There was fair warning for investors of Interchange (NASDAQ:INCX). Its search company peers, such as FindWhat (NASDAQ:FWHT), LookSmart (NASDAQ:LOOK), and Ask Jeeves (NASDAQ:ASKJ), posted disappointing results -- and their stock prices suffered. In the big picture, these companies still have strong growth rates -- just not strong enough to satisfy investors.
Yesterday Interchange caught a similar flu, disappointing Wall Street with forecasted EPS of less than half what the Street had been projecting. On the news, the stock plunged 34.53% to $13.53. Keep in mind that late last year, it hit a high of $31.77.
Of course, Interchange demonstrated fast growth. Quarterly revenues were $6 million, a 115% increase from the same period in 2003. Net income was $1.2 million, up 910% from the same period in 2003. On a per-diluted-share basis, net income was $0.14.
With its late 2004 IPO and private placement, the company has raised roughly $40 million. Interchange recently shelled out $15 million of its cash to purchase Inspire Infrastructure 2i AB, a Swedish Internet and wireless company focused on local search.
The deal makes sense. In the ultracompetitive search market, smaller players need to find ways to differentiate their services. Now Interchange has a broad offering of local and wireless search capabilities, such as search for various wireless messaging (SMS, MMS, WAP, and so on), directory assistance, and multilanguage support. Moreover, the company has recently announced deals for local wireless searching with companies such as Verizon.
To get to the specifics of the disappointing guidance referenced earlier, Interchange forecasts first-quarter earnings of $0.02 to $0.03 per share on revenues of $6.3 million to $6.5 million. The 2005 forecast is for earnings of $0.09 to $0.17 per share on revenues of $31 million to $33 million.
This was certainly a major negative surprise. True, in the search space, it is often difficult for a company to provide reliable guidance, since the industry is still in its infancy. But so far, negative surprises have not been infrequent visitors within the search space.
To remain competitive, Interchange says it will continue to invest in its operations. But, unfortunately, other companies such as Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), and Microsoft (NASDAQ:MSFT) also are investing tremendous amounts in wireless and local search. It is unlikely that these mega search companies see Interchange as a threat. Furthermore, the mega providers can offer their customers much more breadth in terms of distribution.
Basically, search looks to be a "winner-takes-all" market. And investors seem to be discounting second-tier players accordingly.
Fool contributor Tom Taulli does not own shares mentioned in this article.
