America Online has dumped Overture’s pay-for-placement search service in favor of Google’s similar AdWords offering, depriving Overture of one of its biggest customers and sending the company’s shares plummeting nearly 36 percent.
Despite being downgraded by Merrill Lynch from strong buy to buy, Overture said it expects to follow its strong first quarter with a positive second quarter, thanks to other lucrative deals it recently signed.
Overture CEO Ted Meisel said in a conference call, “We view AOL’s decision as a minor setback.” In addition, he called the switch an attempt “to capitalize on Google’s search brand, and pay-for-performance merely came as part of the package.”
Despite Meisel’s seeming nonchalance, it is not clear what effect the loss of a substantial customer like AOL will have on the search engine company’s financials.
Overture has hung onto Microsoft, another significant customer. Together, Microsoft and America Online had represented about half the search engine company’s business.
Earlier this year, the company extended its contract with Microsoft, gaining at least another year of service with the Redmond, Washington-based software giant.
Overture also has inked a three-year extension of its relationship with Yahoo.
Bad News for Inktomi
Despite its other deals, the demise of the AOL relationship represents a significant loss for Overture, which carved out a niche in a tough market by offering a pay-for-placement model to advertisers.
The deal also spells bad news for Inktomi. That company’s three-year deal with AOL will end in August, when it will be replaced by Google as AOL’s Web search engine, both domestically and internationally.
Google will begin offering its pay-for-performance search service to AOL, including the AOL.com and Netscape Communications business units, when Overture’s contract expires this summer.
While news of the AOL-Google deal sent Overture shares down to $21.99, the company raised its financial guidance for full-year 2002.
Overture said it expects revenue for the year will total between $530 million and $570 million. The company earlier had estimated it would generate $473 million in revenue.
Profits now are projected to be between $60 million and $65 million, rather than the previously forecast $58 million, according to the company.
But the company said it expects net income in the second quarter will amount to just $14 million, with earnings per share of 23 cents, down from its previous estimate of $16 million, or 27 cents per share.
Overture beat analysts’ predictions in the first quarter, reporting a profit of $29.3 million, or 48 cents per share.
Google chairman and CEO Eric Schmidt noted that AOL will benefit from “the extreme accuracy and rapid return” offered by Google’s search results.
Incoming AOL Time Warner co-chief operating officer Bob Pittman called Google “the reigning champ of the online search.”