Commentary & Analysis
FREE: Valassis Reports Modest Revenue Gains - Getting Close to $1 Billion Mark: Summary of Q3 Earnings Call
By Jean Goodwin November 2,
By WhatTheyThink Staff
Published: November 2, 2004
By Jean Goodwin November 2, 2004 -- Valassis Communications Inc. (NYSE: VCI) reported third quarter revenues increased 7.6% to $247.6 million from $230.1 million for the same period last year. The company attributed the revenue growth to strong demand for the diversified product portfolio and integrated marketing solutions. Earnings in the third quarter were $22.4 million, or $0.43 in earnings per share, at the top of the previously published quarterly range of $0.37 to $0.43; however, the earnings were down 15.7% from the previous year’s third quarter earnings per share of $0.51. Topics of the summary Overall Performance by Segment Guidance Q & A Overall Performance by Segment Mass Products (Products that reach large markets at a low cost): Co-op free-standing insert (FSI) revenues for the third quarter were down 5.2% to $117.0 million, due to a reduction in co-op FSI pricing. Management noted there was solid co-op FSI industry unit growth for the ninth consecutive quarter. Schultz reviewed the five FSI customer categories and outlined a pricing strategy to increase margins. Run of press (ROP) revenues, generated from the brokering of advertising space on behalf of newspapers, were up 14.3% in the third quarter to $21.6 million. Cluster Targeted Products (Products that reach neighborhoods based on geographic and demographic characteristics): Cluster Targeted product revenues were up 19.0%, versus the third quarter of 2003, to $72.7 million, with particularly strong demand from the direct marketing customer segment. The gross margin percentage for the Cluster Targeted products segment continued to improve, rising over 250 basis points year over year. 1-to-1 Products (Products and services that pinpoint individuals or households to build loyalty to a brand): The 1-to-1 product revenues are comprised of PreVision Marketing, Valassis Relationship Marketing Systems (VRMS) and direct mail. The 1- to-1 revenues increased 82.5% to $14.6 million for the quarter. This robust growth was driven by increased demand for direct mail programs based on frequent shopper data. On Sept. 17, 2004, the company acquired Catalina Marketing's direct mail division, Catalina Direct Marketing Services, positioning Valassis as the clear leader in frequent shopper-based direct mail programs. This acquisition contributed less than $750,000 in revenue during the quarter. International & Services (Marketing products and services available in the United States, Canada, France, Germany, Italy, Mexico, Spain and the United Kingdom): International & Services is comprised of NCH Marketing Services (NCH), Valassis Canada and Promotion Watch. International & Services revenues were $21.7 million for the third quarter, up 16.0% year over year. This increase is being driven by continued strength in the company's international business with substantial growth from Canada. Guidance For the year ending Dec. 31, 2004 , management indicated they are increasing the annual revenue guidance since the company is driving toward $1 billion in revenue for the year, which could result in approximately 10% revenue growth year over year. Management also indicated they plan on being at the high-end of the most recently stated earnings per share range for 2004 of $1.73 to $1.85. For the full year 2005, the company expects revenue to be up by a mid-single digit percentage. The company expects earnings per share for 2005 to be between $1.80 and $2.00. Q & A In the Co-op FSI market space, Valassis has slightly better page growth than the industry. Paper pricing is being built into the 2005 guidance expecting increases in the cost of paper in the high single digits. At this time, no acquisitions are on the table. At the December board meeting, they will be discussing an acquisition strategy. The single biggest factor to offset the overall pricing deterioration for Valassis is the 1-to-1 products segment. As far as industry growth in FSI, Valassis has built in less than a 4 percent growth for 2005. There could be a small upside; however, since the July price announcement, the company has not introduced anything new that would change this projection. The FSI industry shows consistent participation and does not appear to have new growth from new customers at this time. With regard to working capital, the biggest change has been in the ROP business. Valassis believes they can manage the business on $10 million of working capital once they get to a more normalized state. Valassis feels the pricing for the Cluster segment will be similar to the co-op FSI business. Guidance for 2005 assumes 75 percent of pre cash flow on share repurchase.