ValueClick, Inc. Q1 2006 Earnings Conference Call Transcript (VCLK)

May. 8.06 | About: Conversant, Inc. (CNVR)

ValueClick, Inc. (VCLK) Q1 2006 Earnings Conference Call May 8, 2006 5:30 PM ET

Executives

Gary Fuges - VP, IR

James Zarley - Chairman, CEO

Sam Paisley - CAO

Analysts

Aaron Kessler - Piper Jaffray

Mark Mahaney - Citigroup

Eric Martinuzzi - Craig-Hallum

Heath Terry - Credit Suisse

Peggy Grindle - Jefferies

Michael [Prosparra] - ThinkEquity Partners

Mark Bacurin - Robert W. Baird

Scott Wolfgang - Thomas Weisel

Derek Neumann - JP Morgan

Richard Fetyko - Merriman Curhan Ford

Presentation

Operator

(Operator Instructions) Now at this time, I would now like to turn the call over to Gary Fuges, Vice President of Investor Relations for ValueClick Incorporated. Please go ahead, sir.

Gary Fuges

Thank you. Good afternoon and welcome to ValueClick's first quarter 2006 financial results conference call. On the call with me today are James Zarley, ValueClick's Chairman and CEO; and Sam Paisley, Chief Administrative Officer.

Today's call contains forward-looking statements that involve risks and uncertainties, including but not limited to ValueClick's ability to successfully integrate it's recently completed FastClick and WebClient mergers, trends in online advertising spending, and estimates of future online performance-based advertising. Actual results may differ materially from the periods predicted and reported results should not be considered an indication of future performance.

Important factors which could cause actual results to differ materially from those expressed or implied in the forward-looking statements are detailed under the Risk Factors section and elsewhere in the filings of the Securities and Exchange Commission made from time to time by ValueClick. This includes the annual report on Form 10-K, filed on March 31, 2006; and an amendment to its annual report on form 10-K(a) filed on April 21, 2006; recent quarterly reports on Form 10-Q and Form 10-Q(a); the current report on Form 8-K filed on February 26, 2006, another current reports on Form 8-K. This also includes its amended registration statement on Form S4 filed on September 27, 2005 and its final prospectus on Form 424B3, filed on September 28, 2005.

Other factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements include but are not limited to the risk that market demand for online advertising in general, and performance based online advertising in particular, will not grow as rapidly as predicted. ValueClick undertakes no obligation to released publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. With that, I'll turn the call over to Jim Zarley, Chairman and CEO of ValueClick.

James Zarley

Thank you, Gary, good afternoon, and thank you for joining us for ValueClick's [inaudible - technical difficulties] final thoughts and then we'll take your questions.

ValueClick's first quarter was a strong start to what we believe is to be another successful year for the Company. We delivered revenue above the high end of our guidance range and our adjusted EBITDA was in line with our guidance, in spite of $2.6 million in unanticipated professional fees that were not included in our quarterly guidance. Without these expenses, we would have increased our adjusted EBITDA by $2.6 million and our margin would have been more in line with what you expect of $117 million in revenue. You'll see that we recoup those margins when Sam gives his guidance for the second quarter.

Based on our first quarter results and our improved outlook for the rest of the year, we're raising our 2006 guidance for revenue and adjusted EBITDA, and we believe the Company is positioned well to maintain the momentum throughout the year.

The March quarter had a number of highlights. Revenue increased 128% year-over-year to $117.3 million, more than $5 million above the high end of our guidance range of $110 million to $112 million.

Pro forma organic growth in the quarter was 25% year-over-year and revenue was actually higher than the fourth quarter, which is historically the strongest quarter of the year.

We had another strong quarter overall in media and we continue to drive synergies between the recent acquisitions of WebClients and FastClick. Affiliate marketing grew due to continued growth in the U.S. and European e-commerce market, and both media and affiliate marketing were up sequentially in Q1 of 2006.

Gross profit was 66.5% in the quarter, up 20 basis points from last quarter. We would expect this gross margin to continue to grow moderately as we improve media's gross margin post-FastClick during 2006. Reported operating income increased 27% year-over-year to $16.1 million.

Now let's review the quarter highlights of the three business segments. The media division had a very busy and successful quarter with 222% year-over-year revenue growth, and pro forma revenue growth for worldwide media products up 30%.

During the quarter we were successful in integrating our WebClients, FastClick, and ValueClick media products. We are now operating out of a single sales force, selling all the various pricing models through ValueClick. Part of revenue increase is a result of these three organizations working together as a single unit. We believe that this is just the beginning. We now reach two out of every three users, every month, in the United States.

Worldwide affiliate marketing revenue increased 23% and highlights the growth that we're seeing in this space. We experienced excellent growth in the U.S. and even faster growth in Europe. While the UK continues to be our largest producer in Europe, our recent openings in Germany and France are beginning to produce positive results. Our growth is attributable to the value we provide our clients in helping in their e-commerce sales effort.

Technology continues to generate strong margins, and we continue to expect flat to moderate growth from technology throughout 2006. We see potential to grow this area more rapidly by consolidating it into our affiliated marketing product, and we'll have more to say about this on our next call.

Our Company continues to build on a strong cash position. We now have in $260 million in cash, and unless we use the cash to buy back stock or make acquisitions, we anticipate exceeding $300 million in cash before year end.

So overall the quarter was strong; a good quarter and a good start for the year. I'll turn the call over to Sam, who will provide you with more details on our financial performance and raised guidance.

Sam Paisley

Thanks, Jim. Before I discuss our financial results, I want to mention that first quarter 2006 results include a full quarter's activity from e-Babylon and WebClients, which were both acquired in June 2005; and FastClick, which was acquired in late September 2005.

Also starting with this quarter, we began accounting for stock-based compensation in compliance with FAS-123R. Stock based compensation is allocated in our operating expense line items for the first quarter of 2006 and the year ago period.

In the first quarter of 2006, ValueClick generated $117.3 million in revenue from our consolidated operations, an increase of 128% over Q1 2005 revenue of $51.4 million; and above our guidance range of $110 million to $112 million.

Pro forma organic growth, which includes the historical performance of the acquisitions I previously mentioned, was approximately 25% year-over-year. Gross profit was $78 million for the first quarter of 2006, an increase of 105% compared to gross profits of $38.1 million for Q1 2005. This increase results from overall revenue growth.

For the first quarter of 2006, gross margin was 66.5% versus 74% in if the first quarter of 2005. The lower gross margin in Q1 of 2006 was primarily due to the inclusion of FastClick's operations for the entire quarter, which generates a gross margin which is less than the Company's overall average. Gross margin performance was in line with our expectations for the Company.

Operating expenses, excluding stock-based compensation and amortization expense, totaled $52.9 million or 45% of revenue in the first quarter of 2006; compared to $24.1 million or 47% of revenue in Q1 2005. These operating expenses increased 139% year-over-year, primarily due to the inclusion of operating expenses of WebClients, e-Babylon, and FastClick, as well as additional discretionary advertising spend and $2.6 million of unanticipated professional fees.

Sales and marketing expense was $31.4 million in the first quarter of 2006 compared to $11.3 million in Q1 2005. The $20 million increase is primarily due to the inclusion of WebClients, FastClick, and e-Babylon for a full quarter in 2006, as well as the allocation of stock-based compensation in the expense line item.

The percentage of sales and marketing expense to revenue was 27% in the first quarter of 2006 verses 22% in 2005 due to additional advertising and marketing expense supporting the growth of our Price Runner, e-commerce promotional and vertical marketing sites, European growth initiatives, and stock-based compensation.

Excluding stock-based compensation, sales and marketing expense was $30.1 million, or 26% of revenue, in the first quarter of 2006, compared to $11.3 million or 22% of revenue in 2005.

General and administrative expense was $16.8 million or 14% of revenue in the first quarter of 2006, compared to $8.6 million or 17% of revenue in 2005. Excluding stock-based compensation, G&A was $15.5 million or 13% of revenue in the first quarter of 2006, compared to $8.5 million or 17% of revenue in 2005.

As our earnings press release states, and as Jim mentioned previously, Q1 2006 included approximately $2.6 million in unanticipated professional fees, including those associated with the Company's recently completed restatement of its 2004 financial statements to reflect tax-related corrections. None of these expenses were included in the Company's guidance in Q1 of 2006. Excluding these unanticipated expenses and stock-based compensation, G&A was $12.8 million or 11% of revenue.

Technology expense was $8 million in the first quarter of 2006, or 7% of revenue compared to $4.4 million, or 9% of revenue in 2005. Excluding stock-based compensation, technology expense was $7.4 million, or 6% of revenue in the first quarter of 2006, compared to $4.4 million or 9% of revenue in 2005.

Stock-based compensation in aggregate was $3.3 million during the first quarter of 2006, compared to $54,000 in 2005. This increase is due primarily to the adoption of new accounting rules for stock-based compensation under FAS-123R.

Amortization of intangible assets was $5.7 million during the first quarter of 2006, compared to $1.2 million in 2005. The increase is due to the amortization of identifiable intangible assets required in the FastClick, WebClients, and e-Babylon transactions. We anticipate amortization expense will be approximately $21 million to $22 million for the full year 2006, due to the inclusion of amortization of intangible assets from these acquisitions.

As a result of the performance I have previously mentioned, the Company generated operating income of $16.1 million in Q1 2006, a 27% increase compared to operating income and $12.8 million in 2005, despite the unanticipated professional fees of $2.6 million; an increase in stock-based compensation expense of $3.3 million; and an increase in amortization of intangible assets of $4.4 million.

Net interest income was $1.9 million for the first quarter of 2006 compared to $1.4 million in Q1 2005 due to improved investment yields on our marketable securities portfolio.

Income tax for Q1 2006 was $8.3 million with an effective tax rate of approximately 45.8%, higher than our previous guidance due to the impact of implementing FAS-123R. These figures result in net income for Q1 of 2006 of $9.8 million or $0.09 per share based on the weighted average number 104.8 million fully diluted shares outstanding. The impact of the stock-based compensation expense reduced net income by $2.4 million and diluted net income per share by $0.02.

Described in greater detail in our press release, net income before interest, taxes, depreciation, amortization and stock-based compensation, or adjusted EBITDA, was $27.4 million for the first quarter of 2006 in line with our guidance range of $27 million to $28 million despite $2.6 million of unanticipated professional fees. Q1 2006, adjusted EBITDA increased 76% from Q1 2005 adjusted EBITDA of $15.6 million.

I will now make a few comments on the performance of our media, affiliate marketing, and technology business segments. Media segment revenue increased 222% to $92.4 million in the first quarter of 2006, compared to $28.7 million in 2005, Primarily due to strong performance by our media products and the inclusion of a full quarter of operations of FastClick, WebClients and e-Babylon. Our Company revenue was nil in both periods.

Gross margins were approximately 59% in the first quarter of 2006 compared to 60% in Q1 2005, primarily due to a greater mix of lower margin FastClick revenue in Q1 2006, offset by higher margin lead generation products in the U.S. and gross margin improvement in Europe.

Q1 media segment revenue increased 2% over the seasonally strong 2005 fourth quarter, countering typical seasonal trends, and gross margin improved sequentially by approximately 30 basis points.

Affiliate marketing revenue increased 19% to $22.3 million in the first quarter of 2006 compared to $18.7 million in 2004. Inter-company revenue in these amounts was approximately $2.4 million in Q1 2006 and $1.6 million in Q1 2005. Affiliate marketing gross margins improved to approximately 89% in the first quarter of 2006 compared to 87% in 2005, primarily through the operating leverage of our consolidated affiliate marketing infrastructure, supporting higher revenue levels and increases in inter-company revenue. Q1 affiliate marketing revenue was up 1% over the seasonally strong 2005 fourth quarter.

Technology revenue was $5.4 million in the first quarter of 2006, compared to $6.2 million in 2005. Inter-company revenue in these amounts was approximately $300,000 in Q1 2006 and $600,000 in Q1 2005. Technology gross margins were 75% in Q1 2006 versus 78% in 2005.

Because of the success and pace of our integration activities and the opportunity for further integration that may affect our organization, we anticipate that future segment reporting may be structured around three core businesses: Worldwide media, affiliate marketing -- including technology -- and comparison shopping.

The consolidated balance sheet as of March 31, 2006 remains strong with $260 million in cash, cash equivalents and marketable securities; $635 million in total stockholders equity and no long-term debt. Capital expenditures were approximately $2.2 million in Q1 2006. We continue to anticipate the capital expenditures will be in the range of $8 million to $9 million for full year 2006.

Regarding guidance, we are now providing EPS guidance reflecting estimated stock-based compensation, based on the new accounting rules of Statement of Financial Accounting Standards 123R, which we adopted in January, 2006. Actual stock-based compensation expense may differ from these estimates based on the timing and amount of options granted, the assumptions used in option valuation, and the structure of our option plans. Based on our outlook and Q1 2006 financial performance, we are increasing our guidance ranges for 2006 revenue and adjusted EBITDA, and issuing Q2 2006 guidance.

For the second quarter of 2006, ValueClick anticipates revenue in the range of $118 million to $120 million, a 116% to 120% increase from second quarter 2005 reported revenue, and an organic growth rate of 23% to 25% compared to pro forma Q2 2005 revenue.

We anticipate adjusted EBITDA in the range of $29 million to $31 million for the second quarter of 2006 with an adjusted EBITDA margin of 25% to 26%. We anticipate diluted net income per share of $0.11, including stock-based compensation expense of $0.02 per common share, based on an expected share count of $106 million fully diluted shares outstanding.

For full year fiscal 2006, we now expect revenue of approximately $495 million to $505 million, which represents 63% to 66% growth compared to 2005 reported revenue. Organic growth is anticipated to be approximately 22% to 24% compared to pro forma 2005 revenue. We expect adjusted EBITDA in the range of $128 million to $131 million, with an adjusted EBITDA margin of 25% to 26%.

We anticipate diluted net income per common share of $0.46 to $0.48 per share including stock-based compensation expense of approximately $0.10 per common share, based on an expected share count of 106 million fully diluted shares.

The full year 2006 guidance assumes approximately $21 million to $22 million in amortization of intangibles, approximately $9 million to $10 million in depreciation expense, and stock-based compensation of $13 million $14 million, and an effective full year income tax rate of. 45.5%.

I will now turn the call back over to Jim for some closing comments.

James Zarley

Thank you, Sam. Thanks to everyone who has joined us on the call today. The first quarter was a good start to what is shaping up to be another strong year for the Company. Growth was strong in the quarter, the restatement and the associated costs are behind us -- thank God -- and our updated guidance illustrates that we are moving forward to drive growth and profitability throughout the rest of the year.

Advertisers and publishers are embracing our large scale monetization capabilities; we're positioned to help the advertisers achieve their online marketing goals by offering several approaches that generate leads and sales, and our network positions us to help publishers monetize all of their inventory.

In the quarter, we made excellent progress integrating our offerings, including completing the full integration of WebClients, FastClick into ValueClick Media; and given our integration activities and the opportunity for further integration, we see ValueClick structured into three core businesses: worldwide media, affiliate marketing, and comparison shopping. We expect to provide you with more detail on how we report these segments later in the year, but we think a view of our business, we'll provide more clarity in our leadership position, competitive strength, and growth opportunities for each of these three businesses.

Our M&A focus is to continue to look for companies that fit our strategic and valuation framework. We plan to continue to consolidate our segment where it makes the most sense without deviating from our current business models, affiliate marketing, media, and comparison shopping.

Finally, we announced today that our Board ha authorized an additional $100 million to our stock buyback program, which positions us to take advantage of what we believe is an undervalued stock.

Now I would like to turn the call over to operator and take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question of the day from Aaron Kessler with Piper Jaffray.

Aaron Kessler - Piper Jaffray

First on the sales and marketing front, you increased that a little on a sequential basis. Do you expect that to continue to go forward here, the higher levels of sales and marketing investment?

James Zarley

On the sales and marketing expenses, there were primarily two factors that contributed to that. One was some testing that we were doing in Europe in our Price Winner product which was attempting to present more of a branded product; that's more of a consumer product. We did some radio, TV advertising on a test basis, which we're not doing in the second quarter until after we really get a view of the value that has brought us.

The second area was here in the U.S. where, in some cases, we are acquiring traffic for some of our products. In order to prove our ability to really monetize for the publisher, we paid a little more than we would normally pay. That number has been pulled back into line, so I don't anticipate it going forward.

To answer your question, those are really the two areas and I don't anticipate that kind of a spend going forward.

Aaron Kessler - Piper Jaffray

Great. Could you possible provide us with a little more detail on the FastClick improvements that you experienced in the quarter? In terms of sell through rates or other metrics, what do we expect going forward? And also any other plans for other areas of international expansion beyond affiliate marketing? Thank you.

James Zarley

On the integration side, we have found great leverage where we've been able to take the FastClick and ValueClick sales forces and really allow them to sell all of our products that are associated to media, whether it be lead generations, display ads, or what have you. We've just gotten great synergies out of that.

Going forward, I think you were asking about the international expansion. There are a couple of things that are going on internationally that are opportunities for us. First we're expanding our affiliate marketing business into Sweden, right now. We've already got people there, hired and up and going.

The second area is that in the media segment, some of these products that were offered in lead generation, we believe, present opportunities. We are not doing it as of yet, but over the next quarter or two, I think you'll see us expanding those products there, as well.

Aaron Kessler - Piper Jaffray

Great. Thank you, good quarter.

Operator

Next we go to Mark Mahaney with Citigroup.

Mark Mahaney - Citigroup

Great, thanks. Two questions. One, could you talk broadly about the competitive landscape? It seems to be the number one issue on the shares. To what extent are you seeing in your ad network encroachments from ad networks, Google and Yahoo?

Secondly, if you're going to break out the comparison shopping, I assume you're doing that because the segment is starting to show real traction, it is going to be material enough to require a kind of breakout. So what sort of traction are you seeing with PriceRunner, particularly in the U.S.? Thank you.

James Zarley

Thanks, Mark. On the second part of your question, PriceRunner, you're right. We felt that with the investment that we've made and we've really opened into three new markets this past year -- in France, Germany, and then just most recently in the United States -- that it was far too early to represent or start reporting because it was primarily investment in 2005 and up until now.

We probably still do have some real investment in the United States, but the number's getting big enough that we think we should break it out and report it separately going forward. What was the first part of the question, Mark?

Mark Mahaney - Citigroup

One of those broad general questions about the competitive landscape, particularly pressures from other ad networks. It seems to be the biggest issue on your shares here.

James Zarley

The competition clearly is out there, Mark. But from the likes of specifically Google, we have not felt any significant pressure in losing inventory. At this point in time; it's not that we're not acutely aware of what's going on between them and Yahoo and other ad networks, but we're just feeling that we're getting our fair share of the growth of the market. So far, knock on wood, appears that's going to continue on going forward.

Mark Mahaney - Citigroup

Great, thank you very much.

James Zarley

You're welcome.

Operator

We take our next question now from Eric Martinuzzi with Craig-Hallum.

Eric Martinuzzi - Craig-Hallum

Good afternoon, gentlemen. My question has to do with the repurchase program, there's a few points I'd like you to address. (a) Is this open-ended, or is there a timeframe? (b) At what price are you a buyer? And then, (c) are we to read anything in as far as near-term, opportunistic M&A with you focusing in on your own shares?

James Zarley

So far as timing on the repurchase, there is no time limitation on it. The limitation that we have on the repurchase that we've always had is that we are only capable of buying so much based upon what the average trade is in a given day. If you look back over the repurchase program that we've implemented in past years, the bulk of what we bought were block shares. Given where our stock is at today, I'm not sure that we're not going to go out and solicit for block shares, but we want to be in a position that if they come in like they did a few years back, that we'd like to be able to take advantage of them.

So far as the price point, we really haven't established a clear price point. I think we want to wait and see what is going on here for a few days. We can't trade anyway. We'll see what's going to happen and we'll make a decision after that.

Eric Martinuzzi - Craig-Hallum

Okay. Then about the M & A?

James Zarley

M&A, we are always looking at M&A opportunities. In the call, we've talked about focusing on these three segments of media, affiliated marketing, and comparison shopping.

We see opportunities in the comparison shopping areas, not so much as full comparison shopping companies across the broad spectrum of channels that we provide, but in individual verticals. So I think we'll be focusing on things like that.

So far as affiliate marketing is concerned, we've kind of spoken to that several times in the past, we're always looking for other people who are in our business that can help us achieve more market share. There are two or three large ones and then several small ones, primarily over in Europe that we'd be interested there.

On the media side, we don't have a significant amount of activity there currently, because we just made these acquisitions, and we just had our hands full in integrating FastClick and WebClients into our media division. So I think you'll probably see us hold off on that area for a bit of a time anyway.

Eric Martinuzzi - Craig-Hallum

Okay, thanks and congratulations on the sequential revenue growth.

James Zarley

Thanks, Eric.

Operator

We'll go next now to Heath Terry with Credit Suisse.

Heath Terry - Credit Suisse

Great. I was hoping you could talk a little bit more about what you're seeing in the media business in terms of pricing. You mentioned that you weren't losing any inventory to competing ad networks. I was wondering if you could, with the growth you're seeing in the media business, break down for us or give us some kind of an idea on where that growth is coming from; inventory versus price?

James Zarley

For the most part it's large buys. It's still a bit frustrating for us in that, compared to say comparison shopping or affiliate marketing which are pretty predictable business models, the media business have people coming in and going out.

What's generating, what's driving it today for us is the volume, or really the synergies of these three companies that have come together: FastClick, ValueClick, and WebClients. What we would hope is that pricing will continue to pick up for us given the price of search and things like that in the market.

Sam Paisley

One other observation I have about price is that in general our media products have not enjoyed the same price expansion that search terms have procured for the major search engines, so we've had pretty much firm or modestly increasing prices over the past year, year-and-a-half, two years; whereas some of the growth that's been happening over the last three years in search terms really hasn't been enjoyed by our media products.

Heath Terry - Credit Suisse

Great. If you could also talk a little bit about the format of the pricing that you're seeing; has there been more of a shift to price-per-click or price-per-action or cost-per-action verses the impression model? Also if there's any trends that you can talk about in terms of the format of the advertising. You've seen more rich media product, more banners, less pop-ups, that kind of thing.

James Zarley

Well, certainly less pop-ups Heath, and not a significant amount of rich media. I'd say the greatest growth in the pricing model is in the CPA side and that is because of our acquisition of WebClients. A good portion of that is in the lead gen side of business, which is all cost-per-action.

Heath Terry - Credit Suisse

Great. Can you give us a breakdown on what percentage of revenue right now is coming cost-per-action versus cost-per-click or cost-per-impression?

Sam Paisley

That's a pretty difficult thing to do in terms of mix because we have significant volume in all pricing models, and it's not unusual to see customers of ours use each one of the different models and of move budgetary dollars among all categories.

Heath Terry - Credit Suisse

Thank you.

Operator

We go next now to Youssef Squali with Jefferies and Company.

Peggy Grindle - Jefferies & Co.

Peggy Grindle for Youssef. First on technology, wondering if you could tell us if you're feeling any impact from DoubleClick and any pricing pressure there?

James Zarley

We did have a little bit of effect in technology, primarily in Europe. They were a couple of years behind what was happening in the United States so far as pricing on the just the pure ad-serving model, cost per impression. I wouldn't say that we really felt significantly the impact of any significant competition.

The other side that affected us here in the first quarter was we did have a five-year contract that was in place here in the United States. That contract expired. We did renew it, but we had to renew it under the current pricing model. Having said that too, on technology, it is a relatively small component of what we do overall as a Company.

We have recently felt that there are more synergies with our affiliate marketing business and if we could get both entities out promoting the product that there could be some opportunity for us to turn that growth around.

Peggy Grindle - Jefferies & Co.

About the unanticipated professional service fees in G&A. How much of that will continue into Q2 and beyond, or how should we think of that going forward?

Sam Paisley

Well, those fees were primarily related to the restatement on the one hand, and really wrapping up the annual audit on the other. Considering the fact that we did switch auditors in 2005 and each of the audit firms has a slightly different approach in particular to the Sarbanes-Oxley compliance efforts. From an overall standpoint, unfortunately professional service firms in that area, they can't give fixed fee estimates, so it's very difficult for us to anticipate.

Back to the point of your question, this was heavily concentrated on the restatement, on the one hand and wrapping up the year end audit on the other. We do have expectations for not only no more consideration of 2004 -- I think all parties involved consider that to be a dead year, so to speak, never to be reopened again.

On the other hand, with respect to progress on our overall compliance costs, in SOX in particular, we and our outside professionals do see ways that we can economize in the current year. So we don't expect the same level of fees in 2006.

Peggy Grindle - Jefferies & Co.

Thank you.

Operator

We go next now to Michael Prosparra with ThinkEquity Partners.

Michael Prosparra - ThinkEquity Partners

Hi, this is Michael for Stewart Barry at ThinkEquity. Forgive me if someone asked this question, I had some technical difficulties. In wake of the recent funding in the area, do you see any change in the competitive landscape for affiliate marketing?

James Zarley

Michael, would you restate that? You had mentioned funding.

Michael Prosparra - ThinkEquity Partners

In the wake of some recent funding you've seen in the private area, do you see any change in the competitive landscape of affiliate marketing?

James Zarley

You know, I don't. We're very excited about the affiliated marketing channel. In fact, I think in some ways our organic growth that we reported is not indicative of the overall growth of this business. The organic growth, I think, it was 23%, if you look at it on the worldwide basis, and without one of our major contracts that we negotiated actually had about a 29% organic growth, if you look at the other 1,500 customers that we have.

So we're very bullish on it and we love that business, it's predictable, and it's growth rate to us is right in line with the rest of our media company.

Michael Prosparra - ThinkEquity Partners

Okay. And a couple of other questions have already been answered. Have you broken out international revenues and the growth rate on that?

Sam Paisley

No we haven't, however it will be available in the upcoming 10-Q. The growth rate in Europe was in the range of 60%. Growth rate overall in affiliate marketing was 29% to 30%.

Michael Prosparra - ThinkEquity Partners

Thank you.

Operator

And we'll take our next question now from Mark Bacurin with Robert W. Baird and Company.

Mark Bacurin - Robert W. Baird

Good afternoon. Couple questions. Could you give us a sense of where you are on the conversion of some of the FastClick web publishers to the ValueClick revenue share model? Are we 25%, 50% through the process there?

James Zarley

Mark, we're 100% converted at this point. We've taken the two technologies of FastClick and ValueClick and integrated both of them, and all of the publishers today are on what we call the ValueClick system.

Mark Bacurin - Robert W. Baird

In terms of the revenue sharing model, I think FastClick historically shared a higher percentage. Have you made those adjustments in all the relationships and can you comment on maybe what if any churn there was through that process?

Sam Paisley

It's a work in progress for us. We anticipate it's probably going to take us until the end of the year to really complete it. We're making good headway on it, and I think we've talked about several approaches that we've used there. We did not go out across the board and just change the economics for all of the publishers. What we're trying to do is make sure that the publishers do not feel a dollar impact on the conversion. There may be a shift in the percentage of share, but not a downturn in their dollar amount.

Some of this is done through buying on one pricing model and selling on another. So they'll do the kinds of things that we're doing and we are getting progress from it.

Mark Bacurin - Robert W. Baird

But any way to tell where we are in terms of in that process 20%, 30%, 40% along the way?

James Zarley

I would say on the technology side we're 100% complete, and on the pricing side, I would say we're 25% to 30% complete.

Mark Bacurin - Robert W. Baird

Perfect. I don't understand exactly your comments about the technology group and the benefits that might accrue to the affiliate marketing business, so could you give us a little bit more help on exactly what the tie-in or the cross sell opportunity is there?

James Zarley

Some of the things that we're doing in our Mediaplex technology, we're tracking for advertisers, we have a tracking system that we implement for some of our clients and the closer we brought these two organizations together, the more advantage we see in allowing some of the Mediaplex technology to bleed into the commission junction advertiser base.

Where we've had a limited amount of people out on the street selling Mediaplex product, we think it's evolved to the point where it brings some real advantages to commission junction advertisers, primarily in that whole tracking area, and we think there are services that can be used.

Once we integrate them, we really could do similar there what we've done here with WebClients, FastClick, and ValueClick, where we have one sales force selling both products.

Mark Bacurin - Robert W. Baird

Thanks for the help there. Finally, I think you alluded to this a little bit in your comments about the difference in organic growth. When you back out that one contractor, [Neolith] in affiliate marketing, but I assume that relates to eBay and some of the changes that happened there? Can you give us some sense of how your revenues overall related to that one particular client may have changed with the adjustments?

Sam Paisley

There are two things. Still a great client of ours, and I think we have a wonderful relationship. We just signed a new three-year agreement with them. We did do some pricing concession in there. But eBay has also moved, and if you listen to their call, they've moved more to the transactional payment program. I think that's working very well for them as opposed to the acquisition of new clients. So that's primarily what's moving that number.

James Zarley

The other thing I'd stress there is that originally everybody perceived our 2006 guidance to be rather modest. As we mentioned earlier, we had already anticipated the effect of that contract in the 2006 numbers.

I just wanted to clarify an earlier comment. The numbers I mentioned at 29% to 30% growth was really affiliate marketing product growth, if you will, worldwide. The answer to a question which I'm not sure was asked or not, was what was our European growth rate overall? That, as well, will be in our 10-Q and in the first quarter of 2006, that organic growth rate was 27%.

Mark Bacurin - Robert W. Baird

Great, thank you.

James Zarley

Thanks, Mark.

Operator

We take our next question now from Scott Wolfgang of Thomas Weisel.

Scott Wolfgang - Thomas Weisel

That 27% you just gave for European growth, is that affiliate marketing or all of your European?

Sam Paisley

That's all of European.

Scott Wolfgang - Thomas Weisel

Secondly, can you comment on the European market, and affiliate marketing in particular? What you're seeing there competitively and the traction you're getting against your competitors?

James Zarley

Sure, Scott. Not quite a year ago, we really were somewhat outgunned in Europe from some of our competitors. If you go into France, it was a company called CibleClick and TradeDoubler; if you go into Germany, it was [Dilianet] and Zannox and TradeDoubler; if you go into the UK it was TradeDoubler and Commission Junction.

Commission Junction was always primarily focused just on the UK market in the early days. Once our technologies were up to speed and after our companies came together and we had developed the correct taxable model for going into all of these countries, we launched in France and Germany.

So what we're seeing right now is that we're gaining market share in this market, in each one of these markets, and while we're a bit behind these people who have been there a little bit longer, we seem to be getting traction. People who were using us in the UK, and in the U.S., as well, are now using us in France and Germany, and hopefully very soon it will be Stockholm.

Scott Wolfgang - Thomas Weisel

Thank you.

Operator

We go next now to Imran Khan with JP Morgan.

Derek Neumann - JP Morgan

Hi, this is Derek Neumann on behalf of Imran Khan. I had two questions. The first is, you mentioned you'd be a consolidator; are you also open to being consolidated if the price is right?

Secondly, it looks like you did $5 million above the top-end of your range. Was there anything that changed from the point when gave guidance on February 27 to the end of the quarter?

James Zarley

Yes. One of the things that changed in our guidance is some of these large commitments that we talked about actually came in halfway through the quarter. People that we still have, but their commitments were just much larger and covered over a very short period time than what we're used to.

Derek Neumann - JP Morgan

Do you expect that to continue?

James Zarley

I expect that to continue through Q2. You had another question, Derek?

Derek Neumann - JP Morgan

I had a question relating to the news we saw with the general reporting of you and Aquanta talking to each other. Your philosophy in terms of being an acquiree verses an acquirer?

James Zarley

Well, Derek, we talk to so many companies and we don't really comment on any particular one. We focus more on the areas that we're interested in. I think Sam has talked probably to 600 companies in the past year, of which we bought three, so he's busy out looking. We're not for sale, but we're shareholders, that's what we've always said. We're not of the mind that we would walk away from what makes sense for the growth of the valuation of our Company and our stock. But we've always been focused on being more of the consolidator than being consolidated.

Derek Neumann - JP Morgan

Thank you.

Gary Fuges

Operator, how about if we take one more question, please.

Operator

Our final question of the day comes from Richard Fetyko with Merriman Curhan Ford.

Richard Fetyko - Merriman Curhan Ford

Hey, guys, congrats on the quarter. A lot of the questions have been answered. Just curious on the trends of brand advertising, if that's really benefiting; if your inventory is in the type of shape that you can get some of the brand advertising flow. I know you've been deploying some behavioral targeting technology, among others. Just curious if you're seeing some of those dollars?

James Zarley

We're seeing, Rich, some good growth potential that's coming from the brand, but I must say that in the past quarter we've had such a large opportunity in consolidating these three businesses that that's been almost the total focus of what we've been doing. And as you see in the first quarter revenues, it's paid off for us. So branding is a valued component of what we do and we think there's growth and potential for us going forward.

You know, I still believe that for the next quarter or so, there's still just more low-hanging fruit for us to really focus on.

Operator

Did you have anything further, sir?

Richard Fetyko - Merriman Curhan Ford

That's it, thanks.

James Zarley

Thanks, Rich.

Operator

That will conclude your conference for today, we would like to thank you again for joining ValueClick's First Quarter 2006 Conference Call. Just a reminder for the replay information. A replay of today's conference will be available beginning at 4:30 p.m. Pacific Time today by dialing 888-203-1112, or 719-457-0820. The access code for the program will be 7474106.

This replay will be available through May 15th 2006 and thereafter the call can be accessed on ValueClick's website at www.valueclick.com. Again, ladies and gentlemen, that will conclude our conference call for the day. We'd like to thank you all for joining us and wish you all a great afternoon. Good-bye.

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