No Surprise: ReachLocal Seeking IPO in 2010

This has been hinted at or said all-but-explicitly many times in the past. According to Dow Jones Newswires:

ReachLocal Inc . . . plans to sell up to an estimated $100 million of stock in an initial public offering  . . .

The company said it would use a small amount of the proceeds for a deferred payment on its purchase of the stake in its Australian operations it didn’t already own. The rest will go to general corporate purposes and working capital.

ReachLocal, founded in 2003, saw revenue more than doubled last year. In the first nine months of 2009, it was up 38% to $143.3 million while it swung to an $11.7 million profit.

(Here’s the SEC filing, with lots of info about the company, its finances, executive compensation and its revenues.)

According to the company’s Inc 500 profile:

The nearly $147 million in 2008 revenue put ReachLocal’s growth from 2005 at 3,217 percent. Of the companies on Inc. 500 that were founded in 2004, ReachLocal had the third highest revenue. ReachLocal has experienced over 146,000 percent revenue growth since its 2004 founding year.

A little over a year ago when the company opened its UK office it said it “serves 12,000 local businesses in over 30 markets around the world, including the UK, US, Canada and Australia.”

Reach has consistently said to me that its churn is “much lower” than the 65%+ annualized churn experienced by most of the local SEM channels selling online marketing to SMBs. If we assume that there are 15,000 advertisers/accounts that Reach is managing (my guess), that would mean the annual value of each, on average, is just under $10K.

Anyone want to add anything to this or express their opinion about the prospects for a public ReachLocal?

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From the press release about the forthcoming IPO:

ReachLocal, Inc., a local online marketing company, announced today that it has filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission (SEC) relating to a proposed initial public offering of shares of its common stock. The shares of common stock to be sold in this offering are proposed to be sold by ReachLocal and certain stockholders. The number of shares to be offered and the price range for the offering have not yet been determined.

J.P. Morgan Securities Inc. and BofA Merrill Lynch are acting as joint book-running managers. Citi is acting as lead manager, and Piper Jaffray & Co., Needham & Company, LLC and Broadpoint.Gleacher are acting as co-managers.

8 Responses to “No Surprise: ReachLocal Seeking IPO in 2010”

  1. Kyle Kazak Says:

    ReachLocal will not be the last. These companies grow so fast it is astonishing that there hasn’t been an IPO yet. Looking forward to seeing where it takes them.

  2. Scott Says:

    I struggle with this one. They are essentially an agency business that needs a large sales force. If you subtract out their clients’ spend on goog, yhoo, etc, net revenue was up “only” 19% y/y in 3Q, down from 29% y/y growth in 2Q. Net revenue in 2009 will be somewhere between $80-90m. Let’s say it can be a 20% EBITDA margin business, that would be at best $18m in EBITDA this year. A 10x multiple would be more than generous and that is a maximum $180m valuation. Given it is not profitable now, I don’t think 1x net sales is a terrible multiple. That would make it worth no more than $100m.

    Also keep in mind that I would imagine in order to improve the margin structure, they are likely going to buy businesses that either have owned traffic or technologies to make the sales process more automated. Either way, this is going to dilute future shareholders. I need to look at this a bit more, but at first glance it doesn’t get me all excited.

  3. Greg Sterling Says:

    Yes, Scott . . . I think your analysis is right. It will be challenging. Reach is expecting it can build THE independent sales channel in the market however and that it will be one of the primary beneficiaries of the movement of dollars online that is picking up steam.

  4. Hayden Says:

    Some facts about Reach Local. Their growth came from the rapid expansion of new sales offices and new sales people in 2006-2008. However they are up against the wall for expansion moving forward as they are now in the top DMA’s in the US and pretty much just left with smaller, less profitable markets. They also are experiencing a high churn in their customer base, and in their sales force, which leads to an even higher churn in their customer base. The last thing a customer wants to see is 2-3 new sales reps each year. Reach Local offers 4 month contracts, making their annual revenue projections tricky because the customer has 3 opportunities to opt out in a rolling 12 month period, and they do. The biggest problem Reach Local faces though is the diminishing ROI for their customers on their search product. Reach Local has 100% mark up on media. The 3 categories of customers are local, national and reseller accounts. The national and the reseller account (about 40% of sales) have less of a mark up so the local customers mark up can actually range from 200-300%. Take your local roofing contractor. For core keywords, they would be charged $7-$10 per click by Reach Local. Take the roofing contractor who manages their own Google Adwords, they will pay $2.50- $5.00 for the same keywords giving them more visits and customers for their budget putting the Reach Local customer at a huge disadvantage. More and more Reach is looking for traffic off Google for their customers but still charge the customer premium placement Google prices giving Reach’s customers even less of a ROI…

    Reach Local has a non sustainable model. Buyer beware when it comes to their IPO.

  5. peterson08 Says:

    hi, its very informative, IPO , thanks

  6. Breathalyzer Guy Says:

    As an internet marketer myself I see that local search marketing is about to become significantly more competitve. Many national SEO (search engine optimization) folks are jumping into the local SEO market becasue it is seemingly easier to get a local client ranked on the first page of Google than a more competitve national client.

    This kind of surge iws going to force high margin companies like Reach Local to become much more competitve. If their overhead won’t allow them to price low enough they are doomed.

  7. Puppet SEO Says:

    The key to all of this is to turn these expensive services into products. Training and SEM/SEO management products. This will allow for a proliferation of SEM/SEO skills, which is what is needed.

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