Janine Zanelli – Senior Director, IR
Heath Clarke – CEO
Ken Cragun – CFO
Paul Resnik – Red Chip
Jon Hickman – Ladenburg
Local.com Corp. (LOCM) Q4 2011 Earnings Call February 16, 2012 4:30 PM ET
Good afternoon. My name is Sandy and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter and full year 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions).
Thank you. It is now my pleasure to turn the call over to Mrs. Janine Zanelli, Senior Director of Investor Relations at Local Corporation.
Welcome to Local Corporation's fourth quarter and full year 2011 conference call. With me are Local's Chairman and CEO Heath Clarke and our Chief Financial Officer, Ken Cragun. Heath and Ken will discuss our results and outlook for the first quarter and full year 2012 and will then open the line for questions.
Today's discussion includes forward-looking statements that are subject 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 on Local.com's SEC filings. Any forward-looking statements are only made as of the date of this conference 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. Please refer to the press release we issued today for how we define such non-GAAP measures and our reasons for using them as well as a detailed review of our fourth quarter and full year 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 call will be available for the next 90 days.
I'd now like to turn the call over to our CEO, Heath Clarke.
Thanks Janine. I'd like to welcome Janine Zanelli who recently joined Local to lead our Investor Relations effort. So please feel free to contact Janine, Ken or myself anytime.
Over the past five years, we've grown from a single website to a local online media business powering over 1,000 websites and touching a million consumers a day. The first half of 2011 was challenging, yet we delivered on our guidance that we would turn things around sharply in the second half. We grew our business 64% between Q2 and Q4 and ended the year with record revenues and exceeding both revenue and adjusted net income guidance.
We believe we ended 2012 better positioned than ever before with a strong and focused leadership team, key industry partnerships, greatly improved sales capabilities, a broader product range than we've ever had, overall traffic and organic traffic at or near record levels, record monetization, more diversified partner revenue, record proprietary revenue and a more powerful and proprietary technology platform than we've ever had. We operate in a very competitive environment, yet we have three key reasons to feel confident about our prospects.
First, we benefit from the secular trend by advertisers transitioning spend away from print and towards digital media. Second, we believe we have the right set of assets to capture these transitioning ad dollars and third, we believe we've demonstrated an ability to adapt and actively compete in this rapidly evolving marketplace. Let me talk about each of these in more detail.
Firstly secular trends. More consumers are spending more time online and quite simply, advertising in the US is going digital in order to reach those consumers. Between 2010 and 2015 old media advertising declined at the rate of 1% or about $1 billion per year but in that same time frame, digital media will grow from 15 to 25% of all local advertising or from 20 to $38 billion generating a compound annual revenue growth of nearly 14%. This year is the first time in history that digital ad spend is forecast to exceed print ad spend in the US. So you can see that digital media companies benefit from these secular ad trends. And Local Corporation's advantage goes deeper than this to also capitalize on the revolution occurring within digital media itself.
Because consumers spend about 80% of their household income within 20 miles of their homes, advertisers want to target those consumers locally. And this need is shifting digital ad spend towards local digital in key segments. For example, local search advertising will grow from 29% of all search to 35% of all search between 2010 and 2015 or $5 billion to $9 billion in spend representing a compound annual growth rate of nearly 12%. Over that same time, local display advertising will grow from 20% to 30% of all display or from $2 billion to $5 billion representing a compound annual revenue growth rate of nearly 20%. Local rich media, a segment within local display is forecast to grow even faster at 50% per year through 2015 and finally daily deals and innovative local ad segments that didn't even exist a few years ago is projected to grow about 37% per year in that time frame increasing from $900 million in 2010 to $4.2 billion in 2015.
When it comes to online advertising, we believe everything is Local. Local Corporation operates at the intersection of consumer demand for local goods and services, and advertiser demand to reach those consumers. We believe we benefit directly from the secular ad trends and even more so from the local advertising revolution.
Moving now to our second point, we believe we are well positioned to capture these transitioning ad dollars. We aggressively diversified our business in the past 12 months and our (inaudible) acquisition enable us to provide local product search results, local display ads and daily deals. This provides us with a broader range of products and services to fulfill the advertiser demand to reach consumers and also enables us to reach new kinds of advertisers too. Agencies, ad networks, big boss retailers at national brands to name a few.
These investments are already bearing fruit. We debut (inaudible) by Rovio on Adtech in November and launched new seed products by Carillion (ph) in December and January. We have a new mobile products for Carillion in the works plus a new loyalty program launching soon. This is a very exciting time in our history and we are making near term investments in order to continue to extract value from our acquisitions and to position ourselves for the future.
My third point is that we believe we can compete in this hyper competitive market. Inclusive of our current guidance we'll deliver compound annual revenue growth of over 40% from 2006 through 2012. Notwithstanding the choppiness since 2011, we've shown a long-term discipline surrounding growth in three critical areas, traffic, technology and advertisers and we believe we can continue to grow in each of these areas. For example, monetization of Local.com's side traffic during the fourth quarter reached an all-time high of $332 per thousand visitors.
Today, our overall traffic is at record levels and organic traffic is more than 30% of total up from less than 10% a few years ago, boosted by growth of our regional media network to well over 1,000 websites and we expect that our entrance in the local product search, local display and daily deals will provide us with additional reach to consumers while expanding our proprietary revenue streams that include display, daily deals, proprietary search feeds and subscription revenues.
Our proprietary revenues reached a record $6.4 million in the fourth quarter which is about 25% of total revenues. We expect proprietary revenue to grow to about 35% of fourth quarter 2012 revenues helping us to future balance our portfolio proprietary revenue versus third party revenue for leading partners like Google, Yahoo and Super Media. We believe this balance results in a more defensible business.
In the past year our proprietary technology platforms were significantly expanded by acquisitions and now provide us with a wider array of high end digital media solutions for SMBs, agencies, channel partners and national brands leveraging our growing search display, e-mail and mobile channels.
In order to sell our products directly to our own customers we ramped up sales personnel from about 20 at the start of 2011 to about 70 by the end of the year. We now have over 800 SMBs enrolled in our digital media solutions and these customers generate revenue equal to 8,000 of our legacy subscription customers.
We are pleased with the progress and growth of our sales engine and we plan to scale our sales force through the year. In light of these investments we are projecting adjusted net income this year of about $0.05 per share on the back of over 40% revenue growth to about $110 million.
Since we launched our flagship side in 2005 our first quarter was always our seasonally strongest quarter driven by SEM sourced traffic with new ad partners growing proprietary revenues in our multiyear growth in organic traffic we're now seasonality reflect a normal advertising industry seasonality where the fourth quarter is typically strong and the first quarter is typically softer especially in this play.
As a result we are projecting Q1 to be approximately flat with Q4 and with a slight adjusted net loss due to seasonality as well as the loss of the $500,000 contract benefit we received in Q3 and Q4 as disclosed in prior public filings.
We expect revenue growth to resume again in the second quarter and through the end of the year and we expect to deliver adjusted net income in the second quarter we all expect to grow through the end of the year.
I would like to conclude my remarks by restating that one, we're operating in high growth markets, two, we have great assets to continue in those markets, and three, we have a track record of growing our business in this space. We love the local space and we're just really excited about the opportunity in the front of us.
Thank you Heath and thanks to everyone who has joined us for our Q4 2011 financial results conference call. As Heath mentioned our fourth quarter results show continued strong revenue growth and significantly improved bottom line results. We achieved record traffic and record monetization of that traffic, two key performance indicators of our business.
Comparing our operating expenses to the prior quarter Q4 cost of revenue as a percent of revenue decreased to 50% from $60% last quarter, primarily due to the continued improvement in traffic monetization on local.com.
During the third quarter on August 1st, we launched a Google ad feed on our owned and operated sites and optimized feeds from all ad partners which resulted in two favorable outcomes. First we diversified revenue among our ad partners and second, we saw a significant increase in revenue per visit on a flagship side which resulted in improved margins over the last two quarters. The impact of improved margin benefited the third quarter for two months but was fully weighted for the fourth quarter.
We make progress two diversify revenue among ad partners and lower concentrations with our top ad partners. During 2010 our top two partners, Yahoo! and SuperMedia totaled nearly 70% of our revenue. In the fourth quarter of 2011 the concentration of revenue from our top two partners dropped to approximately 50% of revenue with Google, our largest partner comprising only 33%.
Q4 sales and marketing expense increased $449,000 from the prior quarter related to higher marketing spending and a larger sales team to promote and sell our new products including Product Search, Display, Daily Deals and Small Business Digital Media Solutions.
Q4 G&A expense increased $300,000 from Q3 but declined as a percent of revenue from 14% to 13%. Q4 R&D costs increased $600,000 from Q3, primarily due to a severance payment.
Q4 amortization expense was $1.7 million, up from $1.4 million in Q3. The increase in amortization expense is related to accelerated amortization of the Octane360 trade name which we no longer use.
During Q4 we had a GAAP net loss of $3.8 million or $0.17 per share or 22.1 million shares. This compares to a Q3 GAAP net loss of $4 million or $0.18 per share or 21.9 million shares.
During Q4 we had adjusted net income of $412,000, improved from the Q3 adjusted net loss of $1.1 million and above our guidance of break even. I'd like to provide some insight as to how different parts of our business contributed to the Q4 bottom line result. During the fourth quarter we continued investing in our new acquisitions, products and sales force while our core business exclusive of these acquisitions expanded profitability.
As previously disclosed, the company's third and fourth quarter financial results include a top and bottom line net financial benefit of approximately $500,000 per quarter resulting from the modification of the SuperMedia contract.
As for cash and liquidity we ended the year with cash of $10.4 million, up from $10.1 million at the end of the third quarter. During the fourth quarter we achieved positive cash flow from operations of $1.4 million and positive debt free cash flow of over $200,000.
Looking to Q1 2012 we expect revenue to be $25 million with an adjusted net loss of $200.00 or $0.01 per share or 22.1 million shares. We will continue to invest prudently to build our business and we expect to return to positive adjusted net income in the second quarter and expect improved bottom line results in each of the third and fourth quarters.
For full year 2012 we expect 40% revenue growth to approximately $100 million and adjusted net income of $1.1 million or $0.05 per share assuming 23 million diluted weighted average shares.
I'd now like to open the call up to Q&A. Moderator?
(Operator Instructions). Your first question comes from Paul Resnik with Red Chip.
Paul Resnik – Red Chip
In the December quarter Google reported that their average cost per click decreased by approximately 8% from the third quarter. Could you discus how that impacts you and whether you see that trend continuing?
We don't have a lot of historical data, the third quarter with the first quarter in which we partnered with Google effective August 1st. So we really began building our database of information around Google's trends from August onwards. For us we saw a continued improvement in the relationship with Google. It's certainly the monetization of the fee from Google across our traffic
Obviously it reflected in our results today. We certainly can't comment about what we're seeing on Google's speed for competitive reasons and UNDA that we have Google. But our overall picture is reflected in our results. We do see that Google behaves a little differently than some of our ad partners in terms of their feed. So every month is new month and we're looking forward to kind of building a full year's worth of track record but at this point our guidance reflects what we're seeing from Google and Yahoo! and SuperMedia but also across all of our ad partnerships and our direct sales.
There is seasonality and it's more traditional seasonality. We've been a little counter cyclical with respect to seasonality. So we're actually kind of glad that we're showing the kind of seasonality that the major advising players show and it just shows that the growth in organic traffic plus direct revenue is bringing us into alignment with what's going on with the industry and that's because we have been building the out the traffic and the adversities on more proprietary basis and they have behave more consistently with industry.
Your next question comes from Jon Hickman with Ladenburg
Jon Hickman – Ladenburg
Could you take a little bit about the mobile product that you can't go in and also how you expect to kind of sell or expand this Spreebird product because I know you do is pretty local school by school, AYPJ (ph) so want to talk about those two things?
So mobile isn't a single product for us it's more of a channel that we reach across all of our properties in some way, so if we local at Local.com as an example 10% of our traffic hits Local.com via a mobile device that was up from 1% a year ago and how we serve those customers today is through greatly enhanced mobile experience which we launched in the past month I believe once a month and half and it's actually more and more app like experience and so that's kind of how we for now on Local.com serve consumers. On Spreebird we do have an app and we have a website that behaves consistently with that with Krillion as an example we are launching a new product it's in development right now as I have mentioned in the prepared comments, 40% by the way Spreebird uses access to site via mobile device. So we have different layers of mobile engagement across our different properties and you know what we are trying to do as a corporation is really aggregate all of those together and kind of present that more as one data set for analyst and for our partners to be able to leverage on.
But we are excited about mobile, I talked about the hypercompetitive space that we are in within digital media, underlying all of this is not the transition in mobile search in particular where local search for product and services supposedly 80% or approximately 80% is going to be done via a mobile device within the next few years.
So we have to be in mobile, we have to make sure that all of our products and services can be delivered via mobile devices and that's exactly what we are doing. We have launched new mobile products for our SMB customers. We have launched six new mobile products in the last four months and we have got more coming. So we are very much in the mobile.
As far as Spreebird's expansion, yes the way that we reach consumers the primary way we reach consumers with Spreebird is by partnering the schools PTA's and when we launch in a market our presence in the market typically consist of a community manager and a sales person, the community manager is engaging with the schools and we partner with the school's PTAs they promote the Spreebird brand to the parents of the kids in the school. The consumers when they sign up as to be Spreebird's subscribers, we pay a bounty and we pay a percentage of any transactions generated by that consume with deal that we offer them each day.
And that gets donated back to the school 10% of our share of the revenue. So key for us, the reason we do that is we think it's good defensibility once we are in the school. They rely on the revenues and we are happy to pay it to them makes it a little harder for anybody to dislodge that, any competitors. It keeps our consumer acquisition costs down, it costs less to attract the consumers through this channel. How we are expanding that, we are in about a 1000 schools today mostly in Southern California there are a variety of opportunities for us to expand and we can certainly with our own footprint, we also partner with companies that are already in school so that's one of the other ways that we are looking to expand and we are getting expansion at current right now up into the Northern California market.
Jon Hickman – Ladenburg
Well two other questions real quick, you have 70 sales guys right sales personnel, if all goes well by the end of 2012 is that going to be you know a 50% more, 25% more what do you expect?
It will probably be somewhere between 50% and a 100% larger.
(Operator Instructions). We have no further questions at this time; I would now like to turn the call over to Mr. Heath Clarke, Chairman and CEO for closing remarks.
I just like to thank you for being on today's call and we are going to turn it back over to Janine for the final disclosures. Thank you.
This conference call contains certain forward looking statements within the meaning of section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. Word or expressions such as anticipate, belief, estimate, plan, expect, intent, projects, forecasts, potential, feel and other similar expressions and phrases are intended to identify such forward looking statement. 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 the result of certain factors including but not limited to our advertising partners (inaudible) RPC and revenues to us or our search results, our ability to adapt to our business following the shift 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 abilities to develop, market and operate our local search technologies, 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 integration and future performance of our Spreebird business, our Carillion business and our Rovion business, the possibility that the information and estimates used to predict, anticipated revenues and expenses associated with the businesses we acquire are not accurate, difficulties executing integration strategies or achieving planned synergies, the possibility that integration costs and go-forward costs associated with the businesses we acquire will be higher than expected, 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 product, our ability to expand our advertiser and distribution network, 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 factors 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 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 the paragraph. Unless otherwise stated, all site traffic and usage statistics are from third party service providers engaged by the company. This does conclude our call for today and thank you for your interest in Local Corporation.
This concludes today's conference call. Thank you for your participation. You may now disconnect your line.