• by Laurie Petersen , July 31, 2007

ValueClick shares dropped as much as 23.5% on Monday after company executives reported that its promotional lead generation business--now subject to an industrywide regulatory probe--took a "disappointing" $10 million hit in the second quarter that overshadowed gains in its display advertising, behavioral targeting, affiliate marketing and comparison shopping businesses.

"The promotion-based sector suffered a downturn that began in late May and became more pronounced in June, which negatively impacted our quarter," said CEO Tom Vadnais, in an early morning earnings call that ValueClick accelerated by nine days.

ValueClick said second-quarter earnings rose to $17.6 million, or 17 cents per share, from $14.4 million, or 14 cents per share a year ago. However, this fell short of the consensus analyst estimate of 18 cents per share. In addition, the company reported a gross profit for the quarter of $99.6 million--up 13% compared to the same period in 2006.

Westlake Village, Calif.-based ValueClick cut its guidance for the year, and said it now expects $645 million to $660 million in sales for 2007--down from previous expectations of $655 million to $665 million.

The company also announced the completion of its MeziMedia acquisition, which in addition to U.S. comparison shopping scale brings it additional search marketing and search engine optimization capabilities that can benefit the rest of the ValueClick display network, Vadnais said.

The stock began to recover slowly as the day wore on and closed in New York on Monday at 21.01, still down 19.22%.

Ironically, the dip in price had multiple analysts upgrading their ratings and suggesting the company is now in a better buyout position. (ValueClick stock had hit a high of $36.70 in May during the height of the M&A frenzy in the online advertising space, putting it out of reach of many acquirers.)

"We will soon be the only independent ad-serving company of size," Vadnais reiterated in his opening remarks. Advertisers and publishers uneasy about all their data being in one place if the Google/DoubleClick deal is approved, are inquiring into ValueClick's services, he said.

A lingering cloud is the ongoing Federal Trade Commission investigation into the incentivized lead generation industry. The timing of any FTC determination or action remains unknown, said Sam Paisley, ValueClick's chief administrative officer, who characterized the current probe (kicked off in May) as "long and agonizing" compared to earlier Can-SPAM and spyware reviews.

Company officials conceded that both publishers and advertisers have pulled back from promotional lead generation, some of it attributable to the uncertainty of the FTC's intentions.

"What's absent in the current environment, and what's frustrating," said Paisley, "is some guidelines that make it clear for us what we're dealing with, [and that] would level the playing field for all competitors. There are no clear bright lines and no clear indication of when the FTC will come out with new regulations."

Executive Chairman James Zarley said the company plans to cut $7 million in cost from the lead generation business through headcount reduction and technology consolidation. He said 20 jobs have been cut to date, and more will follow.

While ValueClick delivered its sobering news about lead generation, other parts of the business registered strength--including behavioral targeting and comparison shopping, Paisley said.

"Last quarter we said we expected display advertising growth would overcome lead generation growth," Paisley said. "We didn't realize how quickly that was going to happen. Clearly, display is growing at a pace much quicker than lead generation overall."

Meanwhile, he said, "full-motion video is probably occurring as an opportunity for the industry a lot slower than anybody anticipated."

More than 25 million shares of ValueClick changed hands in regular Monday trading--nearly eight times the stock's average. ValueClick also said it would increase its stock repurchase plan to $100 million.

"I'm not certain the promotional lead generation business will ever recover [to its prior levels]. I think it will stabilize," said RBC Capital Markets analyst Jordan Rohan after the ValueClick call. "Everything we've said has been playing out in a more accelerated fashion than we had expected. This was close to a bombshell."

In a Monday afternoon research note, Rohan upgraded ValueClick to "sector perform" and reduced the target stock price from $24 to $20. "We believe ValueClick is worth $20 per share with zero contribution from lead-gen (promotional or other)," Rohan wrote. "While the FTC investigation and reduced outlook could impair private market multiples, we believe there could be strategic buyers for the assets in the $20-$24 range."