LookSmart Q3 2009 Results

SAN FRANCISCO, Nov 2, 2009 -- LookSmart, Ltd. (Nasdaq:LOOK), an online search advertising network solutions company, today announced financial results for the third quarter ended September 30, 2009.

Revenues for the third quarter of 2009 were $12.5 million, a 19% decrease from $15.4 million in the third quarter of 2008 and a 5% decrease from $13.2 million in the second quarter of 2009. Net loss for the third quarter of 2009 was $1.9 million, or ($0.11) per share based on 17.1 million weighted average shares outstanding. This is compared to a net loss for the third quarter of 2008 of $1.7 million, or ($0.10) per share based on 17.0 million weighted average shares outstanding. Net loss for the second quarter of 2009 was $1.3 million, or ($0.08) per share based on 17.1 million weighted average shares outstanding.

Loss from continuing operations for the third quarter of 2009 was $2.1 million, which includes $0.3 million of severance expense and $0.2 million of expenses related to the evaluation of strategic growth alternatives. This compares to a loss from continuing operations in the third quarter of 2008 of $1.7 million, which included $0.2 million of severance expense. Loss from continuing operations for the second quarter of 2009 was $1.4 million, which included a $0.2 million impairment charge, $0.2 million of severance expense and $0.2 million of expenses related to the evaluation of strategic growth alternatives.

"In light of the continued pressure on search advertising demand, CPC pricing, and margins in our industry, we are pleased with the resilience of LookSmart's core Advertiser Network business," commented Ted West, President and Chief Executive Officer. "The more demanding standards being set by search advertisers for better quality search traffic, improved ad network performance, and more competitive advertiser ROI, compelled us to take more proactive steps to upgrade our sales, account management, and network management operations, and to deliver higher quality traffic and stronger ROI to our customers. We believe that these actions position LookSmart well to benefit in a broader search advertising market recovery."

Revenues from the Company's Advertiser Network were $11.8 million in the third quarter of 2009, a decrease of 15% from $13.9 million in the third quarter of 2008, and a decrease of 2% from $12.0 million in the second quarter of 2009. Revenues from the Company's Publisher Solutions were $0.7 million in the third quarter of 2009, a decrease of 51% from $1.5 million in the third quarter of 2008 and a decrease of 39% from $1.2 million in the second quarter of 2009. The year-over-year and sequential decline in Publisher Solutions revenues is primarily attributable to the Company's largest Publisher Solutions client.

Gross margins from continuing operations decreased to 31% in the third quarter of 2009 from 40% in the third quarter of 2008 and 40% in the second quarter of 2009. The year-over-year and sequential decrease in gross margin reflects the higher average traffic acquisition costs (TAC) on the Advertiser Network in the third quarter of 2009, as well as the significant decline in the Company's Publisher Solutions revenues. The Company exited the third quarter with moderate improvement in the average TAC rate on the Advertiser Network, as compared to the TAC rate reported for the third quarter of 2009. While this recent improvement is expected to benefit the Company's gross margin in future quarters, gross margins are not expected to return to historic levels.

Total operating expenses in the third quarter of 2009 were $6.0 million, which includes $0.4 million of non-cash, share-based compensation charges, $0.3 million of severance expense and $0.2 million of expense related to the evaluation of strategic growth alternatives. Operating expenses for the third quarter of 2008 were $8.1 million, which included $0.7 million of non-cash, share-based compensation charges and $0.2 million of severance expense. Operating expenses for the second quarter of 2009 were $6.7 million, which included $0.5 million of non-cash, share-based compensation charges, a $0.2 million impairment charge, $0.2 million of severance expense and $0.2 million of expenses related to the evaluation of strategic growth alternatives.

Non-GAAP net loss (net loss before discontinued operations and excluding stock based compensation and impairment charges) for the third quarter of 2009 was $1.7 million compared to a loss of $1.0 million in the third quarter of 2008. Non-GAAP net loss for the second quarter of 2009 was $0.7 million.

An explanation of LookSmart's use of non-GAAP financial measures, including the limitations of such measures relative to GAAP measures and reconciliation between GAAP and non-GAAP measures where appropriate, is included later in this release.

Capital expenditures, including capitalization of internally developed software, in the third quarter of 2009 were $0.6 million, compared to $1.2 million in the third quarter of 2008, and $0.4 million in the second quarter of 2009. Depreciation and amortization from continuing operations in the third quarter of 2009 was $0.7 million, compared to $0.8 million in the third quarter of 2008, and $0.8 million in the second quarter of 2009.

The Company ended the quarter with $27.1 million in cash, cash equivalents, and investments, a decrease of approximately $2.6 million from approximately $29.7 million at June 30, 2009. The decrease in cash was primarily due to the operating loss generated in the third quarter of 2009. Net cash used in operating activities for the three months ended September 30, 2009 was $2.2 million.

During the third quarter of 2009, the Company launched post-pay terms to its smaller self service advertisers, whereby these customers will pay for clicks after they occur rather than the previous practice of being billed in advance. The adoption of post-pay terms reflects the Company's objective to align its business practices with industry standards and to encourage more self-service advertisers to use the LookSmart Advertiser Network in their campaigns. As a result of this change, the Company reported a $0.3 million decline in deferred revenues on its Balance Sheet at September 30, 2009 as compared to June 30, 2009. The Company expects deferred revenue to continue to decline as customer deferred balances are used up and, correspondingly, for this to have a material adverse affect on cash flow.

Q3 2009 Key Metrics Performance

* Total paid clicks for the third quarter of 2009 were 219 million,
compared to 184 million for the third quarter of 2008 and 207
million for the second quarter of 2009.
* Average Advertising Network revenue per click (RPC) for the
third quarter of 2009 was $0.054, a decrease from $0.076 in the
third quarter of 2008 and $0.058 in the second quarter of 2009.
* Traffic acquisition costs (TAC) of 68.8% for LookSmart's Ad
Network increased from the 62.5% rate in the third quarter of
2008 and increased from the 62.0% rate in the second quarter of
2009.

Executive Chairman Appointment

In a separate release issued today, LookSmart announced the appointment of Jean-Yves Dexmier as the Executive Chairman of the Board of Directors. Dr. Dexmier has served on the Company's Board of Directors since 2007 and has served as the Chair of both the Audit and Strategic Direction committees.

Source: LookSmart, Ltd.