Local Corporation (NASDAQ:LOCM) Q2 2014 Earnings Conference Call August 12, 2014 5:00 PM ET
Fred Thiel - Chairman & CEO
Ken Cragun - CFO
Ed Woo with Ascendiant Capital
Andrew D’Silva - Merriman Capital
Welcome to the Local Corporation’s Second Quarter 2014 Conference Call. On the call today are Local’s Chairman and Chief Executive Officer, Fred Thiel and Local’s Chief Financial Officer, Ken Cragun. Fred and Ken will discuss second quarter 2014 results and guidance for the full year 2014. We will 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 statements. These risks and uncertainties will be outlined at the end of this conference call and are detailed in Local Corporation’s SEC filings. Any forward-looking statements are only made as of the date of this conference call and the company undertakes no obligation to update such statements to reflect subsequent events or circumstances.
The company uses non-GAAP financial measures in evaluating performance. Please refer to the press release issued today for how the company defines such non-GAAP measures and the reasons for using them, as well as a detailed review of our second quarter 2014 results, including corresponding GAAP financial measures and a reconciliation of non-GAAP to GAAP financial measures. This conference call is publicly available via audio webcast through the company’s 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 the Local Corporation’s Chairman and CEO, Fred Thiel.
Thank you for joining us. I’m very excited to speak to you today about the progress we’re making in transforming the business for long term growth. When I joined Local’s Board of Directors in January of 2013 I found the company with great people and assets and a rich legacy in the local search space. Our main goal is to aggregate and curate the most relevant and enrich personalized local content for consumers and present it wherever and however those consumers search for information while providing significant reach and value to our advertisers and partners.
Since becoming CEO in May the management team and I have been focused on refining our strategy and making investments in people and processes to transform the company, position us for long term sustainable growth and to build meaningful shareholder value, we believe we have already made significant progress is our transformation. As you may recall in the first half of 2013 we decided to focus on building and leveraging enterprise partner and advertiser relationships and exited marketing services to small and medium-sized businesses which reduced cost structure and increased margin. In the second half of 2013 we optimize our O&O properties consumer experiences to bring us more in-line with our partners expectations following an algorithm change by major search engine. We also improved monetization and continued the rapid expansion of our network of publisher partners.
In the first part of this year we launched innovative new ad technology and local search products for both mobile and desktops, leveraging our Krillion data ingestion and localization technology and we identified the need to focus on improving network traffic quality.
Now before I go into our business overview for the quarter I would like to review our financial highlights, for the second quarter we delivered solid results that continue to support our expectation that we will achieve our 2014 guidance. Total revenue was $22.5 million Owned & Operated continued to outperform and offset partially declines in network revenue related to traffic quality.
Net loss was $1.3 million improving 63% year-over-year, adjusted EBITDA was positive for the sixth consecutive quarter at $1 million. Monetization improved for the second consecutive quarter with revenue per 1000 visitors reaching $204 up from $189 last quarter and cash increased by $3 million to $6.7 million.
Let’s move on to business highlights from the second quarter. In local search we continued to improve O&O user engagement, we believe our hard work is reflected in our improving monetization rates. This quarter in O&O we continue to improve our traffic acquisition processes with the deployment of new tools while we also optimized our sites with the major search engines and added new content to increase search traffic and content quality. Our relationship with one of the major search engines continues to bear fruit and most recently we’re seeing increased organic impressions for our O&O properties.
We believe this will lead to an increase in our O&O traffic and ultimately an improvement to our gross margins. With O&O local.com our flagship site specifically benefitting from these relationships and improvements. Currently local.com has more than 2.1 million unique visitors per month out of our total 24 million unique visitors for O&O which is approximately 10% of the U.S. internet browsing population. We believe these visitors are high intent, local consumers looking to find businesses near them and the products and services they want to buy from them. As a company we want to ensure the best user experience for our consumers and a positive engagement for our advertisers. As such we will continue to devote resources to focus on how we deliver the most personalized and relevant consumer experience as well as new and engaging ad formats.
Turning to our network, we spent much of this quarter focused on improving partner and traffic quality. We believe traffic quality is critical to attractive advertisers. While the network benefited from rapid traffic growth over the past year our traffic quality was impaired by persistent efforts on the part of sophisticated third parties intent on defrauding advertisers for their own gain via invalid traffic. This is a wide spread facing all advertising companies. While we’re not along in this challenge we’re intent on leading the charge to overcome it. In fact we will be working jointly with other industry leaders on this and recently joined IABs Traffic of Good Intent task force, a consortium focused on creating awareness and formulating solutions to combat non-intentional traffic from non-human actors.
In the last two quarters alone, we have implemented very aggressive traffic quality monitoring and filtering tools. We believe these tools working on consort with our advertisers and partners together with continued vigilance will ultimately improve traffic quality and ensure the value of our network to advertisers.
In the short term the impact of traffic that was disqualified due to quality issues has resulted in decreased network traffic and revenue in the second quarter, nevertheless with improved traffic quality tools and the addition of new sites and partners that meet our high quality traffic standards we expect the network to return to growth. I’m pleased with the momentum we have made with our new mobile search initiatives. Our goal is to take local search across multiple screens where consumers are spending more time searching for the products and services they want and need.
In July we launched nQuery by Local, a white labeled hosted search solution that powers customized search experiences and supports the company’s goal to populate local search across the internet of everything. The company recently entered into partnerships with entities that specialize in monetizing subscriber traffic for mobile operators in public and private WiFi networks.
Through these partnerships Local Corporation expects to power search for a major U.S. mobile carrier, 18 international and prepaid MVNOs and over 10,000 U.S. hotels.
nQuery is already powering millions of user searches per month and is expected to grow significantly with the onboarding of new partners. We also continue to explore new ways to monetize our proprietary assets including our Krillion data ingestion and localization technology. We believe the value of Krillion is that it seamless ingests normalizes and localizes various types of data and presents relevant content across multiple channels in customer use cases. The most recent use case was a launch of new ad formats and where-to-buy solutions for web, social and mobile in the shopping space. We look forward to discussing this more in the future.
Additionally we continued to invest in innovation across the organization as a primary vehicle for growth. In fact we expect nearly half of our employees will be focused on creating new products and technologies by the end of this year. We have recently established local lab to focus on innovating with others in the local search and content related ecosystem on new technologies that will benefit Local Corporation. We believe these innovation efforts ultimately will generate significant incremental revenue each year. Regarding our intellectual property, in May we were issued our 13th patent. This patent covers the technique for locating relevant advertisements that monetize better than other available advertising options for the use of semantic keyword searches.
In July the cascading menu patent trial was stayed pending completion of an administrative action with the United States Patent and Trademark Office. Once complete we expect the process to resume it's course.
Following completion of the litigation, we will be prepared to move the bulk of our patents into our wholly owned IP subsidiary to better position the company for IP licensing and other strategic opportunities. In support of our transformation efforts and execution of our strategic vision we also appointed two new Directors to the Board. David Hughes, CEO of the Search Agency brings 15 years of strategic executive leadership experience with specialties in global digital marketing, SEO and SEM which will provide valuable insights for our business and John Payne, CEO of SimpleAir who has 30 years of experience leading public and private companies specializing in early stage software and technology companies as well as significant IP licensing strategies which is important given our focus on monetizing our IP. Also in July we promoted Scott Reinke, our in-house legal counsel to Chief Legal officer. He will now be responsible for leading the company’s patent portfolio strategy in addition to managing the company’s legal initiative.
Now our CFO Ken Cragun will discuss our financial results.
Thanks Fred. Good afternoon everyone, thanks for joining us today. We’re pleased to report a solid quarter for Q2, 2014. Revenue was 22.5 million, revenue from our O&O business was 12.6 million up 10% from Q1 and up 14% from the second quarter of 2013. Our O&O business showed continued sequential improvements in revenue, monetization and visits. Our key monetization metric is revenue per 1000 visitors. In the second quarter revenue per 1000 visitors was $204 up 8% sequentially and up 3% compared to the prior year period. We’re encouraged by this positive trend. Network revenue was $9.9 million down 33% from Q1 and 14% from the prior year quarter. As discussed working with our partners we augmented our traffic quality, monitoring tools and processes to better identify low quality traffic. At the same time we began refining the composition of our network publishing partners with the focus on increasing traffic quality.
The network revenue run-rate is expected to remain at lower levels in the near term, however, we’re focused on adding new high quality network partners and we expect the network to return to growth as we exit 2014. We believe our efforts will provide higher converting traffic for our advertisers and fuel sustained growth for the network business.
For the second quarter traffic was 73 million monthly unique visitors up 1 million from the first quarter. Overall traffic was down 22% from the prior year quarter due to lower organic traffic from top search engines related to search algorithm changes made in the second half of 2013 but as Fred mentioned we’re encouraged by recent upticks in organic placements on major search engines following our efforts to enhance content on our sites.
And looking at our operating expenses for the second quarter cost of revenue was $16.5 million as a result Q2 gross margin was 27% higher than the first quarter of 2014 and consistent with the second quarter of 2013. Our continued outlook is that gross margin should be 24% to 26% for the year. Note that G&A expense included a $573,000 severance charge, we delivered our six consecutive quarter of positive adjusted EBITDA. Second quarter adjusted EBITDA was $1 million which is up from the first quarter and comparable to the second quarter last year. Notably year-over-year we reduced our GAAP net loss by 63% from $3.6 million down to $1.3 million. We continue to focus on operating efficiencies particularly while we’re investing in product development to fuel future growth.
I will now turn to cash and liquidity, the company’s cash balance grew to $6.7 million up $3 million at the end of the second quarter from $3.7 million at the end of the first quarter. The increase during Q2 reflects a positive effects of operating efficiencies we implemented coupled with strong collections of receivables in the quarter and a $390,000 escrow release in connection with the sale of Rovion in 2012.
On the liability side of our balance sheet the company ended the quarter with $8.9 million outstanding under it's Square 1 bank credit facility as we pay down the line of credit by $700,000 during the quarter. As of June 30, we had availability under the line of credit of about $700,000. The company also had $5 million outstanding related to convertible notes, at the moment we believe we’re well-positioned to address the maturity date of the convertible notes in April 2015.
I would now like to discuss our financial guidance for the year. Inspite of challenges on our network we’re very encouraged by the performance of our O&O business and the recent milestones related to mobile search. We therefore reiterate our 2014 guidance. We expect revenue to range between 103 million and 107 million which at the midpoint represents 11% growth compared to 2013. We expect adjusted EBITDA to be between $3 million and $4 million or between $0.13 and $0.17 per share, a 23.5 million diluted shares. You can find additional slides related to our results on the investor section of our corporate site at ir.local.com. With that I will hand it back to Fred.
Thanks Ken. Our main goal is to aggregate and curate the most relevant and rich personalized local content or consumers and present it wherever and however the consumer search for information while providing significant reach and value to our advertisers and partners. Our whole organization is focused on the transformation to deliver on this mission. Looking ahead we intend to focus on the following objectives, to further our process of continuous improvement for our O&O properties to better attract and engage consumers and provide more value to our advertisers and partners. To build our publisher network with quality partners and together with our advertiser partners eliminate in valid traffic. To innovate across all lines of our business including new mobile, local search solution. To drive revenue growth through new channel partners and markets for our nQuery product, to leverage our Krillion ingestion technology across all our platforms and to the benefit of our partners and to drive value from our intellectual property portfolio.
We’re building positive momentum across the business including exciting advancements in our innovation efforts which we believe will open up new markets and channels. Finally I will provide highlights of our investor relations activities. As noted before we want to increase communications with our shareholders and in the second quarter we conducted non-deal road shows in San Francisco New York in Europe as well as presented it at four investor conferences. In July we were invited to present at the prestigious Digital Media and Technology, Siemer Summit and just last week we presented at the Needham Interconnect Conference in New York.
In September we will present at the Rodman & Renshaw Annual Global H.C. Wainwright Investment Conference and the 2014 Aegis Healthcare and Technology Conference. In addition we will continue to meet with investors through non-deal roadshows as always please contact LHA if you would like to arrange a meeting. Now I would like to open the call for questions. Moderator?
(Operator Instructions). Our first question comes from the line of Ed Woo with Ascendiant Capital. Your line is open.
Ed Woo - Ascendiant Capital
I had a just a very high level overview or question about how the online advertising market is performing and what’s your kind of outlook that you had in the back half of this year?
We believe the market is strong obviously we’re taking measures specifically to address what we believe in invalid traffic. At the end of the day our business in the network is all about providing our advertisers with consumers who want to convert and buy their products and we’re really focused on making sure that those consumers who click on ads are actually consumers that want to convert and buy product. So we’re going to focus on the quality of the traffic that we provider our advertisers, that we maximize the likelihood that those consumers will convert. That’s really what our focus is relative to the network and like I said I think the general market is strong. We’re very focused on really building a partnership that over the balance of the year that’s growing provide us some good momentum as we exit the year.
It's one of the positive trends we’re seeing is improved monetization on local.com. So that makes us feel more bullish about trends in the industry. We have been able to increase RKV and overall revenue in O&O. Sequentially we have increased the revenue for three quarters, so we like that trend and we’re feeling good about monetization and kind of industry factors it's impacting us on the O&O business.
Ed Woo - Ascendiant Capital
And going back to traffic, I know you mentioned that you’re trying to get better quality traffic and I want a clarification do you say that traffic should improve in 2015?
So if you look at the rate at which we exited kind of Q2 at, we think that will improve over the course of the balance of this year and obviously into 2015.
Ed Woo - Ascendiant Capital
And then moving onto a slightly different question, in terms of your IP, you mentioned that the (indiscernible) trial was on hold a little bit. Do you anticipate when can be it be back on?
We don’t have an exact date but it's an administrative issue that they are dealing with so we don’t expect it to be too far.
Our next question comes from the line of Andrew D’Silva with Merriman Capital. Your line is open.
Andrew D’Silva - Merriman Capital
Just a couple of quick questions, I think on your last call you said you felt pretty confident that you would be able to reach the high end of your guidance range, I was wondering if that was still something we should model for going forward?
At this point what we’re guiding to is that we will reiterate the range so the absolute range and kind of commentary on where we’re falling out on that range.
Andrew D’Silva - Merriman Capital
And then I guess last year around this time, the story was kind of transitioning from Owned & Operated to network business and the network business was primarily supposed to be no major growth driver going forward and it seems like there has been a strategic shift and a macro shift that’s leading the Owned & Operated segment to be a faster grower now. Can you kind of elaborate a little bit more on that and then should we overtime expect the network business to become again you know the leader in growth for your company?
So if we look at second half of last year, we were very focused on transforming the experience that consumers had in our O&O network to make it more in-line with the expectations or major search engine partners. That began to flow through the end of last year and since then as we look at O&O it has continually grown very nicely and continues to grow and we believe that the transformation of O&O has worked very well and we will continue to improve O&O and drive it's growth rate. The network we believe now with better quality traffic will get back into a growth mode and I think as we look at the past six months network and O&O are still about a 50:50 split revenue wise and as we have been speaking to our investors definitely since May, our outlook is definitely that the business will remain fairly evenly keeled like that going forward.
Andrew D’Silva - Merriman Capital
And then kind of can you elaborate a little bit more on your interconnected platform and remember last time we met up we discussed that and maybe kind of explain it a little bit and then talk about some of the synergies we can expect between each aspect of platform Owned & Operated network and Krillion based properties?
Sure. So if you think about the fact that our Owned & Operated properties, consumers come in searching to buy products. Consumers are also out in our network searching for products and services and the goal is to harvest that information about consumer behavior and leverage it to better target those consumers with more relevant advertising and to personalize the experience that they have on our sites and on our advertiser sites. As you look at Krillion, Krillion’s value to Local is it's ability to ingest huge volumes of data, standardize and normalize it and allow us to leverage that in providing a much richer and relevant experience to our consumers. Historically we have pointed Krillion at the shopping space and we have ingested millions of records regarding products, 100s of 1000s of retail locations, product availability in those locations, pricing trends and built some very rich data that we can use in better presenting results for product and business searches as well as data that can be licensed to partners and can feed interactive ads.
We’re going to continue to leverage Krillion across a broader swap of data sets and leverage that across the full spectrum of sites that we own and operate as well as make that available to our partners in the industry so that they can leverage the richness of the data that we create there.
I’m not showing any further questions at this time. I would like to turn the call back to Fred Thiel for closing remarks.
Thank you Moderator. I want to thank all our employees for their continued hard work and our partners and shareholders for their continued support. We look forward to meeting you on the road or speaking with you soon. Thank you.
This conference call contains 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. Words or expressions such as ‘anticipate,’ ‘believe,’ ‘think,’ ‘estimate,’ ‘plans,’ ‘expect,’ ‘intend,’ ‘projects,’ ‘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 forward-looking statements, as a result of certain factors, including, but not limited to, our advertising partners paying less revenue per click and revenues to us for our search results, our ability to purchase advertising from third parties to drive users to our sites, including at a profit, our ability to adapt our business following the shifts of our monetization partners, our ability to monetize the Local.com domain, including at a profit, our ability to retain a monetize partner for Local.com and other web properties under our management that allows us to operate profitably, our ability to develop, markets and operate our local-search technologies, our ability to maintain and grow the number of network partners, sites and the aggregate levels of user traffics from such network partner sites while also maintaining the quality level of such traffic.
Our ability to market the Local.com domain as a destination for consumers seeking local-search results, our ability to adapt to policy and technology changes promulgated by our advertising partners and traffic acquisition partners, and our ability to grow our business by enhancing our local-search, including through businesses we acquire.
The integration and future performance of our Krillion 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 to integration costs and go-forward costs associated with the businesses we acquire will be higher than anticipated, the possibility of impairment of assets associated with the businesses we have acquired, 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, our ability to successfully assert our intellectual property rights, competitive factors and pricing pressures, changes in legal and regulatory requirements, and general economic conditions.
Any forward-looking statements reflects our current views with respect to the future events 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 the call for today. Thank you for your interest in Local Corporation.
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