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| LOOK > SEC Filings for LOOK > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
Forward-Looking Statements
The following discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the Notes to those statements which appear elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believes," "intends," "expects," "anticipates," "plans," "may," "will" and similar expressions to identify forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in other sections of this report. All forward-looking statements, including, but not limited to, projections, expectations or estimates concerning our business, including demand for our products and services, mix of revenue sources, ability to control and/or reduce operating expenses, anticipated gross margins and operating results, cost savings, product development efforts, general outlook of our business and industry, future profits or losses, competitive position, share-based compensation, additional expenses to be incurred in connection with the unsolicited tender offer by PEEK, adequate liquidity to fund our operations and meet our other cash requirements, are inherently uncertain as they are based on our expectations and assumptions concerning future events. These forward-looking statements are subject to numerous known and unknown risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to, the possibility that we may fail to maintain or grow our listings advertiser base and/or distribution network, that existing and potential distribution partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing terms, that we may be unable to grow our online search advertising revenue and/or find alternative sources of revenue, that we may be unable to attain or maintain customer acceptance of our publisher solutions products, that changes in the distribution network composition may lead to decreases in query volumes, that we may be unable to maintain or improve our query volume, match rate, number of paid clicks, average revenue per click, conversion rate or other ad network metrics, that we may be unable to achieve or maintain profitability, that we may be unable to retain our existing credit facilities or obtain new credit facilities, that we may be unable to attract and retain key personnel, that we may have unexpected increases in costs and expenses, that we may be unable to remain listed on Nasdaq, or that one or more of the other risks described elsewhere in this report may occur.
All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and except as required by applicable law, we assume no obligation to update any forward-looking statements.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the year ended December 31, 2011. As of June 30, 2012, there had been no material changes to our critical accounting policies and estimates.
Business Overview
LookSmart, Ltd. ("LookSmart" or "the Company") is an advertising network solutions company that provides relevant solutions for search and display advertising customers. LookSmart was organized in 1996 and is incorporated in the State of Delaware.
LookSmart operates in a large online search and display advertising ecosystem serving ads on partner sites. In search advertising we operate in the middle of this ecosystem, acquiring search queries from a variety of sources and matching them with the keywords of our search advertising customers. Our search advertising customers are generally of three types; Intermediaries, Direct Advertisers and Self-Service Advertisers. Intermediaries purchase clicks to sell into the affiliate networks of the large search engine providers. Direct Advertisers and their agencies purchase clicks with the assistance of LookSmart account managers to achieve conversions or sales from the clicks or to obtain unique page views. Self-Service Advertisers are small Direct Advertisers that sign-up online, pay by credit card and manage their account with minimal LookSmart account management assistance.
In display advertising, our customers purchase display advertising which we fulfill and deliver via relationships with third party providers.
LookSmart offers search advertising customers targeted search via a monitored search advertising distribution network using the Company's "AdCenter" platform technology. The Company's search advertising network includes publishers and search advertising customers, including Intermediaries and direct advertising customers and their agencies as well as self-service customers in the United States and certain other countries. The Company's application programming interface ("API") allows search advertising customers and their advertising agencies to connect any type of marketing or reporting software with minimal effort, for easier access, management, and optimization of search advertising campaigns.
LookSmart also offers publishers licensed private-label search advertiser network solutions based on its AdCenter platform technology ("Publisher Solutions"). Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability that allows publishers and portals to manage their advertiser relationships, distribution channels and accounts.
In 2011, revenue from Intermediaries decreased significantly. The decrease was primary driven by a revenue decrease throughout the year, including a significant decrease in the fourth quarter due to revenue chargebacks to our Intermediary customers by large search engine providers. This had a severe impact to Intermediary business models and consequently the business they conduct with us. We have ceased business with several Intermediaries as a result and we do not expect significant future revenue or growth in the Intermediary business. Our future revenue and growth will come largely from Direct Advertisers, Self-Service Advertisers and other digital advertising models we may consider.
In July 2012, PEEK Investments, Inc. (PEEK) and other persons acting in concert with PEEK made an unsolicited proposal to acquire the Company and subsequently commenced a tender offer for all outstanding shares of common stock of the Company. The Company's Board of Directors carefully evaluated the proposal made by PEEK and, after consultation with its financial and legal advisors, unanimously determined that PEEK's proposal was not in the best interests of the Company or its stockholders and recommended that stockholders reject the tender offer. Responding to PEEK's unsolicited tender offer may require the Company to incur significant additional costs.
Results of Operations
Overview of the Three and Six Months Ended June 30, 2012 and 2011
The following tables set forth selected information concerning our results of
operations for the periods indicated (in thousands):
Three Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Revenue $ 3,574 100.0 % $ 6,605 100.0 % $ (3,031 ) (46 %)
Cost of revenue 2,370 66.3 % 3,439 52.1 % (1,069 ) (31 %)
Gross profit 1,204 33.7 % 3,166 47.9 % (1,962 ) (62 %)
Operating expenses:
Sales and marketing 753 21.1 % 558 8.4 % 195 35 %
Product development
and technical
operations 1,555 43.5 % 1,550 23.5 % 5 0.3 %
General and
administrative 1,264 35.4 % 1,037 15.7 % 227 22 %
Total operating
expenses 3,572 100.0 % 3,145 47.6 % 427 14 %
Income (loss) from
operations (2,368 ) (66.4 %) 21 0.3 % (2,389 ) (11376 %)
Non-operating income
(expense), net 9 0.3 % 333 5.0 % (324 ) (97 %)
Income (loss) from
continuing operations
before income taxes (2,359 ) (66.1 %) 354 5.3 % (2,713 ) (766 %)
Income tax benefit - - - - -
Net income (loss) $ (2,359 ) (66.1 %) $ 354 5.3 % $ (2,713 ) (766 %)
Six Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Revenue $ 7,587 100.0 % $ 14,994 100.0 % $ (7,407 ) (49 %)
Cost of revenue 4,585 60.4 % 8,094 54.0 % (3,509 ) (43 %)
Gross profit 3,002 39.6 % 6,900 46.0 % (3,898 ) (56 %)
Operating expenses:
Sales and marketing 1,459 19.2 % 1,167 7.8 % 292 25 %
Product development
and technical
operations 3,343 44.1 % 3,144 21.0 % 199 6.3 %
General and
administrative 2,725 35.9 % 2,462 16.4 % 263 11 %
Restructuring charge - - 889 5.9 % (889 ) (100 %)
Total operating
expenses 7,527 99.2 % 7,662 51.1 % (135 ) (2 %)
Loss from operations (4,525 ) (59.6 %) (762 ) (5.1 %) (3,763 ) 494 %
Non-operating income
(expense), net 16 0.2 % 320 2.1 % (304 ) (95 %)
Loss from continuing
operations before
income taxes (4,509 ) (59.4 %) (442 ) (3.0 %) (4,067 ) 920 %
Income tax benefit - - 1 - (1 ) (100 %)
Net loss $ (4,509 ) (59.4 %) $ (441 ) (3.0 %) $ (4,068 ) 922 %
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Revenue
Revenue is derived from two service offerings or "products" of LookSmart Ltd.
(the "Company"): Advertiser Networks and Publisher Solutions. Total revenue and
revenue from Advertiser Networks and Publisher Solutions for the three and six
months ended June 30, 2012 and 2011, were as follows (in thousands):
Three Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Advertiser Networks $ 3,301 92 % $ 6,313 96 % $ (3,012 ) (48 %)
Publisher Solutions 273 8 % 292 4 % (19 ) (7 %)
Total revenue $ 3,574 100 % $ 6,605 100 % $ (3,031 ) (46 %)
Six Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Advertiser Networks $ 6,950 92 % $ 14,460 96 % $ (7,510 ) (52 %)
Publisher Solutions 637 8 % 534 4 % 103 19 %
Total revenue $ 7,587 100 % $ 14,994 100 % $ (7,407 ) (49 %)
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Advertiser Networks
The decrease in Advertiser Networks revenue for the three months and six months ended June 30, 2012, as compared to the same periods in 2011 is substantially the result of a loss of Intermediary business. We experienced a reduction in Intermediary revenue throughout 2011 and a significant decrease in revenue from Intermediaries in the fourth quarter due to revenue chargebacks to our customers by large search engine providers. This had a severe impact to Intermediary business models and consequently the business they conduct with us. We have ceased business with several Intermediaries as a result and we do not expect significant future revenue or growth in Intermediary business. Our future revenue and growth will come largely from Direct Advertisers, Self-Service Advertisers and other digital advertising models we may consider.
Publisher Solutions
Publisher Solutions revenues were lower in the three months ended June 30, 2012, compared to the same period in 2011 due to seasonal platform volume by one licensee combined with a reduction in a volume by another. Publisher Solutions revenues were higher in the six months ended June 30, 2012, compared to the six months ended June 30, 2011, due to additions to licensees and higher transaction volumes in the first quarter of 2012 as compared to the first quarter of 2011.
Cost of Revenue and Gross Margin
Cost of revenue, consisting of TAC which are amounts paid to our distribution
network partners, connectivity costs, hosting expenses, commissions paid to
advertising agencies, and credit card fees were as follows for the three and six
months ended June 30, 2012 and 2011 (in thousands):
Three Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Traffic acquisition costs $ 2,019 56 % $ 3,044 46 % $ (1,025 ) (34 %)
Other costs 351 10 % 395 6 % (44 ) (11 %)
Total cost of revenue $ 2,370 66 % $ 3,439 52 % $ (1,069 ) (31 %)
Six Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Traffic acquisition costs $ 3,870 51 % $ 7,303 49 % $ (3,433 ) (47 %)
Other costs 715 9 % 791 5 % (76 ) (10 %)
Total cost of revenue $ 4,585 60 % $ 8,094 54 % $ (3,509 ) (43 %)
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TAC as a percent of associated revenue increased in the three and six months ended June 30, 2012, when compared to the three and six months ended June 30, 2011. This increase is due to higher TAC on Intermediary business in 2012 as compared to 2011.
Our other costs of revenue, which consist of network operating costs and credit card processing fees, decreased due to the decrease in revenue.
Operating Expenses
Operating expenses for the three and six months ended June 30, 2012, as compared to the same period in 2011 increased by $0.4 million and decreased $0.1 million, respectively. Operating expense for the six months ended June 30, 2011, included a $0.9 million restructuring charge for a reduction in workforce in that period. Excluding the effect of that 2011 restructuring charge, operating expenses increased by $0.8 million in the first half a year of 2012, compared to the first half a year of 2011.
Operating expenses consist of sales and marketing, product development and technical operations, general and administrative, and restructuring charges for the three and six months ended June 30, 2012 and 2011, and were as follows (in thousands):
Three Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Sales and marketing $ 753 21 % $ 558 8 % $ 195 35 %
Product development
and technical
operations 1,555 44 % 1,550 24 % 5 0 %
General and
administrative 1,264 35 % 1,037 16 % 227 22 %
Total operating
expenses $ 3,572 100 % $ 3,145 48 % $ 427 14 %
Six Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Sales and marketing $ 1,459 19 % $ 1,167 8 % $ 292 25 %
Product development
and technical
operations 3,343 44 % 3,144 21 % 199 6 %
General and
administrative 2,725 36 % 2,462 16 % 263 11 %
Restructuring charge - 0 % 889 6 % (889 ) (100 %)
Total operating
expenses $ 7,527 99 % $ 7,662 51 % $ (135 ) (2 %)
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Sales and Marketing
Sales and marketing expenses include salaries, commissions, share-based compensation and other costs of employment for our sales force, sales administration and customer service staff and marketing personnel, overhead, facilities and allocation of depreciation. Sales and marketing expenses also include the costs of advertising, trade shows, public relations activities and various other activities supporting our customer acquisition effort. The increase in sales and marketing expenses for the three and six months ended June 30, 2012, is primarily due to higher compensation related expense associated with increased headcount.
Product Development and Technical Operations
Product development and technical operations expense includes all costs related to the continued operations, development and enhancement of our core technology product, the AdCenter platform. The AdCenter is used to operate both our own Advertiser Network and other publishers' client networks, and is licensed to publishers to operate their own network. These costs include salaries and associated costs of employment, including share-based compensation, overhead, and facilities. Costs related to the development of software for internal use in the business, including salaries and associated costs of employment are capitalized after certain milestones have been achieved and amortized over a three year period once the project is placed in service. Software licensing and computer equipment depreciation related to supporting product development and technical operations functions are also included in product development and technical operations expense.
Capitalized software development costs include the costs to develop software for internal use, excluding costs associated with research, training and testing.
Product development and technical operations and capitalized software development costs for the three and six months ended June 30, 2012, and 2011, were as follows (in thousands):
Three Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Product development and
technical operations costs $ 1,889 53 % $ 1,671 26 % $ 218 13 %
Capitalized software development
costs (334 ) (9 %) (121 ) (2 %) (213 ) 176 %
Total product development and
technical operations expense $ 1,555 44 % $ 1,550 24 % $ 5 0 %
Six Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Product development and
technical operations costs $ 3,968 52 % $ 3,407 23 % $ 561 16 %
Capitalized software development
costs (625 ) (8 %) (263 ) (2 %) (362 ) (138 %)
Total product development and
technical operations expense $ 3,343 44 % $ 3,144 21 % $ 199 6 %
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The increase in product development and technical operations expense, net of capitalized software development costs for the three and six months ended June 30, 2012, is primarily due to increased travel and higher compensation expense related to higher headcount.
General and Administrative
General and administrative expenses include costs of executive management, human resources, finance, facilities, and desktop support personnel. These costs include salaries and associated costs of employment, including share-based compensation, overhead, facilities and allocation of depreciation. General and administrative expenses also include legal, insurance, tax and accounting, consulting, professional services fees and the provision for, and reductions of, the allowance for doubtful trade receivables.
The increase in general and administrative expenses for the three and six months ended June 30, 2012, is primarily due to higher compensation expense related to higher headcount combined with higher bad debt expense for Intermediary accounts deemed uncollectable in the first quarter of 2012, as compared to the same period in 2011.
During the remainder of 2012, we plan to increase the workforce, primarily in research and development, sales and customer support which will result in comparatively higher operating expenses; however, this planned increase in headcount and associated expense will continue to be closely evaluated relative to operating margin.
Other Items
The tables below set forth other continuing operations data for the three and
six months ended June 30, 2012 and 2011 (in thousands):
Three Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Non-operating income
(expense), net
Interest income $ 21 0 % $ 24 0 % $ (3 ) (13 %)
Interest expense (9 ) 0 % (24 ) 0 % 15 (63 %)
Other income
(expense), net (3 ) 0 % 333 5 % (336 ) (101 %)
Total non-operating
income (expense), net $ 9 0 % $ 333 5 % $ (324 ) (97 %)
Income tax benefit $ - 0 % $ - 0 % $ - 0 %
Six Months Ended June 30,
% of % of Dollar %
2012 Revenue 2011 Revenue Change Change
Non-operating income
(expense), net
Interest income $ 41 0 % $ 47 0 % $ (6 ) (13 %)
Interest expense (21 ) 0 % (53 ) 0 % 32 (60 %)
Other income
(expense), net (4 ) 0 % 326 2 % (330 ) (101 %)
Total non-operating
income (expense), net $ 16 0 % $ 320 2 % $ (304 ) (95 %)
Income tax benefit $ - 0 % $ 1 0 % $ (1 ) (100 %)
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Interest Income and Expense
Interest income, which includes income from our cash, cash equivalents and investments, decreased in the three and six months ended June 30, 2012 from three and six months ended June 30, 2011. The decrease was driven primarily by a shift in the portfolio to shorter term investments and average yields earned during the period.
Interest expense, primarily consisting of interest paid on capital leases, decreased during the three and six months ended June 30, 2012, as compared to the three and six months ended June 30, 2011. This decrease was primarily due to a reduction in capital lease obligations.
Other Income
In 2008, the Company established a settlement fund related to a class action lawsuit in which the Company was named as a defendant, Lane's Gifts and Collectibles, L.L.C., v. Yahoo! Inc. (the "Fund"). In the second quarter of 2011, the Company determined that all settlements related to the Fund had been . . .
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