FindWhat.com Turns Up a Strong Fourth Quarter

FindWhat.com (FWHT Quote) reported better-than-expected financial results for the fourth quarter, confirming the continued growth of the paid-search Internet advertising market dominated by Overture Services (OVER Quote).

Comments from FindWhat.com executives, however, once again drew attention to business challenges faced by Overture, which is expected, when it reports fourth-quarter financials Thursday, to report revenue 15 times greater than FindWhat.com's.

The pay-per-click advertising market in which Overture and FindWhat.com operate -- allowing advertisers to bid for search terms on Internet search engines, but pay for those listings only when users click on their listings to visit their Web sites -- has been an island of strength in the online ad market. But Overture's successes, in particular, have been tinged by investor concerns over how much the company will have to pay Web publishers for the privilege of placing its search engine on their properties.

On Tuesday, FindWhat.com's shares fell 6 cents to $7.75, then jumped 55 cents in after-hours trading upon release of the company's financials. Overture, which announced a deal with ESPN.com Tuesday, saw its shares fall 76 cents to $22.33 in normal trading.

For the fourth quarter ended Dec. 31, FindWhat.com reported revenue of $13.4 million, up from $8 million a year earlier and better than expectations of $12.2 million. Overture, by comparison, says it expects to report nearly $200 million in revenue for the fourth quarter.

FindWhat.com's fourth-quarter earnings based on generally accepted accounting principles amounted to $2.7 million, or 14 cents per diluted share, compared to $1.6 million, or 8 cents a share, a year earlier. The company, which had no income tax expense for 2001, recognized $1 million of income tax expense in the fourth quarter of 2002.

For full-year 2003, the company upped its revenue forecast from $55 million to $60 million, and raised its estimate for pretax earnings from 60 cents to 66 cents.

FindWhat.com said its operating margin, which amounted to 27% in the fourth quarter, would drop to 23%-24% in 2003.

The major factors affecting that operating margins, says the company, are expansion costs such as capital expenditures, litigation costs related to a patent battle with Overture, and the percentage of revenue the company must pay to the online publishers who host FindWhat.com's search engine.

Both the litigation costs and publisher payments have been lower than expected, the company says.

Over the past year, Wall Street has debated whether rising payments to publishers, also known as subscriber acquisition costs, are the Achilles' heel of Overture's business model. On a conference call with analysts, FindWhat.com reiterated its thesis that it will see its subscriber acquisition costs rise neither as quickly nor as high as Overture's because FindWhat.com's partners don't have the bargaining power of Overture's largest partners, which include Yahoo! (YHOO Quote).