ValueClick Inc. (VCLK) reported third quarter 2011 earnings (including stock-based compensation but excluding amortization of intangibles) of 52 cents per share that stormed past the Zacks Consensus Estimate of 21 cents per share. Moreover, reported earnings rose 8.3% from 48 cents in the prior-year quarter.
Earnings on a non-GAAP basis (excluding both amortization of intangibles and stock-based compensation expense) came in at 55 cents per share, substantively above management’s guided range of 27 cents to 28 cents. This also surpassed the year-ago earnings of 49 cents per share.
Revenues, adjusted EBITDA and earnings per share exceeded the company’s previously-announced guidance.
Operating Performance
Gross profit increased 15.3% year over year to $90.3 million in the third quarter. Gross margin decreased from 73.3% in the previous-year quarter to 66.4% in the third quarter, primarily attributable to higher cost of sales compared to revenue growth.
Adjusted EBITDA surged 23.5% year over year to $36.3 million and accounted for 26.7% of the quarter’s revenues. This was within the company’s guidance of $36.0-$38.0 million.
Operating expenses were $62.8 million, up 12.1% year over year. However, operating expenses as percentage of revenue decreased to 46.2% from 52.4% in the prior-year quarter.
Operating income increased 30.0% year over year to $31.2 million, primarily based on lower operating expenses as a percentage of revenue. Operating margin expanded 50 basis points to 22.9% in the quarter.
Revenue
Revenues increased 27.3% year over year to $136.0 million in the quarter. Total revenue came in line with the Zacks Consensus Estimate and was ahead of management’s guided range of $128.0-$130.0 million.
The better-than-expected result was primarily driven by strong growth across all business segments. The Affiliated Marketing segment (24.0% of the total revenue) was up 9.0% year over year to $32.5 million. Owned and operated websites revenue (29.8% of the total revenue) increased 12.7% year over year to $40.5 million in the quarter.
Media (38.8% of the total revenue) grew 58.2% year over year to $52.7 million, while Technology (7.4% of revenues) shot up 31.6% year over year to $10.4 million in the quarter.
Balance Sheet
ValueClick had no long-term debt on its balance sheet at the end of the reported quarter. Cash and cash equivalents were $98.7 million compared with $142.5 million in the previous quarter.
Share Repurchase
During the quarter, ValueClick repurchased 4.3 million shares for a total cost of $63.1 million. Year to date, ValueClick has repurchased 7.0 million shares for a total cost of $102.2 million.
Acquisition
ValueClick closed the Dotomi acquisition on August 31, 2011, and results of operations were included in ValueClick's consolidated and Media segment.
Guidance
For the fourth quarter, management expects revenues in the range of $173.0 million–$179.0 million.
Management expects earnings on a non-GAAP basis to be in the range of 39 cents-41 cents per share. Adjusted EBITDA is expected in the range of $55.0 million–$59.0 million, which represents adjusted EBITDA margin of 32.4% at the mid-point.
The company expects revenues from Affiliate Marketing to grow in high-digit range. Owned & Operated websites are expected to increase in the low-double digits range. Technology is expected to grow in the high single-digit range. Media is anticipated to grow over 100.0% on reported basis, up in high teens to low twenties excluding the impact of acquisitions.
Management expects to scale down some of its low-margin businesses within the Owned and Operated segment and concentrate on the high-margin businesses in the Affiliate, Media and technology segments as it presents the company with tremendous growth opportunities to drive top-line in the forthcoming quarters.
Recommendation
Strength in the Internet advertising industry, increasing e-commerce spending, and improving display ad growth trends coupled with direct advertiser relationships with the Dotomi acquisition, share repurchases, impressive cash flow and a debt-free balance sheet are the positives for the company. The company’s concentration in the high-margin businesses is expected to drive future growth prospects.
We also remain upbeat on ValuClick’s growing Affiliate Marketing segment and expect a turnaround in its Owned and Operated business.
However, a sluggish macro-economic environment and intense competition from Google Inc. (GOOG), Microsoft Corp. (MSFT) and Yahoo! Inc. (YHOO) remain near term headwinds.
We maintain our Neutral rating on the stock over the long term (6-12 months). Currently, we have Zacks #3 Rank for ValueClick, which translates to a short-term Hold rating.
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