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Executives

Neil H. Nguyen - Chief Executive Officer, President, Director and Member of Executive Committee

Omar A. Choucair - Consultant

Analysts

Robert Coolbrith - ThinkEquity LLC, Research Division

Darren Aftahi - Northland Capital Markets, Research Division

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Jed Kelly - Oppenheimer & Co. Inc., Research Division

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Digital Generation (DGIT) Q2 2012 Earnings Call August 9, 2012 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Digital Generation, Inc. Earnings Conference Call. My name is Claire, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Neil Nguyen, Chief Executive Officer. Please proceed, sir.

Neil H. Nguyen

Good afternoon, everyone. Thank you for joining us on our second quarter 2012 earnings call. With me today is Omar Choucair, Chief Financial Officer. Before we start, I would like to have Omar read the Safe Harbor disclosure.

Omar A. Choucair

Good afternoon. I would like to remind listeners that today's discussion may contain certain forward-looking statements related to the company, including the expansion of our digital distribution network and demand among certain clients for digital, audio and video media services. These statements are based on economic market conditions as of August 9, 2012, and assume no material changes from conditions that exist today.

The company can give no assurances as to whether these conditions will continue or if they change, how such changes may affect the company's current expectations. While the company may from time to time revise this information, it assumes no obligation to do so. Listeners are further cautioned that these forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from those projected. Such risks and uncertainties include, among other things, our potential inability to further identify, develop, achieve commercial success for new products; risks associated with integrating the Peer39, MediaMind, and EyeWonder and other acquisitions with our existing operations and personnel, including consolidating our digital segment acquisitions into a single online platform; the possibility of delays in product development; fluctuations in currency exchange rates; risks of new and changing and competitive technologies; potential shift of advertising spending by our customers to online and nontraditional media from television and radio; risks related to potential impairment of our goodwill and other long-lived assets; our ability to successfully transition customers from our previous online acquisitions to our MediaMind digital platform for ad delivery; the development of competing distribution products; and other risks related to DG's business, which are set forth in the company's filings with the SEC.

Today's call and webcast will include non-GAAP financial measures within the meaning of SEC Reg G. A reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release.

At this time, I'll turn the back -- call back to Neil.

Neil H. Nguyen

Thank you, Omar. We continue to make progress in the quarter towards executing our vision as the first global multi-screen advertising platform for agencies and advertisers. But our second quarter financial performance was below our expectation due primarily to the underperformance of our online segment.

The substantial deceleration of business in Europe in the back half of the quarter as well as an FX impact accounted for the majority of our revenue pressure in Q2. In the TV segments, revenues were relative -- were largely in line with plan, with HD penetrations growing to 26% of deliveries, and HD revenue is up 19%. Despite these disappointing near-term results, I remain confident in our long-term strategy supported by industry trends and a few key company prove points.

First to the industry trends supporting our strategy. 70% of all Internet users globally watch video online according to the Nielsen's latest report. 63% of all U.S. TV viewers browse the Internet while watching TV, providing for a greater opportunity for advertisers to further engage with their audiences. Consumers are now watching, on average, 21 hours of digital video a week. Video advertising spend as a category will reach $5.6 billion by 2016, for roughly $2 billion according to Forrester Research; Second, we continue to receive positive feedback from both TV and online advertisers and agencies regarding our products and innovation roadmap, supported by several major customer deals; third, the completion of several strategic technology partnerships and alliances; and finally, one of my goals for the past few quarters has been to deepen the executive team at DG to infuse the company with leadership and experience to execute our vision and strategic objectives.

I'm delighted to welcome several new members who have all joined the company due to their belief in our vision and strategy. First, Ricky Liversidge, our Chief Marketing Officer came to DG from a successful career at Adobe, where he held product marketing leadership positions for some of Adobe's flagship solutions and products. At DG, Ricky will be responsible for all product management, marketing and corporate communications. He will be working closely with our clients and technology partners to bring to market our product roadmap.

Also in the quarter, we successfully recruited and hired a Chief Technology Officer. Noam Sharon brings several decades of experience for Mercury Interactive and most recently Hewlett-Packard, where he was GM and Head of Global R&D. At DG, he is responsible for all of our research and development and engineering teams around the road. He joined Andy Ellenthal, who I noted on our last call, is now leading global sales and operations.

Now looking more closely at the second quarter results. In our TV segments, revenues were slightly down at 2%. HD penetration grew again this quarter at 26% of deliveries, with 62% of stations enabled. In line with recent trends, our HD unit pricing continues to trend downward per plan. We continue to see secular weakness in our SD volume, our long form business saw a solid growth with a number of new customers, as well as renewing several long-term agreements netting a 22% growth year-over-year.

While we've had some onetime costs which had negative impact on our second quarter EBITDA margins, we are committed to maintaining a solid profitability in the TV business and are taking cost-containment initiatives, which Omar will discuss.

As we look at the online segment, there were several key metrics having positive developments within the unit despite the weakness in revenue. Platform customers grew by 50% year-over-year. Online video revenues performed well, growing 26% year-over-year, which we see as an important growth area -- important growth opportunity going forward.

We are very focused on this area as it's a national intersection for our TV and online products with 1 in 3 advertisers preferring free role as the format of choice.

Peer39 continues its solid growth and is on track to hit an aggressive plan. Overall impressions grew by 33% reaching over 273 billion impressions. Emerging markets continue to be a bright spot within our online segment, delivering north of 15% organic growth year-over-year.

MediaMind had good growth outside of EMEA. We also experienced operational issues in North America in the transition of EyeWonder customers onto the MediaMind platform, resulting in customer attrition and delayed new business acquisition.

We're clearly focused on improving our customer service within our online segment. I'm confident that our sales and operations leaderships are making their proper changes both structurally and personnel-wise in order for us to regain the operational essence that our clients have historically experienced.

Now let me turn the call over to Omar to go through the financial details of the quarter.

Omar A. Choucair

Thanks, Neil, and good afternoon again to everyone. For the 3 months ended June 30, 2012, DG reported consolidated revenues of $96.3 million compared to $67.9 million in the year-ago period.

The company reported consolidated adjusted EBITDA of approximately $30.4 million for the second quarter of 2012 versus $31.1 million in the second quarter of 2011. The TV segment reported $61.6 million in revenues during the second quarter of '12 versus $62.7 million in the second quarter of '11. The adjusted EBITDA of the TV segment for the 3 months ended June 30, 2012, was $25.4 million compared to $30.4 million in the 3 months ended June 11.

The 2012 second quarter revenues included approximately $1.4 million of political advertising revenue. The results were again impacted by weak performance in the entertainment vertical, offset slightly by strength in the automotive vertical.

For the 3 months ended June 30, '12, the online segment reported revenues of $34.7 million versus $5.1 million for the 3 months ended June 30, 2011. The online segment adjusted EBITDA was approximately $5 million for the quarter ended June 30, 2012, versus an adjusted EBITDA of $757,000 a year ago.

In the second quarter of 2012, the company reported net income from continuing operations of $518,000 or $0.02 per diluted share versus $10.4 million or $0.38 per diluted share in the second quarter of 2011.

The company recorded acquisition and integration costs for the acquisitions of approximately $2.7 million or $0.05 per diluted share, net of tax, in the second quarter. The company reported approximately $812,000 in operating expenses related to its international TV expansion during the second quarter.

During the second quarter, the TV segment recorded several unusual expenses, including approximately $1 million of litigation expenses related to enforcing the company's trade secrets, $500,000 related to corporate overhead costs and additional $550,000 related to the office rental expenses resulting from the New York City move.

Moving on, the company recorded $8.2 million of interest expense during the second quarter of '12, up from no interest expense in the second quarter of 2011. The company paid approximately $3 million in cash taxes during the second quarter net. In line with our announcement in 2010, the company completed its sale of the Springbox business effective June 1, 2012. Accordingly, the results related to the company's Springbox unit for the quarter and the prior periods were presented at discontinued ops. The company recorded a loss in the sale of discontinued operations of $600,000 net of tax during the second quarter.

Turning to the balance sheet quickly. At June 30, 2012, the company had outstanding debt of $456 million and cash and short-term investment balances of $57 million, resulting in net debt of approximately $399 million. The company also has $120 million revolving credit facility, of which $117 million was available and undrawn at June 30, 2012.

Turning to update on the acquisitions and integration project. The company is on track to realize an annual cost savings of $29 million once all the MIJO, MediaMind, Peer39 and EyeWonder integration activities are complete. Most of these synergies related to reduced headcount and office consolidation.

The company realized approximately $5.5 million of actual cost reductions resulting from the synergy program initiative during the second quarter. The company continues to expect to realize between $18 million and $20 million of cost savings in full year 2012, with the balance to occur in 2013.

To achieve these synergies, the company incurred $2.7 million of acquisition and integration costs during Q2 in 2012, and expects to recognize an additional $2 million of integration costs during the back half of 2012.

The company incurred CapEx totaling approximately $8.2 million during the second quarter. Approximately $6 million of this CapEx amount was for the consolidation of the 5 New York offices into 1 office, which has been completed.

I'd now like to take a few minutes and talk about the 2012 cost-containment program, which is a separate initiative from the synergy program I just covered. Based on the first half performance, management has identified cost reduction initiatives, which will reduce the company's operating expenses over the back half of the year. Management believes this program will reduce current annual run rate expenses by approximately $12 million beginning in September.

Note that cost cutting will not impact R&D, as management believes the ongoing investments in projects, including the converge TV, online platform, enhanced online analytics, in-stream video products and upgraded CRM systems, are critical to achieving the company's cross-platform strategy.

Finally, I do want to provide an update on a recent small acquisition the company completed of a direct response ad delivery company earlier this month. The $3.5 million purchase price included $1.5 million cash payment and approximately $1.9 million earnout.

With that, I'll turn the call back over to Neil.

Neil H. Nguyen

Thanks, Omar. While I'm disappointed in our financial performance, I remain very enthusiastic about the prospect for the company, especially in light of the recent customer wins and partnership.

We took action to add depth to the management team to give us the resource to execute our strategy, as well as implementing a cost-containment plan to protect our margins, yet we're still investing in strategic key areas of the business where we see significant growth prospects for the company in data-driven products and online video.

Ad agencies are confirming that we are addressing a critical pinpoint for them, which is helping advertisers effectively manage a campaign across different channels, both through analytic products and the streamlining of their workflow.

For example, a current TV client at one of the leading independent ad agencies in the U.S. was able to leverage DG's TV broadcast and online campaign management platform to execute a singular video campaign. The TV commercial was distributed to broadcast in cable platforms, while in parallel in near realtime was adapted into in-stream online video ads with supporting banded units, which were targeted to specific markets over our unique solution.

We anticipate the ease of use with our online video products to gain differentiation and momentum. Last week we announced the strategic partnership with Omnicom Media Group, under which the OMG agencies will use our RTEC platform to manage and deliver ads globally. While this is initially focused on digital advertising, OMG's leadership was very vocal that they wanted to work with DG because of our cross channel strategy is attacking the gaps that their agencies are experiencing between TV and online. We anticipate this agreement will allow us to generate an incremental 10% to 20% over the revenue base we already have with OMG over the next 12 months.

In similar fashion, our relationship with WPP through GroupM and 24/7 will lead the effort to drive incremental revenue for our platform services for both TV and online products. A value propositions of the mutual independent single source ad server was core to the strategic partnership.

Lastly, we took a critical step in moving forward with our data-driven products strategy with a multi-year partnership with Nielsen that we announced yesterday. Under this agreement, DG will integrate Nielsen's proprietary watermark technology onto video, TV commercial and distribute supporting Nielsen's keeping track and cross-channel ratings product that provides cross-platform ad tracking, verification and measurement. DG will incorporate multiple Nielsen online and TV data sets into our cross-platform analytics offering, providing measurable results about commercial delivery, audience and media performance across TV and online from a unified centralized analytics platform.

As an example, Nielsen's NetView data will be combined with MediaMind's performance data including conversion data, click throughs, video completion to widen interaction rates to enable advertiser to marry online viewership statistics with campaign performance for over 8,000 sites.

And on the TV side, Nielsen's rating and TV verification data will be combined with DG industry benchmark data to help advertisers optimize media spend across hundreds of video properties. Under this revenue share agreement, DG will take portions of each client we sign, together we will also gain tremendous visibility within the industry for this unique product.

We anticipate along with Nielsen and other partners the opportunity further to create value for our joint clients. These deals are key indicators of our strategy gaining traction in the market. While it will take some time to fully monetize them, we are building great customer and partner support.

Our focus for the second half of the year is execution, and rightsizing our business operations to drive revenue and protect our margins. While we are heads down focused on our strategic plan, we of course recognize the Board's obligation to maximize shareholder value.

As announced on July 16, 2012, DG's Board of Directors has hired Goldman Sachs to advise and assist the Board in a strategic review of the feasibility and relative merits of various financial strategies for the company, including partnerships, strategic business model alternatives, a sale or other transaction.

We noted -- we note the Schedule 13D amendment filed this morning by our Executive Chairman, Scott Ginsburg, which indicates that Mr. Ginsberg may make suggestions or take positions with respect to one or more of the types of possible financial alternatives for the company.

To address this possibility from a corporate governance perspective, the Board has established a special committee composed of independent Directors Jeff Rich, Cecil H. Moore, and John Harris, who will exercise the full power of the Board regarding and will control the company's strategic review process. We are not prepared to comment on any possible alternatives under review by the Special Committee.

In light of the ongoing strategic alternative view, the company's not providing guidance as to future periods at this time. Similarly, we are not confirming prior guidance, but we will continue to report quarterly performance consistent with our past practice as we have done so for you today with respect to our second quarter. We intend to remain fully focused on our plans, and we'll be providing quarterly updates without offering guidance on anticipated future results until further notice.

With that, operators, we'll open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Robert Coolbrith with ThinkEquity.

Robert Coolbrith - ThinkEquity LLC, Research Division

First, with respect to distributed alternative process, do you have -- does the company have a time line in mind as to the duration of that process by which you might say, "Okay, we'll we're going to go back to just focusing on." When not disposed, that you're not currently [ph], but just going on is going your concerned. And then secondly, I wanted to ask a little bit about the Omnicom relationship and does that -- are they essentially taking the full product including the media trading desk, or are there elements of that product which are more focused on rich media that they might be taking and integrating into their systems?

Neil H. Nguyen

Robert, so I think on the strategic alternatives, in regards to timeline, clearly, we don't have visibility into that, and there's limited amount we can say about that process overall. As to the Omnicom relationships, it's a broad technology partnership with OMG, so we will be integrating our entire ad stack, where appropriate, into the Omnicom -- OMG's technology base as a whole. So it will rage both from a data standpoint or ad delivery platform and different parts of our portfolio of services within our online product to start. And then we'll be targeting additional technologies where debut will be critical for them on a cross-platform perspective.

Robert Coolbrith - ThinkEquity LLC, Research Division

And has there been any other indications of your success with respect to cross selling? Have you been able to utilize pricing strategy to drive cross sell or any other the cross-platform capabilities to drive a cross sell into your traditional ad delivery customer base?

Neil H. Nguyen

Yes. I think I want to be -- I want to comment on exactly what happened in the second quarter. But I have -- I'm bullish on the idea that the combination of our portfolio of products will yield additional opportunities for the company to create a unique set of solutions to the advertising market.

Robert Coolbrith - ThinkEquity LLC, Research Division

And then finally, I think you may have said that there was some attrition with respect to the EyeWonder customer base. And correct me if I'm misquoting, but those customers that have reduced their usage of EyeWonder for rich media and may come back to the platform in some later point in time, or can you just elaborate on that a little bit?

Neil H. Nguyen

Yes. To -- I think during the integration, we saw some of it coming out of the first quarter. We executed sub-optimally in the quarter, and we lost business on the rich media side. So in some regards, we just have to go back and win the customer's confidence and specifically to some of the EyeWonder customers that we have lost during the transition.

Operator

Your next question comes from the line of Darren Aftahi with Northland Securities.

Darren Aftahi - Northland Capital Markets, Research Division

Just a couple. On TV, it looks if you x out your growth in HD, the rest of your TV business was down 23% sort of year-on-year. Can you comment on that? Two, in terms of guidance, I mean are you suspending guidance because of the strategic alternatives process, or you just don't feel the transition you have a great handle of your business? Three, Omar, I think you talked about the $2 million of onetime costs in the TV segment business. Are those sort of one and done costs, or is there sort of an ongoing consolidation in New York? And then is your CapEx going to kind of tail off towards the back half of the year, and can you talk about trends there?

Omar A. Choucair

Sure. Let me see if I can take them maybe in reverse order. But in terms of the CapEx, I mean the company did incur a substantial amount of CapEx compared to what the company has previously incurred in historical periods. And I think we've tried to highlight that we got through the New York CapEx project. So in terms of what we expect, we think that the CapEx will be more of a similar estimate. If you go back to the previous periods, it's difficult for us to really talk about future, either CapEx or guidance, et cetera, given what I just mentioned earlier in terms of what the company's position is as it relates to guidance. But I can tell you that the biggest project the company had in front of them, on a CapEx basis, is finished and completed with. As it relates to the items that we had that were unusual, I think the answer is, for the most part, those are all unusual, onetime items that occurred. And I think it's important that we highlight those so shareholders can see that, that was unusual cost as it relates to the TV unit. In terms of the guidance, I think truly all we can say is that the fact is we can't really talk about future guidance or reaffirm the numbers that we had previously talked about, just given what Neil had said earlier. As it relates to the TV business, I'm not sure exactly where you came up with the -- I'm not -- I didn't write down the 20%. But I think the company was roughly in line, maybe down 1.5% to 2% on the top line as it relates to TV. So maybe you could just provide a little more color on the TV question.

Darren Aftahi - Northland Capital Markets, Research Division

I guess my point was if you take back into the numbers the $61-plus million and you back up the HD number, the 19% growth, non-HD was sort of down 23%. I'm just wondering if you can give us a little bit more granularity on some of these other -- the direct response business, the MIJO business, how those are performing, vis-à-vis, anything...

Omar A. Choucair

Yes, sure. I think you’re just talking about the composition. I think clearly the SD business is under pressure. And I think we'd also mentioned that the entertainment vertical continues to be under pressure, has been under pressure for the last couple of periods. In terms of the direct response business, it's fine. And the long form syndication business is actually doing maybe a little bit better than what the company thought. And the Canadian unit is doing very well, maybe a little bit better than what the company expected. So it's really more of the SD and it's the entertainment vertical.

Darren Aftahi - Northland Capital Markets, Research Division

And then just one last housekeeping. HD units, year-on-year, what was the trend?

Omar A. Choucair

The HD units year-on-year were up, and the HD units were up year-over-year, they were up about 78%.

Operator

Your next question comes from the line of Richard Ingrassia with Roth Capital Partners.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Can you say a little bit more about the TV expansion internationally? What markets were launched? And were any revenues recognized in Q2 from those launches? And then repeat again the expenses that you incurred in that rollout?

Neil H. Nguyen

Great. Rich, it's -- so internationally, we're targeting the 5 major market segs. The network is, I'll call it 70%, 80% deployed. Revenue had nominal contribution this quarter. We are booking some business going into Q3, but it'll still be nominal contribution to our business overall. So this year is really dedicated to build. And then, Omar, can you share the investment into the quarter?

Omar A. Choucair

The company invested, Rich, about $800,000 in expenses, personnel, operating costs related to the international unit. That's -- it's about the same amount that the company incurred in the first quarter.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Okay. So if we wanted to truly comp this quarter to last year, given that there's really no revenue contribution from that launch, we'd want to back that out as well, I would think.

Omar A. Choucair

Yes. If you're comparing on a year-over-year basis, that's correct.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Okay. And Omar, can you give us some gross margin breakdown by segment? And maybe just talk about – or, Neil, maybe you want to take this, just talk about pricing dynamics in the quarter TV side?

Omar A. Choucair

Yes. I can just give you the numbers, and then Neil and I can just talk about some of the color. But in terms of the gross margin on the TV business, it's down about 3 percentage points. It was 67% in 2011 it's about 64%, 65% in 2012. And in terms of the online business, it's up from 57% to 64%. So those are the numbers in terms of what the gross margins are. And I can have Neil talk a little bit about some of the customers' pricing.

Neil H. Nguyen

Yes. So Rich, on HD pricing, overall it was sequentially -- it was relatively stable, slightly down, not as significant as other quarters in the past. But so we're still ahead of the estimated 5x to 7x target that we've had as a whole.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Okay, good. And just to be clear on the guidance. You're withdrawing the $4.18 million to $4.28 million guidance all together, right? You're not saying -- you're not reiterating it obviously, but you're also just withdrawing it all together?

Neil H. Nguyen

Yes. I'm not sure we're withdrawing. What we've been counseled is that the company can base with on the strategic alternative process and the activities we have, the company is not providing or affirming its guidance.

Operator

Your next question comes from the line of Jason Helfstein with Oppenheimer.

Jed Kelly - Oppenheimer & Co. Inc., Research Division

This is Jed in for Jason. Saw that Scott increased his ownership over the quarter. And I was wondering if you guys gave some detail on those transactions?

Neil H. Nguyen

Yes. Are you referring to the 13D?

Jed Kelly - Oppenheimer & Co. Inc., Research Division

Yes, exactly.

Omar A. Choucair

Yes. I think the 13D is very specific in terms of what it says and it's hard for us to comment on what it says. But I would just ask you to go back and just reread the table in there. And I think it'll be a little clear as to what the ownership percentages are. And you just have to go back and really tables in terms of what the composition of the total shares are.

Jed Kelly - Oppenheimer & Co. Inc., Research Division

All right. And then what percentage of HD volume was TV -- was of TV deliveries?

Omar A. Choucair

I'm sorry, 26%.

Jed Kelly - Oppenheimer & Co. Inc., Research Division

26%?

Omar A. Choucair

You asked what the penetration was? It was 26%.

Operator

Your next question comes from the line of Richard Fetyko with Janney Capital.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

A bunch of questions. On the cost containment side, could you give us -- could you elaborate on which areas and which segments where the cost containment is coming from?

Omar A. Choucair

Sure, I'd be happy to. I think the company looked at the performance in the second quarter and determined that the corporate structure -- the operating structure needed to be looked at. And as a result, the company identified about $12 million, and that $12 million represents about 5% of the company's total operating expenses. And roughly 3/4 of that $12 million is associated with the online segment, and the remaining amount is related to the TV segment. And so -- and the company just really looked at it. And obviously, Richard, it's a different process than the synergy program. Obviously the synergies were part of redundancy with the acquisitions, et cetera. And this is really just looking at the business from the bottom-up and trying to make sure that we're operating as -- in a most efficient manner as the company can. And really just to align the cost structure to the revenue stream.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

And the $12 million, is that relative to the OpEx in the second quarter?

Omar A. Choucair

It's $12 million on an annual basis. So it's $12 million on an annual basis, and we think that the company will start to see some of the benefit at the very end of this quarter. And obviously, have the full benefit in the fourth quarter.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Okay. And on the online side, on a pro forma basis, what were the revenues down?

Omar A. Choucair

On a pro forma basis, the online segment for the second quarter, the revenues were down about 13% on a pro forma basis.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Okay, that's what I thought. And how much of that -- is there way to ascertain how much of that due to the EyeWonder transition issues versus some of the other European headwind? And then how do the MediaMind, if it's possible, to assess its performance on a standalone basis?

Omar A. Choucair

Sure, I'll be happy to talk about that -- all that, Richard. So in terms of the quarter, I think Neil provided some color as to the pressure that the EMEA business unit had. And if you just look at the online component, roughly -- we think about 75% of the pressure was coming from EMEA. And the remaining 25% is really coming from execution/integration issues. And those execution/integration issues really were occurring in more than just EMEA, North America primarily. So North America, EMEA. So hopefully, that gives you some flavor for where we see the pressure in terms of the total. So the second question that you're asking is what -- how do we look at the EyeWonder business? And clearly, the EyeWonder business is a part of the decline, okay? And I can tell you that it's difficult for the company to look at MediaMind on its own because, as you probably know, all the insertion orders and all the campaigns are running through the MediaMind system. And a lot of the customers are the same. So it's very difficult to pull a MediaMind only. However, given what we've seen, we can tell you that in the emerging markets, LatAm and APAC, that the business is up close to 15%. And those are on the emerging markets. And on North America, purely MediaMind. So if I -- if you were just to try to go back, and the best we could come up with is about 15% in North America, it's up mid-single digits from the best that we can tell. And as we move into Q3 and Q4, it's virtually impossible for us to keep any sense of the difference between old MediaMind and the segment -- and the online segment. So hopefully, that gives you a little color around that.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Yes, it does. And then lastly...

Omar A. Choucair

I'm sorry, one other thing, Richard, is that the EMEA component represents about 40% of the online segment. So as you look at it, it's a pretty significant component of the online segment.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Yes. And then I guess, I keep asking these questions, but let's move on to the last one. I guess just curious with the departure of Gal Trifon, what were the reasons for the departure? And whether you're looking to his position or who is taking over the online division in his absence?

Neil H. Nguyen

So Richard, it's Neil. So Gal is in transition. So he's here with us until the end of the year, and he helped me lead a succession planning for him. So both Ricky, Andy and Noam are, in essence, fulfilling the responsibilities that Gal led as a -- for the company. So Ricky has taken over products and marketing as a whole. And then engineering is going into Noam, and then sales and operations going to Andy. So those 3 executives with their digital experiences were -- are people replacing some of the functions that Gal performed for the company.

Operator

Your next question comes from the line of Mark Zgutowicz with Piper Jaffray.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Maybe just a follow-up on the outlines. Looking at growth pro forma, it looks like online was down about 13% year-over-year, that compares to -- and up about 2% in Q1. And I know you talked a lot about EMEA being the majority of the weakest there. But I didn't hear that too much in Q1. So I'm wondering sort of what sort of change in the environment that there were a few select customers that were responsible for that greater weakness in Q2?

Neil H. Nguyen

So Mark, I think it's on the tail half, I'll call it the back half of the quarter. We saw just a decrease in overall volume. We did have some customer attrition in EMEA as well, but most of it was just based on overall volume decline and spend pull back with our clients. And that's -- that covers both the agency side and some publisher's side business as well.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. So the down 30% pro forma, is that a -- not pinning at your number, but is that something that you're -- would be more comfortable with for the remainder of the year? Or is that -- just given that, that was the sort of starting the back half of the quarter, is that pertain sort of incremental weakness beyond what you saw in the quarter, in the back half of the year?

Neil H. Nguyen

So I'd -- I just had to be careful since we specifically said that we're not providing guidance outward. I'll just say that the business is doing better than the negative 13%. So i don't expect that to be the "trend."

Omar A. Choucair

The only thing I would add to that, Mark, is that as we've said many times that the business is seasonal. And obviously, Q4 is always going to be the strongest quarter for that business. So I think you'd probably have to take that into account too. But that's consistent with what we've said in the past.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And then Neil, you talked about pricing of HD sequentially flat to just modestly down. With that, then it -- that to me would imply that you saw improved pricing on a year-over-year basis. Is that relative to the previous quarter? Is that correct?

Neil H. Nguyen

Yes. I guess it's -- I will not say improved. I think it -- it continues on the summer trend. Sequentially, we didn't see as big as a drop as we add in sequential quarters that we've looked at overall, if that helps to add some color to it.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And then with that in mind, if that's the case, why would TV gross margins be weaker quarter-over-quarter in the TV segment?

Omar A. Choucair

Well I think the -- there's a piece of it related to the revenue, but the other piece relates to some of the expenses that I've mentioned earlier. And the additional rental costs that the company had associated in New York and that's all running through the cost of sales. And then the only other piece I can give some color to is that in anticipation of a couple of the synergy programs that we had inside Treehouse, the direct response business, we did have to organize a couple of extra groups in our Louisville facility in anticipation of moving some of the business, and that's actually going to happen in the third quarter.

Neil H. Nguyen

So we had to put the cost in cost of goods sold in the second quarter as it relates to the integration of the Treehouse business, which we expect to synergize in Q3.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay, very good. And then I just had a few miscellaneous ones. Total TV spot volume growth in the quarter?

Omar A. Choucair

When you say total, you mean SD and HD?

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Correct.

Omar A. Choucair

Is that what you're talking about?

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

That's right.

Omar A. Choucair

I'd already mentioned that the HD deliveries are up about 78%, and the SD volume was down on a consistent basis to what it was in the previous quarters.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And sorry if I missed this, Omar, when you're talking about those $2 million in unusual TV costs. Is that -- can you just, again, break that out, what that $2 million is?

Omar A. Choucair

Yes, there was about $500,000 plus related to the New York rental costs. There's about $0.5 million in some corporate overhead accounting, tax costs. And then there were some $1 million of litigation cost to protect the company's intellectual property rights.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And then last one, the entertainment vertical, when -- should we not start to see easier comps there in Q3, or is that not correct?

Omar A. Choucair

Are you asking if there's a -- if we're going to get a benefit from Q3 and Q4 of 2011?

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Yes. I was just trying to remember when we started to see sort of the incremental weakness in entertainment and thought it was Q3 last year.

Neil H. Nguyen

I think it was Q4. But I mean, just speaking generally, Mark, it's what we're seeing is just a massive change in media buying behavior with that category of customers. I mean, our overall -- we're taking in a lot of the same amount of commercials, and -- but we are sending it to a number of fewer destinations just based in the media mix for those clients, substantially.

Operator

I would now like to turn the call over to Mr. Neil Nguyen for closing remarks.

Neil H. Nguyen

Well, we appreciate all of you joining us today on the call. And we look forward to reporting our Q3 results in the next few months. Thank you.

Operator

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

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