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Executives

Gary Fuges – VP, IR

Tom Vadnais – CEO

John Pitstick – CFO

Analysts

Will Sterling [ph] – Stephens Inc.

Youssef Squali – Jefferies & Co.

Mark Mahaney – Citigroup

Ross Sandler – RBC Capital Markets

Dan Salmon – BMO Capital Markets

Eric Martinuzzi – Craig-Hallum

Christa Quarles – Thomas Weisel Partners

Jonathan Ruykhaver – ThinkEquity

Sandeep Agarwal – Collins Stewart

Mark May – Needham & Co.

Townsend Buckles – JP Morgan

Sameet Sinha – JMP Securities

Clay Moran – The Benchmark Company

Richard Fetyko – Merriman Curhan Ford & Co.

Wayne Chang [ph] – Canaccord Adams

ValueClick, Inc. (VCLK) Q1 2009 Earnings Call Transcript May 5, 2009 4:30 PM ET

Operator

Good day. My name is Keith 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 p.m. Pacific Time on May 12, 2009. Thereafter, it can be accessed on ValueClick's website 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 conference over to Mr. Gary Fuges, Vice President of Investor Relations and Corporate Development for ValueClick Incorporated. Please go ahead, sir.

Gary Fuges

Thank you, Keith. Good afternoon and welcome to ValueClick's First Quarter 2009 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 that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are detailed under the Risk Factors section and elsewhere in the filings with the Securities and Exchange Commission made from time to time by ValueClick including its Annual Report on Form 10-K filed on March 2, 2009, 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, litigation 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 our first quarter 2009 conference call. While the macro environment remain challenged in Q1, ValueClick executed well in the first quarter. I have John go through some of the details here in a moment, but before that I’d like to make some comments on our four business segments.

Revenue, adjusted EBITDA, and earnings per share were above the high end of our guidance ranges and as I mentioned John will get into more detail on that later in the call. Our Media segment performed in line with our expectations. However, we had divergent performance between lead generation and display, which are the two elements of our media segment.

Lead generation revenue of 32 million was down 20% sequentially. We believe some of the performance-based dollars from this segment have shifted to other channels including offerings like our display, and comparison shopping and search businesses. Our lead gen team continues to do a good job in managing the business to deliver strong operating margins. They are working on a number of initiatives to stimulate growth in this area including advertiser education, establishing industry best practices, and enhancing their lead verification e-mail and display distribution capabilities.

While many of our display competitors showed negative growth in Q1, ValueClick display increased 2% year-over-year on a reported basis to 31 .4 million and increased 6% on an FX neutral basis. The FX neutral of course referring to the neutralization for current seasons, about 20% of our revenue comes from Europe.

Our display business is driven primarily by performance-based campaigns in our market leadership technology and increased advertiser demand were drivers in Q1. Our behavior targeting offerings continue to scale and benefit overall network pricing. We had a record number of new advertisers which speaks to the value of our offering in the marketplace. The AdRx Media healthcare vertical network, which we have discussed in recent calls continues to scale very well. We are currently working on additional vertical networks and discuss those with you when we publicly launch them.

Moving now to the Affiliate Marketing segment, this segment was in line with our expectations. Reported revenue was down 10% year-to-year for two reasons. First, we lost a significant customer who was in our Q1 ‘08 numbers and is no longer in our program in Q1 ’09. Second, foreign exchange rates negatively impacted our European business. Adjusted for these items, revenue would have been flat year-over-year in affiliate marketing. We continue to lead the market in client wins as evidenced by our increased share of the Internet retailer top 500 online retailers.

Shifting now to our Technology segment, Mediaplex was in line with our expectations. This business continues to benefit from its independent status in the marketplace. Mediaplex is becoming less about generic ad serving and more about campaign athletics and enhanced functionality. Recent additions to the Technology platform include a new rich media suite and enhanced capabilities in behavioral targeting and dynamic messaging.

Shifting now to Comparison Shopping and Search, as a reminder, this segment includes the Smarter and CouponMountain brands in US and the PriceRunner brand in Europe. As in Q4, Comparison Shopping and Search performed well in Q1. Traffic quality initiatives continue to have a positive impact on the business. In addition, in Q1, we went live with a number of vertical content sites. These vertical content sites are leveraging Mezi's large scale keyword bid management platform. They are key growth initiative for ValueClick and will help add vertical sites as a complement to Media's lead generation business, which relies on display and e-mail traffic.

Each business segment continued to execute well on gross profit and gross margin was up significantly on all four segments. The company also did a great job managing operating expenses as seen in the adjusted EBITDA outperformance. Our margin performance illustrates the strength of our people and our technology as both are needed to execute for our advertisers and drive financial performance.

With that, I would now like to turn the call over to John Pitstick, our CFO to give you more detail on the financials. John?

John Pitstick

Great. Thanks, Tom. Good afternoon everyone. Revenue for the first quarter of 2009 was 135 million. As Tom touched upon in his comments, this was above our guidance range due to strong performance by our comparison shopping and display businesses, offset by continued weakness in lead gen.

Adjusted EBITDA was above guidance and came in at 34.7 for the quarter, representing a margin of 25.7%. EBITDA margin was higher than guidance due to a combination of the revenue live performance and our continued focus on margin and OpEx. In the first quarter of 2009, our fixed operating expenses were approximately 5 million lower than they were in the year ago period. This represents a reduction in our fixed cost base of over 10%.

First quarter 2009 GAAP EPS was $0.15 per share and non-GAAP EPS for the quarter was $0.22. Both GAAP and non-GAAP EPS were above the high end of our guidance. In the first quarter, we generated $40 million in free cash flow and our balance sheet remained strong at 130 million in cash and marketable securities, and no debt.

Turning to Q2 guidance, we expect revenue of 124 million to 130 million. The largest driver of the sequential decrease was our lead generation business, which we expect to be down in the low-teens percentage range. We expect an average sequential decrease in our other businesses of around 5%, as the second quarter is generally the seasonally weakest. We expect adjusted EBITDA in the range of 31 million to 33 million, which represents an adjusted EBITDA margin at the midpoint of 25%.

We anticipate GAAP EPS of $0.13 to $0.14, and non-GAAP EPS of $0.19 to $0.20. Guidance assumes an expected weighted average share count of approximately 87 million diluted shares outstanding and an effective income tax rate of 42%. Stock based-compensation and amortization of intangible assets should be consistent with the Q1 numbers.

With that, I’ll turn the call back to Tom for some closing comments.

Tom Vadnais

Thanks, John. ValueClick strategy has been to have multiple performance-based marketing services for advertisers. The idea is to enable an advertiser to target reach and convert the right consumer across multiple consumer online activities from browsing and communicating to shopping and volume.

We are in multiple products because consumers do multiple things online and advertisers want to engage with them wherever they are. We have the sales and account management teams, technology platforms and back-office systems to enable advertisers to do these things at scale. The macroeconomic environment remains challenging for us during the second quarter and advertiser budget visibility continues to be virtually non-existent. However, we believe ValueClick has been built both financially and operationally to do well both in this environment and when growth returns to the online advertising space.

So with that summary of Q1, I would now like to open it up for questions. So operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will go first to Carter Malloy with Stephens Incorporated.

Will Sterling – Stephens Inc.

Hi guys, this is Will Sterling [ph] for Carter. Thanks for taking my questions. I just have a quick question on display. I was hoping you could explain to us, help us understand the relative strength with you guys versus your competitors and whether or not you think it’s sustainable going forward?

Tom Vadnais

I couldn’t quite queue that question. Could you give to me again?

Will Sterling – Stephens Inc.

Yes, sure. I was just hoping you could help us understand the relative strength of your display this quarter versus your competitors and whether you think its sustainable going forward?

Tom Vadnais

Okay. Well, we do think its sustainable going forward. We think the – one of the reasons for our strength in the first quarter is that this segment that we are playing in display is the performance based segment and the publisher based that we are working with are publishers that like to deal in this segment and have benefited from some of our technology advancements that we’ve made in behavioral targeting and our vertical networks. We are targeting better working with our publishers, targeting the consumers better and for that reason I think we're performing a little better perhaps in some of the portals and better known type networks that tend to focus on the harder end sites that are not converting as well. So we think it’s sustainable, we plan on as I mentioned introducing more vertical sites, I think that's going to help us and we plan to continue to enhance our technology and targeting.

Will Sterling – Stephens Inc.

Okay, great. And quickly, we were happy to see that the California version of the affiliate tax has been put off for another year, we were hoping you could help us understand the likelihood and maybe potential implications of proposed federal version of the affiliate tax and just what’s your thought on around that?

Tom Vadnais

Well, all we have are thoughts. Since we are not – we don’t really know much more about that than anybody else.

Will Sterling – Stephens Inc.

Right.

Tom Vadnais

It is often lot up in the air right now. There haven’t been any real definite decisions. We’ve partnered with the California Tax Payers Association to represent our position on this type of tax and we think it would be best to continue as we are in this space and not upset the equilibrium that the marketplace has established, but we don’t have anymore insight than you do in terms of what the regulatory environment is going to be on this and I think it will a while before we know or see much happen.

Will Sterling – Stephens Inc.

Okay, great. Thanks, I will hop back in queue.

Operator

We will go next to Youssef Squali with Jefferies & Co.

Youssef Squali – Jefferies & Co.

Thank you very much. Couple of questions. First, John, in your prepared remarks you made reference to fixed operating cost being lowered by about $5 million year-on-year. Could you tell us whether that was spread evenly throughout the quarter or whether that was mostly effective towards later part of the quarter? And the reason I am asking trying to reconcile that with the implied EBITDA margin for Q2, which comes out to about 25%, that’s a slight decline from what you just did in the first quarter and then I have a follow-up.

John Pitstick

Okay. The $5 million is – it’s a year-over-year comparison. And as you recall back in the mid-summer Q3 into Q4, we talked with you guys quite a bit about some cost initiatives. So as we look on year-over-year basis, that $5 million is a pretty clean breaking point. We did take some additional cost out early in the first quarter and I eluded to some of those initiatives on the last call and that was part of the reason why we had guided to margins in Q1, a little bit lower than what we typically do because of that, we came in a little better for Q1, some of those initiatives were completed sooner than we had anticipated. So the guidance as we look forward in terms of that margin, the mid 25% range is consistent with where we guided folks to last call in terms of quarters after Q1. We just got there a little bit quicker and managed to get there in the first quarter.

Youssef Squali – Jefferies & Co.

Okay. So mid-20s is a good place to work off given the current revenue run rate, but arguably as revenue go – start going in the other direction with just broader turnaround, we should expect EBITDA margin to continue to improve right?

John Pitstick

I would expect that there is some upside to the margins in an improving revenue environment, but I think you headed with the Q2 numbers being a bit softer than Q1, we didn’t see an opportunity to put the margins higher.

Youssef Squali – Jefferies & Co.

Okay. And then on the behavioral targeting, you guys seem to be getting nice traction with it. Could you help us quantify the lift in pricing that you’ve seen from introducing or since you’ve introduced behavioral targeting? And I guess as a corollary to that, Tom you alluded to the fact that you are going to introducing some additional new verticals. How many verticals would you think you would have by year-end in addition to the Rx you have right now?

Tom Vadnais

Let me start with that one first, Youssef, on the verticals. We are planning to launch three new verticals this year, so that would put us at four vertical networks in our display space by year-end. Now that could change, we could – if we are successful and working fast enough, we could perhaps have more, but I would say we will have at least four by the end of the year. On the pricing issue, we don’t really disclose details on the pricing, but the way the scale works is that the normal CPM rates for display advertising without targeting and without vertical networks and so on, that tends to be the lowest price that we offer. But what advertisers are finding is using our technology. While is the price is higher, they are using targeting technology, the conversions are much higher, so the ROI for the investor or for the advertiser works out very well. So it’s a scale of without targeting, with targeting there is a higher price and then our vertical networks are higher price yet because you are dealing now with very targeted audience that we know is interested in the vertical that we are serving those ads for. So that’s kind of how the scale works, but we don’t disclose the specific numbers.

Youssef Squali – Jefferies & Co.

But just to get a sense of the magnitude, is it two times X? Or is it –?

Tom Vadnais

Yes, I am sure you can imagine, there isn’t like a rate card here that we use, everything is variable. But the targeting – all I can really say there is, it is higher, it’s certainly multiple higher than without targeting and that’s really isn’t as relevant as what the return on investment is that the advertiser is looking for. So it’s not really what you pay for the serving, it’s what you get at the end, that determines the return purchases. And there is still a demand for non-targeted display, but that demand is shifting over towards targeting.

Youssef Squali – Jefferies & Co.

Okay, very helpful. Thank you.

Tom Vadnais

Thank you.

Operator

And we will go next to Mark Mahaney with Citi.

Mark Mahaney – Citigroup

Thank you. Two questions please. Tom, you mentioned in the display advertising business, seeing some new customers come in. Any color on where those customers are coming in from any particular segments or size of customers? And then on the Comparison Shopping business, that seem to nicely outperform your expectations, could you provide a little bit more color on what happened there? One of the factors in the industry obviously has changed in some of the search engine algorithms that are out there, the disrupted comparison shopping engines, have you seen a little less of that recently or was there other factors that caused that upside? Thank you.

Tom Vadnais

Okay, Mark, thank you. First on the display side, and I will ask John to help me a little bit on the Comparison Shopping because there are lot of elements there. On the display side, we think some of the increased traffic in new advertisers that we are seeing there are coming from the lead gen space. So we kind of have an offset there with the lead gen going down in Q1 and display going up. We think that some of the reason that advertisers are simply seeing the technology, the vertical networks, the service that they get and they are giving a better return in some cases, so I was shifting there. We also think that there is a shift away to some extent from some of the – what’s generally referred to as premium inventory or the portal sites well known portal sites that are generally the more expensive publishers for advertisers to use. We think that some of the advertisers are shifting away from those sites because again of the ROI that they are getting with targeted inventory at lower price type positions that we can provide them. So we think it’s a combination of things, but those are certainly two of the areas where we see new business coming from.

On the Comparison Shopping side, again I will ask John to comment to, but what we are focusing on that area is traffic quality in the Mezi media business, the better the traffic quality is that we can drive to our sites and to our partner sites, the more money we make. And at the end of the day, along with our keyword platform and our technology there and filtering the fact that we get high quality traffic, that we think is the biggest contributor to the growth we are seeing there. But John, do you have any other thoughts on that?

John Pitstick

Yes, I think on Comparison Shopping, you had hit the nail on the head. The other thing I would add on the display customer trend and we talked about this for a couple of quarters is – that the average budget size is quite a bit less than what it used to be say a year ago, we are working with the lot more customers, so that’s the other trend I would highlight for you.

Mark Mahaney – Citigroup

Thank you, John and thank you Tom.

Tom Vadnais

Thanks, Mark.

Operator

We will go next to Ross Sandler with RBC Capital Markets.

Ross Sandler – RBC Capital Markets

Thanks guys. Just a couple of questions. First on the Comparison Shopping side, can you give us a few examples of the vertical content site that you are launching and is the make-up of the traffic to these sites primarily organic or is it going to be paid like the legacy stuff and then I have a follow-up.

Tom Vadnais

Okay, Ross. First of all, we are not quite ready to discuss the specific sites that are out there, we will give you a more color on that between now and next quarters call. But they tend to be just in areas that you see a lot of consumer traffic, so home improvement for example is one that we are looking at. But the idea is to drive as much organic traffic as you can by having high-quality content that consumers get a lot of value out of them and they will come back to the site more and more. So it's not going to be exclusively that way, that will be paid search too, but the more we can migrate to organic type search, the better value proposition is for us.

John Pitstick

The goal there is to leverage the expertise that we have in search and driven traffic efficiently via search through Mezi’s technology platform and leveraging that to a broader type site outside of just a pure Comparison Shopping type site.

Tom Vadnais

Ross, could you repeat your second question for us?

Ross Sandler – RBC Capital Markets

Yes. The second question is on lead gen side. You’ve seen more dramatic declines in lead gen than in display, is this the case of some ValueClick inflicted on winding of led gen revenue or is it a particular vertical exposure that's driving the underperformance within led gen relative to display.

Tom Vadnais

Yes, it’s certainly nothing that we are trying to induce. I think we’ve talked in previous calls about the industry itself being impacted with the regulatory intervention that’s taking place, some advertisers and publishers have tended to shy away from it, we are seeing now with some of the technology and other improvements on alternate types of networks, that’s attracted some customers to shift away. But we think also in the lead gen space that we can probably do a better job there to create more business. So I mentioned something’s earlier that we're working on to try to increase demand in lead gen. So we are not in all contributing voluntarily to the decline we are seeing, it’s just a nature of that particular segment is not as attractive for some advertisers and publishers as some of the other segments are, but these things can change over time. So we think it's a good business, it's been a strong contributor to our revenue and profit, we got a strong team working on it. So we would like to see it come back.

John Pitstick

The other thing I would like to add to that Ross is, our sales force on the Media side sells both display and lead gen. And so what they are finding is that there is more demand on display side, so it's not – to Tom’s point, it's not something that they are pushing one or the other.

Ross Sandler – RBC Capital Markets

Great. And Tom, just one quick clarification on that last answer, do you get a sense that there is some participants in the lead gen industry that might be on the less scrutiny than you guys and are still kind of pushing the envelope a little bit more and that’s partially what's causing the shares shift or is it just the whole industry you feel there is still kind of in this transition period.

Tom Vadnais

I think it’s more of the whole industry Ross than anything else. We know most of our competitors fairly well. And this industry is such that there is actually a lot of partnership between competitors where we are moving traffic back and forth, and buying traffic from each other and so on. So we tend to see the same thing happening with many other players in the industry. The lead gen side that seems to be holding up best is the very focus targeted type lead gen companies that are more vertical in industry specific. And they are focusing on their core audience with their solutions and so on in a little bit different way than the broadband led gen companies are. They are generally smaller companies – smaller private companies, but that's where the industry seems to be holding up the best.

Ross Sandler – RBC Capital Markets

Great. Thanks.

Tom Vadnais

Thanks, Ross.

Operator

We will go next to Dan Salmon with BMO Capital Markets.

Dan Salmon – BMO Capital Markets

Good afternoon guys. Thanks for taking my questions. I’ll go two. Stepping away from vertical networks and then just to the company as a whole and how performance by industry vertical was any standouts there worth mentioning? And then just second question is to catch up on your thoughts on the acquisition market currently and what you are seeing there and maybe what in particular you would be interested in purchasing? Thanks.

Tom Vadnais

John, maybe you want to comment on the other sectors performed for us again and I will talk about the M&A side.

John Pitstick

Sure. We had some good strength towards the end of the quarter, particular in the finance vertical and that includes tax, campaigns running display channel for tax companies. The other one that call out will be the health vertical, both of those ends of the quarters pretty strong. Other than that I think most other verticals were fairly status quo with what we have seen in the entire quarters.

Tom Vadnais

On the M&A side, as I am sure we have been active over the past number of years, and that primarily on the buy side although we did divest a couple of our smaller non-core businesses last year, so we’ve really been on both sides of that equation in the last 12 months. We continue to be very interested on the M&A side and assuming more and more high quality type technology companies or service companies into our current platforms to enhance and provide better performance. We think we have most of the key online necessities in terms of appealing to advertisers and almost any type of online activity they want to perform, we think we have the basic ingredients in almost all of the segments. But that doesn’t mean we can’t improve by finding some unique recently developed technology companies or finding some other types of companies where there are some deep talent niches in certain vertical spaces and so on. So we are always on the look out for what’s available. It’s been difficult frankly the last year or two with valuations, because as the public companies have come down in the marketplace, the private companies have not really come down in their expectations. So that’s really slowed down the M&A world, but we continue to be interested in opportunities as they come along.

Dan Salmon – BMO Capital Markets

Okay. Thank you very much.

Tom Vadnais

Thank you.

Operator

Next to Eric Martinuzzi with Craig-Hallum.

Eric Martinuzzi – Craig-Hallum

Thanks for taking my question and Kudos on the margin control and the expense management in the quarter. My question is regarding campaign side in duration, did you see trends shipping throughout the quarter, January, February, March and if you don’t mind commenting on April that would be campaign size or duration.

Tom Vadnais

Eric, the campaign size and duration hasn’t changed much. What has changed is, we don’t have much visibility or long term commitments made for campaign. So in the past where we might get a commitment for a quarter or half a year that so many campaigns will be run, now we are getting much shorter sort of notice but once they are running they seem to be running in similar sort of terms, similar pricing and in fact we’ve actually seen on the display side, a little increase in pricing along with increased performance. But again visibility is the major issue that we continue to see there. John, do you have any other thoughts on that?

John Pitstick

No, that’s good.

Eric Martinuzzi – Craig-Hallum

Okay. And then as far as seasonality goes at the midpoint there, it looks like we are down about 6% sequentially due to the seasonality. Does that reflected equally across all lines?

Tom Vadnais

Yes, Q2 is always our weakest quarter of the year, Eric and it seems to the case every year from what we are seeing now in the first part of the quarter, we are running pretty much on track with what we’ve seen in the past. So Q2 is – it’s in Q1, we have some hang over affect from Q4 of the prior year and that’s usually our biggest quarter. Q2 is kind of a pause period and then the summer hits and we start to getting seen an uptrend usually in Q3 and Q4. So it looks pretty typical this year.

Eric Martinuzzi – Craig-Hallum

Okay.

John Pitstick

This is John. Just to add to that, just to clarify, I made a comment in my prepared statement about lead gen being down more than the 5% sequentially, even caught out low teens percentage, I want to make sure you got that and the rest of them on average should be in that 5% range and towards the one outlay.

Eric Martinuzzi – Craig-Hallum

Thanks for clarifying that. Just a few house keeping items. Cash from ops, repurchases and headcount, could you comment on those?

Tom Vadnais

Yes, we’ve – I think John covered in this top, we’ve got about 140 million of cash and marketable securities, no debt on the balance sheet. That has been pretty consistent our free cash flow development. Repurchase, we have about $1 million approval. $100 million approval from the board that we can exercise at anytime that we would like. We frankly – have been thinking more about the M&A side recently, so we haven’t done any recent repurchases, but we have the ability to do that at almost anytime. And your third point again was what?

Eric Martinuzzi – Craig-Hallum

The headcount Q4 and what it was for Q1?

Tom Vadnais

Yes, the headcount – our total headcount, I don’t have the numbers right in front of me right now, but we have had a hiring fees on since the end of the second quarter last year. So attrition that we’ve had this natural attrition for the most part has not been replaced and then we had also a when we divested couple of our small businesses, we had some headcount goal with those businesses. So John do you have Q4 and Q1 relative numbers down, it seems to be that’s in the neighborhood of 20 to 30.

John Pitstick

Yes, we were down about 40 headcount in total across the company. So that’s 3% or 4% of the total.

Eric Martinuzzi – Craig-Hallum

Thank you.

Tom Vadnais

Thank you.

Operator

We will go next to Christa Quarles with Thomas Weisel Partners.

Christa Quarles – Thomas Weisel Partners

Hi, a couple of questions. First, could you indicate what occurred with the Mezi earn out looking at your goodwill in Q1 of the balance sheet. It doesn’t appear that you paid the earn out in Q1. I was just wondering if you could give us an update there. And then I just a heard a follow-up on the comment that you made about the creation of high quality content across some of these owned sites. It’s what you are doing sort of some of – to more of a Demand Media Internet brands strategy around content creation and syndication? Thanks.

Tom Vadnais

Sure. John, we didn’t make that earn out payment. So tell us more about it.

John Pitstick

Yes. Christa, the way we accounted for that is that at the end of the year 12/31/08 numbers we accrued for that payment, and that’s how we booked the increase to goodwill.

Christa Quarles – Thomas Weisel Partners

Okay.

John Pitstick

That probably got buried in that goodwill write off that we had last quarter in your math and then we did pay that out in the first quarter.

Christa Quarles – Thomas Weisel Partners

Any amount?

John Pitstick

It’s about 54 million.

Christa Quarles – Thomas Weisel Partners

54 million.

John Pitstick

So when we are talking about our current balance sheet, of course it excludes that since that payment's been made.

Tom Vadnais

Your second question on quality content, I don’t really want to comment on what our competitors are doing, but the idea of high quality content is one that exists certainly beyond our company. I think the ability though to produce that content, manage it well, keep it up to date and those kinds of things, that’s I think a variable that we think we might have a competitive advantage because we have lot of divisions that are focused in that same area and we have tremendous amount of technology available to help us access and track and analyze the effectiveness of these sites. So I think it's probably not a unique idea, but hopefully we have a unique way to implement it.

Christa Quarles – Thomas Weisel Partners

Do you have freelance writers in addition to sort of full time employees on the issues or mostly a technology solution?

Tom Vadnais

We will contract with outside firms to do some of the writing of the content. We will look also to outside firms to acquire ideas and so on, and types of content. So it’s a partnership effort. The technology side of it is more on the analytics and tracking side that’s important. So we can on a real time basis access what type of traffic we are getting, how its converting and those kinds of things and that’s probably our competitive advantage in that area.

Christa Quarles – Thomas Weisel Partners

Got it. Thank you.

Tom Vadnais

Thank you.

Operator

We will go next to Bill Morrison with ThinkEquity.

Jonathan Ruykhaver – ThinkEquity

Good afternoon. This is actually Ruykhaver on the call for Bill. First, coming back to lead generation, I was wondering if you talk a little bit about where the incremental weakness, the 20% sequential decline you are talking in Q2 and some of the weakness that we saw in Q1, is that relate particularly to the promotional side of the business or there is something the lead generation types like (inaudible) or whatever else you are doing? Is it more to one side of the product suite than another? And then also if you had an update on any of the initiatives with exchange buying or portal buying? Thank you very much.

Tom Vadnais

Okay. Well, first on the exchange situation, we have consistently said that the exchanges are a small piece of the display ad network world and we have been customers of exchanges for a long, long time. We don’t buy a lot of inventory there, but we buy some. We don’t believe exchanges are going to have a huge place in the market because it tends to be a place where you buy liquidation type inventory, you buy it without much service or technology and we are dealing with different types of inventory in most of our work, but we are customer of exchanges and I think they will be around, but we don’t see them as being a huge part of the business.

On the lead gen situation, we haven’t really discussed specifically the work parts of the lead gen business have declined and so on, and we consider some of that to be confidential, but I think the bottom line is that as I said before in some of these questions, its all about how the advertiser dollars converts for that advertiser. They are spending performance dollars with us, not branding dollars. So whatever performs the best is what they can to buy more. What they are seeing is, we made more advances and I think the industry has in areas other than lead gen with performance enhancement technology and the quality type vertical sites and so on, and so that’s attracting more traffic than perhaps some of the lead gen sectors are. But our goal is to try to have them all of these successful, so we are going to continue to invest and develop lead gen, but I think its more just the ROI they are seeing in other channels that’s attracted some of the players away from the lead gen space.

Next question operator?

Operator

We will go next to Sandeep Agarwal with Collins Stewart.

Sandeep Agarwal – Collins Stewart

Thanks for taking my question. Tom, when you acquired Mezi media, you had a very big size in house team for such marketing and we all know that trend is search engine made which resulted into some shortfall in Q3. So the question is that, did you did have an in-house team helped you in terms of did that serve as a competitive advantage in terms of you ramping up or may be recovering from the change made by search engine faster than some of the other search engines.

Tom Vadnais

Well, I think you probably our prior search technology prior to the Mezi acquisition. Went back a number of years to a small search business called Search 123 and that technology was a good technology for us, but was a very small business and was not geared as much to what we have with Mezi with Comparison Shopping consumer oriented type search. Search 123 as I said was not a big part of our business, we continue to operate at in Europe, its one of the segments that discontinued early this year in the US, just because we had the Mezi side working very, very well. We also had some search expertise in our Affiliate Marketing business in a division of Commission Junction called CJ Search, but again that’s a little bit different focus. That’s largely on providing SEM and SEO consulting to client. So we did really have anything along the scale or the focus that Mezi had prior to buying that and that’s what attractive to us when we did buy them. Did that answer to your question?

Sandeep Agarwal – Collins Stewart

Yes, it does and just one follow-up. So are you in a position to effectively utilize your search resources to make impact on you PriceRunner properties as well?

Tom Vadnais

Our goal – search as you know is a pervasive technology across the Internet and our goal is to use the proprietary search technology that we have continue it with the engine that drives our Mezi comparison shopping business, but also to expand our search capabilities in order divisions. So we will – you should expect to see overtime that we will be using search in everything from display to Mediaplex technology to our lead generation businesses.

Sandeep Agarwal – Collins Stewart

Thank you very much.

Tom Vadnais

Thank you.

John Pitstick

Thanks, Sandeep.

Operator

We will go next to Mark May with Needham.

Mark May – Needham & Co.

Hi. I think I have two questions. Can you just update us on Mezi and sort of their relationship with the major search engines I guess Yahoo and Google particularly, what’s been the trend there in terms of search traffic and your quality score changes in recent months or quarters? And then secondly, we heard that a number of performance marketing categories were strong during Q1 like auto insurance and online tax for movie rentals etcetera. Have you noticed that in recent weeks that some of those categories that have been strong early in the quarter maybe are beginning to peter out? Thanks.

Tom Vadnais

Okay. First on the Mezi side, if you are going to be in the search business, you are going to be working a lot with the large search engine. So Google, Yahoo, MSN are good partners of our business. If you look at the sequential business in Mezi for the past few quarters, it's grown each quarter leading into great first quarter this year, and that couldn’t happen without having a good relationship with all the search engines. So we continue to focus on that link quality is the primary measurement tool. In Yahoo’s case, they provide a regular measurement on a scale of 1 to 10 of the quality that you are providing to them and that’s very, very helpful to us to make sure that we stay on top of the quality. Google doesn’t provide that type of measurement, but we have other indicators we can use with them. So our relationship is very big and those are the two biggest search engines in the two biggest partners that we have in our Mezi business.

Regarding the verticals, I think John mentioned that the verticals in Q1 that performed very well for us were somewhat seasonal to tax vertical. We had a big run on here at the end of the quarter, but as you would expect that has softened considerably since it’s very seasonal business. We also found the health vertical to be very strong in the first quarter and that surprisingly is also somewhat seasonal when we met there is a lot of five advertisers who focus on the New Year’s resolutions and whatever that drives consumers to be more health conscious at the beginning of the year attempts to paid off by the end of the quarter. So we have seen some of the verticals that we are strong because it was seasonal shift away. We see other future opportunities in more generic verticals such as Home and Garden and those kinds of things which also have some seasonality, but you can shift some of your focus on products to the season.

So I think you are always going to see that with verticals, they will come and go and the strengths will be there for a while and shift – you just have to stay on top of it and that’s what we try to do.

Anything else Mark? Operator?

Operator

And we will next to Townsend Buckles with JP Morgan.

Townsend Buckles – JP Morgan

Thanks. You touched on this before, but can you give any color on I guess more on a company wide basis of how the quarter start off? We know that April is behind us.

Tom Vadnais

And our Q2 you mean?

Townsend Buckles – JP Morgan

Yes.

Tom Vadnais

Okay. John, you want to talk about that?

John Pitstick

Sure. Consistent with our expectation that that Q2 is seasonally a weak quarter, I would characterize the start of the quarter as reasonably okay. Its not strong as the way we started first quarter, but that’s pretty consistent with trends we’ve experienced in the past. I wouldn’t say that there is out of line with the trends that we are experiencing in April relative to Q1 and we will see how the quarter plays out given the lack of visibility out there.

Townsend Buckles – JP Morgan

And in the ad network business, are you seeing the publisher side networks becoming any more of a competitor for you and can you update us on any trends in publisher payout or you want to see any more competitive pressure there. Thanks.

Tom Vadnais

We are not seeing any trends in terms of publisher networks that are impacting us. What we are seeing is again a shift on publishers wanting to deal where they are going to get paid more since the performance based, so payment is determined by performance of publishers or perhaps focusing more on where they to want to their inventory, to what type of network so they can get better returns by convergence. So that’s the only change that I can think of it. We’ve seen in the public networks over the past few quarters. John, anything else that come into my view?

John Pitstick

The dealing that I have is we have increased along with our price seen in the network went up from weaker advertisers. We have the payouts that we make to publishers given that thee is a life blood of what we do in that base. So we think we are treating the business the way they need to be treated and they are long term partners for us. We’ve actually increased payments to publishers.

Tom Vadnais

Just a quick one additional point on your question about the publisher side networks. Our experiences being those are typically been put by publishers are looking to extend their own brand. As result, those vertical networks tend to have more of a branding slant on them than performance. So there are little bit of the competitive landscape relative to what we do in display network.

Townsend Buckles – JP Morgan

Got it. Thanks.

Operator

We will go next to Sameet Sinha with JMP Securities.

Sameet Sinha – JMP Securities

Yes, thank you very much. So looking at all the premium display advertising sites, the country see a lot of advertisers generally would have preferred add networks in the past, but not the pricing has come down on the premium display side, they can afford to go there. Can you talk about in terms of magnitude or difference between pricing that you seeing come down and premium and what’s your prices trend on network side, that’s number one. The second is, you are seeing improvements in or (inaudible) there has been some chatter about pharmaceutical companies moving their dollars away from search advertising due to limitations in a number of character that can be used. Are you seeing any benefit from that? That’s it. Thank you.

Tom Vadnais

On the premium pricing question, we’ve never dealt in that space. So we are not the best people to kind of give you the trend of what’s going there. We’ve been pretty consistent with price in our network and that’s been pretty firm over the long period of time. So not much color we can give you on what’s going on with the premium pricing. In terms of –

Sameet Sinha – JMP Securities

Something that you could have picked up from advertisers anecdotally.

Tom Vadnais

Nothing that I could really pass along.

John Pitstick

You mentioned, Sameet, about the migration of advertisers and surprises have come down in what’s called the premium inventory, migration of some advertisers to that space. That maybe happening, but we tend to see the opposite in that those prices had come down for a good reason and that is there can be supportive anymore and like I say, we don’t deal in that space, but you can – in the past, you could look at $60, $70, $80 CPMs and that’s just tough to justify in the market today we think. We’ve never as I say been in it, but we think the prices have come down because the demand has come down, because advertisers have found they can get better ROI working in networks like ours with the technology and targeting that we have, and have not pay those sort of prices, so there is probably some momentum both ways with some people moving into those spaces, but we think there may be more people moving out of given the negative rates that we’ve seen in some of the premium inventory providers.

In the second – tell us again your second part of your question?

Sameet Sinha – JMP Securities

Yes, this was regarding AdRx. Have you seen strength there? Lately, there’s been chatter about pharmaceutical companies, FDA cracking down and saying, potentially they are using the characters on a limited tax ad for certain restrictions , other things that might have (inaudible) moving their dollars away from search to display advertising. And have you seen anything there or seeing any benefit from that?

Tom Vadnais

While we have seen growth in our AdRx network, since we introduced it last year and some of it perhaps is coming from advertisers moving away from search, but I can’t say that I’ve seen an over writing trend as they are abandoning the search market. It is difficult sometimes with the regulatory oversight they are giving, and that may help us and may have already helped us, but all I can really comment on is that we are seeing increasing demand for our network in AdRx, and as I said maybe some of them its coming from those types of advertisers.

Sameet Sinha – JMP Securities

One final question, can you comment on how much CouponMountain is part of revenues from the Comparison Shopping Segment?

Tom Vadnais

Well, we don't disclose that information, but CouponMountain is a well-recognized coupon site that's been in the marketplace for a number of years. The messy sites in total based on comp score data are the fourth largest Comparison Shopping sites in the US. CouponMountain has not been as big as bigger contributor as the Smarter.com site that's been the primary brand. But the coupon space has been good and I think we will continue to be (inaudible)

Operator

We will go next to Clay Moran with Benchmark.

Clay Moran – The Benchmark Company

Good afternoon. Three questions. Your Comparison Shopping Segment is the least predictable and we know its depended on search engine traffic and maybe subject to a little bit of a cat and mouse game with the search engines, can you give us a sense of the portion of the business that is repeatable long-term, maybe repeat users or organic traffic from other sources besides the search engines. And then secondly, there is a question about the content on this vertical content site, I'm not sure if you stated whether they would be pulling content from other websites are not, can you just clarify that? Will it all be original content? And lastly, getting back to the second quarter guidance, can indicate whether the seasonality is whether taking the April run rate or is that more of a projection based on past year’s seasonality? Thanks.

Tom Vadnais

Let me start on Comparison Shopping and I will ask John to help me on your other question Clay. First of all, I don't think the – I would classify our Comparison Shopping as the more volatile or least predictable. If I look sequentially at the last two quarters of ’08 and the first quarter this year, the business has been pretty consistent and very predictable. It has some seasonal qualities to it, but it's been a pretty steady business for us, the last few quarters, I would say probably our lead gen business has been the least predictable business that we’ve had over the last few quarters. So I think that business is reasonably steady and predictable. It is a crowded space, there is lot of players in it, but since we are one of the largest, I think we are holding up pretty well there. John, let me ask you to help with Clay's other question.

John Pitstick

Sure. On the guidance question, just refresh me what was the exact nature of the question? How we are trending in the quarter?

Clay Moran – The Benchmark Company

Just want to get more at whether the guidance reflects the current run rate or projection of seasonal impact in the second – in the last two months of the quarter.

John Pitstick

Well, not going to get details of all the elements in the guidance. That is a combination obviously of what’s been through April what we hand from advertisers as they give us some color about May and then some trending of about what June is probably going to like. So it’s a combination of all those factors. And then on the vertical content sites, it’s still earlier in the process there. I don’t there is not much else we can share with you in terms of the technologies about how we are developing the content. As Tom mentioned earlier, we will look to share more as that initiative grows and becomes more meaningful. That’s something we want to guide into this plan.

Clay Moran – The Benchmark Company

Okay. Then just back quickly to the Comp shopping, you made it pretty clear in the past that it is highly dependent on search marketing and optimization. Can you give us a sense if there is any portion at all that is from repeat users or is it really almost 100% from search engine marketing and optimization.

Tom Vadnais

Yes. When you think about our comparison shopping business, it's important to think about it in two main buckets, one is our European business, the PriceRunner brand, that’s always been focused on brand recognition, repeat customers less reliant on search drive traffic as compared to the US side. US business with multimedia is predominantly search driven and a very small percentage of that is organic traffic. There is opportunities on both sides, one in Europe to use search more efficiently and buy more traffic to supplement the good organic traffic that they have and there is also opportunities less to build up that (inaudible) business.

John Pitstick

Clay, I would say that one of the things we like about the comparison shopping business is there is a reasonable amount of organic traffic. If they have a good experience on the Smarter.com site or PriceRunner.com site or CouponMountain site they have a good experience there. They will tend to come back, book that marketplace [ph] and when they are in the market for something, they’ll come back and see it. So it’s not all new traffic all the time, it tends to be a sticky space if you are doing a good job.

Gary Fuges

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

Operator

Okay. We will go next to Richard Fetyko with Merriman.

Richard Fetyko – Merriman Curhan Ford & Co.

Hi guys, my questions have been answered. Thanks.

Tom Vadnais

Thanks, Richard.

Operator

And for our final question, we will go to Wayne Chang [ph] with Canaccord Adams

Wayne Chang – Canaccord Adams

I think guys. Thanks for taking my call. I am pretty sure all the questions have been answered. But you hope don’t mind just revisiting one last one around the Media business, can you just kind of go in a little bit into more detail around the explanation why we are such a big divergence between display and how of that was pricing driven and what trends you are seeing in that category so far this year, are you seeing a lot of that sort of flattened out and starting to improve?

Tom Vadnais

I will comment on the later part of your question and John maybe some thoughts on the pricing side. The display business is a difficult one to predict especially in this uncertain environment we are in (inaudible) not our long term contract type business, it tends to be campaigns that will come up that we use to get more lead time with and more commitments for longer periods of time, now we are seeing shorter commitments, similar amounts of money being spent, but we can’t predict it as well because we are not getting those longer term insights from the advertiser. So it's been strong for us at least in Q1, while many other ad networks were reporting bad news in Q1 in their display. So we think we are in a pretty good spot, but we are uncertain relative to the future if you just take it day by day in this particular space. John, any other thoughts on pricing?

John Pitstick

No, I think we’ve covered pricing in terms of being it fairly permanent display in our work just to circle back on the comments about lead gen, as Tom mentioned early in the call that we are seeing that as a channel as advertisers are cutting budgets, they are doing it in that channels like our display business and there is overlap as I mentioned with the sales force is selling into both channels and we are going to go with what the advertiser wants, so that’s what driving some of the divergence there.

Wayne Chang – Canaccord Adams

Okay, great. Thanks a lot.

Tom Vadnais

Thanks, Wayne.

Operator

And this does conclude our question-and-answer session. At this time, I would like to turn it back to management for any additional or closing remarks.

Tom Vadnais

I just want to thank everybody again for joining us on the call. And if you have more questions or detail you would like, Gary Fuges is always available to you as we all are. So please don't hesitate to contact us and hopefully we will be seeing you sometime soon the road. Thanks everybody.

Operator

And ladies and gentlemen, thank you for participating in today's ValueClick first quarter conference call. A replay of today's conference will be available beginning at 4:30 p.m. Pacific Time today by dialing 1-888-203-1112 or 1-719-457-0820. The access code for the replay is 8914545. The replay will be available through 9:59 p.m. Pacific Time on May 19, 2009. Thereafter, the replay can also be accessed on ValueClick's website at www.valueclick.com.

This does conclude today’s presentation, you may disconnect.

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