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Recovery Boosts Ad Outlook For AQuantive, CEO Says

By Paula L. Stepankowsky

LONGVIEW, Wash. (Dow Jones) - As the U.S. economy gradually improves, so does the advertising market and the outlook for online advertising for aQuantive Inc. (AQNT).

The Seattle online advertising company has seen its clients become more bullish about the economy, said Brian McAndrews, chief executive, in an interview.

"From what we see from analyst reports and people who predict overall ad spending, it's reasonable to predict spending will grow," McAndrews said.

Online advertising is also growing, with the year-end estimates expected to show online ad spending increased between 15% to 25% in 2003 over 2002 levels, McAndrews said.

AQuantive has two online advertising units, Avenue A and i-Frontier, that help advise clients like Microsoft Corp. (MSFT), Weight Watchers.com and L'Oreal USA how best to spend their money online. AQuantive's ad technology unit, Atlas DMT, helps clients manage and track their ad campaigns. The company was known as Avenue A until March, when it changed its name to aQuantive.

After losing money on an annual basis every year since it went public in early 2000, aQuantive is poised to turn a profit in 2003.

The company issued guidance with third-quarter earnings in October that it expects to earn between 4 cents and 6 cents a diluted share in the fourth quarter and between 15 cents and 17 cents for the year. McAndrews said the company hasn't issued any new comment since then.

Analysts surveyed by Thomson First Call estimate the company will earn a mean of 6 cents a share for the quarter and 17 cents for the year.

In 2002, the company had a net loss on the basis of generally accepted accounting principles of $4.6 million, or 8 cents a share, on revenue of $132.7 million. The 2002 figures included the impact of a change in accounting principles associated with intangible assets.

Company Positioned As One-Stop Ad Agency
While online companies overall have faced tough times in the past three years, aQuantive has survived by positioning itself as a one-stop agency for all online advertising services, McAndrews said.

"We do everything that people want to do online, whether it be serving ads, marketing, searching or e-mail," McAndrews said.

The company's chief competition right now in its ad agency business are the online arms of traditional ad agencies, McAndrews said. When aQuantive looks for new business, it often finds companies that have been doing their own online ads and want to move to the next level.

"We're not always competing for new business, but, in general, if we do compete, it tends to be the more traditional agencies working with that client," he said.

On the ad technology side, the chief competition is DoubleClick Inc. (DCLK), which sells technology to ad agencies for ad servicing and campaign management. DoubleClick competes with aQuantive's Atlas DMT unit. But McAndrews said Atlas DMT's products focus on providing information on managing and tracking an ad campaign to the advertiser, not the publisher.

Atlas has also introduced innovative products, such as a tool to help advertisers target specific customers online and a tool to measure so-called rich media, which includes motion-based ads. Another new product, ChannelScope, lets marketers measure the off-line sales impact of online advertising, which is increasing in importance, McAndrews said.

"We do feel our real strength has been innovation," McAndrews said.

This investment in technology, some of which has patents pending on it, "makes it very hard for new players to compete," McAndrews said.

Acquisition Enhances Search-Engine Business
Another growth area for aQuantive is in the search-engine business, which the company enhanced earlier in December with the acquisition of Go Toast, a provider of paid search management and optimization tools.

As search engines such as Google.com act more like portals to the Internet, companies have increased their interest in advertising on them.

Designing, booking and tracking ads on search engines, however, is a complicated process, McAndrews said.

"What (Go Toast) does is take a very complicated process and make it a lot simpler," McAndrews said.

Search-engine-related business makes up about 25% of aQuantive's overall business. McAndrews said adding Go Toast won't, by itself, increase revenue significantly.

"But having this tool set available will make it more efficient for us and increase the opportunity to increase our participation in that market," he said.

Retaining customers is a challenge for any ad agency, and aQuantive lost a major customer in July in AT&T Wireless Services Inc. (AWE). But McAndrews said losing large accounts is the exception, not the rule, for aQuantive.

The company's ad agencies attracted six new clients in 2003, including Alaska Airlines and Victoria's Secret, "so we feel we've had a pretty good year," McAndrews said.

The Atlas DMT unit had 114 clients at the end of the third quarter, up from 88 at the end of the second quarter, McAndrews said.

AQuantive stock was trading at $10.27 recently, down from the 52-week high of $13.55 set in October but up from the 52-week low of $2.50 set in January.

Dow Jones News Service