ValueClick Inc. (VCLK) reported strong third quarter results, comprehensively beating the Zacks Consensus Estimate of 14 cents. Earnings (including stock-based compensation but excluding one-time items) were 23 cents per share, down 23.3% year over year from 30 cents reported in the prior-year quarter. The reported earnings per share were above ValueClick’s guidance range of 18 cents to 19 cents.
Revenues inched up 1.5% year over year to $106.8 million, but achieved 7.2% sequential growth. Revenues were above management’s guidance range of $100.0 to $104.0 million and the Zacks Consensus Estimate of $103.0 million.
Revenues were primarily driven by strong growth in the Affiliated Marketing segment (27.8% of total revenue), which posted revenue growth of 13.0% on a year-over-year basis to $29.8 million. The growth was driven by higher transactional volumes in the commission junction marketplace, in which ValueClick holds the number one position.
Owned and operated revenues (33.6% of total revenue) increased 20.0% year over year to $35.9 million in the quarter.
Media (31.2% of total revenue) grew 7.8% year over year to $33.3 million in the quarter, in line with management’s guidance of up mid-single-digits to low double-digit growth for the third quarter.
Technology (7.4% of the revenue) revenues increased 19.7% year over year to $7.9 million in the quarter.
Operating Performance
Gross margin declined 180 basis points to 73.3% in the third quarter, primarily due to higher cost of sales and higher revenue.
Excluding amortization of intangible assets, operating expenses decreased 6.2% year over year to $50.6 million (47.4% of revenue) from $53.9 million (51.2% of revenue) in the prior-year period. Lower sales and marketing (5.5% year over year) and general and administrative (26.3% year over year) spending were responsible.
Operating income (excluding stock-based and amortization expenses) increased 10.0% year over year to $27.7 million, primarily based on lower operating expenses. Operating margin expanded 200 basis points to 26.0% in the third quarter.
Adjusted EBITDA (including stock-based compensation) increased 8.9% year over year to $29.4 million and was 27.5% of revenues in the third quarter. This was above ValueClick’s guidance range of $27.0 to $28.0 million or 27.0% of revenue at the midpoint.
Balance Sheet
ValueClick exited the third quarter with no long-term debt. Cash and cash equivalents were $147.5 million compared with $171.7 million in the previous quarter.
ValueClick repurchased 1.3 million shares of its common stock for $13.2 million. The company’s board of directors increased the share repurchase program by $68.6 million, extending the authorization to $100.0 million of common stock.
Guidance
For the fourth quarter of 2010, ValueClick expects revenues in the $122–$126 million range.
Year-over-year, the company expects revenue from Media to grow in the mid-to-high single-digit percentage range. Affiliate Marketing is expected to increase in the low double-digit percentage range. Owned & Operated websites are expected to increase in the low twenties percentage range. Technology is expected to be in the low double-digit range in the fourth quarter.
Adjusted EBITDA is expected to be in the range of $39.0–$40.0 million, which represents an adjusted EBITDA margin of 32% at the midpoint. Earnings on a GAAP basis are expected to be in the range of 22 cents to 23 cents per share, while earnings on a non-GAAP basis are expected to be in the range of 27 cents to 28 cents per share.
Management expects to sustain double-digit growth in the Affiliated Marketing and Media segments for fiscal 2011 through market share gains over the long term.
Our Take
We continue to maintain a Neutral rating on a long-term basis (6–12 months) due to a weak macro environment, customer concentration and increasing competition from Digital River Inc. (DRIV) and Google Inc. (GOOG).
However, strong growth in affiliate and media businesses, international expansion and aggressive share repurchase activity will boost profitability going forward.
Currently, ValueClick has a Zacks #3 Rank, which implies a short-term Hold rating (1–3 months).
