Wednesday, January 04, 2006

LookSmart (LOOK)

LookSmart (LOOK) was initiated as a buy last night by an analyst. LookSmart is a provider of products for advertisers who wish to pay to be included in relevant web search results. Their suite of products provides businesses of all sizes the opportunity to have listings for their company and products included in distributed web search results, so that their listings are available to Internet users at the moment when they are searching for relevant information.

This morning’s WSJ front page highlights the shift that is taking place in the upfront TV advertising process where advertisers are becoming much more reluctant to commit to unknown and untested programming with big bucks. There is a major switch to Internet advertising, and companies like LOOK could well be beneficiaries.

WSJ (subscription required)

However, LOOK is a second tier player. The company has been restructuring for the last two years following the loss of a lucrative MSFT relationship which had been responsible for some 65% of its traffic. Financially, the company has been unimpressive with a history of losses including YTD losses of $14 million and operating cash flow losses YTD of $4.7 million. There is about $55 million in cash and securities on hand giving an EV of only about $40 million. EV/EBIT is negative 2.3 times based on trailing twelve month losses.

The company has shown positive ROIC in 2002 and 2003 but swung to losses in 2004 with ROIC of -34% and the TTM’s -18%. Operating margins have been negative and deteriorating with TTM operating margins at a stark -37%! Revenues have deteriorated by 50% on a TTM basis.

LOOK has changed management in 2004 and has undertaken considerable change in its product offerings. Recent traffic trends have improved, but it is far from being a Google or a Yahoo. The company has seen some success with and and in fact is, as the CEO has described, attempting to be the Turner Broadcasting of the Internet with the recent launch of 181 websites revolving around 13 different vertical categories including health, education, food, and money. These categories are perceived to offer (at least in the future) deep and specific content.

The company maintained its NASDAQ presence through a 1 for 5 reverse split in October of 2005, generally something I view as a caution sign. In addition, insiders have sold some $1.4 million in stock in the last six months.

There may well be signs of turnaround in the operations but clearly that has yet to be demonstrated in the financials in my opinion. Be careful!


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