A Tale of Two Ad Networks

Two ad networks released their first quarter earnings reports Thursday evening and Friday morning — and a quick glance at them highlights the strengths and weaknesses of each one’s approach to online advertising.

Los Angeles-based L90, a poster-child for the “beyond the banner” movement, Thursday posted a quarter that saw system revenue drop 40 percent from the previous quarter, to $10.6 million. Meanwhile, Westlake Village, Calif.’s ValueClick posted pro forma earnings of a penny on Friday — beating the Street’s breakeven predictions.

L90 has long focused on migrating away from banner ad revenue. Indeed, only about 25 percent of the company’s current revenue comes from media sales into banners, said L90’s president and chief executive, John Bohan. The rest comes from a diversified product lineup that includes private-label sweepstakes and ad serving technology.

But in spite of L90’s relative insulation from the problems of efficacy and branding afflicting banner advertising, the network’s bottom line still took a hit from the larger decline in ad spending.

On a pro forma basis, the company posted a loss of $0.28 per share, or $6.8 million, in line with Street consensus according to First Call/Thompson Financial. The company posted a net loss of $7.1 million, or $0.30 per share.

ValueClick’s better-than-expected performance, meanwhile, suggests that a diversified product line isn’t always enough for players in the online advertising sector. Instead, ValueClick’s before-charges profit has more to do with an inherent difference between it and its largest competitors: results-based pricing.

A lineup of cost-per-click and cost-per-action media, and co-registration products isn’t necessarily bulletproof. By charging only when consumers click on an ad, make a purchase, or register for information, ValueClick arguably misses some opportunity to charge advertisers for Web ads’ branding effects.

The firm is striving to overcome this through the recent acquisition of an ROI measurement service to help detect see-now, buy-later Web traffic. But until it becomes easier for the company to track offline conversions — that occur when a Web surfer sees a banner but buys in a brick-and-mortar store — pay-for-performance ad plays will miss a portion of potential revenue.

But in the meantime, ValueClick’s concentration on pay-for-performance deals has protected it from the precipitous drop in CPM pricing — the same decline that’s hurt all the major ad networks, including L90, and ad rep firms like Phase2Media.

One reason for that protection is that pay-for-performance deals often are extremely appealing to advertisers, since it’s easy to come up with a clear figure for ROI.

“ValueClick’s strong profit margins reflect our ability to maintain pricing structures while continuing to reduce costs and achieve operating synergies,” said chairman and chief exertive Jim Zarley. “While we’re certainly pleased with our performance in these respects, we still have a great deal of work to do in terms of top-line revenue growth in this challenging environment.”

While ValueClick is crafting advertiser-focused CPA/CPC deals, L90’s Bohan meanwhile says his company will remain focused on creating deals and products that focus on the publisher side. That’s in spite of the problems with CPM pricing.

“We see L90 as the only viable competitor that is truly committed to building the number one advertising sales representation and ad serving technology that aligns itself on the sell side of the business, or with the Web publishing community,” he told analysts in a call Thursday evening. “Many companies align themselves on the buy side, or the advertiser end of the business. We believe there are significantly higher margins, less competition, and more longevity, on the sell side, or the publishing end of the business.”

“L90 believes our media sales business could be extremely profitable,” he added, and pointed to L90’s increase in gross margins from 42.4 to 54.8 percent of system revenue — due in part to higher commission rates on the L90 Network.

Granted, L90 has a harder road ahead of it — it has to survive the shakeout among ad networks amid falling CPM pricing and larger competitors like DoubleClick, Engage and 24/7 Media.

But Bohan said Thursday that he wasn’t worried, and he sees DoubleClick as L90’s “only viable competitor in the sector,” and added that he’s expecting to capture market share from the players who fall out of the field.

“I believe that this time next year, we will be serving 20 to 25 billion impressions per month,” Bohan said, describing an increase from the 7 billion L90 is handling currently. “Part of this growth will come from shakeout in the industry, as several of our competitors continue to struggle and provide more opportunity for L90. In fact, during the first quarter alone, we had 55 competitive flips from DoubleClick, Engage and 24/7.”

“I’m not going to deny that marketplace conditions are softer than we hoped for,” he said. “But I am going to say we see a tremendous opportunity for L90. We believe that great businesses are built in bad times.”

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