The higher the stakes, the richer the ante.

Overture Services

( OVER) is sure its deals with



and other Internet companies will pay off. Now it's putting hundreds of millions of dollars on the line to back that up, a fact that has some investors worrying anew about the risk that revenue won't keep growing the way the company expects.

The pay-per-click search engine firm said Wednesday that it had guaranteed payments to affiliates of $409 million through 2005 as part of agreements to use Overture's paid listings on their Web sites. Given Overture's disclosure two months ago of payment commitments totaling only $29 million in 2002, the spike in affiliate guarantees suggests the company made significant promises of upfront payments to land at least one of the long-term paid search deals it has announced so far this year.

Overture shares, which have moved sharply in either direction this spring on news of affiliate deals gained and lost, added 34 cents Wednesday to $18.50, putting them toward the bottom of their 52-week range.

More Risk?

The higher payment commitments illustrate that just as Overture's revenue is climbing steadily, so is the size of the upfront risk it's taking on to get the distribution on the Internet it needs to build traffic to its search engine. In addition to these guarantees, Overture also pays affiliates according to various formulas related to actual advertising revenue and usage of its technology.

In the

Securities and Exchange Commission

filing in which it made the new disclosures, Overture doesn't specify which of its affiliates will be receiving the guaranteed payments. Of the several affiliation agreements Overture has announced since the beginning of the year, though, the company's

three-year paid search deal with Yahoo! had the highest profile, sending Overture's stock rocketing. (It

plummeted the following week after Overture was unable to extend an affililation agreement it had with

AOL Time Warner's


America Online.)

Since the start of 2002, Overture has announced affiliation agreements with several other companies, including

United Online




(MSFT) - Get Report

MSN and Infoseek.

A Yahoo! spokeswoman declined to comment on Overture's payment disclosures, and an Overture spokesman had no immediate comment.

Bigger Share

Whomever they're going to, the new payments represent a greater risk for Overture as a percentage of revenue and in absolute dollar amounts. At the beginning of 2001, the company had upfront commitments of $39 million, which amounted to 13% of 2001 revenue of $288 million. In comparison, Overture's 2002 commitments of $125 million, as revealed in its SEC filing, amount to 22% of forecast revenue, though the company has exceeded revenue estimates in the past.

Affiliate commitments climb to $135 million in 2003 and $141.3 million in 2004, according to Overture, and drop to $7.4 million in 2005.

The upfront payments, says one anonymous buy-sider, represent the biggest risks to Overture's stock. If the company weren't able to ring up the sales to cover the fixed payments, "that's how Overture becomes a $1 stock," says the buy-sider, who is long both Overture stock and Overture puts, which are options that pay off if the stock declines, in a bet on the shares' volatility. "I don't think that's the case, but that's the huge risk to the name."

Risks such as competition from rival search engine company Google have spooked Overture shareholders in recent weeks, but the company obviously believes the revenue shortfall risk is a distant one. In fact, Overture has already forecast revenue in the range of $640 million to $690 million for 2003.