ValueClick Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 7.13 | About: Conversant, Inc. (CNVR)

ValueClick (VCLK) Q1 2013 Earnings Call May 7, 2013 4:30 PM ET

Executives

Gary J. Fuges - Vice President of Investor Relations & Corporate Development

John A. Giuliani - Chief Executive Officer, President and Director

John P. Pitstick - Chief Financial Officer and Principal Accounting Officer

Analysts

Youssef H. Squali - Cantor Fitzgerald & Co., Research Division

Debra Schwartz - Goldman Sachs Group Inc., Research Division

Carter Malloy - Stephens Inc., Research Division

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

Ignatius Njoku - Wells Fargo Securities, LLC, Research Division

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Kerry K. Rice - Needham & Company, LLC, Research Division

Daniel Salmon - BMO Capital Markets U.S.

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

Operator

Good day. My name is Justin, 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 4:30 p.m. Pacific Time on May 14, 2013. 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. [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, Inc. Please go ahead, sir.

Gary J. Fuges

Thank you, Justin. Good afternoon, and welcome to ValueClick's First Quarter 2013 Financial Results Conference Call. Joining me on the call today are John Giuliani, President and Chief Executive Officer; and John Pitstick, Chief Financial Officer.

This call will contain forward-looking statements that involve risk and uncertainties. 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 and elsewhere in filings with the Securities and Exchange Commission made from time to time by ValueClick. These include, but are not limited to, the annual report on Form 10-K filed on February 27, 2013, recent quarterly reports on Form 10-Q and other current reports on Form 8-K.

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. John Giuliani, President and CEO of ValueClick. John?

John A. Giuliani

Thank you, Gary. Q1 was a decent quarter in terms of revenue growth within the guidance and profitability exceeding guidance. We continue down our path of integration to become one ValueClick, and we conducted our first ever Analyst Day.

During the Analyst Day, we laid out our considerable efforts around technology, data and personalization. We also outlined some of our strategies, challenges and our opportunities. We're excited about the long-term opportunities, and those have grown even larger with Google's decision to exit Affiliate Marketing.

On the flip side, where I had said on the last call that the worst was behind us in Europe. That simply is not the case, and Europe continues to be a drag on the company. We're working hard to align marketing and media into global offerings led by the U.S. But clearly, there's going to be more work there.

Between the initiatives in the U.S. and now Europe, we're experienced [ph] some of the anticipated indigestion from integration. We think that's going to impact the Q2 top line, and we have identified the issues related to sales and are working hard to correct them, and we work in parallel with those with the integration efforts as well.

We continue to believe we can deliver growth this year in the range that we discussed previously. Given our Q2 expectations of top line and the indigestion I just mentioned, we now expect 2013 growth to be in the 12% to 14% range, where I had alluded earlier in the year that we may be looking in the 13% to 15% range. So same general range, but slightly less.

More importantly, Q2 guidance does not reflect any erosion in the fundamentals of our business. Our confidence in accelerating the long-term organic growth profile of the company are still as great as ever. And that's the key component we want to continue to stress is that the long-term organic growth opportunity is what we're focused on. So the margin profile of the company is stronger than we originally anticipated. The short-term growth will be impacted slightly in 2013 as we move fast to position ourselves for longer-term growth. And the growth opportunity long term is even larger due to the recent events in Affiliate Marketing.

I'll be back to talk a little bit more about some of that specifically, but right now, John P. will walk you through the numbers in the quarter as well as the guidance

John P. Pitstick

Great. Thanks, John. So Q1 revenue came in at $165.4 million, within our guidance range and representing an increase of 13% compared to the year-ago period. Growth rate in Affiliate Marketing of 3% was below our expectations in Q1. I noted on last quarter's call that we saw some early weakness in the tax software vertical. This weakness continued throughout the quarter and ended up having a larger than expected negative impact on the segment's growth for Q1.

The good news is that our activity in the tax vertical is largely isolated to the first quarter. And in the early part of Q2, we are seeing good traction in Affiliate, which we think will result in high single-digit growth for the segment in the second quarter.

This Q2 guidance is assuming only a small contribution from client addition as a result of the recent announcement by Google to close its affiliate business in the next few months. As John touched upon, we have pulled business development resources from our other products to take advantage of the significant but very short-term opportunity to build upon our leadership position in the Affiliate Marketing space. And while we have already secured meaningful new client wins, and we expect to continue to add to our roster of new clients throughout Q2, the contribution will not be felt until the second half of the year as the programs are implemented and ramp up. We believe our incremental revenue opportunity in the third and fourth quarters is upwards of $10 million.

In media, we had another strong quarter and achieved revenue growth of 19%. Gross margins continue to be solid, and OpEx investments, in terms of headcount additions, were behind schedule, which contributed to record first quarter profitability in the Media segment.

For Q2, we are guiding to a growth rate for media in the high single digits at the midpoint. A tougher comp and further challenges in Europe are contributing to what we believe is an abnormally low media growth rate in Q2. John G. will provide more color on why Q2 does not reflect the level of growth that we've seen in recent quarters, nor is it indicative of our expectations for growth post Q2.

In O&O, revenue growth in Q1 of 8% was in line with our guidance for modest growth from this segment during 2013, after a transition year in 2012, where we focused on increasing the margin profile of the business. In Q2, we expect O&O growth to be in the mid-single digits.

In terms of our overall profitability, we mentioned in the last call and in our Investor Day that our focus is on ensuring we're making the right investments for growth, while not necessarily looking to increase our operating margin profile in the short to medium term. But while we're pleased with our bottom line outperformance in Q1, with EBITDA above our guidance range, and over 200 basis points of margin expansion, this is partly due to being behind on our hiring plans. To address this, we've increased our recruiting resources here in Q2 and expect to make up some ground in the hiring front in the coming quarters.

Our solid execution in Q1 allowed us to generate $48 million in free cash flow in the quarter, which helped drive a $62 million reduction in our outstanding borrowings and returned us to a net positive cash position at March 31. We did not repurchase stock in Q1, and given our strong cash flow profile, the board has recently increased the amount available under our stock buyback program to $150 million.

Now moving onto Q2 guidance. We expect revenue of between $164 million and $168 million, representing growth at the midpoint of 8%. As with Q1, we expect some year-over-year margin expansion in Q2 as our operating expense growth is behind schedule. We are guiding for EBITDA to be in the range of $52 million to $54 million, representing a margin at the midpoint of 31.9%, which is 100-basis-point increase from last Q2.

And we're expecting our non-GAAP EPS in Q2 to be in the range of $0.38 to $0.40.

And with that, I'll turn the call back to John for some additional comments.

John A. Giuliani

Yes. So there's really 3 areas that I want to touch on that John had mentioned: the GAN opportunity, the media-perceived softness in Q2, and the stock buyback.

So first of all, the GAN opportunity. Google decided to exit the Affiliate Marketing business. That opened up an opportunity for the industry. We believe that in the players in the U.S., we are the only ones that Affiliate Marketing is at our core. It's an important part of our mix. It's always going to be important part of our mix, and as such, we're going to do -- we are doing everything possible to be there for our customers. Some of those customers are with us in other business lines, and some of them are going to be future customers, but to help them at a period of difficulty and urgency to get ready for particularly for the selling year starting with back-to-school. And so we marshaled resources from our legal side, our business development side, our operation side, training, hiring, everything possible to help get in front of clients, get them the right information, help them get integrated, help them get their contractual work, ensure that we're staffing ahead of that -- ahead of the influx, on-boarding people rapidly, because we know that's important. And we think it's the right opportunity not only for our business, which -- it's a fantastic long-term opportunity. I think it's the right thing to do for our customers. And we put other things on hold that will affect some of the media in Q2 because some of the same integration people, the same legal folks, the same business development folks, we think it makes sense to prioritize their efforts against the opportunity that's most urgent for our customers. So it's a great opportunity. We'll see how -- John's giving you some look into what the back half would look like. We think it really strengthens our position in a core area, and we think it really also demonstrates why having businesses that are core to the owners and why businesses that need to be well funded by their owners. So if you think about point solutions that are not well-funded, we think all this stacks up into the same argument for our customers is that the one ValueClick, it has a lot more importance, and they can rely on us a lot in the future. And it's a great opportunity for us to demonstrate that to them right now.

As I touched on the media, we are pulling resources away from media, all of our different areas, frankly, but particularly, the CRM and some of the media that require some of the work in legal. That has a drag on the short-term effects of that. We understand that and -- but we feel like we can make that up later. We don't feel like we could hesitate on the GAN opportunity.

Particularly, John had mentioned we got further ahead of our operating income in the first quarter, that was not of our intent. A lot of that was due to hiring. Hiring in our world is investment and investment leads into sales. We did not do a good job. A lot of that's on me. I did not -- I was worried about the external Analyst Day and some of our integration strategies and not enough about the execution of the daily operations of hiring and getting the folks in place. That will have a lagging effect, but that something that's correctable, and we've actually brought on 2 full-time sales recruiters that are brand new to the company in addition to our recruiting staff. So we feel like we've got some things in place there.

Additionally, John mentioned the drag on Europe. Europe, particularly in the media side of things, hits us really hard in the first half, particularly in Q2. We saw that effect last year with affiliate. We're seeing that effect this year more in the media. You put all these confluence of things together in Q2, kind of the bad storm. But we think -- we see that as an aberration. We got a healthy media business. We're very bullish on it. Frankly, with a strong Affiliate Marketing business brewing and media returning to where we have been trending in the last several quarters, we feel very bullish about our long-term prospects.

The third thing I just wanted to touch on was our buyback. We have -- we've had lots of questions about that over time about where we stand on the buyback and how do we think about it. I think the board, upping the authorization to $150 million, particularly since we haven't bought back since I've become CEO, which I think was probably chance for the board and everybody else to get the check mile [ph] a little bit and see what I was going to be all about before anybody invested too hard in me. But I think it's a great vote of confidence for the company that we are bullish about our stock. We are doubling down our organic growth. And so we see the best use of our free cash flow is to buy stock back in the current world. And so that's what we're going to do. I think you'll see a change by that authorization is in the past that we've been opportunistic. We will continue to be opportunistic in the future. Should any of you read the results incorrectly over the short haul and decide to trade out the stock, we'll probably be buying. But we'll also be looking over the course of the next several quarters into utilizing that excess free cash flow into taking shares back into the company. And that is a direct belief in where we're going in the future. And so I think that is a bit of a change, a pivot, and one that I think you guys have asked for several times.

So with that, I'm going to turn back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Youssef Squali with Cantor Fitzgerald.

Youssef H. Squali - Cantor Fitzgerald & Co., Research Division

Just a couple of questions, please. I guess, starting with the obvious question of the top line growth decelerating and actually kind of going the other way from where we thought it was going to go. John, you kind of, at Analyst Day, I think on March 14, you kind of reiterated your intent of continuing to believe that there is going to be increasing or accelerating growth even in the short term. So the first question is just maybe if you can just share with us the visibility that you had in the business then and you still have in the business now.

And I guess as a corollary to that, as I look at your Q2 and particularly your second half of the year, 12% to 13% growth rate, that would imply growth of somewhere in the mid-teens, 15%, 16% in the second half to get you to that 12% to 13% that you're talking about. So just trying to get a sense of, one, your confidence in that, and then kind of again your visibility into that.

John A. Giuliani

Yes. So I do remain confident about our ability over the intermediate and relatively short term, Q2 notwithstanding, for continued growth. At the Analyst Day, there was a couple things that came after that. First, I was surprised by Europe. Like I said, the last time I thought the worst was behind. That was probably premature for me to say. And since I've been digging in through some of my other executives, who were giving me facts on the ground, we've been ferreting out some of the issues over there, and the media in particular has taken a hit, particularly starting in Q1. We were able to make up for a lot of that in Q1. But in Q2, it had a more -- a little bit more dramatic effect. But I also look at the short term, and I mentioned this earlier, that some of the things we're feeling from the integration, I may have not -- I probably took my eye off the ball on that and let some folks kind of not keep on track where they needed to be. So we probably lost a couple of points there.

Q2, I'm not as worried about, because that was our highest growth rate in media last year, by 300 basis points, larger than the next higher. So we knew that, that quarter would be a little overlap. So coming into back half of the year, we have our, I wouldn't call them easy overlaps, but they're much easier than that. And I've made a strategic decision with the GAN opportunity is to forgo some short-term media growth in Q2. I think it's the right thing to do. We think that will have a better effect on our back half and next year by having that business in Affiliate Marketing. And so -- and clearly, we've got to get some hiring done that we got behind on. That won't turn around over the next couple of weeks because we still have to prioritize hiring and staffing for Affiliate Marketing because we know when we bring those clients over, they're going to expect a level of service from CJ, and we need personnel to get that, so we're focused on getting those people up and trained. So I see that as very temporary, and I was aware when I made -- marshaling resources, I had visibility on the quarter at that point and said still do it because I think it's the right thing to do long term and I think we'll be proven right at that over time.

Operator

Next will be Debra Schwartz with Goldman Sachs.

Debra Schwartz - Goldman Sachs Group Inc., Research Division

Two questions. The first is, John, can you give us a little bit more granularity on some of the integration issues that you were alluding to earlier? And then did they impact some of the product rollout that you had discussed at Analyst Day in terms of a new betting engine [ph] and personalization, Affiliate Marketing and some of the other products? Can you kind of talk through what the product pipeline is given some of the temporary issues in integrating the businesses?

John A. Giuliani

Yes. So first, I think some as far how it impacted the product lines. There's 2 products in particular. My guys here sort of told me not to say too much about it because you can't really model them. And so I'd hoped to have them out in the quarter here. Part of the integration issues is we have more people involved with it. We will have both those products out, and we'll be getting revenue off of them this year. So we were slightly delayed. Some of it stems, Debra, from really as you're including more people that are impacted, you just -- I underestimated sort of some of the discussion time and the length of time to get the decisions. And I think probably I moved into a more of a mode of maybe cutting discussions off a little sooner and being a little more prescriptive. So we got pretty talented people with strong ideas, and we want to hear them all because -- but we come in it from different areas. And I've been pretty willing to listen to those things, and I think it's the right thing, but probably should've cut things off and been more prescriptive a little earlier. We will do that and I've started to do that already.

As it relates to the personalization of Affiliate Marketing, that is a go ahead. We're continuing to move down that road. We're talking to our marketers about that. We're putting more resources against that. So meaning developers, which we continue to hire and press on, and we've got specific folks working just on that opportunity. And so some of the things you're seeing on the integration really are on the front end. The back end, I think, is -- the ones that we had planned are moving along. But I think you'll see that even move faster because we didn't -- listen, I anticipated, as I mentioned at the Analyst Day, I knew we'd have indigestion issues. I knew we'd have bumps in the road. I didn't quite think they're all going to come together in a similar timeframe along with what I think is a major opportunity. But we'll bounce right through that. I mean, it's going to take work, don't get me wrong, I'm not glossing over any of it. We got real issues to get settled down, to get people focused, to get things done. I don't think you're going to see those things like the unified bidder, some of the things we're doing in the unification of the data profiling, certainly not slowing down the personalization affiliate. I will tell you while we are focused on this GAN opportunity, we'll probably have less cycles from our executive team on the CJ because they're doing everything they can with the clients. So to that extent, there would be some slight delay, but nothing that's going to grind us to a halt. It's really the natural manifestation of bringing people together and I probably pushed a little too hard to get some stuff done because I thought it made sense. But at this point, like I told our team, I'm pushing hard to get the Jeep kind out of the rut and get up the hill. And so we kind of got ourselves into that, and it was the right thing to do. Maybe you would argue, I should have done it a little slower. I'll take a hit to that, but right now, pushing on through it. And I don't think the long-term aspects of the product will be affected. There are those 2 short-term ones that I would've hoped to had Q2 rather than [ph] one, but we will be out in the market in Q2 with them.

Debra Schwartz - Goldman Sachs Group Inc., Research Division

And then also just on the GAN opportunity, when you quantify it at around $10 million or so, is that revenue that you largely have booked or business that you've won? Or is it kind of your expectation of what you expect to win, given client overlap with Dotomi?

John A. Giuliani

Yes, it's a blend of both. It's the client overlap where we've gotten good feedback from Dotomi. It's verbals, contracts, implementations that were already in place -- were already in place. So they don't always go in that order. So sometimes we're verbal-ing or implementing while we're working through the legal, but there's all stages of that. We've got several, over a dozen in that stage right now of clients. And so -- and then there is some prospective modeling on a percentage of the market. It's too early to say we have that definitively. So that's -- I would say it's an estimate based on those confluence of factors. But the largest still out there is you have to model still at this point because people are making their decisions. We fully expect though -- we think we're the only company somebody should turn to right now. We're the only company in Affiliate Marketing in the United States that Affiliate Marketing is one of our core, and we're going to be here, and you're not going to have to face this next year or the year before. We're not competing with our customers, and it's not such a small thing that we're going to forget about it. So we think the opportunity is dramatic. And then as well as the other aspects that we can bring in, and I think it intensifies our one ValueClick story. It's a -- we think this is a great opportunity in many, many ways. So -- and I think it's a reasonable estimate for the back half, and I think we'll probably -- I'm sure we'll be updating you on the next call as well.

Operator

Moving onto Carter Malloy with Stephens.

Carter Malloy - Stephens Inc., Research Division

Just I'll go a little deeper on that question around Google Affiliate Network. So the $10 million, that was just a back-half number, is that correct? Is the $20 million the annual number?

John P. Pitstick

Yes. So the $10 million obviously factors in some timing issues, where we get folks on the platform. It will take different lengths of time dependent on the specific marketer and what part of the market they're in. And then we think we can do a better job with these marketers than what GAN was doing, so the starting point is what -- in what level of revenue in total that GAN had, and there's some different data points out there on that, as well as the things John talked about what sort of market share do we think we can get, so...

Carter Malloy - Stephens Inc., Research Division

That's what I'm getting at, John, is that if you're at, call it, ending the year with a $25 million run rate of GAN customers, would that be assuming that you're actually going to get a majority of half or maybe a slight majority of their revenue?

John A. Giuliani

I think there's -- you have to differentiate what we're kind of seeing in the near term because we're cognizant of people's budgets. So even though we have a larger effect, we know we have more services where that's our -- we out-service people. That's part of our business. So we know that the apples-to-apples installation, we typically will drive more revenue for our customers. Certainly more than GAN, but more than the other players in the industry. We can't -- we don't calculate that in the back half of the year because we can't jam up customers. And so one of the first things I told our folks as we want out to go after customers is we can't jam them. We got to be there. This is their hour of need, and we've got to be there to help them. This is what -- this a chance to prove the one ValueClick. So I think you would expect that, that level of revenue would grow over time as we fully implement and our new one customers have time to adjust budgets. Some will adjust for the back half because they'll want the opportunity, others will be more strictly have to adhere to budgets. We just want to support them either way. So I would expect that, that would grow over time. And I think in your estimation I think we took a relatively conservative approach to our market share vis-à-vis the market. And we don't want to get too much of the ins and outs of our strategy in the market, but I think you can kind of bank on that. We weren't going under our market share. We weren't going significantly over. We tried to take the conservative approach on what we could get out of that.

Carter Malloy - Stephens Inc., Research Division

Okay. And then also on Europe, just a little more there. Just how big overall the problem was in the quarter, actual revenue dollars? How much of 1Q and 2Q is not in the model versus what you expect it to be? And then the other part of that would be, what keeps that from being even further a problem in the third quarter? What gives you confidence it'll come back?

John A. Giuliani

Well, one way or another, if it gets small enough, it just doesn't have anymore impact. So that really wasn't my strategy. I thought we had done that last year. Like I said, I was premature to say that the worst was behind us. I guarantee I'm not stepping out on a limb [ph]. I'll get my own information from now on. I think what you're seeing -- and listen, I'm extremely disappointed with Europe in a number ways. I look at it as it's not a recent phenomena. It's a mismanagement over years. And I think most of the people in our organization that have touched Europe probably, at least on the U.S. side, feel accountability for that. We need to get the folks over there to feel accountability for that. But we also need to own up to what we did in getting our -- and we started to do that, lining out of our products, that's the biggest thing. Lining our products, provide them training, give them a consistent thing to sell, help them compete in their markets. That will -- I think success will help turn that around. That being said, your specific question, although we don't break out the individual line, it's -- in the media world, it's probably cost us 3 points of growth in that quarter and a little less so in the overall top line. So it's not the deciding factor. I don't want to make it sound like it is. It's a contributing factor. But it distracts us. It takes -- all these things take time and effort. That's what -- when I'm talking about it, even the integration bog down. It's the time factor and the distraction. And I've got to get the organization to do things more rapidly and have the proper amount of discussion, bring in the proper amount of data that are required and get to decision points faster, and then stick to those decisions. So I've got -- it's been a great learning experience for me this first quarter to understand where the team is. We've got a wonderful group of folks, very committed to what we're trying to do. But frankly, we've operated in a different mode for a long time. So I'm trying to bring them into that fold. Europe, in particular, is operated even at an arms distance, and it's just not as in sync. There's good people there. There's good products. We have good customers. We're just not as in sync and so we got to double down and work harder to get them. So -- but I think from your specific answer, think about it in terms of media, maybe 3 points in that quarter, not quite as much for the whole business. And until we fix it, I can't really tell you it's not going to be a problem. Although as we look back, this problem probably started last year Q3. And so some of that's going to be mitigated even if we didn't do a lot of work, but I think we will be doing plenty of work to get that aligned. It's growing -- it's becoming less and less significant. That's not the way we want it though. So I wouldn't say we're out of the woods yet, but I'm going to be spending lots of time over the next quarter so that we have a more -- so we have a better feel for it going into Q3.

Operator

Moving on to Brian Fitzgerald with Jefferies.

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

This marks the second time, I think, that Google has left the affiliate space, I believe. What's the rationale or what would make a company -- what would make you, for instance, want to leave the affiliate business like they did?

John P. Pitstick

Well, from our understanding, this is the first time. This business came to Google when they acquired DoubleClick, so this was the old Performics business that got rebranded Google Affiliate Network. So obviously, it wasn't the core reason they bought DoubleClick back in 2007. I think we were surprised, frankly, when they decided to stay in the business. But clearly, at the size it was and the type of business it is, where it really requires a high level of hands-on customer service, just clearly not core to what they're all about. And as John mentioned, it's core to what we do. So we're glad, not completely surprised. It's obviously a positive that we're going to work hard to capture, but I don't think this is their second round of getting out of this particular type of affiliate business.

John A. Giuliani

Yes, I think if you think about it, it is a more service-oriented business. We've been pressing on the service orientation with both our current customers as well as prospects that were already working with GAN. And we were in discussions with a lot of those folks. I think though if you look at that, it's -- their business is much more in the self-serve and automated world. And Google has -- it's just small for them. They have a lot of big businesses, and frankly, I don't blame them for getting out. I wish they would have called me first, and I would've helped them transition those customers a lot easier, more easily, but I think it probably makes sense for them. And -- but like I said, we're -- it's core to us. But if you don't do that math and we're doing this with our other customers, there's some other pretty -- not people as big as Google, but there's some other pretty big companies that are in the Affiliate Marketing business in minor ways on some, and a little bit more solid presence on others. But it's not core to any of the other big companies. And we think that's a very salient point to our customers because I don't think they want to do this again next year and the year after. And so, I don't think the Google was a surprise. I don't blame them. I think they did -- probably did the right thing for their business. And we just want to make sure that our customers, and hopefully you guys do look at it the same way, look at the marketplace and look at the big guys that this is not their focus. It is a focus. It's core for us. And we think this is an inflection point in the industry and for our customers, and we want to come out as the -- we are already the leader, we want to be dominant leader. And we think that's the way we can frankly revolutionize that business because we can do the things necessary to look forward with the customer. So it's a great opportunity for us.

Operator

And moving onto Peter Stabler with Wells Fargo Securities.

Ignatius Njoku - Wells Fargo Securities, LLC, Research Division

This is Ignatius Njoku for Peter. Just a quick question. What are your expectations for U.S. media growth rate in Q2?

John P. Pitstick

Yes, so without slicing and dicing too much of the detail, we do see it being well north of the kind of a segment growth that we've talked about in the high single digits. So U.S. be more in the kind of low- to mid-teens sort of range, and Europe being down pretty significantly.

Ignatius Njoku - Wells Fargo Securities, LLC, Research Division

Okay. And just one follow-up. Can you give us what percentage of your media business comes from agencies versus the client direct?

John P. Pitstick

So for the part of the business we work with agencies, primarily in the mobile part of the business, as well as the traditional display. So those percentages have kind of been pretty stable. We're working to kind of increase our direct relationship, so maybe 50-50 in those parts of the business. And then when you weigh in the CRM, which is primarily direct, as well as a lot of the Mediaplex, ad serving is mostly direct. So when you look at it through the whole Media segment, it's probably in that maybe 1/3 of the revenue comes from agencies.

John A. Giuliani

Yes, 1/3, 1/3 to 1/2 tops. Yes.

Operator

And next will be Eric Martinuzzi with Lake Street Capital Markets.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Maybe I missed it. Did you give the actual revenue numbers for U.S.A. and international this year and last year?

John P. Pitstick

We did not. No. We have a lot of those disclosures in the 10-Ks and the 10-Qs. You just kind of break it out year-over-year so you can get some of that color.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

It's not available now?

John P. Pitstick

It is available. I think depending on which particularly segment, which particular time period, we can speak ad nauseam about all the different numbers, but maybe that's something we can do on follow up [ph].

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Look, I know historically it's been about 85% U.S., 15% Europe or international. Is that in the ballpark still?

John P. Pitstick

Yes, we're about -- in total, we're about 11% currently, it's international.

Eric Martinuzzi - Lake Street Capital Markets, LLC, Research Division

Okay. All right. And then I know historically, the use of cash, you guys have been opportunistic on the M&A side. A lot of times when ValueClick was undervalued, a lot of the prospects in your core dev pipeline are also undervalued. Is there a potential opportunity, specifically in Europe, for you to expand the M&A?

John A. Giuliani

I doubt it. I mean, we will -- Gary is always looking at stuff. He brings it to us. We talk about it. If something fell out that was really, really perfect fit right now, I think I'm going to stay the course on, I think, doubling it down where we're going is the best way to get it. And the sooner we get done and get our organic growth rate where I want, get the integrations done, then I think we can look for those. And I think we'd look more strategic though than opportunistically. The opportunistically -- the opportunistic ones that come over, some of them fit, some of them don't. You've got to work them a little bit. And I don't have my own, but rhythm and discipline on what we want to do on M&A. And so I'd rather not venture into that until we've established that. And I'm not ready to put my focus on it until I get through the short-term things of integration in getting my organic growth rate where I think it deserves to be. So I'm not saying that's something won't fall, but I seriously doubt it, and I really doubt it on Europe until we can get ourselves aligned the right way. We want to get our product portfolio right in Europe first and then start competing because I don't know -- I think before we did that, I would have a hard time justifying to shareholders that I want to spend more money there. I think that's probably where we go.

Operator

And next question comes from Richard Fetyko with Grow Capital.

Unknown Analyst

Just a follow-up on that GAN opportunity, just to be clear. You're saying you think you can generate $10 million revenues from the GAN customers in the second half of this year, therefore the run rate is perhaps as much as $20 million, or is it $10 million figure is actually an annualized run rate [ph]?

John P. Pitstick

Keep in mind when we talked about the back half of the year that the fourth quarter, because this is primarily retail sort of marketers, the fourth quarter is always going to be the biggest quarter. So I think it talks about there's a ramp-up period. I think that will play out throughout the -- exit Q2 and get into Q3. By the time Q4 comes, I think, we'd be pretty well ramped up on all these -- the new programs that we bring in. So there's that kind of timing of things ramping up and also consider the seasonality with Q4.

John A. Giuliani

I think we'll have good visibility, frankly, by the next call. Because with the rate of implementations that are coming in now, verbals, call-ins, we think we will have very -- we'll have great visibility by Q3. And then we'll have to do some extrapolation on how much of that do we think is a -- applies to the annual rate for next year. Because of what John said, seasonality, but also what I said earlier because of budget concerns, and then ramp ups to fully implementing it and getting on publishers the additional new publishers that we will bring in for a lot of those customers.

Unknown Analyst

Okay. And then just on the clarification on the media side, the -- just on the deceleration of growth in Europe media. Can you give us a sense of -- in that market in terms delicate media positioning, the products that you had there for a while I suppose. Were the cutbacks in Affiliate Marketing side perhaps spilling over into the media side now? It's just not particularly clear what really changed in that business [indiscernible] consolidate a bunch of [indiscernible] the low single digit growth I guess from the Europe side?

John A. Giuliani

Yes. So I think there's -- we don't have the same product mix over there. And one of the things I would really -- as we talked about our strategies at Analyst Day and the things that we're doing on the media side, the U.S. business is strong, right? So the Q2, we have a little bit, like I said, a little of overlap, some other integration issues. I think it's a complete aberration. But the media business in U.S. is strong. We have things to do to strengthen it where we want to go. But what's going on in Europe should not be considered any way a proxy for any of the things we're doing strategically because it simply -- the composition of the offerings over there is not anything alike. So we don't have a CRM product. We have limited mobile exposure, really, into one of the markets and we're expanding that. But even if you go within our normal media business, we just don't have the same level of data and sophistication that we have over here. And there's a lot more -- frankly, a lot more of folks doing some gritty stuff to make numbers. And some of that we will actually -- we have and we made decisions on both here and abroad to take some businesses that weren't particularly strategic or growing or profitable, and replace those and put things in that we can sustain and grow and better strategic and more profitable. So it's a mishmash of media over there, and we're, again, we're getting to the bottom of it, and we are streamlining that into the services we have from here.

But I think that's part of the problem. I don't consider it a deceleration. I consider it a rationalization of our past go-to market strategy and management of Europe. I think if anything, it's just a failure of how we managed that business in the past, and it's coming home to roost. It's now under -- it's now under roof here, and we're fixing it. We're going to address it. I don't look at it as a deceleration like a market demand. I think these guys did a lot to hold their business together in many different ways, and in some way or another, we let them run too autonomously or whatever, but we didn't support them with the right product portfolio. That is being corrected as we speak.

Operator

The next question is from Kerry Rice with Needham.

Kerry K. Rice - Needham & Company, LLC, Research Division

A couple of questions both on media. If I think about -- it seems like there's 2 things that are kind of factors at work here. First, what's hiring in the U.S.? And so how long do you think or how many people do you think it will take to kind of get you back on track? I think we were looking for about a little under 16% growth in 2013. So what would it take to get back to about 16% growth there? And then in Europe, if there are indeed just kind of I guess catch-ups from past strategy, missed starts, when do you think that is kind of back on track?

John A. Giuliani

So the honest assessment for Europe is, I don't know. And I hate to say that, except for last time I said it was -- we thought the worst was behind us, and I'm going to be haunted by those words. So I don't want to give you anything that I don't feel strongly about. I think it's going to take a little time over there because it takes time to, a, identify problems, b, make personnel changes, and c, add staff. So everything is a little longer, slower, there's little more regulatory involved.

And so we'll work like crazy to make our current staff and bring the portfolio of products over there to help stabilize. And then hopefully we can augment that with future talent and structural things, as well as bringing some more influence from the U.S. As far as the U.S. media, I think the U.S. media is -- if you look at the first quarter, overall media was strong. It's been that way for several quarters in a row. We haven't quite kept up with particularly in the BC Media business. We got behind in the fourth quarter, that's why they had a few troubles, but we've got some really good strong leadership people that we got in that came aboard in first quarter in Chicago, a weak area for us. And they're bringing people with them. We've hired 3 people in the VP caliber in the first quarter on that business. And so I think you're going to see the natural following, really good folks that had been in the industry with Interclick, with Yahoo!, with ad.com, at one point, with quadrantONE. And so real good leadership people we know. We think that's going to help as much as anything. We're also doubling down on the training. We're building folks off the campus, so that we can start to produce our own. I think I may have told you at one of the meetings, we've got our apprentice program. We've expanded that, so we can have a broader footprint on the campus and produce our own talent for the future. But we're also -- we are out aggressively, like I said, with 2 full time new sales -- dedicated sales recruiters, I would anticipate we will be having a much more robust pipeline of talent. And as we get our story out, people are starting to hear about what we're doing on the integration. We're attracted -- or attractive to a lot more of the talent in the industry. We were a little bit of a sleepy image company before, and so it's really gratifying to see that. As those folks come on and see what we have and what we can do, they're getting excited and they're bringing people with them. So I would guess, by the end of Q2, we will be in a position of a much greater strength with -- from a sales alignment standpoint, and then it will be how quickly we can onboard and get folks in play to affect Q3 and Q4, particularly for this year.

Kerry K. Rice - Needham & Company, LLC, Research Division

Do you have any sense or can you give us any quantitative numbers on how many people you wanted to hire versus how many you actually did hire kind of going into Q1, or what you thought you wanted to do versus what actually you did?

John A. Giuliani

I don't believe -- do you know how many headcount were done?

John P. Pitstick

Yes, I mean I can tell you that we were -- at the end of Q1, we were down on headcount about 1% from where we ended the year. Whereas we would have expected to be several percentage points higher than where we ended the year. So impact, when you think about the growing revenues year-over-year in Q1, 13%, really doing that with as much if not a few less headcount. So I think that speaks to directionally that we got behind a little bit, and we've got some ground to make up.

John A. Giuliani

Yes, and part of that is, again, there's -- a lot of these things from an execution standpoint. I'm trying to put my standards on the organization. So from hiring, where it comes down from an interviewing to offer request, even a requisition of the physicians, I'm probably putting more stringent procedures in place that short term slow things down, but long term will help us be quicker and hire better for the positions we have available. So I think it's the right thing to do -- everything we try to do here, I really do try to focus on the longer term. And I know it slows some things down short term, but I know it's worth it if I can get an organization to raise the standards to what I'd like because we got great people and I want to hire more great people. And when you turn on the faucet sometimes, people they don't continue to find great people like they already have. So we want them to do that. We want them to help them do that. And so there's been a process through the beginning of this year, where I've been looking at all offers and requisitions, and it's painful for the organization because it slows it down and -- but I think it's the right thing to do long term, and it helps us with the quality. And I personally get involved with hiring some of these folks as well, like the folks we talked about and the 3 VPs that worked in BC [ph] Media. Those are all guys I was heavily involved with and will continue to be. So I think we can -- we're getting the throttle right on that stuff. And if I get out of the way, we'll probably hire a little faster.

Operator

And the next question comes from Dan Salmon with BMO Capital Markets.

Daniel Salmon - BMO Capital Markets U.S.

John, notwithstanding that you're going to, in the short term, pull some resources away from media, I'd just be interested one of the things I think a lot of us were interested in hearing about at the Analyst Day was bringing the CRM capabilities and some of the strengths of Dotomi to the longer client list that CJ has. So again notwithstanding, there's a little bit of a short-term shift in resources. You talked about the integration maybe not going quite as planned, is that more execution wise, or has there maybe lower expectations for bringing that offering to some of those e-commerce clients in particular and seeing what they are sort of judging your sort of new approach of one ValueClick to come to them? Or does that remain still pretty positive conversations with just a short-term opportunity around GAN to go after?

John A. Giuliani

Yes, so I think the conversations are really good. People are eager to hear them when you get the right ones. The failure, if there's a failure to get the integration done on the sales side business development, it falls on me. When we got that underway last fall, it was -- I was still operating just the U.S. businesses, the non-O&O, non-Europe, and had all my energies going towards first and foremost that business development function because I thought that was the key thing. I thought our ability to work with our customers, to be larger for them to really demonstrate how we could take care of their needs was front and center of what we were -- from my strategic direction at that time.

By the middle of November, we started talking about the CEO job, and by the 1st of December, I take the CEO job, and I'm not focused on business development anymore. And that's a strength of mine, sales is a strength of mine. Not many other things. But salesmen know how to deal with customers and I know how to deal with salespeople. The rest of it, everybody's kind of got to shore me up. So when I took my eyes off of that, it didn't get done the way I wanted to. That's squarely on my back. And what I've committed to everybody down here is I will do the one thing I know how to do reasonably well and stay out of everybody else's way.

So I have great confidence that we can get that. And the good news is that our -- the customers, it's a great dialogue because we want to help them. And we have some fantastic customers, and they're forward-looking and they want to know it's for real though that we can bring the resources to them and it's tangible. I thought the thing that we're doing with GAN was a demonstrable way to show that, right? Because there was -- it's people from all of the different divisions that are just in a department now helping out wherever it's possible through representations, through implementations, through legal, all those things I mentioned before, through marketing, and so it demonstrates to our customers that we have the resources and can marshal them on their behalf.

So I think all those things are in good shape. I think had we had not make the handoff with me to be CEO, we'd probably be further along on our business development side and our sales in. I took my eyes off the ball. That's my fault, and I'm squarely on it right now as you can kind of go back to our sales VPs and heads, and they're all high-quality people by the way. But they'll tell you, I'm more involved talking to them on the weekends, talking to them on this weekly frequency, helping them with the recruiting and being a better resource to them, which I should have been all along.

Operator

The next one will be from Colin Sebastian with Baird.

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

This is Gregor Schauer. I'm in for Colin. He's traveling at the moment. So one question just regarding the impact on the Media segment as a result of ramping up in the Affiliate business in Q2. Could you explain that a little bit more because I guess what I'm trying to [indiscernible] is I would think that from the Affiliate business side, you want to ramp-up that business, but that's more just of a headcount issue, so you hire more people? And I guess I'm not quite sure how does that impact the Media segment from a growth perspective?

John A. Giuliani

The hiring, specifically, you can only hire so many people. We prioritized hiring folks for CJ so that we can handle the new load of customers. In that specific instance, it's not the only thing we're going to do, but they get a higher priority. So we'll be hiring a disproportionate amount of our new hires will come to work specifically on the Affiliate business, particularly in account management, but also in development, operations and analytics.

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

Okay. And is that what you were referring to when you said that there would be some impact on the growth in the media business as a result of the focus that is going to be placed on the Affiliate Marketing business?

John A. Giuliani

Yes. So that, specifically, is -- some of those -- some of the business development people we have that are aligned to sell some of the media products, particularly CRM, but also some of the ad technology, we put them on accounts as either the backup or the first chair to represent Affiliate Marketing because we thought that was a strength of our organization to have people coordinating with our customers. We felt we could cover more ground.

Separately, we've taken -- I think I mentioned last time and at the Analyst Day, we've been -- we consolidated our, whether you want to call it, professional services or integration engineers and our ops team that helped onboard clients, specifically in CRM technology and Affiliate. We've aligned that under one person and as one staff, and we prioritized all Affiliate Marketing on that. Because again, we know there's going to be a rush to get implementations done. And we don't want any of our customers to not be able to get implemented. So we made a conscious decision to say, we have to back off some of those other technology and CRM engagements that we might get or could get in favor of getting the implementations done on Affiliate Marketing right now because we know for them, time's clicking. And when July comes around, there's no -- if they're out without an affiliate program, they are losing money. So we prioritized that way.

We've done the same thing with our legal staff. We were looking and we're working with hundreds of contracts. We think this is an advantage of ours, right? We pulled those resources and we said, okay, prioritize getting the Affiliate contracts done. Now we can't ignore our other businesses because we have other customers, but what you're doing is tilting your resources and your initiations go down in those other businesses, while you take care of this opportunity.

That's where I was meaning to trade-off. It's where -- down the line, our marketing is spending their time on how to get that Affiliate message out. But it's right down the line of what we're doing, so that we do everything possible to take care of those Affiliate customers.

Operator

And the final question will come from Aaron Kessler with Raymond James.

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

A couple of questions. First, I may have missed it, but can you update us on maybe generally directionally the growth you're seeing in both the Dotomi business as well as Greystripe? And also on the Owned & Operated gross margins, I noticed those were down about 200 basis points year-over-year. I didn't know if there's anything specific there that you can comment on.

John P. Pitstick

Sure. So on the media growth rates on the CRM and the mobile side, we talked throughout this call about the U.S. component or the U.S. part of media being a much stronger growth than Europe and being above the average for the segment. Certainly, when we think about mobile, that's on a percentage basis, going to be the highest growth business that we have. The next in line within the media business would be the CRM Dotomi business. So that's been a consistent theme for us for a number of quarters, and there hasn't been any change in that mix or those kind of relative growth rates. And then on the O&O business, the lower gross margin in the quarter, primarily due to, we think about a lot of the monetization that we do in a certain part of that business through Google-sponsored listing relationship, and to the extent that there's been some CPC pricing pressure that you hear Google talk about, that's impacted our margins a little bit within O&O.

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

Great. And just quickly on the CRM business, are you seeing any increased competition there? Seems like a lot of companies are talking more about kind of leveraging some offline data. Are you seeing much change in the competitive set at this point?

John A. Giuliani

We're seeing more people talk about just what you said, about trying to align with some other data provider. I don't think it's truly CRM, but, yes, we're seeing a lot of nibbling from a lot of different areas trying to get in there, yes.

Operator

And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

Gary J. Fuges

This is Gary. Thank you very much for participating in the call, and we will see you on the road this quarter. Thank you.

Operator

And 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 2102101. The replay will be available through 4:30. p.m. Pacific time on May 14, 2013. Thereafter, the replay can be accessed on ValueClick's website at www.valueclick.com.

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