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Yellow Pages Look Green to FindWhat Investors

A deal with Verizon sends an also-ran in the paid-search business up 16%.

Pay-per-click search engine operator

FindWhat.com

(FWHT)

announced a deal with

Verizon's

(VZ) - Get Verizon Communications Inc. Report

yellow pages business Wednesday.

The agreement, under which FindWhat.com will enable Verizon to sell keyword-targeted ads in its SuperPages.com online phone listings, sent FindWhat.com's stock soaring.

The announcement once again spotlights the promise of locally targeted Internet advertising -- a market that companies from

Microsoft

(MSFT) - Get Microsoft Corporation Report

on down have attempted to tap for years, without a significant payoff.

The news also highlights a business strategy first publicized more than a year ago by FindWhat.com, which is a distant contender in the paid search business to industry leaders

Google

and the

Yahoo!

TheStreet Recommends

(YHOO)

-owned Overture Services. In addition to operating a pay-per-click search engine that appears on various Internet publishers' sites, FindWhat.com has sought to build a private-label search business by licensing the technology, originally to

Terra Lycos

(TRLY)

and now to Verizon.

The usual industry practice would have FindWhat.com selling the keyword-based advertising that appears on Verizon's site, then sharing the ad revenue with Verizon. But under the private-label deal, Verizon itself will do the ad sales -- say, an ad for

Krispy Kreme

(KKD)

that pops up when a SuperPages.com user searches for "donuts" -- then pay a percentage of that as a licensing fee to FindWhat.com.

On Wednesday afternoon, FindWhat.com's shares were up $2.40, or 16%, to $17.26.

The two companies didn't disclose the financial terms of the agreement, which is set to take effect on SuperPages.com early next year. FindWhat.com also has neither broken out the financial performance of, nor announced long-term targets for, its private-labeling business. But, says FindWhat.com corporate development head Rick Szatkowski, private labeling "is a very important part strategically" of the company's product offerings.

Potentially, a private-label search engine might be attractive to large publishers able to sell search-engine or keyword-targeted advertising on their own. But FindWhat.com has a long way to go before it can upend the paid search industry. The company expects revenue of $70 million for the year -- less than a tenth of what Overture was expecting, before its acquisition by Yahoo! -- to reap in 2003.

Next, to FindWhat.com's sub-$100 million revenue, the numbers associated with yellow-pages advertising look exceedingly attractive. In its Wednesday press release, FindWhat.com cited numbers from the Kelsey Group research firm forecasting that the U.S. online yellow-pages market will reach $5.2 billion in 2008, growing at a compound annual growth rate of 59%.

But it's unknown, of course, how much of that money Verizon might get, and how much of it will trickle down to FindWhat.com.

Furthermore, companies have been predicting the imminent boom of the local online advertising market since the mid-1990s. But, as the skeletons of such efforts as Microsoft's Sidewalk attest, that boom has so far failed to appear. That optimism, however, has returned this year, with Google and Overture each developing locally targeted advertising products.

Szatkowski is optimistic about Verizon's chances for success, given the telco's established yellow-pages sales force. "Trying to reach the local businesses is difficult and nearly impossible unless you're focused on that market to start with," he says. If a company doesn't already have relationships with small and medium-sized businesses, he says, "it's going to be very difficult to build up that local advertising base."