IPO Analysis: Local Matters (LOCL)

| About: Local Matters (LOCL)
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Story: Local Matters (proposed ticker: LOCL) works with Yellow Pages companies to create an online or otherwise electronic version of their products. On the one hand, we love the local advertising idea, but we have not yet found a good online player in that field, although there are many aspirants.

Local Matters, unlike the other search engine companies trying to enter this space, is trying to leverage the excellent current or ex-Bell telephone Yellow Page products with an online presence. They have a number of various products for internet, voice, and mobile local searching, both on the back-end (e.g. facilitating 411 calling) and on the front end (e.g. local city guides based around AreaGuides.net).

When I use the AreaGuides.net search in my local area for an esoteric business that I know exists just around the corner from me, I get a number of accurate hits that are non-local, and when I restrict it to only local hits I get "no listings found". Believe it or not, that's good, in that, as I outlined in one of the links above, their precision is high, and they only suffer from a lack of completeness. That is, I got no spurious results.

That means that if they were to extend their technology to my local area in the category I searched, they have a hope of providing a useful product (unlike anything I have seen from the online search oriented companies). In other search categories, they provided useful local results, and again no spurious results. However, the results are polluted by "advertisers". For example, under "Roofing Contractors", first 56 listings were claimed, but then only 36 returned after clicking in. Of those, 8 of them are actual roofers, and the remaining 28 were services which offer to hook one up with a roofer, and a number of those were duplicates. Utility factor pretty darn low.

As another curiosity, the top of the page says "Powered by AreaGuides.Net", while the bottom says "Powered by Verizon SuperPages.com", with "data by Acxiom". It's unclear to me, from that, what value-add Local Matters brings to this over Verizon alone. This is not a thorough analysis, but in the one meager area tested their technology is not junk, but it is no where near good enough to be a destination. For other searches, of which they provide many, they extensively use third-party products (dating, jobs, car rentals, etc.). So the AreaGuides.Net are aggregators, and suffer or excel based on their component qualities.

As we have tried to emphasize previously, we love the idea of local search, but execution is everything, and so far these guys do not stand out. Perhaps their back-end or otherwise untested (by me) products are compelling though. We'll let their P&L speak for itself.

Company: From their prospectus (pg 7), they are tiny ($8.4M revenue in 2005), growing their top line (347% Y/Y or $6.6M absolute - $8.5M/$1.9M), but growing their operating expenses a lot faster ( 220% Y/Y or $8.8M absolute - $12.8M/$4.0M), and they have never turned a profit.

I can generate losses faster than revenue growth just by not showing up. What do I need them for? I doubt this company will get publicly funded - it certainly shouldn't. Dog.

Stock: Not public yet, probably never will be without significantly cleaning up their operations. We were hoping this would finally be a promising play on local advertising, but that cherry is still waiting to be picked, despite all the efforts.