Local Corporation Dominates Local Mobile And Online Advertising With Record Quarter

About: Local Corporation (LOCM), Includes: AABA, FB, GCI, GOOG, MSFT, YELP
by: Ray Dirks

Local Corporation (NASDAQ:LOCM) posted a stellar quarter that beat estimates, with revenues mounting across the board. Traffic of over 100 million unique visitors per month was a company record. Mobile traffic was up almost 275% over last year. Money made from traffic was impressive, margins were good, and costs were controlled. Cash was used carefully and will get a healthy boost from Rovion's sale to Gannett Co. (NYSE:GCI) announced last month.

The fundamentals are stronger than ever. A 30% gain in revenues this year will make Local a $100 million company, about twice the size of its market cap, keeping pace with a six-year record of 40% compound annual revenue growth.

Local dominates the local search and advertising market. As an indication of how important and valuable Local's market position is, one needs to look no further than Google (NASDAQ:GOOG). In the first six months of 2012, Google made more money from ads than print media combined. With $10.9 billion in ad revenue in the first six months of 2012, Google beat all other pint media combined including newspapers and magazines in the U.S., according to Statista.

The $5 billion plus local search market is the biggest and fastest growing segment of the $47 billion online advertising industry, and in a few years digital revenues will account for more than 25% of all US local media advertising. Yahoo Inc. (NASDAQ:YHOO), Google Inc., and Microsoft Corp. (NASDAQ:MSFT) - will jockey to position themselves in this emerging goldmine.

Everything is going mobile in an industry changing rapidly, and local search is no exception. Since announcing its mobile app a few months ago, Local thinks mobile will be a big portion of its overall traffic in the future and will strategize accordingly. So far, Google leads with the highest rate of local searches on mobile devices with 16%; Yahoo is next with 15% and Bing last with 5%. Facebook, Inc. (NASDAQ:FB) mobile ads are up to 14% of advertising revenues, and they just started.

With Yelp Inc. (NASDAQ:YELP) going global, we could be in store for the next wave of Internet money-making. Don't forget that time-honored strategy, the roll-up, small M&A deals that make an industry. We could be seeing that now, too. Yahoo Inc. likes acquisitions under $500 million, and only six out of its 97 total deals were higher. Same with Google Inc. Out of 300 acquisitions, only 10 cost north of one half of a billion dollars.

The best news of the quarter for Local came from three deals: A deal with Yahoo, sale of Rovion and a licensing agreement on Krillion to Gannet. Local's month-to-month agreement with Yahoo to distribute paid search results was upgraded into a five year lock-up, a remarkable move that suggests to me that Yahoo wants Local all to itself. I suspect Yahoo sees a big future for its partner and feels more comfortable committing long-term, most likely lured by Local's burgeoning traffic growth, a huge plus for reasons mentioned above.

Rovion, Local's rich media technology company that does not require coding to create and send professional-grade ads, was sold to mammoth Gannet Co. , publisher and owner of USA Today and 800 other print publications, 23 television stations, a myriad of website affiliations including ShopLocal.com and CareerBuilder, and developer of marketing campaigns for Dunkin' Donuts, Ford and Sprint. Gannett wants Rovion's main product for its PointRoll digital marketing subsidiary to step up mobile platform capabilities. The beauty of this deal is that little Rovion becomes part of Gannett Digital, with each Gannett division able to access the Rovion technology, including Local itself, which struck a licensing pact with Gannett at the time of the sale. Not bad when you factor in a 44% return on investment and the elimination of a third of a million of Local's cash burn per quarter.

The Gannett/Local relationship deepened when, at the time of the Rovion transaction, Gannett agreed to license Krillion, Local's product search directory that had already been woven into Rovion's ad platform. A nice fit with Gannett's ShopLocal.com and its multi-channel shopping and advertising services.

We all know the risks of investing in Internet stocks - fierce competition, rapid technology changes, fads - and I believe Local is immune to these for reasons I have already expressed. One short-term glitch investors should know is a slight expected downtick in fourth quarter revenues from one of Local's websites. One of its partners made a policy change that called for less ads on a web page (this happened within the industry, not just with Local) that cut ad revenues, but because Local was quick to put the policy in action, any residual revenue drain was stopped, and the outcome is good because viewers get a better experience from the Local site.

Local then tweaked the placement of ads to optimize monetization by increasing traffic to the ads, a very smart move using the simple formula traffic x monetization = revenues. So, if Local's monetization goes down, they just stop whichever sluggish advertising campaign was causing it. If monetization goes up, the campaigns are boosted, turning a double negative into a double positive.

Local has grown from its big-margin organic revenues and organic traffic, which represents 40% of total traffic. This was just a fraction of the total revenues a couple of years ago. Judging from the quarter, Local's organic traffic is at record levels.

I am thrilled with Local's performance so far this year, proving it can attract and cut a deal with a major media concern and then extend a lucrative contract with a huge online player. Local's recent quarter only goes to show that solid business fundamentals can exist in Internet stocks. I believe Local is extremely undervalued and stand by my $12 target price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.