Rloc Earnings Report

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RLOC - Q1 2012 Reachlocal Inc Earnings Conference Call EVENT DATE/TIME: MAY 01, 2012 / 9:00PM GMT
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MAY 01, 2012 / 9:00PM, RLOC - Q1 2012 Reachlocal Inc Earnings Conference Call
CORPORATE PARTICIPANTS
Alex Wellins The Blueshirt Group Zorik Gordon ReachLocal, Inc. - CEO Michael Kline ReachLocal, Inc. - Chief Strategy Officer, President - Local Commerce Ross Landsbaum ReachLocal, Inc. - CFO
CONFERENCE CALL PARTICIPANTS

Gene Munster Piper Jaffray - Analyst Shelby Taffer JPMorgan - Analyst Kerry Rice Needham & Co. - Analyst George Sutton Craig-Hallum - Analyst Anil Gupta Imperial Capital - Analyst
PRESENTATION
Operator Good afternoon, ladies and gentlemen, and thank you for standing by, and welcome to the ReachLocal First Quarter 2012 Earnings Conference Call. (Operator Instructions) This conference is being recorded today, Tuesday, May 1, 2012. And at this time, I'd like to turn the conference over to Alex Wellins of The Blueshirt Group. Please go ahead, sir.
Alex Wellins - The Blueshirt Group Thank you for joining us on today's call. This call is being broadcast live over the web and can be accessed at the investor relations page of ReachLocal's website at reachlocal.com. With me on today's call are ReachLocal's CEO, Zorik Gordon, Chief Strategy Officer and President of Local Commerce, Michael Kline, and CFO, Ross Landsbaum. During the course of this conference call, management may make projections or other forward-looking statements, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties that could cause actual results to differ significantly from those projected. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this call. A detailed discussion of the material factors that may cause results to differ from the statements we made can be found, for example, in risk factor section of ReachLocal's filings with the SEC, including its annual report on Form 10-K, ReachLocal's updates in its quarterly forms on 10 -- reports on Form 10-Q, and current reports on Form 8-K, including the Form 8-K and attached press release filed today. Certain supplemental financial measures we will use on this call, such as adjusted EBITDA, underclassmen expense, non-GAAP net income, and non-GAAP net income per share are expressed on a non-GAAP basis. In addition, underclassmen expense is a financial measure that we have developed internally.
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It is not directly comparable with any financial measure recognized under GAAP and represents an estimate that requires management's judgment. Definitions and calculations of these financial measures and in cases of adjusted EBITDA and non-GAAP net income, a GAAP to non-GAAP reconciliation can be found in our earnings release. These financial measures are not intended to replace any GAAP financial measure. You should rely primarily on our GAAP results and consider adjusted EBITDA, underclassmen expense, non-GAAP net income, and non-GAAP net income per share only as a supplement to our GAAP results. With that said, I'll turn the call over to Zorik Gordon, ReachLocal's CEO. Zorik?
Zorik Gordon - ReachLocal, Inc. - CEO Thanks, Alex, and I'd like to thank everyone for joining us on today's call. We were very happy to report a strong first quarter of 2012. While we're still cautious regarding a sustained economic recovery, we were pleased to see a strong easing of the macroeconomic conditions we've been witnessing over the last several quarters. Based on this fact and our performance in Q1, we are raising our outlook for the rest of 2012. In Q1, we saw solid growth across all aspects of our business. Revenue in the quarter increased to $104 million, a 24% increase over Q1 of last year. Our international operations continue to post strong gains, up 60%, year over year, to $27.5 million. We also saw solid gains in our NBAR channel, which grew 4.7% over Q4 of 2011. Adjusted EBITDA was $4 million for the quarter, compared to $1.7 million in the year ago period, a 137% increase on a year over year basis. I'd like to start my comments by highlighting several key factors that drove our performance in the quarter. First, we saw clear improvement in the macroeconomic climate in North America. Second, our international initiatives continued their strong performance and are continuing to scale, and third, our [distribution] organization continues grow, and we're seeing increasing productivity levels driven by continued sales optimization efforts. And finally, our best of breed suite of product offerings continued to evolve, improve, and grow. Let's begin with North America, given that it represents the majority of our revenue. I'm pleased to note that the improvement in macroeconomic conditions clearly extended to North America. This is reflected in our strong revenue and metrics performance. In addition, as reported by our [NC], we're seeing a more upbeat tone from our SMB customers. While competition for SMB's wallet share remains high, ReachLocal's scale, our presence in the market, and strong track record of delivering quality results is driving customer growth and expanding budgets. During the quarter, we continued to grow and optimize our North American IMC base. As discussed last quarter, we plan to continue to scale our sales force in our existing North American market as we continue to add new geographies recruited, albeit at a slightly lower level compared to prior years, as we shift more investment toward our faster growing international operations. On our last call, we also discussed our intent to pilot a North American telesales effort, targeting smaller tier 2 and 3 markets. We have, in fact, launched this inside sales team during Q1. While the inside sales team is still small and we only have a quarter's worth of sales data to reference, the preliminary results are good, and the program is meeting our expectations. We believe that, if proven, telesales could be an effective addition to our existing direct local efforts and an efficient way for us to improve our geographic reach into smaller tier 2 and 3 markets globally. We intend to continue the pilot and gather data throughout the second quarter. Moving on to international, we remain excited about our global opportunities, as our international operations continued to perform very well in Q1, with international IMCs continuing to post significantly higher levels of revenue productivity relative to the North American counterparts. ReachLocal is now in 8 countries on 4 continents, and in the quarter, we opened an additional (inaudible) offices, including Tokyo, Japan, Munich, Germany, Calgary, Canada, and [Canberra], Australia. We intend to continue our international expansion and launch in another major country in the second half of 2012. In Q1, 27% of our business came from our international operations. That is up from 21% from the prior year. Given our growth, we believe that we are well on track to hit our previously mentioned target of growing international to 40% of our revenues within the next two to three years.

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Now, turning to some international highlights. In Q1, our German operations marked their one year anniversary, which means we now have graduated our first group of upperclassmen in Germany. I am pleased to report that the early underclassmen and upperclassmen metrics we've seen in Germany are among the highest we've experienced in any market. This fact, combined with the large size of the German SME market, (inaudible) Germany is shaping up to be an extremely productive territory for us, with multiple future expansion opportunities beyond the three cities we're already in. On our last call, we also discussed the launch of our Tokyo office in February. The office is off to a good start, with the first sales already booked and running on the platform in the quarter. Of course, it is still very early, but we are pleased with the start the team has had, and again, given the density of the Tokyo market, as well as size of the Japanese market, we're excited about our growth prospects there. As our force forayed into Asia, this launch will also hopefully set the stage for future expansion across this important region. Moving on to distribution, Michael will report on specific IMC productivity metrics and trends in a moment, but from a highway perspective, we did see strong IMC productivity in the quarter, especially in our upperclassmen ranks. We ended Q1 by growing IMC accounts at 798, with 381 of those IMCs as upperclassmen, a 26% year over year growth rate. We also had strong active advertiser growth and active campaign growth of 17% and 24%, respectively. Our NBAR channel also improved over prior quarters, delivering a solid performance with a 4.7% quarter over quarter growth. We attribute this performance to a combination of stronger advertising demand combined with the effects of the increased sales investments we've been making over the last few quarters. The positive trends we've seen in this segment are another element to our upwardly revised forecast for the year. I will summarize the discussion about distribution by saying that we feel very positive about the health of our IMC force and that we're excited to be building one of the largest digital sales forces globally. We strongly believe that our proprietary feet on the street sales force is both a major asset and a sustainable competitive advantage for ReachLocal around the world. Finally, I'll wrap up by (technical difficulty) our product initiatives. As we've consistently stated, we are executing on a strategy of sustained investment in our core online marketing services product suite of ReachSearch, ReachCast, and ReachDisplay. We are also investing into driving innovation in new product opportunities that have the potential to be transformative for our business. Starting with our core marketing services products, in Q1, ReachSearch was quite strong, a direct result, we believe, of improving SMB advertiser demand and continued desire for performance based advertising by advertisers. Our customers are clearly seeing the value in our best of breed technology, our leading service offerings, and the strong levels of ROI they receive from their campaign. Switching to ReachCast, our social presence product offering. In the first quarter, ReachCast continued to be a stable contributor, and we believe that this product will continue to help diversify revenue mix at margins that are higher than some of our other products. As we also mentioned in our last call, mobile will play a major theme for ReachLocal throughout (technical difficulty). In the quarter, we continued our development on that front and began beta testing some of our early mobile functionalities. We are looking to deploy the first full version of our mobile application in the second half of this year. We strongly believe that the mobile competing phenomenon is quickly disrupting the desktop and will eventually become the primary means by which our customers will interact with the web. Mobile provides us with an exciting way to position ReachLocal closer to our customer and to interact with them in a simpler and more powerful way. As well, it's helping us differentiate ourselves from our competitors at the point of sale. The final area of product focus is around local commerce initiatives. We made good progress on that front in Q1 and are on track to launch the product in 2012. We remain excited about what we are building, and we continue to believe that local commerce presents a very attractive opportunity to extend our platform and product reach.

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To wrap up, by intently focusing on our core business, optimizing our sales force, and continuing [to have] our best in class online marketing products, we delivered a strong Q1. We are very pleased with the quarter, we're raising our outlook and are looking forward to an exciting 2012. I'll now turn the call over to Michael to provide you with an operational update. Michael?
Michael Kline - ReachLocal, Inc. - Chief Strategy Officer, President - Local Commerce Thanks, Zorik. I'll take the next few minutes to review our operational progress and business metrics for the first quarter. We ended Q1 with 30,100 active campaigns and 20,400 active advertisers, which represents an average of almost 1.5 campaigns per advertiser, a new high point in terms of products sold per advertiser. The active campaign and active advertiser metrics are up 24% and 17%, respectively. Turning to our performance by channel, our direct local channel revenues of $81.7 million represent a 27% increase over the prior year quarter. Our sales force of locally based IMCs grew to 798 at the end of Q1, up 8% from the prior year quarter. We ended Q1 2012 with 381 upperclassmen and 417 underclassmen. IMC productivity in Q1 increased to annualized rate of $410,000 per average IMC, up more than 11% from $368,000 a year earlier. We attribute the increase in productivity primarily to the following factors. One is the continued increase in the number of upperclassmen, which increased 26% over the prior year period, as well as the increasing maturity of our upperclassmen. Productivity tends to increase as the tenure of our IMC force increases. The average upperclassman tenure at the end of Q1 reached an all-time high of almost 34 months. Another factor is the increase in the number of campaigns or products sold per active advertiser. In the direct local channel, this increased to more than 1.5 campaigns sold per advertiser in the quarter, which was a new high in the channel. A byproduct of the increased number of products sold per advertiser is higher advertiser retention. On our last call, we mentioned that both as a percent of revenue and as a percent of our total active advertiser base, advertisers more than one year post trial have increased. Advertisers purchasing more than one product from the Company tend to have higher retention rates. An additional factor driving improvements in overall IMC productivity, and one which is at the center of our IMC investment and growth plan, is due to the increase in the number of international IMCs as a percent of our total IMC force. This is due to the higher productivity of our international IMCs. On our last call, we mentioned that we would be focusing on the following initiatives in our direct local channel, and I wanted to provide a brief update on those initiatives. First is our goal of increasing our international footprint. In the first quarter of 2012, we opened an additional four offices outside the United States. This (technical difficulty) global office count to 61 offices, of which 18 are outside of the United States. In the coming quarters, we will be announcing direct entry into additional tier 1 international markets, again, with the target goal of having international represent 40% of our total revenues in the next three years. Second, in North America, we mentioned we were going to divert some of our planned IMC hires to sales productivity enhancement programs. That was successfully launched in 2011, as well as two new programs looking to expand the number of ways we acquire and serve advertisers. To that end, we have started to expand our account manager program, which has proven to be an effect -- to be effective in enabling our upperclassmen to spend more time on new business, driving higher level to revenue growth. We are also complementing our dedicated in office account managers with centralized account managers with more technical campaign management expertise, in order to assist a wider base of IMCs and free them up to focus more on new client acquisition and less on day-to-day account management function. In addition, as Zorik mentioned, we successfully deployed our first class of inside sales IMCs in the quarter. These IMCs are primarily focused on tier 2 and tier 3 markets and are also exclusively focused on new advertiser acquisition. We are teaming those IMCs, from the beginning, with a centralized

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account management support team so that they can focus exclusively on building their book (technical difficulty). While the results are still early, we are pleased with the productivity levels of our first class of inside sales IMCs. Turning to our NBAR channel, our NBAR revenue was $22.3 million, representing 14% growth over last year. The national brand segment of the channel experienced year over year growth rates close to those in our direct local channel, and our agencies and resellers portion of the channel grew in the high single digits, which marked a strong turnaround from prior quarters. As we mentioned in our last call, we have begun reinvesting in the channel by hiring additional sales, business development, and account management personnel, in North America and internationally, in an effort to return to higher levels of growth in that segment. Finally, from a technology standpoint, we are focused on the following key initiatives. First, we continue to invest resources in extending our platform so that it support our rapid international growth plan. As we mentioned previously, we successfully launched our first platform in Asia, with the necessary local language and character support in the quarter. We are now continuing our platform international (technical difficulty) relation efforts, so that it can scale even faster as we need to support additional languages and currencies. Second, we continue to invest resources in diversifying our media offerings. We are currently working on product line extensions to our display and remarketing product offerings and are integrating with new publishers to extend our display network. Third, as our technology platform is not only used to fulfill and optimize our media offerings, but also to support our sales force in many of their day-to-day activities, we are investing in new sales productivity tool, in order to better optimize our advertiser prospecting, acquisition, and management activity. Fourth, as Zorik mentioned, we are integrating mobile into all of our product development efforts. As the percentage of people accessing the internet and performing searches through mobile devices increases, with many forecasting that searches through mobile devices will overtake desktop searches in the next two to three years, we believe that providing leading edge solutions in and around the mobile device will be key to our product differentiation. From mobile optimized search campaigns as part of our research offering to the real-time delivering of leads to our advertisers' mobile devices, we will be focusing our product resources in this area. Last, we are making targeted investments in new product development around extending our core marketing services deeper into lead optimization and conversion, as well as our local commerce initiative, as Zorik mentioned earlier. Thank you. I'll now turn the call over to Ross.
Ross Landsbaum - ReachLocal, Inc. - CFO Thanks, Michael. Let's turn to a discussion of our results for the first quarter ended March 31, 2012. As a reminder, our prior year results present Bizzy as a discontinued operation. We previously published a reconciliation table on our investor relations site to assist you in your analysis. Revenue for the first quarter of 2012 totaled $104 million, up 24% over the first quarter of 2011. While this revenue growth was driven by a number of drivers, as previously highlighted by Michael, we are pleased that we saw our growth supported by a strong balance of active advertiser and active campaign growth, which grew by 17% and 24%, respectively, versus the prior year. Direct local revenue of $81.7 million grew 27% from $64.5 million in the same period last year. As a percentage of total revenue, direct local represented 79% versus 77% in the year ago period. Revenue from the NBAR channel amounted to $22.3 million for the first quarter, a 14% increase over the year ago period. Revenue from the national brands portion of the channel grew 21% versus the prior year period. The agency and reseller portion of the channel grew by 9% versus the prior year period, driven by growth in our international market and improved performance in our domestic market. The growth of this portion of the channel is the result of our renewed investment and resulting client additions in productivity gain. International revenue included above grew to $27.5 million, up 60% compared to the first quarter of last year. Overall, while representing 27% of revenue, our combined international, direct local, and NBAR sales operations delivered 52% of our dollar growth from the year ago period.
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Cost of revenue totals $52.4 million, or 50.4% of revenue, in the first quarter, compared to 52.9% of revenue in the year ago period. This improvement was driven primarily by an increase in vendor rebates, from 1.1% of revenue in the first quarter of 2011 to 4.5% in the first quarter of 2012, in scaling of our operations and service infrastructure, partially offset by the change in our geographic product and service mix. In our emerging international markets, the initial sales focus is in our lead search product, which affects our product and service mix. Sales and marketing expense for the first quarter was $38.5 million, or 37.1% of revenue, as compared to 38.3% of revenue in the first quarter of 2011. Committed to expense as a percent of revenue with 10.7% in the first quarter as compared to 11.3% in 2011, reflecting the continued shift in revenue mix towards direct local and national brand client revenue. Underclassmen expense accounted for $11.1 million of total sales and marketing expense in Q1, an increase of $659,000 over the prior year's quarter, driven by the increased number of underclassmen in our new and established international markets, partially offset by reduced underclassmen expense in North America. Product and technology expenses for the first quarter totaled $4.3 million, or 4.2% of revenue, and our net of $1.7 million of costs capitalized. This compares to $3 million in expenses, or 3.6% of revenue, which was net of $2 million of costs capitalized in the first quarter of 2011. The increase is principally driven by an increase in the cost of product development and amortization of completed projects associated with the RL platform. The decrease in the amount capitalized is the timing of capitalizable versus noncapitalizable projects in the current quarter. General and administrative expenses for the first quarter totaled $9.8 million, or 9.4% of revenue, as compared to 8.4% of revenue in the first quarter of 2011. The increase was primarily due to increased headcount and related costs associated with our expansion, increased facilities costs, significant professional fees associated with SOX compliance and testing work and our accelerated international expansion and increased stock compensation expense. After the provision for taxes, our loss from continuing operations was $1 million, or $0.03 per diluted share, for the quarter versus a loss from continuing operations of $2.7 million, or $0.09 per diluted share, for Q1 2011. The improvement between the periods is principally due to the increased operating performance of the business in the quarter, partially offset by increased noncash depreciation, amortization, and stock-based compensation expenses, including the amounts attributable to our acquisitions. There was no activity from discontinued operations reported in the first quarter of 2012. Therefore, the net loss for the first quarter, including the loss from discontinued operations, was also $1 million, or $0.03 per diluted share, versus a loss of $3.4 million, or $0.12 per diluted share, in the same period last year, which did include a loss in discontinued operations. Non-GAAP net income for the quarter, which is based on continuing operations, was strong at $2 million, or $0.07 per diluted share, versus non-GAAP net income of $300,000, or $0.01 per diluted share, in the year ago quarter. Our operating gains were partially offset by increased appreciation and amortization expense for our -- from our continued expansion and product releases versus the previous quarter. For the quarter, we are reporting adjusted EBITDA of $4 million, or 3.9% of revenue, as compared to the adjusted EBITDA of $1.7 million, or 2% of revenue, in the year ago period. The increase over the prior year reflects continuing operating gains in our established markets, partially offset by the significant investments in existing and new international markets, new sales channels, and continued product innovation, as we discussed on our last call. Net cash from continuing operating activities for the first quarter of 2012 was $13.4 million compared with net cash from continuing operations of $4.6 million for the prior year period, reflecting our operating gains, strong growth in client deferred revenue additions, and the normalization of our rebates receivable from the previous quarter. During the quarter, we repurchased 388,000 shares of our stock, totaling $2.6 million of the $20 million repurchase program. Since the inception of our stock repurchase program, the Company has acquired a total of 1,257,000 for a total of $9.3 million. We ended the first quarter with 28,499,000 shares outstanding. We finished the quarter with cash and cash equivalents and short-term investments totaling $90.8 million.

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We are pleased with our performance for the quarter and are cautiously optimistic regarding the improving North American economy. Our guidance for the upcoming quarter and the remainder of 2012 reflects our continued investment initiative and the appropriate view of macroeconomic risk, new market entry risk, and FX uncertainty, and it is based on our performance to date and the improving economic climate. We are therefore raising our full year 2012 revenue and adjusted EBITDA guidance, which is also reflected in our outlook for the second quarter of 2012, from which we currently expect revenue in the range of $108.7 million to $110.7 million, adjusted EBITDA in the range of $4.3 million to $5.3 million, ending upperclassmen headcount in the range of 390 to 410, ending underclassmen headcount in the range of 420 to 440, and ending total IMC headcount in the range of 810 to 850. Our updated guidance for the year is as follows. Revenue in the range of $439 million to $454 million, adjusted EBITDA in the range of $18 million to $22 million, ending upperclassmen headcount in the range of 420 to 460, ending underclassmen headcount in the range of 390 to 430, and ending total IMC headcount in the range of 810 to 890. With that, let's turn the call over to the operator to start the Q&A. Operator?
QUESTIONS AND ANSWERS

Operator Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions) Gene Munster, Piper Jaffray.
Gene Munster - Piper Jaffray - Analyst Hey, good afternoon and some encouraging results here encouraging guide. A couple questions. Zorik, can you talk a little bit about -- I know you went through some of the international -- the number of offices you have and some of them, [like just] in Tokyo, are just starting to ramp up. But if you could look at it from the perspective of how many offices are kind of at a reasonable run rate versus how many offices are just opening or will be open in the next year. (inaudible) questions.
Zorik Gordon - ReachLocal, Inc. - CEO Sure. So, Gene, it's Zorik. Let me start with that, and Michael will jump in and fill in any additional commentary. Clearly, we've been internationally in Australia, the UK, and Canada for the longest amount of time. For example, our London and our Sydney office would be more or less considered more on the mature side of things. But, actually, even within those markets, there are offices -- for example, we just opened Canberra. We just opened an initial office in Germany this particular quarter. So, on balance, there are some mature markets overseas, but there are a tremendous number of still untapped, very early stage markets. I mean, for example, as we mentioned in the prepared remarks, Germany -- we just graduated our first set of upperclassmen, so that market is still well in its early ramp. There's still markets ramping in the existing UK and Australia offices, as well as The Netherlands. We just launched Tokyo. So, on a whole, there are some offices that are on the mature side, but I would say the international opportunity is still on the very early side of the expansion potential that we have in existing markets as well as, we mentioned in the prepared remarks, there are additional countries and continents, for that matter, that we haven't penetrated or entered as of yet.
Gene Munster - Piper Jaffray - Analyst (inaudible)

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Michael Kline - ReachLocal, Inc. - Chief Strategy Officer, President - Local Commerce Yes. Hi, Gene.
Gene Munster - Piper Jaffray - Analyst Go ahead. Go ahead.
Michael Kline - ReachLocal, Inc. - Chief Strategy Officer, President - Local Commerce Gene, I just -- just a little bit more color. This is Michael. So, I think we mentioned that of our offices, 18 are outside of North America, and I'd say about a third of those are kind of under a year old. So, just to give you kind of a perspective, in terms of the balance. I would say, though, in the two-thirds, where -- that have been open more than a year, while we'd consider those somewhat established, we still have a fair amount of headroom, in terms of still growing the IMC count in those markets. And if you look at the overall international growth, clearly, at 60%, the bulk of our revenue is still coming from our established markets, so that's still a pretty healthy growth rate, even from those established market.
Gene Munster - Piper Jaffray - Analyst Got it. And of that 18, can you remind us of the target you're on? Is that going to be 20 in a year or 25? Any idea of -- or are we kind of that 18 number, and it's just ramping the existing offices?
Zorik Gordon - ReachLocal, Inc. - CEO So, we don't set a specific office target. I mean, I think we are setting some targets in terms of additional countries we want to enter. I think we have kind of a target of between two and four additional countries in the next kind of year or so for kind of specific terms of our Google arrangement. We typically will enter between -- at a minimum of one office, but typically, three to four offices in the country that we do enter and kind of at a typical rate of one, with maybe a max of two new offices per quarter.
Gene Munster - Piper Jaffray - Analyst Okay. And then, I know in the prepared remarks, you guys talked a little bit about the telesales, [in terms] the success you've had there. Is there anything else that you can add, in terms of how many -- can you remind us how many you have or how many you'll add in the future? Any more details on that?
Zorik Gordon - ReachLocal, Inc. - CEO Gene, at this point, it's still a small group. I mean, we tend to be patient, right. We validate things before we scale them out. So we're clearly not at the point of scaling out that initiative, but the validation pilot is a small -- it's a small group of telesales professionals that we have. Again, we think they performed very admirably in the quarter. We're very excited about the potential, if that continues on, but we're not scaling those as of yet. But we'll be looking to potentially make that kind of scale decision sometime in the second half of this year, possibly. So, right now, it's still a validation pilot small group and look to let you guys know as soon as we start to scale that out. But again, there are 100 plus tier 2 and 3 markets that we're in, so at the moment that we do scale that out, I think that we can have a fairly large potential telesales operation. But again, we're not at that point as of yet.

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Gene Munster - Piper Jaffray - Analyst Okay. So you may or may not scale it out. You'll make that decision at some later point.
Zorik Gordon - ReachLocal, Inc. - CEO At this point, we're validating. We're pleased with the initial results, but we're not at the point of scaling it out to where we're on a hiring ramp of any sort at this particular point. But the good news that we want to report back is that the initial results that we're seeing, in terms of the productivity of the telesales operations, has been very promising, and that bodes well for us potentially scaling it out.
Gene Munster - Piper Jaffray - Analyst Okay. Got it. Thank you.
Zorik Gordon - ReachLocal, Inc. - CEO You're welcome.
Operator Thank you. Doug Anmuth, JPMorgan.
Shelby Taffer - JPMorgan - Analyst Hi. It's Shelby Taffer calling in for Doug. Can you comment on the growth of your non search products and the differences in renewal rates amongst the mix of your products? And just secondly, are you seeing any impact to the performance of your search product from Google algorithm and ad quality changes? Thanks.
Zorik Gordon - ReachLocal, Inc. - CEO I'll jump on the first part of it. As Michael mentioned, we had almost 1.5 campaigns per advertiser, so our product mix and our product diversification efforts continue to go in the right direction. Those are mostly, today, around display, around ReachCast, which continues to be stable. So we're happy with those efforts. Clearly, those products have a better margin profile, as we've always talked about in previous calls. So we're happy with our ability to continue add additional products at a higher margin profile. I think that, as we look out, those will stabilize at a particular point, from a retention perspective. Overall, I think we were very pleased with the way all of our products have been retaining. Even going back to last quarter, on a year over year basis, our retention has been strong, as we've seen, and we were pretty clear in our remarks, we've seen that strong improvement in the macroeconomic headwinds that we've had. I think that's both had a primary impact, in terms of new sales of products, especially search, but also, I think it's had a retention impact, as well, as our customer renewals were strong, as well, throughout the quarter. So we're happy with the product diversification mix. And, Mike, you have anything specific to add, in terms of the Google portion of the question, I'll push it over to you.

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Michael Kline - ReachLocal, Inc. - Chief Strategy Officer, President - Local Commerce Sure. I'll take the second half, in terms of the algorithm change. I think, in terms of that, that would probably more affect companies really focused on SEO, as opposed to paid search. We do have a certain component of our ReachCast product that is SEO driven, but haven't really seen a large impact at all, with regard to the algorithm changes. I think, in terms of paid search, right, which wasn't necessarily impacted by those changes, what we did see is just in -- as Google reported, is very interesting transition to a higher percentage of searches coming from mobile devices, and I think that's really helped, in terms of our verticals. If you think -- since the phone call is kind of the currency for a lot of our advertising, in terms of how they measure devices and the fact that more searches are happening on mobile devices, where the phone call is that much closer, we've been able to really drive, more cost effectively, even more phone calls for advertisers. So that's an interesting trend. I think, to kind of pick up on some of Zorik's opening remarks about mobile being really integrated into all aspects of our product development, that's certainly a driver for that decision.
Shelby Taffer - JPMorgan - Analyst Thanks.
Operator Thank you. (Operator Instructions) Kerry Rice, Needham & Company.
Kerry Rice - Needham & Co. - Analyst Thanks. Good quarter, guys. Can you expand at all -- you provided some metrics, I think, related to international productivity of your IMCs last quarter, at least, how high or how that compares to the North American peers. And then, I didn't know if you can break out how many international IMCs you had at this point. And then, I've got a couple follow-up questions.
Zorik Gordon - ReachLocal, Inc. - CEO I think, Michael, if you can address that.
Michael Kline - ReachLocal, Inc. - Chief Strategy Officer, President - Local Commerce Sure, Kerry. This is Michael. Just -- first, in terms of productivity, I know, in the past couple calls, we've kind of talked about the higher productivity levels of our international IMCs. I think, on the last one, we mentioned in the high 80% to low 90% more productive for those IMCs in our first two years' international markets. If we actually look at Q1 of 2012 versus the prior year quarter, that percentage productivity increase remained pretty constant. Matter of fact, it was around 88%, so we're seeing very strong, continued productivity measures from our international IMCs. We don't actually break out international IMCs from our total IMC count. Obviously, they did increase as a percentage of our total IMCs, and that was one of the drivers of overall IMC productivity increases in the quarter.

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Kerry Rice - Needham & Co. - Analyst Okay. And then, I noticed on -- for first quarter guidance, you had kind of guided hiring or the headcount -- ending headcount of about 385 to 405, and you ended up at 417. Was it the macro environment that kind of pushed you guys to hire more, or was there a higher graduation rate -- well, I guess not graduation rate of underclassmen, but hiring? Or was there something else driving the additional hiring of the underclassmen?
Zorik Gordon - ReachLocal, Inc. - CEO Well, I think the metric is -- the ending result was kind of a function of two things. One, slightly higher retention of those under -- existing underclassmen, but second, we actually accelerated a little bit of some of our international hiring into the quarter, kind of the last month of the quarter that, frankly, anticipated in April, so coming into March. So it was really just a little bit of a timing issue there.
Kerry Rice - Needham & Co. - Analyst Okay. And then, one final question. If I think about the growth in North America and, I guess, more about the direct local, would you be able to split out which was the kind of key growers between macro and, I guess, the additional headcount there -- if you could split out which were the -which one of those were the biggest factor of the growth?
Ross Landsbaum - ReachLocal, Inc. - CFO Hey, Kerry. It's Ross. I think if you actually look at it, I would sit back and sit there and say, look, we had continued maturation in North America. There was no doubt that the stabilization of the North American macro environment that we saw in the quarter certainly helps when you have a healthier selling environment, but ultimately, at the end of the day, we had really solid client additions. The number of underclassmen that we added in the quarter is going to have a fairly minimal impact. It was really the upperclassmen productivity, as well as continued incremental product sales into the territory.
Kerry Rice - Needham & Co. - Analyst Okay. Thank you very much.
Operator Thank you. George Sutton, Craig-Hallum.
George Sutton - Craig-Hallum - Analyst Thank you. On that macro piece of the equation -- just curious -- how much of it do you view is better -- just a better selling environment, and how much of it might be just less confusion from the customers that you're calling into, given a little bit of the pullback on the local side?
Zorik Gordon - ReachLocal, Inc. - CEO This is Zorik. I think -- look, we've been doing this business for a while. I think what we saw was a pretty strong reversal of headwind. We've seen it before. I mean, you saw a customer base, an advertiser base that felt better that was more aggressive, and from that, we saw a lot higher advertiser demand. That -- it felt a lot more like that. It was also anecdotally what we heard back from our IMCs. I mean, clearly, the beginning of the year is always a good time for sentiment, and historically, for us as well.

Client Id: 43
But I think specifically, in this quarter, we saw it a little bit. We started to mention on the tail end of Q4. We did really start to see it, and you could actually track consumer confidence in how it's turned since the tail end of Q4, and I think that really translates to our advertiser demand. I think they're feeling more bullish. I think they're feeling more aggressive, and it's a better environment to sell it to, and that's why I think we have the good results, and we feel good about where we are today. That stuff was starting to help us.
George Sutton - Craig-Hallum - Analyst Okay. Great. And then, I'm just curious if you could provide your thoughts, if any, on the Demandforce acquisition by Intuit, in terms of, obviously, healthy valuation, but also, strategic importance or impact.
Zorik Gordon - ReachLocal, Inc. - CEO Very good question. So, Demandforce is a company we're quite familiar with. They were in a, I would say, an -- a tangential space to us, more on the software side. Much more focused on one thing -- that customers really book -- making sure that that customer completed their appointment; making sure that that particular customer was in a [TRM]; that that particular customer lifecycle was maximized. We think that's an interesting space. They've been in that business for quite a while. I think they were really good at it, but it is an area of focus for us. I mean, if you think about where we are, we've really built a tremendous global business on driving a significant number of beliefs to our customers' doors through a combination of search, social, display, all the media products that we offer through the ReachLocal advertising platform. We're spending a lot of time internally and have, over a good amount of time, looking at how we can help our customers maximize and convert those leads, nurture those leads, and then, get those leads coming back to those businesses. So I think it's a good testament that, one, there are other areas outside of [media bind] that have, potentially, extremely high values associated with them. And it is an area that we've given a lot of thought to, and we've actually -- internally, have a few things working in that direction. So it was very good. We're very happy for those guys. They've built a great business, but we think there's a lot of opportunities. And not only going wide with our customers, but actually, now, going deep into taking those leads, converting those leads, and then, getting those leads to potentially come back into that business. And we think those are really exciting areas to expand our business. We always looked at our business as being the sort of BP of marketing in the box. The lead product for customers has always been bring me leads -- I mean, along customers. But as they become more sophisticated, we do see an opportunity emerging where we can help them with those next levels of converting leads, increasing the conversion rates, as well as increasing lifetime customer value. So, it's very good validation and an area we are looking at.
George Sutton - Craig-Hallum - Analyst Okay. Great. Thanks for the perspective.
Operator Thank you. Shyam Patil, Raymond James.

Client Id: 43
Unidentified Participant Hey, guys. This is Nate, calling in for Shyam. Had a couple quick questions for you. First, internationally, can you talk a little bit about the traction that you're seeing with some of your non search products, and how do you see that ramping over time?
Zorik Gordon - ReachLocal, Inc. - CEO I'll take the first part, and then, guys, feel free to jump in. I -- internationally, because of the early stages of those markets, we're still a very, very, very search centric product. We have released ReachCast into Australia, some of -- our most mature international market. We do have some display products available in the UK. But, looking at these early markets, we really do look at it as the US eight years ago, where the big demand is getting these guys into online advertising, and the very best first product to do that with is search. So we have a very high penetration of search, and as you see us begin to have international become a bigger and bigger part of our revenue mix, you'll start to see that concentration of search effect or overall product mix. But we do fundamentally believe that as those markets mature and we gain the foothold, we're in a great position to bring in other products, such as display, ReachCast, chat, and other things that we have in the works and building that full, complete marketing system for those guys.
Unidentified Participant Okay, great. And the second question I had is can you comment a little bit about the SMB macro pressure, internationally versus what you guys have been seeing in the US?
Zorik Gordon - ReachLocal, Inc. - CEO Look -- I mean, we -- again, we're very early. We're first movers in very large markets, so when you're like that -- for example, in Germany and in Japan, you really aren't affected by macroeconomic pressure, because the first mover advantage is the size of the market is so large. In some of our more mature markets, again, we've seen, as you saw in the quarter, very strong growth rates. I know there's talk about potential double dip recessions in Europe. There's concerns in Australia, the China slowdown. We're cautious about it. We haven't seen a tremendous amount of evidence from that, but we clearly are getting to the size in those markets where, if there is massive macroeconomic issues like we had back in '08, I don't think that we would come out unscathed. I don't think anybody would, at this particular point. But, as you saw by our growth in the first quarter -- there were a lot of news stories going out in the first quarter. We were still able to deliver a very, very solid 60% international growth rate. But it is something we're cautious. We're looking at it, and we'll definitely update you guys as the quarters come on, but in the first quarter, it wasn't much of an issue.
Unidentified Participant Okay. Thanks a lot, guys.
Operator Thank you. Anil Gupta, Imperial Capital.

Client Id: 43
Anil Gupta - Imperial Capital - Analyst Hey, guys. Thanks for taking the question. Just wanted to talk a little bit about conversion. It seems like you're generating an increased amount of revenue from your first year, post trial, and long-term customers. And wanted to just get a little bit of color around any sort of improvement, decline, or any change you're seeing, in terms of conversion of the trial -- your trial customers to, I guess, more mature customers and any sort of differences you're seeing between domestic and international conversion.
Zorik Gordon - ReachLocal, Inc. - CEO Michael, you on?
Michael Kline - ReachLocal, Inc. - Chief Strategy Officer, President - Local Commerce Yes, I'll take this one. I'm sorry. Yes, I think -- and as we reported, this is a -- it's typically an annual metric that we report on, in terms of what percent of the revenue comes from different advertiser maturities. And I think there's several drivers there. I think we've seen some very positive returns on our investments in service. We think that -- in addition to the technology, that having dedicated service professionals really does enhance the overall retention of advertisers. I think the second also has to deal with product -- new product introductions. As Ross mentioned, we averaged in the quarter a little bit more than one-and-a-half products sold per advertiser. And it's kind of an obvious thing to say, but those advertisers that purchase more than one product us tend to have much high levels of retention. And so, that as more and more advertisers do get exposed to additional products, that has driven increases in advertiser retention and higher levels of revenue from those more mature advertisers.
Anil Gupta - Imperial Capital - Analyst Okay. Thanks. And just a follow-up. I know you mentioned that the majority of your international customers are primarily ReachSearch oriented, but are you seeing any sort of evidence that there's a discrepancy or a difference between the uptick or the adoption of additional products internationally versus what you saw in the US, if you go back eight, ten years ago?
Zorik Gordon - ReachLocal, Inc. - CEO Well, I mean, it's really hard to say, because we've really only introduced -- I mean, we've only been in the business for a little over eight years. So, in terms of second product mix, probably came out four or five years ago. I think it's still probably too early to tell, because in certain markets, we haven't really released any additional products. But again, I would imagine that history will play itself out pretty similarly. But at this point, we are -- we're still so early in those markets that customers are still coming off of yellow pages. They really -- there's such an amount of nonconsumption, in terms of search spend. Right now, that should be our focus, and when the time is right and as we start to get a larger penetration into customers who are now consuming search, then you begin to work them up and say, you were doing display offline. Well, now it's the time to start doing display. You were doing PR, and you need to be on Facebook, so, clearly, social will come into play. But, for now, it's really just the right time to be selling them search, because that's what they should be buying as their very first [orient] advertising. I foresee that to continue on in many countries for -- for definitely, Germany -- for at least the foreseeable 12 to 24 months.
Anil Gupta - Imperial Capital - Analyst Okay. Thank you.

Client Id: 43
Operator Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation, and you may now disconnect.
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THOMSON REUTERS STREETEVENTS

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CONFERENCE CALL PARTICIPANTS

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QUESTIONS AND ANSWERS

Gene Munster - Piper Jaffray - Analyst (inaudible)

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Gene Munster - Piper Jaffray - Analyst Go ahead. Go ahead.

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Zorik Gordon - ReachLocal, Inc. - CEO You're welcome.

Operator Thank you. Doug Anmuth, JPMorgan.

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Shelby Taffer - JPMorgan - Analyst Thanks.

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Operator Thank you. George Sutton, Craig-Hallum.

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Zorik Gordon - ReachLocal, Inc. - CEO You're welcome.

Operator Thank you. Shyam Patil, Raymond James.

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Unidentified Participant Okay. Thanks a lot, guys.

Operator Thank you. Anil Gupta, Imperial Capital.

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Zorik Gordon - ReachLocal, Inc. - CEO Michael, you on?

Anil Gupta - Imperial Capital - Analyst Okay. Thank you.

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Zorik Gordon - ReachLocal, Inc. - CEO You're welcome.

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