Online advertising isn't a pie being split by just Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO). A few layers deep, companies like Marchex (NASDAQ:MCHX) are doing their best to cash in on growing traffic with contextual-search marketing services.
Last night, Marchex posted its first-quarter results. Revenue surged 69% higher, but things didn't play out so well on the way to the bottom line, with last year's $0.01 profit per share for the same quarter becoming a $0.03-per-share loss.
This may be disappointing to those who watched the company draw a whopping 28 million unique monthly visitors and still close out the period in the red. Then again, if you back out stock-based compensation and acquisition-related amortization charges, you arrive at a profit of $0.09 a share. On that basis, the company performed in the ballpark of what analysts were expecting.
As an investor in Marchex through its convertible preferred shares, I'm not a shareholder expecting near-term blowout results. I was drawn to Marchex because of its portfolio of 220,000 mostly high-traffic domains and other online businesses, and that requires a bit of patience to see things through.
Like local search specialist Interchange (NASDAQ:INCX), Marchex is positioned well in the booming space of narrow, localized search results. It owns several 5-number Zip Code domains -- like 90210.com -- that will benefit from the organic traffic that stems from more content.
My near-term concern is that the company is bent on overspending to sell ads in-house. The company conceded that it has had to bump up salaries in a "competitive" environment, and one has to wonder if all that traffic would be better served by a leaner organization simply turning to a third-party server like Google, Yahoo!, or Inside Value pick Microsoft (NASDAQ:MSFT). More attention to content creation instead of direct ad-selling would help.
That may seem a bit counterproductive to its more advanced search-marketing services, but the patient version of me wouldn't mind a little improvement in the near term. Watching general and administrative costs more than double -- and sales and marketing overhead more than quadruple -- is tough to swallow. But then I look back at the potential of Marchex to monetize its virtual real estate, and I figure that even if I disagree with the near-term expenditures, there's a dot-com asset play here waiting to explode.
Eventually.
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.
