By Trevor Shackelford July 28, 2005 -- Valassis Communications Inc. (NYSE: VCI) announced their second quarter results today. The company reported revenues of $276.4 million, up 7.7% from the same period last year. Net earnings for the quarter were $25.5 million, or $0.50 per share, down 4.9% from last year. Based on the performance, the company has raised its full-year 2005 EPS guidance to between $1.96 and $2.08. Contents of this Summary Quarter Highlights Segment Performance Guidance Raine Radar Q & A Quarter Highlights Hired John Lieblang to take on the role of Vice President and Chief Technology Officer Increased FSI distribution by approximately 1 million FSI size decreased to match move by News America Cash balance remains strong with over $80 million – Management and board currently investigating options for cash Segment Performance Mass Products This segment is composed of the FSI and Run on Press (ROP) business. Co-op FSI revenues in the second quarter were 134.4 million, up 1.6% year over year. Unit growth offset a reduction in FSI pricing. Total circulation for co-op FSI will increase from 58.7 million to 59.7 million on October 2, 2005. FSI prices seem to fluctuate in a random pattern, but the sales organization is focusing on recovering pricing. ROP revenues, generated from brokering advertising space on behalf of newspapers, were up 1.5% to $27.3 million year over year. Cluster Targeted Products These products reach neighborhoods based on geographic and demographic characteristics. Second quarter revenues increased 28% to $72.2 million from the same period last year. Much like last quarter, preprinted inserts from telecommunications, retail, and food service were responsible for most of the growth. Total growth for this segment is expected to be lower than originally thought for 2005. 1 to 1 Products This segment includes PreVision Marketing, Valassis Relationship Marketing Systems, and direct mail. Revenues for the second quarter were up 3.1% from last year to $16.6 million. Direct mail and VRMS revenues were up 17.6%. Margins on direct mail are expected to increase as the number of pieces with a product sample increases. PreVision saw a decline in revenues of 26.4%. International & Services Revenues were up 3.2% to $25.9 million for the second quarter. Profitability was down due to issues in France and the United Kingdom. The company is continuing to test its products in Europe, particularly in Germany. Guidance Valassis increased its EPS guidance for 2005 to $1.96 – $2.08, up from its previous $1.80 to $2.00 range. The company cited its strong first half as reason for the increase. Valassis sees particular strength in the cluster targeted products as well as better than anticipated FSI sales. Raine Radar Valassis has reported that their 2007 FSI contracts indicate average price per page will be better in 2007 than 2006. The delay in securing 2006 FSI contracts has also eased, moving into a more normalized pattern. These factors seem to corroborate the claim that FSI pricing is currently too low and is in a recovery pattern. Alan Schultz, Chairman, President, and CEO of Valassis indicated that management and the board would be investigating ways to utilize cash, and asked for creative and unique suggestions from the analyst community. There was at least one vote on the call for a share repurchase, but Schultz seems to be interested in exploring other options. With the growth in direct mail in the industry and for Valassis, perhaps a strategic acquisition to expand those capabilities would make sense. Q & A Spot prices for FSI today are higher than contract prices. Unit growth for FSI is up in the mid-single digits for the first half of the year. Growth is coming from appliances and electronics Sales, general, and administration expense is up due to the addition of sales, marketing, and product development personnel as the company preps to release new products abroad and in the U.S. Also, increased incentive compensation is contributing to the rise in SG&A. FSI contract mix between large and small deals hasn’t changed significantly. The Q4 is looking particularly strong this year, with a $0.08 per share increase from the previously announced guidance. The forecast is based on an increase in distribution of FSI is about $0.03 - $0.04 of that, with the remainder coming from projected trend lines in the rest of the business. Valassis is matching News America’s move to reduce the book size of FSI. Customers requested this to make it easier for them to repurpose their creative design. Direct mail customers are becoming more diversified, but currently the majority of customers are in the CPG vertical. Retail is also becoming a key vertical to the business. Upside potential in FSI is approximately another 8 million in circulation. Customers do not seem to be considering reducing unit purchases as FSI pricing rises. The increased circulation in FSI will not affect per-page pricing. The company sees more supply than demand in paper, and thinks that the recent increases may be at an end.