Overture Jumps on Yahoo! Surprise

Updated from April 25

Overture Services (OVER) jumped 33% Friday morning after it offered a rash of good news Thursday evening.

The pay-per-view Internet search engine posted a first-quarter profit of 48 cents a share, nearly half again as much as the analyst consensus estimate and reversing a year-ago 13-cent loss. Overture also boosted second-quarter and full-year financial targets, saying advertisers continue to pay the company more for placement in Overture's search results.

And perhaps most important, execs said in a postclose earnings conference call that Overture has extended by three years its affiliation with Yahoo! (YHOO). The stock jumped $8.46 Friday morning to $34.09.

To and Fro

Overture shares have been moving strongly for the past month amid rampant speculation about the fate of talks with America Online. The companies on Wednesday extended their partnership deal for the second time, this time to May 1, as they continue discussions. Investors have worried less about the immediate financial implications of such a move -- Overture has said in the past it can make its 2002 numbers without a renewal from AOL Time Warner (AOL) subsidiary America Online -- than about the prospect that the deal might indicate that AOL and other large affiliates would slice into the amount of advertising revenue Overture would get to keep for itself.

All those worries appeared overwrought, however briefly, Thursday afternoon. Overture's numbers were strong across the board: Revenue surged to $143 million from $52 million a year earlier, beating the $126 million estimate. Earnings before interest, taxes, depreciation and amortization, a common media industry bottom-line yardstick, amounted to $32.5 million in the first quarter, compared with an EBITDA loss of $3.9 million one year earlier.

The company projected a second-quarter profit of 27 cents a share on revenue of $133 million; analysts had expected a 24-cent profit. A year ago, Overture lost 6 cents a share on $63 million in revenue. For 2002, the company said it should earn 94 cents a share on revenue of $473 million, up from the analyst estimates of 87 cents on $466 million and the year-ago earnings of 32 cents on revenue of $288 million.

Sharing the Ball

On the company's conference call, CEO Ted Meisel said that it was still too early in Overture's history to say what the right sharing arrangements between Overture and its affiliates should be. But, he said, the company would continue to improve the economics of its business, primarily by increasing the average amount of money it reaps per sales lead provided to advertisers.

Salomon Smith Barney analyst Lanny Baker on Thursday said that the threat to Overture's bottom line from increased payments to affiliates was overblown. "As long as revenue per click keeps rising, there's a lot of strategic and financial flexibility," said Baker, who has a buy rating on Overture. His firm has done underwriting for the company.

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