LookSmart Breaks Even, Surprises Analysts

LookSmart did better than expected in the third quarter, effectively breaking even on a per-share basis by posting net income of $15,000. Analysts had expected the company to post a $0.02 per share loss.

The unexpected results were due, at least in part, to certain one-time events, including a gain of $1 million from discontinued international operations. Still, at least some of the improvement came from better-than-expected revenue growth. The company brought in $17.5 million for the third quarter, after having said it expected $16 to $17 million. That’s an 82 percent increase over the third quarter of 2003, when LookSmart brought in just $9.6 million.

LookSmart has been through dramatic changes over the past year. Last October, it got word its biggest distribution partner, MSN, would drop it in January. Since then, the company has slimmed down its work force, and introduced a paid listings product. In this most recent quarter, it acquired Furl.net to increase distribution of its listings and named a new CEO, David Hills, formerly of 24/7 Real Media.

“This company has undergone a remarkable transformation over the last 10 months,” said Hills on the company’s conference call with investors. “We continue to look for large opportunities to grow profitably.”

Looking ahead to Q4, LookSmart boosted its expectations. The company predicts it will bring in between $18 and $20 million, which is expected to result in a net loss of less than $1 million for the quarter. Traffic acquisition costs, or the amounts LookSmart pays its partner publishers, are expected to come in between 51 and 53 percent. This quarter, TAC came in at only 47 percent. The company said that was partly due to circumstances that won’t recur.

The company is pinning its future hopes on three trends: higher prices in bigger search players’ marketplaces; development of proprietary content on which to display listings; and the ability to compete for distribution partners via private-label search portals, such as the deal it struck with the University of California at Berkeley.

“We’re moving aggressively to offer highly differentiated products to distribution partners,” said Hills. “We don’t want to compete on revenue share alone.”

One of the company’s proprietary content areas will be family-safe search, which the company is exploring with its Net Nanny service. Additionally, the company plans to unveil a re-design of the recently-acquired Furl.net later this week, which will allow users to search across all public archives of URLs users have saved.

“We have hundreds of thousands of high quality archives created by Furl users,” said Hills. “The more people use Furl, the better the content gets.”

Hills said the company has already integrated Furl.net with another property, FindArticles, to add greater functionality and cross-pollinate the traffic.

Hills said executives were looking into a variety of areas for future growth opportunities. He pointed out local search, mentioning the company’s deal with Bell South. The company is also examining whether to get into contextual advertising, but Hills said that’s yet undecided.

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