Overture Sees Revenues Up, Along With Acquisition Costs

Paid search leader Overture Services said late Monday that its fourth-quarter revenue would be higher than anticipated, but net income would fall.

The Pasadena, Calif., company said it now expects revenue in the fourth quarter to come in at $200 million, up from the $190 million originally forecast. However, net income will be off, thanks to a charge arising from Overture’s legal spat with former affiliate partner Internet Fuel. An arbitration panel recently awarded Internet Fuel $8.7 million, after finding that Overture improperly terminated their contract in April 2001. Overture said it cut off Internet Fuel due to “advertiser complaints about traffic quality.” The company said it would explore appeal options to the ruling.

Another potential hiccup for Overture is its cost of acquiring traffic, which the company now expects to be a percentage point higher, at 62 percent of revenue. While a small increase, traffic-acquisition costs have been creeping up. Last quarter, they ran at 59 percent of revenues. The company blamed the increased costs on its largest partners, of which Yahoo is No. 1, accounting for a greater share of revenues.

Overture reports its fourth-quarter results on Feb. 6.

Soundview Technologies on Tuesday morning seized on this as a reason to downgrade its rating on Overture from “neutral” to “underperform,” citing the company’s increased customer-acquisition costs as a potential roadblock to future growth. Overture’s deals with Yahoo and MSN accounted for 63 percent of the company’s $173 million of third-quarter sales.

Overture shares the revenue generated when customers click on paid listings that appear on the sites of its affiliate partners. Deals with mega-portals like Yahoo and MSN give them a higher percentage of revenues as compared to Overture’s deals with smaller partners.

Another factor in the increased acquisition costs was Overture’s international expansion, which continued Monday with the announcement that South Korea would become its fifth international market in the second half of the year. It will join Overture operations in the United Kingdom, France, Germany and Japan.

The South Korea expansion will be spearheaded through a partnership Overture struck with Daum Communications, which operated Korea’s largest Internet portal. Under the terms of a three-year contract, Overture will be the exclusive paid listings provider to Daum.

International expansion has been earmarked as a high priority at Overture in order to make it less dependent on its large U.S. affiliate partners like Yahoo. Also, with the paid listings market in the United States quickly maturing, Overture sees more long-term growth opportunities abroad, where paid search is just taking root.

The company has scored a number of international wins lately, beating out rival Google for a contract with the top portal in the United Kingdom and sharing a deal with Yahoo Japan.