Proving that there's more than one way to skim profits off the Internet, Marchex (NASDAQ:MCHX) came through with a solid quarter as it continues to monetize attractive domains through its local search, contextual marketing, and vertical networking efforts. Revenues soared by 97% to hit $29.8 million for the quarter, and earnings came in at $0.03 a share, a penny better than last year's fourth-quarter showing.
That compares quite favorably with rival Interchange (NASDAQ:INCX), a local search specialist that posted a loss earlier this week on a significant dip in revenues.
By now, you may be curious about what Marchex does. The company owns a few contextual pay-per-click marketing outfits, including IndustryBrains and Enhance Interactive. However, the part of Marchex that appeals to me most is the direct-navigation business.
Even though direct navigation made up just a third of the company's revenues, that part of the company's business has the most potential. Of the roughly 200,000 domain names Marchex owns, 74,000 happen to be ZIP code-dot-com (and in some cases dot-net) domains that cover 96% of the country's five-digit postal codes. There's not a whole lot of content there, but if you click on, say, 90210.com, you will be treated to basic information and a ton of ads from Yahoo! (NASDAQ:YHOO). Every interested click on a Yahoo! sponsor's text ad results in Marchex receiving the lion's share of the ad revenue.
Other winners in the portfolio with high type-in traffic include properties such as debts.com, CareerInfo.com, and hardware-update.com. Did that last one not exactly win you over? Well, it was a domain name that Inside Value pick Microsoft (NASDAQ:MSFT) employed to welcome users of Windows 2000 when they received hardware-related error messages. For some inexplicable reason, Mr. Softy let the domain registration lapse, and Marchex has it now. Even though the organic traffic to the domain is likely to dwindle as consumers upgrade to newer versions of Windows, it's still a popular landing page.
If stockpiling domains that lack proprietary content and exist solely on their type-in value seems like a flimsy model, part of me agrees with you. The company is working on content-building initiatives, and that's where the long-term potential of all of this virtual real estate will really come into play. Debts.com is a good example, but so much more is possible.
Until then, the part of me that doesn't mind this light model can point to a WebSideStory study that found that 4% of the visitors to a direct navigation site wind up clicking on a revenue-generating ad. That's twice the conversion rate of the popular search sites, and even better than most standalone content sites. It makes sense: If you're lost enough to go for a type-in domain, you're likely to click on the first ad you see that seems relevant to your needs. What seems like a cheap parlor trick is actually a legitimate lead, and it is clearly effective.
For 2006, Marchex is looking to produce revenues between $125 million and 133 million. Operating profits before amortization should clock in between $33 million and $38 million. That's in sync with the company's long-term expectations of growing operating income (before amortization accounting) by 30% or more annually.
This may not be the next Google (NASDAQ:GOOG) or Yahoo!, but Marchex is benefiting from companies like those that are popularizing high-paying contextual marketing ads. Marchex is mining away, and there's gold up in them thar virtual hills.
Longtime Fool contributor Rick Munarriz does own preferred shares in Marchex, which give him a healthy dividend as he waits this growth story out. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
