financial analysis reach local

7/31/2019 Financial Analysis Reach Local

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ReachLocal Inc. NASDAQ:RLOC

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CONFIDENTIAL - DO NOT DISSEMINATE. This Financial Analysis contains confidential and is shared onlywith the understanding that you will not share its contents or ideas with third parties without theexpress written consent.

Overview

ReachLocal, Inc. provides a suite of online marketing and reporting solutions, includingsearch engine marketing, display advertising, remarketing, and online marketing analytics for thesmall and medium sized business markets. The company provides online advertising solutionsthrough search engine marketing product, ReachSearch; display advertising products,ReachDisplay; and remarketing product and campaign performance tracking product, TotalTrack. Itdelivers its solutions through a combination of its proprietary RL Platform and direct sales force,and select third-party agencies and resellers. ReachLocal was founded in 2003 and is based inWoodland Hills, California.

21700 Oxnard Street Suite 1600,WOODLAND HILLS, CA 91367United States - Map+1-818-2740260 (Phone)+1-302-6365454 (Fax)

Analysis & Recommendation

I have done a Vertical Analysis on Reach Locals financials, mainly due to its recent IPO andAnnual Statement available for one year. Our analysis of Reach local is based on the analysis offollowing factors -

Current Market Snap-shot

Competition Review

Financial Ratio Analysis Liquidity

Financial Ratio Analysis Profitability

Financial Ratio Analysis Solvency

Financial Ratio Analysis Market Indicators & Growth

Recommendation about the business

Current Market Snap-shotReachLocal announced on May 19, 2010 the initial public offering of 4,166,667 shares

of its common stock at a price of $13.00 per share. With this in mind we have limited data toretrospect the past performance. However, the current snapshot of market is :

$7.59We project that RLOC will perform in line with the market over thenext 6 to 12 months. This projection is based on our analysis of threekey factors that influence common stock performance: earnings

strength, relative valuation, and recent price movement.

Price as of 3/13/2012 52-Week Range Market Capitalization Industry

$7.59 $6.18 - $25.51 $223.1 Million Advertising


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General Stock Trend( http://www.google.com/finance?q=NASDAQ%3ARLOC&hl=en)

Stock Price is down 56.4% in the past yearRLOC $7.70 (blue)

03/13/20121 Year Price Change of -56.4% VERY NEGATIVE

1 Quarter Price Change of -5.2% VERY POSITIVE1 Month Price Change of -16.9% VERY POSITIVE

Price Movement is POSITIVEReachLocal Inc.'s stock price is down 56.4% in the last 12 months, down 5.2% in thepast quarter and down 16.9% in the past month. This historical performance shouldlead to above averageprice performance in the next one to three months.Historical price action of a company's stock is an especially helpful measure used toidentify intermediate and short term performance potential. Long term historical

performance is a good predictor of future price performance, but much more importantly,

large price movements over the intermediate and short term tend to reverse themselves.Ford's price momentum measure integrates historical long, intermediate and short term

price changes, creating ratings that are highest for stocks with strong twelve month price

performance that have had a price consolidation in the past quarter and month.


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Competitor Analysis

A snap-shot of some close competitors and their market share is shown below:

Ticker Company Price ($) Market Cap

(Billions)

One year Price

change ($)

RLOC ReachLocal Inc. 7.59 $0.23 -56.4

CTCT Constant Contact Inc. 29.82 $0.90 -2.5

DGIT Digital Generation Inc. 10.63 $0.29 -67.9

MDCA MDC Partners Inc. 13.2 $0.40 -29.3

The market for local online advertising solutions is intensely competitive and rapidly changing, and with the

introduction of new technologies and market entrants, we expect competition to intensify in the future for ReachLocal. Many of the current and potential competitors of Reach Local enjoy substantial competitive advantages, suchas greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater

financial, technical and other resources. In addition, many current and potential competitors have establishedmarketing relationships and access to larger customer bases.

Competitor Categories for Reach local are :

Traditional, Offline Media Companies. Reach Local competes with traditional yellow page and newspapercompanies with large, direct sales forces. While these traditional media companies have made investments to

address the migration of advertising expenditures away from their existing print products, we believe that they facethe prospect of cannibalizing their existing higher margin products that they own and the challenge of re-training

and restructuring their sales forces, most of whom have only sold print products and many of whom still receive themajority of their income from selling those products. They compete with these companies on the basis of the

strength and breadth of our technology platform and product offering and our focus exclusively on Internetadvertising.

Other SMB Marketing Providers. Reach Local also compete with technology companies providing online

marketing platforms focused on the SMB market, as well as new market entrants, such as Groupon andLivingSocial, which are actively focused on new forms of online marketing solutions for SMBs and buildingsignificant direct sales forces. We compete with these companies based on our scale, technological platform, breadth

of product suite, size and geographic scope of our IMCs and established publisher relationships.

Internet Marketing Providers. Reach Local also competes with large Internet marketing providers such asGoogle, Yahoo and Microsoft. These providers typically offer their products and services through disparate, online-

only, self-service platforms. They (Reach Local) compete with these companies on the basis of their sales-force,product offerings and publisher-agnostic services to our clients. Although they compete against the self-service

offerings of these large providers, they also have business relationships with them and they believe they are animportant customer for their locally-targeted search inventory.


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FINANCIAL RATIO ANALYSIS - LIQUIDITY

ReachLocal Inc.'s Current Ratio is 1.4, Accounts Receivable Turn Over Ratio is 89.42and Ratio of Cash from operating activities to Current liabilities is 0.264.

Liquidity Analysis, using the above ratios measures, the companys ability to pay its currentcosts. Reviewing the current ratio we see that Reach Local is capable of paying its currentliabilities with its current assets. A ratio of 1.4 indicates that even after paying for thecurrent liabilities, the company can function. This is a positive indication for any potential

buyer. Reviewing the Accounts receivable turnover ratio we see that they are able to get areturn on their accounts in less than a week. Further, reviewing the ratio of cash fromOperations to current liabilities, which references that only cash generated from operatingactivities is used to pay current liabilities, shows a low value, indicating there might be apotential issue. This is a negative indication for a potential buyer. Overall we rate theliquidity rating to be 3 out 5

1 2 3 4 5Liquidity

weak Strong

2010Current Ratio Total Current Assets/ Total Current

Liabilities

93785/66891

1.402057078

Accounts Receivable Turn

Over Ratio

Net Credit Sales/ Avg. Net Accounts

Receivable

291689/(3295+3229)/2

89.4202943

Cash from Operations to

Current Liabilities

Net cash from Operating Activities /

Average current liabilities

17675/66891

0.264235846


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FINANCIAL RATIO ANALYSIS - PROFITABILITY

2010

Profit Margin Ratio Net Income / Net Sales (-11,147)/291,689

-0.03821536

Gross Profit Margin Ratio (Net Sales - Cost of Goods)/Net Sales (291,689 - 159,019)/(291,689)

0.454833744

Return on Assets Net Income / Average Total Assets (-11147)/(150,580 + 97,887)/2

-0.089726201

Asset Turn Over Ratio Net Sales/Average Total Assets (291,689)/(150,580 + 97,887)/2

2.348

ReachLocal Inc.'s Profit Margin Ratio is -3.8%, Gross Profit Margin Ratio is 45.4%,Return on Assets Ratio is -9% and Asset Turn Over Ratio is 2.348.

Profitability Analysis, using the above ratios measures, the operating or incomeperformance of the company. These ratios measure how well is the company performing toits goals. Reviewing the profit margin ratio we see that Reach Local is making a loss per

each dollar of sales. Although the loss is low, this is something a potential buyer mightconsider negative. Gross Profit ratio, which is an industry standard to measure profitability,shows a 45%, indicating that 45% of its sales is gross profit. Analyzing other ratios alongwith ones detailed above we feel the profitability is 2.5/5.

1 2 3 4 5Profitability

weak Strong


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FINANCIAL RATIO ANALYSIS - SOLVENCY

2010Debt-To-Equity Ratio Total Liability / Total Shareholder's Equity 68564/82,016

0.83597303

ReachLocal Inc.'s Debt-To-Equity ratio is 0.83

Solvency Analysis, using the above ratio measures, the companys ability to meet its longterm obligations, such as long-term debt, and to survive over a longer period of time. Thisratio has helped us to compare the amount of long term debt the company has with theamount the owners have invested in the company. While. a 100% debt to equity ratio (halfdebt and half equity) is quite common. Reach locals 83% debt to equity ratio indicates ithas less debt and more share holders equity. We would rate the solvency to be a 3 out of 5.

1 2 3 4 5Solvency

weak Strong


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MARKET INDICATOR RATIOS & GROWTH

P/E Ratio Market Price Per Share/ Earnings Per

share

7.7/(-0.56)

-13.75

Dividend Yield Ratio Dividend Per Share/ Market Price per

share

Not Applicable since no

dividends offered.

Revenue or Net Sales 291,689 (in thousands)

Net Income (or Loss) -11,147 (in thousands)

ReachLocal Inc.'s P/E ratio is -13.75

P/E ratio indicates a companys future earning potential. A high P/E Ratio indicates that thecompany has the potential for significant growth. For Reach Local, this ratio indicates a 14cents loss in market price per 1$ of earnings, this ratio being negative, should be a concernfor potential buyers. Further, the above information is based on the 2010 FinancialStatements from the Annual Report, however, we have also reviewed the recent quarterEPS indicators are also reviewed by us to do justice. Based on our analysis the

1 2 3 4 5Growth

weak Strong


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Recommendations:

We did a financial ratio, competitor and current market stock analysis for ReachLocal Inc. The goal of this analysis is to create an accurate picture of the current state ofReach local and analyze if Reach Local will be a viable purchase for the company.

To create this report we primarily looked at the Annual report/10K statementposted on the reach local website, stock analyst reports from Ford and State StreetFinancials. We also reviewed the market in the domain reach local is in. Some of thefindings are :

Although many companies are in advertising and media space, Reach Localhas unique offerings which surpass some of the offerings provided even bythe huge media companies. The products of reach local e.g. ReachCast, Local

Branding help, makes the company stand out. Many internet companies have local offerings, however ReachLocals edge by

including the publishers and marketers makes it self more inclined to standout and understand the Small Business Local customers.

Financial analysis detailed by us on areas of Liquidity, Profitability, Solvencyand Growth together show a low combined score. This might be due to thenew market of local business which Reach Local is trying to capture.

Competitor analysis was very complex for reach local, mainly due to itsunique offering. However we analyze four competitors that we thought wereclosest to the business. However, the analysis did indicate that reach localstill has room to grow.

A careful review of the stock price shows a recent improvement, indicatingthe company is starting to get the new market.

Based on all these, we would recommend that Reach-Local with its current market price of$7.70 is a Good buy. The company has huge potential and we can get to penetrate a verynew local market using their niche and lead.


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References :

http://investors.reachlocal.com/secfiling.cfm?filingID=1193125-11-79852&CIK=1297336

http://www.fordequity.com/

http://www.statestreet.com/


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CONFIDENTIAL - DO NOT DISSEMINATE. This financial Analysis contains confidential and is shared only with thenderstanding that you will not share its contents or ideas with third parties without the express written consent.

Appendix:

REACHLOCAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

December 31,2010 2009

Assets

Current assets:Cash and cash equivalents $ 79,906 $ 35,37Short-term investments 8,208 8,03

Accounts receivable, net of allowance for doubtful accounts of $373 and $142 at December 31, 2010and 2009, respectively 3,295 3,22

Prepaid expenses and other current assets 2,376 1,59

Total current assets 93,785 48,23

Property and equipment, net 6,710 4,90Capitalized software development costs, net 10,803 5,09Restricted certificates of deposit 801 1,13ntangible assets, net 2,963 2,06

Other assets 1,400 96Deferred offering costs 3,09Goodwill 34,118 32,38

Total assets $ 150,580 $ 97,88

Liabilities and Stockholders Equity

Current Liabilities:Accounts payable $ 27,471 $ 21,49Accrued expenses 14,234 10,34Deferred payment obligations 530 5,95Deferred revenue and other current liabilities 24,656 17,15

Total current liabilities 66,891 54,94Deferred rent and other liabilities 1,673 82

Total liabilities 68,564 55,76

Commitments and contingencies (Note 7)

tockholders Equity:Convertible preferred stock, Series A, $0.0002 par value0 and 1,221 shares authorized, issued and

outstanding at December 31, 2010 and 2009, respectively Convertible preferred stock, Series B-1, $0.0002 par value0 and 3,615 shares authorized, issued and

outstanding at December 31, 2010 and 2009, respectively Convertible preferred stock, Series B-2, $0.0002 par value0 and 5,272 shares authorized, issued and


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outstanding at December 31, 2010 and 2009, respectivelyConvertible preferred stock, Series C, $0.0002 par value0 and 371 shares authorized, issued and

outstanding at December 31, 2010 and 2009, respectively Convertible preferred stock, Series D, $0.0002 par value0 and 5,974 shares authorized, issued and

outstanding at December 31, 2010 and 2009, respectively Common stock, $0.00001 and $0.0002 par value140,000 shares authorized; 28,165 and 6,932 shares

issued and outstanding at December 31, 2010 and 2009, respectively

Receivable from stockholder (87) (9Additional paid-in capital 98,140 47,24Accumulated deficit (16,044) (4,89Accumulated other comprehensive income (loss) 7 (13

Total stockholders equity 82,016 42,11

Total liabilities and stockholders equity $ 150,580 $ 97,88

See notes to consolidated financial statements.

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able of Contents

REACHLOCAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Year Ended December 31,2010 2009 2008

Revenue $ 291,689 $ 203,117 $ 146,68Cost of revenue 159,019 112,218 77,49Operating expenses:

Selling and marketing 110,024 76,175 61,05

Product and technology 11,239 5,167 2,93General and administrative 23,695 15,534 12,12

Total operating expenses 144,958 96,876 76,12

Loss from operations (12,288) (5,977) (6,92Gain on acquisition of ReachLocal Australia 16,223 Equity in losses of ReachLocal Australia (81Other income (expense), net 601 (7) 88

ncome (loss) before provision (benefit) for income taxes (11,687) 10,239 (6,85Provision (benefit) for income taxes (540) 217 14

Net income (loss) (11,147) 10,022 (6,99Undistributed income attributable to preferred stockholders 8,638

Net income (loss) available to common stockholders $ (11,147) $ 1,384 $ (6,99

Net income (loss) per share available to common stockholders:Basic $ (0.56) $ 0.22 $ (1.2

Diluted $ (0.56) $ 0.18 $ (1.2

Weighted average common shares used in computation of net income (loss) per shareavailable to common stockholders:

Basic 19,867 6,283 5,67

Diluted 19,867 7,901 5,67The following earnings per share information is presented as if all preferred shares

were converted into common stock as of the beginning of the period presented. Pro forma net income (loss) per share, as if converted:

Basic $ (0.42) $ 0.44 $ (0.3

Diluted $ (0.42) $ 0.41 $ (0.3


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Pro forma weighted average common shares used in computation of net income (loss) pershare, as if converted:

Basic 26,286 22,995 22,38Diluted 26,286 24,613 22,38



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REACHLOCAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended December 31,2010 2009 2008

Cash flow from operating activities:

Net income (loss) $ (11,147) $ 10,022 $ (6,99Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization 6,704 3,348 1,85Stock-based compensation, net 5,768 2,961 1,81Provision for doubtful accounts 252 12 21Provision for deferred income taxes (702) Interest and foreign currency gain on payment obligations, net (102)

Equity in losses of ReachLocal Australia 81Write-off of stockholder loan 227 Gain on purchase of ReachLocal Australia (16,223) Changes in operating assets and liabilities:

Accounts receivable (171) 49 (82Prepaid expenses and other current assets (778) (598) (7Other assets (430) (105) (60Accounts payable and accrued expenses 10,301 8,382 10,79Deferred revenue, rent and other liabilities 7,980 6,233 5,08

Net cash provided by operating activities 17,675 14,308 12,06

Cash flow from investing activities:Additions to property, equipment and software (9,929) (5,593) (5,15

Purchase of ReachLocal Australia, net of acquired cash (5,853) (3,083) Purchase of SMB:LIVE, net of acquired cash (2,759) Cash contributed to ReachLocal Australia (81Purchases of restricted certificates of deposit (204) (456) (6Proceeds from maturity of certificates of deposit 589 Purchases of short-term investments (171) (7,730) (15Proceeds from sale of short-term investments 23,35

Net cash provided by (used in) investing activities (18,327) (16,862) 17,16

Cash flow from financing activities:Proceeds from exercise of stock options 1,068 54 1Proceeds from initial public offering 47,649 Proceeds from issuance of common stock 1,31

Deferred offering costs (4,620) (1,033) Net cash provided by (used in) financing activities 44,097 (979) 1,32

Effect of exchange rate changes on cash 1,082 92 (13

Net change in cash and cash equivalents 44,527 (3,441) 30,41Cash and cash equivalentsbeginning of period 35,379 38,820 8,40

Cash and cash equivalentsend of period $ 79,906 $ 35,379 $ 38,82


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upplemental disclosure of other cash flow information:Cash paid for interest $ 184 $ $

Cash paid for income taxes $ 214 $ 277 $ 21

upplemental disclosure of non-cash investing and financing activities:Capitalized software development costs resulting from stock-based compensation and

deferred payment obligations $ 2,461 $ 292 $ 9

Accrued offering costs $ $ 2,066 $

Accrued purchases of fixed assets $ 149 $ 212 $

Deferred payment obligation $ 530 $ 5,955 $


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financial analysis reach local

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