Berk Sure Has A Way

If you dig through Marchex’s financial statements and press releases, you can piece together a picture of how all of Marchex’s businesses would have performed on a pro forma basis. With some conservative estimates for Q4 of last year, it appears that Marchex is not growing organically. Q4, Q1, and Q2 were $24.2, $24.7 and $24.2 million respectively. 

Since Q4 of last year, MCHX managed to grow to $26.3 million in Q3 of 2005 – less than 9% overall and less than 7% over since Q1 2005! 

The numbers look a bit better if you compare year over year with a 25% growth rate. However, since most of that growth likely happened from Q3 to Q4 of 2004, it is clear that the annual growth rate is decelerating rapidly. 

Based on current estimates, they will grow at ~15% Y/Y in Q4. This is not a growth rate of a stock trading at 50 times cash flow. 

See the table below for historical actuals and my estimates of each of their businesses:

Even if you assume they can grow the direct navigation business (more on that later), MCHX’s overall pro-forma revenue will likely be flat in 2006 from 2005. My guess is that they will continue to buy businesses to mask the underperformance of their core business.

Most troubling about these numbers is the fact that all of MCHX cash flow seems to come from the direct navigation (domains) business. That means that investors are valuing MCHX at $800 million on the back of a business MCHX purchased for around $200 million this year.

I own puts on MCHX at various prices.