IB Net Payout Yields Model

Local.com Beats Again, Estimates Too Low

Local.com (LOCM) reported another strong quarter last week and again guided to strong growth in 2010. All in all they reported 47% revenue growth in 2009 amazing considering the economic environment and the history of LOCM failures. For Q4, they reported 8% sequential growth and generated $2.8M in cash. All of the reported numbers and guidance handily beat estimates (not that many exist). LOCM has clearly turned the corner to a fast growth, profitable company. Stock is still lagging for a lack of attention as they only had 2 analysts with estimates at that time.

What's interesting now is to look towards the estimates of LOCM. In the past (talked about this on 12/8- Local.com Ups Estimate Again), analysts were highly focused on the GAAP numbers for them. This forced them to view LOCM as a money losing company because of stock based compensation and amortization of intangibles. Contrary to that view, LOCM has been generating strong cash for the last few quarters and reported adjusted income of $.13. Since that 12/8 report, analysts starting reporting LOCM estimates based on the common non-GAAP or adjusted earnings figures used in the tech industry. This changes the view of LOCM and hopefully the multiples. Estimates are now $.48 for 2010 and $.66 for 2011 (or they were until a 3rd analyst posted some GAAP estimates for me 2010 - unbelievable). The original estaimates are already too low as they guided to $.13-.14 in Q1 versus the estimate of $.11. Take into account that LOCM has consistently guided too low for the last 4-5 quarters its very likely that they'll actually report in the $.15 range. Annualized that number to $.60 and that 2011 estimate could be hit in 2010. The more likely 2011 number could be over $.80.

Local.com is very under followed by the Street as they continue to grow and expand without much mention from analysts. A lot of similar sized internet companies such as OpenTable (OPEN) trade at substantial multiples over that of LOCM. In fact, LOCM guided for Q1 numbers that were similar (revenue) to much higher (eps) then what OPEN expects for Q4. Oddly OPEN trades at $26 and LOCM is at $6. Another interesting comparison is the private Yelp! which supposedly had a $700M offer from Mircosoft (MSFT) after turning down a $550M offer from Google (GOOG).

Once people pick up on the growth and earnings potential this stock is likely to go through a quick growth spurt. 20x 2011 earnings would yield a $16 stock compared to the current price of $5.5.

Fourth Quarter Results Highlights:

Revenue – Fourth quarter 2009 revenue of $16.4 million represents a sequential increase of 8% over the third quarter 2009 revenue of $15.1 million.

Adjusted Net Loss – Fourth quarter 2009 Adjusted Net Income was $2.0 million or $0.13 per diluted share, which represents a sequential increase of 49% over third quarter 2009 Adjusted Net Income of $1.3 million or $0.09 per diluted share.

• GAAP Net Income (Loss) – Fourth quarter 2009 net loss was $0.5 million or ($0.03) per share, compared to the third quarter 2009 net loss of $1.4 million or ($0.10) per share. The net loss in Q4 and Q3 2009 includes the recognition of a non-cash charge associated with the revaluation of warrants of $0.6 million or $0.04 per share and $1.2 million or $0.08 per share respectively.

• Cash – On December 31, 2009, the company’s cash balance was $10.1 million. For the full year ended December 31, 2009 the company generated $3.4 in cash from operations, including $2.8 million in Q4 2009.

• Debt – The company drew down $3.0 million of its $10.0 million credit facility to fund the December 30, 2009 acquisition of small business customers.

• Taxes – The company has $46 million in Net Operating Loss carry-forwards and approximately $21 million in deferred tax assets, which are fully reserved against and limited by section 382 of the IRC. The $0.2 million provision for income tax in Q4 2009 is the result of California state legislation postponing the use of corporate net operation loss carry-forwards.

“Although the fourth quarter is seasonally our weakest quarter, we were able to deliver revenue growth, manage costs and boost Adjusted Net Income to $2.0 million, which exceeded our expectations,” said Brenda Agius, chief financial officer. “In fact, of the $3.4 million generated in full year cash flow from operations, $2.8 million was generated during the fourth quarter alone. During the first half of 2010, we will be investing in our people, technology infrastructure and products in order to position the company for continued growth through 2010.”

First Quarter 2010 Financial Guidance:

Revenue - The company expects first quarter 2010 revenue of $17.2 million to $17.5 million.

Adjusted Net Income - Adjusted Net Income for Q1 2010 is expected to be $2.0 million to $2.2 million or between $0.13 to $0.14 per diluted share.


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