April 28, 2006, 12:00 AM

Looking Smarter

(Page 2 of 3)

In choosing LookSmart’s niches, Hills maintains that he and his team took a mathematical approach to determining what consumers were looking for when they went online. “We looked at the findings of all the major rating services to break out not only which sites consumers are using, but what they are looking for when they go to those sites,” Hills says. “We needed a mathematical underpinning to what we were doing so we could justify our decisions based on scientific evidence.”

Hills and his staff also looked at LookSmart’s existing advertising sources to find areas of concentration.

Flexibility

While LookSmart is pretty much wedded to the 13 original clusters, Hills admits the company is willing to make changes if needed. “Part of any good turnaround requires that you be flexible,” he says. “If we find some of these areas are not working out, we need the flexibility to change our orientation.”

And as part of being a provider of search services to niche audiences, LookSmart knows it needs to offer customers extra features. One such special feature is that when a user finds valuable information, the user can download that information to the LookSmart server and retrieve it as needed. “We realize with so many documents available, it gets to be unwieldy for individuals to save all the pertinent information on their own. We want to help them by keeping valuable information for them,” Hills says.

The strategy Hills devised was in keeping with the direction that had previously been set out by its board. “We knew we wanted to develop a set of vertical web sites with the LookSmart brand that could build upon the advertising base that we had,” says Ted West, chairman of the LookSmart board. “But as a board, we only had a fuzzy idea of what we wanted. It took Dave, who had built web sites in the past, to crystallize the ideas that we had.”

Analyst Matinuzzi agrees that Hills may just be the person to lead LookSmart back into profitability. “I think highly of Dave Hills and he is an Internet industry veteran,” Matinuzzi says. “If anyone can bring this company around, I think he is the one.”

While it is still early, Hills’ strategy seems to be paying off, at least in site visitors. When the new site debuted in October, LookSmart had an aggregate audience of 4 million visitors, including visitors to affiliate sites. By December, that number had more than doubled to 9 million.

Another year of development

And while Hills won’t divulge information about advertising revenue, he notes that the site just began selling advertising in the fourth quarter and “there has been good feedback from the advertising community.”

According to the company’s latest quarterly report released in February, LookSmart’s revenue was $10 million in the fourth quarter of 2005, up 9% from the previous quarter. The report shows the company is anticipating 3% to 5% sequential growth for the first quarter of 2006.

Still, Hills knows it will be a long road back to where the company once was. “We know it will take all of this year to develop a base of regular users, but we’re seeing progress and think we’re going in the right direction,” he says.

Those are somber words for a company whose stock soared for a brief period after it went public in 1999. “We were a high flying dot-com-er for about 25 minutes until reality set in,” Hills laughs. Indeed, LookSmart shares were trading at over $350 a share in early 2000; today, they’re at about $5 a share.

Because of its relationship with Microsoft and as a result of guaranteed income, LookSmart didn’t face the same disastrous scenarios that the other Internet companies faced in the early part of this decade-but only because its day of reckoning was delayed. “What other dot-com companies went through in 2001 and 2002, we face now,” Hills says. For example, in 2002, at its peak, LookSmart had 500 employees. Today it is pared down to about 130.

And in coming to LookSmart, Hills had to do more than just develop a successful strategy, he had to deal with a demoralized company. “After Microsoft was out of the picture, the company lost not only most of its revenue, but much of its energy,” says board chairman West. “Dave Hills breathed new life into the company and took an aggressive posture that we needed.”

On the way back

West has seen the good times and the bad at LookSmart, having become acquainted with the company when it started in the mid 1990s. He himself has 25 years of experience as an entrepreneur and advisor to emerging companies. He currently is a managing director of Sage Partners, a strategic advisory company.

Today, Hills spends much of his day talking to Wall Street analysts and investors and persuading them to be patient. “We’ve been clean with Wall Street for the past year. We don’t put up any false hopes or projections. They know it will be a while before we can break even, but they understand we have a new plan and we’re on our way back to profitability,” Hills says.

LookSmart had a net loss of $17.8 million on revenue of $41.4 million for fiscal year 2005. That compares to a net loss of $9.6 million on revenues of $77 million in 2004. Still, to get back to profitability, analyst Matinuzzi estimates the company’s quarterly revenue of $10 million need to get to get closer to $18 million.

Hills has been around the media business long enough to know there are ups and downs in the business. He spent 21 years with Cox Enterprises, mostly in advertising and sales. In 1994, he moved over to the Internet side of the business working on Cox’s online subsidiary as vice president of sales for interactive media. That latter experience was enough for him to become excited about the Internet world.

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