LookSmart (Look)

[Andy R]

Here is a small internet company that I have been following for a while and wanted to see if anyone else senses an opportunity here (as I do).

The company is LookSmart (ticker LOOK). Their market cap is $58.6 million (52 week low) but they have $38.6 million in cash & short term investments (Balance Sheet). They have a volatile past including being billion dollar valuation in the dot.com boom and turnover in leadership including the stepping down of the CEO in the last week (which I think is a good thing).

Trends are showing them making gains in the right direction (increasing revenue and decreasing expenses) but they are still not profitable.

My thoughts on LOOK:
I have been following this company for a few years. I have invested at different times and currently do not hold any of their stocks. They earn their money from various business channels including the licensing of ad serving software to IAC's Ask and recently signed Wikia (the for profit company started by the Wikipedia founder). From my estimates the ad serving business is only accounting for 17% of the revenue while the other 83% comes from their content division which had 50% growth in traffic in the last year.

When you subtract their cash and short term investments from their market cap it gives a value of $20 million to the company with possible revenues of $60 million for 2007. I could see a content company acquire them for their web traffic and/or their ad serving technology be picked up by a larger publisher (newspapers or magazine) looking to expand online.

So I really want to pull the trigger and buy some LOOK but I know I should stay away from speculative (gut) purchases. Can some of you all beat some sense into me so I won't buy any LOOK right now as it is hovering near an all time low?

[wildcat]

Any idea on what their cash burn rate is? To me, cash is a buffer in the short-term but it is meaningless to hold it on long-term unless it will be put to good use. Does the company make efficient use of its cash or has it done so in the past? You probably know this area much better than I do but those are some of the questions I would ask myself if there was a high cash per share stock in front of me.

[Andy R]

Originally Posted by wildcat

Any idea on what their cash burn rate is?

Based on their latest filing it's about $8.4mm per year (so they would have 4+ years on hand).

Originally Posted by wildcat

Does the company make efficient use of its cash or has it done so in the past?

In the past they have not made the smartest investments but they have been taking baby steps to clean up the past and position themselves for the future. I think they would be a good candidate for an acquisition but the M&A market seems to be drying up pretty fast.

The reality is I should not be investing in individual stocks much at this point. I was so tempted to buy some LOOK this morning but I have to resist the urge for now as I need to get my portfolio allocated properly. Right now I have 60% in a savings account earning 5%. I need to determine the proper allocation and then maybe buy a little LOOK in my small cap portion of that allocation. So much to do and so few hours a day, argh...

[terminator]

Originally Posted by Andy R

Based on their latest filing it's about $8.4mm per year (so they would have 4+ years on hand).

I think it's better than that b/c of this quarter's $2.1MM loss, $1.2MM was depreciation and $0.6MM was non-cash stock expense. Even figuring the capital expenditures back in (which are probably about 50% of the depreciation figure based on a guess looking at their last few cash flow statements) the burn rate (based on this quarter) may only be $1MM. The current assets-liabilities is about what the stock is trading for now.

What did they used to do back in 2003/2003 when they were making money that they don't do today? I see their revenues are one-third of what they used to be.

[Andy R]

Originally Posted by terminator

What did they used to do back in 2003/2003 when they were making money that they don't do today? I see their revenues are one-third of what they used to be.

They used to have a big contract to power many (maybe all) the contextual ads on Microsoft's websites. Microsoft left to build their own contextual ad system and the revenue plummeted. I think one of their big content plays early on was online Yellow Pages but that now has been trumped by Google and other search engines that give you yellow pages info when you do a regular search. Now their big assets IMO are their websites (ad revenue) and their ad servers software that has evolved a lot over the years and is one of the more mature players in this space. IMO the Wikia contract could be pretty big if Wikia takes off.

I think they did some things right over the last year (simplify, lower costs, etc) but some of their strategy with the vertical portals they developed seemed a little odd, an example would be the way they named the portals.

http://www.looksmartclassicautos.com
http://www.looksmartautos.com

Building brand is ok, but I don't think people really think of LookSmart portals as authority sites. Another thing that is strange is the fact their sites get a lot of Page Rank with Google but they have very few pages listed in the search index. If you click here you will see that the Classic Auto site has only 9 pages index in Google. We have over 107,000 indexed for E-R.org. So there is definately room for them to grow traffic when they get a Search Engine Optimization firm to help them put together a strategy.

To my, I think they have lots of good pieces they are just not put together as well as possible. Sometimes people internally go blind to simple changes because they simply "don't do things that way" and it takes a new chief to instigate change. If the new interim CEO make a handful of the right moves, they should be able to be able to increase revenue significantly. A Earnings per click of $.25 is achievable in the hot online ad market. So that alone leaves room for big improvements.

If they would just give me the keys and let me drive that company!

[wildcat]

Where is twaddle's opinion?

Looks like they need a new CFO too.

[twaddle]

Sorry, no special insight here. LOOK is one of those third-tier players that have probably been considered as an acquisition target over the years, and for whatever reason, people have passed.

I wouldn't bet on an operational turn-around. You know that morale has got to be low and they have no way to attract good people. But they don't look too bad from a liquidation perspective.

[Nords]

Originally Posted by Andy R

So I really want to pull the trigger and buy some LOOK but I know I should stay away from speculative (gut) purchases. Can some of you all beat some sense into me so I won't buy any LOOK right now as it is hovering near an all time low?

Originally Posted by Andy R

The reality is I should not be investing in individual stocks much at this point. I was so tempted to buy some LOOK this morning but I have to resist the urge for now as I need to get my portfolio allocated properly.

Sounds like you've answered your own question, but this is a thought process worth working through.

I made the same error with Nortel & Sun Microsystems-- "great" companies hovering at multi-year lows with what seemed to be good management and "good prospects for the upside". The only problem was a lack of cash flow and a lack of new/desirable products to generate cash flow. I suspect cash flow is more important than reputation.

But LOOK has an even uglier cash flow statement. Balance sheet aside, it appears that LOOK has been slowly bleeding out the last three years. Every time since 2003 when they've actually been at the point of making money it's been a one-time occurrence followed by another downturn. I bet if you plot their quarterly numbers since 1Q04 there's not much of a trend.

Originally Posted by Andy R

turnover in leadership including the stepping down of the CEO in the last week (which I think is a good thing).

I got sucked into Nortel primarily by their replacing a criminal CEO with a retired admiral who I knew & admired. He did a good caretaker job but the only thing he brought to the company was his ethics (which admittedly they desperately needed).

I'm beginning to think that new CEOs are a crapshoot, although I'm biased. I realize it's only been a few days but there are signs to watch for. What do you know about the new CEO? Does he have a brain, a plan, a clue? What's the rest of management think about him, and how's morale? Has the new CEO ever done a turnaround before? Any defections or ongoing strife? I've done well (so far) with Intel stock because the CEO generated some good buzz, seemed to have a plan, and was well spoken of by former employees. Any similar info on LOOK's CEO?

Right now LOOK doesn't seem to be selling at a discount to their net assets. Their market cap is quoted as $58M and their net assets are listed at $57M. True, a lot of that equity is cash, but that seems to be accounted for in the stock price. Value vultures might start buying the stock when it drops another 30%... can you wait for $1.90/share?

Originally Posted by Andy R

I could see a content company acquire them for their web traffic and/or their ad serving technology be picked up by a larger publisher (newspapers or magazine) looking to expand online.

Everything I read about today's media companies says "dinosaurs". Big media like the NYT or Gannett just doesn't seem to get it and the industry conferences have been about preserving hardcopy readership instead of expanding online. The only long-term online media success has been WSJ, and look how hard they fought off the "new guy". Even Buffett, a real newspaper cheerleader, is beginning to get discouraged about his Buffalo newspaper. The only reason he's holding onto the Washington Post is because he's had it for over 30 years of dividends.

IAC or even Murdoch might see the light of owning a company like LOOK, but does LOOK have a competitive edge against other companies of their ilk? I'm afraid I suck at answering this type of question, which would account for my track record with valuing tech.

Buyouts would've been a lot easier even six months ago but tightening credit makes this type of acquisition look like a real loser (no cash flow, no immediate accretion to earnings). Unless you know the new CEO or hear about great things, or unless you know of a competitive edge, then the company's only future appears to be liquidating.

Essentially your only hope of boosting the share price is the "greater fool" theory that someone will be willing to pay more for the shares than you would have already paid. Admittedly that expectation has made many stocks go up in anticipation of a premium buyout or even cashflow, but unless you see the trend before someone else then you're just waiting for lightning to strike. At least with a savings account you're getting paid 5% to wait.

You could make a lot of money from LOOK if it gets even cheaper or you hear about an acquisition. But research has shown that asset allocation is responsible for the vast majority of portfolio performance, so you'll probably make even more money (and use your time better) by sorting that out first. Then you can figure out if you want LOOK to be 1% of your wild money or even more.