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ValueClick, Inc. (VCLK)

Q2 2006 Earnings Conference Call

August 1, 2006 4:30 pm ET

Executives

James R. Zarley - Chairman of the Board, President, Chief Executive Officer

Samuel J. Paisley - Chief Administrative Officer

Gary J. Fuges - Manager, Investor Relations

Analysts

Mark Mahaney - Citigroup

William Morrison - JMP Securities

Hagit Reindel - Jefferies & Co.

Aaron Kessler - Piper Jaffray & Co.

Heath Terry - Credit Suisse First Boston

Michael Prospero - ThinkEquity Partners

Sameet Sinha - Kaufman Brothers, L.P.

Matthew Hewitt - Craig-Hallum Capital Group

Presentation

Operator

Good day, my name is Deanna 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 10:00 p.m. Pacific time on August 8, 2006. 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 speaker’s remarks, there will be a question-and-answer period.

(Operator Instructions)

At this time, I would like to turn the call over to Mr. Gary Fuges, manager of investor relations for ValueClick Incorporated. Please go ahead, sir.

Gary J. Fuges

Thank you, Deanna, and good afternoon. Welcome to ValueClick’s second quarter 2006 financial results conference call. On the call with me today are James Zarley, ValueClick’s Chairman and Chief Executive Officer, and Sam Paisley, Chief Administrative Officer.

Today’s call contains forward-looking statements that involve risks and uncertainties, including but not limited to ValueClick’s ability to successfully integrate its recently completed fast click and web clients mergers, trends in online advertising spending and estimates of future online performance-based advertising.

Actual results may differ materially from those results predicted and reported results should not be considered an indication of future performance.

Important factors which could cause actual results to differ materially from those expressed or implied in the forward-looking statements are detailed under the risk factors section and elsewhere in the filings with the Securities and Exchange Commission made from time to time by ValueClick.

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 risk that market demand for online advertising in general and performance-based online advertising in particular will not grow as rapidly as predicted. 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 would like to turn the call over to Jim Zarley, Chairman and CEO of ValueClick. Jim.

James R. Zarley

Thank you, Gary. Good afternoon, and thanks for joining us for ValueClick’s second quarter 2006 conference call.

I will review the quarter highlights and then Sam will review some of the financial details. I will return and give you some final thoughts, and then we will take your questions.

ValueClick’s second quarter performance was another strong statement about the company’s scale, diversification and competitive position in the market. Revenue, adjusted EBITDA, and EPS were all above the high-end of their respective guidance ranges, as the breadth and scale of our performance marketing services drove record results for the revenue and adjusted EBITDA.

During the quarter, we made a strong statement about our stock’s valuation by increasing our share buyback authorization by $150 million, and so far buying back 6.9 million shares, and that is more than 6.5% of the company’s total outstanding shares at the end of March.

Based on our second quarter results, our improved outlook for the rest of the year, we are again raising our 2006 guidance. We believe the company is in an excellent position to maintain the first-half momentum throughout the second-half of the year.

In the second quarter, we increased revenue 138% year over year, to a record $130 million -- $10 million above the high-end of our guidance range of $118 million to $120 million, and pro forma organic growth in the quarter was 35% year over year. We had an exceptionally strong quarter in media. Our scale is differentiating us in the market, and we continue to drive synergies across the entire company.

Gross margin was 67.6% in the quarter, up 110 basis points from the first quarter. The scale of our media business and the gross margin initiatives that we discussed on prior calls continued to gain traction.

Higher revenue enabled us to increase our adjusted EBITDA to a record $36 million for the quarter, up 163% year over year, with a margin of 27.7%. Adjusted EBITDA was $5 million above the high-end of our guidance range of $29 million to $31 million. $1.9 million of this increase was the result of a favorable legal settlement, but even without this figure, the adjusted EBITDA margin would have been 26.2%.

Earnings per share of $0.14 were $0.03 better than our guidance of $0.11.

Now, let’s review the highlights of our three business segments.

In Media, we had another successful quarter with 231% year over year revenue growth. Pro forma revenue growth for worldwide media products was 46%. So you can see, we are getting good traction from the acquisitions we made in 2005. We are clearly building on the momentum of an integrated sales force for display ads and lead generation products.

In the second quarter, the U.S. Media division was working as a single unit. The numbers speak for themselves, but I would like to emphasize that we are not seeing competitive pressures from the large search engines that are testing monetization of non-search traffic, an alternative to click-based pricing models.

While these companies are well-positioned to continue their growth in the search business, the technology, expertise and publisher tools do not automatically lend themselves to monetizing non-search traffic.

For publishers, we are a trusted large-scale monetization partner that is not competing for their traffic. We get publishers access to campaigns they cannot participate in on their own. We give them reporting tools that give them control over the campaigns they participate in and transparency into the ECPM their traffic generates.

Publishers keep working with us because of the reporting tools, advertising relationships, and performance they receive from us.

For advertisers, we provide large scale reach that is complementary to the largest portals and more cost-effective. We also provide a number of agency-like services in the pre- and post-campaign process, such as consulting services for creatives, optimization of ad units and media sources, pre-campaign testing, and post-campaign reporting and analysis.

Our expertise is in actively managing campaigns to help advertisers generate the ROI they require. Our product and services cannot rely solely on technology and self-service interfaces.

Our advertiser services throughout the campaign cycle delivers results and helps us build and extend advertiser relationships over time.

Affiliate marketing worldwide represented a 23% increase year over year, excluding eBay, and 16% growth worldwide overall. While the decrease in eBay was larger than we expected, the remaining 1,500 clients in affiliate marketing were growing quite nicely.

The three primary reasons for the eBay reduction were lower negotiated prices effective in January, different payouts to publishers, which are now being paid for performance post-sign-up, and eBay’s decision to buy more of their own keywords themselves versus through our affiliates.

I would like to point out in spite of this effect, our affiliate marketing business is doing very well and we are seeing more growth opportunities in this segment going forward.

We expanded our search engine marketing services department based on our own proprietary technology, and believe that it will produce additional revenue growth for us in the second-half of the year.

We are also adding services in the area of website development and creative services bureau-related products, which in the past has been referred to outside vendors.

Our growth in Europe continues to gain momentum and we believe that we will be able to expand it to new markets by the end of the year. On the competitive front, we are not experiencing fallout as a result of the recent announcement of Google CPA testing. We believe our type of performance marketing is not solely conducive to a self-server service interface, and there is a significant amount of coordination between advertisers and publishers to work on traffic quality, creative, and other optimization processes.

Technology continues to contribute to profitability. We continue to expect flat growth and healthy margins from technology throughout 2006, and while still a small part of our overall business, it continues to be an integral part of what we do.

U.S. pro forma revenue growth was 33% year over year in the second quarter, and Europe’s growth was even more impressive at 50%.

Growth is coming from all three major segments of our business -- media, affiliate marketing, and comparison shopping.

Pricerunners year over year growth was about 50% for the quarter. As we mentioned before, in the near future, no later than year-end, that we would break out the comparison shopping business separately so you can have a view of its performance.

Now I would like to turn the call over to Sam for some more details on the quarter and our increased guidance. Sam.

Samuel J. Paisley

Thanks, Jim. Before I discuss our financial results, I want to mention that second quarter 2006 results include a full quarter’s activity from E-Babylon and Webclients, which were both acquired in June, 2005, and Fastclick, which was acquired in late September, 2005. Second quarter 2005 results include one month of activity from E-Babylon.

In the second quarter of 2006, ValueClick generated revenue of $130 million, a record for the company and an increase of 138% over Q2 2005 revenue of $54.6 million. Revenue was $10 million above the high-end of our guidance range of $118 million to $120 million. Pro forma organic growth, which includes the historical performance of the acquisitions I previously mentioned, was approximately 35% year over year.

Gross profit was $87.9 million for the second quarter of 2006, an increase of 115% compared to gross profit of $40.8 million for Q2 2005. This increase results from overall revenue growth.

For the second quarter of 2006, gross profit margin was 67.6% versus 74.8% in the second quarter of 2005. The lower gross margin in Q2 of 2006 was primarily due to the higher mix of media business as a result of our 2005 acquisitions.

Gross margin increased 110 basis points from Q1 gross margin of 66.5%, as we continued to improve the company’s gross margin since the Fastclick acquisition.

Operating expenses, excluding stock-based compensation and amortization expense, totaled $54.1 million, or 42% of revenue in the second quarter of 2006, compared to $28.4 million, or 52% of revenue in Q2 2005. These operating expenses increased 90% year over year, primarily due to the inclusion of operating expenses of web clients E-Babylon and Fastclick.

Sales and marketing expense was $37.6 million in the second quarter of 2006, compared to $15.1 million in Q2 2005. The $22.6 million increase is primarily due to the inclusion of web clients Fastclick and E-Babylon for a full quarter in 2006, as well as the inclusion of increased stock-based compensation due to the implementation of statement of financial accounting standard number 123R. The percentage of sales and marketing expense to revenue increased at 29% and the second quarter of 2006 from 28% in 2005, primarily due to the implementation of the new accounting rule for stock-based compensation.

General and administrative expense was $11.4 million, or 9% of revenue in the second quarter of 2006, compared to $8.7 million or 16% of revenue in 2005.

As our earnings press release states, and as Jim mentioned previously, Q2 2006 included approximately $1.9 million in net proceeds associated with a favorable legal settlement in the quarter, which reduced G&A.

Technology expenses was $8.3 million in the second quarter of 2006, or 6% of revenue, compared to $4.7 million, or 9% of revenue in 2005.

Stock-based compensation in aggregate was $3.2 million during the second quarter of 2006 compared to $45,000 in 2005. This increase is due primarily to the adoption of new accounting rules for stock-based compensation.

Amortization of intangible assets was $5.4 million during the second quarter of 2006 compared to $1.4 million in 2005. The increase is due to the amortization of intangible assets acquired in the Fastclick, Webclients, and E-Babylon transactions. We anticipate amortization expense will be approximately $21 million to $22 million for the full year 2006 due to the inclusion of the amortization of intangible assets from these acquisitions.

As a result of this performance, the company generated operating income of $25.2 million in Q2 2006, a 135% increase compared to operating in come of $10.7 million in 2005, despite the $3.2 million increase of stock-based compensation and $4 million increase in amortization of intangible assets.

Net interest income was $2 million for the second quarter 2006, compared to $1.4 million in Q2 2005, due primarily to improved investment yields on a marketable securities portfolio.

Income tax expenses for Q2 2006 was $12.7 million, an effective tax rate of approximately 46.8%, higher than our previous guidance due to a slight increase and our anticipated full-year state income tax rate. We expect our full year 2006 effective tax rate to be 46.4%.

These figures result in net income for Q2 of 2006 of $14.4 million, or $0.14 per share, based on the weighted average number of 103.5 million fully diluted shares outstanding. The impact of the stock-based compensation expense reduced net income by $2.3 million and diluted net income per share by $0.02.

As described in greater detail in our press release, adjusted EBITDA was $36 million for the second quarter of 2006, $5 million above the high end of our guidance range of $29 million to $31 million.

Q2 2006 adjusted EBITDA increased 163% from Q2 2005 adjusted EBITDA of $13.7 million.

I will now comment on the performance of our media affiliate marketing and technology business segments.

Media segment revenue increased 231% to $107.2 million in the second quarter of 2006, compared to $32.4 million in 2005, primarily due to strong performance by our media products and the inclusion of a full quarter of operations of Fastclick, Webclients, and E-Babylon. Inter-company revenue was nil in both periods. Year over year pro forma organic growth was 46% for worldwide media products.

Media gross margins were approximately 61.9% in the second quarter of 2006 compared to 61.5% in Q2 2005, and gross margin improved sequentially by approximately 320 basis points due to higher margin lead generation products in the U.S., gross margin improvement in Europe, and continued traction in our initiative to improve U.S. media gross margin after the Fastclick acquisition.

Affiliate marketing revenue increased 12% to $20.1 million and the second quarter of 2006, compared to $17.8 million in 2005. Inter-company revenue in these amounts was approximately $2.2 million in Q2 2006, and $1.5 million in Q2 2005. Affiliate marketing segment revenue does not include international affiliate marketing revenue, for which SEC reporting purposes is a part of our media reporting site. Including international revenues, and excluding the impact of eBay’s new contract, which Jim discussed earlier, worldwide affiliate marketing product revenue grew 23% year over year in Q2 2006.

Affiliate marketing gross margins improved to approximately 87.8% in the second quarter of 2006, compared to 86.5% in 2005, primarily through the operating leverage of our consolidated affiliate marketing infrastructure supporting higher revenue levels and increases in inter-company revenue.

Technology revenue was $5.3 million in the second quarter of 2006, compared to $6.2 million in 2005. Inter-company revenue in these amounts was approximately $300,000 in Q2 2006 and $400,000 in Q2 2005.

Technology gross margins were 75% in Q2 2006 versus 80% in 2005.

Because of the success and pace of our integration activities, and the opportunity for further integration that may affect our organization, we anticipate that future segment reporting may be structured around four business lines -- media, affiliate marketing, technology, and comparison shopping. We anticipate that we will prepare our financial results by these worldwide product lines by year-end 2006.

The consolidated balance sheet as of June 30, 2006 remains strong with $188 million in cash, cash equivalents, and marketable securities; $569 million in total shareholders equity, and no long-term debt.

Through July 31, 2006, we invested more than $103 million to repurchase 6.9 million shares of our common stock, or more than 6.5% of total outstanding shares as of March 31, 2006.

Capital expenditures were approximately $2.6 million in Q2 2006. We anticipate that capital expenditures will be in the range of $8 million to $10 million for the full year 2006.

Regarding guidance, we are now providing EPS guidance reflecting estimated stock-based compensation based on the new accounting rules of statement on financial accounting standard 123R, which we adopted in January, 2006.

Actual stock-based compensation expense may differ from these estimates based on the timing and amount of options granted, the assumptions used in option valuation, and the structure of our option plans.

Based on our outlook and Q2 2006 financial performance, we are increasing our guidance ranges to 2006 and issuing Q3 2006 guidance.

For the third quarter of 2006, ValueClick anticipates revenue in the range of $133 million to $135 million, a 61% to 63% increase from third quarter 2005 reported revenue, and an organic growth rate of 30% to 32% compared to pro forma Q3 2005 revenue.

We anticipate adjusted EBITDA in the range of $33 million to $35 million for the third quarter of 2006, with an adjusted EBITDA margin of 25% to 26% percent.

We anticipate diluted net income per share of $0.14, including stock-based compensation expense at $0.02 per common share, based on an expected share count of approximately 99 million fully diluted shares.

For full year 2006, we now expect revenue of approximately $519 million to $529 million, which represents 71% to 74% growth compared to 2005 reported revenue.

Organic growth year over year is anticipated to be approximately 27% to 30%.

We expect adjusted EBITDA in the range of $133 million to $137 million, with an adjusted EBITDA margin of 25% to 26%.

We anticipate diluted net income per share of $0.48 to $0.54, including stock-based compensation expense of approximately $0.09 to $0.10 per common share, based on expected share count of approximately $102 million fully diluted shares.

The full year 2006 guidance assumes approximately $21 million to $22 million in amortization of intangibles, approximately $9 million to $10 million in depreciation expense, and stock-based compensation of $12 million to $13 million, and an effective income tax rate of 46.4%.

I will now turn the call back over to Jim for some closing comments.

James R. Zarley

Thank you, Sam. Thanks to everyone who has joined us on the call today. While the industry is having another successful year, we are outperforming most of the players. The industry is still in the early stages of development. The more successful each player in our space becomes, the better it is for everyone. We are not competing for a slice of the pie, but rather increasing the size of the pie itself, and the more success we have in the industry the greater of the market share we will have of all the advertising dollars, on and offline.

We have a number of initiatives that we are working on to position ourselves for continued growth in 2007. In media, we plan to drive additional growth in European lead generation, which is just getting off to a good start in the U.K., and we are continuing to improve our targeting capabilities through all of our technology platforms.

We see ways to expand our Pricerunner products through distribution agreements with leading third-party publishers. I look forward to sharing more with you on this initiative very soon.

We also plan to expand our affiliate marketing footprint in Europe. We launched affiliate marketing in Sweden recently and we are still in the early stages of growth of this business in France and Germany.

All these initiatives are incremental to our existing expectations. Giving these integration activities and growth initiatives, we see ValueClick in the near term as the sum of four global businesses -- media, affiliate marketing, technology and comparison shopping.

We expect to start reporting our financial results in these four global businesses no later than the end of the year. This will give you a simplified view of our worldwide businesses and their individual growth.

In the M&A area, we continued to look for companies that would help us consolidate our offerings, and we are being very selective, given our current valuation. We would prefer to utilize cash in any future transaction. We continue to be interested in the Asian market, and we are currently considering our options in this area as well.

We had a great quarter, overall. We positioned ourselves for a strong second-half.

Now, I would like to turn the call over to the operator to take your questions. Operator.

Question-and-Answer Session

Operator

Thank you, sir.

(Operator Instructions)

We will go first to Mark Mahaney of Citigroup.

Mark Mahaney - Citigroup

Thank you. Two questions, first on the integration with Fastclick, can you just update where the margins in the sell-through rates are likely going for that business?

Secondly, just in terms of the media upside, could you be a little bit more specific in terms of where the geographic upside -- the revenue upside was for the media segment in terms of geographies, was it more U.S.-based or was it more European-based, relative to your guidance? Thank you.

James R. Zarley

Thanks, Mark. First, the Fastclick side, on the integration. We had talked when we initially acquired Fastclick about improving the gross margins, and I would say we are about 70% of the way there. We talked about improving about 10 percentage points on gross margins. I think we are about 7% of that now. I believe through the end of the year that we will be able to hit the target that we originally set out.

On the media growth side, the significant portion of the media growth has come here in the United States. The synergies of the acquisition of Webclients and Fastclick have really proven to work out very, very well for us.

The areas that we are growing, we have great utilization of the traffic that we had in the acquisition of Fastclick and ValueClick display network by utilizing that more efficiently through Webclients. We have done an excellent job, I think, at Webclients on the technology front of being able to monetize the traffic, and that has given us some good lift.

Most importantly, we have been able to take the combination of ValueClick and Fastclick sales organization and have them sell both products, the lead gen as well as display. They have done a great job in doing that.

That is where the lift is really coming from.

Operator

Thank you. We will go next to William Morrison of JMP Securities.

William Morrison - JMP Securities

Jim, I was wondering if you could give us an update on how -- I just do not know what the math is for the -- how much of the buyback you have left. I was wondering if you could tell us where you are in the buyback and just how you view the buyback looking forward, after buying so much stock back in the past six months.

Secondly, you announced the deal with Jumpstart Media in the quarter that looked pretty interesting. It is the first deal I have seen you guys do with another ad network, albeit a more specialized kind of vertical ad network. I was just wondering if you could update us on how that deal is going. Is it going to be significant to your financials this year or next? Just how it works with them -- what are you bringing to the table, what are they brining to the table, and do you see future deals with other vertical specialized ad networks in the future? Thank you.

James R. Zarley

First, on the stock buyback, we bought around 6.9 million shares. That is actually to yesterday, I believe. We should have somewhere in the range of about 65 million left in the buyback fund. We started off with about 18 million, 19 million. We then added 100 million and then later another 50 million, and I think we have spent just a little over $100 million in buying back stock. So we still have a considerable amount left there in the buyback. As long as our stock continues to be undervalued, we would probably continue to utilize that. We will see what happens going forward.

On the Jumpstart agreement, it is really very early stage here, but it is a little different than what we have done in the past in that we are providing traffic in this case, and Jumpstart is actually providing the sales force. We are very excited about the opportunity, but it is still very early on and just beginning, so as far as doing any more of that going forward, I would be delighted if we could find more situations like that going forward for the company.

Operator

Thank you. We will next to Youssef Squali of Jefferies & Co.

Hagit Reindel - Jefferies & Co.

Hi, this is Hagit Reindel for Youssef. First question to Jim -- you mentioned in your prepared remarks the move into more sort of agency like services, like creative and web development. Could you expand a little more on that? What the pricing model is, who you will be competing with and what the strategy is there? Thank you.

James R. Zarley

The strategy for us on this front is that we are always looking for more revenue streams in the company, and up to this point in time, over the last couple of years, the affiliate marketing business was growing at the rate and we are just trying to keep our growth in track with hiring the number of people that we needed. We believe though that we have really been giving up a percentage of the revenue in this area on the creative side, where we are already providing some of the consulting services, and after we do that, then we turn it over to some creative house, much like the agencies do today.

We just believe that if we start providing these services ourselves, there is a real revenue stream there for us that is incremental to what we currently do at this juncture. I am not quite sure what to expect of it yet. It is early, but it is a real number over time, that is for certain.

Hagit Reindel - Jefferies & Co.

Second maybe to Sam. First of all, on guidance, it looks like you are raising your comp line by pretty much the upside that came this quarter. Is there any kind of softness in the second half that you are building into your expectations, maybe due to economic conditions or anything like that? Or is this just conservatism on your part?

Samuel J. Paisley

We try to be realistic in our guidance, and from an overall standpoint, we feel that high-end guidance at 30% organic growth is a pretty attractive year for us. As I say, from a guidance standpoint, we want to be realistic.

James R. Zarley

The other thing on that front is that how much vision we have into clearly the future. We can see pretty clearly into the third quarter, but a lot of our agreements are really anywhere from 30 to 90 days. In some cases, we do have longer, but just trying to estimate what we know we have and what we can perform on now.

Hopefully in the next quarter we would be able to speak more positively about the fourth quarter.

Hagit Reindel - Jefferies & Co.

Lastly, Sam, just on sales and marketing, excluding the stock comp, it came in around 28% of revenue this quarter. Last quarter it was lower, and you mentioned that was because of one-time testing you were doing offline. How should we think of that going forward? Is the 28% level sort of where you expect it to continue, or were there any one-time things that happened again this quarter?

Samuel J. Paisley

Some of that has to do with the mix between advertising that is occurring across the network from a display ad standpoint versus lead generation activity, which occurs to a large degree on sites that we host.

So a lot of the revenue upside was indeed a part of the great collaboration happening between our lead gen units and our display ad networks, but a good deal of that traffic came across sites that we hosted, so therefore there was a fairly large amount of traffic buys on the media or on the marketing and sales expense.

We were true to our statement that we did not expect to repeat any branded advertising in offline medium buys in the second quarter. That is still on a moratorium.

Operator

Thank you. We will go next to Aaron Kessler of Piper Jaffray.

Aaron Kessler - Piper Jaffray & Co.

A couple of questions for you. First, can you give us a sense of maybe how far or where you are at in terms of the monetization process for the media segment, either Fastclick or integrating the rest of the business, and how much more monetization improvements are there.

Secondly, I guess G&A was also down, it looks like $1 million, if you ex out the one-time charges that are a gain from this quarter and a loss from last quarter. What will it do to that factor?

Also, on affiliate marketing, should we expect similar growth rates for the rest of this year? Is there any accelerated growth as you start to anniversary the eBay business? Thank you.

Samuel J. Paisley

Three-part question -- let me make sure I have all the components. What is left to be had in terms of monetization across the Fastclick network, there appears to be a G&A decrease beyond the benefit on the legal settlement and what kind of growth rates are we expecting in affiliate marketing going forward.

The most difficult question you have asked is really the Fastclick monetization. There is still upside available to us there. I think we have made some progress, but part of what has happened is at the tail-end of the first quarter, we really fully integrated publishers coming over from Fastclick from what we previously had in the ValueClick media network, so those teams are working together and quite frankly, they are working not only on display ads but on the lead generation side with the other managers within the company.

Progress has been made. There is still some upside yet to go.

In terms of the G&A decrease, you will recall that in the first quarter, we had a fair amount of Sarbanes-Oxley compliance work, as well as intense activity in our annual audit, including the restatement that we were undergoing. We have had some benefits of not having those types of recurring professional fees in the second quarter.

Lastly, with respect to affiliate marketing, overall without the effects of eBay, we are really thinking that full-year is in the high-20’s range, if you will, in terms of growth rates. Including eBay, probably something that is in high-teen’s, or just south of 20.

Aaron Kessler - Piper Jaffray & Co.

Thank you. Finally, could you just give us a sense of what ending share count was in the quarter, and if you bought back any shares in Q3?

Samuel J. Paisley

There was a slight difference there. I will have to actually do that calculation and we will push that out a little bit later on.

What we did announce is that as of the end of July, we had spent up around $103 million in total and the cut-off by the end of the quarter was $88 million, I believe. You could probably run the math yourself, Aaron, but we will clarify that question in the near-term.

Operator

Thank you. We will go next to Heath Terry of Credit Suisse.

Heath Terry - Credit Suisse First Boston

Thank you. I was wondering if you could talk a little bit about the monetization that you are seeing, both in terms of the commission junction business as eBay, as you see the business around eBay decline. Is there a change in the overall pricing that you are seeing with the affiliates? How should we expect that to trend going forward?

Samuel J. Paisley

A lot of what you see in our affiliate marketing revenue is the impact of eBay in terms of growth rates. As we mentioned earlier, if you call out those affects, its organic growth rate of about 23%.

We have not really seen anything major happen with respect to pricing relative to RFP’s overall. As Jim mentioned, the business continues to be strong. It is growing a bit more rapidly in Europe because of our new venues that we have introduced the product to there, but no specific changes in pricing overall for clients outside of eBay.

Operator

Thank you. We will go next to Michael Prospero of ThinkEquity Partners.

Michael Prospero - ThinkEquity Partners

This is Michael for Stuart Berry. Have you noticed a shift from a CPC to more of a CPN model as more brand marketers are moving dollars online?

James R. Zarley

Michael, we have not seen that happen. I would say it is more -- what we do here, at least, is primarily CPA, the overwhelming majority of what we do through all of our media products are CPA. Then I would say second would be CPN, and then followed by CPC.

Michael Prospero - ThinkEquity Partners

You talked about how you would like to enter the Asian market. Is it more likely that you will partner, acquire or try to grow organically?

James R. Zarley

I think it is going to be a partner. I do not think it is going to be organic.

Operator

Thank you. We will go next to Sameet Sinha of Kaufman Brothers.

Sameet Sinha - Kaufman Brothers, L.P.

A quick question, on the link management interchange, could you give us an update on that? My second question was regarding the higher sales and marketing costs. Is that something we should expect going forward? What is the scale? Right now, you are getting great synergies that goes with media buys. How long do you think you will be able to sustain that?

James R. Zarley

Let me speak to link management, this is in reference to commission junction. What we have started to do is try and get our publishers to move their tags over to their JavaScript, because we believe that over time that it is going to be demanded more and more on the advertiser side. We are not mandating it, however, and it could take a considerable amount of time to do such a migration.

We got a response loud and clear from our publisher that they are not willing to do this on a wholesale basis, but we believe that over time, maybe it takes a year or two, that this will be the way that the market will go. So we are going to be patient with it. Right now, we are just working with our publisher on a one-to-one basis, and eventually I would anticipate that we will get there over time.

What was the next question?

Gary J. Fuges

The next question, Jim, I believe was we have seen some additional marketing expense attributable to traffic buys for lead generation. What do we see in terms of a trend moving forward there?

James R. Zarley

I believe that will increase, because we have been buying more and more traffic as the lead generation business is growing, so I would expect that to grow moderately over the next couple of quarters.

Samuel J. Paisley

The thing I would note that in terms of the dynamics in the margins in both our lead generation as well as our display business, you can see the gross margins are attractively expanding so far this year, and that in terms of our overall operating margin, that we have sustained that quite nicely, so it has not been a matter of sacrificing margin to generate traffic.

Sameet Sinha - Kaufman Brothers, L.P.

As a quick follow-up, most of the private lead generation players have been hurting for the first-half of this year. You managed to grow, and that is a good thing. Can you talk about how you differentiate yourself on a lead generation strategy?

James R. Zarley

I think primarily it would be attributable to the significant sales force that we have in the field, that is going in and sitting down with advertisers and designing with them what the best play is for them and how they are going to get the best result -- even putting together a campaign whereby we provide a combination of lead generation and display.

I think the differentiating factor is that, for one, and second, I think it is the technology that we acquired when we came together with Webclients. We believe that is a world class technology and it is actually beating the competition out in the marketplace.

Samuel J. Paisley

I would also say that many of the private lead gen companies that we are aware of have actually done pretty well this year. So it is not an across-the-board kind of situation.

James R. Zarley

It is a mix. Some of the lead gen’s have fallen by the wayside, and some of them are doing very well.

Gary J. Fuges

Operator, how about if we take one more question?

Operator

Thank you, sir. We will take our last question from Matt Hewitt of Craig-Hallum.

Matthew Hewitt - Craig-Hallum Capital Group

Quick question -- delivering video ads appears to be rising in importance to advertisers, and I was wondering what you are doing to improve your offering?

James R. Zarley

We have not really talked much about that, Matt, but we are looking at it. I would anticipate that in our next call, you will hear some announcements from us concerning video.

Matthew Hewitt - Craig-Hallum Capital Group

Thank you.

Operator

At this time, I would like to turn the conference back over to Mr. Zarley for any additional or closing remarks.

James R. Zarley

Thanks, everybody. We look forward to talking to you next quarter. Hopefully we will bring back some similar results that we have shown you this quarter. Thanks a lot.

Operator

Thank you for participating in today’s ValueClick second quarter conference call. A replay of today’s conference will be available beginning at 4:30 p.m. Pacific time today by dialing 888-203-1112 or 719-457-0820. The access code for the program will be 6522400. This replay will be available through August 8, 2006. Thereafter, the call can be accessed on ValueClick’s website at www.valueclick.com.

Thank you for your participation. You may disconnect at this time.

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Source: ValueClick Q2 2006 Earnings Conference Call Transcript (VCLK)
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