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3 Things About ValueClick, the Web Ad Services Provider, That Don't Make Sense

ValueClick (VCLK) turned a corner in Q3 2010 with an increase in revenues after continuous declines since the end of 2007. But don't breathe a sigh of relief yet, because there are three things about this company that just don't seem to make any sense:
  1. Why was a recent deal in which it sold its Web Clients unit surrounded in mystery?
  2. Why is ValueClick so slow to take advantage of the upturn in advertising?
  3. Why has no one acquired a company that, at base, is roughly twice as profitable as a traditional ad agency?
It's been a long three years for ValueClick, and there now may be light at the end of the tunnel. ValueClick is the last of six publicly traded ad services companies to see revenue growth -- an amazingly depressing feat, given that as a web provider it ought to have been the first.

It also saw a nice increase in net income, up 55 percent to $36 million on revenues of $107 million, up from $105 million in 2009.

Underneath that healthy performance are a couple of items that don't look quite so peachy. The profit performance was helped by a one-off $16 million tax benefit, so don't expect to see that again.

And its revenues are still down heavily from 2007, when the company raked in $177 million per quarter. Part of that collapse was the recession, but the other part was the "sale" of its Web Clients unit for "$45 million." You'll see why there are sarcastic quote-marks round those words when you learn the terms and history of the deal:

ValueClick bought Web Clients, a lead generation firm, for $141 million in 2005. The company had about $59 million in annual revenue. This year, it divested Web Clients to an unnamed buyer in exchange for a note receivable worth $45 million by the end of its five-year term. That's right: it took an immediate $96 million paper loss on a deal that may not even pan out if Web Clients goes bankrupt. Given that the company refused to say in its 10-Q or its press release who the buyer was, what do you think the chance of Web Clients still being around in five years are, given that ValueClick doesn't even want the unit on its books anymore?

Which brings us back to ValueClick's revenues. Everyone else is reporting skyrocketing growth, and ValueClick, a web-only operation is only scraping out a 1.5 percent increase. Online ad impressions jumped 22 percent last quarter. Global ad spending is up 13 percent. Google (GOOG)'s revenues were up 23 percent. Why can't ValueClick get some of that action?

One answer is that ValueClick is substantially based on the "old" media of serving ads on web pages. The real action online is currently in social media, mobile and search, none of which are static web-page based. In other words, the company's fortunes may be hooked to the newspapers of the internet. Making things worse, the company doubled down on old web pages by buying Investopedia for $42 million.

That might explain why no one wants to buy ValueClick, despite its underlying profitability. WPP (WPPGY) and Publicis (PUB) both made digital acquisitions during the recession when asset prices were depressed, but they didn't go anywhere near ValueClick. There just may not be any growth in the business the company is in.


Image by Flickr user vvvracer, CC.