Company history and business
LookSmart (LOOK, Financial) was founded in Melbourne, Australia as far back as 1995, under the name Homebase. It was majority-owned by Reader’s Digest. The company was bought by its founders Evan Thornley and Tracy Ellery together with Martin Hosking. The firm attracted venture capital funding both in the U.S. and Australia and relocated to San Francisco. Success came when Looksmart signed a deal with Microsoft (MSFT, Financial) in 1998. The company provided directory and listing services. Microsoft would renew until 2003 although the company lost many other customers in the aftermath of the dot-com bubble in 2000. The founders started selling out soon after the IPO in 1999 but stopped selling when the stock dropped below IPO levels. Subsequently they resumed selling in 2004. From 2004 onwards, when the founders left, it was pretty much downhill for LookSmart although there was a small revival in stock price in 2011.
Then in January 2013 there was an important change when LookSmart appointed Michael Onghai as CEO. Michael Onghai is a value-oriented investor who bought up ~50% of the shares of LookSmart and installed a new board. Board member and intellectual property investor Thorsten Weigl also holds a small % of the company’s shares. They moved immediately cutting costs everywhere except in development and sales and acquired the key assets of Syncapse Corp (most notable the Clickable.com assets) in a bankruptcy sale as early as August 2013. Peter Thiel was an investor in Syncapse.
Products and services
LookSmart provides search, pay-per-click and contextual advertising services. LookSmart also licenses and manages "white label" search ad networks. Today, LookSmart is an online advertising and technology company. It provides advertising solutions for advertisers and publishers. Fortune 100 companies use LookSmart’s product, which is marketing ROI dashboard platform that connects to any data source (ad networks, ad analytics, ad exchanges, mobile, video, social, search, display, offline). The dashboard offers the option to outsource management of Mobile, Search and Social portfolio ad buying across Facebook (FB, Financial), Google (GOOG, Financial)(GOOGL, Financial), Bing, LookSmart and other Tier2 channels. The product basically makes it easy to manage advertising across a number of different platforms. Potentially this saves online marketing people at small, medium and major corporations a lot of time. Based on the contact through the ROI dashboard the company then sells the managed ad services. Before, going bankrupt Syncapse had quite a few major customers.
Financial strength
Although the company has virtually no debt and $1.4 million of cash I wouldn’t call it financially stable. The problem is that, in effect, it’s burning money. Michael Onghai is turning around the company and is very effectively bringing the cost base down through closing down leases, firing expensive executives and other cost savings (he only takes a very modest salary of $80K himself) but without a decent increase in revenue the company is ultimately not going to survive. In my opinion the odds are pretty good that the company is able to increase its revenue. Management believes its existing cash is sufficient to satisfy operating needs for at least another 12 months.
Management
I’ve already mentioned Michael Onghai bought up 50% of LookSmart’s shares, kicked out the previous management. Just slashing previous management salaries and only taking $80k per year himself slashed expenses over half a million per year. Onghai is an experienced value investor and founder of a tech company called AppAddictive which operates in the social media/data/advertising space. Onghai managed a value oriented, long term, hedge fund specializing in online businesses, spinoffs, post-bankruptcies, tender offers, engaged investing in Asia. He is a member of the value investors club and a follower of Buffett. Onghai says he travels to Omaha, for the Berkshire meeting, every year to be there in person. He sees Tom Murphy, James Sinegal, Ben & Jerry's as his ideal CEOs.
The fact that Onghai has an investing background based on value investing and he owns about half of all the shares outstanding tells me he knows how to create shareholder value and is heavily incentivized to succeed. Overall, I really like his background and skin in the game and think management is a crucial part of this investment thesis.
Risks
The most important risk is that LookSmart is unable to gain any traction with its integrated LookSmart/Syncapse products. If revenue doesn’t improve significantly at some point over the next year, the company is going to bleed to death sooner or later due to operating expenses. Other risks are the company gets sold for a decent premium but falling far short of your expectations after a successful turnaround.
Valuation
Although LookSmart is a turnaround that is currently burning cash I don’t think the downside is really 100%. The CEO holds 50% of the shares and has experience with bankruptcy sales through his investing activities and buying the Syncapse assets. The company bought those assets in 2013 for $3 million. To give you an idea, the entire market cap of LookSmart is $5 million. The most important Syncapse asset was Clickable.com between 2006 and 2013; Union Square Ventures, FirstMark Capital and Peter Thiel sank $32.5 million into it and it was acquired by Syncapse only in 2012 for $33 million. They aren’t dumb investors; are the assets Syncapse paid $33 million for a year before really worth only $3 million now?
I don’t think so, not in the least because how Syncapse (Clickable.com) went bankrupt and was forced to sell. From the bankruptcy documents of Syncapse you can learn that the company had a huge overhead. Its major problem was that it lost its Blackberry business when that company lost its mojo. Losing a customer is something most companies can overcome but unfortunately for Syncapse 89% of its revenues in 2009 were coming from Blackberry. So when that company started scaling back marketing due to its own problems it really hurt Syncapse. If you look at its growth rate of the ex-Blackberry business, it was actually growing. A the time of its demise its customers included Anheuser-Busch InBev (BUD, Financial), Alticor Inc. (Amway), The Coca-Cola Company (KO, Financial), Diageo PLC (DEO, Financial), JPMorgan Chase (JPM, Financial) Bank, Johnson & Johnson (JNJ, Financial) and L'Oreal Canada Inc. and in addition to that impressive enterprise customer base, LookSmart had approximately 100 small and medium business clients. I think it’s important to realize this because it tells you something about what the situation could look like if and when LookSmart were able to win back the Syncapse business.
Instead of thinking about the asset value you could go by FCF as well. If LookSmart is able to win back Syncapse business with its new integrated product or to significantly grow adoption of its integrated business $10 million in revenue over 2015 or 2016 are not that outrageous. LookSmart's legacy business brought in approximately $5 million in revenue and Syncapse’s business about $8 million near the end.
If $10 million in revenue seems reasonable as a forward estimate that will result in approximately $2.7 million in EBITDA. With an Enterprise Value of $2.9 million the company trades at an incredible EV/Ebitda multiple of just 1.07x. A bargain like no other in the U.S. markets.
Outlook
The coming year is showtime for LookSmart. We need to see revenue turn a corner and have the company report its product is gaining traction with customers. I expect we are going to see both lowered expenses and customers are, indeed, signing up. The Clickable.com domain is revamped and looks like it's optimized much better to bring in customers. Onghai owns 50% of the shares and is highly incentivized to make it work. The company is hiring sales people every time I check. No doubt, there is a chance Onghai will fail and will have to liquidate the company as best he can; in that scenario investors stand to lose a bundle but never more than 100%. If Onghai succeeds I see a double of the shares as an absolute minimum result.
