Berk Sure Has A Way

I’ve been silent on MCHX for a while (been busy with a new baby), but I have another interesting post coming up soon!   In recent news, however, Marchex released earnings last week and have seemingly continued to convince investors that they are a growth business.  While their direct navigation top-line growth was intriguing (see marketing analysis below), I still contend that Marchex is overvalued and their stock price will correct.  Below are some of the red flags from the press release and conference call.

• 117% or 35%?The press release (and the business press too) proclaims that revenue was up 117% for the year.  However, if you look deeper, you can see that pro forma revenue (including all the acquisitions) was only up 35% for the year and a even smaller 27% Q4 over Q4.  Revenue growth is not robust and is decelerating.  For the businesses MCHX started the year with (Enhance, Goclick and Trafficleader) revenue was up only 9% Q4 over Q4 – going from $15.1 million in Q4 2004 to $16.4 million in 2005.  The Q4 over Q3 was a paltry 2% in those businesses – what happened to the famous Q4 bump? See my posts on their slow growing old businesses and lack of overall organic growth.

• High PE with modest growth?  Pro forma revenue is projected to grow 19-27% from 2005 to 2006 ($105 mil growing to $125-133 mil).  That is pretty low growth rate for a company trading at EV/FCF ratio above 50.  If you take Q4 on a run rate basis (4x 29.8 mil = $119.2 million), growth will be in the 5-12% range – hardly the growth rate of Google or Yahoo.  Theoretically, it should be easier to grow a business off the smaller revenue base that MCHX has.  See my post on their cash flow ratios.

• One million shares of dilution!  Another quarter and another million shares in dilution.  Shares outstanding went from 38.3 to 39.3 million from Q3 to Q4.  That is over $20 million in value dilution.  Marchex didn’t even have $30 million in revenue yet shareholders suffered over $20 million in dilution.

• Eye-popping marketing growth!  Q4 sales and marketing expenditure skyrocketed by 261% year over year and 59% over Q3.  Marketing as a percentage of reported revenue has doubled from a recent 7.3% to 14.7%.  If you look at the businesses they acquired this year, the numbers are even more dramatic with marketing as a percent going from basically nothing to 22.4% of revenue from new businesses.  Management has indicated that they have been purchasing sponsored listings to drive traffic to their direct navigation domains.  This arbitrage window should close as CPCs rise on the terms MCHX is buying.   Is MCHX basically buying short term revenue growth?

I own puts on Marchex shares at various prices.