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LookSmart (NASDAQ:LOOK) fell 15% Wednesday after reporting disastrous fourth quarter earnings following the market close on Tuesday. The former dot-com darling and search provider - which traded as high as $350 on a split-adjusted basis at the peak of the Internet bubble - closed at $1.19, with the intraday low of $1.10 its lowest trade in two years.

Changing business models is nothing new for LookSmart, which ditched its legacy search engine in 2007 and has bought - and then sold - products and websites such as Net Nanny, Furl, and FindArticles.com. The problem for investors is that none of the initiatives - or repeated management changes - have worked.

Now, the company's search advertising placement business is cratering, with fourth quarter revenues down 46% year-over-year, and 2011 net sales 42% below those of 2010. As CEO Jean-Yves Dexmier explained the issue in the fourth quarter release:

In the fourth quarter, several customers were charged back with very significant settlements for traffic quality, a large portion of which was unrelated to LookSmart. Some customers discontinued their affiliate network business model and our revenue was impacted accordingly. Our net results were further negatively affected by receivable reserves related to those intermediaries whose credit worthiness has been severely impacted by this matter.

In short, LookSmart was dealing with several customers - intermediaries in the online advertising market - who were engaging in "click fraud" of some type. Not only must LookSmart sever its ties with these customers, but it will take a loss on accounts payable by those companies.

Without that revenue, LookSmart's already struggling business appears doomed. Dexmier's forecast was typically understated, but devastating nonetheless:

The intermediary business model experienced a significant change in the fourth quarter. We have ceased business with several of our intermediary customers and do not expect significant future revenue growth in this area. Our future growth will come largely from direct search advertisers, self-service search advertisers and other digital advertising models under development."

The company does not "expect significant future revenue growth" because the business model is broken - it cannot even expect significant future revenue, let alone growth. Now, investors in LOOK must have faith in a turnaround at a company which has seen revenues collapse, which has reported an annual profit once since 2003 - in 2010, using customers that are no longer trustworthy - and which has an accumulated deficit of $234.1 million, compared to a market capitalization of just $20.6 million.

What the "digital advertising models under development" are is unclear, and Dexmier did not elaborate on the conference call. What is clear is that tiny LookSmart is not going to find a pot of gold in an industry dominated by titans like Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), and Microsoft (NASDAQ:MSFT). Yes, the company has $1.43 per share in net cash, but its burn rate looks set to accelerate and it seems unlikely that the company plans to liquidate and return the remaining assets to investors.

In a way, it is impressive that LookSmart held on for as long is it did, given how quickly many of the dot-com meteors like Pets.com and AltaVista vanished from the business world. The company's many maneuvers, acquisitions, restructurings, and management changes prove that LookSmart did, indeed, try its best. But it appears it has failed; it is time for the company, and investors, to move on.

Source: LookSmart Is As Good As Finished