Local's CEO Discusses Q2 2013 Results - Earnings Call Transcript

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Local Corporation ( LOCM )

Q2 2013 Earnings Conference Call

August 8, 2013 5:00 PM ET

Executives

Heath Clarke - Chairman and CEO

Ken Cragun - CFO

Analysts

Edward Woo - Ascendiant Capital

Presentation

Operator

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 or circumstances.

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.

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 Q&A.

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.

Ken Cragun

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% to 27.4%.

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 costs.

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 assets.

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?

Question-and-Answer Session

Operator

We will now begin the Q&A session of today's call. (Operator Instructions). Your first question comes from the line of Ed Woo, Ascendiant Capital.

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?

Heath Clarke

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?

Heath Clarke

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?

Heath Clarke

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 very closely in terms of user experience, user interaction, what ad 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 by.

Edward Woo - Ascendiant Capital

Great. Well thank you and good luck.

Heath Clarke

Thanks Ed.

Ken Cragun

Thanks Ed.

Operator

(Operator Instructions). Currently we have no further questions in queue.

Ken Cragun

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.

Operator

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 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 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 company.

This concludes the call for today. Thank you for your interest in Local Corporation.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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