ReachLocal has grown from a small Internet advertising firm in Woodland Hills to a public company with more than a thousand employees. Now the company has its sights set on becoming an international force.
The company already has offices in a handful of mostly English-speaking countries, but plans to accelerate expansion into several new countries thanks to a deal with Google Inc. that expands its search advertising partnership overseas.
Meanwhile, ReachLocal has filed plans with the Securities and Exchange Commission to launch a small secondary offering that could eventually raise money to pay for more international efforts.
The company reported last week that international operations are the fastest growing part of the business, helping it post revenue gains and inch closer to profitability.
ReachLocal sells Internet advertising and marketing services, such as website design, display and search ads, and social networking, to small and medium-size businesses.
International markets could become ReachLocal’s best bet for growth because many businesses abroad haven’t yet launched local online ad campaigns, said James Cakmak, an analyst with Sidoti & Co. in New York.
“When you look at the international markets, they are virtually untapped,” he said. “By entering these nascent markets, ReachLocal has the first-mover advantage.”
ReachLocal has most of its offices in the United States, but has also established a presence in Canada, Australia and the United Kingdom. The company opened an office in Germany, its first non-English-speaking country, in February.
Those international markets were a key factor in the company’s second quarter performance. On Aug. 2, ReachLocal reported second quarter revenue of $92.8 million, up 32 percent from the prior year.
The company is also coming closer to profitability. Its net loss was $949,000, compared with a loss of $2.39 million in the second quarter last year.
International business brought in $20.7 million, more than 22 percent of total revenue. It was also the fastest-growing division within the company, with an 86 percent increase over the same quarter last year.
Zorik Gordon, the company’s chief executive, said ReachLocal’s domestic business was sluggish this quarter because of the weak economy, but international growth was spurred by healthier economies in the company’s markets abroad.
“The economy in North American for small and medium-sized businesses has been a little tight,” he said. “Australia and Germany have a healthier and more robust economic climate.”
Growing overseas
ReachLocal, which has more than 750 consultants working in 54 offices around the world, plans to ramp up its presence abroad by expanding into another European country, yet to be identified, before the end of the year and to its first Asian country, also yet to be identified, during the first quarter of 2012. In the next three years, ReachLocal plans to open offices in a total of eight new countries.
The company can accelerate its expansion thanks to the broadened partnership deal struck with Google in April.
The deal gives ReachLocal the ability to offer Google AdWords advertisements, which appear as part of Google’s search results, to customers in any market. The company’s previous deal with Google extended to only a few international markets.
Every time a business gets a click from an ad on AdWords, the business pays Google and ReachLocal gets a cut of the revenue. Individual AdWords advertisements generate insignificant amounts that eventually add up over time, and increasing the AdWords deal will mean more money for ReachLocal in the long term.
Gordon said the Google partnership will bring cash to the company that will allow it to expand more quickly and without slowing it down on its path to profitability.
“As we’ve gone public, we’ve really balanced growing our revenue with generating profitability,” he said. “Based on that balance, we were probably going to be able to expand into one country a year. The Google deal has some financial benefits to use for some of our expansion.”
ReachLocal’s plans for a secondary offering could also give a boost to the company’s growth abroad.
The company filed July 8 with the SEC to sell 6 million shares – 1 million from the company and 5 million from shareholders – in the offering. The company said it would use proceeds from the sale of its 1 million shares to fund working capital and general corporate expense.
But Gordon said the money could also be used as part of the company’s development in new countries.
“If we wanted to be really aggressive, we could use those proceeds (for expansion),” he said.
The secondary offering also will help ReachLocal’s stock become more liquid, said Sidoti analyst Cakmak, who rates the stock a “buy.” Currently, the company’s shares are concentrated among its initial venture capital investors.
Cakmak doesn’t expect the company to complete its secondary offering until the stock nearly doubles in price to about $30 a share. Shares closed down 6.5 percent Aug. 4 to $16.71.
“At the appropriate price, doing a secondary will help free up shares and open up the stock to a broader group of investors,” Cakmak said. “But not at this price.”
Gordon said the company has no immediate plans to pull the trigger on the secondary offering.
“There is nothing imminent planned at this point,” he said. “It gives us the ability, when we deem fit, to execute on a secondary offering very quickly.”
