Despite a continuing slump in the market for online advertising, pay-for-placement Internet search service GoTo.com posted second-quarter earnings Wednesday that widely beat analyst estimates, and predicted that it would be profitable two quarters earlier than previously expected.
Pasadena, Calif.-based GoTo.com reported a net loss of $2.9 million (6 cents per share) for the period ending June 30, down 85.7 percent from a net loss of $20.3 million (42 cents) reported for the same period a year earlier. The second-quarter loss was far lower than the 17-cents-per-share average estimate of five analysts polled by Thompson/First Call. Indeed, the second quarter marked the first in which GoTo broke even when it excluded interest, taxes, depreciation and amortization.
Second-quarter revenues rose nearly 200 percent, to $62.5 million from $21 million reported for the second quarter a year earlier. GoTo increased revenue forecasts for the second half of the year to $134 million, up from previous estimates of $121 million. The company said it expects to post a profit for the first time in the third quarter, with net income of $1 million (2 cents). That's a major improvement over previous estimates, in which the company said it will break even by the fourth quarter and turn a profit after that.
GoTo sells placement to advertisers on its search engine. Meaning that each time a user clicks through a listing obtained in a search with GoTo, the advertiser pays GoTo a set bid price. GoTo has emerged as one of the few Internet companies to withstand the advertising downturn, and analysts said that it's because GoTo's search-based service offers valuable leads to advertisers at a time when banner ads have become less popular and the company's business has not relied intensely on dot-coms.
"The company has never been in a stronger position," GoTo CEO Ted Meisel said in a conference call after markets closed Wednesday. "To date, we've seen the economy be mostly a neutral for us."
More than 95 percent of GoTo's searches are generated by affiliates such as America Online and AltaVista, which display GoTo's results on their Web sites.
Earlier this month, a consumer group founded by activist Ralph Nader called Commercial Alert filed a deceptive-advertising complaint with the Federal Trade Commission that indirectly targets GoTo's listings. The complaint took issue with GoTo affiliates such as AltaVista and MSN.com, which both use the description "featured sites" to set apart the paid-placement results on their sites retrieved through GoTo's system. The complaint was not aimed at GoTo because GoTo's own site specifically includes costs to advertisers and the amount the advertiser bid for placement in its search results.
The company sold 2.75 million shares July 9 in a follow-on offering, raising $58.6 million on a share price of $16.50. Bill Gross' Idealab, an Internet incubator that hatched GoTo, also sold 4.75 million shares.
Advertisers paid GoTo an average of 19 cents per paid introduction, compared with 16 cents in the first quarter and 21 cents in the second quarter of 2000. Safa Rashtchy, an analyst with U.S. Bancorp Piper Jaffray, characterized the rebound as "an affirmation there is indeed demand from advertisers."
"The space is big enough; there's room for them to grow, as well," added Rashtchy, whose firm was among the underwriters of a follow-on offering by GoTo on July 9.
The company sold 2.75 million shares in the follow-on offering, raising $58.6 million on a share price of $16.50. Bill Gross' Idealab, an Internet incubator that hatched GoTo, also sold 4.75 million shares.
Shares of GoTo rose 10.3 percent Wednesday to close at $21.15.
