Usually when a company reports sales have increased 136% year over year, you don't expect it to lose more than a third of its market value over a three-day period. Yet that's what happened to paid search firm FindWhat.com (NASDAQ:FWHT) as it released its first-quarter results but also reported that its CFO resigned, its auditor resigned because of a plethora of problems found in its internal controls, and its profits for the rest of the year have evaporated. Not exactly the kind of report to cheer investors' hearts.
At one time, FindWhat.com was an industry leader, but that field has become crowded with the likes of larger rivals Google (NASDAQ:GOOG), AskJeeves (NASDAQ:ASKJ), and Yahoo (NASDAQ:YHOO) elbowing it out of the way, along with other, smaller firms such as Mamma.com (NASDAQ:MAMA) and LookSmart (NASDAQ:LOOK) taking business.
When colleague Rick Aristotle Munnariz noted that despite this not being the company's finest hour, it was still an intriguing investment play, I'm sure he had no idea that the company was in such dire financial straits. In the fourth quarter of 2004, it reported a record 251 million click-throughs and a 7% increase in its "active relationships," those businesses that have had a paying transaction with FindWhat. In the most recent quarter just reported, FindWhat.com saw click-throughs increase to 259 million and the active relationships grow an additional 13% to 85,000 businesses.
The problem is that instead of the $0.14 per share in earnings the analysts had been expecting, the paid search company turned in earnings of only $0.10 a share, well below the $0.17 it had earned last year. That was the result of a number of partnerships it terminated as a result of their falling below FindWhat's standards: That usually means they install spyware or similar type software on customers' computers and make it difficult to remove. They might also run afoul of the standards by redirecting customers to websites with which FindWhat doesn't have a business relationship. It marks the second quarter in a row that it has made that decision and taken a direct hit to its profits.
Last year the company made a conscious decision to stop showing online gambling ads in the U.S. That move accounted for $2.3 million in third quarter revenues last year. That was followed in February by a decision to eliminate partners that didn't generate conversions to sales, a move that deleted sources that could have generated revenues of $70,000 a day. FindWhat said it was trying to create a quality client list instead of one boasting a quantity of names.
While such moves appear to be the "right thing to do," as CEO Craig Pisaris-Henderson says, it's also creating huge pockets of air in its financial statements. It now predicts it will earn somewhere between $175 and $200 million for the full year, whereas only two months ago it had predicted sales of $250 to $275 million. The weak results caused the company's CFO to tender her resignation immediately, though she'll supposedly stay on until a replacement is found.
Equally disconcerting for investors is the resignation of the company's auditors, Ernst & Young. Although they certified FindWhat's financial statements, they also reported six material weaknesses in its financial controls and disagreed with management over a goodwill impairment related to its 2004 accounts. The paid search firm has been acquiring smaller companies of late, including five in 2004. Throw in an ongoing lawsuit with Yahoo's Overture search service -- a decision on whether FindWhat is violating Overture's patents is due any day -- and the company is filled with major uncertainty over how it will continue to expand, grow, and prosper.
With the consolidation that has been occurring in the industry and with FindWhat.com's price at the lowest level it's been at in years, FindWhat may just find itself a takeover candidate on its own.
Find your way around the search industry with these related bits of Foolishness:
- FindWhat Searches for a Tailor
- FindWhat.com: A Year Later
- Searching for Innovation
- Searching for Profits
Fool contributor Rich Duprey sadly owns shares in this disaster called FindWhat.com. He does not own any of the other stocks mentioned in the article.
