February 6, 2003 4:20 PM PST

Overture profits down as costs spike

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Search company Overture Services on Thursday reported a decline in fourth-quarter net income due to a one-time charge and sharply higher distribution costs, although it said revenue exceeded analyst expectations and its paid advertising listings grew.

The Pasadena, Calif.-based company, which auctions placement in search results on major partner sites such as Yahoo and MSN, reported net income of $9.5 million, or $0.16 per diluted share, on revenue of $199.6 million in the fourth quarter. Those figures compare with net income of $20.8 million, or $0.35 per diluted share, on revenue of $101.2 million in the fourth quarter of 2001.

The company reported that its traffic acquisition costs grew by more than 140 percent to $124.8 million for the year, compared with $51.9 million in 2001. As a percentage of revenue, traffic acquisition costs were 62 percent in the fourth quarter of 2002, ended Dec. 31, compared with 51 percent a year ago.

Fourth-quarter results included a one-time, pretax charge of $8.7 million in an arbitration decision with a former affiliate, Internet Fuel. The quarterly results also included $3.3 million in tax expenses, compared with $750,000 in the fourth quarter of 2001.

Excluding the charges, the company's profit was $14.7 million, or 24 cents a share. Analysts expected Overture to earn 23 cents per share on revenue of $194.18 million, according to a survey by First Call.

Looking ahead, Overture said it expects first-quarter net income of between $8 million and $9 million, or 13 cents to 14 cents per share, on revenue of between $215 million and $220 million. It also expects traffic acquisition costs as a percentage of revenue to reach as high as 64 percent.

For the full year, the search company said it is aiming to reach revenue of approximately $1 billion.

Overture's shares were down 18 percent in after-hours trading, dropping from $22.38 a share to $18.94.

For the year ended 2002, Overture reported net income of $78.4 million, or $1.31 per diluted share, on revenue of $667.7 million, excluding the fourth quarter one-time charge. That compares with net income of $20.2 million, or 36 cents per diluted share, on revenue of $288.1 million for 2001.

Ted Meisel, Overture's president and chief executive officer, ascribed the company's growth to its international expansion and to greater demand for paid search.

"We continue to make great progress toward our mission of providing marketers with new and powerful ways to connect with customers," said Meisel. "In a dynamic market, we executed well across every important measure of the business and ended a highly successful year on a strong note."

Overture is by far the titan of pay-for-performance advertising on the Internet. The company has been on a tear recently, signing distribution deals with many major Web sites. On Wednesday, the company said it broadened a deal to provide pay-for-placement search results for AOL Europe's Web sites. In addition, Yahoo is testing a new layout for search results that packs more paid listings from Overture onto the page, a move that could increase revenue for both companies. Furthermore, Overture has been successfully courting news and information Web sites, signing a three-year agreement with CNN.com and another with ESPN.com.

The company is also expanding overseas at a fast clip. It's plotting expansion into South Korea and greater exposure on its European partner sites, which include AOL Europe, Lycos Europe, and Wanadoo and Voila in France.

Lanny Baker, financial analyst at Salomon Smith Barney, wrote in a report Thursday that he expected Overture to realize 16 percent sequential growth and 98 percent year-over-year revenue growth in the fourth quarter of 2002.

He was bullish on the search industry overall, estimating that it comprised between 20 percent and 24 percent of the total online advertising industry in 2002. That compares with its share of between 10 percent and 12 percent in 2001.

Overture said that revenue was bolstered by its average number of paid introductions, or "clicks." It delivered 563 million paid introductions between advertisers and consumers worldwide in the fourth quarter of 2002, compared to 442 million paid introductions on a worldwide basis in the same period the previous year. For the full year 2002, Overture facilitated 2.2 billion paid introductions, up from 1.4 billion for the full year 2001.

Globally, advertisers paid Overture an average of 35 cents per click during the fourth quarter, compared with an average of 23 cents during the same period a year earlier. The company also recently raised its minimum bid rate in the United Kingdom and is expected to do the same in the United States.

Additionally, the search company reported that it has more than 80,000 advertisers, a 51 percent increase from a year earlier.

On a conference call, Overture said that for 2003, Yahoo and MSN will make up about 50 percent of its revenue, with the top ten of its customers comprising about 75 percent. It said that for the year, it's target margin is 15 percent.

"This is a large market and getting larger everyday, yet it's still young," said Meisel. "The global opportunity is immense--Internet use is growing, and search is growing, and we're just starting to scratch the surface."

Overture ended 2002 with about $251 million in unrestricted cash and liquid investments, up from $170 million as of Dec. 31, 2001.

 

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