Warren Buffett Might Put ValueClick in the 'Too Difficult' Pile

ValueClick (VCLK) is the kind of investment Warren Buffett might put in the “too difficult” pile. Not only does the company compete in the fast-changing, technology-driven online advertising market, but it has also been cobbled together from various acquisitions, making it difficult to judge organic growth and internal cohesiveness. We are concerned that the online ad space remains a “wild west” of new media, with intrusive tactics still used by some players to capture consumers. We note that ValueClick settled with the FTC in February regarding allegations of deceptive marketing. We have no basis on which to judge the predictability or sustainability of ValueClick’s FCF, putting us on the sidelines.

BUSINESS OVERVIEW

ValueClick is an online marketing services firm that sells targeted online ad campaigns to advertisers, generating leads, online sales and brand recognition. The company was founded in 1998 and operates in four segments:

The Media segment’s ValueClick Media brand provides online display advertising and lead generation.

Affiliate Marketing’s Commission Junction brand allows advertisers to pay their own salesforce of online publishers.

Comparison Shopping operates PriceRunner in Europe and Smarter.com and CouponMountain.com in the U.S.

Technology’s Mediaplex provides ad serving and tracking for advertisers seeking to understand their online ad spending.

SELECTED OPERATING DATA

FYE December 31	2005	2006	2007	YTD 9/30/08
% of revenue by segment:
Media	54%	70%	60%	48%
Affiliate marketing	31%	21%	21%	18%
Comparison shopping	6%	5%	14%	28%
Technology	9%	5%	5%	6%
Revenue growth by segment:
Media	157%	132%	1%	-20%
Affiliate marketing	30%	17%	22%	9%
Comparison shopping	204%	52%	251%	123%
Technology	6%	-5%	27%	21%
Total revenue growth	80%	79%	18%	7%
EBIT margin by segment:
Media	23%	25%	22%	22%
Affiliate marketing	47%	52%	50%	48%
Comparison shopping	12%	12%	19%	24%
Technology	34%	30%	39%	41%
Corporate and other	-10%	-11%	-12%	-19%
Total EBIT margin	21%	19%	17%	9%
% of revenue by geography:
U.S.	84%	87%	85%	83%
International	16%	13%	15%	17%
EBIT margin by geography:
U.S.	23%	20%	18%	11%
International	10%	9%	9%	2%

INVESTMENT HIGHLIGHTS

• Leadership positions in core businesses that benefit from long-term growth in online ads and ecommerce. ValueClick is the leading independent online display ad network, with 142 unique visitors per month. The company is also the leading player globally in online affiliate marketing.
• Multiple touch points allow ValueClick to engage consumers more deeply than more narrowly-focused alternatives. Each ValueClick technology feeds into a common data platform and leverages anonymous consumer data for enhanced targeting.
• Growth strategy based on acquisition-driven and organic growth. While the company has indicated an interest in exploring M&A opportunities, it is also focused on new and upgraded products.
• $119 million in cash and securities and no debt.
• Repurchased 12 million shares for $150 million YTD, 2.3 million shares for $44 million in 2007, and 33 million shares for $179 million before 2007. Despite the buybacks, average diluted shares grew from 91 million in 2005 to 101 million in 2007.
• Stock price implies 27% trailing FCF yield, 10x trailing P/E and 9x forward P/E.

INVESTMENT RISKS & CONCERNS

• Seeing weaker revenue trends than anticipated, with consumers taking less action on online shopping sites, and advertisers holding sites to stricter performance objectives. The company has responded with spending and headcount reductions.
• Guiding for revenue decline of 1%-2% to $633-638 million in 2008. Management anticipates 2008 “adjusted” EBITDA of $161-164 million (25-26% margin) and GAAP EPS of $0.55-0.56, lower than previous guidance for EPS of $0.69-$0.71.
• M&A rollup strategy. ValueClick has completed numerous acquisitions in recent years, including MeziMedia, Shopping.net, Fastclick, Webclients, E-Babylon, Pricerunner, Commission Junction, etc.

COMPARABLE PUBLIC COMPANY ANALYSIS

($mn)	MV	EV	EV/Rev	P/TB	08 P/E	09 P/E
DRIV	865	565	1.4x	3.1x	13x	12x
GOOG	97,580	83,168	4.0x	4.5x	16x	14x
MWW	1,432	1,040	.7x	4.3x	8x	11x
VCLK	495	406	.6x	5.2x	10x	9x

MAJOR HOLDERS

CEO Vadnais <1% │ Other insiders 1% │ Schroder 6% │ Barclays 6% │ ValueAct 3%

RATINGS

VALUE	Intrinsic value materially higher than market value?	**
MANAGEMENT	Capable and properly incentivized?	***
FINANCIAL STRENGTH	Solid balance sheet?	*****
MOAT	Able to sustain high returns on invested capital?	**
EARNINGS MOMENTUM	Fundamentals improving?	***
MACRO	Poised to benefit from economic and secular trends?	***
EXPLOSIVENESS	5%+ probability of 5x upside in one year?	***

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Comments

[LookingConf...:]

ValueClick's "gateway" (?) in Simpli.com - it's Global users are UP by 710% in the past 3 months.

"LookSmart Reports Fourth Quarter and Full Year 2007 Results"

When Looksmart released it's (above) Q4 - 2007 Report (on Feb 28, 2008), the CEO Ted West did advise the Market of the following:

"Looking to 2008, we continue to execute our strategic plan to best position LookSmart for significant revenue growth and progress towards profitability in online search advertising.

Core to our growth strategy will be investing in the development and extension of our Ad Center technology platform, marketing it and selling it to online search advertisers through Advertiser Networks, and to Publishers through private-labeled online search advertising solutions."

So, ..."Core to our growth strategy will be investing in the development and extension of our Ad Center technology platform, marketing it and selling it .....to Publishers through private-labeled online search advertising solutions".

On July 19th 2006 Looksmart had announced that:

"LookSmart's distribution network includes selected, 'monitored syndicated publishers' and search engine partners that maximize advertiser ROI. Distribution partners include CNET's Search.com, Cox Interactive, InfoSpace (Dogpile, Webcrawler), Localcom, Simpli.com and Viacom".

investor.shareholder.c...

I've a long held "theory", of Looksmart having to 'forgo' those additional revenues once enjoyed from the monitoring of syndicated publishers, and that for it to then become that "totally independent" EXCHANGE (for both advertisers and publishers alike), Looksmart has had to do so. Effectively, LOOK will have then gone on to stop monitoring (on behalf of publishers) and as a consequence, fore-go that percentage of click revenues attached to such type of service. Some short term 'pain' for long term 'gain', maybe?

And the emphasis is on how Looksmart clearly had described those early day Network partners as being "MONITORED" (syndicated publishers) whereby (IMO), Looksmart apparently did all the monitoring for them.

So, by Looksmart then "teaching them" (all), how to operate their OWN "white labeled" PUBLISHER CENTER (AdCenter) they can then see them operate freely, and without Looksmart having anything to do with their "ask/buy prices" or, bids, for any of their inventory in the 'day-to-day' operation of the Looksmart Global Marketplace's auction based platform.

And in their doing so (I believe), Looksmart can then go on to "white-label" the Licencing of (many) Publishers, and lots of other Ad Networks, plus Publisher Networks and even Global Brands, too....

And Looksmart then get to remain INDEPENDENT (blind) to ALL of their individual "bid's action" (at both ends of the scale), until such time as, (after) the moment that a "connect" (between such advertisers and publishers), has been registered. Is how I'm reading it all.

And if the Global user "activity" to AdCenter partner in Simpli.com (and, is owned by ValueClick) happens to be any indication, Looksmart have done a mighty fine job over the past 12 months or, so. - (Simpli.com - it's UP 710% in the past 3 months)

www.alexa.com/data/det...

Q4 results (for both) will show a little of what's to come in both the 'near' and 'long' term future for Looksmart and ValueClick, no doubt. I'm excited!!

Cheers!!

Jan 29 08:00 PM