Prospectus Summary
PROSPECTUS SUMMARY This summary highlights the information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that may be important to you. For a more complete understanding of the information that you may consider important in making your investment decision, we encourage you to read this entire prospectus. Among the other information in this prospectus, you should carefully consider the information set forth under the heading “Risk Factors” and in our consolidated financial statements and accompanying notes included elsewhere in this prospectus.ReachLocal Overview
Our mission is to help small and medium-sized businesses, or SMBs, acquire, maintain and retain customers via the Internet. We offer a comprehensive suite of online marketing and reporting solutions, including search engine marketing, display advertising, remarketing and online marketing analytics, each targeted to the SMB market. We deliver these solutions to SMBs through a combination of our proprietary RL Platform and our direct, “feet-on-the-street” sales force of Internet Marketing Consultants, or IMCs, and select third-party agencies and resellers.
We use our RL Platform to create advertising campaigns for SMBs to target potential customers in their geographic area, optimize those campaigns in real time and track tangible results. Through a single Internet advertising budget, we enable our clients to reach local customers across all the major search engines and leading general interest and vertically focused online publishers. Based in or near the cities in which our clients operate, our IMCs establish a direct consultative relationship with our clients and, empowered by the RL Platform, work with the clients to achieve their marketing objectives.
At September 30, 2009, we managed 17,600 Active Campaigns across 14,500 Active Advertisers, a substantial majority of which we calculate spend from $500 to $3,000 per month with us. Our clients include SMBs in a number of industry verticals, such as home repair and improvement, automobile sales and repair, medical and health services, legal services and retail and personal services. Since inception, we have delivered to our SMB clients more than 250 million geographically targeted clicks and 20 million phone calls. We employ 525 IMCs in North America, Australia and the United Kingdom and work with over 350 third-party agencies and resellers that use the RL Platform to serve their SMB clients. We intend to expand our IMC sales force both in existing and new markets.
We generate revenue by providing online advertising solutions for our clients through our ReachSearch™, ReachDisplay™, Remarketing, TotalTrack® and other products and services. We reported $146.7 million in revenue in 2008 as compared to $68.4 million in 2007, an increase of 115%, and $143.3 million in revenue in the nine months ended September 30, 2009, a 37.5% increase as compared to the same period in 2008.
Industry Overview
The Local SMB Advertising Market
SMBs serving local markets represent significant economic activity, control substantial purchasing power and address the needs of hundreds of millions of consumers. These SMBs include businesses such as lawyers, physicians, car dealers, dentists, plumbers, florists and local operations of national chains. According to Borrell Associates, there were more than 15 million businesses with less than 50 employees in the United States in 2008, of which more than three million spent an average of $1,200 per month on advertising. Borrell Associates estimates total local advertising spend for U.S. SMBs in 2008 at $60.5 billion.
An SMB’s owner and operator is also typically its chief marketing officer because the business is too small to justify hiring dedicated marketing personnel. Companies that operate traditional offline media formats, such as the yellow pages, newspapers, radio stations and direct mail publishers, adapted to the limited amount of time and effort that SMB owners and operators are normally able to devote to advertising and marketing by developing products, distribution and service delivery models that greatly simplified the marketing process for SMBs. These traditional offline media companies deployed direct local sales forces that walked into the SMB’s place of business for a face-to-face meeting, presented a media package that gave the SMB broad customer reach through a single advertising purchase, assisted in the creation of the media advertisement for the SMB and ultimately asked the SMB to do little more than write a check.
The Digitization of Local Advertising
Over the past decade, the local advertising market for SMBs and other local businesses has undergone rapid and fundamental changes. The delivery and consumption of local advertising, like all media, is becoming increasingly fragmented and digitized. Many consumers who used to search for a local business in the yellow pages are now going online and searching on Google, checking reviews on Yelp and Citysearch and asking their friends for their opinions through Facebook and Twitter. Similarly, many consumers who used to read the newspaper are now accessing the news through news sites, portals and blogs. According to a TMP Directional Marketing and comScore Local Search Usage Study, consumers used online sources for 64% of local business searches, and of these consumers, 46% contacted the business owner over the phone and 37% visited the business’s physical location following their online search. This consumer-led digital transformation has profoundly disrupted the ways that businesses of all sizes need to acquire, maintain and retain their customers.
To keep pace with this transformation, we believe that SMBs need to follow their customers and move an increasing portion of their marketing efforts and spend online. According to Veronis Suhler Stevenson, the amount of money spent on local advertising in the U.S. through traditional media sources, which include yellow pages, newspapers, TV, radio, magazines and out-of-home media as well as their associated online platforms, is forecast to decline from $101.5 billion in 2007 to $73.6 billion in 2011. Over the same period, spend for all local online advertising in the U.S. is projected to grow from $8.7 billion to $15.9 billion, according to Borrell Associates.
The Local Challenge
The growth of local online advertising spend has, however, significantly lagged the increase in online media consumption. According to Forrester Research, 50% of weekly media consumption among U.S. adults is done via the Internet. However, according to Borrell Associates, SMBs spend only 11% of their advertising budgets online. We believe that this lag is the result of two significant challenges:
The ReachLocal Solution
We combine advanced, publisher-agnostic technology and an experienced, digitally sophisticated direct sales force to provide SMBs with a single, easy-to-use and cost-effective solution to acquire, maintain and retain customers using digital media. Our target market is SMBs that spend at least $5,000 per year on advertising.
The Product Solution: the RL Platform
We have built a technology platform that addresses the needs of the SMB and re-creates with online media the simplicity, breadth of customer reach and effectiveness to which SMBs are accustomed with offline media.
Each of our products and services includes, through a single budget, access to multiple publishers, some of which are not available to SMBs, as well as access to our proprietary optimization and tracking technologies that dynamically adjust the publishers to which we allocate clients’ media spend in order to meet their performance objectives. For these reasons, while we rely on third-party publishers for the substantial majority of the media we purchase on behalf of our clients, we are not simply a reseller of media; rather, we market our products and services as a complete package of media optimized for the client using our RL Platform.
Our comprehensive suite of SMB-focused online marketing and reporting products include:
The Distribution Solution: Internet Marketing Consultants
We have built a direct sales force of IMCs that re-creates the way SMBs traditionally purchased offline advertising products and services. Our IMCs sell our products and services directly to our SMB clients through an in-person, consultative sales process. Our IMCs are trained to explain the benefits of a digitally focused marketing strategy to SMB owners and operators who are generally preoccupied with operating and managing their businesses. Our largest operating expense has been our investment in the hiring, training and ongoing support of our IMCs while they develop a portfolio of SMB clients. Our IMC development program divides IMCs into two groups: Underclassmen, which consists of IMCs during their first 12 months of employment; and Upperclassmen, which consists of IMCs with more than 12 months of employment. Increasing the number of our IMCs has been the principal engine for our growth. In particular, our growth is driven by the increase in the number of Upperclassmen, who are significantly more productive than our Underclassmen. Our recruitment, training and performance system is designed with the objective of increasing the number of our Upperclassmen over time and increasing the percentage of Underclassmen who become Upperclassmen.
At September 30, 2009, we employed 438 IMCs in North America and an additional 87 IMCs internationally, of which 208 were Upperclassmen. The principal characteristics of our IMCs include the following:
In addition, we have a separate sales channel targeting national brands with operations in multiple local markets and select third-party agencies and resellers.
We believe that the ReachLocal solution, a combination of technology and human capital, gives our SMB clients access to technology and media that they could not access by themselves, and we show that it works in ways they understand. We allow the SMB to write a single check while we do the rest.
Our Strategy
We believe that we are in the early stages of a large and long-term business opportunity presented by the shift of local marketing budgets from traditional media formats to digital media formats. Our strategy for pursuing this opportunity includes the following key components:
Corporate Information
We were incorporated in the State of Delaware in August 2003. Our principal executive offices are located at 21700 Oxnard Street, Suite 1600, Woodland Hills, California 91367, and our telephone number is (818) 274-0260. We maintain a number of websites, including www.reachlocal.com. The information on, or accessible through, our websites does not constitute part of, and is not incorporated into, this prospectus.
ReachLocal®, ReachSearch, ReachDisplay, TotalTrack, the ReachLocal logo and other trademarks or service marks of ReachLocal appearing in this prospectus are the property of ReachLocal. All other service marks, trademarks and trade names referred to in this prospectus are the property of their respective holders.
Industry Data
Some of the industry and market data contained in this prospectus are based on independent industry publications or other publicly available information, while other information is based on our internal sources. Although we believe that each source is reliable as of its respective date, the information contained in such sources has not been independently verified, and neither the underwriters nor we can assure you as to the accuracy or completeness of this information. As a result, you should be aware that the industry and market industry data contained in this prospectus, and beliefs and estimates based on such data, may not be reliable.
The Offering
The number of shares of common stock to be outstanding after this offering is based on 23,619,661 shares outstanding as of September 30, 2009 and excludes:
Unless otherwise indicated, this prospectus reflects and assumes the following:
Summary Consolidated Financial and Other Data
The following tables summarize financial and other data regarding our business. You should read the following summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
We derived the consolidated statements of operations data for the three years ended December 31, 2006, 2007 and 2008 and the nine months ended September 30, 2009, as well as the consolidated balance sheet data as of September 30, 2009, from our audited consolidated financial statements included elsewhere in this prospectus. We derived the unaudited consolidated statement of operations data for the nine months ended September 30, 2008 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The as-adjusted balance sheet data reflects the balance sheet data at September 30, 2009 as adjusted to reflect our receipt of the net proceeds from the sale by us in this offering of shares of common stock at an assumed public offering price of $ per share, the midpoint of the estimated price range on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions, estimated offering expenses payable by us and payment of our deferred purchase price obligation in connection with the ReachLocal Australia acquisition. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of our management, reflect all adjustments necessary for the fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of results to be expected in any future period.