f
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 000-50658
Marchex, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware |
35-2194038 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
520 Pike Street, Suite 2000
Seattle, Washington 98101
(Address of principal executive offices)
(206) 331-3300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” or “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
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Large accelerated filer |
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Accelerated filer |
☒ |
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Non-accelerated filer |
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☐ |
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Smaller reporting company |
☒ |
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Emerging growth company |
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☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
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Class |
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Outstanding at November 6, 2018 |
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Class A common stock, par value $.01 per share |
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5,056,136 |
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Class B common stock, par value $.01 per share |
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36,926,629 |
Form 10-Q
Table of Contents
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Page |
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PART I. |
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Item 1. |
1 |
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1 |
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2 |
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3 |
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4 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 |
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Item 3. |
30 |
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Item 4. |
30 |
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PART II. |
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Item 1. |
32 |
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Item 1A. |
32 |
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Item 2. |
52 |
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Item 4. |
53 |
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Item 6. |
54 |
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55 |
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Item 1. Condensed Consolidated Financial Statements
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
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December 31, |
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September 30, |
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2017 |
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2018 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
104,190 |
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$ |
78,605 |
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Accounts receivable, net |
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14,860 |
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13,646 |
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Prepaid expenses and other current assets |
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2,041 |
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2,322 |
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Total current assets |
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121,091 |
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94,573 |
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Property and equipment, net |
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2,405 |
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2,797 |
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Other assets, net |
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326 |
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919 |
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Total assets |
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$ |
123,822 |
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$ |
98,289 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
4,928 |
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$ |
5,258 |
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Accrued expenses and other current liabilities |
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5,585 |
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5,804 |
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Deferred revenue and deposits |
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313 |
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1,165 |
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Dividends payable |
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21,907 |
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— |
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Total current liabilities |
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32,733 |
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12,227 |
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Other non-current liabilities |
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1,090 |
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1,155 |
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Total liabilities |
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33,823 |
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13,382 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Common stock, $0.01 par value, Authorized 137,500 shares |
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Class A: 12,500 shares authorized; 8,032 and 5,056 shares issued and outstanding, respectively, at December 31, 2017 and September 30, 2018 |
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53 |
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53 |
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Class B: 125,000 shares authorized; 38,736 shares issued and outstanding at December 31, 2017, including 710 shares of restricted stock; and 36,798 shares issued and outstanding at September 30, 2018, including 586 shares of restricted stock |
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387 |
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368 |
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Additional paid-in capital |
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343,268 |
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340,047 |
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Accumulated deficit |
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(253,709 |
) |
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(255,561 |
) |
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Total stockholders’ equity |
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89,999 |
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84,907 |
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Total liabilities and stockholders’ equity |
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$ |
123,822 |
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$ |
98,289 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
1
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
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Nine Months Ended September 30, |
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Three Months Ended September 30, |
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2017 |
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2018 |
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2017 |
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2018 |
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Revenue |
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$ |
68,444 |
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$ |
62,120 |
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$ |
22,053 |
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$ |
20,006 |
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Expenses: |
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Service costs |
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37,690 |
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35,084 |
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11,917 |
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10,877 |
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Sales and marketing |
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12,075 |
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10,275 |
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3,612 |
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3,330 |
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Product development |
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13,809 |
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11,382 |
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4,256 |
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3,861 |
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General and administrative |
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10,568 |
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8,083 |
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3,144 |
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2,570 |
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Acquisition related costs |
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— |
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110 |
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— |
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110 |
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Total operating expenses |
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74,142 |
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64,934 |
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22,929 |
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20,748 |
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Loss from operations |
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(5,698 |
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(2,814 |
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(876 |
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(742 |
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Interest income and other, net |
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134 |
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805 |
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77 |
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296 |
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Loss before provision for income taxes |
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(5,564 |
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(2,009 |
) |
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(799 |
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(446 |
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Income tax expense |
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37 |
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32 |
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12 |
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11 |
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Net loss applicable to common stockholders |
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$ |
(5,601 |
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$ |
(2,041 |
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$ |
(811 |
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$ |
(457 |
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Basic and diluted net loss per Class A and Class B share applicable to common stockholders |
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$ |
(0.13 |
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$ |
(0.05 |
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$ |
(0.02 |
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$ |
(0.01 |
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Shares used to calculate basic net loss per share applicable to common stockholders: |
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Class A |
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5,056 |
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5,056 |
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5,056 |
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5,056 |
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Class B |
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37,565 |
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37,243 |
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37,820 |
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36,127 |
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Shares used to calculate diluted net loss per share applicable to common stockholders: |
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Class A |
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5,056 |
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5,056 |
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5,056 |
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5,056 |
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Class B |
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42,621 |
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42,299 |
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42,876 |
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41,183 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
2
MARCHEX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
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For the Nine Months Ended September 30, |
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2017 |
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2018 |
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Operating Activities: |
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Net loss |
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$ |
(5,601 |
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$ |
(2,041 |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Amortization and depreciation |
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2,266 |
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1,360 |
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Allowance for doubtful accounts and advertiser credits |
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673 |
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335 |
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Stock-based compensation |
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3,500 |
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2,335 |
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Change in certain assets and liabilities: |
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Accounts receivable, net |
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3,356 |
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879 |
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Prepaid expenses, other current assets and other assets |
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63 |
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(268 |
) |
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Accounts payable |
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(1,525 |
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401 |
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Accrued expenses and other current liabilities |
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(1,003 |
) |
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207 |
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Deferred revenue and deposits |
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(14 |
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853 |
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Other non-current liabilities |
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(23 |
) |
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1 |
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Net cash provided by operating activities |
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1,692 |
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4,062 |
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Investing Activities: |
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Purchases of property and equipment |
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(1,274 |
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(1,580 |
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Purchases of intangible assets and other assets |
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(15 |
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(576 |
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Net cash used in investing activities |
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(1,289 |
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(2,156 |
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Financing Activities: |
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Repurchases of Class B common stock |
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— |
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(5,673 |
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Proceeds from exercises of stock options, issuance and vesting of restricted stock and employee stock purchase plan, net |
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24 |
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93 |
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Common stock cash dividends paid |
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— |
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(21,911 |
) |
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Net cash provided by (used in) financing activities |
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24 |
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(27,491 |
) |
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Net increase (decrease) in cash and cash equivalents |
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427 |
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(25,585 |
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Cash and cash equivalents at beginning of period |
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103,950 |
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104,190 |
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Cash and cash equivalents at end of period |
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$ |
104,377 |
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$ |
78,605 |
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See accompanying Notes to Condensed Consolidated Financial Statements.
3
MARCHEX, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Description of Business and Basis of Presentation
Marchex, Inc. (the “Company”) was incorporated in the state of Delaware on January 17, 2003. The Company is a call analytics company that helps businesses connect, drive, measure, and convert callers into customers. The Company provides products and services for businesses of all sizes that depend on calls to drive sales. The Company’s analytics technology can facilitate call quality, analyze calls and measure the outcomes of calls. The Company also delivers performance-based, pay-for-call advertising across numerous mobile and online publishers to connect consumers with businesses over the phone.
The accompanying unaudited condensed consolidated financial statements of Marchex, Inc. and its wholly-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or for any other period. The balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2017, as amended, and filed with the SEC.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to the consolidated financial statements in the prior periods to conform to the current period presentation.
(2) Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These judgments are difficult as matters that are inherently uncertain directly impact their valuation and accounting. Actual results may vary from management’s estimates and assumptions.
Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
FASB ASC Topic 606, Revenue from Contracts with Customers, (ASC 606) is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted ASC 606 on January 1, 2018 using the modified retrospective approach for all contracts not completed as of the date of initial application, referred to as open contracts. Therefore, the comparative information has not been adjusted and continues to be reported under ASC 605. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. The Company measures revenue based on the consideration specified in the customer arrangement, and revenue is recognized when the performance obligations in the customer arrangement are satisfied. A performance obligation is a promise in a contract to transfer a distinct service or product to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation.
The primary impact upon adoption of the standard relates to the deferral (i.e. capitalization) of incremental contract acquisition costs which are recorded as other non-current assets in the balance sheet and the recognition (i.e. amortization) of them in sales and marketing expenses in the statements of operations over the term of the initial contract and anticipated renewal contracts to which the costs relate. The Company recognized a $189,000 decrease to accumulated deficit as of January 1, 2018 for the cumulative impact of adoption of the amended guidance associated with the incremental contract acquisition costs on open contracts that were capitalized. The impact of the adoption of ASC 606 on net loss applicable to common stockholders for the three and nine months ended September 30, 2018 and on the unaudited consolidated balance sheet at September 30, 2018 was not significant.
4
Recent Accounting Pronouncement(s) Not Yet Effective
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15), an ASU which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to be capitalized. The ASU is effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect adoption of ASU 2018-15 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), an ASU which modifies the disclosure requirements on fair value measurements in ASC 820. The ASU is effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company does not expect adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, Compensation - Stock Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), an ASU which expands the scope of Topic 718 to include share-based payment transactions for acquiring good and services from nonemployees. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (Topic 842) (ASU 2016-02), an ASU requiring the recognition of lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued Accounting Standards Update No. 2018-11, Leases (Topic 842) – Targeted Improvements (ASU 2018-11), which provides entities with an additional (and optional) transition method to adopt the new leases standard. Entities may adopt the new leases standard either using the modified retrospective approach or using the optional method to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements. The Company currently plans to adopt the new standard on January 1, 2019. The Company anticipates that adoption will affect its statement of financial position and will require changes to some of its processes. Most significant to the Company, the new guidance requires lessees to recognize operating building leases with a term of more than 12 months as lease assets and lease liabilities. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 will have on its consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (ASU 2016-13), an ASU amending the impairment model for most financial assets and certain other instruments. The ASU is effective for reporting periods beginning after December 15, 2019, with early adoption permitted after December 15, 2018. The ASU must be adopted using a modified-retrospective approach. The Company does not expect adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.
(3) Revenue Recognition
The Company generates the majority of its revenues from advertisers for its performance based advertising services, which include the use of its call analytics technology and pay-for-call advertising products and services. The Company’s revenue also consists of payments from its reseller partners for use of its local leads platform and marketing services, which they offer to their small business customers. Customers typically receive the benefit of the Company’s services as they are performed and substantially all the Company’s revenue is recognized over time as the services are performed.
The Company’s call analytics technology platform provides data and insights that can measure the performance of mobile, online and offline advertising for advertisers and small business resellers. The Company generates revenue from the Company’s call analytics technology platform when advertisers pay the Company a fee for each call or call related data element they receive from calls including call-based ads the Company distributes through its sources of call distribution or for each phone number tracked based on a pre-negotiated rate. Revenue is recognized as services are provided over time, which is generally measured by the delivery of each call or call related data element or each phone number tracked.
The Company’s call marketplace offers advertisers and adverting service providers’ ad placements across the Company’s distribution network. Advertisers or advertising service providers are charged on a pay-per-call or cost-per-action basis. The Company generates revenue upon delivery of qualified and reported phone calls to advertisers or advertising service providers’ listings. These advertisers and advertising service providers pay the Company a designated transaction fee for each qualified phone call, which occurs when a user makes a phone call, clicks, or completes a specified action on any of their advertisement listings after it has been placed
5
by the Company or by the Company’s distribution partners. The Company also generates revenue from cost-per-action services, which occurs when a user makes a phone call from the Company’s advertiser’s listing or is redirected from one of the Company’s web sites or a third-party web site in the Company’s distribution network to an advertiser web site and completes the specified action. Each qualified phone call or specified action on a listing represents a completed transaction. Revenue is recognized as services are provided upon the delivery of a qualified phone call or completed action. The Company’s distribution network is primarily comprised of third party mobile and online search engines and applications, mobile carriers, directories, destination sites, shopping engines, internet domains or web sites, other targeted Web-based content, and offline sources. The Company enters into agreements with these third-party distribution partners to provide distribution for pay-for-call advertisement listings, which contain call tracking numbers and/or URL strings. The Company generally pays distribution partners based on a percentage of revenue or a fixed amount per phone call or other actions on these listings. The Company acts as the principal with the advertiser for revenue call transactions, and is responsible for the fulfillment of services. The Company recognizes revenue for these fees under the gross revenue recognition method.
The Company’s local leads platform allows reseller partners to sell call advertising, search marketing, and other lead generation products through their existing sales channels to small business advertisers. The Company generates revenue from reseller partners utilizing the Company’s local leads platform and is paid account fees and/or agency fees for the Company’s products in the form of a percentage of the cost of every call or click delivered to advertisers. Revenue is recognized over time as services are provided. The reseller partners engage the advertisers and are the principal for the transaction, and the Company, in certain instances, is only financially liable to the publishers in the Company’s capacity as a collection agency for the amount collected from the advertisers. The Company recognizes revenue for these fees under the net revenue recognition method. In limited arrangements resellers pay the Company a fee for fulfilling an advertiser’s campaign in its distribution network and the Company acts as the principal and recognizes revenue for these fees under the gross revenue recognition method.
For the three and nine months ended September 30, 2018, revenues disaggregated by service type were $18.4 million and $56.9 million for performance based advertising services, respectively, and $1.6 million and $5.2 million for local leads services, respectively.
The majority of the Company’s customers are invoiced on a monthly basis following the month of the delivery of services and are required to make payments under standard credit terms. The Company establishes an allowance for advertiser credits, which is included in accrued expense and other current liabilities in the balance sheet as of September 30, 2018, using its best estimate of the amount of expected future reductions in advertisers’ payment obligations related to delivered services based on analysis of historical credits. Customer payments received in advance of revenue recognition are contract liabilities and are recorded as deferred revenue. During the three and nine months ended September 30, 2018, revenue recognized that was included in the contract liabilities balance at the beginning of the period was insignificant.
The majority of the Company’s total revenue is derived from contracts that include consideration that is variable in nature. The variable elements of these contracts primarily include the number of transactions (for example, the number qualified phone calls). For contracts with an effective term greater than one year, the Company applies the standard’s practical expedient that permits the exclusion of disclosure of the value of unsatisfied performance obligations for these contracts as the Company’s right to consideration corresponds directly to the value provided to the customer for services completed to date and all future variable consideration is allocated to wholly unsatisfied performance obligations. A term for purposes of these contracts has been estimated at 24 months. In addition, the Company applies the standard’s optional exemption to disclose information about performance obligations for contracts that have original expected terms of one year or less.
For arrangements that include multiple performance obligations, the transaction price from the arrangement is allocated to each respective performance obligation based on its relative standalone selling price and recognized when revenue recognition criteria for each performance obligation are met. The standalone selling price for each performance obligation is established based on the sales price at which the Company would sell a promised good or service separately to a customer or the estimated standalone selling price.
In certain cases, the Company records revenue based on available and reported preliminary information from third parties. Collection on the related receivables may vary from reported information based upon third-party refinement of the estimated and reported amounts owed that occurs subsequent to period ends.
The Company’s incremental direct costs of obtaining a contract, which consist primarily of sales commissions, are generally deferred and amortized to sales and marketing expense over the estimated life of the relevant customer relationship of approximately 24 months and are subject to being monitored every period to reflect any significant change in assumptions. In addition, the deferred contract cost asset is assessed for impairment on a periodic basis. The Company’s contract acquisition costs are included in other assets, net in the balance sheet. The Company is applying the standard’s practical expedient permitting expensing of costs to obtain a contract when the expected amortization period is one year or less, which typically results in expensing commissions paid to acquire certain contracts. As of September 30, 2018, the Company had $342,000 of net deferred contract costs and the amortization associated with these costs was $90,000 and $233,000 for the three and nine months ended September 30, 2018, respectively.
6
(4) Stock-based Compensation Plans
The Company grants stock-based awards, including stock options, restricted stock awards, and restricted stock units. The Company measures stock-based compensation cost at the grant date based on the fair value of the award and recognizes it as expense over the vesting or service period, as applicable, of the stock-based award using the straight-line method. The Company accounts for forfeitures as they occur.
Stock-based compensation expense was included in the following operating expense categories as follows (in thousands):
|
|
|
Nine Months Ended September 30, |
|
|
Three Months Ended September 30, |
|
|
||||||||||
|
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
||||
|
Service costs |
|
$ |
385 |
|
|
$ |
338 |
|
|
$ |
130 |
|
|
$ |
108 |
|
|
|
Sales and marketing |
|
|
768 |
|
|
|
411 |
|
|
|
299 |
|
|
|
125 |
|
|
|
Product development |
|
|
497 |
|
|
|
276 |
|
|
|
199 |
|
|
|
94 |
|
|
|
General and administrative |
|
|
1,850 |
|
|
|
1,310 |
|
|
|
534 |
|
|
|
375 |
|
|
|
Total stock-based compensation |
|
$ |
3,500 |
|
|
$ |
2,335 |
|
|
$ |
1,162 |
|
|
$ |
702 |
|
|
The Company uses the Black-Scholes option pricing model to estimate the per share fair value of stock option grants with time-based vesting. The Black-Scholes model relies on a number of key assumptions to calculate estimated fair values. The expected life of each award granted was determined based on historical experience with similar awards, giving consideration to contractual terms, anticipated exercise patterns, vesting schedules and expirations. Expected volatility is based on historical volatility levels of the Company’s Class B common stock and the expected volatility of companies in similar industries that have similar vesting and contractual terms. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. For the nine months ended September 30, 2018, the Company used an expected dividend yield for grants prior to the record date of the Company’s common stock cash dividend payment in March 2018.
The following weighted average assumptions were used in determining the fair value of time-vested stock option grants for the periods presented:
|
|
Nine Months Ended September 30, |
|
Three Months Ended September 30, |
||||
|
|
2017 |
|
2018 |
|
2017 |
|
2018 |
|
Expected life (in years) |
4.0-6.25 |
|
4.0-6.25 |
|
4.0-6.25 |
|
4.0-6.25 |
|
Risk-free interest rate |
1.68-1.96% |
|
2.54%-2.93% |
|
1.71-1.96% |
|
2.86%-2.93% |
|
Expected volatility |
55-56% |
|
42%-53% |
|
55% |
|
42%-49% |
|
Expected dividend yield |
0% |
|
0%-3.57% |
|
0% |
|
0% |
Stock option activity during the nine months ended September 30, 2018 is summarized as follows:
|
|
|
Shares (in thousands) |
|
|
Weighted average exercise price |
|
|
Weighted average remaining contractual term (in years) |
|
|
|||
|
Balance at December 31, 2017 |
|
|
5,713 |
|
|
$ |
5.33 |
|
|
|
5.93 |
|
|
|
Options granted |
|
|
677 |
|
|
|
2.83 |
|
|
|
|
|
|
|
Options forfeited |
|
|
(274 |
) |
|
|
3.24 |
|
|
|
|
|
|
|
Options expired |
|
|
(659 |
) |
|
|
6.05 |
|
|
|
|
|
|
|
Options exercised |
|
|
(25 |
) |
|
|
2.66 |
|
|
|
|
|
|
|
Balance at September 30, 2018 |
|
|
5,432 |
|
|
$ |
5.05 |
|
|
|
5.72 |
|
|
Restricted stock awards and restricted stock units are generally measured at fair value on the date of grant based on the number of awards granted and the quoted price of the Company’s common stock. Restricted stock units entitle the holder to receive one share of the Company’s Class B common stock upon satisfaction of certain service conditions.
7
Restricted stock awards and restricted stock unit activity during the nine months ended September 30, 2018 is summarized as follows:
|
|
|
Shares/ Units (in thousands) |
|
|
Weighted average grant date fair value |
|
||
|
Unvested balance at December 31, 2017 |
|
|
1,871 |
|
|
$ |
3.25 |
|
|
Granted |
|
|
120 |
|
|
|
2.93 |
|
|
Vested |
|
|
(484 |
) |
|
|
4.47 |
|
|
Forfeited |
|
|
(387 |
) |
|
|
3.31 |
|
|
Unvested balance at September 30, 2018 |
|
|
1,120 |
|
|
$ |
3.56 |
|
(5) Net Income (Loss) Per Share
The Company computes net income (loss) per share of Class A and Class B common stock using the two class method. Under the provisions of the two class method, basic net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common and dilutive common equivalent shares outstanding during the period. The computation of the diluted net income (loss) per share of Class B common stock assumes the conversion of Class A common stock to Class B common stock, while the diluted net income (loss) per share of Class A common stock does not assume the conversion of those shares.
In accordance with the two class method, the undistributed earnings (losses) for each year are allocated based on the contractual participation rights of the Class A and Class B common shares and the restricted shares as if the earnings for the year had been distributed. Considering the terms of the Company’s charter which provides that, if and when dividends are declared on the Company’s common stock in accordance with Delaware General Corporation Law, equivalent dividends shall be paid with respect to the shares of Class A common stock and Class B common stock and that both classes of common stock have identical dividend rights and would share equally in the Company’s net assets in the event of liquidation, the Company has allocated undistributed earnings (losses) on a proportionate basis.
Instruments granted in unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities prior to vesting. As such, the Company’s restricted stock awards are considered participating securities for purposes of calculating earnings per share.
The following tables present the computation of basic net loss per share applicable to common stockholders for the periods ended (in thousands, except per share amounts):
|
|
|
Nine months ended September 30, |
|
|
|||||||||||||
|
|
|
2017 |
|
|
2018 |
|
|
||||||||||
|
|
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class B |
|
|
||||
|
Basic net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(665 |
) |
|
$ |
(4,936 |
) |
|
$ |
(244 |
) |
|
$ |
(1,797 |
) |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate basic net loss per share |
|
|
5,056 |
|
|
|
37,565 |
|
|
|
5,056 |
|
|
|
37,243 |
|
|
|
Basic net loss per share applicable to common stockholders |
|
$ |
(0.13 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
8
|
|
Three months ended September 30, |
|
||||||||||||||
|
|
|
2017 |
|
|
2018 |
|
||||||||||
|
|
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class B |
|
||||
|
Basic net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(96 |
) |
|
$ |
(715 |
) |
|
$ |
(56 |
) |
|
$ |
(401 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate basic net loss per share |
|
|
5,056 |
|
|
|
37,820 |
|
|
|
5,056 |
|
|
|
36,127 |
|
|
Basic net loss per share applicable to common stockholders |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
9
The following tables present the computation of diluted net loss per share applicable to common stockholders for the periods ended (in thousands, except per share amounts):
|
|
|
Nine months ended September 30, |
|
|
|||||||||||||
|
|
|
2017 |
|
|
2018 |
|
|
||||||||||
|
|
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class B |
|
|
||||
|
Diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(665 |
) |
|
$ |
(4,936 |
) |
|
$ |
(244 |
) |
|
$ |
(1,797 |
) |
|
|
Reallocation of net loss for Class A shares as a result of conversion of Class A to Class B shares |
|
|
— |
|
|
|
(665 |
) |
|
|
— |
|
|
|
(244 |
) |
|
|
Diluted net loss applicable to common stockholders |
|
$ |
(665 |
) |
|
$ |
(5,601 |
) |
|
$ |
(244 |
) |
|
$ |
(2,041 |
) |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate basic net loss per share |
|
|
5,056 |
|
|
|
37,565 |
|
|
|
5,056 |
|
|
|
37,243 |
|
|
|
Conversion of Class A to Class B common shares outstanding |
|
|
— |
|
|
|
5,056 |
|
|
|
— |
|
|
|
5,056 |
|
|
|
Weighted average number of shares outstanding used to calculate diluted net loss per share |
|
|
5,056 |
|
|
|
42,621 |
|
|
|
5,056 |
|
|
|
42,299 |
|
|
|
Diluted net loss per share applicable to common stockholders |
|
$ |
(0.13 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
|
|
|
Three months ended September 30, |
|
|||||||||||||
|
|
|
2017 |
|
|
2018 |
|
||||||||||
|
|
|
Class A |
|
|
Class B |
|
|
Class A |
|
|
Class B |
|
||||
|
Diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders |
|
$ |
(96 |
) |
|
$ |
(715 |
) |
|
$ |
(56 |
) |
|
$ |
(401 |
) |
|
Reallocation of net loss for Class A shares as a result of conversion of Class A to Class B shares |
|
|
— |
|
|
|
(96 |
) |
|
|
— |
|
|
|
(56 |
) |
|
Diluted net loss applicable to common stockholders |
|
$ |
(96 |
) |
|
$ |
(811 |
) |
|
$ |
(56 |
) |
|
$ |
(457 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used to calculate basic net loss per share |
|
|
5,056 |
|
|
|
37,820 |
|
|
|
5,056 |
|
|
|
36,127 |
|
|
Conversion of Class A to Class B common shares outstanding |
|
|
— |
|
|
|
5,056 |
|
|
|
— |
|
|
|
5,056 |
|
|
Weighted average number of shares outstanding used to calculate diluted net loss per share |
|
|
5,056 |
|
|
|
42,876 |
|
|
|
5,056 |
|
|
|
41,183 |
|
|
Diluted net loss per share applicable to common stockholders |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
The computation of diluted net loss per share excludes the following because their effect would be anti-dilutive (in thousands):
|
|
• |
For the three and nine months ended September 30, 2017 and 2018, outstanding options to acquire 6,277 and 5,432 shares, respectively of Class B common stock. |
|
|
• |
For the three and nine months ended September 30, 2017 and 2018, 748 and 585 shares of unvested Class B restricted common shares, respectively. |
|
|
• |
For the three and nine months ended September 30, 2017 and 2018, 1,381 and 535 restricted stock units, respectively. |
(6) Concentrations
The Company maintains substantially all of its cash and cash equivalents with two financial institutions and are all considered at Level 1 fair value with observable inputs that reflect quoted prices for identical assets or liabilities in active markets. At various points during the nine months ended September 30, 2017 and 2018, the Company held cash equivalents in deposit sweep accounts with these same financial institutions. These Level 2 assets were fully liquidated prior to September 30, 2017 and 2018.
10
The advertisers representing more than 10% of revenue are as follows (in percentages):
|
|
|
Nine Months Ended September 30, |
|
|
Three Months Ended September 30, |
|
||||||||||
|
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
||||
|
Advertiser A |
|
|
22 |
% |
|
|
22 |
% |
|
|
21 |
% |
|
|
25 |
% |
|
Advertiser B |
|
|
16 |
% |
|
|
21 |
% |
|
|
15 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertiser A is also a distribution partner.
The outstanding receivable balance for each advertiser representing more than 10% of accounts receivable is as follows (in percentages):
|
|
|
At December 31, 2017 |
|
|
At September 30, 2018 |
|
||
|
Advertiser A |
|
|
17 |
% |
|
|
13 |
% |
|
Advertiser B |
|
|
31 |
% |
|
|
29 |
% |
|
Advertiser C |
|
|
10 |
% |
|
* |
|
|
* Less than 10% of accounts receivable.
In certain cases, the Company may engage directly with one or more advertising agencies who act on an advertiser’s behalf. In addition, an advertising agency may represent more than one advertiser that utilizes the Company’s products and services. One advertising agency represented 12% and 15% of revenue for the three and nine months ended September 30, 2018, respectively, and less than 10% of revenue for the three and nine months ended September 30, 2017. This same advertising agency represented 21% and 22% of accounts receivable as of December 31, 2017 and September 30, 2018, respectively. One other advertising agency represented 11% and less than 10% of accounts receivable as of December 31, 2017 and September 30, 2018, respectively.
A significant amount of the Company’s revenue earned from advertisers is generated through arrangements with distribution partners. The Company may not be successful in renewing any of these agreements, or, if they are renewed, they may not be on terms as favorable as current arrangements. The Company may not be successful in entering into agreements with new distribution partners or advertisers on commercially acceptable terms. In addition, several of these distribution partners or advertisers may be considered potential competitors. There were no distribution partners paid more than 10% of revenue for the three and nine months ended September 30, 2017 and 2018.
(7) Segment Reporting and Geographic Information
Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for the Company’s management. For the periods presented, we operated as a single segment.
Revenues from advertisers by geographical areas are tracked on the basis of the location of the advertiser. The vast majority of the Company’s revenue and accounts receivable are derived from domestic sales to advertisers engaged in various mobile, online and other activities.
Revenues by geographic region are as follows (in percentages):
|
|
|
Nine Months Ended September 30, |
|
|
Three Months Ended September 30, |
|
||||||||||
|
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
||||
|
United States |
|
|
96 |
% |
|
|
99 |
% |
|
|
96 |
% |
|
|
99 |
% |
|
Canada |
|
|
4 |
% |
|
|
1 |
% |
|
|
4 |
% |
|
|
1 |
% |
|
Other countries |
|
* |
|
|
* |
|
|
* |
|
|
* |
|
||||
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
* |
Less than 1% of revenue. |
11
Property and equipment consisted of the following (in thousands):
|
|
|
At December 31, 2017 |
|
|
At September 30, 2018 |
|
||
|
Computer and other related equipment |
|
$ |
19,157 |
|
|
$ |
20,126 |
|
|
Purchased and internally developed software |
|
|
6,687 |
|
|
|
6,690 |
|
|
Furniture and fixtures |
|
|
1,071 |
|
|
|
1,000 |
|
|
Leasehold improvements |
|
|
1,168 |
|
|
|
1,230 |
|
|
|
|
$ |
28,083 |
|
|
$ |
29,046 |
|
|
Less: Accumulated depreciation and amortization |
|
|
(25,678 |
) |
|
|
(26,249 |
) |
|
Property and equipment, net |
|
$ |
2,405 |
|
|
$ |
2,797 |
|
Depreciation and amortization expense related to property and equipment was approximately $786,000 and $336,000 for the three months ended September 30, 2017 and 2018, respectively. Depreciation and amortization expense related to property and equipment was approximately $2.3 million and $1.1 million for the nine months ended September 30, 2017 and 2018, respectively.
(9) Commitments, Contingencies, Taxes and Other
(a) Commitments
The Company has commitments for future payments related to office facilities leases and other contractual obligations. The Company leases its office facilities under operating lease agreements and recognizes rent expense on a straight-line basis over the lease term with any lease incentive amortized as a reduction of rent expense over the lease term. Other contractual obligations primarily relate to minimum contractual payments due to outside service providers. Future minimum payments are approximately as follows (in thousands):
|
|
|
Facilities operating leases |
|
|
Other contractual obligations |
|
|
Total |
|
|||
|
2018 |
|
$ |
361 |
|
|
$ |
861 |
|
|
$ |
1,222 |
|
|
2019 |
|
|
1,476 |
|
|
|
2,006 |
|
|
|
3,482 |
|
|
2020 |
|
|
1,520 |
|
|
|
117 |
|
|
|
1,637 |
|
|
2021 |
|
|
1,566 |
|
|
|
4 |
|
|
|
1,570 |
|
|
2022 and after |
|
|
5,417 |
|
|
|
4 |
|
|
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5,421 |
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Total minimum payments |
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$ |
10,340 |
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$ |
2,992 |
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$ |
13,332 |
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In June 2017, the Company entered into an amendment to the lease agreement originally dated in June 2009 and as amended to date, with respect to office space in Seattle, Washington. The amendment extends the lease term for a period of 84 months expiring on March 31, 2025 and reduces the leased office space starting on September 1, 2017. The Company has the option to terminate the lease in March 2023, subject to satisfaction of certain conditions, including a payment of a termination fee of approximately $671,000. In addition, the lessor will pay towards the cost of certain leasehold improvements (“landlord contribution”) of which the Company may use up to approximately $180,000 of any unused landlord contribution as a credit against any payment obligation under the lease. In 2018, the lessor refunded the previously provided security deposit and the Company provided a letter of credit to the lessor in the amount of $575,000, which will be reduced by $100,000 annually starting in April 2019. The letter of credit is collateralized by a $575,000 certificate of deposit which is restricted in use and is included in other assets in the Company’s condensed consolidated balance sheet as of September 30, 2018.
Rent expense incurred by the Company was approximately $651,000 and $369,000 for the three months ended September 30, 2017 and 2018, respectively, and was approximately $1.6 million and $1.1 million for the nine months ended September 30, 2017 and 2018, respectively.
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The Company from time to time is a party to disputes and legal and administrative proceedings arising from the ordinary course of business. In some agreements to which the Company is a party, the Company has agreed to indemnification provisions of varying scope and terms with advertisers, vendors and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of agreements or representations and warranties made by the Company, services to be provided by the Company and intellectual property infringement claims made by third parties. As a result of these provisions, the Company may from time to time provide certain levels of financial support to our contract parties to seek to minimize the impact of any associated litigation in which they may be involved. To date, there have been no known events or circumstances that have resulted in any material costs related to these indemnification provisions and no liabilities therefore have been recorded in the accompanying consolidated financial statements. However, the maximum potential amount of the future payments we could be required to make under these indemnification provisions could be material.
While any litigation contains an element of uncertainty, the Company is not aware of any legal proceedings or claims which are pending that the Company believes, based on current knowledge, will have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or liquidity.
(c) Taxes
The Company determined that it is not more likely than not that its deferred tax assets will be realized and accordingly recorded 100% valuation allowance against these deferred tax assets as of December 31, 2017 and September 30, 2018. In assessing whether it is more likely than not that the Company’s deferred tax assets will be realized, factors considered included: historical taxable income, historical trends related to advertiser usage rates, projected revenues and expenses, macroeconomic conditions, issues facing the industry, existing contracts, the Company’s ability to project future results and any appreciation of its other assets. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considered the future reversal of deferred tax liabilities, carryback potential, projected taxable income, and tax planning strategies as well as its history of taxable income or losses in the relevant jurisdictions in making this assessment. Based on the level of historical taxable losses and the uncertainty of projections for future taxable income over the periods for which the deferred tax assets are deductible, the Company concluded that it is not more likely than not that the gross deferred tax assets will be realized.
From time to time, various state, federal and other jurisdictional tax authorities undertake audits of the Company and its filings. In evaluating the exposure associated with various tax filing positions, the Company on occasion accrues charges for uncertain positions. Resolution of uncertain tax positions will impact our effective tax rate when settled. The Company does not have any significant interest or penalty accruals. The provision for income taxes includes the impact of contingency provisions and changes to contingencies that are considered appropriate. The Company files U.S. federal, certain U.S. states, and certain foreign tax returns. Generally, U.S. federal, U.S. state, and foreign tax returns filed for years after 2012 are within the statute of limitations and are under examination or may be subject to examination.
(d) Other
In the first quarter of 2017, the Company incurred approximately $700,000 of employee separation related costs as part of savings measures implemented in 2017, all of which were paid in the first half of 2017.
(10) Common Stock
In November 2014, the Company’s board of directors authorized a share repurchase program (the “2014 Repurchase Program”), which supersedes and replaces any prior repurchase programs. Under the 2014 Repurchase Program, the Company is authorized to repurchase up to 3 million shares of the Company’s Class B common stock in the aggregate through open market and privately negotiated transactions, at such times and in such amounts as the Company deems appropriate. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, capital availability, and other market conditions. The 2014 Repurchase Program does not have an expiration date and may be expanded, limited or terminated at any time without prior notice. The Company did not repurchase any Class B common stock under the 2014 Repurchase Program for the nine months ended September 30, 2018.
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In May 2018, the Company repurchased approximately 2.3 million shares of its Class B common stock for approximately $5.7 million from a former member of the Company’s board of directors. The Company’s board of directors approved the repurchase transaction and the Company retired these shares in the second quarter of 2018.
In December 2017, the Company declared a special cash dividend in the amount of $0.50 per share on the Company’s Class A and B common stock and recorded a Dividends Payable of $21.9 million in its consolidated balance sheet at December 31, 2017. The Company paid the total dividend of $21.9 million in the first quarter of 2018.
(11) Subsequent Event
On November 5, 2018, the Company entered into a share purchase agreement with Telmetrics, Inc. (“Telmetrics”), a call and text tracking and analytics company based in Mississauga, Ontario, pursuant to which the Company acquired all of the issued and outstanding shares of Telmetrics. The consideration to Telmetrics’ shareholders consisted of:
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approximately $10.1 million in cash at closing; and |
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future contingent consideration of up to $3.0 million in cash payable on the 12th and 24th month anniversaries of the closing, subject to achieving certain revenue and income growth targets over the corresponding two 12 month periods following the closing. |
In connection with the closing, the Company issued approximately $500,000 of restricted stock units and options to certain employees of Telmetrics subject to vesting over three and four years, respectively.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believes,” “intends,” “expects,” “anticipates,” “plans,” “may,” “will” and similar expressions to identify forward-looking statements. All forward-looking statements, including, but not limited to, statements regarding our future operating results, financial position, prospects, acquisitions, dispositions, and business strategy, expectations regarding our growth and the growth of the industry in which we operate, and plans and objectives of management for future operations, are inherently uncertain as they are based on our expectations and assumptions concerning future events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements we make. There are a number of important factors that could cause the actual results of Marchex to differ materially from those indicated by such forward-looking statements. Any or all of our forward-looking statements in this report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including but not limited to the risks, uncertainties and assumptions described in this report, in Part II, Item 1A. under the caption “Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2017, as amended, and those described from time to time in our future reports filed with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur as contemplated and actual results could differ materially from those anticipated or implied by the forward-looking statements. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our results of operation and financial condition. You should read this analysis in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with our audited consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2017, as amended.
Overview
References herein to “we,” “us” or “our” refer to Marchex, Inc. and its wholly-owned subsidiaries unless the context specifically states or implies otherwise.
Marchex is a call analytics company that helps businesses connect, drive, measure and convert callers into customers.
We provide products and services for businesses of all sizes that depend on consumer phone calls to drive sales. Our analytics products can provide actionable intelligence on the major media channels advertisers use to acquire customers over the phone.
Our primary product offerings are:
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Marchex Call Analytics. Marchex Call Analytics is an analytics platform for enterprises that depend on inbound phone calls to drive sales, appointments and reservations. Marketers can use this platform to understand which marketing channels, advertisements, or search keywords are driving calls to their business, allowing them to optimize their advertising expenditures across media channels. Marchex Call Analytics also includes technology that can extract data and insights about what is happening during a call and measures the outcome of calls and return on investment. The platform also includes technology that can block robocalls, telemarketers and spam calls to help save businesses time and expense. Marchex Call Analytics data can integrate directly into third-party marketer workflows such as Salesforce, Eloqua, Adobe, DoubleClick Search, Kenshoo, Marin Software, Facebook and Instagram, in addition to other marketing dashboards and tools. Advertisers pay us a fee for each call or call related data element they receive from calls including call-based ads we distribute through our sources of call distribution or for each phone number tracked based on pre-negotiated rates. |
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Marchex Speech Analytics. Launched in 2017, Marchex Speech Analytics is a product that can enable actionable insights for enterprise and mid-sized companies, helping them understand what is happening on inbound calls from consumers to their business. Marchex Speech Analytics leverages Marchex's proprietary Call DNA® and our proprietary and patent pending speech recognition technology. Marchex Speech Analytics incorporates machine and deep learning algorithm and artificial intelligence powered conversation analysis functionality that can give customers strategic, real-time visibility into company performance. Marchex Speech Analytics includes customizable dashboards and visual analytics to make it easier for marketers and call center teams to discern actionable insights across a growing amount of call data. |
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Marchex Search Analytics. Marchex Search Analytics is a product for search marketers that can drive phone calls from search campaigns. Marchex Search Analytics can attribute inbound phone calls made from paid search ads and landing pages to a keyword. The platform can deliver this data as well as data about call outcomes directly into search management platforms like DoubleClick Search and Kenshoo. According to a June 2016 BIA Kelsey report, mobile calls represent 60% of inbound calls to businesses in 2016. This equals 85 billion global mobile calls annually, a figure that is projected to grow to 169 billion by 2020. |
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Marchex Display and Video Analytics. Marchex Display and Video Analytics is a product for marketers that buy digital display advertising. Marchex Display and Video Analytics can measure the influence that display advertising has on inbound phone calls so that marketers can better attribute their return on advertising spend for inbound phone calls and delivers this data to marketers in a reporting dashboard. According to a December 2017 eMarketer report, US advertisers are expected to spend nearly $48 billion in 2018 and are projected to spend $67 billion in 2021 on display advertising. |
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Marchex Site Analytics. Marchex Site Analytics is a product for marketers that can drive phone calls from websites. Marchex Site Analytics can identify which websites are driving calls and provides actionable insights to help marketers understand the customer’s journey to their website, what drove them to call, and can enable marketers to better optimize both online and offline. |
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Marchex Social Analytics. Launched in 2017, Marchex Social Analytics is a product for marketers that buy social media advertising. Marchex Social Analytics can help measure the influence of social media advertising has on inbound calls from platforms like Facebook or Instagram so marketers can see which posts are working. According to a December 2016 Zenith Media report, global social media is forecasted to grow 72% between 2016 and 2019, rising from $29 billion to $50 billion. |
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Marchex Audience Targeting. Launched in 2017, Marchex Audience Targeting leverages call data to automatically build unique audience segments for display and social media platforms. Marchex Audience Targeting can help marketers target high intent audiences with their display campaigns and fine-tune campaigns to specific audience segments that are most likely to convert to customers, or can find new segments and opportunities that have not been targeted before. |
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Marchex Call Marketplace. Marchex Call Marketplace is a mobile advertising network for businesses that depend on inbound phone calls to drive sales. We offer advertisers ad placements across numerous mobile and online media sources to deliver qualified calls to their businesses. It leverages analytics for tracking, reporting and optimization. Advertisers are charged on a pay-per-call or cost per action basis. |
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Local Leads. Our local leads platform is a white-labeled, full service advertising solution for small business resellers, such as Yellow Pages providers and vertical marketing service providers, to sell call advertising, search marketing and other lead generation products through their existing sales channels to their small business advertisers. These calls and leads are then fulfilled by us across our distribution network, including mobile sources, and search engines. The lead services we offer to small business advertisers through our local leads platform include pay-for-call, search marketing and ad creation and include advanced features such as call tracking, geo-targeting, campaign management, reporting and analytics. The local leads platform is scalable and has the capacity to support hundreds of thousands of advertiser accounts. Reseller partners and publishers generally pay us account fees and agency fees for our products in the form of a percentage of the cost of every click or call delivered to their advertisers. Through one of our primary contracts with Yellowpages.com LLC (“YP”), we generate revenues from our local leads platform. This local leads platform arrangement, which expires December 31, 2019, provides YP flexibility to migrate active accounts to itself or a third-party provider prior to the end of an advertiser contract and provides YP with certain termination rights upon four months of notice. In 2017, Dex Media, Inc. (“Dex”) acquired YP Holdings LLC (“YP Holdings”), which is the parent company of YP. We also have separate pay-for-call services and distribution partner agreements with YP and separate reseller partner arrangements with Dex for pay-for-call and call analytic services. YP including Dex (collectively “DexYP”) is our largest reseller partner and was responsible for 21% and 22% of our total revenues for the three and nine months ended September 30, 2017, respectively, and was 25% and 22% of our total revenues for the three and nine months ended September 30, 2018, respectively. |
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Key elements of our strategy include:
Innovating on Our Mobile Performance Advertising. We plan to continue to expand our range of call-based advertising product capabilities and channel specific solutions by growing our call analytics offerings including number provisioning, call tracking, call mining, keyword-level tracking, display ad impression measurement and other products as part of our owned, end-to-end, call-based advertising solutions. We launched several new products or features in 2017. Our more recent products and features include: (1) Marchex Speech Analytics, which can help companies understand what is happening on inbound calls from consumers and can deliver actionable operational and advertising insights from those consumer interactions; (2) Display and Video Analytics, which can measure the impact of display and video advertising campaigns on inbound phone calls to call centers and stores; (3) Marchex Omnichannel Analytics Cloud, which can connect call data to media channels, including search, display and video, social and sites, to phone calls made to a business; (4) Marchex Social Analytics, which can help measure the influence that social advertising from sources like Facebook or Instagram has on inbound phone calls so that marketers can better attribute their return on advertising spend for inbound phone calls; and (5) Marchex Audience Targeting, which leverages call data and can automatically build audience segments for display and social media platforms. Additional information regarding our product offerings launched in 2017 is included in the Overview section on pages 14 through 15. We are also focused on growing our base of call distribution by bringing in new sources of the rapidly growing mobile advertising market as well as other online and offline sources of distribution.
Supporting and Growing the Number of Advertisers Using Our Products and Services. We plan to continue to provide a consistently high level of service and support to our advertisers and we will continue to help them achieve their return on investment goals. We are focused on increasing our advertiser base through our direct sales and marketing efforts, including strategic sales, inside sales, and additional partnerships with large local advertiser resellers.
Pursuing Selective Acquisition Opportunities. We intend to pursue select acquisition opportunities and will apply evaluation criteria to any acquisitions we may pursue in order to enhance our strategic position, strengthen our financial profile, augment our points of defensibility and increase shareholder value. We will focus on acquisition opportunities that represent one or more of the following characteristics:
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revenue growth and expanding margins and operating profitability or the characteristics to achieve larger scale and profitability; |
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opportunities for business model, product or service innovation, evolution or expansion; |
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under-leveraged and under-commercialized assets in related or unrelated businesses; |
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an opportunity to enhance efficiencies and provide incremental growth opportunities for our operating businesses; and |
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business defensibility. |
In November 2018, we acquired Telmetrics Inc. (“Telmetrics”), an enterprise call and text tracking and analytics company, for consideration of $10.1 million in cash at closing and up to $3.0 million in cash based upon the achievement of certain financial growth targets over the corresponding two 12 month periods following the closing. With the acquisition of Telmetrics, we plan to leverage our combined resources to expand and enhance the innovation of our products and services and help our advertisers achieve their return on investment goals.
Evolving Our Business Strategy. Our industry is undergoing significant change and our business strategy is continuing to evolve to meet these changes. In order to profitably grow our business, we may need to expand into new lines of business beyond our current focus of providing mobile advertising analytics products and services, which may involve pursuing strategic transactions, including potential acquisitions of, or investments in, related or unrelated businesses. In addition, we may seek divestitures of existing businesses or assets.
Developing New Markets. We intend to analyze opportunities and may seek to expand our technology-based products into new business areas where our services can be replicated on a cost-effective basis, or where the creation or development of a product or service may be appropriate. We have technology integration partnerships and referral agreements with Adobe, DoubleClick, and Salesforce and other third-party marketers; and in 2017, we signed an integration agreement with Facebook. We anticipate utilizing various strategies to enter new markets, including: developing strategic relationships; innovating with existing proprietary technologies; acquiring products that address a new category or opportunity; and creating joint venture relationships.
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