Local.com Corporation Q2 2009 Earnings Call Transcript

Jul.30.09 | About: Local Corporation (LOCM)

Local.com Corporation (NASDAQ:LOCM)

Q2 2009 Earnings Call Transcript

July 30, 2009 at 4:30 pm ET

Executives

Bruce Crair - President and Chief Operating Officer

Brenda Agius - Chief Financial Officer

Ken Cragun - Vice President of Finance

Analysts

Richard Fetyko - Merriman

Jeff Rath - Canaccord Adams

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2009 Local.com Corporation earnings conference call. My name is Vienna and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn your presentation over to your host for today's call, Mr. Ken Cragun, Local.com Vice President of Finance. Please proceed.

Ken Cragun

Thank you and good afternoon. It is my pleasure to welcome you to Local.com's second quarter financial results conference call. With me today are Local.com President and Chief Operating Officer, Bruce Crair; and our Chief Financial Officer, Brenda Agius. Unfortunately, Heath Clarke, our Chairman and CEO cannot be with us on the call today because of a last minute family medical emergency. However, he will be available for questions via telephone after the call for those who would like more information. Please contact Brenda to set up that up. The executive team will discuss the company's financial results for the second quarter of 2009, and our outlook for the third quarter of 2009. At the conclusion of their prepared remarks, we will open the lines for questions.

I would like to bring everyone's attention to the fact that today we will make forward-looking statements within the meaning of Section 21-A of the Securities and Exchange Act of 1934 as amended. These statements are subject to risk and uncertainties that may cause actual results and events to differ materially from those expressed in forward-looking statements. These risks and uncertainties will be outlined at the end of this conference call and are also detailed in Local.com's filings with the Securities and Exchange Commission.

Forward-looking statements made during today's call are only made as of the date of this conference call and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Before turning you over to Bruce, it is important that I mention that we use non-GAAP financial measures in evaluating our financial performance. Specifically the non-GAAP financial measure of adjusted net income or loss, pleas refer to the press release we issued today and to our Form 10-Q to be filed with the Securities and Exchange Commission or how we define adjusted net income or loss and our reasons for using that non-GAAP measure as well as the detailed review of our second quarter results including in a corresponding GAAP financial measures and the reconciliation of our non-GAAP financial measures to GAAP financial measures.

To comply with the SEC's guidance on fair and open disclosure, we have made this conference call publicly available via audio webcast through the Investor Relations section of our website and the replay of the conference call will be available for 90 days after the call.

I would now like to turn the call over to our President and COO, Bruce Crair.

Bruce Crair

Thank you for joining us today. We are pleased to report record numbers meeting our top and bottom line guideline and we move decisively to adjusted net income during the second quarter. I believe this progress reflects our strategy discipline and continued execution by our team despite the though macroeconomic condition. Our overall local ad spending is moving from offline to online, small business spend is still down and may worsen further through the end of the year. All advertising companies both online and offline operate in a very tough environment today.

As with the last quarter, RPCs from certain partners declined. Despite these challenges, Local.com is in growth mode and we have more than offset the declines through efficiencies and improvements across our business. On our own and operated property, Local.com, we reached record overall and organic traffic and monetize that traffic at a record high. We continue to grow our local syndication network and see additional growth opportunities for this business line as well as opportunities to create new network line. We believe all of these results were drive by our focus on technology, advertisers and traffic.

Let me give you a little more detail on this. We substantially improved our performance in Q2 over Q1 which is typically our strongest quarter in almost all aspects of our business. We had over 63 million monthly unique visitors on Local.com and our network of about 700 sites in Q2, a 27% increase over the same period in 2008. Over 29 million monthly unique visitors came to us organically, in other words, not through search engine marketing. Both of these numbers represented new records for our Company.

Our revenue per thousand visitors or RKV this last quarter was $285, up 16% from the first quarter and another new record for us. Our overall increase in monetization came primarily from improvements in the revenue sharing arrangements we have with several of our advertising partners. We have continued to see weakness in the revenue per click from our partner's advertisers. With the increasing click view rates as well as the increase in traffic we have experienced have more than made up for this decrease in RPC from those partners.

At the end of the second quarter 2009, our gross number of advertisers was lower in the prior quarter. However, we manage to bring our churn numbers in line with our modeling and bring our outsource sales efforts to breakeven. This has been a significant achievement allowing the team to now focus on the profitability of the sales program. To be clear, we do expect to add net new advertisers during this third quarter. However, our objective is switched from a rapid ramp rate with losses to profitable growth. We believe this is the prudent course of action while we wait for the economy to improve and until we bring new products and services to market.

On the technology front, we are heavily focused on bringing new products and services to market as well as enhancing the Local.com user experience even further. We expect to test some of these new products and user enhancements during the third and fourth quarters, and finally, we now have 63 licensees of our local search patent.

Now, I would like to turn the call over to Brenda to discuss our financial results.

Brenda Agius

Thank you, Bruce and thank you to everyone who has joined us today for our Q2 2009 earnings call. Please note that in the interest of time and so we can expeditiously get to the question-and-answer session of the call, I have eliminated prior period comparison, unless such comparison is being material. As such, please refer to today's press release from historical financial performance.

Revenue for the quarter was a record $13.7 million. This represented a 24% sequential increase over Q1 2009. Of the 24% quarter-over-quarter growth, 18% represents organic growth and 6% awaits to the asset we acquired in February and March of this year. With respect to our expenses, our third standing expense in Q2 was $1 million which decreased sequentially as a percentage of revenue to 7.4% from 10% in Q1 2009. Our sales and marketing expense of $9.2 million decreased significantly as a percentage of revenue to 66.7% from 83.6% in Q1 2009.

The decrease in our percentage related primarily to one, better monetization of our traffic related to more favorable times with our advertising partners; two, greater efficiencies with regard to our Q2 SEM campaign that relates to traffic acquisition cost and three, an increase in the organic traffic to the Local.com site. General and administrative expense to Q2 totaled $2.4 million or 17.8% of revenue. G&A appeared significantly better as a percentage of revenue when compared to the prior quarter.

That said in reality, G&A as a percentage of revenue was essentially flat from Q1 to Q2 as they normalize for the activity for the one-time Q1 and Q2 adjustment and the incremental processing fees related to the acquired assets which were recognized for a full quarter ending June 30. Research and development cause in the second quarter totaled approximately $700,000 or 5.4% of revenue and also in Q2, amortization expense was approximately $700,000 or 5.3% of revenue.

Moving to our net loss and record positive adjusted net income; we realized the net loss in Q2 2009 of $333,000 or $0.02 per share with approximately $14.3 million weighted average share outstanding. The Company measured its performance utilizing adjusted net income or loss and adjusted net income or loss per share. Adjusted net income or loss is defined in GAAP net income or loss excluding the net effect of taxes, interest, depreciation, amortization, stock-based compensation and non-recurring item.

Adjusted net income or loss per share is defined an adjusted net income divided by the number of weighted average diluted shares outstanding. We are pleased to report that for the period ending June 30, 2009, the Company's adjusted net income was $943,000 or $0.06 per diluted share with 14.7 million weighted average diluted shares outstanding. As the cash and liquidity, at June 30th, 2009, the Company had 6.7 million in cash and no debt. Although we had positive adjusted net income, cash was lower than the prior reported quarter due to the realization of approximately $3.2 million in deferred revenue in Q2.

We also realized an increase in our accounts receivable balance at June 30 of $2.1 million which relates primarily to the advertisers we acquired again at the end of Q1. Additionally, we are happy to report that we closed our $10 million credit facility with Square 1 Bank. We have not yet utilized the facility which would secure primarily the funds due to possible acquisitions and strategic growth initiative.

Finally, we are pleased to report that looking towards Q3 2009, we expect revenues to be between $14.1 million and $14.6 million with an adjusted net income of $1 million to $1.3 million or $0.07 to $0.09 per diluted share which is in 14.8 million weighted average diluted shares outstanding.

Thank you. I would like to turn the call over to questions and answers. Moderator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Richard Fetyko -Merriman.

Richard Fetyko - Merriman

Great results. Congrats on that on the progress and sending my best wishes to Heath's family. With that, just couple of the adjusted deferred revenue issue, I am sorry, so accounts receivables were up because of the advertiser acquisitions you made. What about the deferred revenue change? Can you remind me what that was related to?

Brenda Agius

In Q1, we were starting to deal with one of our larger advertiser department whereby [distorted]…

Richard Fetyko - Merriman

Got you.

Brenda Agius

With regards to the prepayment, we have started to see deferred revenue on our balance sheet as of March 31st if we take a look at that. So, just join this two, we have utilized the deferred revenue along sideline where the cash obviously went down [distorted] quarter over quarter growth. So that is coupled with the additional AR from the acquired asset in Q1 due to that cash burn.

Richard Fetyko - Merriman

Got it and yet you expect revenue growth in the sequential basis so that start the deferred revenue decline, there is on implication for this of the following quarters growth.

Brenda Agius

That is right. If you look at the balance sheet that was published today, they are starting on their way as deferred revenue so that we have now normalized.

Richard Fetyko - Merriman

Okay and Bruce, maybe you could comment on the next question. in terms of the RPCs you mentioned and no secret out there that cost per click or revenue per click, price per click has declined for Google and Yahoo year over year. Sequentially though, well there appears to have this stabilization of some of these search engines and I was just curios if you could comment what you are seeing at least perhaps how the RPCs progress throughout the second quarter as the quarter unfolded and perhaps what you are seeing in July.

Bruce Crair

I would say, not speaking specifically about any particular advertising partner, I would say as you mention the RPCs did decline in the second quarter. I think they have somewhat stabilized but I think it is really too soon to tell definitively whether they really have stabilized or we will start going back up yet.

Richard Fetyko - Merriman

Got you and when you say decline, you mean on a sequential basis to some decline seen?

Bruce Crair

Sequential for first quarter, the second quarter, yes.

Richard Fetyko - Merriman

And did that helped you on the cost of traffic acquisition side? I mean, I am pleasantly surprised by the sort of flat lining of sales and marketing expense line considering the increase in revenue because it has to do with increase organic traffic but I was just also wondering if the lower search keyword prices help you on the tact as well.

Bruce Crair

Absolutely. Of course, when RPC goes down, it perks on one end and helps on the other end but as I mentioned in my comment, we are able to make up to the RPCs going down of the revenue side by increased click through rates and increased traffic and on the traffic acquisition side, we certainly took advantage of that.

Richard Fetyko - Merriman

Got it and one last question and I will get back in queue, with respect to the click through rates, any idea what helped on that metric?

Bruce Crair

Most of the click through rates that we see are driven by changes that we make to our site and how we manage what goes where on the side and what it looks like. So, most of that is driven by things we do including increasing the relevancy of the advertising that we provide to our end users as well as increasing the relevancy of our organic results so that they find the right information they need.

Richard Fetyko - Merriman

Right. Got it. So you think these improvements in click through rates are sustainable enough or is there a lot of volatility in that?

Bruce Crair

I would not say there is a lot of volatility and I cannot really comment whether it is sustainable or not, only time will tell that.

Operator

(Operator's instruction) You have a follow up question from the line of Richard Fetyko - Merriman.

Richard Fetyko - Merriman

Okay, I am sure no one is waiting for me. I will just keep rolling, in terms of Brenda, the operating expenses in the second quarter or perhaps more looking forward the third and fourth quarters, is there anything that we should be thinking about that perhaps you are hiring in certain areas or investing into others?

Brenda Agius

I think overall we have done a really good job in the margin improvement quarter over quarter. I do not see significant fluctuations otherwise there will be some investing and some higher [SPD] in Q3 and Q4 but overall, considering how the revenue stream is going and the margins on that side, I do not think we are going to see anything significant either way.

Richard Fetyko - Merriman

Okay and the sequential increase in revenue that you guide into relatively unusual in the space considering what we have seen from some of the other media companies including the top search engines are looking for sequentially flat to down revenues. So, what gives you the visibility and the confident that you will see sequentially up revenues?

Brenda Agius

It is a couple of things. It is the, again, it is the partners that we have. It is the traffic that we are seeing is the increasing organic traffic. It is the focus on a couple of internal initiatives. I think 5% increase quarter over quarter in Q2 to Q3 is a very good estimate and we have ended the quarter and we are still seeing some strong momentum.

Richard Fetyko - Merriman

Got you. Bruce, you guys mentioned in the press release a couple of new local websites that you have added to your network and you kind of eluded it in your prepared remarks through decent pipeline of deals. Can you just maybe shed more light on like there is a lot of sort of business development focusing on this, how you are driving and lending some of these new distribution deals?

Bruce Crair

Well, we have had a really good pipeline of deals coming down for the last few years and we do have some obviously some people focused on working with partners and potential partners so it is two pieces. One is the partners that come aboard, some of them initially tried out us with a few of their properties and when things work out well and we start setting them revenue checks. They liked that and they bring the rest of their properties on board.

The other one is focusing on new partners. They do not have anybody on board so both of those drive new partnerships and new traffic to our network or sites. The other thing that we do is we are focusing on expanding out beyond our traditional newspaper segments into radio, TV, and also other vertical geographically oriented local sites, city sites and the like. So, there is lots of opportunity out there. We do happen to be the biggest player around and we believe with the best opportunity for our partners to monetize the sites we give them.

So, it is a great product. We focus on the right customer base to sell to and it is a very compelling author.

Richard Fetyko - Merriman

Are you replacing someone else in those kinds of deals or is that some brand new revenue to some of these sites?

Bruce Crair

It tends to be a mix. Many of them is brand spanking new, others they have either tried it themselves and just could not make it work or they have had somebody else and they are doing it typically charging them for plans.

Richard Fetyko - Merriman

I see, got it and then you mentioned the number of licensees has increased for research technology. I know you have done some deals in the past where you have kind of thrown in the lights I think, correct me if I am wrong where you have thrown in some search technology, licensees when it was a still a strategic partnership deal. The increase that we are seeing on a sequential basis from 48 to 63 licensees, are these actually paying fee licensees or more of a bundle of just part of the partnership or some sort of a strategic deal that you have done?

Bruce Crair

Well they are paying but it is typically part of a bundle of services we provide.

Richard Fetyko - Merriman

Got it.

Bruce Crair

Either way it is not material to our result.

Richard Fetyko - Merriman

Right, I figured that and then I am pleased to hear that you have sort of gotten some of the metrics in line for the alters telemarketing project or initiative. What is next for that? Are you sort of rolling that out to additional call center partners or were just adding more agent to the existing ones? If you could just talk about a little more about that initiative, how that is progressing and what do you expect from it?

Bruce Crair

Yes, as I mention a little bit in my prepared remarks, we are not expanding that at the moment. We are managing it carefully. Two things we are doing, one is we are managing the profitability which is important but secondly, we are getting ready to come out with some new products in the third and fourth quarter which were going to add into the telesales effort and into our total sales effort and to new channel to focus on bringing the right customers aboard at the right price with the right product.

So, until we see it turnaround in the macroeconomic condition so that small businesses are more prepared to pay for advertising in general whether it is online or offline and we have some more products that we can offer them at good prices. We are going to kind of, I would not say trade water, but we are going to manage the profitability rather than manage the growth.

Richard Fetyko - Merriman

Got you and then any other color you can give us on these products? What are you talking about? I mean, you are talking about sort of a bucket of click through digging ourselves to certain advertisers or any other sort of color you could provide on that?

Bruce Crair

Until we launch those, we really rather not comment.

Richard Fetyko - Merriman

Fair enough.

Operator

(Operator's instruction) Your next question comes from the line of Jeff Rath - Canaccord Adams.

Jeff Rath - Canaccord Adams

I joined a little late so I apologize. Great quarter, your business seems to be tracking along pretty well here and I again I apologize if you hit on some of these in your previous remarks but with regards to your revenue per thousand, your RKV, how should we think about that going forward? What are the key drivers in that line item and the strength there and where do you think that that goes? Are you selling, are your incremental sales coming in? Just any color around the trends there, where you think that levels out? That would be very helpful.

Bruce Crair

I think Heath had said in the past that there is no reason why we could not continue to drive that further up. As time goes by, as we bring new products online at better price points with even higher margins for us for our customers as well as that we drive new traffic, we become more and more important to our advertising partners so we can strike better deals with them. So, I do not see any reason why RKV would reverse or even level out at this point.

Jeff Rath - Canaccord Adams

Can you give any color as to what type of initiatives more specifically you would target to drive that higher?

Bruce Crair

I cannot give you a whole lot of detail other than what I said. It is basically, the deals we have with our partners and new products and services, we can offer directly to our advertisers. So, that is about as much details I can give you right now.

Jeff Rath - Canaccord Adams

I guess within your current trends, do you see, no I guess, you are speaking to it with this much level of visibility as you care to. Alright, just moving on, as you talked about managing the reinvestment activity to continue to deliver growth, how should we think about the timing and impact of that going forward? Is that, as we look at the leverage improving the operating leverage improving in your financial model here clearly based on the quarter and the result, how should we think about that reinvestment activity? Is that a step function in cost that is coming here or was that going to be managed within the drumbeat of delivering margin expansion?

Brenda Agius

It will be managed very, very closely. It is not going to be a step up where we have to specifically budget it. We do have a part of growth map. We do have, we are looking at hiring some very high level people to help us execute on some short and longer term initiatives. It is going to be managed very closely with the higher margin revenues that we are going to be stepping through too.

So, we are going to try at the very least to maintain this margin. If there is going to be some big initiatives out there that we will be executing on, then one thing that we always ask ourselves internally is how do we cover those additional investments and initiatives. We have made significant improvement quarter over quarter and the last thing we want to do is to see that deteriorate. That is not to say that we would not make good decisions on good investments but at this point in time in a short term, we see those margins staying in line with Q2 not significantly different.

Jeff Rath - Canaccord Adams

Now, going back to your advertisers and maybe I have misread this but it suggested that you ended the quarter with 27,000, was that down from last quarter?

Bruce Crair

Yes, it was down from last quarter.

Jeff Rath - Canaccord Adams

Can you speak to that dynamic and how we should think about advertiser additions going forward? You might have already answered that. I apologize.

Bruce Crair

That is okay. I understand that you were not there. Yes, it was down. What we have done is we managed as I mentioned in previous call, we were focusing very carefully on our trend numbers and on how we manage those sales to make them profitable. So, we did this last quarter was bring those churn numbers in line with our modeling and brought our outsource sales efforts to breakeven.

This I a big deal for us and now it allowed the team to focus on profitability at the sales program versus just growing our sales and until we see turnaround in the overall small business advertiser attitude towards advertising in general and until we bring on some more products that will drive more revenue and margin for us, we are going to continue to focus on the profitability of this versus the growth of it.

Jeff Rath - Canaccord Adams

So do you think expectation should be at least for the time being much more moderate or level growth on the gross number of advertisers here given your focus?

Bruce Crair

Yes.

Jeff Rath - Canaccord Adams

Okay, that is helpful. Guiding a little bit more deeply into that advertiser based, are you able to share with us the concentration of that 27,000? Is that, any color you can give geographically or by industry vertical would be helpful?

Bruce Crair

It is really spread across the board. There is no specific vertical other than to say that there are pretty typical yellow pages directory-type vertical that we fell into and that is what our customers are. It will be in the financial industry, the insurance industry, the service industry. You are typically not going to see consultant and advertising in a directory nor with us. So, in terms of geography, it is very much spread across the country as population goes.

Jeff Rath - Canaccord Adams

Okay, so and I think you already answered this with the previous question but if you could characterize how you see the emerging opportunity to take more advertisers, it sounds like you are focusing on profitability in managing that which is a great thing but it also seems like there is an enormous Greenfield opportunity here as far as the ability to grab mind share and market share. So, how do you think about those two dynamics? Are you finding that there is a certain customer that is just not profitable for you and are just improving your targeting or it is almost one of these things in a roundabout way with such as huge opportunity in front of you, you could almost second guess yourself and just try to put the pedal to the meddle and double or triple that number. How do you think about the tradeoff there?

Bruce Crair

It is a tradeoff we think about a lot and there is two piece of that; one is obviously focusing on profitability and in macroeconomic environment but the other piece as I mention is coming out with new products and services that are unique and different for the market place but that will provide great value for the advertisers in allowing them to get in front of their customers, their end users and be able to sell their product. I mean, bottom line is what kind of product can we provide for an advertiser that makes their business better and that is where we are focusing on.

So, as we start bringing out new products and services that drive higher revenue for us as well as our advertisers, that will also drive higher margin which will allow us to as you put it put the pedal to the meddle.

Jeff Rath - Canaccord Adams

Okay, I guess one of my final questions and then I will pass it on here is more related to your traffic. You have clearly executed very low on growing the organic traffic of your business here impressively. Can you give us any color if you are currently tracking return unique users and is that an important metric we should be thinking about going forward so that this becomes more of a destination site that people are returning back to? Is that important for the success of your business and if it is, are you tracking it and how do you think about that.

Bruce Crair

We absolutely do track that. It is extremely important to us. I think you will be seeing over the next couple of quarters some two products and features for our end users, not just for our advertisers that will be coming to the floor that will be much more valuable for those end users kind of giving the end user a reason to come back to Local.com for more than just finding local business and services but really allowing the end user to come toLocal.com and our network sites to find anything local, anything in their neighborhood that would be of interest of the and allow them to click through find content, really unique content and information as well as an aggregation of a content from across the web and offline.

Jeff Rath - Canaccord Adams

Are you doing any of that even on a trial basis now or is that just something that we will just wait? Can you speak to some of the things you are exploring?

Bruce Crair

We are doing some very small trials right now that are very controlled in what works and what does work but I think within the next few months, you will be seeing one or two of those closed accounts.

Operator

And there are no more questions in the queue at this time. I would like to turn the call over to Bruce Clair for any closing remarks.

Bruce Crair

So, Local.com achieved great results in the second quarter and we believe we will grow our top and bottom line through the end of the year. While the overall economy really remains challenged, we believe we are well positioned to capture more of the secular shift of local advertising spend by small business from offline print to online search. We are executing and intend to continue to do so with the strategy discipline around building our three key drivers of traffic, technology and advertisers. Thank you for participating in today’s call and now, I would like to turn the call back over to Ken for some final disclosures.

Ken Cragun

This conference call contains certain forward-looking statements within the meaning of Section 21-A of the Securities and Exchange Act of 1933 and Section 21-E of the Securities Act of 1934. Words or expressions such as anticipate, belief, estimate, plan, expect, intend, project or similar expressions and phrases are intended to identify such forward-looking statements.

Any forward-looking statements are based on the belief of our management as well as assumptions made by an information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to our ability to monetize the Local.com domain, incorporate our local search technologies, market the Local.com domain as a destination for consumers seeking local search result, grow our business by enhancing our local search services, successfully expand and implement our outsourced direct subscription advertising sales efforts, increase the number of businesses that purchase our subscription and advertising products, expand our advertiser and distribution networks, integrate and effectively utilize our acquisitions technology, develop our products and sales, marketing, finance and administrative functions and successfully integrate our expanded infrastructure as well as our dependence on major advertisers, competitive factors and pricing pressures, changes in legal and regulatory requirement and general economic conditions.

Any forward-looking statements reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operation, results of operation, growth strategy and liquidity. All subsequent written and oral forward-looking statement attributable to us or person acting on our behalf are expressly qualified in their entirety but this disclosure. Unless otherwise stated, all site traffic and usage statistics are from third party service provider engaged by the Company.

Our annual report on Form 10-K, subsequent quarterly report on Form 10-Q including our 10-Q to be filed for the second quarter of 2009, recent current reports on Form 8-K and other Securities and Exchange Commission filing discussed the foregoing risk as well as other important risk factors that could contribute to such differences or otherwise affect our business, result of operations and financial condition.

The forward-looking statements made on this earnings call speak only as of the date they are made. We undertake no obligations to revise or update publicly any forward-looking statement for any reason. This concludes our call for today. Thank you for your interest in Local.com.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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