Claria Files for $150M IPO

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Adware maker Claria filed with the Securities and Exchange Commission last week for a public offering of shares that could net it up to $150 million.


The IPO filing shows the controversial firm as highly profitable. For 2003, Claria reported net income of $34.8 million on $90.5 million in sales. The results were a sharp turnaround from 2002, when Claria eked out a $91,000 profit on $40.6 million in sales.


Claria changed its name from Gator in October. Its adware serves pop-up ads tied to users' Web browsing behavior. The ads drew the ire of both publishers and advertisers, along with a flurry of lawsuits claiming they constituted copyright and trademark infringement and an unfair business practice.


Claria asserts its ad software resides on a user's desktop and displays windows on the user's computer screens not unlike instant messaging programs. In return for the ads, users get use of the eWallet software for filling in online forms.


Despite ongoing litigation, Claria has strong finances. One big driver is paid listings through Yahoo's Overture Services unit. Claria displays Overture ad listings through its SearchScout adware. When users do a Web search, SearchScout displays a pop-under window with Overture results keyed to the search.


According to Claria's SEC filing, in 2003 fees from clicks on these Overture listings generated $28 million, or 31 percent of its revenue. Claria began using Overture listings in early 2003. The listings ended up accounting for nearly half of the company's revenue growth for the year. Claria's agreement with Overture expires in September 2007.


Claria's reliance on paid search revenue is similar to that reported by e-commerce search engine Shopping.com in its IPO filing last month. Shopping.com counts on Google for 38 percent of its sales.


Claria's proposed public stock offering is evidence of how far the adware industry has come. Often accused of underhanded distribution tactics and invading user privacy, adware makers like Claria and WhenU.com have become sought after for their connection with users as a way of funneling ad messages.


180Solutions, a Bellevue, WA, adware maker, recently took in $40 million in venture capital funding. Its Zango search appliance is adware that users download in exchange for access to online content. It periodically launches an advertiser's Web site when a user searches for a keyword or is on a Web page tied to that term.


180Solutions said it has 6,000 advertisers and 31 million downloads. The company said it turned a profit on more than $19 million in sales last year.


Claria, founded in 2000, said it has 43 million users worldwide and 425 advertisers, including NetFlix, FTD.com and Orbitz.


Despite the buoyant numbers, Claria and other adware makers still face legal and regulatory challenges.


Utah recently enacted an anti-spyware law that Claria said would bar it from providing its ad services there. The law, which takes effect May 3, bans software that delivers ads based on a user's Internet behavior.


Adware companies are not alone in protesting the law. Industry groups and more than 30 technology companies including Yahoo, Amazon and Microsoft opposed the legislation, saying its broad wording would cover a host of innocuous Internet communications such as virus tracking by security companies.


Congress is also considering legislation that could impede adware's growth. WhenU.com CEO Avi Naider testified before the Senate on March 10 about how poorly crafted federal anti-spyware legislation could hurt legitimate online advertising businesses. The Federal Trade Commission will hold a public hearing about how to define spyware April 19.


Claria already has faced a spate of lawsuits, including one by The New York Times, Washington Post and other top news publishers. That suit, which alleged Claria broke copyright and trademark laws with its ad-serving tactics, was settled in February 2003.


It still has cases pending in U.S. courts and in Europe, where Hertz recently won a restraining order against Claria serving ads to visitors of the Hertz site in Germany. In its SEC filing, Claria notes that nine companies are suing it. Litigants include Hertz, L.L. Bean, Six Continent Hotels and Wells Fargo.


Lawsuits against Claria have questioned whether users truly are aware of Gator's presence, since it is often bundled with other software. Claria's flagship GAIN software is bundled with file-sharing application KaZaA, for example. Claria said KaZaA downloads account for "a substantial portion" of its user base.


Claria notes that half of its users uninstall its software within 30 days of downloading it.


Deutsche Bank Securities, Piper Jaffray, SG Cowen and Thomas Weisel will underwrite the stock offering. Claria proposes trading on Nasdaq under the ticker "CLRA."


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