FindWhat Profits Down Amidst Tough Decisions today reported a 15 percent year-to-year drop in profits for the first quarter, which it largely attributes to its decision to eliminate underperforming distribution partners. This is the second quarter in a row FindWhat has blamed poor financial performance on that decision.

Net income for the quarter was $3.2 million, or $0.10 per diluted share, compared to $3.8 million, or $0.16 per diluted share, for the same period in 2004. Revenue was up 136 percent to $58.2 million, primarily due to the inclusion of operating results from acquisitions of Miva, Espotting, B&B Enterprises, and Comet Systems, all completed in 2004.

FindWhat expects Q2 2005 revenue to be $40 to $50 million and anticipates full-year 2005 revenue to be $175 to $200 million.

The company began cleaning up its network in November, vowing to stop showing online gambling ads in the U.S. It announced a plan in February to focus on distribution partner quality instead of just the amount of traffic partners generate. Part of that effort includes eliminating distribution partners that aren’t producing conversions.

The trend continued in recent weeks, when FindWhat began removing certain distribution partners, representing “a meaningful percentage” of daily click-through revenue, said Craig Pisaris-Henderson, FindWhat’s chairman and CEO, a move that affected the company’s short-term financial performance in exchange for potential long-term gains.

“We took steps to strengthen our advertising relationships with the objective of improving our conversion rates, while ensuring the long-term value of our distribution network,” Pisaris-Henderson said. “We’re removing low-quality sources of traffic, which is something all paid search providers must address if they’re to thrive.”

FindWhat classifies traffic quality based on the destination page’s relevance to the keyword, the conversion rate, and the way users find the paid listings. According to Pisaris-Henderson, the partners that were removed last week, or their sub-affiliates, had developed methods for obtaining new users that didn’t follow the company’s distribution guidelines.

FindWhat is facing several other issues at the moment, most notably an ongoing patent dispute with rival Yahoo over who owns the bid-for-placement technology that powers paid search advertising. An outcome in Yahoo’s favor would put FindWhat’s business model and future as a company at risk.

That lawsuit is in its third week of testimony before a jury, and final arguments began today. As early as tomorrow, the jury will be asked to decide whether FindWhat infringes on the patent and, if so, whether it should be ruled invalid. With more than 50 issues to decide, it could still be days before the jury reaches a decision. The judge will determine whether the patent is unenforceable due to inequitable conduct, but his decision may come weeks or months after any jury decision.

The company also said it has accepted the resignation of its CFO, Brenda Agius, and has been seeking to replace its auditor, Ernst & Young, since January. A company spokesperson said Agius is leaving for personal reasons and will stay on with the company through a transition period until a replacement is found. Ken Cragun, FindWhat’s VP of finance, will serve as interim CFO.

The decision to find new auditors is unrelated to Agius’ departure, according to the company, but is instead a product of differing philosophies. No violations or improprieties have been alleged, and E&Y has certified all FindWhat’s financial results through the end of the quarter.

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