Homestore faces shareholders

Homestore will host its annual shareholder meeting today in Los Angeles. Investors likely will question the company’s outlook for profitability and how it plans to compete with the latest entrants to online real estate, including Barry Diller’s LendingTree.

Homestore provides marketing exposure and technology products to the real estate industry. The company also operates Realtor.com, the official Web site of the National Association of Realtors.

The company’s stock (Nasdaq: HOMS) traded at $3.81 a share this morning, little changed from the previous day’s closing price of $3.83. Overall, Homestore’s stock performance is up from this time last year when shares were trading at below $2.

In the past year, Homestore narrowed its quarterly loss, struck a deal with Microsoft, settled major class-action lawsuits brought against it and achieved year-over-year quarterly revenue growth. Despite these milestones, investors have questioned whether the company’s current business model should be altered to encompass lead referral fees as a way to speed up the prospect of profitability.

The licensing agreement Homestore has with NAR prohibits referral fees, but NAR leadership is considering modifying the agreement. Referral fees are viewed as one strategy for helping to make Homestore profitable.

Homestore still has not reported a profit, but its earnings reports have shown improvement this year.

In the first quarter, Homestore achieved its first year-over-year quarterly revenue growth. The company reported first-quarter revenue of $56.1 million, up from $54.9 million during the same quarter a year ago. The increase was due to Homestore’s media services segment, which added $1.7 million in revenue, and the software segment, which added $200,000. Revenue from the print segment decreased $600,000.

Homestore reported a first-quarter loss of $5.1 million, or 4 cents per share, an improvement from its net loss of $12 million, or 10 cents a share, the previous quarter.

The first-quarter loss compared with a net income of $87.2 million during the same quarter a year ago. However, that income included a $104 million one-time gain related to the settlement of Homestore’s distribution agreement with AOL.

Homestore had $41.1 million in cash and short-term investments at the end of the first quarter, compared with $5.5 million the previous quarter.

On other troubled fronts, current Homestore management, led by CEO Mike Long this year made progress in cleaning up pending litigation against the company. In March, a federal judge approved a $93 million settlement in a class-action shareholder lawsuit, which accused Homestore of falsifying financial statements and engaging in accounting irregularities in 2000 and 2001.

In April, Homestore placed in escrow the final $3 million of its cash settlement agreement relating to the shareholder class action lawsuit. Last October, the company agreed to pay the California State Teachers’ Retirement System (CalSTRS) $13 million in cash and issue 20 million shares of newly issued common stock to the group, which was the lead plaintiff in the suit. The company placed $10 million of the cash settlement in escrow last fall.

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