Bid-for-placement portal reports strong quarterly results and a provides a healthy outlook. Advertisers and consumers alike are beginning to warm up to GoTo's model in which choice search results can be bought. Performance has become the name of the game and GoTo is playing all the right cards.

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By Rick Aristotle Munarriz (TMF Edible)
July 26, 2001

Pay-for-performance search engine specialist (Nasdaq: GOTO) has taken its business model to heart, delivering results at a time when its larger peer portals like Yahoo! (Nasdaq: YHOO) and Lycos parent Terra Lycos (Nasdaq: TRLY) are stumbling.

With second-quarter revenues nearly tripling to $62.5 million, GoTo reported break-even results on an EBITDA (earnings before interest, taxes, depreciation, and amortization) basis.

Wait, it gets better. GoTo now expects to be profitable ahead of schedule. The company is looking at sequential revenue growth and $0.02 and $0.05 a share in profits in the third and fourth quarters. While next year's target of $0.31 a share in net income is in line with analyst estimates, having a company confirm projections rather than hose them down is a rare welcome sight nowadays.

GoTo's upstream strength stems from its simple premise. Sites bid for placement on the company's popular search engine. The results are then ranked based on how much each advertiser is willing to pay GoTo. The company makes no bones about it, spelling out exactly how much each click will cost the GoTo client. There was a time when GoTo was the ethically bankrupt portal; spitting out results based not on criteria or impartial relevance but simply on the weight of the ransom a site was willing to pay to be ranked highly.

GoTo hasn't changed its ways, but the mindset of the advertiser and consumer has. Internet sponsorship has soured on the idea of banner ad impressions as the sole basis for setting a pay scale. Advertisers now want actionable clicks. GoTo delivers on that front, to a targeted audience, or the advertiser doesn't have to pay. While it might be a harder sell on some users, the GoTo crowd seems to accept the once peculiar notion that a company willing to transparently pay for a click might have something worth checking out.

Granted, there is also tangible proof that the warming process continues. Landing a record 323 million paid introductions during the quarter, the user seems to have no problem clicking on GoTo's generated results. As for advertisers, despite so many dot-com obituaries, GoTo now has 45,000 sponsors on board. The average click was also worth $0.19. While that's off last year's $0.21 mark, it is still three cents higher than the company generated in this year's first quarter.

But clients aren't the only ones bidding up GoTo exposure. Investors have seen the stock climb nearly fivefold since its December lows. Like its signature logo, the company is seeing nothing but green lights on the information superhighway. Let's just hope it's also cautious enough to mind its speed.

Rick Aristotle Munarriz loves (Cost to advertiser: $0.00). He also owns shares of Yahoo! Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

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