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VCLK > SEC Filings for VCLK > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for VALUECLICK INC/CA

Form 10-Q for VALUECLICK INC/CA


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT

This report contains forward-looking statements based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled "Risk Factors" in this Form 10-Q and similar discussions


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in our Annual Report on Form 10-K for the year ended December 31, 2011, and in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.

OVERVIEW

ValueClick, Inc. and its subsidiaries (collectively "ValueClick" or the "Company" or in the first person, "we", "us" and "our") is one of the world's largest and most comprehensive digital marketing services companies. We offer a suite of products and services that enable marketers to engage with their current and potential customers online and through mobile devices to increase brand awareness and generate leads and sales. We also offer technology infrastructure tools and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. The broad range of products and services that we provide enables our customers to address all aspects of the digital marketing process, including strategic planning, ad creation and optimization, media sourcing, and sophisticated reporting and analytics.

Our customers are primarily direct marketers, brand advertisers and the advertising agencies that service these groups. The proposition we offer our customers includes: one of the industry's broadest online marketing services portfolios-including performance-based campaigns and programs where marketers only pay for advertising when it generates a customer lead or product sale; our ability to target campaigns to reach the online consumers our customers are most interested in; and the scale at which we can deliver results for online advertising campaigns.

We generate the audiences for our advertisers' campaigns through a unique combination of: proprietary networks of third-party websites, ad exchanges, ad network optimization providers, spot buys with large publishers, search engines, and websites that we own and operate in several key verticals. Our sophisticated data management platform harnesses the large amount of anonymous data that is generated by our businesses, and we utilize this data, along with our technology platforms and marketing expertise, to deliver measurable performance for our customers.

Our publisher partners enjoy efficient and effective monetization of their online advertising inventory through representation by our direct sales teams in major U.S. and European media markets, participation in large-scale advertiser and advertising agency campaigns they may not have access to on their own, enhanced monetization through our proprietary campaign optimization and targeting technology, and settlement services to facilitate payments to publishers for the online inventory utilized by the advertisers. As we do not primarily compete directly with our publisher partners for online consumers, we act as a trusted partner in helping online publishers monetize their online audience and advertising inventory.

We believe that the effectiveness of our online marketing services is dependent on the quality of our networks and our publisher partner relationships. As such, we have established stringent quality standards that include publisher rejection from our networks due to inappropriate content, illegal activity and fraudulent clicking activity, among other criteria. We enforce these quality standards using a combination of manual and automated auditing processes that continually monitor and review both website content and adherence to advertiser campaign specifications.

In previous reporting periods, we reported four business segments: Affiliate Marketing, Media, Owned & Operated Websites, and Technology. However, with the continued evolution of our products and services (including elements of shared computing infrastructure and overlapping services) and recent changes to our internal reporting structure, we reassessed our operating and reportable segments in the second quarter of 2012. We determined that our Mediaplex business, which previously comprised the Technology segment, no longer meets the definition of an operating segment. As such, our Mediaplex business is now included in the Media operating segment. With this change, we now derive our revenue from three business segments: Affiliate Marketing, Media and Owned & Operated Websites, which are described in more detail below. All prior period segment information contained herein has been recast to conform to this presentation.

AFFILIATE MARKETING

ValueClick's Affiliate Marketing segment, which operates under the "Commission Junction" brand name, provides the technology, network and customer service that, in combination, enable advertisers to create their own fully-commissioned


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online sales force comprised of third-party website publishers, also known as affiliates. Advertisers that utilize the Commission Junction platform generally are only obligated to pay affiliates when the affiliate delivers a consumer who achieves the desired result, which is typically a closed e-commerce transaction or a new customer lead. By joining the Commission Junction network, advertisers gain access to: a) the Company's proprietary technology platform that has been developed over the past decade and is completely focused on the unique needs of the affiliate marketing channel; b) a proprietary network of tens of thousands of high-quality website publishers; and c) the Company's digital marketing expertise and campaign management teams who ensure advertisers' campaigns are optimized for maximum performance. Commission Junction's revenues are driven primarily by variable compensation that is generally based on either a percentage of commissions paid by the Company's customers to affiliates or on a percentage of transaction revenue generated by the Company's customers from the programs managed with the Company's affiliate marketing platforms.

MEDIA

ValueClick's Media segment, which began as a leading display ad network operating primarily under the "ValueClick Media" brand name, provides a comprehensive suite of digital marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors and generate leads and sales through the Internet and mobile applications. In August 2011, we acquired Dotomi, Inc. ("Dotomi"), a leading provider of data-driven, intelligent display media for major retailers, and in April 2011, we acquired Greystripe, Inc. ("Greystripe"), the largest brand-focused mobile advertising network. Also, as discussed above, beginning in the second quarter of 2012, the Media segment also includes our Mediaplex business, which was previously reported as a separate business segment. Mediaplex offers technology products and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. Mediaplex is also beginning to offer media services in addition to its prior role as a technology provider.

Through these various media-focused products, our Media segment is able to access its customers' target audiences through the unique combination of: its ability to acquire inventory by bidding on a real-time basis through ad exchanges and other channels; its proprietary broad-based network of thousands of high-quality online publishers; relationships with leading mobile application developers; vertically-focused networks in the areas of pharma/healthcare (AdRx Media), home and garden (Modern Living Media) and motherhood (Mom's Media); and its ability to access inventory from ValueClick's owned and operated websites, as described below. Our Media segment applies its proprietary data and targeting and optimization technologies to these inventory sources to ensure that the metrics that are most important to its customers are achieved. Our services in the Media segment are sold on a variety of pricing models, including cost-per-thousand-impression ("CPM"), cost-per-action ("CPA"), and cost-per-click ("CPC").

OWNED & OPERATED WEBSITES

ValueClick's Owned & Operated Websites segment services are offered through a number of branded websites, including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com, and a limited number of content websites in key online verticals such as healthcare, finance, travel, home and garden, education, and business services.

The Pricerunner comparison shopping destination websites operate in the United Kingdom, Sweden, Germany, France, Denmark, and Austria. The Smarter.com and Couponmountain.com websites operate primarily in the United States and, to a lesser extent, Japan, Korea and China. The Pricerunner and Smarter.com websites enable consumers to research and compare products from among thousands of online and/or offline merchants using its proprietary technologies. The Company gathers product and merchant data and organizes it into comprehensive catalogs on its destination websites, along with relevant consumer and professional reviews. The Couponmountain.com website allows consumers to locate coupons and deals related to products and services that may be of interest to them. The Company's Investopedia.com website, which the Company acquired in August 2010, provides information on a broad range of financial and investment topics, including a proprietary dictionary of financial terms, and the Company's other vertical content websites offer consumers information and reference material across a variety of topics. The Company's services in these areas are free for consumers, and revenue is generated in one of three ways: on a CPC basis for traffic delivered to the customers' websites from listings on the Company's websites; on a CPA basis when a consumer completes a purchase or other specific event; and on a CPM basis for display advertising shown on the Company's websites.

On September 30, 2012, we sold our self-service paid search offering business, Search123, which was previously included in the Owned & Operated Websites segment. We have reported the results of operations of Search123 as discontinued operations for all periods presented. See Note 5 to our condensed consolidated financial statements contained in this quarterly report on Form 10-Q for additional information on this divestiture.


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SEGMENT OPERATING RESULTS
The following table provides revenue, cost of revenue, gross profit, operating expenses, and income from operations information for each of our three business segments. Segment income from operations, as shown below, is the performance measure used by management to assess segment performance and excludes the effects of: stock-based compensation, amortization of intangible assets and corporate expenses. Corporate expenses consist of those costs not directly attributable to a business segment, and include: salaries and benefits for our executive, finance, legal, corporate governance, human resources, and facilities organizations; fees for professional service providers including audit, tax, Sarbanes-Oxley compliance, acquisition related costs, and certain legal matters; insurance; and, other corporate expenses. A reconciliation of segment income from operations to consolidated income from operations and a reconciliation of segment revenue to consolidated revenue are also provided in the following table.

                                         Three-month Period             Nine-month Period
                                         Ended September 30,           Ended September 30,
                                         2012           2011           2012           2011
                                                          (in thousands)
Affiliate Marketing
Revenue                              $   34,871     $   32,525     $  105,583     $   99,615
Cost of revenue                           4,514          4,260         12,890         12,898
Gross profit                             30,357         28,265         92,693         86,717
Operating expenses                       10,014          9,457         29,718         28,304
Segment income from operations       $   20,343     $   18,808     $   62,975     $   58,413

Media
Revenue                              $   96,104     $   63,062     $  267,941     $  159,295
Cost of revenue                          38,735         27,052        106,226         71,534
Gross profit                             57,369         36,010        161,715         87,761
Operating expenses                       29,722         19,109         86,543         45,145
Segment income from operations       $   27,647     $   16,901     $   75,172     $   42,616

Owned & Operated Websites
Revenue                              $   29,973     $   32,388     $   88,049     $   94,716
Cost of revenue                          17,408         20,917         51,711         60,680
Gross profit                             12,565         11,471         36,338         34,036
Operating expenses                        5,451          5,420         17,072         16,298
Segment income from operations       $    7,114     $    6,051     $   19,266     $   17,738

Reconciliation of segment income
from operations to consolidated
income from operations:
Total segment income from operations $   55,104     $   41,760     $  157,413     $  118,767
Corporate expenses                       (7,010 )       (6,291 )      (20,779 )      (18,945 )
Stock-based compensation                 (5,556 )       (3,715 )      (17,390 )       (8,246 )
Amortization of acquired developed
technology and websites included in
consolidated cost of revenue             (2,519 )       (2,197 )       (7,504 )       (7,135 )
Amortization of intangible assets
included in consolidated operating
expenses                                 (5,782 )       (4,222 )      (18,427 )      (10,319 )
Consolidated income from operations  $   34,237     $   25,335     $   93,313     $   74,122

Reconciliation of segment revenue to consolidated
revenue:
Affiliate Marketing                  $   34,871     $   32,525     $  105,583     $   99,615
Media                                    96,104         63,062        267,941        159,295
Owned & Operated Websites                29,973         32,388         88,049         94,716
Inter-segment eliminations                  (64 )          (59 )         (272 )         (310 )
Consolidated revenue                 $  160,884     $  127,916     $  461,301     $  353,316

RESULTS OF OPERATIONS-THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2012 COMPARED TO
SEPTEMBER 30, 2011

Revenue. Consolidated revenue for the three-month period ended September 30, 2012 was $160.9 million compared to $127.9 million for the same period in 2011, representing a 25.8% increase, or $33.0 million.


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Affiliate Marketing segment revenue increased to $34.9 million for the three-month period ended September 30, 2012 compared to $32.5 million in the same period in 2011. This increase of $2.3 million, or 7.2%, was attributable to our domestic operations and due to an increase in transaction volumes associated with existing customers and an increase in the number of customers. Domestic affiliate marketing growth was offset by a decrease in our European affiliate marketing business due to a weak macroeconomic environment and the impact of foreign exchange rate changes.

Media segment revenue increased to $96.1 million for the three-month period ended September 30, 2012 compared to $63.1 million for the same period in 2011. The increase of $33.0 million, or 52.4%, in Media segment revenue was attributable to the acquisition of Dotomi, acquired on August 31, 2011 and only included in the Company's consolidated results for one month in the third quarter of 2011, and growth in our mobile and online display businesses, offset partially by a decrease in our European media business due to a weak macroeconomic environment and the impact of foreign exchange rate changes.

Owned & Operated Websites segment revenue decreased to $30.0 million for the three-month period ended September 30, 2012 compared to $32.4 million in the same period in 2011. The decrease of $2.4 million, or 7.5%, was primarily attributable to our efforts to reduce the volume of activity within the Owned & Operated Websites segment that relies on paid traffic and search monetization. Owned & Operated Websites segment revenue is concentrated with one major customer, Google. A loss of, or further reduction of revenue from, this customer could have a significant negative impact on the revenue of this segment and the Company.

Cost of Revenue and Gross Profit. Cost of revenue includes payments to website publishers, payments to search engines and other partners for driving consumer traffic to our owned and operated websites, certain labor costs that are directly related to revenue-producing activities, Internet access costs, amortization of developed technology and websites acquired in business combinations, and depreciation on revenue-producing technologies.

Costs associated with payments to search engines for driving consumer traffic to our owned and operated websites were, prior to the fourth quarter of 2011, classified in operating expenses in the Sales and marketing expense line item. Beginning in the fourth quarter of 2011, we are classifying these costs in Cost of revenue. Additionally, we corrected the accounting classification of the amortization of developed technologies and websites acquired in business combinations by including it in Cost of revenue beginning in the fourth quarter of 2011. These reclassifications are more fully described in Note 1 to our condensed consolidated financial statements. Amortization related to developed technologies and websites acquired in business combinations was previously recorded in operating expenses in the Amortization of intangible assets acquired in business combinations line item. Prior periods presented in the Condensed Consolidated Statements of Comprehensive Income included herein are presented using the new classifications.

Our consolidated cost of revenue was $63.1 million for the three-month period ended September 30, 2012 compared to $54.4 million for the same period in 2011, an increase of $8.7 million, or 16.1%. Our consolidated gross margin was 60.8% and 57.5% for the three-month periods ended September 30, 2012 and 2011, respectively. Consolidated gross margin increased from the year ago period due to the improved gross margin in our Media and Owned & Operated segments as described below.

Cost of revenue for the Affiliate Marketing segment increased slightly to $4.5 million for the three-month period ended September 30, 2012 compared to $4.3 million for the same period in 2011. Our Affiliate Marketing gross margin remained relatively consistent at 87.1% for the three-month period ended September 30, 2012 compared to 86.9% for the same period in 2011.

Cost of revenue for the Media segment increased $11.7 million, or 43.2%, to $38.7 million for the three-month period ended September 30, 2012 compared to $27.1 million for the same period in 2011. Our Media segment gross margin increased to 59.7% for the three-month period ended September 30, 2012 compared to 57.1% for the same period in 2011 primarily due to the inclusion of Dotomi for the full quarter in the current year period.

Cost of revenue for the Owned & Operated Websites segment decreased $3.5 million to $17.4 million for the three-month period ended September 30, 2012 compared to $20.9 million for the same period in 2011. Our Owned & Operated Websites segment gross margin increased to 41.9% for the three-month period ended September 30, 2012 from 35.4% for the same period in 2011. The increased gross margin is a result of our efforts to decrease the mix of certain paid traffic, which generates lower gross margin than our organic (non-paid) traffic sources.


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Operating Expenses:

Sales and Marketing. Sales and marketing expenses consist primarily of compensation and employee benefits of sales and marketing and related support teams, certain advertising costs, travel, trade shows, and marketing materials. Online advertising costs (traffic acquisition costs) in our Owned & Operated segment that were previously included in sales and marketing expenses have been reclassified to cost of revenue for all periods presented, as described above.

Total sales and marketing expenses for the three-month period ended September 30, 2012 were $21.1 million compared to $16.5 million for the same period in 2011, an increase of $4.6 million, or 27.5%. The increase was primarily due to the acquisition of Dotomi, including the associated higher stock-based compensation as described below, and increases in salaries and wages as a result of increased headcount in our sales and marketing organizations. Our sales and marketing expenses as a percentage of revenue remained relatively consistent at 13.1% for the three-month period ended September 30, 2012 compared to 12.9% for the same period in 2011.

General and Administrative. General and administrative expenses consist primarily of facilities costs, executive and administrative compensation and employee benefits, depreciation, professional services fees, insurance costs, bad debt expense, and other general overhead costs. General and administrative expenses increased to $20.2 million for the three-month period ended September 30, 2012 compared to $14.8 million for the same period in 2011, an increase of $5.3 million. The increase was primarily due to the acquisition of Dotomi, including the associated higher stock-based compensation as described below. As a percentage of revenue, general and administrative expenses increased to 12.5% for the three-month period ended September 30, 2012 compared to 11.6% for the year-ago period due to higher stock-based compensation.

Technology. Technology expenses include costs associated with the maintenance and ongoing development of our technology platforms, including compensation and employee benefits for our engineering and network operations departments, as well as costs for contracted services and supplies. Technology expenses for the three-month period ended September 30, 2012 were $16.5 million, or 10.2% of revenue, compared to $12.6 million, or 9.8% of revenue, for the same period in 2011, an increase of $3.9 million, or 30.7%. The increase in technology expenses was primarily due to the inclusion of Dotomi, including the associated higher stock-based compensation as described below.

Segment Income from Operations. Affiliate Marketing segment income from operations for the three-month period ended September 30, 2012 increased 8.2%, or $1.5 million, to $20.3 million, from $18.8 million in the same period of the prior year, and represented 58.3% and 57.8% of Affiliate Marketing segment revenue for the three-month periods ended September 30, 2012 and 2011, respectively.

Media segment income from operations for the three-month period ended September 30, 2012 increased 63.6%, or $10.7 million, to $27.6 million, from $16.9 million in the same period of the prior year, and represented 28.8% and 26.8% of Media segment revenue in these respective periods. Media segment operating margin increased from the prior year primarily due to the inclusion of Dotomi for the full quarter in the current year period.

Owned & Operated Websites segment income from operations for the three-month period ended September 30, 2012 increased to $7.1 million from $6.1 million in the same period of the prior year. The operating margin for this segment increased to 23.7% in the current period compared to 18.7% in the year ago period. The increase in income from operations and operating margin were due to the higher gross margin as described above.

Stock-Based Compensation. Stock-based compensation for the three-month period ended September 30, 2012 increased to $5.6 million compared to $3.7 million for the same period in 2011. The increase in stock-based compensation is primarily due to unvested stock awards assumed in connection with the acquisition of Dotomi. We currently anticipate stock-based compensation to be approximately $22 million for the year ending December 31, 2012. Such amounts may change as a result of higher or lower than anticipated equity award grants to new and existing employees, differences between actual and estimated forfeitures of stock awards, fluctuations in the market value of our common stock, modifications to our existing stock award programs, additions of new stock-based compensation programs, or other factors.

Amortization of Intangible Assets. As discussed above under Cost of revenue, we corrected the accounting classification of the amortization of developed technologies and websites acquired in business combinations by including it in Cost of revenue beginning in the fourth quarter of 2011. All prior periods presented in the Condensed Consolidated Statements of Comprehensive Income included herein are presented using the new classifications. Previously, all amortization expense was recorded in operating expenses in the Amortization of intangible assets acquired in business combinations line item.


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Amortization of developed technologies and websites acquired in business combinations, included in Cost of revenue, for the three-month period ended September 30, 2012, was $2.5 million compared to $2.2 million in the year ago period. Amortization of all remaining intangible assets, included in Amortization of intangible assets acquired in business combinations, increased . . .

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