us morning research * A Devastating And Surprise Loss.
* After the market close, October 6, LOOK announced the loss of its largest
distribution partner, MSN, which accounted for approximately 68% of LOOK's
total revenues in 2Q03 (65% of the paid inclusion revenues, 100% of
licensing revenues). The decision came as a surprise to LOOK, especially
since MSN had recently indicated that it would at least renew the
licensing deal. As we had noted in our observations of MSN's effort, it
was clear MSN had put all options on the table and, at the end, decided it
will do away completely with the directory model and rely on algorithmic
solutions, relying entirely on an algorithmic approach. This loss is not
only serious because of the massive revenue impact, but we believe it
could make it more difficult for LOOK to get new partners. Up to now, MSN
provided validation of LOOK's directory and paid inclusion model. Given
that the deal was not lost for economics or competitive reasons, MSN's
decision may well cause other potential partners to more thoroughly
examine their options.
* Inktomi
* Flow Through.
* This solution is unlikely to be ready for launch in the next few months
and MSN is likely to continue to use Inktomi, which uses LOOK as a back-
fill. This arrangement will allow some small revenue stream from MSN to
continue to flow to LOOK indirectly in 2004.
* Estimate Revisions.
* We are lowering our 2004 revenues from $194m to $67.8m and EPS from $0.15
to ($0.13). Our estimates are based on a run rate of LOOK's existing
partner base with a moderate level of growth and does not include the
impact from LOOK's new paid listings platform or flow-through Inktomi
revenues. We are also assuming LOOK will scale back its OPEX substantially
and maintain a roughly 50% TAC with remaining partners.
* Post MSN Strategy.
* We expect LOOK to refocus its effort on middle-market search players,
competing more directly with smaller paid search providers such as
FindWhat. Look has certain assets the can help it in this market:
advertiser base of over 30k, a proven paid inclusion platform, and $60m in
cash. However, winning in this market with favorable economics will not be
easy and still LOOK will need to substantially lower its expense
structure.
* What To Do Now?
* We believe LOOK can now be an interesting takeover candidate for other
search companies. There is still significant uncertainty on LOOK's future
and no fundamental support level for the stock. We prefer to wait until
the stock stabilizes and are downgrading shares of LOOK from Market
Perform to Underperform, pending better visibility on LOOK's cost
structure and new initiatives. Our new price target is $1.15, based on
LOOK's current $60m in cash plus 1x our $67.8m revenue estimate.
LOK
looksmart limited
