Overture Gets Squeezed

After pioneering the paid search market, Overture Services now faces its roughest patch yet, in its fifth year, as it tries to diversify its business, consolidate two mergers, and fend off Google.

On Wednesday, the company suffered a double whammy: it had to cut its earnings forecast for the year in half while Google simultaneously announced the acquisition of Overture distribution partner Applied Semantics.

While Overture returned solid profits on increased revenue in the first quarter, the company was forced to admit that the vast changes it’s undertaken in the last six months — two mergers, the rollout of at least four new products, and launches in seven international markets — have proven more complex and difficult than previously expected. As a result of that, and lower profits expected from its domestic paid listings business, the company cut its profit guidance for the year by half.

Overture had long signaled that this year would be a transitional year, in which the company re-ordered its business to match up against Google, reduce dependence on its two biggest portal partners, and find increased revenue opportunities from search.

Still, the news sent a frisson of fear through Overture investors, who today drove the company’s stock down 27 percent by early afternoon. Wall Street analysts put their seal of approval on the sell-off, downgrading their recommendations of Overture’s shares. Smith Barney, Credit Suisse First Boston, and U.S. Bancorp Piper Jaffray all lowered their ratings on the stock. The company’s shares are now down nearly 60 percent in 2003.

The shock of the drastically altered earnings outlook was exacerbated by Overture rival Google, which announced yesterday its acquisition of search technology provider Applied Semantics, in a move that will aid its nascent content-targeted ad program.

Google already got the jump on Overture by rolling out its program in March, while Overture is still testing its own offering. The addition of Applied Semantics will only widen Google’s lead in the newest area for paid listings.

Applied Semantics was an early pioneer in contextual advertising, rolling out its AdSense last October. AdSense uses Applied Semantics’ search technology to figure out the key concepts of a Web page based on the technology’s database of millions of related concepts. It then serves ads based on those key concepts. Overture was among the partners Applied Semantics signed up to supply paid listings on AdSense ads, which are used by USAToday.com and NYPost.com.

The Applied Semantics distribution deal is small compared to those Overture’s has with its mammoth partners, Yahoo and MSN, which account for two thirds of its revenue. However, it is big enough to rank in the top 10 distribution partners in Overture’s latest financial filing.

The company won’t comment on the deal, which runs through August. Google has said all deals will be reviewed, but few would expect the two heated rivals to work together.

“[Applied Semantics is] a significant player,” said Danny Sullivan, editor of Search Engine Watch, which is owned by the parent company of this site. “They’re probably not that much behind someone like Ask Jeeves. That’s a real blow, especially when Overture is having some problems.”

What’s worse, Google bragged that the deal for the Los Angeles-based company would allow it to further its engineering presence in Southern California, giving it a perch just miles from Overture’s Pasadena headquarters.