This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Overture Plunges as Costs Rise

Updated from 5 p.m. EST

Overture Services (OVER) plunged late Thursday after the company warned of a first-quarter shortfall and said costs would rise in 2003.

The setback came as the company posted fourth-quarter results that were in line with Wall Street estimates and maintained its financial guidance for the whole of 2003. But the prospect of a steep shortfall in the first quarter, and the bad news on so-called traffic acquisition costs, a key component of the bearish case on the stock, knocked Overture down 15% in after-hours trading.

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

For the fourth quarter ended Dec. 31, earnings fell to $10 million, or 16 cents a share, from $21 million, or 35 cents a share, a year earlier. The latest quarter included a charge related to an unfavorable arbitration ruling regarding a former affiliate; excluding those costs, net income was $15 million, or 24 cents a diluted share. Revenue nearly doubled, to $200 million from $101 million a year earlier; analysts surveyed by Thomson Financial/First Call had expected earnings of 23 cents a share on revenue of $195 million.

More worrisome to investors, though, was the company's first-quarter forecast. Overture said first-quarter earnings would be 13-14 cents a share on revenue of $215 million-$220 million. Wall Street analysts had expected earnings of 23 cents a share on revenue of $223 million.

Part of the reason first-quarter profit will be at that level, says Overture, is that the company is investing in new tools for advertisers, and it is speeding up its rollout of international operations. The company says it expects its international operations to be profitable in 2004.

Also problematic was Overture's forecast that traffic acquisition costs, or the amount of money the pay-per-view search engine shares with its business partners, would rise to 63%-64% of revenue in the first quarter. The company had previously said it expected that number to stay in the 61%-63% range. The percentage of revenue devoted to traffic acquisition cost is expected to rise one-quarter to one-half a percentage point each quarter from the end of the first quarter through 2004.

Key to that rising traffic acquisition cost, say Overture bears, is the increasing share of Overture's revenue coming from its largest partners -- a trend which increases those players' bargaining power in determining the revenue Overture must share with them.

"We've certainly seen an increase in concentration," said CEO Ted Meisel on Thursday, on a call with analysts. But he said that the company was constantly surprised, and "pleasantly so," by the contributions to Overture's revenue from its partnership with smaller players.

News of the shortfall comes during an eventful week for Overture, which earlier noted deals with AOL Europe and ESPN.

Overture, which was trading above $30 in early January, fell 60 cents in regular trading Thursday to $22.38, then dropped to $18.93 in after-hours trading, after the announcement of its results.

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,678.70 +6.10 0.03%
S&P 500 2,057.09 +5.27 0.26%
NASDAQ 4,771.7630 +13.8840 0.29%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs