Description

VCLK is the global leader in performance-based internet advertising. Post-merger with Be Free, accomplished at a price below Be Free’s existing cash, VCLK has now achieved operational break-even, without debt, and with a net cash position of $2.98 per share. The shares currently trade at $2.46, and 20% discount to cash.

VCLK offers advertisers and marketers—and their advertising agencies—internet ad-serving (placement) on VCLK’s network of over 14,000 affiliate web-sites, plus increasingly complete and sophisticated software-based analytical tools. Ad-serving, including sophisticated interactive, sorting, and tracking capabilities is an automated and scalable process generating better than 65% gross margins during its most recent (Q2 ’02) quarter—despite a very challenging advertising environment.

During the recent advertising downturn, VCLK has leveraged its strong balance sheet to make selective and acretive acquisitions (primarily using stock) within the on-line advertising industry. Most recently these acquisitions were achieved at prices below the acquired companies net cash positions. This consolidation has added to their network of website publishers and advertisers and, at the same time, allowed VCLK to offer increasingly more sophisticated and diverse services to their clients…in effect becoming a one-stop shop for advertisers wishing to grow their presence on-line.

VCLK also offers their website publisher/affiliates an efficient out-sourced advertising revenue lifeline. Most of VCLK’s network of website publishers are small-to-medium traffic sites (that have been carefully selected for content) who can ill-afford to build and maintain full-time ad-sales organizations, nor compete with VCLK’s technological capabilities. VCLK is using its network and technological expertise to bring together many buyers with many sellers. This classic "switchboard" profit model—similar to what Ebay, and Charles Schwab have achieved, the latter with its successful mutual fund supermarket asset gathering concept. This creates a potentially very profitable and defensible competitive advantage allowing VCLK to extends its lead in the performance-based advertising space. By aggregating these, mostly small-to-medium traffic web-sites, which in total reach 38.5% of internet users each month, VCLK can offer online advertisers and marketers an attractive and manageable solution. The online demographic is skewed toward the young, educated, and affluent. That combines with VCLK’s offer to website publishers to efficiently sell their space inventory to dependable, high-profile click-and-mortar advertisers. (VCLK counts GM, Coca-Cola, Heineken, Sara Lee, GlaxoSmithKline, Citigroup, American Express, British Airways, Hyatt, Michelin, SBC, Sears, ESPN, Samsung, Kellogg, Renault, Panasonic, Sprint, Verizon and McCann Erickson among its past and current advertising client list.)

What is “performance-based” advertising?
VCLK is the leader in providing online advertisers and publishers advertising models known as cost-per-click (CPC), cost-per-action (CPA), and cost-per-lead (CPL) in which an advertiser only pays VCLK (and VCLK only pays a website publisher) when an Internet user clicks on an advertiser's banner ad or performs a specific action, such as a software download, an online registration or some other transaction. VCLK also does provide advertisers with the ad model known as cost-per-thousand-impressions (CPM)--the traditional ad media model--whereby the advertiser pays for the number of times an ad is viewed.

Advertisers (or their ad agencies) deliver to VCLK their (digital) ad materials which are placed on VCLKs ad-servers for distribution on their Network of websites, either on a comprehensive (all sites) or on a pre-selected targeted basis. Ads are served, and Internet user actions and impressions are counted, sorted, and analyzed automatically. (This is a very scalable model.) Computer networks are fundamentally more 'intelligent' than traditional media, that is they can 'keep track of' users and their actions and preferences—even make recommendations based on user actions-- in a way that traditional (non-interactive) media cannot. VCLK emphasizes this inherent advantage in its CPC, CPA, CPL ad models.


The combined (post-BE FREE merger) VCLK currently has a negative enterprise value: 92.5 million diluted shares x $2.46 current share price= $227.55 mm, plus .3mm in debt--$228 mm—less $276mm in cash and securities = EV (-$48.2mm)

Recently released Q2 ’02 Revenues (with one month of Be Free which closed in late May, 02): $14.1 mm. On a pro-forma basis VCLK was cash earnings positive--$17K. (Non cash restructuring charges were $2.32mm attributable to the Be Free merger.)
Q3 ’02 Revenues are expected (with a full quarter of Be Free contribution) to be: $18-18.5mm and GAAP earnings guidance of (.01). Full 2002 Revenues are conservatively expected to be $64-67mm, and VCLK expects to be GAAP earnings positive--.01—in Q4 '02.


VCLK is successfully consolidating the performance-based online advertising industry, solidifying its leading position in a way that continues to attract leading advertisers and affiliates. The current proposition for value investors is that the company is trading at a 20% discount to cash, and has matured to the point where it is generating cash on an operating basis. Longer term this combines with the promise that, once online advertising revenues revive, this is a scalable model that will allow incremental topline dollars to flow powerfully through to earnings.

Catalyst

VCLK is just exiting its end-of-quarter quiet period with $33mm in still unspent share buyback authorization. Having reached positive cash earnings, management seems intent on buying in shares immediately to eliminate the discount to cash.