Local Corporation (
Q2 2013 Earnings Conference Call
August 8, 2013 5:00 PM ET
Heath Clarke - Chairman and CEO
Ken Cragun - CFO
Edward Woo - Ascendiant Capital
Welcome to Local Corporation's Second Quarter 2013 Conference
Call. On the call today are Local's Chairman and CEO, Heath Clarke;
and Chief Financial Officer, Ken Cragun. Heath and Ken will discuss
second quarter 2013 results and guidance for the full year 2013. 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
The company uses non-GAAP financial measures in evaluating
financial performance. Please refer to the press release issued
today, how the company defines such non-GAAP measures and the
reasons for using them, as well as a detailed review of our second
quarter 2013 results, including the 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 Local Corporation's
Chairman and CEO, Heath Clarke.
Thanks moderator. We had another solid quarter, delivering 6%
consecutive revenue growth to $22.7 million, reducing our operating
loss by $1.8 million to only $381,000 and growing adjusted EBITDA
70% to $1.2 million. More important though, are some excellent
transit developed within the quarter. We raised $5 million in
April, to invest in our Network business, and we saw that
investment pay off during the second half of the quarter, resulting
in nearly 120% year-over-year growth in Network.
We also made big improvements in mobile monetization rates. As a
result of the positive trends, we exited the quarter at a higher
trajectory than we expected, which is why we are increasing annual
guidance by $2 million at the midpoint, and moving adjusted EBITDA
upward by $400,000 to at least $5.4 million.
We had four key activities planned for the second half of the
year. One, grow our Network business; two, invest in our mobile
future; three increase our O&O margins; and four, move forward
with monetizing our intellectual property. I'd like to touch on
each of these briefly, before Ken speaks, and we open it up to
First, the Network; we raised $5 million in April to expand our
network business, and we believe the investment is paying off.
Network revenues ex-TAC were up 17% sequentially, and up nearly
120% from a year ago period. This increase was directly
attributable to an increase in a number of sites, from over 1,200
in Q1, to nearly 1,600 in Q2. We spent years developing our network
business, and we believe that it's a highly scalable business with
unique products and growth prospects, and that it has great
operating leverage. We plan to grow our network by adding more
sites, and adding more proprietary content into those sites.
We continue to invest to make tremendous progress in mobile.
Mobile traffic is at record levels, up 6% consecutively and up 79%
over the year ago period. In our regional testing on mobile
traffic, we monetized only 20% of the [rated] [ph] desktop traffic.
That was a huge gap. To address this, we launched the mobile
testing platform during the second quarter, and I am very pleased
to report that we now monetize mobile traffic on our network at
about 75% of the [rated] [ph] desktop traffic, a huge improvement
over the past quarter alone.
We expect further gains in mobile, as we test a variety of
different user layouts and ad units for our mobile search traffic,
including pay-per-call listings.
We are also well along in the design and development of our
newest app, which we think will be a groundbreaking shopping app.
This is scheduled for release during the fourth quarter on the
newest iOS 7 platform, with Android to follow.
With regards to O&O, we continue to develop and deploy
internal search engine marketing tools, that are intended to expand
our margins during the second half. The biggest headwind here, is
lower revenues per click from our ad partners, which lowers yield.
This in turn makes some of our SEM campaigns unprofitable, and when
that happens, we switch them off until yields improve. This is why
second quarter traffic was lower than first quarter.
Moving now to intellectual property; we have two items in this
regard, the first is the cascading menu patent suite, which we
filed against Frys Electronics last year. The Markman hearing for
this matter is scheduled on August 28th. Once claim construction is
complete, we expect to be in a better position to assert our rights
with respect to this patent.
The second item is our portfolio pay-per-call patent. We are
currently analyzing this portfolio with a patent litigation firm,
and based on our initial review, we believe that we may own seminal
patents in the emerging pay-per-call market. The pay-per-call
industry is an estimated Borrell Associates to grow from $1.7
billion this year, to $8 billion per year by 2018. Our objective
with our pay-per-call patents will be to derive licensing revenue.
As with our Frys' litigation, we will update you from time-to-time
as we seek to leverage our intellectual property rights.
Over to you, Ken.
Thank you, Heath and thanks to all who are joining us on the
call this afternoon. I'd like to walk you through this quarter's
results, and discuss our updated 2013 financial guidance. Our Q2
revenues are up 6%, and adjusted EBITDA is up over 70% from Q1. We
are making excellent progress on our goal of growing our Network,
our most profitable line of business. We are also growing our
mobile traffic, with a record 34 million monthly unique visitors
from mobile devices during the quarter.
We exited the daily deals business early in the third quarter,
through the sale of Spreebird, which had been a drain on our
earnings and cash flow. Comparing our COGS and operating expenses
to the prior quarter, Q2 cost of revenue increased slightly, due to
higher revenue sharing costs related to higher network revenue. As
a percent of revenue, cost of revenue decreased from last quarter,
resulting in a slightly improved gross margin percentage from 27.3%
Q2 sales and marketing expense decreased $1.2 million from the
prior quarter, as we ceased the direct sales efforts of our SMB
products in January 2013. Q1 sales and marketing expense included
approximately $900,000 of severance and other non-recurring
Q2 G&A expense was down slightly, as the prior quarter
included deal costs related to the $5 million financing we
completed early in the second quarter. Q2 R&D costs decreased
over $200,000, primarily due to lower personnel related costs, and
consulting expenses. Q2 amortization expense was flat from the
prior quarter. Q2 interest and other expense decreased from the
prior quarter, as Q1 included a $723,000 non-cash loss, for the
exchange of warrants for common stock.
During Q2, we had a GAAP net loss of $3.6 million or $0.16 per
share on 22.9 million shares. This compares to a Q1 GAAP net loss
of $3.4 million or $0.15 per share on 22.6 million shares. Note
that the Q2 GAAP net loss included a $3.3 million or $0.14 per
share loss from the Spreebird discontinued operations, primarily
non-cash writedowns of Spreebird goodwill and intangible
During Q2, we had adjusted EBITDA of nearly $1.2 million,
improved from the Q1 adjusted EBITDA of $685,000. As for cash and
liquidity, we ended the second quarter with cash at $4.8 million,
up from $3.1 million at the end of the first quarter. During the
second quarter of 2012, we closed a $5 million financing, used
$761,000 of cash for capital expenditures, and paid down the line
of credit by $375,000.
Cash used in operating activities was $2.2 million, as accounts
receivable increased $3.1 million due to the rapid growth of our
Network revenue, which was up 40% from Q1. This rapid growth did
yield positive contributions to working capital during the quarter.
Cash and receivables combined grew $4.5 million from Q1 to Q2.
With over $3.5 million in adjusted EBITDA expected in the second
half, we believe we have adequate liquidity and capital resources,
and have no plans for additional financing. We are updating our
financial guidance for full year 2013. We now expect revenue to be
in the range of $95 million to $97 million, with adjusted EBITDA of
at least $5.4 million. We will provide additional slides related to
our second quarter today, at ir.local.com.
I'd now like to open the call up to Q&A. Moderator?
We will now begin the Q&A session of today's call. (Operator
Instructions). Your first question comes from the line of Ed Woo,
Edward Woo - Ascendiant Capital
Thank you. Good report guys. I had a clarifying question. I
think Heath, you mentioned about your IP portfolio. Have you
factored any of this into your guidance?
No, we haven't. We do expect licensing revenues, but we haven't
based any of that. We certainly don't expect any in the second
half, regardless. So nothing from a licensing standpoint has been
included in the forecast.
Edward Woo - Ascendiant Capital
Okay. And you've got some better results this quarter, is that
the upside you expect -- for you to raise your guidance, or do you
see the momentum continuing in the back half?
Yeah. We see the momentum continuing in the back half, which is
the main reason. It's not that we necessarily overperformed in Q2,
we just saw exiting Q2 that we were on a higher growth track, and
that flows through into Q3 and Q4 as we see it today, and that's
the result -- we see that additional couple of million in the
second half. That said, at the mid range, we did $44 million in Q1
and we expect to do about $52 million in -- excuse me, in first
half and second half of that $52 million.
Edward Woo - Ascendiant Capital
Yeah, and you guys did a great job in getting your monetization
up about 75% of desktop. Do you think that you would be able to get
close to 100%? You think -- what do you guys to write that -- allow
you guys to make such a big jump?
So one of the things that we think we are pretty good at is
yield management and yield discovery, and we have been doing that
on the O&O business for, well eight years now, and we layer
that -- basically that testing framework across the network
business more recently, and then we kind of took it a step further,
we are actually taking it two steps further. A step further we took
in Q2, is to create that same testing framework, as it relates to
mobile specifically, and that allows us to test those different
user interfaces, different ad units and so on, and so we do expect
incremental increases. It's the other area where we are going to be
taking this into, or within the app itself, as we deploy more apps
and as we power data on other apps, we intend to really track that
units work, don't work and so on.
Ideally, will get us to 100% or higher. But of course, the
online versus mobile, desktop versus mobile, we need more ad units
in mobile. Obviously, Google has got enhanced campaigns as the way
to drive that, so we are hopeful that that helps, separating aside
from all the testing that will do and all the iterations that will
do, I think there is more marketplace changes occurring, you see
more spend occurring mobile, that will only benefit us as time goes
Edward Woo - Ascendiant Capital
Great. Well thank you and good luck.
(Operator Instructions). Currently we have no further questions
Great. Well I'd like to thank everybody who participated today.
Thank you for being on the call, and I will turn the call back over
to the moderator for our final disclosures.
This conference call contains certain 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,' '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
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 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 adapt to policy changes promulgated by our
advertising partners and traffic acquisition partners; our ability
to grow our business by enhancing our local-search services,
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 that 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
Any forward-looking statements reflect our current views with
respect to future events and are subject to these and other risks,
uncertainties and assumptions related 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
This concludes the call for today. Thank you for your interest
in Local Corporation.
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