An ostensibly positive preannouncement that looked negative to Wall Street sent
stock down as much as 13% Tuesday.
Overture, operator of a pay-per-click search engine used by
(YHOO - Get Report)
and other online properties, said revenue for the fourth quarter ended Dec. 31 will be nearly $200 million, surpassing the $190 million figure the company had previously forecast.
Unfortunately for Overture, which is slated to report full results Feb. 6, investors focused instead on another figure in Overture's Monday night release: the percentage of fourth-quarter revenue that Overture paid to companies for placing the search engine on their sites. Instead of paying the forecast 61% of revenue for what Overture calls "traffic acquisition costs," Overture paid 62%.
That increase, though slight, corresponds to what is probably the strongest bearish critique of Overture. Despite the company's revenue and income growth in what is otherwise a difficult environment for online advertising, short-sellers argue that Overture will have to spend
an inexorably rising percentage of its revenue
on traffic acquisition costs. They argue that this trend will ultimately keep the company from meeting the aggressive profit projections that bulls bandy about.
Overture suffers a setback
Aligned with this argument, SoundView Technology Group analyst Jordan Rohan cut his rating on Overture Tuesday morning from neutral to underperform. Rohan's price target for Overture, which he raised from $26 to $31 a week ago, dropped to $29. SoundView hasn't done banking for the company.
Shares in Overture were trading at $28.25 near midday Tuesday, down $2.79, or 9%.
In his Tuesday note, Rohan said Overture's deal with Yahoo! appeared to be at the heart of Monday's announcement. While the volume of usage on Yahoo! seemed to drive revenue higher, the specific revenue-sharing terms with Yahoo! are also cutting into Overture's bottom line, said Rohan. He estimated Yahoo! gets at least 70% of Overture's Yahoo!-driven advertising revenue.
Though Overture has said traffic acquisition costs will be in the 61%-63% range for 2003, Rohan says he believes the company will nudge that range higher, and that those costs could amount to 65% to 66% in 2004.