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Friday, July 22, 2011

ValueClick (VCLK)

Ah, ValueClick.  That brings back memories.  Bought it for something like $2.20 back around 2002 or maybe 2003. Sold it for a little over $4.  When I sold it, I was saying that I had a hunch that the price was going to keep on going up, but I can't rely on hunches.  It went up to around $30.

Today, it's selling around $18.75.  I'm curious how they've been doing.  If they're quietly growing at a moderate rate or more, then I might be interested.



2006: $257 million
2007: $376 million
2008: $455 milion
2009: $423 million (I'm actually kinda glad to see this)
2010: $431 million (and this)

Net income
2006: $63 million
2007: $70 million (so far, so good)
2008:  ($214 million)   This was a $270 million writedown of goodwill
2009: $69 million
2010: $91 million

Diluted share count:
2006: 102 million shares
2007: 1001 million
2008: 92 million
2009: 87 million
2010: 82 million

Balance sheet is very solid. They can pay off all liabilities with cash on hand.  Cash flow looks quite good.

Just right off the bat, I like the disclosures that I'm seeing in the 10-K.  This is definitely worth looking into.  Time to dive in....

81 million shares on Feb 18, 2011

Targeted and measurable online advertising.  Generate customer leads, online sales, and brand recognition.  Personally, my opinion on this is that nothing beats giving customers what they want.  Being annoying, being deceptive, etc. is never the optimum approach.

VCLK's customers are direct marketers, brand advertisers, ad agencies.  VCLK has performance based campaigns and programs.  VCLK works with 3rd party websites, online publishers, search engines (probably not Google, I would imagine).

VCLK aggregates publisher spots into networks and optimizes them for specific goals. They own some comparison shopping websites, coupon stuff, etc. which seems fairly worthless.

Diret sales teams in US and Europe.  NOTE: Why are they not in Asia????  One out of every three people in the world is in China or India and sooner or later these people will get online, and will be using their own languages like Telugu, Kanneda, and Simplified Chinese.  If VCLK isn't involved early, they'll probably get locked out.

Four segments:
1) Affiliate marketing
2) Media
3) Owned and operated websites
4) Technology

Affiliate Marketing Segment

Wholely owned subsidiary: Commision Junction.  Large scale pay-for-performance model using proprietary technology, marketing, and advertising.
We believe we are the largest provider of affiliate marketing services.
The publisher gets a commission from the advertiser when the visitor takes an agreed-upon action.

Advertisers upload their offers to the "CJ Marketplace" making them available for placement by publishers who apply to join the advertiser's program.  CJ Marketplace serves and tracks the links.

Advertisers get a lot of real-time info.

This type of advertising seems extremely valuable to advertisers and consumers, plus it destroys the monopoly that newspapers, TV,  radio have over access to consumers.  The real question is whether VCLK has any sort of sustainable edge over competitors.

VCLK also has a full-service fixed-fee model where they handle everything for an advertiser.  That might provide a sustainable edge, I don't know.

Media Segment

This looks similar to the other segment, but is for a larger scale.  They can do all the usual targeting based on all the information that comes in via the browser (it's insane how much they know about you right on the first click).

10,000 active online publishers in the US.  15,000 worldwide.  168 million unique visitors in 2010, 79% of the US internet audience.  Wow!

They divested a lead generation marketing business in Feb 2010, and an e-commerce business in 2008.

Owned and Operated Websites Segment

Pricerunner, Smarter.com, Couponmountain.com, Investopedia.  I'm hoping this is a small percentage of their revenues.... It's fairly big, matching Affiliate Marketing and Media segments.  However, it's been shrinking (not surprising).  It turns out, that's due to a single issue with Yahoo.

Technology Segment

Wholely owned subsid Mediaplex, Inc.  This is the only small segment.

End Segments

Intense competition.  The factors that help them compete are:

655 US employees, 407 international employees.  No unions.  Entered Japan and China in 2007.  Korea 2010.

2008 spamming lawsuit being appealed by Hypertouch.  Sent back down to the lower count (L.A.)  Seems pretty minor now.

Let's look at the operating margins for each of the main segments to look for what's going on:
Affiliate Marketing Segment: Gross margin = 86%!, Operating margin = 56%.  Back in 2008 the numbers were 84%, 48%.   Ok, they've got market power
Media Segment: Gross margin = 46% (healthy, but far lower than Affiliate Marketing), Operating margin = 25%.  Back in 2008 the numbers were 45%, 19%, at least it's improving.
Websites Segment: Gross margin = 82% (I like being proven wrong here).  Operating margin = 20%.  Back in 2008 the numbers were 73%, 23%.
Technology Segment looks reasonable (roughtly 50% operating margin), it's a small segment.

Website segment had some issue with Yahoo in 2009.  Revenue dropped.

Technology segment has a single major customer.

Overall G&A decreased due to legal fees in prior year.

PricewaterhouseCoopers auditors  No qualifications to statement.

I already noted the balance sheet is insanely solid.  $50 million in NET CASH. [That reminds me: When I bought the stock in 2002-2003, I paid LESS THAN NET CASH for it and they were just crossing above the breakeven point on profitability!  Even if they had shut down the business I would have made a profit!]

They've been buying back a lot of stock.

Cash flows look good.  Very low capex.  However, there's an odd trend during the past 3 years.  Net income has been rising, but cash flow from operations has been dropping.  Let's see why...

It's partly due to a decrease in depreciation, which is a good thing?  Overall, it's good for this to be decreasing.  Ok, this is making my head hurt: Earnings go up, cash flow decreases, depreciation decreases.  That means earnings increases really were worse than they appear.  But the amount is about $10 million, not that much really.
Stock option compensation accounts for some.  This means it's making earnings increases look better.
Asset/Liability changes seem to account for some

Investing cash flows are basically acquisitions of businesses, aside from capex.

Financing is basically all stock buybacks and cash from stock options.

Google accounted for 15% of revenue.  Looks like I was wrong again.  In 2009, Yahoo was 17% and Google was 10.6%.

Oh crap, they own a student loan backed security.  Could this be essentially stolen by government fiat?  Also a bunch of other munis.

They tend to buy and also discontinue businesses.  Not an efficient sort of activity in most cases.

They sold the Web Clients business for $32.8 million.  They got a $45 million (face value) note paying 5% interest over ten years, with a balloon payment at 5th year.  Secured by assets.

2 million stock options outstanding total.  They haven't been granting any lately.


So far this looks like what I had seen before.  The fact that it still looks good after about 8 years or so is a good sign.  If I had to guess a value for it, I'd say it might be worth $30, but that's kind of a high number and it's assuming continued growth.  At $18.78 I'm thinking about it.

Note that Google owns Doubleclick (formerly DCLK).  That's something to worry about.

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