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Local.com Corporation (NASDAQ:LOCM)

Q1 2012 Earnings Call

May 10, 2012 5:00 pm ET

Executives

Janine Zanelli – Investor Relations

Heath B. Clarke – Chairman and Chief Executive Officer

Kenneth S. Cragun – Chief Financial Officer and Secretary

Analysts

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

Edward M. Woo – Ascendiant Capital Markets

Operator

Good afternoon. My name is Sunny, and I will be your conference operator today. At this time, I’d like to welcome everyone to the First Quarter 2012 Local Corporation’s financial results conference call. (Operator Instructions)

Thank you. It is now my pleasure to turn the call over to Ms. Janine Zanelli. Please go ahead ma’am.

Janine Zanelli

Welcome to Local Corporation’s first quarter 2012 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 first quarter 2012 results and updated guidance for the full year 2012. We’ll then open the lines 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 statement. 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 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 first quarter 2012 results including the corresponding GAAP financial measures and a reconciliation of our non-GAAP 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.

Heath B. Clarke

Thanks, Janine. Local Corporation continues to make great progress meeting our first quarter guidance and raising our adjusted net income guidance for the year. Three simple ideas that I’d like to share on this call execution, growth and platform.

So let’s start with execution. In the first half of last year, we experienced a revenue decline caused by the Yahoo!/Bing alliance. This decline ended when we deployed Google in August. Since then, Local Corporation has met our guidance for three consecutive quarters. As a team, we’ve executed well on many initiatives over the past nine months and this has yielded a rapid turnaround in our business we projected and delivered in the second half of 2011. We saw a revenue growth of 40% over the first half. We significantly improved our visibility since mid ’11 and we have confidence in our projection of a further 40% revenue growth in 2012.

That leads us to our second topic, growth. We’ve consistently delivered record overall organic and now mobile traffic in record monetization of our traffic. In the past year, we’ve greatly enhanced our technology platform, diversified our revenues, launched many new products and achieved record organic revenue. We believe we’ll see many new records achieved again this year, starting with record revenue of $27 million projected for the second quarter, up 73% from the year ago period.

Consistent with previous guidance, we expect a small adjusted net income, while we continue to invest for future growth, most heavily in our own sales engine selling our unique product off our proprietary platform.

And that brings me to my third point, platform. We’ve compiled a proprietary platform that’s uniquely powerful in the local online ad industry. Our platform provides three key solutions for an SMB, SM being small and medium-sized business. The three key solutions are presence, reach and engagement. This means a comprehensive online presence, highly targeted reach to potential new customers and now engagement tools for an SMB’s existing customers.

Let me give you an example of presence. One of our marketing consultants asks an SMB two simple questions, what do you sell and where do you sell in? With those questions answered, our platform acquires a domain name uniquely tailored for that SMB, and we create a beautiful website for them, plus a social media presence, and then we muggle enable everything, so consumers can find that SMB no matter what device they use.

To make it all fit, we ensure our SMB has brand consistency across all these online properties. Our highly automated platform completes this process in minutes. We then periodically publish fresh and interesting content across our SMB sites to keep their customers engaged.

Once the SMBs have presence, they want to reach more customers online. Our platform provides a variety of digital marketing solutions including pay per click, regeneration, site listings, superior display ads, search engine optimization in daily deals. So that our small-business customers can reach their potential customers efficiently and effectively. The final step in our platform in selling, I’m really excited about is what we call engagement. It’s how our SMB customers engage with their customers after the sale. This is new for us, but we anticipate three new products in the second half email, SMS and Rewards.

We have built and are now beta testing an email marketing product and we expect to integrate SMS, also known as text marketing into our platform later this year. As we announced today, we are now beta testing our Rewards program in two markets. Just like Rewards according to local supermarket, we provide our SMB customers with a card that they give to their best customers.

No matter whether those customers came from a competitor, us, or some other source. Each time the card holder purchases from that retailers they receive immediate reward, the card works on any of sale terminal and best of all card holders can simply use their phone number, they don’t even need to carry the card.

We believe that our Rewards program is superior to other rewards programs, due to its ease of use by both consumers and SMB. I hope by now you are getting a sense of just how comprehensive and powerful our platform has become. We think there are very few competitors capable of providing this kind of complete marketing solutions at SMB.

And because it’s built up our own platform, we believe we have a long term pricing advantage, which is why we plan to operate everything we’ve just described at the low prices of just $199 per month. Why we are doing it so low because we can. We are serious about becoming the leading provider of Digital Media Solutions to the 5 million SMBs in our target market and we are going to price our product in a manner we believe will allow us to win market share and grow rapidly.

While we still have much work to do, we feel passionately that our best days are yet to come and we are as excited as we’ve been about our business. I’d like to end my prepared statement by commenting that we don’t believe our current market cap, that is reflective of our long-term achievements, our most recent achievements, the value and power in our platform or our patents, nor our near-term outlook and long-term potential. As such, we’ll continue to work diligently in helping the investment community understand our story.

Now, I’d like to hand the call over to our CFO, Ken Cragun.

Kenneth S. Cragun

Thank you, Heath. As Heath mentioned, we have achieved strong revenue growth. Our first quarter revenue grew 50% from the prior year period. We maintained record levels of overall traffic and strong monetization of that traffic, two key performance indicators of our business.

Comparing our COGS and operating expense for the prior quarter, Q1 constant revenue increased $2.4 million primarily related to higher traffic acquisition costs. As a percentage of revenue, constant revenue increased about 10 points from last quarter, lowering our gross margin, in part due to seasonally lower display ad revenues plus the loss of a financial benefit of approximately $500,000 that was included in the fourth quarter as previously disclosed.

The lower gross margins were almost entirely offset by the following cost savings. Q1 sales and marketing expense decreased nearly $900,000 from the prior quarter related to lower advertising and marketing spending as well as lower personal costs, primarily bonus expense.

Q1 G&A expense also decreased nearly $900,000 from Q4 due to lower bonus expense as well as lower outside consulting and professional fees. Q1 R&D cost decreased $1.1 million from Q4, primarily due to lower depreciation and the fact that Q4 included a severance payment.

Q1 amortization expense was $1 million, down from $1.7 million in Q4. The prior quarter amortization expense was high due to accelerated amortization of certain intangible assets.

During Q1, we had a GAAP net loss of $3.2 million or $0.14 per share on 22.1 million shares. This compares to a Q4 GAAP net loss of $3.8 million or $0.17 per share on 22.1 million shares.

During Q1, we had an adjusted net loss of $194,000, down from the Q4 adjusted net income of $412,000 and consistent with our guidance. During the first quarter, our core business exclusive of new acquisitions continued to generate profits, offset by investments in the operations of new acquisitions, new products and growing our sales force.

As for cash and liquidity, we ended the first quarter with cash of $6.8 million. During the quarter, we used cash from operating activities of $2.6 million and had capital expenditures of $972,000. For the remainder of 2012, in light of our projected improvements in our bottom-line results, we expect a modest cash burn over the next two quarters of less than $1 million total, mostly for capital expenditures, and we expect to have cash balance improvements in the fourth quarter of 2012.

Looking to Q2 2012, we expect revenue to be $27 million with an adjusted net income of $150,000 or $0.01 per share of 22.3 million shares. We intend to invest prudently to build our business and expect to see increased adjusted net income in each of the third and fourth quarters. For full-year 2012, we reiterate our top line guidance of 40% revenue growth to approximately $110 million. We are increasing our adjusted net income guidance from $1.1 million to $1.3 million or $0.06 per share assuming $23 million diluted weighted average shares.

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

Question-and-Answer Session

Operator

(Operator Instructions) your first question comes from Jon Hickman with Ladenburg.

Heath B. Clarke

Hi, Jon.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

Hi, guys, good quarter. I have a couple of questions. First of all, can you elaborate on the higher traffic acquisition costs and what you think might, what they’re going to look like going forward in the Q2, Q3?

Kenneth S. Cragun

Sure. so we saw revenue about flat, down just 1% from Q4 to Q1. but our monetization of the traffic was seasonally strong in the fourth quarter. and so, to maintain that same amount of revenue with a lower monetization, we increased our traffic, so we improved some more traffic acquisition costs and I think the margin level that you see in Q1 will probably give up that level and probably improve through the year and be strongest in Q4 of 2012.

Heath B. Clarke

Yes.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

So this is a more seasonal, like normal trend for Internet related kind of media traffic et cetera, you just would expect monetization to be lower in the first quarter than in the fourth quarter?

Kenneth S. Cragun

No, what we’ve, if you recall on our prior quarter, we talked about the display ad business team particularly stronger the record for us in Q4 and that really impacts monetization as well very favorably.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

Yeah.

Heath B. Clarke

And so display ad came down, in Q1, we projected that, that’s absolutely seasonal and we expect that in every quarter, at least for that component of our business. So we had a particularly strong monetization quarter in part by that $0.5 million benefit that we got in Q4, which drops off in Q1. We basically – we won’t see that going forward. So I think it was running off about 4% year-over-year. So it’s much more consistent than the 10% quarter-over-quarter that you’re seeing now. And as Ken said, you probably see that normalize going forward.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

Okay. And the next question is about Exact Match. Your price for the Exact Match at $199 per month?

Heath B. Clarke

Yeah, so Exact Match has lots of pieces to it and/or what we kind of phrase internally here the all-in-one, which is everything, is $199 per month. That’s the entry level product, all the pieces or nearly all of the pieces have an – each of them has an upgrade path. So the average price per unit right now of Exact Match is closer to $250 and $199, but basically what we’re doing and our strategy is to add more pieces that we have built up our platform, there will be quite some pieces that we licensed from others, but ultimately the majority of Exact Match as we expand it comes from our own infrastructure. And so our view is that we add pieces to that in order to continue add value to our customers and in doing so our goal is to beat our competitors.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

Heath, so would you characterize that product as – I mean, I know you’re still adding pieces in software, you pretty much locked down the base product and the sales methodology and…?

Heath B. Clarke

Yes. Well, I think we’re still – the sales methodology will expand, that’s a big focus for us in Q2 and for the rest of this year. Yeah, the core product as I mentioned, we’ve got kind of three pieces as presence, as reach and then as engagement. And engagement is new, and I’ll come to that in a second. But presence we’ve been doing for about a year now. We’ve been testing that, and testing and refining the sales process and the pitch there. And reach we’ve been doing for quite some time, I mean the elements of the reach, I’ll call it bundle that we’ve been doing for many years listings for example.

But the third piece is engagement, and that’s the – ultimately it’s built up of the Spreebird platform and that’s the e-mail, the rewards are very excited about that. And then we plan to add SMS, that should be a third-party yet, either technology or licenses and fashion. And all those pieces together, we’re going to bundle at $1.99, and it’s light version of most of those pieces. So when a customer wants more power, they pay for an upgrade path there.

And today, we sell it primarily to telesales. We do anticipate that we’ll have channel sales. We are speaking with channel sales partners today about – if not the entire bundle, various aspects of the bundle. The beauty of the suite of services that we have, the digital media solution is that so many pieces we can bundle them and orient them towards different kinds of channel sale partners.

So I think that about our publisher network 1,200 sites, certainly 100 publishing partners. We’re going to be talking with each of those in the coming quarters about reselling at least certain aspect of our bundle. And so, I wouldn’t say that we’ve got the sales, at last we’ve got the telesales much more refined, and we continue to refine that, but we’re really looking to add to the ability to light label portions of the exact to our channel partners either existing or new.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

So, was there growth in the number of customers in Exact Match from Q4 to Q1?

Heath B. Clarke

Yes, we did grow. The Exact Match customers we had at the end of Q4 is actually about 720, we reported about 800 that was actually – the 800 is the number that we had at the time in which we reported, but quarter-over-quarter from that 720 to about 860.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

Okay and then one last question. So for the expenses going forward in the next couple of quarters, are they, on a percentage basis going to look kind of like the first quarter and the sales and marketing G&A?

Heath B. Clarke

Yes, in the near-term, I think from a dollar point of view the SG&A, R&D would be fairly consistent. We’re planning on growing our telesales team throughout the year. So the sales and marketing dollars will pick up throughout the year but will also – that’s a part of our revenue growth also is that we’ve assumed to get to the $110 million is expanding the Exact Match sales and so that would be a little bit of an up tick in the sales and marketing dollars. But G&A, R&D dollars probably be fairly flat over the next few quarters.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

And then I’m sorry, can I ask one more question? Just in your opinion or in your view of the market space here. Do you see any other competitors with kind of all-in-one Exact Match type product that for the small medium business kind of one stop shop, is it obviously running just like that kind of thing?

Heath B. Clarke

Yes, I mean we don’t see many, there is certainly a lot of competitor and you kind of break it down, there is plenty of companies that do web hosting, there is plenty of companies that will provide a social media presence Facebook, Twitter and so on, plenty of smaller providers that will mobile-enable your website, if you have a website already.

Obviously, a lot of providers will pay for click and search engine optimization companies they are hundreds of those. Obviously, we got the leaders in Daily Deals and they are all pushing towards rewards as a way to validate the value of the customer they are delivering to Daily Deals.

So, we don’t think that there is many, I can’t think of one today anyway that has all of those things off pretty much a single platform or at least from a single company. And so that’s kind of – I think that’s where we differ quite a bit. We’ve spent some years doing a few different things all around the local online advertising space, but what we have now got particularly with the three recent acquisitions we did is we really have the power to deliver an end-to-end solution. We get a small business online, we get them customers online and deliver them off-line and we can track that. And that engagement is an important piece of tracking that, not only tracking the customers that we deliver, but tracking the customers that other people deliver as well.

And it’s really a turnkey solution. And when we talk about how do we sell that we’re really excited about it, being able to reach out to small businesses at conventions and really presenting an end-to-end solutions for them at an entry level of product price that is almost impossible to ignore.

And that’s our strategy, and that’s why we want to go so hard on the sale side, is because we think we very much have a unique combination of products and we want to go to market rapidly and that’s why we’ve trip on that sales force last year and we continue to grow it this year its all about leveraging off the assets that we required or developed in taking advantage of that market opportunity.

Jon R. Hickman – Ladenburg Thalmann & Co. Inc.

Okay, thanks. I appreciate it.

Heath B. Clarke

Thanks John.

Operator

Your next question comes from Ed Woo of Ascendiant Capital.

Edward M. Woo – Ascendiant Capital Markets

Great, good quarter. I had a question about the linearity of revenue during the quarter. Do you see any impact or you see any impacts on some of the economic uncertainty?

Heath B. Clarke

That’s a great question. Well, we’ve announced this in prior years and I’d say that in some respect this is when I see SMB and the products that we sell there. I don’t think we have a good track record or at least length of time in selling those, be able to compare meaningfully year-over-year.

We have seen in the past that nervousness on the SMB generally impacts some for us local on advertising pretty directly, but you got nervous that small business people that cannot spend as much on marketing certainly online and we see that almost real-time basis and I think, frankly I think that was some other reason overall for the choppiness last year. And we’re starting to see a little bit more stability in that, a little bit firmer base and that’s really why we see the 40% revenue growth this year.

Well, we being the local on an ad industry, overall we have some pretty strong tailwinds regardless the big broad buster I saw that the dollars are flowing from offline or online even with nervousness in the marketplace assuming that there is at a fairly high clip and our job is really to capture that efficiently which is, well the products we have. And to the extent that there is a decline in 1 or 2 or 3 percentage points due to nervousness of SMBs to spend money, it’s kind of overshadowed by the rate of which they are deploying the dollar online versus off-line.

Edward M. Woo – Ascendiant Capital Markets

That was great. Another question I have is have, you ever notice any real change in the competitive landscape, you’ve mentioned about some of the competitors that you have. Have you noticed at any particular area that you saw either increase or decrease in your competition?

Heath B. Clarke

Well, certainly in the daily deal space in particular, we’re seeing a lot of churn as competitors out there. I mean it’s a different marketplace than it was a year ago. There is no question about that. There is a lot of companies that have been trimming up, and a lot of companies have been shutting down; and other companies, that’s being reaching out to south. So that’s an area that’s changed quite a bit. In the other areas, there are all those competitors as they’ve ever been and I think that’s one of the reasons why having a comprehensive ad bundle or solution for SMBs is important. Again, if you look at, so its changes to an optimization services that what you are selling. There are hundreds of competitors out there today and a lot of them do a great job, but none of them can offer a rewards component to that. None of them can offer or not many of them can offer access to 30 million unique visitors each month, which we offer on our ecosystem.

So we really have some important competitive advantages. And really my theme is that we are simply leveraging of those competitive advantages and focused on that leveraging for the reminder of this year. And we have a lot of power in our platform and all we are focused on is extracting the value add of that and deploying that on behalf of our SMB customers. So you know to the extent to that it a little bit more competitive in one area that we haven’t seen that at this point, but it’s early days for us obviously Groupon that they are doing rewards. That was expected, they have been talking that for sometime and no doubt many other daily deals companies will, but again even with that we have a bunch of other stuffs that we have at our disposal, its proprietary and we think that makes us a very nimble and we can respond very quickly to change in the marketplace, which I think we have done a pretty good job of doing over the years that’s one of our strengths.

Edward M. Woo – Ascendiant Capital Markets

Great well, thank you and good luck.

Heath B. Clarke

Thanks Andrew.

Operator

You have no further questions at this time. I would now like to hand the call over to Mr. Ken Cragun for closing remarks.

Kenneth S. Cragun

I would like to thank you for being on today’s call and I’ll turn the call over to Janine for final disclosures.

Janine Zanelli

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 of 1934. Words or expressions such as anticipate, believe, estimate, plans, expect, intend, project, forecast, potential, feel and similar expressions and phrases are intended to identify such forward-looking statements.

Any forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited to, our 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 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 Krillion 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 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 successfully bill our monthly subscription customers, our ability to expand our advertiser 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 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 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 and thank you for your interest in Local.

Operator

This concludes today’s conference call. You may now disconnect your line.

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