An unexpected surge in customer cancellations hurt House Values (NASDAQ: SOLD) earnings in the fourth quarter, company CEO Ian Morris said Thursday.

The company, which offers marketing tools and services for real estate professionals, announced a net loss of $5.34 million for the quarter ended Dec. 31, 2006, or 22 cents per diluted share, compared with net income of $4.01 million for the same quarter in 2005.

Fourth-quarter 2006 revenue rose 15 percent to $21.5 million compared to the prior year’s quarter. The company also reported that adjusted earnings before interest, taxes, depreciation and amortization in the fourth quarter were a loss of $492,000 compared with adjusted earnings of $6.62 million in fourth-quarter 2005.

For the full year in 2006 the company reported a net loss of $3.14 million, or 12 cents per diluted share, compared with net income of $14.98 million in 2005.

Revenue increased 13 percent in 2006 to $98.2 million. The company’s adjusted earnings before interest, taxes, depreciation and amortization were $7.7 million in 2006 compared with $24.1 million in 2005. Cash flow from operations was $11.2 million in 2006 compared with $24 million in 2005.

The company reported that it lost more customers than it gained in the fourth quarter — with about 4,300 canceling customers and 2,700 new customers.

“This nonrenewal rate is unacceptable,” Morris said during the company’s earnings announcement Thursday. The company ended the fourth quarter with about 14,600 customers, Morris said. “There’s no doubt the market conditions have made the last couple of quarters more challenging than we expected.”

The company’s revenue decline, due in part to fewer real estate customers, also reflects lower average revenue per real estate customer and a decline in revenue from the mortgage business that the company has exited, the company announced.

In January, HouseValues officials announced that the company was cutting 60 employees — or about 12 percent of its overall workforce, in a move to leave the mortgage lead-generation business and to refocus its operations on its real estate agent customers.

The company also announced that it would scale back or eliminate other initiatives that are not vital to supporting its real estate agent customers.

Morris said Thursday that the company intends to focus its efforts to retain and attract successful agents who tend to be the most profitable for the company. “Focusing on the right customer is an integral part of our goals for 2007,” he said, noting that the company now has the highest number of customers who have been using the company’s services for two years or more.

Morris also said that the company will continue to support its property-search Web site, HomePages.com, with enhancements.

The company’s stock price per share rose 8 cents Thursday to close at $5.89.

An audio replay of the company’s earnings conference call is available through 11:59 p.m. ET on Friday, Feb. 23, by dialing (719) 457-0820 and entering the passcode: 4168400#.

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