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Executives

Gary Fuges - Manager of IR

Tom Vadnais - CEO

John Pitstick - CFO

David Yovanno - COO

Analysts

Youssef Squali - Jefferies & Co.

Clark Wong - Needham & Co.

Aaron Kessler - Piper Jaffray

Brian Russo - Banc of America Securities

Mark Mahaney - Citigroup

Bridget Weishaar - JPMorgan

Kyle Evans - Stephens

Mark Bacurin - Robert W. Baird

William Morrison - ThinkEquity

Eric Martinuzzi - Craig-Hallum Capital

Ben Schachter - UBS Securities

ValueClick Inc. (VCLK) Q1 2008 Earnings Call May 6, 2008 4:30 PM ET

Operator

Good day everyone, my name is Diana and I'll be your conference facilitator today. A replay of this call 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 May 13 of the year 2008. 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. (Operator Instructions).

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

Gary Fuges

Thank you, Diana. Good afternoon and welcome to ValueClick's first quarter 2008 financial results conference call. On the call with me today are Tom Vadnais, Chief Executive Officer, and John Pitstick, Chief Financial Officer. Also on the call today is David Yovanno, our COO of US Media.

Today's call contains 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 on February 29, 2008. 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 Mr. Tom Vadnais, CEO of ValueClick. Tom?

Tom Vadnais

Thanks, Gary. Good afternoon everyone and thanks for joining us for our call. As we usually do, I will start with comments on our four business segments and then ask our CFO, John Pitstick to follow up with the company's overall financial performance, and then we'll go to Q&A.

Overall, Q1 was a solid quarter for us. As shown in this afternoon's press release, revenue, adjusted EBITDA, EPS all exceeded the high-end of their respective guidance ranges. We achieved our goals in all four of our business segments and also had a one-time event in our comparison shopping segment that lifted our performance above our guidance, but will not be recurring revenue. I'll discuss this later in the call.

With that as an introduction, I'll now give you a brief summary of the Q1 performance of our business segments. In the media segment as discussed in our recent calls, lead generation continues to be challenged in growing revenue. Our Q1 results were slightly below our internal expectations and we believe this is an industry issue since we have not seen spending return of this channel.

The good news is that we've been successful in driving lead gen margin in spite of the softer than expected revenue; we shall keep the media segment, operating margin above 20% in Q1. Our Media display ad business had another good quarter, year-over-year revenue growth worldwide was 17% with our greatest growth coming in from our European media business.

During Q1 we continue to build out and refine our next generation behavioral targeting platform to improve overall performance in the network. We believe the combination of our scale and proprietary technology gives us a competitive advantage in this segment.

Moving to the technology segment, this sector has been in the news recently with the M&A activity of our competitors. While our competitors have been consolidating, we had another strong quarter with accelerating year-over-year growth and expanding margins.

Q1 was a record quarter for revenue, profit and deals signed in our technology businesses. Our sales team is also getting higher profile meetings as a result of the consolidation in the industry and our status as the largest independent platform provider.

In our affiliate marketing segment, we also had another good quarter and met our expectations for both revenue and profitability. The commission junction business in the US grew 16% year-over-year, offset by a slight decline in our European CJ business. We continue to add clients to the CJ roster, and we believe that we are taking share from our competitors. For example, in Q1, we had seven net competitive steals of accounts listed in the Internet Retailer 500 list of top US online retailers.

We are also excited about the traction in one of our synergy initiatives to expand our CJ distribution capabilities through our ValueClick Media business. On a related subject to our Affiliate segment, I want to make you aware of a change we will be making next quarter and how we report this segment.

Search123 has been included in the Affiliate Marketing reporting segment since we went to four segments in the fourth quarter of 2006. We reported this way, because until recently the Search123 and CJ Search businesses were managed by the same management team. Recently, we separated the management structure, and as a result, we plan to move the Search123 business out of the Affiliate segment. John will give you more details on this move later in the call.

Moving to our fourth segment, Comparison Shopping, this was the key source of our out performance in Q1. In Europe, PriceRunner Europe had another quarter of good growth in Comparison Shopping. In the US, MeziMedia exceeded our expectations. The quarter included a temporary spike and traffic from existing partners late in the quarter, which resulted in some non-recurring revenue. Even without this revenue however, the fundamentals were very strong and Mezi exceeded its revenue and profit goals.

Before I turn the call over to John, I would like to comment on our updated outlook and the increased authorization on our buyback program. As shown in today's press release, we are reiterating our fiscal year 2008 revenue guidance range of $730 million to $745 million. But we are pleased with our Q1 out performance. We are not increasing our revenue guidance because of the current economic uncertainty. We are seeing some budget delays in the display and lead gen business and in Media, since these rely on short-term fully cancelable contracts known as insertion orders that trend can continue.

Updated adjusted EBITDA guidance for fiscal 2008 is up $5 million relative to both the low end and high end of our prior guidance. This illustrates our continued focus on driving the bottom line, even as we managed through the challenges of lead gen and the current economic uncertainty.

Finally, I'd like to update you on our buyback program. John will walk you through the details of our activity year-to-date and our updated authorization. But I want to emphasize that year-to-date we have repurchased 3.2 million of our own shares for $54.7 million, because we believe the market is undervaluing the strategic value, competitor differentiation and long-term opportunity of our online performance marketing businesses.

We are many times referred to as an ad network, which is one of our core competencies; many people don't recognize the broad spectrum of services that we offer. We have leadership positions across each of the key performance marketing channels affiliate, display, search and lead generation. No other player in the industry has the breadth and scale and technology platforms, consumer reach and relationships with publishers and advertisers as ValueClick.

We believe the company is positioned to take advantage of the long-term opportunity and ad spending and move into the online channel, as we provide more measurable online marketing solutions than anyone else in the industry.

With that, I'd now like to turn the call over to John Pitstick, our CFO to give you more detail on the financials. John?

John Pitstick

Thanks, Tom. Before I discuss our financial results, I want to mention that first quarter 2008 results include three months of activities from MeziMedia, which was acquired in July 2007. In the first quarter of 2008, ValueClick generated revenue of $176 million, a 12% increase over Q1 2007 revenue of $156.9 million, and above the high end of our previously issued guidance range of $166 million to $170 million. Gross profit was $120.9 million for the first quarter of 2008, compared to $109.9 million in Q1 2007. Gross margin remained relatively consistent at 69% in the first quarter of 2008, compared to 70% in Q1 2007.

Our cash operating expenses, which exclude stock-based compensation and amortization expense, totaled $77.5 million in the first quarter of 2008, compared to $71.3 million in Q1 2007. As a percentage of revenue, cash OpEx improved to 44% of revenue in Q1 2008, versus 45.4% in Q1 2007, primarily due to a decline in sales and marketing expenses in our lead generation business.

Adjusted EBITDA was $46 million for the first quarter of 2008, above the high end of previously issued guidance and an increase of 12% over the prior year amount of $41 million. Adjusted EBITDA margin was 26.1% in both Q1 of 2008 and Q1 of 2007.

Stock-based compensation was $5.8 million in the first quarter of 2008, compared to $3.6 million in 2007. This increase is due to full-quarter impact of stock options that were granted throughout 2007.

Amortization of intangible assets was $7.8 million in first quarter of 2008 compared to $5.8 million in Q1 2007. This increase is due to the acquisition of MeziMedia in July of 2007.

The company has generated operating income of $29.8 million in Q1 2008 compared to $29.2 million in 2007. Operating margin was 17% compared to 18.6% in the year ago period. The decrease in operating margin is due to the higher stock-based compensation and amortization expense as compared to the year ago period.

As I noted earlier, our adjusted EBITDA margin held steady at 26.1% in both the current and prior year periods.

Net interest in other income was $3.1 million for the first quarter of 2008. We expect this amount to be lower per quarter for the remainder of the year due to the $106 million MeziMedia earn-out payment that was paid in the first quarter, and a $54.7 million of stock purchased year-to-date.

Income tax expense for Q1 2008 was $13.7 million and the company's net effective income tax rate was 41.7% in the quarter, which is in line with previously issued guidance of 42%.

These figures result in first quarter 2008 net income of $19.2 million or $0.19 per share, based on the weighted average number of 98.6 diluted shares outstanding. This performance is above the high-end of our guidance range of $0.15 to $0.16 per share, and as an increase over the prior year diluted EPS of $0.18.

I would like to point out that the higher stock-based compensation and amortization expense I described earlier reduced diluted EPS by $0.03 in a year-over-year comparison. Factoring out the impact of the increase in these non-cash items, our diluted EPS grew 22% year-over-year.

We generated over $50 million in cash from operations in the first quarter 2008. The consolidated balance sheet as of March 31 remained strong with $195 million in cash, cash equivalents and marketable securities, almost $700 million in total stockholders equity and no long-term debt.

Year-to-date, the company has bought back 3.2 million shares of stock for $54.7 million at an average price of just over $17. In addition, our Board of Directors increased the authorization of the stock repurchase program by $100 million and as of today, up to $101.3 million of the company's capital may be used to repurchase the company's common stock.

Capital expenditures were approximately $1.6 million in Q1 2008, and we expect about $10 million of total CapEx for the year.

Today we are providing second quarter 2008 guidance and updating our fiscal year 2008 guidance. For the second quarter, we expect revenue of approximately $166 million to $170 million.

We expect adjusted EBITDA in the range of $40 million to $42 million. And 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 expected share account of approximately 98 million shares outstanding.

For the full year 2008, we expect revenue of approximately $730 million to $745 million. We expect adjusted EBITDA in a range of $190 million to $195 million which is a $5 million increase from our previously issued guidance.

We anticipate diluted net income per common share of $0.81 to $0.83 which is also up from our previous guidance. This figure includes stock-based compensation expenses of approximately $0.15 per common share based on an expected share account of approximately 98 million diluted shares outstanding.

The full year 2008 guidance assumes approximately $29 million in amortization of intangibles, $10 million of depreciation, $23 million to $24 million of stock-based compensation, $8 million to $9 million in interest income, and effective income tax rate of 42%.

Before I turn the call back over to Tom, I'd like to share with you an initiative we are working on to realign our segment reporting structure. Due to recent changes in our management structure and the large acquisition of MeziMedia, we are reevaluating the way we report our segments.

Our goal is to provide segment level results that most accurately reflect business drivers per segment, and that are lined with our current internal management structure. As a result of this reevaluation, we currently plan to reclassify our Search123 distribution business.

As we have described in our previous public filings, Search123 has been part of the affiliate marketing segment since the company went with four worldwide business segments affective in Q4, 2006.

We plan on moving Search123 into the existing comparison shopping segment effective in the second quarter of 2008. With the acquisition of MeziMedia, our comparison shopping segment has become more relying on search traffic, so we feel it’s appropriate to group our Search traffic-based businesses in the same segment.

Mezi is best known for its comparison shopping and online coupon websites which add value to search traffic acquired through its proprietary SEM technology platform and search expertise. In addition, both Mezi and Search123 now report to Dave Yovanno, our COO of US Media.

With this change, we plan on renaming the segment, Comparison Shopping and Search. We will provide historical database on this new segment structure with our Q2 earnings release. To give you a sense of the impact of this reclassification, Search123 generated worldwide revenue of approximately $21 million in 2007, and we are expecting approximately $17 million to $18 million from this business in 2008. Operating margins from this business are generally in the low-20% range.

I would now turn the call back over to Tom.

Tom Vadnais

Thanks, John. Operator, we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question today from Youssef Squali of Jefferies & Co.

Youssef Squali - Jefferies & Co.

Thank you very much. Good afternoon, everybody. Couple of question. I was wondering if you could quantify for us what the lead gen business was this quarter, and then, for the remainder of the year, what is baked into your guidance? And second, any chance we could get a quantification of the organic growth in the Comparison Shopping business? Again Mezi this quarter seems to again have had a huge quarter. Thanks.

Tom Vadnais

Okay, Youssef, let's start with the lead gen question, and I will ask John to try to give you a quick organic growth calculation. As you know, we don't report specific business unit segments, which lead gen is one. But we have been pretty clear in our past few calls about the decline we saw in the lead gen revenue starting in Q2 last year, when we got notice from the FTC of their review. And that business continued to decline through Q3 and Q4 last year. We saw it starting to stabilize a little bit into Q4. And as we went into this year, we took an approach of its staying flat for this year. It was actually down slightly in Q1 from our Q4 number, but we feel, at this point, we just went through review of this within the last few days that we maybe seeing some signs of it starting to turn up a little bit.

We don't think it's going to return to the previous level from a year ago, because we think the entire lead gen industry has really been impacted as we have been. But, if we can start to see this growth slightly in Q2 and Q3 and Q4, I think we will achieve our plans for the year with lead gen. And if they can pick up a little higher rate growth, we will do even better. So, it's been a flat business, Youssef, for couple of quarters now and we are looking for hopefully a little bit of improvements in. On the organic growth, I'll let John take the shot at that one for Comparison Shopping.

John Pitstick

Yeah, so, Youssef, the $53 million we reported in the quarter represents a pro forma organic growth of about 90%.

Youssef Squali - Jefferies & Co.

Okay. That's helpful. And if I look at the market, we've seen the rise of multiple vertical ad networks in last couple of years, and I was wondering, if you could just kind of speak to the value proposition of ValueClick today versus what it was a couple of years ago and just kind of considering the new competitive environment, who are you kind of come in up against?

Tom Vadnais

Yeah, I am glad you asked that question, because it is one that comes up a lot, and you are correct there seem to be a lot of people jumping into the ad network business. Dave Yovanno, our Chief Operating Officer for U.S. Media has been part of our ad network business here since almost the beginning of the company. So, there is nobody better qualified on our team to talk about that today. So, Dave, I will let you take that.

Dave Yovanno

In our advertisers' feedback, they seem to be after primarily one or both of two main objectives and that is aligning their brand with specific content or they want overall performance and scale from their campaigns. And it's on the ladder that we have really established our core ad network business and continue to have a leadership position in the market. And in fact, our display ad network business within our media segment, which is primarily we are talking about here, those have a number of vertical categories available.

However, in reality, its main recognition in the market is really as a, with some refer to as a horizontal ad network, with a focus on performance and behavioral targeting. However, as a natural growth strategy and to capitalize on our core assets and our network expertise, we do expect do curb about 1 to 2 vertical network strategies this year that will have an independent team and independent position in the market.

We do feel that a vertical network strategy has value or you have a team that is an expert within that vertical focus that can really speak the same language with the advertiser and help them kind of achieve their marketing objectives online by aligning their brand without specific content and without specific audience. And we just don't feel operating at the same scale as more of that, what I call the horizontal ad network that focuses on more performance than scale and there seems to be lot of volume there. But we do see as a natural organic growth strategy for us in the coming years.

Youssef Squali - Jefferies & Co.

Okay, helpful. Thank you very much.

Tom Vadnais

Thank you. Next question please.

Operator

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

Clark Wong - Needham & Co.

Hi, this is [Clark Wong] on behalf of Mark May. I was wondering if you guys could give a little more clarity on what growth that spike you guys had at the end of the quarter for comparison shopping?

Tom Vadnais

Sure. That -- comparison shopping is a part of our business for Mezi, specifically a part of our business that falls in today's area again. He has been very involved with that. So, again I'll let him respond to that question.

Unidentified Company Representative

As in our display business for large advertiser can unexpectedly increase their budget any given quarter, and MeziMedia experienced an unexpected traffic acquisition opportunity with existing traffic partners in the last month of the first quarter. This was opportunistic and we don't expect this increase to be sustainable.

Clark Wong - Needham & Co.

Okay, thanks. And just know, one more housekeeping question I guess is, what was CapEx for the quarter?

Unidentified Company Representative

CapEx was $1.6 million for the quarter.

Clark Wong - Needham & Co.

Thank you very much.

Tom Vadnais

Okay.

Operator

And we'll take our next question from Aaron Kessler of Piper Jaffray

Aaron Kessler - Piper Jaffray

Yeah, hi. I'm following up on the last question; did you size the impact of the comparison shopping in the last month from the opportunistic volume?

Tom Vadnais

Well, again, we generally don't disclose specific business unit results, but our over achievement in the comparison shopping segment was -- we all received our original targets without this spike in volume by a reasonable amount, and then the spike added to that. So, I think the way to look at it is, we would have achieved our guidance that we gave you in our internal budget for comparison shopping without this one time spike in it, its simply added to our overall achievement.

Aaron Kessler - Piper Jaffray

Great. And then David, can you expand in terms of the -- I think it's had some weakness just in terms of some companies delaying their ad spend. While I guess in Q1, which verticals were you seeing some strength, any weakness from in the Q1 and how they are looking so far in Q2 on the current network business? Thank you.

Dave Yovanno

We have seen some budget delays, we interestingly announced in our quarter this review last week, we actually saw an increase in number of advertisers but the total dollar amount spend was slightly less than that we've seen in the past. In terms of specific verticals that have shown weakens, it's primarily related to finance and healthcare and particularly Pharma for us. We showed some increase in telco specifically wireless. And actually some increase in travel for our business specifically, and that's mostly in the Media business I am speaking of.

Aaron Kessler - Piper Jaffray

Great, thank you.

Dave Yovanno

One other thing on that question, I made a point in the comments that we had, we meet our objectives in terms of growth for display but we were stronger in Europe than we were here and that may be an indication of the economic issue simply not been as severe in your -- but our growth quarter-over-quarter was stronger in our European business then it wasn't US. So I just wanted to reemphasize that point.

Aaron Kessler - Piper Jaffray

Got it, thank you.

Operator

And we'll take our next question from Brian Pitz with Banc of America Securities

Brian Russo - Banc of America Securities

Hi, this is Brain Russo for Brian Pitz. Question on the Affiliate Marketing segment, you had some comments that you saw that 16% growth in US that was pretty strong but it was offset in Europe and then trying to get my head around exactly how this performance came in considering that eBay one of your largest customers, pulled away. So, I guess I would have thought that they were a client in the US but noting that the US was strong. so I guess could you give a little more detail on that that, it will be helpful. Thanks.

Tom Vadnais

Sure. First of all in our affiliate marketing business, the European portion of that is less than 10% of the total, and is something we just few years ago so it doesn’t have nearly the market share in Europe that we have here since its still a fairly new business. The eBay business, we had both in US and in Europe, it was a higher percentage of our European business. Since the business there was much smaller, the eBay business was a bigger percentage of the total. For Q1 however, the eBay change was not in effect, it was not effective until Q2 and it really will take sometime to get fully integrated as they have built some of their own technology, they are easing their way into it. So we continue to see revenue with them in Q1 both, in the US and Europe, it's tended to slowdown a little faster in Europe than in the US. And in addition, Europe did not have the success in Q1 that we had in the US in terms of new contracts. So that's why the European side did not perform as well as the US. The US growth is a much bigger share of the total worldwide revenue, more than offset sure of what we have in Europe.

Brian Russo - Banc of America Securities

Great, thanks. One follow-up question. Do you think you eBay pulling this in-house that they could potentially be a kind of a competitor in this sector in the future or is there too many conflicts of interest?

Tom Vadnais

You know Brian, a lot of people have asked that question and I be very surprised, if that would happen. I don't think they have any intent whatsoever of wanted to be in the Affiliate Marketing business. They have got their hands full with their own business. I think it is just that this is such an effective marketing tool for them in their auction business, and it became such a big part of their traffic acquisition, that they wanted to in source it just to have more control over it for their own purpose, and they certainly haven't given us any indication and I will be very surprised, if they got into the Affiliate Marketing business.

Brian Russo - Banc of America Securities

Great, thanks.

Operator

And we will take our next question from Mark Mahaney of Citi.

Mark Mahaney - Citigroup

Thank you very much. Two question, please. I still want to go back to this Comparison Shopping spike, this unexpected traffic acquisition opportunity. Is there any particular reason to think that you wouldn't see that kind of opportunity again? So, is there any reason why -- is there any more detail you can provide on that? Was it from company that or sector that we won't see again in the next couple of quarters? And then a question on the share buyback, you clearly buyback some shares year-to-date, arguably you certainly have the capacity to buyback materially more. How do you think about the rate at which you want to be buying back that stock, the rate at which you want to use up that $100 million incremental authorization? Thank you.

Tom Vadnais

Mark, let me respond to that one first, and then I will ask Dave to help respond to the traffic acquisitions spike issue. In terms of share buyback, we'd like to keep a sufficient pool of money available, so that we can make opportunistic decisions when the share price dips and jump in and buy some shares. So, that's why we always are when we run low or run out, which virtually we were before our Board Meeting a week ago. We got approval for another $100 million, so we can use it when the opportunity presents itself.

Most recently, the shares that we bought -- the 3 million plus shares we bought this quarter, we bought at an average price of around $17 and we just felt that when the stock was in that range and drop certainly below $17 into the $16, we just bought that was such a severe undervaluation issue that we had to jump in and buy which is too good an opportunity. At the same time, we want to continue our acquisition strategic that we have been on, as you know. So, we are trying to keep a balance between how much we spend on our stock and keeping our resources available for other acquisitions. So nothing more complex than that Mark and we will continue to be in the market when the opportunity presents itself.

Now on the Mezi situation, I'll ask Dave again to respond. I'd simply say, I guess, you can never say, never. We did not anticipate that spike, when it happened. So, I suppose it could happen again, but I think could be irresponsible of us to build that into our model for the future since we don't have any basis to anticipate it again. But, Dave, why don't you give us your thoughts on that too?

Dave Yovanno

Yeah, Mark, all I can really say to describe what exactly happened there is that few of our existing traffic partners essentially brought some additional traffic opportunities to us in March. And we evaluated it and it resulted in incremental revenue. But we, like Tom said, that we don't just expect that opportunity to continue. We are not exactly sure what cause the availability of that traffic. We don't have all that in place from our key partners that we work with on this and for that reason that we can't really comment on and whether or not to expect that in the future.

Mark Mahaney - Citigroup

Was it traffic that was materially less profitable than your typical traffic trying to tell from looking at your gross margin that may have been the case, but can you comment on that?

Dave Yovanno

I don't feel comfortable commenting on that because I am little concerned about revealing a kind of competitive intelligence on the way that we've managed that traffic.

Mark Mahaney - Citigroup

Okay. Thank you very much, Dave. Thank you very much, Tom.

Tom Vadnais

Thanks Mark.

Operator

And we will take our next question from Imran Khan of JPMorgan.

Bridget Weishaar - JPMorgan

Hello, this is [Bridget] calling in for Imran. Can we go back to the Affiliate Marketing in Europe, it looks like this is the second quarter that performance has been little weak there despite display being strong. Could you give us a little inside into why that is? And also Google has decided to keep its Affiliate Marketing segment on Performix. Can you discuss how you're differentiated from them? Thanks.

Tom Vadnais

Yeah, let's start with that one first. Performix has been a competitor of ours for the whole time we have been in business virtually. We know them very well. The founder of Performix is now on our Board. So, we are very familiar with our business. They are a fine company. And if they were on the market, we would certainly consider talking to them. But apparently, Google has decided they want to keep that business. We are somewhat surprised by that, because unlike the other Google businesses which tend to be self service, Affiliate Marketing is anything but a self service business.

So I am not sure what their intent is. Our differentiation is fairly significant and that Performix has focused a lot on search and SEM marketing to make their affiliate program successful. And while we have our CJ search business, it's fairly small part of our affiliate offering, whereas in Performix case it's a major part of their offering.

So we are quite different in that regard. We have the same goals of improving sales results for our advertisers through the internet, but they go at much more of research and we go at it in numerous other ways. So, that's the primary difference between us in that regard. And obviously, size, were considerably larger than they are. I mean, they are being private were not exactly sure where they are now. But we knew where they were a while back and we have won some customer's from them. So, there is a considerably scale difference between us in performance. So, that's as much as I can tell you there. On the Affiliate marketing in Europe, I think that was your other question in terms of the growth fair budget?

Bridget Weishaar - JPMorgan

Yeah.

Tom Vadnais

I don't have a real good answer for you. Our European business is challenged in that. We are running all of our ValueClick businesses over there through a single management team and a lot of them are new, such as the Affiliate business since we've started with our Media business and expanded with Affiliate and Comparison Shopping and technology. So, they have their hands full and they had just a blow up quarter on display revenue in Q1, and I suspect they might have got a little distracted with that. There is also a long sales cycle on Affiliate and selling these long-term contracts, it can many times be three to six months in getting the contract singed and then another three months or so to get it up and running. So, they didn't have a stronger pipeline as I would like to see, and as a result, haven't brought as many new customers on line as they should. But, I think it's just a matter of -- they are looking at the opportunities and they saw a lot of display opportunities and Comparison Shopping was very strong. So, Affiliate just didn't probably get as much attention as it should have. So, that's the best answer I can give you.

Bridget Weishaar - JPMorgan

Great, thank you.

Operator

And we'll take our next question from Kyle Evans of Stephens.

Kyle Evans - Stephens

Hey, good afternoon guys.

Tom Vadnais

Hey, Kyle.

Kyle Evans - Stephens

You were kind enough on the fourth quarter to talk a little bit of detail around the segment growth rates and operating margins. And if I recall, the Comp Shopping business was expected to grow at roughly 40% pro forma and you just put up a 90. Media is a little bit lower. Is it, should we be re-thinking the way that were looking at the segments going forward?

John Pitstick

Yes Kyle, this is John. We've put out on our website an updated investor presentation document that highlights the new thinking in terms of the midpoint of the guidance by segment, and as well as our expected segmented margins as we briefly talk about. So you're exactly right, there is a bit of a mix shift there between Comparison Shopping and Media, that's on the side, but I can answer any specifics year have.

Kyle Evans - Stephens

No, no, that's perfect. The -- well have you John, the cash flow from operations in the period, if I've heard you correctly, $50 million?

John Pitstick

Correct.

Kyle Evans - Stephens

Sounds like a really big number considering the seasonally weak period that we just went through. And did something happen in terms of change in working capital there that we need to be thinking about to adjust?

John Pitstick

No, the first quarter is a typically a strong quarter for us from a cash generating perspective. That's larger part due to coming off of Q4 where we build up a decent receivable balance and we are fortunate enough to collect almost of that in the first quarter. The only thing that happens in the first quarter is, we didn't make any tax payments which predominate it would do throughout the quarters. So I would not expect that $50 million to be represented above, the quarters going on but Q1 is typically is the strongest quarter for us.

Kyle Evans - Stephens

Great. And lastly, since Dave is on the call and I think this maybe the first time in my memory. Can you talk a little bit more about the competitive landscape, not necessarily just vertical? But it seems like there is lot of VC founded ad networks out there and there is some anecdotal evidence that some of them are trying to buy, reach and share with really high payouts. As the dynamic there changed much, I know investors used to be horrified that adsense would suck the life out of your network and now everybody is worried about all the little guys that are in the comScore for reach metrix?

Dave Yovanno

I think there is a lot of money in the market right now and from my perspective, I don't see a whole lot of businesses is sticking. I'm just talking about comScore in specifically and just some random commentary and cut me off at any time you're bored here, but my opinion, comScore will in perfect continues to be that accepted and proceed, measure, size and reach. I think the ultimate measure really should be the companies financial performance that we are talking about and as well as [coin that] transaction and well I understand that's hard to document for comparative purposes. We've historically been the top reach vehicle for comScore for a number of years and in my experiences, advertisers will typically use an overall reach number more so if just a qualified whether or not take a meeting. Its not so important to be number four versus number five, its actually at least just important to be within the top 15 lets say. And that more or less qualifies you and demonstrates that you've at least got access to scalable inventory and it's most important to ultimately demonstrate performance to the advertiser.

But what comScore is ranking methodology also highlights is the difference in ad network strategies and for me there is primarily two, they are the Media buying and a brokerage type of strategy like what I think you're referring to. And then what is, more descriptive of our strategy within the display segment and that's the longer-term revenue share strategies, I rate them in terms of relationship with publishers. We believe that our revenue shares and partnerships strategy with publishers is more consistent and sustainable. And we've got long standing relationships with more long hailed types of publishers. We are not in a sense buying and trying to sell or monetize it at higher rate than what we pay for it. The recent changes in the comp score ranking at the top basically show what you're pointing out, which is that you could actually buy reach. In the past, we have always taken the position that most advertisers should be able to work with the top site's director through an agency, but after analyzing the impact of some of these changes and how the market has responded, we do plan to increase our activities related to the Media buying activities with the top site, but we would only do that as an incremental growth strategy, not as a cannibalistic activity as it pertains to rest of our network. Does that help give you a little bit of an overview on that?

Kyle Evans - Stephens

That helps quite a bit. Thanks. And one last follow-up. I guess, it is not really clear to me why lead gen would still be weak, if you have gotten the okay from the FTC and the ROI is still there. Can you help us, I know that there is a lot of other players out there that haven't gotten the green light from the FTC, but if it's math based, what is the holdup?

Tom Vadnais

We all are kind of guessing, but the reason we think it's pretty much spread throughout the industry is that players in the lead gen and different companies are included, do a lot of business with other players in the industry, supplying traffic and other business relationship. So, it's the type of industry where you have a pretty good insight, even though we are talking about private companies with the exception of us and pretty good insight to what's going on with the other business. And the feedback I am hearing from our lead gen team is that as they are talking with the other players in the industry, they are all experiencing a similar sort of flattish type business, as a result of advertisers, in some cases, publishers, but I think more advertisers driven, just simply not spending as much money in that sector.

So, it's an imperfect science, but that's what we are hearing through the other companies that we are partners with. Dave, what other thought do you have on that?

Dave Yovanno

We believe that the advertisers remain cautious throughout our FTC investigation and it has been a slow process for us to reengage them. Having said that, throughout Q1, we did get traction with the number of key advertisers and Tom might give me hard time later, but we are optimistic that Q2 will show an improvement and I do think we are turning a corner here. We also took the opportunity during this down period to institute additional product enhancements and traffic quality control measures based on client feedback and we are hoping that that will also increase demand and ensure more long-term sustainability within this distribution channel.

As stated earlier in the scripts, we've done a good job, the lead gen team has in managing both their gross margin and OpEx within these channels, and as a result, we did still drive some strong financial performance to the bottom line. I guess, the only other deterrent in getting back on track in terms of traffic acquisitions sources with some of the FTC guidelines was in the creative messaging, we haven't quite figured that out on how to get the volume of traffic back up to the scale that it was and adhering to some of those restrictions that we are focused and we will see this start to increase here starting in Q2.

Kyle Evans - Stephens

Great thanks.

Gary Fuges

Next question, please.

Operator

Okay, thank you. We will take our next question from Mark Bacurin of Robert W. Baird.

Mark Bacurin - Robert W. Baird

Hi, good afternoon. Couple of things. I guess first on the Comparison Shopping business, I know there was this one time item that you are talking about and sounds like you don't want to give us specific revenue number. But given that I think Q4 is seasonally the strongest quarter for that business, I am just wondering if you could help us understand the pretty significant sequential uptick, and part of it was traffic acquisitions, it sounds like there was maybe something else going on there as well?

Tom Vadnais

All right. I'll again ask Dave to comment on that one.

Dave Yovanno

For us, the spike had less to do with advertiser demand which is typically what you are going to see in the Q4 seasonal period and it's actually more, I wouldn't blame it on seasonal but since you brought up that comparison, you could easily argue that there is more supply available in Q1. And if you're skilled at traffic acquisition, then you're going along with that thought process. There should be an increase in traffic opportunities for you if you still that volume. And I think we have answered the question as best we can and so I just leave at that. The other thing I point when you look at sequential growth as Mezi is still on a pretty rapid growth trajectory, so some of the normal seasonal trends are muted to some extent because of that growth trajectory.

Mark Bacurin - Robert W. Baird

Okay. And John, I was hoping, I don't know if you can break this up this specifically or not, but the eBay revenue contribution in Affiliate Marketing for the next few quarters, so you can have a sense of what the comparison overhang is?

John Pitstick

Yeah, that is not totally clear yet, but it will be small relative to the past, I would just guess that we might be doing 10% or less of the Affiliate revenue with them in the future as to what -- compared to what we were doing in the past. So lot is going to depend on how happy they are with their own platform and we have worked with them an awful long time. So, we think they will probably do a pretty do job at this. But they know we are there to help, if there are some sectors that they want to us to comeback into and we are going to keep a few of their sectors already, but I think it's going to be small as I said. But our revenue with them in other businesses, primarily Mediaplex continues to grow. And our Mediaplex revenue was larger than our Commission Junction Revenue with eBay last year. So, we're still going to have a lot of revenue from eBay be a strong partner with them.

Mark Bacurin - Robert W. Baird

Great. And then, just finally, could you maybe just give us some comments about, I know your technology business is benefiting from the Goggle double-click merger and people are looking for alternate technology vendors. But could you comment, maybe on what you are hearing from clients or what you're seeing on the competitive landscape related to goggle's ambitions, potentially of developing some sort of display ad network? And are you hearing customers saying that they are seeing more activity there?

Tom Vadnais

Well, I'll give you a thought on that and as Dave gave you though too, specially on display ad network topic, but in general the customer in our technology side that we've talked to -- have some concerns over the data being in Google's hands or other companies hand, when in the past it was in the hands of one trusted party and now it's perhaps in the hands of a bigger organization with you seems that we are not sure off. That seems to be the biggest issue we hear from clients. And a transition as they that concerning up about to make a change. Transition is not something that happens very quickly because in this business, unlike our display business, we have long-term contracts, there is integration that needs to go on, training that needs to go on between us and the customer. So it will happen at the aspiration of a contract which might be quite as way as down to road. So, it's a slow process but the concern seems to simply be data and where is my data going to be. That's the biggest issue we're seeing on that score. Relative to the ad network one or two those plans there, it's always hard to predict what your plans are but Dave, what's your thought on that one?

Dave Yovanno

I would assume that your question is more related to the publisher side relationship with regards to the ad network, and especially talking about DoubleClick since that's the majority of their revenues as far as I understand. And from our perspective, it's not an all-or-nothing game with regards to who publishers choose to work with the monetize their inventory in fact in our experience and publishers will sometime ease up at four primary partners that maximize their yield. We continue to score high in our publisher surveys which we conduct each year, and they consistently rank us number one or number two in those. Who publishers work with and who are their preferred network partners, I can tell you that Google is right out there. It's not -- they've had a network added, a square network out for quite a while and we, both haven't heard a whole lot about it, I don't know exactly why that is? All I know is, our business and that is that we continue to grow quarter-over-quarter in terms of imbalance ad impression requires, throughout a specific metric, we actually grew Q2 to Q1 12% in terms of the ad impression requests through our display network. The fact is that Google, Google is a network competitor, they've got specific expertise in good contextual monetization. We excel in more general content, in behavioral targeting monetization, as well as through our surveys or UI features, etc, and that all.

Operator

And we'll take our next question from William Morrison from ThinkEquity.

William Morrison - ThinkEquity

Hi, thanks. Two clarifications and then one question for Dave. I just hate to press this because I know it's been asked nine different ways in the call, but, can I restate what you said earlier Tom, which -- it sounded like you said that the upside to your guidance was what account for most of the onetime impact in the Comparison Shopping businesses, somewhere around $6 million to $8 million? And I realized you said maybe lead gen was a little bit weaker so maybe around the $6 million, would that be an accurate conclusion?

Tom Vadnais

I'm not sure I understood where you got the $6 million. Could you just ask again?

William Morrison - ThinkEquity

I thought you said earlier in the call that the onetime upside, had it not been there you would have come in around within the range of your guidance?

Tom Vadnais

Yes, we would had the high-end, at or above the high-end of the guidance range.

Dave Yovanno

Yeah.

William Morrison - ThinkEquity

So that's around $6 million, I believe?

Tom Vadnais

Yeah, I think that's a good number. Keep in mind now the reason we're bringing it up is simply to be as straight forward as we can be with all of you to say that we love having that blow out quarter that we had in first quarter but knowing that some of that revenue was not what we think will be recurring we just wanted to isolate it and point in out as a kind of a onetime event. So that's the reason we brought it up, is just to try to give you as much visibility as possible into what was going on.

Gary Fuges

Bill hey, this is Gary. We are trying to avoid quantifying the onetime event but yeah, just to be really clear that netted out onetime event, we would have been above the high-end of the guidance ranges.

William Morrison - ThinkEquity

Okay, great. And then one other clarification, just, I'm afraid I might be doing my math wrong but I thought, I heard you say that the US Affiliate marketing businesses was up 16%. I think the total business if I am not doing my math wrong which I maybe was up around 8% and you said that Europe and or international was weak but it's less than 10% of the total Affiliate marketing business. If that's all corrected kind of implies that the international business was down pretty significantly year-over-year. Is that a correct assumption?

Tom Vadnais

There are two things, Bill, in that. Number one, the European revenue was down, it's a small revenue base, but it was down in Q1. So, that is part of the equation. The other part of equation is we talked about how we had combined into Affiliate, the Search123 business because it was all under one management at the time and so on. And that business was also down in the first quarter as Search123 business was. So, if we just sit on and look at what the core business is and look at the Affiliate business in the U.S., it was up 16%.

William Morrison - ThinkEquity

I got you, okay. I missed the Search123 part.

Tom Vadnais

Yes, it's kind of complex thing, which is why we want to streak it out and get the segments realigned. So, we will give you more visibility on that on our next call, when we have all the work done. We will give all of the restatement of the income so you can see it.

William Morrison - ThinkEquity

That was the piece I was missing, thanks.

Tom Vadnais

Okay.

William Morrison - ThinkEquity

One last question for Dave. Could you talk about, there seem to be a number of emerging kind of yield in management optimization, network optimization platforms coming into the market. I am just curious as to your opinion about whether you favor these platforms, just as kind of generically. Will they help you because you tend to do better on average when competing an effective CPM, or do you view it as something that might increase competition? Or just about your thoughts on these kinds of new yield management platforms or publishers to kind of manage their ad networks via new technology? Thanks.

Dave Yovanno

Yeah, I feel personally that we should have relatively no impact on our business. I don't feel the same for the publisher themselves because at some point the company that you are referring to have to make money, which I don't see it as now. There is a strong revenue strategy with those businesses and I think they have to really prove it out that the value that they are adding in that exchange is worth about publishers paying for it. We feel that what we generate to publishers in terms of the effective CPM overall fill quality ads which are some of the key things that publishers look for in a relationship. And if the publisher would call us first, they have got pretty good shot at, they are having some of the best monetization strategy for their inventory.

And our technology is built to allow them to do some of that monetization, although we don't have that third party ad service that internet view we're always going to choose the most optimally, even I have just got a kind of idea of that service. But on our own first call we are one of the better options out there. And we would expect that to continue with that type of service plugged in and currently publishers are to our technology redirecting to other solutions, that automates it. But again I think that they got to prove the value for whatever those companies plan to charge down road. I don't see it having a strong impact on our business today.

Gary Fuges

Thanks Bill. It's Gary. We have time for two more questions here since we've been on about an hour now.

Operator

(Operator Instructions) We will go next to Eric Martinuzzi, of Craig-Hallum.

Eric Martinuzzi - Craig-Hallum Capital

Thanks. Based on the Q1 outperformance you had as well as the Q2 guidance, I have done some year-over-year math on your organic growth rate. It looks like for the first half, it's around zero percent, we kind of knew that coming in just given the fall off in the lead-gen business. It also implies the back half growth rate of around 13%. For those of us who are modeling beyond 2008, is there any reason to believe that that growth rate can accelerate beyond what's implied in the back half of '08?

Tom Vadnais

John, why don't you take shot at that one.

John Pitstick

Yeah, because we don't forecast out past the year that we are in, although we are excited about our competitive position in the marketplace and there is always the opportunity to expand those growth rates, but we can't make any predictions at this point about anything past away.

Operator

And we will take our next question from Ben Schachter of UBS Securities.

Ben Schachter - UBS Securities

Hey guys. Not to beat a dead horse on this, but just to talk one more question on the late quarter. Was it something where the inventory came in right at the end of the quarter, you got it and then it stopped right at March 31st, or did it bleed into Q2. I am just a little confused on how that works? And then just a broader question. When you are thinking about international growth, is the focus still Europe, or are you going to be looking more towards potential acquisition or interesting opportunities in LatAm or Asia. Thanks.

Tom Vadnais

Right now, Europe is our primary target since we already have infrastructure in place there. But, we also now have infrastructure in place in China. So that has risen in our priority list as an opportunity. But our plans right now that we are close to implementing all revolver on Europe. Over time you will see Asia come in to that equation. On the revenue side in Mezi, I don't have it right in front of me, but it was right at the end of the quarter and Dave did it spill over all into Q2?

Dave Yovanno

No, it didn't. It was contained in a 3 to 4 week period only in the month of March.

Tom Vadnais

Yeah, it was a very concentrated in at the end of March. And as a result, as I said earlier, we don't anticipate having that spike. It would be nice if we did, but we don't anticipate it in Q2 or beyond.

Ben Schachter - UBS Securities

Okay. Thanks.

Operator

And gentlemen, I will turn it back over to you for any additional for any additional or closing remarks.

Tom Vadnais

Okay. Well, I am sorry, we are out of time. I am sure there were some questions that weren't answered. As always you will have access to team here for further questions and we will look forward to seeing you when we are on the road or when you come to see us. So thanks everybody. Bye, bye.

Operator

And that does conclude today's conference call. Thank you for participating in today's ValueClick call. A replay of today's conference will be available beginning at 4:30 PM Pacific Time today by dialing 1-888-203-1112 or 1-719-457-0820.The access code for today's replay is 4955781 and the replay will be available through 9:59 PM Pacific Time on May 13th of the year 2008. Thereafter, the replay can be accessed on ValueClick's website at www.valuelclick.com. Again, thank you so much for your participation and you may disconnect at this time.

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Source: ValueClick Inc. Q1 2008 Earnings Call Transcript
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