Marchex pins hope on Local Advertising

Today was another 52-week low for Marchex, Inc. (NASDAQ:MCHX) with shares touching $5.71.  Despite the positive outlook by CEO Russell Horowitz, Mr. Market is taking Marchex shares to new lows on a daily basis.

Marchex is a local search and advertising company, and according to their website, more than 33 million people every month use their local network, which includes OpenList.com and Yellow.com, they make their money from advertising on that network. They are a Pay Per Click advertiser, a smaller version of Google Adsense, see their flow chart taken from their website:

However, Web 2.0 companies that have to explain their business model by graphics and pictures is getting less support these days, after all, if you can't understand how a company makes their money, why would you invest in it?

Add to it that even Google Inc. (NASDAQ:GOOG) has come under fire from analysts in the last few weeks predicting slower revenue growth for the fourth quarter amid signs that Internet users are growing less likely to click on advertising links, Google's main source of revenue.  If Google can't escape earnings and revenue estimates being cut by our deteriorating economy, how can Marchex not, thus the falling share prices of Marchex.

The Stress on Local Advertising

"In the third quarter, we continued to focus Marchex's business around our local and strategic initiatives. Because of this focus and the investments we made in our partners and products throughout 2008, we have hit the major operational milestones we laid out at the beginning of the year, including launching a major update to our industry leading local advertising platform," said Russell C. Horowitz, Marchex Chairman and CEO.

"The current economic climate is challenging for advertisers and we are realistic about the impact the fluid economic conditions will have on the advertising sector as a whole for the foreseeable future. However, we believe that the local online opportunity will outpace overall Internet advertising on a relative basis, and that Marchex is very well positioned in local, one of the most important markets within Internet advertising over the next several years. We believe our strong operating cash flow characteristics, product and partnership pipeline, cash-rich and debt free balance sheet, in conjunction with our continued financial discipline, will enable us to weather the economic headwinds and come out in a better relative position as the economy recovers."

Stats from Marchex's earnings call earlier this month:
Marchex beats by $0.02, misses on revs; guides Q4 revs below consensus Reports Q3 (Sep) earnings of $0.11 per share, $0.02 better than the First Call consensus of $0.09; revenues rose 11.0% year/year to $37.2 mln vs the $37.9 mln consensus. Co issues downside guidance for Q4, sees Q4 revs of $35-36.5 mln vs. $40.1 mln consensus.

Sure their balance sheet is in order and they have some great assets (thousands of web domains), but it's their revenue and earnings investors are worried about:

Financials (In millions of USD)

More from Marchex's Call:

Operating Highlights
Local Advertising Services: For the third quarter of 2008, revenue from Local Advertising Services was $17.5 million. In the third quarter, Marchex added more than 5,000 new advertisers through its local aggregator partnerships and direct sales channel. Marchex now has more than 80,000 advertisers using its products and services. While it is more difficult to predict advertiser growth rates in the current economy, Marchex still expects to reach its previously stated goal of 100,000 local advertisers using Marchex products and services by the end of 2009.

Local Search Network (proprietary traffic sources): For the third quarter of 2008, revenue from Marchex's Local Search Network was $19.7 million. Additionally, Marchex attracted more than 33 million unique visitors for the month of September 2008 and delivered more than 180 million revenue-generating events and referrals in the third quarter. Unique visitor statistics are based on internal traffic logs, which calculate unique IP (Internet protocol) addresses on an unduplicated basis during a given month.

Bottom line, Marchex's prospects in the long-term look good, but investors don't have patience to buy and hold these days.  Keep in mind that Marchex's short float is at 28%, so expect this stock to swing all over the place on a daily basis. 

All Marchex needs is some support and kudos from Wall Street and their stock price will comeback, they are a growth stock that has been beaten down by the struggling U.S. economy.

Still not convinced?  While you wait for Marchex declared a regular quarterly dividend in the amount of $0.02 per share on its common stock. Marchex will pay these dividends on November 17, 2008 to the holders of record as of the close of business on November 6, 2008. 

Keep in mind, Advertising Great Google doesn't even pay a dividend.

Disclaimer: No positions in any of the securities mentioned in this publication.