Ask Jeeves Answers Microsoft's Questions (News) October 11, 1999

Ask Jeeves Answers Microsoft's Questions

By Dave Marino-Nachison (TMF Braden)
October 11, 1999

OK, we'll admit it: Ask Jeeves' (Nasdaq: ASKJ) online question-and-answer service has been the butt of a few jokes around here at Fool HQ.

Can you blame us? After all, the website's very interface is begging for mockery, asking users to type in a question -- in plain and simple English -- and wait for it to come up with links that will, hopefully, point toward an answer.

So as Fools, you'll forgive us if we sometimes get a little punchy from too many late nights on the message boards and take a break to ask Jeeves "Where are my pants?" (some interesting suggestions) or "Qui�n es mas guapo, Lorenzo Lamas o Ricardo Montalban?" (not much help there).

Alas, the question "When will your company turn a profit?" is gently parried.

But by focusing our energies on Ask Jeeves' consumer search engine, there's a chance we're overlooking the one aspect of the company's business that could distinguish it significantly more than a cartoon of a butler ever would.

Today's news involving an expanded deal with software giant Microsoft (Nasdaq: MSFT) not only sent Ask Jeeves' shares up more than 30% but drew attention to a small but growing piece of the company's revenue pie: its corporate question answering service. Microsoft is ramping up the integration of Ask Jeeves' interface on its Personal Online Support page -- terms of the deal weren't disclosed -- which the company said gets more than 250,000 questions daily.

For reference purposes, Ask Jeeves as a whole answered an average of just over a million questions daily in Q2, the vast majority of them by the consumer site. The corporate unit, though, counts per-answer fees among its revenue streams, while the consumer area is supported by advertising and partner fees.

Trying to analyze the impact of the corporate answering service on Ask Jeeves' results is difficult given its very brief operating history.

What we do know is this: For the second quarter ended June 30 -- the first period in which the two divisions ran as separate business units -- the corporate operation accounted for 30% of revenues (the consumer site makes up the rest), up from 6% in Q1.

Ask Jeeves didn't turn a gross profit in Q1 but did nearly 16% in Q2. It doesn't appear that the corporate division was responsible for that, however. Customization and installation of the corporate service requires more work and time -- as much as five months -- as it requires considerable specialization and interaction with the customer. Ask Jeeves outsources much of that work but has been extra-cautious because of quality control concerns. That may in part explain why the corporate division couldn't manage a gross profit in Q2.

Still, the corporate service operates on a contract basis (usually one year), so there is the potential for a more regular revenue stream. The flip side of this is that for many companies it might not make sense to use the Ask Jeeves offering as it's most valuable for large companies with broad, complex web sites, such as BellSouth (NYSE: BLS), Compaq (NYSE: CPQ), Dell (Nasdaq: DELL), and Office Depot (NYSE: ODP) -- all users of Ask Jeeves. That could constrain the market opportunity considerably.

Nevertheless, that such well-known and respected companies are on board with Ask Jeeves speaks well to the potential and acceptance of the company's interface and should provide it with the support to collect additional customers. It also suggests that Ask Jeeves is actively looking for ways to find new ways to leverage its technology and pick up new revenues. The corporate service is clearly a work in progress, but the progress shown since the division launched about a year ago is encouraging.

Ask Jeeves, as an investment, is still by most measures a highly speculative place to put one's money. But for those who are interested in this and other new and quickly changing companies -- and who plan on actually doing their research before sending a ticker symbol to their online brokerages -- it pays to read 10-Ks and other sources of corporate information carefully.

In the case of Ask Jeeves, to evaluate the company purely based on its consumer-focused publicity might end up doing both it and your account balance a pretty gross disservice.

Related Links:
AskJeeves Web Page
AskJeeves Message Board
Lorenzo Lamas
Ricardo Montalban

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