lok - reasons for the run up......

LOK - Reasons for the run up............

Thanks to Lookinsmart2002 for his following thoughts:

About 18 months ago the new CEO, David Hills arrived to find a company still struggling from the loss of their one major partner MSN. They had a number of problems:- click fraud - 99% of revenue was from distribution of listings to third party sites- No "home grown" traffic to speak of - high costs still in place from before the loss of MSN. In the last year or so Hills has started to turn this company around. He has introduced the following initiatives:

1. Technology licensing - Hills realised that the software tools that LOOK had developed for internal use were valuable. He then licensed their Ad Center to Ask Jeeves, their search framework to Viacom, and licensed advertiser tracking software to a multitude of other companies.

2. Whitelabelling - Hills has provided some of LOOK's main consumer products to third parties to rebrand as their own. New York Times among others has licensed Furl for their popular Times Select offering. Local.com also licensed Furl.

3. Increased Content - Hills realised early on that FindArticles was LOOK's premier source of traffic, and quickly increased the number of articles from 5m to 10m, then 12m, and has recently increased again.

4. Vertical Search - Hills realised that traffic to FindArticles would be worth more if it was more qualified and demographically segmented. So using the About.com approach with a twist, he launced 181 vertical search sites, providing access to web search, news, blogs, artices and furled items.

5. In-house advertising - Hills realised that if LOOK could license their advertising software it made sense to bring inhouse all banner advertising on their own network, and start looking at inhouse contextual advertising.

6. Leveraging of Furl - Hills saw the value LOOK had in Furl, and saw the impact it could have on search results. He integrated furled items into LOOK's search streams, providing a better user experience.

7. SEO - LOOK's millions of content pages did not feature prominently in search engines. LOOK hired an SEO, changed the pages, and subseuqently doubled their traffic during 2005.

...Most of the above actions occurred with little fanfare to the market, and have never been completely priced into the stock.

So .... Few understood the consequences those actions would have on the bottom line of the company. They are as follows:

1. Diversified revenue - Previously LOOK had nearly all its revenue from one product (distributed search listings), and from one customer buying that product (MSN). Now it has revenue from :

- licensed technology - white labelled technology - Distributed listings traffic - Owned listings traffic

- Owned banner advertising - Owned skyscraper advertising - Owned Contextual advertising

- Google Contextutal advertising - Parental protection software subscriptions

2. Increasing immunity to TAC (Traffic Aquisition Costs) - Previosly LOOK was at the mercy of TAC, and as TAC went up, LOOK's margins would shrink. Now since the above revenue sources are high margin and not related to TAC, as they increase LOOK's margin increases despite TAC. In Q4 2005, TAC went up, and for the first time, LOOK's margin did not decrease.

3. More advertiser value - the ROI advertisers enjoy by advertising on LOOK's vertical sites is a lot higher than that of previous partner sites. This means that :

- advertisers will ultimately pay more per click
- more advertisers competing will drive auctioned click rates up
- audience will be more receptive to advertising.

Keep an eye on "RPC" - revenue per click. It has been rising for the last couple of quarters. As advertisiers increase linearly, revenue increases exponetially because they are competing for the same space, driving up click rates.

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LOOK's revenue bottomed out in Q3 2005. It has risen since, and will continue to do so. Analysts are not fully comprehending the effect the new high margin revenue streams will have on the breakeven point. Break even revenue level will be a lot lower than it was last time they reached profitibility. In fact I would not be at all surprised to see profitibility achieved this year.


The way things are tracking, this stock should run to the $10-$11 (UD$$$'s) mark in the relatively near future, provided no unexpected bad news comes along. And if we get upside surprise, well take a look at a 7 year chart to see where we could head.

A great post Lookin2002

Thanks

:)

LC