DoubleClick take-out and lackluster earnings a warning for other Internet ad stocks? (1Q05 earnings)

DoubleClick (ticker: DCLK) agreed to be acquired by private equity firm Hellman & Friedman LLC for $8.50 per share in cash, following lackluster Q1 results. Though DCLK is no longer "in play" for most investors (its now an arbitrage bet on the deal's closure), its Q1 results and purchase provide important data points and lessons for Internet investors. Details and comments:

Q1 Results
(all percentage changes and comparisons are year on year, unless stated otherwise)

• Revenue was $76.3 million, up 12.2%.

• GAAP net loss was $0.9 million, or $0.01 per share, versus GAAP net income of $7.7 million, or $0.05 per share.
• Gross margin was 69.4% versus 66.8%.
• EBITDA was $5.3 million versus $14.6 million.
• GAAP operating expenses were $56.7 million, up 32.2%.
• Headcount at end-quarter was 1,540 versus 1,275, mainly due to the acquisitions of Performics and SmartPath plus additional hiring in the Ad Management, Abacus, and Data Management Solutions (DMS).
• GAAP net income and EBITDA were negatively impacted by costs associated with DoubleClick's attempt to sell itself.
• Cash flow from operations was negative $1.7 million versus negative $7.4 million.The year-over-year improvement was mainly due to the absence of lease termination payments and stronger working capital, partially offset by lower net income.
• Balance sheet: $537.3 million in cash and marketable securities; net cash of $402.3 million, or $3.19 per share.
• Revenue breakdown: Doubleclick breaks down its business into two parts: Tech Solutions (Performics, SmartPath, Email marketing, Ad Management) and Data (Abacus and Data Management Solutons). Tech Solutions was up 13.7% mainly due to acquisitons of Performics and SmartPath; Data was up 8.8%.
• Tech Solutions is dominated by the Ad Management business, which accounted for 42% of DCLK's total revenue. It was down 4.8%.
• The Data business is dominated by Abacus, which accounted for 27% of DCLK's total business. It was up 1.5%.

Guidance

• Q2 revenue expectected to be $71-77 million, up 7% (at the mid-point) year-over-year.

Quick comments:

• Investors and journalists have often failed to differentiate between
  different online advertising businesses, incorrectly arguing that a
  rising (online ad) tide will lift all (online advertising stock-)
  boats. Wrong. Traditional banner ad management is brutally competitive, lacks the dramatic growth of the search ad business, and is beset by lack of product
  differentiation compared to GOOG's contextual advertising technology.
• The proof: DCLK's Q1 results were a stark contrast to GOOG's: revenue growth was driven almost entirely by acquisitions, DCLK's main ad management business shrunk by 4.8%, and its data business grew by a measly 1.5%.
• DoubleClick's explanation in its press release of the decline in Ad Management revenue: "These declines were principally due to pricing declines outweighing volume increases for DoubleClick's Advertiser and Publisher solutions... partially offset by an increase in revenue for DoubleClick's Rich Media offering."
• Other online ad stocks which investors may be mistakenly bullish on: APTM, AQNT, FSTC, FWHT, LOOK, TFSM, VCLK. (Full disclosure: at the time of writing I'm short VCLK.)
• Are DCLK investors getting a good deal at $8.50 per share in cash? Maybe, but look at the chart below. DCLK investors who have held the stock for two years aren't doing so well. So much for the broad-based boom in Internet advertising...