company update | comment · some of its traffic. • transparency lacking: marchex has not...

COMPANY UPDATE | COMMENTJUNE 4, 2007

Marchex, Inc. (NASDAQ: MCHX)

Monetization Catalyst May Not Emerge For MCHX

Sector PerformSpeculative Risk

Price: 15.26

Shares O/S (MM): 39.2Dividend: 0.00Float (MM): 18.1Debt to Cap: NMInstitutional Ownership: 35%

Price Target: 13.00Implied All-In Return: (14.8%)Market Cap (MM): 598Yield: 0.0%Avg. Daily Volume (MM): 0.553-Yr. Est. EPS Growth: 45.00%

Event

Company Update

Net: There are more questions than answers about the sustainability of revenuegrowth for MCHX. First, we believe the company is not likely to see a big uptickfrom the renegotiation of its Yahoo contract, as some investors had hoped.Second, there is a risk that MCHX will see its payouts "discounted" by Yahoo in2H07 by up to 20%. Next, after Google's recent move to stop monetization ofMade for Adsense (search arb) pages, the attractiveness of moving to Googlemonetization declined significantly. The alternative: MCHX could stop searcharbitrage spending, add content to every domain, and accept a higher risk of anear-term earnings miss. We remain on the sidelines.

• Marchex's Choice, Yahoo with Discounted Feed or Google Without SearchArb: We believe that there is an 80% probability that MCHX stays with Yahoovs. shifting to Google, as Google's recent policy change on search arbitrageshould prevent a flip. Unfortunately, Yahoo is now pushing to implement"discounting" in 2H07, which could negatively impact MCHX monetization,but could be partially offset by a higher revenue share with Yahoo.

• June 1st Deadline Announced in Mid-May: Google sent out notice toAdsense publishers who use search arbitrage tactics on May 18th stating that itwould no longer monetize these pages. Yahoo still permits publishers toconduct search arbitrage but might not allow existing search arb domainers toswitch to Yahoo for monetization. Marchex currently uses search arb to drivesome of its traffic.

• Transparency Lacking: Marchex has not disclosed the extent of revenuegenerated from search arb on its domains, the revenue from third-party arbplayers on its PPC network, or the probability and extent to which its payoutsfrom Yahoo will be "discounted" over the next few months. Even informedinvestors remain in the dark on this name. Our price target remains $13.

Priced as of prior trading day's market close, EST (unless otherwise noted).

125 WEEKS 14JAN05 - 01JUN07

12.00

14.00

16.00

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20.00

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24.00

26.00

J F M A M J J A S O N2005

D J F M A M J J A S O N2006

D J F M A M J2007

HI-23DEC05 26.40HI/LO DIFF -58.30%

CLOSE 15.26

LO-26JAN07 11.01

1500

3000

4500

6000

PEAK VOL. 6943.5VOLUME 2346.7

60.00

80.00

100.00

120.00Rel. S&P 500 HI-13JAN06 128.11

HI/LO DIFF -60.92%

CLOSE 62.68

LO-19JAN07 50.07

RBC Capital Markets Corp.

Jordan Rohan (Analyst)(212) 428-6411; [email protected]

Ross Sandler (Associate)(212) 428-6227; [email protected]

Stephen Ju (Associate Analyst)(212) 428-2365; [email protected]

Jason Brenner (Associate)(212) 428-6412; [email protected]

FY Dec 2005A 2006A 2007E 2008E

Revenue (MM) 95.0 127.8 146.1 166.2

EBITDA (MM) 29.6 39.5 43.1 49.1

EPS (Op) - FD 0.36 0.44 0.50 0.57

P/E 42.4x 34.7x 30.5x 26.8x

Revenue (MM) Q1 Q2 Q3 Q4

2005 18.4A 21.2A 25.6A 29.8A

2006 31.1A 31.7A 32.3A 32.6A

2007 34.2A 34.9E 37.1E 39.9E

2008 41.5E 41.5E 40.7E 42.5E

EBITDA (MM)

2005 4.7A 7.2A 8.1A 9.5A

2006 9.6A 9.7A 10.2A 10.0A

2007 9.5A 9.6E 11.2E 12.8E

2008 13.0E 11.0E 12.3E 12.7E

EPS (Op) - FD

2005 0.07A 0.09A 0.09A 0.11A

2006 0.09A 0.12A 0.12A 0.11A

2007 0.11A 0.11E 0.13E 0.15E

2008 0.15E 0.12E 0.14E 0.15E

All values in USD unless otherwise noted.

For Required Disclosures, please see 1.

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Summary and Investment Conclusion: Between a Rock and a Hard Place Marchex management faces some difficult decisions in 2H07. Its choice of monetization partner for its domain portfolio is of primary concern. We believe that there is an 80% probability that MCHX stays with Yahoo as opposed to shifting its business to Google, as Google’s recent policy change on search arbitrage could prevent a flip. Unfortunately, Marchex’s own monetization partner, Yahoo, is pushing to implement “discounting” for the domain channel in 2H07, and that push could negatively impact MCHX monetization. The hope among the bullish camp is that the discounting would be offset by a higher revenue share with Yahoo. That may or may not prove true. However, the best case may be flat monetization in 2008 (post-renegotiation), either with Yahoo or Google. A move to Google, which had always been perceived as a force of salvation for MCHX’s domain monetization, may in fact lead to lower monetization than a renegotiation with Yahoo. The recent actions of Google are also worth noting, and have likely escaped the awareness of the Marchex investor base. A few weeks ago, Google sent out letters to its domain channel partners that utilize search arbitrage tactics stating that as of June 1, 2007, Google would no longer allow those publishers to use Google AdSense to monetize those pages. This did not impact Marchex directly, as Marchex currently uses Yahoo’s syndicated text links for monetization. However, Google’s initiatives reduce the instant markup of direct navigation revenues that would be realized by a large Google partner such as IAC/Interactive Corp if it were to acquire MCHX. Lack of Transparency Increases Risk Profile We remain on the sidelines on Marchex as a result of several potential risks.

• Distribution of Traffic Across Domains: Marchex has disclosed some statistics around uplift of traffic from certain domains once Openlist is integrated, primarily on the local zip-code domains. However, Marchex has never disclosed how the 31 million unique visitors are distributed throughout its domain portfolio. Without such disclosure, we are unable to assess how much growth is organic and how much comes from search engine marketing activities, or search arb. Industry contacts suggest MCHX’s search arb activities are a significant driver of total traffic to Marchex domains.

• Composition of Advertisers: Marchex provides little transparency around the composition of the advertisers. On the previous two quarterly conference calls, Marchex has stated that it has been working to clean up its advertiser base, kicking out a number of “wholesale” advertisers, or search arb companies, who have migrated to the second tier networks as Google has made such practices less profitable. Some of the growth in 3Q06 and 4Q06 in the marketing services businesses at Marchex was a result of increased activities from wholesale advertisers. If Yahoo were to implement discounting, many of these businesses would be unsustainable, and marketing services revenue could be negatively impacted.

• Dispersion of Domain Revenue: Marchex provides no disclosure around the distribution of revenue within the domain portfolio, or the traffic quality within the domains. There are a number of high quality domains in the Marchex portfolio, but also a number of obscure domains.

Marchex, Inc.June 4, 2007

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Marchex’s Monetization Options 1) Flip to Google – We view this as unlikely, as Google has recently shifted its policy to eliminate search arb on MFA domain sites, a practice that Marchex currently uses on its Yahoo monetized domains. Additionally, Google uses a technique called “Smart pricing” (explained below) to match advertiser ROI across partner sites, and lower monetization to publishers that have low converting traffic. Domain businesses, like Marchex, that conduct search arb and have parking programs generally have lower converting traffic than pure type-in domain businesses, and are smart-priced down accordingly by Google. Marchex management often states that its traffic is of high quality. We believe that only some of the Marchex domain traffic has that quality profile, and other Marchex owned-and-operated traffic has lower quality. 2) Stay with Yahoo – We view this as highly likely, given Google’s recent policy shift around MFA domain businesses conducting search arb. Yahoo has not yet attempted to reduce monetization of search arbitrageurs, as Yahoo needs the query volume more than Google does, and can’t afford to lose the domain channel. In a sense, Marchex has benefited from Yahoo’s lack of discounting to date. Yahoo could implement discounting in 2H07, which could negatively impact Marchex’s proprietary traffic revenue by as much as 20% (and an even greater impact to EBITDA). Google’s Recent Policy Change on MFA Search Arb Google recently notified publishers who employ search arbitrage (Made For Adsense) pages and monetize with Google that it will no longer allow such tactics. Specifically, Google will prohibit the use of Adsense for monetization of MFA pages when the domain owner drives traffic to its sites via Adwords. While MCHX monetizes its domains with Yahoo, its broad use of search arbitrage could keep it from seriously considering a move to Google later this year. The alternative: MCHX could stop search arbitrage spending, add content to every domain, and accept a higher risk of earnings miss.

• June 1st Deadline Announced in Mid-May: Google sent out notice to Adsense publishers who conduct search arb on May 18th stating that it would no longer support these business models. Specifically, arbitrage domainers will no longer be able to monetize their sites via Google beginning on June 1st. Yahoo permits some partners to conduct search arb, but won’t likely allow existing Google arb domainers to switch to Yahoo for monetization.

Search Arb and Why Marchex Doesn’t Discuss It Search arbitrage happens when a domain portfolio owner buys ads on various search engines (incl. Google) to drive consumers to a page of keyword based text links. MCHX doesn't boast about its reliance on search arb because it would take away from the notion that growth in traffic is organic (unpaid) and carries high margins. Search arb is most profitable when users are channeled from low CPC keywords on any to a page full of high CPC syndicated ads. Like any arbitrage, the model succeeds if the arbitrageur can buy low and sell high.


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Source: Google, RBC Capital Markets The searcher clicks on a paid ad (text link) and is taken to a domain page, such as the one owned by Marchex, below (www.camcorder.com, in this example). The domain landing page is filled with CPC ads, which, by necessity, must generate enough revenue (also via CPC) that the arbitrageur can make a spread even after factoring in the click through rate.

Source: www.camcorders.com, RBC Capital Markets

Examples of paid search ads on a Google search results page.

A consumer is funneled from the search engine via CPC advertisements (low-cost CPC ads) to a domain landing page filled with higher-priced CPC ads. The arbitrageur pockets the difference between the low price paid for the CPC ad on the search results page and the higher price he generates when a user clicks on a CPC ad on the domain page.


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There are several ways to conduct search arb, some more profitable than others (but less sustainable longer-term). In its most basic form, search arb can be facilitated by funneling traffic from a source of traffic to a page full of links from a PPC network: 1) From a Google search engine results page to a Google-monetized domain, 2) From a Google search engine results page to a Yahoo-monetized domain, 3) From a Yahoo search engine results page to a Google-monetized domain. and 4) From a second tier search network’s results pages to a Google or Yahoo monetized domain. The most common technique is option 2, Google-to-Yahoo, as Google traffic carries a high conversion rate generally, and massive traffic from its high search market share, and Yahoo has not discounted the monetization on its domain partner’s pages (yet). As we discussed above, Google has shifted policies recently to eliminate Google to Google search arb (option 1 above) or Yahoo to Google (option 3), which is rarely used anyway. To get around Google’s policy changes on search arb, the domainer can choose to add content to pages so that the domain is not viewed as MFA site by Google’s algorithm. Yahoo “Discounting” Could Compress Search Arb Margins Yahoo’s discounting or, as Google calls it, Smart pricing, is a mechanism where Yahoo or Google marks down the payout for clicks that happen on its partners’ websites. The idea is that the ROI for search marketers should be equal to what an advertiser would get on the search engine results pages. Yahoo and Google ask the partner to tag all of the clicks that occur on the partners’ domains into different tranches, based on how well the clicks convert into sales. Yahoo and Google then give each tranche a score, from 1 to 10, 10 being the highest, or clicks that convert at the same rate (or a higher rate) as the clicks on the SERPs. Yahoo and Google then aggregate all the tranche scores and give the entire domain portfolio an aggregate score, 1 to 10. The ads that appear on the domainer’s sites are then discounted by the appropriate amount, for instance, a score of 8.5 out of 10 would result in a 15% discount to ads that appear on the domains. (As illustrated below)

Importantly, in the domain channel, business models such as search arb and parking programs generally receive a lower score than pure direct type-in traffic, as conversion


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rates tend to be lower, on average. Some search arb businesses that buy traffic on Google solely would receive a higher score than vs. search arb businesses that buy traffic on second tier search engines and elsewhere. Parking programs also vary widely, but in general would receive a lower score than direct type-in traffic, because most parking programs have a difficult time monitoring the activities of every partner. Whether or not it is discussed, the lower quality traffic comes from the higher levels of click fraud and “bot” traffic that exists on some PPC networks. Currently, Yahoo is in the process of communicating to the domain channel what each partner’s score would be in a post-discounting scenario, but Yahoo has yet to implement discounting. We expect Yahoo discounting to occur at some point in 2H07. We have conducted numerous channel checks to determine the score for many types of businesses in the domain space. Results have been mixed, with some portfolio owners receiving higher scores than others. However, the “purest” score we have come across is 8.7 out of 10. In a post-discounting scenario, there could be some pressure on search arb businesses as a result of the mark-down of the ads that are shown on domain pages.

Marchex’s Search ArbIt is difficult to estimate the amount of search arb that Marchex conducts. We believe it has increased significantly in the past eight quarters. Sales and marketing expense was $1.2m in 4Q04, the quarter prior to the acquisition of the Name Development domain portfolio, and was $7.1m in the most recent reported quarter. The company has made a number of acquisitions, so S+M expense should have increased over time, but we believe that as much as $2m-$3m per quarter could be spent on search arb.


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Yun Ye, the prior owner of the Name Development domain portfolio, purchased a significant amount of domains with expiring “link-in” traffic. This would naturally cause a drag on traffic growth and on direct navigation revenue for the new owner (Marchex), as the links to other sites are removed and the organic traffic to individual sites declines, and also cause a need to ramp search engine marketing spend, or search arb, in the years following the acquisition. At the time of the Name Development acquisition (1Q05), Marchex claimed to have 18m unique visitors to its domain portfolio. The company has added a number of assets to its domain portfolio, including Pike Street, Area Connect, Open List and most recently ClickDiario. The only disclosure given on traffic levels from these acquisitions is 2m unique visitors from the Pike Street deal and 1m uniques from the ClickDiario domains. The company reported 31m uniques in the most recent quarter. Therefore, if the 18m uniques originally disclosed at the end of 1Q05 should have actually declined over time as a result of expiring links, and if Marchex only added 3m unique visitors via acquisition, up to 15m uniques could theoretically have come from search arb. We don’t believe that search arb represents half of the Marchex traffic, but even if we assume a pick up in repeat visitation to the domain portfolio over the past two years, search arb clearly represents a significant amount of total traffic. As a result, if and when Yahoo decides to move forward with its discounting initiative, Marchex’s revenue could be significantly impacted. Additionally, if Yahoo discounting eliminates the ability for search arb companies to buy traffic from second tier sources, Marchex’s marketing services revenue (the Enhance Interactive and GoClick businesses) could also be impacted, as some of the advertisers on those platforms are search arb companies. Companies Mentioned: Google Inc. (GOOG, Outperform, Average Risk, $500.40 USD) Yahoo! Inc. (YHOO, Outperform, Average Risk, $28.78 USD)


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Valuation

Similar to the valuation methodology for the other companies in our coverage universe, we have taken a blended approach using P/E,EV/EBITDA, and FCF yield on our 2007 and 2008 estimates.

P/E: Using a target multiple of 25x our 2007 and 2008 Pro Forma EPS yields a $13 target.

EV/EBITDA: Our target EV/EBITDA multiple is 12x and its application on our 2007 and 2008 estimates yields a target of $14.50.

FCF: Application of an FCF yield of 6% on our 2007 and 2008 estimates yields target of $11.

To arrive at our target price of $13, we have taken the average of the targets yielded by the above valuation methodologies.

Marchex, Inc. -- Valuation Worksheet

($ in millions, except per share amounts)

Current Price $15.26

Diluted Shares Outstanding 45.7

Current Market Cap 696.9

Less Cash and Other Assets 46.1

Add Face Value of Preferreds 2.4

Adjusted Enterprise Value 653.2

Price to Earnings 2007E 2008E

Pro Forma EPS (fully taxed, includes amort.) $0.37 $0.45

Current P/E Multiple 41.3x 34.1x

Adjusted EPS (fully taxed) $0.50 $0.57

Current P/E Multiple 30.7x 26.9x

Target Multiple 25.0x 25.0x

Implied Stock Price on Forward EPS $12 $14

EV to EBITDA 2007E 2008E

Adjusted EBITDA 43.1 49.1

Current EV/EBITDA Multiple 15.2x 13.3x

Target Multiple 12.0x 12.0x

Enterprise Value 517.3 589.7

Add FY Ending Cash Balance 46.1 91.5

Equity Market Capitalization 561.0 678.8

FY06 End Projected Sharecount 44.1 42.2

Implied Stock Price on Forward EBITDA $13 $16

FCF Yield 2007E 2008E

FCF per Share $0.69 $0.68

Current FCF Yield 4.5% 4.5%

Target Yield 6.0% 6.0%

Implied Stock Price on Forward FCF $12 $11

Average Target $13

Source: Company reports and RBC Capital Markets

Price Target Impediment

• Marchex's pay-for-performance network is up against bigger and well-funded competition.


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• Potential for decelerating growth in online ad spending.

• Direct Navigation revenue may take longer to ramp and the business may require a larger investment than anticipated.

Company Description

Marchex is a provider of performance-based advertising and search marketing services. The company's technology-based platform helpsmerchants generate highly targeted traffic and sales leads through multiple online distribution channels, including search engines,directories, comparison shopping, and direct navigation.


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Marchex, Inc. -- Quarterly Earnings Analysis($ in millions, except per share amounts)

Mar A Jun A Sep A Dec A Mar A Jun A Sep A Dec A Mar A Jun E Sep E Dec E Mar E Jun E Sep E Dec EFY Dec 1QA 2QA 3QA 4QA 2005A 1QA 2QA 3QA 4QA 2006A 1QA 2QE 3QE 4QE 2007E 1QE 2QE 3QE 4QE 2008E

Direct Navigation Revenue 2.8 6.4 7.7 10.3 27.2 11.3 11.1 12.3 13.1 47.7 15.1 14.2 16.2 18.8 64.3 20.1 20.1 19.3 20.9 80.5IndustryBrains 1.9 3.1 5.0 3.2 3.2 3.3 4.1 13.8 4.3 4.3 4.4 4.6 17.6 4.8 4.8 4.9 5.1 19.7Core Marchex Revenue 15.6 14.8 16.0 16.4 62.8 16.6 17.4 16.8 15.4 66.2 14.8 16.3 16.5 16.5 64.1 16.5 16.5 16.5 16.5 66.0

Net Revenue 18.4 21.2 25.6 29.8 95.0 31.1 31.7 32.3 32.6 127.8 34.2 34.9 37.1 39.9 146.1 41.5 41.5 40.7 42.5 166.2Cost of Revenue 10.7 10.7 13.4 14.1 48.9 14.6 14.8 14.9 15.0 59.3 15.1 15.6 16.2 17.1 64.1 17.7 18.2 17.4 18.7 72.0Gross Profit 7.7 10.4 12.2 15.7 46.1 16.5 17.0 17.4 17.6 68.5 19.1 19.2 20.9 22.8 82.0 23.7 23.3 23.3 23.9 94.2Operating Expenses:

Selling and Administrative 1.3 1.5 2.8 4.4 10.0 4.8 4.5 5.1 5.7 20.1 7.1 7.0 7.3 7.6 29.0 8.2 9.1 8.7 8.9 35.0Product Development 0.8 1.3 1.2 1.2 4.5 1.5 1.7 1.8 1.8 6.8 2.1 2.2 2.1 2.2 8.6 2.3 2.7 2.3 2.3 9.6General and Administrative 1.5 1.5 1.5 1.9 6.4 1.9 2.4 1.9 1.9 8.2 2.3 2.5 2.4 2.6 9.7 2.5 3.0 2.6 2.5 10.7Acquisition-related retention consideration 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Facility Relocation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Stock Based Compensation 0.1 0.5 0.6 0.8 2.0 3.5 3.4 3.2 2.6 12.8 2.9 4.0 4.0 4.0 14.9 4.0 4.0 4.0 4.0 16.0Amortization of Acquired Intangibles 3.1 4.9 5.2 5.2 18.4 4.9 5.2 5.3 5.1 20.5 4.5 5.2 5.2 5.2 20.1 5.2 5.2 5.2 5.2 20.8

Total Operating Expenses 6.8 9.8 11.2 13.5 41.3 16.4 17.1 17.4 17.1 68.0 18.9 20.9 21.0 21.6 82.4 22.3 24.0 22.8 23.0 92.1Reported Operating Income 0.9 0.7 1.0 2.2 4.8 0.1 (0.1) 0.0 0.6 0.6 0.2 (1.7) (0.1) 1.3 (0.3) 1.4 (0.7) 0.6 0.9 2.1

Pro Forma Operating Expenses 6.6 9.3 10.6 12.8 39.3 13.1 13.8 14.1 14.5 55.5 16.0 16.9 17.0 17.6 67.5 18.3 20.0 18.8 19.0 76.1Pro Forma Operating Income 1.1 1.2 1.6 2.9 6.8 3.4 3.2 3.3 3.1 13.0 3.1 2.3 3.9 5.3 14.5 5.4 3.3 4.6 4.9 18.1Amortization of Acquired Intangibles 3.1 4.9 5.2 5.2 18.4 4.9 5.2 5.3 5.1 20.5 4.5 5.2 5.2 5.2 20.1 5.2 5.2 5.2 5.2 20.8Adjusted OIBA 4.2 6.1 6.8 8.2 25.2 8.3 8.3 8.6 8.3 33.4 7.6 7.5 9.1 10.5 34.6 10.6 8.5 9.8 10.1 38.9Depreciation 0.2 0.2 0.3 0.3 1.0 0.3 0.4 0.5 0.5 1.7 0.9 1.0 1.2 1.3 4.5 1.4 1.5 1.6 1.7 6.2Amortization of Domains and YHOO settlement 0.4 0.8 1.0 1.1 3.3 1.0 1.0 1.2 1.2 4.4 1.0 1.0 1.0 1.0 4.0 1.0 1.0 1.0 1.0 4.0Adjusted EBITDA 4.7 7.2 8.1 9.5 29.5 9.6 9.7 10.2 10.0 39.5 9.5 9.6 11.3 12.8 43.1 13.0 11.0 12.4 12.8 49.1

Interest Income 0.3 0.6 0.5 0.6 2.0 0.7 0.8 0.8 0.8 3.1 0.7 0.7 0.8 1.0 3.2 1.1 1.2 1.4 1.5 5.3Interest Expense (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Pretax Income 1.2 1.3 1.6 2.8 6.8 0.8 0.6 0.8 1.4 3.7 0.9 (1.0) 0.7 2.2 2.9 2.5 0.5 1.9 2.4 7.4Income Tax Expense (benefit) 0.5 0.5 0.9 1.1 2.9 0.7 0.8 0.8 2.0 4.3 0.5 (0.4) 0.3 0.9 1.3 1.0 0.2 0.8 1.0 3.0Reported Net Income 0.7 0.8 0.7 1.7 3.9 0.1 (0.2) 0.0 (0.6) (0.6) 0.4 (0.6) 0.4 1.3 1.6 1.5 0.3 1.2 1.4 4.4Convertible Preferred Stock Dividends 0.3 0.7 0.7 0.7 2.4 1.5 0.4 0.4 (5.5) (3.2) (0.1) 0.0 0.0 0.0 (0.0) 0.0 0.0 0.0 0.0 0.1Accretion to Redemption Value of Redeemable Convert 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net Income (loss) Applicable to Common 0.4 0.1 0.0 1.0 1.5 (1.2) (0.6) (0.4) 5.0 2.8 0.5 (0.6) 0.4 1.3 1.6 1.5 0.3 1.1 1.4 4.3

Pro Forma Operating Income 1.1 1.2 1.6 2.9 6.8 3.4 3.2 3.3 3.1 13.0 3.1 2.3 3.9 5.3 14.5 5.4 3.3 4.6 4.9 18.1add: Amortization of acquired intangibles 3.1 4.9 5.2 5.2 18.4 4.9 5.2 5.3 5.1 20.5 4.5 5.2 5.2 5.2 20.1 5.2 5.2 5.2 5.2 20.8Interest Income 0.3 0.6 0.5 0.6 2.0 0.7 0.8 0.8 0.8 3.1 0.7 0.7 0.8 1.0 3.2 1.1 1.2 1.4 1.5 5.3Interest Expense (0.0) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Pretax Income 4.4 6.7 7.3 8.7 27.2 9.0 9.1 9.4 9.1 36.6 8.3 8.2 9.9 11.5 37.9 11.7 9.8 11.1 11.6 44.2Income Tax Expense (Benefit) 1.9 2.8 3.1 3.6 11.4 3.7 3.8 3.9 4.0 15.4 3.4 3.4 4.1 4.8 15.7 4.9 4.1 4.6 4.8 18.4Adjusted Net Income 2.6 3.9 4.3 5.1 15.8 5.3 5.3 5.5 5.1 21.1 4.8 4.8 5.8 6.7 22.1 6.8 5.7 6.5 6.8 25.8Convertible Preferred Stock Dividends

Adjusted Net Income 2.2 3.2 3.6 4.4 13.4 3.8 4.9 5.1 5.1 18.8 5.0 4.8 5.8 6.7 22.2 6.8 5.7 6.5 6.8 25.7

Diluted Earnings per ShareReported Earings per Share $0.01 $0.00 $0.00 $0.03 $0.04 ($0.03) ($0.02) ($0.01) $0.11 $0.06 $0.01 ($0.02) $0.01 $0.03 $0.04 $0.03 $0.01 $0.02 $0.03 $0.10Adjusted EPS $0.07 $0.09 $0.09 $0.11 $0.36 $0.09 $0.12 $0.11 $0.11 $0.44 $0.11 $0.11 $0.13 $0.15 $0.50 $0.15 $0.13 $0.14 $0.15 $0.57

Basic Shares Outstanding 30.2 35.3 36.0 36.6 34.5 37.1 38.3 38.7 38.8 38.3 39.2 39.2 39.4 39.6 39.4 39.8 40.0 40.2 40.4 40.1Diluted Shares Outstanding 32.9 37.5 38.1 39.2 36.9 39.8 41.0 44.4 45.7 42.7 44.4 44.5 44.7 44.9 44.7 45.1 45.3 45.5 45.7 45.4

Margin AnalysisGross Margin 42.0% 49.3% 47.7% 52.8% 48.5% 53.0% 53.4% 53.9% 54.1% 53.6% 55.8% 55.2% 56.2% 57.2% 56.2% 57.2% 56.2% 57.2% 56.2% 56.7%Total Operating Expenses as % of Revenue 36.9% 46.1% 43.6% 45.5% 43.4% 52.8% 53.8% 53.9% 52.3% 53.2% 55.2% 60.1% 56.6% 54.0% 56.4% 53.9% 57.8% 55.9% 54.1% 55.4%Pro Forma Operating Margin 5.9% 5.5% 6.3% 9.9% 7.2% 11.0% 9.9% 10.1% 9.6% 10.2% 8.9% 6.6% 10.4% 13.2% 9.9% 13.0% 8.0% 11.2% 11.5% 10.9%Adjusted OIBA Margin 22.7% 28.9% 26.5% 27.4% 26.6% 26.6% 26.2% 26.6% 25.3% 26.2% 22.2% 21.6% 24.5% 26.3% 23.7% 25.6% 20.5% 24.0% 23.7% 23.4%Adjusted EBITDA Margin 25.7% 34.0% 31.6% 31.9% 31.1% 30.8% 30.6% 31.6% 30.7% 30.9% 27.7% 27.4% 30.3% 32.1% 29.5% 31.4% 26.5% 30.3% 30.0% 29.6%Effective Tax Rate 39.4% 37.3% 55.1% 39.7% 42.8% 81.7% 129.2% 98.6% 139.6% 116.1% 51.8% 40.0% 40.0% 40.0% 43.7% 40.0% 40.0% 40.0% 40.0% 40.0%Adjusted Net Income 12.1% 15.1% 14.0% 14.8% 14.1% 12.1% 15.4% 15.7% 15.5% 14.7% 14.5% 13.7% 15.5% 16.7% 15.2% 16.4% 13.7% 15.9% 15.9% 15.5%

Year Over Year GrowthDirect Navigation Revenue 308.1% 73.1% 59.2% 27.1% 75.7% 33.8% 28.1% 32.2% 43.8% 34.8% 33.2% 41.8% 19.3% 10.9% 25.1%Core Marchex Revenue 105.6% 66.6% 31.2% 8.5% 43.4% 6.5% 17.9% 4.7% -6.1% 5.4% -11.2% -6.1% -1.6% 7.2% -3.2% 11.6% 1.0% 0.0% 0.0% 2.9%Net Revenue 142.0% 138.8% 109.8% 97.1% 116.9% 69.1% 49.8% 26.1% 9.4% 34.5% 10.0% 9.9% 14.7% 22.5% 14.4% 21.2% 19.0% 9.8% 6.5% 13.8%Operating Income -358.4% -467.3% 345.5% 209.5% 1092.7% 211.9% 168.9% 104.2% 6.3% 90.2% -10.3% -26.7% 17.8% 68.4% 11.9% 76.4% 42.7% 17.8% -7.7% 24.9%Adjusted EBITDA 535.1% 733.9% 320.2% 252.4% 374.0% 102.2% 34.8% 26.3% 5.3% 33.8% -1.0% -1.6% 10.1% 28.2% 9.1% 37.3% 15.2% 9.8% -0.4% 14.0%Pro Forma Net Income 5765.2% 630.5% 234.1% 199.4% 355.8% 69.3% 52.7% 42.0% 14.7% 40.1% 31.3% -2.0% 13.6% 31.5% 17.9% 37.5% 18.6% 12.5% 1.3% 16.0%Pro Forma Diluted Earnings per Share 2414.0% 371.4% 136.2% 111.6% 185% 40.0% 39.6% 22% -1.6% 21% 17.6% -9.8% 12.8% 33.6% 13% 35.4% 16.6% 10.5% -0.4% 14%

Other MetricsFree Cash Flow 1.4 3.9 2.1 3.5 10.9 5.3 2.7 7.3 1.1 16.5 11.0 7.0 6.0 7.1 31.0 7.8 7.7 7.2 8.3 31.0Free Cash Flow per Share $0.04 $0.10 $0.06 $0.09 $0.30 $0.13 $0.07 $0.17 $0.02 $0.39 $0.25 $0.16 $0.13 $0.16 $0.69 $0.17 $0.17 $0.16 $0.18 $0.68

Source: Company reports and RBC Capital Markets

2008E2007E2006A2005A


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Required Disclosures

Explanation of RBC Capital Markets Rating System

An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned toa particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst'ssector.RatingsTop Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector over 12months; provides best risk-reward ratio; approximately 10% of analyst's recommendations.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk Qualifiers (any of the following criteria may be present):Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; nosignificant cash flow/financing concerns over coming 12-24 months; fairly liquid.Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability; maynot be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float.Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being delisted.

Distribution of Ratings, Firmwide

For purposes of disclosing ratings distributions, regulatory rules require member firms to assign all rated stocks to one of three ratingcategories--Buy, Hold/Neutral, or Sell--regardless of a firm's own rating categories. Although RBC Capital Markets' stock ratings ofTop Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, themeanings are not the same because our ratings are determined on a relative basis (as described above).

Distribution of Ratings/IB ServicesRBC Capital Markets

Investment BankingServ./Past 12 Mos.

Rating Count Percent Count Percent

BUY[TP/O] 443 42.52 177 39.95HOLD[SP] 501 48.08 149 29.74SELL[U] 98 9.40 18 18.37

Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q15

10

15

20

25

30

2005 2006 2007

02/22/05I:SP:25

06/30/05OP:20

11/10/05OP:25

12/16/05OP:30

02/24/06OP:29

05/09/06OP:25

08/09/06OP:20

10/31/06UP:13

11/09/06UP:12

02/21/07SP:13

Rating and Price Target History for: Marchex, Inc. as of 06-01-2007 (in USD)

Legend:

TP: Top Pick; O: Outperform; SP: Sector Perform; U: Underperform; I: Initiation of Research Coverage; D: Discontinuation of Research Coverage; NR: Not Rated;

NA: Not Available; RL: Recommended List - RL: On: Refers to date a security was placed on a recommended list, while RL Off: Refers to date a security was

removed from a recommended list.

Created by BlueMatrix


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Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q116

24

32

40

48

2005 2006 2007

09/23/04I:OP:40

01/11/05I:OP:42

01/19/05OP:43

02/24/05SP:34

04/20/05SP:36

06/27/05SP:40

07/20/05SP:36

01/13/06SP:42

01/18/06OP:42

04/19/06OP:40

07/19/06OP:33

10/18/06OP:31

12/20/06OP:30

01/24/07OP:31

02/16/07OP:34

Rating and Price Target History for: Yahoo! Inc. as of 06-01-2007 (in USD)

Legend:





Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q10

150

300

450

600

2005 2006 2007

09/23/04I:SP:115

10/22/04SP:145

01/11/05I:TP:235

02/02/05TP:250

02/24/05SP:200

04/20/05OP:230

04/22/05OP:280

06/06/05OP:330

07/20/05OP:340

10/21/05OP:450

11/18/05OP:475

01/13/06OP:500

02/01/06OP:435

04/21/06OP:465

10/20/06OP:525

02/01/07OP:550

04/20/07OP:560

Rating and Price Target History for: Google Inc. as of 06-01-2007 (in USD)

Legend:





References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by a member company of RBC Capital Markets or one of its affiliates. RBC Dain Rauscher Inc. RecommendedLists include a former list called the Western Region Focus List (1), a former list called Model Utility Portfolio (2), and the PrimeOpportunity List (3) (formerly called the Private Client Selects), Private Client Prime Portfolio (4), a former list called Private ClientPortfolio (5), the Prime Income List (6), the Guided Portfolio: Large Cap (7), and the Guided Portfolio: Dividend Growth (8). Theabbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' means the date a securitywas removed from a Recommended List.

Analyst Certification

All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of thesubject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

Dissemination of Research

RBC Capital Markets endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients, havingregard to local time zones in overseas jurisdictions. RBC Capital Markets' equity research is posted to our proprietary websites toensure eligible clients receive coverage initiations and changes in rating, targets and opinions in a timely manner. Additional


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distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third partyvendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Marketsresearch.

Conflicts Disclosures

RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. Toaccess our current policy, clients should refer tohttp://www.rbccm.com/cm/file/0,,63022,00.pdfor send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower,Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

Important Disclosures

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated byinvestment banking activities of the member companies of RBC Capital Markets and its affiliates.

RBC Capital Markets Corp. makes a market in the securities of Marchex, Inc. and may act as principal with regard to sales or purchasesof this security.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from Marchex, Inc. during the past 12 months. During this time, a member company of RBC CapitalMarkets or one of its affiliates provided non-securities services to Marchex, Inc.

RBC Capital Markets has provided Marchex, Inc. with investment banking services in the past 12 months.

RBC Capital Markets has provided Marchex, Inc. with non-securities services in the past 12 months.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services fromYahoo! Inc. in the past 12 months.

RBC Capital Markets Corp. makes a market in the securities of Yahoo! Inc. and may act as principal with regard to sales or purchases ofthis security.

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from Yahoo! Inc. during the past 12 months. During this time, a member company of RBC Capital Marketsor one of its affiliates provided non-securities services to Yahoo! Inc.

RBC Capital Markets has provided Yahoo! Inc. with investment banking services in the past 12 months.

RBC Capital Markets has provided Yahoo! Inc. with non-securities services in the past 12 months.

RBC Capital Markets Corp. makes a market in the securities of Google Inc. and may act as principal with regard to sales or purchases ofthis security.

Additional DisclosuresRBC Capital Markets is the business name used by certain subsidiaries of Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital MarketsCorporation, Royal Bank of Canada Europe Limited and Royal Bank of Canada - Sydney Branch. The information contained in this report has been compiled by RBCCapital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, itsaffiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets'judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this reportconstitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been preparedwithout regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitablefor you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report isnot an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss oforiginal capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includesprofits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulatingthe types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in thisreport may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as securities broker ordealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the fullextent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential lossarising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the priorconsent of RBC Capital Markets.

Additional information is available on request.


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To U.S. Residents:This publication has been approved by RBC Capital Markets Corporation, which is a U.S. registered broker-dealer and which accepts responsibility for this report and itsdissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that wishesfurther information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital MarketsCorporation.To Canadian Residents:This publication has been approved by RBC Dominion Securities Inc. Any Canadian recipient of this report that is not a Designated Institution in Ontario, an AccreditedInvestor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further informationregarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, withoutin any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.To U.K. Residents:This publication has been approved by Royal Bank of Canada Europe Limited ('RBCEL') which is authorized and regulated by Financial Services Authority ('FSA'), inconnection with its distribution in the United Kingdom. This material is not for distribution in the United Kingdom to private customers, as defined under the rules of theFSA. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.To Persons Receiving This Advice in Australia:This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been prepared forgeneral circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on thismaterial, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possibleacquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider thatdocument before making any decision about whether to acquire the product.To Hong Kong Residents:This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, a licensed corporation under the Securities and Futures Ordinance. Thismaterial has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishingto obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited at 17/Floor, Cheung KongCenter, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388).

®Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.Copyright © RBC Capital Markets Corporation 2007 - Member SIPC

Copyright © RBC Dominion Securities Inc. 2007 - Member CIPFCopyright © Royal Bank of Canada Europe Limited 2007

Copyright © Royal Bank of Canada 2007All rights reserved


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