ReachLocal Seeking Growth Via New Products, International

On last week’s Q2 earnings call, local online marketing firm ReachLocal emphasized how its international expansion will fuel its growth. Plus the company offered a glimpse into its efforts to expand into smaller U.S. markets via telesales.

ReachLocal has long been among the most closely watched companies in the local online/SMB space, and its president, Nathan Hanks, will be among the featured speakers at BIA/Kelsey’s upcoming SMB Digital Marketing conference in Chicago (Sept. 17-19).

ReachLocal’s financial results for the first half show a company that is growing revenue at a fairly strong clip. Total revenue for the first half was $216.2 million, up 22 percent from $176.8 million in 1H 2011. Adjusted EBITDA grew by 64 percent to $10 million, with the EBITDA margin growing from 3.5 percent to 4.6 percent, an improving but still razor thin margin.

ReachLocal is currently operating in eight countries ( Canada, USA, Germany, Netherlands, UK, Japan, Australia and New Zealand), with 64 sales offices. On the earnings call, ReachLocal executives outlines a plan for further expansion via a franchise operations called OxataSMB BV. Over the next two years, this new operation will expand reach into the Czech Republic, Hungary, Poland, Russia and Slovakia. ReachLocal’s stated goal is to hit 40 percent of revenue from international within three years.

The company also discussed its efforts to test inside sales teams to reach down into second and third tier U.S. markets. Reach’s costly direct sales model has limited its expansion. The company has tested the inside sales model in a few markets, producing no material financial results but apparently proving out the model well enough to merit expansion. The company plans to roll out telesales to all U.S. tier II & III markets. According to its investor presentation, ReachLocal has 823 Internet
marketing consultants (IMCs), its term for outside sales rep. The company also works with more than 300 resellers.

The move downmarket via telesales is a potentially significant development, making Reach a competitive challenge in a greater number of U.S. markets. Without reaching more accounts in more places, including lower value accounts not economically served by outside sales, ReachLocal may struggle to continue growing and improve its margins.