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TMCNet:  VALUECLICK INC/CA - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[February 27, 2013]

VALUECLICK INC/CA - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this annual report on Form 10-K beginning on page F-1.


The following discussion contains forward-looking statements based on the current expectations, assumptions, estimates, and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in Item 1A "Risk Factors" and elsewhere in this annual report on Form 10-K. We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview ValueClick is one of the world's largest and most comprehensive digital marketing services companies. Our customers include direct marketers, brand advertisers and the advertising agencies that service these groups. We offer a suite of products and services that enable marketers to engage with their current and potential customers online and through mobile devices to increase brand awareness and generate leads and sales. We also offer technology infrastructure tools 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. The broad range of products and services that we provide enables our customers to address all aspects of the digital marketing process, including strategic planning, ad creation and optimization, media sourcing, and sophisticated reporting and analytics.

In 2011, we acquired Dotomi, Inc. ("Dotomi"), completed on August 31, 2011, and Greystripe, Inc. ("Greystripe"), completed on April 21, 2011. On August 3, 2010, we completed the acquisition of Investopedia.com ("Investopedia"). The results of operations of Dotomi, Greystripe and Investopedia have been included in our consolidated results of operations beginning September 1, 2011, April 22, 2011 and August 4, 2010, respectively. Note 3 to our consolidated financial statements included in this annual report on Form 10-K provides unaudited pro forma revenue, net income and basic and diluted net income per common share for the year ended December 31, 2011 and 2010 as if the acquisition of Dotomi occurred as of January 1, 2010. The results of operations of Greystripe and Investopedia were immaterial to our consolidated financial statements for the periods prior to their acquisition and have therefore been excluded from our pro forma disclosure herein.

In September 2012, we completed the disposition of our Search123 business. In February 2010, we completed the disposition of our Web Clients subsidiary. The results of operations of Search123 and Web Clients have been classified as discontinued operations in our consolidated financial statements. All current year and prior year financial information discussed herein pertains to the remaining continuing operations.

In periods prior to the second quarter of 2012, we derived our revenue from four business segments: Affiliate Marketing, Media, Owned & Operated Websites, and Technology. With the continued evolution of our products and services (including elements of shared computing infrastructure and overlapping services), and changes to our internal reporting structure, we reassessed our operating and reportable segments in the second quarter of 2012 and determined that our Mediaplex business, which previously comprised the Technology segment, no longer met the definition of an operating segment. Our Mediaplex business is now included in the Media operating segment. With this change, we now operate in three business segments: Affiliate Marketing, Media and Owned & Operated Websites, which are described in more detail below. All prior period segment information herein has been recast to conform to this presentation. Each of our three business segments is described in Item 1 "Business" of this annual report on Form 10-K.

Our operations and financial performance depend on general economic conditions.

The economies in which we primarily operate have experienced, and could continue to experience, an economic downturn due to various factors including: challenges in worldwide credit markets, slower economic activity, decreased consumer confidence, high consumer debt levels and unemployment rates, and other adverse business conditions. Such fluctuations in these economies could cause, among other things, deterioration and continued decline in business and consumer spending, reductions in our customers' advertising budgets, and a decrease in demand for the types of online marketing services we provide or the products our customers offer.

25-------------------------------------------------------------------------------- These factors have negatively impacted our revenue levels in the past and could continue to negatively impact our business in the future.

The following table provides revenue, gross profit, operating expenses, and income from operations information for each of our three business segments.

Segment income from operations, as shown below, excludes the effects of stock-based compensation, amortization of intangible assets and corporate expenses, as these items are excluded from the segment performance measures utilized by our chief operating decision maker in evaluating the performance of the segments. 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.

For the Year Ended December 31, 2012 2011 2010 (in thousands) Affiliate Marketing Segment Revenue $ 149,527 $ 139,409 $ 124,126 Cost of revenue 17,546 17,125 17,215 Gross profit 131,981 122,284 106,911 Operating expenses 40,631 37,711 37,359 Segment income from operations $ 91,350 $ 84,573 $ 69,552 Media Segment Revenue $ 390,635 $ 261,324 $ 169,041 Cost of revenue 152,197 113,763 77,168 Gross profit 238,438 147,561 91,873 Operating expenses 118,233 72,984 41,650 Segment income from operations $ 120,205 $ 74,577 $ 50,223 Owned & Operated Websites Segment Revenue $ 121,058 $ 128,419 $ 117,630 Cost of revenue 69,678 81,118 75,847 Gross profit 51,380 47,301 41,783 Operating expenses 23,337 21,468 17,756 Segment income from operations $ 28,043 $ 25,833 $ 24,027 Reconciliation of segment income from operations to consolidated income from operations: Total segment income from operations $ 239,598 $ 184,983 $ 143,802 Corporate expenses (29,061 ) (26,531 ) (26,663 ) Stock-based compensation (21,767 ) (14,022 ) (7,944 ) Amortization of acquired intangible assets included in consolidated cost of revenue (9,995 ) (9,633 ) (7,522 ) Amortization of acquired intangible assets included in consolidated operating expenses (22,420 ) (16,646 ) (13,089 ) Consolidated income from operations $ 156,355 $ 118,151 $ 88,584 Reconciliation of segment revenue to consolidated revenue: Affiliate Marketing $ 149,527 $ 139,409 $ 124,126 Media 390,635 261,324 169,041 Owned & Operated Websites 121,058 128,419 117,630 Inter-segment eliminations (342 ) (399 ) (914 ) Consolidated revenue $ 660,878 $ 528,753 $ 409,883 26-------------------------------------------------------------------------------- RESULTS OF OPERATIONS-Fiscal Years Ended December 31, 2012 and 2011 Revenue. Consolidated revenue for the year ended December 31, 2012 was $660.9 million, representing a 25.0% increase from the prior year total of $528.8 million.

Affiliate Marketing segment revenue increased to $149.5 million for the year ended December 31, 2012 compared to $139.4 million in 2011. This increase of $10.1 million, or 7.3%, was attributable to growth in our domestic operations, partially offset by a decrease in revenue from our international operations. Our domestic growth 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 year ended December 31, 2012.

Media segment revenue increased to $390.6 million for the year ended December 31, 2012 compared to $261.3 million for 2011. This increase was primarily attributable to the inclusion of a full year of results from Dotomi and Greystripe, which we acquired on August 31, 2011 and April 21, 2011, respectively, and growth in these businesses in 2012.

Owned & Operated Websites segment revenue decreased to $121.1 million for the year ended December 31, 2012 compared to $128.4 million in 2011. The decrease of $7.4 million, or 5.7%, was primarily attributable to our de-emphasizing certain lower margin traffic acquisition strategies in 2012. Our Owned & Operated Websites segment revenue is concentrated with one major customer, Google. A loss of, or reduction of revenue from, this customer could have a significant negative impact on the revenue and profitability of this segment and the company.

Cost of Revenue and Gross Profit. Cost of revenue includes payments to website publishers, payments to search engines for driving consumer traffic to our owned and operated websites, certain labor costs that are directly related to revenue-producing activities, Internet access costs, amortization of developed technology and websites acquired in business combinations, and depreciation on revenue-producing technologies.

Costs associated with payments to search engines for driving consumer traffic to our owned and operated websites were, prior to the fourth quarter of 2011, classified in operating expenses in the Sales and marketing expense line item.

In the fourth quarter of 2011, we began classifying these costs in Cost of revenue. Additionally, we corrected the accounting classification of the amortization of developed technologies and websites acquired in business combinations by including it in Cost of revenue beginning in the fourth quarter of 2011. These reclassifications are more fully described in Note 1 to our consolidated financial statements. Amortization related to developed technologies and websites acquired in business combinations was previously recorded in operating expenses in the Amortization of intangible assets acquired in business combinations line item. All periods presented in the Consolidated Statements of Comprehensive Income included herein are presented using the new classifications.

Consolidated cost of revenue was $249.3 million for the year ended December 31, 2012 compared to $221.4 million in 2011, an increase of $27.9 million, or 12.6%.

Our consolidated gross margin increased to 62.3% for the year ended December 31, 2012 compared to 58.1% for the year ended December 31, 2011.

Cost of revenue for the Affiliate Marketing segment was $17.5 million for the year ended December 31, 2012 compared to $17.1 million in 2011. Our Affiliate Marketing segment gross margin remained relatively consistent at 88.3% for the year ended December 31, 2012 compared to 87.7% for the same period in 2011.

Cost of revenue for the Media segment increased to $152.2 million for the year ended December 31, 2012 compared to $113.8 million in 2011. Our Media segment gross margin increased to 61.0% for the year ended December 31, 2012 compared to 56.5% for the same period in 2011. The increase in Media segment gross margin resulted primarily from the inclusion of a full year results of Dotomi which was acquired on August 31, 2011. Excluding the impact of Dotomi, our Media segment gross margins were consistent with the year ago period.

Cost of revenue for the Owned & Operated Websites segment was $69.7 million for the year ended December 31, 2012 compared to $81.1 million in 2011. Our Owned & Operated Websites segment gross margin increased to 42.4% for the year ended December 31, 2012 compared to 36.8% in 2011. The decrease in cost of revenue, and related increase in gross margin, was due to our de-emphasizing certain lower margin traffic acquisition strategies as discussed above.

27 -------------------------------------------------------------------------------- Operating Expenses: Sales and Marketing. Sales and marketing expenses consist primarily of compensation and employee benefits of sales and marketing and related support teams, certain advertising costs, travel, trade shows, and marketing materials.

Sales and marketing expenses for the year ended December 31, 2012 were $85.5 million compared to $65.0 million in 2011, an increase of $20.5 million, or 31.5%. Sales and marketing expenses increased primarily due to the growth in our businesses as described above and the inclusion of a full year of results from Dotomi and Greystripe. Our sales and marketing expenses as a percentage of revenue increased slightly to 12.9% for the year ended December 31, 2012 compared to 12.3% in 2011.

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 $81.1 million for the year ended December 31, 2012 compared to $58.5 million in 2011, an increase of $22.5 million, or 38.5%.

General and administrative expenses increased primarily due to the inclusion of a full year of results from Dotomi and Greystripe and higher stock-based compensation expense as described below. As a percentage of revenue, our general and administrative expenses increased to 12.3% for the year ended December 31, 2012 compared to 11.1% in 2011.

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 year ended December 31, 2012 were $66.3 million compared to $49.1 million in 2011, an increase of $17.3 million, or 35.2%. The increase in technology expenses was primarily due to the growth in our businesses as described above and the inclusion of a full year of results from Dotomi and Greystripe. Our technology expenses as a percentage of revenue increased slightly to 10.0% for the year ended December 31, 2012 compared to 9.3% in 2011.

Segment Income from Operations. Affiliate Marketing segment income from operations for the year ended December 31, 2012 increased 8.0%, or $6.8 million, to $91.4 million, from $84.6 million in the prior year, and represented 61.1% and 60.7% of Affiliate Marketing segment revenue in these respective periods.

The increase in Affiliate Marketing segment income from operations was primarily attributable to the higher revenue as described above.

Media segment income from operations for the year ended December 31, 2012 increased 61.2%, or $45.6 million, to $120.2 million, from $74.6 million in the prior year, due to the higher revenue and gross margin as described above. Media segment operating income margin increased to 30.8% for the year ended December 31, 2012 compared to 28.5% in 2011.

Owned & Operated Websites segment income from operations for the year ended December 31, 2012 increased to $28.0 million, from $25.8 million in the prior year, due to the higher gross margin as described above. Owned & Operated Websites segment operating income margin increased to 23.2% for the year ended December 31, 2012 compared to 20.1% in 2011.

Stock-Based Compensation. Stock-based compensation for the year ended December 31, 2012 was $21.8 million compared to $14.0 million in 2011. The increase of $7.7 million was primarily due to unvested equity awards assumed in the acquisitions of Dotomi and Greystripe as well as new equity awards granted throughout 2012 and 2011. We currently expect our stock-based compensation expense in 2013 to be in the range of $21 million to $23 million. 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 options and restricted stock, fluctuations in the market value of our common stock, modifications to our existing stock option programs, additions of new stock-based compensation programs, or other factors.

Amortization of Acquired Intangible Assets. Amortization of developed technologies and websites acquired in business combinations, included in Cost of revenue, for the year ended December 31, 2012 was $10.0 million compared to $9.6 million in 2011. Amortization of all remaining acquired intangible assets, included in Amortization of acquired intangible assets, for the year ended December 31, 2012 was $22.4 million compared to $16.6 million in 2011. The increases in amortization expense compared to the prior year are primarily due to the addition of certain intangible assets arising from the acquisitions of Dotomi, and Greystripe.

We currently anticipate total amortization of intangible assets of approximately $24.9 million for the year ending December 31, 2013, with approximately $9.4 million of this amount being recorded in Cost of revenue and approximately $15.5 million being recorded in operating expenses. Such amounts may change as a result of any future acquisitions.

28 -------------------------------------------------------------------------------- Interest and Other Income, net. Interest and other income, net, consists principally of interest earned on our note receivable, foreign currency exchange gains or losses and interest expense associated with our credit facility.

Interest and other income, net was $1.2 million for 2012 compared to $4.7 million for the same period in 2011. This was due to additional interest expense on borrowings under our credit facility in 2011, offset partially by an increase in foreign exchange gains.

Income Tax Expense. For the years ended December 31, 2012 and 2011, we recorded income tax expense of $61.6 million and $28.6 million, respectively. Our effective income tax rate for the year ended December 31, 2012 increased to 39.1% from 23.3% for the year ended December 31, 2011. In both 2012 and 2011, we recognized tax benefits related to the reversal of contingency reserves due to the expiration of certain statutes of limitations. The tax benefit realized in 2012 of $2.6 million was lower than the $19.5 million tax benefit we recognized in 2011, resulting in the higher effective tax rate for 2012. We currently expect our effective tax rate to be approximately 40.0% in the year ending December 31, 2013.

Adjusted-EBITDA. Adjusted-EBITDA for the year ended December 31, 2012 increased to $222.3 million from $166.8 million for the same period in 2011, representing an increase of $55.5 million, or 33.3%. The increase is due to the increased operating income in all of our segments as described above.

RESULTS OF OPERATIONS-Fiscal Years Ended December 31, 2011 and 2010 Revenue. Consolidated revenue for the year ended December 31, 2011 was $528.8 million, representing a 29.0% increase from the prior year total of $409.9 million.

Affiliate Marketing segment revenue increased to $139.4 million for the year ended December 31, 2011 compared to $124.1 million in 2010. This increase of $15.3 million, or 12.3%, was attributable to our domestic operations and 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 year ended December 31, 2011.

Media segment revenue increased to $261.3 million for the year ended December 31, 2011 compared to $169.0 million for 2010. This increase was attributable to: (a) the acquisitions of Dotomi and Greystripe, which we acquired on August 31, 2011 and April 21, 2011, respectively, and together contributed approximately $60.8 million of revenue in 2011; (b) growth in our historical display advertising business as a result of our larger sales organization, new product offerings and a strong display advertising market in the United States in 2011; and (c) new ad serving customers and higher volumes of ad serving, particularly in our international operations.

Owned & Operated Websites segment revenue increased to $128.4 million for the year ended December 31, 2011 compared to $117.6 million in 2010. The increase of $10.8 million, or 9.2%, was primarily attributable to increased volume in our Pricerunner.com businesses in Europe and the inclusion of a full year of results from Investopedia, which we acquired on August 3, 2010.

Cost of Revenue and Gross Profit. Including the cost reclassifications discussed more fully above, consolidated cost of revenue was $221.4 million for the year ended December 31, 2011 compared to $177.1 million in 2010, an increase of $44.3 million, or 25.0%. Our consolidated gross margin increased to 58.1% for the year ended December 31, 2011 compared to 56.8% for the year ended December 31, 2010.

Cost of revenue for the Affiliate Marketing segment was $17.1 million for the year ended December 31, 2011 compared to $17.2 million in 2010. Our Affiliate Marketing segment gross margin remained relatively consistent at 87.7% for the year ended December 31, 2011 compared to 86.1% for the same period in 2010.

Cost of revenue for the Media segment increased to $113.8 million for the year ended December 31, 2011 compared to $77.2 million in 2010. Our Media segment gross margin increased to 56.5% for the year ended December 31, 2011 compared to 54.3% for the same period in 2010. The increase in Media segment gross margin resulted primarily from the inclusion of the relatively higher gross margin Dotomi business. Excluding the impact of Dotomi, our Media segment gross margin was consistent with the year ago period.

Cost of revenue for the Owned & Operated Websites segment was $81.1 million for the year ended December 31, 2011 compared to $75.8 million in 2010. The increase in cost of revenue was due to the higher revenue described above. Our Owned & Operated Websites segment gross margin remained relatively consistent at 36.8% for the year ended December 31, 2011 compared to 35.5% in 2010.

29 -------------------------------------------------------------------------------- Operating Expenses: Sales and Marketing. Sales and marketing expenses consist primarily of compensation and employee benefits of sales and marketing and related support teams, certain advertising costs, travel, trade shows, and marketing materials.

Sales and marketing expenses for the year ended December 31, 2011 were $65.0 million compared to $44.9 million in 2010, an increase of $20.1 million, or 44.8%. Sales and marketing expenses increased primarily due to the growth in our businesses as described above and the acquisitions of Dotomi and Greystripe. Our sales and marketing expenses as a percentage of revenue increased to 12.3% for the year ended December 31, 2011 compared to 11.0% in 2010 due to increased compensation as a result of increased headcount.

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 $58.5 million for the year ended December 31, 2011 compared to $51.5 million in 2010, an increase of $7.1 million, or 13.7%.

General and administrative expenses increased primarily due to the acquisitions of Dotomi and Greystripe and higher stock-based compensation expense as described below. However, our general and administrative expenses as a percentage of revenue decreased to 11.1% for the year ended December 31, 2011 compared to 12.6% in 2010 as our corporate expenses remained relatively flat despite the growth in our revenue.

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 year ended December 31, 2011 were $49.1 million compared to $34.8 million in 2010, an increase of $14.3 million, or 41.0%. The increase in technology expenses was primarily due to the growth in our businesses as described above and the acquisitions of Dotomi and Greystripe. Our technology expenses as a percentage of revenue increased slightly to 9.3% for the year ended December 31, 2011 compared to 8.5% in 2010.

Segment Income from Operations. Affiliate Marketing segment income from operations for the year ended December 31, 2011 increased 21.6%, or $15.0 million, to $84.6 million, from $69.6 million in the prior year, and represented 60.7% and 56.0% of Affiliate Marketing segment revenue in these respective periods. The increase in Affiliate Marketing segment income from operations and operating income margin was primarily attributable to the operating leverage associated with the higher revenue as described above.

Media segment income from operations for the year ended December 31, 2011 increased 48.5%, or $24.4 million, to $74.6 million, from $50.2 million in the prior year, due to the higher revenue as described above. Media segment operating income margin remained relatively flat at 28.5% and 29.7% of Media segment revenue in these respective periods.

Owned & Operated Websites segment income from operations for the year ended December 31, 2011 increased to $25.8 million, from $24.0 million in the prior year, due to the higher revenue described above. Owned & Operated Websites segment operating income margin remained remained relatively flat at 20.1% and 20.4% of Owned & Operated Websites segment revenue in these respective periods.

Stock-Based Compensation. Stock-based compensation for the year ended December 31, 2011 was $14.0 million compared to $7.9 million in 2010. The increase of $6.1 million was primarily due to unvested equity awards assumed in the acquisitions of Dotomi and Greystripe as well as new equity awards granted during the year ended December 31, 2012.

Amortization of Acquired Intangible Assets. Amortization of developed technologies and websites acquired in business combinations, included in Cost of revenue, for the year ended December 31, 2011 was $9.6 million compared to $7.5 million in 2010. Amortization of all remaining acquired intangible assets, included in Amortization of acquired intangible assets, for the year ended December 31, 2011 was $16.6 million compared to $13.1 million in 2010. The increases in amortization expense compared to the prior year were primarily due to the addition of certain intangible assets arising from the acquisitions of Dotomi, Greystripe and Investopedia, offset partially by certain intangible assets from an earlier acquisition that became fully amortized.

30 -------------------------------------------------------------------------------- Interest and Other Income, net. Interest and other income, net, consists principally of interest earned on our note receivable, foreign currency exchange gains or losses, interest expense associated with our credit facility, and in 2010, gains and losses on sales of marketable securities. Interest and other income, net was $4.7 million for 2011 compared to $2.2 million for the same period in 2010. In 2010, we realized $2.8 million in losses on sales of auction rate securities, which was the primary reason for the increase in net interest and other income from 2010 to 2011. Excluding the impact of those losses, interest and other income, net decreased slightly. This was due to additional interest expense on new borrowings under our credit facility in 2011, offset partially by an increase in foreign exchange gains.

Income Tax Expense. For the years ended December 31, 2011 and 2010, we recorded income tax expense of $28.6 million and $13.6 million, respectively. Our effective income tax rate for the year ended December 31, 2011 increased to 23.3% from 15.0% for the year ended December 31, 2010. In both 2011 and 2010, we recognized tax benefits related to the reversal of contingency reserves due to the expiration of certain statutes of limitations. The tax benefit realized in 2011 of $19.5 million was lower than the $24.9 million tax benefit we recognized in 2010, resulting in the higher effective tax rate for 2011.

Adjusted-EBITDA. Adjusted-EBITDA for the year ended December 31, 2011 increased to $166.8 million from $123.6 million for the same period in 2010, representing an increase of $43.2 million, or 35.0%. The increase is primarily due to increased operating income in our Affiliate Marketing and Media segments as described above.

Liquidity and Capital Resources We have financed our operations, our stock repurchases and our cash acquisitions primarily through cash generated from operations and borrowings under our credit facility. At December 31, 2012, our cash and cash equivalents balance totaled $136.6 million, including $77.8 million of cash and cash equivalents held by our international subsidiaries.

Net cash provided by operating activities totaled $156.1 million for the year ended December 31, 2012 compared to $114.9 million in 2011 and $96.9 million in 2010. The increase in net cash provided by operating activities of $41.1 million from 2011 to 2012 was due to an increase in net income before non-cash items and the impact of positive working capital changes. The increase in net cash provided by operating activities of $18.0 million from 2010 to 2011 was primarily due to an increase in net income before non-cash items, offset partially by the impact of negative working capital changes.

Net cash used in investing activities for the year ended December 31, 2012 of $13.5 million was due to purchases of property and equipment of $17.5 million, offset by $4.2 million in principal payments received on our note receivable.

Net cash used in investing activities for the year ended December 31, 2011 of $221.0 million was due to the use of $216.5 million for acquisitions, including net cash payments of $68.9 million for Greystripe and $147.6 million for Dotomi, and net purchases of property and equipment of $11.2 million, offset by $3.0 million in proceeds from the sale of marketable securities and $3.7 million in principal payments received on our note receivable. Net cash used in investing activities for the year ended December 31, 2010 of $24.7 million was the result of the use of $41.7 million used to acquire Investopedia and net purchases of property and equipment of $7.4 million, offset by proceeds from the maturity and sale of marketable securities of $21.8 million and $2.7 million in principal payments received on our note receivable.

Net cash used in financing activities for the year ended December 31, 2012 of $125.3 million was primarily due to common stock repurchases of $110.8 million and net payments under our credit agreement of $25.0 million, offset partially by proceeds from shares issued under employee stock programs of $7.2 million and excess tax benefits from the exercise of stock-based awards of $3.3 million. Net cash provided by financing activities for the year ended December 31, 2011 of $31.8 million was primarily due to net borrowings under our credit agreement of $167.5 million and proceeds from shares issued under employee stock programs of $6.9 million, offset by the use of $145.0 million to repurchase common stock under our stock repurchase program. Net cash used in financing activities for the year ended December 31, 2010 of $33.8 million was primarily attributable to the use of $38.6 million to repurchase common stock under our stock repurchase program, offset partially by proceeds from shares issued under employee stock programs of $4.2 million.

31-------------------------------------------------------------------------------- Credit Facility On August 19, 2011, we entered into an Amended and Restated Credit Agreement (the "Credit Facility"), which replaced our previous $100.0 million line of credit. The Credit Facility originally consisted of a revolving loan commitment of $150.0 million and a term loan of $50.0 million, with an option to increase the total revolving loan commitment to $200.0 million subject to certain conditions. On June 29, 2012, we entered into a Commitment Increase Agreement to increase the total revolving loan commitment under the Credit Facility to $200.0 million. The term loan is payable in quarterly installments of $2.5 million per quarter. The Credit Facility expires on August 19, 2016. Availability under the Credit Facility is subject to our meeting certain financial and non-financial covenants, as more fully described in Note 15 to our Consolidated Financial Statements included herein. The revolving loan commitment provides us with additional financial flexibility for pursuing acquisitions, repurchasing our common stock and general corporate purposes. At December 31, 2012, there was $37.5 million outstanding on the term loan. In addition, $105.0 million was outstanding under the revolving loan commitment, resulting in $142.5 million outstanding under our Credit Facility at December 31, 2012. At December 31, 2011, we had a total outstanding balance under our Credit Facility of $167.5 million, consisting of $47.5 million outstanding on the term loan and $120.0 million outstanding under the revolving loan.

Stock Repurchase Program In September 2001, our board of directors authorized a stock repurchase program (the "Program") to allow for the repurchase of shares of our 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, 2011, our board of directors authorized a total of $633.3 million for repurchases under the Program and we repurchased a total of 64.4 million shares of our common stock for approximately $592.5 million. In 2012, our board of directors authorized an additional $159.2 million for repurchases under the Program.

During the year ended December 31, 2012, we repurchased 6.6 million shares for $110.7 million, leaving up to an additional $89.3 million of our capital to be used to repurchase shares of our outstanding common stock under the Program as of December 31, 2012.

Repurchases have been funded from available working capital and borrowings under our Credit Facility, 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 us, and we may discontinue repurchases at any time that management or our board of directors determines additional repurchases are not warranted. The amounts authorized by our board of directors exclude broker commissions.

Commitments and Contingencies Contractual obligations at December 31, 2012 are as follows (in thousands): Payments due by period 1 to less 3 to less Less than than than More than Total 1 year 3 years 5 years 5 years Other Operating leases(1) $ 45,233 $ 7,835 $ 15,419 $ 10,792 $ 11,187 $ - Purchase obligations(2) 4,043 2,671 1,369 3 - - Liability for unrecognized tax benefits(3) 19,700 - - - - 19,700 Borrowings under Credit Facility(4) 142,500 10,000 20,000 112,500 - - Total contractual obligations $ 211,476 $ 20,506 $ 36,788 $ 123,295 $ 11,187 $ 19,700 (1) The non-cancelable operating lease obligations shown in the table have not been reduced by minimum non-cancelable sublease rentals aggregating $714,000. We remain secondarily liable under these leases in the event that any sublessee defaults under the sublease terms. We do not currently believe that material payments will be required as a result of the secondary liability provisions of the primary lease agreements.

(2) Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms.

Purchase obligations exclude agreements that are cancelable without penalty.

(3) Please refer to Note 9 to the consolidated financial statements for a description of the liability for unrecognized tax benefits. As more fully described in Note 9, because the ultimate resolution of this unrecognized tax benefit depends on many factors and assumptions, we are not able to estimate the timing of any payments that may result from this liability.

32--------------------------------------------------------------------------------(4) Includes payments on the principal borrowings under our Credit Facility.

Please refer to Note 15 to the consolidated financial statements for a description of the Credit Facility.

Other commercial commitments as of December 31, 2012 are as follows (in thousands): Other Commercial Commitments 1 to less 3 to less Less than than than More than Total 1 year 3 years 5 years 5 years Standby letters of credit $ 501 $ - $ 290 $ 211 $ - The standby letters of credit are maintained pursuant to certain of our lease agreements and remain in effect at declining levels through the terms of the related leases.

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third-parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. We have also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and certain of our officers, employees and former officers, directors and employees of acquired companies, in certain circumstances.

It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.

Capital Resources We believe that the combination of our existing cash and cash equivalents, our Credit Facility and our expected future cash flows from operations will provide us with sufficient liquidity to fund our operations and capital requirements for at least the next twelve months.

However, it is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to consummate acquisitions of other businesses, products or technologies. We could raise such funds by selling more stock to the public or to selected investors, or by borrowing, whether under the existing Credit Facility or a new facility. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities for other reasons. We cannot assure you that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders may be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

Although we believe we have sufficient capital to fund our activities for at least the next twelve months, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including: • the macroeconomic environment; • the market acceptance of our products and services; • the levels of promotion and advertising that will be required to launch our new products and services and achieve and maintain a competitive position in the marketplace; • our business, product, capital expenditures and technology plans, and product and technology roadmaps; • capital improvements to new and existing facilities; • technological advances; • our competitors' responses to our products and services; • our pursuit of strategic transactions, including mergers and acquisitions; • our stock repurchase program; and • our relationships with our advertiser customers and publisher partners.

33-------------------------------------------------------------------------------- Off-Balance Sheet Arrangements None.

Critical Accounting Policies and Estimates Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including, but not limited to, those related to revenue recognition, allowance for doubtful accounts and sales credits, investments, income taxes, goodwill and other intangible assets, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.

We apply the following critical accounting policies in the preparation of our consolidated financial statements: • Revenue Recognition. We recognize revenue when the following criteria have been met: persuasive evidence of an arrangement exists, no significant Company obligations remain, collection of the related receivable is reasonably assured, and the fees are fixed or determinable. To date, our agreements have not required a guaranteed minimum number of click-throughs or actions.

Revenue for our Affiliate Marketing segment is generated primarily from: commission fees earned from transactions, including product sales made by our advertiser customers, occurring on our affiliate marketing networks; fixed monthly fees from program management services; and, to a lesser extent, implementation fees. Commission fee revenue from transactions on our affiliate marketing networks are recognized on a net basis as we act as an agent in these transactions and the payments to publishers are the contractual obligation of the advertiser customers. Commission fee revenue is recognized in the period that our advertiser customer generates a sale or other agreed-upon action on our affiliate marketing network, provided that no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. Program management services fees revenue is recognized over the contractual service period, provided no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. Implementation fee revenue is recognized over the estimated customer lives, provided no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable.

Our Media and Owned & Operated Websites segment revenue is recognized in the period that the advertising impressions, click-throughs or actions occur, when lead-based information is delivered or, for our Mediaplex business where revenue is generated primarily from fixed or transaction volume-based monthly fees, in the period that we make our technologies available to our customers on an application services provider ("ASP") basis, provided that no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. We act as a principal in Media and Owned & Operated Websites segment transactions in that we are the primary obligor to the advertiser customer. In accordance with GAAP, revenue is recognized in our Media and Owned & Operated Websites segments on a gross basis, and publisher expenses that are directly related to a revenue-generating event are recorded as a component of cost of revenue.

Deferred revenue consists primarily of the unrecognized portion of implementation fee revenue for our Affiliate Marketing segment. Prepayments and amounts on deposit from customers are classified as an advertiser deposit liability which is classified under accounts payable and accrued expenses in our consolidated balance sheets.

We estimate a provision for sales returns which is recorded as a reduction to revenue. The provision for sales returns reflects an estimate of commission based fee reversals related to product returns from consumers of our Affiliate Marketing customers. In determining the estimate for sales returns, we rely upon historical data, contract information and other factors. The estimated provision for sales returns can vary from actual results. More or less product may be returned from consumers of our Affiliate Marketing customers as compared to what was estimated. These factors and unanticipated changes in the economic and industry environment could make the provision for sales returns estimates differ from actual returns.

34--------------------------------------------------------------------------------• Allowance for Doubtful Accounts and Sales Credits. We estimate our allowance for doubtful accounts using two methods. First, we evaluate specific accounts where information indicates our customers may have an inability to meet financial obligations, such as due to bankruptcy, and receivable amounts outstanding for an extended period beyond contractual terms. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. Second, an allowance is established for all customers based on a range of loss percentages applied to receivables aging categories based upon our historical collections and write-off experience. The amounts calculated from each of these methods are analyzed to determine the total amount of the allowance for doubtful accounts. We also estimate an allowance for sales credits based upon our historical sales credits experience. Historically, actual bad debt write-offs and sales credits have not significantly differed from our estimates. However, factors including higher than expected default rates or sales credits may result in future write-offs that are greater than our estimates.

As of December 31, 2012, we recorded an allowance for doubtful accounts and sales credits of $6.2 million, which represents an allowance percentage of 4.0% of our gross accounts receivable balance of $154.8 million. If our assumptions and estimates regarding the ultimate collectability of our outstanding accounts receivable balances and/or our sales credits changed to warrant a 100 basis point increase in the ending allowance percentage, the result would be an increase in the December 31, 2012 allowance for doubtful accounts and sales credits of approximately $1.5 million and a corresponding decrease in our operating income for the year then ended.

• Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense or benefit is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity's financial statements or tax returns. We make judgments, assumptions and estimates to determine our income tax expense and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our judgments, assumptions and estimates relative to the income tax expense take into account enacted tax laws, our interpretation of tax laws and possible outcomes of audits if and when conducted by tax authorities. Changes in tax laws or our interpretation of tax laws and the resolution of tax audits, if and when conducted by tax authorities, could significantly impact the amount of income tax expense in our consolidated financial statements.

As of December 31, 2012, we have gross deferred tax assets of $59.6 million, relating to net operating loss carryforwards, goodwill impairment and certain other temporary differences. As of December 31, 2012, based upon both positive and negative evidence available, we have determined it is more likely than not that certain deferred tax assets primarily relating to capital loss carryforwards and net operating loss carryforwards in various jurisdictions may not be realizable. Accordingly, we have recorded a valuation allowance of $3.0 million against these deferred tax assets as of December 31, 2012. Should we determine in the future that we will be able to realize these deferred tax assets, or not be able to realize all or part of our remaining net deferred tax assets recorded as of December 31, 2012, an adjustment to the net deferred tax assets would impact net income in the period such determination was made.

In addition to our deferred tax assets, management is required to make judgments and assumptions related to our uncertain tax positions. As further described in Note 9 to the consolidated financial statements, as of December 31, 2012 we have recorded a liability for uncertain tax positions of $19.7 million. The ultimate resolutions of these uncertain tax positions may take several years. Such resolutions could result in additional tax payments by us to the applicable tax jurisdiction(s). If the ultimate resolutions of any of our uncertain tax positions results in either (a) an additional tax payment that is lower than our liability recorded for such uncertain tax position or (b) no additional tax payment, then we would record a reduction to our liability for uncertain tax positions and a corresponding decrease to our income tax expense in the period such resolution is achieved. Accordingly, a resolution of one or more of our uncertain tax positions in any given period could have a material impact to our reported net income for such period. However, because the ultimate resolution of our uncertain tax positions depends on many factors and assumptions, we are not able to estimate the range of potential changes in our liability for uncertain tax positions or the timing of such changes.

35--------------------------------------------------------------------------------• Goodwill and Other Intangible Assets. As of December 31, 2012, we had goodwill and other intangible assets with net balances of $434.5 million and $81.8 million, respectively. Goodwill is tested for impairment at the reporting unit level on an annual basis as of December 31 or between annual tests whenever facts and circumstances indicate that goodwill might be impaired. As of December 31, 2012, our reporting units consisted of the Affiliate Marketing, Media, Dotomi, and Owned & Operated Websites operating segments. Application of the goodwill impairment test requires certain estimates and assumptions, including the identification of reporting units, assigning assets and liabilities to reporting units, and determining the fair value of each reporting unit. We have determined the fair value of each reporting unit using a discounted cash flow approach, giving consideration to the market valuation approach.

As a result of our 2012 annual goodwill impairment test, no goodwill impairment was recorded as the estimated fair value of each reporting unit exceeded the carrying value. Based on our 2012 impairment testing, there would have to be significant unfavorable changes to our estimates and assumptions for an impairment to exist.

In addition to the accounting for goodwill as described above, we amortize other intangible assets over their estimated economic useful lives. We record an impairment charge on these assets when we determine that their carrying value may not be recoverable. In determining if impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets' carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the intangible assets exceeds the fair market value of the intangible assets. Our estimates of future cash flows attributable to our other intangible assets require significant judgments and assumptions, including anticipated industry and economic conditions. Different assumptions and judgments could materially affect the calculation of the fair value of any individual other intangible assets which could lead to impairment.

No impairment was identified in 2012 or 2011 related to intangible assets associated with our continuing operations.

• Contingencies and Litigation. We evaluate contingent liabilities including threatened or pending litigation in accordance with GAAP and record accruals when the outcome of these matters is deemed probable and the liability is reasonably estimable. We make these assessments based on the specific facts and circumstances of each matter.

Recently Issued Accounting Pronouncements In July 2012, the Financial Accounting Standards Board ("FASB") issued amendments to the goodwill and indefinite-lived intangible assets impairment guidance which provides an option for companies to not calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (early adoption is permitted). The implementation of this amended accounting guidance is not expected to have a material impact on our consolidated financial position and results of operations.

In September 2011, the FASB issued amendments to the goodwill impairment guidance which provides an option for companies to use a qualitative approach to test goodwill for impairment if certain conditions are met. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The implementation of this amended accounting guidance did not have a material impact on our consolidated financial position and 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 eliminated the option to report other comprehensive income and its components in the statement of stockholders' equity. This standard became effective for interim and annual periods beginning after December 15, 2011 and requires retrospective application. Also, in December 2011, the FASB indefinitely deferred the requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented.

36-------------------------------------------------------------------------------- In May 2011, the FASB issued new accounting guidance that amended 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. This guidance became effective for financial statements issued for interim or annual reporting periods ending on or after December 15, 2011. The adoption of this guidance did not have a significant impact on our financial position or results of operations.

Inflation Inflation was not a material factor in either revenue or operating expenses during the fiscal years ended December 31, 2012, 2011 and 2010.

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