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ValueClick Inc. reported second-quarter 2013 non-GAAP earnings of 21 cents per share, down from 35 cents reported in the year-ago quarter. Including stock-based compensation, earnings came in at 17 cents a share, significantly lower than the Zacks Consensus Estimate of 35 cents per share.

Quarter Details

Although revenues increased 3.7% from the year-ago quarter to $159.7 million, it lagged the Zacks Consensus Estimate of $166 million. Reported revenues also missed management’s guided range of $164 million-$168 million. The year-over-year growth in revenues was primarily driven by strong performance in the Affiliate Marketing and the Owned & Operated Websites segments.

Revenues from the Affiliate Marketing segment increased 9% from the year-ago quarter to $36.6 million while revenues from Owned and Operated Websites increased 7.7% year over year to $31.7 million. ValueClick’s Media segment reported modest increase of 0.4% in revenues.

Operating expenses were down 6.0% year over year to $59.6 million. General & administration expenses were down 19.5% year over year, but technology expenses were up 1.3% year over year. Expenses related to sales and marketing increased 10.6% year over year. As a percentage of revenue, operating expenses were down 390 basis points to 37.3%.

ValueClick’s non-GAAP income from operations spiked 26.4% from the year-ago quarter to $38.2 million. Operating margin increased from 19.6% in the year-ago quarter to 23.9%, primarily due to favorable mix toward value added services. Including stock-based compensation, operating income came in at $43.4 million.

Net income on a non-GAAP basis was $16.3 million compared with $28.2 million in the year-ago quarter. However, including stock-based compensation, net income came in at $13.2 million in the quarter.

Cash and cash equivalents were $127.1 million compared with $129.1 million in the previous quarter. The company reported free cash flow of $73.0 million at the end of the reported quarter (year-to-date).

Outlook

For the third quarter of 2013, ValueClick expects revenues in the range of $164 million-$168 million and non-GAAP earnings in the range of 39 cents-40 cents per share.

ValueClick forecasts revenues from Affiliate Marketing to grow in the low double-digits in the third quarter. Revenues from Owned & Operated Websites are expected to remain flat. For the third quarter, Media revenues are expected to grow in the low single-digits.

Recommendation

We believe that ValueClick’s strong product portfolio, aided by accretive acquisitions, will continue to drive market share, going forward. The company is realigning its operations toward high-margin business, which is expected to drive profitability. Moreover, ValueClick is expected to benefit from Google’s exit from the Affiliate marketing business.

However, unfavorable foreign exchange and a sluggish European market remain near-term headwind. ValueClick continues to face competition from Yahoo (YHOO - Analyst Report) and Digital River (DRIV - Snapshot Report) which is expected to affect its profitability, going forward.

Currently, ValueClick holds a Zacks Rank #4 (Sell).

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