Locafy NASDAQ:LCFY
The purpose of this piece is to provide an overview over the company. It should serve as an introduction and place for reference for people new to the story.
Locafy provides fast working SEO solutions for local, national and brand focused businesses. It helps businesses and brands increase search engine relevance and prominence in specific proximities.
LCFY is an Australian company listed on the Nasdaq. The business underwent a significant transformation in the past couple of quarters and appears to be on the precipice of enormous success after some initial setbacks. Based on our visibility, the company has never been better positioned to drastically increase revenues and earnings, the company simply needs to execute.
The market and the technology
The need for SEO should be relatively obvious. You want your website to be found in a search (Google) and that is a very large market fraught with barely working, labor intensive and very expensive solutions, but also bad actors.
The company’s patented technology programmatically deploys effective local search marketing at scale. There are four core solutions to brands and channel partners - Listings, Landing Pages, Locators, and Lead Sites.
Broadly speaking there are a few key ingredients to how the technology works. It is a combination of data integrations and generative AI (“Content”) and the “Entity Based” SEO technology and know-how (“Site Structure”). Once the Content and Site Structure is integrated, the production of search engine optimized web pages is largely automated, which allows rapid scaling at 0 marginal cost. From my conversations with Gavin it has become clear that really the site structure is what search engines respond to. It is not what is written, but rather how. Those are often details that a normal reader would not even notice. Where the company applies generative AI content creation is in populating templates for new clients. For existing webpages, the content can largely simply be adopted while improving the site structure and implementing the extremely important landing pages. These landing pages in a sense replicate an existing website and sit on top, which improves discoverability, searchability and speed.
The products and divisions
Originally, as the name “Locafy” indicates, the focus was on local search. Let me give you an example: You are in a new town and want to go eat pizza. You pull up your phone and search for places to get pizza, where you are. You couldn’t care less about results for the next city or state. Such searches could be in Google Maps or just a normal search where the location of the user is recognized or specifically addressed in the search term (“pizza in XYZ”).
With the acquisition of the technology assets from Jimmy Kelley Digital in August 2022, product offering could be extended beyond local search solutions to “national search” and “brand search” solutions.
National search presents an additional and wider market opportunity by enabling end users to reach a broader audience for “national” search terms. The key ingredient here is what the company calls “Entity-Based” SEO. Such an “Entity” is the highest order keyword or reference point attributed by search engines that they use to help establish the context of a website. It encompasses a collection of associated keywords. The effect is to gain leverage across multiple keywords through the optimization of a singular Entity. The associated product is called Keystone.
Brand search solutions are primarily focused on improving search prominence for products sold via online marketplaces, in particular, on Amazon. This is however, more labor intensive and significantly less automated.
The company also operates a Publishing division, which includes ownership of Hotfrog, a global online business directory, and three additional Australian-focused directories, AussieWeb.com.au (“AussieWeb”), PinkPages.com.au (“PinkPages”) and SuperPages.com.au (“SuperPages”). Combined, these directory assets contain more than 46 million business listings and an email database of approximately 245,000 subscribers.
An important component of an online presence for a business owner is to publish a business profile on various online directories, also referred to as “citation management.” Business owners or digital agencies on behalf of business owners publish business profiles (providing search relevancy) on many business directories in markets in which the business operates (providing search prominence in their proximity). While many smaller business owners do this manually, there are service providers that manage large volumes of business profiles through technology platforms. It is more efficient for these citation management services to be managed via an API that can synchronize with and publish to third-party directories, such as Locafy’s.
There are several commercial agreements with citation management companies in place generating fees for the API connecting to those directories. At the moment though, these are a relatively small (less than 20%) revenue stream for the company. The attraction for citation management companies is that Locafy’s directory network attracts high volumes of Internet traffic and clicks as a result of consumers searching for local products and services.
What makes Locafy unique lies in the nature of the technology. The actual website of a customer or its content is not touched at all. As a result, the optimization via lending pages based on the chosen keywords or entities is happening very quickly, at scale and for little cost. Best of all, once implemented, these adaptations can automatically be updated and changed, for example when a significant modification to Google’s algorithm detrimentally effects their effectiveness and necessitates quick reaction. Let me put it very simply: If the algorithm changes, the company can with its know how determine the required response and with the push of a button implement those changes for all clients across products immediately.
Go to Market
The sales strategy involves direct sales, channel sales and resellers, but also strategic and publishing partnerships. Of those, the resellers and partnerships are clearly the most significant.
The sales network mainly consists of resellers that typically manage many business profiles, ranging from a few dozen for smaller agencies, to several thousand for mid-sized agencies, to hundreds-of-thousands or even millions for Publishers.
These resellers typically receive a discount to suggested retail pricing. They are responsible for invoicing their end user clients and maintaining those relationships. Needless to say, this approach is highly scalable with minimal marginal production cost.
On the publishing side there are commercial agreements in place with diversified media organizations who wish to increase their online audience reach. Specifically, Locafy improves the online search prominence of their publications, which the media organizations themselves are able to monetize on their online publishing “mastheads”. Notably, on June 22, 2023 the company announced the signing of an agreement with a prominent U.S.-based diversified media company to sell the Keystone technology to its portfolio of clients that advertise on their media assets. The significance of this cannot be overstated and I will touch on the potential scale later.
There are also partnerships with data aggregation companies who provide citation management services whereby their business users are able to centrally manage their advertised business profile across multiple online directories, search engines, applications and maps. Data aggregation companies connect to the company’s Publishing API, to facilitate automated bulk publishing to one or more owned directories.
In the future there is also the potential of applying Proximity Networks (part of local search) towards these owned online directory properties. The strategy there is to increase both the number of pages as well as the search prominence of those pages with an expectation of increased search impressions, leading to increased advertising revenues.
Economics
The sources of revenue are license subscription fees for using the technology as well as data and advertising fees earned from customers publishing their content on Locafy’s digital property network. By far the most significant are the subscription fees and while those are recurring in nature, the contracted durations are often rather short, ie month(s). This shouldn't not be a problem if the company delivers on its promise and we have in fact seen examples where the company stopped providing its services, which immediately caused a steep drop in the respective websites search rankings.
What all of those revenue streams have in common is that gross margins are extremely high, we are talking 80-90%. Furthermore, as I tried to explain above, the company’s solutions can be implemented at scale with little marginal cost and they are able to leverage resellers and partnerships. This means that revenues can increase exponentially without needing to ramp up the associated costs. They just don’t need an army of their own sales people or software engineers and developers to grow revenues. What is more, Locafy has managed to cut the existing cost base significantly, to the point where they are close to breakeven already, even though revenues were flat to declining recently.
Those shrinking revenues were not pleasant but well explained by a changing focus of the company towards the best opportunities and also some degree of billing relieve the company deemed necessary to keep clients happy during some significant platform changes and upgrades associated with the integration of Jimmy Kelley Digital technology for example. As to the first point, brand solutions is one example the company is not prioritizing since it is very labor and cost intensive to implement at scale.
While I do have high hopes for sales growth via resellers, the most exciting aspect to me is the rapid and extreme revenue growth potential on the publishing side.
Coming back to the agreement signed in June 2023, my research indicates that this media company commands hundreds of sales people, each of them having thousands of clients, themselves having numerous publications. Each of these publications could be promoted by the company for a fee of $500 per month. I am told this is the discounted price, other agreements in the future may be higher priced and notably also start to include value based pricing whereby Locafy potentially partakes directly in the income generated from those publications, or at least has a success component embedded.
Even so, a little math indicates that this one agreement could ultimately scale up to tens of millions in revenue per month (100 reps times 100 clients times 1 publication @ $500 would be $5M). I believe we are right now at the point where this potential can be realized with first orders after successful trials already received. A good assumption is $30k per order and we know the company has 4 orders, that are not yet active due to issues like lack of legal approval. This alone would contribute at least $1M in revenue per year, most of it falling directly to the bottom line.
The company has also identified a significant opportunity to acquire such media assets and monetize them directly, thus cutting out the middle man. I am looking forward to more of that in the future.
Balance sheet, cap structure and valuation
Balance sheet and cap structure are very solid. There is no debt relevant enough to speak of, the company has over a million dollars in cash and is not burning much if any money currently and in the near future. There are about 1.3M shares outstanding with hardly any options (mostly compensation) and the IPO warrants are so far out of the money that they are completely irrelevant. No other toxic instruments or anything of that nature exist. It is noteworthy though that the company had issues maintaining the Nasdaq listing due to the dwindling equity line item. Thus, they were forced to use the ATM in the past and may be in the near future if profitability is somewhat delayed even though to a rather limited degree I believe. Nothing I would be worried about.
Insiders own more than 20% of the shares and the company has financially powerful backers like Chairman Collin Visaggio. The actual trading float is extremely tight and it is also worth highlighting that while the short interest appears to be low, the borrowing fees for short sales are normally in the 50%+ range. In other words, this stock can move hard and fast, in fact we have seen this in the past.
Currently the market cap is just about USD 8M and as I indicated above, the orders already known to the company could generate enough income for a single digit multiple. And those orders are only from a single sales person for a tiny fraction of their client base. Let. That. Sink. In.
Even if that deal were to fall flat completely, we should see revenues starting to grow again from the resale channel and other revenue streams so that the path to profitability would be short and sizable income in relation to the current market cap could be expected.
Management
CEO and founder Gavin Burnett is very experienced in digital media and technology and had a successful exit in the past. While he is still relatively new to public markets, he does a great job as CEO in my opinion. There is no doubt that he is an expert in this field and his decisions since I know the company have been effective and deliberate. I would highlight that I have experienced him as very upfront, open and honest. Beyond being a really nice person, he is clearly motivated to build this company into something very big.
No less experienced is CFO Melvin Tan. I only had the opportunity once to speak to him but I am getting increasingly confident in his abilities to steer this company financially.
Jimmy Kelley joined the company recently and while I am still unclear about the nature of his compensation, there is no doubt that he is a tremendous asset to the company. Beyond the technology he brought to the table, he is extremely well known in the SEO space and has been very successful on his own. His involvement also includes a strong network and access to more sales channels, SEO practitioners, etc.
Risks and summary
Two big risks need to be mentioned. With SEO there is always the question if the technology works and will work in the future or could become obsolete. This kind of risk can never be completely eliminated, but the bulk of the evidence I have seen indicates that the technology is extremely effective and what is more can be adapted quickly for it to stay effective. There are always exceptions of course. The other risk is that the company is not yet profitable, needs to potentially raise more money for Nasdaq compliance and we just have not seen that big revenue ramp yet. The company is in “show me” mode. But I believe this is exactly our opportunity because once these orders come through or revenues grow through other channels, the impact on the bottom line will be dramatic and the stock will respond and do so very quickly. We have seen the stock triple in hours before and I would not exclude that to happen again. If you further consider the gigantic potential I have elucidated previously, it is hard not to view the risk reward at the moment to be off the charts favorable.
For this reason, I have made LCFY my largest position and a very significant portion of my portfolio.
It is a tiny company in a huge market commanding a unique, powerful and effective technology, not known to many, with solid balance sheet and cap structure, extreme operating leverage and scalability, contracts in place and many ways to win big.
What else can an investor want?
PS: Astute readers will have noticed that LCFY is my No 1 and SNIPF my No 2. The reason is simple: I believe LCFY can spike hard soon and I would like to be extra overweight to take some gains in the event. I do believe though that SNIPF is “saver” and I am more sure about the long term trajectory and success. So it is a close call.
Author’s Disclosure: We have a beneficial long position in the shares of LCFY and SNIPF either through stock ownership, options, or other derivatives, no position in any other company mentioned. I wrote this post myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. I am not a licensed securities dealer, broker or US investment adviser or investment bank.
Breakout Investors’ Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Breakout Investors as a whole. Breakout Investors is not a licensed securities dealer, broker or US investment adviser or investment bank.