Edenbrook: Marchex Trading at Cash Value?

Purpose of Transaction.
No Reporting Person has any present plan or proposal which would relate to or result in any of the matters set forth in subparagraphs (a) – (j) of Item 4 of Schedule 13D except as set forth herein. The Reporting Persons intend to review their investment in the Issuer on a continuing basis.
The Reporting Persons acquired the Class B Common Stock to which this Schedule 13D relates for investment purposes in the ordinary course of business. The Reporting Persons acquired the Class B Common Stock because they believed that the Class B Common Stock reported herein, when purchased, represented an attractive investment opportunity.
The Reporting Persons have again increased the size of their position in the Issuer because they believe that the market continues to materially undervalue the Issuer and that the gap between price and value has widened considerably.  With the stock now trading at pennies above its cash value on a per share basis, the Reporting Persons believe that the market is ascribing almost no value to the Issuer’s business, intellectual property or net operating loss carryforwards. The Issuer has seen significant increases in operating costs the past two years, primarily for product development and to build an enterprise salesforce and expand internationally.  As a result of the cost expansion and lack of revenue growth, 2016 will likely be the Issuer’s first free cash flow negative year, given the Issuer’s cash burn through the first three quarters of 2016 and the Issuer’s publicly provided guidance on its most recent earnings call.  The Reporting Persons are thus heartened by the Issuer’s commitment, via its October 3, 2016 press release, to focus “on returning Marchex to a profitable, cash-generating company as soon as possible.”
The Reporting Persons believe that with the right cost structure, the company could earn 10% operating margins.  On the current revenue base, at just 8x operating profit, that would yield a value more than double today’s market price.  Additionally, the Issuer has invested over $100 million into product development and infrastructure, per the November 2, 2016 earnings call.  That amount represents nearly 100% of the current market capitalization of the Issuer.  The Reporting Persons believe that the Issuer spent that capital with the intention of earning a good return on it, and that if the Issuer can simply recapture that investment, it would be worth another multiple of the current stock price.  In other words, between cost savings and investment recapture, the Reporting Persons believe that the Issuer’s stock could be worth approximately triple the current price per share.  With the business trading near cash levels, the Reporting Persons believe this represents a very compelling risk-reward framework, with meaningful optionality attached to it that could be additive to that value (from business improvement, asset monetization, patent licensing, capital returns to shareholders, etc.).  While the Reporting Persons recognize that the path to value creation will likely not be perfectly linear, they believe that the Issuer’s Board of Directors and the Office of the CEO members are economically incentivized to get this right and have a history of working together in value-creating transactions.
Given the Issuer’s large cash position, the near-cash valuation of the stock and the commitment to generating cash going forward, the Reporting Persons also believe that an investment in the Issuer’s common stock represents one of the most attractive options for the Board to pursue.  Using just $20 million of cash through an accelerated purchase plan would allow the Issuer to buy back nearly 20% of the Company at current prices, which the Reporting Persons believe would be highly accretive to long-term investors.  Such a move would still leave the Issuer with $85+ million of cash, which the Reporting Persons believe would be more than sufficient to manage the turnaround and serve as a strategic asset.  The Reporting Persons also welcome members of the Issuer’s management team and Board to take advantage of this opportunity by personally making open market purchases of the Issuer’s stock, when regulatory windows permit.
The Reporting Persons further believe that the Issuer occupies a unique niche in the mobile advertising analytics industry and that its strong base of leading global brand customers and stable of products position the Issuer for meaningful, profitable growth in the years to come.  Should the market not recognize that value over time, the Reporting Persons believe that the Issuer could be an attractive target for strategic acquirors, or given its strong balance sheet and commitment to improved free cash flow generation, to financial buyers.
The Reporting Persons and their representatives have, from time to time, engaged in, and expect to continue to engage in, discussions with members of management and the board of directors of the Issuer, other current or prospective shareholders, industry analysts, existing or potential strategic partners or competitors, investment and financing professionals, sources of credit and other third parties regarding a variety of matters relating to the Issuer, which may include, among other things, the Issuer’s business, management, capital structure and allocation, corporate governance, composition of the Issuer’s board of directors and strategic alternatives and direction, and may take other steps seeking to bring about changes to increase shareholder value.
The Reporting Persons continually evaluate their investment in the Class B Common Stock and may in the future seek to acquire additional Shares or to dispose of all or a portion of the Class B Common Stock beneficially owned by them. Any such acquisition or disposition may be effected through privately negotiated transactions, in the open market, in block transactions or otherwise. In addition, the Reporting Persons may enter into hedging or derivative transactions with respect to the securities of the Issuer, including Class B Common Stock beneficially owned by them. Any determination to acquire or dispose of securities of the Issuer will depend on a number of factors, including the Issuer’s business and financial position and prospects, other developments concerning the Issuer, the price levels of the Class B Common Stock, general market and economic conditions, the availability of financing and other opportunities available to the Reporting Persons.