Local.com (NASDAQ:LOCM) got Nasdaq listing on 10/2004 when it raised $22 million at $8/share. The listing enjoyed early success with the stock climbing steadily to $30/share in one month. This was a ride on the back of press releases such as the one about licensing “Local Direct search and advertising platform to Internet Yellow Pages [IYP] provider, MYePages LLC”.
By 5/2005, the stock was down at $5. By 6/2007, the stock was hovering around $4 and the average volume 100K down from 1 million in 2005. Then excitement began with 2 patent announcements.
U.S.Patent# 7,231,405 for Location-Based Search
The first announcement was the June 25 press release for U.S. Patent Number 7,231,405 For Location-Based Search . This immediately attracted a positive blog report (Could Local.com Become the Local Search Industry's Qualcomm?) from John Gilliam (a long – disclosed in the article) and a rebuttal (Local.com: More Matter With Less (Prior) Art) from Marty Himmelstein, a local search specialized tech guy who founded Long Hill consulting.
John’s published profile indicates that he has a law background and is the manager at Point Clear Strategic capital. Long Hill consulting web-site indicates that the company may have competitive technology. So, the value of these differing points of view are limited by the fact that one way or the other each of them has a personal benefit in portraying Local.com’s prospects in a certain way. Below is an attempt at what can be derived from the public info. The basic claim of this invention is as follows (the spelling/grammar problems are as is from the patent text!!???)
A method for geographically indexing information, the method comprising: identifying a geocoded web page of a web site; identifying a geocode contained within content of the geocoded web page of the web site, the geocode indicating a physical location of an entity associated with the web site; identifying at least one geocodable web page of the web site, the geocodable web page does not contain the geocode; indexing content of the geocoded web page and content of the at least one geocodable web page, the indexing including associating the geocode contained within content of the geocoded web page to the indexed content of the geocoded web page and to indexed content of the at least one geocodable web page to allow geographical searching of the content of the geocoded web page and the at least one geocodable web page relative to the geocode.
There are 20 other claims based on this one. Reading this text, it seems the claim is very broad but involves several steps. Each of the steps can be done many ways and these claims attempt to pin down the ways. Marty’s rebuttals are based on two basic arguments: a) prior art from Microsoft that has similar language and b) some of these steps are either inefficient or there is prior art that does it better. He backs up his arguments with technical points. The primary concern for an investor is whether local.com can make money out of the invention profitably. To that end, the prior art citing does not seem especially worrying, given the patent examiner cited the work already – in fact, most all patents cites prior art on which portions of the work is based on. However, the rebuttals citing the inefficiencies are somewhat worrying. This could enable a competitor to sidestep the patent, by doing one of the steps more efficiently resulting in a more functional product. John’s article speculates on the similarities of the business strategies that may exist between successful web businesses that eventually got acquired for a lot of money such as Overture. The title is a good giveaway on the general tone, given Qualcomm developed a patent strategy after being a fairly successful company for many years. Further, Local.com has not explicitly stated anywhere that their business strategy is focused on defending their IP. So, most of the article can be termed as overly optimistic speculative musings of a blogger. Patent litigation/settlement profits are in general a long shot. Local.com might not use that as a strategy, given there are lot of companies using similar technology that may have sidestepped the claims in the patent. Whether licensing royalties will materialize based on this invention depends on time to market issues rather than how good the invention really is. If partners/competitors see immediate benefit in licensing the technology as opposed to developing similar technology from scratch, then there is a chance that they will see some material benefit.
U.S. Patent# 7,200,413 for Ad-Supported 411 Local Search Model
The second patent awarded to Local.com in a week was announced in the July 2nd press release for U.S. Patent Number 7,200,413 for Ad-Supported 411 Local Search Model. The interesting thing about that announcement was that the press didn’t seem nearly as excited this time around. Chairman & CEO Heath Clarke appeared more bullish on this as he prodded free 411 providers to license the technology. Given the lack of coverage, we are left with the patent text and other public information to help us gauge whether this patent will be the magic bullet for the company. Examining the patent text, a couple of things are noteworthy: a) the description starts with a Notice of Copyright and Trade Press. One can only guess at the reasons behind the company adding this clause for this patent while not doing it for the local index search patent - The company may wish to use some of the drawings and/or other contents as a way of identifying their product in the future, and b) there is only 1 claim in the patent. If there were other claims in the original filing, they were rejected by the patent examiner. These could imply that the company may originally have attempted to make this patent apply for a more general situation. The patent claim text is as follows:
1. A method of sharing directory listings via a wireless messaging system in a distributed environment using a computer network comprising: (a) Maintaining a database including a plurality of directory listings, wherein each listing is associated with a referral phone number, at least one search term and a dynamic, controllable index; (b) Receiving a directory assistance request in the form of a keyword from the customer; (c) Identifying the directory listings having keyword terms generating a match with the request; (d) Ordering the identified directory listings into a phone number result list in accordance with the values of some controllable index for the identified directory listings; (e) Translating phone number result list into a format that is compatible with a wireless messaging standard; (f) Transmitting the translated result list through a wireless messaging system back to the requesting customer's wireless messaging device; (g) Enabling the receiving message device to automatically callback the directory listing provider requesting a telephone referral; (i) Receiving the message phone callback and authenticating the caller; (j) Correlating the callback to a previous request and result set; (k) Transferring the callback phone call to the corresponding telephone referral number; (l) Initiating a business transaction to generate billing and revenue transactions for the paid referral.
It describes a free 411-service model that uses ad-supported keyword based business matching. On the assumption, that the technology itself is valid IP, let us proceed to look at the value a business might see in licensing the technology. Currently, the 411 businesses make money at both ends of the deal. On the one end, businesses have to pay money to get listed and on the other end, the 411 customers pay a fee for the service. The new technology touts the use of a fully ad-supported revenue model by allowing a much more flexible business search mechanism using keywords. This free flexible system should benefit the consumer compared to the rigid fee based existing 411-system. For the service provider there is potential for more revenue as advertisers compete for choice keywords. Another area that commands focus is the competitive landscape for a product based on this IP. Products exist in the market with similar functionality making the added value tough to gauge. The public is well aware of Internet searches with access to all service providers. With the proliferation of wireless Internet, it should be regarded as a very viable competitive threat. GPS devices are a step ahead in that it knows your exact location too. Currently, PDA’s with both GPS and wireless Internet functionality provides a far superior alternative to a search variant of the old 411 business and so developing a new business model will not be feasible. That said, 411 businesses might see value in licensing the technology as an upgrade to their existing product.
Current Valuation & Business Outlook
Local.com is expected to generate positive cash flow next year. It just raised $13 Million to raise the total cash hoard to around $20 Million. Assuming the cash requirements does not drastically increase going forward and that the existing businesses continue to provide slow growth, the company is cushioned. Further, the existing business is projected to bring in revenue close to $30 Million next year. It is growing at a relatively slow rate but at less than 2 times revenue the valuation is reasonable. Let us evaluate a couple of small cap companies whose business strategy is licensing IP. Immersion Corporation (NASDAQ:IMMR) has a fairly large patent portfolio. They have been successful in generating a good portion of their revenue from IP (see royalties & licenses line under Revenue) and have seen a steady rise in its stock price. SCO Group (SCOX) on the other hand has been unsuccessful in generating significant revenue from IP and from their press releases it is unclear what they actually own. SCOX made a lot of noise, but the stock went down reflecting its business prospects. The one thing common between these two companies is the wild fluctuations in price over the years as the general public speculated on the value of their IP. To summarize, valuing IP is extremely hard to do. Local.com is valued in the mid-range of small cap companies on an enterprise value to revenue basis. Odds are high for them to continue trading in an up-and-down pattern for an extended period of time. For short-term investors, trading in and out following the cycles could be a profitable strategy. Since the valuation is reasonable, for long-term investors, holding the stock as part of a strategy to own a small portion of ones portfolio in a speculative but value based approach is logical as well!