ReachLocal Retrenches to Focus on Markets with ‘Potential for Positive, Sustainable Economics’

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Local digital marketing firm ReachLocal, which has been engaged in a long and difficult turnaround effort, told investors on Friday that it was retrenching further, exiting from direct sales in the U.K. to focus on “only on markets with the potential for positive, sustainable economics and contribution margin.” The company also announced 2015 operating expenses would be approximately 25 percent lower than 2014 levels, and that it planned to reduce expenses by an additional 15 percent in 2016, citing “already implemented and planned efficiency programs.” ReachLocal said it had entered a series of financing agreements with its largest shareholders to provide the company with additional liquidity to fund future growth.

Reduced costs, an improved cash position, and the resulting raised EBITA outlook are storylines that appeal to Wall Street. ReachLocal upped its Q4 EBITDA guidance, projecting a revised range of $2.4 to $3.0 million, substantially higher than the prior range of $0.8 million to $1.4 million. The company’s stock, which had declined around 70 percent since the beginning of the year, rose sharply on Friday following the news.

However, those storylines don’t necessarily reflect progress for ReachLocal on Main Street. The company left its Q4 revenue outlook unchanged, indicating it is still focused on cutting things that aren’t working rather than regaining growth momentum.

ReachLocal is entering the second year of its turnaround effort. When Street Fight spoke with ReachLocal CEO Sharon Rowlands in August 2014, she had been in the job for approximately four months. She acknowledged the company had “made some tactical mistakes on the execution front” and “gotten distracted by new shiny things,” but maintained the problems were “all very fixable,” adding “it’s all blocking and tackling; it doesn’t happen overnight.” Rowlands said ReachLocal was investing heavily in product development to develop a comprehensive, integrated solution for SMBs, noting “2015 will be a big year for us.”

Just over a year later, on the eve of the Street Fight Summit, we sat down with Rowlands again. She reaffirmed the need to offer a full suite of services. “A lot of companies started with a one-product solution — ReachLocal in search and other companies in email marketing or social,” she said. “But our customers’ needs evolved, and they needed more than that one product. In order to stay relevant with your market, you have no choice but to broaden.”

The latest announcement suggests ReachLocal is stockpiling cash to continue financing that expansion. Repositioning and restructuring a company take time, perhaps more time than Rowlands initially anticipated in a hotly contested market. Unless and until business picks up, ReachLocal also may need those funds to maintain the status quo.

Noah Elkin is Street Fight’s managing editor.