ValueClick Beats on Increased Revenue

| About: Conversant, Inc. (CNVR)

ValueClick Inc.’s (VCLK) fourth quarter 2010 earnings beat the Zacks Consensus Estimate of 23 cents per share by 6 cents. Earnings (including stock-based compensation but excluding amortization of intangibles) were 29 cents per share, up 26.1% year over year from 23 cents per share reported in the prior-year quarter.

Earnings on a non-GAAP basis (excluding both amortization of intangibles and stock-based compensation expense) came in at 31 cents per share, well above m anagement’s guidance of 27 cents to 28 cents. This was also above last year’s earnings of 25 cents per share.

Better-than-expected earnings in the quarter were primarily due to higher revenues, reduction in operating expenses and improved margins.

Revenues, adjusted EBITDA and earnings per share exceeded the high end of management’s guided range provided last quarter. The shares were up 11.4% or $1.69 at $16.49 after hours.


Revenues increased 16.6% year over year to $128.7 million in the quarter. The reported revenue was also ahead of management’s guidance range of $122.0 to $126.0 million and the Zacks Consensus Estimate of $125.0 million.

Revenues were primarily driven by strong growth in the Affiliated Marketing segment (28.1% of total revenue), which grew 14.7% year over year to $36.2 million. The growth was driven by higher transactional volumes in the commission junction marketplace, in which ValueClick holds the number one position.

Owned and operated revenues (33.2% of total revenue) increased 34.6% year over year to $42.7 million in the quarter.

Media (32.4% of total revenue) grew 3.9% year over year to $41.7 million in the quarter, while Technology (6.6% of the revenue) increased 13.0% year over year to $8.5 million in the quarter.

Operating Performance

Gross margin increased 700 basis points to 72.5% in the fourth quarter, primarily attributable to lower cost of sales and higher revenue. Operating income increased 23.9% year over year to $32.7 million, primarily based on lower operating expenses. Operating margin expanded 150 basis points to 25.4% in the fourth quarter.

Adjusted EBITDA increased 19.0% year over year to $41.9 million and was 32.5% of revenues in the fourth quarter. This was above ValueClick’s guidance range of $39.0 to $40.0 million or 32.0% of revenue at the midpoint.

Balance Sheet

ValueClick exited the fourth quarter with no long-term debt. Cash and cash equivalents were $197.3 million compared with $164.0 million in the previous quarter. In 2010, the company generated $90.0 million in free cash flow.


Guidance for the first quarter exceeded analyst’s expectation. For the first quarter of 2011, ValueClick expects revenues in the $111–$113 million range.

Year-over-year, the company expects revenue from Media and Affiliate Marketing to grow in the low double-digit percentage range. Owned & Operated websites are expected to increase in the high 20s to low 30s percentage range. Technology is expected to grow in the low to mid single-digit range in the first quarter.

Adjusted EBITDA is expected in the range of $31.0–$32.0 million, which represents an adjusted EBITDA margin of 28.0% at the midpoint. Earnings on a GAAP basis are projected in the range of 16 cents to 17 cents per share, while earnings on a non-GAAP basis are expected to be in the range of 21 cents to 22 cents.

The Street was expecting $107.8 million in revenues and 17 cents per share in earnings at the time the results were released.

Our Take

Strength in the Internet advertising industry, increasing ecommerce spending,growing display ad trends in the U.S., synergies from the Investopedia acquisition, share repurchases, impressive cash flow and debt free balance sheet are positives.We also remain upbeat on ValuClick’s growing Affiliate Marketing segment and a rebound in its Owned and Operating segment.

However, intense competition from Google Inc. (NASDAQ:GOOG), Microsoft Corp. (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO) are areas of concern. Although we expect the company to deliver improved results in 2011 on an accelerating top line, we maintain our Neutral rating on the stock awaiting sustained growth.

The stock is currently a Zacks #2 Rank, which translates to a short-term Buy rating.