LookSmart Turns Profit, Brightens Outlook

LookSmart reported strong second-quarter earnings on Tuesday, with a sharp rise in paid clicks. The paid inclusion search company reported revenues of $38.4 million, an 83 percent increase from the same quarter last year. LookSmart returned a profit of $1.2 million, or 1 cent per share, a sharp turnaround from the $806,000 loss from a year earlier. Both results exceeded the company’s projections.

The positive results were driven by big gains in the number of paid clicks generated from listings appearing on LookSmart partners, including MSN. Paid clicks for the quarter increased 141 percent from the same period a year ago to 210 million. Listings revenues more than doubled from $17.2 million to $34.6 million.

LookSmart CEO Jason Kellerman said this growth, combined with the adoption by Terra Lycos of LookSmart’s search and paid inclusion services earlier this month, has allowed the company to raise its earnings outlook for the year.

“The combination of strong customer growth and the impact of this new distribution partner allows us to raise guidance,” he said.

LookSmart’s positive results show the growing interest in paid inclusion. Unlike paid listings, in which advertisers pay to have their listings appear on search results pages, paid inclusion allows advertisers to pay to have their Web pages crawled. While the service does not guarantee placement, it does give businesses the opportunity to list pages deep in their sites or pages with dynamically generated content.

The market for paid inclusion is still small, about $200 million today, but Kellerman has said he expects it to grow to $3 billion by 2007.

In the aftermath of Yahoo’s recent agreement to acquire Overture Services, many industry analysts speculated that Microsoft’s MSN would make a play for LookSmart to bring more search capabilities in-house. Once the acquisition is completed, Yahoo will have three of the top four paid inclusion providers under its umbrella: Inktomi, FAST and Alta Vista.

LookSmart and MSN already enjoy a close relationship dating back to 1998, and MSN accounts for nearly two thirds of LookSmart’s revenues.

LookSmart’s dependence on MSN would seem to put it in a similar position as Overture, which faced persistent market doubts on account of the favorable partnership deals its largest partners, Yahoo and MSN, had struck. However, LookSmart has managed to keep its distribution costs in check, remaining at 53 percent of revenue — the same from the first quarter.