$13 per share? What in the SMB happened?
One might expect OrangeSoda, a competitor, to derive a certain degree of schadenfreude from what has to be an exceedingly disappointing result for both ReachLocal and its investors. However, we are actually really dissappointed that the market had such a tepid reception for a good company in the sector. I did note in my earlier post that timing was questionable. But even though the book of orders for the stock didn’t come in strong, management and investors apparently felt like the benefits outweighed the costs of delaying or pulling the IPO.
Quality of Revenue
So why did institutional investors have so little love for a company that is growing revenue at an approximately 50% annual clip? I’d say it probably came down to lack of confidence in the quality of their revenue. Not only are they paying an arm and a leg to get those revenues (see their Sales & Marketing expenses) but they are also seeing that revenue churn at a relatively high rate. Churn is an issue common to most companies in this sector and it gives investors major heartburn.
OrangeSoda has seen significant traction in reducing churn by focusing on delivering tangible results for our clients, providing agency-like service to locally focused businesses, and primarily selling to those businesses through channel partners that local businesses already know and trust. As much as ReachLocal, Yodle and OrangeSoda would love to be household names, we are not there yet and that does have some impact on churn in my view. Some may claim that SMBs just churn and there isn’t much you can do about it. I would argue that most SMBs are highly loyal when they find a service provider they trust. That’s why OrangeSoda loves working with already trusted name channel partners. We provide those channel partners a best-of-breed online marketing service offering for local businesses and they leverage their well established trust and sales forces to sell those marketing services.
I’ll post one more update to this once we see how the stock trades in its first day of trading. My guess is that it will close a good deal above its offer price as the implied valuation is far below the comp group. Ultimately I believe they are a quality company that will trade closer to Vistaprint and Constant Contact multiples than Marchex (see my earlier post for valuation multiples). Plus the public float isn’t all that much and there is likely some strong retail demand.
NOTE: Make your own decision on the stock as I have no insider information and am not an investment advisor!
UPDATE: The Silver Lining