Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
LOCM > SEC Filings for LOCM > Form 10-K on 2-Apr-2013All Recent SEC Filings

Show all filings for LOCAL CORP

Form 10-K for LOCAL CORP


2-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Report. In addition to current and historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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," "intend," "expect," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," or "continue," the negative of such terms, or other comparable terminology. These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part 1, Item 1A. "Risk Factors" of this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Annual Report on Form 10-K to reflect actual results or future events or circumstances.

Overview

We are a local media advertising company that connects brick-and-mortar businesses with over a million online and mobile consumers each day using a variety of digital marketing products.

Our Consumer Properties business unit consists of our O&O and Network division and reaches over 30 million monthly unique visitors. O&O consists primarily of our flagship property, Local.com. Network operates a leading private label local syndication network of over 1,200 U.S. regional media websites; our own organic feed of local businesses plus third-party advertising feeds, both of which are focused primarily on local consumers to a distribution network of hundreds of websites; and our network of owned and third party websites that display our own and third party display advertisements. Our Business Solutions business unit sells and supports products directly to small businesses. These products include our Spreebird daily deals products, our Launch by Local product suite and our LocalPremium direct listing products. We use patented and proprietary search technologies and systems to provide consumers with relevant search results for local businesses, products and services. By providing our users and those of our network partners with robust, current, local information about businesses and other offerings in their local area, we have attracted an audience of users that our direct advertisers and advertising partners desire to reach.

We launched Local.com in August of 2005 and our local syndication network in July 2007. In the third quarter of 2010, we also acquired Octane360 which provided the technology platform for our Launch by Local product suite. During the second quarter of 2011, we acquired Krillion which includes a robust local product search platform that enables consumers to search for products and product availability at local retailers. In the third quarter of 2011, we acquired SMG, a daily deals business, as part of our efforts to expand our own daily deals business, Spreebird (located at www.spreebird.com), which we had launched in May 2011. We have been regularly developing and deploying new features and functionality to each of these channels designed to enhance


Table of Contents

the experience of our users and increase the value of our audience to our advertisers. With a strategic focus on three key drivers for our business - traffic, technology and advertisers - we believe we can improve our bottom-line results by increasing our margin on our largest business, O&O, and growing our most profitable business, the Network.

2012 Corporate Highlights

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 between us 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 our 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, for $3.9 million, of which approximately $3.5 million was received in cash with the remainder placed in escrow to be settled within 18 months. We recognized a gain on sale of the Rovion business of approximately $1.5 million included in net income (loss) from discontinued operations in the accompanying consolidated statements of operations. The financial information in management's discussion and analysis has been updated to reflect the Rovion business as discontinued operations.

At June 30, 2012, we performed an impairment valuation of goodwill as it related 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 impairment charges 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 the remainder of the LEC billing ceased 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. As of December 31, 2012, assets related to the LEC-billed subscriber bases have been fully amortized. We also recorded an additional reserve for the long term LEC receivables of approximately $1.4 million and reclassified the receivable to long term receivables.


Table of Contents

On November 1, 2012, we entered into a new Yahoo! Publisher Network Agreement with Yahoo, which provides for the distribution of Yahoo's paid search results by us for which we are compensated a 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.

During the annual impairment review of goodwill performed on December 31, 2012, we identified and recorded an additional impairment charge of $4.1 million relating to the Spreebird business unit. This was the result of further declines in the market capitalization of comparable public companies together with lower than expected financial performance, mainly brought on by our decision due to shift our strategy away from direct sales to small and medium sized businesses in favor of channel sales opportunities.

Outlook for Our Business

According to BIA/Kelsey, the U.S. online advertising market is an approximately $42 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 such as entering "florists in Irvine, CA." According to a September 2012 study, BIA/Kelsey estimates that the local search market in the United States will grow from $6.1 billion in 2011, to $13.4 billion by 2016. 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.

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. For example, Facebook recently announced a Graph Search tool which allows users to access the interests and opinions of friends regarding local places, movies and interests and which may emerge as a significant competitor to our current offerings.

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 who 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 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.


Table of Contents

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, 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, 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 Local.com website and Network 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 year ended December 31, 2012, approximately 60% of our overall traffic was purchased from other search engine websites. During the year ended December 31, 2012, advertising costs to drive consumers to our Local.com website were $57.3 million of which $39.7 million and $15.4 million was attributable to Google and Yahoo, respectively. During the year ended December 31, 2011, approximately 66% of our overall traffic was purchased from other search engine websites. During the year ended December 31, 2011, advertising costs to drive consumers to our Local.com website were $37.4 million of which $25.6 million and $9.3 million was attributable to Google and Yahoo, respectively. During the year ended December 31, 2010, advertising costs to drive consumers to the Local.com website were $30.8 million of which $22.5 million and $5.3 million was paid to Google and Yahoo, respectively. If we are unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will likely suffer materially.


Table of Contents

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.

Results of Operations

The following table sets forth our historical operating results as a percentage of revenue for the years ended December 31, 2012, 2011 and 2010:

                                                              Year ended December 31,
                                                      2012           2011(1)          2010(1)
Revenue                                                100.0 %          100.0 %          100.0 %

Operating expenses:
Cost of revenues                                        73.3             62.9             55.3
Sales and marketing                                     19.3             26.1             17.1
General and administrative                              12.0             15.5             10.3
Research and development                                 5.2              8.4              6.1
Amortization of intangibles                              4.2              6.6              6.8
Impairment of goodwill and intangible assets            10.8                -                -

Total operating expenses                               124.8            119.5             95.6

Operating income (loss)                                (24.8 )          (19.5 )            4.4
Interest and other income (expense), net                (0.4 )           (0.5 )           (0.3 )
Change in fair value of warrant liability                0.1              3.3              1.1

Income (loss) from continuing operations before
income taxes                                           (25.1 )          (16.7 )            5.1
Provision for income taxes                              (0.1 )           (0.2 )           (0.1 )

Net income (loss) from continuing operations           (25.2 )          (16.9 )            5.0
Income (loss) from discontinued operations (net
of taxes)                                                0.4             (1.7 )              -

Net income (loss)                                      (24.8 )%         (18.6 )%           5.0 %

(1) Prior year balances have been reclassified to conform to current period presentation


Table of Contents

Years ended December 31, 2012 and 2011

Revenue



                                        Year ended December 31,                         Percent
                           2012             (*)             2011             (*)         change
                      (in thousands)                   (in thousands)
 Owned and operated   $        69,241        70.8 %    $        50,736        64.8 %        36.5 %
 Network                       20,926        21.4 %             16,870        21.6 %        24.0 %
 Business solutions             7,606         7.8 %             10,653        13.6 %       -28.6 %

 Total revenue        $        97,773       100.0 %    $        78,259       100.0 %        24.9 %

(*) - Percent of total revenue.

Owned and operated revenue for the year ended December 31, 2012, increased 36.5% compared to the same period in 2011. The increase in revenue for the year ended December 31, 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 $270, for the year ended December 31, 2012, from $248 for the same period in 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 year ended December 31, 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.

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. Due to these changes we have seen a reduction in both traffic and monetization, which had a negative impact on our fourth quarter of fiscal 2012 revenue and results of operations. While we expect to grow our O&O revenue from the fourth quarter of fiscal 2012 run rate, we do expect fiscal 2013 O&O revenue to be lower than 2012. We also expect changes from this advertising partner in June 2013 related to bidding for mobile and desktop advertising campaigns, which may have a negative impact on our traffic and monetization of such traffic. We continue to work closely with this traffic provider to refine our traffic acquisition approach and user experience on our search results pages.

                                                       RKV
                      Year ended December 31, 2011:
                      First quarter                   $ 211
                      Second quarter                  $ 194
                      Third quarter                   $ 254
                      Fourth quarter                  $ 332
                      Full year                       $ 248


Table of Contents
                                                       RKV

                      Year ended December 31, 2012:
                      First quarter                   $ 285
                      Second quarter                  $ 299
                      Third quarter                   $ 276
                      Fourth quarter                  $ 230
                      Full year                       $ 270

Network revenue for the year ended December 31, 2012, increased 24.0% compared to the same periods in 2011. The increase is primarily due to increased traffic to our network partner websites and the increase in 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. A portion of the Network revenue is based on other websites for which we provide our organic and third-party ad feeds. We have experienced volatility in this portion of our Network revenue related to changes in the partners' traffic levels, traffic quality and market conditions for paid search.

Business Solutions revenue for the year ended December 31, 2012, decreased 28.6% 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 the remainder of the LEC billing ceased at the end of November 2012. In January 2013, we made a decision to eliminate our direct sales efforts of our Launch by Local product suit to small and medium size businesses. We will still be providing our SMB solution through our channel partners.

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):

                                                          Year Ended December 31,                    Percent
                                               2012          (*)           2011          (*)          change
Revenue from internal and outsourced sales    $ 3,088         40.6 %     $  3,487         32.7 %        -11.4 %
Revenue from acquired bases                     2,719         35.7 %        6,095         57.2 %        -55.4 %
Spreebird daily deals revenue                   1,799         23.7 %        1,071         10.1 %         68.0 %

Total business solutions revenue              $ 7,606        100.0 %     $ 10,653        100.0 %        -28.6 %

(*) - Percent of total revenue.

Based on the above, total revenue for the year ended December 31, 2012, increased to $97.8 million from $78.3 million for the year ended December 31, 2012, an increase of $19.5 million, or 24.9%.

The following table identifies our major partners that represented greater than 10% of our total revenue in the periods presented (note that we entered into a Google service agreement effective August 1, 2011):

                                            Percentage of
                                            Total Revenue
                                              Year Ended
                                             December 31,
                        Customer           2012        2011
                        Yahoo! Inc.         20.7 %      23.8 %
                        SuperMedia Inc.      1.7 %      22.2 %
                        Google Inc.         44.2 %      17.9 %


. . .
  Add LOCM to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for LOCM - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.