Although we expect ValueClick Inc. (VCLK) to deliver improved results in 2011 as top line seems to accelerate, we maintain our Neutral rating on the stock until it delivers a sustained growth.
The stock is expected to perform in line with the market. Our price target represents a discount to the industry.
ValueClick’s second quarter 2010 results announced on August 5th beat the Zacks Consensus Estimates, boosted by prudent cost controls. Revenues, earnings and adjusted EBITDA (earnings before interest and taxes, depreciation and amortization) exceeded the high end of management’s expectation, demonstrating the company’s focus on driving growth.
Second quarter earnings per share from continuing operations (excluding amortization of intangibles but including stock-based compensation expense) of 15 cents surpassed the Zacks Consensus Estimate of 12 cents. Profit was in sync with the year-ago period. Better-than-expected earnings in the quarter were primarily attributable to a reduction in operating expenses, partially offset by a year-over-year decline in revenues.
Revenues of $99.6 million were down 4.3% year over year. However, this was above management’s revenue guidance of $95 million to $98 million. Revenues also beat the Zacks Consensus Estimate of $97.0 million.
The year-over-year decrease was mainly due to the fall in Media and Owned and Operated Websites (previously known as Comparison Shopping and Search) revenues, partially offset by a growth in Affiliate Marketing and Technology segment revenues that performed considerably well in the quarter.
The company also provided encouraging third quarter guidance. Management expects second half 2010 to grow on the back of increased acquisition, new growth initiatives and cost controls. Revenues are expected to be in the $100.0 million to $104.0 million range. Earnings are expected in the range of 18 cents to 19 cents per share.
Over the long term, we are positive about the online advertising growth. The divestiture of the lead generation business will increase the company’s focus in other areas of its business, delivering incremental benefit beyond 2010.
We also believe that the acquisition of Investopedia will deliver higher synergies, going forward. Investopedia will contribute approximately $1.5 million in revenues and $0.75 million in adjusted EBITDA in the third quarter of 2010.
For the full year 2010, Investopedia is expected to generate approximately $10 million in revenues and $5 million in adjusted EBITDA. In our opinion, the acquisition will drive higher synergies in the segment as it will expand ValueClick’s reach in the online financial services ad vertical and help generate organic traffic growth.
A growing Display business, strength in the Internet advertising industry, increasing display ad trends in the U.S, impressive cash flow and debt free balance sheet are other positives.
However, intense competition from Google Inc. (GOOG) and Digital River Inc. (DRIV) and slower international business, particularly in Europe, could have a negative impact on growth in the future.
We continue to maintain a Neutral rating on a long-term basis (6-12 months). Currently, ValueClick has a Zacks Rank of #3, which implies a short-term Hold rating.