Investors in Overture Services( OVER) have a bad case of the jitters. And there was little the company could do Wednesday morning to soothe them.
Despite a conference call in which the pay-per-click search engine operator tried to direct attention toward new and improved financial forecasts, Wall Street continued to fixate on the threat Overture faces from the boogeyman creeping out of Overture's closet: privately held Google, which last night
ripped Overture from its slot as paid-search provider to America Online's U.S. properties.
After opening low on premarket news of the AOL affiliation loss -- not to mention a Merrill Lynch downgrade to buy from strong buy -- Overture stayed low. In early afternoon trading, Overture's shares were changing hands at $21.67, down $12.52 for the day, or 37%.
On the conference call, as bullish Overture sell-side analysts betrayed dismay that indeed the monster in the closet might indeed be real, CEO Ted Meisel and CFO Todd Tappin focused their message on how the loss of the domestic AOL affiliation wouldn't affect the company's projected growth. "AOL was far from our largest partner," said Meisel. As Overture has said previously, the company hadn't been assuming an extension of the AOL relationship in any of its financial projections.
In addition, said Meisel, the company is continuing to see a steady increase in the revenue it reaps per click "for the foreseeable future."
The company expects bottom-line growth in its core business to continue year over year in 2003, Tappin said; the prospect of shrinking operating margins that Wall Street sees in the company's comments and projections, says Overture, would be due to the costs of international expansion and business investments that lag the company's surprising revenue growth.
But the subject on the call and afterward returned to Google, a company whose nascent AdWords Select pay-per-click advertising business distantly trails Overture's, but nips at its heels nonetheless.
One institutional investor in Overture says that the publicity and the user traffic generated by the AOL deal suddenly make Google a more formidable competitor to Overture. "There are not a lot of real advertisers with AdWords," says the buy-sider, speaking on condition of anonymity. "That's going to change tonight." The investor's firm had a net long position in Overture going into the news of the AOL loss, but was roughly neutral after the slide. Things will get rougher for Overture, says the investor, when Google goes public -- a move that Google isn't talking about making, but which Wall Street expects anyway.
On the call, Meisel said he didn't think AOL -- a unit of
AOL Time Warner
-- went with Google because AOL thought it could make more money from Overture's rival. Rather, he said, AOL appeared to be capitalizing on Google's brand value.
Meisel also hinted at the sacrifices Google might have had to make to land the deal. He didn't know, he said, what another company "might choose to lose" for an opportunity to appear on another company's search pages.
That comment gets to the heart of the Overture bear case: that increased competition from alternative suppliers will eat away at the portion of ad dollars that Overture can keep for itself, rather than turn over to affiliates.
Unfortunately for skittish investors, the next round of boogeyman scares may be popping up awfully soon: affiliation agreements with
and the Netscape browser are due to expire in the coming weeks, according to a recent Overture filing. Another possible risk, says the anonymous buy-sider, stems from the affiliation agreement with
announced last Thursday: The companies haven't said whether Overture is the exclusive paid-search provider; if it isn't and Yahoo! one day announces a deal with Google, too, that's going to hurt, says the buy-sider.