AOL signs up Google

NEWS America Online will use search services from Google, ending its relationship with Overture Services, the companies announced on Wednesday. But Overture stressed that it still expects to see a strong quarter because of its recent deal with Yahoo!. Analysts had been closely watching the negotiations with AOL, a unit of AOL Time Warner. Microsoft and AOL together accounted for 40 percent to 50 percent of Overture's revenue in earlier quarters. In February, Overture announced that it extended its deal with Microsoft's MSN service for at least a year. Overture's search engine allows advertisers to pay for placement in search results. It typically partners with portal sites, splitting the revenue. Although its pay-for-placement model helped it ride out tough times in the Internet advertising market, Overture still faces increasing competition, particularly from rival search engine Google Shares of Overture fell $9.14, or 26 percent, to $25.05 in early trading. Merrill Lynch analyst Justin Baldauf downgraded Overture to "buy" from "strong buy" and other analysts said they were surprised by the demise of the AOL-Overture partnership. AOL said its deal with Google would provide pay-for-placement search results for its AOL, CompuServe, AOL.com and Netscape Communications properties starting this summer. The companies did not provide details about the multiyear deal. Searches performed on AOL's Web site and proprietary service on Wednesday morning indicated that some results were provided by Inktomi. Overture said its deal with AOL's Netscape unit would phase out by August. Its contract to provide search services for the AOL and CompuServe services, as well as the AOL.com site, were set to expire on Wednesday. The company will continue to provide search results for AOL's properties in the United Kingdom, France and Germany under a multiyear deal the companies signed in January. Surprising Wall Street last week, Overture posted a profit of $29.3m, or 48 cents per share, for the first quarter and announced a three-year extension of its deal with Yahoo. Overture: Revenue on course
Overture did not say in its release what effect the termination of the AOL deal would have on its finances. The company did, however, reiterate revenue estimates for the second quarter, adding that because of a $2m change in tax provision estimates it now expects to see net income of $14m and earnings per share of 23 cents. That compares with previous guidance of $16m and 27 cents per share, respectively. The company also raised estimates for the full year, largely because of to the Yahoo deal. The company now says it expects to post revenue of between $530m and $570m for 2002, up from previous estimates of $473m. The company also expects to see a profit of between $60m and $65m, or between 97 cents and $1.05 per share, compared with previous guidance of $58m, or 94 cents per share. Analysts were mixed on Overture's future prospects. "The Yahoo! win more than offsets the AOL loss," wrote Goldman Sachs analyst Anthony Noto, who reiterated his "recommend" rating on the stock and upped his earnings estimates for Overture on Wednesday. "The AOL deal does not change our growth projections or valuation perspective...We viewed the AOL deal as an option, not a risk," Noto wrote. "Overture's leadership position and traffic acquisition costs are unchanged." But other analysts weren't quite as optimistic. Baldauf said the loss of the AOL deal will begin to hurt Overture's financial results in 2003. Overture projected 2003 earnings between 53 cents a share and 83 cents a share, slightly lower than current First Call projections. Revenue, however, will be above estimates at $640m to $690m for 2003. Those targets imply that Overture's profit margins are likely to take a hit because of competition from Google, said Baldauf. "We believe that uncertainty about long-term margins due to competition from Google will likely limit opportunities," he said. Troy Mastin, an analyst at William Blair, pointed out that many analysts had expected the deal between Overture and AOL to be renewed. The failure to ink a deal probably "was not due to a lack of interest on either party's part," he said. However, Mastin said that based on Overture's new fiscal 2002 projections it's likely that "the economics of the Yahoo! agreement are more favorable than the balance of the company's affiliate arrangements."

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