Settlement gets Homestore in shape for more growth.

Homestore Inc. has taken another step in its long road to a turnaround late last month when the company reached an agreement that will cap its financial responsibilities related to its former CEO Stuart Wolff.

The Westlake Village-based Internet real estate marketing and information company agreed to pay up to $11 million in legal expenses incurred by Wolff, who is involved in litigation related to Homestore's financial irregularities earlier in the decade.

The agreement is expected to help the company predict its future expenses and plan for the operating steps it hopes to take to rebuild its business.

"Capping the exposure to what is the highest profile executive is a pretty good thing," said Frank S. Gristina, senior analyst with Avondale Partners LLC, which does not have a position with Homestore. "If this executive has the largest legal expense, we know the others will be below that."

Wolff has already incurred $7.6 million in legal expenses for his alleged role in Homestore's accounting irregularities. As part of the agreement, Homestore will not seek repayment of the expenses it reimburses to Wolff.

Homestore is expected to incur additional charges related to two other former executives of the company. But analysts said that the lingering effects of the company's financial troubles are likely behind it.

Homestore has already paid out about $100 million to settle a class action suit by shareholders related to the same financial reporting issues.

Early in the decade, Homestore's financial reporting troubles nearly crippled the company, which has since replaced its senior management team.

Over the past three years, the company has been rebuilding its business, initially directed at providing real estate listings online, but its efforts have been hampered by its litigation costs.

So far, Homestore has focused on its Realtor.com website in its turnaround efforts, shifting its emphasis from providing listings to offering advertising opportunities to real estate agents.

Homestore executives did not return phone calls, but in an investors' conference hosted by ThinkEquity Partners on Sept. 11, Mike Long, the company's CEO, reported that its efforts have to date shown results.

"Three years ago we were selling technology products to realtors for a subscription at $300 or $400 a year. It capped our revenue opportunity," Long said. "Part of our investment strategy is to convert it to a true media online model, so we could build a relationship with the real estate agent to where we could sell them advertising products limited only by our imagination and their needs."

New model

Today, 85 percent of Homestore's revenues are derived from online media products, compared to 30 percent as of the second quarter of 2003, Long said, and the new model seems to be paying off.

For the most recent quarter ended June 30, Homestore reported net income of $3.3 million or $0.02 per share on revenues of $63.3 million.

The second quarter revenues performance reflects a 16 percent increase over revenues for the comparable period last year, but it is in earnings where Homestore has shown the greatest improvement.

Its second quarter net compared with a loss of $4.3 million in the year-ago quarter, and it was only the second time in the previous eight quarters that Homestore earned a profit.

Driving officials' optimism about their new business model is a market they say accounts for some $20 billion in annual advertising expenditures when all products and services related to moving are factored in.

Realtors, home builders and apartment owners, the primary focus of the new model, account for some $9 billion in annual advertising expenditures, and the majority of that spending is done in traditional media.

"Online advertising is almost completely undeveloped," Long said during the investors' conference.

Marketing products

The company now plans to spend about $25 million through the second quarter of 2006 on its Homebuilder.com and Welcome Wagon product, a print vehicle it is marketing as an advertising opportunity for a variety of products and services for new homeowners.

Gristina noted that once the company strays from its core realtor market, it will face a great deal of competition. Nonetheless, he added, there is ample opportunity for growth with real estate brokers.

"That's a $5 billion a year market, so that's a fertile market and there's plenty of room for them to take a larger share of that," Gristina said.

Homestore also faces a great deal of competition from real estate brokerage companies that have enhanced their own Websites, particularly in the years that Homestore stumbled.

But Gristina also pointed out that in many parts of the country, real estate brokerages are very fragmented, and, perhaps more important, consumers will continue to seek third party Websites that provide a wider range of information than individual brokerage companies offer.

Homestore Logs Slow improvement

Net earnings (Losses) * (* in millions)

9/03    -30.6
12/03   -12.1
3/ 4     -5.1
6/04     -4.3
9/04     -4.6
12/04    +6.0
3/05      -.395
6/05     +3.3

Note: Table made from bar graph.