ValueClick Facing Lead-Generation Gap

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ValueClick Inc., the nation’s No. 1 independent online advertising network, stumbled last week with a big drop in stock price after the company reported second quarter earnings below Wall Street’s targets and lowered its guidance.


The stock dropped 19 percent on Monday to a low of $19.90. It recovered a bit, trading in the $20 to $21 range much of last week. That’s well below the $30 level, where it had been trading as late as July 20.


“It’s disappointing,” said analyst Denise Garcia of AG Edwards. “I think they lost a little bit of credibility with the Street.”


ValueClick reaches more than 130 million unique users in the United States every month which amounts to about 75 percent of the Internet through a network of more than 5,000 advertisers including eBay, Verizon, Wells Fargo, Dell, HP and Expedia.


The recent woes for the Westlake Village-based company stem from what’s called its lead generation business, in which online promotions are used to drive advertising sales.


The Federal Trade Commission is investigating the business, along with several other lead-generation companies, for possible violations of a law that bans misleading e-mail header information and requires commercial e-mails to be identified as advertisement and include the sender’s valid postal address.


“The increased regulatory scrutiny has negatively impacted our promotion segment,” said Tom Vadnais, the company’s chief executive, on an earnings call. “This portion of our business has been driven by advertiser demand, which clearly is not an indication of poor lead quality.”


There’s a conflict in that statement, said Garcia.


“If there were high quality leads, we wouldn’t see them pulling back,” she said.


Gary Fuges, vice president of investment relations at ValueClick, said it’s not the quality of the leads that has suffered but the traffic that drives those leads. A major publisher, along with several smaller Web sites, pulled out of the promotional campaigns around the time the company got a letter from the Federal Trade Commission.


“We don’t know why they pulled out, but when you suffer a loss in traffic you’re going to be more challenged to deliver leads,” Fuges said.


The company saw a $10 million decline in revenue from lead generation in the second quarter. The lead generation business accounts for about 20 percent of the company’s revenues. The rest of the business is in display advertising, affiliate marketing, search engine marking, comparison shopping sites and monetization software technology.


“One of the advantages of being a diversified company is that when things go bad in one division, other divisions can compensate for it,” said analyst Eric Martinuzzi of Craig-Hallum Capital Group. “We still have a bullish outlook for the company.”


That’s because ValueClick is ranked the No. 1 independent display advertiser by ComScore, an online ranking service, and the No. 1 affiliate marketer by Affiliate Marketing Benchmarks. In affiliate marketing, the online advertiser rewards the publisher for every sale made through the Web site.



Buy comparison

The company also bolstered its comparison shopping business by recently acquiring MeziMedia Inc., an L.A.-based leading operator of comparison shopping sites, for $100 million in cash. The company said it would make additional payments through 2009, up to a total of $352 million, if certain revenue and other targets are met.


MeziMedia, ranked fourth in the comparison shopping category in a June 2007 ComCast report, reached 10.5 million U.S. visitors that month. The company has about 160 employees and brought in $40 million in revenue last year.


ValueClick is the last major independent advertising network left standing. Google is buying DoubleClick for $3.1 billion and Microsoft is buying aQuantive for $6 billion. Advertising.com, the largest online advertising network, is owned by AOL.


That makes ValueClick stronger, said Fuges.


“If you’re in an online publishing business yourself and you’re trying to make other publishers monetize their inventory, that’s a conflict right?” he said. “We’re not in the publishing business ourselves, so our interests are never in conflict with the publishers we serve.”


In its report last week, ValueClick said second quarter earnings rose to 17 cents per share, or $17.6 million, from 14 cents per share, or $14.4 million, a year ago. Analysts were expecting earnings per share of 18 cents.


The company scaled back its 2007 guidance. It now expects $645 million to $660 million in revenue for the year, down from previous expectations of $660 to $655 million. It lowered earnings per share projections to as much as 76 cents from as much as 81 cents.