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Has Local.com Turned the Corner with Top 10 Search Ranking?

After reporting Q2 numbers that we'll discuss in more detail later, Local.com (LOCM) showed signs of actually starting to turn the corner from a serial disappointing money loser to a fast growing money maker. Then on Sept 14th, Nielsen reported that little $60M market cap Local.com made the Top 10 Search Providers for August. Its hard to tell if this really adds up to much considering they just grew with the market at 2.9% MOM, but the extra attention might just help. Local.com has always had an interesting concept of delivering great local internet searches at an easy to remember website. Unfortunately they've never caught the attention of the mass market and especially advertisers. Making these Top 10 lists might help spur on media attention and with just 0.2% of the market share they've got plenty of room for gaining share not to mention growing with the market.

Table 1: Top 10 Search Providers for August 2009, Ranked by Searches (U.S.)



M-O-M %

Share of

Total 10,812,734 2.9% 100.0%
Google Search 6,986,580 2.6% 64.6%
Yahoo! Search 1,726,060 -4.2% 16.0%
MSN/Windows Live/Bing Search 1,156,415 22.1% 10.7%
AOL Search 333,231 1.8% 3.1%
Ask.com Search 186,270 2.9% 1.7%
My Web Search 128,432 0.5% 1.2%
Comcast Search 50,328 -21.6% 0.5%
Yellow Pages Search 37,923 2.7% 0.4%
NexTag Search 31,830 0.4% 0.3%
Local.com Search 16,314 2.9% 0.2%

Source: Nielsen MegaView Search

Just making the Top 10 alone isn't cause to buy the stock. LOCM has always been high on promise and low on profits. Or make that huge losses with promises of profits just around the corner. Then came the shock of the Q2 earnings report. Low and behold, LOCM actually made a pretty decent Adjusted Net Income of nearly $1M or $0.06 per share. Its a little surprising that most analysts following this company use the GAAP number which was reported at a $.02 loss. This number includes non-cash charges such as amortization of intangibles and stock based compensation. Its very common and appropriate in the tech world to exclude these non cash charges. Now I'm more inclined to include the depreciation charges which best I can tell amount to $160K per quarter. In that case, LOCM still made $800K or a nearly 6% profit margin. If they can continue to grow the search business and increase the RKV (revenue per thousand visitors) as they did in Q2 by 16% QOQ those profits and margins will continue to soar. The Q2 income number was $.14 better then Q1 afterall.

The forecast for Q3 was even more encouraging with estimates of a 5% sequential revenue gain and based on these search rankings for August I'd guess that those gains will be easily surpassed. After being a serial disappointer the last several years, LOCM seems to have finally caught on to the UPOD (under promise, over deliver) concept. They've forecasted a Net Adjusted Income of $1M+ and $0.07+. Being able to exceed these estimates will surely spur the stock much higher.

Right now analysts forecast a $0.02 GAAP loss or equal to the Q2 amount. Every indication is that they'll easily beat that number, but I'm still concerned that the general market for some reason focuses on this number instead of the more important non cash number. LOCM is finally generating enough cash that they actually bought back shares during the first half of this year. Maybe it was only 131K shares for roughly $335K, but it was pretty bold to spend precious cash in such a difficult market.

Using the Non-GAAP numbers which is standard in the industry, LOCM is likely to earn greater then $0.40 in 2010. This number could easily expand if they are able to continue growing the RKV and organic traffic numbers. The organic traffic numbers were up 61% YOY and are very key to profit margins. In the past, LOCM only seemed able to grow based on paid listings where they got traffic from other sites and in many cases had a negative ROI. Continuing to grow these numbers would rapidly expand margins and hence the stock price.

Search leader Google (GOOG) trades at 8x revenue and has long suggested that local search is where future high margin growth exists. If local.com can continue to grow and gain marketshare they could easily expand margins and multiples. Currently trading at just roughly 1x revenue is incredibly low considering their inclusion in the Top 10 rankings. It can sometimes be a fools game with these microcap stocks because a giant like GOOG or Yahoo! (YHOO) can quickly easily target them for extinction so investing in such a stock requires focusing on the results on a daily basis. Its a high risk/high reward scenario not for the faint of heart.

The good news for anybody buying now is that the good news of the last 3-6 months has all but been ignored. LOCM appears to have turned the corner and only trading at 1x revenue with positive cash flow somewhat limits the downside. The Q3 earning report will be very crucial for proving the trend is for real.


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