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Executives

Gary Fuges - VP, Investor Relations and Corporate Development

Tom Vadnais - CEO

John Pitstick - CFO

Analysts

Youssef Squali - Jefferies & Company

Robert Coolbrith - ThinkEquity

Ben Schachter - UBS

Mark Mahaney - Citigroup

Christa Quarles - Thomas Weisel Partners

Carter Malloy - Stephens Incorporated

Eric Martinuzzi - Craig-Hallum

Townsend Buckles - JPMorgan

Sameet Sinha - JMP Securities

Ross Sandler - RBC Capital Markets

Mark May - Needham

Dan Salmon - BMO Capital Markets

ValueClick Inc. (VCLK) Q4 2008 Earnings Call February 12, 2009 4:30 PM ET

Operator

Good day and my name is Elizabeth and I will be your conference facilitator today. A replay of this call will be available by telephone beginning at 4:30 p.m. Pacific Time today, and may be accessed through 10 O'clock p.m. Pacific Time on February 19, 2009. Thereafter, it can be accessed on ValueClick's web site at www.valueclick.com or www.streetevents.com.

Previously filed SEC filings can also be found on ValueClick's site. All lines have been placed in a listen-only mode to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions).

At this time, I would like to turn the call over to Mr. Gary Fuges, Vice President of Investor Relations and Corporate Development for ValueClick, Incorporated. Please go ahead, sir.

Gary Fuges

Thank you, Elizabeth. Good afternoon and welcome to ValueClick's Fourth Quarter and Fiscal Year 2008 Financial Results Conference Call. On the call with me today are Tom Vadnais, Chief Executive Officer and John Pitstick, Chief Financial Officer.

Today's call contains forward-looking statements that involve risks and uncertainties including, but not limited to, trends in online advertising spending, and estimates of future online performance based advertising. Actual results may differ materially from the results 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 filings with the Securities and Exchange Commission made from time to time by ValueClick including its Annual Report on Form 10-K filed on February 29, 2008, recent quarterly reports on Form 10-Q and current reports on Form 8-K.

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 risks that market demand for online advertising in general and performance based online advertising in particular will not grow as rapidly as predicted, and legislation and governmental regulation that could negatively impact the company's performance. ValueClick undertakes no obligation to release 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'd like to turn the call over to Mr. Tom Vadnais, CEO of ValueClick. Tom?

Tom Vadnais

Thank you, Gary. Good afternoon, everyone and thanks for joining us for ValueClick’s fourth quarter 2008 conference call. Despite of the macro issues faced by virtually every company today, ValueClick executed well in the fourth quarter of ’08.

Revenue increased sequentially and was $5 million above the high-end of our guidance range. The company was successful in converting a high percentage of the revenue growth into adjusted-EBITDA, which resulted in adjusted-EBITDA above the high-end of our guidance range and an adjusted-EBITDA margin of 25.4%.

There were housekeeping items in the quarter that John will discuss later in the call, including the presentation of two divested businesses as discontinued operations. He will also review something you’ve seen from a lot of companies this quarter, a goodwill impairment charge.

Before I turn the call over to John, I’d like to comment on our four business segments. In media, worldwide display advertising increased about 3% sequentially, which was better than the flat sequential growth, which we guided in our last call.

ValueClick Media's scale, performance-based offerings and reputation are definitely a competitive advantage in this market. We also feel that our proprietary behavioral targeting capabilities are improving giving us say, competitive advantage in the sector.

The software and telco verticals were healthy in the quarter and our AdRX vertical network help deliver strong results in the pharma vertical.

Shifting to lead generation, our lead generation sector was down about 7% sequentially in the quarter, which was in-line with the guidance provided on our last call.

Broad-based lead gen players across the industry remain challenged in this macro environment, as some demand has shifted to alternate online channels.

Affiliate marketing revenue increased about 8% sequentially versus guidance for flat sequential growth.

Aggressive offers from retail advertisers help drive a stronger than expected holiday season for CJ. We think CJ's performance in the quarter is an indication of the channel’s value to our advertisers. It also reinforces our leadership position in the affiliate marketing sector.

Our Technology segment which now consists solely of our third party ad serving analytics business had a great year. Revenue grew 10% sequentially in the quarter and 20% year-to-year.

The growth was driven by increase in volume from existing customers and the addition of many new customers during the year. The biggest outperformer in the fourth quarter was the Comparison Shopping and Search segment with a 4% sequential revenue increase versus guidance down of 10%.

There were three items that helped drive the revenue outperformance. Traffic quality initiatives that we discussed with you previously; improved traction on the CouponMountain site due to the economy; and enhancements to the Smarter.com site, which have improved site monetization.

We expect these initiatives will continue to contribute to performance of our comparison shopping segment. All four of our business segment expanded operating margin sequentially in Q4.

The full-year operating margin for each segment was in line with margin guidance we provided earlier in the year, in spite of the economy’s impact on revenue.

I believe all of our businesses are benefiting from seasoned management teams who are running our businesses well in this market environment. We are a well respected player with a strong balance sheet and a great reputation in the marketplace over the last 10 years.

With that, I'd like to turn the call over to John Pitstick, our CFO to give you more details on the financials. John?

John Pitstick

Great. Thanks, Tom. Before I discuss the financial results, I'd like to discuss two items we included in our earnings press release today. First, back in October we announced the divestiture of two non-core businesses. Subsequent to that announcement, we completed our analysis of the related accounting rules and determined that these divested businesses are required to be treated as discontinued operations.

We have accordingly restated our historical statements of operations and our segment operating results which reflects this change. A PDF file containing historical financial information reflecting this new presentation is available for download on our Investor Relations website.

Our previously issued guidance range for full year 2008 did not reflect the restatement of these businesses at discontinued operation.

Second item in the fourth quarter and our fiscal 2008 financial statement include the impact of an estimated $327 million pre-tax, non cash, goodwill impairment charge, based upon the preliminary results of our annual goodwill impairment test.

We are in the process of completing our goodwill impairment test and determining the associated income tax impact. Accordingly, fourth quarter and fiscal year 2008 GAAP operating results released today are preliminary and subject to change. Final GAAP operating results will be included in our Form 10-K, which we'll file with the SEC no later than March 2nd.

In the fourth quarter of 2008, ValueClick generated revenue of $150.1 million, compared to $175.7 million in Q4 2007.

Fourth quarter revenue was above our previously issued guidance range of $140 million to $145 million, due primarily to the strength in the comparison shopping, affiliate marketing and display advertising businesses that Tom described earlier.

Our cash operating expenses, which excludes stock-based compensation, amortization expense and impairment of goodwill totaled $61.9 million in the fourth quarter of 2008, compared to $80.1 million in Q4 of 2007. Cash OpEx was 41% of revenue in Q4 2008, down from 46% of revenue in a year ago quarter. This demonstrates the company's ability to manage expenses in this environment.

Adjusted-EBITDA was $38.2 million in the fourth quarter of 2008, above the high-end of the guidance range of $33 million to $36 million. Adjusted-EBITDA margin expanded to 25.4% in the quarter and 25.2% in the year ago period.

Our stock-based compensation was $2.6 million in the fourth quarter of 2008 compared to $5.2 million in 2007. We expect stock-based compensation to be approximately $3 million per quarter throughout 2009.

Amortization of intangible assets was $6.5 million in the fourth quarter of 2008, which is our expected quarterly run rate for 2009.

Due to the goodwill impairment charge, I mentioned earlier, Q4 GAAP operating loss was $300.3 million excluding this charge operating income would have been $26.7 million in the quarter. Our normalized operating margin was 18% in Q4, which is consistent with the normalized operating margin last year of 18%.

Net interest and other income was a negative $1.9 million for the fourth quarter of 2008, due to currency translation losses associated with the continued strengthening in the U.S. dollar throughout Q4.

Our income tax benefit for Q4 2008 was $41 million due to the goodwill impairment charge. Excluding the impact of the goodwill impairment charge, our effective tax rate for the quarter would have been 43%. These figures result in fourth quarter 2008 GAAP net loss from continuing operations of $261.2 million or $3.01 per share based on the weighted average number of $86.7 million diluted shares outstanding.

Excluding the impact of goodwill impairment charge, net income from continuing operations would have been $0.16 per share at the high end of the previously issued guidance range of $0.15 to $0.16.

Starting this quarter, the company began reporting a non-GAAP net income per share metric, which excludes the impact of stock-based compensation, amortization of intangible assets and one-time events such as this quarter's goodwill impairment charge.

For the fourth quarter of 2008, non-GAAP EPS was $0.23 compared to $0.26 in the year ago quarter. The press release contains the schedule that reconciles GAAP EPS, the non-GAAP EPS. Consolidated balance sheet of 12/31 remains strong with $150 million in cash, cash equivalents and market securities and no debt.

As stated in this afternoon's earnings press release, the company repurchased approximately 190,000 shares or $1.1 million in the fourth quarter. As of today, up to $105 million of ValueClick's capital may be used to repurchase shares of the company's common stock under our approved repurchase program.

We generated over $120 million in free cash flow in fiscal 2008 including $30 million in the fourth quarter alone.

We also increased our financial flexibility in the fourth quarter by securing at $100 million line of credit. We believe our ability to secure this facility in this difficult credit market is a testament to ValueClick's strong cash generation and our solid reputation in the market.

Today, we are providing guidance for the first quarter 2009. We expect revenue of approximately $126 million to $132 million. The midpoint in this guidance range implies a 14% sequentially decrease from Q4. Our expectations for each of our four segments are in this range of sequential decrease.

We expect adjusted-EBITDA in the range of $29 million to $31 million, which represents an adjusted-EBITDA margin at the midpoint of 23%.

Some of our full-year operating expenses are typically front-end loaded. We expect some incremental cost in the quarter associated with expense reduction initiatives completed early in the quarter. Both of these items will have a slight negative impact on the margins.

We anticipate GAAP diluted net income per common share of $0.11 to $0.12 per share. Non-GAAP EPS is expected to be $0.17 to $0.18.

With that, I will turn the call over to Tom.

Tom Vadnais

Thanks, John. We are going to open up the line for questions now, so operator, would you handle it please.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question from Youssef Squali with Jefferies & Company

Youssef Squali - Jefferies & Company

Thank you very much. Good Afternoon. Two questions: First, Tom. Your comparison shopping business, obviously you did better than expected, some commentary out of some of your competitors like Shopping.com and others were pointing to a much, much dire scenario, can you kind of carve out how much of the improvement that you've done are one-time in nature? How much of the other is sustainable? I'm trying to figure out what baked into your Q1 and then hopefully '09 guidance?

And second, in terms of margins, the midpoint of your guidance for EBITDA for Q1 implies margins of about 23%, I think, John, you mentioned something to the fact that some of these costs tend to be front-end loaded, yet if I look at the last couple of years, your EBITDA margin in Q1 was actually higher than the average for the year. So if you can help us reconcile that, that'll be great, trying to really just figure out your ability effectively to protect margins in this kind of environment. Thanks.

John Pitstick

Sure. I'll start off with the margins. If you look back to the first quarter of 2008, as well as 2007, we had some very strong performance in those areas. Should we call first quarter of '08, our if Comparison Shopping and Search business had a tremendous quarter, and we called out last year some one-time revenue events, which helped the quarter on the top line, as well as the margin.

And looking back to the first quarter of 2007, we actually have record revenues that quarter in our lead gen business and that also contributed to the margins for the quarter.

Though I think the market performance in the fourth quarter, was a bit stronger than we expected. So we do anticipate a little bit of higher level of expenses in the first quarter of '09, but the 23% operating or EBITDA margin, that we can call that, we don't see that as a longer term EBITDA margin.

Youssef Squali - Jefferies & Company

Are you sure, you do you expect margins to kind of move up from that base level throughout the year?

John Pitstick

We would, yes.

Youssef Squali - Jefferies & Company

Thank you. And, Tom?

Tom Vadnais

Yes, regarding the Comparison Shopping and Search business, first of all, there always is a, we expect some uplift in Q4 in this business, which we did see, so some of that of course is seasonal. But there are also a number of things, that we did with our two platforms in comparison shopping that contribute I think to longer term sustained growth outside of the seasonal uplifts.

As you know we have two platforms, for comparison shop, in the U.S. it's Mezi, and the Smarter.com site, CouponMountain site and couple others and in Europe it's PriceRunner. In the Mezi platform, we've been working on traffic filtering technology to improve the lead quality, which should be a sustained and continued improvement in that business.

We did have, as I have mentioned, little higher than expected traffic in monetization on CouponMountain site, which I think is somewhat related to the economy, as people were looking more for coupons and deals and ways to acquire products at lower cost, so that we would expect to continue, but probably not at the same seasonal uplift.

On the PriceRunner side, we are doing a couple of things, we are in the process of converting, essentially the back office operations to use the Mezi platform, which would give us some streamline in cost reduction opportunities.

We also have grown our distribution network to publishers in the PriceRunner, business lines that will continue to help us. There was definitely some seasonal uplift in Q4, but I think we have some sustained growth opportunities there also.

Youssef Squali - Jefferies & Company

Thanks.

Operator

And we will take our next question from Robert Coolbrith of ThinkEquity.

Robert Coolbrith - ThinkEquity

Hi, this is Rob on the call for Bill. Just a quick question again on Comparison Shopping. There's been made some concerns as to the potential impact of Google on Comparison Shopping businesses in terms of their ability to discount monetization spending from where traffic comes from. I'm just wondering if you could talk a little bit more about what you've been doing on Mezi side and Smarter.com. In terms of any changes that you've made, do you feel they are sustainable changes that prevent further discounting of monetization by partners?

Tom Vadnais

Okay. The Smarter.com site, which is the primary site in the U.S. for us. We have made some enhancements to improve monetization and if you go to that site, if you've looked that in the past, you'll see some changes. Among other things, we're are using some space on the site now for some banner advertising and so on which is a high in demand space inventory for advertisers since people going to Comparison Shopping sites are usually interested in buying something.

So, we've done some things like that, we have fewer sponsored links on the site so on. So they've all been designed for some long term changes, none of this was seasonal or geared around trying to do anything with search engines or geared around just good business judgment to drive more monetization from the site.

Robert Coolbrith - ThinkEquity

So the changes there at Smarter has that helped the ValueClick media sales channel and all in providing more inventory or did that help or did that contribute to the very expected results at ValueClick media. And that's it, thank you very much.

Tom Vadnais

Short answer to that one. It obviously provides more publisher inventory, but its only one site of vast network of publishers we have in ValueClick media. So it really wasn't designed for ValueClick media, it's more strictly a way to make it a better site for shoppers.

Robert Coolbrith - ThinkEquity

All right. Thank you very much

Gary Fuges

Rob, here is Gary. One thing to add. Unlike the first quarter of 2008 we did not have any one-time revenue spikes, this pertains Mezi in fourth quarter 2008. So just want to make sure that's clear.

Robert Coolbrith - ThinkEquity

Great. Thank you.

Operator

We'll take our next question from Ben Schachter of UBS.

Ben Schachter - UBS

I've got two questions and also on Comparison Shopping. With regards to the last answer, could you talk about what keyword revenue did and in general when we're trying to model this thing, I was not having confidence in our ability to really model it. Have you had any face-to-face discussions or non-generic contracts signed with Google and Yahoo! regarding how they may or may not move things around on you in 2009, just don't want to get caught, sort of, without knowing what's happening there. And then also you'd discuss the earn-outs in 2009, broadly speaking for the company. Thanks.

Tom Vadnais

Okay, Ben. First of all, we haven't had any contractual changes whatsoever with Google or Yahoo! so that's business as usual. In terms of the keyword volume and those kinds of things, I think could be best, I just don't have a detail here with me, it would be best if you'd cover that in a separate call with Gary and John, we can deal with you one-on-one at a later time. So, that's I think is the best answer I can give you right now. And was there another part to your question?

Ben Schachter - UBS

The earnouts in 2009?

Tom Vadnais

There is one more earnout period that is essentially the 2009 year. It's based on EBITDA. And it's far too early at this point to speculate on what might happen on that. Obviously, the downturn in the economy does not help, the opportunity for that earnout, and so we're aware of it. And we'll just keep you posted as year goes on.

Ben Schachter - UBS

And one more question, you also mentioned that the couponing sites were doing better. Are there opportunities for you guys to actually acquire some profitable sites in that area for reasonable prices?

Tom Vadnais

I think the key to that question was the last part of your sentence, reasonable prices. There we haven't come across – as you know, we are always interested in looking at acquiring complementary pieces to our business, but we haven't come across anything at reasonable prices in the recent past. So, we are open to it, but right now pricing would be an issue.

Ben Schachter - UBS

Great. Good luck in '09.

Tom Vadnais

Thanks.

John Pitstick

Thanks, Ben

Operator

We'll go next to Mark Mahaney from Citi.

Mark Mahaney - Citigroup

Thank you. Two question please. John, you'd mentioned expense reduction initiatives that occurred early in the quarter, could you just review again, what those were and what the potential impact of those is?

And then secondly, in terms of the guidance for the quarter, could you may be talk about the linearity of the guidance or what I mean by that is that year-over-year decline of, call it something around 20% that's implied in your guidance, 25% that's implied in your guidance. Did you see worse than that in January and you're expecting things to get better as you go through the quarter or have you seen in the first month of the quarter, something similar to that and you're expecting kind of steady pattern throughout the quarter? Thank you.

John Pitstick

Sure. I'll start with the expense side. As you recall, last quarter we talked about a target of about $7 million of annual expenses we take out of the run rate, and as we exited the fourth quarter we had achieved that cost savings or that cost takeout. And there was a bit of incremental in the early part of the first quarter. I won't quantify or go into too much detail as what those were. But, we'd expect to be well above the $7 million of annual cost that we've originally targeted.

And in terms of linearity within the quarter, January started up okay. I think we've been pleased with how that's formed so far. We are not accounting on a big uplift in the second part of the quarter.

Mark Mahaney - Citigroup

Let me ask one follow-on question please. Which has to do with, what would be the factors that would indicate that you are looking for to indicate that businesses has stabilized and they are starting to get less worse or are you thinking about, I know you did not give any guidance for the balance of the year, but the revenue dropped implied year-over-year stepper than in Q4, are there certain triggers you are looking for that'll indicate to you that business is stabilized and you can start moving back to growth or there are one or two key factors that will change the revenue profile for ValueClick.

John Pitstick

I think, when you think about the display network. We've talked about over the last year, where the average budget size has really come down. I think when you start to see, that average budget size start to go the other way that's going to be obviously a positive sign.

On the affiliate channel, we've talked to you before about dependence there or how that tracks with overall e-commerce growth rate, so you have access to the same type of data we do in terms of what, how that's tracking and what the projections are? Those are types of things that we focus on.

Mark Mahaney - Citigroup

Thank you, John.

Operator

We will take our next question from Christa Quarles of Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

Hi, first question is, I am just trying to get a better understanding what came stronger in the quarter and I'm wondering if December was much better than your expectation and it followed this delayed consumer purchase activity that we've been hearing about?

And then the second question was just the on comparison shopping. I was wondering if you could highlight the mix of your spend across channels IE, have you consolidated or to Yahoo away from Google, and then I have a housekeeping question.

John Pitstick

Sure. Yes, I think it is fair to say that December did little bit stronger than we’ve thought and we gave the guidance back in October. The affiliate channel, Tom mentioned there was some pretty aggressively retail offers that help drive volumes in that channel and we benefited from that. And also on the display side it was little bit stronger than we expected with advertisers coming in with some bigger budgets than we thought.

In terms of mix on the Comparison Shopping business of our sourcing traffic, we don’t typically provide those details. We have said that Google is not a large partner for us in terms of traffic acquisition and then there is a mix after that of some of the other top guys as well as second tier players.

Christa Quarles - Thomas Weisel Partners

And then on the housekeeping, I don’t know if it has been asked, but I guess I was more interested during the 2008 or not as to whether or not you’d be paying the $64 million I think that what we do in Q1 there?

John Pitstick

Yes. We will be paying that in Q1, $64 million.

Christa Quarles - Thomas Weisel Partners

Got you, thanks.

Operator

And our next question comes from Carter Malloy of Stephens Incorporated.

Carter Malloy - Stephens Incorporated

Hey, thanks for taking my questions. I'm just kind of wondering about the spending trends you are seeing across your per advertiser base, is that still trending down and maybe if you had strength or weakness in that vertical? And then also as a follow up to that, as a related question is that if you’ve been able to get any real commitments from your advertisers for their ’09?

Tom Vadnais

Well, commitments, no. The nature of the business is such that in the display business. We work off of the insertion orders or campaigns and those are not long-term commitments, so it’s hard to predict there. In our affiliate business, we have contractual arrangements with clients, but the volume of activity is really up to them in terms of how aggressive they want to be with offers they place into the network. So, we don't have any sort of commitments that we can go on, which is what makes the business in general hard to predict. And we add that to the current macro forces we are dealing with, it becomes very difficult to predict. But as John mentioned earlier, December was stronger than we had anticipated, which is good a news. We think we are off to a good start this year based on January results. So we're encouraged but I can't point out commitments to you that we have optimism I would say right now that we have.

Carter Malloy - Stephens Incorporated

I guess I was just trying to point more towards in your conversations with advertisers it seemed like they would (inaudible)?

Tom Vadnais

What we do think is that advertisers in tough times are more inclined to use performance-based advertising, where they have a direct return that they can calculate for their advertising dollars as opposed to branding dollars. Our business at ValueClick has always been performance based. We do little or no branding type advertising. So we think that to that extent even though the total advertising spend will probably be down this year, the shift of some of those dollars to the online world out of the traditional advertising for more performance based type advertising, we think could help us. Now that shift has been going on in recent years, each year there is a little higher percentage of the total advertising spend to online. This year may be it will be a little bit higher even though the total spend might be a little lower. So just as I said earlier, one of those things that we can't point to any commitments but we think we have the right model for this type of economy.

Carter Malloy - Stephens Incorporated

Okay, great. Thank you.

Gary Fuges

Carter, just to add couple of just quick points to add to Tom's comments that, we've provided this metric in past calls that spend for advertiser in the media network which is 20% or so, the business was up slightly, sequentially. So, just that might give a little more color on the quarter, that part of the business.

Carter Malloy - Stephens Incorporated

That's great. I appreciate it.

Operator

And we'll hear next from Eric Martinuzzi of Craig-Hallum.

Eric Martinuzzi - Craig-Hallum

Thanks and congratulations on the strong execution in Q4.

Tom Vadnais

Thank you.

John Pitstick

Thanks, Eric.

Eric Martinuzzi - Craig-Hallum

The cash comments you've made so far, you finished out the year at $150 million, you've got the $64 million earnout to pay. What as far as your expectation – what are your expectations for Q1 based on the guidance that you've given for free cash flow generation?

Tom Vadnais

It's always hard to project what a cash flow number is going to be. It obviously depends on timing of AR Collections and payments that we make. Obviously, in the fourth quarter, we closed out the year strong, and averaged about 30 million a year – quarter over the course of 2008. So I'm not going to call out a number or predict any number but I think we should be in the same ballpark of where we've been.

Eric Martinuzzi - Craig-Hallum

Okay. And then just one follow-up, the Lead Generation Business, you talked about that, customers shifting away to alternate channels; are those other ValueClick service offerings, or are those outside the company and what might they be?

Tom Vadnais

Well, I think it's both. What we can tell from the industry, which is difficult since most, if not all of the major Lead Gen companies are private, so the data is hard to come by. But from what we can see, most of the Lead Gen companies are going through a fairly significant downturn and we can sense from that, that there is just as less demand in the marketplace for the traditional type of Lead Gen business.

And now, that's shifting, we think some of that demand it's not going away, it's just shifting over to display and affiliate and other types of online Lead Generation channels. And since we're in, virtually all of the other online channels to that extent, perhaps it benefits us, more than other Lead Gen companies that only have Lead Gen or may be one other channel to deal with. And we have seen customers who work with us in multiple channels and some of them shifting more dollars into other channels that we have.

So, it's difficult to tell as I said because there aren't a lot of industry metrics, but we think that the reduced demand in that sector is the primary reason that we are not showing growth there.

Eric Martinuzzi - Craig-Hallum

Thanks.

Operator

Our next question comes from Townsend Buckles of JPMorgan.

Townsend Buckles - JPMorgan

Thanks. In your Ad Network business last quarter you mentioned you saw some positive results from buying portal inventory and using Ad Exchanges. Can you update us on your progress there? Are you ramping up this initiative and have you seen any difference in profitability?

Tom Vadnais

Well, we rely primarily on our Ad Network. We've commented before in response to questions about Ad Exchanges because they were getting a lot of publicity. We've commented before that we do use Ad Exchanges, it's relatively small percentage of our inventory buyers but we do use them on occasion. It's not a growing part of our business; it's kind of a fill-in part of our business, when we need that type of inventory. It tends to be the lowest cost inventory, tends to be the inventory that's not in high demand that's why it's been sold out on exchange. So, it's not a key part of our strategy, but we do business with the exchanges.

The same is true with the portals, we have some high quality inventory that we can buy from the portals and we do that but our primary distribution is through our Ad Network. We think that's our strength as dealing with high quality publishers that we have long-term relationships with. So you shouldn't be seeing that change in the future.

Townsend Buckles - JPMorgan

Okay, thanks. And can you talk about where you see data ownership down the road; WPP, recently amended its online media buying contracts, which got a lot of press, it's best line that data generated by its campaign is confidential to the agency and advertiser, implying that publishers and ad networks may not be able to use it or at least not on a more granular level. Can you talk about where you see this issue playing out? And does it pose any risk to your behavioral targeting?

Tom Vadnais

Well, that's a hot topic in the press today and in the industry. And it really is an industry issue; it's not any company or in the industry necessarily. And I think there is a lot of education needs to take place there and lot of communication that needs to take place. In the long-term, we feel it's to the benefit of consumers if they would serve ads that have some relevancy to interest levels that they've shown on the Internet. So, we think it can be beneficial in that regard that they are not seeing a lot of ads that have no interest to them and wasting lot of their time.

On the other hand, there is a privacy concern, especially, if you are dealing in businesses where you get personally identifiable information, such as, credit numbers and so on. A very little of our business do, we even have access to that information with the channels that we're operating in.

So, at the end of the day, I think there is a lot of development to come here, in terms of what kind of legislation might come into play, and what views consumers have in making their online behavior do something that is at least accessed by other companies. We're going to respect all legislation that might take place, and make it truly a consumer choice on this. But as I said, we think it benefits to consumer if there is some form of targeting that can be applied to ads that are going to be served anyway, why not serve them more relevant ads. So that's kind of our position, but it's really a broad industry topic that we are just going to see unfold, I think over the next year or two.

Townsend Buckles - JPMorgan

Okay. Thanks.

Operator

And we'll go next to Sameet Sinha of JMP Securities.

Sameet Sinha - JMP Securities

Yes, thank you. Couple of questions. First is, could you comment on pricing trends that you saw in various businesses, where did you see less pressure versus in some of the other business. And the second question is on Lead Gen, can you comment whether efficacy has come down for this medium due to the macro-conditions or is this is a secular trend and even if market turns around we can expect this trend to continue. And if you can also comment on this, is FTC overhang still affecting this business?

Tom Vadnais

Sure. In terms of pricing trends, Sameet, on the display side of the business, we actually had conforming and pricing in the fourth quarter and pricing across that business was up a little bit over the third quarter, so we're pleased to see that. The affiliate marketing business, we haven't really seen changes in the pricing there, that is a net revenue accounting model so that's a little bit less relevant to how the financials get presented.

Technology, I think, had a good year in terms of pricing, as we look into '09, we do expect a little bit of pricing pressure in the technology business. But, overall, across the business pricing hasn't been a major downdraft for us.

In terms of your question on Lead Generation and the efficacy there; in this economy when you're thinking about a Lead Gen business, the advertisers looked over life time value of the customer before paying certain amount to drive that customer in-house as consumers are evaluating how they're spending their money; and if that lifetime value equation changes, that would impact the efficacy of the business.

In terms of the efficacy investigation was set for couple of quarters now that we haven't really seen the overhang there.

Sameet Sinha - JMP Securities

Okay thank you very much.

Tom Vadnais

Sure.

Operator

And we'll hear next from Ross Sandler of RBC Capital Markets.

Ross Sandler - RBC Capital Markets

Thanks for squeezing me in. Just a couple of questions. First on the guidance, so it calls for about 25% decline at the mid point, down from a 16% or so decline in 4Q, if you kind of strip out the divested businesses. And clearly you have a tough comp in comparison shopping, but; can you give us a little bit more color on what kind of growth rates you're assuming for media and comparison shopping in 1Q? And then I've got a follow-up.

John Pitstick

Yes. We're really looking at the businesses sequentially given how fast things have changed over the course of 2008, and we think that's the most relevant way to look at these. And that's how we construct our guidance about the first quarter and how we think about the rest of the year internally. So the 14% sequential decrease that we talked about across the Board, mention that we do expect that to hold-up plus or minus a couple of points for all the businesses. But we're really looking at it from a sequential standpoint.

Tom Vadnais

Yes, Ross it might be better also on another call you'll get some more detailed go through with you, the sequential growth in Q4 '08 from Q3 '08 because we had positive growth in all of our sectors, except Lead Gen in Q4 '08 from Q3. So, we can go through those numbers with you on a separate call.

Ross Sandler - RBC Capital Markets

Okay. And just on the sequential in the 1Q. Any directional color on, which will be outperforming or underperforming that 14, if we're just looking at media versus comparison shopping it would be helpful?

Tom Vadnais

They were both pretty good, in January, based on our internal plan, they held up about where we expected. So, it's a horse race right now. I hope they both continue strong.

Ross Sandler - RBC Capital Markets

Okay, great. And then, I hate to keep going back to it. But can we drill down a little bit more on comparison shopping. You guys mentioned traffic filtering technology improvements. Can you just tell us exactly what you mean there? Are you getting a little bit better at buying media on the front-end or is that your overall traffic quality is improving, which means you're getting more revenue per click on the back-end like how do you?

Tom Vadnais

Well, it's really both. The better quality you get in the front-end, the more revenue you get from the back-end. And the issue on traffic, getting high quality traffic is the name of the game and we generate a lot of our own traffic, we buy traffic from other providers in both cases having some technology that filters that traffic. So, you have a little better feeling about whether or not it's going to convert before you take it into your inventories is what's key there, and that's what we've been working on. But as I said, getting better quality traffic on the front-end will give you better returns on the back-end, so it's kind of all one and the same and it's all about technology.

Ross Sandler - RBC Capital Markets

And do you feel like you have a better level of conviction on providing; you've had some issues with this segment in '08, obviously in terms of your ability to directionally give us some visibility on this. And do you feel better about forecasting the Comparison Shopping segment given these changes as this is a new era for this segment?

Tom Vadnais

We do feel better last year in the second quarter, we pre-announced because of a big bubble we had kind of one-time events in Q1 end, in the Comparison Shopping space because we were getting various types of traffic that weren't going to be repeatable. We think we've got that under control and we're not anticipating any big swings in one-time events this year like we had a single time last year.

Ross Sandler - RBC Capital Markets

Great. Thanks.

Gary Fuges

Operator, we'll take two more questions, please.

Operator

Okay. Our next question will come from Mark May of Needham.

Mark May - Needham

Hi, thanks. Question on the Media Group, I guess, the term Lead Gens often loosely defined but based on how you guys define it. What percent of the Media segment does that represent today or in the fourth quarter? And what was the revenue growth or decline in the Media reporting segment if you excluded what you define as Lead Gen?

Gary Fuges

Hey, Mark. It's Gary here. The Media business in general be it the Display business or the Lead Gen business is virtually all performance oriented. The one notable exception might be we are at X vertical, which is probably the more back grinding play. But if the campaign and display is price CPM, CPC or CPA even the CPM inventory or campaigns is being measured and optimized to a CPA metric. So, I think it's fair to say virtually everything we do in Media is on the performance end of this phase.

Tom Vadnais

John, you want to or do have that numbers there to talk about any of the comparison of what we call media which we mean Display and Lead Gen, obviously, as media business but it's different than Display business, that there are so much similar sized businesses right now. But we may have to talk to you on the separate call to give you more detail.

Mark May - Needham

Okay. No, I am aware of the different ways that you generate revenue, but you called-out Lead Gen, I think down 7%, I am just wondering what the rest of the Media segment did excluding that.

John Pitstick

Yes, we said Display which is the other part of the Media segment. We said that was up about 3%, sequentially.

Mark May - Needham

Okay, sorry I missed that. All right, and in the Media segment, what is the overwriting, dynamic driving revenue there? Is it a dynamic that you are selling fewer units in general or the slowdown in the units being sold or monetized or are you selling the units at a lower rate?

Tom Vadnais

Surprisingly, the pricing has remained pretty firm in the Display business and we had seen some reduction in volume, in other words, we were dealing with the same number of advertisers but they were running, taking some dollars out of their budgets on the campaigns. In the fourth quarter we saw a lot of that come back, and again we are dealing with essentially the same number of advertisers but they started that put more dollars into the campaign. We saw that was Seasonal and some of that I think was a shift from the offline dollars that I've mentioned earlier.

So, we're not seeing any major changes there at all and what drives it is the results. If you are in a performance based model like we are, the results that you deliver to your advertiser that ultimately determines whether or not they'll come back for more campaigns. So that's why we are so focused on the results that we give and while we are happy to see growth last sequentially and for the year in that media segment, and we are anticipating a good year this year.

Mark May - Needham

And on your – talking about your business from the perspective of the advertiser, but when you look at the publisher what's been the impact of, as you know, Google and Yahoo and other larger players push into the performance and/or display space. Have you seen any impact in terms of your ability to buy inventory profitably?

Tom Vadnais

No, we really haven't. We tend to deal in all of our businesses with the highest quality publishers that we can find. We tend to have long-term relationships with them. And while there is pressure on publishers as the demand has lessened from advertisers, puts more pressure on the publishers obviously, since they've got excess supply. But the higher end quality publishers are not feeling that. And I think the pressure that exists may be on the newer, smaller, lesser quality type publishers, but, they're generally not part of our network. So we haven't seen any real problem there or a new shift of anything in that side of our business.

Mark May - Needham

Okay. Thanks.

Gary Fuges

Hi, Mark, it's Gary. One thing I add to that and it goes back to the off network bias question. This quarter we actually had some better traction in terms of picking up inventory from some branded publishers that we can't disclose that you would recognize. So to your question, we are actually getting more traction in terms of getting inventory and monetizing on Q1 and Q2 sides.

Mark May - Needham

Great, thanks.

Operator

And we will take our last question from Dan Salmon of BMO Capital Markets.

Dan Salmon - BMO Capital Markets

Hi guys. Most of my questions have been covered one sort of big picture one, to maybe end on is. How are you thinking about using this cash for the year, beyond the Mezi earnout payment? They are a bit perhaps getting back into more aggressive share repurchase and acquisitions or is it typically a cash is king type situation with the uncertain outlook? Thanks.

Tom Vadnais

Yes. We are definitely looking to rebuild the cash balances because we do believe there will be some good opportunities in the near future on the M&A landscape. So, our primary focus right now is, rebuilding the cash. We do have a fair amount of availability on the stock buyback and we are waiting for some of the volatility in the markets to kind of recede and get a better sense for where valuations and multiples are going come in, before we allocate capital back to the share buybacks.

But we do think there will be some opportunities on the M&A side and that's going to be the primary focus over the next few quarters is looking at those opportunities. Valuations on the private company side are still a little bit higher, quite a bit higher than where they need to be, given where public companies are at, but we are patient and will be rebuilding cash in the meantime.

Dan Salmon - BMO Capital Markets

Okay, that's very helpful. Thanks.

Operator

And that does conclude today's question-and-answer session. I would like to turn it back to your speakers today for any closing remarks.

Tom Vadnais

We don't have any closing remarks prepared. We can talk to you for a long time about things we are doing but we appreciate you calling in and I know there will be some further discussions over the next day or two with our team here. So we look forward to that and look forward to our next call and wish you the best. Thanks. Operator?

Operator

Thank you for participating in today's ValueClick's fourth quarter conference call. A replay of today's conference will be available beginning at 4:30 pm Pacific Time today by dialing 1-888-203-1112 or 719-457-0820. The access code for the replay is 5647052. The replay will be available through 9:59 pm Pacific Time on the February 19th, 2009. Thereafter the replay can be accessed on ValueClick's website at www.valueclick.com.

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Source: ValueClick Inc. Q4 2008 Earnings Call Transcript

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