Marchex Attempts Overhaul of Web Site Ad Business

The strategy to make its sites more than just a platform for advertisers has been in the works for years now. If the thousands of pieces of Marchex's plan fall into place, then investors should see some upside to the company's shares, which have fallen 42% from a 52-week high of $23.24 hit last April. The stock recently traded at $13.55 a share. But investors should be warned that this plan won't be an overnight success for the Seattle-based company.

Founded in 2003, Marchex makes more than a third of its money by selling ad space on its network of "direct navigation" and zip-code-based web sites. The rest comes from the company's performance-based advertising and online search services, as well as partner relationships with search engines and online retailers. It's Marchex's direct-navigation sites, which typically hold generic domain names like videocamera.com, that hold the most promise in the company's makeover.

Here's how direct navigation works. Say an online shopper is looking for a new digital video camera. Whether via a search-engine hit or by intuitively typing in the web address, he ends up at videocamera.com. There he'll find links to online stores like Target (TGT) and Circuit City (CC), where video cameras are sold. Of course, the retailers pay Marchex every time a web surfer clicks an ad.

These sites, Marchex hopes, will become the company's future cash cow. Independent marketing research firm eMarketer expects online ad spending to grow 19% this year to $19.5 billion. Marchex is also tapping into the local advertising markets with its thousands of zip code domain names like 90210.com, which showcases local restaurants, hotels and realtors in and around Beverly Hills. Local advertising is expected to comprise $2 billion of that $19.5 billion total, according to eMarketer.

Getting a bigger piece of that ad spending would be great news for Marchex and its investors, who have endured slowing profit growth at the company for the last few quarters now. Marchex management attributed declines in its latest quarter to lower spending among its ad services clients and softness among its third-party distribution partners such as online search site Yahoo (YHOO) and shopping site Gifts.com.

In its latest fourth quarter, Marchex's revenue grew by a mere 9% year over year to $32.6 million. For the full year, revenue grew 35% to $127.8 million, up from $95 million in 2005. The company says this year investors can expect revenue to come in somewhere between $144 million and $150 million, with revenue growth rates at 8% to 10% during the current first quarter and accelerating to 20% to 25% in the fourth quarter of this year.

"At this stage we feel most of these noted challenges from the back half of 2006 are predominantly behind us and that we have laid a strong foundation from which to see growth rates accelerate as we move through each of the quarters in 2007," said CEO Russell Horowitz in the company's Feb. 22 earnings release.

Last May, Marchex paid $13 million in stock and cash to acquire Open List, a company that specializes in Internet search technology that seeks out and aggregates free editorial content, product reviews and other community-based material on the web. Using 90210.com as an example, Open List's technology scanned the web for restaurant reviews, maps and things to do while in Beverly Hills. By June, Marchex hopes to use Open List to populate 100,000 of its sites with such information.