Local.com Corporation (LOCM)
Q4 2008 Earnings Call Transcript
February 19, 2009 5:00 pm ET
Deirdre Skolfield – Executive Director, IR
Heath Clarke – Chairman and CEO
Bruce Crair – President and COO
Doug Norman – CFO
Richard Fetyko – Merriman
Gary Madrid [ph]
Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2008 Local.com Corporation earnings conference call. My name is Eric. I will be your audio coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of the presentation. (Operator instructions) I would now like to turn your presentation over to Ms. Deirdre Skolfield, Executive Director of Investor Relations. Please proceed.
Thank you, Eric. With me today are Local.com Chairman and CEO, Heath Clarke; President and Chief Operating Officer, Bruce Crair; and our Chief Financial Officer, Doug Norman. The executive team will discuss the company's financial results for the fourth quarter and full year 2008, and the company’s outlook for 2009. At the conclusion of their prepared remarks, we will open the lines for questions.
Certain matters discussed during this conference call include forward-looking statements within the meaning of Section 21-A of the Securities and Exchange Act of 1934 as amended. All statements regarding financial results and future plans and objectives of the company, including the company's assumptions regarding the value, growth, margins, and defensibility of Local.com, its traffic and advertiser acquisition strategies, subscription advertising products and planned future search activities, as well as patents and potential acquisitions, are forward-looking statements that involve various risks and uncertainties.
There can be no assurance that such statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause the actual results to differ materially from the company's expectations include, but are not limited to, such factors that are disclosed under the heading Risk Factors and elsewhere in the company's documents filed from time to time with the SEC and other regulatory authorities.
Forward-looking statements made during today's call are only made as of the date of this conference call and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Unless otherwise stated, all site traffic and usage statistics provided during today's call are from third party service providers engaged by the company.
I'll now turn the call over to our Chief Executive Officer, Heath Clarke.
Thanks, Deirdre. And welcome to everybody on the call today. We have a lot of good news to cover during today’s call. Before Bruce and Doug report operations and financial data, I’d like to share my very bullish view on the near and long-term prospects for our business and why Local.com is nearing breakeven and has the confidence to project 30% revenue growth to about $50 million this year and turn to net income despite the tough economy.
Let me start with an industry overview. Today, we are faced with the challenging economic times following a long period of economic expansion. Our primary customers are small business advertisers, and in the good times, they tend to be less focused on what works within their current advert budgets versus what doesn’t work.
For example, in the past few years, getting an electrician or builder to return your call and show up has been hard, in large part because these small businesses had no shortage of customers. Their phones were ringing off the hook no matter what advertising they did. In some cases, this is actually suppressed (inaudible) more effective advertising channels like search, and now ad spends are changing.
There is no question that during this economic downturn ad budgets have and will be cut. The question is, where and how, and what impact will that have on Local.com in particular. Remember that builder you couldn’t get hold out for so long, well, his funds stopped ringing months ago. And he started a question whether his Yellow Pages print ad was ever really working for him.
A recent report from the Kelsey Group, a leading industry research group, indicates that while half of small businesses cutting a Yellow Page print ad budgets this year aren’t sure what they are going to do with the savings, a full one-third are going to reallocate that spend to other forms of advertising like local online advertising.
Not only will our industry and Local.com receive some of the spend in the near-term, but in the long-term we believe our industry will permanently win this ad spend. Though, that shift in ad dollars is what’s driving continued growth in online advertising and local online advertising in particular. Yes, it’s slower than it has been in the past few years, but local online ad industry remains a very bright spot in today’s economy.
Kelsey estimates that online ad revenues will grow about 15% this year and local online ad revenues will grow about 25%. For the fourth year in a row, Local.com expects to outperform industry growth rates and gain market share because we continue to improve our business and are better positioned than many of our peers.
The shift in ad dollars from old to new media isn’t new. Industry experts have reported this for years. We believe that online advertising is over the long-term fundamentally local in nature. That’s why we believe our long-term growth prospects are excellent. We spent the last four years building our business and developing our platform in order to capitalize on this secular shift of small business ad spend away from local print towards local online advertising, and we’ve made a lot of progress.
Today, Local.com has America’s largest private label local search network covering small business directories on over 700 regional media sites. With our flagship Local.com property, we serve relevant search results using our patented technology to over 50 million monthly unique visitors last quarter, over half of which were organic visitors. We spent the last several years building our market share, and today Local.com is one of the leading local search engines. And we’ve built and expanded upon successful relationships with many of the companies in our sector.
The progresses we’ve made in these different areas of our business have diversified our traffic and revenue sources, and overall we’ve increased monetizing on our platform to the point where we start making money. We expect to grow revenue this quarter by about 12% to about $10.7 million.
Our loss is up a little this quarter because our direct sales haven’t performed to expectations. Despite this, we will exit this quarter about breakeven on an adjusted basis, and we expect to continue to grow our bottom line throughout the year forecasting adjusted earnings for the entire second quarter. Gaining a breakeven by the end of this quarter has been a major milestone for our company and represents what we believe is a fundamental step towards delivering earnings per share from this point forward.
We continue to have two main objectives through 2009; grow our direct advertiser basis and grow our organic traffic, both of which leverage our current infrastructure and increase our profits. As many of you know, we’ve been growing our direct sales channel, which is selling a $50 per month basic listing product on our site. We utilized third party call centers worldwide that today employ over 200 sales personnel exclusively to sell our product. And we incorporated less billing in the past seven months as an alternative way for customers to pay us.
Although we achieved early success in increasing the volume of advertisers to test our product, our processes are not yet mature. And we’ve fallen short of converting our outsourced customers to long-term clients, primarily due to reasons within our control that Bruce will talk more about in a moment. I’d like you to note that our current first quarter forecast includes outsourced telesales cost of $900,000 or $0.06 per share.
Our plan is to limit our ongoing cost on this project until we are satisfied that we have the formula right. We believe telesales costs will come into alignment later in the second quarter, and once this happens, we’ll buy us (inaudible) sales force. We remain committed to our target of 50,000 small business subscribers by the end of this year. One of the ways we can complement our own efforts is through the acquisition of customers. And we just acquired nearly 12,000 small business customers for about $1.2 million.
Our new customers pay $35 per month for web hosting service, which is fulfilled by a third party. Our new customers also receive a web listing on Local.com. This acquisition is immediately accretive and the revenue is recurring and highly predictable. We believe that gradually expanding our small business products will allow us to drive increased monetizing and margins from our platform. Today we have about 17,000 small business clients and we will continue to explore creative ways to cost effectively reach our target of 50,000 customers by year-end.
Our second objective this year is to grow organic traffic, which is an evergreen process involving a premise to our site, expanding our local search network and SCL [ph] improvements to both site and network. Organic traffic is desirable because it represents a recurring flow of search traffic that Local.com can monetize through advertising and makes us an independent source of that traffic for advertisers.
Another reason organic traffic is improvement is that it generates higher margin for Local.com because we get to keep most or all of the revenues generated. As a comparison, search engine marketing source traffic has relatively low margin for us. We recently launched a new version of our site in order to increase organic traffic, and we also plan to expand our local search network by increasing the number of participating sites and by increasing the amount of traffic each site generates. Layered across this traffic expansion are projected monetizing improvements, which all served to grow our overall revenue and margin.
On the technology front, we find a number of challenges in our industry and we see enormous opportunities in developing solutions to those challenges. For example, our industry often cannot drive enough traffic back to advertisers to keep up with their demand for traffic. Another challenge is getting enough content about small businesses to help consumers make buying decisions. These are friction points within our industry that we understand and that we feel Local.com is uniquely positioned to solve. If we can solve these issues, we create an opportunity for Local.com to become a very central player in local search syndication.
We capitalize on this. We are upgrading our local search platform to address these content and syndication challenges. This represents an investment we are making this year for 2010 and beyond.
Now I’d like to turn the call over to Bruce to discuss our KPIs and operations.
Thanks, Heath. As we’ve discussed in the past, the three primary drivers of value in the local search business are traffic, advertisers and technology. I’d like to give some operational insight and data points on each of these. Over the past few years, we have substantially increased traffic to our sight and network. In the fourth quarter, traditionally our slowest quarter, we had over 50 million monthly unique visitors, with just over one-half of those visitors coming to us organically. In other words, not through search engine marketing.
On Local.com, the percentage of organic users rose more than 10% from Q3 to Q4, and we are continuing to see organic traffic growth this quarter as well. We have more than 700 sites at our private label network, although we plan to pare back some of the lower performing sites while continuing to add more high performing sites. The majority of our revenues is via third-party advertising relationships, such as with Yahoo!, Idearc, Citysearch and many others.
As predicted on our last call, revenue per 1,000 visitors flattened from $278 RKV in Q3 to $275 RKV during the fourth quarter, not surprising given the economy. We expect us to grow again as we increase monetization on the site via more advertisers, more favorable relationships with our business partners, and ongoing improvements in user experience.
Moving now to advertisers, we’ve been working diligently to build our own advertiser base, and today we have our own internal sales force as well as outsourced telesales centers focused on acquiring customers for our subscription-based advertising. We’ve learned a lot over the last few quarters about the process of acquisition as well as how to keep those advertisers. We’ve had a number of challenges in developing and ironing out the business processes we use to acquire those advertisers as well as the processes we use to build and maintain them. As a result, our initial churn, in other words, the number of customers we lose in the first 30 days of their life with us, has been higher than we modeled. However, most of the issues associated with that churn are controllable, and we are working through those issues as we speak.
Let me give you some detail. While we were ramping up our sales with our outsourced sales partners, we were learning how to fly [ph] and didn’t have all of our processes or systems fully documented for us or for our call centers. Because of that, some of our customers would make it through the initial sales process, but for one reason or another would fail to make it through the fulfillment of billing process. Some of the more major processes have been corrected. And we are seeing retention improvements now. We have other processes still subject to improvement.
Another example is that our sales centers use different – use several different processes and handoffs to get our new customers into our billing and fulfillment engines. All centers will now be using a single system that gets the customer enter into our billing engine with immediate feedback to the center if there is a problem with an order. This allows that center to immediately correct the problem and/or call the customer back to correct inaccurate information so that the order can be resubmitted and increases the quality of the orders flowing to the systems.
While we implement these improvements, we are refining our outsourced telesales line [ph] with a view to containing further cost until we see sustained improvement in our retention. During our last earnings call, we reported that we had almost 7,000 advertisers as of the end of October 2008. This number represented those advertisers being billed plus those in the 30-day trial period minus our anticipated churn during that 30-day period.
Going forward, rather than estimating the first 30-day churn, we will be reporting only those advertisers actually being billed as of the reported date. As of January 31, 2009, we had 5,100 billed advertisers. This number is obviously lower than projected, and we are not at all satisfied with the result. However, as a result of the efforts I just described as well as potential customer acquisitions that Heath has noted, we remain confident in achieving our target of 50,000 small business customers by the end of this year.
On the technology front, we have launched a new look and feel for our flagship Local.com site. The new site showcases a sleek, flexible, user-friendly interface; an innovative, modular architecture; and state-of-the-art design. The flexible structure of the new site lets us display additional local business content and includes new geo-targeted home, search results and profile pages. It also incorporates technology that dramatically reduces page load times, reduces user navigation time, and optimizes various content areas throughout the site, making it faster and easier for consumers to access local business content using Local.com.
In addition, we will be investing in new technologies and capabilities over the next few quarters. We continue to improve both the users’ experience and improve monetization of our sites.
Now I’d like to turn the call over to Doug to discuss our financial results.
Thank you, Bruce. Fourth quarter of 2008 revenue was $9.6 million was slightly above the midpoint of the company’s prior guidance of $9 million to $10 million. This represented growth of 61% over the fourth quarter of 2007. Two partners represented over 10% of our revenues for the quarter. Yahoo! and Idearc totaled 45% and 13% of our revenues respectively.
Expenses were as follows. Search serving was 12% of our revenue and decreased from $1.3 million in Q3 to $1.2 million due to lower revenue share and depreciation expenses. Sales and marketing was 86% of our revenue and decreased from $8.5 million in Q3 to $8.2 million. The decrease was due primarily to lower tax and outsourced sales expenses. General and administrative was 15% of our revenue, an increase from $1.3 million in Q3 to $1.4 million due to the increased outsourced sales expenses. Research and development was 7.5% of our revenue and remained the same at $700,000. Amortization of intangibles totaled $200,000 or 2% of revenue, and remained the same as Q3.
Interest income was $21,000. Our net loss totaled $2.2 million and our basic and diluted net loss per share was $0.15. The net loss included a total of $935,000 or $0.06 per share of non-cash expenses, which is made up of $334,000 of depreciation and amortization, $601,000 of stock-based compensation. This net loss was in the mid range of our guidance of $2.1 million and $2.3 million. Basic and diluted earnings per share were calculated using weighted average of 14.4 million shares.
I would now like to provide financial guidance for the first quarter and fiscal 2009. The company expects first quarter 2009 revenue to be between $10.6 million and $10.8 million, which represents between 11% and 13% sequential increase over the fourth quarter of 2008. The company expects a net loss for the first quarter of 2009 to be approximately $2.5 million or $0.17 per share and to include the following items. Interest and other income and expenses of $6,000, depreciation and amortization of $425,000, and stock-based compensation charges of $465,000. Excluding the above figures from net loss, adjusted EBITDA is expected to be approximately $1.6 million or $0.11 per share for the first quarter of 2009. The net loss per share forecast assumes a weighted average share count of 14.45 million.
Operating expenses in the first quarter of 2009 are expected to include approximately $900,000 or $0.06 per share for outsourced direct sales efforts in order to acquire new advertisers. The company expects to exit the first quarter of 2009 approximately breaking even on an adjusted EBITDA basis and forecasts adjusted EBITDA for the second quarter.
For fiscal 2009, the company expects revenues to be approximately $15 million, which represents about 31% growth over 2008. The company also expects to have net income for fiscal 2009. Now I’d like to discuss the balance sheet. At December 31, 2008, the company had $12.1 million in cash and no debt.
I would now like to turn the call back over to Heath.
Thanks, Dough. I’d actually like to open the floor up to Q&A right now. Moderator?
Thank you. (Operator instructions) Your first question comes from the line of Richard Fetyko with Merriman. Please proceed.
Richard Fetyko – Merriman
How are you?
Richard Fetyko – Merriman
Doing well, thanks. First on the acquisition you made on the web hosting base of customers, could you tell us when that acquisition closed? And also I mean, is there any financials you can share with us from that acquisition? And what kind of synergies – sort of the strategy behind that, what kind of synergies – I assumed you think you can sell on some of your local advertising bundles, but just curious, if that’s the strategy and if so, if there’s been some testing done ahead of the acquisition to suggest that that’s going to work?
Sure. The financials – they are paying about $35 per month. There’s about 11,700 or so of them. And I think we recognized about $400,000 per month in revenue; the kind of margin on that in the order of 25% to 20%, maybe a little bit higher. It’s not so much about – I mean, in terms of the strategy, I’m not a big believer in the ability to cross sell necessarily. What I see here is an opportunity to serve a small business customer with a different kind of product. 60% [ph] – approximately 60% of our customers don’t have websites – or we see who don’t have email addresses, which infer that they don’t have websites either. So there is a cross-selling opportunity, but at the end of the day, this could be a standalone product for us that we can run through call centers that are specific to this kind of product and successfully sell those. And it fits within our objective of serving small business customers with subscription products, and in part because we like highly recurring revenues in the subscription, that’s something that the small business understands. That’s not so (inaudible) we can necessarily turn a web listing customer into web hosting customer while although we certainly try that. We see this as a discrete revenue stream, and our goal is to build that over time. And certainly we will test the idea of cross-selling.
Richard Fetyko – Merriman
Okay. And then with respect to the call center effort, could you tell us how many call centers you are using today or how many agents within those call centers combined perhaps? And I guess when will you sort of – when do you think you would be ready to start ramping debt up? When do you think you will have all the processes (inaudible) call scripts, tested and so forth?
Well, it’s an evergreen process. It kind of never ends, but we expect to get to a point where we are comfortable ramping later in the second quarter. And so our outlook in terms of second quarter earnings, adjusted earnings incorporates that idea. We have over 200 sales people today selling our products in about half a dozen call centers. And our goal at this point is to make sure that we contain those costs while we drive these efficiencies that Bruce talked about. And the good part is that we know – we think we know the low-hanging fruit there and we’ve begun to implement some of these changes already. We’ve got more to implement. Of course, it doesn’t make a lot of sense to ramp up while those are being implemented. What we want to do is we want to kind of maintain our cost – and perhaps even lower them while we implement these changes with a view to once kind of the metrics are aligned with our modeling ramping up at that point. And that’s the second half of the second quarter.
Richard Fetyko – Merriman
Okay. And with respect to the price point that you are selling the local bundle for, is that an issue at all? Have you seen any resistance on that or that is more of a sort of fulfillment in the processes where you need some improvement?
Sure. That’s a good question. We are testing different price points. We don’t believe that it’s an issue that stands out, but we are certainly open to the idea that there may be some sensitivity of the pricing. So we’re going to be testing that if we haven’t already begun testing it to see if that does make a difference. But the changes or the process improvement that Bruce has talked about, many of those internal. We feel that we’ve got – kind of to use an example, we’ve got a bucket that we figured out how to fill with water. And our business processes are the holes in that bucket. And advertisers are flowing out. But we kind of have a good idea of the biggest holes, and we are going to plug those holes over the next few months. And the idea is of course that that bucket fills over time. Once we see that we’ve gotten to the point where we also have a bucket, then we are going to ramp up. But we – we've learned a lot and it’s not been a straight line for sure. It’s punctuated equilibrium. We made progress here, maybe a step-back there. But overall, we’ve got a pretty good handle on the thing that we need to do to drive that. We brought in some additional health in terms of expertise to help us think about what we are doing and how we are doing it, and to drive these improvements. And we see kind of a multi-month effort, but our goal would be to contain costs while that effort is underway before we grow again in that area. And we see acquisitions – potentially acquisitions of advertisers as a way to complement our strategy. We look at other companies in aligned sectors or allied sectors that are serving small businesses and we know they have a combination of organic growth, organic advertising growth strategies as well as acquisition strategies. And again, as we kind of learn more, we thought that that makes a lot of sense to different way to skin the cat. And if we can see acquisition opportunities that are in line with our modeling in terms of cost, then there is no reason why wouldn’t pursue those as well.
Richard Fetyko – Merriman
Thanks. And then lastly, with respect to turning EBITDA and earnings positive, it sounds like starting in the second quarter, at least on the EBITDA level, what gives you that level of confidence and visibility? And where is the lever? Is it traffic growth or monetization improvements? I assume the acquisition helps as well to get you closer, but I was just wondering if there is other leverage (inaudible) expenses, monetization improvements or traffic growth that you think will push you over that inflection point. It seems one or two quarters ahead of my expectations.
Yes, sure. Recall also that the first quarter is seasonally our strongest quarter. And it’s not that it backs off greatly in the second quarter, but the fourth quarter is traditionally weakest quarter. So we are coming into a strong quarter albeit at lower growth rate than prior first quarter. So we’ve got that in our favor and we feel that that flows into Q2. We have business relationships that have expanded during the quarter. And we’ve got a pretty good eye on containing our costs related to the subscriber base, the advertiser base, as well as the acquisition. And that’s not going to be a material contribution during this quarter, and perhaps not even in an ongoing basis. It’s an acquisition that makes sense with our strategy and as to the bottom line each month. So the big drivers there are expanded relationships with business partners, growing the subscriber base while containing costs, and growing our organic traffic. Those are the big things. As Bruce pointed out, organic traffic on Local.com is up 10%. That’s all margin for us. And so those things in combination are putting us on a different growth trajectory effectively starting next month. And that changes the bottom line a lot.
Richard Fetyko – Merriman
All right, thanks.
(Operator instructions) Question comes from the line of Gary Madrid [ph]. Please proceed.
Hi. Two questions. Is acquiring advertisers more efficient than building them yourself through the call centers? And two, have you identified any other advertisers that you can acquire or a base of them such as the 11,000 you just acquired?
Sure. So, as I kind of commented with Richard, as we gained experience in acquiring small business subscribers and looked at what are the companies they are doing in this space or in allied spaces, we recognize that acquisition of subscriber base has been part of the growth strategy. And to the extent that the cost per subscriber base of the acquisition cost is in line with our modeling, then there is no reason why we wouldn’t go ahead and do that. And so that becomes part of our growth strategy on a go-forward basis. And in terms of other advertisers, we don’t comment on a conversation that may or may not be taking place.
Okay, thank you.
Your next question is a follow-up question from the line of Richard Fetyko. Please proceed.
Richard Fetyko – Merriman
Hi, guys. I was just wondering if you could give us an update on Idearc and what trends you are seeing with that partner, and whether you’ve been able to add any other third-party advertising partners or maybe perhaps you already have some that were not 10% partners we are not aware of, but whether you are sort of adding new third-party advertising partners or expanding with some outside of Idearc and Yahoo!?
Well, Idearc, in particular, we’ve enjoyed a good relation with Idearc and we’ve spent some time with them this quarter in trying to figure out different ways that we can expand upon the relationship that are mutually productive. And that’s been – like I said, we enjoyed working with the Idearc team. So that’s been an enjoyable process. And we think we’ve come up with some ways in which we can continue to build the relationship. We also have increased our relationships with others like Citysearch and Yellowpages.com as other examples. So the bigger our footprint becomes in terms of traffic, the more we are able to leverage existing relationships and expand – or add relationships that we haven’t had in the past. So Yellowpages.com would be an example of kind of a relationship that we haven’t had much exposure to historically, but we are getting creative about working with them. And we are always going back to our big partners, Yahoo! and Idearc and Citysearch. We will continue to do that. That again is an evergreen process. And we have people that are aligned with trying to figure out how to make more money in local search. So I think you can expect to see that relationships expand.
Richard Fetyko – Merriman
Got it. Thanks.
It appears we have no more questions in queue at this time. I would like to turn the call over to Mr. Heath Clarke for closing remarks.
Thank you. Local.com has challenges to rise to, particularly in the area of growing our customer base organically. Yet by being creative, we are already one-third of the way to our goal of 50,000 customers by year-end. We are executing well in many other areas of our business and as a result adjusted breakeven is imminent. In the second quarter, we expect adjusted earnings and forecast 30% growth to $15 million this year, with a net income for the entire year. The structural changes occurring in the advertising industry are set to directly benefit our company and we are well positioned to capitalize on these opportunities. Coupled with our seasonally strong first quarter, the big drivers for our return to profit are expanded relationships with our business partners, growing our small business customer base while containing costs, and growing our organic traffic. We are executing on all of these drivers, and as a result, we are bullish in our business in 2009. Thank you for participating in today’s call.
Thank you for your participation in today’s conference. This concludes our presentation. You may now disconnect. Have a good day.
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