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Digital Generation (NASDAQ:DGIT)

Q3 2012 Earnings Call

November 08, 2012 5:00 pm ET

Executives

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

Omar A. Choucair - Consultant

JoAnn Horne

Analysts

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

John D. Crowther - Piper Jaffray Companies, Research Division

Darren Aftahi - Northland Capital Markets, Research Division

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Operator

Good day, ladies and gentlemen and welcome to the 2012 Digital Generation, Inc. Third Quarter Earnings Conference Call. My name is Kim, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Neil Nguyen, CEO and President.

Neil H. Nguyen

Good afternoon, everyone. Thank you for joining us today. Joining me today is Omar Choucair, Chief Financial Officer. Before we start, I'd 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 at our digital distribution network and demand among certain clients for digital, audio and video media services. These statements are based on economic marketing conditions as of November 8, 2012 and assume no material changes from conditions that exist today. The company can give no assurance 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 outlook, 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 and achieve commercial success for new products, risks associated with integrating the MediaMind, EyeWonder, Peer39, North Country and other acquisitions with our operations and personnel; possibility of delays in product development; risks associated with operations in foreign countries; and fluctuations in current exchange risks; risk of new and changing and competitive technologies; risk related to additional impairment of our goodwill or other long-lived assets; 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 measures calculated and presented in accordance with GAAP can be found in today's press release.

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

Neil H. Nguyen

Thanks, Omar. In looking at the third quarter results, I'm pleased with the sequential improvement in the online operating results, reversing a double-digit decline and these results were achieved in a seasonally weak quarter despite the well-documented pressure in Europe. In our TV segment, while HD penetration continues to grow and pricing appears in the near term to have stabilized, results were below our expectations due to continued lower spending from our entertainment vertical. Last quarter, I had shared that the broad industry trends support a cross-channel strategy. With online video and data-driven products key to our vision, I also relayed that clients were telling us they believe in our strategy and the value proposition that we present.

This quarter, we saw progress with the execution of several large customer wins and contractual commitments. So part of my message today is our strategy is gaining traction. Today, DG sits at the crossroads of an evolving advertising ecosystem, with established assets in both of the most relevant advertising mediums. The convergence of channel is happening where video will be agnostic across screens and the transition from a black box closed system will give way to greater transparency, automated workflow and data-driven advertising as the new operating standard.

The dramatic growth of connected devices globally and consumption of video continues to grow exponentially, representing a massive opportunity for DG to continue evolving and take advantage of the growth trends in online video and data-driven advertising services. At CNET air well [ph], their video ad revenue has grown from $10 million to over $100 million over the past 2 years. As a proof point of this converge strategy, this quarter we have signed several significant TV, video and online deals with some of the largest advertising groups in the world.

I'll discuss some of our key partnerships and customer wins shortly, but first, let me review Q3 highlights. In a seasonally weak quarter, total revenues increased 11% to $94 million. EBITDA was down 11% to 27.6 due to primarily lower TV revenues, along with ongoing investments to integrate the business, product development and a $700,000 negative FX impact.

As I stated at the beginning of the year, 2012 is a year of investment to create the infrastructure and products to leverage the opportunity in front of us and our spending is in line with our plan.

Revenue in the Online segment was $33.7 million, showing a marked improvement from Q2 despite a negative 18% decline in EMEA revenues. As a reminder, historically, EMEA has represented 40% of our Online segment revenues. So we're very pleased that with the integration largely behind us, the addition of key members of management team has stabilized the business and are beginning not only to recapture lost clients but we're on the offensive again.

Emerging markets were again very strong, with Latin America growing 37%. North America also saw reverse of its downward trend, increasing 3% in the quarter. We saw strength across the board in our online metrics. Platform customers' revenue grew 19%. We saw 24% growth in online video revenues and overall, impressions grew roughly 40% to 277 billion impressions and on track to exceed over 1 trillion ads served in 2012.

We've also began to introduce new differentiated products that drive efficiency and reliability. One example is our new verification suite which is fully integrated into the MediaMind platform. Utilizing Peer39 technology, we now offer the most complete verification capability of any major ad server, allowing agencies and advertisers to deal with one vendor for brand safety, ad walking, viewable impression metrics and consolidated billing and reporting. A second example is first to tag a single, secure tool for deploying, managing and updating an advertiser's digital marketing tags.

Revenues in the TV business were relatively flat at $60.1 million. The positive news is HD continues to grow, with revenues up 15% on a 48% increase in volume. Penetration at the end of the quarter almost doubled to 30% from a year ago. HD pricing continued downward but declining trend has slowed. SD volume declines were in line with previous quarters.

Entertainment companies' continued shift in media spend into digital, including social, YouTube and sponsorship buys. We have also seen the number of media markets they historically bought for preopening evolve to focus more towards the top media markets and national cable platforms.

On the positive side, we saw a strong performance from automotive, telecommunications and the fastfood verticals. During the quarter, we made significant updates to our TV platform. Clients in the U.S. and international will benefit from that streamlined TV delivery service directly to stations globally. Clients will also benefit from easier access to spot content and reporting. This is the first time DG's extensive distribution network will be available for 100% coverage for agencies and broadcasters across the United Kingdom.

We're also pleased to announce an updated DG station tools, the DG delivery portal. These improvements provide better service directly to TV stations and the transition of all TV destinations that currently receive deliveries intake, both SD and HD, to complete digital downloads. We're excited to have already received encouraging responses from clients who have tested the service such as NBC Universal.

Let me turn the call over to Omar so he can view the financials in detail.

Omar A. Choucair

Thanks, Neil, and good afternoon, again to everyone. For the 3 months ended September 30, 2012, DG reported consolidated revenues of $93.8 million compared to $84.6 million in the year-ago period. Please note the reported revenue includes approximately $700,000 reduction in revenue led to foreign currency impact associated with the online segment. The company reported consolidated adjusted EBITDA of $27.6 million for the third quarter of '12 versus $30.7 million in the third quarter of 2011.

The TV segment reported $60.1 million in revenues during the third quarter of '12 versus $60.6 million in the third quarter of 2011. The adjusted EBITDA in the TV segment for the 3 months ended September 30, 2012, was $24.2 million compared to $28.8 million in the 3 months ended September, 2011. The 2012 third quarter revenues include approximately $2.6 million of political advertising revenue.

Results were again impacted by weaker-than-expected results in the entertainment vertical. The TV segment EBITDA, before corporate overhead allocations, was $30.9 million during the third quarter versus $32.5 million in the third quarter of 2011. The TV segment gross margin was 64% in Q3 2012 versus a gross margin of 65.5% in Q3 of 2011, the most significant factors being the redundant New York office lease expense, certain employees terminated after June 30 and the investment in the EMEA business.

During the third quarter, the TV segment recorded several unusual expenses, including approximately $500,000 of litigation expenses related to enforcing the company trade secrets, $400,000 related to the integration of the new CRM system included in corporate overhead costs, and an additional $300,000 related to the office rental expenses resulting from duplicative office space. The company expects the new CRM system charges and the office-related rental expenses will end or have ended in the third quarter of 2012.

The reported adjusted EBITDA, after corporate overhead and excluding the impact of these unusual costs, would have been $28.8 million for the third quarter. For the 3 months ended September 30, 2012, the online segment reported revenues of approximately $33.7 million versus $24 million for the 3 months ended September 30, 2011. The online segment adjusted EBITDA was approximately $3.4 million for the quarter ended September 30, 2012, versus an adjusted EBITDA of $2 million a year ago. The online segment EBITDA before corporate overhead allocations was $4.3 million during the third quarter of '12 versus $3.1 million in the third quarter of 2011.

In the third quarter of 2012, the company reported net loss from continuing operations $219.7 million or $7.96 per diluted share versus $2.8 million or $0.10 per diluted share loss in the third quarter of 2011. The company recorded acquisition integration cost for acquisitions of approximately $1.4 million during the quarter.

The company reported approximately $600,000 of incremental operating expenses related to its International TV expansion during the third quarter.

Moving on through the income statement. The company recorded $7.8 million of interest expense during the third quarter of '12, up from $6.5 million of interest expense in the third quarter of 2011. The company paid no cash taxes for the third quarter of 2012. The company recorded $208 million of non-cash charge to write down a portion of the goodwill of the online segment. The charges are the result of management's estimate of the fair value of the online segment compared to the online segment carrying value and the fact that company's market capitalization was less than the company's consolidated book value. The company based its valuation of its online segment based on cash flow projections and valuation based on a third-party report.

The majority of the goodwill impairment is not tax affected for GAAP purposes. The impairment did result in a noncash tax expense of approximately $11 million because the goodwill impairment caused the company's cumulative 3-year earnings to be negative. Going forward, however, cash taxes will continue to be reduced over time as the company utilizes its tax NOL of approximately $42 million after tax.

At September 30, 2012, the company had outstanding debt of $455 million in cash and short-term investment balance of $68.6 million resulting in net debt of approximately $386.4 million at the end of the quarter.

Turning to the integration points that we want to provide an update on, the company is on track to realize annual cost savings of approximately $30.8 million once all the MIJO, MediaMind, North Country and EyeWonder integration activities are complete. Most of these synergies relate to reduced headcount and office consolidation.

The company incurred approximately $1.4 million of acquisition and integration costs during Q3 of 2012. The company incurred approximately $600,000 of cost related to the strategic alternatives process, and this amount is included in the $1.4 million of acquisition and integration cost.

The company incurred CapEx totaling approximately $3.4 million during the -- quarter 2012. I want to quickly give an update on the 2012 cost-containment program. As previously discussed, management has taken actions on the cost reduction initiative which will reduce the company's 2012 operating expense profile. Management believes this program will reduce the current annual run rate expenses by approximately $12 million. The company only realized a very small amount of this benefit in the third quarter. However, management expects to realize approximately $2.5 million to $3 million of full benefit during the fourth quarter.

In closing, the company's maintaining its policy of not providing any financial guidance given the ongoing strategic alternative process being conducted by the special committee. With that, I'll turn the call back over to Neil.

Neil H. Nguyen

Thanks, Omar. The key to the quarter for me, as I stated earlier, is that we've begun to see positive monetization of our strategy. There's still much to be done and we're working very hard at executing our operating plan.

In addition to the key holding company deals we discussed last quarter, in Q3, we added the most significant deal yet, securing a $57 million, 3-year minimum commitment from one major ad agency in EMEA for our technology services. It's a significant endorsement of our strategy, our technology and provides a foundation for our business to recover and grow in EMEA.

We also closed 2 significant cross-platform deals, one in North America and another one in EMEA for a multimillion dollar incremental revenue that includes both online ad serving and TV distribution. The first is with Havas Digital, a global interactive and media agency with 55 offices in 43 countries. The deal highlights include multimillion dollar commitments for ad serving and TV distribution in the EMEA market. To quote Havas, "DG solutions and the continued efforts to bridge the gap between online and TV bring significant value in cross-media data and reporting to our clients."

The second agreement is with a major media agency in North America where our convergent strategy is at the core of the value proposition. With this win, we have transitioned 4 to 5 major advertisers over to our MediaMind platform and we expect incremental new TV distribution business in Q1 of 2013 to come from this agreement.

Turning to our publisher-driven relationship, we closed several significant publisher deals. First, at ad:tech Tokyo, Yahoo! Japan announced DG MediaMind as their preferred third-party ad server for display and video. This opens up the number 2 media market in the world to our technology and services. In addition, MediaMind has become a certified Yahoo! smart ad partner in North America which will allow Yahoo! customers to take advantage of MediaMind's Smart Versioning product to produce and serve more dynamic creative ads and measure their effectiveness.

As part of our marketing efforts to stay close our customers and to develop customer interest, we have created a series of technology workshops around converged technology. Over 70 VIP customers, including key advertisers and agencies from both online and TV across Europe, attended our inspiring event in Germany, showcasing the latest in cross-channel technologies. We're also seeing demand and usage of our video solution leverages our TV assets and the integration with our MediaMind platform. Customers like PetSmart and Biltmore who wanted to seamlessly take their TV video assets and to deliver them across the multiple screens were able to accomplish this with DG.

Our business momentum is improving, but we recognize the urgency to manage our costs closely as we continue to capture more cross-selling opportunities. Over the past quarter, we have added several senior management members to my executive team that have helped lead our businesses. This effort is now complete with the appointment of Craig Holmes as Chief Financial Officer, which we announced in the press release today.

As previously discussed, Omar informed us he wanted to pursue new endeavors and step down as CFO. He will continue to provide support to the strategic alternative process through year end. We again want to thank Omar for his loyalty and many years of services to the company. We would like to welcome Craig to the team. He brings a wealth of experience in the Internet and software sector with both public and private companies and we look forward to his contribution.

With that, we're happy to take your questions. Note that we can only respond to questions related to the third quarter. We're not going to make any remarks or take any questions on the strategic alternative review process. The strategic review process underway by the Special Committee is continuing and we do not intend to disclose developments in this process until such time as the Board of Directors approves or has a transaction or transactions to recommend to stockholders or otherwise deemed further disclosure appropriate. Operator?

JoAnn Horne

Operator, we'll take questions now, please.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Rich Ingrassia with Roth Capital partners.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Neil, clearly the write-down on the online segment reflects more than just temporary issues with MediaMind sales in Europe. Can you say a little bit more about what's going on there? Whether it's in terms of the industry macro, competition or company-specific issues in product development or sales?

Neil H. Nguyen

Rich, let me just clarify the question. You're asking specifically about our performance in EMEA?

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Yes. Well, specifically, the MediaMind business. I guess the online business overall, in light of the write-down.

Neil H. Nguyen

So I think overall, our business is starting, as I've announced today, we're starting to see some positive momentum from Q2. We still face headwinds in Europe as a whole, but marked improvements in operations across -- around the world in other segments.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Any issues at all in the platform itself in Europe?

Neil H. Nguyen

No specific issues around our technology platform. I think the inward focus of the company for the better part of the last 2, 3 quarters of integrating EyeWonder, Unicast and MediaMind did take a toll on us as a company. And that, along with just the macro headwind of the business, where advertisers are spending less in those markets, contribute to a less-than-solid revenue performance.

Omar A. Choucair

Rich, it's Omar. Maybe what I should do is just give a little additional color around the process that the company went through in terms of the goodwill actions that the company took. As we look over the last 4, 5 quarters, the company carefully monitored the goodwill balances through a variety of phases. And obviously, the company looks at the market capitalization versus the book value of the company. And continues to look at the performance of the company. And the company has an obligation to review the valuation of all of its goodwill on an annual basis. And at the end of the day, that's where the company came up in Q3 in terms of its annual estimate and engaged with a third-party evaluation firm to help us analyze the segment values. And the third-party valuation the company used a variety of metrics in terms of determining fair value. And after a very full and thorough process for the company and for the third-party evaluation firm, the company determined that there was a number, about $208 million dollars to be adjusted for the online segment. So I think it's a function of a lot of factors. I know Neil had addressed the operations of the business but I think it's more than just the operations. And clearly, Q2 to Q3, the company saw additional improvement as it related to the online business. And then the other thing that Neil said was, 2012 was a significant transition year and the good news is that the company is on the very tail end of integrating both the Unicast and the EyeWonder businesses. So I don’t know if that gives you a little more color or for data points for the goodwill charge that the company took. And obviously, it's a non-cash charge that the company took on the financial statements.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Okay. What I was getting to is how much of it is due to a change in the valuation assessment versus a reduction in your cash flow projections for that business over the next 3 to 5 years?

Omar A. Choucair

I mean it's a fair question. It's probably more complicated answer because I don't know if we -- I don't know if we actually quarantined how much of the charge is related to X or how much of the charge is related to Y. I think it was really a combination of looking at the company's cash flow projections. And then looking at, on a market approach, what market comps were. And then the third-party evaluation firm took a blend or hybrid and did a weighting between both of those, and that's how we came up with the number.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Last question then. Just any indications on TV spending patterns for Q4? Any kind of pacing you can provide us would be helpful.

Neil H. Nguyen

Thanks, Rich. It's tough for us to prognosticate the Q4 spending. What I've heard is scatter pricing is up in the market. That's the latest I've heard so far. So not much other than that.

Operator

[Operator Instructions] Your next question comes from the line of Jason Helfstein with Oppenheimer & Co.

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

A few questions. Just thinking about the TV business for a second, can you just lay it out? I mean, what do you think your average HD pricing is versus extreme reach as far as in percentage? I mean, has it gotten to parity yet? Are you 25% more expensive? Just give us an understanding just of kind of where it is in that competitive dynamic. That's question one. Number two, we obviously -- we would all like to understand your organic growth with online, but just given the acquisitions it's hard. So is there -- we can look at the sequential change in the business, but is there a way to think about an organic or pro forma growth rate for revenue from online for the quarter? And then with just some more color, can you break down the online revenue between U.S./International and tell us how many online salespeople you had at the end of the quarter?

Omar A. Choucair

I think I can take a couple of these and I'll have Neil field the other ones. In terms of the online segment on a pro-forma basis organic, that would include the results of the MediaMind business, EyeWonder and Unicast and Peer39 which we all put together as the Online segment. And I think I've mentioned, or thought maybe I mentioned that, that was flat on a year-over-year basis. So that compared to a double-digit decline, I think, of around 12% in Q2. So in Q2 of 2012 versus Q2 of 2011, the organic down was about 12% -- 12%, 13%. In Q3 of 2012 versus Q3 of 2011, that top line was basically flat on a year-over-year basis. So that's why we say, Jason, that the business, the trend reversed from a negative trend to obviously a more stable -- that's okay. So that's how we look at, I guess, the online piece. I think in terms of the online segment, in terms of how much is North America and how much is International, I just want to make sure. Is that the question?

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

Yes, that's the question.

Omar A. Choucair

So I can go back and confirm in just a minute but I'm relatively sure that on the online side, 40% is non-North America and 60% is North America. So I think that answers...

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

The number of salespeople.

Omar A. Choucair

The number of salespeople. And I think when you talk salespeople, you want to include sales support or you're just talking about just the true sales folks? Because I know the number excluding the sales support is about 85 to 90 folks, and that's true sales. It does not include sales support.

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

And that's just online?

Omar A. Choucair

That's just online.

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

And what's the total online? Simply just because there may be some overlaps. I was just trying to -- I mean what's the, I guess, the total number of online employees?

Omar A. Choucair

It's 650 to 675, is online. And then the total number of employees in the company is like 1,680; 1,650 to 1680. And then I think you had one other question. I think you had one other question on pricing. I think the only thing I would say -- and I can take a stab at it and let Neil finish it. In terms of -- I don't think it's really appropriate for us to talk about pricing versus one other company or the other. I think where the company looks at HD pricing is Q3 of 2012 was pretty much in line with what the company expected. The company, as you probably remember, has identified a range of 5x to 7x is where we think that pricing will go. We're not saying that we're there yet. But over time, we think it'll settle 5 to 7 and we still believe that's a reasonable range in terms of where the HD pricing goes. And obviously, that pricing is going to be a function of the volume growth. And to the extent that the volume growth happens on a more accelerated basis, then I think one could assume that the pricing would have an impact going that way -- going the other way. So I'll let Neil see if he has any additional comment on that particular item.

Neil H. Nguyen

Jason, from an HD pricing standpoint, I know that we continue to get a premium in the market over, I'll call it, the rate. I mean it's across-the-board. I think we're -- there's still a little bit of gap between where I believe our TV HD pricing is and what the competitive rates are in the market.

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

And so to the extent that -- I mean when you think about what the industry is growing, do you think the company is losing share in TV?

Neil H. Nguyen

We definitely had some customer attritions in 2012 as a whole. But we've also won other businesses to make up for it. So hence, you can see our businesses kind of relatively flat year-over-year. But from a share perspective, I would say, we're about even.

Operator

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

John D. Crowther - Piper Jaffray Companies, Research Division

This is John Crowther in for Mark. Just kind of following up on the TV HD pricing question. By my math, it looks like you actually had a sequential decline in total HD spots in Q3, which would be the first time I think we've seen that happen in the last couple of years or basically in history. Just wondering if there was a change in sort of your approach towards pricing versus volume gains? I know at the beginning of the year, you said you were going to be using pricing aggressively to sort of move that penetration rate up. But certainly seems like based on the sequential decline in total spots, you may have changed that approach.

Omar A. Choucair

John, I just want to make sure we have the same data points. I'm not sure what your model says but, Omar, I don't believe our sequential -- I want to make sure we're on the same definition before we address your question. So maybe you can clarify how you got to your number?

John D. Crowther - Piper Jaffray Companies, Research Division

So the way I'm just looking at it is based on what you said for volume growth here, 48% year-over-year, it's sort of a meaningful tick down from 78% in Q2, compared to sort of 65% to 70% growth rates you've seen in the June and September quarters of last year. So even if it wasn't an absolute sequential decline, there seems to be a meaningful change in sort of the year-over-year growth pattern there.

Neil H. Nguyen

I think if you've been around our business, it does fluctuate a little bit based on the seasonality of our business. You know, clearly in the quarter we had -- as we said, our entertainment vertical was much lighter. And so that definitely will have a volume impact because they're a big user of our HD product as a whole. So I don't think we can specifically say that it's a systemic decline in trends. What we saw was strong growth in other categories to make up for the entertainment vertical.

Omar A. Choucair

John, the only comment I would make is that it probably wouldn't be fair to make that statement just in a vacuum sense. The company's never actually talked about exactly what the volumes would be on a per quarter basis. So I think, A, you'd have to take into account what the seasonality is, what Neil's saying. And I think you may be trying to solve for 2 different variables. But I guess in terms of how we look at it, we saw what the revenue growth was on year-over-year and we track what the volume growth is on a year-over-year basis. So I don't know if the numbers sequentially from Q2 to Q3 were pretty close, I wouldn't necessarily say that was unexpected on behalf of the company, just given where Q3 is in terms of seasonality from Q2 to Q3 to Q4.

Neil H. Nguyen

The last thing, John, just to answer your question directly about pricing strategy and volume commitment. Clearly, we strive to grab a couple of variables for us in striking deals and this is you increase the amount of volume for lower pricing and/or some form of exclusivity or agreement with our clients. So one of those 2 things we usually get to -- of those -- 2 of those variables in a negotiation with one of our existing customers.

John D. Crowther - Piper Jaffray Companies, Research Division

And then just on the Internet side, wondering if maybe you can let us know -- I know last quarter you sold a piece of that business off in exchange for some business for WPP. Wondering if you could sort of comment on if any of that came online in Q3 that may have been more sort of onetime in nature?

Neil H. Nguyen

No. I think that relationship is a 12-month process and we didn't see anything specific to the disposition of the Chors asset in the quarter that would benefit as a onetime event.

John D. Crowther - Piper Jaffray Companies, Research Division

And then just lastly, I know. Omar, that you walked through a couple of sort of onetime expenses on the TV side and I may have missed it. The first question is, what the online EBITDA was? I think you probably said that but I may have missed it. And then two, just wondering, even if I back out some of those one line expenses, it seems like your overall expenses were up on a sequential basis and just wondering, what may have sort of driven that -- those increases?

Omar A. Choucair

Well, first of all, if you go in reverse, the company's expenses did not go up sequentially. So when you can line up the press releases or the company intends to file the Form 10-Q and you can see it all in very good detail over the next day or so. So that's number one. In terms of the online EBITDA for Q3, it was $3.5 million after corporate overhead and it was $4.3 million before corporate overhead.

Operator

[Operator Instructions] And your next question comes from the line of Darren Aftahi with Northland Securities.

Darren Aftahi - Northland Capital Markets, Research Division

Just Omar, following on the last question, what's the apples-to-apples, year-over-year EBITDA number for the online business from the $3.5 million you referenced? Second point, what are some cost synergies the company anticipated, let's say, in 3Q that got pushed out to 4Q? If so, could you quantify the $3.4 million in CapEx you reported? Is that more of a normalized run rate going forward and what was cash flow from operations in the quarter?

Omar A. Choucair

Okay, sure. No problem. Let me see if I can take them, I guess, in reverse order. In terms of the cash flow for the quarter, the free cash flow in 2012 Q3 was about $14.3 million and the cash flow in 2011 Q3 was about $9 million. And there was a delta between those 2, primarily because there were cash payments for taxes that were made in Q3 of 2011 that the company did not make those cash payments in Q3 of 2012. So I can tell you that. In terms of the pro forma for online, I can tell you that the reported number I mentioned was $3.5 million was -- Q3 2012, $3.5 million. And on a pro-forma basis, that number was roughly the same and the reason why I can tell you the difference is, is we had Peer39 that was on a pro-forma basis that came in last year. And the Peer39 business, as we bought it, had a negative carry on the EBITDA side. So when you drop that in, and that's where the pro forma EBITDA was for the prior-year on online. And I'm trying to think what your next -- that's 2 of your questions. What was the next question, Darren?

Darren Aftahi - Northland Capital Markets, Research Division

The balance versus [indiscernible] CapEx, one, and then the second one was were there any push-outs and cost synergies? -- the fourth quarter still quantifiable?

Omar A. Choucair

When you say cost synergies, I assume you're talking about cost synergies related to the acquisitions, right? Are you talking about cost containment? I just want to make sure that I answer your question.

Unknown Analyst

You talk about a certain level of synergy that will be taken out of the business by the end of the year and it seems like some of that stuff has been pushed out a little bit. If you could kind of talk about that, that would be great.

Omar A. Choucair

I think we're on track in terms of what the company expects to have in cost savings for the full year. I think we've said the number was $18 million to $20 million that we were going to take and realize during 2012, and the number's actually going to come in around $20 million to $21 million, that's going to come in. The only things that have been pushed out, and we can talk a little bit about this, is really 3 categories of items that have been pushed out. One is the synergies associated with North Country. And these are all going to have the same theme, Darren, that during the fourth quarter, the company elected to push some of that integration into the first quarter of 2013, just given the nature of Q4 and how important it is to the company's clients. So that's number one. And then number two and number three relate to EyeWonder and Unicast. And they're, we've integrated substantially all of the customers. There is a category of customers both on EyeWonder and Unicast that the company elected to wait until the Q4 push was completed. And as a result, those synergies have been pushed until probably February or March of next year. But other than those 3 categories, the company's acted on and should be basically in line with what the company expected. So those are the only 3 categories that got pushed to 2013. As it relates to CapEx, I think the $3 million number during the quarter is a good surrogate for run rate. I think before 2012 and the onetime program that we had in New York, the company was running anywhere from a $12 million to $14 million run rate on an annual basis for CapEx. So I think the $3.4 million is right in line.

Operator

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

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Just a follow-up on some of the other questions such as, you mentioned the stabilization in the online segment. But what would you attribute to the improvement in the performance in that segment? Did you have some of the salespeople perhaps are maturing or hire some new guys? What stabilized that business specifically? Any actions that you've taken or?

Neil H. Nguyen

Hey, Richard, it's Neil. I think it starts with the addition of our leadership team. I think Andy Ellenthal joined the organization through the Peer39, brought greater focus on the sales side as well as operationally. So as we went through the second quarter, we started -- our operations improved from a service standpoint. And that's always a great benefit and that provides this foundation and confidence for our sales team to go out and win more business. So a combination of all those factors. But I would credit that to across-the-board, the management team digging in and executing a lot better than we did in the first half of the year.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Okay, and you're seeing obviously headwinds in Europe, the EMEA region overall. So what are you guys doing to respond? Are you just -- are you cutting back on some headcount there or just kind of holding steady to weather the storm and come out of this stronger?

Neil H. Nguyen

Well, I think we're using the opportunity, one, to refocus our business in certain markets where we can capture market share is one. So we'll invest where -- in people, to those markets. And the markets that are underperforming, we're currently taking a hard look at the operational cost and adjusting it for the volume in those markets. But across the board, I think for us as a company, because of the global nature of our business, we're able to go out and try to win share, leveraging the value proposition of a global platform versus a very region-specific business.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

And impressions were up 40% year-over-year but revenues were flat in the online segment. Does that suggest compression in pricing or is mix shift issue perhaps within rich media and standard banner growth? Could you give us a little more...

Neil H. Nguyen

I think you hit it. So clearly, rich media, we continue to see some -- on the online business, there's always pricing compression in the business but your expectation is that you drive volume even greater than the 40% that we reported. So since there is a mix shift of products as well, rich media, pricing came down; our standard business grew pretty significantly in the 30-plus percent or so, along with tracking. I think we reported online video, which is a higher-CPM product, beginning to really take hold. So I think over the next few quarters, we'll see a much more stabilization of CPM as Rich Media as a category is becoming a little more stagnant inside of -- within all the ad formats that advertisers use.

Richard Ingrassia - Roth Capital Partners, LLC, Research Division

The $12 million in cost reduction initiative that you've executed on, which areas did those come out of, or which segments?

Neil H. Nguyen

So it was a combination of both, the lion's share coming out of the -- when we went through our analysis, was a lot of it came out of online and a chunk of it came out of TV as well.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Mostly headcount or...

Neil H. Nguyen

Headcount. Raw, straight, cut right out of the run rate.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

And then lastly, on the CapEx side, the $3.4 million, it doesn't include capitalized R&D, does it? If it doesn't, could you give us that number?

Omar A. Choucair

It does not include capitalized R&D and I can give that now to you if I can get it in a few seconds.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

While Omar is looking for it...

Omar A. Choucair

It's about $3 million of the capitalized software for the third quarter.

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Just curious, I noticed you guys are also talking about EBITDA. Segment EBITDA prior to overhead, I haven't seen you guys do that. Is that to give some transparency for the strategic review process or why would you discuss -- disclose that now?

Neil H. Nguyen

I'll take the first cut and Omar can add color to it. I think we want to demonstrate and show that, from an operating perspective, our units are performing better. And clearly, we've had an increase in corporate costs over all and it's an area that I plan to spend a significant amount of time evaluating in the next quarter with the financial team as a whole. But I think it was to definitely show to our shareholders and to our analysts that our units are performing. We are making decisions from an operating perspective to manage and sustain our margins.

Omar A. Choucair

I think the only thing I would add, Richard, is that as the company understands how we should look at the businesses, it became pretty apparent over the last quarter or so that there's multiple ways to look at the performance of the segments. And one way to look at it after corporate overhead has been identified and another way to look at it is to look at it prior to the corporate overhead. So as we moved into the third quarter, as the company looks at certain metrics inside the businesses on a week-to-week or month-to-month basis, the company elected to make sure that, that's how we make those statements parallel with the financial reporting or the public reporting for the company's 10-Qs and 10-Ks. So that's why we're bringing it, that's why we're identifying it and making it more transparent today.

Operator

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

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Just one or two real quick follow-ups. One is, can you just talk about any contribution from International to the TV business in the quarter? And two, if you can give us an update on your leverage ratio on a pro-forma basis just so I can understand that, given the acquisitions you've had over the last year?

Neil H. Nguyen

I'd be happy to. In terms of the leverage, the company has a leverage covenant of 3.50 and leverage covenant, obviously, is debt divided by consolidated adjusted EBITDA as defined in the credit agreement. And the company is well underneath that covenant for September 30. So I can tell you that on the covenant. As it relates to the investment that the company's made into the TV EMEA business, given the recent third quarter investment, I think the company is running a little over $2 million in terms of how much we've invested inside the TV business. And there's a full group of folks that are on the ground in several countries in the region and they're working as hard as they can. I think Neil had a few comments earlier in terms of the cross-pollinization between the Online business in those countries and the group that's on the ground of the TV side. So it's ongoing and obviously it's a number that the company looks at extremely hard given the impact of that it's had on the financial statements.

Operator

I have no further questions at this time. I would now like to turn the call over to management for closing remarks.

Neil H. Nguyen

We'd like to thank all of you for joining us today and look forward to our next call. Thank you.

Operator

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

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