aQuantive Q3: Razorfish Weighs, DRIVEpm Strong

Third quarter growth in aQuantive’s Atlas DMT and DRIVEpm units offset dragging profits in its new Razorfish business. The result was net income of $3.5 million, or $0.05 per share, which fell toward the high end of the company’s earlier guidance.

The digital marketing company more than tripled its third quarter revenue compared with the same period last year, from $15.5 million to $46.7 million, but net income was down slightly from Q3 2003.

The increased revenue is largely the result of aQuantive’s acquisition of interactive agency behemoth SBI.Razorfish in July. Third quarter results include two months of operations from that business. The company’s combined interactive agencies, Avenue A/Razorfish and i-FRONTIER, brought in $28.3 million, compared with $7.3 million during Q3 2003.

However, the company said the profit from Avenue A/Razorfish is weaker than expected, and several investors quizzed CEO Brian McAndrews and CFO Michael Vernon on the reasons behind this.

“Razorfish margins are not as strong as we would like,” said President and CEO Brian McAndrews. “Razorfish’s business has historically been focused on generating revenues rather than profits. As we put together our 2005 plan, we are working to ensure that objectives are clear and incentives are properly aligned to increase profitability.”

CFO Vernon added Razorfish’s faltering Q3 revenues were partly attributable to projects that didn’t get finished, or “were pushed off a little bit.”

He said the agency would focus on improving the profitability of existing clients, and would redeploy staff to its more profitable accounts.

On the bright side, the company reported doubled margins for its Atlas DMT ad management unit and stand-alone profitability for its DRIVEpm business.

aQuantive issued fourth quarter guidance in the range of $53 to $56 million in revenue, and full-year 2004 guidance of $150 to $153 million. This number is slightly down from the company’s earlier projections, a change that results from lowered expectations for the Razorfish business, the company said. The company is not giving detailed guidance for 2005, but it expects Razorfish revenues to increase by 5 to 8 percent. This is lower than the 10 percent growth predicted last quarter.

The issue of Atlas DMT competitor DoubleClick’s potential sale also came up during the investor call. One investor asked whether aQuantive has the resources to consider buying assets of Doubleclick, which is on the block. McAndrews acknowledged the Razorfish acquisition occupies a large portion of the company’s attention, and that would affect its ability to consider new mergers or acquisitions in the short term.

aQuantive’s reported net income of $3.5 million does not take into account an income tax credit of $20.6 million, which the company recorded as part of a full valuation allowance on its deferred tax assets.

The company’s stock was down 12 percent in morning trading.

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