QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 1, 2011 was 79,145,386.
Intangible assets acquired in business combinations, net
47,366
33,525
Deferred tax assets, less current portion
45,548
49,360
Other assets
1,092
1,258
TOTAL ASSETS
$
624,871
$
613,567
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses
$
98,438
$
100,974
Other current liabilities
1,719
2,284
Total current liabilities
100,157
103,258
Income taxes payable
37,593
36,595
Deferred tax liabilities
889
1,073
TOTAL LIABILITIES
138,639
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 June 30, 2011 and December 31, 2010
—
—
Common stock, $0.001 par value; 500,000,000 shares authorized; 79,129,258 and 80,974,145 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively
79
81
Additional paid-in capital
529,328
555,859
Accumulated other comprehensive loss
(108
)
(6,389
)
Accumulated deficit
(43,067
)
(76,910
)
Total stockholders’ equity
486,232
472,641
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
624,871
$
613,567
See accompanying Notes to Condensed Consolidated Financial Statements
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 and mobile applications. In addition, in April 2011, the Company acquired the leading brand-focused mobile advertising network, Greystripe, Inc. ("Greystripe"), and has integrated Greystripe into its Media segment. ValueClick Media and Greystripe (collectively "ValueClick Media") are able to access their customers' target audiences through the unique combination of: proprietary broad-based network of thousands of high-quality online publishers; proprietary relationships with leading mobile application developers; 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 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 branded websites, including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com, and 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 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 May 2011, the Financial Accounting Standards Board ("FASB") issued new accounting guidance that amends some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The Company will adopt this accounting standard upon its effective date for periods ending on or after December 15, 2011, and does not anticipate that this adoption will have a significant impact on its financial position or results of operations.
In June 2011, the FASB issued authoritative guidance related to the presentation of other comprehensive income. The guidance requires companies to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders' equity. This standard is effective for interim and annual periods beginning after December 15, 2011 and requires retrospective application. Because this guidance affects financial statement presentation only, it will have no effect on the Company's financial position, results of operations or cash flows.
3. STOCK-BASED COMPENSATION
In the three-month periods ended June 30, 2011 and 2010, the Company recognized stock-based compensation of $2.6 million and $2.2 million, respectively. In the six-month periods ended June 30, 2011 and 2010, the Company recognized stock-based compensation of $4.5 million and $4.2 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- and six-month periods ended June 30, 2011 and 2010 (in thousands):
Three-month Period Ended June 30,
Six-month Period Ended June 30,
2011
2010
2011
2010
Sales and marketing
$
533
$
332
$
819
$
660
General and administrative
1,676
1,660
3,089
3,097
Technology
405
208
623
400
Stock-based compensation
2,614
2,200
4,531
4,157
Related income tax benefits
(890
)
(772
)
(1,661
)
(1,486
)
Stock-based compensation, net of tax benefits
$
1,724
$
1,428
$
2,870
$
2,671
4. RECENT BUSINESS COMBINATIONS
Greystripe, Inc. On April 21, 2011, the Company completed the acquisition of Greystripe, a brand-focused mobile advertising network. Under the terms of the agreement, the Company acquired all outstanding equity interests in Greystripe for cash consideration of $70.6 million. The Company incurred $127,000 in transaction costs, which is recorded in the "General and administrative expense" caption in the accompanying Condensed Consolidated Statements of Operations.
Greystripe provides the Company with immediate scale in the U.S. mobile advertising market. This factor contributed to a purchase price in excess of the fair value of Greystripe's net tangible and intangible assets acquired, and, as a result, the Company has recorded goodwill in connection with this transaction. The results of Greystripe's operations are included in the Company's consolidated financial statements beginning on April 21, 2011.
The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on the estimated fair values, and the useful lives, in years, assigned to intangible assets, is as follows (in thousands):
The identifiable intangible assets, goodwill and deferred income taxes resulting from this acquisition are based upon preliminary valuation assumptions and may change based on final analysis. Any such change may result in reclassification between identifiable intangible assets, goodwill and deferred income taxes.
The Company does not expect any goodwill to be tax deductible. The Company does not consider the acquisition of Greystripe material for purposes of further disclosure.
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 $45.0 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 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):
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 $45.0 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 June 30, 2011 and December 31, 2010 (in thousands):
June 30, 2011
December 31, 2010
Note receivable, gross
$
40,524
$
42,348
Discount
(8,549
)
(9,712
)
Note receivable, net of discount
31,975
32,636
Less: current portion
(1,465
)
(1,369
)
Note receivable, less current portion
$
30,510
$
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 June 30, 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 June 30, 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 and $2.2 million for the three- and six-month periods ended June 30, 2011. Total interest income related to this note was $1.1 million and $1.9 million for the three- and six-month periods ended June 30, 2010.
The changes in the carrying amount of goodwill, by reporting unit, for the six-month period ended June 30, 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
338
143
1,221
1,702
Tax adjustments
—
(9
)
—
(9
)
Acquisition
—
47,263
—
47,263
Balance at June 30, 2011
$
30,779
$
153,311
$
48,084
$
232,174
Goodwill, accumulated impairment losses and the net carrying amount of goodwill, by reporting unit, as of June 30, 2011 were as follows (in thousands):
Affiliate
Marketing
Media
Owned &
Operated
Websites
Total
Goodwill
$
30,779
$
265,311
$
258,084
$
554,174
Accumulated impairment losses
—
(112,000
)
(210,000
)
(322,000
)
Goodwill, net
$
30,779
$
153,311
$
48,084
$
232,174
The gross balance, accumulated amortization and net carrying amount of the Company’s intangible assets as of June 30, 2011 and December 31, 2010 were as follows (in thousands):
Gross
Balance
Accumulated
Amortization
Net Carrying
Amount
June 30, 2011:
Customer, affiliate and advertiser relationships
$
51,624
$
(35,870
)
$
15,754
Trademarks, trade names and domain names
30,950
(18,961
)
11,989
Developed technologies and websites
46,456
(28,654
)
17,802
Covenants not to compete
9,420
(7,599
)
1,821
Total intangible assets
$
138,450
$
(91,084
)
$
47,366
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 six-month period ended June 30, 2011, the increase in the gross intangible assets balance was primarily due to the acquisition of Greystripe of $24.3 million and foreign currency translation adjustments of approximately $1.6 million, offset by a $7.5 million write-off of a fully amortized customer relationship asset. The Company recognized amortization expense of $6.1 million and $4.9 million on intangible assets for the three-month periods ended June 30, 2011 and 2010, respectively. Amortization expense was $11.0 million and $9.9 million for the six-month periods ended June 30, 2011 and 2010, respectively. Estimated intangible asset amortization expense for the remainder of 2011, the succeeding five years and thereafter, is as follows (in thousands):
Accounts receivable are stated net of an allowance for doubtful accounts and sales credits of $4.1 million at June 30, 2011 and $4.0 million at December 31, 2010. No customers accounted for more than 10% of the accounts receivable balance at June 30, 2011 or December 31, 2010.
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2011 and December 31, 2010 (in thousands):
June 30, 2011
December 31, 2010
Computer equipment and purchased software
$
36,823
$
34,582
Furniture and equipment
4,499
4,464
Leasehold improvements
2,840
2,415
Property and equipment, gross
44,162
41,461
Less: accumulated depreciation and amortization
(29,993
)
(29,047
)
Total property and equipment, net
$
14,169
$
12,414
10. FAIR VALUE MEASUREMENT OF ASSETS
As of June 30, 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 immaterial 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.
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. A trial date in this matter has been set for April of 2012.
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- and six-month periods ended June 30, 2011, the Company’s liability for unrecognized tax benefits increased by $0.3 million and $0.7 million, respectively, as a result of income tax positions taken during the period, resulting in a total liability for unrecognized tax benefits at June 30, 2011 of $32.5 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 June 30, 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 $0.4 million and $0.7 million in gross interest and penalties expense related to unrecognized tax benefits in each of the three-month periods ended June 30, 2011 and 2010, respectively. During the six-month periods ended June 30, 2011 and 2010, the Company recognized $0.7 million and $1.3 million, respectively, in gross interest and penalties expense related to unrecognized tax benefits. The Company had an accrual for interest and penalties in the amount of $6.3 million and $5.6 million at June 30, 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. The Company repurchased 0.4 million shares for $6.2 million and 2.6 million shares for $37.7 million during the three- and six-month periods ended June 30, 2011, respectively. As of June 30, 2011, up to an additional $62.3 million of the Company’s capital may be used to repurchase shares of the Company’s outstanding common stock under the Program.
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.
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 June 30,
Six-month Period Ended June 30,
2011
2010
2011
2010
Net income
$
16,981
$
12,042
$
33,843
$
33,271
Weighted-average common shares outstanding - basic
78,981
81,551
79,829
82,218
Dilutive effect of stock options and employee benefit plans
1,078
661
1,018
632
Number of shares used to compute net income per common share - diluted
80,059
82,212
80,847
82,850
Net income per common share:
Basic
$
0.22
$
0.15
$
0.42
$
0.40
Diluted
$
0.21
$
0.15
$
0.42
$
0.40
Employee stock-based awards totaling 429,000 shares and 2,297,000 shares during the three-month periods ended June 30, 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. For the six-month periods ended June 30, 2011 and 2010, the number of anti-dilutive shares excluded from the diluted net income per common share computation was 665,000 and 2,452,000, respectively.
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 June 30, 2011 and December 31, 2010, 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 June 30, 2011 and December 31, 2010, the Company was in compliance with all of the financial covenants of the Line of Credit.
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 June 30,
2011
2010
2011
2010
(in thousands)
Affiliate Marketing
$
32,616
$
28,738
$
19,116
$
15,274
Media
42,986
31,637
9,008
7,566
Owned & Operated Websites
40,554
31,986
8,895
5,510
Technology
9,092
7,610
4,730
3,775
Inter-segment revenue
(186
)
(370
)
—
—
Total
$
125,062
$
99,601
$
41,749
$
32,125
Revenue
Segment Income
from Continuing Operations
Six-month Period Ended June 30,
2011
2010
2011
2010
(in thousands)
Affiliate Marketing
$
67,090
$
58,097
$
39,605
$
31,323
Media
79,188
62,440
16,856
15,232
Owned & Operated Websites
78,501
59,883
15,942
10,394
Technology
17,173
15,504
8,859
7,863
Inter-segment revenue
(379
)
(641
)
—
—
Total
$
241,573
$
195,283
$
81,262
$
64,812
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 June 30,
Six-month Period Ended June 30,
2011
2010
2011
2010
Segment income from operations
$
41,749
$
32,125
$
81,262
$
64,812
Corporate expenses
(6,454
)
(6,452
)
(12,654
)
(13,241
)
Stock-based compensation
(2,614
)
(2,200
)
(4,531
)
(4,157
)
Amortization of intangible assets
(6,147
)
(4,936
)
(11,035
)
(9,902
)
Consolidated income from operations
$
26,534
$
18,537
$
53,042
$
37,512
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):
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.
The Company’s geographic information was as follows (in thousands):
Revenue
Three-month Period Ended June 30,
Six-month Period Ended June 30,
2011
2010
2011
2010
United States
$
98,107
$
78,628
$
189,005
$
153,041
United Kingdom
14,661
11,452
29,376
22,754
Other countries
13,770
10,707
26,079
21,770
Inter-regional eliminations
(1,476
)
(1,186
)
(2,887
)
(2,282
)
Total
$
125,062
$
99,601
$
241,573
$
195,283
Income from Operations
Three-month Period Ended June 30,
Six-month Period Ended June 30,
2011
2010
2011
2010
United States
$
24,152
$
15,384
$
47,672
$
31,055
United Kingdom
3,567
2,180
7,217
4,528
Other countries
(1,185
)
973
(1,847
)
1,929
Total
$
26,534
$
18,537
$
53,042
$
37,512
For the three-month periods ended June 30, 2011 and 2010, one customer, Google, accounted for approximately 17.2% and 15.0%, respectively, of total revenue. For the six-month periods ended June 30, 2011 and 2010, one customer, Google, accounted for approximately 16.6% and 14.1%, respectively, of total revenue. Revenue from Google is recognized entirely in the Company's Owned & Operated Websites segment.
17. SUBSEQUENT EVENTS
On August 1, 2011, the Company signed an Agreement and Plan of Merger with Dotomi, Inc., a provider of data driven display marketing solutions. The closing of the acquisition is subject to customary closing conditions, including regulatory review, and is expected to be completed before the end of the third quarter of 2011. The total merger consideration is approximately $295 million, plus unvested equity awards assumed by the Company with an estimated value of approximately $15 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.
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.
We generate the audiences for our advertisers' campaigns through a combination of: networks of third-party websites, ad exchanges, mobile applications, spot buys from large publisher partners, and search engines. We optimize these inventory sources for specific marketing goals, and deliver the campaigns across the appropriate sources to meet our advertisers' target campaign metrics. As a result of our significant customer relationships and ability to access large volumes of online and mobile inventory, we are one of the industry's largest 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.
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 and mobile applications. In addition, in April 2011, we acquired the leading brand-focused mobile advertising network, Greystripe, and have integrated Greystripe into our Media segment. ValueClick Media and Greystripe (collectively "ValueClick Media") are able to access their customers' target audiences through the unique combination of: proprietary broad-based network of thousands of high-quality online publishers; proprietary relationships with leading mobile application developers; 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 branded websites, including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com, and 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.
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.
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 June 30,
Six-month Period
Ended June 30,
2011
2010
2011
2010
(in thousands)
Affiliate Marketing
Revenue
$
32,616
$
28,738
$
67,090
$
58,097
Cost of revenue
4,314
4,418
8,638
8,437
Gross profit
28,302
24,320
58,452
49,660
Operating expenses
9,186
9,046
18,847
18,337
Segment income from operations
$
19,116
$
15,274
$
39,605
$
31,323
Media
Revenue
$
42,986
$
31,637
$
79,188
$
62,440
Cost of revenue
23,082
16,908
42,795
32,761
Gross profit
19,904
14,729
36,393
29,679
Operating expenses
10,896
7,163
19,537
14,447
Segment income from operations
$
9,008
$
7,566
$
16,856
$
15,232
Owned & Operated Websites
Revenue
$
40,554
$
31,986
$
78,501
$
59,883
Cost of revenue
11,954
5,434
20,030
10,517
Gross profit
28,600
26,552
58,471
49,366
Operating expenses
19,705
21,042
42,529
38,972
Segment income from operations
$
8,895
$
5,510
$
15,942
$
10,394
Technology
Revenue
$
9,092
$
7,610
$
17,173
$
15,504
Cost of revenue
888
860
1,806
1,625
Gross profit
8,204
6,750
15,367
13,879
Operating expenses
3,474
2,975
6,508
6,016
Segment income from operations
$
4,730
$
3,775
$
8,859
$
7,863
Reconciliation of segment income from operations to consolidated income from operations:
Total segment income from operations
$
41,749
$
32,125
$
81,262
$
64,812
Corporate expenses
(6,454
)
(6,452
)
(12,654
)
(13,241
)
Stock-based compensation
(2,614
)
(2,200
)
(4,531
)
(4,157
)
Amortization of intangible assets
(6,147
)
(4,936
)
(11,035
)
(9,902
)
Consolidated income from operations
$
26,534
$
18,537
$
53,042
$
37,512
Reconciliation of segment revenue to consolidated revenue:
RESULTS OF OPERATIONS—THREE-MONTH PERIOD ENDED JUNE 30, 2011 COMPARED TO JUNE 30, 2010
Revenue. Consolidated revenue for the three-month period ended June 30, 2011 was $125.1 million compared to $99.6 million for the same period in 2010, representing a 25.6% increase, or $25.5 million.
Affiliate Marketing segment revenue increased to $32.6 million for the three-month period ended June 30, 2011 compared to $28.7 million in the same period in 2010. This increase of $3.9 million, or 13.5%, 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 on our network did not have a significant impact on Affiliate Marketing revenue in the three-month period ended June 30, 2011.
Media segment revenue increased to $43.0 million for the three-month period ended June 30, 2011 compared to $31.6 million for the same period in 2010. The increase of $11.3 million, or 35.9%, in Media segment revenue was primarily attributable to our larger media sales organization in the United States as compared to the year ago period, which allowed us to more effectively participate in the strong online display advertising market, and the acquisition of Greystripe, which contributed $3.7 million of revenue during the period from its acquisition date, April 21, 2011, through June 30, 2011.
Owned & Operated Websites segment revenue increased to $40.6 million for the three-month period ended June 30, 2011 compared to $32.0 million in the same period in 2010. The increase of $8.6 million, or 26.8%, 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. Owned & Operated Websites segment revenue is concentrated with two major customers, Google and Yahoo!. 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 $9.1 million for the three-month period ended June 30, 2011 compared to $7.6 million for the same period in 2010, an increase of $1.5 million, or 19.5%. The increase in revenue was due to higher volumes of ad serving in both our domestic and 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, CPM, or cost-per-lead 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 $40.1 million for the three-month period ended June 30, 2011 compared to $27.3 million for the same period in 2010, an increase of $12.8 million, or 46.6%. Our consolidated gross margin was 67.9% and 72.5% for the three-month periods ended June 30, 2011 and 2010, respectively. Consolidated gross margin decreased from the year ago period due to a mix shift in traffic acquisition sources for the Owned & Operated Websites segment as discussed below.
Cost of revenue for the Affiliate Marketing segment remained consistent at $4.3 million for the three-month period ended June 30, 2011 compared to $4.4 million for the same period in 2010. Our Affiliate Marketing gross margin increased to 86.8% for the second quarter of 2011 compared to 84.6% for the same period in 2010 due to the leverage associated with increased revenue.
Cost of revenue for the Media segment increased $6.2 million, or 36.5%, to $23.1 million for the three-month period ended June 30, 2011 compared to $16.9 million for the same period in 2010 due to the increase in revenue. Our Media segment gross margin remained flat at 46.3% for the three-month period ended June 30, 2011 compared to 46.6% for the same period in 2010.
Cost of revenue for the Owned & Operated Websites segment increased $6.5 million to $12.0 million for the three-month period ended June 30, 2011 compared to $5.4 million for the same period in 2010. Our Owned & Operated Websites segment gross margin decreased to 70.5% for the second quarter of 2011 from 83.0% for the same period in 2010 due to a mix shift in this segment's traffic acquisition strategies, which increased the mix of consumer traffic coming from distribution partners with a revenue-share relationship, and decreased the mix of consumer traffic coming from sources that we pay on a CPC basis. Traffic costs purchased on a CPC basis are included in sales and marketing expense. The mix shift of traffic sources did not have a material impact on the overall operating margin of the Owned & Operated Websites segment, as discussed below.
Technology segment cost of revenue remained flat at $0.9 million for the three-month periods ended June 30, 2011 and 2010. Our Technology segment gross margin increased to 90.2% for the three-month period ended June 30, 2011 compared to 88.7% for the same period in 2010 due to the operating leverage associated with the higher revenue.
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 June 30, 2011 were $27.9 million compared to $27.1 million for the same period in 2010, an increase of $0.8 million, or 2.8%. Increases in sales and marketing expenses as a result of increased headcount were offset by lower online advertising costs in our Owned & Operated segment due to a shift in that segment's traffic acquisition strategies, as discussed above. Our sales and marketing expenses as a percentage of revenue decreased to 22.3% for the three-month period ended June 30, 2011 compared to 27.2% 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 increased to $13.6 million for the three-month period ended June 30, 2011 compared to $13.4 million for the same period in 2010, an increase of $0.2 million. As a percentage of revenue, general and administrative expenses decreased to 10.8% compared to 13.4% for the year-ago period.
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 June 30, 2011 were $10.9 million, or 8.7% of revenue, compared to $8.3 million, or 8.3% of revenue, for the same period in 2010, an increase of $2.6 million, or 30.7%. The increase in technology expenses was primarily due to increased salaries and wages as a result of increased headcount to support the growth in our business.
Segment Income from Operations. Affiliate Marketing segment income from operations for the three-month period ended June 30, 2011 increased 25.2%, or $3.8 million, to $19.1 million, from $15.3 million in the same period of the prior year, and represented 58.6% and 53.1% 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 June 30, 2011 increased 19.1%, or $1.4 million, to $9.0 million, from $7.6 million in the same period of the prior year, and represented 21.0% and 23.9% of Media segment revenue in these respective periods. Operating margin decreased from the prior year primarily due to higher operating expenses associated with increased headcount in this segment as well as the acquisition of Greystripe, which currently has an operating margin that is less than other components of this segment due to investments to drive growth in the mobile advertising market.
Owned & Operated Websites segment income from operations for the three-month period ended June 30, 2011 increased to $8.9 million from $5.5 million in the same period of the prior year. The operating margin for this segment increased to 21.9% compared to 17.2% 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 June 30, 2011 was $4.7 million and $3.8 million for the three-month periods ended June 30, 2011 and 2010, and represented 52.0% and 49.6% of Technology segment revenue in these respective periods. The increase in Technology segment income from operations and the higher operating margin were attributable to the operating leverage associated with the higher revenue as described above.
Stock-Based Compensation. Stock-based compensation for the three-month period ended June 30, 2011 increased to $2.6 million compared to $2.2 million for the same period in 2010. The increase in stock-based compensation is primarily due to stock options assumed in connection with the acquisition of Greystripe. 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 increased to $6.1 million for the three-month period ended June 30, 2011 compared to $4.9 million for the same period in 2010. The increase in amortization of intangible assets is due to the acquisition of Greystripe. 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, 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 $0.7 million for the three-month period ended June 30, 2011 compared to $2.4 million for the same period in 2010, as the year ago period included foreign currency exchange gains of $1.3 million while the current period included foreign currency exchange losses of $0.4 million.
Income Tax Expense. For the three-month period ended June 30, 2011, we recorded income tax expense of $10.2 million compared to $8.9 million for the same period in 2010. The decrease in the effective income tax rate for the three-month period ended June 30, 2011 to 37.5% from 42.6% 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%.
RESULTS OF OPERATIONS—SIX-MONTH PERIOD ENDED JUNE 30, 2011 COMPARED TO JUNE 30, 2010
Revenue. Consolidated revenue for the six-month period ended June 30, 2011 was $241.6 million compared to $195.3 million for the same period in 2010, representing a 23.7% increase, or $46.3 million.
Affiliate Marketing segment revenue increased to $67.1 million for the six-month period ended June 30, 2011 compared to $58.1 million in the same period in 2010. This increase of $9.0 million, or 15.5%, 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 on our network did not have a significant impact on Affiliate Marketing revenue in the six-month period ended June 30, 2011.
Media segment revenue increased to $79.2 million for the six-month period ended June 30, 2011 compared to $62.4 million for the same period in 2010. The increase of $16.7 million, or 26.8%, in Media segment revenue was primarily attributable to our larger media sales organization in the United States as compared to the year ago period, which allowed us to more effectively participate in the strong online display advertising market, and the acquisition of Greystripe, which contributed $3.7 million of revenue during the six-month period ended June 30, 2011.
Owned & Operated Websites segment revenue increased to $78.5 million for the six-month period ended June 30, 2011 compared to $59.9 million in the same period in 2010. The increase of $18.6 million, or 31.1%, 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. Owned & Operated Websites segment revenue is concentrated with two major customers, Google and Yahoo!. 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 $17.2 million for the six-month period ended June 30, 2011 compared to $15.5 million for the same period in 2010, an increase of $1.7 million, or 10.8%. The increase in revenue was due to higher volumes of ad serving in both our domestic and 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. Our consolidated cost of revenue was $73.0 million for the six-month period ended June 30, 2011 compared to $52.8 million for the same period in 2010, an increase of $20.1 million, or 38.1%. Our consolidated gross margin was 69.8% and 72.9% for the six-month periods ended June 30, 2011 and 2010, respectively.
Cost of revenue for the Affiliate Marketing segment increased $0.2 million, or 2.4%, to $8.6 million for the six-month period ended June 30, 2011 compared to $8.4 million for the same period in 2010 due to the increase in revenue. Our Affiliate Marketing gross margin increased to 87.1% for the second quarter of 2011 compared to 85.5% for the same period in 2010 due to the leverage associated with higher revenue as described above.
Cost of revenue for the Media segment increased $10.0 million, or 30.6%, to $42.8 million for the six-month period ended June 30, 2011 compared to $32.8 million for the same period in 2010 due to the increase in revenue. Our Media segment
gross margin remained relatively consistent at 46.0% for the six-month period ended June 30, 2011 compared to 47.5% for the same period in 2010.
Cost of revenue for the Owned & Operated Websites segment increased $9.5 million to $20.0 million for the six-month period ended June 30, 2011 compared to $10.5 million for the same period in 2010. Our Owned & Operated Websites segment gross margin decreased to 74.5% for the first quarter of 2011 from 82.4% for the same period in 2010 due primarily to the mix shift in this segment's traffic acquisition strategies, which increased the mix of consumer traffic coming from distribution partners with a revenue-share relationship.
Technology segment cost of revenue increased $0.2 million, or 11.1%, to $1.8 million for the six-month period ended June 30, 2011 compared to $1.6 million for the same period in 2010. Our Technology segment gross margin remained flat at 89.5% for the six-month periods ended June 30, 2011 and 2010.
Operating Expenses:
Sales and Marketing. Total sales and marketing expenses for the six-month period ended June 30, 2011 were $57.4 million compared to $51.6 million for the same period in 2010, an increase of $5.8 million, or 11.2%. Sales and marketing expenses increased due primarily 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 decreased to 23.8% for the six-month period ended June 30, 2011 compared to 26.4% for the same period in 2010.
General and Administrative. General and administrative expenses decreased to $26.1 million, or 10.8% of revenue, for the six-month period ended June 30, 2011 compared to $27.2 million, or 13.9% of revenue, for the same period in 2010, a decrease of $1.1 million, or 4.0%. 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 for the six-month period ended June 30, 2011 were $21.0 million, or 8.7% of revenue, compared to $16.2 million, or 8.3% of revenue, for the same period in 2010, an increase of $4.8 million, or 29.5%. 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 six-month period ended June 30, 2011 increased 26.4%, or $8.3 million, to $39.6 million, from $31.3 million in the same period of the prior year, and represented 59.0% and 53.9% 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 six-month period ended June 30, 2011 increased 10.7%, or $1.6 million, to $16.9 million, from $15.2 million in the same period of the prior year, and represented 21.3% and 24.4% 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 six-month period ended June 30, 2011 increased to $15.9 million from $10.4 million in the same period of the prior year an increase of $5.5 million, or 53.4%. The operating margin for this segment increased to 20.3% compared to 17.4% 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 six-month period ended June 30, 2011 increased to $8.9 million for the six-month period ended June 30, 2011 compared to $7.9 million for the same period of the prior year, and represented 51.6% and 50.7% of Technology segment revenue in these respective periods.
Stock-Based Compensation. Stock-based compensation for the six-month period ended June 30, 2011 of $4.5 million was relatively consistent with the $4.2 million of stock based compensation for the same period in 2010.
Amortization of Intangible Assets. Amortization of intangible assets increased to $11.0 million for the six-month period ended June 30, 2011 compared to $9.9 million for the same period in 2010. This increase is due to the acquisition of Greystripe during the second quarter of 2011 and Investopedia during the third quarter of 2010.
Interest and Other Income, Net. Interest and other income, net decreased to $1.1 million for the six-month period ended June 30, 2011 compared to $3.0 million for the same period in 2010 due to foreign currency exchange losses in the current year compared to foreign currency exchange gains in the prior year period.
Income Tax Expense. For the six-month period ended June 30, 2011, we recorded income tax expense of $20.3 million compared to $17.1 million for the same period in 2010. The decrease in the effective income tax rate for the six-month period ended June 30, 2011 to 37.5% from 42.3% in the same period of the prior year was primarily due to certain state tax law changes effective as of January 1, 2011.
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 net income to Adjusted‑EBITDA for the three- and six-month periods ended June 30, 2011 and 2010 (in thousands):
