It's been an up-and-down-and-up few hours for Overture Services(Nasdaq: OVER).

The leader in pay-for-performance search advertising reported a 97% jump in revenue after the bell yesterday, hitting raised targets and a fourth-quarter profit of $0.16 per share. It also increased sales expectations for 2003, but lowered its earnings forecast. That caused shares to tumble below $19 in after-hours trading, but they've climbed back to $21.20, down only about 5% from yesterday's close.

Overture provides its technology to "distribution partners" such as Yahoo!(Nasdaq: YHOO) and Microsoft(Nasdaq: MSFT). Advertisers bid for placement in those companies' search results, and the higher the bid, the higher the placement. Thus, when consumers type a word or phrase into Yahoo!'s search engine, the first results they'll see are "sponsor matches" provided by Overture.

One thing worrying investors is the company's "traffic acquisition costs," which rose from 51% of revenue last year to its current level of 62% -- meaning Overture is having to share more of its revenue with distribution partners. Management expects the figure to rise even higher for the next quarter, to the 63% to 64% range, and increase by one-quarter to one-half percent each quarter through 2004. This is the main factor pressuring the bottom line.

In November, we covered two risk factors to keep an eye on: the company's reliance on a relatively few major distribution partners and competitive pressure from Google. Risk from the first factor seems to be diminishing somewhat, as Overture has signed more partners during the fourth quarter, including (a division of AOL Time Warner(NYSE: AOL)) and Disney's(NYSE: DIS)

The second factor is partially responsible for the higher traffic acquisition costs. With Google hanging around as a viable alternative, Overture loses negotiation leverage with potential partners. That's one risk that won't go away anytime soon.