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Sunday, October 16, 2011

ValueClick (VCLK) update

Whenever you buy Halloween candy for the kids, if you get the mixed bag that has 20% really good stuff, it always gets eaten up before Halloween.  Kids get the leftovers.  Life's tough.

Completed acquisition of Dotomi on Aug 31.  $264 million in cash and stock, plus assumption of some unvested options.  Dotomi CEO elected to ValueClick board and gets cash, stock (1 yr lockup).

VCLK also repurchasing some stock.

New revolver. Expires 2016, $150 million, secured by all assets.  Also $50 million term loan.

New 10-Q for period ending June 30, 2011.
79 million shares on Aug 1, 2011 (adding in the 7.6 million shares issued in the Dotomi acquisition, plus another 1 million in employee options at a $2 strike!)

Comparing to Dec 2010.

Balance sheet is still rock-solid, but goodwill keeps climbing.  But the balance sheet is still solid even if you back out the goodwill.

After all these years, they've almost, ALMOST, earned a profit for the original investors.  And when I first bought them back in 2002, they had just reached breakeven.  Moral of the story: startups burn money.

Revenues are up about 25% from December.  Looking back at March, (78 million shares), 

Let me go back to the balance sheet.  Cash dropped by about $58 million.  What happened?  Equity increased by $18 million, assets increased by $21 million.  Liabilities INCREASED by a few million.  I found it: it's down there in goodwill.  I hope they know what they're acquiring!

Back to revenue:  Q2 was good both yoy and qoq.
70% gross margins vs 72% in Q1.
22% operating margins vs 23% in Q1.
14% net margin (38% tax) vs 14% in Q1 (looks like similar tax rate)

Earned 21 cents diluted, same as Q1.

Equity statement looks good.  271K shares issues in stock options, 2.2 million repurchased.

Cash flow:

Q1: Cash flow from operations was nearly double net income due to changes in assets/liabilities and depreciation.  Only 1/3 of the depreciation amount was sunk into capex.  Can't tell if that means anything here.

Q2: Cash flow from operations for H1 was 50% higher than net income.  So Q2 it was the same.  Capex was much bigger in Q2, blah blah.  It all works out.

Cash flow statement overall is very simple, clean, and wonderful, except for the $69 million acquisition of Greystripe. It all hinges on whether they're making good acquisitions.
They claim Greystripe contributes to the U.S. mobile advertising market and this justified paying above book value.  They have the intangible assets depreciating over time at what seems like a reasonable schedule.  Not sure if they plan to depreciate goodwill.

Acquired Investopedia.com in Aug 2010.  Their reasons for paying more than book value here look iffy.

VCLK disposed of a lead generation business in Feb 2010 for $45 million.  This had a pre-tax $1.1 million gain, but also $8.9 million tax benefit due to tax deductable goodwill realized on the sale.  If I follow this correctly, the subsidiary lost a bunch of money while VCLK owned them, but VCLK was able to sell them at a high price than they paid for it.  OK, fine.

There's a long-running spam email lawsuit that they sorta won, but then it got reversed on appeal and now it's back in play.  Trial in April 2012.

Their tax situation is uncertain right now, both state and federal.  They're being audit by the IRS for 2007.

Segment Info:
All segments increased revenues and income (but some of this is due to acquisitions, but none of it hid downturns).  All the segments have good margins.


CONCLUSION

Back in July, I had said that VCLK stock was worth around $30, but admitted that this is a fairly high price and assumes a lot of good things that I see in the company will continue.  I think $20 is a much safer valuation.  The fact that these numbers are so far apart says that it's not easy to value.  The stock is currently selling for around $17, still too high to consider.

I'm currently asking myself if I've been holding out too much for a serious downturn.  Should I have bought the stuff I'm looking at back in August?

I don't think so and here's why: My strategy is based on something that may take a long time to play out. It might be years before I actually jump back in.  I'll end up wrong if the global economy jumps into high gear and continues that way for years.  At that point, the global problems will be saved by big increases in revenues.  If people don't learn their lesson about debt and spending, it might take a decade more before a day of reckoning occurs.  But the stock market prices of 2011 and maybe even 2012 won't have anything to do with how that plays out.

I'll probably stay heavily in cash, but move investments around based on the valuations of various stocks.


Comments:
What is your opinion about NICK?

Looks like a very solid investment at these prices...

Company has lost 1/5 in value since summer highs...
 
hmm interesting, any thoughts on epic: orcp uk listed.
 
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