aQuantive, Inc. Q1 2006 Earnings Conference Call Transcript (AQNT)

aQuantive, Inc., (AQNT)
Q1 2006 Earnings Conference Call
May 8, 2006, 4:30 p.m. EST

Executives:

Brian McAndrews, President and Chief Executive Officer
M. Wayne Wisehart, Chief Financial Officer
Mike Vernon, Outgoing Chief Financial Officer

Analysts:

Richard Ingrassia, Roth Capital
Youssef Squali, Jefferies & Company
Jessica Reif Cohen, Merrill Lynch
Paul Bieber, Piper Jaffray
Benjamin Schachter, UBS
Stewart Barry, ThinkEquity Partners
Julia Choi, Bear Stearns
Denise Garcia, WR Hambrecht
Chad Bartley, Pacific Crest Securities
Christa Quarles, Thomas Weisel Partners
Richard Kaiser, Stanford Bernstein
Marianne Wolk, Susquehanna Financial

Presentation

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2006 aQuantive, Inc. Earnings Conference Call. My name is Sarah and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct the question and answer session towards the end of this conference. If at any time during the call, you require assistance please press * followed by 0 and a coordinator will be happy to assist you. I would now like to turn the call over to Mr. Michael Vernon. Please proceed sir.

Mike Vernon, Outgoing Chief Financial Officer

Hello and thank you for joining aQuantive’s First Quarter Conference Call. This is Mike Vernon and with me is Brian McAndrews, aQantive’s President and Chief Executive Officer, and Wayne Wisehart, aQuantive’s Chief Financial Officer. The following remarks contain statements that are forward-looking including statements about our expectations or projections regarding future results and plans for the business. It is important to remember that our actual results may differ materially from our expectations, projections or plans. A complete list of additional factors that may affect our business, future operating results, and financial condition or risk factors is detailed in our SEC filings. I would now like to turn the call over to Brian.

Brian McAndrews, President and Chief Executive Officer

Thank you Mike. I’m pleased to report on another very strong quarter for aQuantive. Revenue of $92.9 million represents a 42% increase over the first quarter of 2005 with 35% organic growth. Adjusted EBITDA grew 44% to $21.7 million and net income increased 19% to $7.6 million after including the impact of stock-based compensation expense. Before stock-based compensation expense net income grew 64% year-over-year to $10.5 million.

First quarter was a great start to what we expect will be another very good year. In addition to generating strong organic growth in each of our domestic businesses, we continue to grow our international business which represents 19% of our consolidated revenue, up 7 percentage points from 2005. We also completed a successful follow on equity offering, raising almost $200 million after expenses, but we do not have a specific update today. We are actively evaluating acquisitions and believe we will put the funds to productive use and accelerate our growth prospects in both domestic and international markets.

Before speaking about our specific division, let me take a moment to address the question that maybe on your mind. An article here today in the Wall Street Journal speculating about conversations between aQuantive and ValueClick. While it is our policy to not comment on rumors and speculations, and I do not intend to address that particular article, I do not want our shareholders expending any energy as a result of this article worrying about what might or might not happen. So, what we confirm on aQuantive we have is no discussions are underway nor being contemplated with ValueClick. I repeat, no discussions are underway nor being contemplated with ValueClick. And now I’d like to discuss some key developments in each of our business segments.

The Digital Marketing Services segment made up of Avenue A ¦ Razorfish and DNA finished the quarter with $55.2 million in revenue, an increase of 41% year-over-year. In addition to continuing to serve our premier client base well, key developments during the quarter include the following: Avenue A ¦ Razorfish had key client wins including Coors Brewing. The New York Times new website designed by Avenue A ¦ Razorfish was successfully launched. We released the 2006 Avenue A ¦ Razorfish digital media outlook report, a highly respected and often quoted overview of the digital marketing industry. Advertising Age came out with their annual rankings of interactive agencies and Avenue A ¦ Razorfish continues to be ranked as the number one interactive agency. Avenue A ¦ Razorfish hosted its sixth annual client summit, which included a news making keynote address by Microsoft CEO, Steve Ballmer, where over 300 clients were represented. And most importantly in the first quarter, through a superior service innovation and plain old hard work, Avenue A ¦ Razorfish continued to demonstrate its leadership position in the digital marketing industry.

The digital marketing technology segment, Atlas, achieved 34% topline growth year-over-year with total revenue of $27.7 million. While the majority of overall revenue continues to come from the United States, we are making significant progress in growing internationally as well. Supporting clients throughout North America, Europe, and South East Asia, Atlas served in over 20 countries in the first quarter, growing international revenues to 27% of the overall Atlas business.

In additional to broadening our opportunities through geographic expansion, we have grown our product offering to include Search, Rich Media, and Site Optimization, meaning that our addressable market has continued to grow as well. Share data for the markets we participate in are not public. However, we estimate that our client based on revenue is growing ahead of the market in all of the areas we serve. In our two largest markets, the U.S. and U.K., we estimate that we are now the leader in by side ad serving marketshare. Combining the significant growth and increasing marketshare with our investments and product development, including our exciting Atlas On Demand initiative, points to a continued bright future for the digital marketing technology segment.

Our digital performance media segment consisting of DRIVEpm and MediaBroker continues to grow significantly with revenue of $9.3 million, up 77% over the first quarter 2005. Our U.K.-based business was particularly strong in the first quarter representing 57% of the segment revenue. Our investments in technology and a concerted effort to deliver premium targeting in an increasingly efficient manner for our customers are driving the expansion of our network. I am also pleased to report that Kirk McDonald has joined DRIVEpm as Senior Vice President of Sales, Service, and Marketing. Prior to DRIVEpm, Kirk spent nine years in senior leadership positions with CNET Networks. As we continue to scale our business and expand our sales capabilities, Kirk’s expertise and experience will be very beneficial. The success accomplished by this team today and recent organizational development suggests that our aggressive target is to grow faster than the market and obtain a market leading position are on track.

Now, I’d like to turn the call over to our CFO, Wayne Wisehart, to talk about the quarter’s financial results in greater detail.

M. Wayne Wisehart, Chief Financial Officer

Thanks Brian. First, I’d like to say how pleased I am to be a part of the aQuantive team and I look forward to meeting each of you in the future. My personal impressions are that this is a strong company with good people operating in a fast growth industry. These are the ingredients that can fuel growth and I’m excited to learn more about the industry and to aid in aQuantive’s growth.

Now, looking at the first quarter, revenue of $92.2 million represented total revenue growth of 42% over the first quarter of 2005. Each of the businesses had notable organic growth in the first quarter. Operating income during the first quarter was $11.2 million including the $4.7 million in stock-based compensation expense resulting in operating margin of 12%. For comparability, before the stock-based compensation expense, operating income increased 44% to $15.9 million versus $11.1 million in the first quarter of 2005 for an operating margin of 17%. We reversed referrals made in prior periods for a business packed assessment liability, which reduced our operating expenses by $1.9 million during the quarter. This benefit is reflected in our digital marketing services segment. Net income was $7.6 million in the first quarter or $0.10 per diluted share compared to net income of $6.4 million or $0.09 per diluted share in the first quarter of 2005. Net income before stock-based compensation was $10.5 million or $0.14 per diluted share in the first quarter.

Adjusted EBITDA or EBITDA excluding the $4.7 million in stock-based compensation expense was $21.7 million or $0.27 per diluted share. On an adjusted basis, EBITDA increased by 44% year-over-year. The effective GAAP income tax rate was 38% in the first quarter. We expect the effective tax rate to be 39% for 2006. The slight decline in our tax rate was due to higher contribution to operating income from the U.K. where the statutory income tax rate of 35% is below the combined Federal and State tax rates in the U.S.

aQuantive’s CapEx was $5.5 million in the first quarter. These capital expenditures supported the rapid growth experienced in our Atlas business, increased process and capacity for ad serving, and new lease hold improvements for our operating locations. After the follow-on equity offering, we ended the quarter with $271 million in cash in short-term investments. This is an increase of about 140% or $151.1 million above our cash balances at the end of last year. Net proceeds from the follow-on equity offering contributed $172.7 million. Please note that our quarter end cash did not include the impact of the sale of an additional $25 million in equity and the over-allotment granted to underwriters as part of our offering process. The sale of those shares occurred in mid April, so the balance will be reflected in the second quarter close. Acquisition earn-out payments made in the quarter for High Frontier and Net Conversions totalled $26.7 million. Please note that the quarter in cash balances are subject to significant swings due to variances in the timing of collection and disbursements on our receivables and payables.

Our day sales outstanding accounts receivable for the first quarter was 82 days, up slightly over the last two quarters.

Now, I’ll review performance by business segment during the quarter. Digital marketing services including Avenue A ¦ Razorfish and DNA generated revenue of $55.2 million in the first quarter. It also contributed operating income of $7.7 million during the quarter for an operating margin of 14%. The operating margin was impacted by increased head count, expenses associated with the annual client summit, and the use of contractors to manage the healthy project pipeline. When we adjust for the change in an estimate for business packs of drill mentioned earlier, which is shown in this business segment, the operating margin is 11% and is about the same as in the first quarter of 2005. These in results in revenues and margins were inline with our expectations. Our web development business, which has somewhat lower margins than our web media business, represented a slightly larger proportion of our revenue in the first quarter than it did in the comparable quarter last year. We had been hiring aggressively to ensure that we have the resources to make the strong market demand that we are seeing and we continue to supplement these hires with more expensive contract resources where needed. It remains our expectation that the operating margin in this business will be higher in 2006 than it was last year.

For diversification of DMS revenue for the first quarter demonstrated that the client categories that we served, percentage of sector contribution was as follows: Financial services clients 19%, pharmaceutical clients 16%, retail 16%, technology clients 16%, travel and entertainment 9%, telecommunications 9%, all other client sectors combined represented the remaining 15% of Avenue A ¦ Razorfish’s quarterly revenue.

As of March 31, 2006, Avenue A ¦ Razorfish employed 1087 people representing an increase of 36% over the same period in 2005. Revenue per employee equaled approximately $50,800 in the first quarter, up slightly from a year ago period. Operating income per employee was approximately $7100 in first quarter representing an increase of 27% from the first quarter 2005. Over the last year, Avenue A ¦ Razorfish has grown its employee base, client base, and project pipeline and has improved operational efficiency in this very competitive and dynamic market.

Digital marketing technology, the Atlas technology business posted revenue of $27.7 million in the first quarter. This is 34% higher in the same period in 2005. Atlas generated quarterly operating revenue of $11.6 million, which was 12% higher than the first quarter of 2005 and represents an operating margin of 42%. Atlas had a strong quarter, somewhat above our expectations and with good contributions from our core ad serving business, our publisher business, and from our U.K. and European businesses.

As of March 31, Atlas employed 279 people, which is 40% higher than the same period in 2005. Revenue per Atlas employee decreased slightly to $99,200 in the first quarter 2006 from the same period last year due to the success of hiring product development staff. Operating income per employee was $41,400 in the first quarter 2006, down 19% from the first quarter 2005. As we have mentioned in the past, we expect Atlas margins to decrease somewhat from historical levels due to continued investments made by Atlas for client support, capacity, and technology to capture future growth.

Digital performance including DRIVEpm and MediaBrokers contributed revenue of $9.3 million, up 77% year-over-year. Operating income increased by 115% over the first quarter 2005 to $1.9 million and represents a margin of 20%. As of March 31st, Performance Media employed 45 people representing 55% growth over the same period in 2005. Gross profit of $4 million represented a gross margin of 43% versus 39% in the same period in 2005. Gross profit per employee increased 26% in the first quarter to $89,400 from the same period last year. Operating income per employee was up 38% in the first quarter 2006 to $42,300 from the first quarter 2005.

Now, I’ll spend a few minutes discussing our outlook for this year. Due to the strong start of the year and our expectations for continued strong performance from our businesses in 2006, we are raising our full year guidance. For the full year, we anticipate revenue in the range of $390 to $405 million. GAAP net income, which includes the impact of FAS 123R is projected to be in the range of $0.44 to $0.48 with net income before stock-based compensation in the range of $0.61 to $0.65 per diluted share for the year. Adjusted EBITDA is projected to be in the range of $1.19 to $1.25 per diluted share for the year. For the second quarter, we anticipate revenue of $96 to $100 million with net income in the range of $0.10 to $0.12 per diluted share, net income before stock-based compensation of $0.13 to $0.15 per diluted share and adjusted EBITDA of $0.26 to $0.29 per diluted share. Our guidance is based on an average diluted share of 87.5 million shares for the full year and 89.5 million shares for the second quarter. We forecast full year CapEx in the range of $16 million to $20 million.

That completes my remarks and I will return the call to Brian for concluding comments.

Brian McAndrews, President and Chief Executive Officer

Thank you Wayne. We are very happy to have Wayne on board in aQuantive. Wayne has tremendous CFO and other executive experience, which I believe makes him very well suited for the opportunities and challenges were face with aQuantive. He’s been on the job for about a month and a half providing an excellent transition period with Mike, who finishes his time at aQuantive this week. At this time, I’d like to thank Mike Vernon for all of his contributions over the years. During his tenure, we managed through periods of rapid growth, industry decline, and the rise to profitability and sustainable and strong financial results. While these accomplishments represent hard work by all members of the aQuantive team, Mike played a key and very much appreciated role. He will be missed and we wish him the very best.

And now, Wayne, Mike, and I would be happy to take your questions.

Operator

Ladies and gentlemen if you’d like to ask a question, please press * and 1 on your touchtone telephone. If you’re question has been answered or if you wish to withdraw your question, please press * and 2. Questions will be taken in the orderly phase. Please press *1 to begin.

Please standby for your first question. Your first question comes from the line of Richard Ingrassia with Roth Capital Partners, please proceed.

Richard Ingrassia, Roth Capital Partners

Thanks, good afternoon everybody. Three questions if you don’t mind; first from the balance sheet. Mike or Wayne, can you give us some detail around the sequential increase in pre-billed media, looks like it’s up more than 90% sequentially versus 2005 when it was actually down about a third?

M. Wayne Wisehart, Chief Financial Officer

Yeah let me handle that, Rich, again, the pre-billed media is an area we’ve been putting a lot of emphasis on in the Avenue A ¦ Razorfish business to get clients to pre-bill their media purchases. It very much can vary at the end of any quarter or particular client mix we have or particular clients. The magnitude of that particular may not be represented of a longer term trend, but it is representative of the fact we’re putting a lot of emphasis on getting media data in advance to certainly improve our cash flow and to ensure we have an appropriate mix of credit risk. So, what you’re really seeing is probably a little bit of anomaly for the quarter because again it should not be represented necessarily of a longer term trend of that magnitude, but it is represented of the emphasis that we are putting on getting pre-billed media as part of our operations.

Richard Ingrassia, Roth Capital

Okay, thanks. And secondly, you remained one of seven interactive agencies on PNG’s 2006 roster, maybe could cannot talk, Brian, about any specific client brands but maybe you can just give us some indication of what this announcement has meant so far with respect to either meetings with PNG or RP’s or Pitches.

Brian McAndrews, President and Chief Executive Officer

Rick, I really can’t comment. PNG, we really have to defer questions to them. I can confirm what you said that we are one of the seven interactive agencies they have designated to work with, and as a result we have an ability to work with them on their many businesses, but beyond that I really can’t comment.

Richard Ingrassia, Roth Capital Partners

Okay, fair enough. Finally, on the competition, there’s been some senior departures at AKQA, some shuffling at RGA and at WPP and a new unit, it seems like a fair amount of repositioning going on, can you characterize that environment today versus a typical turnover in space, and should we read the sort of news as it being a good time to acquire talent?

Brian McAndrews, President and Chief Executive Officer

Good question, I don’t know that I would say there’s anything extraordinary going on. I think people are recognizing the big opportunity that online has become and it’s becoming more and more real. I think people like PNG and other big brands are coming online and seeing people like us be very successful in this world. So, I think people are trying to find the right combination of talent, and I think it’s somewhat harder to get talent because there is more demand with the growth. So, I wouldn’t say there’s anything super significant other than I would say in the last year or so. We have seen an increase in the interests of larger brands coming online, and I think that’s probably making people reassess their capabilities and strategies in trying to take advantage of that.

Richard Ingrassia, Roth Capital Partners

Okay, thank you.

Operator

Your next question comes from the line of Youssef Squali from Jefferies. Please proceed.

Youssef Squali, Jefferies & Company

Thank you very much, Youssef Squali, hi guys. A couple of questions; first, if I look at your guidance for the second quarter, it implies about a 6% sequential increase. If I look at what you were able to perform last year, it was triple that, it was about 19%, and I contract that with your sequential guidance or sequential performance first quarter over fourth quarter this year versus last year, and that was actually pretty much inline. So, why should we expect the drop off at least in sequential increase? That’s number one and I have a followup.

M. Wayne Wisehart, Chief Financial Officer

For one thing, Youssef, please remember that in our guidance, particularly on the operating income side, we did have this $1.9 million and one time benefit to expenses that did impact first quarter of this year favorably, so that might impact sort of the relative position of that with the second quarter a bit. I’d say in general, again not to go too much into past periods, but if you recall first quarter of last year, we had some particularly large contributions in our Atlas on a one-time event, about $2 million of revenue, much of which flowed down to our bottom line due to one-time event with a customer. So, again that impact sort of helped things shake out this year versus last year, but I’d just say in general what we’re seeing is a good steady growth in our business now. I don’t necessarily want to compare to how things went sequentially last year because you do get some of these non-recurring events, but we are definitely seeing continued growth and strength in the business and we did feel that we had a very strong first quarter particularly in Atlas business, and we always like to be a little careful in how we’re issuing our guidance, but we do think even the guidance we’ve given is indicative, just a continued strong growth in each of our business that we really expect to have this year both in second quarter and through the rest of the year.

Youssef Squali, Jefferies & Company

Okay, and then, Brian, you talked earlier…this is a question about Atlas…you said earlier that you guys believe that you have become the leader in by side ad serving share. Could maybe quantify that for us a bit. And then as a correlation to that there was some talk about that DoubleClick maybe becoming a little more competitive in the environment now that they’re getting their act together, you continue to guide from margin erosion in this business going forward, I wonder how much of that is really a change in the competitive landscape versus just this business having kind of starting to mature and therefore not just staying in those type of margins forever?

Brian McAndrews, President and Chief Executive Officer

Sure, on the first piece I’d say, as I said in my comments, we don’t have public data but we do our best to analyze. Based on the data we are aware of what we see in the marketplace and ever since we entered the market with Atlas as a separate unit in 2001, we feel we’ve been continually gaining share and we do feel in the U.S. and U.K., if you look at the ad serving market, we believe we’ve probably doubled with both in the 40s in just the marketshare, just in that piece; that’s not including Search and Rich Media which makes the market larger. But in that piece, we believe that we are anywhere from 1 to 3 or 4 percentage points ahead of them in the U.S. and U.K.

And on the second point, I can address in general, but Mike or Wayne may want to jump in. DoubleClick, we’ve always taken them seriously as a competitor. We continue to and we always feel they are the other major player out there, of course in that space, so we take them very curiously. I would say that again we think we continue to gain market share, we think that getting into Search and getting into Rich Media have been good moves for us that will help us to continue to grow and help us to continue to defend margins. Having said that, we have felt for a while that the margins that we had in Atlas were not sustainable long term because they were very high, so we continue to believe that and it’s more about hiring people and getting more developers essentially instead of being in one product business and third-party ad serving but being in multiple products with Rich Media, Search, Site Optimization. So, we think this is just a more investment necessary and prudent in that business and that’s why we think long term that margins are sustainable and we’re starting to see some of that.

Mike Vernon, Outgoing Chief Financial Officer

Youssef, this is Mike. Let me just add also that we do not really see any change in the competitive landscape with DoubleClick, not on the pricing side, not really on any side. We continue to invest heavily in the product. We think DoubleClick is probably doing the same as well. We feel we’re continuing to take marketshare. The pricing environment remains competitive. The unit prices, CPM prices have been coming down. They are continuing to come down, but we don’t see any change in that. That price competitiveness has not accelerated. It’s stayed about the same as it was before. So, we’re not seeing any real change in the competitive landscape, and again we think that continues to augur well for our business. We’ve been very successful in this competitive environment. We’re continuing to invest heavily and successfully and we expect to have continued success competitively going forward, but we are not seeing any change in the competitive landscape.

Youssef Squali, Jefferies & Company

That’s great, congratulations and Mike, best of luck.

Mike Vernon, Outgoing Chief Financial Officer

Thank you Youssef.

Operator

Your next question comes from the line of Jessica Cohen with Merrill Lynch, please proceed.

Jessica Reif Cohen, Merrill Lynch

Hi, thank you, just a couple of quick questions. The Performance Media business, the gross profit margins seem to be very good. I was wondering whether this was based on your ability to price better or improvement in efficiency in terms of buying. And then also, second question is in regards to the growth in your marketing services business, web development seems strong, I was wondering if you can provide us with better color about the growth rate between web development versus media.

M. Wayne Wisehart, Chief Financial Officer

This is Wayne. On the drive business, in terms of the margin, it was a good quarter with a good performance. The margin I think is around 20% and we think that that is probably what we would expect in the future. I think that’s about the right kind of margin there.

Jessica Reif Cohen, Merrill Lynch

And in terms of your marketing services business, in terms of growth rates between your growth development side versus the media planning side?

Mike Vernon, Outgoing Chief Financial Officer

Yeah, this is Mike. We’re not going to break those things out individually anymore, but I can tell you each of them had very strong growth during the quarter. So, we’re very pleased with the performance of each part of the business, but we’re not going to break out the details of those businesses anymore as we indicated last year. We’re going to stop doing that.

Jessica Reif Cohen, Merrill Lynch

Okay, if I can follow up then, in terms of the breakout by vertical, the other category seemed to be pretty good, I was wondering if you could provide a couple of examples of what clients those might be and whether if those are specific projects or more media accounts.

Brian McAndrews, President and Chief Executive Officer

I’m sorry you cut out during part of that, could you repeat the question?

Jessica Reif Cohen, Merrill Lynch

I was just curious if you could provide more color on what other clients in your other category is really accounting for some of the increase there?

M. Wayne Wisehart, Chief Financial Officer

Yeah, this is Wayne. I don’t think there’s no one client that’s really significant there. It’s a lot of smaller clients accumulating to the 15%, so I don’t think that there is anything notable about that category, just more clients in general.

Jessica Reif Cohen, Merrill Lynch

Okay, so it seems to be pretty much strength across the board?

M. Wayne Wisehart, Chief Financial Officer

Yes.

Jessica Reif Cohen, Merrill Lynch

All right, thank you.

Operator

Your next question comes from the line of Aaron Kessler with Piper Jaffray. Please proceed.

Paul Bieber, Piper Jaffray

Good afternoon, this is Paul Bieber for Aaron Kessler. Congratulations on a good quarter. Two quick questions; can you broadly provide some color on the general acceleration of demand for web development services? And secondly, can you provide some color on cross-selling activity in the quarter?

Brian McAndrews, President and Chief Executive Officer

Sure Paul, this is Brian. On the web development, the color on general acceleration is we’re just seeing I think a few things. One is the increased penetration of broadband and the increased capabilities in Rich Media. I think basically companies are recognizing that the website is critical, and we’ve been saying it for a while is that it’s replacing the 32nd commercial as the central expression of the brand for advertisers where TV commercial is more and more going to be kind of a way to drive people to your website, and then your website provides much deeper, richer experience, at least that opportunity for deeper, richer interactive experience. I think we saw a cycle of development of websites in the bubble period back in 1999 when a lot of companies were building websites and then we saw a maintenance mode during the downturn and now we’re seeing advertisers and companies coming back, both outside in their consumer effacing websites but also to some degree in enterprise portal in their business-to-business and their internal websites, Internet sort of thing. You know, there’s just so much more than can happen. We need to be update, we need to be competitive, and the consumer is expecting more because they’re getting from certain websites and they’re just expecting more. So, I think we’re seeing overall a general positive trend, plus there are more brand advertisers come on line, they recognize the value of that creative piece that a website can be, that creative relationship with their customers. So, I think we’ve just seen a lot of advertisers coming to us saying “It’s time for me to invest in a website, it’s time for me to recognize that there’s an audience there.” I mentioned Corrs in my comments, certainly that’s part of what’s motivating them. They’re young…well not too young, but adult male audience is online and they want to find new ways to reach them. So that’s that. I’m sorry I forget the second part of the question.

Paul Bieber, Piper Jaffray

Cross selling…

Brian McAndrews, President and Chief Executive Officer

Yeah, we gave up based on that last year and going into this year we decided we’re not giving any numerical updates, because the way we’re looking at the business now that Avenue A ¦ Razorfish is now pretty well integrated. What we sell to our clients now is the entire offering, which is not to say that people buy the entire offering all the time. They often will start with one or two pieces and then build over time. So, we’re not giving an update. I mean, the last update we gave towards the end of the last year was over 30 clients across, so we haven’t been updating that since, because again, we’re looking at it more of a uniform offering. Having said that, we have a lot of clients and not all of them are using our offering, so we certainly expect to get deeper penetration and see growth in Avenue A ¦ Razorfish come from both new clients as well as existing clients, spending more online and spending more with us as they expand their number of products and services of ours they use.

Paul Bieber, Piper Jaffray

Can you also show PP guidance for the share counts that you mentioned?

M. Wayne Wisehart, Chief Financial Officer

Sure, for the year we’re using $87.5 million and for the second quarter $89.5.

Paul Bieber, Piper Jaffray

Great, thank you, congratulations on a good quarter.

Operator

Your next question comes from the line of Ben Schachter with UBS. Please proceed.

Benjamin Schachter, UBS

Hey guys, let me be another to add on to, congratulations on a good quarter. A few questions for you; one on the contract employees and I would like for you to talk about, was that anything out of the ordinary and do you think you’re going to be able to rein that in a bit more and actually make the more full-time hires. Second question is on Rich Media. In general, do you guys think you’re going to be able to grow that product on your own or you’re happy with your progress, or do you think you may have to acquire or just look for outside help in that? And then I have a followup after that.

Brian McAndrews, President and Chief Executive Officer

Okay, let me take the contract employees. I think that that’s a normal event for us. I think it was probably a little bit higher than the first quarter, the normal due to the large pipeline of business we have, and we are working hard to hire people and we are making a lot of progress with that, though we got a lot of business. So, we probably have heavier contractors in the first quarter than we’ve had previously. The answer to your question is yes. We believe that we will have full-time employees to replace many of those very soon.

M. Wayne Wisehart, Chief Financial Officer

Then, on the Rich Media question, I would say, while we never rule out potential acquisitions in any area, as we sit here today we don’t think we need to make any acquisitions in Rich Media. Our business is growing well and we’re very happy with our progress. By the end of last year we were over 1000 websites serving including the big three portals. We’re using our product, so it’s really a question of just continuing to expand and penetrate. We think that the offering we have with third-party Ad Serving and Search and Site Optimization all in one tool is really beneficial, and that integrated story is selling well. So, we think we have the capabilities and the development talent in house and our pulse on what the customers want to be able to continue to evolve and improve our product without any near-term acquisitions. Again, I wouldn’t rule anything out long term. If we find there’s a capability out there that we can accelerate our growth more quickly, accelerate our capabilities by acquiring it, we certainly wouldn’t hesitate to do that, but at this point I would say that’s not on the short-term horizon.

Benjamin Schachter, UBS

Okay, and just one other followup on potential acquisitions, particularly international, I’m wondering if you could discuss what the environment is in terms of how people are viewing their own evaluations and if they’re notably different in Europe versus Asia.

Brian McAndrews, President and Chief Executive Officer

I guess I’d say that certainly since the market is strong, evaluations are strong, but I think on the agency side, which is we’re primarily looking acquisition wise internationally, we have made acquisitions in the past on an earn-out basis, and I think that one of the nice things about an earn out is that your evaluation is ultimately as good as your performance. So, if you’re bullish and you believe that you can perform well, you will do well, and yet it’s a risk sharing thing. So, I think that while evaluations are certainly healthy that’s not an obstacle at this point if we find companies that we feel good about and feel the cultural fit is good, feel the management is strong, feel we have good client base, and the ability to work well with our offering. We haven’t had to walk away from something because of evaluation at this point, and we’ve been primarily focused on Europe, a little bit in Asia. I would say, Asia, the evaluations are more aggressive and could be a bigger issue there, but we haven’t spent as much energy in that part of the world.

Benjamin Schachter, UBS

Thank you and good luck, Mike.

Operator

Your next question comes from the line of Stewart Barry with ThinkEquity. Please proceed.

Stewart Barry, ThinkEquity Partners

Good afternoon and congratulations. What was international revenue during the quarter, and could you comment a little bit on the cross-line opportunities between DNA and Avenue A ¦ Razorfish?

Brian McAndrews, President and Chief Executive Officer

I’ll answer the second part first and I’ll let Michael Wayne give you the numbers. I think that there are definitely cross-selling opportunities, and I guess they could go either direction, but I think one of the compelling reasons for Avenue A ¦ Razorfish to want to have an international presence besides the obvious growth opportunity for the business is that our clients are many of the multinational Fortune 1000 type companies and they do want us to be able to help them in other countries as well. So, we do expect to see growth there and we have already seen some progress…I believe there’s been at least one client that DNA has already taken on, that is a U.S.-based client, and there at least several other communications going on with U.S.-based clients and they also have an interest in ultimately working with DNA.

M. Wayne Wisehart, Chief Financial Officer

The international revenue was 19% of total accounted revenue, the 19% of the $92 million.

Stewart Barry, ThinkEquity Partners

And then just one more question, utilization around 80%, I believe that was a level in the fourth quarter and in turn over I think you had set a time somewhat below 15%, are you still at those rates?

Mike Vernon, Outgoing Chief Financial Officer

Yeah, I’d say our utilization remains very high, Stewart. Where demand is strong and it’s one indicator we have a good pipeline of our business, and the use of contractors is a little bit higher than we would like it to be in the long term, but I’d say our utilization continues to be about the levels that it has been historically, which essentially is full utilization for all practical purposes.

Stewart Barry, ThinkEquity Partners

Okay, great, thanks a lot.

Operator

Your next question comes from the line of Julia Choi with Bear Stearns. Please proceed.

Julia Choi, Bear Stearns

Thank you. I just have a couple of quick questions. First, if you could just talk a bit more about the competitive environment specifically versus the ad holding companies, I just want to get a sense of how competitive you think it is today versus just a few years ago, is it more or less about the same. And then if you could also give us some update on your win rate in both media and web design projects.

Brian McAndrews, President and Chief Executive Officer

Julia, on the competitive side, I would say it is competitive out there, but I think that the market is growing very fast and we feel very good about our Avenue A ¦ Razorfish capabilities. So, I think that our positioning in the marketplace is very much as it has been about using data and analytics and our technology expertise to drive results for our clients. Digital marketing is different from offline marketing obviously and far more technology analytically driven, and we think it continues to help us to win business with more and more clients. I think the overall pie is growing, so that’s good for everybody. We think we continue to get a little bit more and more of our share of that pie. I guess I would say people are investing more, so maybe the market is a little bit more competitive than it was a few years ago when people had kind of written off the segment. I would say probably gotten more competitive, but it’s nothing that has been incredibly challenging to our growth at this point. On the win rate, it’s not something that we publish any numbers on other than to say that we had very strong organic growth in our Avenue A ¦ Razorfish business, and that is coming from both existing clients spending more and from new client wins, some of which we’re glad to talk about and some of which we’re not.

Julia Choi, Bear Stearns

Okay, great, thank you.

Operator

Your next question comes from the line of Denise Garcia with WR Hambrecht. Please proceed.

Denise Garcia, WR Hambrecht

Hi guys, congratulations on a good quarter. I had a question about your partnership with telecommunications and the tests that I think you’re going through for the Atlas On-Demand VOD serving technology, I was wondering if you could give us a little more color on that, how you are pricing your VOD serving, what are you expecting from the test, what would make a good test or a bad test, and where do you see the market opportunity for VOD advertising?

Brian McAndrews, President and Chief Executive Officer

Sure Denise, I’ll start with the second part first. The opportunity we see is being really longer term and significant, and we’re not exactly sure how the market shapes out. What our hypothesis is that as other media becomes digital and television is obviously headed in that direction, that the skill set and capabilities that we bring to the Internet are going to be more and more applicable to that offline world. So, the Internet is obviously an on-demand medium with ads being inserted and targeted and people having the ability to be far more targeted and far more accountable. And our vision is that that’s the way television goes as it becomes more of an on-demand medium also, people can get content when they want it and it will be our challenge to make sure that we can help people get the marketing messages at the right time at the right place and get interactive and give our clients measurability. So that’s where we see it going longer term and obviously that’s both in terms of television and what you’re seeing in Video On Demand but also in IPTV and other distribution channels. So the charter test is just a step in that direction, it’s an early step but we’re excited about it because it gives us a real world step, which will give us an opportunity to see how our current technology which we’ve been able to leverage a tremendous amount of our Atlas technology, though we have some new capabilities we obviously needed to add for Video On Demand, this give us the first real world road test with actual clients, with an actual MSO, with our partnerships to see how things work and to learn from that. And one of the things we hope to learn is what is the right way to price and what is the right way to share the pie in the economic model, what is the value that we help create. So, I guess I would say to you and investors that this is early and we’re not expecting a lot of revenue from either this test or from 2006, but we’re excited that the test is happening and that there’s a lot more going in the marketplace in terms of discussion about this area, and we think we’re in a good position to continue to learn and leverage the capabilities we have to play a part in this however it evolves.

Denise Garcia, WR Hambrecht

And when is the test over?

Brian McAndrews, President and Chief Executive Officer

I think it will definitely be this year, I don’t think we have a specific date on it.

Denise Garcia, WR Hambrecht

Okay, great, thanks, and good luck Mike.

Operator

Your next question comes from the line of Chad Bartley with Pacific Crest.

Chad Bartley, Pacific Crest Securities

Hi, thank you, just wanted to confirm that guys stated your organic growth rate was 35%, and does that just back out the contribution from DNA? And then I also wanted to clarify, was Razorfish as a percent of the DMS revenue or was it up as a percent of total company revenue year-over-year?

Mike Vernon, Outgoing Chief Financial Officer

Let me take the fist one here. Yes, the organic growth was 35% and that is nearly backing out DNA from the equation.

M. Wayne Wisehart, Chief Financial Officer

On the second part, Chad, the contribution of our web business was relatively constant as a percentage of DMS revenue.

Chad Bartley, Pacific Crest Securities

Okay, thank you very much.

Operator

Your next question comes from the line of Christa Quarles with Thomas Weisel Partners. Please proceed.

Christa Quarles, Thomas Weisel Partners

Hi guys, a couple of questions. First, it looks like your international performance was much, much stronger than I guess what we had been anticipating. It seems like it was at least a finger comment part of the performance in D&T, I tried to strike DNA from the mix and even with that it seems like it was extraordinarily strong, can you comment on that specifically? And then also, what competitive pressures Falk may have or have not had in that marketplace? And the second question is on mobile. I know, Wayne, it’s your background but is it too soon to start asking about when you’ll develop a mobile product. And then the third question is just on DRIVEpm, the acceleration in growth, was that due to an increase in the overall number of publishers that you guys had out there? And then finally, I would like to also bid farewell to Mike as well. Thanks.

Brian McAndrews, President and Chief Executive Officer

Okay, Christa, it’s Brian, I’ll start off and then the others will join in. On the international piece, we’ve seen some strong success on the part of Atlas in expanding, as I think I mentioned in my remarks we’re in 20 countries now and the U.K. is clearly the largest, but we have made great inroads in other parts of Europe and in parts of Asia and Australia, led many times by clients who are multinationals who really want to have the Atlas tool collecting data across the different parts of the country and the world. We’ve also seen some benefit from Atlas publisher tool which is the tool designed among other things, MediaBrokers in the U.K., but we’ve seen benefit from that as well. In terms of Falk I think the DoubleClick acquisition of Falk could end up working well in our favor actually; I mean it eliminates the competitor in Germany, from two competitors down to one, and Falk was not a company that really had much of a presence in the U.S. and a lot of their business is really on the publishers side, competing more with DoubleClick. So, we don’t see that having a significant impact on the landscape for us beyond the change of our strategy in any way.

In terms of mobile, I think that we’re counting on Wayne to create…I think it’s certainly something we look at. We look at all these different areas and we have people in both Avenue A ¦ Razorfish and Atlas dedicated to the emerging media areas and looking at them. And I think we think that overtime mobile will become more significant as a content platform than as an advertising platform, but it’s still small and it’s not the low-hanging prune, it’s not where the big opportunities are particularly for the big advertisers who want to have a lot of penetration and want to know that if they’re going with something new that it’s going to reach a fair amount of people. So, I’d say that it’s certainly something that we are paying close attention to along with other things, but it’s not the next big thing from an advertising standpoint from our point of view. Mike, do you want to answer the drive and the acceleration in growth question?

Mike Vernon, Outgoing Chief Financial Officer

I think in the performance media business, Christa, what you’re seeing is really an increase on the demand side and the customer side. We continue to add publisher and publisher inventory as needed, but what we’re beginning to see now is benefits of the investments we’ve made in the technology, sort of to improve the CPMs that we can achieve and also in the number of clients that we’re winning. So, it’s much more I’d say on the demand somewhat on the pricing side response to technology ramping and improvement.

Christa Quarles, Thomas Weisel Partners

So nothing has changed there in terms of the market that you’re going after, in terms of the sort of top tier or the top 200 publishers?

Mike Vernon, Outgoing Chief Financial Officer

No, that remains the same.

Christa Quarles, Thomas Weisel Partners

Okay, thanks.

Operator

Your next question comes from the line of Richard Kaiser with Stanford Bernstein. Please proceed.

Richard Kaiser, Stanford Bernstein

Hi, I was hoping if you could just discuss perhaps both Google and Yahoo in particular appear to be beefing up the tools for advertisers on their own sites. I just wanted to see how you view those tools, if you viewed them as a competitive threat or if you viewed them primarily for smaller companies only, or if this is not really aimed at the larger companies, why are Google and Yahoo kind of focusing on these types of tools? Thanks.

Brian McAndrews, President and Chief Executive Officer

Yes, Richard, I would answer your question by saying I agree with your own answer there. It is primarily for the smaller customers, sort of self-service tools, and they to some degree are challenging the low end of the web analytic tools that our there and to some degree people who didn’t use tools at all. And in my view the reason that Google and Yahoo would do that is because they have a tremendous amount of small customers and so it is actually to their benefit to provide that type of tool for those customers when people like Atlas who has Atlas search are not providing this much, because we really are focused on primarily larger agencies, larger potential businesses. So, it is arguably complementary. We also think that in the long run the real benefit that Atlas has, it is truly a third-partly tool that allows people to make decisions across the multiple search engines, Google, Yahoo, MSN, Ask, and obviously a tool that is provided by one of those particular companies is by definition not a third-party tool.

Richard Kaiser, Stanford Bernstein

Okay great, if I could ask one other quick one. It seems as if the first year or two, I guess depending on when your starting point was, that a tremendous amount of experimentation had been going on with Internet advertising and one of the key values that you provide is calculating that return and with that you’d assume the companies will become more educated about what works and what doesn’t, and then with that they maybe increasing in some areas and decreasing in other areas when they find out what doesn’t work. Could you just comment on that dynamic and how you think companies are proceeding now, are they are more educated, is there is less experimentation going on, are there are a set of things that you know works very well and other things that don’t?

Brian McAndrews, President and Chief Executive Officer

The hypothesis is right that in the sense that we do help our clients figure out what works and we’re constantly calculating ROI and testing things. I think where the theory breaks down though is the world we’re in is so dynamic that there are always new things to test. So while we do learn…first of all a lot of things that come out aren’t necessarily binary where one thing works and one thing doesn’t. So, for example, you’ve obviously got Search, you’ve got Display Media, you’ve got Rich Media, and all three of those can work together, but they might work in varying degrees for different clients where some clients should be spending a lot more on Search versus the others and vice-versa. So that’s one of the benefits of our offering and our tools, it’s helping you figure out between that. But then, even when you think you have that figure out, you’ve got blogs and you’ve got podcasting, you have pop-up ads, you use those or don’t use those, and those have kind of largely gone away, and the things are constantly evolving and now there’s going to be web video now. There was Rich Media and now there is Web Video and there will be long form ads on websites perhaps and shorter forms, and there are things you can do within a website now with AJAX and other development tools that make the website much more dynamic, and you can make changes without leaving the page you’re on. So, in a sense, I think our job is to do that, help figure out what works. I think clients are becoming more educated, but there’s always more to educate them on. I think that the major education the clients definitely have gotten is, eyeballs are online, there’s a lot of capabilities that are online that allow the advertiser to reach those customers in compelling ways, and so I need to be there and now the question is help me figure out how much I should be spending and on what.

Richard Kaiser, Stanford Bernstein

Okay, great, thank you.

Operator

Your last question comes from the line of Marianne Wolk with Susquehanna. Please proceed.

Marianne Wolk, Susquehanna Financial

Thanks, I was just hoping if you could give us the international mix and maybe the fourth quarter of even the first quarter of last year just so we could understand the growth rate in that business, sort of above and beyond DNA?

Mike Vernon, Outgoing Chief Financial Officer

Until this quarter we have not broken out exactly how big that is, but I think it’s fair to say obviously with DNA’s contribution that has made a big difference, but there was also very significant growth in the contribution of MediaBrokers and our Performance Media business and also in Atlas’ business in Europe. We have not broken that out in the past, so I can’t give you direct growth rates, but I can tell you directionally, each of the businesses grew very significantly in its international contributions in the first quarter.

Marianne Wolk, Susquehanna Financial

You know, Mike, what I was trying to do is understand, how much of this was driven within Atlas by TechnologyBrokers in the U.K. and how much was driven by the core Atlas product, was most of the growth of site and Technology Brokers?

Mike Vernon, Outgoing Chief Financial Officer

Well Technology Brokers is really the U.K. distribution arm of Atlas. So, Technology Brokers sell the core Atlas product over there. That is what the business of Technology Brokers is.

Marianne Wolk, Susquehanna Financial

It’s more than just performance then? I always thought it was a performance driven tool when you acquired it.

Brian McAndrews, President and Chief Executive Officer

Just to clarify it, Technology Brokers, the name no longer exists. We now call it Atlas Europe. MediaBrokers is the DRIVEpm equivalent in Europe and that is the performance-based media, and that is also growing. So if you’re asking Mike about that, that is growing and I think we said this quarter 57% of that segment. So we’ve seen growth there, but we’ve also seen growth in what used to be TechnologyBrokers and is now called Atlas Europe, which is simply the Atlas tool being sold in Europe.

Marianne Wolk, Susquehanna Financial

Okay, thank you.

Operator

At this time, there are no further questions. I’d like to turn the call over to Brian McAndrews for closing remarks.

Brian McAndrews, President and Chief Executive Officer

Okay, thank you all for your interest in your questions and we look forward to speaking to you again soon. Thank you and goodbye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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