Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Gary Fuges - Manager of IR

Tom Vadnais - CEO

John Pitstick - CFO

Sam Paisley - CAO

David Yovanno - COO of US Media Group

Analysts

Kyle Evans - Stephens Investment

Mark Mahaney - Citi

Imran Khan - JPMorgan

William Morrison - ThinkEquity

Youssef Squali - Jefferies

Eric Martinuzzi - Craig Hallum

Christa Quarles - Thomas Weisel

Sandeep Aggarwal - Oppenheimer

Mark Bacurin - Robert W. Baird

Ben Schachter - UBS Securities

Brian Russo - Banc of America Securities

Ross Sandler - RBC Capital Markets

Clay Moran - Stanford Group

Aaron Kessler - Piper Jaffray

Brian Pitz - Banc of America Securities

Carl Long - Needham & Company

ValueClick Inc. (VCLK) Q4 2007 Earnings Call February 13, 2008 3:00 PM ET

Operator

Good day. My name is Dewayne and I will be the conference facilitator today. A replay of this conference will be available by telephone beginning at 4:30 p.m. Pacific time today and may be accessed through 10:00 p.m. Pacific time on February 20, 2008.

Thereafter, it can be accessed on ValueClick's website at www.valueclick.com or at www.streetevents.com. Previously filed SEC filings can also be found on ValueClick's site. All lines will be placed in a listen-only mode to prevent any background noise at this time. After the speaker’s remarks, there will be a question-and-answer period. (Operator instructions)

At this time, I'd like to turn the conference over to Gary Fuges, Manager of Investor Relations for ValueClick Incorporated. Please go ahead, sir.

Gary Fuges

Thank you, Dewayne. Good afternoon. Welcome to ValueClick's fourth quarter 2007 financial results conference call. On the call with me today are Tom Vadnais, Chief Executive Officer, John Pitstick, Chief Financial Officer and Sam Paisley, Chief Administrative Officer with me and David Yovanno, who is our Chief Operating Officer of US Media.

Today's call will contain forward looking statements 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 filings with the Securities and Exchange Commission made from time to time by ValueClick including its annual report on Form 10-K filed 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 demand for online advertising in general and performance based online advertising in particular will not grow as rapidly as predicted, and legislation and governmental regulations that could negatively impact the company's performance.

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

With that, I'd like to turn the call over to Tom Vadnais, CEO of ValueClick. Tom?

Tom Vadnais

Thank you, Gary and thanks to all of you who joining us on the call. We have a lot to discuss today with our normal review of prior quarter and some discussions of 2008. And in our Q&A session, in addition, I am going to formally introduce you to some of ValueClick executives, who are with us today, that you may not know.

So, I will get right into it. Fourth quarter was a strong finish for the year for us with revenue above the high-end of the range, as we provided in our November call. The Comparison Shopping segment and the Media Segment's display Ad business were the primarily drivers of the revenue our performance.

Better than expected revenue enabled us to exceed the high-end of our adjusted EBITDA guidance and diluted net income per common share, which was at the high end of our guidance range. As we stated in a press release this afternoon in Q4, we booked $2.9 million reserve related to our settlement with the FTC, which lowered adjusted EBITDA by $2.9 million and EPS by $0.03.

I will give you more color on the FTC settlement shortly, but I want to point out that our previously issued guidance did not include the impact of any settlement reserve. So, we had an even better fourth quarter compared to guidance than the reported adjusted EBITDA and EPS figures would suggest.

Now I'll give you a brief summary of our Q4 performance in our four business segments. Starting with Media, in Media we continue to see strong growth in display advertising. The network enjoyed continued revenue diversity across all of our pricing models. Lead generation revenue was within the $48 million to $49 million guidance range that we have provided on the last call.

In our Affiliate Marketing business, Commission Junction had another strong quarter of growth in the US with continued success in launching new clients. In 2007, CJ in the US met its internal goal, a major client win and revenue. In the quarter, we launched twice as many new advertiser accounts as our two largest competitors combined.

The Technology segment had also completed strong year, growth for the full year '07 was 27% and margins continue to be healthy. As I mentioned in the last call, we are now marketing the MediaPlex solution for multi-channel conversion tracking and not just for Ad survey. We think we have a differentiated solution that helps marketers understand the impact of display Ads, email and search relatively to the conversion rates for this type of advertising.

Finally, Comparison Shopping in 2007, we again had record growth. In Europe, PriceRunner had another outstanding quarter, in the US, MeziMedia was again much stronger than expected. We will further discuss MeziMedia's performance a little bit later in the call.

Now I'd like to update you on the FTC investigation regarding our Lead Gen business. We announced this afternoon that we have reached a settlement agreement with the FTC that is waiting approval from the Department of Justice in the presiding court.

As we said on November call, the settlement includes a payment that is not material to the company's overall financial position and is stipulated injunction regarding business practices post-settlement. The settlement payment is based on the FTC's allegation that we utilized the deceptive practices to violate the CAN-SPAM and FTC Acts.

Although we disagree with the FTC on this issue, we thought their continued negotiations and potential litigation could have added significant time and expense to get this resolved. We decided, therefore, to settle the issue with the FTC with the payment of $2.9 million without any admission of liability. The payment is based solely on the practices of Hi-Speed Media and not on the practices of Webclients or any other ValuClick subsidiary.

We are also announcing today that we are completing the consolidation of the former Hi-Speed Media division into our Webclients division. This stipulated injunction part of the settlement relates to enhanced disclosures on our landing pages and offers pages of the promotional sites and on email marketing messages that drive traffic to these sites.

We worked with the FTC and agreed on the guidelines that will govern our lead generation business going forward. We also believe that these standards will set guidelines for the entire lead generation industry. As a leader in the space and a member of the Internet Advertising Bureau, we have leveraged our work with the FTC and contributed great deal to the IAB's announcement last Thursday of online lead generation B2B and B2C best practices for US based advertisers and publishers. So, we are very pleased with this settlement.

Before we get into more details about our performance, I'd like to shift gears for a moment and say a few words about our Chief Administrative Officer, Sam Paisley, who announced today that he will be leaving ValueClick to pursue another opportunity. Sam has been with ValueClick since 2000 and most recently has helped lead our M&A program along with our Executive Chairman Jim Zarley.

Sam is on the call with us today and I'd like thank him for his service to the company and wish him continued success in his next role. Going forward, Jim will leave the M&A program and Gary Fuges will report to me and continue to run the Investor Relations program. But Sam, we are sorry to see you leaving; I wonder if you would like to say a few a words.

Sam Paisley

Thanks for the kind words, Tom. I have been proud of my association with ValueClick over the last 8 years. Soon I will be joining another Los Angeles area company. This pre-public high growth company offered me a C-level position and attractive equity participation. Despite the compelling offer, this was a difficult decision for me because of my favorable history here and my strong belief in ValueClick and its team.

In the end, I couldn't resist this new opportunity and I will miss my partners at ValueClick. Thanks again, Tom for these kind words and your partnership.

Tom Vadnais

Thanks, Sam. Good luck in your new venture and I know we will stay in touch. Next, I'd like to introduce you to someone that you will start seeing more of on the investor relation circuit with Gary and me. His name is John Pitstick and he has been our CFO, since last September.

Some of you may not know John, so I will spend just a moment introducing him. John joined ValueClick as a Senior Finance Executive in 2005 and he was promoted to Chief Financial Officer in September of 2007. Prior to joining ValueClick John was a Senior Manger audit practice of Ernst & Young, where he served both public and private companies in the High Tech area for over 10 years.

John is on the call today and we’ll now take the call to provide more details regarding the quarter and our initial 2008 guidance. John?

John Pitstick

Thanks Tom. Before I discuss our financial results, I'd like to mention that fourth quarter 2007 results include three months of activity from MeziMedia, which we acquired in July, 2007, and three months of activity from Shopping.net, which we acquired in December, 2006. Both acquisitions are part of our Comparison Shopping segment.

In the fourth quarter of 2007, ValueClick generated revenue $183.1 million, a 14% increase over Q4 2006 revenue of $160.4 million, and above the high-end of our previously issued guidance range of $172 million to $177 million. Revenue our performance was driven primarily by our Media segment, Display Ad business and by our Comparison Shopping segment.

Gross profit was $125.1 million for the fourth quarter of 2007, compared to $112.6 million for Q4 2006. Gross margin was 68.3% in the fourth quarter of 2007, compared to 70.2% in Q4 of 2006. Gross margin decreased primarily because of reduction in mix of lead generation revenue in the fourth quarter of 2007, compared to 2006.

Operating expenses excluding stock-based compensation and amortization expense totaled $82 million or 44.8% of revenue in the fourth quarter of 2007. Sales and marketing expenses were down as a percentage of revenue in Q4 2007 versus 2006 due to the decline in advertising cost, supporting our lead generation business.

As Tom mentioned in the fourth quarter 2007, we booked a $2.9 million reserve in G&A associated with the settlement agreement with the SEC. Excluding this reserve, cash operating expense would have been $79.1 million or 43.2% of revenue compare to $69 million or 43% of revenue in Q4' 2006.

Adjusted EBITDA was $45.6 million for the fourth quarter 2006 compared to $46.1 million in the prior year. Adjusted EBITDA margin was 24.9% in Q4 2007, excluding the impact of the SEC settlement approval, adjusted EBITDA would have been $48.5 million for the quarter, and our adjusted EBITDA margin would have been 26.5%.

Stock-based compensation in aggregate was $5.3 million in the fourth quarter 2007, compared to $2.4 million in 2006. This increase is due to new stock options granted during 2007, combined with the higher fair value assigned to each option granted in 2007, compared to 2006.

Amortization of intangible assets with $8 million in the fourth quarter of 2007, compare to $5.2 million in Q4 2006. This increase is due to the addition of new intangible assets from the July 2007 acquisition of MeziMedia.

The company generated operating income of $29.7 million in Q4 2007 compared to $36 million in 2006. Operating margin was 16.2% compared to 22.4% in the year ago period. The decrease in operating income and operating margin is due to the impacts of the SEC settlement reserve and related legal fees incurred in Q4 2007 as well higher stock-based compensation and amortization expense as compared to the prior year period.

Income tax expense for Q4 2007 was $14.4 million and the company's net effective income tax rate was 44.2% in the quarter. The effective tax rate was higher than previously issued guidance of 42.5% as a $2.9 million FTC settlement reserve is not tax deductible.

As a result, in the settlement reserve, the effective tax rate in the quarter was negatively impacted by more than 300 basis points. These figures result in fourth quarter 2007 net income of $18.1 million or $0.18 per share based on the weighted average number of $99.2 million diluted shares outstanding. This performance is at the high end of our guidance range $0.17 to $0.18 per share.

As Tom noted the $2.9 million FTC settlement was not anticipated in our previously issued guidance and had the impact of lower range in Q4 EPS by $0.03 per share.

The consolidated balance sheet as of December 31, 2007 remain strong with $287 million in cash, cash equivalents and marketable securities over $700 million in total stockholders' equity and no long term debt. The balance sheet as of December 31, 2007 includes a $107 million increase in payables and goodwill for the cash run out that will be paid to the shareholders and the MeziMedia in the first quarter of 2008. Due to a strong financial performance, MeziMedia earned the maximum payout for the 2007 earn out periods.

Total cash consideration for MeziMedia, which include the $97 million cash upfront and the $107 million earn out for 2007 will range between approximately $204 million and $349 million depending on whether the 2008 and 2009 revenue and adjusted EBITDA targets are met. Any contingent consideration paid after the closing day will be accounted for additional purchase price and added to growth. Capital expenditures were approximately $4.5 million in Q4 2007and $9.3 million for the full year.

I will now discuss the fourth 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 corporate expenses, amortization of intangibles and stock-based compensation.

Worldwide Media revenue was $91.8 million in the fourth quarter of 2007, compared $111.6 million in Q4 2006. Strength in US and European Display Ad business was offset by year-over-year decline in the lead generation business. Media revenue increased 7% from the third quarter of 2007, and lead generation revenue for the quarter was within the previously issued guidance range of $48 million to $49 million.

Media's operating margin was 21.4% in the fourth quarter 2007, compared to 25.4% in the year ago period. The decrease in segment operating margin was primarily due to the decrease in lead generation revenue. Compared to the third quarter of 2007, Media segment operating margin increased 20.1% to 21.4% in the fourth quarter 2007.

Worldwide Comparison Shopping revenue increased over 400% on a reported basis to $45.8 million in the fourth quarter 2007, primarily due to the inclusion of three months results of MeziMedia and strong performance by PriceRunner Europe. Segment operating margin decreased to 21.3% compared to 23.1% in the year ago quarter primarily due to higher discretionary marketing spend in Europe.

Worldwide Affiliate Marketing revenue increased 15% to $37.5 million in the fourth quarter 2007, due to higher e-commerce activity transacted through our core affiliate marketing network. Growth in the US was offset by softness in the UK.

Segment operating margin of 52.7% in the fourth quarter of 2007 declined from 56% in Q4 2006 due to higher operating costs, as we continue to invest and expand our operating marketing business in Europe. Worldwide technology revenue increased 18% year-over-year to $9.1 million due to growth in the US and Europe. Segment operating margin expanded to 40.7% in Q4 2007 from 40% in the prior year due to the operating leverage associated with the higher revenue.

Today we are providing initial guidance for the first quarter in fiscal year 2008. For the first quarter, we expect revenue of approximately $166 million to 170 million. We expect adjusted EBITDA in the range of $40 million to $41 million. We anticipate diluted net income for common share of $0.15 to $0.16, which includes stock-based compensation expense of approximately $0.04 per common share, based on an unexpected share count of approximately 100 million diluted shares outstanding.

For full year 2008, we expect revenue of approximately $730 million to $745 million. We expect adjusted EBITDA in the range of $185 million to $190 million, and we anticipate diluted net income for common share of $0.78 to $0.81 including stock-based compensation expense of approximately $0.14 per common share, based on expected share count of approximately 100 million diluted shares outstanding.

The full year 2008 guidance assumes approximately $29 million in amortization of the tangibles, $9 to $10 million in depreciation, $22 to $23 million of stock based compensation, $8 to $9 million interest income and net effected income tax rate of 42%. We anticipate capital expenditure during 2008 of approximately $10 million.

So, with that I'll turn the call back over to Tom.

Tom Vadnais

Thanks, John. Before we get to Q&A I want to formally introduce one of the newest members of the Senior Executive team as Gary mentioned, when the call started. He is with us today, David Yovanno. Dave is recently announced as COO of our US Media Group, which includes the ValueClick Media division and our now consolidated lead generation business with Webclients.

He has been with us since early 2000. He has spent most of his career here in the media side of the business, very knowledgeable in this side of the business, and knows the industry very well. He’s a Member of the Board of Directors of the Internet and Advertising Bureau and I think a great addition to the senior team.

So, he’s with us and he will help us participate in the Q&A session on issues that involve his area. So, with that Gary, I will let you get us going on Q&A.

Gary Fuges

Operator, let's begin the Q&A please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Kyle Evans with Stephens Investment.

Kyle Evans - Stephens Investment

Sam, I got to ask can you give us any more detail on where you're going as I hate to see you down the road at another network digital marketing business model.

Sam Paisley

Jim told me to be obscure about where I was going on this call. No, I’m only kidding. The company I'm joining is the company by the name of Spot Runner and I'm going to be Chief Financial Officer and I believe that I can, although I don't know everything about my new association just yet. I do believe since it's an agency oriented enterprise I do believe there's an opportunity for us in the future to be a good customer of ValueClick.

Kyle Evans - Stephens Investment

Great. Well, congratulation to you and them.

Sam Paisley

Thanks.

Kyle Evans - Stephens Investment

Can you guys give me revenue and EBITDA margin segment guidance to give us a little bit more context around the '08 guidance?

Tom Vadnais

Yeah, we've got some preliminary numbers there for you Kyle. John, you want to take that one?

John Pitstick

Yeah, if we breakdown to each of the segments in terms of where we see the revenue growth in '08 versus '07, I think for the Technology segment we are expecting growth in the mid-teens. For the Affiliate Marketing business, we're expecting growth in the low-teens.

Our Comparison Shopping segment including MeziMedia where we are expecting pro forma growth of about 40%. And in our Media business, we're expecting that to be down on a year-over-year basis, given the impact of lead generation, and we expect that to be down in the 7% to 8% range year-over-year.

Kyle Evans - Stephens Investment

Okay, great. So, going into my last question and then I'll get back in the queue. You mentioned what total lead gen was in the quarter 48 to 49. Could you give a little bit more detail around the promo lead gen piece of that and what's your outlook is for the overall lead gen business for this year? Thanks.

Tom Vadnais

Kyle, we haven't broken out the promo piece. Earlier in the 8-K we talked about what portion of the lead gen was in the promo side. But we also said, we thought things are pretty much leveled out at the end of last quarter, which proved true for the fourth quarter and we are not get into detail guidance by segment anymore on this stake.

So, basically say though for the Media segment in 2008, we've got a combination of display having a nice growth rate and the lead gen business being down on a year-to-year basis, but that's primarily because we had a strong first and second quarter last year before the FTC issue arose.

And as we go into '08, we are just not sure how the revenue situation may change with the new settlement. So, we're still somewhat hesitante on projections here, but we've got good growth in display and year-to-year decline in lead gen because of the high first and second quarter. And that's as far as when we go on disclosure right now, Kyle.

Kyle Evans - Stephens Investment

Okay. Thanks. I'll get back in queue.

Tom Vadnais

Okay.

Operator

Our next question is from Mark Mahaney with Citi.

Mark Mahaney - Citi

I like to stick with the lead generation topic. Can I ask in terms of the guidelines that were agreed to with the FTC, is that something there to fundamentally changes the revenue model or the P&L of the expense side of your lead generation going forward? Thanks

Tom Vadnais

Mark, there is nothing in the injunction that changes the revenue model or the expense side of this. The injection talks about in a very simple sense, more disclosure on the promotion lead gen advertising. That doesn't change our cost structure at all.

The question is, what will happen now that the FTC issue is behind us, no longer potential negative for advertisers and publishers who are involved in this space, and we just don't know what that impact is going to be at this point. And in fact as I said earlier until DOJ and the presiding court approves what the FTC commissioner have approved, its still somewhat in a preliminary state, so just a little few early for us to give you much help on that, Mark.

Mark Mahaney - Citigroup

And then could you comment on it maybe way too early, but what you think about the impact on your business of the potential Microsoft, Yahoo merger?

Tom Vadnais

Yeah. That question has come up a fair number of times and we really don't see that it has much of an impact for us. It's primarily about paid search, which really isn't our business in the first place. So, we are not looking at it is having any threat to our business whatsoever.

Mark Mahaney - Citigroup

Thank you, Tom.

Tom Vadnais

Thanks Mark.

Operator

Our next question is from Imran Khan with JPMorgan.

Imran Khan - JPMorgan

Yes, hi. Thank you for taking my questions. Congratulations, Sam. You will be a good partner with Nick. A couple of questions first. I see the guidance of Q1. It seems like Q1 guidance implies 7% year-over-year growth rate considering you had a 14% -- fourth quarter guidance guiding 14% full year guidance as well.

So, start to better understand why you are guiding such as deceleration in the growth rate in your guidance. And then I have a follow-up question.

Tom Vadnais

Let's take that one first and Dave maybe I'll let you respond to that one.

David Yovanno

If you look at Q1 of '07 Imran that was really when our lead generation revenue was at its peek before the FTC matter came out in second quarter. So, looking at a peer year-over-year growth rate there you got a factor that impact into that.

Imran Khan - JPMorgan

Okay.

Tom Vadnais

That's really the whole answer. All of our other business segments are having nice growth, but we had our peak quarter in of Q1 of last year in lead gen and that's certainly not coming back at least right now.

Imran Khan - JPMorgan

Okay. Because it seems to me that sequentially business is dropping off significantly as well. It's probably the most sequential decline I saw in two years in the business. But the second question is on the Affiliate Marketing side, Affiliate Marketing growth rate also decelerated from Q3 to Q4. I think you talked about the UK market being weak and our understanding, talking to one of your competitors that the average price is declining in the UK market. But is there anything else going that Affiliate Marketing growth rate decelerate 9 points on year-over-year basis?

Tom Vadnais

Are you talking year-over-year or?

Imran Khan - JPMorgan

Yes. I think in Q3 Affiliate Marketing growth rate was 24.6, if my math is correct. And I think fourth quarter growth rate, what 15 you said?

Tom Vadnais

Okay. You're at looking at Q3 '07 compared to Q4 '07?

Imran Khan - JPMorgan

Yes, the growth rate decelerated 9 points.

Tom Vadnais

Yeah, the answer to that is we did have a slow down in Europe that impacted the -- what we anticipated the growth rate could be. And that market is quite different than the US market and kind of there is a separate discussion if you want to get into the detail on it.

On US side, we had a good quarter in Q4, we had some revenue that didn’t get closed and come in that we had anticipated, but we think it's more deferred into 2008 and loss. So, there is a combination of some softness in Europe and some I'll call deferred revenue at this point in the US.

Imran Khan - JPMorgan

Okay. Thank you

Operator

And our next question will come from William Morrison from ThinkEquity.

William Morrison - ThinkEquity

Yeah. Hi, can you hear me?

Tom Vadnais

Yes, we hear fine.

William Morrison - ThinkEquity

Thanks. Sorry I'm on a cell phone. Could you just break out, maybe give us a little bit more color on the display growth implied in your guidance versus lead gen, I guess decline in the Media segment.

And the only other question I've got was that it looks like (inaudible) are there any one-time expenses like yearend bonuses in the G&A line. It looks like even if you exclude the $2.9 million charge for the legal settlement. It still went up pretty significantly sequentially and just curious if there is any thing one-time in that? Thanks.

Tom Vadnais

John I don't think we got any other one-time entries or do we?

John Pitstick

Yeah, one thing that keep in mind when you look at the reported G&A line, the stock-based compensation in that line on the year-over-year basis Q4 '07 versus Q4 '06 if stock-based compensation was up in the G&A line about $2.8 million.

William Morrison - ThinkEquity

If you exclude the stock-based comp in the $2.9 million, it looks like it was still up around just high at $3 million sequentially; is there -- other year end bonuses or anything or the G&A cost just kind of ramp up?

John Pitstick

The other thing that, that's in the Q4 numbers, when we look at the efforts with the LTC, legal cost in the quarter were higher than normal. If you compare Q4 '07 to Q4 '06 they are up about $1 million at last in the Q4 '07 numbers and then Q4 as usually our biggest quarter in terms of revenues in overall activity. So, G&A tends to be little higher.

Tom Vadnais

It relates to one-time issues, the stock-based compensation and amortization those are not one-time issues.

William Morrison - ThinkEquity

Right.

Tom Vadnais

So, I don't see a lot of that and other than what John just discussed in terms of one-time issues. Do you have another question William?

William Morrison - ThinkEquity

And then the display growth implied in your guidance versus the lead gen decline for the Media segment?

Tom Vadnais

All right, well I'll let Dave, give you some color on the display business. But we are projecting on the growth as I mentioned for display. On the lead gen we're not projecting a sequential decline there. We are simply not sure about what growth might come about.

So, we are looking sequentially at a flat lead gen business, the decline from last year because of the high first and second quarter. On the display side, we are looking at continued growth and Dave you want to comment on?

Dave Yovanno

Of course, we all think a lot of the folks in the industry know that we've got some of the sales folks, accountant management folks, media development folks just executing extremely well. We've got a lot of -- 10 years is a lot of experience on team. I think that's first and foremost especially in the Q4 results.

We continue to evolve our behavioral targeting platform, our optimization platform that put us in a position with it demonstrating more scale and performance for our clients. And with that, resulted it is larger budget for our performance based advertises. That's helped with our increase. We had very strong performance in Europe and we continue to see that growth throughout 2008. Those were the key drivers.

Tom Vadnais

When as I mentioned earlier, we are not going to get into business unit reporting and guidance issues, but our display business is projected to grow quarter-to-quarter over each quarter of 2007 and had a strong year in display.

Gary Fuges

Hey, Bill, this is Garry. I’ll just touch on something Tom said about the growth rate regarding lead generation. The way one way to think about that is the exit quarter for '07 for lead gen and think about annualizing that for 2008 it can give you some sort of barring on what's baked into our guidance as it pertains 2008.

William Morrison - ThinkEquity

That's helpful. Thanks a lot, Gary.

Gary Fuges

You're welcome.

Operator

Our next question is from Youssef Squali with Jefferies.

Youssef Squali - Jefferies

Thank you very much and Sam best of luck to you.

Sam Paisley

Thank you.

Youssef Squali - Jefferies

A couple of questions, I guess back to John, the implied growth by just looking at the numbers is about 14% the midpoint.

Adjusted for Mezi and shopping, what is the implied organic growth there? And then, secondly, maybe for Tom, what economic environment do you have, a kind of bake into your projections, are you baking effectively steady state or slightly worse, slightly better?

Tom Vadnais

John, you answer the first question and then I'll join the topic.

John Pitstick

Yeah, so you are right. So, the 14% growth rate on a reported basis were coming in out at. On a pro forma basis if you factor in MeziMedia and also adjust for the -- for what's happens in the lead gen business, we are expecting that rate growth to be in the high teens to around 20%.

Tom Vadnais

As it relates to the outlook for the year, we had a strong fourth quarter, strong December. We didn’t experience really any significant changes in the economic outlook. But obviously, would everything being discussed now in the economy it could have some impact. And I guess my position would be things might be a little bit more difficult this year than they were last year.

If you look at the projected e-commerce statistics published by Jupiter and Forrester, they're looking for a slowdown on a year-to-year basis to the mid-teens range, which is about where we're projecting our revenue. So, that's kind of how I see it now, and I think we are all kind of wait and see mode.

Gary Fuges

Sorry, Gary here. Just a little point on a little more on John's comments about the year-over-year pro forma growth for 2008 1Q '08 versus 1Q '07. If you look at it on a reported basis, the number will be down, but as Tom pointed out and John pointed out, first quarter of '07 had record lead generation revenues. So, clearly lead gen revenue will be down year-over-year 1Q '08 versus 1Q '07.

Youssef Squali - Jefferies

And John when you talk about high-teens were around 20%, you effectively normalizing for the lead gen business or promotional lead gen business. What are you doing there, taking it out or?

John Pitstick

Taking out the lead gen business, entirely.

Youssef Squali - Jefferies

Okay. And then if I look at the EBITDA margin, I think it's that you are guiding to roughly around 25%. That's about 150 basis points down from the core you just reported, right when you normalize for the FTC thing. I am trying to kind of reconcile that with the fact of that, if you have a lower O&O business or at least promotional O&O business, wouldn't that actually help you? How does that work?

John Pitstick

Well, the fourth quarter is always going to have, it is where we have the most leverage in our adjusted EBITDA which can be the highest in the fourth quarter in general. I think when you look at a full year 2007 compared to full year 2008, we are expecting that adjusted EBITDA margin to be pretty very close. So, I don't think if it has is being impacted in the way you described.

Youssef Squali - Jefferies

Okay with it, alright. Okay, that helps. Thank you.

Tom Vadnais

Thank you.

John Pitstick

Thank you.

Operator

Our next question is from Eric Martinuzzi with Craig Hallum.

Eric Martinuzzi - Craig Hallum

Thanks for taking my question. One on Europe and one on the cash from Operator, you talked about Affiliate growth being a little bit slower than you might have originally expected in EU as well as some higher discretionary spending in the price PriceRunner business.

Could you give a little bit more detail on both of those? And then secondly the cash from ops for Q4 as well as the full year, so I could back into that once again in Q4?

Tom Vadnais

John, with response to the cash question on the Affiliate and Comparison Shopping businesses, on the Affiliate side there is some large customer issue, a large customer issue there they had a slow down in the fourth quarter. And it's also a much different market in the US. There are about 20 different competitors there. Some of whom appeared to be wanting to get [bath] in or doing some strange things in the market to generate revenue and try to get ready for acquisitions and so on.

So, it's seems to be a little bit of abnormal time in that market competitively and that we think contributed to a little slower performance than we had anticipated in the fourth quarter. On the Comparison Shopping side as we mentioned we had a record year price on Europe which did great. One of the reasons they did well, was because some investment in that business, and they maybe got a little ahead of themselves, little ahead of the revenue with some of that investment, but that's where we want to do some investing as the business are growing quickly. So, we think that was a good investment.

Eric Martinuzzi - Craig Hallum

But that was not a competitive issue that was by choice?

Tom Vadnais

Yeah. That's no, that's correct. John on the cash issue?

John Pitstick

Yeah, so cash balances quarter-over-quarter were up about $37 million to that of course primarily cash from operations. Are you looking for something else?

Eric Martinuzzi - Craig Hallum

Okay. If that explains the delta then, that answers the question.

John Pitstick

Okay.

Operator

Our next question will come from Christa Quarles with Thomas Weisel.

Christa Quarles - Thomas Weisel

Hi, yeah. I was just wondering if you can highlight a little bit more on the Affiliate side, and I guess where your expectations will be, if we were to see a bigger slowdown there and I apologize if some of that related to recessionary discussion was asked. But I was just trying to figure out if you could actually see a pick up in Affiliate base activity, given the certainty of it. Just some commentary there, thanks.

Tom Vadnais

Well, the Affiliate business tracks very closely with the on line e-commerce business, since that's really what the Affiliate business is all about. As I mentioned earlier, at least the Forrester and Jupiter numbers are taking the growth rate down from 2007 and the 2008, down from around 20% down to the mid-teens. That's the best independent indicator I can give you is to outlook still showing growth, but showing less growth than 2007.

I think we will track very close to that in commission junction. The nature of that business is, although we have long-term contracts it's still the actual revenue generated by the consumer or by the merchant and consumer purchases is what determines our revenue. So, we're going to be in that same volatility range., but we don't see any significant slowdown, just probably, slightly less growth than we had in 2007 is the best outlook we can give you right now.

Christa Quarles - Thomas Weisel

And you don't expect any major shift in bounties. For example, if average selling prices, among them obviously you would be as a percentage, but in terms of straight fee based bounties or any anything like that is potentially overall activity would diminish?

Tom Vadnais

No, we haven't seen that. There could be some merchant pricing actions taken to try to stimulate more demand, but generally those are actions to stimulate the consumer to do more. We don't see or haven't seen any activity with changing the commission structure or percent of sales that are shared with publishers. We haven't seen any change in that area. So, right now I'm not anticipating anything happening there.

Christa Quarles - Thomas Weisel

Okay. Thanks.

Tom Vadnais

Thanks Christa.

Operator

Our next question will come from a Sandeep Aggarwal with Oppenheimer.

Sandeep Aggarwal - Oppenheimer

Thank you. Sorry I joined you late. So, pardon me if I'm repeating some of the questions, which were asked earlier. First is can you talk about how is the ramp up of MeziMedia going on and secondly because of the presence of enduring team in China, are you likely to see some offshore benefit this year, and finally any comments on, how do you see Microsoft-Yahoo acquisition and what does that mean to ValueClick? Thank you.

Tom Vadnais

The Dave Yovanno just returned a few weeks ago from a trip to Shanghai to meet with our Mezi team and he is spending a lot of time with them. So, I'll ask him to respond to that question.

David Yovanno

Great, so Mezi is the high growth aspect of our business. I think they do a number of things that are pretty unique and I think that your question leading to really -- benefits out of this development team in Shanghai. I think those are already built-in to our forecasting guidance for the year.

Mezi it's a great consumer experience for Comparison Shopping. I think the team and the technology that can place there has a very strong expertise in the general area of search. We had over 100 personnel based in Shanghai. We are going to continue to leverage that team to not just achieve our financial goals or the Mezi business, but other aspects of ValueClick we would expect out of those.

Gary Fuges

Sandeep, its Gary. Tom had answered the Yahoo-Microsoft question earlier in the call. Just to summarize we don’t think the game changes for us. We think that's really more about page search and not about with core of our business.

Sandeep Aggarwal - Oppenheimer

Thank you.

Tom Vadnais

We also didn’t mention that we have some business now in Japan, as a result of the Mezi acquisition. We have a small office in Japan, we are generating revenue there and we are looking for further growth in Japan. Although, we are not factoring a lot in this year, it's a strategic move for us to try to grow in that market also.

Sandeep Aggarwal - Oppenheimer

Thanks, Tom.

Tom Vadnais

Thank you.

Operator

Our next question then is from Mark Bacurin with Robert W. Baird.

Mark Bacurin - Robert W. Baird

Good afternoon. Two questions, first going back to the FTC settlement, its sounds like most of the settlement depends on the new disposal rule. So, I want to know first how quickly can the new rules be implemented?

And then secondarily have you experimented all of these new disclosures in terms of trying to monitor consumer response rates to see if there is any implication there with regard to the revenue generation potential?

Tom Vadnais

Yeah. First of all on the new disclosure rules, you are right. There is the significance of the injunction. And we think as I mentioned earlier that the new rules or guidelines as the FTC is referring to them as the IAB is referring to.

We think those are good things for the industry to make as a fair and open as possible for consumers to evaluate the offers that they see in this type of advertising. We have been experimenting trying out various things, we participated as I said with the FTC and coming up with these new guidelines. So, it's not going to take us much time to get fully up and running with them.

In terms of the actual impact we haven't had a lot of time yet to do significant testing. So, that's why we are a little uncertain as to the outlook until we get little too much into this and really see if there is a big change in the conversion rates for this advertising we just don't know. So, that's why we are at for the present just holding as a flat line. But, we don't have any delay; you'll see us we're already in progress in making these changes. So, we should some have input for you in the not too distant future.

Mark Bacurin - Robert W. Baird

Great and then on the MeziMedia, just on this -- I guess in the last question, but it seems like that business continues to do well out performing your expectations. Can you just comment, maybe more specifically about what things they are doing better that's allowing them to drive the growth. It's seems like it just continues to blow the expectations?

John Pitstick

Well, again, just to reiterate. First and foremost they are a great web2.0 Shopping Comparison experience. And so they’ve done a lot of innovative things and providing that service for consumers I think that's catching on, in terms of pulling the audience.

And again that team has deep and rich experience and a well rounded team with expertise in general areas of search. So, in terms of managing traffic in and how to maximize the yield of those visitors and provide a great service to the consumers, is really catching up.

Mark Bacurin - Robert W. Baird

Great, let me add my congratulation to Sam. Hate to see you go, Sam.

Sam Paisley

Thanks so much.

Operator

Our next question is from Ben Schachter with UBS Securities.

Ben Schachter - UBS Securities

Hi, guys. I'll add my congratulation to Sam as well as being getting to work together longer. Few question for you guys. One, the more recent successes of Amazon in terms of pulling a greater share of overall e-commerce, is that impacting the Affiliate business?

And then, if you could discuss a lot of about the Comparison Shopping business, is the traffic source that's really driving it more organic, any kind of breakout, and any kind of color you can give us there?

And then finally, are there any particular verticals that are going to be the crucial factor, the swing factor for '08? Thanks.

Tom Vadnais

Regarding Amazon and Dave maybe you can give his some comments on traffic sources in the Comparison Shopping world. Amazon has had some good growth. I can't say we can pin-down anything that we've seen in the Affiliate side. Its real impact is there. I think perhaps it might impact more of the other retailers in the industry, but we can attribute any down turn in our Affiliate e-commerce business from Amazon's success.

So, really don't have anything to cover with you there. On Comparison Shopping, that traffic source is stable. Dave would be say about that.

David Yovanno

Is the faster growing segment of traffic acquisition for Mezi business? It is the organic traffic to the site. However, they are extremely adapt at a combination of SEO and SEM, as any consumer facing brand is on the internet. That's successful with this type of service. Does that help?

Ben Schachter - UBS Securities

And then the final question on swing verticals for the overall business? If the finance verticals and either the big swing factor in '08 or other particular verticals here, more or less worried about?

Tom Vadnais

Yeah, we don't track specifically each vertical by each business. So, it's a little difficult to answer that, but obviously in '07, there was some downturn in the finance verticals it related to the mortgage sector. We didn't see much downturn in the finance vertical on credit cards and other financial type offerings, but certainly mortgage was down.

That said, that was the only significant change from 2007. As we go into 2008, that probably is going to stay down depending on what happens in the mortgage sector, but I don't see any other industry vertical segments with any forecasted change that we have in our model.

Ben Schachter - UBS Securities

Great, thanks.

Operator

Our next question is from a Brian Pitz with Banc of America Securities.

Brian Russo - Banc of America Securities

Hi, this is Brian Russo for Brian Fitzgerald. I have two questions for you guys. The first is about to get your thoughts on the emergence of these publisher Ad networks such as News Corp trying to do in Martha Stewart OmniMedia. Curious to understand how you feel this may change the competitive landscape?

The second question is again on the Microsoft-Yahoo possible merger. I mean I understand it certainly about search market shares, but clearly if they get together to be integrate both drive PM with BlueLithium, Yahoo Publisher Network and Right Media you are probably talking about the largest Ad network in the market place.

So, what look like your thoughts on how that may or may not affect you guys in terms of competitive landscape? Thanks.

Tom Vadnais

Dave is our best expert as it's relate to Ad networks. So, I'll let him respond. But the one thing comment I make is when you try to combine a direct sales force selling inventory on a portal and an exchange selling inventory on a portal and Ad network selling inventory on a portal and try to integrate all those things without lot of channels conflict that's a big job.

So, that's why we kind of look at it as an observer more than anything else. We just wonder how all that's going to fit together. In addition to that we can be a customer on the exchange side of that if we can get inventory at a good price, so right now it's not something that as we said earlier we look at as a big threat. But Dave, what your thoughts on.

Dave Yovanno

I think at the Ad network model in general is really cut on in the past year. And I think our business is definitely benefiting from being one of the first Ad networks in the States and getting to the size that we've gotten essentially holding that leadership position is really benefited it's really well. The critical math of the market place that we maintained, generates tremendous return for our publishers, great performance, since scale for advertisers and is very difficult to replicate that.

I always say that barriers that entry has an Ad network business are extremely low, but the barriers to scale are extremely high. And I think what you're seeing is you've got companies such as ValueClick, who are leading this space, really we think we can add with regards to the evolution of their technology platforms. And again, the overall yield that you are able to generate for both sides of the equation for publishers and advertisers that any new entrant into this space is going to find it difficult to compete.

Brian Russo - Banc of America Securities

Thank you.

Operator

Our next question is from Ross Sandler with RBC Capital Markets.

Ross Sandler - RBC Capital Markets

Thanks guys. Just a follow-up on Gary's comments about lead gen. So, in your guidance for ’08, do you have any assumption of growth from the $48.5 million revenue run rate in the fourth quarter as we move into the later stage of 2008? And I got one follow-up?

Tom Vadnais

The answer to the first question is right now, no. We're not -- we don't have enough feedback yet and enough experienced with the settlement to know what is going to do. So, we thought the best projection was we want to stay on the same track that we've been on the last couple of quarters. And we'll look for signs of growth and if we see that it will be reflected on our future guidance.

Ross Sandler - RBC Capital Markets

Okay, thanks. And if I do the numbers than in the flat line lead gen for '08, it implies something in the mid-teens for non lead gen revenue in the media business. So, my question is as it relates to your comment on affiliate marketing growing kind of in the low-teens in '08, is that just a bit of conservatism or is there any reason it why it would grow at a slower rate than kind of the core display business? Thanks.

John Pitstick

I think it's more a reflection of just the comps given the high growth rate in 2007. I'd expect they should grow pretty close to similar type growth rates. So, there is no any significance in that minor difference in the projected growth rate.

Ross Sandler - RBC Capital Markets

Thank you.

Operator

Our next question is from Clay Moran with Stanford Group.

Clay Moran - Stanford Group

Thanks. I understand you have paid the earn-out soon but even after that you've almost $200 million of cash and no debt generating somewhere around $35 million a quarter. Can you just tell us your thoughts on use of cash at this point and time, whether it's potential stock buyback or acquisitions? Thanks.

John Pitstick

Well, it's all of the above. We've a significant amount of headroom left with the current authorization we've from the board for more share buybacks, which we won't hesitate to us, if the right opportunity comes along for us. At the same time, we're always looking for accretive acquisitions. It's been a little bit tough lately the pricing side, where some of the deals that have taken place some of the private companies are still hesitant to take their evaluation -- suggest their valuations to what the public markets you like. So, that's been perhaps an inhibitor. But we've an appetite for acquisitions. We won't hesitate to buy our stock back and we think we can make good use of that cash in the future.

Clay Moran - Stanford Group

Okay, thanks.

John Pitstick

Thank you.

Operator

Our next question is from Aaron Kessler with Piper Jaffray.

Aaron Kessler - Piper Jaffray

Hey guys, congrats Dave and Sam good luck in the new venture. A couple of questions. First Dave, are you seeng any signs of a slowdown either in a Q4 or 1Q in terms of the core display business. Also, when you talked about advertisers and agencies, if they are cutting at all, what segment of online advertising do you think they would cutback on? And then also just maybe a sense for what the gross margin outlook is for the display Ad network segment? Thanks.

David Yovanno

I'll let John comment on the gross margin aspect of it. But with regard to slowdown I think it's fair to say that in general review at the conferences and what we're hearing from some clients that we are off to a relatively slow start for the year. However, the feeling and the [bite] that we get is that we don't expect a general slowdown in the core display business going forward. If anything, I think that anything that we hear in the macroeconomics is going to generate more spend online in other way we hear from our clients.

John Pitstick

And in terms of gross margin you asked about only just display but we haven't broken down those gross margins for the media business like that. In the media business, in total we expect gross margin for '08 in around 50 -- mid 50% range. We expect our operating income margins for the media segment to be in the low 20s.

Aaron Kessler - Piper Jaffray

Great. And one follow-up question on the affiliate marketing segment of the e-commerce in general there has been some concern that in Q4 just consumer activity slowdown since a number of people searching and clicking in., is it your sense that you felt any slowness form the consumer side as opposed to the advertiser side?

Tom Vadnais

I think it was more on the consumer side. Although, we didn't have any significant slowdowns in Q4 in December. It seems like '08 there has been a little bit more sluggishness. But I think it's on the consumer side is what we've seen so far.

Aaron Kessler - Piper Jaffray

Great, thank you.

Gary Fuges

Two more questions operator please.

Operator

All right. Next is Brian Pitz with Banc of America Securities.

Brian Pitz - Banc of America Securities

All my questions have been answered. Thank you.

Operator

Very good. And then [Carl Long] with Needham & Company.

Carl Long - Needham & Company

Hi, guys. Thanks for taking my questions. Just quick clarity, can you give us organic growth for the media business ex lead gen and also what the growth for comparison shopping would be had MeziMedia and shopping been part of the company doing both quarters for all three months?

And also, I guess MeziMedia one of the reasons you guys purchased that business was the search capabilities and its ability to and you'll talk about maybe leveraging some of those capabilities to drive traffic to the lead gen products? I was wondering perhaps you can update on that?

Gary Fuges

It's Gary. It's just kind of -- check before we get to the answers. The media business didn’t any acquisitions in it.

Carl Long - Needham & Company

The comp shop, like media ex lead gen and what comp shop was acquisition for….

John Pitstick

Right. And the comparison shopping numbers are available, you can see that in the footnote of the P&L in terms of how the acquisition occurred January 1,’06 revenue would have been X. So, you'll will be I mean, you calculate those growth rates right off the press release. So, I don't have the growth rate in front me, but…

Carl Long - Needham & Company

Yeah that's okay. Q4 '07 over Q4 ’06 on a pro forma basis for comparison shopping segment was up about 77%. If you pro forma that?

John Pitstick

On the leveraging Mezi, we've a desire to do that with the success we've been having with Mezi or Mezi has been having with their own business has precluded some of our initiatives to get them involved and utilize some of their technology and other businesses just because we've been so busy in their core business. But that's still an objective of ours and we'll report more on during the year as it develops.

Carl Long - Needham & Company

Okay, thank you.

John Pitstick

Thank you.

Gary Fuges

Operator, last question please.

Operator

Is a follow-up from Kyle Evans with Stephens Investment Bank.

Kyle Evans - Stephens Investment Bank

Hey, guys, thanks. A follow-up specifically for Dave. I think all of us on the call here are used to having investors to be concerned about Google and ad sense kind of sucking the oxygen supply out of these network business models. But we're seeing a lot of new Ad networks, moving up the ranks in the comp score each numbers. Did you comment specifically on the competitive landscape in your display, Ad network business and the potential impact of these new in terms of into the market? Thanks.

David Yovanno

Sure, my opinion is, I don't think you should use comp scores so much as an accurate depletion of the competitive landscape. It could be one factor in trying to get through the answer to your question. With specific regards to concern on competing with Google etcetera when I said why we've such growth in the display business in Q4 and growing forward in 08, I think that the team has a lot to do with it.

So, I think in terms of how -- how we are able to bring a high level service, performance, and scale of their clients, that's become dependent on and that's something that we deliver on. With regard to the publishers, we feel that we've got one of best UIs out in the space for managing an Ad network for publisher and manger brought the yield on their side.

Every bid is competitive as what they would see in working with an exchange although we don't carry that way. And we just feel confident that our leadership position in the space will carry on and it's difficult to replicate the same level of scale as in upcoming, network. There are kind of new tries at in bringing new features to the table lot of networks specifically focused on one thing may be behavioral targeting.

Kyle Evans - Stephens Investment Bank

But you're not seeing any specific pressure on payout to publishers. It's just some of the jumps in reach have been pretty significant and I know the comp score is just one measure, but….

David Yovanno

Yeah I know for our network overall we continue to have very strong growth rates in overall impressions over our paid impressions. The payouts to publishers within our business has remained pretty consistent. CPMs have remained pretty consistent what we've been able to do is continue to drive more volume basically and that's what we focused on.

Kyle Evans - Stephens Investment Bank

Great, thank you.

David Yovanno

Thanks Kyle.

Operator

And with that this does conclude today's conference call. We would like to thank everyone for participating in today's ValueClick fourth quarter conference call. A reply of the conference call will be available beginning at 4:30 p.m. Pacific Time today by dialing 188-203-1112 alternatively 719-457-0820. The access code for the replay is 1050849. The replay will be available through 10:00 p.m. Pacific Time on February 28, 2008. Thereafter the replay can be accessed on ValueClick's website at www.valueclick.com.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ValueClick Inc., Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts