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ValueClick Inc. reported third quarter 2012 non-GAAP earnings of 39 cents, which managed to beat management’s range of 36 cents-37 cents, but was down 25% from the year-ago quarter. Including stock based compensation; earnings came at 27 cents, surpassing the Zacks Consensus Estimate of 25 cents per share.

Quarter Details

Revenue increased 25.8% year over year to $160.9 million in the quarter, but missed management’s guided range of $164 million-$169 million and the Zacks Consensus Estimate of $166 million. The year-over-year growth in revenue was primarily driven by strong performance from the Media and Affiliate Marketing segment, which fully offset the weakness in Owned & Operated segment.

Revenue from Media segment surged 52.3% year over year to $96.1 million, while Affiliate Marketing revenue increased 7.4% year over year to $34.9 million. The upside was primarily driven by strong domestic performance. However, Owned and Operated websites revenue declined 7.7% year over year to $29.9 million. The company also divested Search123 business, which was a part of Owned and Operated segment.

Gross profit increased 33% year over year to $97.7 million in the third quarter due to higher revenue base. Gross margin expanded 330 basis points (“bps”) to 60.8%, primarily driven by favorable revenue mix.

Operating expenses was up 31.8% year over year to $63.5 million, primarily attributable to the 27.5% yearly increase in sales and marketing expenses. Moreover, general & administration expenses jumped 36% and technology expenses increased 27.1% year over year.

Operating income (including stock-based compensation but excluding other one time items) increased 37% year over year to $39.8 million, while operating margin increased to 24.7% from 22.7% in the prior-year quarter.

Net income from continuing operations on non-GAAP basis (excluding stock-based compensation and amortization of intangible assets) was $29.6 million or 39 cents per share compared with $42.6 million or 52 cents in the year-ago quarter. However, including stock-based compensation and excluding amortization of intangible assets, net income was $20.9 million or 27 cents per share.

Cash and cash equivalents were $120.2 million compared with $88.2 million in the previous quarter. During the quarter, ValueClick repurchased 590,000 shares for approximately $9.2 million.

Guidance

For fourth quarter, ValueClick expects revenue in the range of $196 million-$200 million and earnings in the range of 51 cents-52 cents per share.

ValueClick forecasts revenue from Affiliate Marketing to grow in high-single digits in the fourth quarter. Revenue from Owned & Operated websites are expected to decrease by mid-single digits. For the fourth quarter, Media revenue is expected to grow in the low-twenties range.

Recommendation

We believe that ValueClick’s strong product portfolio based on 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 going forward. Moreover, frequent share buybacks will also drive earnings in the near term.

However, unfavorable foreign exchange and a sluggish European market remain headwind in the near term. ValueClick continues to face stiff competition from Google Inc. and Yahoo! Inc. (YHOO - Analyst Report), which is expected to affect its profitability going forward.

We maintain our Neutral recommendation on the stock over the long term (6-12 months). Currently, we have Zacks #3 Rank for ValueClick, which translates into a short-term Hold rating.

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