aQuantive Q1 2007 Earnings Call Transcript

TRANSCRIPT SPONSOR

aQuantive, Inc. (AQNT)
Q1 2007 Earnings Call
May 08, 2007 8:30 am ET

Executives

Brynn Hoover - Director of IR
Brian McAndrews - President and CEO
Wayne Wisehart - CFO

Analysts

Alexia Quadrani - Bear Stearns
Heath Terry - Credit Suisse
Youssef Squali - Jefferies & Company
Lee Westerfield - BMO Capital Markets
Troy Mastin - William Blair & Company
Imran Khan - JP Morgan
Christa Quarles - Thomas Weisel & Partners
Ben Schachter - UBS Securities
Stewart Barry - ThinkEquity Partners
Mark Mahaney - Citigroup
Aaron Kessler - Piper Jaffray
Sameet Sinha - Kaufman Brothers

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2007 aQuantive Earnings Call. My name is Caressa, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s conference Ms. Brynn Hoover. Please proceed, ma'am.

Brynn Hoover

Thank you, Caressa. Good morning and thank you for joining aQuantive's first quarter conference call. This is Brynn Hoover, Director of investor relations and with me are Brian McAndrews, President and CEO and Wayne Wisehart, CFO.

The following remarks contain statements that are forward-looking, including statements about our expectations or projections regarding future results and plans for the business. aQuantive's actual results may differ materially from our expectations, projections or plans. A complete list of additional factors that may affect our business, future operating results and financial conditions is in the risk factors and other sections of our SEC filings.

Now, Brian will provide an overview.

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Brian McAndrews

Thank you, Brynn. I'm pleased to report a great start to 2007 with another very strong quarter for aQuantive. Revenue of $142.6 million represents an impressive 55% increase over Q1 of 2006 with 42% organic growth. Adjusted EBITDA grew 51% to $32.7 million, and net income, which includes the impact of stock-based compensation expense increased 87% to $14.2 million.

These Q1 results are a reflection of our strong positions in each of our businesses and our relentless focus on serving our clients. In addition to very strong domestic growth, our international business is growing nicely as well, up 67% from Q1 of 2006 and representing 21% of our consolidated revenue. And speaking of 2006, I'm very proud to report that according to Advertising Age, aQuantive ranked as the ninth largest marketing organization in the world, up four spots from last year and the first digital company to crack to top ten.

Now, we will turn to results and key developments in each of our business segments. The Digital Marketing Services segment, including Avenue A¦Razorfish, DNA, Amnesia, NEUE DIGITALE, e-Crusade and now Duke, reported revenue of $83.1 million in Q1 2007, a 50% increase over Q1 2006. Total organic DMS revenue for the quarter was $77 million, a 39% increase over Q1 2006. DMS international revenue was $12.5 million.

As of March 31, 2007, DMS employed 1,694 people, an increase of 56% from the same date in 2006. In March, Avenue A¦Razorfish bought Duke, an interactive agency based in Paris. The Duke team has a reputation for high-quality ad creative and web development work as well as an impressive client roster, which includes large multinational clients such as McDonalds and Nissan. The entrance into France continues our global service expansion, as we now have a substantial presence in the seven largest markets in the world as measured by online ad spend.

At the end of March, Avenue A¦Razorfish held its seventh annual clients summit, featuring cutting-edge work and the theme of digital reinvention. The gathering, the larger ever, included over 500 clients from four continents and will no doubt result in stronger and deeper client relationships for the agency.

The adoption of Rich Internet Applications is rapidly increasing. In fact, more than half of the websites being development by Avenue A¦Razorfish includes some significant elements of Flex, Flash or other Rich Internet Applications. However, due to the unique nature of these applications, there has been no good way to measure or optimize website performance, until now.

Just last week, Avenue A¦Razorfish announced the launch of RIAx or RIAx, a highly flexible reporting solution that measures how consumers are engaging with Rich Internet Applications online, including media, microsites and websites. No other agency delivers an offering like RIAx. Avenue A¦Razorfish has performed more than 40 installations of RIAx to date. Also this month, Avenue A¦Razorfish was again named by Ad Age as the largest interactive agency in the US.

The Digital Marketing Technologies segment, including Atlas and Accipiter reported revenue of $38.1 million in Q1 2007, 38% increased over Q1 2006. Total organic DMT revenue for the quarter was $35.8 million. DMT international revenue was $9.9 million, a 23% increase year-over-year.

As of March 31, 2007 DMT employed 404 people, an increase of 45% from the same date in 2006. As you know the competitive landscape for Atlas’ process is changing. Assuming the Google acquisition of DoubleClick closes, Atlas will be the only independent third party ad-serving offering in the market place with scale on the both the buy side and the sell side, and we think that this creates nice opportunities for us.

We will continue to compete as we have in the past by focusing on our client's need and investing aggressively to continue driving valuable innovation in the market. On the advertiser or buy side of our business, we think we can continue to win market share from DoubleClick as we have consistently over the past five years, and now we have the added opportunity of being the only independent player.

On the publisher or sell side of our business, many of our customer's prospects and DoubleClick’s current customers are directly competitive with Google. We believe that our strong product and service offering and our stats with an independent player gives us a great opportunity to aggressively gain market share on the sell side as well.

Speaking of the sell side, the integration of Accipiter is progressing well. From an operation’s perspective, it is fully integrated and the team is leveraging existing Atlas resources. Only three months after the acquisition, Atlas introduced the first in a series of innovations resulting from integrating the best and breed resources of Atlas and Accipiter.

AdManager, our solution for publishers recently released version number 10 which in addition to product work flow improvements and forecasting enhancement incorporates a new feature which we are calling an Ad Network Control Panel. This industry first offering is designed to help publishers realize revenue from discretionary inventory at a significantly higher rate and with a lower operational burden than manual management of remnant ad deals. Publishers concept their own CPM price and the system will automatically deliver ads when that price is met capturing a premium for a portion of their undersold inventory.

The Digital Performance Media segment, including DRIVEpm, MediaBrokers and Franchise Gator, reported revenue of $21.4 million in Q1 2007, a 130% increase over Q1 2006. Total organic DPM revenue for the quarter was $18.2 million, a 95% increase over Q1 2006. DPM international revenue was $7.8 million, a 48% increase year over year. As of March 31st, 2007, DPM employed 97 people, an increase of 116% from the same date in 2006.

DRIVEpm and MediaBrokers are beginning to purchase more targeted inventories to deliver greater results for clients. We've also invested in greater sales and marketing programs and significantly grown our sales staff year over year. I would now like to turn the call over to Wayne to talk about the quarter's financial results and investments in greater detail, as well as provide financial guidance for the second quarter and remainder of the year.

Wayne Wisehart

Thanks Brian. Continuing the momentum from the fourth quarter of 2006, the first quarter was very strong for all of our businesses. Revenue grew by 55% to $142.6 million in Q1 from $92.2 million in Q1 2006. Excluding revenue contributions from newly acquired companies, our year-over-year organic growth was 42% for Q1. Operating income increased by 78% to $19.9 million or 14% of revenue versus $11.2 million in Q1 2006 or 12% of revenue. Net income increased by 87% to $14.2 million in Q1 or $0.16 per diluted share compared to $7.6 million or $0.10 per diluted share in Q1 2006. Adjusted EBITDA was $32.7 million in Q1 or $0.37 per diluted share, an increase of 51% over Q1 2006. Our EBITDA margin was 23% in both Q1 2007 and Q1 2006.

aQuantive's effective income tax rate in Q1 was 39%. We expect the effective tax rate to be approximately 40% in 2007. Our stock based compensation expense was $4.7 million for both Q1 2007 and Q1 2006. aQuantive's CapEx was $6.8 million for the first quarter. We ended the quarter with $296.7 million in cash and short-term investments. Our Day's Sales Outstanding and accounts receivable for Q1 was 76 days, compared to 79 days in Q4 2006.

Now I would like to review the performance by business segment during the quarter, but first I would like to reiterate what I outlined in the 2006 Q4 call. Q1 experienced increases and expenses due primarily to annual compensation adjustments effective January 1st.

Digital Marketing Services revenue grew 50% year-over-year to $83.1 million in Q1. Organic revenue was up 39% from Q1 2006. DMS generated quarterly operating income of $10.3 million during the quarter for an operating margin of 12%. Just as we did in Q4, in Q1 we reversed amounts reserved in prior years for payments to publishers when it was determined that the payments could not be made due to the lapse of time. When one excludes the benefit of this $1 million other operating income item, the operating margin would have been 11%.

The diversification of DMS revenue for the first quarter is demonstrated by client categories that we served. The percentage of sector contribution was as follows: Travel, media and entertainment clients at 20%; financial services clients at 15%; technology clients at 11%; CPG, retail and pharmaceutical clients each at 10%; telecommunications clients at 8%; automotive clients at 6% and other client sectors combined representing remaining 10% of DMS quarterly revenue.

Digital Marketing Technologies' revenue grew 38% year-over-year to $38.1 million in Q1. Organic revenue was up 30% from Q1 2006. DMT generated quarterly operating income of $13.9 million for an operating margin of 37%.

Digital Performance Media revenue grew 130% year-over-year to $21.4 million in Q1. Organic revenue was up 95% from Q1 2006. DPM generated quarterly operating income of $3.2 million for an operating margin of 15%.

Now, I'll spend a few minutes discussing our outlook for 2007. 2007 is off to a great start with continued strong performance from our businesses throughout the full year for total revenue in the range $595 million to $615 million. We believe that each of our three business segments will experience notable growth in 2007. As in the past, we are not going to give specific segment revenue guidance.

Adjusted EBITDA is expected to be in the range of $150 million to $156 million. We project net income in the range of $66 million to $71 million. Net income will not increase in line with revenue due the addition of Duke in March. Our projected average diluted share count for the year is 91 million to 92 million shares. We continue to expect stock-based compensation expense to be in the range of $21 million to $23 million for the year. We continue to forecast full year CapEx in the range of $25 million to $30 million.

We expect Q2 revenue in the range of $148 million to $153 million. Adjusted EBITDA is expected to be between $32 million and $34 million. Net income is projected to be in the range of $13 million to $14.5 million. Our projected average diluted share count for Q2 is approximately 90 million shares. We expect stock-based compensation to be in the range of $5 million to $6 million for the quarter. We will continue to update you on our progress, including acquisitions and investments for all segments. I expect margins for the year 2007 to be within the ranges we gave last quarter. To remind you, here are the ranges. DMS will continue to be in the range of 15% to 20%. DMT will be in the range of 35% to 40%. For DPM, I expect margins to be within 17% to 22% for 2007.

That completes my remarks, and I will turn the call back to Brian.

Brian McAndrews

Thank you, Wayne. At aQuantive, we continually strive to find the right balance between investments and people and capabilities for the long-term and taking advantages of market opportunities in the short-term. I believe that our results in Q1 demonstrate the continuing success of our model. While we have increased investment across the board and our businesses, we've also been able to take advantage of the strong market, strive for significant gains in revenue and our peers' market share. We intend to continue on this profitable path in 2007 and beyond.

And now, we'd like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Alexia Quadrani of Bear Stearns. Please proceed.

Alexia Quadrani - Bear Stearns

Thank you. A couple of questions, on the DMT margin, which seem to be under less pressure than we have anticipated. Is the Accipiter acquisition, is it turning -- I guess, the Accipiter Company turning around faster than you saw in terms of profitability? Or is the core business just performing better? And then on the DMS side, can you give us some more color on what's really driving the great growth there? Is it the media buying and planning side, or is it accretive, and do you feel that you are gaining market share there as showing growth ahead of industry? Thanks.

Wayne Wisehart

Okay. Let me take the first part of the question that -- well the answer is yes, Accipiter is doing very well, but the improved performance on the DMT division is really very strong growth on overall performance in the segment overall. We had an extremely good Q1 and revenue growth and a much, much better than we would have thought a few months ago.

Brian McAndrews

And on the DMS point, we are seeing really growth across the board, I would say, we are certainly seeing it in the media fees and in the web development fees, may be securing a little bit towards web development, but I think we are seeing pretty strong growth in both. And I say a lot of existing clients work, but also new client work, new clients who have signed on towards the end of last year or into this year had a large impact in Q1. And we obviously don’t know what the overall market numbers are, and so people look at them in hindsight but I'd be quite surprised if we didn’t gain market share with this kind of growth. It was 39% organic growth, and for an agency business, that’s considered media and web development; that's pretty impressive.

Alexia Quadrani - Bear Stearns

And then just quickly on the Google DoubleClick acquisition, could you give us any feedback that you might be hearing from your clients to be asked in that potential deal, and also if you could remind us for your market shares versus DART?

Wayne Wisehart

Sure, on the reaction we are talking to people and hearing things all along the way, I will say even before it was announced, but when it was rumored and then since, yeah, there is definitely concern out there about Google and DoubleClick combination, I mean there is a concern about conflicted interest that DoubleClick could now have on both the Buy-Side, where one of the -- where a tool virtual, where using a tool like DoubleClick or like applet to measure the impact of different types of media including Google search. And so there is a concern about the loss of objectivity when the tool is owned by one of those applets, in this case, Google search.

And on the publisher side, there is concern that a lot of publishers that work with DoubleClick’s product DFT are competitors of Google, and there is a tremendous amount of sensitive data that would now be part of Google, would being shared with Google, from the company of Google. So we heard that there is a concern, the deal hasn’t closed yet. So, it will see whatever impact we see will happen over time, but we certainly have heard that as concern. The market shares, there are no third party that measure this market share. It continues to be our belief that in the Buy-Side we have the number one market share in the US and the UK, our two largest markets. And on the Sell-Side, DMT has the largest market share. And, since we acquired Accipiter, it has relatively a small market share, but we are optimistic, that overtime, over five or so years against DFA, that we will gain market share on the Sell-Side as well.

Alexia Quadrani - Bear Stearns

Thank you.

Wayne Wisehart

Thank you.

Operator

Your next question comes from the line of Heath Terry of Credit Suisse. Please proceed.

Heath Terry - Credit Suisse

Great, thank you. If we look at the revised guidance here versus your previous guidance and the guidance from the acquisition, it seems like there is probably about $11 million of higher core business guidance in the remainder of the fiscal 2007. I was wondering if you could tell us, is that coming from a specific segment, is there something else to that, that maybe we should be thinking about?

Wayne Wisehart

You’re correct. There is additional revenue guidance about the acquisition, and I would say that that's spread really across all three segments. All three segments have started off the year very strong, and we have higher expectations now then we did a quarter ago for all three segments. So, it's no one specific business or one big client win or anything like that. It spreads pretty evenly across all the segments.

Heath Terry - Credit Suisse

Great. And then when looking at the pricing within the ad network business, I was wondering if you could just talk to us a little bit more about what you are seeing, if there is any, if it's more a mixed shift to higher value type advertisements, whether it's Rich Media or what have you or if its simply an increase in pricing across all formats?

Wayne Wisehart

I guess, I think Terry, it is really more of a mixed shift. I think we've continued to get inventory without too much trouble in the network business, but to your point, there is more Rich Media is becoming a bigger factor, and the other pieces we've also been doing more experimentation with, more expenses, more targeted inventory and finding necessarily effective if we purchase it correctly. So, I think it really is more of a mix issue.

Heath Terry - Credit Suisse

Great. Thank you very much.

Wayne Wisehart

Sure, Heath. Thanks.

Operator

Your next question comes from the line of Youssef Squali of Jefferies & Company. Please proceed.

Youssef Squali - Jefferies & Company

Thank you very much. Good morning Brynn, Wayne and Brian, congratulations. A couple of questions. Wayne, your Q2 guidance implies lower EBITDA margin. And I thought you just said in your prepared remarks that Q1 typically has higher expenses, primarily related to your payroll taxes. And then if I look at what happened last year, Q1 and Q2, you certainly show the nice sequential increase. So, I was wondering if you could comment on that. And then what's baked into your guidance in terms of organic revenue growth?

Wayne Wisehart

Okay. Let me address the Q2 guidance. You are absolutely right. Q1 has extraordinary expenses, primarily the increases and the increases in compensation effective January 1. The Q2 guidance for EBITDA is not as high as it is for revenue. And the reason for that primarily is because of the Duke acquisition, the acquisition of the French subsidiary, which occurred in March, which will produce nice revenues. But in the beginning, we'll not have as high of an EBITDA margin as the core business.

So, we will feel the impact of that in Q1 as well as the rest of the year for that matter. That in addition to what we said all along is that we continue to make investments in the company, reinvestments in the company, which means really hiring people. It would be good if that could occur evenly each quarter over the year. But in real life, that's not the way it happens. So, we expect the additional reinvestment to be at a fairly high level in Q4, especially compared to Q1, as we have success in hiring people there. So, that will have an impact. And then, also as I said before, the acquisitions that we made in 2006 as a whole, particularly the first year of the acquisition, will have a negative impact on the margins for EBITDA, net income, and that will continue to be the case throughout most of 2007 as we integrate those acquisitions that we made in 2006.

Youssef Squali - Jefferies & Company

And the organic revenue growth, can you provide any guidance?

Wayne Wisehart

We really don't break it out separately in terms of our guidance for organic growth. But I can tell you that we expect strong organic growth through the rest of the year. And of course, we do expect our acquisitions to come along nicely as well. So, it will be a nice mix. We expect really good growth from both. But I reiterate that the core businesses and all three segments are very strong, and we are off to a great start for the year.

Youssef Squali - Jefferies & Company

Thank you. And lastly, if I may, Brian, you said in your prepared remarks that you on the ad serving side that you should continue to win share form DoubleClick on the buy side. I was wondering, so last several years you've done it primarily through better pricing, and I was wondering why you believe that to be the case and can you just share with us what's the strategy there?

Brian McAndrews

Sure. We just agreed that we've done it through better pricing. We had competitive pricing, but we believe we had a superior product. We were the first to integrate search. We were the first to launch Web Video. We were the first to introduce the Media Console. And so, we think we've had a better product, and we think we've had better customer service. We, as a company, have really stressed that on [culture] very much about the service and our surveys that we do with customer. We enforce that we have very strong customer service in the marketplace.

So, we just think we will continue to steal market share and grow market share through -- we have a strong sales force. We have a strong value proposition, and we have strong customer service. So, we don't see any reason why that dynamic will change. Now, that's get harder to steal share when you're ahead. And so, we are not saying these points are going to come easy, but we do think we will see growth. We'll also see market share gains, we believe internationally, where our presence has not been as strong, but we'll be stronger in the coming years.

Youssef Squali - Jefferies & Company

Terrific. Thank you very much.

Brian McAndrews

Thanks.

Operator

Your next question comes from the line of Lee Westerfield of BMO Capital Markets. Please proceed.

Lee Westerfield - BMO Capital Markets

Yes. Thank you very much. Just three questions for me. The first is, if you can detail what the impact of currency adjustments to revenue line might have been in the first quarter, so we can better get a line along if there was any significant impact in that regard? Secondly, Wayne, if you can help us get a better understanding about how you are doing your tax forecasting given a slightly more contribution from international revenue this year and your outlook on effective and also cash-tax rates for the year? And the third, it's a detail, and I think I see the answer to this one. There was a little more than $1 million of other income, other operating income in the quarter, and I think that was a reversal of some payments out of business publishers, but if you can elaborate if I'm right about that and what might have this been from?

Wayne Wisehart

Okay. Let me take. Yeah, we take them in sort of reverse order here the $1 million of other operating income is indeed the reversal of the publisher reserves that had been established in prior years. And due to the lapse of time statute of limitations expiring those payments, actually can not be made now. So we reverse those when that as that occurs. The tax forecasting is really just looking at the projected income and so on for the year and combing all the tax rates from all the taxing authorities internationally as well as in the U.S. and combining that to form an effective tax rate.

And so what we expect is about 40% that's always a good rate to use on a combined basis now it could vary 1% each way 39 or 41, but generally it's going to be around 40%. The currency impact is very small $300,000, so, not much at all.

Lee Westerfield - BMO Capital Markets

That's fabulous. Thank you very much.

Wayne Wisehart

You are welcome.

Operator

Your next question comes from the line of Troy Mastin of William Blair & Company. Please proceed.

Troy Mastin - William Blair & Company

Good morning. Thank you. You continue to put up really impressive growth in the DMS segment and it's gotten to a pretty notable scale. I am curious if there are any signs of strain from this growth in terms of your ability to maintain part of your people, your products or customer service? And as an add-on to that is there some sort of a natural limit on how fast you can grow a services business when you're at this kind of scale?

Brian McAndrews

Yeah, it's right. I guess, I would say, has there been a strain? Yeah, there has been some strain. We are growing fast and it's a challenge at times to hire people. I think we certainly haven't sacrificed quality of work or of hiring and we just take more time if we need to and we do supplement with contractors. So when we have bursts of incoming work, we can hire contractors. And then we have also ramped up our recruiting pretty significantly over the last year and a half.

So, all those things we've certainly been adjusting as we've gone because the growth is pretty robust. I don’t know what the upper limit is, I think 39% organic growth is pretty impressive. So, I wouldn't project a lot higher than that, but I think it's going to have been slow as the market grows. So, right now the market is very strong and we have an incredibly competitive offering. People want to do business with us, so in getting new business and getting new assignments has not been a challenge. The challenge is making sure that we do have enough people and the right people at the right time to do all the work.

Wayne Wisehart

And if I could just add on to that, the fast growth does have a cost too in terms of contractors usages Brian mentioned and in fact that's one of the new impacts to the Q2 and the rest of the year guidance in terms of EBITDA net income. It's the fact that contractor expenses will be higher than normal in the DMS segment due to the fast growth.

Troy Mastin - William Blair & Company

How meaningful is the use of contractors and how much worse in the margins that you do use contractors?

Brian McAndrews

There will always be a level of contractor usage, it's a little bit higher now then it normally is. It's not really terribly meaningful but it does have some impact on the margin. And as Brian said we are certainly working hard and we've increased our recruiting efforts to get this particular cost side down and hire people a little faster.

Troy Mastin - William Blair & Company

Okay. And then if you could comment on the mix of your revenue growth between existing a new customers in the DMS business. With new customers are they generally new to the medium or are they more typically wins from a competitor?

Brian McAndrews

It's really a combination of both. I would say that the majority of our growth comes from existing customers, expanding their budgets for digital marketing and that is probably a very large percentage of the growth. But there is a healthy mix of both new customers and the existing customer growth particular on the web development side. And the wins, I would say Troy it's both probably more skewing towards taking it from other people. Some people are still doing things in house, but mostly people, at this stage the industry is mature enough that most people are working with someone. So most of our wins are competitive wins.

Troy Mastin - William Blair & Company

Okay. Thank you.

Operator

Your next question comes from the line of Imran Khan of JP Morgan. Please proceed.

Imran Khan - JP Morgan

Yes, hi, thank you very much for taking my question. Brian a question for you. Can you give some color on your progress that you are making on the international market? You made quite a few of acquisitions. And I was wondering like some of the acquisitions that you have for a couple of quarters, what are you seeing in terms of the revenue growth, in terms of the market share gain and the margins brokers you're making? Thank you.

Brian McAndrews

Sure. We are definitely seeing good things. It's still early with most of these. We've had, I guess DNA is the one we've had the longest, which we've had for over a year now. But the others are less than a year. So, it's early to say exactly what their market share gains are and things like that. I was just actually in Europe last week visiting three of our offices. And there is the common theme in terms of people needing more space and hiring. So I mean there is growth going on across the Board, the growth we talked about in the DMS, was both strong organic growth but strong overall growth too.

So, we are seeing, we are definitely seeing growth. And we are seeing, there is some of the benefits and opportunities we are getting from having those markets in terms of some clients that are US-based clients that are running business outside the US. So, I think it's been about six US clients that we have worked with overseas or are now working with overseas in multiple countries.

We've had three global clients that we pitched in one. And we have a couple of clients from the UK that are now doing work in the US. So overall, and that's just what happened so far with a bunch more of discussions going on. So overall, we say, certainly we are very pleased with the progress we are making with the international network growing that has just been overall positive. I mean Wayne talked to the margin impact that you get in the short run, which is a negative. But in terms of the business, overall, it's just making us much stronger domestically, more appealing to global clients. And we feel very good about the acquisitions we made.

Imran Khan - JP Morgan

Thank you.

Operator

Your next question comes from the line of Christa Quarles of Thomas Weisel Partners. Please proceed.

Christa Quarles - Thomas Weisel Partners

Hi, couple of questions. First, I was wondering if you could just update us on some of the emerging media trends, i.e. in a video and mobile. Second, I was impressed by the Havas deal that you guys were able to land. I was just wondering how your global capabilities now compare with DoubleClick? Obviously, they are strong in Germany. And then third, Franchise Gator actually was a lot better than what I expected. So, I am just wondering is there a business emerging in there that we could see some upside around? Thanks.

Brian McAndrews

Sure. Christa, let me try take on those. In emerging media, I think we are investing quite a bit in all our business units, but really primarily, Atlas and Avenue A¦Razorfish. In Atlas, we have an emerging media group that is charged with basically taking the technology that we have in the Internet and making it relevant and applicable to other emerging media. And in that context, I think you're familiar with the fact that we've done a lot in the video on demand space and are a leader there.

We've done two pilots now. Most recently, we finished our pilot with Chartered Communications, and that's gone well. And we are looking to expand our footprint, basically the number of homes that we can work with that will be VOD-enabled and be Atlas on demand-enabled, if you will. So, we are making progress there.

Another very positive thing there was our acquisition of Accipiter because the sell side in emerging media develops usually more quickly than the buy side. And so, we can take a lot of the learning and relationships we've created on the buy side, take the sell side technology, and we think we can make some headway there as well. And the Accipiter technology was actually designed years ago back during the bubble period, with lots of CMGI money was actually designed to be ready for mobile and video.

So, we feel like, we really benefited from that development from years ago. And in fact, Accipiter or I should call it, AdManager. AdManager is serving wireless ads today. So, we're seeing progress there. On the Avenue A¦Razorfish side, we have Advanced Media Solutions Group. And their entire charge really is to focus on emerging media, the experts in that and share best practices around the world with all our agencies around the world. And frankly, we get learning from those agencies.

As I mentioned, I was in Europe last week, I mean, things that are happening in mobile and other countries are ahead of the US in some area. So, we have lots of learning there. Web video is obviously something that's happening now. Atlas has launched web video. And while it's still small, getting lots of publishers to accept it, so we are beginning to serve on multiple publishers. And we don't expect that to be real big this year. But we do certainly expect that to be big in the future. And our ability to dynamically insert advertising, we think, will be a real strength both in the on demand world as well as on the web.

In terms of expanding internationally, you are right that, I think outside the US and UK, where, as I said, in the buy side, we believe we have the number one market share. DoubleClick does tend to have a larger presence than we do having made the moves earlier than we have. But we are certainly seeing some growth in Western Europe. And we are starting to put people on the ground in other countries besides the UK. We now have people on the ground in Germany and Italy, before we've got business outside the UK, mostly with PAN European deal.

So, we've seen a lot of business to [work in] over 20 countries between the AdManager products and the Atlas Digital Marketing Suite. So we are in a lot of countries, but in terms of having people on the ground, we are just really now beginning to invest more this year in that. And, so we think that there is a lot of upside. So there is already business to be had, and then in a lot of countries Accipiter and now AdManager, as it's called, have some great business already. So we do see tremendous potential, but I think it's still early.

And on Franchise Gator, we acquired the business knowing that it wasn’t that large, but that it had great potential to continue to grow low-run business. And we are seeing some of that potential come to before this year, and so you are right, we've been pleased with the progress we made on the business. And we expect it to continue to grow; it is one vertical. So there is someone as to how big it can be, but we also believe when we got into the lead generation business of this type that there would be other verticals that we would ultimately expand into make that an even larger opportunity.

Christa Quarles - Thomas Weisel Partners

Okay. Thanks.

Operator

Your next question comes from the line of Ben Schachter of UBS Securities. Please proceed.

Ben Schachter - UBS Securities

Hey, guys, congratulations on a great quarter. A couple of quick housekeeping issues, the tax adjusted stock comp number. And then on you reversal for the million bucks, we expect more of those going forward. And then Brian, on the DoubleClick acquisition, do you see regulatory issues with that, and will you, kind of actually push for any regulatory body to look at that?

Brian McAndrews

Okay. Well, I will answer that first and then I will let Wayne answer the housekeeping one. You know, first of all, I am certainly not a tax expert so I don't know, I mean, I understand that certainly people have raised concerns and I am still confident that they will be looked and addressed by the government. And appropriately so, our own feeling is that we are not challenging the deal. There are people with deeper pockets than us who have already expressed interest and we’ll let them fight that fight. Certainly if we are asked questions by the government, we obviously will answer them. We are feeling we will compete in the market place and we are very comfortable doing that.

Wayne Wisehart

Okay. In terms of the reversal, there is around $1 million to be reversed on that; it should be spread over a number of quarters. So, I wouldn’t expect any large amount in any future quarter, certainly would not approaching a million dollars in future quarters. I am sorry, I am not sure I have quite understood the question on stock-based comp?

Ben Schachter - UBS Securities

I think in the past you have given the table that shows the adjusted EPS, and what it would look like impact the adjusted comp, and I don’t think there are tables in this release?

Brynn Hoover

You are right, because we are not providing guidance for adjusted EBITDA.

Brian McAndrews

Yeah, we provide, that’s true we provide guidance for adjusted EBITDA which excludes stock-based compensation expense and are giving guidance on net income which includes stock-based compensation expense, and are not providing any kind of reporting on net income excluding stock based comp.

Ben Schachter - UBS Securities

Okay. If I could just have one follow-up, Brian, did you consider any type of combination between Atlas and DoubleClick?

Brian McAndrews

No, I wouldn’t comment on that. I don’t comment on M&A discussions or anything like that.

Ben Schachter - UBS Securities

Thank you very much.

Brian McAndrews

You are welcome.

Operator

Your next question comes from the line of Stewart Barry of ThinkEquity. Please proceed.

Stewart Barry - ThinkEquity Partners

Hi, good morning. Congratulations. Brian, you touched on, in the market share gain opportunities that there is a prospect of Google backed DoubleClick, may be creating, but over the long-term given the importance of innovation, product development and technology, how do you compete with the resources of a group backed by DoubleClick, and do you think you might have to escalate investments in technology?

Brian McAndrews

Yes, a good question, clearly they have deep pockets and the ability to invest a lot of money in development. I would say a couple of things; one is we do believe that with our customer focus and our customer service that we are very close to the customer, we are very focused on the needs of agencies. As you know, we own a agency, so we certainly understand and are sympathetic to the needs of agencies.

And so I think we do feel that we will have insights that they would not have given of those relationships. Google does not have the closest relationship with agencies. There are many agencies, as you know. You have outright said Google was an enemy. Google has implied, in comments they've made, that they have said that they like to disintermediate agencies in many cases.

So I think there is just a cultural difference in the way we will approach the business and the way Google and DoubleClick will approach the business, which I think will work in our favor. And the third thing is, there maybe times that we will also invest money. Clearly, we have already stepped up our investments in a lot of different areas because we see great opportunities to grow both internationally in growing capability.

So, we feel good about our level of investments now which is stepped up, but I guess it's always possible. But again I think our feeling is that given the concerns that people have about the combination, given our culture and our relationship and our agency focus that there will be plenty of market share points for us for a long time to come.

Stewart Barry - ThinkEquity Partners

Okay. And Brian, you're pretty far along here, it's been your corporate development objective number one, that's to gain international footprint in the agency business. And I was wondering if you could just update us on whether not your corporate development priorities have changed and kind of what's next in that area?

Brian McAndrews

Yes sure, I guess I would say our corporate development priorities are, generically speaking, are always about how can we better serve our clients. And that leads to acquisitions or has lead to historically acquisitions that either add capabilities that we don't have, that build versus buy on. So, when we acquired Search capabilities for Atlas, when we acquired Rich Media capabilities for Atlasand when we acquired of course, Razorfish to bring in creative and web development capabilities for our agency business.

Each time, it's really been based on what do our clients need, looking forward what are they going to need and making sure that we continue to be at the forefront of offering full range of offering across each of our businesses. So, that will continue and right now, there are no significant holds in our offering that I am aware of, but that can always change in a dynamic market like this. So, the one hold that we have had was geographic. And to your point we have plugged that hole to a large degree, but not completely and we're not done.

I mean, certainly on both sides of our business are all three pieces of our business, we want to continue to expand internationally, we see great potential. So, while we made tremendous strides in the Avenue A¦Razorfish side getting into the top six markets outside the U.S., there will be more to come overtime. And so I'd say that's still a focus and then otherwise the focus like I said will just be when a business unit that has got just the capability my clients want. I really want and we could build it or buy it we'll look at the opportunity to acquire.

Stewart Barry - ThinkEquity Partners

Great thank you very much.

Brian McAndrews

Sure thanks Stewart.

Operator

Your next question some from the line of Mark Mahaney of Citigroup, please proceed.

Mark Mahaney - Citigroup

Great, thanks. I just had one industry question for Brian. You were asked earlier about pricing trends wonder if I could just get you to comment on pricing trends just within one segment if you will, which is non-premium display advertising. And it seems like there is a fair amount of inventory out there that has caused pressure at least for some of the large publishers in the space. Do you see that continuing for some time or anyway you could quantify that? Thank you very much.

Brian McAndrews

Sure Mark it's hard to predict things like that or quantify that. My guess I would say that our experience with drive, which is out acquiring inventory is that at the low end, but the non-premium display inventory you are referring to there is a fair amount of supply. So there has not been a real challenge getting that, which again is a good opportunity for us. I think the flip side of that is though our job in doing is to help the publishers make more money by using our targeting and sophisticated behavioral targeting and the technology to help make it more valuable.

So it’s a whole place to win-win. That’s the goal there, but I would say there still is playing inventory, overtime I think they will continue to be, because it continues to be a great proliferation of content both generated by media companies as well as user generated. So I think there will continue to be those opportunities for some time to come, but also and plus in your question there are different kinds of inventory and there will continue to be different kinds of inventory. There will be that type of inventory, but there will also be premium inventory, premium display inventory as well as rich media and web video and other types of inventory where publishers with good brands and good audience will be able to monetize [that] I am quite successfully.

Mark Mahaney - Citigroup

Thank you very much.

Operator

Your next question comes from the line of Aaron Kessler of Piper Jaffray. Please proceed.

Aaron Kessler - Piper Jaffray

Just a couple questions, first, can you just give us a sense for what's driving the demand for the DMS business, fairly strong growth maybe couple of items there that are really driving the strong demand? Also, can you give us the operating margins or maybe the stock comps for each of the three segments if you have it, just on so we can compare to our last years numbers?

Brian McAndrews

Sure, I'll talk the first one. The DMS growth, as I think too secret there. It really is more people spending more money online. We are seeing certainly more website development. People reorganize that the website is, as we've said for a longtime replacing the 30 second commercial as the central expression of the brand. People reorganize they have to have a robust website. They have to continue to update it with the rich internet applications that I talked about. People are finding ways, just take advantage of Web 2.0. We've done recent work with Condé Nast and some of their publications where they’re providing combination of their own user generated content. So there are lots of companies that recognize that this where eyeballs are going, this is where users are going and they need to be there. And so there is a new website and there are refresh websites, there aremarketing campaigns. And on the media side, again dollars are shifting online, so people are looking for experts to spend their dollars online. It’s search but we also are seeing a growth in display and rich media ads as well. So, there is no one particular thing. Overall there is tremendous growth across the board, just in demand from a variety of clients.

Aaron Kessler - Piper Jaffray

Okay.

Wayne Wisehart

Okay. And in terms of the margins for the segments for Q1, the DMS had 12%, DMT had 37%, and DPM had 15% margins -- operating income margins, our stock-based compensation is managed centrally and is not allocated, and if you are interested in seeing the functions to which stock-based compensation apply, you could see there on the supplemental schedule and segment information that's included with the press release.

Aaron Kessler - Piper Jaffray

Can you give us Duke revenues for the quarter?

Wayne Wisehart

I am sorry?

Aaron Kessler - Piper Jaffray

For the Duke revenues for Q1, do you have those?

Wayne Wisehart

No -- yes, I have them, but we don’t disclose those separately. We don’t disclose any separate, any of the acquisitions separately.

Aaron Kessler - Piper Jaffray

Okay. Great. Thank you.

Operator

Your next question comes from the line of Sameet Sinha of Kaufman Brothers. Please proceed.

Sameet Sinha - Kaufman Brothers

Yes. Thank you very much. Last quarter you spoke about the synergies between all your international acquisitions in the DMS business. Can you talk about how they are progressing? You obviously spoke about clients from the U.S. going to those international markets. Ca you service them and vice versa? Can you talk about in terms of operationally, how it's all coming together in terms of hiring, what's the lag time between hiring and revenue growth in those businesses? And are they still on track to get to overall DMS margins or domestic margins by the end of the year?

Wayne Wisehart

Sure. I can attempt to answer at least part of those. Let me first start with the margins and let me just reintegrate and let very clear that when I speak of margins, I am talking about all of the acquisitions as a group. If you look at individual ones, you would find in some cases margins are better and in some cases margins are as not as good as outlined in Avenue A¦Razorfish. But as a group, they do have a negative impact on the overall DMS margin. I expect that will be the case for about a year, and as a group after a year of operation, I would expect, as a group, that those margins would then become consistent with the core business of Avenue A¦Razorfish.

In terms of operations, all the international operations are progressing just as we thought they would. There aren't any particular issues in terms of synergies or in terms of integration of those. They are progressing just as we thought. They have the same opportunities and also the same issues that we have in the U.S. in terms of Avenue A¦Razorfish. So, we are not disappointed at all. We are going along just as we expected.

Sameet Sinha - Kaufman Brothers

Okay. Thank you. Next question, in terms of Accipiter, can you talk about anecdotally how they're benefiting from the Atlas brand name and the balance sheet? And when you speak about gaining share in the international market and the technology business, how does Accipiter figure in that?

Brian McAndrews

Sure, I guess that they are in the first piece. We definitely have heard from particular prospects, and I know one in particular who was very interested -- it's actually happened during the time we were making the acquisition where a prospect, the team really wanted the Accipiter technology; felt that it was strongest out there, but the management was concerned about the company’s viability.

And once they found out that we were acquiring them, they immediately signed Accipiter. So it was a great confirmation point for us, as well as, you know, our belief of what we were being told by Accipiter, which was that the technology was really good, but they tended to have a harder time winning some of the bigger clients because people were just concerned would they be around, and that issue has now gone away. So, we have definitely been involved in, invited to pitches and presentation that Accipiter would not have been invited to as a standalone.

On the international piece, I guess on the DMT and DPM side of the business, when we entered new markets now, we can basically have the opportunity to offer three products broadly defined, the Atlas Digital Marketing Suite or the Buy-Side, Atlas AdManager or the Sell-Side and drive with the market with the network. So, the more products you have to sell, as you enter new markets, of course, the more efficient you can be in terms of hiring one sales person to start to sell all three, you can basically get much more benefits of scale and leverage there. So, that’s where we see the benefit.

We also have some markets that we are in, I think there is about half a dozen markets that AdManager or Accipiter as it was called wherein before that we were not and before we acquired them. So just having that presence, having those relationships are going to help. No question as we grow internationally.

Sameet Sinha - Kaufman Brothers

Thank you.

Operator

At this time, I'd like to turn the call back over to Brian McAndrews for closing remarks.

Brian McAndrews

Okay. We just want to thank you all. We are obviously very pleased with our Q1 results. We thank you all for your interest and continued support, and we'll talk to you again in the future. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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