CORPORATE FOCUS—Internet Ad Firm Struggles In a Brave New Economy

If it can happen to Yahoo, what chance does a small Internet advertising agency have? The obvious answer is not much. But ValueClick has, so far at least, defied expectations. The two-year-old Westlake Village-based company sells advertising space on Web sites with a formula that allows advertisers to pay only when users click through to their site. So far at least, the so-called “performance-based” advertising strategy has helped ValueClick withstand a downturn in Internet advertising revenue that has even affected sales and earnings at the industry’s premier company, Yahoo. But with Internet ad revenues expected to shrink further and hundreds of e-businesses expected to depart, the company’s outlook is less certain. “From the rear view mirror the business looks pretty good,” said Lanny Baker, a research analyst with Salomon Smith Barney in San Francisco. “Looking ahead, it looks challenging. It’s going to be tough.” For the fourth quarter ended Dec. 31, 2000, ValueClick reported pro forma operating income of $1.3 million or 4 cents per diluted share. When merger-related costs and other expenses are included, the company’s net loss for the quarter was $57.5 million on revenues of $15.3 million. (Analysts regard pro forma operating income a more accurate measure of performance because it reflects the profit actually generated from the business.) By comparison, ValueClick generated pro forma operating income of $2.1 million for the final quarter of 1999 or 14 cents per share on a diluted basis and a net loss of $968,000 or 6 cents per diluted share for the period on revenues of $12.3 million. For the full year, ValueClick’s pro forma operating income amounted to $6.8 million or 23 cents per diluted share compared to $4.5 million or 30 cents per diluted share in 1999. The company’s net loss for 2000 was $55.6 million or $1.89 per diluted share on revenues of $56.7 million, compared to a net loss of $1.2 million or 8 cents per diluted share on revenues of $24.8 million for the year ended Dec. 31, 1999. Officials at ValueClick declined comment for this story, saying they were unavailable the week of March 12, but analysts attributed the company’s performance to its results-oriented strategy. “Their focus on results insulates them somewhat from the confusion surrounding brand advertising,” said Jordan Rohan, a principal with Wit Soundview, a New York-based investment banking firm. “Over time the cost-per-click model will emerge as a dominant form of direct marketing on the web.” No longer content to hang their brand shingle on every site that boasts a large volume of hits, advertisers are now looking for assurances that their ad dollars will lead directly to potential customers, and they are cutting their ad spending accordingly. For the first time since the Internet Advertising Bureau began tracking spending in 1996, Internet ad revenue in the third quarter of 2000, the most recent period for which data is available, fell by 6.5 percent to $1.97 billion. “We’re not going to see people spending furiously,” said Aubie Goldenberg, a partner and area director for e-business services at Ernst & Young LLP. Such thinking has sent ValueClick stock prices plummeting from its initial public offering price of $19 per share last March when the company put 4 million shares on the Nasdaq market. Except for a brief rise to $24, ValueClick’s share price has declined steadily since then, trading in the high $3 range most recently. On Friday, March 16, shares in ValueClick were trading at $3.53. Analysts have retained a buy rating on the stock, largely because its share price comes close to its cash value. But they caution that ValueClick has a lot of work to do to raise its stock price, including integrating four recent acquisitions it made to boost its client base and expand services: Click Agents Inc., Bach Systems Inc., Z Media Inc. and StraightUP! ValueClick is likely to face fierce competition as e-businesses continue to fall and others cut spending. “Some of (ValueClick’s) competitors have been laying off people and scaling back and, if the numbers are any indication, a shakeout is going to come hard and fast and knock people for a loop,” Salomon’s Baker said.