ValueClick Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 1.12 | About: Conversant, Inc. (CNVR)

ValueClick (VCLK) Q3 2012 Earnings Call November 1, 2012 4:30 PM ET

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

Kip N. Paulson - Cantor Fitzgerald & Co., Research Division

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

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Ben Hearnsberger - Stephens Inc., Research Division

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

Peter Stabler - Wells Fargo Securities, LLC, Research Division

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

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

Operator

Good day. My name is Marici, 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 November 8, 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 site. [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 Inc. Please go ahead, sir.

Gary J. Fuges

Thank you, Marici. Good afternoon, and welcome to ValueClick's Third 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. 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 Risk Factors and elsewhere in filings with the Securities and Exchange Commission made from time to time by ValueClick. These will include, but not limited to, the annual report on Form 10-K filed on February 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. We feel very good about our performance in the third quarter. In Media and Affiliate Marketing, our U.S. businesses are performing very well. We've improved the growth rate in our Affiliate Marketing from the prior quarter, and we're seeing strong growth in all of our media products, CRM, display, mobile and video.

In Europe, while we've been impacted by macro conditions, we've also identified other areas in Europe where improvements can be made and actions are under way to change how we are doing business. We believe the next couple of quarters will show improvement.

In Owned & Operated, we've talked about improving our traffic mix and continuing to grow our high-quality content sites, and we've made great progress in these areas. We've also divested Search123. As a result, the Owned & Operated segment is in a much stronger position with better margins. We now expect this business to be back on the growth path for 2013.

As John Pitstick will discuss in more detail, Q4 guidance shows we will continue to expect solid growth in Affiliate Marketing and Media. Q4 will be the first apples-to-apples revenue growth quarter for ValueClick since the Dotomi acquisition. And we believe this milestone will help investors appreciate the organic growth profile of the company.

We made great strides in Q3 towards our goal of becoming the go-to digital marketing services partner for large advertisers, and we expect to make additional progress towards this goal in Q4. We believe our efforts will set us up for good growth in 2013 and healthy margins.

I'm excited about ValueClick's clear leadership position in the digital marketing services space as no company can match our capabilities in data, traffic and services.

With that, I'll turn the call over to John Pitstick for more details on Q3 results and Q4 guidance. John?

John Pitstick

Great. Thanks, Jim. Before discussing the Q3 results, I want to remind everyone that our reported results exclude the Search123 business, which we sold at the end of the quarter. We've updated our historical results to reflect this change, and the numbers that we discuss today, which I'll often refer to as our continuing operations, exclude Search123 for all periods. There's a schedule on our IR page that has trended historical information on this new basis.

Q3 revenue from our continuing operations was $160.9 million. This represents a reported revenue increase of 26% and pro forma growth of 12%. The growth rate in Affiliate Marketing of 7% was right in line with our expectations for Q3. The U.S. business was up in the low double digits, while Europe was down as compared to Q3 2011.

Looking into Q4, the midpoint of guidance is for worldwide revenue growth in Affiliate Marketing to again be in the high single digits, with the U.S. up double digits and Europe down year-over-year.

Total Media segment revenue was $96.1 million in Q3, up approximately 22% on a pro forma basis. This includes $9.6 million of revenue associated with the prior Technology segment, which we integrated into the Media segment back in Q2. As with the last couple of quarters, all of our domestic products within Media generated strong revenue growth, while we saw year-over-year declines in parts of Europe.

Our Q4 guidance for the Media segment reflects reported growth in the low 20% range. As Jim noted, Q4 is the first quarter with an apples-to-apples reported growth figure, and we believe growth rates north of 20% show we are gaining share in this part of the market.

Moving to O&O, as I mentioned, O&O segment revenue no longer includes the divested Search123 business, which would have contributed approximately $7 million of revenue in Q3 as compared to $8 million in the year ago period. The continuing operations of O&O generated revenue of $30 million in Q3, which is down 7% year-over-year, as we continue to improve the traffic mix. Despite the lower revenue, the bottom line contribution of this segment increased by 18% year-over-year due to the improving fundamentals of this business. While we expect Q4 O&O revenue to be down in the mid-single digits as compared to the year ago period, we believe this segment is now positioned for growth heading into 2013.

Our total adjusted EBITDA from continuing operations in Q3 was $51.2 million or 31.8% of revenue, which is above the high end of our original guidance of $49 million to $51 million for the quarter even before adjusting for the divestiture of Search123. Had we included the Search123 results, our Q3 EBITDA would've been approximately $53 million or $2 million above the previous guidance.

Our non-GAAP EPS from continuing operations in Q3 of $0.39 was above the high end of our original guidance. When comparing this quarter's EPS to the prior year, please keep in mind that our Q3 2011 EPS benefited from a large positive tax adjustment of approximately $0.24 per share. Excluding the tax benefit, our non-GAAP EPS grew 39% year-over-year.

In the first 9 months of 2012, we generated $92 million of free cash flow. We repurchased an additional 590,000 shares of our common stock in Q3, bringing the full year total to 6.5 million shares. We ended Q3 in a net debt position of $55 million, down from $84 million at the end of Q2. And absent further stock repurchases, we expect to be in a net positive cash position by Q1 2013.

Turning to guidance, we expect Q4 revenue of between $196 million and $200 million. We expect EBITDA for Q4 to be in the range of $68 million to $70 million, representing a margin at the midpoint of about 35%. The full year EBITDA from continuing operations at the midpoint of guidance is $214 million or 32.5% of revenue.

As we start thinking about 2013, it's important to mention that we have been incurring approximately $2 million in costs each quarter of 2012 related to certain acquisition-related costs and a legacy legal matter. These costs will not continue into 2013. Q4, we anticipate non-GAAP EPS of $0.51 to $0.52.

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

John A. Giuliani

Thank you, John. I'd like to provide a continued update to our efforts to unite the U.S. Media and Affiliate Marketing businesses. We continue to make significant progress on this strategic directive. On the last call, we indicated we rolled out our automated version of the Dotomi CRM service to a segment of the CJ customer base. Currently, we have over a dozen CJ customers in process in either committed, signed or live stages, and we have some customers who have already renewed.

In addition, in September, we announced our Master TMS service, which is a robust tag management platform launched by our technology business but with a combined effort by engineers, product and sales function across the company. In addition to countless meetings and across the customer base, we've already begun -- we've already gone live with some new customers.

In addition to those efforts, we have begun to consolidate our Media operations worldwide. This will provide enhanced sufficiency, greater reach and will leverage fewer technology platforms.

Lastly, our combined Mobile efforts between Greystripe and Dotomi will lead to a nearly tripling of our overall mobile revenue in Q4. We'll now open the call to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Youssef Squali with Cantor Fitzgerald.

Kip N. Paulson - Cantor Fitzgerald & Co., Research Division

This is Kip Paulson for Youssef. Just a couple of quick questions. First, how did the Greystripe acquisition perform versus your expectation since closing and essentially the growth rate for that business? And secondly, how are conversations with advertising agencies at this stage as we get deeper into Q4? Any sense that confidence is returning or ebbing?

John Pitstick

Yes, on the Greystripe acquisition, I'd reiterate what we said in the past several quarters that the business is performing in line with those expectations. We were a bit short, coming out of gate. If you remember back in the middle of 2011, we started off a bit slower than we would've liked. But since that time, we've really been hitting the numbers that we thought we would, and the growth there has been pretty impressive. In terms of discussions with ad agencies, I think we've reflected normal seasonal trends that we would expect to see going into the fourth quarter. I don't think there's been a real change there. I'd say there's certainly some uncertainty as we and our customers digest what happened on the East Coast. Our largest sales office is based in New York. Logistical issues with phone lines still being down, so we're working through those at the moment. But in terms of where we sit and what we're hearing, no real change from where we were.

James R. Zarley

Yes, the other thing I would ad to that on the ad agency side is that while they're still a significant, there's still a good chunk of our business -- the majority of our business today is not through ad agencies. Businesses like Commission Junction, Dotomi, the Owned & Operated businesses and things like that do very little, if any at all, with ad agencies.

John A. Giuliani

But they are -- this is John G. They're an important part of our mix and we'll continue to refine our offerings to meet their needs too because we want to work with them along with our direct customers. One last thing on the Greystripe, I think as we -- as you'll see going forward, we'll continue to integrate our efforts in the U.S. that will include on the mobile, because as I mentioned it before, the combined efforts of mobile are really exceeding what we would have thought of our overall mobile business coming in different -- from different services that we offer, whether it's Dotomi or Greystripe. You'll see more of that, and I think combining those efforts to accelerate growth in the future.

Operator

Our next question comes from Ryan Bergan with Craig-Hallum.

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

Now that you have divested Search123, it looks like the guidance for the O&O properties is improving. You talked about some good growth -- well, some growth next year in 2013. Do you feel like you have the right properties in place now? And would we expect to see any more activity with those assets?

James R. Zarley

Yes. I think for now, I think we're on a good track with that. I think divesting Search123 was a good move for us to improve on the traffic quality that we're really looking for in growing that business out. So I would say it's really continuing to focus on content, high-quality traffic sources where that business could really grow. And next year -- I mean if you look at what we've done, while we've diversified the traffic sources, we've also increased the bottom line pretty substantially. I would expect that to continue into 2013.

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

Okay. And then, Jim, can you talk about some of the areas in Europe you've identified that you continue to work on and improve and kind your expectations for when you see the movements are going to show through?

James R. Zarley

Ryan, what traditionally happened in our Europe operations, the various countries that we're in, we would bring the changes that we have, that we go through on a regular basis here in the United States, we would prove out and test and then later take them into the various countries. And I think that was probably -- in hindsight, probably that's the right approach. So what we're doing today is training people throughout these other countries at the same time as we do our own people. So when there's a release of new optimization engines, new traffic sources, new ways of buying on all the exchanges and all the things that we've done with data management, we're planning on taking those into those countries immediately. Some of those folks are here right now being trained. We're going to continue to train them going forward. And I would foresee just shortening that fuse, where we're going to take them in 6 months after we've proved them out here, that we'll take them in immediately.

Operator

We'll take our next question from Richard Fetyko with Janney Capital.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

A question on Dotomi. How much use was Dotomi able to make of ValueClick's first-party data? And then secondly, the ongoing debate on the ad networks versus the ad exchanges, I don't see them as a complete substitute, but just curious how the ad network -- ValueClick's ad network is doing and to what extent how the ad exchanges are a source of impressions. And so how do you sort of see the evolution of these 2 channels for ValueClick to play out?

John A. Giuliani

Yes, so this is John G. First of all, on the first-party question for Dotomi, really, Dotomi's data is not really taking advantage of anything with ValueClick. The data comes from customers. We use it, we un-automize it, and we're very selective about bringing anything in that wouldn't come directly from the retailer unless it's some type of census data. That's kind of -- clearly, those are -- there's kind of a firewall between those. As far as exchanges and the RTB and those, we really don't think of the historic leasing media businesses' network any longer, because it's so more sophisticated with data and now video and personalization. We view -- whether it's exchanges or other networks or direct publisher integrations, are just really a way to use the market and to acquire inventory. And we're constantly on the search for that. And we really look at 3 things: unique reach, performance of the media and the price paid. We're balancing those because our customers need us to balance for some type of return on investment or return on ad spend. And so we're sort of agnostic. We're constantly searching for inventory, and we're testing and going back and forth. So we don't view one or the other. We think we have to be sort of in the market, to be on top of whatever the trends are and creating trends as well, and then use the market to benefit our customers. So we don't distinguish a lot between, and those sources are somewhat fungible.

Operator

Our next question comes from Carter Malloy from Stephens Inc.

Ben Hearnsberger - Stephens Inc., Research Division

It's actually Ben on for Carter. First, in looking at O&O, are you happy with kind of the portfolio there? Or are there others that fit kind of the divestiture profile or similar to Search123 you're looking at maybe getting rid of in the future?

James R. Zarley

At this point, I think we're fine with where we're at. We are going to continue to really focus more on content and building that business through building more and more content-related sites and diversifying -- continuing to diversify the traffic sources. So I don't anticipate, if you mean, acquisition there. I don't have anything in mind right now as far as acquiring. As far as diversifying or divesting, we don't have anything planned at this point to divest at all.

Ben Hearnsberger - Stephens Inc., Research Division

Okay. And then one for John. John, if you could give us an update on kind of the Commission Junction-Dotomi cross-sell and where you are now versus where you were a quarter ago?

John A. Giuliani

Yes. Again, as you look at where we're going with that, we sort of look at -- and internally, we sort of don't think cross-sell anymore because we think that's probably something that we've tried and it's less effective. So as we look at how we leverage our different relationships, we look at, I mentioned the last time, on the last call, we were bringing together our business development functions. That's fully in process. And I think probably of the top 10 new opportunities in CJ are -- they're high-end retailers -- 6 are customers -- 6 of those are current Dotomi customers. So we start with a good relationship, we start with knowledge, and it's a much broader discussion. And what we're finding from our customers is they really want to integrate these functions. They want to look at this more holistically. They want to leverage the data back and forth to make sure they have consistent programming. And so we think there's real big opportunities for our customers to link up Affiliate Marketing along with the CRM strategy that we have. So that's going very well. You'll see more of that leveraging going forward in the fourth quarter and into next year. And then as I mentioned, on the automated Dotomi version, we now have got that somewhat, I wouldn't call dialed in yet, but we've got great traction going on, and the real kick to me is that we're getting renewal, and we're demonstrating to the CJ customers an automated product that can work for them and kind of fit into their framework, both on reporting and how they look at their business. So very strong. It's not just between CJ and Dotomi; you'll see a lot of traction like that throughout the divisions, as we make 5 companies and 4 divisions into 1 in an effort to really be bigger and more important, particularly to our retail customers, but to all of our customers.

Operator

We'll take our next question from Sameet Sinha with B. Riley.

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

A couple of questions. First one for John G. John, how do you see the trends in the Dotomi business especially as you're going into the holiday season? And in line with that question, [indiscernible] was talking a lot about being an audience-based targeting. Do you think there's an opportunity for you to work with them? I know that Yahoo! had closed down its network for other players earlier in the year. Second question is, any impact to the Affiliate Marketing business from the California tax? And my third would be any opportunities of getting into the Facebook exchange?

John A. Giuliani

Yes. So let me handle 1 and 3. And did you mention is there an opportunity to work with Yahoo? Or. . .

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

Yes.

John A. Giuliani

Okay. So first of all, trends in the holiday season are fantastic. Our customers -- this is a great time of the year. It's the most important part of the year for them. We -- the longer we've been running with our customers, the more we have an understanding of what our impact is. And because they always make money on our CRM approach that they generally -- if they have excess funds in this quarter and they need incremental revenue as possible, we become a great source to them. As well as our size and scale allow us to impact their business rapidly. So we tend to pick up very good seasonal business in the fourth quarter. We're locked with them in planning early on, but we still are there locally with them, month-to-month as they go through in the gyrations of the season, we can respond to it. We can also do that from a creative effort and a promotional effort, which gives us a real leg up because of our dynamic ad and creative business really allows them to make changes on the fly. And in fact, we've probably set most of those things up ahead of time. So when they see certain circumstances, they can call on us just to change creative, almost on a dime. And that way they can stay both tuned to the market and leverage a bit based on profitability or revenue, whatever they need. The third one, I'll go back to -- so -- and working with Yahoo! we do work with Yahoo! in many of our different businesses. I think we will continue to. We're always open to working with folks in the industry. And so whatever opportunities exist, we're open to those and we do work with them. It's just a matter of, frankly, different companies have different trends at different times. Early in the year, there was some different leadership at Yahoo! and different ideas. And as those change, new ideas come into play, we're always willing to work with a great company like Yahoo!. The third one you asked about, and I'll let John answer the Affiliate, was about the Facebook exchange. We have multiple efforts with Facebook right now, working with them to integrate and -- but more importantly, do other things with them, particularly where it comes down to personalization. On the Dotomi side of things, it's really important particularly when you're taking a smaller ad unit, is to be able to make the most of that. I mean, personalization works, so those are some things we work with them on. We continue to monitor that back and forth. It's an important area of inventory. It's still too early to tell how it performs vis-à-vis other forms of media. But we think it's a great opportunity, and we're actively working with them. I'll turn the second question back over to John.

John Pitstick

Sure. Sameet, so on the Affiliate tax, obviously, when we think back to Q3 of last year, when that tax went into place in California, right, before the quarter started, we did see somewhat of an impact. I think we quantified that last year in the sub 2% range on the total Affiliate business. So now that advertisers have had more time to plan for that, work with their publishers, figure out strategies to address that, that law has gone back into place effective September 15, and we don't expect any impacts on the Affiliate business. We've worked very closely with advertisers and publishers to plan for that and to make sure that, that wasn't going to impact any party within this broad ecosystem in Affiliate Marketing. So we thought about that quite a bit and looked at the numbers, and we don't see any impact from that.

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

John, while I have you on the line, could you elaborate on the $2 million per quarter in operating expense we should expect to come down in 2013?

John Pitstick

We don't want to go into too much detail, but those are very specific items that are discrete, that will not continue in those couple of categories that I mentioned. And obviously, the point of pointing those out was to look at the EBITDA I talked about of $214 million at the midpoint. And we think it's fair to add about $8 million to that to back out these expenses, which will not continue, but very specific costs that were related to the acquisition that will not continue as well as an old legal matter that has some royalties associated with it that went through this year. But we'll keep it at that high level, but those costs will not be continuing.

Operator

Our next question comes from Peter Stabler with Wells Fargo Securities.

Peter Stabler - Wells Fargo Securities, LLC, Research Division

A couple more on Dotomi if we could. I think when the acquisition was completed, you had talked about Dotomi growth rate in the 50% range. Wondering if you could offer any more color there? I realize it's been integrated into the Media segment, but my impression is that it probably still operates somewhat independently. So if you could offer some color there, that would be great. And then further on the growth drivers for Dotomi, any color you could offer on organic growth from existing clients versus the pipeline of new clients coming in fueling this growth, so kind of an organic plus new client contribution or I guess client renewal rates?

John A. Giuliani

Yes. So first of all, Dotomi still reports into me -- this is John G. -- and as well as the other divisions, U.S. And so it runs about as autonomous as anything else that runs under me, which is to say I'm busy weaving these together into one. That being said, the growth rates we've enjoyed in the past at Dotomi continue in the historical trends. The service is a very strong one. It grows as we grow participation of retailers. The largest part of the growth right now in the last, really the last 2 years has been from expanding existing customers. And we do that because we believe when the customer comes on that the most important thing is to make sure they hit their goals and we scale it for them to be able to impact their business. Usually, when somebody comes on, they want fairly rapid tangible results. And so it's not the kind of thing where we test them for 1 year and then we kind of expand them year 2. We typically go pretty quickly with them, and they -- and we want to help them make tangible results. So we get a lot out of our current business, and we do that in a number of ways. One of the ways that we'll continue to do that is through our mobile. And the mobile is a fast -- now is the fastest-growing part of the Dotomi, along with our historical CRM database portion. Both of those are exponential growth at this moment. We see in the next couple of years more growth being impacted by additional customers. And we see that with our business development folks being unified across all the divisions. We think we'll have more pressure against the market, more sales. We definitely -- we're going to add about 25% head in the business development function next year. But we will also be having a subsegment of our business development group selling our overall product portfolio, so that a retailer can or a large vertical customer can look at our portfolio, whether it's tag management or ad serving or Affiliate Marketing or a combination of mobile services along with CRM. They can make a decision on a much bigger point of view, because we think -- our customers are telling us they don't want more vendors calling them; they want fewer. They don't have more resources; they have fewer. And so to the extent that we can meet their needs with a more unified offering, we think there's a lot of growth enhancement. So next year I would see the Dotomi to continue to grow somewhere in those historical rates but with probably an additional push from new customers coming in from all different levels.

Operator

Our next question comes from Mark Zgutowicz with Piper Jaffray.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Just a couple of quick ones. Obviously, you're seeing some nice gross margin strength in the Media segment, which I'm assuming has a direct correlation to your move to more real-time bidding. I'm curious if, first of all, if that's the case and sort of how much you would quantify that strength or attribute to that. And secondly, if we sort of look to next year when you start to comp off of that sort of more aggressive move into RTB, do you still expect to see that type of growth on the gross margin line?

John Pitstick

Sure. So the gross margins in our view have been pretty consistent over the past number of quarters. There's a mix issue as we roll Dotomi in for a full quarter and full year this year relative to say, Q3 of last year, which had it in for a partial quarter. But if you look back Q3 versus Q2, the gross margins in Media were pretty consistent. Q1, they were high, and we talked about that back in the Q1 call that those were higher than normal and impacted our growth a bit. As we think about the RTB activity, one of the things that we started doing when we ramped that up was, let's make sure that we can acquire traffic that's going to work for the advertisers but also be consistent with the types of gross margins that we look for in the rest of our business through the network relationships. And we've proved that out from the get-go. So it's really just been a matter of scaling those traffic sources, integrating them into our system. So I think the short answer is there hasn't really been a shift in our view of gross margins, whether it's on network, off network, whether it's through a supply type platform or an exchange. All of our businesses are kind of running where they've been, and we don't see that changing here in the near term.

John A. Giuliani

And I'd add one thing. I think we'll get -- we'll continue to refine our efficiency as we combine media operations. And we're somewhat agnostic as to where we get inventory. We want to make sure, like I said before, performance, unique reach and price. But I think the biggest reflection in my mind of -- if we're able to improve gross margins is how much value we create for our customers. That's really the big linchpin for us is how much more value can we make sense of data, make smarter choices, for creative, more smarter choices for audience delivery. And that's where we have put our emphasis to try to drive gross margins to improve the value equation to our customers in the hope that, and really the way we operate is, if we can create -- if we can expand the value creation, most of that should accrue to our customers, but some of it should accrue to us. And so you should -- if we're doing a good job, you should see us slowly increasing that gross margin, because most of that should accrue to our customers. And then on the bottom line, we'll continue to get efficiency. But I don't think that will be the driver of our gross margin, is efficiency down below. I think we'll just be smarter about how we traffic ads.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. Great. And then so the majority of that gross margin benefit is Dotomi, which sort of you're anniversarying, obviously, next quarter. So in terms of sort of quarter-over-quarter going forward, is Dotomi still a margin contributor on the gross margin line?

John A. Giuliani

Well, I think like John said, we don't look at this changing a whole lot. The mix will change slightly. I think you'll see us work very hard on traditional media side and continue to work hard on the mobile to add value to those margins reflect more and more similarly to our consolidated business. Dotomi will have an effect if we add some, but I think as much as anything, the new products we're launching on BC media and getting them smarter and smarter in their delivery will help it not only be differentiated but will lead to slightly higher margins. I don't see huge expansion in that area, but we would see maybe a slow expansion of that.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. Great. And then just one last quick one. In terms of Dotomi and CJ cross-sell, you'd mentioned that you're sort of moving forward without that cross-sell. I know that was I guess one of the catalysts I guess that some may have expected heading into the back half of this year. I'm just curious, what was the challenge there? Was it the sort of agency versus client-facing relationship? Or what was it? Because it seems -- or was there something else? Because it seems that, that would have been sort of an easy sort of cross-sell. I'm just more curious as to what you found in reality was the challenge there.

John A. Giuliani

Yes, there's a couple of parts. I think there may be some nomenclature differences here. I don't really like the cross-sell approach, because it feels sort of ad hoc to me, and I'm much more systematic and that -- so when you have divisions running kind of autonomously, that cross-sell or introduction kind of thing makes some sense, but it's not a very repeatable process. And so what I've done -- I said I don't really want to go down the cross-sell route. What I want to do is integrate the business development function so there's a true leveraging of our installed customers. Because they're -- in my view of the world, when I take over this business and all these customers are mine, and I treat them all, I want them all to have my best services. And so when you think of that in that term, then I have responsibility for my business development to actually make sure I introduce the right services for the right opportunities that exist with our customers and not do it in an ad hoc function. I will tell you, though, to the first part of your question, is I think we probably thought that the Dotomi services would easily ride on CJ. And what we found is it was a little easier introducing CJ into our customers, into the Dotomi customers. And with the added benefit of almost probably I'm going to guess all of our customers in Dotomi have an affiliate program of some sort. So they were interested, they had people that managed that. And they're very interested in the combined -- the future of combining the products together and what that might yield them in consistency in their media communications. So we've gotten really strong traction on that. If you conversely look at where we would go on the CJ account, most of the folks -- of their customers, don't have a CRM display, particularly a display service like we have. So it didn't lend itself to that. Where we have had high-level meetings, it's worked very well. Because whether they had it or they didn't have that kind of service, they can see the benefit of not only the Dotomi standalone service, but expressly in the combination of what the potential of bringing our services together. And so it really is some nomenclature in there and some of it really a move to accelerate through our business development. We think that's still a great opportunity. And like I said, the automated version that we're launching into CJ is working real well, and we will continue to accelerate that going into the fourth quarter and the first quarter of next year. So I hope that helps some.

Operator

We'll take our next question from Shyam Patil with Raymond James.

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

The first question is just around what you guys are seeing in terms of the overall kind of demand environment in the Media business. It seems like the agency commentary we've seen around 3Q and then the outlook for 4Q has been fairly negative even around online ad spending. So I'm just curious what you think it is that's allowing you guys to maybe outperform that commentary and if you think you're gaining share, and if so from who.

John A. Giuliani

Yes. So I'm not positive on who we're getting share from. It's probably a little bit from a lot of people. I think probably what you see in our Media business is very, very accountable and it's very sophisticated in the analytics of what the true impact is. And you're going to see us continue down that road of being -- having differentiated products, measurable products and making sure we can deliver against a true return on ad spend or ROI. I spent years building Dotomi against the grain of making sure we could focus on the incremental impact and get away from a lot of the online gimmickry. And frankly, I think there's just a lot of customers that have got -- the budgets have gotten high enough where they can't do some perfunctory kind of click analysis or something that is some type of attribution model that is less scientific. And so when you get more scientific, more data-driven, particularly when you're using their data and their customer data, it proves out, and you've got a lot of sophistication in our marketers. Our retailers are gaining savvy all the time into the market. And so I think we are able to get there because we're giving them more. And I think it's a simple -- it's a really simple thing. We measure ourselves on the value we create. And when you think about it in those terms, you've got to come to work every day helping create more value for your customer. And I believe the customers that are with us longer tend to keep expanding, and that's part of what's going on. And they've asked us to do more. And that's one of the reasons we're bringing these divisions together. We think there's an opportunity to have much larger relationships with our customers, and for our benefit, maybe take a larger share of the spending, but for their benefit, to have a lot less resource allocation on their part, have a lot less to go out and go through all the many vendors out there and try to digest who's doing what and vet all of those. It really becomes a streamlined process, provided we make sure we keep focused on creating value for them, demonstrating that value and articulating it in a way they can get their head around in terms of ROAS, return on ad spend, or ROI, return on investment. And as long as we keep that in place, I think we can continue to grow our business like we have, and I think that's what you'll see from us in the future.

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

Great. And I just had one quick question, a follow-up on that. Can you talk about just the kind of the opportunity you see right now in the online video advertising space? It seems like we're starting to see an inflection point in terms of budgets coming from offline to online video. And just how ValueClick is positioned to benefit from that opportunity.

John A. Giuliani

Yes. So I think once we moved onto our own platforms, which was, I don't know, sometime last year, we've seen a significant increase. It's actually one of the fastest-growing albeit small services we're offered under the Media side. You will see us continue to grow that. That's because that's an emphasis we want to be best in class in. We want to continue to add some of the data profiles. We'd like to do some of the creative things we've done in the past with other forms of media to make that more personalized. And so I think that's an area that we can continue to grow. And we will put R&D dollars against, sales heads against and continue the refinement in our creative areas.

Operator

The next question comes from Richard Fetyko with Janney Capital.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Just a follow-up on the commentary around mobile. Just curious, John G., how do you leverage mobile medium for your sort of CRM product or other products within Dotomi or...? And then how do you deal with the fact that there's no cookies obviously in the mobile environment and even some of the other customer identification systems are being phased out by Apple?

John A. Giuliani

Yes. So first of all, we sort of see this convergence of devices, and so we spend a lot of time on device interconnectivity, both tying that to IDs and tying that to our anonymous profiles. And so we think that's critical. And when you look at sort of the range of devices from a desktop to a laptop to a tablet to a mini tablet to a smartphone, our view is we've got to connect all those together for our retail customers and do it in a consistent fashion, so that we have a similar profile for all of those, that we can also have a consistent stream of communication against them, so that they're saying the same things based on the device, and then being able to measure that back against that total spend, against what did I get for my -- for that spend? And so we think those inter-device connectivity is critical. To leverage it, there are several ways to leverage. A lot of things we're doing technologically are proprietary, so we probably don't want to talk about them right here. But we're working diligently to make sure we can identify those devices and then cross-reference to connect them with other devices. And probably most importantly then keep them back to an anonymous profile. So a, we can calibrate the spend on that consumer; b, that we keep communication and copy consistency across device; and c, so that we can analyze for our customers what the true payout or effect of the media is. We think the combination of things we're going to be continually be challenged by. We think we've got a head start on that. And we think it's a great -- in fact, the people around here know I love the complicated problems because we fix those and you get a head start on those, those are the things that make a difference for our retailers, because they have the same issue being able to identify people. And so we are really working with them hand in glove to understand that. We think this notion, though, of interconnectivity of devices, tie-back to profile, all through payout on agnostic to channel or channel being offline/online or by device, bringing all that together in the unified analytical study for our retailers and our customers is really a big win for them, and so it's a big win for us. We will pour a lot of our R&D into that, a lot of our energy and effort into connecting those devices and proving that out. So hope that helps.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

It's helpful. If I may, just to follow up on that. I mean, so you're able to on the Dotomi side tap into some of the mobile advertising inventory available through some of the mobile ad exchanges and ad networks, including Greystripe, is that the idea?

John A. Giuliani

Well, there's a couple of ideas. We're doing it sort of separate from that. We will do similar to what you just said with the Greystripe. To date, we're getting inventory separately from Greystripe. I think as we bring media operations together, that inventory will make itself more plentiful across the divisions. Again, one of the reasons I want to consolidate our operations on Media worldwide, not only to do what I'm talking about, but to do what Jim had referenced earlier, so we have a worldwide approach to our services and then we can roll those out. Because really what we're really trying to focus on is, in the show that I'm trying to run is, the customer is the star of it. So we're looking at them and say what are all the changes and how do we interconnect the things we do seamlessly to them. And mobile is just on everybody's mind, and so that's what we're working hard to do. But to your express question, we're not sharing too much inventory back and forth right now.

Gary J. Fuges

That concludes the call for the quarter. Thanks for your participation, and we'll talk to you soon.

Operator

Thank you for participating in today's ValueClick third 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 9435993. The replay will be available through 10:00 p.m. Pacific time on November 8, 2012. Thereafter, the replay can be accessed on ValueClick's website at www.valueclick.com.

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