Tuesday, February 28, 2006

Marchex: New Growth Drivers--Yahoo!

Online ad seller Marchex Inc. (MCHX-$23.28) said income was up 61 percent in the fourth quarter ended December 31, 2006, aided by a sharp jump in revenue. The Company reported net income of $980,000, or $0.03 per share, compared to net income applicable to common stockholders of $607,000 or $0.02 per share for the same period of 2004. Revenue grew 97 percent to $29.8 million for the fourth quarter, compared with $15.1 million in the fourth quarter last year.
The 10Q Detective is attracted to Marchex because of its increasingly ability to monetize its own traffic with its own advertisers. For the fourth quarter, revenue attributable to proprietary traffic sources was $14.4 million, with $10.3 million arising from the Name Development and Pike Street Industries asset acquisitions.

The Company is focused on search marketing, local search, and direct navigation. Marchex's platform of integrated performance-based advertising and search-marketing services enables merchants to efficiently market and sell their products and services across multiple online distribution channels, including search engines, product shopping engines, directories and selected Web properties.

According to the comScore Media Metrix Search report for December 2004, Yahoo! Search accounted for 32% of the online searches in the United States and Google accounted for 35%. As a result, these larger distribution partners have greater control over determining the market terms of distribution, including placement of merchant advertisements and cost of placement.

Yahoo!, primarily through its subsidiaries, such as Yahoo!Shopping, is the Company’s largest distribution partner and delivers traffic to Marchex’s merchant listings, accounting for approximately 10% of total revenue for the most recent full-year December 31, 2005.
Some of these advertising and search marketing contracts with Yahoo! expire in FY ’07 and corporate may not be successful in renewing some of these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The reason for this is simple—Yahoo! (and Google) controls significant portions of its traffic that it delivers to advertisers.
Nonetheless, in 2005, the Company added more than 100 new partners, and these new partnerships include relationships with two of the largest search networks, MSN and Ask Jeeves. Marchex also added several of the largest shopping networks such as Shopzilla, MSN Shopping and Become.com and several premium vertical publishers such as Forbes.com, BusinessWeek, Travel and Leisure, Investors Business Daily, Fodors, and USAToday. As a result of this progress, corporate believes that it now has one of the largest, high-quality, third-party distribution networks online, as well as having relationships with, and access to top-tier partners in each online customer acquisition channel.
In looking at Marchex’s search marketing technology and expanded partner distribution network, corporate significantly expanded its future monetization platform.
The 10Q Detective is also intrigued with the potential for Marchex’s local search engine business as a growth driver. According to The Kelsey Group (a provider of strategic research and analysis, data and competitive metrics on Yellow Pages, electronic directories and local media) 22 million small and medium sized businesses spend 46 percent of their advertising budgets on Yellow Pages marketing and put only 3 percent into search engine keywords. The Kelsey Group also reports that 25 percent of every Internet search is local in nature; meaning local consumers are looking for local merchants. However, less than 1 percent of local businesses have established an online marketing presence.
In looking at Marchex’s progress in local search, the Company added several new super-aggregator partners in 2005. These partners leverage Marchex’s search marketing technology and monetization platform to sell local online search packages to their offline and online local merchant customers. The addition of these new local super-aggregator relationships coupled with the growth in the advertiser basis of the existing super-aggregator partners led to a significant increase in the number of local merchant advertisers utilizing Marchex’s search marketing technology and distribution network.
According to management in its fourth quarter conference call, there are now thousands of local merchants utilizing the Company’s platform. Additionally corporate said that they were very pleased with its progress in this channel, for the signup and renewal rates of local merchants utilizing Marchex’s platform continues to track favorably.
Proprietary traffic metrics are growing sequentially, too. According to internal log files, corporate said on the earnings call that the Company had more than 27 million unique visitors in December 2005, up from more than 24 million unique monthly visitors in September of 2005, who accessed vertical and local websites.
Consistent with internal efforts to provide more utility and relevance for users, corporate focused on several technology driven enhancements to these websites that included elements such as targeted advertisements related to the location, integration for from local information services such as weather maps, jobs and related functionality, and, travel information on a demographics—all in an enhanced, more intuitive user interface.
As mentioned previously, revenue attributable to proprietary traffic sources, Name Development and Pike Street, contributed $10.3 million to top-line growth in the most recent quarter. Furthermore, the Company was successful in increasingly monetizing its own traffic with its direct Marchex advertisers. Prior to 2005, Marchex did not have a proprietary traffic source.
Management reminded listeners on the call, too, that the focus during the fourth quarter was not supporting its local super-aggregative partners to drive more local merchants online. This local search engine opportunity is viewed by corporate as a great growth driver that is relatively early in its lifecycle.
In our opinion, there is a strong need for technology providers to assist local merchants in creating, tracking, fulfilling and maintaining locally focused advertising campaigns. Today this channel is vastly underrepresented in online advertising spending.
According to another recent forecast by the Kelsey Group, the global online local search distribution channel—which includes Internet yellow pages, local search, and wireless—will grow to nearly $13 billion by 2010.
Management provided first guidance for 2006 on the call, too. For FY ’06, corporate is anticipating revenue in the range of $125 million to $133 million. For adjusted operating income before amortization, the Company gave a range of $33 million to $38 million. In addition, management is maintaining its long-term target for adjusted operating income before amortization targets of 30% or more.
Marchex is tracking to be one of the largest, most targeted vertical networks online.
That said, however, the stock price is selling for a multiple of 31.5x forward December 2007 estimates of $0.74 per share. This leaves little wiggle-room for operating mishaps. The 10Q Detective prefers to watch the stock for now—looking for an entry point below $20.00 per share—its 200-day moving average. [ed. note. Given the fragmented online advertising market, it would not surprise us to see Marchex gobbled up at about a 15% premium to its existing trading value].

1 comment:

Kevin Berk said...

I've been following Marchex for a while and I think you will find that they are talented at M&A, but if you look closer they aren't growing very rapidly and all their earning come from the Name Development acquisition.

Look Closer. Here are a list of my blog posts on Marchex:

My Marchex posts are:

http://berk.typepad.com/bshaw/2005/11/mchx_10_reasons.html - First post - summary
http://berk.typepad.com/bshaw/2005/11/wheres_the_grow.html - Lack of Organic Revenue Growth
http://berk.typepad.com/bshaw/2005/11/mchx_cash_flow_.html - Declining cash flow in non-Direct Nav businesses
http://berk.typepad.com/bshaw/2005/11/tier_two_paid_s.html - Critiques of Enhance / GoClick
http://berk.typepad.com/bshaw/2005/11/irrelevant_traf.html - Irrelevant Traffic Arbitrage (fascinating)
http://berk.typepad.com/bshaw/2005/12/more_marchex_ar.html - More detail on MCHX traffic arbitraging
http://berk.typepad.com/bshaw/2005/12/insp_miva_look_.html - MCHX is overvalued relative to comps
http://berk.typepad.com/bshaw/2005/12/foolish_mchx_my.html - Rebutting a Motley Fool Article
http://berk.typepad.com/bshaw/2006/02/marchex_earning.html - Q4 Earnings Red Flags
http://berk.typepad.com/bshaw/2006/03/marchex_mania_o.html - List of MCHX compettiors