aQuantive Living the Dream

When aQuantive (NASDAQ:AQNT) CEO Brian McAndrews told Tom Taulli that all advertising agencies would someday become digital agencies, few believed.

Investors, especially. Shares of the digital marketer, best known for combining creative talent with technology for producing Web pitches, languished at $23.95 a stub as my fellow Fool pressed McAndrews for details.

His response? Go global. So far, McAndrews has made good on the promise. Here's a list of aQuantive's 2006 acquisitions:

Investors, now bidding $28.10 for aQuantive shares as I write, seem to have gotten the message.

Good thing, too. Growth of online marketing and advertising overseas is on the sort of trajectory that's usually reserved for NASA. Australia, for example, saw digital pitches account for more than $1 billion in revenue during 2006, up 61% from the year before.

That, in turn, is helping aQuantive. Revenue climbed 53% in the just-reported fourth quarter and 43% for the full year. Net income, meanwhile, was up 77% and 53%, respectively, over the same periods. Better still, organic revenue growth, or growth before acquisitions, was 33%.

But the real story was owner earnings (OE), which represent the true cash-generating ability of the firm. For the full year, aQuantive booked $58 million in OE, surpassing net income and up 74% over 2005. Equally important, OE during 2006 equaled 13% of revenue, up from last year's 11%.

Practically, that means aQuantive is using deals to squeeze more cash out of its operations each quarter. If that keeps up, it will make it easier to spend moola to acquire more growth overseas.

But there are areas of concern. Margins top this list; for both the quarter and the year, gross and operating margin declined. Management says part of the problem is integrating new agencies, and those costs will continue through 2007. By 2008, however, margins are supposed to recover as integration is completed.

What should investors do? Watch the OE line instead. So long as aQuantive steadily increases its cash earnings as a percentage of revenue, continued growth should be assured. I've little doubt that McAndrews and his team will succeed in doing that, which is why I'll be buying shares when disclosure rules allow.

Ad up your portfolio with related Foolishness:

• aQuantive was a top growth stock recently.
• But the firm's dream is to be a global digital agency.

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Fool contributor Tim Beyers, ranked 1,494 out of more than 22,700 in CAPS, is a sucker for growth stocks and a regular contributor to Rule Breakers. Tim owns shares of Interpublic and will be buying shares of aQuantive when disclosure rules allow. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on growth stocks, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy dreams of making you rich.