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Digital Generation (DGIT)

Q3 2012 Earnings Call

November 08, 2012 5:00 pm ET


Neil H. Nguyen - Chief Executive Officer, President, Director and Member of Executive Committee

Omar A. Choucair - Consultant

JoAnn Horne


Richard Ingrassia - Roth Capital Partners, LLC, Research Division

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

John D. Crowther - Piper Jaffray Companies, Research Division

Darren Aftahi - Northland Capital Markets, Research Division

Richard Fetyko - Janney Montgomery Scott LLC, Research Division

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division



Good day, ladies and gentlemen and welcome to the 2012 Digital Generation, Inc. Third Quarter Earnings Conference Call. My name is Kim, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Neil Nguyen, CEO and President.

Neil H. Nguyen

Good afternoon, everyone. Thank you for joining us today. Joining me today is Omar Choucair, Chief Financial Officer. Before we start, I'd like to have Omar read the Safe Harbor disclosure.

Omar A. Choucair

Good afternoon. I would like to remind listeners that today's discussion may contain certain forward-looking statements related to the company, including the expansion at our digital distribution network and demand among certain clients for digital, audio and video media services. These statements are based on economic marketing conditions as of November 8, 2012 and assume no material changes from conditions that exist today. The company can give no assurance as to whether these conditions will continue or, if they change, how such changes may affect the company's current expectations.

While the company may, from time to time, revise this outlook, it assumes no obligation to do so. Listeners are further cautioned that these forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those projected. Such risks and uncertainties include, among other things, our potential inability to further identify, develop and achieve commercial success for new products, risks associated with integrating the MediaMind, EyeWonder, Peer39, North Country and other acquisitions with our operations and personnel; possibility of delays in product development; risks associated with operations in foreign countries; and fluctuations in current exchange risks; risk of new and changing and competitive technologies; risk related to additional impairment of our goodwill or other long-lived assets; the development of competing distribution products; and other risks related to DG's business, which are set forth in the company's filings with the SEC.

Today's call and webcast will include non-GAAP financial measures within the meaning of SEC Reg G. A reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release.

At this time, I'll turn the call back to Neil.

Neil H. Nguyen

Thanks, Omar. In looking at the third quarter results, I'm pleased with the sequential improvement in the online operating results, reversing a double-digit decline and these results were achieved in a seasonally weak quarter despite the well-documented pressure in Europe. In our TV segment, while HD penetration continues to grow and pricing appears in the near term to have stabilized, results were below our expectations due to continued lower spending from our entertainment vertical. Last quarter, I had shared that the broad industry trends support a cross-channel strategy. With online video and data-driven products key to our vision, I also relayed that clients were telling us they believe in our strategy and the value proposition that we present.

This quarter, we saw progress with the execution of several large customer wins and contractual commitments. So part of my message today is our strategy is gaining traction. Today, DG sits at the crossroads of an evolving advertising ecosystem, with established assets in both of the most relevant advertising mediums. The convergence of channel is happening where video will be agnostic across screens and the transition from a black box closed system will give way to greater transparency, automated workflow and data-driven advertising as the new operating standard.

The dramatic growth of connected devices globally and consumption of video continues to grow exponentially, representing a massive opportunity for DG to continue evolving and take advantage of the growth trends in online video and data-driven advertising services. At CNET air well [ph], their video ad revenue has grown from $10 million to over $100 million over the past 2 years. As a proof point of this converge strategy, this quarter we have signed several significant TV, video and online deals with some of the largest advertising groups in the world.

I'll discuss some of our key partnerships and customer wins shortly, but first, let me review Q3 highlights. In a seasonally weak quarter, total revenues increased 11% to $94 million. EBITDA was down 11% to 27.6 due to primarily lower TV revenues, along with ongoing investments to integrate the business, product development and a $700,000 negative FX impact.

As I stated at the beginning of the year, 2012 is a year of investment to create the infrastructure and products to leverage the opportunity in front of us and our spending is in line with our plan.

Revenue in the Online segment was $33.7 million, showing a marked improvement from Q2 despite a negative 18% decline in EMEA revenues. As a reminder, historically, EMEA has represented 40% of our Online segment revenues. So we're very pleased that with the integration largely behind us, the addition of key members of management team has stabilized the business and are beginning not only to recapture lost clients but we're on the offensive again.

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