Overture Plunges as Margin Questions Resurface

Shares in Overture Services (OVER Quote) fell more than 17% Friday after a Salomon Smith Barney analyst cut his earnings estimates, price target and rating for the stock.

Overture's drop Friday is the latest twist in a volatile Wall Street debate over the long-term prospects for Overture, which operates an advertising-supported, pay-per-click search engine that appears on Yahoo! (YHOO Quote), Microsoft's (MSFT Quote) MSN and other Internet properties.

While Overture bulls point to the company's remarkable ability to increase revenue and profits in an otherwise anemic Internet advertising market, Overture short-sellers insist that competition from rival search engine operator Google, along with the bargaining power of big players like Yahoo!, will erode Overture's gross margins by forcing the company to pay an ever-higher percentage of advertising revenue to the companies on whose properties Overture's search engine appears.

Overture's shares fell $4.83 Friday, or 17.5%, to trade at $22.70.

New Front

Friday's report by Salomon Smith Barney analyst Lanny Baker, however, opens up a new front in the ongoing debate. Rather than saying Overture's margins are at risk from big players like Yahoo! and Microsoft -- companies with vast online distribution networks that presumably can drive a hard bargain with Overture -- Baker says that the privately held Google's entry into the paid-search market threatens Overture's pre-eminence among smaller distribution partners that account for a majority of the company's earnings.

To and Fro Overture's volatile year

Baker cut his price target on Overture Friday from $31 to $21 and his rating on the stock from outperform to in line. While keeping his fourth-quarter 2002 earnings estimate steady for the company, Baker cut his full-year 2003 earnings estimate from $1.10 per share to 95 cents -- from 5 cents over the high end of Overture's guidance down to 5 cents over the low end.

Salomon Smith Barney or an affiliate has done investment banking for Overture in the past 12 months.