*** do not touch looksmart ***

LookSmart warns of rocky times ahead
Oct 16
David Crowe

Internet company LookSmart has formally warned investors it is likely to lose money next year as it struggles to retain customers following the axing of a key agreement with software giant Microsoft last week.

In a terse statement on the risks to its business, LookSmart said it could lose advertisers because it would not be able to distribute their search listings on Microsoft's popular MSN online service. The statement confirmed the challenges the company faces after its Microsoft deal, which accounted for 68.4 per cent of its most recent quarterly sales, ends on January 15.

"We likely will not be able to maintain profitability in 2004," the company said in a filing to the Securities and Exchange Commission in the United States.

"The extent of our net losses in 2004 will depend on our ability to contain expenses, preserve revenues, restructure our business in light of the loss of the Microsoft relationship and develop our distribution network," it said.

The company has not issued a forecast for its financial performance next year, arguing that the sudden cancellation of the Microsoft alliance made it too difficult to predict its fortunes.


It also warned that advertisers may not renew their agreements because, lacking Microsoft's support, the paid listings at LookSmart would not generate as many "clicks" from internet users.

"We may lose customers as a result of the expiration of the Microsoft agreement," it said. "Because Microsoft represented a majority of our paid clicks, some advertisers may believe it is no longer worthwhile to advertise with LookSmart because it is anticipated that our click traffic will decline.

"Most of our advertising contracts are short term in nature and are terminable on short notice."

The company said Microsoft accounted for 73 per cent of its paid clicks - that is, hits on LookSmart listings that resulted in a paid advertisement appearing - and its traffic "will likely decline significantly" after January 15.

LookSmart's shares almost halved last week after it announced the loss of the Microsoft contract, though they have remained relatively stable since then. The shares, listed on both the Nasdaq and the ASX, closed yesterday at 10.5¢.

The company's statements on its performance were contained in a registration document lodged with the SEC for 1.2 million shares to be sold by individuals associated with two of LookSmart's recent acquisitions, WiseNut and Grub.

Analyst Safa Rashtchy of US Bancorp Piper Jaffray said on Monday he expected LookSmart to focus on middle market search opportunities outside the sphere of the major portals like Microsoft.

"While we believe it is now a very interesting takeover candidate, we have no visibility into its future and there is no clear support level for the stock yet," he said in a note to clients.