Its been a brutal market lately especially for any company that doesn’t stack up to expectations. When investors are hitting the exits, it doesn’t take much to cause panic and ValueClick (VCLK) certainly did the trick this morning with their earnings announcement.

Revenue came in at $148.7m for the quarter and EPS was at 17 cents. The earnings were at the low end of previously issued guidance and Revenue and EBITDA numbers were below guidance. Furthermore, the company revised expectations for Q3 and 2007 as a whole with EPS for the year only expected to be .74 to .76. This was a giant disappointment to the street and the stock quickly sold down over 20% as disillusioned investors turned tail and ran.

In looking through a transcript of the conference call and reading the press release, there were very few bright spots to point to. Management noted strong performance in UK but that was due to new management for the business segment (reading between the lines, the old guy wasn’t getting the job done so its only natural a new manager would get results.) The company also pointed to an acquisition of MeziMedia which is a bolt on purchase that should give the company a leading position in US comparison shopping. However, comparison shopping revenue was down quarter over quarter even AFTER this acquisition which means the business must be extremely cyclical or under pressure.

One of the biggest negatives in looking at this stock (and the sector in general) is scrutiny over promotion based advertising. At this point there are several FTC investigations in the area and customers are unwilling to spend marketing dollars in this area. This will likely continue to be a drag on the company and may at some point require significant litigation and defense expenses. It is hard to quantify this liability but it is important for any investor to know the wildcard is out there.

On the positive side, the company has no debt and appears to have adequate working capital for the time being. Weakness in the debt market and a falling equity valuation make it less likely that the company will be able to pursue acquisitions of any size, but it is expected they will be able to maintain current business practices for the next few years at least. At depressed prices, it is possible that the company could be a takeout candidate, but the easy environment for dealmaking appears to have become much more difficult.

I ended the week with a decent short position in VCLK through some puts I was long. As the stock traded down today I used the opportunity to lock in some of my gains by buying stock. I expect that over the next week or two, the stock will bounce as investors digest the information and short positions are closed. However, this appears to be a longer-term negative story and I would consider selling my long stock in the mid 20’s and giving it another chance to trade lower. This may be getting too “cute” with my positions, but I do believe the pressure will remain for some time.

VCLK Notes

FD: Author has a short position in VCLK

Additional Reading:

Jon Ogg gives his initial take on the VCLK earnings report

A quick bit on VCLK and MNST as possible buyout candidates