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piper jaffray - reiterate outperform

  1. High Pullback Creates Attractive Buying Opportunity - Piper Jaffray


    LookSmart, Ltd. (LOOK - $2.72)
    Outperform Volatility: High

    Pullback Creates Attractive Buying Opportunity;
    Reiterate Outperform

    Buying Opportunity. Shares of LookSmart have lost 20% over the past few
    days with no news or negative catalyst, we believe mostly on continued
    reaction to the increasing traffic cost that the Company announced in its
    earnings on January 28. At the current price, LOOK is trading at 15x our 2003
    GAAP earnings, a deep discount to its comp group, which trades north of 20x.

    Attractive Acquisition and Partnership Candidate.
    We reiterate our view
    that LOOK represents a very attractive option in the search market with its trio
    of assets: editorial directory, Paid Inclusion (much in demand these days), and
    algorithmic search. These assets make LOOK both an attractive acquisition
    candidate as well as a desirable partner to increase search monetization and

    Overblown Concerns on Margins. While the increase in distribution cost
    was a surprise and negatively impacted our 2003 margin estimates, we note
    that it was due primarily to an increase in revenue, which ultimately pushed
    LOOK into the highest revenue share bracket with MSN. However, we believe
    the revenue share percentage will not increase beyond the 53% - 55%, as the
    incremental revenue share step-up, is at its maximum level. Even at these
    levels, the Company is highly profitable with projected operating margin of
    12% in 2003, going to 16% in 2004, despite the fact that we are increasing
    distribution cost even further in our model for 2004.

    Leverage Still There: 30%+ Incremental EBIDTA Margin. We note that
    even with the increased costs, and assuming further increases in 2004, the
    Company still has tremendous leverage, with incremental EBITDA margin of
    over 30% in 2004.

    Risks. Include loss of distribution, concentration risk from MSN, and
    increased distribution costs.

    Search Industry is Heating Up. We believe 2003 will prove to be a highly
    dynamic year for the search industry, with major portals (Yahoo, MSN, AOL)
    making significant partnership additions/acquisitions to increase their monetization
    of search and gain market share. In this environment, we believe LOOK is well
    positioned both as a partner to generate addition revenues from Paid Inclusion as
    well as a potentially attractive acquisition, offering an algorithmic search
    (Wisenut), an editorial directory, and paid inclusion infrastructure. These assets are
    highly desirable as the portals are focused on two key themes: owning search
    functionality and increasing monetization of the search page beyond paid listings
    provided by Overture. Beyond these two potentials (of added distribution or
    acquisition), we expect LOOK to outperform our estimate just on an organic basis
    and believe it is an attractive investment even without an additional catalyst.

    LookSmart, Ltd. is a global leader in Web directories, reaching more than four out
    of five U.S. Internet users.
    650-838-1347, [email protected]
    Jason M. Avilio, Research Analyst
    650-838-1427, [email protected]
    Reason for Report:
    Company Update
    From To
    Changes (Previous) (Current)
    Rating -- Outperform
    Price Tgt -- $4.50

    FY03E Rev (mil) -- $140.2
    FY04E Rev (mil) -- $183.0

    FY03E EPS -- $0.18
    FY04E EPS -- $0.30

    Price: $2.72
    52 Week High: $4.13
    52 Week Low: $0.76
    Price Tgt -- $4.50
    (15x 2004 GAAP EPS)

    Shares Out (mil): 105.2
    Market Cap. (mil): $286.1
    Avg Daily Vol (000): 675
    Book Value/Share: $0.65
    Cash Per Share: $0.49
    Div (ann): NA
    Yield: NM

    Est LT EPS Growth: 30%
    P/E to LT EPS Growth (FY03): 0.5x
    Est Next Rep Date: 04/03
    Fiscal Year End: Dec

    Rev (mil) 2002A 2003E 2004E
    Mar $20.1A $32.0E $41.3E
    Jun $21.0A $33.5E $43.9E
    Sep $23.8A $35.0E $46.7E
    Dec $31.3A $39.7E $51.2E
    FY $96.0A $140.2E $183.0E
    CY $96.0A $140.2E $183.0E

    FY RM 3.0x 2.0x 1.6x
    CY RM 3.0x 2.0x 1.6x

    EPS 2002A 2003E 2004E
    Mar ($0.05)A $0.04E $0.06E
    Jun ($0.01)A $0.04E $0.07E
    Sep $0.00A $0.04E $0.08E
    Dec $0.33A $0.06E $0.10E
    FY $0.29A $0.18E $0.30E
    CY $0.29A $0.18E $0.30E
    FY P/E 9.4x 15.1x 9.1x
    CY P/E 9.4x 15.1x 9.1x

    EPS estimates are GAAP, excluding impact of
    potential variable accounting charges relating to
    non-cash stock option expense.

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