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Conversant, Inc. (CNVR - Snapshot Report) or erstwhile ValueClick reported first-quarter 2014 non-GAAP earnings (including stock-based compensation) of 35 cents per share, which was in line with the Zacks Consensus Estimate. However, share price declined due to unimpressive outlook.

Revenues

Revenues increased 8.5% year over year to $145.9 million and were higher than management’s guided range of $138.0–$144.0 million. The year-over-year increase was primarily driven by strong performances from the Affiliate Marketing segment and the Media business.

Revenues from the Affiliate Marketing segment increased 11.0% from the year-ago quarter to $42.5 million. Conversant’s Media segment reported an increase of 7.0% year over year to $103.5 million.

In the first quarter, Conversant generated more than 40.0% of its media segment revenues from client campaigns, targeting consumers across multiple delivery channels such as the display of mobile. Although still a smaller part of the overall business, mobile and video products continue to lead media segment with impressive revenue growth.

Per comScore's ad focus rankings, Conversant's monthly unique visitors now rank as the second largest audience only lagging Google (GOOGL - Analyst Report) for display among all buy side entities in the U.S.

Margins

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) decreased 4.0% year over year to $48.5 million, which was within management’s guided range of $47.0 to $49.0 million.

Operating expenses (excluding amortization) as percentage of revenues increased 330 basis points (bps) to 41.4%, driven by higher sales & marketing and technology related expenses, which increased 250 and 80 bps, respectively. This was partially offset by a lower general & administrative expense, which declined 10 bps from the year-ago quarter.

Operating margin plunged 400 bps from the year-ago quarter to 27.9%. Net income (including stock-based compensation but excluding amortization) was $24.2 million or 35 cents per share compared with $26.5 million or 34 cents in the year-ago quarter.

Excluding stock-based compensation and amortization, net income was $27.0 million or 39 cents compared with $29.1 million or 38 cents in the year-ago quarter.

Balance Sheet & Cash Flow

Cash and cash equivalents were $90.4 million compared with $81.3 million in the previous quarter. The company reported free cash flow of $165.0 million compared with $165.0 million in the previous quarter.

Conversant repurchased 758,000 common shares at an average cost of $24.60 per share during the first quarter ended Mar 31, 2014. As of May 6, 2014, the remaining availability under Conversant’s stock repurchase authorization was $61.5 million.

Outlook

For the second quarter of 2014, Conversant expects revenues in the range of $135.0–$140.0 million, much higher than $128.1 million reported in the year-ago quarter. Conversant forecasts revenues from Affiliate Marketing to be in the range of $39.0 to $40.5 million. Media revenues are expected to be in the range of $95.5 to $99.5 million.

Adjusted EBITDA is expected to be in the range of $42.0 to $44.0 million, slightly down from $46.8 million. Non-GAAP earnings are expected to be in the range of 34–35 cents per share, much better than 16 cents reported in the year-ago quarter.

Our Take

We believe that Conversant’s strong product portfolio, aided by accretive acquisitions, will continue to drive market share for the rest of 2014. The company is realigning its operations toward high-margin businesses, which is expected to drive profitability.

Moreover, the company is re-branding its business in the domestic market, which will boost its presence among marketers. The upcoming customer relationship marketing (CRM) product launch and European re-branding program are additional growth catalysts.

Additionally, we believe that the acquisition of SET Media (in February) provides marketers with unparalleled targeting capabilities and complete brand safety in digital video advertising, which in turn will drive growth and profitability.

However, intensifying competition from the likes of Google, Yahoo! (YHOO - Analyst Report) and Digital River (DRIV - Snapshot Report) remains a concern. Conversant’s CRM business is also expected to face significant headwinds due to the bankruptcy of a couple of clients, which will hurt second-quarter top-line growth.

Currently, Conversant has a Zacks Rank #3 (Hold).

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