Compared with giants like Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), and Microsoft (NASDAQ:MSFT), Interchange (NASDAQ:INCX) is a mere speck in the online search business. While the top companies are making enormous profits, this is certainly not the case with Interchange.
In the first quarter, revenues were $3.2 million, which was down from $5.9 million in the same period a year ago. The company posted a net loss of $3.8 million, down from $131,000 in net income a year ago. The big drop on the top line is the result of the massive deterioration of the national search market. And, given Interchange's cost structure -- that is, hard to cut it enough -- the loss was massive. Also, the margins on the national search market are not large (so a big drop in revenues magnifies the net loss).
Traditionally, Interchange has provided search services for national advertisers. This is done through sponsored listings that show up when users search for key terms, making it easy for advertisers to tap into a broad network of search engines and websites. For this, Interchange gets a piece of the money spent on advertising. However, this has been a declining business for Interchange, and it hired Merriman Curhan Ford to sell it off.
So it was certainly a smart move for Interchange to move its business to local search in August 2005. Interchange also licenses its local-advertising platform to third parties.
Basically, with local search, online consumers can look for business products and services by area, city, and ZIP code. And advertising spending for the local online market is expected to be large; according to The Kelsey Group, it's forecasted to be $6.2 billion per year by 2010.
In the first quarter, Interchange's local search business generated $1.2 million in revenues, which was a $600,000 increase from the prior quarter. Yet the company is ranked No. 6 in the local search market -- which is including more and more players (such as those backed by venture capitalists).
If Interchange could not compete on the national market, why will it now be able to succeed in the local market? Simply put, with only about $12 million in the bank, Interchange really does not have a lot of resources to capitalize on this growing market. Yes, history may repeat itself, and the winners for local search are probably going to be the big players, like Google, Yahoo!, and Microsoft.
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Fool contributor Tom Taulli does not own shares mentioned in this article.
