Dave Hills doesn’t exactly remember how long it’s been since LookSmart turned a profit: “Some quarter in late 2003, I think, or something like that,” he says. Anyway, it was before he left his post as president of media solutions at 24/7 Real Media to take over as LookSmart CEO.
Those profitable days were also before the company’s search platform took a few major hits to the client list, most notably MSN, which left to grow its own search. And it was also before Hills imposed a culling of suspect Web site partners and an end to a harmful policy of paid search inclusion.
So it was with some fanfare and trumpets that LookSmart announced last week that it is on track to produce a sort of profit during the last quarter of this year. Not a true-blue, take-it-to-the-bank positive earning, but at least a profit before figuring in the cost of stock options.
And if some favorable trends persist, real net profitability should come in 2007, the company said in releasing its third-quarter 2006 results.
For now, the news is that the search platform/ ad network/ Web portal company has simply narrowed its losses compared to third-quarter 2005. From July through September this year, LookSmart grew revenue 33% year over year to $12.2 million, and reported a net loss of $3.9 million, compared to a loss of $4.3 million the same time last year.
But clicks on its AdCenter network were up 41% for the quarter to 100 million, compared to 71 million in Q3 2005, while average revenue per click dropped slightly to 10 cents from 11 cents. And LookSmart’s cost of acquiring traffic fell two percentage points during the quarter to 64%, improving the company’s margins.
In light of those facts, LookSmart CFO John Simonelli said in an earnings conference late last week that the company expected to be “EBITDA-positive”—that is, post a profit before certain expenses—in the fourth quarter of 2006 and to see revenue grow 26% to 28% over Q3.
If those trends persisted into 2007, LookSmart might be within shouting distance of profitability in the coming year. Management wouldn’t speculate on that possibility in the Q3 earnings call, but Simonelli did say the prospect of a nominal profit in Q4 was “an important first step in our efforts to return to profitability.”
Hills says that several online trends are working together to produce a turnaround in his company’s financial fate. For one thing, the success of pay-per-click advertising has made marketers more willing to look deeper into the channel for inventory—to LookSmart’s benefit.
“Advertisers continue to want to spend deeper into the medium than just the top two or three guys,” he says. “We’ve seen that in our advertising metrics, both for large advertisers and small. Not that we’re nicking Google’s business, but as advertisers move money out of traditional media channels and into online, they’re trying to buy as deeply as they can.”
Google is operating “really, really well”, Hills admits, but LookSmart is “beginning to execute better than we did before. And as long as you’ve got quality, service, good technology and ease of operation, advertisers will come back.”
CFO Simonelli pointed out that improved sales efforts have brought some large-volume advertisers into the LookSmart stable—an encouraging development, he said, even though their focus on return on investment and conversion rates meant LookSmart was trading off some price advantages for higher traffic volumes in its ad network.
Another trend that Hills sees as wind in LookSmart’s sails is the drive by some high-profile Web sites to sell more of their ads directly rather than through a third-party network. That works in LookSmart’s favor because its publisher services business line licenses ad-serving, Web search and the Furl bookmarking technology to Web sites.
“In a high-growth environment, media companies want to control and own as many advertiser relationships as possible,” Hills says. “They’ll use ad networks like AdSense, Yahoo! or LookSmart to backfill ads. Our proposition to the publisher is, we’ll be your plumbing, and you own everything else: ad pricing, terms and conditions.”
Having Ask.com running on the AdCenter platform as well as LooksSmart’s own network gives it the kind of heft that can appeal to advertisers too, Hills says, and an open API lets agencies access every publisher running the AdCenter technology, not simply LookSmart.
On the consumer side, LookSmart remains committed to its vertical-site approach, organizing content into TV-like channels that it makes easy to search topics, and to save and share articles using its Furl bookmarking technology. Unique visitors to the LookSmart sites grew to more than 14 million in the third quarter, after falling off sharply in Q2 to 10 million. Hills admits that a lot of that growth came from the FindArticles.com site and not directly from the LookSmart portal, and that the growth rate may not be sustainable over coming quarters.
“We’re pleased with the verticals, but we realize they’re going to be a long-term project,” he says. “We’ll go ahead and invest the money, because we know we’re going to get a good return and because ownership of audience is important in the long run. But of the three legs of the stool—the ad network, technology syndication and audience-building—that third one is going to take us the longest.”
Since LookSmart debuted that vertical strategy a year ago, other Web and search trends have arisen that validate the idea of a more focused search, but that may also erode the audience that would otherwise turn to a LookSmart vertical on health, finance or cars. Yahoo! is rolling out a series of content sites focused on just those topics; most recently, last week it introduced two sites spotlighting food and cooking. And Google recently began offering a customizable search engine that will let Web operators tailor their own index of Web pages to search, either by themselves or in collaboration with trusted visitors to their sites—and start earning revenue from AdWords ads in the bargain.
Hills thinks that LookSmart can stave off the challenges posed by both these trends. “There are going to be a lot of different types of consumer behavior,” he says. “For some topics, I might want to put together my own index. But we still think there’s going to be a need for something between a broad Web search and me having to build my own index.”
LookSmart plans to unveil a new version of its Furl bookmarking technology early next year. According to Hills, this new edition will incorporate social tagging features to make it more like the Digg and Del.icio.us services that have become so popular in the last year.
Another change that’s come up in recent months has been a new insistence by large online advertisers on network accountability for proving the value of clicks, with news reports that some big brand names are demanding regular click audits in return for their advertising dollars. Hills maintains that the work he and his team did last year to clear suspect publisher sites out of an admittedly overgrown LookSmart network has put the company in a good position to compete on the basis of click quality.
“Last year we cut close to two-thirds of the clicks out of our network in order to get the right quality,” he says. “From an industry perspective, we went first in terms of pruning what we need to prune.” While LookSmart doesn’t release figures on refunds for fraudulent click traffic, the number is “very, very low”, Hills maintains.
“The other metric we watch is whether advertisers are voting with their dollars,” he says. “Clearly, as our financials show, they are.”
