February 12, 2002 3:15 PM PST

Overture surprises analysts, extends MSN deal

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Internet search company Overture Services on Tuesday swept past Wall Street expectations for the quarter and announced that it has extended a relationship with Microsoft for at least a year.

Overture, formerly known as GoTo.com, allows advertisers to pay for placement in Internet search results. The Microsoft deal will allow the company to provide results for Microsoft's MSN search, a move that locks in one of its most important customers. MSN's search results page will feature Overture's top three so-called pay-for-performance listings under the heading "sponsored sites."

Shares of Overture gained on news of the agreement, climbing $5.91, or 27 percent, to close at $27.66 on the Nasdaq Stock Market. Shares continued to gain in after-hours trading after the company blew away Wall Street's earnings and sales estimates.

The company reported net income of $20.8 million, or 35 cents a share, on revenue of $101.2 million. Research firm First Call had projected earnings of 19 cents a share on revenue of roughly $85 million.

Overture makes money every time a Web visitor clicks on a paid link found through its search service. The company said such "paid clicks" surged in the fourth quarter to 442 million, up from 338 million in the third quarter. Advertisers paid Overture an average of 23 cents per paid click.

Investors had questioned Overture's future when it lost to rival Google a deal to provide search results for Internet service provider EarthLink. But Overture earlier this month stood by its expectations to top quarterly results despite the end of the EarthLink agreement.

On Tuesday, Overture also projected revenue of $422 million for 2002 and earnings of 93 cents a share. That tally is well ahead of First Call estimates, calling for revenue of $357 million and earnings of 52 cents a share.

Microsoft is one of Overture's key customers, which, along with America Online, accounted for 40 percent to 50 percent of its third-quarter revenue. The company has also announced an extension of its deal with Yahoo through the end of the second quarter.

Goldman Sachs analyst Anthony Noto added the stock to his "recommend list" Tuesday, saying in a research note that he believes domestic revenue could grow at 19 percent through 2006. International revenue, meanwhile, should generate a "meaningful portion of revenues by 2004 as the company gains traction in its new markets," Noto said, adding that he expects international sales to account for 27 percent of total revenue by 2006.

Noto said he didn't think losing the EarthLink deal would hurt the company's chances with other customers, such as Microsoft and AOL.

"We believe there is room for multiple players in the space," he said, adding that Overture's dynamic pricing and the power of its established advertising network would "support their ability to maintain a significant leadership position much in the same way that eBay was able to do when Yahoo and Amazon entered the auction market."

 

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