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Executives

David Katzoff – Associate VP

Heath Clarke – Chairman and CEO

Ken Cragun – CFO

Analysts

David Delleo – Canaccord

David Kestenbaum – Morgan Joseph

Richard Fetyko – Janney Montgomery Scott

George Santana – Ascendiant

Local.com Corporation (LOCM) Q2 2011 Earnings Conference Call August 3, 2011 5:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Local.com’s earnings conference call.

My name is Jeremy and I’ll be your operator for today.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Mr. David Katzoff, Associate Vice President. Please proceed.

David Katzoff

Welcome to Local.com second quarter 2011 conference call. With me today are Local.com’s Chairman and CEO, Heath Clarke; and our Chief Financial Officer, Ken Cragun. Heath and Ken will discuss our results and our outlook for the third quarter 2011, and we will then open the lines for questions.

Today's discussion includes forward-looking statements that are subjected to risks and uncertainties that can cause actual results 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 detailed in Local.com's SEC filings.

Any forward-looking statements are only made as of the date of this call and we undertake no obligation to update such statements to reflect subsequent events or circumstances.

We use non-GAAP financial measures in evaluating our financial performance, specifically the non-GAAP financial measure of adjusted net income loss.

Please refer to the press release we issued today for how we define adjusted net income loss and our reasons for using that non-GAAP measure, as well as a detailed review of our second quarter 2011 results, including the corresponding GAAP financial measures and a reconciliation of our non-GAAP financial measures to GAAP financial measures.

This conference call is publicly available via audio webcast through our website, and a replay of the conference call will be available for the next 90 days.

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

Heath Clarke

Thanks, David, and welcome to everyone on our call. Today we reported our second quarter results and preliminary third quarter guidance which Ken will discuss in a moment.

After a challenging first half where lower monetization impacted us again, we’re now forecasting a strong return to growth. I am pleased to report the tremendous progress we have made during the first half of this year which we believe will allow us to deliver much improved second half revenues. We’re excited about the many opportunities ahead.

During the second quarter, we secured a new ad partner in order to diversify our ad revenue and increase traffic monetization starting August 1st. We acquired two new businesses to open up the new ad market; we made key executive changes and promotions, reengineered our sales operations and product development teams and streamlined our business overall; we delivered record organic traffic; and we accelerated our growth in the daily deal space with the strategic acquisition at the beginning of the third quarter.

Let me provide more color on each of these. Our biggest challenge during the first half of the year was declining monetization as a result of the Yahoo! being aligned. Although our value partnership with Yahoo! worked well for the past five years, we clearly needed revenue diversification. At the end of the second quarter and into Q3, we successfully executed partnership agreements with both the leading ad providers. We believe this partner configuration will help us to address our monetization challenges as well as diversify our ad revenues between our ad partners. Our newest ad feeds were activated August 1st, three days ago, and the initial metrics are favorable. However, as a consequence of having very limited data we’re providing on a general adjusted net income guidance for the third quarter.

We acquired two new businesses during the quarter which we believe will provide us with the team, technologies and products to pursue new markets. Among other things, Rovion provides us with a rich media ad management platform that we can market to our regional media publishers and Krillion provides location based product search for over 60,000 big box retailers that we can use to enhance our existing local search services by a mobile device. We’ll continue to invest in these platforms and expect to announce a variety of new customers and products on the Rovion and Krillion platforms in due course.

We’re continuing to pursue revenue diversification with an emphasis on building a base of small business customers using our proprietary ad products and increasing the number of regional media publishers using our platform. In order to achieve these objectives, we need more products and an efficient way to sell them. In order to develop products more rapidly, we made a number of organizational changes, including a new COO and changes within our product organization. In addition, the acquisition of Rovion and Krillion provided us with further product development capabilities.

We ended the quarter better positioned for more rapid product development and we recently began test selling two new local ad products during the quarter. We remain heavily focused on expanding our product suites for local merchants and expect to make near-term announcements in this regard. We also expanded and upgraded our sales capabilities during the quarter. I am pleased to report that during the second quarter we greatly improved sales metrics from our internal teams.

We still have a lot of work to do but we’ve laid a great foundation for direct revenue growth and we expect the majority of our hiring for the remainder of the year to be in sales. We believe the addition of direct advertisers will provide us with more defensible and recurring revenue and enable us to deliver a better user experience in our properties due to more relevant ads.

We care greatly about our user experience, because that’s one of the main ways we grow organic traffic. We achieved record organic traffic during the second quarter which now represents almost 40% of our total traffic. Growing organic traffic has been a key goal of the company for the past two years and we’ll continue to invest in our consumer products in future periods in order to drive that number upwards.

Our recent acquisition of Screamin’ Media Group greatly accelerates our growth in the daily deal segment. Daily deal is strategic to our business because it allows us to increase organic traffic by email instead of within a search ecosystem dominated by the major search engines, it enables us to monetize our search traffic with our own ad products, it’s a new market segment overall and therefore diversifies our revenues, and it enables us to deploy direct sales force.

We’re still integrating Screamin’ Media Group which is already relocated to our corporate headquarters here in Irvine. The Screamin’ brand will be retired in favor of the Spreebird brand in the next few months, but for now we’re mostly focused on integrating the recent acquisitions and we’re making good progress in this regard.

Each of these acquisitions requires additional investments and our guidance is reflective of this. We take a long-term view and we’ll continue to make the investments we feel are appropriate to meet our vision of building and leading online local media business.

In summary, we’ve spent the first half of the year laying a foundation which we believe will diversify our revenue stream, both inside and outside of the search ecosystem, strengthen our product development capabilities as well as our capacity to sell those products directly and grow organic traffic. While there is much work remaining, we believe we have a more defensible revenue foundation with strong growth potential into the future. We believe our third quarter guidance illustrates that our work is beginning to payoff.

Ken will now discuss our financial results.

Heath Clarke

Thank you, Heath, and thanks to everyone who has joined us for our Q2 2011 financial results conference call.

As Heath mentioned in his remarks, our second quarter results were impacted by lower traffic monetization, which contributed to lower-than-expected revenue of $15.6 million, 8% below our $17 million guidance. We also lowered our operating expenses which resulted in positive cash flow from operations for the quarter and favorable bottom-line results with adjusted net loss about $600,000 better than the $2.5 million adjusted net loss projected for the quarter. Organizational changes during the quarter resulted in a $900,000 charge for officer and severance costs. The favorable bottom-line results were also in part due to lower Q2 marketing spend on our daily deal business.

Comparing our operating results to the prior quarter Q2 cost of revenue as a percent of revenue increased to 69% from 65% last quarter due to the decrease in traffic monetization and a decrease in our high-margin SAS revenue from expected subscriber churn.

Q2 sales and marketing expense increased from the prior quarter as we added sales and marketing resources for our recently acquired Rovion and Krillion businesses. Q2 G&A expense increased from Q1 as most of the change in officer and other severance costs were recorded at the G&A expense. Q2 R&D costs were slightly from Q1 as we reduced our contract development costs. Q2 amortization expense was flat from Q1 at about $1.2 million.

During the second quarter, we recorded a $411,000 or $0.02 per diluted share warrant evaluation gain using a Black-Scholes model calculation that takes into account among other things the trading price of our common stock.

During Q2, we had a GAAP net loss of $5.4 million or $0.25 per diluted share with 21.3 million shares outstanding. This compares to a Q1 GAAP net loss at $1.3 million or $0.07 per diluted share with 20.2 million diluted shares outstanding.

As for cash and liquidity, we ended the second quarter with $13.5 million of cash, down from $20 million at the end of the first quarter. We had positive cash flow from operations of $700,000 in the quarter offset by approximately $6.4 million of cash used related to acquisitions in the purchase of intangible assets. About $1 million of cash was used during the quarter for capital expenditures, mostly related to investments in our technology infrastructure and capitalized website development costs.

Looking to Q3 2011, we expect revenue to be approximately $21 million, an increase of 35% over the second quarter. Growth is expected from increased traffic monetization across our O&O and network businesses, and due to the contribution from our recent acquisitions.

We are not providing specific adjusted net income or loss guidance for the third quarter of 2011 as we have limited monetization data from a new mix of ad partners that started on August 1st. However, we do expect a lower adjusted net loss in the third quarter than in the second quarter.

I’d now like to open the call up to Q&A. Moderator?

Moderator we’re ready for the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of David Delleo with Canaccord. Please proceed.

David Delleo – Canaccord

Hi guys. Thanks for taking my question. Can you hear me all right?

Heath Clarke

Yes, we can.

David Delleo – Canaccord

Great. Just some clarity on my part with the new ad agreement starting August 1st. So I’m under the assumption that that’s Google and Yahoo!. Is that correct?

Heath Clarke

Well, we have an ad agreement with Google and we have an ad agreement with Yahoo!. Yes.

David Delleo – Canaccord

Yes. So I’m trying to understand – I thought that the Google partnership was replacing Yahoo! as of August 1st, but it sounds like maybe Yahoo! was then renewed instead of being replaced.

Heath Clarke

Yes. We – I mean obviously we’ve been partner with Yahoo! for a number of years, so we do a lot of different things with Yahoo!.

David Delleo – Canaccord

Okay.

Heath Clarke

And we want to continue to do some of those other things with Yahoo!. And the relationship that we have under the new agreement allows us to continue to be creative and do some of the other things that perhaps Google doesn’t necessarily want to do.

David Delleo – Canaccord

Okay, I understand. Okay, that’s helpful. So moving on, just some previous message that were supplied last quarter, so as far as Spreebird, you guys are still targeting about 20 markets by year-end with Spreebird?

Heath Clarke

Yes, that’s correct.

David Delleo – Canaccord

Okay. And then you had also mentioned targeting organic growth over the long-term is about a $100 million, any change there to the positive or negative?

Heath Clarke

Organic growth to a $100 million, I’m sorry. In the last call, I had said that we’re looking for a revenue growth to hundreds of million, so yes we haven’t changed that. So we didn’t give a – just to clarify we didn’t give a timeline on that either.

David Delleo – Canaccord

Okay. And then just lastly on the direct sales board; so it sounds like that kind of implementation this quarter, you gave some brief description on leading traction there. Any other color as far as challenges you run into not accepted or is it kind of expecting the kind of trend you better than expected?

Heath Clarke

No. On the direct sales force, let’s talk about it a little bit. We’ve got really two pieces. We’ve now got feet on the street sales in 14 markets and then we have our own internal telesales team here. And what I was referring to in terms of strong metrics is really referencing our internal telesales in particular. We’ve had challenges in the past getting the telesales operation running as efficiently as we wanted it to and I think we talked about that in the last call as well.

We haven’t performed as well historically as we would want to there. And so we brought in a new COO with stronger sales background, we’ve got new sales leadership there more recently announced, and basically kind of took a whole – a good look at that whole operation and we’re tightening it up. And it’s – we’re hitting some very good numbers here and we’re – they’re very compelling from our standpoint. And so we look to the remainder of the year at really kind of expanding our sales capacity, and we do believe most of our hires will come within sales, of course so it’s going to be direct sales feet on the street as well as direct telesales. So we’ll be looking to beat that up quite a bit through the year.

David Delleo – Canaccord

Okay, that’s helpful. I appreciate the color. Thanks guys. That’s it from me.

Heath Clarke

Thanks David.

Operator

Our next question comes from the line of David Kestenbaum with Morgan Joseph. Please proceed.

David Kestenbaum – Morgan Joseph

Okay, thank you. Just a follow-up on the previous caller’s questions on Yahoo!. Will they be carrying your traffic on the network business going forward?

Heath Clarke

Carrying our traffic; you mean will we be distributing their ads on the network business?

David Kestenbaum – Morgan Joseph

Yes.

Heath Clarke

Yes.

David Kestenbaum – Morgan Joseph

Okay. And as far as the guidance, can you talk about the $21 million – can you clarify how much is coming from say Screamin’ Media and some of the other recent acquisitions or just give us some color around that?

Heath Clarke

Yes. About half of the revenue growth is from the acquisitions. And, obviously, the majority of that would be Screamin’ Deal Deals, and the rest is from our core operations.

David Kestenbaum – Morgan Joseph

Okay. And then you obviously transitioned to Google. You had said it took about 20% to 30% hit from the transition from Yahoo! to Bing. Can you talk about maybe quantify what do you think you can get back from this relationship with Google? And that’s it.

Heath Clarke

Yes. We actually we can’t. We’re – obviously we’re tracking the numbers very closely. The reason why we’ve made this transition is two-fold. One is to diversify revenues overall and the other is, of course, to pickup on the monetization lag that we’ve experienced. So directionally, of course, we anticipate that we’re going to pick that up and that’s going to be better than it was and nothing’s change in that regard. But we definitely – it’s too early days for us to – to be able to try to quantify that in terms of what that pickup might be.

David Kestenbaum – Morgan Joseph

Okay, thank you.

Heath Clarke

Thanks David.

Operator

Our next question comes from Richard Fetyko with Janney Montgomery Scott. Please proceed.

Richard Fetyko – Janney Montgomery Scott

Good afternoon, guys. A couple of questions. A little more granularity on the guidance of $21 million, you just mentioned that about 50% of that increase sequentially came from organic initiatives. Just curious; so that would be basically going from $17 million to $21 million, about $4 million sequential increase in revenues, about half of that is about $2 million from organic core business. Just curious; out of that $2 million, how much of that is attributable to better monetization?

Heath Clarke

Well, actually, it’s – we’re going from about $15,600,000 to about $21 million. So call that about $5.5 million, $6 million thereabout. And so the numbers are closely about $3 million organic, $3 million – or $3 million core and then $3 million acquisition related just to kind of get the numbers a little more accurate. I don’t know if that helps.

Richard Fetyko – Janney Montgomery Scott

Yes, yes. I’m sorry. I was looking at the – I was thinking of the $17 million guidance, not the actual reported number. But just curious, out of that organic increase in revenue sequentially that you’re anticipating in the third quarter, how much of that is attributable to the monetization improvements as opposed to all the other things perhaps such as traffic growth, increase the direct sales and telesales initiatives, things like that.

Heath Clarke

Yes. No, look, there is a – obviously there is a portion attributed to the list in monetization, but we also – we’re spending our footprint online, we have record organic traffic overall. So our network business is growing, good business. But we haven’t – we’re really giving ourselves a fair bit of flexibility there intentionally in terms of the guidance because it’s only – Google has only been on for three days and we’ve really only got one full 24-hour period of data. So we just don’t want to put too much information out there until we gather more data. I mean, but we do have – obviously we have expectations, we’ve modeled those in, but we wouldn’t want to get to that granularity in terms of how we would break that out.

Richard Fetyko – Janney Montgomery Scott

But you feel like you’ve taken a conservative approach with respect to what that monetization lift could be in your guidance?

Heath Clarke

Yes.

Richard Fetyko – Janney Montgomery Scott

And then, secondly, with respect to improvements in direct sales and telesales efforts, are we still talking about the exact match product primarily?

Heath Clarke

Yes. And actually maybe I can talk a little bit about that, because we had challenges with the exact match product in the first and second quarter. We spent the second quarter trying to get that dialed in. As we talked about on the last call, Google’s algorithm changes, the Farmer update, Panda update whatever you want to call it, positively impacted our organic traffic but negatively impacted our exact match product. But the exact match platform is a very powerful platform, it’s core to our product development efforts today. And we dialed in the core product and we’ve been making very, very good progress on that in terms of selling it and delivering value to our customers.

We’ve also added two new customers – two new products exact match social and exact match display. And those are early days testing, but again favorable results from our sales team internally have done a great job and might [inaudible] tele has done a great job of kind of bringing all that into alignment and just hitting stronger numbers than we’ve hit in years. And we have a good product development pipe, we’ve beefed up our product development engine here, and we’ll have new products that we’ll be announcing pretty quickly.

So we’re excited about all of them. And most of the products – the new products are outside the search ecosystem. So exact match social gives a small business social presence and that entitles – incurs entirely outside of search, so that’s part of our revenue diversification overall.

Richard Fetyko – Janney Montgomery Scott

Thank you.

Heath Clarke

Thanks Richard.

Operator

Our next question comes from George Santana with Ascendiant. Please proceed.

George Santana – Ascendiant

Hi guys. A couple of questions. One of your competitors on the local side yesterday talked about some headwinds in the North American business in the small and medium businesses. Can you give us a little flavor on what you’re seeing in that segment and whether the marketing spend is stable, is it recovering or is it just kind of bit a little bit of stuff much?

Heath Clarke

Yes. So the comment that was made is spot on the small business and those that are connected to them. To the extent there is changes in the economy, those companies like ours that serves the small businesses nationwide tend to dial into that fairly quickly, and we made reference to our experience in that particular space back in 2008 fourth quarter when economy started to have issues. So we’re much dialed into that.

Now, having said that, we’ve got so many things that are new and influx for ourselves in a positive way, we’re probably not the best company to ask that this quarter. We’re not acquiring new subscribers as we had done a year-ago, we’re developing new subscribers through our own direct sales efforts, and we don’t – frankly we don’t have a lot of them right now, and so we wouldn’t be a good barometer of that. The company that mentioned that yesterday is also a – they serve a different segment of big – small business segment versus ours and our product suite, so they may have different data for a different set of customers than ours. Well, I don’t feel comfortable that we’ve got enough data from our chosen set of customers to able to kind of infer anything further.

George Santana – Ascendiant

Okay, that’s fair. And second if I could, could you comment a little bit obviously with Google’s purchase of The Dealmap a couple of days ago, whether that – it’s just an incredible validation of what’s going on there, whether they’re more of now a competitor or a frenemy, how are they positioned versus you?

Heath Clarke

Yes. Well, we don’t comment on other company’s acquisitions. I think Google’s $6 billion bid of Groupon I think was pretty good validation in the space. I think it’s – it remains an exciting space. Because it’s local it’s not very different, it’s not the same as a search, it’s – you got to be able to reach out and serve small business customers right across the country and there is millions of them. So I think this market remains wide open. I think it’s right for consolidation and hopefully we can be one of those companies doing that consolidation in our desired segment which is community deals.

George Santana – Ascendiant

All right, thanks guys.

Heath Clarke

Thanks George.

Ken Cragun

Thanks George.

Operator

(Operator Instructions). At this time, there are no questions queued, and I’d like to hand it back to Health Clarke.

Heath Clarke

I’d like to thank everybody for joining us on the call today. I’ll hand it over to David to conclude our forward-looking statements.

David Katzoff

This conference call contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act 1934. Words or expressions such as anticipate, believe, estimate, plans, expect, intend, projects, forecast, potential, feel and other 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 advertising partners paying less RPC and revenues to us for our search results; our ability to adapt our business following the shifts in our monetization partners; our ability to monetize the Local.com domain, including at a profit; our ability to retain a monetization partner for the Local.com domain and other web properties under our management that allows us to operate profitably; our ability to develop market and operate our local-search technology; our ability to market the Local.com domain as a destination for consumers seeking local-search results; our ability to grow our business by enhancing our local-search services, including through businesses we acquire; the future performance of our OCTANE360 business; the integration and future performance of our social buying business, our Krillion business and our Rovion business, as well as other businesses we may acquire including our newly acquired Screamin’ Daily Deals business; our ability to successfully expand our Spreebird business into new markets, including through acquisition such as the Screamin’ Daily Deals acquisition; the possibility that the information and estimates we use to predict anticipated revenues and expenses associated with the business we acquire are not accurate; difficulties executing integration strategy or achieved planned synergies; the possibility that integration costs and go-forward costs associated with the business we acquire will be higher than anticipated; our ability to successfully expand our sales channels for new and existing products and services; our ability to increase the number of businesses that purchase our advertising products; our ability to expand our advertising and distribution networks; our ability to integrate and effectively utilize our acquisitions' technologies; our ability to 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 forces and pricing pressures, changes in legal and regulatory requirements, and general economic conditions.

Any forward-looking statements reflect our current views with respect to future events and are subject to these and other risk, 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 paragraph. Unless otherwise stated, all site traffic and usage statistics are from third-party service providers engaged by the company.

This concludes our call for today. Thank you for your interest in Local.com.

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