ReachLocal's (RLOC) CEO Sharon Rowlands on Q1 2014 Results - Earnings Call Transcript

| About: ReachLocal Inc. (RLOC)

ReachLocal, Inc. (NASDAQ:RLOC)

Q1 2014 Results Earnings Conference Call

May 06, 2014, 5:00 PM ET


Alex Wellins - Co-Founder & Managing Director

Sharon Rowlands - CEO

Ross Landsbaum - CFO

Joshua Claman - President


Diana Kluger - JPMorgan

Kerry Rice - Needham

Todd Van Fleet - First Analysis

George Sutton - Craig-Hallum

Jason Mitchell - Bank of America


Good day, ladies and gentlemen. Thank you for standing by. Welcome to the ReachLocal First Quarter Earnings Call. (Operator Instructions) This conference is being recorded today, May 6, 2014.

I would now like to turn the conference over to our host, Alex Wellins of BlueShirt Group. Please go ahead, sir.

Alex Wellins

Thank you for joining us on today's call. This call is being broadcast live over the Web and can be accessed at the Investor Relations page of ReachLocal's website at With me on today's call are ReachLocal's new CEO, Sharon Rowlands; the company's President, Josh Claman; and CFO, Ross Landsbaum.

During the course of this conference call, management may make projections or other forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those projected. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as to the date of this call.

A detailed discussion of the material factors that may cause results to differ from the statements made can be found, for example, in the Risk Factors section of ReachLocal's filings with the SEC, including its annual report on Form 10-K, ReachLocal’s updates in its quarterly reports on Form 10-Q and current reports on Form 8-K, including the Form 8-K and attached press release filed today.

Certain supplemental financial measures we will use on this call such as adjusted EBITDA, non-GAAP net income and non-GAAP net income per share and constant-currency revenues are expressed on a non-GAAP basis.

Definitions and calculations of these financial measures and in the case of adjusted EBITDA, non-GAAP net income and constant currency revenues a GAAP to non-GAAP reconciliation can be found in our earnings release. These financial measures are not intended to replace any GAAP financial measure. You should rely primarily on our GAAP results and consider adjusted EBITDA, non-GAAP net income, non-GAAP net income per share and constant-currency revenues only as a supplement to our GAAP results.

With that said, I'll turn the call over to Sharon Rowlands. Sharon?

Sharon Rowlands

Thank you very much, Alex. I’m very happy to be here and I’m looking forward to meeting our analysts and our investors in the coming weeks and months. With only five weeks into the job, I’m certainly aware there is a lot of work to do to drive the ReachLocal business forward. But I’m also convinced that ReachLocal has a compelling platform of technology and people to take advantage of the huge market for online marketing services for SMB.

ReachLocal has always been a pioneer in developing products for SMBs, mostly recently witnessed by the rollout of ReachEdge and we’re already working through plans to innovate in our core media business. As the team updated you at the last quarter, our sales and go-to market models needed to evolve as well. In that regard, the company made a significant investment in order to take the North American sales force to the next level with its sales realignment.

And while the execution hasn’t been perfect and the disruption is certainly greater than the company had originally expected, I firmly believe that we are on the right path. As I’m sure you’ve seen in our press release, we materially reduced our outlook for the year. We’ll go into the rationale behind this change in more detail during the call, but at a high level, the guidance we gave earlier this year concentrated on a relatively short disruption to our business.

After reviewing our business, we now believe that this disruption will continue through the balance of this year and have revised our guidance accordingly.

I’ll now turn the call over to Ross who’ll take you through our financial results. Josh will then follow with an update on our North American and international sales activity, and then I’ll tell you a bit more about myself and why I’m bullish on the opportunities presented at ReachLocal. Over to you Ross.

Ross Landsbaum

Thank you, Sharon, and welcome, and thank you all for joining us today. Let's turn to a discussion of our results for the first quarter ended March 31, 2014. All comparisons are to the quarter ended March 31, 2013 unless I state otherwise. I will elaborate on significant trends in my brief comments.

Revenue for the first quarter of 2014 was $124.7 million, up 3% or 5% on an FX constant basis. Direct Local revenue for the first quarter was $98.6 million, up 1% or 4% on an FX constant basis. Direct Local represented 79% of total quarterly revenue, flat year-over-year.

The realignment of our North American outside Direct Local sales force impacted our sales productivity and customer retention last quarter, and was the primary driver of North America Direct Local revenue declining 12% in Q1 versus the fourth quarter. As we will discuss later on, this will have an ongoing impact as we move through 2014. Overall, North American revenues declined by 7% to $77.1 million.

Revenue from the NBAR channel, overall, grew to $26.2 million in the first quarter, up 8% or 10% on an FX constant basis. Revenue from the National Brands portion of the channel declined by 6%, and the Agencies and Resellers portion of the channel grew by 20%, driven by strength in all regions. Overall, international revenue for the first quarter grew to $47.6 million, up 23% or 31% on an FX constant basis, driven by growing overall productivity from existing sales headcount.

Moving on to key metrics that drive revenues, we ended Q1 with 35,900 Active Product Units, up 6% and 24,100 Active Clients, up 6%, although roughly flat with the prior quarter. The number of product units per client remained constant at 1.5 and the average quarterly revenue per our client was $5,202, a decline over the prior year and last quarter.

You should note that this amount does reflect that approximately 500 of our Active Clients were ReachEdge-only clients, and as a result, if we compare apples-to-apples relative to the prior year and exclude these clients, ARPU was $5,246. This is modestly below last year’s average as our sales force, principally in Europe, focused on selling to clients with our preferred profile who generally retain better and are best served by our product suite.

Our higher business outlook contemplated much larger growth in our client base coming out of the first quarter, and as Josh will discuss, our sales operations are lagging in North America and in the U.K. Our lower outlook for the year reflects these trends as we continue to reshape the business and reassess our investment priorities for the year as Josh and Sharon will further discuss.

Cost of revenue for the quarter was $63.4 million or 54.8% of revenue, compared to 50.2% of revenue. This increase was primarily due to an increase in service and support costs and the change in our geographic product and service mix, partially offset by an improved media buying efficiencies and an increase in publisher rebates.

The increase in service and support costs was principally in support of new products and expansion in our international markets to address continued growth. Publisher rebates, as a percentage of revenue, increased to 4.1% of revenue from 3.8% in Q1 2013, principally as a result of a shift in product mix. Our extension negotiations with Google, the source of the bulk of our publisher rebates, continue. And in addition to the North American extension we discussed last quarter, our global arrangements with Google have been extended through June 30.

Sales and marketing expense for the quarter was $46.8 million or 37.5% of revenue compared to 35.9%. The increase was primarily due to an increase in salaries and fixed costs as a result of partially replacing (indiscernible) residual commission plan with additional base compensation and commissions tied to specific actions such as closing new client sales, retention, up-sells et cetera for most of our North American sales personnel under the recent realignment of that sales force.

The increase was partially offset by a decrease in commission expense as a percentage of revenue from 10.4% to 8.6% due to a decrease in sales activity and a change in the applicable commission rates in North America in connection with the realignment and a higher percentage of revenue from our international Direct Local channel, for which we have historically paid lower commissions. As sales activity increases in North America, we expect to see some increase in the effective commission rate.

Product and technology expenses totaled $7 million or 5.6% of revenue and are net of $3.5 million of cost capitalized. This compares to $5.9 million in expenses or 4.8% of revenue, which was net of $2.3 million of costs capitalized in the first quarter of 2013. The increase is primarily attributable to $2.1 million of increased salary and compensation expense as a result of increased headcounts related to the ongoing development of our technology platform and new product initiatives. The increase was partially offset by $1.2 million of increased capitalization.

General and administrative expenses for Q1 were $14.2 million or 11.4% of revenue, an increase from 7.6% of revenue. The increase was primarily due to a $1.9 million charge in the quarter related to the extension of the time to exercise pre-existing option grants and a $1.2 million increase in other employee-related costs primarily as a result of increased payroll cost, including the higher payroll taxes we typically see in the first quarter.

As previously discussed, we took a restructuring charge of $1.8 million related to a work force reduction and resizing of our North American real estate footprint. We expect additional charges over the course of 2014 as we continue to assess our real estate portfolio.

For Q1, we reported adjusted EBITDA of $2.3 million or 1.8% of revenue, down from $8.3 million or 6.9% of revenue. The decline is primarily due to lower business performance just discussed about. We finished the quarter with cash and cash equivalents and short-term investments totaling $73.7 million and 28,930,000 shares outstanding.

Now, let’s turn to our business outlook. Taking into account the business challenges that I highlighted, we are giving the following business outlook. For Q2 2014, we expect revenue in the range of $120 million to $125 million and adjusted EBITDA in the range of zero to a loss of $5 million. While we are updating our guidance for fiscal 2014, we are doing so early in Sharon’s tenure with the company in advance of the formation of our action plan and the operational shifts we may undertake under her direction.

That being said, we currently expect revenue in the range of $500 million to $525 million and adjusted EBITDA in the range of $2 million to $5 million.

Now, let me turn the call over to Josh who will go deeper into our sales activity this quarter before turning the call over to Sharon.

Joshua Claman

Thanks, Ross. You’ll remember that on our last call we laid out a sales transformation plan to address the slowing growth in North America that we have experienced over the last few years. We addressed this issue through specialization, dividing our team into sales executives to acquire new clients and account executives who are charged with nurturing, adding value to and up-selling our current clients.

We also continued the aggressive expansion of our inside sales organization, which opens new regional markets for us. All of this is designed to improve client retention, acquire new clients more effectively and ready ourselves for us to sell an expanding portfolio of solutions. We opted to make this change quickly throughout all of North America because we felt strongly that moving us more quickly down this path would ultimately serve the interest in both the company and its clients.

We believed and still believe that half measures would not have benefited the company or its clients. Like most change, this has been challenging. ReachLocal has had one sales model since our inception, and this change created a level of disruption well above what we had expected. While we did see additional client attrition with the transition to the new sales model, given the significant number of clients transferred from an IMC to a new AE relationship. The broader issue we’re tackling is the time it is taking for the sales team to fully ramp into the new role.

Readdressing the combination of the additional attrition and the lower productivity in the first quarter of the year will occupy us for the remainder of the year. While this update is not what we had hoped before, we still believe that realignment was the right thing to do for the long-term success of the business.

We are taking actions on a number of fronts. Our execution on recruitment, on-boarding and training has been changed in the group. As we look at our vertical programs, training, product and industry knowledge are all areas that we are working to improve.

We are also refining our lead generation efforts to enhance the efficiency of our sales force which we are combining with improvements to our back-end systems, to improve efficiency and client experience. Solid execution against these initiatives over this year will ultimately drive enhanced performance of our sales force and show results by delivering stronger new business growth and improvement in client retention.

As it relates to our products, ReachEdge continues to ramp and we just recently launched (indiscernible). In Q1, while we were further refining and experimenting with our pricing, customer (indiscernible) we sold over 500 additional ReachEdge units giving us over 1,500 units sold since the product was introduced. Additionally, we recently started offering two different ReachEdge bundles, one with ReachSEO and one with ReachSearch.

At the end of the last quarter, we also launched ReachSEO and given the price point relative to ReachEdge, we do expect a slower adoption curve than we saw with ReachEdge, but this is a product that is clearly part of our target clients’ marketing wallet.

Outside of the U.S., Japan has grown well for us, logging over 100% year-on-year growth. We plan doubling down there to ensure that we continue this momentum. Brazil also continues to be on an exciting path and we are launching a fuller suite of products there to exploit this potential. We also launched in Mexico this quarter and expect great things with 22 new excited employees.

Q1 was often challenged by additional client attrition in the U.K. as we saw a higher level of competition in the market than we previously experienced. In the U.K., we have greater sales force and client attrition and that is likely to take a few quarters to rectify. In Germany, while still growing well, we orchestrated a slowdown in hiring as we readjusted our hiring profiles which has impacted our new business performance.

We have changed the leadership in Europe leveraging the successful Head of Operations from Australia to redirect and improve our efforts there and have added a new experienced sales leader as well. Overall, while we had some tough challenges, we have a focus on the key items we need to address. We continue to be extremely optimistic and excited about the business and our path back to growth for the mid and long term. Sharon?

Sharon Rowlands

Thanks very much, Ross and Josh. So I’d like to start out by sharing some thoughts with you about why I’m excited to join ReachLocal as its CEO. First, the industry that ReachLocal is in is very large and fragmented. The spend on digital advertising and marketing in the U.S. by SMBs is estimated at $24 billion and growing.

We have less than 2% share of our target market and yet are one of the largest player. On top of this large fragmented U.S. market, there is a huge potential for growth outside of the U.S. but we were in the early stages of penetrating. So I see a tremendous opportunity for us to grow the market share.

ReachLocal today is empowering more than 24,000 SMBs to generate leads digitally in a cost effective and predictable manner. Now ReachLocal is helping them take their marketing to the next level from lead generation through to lead conversion, turning those leads into customers wrapped in an end-to-end digital marketing solution that makes running their business easier and helping them grow faster.

ReachEdge allows our clients to optimize their marketing in a multi-channel environment. So I believe we have an incredible opportunity ahead of us. The ReachLocal strategy is sound and it’s focused with the client in mind. However, as we all know, strategy without execution is hallucination, and this is where many companies can stumble. Having the opportunity and the vision is not enough, there needs to be an unwavering focus on getting it done. And this is one of the reasons why I’m here.

ReachLocal is in the midst of a transformation, the right long-term journey I would add, a transformation from a primarily digital advertising business to an integrated technology solutions business. We’re on a journey to modernize our go-to-market approach, which will ultimately grow our customer base and ensure they stay with us all at a lower cost of sales.

And ReachLocal is also transforming into a mature company that is even more professional in its approach, that knows how to allocate resources based on sound business decisions, that knows how to balance the needs of the global market and make the prioritization call and it’s based on culture of client focus, execution and operational excellence.

Now, why do I call this out to you, well, frankly it provides the context for my comments about what I’ve seen at ReachLocal since taking the helm five weeks ago. We are a company passionate about our industry, the role we play in it, and our clients. We have engaged and committed employees and we have a roadmap and a journey heading to the right destination.

In fact, I believe we may (indiscernible) one of the best products and people platforms in our market. But I see an opportunity to leverage that platform better and more effectively execute against our priority. I see an opportunity to up our game on many fronts and as a result of that, my thesis based on what I see really is as follows.

Firstly, strategically we are pointed in the right place. ReachEdge is the right solution for the SMBs that need the technology solution to drive total ROI visibility and manage from lead gen to client conversion. The market for this product is very large and we will continue to commit resources to understanding the customers’ need and driving engagement and usage of this product.

The focus on new products at ReachLocal historically have come at the expense of energy on the core media business. This will change. I believe that our core business of search and digital (indiscernible) can yield growth and I want to see more innovation and energy put behind that.

Our sales transformation previously described to you is the right long-term journey, but it is apparent that we underestimated the strain it puts on an organization and the time it takes to complete. While this is unfortunate, we believe the end result will deliver the success criteria previously laid out of great client acquisition, reduced client churn and a better cost of sale, but instead of the three months to achieve, it’s more likely a nine to 12 month period.

And then as just described we have experienced some upheaval in our European business, some resulting from poor execution and some resulting from external factors but we are focused on addressing with a sense of urgency.

Now, time is a transformation for any organization, execution is critical. Over the last 20 years, I’ve lead transformation in businesses that involves products, go-to-market, large sales transformation. I’ve driven technology change in large businesses from an operational level as well as a Board level. Already after five weeks, I can see a difference in the sense of urgency and effective decision making taking hold in the business at ReachLocal.

Right now, my areas of focus are making sure that we achieve a long-term benefit of our North American transformation that we originally laid out and to directing our international business to accelerate growth again and ensuring we have the right capabilities to accelerate our general progress.

Strategically, we will continue to develop ReachEdge as an innovative new platform but we will add to this a reinvigoration of our core media business to strengthen the value proposition. I joined ReachLocal because I believe in this business and that there is great growth opportunity for us. While we have our work cut out for it, it’s certainly not unusual for growing a company to hit inflection point, to acquire business change and evolution.

The good thing is we have recognized that fact and are moving aggressively to transform our business. The company is on the right long=term journey and we have the right strategy. I’m excited to be leading ReachLocal and committed to helping SMBs grow and operate their businesses better which will drive growth for the company and will create value for all of our shareholders.

We’d now like to take all of your questions, and so I’m going to hand the call back over to the operator to moderate.

Question-And-Answer Session


(Operator Instructions) And our first question is from the line of Douglas Anmuth with JPMorgan. Please go ahead.

Diana Kluger - JPMorgan

Hi. This is Diana Kluger on for Doug. I was wondering if you could talk a little bit more in detail about the length of process, three months to the nine to 12, some specific examples of what’s taking longer and maybe sales force attrition or some quantitative metrics you can put around that?

Sharon Rowlands

I think that the first thing to say an undertaking as big as this is a very, very large project because essentially what we’re doing is changing our whole go-to-market model, from a pure model of IMCs to more of account management model and a separate new business client acquisition model. And essentially that really means the majority of our people do very different jobs to the jobs they were doing three months ago.

So what is taking longer is the realization that really the learning curve for people in their new jobs is taking much longer. We have had increased sales force churn, which is -- we’ve had to put more energy between greater hiring and as a result of that we have more new people that just exacerbates the trading requirement.

It really involves the creation of a whole new set of systems and processes to the sales force to be able to execute and then the other key learning we’ve had is we’re allocating more headcount to new business acquisition, we really need to strengthen the whole lead generation process for the business, so that we can put those sales people to effective work.

I’m not surprised that this transformation is going to take nine to 12 months to get done, and to be quite honest with you I think the assumption that it was going to get done in three to four months was probably over optimistic at that time. Thank you.


And our next question is from the line of Kerry Rice with Needham. Please go ahead.

Kerry Rice- Needham

Couple of questions. First, can you comment at all or maybe provide some context around the negotiations with Google, not specifically, but it sounded like you signed at least a two month extension. The kind of change in the business model or maybe the slowdown and push out because of that, any problems with that in with your relationship with the Google at all? And then secondly, you talked about the upheaval in Europe, and I thought Europe was largely already in the sales transformation when you hired that and started building that sales force up was already kind of in this new alignment, so is it competition, is it execution, is it both, can you kind of elaborate on some of the issues in Europe? Thank you.

Sharon Rowlands

Sure. So, Kerry, couple of questions within that. I’m going to leave Ross in a minute and he’ll comment on the status of our negotiations with Google although I will tell you I’ve met with the Google people both in North America and in Europe and actually very positive, very healthy relationship, and I actually felt very energized by the ways in which we can collaborate actually more deeply.

I’m going to make a comment on your European comment, and then I’ll ask Ross to jump in on the specifics around the Google negotiation. First of all, I would say, generally, we feel good about our international growth and we feel good generally about our European growth. The issues we’ve seen in Europe really relate to two specific markets, within the U.K. market where we’ve certainly seen some challenges that I would say are more market structural and more competition at the lower end of the market around price, and that is something that we’re working through.

And then within Germany, we’ve seen a slight slowdown which I would put down to more of a maturing of that business model there and some execution issues, but Germany does continue to grow. So, if you want us to comment more deeply on the U.K., we can come back to that, but Ross why don’t you just fill in on the absolutes with Google?

Ross Landsbaum

Just with respect to Google, the negotiation process is taking about the same amount of time as it took the last time when we initiated the agreement. It’s a fairly complicated agreement. It obviously impacts and needs to be addressed with all the various Google operations around the world.

Practically speaking, they extended the existing agreement to the end of the quarter from the April 30th expiration. Quite frankly, this gave us all time in recognition of the fact that it is a slow process working with them. None of this has anything to do with quite frankly what we’re reporting today and we agreed to actually go down the process of extending this long before quite frankly we recorded in the fourth quarter when we had also extended the North American agreement.

So it’s not really a reflection, and as Sharon say, generally relationships with Google are positive and this is not -- what we’re talking about is impacting those negotiations.


And our next question is from the line of Todd Van Fleet with First Analysis. Please go ahead.

Todd Van Fleet - First Analysis

Let me ask more specifically, I guess, on Google. So what does your guidance assume regarding the Google relationship, is it the status quo, the contract as is? And if you could comment on that, and then what’s your confidence surrounding that? So, if you don’t have certainty as of today because you have the renewal out to the end of June, what’s your confidence level that your guidance accurately reflects the renewal terms? Thanks.

Ross Landsbaum

So the guidance that we gave today, the model is based upon the state of the negotiations where they are and where we believe that they will settle out. And we’re -- I would say the conversations are fairly far long that we’re reasonably comfortable with that -- with the outcome.

That being said, things can change but I would sit here and tell you based on where the negotiations are, we’re fairly comfortable in the assumptions we’ve made in our guidance.

Todd Van Fleet - First Analysis

If I could ask then on the transitions that are taking place within the business, just to understand, I think you’ve indicated, Sharon, that the turnover I think amongst, I don’t know whether it’s amongst new reps that have been brought in within the past year or if it’s in more mature reps, the turnover is then higher, the learning curve has been a bit longer. I think as we learned the strategy last quarter in the company’s kind of go-forward strategy, kind of the hunter/gatherer strategy, I’m wondering are you seeing the turnover within the hunters and gatherers, how has everyone been kind of seeing it more in one group as opposed to the other, if you could offer a little bit more detail on that front that would be helpful. Thank you.

Sharon Rowlands

I’ll actually ask Josh to answer that question. He is sort of a lot closer to that.

Joshua Claman

It might be worthwhile just for everyone on the phone to backup a second and just remind everyone what we did. When we came into the year, beginning of Q1 with just over 900 sales people globally, where [500 of those] (ph) were in North America and if you recall we had some big, we call it, big book IMCs, so these were the traditional IMCs that had quite a big book and they’re a successful sales people and quite skilled as managing that book as well. We left them where they were.

And today they are doing largely the same job they were doing. The rest of the sales force we split into, you’ve got the hunter/gatherer, farmer/hunter, whatever, but we call them SEs, so sales executives, which are charged with acquiring clients, and AEs or account executives, which are charged with nurturing those relationships and up-selling and cross-selling.

Where we’ve seen the biggest impact, the big book IMCs are stable. We’ve seen actually less than our historical attrition on the big book IMCs. The AEs are largely stable now. There was a initial disruption in both the SE and the AE population which created a little bit of hole for us, because we are a subscription service. So, where we saw a slowdown in sales for a few weeks, that leaves a hole that we then need to climb out of.

The biggest single issue we have right now is not the big books, it’s not the AEs who are actually sound in their feet, they’ve gone to know and developed their relationships with their clients. They are up-selling and cross-selling effectively. Where we see the biggest issue now is with the SEs and we found, as Sharon commented, we need to really focus our attention on making sure we have the right people in the right jobs, making sure we train them and ramp them appropriately and making sure that we have a lead generation engine which heats that sort of engine fuel for them.

But the SEs, we’re looking to isolate the problem and isolate the issue that has the highest correlation with our guidance, it would be the performance of the hunters.

Todd Van Fleet - First Analysis

Just one more, and I’ll let you go here. So in thinking about those kind of three different people components of the business, can you quantify for us the portion of business that maybe you are reliant upon those folks that you were having a little bit difficulty for the SEs, you’ve got your folks that are maintaining the existing book of business, you’ve got the folks that are kind of your big book as you said and then you have this other group that you really need to do some work on it, it sounds like, as we think about the new guidance, revenue guidance for this year, $500 million to $525 million, how much of that $500 million to $525 million is in the bucket of what we need -- really the SEs that that were having some issues with really kind of perform at a certain level in order to generate, I don’t know what the number is, whether it’s 20%, 25% but that’s really -- as we think about the potential downside here, that’s what I’m really trying to get my arms around. Thanks.

Sharon Rowlands

Why don’t I just frame it out a little bit, and then Ross if you can jump in to, (indiscernible). So I feel the first takeaway is that the IMC base in North America still exists, it’s actually accountable to 50% of our Direct Local base. So, that is in sort of like pretty good hands. The main driver of the guidance reduction is that we are not seeing the new business generation, the client acquisition that we have originally anticipated with the change.

And so we have modeled through the rest of the year a much more gradual ramp, an improvement in sales, productivity and performance that is more likely to be the reality. I don’t know whether Ross you wanted to --?

Ross Landsbaum

And I guess what I would add is that if you look at the adjustment to guidance, roughly two-thirds of that is related to what we’ve been talking about in North America. And as we look to guidance, we’re obviously, when you look at Q2, we’re obviously expecting Q2 to still be a (indiscernible) transition and then from there going forward to the end of the year, we are expecting very modest growth coming out of that quarter, we’ve taken a fairly pragmatic view.

As to how we think things are going to turn around and quite frankly if we over-perform I think everyone will be happy, but I think we wanted to take, given quite frankly how we got a little bit ahead of reality, ensure that as we guided going forward, it was in line with what we’re experiencing today and relatively modest expectations going forward.


And our next question is from the line of George Sutton with Craig-Hallum. Please go ahead.

George Sutton - Craig-Hallum

So if I look at this from two groups, I look at this from an existing customer perspective and then a new potential customer, it sounds like that new potential customer hasn’t been necessarily contacted as frequently or as effectively yet, correct me if I’m wrong there. And then the existing customer, how have things changed?

Sharon Rowlands

So the way you should think about it, it is the rationale for this change was really to provide our existing customers with a better account management model that was really dedicated to looking after the customer, up-selling the customer and cross-selling the customer.

That new model so far actually is really proving out to be pretty effective. What historically has been an issue for ReachLocal and has been a big driver of this change was that the new client acquisition has actually fallen off historically, partly because the IMC model got to a point where the IMCs weren’t necessarily incented to do a lot of new business acquisition. That is, I think, the biggest challenge we have right now, but it’s also where we have a significant opportunity.

I referenced we have less than 2% market share. The model that we have for this business to really brining in new clients and then with the ability to have more products and therefore be able to really drive up the asking per client, really is what will revitalize sort of the North America bucket. So it really is predominantly this new client acquisition model that we are really working to get it right, which is about talent, it’s about sales management, it’s about the right process, but it’s also about the right marketing lead gen, so that you are applying that new business team against, if you like, leads rather than just sort of wailing about in the sort of marketplace.

George Sutton - Craig-Hallum

And relative to ReachCommerce, I don’t believe that’s been mentioned on the call, could you just give us an update on that and then also your potential opportunities with Yelp and MerchantCircle relative to that?

Ross Landsbaum

George, it’s Ross. So the product remains in beta. We have completed the engineering integration with the Yelp API and we are in the process of testing the experience both from a client perspective and from a consumer perspective and we’re continuing our thinking and work in the space.


And our final question is from the line of Nat Schindler with Bank of America. Please go ahead.

Jason Mitchell - Bank of America

Hi. This is Jason Mitchell for Nat Schindler. I guess can you just remind us, any of the other international markets still using the IMC model? And then, on your ReachEdge licenses, how do you see that kind of selling through for the rest of the year? You just kind of expect a slow up-sell of that product should you move forward?

Sharon Rowlands

So why don’t I make a comment about ReachEdge and then I’ll ask Josh to give some extra insight and then talk a bit about the go-to-market model internationally. So, I’m excited by ReachEdge. I think it’s the right product, I think it really fits a critical need in the marketplace.

I think whilst it’s early days, I think the initial reflection has been strong, and we’re seeing based on opportunities to sell into the existing client base as well as to sort of sell a broader sales marketing solution to a new client base where really the combination of our search SEO capabilities in ReachEdge provide really compelling bundle. Josh?

Joshua Claman

So just on the IMC question, we have sort of three models now, and [I don’t want to confuse] (ph), and I’d try to simplify it, all of the Americas are on the new aligned model with the SEs and the AEs everything from Canada down to Brazil, and certainly Canada, Brazil and Mexico are performing just great, so the model seems to be working there.

Asia is on the Reach’s new aligned -- realigned model as well. Australia has a little bit of hybrid but it’s moving there gradually. Europe is the last [fashion] (ph) of the IMC model and it looks very much like the U.S. did a year ago with everyone, there are big book IMCs and there are new IMCs and we judge ramp based on that. Now, we don’t see a need for wholesale reinvention or realignment exercise like we did in North America and Europe, but we will gradually be moving to more specialized drills in Europe as well.


Thank you. And at this time, I would like to turn the call back over to management for any closing remarks.

Sharon Rowlands

Okay. Thank you very much, operator. And thank you everybody for your questions and for dialing in today. At the end, what I would sort of like to leave you with in terms of final thoughts is as you sort of think about ReachLocal and value and where it can go as a company, is that this is a company that operates in a very large market, currently has very low market share.

It’s invested in really building out a much broader product range with a compelling value proposition and we are really in the early stages of bringing those products to market. The go-to-market change is definitely an upheaval and that’s not surprising, but in the longer-term, this absolutely will bring us a lower cost of sales, greater client acquisition, and I believe, stronger client retention.

And really the final thought is, whilst the management team really like to be bringing guidance down to this level, what I will say this is not because we have some major strategic market sort of disconnect, it really is down to changes that we have to manage through the team and execute on, that really are within the company’s control. None of it is about waving a silver -- magic wand, it really is, a number of things well executed on simultaneously and you have my commitment as the new CEO and I know the rest of the T that we are going to be aggressively focused on making that happen and we’ll look forward to reporting progress to you at the next quarter. Thank you.


Ladies and gentlemen, this concludes our conference call for today. We thank you for your participation and you may now disconnect.

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