Overture Services

1
Overture Services

• McIntire Investment Institute
• November 5, 2002

2
Business Description

• Overture operates a service that allows
  advertisers to bid for priority placement within
  Internet search engine results
• The advertiser chooses a specific keyword on
  which to bid
• Advertisers pay the amount they bid every time
  someone clicks on their link within the search
  results after searching for that keyword

3
Business Description (cont.)

• Minimum bid amount 0.05
• Although the company operates a stand-alone
  search engine on its website, Overture relies on
  affiliates (portals, web browsers) to integrate
  its product into their search engines to generate
  the vast majority of traffic on the service

4
Major Affiliates
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Affiliate Relationships

• Affiliates offer Overture search results in
  several ways
• Aggregated with the search results of several
  services
• At the top of the page above their own results
  (Yahoo, MSN)
• In rotation with other search products (Netscape)
• As a stand alone service by providing Overture
  results on their own site or by linking to the
  Overture Website

6
Affiliate Relationships (cont.)

• Overture compensates affiliates for carrying the
  service with
• Fixed guarantees (with minimum traffic
  requirements)
• Variable payments of revenue generated by the
  affiliate or per search or per click
• Combination of above
• Compensation to affiliates for carrying the
  service is referred to as traffic acquisition
  expense

7
Investment Thesis

• Overture is a short because
• The company relies heavily on a few affiliates to
  generate a disproportionately large amount of
  traffic on its service
• There are few barriers to entry in the business
  and new entrants, especially Google, pose a
  significant threat to the companys long-term
  success

8
The company relies heavily on a few affiliates to
generate a disproportionately large amount of
traffic on its service

• Q302 Yahoo and MSN accounted for 63 of
  traffic on the Overture Service
• Affiliates generate 95 of OVERs traffic
• Powerful affiliates may demand higher percentage
  of revenues
• Traffic acquisition costs are rising
• May develop their own service

9
The company relies heavily on a few affiliates to
generate a disproportionately large amount of
traffic on its service
10
The company relies heavily on a few affiliates to
generate a disproportionately large amount of
traffic on its service

• According to a Street.com article
• Larger affiliates account for 65 of revenue but
  only 25 of profits
• Smaller affiliates contribute up to 75 of net
  income
• Additional risk to OVER Smaller affiliates will
  use this leverage to extract more lucrative deals

11
There are few barriers to entry in the business
and new entrants, especially Google, pose a
significant threat to the companys long-term
success

• Hundreds of pay-per-click services are available
  on the internet
• Only need to worry about one

12
There are few barriers to entry in the business
and new entrants, especially Google, pose a
significant threat to the companys long-term
success

• Googles popularity threatens Overtures
  continued success
• Entered pay-per-click in mid 2001
• Google took AOL and AskJeeves affiliate
  relationships from OVER

13
Google Stats

• 150 million searches a day
• May account for up to 40 of web searches
• Searches 2 billion web pages
• Overtures search service limited to database of
  8 million sites
• Cannot compete on stand-alone basis
• Over 50 of traffic from outside the U.S.
• OVERs growth strategy shifting overseas

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How can Google affect OVER?

• Direct traffic away from affiliate search
  services
• Less traffic on Yahoo, MSN, etc. less revenue
  for OVER
• Well, we think Google is a threat to our
  partners and their search businesses . . . search
  has grown quite a bit over the past year or two,
  and probably of the new search, or the new search
  volume, Google has probably gained a majority of
  that. So we're concerned about that with respect
  to our partner businesses. And, obviously, the
  better our partners do the better we do --- Ted
  Meisel, OVER CEO, 7-26-02

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How can Google affect OVER?

• Steal affiliate partnerships when contracts
  expire
• AOL and AskJeeves
• Unlike OVER, Googles search engine generates
  traffic on its standalone site
• May offer affiliates more lucrative contracts to
  gain market share (can rely on revenues from
  Google.com and return more to affiliates)

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Risks to Investment Thesis

• Overture is a profitable company with significant
  revenue growth
• Recently extend contracts with MSFT (12-03/04),
  Yahoo! contract through 4/05
• OVER has maintained its margins through
  increasing average price-per-click
• Some affiliates are dependent on OVER for revenue
• Yahoo!

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Overture Fundamentals

• Market Cap 1.35B
• ROE 38.65
• Current ratio 2.67
• Short ratio 18.3
• LT Debt 0
• Profit Margin
• Q3 9.8
• Q2 11.4

• Operating Margin
• Q2 17.8
• Q1 19.0
• FCF
• 1st Half 02 13.3M
• Net income 46.8
• 4.5 of revenues

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Revenue Growth
19
Net Income
20
Price-Per-Click Growth
21
Paid Introductions
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Management

• Ted Meisel, CEO, since 2000
• With OVER since 98 (COO)
• TicketMaster/CitySearch
• McKinsey Co.
• Dartmouth/Stanford

23
Management

• Jaynie Studenmund, COO
• PayMyBills
• Retail Banking
• Booz, Allen Hamilton
• Avery Dennison
• Wellesley/Harvard

24
Management

• Todd Tappin, CFO since 98
• Twentieth Century Fox
• MCA/Universal
• University of Colorado

25
Board of Directors

• Meisel TicketMaster
• Bob Kavner Ticketmaster
• Steve Alesio American Express, Administaff
• Linda Levinson American Express, Administaff
• Bill Elkus original VC investor
• Bill Gross founder, original chairman
• Terrell Jones Replaced Brewer, former CEO of
  GoTo.com

26
Additional Findings and Areas for Future Research

• Merrill Lynch Affidavit
• GoTo.com coverage (prior to IPO)
• Kristen Cambell, research analyst
• Emails indicate ratings were inflated because
  Merrill didnt want Todd Tappin to be mad
• ML Investment Banking was seeking the IPO
  business
• Integrity?

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Additional Findings and Areas for Future Research

• Jeffery Brewrer, 33, resigned from OVER Board to
  pursue philanthropic interests and new commercial
  ventures
• Former CEO of GoTo (replaced in 2000 with Meisel)
• Why?
• What is he doing now?

28
Additional Findings and Areas for Future Research

• Message Boards
• Isolated messages about inexplicable changes in
  click rates and competitor manipulation
• Are these isolated incidents or an indication of
  more widespread problems?

29
Additional Findings and Areas for Future Research

• Conversation with Terri Adams of Precision Arts
  Advertising (Ambassador Program)
• Suggested price sensitivity of advertisers
• Could indicate ceiling on average PPC
  (substitutes available Google)
• Need to determine if this exptrapolates to the
  majority of advertisers

30
Additional Findings and Areas for Future Research

• Changes in language in financial statements
  regarding litigation and contigencies
• Trademark infringement suits
• More disclusure and increased statements
  regarding materiality of possible outcomes
• Does this indicate increased likelihood of
  negative outcome?

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QUESTIONS?