LookSmart: Determinedly Second-Tier, Exploring Options

An optimistic LookSmart raised its guidance for the year, after reporting third-quarter revenue of $40.3 million, up 70 percent over the same quarter last year and 5 percent over the previous quarter. It now expects its full-year adjusted net income of around $8 or $9 million, up from its previous goal of $4 to $5 million, excluding any restructuring charges.

CEO Jason Kellerman and CFO William Lonergan painted a rosy picture of the company’s financials. The San Francisco, Calif.-based search provider has around 32,000 advertisers, up from 29,000 last quarter. It delivered 87 percent more paid clicks than the same quarter last year, at an average cost per click of sixteen cents.

That was this year. At the beginning of the month, LookSmart said it was losing its key distribution deal with Microsoft’s MSN, which represented 69 percent of LookSmart’s revenues from paid inclusion listings and about the same percentage of its paid clicks. The agreement was originally set to terminate December 3, which would have been disastrous for LookSmart’s fourth quarter. Microsoft agreed to extend the deal until January 15.

Distribution is the killer. Kellerman couldn’t point to any additions to the company’s approximately 65 partners, let alone a prospect that might make up for the loss of Microsoft. Kellerman acknowledged this is a turning point for the company, but steadfastly refused to hint at the strategies the company is considering. Lay-offs among the staff of 429 seem inevitable. He said any announcement of plans would need to be done with respect for employees, but the company would certainly reduce the costs associated with servicing the Microsoft account. He acknowledged that the company’s strategy was going after second- and third-tier distribution.

Earlier this month, LookSmart jumped into paid search, introducing Sponsored Listings, a product that enables management of both bid-for-placement and paid inclusion advertising from one integrated platform. “While this is a competitive space,” Kellerman said, “discussions with our advertisers and distribution partners showed there was room in the marketplace for another offering.” He said LookSmart could provide a secondary source of traffic beside market leaders Overture and Google. But those listings will have limited distribution, appearing on CNET, Road Runner, InfoSpace, and Cox Internet.

With $61 million in cash, LookSmart could acquire a smaller player or even two, but such consolidation would still leave the company with a much smaller footprint than the leaders. That cash position may also make LookSmart an attractive acquisition target itself, though it’s not clear which of the bigger players in the space would be interested in the business.

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