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Local.com Corporation (NASDAQ:LOCM)

Q3 2009 Earnings Call

October 27, 2009 16:30 a.m. ET

Executives

Ken Cragun - VP Finance

Heath Clarke - Chairman, CEO

Bruce Crair - President and COO

Brenda Agius - CFO

Analyst

Wayne Chang - Canaccord Adams

Corbin Woodhull - Merriman Curhan Ford

Jud Traphagen - Plough Penny

Operator

Good day ladies and gentlemen and welcome to the Q3 2009 Local.com Corporation earnings conference call. My name is Christlynn and I will be your operator for today. At this time all participants are in listen-only mode. Later, we will conduct the question and answer session. (Operator instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today Mr. Ken Cragun, Vice President of Finance. Please go ahead.

Ken Cragun

Thank you and good afternoon. Its my pleasure to welcome you to Local.com’s third quarter financial results conference call. With me today are Local.com Chairman and CEO Heath Clarke, President and Chief Operating Officer Bruce Crair and our Chief Financial Officer Brenda Agius. The executive team will discuss our financial results for the third quarter 2009. And our outlook for the fourth quarter and full year 2009. after conclusion of their prepared remarks, we will open the lines for questions.

I would like to bring to everyone’s attention that today’s comments will include 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 risks and uncertainties that may cause actual results and events to differ materially from those expressed in the 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 Heath, it is important that I mention that we used non-GAAP financial measures in evaluating our financial performance. Specifically the non-GAAP financial measure of adjusted net income [revised].

Please refer to the press release we issued today and to our Form 10-Q to be filed with the Securities and Exchange Commission for how we define adjusted net income or loss. And our reasons for using that non-GAAP measure. As well as a detailed review of our third quarter results including the corresponding GAAP financial measures and a 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 a replay of the conference call will be available for 90 days after the call.

I’d now like to turn the call over to our CEO, Heath Clarke.

Heath Clarke

Thanks, Ken. And thank you for joining us today. Once again we are pleased to report record revenue, beating our top line and coming in at the high end of our bottom line guidance and growth in our adjusted earnings for the third consecutive quarter. We remained focused on building a three value creators in search traffic advertisers and technology.

Local.com traffic is generated on our owned and operated site Local.com plus our local syndication network at regional media sides. On Local.com our strategic objective is to grow organic traffic and to achieve this goal we plan to greatly increased amount of local content available to our users and improve the overall user experience.

Our content initiative is an important part of our growth strategy for 2010, and requires continued investment on our platform.

In Q4, we expect to debut two new content verticals with plans for the release of additional verticals and phases throughout 2010.

Overall, Q3 saw record traffic for Local.com. Although the fourth quarter is a seasonally weakest quarter, we expect continued revenue growth in Q4 before heading into our seasonally strongest first quarter.

Local.com also generates organic traffic on its local syndication network of over 700 regional media sites. We have four objectives on this network. First, grow the number of sites by our sales and business development efforts. Second, expand the traffic per site through improved SEO and added content. Third, expand the services offered to our network partners through the addition of new products such as coupons and enhanced ratings and reviews. And fourth, monetize the traffic on the network more fully via page optimization.

During the third quarter, we test launched a new product, our local distribution network, which distributes our [adding] content feed to third party sites, which then present them with their own look in field. It’s still very early for us, but so far we are seeing good demand for this product in the market.

Moving now to our sales and ad services, Local.com had over 25,000 business subscriber at the end of the quarter a small decrease from the end of Q2. We are committed to profitably growing our business subscriber base, and tested many different acquisition strategies over the past year.

During the third quarter, we made the decision to substantially decrease our outsourced telesales efforts in favor of what we believe a more profitable subscriber acquisition strategies. We believe we are not better position to profitably grow our subscriber base from this point forth. And we look forward to updating you on our progress in due course.

On the technology front, Local.com recently received a long awaited patent with respect to enhance directory assistance. And I understand there are lot of questions about this patent. We received our first patent related to enhance directory assistance in 2007. At that time we believe we would have an important body of intellectual property in the emerging ad supported directory assistance base when that patent was viewed together with certain of our patents pending.

If you recall our prior Enhanced Directory Assistance patent was in relation to how the consumer requested and received their 411 type results. With that patent that 411 was using wireless messaging protocols such as SMS.

We feel our newest patent addresses the core concept behind ad supported directory assistance which is that advertisers you pay the most will appear the highest in searches results delivered via 411 for enquires like tow truck in Irvine, California.

Our patented method is generally agnostic as to which manner in which Enhanced Directory Assistance enquiries are received or results distributed. We therefore believe that live operator, voice or text based ad supported directory assistance services that use our patented method are subject to our intellectual property rights.

With the receive of this most recent patent we believe we now have a sufficient body of IP to justify pursuing enforcement options. To that end, we have been developing a patent enforcement strategy and will provide updates on our progress from time-to-time.

Before I turn it over to Bruce to discuss our key metrics, I’d like to take this opportunity to welcome our new Chief Technology Officer Mike Plonski. He joins us from Martha Stewart's Omnimedia. Mike is responsible for engineering and product development at Local.com. And we are excited at the prospect to delivering better products to market faster than ever before under Mike's leadership.

Bruce Crair

Thanks Heath, during the last quarter we maintained our focus on traffic, advertisers and technology and this is how it has delivered the results Heath mentioned. Let me give you a little more detail on this. We continue to grow in many areas during the third quarter we had over 66 mill multi unique visitors on Local.com, and our syndication network in Q3. A 5% increase over Q2, and 23% increase over the same period in 2008

Of those visitors about 28 million multi unique visitors came to us organically. RKV this last quarter was $270, down slightly from Q2 due to two primary reasons. Lower business subscriber number Heath noted, and a slight decline in page use per visitor during the third quarter.

As we can see from our third quarter financial performance, a lower RKV number does not always indicate a worse outcome for our overall business than a higher RKV number. This is because RKV only applies to our Local.com site traffic not out overall business.

We have a variety of other revenue streams that may grow without influencing RKV at all. For example neither our web hosting customers, nor our network business revenues influence RKV.

RKV can also be negatively influenced by growth in organic traffic which is a strategic objective of our business, if it is high margin and make that makes Local.com more defensible in the market place. However, organic traffic tends to monetize at a lower rate, therefore tending to offset RKV growth.

So, although we expect RKV to [track] high over time. RKV in different periods may be influenced up or down by how long we tend to execute in each of these areas of subscriber growth, page views per visitor growth and organic traffic growth among other factors.

On the technology front, we are very focused on bringing new products and services to market for our visitors, advertisers and our syndication partners. As Heath mentioned, we lost our local distribution network in Q3 with early indications of growth and margin.

In addition, we’ve been testing several new products for our advertisers that are intended to increase our average revenue per subscriber over time.

Finally, we are testing several new vertical content categories that we believe will enable our users to find even more local information and connect more easily with local businesses and service providers.

We look forward to all of these efforts driving more usage of our services, revenue and margin overtime.

Now I’d 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 for our Q3, 2009 earnings call. Please note that in the interest of time and so we can move on to the question and answer portion of the call, I have limited the comparison of Q3, 2009 results to prior periods. Unless such comparison is deemed material. Please refer to today’s press release for historical financial performance and comparisons.

Revenue for the quarter was a record $15.1 million. This represents a 10% sequential increase of Q2, 2009 revenue of $13.7 million, and a 48% increase over Q3, 2008 revenue of $10.2 million.

With respect to our expenses, our search serving expense in Q3 was $1.3 million or 8.5% of revenue. As a percentage of revenue our search serving expense was marginally higher than in the second quarter.

The increase in Q3 is due to tax associated with higher than anticipated local distribution network revenue, which has a revenue sharing components. In Q4, we expect local distribution network revenue to increase further over Q3 as a result the percentage of search serving expense to revenue will increase approximately to 11%.

Sales and marketing expense in Q3 was approximately $10.1 million or 67% of revenue. General and administrative expense in Q3 totaled $2.2 million or 14% of revenue.

Research and development cost in the third quarter totaled approximately $1 million or 6.4% of revenue. A slight increase as a percentage of revenue is the result of less capitalized development cost in the third quarter versus the second quarter. Amortization expense remained constant in Q3 at $723,000.

Moving on to our net loss and record adjusted net income, we have realized that net loss in Q3, 2009 of $212,000 or $0.01 per share with approximately $14.3 million weighted average shares outstanding. The company measured this performance utilizing adjusted net income or loss and adjusted net income or loss per share.

Adjusted net income or loss is defined as GAAP net income and loss, excluding the net effective taxes, interest, depreciation, amortization stock based compensation and non-recurring items.

Adjusted net income or loss per share is defined as adjusted net income divided by the number of weighted average diluted shares outstanding. We are pleased to report that for the third quarter ended September 30, 2009 the company’s adjusted net income was $1.3 million or $0.09 per diluted share with $14.8 million weighted average diluted shares outstanding.

Notably, 27% or $400,000 of the $1.4 million on revenue growth from Q2 to Q3 went directly to our bottom line. As for cash and liquidity, at September 30, 2009 the company had $7.2 million in cash and for the nine months ended September 30, 2009 we generated positive cash flow from operations, and for the three months ended September 30, 2009 the company generated positive free cash flow.

As of today, the line of credit facility obtained from Square 1 Bank remains untouched. This facility was secured primarily to fund future acquisitions and strategic growth initiative.

Finally, we are pleased to report that looking towards Q4, 2009 we expect revenues to be between $15.3 million and $15.6 million. A net loss of $100,000 to breakeven, adjusted net income of $1.4 million to $1.5 million or $0.09 to $0.10 per diluted share which assumed $14.9 million weighted average diluted shares.

For the fiscal year ending December 31, 2009, the company at the mid point of guidance expects revenue of $55.4 million which represents 45% increase over the prior year’s revenue of $38.3 million.

Although full year 2009 adjusted net income is expected to be approximately $2.5 million to $2.6 million or $0.17 to $0.18 per share, which assumes a full year 2009 weighted average diluted share of $14.7 million.

Thank you and I would now like to turn the call over to question-and-answers. Moderator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Wayne Chang with Canaccord Adams. Please go ahead.

Wayne Chang - Canaccord Adams

Just related to your opening remarks about the intended plan vertical launches. Can you just shed a little bit more light around what key categories or segments you guys have evaluated i.e. whether its health consumer products, autos etcetera that seem attractive and talk a little about the timing of this as well as monetization that might occur. Should we expect that this to be more of a second half event or even later, and can you also talk a little bit more about whether you’ve conducted a internal, perhaps opportunity announces or what valuation looks like for the second time you guys have been assigned the directory assistance since your announcement during the analyst day. Thanks

Heath Clarke

So, on the verticals we’ve been doing a lot of research into the different verticals that we have an interest in, which is going to be commercial verticals, where we can supply lot of local information’s and basically add value to the consumer experience and the two verticals that we selected initially, have been selected in part based on utility and in part based on SEO ability. One of those is in around city data, which should be demographic information about your local area and that’s intended to increase SEO, and the other is more oriented towards events that occur in your location. And so those are the two verticals that will bring up and then, as we said, we want to bring other verticals in phases and at this point we’re kind of focusing on those two. But you can expect kind of the launch of tow to three verticals perhaps at a time in each phase and that’s not necessarily in the second half. These first two will be in, we hope in the fourth quarter and we hope we can kind of do about a phase a quarter, and we’ll see how that plays out through 2010.

So in terms of the opportunity analysis related to the patent, that’s underway. The way that it works with the USPTO you basically the patent arrives on your front door and so that kind of create a set of logistics that we have to go through to gather information about the IP, remember that we saw these seven years ago, not that we are not interacting with the patent and trademark office we are fairly frequently, but these kind of spit out the other end by themselves and affect, so what we are doing right now is going through that process where we figure out how that market has evolved since we initially saw the pattern or since we in this case we actually got some recent data or more recent data in 2007 after size we enhanced directory assistance market actually it was report that was written in 2006, and so we have requested that provider to kind of update the numbers and give us a sense of how big that market place is. Who are the major players are and so on. And then we use that internally will figure out you know we should be concentrating our efforts in terms of enforcement opportunities. And that’s in conjunction is doing an analysis of who those players are what kind of IP they have so that’s something is underway and we hope to have internally, we hope to have a strategy kind of go forward strategy that is concluded in this quarter and begins to be implemented at the beginning of the next quarter.

Wayne Chang - Canaccord Adams

Have you seen anything so far in October to make you think that [RVKs] could potentially re-inflate sequentially or is it too early to tell?

Heath Clarke

The RKVs well as Bruce said the RKV is influenced by a number of factors, He touched in on two of them, I mean our goal net net, lets be clear, our goal is to increase the number business subscribers that we have and you know the web listing business subscribers would their revenues are directly attributable to the RKV number and increase the number of pages per visitor, which will also influence positively the RKV number.

Pages per visitor is a little harder to forecast but our goal is to add more subscribers during the fourth quarter, so that will have a positive impact on RKV, partially offset by any gains we make in organic traffic and we do plan to grow organic traffic. We have never given RKV guidance and the reason Bruce can delve into that a little bit in terms of what comprises RKV is just to make sure that everybody understands RKV is A data point for our business its not V data point. Its an important data point where what is now a piece of our business although a large piece which is the Local.com site traffic, but we also have business a network business that’s growing nicely, and RKV doesn’t apply to that at all. So we just want to kind of caution on the over emphasizing the RKV. It may be choppy and how we implement those three and succeed in those three and then given quarter among other factors may influence the RKV up or down. Overall again make no mistake our goal is to increase RKV as well.

Wayne Chang - Canaccord Adams

Great. Thanks.

Operator

Your next question comes from the line Corbin Woodhull with Merriman Curhan Ford. Please go ahead.

Corbin Woodhull - Merriman Curhan Ford

I just had a couple of questions. First is going to do with CPCs. At yahoo they were down 10% to 20% year-over-year with our estimates and a little bit down quarter-over-quarter. What kind of trends you are seeing and whether you think CPCs is going to rebound back to 2008 levels. My second question has to do with seasonality in the fourth quarter tends to be strong in terms of traffic especially in the retail vertical, but slow in terms of small business advertising, Just wondering how you think that will shake out in the fourth quarter. Thanks a lot.

Heath Clarke

Sure. I’ll ask Bruce to comment on the CPC and I’ll just jump in and come in on the seasonality.

For our business we are little bit kind of cyclical. And the reason for that is a good portion of the traffic on our Local.com site historically has been through SEM, its actually reducing components and our plan is to reduce the percentage of traffic that comes to us through SEM but that percentage that comes through SEM is very seasonal and kind of cyclical to what you would expect to see in terms of traffic trends and let me explain why that is?

So, in the fourth quarter overall you are going to see a lot of search traffic related to, its basically a lot of commercial search for the Christmas period. And so lot more search online is commercial on nature which is our sweet spot. What happens therefore for us is we see a lot of competition for keyword bid and we actually tend to kind of back out of the market a little bit as the quarter progresses and allow others to come in and pay a lot more for those clicks and we would be prepared to pay ordinarily and what happens for us is as we approach Christmas Day that whole market place tends to get very quite around the 20th of December and for us it actually ignites the day after the Christmas because everybody is looking to return presents and generally re-engage with the small businesses and big box retailers as well.

So our traffic tends to jump right after Christmas which is why seasonality wise or seasonally the first quarter for us is the strongest quarter, because we have a lot of SEM based traffic that we are able to capitalize on in Q1. Now that seasonality as we grow organic traffic will be softened overtime, because again with the organic traffic we are going to have consistency with the rest of the market place in terms of our seasonality. So, I hope that gives you little bit extra color on the seasonality from our perspective and I hand it over to Bruce to talk about CPCs.

Bruce Crair

Sure Corbin. Regarding CPCs, what we’ve been seeing is similar to what you actually not quite what you saw in the Yahoo numbers, we have seen Yahoo numbers soft, softer than they were last year. We do anticipate that the Yahoo CPC will rise through the end of the year at least through about the 20th of December when they should drop precipitously I think back to what we are currently seeing through the end of the quarter. All that being said we are seeing, we believe we are going to have a pretty strong fourth quarter especially considering what we experienced last year and the year before.

Heath Clarke

Just to clarify that precipitously is maybe an overstatement. It would drop consistent with that time of the year.

Corbin Woodhull - Merriman Curhan Ford

Great, thanks a lot.

Operator

(Operator Instructions). It’s just another moment. Your next question comes from the line of Jud Traphagen with Plough Penny. Please proceed.

Jud Traphagen - Plough Penny

Hey, guys. Can you give us an idea of fourth quarter CapEx expectations and maybe ongoing quarterly CapEx expectations?

Brenda Agius

Fourth quarter CapEx is going to be minimum; we did spend some CapEx in Q3 with $700,000. We had some capitalized software cost as well as about $150,000, but total CapEx in Q4 is probably going to be between $300,000 and $500,000 and then moving forward, we anticipate that the increase in Q1 and Q2, right now we’re looking at CapEx in Q1 anywhere between $752 million possibly and then Q2 that will go back down to about $500,000 as we are looking to reinvest in the platform.

Operator

There are no further questions. I would now like to turn the call back over to Mr. Clarke for closing remarks.

Heath Clarke

Local.com achieve another quarter of improve financial results and we expect year-over-year growth of about 45% for 2009. We remain focused on growing Local.com high margin products while building on our value created as a traffic, advertises and technology. Thank you for being on today's call and now I'd like to turn the call back over to Ken for final disclosures.

Ken Cragun

This conference call contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21A of the Securities Exchange Act of 1934. Words or expressions such as anticipate, believe, estimate, plans, expect, intend, projects, feel and similar expressions and phrases are intended to identify such forward-looking statements. Any forward-looking statements are based on the beliefs of our management as well as assumptions made by and 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 results, grow our business by enhancing our local search services, increase the number of businesses that purchase our subscription advertising and other business products, expand our advertising and redistribution networks, integrate and effectively utilize our acquisitions technologies, 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 requirements and general economic conditions.

Any forward-looking statements that reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this disclosure. Unless otherwise stated, all site traffic and usage statistics are from third party service providers engaged by the company.

Our annual report on Form 10-K, subsequent quarterly reports on Form 10-Q, including our 10-Q to be filed for the third quarter of 2009 current reports on Form 8-K and the other Securities and Exchange Commission filings discuss the foregoing risks as well as other important risk factors that could contribute to such differences or otherwise affect our business, results 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

Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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Source: Local.com Corporation Q3 2009 Earnings Conference Call
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