|Shares Out. (in M):||38||P/E||0.0x||0.0x|
|Market Cap (in $M):||138||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-24||EBIT||0||0|
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Marchex, Inc. (Nasdaq: MCHX, www.marchex.com, 3.8% dividend yield) is a very rare find. Based in Seattle, MCHX is a severely mispriced, fast-growing, free cash flow and intellectual property rich company that has been left for dead by investors after series of guidance reductions relating to its non-core business units. As the sale of non-core assets is completed as expected, MCHX will be transformed into a market-leading, pure-play digital/mobile call advertising company with strong free cash flow, fast growth and mission-critical IP assets that will most likely be acquired by a major technology/media company driven by both offensive (growth) and defensive (IP) motives.
Buyers of the stock at $3.65 today are getting the core, $15mm+ EBITDA, fast-growing business and IP assets potentially for free, at an estimated Adjusted TEV ranging from $(26)mm to $44mm, creating an opportunity for investors to return several multiples on their investment as value is realized. When one peels back the onion, it becomes clear why management is aggressively buying stock in both personally (via new 10b5-1 plans) and for the company (via a 2mm share repurchase) at these levels. A limited float, extremely high short interest (21 days to cover) and several near-term catalysts could easily drive the stock back over $10.00 on a standalone basis, and potentially much higher as MCHX is ultimately sold to a large strategic buyer (MSFT/GOOG/YHOO/FB, etc.), where a valuation could be multiples of MCHX’s annual revenues given the company’s leading technology and strategic patent portfolio, and the fast-growing smartphone/mobile advertising market.
Keys to the thesis are as follows:
MCHX is the market leader in digital call advertising focused largely on smartphone users, and generates revenue primarily through its performance-based digital call advertising products, the Marchex Digital Call Marketplace and the Marchex Call Analytics platform.
As succinctly described in Seattle Business Magazine, this is how MCHX’s call advertising works:
MCHX owns the following pending patent applications and issued patents:
Recent Jingle Networks Acquisition
On April 11, 2011, MCHX announced its pending acquisition of mobile voice search leader Jingle Networks for $62.5mm of cash and stock (http://investors.marchex.com/phoenix.zhtml?c=175199&p=irol-newsArticle&ID=1672433&highlight=). Having made an $18mm cash payment to Jingle holders in April 2012, the final payment of $18mm is due in October. While MCHX has the option to issue stock for this payment, all indications are that this payment will be made in cash. CFO Michael Arends noted on the latest conference call: “We have a little over $33 million cash on hand at the end of June, and we are cash-generating, as you know, every quarter from an operating cash flow. We generated actually $8 million in operating cash flow this last quarter. The Jingle payment in October is $18 million, and so by that point in time, we will one have -- continued to increase our cash coffers just from operating cash flow. But in addition to that, we still see a significant interest on the part of different parties out there and some of our domain name assets, and so that would be incremental from a cash perspective, any sales that we have on top of our operating cash flow. So we should have a fairly satisfactory level of cash flow, as well as cash balances, by the October payment date.”
How Will Value Be Realized?
I expect value to be realized in multiple steps here:
The primary risks relate to the ability to execute on the stated business plan, withstand competition and continued ability to reduce its concentration with YP Holdings (formerly AT&T Interactive), which represented 28% of Q2 2012 revenue. With regard to YP, Horowitz said on the 8/2/12 call "We feel good about where the relationship is. We're not giving specific commentary about spend levels, but we support them on an exclusive basis with multiple products. Our Call Marketplace is, I think, a critical piece of the value proposition that their end customers get. We are the most cost-effective provider of high-quality leads, and so we think there's opportunities for growth in general and with that relationship, particularly, as we think about the balance of the year and beyond."
Disclaimer: The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice. The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates. No representation or warranty is made as to the accuracy of the data or opinions contained herein.
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