Full Transcript of ValueClick’s 3Q05 Conference Call - Prepared Remarks (VCLK)

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Here’s the entire text of the prepared remarks from ValueClick’s (ticker: VCLK) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

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Executives:

Gary Fuges, Manager of Investor Relations

James Zarley, Chairman and CEO

Sam Paisley, Chief Administrative Officer

Scott Ray, Chief Financial Officer

Analysts:

Aaron Kessler, Piper Jaffray, Analyst

Kyle Evans, Stephens, Inc., Analyst

Eric Martinuzzi, Craig-Hallum Capital, Analyst

Imran Khan, JPMorgan Chase, Analyst

Martin Pyykkonen, Hoefer & Arnett, Analyst

Stewart Barry, ThinkEquity Partners, Analyst

Youssef Squali, Jefferies & Co., Analyst

William Morrison, JMP Securities, Analyst

Operator

Good afternoon, my name is Dahlia and I will be your conference facilitator for today. A replay of this call will be available by telephone beginning at 4:30 p.m. Pacific time and may be accessed through midnight Pacific time on November 8, 2005. Thereafter it can be accessed on ValueClick's website at www.valueclick.com or www.streetevents.com. Previously filed SEC filings can also be found on ValueClick's site. All lines have been placed in a listen only mode to prevent any background noise. [Operator Instructions]

At this time I would like to turn the call over to Mr. Gary Fuges, Manager of Investor Relations for ValueClick Incorporated. Please go ahead.

[Gary Fuges, Manager of Investor Relations]

Thank you and good afternoon. Welcome to ValueClick's Third Quarter 2005 Financial Results Conference Call. Joining me on the call today are James Zarley, Chairman -- ValueClick's Chairman and Chief Executive Officer; Sam Paisley, Chief Administrative Officer; and Scott Ray, Chief Financial Officer.

Today's call contains forward-looking statements that involve risks and uncertainties including but not limited to, ValueClick's ability to successfully integrate its recently completed FastClick merger, 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 with the Securities & Exchange Commission made from time to time by ValueClick including a tendered report on form 10K filed on March 31, 2005, Recent quarterly reports on Form 10Q, current reports on form 8K, its amended registration statement on form S4 filed on September 27th, 2005 and its final prospectus on form 424 B3 filed on September 28th, 2005.

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 risks that market demand for online advertising in general and performance based online advertising in particular will not grow as rapidly as predicted. ValueClick undertakes no obligation to release publicly any revisions to forward-looking statements to reflect circumstances or events after the date hereof or to reflect the occurrence of unanticipated events.

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

[Jim Zarley, Chairman and CEO]

Thank you, Gary. Good afternoon and thanks for joining us for ValueClick's third quarter 2005 conference call. I'll start with reviewing the quarter's highlights and then Sam will review the quarter's financial detail. I'll return to give you some final thoughts and then we'll take your questions.

ValueClick had a great great quarter financially and strategically. The company executed to deliver growth and profitability from its existing businesses while acquiring FastClick to significantly increase the scale and breadth of our online ad network. Through this quarter's achievements the Company is now in the best competitive position in its history to capitalize on the growth trends in our industry. I'll have more to say about the Company's position in our outlook for the continued growth later in the call. First let's review how well the company executed this quarter.

This was another strong quarter for the Company with revenue and net income per share and EBITDA exceeding our guidance and consensus expectations. Revenue increased 87% year-over-year to $81.4 million, $2.4 million above the high end of our guidance of 78 to $79 million. We saw particular strength in the lead generation areas of our media business and affiliate marketing.

Operating income increased 105% year-over-year to $17.8 million with operating margins of 22%. EBITDA was $22.6 million, $3.6 million above the high-end of our guidance of 18 to $19 million with year-over-year EBITDA margin expansion from 26 to 28%. And earnings per share of $0.13 cents was well above our guidance of $0.09.

We also announced today that we're raising our 2005 guidance for revenue and profitability and giving initial 2006 guidance. In 2006 we expect to continue our growth and profitability, integrate our web clients and FastClick acquisitions and expand many of our existing products into new geographic markets.

In the quarter, affiliate marketing continued its strong growth increasing 29% year-over-year. Affiliate marketing continues to grow through increased transaction, revenue from existing clients and recently launched programs with new clients. Affiliate marketing also added more predominant clients to its customer base such as Qwest, Vonage, Panasonic and American Greetings.

Our affiliate marketing division, Commission Junction, hosted its 6th annual CJ University forum for advertisers and publishers in September. CJU 2005 was another sellout with 500 attendees gathering to network and learn how to get the most out of their affiliate marketing relationships. Feedback on the event was positive across the board as many cited CJU 2005 as the best CJ University they've attended.

Technology had another in-line quarter. We continue to expect moderate growth and stable margins in our tech segment for the rest of the year and throughout 2006.

The media segment had a very successful quarter with 135% year-over-year revenue growth, though former revenue growth of our media products was approximately 32% year-over-year. Our June 2005 acquisition of Web Clients, a leading provider of lead generation services contributed to the Company for the first time this quarter. In addition to Web Clients, other areas of our Company saw increased momentum in lead generation as well.

We believe this strength is due to our significant scale combined with the increasing use of performance based online ad campaigns by traditional brand advertisers. As others have said in the industry traditional brand advertisers are utilizing more performance based ad campaigns in the online channels. I'm pleased to say we're participating in this trend as well. And for ValueClick the sweet spot is in lead generation. Our ValueClick and FastClick networks, Commission Junction affiliate marketing, our proprietary content and our comparison shopping channel all generate leads.

Brand advertising dollars are the biggest part of offline ad spending as these funds continue to migrate on line, traditional brand advertisers will be looking for partners that can execute on performance based campaigns. And given the scale that we've amassed in lead generation we are positioned well to capitalize on this trend. We think that these are the key differentiators as we continue to grow our Company.

We're also seeing traction with pure brand advertising campaigns. We feel the opportunity will be large in this area and we believe the scale we've added to our display ad network through FastClick acquisition coupled with our optimization technologies will enable us to expand in this important area for future growth. So whether a brand advertising wants a large scale branding campaign or performance based campaign we have a solution for them. If they want to run a broad, long-term program that drives online leads and sales we have the solution for them as well. This brings us to our acquisition of FastClick, which is a powerful transaction for a number of reasons.

First, the combination of FastClick and ValueClick positions us as one of the largest display ad networks in the business with reach that compares favorably with the major portals. As online advertising budgets continue to grow, advertisers and agencies will continue to be looking to work with a company with the broadest reach and solutions to fulfill their needs.

Second we can capitalize on the cost synergies related to redundant facilities and operating expenses. When we announced the acquisition we said we could realize about $4 million in annualized cost synergies. We have already implemented a significant number of these redundancies and have identified others to raise the potential annual savings to nearly $5 million.

Third, we have an opportunity to increase FastClick's gross margins. Each percentage point of gross margin improvement increases the bottom line by $1 million. Our goal is to increase FastClick's gross margin 10 percentage points over the next 12 months.

Fourth, FastClick provides us with a search engine marketing solution that can add functionality to our Mediaplex ad serving platform and enable us to scale the small SEM business we currently have in place at Commission Junction. And while FastClick had planned to market their emerging SEM capabilities as a separate product and recognize revenues on an gross basis, we consider SEM a service business and will recognize any SEM revenue on a net basis.

Finally, I'd like to give you an update on PriceRunner. PriceRunner continues to perform well in Europe with significant organic growth. And as you know we launched PriceRunner in the U.S. this past quarter. We are continuing to scale its base of paying merchants by leveraging the relationships throughout our divisions. In its October 2005 edition, PC World conducted an independent survey of U.S. comparison shopping sites and rated PriceRunner number one. As PC World's best all around comparison shopping site, PriceRunner beat every other major comparison shopping site in the United States. We are pleased to have this powerful B to C lead generation channel in our portfolio and we're just beginning to tap the synergies between PriceRunner and our other businesses to drive leads to merchants.

I'm now turn the call over to Sam who will provide you with more detail on our third quarter financial performance. Sam?

[Sam Paisley, Chief Administrative Officer]

Thanks, Jim. Before I discuss our financial results I want to mention that third quarter 2005 results through the full quarter's activity from PriceRunner acquired in August 2004, E-Babylon, acquired in June 2005 and Web Clients acquired in late June 2005. Fast Click, which was acquired in late September 2005, was not included in our Q3 2005 reported operating results.

In the third quarter of 2005, ValueClick generated $81.4 million in revenue from our consolidated operations, an increase of 87% over Q3 2004 revenue of 43.5 million and 2.4 million above the high-end of our guidance range. Pro forma organic growth, which includes the historical performance of FastClick, was approximately 29% year-over-year. Our organic growth rate excluding FastClick was 30%.

Gross profits were $58.9 million for the third quarter of 2005, an increase of 94% compared to gross profits of 30.3 million for Q3 2004. This increase results from the overall growth in revenue and a greater mix of higher margin revenue in Q3 2005. Gross margins were approximately 72.4% in Q3 2005, an improvement from 69.6% in Q3 2004. Operating expenses, excluding non-cash stock compensation and amortization expense, totalled $37.9 million or 47% of revenue in the third quarter of 2005 compared to 20.4 million also 47% of revenue in Q3 2004. These operating expenses increased 86% year-over-year, primarily due to additional marketing expenses.

Sales and marketing expense was 22 million in the third quarter of 2005 compared to 9.8 million in Q3 2004. The $12.2 million increase is primarily attributable to additional advertising and marketing expense supporting the growth of our PriceRunner, e-commerce promotional and vertical marketing sites and European growth initiatives. As a result the percentage of sales and marketing expense to revenue was 27% in the third quarter of 2005 versus 22% in 2004. As a percentage of revenue both general and administrative and technology expense improved in Q3 2005 versus 2004. General and administrative expense was $10.3 million, or 13% of revenue in the third quarter of 2005, compared to 7 million, or 16% of revenue, in 2004.

Technology expense was 5.7 million in the third quarter 2005 or 7% of revenue compared to 3.7 million or 8% of revenue in 2004. Amortization of stock based compensation was $70 million during the third quarter 2005 compared to 124,000 in 2004. The decrease is due primarily to our amortization method which charges a higher portion of stock-based compensation in the earlier years of the option investing period. We anticipate stock-based compensation expense will be approximately $1.8 million in the fourth quarter of 2005 and $3.3 million for the full year 2006 due to the inclusion of additional stock-based compensation from the FastClick acquisition.

Amortization of intangible assets was $3.1 million during the third quarter of 2005 compared to 1.1 million in 2004. The increase is due primarily to the amortization of intangible assets acquired in the PriceRunner, Web Clients and E-Babylon transactions. We anticipate amortization expense will be approximately $5.3 million in the fourth quarter of 2005 and $21 million for the full year 2006 due to the inclusion of additional amortization of intangible assets acquired in the FastClick transaction. As a result of the revenue performance and increased operating leverage I have previously described the Company generated operating income of $17.8million in Q3 2005, a 105% increase compared to operating income of 8.7 million in 2004.

Net interest income was $687,000 for the third quarter of 2005 compared to $1 million in Q3 2004, primarily due to the cash payments associated with the Web Clients acquisition and interest payments associated with our short-term debt agreement. We anticipate that net interest income will be approximately $1.3 million in the fourth quarter of 2005. Approximately $65 million of the cash acquired through the FastClick merger, which was consummated on September 29th, was used to retire the short-term debt agreement.

Income tax for Q3 2005 was $7.5 million compared to 2.1 million in 2004. The effective tax rate for Q3 2005 increased to approximately 40% from 21% in 2004 due to increased levels of expected pre-tax profitability, the release of our deferred tax asset valuation allowances in December 31, 2004 and an increasing mix of U.S. jurisdiction taxable income resulting from our recent acquisitions. Absent this increase in the effective tax rate, fully diluted earnings per share would have been about 17%, $0.17 in Q3 2005. Our revised guidance for Q4 and full year 2005 anticipates effective tax rates of approximately 41% and 39% respectively. These figures result in net income of $11 million or $0.13 per share based on the weighted average number of 87.7 million fully diluted shares outstanding. This exceeds our previously issued guidance of $0.09 per share.

As described in greater detail in our press release, net income before interest, taxes, depreciation and amortization or EBITDA was $22.6 million for the third quarter of 2005, above our EBITDA guidance range of 18 to $19 million. Q3 2005 EBITDA increased 99% from Q3 2004 EBITDA of $11.4 million.

I will now make a few comments on the performance of our media affiliate marketing and technology business segments. Media segment revenue increased 135%, to $58.6 million in the third quarter of 2005 compared to 25 million in 2004 primarily due to strong performance by our U.S. media products and the inclusion of a full quarter of operations of Web Clients, E-Babylon and PriceRunner. Intercompany revenue was nil in Q3 2005 versus 100,000 of intercompany revenue in 2004. Gross margins were approximately 64% in the third quarter of 2005 compared to 54% in Q3 2004, primarily due to a grater mix of higher margin revenue in Q3 2005 from lead generation products in the U.S. and PriceRunner in Europe.

Affiliate marketing revenue increased 29% to $19 million in the third quarter of 2005, compared to 14.7 million in 2004. Intercompany revenue in these amounts was approximately $1.7 million in Q3 2005 and 1.2 million in Q3 2004. Affiliate marketing gross margins improved to approximately 88% in the third quarter of 2005, compared to 84% in 2004 primarily through the operating leverage of our consolidated affiliate marketing infrastructure supporting significantly higher revenue levels. Technology revenue increased 5% to $5.9 million in the third quarter of 2005 compared to 5.6 million in 2004. Intercompany revenue in these amounts was approximately $300,000 in Q3 2005 and $600,000 in Q3 2004. Technology gross margins were 78% in both Q3 2005 and 2004.

The consolidated balance sheet remains strong with approximately 226 million in cash, cash equivalents and marketable securities and 652 million in total stock holders equity as of September 30, 2005. Capital expenditures were approximately $2 million in Q3 2005 and 6 million for the 9 months ended September 30th, 2005. We anticipate that capital expenditures will be in the range of 7 to $8 million for full year 2005 primarily due to investments in recently closed acquisitions. Based on our outlook in Q3 2005 financial performance we are raising our full year guidance and are providing Q4 2005 guidance. We are also issuing preliminary guidance for 2006.

For the fourth quarter of 2005 ValueClick anticipates revenue in the range of 112 to 117 million with the mid point of guidance representing a 111% increase from fourth quarter 2004 reported revenue. EBITDA for the fourth quarter of 2005 is expected to be in the range of 26 to $28 million. Adjusted EBITDA, defined as EBITDA before stock-based compensation, is expected to be in the range of 28 to $30 million.

The Company expects fully diluted net income for common share of approximately $0.12 in the fourth quarter of 2005 which is based on approximately 106 million fully diluted shares outstanding. For full year 2005 we currently expect to generate revenue of approximately 299 million to 304 million. EBITDA is expected to be in the range of 78 to 80 million and adjusted EBITDA is expected to be in the range of 80 to 82 million. We expect net income of approximately $0.43 to $0.45 per diluted share.

For fiscal year 2006, we currently expect revenue of approximately 480 million to $500 million which represents a 63% growth between the mid points of 2005 and 2006 revenue guidance. Organic growth is anticipated to be approximately 21% at the mid point of pro forma 2005 and 2006 guidance. EBITDA is expected to be in the range of 120 to $125 million and net income is anticipated to be in the range of approximately $0.53 to $0.59 per fully diluted share.

The 2006 guidance assumes approximately $21 million in amortization of intangibles, 3.3 million in stock-based compensation, 8 million in depreciation, and effective tax rate of 40% and 107 million fully diluted shares. Capital expenditures are expected to be in the range of 7 to $8 million. Our new 2006 guidance does not include the impact of expensing stock options under SFAS 123 R.

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

[James Zarley, Chairman and CEO]

Thank you, Sam, and thanks to everyone who joined us on the call today. This was another good quarter for the Company and I believe that the combination of our existing product growth and recent strategic acquisitions have positioned us to become a stronger player in this exciting new industry. We are now a leading comprehensive online marketing services company capable of satisfying online marketing goals with large scale solutions including the largest independent display ad network for branding and traffic-oriented campaigns, the large scale lead generation solutions that tap into multiple online channels such as e-mail, promotional and vertical websites and comparison shopping and the number one affiliate marketing solution for online sales programs and lead generations.

We can now approach an advertiser, see what they are looking to achieve online and provide a large-scale solution that fits their needs. We expect this position to generate another strong year of growth and profitability in 2006 as shown in our initial 2006 guidance. We believe we can generate revenue of 480 to $500 million next year and EBITDA of 120 to $125 million and still invest in new initiatives while generating strong returns for our shareholders.

We've hit a milestone by positioning the Company to be well-placed in the market with a $500 million revenue stream and respectable profit. We're now ready to take the Company to the next step. And on the M&A front we'll continue to be on the lookout for those companies that fit our strategic framework at valuations that are accretive to our shareholders. We believe this can be done without deviating from our current business model and I believe that we will continue to consolidate our segment where it makes the most sense.

Now, I'd like to turn the call over to the operator to take your questions. Operator?

Question-and-Answer Session

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