Marchex, Inc. (MCHX)

2018
Marchex, Inc.
Office of the Chairman and Office of the CEO
520 Pike Street
Suite 2000
Seattle, WA 98101
Attention: Anne Devereux-Mills, Russell Horowitz and Mike Arends
 
Dear Anne, Russ and Mike:
 
Edenbrook Capital, LLC (“Edenbrook,” “we,” or “us”) beneficially owns 5,360,495 shares of Class B common stock, par value $0.01 per share (the “Class B Stock”) of Marchex, Inc. (“Marchex,” or the “Company”), representing approximately 14.5% of the outstanding Class B Stock and approximately 12.0% of Company’s outstanding common stock, including its privately-held Class A common stock, par value $0.01 per share. Edenbrook has been a stockholder since the first quarter of 2015 and has steadily grown its position to become the Company’s largest institutional stockholder.
 
Over the nearly four years of ownership, we have seen the Company’s management team successfully transform Marchex from a primarily transactional business to a recurring revenue business focused on enterprise clients. In doing so, you have put Marchex on a path to long-term, profitable and cash-generative growth. While the path to getting to this point has not been linear, the progress has been profound, and accelerated significantly this year. Over the course of 2018 alone, the Company has executed several meaningful examples of capital allocation, including:
 

1)
Paying a special dividend of $0.50 per share in March

2)
Opportunistically repurchasing an insider block of 2.3mm shares at $2.43 per share in May

3)
Acquiring Telmetrics, an enterprise call and text tracking analytics company, in November

4)
Acquiring Callcap, a call monitoring and analytics company, in December
 
Additionally, for the first time, in its third quarter 2018 earnings release, Marchex provided stockholders with segment reporting that broke out the Company’s faster-growing, higher-margin analytics revenue, which is largely recurring in nature. This high quality, software-based business, when combined with the two acquisitions referenced above, positions the Company to have a growing analytics business with more than $50 million in revenue. With the faster growing, higher-margin business expected to be more than half revenue in 2019, we expect to see meaningful pull-through effects for the Company’s aggregate financial profile. As one might have expected from this segment reporting, stockholders enjoyed an initial bounce in the stock price after Marchex’s third quarter earnings report showed how strong the crown jewel analytics business has become.
 
 
 
 

 
Despite all of these positive developments, Marchex’s Class B Stock now trades at an enterprise value of less than $70 million. One way to look at Marchex’s trading price is to say that Marchex is being valued at less than 1.4x its high quality analytics revenue, with zero value being given to the $50 million in trailing twelve months revenue from the Company’s legacy marketplace business, its $100+ million net operating loss carryforward or any of the Company’s intellectual property, including the massive conversational data set built up over many years, which is both hard to replicate and is the source of value creation for new higher, margin, recurring products.
 
We believe Marchex’s trading price of $2.63 per share (as of December 21, 2018) demonstrates a substantial discount to comparable industry valuations. Similar analytics-based public companies are trading at 4-6 times revenue, while private companies are being financed at 6-10+ times revenue. If Marchex were valued at 3 times analytics revenue (which is still a substantial discount to the market and less than Marchex just paid for Callcap), and approximately $44 million in cash were factored in, this would yield a value today of approximately $4.65 per share, which is 75% above today’s trading price of $2.63 per share (as of December 21, 2018). Adding in discounted values for the legacy business and the NOL carryforward would yield another approximately $1.60 per share, totaling approximately $6.25 per share, more than double today’s price. Further, given the continued profitable growth of the business, we expect these values to continue to expand in the coming years.
 
While the market is currently missing out on the accretive, profitable changes you are making to the business, we remain steadfast supporters of your transformation and believe that in time, the value will shine through and shareholders will be rewarded for your efforts and value creation.
 
Sincerely,

Jonathan Brolin
Managing Partner

Marchex, Inc. (NASDAQ: MCHX) has been undergoing a period of transformation and should become a growth business in 2019 and beyond, according to Roth Capital.
The Analyst
Roth Capital’s Darren Aftahi upgraded Marchex from Neutral to Buy and raised the price target from $3.40 to $7.
The Thesis
Marchex’s fundamentals have started gaining traction, and both its business and shares have become compelling, Aftahi said in the Sunday upgrade note. 
An uptrend is underway in speech-based analytics revenue, the analyst said. Organic growth in analytics revenue was around 17 percent year-on-year and 8-percent sequentially in Q3, he said.
Analytics revenue has also been boosted by recent acquisitions. With this segment beginning to comprise a major portion of Marchex's revenue base, the company is becoming “a more compelling story given its growth profile; tiered-subscription-based recurring revenue, and higher margin profile,” Aftahi said. 
Marchex has gathered a massive database of first-party conversational analytics data, according to Roth Capital.
Given this and Marchex’s scale, with more than 1,200 brands, the company has differentiated itself, Aftahi said.
While Marchex can use its core dataset to train models and create unique models for clients, other platforms need to purchase the datasets from third-parties in order to train models, the analyst said.