ReachLocal Grabs CEO

ReachLocal Inc. was a pioneer during the early days of online marketing, a one-stop shop where befuddled small businesses could go to get their stores and brand on the Internet. That was in 2003, before the rise of sites such as Yelp and Groupon that are easy to use and allow business owners and customers to connect at low cost. So with losses mounting, the Woodland Hills company is in turnaround mode, and in May hired new Chief Executive Sharon Rowlands, who was most recently head of Altegrity Risk International, a global risk management firm based in New York. But she has a big task ahead of her. Earlier this month, the online marketing services company reported a second-quarter net loss of $10.3 million, compared to a loss of only $141,000 for the same period a year ago. Rowlands believes she can return the company to growth and eventually profitability, but said it will take a while. “I’ve been on this job four months and I’m incredibly excited by the market we operate in,” said Rowlands, 55. “It’s a large market, very fragmented, and the customer has a real need we can satisfy. As we reach 2015, we’re going to deliver the level of performance that our shareholders expect.” The company promotes small- and medium-sized businesses on the Internet by selling a package of services. They include website construction, search engine optimization and advertising, live chat with customers, display ads, a Facebook page, reputation management and mobile apps. At the end of last year, the company had about 23,900 clients globally, providing annual revenue of $514 million. Competitors include small companies that perform one or two of those functions, as well as in-house web gurus who work at the client companies. ReachLocal entered transition mode in October when Zorik Gordon, founder and chief executive, announced his retirement to “pursue other entrepreneurial opportunities.” Chairman David Carlick stepped in as interim leader of the company’s 2,100 employees. Kerry Rice, an analyst at Needham & Co. in San Francisco, said Gordon was the right person to start the company and grow it to $500 million in revenues, but the board realized it required a different skill set to get to the $1 billion level. The board recruited Rowlands, who before Altegrity, had run London financial data firm Thomson Financial for a decade where revenue topped $2 billion. “They wanted someone more operational, and that’s where Sharon fits in,” Rice said. Competitive market ReachLocal’s target customer has 10 to 30 employees and revenue between $1 million and $10 million, according to its annual report. Monthly budgets for typical customers, which include expenditures for ads, range from $1,000 to $4,650, according to the company’s website. Lorrie Thomas, chief executive of consulting firm Web Marketing Therapy in Santa Barbara, said companies such as ReachLocal first developed as the yellow pages were fading and small businesses wanted an online replacement. They promised to give small companies a presence on search engines run by Google Inc. and Yahoo Inc. But Thomas believes the evolution of the web has brought more competition. For example, Google has taken steps to make it easy for businesses to buy Ad Words directly. New services such as Yelp Inc., a review site that allows businesses to tell their history and expertise, appeal to do-it-yourselfers. Groupon Inc. and other coupon sites often work directly with retailers, but don’t require any upfront investment. And Facebook ads are sometimes cheaper and more effective than search engine ads. “Business owners don’t need that attention month-to-month – a lot of them are doing it themselves,” Thomas said. Thomas competes against ReachLocal and similar companies, but also works in conjunction with them on behalf of certain clients. She believes smaller companies such as hers that lack the overhead costs of large offices and dedicated sales staff can provide marketing services for a lower price than large corporate marketers such as ReachLocal. One immediate issue facing Rowlands was the unintended effect of an effort to soup up sales by creating a specialized sales force. Soon after Gordon’s departure, the company changed the organization of its sales staff. Previously, the company’s “consultants” would find small businesses, sign them up and service the account in perpetuity. Under the new system, the sales force is divided into “hunters” and “farmers,” according to the company’s annual report. Sales executives, or hunters, find new clients. Once the clients are on board, they are turned over to account executives, who like farmers grow the business by retaining and upselling the customer. Compensation in terms of commissions and salary are designed to incentivize the proper activity. But the switch has resulted in large turnover, and the loss of productivity and training costs have impacted the company. During the most recent quarter, general and administrative costs totaled $14.5 million, a 46 percent increase from the same quarter last year. Rowlands said the hunter-farmer model meant about 500 people had new job descriptions. Many of them were not prepared or unwilling to change, which resulted in turnover. “We’ve spent the last few months hiring back, and we now have the right number of people, but they are inexperienced,” she said. “We’re putting a lot into training, but that takes time. It will take three to six months to get the sales force to where they can drive performance. It has been a painful process for the company, but by the time we leave 2014 and enter 2015, we will be in a stronger place.” Brand equity Another internal challenge is the fate of ReachEdge, a computer dashboard that allows business owners to monitor their search, Facebook and other Internet marketing campaigns on a single screen. Launched last year, the company called it “our most important new product introduction to date.” However, for ReachEdge to work, the client’s website must be built by ReachLocal. That has proved a deal-breaker for many potential customers, according to Gene Munster, an analyst at Piper Jaffray in Minneapolis. “The challenge is that small businesses tend to already have a website that they don’t want to give up,” he wrote in a note to investors on Aug. 7. During the next year, Rowlands plans to reprogram ReachEdge so it will work with third-party sites, a process called unbundling. “Today, the only people we can sell (ReachEdge) to are people who want to change to a ReachLocal website. With the unbundling, we can plug it into any website the client is using. That will greatly expand our market,” she said. The change in leadership and strategic direction has produced a 54 percent decline in the company’s share price since the beginning of the year. After its most recent quarterly report, Munster at Piper Jaffray downgraded the stock to “neutral” from “overweight” and dropped his target price to $5 from $12. The stock closed Aug. 20 at $5.56 “Our revised model expects revenue growth to return in the third quarter of 2015,” Munster wrote in a note to investors. “Given we are four quarters away from revenue growth, we are taking a conservative approach to our rating and downgrading shares.” Rice, the analyst at Needham, downgraded the stock in February to “hold” from “buy,” estimating that the organizational changes won’t produce any results until next year. Munster believes ReachLocal needs to re-establish itself as a trusted name in the market – a condition that usually allows a company to charge premium rates and upsell products. The outcome of the ReachEdge revamp and the resolution of the sales force switch will go a long way toward that goal. “Building a brand is a critical factor in long-term success given the greater competition,” he wrote in his note to investors. “Overall, we believe these changes will return ReachLocal to growth but expect that process to take several quarters.”