Why ReachLocal Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of ReachLocal (NASDAQ: RLOC  ) were moving the wrong way today, falling as much as 19% after providing disappointing guidance in its quarterly report.

So what: The online-marketing specialist said revenue grew 17% to $121.8 million, slightly below expectations, while adjusted EPS topped estimates by $0.11, coming in at $0.10. Without adjustments, however, the company lost $0.02 a share. ReachLocal maintained its full-year guidance, matching estimates, but lowered its guidance for the current quarter due to "macroeconomic challenges" and a change the timing of "Underclassmen" hiring, a term the company uses to connote new ad accounts. ReachLocal now expects revenue of $124 million to $126 million against estimates of $131.3 million.

Now what: There were some positives in the report in addition to the earnings beat, as ReachLocal showed strong revenue growth, with a jump of 32%, and entered the Russian and Austrian markets. Also, considering management didn't cut full-year guidance, the company seems to be indicating that it will make up for the shortfall in the second half of the year. ReachLocal is one of several cloud-computing-based companies that carries high expectations and a high price tag because of it. With slim profits and only moderate revenue growth, I'd wait for better signs before getting invested.

Want more on ReachLocal? Add the company to your watchlist by clicking here.

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