|
LOCAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
This Quarterly Report on Form 10-Q or certain information included or
incorporated by reference in this report, contains or may contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements, other than statements of
historical fact, are statements that could be deemed "forward-looking
statements" within the meaning of the federal securities laws. These statements
relate to our future operations, prospects, potential products, services,
developments and business strategies. These statements can, in some cases, be
identified by the use of terms such as "may," "will," "should," "could,"
"would," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"project," and "potential" or the negative of such terms or other comparable
terminology. In addition, important factors to consider in evaluating such
forward-looking statements include changes or developments in social, economic,
market, legal or regulatory circumstances, changes in our business or growth
strategy or an inability to execute our strategy due to changes in our industry
or the economy generally, the emergence of new or growing competitors, the
actions or omissions of third parties, including customers, competitors and
governmental authorities, and various other factors, including those described
or referred to in Item 1A of Part II of this Quarterly Report. Should any one or
more of these risks or uncertainties materialize, or the underlying estimates or
assumptions prove incorrect, our actual results could differ materially from
those expressed in the forward-looking statements and there can be no assurance
that the forward-looking statements contained in this report will in fact occur.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the attached condensed
consolidated financial statements and related notes thereto, and with the
audited consolidated financial statements and related notes thereto as of
December 31, 2011, and for the year ended December 31, 2011, included in our
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 15, 2012.
Overview
We are a local media company that specializes in connecting local businesses
with online consumers. We reach consumers on our proprietary sites, as well as
third-party sites (collectively, "Consumer Properties"), which includes our
Owned & Operated web sites such as Local.com and Krillion.com (collectively,
"O&O"), as well as our network of over 1,000 third-party U.S. regional media
websites (collectively, "Network"). We provide a variety of digital media
services to small and medium sized businesses ("SMBs") to enable these customers
to reach consumers both on our Consumer Properties as well as on the major
search engines (collectively, "Business Solutions") and we also enable third
parties to distribute their advertiser listings on our Consumer Properties, for
which we generate ad revenues. We generate revenue from performance ad units
such as daily deals, pay-per-click, pay-per-call and lead generation,
subscription ad units, and CPM ad units, among others.
Our Consumer Properties serve over 30 million consumers each month. We use
patented and proprietary search technologies and systems to provide users of our
O&O websites and our Network with relevant search results for local businesses,
products and services, incorporating daily deals, event information, ratings and
reviews, driving directions and more. By distributing this information across
our Consumer Properties we are able to reach users that our direct advertisers
and advertising partners desire to reach.
Our Business Solutions offer a variety of digital media products. The products
are sold primarily via telesales. Our sales efforts focus principally around our
Launch by Local product suite, which offers a variety of digital media features
including web hosting, search engine optimization services, display ads, mobile
ads, and social media presence management. Approximately 900 direct SMB
customers are enrolled in our new Launch by Local product. An average Launch by
Local subscription generates approximately the same monthly revenue as six
legacy customers. Our Business Solutions technologies also power a variety of
platform products targeted towards larger businesses such as regional media
publishers and ad agencies. Over 6,000 of our direct SMB customers use a legacy
web hosting and/or listing solution that will be phased out by the end of 2012.
18
--------------------------------------------------------------------------------
Table of Contents
We regularly develop and deploy new products and product features based on our
powerful technology platform, for which we have 9 issued patents and 11 pending.
We have a long-term focus on building three key drivers for our business -
traffic, technology and advertisers. Our traffic is at record levels, our
technology platform has been dramatically expanded, and we are generating record
revenues from our own direct Launch by Local customers. We also recently
launched our Local.com mobile device application with the intent to capitalize
on an ever expanding mobile device market.
Recent Developments
On March 28, 2012, we entered into the First Amendment to the Loan and Security
Agreement with Square One Bank, which amends the Loan and Security Agreement by
and between us and Square One Bank dated August 3, 2011 ("Loan Agreement"). The
First Amendment to the Loan Agreement modifies the borrowing base eligibility
criteria under the Loan Agreement, provides a five (5) day cure period for any
liquidity ratio violations before any such violation would be deemed an event of
default under the Loan Agreement, and establishes certain Adjusted EBITDA
financial covenant, as defined, levels for fiscal 2012 pursuant to the Loan
Agreement. On April 11, 2012, we entered into the Second Amendment to Loan
Agreement with Square One Bank, which amends the Loan Agreement by and among the
Company and Square One Bank dated August 3, 2011. The Second Amendment of the
Loan Agreement modifies the maximum allowable borrowings under the non-formula
line by increasing the maximum to $5.0 million from $3.0 million under certain
circumstances. Additionally, it redefines the liquidity ratio to provide that
non-formula borrowings only require a 1.0:1.0 ratio, rather than the 1.25:1.0
ratio. On August 17, 2012, we entered into the Third Amendment of the Loan
Agreement to lower the maintenance limits for its depository and operating
accounts to 90% and to amend the definition of Adjusted EBITDA to exclude any
non-cash expenses, as well as to provide a waiver of a technical violation of
the Adjusted EBITDA covenant described in Section 6.7(a) of the Agreement that
occurred prior to the definition amendment noted above.
During the second quarter 2012, we decided to sell all assets relating to the
Rovion business. The Rovion business, which is considered a usage model, did not
align with our intent to become both a local media publisher and local
advertising sales and marketing organization. On October 19, 2012, we sold all
assets relating to the Rovion business. We licensed the Rovion technology as
part of the asset purchase agreement and will continue to use the technology in
its Launch by Local product offering.
At June 30, 2012, we performed an impairment valuation of goodwill as it relates
to the Spreebird business unit. The evaluation was triggered by the continued
decline in the market capitalization of comparable public companies and lower
than expected financial performance of the Spreebird business unit during the
second quarter of 2012. The evaluation resulted in an estimated impairment
charge of $5.5 million to goodwill. The goodwill impairment valuation was
finalized in the third quarter and no additional impairment charges were
recorded. During the second quarter of 2012, we also recorded an impairment
charge relating to intangible assets and capitalized software of the Spreebird
business unit for $799,000 and $152,000, respectively.
On September 14, 2012, we changed our name from Local.com Corporation to Local
Corporation. We amended our Amended and Restated Certificate of Incorporation in
connection with a merger of our wholly-owned subsidiary with and into us in
accordance with Section 253 of the Delaware General Corporation Law.
During the third quarter 2012, revenue from our LEC-billed subscriber bases
decreased significantly due to a decision by certain LEC's to no longer provide
billing services for our products and services. The majority of the LEC billing
ceased at the end of August 2012 and we expect the remainder of the LEC billing
to cease at the end of November 2012. In connection therewith, we accelerated
the amortization of our subscriber base to align with the expected related
future cash flows.
On November 1, 2012, we entered into a new Yahoo! Publisher Network Agreement
with Yahoo! Inc., which provides for the distribution of Yahoo! Inc.'s paid
search results by us for which we are compensation a certain percentage of the
adjusted gross revenue (as defined in the agreement) derived by Yahoo! from such
paid search results. The agreement with Yahoo ends on October 31, 2017, unless
earlier terminated by the parties.
Outlook for Our Business
According to BIA/Kelsey, the U.S. online advertising market is an over $47
billion a year industry. "Local search," that is, searches for products,
services and businesses within a geographic region is an increasingly
significant segment of the online advertising industry. Local search allows
consumers to search for local businesses' products or services by including
geographic area, zip code, city and other geographically targeted search
parameters in their search requests. According to a May 2011 study, BIA/Kelsey
estimates that the local search market in the United States will grow from $5.1
billion in 2010, to $8.2 billion by 2015. Consumers who conduct local searches
on the Internet ("local searchers") tend to convert into buying customers at a
higher rate than other types of Internet users. As a result, advertisers often
pay a significant premium to place their ads in front of local searchers on
websites like those powered by our Consumer Properties business, including
Local.com or our network partners' websites. Additionally, local SMBs that would
not normally compete at the national level for advertising opportunities are
increasingly engaging in and competing for local advertising opportunities,
including local search, to promote their products and services.
19--------------------------------------------------------------------------------
Table of Contents
Local online search is still relatively new, and as a result, it is difficult to
determine our current market share, or predict our future market share. However,
we have a number of competitors that have announced an intention to increase
their focus on local search with regard to U.S. online advertising, including
some of the leading online advertising companies in the world, including Google,
Yahoo!, and Microsoft, among many others, with greater experience and resources
than we have.
The U.S. online advertising industry, including the local search segment, is
regularly impacted and changed by new and emerging technologies, including, for
instance, ad targeting and mobile technologies, as well as the increased
fragmentation of the online advertising industry in general, from different
technology platforms, to different advertising formats, targeting methodologies
and the like. Those companies within our industry that are able to quickly adapt
to new technologies, as well as offer innovations of their own, have a better
chance of succeeding than those that do not.
We believe that local search will be an increasingly significant segment of the
online advertising industry. Although search advertising has been used primarily
by businesses that serve the national market, local businesses are increasingly
using online advertising to attract local customers. Our Consumer Properties and
Business Solutions are all designed to serve this market of consumers,
advertisers and publishers, which we believe will provide an opportunity for
growth from increased local search volumes by consumers, as well as increased
competition by advertisers to display their ad listings in front of those
consumers.
Our revenue, profitability and future growth depend not only on our ability to
execute our business plan, but also, the growth of the paid-search market and
our ability to effectively compete with other providers of local, and
paid-search technologies and services among other things.
As we continue to diversify our technologies and traffic sources, we remain
focused on local media offerings that will improve the experience for our end
users, enable our SMBs to better reach their potential customers, and allow our
regional media network partners to enhance their service offerings and lower
their costs. While we are still very focused on the local search industry, we
believe there are additional opportunities in local media that we and our
customers can benefit from, while diversifying our revenue sources. We intend to
continue making significant investments in initiatives to diversify our revenue
sources and promote our future growth.
As we continue to invest in our core offerings, while pursuing the acquisitions
noted above, we have increased our operating expenses, mainly related to traffic
acquisition costs, the deployment of new features and functionality across our
business and the support of our acquired companies. We cannot give assurances
that our efforts to improve our results of operations through this strategy will
be successful.
Sources of Revenue
We generate revenue primarily on our Consumer Properties from both direct and
indirect advertiser relationships, via:
• click-throughs on sponsored listings;
• calls to cost-per-call advertiser listings;
• lead generation;
• banner ads;
• subscription advertiser listings;
• domain sales and services;
• web hosting services; and
• daily deal offerings.
Operating Expenses
Cost of Revenues
Cost of revenues consists of traffic acquisition costs, revenue sharing payments
that we make to our network partners, and other cost of revenues. Traffic
acquisition costs consist primarily of campaign costs associated with driving
consumers to our Local.com website, including personnel costs associated with
managing traffic acquisition programs. Other cost of revenues consists of
Internet connectivity costs, data center costs, amortization of certain software
license fees and maintenance, depreciation of computer equipment used in
providing our paid-search services, and payment processing fees (credit cards
and fees for LEC billings). We advertise on large search engine websites such as
Google, Yahoo!, MSN/Bing and Ask.com, as well as other search engine websites,
by bidding on certain keywords we believe will drive traffic to our Local.com
website. During the three and nine months ended September 30, 2012,
approximately 61% and 62%, of our overall traffic was purchased from other
search engine websites. During the three and nine months ended September 30,
2012, advertising
20
--------------------------------------------------------------------------------
Table of Contents
costs to drive consumers to our Local.com website were $15.2 million and $46.4
million respectively. Of the total advertising cost for the three and nine
months ended September 30, 2012, $10.3 million and $32.1 million were
attributable to Google, Inc. and $4.3 million and $12.7 million were
attributable to Yahoo!, respectively. During the three and nine months ended
September 30, 2011, approximately 68% and 66% respectively, of our overall
traffic was purchased from other search engine websites. During the three and
nine months ended September 30, 2011, advertising costs to drive consumers to
our Local.com website were $9.4 million and $25.0 million respectively. Of the
total advertising cost for the three and nine months ended September 30, 2011,
$6.6 million and $18.4 million were attributable to Google, Inc. and $1.3
million and $4.1 million were attributable to Yahoo!, respectively.
Sales and Marketing
Sales and marketing expenses consist of sales commissions and salaries for our
internal and outsourced sales force, customer service staff and marketing
personnel, advertising and promotional expenses. We record advertising costs and
sales commission in the period in which the expense is incurred. We expect our
sales and marketing expenses will increase in absolute dollars as we continue to
experience growth.
General and Administrative
General and administrative expenses consist of salaries and other costs
associated with employment of our executive, finance, human resources and
information technology staff, legal, tax and accounting, and professional
service fees.
Research and Development
Research and development expenses consist of salaries and other costs of
employment of our development staff, outside contractor costs and amortization
of capitalized website development costs.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities and equity and disclosure of contingent
assets and liabilities at the date of the condensed consolidated financial
statements and the reported amounts of revenue and expenses during the reported
period. We review our estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the result of which forms the basis for
making judgments about the carrying values of assets and liabilities and the
reported amounts of revenue and expenses. Actual results may differ materially
from these estimates under different assumptions or conditions. Our significant
accounting policies described in more detail in Note 1 to our condensed
consolidated financial statements included in this Report on Form 10-Q, involve
judgments and estimates that are significant to the presentation of our
condensed consolidated financial statements.
Revenue Recognition
We recognize revenue when all of the following conditions are satisfied:
(1) there is persuasive evidence of an arrangement; (2) the service or product
has been provided to the customer; (3) the amount of fees to be paid by the
customer is fixed or determinable; and (4) the collection of our fees is
probable.
We generate revenue when it is realizable and earned, as evidenced by
click-throughs occurring on advertisers' sponsored listings, the display of a
banner advertisement, the fulfillment of subscription listing obligations, the
sale of deal of the day vouchers, or the delivery of Exact Match products to our
customers. We enter into contracts to distribute sponsored listings and banner
advertisements with our direct and indirect advertisers. Most of these contracts
are short-term, do not contain multiple elements and can be cancelled at
anytime. Our indirect advertisers provide us with sponsored listings with bid
prices (for example, what their advertisers are willing to pay for each
click-through on those listings). We recognize our portion of the bid price
based upon the execution of our contractual obligations. Sponsored listings and
banner advertisements are included within pages that display search results,
among others, in response to keyword searches performed by consumers on our
Local.com website and network partner websites. Revenue is recognized when
earned based on click-through and impression activity to the extent that
collection is reasonably assured from credit worthy advertisers. Management has
analyzed our revenue recognition and determined that our web hosting revenue is
recognized net of direct costs.
During the year ended December 31, 2010, we entered into multiple-deliverable
arrangements for the sale of domains and for providing services relating to such
domains. Management evaluated the agreements in accordance with the provision of
the revenue recognition topic that addresses multiple-deliverable revenue
arrangements. The multiple-deliverable arrangements entered into consisted of
various units of accounting such as the sale of domains, website development
fees, content delivery and hosting fees. Such elements were considered separate
units of accounting due to each element having value to the
21--------------------------------------------------------------------------------
Table of Contents
customer on a stand-alone basis. The selling price for each of the units of
accounting was determined using a combination of vendor-specific objective
evidence and management estimates. Revenue relating to domains was recognized
with the transfer of title of such domains. Revenue for website development,
content delivery and hosting fees are recognized as such services are performed
or delivered. The agreements did not include any cancellation, termination or
refund provisions that we consider probable. Subsequent to December 31, 2010, we
did not enter into any significant multiple deliverable arrangements.
We launched our Spreebird daily deals business in May 2011. Revenue relating to
the Spreebird daily deals business is recorded exclusive of the portion of gross
billings paid as merchant revenue share, since we generally act as the agent,
rather than the principal, when connecting merchants with online customers.
Spreebird deal vouchers are sold primarily through email marketing and our
www.spreebird.com website. Revenue for our Spreebird business is recognized when
earned. Revenue is considered to be earned once all revenue recognition criteria
have been satisfied.
We evaluate whether it is appropriate to record the gross amount of sales and
related costs or the net amount earned as revenue. Generally, when we are
primarily obligated in a transaction, are subject to inventory risk, have
latitude in establishing prices and selecting suppliers, or have several but not
all of these indicators, revenue is recorded at the gross sales price. We
generally record the net amounts as revenue earned if we are not primarily
obligated and do not have latitude in establishing prices. Such amounts earned
are determined using a fixed percentage, a fixed-payment schedule, or a
combination of the two. All revenue, other than Spreebird daily deals revenue
and web hosting revenue, is recognized on a gross basis.
Allowance for Doubtful Accounts
Our management estimates the losses that may result from that portion of our
accounts receivable that may not be collectible as a result of the inability of
our customers to make required payments. Management specifically analyzes
accounts receivable and historical bad debt, customer concentration, customer
credit-worthiness, current economic trends and changes in customer payment terms
when evaluating the adequacy of the allowance for doubtful accounts. If we
believe that our customers' financial condition has deteriorated such that it
impairs their ability to make payments to us, additional allowances may be
required. We review past due accounts on a monthly basis and record an allowance
for doubtful accounts generally equal to any accounts receivable that are over
90 days past due and for which collectability is not reasonably assured.
As of September 30, 2012 and December 31, 2011, two customers, Yahoo! and Google
represented 56% and 47% of our total accounts receivable, respectively. These
customers have historically paid within the payment period provided for under
their contracts and management believes these customers will continue to do so.
Goodwill and Other Intangible Assets
Goodwill representing the excess of the purchase price over the fair value of
the net tangible and intangible assets arising from acquisitions and purchased
domain names are recorded at cost. Intangible assets, such as goodwill and
domain names, which are determined to have an indefinite life, are not
amortized. The first step in determining if there is any goodwill impairment is
a comparison of the estimated fair value of an internal reporting unit with its
carrying amount, including goodwill. If the estimated fair value of the
reporting unit exceeds its carrying value, goodwill of the reporting unit is not
considered impaired and the second step is unnecessary. If the carrying value of
the reporting unit exceeds its estimated fair value, the second step is
performed to measure the amount of impairment by comparing the carrying amount
of the goodwill to a determination of the implied value of the goodwill. If the
carrying amount of goodwill is greater than the implied value, an impairment
charge is recognized for the difference. We engage an independent appraiser to
assist management in the valuation. We perform annual impairment reviews during
the fourth fiscal quarter of each year or earlier if indicators of potential
impairment exist. For other intangible assets with indefinite lives, we compare
the fair value of related assets to the carrying value to determine if there is
impairment. For other intangible assets with definite lives, we compare future
undiscounted cash flow forecasts prepared by management to the carrying value of
the related intangible asset group to determine if there is impairment. We
performed our annual impairment analysis as of December 31, 2011, and determined
that the estimated fair value of the reporting units exceeded its carrying value
and therefore no impairment existed. The Spreebird business unit was identified
as a separate reporting unit for evaluation of goodwill impairment. Due to lower
than expected financial performance by the Spreebird business unit and a
significant decrease in the market capitalization of comparable public companies
during the second quarter of fiscal 2012, we determined that there were
potential indicators of impairment at June 30, 2012. Goodwill was tested for
impairment by estimating the fair value of the reporting unit using a
consideration of market multiples (Level 3 Fair Value Measurement) and was
written down to its estimated implied fair value, which was approximately $6.7
million as of June 30, 2012, resulting in an estimated impairment charge of
approximately $5.5 million, which is included in Impairment of goodwill and
intangible assets in the accompanying condensed consolidated statements of
operations. We finalized the goodwill impairment review of the
22--------------------------------------------------------------------------------
Table of Contents
Spreebird business unit and the related impairment charge recorded in the second
quarter 2012 during the third quarter 2012. The finalization of the Spreebird
goodwill impairment review did not result in any adjustments to the initial
impairment charge recorded in the second quarter 2012. The Company noted no
potential indicators of impairment related to the Spreebird goodwill as of
September 30, 2012.
Stock Based Compensation
Total stock-based compensation expense related to continuing operations
recognized for the three and nine months ended September 30, 2012 and 2011, is
as follows (in thousands, except per share amount):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
Cost of revenues $ 22 $ 12 $ 61 $ 165
Sales and marketing 261 306 846 955
General and administrative 320 491 988 1,427
Research and development 63 87 163 313
Total stock-based compensation
expense $ 666 $ 896 $ 2,058 $ 2,860
Basic and diluted net
stock-based compensation expense
per share $ 0.03 $ 0.04 $ 0.09 $ 0.14
Results of Operations
The following table sets forth our historical operating results as a percentage
of revenue for the three and nine months ended September 30, 2012 and 2011:
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of revenues 74.5 60.4 72.6 64.7
Sales and marketing 16.8 28.5 18.8 25.2
General and administrative 10.2 14.4 10.0 16.8
Research and development 5.0 7.3 4.8 8.3
Amortization of intangibles 7.5 6.1 4.7 6.8
Impairment of goodwill and
intangible assets - - 8.4 -
Total operating expenses 114.0 116.7 119.3 121.7
Operating income (loss) (14.0 ) (16.7 ) (19.3 ) (21.7 )
Interest and other income
(expense), net (0.5 ) (1.1 ) (0.4 ) (0.6 )
Change in fair value of
warrant liability 0.3 2.5 0.2 4.7
Income (loss) from continuing
operations before income
taxes (14.2 ) (15.3 ) (19.5 ) (17.6 )
Provision for income taxes 0.1 0.2 0.2 0.2
Net income (loss) from
continuing operations (14.3 ) (15.5 ) (19.6 ) (17.8 )
Income (loss) from
discontinued operations (net
of taxes) (1.0 ) (4.0 ) (1.6 ) (2.5 )
Net income (loss) (15.3 )% (19.5 )% (21.3 )% (20.3 )%
23
--------------------------------------------------------------------------------
Table of Contents
Three and nine months ended September 30, 2012 and 2011
Revenue (dollars in thousands):
Three Months Ended September 30, Percent Nine Months Ended September 30, Percent
2012 (*) 2011 (*) change 2012 (*) 2011 (*)
change
Owned and operated $ 18,340 74.0 % $ 13,457 65.0 % 36.3 % $ 56,791 73.9 % $ 33,200 62.7 % 71.1 %
Network 4,961 20.0 % 4,364 21.1 % 13.7 % 13,289 17.3 % 11,805 22.3 % 12.6 %
Business solutions 1,470 5.9 % 2,867 13.9 % -48.7 % 6,795 8.8 % 7,955 15.0 %
-14.6 %
Total revenue $ 24,771 100.0 % $ 20,688 100.0 % 19.7 % $ 76,875 100.0 % $ 52,960 100.0 % 45.2 %
(*) - Percent of total revenue
Owned and operated revenue for the three and nine months ended September 30,
2012, increased 36.3% and 71.1%, respectively, compared to the same periods in
2011. The increase in revenue for the three and nine months ended September 30,
2012, compared to the same period in 2011 is mainly due to increased traffic to
our Local.com website, together with an increase in monetization as our revenue
per thousand visitors ("RKV") increased to $276 and $287, respectively for the
three and nine months ended September 30, 2012, from $254 and $220, respectively
for the three and nine months ended September 30, 2011. The increase in RKV was
primarily a result of changes made to our advertising partner relationships. The
increase in RKV due to a new advertising partner relationship was partially
offset by a significant decrease in revenue from one of our large advertising
partners. The lower RKV for the three and nine months ended September 30, 2011,
was primarily due to the Yahoo!/Bing alliance, which resulted in changes to the
Yahoo! search and advertising platform. Starting in August 2011 we entered into
a new advertising partner relationship that resulted in a significant increase
in monetization of traffic to our owned and operated properties. The increase in
RKV due to a new advertising partner relationship was partially offset by a
significant decrease in revenue from one of our large advertising partners. The
increase in traffic to our owned and operated properties are the result of
higher cost of revenues to attract users as well as increased organic search
traffic over the same period.
As noted above, in August 2011, we entered into an agreement with a new
advertising partner. The revenue generated from such partner has been subject to
seasonality, which has similarly subjected all of our owned and operated revenue
results to seasonality. As such, owned and operated revenue was seasonally lower
for the third quarter of fiscal 2012 compared to the first and second quarter of
fiscal 2012.
Periodically traffic providers will make changes to their policies and
guidelines. These changes could impact both our advertising campaigns to
purchase traffic and the monetization of our search results pages. During
October 2012, our largest traffic provider made certain changes to their
policies and guidelines. We are working closely with this traffic provider to
refine our traffic acquisition approach and user experience on our search
results pages. We are assessing the impact and expect see a reduction in both
traffic and monetization, which will have a negative impact on our fourth
quarter of fiscal 2012 revenue and results of operations.
Network revenue for the three and nine months ended September 30, 2012,
increased 13.7% and 12.6%, compared to the same periods in 2011. The increase is
primarily due to increased traffic to our network partner websites and the
increase in revenue per click ("RPC") from our advertising partner feed. The
increase in traffic is a combination of increased cost of revenues to attract
users to the network partner sites together with an increase in organic traffic
over the same period.
Business Solutions revenue for the three and nine months ended September 30,
2012, decreased 48.7% and 14.6%, respectively compared to the same periods in
2011. The decrease in revenue is due to a decrease in revenue from our
LEC-billed subscriber bases, partially offset by an increase in revenue from our
Launch by Local product suite and revenue from our Spreebird business. The
decrease in revenue from our LEC-billed subscriber bases are due to a decision
by certain LEC's to no longer provide billing services for our products and
services. The majority of the LEC billing ceased at the end of August 2012 and
we expect the remainder of the LEC billing to cease at the end of November 2012.
We remain focused on selling our new products from our Launch by Local product
suite, which are billed via credit card and are entirely unaffected by LEC
billing. As of September 30, 2012, we had over 800 Launch by Local customers
which are billed monthly at an average charge that is approximately six times as
much as one legacy subscription customer. There can be no assurance that our
efforts to secure new Launch by Local customers will be capable of offsetting
the revenue and net income losses we experience from the loss of our revenue and
net income by our legacy subscribers.
24--------------------------------------------------------------------------------
Table of Contents
The growth in small business subscribers in prior years was a result of
acquisitions of subscriber bases and internal and outsourced sales efforts. The
following table provides the revenue relating to the acquisition of subscriber
bases and revenue relating to internal and outsourced sales efforts (dollars in
thousands):
Three Months Ended September 30, Percent Nine Months Ended September 30, Percent
2012 (*) 2011 (*) change 2012 (*) 2011 (*) change
Revenue from internal and
outsourced sales $ 1,002 68.2 % $ 1,507 52.6 % -33.5 % $ 4,203 61.9 % $ 3,109 39.1 %
35.2 %
Revenue from acquired bases 468 31.8 % 1,360 47.4 % -65.6 % 2,592 38.1 % 4,846 60.9 %
-46.5 %
Total sales and advertiser
services revenue $ 1,470 100.0 % $ 2,867 100.0 % -48.7 % $ 6,795 100.0 % $ 7,955 100.0 % -14.6 %
Based on the above, total revenue for the three and nine months ended
September 30, 2012, increased 19.7% and 45.2%, respectively, compared to the
same periods in 2011.
The following table identifies our major customers that represented greater than
10% of our total revenue in the periods presented:
Percentage of Total Revenue Percentage of Total Revenue
Three Months Ended September 30, Nine Months Ended September 30,Customer 2012 2011 2012 2011
Google, Inc 44.3 % 21.7 % 45.0 % 9.3 %
Yahoo! Inc. 20.2 % 16.2 % 18.3 % 28.0 %
SuperMedia Inc. 1.8 % 25.4 % 1.8 % 23.8 %
Operating expenses:
Operating expenses were as follows (dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
Percent of Percent of Percent of Percent of
Total Total Percent Total Total Percent
2012 Revenue 2011 Revenue Change 2012 Revenue 2011 Revenue Change
Cost of revenues $ 18,463 74.5 % $ 12,487 60.4 % 47.9 % $ 55,798 72.6 % $ 34,273 64.7 % 62.8 %
Sales and marketing $ 4,152 16.8 % $ 5,905 28.5 % (29.7 )% $ 14,443 18.8 % $ 13,340 25.2 % 8.3 %
General and administrative $ 2,522 10.2 % $ 2,975 14.4 % (15.2 )% $ 7,706 10.0 % $ 8,882 16.8 % (13.2 )%
Research and development $ 1,227 5.0 % $ 1,511 7.3 % (18.8 )% $ 3,684 4.8 % $ 4,396 8.3 % (16.2 )%
Amortization of intangibles $ 1,865 7.5 % $ 1,255 6.1 % 48.6 % $ 3,608 4.7 % $ 3,585 6.8 % 0.6 %
Impairment of goodwill and
intangible assets $ - - % $ - - % NM $ 6,451 8.4 % $ - NM NM
Total operating expenses $ 28,229 114.0 % $ 24,133 116.7 % 17.0 % $ 91,690 119.3 % $ 64,476 121.7 % 42.2 %
Cost of revenues
Cost of revenues for the three and nine months ended September 30, 2012,
increased by 47.9% and 62.8%, respectively, compared to the same periods in
2011. The increase during the three and nine months ended September 30, 2012
compared to the same periods in 2011 is due to an increase in traffic
acquisition costs associated with driving consumers to our Local.com website.
The increase of cost of revenues as a percentage of total revenues is mainly due
to a decrease in high margin LEC revenues as well as a decrease in high margin
revenue from one of our advertising partners. Included in cost of revenues for
the three and nine months ended September 30, 2012 is $56,000 and $166,000,
respectively, relating to the Daily Deals segment. Included in cost of revenues
for the three and nine months ended September 30, 2011 is $208,000 and $238,000,
respectively, relating to the Daily Deals segment, which commenced operations in
May 2011.
Sales and marketing
Sales and marketing expenses for the three months ended September 30, 2012,
decreased 29.7% compared to the same period in 2011. The decrease is mainly due
to a decrease in personnel-related cost as part of our continued cost savings
efforts. Sales and marketing expenses for the nine months ended September 30,
2012, increased 8.3% compared to the same period in 2011. The increase in due to
acquisitions that occurred in the second half of 2011, partially offset by
decreases in personnel related cost as part of our continued cost savings
efforts. Included in sales and marketing expense for the three and nine months
ended September 30, 2012 is $617,000 and $2.9 million, respectively, relating to
the Daily Deals segment. Included in sales and marketing expense for the three
and nine months ended September 30, 2011 is $2.6 million and $3.1 million,
respectively, relating to the Daily Deals segment, which commenced operations in
May 2011. The reduction in sales and marketing expense for the Daily Deals
segment is mainly due to a reduction in personal related cost.
General and administrative
General and administrative expenses for the three and nine months ended
September 30, 2012, decreased by 15.2% and 13.2%, respectively, compared to the
same periods in 2011. The decrease was mainly due to a decrease in compensation
expense for the quarter, partially offset by an increase in personnel related
cost due to acquisitions. Costs incurred related to the Daily Deals segment was
immaterial for the three and nine months ended September 30, 2012 and 2011.
25--------------------------------------------------------------------------------
Table of Contents
Research and development
Research and development expenses for the three and nine months ended
September 30, 2012, decreased by 18.8% and 16.2%, respectively, compared to the
same periods in 2011. The decrease is mainly due to our effort to reduce
technology related costs together with a larger percentage of total technology
related cost being capitalized as we invest in improving existing and newly
acquired technologies.
The following table sets forth research and development expenses, additional
capitalized website development costs and amortization of capitalized website
development costs for the periods indicated (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
Research and development expense $ 1,227 $ 1,511 $ 3,684 $ 4,396
Capitalized website development
costs $ 457 $ 668 $ 1,704 $ 2,397
Amortization of capitalized
website development costs $ (606 ) $ (552 ) $ (1,649 ) $ (1,357 )
Amortization of intangibles
Amortization of intangibles expense was $1.9 million and $3.6 million for the
three and nine months ended September 30, 2012, respectively, compared to $1.3
million and $3.6 million for the same periods in 2011. The increase in
amortization expense was primarily due to the acceleration of amortization
related to the LEC-billed subscriber bases, as the majority of billings relating
to such subscriber bases ceased due to LEC's decision not to provide future
billing services as it relates to our products.
Impairment of goodwill and intangible assets
During the second quarter 2012, we recorded an impairment charge of $6.5
million, which consisted of the impairment of goodwill, intangible assets and
capitalized software related to the Spreebird business unit.
Interest and other income (expense), net
Interest and other income (expense), net were ($131,000) and ($325,000) for the
three and nine months ended September 30, 2012, respectively, compared to
($227,000) and ($312,000) for the same periods in 2011. The decrease for the
quarter is due to an increase in interest expense for the third quarter 2011, as
all prepaid finance charges relating to the Silicon Valley Bank line of credit
were expensed when the line of credit was cancelled.
Provision for income taxes
Provision for income taxes was $22,000 and $121,000 for the three and nine
months ended September 30, 2012 and $47,000 and $107,000 for the three and nine
months ended September 30, 2011. Taxes are primarily due to anticipated tax
amortization on indefinite-lived assets, partially offset by California research
and development credits.
Liquidity and Capital Resources
Liquidity and capital resources highlights (in thousands):
September 30, December 31,
2012 2011
Cash and cash equivalents $ 3,706 $ 10,394
Working capital (deficit) $ (1,806 ) $ 1,540
Cash flow highlights (in thousands):
Nine Months Ended September 30,
2012 2011Net cash (used in) provided by operating activities $ (3,747 )
$ (2,191 )
Net cash used in investing activities (2,585 ) (19,875 )
Net cash provided by financing activities (356 ) 19,106
26
--------------------------------------------------------------------------------
Table of Contents
We have funded our business, to date, primarily from issuances of equity
securities as well as through debt facilities. Cash was $3.7 million as of
September 30, 2012, and $10.4 million as of December 31, 2011. We had a working
capital deficit of $1.8 million as of September 30, 2012, and working capital of
$1.5 million as of December 31, 2011. As of September 30, 2012, we had a total
of $7.6 million outstanding on the revolving credit facility with Square 1 Bank.
The decrease in working capital is largely due to a decrease in cash of
approximately $6.7 million, which was mainly due to the payment of expenses
accrued for at December 31, 2011, and capital expenditures during the first
three quarters of 2012. This decrease was partially offset by the timing of
payments to vendors and cash receipts from customers. Working capital excludes
the warrant liability and includes assets and liabilities held for sale.
Net cash used in operating activities was $3.7 million for the nine months ended
September 30, 2012. Net loss adjusted for non-cash charges (adding back
depreciation and amortization, stock-based compensation expense, change in fair
value of warrant liability and asset impairment) used was approximately $1.2
million, and changes in operating assets and liabilities used cash of $2.6
million for the nine months ended September 30, 2012. Net cash used in operating
activities was $2.2 million for the nine months ended September 30, 2011. Net
loss adjusted for non-cash charges (adding back depreciation and amortization,
stock-based compensation expense, change in fair value of warrant liability and
asset impairment) used was approximately $4.3 million. Changes in operating
assets and liabilities provided cash of $2.1 million.
There are four primary drivers that affect cash provided by or (used in)
operations: net income (loss); non-cash adjustments to net income (loss);
changes in accounts receivable; and changes in accounts payable. For the nine
months ended September 30, 2012, the terms of our accounts receivable and
accounts payable remained unchanged.
The table below substantiates the change in net cash provided by (used in)
operating activities for the nine months ended September 30, 2012 and 2011 (in
thousands):
Nine Months Ended September 30,
2012 2011 Change
Net income (loss) $ (16,351 ) $ (10,753 ) $ (5,598 )
Non-cash (1) 15,173 6,471 8,702
Subtotal (1,178 ) (4,282 ) 3,104
AR, AP and Other (2,569 ) 2,091 (4,660 )
Net cash (used in) provided by operations $ (3,747 ) $
(2,191 ) $ (1,556 )
(1) Includes depreciation, amortization, change in fair value of warrant
liability, asset impairment, non-cash expense related to stock-based
compensation and provision for doubtful accounts.
Net cash used in investing activities was $2.6 million for the nine months ended
September 30, 2012, and consisted of $2.6 million of capital expenditures,
primarily related to website development costs. Net cash used in financing
activities was $356,000 for the nine months ended September 30, 2012, and
consisted of a repayment on the Square 1 Bank line of credit of $1.4 million,
partially offset by a draw on the line of credit of $1.0 million.
Net cash used in investing activities was $19.9 million for the nine months
ended September 30, 2011, and consisted of $3.1 million for capital
expenditures, $16.0 million acquisition related cost and $0.8 million for
purchases of customer-related intangible assets. Net cash provided by financing
activities was $19.1 million for the nine months ended September 30, 2011,
primarily consisted of $18.2 million from a public offering of the Company's
common stock, $8.0 million drawn on the our new revolving credit facility with
Square 1 Bank, partially offset by the repayment of the $7.0 million outstanding
balance of the revolving credit facility with SVB.
During the second half of 2011, and continuing through the third quarter 2012,
we were able to reduce our operating losses (excluding impairment charges)
through the restructuring of agreements with current partners, entering into
agreements with new partners and continued efforts to optimize monetization on
our O&O and Network properties. These changes resulted in a significant
improvement in monetization compared to the prior quarters. Part of the
improvement related to a new significant ad partner which was effective
August 1, 2011. We have been able to increase traffic to our O&O and Network
sites resulting in record traffic for the past twelve months. During October
2012, our largest traffic partner made changes to their policies and guidelines.
We expect that these changes will have a negative impact on our revenues and
results of operations for the fourth quarter 2012. Although we have increased
investments in recently acquired businesses, much of the investment became
discretionary marketing spend beginning in the second quarter of 2012, and is
accordingly now controlled based on available working capital. On October 19,
2012, we sold the Rovion business for $3.9 million. Of the $3.9 million sales
price, we received $3.5 million in cash on the date of sale, while the remaining
balance will be held in escrow for eighteen months and released based on the
terms as stipulated in the sales agreement. The additional cash and the cost
savings from the sale of Rovion should have a positive impact on our cash flow
and liquidity in the fourth quarter of 2012.
27--------------------------------------------------------------------------------
Table of Contents
Management believes that based upon projected operating needs, cash from
operations and investing activities and availability on our revolving credit
facility will be sufficient to fund our operations for at least the next 12
months. However, we continue to evaluate our operating plan and manage our cost
in line with estimated revenues, including contingencies for further cost
reductions if projected revenue and improvements in operating results are not
fully realized. Furthermore, if the projections and assumptions used by
management to form its opinion prove incorrect, then we may require additional
capital to fund our operations over the next 12 months. Management cannot
provide assurances that, if required, any additional equity or debt arrangements
will be available to us in the future or that the required capital would be
available on terms acceptable to us, if at all, or that any such activity would
not be dilutive to our stockholders.
Shelf Registration Statement
On January 14, 2011, we filed a new shelf registration statement with the
Securities and Exchange Commission pursuant to which we registered 8,000,000
shares of our common stock. On March 23, 2011, we filed an amendment to the new
shelf registration statement with an effective date of April 12, 2011. The new
shelf registration statement is set to expire in April 2014. We may periodically
offer all or a portion of the shares of common stock registered on the new shelf
registration statement, when it becomes effective, at prices and on terms to be
announced when and if the shares of common stock are so offered. The specifics
of any future offerings, along with the use of proceeds of any common stock
offered, will be described in detail in a prospectus supplement, or other
offering materials, at the time of the offering. Our ability to sell our common
stock, including on terms and at prices that are acceptable to the Company, is
subject to market conditions and other factors, such as contractual commitments
of our previously issued warrants.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to our investors.
28
--------------------------------------------------------------------------------
Table of Contents
[ Back To TMCnet.com's Homepage ]
|
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
