ValueClick Q1 2007 Earnings Call Transcript

TRANSCRIPT SPONSOR

ValueClick, Inc. (VCLK)
Q1 2007 Earnings Call
May 3, 2007 4:30 pm ET

Executives

Gary Fuges - Manager of Investor Relations
Jim Zarley - Chairman and Chief Executive Officer
Sam Paisley - Chief Administrative Officer

Analysts

Mark Mahaney - Citigroup
Youssef Squali - Jefferies & Co
Bill Morrison - JMP Securities
Heath Terry - Credit Suisse
Imran Khan - J.P. Morgan
Aaron Kessler - Piper Jaffray
Kyle Evans - Stephens Inc.
Christa Quarles - Thomas Weisel Partners
Eric Martinuzzi - Craig-Hallum
Mark May - Needham & Co
Stewart Barry - ThinkEquity Partners
Sameet Sinha - Kaufman Brothers
Denise Garcia - A.G. Edwards
Richard Fetyko - Merriman Curhan Ford & Co.
Jordan Rohan - RBC Capital Markets
Mark Bacurin - Robert W. Baird
Martin Pyykkonen - Global Crown Capital

Presentation

Operator

Good day everyone. My name is Dustin, and I will be your conference facilitator today. A replay of this call will be available by telephone beginning at 4.30 pm Pacific Time today, and maybe accessed through midnight Pacific Time on May 9th. 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 website. 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-answers session. If you would like to ask a question. (Operator Instructions)

And now at this time, I'd like to turn the call over to Mr. Gary Fuges, Manager of Investor Relations for ValueClick Incorporated. Please go ahead, sir.

Gary Fuges

Thank you Dustin and good afternoon. Welcome to ValueClick's First Quarter 2007 Financial Results Conference Call. Joining me on the call today are James Zarley, ValueClick's Chairman and CEO, and Sam Paisley, Chief Administrative Officer.

Today's call will contain forward-looking statements that in that involve risks and uncertainties including, but not limited to, trends in online advertising spending, and
estimates of future online performance based advertising.

Actual results may differ materially from the results predicted and reported results should not be considered an indication of future performance. Important factors 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 of the Securities and Exchange Commission made from time to time by ValueClick, including its annual report on form 10-K filed on March 1, 2007, recent quarterly reports on Form 10-Q and current reports on Form 8-K.

Other factors that could cause actual results to differ materially from those expressed or implied in the forward looking statements include, but are not limited to the risk that market demands for online advertising in general, and performance based online advertising in particular will not grow as rapidly as expected.

ValueClick undertakes no obligation to release publicly any revisions to any forward looking statements to reflect events or circumstances after the date here of, or to reflect the occurrence of unanticipated events.

With that, I would like to turn the call over to Mr. James Zarley, Chairman and CEO of ValueClick. Jim?

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Jim Zarley

Thank you, Gary. Good afternoon and thanks for joining us for ValueClick's first quarter 2007 conference call. I'll start with some comments on this quarter’s results, and then Sam will provide more details on the financials. I'll return with a few comments and then we'll take your questions.

ValueClick’s first quarter was a strong start to the year. Q1 revenue, adjusted EBITDA, and EPS all beat the high end of our guidance ranges. We continue to benefit from our scale and breadth in performance marketing solutions.

Reported revenue increased 34% year-over-year to a $156.9 million, $7.9 million above the high end of our guidance of $148 million to $149 million.

Pro forma organic growth was 33%, and all segments posted strong performance. Adjusted EBITDA was $41 million, $2 million above the high end of our $38 million to $39 million guidance range. And earnings per share was $0.18, it was $0.01 better than the guidance of $0.17.

The media segment had another strong quarter. Revenue increased 37% year-over-year, driven by the strength from all of our business. The network business continues to add to its audience and publisher base. It also added to its advertiser and market share, including new client wins with a number of major brands looking to run performance-based media campaign.

As we expected, video was a small part of our overall network business. Video revenue grew moderately, and we still anticipate it to show gradual growth overtime. Behavioral targeting was a more immediate contributor showing good performance, relative to media's typical seasonal patterns.

The lead generation continues to grow, thanks to our long standing leadership position in both performance and industry practices. I've been saying this for over a year, but I think its worth repeating, given some of the recent speculation. Our growth in lead generation is driven by our focus on high quality leads. Lead generation has been a part of online advertising from the very beginning.

These products are driven by demand from our advertisers and are paid for on a cost per action basis. So, for not meeting the ROI expectations, the demand would simply not be there. Some of these products are very similar to offline direct marketing and offers with one key exception. Our advertisers only pay when they get a qualified lead.

As in any business, there may be a few bad actors in the promotional area which is only a portion of this sector. And I anticipate as they are filtered out, that the overall opportunity in lead generation could increase.

We currently are members of the DMA and the IAB, and we are a participating member in the IAB lead generation committee. We consistently apply best practices, technology, and customer service to deliver quality leads to our advertiser.

We believe our disclosure and privacy policies comply with all Federal and state guidelines, and we have a legal team and a compliance team in place to monitor these practices.

In the comparison shopping area, we grew 55% year-over-year during the quarter. Growth continues to be driven by our European comparison shopping sites, and we're seeing good synergy between price runner and shopping.net sites.

Affiliate marketing grew 22% year-over-year, and we saw a record number of new account wins in the first quarter of 2007, and we expect to contribute revenue growth over the year, with particularly good growth in Europe and we anticipates those are expansion into new European markets between now and the end of the year. We are also taking a hard look at opening an office in Chicago.

One of the initiatives in growing affiliate marketing is people. We put a lot of focus on bringing new talent into commission junction, and we've made good progress in this area by expanding our presence and adding personnel, not only in Santa Barbara, but in New York and San Francisco as well.

Search engine marketing which falls under affiliate marketing division continues to grow and we expect this segment of our business to expand throughout the year. Technology had an excellent quarter with year-over-year growth of 29% that accelerated from 20% growth in the Q4. Tech growth has been fueled by enhancements in our rich media products or big management tools and tracking system.

Total revenue on the geographic basis was 31% in the U.S. and 50% in Europe. Europe accounted for 14% of the Q1 revenue and all full European business segments contributed to growth and in profitability.

Now I'd like turn the call over Sam for some more details on our quarter and our updated 2007 guidance. Sam?

Sam Paisley

Thanks Jim. Before I discuss our financial results, I want to mention that first quarter 2007 results include three months of activity from Shopping.net, which was acquired in December 2006. Shopping.net's contribution was immaterial to the quarters overall results.

In the first quarter of 2007, ValueClick generated revenue of $156.9 million, a 34% increase over Q1, 2006 revenue of $117.3 million. Revenue was $7.9 million above the high end of our guidance range of $148 million to $149 million. Gross profit was $109.9 million for the first quarter of 2007, an increase of 41% compared to gross profit of $78 million for Q1, 2006.

Gross margin expanded to 70% in the first quarter of 2007, from 66.5% in first quarter of 2006. Gross profit and gross margin improvements were primarily due to improvements in the company's media gross margin since the Fastclick acquisition, and an increase in the mix of lead generation revenue in 2007.

Operating expenses excluding stock-based compensation and amortization expense totaled $71 million or 45% of revenue in the first quarter of 2007, compared to $53 million or 45% of revenue in Q1, 2006. These operating expenses increased primarily due to additional marketing expense in support of our media revenue.

Stock-based compensation in aggregate was $3.6 million in the first quarter of 2007, compared to $3.3 million in 2006. Amortization of intangible assets was $5.8 million in the first quarter of 2007, compared to $5.7 million in 2006.

As a result of this performance, the company generated operating income of $29.2 million in Q1, 2007, an 81% increase from $16.1 million in 2006. Operating margin increased 480 basis points to 18.6% in the quarter, versus 13.8% in the year ago period.

Net interest income was $2.9 million for the first quarter of 2007 compared to $1.9 million in Q1, 2006, due primarily to higher cash balances and improved investment yields on our marketable securities portfolio.

Income tax expense for Q1, 2007 was $13.5 million, with an effective tax rate of approximately 42%. These figures resolved in first quarter 2007 net income of $18.6 million or $0.18 per share based on a weighted average number of 101 million diluted shares outstanding. EPS was $0.01 above our guidance of $0.17.

Adjusted EBITDA was $41 million for the first quarter 2007, $2 million above the high end of our guidance range of $38 million to $39 million. Adjusted EBITDA margin are 26.1% for the first quarter, expanded 280 basis points from 23.3% in the year ago period.

A consolidated balance sheet as of March 31, 2007 remained strong with $334 million in cash, cash equivalents and marketable securities, approximately $671 million in stockholders equity and no long term debt. Capital expenditures were $1.8 million in Q1, 2007.

I will now discuss the first quarter performance of each of our four worldwide business segments. Today's press release includes a table of segment level financial performance. Segment operating income excludes its corporate expenses, amortization of intangibles, and stock based compensation.

Worldwide media revenue increased 37% to $108.4 million in the first quarter of 2007, due to strength in both our U.S. and European media businesses. Lead generation remained strong in the U.S. market, and we continue to benefit from our leading display advertising network.

Media's gross margin of 64.5% improved from 57.5% in Q1, 2006 due to improvements in display at network margin, and an increase in the mix of lead generation revenue in 2007. Segment operating income increased 39% year-over-year with a Q1, 2007 margin of 23.8% improved from 23.4% in the year ago quarter.

Worldwide comparison shopping revenue increased 55% to 8.6 million in the first quarter of 2007, primarily due to strong growth in established markets, contribution from emerging positions in Germany, France and the U.S., and the inclusion of the results of Shopping.net.

Adjusting for the December 2006 Shopping.net acquisition, Pro forma organic growth was 38%. Gross margin of 84.3% declined from 94.7% in 2006 due to an increased mix of distribution partner revenue.

Segment operating margin expanded 6.3% from a negative 2.2% in the year ago quarter due to improved operating leverage and a decline in offline marketing spend from the year ago quarter.

Worldwide affiliate marketing revenue increased 22% to $32.8 million in the first quarter of 2007, due primarily to strength in both the affiliate marketing and search businesses. As we have mentioned, we report revenue related to affiliate marketing industry and SEM services on a net revenue basis.

Gross margin of 81.8% declined from 84.7% in 2006, due primarily due to increase from [extra] search business. The segment operating income increased 22% year-over-year, with segment income margin of 51.7% in both Q1, 2007 and 2006.

Worldwide technology revenue increased 29% year-over-year to $7.5 million due to growth in both U.S. and Europe.

Gross margin of 80.6% expanded from 77.1% in 2006, and segment operating income increased 89% year-over-year. Segment income margin expanded to 34.5% in Q1, 2007 from 23.7% in the prior year.

Today we are raising the mid-point of our 2007 full year guidance, and providing second quarter 2007 guidance. For the second quarter 2007, ValueClick anticipates revenue in the range of $157 million to $159 million, a 21% to 22% increase from the strong second quarter 2006 revenue of $130 million. And a pro forma organic year-over-year growth rate of 20% to 21%.

We anticipate adjusted EBITDA in the range of $40 million to $42 million for the second quarter of 2007, with an adjusted EBITDA margin of approximately 26%. We anticipate diluted net income per share of $0.17 to $0.18, including stock-based compensation expense of $0.03 per common share based on an expected share count of approximately 102 million diluted shares outstanding.

For full year 2007, we now expect revenue of approximately $655 million to $665 million, which represents 21% growth at the mid-point compared to 2006 reported revenue.

Organic growth year-over-year is anticipated to be in the range of 19% to 21%. We expect adjusted EBITDA in the range of $177 million to $182 million, with an adjusted EBITDA margin of 27%.

We anticipate diluted net income per common share of $0.79 to $0.81 including stock based compensation expense of approximately $0.12 per common share, based on an expected share count of 103 million diluted shares outstanding.

The full year 2007 guidance assumes approximately $21 million in amortization of intangibles, $10 million in depreciation, $19 million of stock-based compensation, an effective income tax rate of 42.5%, and capital expenditures of $10 million to $12 million.

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

Jim Zarley

Thank you, Sam. Thanks everyone who have joined us on the call today. I am pleased with our Q1 performance. In 2007 we continue to expect to grow at least as fast as the industry, while first expanding our adjusted EBITDA margin and investing in future growth.

To me the recent M&A events validate what our strategy’s been all along. Develop a broad base of online performance marketing solutions that help businesses achieve something that they have always wanted. A way to target and measure the effectiveness of their advertising spend.

The vast majority of our business is CPA-based. Virtually everything we do is tracked and measured by our advertisers. Our diversity in technology solutions differentiate us and make us a major player in our segment of the market.

Our objective has always been to take the risk out of the buying decision. We do all these things without creating a conflict with our publishers or advertisers. Our technology platforms are optimized to improve monetization. Our account management team bridged the gap between technology and client satisfaction, and our performance-based solutions deliver high quality results for advertisers and publishers.

Our position in the industry coupled with the industry sector of growth provide us with a great opportunity for future growth. I’m pleased with our Q1 results. I’m looking forward to driving additional success this year and beyond.

And we’ll now open the call to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And we’ll go first to Mark Mahaney with Citigroup.

Mark Mahaney - Citigroup

Great. Thanks Jim, Gary, and Sam. I want to try to wrap two questions into one. Your guidance for the June quarter of 20% to 21% year-over-year organic growth seems hard to believe given the 30% plus growth you’ve had for the last couple of quarters.

Unless you're seeing hesitancy in the market because of those M&A deals that Jim you just mentioned. Is there anything that you're seeing? Are you seeing hesitancy now with perhaps different solutions coming at the marketplace and advertisers unwilling to commit or is it that you're just trying to be reasonably conservative about the June quarter? Thank you.

Sam Paisley

Mark this is Sam. We always try to be reasonable in our guidance. But the main thing that influences our guidance for the second quarter of this year has to do with the real strong comp we are going against in the second quarter of last year.

If you recall in 2006 between the first and second quarters, we had pretty expensive growth in our media segment in particular. And a lot of that had to do with the integration synergies that we were foreclosing on, that came to us through both the Fastclick and the WebClient acquisition.

And the guidance in the second quarter this year has most to do with our tough comp, and the fact that that integration efficiency if you will was something that provided us a very significant boost in the second quarter of last year.

Mark Mahaney - Citigroup

Great. Thank you very much.

Operator

We'll take our next question from Youssef Squali with Jefferies & Company.

Youssef Squali - Jefferies & Co

Thank you very much. Good afternoon. Couple of questions. So, first, not to beat a dead horse, but I want to go back to the quality of the lead gen business. Really just following up on a number a press reports stocked in by the FCC, potentially investigating some aggressive practices out there. How realistic is that risk for your WebClient business in particular? What are you doing to mitigate it?

And my second question is, if I look at your incremental EBITDA margin in your guidance for the year, it implies about a 20% level, whereas you just delivered 26%. The mid-20 seems to be kind of a comfortable level for you, why 600 basis point below what you've done?

Jim Zarley

Youssef, I'll take the first part of the question concerning the lead gen business. We are not aware of any imminent legislation, but we do have people on staff who are tracking any potential developments. As in the past would be heavily involved as we have been in the past with [Camspam] and Spyware business and these kinds of things. So just like we are not aware of any imminent legislation, but we will monitor and to some degree I think may not all be bad because it could call out some of the bad actors that are in that space.

If you are referring to this note that’s out regarding aggressive lead generation practices. We've not been involved in that and we have not been investigated by the FTC on that issue.

So I do believe that this area, since the way we charge the advertisers is on a CPA basis. Obviously they would not be buying if it wasn't brining them the results that they are look for. And the largest complaint that I've said time and time again that, we have ever gotten is that we can’t give enough leads because there is a limit to just how much you can really do effectively.

So my feeling is that lead generation is a component of what we do, it’s one of those things that we do in our company. It will continue to there for the long time. I do think that there are a few people in the place in this space that needs to be called out. And when we do, I think it will just make it a better place. Much the way Spyware and [Camspam] have.

Sam Paisley

And with respect to the second part of your question Youssef. With regard to full year guidance, we have projected EBITDA margin of 27%. Currently in the first two quarter it is expected around 26% or so plus. Some of the things that we have to benefit us in the back end of the year are leverage in the fourth quarter, as we've seen historically. And there are some aspects of the overall corporate G&A spend that we haven't seen the benefits we are anticipating in full year 2007 just yet.

We still had heavy spend in particular, in the areas of audit and consulting fees related to our controls systems because in the first quarter of this year we were finishing up those activities. So some of that benefits we are anticipating in full year yet to come.

Youssef Squali - Jefferies & Co

Just as a clarification the 20% incremental EBITDA margin I was referring to is really just looking at the increasing guidance in EBITDA or adjusted EBITDA over the increase in guidance for revenues that helps.

Sam Paisley

Okay.

Gary Fuges

Next question Operator.

Operator

We will take our next question from Bill Morrison with JMP Securities.

Bill Morrison - JMP Securities

Hi, want to get back to not the second quarter guidance but may be for the full year and beat a dead horse. It looks to us like, even for the full year not just for the second quarter that your guidance implies a pretty significant slow down from the quarter which was great. And I don't know if you saw AOL or [Z.com] revenue was down organically 1500 basis points this morning. You obviously didn't see that in the quarter.

I am just wondering if you could comment with a little more detail on what is driving your guidance? Looks like you are just assuming the upside in a quarter to get to the higher guidance for the year but not counting on much more upside beyond that. Can you just give us little bit more clarity there? Thanks.

Sam Paisley

Yes. So on the question of full year guidance, first off just to reiterate there was a pretty significant acceleration between Q1 and Q2 of last year, because of the synergies afforded to us and in the integration of both Fastclick and WebClient.

We are still counting on some seasonal uplift in both the third quarter of this year, as well as the fourth quarter. This is not incredibly unlike what we experienced in 2006. So if you were to apply the guidance we have for second quarter this year, and apply the seasonality percentages that we have experienced in 2006. You would be pretty much spot on the mid-point of our guidance range.

Bill Morrison - JMP Securities

And maybe one quick follow-up for Jim. You mentioned that you were looking at an office potentially in Chicago. I’m just curious if that has anything to do with DoubleClick sale to Google and the Performix business there. Do you think you can gain some competitive advantage, now that, that business is becoming a part of a much bigger business. And maybe could you provide us with just some general comments about that deal and how you think it might or might not impact your business.

Jim Zarley

Yeah sure, Bill. No it doesn’t have anything to do with it. The Midwest is really a very large direct marketing area, and a lot of direct marketing companies are selling right throughout the Midwest corridor.

I would like to think that maybe we forget some synergy out of the acquisition, but that's not the motivator. We wanted to get a presence in Chicago for some time. We do have probably a half dozen employees there, and it really makes sense for us to, give them the size of that market, to have a much bigger presence. So I think that's really the driver.

And yeah there are perhaps some personnel in that area that we’d look to try and pick up that along with some of our competition. I think you had asked about that transaction between Google and DoubleClick. We don’t really see an effect on our business. We thought maybe there might be a bit of lift in our technology side because some of the current client that use the DoubleClick may want to be connected, given that they could be competitors directly.

But I don’t see that as a huge item either, because a lot of those clients are publishers, very large publishers, and that’s a pretty tough rule to make. I'm not sure I see where the great advantage is given that all of the data and all the use of information really belongs the publisher and advertiser who is being served by DoubleClick.

So I'm not sure what we don’t know, but we scratch our heads on the whole issue.

Operator

We'll go next to Heath Terry with Credit Suisse

Heath Terry - Credit Suisse

Great, thank you. Just wondering if you could just give us an update on where you are in the video advertising front, what kind of demand you are seeing, how much of your inventory and your publisher network currently is video or has the capability of doing video?

Jim Zarley

It’s really not going as quickly even as we imagine. We thought it would be a very slow process, but there really is a lot of work still to be done in building out our network, and I think also building out some of the features of what our technology does and how it does it.

I still don’t anticipate that in the next two quarters that we'll see much lift there, but overtime this will be an area that becomes another channel for us with all the other things that we do.

Heath Terry - Credit Suisse

Great, thank you.

Operator

We'll go next to Imran Khan with J.P. Morgan.

Imran Khan - J.P. Morgan

Yes, hi. Thank you very much for taking my questions. Two questions, one is sort of housekeeping. You talked about your comparison shop and gross margin is down because of partnered mix increase. Can you talk a little bit about, how we should think about going forward if the partner mix will remain this high?

And secondly media margins expansion seems to be supported by increase in lead gen business. Can you give us some color like the mix between lead gen business and display advertisement business? And do you expect to see lead gen business going faster than the display over the next few quarter's? Thank you.

Sam Paisley

So let me take the last question first. In terms of the mix between display and lead gen, we'd expect to see growth rate that would be similar to the two as apposed to one over coming the other in future quarter's.

And with respect to the comparison shopping, obviously there are two factors in terms of partner payments. One, the Shopping.net property has affected margins in terms of the mix as well as the MSN arrangement we have in UK and in France.

And although there is potential to grow those kinds of distribution relationships, we feel that because of the growth initiatives, we do see an improving margin through our net margin if you will throughout the course of the year.

And as we've said earlier, we expect that for the comparison shopping business in the longer run than a normalize margin could be higher on an EBITDA basis than the company's average.

Youssef Squali - Jefferies & Co

Thank you.

Operator

We'll go next to Aaron Kessler with Piper Jaffray.

Aaron Kessler - Piper Jaffray

Guys a couple of question. First there has also been a lot of media tension in the last few months on kind of the ad exchange models. Will be interesting to get your take on; one, do see exchanges today? Do you believe there is kind of need for these ad exchanges? And what may be misunderstood if any thing abut on how they work.

And also I had some secondary. Can you give us an update on where are your investments that you are making your technology business. I think a couple of quarters ago you said you would be increasing that investment as well. Thank you.

Jim Zarley

Yes. Let me take the first part. So far as ad exchanges are concerned, its not something that ValueClick does right now, because most of everything that we do in our network is really trying to monetize and put to use that traffic that we currently represent.

So as we represent the publisher, our intent is to try and fill as much of publisher network as we possibly can, by selling it to an advertising that converts very well. Now on the other hand, we certainly see the strategy in the manner to what Yahoo is doing with their ad exchange. If we had a very large portal that had a lot of unsold inventory in it, an ad exchange probably makes some sense.

Let me tell you something, it makes a lot of sense. But at the same time and compared to what we do here, most of everything we do is on a CPA basis. We believe in some way if you have an ad exchange that is a primarily a CPM buy by an advertiser and sold by a publisher, that you are in some ways stepping back into what the offline business does.

It's more of a branding component, and it's very hard to measure. So I can certainly see the marriage if you have a lot of unsold inventory because it’s basically saying, lets put it in to the exchange and see what it can do because it's not been sold any way. Does that answer your question?

Aaron Kessler - Piper Jaffray

Yes it does.

Jim Zarley

Yes.

Sam Paisley

The only thing that I'll add to that Aaron is that, it's hard to say exactly what will happen with exchanges because there is not a lot of existing exchange that one could look at, and say it's working if you will.

But as Jim mentioned, if large portals with copious amounts of inventory decided to clear that by listing it on an exchange in an auction model on a CPM basis. I still believe it could be an opportunity for us from the standpoint that the prices would be quite attractive, they have been for large-scale properties of that nature. And for people like us that have the additional assets to take the raw opportunity in buying a CPM encounter with consumer on a broad based property, we have the additional data and technology to turn that into an event for an advertiser, where they can good return on a CPA priced basis.

So if it works out to be an efficient market where there is not a great deal of mark-up and large amounts of inventory are available, it maybe a very attractive proposition for us. But that kind of inventory has not been cleared through that kind of mechanism in the past certainly not successful.

Jim Zarley

And the other point would be that, if we are wrong about this concept and it makes sense for us to do it, our technology is really positioned very well to do it. I would say in 3 to 6 months we could have an ad exchange up because we've got all the building blocks inside our current technology to do it.

So if we would have thought we could have got $850 million to do that, we might have done that a little earlier. But the point I want to make here is that, we can certainly build an ad exchange, if that is where the market is going over time. We've been more about direct marketing, we've been more about CPA, and performance based marketing all along.

Aaron Kessler - Piper Jaffray

Alright, thank you.

Jim Zarley

Okay.

Operator

Our next question comes from Kyle Evans with Stephens.

Kyle Evans - Stephens Inc

Hi, Jim, Sam and Gary.

Gary Fuges

Hi Kyle.

Kyle Evans - Stephens Inc

Would you mind giving me a little bit more detail on trends in the affiliate marketing segment specifically, maybe some new merchant wins and some metrics there, what you are saying in terms of competition and any potential pricing pressure you might see out there? Thanks.

Jim Zarley

I guess there has been just a little bit of pricing pressure Kyle. But one of the constraints that I think we've had is more on the personnel side. And in the last two quarters we've really focused in that area and the team has done a great job in expanding these markets up.

Now, you haven’t seen it, yet in a lift of revenue because these people have just come on board say here in the last three to four months. But we've expanded our presence in the San Francisco market, we’ve expanded our presence in the New York market and we've put a significant team, larger team in place in Santa Barbara and in Marlborough, Massachusetts. So, these folks are revenue generating people who overtime will help that growth.

Kyle Evans - Stephens Inc

Are they revenue generators in the sense that they are direct sales people or are they working on the full service side of CJ or are they doing SEM?

Jim Zarley

Well two things. They are working on the full service side, not so much as increasing the direct sales force, but its more taking that which direct sales force is selling and putting more effort into helping those new clients ramp their sales up much more quickly and finding them, the right publishers and working with them on things like creative and things of that nature, that really get that ramp of revenue up much quicker.

Typically a new client that comes in will take three to six months to depending on their size to really come to maturity so for us how the revenue is going to ramp. And we were just under resourced not because we are willing to spend the money, but because it's been a very competitive market place for personnel.

And in many cases where we had great clients, those clients would in some cases hire those personnel into their own organization. And it was not all bad, it was helpful because it deepened our relationship with client, but we had to replace those people. So that's been a challenge for us, and I think we're making head way with it and I am optimistic about how that will play out over the next few quarters.

Sam Paisley

The only thing I would observe is the top side level Kyle. Is that -- the names of the major players and certainly the U.S. and Europe and I guess for that matter Asia haven't really changed in some substantial period of time.

There have been ownership changes, there have been approaches to large scale transactions like TradeDoubler encountered in Europe. And there have been some internal changes in leadership in organizations like LinkShare and TradeDoubler. But it hasn’t really changed the pecking order if you will as to the major competitors.

So in that regard, there really haven't been any major changes in the affiliate marketing management services sector in some time.

Jim Zarley

In Search Engine marketing we have been putting some resources in there as well. And that's coming long. I think you'll see some growth in that area between now and the end of the year. And that's all in the affiliate marketing space where we are providing search engine marketing services too. The 1700 advertisers that we currently have.

Kyle Evans - Stephens Inc

And you are still anticipating kind of a mid 20% growth rate of that affiliated segment?

Jim Zarley

Yes.

Kyle Evans - Stephens Inc

Great, thank you.

Operator

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

Christa Quarles - Thomas Weisel Partners

Hi, quick question. Just following up on the Yahoo purchase of Right Media, it sounded like the comments around price discovery that they made were indicative of perhaps an increases to pay the play if you will. So the first question would be on the sustainability of the spots that find out there.

And then I guess the second question is a broader one in the sense that, if the exchanges are successful in theory it reduces size as being the competitive advantage. And so I guess my question to you would be, as you look at the other resources of competitive advantage around sales force efficiency, audience customization, behavioral targeting etcetera. What would you highlight as being the primary area of competitive advantage for you as you participate in the ad market? Thanks.

Sam Paisley

Yes. I think the two dimensions of your question are really -- there is a suggestion exchanges could potentially increase pricing. And in terms of exchanges do they actually level the playing field than reduce scale advantages? On the pricing front I think that traditionally with Right Media in particular, they seem to have always operated in the very long tail. So most of this evidence is mostly anecdotal in nature.

What I’ve heard from network sources and in presentations is a suggestion that the very long tail inventory might be improving slightly. But it still appears to be way off market for the average prices that we offer publishers in our network.

So the question of whether or not someone like a Yahoo would be willing to put large amounts of their either non-sponsorable inventory or unsold remnant inventory on a exchange and potentially jeopardize the rate card still remains to be tested from our perspective.

And I think what Jim mentioned earlier is that if the inventory becomes very widely available from Yahoo or other portal resources on an exchange. I think that creates an advantage to us. That’s not unlike what we experienced last year with the social community sites if you will.

When broad amounts of that inventory became available in large quantities, it was a real advantage for us, which gets to the second part of your question. I think if exchanges evolve to be of that nature, large amounts of copious inventory with very limited commissions on top for the provider of the exchange, then I actually think that’s going to increase scale advantages. Because scale is not just sized from our perspective, it's size and aggregating demand which is what we do in addition to aggregating supply.

But it also means that you have access to the various data points, on how various types of inventory perform. And I believe that we will still continue to be significant scale advantages in that regard. And I think the folks at the right have observed that. They are not planning to do much more than in a sense provide an access on an exchange.

But the other elements of doing a good job to bring a return on investment to an advertiser, of aggregating it into meaningful packages, doing adequate targeting, you'll still need a lot [exscertium] worth of experience in data to be able to do that efficiently, and its going to place a greater emphasis on demand side relationships and the ability to bring large scale demand to the exchange to bid competitively.

Christa Quarles - Thomas Weisel Partners

Okay, thanks. And just one quick follow-up. You did mention behavioral, I think Jim mentioned at the beginning part. I was just wondering if you could describe how you sell it and particularly in comparison to say how our revenue [plans] for Dakota sold their behavior?

Jim Zarley

Yeah, the behavioral targeting ties into what we had talked about early. And that most everything that we do is measured very closely by on an ROI by the advertiser. So, what our proposition has been from the very beginning is really, you call it that to drilling the oil and how deep can you go to get to richest vein.

So what we continue to develop our technology to help price out not on a CPM basis but on a CPA basis, so that our advertisers can really measure what their advertising spend is doing for them. That is to watch our gain. So as we continue to develop our technology and deeper into that well and do a better job of developing behavioral targeting. That’s where we feel our growth is.

Operator

We'll go next to Eric Martinuzzi with Craig-Hallum

Eric Martinuzzi - Craig-Hallum

Thanks. Congratulations on a terrific quarter.

Sam Paisley

Thanks.

Eric Martinuzzi - Craig-Hallum

My question is to deal with the cash. You've got $334 in cash, I am specifically looking for you to address A, the types of business you are looking at and then B just your current think on share repurchases? Thanks.

Jim Zarley

Eric I thought that, I thought we had a lot of cash until I saw these last two transactions. And what I thought we could go out may be and make an investment on, I am beginning to have second thoughts. But our intent as with cash is the same as it has always been, to use it to make smart acquisitions.

We've always had a mandate to acquire businesses or products that are accretive to our shareholders. That's becoming increasingly difficult. But we're going to keep our powder dry and utilize that cash when some of this settles down a little bit, and hopefully continue on the same path as we always been, to make accretive acquisitions that grow our company, and probably not add a lot of different products but add to the four segments that we currently have.

Eric Martinuzzi - Craig-Hallum

And then the share repurchase thinking?

Jim Zarley

We've done it now on several occasions, and I think it kind of fits. We look at share repurchasing similar to what we look at M&A. If it is the best buy in the business, and we feel compelled to spend our money on that or that is our best investment then we'll do it.

Today we have felt that there were acquisition opportunities up to this last few weeks. We felt that there were acquisition opportunities for us that we could better place and invest our money. But if it gets to the point where we feel that ValueClick stock is the best investment in the market we will do that.

Sam Paisley

Yes. I would like to reiterate, we do have $66 million worth of existing authority, and consistently managements has been able to go back to the board and get permission to extend that authority when it was appropriate under the circumstances.

And the other thing I would mention on the acquisition front. As Jim mentioned relative to the capability to develop an exchange, we do have some of the assets that we could consider that as organic opportunity for us. So fortunately for us we don't have to bid for that kind of asset.

And given where the money is being spend in the M&A market, it may provide an opportunity for us to look into other areas that still may be attractive from our perspective that have sort of fallen out of favor in the current M&A environment.

Operator

We will take our next question from Mark May with Needham & Co.

Mark May - Needham & Co

Thanks for taking my question. Just to follow on with the M&A question. It sounds as though Google may need to do something with Performix possibly sell it with that. Would you be interested in that business, seems like it would fit in well with the other?

Jim Zarley

Absolutely it could be very interested. That would solve two things we’d like to accomplish, expand our affiliate marketing business, give us presence in Chicago, but hopefully not at the same multiples that the [pace] is ever put.

Mark May - Needham & Co

Is that something that you are actively pursuing today?

Jim Zarley

No.

Mark May - Needham & Co

A little too early. Second question in terms of seasonality, the affiliate marketing services business over the last few years has tended to be seasonally down from Q1 to Q2. Would you expect that same pattern this year?

Jim Zarley

Yeah I think so Q2 historically has been one area that we've been able to point to, that is always the -- if there is a weakness it's always the weakest part of the year in Q2. It seems like either people who are getting ready to go on vacation or what have you. But it's certainly tied directly many ways to the retail marketplace.

Operator

We’ll go next to Stewart Barry with ThinkEquity.

Stewart Barry - ThinkEquity Partners

Good afternoon.

Gary Fuges

Hello Stewart.

Stewart Barry - ThinkEquity Partners

As the network achieves greater scale and as we get some more data in these behavioral targeting and so on. To what extent can you go out and acquire or take inventory risk to drive gross margins higher in the network business?

Sam Paisley

Yeah, good question. I think that there are two things that we have on the table that we're currently developing, that could put us in a very good position to do exactly. We've always stayed away from buying on one multiple and selling on another. Unless I could buy on the CPA and sell on CPM, that would be nice. But it's always been the other way around.

So we've been very cautious. We do a little bit of it now Stew. But there are some things that are happening in our technology development that between now and year end will enable us to do much more of that, and that is our goal.

Stewart Barry - ThinkEquity Partners

Great. Thank you.

Operator

We’ll go next to Sameet Sinha with Kaufman Brothers.

Sameet Sinha - Kaufman Brothers

Good evening. I had a question on affiliate marketing. You spoke about the trends pricing coming up. Could you comment on industry growth. What are you seeing there? Is the growth domestic or international? And then I have one follow-up question.

Jim Zarley

On the affiliate marketing, we've had some significant growth in Europe, but we've also had good growth here in the United States. And I would anticipate as the year goes out that you'll continue to see the U.S. market continue to grow because of our investment in personnel that we've mentioned earlier.

But then into '08, if we successfully get opened up into the three new markets that we are currently looking at, I think you'll see '08 jump in the European market pretty significantly as well.

Sameet Sinha - Kaufman Brothers

Okay. And in terms of search engine marketing services that you offer, are you offering this for affiliate marketers or these are standalone services for any other clients as well?

Sam Paisley

For both really.

Sameet Sinha - Kaufman Brothers

How would you say that growth is in that segment versus the core affiliate marketing business?

Sam Paisley

Well, in terms of the overall growth, the improved growth for us is really coming from the increased product offering, but also in the core affiliate marketing itself. As Jim mentioned earlier, we are consistently going into new venues across Europe for affiliate marketing and offering the full basket of services.

And with respect to growth rates, our perception is that Europe is growing faster than the U.S. in that segment, and we are growing even faster because of our growth initiatives if you will.

Operator

We'll go next to Denise Garcia with A.G. Edwards.

Denise Garcia - A.G. Edwards

Hi guys, nice quarter.

Sam Paisley

Thank you.

Denise Garcia - A.G. Edwards

You're welcome. I wanted to ask you about the video, and you had mentioned that mostly advertising in your network is on the CPA basis. And I'm wondering if that’s how you’re pricing video. I'm wondering if you see some issues there with pricing video on a CPA basis, generally that kind of advertising wins itself to more brand based creative, less call to action.

Do you see any changes there in your thinking of pricing advertising primarily on a CPA basis as you are entering the video?

Sam Paisley

Yeah, I do believe Denise that this is more of a branding product than a performance product. That a lot of original content owners are trying to figure out, how they can kind of garner the largest share of the value that's in that particular value chain.

And as a result it’s caused some thinking about the nature of the technology solutions to be a bit more complicated relative to implementation.

So these are things that we originally anticipated could happen. And so until there is a fair division of the total margin in the value chain allotted to distribution players, I guess this is going to continue to move slowly.

Jim Zarley

Yeah I want to just clarify that. This isn’t just a challenge for our growth, it’s really challenge in the entire industry. I think everyone is experiencing the same thing. So, I still thinks it’s going to do fine overtime, but we've got to see it from the very beginning that this would be an evolutionary change not a revolutionary change in the industry.

Denise Garcia - A.G. Edwards

Okay. And that does more complicated technology solutions. Would that be a cost that would come out in your technology line? And is that something that we should be thinking of increasing or are we pretty much inline with we are still in the [past]?

Sam Paisley

No, it’s a matter of the parties formulating new ideas about the specifications to the solution.

Denise Garcia - A.G. Edwards

I see.

Sam Paisley

So its kind of like wow, this is what we think we wanted and then we go after and do some development and then later on they say, well it would be better if it looked this way.

So as we talked about before, we believe an open technology solution in that area is going to be necessary. And there are going to be a lot of different players like content owners as well as distribution partners and advertisers that are going to give input to the spec. And so it's going to uptake a little bit longer period time for the spec to crystallize, and that's what we are dealing with.

It’s not a matter of we know exactly what we need to drive to and we are continuing to spend money on the same project. It's basically course changes because the standard quite frankly doesn't exist, and an open technology solution is going to be the one that's necessary.

Denise Garcia - A.G. Edwards

Okay. Thanks.

Operator

We will go next to Richard Fetyko with Merriman Curhan Ford & Co.

Richard Fetyko - Merriman Curhan Ford & Co

Hi guys. Curious about the lead generation business. You mentioned that the growth's been very healthy and that the advertising demand is high and really the constraint has been on the volume availability. If you could explain how do you grow this business? How do you grow the volume of lead?

Jim Zarley

Some of what we do Rich is very valued for [choice] been a B2B player, but we also have sites that we own. So we create in organization of some of our own content. But the lead generation business while it has grown very nicely, it’s been a nice synergy between ValueClick media, Fastclick and WebClient.

The lead generation decision is not for everyone. It is not fit, and in this particular area it really is probably many more about the publisher and their ability to have the content that will convert for the advertisers, because virtually 100% of what we are doing there is on a cost per action basis. And then it's also about generating the quality of lead that causes that advertiser to continue to commit on an ongoing basis.

So what will the growth be over time? I’m not sure. I think, we've got good synergy between the two, but we think it's leveling out, and the some of our other businesses are expanding. But I believe that lead generation will continue to be one of the best converting parts of our business that we have.

Sam Paisley

Yeah I think one other things that is evident about this particular area. It's not just about technology that technology matters, the way you manage the presentation of offers and the way you collect permitted data from a consumer and then process it and screen it for the benefit of the advertiser is quite important.

And in terms of managing relationships, you have to be a trusted party if it's known to the advertiser, you have to have deep relationships with the distribution partners, publishers that you work with, and you have to be able to manage the consumer concerns if you will; because if consumers don’t accept and truly have an interest in the offer, you really can’t do this in volume. And you have to mange all those relationships and technology. At the same time toeing the line with respect to regulations. And regulations are concerned not just the consumers, but it's how you interact with ISPs and so forth.

So it is very difficult to scale this business, because it has a lot of moving parts and a lot of relationship concerns that you have to adequately manage and satisfy.

Operator

We'll take our next from Jordan Rohan with RBC Capital Markets.

Jordan Rohan - RBC Capital Markets

Hi guys.

Gary Fuges

Hi Jordan.

Jordan Rohan - RBC Capital Markets

Can you just reconcile your statement to open the conference call that your lead gen units are in line with the industry best practices? With the tactics used by some of the sites that you own that offer free products when in fact 8 or 10 or more purchases would need to be made in order for something to be conveyed to a consumer? Thank you.

Sam Paisley

I think our opening remarks pretty much address what you mentioned in your note and that is, first off there are industry forums that we participate in and there are industry committees that have been formed to address what industry players can consider to best practices.

There are appropriate staff members on our team that include both legal expertise as well as customer service expertise. And all those things are constantly in motion. And we've also been active in monitoring new legislative initiatives including H.R. 964. We've had both internal and external legal advisors involved in that process. And all matters consider we've concluded that we are fully compliant in our business practices. And as Jim mentioned earlier, our business continues to grow and our advertisers are pleased with our product.

Operator

We’ll take our next question from Mark Bacurin with Robert W. Baird.

Mark Bacurin - Robert W. Baird

Hi good afternoon. Most of the question have been answered. I was hoping may be to go back and touch on the Google, DoubleClick acquisition. And with that acquisition Google obviously picks up lots of advertiser and publisher relationships. And so I was wandering if guys might go to a comment on what pitfalls there may be taking that technology and those relationships and trying to develop an ad network that would rival users at advertising.com and what do you see as impediment there?

Jim Zarley

I guess we are just not seeing that. The relationships that they have are more strictly along the technology range. A good deal of what they do are with very large publishers, who for the most part represents their own site with their own sales forces and have their own way of producing revenue for their site.

So may be there is some opportunity to do something with the run rate, but from what I understand will have to change the agreement to allow them to have access to that data, which they currently in my understanding do not have.

But nonetheless, whether they do represent it or don't represent it, I think for the most part these are not publishers or advertisers that we are currently representing in our own network. So I don't see it taking something away from us so much.

But I believe that there could be, when DoubleClick announced that they had an ad exchange; that could have been some real interest in building that same type of model which frankly has been unproven. As I mentioned earlier the ad exchange make it very well for very large portal that has a significant amount of unsold inventory.

I am not sure that the add exchange, in fact I would have doubt in my mind that the ad exchange would really be more of an opportunity possibly for us then would be a competitive situation. In that, everything that we do is focused on CPA, Cost Per Action, Cost Per Sale kind of business, and the add exchange simply doesn’t do that.

It’s a CPM model, and it’s primarily I think build for unsold inventory. And in these particular cases, the advertiser is going to have to be very savvy in understanding just exactly what they have to do to buy the proper inventory and then price it, and then be able to measure and determine what it will have does for them.

Right now, that’s what ad agencies and ValueClicks will do, is do that on behalf of the advertiser. So, I think the whole ad exchange makes sense for a very large portal, but I think it’s still unproven and I believe that in some ways it’s a bit of a step back. I mean for Google has done after this point in time is built a wonderful search engine that has got credibility to online advertising, because it has CPC product that has delivered well for advertisers and agencies and companies like ourselves. We even have been able to go by key words and get a good result from it. The ad exchange does not do that.

Sam Paisley

And the key here is that DoubleClick is not an ad network in its current formulation. So, that’s been paid in this acquisition is an option value if you will. And the other aspect is, there are clear established advertiser and publisher relationships for a technology platform that may or may not be sustained now that there is a new owner that maybe perceived to be in conflict with those relationships. So others have observed this might be an opportunity for independent merchant technology providers, and we are still in that business.

Gary Fuges

Operator we have time for one more question. Thanks.

Operator

Alright. We’ll take our last question from Martin Pyykkonen with Global Crown Capital.

Martin Pyykkonen - Global Crown Capital

Yeah thanks. The question on the authority of marketing side from the U.S. versus overall. Anything you can characterize from the Q1 numbers and going forward. And going down one level on the search versus traditional side. And then you mentioned on the M&A side it sounds like obviously from the market multiples or maybe an issue and you’d kind of stay core to your strategy, but anything else you can provide some color for that areas of general that you might be interested in? Thanks.

Sam Paisley

Martin are you still on the line?

Martin Pyykkonen - Global Crown Capital

Yeah.

Sam Paisley

Could you restate the first part your question again?

Martin Pyykkonen - Global Crown Capital

Yeah just on the affiliate marketing side you talked about it being up 22% total and Q1 I’m just looking for a little more color in terms of U.S. versus elsewhere. Obviously Europe was a good driver to that and then drilling down between the search side and kind of traditional affiliate marketing. And then on the M&A question, just general areas you might be in tune to looking at going forward.

Sam Paisley

So on the affiliate marketing side, it is true as we mentioned earlier, the growth in Europe because of the initiatives and because of that market was greater than the growth we experienced in the U.S. if you will. Though we haven’t really given a breakout on the individual components.

And on the M&A front, I'd rather not necessarily draw attention to the [earliest] that we would be moving to. But definitely with respect to technologies that could enable us to have an exchange, as Jim mentioned earlier we already have those component available to us if you will. So we won't be seeking acquisitions in that particular area.

But in the past we have indicated that we are interested in doing further consolidation in affiliate marketing, and Jim mentioned that indeed if one of the other major competitors did become available at a reasonable price that would be quite attractive to us, the same would be true in comparison shopping.

And we have said that that there are other potential areas that might encompass similar kinds of content of price runner. That would be content that not only attracts a high level of natural traffic, but the people that come are in the market and represent high quality traffic. Those kind of propositions can be quite interesting to us, and could fit quite while with the other assets that we have.

Operator

And at this point I would like to conference back to our speaker for any additional or closing comments.

Jim Zarley

This is Jim Zarley. I want to thank everybody for joining us, and looking forward to give you some update as things move out especially in this area with the recent acquisitions. If we have any other thoughts we will be happy to share them with you. Thank you.

Operator

Again, we would like to thank you for participation, and remind you that a replay of today's conference will be available beginning today. You may access this replay by dialing 888-203-1112 or 719-457-0820. The access code for the program will be 5077746.

This reply will be available through midnight May 9th. Thereafter the call can be accessed on ValueClick's website at www.valueclick.com. Again that concludes today's conference call. Thank you for your participation.

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