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Executives

Gary J. Fuges - Vice President of Investor Relations & Corporate Development

James R. Zarley - Chief Executive Officer, President and Executive Director

John Pitstick - Chief Financial Officer and Principal Accounting Officer

John A. Giuliani - Chief Operating Officer and Director

Analysts

Clayton F. Moran - The Benchmark Company, LLC, Research Division

Thomas C. White - Macquarie Research

Sameet Sinha - B. Riley & Co., LLC, Research Division

Robert Coolbrith - ThinkEquity LLC, Research Division

Carter Malloy - Stephens Inc., Research Division

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Shyam Patil - Raymond James & Associates, Inc., Research Division

Peter Stabler - Wells Fargo Securities, LLC, Research Division

John D. Crowther - Piper Jaffray Companies, Research Division

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

ValueClick (VCLK) Q2 2012 Earnings Call August 2, 2012 4:30 PM ET

Operator

Good day. My name is Melanie, and I will 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 August 9, 2012. Thereafter, it can be accessed on ValueClick's website at www.valueclick.com or www.streetevents.com. Previously filed SEC filings can also be found on ValueClick's website. [Operator Instructions]

At this time, I would like to turn the call over to Mr. Gary Fuges, Vice President of Investor Relations and Corporate Development for ValueClick, Incorporated. Please go ahead, sir.

Gary J. Fuges

Thank you, Melanie. Good afternoon, and welcome to ValueClick's Second Quarter 2012 Financial Results Conference Call. On the call with me today are Jim Zarley, Chief Executive Officer; John Pitstick, Chief Financial Officer; and John Giuliani, Chief Operating Officer.

This call contains forward-looking statements that involve risks and uncertainties including, but 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; the risk that legislation and government regulation could negatively impact the company's performance; the effects of the Dotomi acquisition on ValueClick's financial results; and the potential inability to successfully operate or integrate Dotomi's business, including the potential inability to retain customers, key employees or vendors.

The actual results may differ materially from the results predicted and reported. Results should not be considered an indication of future performance. Important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are detailed under the risk factors and elsewhere in filings with the Securities and Exchange Commission made from time to time by ValueClick, which include, but are not limited to, its annual report on Form 10-K filed on January 29, 2012, recent quarterly reports on Form 10-Q and other current reports on Form 8-K.

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. Jim Zarley, CEO of ValueClick. Jim?

James R. Zarley

Thank you, Gary. Q2 was another strong quarter, and we continue to execute our strategic initiatives that will bring our businesses closer together to benefit of our clients. Despite challenges in Europe and our continued de-emphasis of lower margin revenue streams within the Owned & Operated division, we delivered revenue and profitability above our guidance ranges. We achieved this to strengthen our U.S.-based Media businesses and Affiliate Marketing business.

In Media, our recent acquisitions and traditional businesses are performing very well. Our ongoing investments in data, real-time biddable traffic acquisition and optimization are paying on. The vast majority of our inventory we now use in our Media business comes from programmatic buying, where we are leveraging our data and optimization abilities. Even within the -- our traditional display business, we're now outsourcing about half of our traffic through programmatic buying, which supplements our network and spot-buying channels.

In addition, the recent additions of the sales force and our focus on direct advertising relationships are gaining traction. We uniquely positioned in the market to deliver brand lift, customer leads, e-commerce transactions and customer relationship management offerings and scale. And we are starting to position the company to take a better advantage of our competitive differentiation. To this end, we are aligning our business to work more closely together. One step in this direction is to consolidate our Mediaplex technology platform business with our Media segment, which we discussed in our prior calls and announced today as part of our Q2 results.

Mediaplex is now beginning to leverage its strategic advertiser relationships and the first-party data to capture incremental display revenue, so it makes sense to push this consolidation forward ahead of the holiday season. Our confidence in the future is reflected in our stock-buyback activity. We purchased 5.9 million shares in Q2, which was more than 7% of the total shares outstanding as of the end of Q1. And during our -- due to our strong cash flow generation and financial flexibility, our board has authorized an additional $100 million in buyback.

Now I'll turn the call over to John Pitstick, who will review Q2 results and our outlook for the second half of the year, and John Giuliani will discuss our progress on our initiatives to drive these businesses forward. John?

John Pitstick

Thanks, Jim. Revenue for Q2 of $161 million was above the high end of our guidance and represented a reported revenue increase of 29% and pro forma growth of 11%. Excluding the impact of the planned O&O revenue decline, which I'll speak to in a moment, the remainder of our businesses posted 19% pro forma growth in Q2. The worldwide growth rate in Affiliate Marketing of 3% was below our guidance for the segment of mid-single-digit growth. FX rates and additional weakness in Europe negatively impacted Affiliate revenue relative to our guidance. The U.S. business continues to perform well and posted high single-digit growth in Q2.

Looking into the second half of the year, the midpoint of guidance is for revenue growth in Affiliate Marketing in a high single digit.

Turning to Media. As Jim mentioned, we are now including the result of the ad serving and analytics business in the Media segment. On its combined basis, total Media segment revenue was $91.1 million, Q2, up nearly 30% on a pro forma basis. This includes $9.1 million of revenue associated with the prior Technology segment. All of our domestic products within Media generated strong revenue growth that was at or above our expectations for the quarter, while Europe continues to be challenged for growth.

Our Q3 revenue guidance for the Media segment reflects pro forma growth in the low- to mid-20% range, and our Q4 guidance reflects reported growth in the Media segment in the mid-20% range. As Dotomi was acquired at the end of August 2011, Q4 will be an apples-to-apples reported growth for the year.

In the O&O segment, revenue in Q2 was down 10% year-over-year, as we continue to reduce the mix of lower-margin paid traffic and search monetization. The growth in operating margins in O&O expanded year-over-year due to the improved revenue mix. We will continue these efforts in Q3 and Q4 and expect reported revenue declines in O&O back half of the year in the mid-teens, with margins continuing to improve on a year-over-year basis.

Our total adjusted EBITDA in Q2 was $49.5 million or 30.7% of revenue, which represents record second quarter profitability. This is above the high-end of our guidance for the quarter and is an increase of 33% over the prior year.

Our non-GAAP EPS in Q2 of $0.37 also exceeded the high end of our guidance and was 32% higher than Q2 2011. In the first half of 2012, we generated $60 million of free cash flow and repurchased 5.9 million shares of common stock for $100 million. Our ending outstanding share count of approximately 75 million has been reduced by nearly 25% in the last 4 years.

Turning to guidance. We expect Q3 revenue of between $164 million and $169 million and Q4 revenue of between $200 million and $210 million. Our Q4 revenue expectations are based on historical sequential growth trends by business. The Affiliate business is typically up in the low 20% range from Q3 to Q4, and various products within the Media segment are up in the low 30s on average. For O&O, we are expecting single-digit sequential growth heading into Q4.

Our EBITDA guidance for Q3 and Q4 represents margins at the midpoint of 30% and 34%, respectively. The full year EBITDA at the midpoint of guidance is $217 million or 32% of revenue. This is higher than the 30% to 31% range we previously discussed for 2012. We anticipate non-GAAP EPS in Q3 of $0.36 to $0.37. And in Q4, we expect $0.52 to $0.53. The midpoint of this guidance represents full year non-GAAP EPS of $1.63.

So with that, I'll hand the call over to John Giuliani.

John A. Giuliani

Thanks, John. I just want to take a minute and provide a quick update on our efforts to unite the U.S. Media and Affiliate businesses, along with -- as Jim mentioned earlier today, we announced the consolidation of Mediaplex into the Media segment. We're making good progress in aligning our resources to better serve our customers and it's been well received by our customers. During the June, July timeframe, we built out and consolidated our major offices in San Francisco and Chicago, which will house ValueClick employees across divisions. New York is always -- is already that way, so with those 3 are the bench for going forward. And that's allowed us to enhance our ability to collaborate and refine our go-to-market strategy. One tangible initiative that's come out of that is our consolidating of our business development resources into a single group to not only represent across divisions but to create an enterprise offering for ValueClick U.S. Media and Affiliate.

To date, we're enjoying good traction in introducing the Affiliate Marketing to the Dotomi customers, and we've gone live with an automated version of Dotomi offering into a segment of the Affiliate customers, so crossing both ways. Several new contracts have been signed with the first of those customers now live with CJ.

Finally, we're utilizing services in tech teams across divisions to develop projects that can be leveraged across the entire organization. The first of those new services will be hitting the market over the next few weeks, the direct result of the consolidating of the groups. It's early, but things are coming together quickly, and we've got great buying across the organization.

And with that, I will turn it back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Clay Moran with Benchmark.

Clayton F. Moran - The Benchmark Company, LLC, Research Division

A couple questions. The Commission Junction you mentioned was a bit light, but now you're expecting that to pick back up in the second half. Can you just go into what changes in the second half and what gives you confidence in that growth? Will we accelerate? And then secondly, could you update us on the O&O paid traffic wind-down, Search123, Smarter and whatever else is included there? How far along is that process? And is there any thoughts or discussions around potentially divesting of those assets?

John Pitstick

Sure. This is John. On the CJ growth, it's important to keep in mind the real strong growth we had in the first half of 2011. If you look at the growth rate there for Affiliate worldwide in the first half of 2011, we averaged about 15% growth. Those comps get a little bit easier as we head into the second half, where we had about 9% growth in the second half of 2011. So that's what gives us confidence that high single-digit worldwide number is achievable. I'd also say the drag coming out of Europe gets less in the second half of the year. So both of those factors come into play when we think about going from a low single-digit growth in Q2 up to high single digits in Q3, as well as the initiative that John's talked about in terms of the new clients and initiatives there. So we feel pretty good about those growth targets for the second half of the year.

James R. Zarley

On the O&O side, what we're trying to do is transition it between now and the end of the year. We've been scaling down on the revenue side as you can see, but we have also been holding our margin. So actually, we're driving margins up in the rest of our content businesses. We are cutting down on some of the paid traffic. I would anticipate we should be completed with that by the end of the year. So I would think it would continue on. As far as divesting that asset, I think we'll take a look at next year. But just at this particular point, I think we're -- what we're doing is transitioning that business into a solid content business. And we get that completed, and it fits very well with the rest of our products.

Operator

We'll go next to Tom White with Macquarie.

Thomas C. White - Macquarie Research

So it looks like your full year revenue guidance is now sort of falling short of that north of $700 million number you guys used to talk about. Can you talk a little bit about, I guess, what is changed? Or what parts of the business have sort of deteriorated since the last time we spoke? And then also on the Media segment, is there any way you could I guess update us on kind of what the core growth rates are for the core network business and also the 2 recent acquisitions? Or just has there been any kind of change there or change the way you see those progressing for the next few quarters?

James R. Zarley

Sure. So on the question of the $700 million target and the guidance being below that, certainly, if you look at what's happened with exchange rates in Europe since the last time we spoke, as well as the additional macro weakness there, that's part of the biggest bucket in terms of why we think $700 million is -- was so achievable, and we've got some internal goals to get there. We felt it was prudent to guide based on what we see today. So both what's going on in Europe and the environment here in the U.S. has softened a little bit, I think, over the course of the last couple quarters. But when you step back and look at the growth that we've put up both in the second quarter and what's implied in the guidance, we're disappointed that we're not guiding that $700 million number. I think it still represents pretty solid growth and particularly in context of what you're seeing from some other companies out there. So we feel good about it. We're going to work hard and hopefully, we'll have some better news to report in terms of getting there. But we thought it would be prudent to reset the guidance for the back half of the year, based upon where we are today and what we see as normal sequential trends. And there is some upside in terms of some of the initiatives kicking into place sooner than later. The second part of your questions, Tom?

Thomas C. White - Macquarie Research

Media in the core -- the core of the Media has been...

John A. Giuliani

I think, really, this is John G. talking. We are really -- particularly over the last quarter, we're moving these businesses together so rapidly and working together. We consider it all core, and we're migrating customers back and forth to get the right service offering to each of them. We're going to continue that. It's going to further get blurry as far as what you've been accustomed to historically. But that's because we have these new businesses, and we don't want -- there's no reason to keep these things separately when we're talking to a customer. And so we've migrated the services. And in the case of the ValueClick Media team, they are now and some of their customers representing a Dotomi-like service, where we have other clients in the BC media roster. If this -- if the offering is better from Dotomi or more aligned with what their customer needs are, we're going with that. And that's going to continue along with taking the mobile opportunity into all of our different business, because we really see just where all the potential to put that in all of our customers. So it really is -- we're excited. The best way to look at that is the way we're consolidating them. That's one of the reasons we're doing that.

Operator

We'll go next to Sameet Sinha with B. Riley & Company.

Sameet Sinha - B. Riley & Co., LLC, Research Division

In terms of the guidance reset that you did, any thoughts on how much of that was due to just maybe acceleration in the decline of O&O? That's question number one. Secondly, in terms of Europe, can you detail some of the exposure that you have in different businesses and the list there? And lastly, in terms of the weakness in the domestic business, can you be very -- can you be specific about which particular segments and maybe -- or verticals that you're seeing?

John Pitstick

Yes. So I think you mentioned O&O in terms of resetting the back half of the year guidance. I think if you look at -- when we first started talking about the expectations for 2012, we were talking about a 10%-or-so decline in the full year O&O business. If you look at where we are today, we're looking at more of the low teens in terms of that year-over-year decrease. So more of that is back-end loaded than where it was, say, a quarter or 2 ago. Step back on what we've done to the O&O segment where revenue has come down right on plan, and we've got the bottom line there pretty stable. So I think we're executing pretty well on our goal there, and we'll continue to do that. But it is a little bit more back-end loaded than, say, where it was a quarter or 2 ago. I think within Europe, in terms of areas of exposure, certainly, we've had the biggest challenge in terms of the year-over-year numbers within the Affiliate business. But all the businesses, I'd say, except for the PriceRunner business in Europe, all the businesses are down on a year-over-year basis. Some of that's FX, some of that's FX and underlying results. So I think there's challenges across the board with a bright spot being PriceRunner. So it's a further exposure from where we are today. I think -- I don't think there's much downside. I think we've got some plans to grow those businesses, and we'll be talking about that a little bit more in the next couple of quarters.

James R. Zarley

And then the domestic business question, would that relate to Commission Junction or just...

Sameet Sinha - B. Riley & Co., LLC, Research Division

Just in general, well, across Media, Affiliate, both of these.

James R. Zarley

Yes. I think it's just -- more just a statement about the general macro environment. Certainly, go back over the last few quarters and look how GDP growth has been down every quarter. Certainly, there just seems to be a bigger question mark and a little bit more uncertainty in the market that we're hearing from advertisers.

John A. Giuliani

Yes. And I wouldn't characterize it as weakness. I think we mitigated a little bit of the growth rate to be prudent. But we think we're, across the business lines that we've unified into the U.S. Media and Affiliate division. All business lines will be up double digits. And so I wouldn't characterize that as weakness. It's just more of being prudent as to the guidance going forward.

Operator

We'll go next to Robert Coolbrith with ThinkEquity.

Robert Coolbrith - ThinkEquity LLC, Research Division

In your commentary on programmatic-bidding activity, just wondered if you could provide a little more detail on what you mean there? Are you referring solely to buying dramatic changes or bits of what else is included? Could you also address the margin profile of that inventory-acquisition activity versus other inventory acquisition channels. I think there's been some questions about that. Then also looking forward to that, I was wondering if you could maybe speak to your thoughts on Do Not Track in IE 10 and how you're thinking about that.

John Pitstick

Sure. So the commentary on the programmatic buying really speaks to how we've evolved the business. So as Jim mentioned in his comments, about half of what we do with them -- what is often considered that network business really has nothing to do with the network. So our traditional display business has really evolved where we're doing as much off network through the programmatic buying and real-time bidding and exchanges or leveraging our entire data and our optimization. So we've really made a lot of progress there in the last year, where that, say, a year ago was a pretty small percentage of what we did in terms of overall inventory in the media business. Now it's about half in terms of that display business. And then we look at Dotomi, virtually everything they do is under the umbrella of programmatic buying through.

James R. Zarley

And yes, I think, I agree with that, John, in one way or another. And I think our view on this is just utilizing the market to get the available impressions for customers. And whether we do it on an exchange or a private exchange or portals or spot buying or remnant buying, it's all about getting the inventory. And really, that's not the trick of things for us. It's really from that point, how much value can we add for the customers. So we're sort of agnostic as to where we get it, except that we want to get it at plentiful amounts at a reasonable price. But really, the trick we put most of our focus on is how do we build value into that. Because we are always part-paying the market rate for it. So as long as we have availability, the biggest focus we have is adding value to that. And that's what we spend most of our time doing, both on the traditional side as well as the Dotomi side.

John A. Giuliani

Yes. And that speaks to the margin profile, which is part of your question, Robert. Our goal all along with anything we do off network was to make sure we could do that and margins that we're consistent with what we do on the network. So when we're fulfilling campaigns on our systems or working the algorithms in the data, we're agnostic as to where we source that. But we want to make sure we're doing it in a way that makes sense for the advertiser and where we're getting our fair share of the margin as well. I think your last question was on Do Not Track in IE 10. I think we feel like we're pretty well covered in terms of our participation in the industry groups and what we're doing there.

James R. Zarley

We're extremely active in the industry groups. We're -- and we're -- and with all the -- in all the sessions that are going back and forth, whether it's industry or in combination with government. And we make our -- we're representing our customers and our consumers and the industry. And I think we are taking the lead role on that. And so it's -- I think right now, it's a little bit of a bright period, and I think it's probably will be prudent to wait until we know more as we go forward.

Operator

We will go next to Carter Malloy with Stephens.

Carter Malloy - Stephens Inc., Research Division

You referred to your legacy ad exchange business -- I'm sorry, ad network business a little bit ago. But can you actually tell us how big that is or maybe at least give us a sense of the organic growth rate there with the core legacy business?

John Pitstick

Well, I think as John G. mentioned, we're not going to break those out. I think what I said in the prepared comments was all the U.S. businesses had nice growth. It's certainly fair to say that the mobile business and the CRM solution had relatively higher growth and that's traditional business. But these lines are being so blurred that for me to even pinpoint a specific number associated with each business becomes somewhat of an exercise of moving numbers around because of what we're doing with the client relationships that John referred to in making sure we're providing the best solution and regardless of what product line that may be coming out of. So it's hard to say that all of those businesses grew well relatively higher, so on the mobile and CRM solution.

Carter Malloy - Stephens Inc., Research Division

Sure. Would it be fair to say then that, that business at least -- because it has grown a little slower than you thought it would in the first quarter, would it be fair to say that, that business picked up a little bit sequentially?

John Pitstick

Oh, absolutely, yes. So some of the sales force productivity that was below where we thought it would be in Q1 has really picked up, and all the businesses had great sequential growth. So that would include the core VC Media business.

Carter Malloy - Stephens Inc., Research Division

Okay, great. And then you guys referred to your long-term strategy in knowing when to get -- how much more content-heavy at the risk of getting a no on this one also. Can you give us a sense of what the good organic content, i.e., PriceRunner, Investopedia, CouponMountain, what those are as a percent of that business at this point versus things like Smarter and Search123, which is probably mostly gone?

John A. Giuliani

For some of the key content businesses, PriceRunner's growing very nicely, and some can find there's another content that can do finances and another content site that we built and the Investopedia as well. These are all the content. What we'd like to do over time if we continue to grow them is add to them in those areas, where we can utilize that traffic into some of our other divisions. So as we continue to do that and we keep the margins high, it allows us to then start to scale down those areas where we're trying to get rid of some of the big content -- or big traffic.

Carter Malloy - Stephens Inc., Research Division

Okay. And on the more paid traffic side of the house, specifically on Smarter and Search123, that group of companies. Are those a minority or a small minority? If you can give us a sense as to how much those still represent after the decline this year.

John Pitstick

Yes. So they still are a meaningful part of the revenue. And what I'd say is if you look at the year-over-year results of the segment where the revenue is down about $4 million, that entire decrease relates to those assets where we're monetizing through one of the major search guys. So that speaks to how far we've evolved, and all that decrease is coming out of that area that we've been talking about minimizing. And again, when you look at the margins, the bottom line of that segment that brought revenue down about $4 million year-over-year was about a $200,000 impact on the bottom line. So now bear with us as we continue with that process. There'd be more noise on the top line, less some on the bottom line, but we're making good progress there.

Operator

We'll go next to Ryan Bergan with Craig-Hallum.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

I wonder if you could talk about the Media gross margin in the quarter. Now that it's combined with Mediaplex, it looks like it wasn't so different than it was in the first quarter, yet you had a higher margin contribution from Mediaplex in there. So does that suggest that the Media business had a tougher gross margin in the quarter?

John Pitstick

Yes. So Q1, as we talked about last quarter, was a record margin for us in the Media segment, excluding what happened in Technology and excluding that business. We think it cost us a little bit of revenue in Q1 as we talked about. So our goal, as we head into Q2 and for the rest of the year, was to get back to that -- the normalized kind of gross margin that we saw in Q4. That'd be the first full quarter, where we had Dotomi in for the entire quarter and all the other assets. So I would look at Q1 as higher than we plan on running that business going forward. Q2 is going to be more reflective of where we think that should be. So the short answer is there's no change in terms of our gross margin profile for that and for the -- when you think of as the Media business, excluding Technology, and then Technology, actually that's layered in here in terms of all the historical numbers. So it all lines up. So you can see reasonable comparisons of where it's been. But again, that Q1 number was a little bit higher than I would expect going forward.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

And then as far as the Mobile business is going, can you talk about just the contingent of adoption of Greystripe and what verticals are standing out? And what you're seeing from pricing environment in that business?

John A. Giuliani

Yes. So pricing has been stable. I think, across all of our businesses, pricing hasn't been a big issue up or down. But key verticals nothing jumps in terms of anything new. And I think we kind of do a lot of brand-focused work there. So we work with folks like the auto guys and big retailers and guys with web services. So no real changes there.

James R. Zarley

It's pretty broad -- it's a broad-based solution. I think you expect the broad base because of the adoption in verticals.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

And then for hiring for the year, the guys suggest that your margins are actually going to be a little bit better than the original guidance. What are your plans for hiring? And what was your headcount at 6/30? What do you think it can be at the end of the year?

John Pitstick

Yes. So we ended Q2 with just under 1,500 people. So that was up 30 to 40 people from Q1. I think you'll see us continue at, at least that sort of pace throughout the second half of the year. Continuing to invest in the growth that we see not just in the second half of the year but for 2013 and beyond. So we'll continue that headcount, and that's -- probably the biggest challenge we face is bringing in enough good, talented people to that [indiscernible] side of the business.

Operator

We'll go next to Shyam Patil with Raymond James & Associates.

Shyam Patil - Raymond James & Associates, Inc., Research Division

On Dotomi, could you talk a little bit more about the cross-selling initiatives there with CJ? And then in the retiring space, can you talk about the competitive landscape a little bit and how that's -- has become more intense, more competitive over the past few months? And how that's impacted the gross margins there?

John A. Giuliani

Yes. So from a Dotomi standpoint, we've -- we enjoy pretty deep relationships with a lot of our customers, and we've been able to bring the Affiliate Marketing program in. And we're -- one of the things the customers are liking is the ability to tie their historical data, their site navigation data and their affiliate data. And they're looking at the future with our array of services and saying, "I can get a lot more understanding and how all of these different media choices work together." And so we've had some really good traction with getting CJ introduced into the company's actual adoption, and we're actually live with a couple right now. And I think as you look at -- and this isn't your question but as -- going into Q3, some of those new ones will start to be ramping and affecting going in the future. That's really helped us. On the flip side, we've taken an automated approach to the Dotomi offering and enabled the CJ account teams in -- to offer a subsegment of their customers of our automated version. And that's got some great traction so far. And we've got about several meetings that went through, already got -- for several verbals and live -- some live -- excuse me, some signed contracts. And now we've actually -- the first couple of those have actually gone live. So very pleased with that. We think that will continue to accelerate. I think it's an important part of the mix. As far as your question about -- I think you're really talking about the transactional kind of the low end of remarketing. We -- in Dotomi, we really don't participate too much in that. That's really the guys that are a little less sophisticated or mainly click based and sort of just on the site with sort of rudimentary technology, which we think has a place in the marketplace for sure. That probably will compress because there's not a lot of value added there. And most of them don't have real good sense of what the incremental impact is. That really doesn't impact us. We work more with the more sophisticated marketers that are a little bit tying the site, as well as their customer -- historical customer data together. And that's just a different proposition. And then tying the offline with the online, and so that really looks dramatically different than some of those transactional remarketer you're referring to. I think on that end of the market, though, I think you're probably right. It's going to get more competitive, because it's hard for those guys to differentiate one another. We try not to play in that area because we're looking more for longer-term payout and for the customers. So they can see the effects of their marketing over time. Hopefully, that helps you on that.

Operator

We'll go next to Peter Stabler with Wells Fargo.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Just to go back to Europe for a moment, I have a couple questions. John, you mentioned the negative impact of both FX and of course an anemic macro outlook over there. Any way you could quantify for us the kind of impact that FX had on the quarter? And if you could remind us what total company revenue exposure is and maybe what kind of growth or lack of growth we saw in Europe?

James R. Zarley

Yes. This is Jim. Before John answers that question, I want to bring something else on Europe. Some of the advancement that we've made and will continue to buy more and more on exchanges and things of this nature. In Europe, we tend to trail by about 6 to 12 months. So the growth that we've had in buying traffic and doing some of the optimization stuff are lagging behind in Europe. And I think that's cost them some, not so much in the Affiliate side but more on the Media side, in the display businesses. They are catching up. I think you'll see some improvement in -- over the next couple of quarters over there. And I'm going to spend a lot more time there myself with Europe, because they are challenged. And since John Giuliani has come in and taken on a lot more of the operation here in the U.S., it gives me time to go over and spend some time.

John Pitstick

Yes. Then on the FX question, I guess, a couple of ways to frame that. If you look at Q2 on a full quarter basis, just on a year-over-year and what FX rates did, and it certainly impacted the overall numbers, probably about 1% on the overall growth rate of the company just on FX. Some of that FX movement was later in the quarter. So relative to the guidance that we gave, we gave that in early May. Certainly, none of that was built into the guidance. So in terms of quantifying that, I don't have a number for you. But in the context of overall ValueClick, not a big impact on Q2 relative to expectations. But certainly, it was not from -- when we talk about Affiliate Marketing and a few hundred thousand dollars here and there, it impacted the growth rates. So as we sit here today, about 15% of what we do now is outside of the U.S. So less impactful to maybe some of the others in the space but enough to move the growth rates a little bit.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

And wondering if you could quickly update us on your video network and the growth you're seeing there. And if you could, what kind of contribution you're getting from the deal? I know it's small, but just kind of what kind of growth rates you're seeing?

John A. Giuliani

Yes. It's -- it is small, but it's -- it is growing. On a percentage basis, it's going to do very well this year or next year. But it's a small component, but it's doing well, and it's becoming a bigger and bigger chunk of what we do in the display side.

John Pitstick

It's not material part of the revenue today. It's an important part of the offering going forward.

James R. Zarley

Yes. That's what's worse than a timing [indiscernible]. It's the best in class, and it's growing.

Operator

We'll go next to Mark Zgutowicz with Piper Jaffray.

John D. Crowther - Piper Jaffray Companies, Research Division

Yes. This is John Crowther on for Mark. My question deals with the Affiliate Marketing business and specifically, the guidance you're seeing there. For the second half of the year, wondering on that, in particular, if you could update us on sort of what the year-over-year trends and comps for Europe are that gives you a little bit more confidence that, that can get better, just sort of understanding what the difference is between the first and second half. And then in the U.S., I think you guys have said in the past that it trends fairly closely with retail sales and that we're seeing some weakening of retail sales here. So I'm wondering if you could sort of help us quantify what is built into guidance from some of these. What percentage of that growth has built into guidance from some of these new initiatives of cross-selling Dotomi with CJ?

John A. Giuliani

On the Europe comps in the Affiliate side, I think what we're -- what is impacting us there is more macro, not just FX, but also macro. So I don't know that we're going to see a big rebound in the second half of the year for that particular area, because it's really more focused in the macro market than the FX market. On the display side, however, it's a little different in that a lot of what's going to give some of that additional push through the second half, I believe, is going to be how we buy traffic and the improvement that we're making in how we buy on exchanges and things of that nature, somewhat like what we've done here in the United States. What was the other?

John D. Crowther - Piper Jaffray Companies, Research Division

The contribution from Dotomi and CJ together that maybe can help us kind of quantify how much you think that's going to help in the second half.

John Pitstick

We don't have big expectations in terms of 2012 contribution Affiliate marketing programs as we talked about in the past. They take a while to ramp up, and we've got a massive client base within Affiliate Marketing and some very large retailers that we work with today. And there's no one single customer within Affiliate even today that's more than 2% of the revenue. So it's difficult for 1 or 2 customers to come in and really move the needle there. So they'll help but they're not going to be game changers in terms of growth rates. And I think that the same would be true for the new initiatives, where we're offering the more automated CRM solution to the CJ client base. That's very early in that process. As John mentioned, we've got a couple of folks just going live very recently. Those -- that'll take time to ramp up, and it'll be more impactful as we think going into next...

James R. Zarley

2013, they'll have that impact, yes. So -- and I think as we follow the retail sales, it's really the trends that we're watching in the Affiliate business and the trends that, in July, were stronger than we thought -- mildly stronger but stronger than we thought. And so that gives us increased encouragement that the projections that we have are still solid.

Operator

We'll take our last question from Colin Sebastian with Robert W. Baird.

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

This is Gregor Schauer. I'm calling in for Colin. I'm sure if you guys could provide any more color on what you think the incremental upside is with the Facebook ad exchange. They're currently still in the early testing phase, and I think you guys have said before you're one of the biggest buyers in the Google display network. And I imagine that you guys would, if that's still true, you'd still expect to -- or you would hope to be one of the bigger businesses in the Facebook ad exchange and if that could offer as much opportunity as the Google display network.

John A. Giuliani

Yes. I'll -- we will -- we look at that -- I don't -- I think it's really too early to say what that impact would be. And we're sort of -- we really are agnostic to as where we get the inventories. We look at unique reach performance and price we pay, and we balance that with the goals that we have with our customers. So whether it's Facebook or Google or some other exchange or a private exchange or a porta-buy, we're -- we have the same analysis all the time. How does it perform, what do we pay and what kind of unique reach does it -- would provide us? And so I -- we'll look at the Facebook. We look at it -- we don't need it right now for inventory purposes. So we test our way into everything to make sure those 3 dimensions are right. And -- but I think right now I'm sort of -- have no opinion on whether it's going to be important or not. We don't currently need it for inventory, so we'll lean into it on a testing basis. But we'll see. I'm a little skeptical because of the ad format, and that's really a critical component for us is the creative execution and really matching that to the consumer. And whether that environment will allow us to have it or not, I don't know that it will. So I'm a little skeptical.

Gary J. Fuges

All right. Thank you very much for participating in the call, and we look forward to seeing you on the road in the quarter. Thanks.

Operator

Thank you for participating in today's ValueClick second quarter conference call. A replay of today's conference will be available beginning at 4:30 p.m. Pacific Time today by dialing 1(888)203-1112 or 1(719)457-0820. The access code for the replay is 3346413. The replay will be available through 10:00 p.m. Pacific Time on August 9, 2012. Thereafter, the replay can be accessed on ValueClick's website at www.valueclick.com.

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