10-Q 1 a2011q110q.htm FORM 10-Q WebFilings | EDGAR view
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from       to       
 
Commission file number 000-30135
 
VALUECLICK, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0495335
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
30699 RUSSELL RANCH ROAD, SUITE 250
WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of principal executive offices, including zip code)
 
(818) 575-4500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer x
 
Accelerated filero
Non-accelerated filero
 
Smaller Reporting Companyo
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
 
The number of shares of the registrant’s common stock outstanding as of May 2, 2011 was 78,681,951.


VALUECLICK, INC.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
Certification of CEO - Sarbanes-Oxley Act Section 302
 
Certification of CFO - Sarbanes-Oxley Act Section 302
 
Certification of CEO and CFO - Sarbanes-Oxley Act Section 906

2


PART I. FINANCIAL INFORMATION 
 
ITEM 1. FINANCIAL STATEMENTS
 
VALUECLICK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
March 31, 2011
 
December 31, 2010
ASSETS
 
 
 
 
 
CURRENT ASSETS:
 
 
 
 
 
Cash and cash equivalents
$
199,777
 
 
$
194,317
 
Marketable securities
 
 
3,000
 
Accounts receivable, net
81,076
 
 
86,738
 
Prepaid expenses and other current assets
6,769
 
 
5,688
 
Income taxes receivable
2,965
 
 
7,091
 
Deferred tax assets
5,718
 
 
5,691
 
Total current assets
296,305
 
 
302,525
 
Note receivable
30,895
 
 
31,267
 
Property and equipment, net
12,619
 
 
12,414
 
Goodwill
184,769
 
 
183,218
 
Intangible assets acquired in business combinations, net
29,126
 
 
33,525
 
Deferred tax assets, less current portion
49,108
 
 
49,360
 
Other assets
1,144
 
 
1,258
 
TOTAL ASSETS
$
603,966
 
 
$
613,567
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
CURRENT LIABILITIES:
 
 
 
 
 
Accounts payable and accrued expenses
$
90,952
 
 
$
100,974
 
Other current liabilities
6,807
 
 
2,284
 
Total current liabilities
97,759
 
 
103,258
 
Income taxes payable
37,076
 
 
36,595
 
Deferred tax liabilities
1,019
 
 
1,073
 
TOTAL LIABILITIES
135,854
 
 
140,926
 
 
 
 
 
Commitments and contingencies (Note 11)
 
 
 
 
 
 
 
 
 
STOCKHOLDERS’ EQUITY:
 
 
 
 
 
Convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued or outstanding at March 31, 2011 and December 31, 2010
 
 
 
Common stock, $0.001 par value; 500,000,000 shares authorized; 79,075,293 and 80,974,145 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively
79
 
 
81
 
Additional paid-in capital
529,142
 
 
555,859
 
Accumulated other comprehensive loss
(1,061
)
 
(6,389
)
Accumulated deficit
(60,048
)
 
(76,910
)
Total stockholders’ equity
468,112
 
 
472,641
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
603,966
 
 
$
613,567
 
 
See accompanying Notes to Condensed Consolidated Financial Statements

3


VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 
Three-month Period
Ended March 31,
 
2011
 
2010
 
 
 
 
Revenue
$
116,511
 
 
$
95,682
 
Cost of revenue
32,877
 
 
25,499
 
Gross profit
83,634
 
 
70,183
 
Operating expenses:
 
 
 
 
 
Sales and marketing (includes stock-based compensation of $286 and $328 for 2011 and 2010, respectively)
29,549
 
 
24,495
 
General and administrative (includes stock-based compensation of $1,413 and $1,437 for 2011 and 2010, respectively)
12,523
 
 
13,823
 
Technology (includes stock-based compensation of $218 and $192 for 2011 and 2010, respectively)
10,166
 
 
7,924
 
Amortization of intangible assets
4,888
 
 
4,966
 
Total operating expenses
57,126
 
 
51,208
 
 
 
 
 
Income from operations
26,508
 
 
18,975
 
Interest and other income, net
408
 
 
559
 
Income before income taxes
26,916
 
 
19,534
 
Income tax expense
10,054
 
 
8,211
 
Income from continuing operations
16,862
 
 
11,323
 
 
 
 
 
Loss from discontinued operations (Note 5)
 
 
(134
)
Gain on sale, net of tax
 
 
10,040
 
 
 
 
 
Net income
$
16,862
 
 
$
21,229
 
 
 
 
 
Basic income per common share from:
 
 
 
 
 
Continuing operations
$
0.21
 
 
$
0.14
 
Discontinued operations
$
 
 
$
0.12
 
Net income
$
0.21
 
 
$
0.26
 
 
 
 
 
Diluted income per common share from:
 
 
 
 
Continuing operations
$
0.21
 
 
$
0.14
 
Discontinued operations
$
 
 
$
0.12
 
Net income
$
0.21
 
 
$
0.25
 
 
 
 
 
Weighted-average shares used to calculate net income per common share:
 
 
 
 
 
Basic
80,687
 
 
82,892
 
Diluted
81,644
 
 
83,496
 
 
See accompanying Notes to Condensed Consolidated Financial Statements

4


VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands)
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(in thousands, except share data)
Balance at December 31, 2010
 
 
 
 
80,974,145
 
 
$
81
 
 
$
555,859
 
 
$
(6,389
)
 
$
(76,910
)
 
$
472,641
 
Non-cash, stock-based compensation
 
 
 
 
 
 
 
 
1,917
 
 
 
 
 
 
1,917
 
Shares issued in connection with employee stock programs
 
 
 
 
271,709
 
 
 
 
2,683
 
 
 
 
 
 
2,683
 
Repurchase and retirement of common stock
 
 
 
 
(2,170,561
)
 
(2
)
 
(31,485
)
 
 
 
 
 
(31,487
)
Tax benefit from employee stock transactions
 
 
 
 
 
 
 
 
168
 
 
 
 
 
 
168
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
 
 
 
 
16,862
 
 
16,862
 
Foreign currency translation
 
 
 
 
 
 
 
 
 
 
5,328
 
 
 
 
5,328
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
22,190
 
Balance at March 31, 2011
 
 
 
 
79,075,293
 
 
$
79
 
 
$
529,142
 
 
$
(1,061
)
 
$
(60,048
)
 
$
468,112
 
 
See accompanying Notes to Condensed Consolidated Financial Statements
 

5


VALUECLICK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Three-month Period
Ended March 31,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
Net income
$
16,862
 
 
$
21,229
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization expense
6,642
 
 
6,576
 
Amortization of discount on note receivable
(582
)
 
(748
)
Provision for doubtful accounts and sales credits
251
 
 
242
 
Gain on sale of business, net of tax
 
 
(10,040
)
Non-cash, stock-based compensation
1,917
 
 
1,957
 
Deferred income taxes
117
 
 
(4,708
)
Tax benefit from stock-based awards
168
 
 
17
 
Excess tax benefit from stock-based awards
(201
)
 
(17
)
Changes in operating assets and liabilities
4,799
 
 
16,128
 
Net cash provided by operating activities
29,973
 
 
30,636
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Proceeds from the sales of marketable securities
3,000
 
 
 
Purchases of property and equipment
(1,918
)
 
(2,488
)
Principal payments received on note receivable
907
 
 
 
Net cash provided by (used in) investing activities
1,989
 
 
(2,488
)
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Repurchases and retirement of common stock
(31,487
)
 
(25,343
)
Proceeds from shares issued under employee stock programs
2,683
 
 
1,058
 
Excess tax benefit from stock-based awards
201
 
 
17
 
Net cash used in financing activities
(28,603
)
 
(24,268
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
2,101
 
 
(2,708
)
Net increase in cash and cash equivalents
5,460
 
 
1,172
 
 
 
 
 
Cash and cash equivalents, beginning of period
194,317
 
 
158,497
 
Cash and cash equivalents, end of period
$
199,777
 
 
$
159,669
 
 
See accompanying Notes to Condensed Consolidated Financial Statements
 

6


VALUECLICK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    THE COMPANY AND BASIS OF PRESENTATION
 
Company Overview
 
ValueClick, Inc. and its subsidiaries (''ValueClick'' or the "Company'') offer a suite of products and services that enable marketers to advertise and sell their products through major online marketing channels including display advertising, comparison shopping, and affiliate marketing. The Company also offers technology infrastructure tools and services that enable marketers to implement and manage their own online advertising across multiple channels including display, email, paid search, natural search, on-site, offline and affiliate. The broad range of products and services that the Company provides enables its customers to address all aspects of their online marketing process, from strategic planning through execution, including results measurement and campaign refinements. The Company derives its revenue from four business segments. These business segments are presented on a worldwide basis and include: Affiliate Marketing, Media, Owned & Operated Websites, and Technology.
 
AFFILIATE MARKETING - ValueClick's Affiliate Marketing segment, which operates under the ''Commission Junction'' brand name, provides the technology, network and customer service that, in combination, enable advertisers to create their own fully-commissioned online sales force comprised of third-party website publishers, also known as affiliates. Advertisers that utilize the Commission Junction platform generally are only obligated to pay affiliates when the affiliate delivers a consumer who achieves the desired result, which is typically a closed e-commerce transaction or a new customer lead. By joining the Commission Junction network, advertisers gain access to: a) the Company's proprietary technology platform that has been developed over the past decade and is completely focused on the unique needs of the affiliate marketing channel; b) a proprietary network of tens of thousands of high-quality website publishers; and c) the Company's digital marketing expertise and campaign management teams who ensure advertisers' campaigns are optimized for maximum performance. Commission Junction's revenues are driven primarily by variable compensation that is generally based on either a percentage of commissions paid by the Company's customers to affiliates or on a percentage of transaction revenue generated by the Company's customers from the programs managed with the Company's affiliate marketing platforms.
 
MEDIA - ValueClick's Media segment, which operates under the ''ValueClick Media'' brand name, provides a comprehensive suite of online marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors and generate leads and sales through the Internet. ValueClick Media is able to access its customers' target audiences through the unique combination of: its proprietary broad-based network of thousands of high-quality online publishers; its vertically-focused networks in the areas of pharma/healthcare (AdRx Media), home and garden (Modern Living Media), and moms (Mom's Media); its ability to acquire inventory by bidding on a real-time basis through ad exchanges and other channels; and its ability to access inventory from ValueClick's owned and operated websites, as described below. ValueClick Media applies its proprietary data and targeting and optimization technologies to these inventory sources to ensure that the metrics that are most important to its customers are achieved. ValueClick Media's services are sold on a variety of pricing models, including cost-per-action (''CPA''), cost-per-thousand-impression (''CPM''), and cost-per-click (''CPC'').
 
On February 1, 2010, the Company divested its promotional lead generation marketing business and has reported its results of operations as discontinued operations for all periods presented. See Note 5 for additional information on this divestiture.
 
OWNED & OPERATED WEBSITES - ValueClick's Owned & Operated Websites segment services are offered through a number of transaction-focused branded websites including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com. In 2009, ValueClick also launched a limited number of content websites in key online verticals such as healthcare, finance, travel, home and garden, education and business services.
 
The Pricerunner comparison shopping destination websites operate in the United Kingdom, Sweden, Germany, France, Denmark, and Austria. The Smarter.com and Couponmountain.com websites operate primarily in the United States and, to a lesser extent, Japan and China. The Pricerunner and Smarter.com websites enable consumers to research and compare products from among thousands of online and/or offline merchants using its proprietary technologies. The Company gathers product and merchant data and organizes it into comprehensive catalogs on its destination websites, along with relevant consumer and professional reviews. The Couponmountain.com website allows consumers to locate coupons and deals related to products and services that may be of interest to them. The Company's Investopedia.com website, which the Company acquired on August 3, 2010 as more fully described in Note 4, provides information on a broad range of financial and

7


investment topics, including a proprietary dictionary of financial terms, and the Company's other vertical content websites offer consumers information and reference material across a variety of topics. The Company's services in these areas are free for consumers, and revenue is generated in one of three ways: on a CPC basis for traffic delivered to the customers' websites from listings on the Company's websites; on a CPA basis when a consumer completes a purchase or other specific event; and on a CPM basis for display advertising shown on the Company's websites.
 
In addition to the Company's destination websites, Search123, which operates primarily in Europe, is ValueClick's self-service paid search offering that generates its traffic primarily through syndication relationships with content websites. Search syndication revenues are driven primarily on a CPC basis.
 
TECHNOLOGY - ValueClick's Technology segment, which operates under the brand name ''Mediaplex'', is an application services provider (''ASP'') offering technology products and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline and affiliate. Mediaplex's MOJO® product suite is supported by a single proprietary technology platform, which has the ability to manage all aspects of online advertising from campaign implementation to real-time behavioral targeting to enterprise-level cross channel analysis. Revenues are primarily driven by software access and usage fees which are priced on a CPM or email-delivered basis.
 
Basis of Presentation and Use of Estimates
 
The condensed consolidated financial statements are unaudited and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. As permitted by the Securities and Exchange Commission (“SEC”) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related notes have been condensed and do not contain certain information that may be included in ValueClick's annual consolidated financial statements and notes thereto. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in ValueClick's Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on February 28, 2011. The December 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including, but not limited to, those related to: i) the allowance for doubtful accounts and sales credits; ii) the assessment of other-than-temporary impairments related to the Company's marketable securities; iii) the valuation of equity instruments granted by the Company; iv) the value assigned to, recoverability and estimated useful lives of, goodwill and intangible assets acquired in business combinations; v) the Company's income tax expense, its deferred tax assets and liabilities and any valuation allowances recorded against deferred tax assets; and vi) the recognition and disclosure of contingent liabilities. These estimates and assumptions are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
 
The Company has evaluated all subsequent events through the date the financial statements were issued. Refer to Note 17 for disclosure of subsequent events.
 
2.    RECENTLY ISSUED ACCOUNTING STANDARDS
 
 In July 2010, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that requires enhanced disclosures regarding the nature of credit risk inherent in an entity's portfolio of financing receivables, how that risk is analyzed, and the changes, as well as the reasons for such changes, in the allowance for credit losses. The guidance requires companies to enhance disclosure about the credit quality of financing receivables and the allowance for credit losses, including credit quality indicators, non-accrual and past due information, impaired loans, and modifications of financing receivables. This guidance became effective for financial statements issued for interim or annual reporting periods ending on or after December 15, 2010. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
 
In January 2010, the FASB issued additional authoritative guidance to improve disclosures about fair value

8


measurements. The guidance requires that an entity disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and describe the reasons for the transfers. Furthermore, an entity should present information about purchases, sales, issuances, and settlements for Level 3 fair value measurements. The guidance also clarifies existing disclosures for the level of disaggregation and disclosures about input and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements for the activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. On January 1, 2010, the Company adopted the disclosure amendments, and on January 1, 2011, the Company adopted amendments to Level 3 fair value measurements as described above. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
 
In October 2009, the FASB issued new accounting guidance related to the recognition of revenue from multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies are required to develop a best estimate of the selling price for separate deliverables and allocate arrangement consideration using the relative selling price method. In addition, the guidance requires additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements. The guidance is effective prospectively for revenue arrangements entered into or materially modified in annual periods beginning after June 15, 2010. The Company adopted this guidance as of January 1, 2011. The adoption of this guidance did not have any impact on the Company's consolidated financial statements.
 
3.    STOCK-BASED COMPENSATION
 
In the three-month periods ended March 31, 2011 and 2010, the Company recognized stock-based compensation of $1.9 million and $2.0 million, respectively. The following table summarizes, by statement of operations line item, the impact of stock-based compensation and the related income tax benefits recognized in the three-month periods ended March 31, 2011 and 2010 (in thousands):
 
Three-month Period
Ended March 31,
 
2011
 
2010
Sales and marketing
$
286
 
 
$
328
 
General and administrative
1,413
 
 
1,437
 
Technology
218
 
 
192
 
Stock-based compensation
1,917
 
 
1,957
 
Related income tax benefits
(771
)
 
(714
)
Stock-based compensation, net of tax benefits
$
1,146
 
 
$
1,243
 
 
4.    RECENT BUSINESS COMBINATIONS
 
Investopedia.com. On August 3, 2010, the Company completed the acquisition of Investopedia.com (“Investopedia”), a leading financial information and investing education website. Under the terms of the agreement, the Company acquired the assets and assumed certain liabilities of Investopedia for an aggregate purchase price of $41.7 million. Investopedia provides consumers with a comprehensive library of financial terms, articles, tutorials, and investing education tools.
 
Investopedia provides content, organic traffic and established advertiser relationships in the financial services advertising vertical, as well as an experienced team and synergy opportunities with the Company's existing business units within its Media and Owned & Operated Websites segments. These factors contributed to a purchase price in excess of the fair value of Investopedia's net tangible and intangible assets acquired, and, as a result, the Company has recorded goodwill in connection with this transaction. The results of Investopedia's operations are included in the Company's consolidated financial statements beginning on August 3, 2010.
 
5.    DISCONTINUED OPERATIONS
 
On February 1, 2010, the Company completed the disposition of its promotional lead generation marketing business, operated through its subsidiary Web Marketing Holdings LLC ("Web Clients"). The proceeds from the sale consisted of a $45 million (face amount) five-year note receivable bearing interest at the rate of five percent. The estimated fair value of the note receivable was $32.8 million on the date of sale. Refer to Note 6 for additional information on the note receivable. The

9


divestiture generated, in the first quarter of 2010, a pre-tax gain of $1.1 million, and a $10.0 million gain net of income taxes due to an $8.9 million tax benefit related to tax deductible goodwill that was realized upon the sale of Web Clients. The historical results of Web Clients are treated as discontinued operations herein.
 
The following amounts related to Web Clients were derived from historical financial information and have been segregated from continuing operations and reported as discontinued operations (in thousands):
 
 
Three-month Period
Ended March 31,
 
2011
 
2010
Revenue
$
 
 
$
5,926
 
 
 
 
 
Loss before income taxes from discontinued operations
 
 
(222
)
Income tax benefit
 
 
(88
)
Loss from discontinued operations, net of tax
$
 
 
$
(134
)
 
6.    NOTE RECEIVABLE
 
As discussed in Note 5, the Company sold its Web Clients business on February 1, 2010. The net proceeds from the sale of approximately $32.8 million consisted of the estimated discounted fair value of a $45 million (face amount) five year note receivable bearing interest at the rate of five percent, with monthly payments amortized over a ten year period and a balloon payment at the end of the fifth year. The note is collateralized by substantially all of the assets of the buyer, consisting of Web Clients and other unrelated businesses. The collateralization of Web Clients resulted in the identification of Web Clients as a variable interest entity. However, because the Company does not have the power to direct the day-to-day operations of Web Clients and the risk of loss is limited to the amount of the note receivable, the Company is not considered the primary beneficiary and is not required to consolidate this variable interest entity. Other than the note receivable, the Company has not, nor does it intend to, provide financial or other support to Web Clients.
 
The following table details the composition of the note receivable at March 31, 2011 and December 31, 2010 (in thousands):
 
 
March 31, 2011
 
December 31, 2010
Note receivable, gross
$
41,441
 
 
$
42,348
 
Discount
(9,130
)
 
(9,712
)
Note receivable, net of discount
32,311
 
 
32,636
 
Less: current portion
(1,416
)
 
(1,369
)
Note receivable, less current portion
$
30,895
 
 
$
31,267
 
 
The Company classifies the portion of the note receivable due within one year as current assets in the caption “Prepaid expenses and other current assets” in the accompanying Condensed Consolidated Balance Sheets. The total long-term portion of the note receivable as of March 31, 2011 is classified separately on the Condensed Consolidated Balance Sheets. Through the Company's review of the buyer's financial statements and its history of on-time payments, the Company determined that as of March 31, 2011 and December 31, 2010, an allowance for credit loss was not required. The Company reflects interest income associated with this note in the “Interest and other income, net” caption in the accompanying Condensed Consolidated Statements of Operations. Total interest income related to this note was $1.1 million for the three-month period ended March 31, 2011.
 

10


7.    GOODWILL AND INTANGIBLE ASSETS
 
The changes in the carrying amount of goodwill, by reporting unit, for the three-month period ended March 31, 2011 were as follows (in thousands): 
 
Affiliate
Marketing
 
Media
 
Owned &
Operated
Websites
 
Total
Balance at December 31, 2010
$
30,441
 
 
$
105,914
 
 
$
46,863
 
 
$
183,218
 
Foreign currency translation adjustments
333
 
 
141
 
 
1,077
 
 
1,551
 
Balance at March 31, 2011
$
30,774
 
 
$
106,055
 
 
$
47,940
 
 
$
184,769
 
 
Goodwill, accumulated impairment losses and the net carrying amount of goodwill, by reporting unit, as of March 31, 2011 were as follows (in thousands): 
 
Affiliate
Marketing
 
Media
 
Owned &
Operated
Websites
 
Total
Goodwill
30,774
 
 
218,055
 
 
257,940
 
 
506,769
 
Accumulated impairment losses
 
 
(112,000
)
 
(210,000
)
 
(322,000
)
Goodwill, net
30,774
 
 
106,055
 
 
47,940
 
 
184,769
 
 
The gross balance, accumulated amortization and net carrying amount of the Company’s intangible assets as of March 31, 2011 and December 31, 2010 were as follows (in thousands): 
 
Gross
Balance
 
Accumulated
Amortization
 
Net Carrying
Amount
March 31, 2011:
 
 
 
 
 
 
 
 
Customer, affiliate and advertiser relationships
$
41,460
 
 
$
(34,024
)
 
$
7,436
 
Trademarks, trade names and domain names
30,575
 
 
(18,135
)
 
12,440
 
Developed technologies and websites
34,523
 
 
(25,888
)
 
8,635
 
Covenants not to compete
7,500
 
 
(6,885
)
 
615
 
Total intangible assets
$
114,058
 
 
$
(84,932
)
 
$
29,126
 
 
 
 
 
 
 
December 31, 2010:
 
 
 
 
 
Customer, affiliate and advertiser relationships
$
48,327
 
 
$
(39,507
)
 
$
8,820
 
Trademarks, trade names and domain names
29,811
 
 
(16,899
)
 
12,912
 
Developed technologies and websites
34,399
 
 
(23,690
)
 
10,709
 
Covenants not to compete
7,500
 
 
(6,416
)
 
1,084
 
Total intangible assets
$
120,037
 
 
$
(86,512
)
 
$
33,525
 
 
For the three-month period ended March 31, 2011, the decrease in the gross balance was due to a $7.5 million write-off of a fully amortized customer relationship asset, offset by foreign currency translation adjustments totaling approximately $1.5 million. The Company recognized amortization expense of $4.9 million and $5.0 million on intangible assets for the three-month periods ended March 31, 2011 and 2010, respectively. Estimated intangible asset amortization expense for the remainder of 2011, the succeeding five years and thereafter, excluding amortization expense associated with the acquisition of Greystripe, Inc. as discussed in Note 17, is as follows (in thousands):
 
Nine months ending December 31, 2011
$
10,576
 
2012
$
7,869
 
2013
$
2,798
 
2014
$
1,703
 
2015
$
1,703
 
Thereafter
$
4,477
 
 

11


8.    ACCOUNTS RECEIVABLE
 
Accounts receivable are stated net of an allowance for doubtful accounts and sales credits of $4.0 million at March 31, 2011 and December 31, 2010. No customers accounted for more than 10% of the accounts receivable balance at March 31, 2011 or December 31, 2010.
 
9.    PROPERTY AND EQUIPMENT
 
Property and equipment consisted of the following at March 31, 2011 and December 31, 2010 (in thousands):
 
March 31, 2011
 
December 31, 2010
Computer equipment and purchased software
34,658
 
 
34,582
 
Furniture and equipment
4,338
 
 
4,464
 
Leasehold improvements
2,571
 
 
2,415
 
Property and equipment, gross
41,567
 
 
41,461
 
Less: accumulated depreciation and amortization
(28,948
)
 
(29,047
)
Total property and equipment, net
$
12,619
 
 
$
12,414
 
 
10.    FAIR VALUE MEASUREMENT OF ASSETS
 
As of March 31, 2011, the Company did not hold assets that are required to be measured at fair value on a recurring basis. As of December 31, 2010, the Company held certain assets that are required to be measured at fair value on a recurring basis. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as fair value measured based on observable inputs such as quoted prices in active markets for identical assets; Level 2, defined as fair value measured based on observable inputs such as quoted prices in active markets for similar assets, and inputs other than quoted prices in active markets that are either directly or indirectly observable and for identifiable assets in less active markets; and Level 3, defined as fair value measured based on unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
As of December 31, 2010, the Company's assets that were required to be measured at fair value include the Company's investment in marketable securities, which were classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, generally recorded in a separate component of stockholders' equity within the accumulated other comprehensive income balance. Unrealized losses on available-for-sale securities that are related to credit losses or an other-than-temporary impairment ("OTTI") are charged to earnings. At December 31, 2010, marketable securities consisted of an auction rate security ("ARS") with an aggregate cost and estimated fair value of $3.0 million. During the three-month period ended March 31, 2011, the Company sold the ARS at its par value of $3.0 million.
 
The Company’s assets measured at fair value on a recurring basis at December 31, 2010, were as follows (in thousands):
 
 
 
Fair Value Measurements at Reporting Date Using
 
December 31, 2010
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Description:
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities measured at fair value
$
3,000
 
 
$
 
 
$
 
 
$
3,000
 
 
There were no transfers of assets between levels within the fair value hierarchy for the three-month period ended March 31, 2011.
 

12


11.    COMMITMENTS AND CONTINGENCIES
 
On April 8, 2008, Hypertouch, Inc. filed an action against the Company in the Superior Court of California, County of Los Angeles. The complaint asserts causes of action for violation of California Business & Professions Code §§ 17529.5 and 17200, et seq., arising from the plaintiff's alleged receipt of a large number of email messages allegedly transmitted by the Company "and/or (the Company's) agents" and seeks statutory damages for each such email. The Company filed its answer to the complaint on May 28, 2008. On May 4, 2009, the court granted the Company's motion for summary judgment which ended the case in this court. Hypertouch appealed the Court's ruling.
 
On January 18, 2011, the Second District of the Court of Appeal for the State of California reversed the lower court's May 4, 2009 summary judgment ruling. The ruling means that the case is remanded back to the lower court to be decided on its merits. In addition, the Court of Appeal ruled that a one-year statute of limitations applies to the emails at issue in the case. This ruling significantly reduces the number of emails at issue in the case.
 
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal proceedings, except as discussed above, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company's business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
 
12.    INCOME TAXES
 
As of December 31, 2010, the Company had recorded a liability of $31.8 million for unrecognized tax benefits. During the three-month period ended March 31, 2011, the Company’s liability for unrecognized tax benefits increased by $0.4 million as a result of income tax positions taken during the period, resulting in a total liability for unrecognized tax benefits at March 31, 2011 of $32.2 million. If recognized in future periods, this liability for unrecognized tax benefits would be recorded as a reduction to income tax expense. Facts and circumstances could arise in the twelve-month period following March 31, 2011 that could cause the Company to reduce the liability for unrecognized tax benefits, including, but not limited to, settlement of income tax positions or expiration of the statutes of limitations. Because the ultimate resolution of uncertain tax positions depends on many factors and assumptions, the Company is not able to estimate the range of potential changes in the liability for unrecognized tax benefits or the timing of such changes.
 
The Company’s policy is to recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense. The Company recognized $0.3 million and $0.6 million in gross interest and penalties expense related to unrecognized tax benefits in each of the three-month periods ended March 31, 2011 and 2010, respectively.  The Company had an accrual for interest and penalties in the amount of $5.9 million and $5.6 million at March 31, 2011 and December 31, 2010, respectively, related to unrecognized tax benefits. These amounts are included in non-current income taxes payable.
 
The Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. These include the 2007 through 2010 tax years for federal purposes, 1999 and 2004 through 2010 tax years for various state jurisdictions, and 2004 through 2010 tax years for various foreign jurisdictions. The Company is currently under Internal Revenue Service audit examination for the 2007 tax year, as well as various state and foreign jurisdictions for various tax years.
 
13.    STOCKHOLDERS’ EQUITY
 
In September 2001, the Company’s board of directors authorized a stock repurchase program (the “Program”) to allow for the repurchase of shares of the Company’s common stock at prevailing market prices in the open market or through unsolicited negotiated transactions.  Since the inception of the Program and through December 31, 2010, the Company’s board of directors authorized a total of $547.7 million for repurchases under the Program and the Company had repurchased a total of 54.7 million shares of its common stock for approximately $447.7 million. During the three-month period ended March 31, 2011, the Company repurchased 2.2 million shares for approximately $31.5 million under the Program. As of March 31, 2011, up to an additional $68.5 million of the Company’s capital may be used to repurchase shares of the Company’s outstanding common stock under the Program. Subsequent to March 31, 2011, the Company repurchased 0.4 million shares for $6.2 million, leaving approximately $62.3 million available under the Program as of May 6, 2011.
 
Repurchases have been funded from available working capital, and all shares have been retired subsequent to their repurchase. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company

13


may discontinue repurchases at any time that management or the Company’s board of directors determines additional repurchases are not warranted. The amounts authorized by the Company’s board of directors exclude broker commissions.
 
14.    NET INCOME PER COMMON SHARE
 
The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data):
 
 
Three-month Period
Ended March 31,
 
2011
 
2010
Net income
$
16,862
 
 
$
21,229
 
 
 
 
 
Weighted-average common shares outstanding - basic
80,687
 
 
82,892
 
Dilutive effect of stock options and employee benefit plans
957
 
 
604
 
Number of shares used to compute net income per common share - diluted
81,644
 
 
83,496
 
 
 
 
 
Net income per common share:
 
 
 
 
 
Basic
$
0.21
 
 
$
0.26
 
Diluted
$
0.21
 
 
$
0.25
 
 
Employee stock-based awards totaling 904,000 and 2,609,000 shares during the three-month periods ended March 31, 2011 and 2010, respectively, were excluded from the computation of diluted net income per common share because their effect would have been anti-dilutive under the treasury stock method.
 
15.    LINE OF CREDIT
 
In November 2008, the Company obtained a line of credit with a bank group which allows for borrowings of up to $100 million through November 14, 2011 (the "Line of Credit"). The Line of Credit was amended on February 1, 2010. Advances under the Line of Credit bear interest at either (i) the Base Rate, which is equal to the highest of (a) the Agent's prime rate, (b) the federal funds rate plus 1.50%, and (c) the one month reserve adjusted daily LIBOR rate plus 1.50%, or (ii) the London Interbank Offered Rate ("LIBOR"), in each case plus an applicable margin as in effect at each interest calculation date. The applicable margin in effect from time to time is based on the Company’s total leverage ratio. The applicable margins range from 1.50% to 2.25% for LIBOR loans and from 0.50% to 1.25% for Base Rate loans.
 
Certain of the Company's domestic subsidiaries have guaranteed the obligations of the Company and all future domestic subsidiaries of the Company also are required to guarantee the obligations of the Company under the Line of Credit. The Company's obligations are secured by a lien on substantially all of its present and future assets pursuant to a separate security agreement (the "Security Agreement"). In addition, the obligations of each subsidiary guarantor are secured by a lien on substantially all of such subsidiary’s present and future assets pursuant to a separate guaranty agreement (the "Guaranty Agreement"). The subsidiary guarantees and the collateral under the Security Agreement are subject to release upon fulfillment of certain conditions specified in the Line of Credit, Security Agreement and the Guaranty Agreement.
 
The Line of Credit is available to be used by the Company to, among other things, fund its working capital needs and for other general corporate purposes, including acquisitions and stock repurchases. The Company pays a commitment fee on unused amounts up to a maximum of 0.50% based on the Company’s total leverage ratio. The agreement also contains customary events of default such as failure to pay interest or principal when due, material inaccuracy of representations or warranties, bankruptcy events, change of control, a material adverse change in financial condition or operations, or a default of covenant. Upon the occurrence of an event of default, the principal and accrued interest under the Line of Credit then outstanding may be declared due and payable. At March 31, 2011, no amount was outstanding on the Line of Credit.
 
The Company has provided various representations and agreed to certain financial covenants including a total leverage ratio, minimum trailing-twelve month EBITDA (defined as earnings before interest income, income taxes, depreciation, amortization, stock-based compensation, and certain other non-cash or non-recurring income or expenses) of $100 million, and minimum unrestricted, unencumbered liquid asset requirements. At March 31, 2011 and December 31, 2010, the Company was in compliance with all of the financial covenants of the Line of Credit.
 

14


16.    SEGMENTS, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
 
The Company derives its revenue from four business segments. These business segments are presented on a worldwide basis and include: Affiliate Marketing, Media, Owned & Operated Websites, and Technology.  The following table provides revenue and segment income from continuing operations for each of the Company’s four business segments. Segment income from continuing operations, as shown below, is the performance measure used by management to assess segment performance and excludes the effects of stock-based compensation, amortization of intangible assets and corporate expenses. Corporate expenses consist of those costs not directly attributable to a business segment, and include: salaries and benefits for the Company’s executive, finance, legal, corporate governance, human resources, and facilities organizations; fees for professional service providers including audit, tax, Sarbanes-Oxley compliance, acquisition related costs, and certain legal fees; insurance; and, other corporate expenses. 
 
Revenue
 
Segment Income
from Continuing Operations
 
Three-month Period Ended March 31,
 
2011
 
2010
 
2011
 
2010
 
(in thousands)
Affiliate Marketing
$
34,474
 
 
$
29,359
 
 
$
20,489
 
 
$
16,049
 
Media
36,202
 
 
30,803
 
 
7,848
 
 
7,666
 
Owned & Operated Websites
37,947
 
 
27,897
 
 
7,047
 
 
4,884
 
Technology
8,081
 
 
7,894
 
 
4,129
 
 
4,088
 
Inter-segment revenue
(193
)
 
(271
)
 
 
 
 
Total
$
116,511
 
 
$
95,682
 
 
$
39,513
 
 
$
32,687
 
 
A reconciliation of total segment income from operations to consolidated income from operations is as follows for each period (in thousands): 
 
Three-month Period
Ended March 31,
 
2011
 
2010
Segment income from operations
$
39,513
 
 
$
32,687
 
Corporate expenses
(6,200
)
 
(6,789
)
Stock-based compensation
(1,917
)
 
(1,957
)
Amortization of intangible assets
(4,888
)
 
(4,966
)
Consolidated income from operations
$
26,508
 
 
$
18,975
 
 
Depreciation and leasehold amortization expense included in the determination of segment income from operations as presented above for the Affiliate Marketing, Media, Owned & Operated Websites, and Technology segments is as follows for each period (in thousands):
 
Three-month Period
Ended March 31,
 
2011
 
2010
Affiliate Marketing
252
 
 
244
 
Media
682
 
 
489
 
Owned & Operated Websites
443
 
 
392
 
Technology
262
 
 
228
 
Corporate
115
 
 
253
 
Total
1,754
 
 
1,606
 
 
The Company’s operations are domiciled in the United States with operations internationally in Europe, Canada, South Africa, Korea, China and Japan through wholly-owned subsidiaries. Revenue is attributed to a geographic region based upon the country from which the customer relationship is maintained. The Company’s operations in Canada and China primarily support the revenue generated in the United States and, therefore, the costs associated with these operations are attributed to the United States in the determination of geographic income from operations shown below.
 

15


The Company’s geographic information was as follows (in thousands):
 
 
Revenues
 
Three-month Period
Ended March 31,
 
2011
 
2010
United States
$
90,898
 
 
$
74,413
 
United Kingdom
14,715
 
 
11,302
 
Other countries
12,309
 
 
11,062
 
Inter-regional eliminations
(1,411
)
 
(1,095
)
Total
$
116,511
 
 
$
95,682
 
 
 
Income from Operations
 
Three-month Period
Ended March 31,
 
2011
 
2010
United States
$
23,520
 
 
$
15,670
 
United Kingdom
3,650
 
 
2,349
 
Other countries
(662
)
 
956
 
Total
$
26,508
 
 
$
18,975
 
 
For the three-month period ended March 31, 2011, one customer, Google, accounted for approximately 15.9% of total revenue. For the three-month period ended March 31, 2010, one customer, Google, accounted for approximately 13.1% of total revenue. Revenue from Google is recognized entirely in the Company's Owned & Operated Websites segment.
 
17.    SUBSEQUENT EVENTS
 
On April 21, 2011, the Company completed the acquisition of Greystripe, Inc. ("Greystripe"), a brand-focused mobile advertising network that provides ValueClick with immediate scale in the U.S. mobile advertising market. Under the terms of the agreement, the Company acquired all outstanding equity interests in Greystripe for cash consideration of approximately $70.0 million.
The Company is currently performing a valuation analysis of the assets and liabilities acquired and the resulting goodwill. As a result, the Company is unable to disclose these valuations at this time.
 

16


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CAUTIONARY STATEMENT
 
This report contains forward-looking statements based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled “Risk Factors” in this Form 10-Q and similar discussions in our Annual Report on Form 10-K for the year ended December 31, 2010, and in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.
 
OVERVIEW
 
ValueClick, Inc. and its subsidiaries (collectively "ValueClick" or the "Company" or in the first person, "we", "us" and "our") is one of the world's largest and most comprehensive online marketing services companies. We sell targeted and measurable online advertising campaigns and programs for advertisers and advertising agency customers, generating qualified customer leads, online sales and increased brand recognition on their behalf with large numbers of online consumers.
 
Our customers are primarily direct marketers, brand advertisers and the advertising agencies that service these groups. The proposition we offer our customers includes: one of the industry's broadest online marketing services portfolios—including performance-based campaigns and programs where marketers only pay for advertising when it generates a customer lead or product sale; our ability to target campaigns to reach the online consumers our customers are most interested in; and the scale at which we can deliver results for online advertising campaigns. Additionally, our networks of online publishers provide advertisers with a cost-effective and complementary source of online consumers relative to online portals and other large website publishers. Through this approach we have become an industry leader in generating qualified customer leads and online sales for advertisers.
 
We generate the audiences for our advertisers' campaigns primarily through networks of third-party websites, other online publisher partners and search engines. We aggregate our publisher partners' online advertising inventory into networks, optimize these networks for specific marketing goals, and deliver the campaigns across the appropriate networks' advertising inventory. We are one of the industry's largest online network providers, with: industry expertise and proprietary technology platforms for online advertising inventory aggregation; campaign targeting and optimization, delivery, measurement, and reporting; and, payment settlement and delivery services. We also own and operate a number of websites in the areas of comparison shopping, coupons and deals, financial services, and other verticals.
 
Our publisher partners enjoy efficient and effective monetization of their online advertising inventory through representation by our direct sales teams in major U.S. and European media markets, participation in large-scale advertiser and advertising agency campaigns they may not have access to on their own, enhanced monetization through our proprietary campaign optimization and targeting technology, and settlement services to facilitate payments to publishers for the online inventory utilized by the advertisers. As we do not primarily compete directly with our publisher partners for online consumers, we act as a trusted partner in helping online publishers monetize their online audience and advertising inventory.
 
We believe that the effectiveness of our online marketing services is dependent on the quality of our networks and our publisher partner relationships. As such, we have established stringent quality standards that include publisher rejection from our networks due to inappropriate content, illegal activity and fraudulent clicking activity, among other criteria. We enforce these quality standards using a combination of manual and automated auditing processes that continually monitor and review both website content and adherence to advertiser campaign specifications.

17


 
We derive our revenue from four business segments. These business segments are presented on a worldwide basis and include Affiliate Marketing, Media, Owned & Operated Websites, and Technology, which are described in more detail below.
 
AFFILIATE MARKETING
 
ValueClick's Affiliate Marketing segment, which operates under the "Commission Junction" brand name, provides the technology, network and customer service that, in combination, enable advertisers to create their own fully-commissioned online sales force comprised of third-party website publishers, also known as affiliates. Advertisers that utilize the Commission Junction platform generally are only obligated to pay affiliates when the affiliate delivers a consumer who achieves the desired result, which is typically a closed e-commerce transaction or a new customer lead. By joining the Commission Junction network, advertisers gain access to: a) the Company's proprietary technology platform that has been developed over the past decade and is completely focused on the unique needs of the affiliate marketing channel; b) a proprietary network of tens of thousands of high-quality website publishers; and c) the Company's digital marketing expertise and campaign management teams who ensure advertisers' campaigns are optimized for maximum performance. Commission Junction's revenues are driven primarily by variable compensation that is generally based on either a percentage of commissions paid by the Company's customers to affiliates or on a percentage of transaction revenue generated by the Company's customers from the programs managed with the Company's affiliate marketing platforms.
 
MEDIA
 
ValueClick's Media segment, which operates under the "ValueClick Media" brand name, provides a comprehensive suite of online marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors and generate leads and sales through the Internet. ValueClick Media is able to access its customers' target audiences through the unique combination of: its proprietary broad-based network of thousands of high-quality online publishers; its vertically-focused networks in the areas of pharma/healthcare (AdRx Media), home and garden (Modern Living Media), and motherhood (Mom's Media); its ability to acquire inventory by bidding on a real-time basis through ad exchanges and other channels; and its ability to access inventory from ValueClick's owned and operated websites, as described below. ValueClick Media applies its proprietary data and targeting and optimization technologies to these inventory sources to ensure that the metrics that are most important to its customers are achieved. ValueClick Media's services are sold on a variety of pricing models, including cost-per-action ("CPA"), cost-per-thousand-impression ("CPM"), and cost-per-click ("CPC").
On February 1, 2010, the Company divested its promotional lead generation marketing business. The results of operations of the promotional lead generation marketing business are reported as discontinued operations for all periods presented. See Note 5 to our condensed consolidated financial statements contained in the quarterly report on Form 10-Q for additional information on this divestiture.
 
OWNED & OPERATED WEBSITES
 
ValueClick's Owned & Operated Websites segment services are offered through a number of transaction-focused branded websites including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com. In 2009, ValueClick also launched a limited number of content websites in key online verticals such as healthcare, finance, travel, home and garden, education and business services.
 
The Pricerunner comparison shopping destination websites operate in the United Kingdom, Sweden, Germany, France, Denmark, and Austria. The Smarter.com and Couponmountain.com websites operate primarily in the United States and, to a lesser extent, Japan and China. The Pricerunner and Smarter.com websites enable consumers to research and compare products from among thousands of online and/or offline merchants using its proprietary technologies. The Company gathers product and merchant data and organizes it into comprehensive catalogs on its destination websites, along with relevant consumer and professional reviews. The Couponmountain.com website allows consumers to locate coupons and deals related to products and services that may be of interest to them. The Company's Investopedia.com website, which the Company acquired on August 3, 2010 as more fully described in Note 4 to our condensed consolidated financial statements contained in this quarterly report on Form 10-Q, provides information on a broad range of financial and investment topics, including a proprietary dictionary of financial terms, and the Company's other vertical content websites offer consumers information and reference material across a variety of topics. The Company's services in these areas are free for consumers, and revenue is generated in one of three ways: on a CPC basis for traffic delivered to the customers' websites from listings on the Company's websites; on a CPA basis when a consumer completes a purchase or other specific event; and on a CPM basis for display advertising shown on the Company's websites.
 
 

18


In addition to the Company's destination websites, Search123, which operates primarily in Europe, is ValueClick's self-service paid search offering that generates its traffic primarily through syndication relationships with content websites. Search syndication revenues are driven primarily on a CPC basis.
 
TECHNOLOGY
 
ValueClick's Technology segment, which operates under the brand name "Mediaplex", is an application services provider ("ASP") offering technology products and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline and affiliate. Mediaplex's MOJO® product suite is supported by a single proprietary technology platform, which has the ability to manage all aspects of online advertising from campaign implementation to real-time behavioral targeting to enterprise-level cross channel analysis. Revenues are primarily driven by software access and usage fees which are priced on a CPM or email-delivered basis.
 

19


SEGMENT OPERATING RESULTS
 
The following table provides revenue, cost of revenue, gross profit, operating expenses, and income from operations information for each of our four business segments. Segment income from operations, as shown below, is the performance measure used by management to assess segment performance and excludes the effects of: stock-based compensation, amortization of intangible assets and corporate expenses. Corporate expenses consist of those costs not directly attributable to a business segment, and include: salaries and benefits for our executive, finance, legal, corporate governance, human resources, and facilities organizations; fees for professional service providers including audit, tax, Sarbanes-Oxley compliance, acquisition related costs, and certain legal matters; insurance; and, other corporate expenses. A reconciliation of segment income from operations to consolidated income from operations and a reconciliation of segment revenue to consolidated revenue are also provided in the following table.
 
Three-month Period
Ended March 31,
 
2011
 
2010
 
(in thousands)
Affiliate Marketing
 
 
 
 
 
Revenue
$
34,474
 
 
$
29,359
 
Cost of revenue
4,324
 
 
4,019
 
Gross profit
30,150
 
 
25,340
 
Operating expenses
9,661
 
 
9,291
 
Segment income from operations
$
20,489
 
 
$
16,049
 
 
 
 
 
Media
 
 
 
 
 
Revenue
$
36,202
 
 
$
30,803
 
Cost of revenue
19,713
 
 
15,853
 
Gross profit
16,489
 
 
14,950
 
Operating expenses
8,641
 
 
7,284
 
Segment income from operations
$
7,848
 
 
$
7,666
 
 
 
 
 
Owned & Operated Websites
 
 
 
 
 
Revenue
$
37,947
 
 
$
27,897
 
Cost of revenue
8,076
 
 
5,083
 
Gross profit
29,871
 
 
22,814
 
Operating expenses
22,824
 
 
17,930
 
Segment income from operations
$
7,047
 
 
$
4,884
 
 
 
 
 
Technology
 
 
 
 
 
Revenue
$
8,081
 
 
$
7,894
 
Cost of revenue
918
 
 
765
 
Gross profit
7,163
 
 
7,129
 
Operating expenses
3,034
 
 
3,041
 
Segment income from operations
$
4,129
 
 
$
4,088
 
 
 
 
 
Reconciliation of segment income from operations to consolidated income from operations:
 
 
 
 
 
Total segment income from operations
$
39,513
 
 
$
32,687
 
Corporate expenses
(6,200
)
 
(6,789
)
Stock-based compensation
(1,917
)
 
(1,957
)
Amortization of intangible assets
(4,888
)
 
(4,966
)
   Consolidated income from operations
$
26,508
 
 
$
18,975
 
 
 
 
 
Reconciliation of segment revenue to consolidated revenue:
 
 
 
 
 
Affiliate Marketing
$
34,474
 
 
$
29,359
 
Media
36,202
 
 
30,803
 
Owned & Operated Websites
37,947
 
 
27,897
 
Technology
8,081
 
 
7,894
 
Inter-segment eliminations
(193
)
 
(271
)
   Consolidated revenue
$
116,511
 
 
$
95,682
 
 

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RESULTS OF OPERATIONS—THREE-MONTH PERIOD ENDED MARCH 31, 2011 COMPARED TO MARCH 31, 2010
 
Revenue.   Consolidated revenue for the three-month period ended March 31, 2011 was $116.5 million compared to $95.7 million for the same period in 2010, representing a 21.8% increase, or $20.8 million.
 
 Affiliate Marketing segment revenue increased to $34.5 million for the three-month period ended March 31, 2011 compared to $29.4 million in the same period in 2010. This increase of $5.1 million, or 17.4%, was due to an increase in the number of customers and an increase in transaction volumes associated with existing customers. Changes in our pricing or the average order value of transactions closed did not have a significant impact on Affiliate Marketing revenue in the three month period ended March 31, 2011.
 
Media segment revenue increased to $36.2 million for the three-month period ended March 31, 2011 compared to $30.8 million for the same period in 2010. The increase of $5.4 million, or 17.5%, in Media segment revenue was primarily attributable to our larger media sales organization in the United States as compared to the year ago period.
 
Owned & Operated Websites segment revenue increased to $37.9 million for the three-month period ended March 31, 2011 compared to $27.9 million in the same period in 2010. The increase of $10.1 million, or 36.0%, was attributable to the acquisition of Investopedia.com in August 2010 as well as increased volume across all of our owned and operated businesses, particularly Search123 and Pricerunner.com in Europe and Smarter.com and Couponmountain.com domestically. It should be noted that Owned & Operated Websites segment revenue is concentrated with two major customers. A loss of, or reduction of revenue from, one or both of these customers could have a significant negative impact on the revenue and profitability of this segment and the Company.
 
Technology segment revenue was $8.1 million for the three-month period ended March 31, 2011 compared to $7.9 million for the same period in 2010, an increase of $187,000, or 2.4%.  The increase in revenue was due to higher volumes of ad serving in our international operations. Technology segment revenue is concentrated with a limited number of customers. A loss of, or reduction of revenue from, one or more of these customers could have a significant negative impact on the revenue of this segment.
 
Cost of Revenue and Gross Profit.   Cost of revenue for the Media and Owned & Operated Websites segments consists primarily of amounts that we pay to website publishers and distribution partners that are directly related to a revenue-generating event. We pay these entities on a CPC, CPA, CPL, or CPM basis. Cost of revenue for all segments also includes labor costs, depreciation on revenue-producing technologies and Internet access costs.  Our consolidated cost of revenue was $32.9 million for the three-month period ended March 31, 2011 compared to $25.5 million for the same period in 2010, an increase of $7.4 million, or 28.9%. Our consolidated gross margin was 71.8% and 73.4% for the three-month periods ended March 31, 2011 and 2010, respectively.
 
Cost of revenue for the Affiliate Marketing segment increased $305,000, or 7.6%, to $4.3 million for the three-month period ended March 31, 2011 compared to $4.0 million for the same period in 2010 due to the increase in revenue. Our Affiliate Marketing gross margin remained relatively consistent at 87.5% for the first quarter of 2011 compared to 86.3% for the same period in 2010.
 
Cost of revenue for the Media segment increased $3.9 million, or 24.3%, to $19.7 million for the three-month period ended March 31, 2011 compared to $15.9 million for the same period in 2010 due to the increase in revenue. Our Media segment gross margin decreased to 45.5% for the three-month period ended March 31, 2011 compared to 48.5% for the same period in 2010. The Media segment gross margin in the current year period was in-line with the historical norm for this segment, whereas the Media segment gross margin in the year ago period was higher than normal due to a mix of higher margin campaigns in that period.
 
Cost of revenue for the Owned & Operated Websites segment increased $3.0 million to $8.1 million for the three-month period ended March 31, 2011 compared to $5.1 million for the same period in 2010. Our Owned & Operated Websites segment gross margin decreased to 78.7% for the first quarter of 2011 from 81.8% for the same period in 2010 due primarily to the increase in publisher costs related to the higher Search123 revenue in Europe described above.
 
Technology segment cost of revenue increased $153,000, or 20.0%, to $918,000 for the three-month periods ended March 31, 2011 compared to $765,000 for the same period in 2010.  Our Technology segment gross margin remained relatively consistent at 88.6% for the three-month period ended March 31, 2011 compared to 90.3% for the same period in 2010.
 

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Operating Expenses:
 
Sales and Marketing.   Sales and marketing expenses consist primarily of certain online and offline advertising costs, compensation and employee benefits of sales and marketing and related support teams, travel, trade shows, and marketing materials. Total sales and marketing expenses for the three-month period ended March 31, 2011 were $29.5 million compared to $24.5 million for the same period in 2010, an increase of $5.1 million, or 20.6%. Online advertising costs included in sales and marketing expenses relate to our Owned & Operated websites segment and are comprised primarily of amounts that we pay to website publishers and distribution partners that are not directly associated with a revenue-generating event, and were $16.9 million and $13.1 million in the three-month periods ended March 31, 2011 and 2010, respectively. The increase in online advertising costs is directly related to the increased revenue in the Owned & Operated Websites segment as described above. Other sales and marketing expenses increased due to increased salaries and wages as a result of increased headcount compared to the year ago period.  Our sales and marketing expenses as a percentage of revenue remained flat at 25.4% for the three-month period ended March 31, 2011 compared to 25.6% for the same period in 2010.
 
General and Administrative.   General and administrative expenses consist primarily of facilities costs, executive and administrative compensation and employee benefits, depreciation, professional services fees, insurance costs, bad debt expense, and other general overhead costs. General and administrative expenses decreased to $12.5 million, or 10.7% of revenue, for the three-month period ended March 31, 2011 compared to $13.8 million, or 14.4% of revenue, for the same period in 2010, a decrease of $1.3 million, or 9.4%. General and administrative expenses decreased primarily due to a decrease in legal fees associated with a matter that was resolved in the second quarter of 2010.
 
Technology.   Technology expenses include costs associated with the maintenance and ongoing development of our technology platforms and network development, including compensation and employee benefits for our engineering and network operations departments, as well as costs for contracted services and supplies. Technology expenses for the three-month period ended March 31, 2011 were $10.2 million, or 8.7% of revenue, compared to $7.9 million, or 8.3% of revenue, for the same period in 2010, an increase of $2.2 million, or 28.3%. The increase in technology expenses was primarily due to increased salaries and wages as a result of increased headcount compared to the year ago period.
 
Segment Income from Operations.   Affiliate Marketing segment income from operations for the three-month period ended March 31, 2011 increased 27.7%, or $4.4 million, to $20.5 million, from $16.0 million in the same period of the prior year, and represented 59.4% and 54.7% of Affiliate Marketing segment revenue in these respective periods. The increase in Affiliate Marketing segment income from operations and the higher operating margin were attributable to the operating leverage associated with the higher revenue as described above.
 
 Media segment income from operations for the three-month period ended March 31, 2011 increased 2.4%, or $182,000, to $7.8 million, from $7.7 million in the same period of the prior year, and represented 21.7% and 24.9% of Media segment revenue in these respective periods. Operating margin decreased from the prior year due to the lower gross margin as described above as well as higher operating expenses associated with increased headcount in this segment.
 
Owned & Operated Websites segment income from operations for the three-month period ended March 31, 2011 increased to $7.0 million from $4.9 million in the same period of the prior year.  The operating margin for this segment increased to 18.6% compared to 17.5% of Owned & Operated Websites segment revenue in these respective periods, primarily as a result of the higher relative profitability of Investopedia, which was acquired in the third quarter of 2010.
 
Technology segment income from operations for the three-month period ended March 31, 2011 remained consistent at $4.1 million for the three-month periods ended March 31, 2011 and 2010, and represented 51.1% and 51.8% of Technology segment revenue in these respective periods. 
 
Stock-Based Compensation.   Stock-based compensation for the three-month period ended March 31, 2011 remained consistent at $1.9 million compared to $2.0 million for the same period in 2010. We currently anticipate stock-based compensation in the range of $10 million to $11 million for the year ending December 31, 2011. Such amounts may change as a result of higher or lower than anticipated equity award grants to new and existing employees, differences between actual and estimated forfeitures of stock awards, fluctuations in the market value of our common stock, modifications to our existing stock award programs, additions of new stock-based compensation programs, or other factors.
 
Amortization of Intangible Assets.   Amortization of intangible assets remained consistent at $4.9 million for the three-month period ended March 31, 2011 compared to $5.0 million for the same period in 2010. We currently anticipate amortization expense of between $19 million and $21 million for the year ending December 31, 2011. This estimate includes amortization expense of between $4 million and $6 million associated with the Greystripe acquisition that closed on April 21,

22


2011. As the purchase price allocation is yet to be finalized, the amortization expense associated with Greystripe is subject to change.
 
Interest and Other Income, Net. Interest and other income, net decreased to $408,000 for the three-month period ended March 31, 2011 compared to $559,000 for the same period in 2010 due to higher foreign currency exchange losses related to intercompany receivable balances with certain of our European subsidiaries.
 
Income Tax Expense. For the three-month period ended March 31, 2011, we recorded income tax expense of $10.1 million compared to $8.2 million for the same period in 2010. The decrease in the effective income tax rate for the three-month period ended March 31, 2011 to 37.4% from 42.0% in the same period of the prior year was primarily due to certain state tax law changes effective as of January 1, 2011.  We currently anticipate an effective income tax rate for the year ending December 31, 2011 of approximately 38%.
 
Adjusted-EBITDA as a Non-GAAP Financial Performance Measure
 
In evaluating our business, we consider earnings from continuing operations before interest, income taxes, depreciation, amortization, and stock-based compensation ("Adjusted-EBITDA"), a non-GAAP financial measure, as a key indicator of financial operating performance and as a measure of the ability to generate cash for operational activities and future capital expenditures. We use Adjusted‑EBITDA in evaluating the overall performance of our business operations. We believe that this measure may also be useful to investors because it eliminates the effects of period-to-period changes in income from interest on our cash and marketable securities and the costs associated with income tax expense, capital investments, and stock‑based compensation expense which are not directly attributable to the underlying performance of our continuing business operations. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under U.S. Generally Accepted Accounting Principles (“GAAP”), or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted‑EBITDA is a non-GAAP measure, it may not necessarily be comparable to similarly titled measures employed by other companies.
 
The following is a reconciliation of income from continuing operations to Adjusted‑EBITDA:
 
 
Three-month Period Ended March 31,
 
2011
 
2010
 
(in thousands)
Income from continuing operations
$
16,862
 
 
$
11,323
 
   Interest and other income, net
(408
)
 
(559
)
   Income tax expense
10,054
 
 
8,211
 
   Amortization of intangible assets
4,888
 
 
4,966
 
   Depreciation and leasehold amortization
1,754
 
 
1,606
 
   Stock-based compensation
1,917
 
 
1,957
 
Adjusted-EBITDA
$
35,067
 
 
$
27,504
 
 
 
Adjusted-EBITDA for the three-month period ended March 31, 2011 increased to $35.1 million from $27.5 million for the same period in 2010, an increase of $7.6 million, or 27.5%. The increase is primarily due to the growth in our Affiliate Marketing and Owned & Operated Websites segments as described above and lower corporate expenses as compared to the year ago period.
 
Liquidity and Capital Resources
 
In recent years, we have financed our operations, our stock repurchases and our cash acquisitions primarily through working capital generated from operations. At March 31, 2011, our combined cash and cash equivalents balances totaled $199.8 million.
 
Net cash provided by operating activities remained relatively consistent compared to the year ago period, totaling $30.0 million for the three months ended March 31, 2011 compared to $30.6 million in the same period of 2010. An increase in cash resulting from increased operating income in the current period was offset by a decrease in the impact of net working

23


capital changes on cash.
 
Net cash provided by investing activities totaled $2.0 million for the three-month period ended March 31, 2011 compared to net cash used of $2.5 million in the same period of 2010. The increase was due to the sale of marketable securities of $3.0 million, principal payments received on our note receivable of $0.9 million and lower equipment purchases for the three-month period ended March 31, 2011
 
Net cash used by financing activities of $28.6 million for the three months ended March 31, 2011 was primarily related to common stock repurchases of $31.5 million, partially offset by $2.7 million in proceeds received from shares issued under our employee stock programs. Net cash used by financing activities of $24.3 million for the three months ended March 31, 2010 was primarily related to common stock repurchases of $25.3 million, partially offset by $1.1 million in proceeds received from shares issued under our employee stock programs.
 
Marketable Securities
The Company did not hold any marketable securities as of March 31, 2011. Marketable securities as of December 31, 2010 consisted of one auction rate security ("ARS") with a par value and an estimated fair value of $3.0 million. This ARS was sold in January 2011 at its par value.
 
Line of Credit
 
In November 2008, we entered into a $100 million line of credit with a bank group.  The line of credit expires in November 2011 and the availability under the line of credit is subject to our meeting certain financial and non-financial covenants, as more fully described in Note 15.  The line of credit provides us with additional financial flexibility for pursuing acquisitions, repurchasing our common stock, and for general corporate purposes. We have not borrowed against the line of credit, and thus no amount was outstanding against the line of credit at March 31, 2011 and December 31, 2010, respectively.
 
Stock Repurchase Program
 
In September 2001, our board of directors authorized a stock repurchase program (the “Program”) to allow for the repurchase of shares of our common stock at prevailing market prices in the open market or through unsolicited negotiated transactions.  Since the inception of the Program and through December 31, 2010, our board of directors authorized a total of $547.7 million for repurchases under the Program and we have repurchased a total of 54.7 million shares of our common stock for approximately $447.7 million. During the three-month period ended March 31, 2011, we repurchased 2.2 million shares for approximately $31.5 million under the Program. As of March 31, 2011, up to an additional $68.5 million of our capital may be used to repurchase shares of our outstanding common stock under the Program. Subsequent to March 31, 2011, we repurchased 0.4 million shares for $6.2 million, leaving approximately $62.3 million available under the Program as of May 6, 2011.
 
Repurchases have been funded from available working capital, and all shares have been retired subsequent to their repurchase. There is no guarantee as to the exact number of shares that will be repurchased by us, and we may discontinue repurchases at any time that management or our board of directors determines additional repurchases are not warranted. The amounts authorized by our board of directors exclude broker commissions.
 
Commitments and Contingencies
 
Other than certain legal matters described below under Legal Proceedings, there were no significant changes to our commitments and contingencies during the three-month period ended March 31, 2011.
 
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third-parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. We have also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and certain of our officers, employees and former officers, directors and employees of acquired companies, in certain circumstances.
 
It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due

24


to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.
 
Capital Resources
 
We believe that the combination of: our existing cash and cash equivalents; our $100 million line of credit; and our expected future cash flows from operations, will provide us with sufficient liquidity to fund our operations and capital requirements for at least the next twelve months. However, it is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to consummate acquisitions of other businesses, products or technologies. We could raise such funds by selling more stock to the public or to selected investors, or by borrowing, whether under the existing line of credit or a new facility. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities for other reasons. We cannot assure you that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders may be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.
 
Although we believe we have sufficient capital to fund our activities for at least the next twelve months, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:
 
the macroeconomic environment;
 
the market acceptance of our products and services;
 
the levels of promotion and advertising that will be required to launch our new products and services and achieve and maintain a competitive position in the marketplace;
 
our business, product, capital expenditures and technology plans, and product and technology roadmaps;
 
capital improvements to new and existing facilities;
 
technological advances;
 
our competitors’ responses to our products and services;
 
our pursuit of strategic transactions, including mergers and acquisitions;
 
the extent of dislocations in the credit markets in the United States and the related impact on the liquidity of our marketable securities;
 
the timing and outcome of examinations by tax authorities;
 
our stock repurchase program; and
 
our relationships with our advertiser customers and publisher partners.
 
Critical Accounting Policies and Estimates
 
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including, but not limited to, those related to revenue recognition, allowance for doubtful accounts and sales credits, investments, stock-based compensation, income taxes, goodwill and other intangible assets, and contingencies and litigation. We base our estimates and assumptions on historical experience and on various other estimates and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
 

25


There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
 
Recently Issued Accounting Standards
 
In July 2010, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that requires enhanced disclosures regarding the nature of credit risk inherent in an entity's portfolio of financing receivables, how that risk is analyzed, and the changes, as well as the reasons for such changes, in the allowance for credit losses. The guidance requires companies to enhance disclosure about the credit quality of financing receivables and the allowance for credit losses, including credit quality indicators, non-accrual and past due information, impaired loans, and modifications of financing receivables. This guidance became effective for financial statements issued for interim or annual reporting periods ending on or after December 15, 2010. The adoption of this guidance did not have a material impact on our consolidated financial statements.
 
In January 2010, the FASB issued additional authoritative guidance to improve disclosures about fair value measurements. The guidance requires that an entity disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and describe the reasons for the transfers. Furthermore, an entity should present information about purchases, sales, issuances, and settlements for Level 3 fair value measurements. The guidance also clarifies existing disclosures for the level of disaggregation and disclosures about input and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements for the activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. On January 1, 2010, we adopted the disclosure amendments, and on January 1, 2011, we adopted amendments to Level 3 fair value measurements as described above. The adoption of this guidance did not have a material impact on our consolidated financial statements.
 
In October 2009, the FASB issued new accounting guidance related to the recognition of revenue from multiple element arrangements. The new guidance states that if vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, companies are required to develop a best estimate of the selling price for separate deliverables and allocate arrangement consideration using the relative selling price method. In addition, the guidance requires additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements. The guidance is effective prospectively for revenue arrangements entered into or materially modified in annual periods beginning after June 15, 2010. We adopted this guidance as of January 1, 2011. The adoption of this guidance did not have any impact on our consolidated financial statements.
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
INTEREST RATE RISK
 
We do not believe that our current investment activities subject us to significant interest rate risks that could have a material impact on our financial position or results of operations.
 
FOREIGN CURRENCY RISK
 
We transact business in various foreign countries and are thus subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to revenue and operating expenses of our foreign subsidiaries, which denominate their transactions primarily in British Pounds, Euros, Swedish Kronor, Japanese Yen, Korean Won, Chinese Yuan Renminbi, and Canadian dollars. The effect of foreign currency exchange rate fluctuations for the three-month period ended March 31, 2011 was not material to the consolidated results of operations. If there were an adverse change of 10% in overall foreign currency exchange rates over an entire year, the result of translations would be an estimated reduction of revenue of approximately $10.5 million, an estimated reduction of income before income taxes of approximately $2.5 million and an estimated reduction of net assets, excluding intercompany balances, of approximately $9.5 million. While we perform certain hedging activities related to exposures associated with certain intercompany balances with our foreign subsidiaries, we do not hedge all of the foreign exchange related exposures faced by our operations. Accordingly, we may experience economic loss and a negative impact on earnings, cash flows or equity as a result of foreign currency exchange rate fluctuations. As of March 31, 2011, we had $77.5 million in total current assets and $15.6 million in total current liabilities denominated in foreign currencies, including British Pounds, Euros, Swedish Kronor, Japanese Yen, Korean Won, Chinese Yuan Renminbi, and Canadian dollars.
 

26


Our international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign currency exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these or other factors.
 
ITEM 4. CONTROLS AND PROCEDURES
 
(a)
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”), Rules 13a-15(e) and 15d-15(e)) under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.
 
(b)
Changes in Internal Control over Financial Reporting
 
Additionally, our Chief Executive Officer and Chief Financial Officer have determined that there have been no changes to our internal control over financial reporting during the three-month period ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION AND SIGNATURES
 
ITEM 1. LEGAL PROCEEDINGS
 
On April 8, 2008, Hypertouch, Inc. filed an action against the Company in the Superior Court of California, County of Los Angeles. The complaint asserts causes of action for violation of California Business & Professions Code §§ 17529.5 and 17200, et seq., arising from the plaintiff's alleged receipt of a large number of email messages allegedly transmitted by the Company "and/or (the Company's) agents" and seeks statutory damages for each such email. The Company filed its answer to the complaint on May 28, 2008. On May 4, 2009, the court granted the Company's motion for summary judgment which ended the case in this court. Hypertouch appealed the Court's ruling.
 
On January 18, 2011, the Second District of the Court of Appeal for the State of California reversed the lower court's May 4, 2009 summary judgment ruling. The ruling means that the case is remanded back to the lower court to be decided on its merits. In addition, the Court of Appeal ruled that a one-year statute of limitations applies to the emails at issue in the case. This ruling significantly reduces the number of emails at issue in the case.
 
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal proceedings, except as discussed above, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
 
ITEM 1A. RISK FACTORS
 
You should carefully consider the following risks before you decide to buy shares of our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our stock.
 
This report on Form 10-Q contains forward-looking statements based on the current expectations, assumptions, estimates, and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this report on Form 10-Q. We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

27


 
OUR PROFITABILITY MAY NOT REMAIN AT CURRENT LEVELS
 
We face risks that could prevent us from achieving our current profitability levels in future periods. These risks include, but are not limited to, our ability to:
 
adapt our products, services and cost structure to changing macroeconomic conditions;
 
maintain and increase our inventory of advertising space on publisher websites, ad exchanges and other sources;
 
maintain and increase the number of advertisers that use our products and services;
 
continue to expand the number of products and services we offer and the capacity of our systems;
 
adapt to changes in Web advertisers' marketing needs and policies, and the technologies used to generate Web advertisements;
 
respond to challenges presented by the large and increasing number of competitors in the industry;
 
respond to challenges presented by the continuing consolidation within our industry;
 
adapt to changes in legislation, taxation or regulation regarding Internet usage, advertising and e-commerce; and
 
adapt to changes in technology related to online advertising filtering software.
 
If we are unsuccessful in addressing these or other risks and uncertainties, our business, results of operations and financial condition could be materially and adversely affected.
 
OUR REVENUE COULD DECLINE IF WE FAIL TO EFFECTIVELY MANAGE OUR EXISTING ADVERTISING SPACE AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE NEW ADVERTISING SPACE.
 
Our success depends in part on our ability to effectively manage our existing advertising space as well as successfully access advertising space available on ad exchanges and through ad network optimization service providers. The Web publishers that list their unsold advertising space with us are not bound by long-term contracts that ensure us a consistent supply of advertising space, which we refer to as inventory. In addition, Web publishers can change the amount of inventory they make available to us at any time. If a Web publisher decides not to make advertising space from its websites available to us, we may not be able to replace this advertising space with advertising space from other Web publishers that have comparable traffic patterns and user demographics quickly enough to fulfill our advertisers' requests. This would result in lost revenue.
 
We expect that our advertiser customers' requirements will become more sophisticated as the Web continues to mature as an advertising medium. If we fail to manage our existing advertising space effectively to meet our advertiser customers' changing requirements, our revenue could decline. Our growth depends, in part, on our ability to expand our advertising inventory within our networks and to have access to new sources of advertising inventory such as ad exchanges. To attract new customers, we must maintain a consistent supply of attractive advertising space. Our success relies in part on expanding our advertising inventory by selectively adding new Web publishers to our networks that offer attractive demographics, innovative and quality content and growing Web user traffic and email volume. Our ability to attract new Web publishers to our networks and to retain Web publishers currently in our networks will depend on various factors, some of which are beyond our control. These factors include, but are not limited to: our ability to introduce new and innovative products and services, our ability to efficiently manage our existing advertising inventory, our pricing policies, and the cost-efficiency to Web publishers and email list owners of outsourcing their advertising sales. In addition, the number of competing intermediaries that purchase advertising inventory from Web publishers continues to increase. We cannot assure you that the size of our advertising inventory will increase or remain constant in the future.
 
OUR OWNED & OPERATED WEBSITES SEGMENT REVENUE IS SUBJECT TO CUSTOMER CONCENTRATION RISKS. THE LOSS OF ONE OR MORE OF THE MAJOR CUSTOMERS IN OUR OWNED & OPERATED WEBSITES SEGMENT COULD SIGNIFICANTLY AND NEGATIVELY IMPACT THE REVENUE AND PROFITABILITY LEVELS OF THIS SEGMENT.
 
Our Owned & Operated Websites business generates revenue through a combination of: sponsored search listings

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placed on our destination websites, merchant relationships, affiliate marketing networks and display advertising on our destination websites. The majority of the revenue, and approximately one-half of the profitability, in our Owned & Operated Websites segment is generated via sponsored search listings from major search engines. Factors that could cause these relationships to cease or become significantly reduced in scale include, but are not limited to: the non-renewal of our distribution agreement with one or more of the major search engines; the determination by one or more of the major search engines that consumer traffic received from us does not meet their quality standards (in other words, the traffic is not converting at appropriate rates); and changes in the competitive environment, such as industry consolidation. If our relationships with one or more of the major search engines were to cease or become significantly reduced in scale, our revenue and profitability levels could be significantly and negatively impacted. In the fourth quarter of 2009, our largest customer in our Owned & Operated Websites segment made changes that negatively impacted the amount of traffic that we could monetize with them. This change had a significant negative impact on the revenue levels of this segment beginning in the fourth quarter of 2009.
 
CHANGES IN HOW WE GENERATE ONLINE CONSUMER TRAFFIC FOR OUR DESTINATION WEBSITES COULD NEGATIVELY IMPACT OUR ABILITY TO MAINTAIN OR GROW THE REVENUE AND PROFITABILITY LEVELS OF OUR OWNED & OPERATED WEBSITES SEGMENT.
 
We generate online consumer traffic for our destination websites using various methods, including: search engine marketing (SEM), search engine optimization (SEO), organic traffic, email campaigns, and distribution agreements with other website publishers. The current revenue and profitability levels of our Owned & Operated Websites segment are dependent upon our continued ability to use a combination of these methods to generate online consumer traffic to our websites in a cost-efficient manner. Our SEM and SEO techniques have been developed to work with the existing search algorithms utilized by the major search engines. The major search engines frequently modify their search algorithms. Future changes in these search algorithms could change the mix of the methods we use to generate online consumer traffic for our destination websites and could negatively impact our ability to generate such traffic in a cost-efficient manner, which could result in a significant reduction to the revenue and profitability of our Owned & Operated Websites segment. There can be no assurances that we will be able to maintain the current mix of online consumer traffic sources for our destination websites or that we will be able to modify our SEM and SEO techniques to address any future search algorithm changes made by the major search engines.
 
WE MAY FACE INTELLECTUAL PROPERTY ACTIONS THAT ARE COSTLY OR COULD HINDER OR PREVENT OUR ABILITY TO DELIVER OUR PRODUCTS AND SERVICES.
 
We may be subject to legal actions alleging intellectual property infringement (including patent infringement), unfair competition or similar claims against us. Companies may apply for or be awarded patents or have other intellectual property rights covering aspects of our technologies or businesses.  Defending ourselves against intellectual property infringement or similar claims is expensive and diverts management's attention.
 
IF THE TECHNOLOGY THAT WE CURRENTLY USE TO TARGET THE DELIVERY OF ONLINE ADVERTISEMENTS AND TO PREVENT FRAUD ON OUR NETWORKS IS RESTRICTED OR BECOMES SUBJECT TO REGULATION, OUR EXPENSES COULD INCREASE AND WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY.
 
Websites typically place small files of non-personalized (or "anonymous") information, commonly known as cookies, on an Internet user's hard drive. Cookies generally collect information about users on a non-personalized basis to enable websites to provide users with a more customized experience. Cookie information is passed to the website through an Internet user's browser software. We currently use cookies, along with other technologies, as set forth in our privacy policies, for purposes that include, without limitation, improving the experience Web users have when they see Web advertisements, advertising campaign reporting, website reporting and to monitor and prevent fraudulent activity on our networks. Most currently available Internet browsers allow Internet users to modify their browser settings to prevent cookies from being stored on their hard drive, and some users currently do so. Internet users can also delete cookies from their hard drives at any time. Some Internet commentators and privacy advocates have suggested limiting or eliminating the use of cookies, and legislation has been introduced in some jurisdictions to regulate the use of cookie technology. The effectiveness of our technology could be limited by any reduction or limitation in the use of cookies. If the use or effectiveness of cookies were limited, we expect that we would need to switch to other technologies to gather demographic and behavioral information. While such technologies currently exist, they may be less effective than cookies. We also expect that we would need to develop or acquire other technology to monitor and prevent fraudulent activity on our networks. Replacement of cookies could require reengineering time and resources, might not be completed in time to avoid losing customers or advertising inventory, and might not be commercially feasible. Our use of cookie technology or any other technologies designed to collect Internet usage information may subject us to litigation or investigations in the future. Any litigation or government action against us could be costly and

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time consuming, could require us to change our business practices and could divert management's attention.
 
IF WE FAIL TO COMPETE EFFECTIVELY AGAINST OTHER INTERNET ADVERTISING COMPANIES, WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY AND OUR REVENUE AND RESULTS OF OPERATIONS COULD DECLINE.
 
The Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands. The introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our existing products and services obsolete and unmarketable or require unanticipated technology or other investments. Our failure to adapt successfully to these changes could harm our business, results of operations and financial condition.
 
The market for Internet advertising and related products and services is highly competitive. We expect this competition to continue to increase, in part because there are no significant barriers to entry to our industry. Increased competition may result in price reductions for advertising space, reduced margins and loss of market share. Our principal competitors include other companies that provide advertisers with performance-based Internet advertising solutions and companies that offer pay-per-click search services. We compete in the performance-based marketing segment with CPL and CPA performance-based companies, and with other large Internet display advertising networks. In addition, we compete in the online comparison shopping market with focused comparison shopping websites, and with search engines and portals such as Yahoo!, Google and MSN, and with online retailers such as Amazon.com and eBay. Large websites with brand recognition, such as Yahoo!, Google, AOL and MSN, have substantial proprietary online advertising inventory that may provide competitive advantages compared to our networks, and they have the ability to significantly influence pricing for online advertising overall. These companies have longer operating histories, greater name recognition and have greater financial, technical, sales, and marketing resources than we have. Further, Google, Yahoo! and Microsoft have made acquisitions to put them in direct competition with a number of our offerings.
 
Competition for advertising placements among current and future suppliers of Internet navigational and informational services, high-traffic websites and Internet service providers ("ISPs"), as well as competition with other media for advertising placements, could result in significant price competition, declining margins and reductions in advertising revenue. In addition, as we continue our efforts to expand the scope of our Web services, we may compete with a greater number of Web publishers and other media companies across an increasing range of different Web services, including in vertical markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by us, our business, results of operations and financial condition could be negatively affected. We also compete with traditional advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers' total advertising budgets. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical, sales, and marketing resources. As a result, we may not be able to compete successfully. If we fail to compete successfully, we could lose customers or advertising inventory and our revenue and results of operations could decline.
 
WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD HARM OUR BUSINESS.
 
Our success depends in part on the retention of personnel critical to our combined business operations due to, for example, unique technical skills, management expertise or key business relationships. We may be unable to retain existing management, finance, engineering, sales, customer support, and operations personnel that are critical to the success of the Company, which may result in disruption of operations, loss of key business relationships, information, expertise or know-how, unanticipated additional recruitment and training costs, and diminished anticipated benefits of acquisitions, including loss of revenue and profitability.
 
Our future success is substantially dependent on the continued service of our key senior management. Our employment agreements with our key personnel are short-term and on an at-will basis. We do not have key-person insurance on any of our employees. The loss of the services of any member of our senior management team, or of any other key employees, could divert management's time and attention, increase our expenses and adversely affect our ability to conduct our business efficiently. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees. We may be unable to retain our key employees or attract, retain and motivate other highly qualified employees in the future. We have experienced difficulty from time to time in attracting or retaining the personnel necessary to support the growth of our business, and may experience similar difficulties in the future.
 

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DELAWARE LAW AND OUR STOCKHOLDER RIGHTS PLAN CONTAIN ANTI-TAKEOVER PROVISIONS THAT COULD DETER TAKEOVER ATTEMPTS THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS.
 
Provisions of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us, without our board of directors' consent, for at least three years from the date they first hold 15% or more of the voting stock. In addition, our Stockholder Rights Plan has significant anti-takeover effects by causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors.
 
SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, WHICH COULD CAUSE US TO LOSE CUSTOMERS OR ADVERTISING INVENTORY.
 
Our success depends on the continuing and uninterrupted performance of our systems. Sustained or repeated system failures that interrupt our ability to provide services to customers, including failures affecting our ability to deliver advertisements quickly and accurately and to process visitors' responses to advertisements, would reduce significantly the attractiveness of our solutions to advertisers and Web publishers. Our business, results of operations and financial condition could also be materially and adversely affected by any systems damage or failure that impacts data integrity or interrupts or delays our operations. Our computer systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious or accidental human acts, and natural disasters. We lease data center space in various locations in northern and southern California; Virginia; Stockholm, Sweden; and Shanghai, China. Therefore, any of the above factors affecting any of these areas could substantially harm our business. Moreover, despite network security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems in part because we cannot control the maintenance and operation of our third-party data centers. Despite the precautions taken, unanticipated problems affecting our systems could cause interruptions in the delivery of our solutions in the future and our ability to provide a record of past transactions. Our data centers and systems incorporate varying degrees of redundancy. All data centers and systems may not automatically switch over to their redundant counterpart. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems.
 
IT MAY BE DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE BECAUSE OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
 
Our revenue and operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our results of operations as an indication of our future performance. Our results of operations have fallen below the expectations of market analysts and our own forecasts in the past and may also do so in some future periods. If this happens, the market price of our common stock may fall significantly. The factors that may affect our quarterly operating results include, but are not limited to, the following:
 
macroeconomic conditions in the United States, Europe, Asia, and Canada;
 
fluctuations in demand for our advertising solutions or changes in customer contracts;
 
fluctuations in click, lead, action, impression, and conversion rates;
 
fluctuations in the amount of available advertising space, or views, on our networks;
 
the timing and amount of sales and marketing expenses incurred to attract new advertisers;
 
fluctuations in sales of different types of advertising; for example, the amount of advertising sold at higher rates rather than lower rates;
 
fluctuations in the cost of online advertising;
 
seasonal patterns in Internet advertisers' spending;
 
fluctuations in our stock price which may impact the amount of stock-based compensation we are required to record;
 
changes in our pricing and publisher compensation policies, the pricing and publisher compensation policies of our competitors, the pricing and publisher compensation policies of our advertiser customers, or the pricing policies for

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advertising on the Internet generally;
 
changes in the regulatory environment, including regulation of advertising on the Internet, that may negatively impact our marketing practices;
 
possible impairments of the recorded amounts of goodwill, intangible assets, or other long-lived assets;
 
the timing and amount of expenses associated with litigation, regulatory investigations or restructuring activities, including settlement costs and regulatory penalties assessed related to government enforcement actions;
 
the adoption of new accounting pronouncements, or new interpretations of existing accounting pronouncements, that impact the manner in which we account for, measure or disclose our results of operations, financial position or other financial measures;
 
the loss of, or a significant reduction in business from, large customers resulting from, among other factors, the exercise of a cancellation clause within a contract, the non-renewal of a contract or an advertising insertion order, or shifting business to a competitor when the lack of an exclusivity clause exists;
 
fluctuations in levels of professional services fees or the incurrence of non-recurring costs;
 
deterioration in the credit quality of our accounts receivable and an increase in the related provision;
 
changes in tax laws or our interpretation of tax laws, changes in our effective income tax rate or the settlement of certain tax positions with tax authorities as a result of a tax audit; and
 
costs related to acquisitions of technologies or businesses.
 
Expenditures by advertisers also tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. Any decline in the economic prospects of advertisers or the economy generally may alter advertisers' current or prospective spending priorities, or may increase the time it takes us to close sales with advertisers, and could materially and adversely affect our business, results of operations, cash flows and financial condition.
 
OUR EXPANDING INTERNATIONAL OPERATIONS SUBJECT US TO ADDITIONAL RISKS AND UNCERTAINTIES AND WE MAY NOT BE SUCCESSFUL WITH OUR STRATEGY TO CONTINUE TO EXPAND SUCH OPERATIONS.
 
We initiated operations, through wholly-owned subsidiaries or divisions, in the United Kingdom in 1999, France and Germany in 2000, Sweden in 2004, Japan and China in 2007, Spain and Ireland in 2008, and Korea, South Africa and Canada in 2010. Our international expansion and the integration of international operations present unique challenges and risks to our company, and require management attention. Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business in international jurisdictions and could interfere with our ability to offer our products and services to one or more countries or expose us or our employees to fines and penalties. These laws and regulations include, but are not limited to, content requirements, tax laws, data privacy and filtering requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials, such as the U.K. Bribery Act. Violations of these laws and regulations could result in monetary damages, criminal sanctions against us, our officers, or our employees, and prohibitions on the conduct of our business. Our continued international expansion also subjects us to additional foreign currency exchange rate risks and will require additional management attention and resources. We cannot assure you that we will be successful in our international expansion. Our international operations and expansion subject us to other inherent risks, including, but not limited to:
 
the impact of recessions in economies outside of the United States;
 
changes in and differences between regulatory requirements between countries;
 
U.S. and foreign export restrictions, including export controls relating to encryption technologies;
 
reduced protection for and enforcement of intellectual property rights in some countries;
 
potentially adverse tax consequences;

32


 
difficulties and costs of staffing and managing foreign operations;
 
political and economic instability;
 
tariffs and other trade barriers; and
 
seasonal reductions in business activity.
 
Our failure to address these risks adequately could materially and adversely affect our business, revenue, results of operations, cash flows and financial condition.
 
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM UNAUTHORIZED USE, WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTS AND SERVICES, WEAKEN OUR COMPETITIVE POSITION AND REDUCE OUR REVENUE.
 
Our success depends in large part on our proprietary technologies, including tracking management software, our affiliate marketing technologies, our display advertising technologies, our technology, including SEM technology that runs our owned and operated websites, and our MOJO platform. In addition, we believe that our trademarks are key to identifying and differentiating our products and services from those of our competitors. We may be required to spend significant resources to monitor and police our intellectual property rights. If we fail to successfully enforce our intellectual property rights, the value of our products and services could be diminished and our competitive position may suffer.
 
We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Third-party software providers could copy or otherwise obtain and use our technologies without authorization or develop similar technologies independently, which may infringe upon our proprietary rights. We may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technologies or develop competing technologies. Intellectual property protection may also be unavailable or limited in some foreign countries.
 
We generally enter into confidentiality or license agreements with our employees, consultants, vendors, customers, and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to disclose, obtain or use our products and services or technologies. Our precautions may not prevent misappropriation of our products, services or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.
 
GOVERNMENT ENFORCEMENT ACTIONS, CHANGES IN GOVERNMENT REGULATION, TECHNICAL PROPOSALS AND INDUSTRY STANDARDS, INCLUDING, BUT NOT LIMITED TO, SPYWARE, PRIVACY AND EMAIL MATTERS, COULD DECREASE DEMAND FOR OUR PRODUCTS AND SERVICES AND INCREASE OUR COSTS OF DOING BUSINESS.
Laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent. These regulations could affect the costs of communicating on the Web and could adversely affect the demand for our advertising solutions or otherwise harm our business, results of operations and financial condition. The United States Congress has enacted Internet legislation regarding children's privacy, copyrights, sending of commercial email (e.g., the Federal CAN-SPAM Act of 2003), and taxation. The United States Congress has passed legislation regarding spyware (i.e., H.R. 964, the "Spy Act of 2007") and the New York Attorney General's office has also pursued enforcement actions against companies in this industry. In addition, on December 1, 2010, the FTC issued its long-awaited staff report criticizing industry self-regulatory efforts as too slow and lacking adequate protections for consumers and emphasizing a need for simplified notice, choice and transparency to the consumer of the collection, use and sharing of their data. The FTC suggests various methods and measures, including an implementation of a "Do Not Track" mechanism - likely a persistent setting on consumers' browsers-that consumers can choose whether to allow the tracking of their online searching and browsing activities. As a result of the report, some of the browser makers have been working on their own do-not-track technical solutions, notably Microsoft Internet Explorer, Mozilla Firefox, Apple Safari and Google Chrome. Microsoft's Internet Explorer 9 offers a tracking protection feature that doesn't allow for tracking by allowing internet users to download tracking protection block lists which consequently block any third-party domain included in such block lists from serving content. This content-blocking feature, depending on the adoption by internet users, may adversely affect our ability to grow our company, maintain our current revenues and

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profitability, serve and monetize content and utilize our behavioral targeting platform. Legislatively on the federal level, there have been a number of House bills that have been introduced addressing online privacy, including Congressman Bobby Rush's Best Practices Act - H.R. 611, Congressman Cliff Stearns' Consumer Privacy Protection Act of 2011, and Congresswoman Jackie Speier's Do Not Track Me Online Act of 2011 - H.R. 654. In the Senate, Senators John Kerry and John McCain have introduced bipartisan privacy legislation (the Commercial Privacy Bill of Rights Act of 2011) that is designed to establish a regulatory framework for the comprehensive protection of personal data for individuals under the aegis of the Federal Trade Commission and for other purposes, including requiring that information that is used for online behavioral advertising that is not “sensitive personally identifiable information” be subject to clear, concise and timely notice and opt-out. On the state level, California has introduced a “Do Not Track Bill” - S.B. 761 that legislates the collection and use of information transmitted online. There are others within the House and the Senate and possibly other states that are looking to introduce bills regarding the privacy of online and offline data. These bills, if passed, could hinder growth in the use of the Web generally and adversely affect our business. Other laws and regulations have been adopted and may be adopted in the future, and may address issues such as user privacy, spyware, "do not email" lists, pricing, intellectual property ownership and infringement, copyright, trademark, trade secret, export of encryption technology, acceptable content, search terms, lead generation, behavioral targeting, taxation, and quality of products and services. Such measures could decrease the acceptance of the Web as a communications, commercial and advertising medium. We have policies to prohibit abusive Internet behavior, including prohibiting the use of spam and spyware by our Web publisher partners.
WE COULD BE SUBJECT TO LEGAL CLAIMS, GOVERNMENT ENFORCEMENT ACTIONS AND DAMAGE TO OUR REPUTATION AND HELD LIABLE FOR OUR OR OUR CUSTOMERS' FAILURE TO COMPLY WITH FEDERAL, STATE AND FOREIGN LAWS, REGULATIONS OR POLICIES GOVERNING CONSUMER PRIVACY, WHICH COULD MATERIALLY HARM OUR BUSINESS.
Recent growing public concern regarding privacy and the collection, distribution and use of information about Internet users has led to increased federal, state and foreign scrutiny and legislative and regulatory activity concerning data collection and use practices. The United States Congress and the State of California currently have pending legislation regarding privacy and data security measures, as detailed in the above previous paragraph. Any failure by us to comply with applicable federal, state and foreign laws and the requirements of regulatory authorities may result in, among other things, indemnification liability to our customers and the advertising agencies we work with, administrative enforcement actions and fines, class action lawsuits, cease and desist orders, and civil and criminal liability. Recently, class action lawsuits have been filed alleging violations of privacy laws by ISPs. The European Union's directive addressing data privacy limits our ability to collect and use information regarding Internet users. These restrictions may limit our ability to target advertising in most European countries. Our failure to comply with these or other federal, state or foreign laws could result in liability and materially harm our business.
In addition to government activity, privacy advocacy groups and the technology and direct marketing industries are considering various new, additional or different self-regulatory standards. This focus, and any legislation, regulations or standards promulgated, may impact us adversely. Governments, trade associations and industry self-regulatory groups may enact more burdensome laws, regulations and guidelines, including consumer privacy laws, affecting our customers and us. Since many of the proposed laws or regulations are just being developed, and a consensus on privacy and data usage has not been reached, we cannot yet determine the impact these proposed laws or regulations may have on our business. However, if the gathering of profiling information were to be curtailed, Internet advertising would be less effective, which would reduce demand for Internet advertising and harm our business.
Third parties may bring class action lawsuits against us relating to online privacy and data collection. We disclose our information collection and dissemination policies, and we may be subject to claims if we act or are perceived to act inconsistently with these published policies. Any claims or inquiries could be costly and divert management's attention, and the outcome of such claims could harm our reputation and our business.
Our customers are also subject to various federal and state laws concerning the collection and use of information regarding individuals. These laws include the Children's Online Privacy Protection Act, the Federal Drivers Privacy Protection Act of 1994, the privacy provisions of the Gramm-Leach-Bliley Act, the Federal CAN-SPAM Act of 2003, as well as other laws that govern the collection and use of consumer credit information. We cannot assure you that our customers are currently in compliance, or will remain in compliance, with these laws and their own privacy policies. We may be held liable if our customers use our technologies in a manner that is not in compliance with these laws or their own stated privacy policies.
 
OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY.
 
Our common stock has been publicly traded since March 30, 2000. The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering. The stock market has from time to time

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experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology companies. As a result, the market price of our common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We were involved in this type of litigation, which arose shortly after our stock price dropped significantly during the third quarter of 2007. Litigation of this type is often expensive and diverts management's attention and resources.
 
SEVERAL STATES HAVE IMPLEMENTED OR PROPOSED REGULATIONS THAT IMPOSE SALES TAX ON CERTAIN E-COMMERCE TRANSACTIONS INVOLVING THE USE OF AFFILIATE MARKETING PROGRAMS.
 
In 2008, the state of New York implemented regulations that require advertisers to collect and remit sales taxes on sales made to residents of New York if the affiliate/publisher that facilitated that sale is a New York-based entity. In 2011, the state of Illinois implemented similar regulations. In addition, several other states, including California, have proposed similar regulations, although most of the regulations proposed by these other states have not passed. While the New York sales tax requirement has not had a material impact on our Affiliate Marketing segment results of operations, and the Illinois sales tax requirement is not expected to have a material impact on our Affiliate Marketing segment results of operations, we are unable to determine the impact on our Affiliate Marketing business if other states adopt similar requirements.
IF OUR NOTE RECEIVABLE BECOMES UNCOLLECTIBLE, WE WOULD BE REQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS.
As more fully described in Note 6 to our condensed consolidated financial statements, we sold our Web Clients business on February 1, 2010 in exchange for a note receivable with a fair market value of $32.8 million. If this note receivable were to become uncollectible, we would be required to take a charge against earnings for the amount of the note that becomes uncollectible. This may have an adverse impact on our results of operations.
 
WE MAY BE REQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS IF OUR GOODWILL OR AMORTIZABLE INTANGIBLE ASSETS BECOME IMPAIRED.
 
As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, we recorded an impairment charge as of December 31, 2008 related to our goodwill and amortizable intangible assets totaling $269.5 million.  As of March 31, 2011, we have $184.8 million and $29.1 million of goodwill and amortizable intangible assets, respectively, remaining.
 
We perform our annual impairment analysis of goodwill as of December 31 of each year, or sooner if we determine there are indicators of impairment, in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Under GAAP, the impairment analysis of goodwill must be based on estimated fair values. The determination of fair values requires assumptions and estimates of many critical factors, including, but not limited to: expected operating results; macroeconomic conditions; our stock price; earnings multiples implied in acquisitions in the online marketing industry; industry analyst expectations; and the discount rates used in the discounted cash flow analysis. We are required to perform our next goodwill impairment analysis at December 31, 2010.  If macroeconomic conditions deteriorate in 2011 or our stock price experiences declines, we may be required to record additional impairment charges in the future.
 
We are also required under GAAP to review our amortizable intangible assets for impairment whenever events and circumstances indicate that the carrying value of such assets may not be recoverable. We may be required to record a significant charge to earnings in a period in which any impairment of our goodwill or amortizable intangible assets is determined.
 
WE MAY INCUR LIABILITIES TO TAX AUTHORITIES IN EXCESS OF AMOUNTS THAT HAVE BEEN ACCRUED WHICH MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
 
As more fully described in Note 12 to our condensed consolidated financial statements, we have recorded significant income tax liabilities. The preparation of our condensed consolidated financial statements requires estimates of the amount of income tax that will become payable in each of the jurisdictions in which we operate. We may be challenged by the taxing authorities in these jurisdictions and, in the event that we are not able to successfully defend our position, we may incur significant additional income tax liabilities and related interest and penalties which may have an adverse impact on our results of operations and financial condition.
 
 

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IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD AND OUR BUSINESS MAY BE HARMED AND OUR STOCK PRICE MAY BE ADVERSELY IMPACTED.
 
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting. We determined that our internal control over financial reporting was effective as of December 31, 2010. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls, we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(c) Purchases of Equity Securities — The table below summarizes the Company’s repurchases of common stock during the three months ended March 31, 2011.
 
Period
 
Total Number
of Shares
Purchased (1)
 
Average Price
Paid per
Share (2)
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Approximate
Dollar Value of Shares
 that May Yet Be
Purchased Under the
Plans or Programs
January 1, 2011 through January 31, 2011
 
 
 
$
 
 
 
 
$ 100.0 million
 
 
 
 
 
 
 
 
 
February 1, 2011 through February 28, 2011
 
 
 
 
 
 
 
$ 100.0 million
 
 
 
 
 
 
 
 
 
March 1, 2011 through March 31, 2011
 
2,170,561
 
 
14.51
 
 
2,170,561
 
 
$ 68.5 million
 
 
 
 
 
 
 
 
 
Total
 
2,170,561
 
 
$
14.51
 
 
2,170,561
 
 
$ 68.5 million
____________________
(1)        In September 2001, the Company’s board of directors authorized a stock repurchase program (the “Program”) to allow for the repurchase of shares of the Company’s common stock at prevailing market prices in the open market or through unsolicited negotiated transactions.  Since the inception of the Program and through December 31, 2010, the Company’s board of directors authorized a total of $547.7 million for repurchases under the Program and the Company had repurchased a total of 54.7 million shares of its common stock for approximately $447.7 million. During the three-month period ended March 31, 2011, the Company repurchased 2.2 million shares for approximately $31.5 million under the Program. As of March 31, 2011, up to an additional $68.5 million of the Company’s capital may be used to repurchase shares of the Company’s outstanding common stock under the Program. Subsequent to March 31, 2011, the Company repurchased 0.4 million shares for $6.2 million, leaving approximately $62.3 million available under the Program as of May 6, 2011.
      
Repurchases have been funded from available working capital and all shares have been retired subsequent to their repurchase. There is no guarantee as to the exact number of shares that will be repurchased by the Company, and the Company may discontinue repurchases at any time that management or the Company’s board of directors determines additional repurchases are not warranted. The amounts authorized by the Company’s board of directors exclude broker commissions.
 
(2)            Includes commissions paid.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 

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ITEM 4. RESERVED
 
ITEM 5. OTHER INFORMATION
 
None.
 
ITEM 6. EXHIBITS
 
(a)           Exhibits:
 
Exhibit
Number
 
Exhibit
Description
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 6, 2011
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 6, 2011
 
 
 
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 6, 2011
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document.
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
*
XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.
 

37


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
VALUECLICK, INC. (Registrant)
 
 
 
 
 
 
 
 
 
 
By:
/s/ JOHN PITSTICK
 
 
 
John Pitstick
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)
Dated:
May 6, 2011
 
 

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