ReachLocal Reports Third Quarter 2010 Results

Revenue Increases 47% Year-over-Year and 10% Quarter-over-Quarter to $77.1 Million

Direct Local Revenue Grows 55% Year-over-Year to $57.2 Million

WOODLAND HILLS, Calif.--()--ReachLocal, Inc. (NASDAQ:RLOC), a leader in local online marketing solutions for small- and medium-sized businesses (SMBs), today reported financial results for the third quarter ended September 30, 2010.

“We are pleased to have delivered strong results for the third quarter. Despite a challenging economic climate, we continued our momentum and achieved 47% year-over-year revenue growth and positive Adjusted EBITDA performance," said Zorik Gordon, President and CEO of ReachLocal. "We grew our local Internet Marketing Consultant (IMC) sales force by 33% compared to the third quarter of 2009 to 696 IMCs worldwide. We also entered two new markets bringing our total to 45, completed the roll-out of our campaign performance group across our North American markets and completed a pilot of ReachCast™, our new digital presence, social media and reputation management platform.”

 

Quarterly Results at a Glance

(Amounts in thousands, except per share amounts)

 
 

Q3 2010

 

Q3 2009

 

% Change

Revenue

$77,121 $52,610 47%
Net Income (Loss)* $(2,871) $14,929 (119)%
Net Income (Loss) per Diluted Share* $(0.10) $0.61 (116)%

Adjusted EBITDA

$523 $1,165 (55)%
Underclassmen Expense $9,540 $6,389 49%
Cash Flow from Operations $ (3,316) $3,574 (193)%
Non-GAAP Net Income (Loss) $ (725) $311 (333)%
Non-GAAP Net Income (Loss) per Diluted Share $(0.03) $0.01 (400)%
 

*Q3 2009 results include a one-time non-cash gain of $16.2 million in connection with the acquisition of the portion of ReachLocal Australia which the Company did not already own.

 

Key Metrics (at period end):

Active Advertisers 17,100 14,500 18%
Active Campaigns 22,500 17,600 28%
Total Upperclassmen 264 208 27%
Total Underclassmen 432 317 36%
Total IMCs 696 525 33%
 

Revenue by Channel and Geography:

Direct Local Revenue

$57,245 $37,048 55%

National Brands, Agencies and Resellers (NBAR) Revenue

$19,876 $15,562 28%

International Revenue (included above)

$13,395 $2,749 387%
 

“The primary drivers of our strong third-quarter results were the 55% year-over-year growth in our Direct Local channel and the 28% year-over-year growth in our NBAR channel,” said CFO Ross Landsbaum. “We are also pleased with our Adjusted EBITDA performance in the quarter, particularly as we continued to execute on our strategy of investing in the growth of our IMC sales force, enhancing our customer service and support infrastructure and launching new products and services.”

Business Outlook

The Company’s outlook for the fourth quarter and the full year 2010 is as follows:

Fourth Quarter 2010

  • Revenue in the range of $80.0 to $80.4 million
  • Adjusted EBITDA in the range of $(0.25) to $(0.45) million

Full Year 2010

  • Revenue in the range of $291.1 to $291.5 million
  • Adjusted EBITDA in the range of $0.3 to $0.5 million
  • Ending IMC Upperclassmen in the range of 280 to 300
  • Ending IMC Underclassmen in the range of 360 to 380

Conference Call and Webcast Information

The ReachLocal third quarter fiscal 2010 teleconference and webcast is scheduled to begin at 2:00 p.m., Pacific Time, on Tuesday, October 26, 2010, during which the Company will provide forward-looking information. To participate on the live call, analysts and investors should dial 877-941-8601 at least ten minutes prior to the call. ReachLocal will also offer a live and archived webcast of the conference call, accessible from the "Investors" section of the Company’s Web site at www.reachlocal.com.

Use of Non-GAAP Measures

ReachLocal management evaluates and makes operating decisions using various financial and operational metrics. In addition to the Company’s GAAP results, Management also considers non-GAAP measures of net income (loss), net income (loss) per share, and Adjusted EBITDA. Management believes that these non-GAAP measures provide useful information about the Company's core operating results and thus are appropriate to enhance the overall understanding of the Company's past financial performance and its prospects for the future. The attached tables provide a reconciliation of these non-GAAP financial measures with the most directly comparable GAAP financial measures. Management also tracks and reports on Underclassmen Expense, Active Advertisers, Active Campaigns and the total number of Internet Marketing Consultants (IMCs), as each of these metrics are important gauges of the progress of the Company’s performance.

The non-GAAP net income is defined as earnings before (a) stock-based compensation related expense (including the related adjustment to amortization of capitalized software development costs) and (b) acquisition related costs (including in the case of the February 2010 acquisition of SMB:Live, the amortization of acquired intangibles and the deferred cash consideration). Adjusted EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization expenses, excluding, when applicable, stock-based compensation, the effects of accounting for business combinations and amounts included in other non-operating income or expense.

Each of these non-GAAP measures, while having utility, also have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. Some of these limitations are:

  • Adjusted EBITDA does not reflect the Company’s cash expenditures for capital equipment or other contractual commitments;
  • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;
  • Adjusted EBITDA does not reflect changes in, or cash requirements for, the Company’s working capital needs;
  • Adjusted EBITDA and non-GAAP net income (loss) do not consider the potentially dilutive impact of issuing equity-based compensation to the Company’s management and other employees;
  • Adjusted EBITDA does not reflect the potentially significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness that the Company may incur in the future;
  • Adjusted EBITDA does not reflect income and expense items that relate to the Company’s financing and investing activities, any of which could significantly affect the Company’s results of operations or be a significant use of cash;
  • Adjusted EBITDA and non-GAAP net income (loss) do not reflect costs or expenses associated with accounting for business combinations;
  • Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to the Company; and
  • Other companies, including companies in the same industry, calculate Adjusted EBITDA and non-GAAP net income (loss) measures differently, which reduces their usefulness as a comparative measure.

Adjusted EBITDA is not intended to replace operating income (loss), net income (loss) and other measures of financial performance reported in accordance with GAAP. Rather, Adjusted EBITDA is a measure of operating performance that may be considered in addition to those measures. Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to the Company to invest in the growth of the business.

Underclassmen Expense is a number the Company calculates to approximate its investment in Underclassmen and is comprised of the selling and marketing expenses allocated to Underclassmen during a reporting period. The amount includes the direct salaries and allocated benefits of the Underclassmen (excluding commissions), training and sales organization expenses including depreciation allocated based on relative headcount and marketing expenses allocated based on relative revenue. While management believes that Underclassmen Expense provides useful information regarding the Company’s approximated investment in Underclassmen, the methodology used to arrive at the estimated Underclassmen Expense was developed internally by the Company, is not a concept or method recognized by GAAP and other companies may use different methodologies to calculate or approximate measures similar to Underclassmen Expense. Accordingly, the calculation of Underclassmen Expense may not be comparable to similar measures used by other companies. Management refers to sales through its sales force of Internet Marketing Consultants as its Direct Local channel. As the sale to agencies, resellers and national brands involves negotiations with businesses that generally represent an aggregated group of SMB advertisers, management groups them together as the National Brands, Agencies and Resellers (NBAR) channel.

Active Advertisers is a number the Company calculates to approximate the number of clients directly served through the Company’s Direct Local channel as well as clients served through the Company’s National Brands, Agencies and Resellers channel. The Company calculates Active Advertisers by adjusting the number of Active Campaigns to combine clients with more than one Active Campaign as a single Active Advertiser. Clients with more than one location are generally reflected as multiple Active Advertisers. Because this number includes clients served through the National Brands, Agencies and Resellers channel, Active Advertisers includes entities with which the Company does not have a direct client relationship. Numbers are rounded to the nearest hundred.

Active Campaigns is a number the Company calculates to approximate the number of individual products or services the Company is managing under contract for Active Advertisers. For example, if the Company is performing both ReachSearch and ReachDisplay campaigns for a client, the Company considers that two Active Campaigns. Similarly, if a client purchased ReachSearch campaigns for two different products or purposes, the Company considers that two Active Campaigns. Numbers are rounded to the nearest hundred.

Caution Concerning Forward-Looking Statements

Statements in this press release regarding the Company’s guidance for future periods and the quotes from management constitute “forward-looking” statements within the meaning of the Securities Exchange Act of 1934. These statements reflect the Company’s current views about future events and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to materially differ from those expressed or implied by the forward-looking statements. Actual events or results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including: (i) the Company’s ability to purchase media from Google, Yahoo! and Microsoft under commercially reasonable terms; (ii) the Company’s ability to recruit, train and retain its Internet Marketing Consultants; (iii) the Company’s ability to attract and retain customers; (iv) the Company’s ability to successfully enter new markets and manage its international expansion; (v) the Company’s ability to successfully develop and offer new products and services in the highly competitive online advertising industry; (vi) the impact of worldwide economic conditions, including the resulting effect on advertising budgets; and (vii) our ability to comply with government regulation affecting our business, including regulations or policies governing consumer privacy. More information about these factors and other potential factors that could affect the Company's business and financial results is contained in its final Prospectus related to its initial public offering filed pursuant to Rule 424(b) under the Securities Act with the SEC on May 19, 2010 and the Company’s updates in its Quarterly Reports on Form 10-Q and Current Reports on Form 8-K . The Company does not intend, and undertakes no duty, to update this information to reflect future events or circumstances.

About ReachLocal, Inc.

ReachLocal, Inc.'s (NASDAQ: RLOC) mission is to help small- and medium-sized businesses (SMBs) acquire, maintain and retain customers via the Internet. ReachLocal offers a comprehensive suite of online marketing solutions, including search engine marketing (ReachSearch™), display advertising (ReachDisplay™) and remarketing, customer retention tools (Bizzy™), online marketing analytics (TotalTrack®), and our out-of-the-box assisted chat service (TotalLiveChat™), each targeted to the SMB market. ReachLocal delivers this suite of services to SMBs through a combination of its proprietary technology platform and its direct, "feet-on-the-street" sales force of Internet Marketing Consultants and select third party agencies and resellers. ReachLocal is headquartered in Woodland Hills, CA, with offices throughout North America and in Australia and the United Kingdom.

   
REACHLOCAL, INC.
UNAUDITED BALANCE SHEETS
(in thousands, except per share data)
 
September 30, December 31,
  2010     2009  
Assets
Current assets:
Cash and cash equivalents $ 70,155 $ 35,379
Short-term investments 8,114 8,037
Accounts receivable, net 3,459 3,229
Prepaid expenses and other current assets   2,273     1,590  
Total current assets 84,001 48,235
 
Property and equipment, net 5,628 4,900
Capitalized software development costs, net 9,524 5,099
Restricted certificates of deposit 840 1,131
Intangible assets, net 3,346 2,068
Other assets 1,340 967
Deferred offering costs - 3,099
Goodwill   34,118     32,388  
Total assets $ 138,797   $ 97,887  
 
Liabilities and Stockholders’ Equity
 
Current Liabilities:
Accounts payable $ 18,358 $ 21,498
Accrued expenses 12,399 10,342
Deferred payment obligations 375 5,955
Deferred revenue 23,520 16,989
Other current liabilities   280     165  
Total current liabilities 54,932 54,949
 
Deferred rent and other liabilities   1,353     820  
Total liabilities   56,285     55,769  
 
Stockholders’ Equity:
Common stock - 1
Convertible preferred stock - 4
Receivable from stockholder (99 ) (99 )
Additional paid-in capital (common stock) 95,176 47,247
Accumulated deficit (12,416 ) (4,897 )
Accumulated other comprehensive loss   (149 )   (138 )
Total stockholders’ equity   82,512     42,118  
Total liabilities and stockholders’ equity $ 138,797   $ 97,887  
         
REACHLOCAL, INC.
UNAUDITED STATEMENT OF OPERATIONS
(in thousands, except per share data)
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2010     2009     2010     2009  
 
Revenue $ 77,121 $ 52,610 $ 211,109 $ 143,315
Cost of revenue 42,172 29,173 115,458 79,614
Operating expenses:
Selling and marketing 28,874 19,174 79,155 53,935
Product and technology 3,015 1,319 7,881 3,581
General and administrative   6,003     4,179     17,006     10,598  
 

Total operating expenses

  37,892     24,672     104,042     68,114  
 
Loss from operations (2,943 ) (1,235 ) (8,391 ) (4,413 )
Gain on acquisition of Reach Local Australia - 16,223 - 16,223
Other income (expense), net   155     (9 )   410     26  
 
Loss before provision for income taxes (2,788 ) 14,979 (7,981 ) 11,836
Provision (benefit) for income taxes   83     50     (462 )   174  
 
Net income (loss) $ (2,871 ) $ 14,929   $ (7,519 ) $ 11,662  
 
 
Net income (loss) per share available to common stockholders
Basic $ (0.10 ) $ 0.65 $ (0.29 ) $ 0.51
Diluted $ (0.10 ) $ 0.61 $ (0.29 ) $ 0.48
 
Weighted average common shares used in computation of net loss per share (5)
Basic 27,848 22,979 25,728 22,825
Diluted 27,848 24,608 25,728 24,417
                   
Stock-based compensation, net of capitalization, and depreciation and amortization included in above line items:
 
Stock-based compensation:
Cost of revenue $ 51 $ 33 $ 212 $ 58
Selling and marketing 324 180 765 422
Product and technology 303 69 826 101
General and administrative   871     526     2,231     1,527  
$ 1,549   $ 808   $ 4,034   $ 2,108  
 
Depreciation and amortization:
Cost of revenue $ 97 $ 65 $ 267 $ 191
Selling and marketing 264 247 758 639
Product and technology 1,245 442 2,753 1,201
General and administrative   278     66     787     180  
$ 1,884   $ 820   $ 4,565   $ 2,211  
   
REACHLOCAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)

 

Nine Months Ended September 30,

  2010     2009  
Cash flow from operating activities:
Net loss $ (7,519 ) $ 11,662
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 4,565 2,211
Stock-based compensation, net 4,034 2,108
Provision for doubtful accounts 234 (218 )
Provision for deferred income taxes (702 )
Interest and foreign currency gain on payment obligations, net (102 )
Write-off of stockholder loan 227
Gain on purchase of ReachLocal Australia (16,223 )
Changes in operating assets and liabilities:
Accounts receivable (318 ) 544
Prepaid expenses and other current assets (676 ) (452 )
Other assets (369 ) (15 )
Accounts payable and accrued liabilities 32 7,487
Deferred revenue and other   6,990     4,785  
Net cash provided by operating activities   6,169     12,116  
 
Cash flow from investing activities:
Additions to property, equipment and software (6,932 ) (3,726 )
Purchase of ReachLocal Australia, net or acquired cash

(3,083 )
Purchase of SMB:LIVE, net of acquired cash (2,759 )
Purchases of certificates of deposit

(455 )
Proceeds from maturity of certificates of deposit 371
Payment of deferred obligation (5,853 )
Purchases of short term investments   (136 )   (7,717 )
Net cash used in investing activities   (15,309 )   (14,981 )
 
Cash flow from financing activities:
Proceeds from exercise of stock options 428 43
Proceeds from initial public offering 47,648
Deferred offering costs   (4,620 )   (280 )
Net cash provided by (used in) financing activities   43,456     (237 )
 
Effect of exchange rates on cash   460     (3 )
 
Net change in cash and cash equivalents 34,776 (3,105 )
Cash and cash equivalents—beginning of period   35,379     38,820  
 
Cash and cash equivalents—end of period $ 70,155   $ 35,715  
 
  Three Months Ended   Nine Months Ended
September 30, September 30,
  2010       2009     2010       2009  
Reconciliation of Adjusted EBITDA to Loss from operations
(in thousands)
Loss from operations $

(2,943

) $ (1,235 ) $ (8,391 ) $ (4,413 )
Add:
Depreciation and amortization 1,884 820 4,565 2,211
Stock-based compensation, net 1,549 808 4,034 2,108
Acquisition and integration costs 33 312 542 312
Amortization for step-down in deferred revenue on acquisition, net of tax   -     460     -     460  
Adjusted EBITDA (1) $ 523   $ 1,165   $ 750   $ 678  
 
Underclassmen Expense (2) $ 9,540   $ 6,389   $ 26,025   $ 19,249  
 
REACHLOCAL, Inc.
Reconciliation of GAAP to Non-GAAP Operating Results for Three Months Ended September 30, 2010 and 2009
(in thousands, except per share amounts)
 
  Three Months Ended September 30, 2010     Three Months Ended September 30, 2009
  Adjustments:     Adjustments:  
Stock-based   Stock-based  
GAAP Compensation Acquisition Non-GAAP

GAAP

Compensation Acquisition Non-GAAP
Operating Results Related Related Operating Operating Results Related Related Operating
"As Reported"   Expense (3)   Costs (4)   Results "As Reported"   Expense (3)   Costs (4)   Results
Revenue $ 77,121 - - $ 77,121 $ 52,610 - 460 $ 53,070
 
Cost of revenue 42,172 (51 ) - 42,121 29,173 (33 ) - 29,140
 
Operating expenses:
Sales and marketing 28,874 (324 ) - 28,550 19,174 (180 ) - 18,994
Product and technology 3,015 (483 ) (225 ) 2,307 1,319 (94 ) - 1,225
General and administrative   6,003     (871 )   (192 )     4,940     4,179     (526 )   (312 )     3,341  
Total Operating expenses   37,892     (1,678 )   (417 )     35,797     24,672     (800 )   (312 )     23,560  

Income (Loss) from operations

(2,943 ) 1,729 417 (797 ) (1,235 ) 833 772 370

Gain on acquisition of ReachLocal Australia

16,223 - (16,223 ) -
Other income (expense), net   155     -     -       155     (9 )   -     -       (9 )

Income (Loss) before provision for income taxes

(2,788 ) 1,729 417 (642 ) 14,979 833 (15,451 ) 361
Provision (benefit) for income tax   83     -     -       83     50     -     -       50  

Net Income (Loss)

$ (2,871 )   1,729     417     $ (725 ) $ 14,929     833     (15,451 )   $ 311  
 
Net income (loss) per share
Basic $ (0.10 ) $ (0.03 ) $ 0.65 $ 0.01
Diluted $ (0.10 ) $ (0.03 ) $ 0.61 $ 0.01
 
Weighted average shares outstanding (5)
Basic 27,848 27,848 22,979 22,979
Diluted 27,848 27,848 24,608 24,608
 
REACHLOCAL, Inc.
Reconciliation of GAAP to Non-GAAP Operating Results for Nine Months Ended September 30, 2010 and 2009
(in thousands, except per share amounts)
 
  Nine Months Ended September 30, 2010     Nine Months Ended September 30, 2009
  Adjustments:     Adjustments:  
Stock-based   Stock-based  
GAAP Compensation Acquisition Non-GAAP GAAP Compensation Acquisition Non-GAAP
Operating Results Related Related Operating Operating Results Related Related Operating
"As Reported"   Expense (3)   Costs (4)   Results "As Reported"   Expense (3)   Costs (4)   Results
Revenue $ 211,109 - - $ 211,109 $ 143,315 - 460 $ 143,775
 
Cost of revenue 115,458 (212 ) - 115,246 79,614 (58 ) - 79,556
 
Operating expenses:
Sales and marketing 79,155 (765 ) (7 ) 78,383 53,935 (422 ) - 53,513
Product and technology 7,881 (1,104 ) (697 ) 6,080 3,581 (157 ) - 3,424
General and administrative   17,006     (2,231 )   (862 )     13,913     10,598     (1,527 )   (312 )     8,759  
Total Operating expenses   104,042     (4,100 )   (1,566 )     98,376     68,114     (2,106 )   (312 )     65,696  
Loss from operations (8,391 ) 4,312 1,566

(2,513

) (4,413 ) 2,164 772 (1,477 )

Gain on acquisition of ReachLocal Australia

16,223

-

(16,223

)

-

Other income (expense), net   410     -     -       410     26     -    

-

      26  

Income (Loss) before provision for income taxes

(7,981 ) 4,312 1,566 (2,103 ) 11,836 2,164 (15,451 ) (1,451 )
Provision (benefit) for income tax   (462 )       701       239     174     -     -       174  

Net Income (Loss)

$ (7,519 )   4,312     865     $ (2,342 ) $ 11,662     2,164     (15,451 )   $ (1,625 )
 
Net income (loss) per share
Basic $ (0.29 ) $ (0.09 ) $

0.51

$ (0.07 )
Diluted $ (0.29 ) $ (0.09 ) $

0.48

$ (0.07 )
 
Weighted average shares outstanding (5)
Basic 25,728 25,728 22,825 22,825
Diluted 25,728 25,728 24,417 24,417
Footnotes
 
(1) Adjusted EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization expenses and excluding, when applicable, non-cash stock-based compensation, the effects of accounting for business combinations and amounts included in other non-operating income or expense.
 
(2) Underclassmen Expense is a number the Company calculates to approximate its investment in Underclassmen and is comprised of the selling and marketing expenses allocated to Underclassmen during a reporting period. The amount includes the direct salaries and allocated benefits of the Underclassmen (excluding commissions), training and sales organization expenses including depreciation allocated based on relative headcount and marketing expenses allocated based on relative revenue.
 
(3) Stock-based Compensation Related Expense: Includes stock-based compensation expense and the related adjustment to amortization of capitalized software development costs.
 
(4) Acquisition Related Costs: Acquisition related costs, including the amortization of acquired intangibles and the deferred cash consideration for the SMB:Live acquistion, are excluded from the Non-GAAP operating results as these are non-recurring charges which the Company would not have incurred as part of continuing operations.
 
(5) Weighted average shares outstanding: The weighted average shares outstanding prior to the initial public offering date of May 19, 2010 have been retroactively adjusted to reflect the conversion of the Company's preferred stock into common stock. The periods after the initial public offering reflect the actual shares outstanding.

Contacts

The Blueshirt Group
Investor Relations:
Alex Wellins, 415-217-5861
alex@blueshirtgroup.com
or
ReachLocal, Inc.
Media Contact:
David Glaubke, 818-936-9908
Director of Corporate Communications
dglaubke@reachlocal.com

Contacts

The Blueshirt Group
Investor Relations:
Alex Wellins, 415-217-5861
alex@blueshirtgroup.com
or
ReachLocal, Inc.
Media Contact:
David Glaubke, 818-936-9908
Director of Corporate Communications
dglaubke@reachlocal.com