24/7 Real Media Q1 2007 Earnings Call Transcript

TRANSCRIPT SPONSOR

24/7 Real Media, Inc. (TFSM)
Q1 2007 Earnings Call
May 10, 2007 8:30 am ET

Executives

Sushene Leitch - Director, Investor Relations
David J. Moore - Chairman of the Board, Chief Executive Officer
Jonathan K. Hsu - Chief Financial Officer, Chief Operating Officer, Executive Vice President

Analysts

Aaron Kessler - Piper Jaffray
William S. Morrison - JMP Securities
Stewart Barry - Think Equity
Sameet Sinha - Kaufman Brothers
Chad Bartley - Pacific Crest
Youseff H. Squali - Jefferies & Company
Edward Woo - Wedbush Morgan Securities
Yun Kim - Pacific Growth Equities
Clayton F. Moran - Stanford Group
Jordan Rohan - RBC Capital Markets
Joe A. Maxa - Dougherty & Company

Presentation

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2007 24/7 Real Media earnings conference call. My name is Lauren and I will be your coordinator for today. (Operator Instructions) I would now like to turn the call over to your host for today’s presentation, Sushene Leitch, Director of Investor Relations.

Sushene Leitch

Hello and welcome to 24/7 Real Media’s first quarter 2007 results conference call. On the line today are Chairman and Chief Executive Officer, David J. Moore; and Chief Financial Officer and Chief Operating Officer, Jonathan Hsu, as well as General Counsel, Mark Moran.

Before we begin, the company would like to remind you that it will be making forward-looking statements regarding future events and future financial performance during both the company’s presentation and in response to questions asked during the Q&A that follows. The company makes these statements as of May 10, 2007 and except as required by law, disclaims any duty to update them. You should be aware that actual events and results might be materially different from such forward-looking statements. Please refer to the company’s most recent 10-K and 10-Q for a discussion of risk factors that could materially affect the company’s actual results.

Throughout this conference call, the company may present both GAAP and non-GAAP financial measures. Non-GAAP financial measures, such as pro forma operating income, may exclude charges associated with amortization of intangible assets, stock-based compensation, depreciation and other charges. A supplemental schedule to the company’s earnings release provides a reconciliation of non-GAAP to GAAP historic financial measures.

All non-GAAP financial measures are provided as a complement to the company’s GAAP results and the company encourages investors to carefully consider all GAAP measures before making an investment decision. You may find copies of the company’s SEC filings, its earnings release, including a reconciliation of non-GAAP and GAAP financial measures, and a replay of the webcast of this conference call at www.247realmedia.com.

At this time, I’d like to turn the call over to David Moore, Chairman and CEO of 24/7 Real Media. Dave, please go ahead.

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David J. Moore

Thank you, Sushene. Good morning, everyone and thanks for joining us for 24/7 Real Media's first quarter 2007 conference call. Just a few months in, there are already very clear indications that 2007 is going to be an eventful year for our industry, both in terms of market opportunities and changing sector dynamics. The main growth drivers for the digital marketing sector, including the reallocation of ad spend from traditional to interactive media, globalization of campaigns, and the increased demand for accountability continue, to gain influence and result in larger budgets from a broad spectrum of advertisers.

At the same time, the heightened pace of strategic dialog and activity among industry participants speaks to the critical focus that our sector is attracting. Additionally, there is increased recognition that established, scalable technology platforms are strategically important and we have always believed that technology will play a major role in the evolving, ever-larger advertising industry. I will speak more on this in a few moments.

Operationally, results generated by 24/7 Real Media in the first quarter of 2007 were mixed. We experienced continued strength within our search and technology divisions. However, overall results were dampened by under-performance in our media segment. While we always anticipate the influence of seasonality on first quarter results, especially as compared to the robust holiday-driven fourth quarter activity, we witnessed a more significant seasonal slow-down in CPM based display advertising than previously expected.

Globally, we believe that this sector-wide trend was experienced by many companies in both North America and Europe. One bright spot was Asia, where our leading Korea business started 2007 very strongly.

Encouragingly, we did see a pick-up in overall display advertising activity as we exited Q1 and entered Q2. Our Asia-Pacific operations performed exceptionally well during Q1, nearly doubling revenue year over year on the strength of our Korean media franchise and solid sequential gains within the search engine marketing business.

Our recently announced enhancement to our Decide DNA search engine marketing platform, developed to address the mobile search marketing needs first identified by clients in Asia, is an example of the leverage of both operations and research and development gained through our significant Asian footprint.

We expect continued strong growth from our businesses throughout the Asia-Pacific region. There is a significant opportunity to increase organic cross-selling of products and services, such as the recent successful introduction of our open ad serving platform into the Australian market.

Additionally, our growing partnership with Dentsu continues to open new markets in the region, bringing to bear our compelling combination of traditional and digital media and technology expertise. Most recently, I joined a number of our Dentsu colleagues in Seoul to celebrate the operational launch of our first joint venture office outside of Japan. Concurrently, we have stepped up our business diligence on the other potential expansion markets, most notably China. We have already received many significant China-based sales leads and we are looking at ways to address the growing market needs of Chinese advertisers by the end of this year.

Continued focus on technology innovation cumulated in the release last quarter of Open AdStream Mobile Edition, which enhances the wireless delivery capabilities of our proprietary ad-serving platform. We believe this strengthens our competitive position, given increased marketplace desire to manage across multiple delivery channels. Several strategic clients have already agreed to utilize our Open AdStream Mobile Edition as their technology platform to address the increasing global wireless advertising opportunity.

Finally, the recent acquisition of DoubleClick by Google has created a compelling opportunity for 24/7 Real Media to capitalize upon the independence and sell side focus of the Open AdStream platform, as well as the global breadth of our leading search engine marketing franchise.

We have already increased our sales efforts, our technology development activities, and our recruiting in order to aggressively build upon our market share gains. We believe that these prudent investments will bear fruit as we exit 2007 and enter 2008.

The acquisition of DoubleClick by Google has served as a catalyst for increased corporate development activity throughout the digital marketing sector. Yahoo!’s acquisition of Right Media, the sale of Digitas to Publicis, and the acquisition of Reprise Media by Interpublic have further validated the strategic importance of digital marketing technologies, operations, and expertise.

We believe that our sector is now in a period of both consolidation and increased strategic partnerships, driven by the recognition by traditional media and advertising giants that digital marketing technologies and expertise are necessary strategic assets for any future business model.

To that end, we have engaged Lehman Brothers to explore and assess a wide array of strategic alternatives for 24/7 Real Media, to ensure the continued maximization of value for all our shareholders.

I would now like to turn the call over to Jonathan Hsu, who will take you through the financial results for the quarter. Jon.

Jonathan K. Hsu

Thanks, Dave and welcome to all of you on the call. In a traditionally weak quarter for advertising, 24/7 Real Media operations generated a mixed performance. Our search and technology businesses continued to experience solid growth at rates above the underlying sub-sector growth rate. Both search and technology benefited from increased scale and steady gross margins.

Our media business was negatively affected by a more significant seasonal slowdown in CPM-based display advertising than previously expected, especially in North America and Europe. As mentioned previously, our leading Korea media franchise was a bright spot, performing strongly in the first quarter.

Given the lower gross margin nature of the creative media business, overall global media gross margins experienced a negative mixed shift.

With the opening of our new joint venture office in Seoul, 24/7 Real Media is significantly expanding our successful relationship with Dentsu. Asia is the future and 24/7 Real Media is ideally positioned to benefit.

I would like to take a moment to personally thank the leadership team of Dentsu, who have strongly supported 24/7 search over the past 18 months, and now who entrust 24/7 Real Media to be the partner of choice to address the pan-Asia search opportunity. We are honored by Dentsu’s commitment and we will continue to work very diligently to make certain that we are worthy partners.

And now, let me provide details about 24/7 Real Media's first quarter performance.

Total revenue for the first quarter of 2007 rose 34% to $57.7 million from the first quarter of 2006 revenue of $42.9 million. International revenues continued to accelerate, contributing 64% to overall revenue in the first quarter. This continued shift was driven in particular by significant growth across our operations throughout the Pacific rim, which realized a near doubling of revenue as compared to the first quarter of 2006.

Pro forma operating income for the first quarter was $4.4 million, or $0.08 per fully diluted share, compared to pro forma operating income of $3.5 million, or $0.07 per fully diluted share for the year-ago period.

For the first quarter of 2007, we are reporting a GAAP loss of $56,000, or $0.00 per share, compared with a GAAP net loss of $7.5 million, or $0.15 per share in the year-ago period.

Moving to our business segments, revenue within our media operations grew 13% to $20.6 million in the first quarter of 2007, from $18.2 million in the same period of 2006. Gross margins for the quarter were 28.8%.

Search solutions contributed $28.7 million to revenue in the first quarter of 2007, climbing 61% from $17.8 million in the same quarter of 2006. Blended gross margins in the segment were 21.3%, with search gross profit dollars increasing 29% year on year.

Technology solutions revenue maintained its above market growth rate, rising 21% to $8.3 million in the first quarter of 2007, from $6.9 million in the same quarter of 2006. Gross margins for this segment, excluding stock-based comp, have remained strong at 80.1% for the quarter.

Cash flow from operations for the first quarter was a record $8.1 million, and we ended the quarter with a cash balance of $62.6 million, up from $59.4 million at the end of 2006, an indication of the continued financial strength of the company.

Please note that during the quarter, we invested $5 million into our expanded Dentsu joint venture holding company. Inclusive of this $5 million investment, system-wide cash would total approximately $67.6 million.

Now, let me provide you with company guidance for the second quarter, as well as updated guidance for full year 2007.

For the second quarter of 2007, the company anticipates revenue of between $61 million and $65 million, the midpoint of which represents an increase of 31% over second quarter 2006 revenue of $48.2 million. The company expects pro forma operating income of $0.09 to $0.12 per share for the second quarter of 2007.

For full year 2007, the company is raising previously issued revenue guidance and currently expects revenue of between $265 million and $275 million, the midpoint of which represents an increase of 35% from revenue of $200.2 million in 2006.

The company continues to expect full year diluted pro forma operating income of between $0.52 and $0.55 per share.

I will now turn it back to David.

David J. Moore

Lauren, please open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Aaron Kessler with Piper Jaffray.

Aaron Kessler - Piper Jaffray

Hey, guys, a couple of questions; first, on the guidance, can you help us understand the -- you raised revenue guidance, even though revenues in the quarter were a little light, so maybe what gives you confidence to raise revenues at this point, and also the same thing on the earnings side.

Also, the operating expenses were a little higher. As you indicated, you are investments. Can you give us a little more color what areas you are specifically investing in? And I have one follow-up. Thank you.

Jonathan K. Hsu

Certainly. Why don’t I take a crack at both of those items? Our pipeline has been stronger and stronger as we went through the first four months of this year, and obviously with some of the corporate activities, particularly the acquisition of DoubleClick by Google, a number of larger opportunities have now appeared in our pipeline, so we certainly expect that revenue will accelerate as we go through the back-end of this year and go into 2008.

With regard to expenses, I think that we are going to be investing in technology development in terms of some additional headcount on sales and sales support, particularly to take advantage of these larger organic opportunities that are now presenting themselves because of the Google DoubleClick acquisition. Perhaps everyone has seen the marketing campaign that we launched the Monday after the formal announcement of DoubleClick’s takeover, and based on that, we’ve had a number of significant inbound leads.

I think that those are the buckets in which we will be investing to drive further organic growth going into the outer years.

Aaron Kessler - Piper Jaffray

Great, and could you just give us a sense for the growth in the media business in North America, Europe, and do you think you also need share there? It looks like some of your competitors may have grown a little faster in the North American market. Thank you.

Jonathan K. Hsu

Sure, Aaron. I think that with regard to overall media performance in North America and Europe, I think it was a lackluster quarter, as we indicated. Obviously I am very hesitant to point to any short-term trends because in Q4, both those markets greatly outperformed and certainly I would hesitate to say that that was the beginning of a trend either.

I really do think that CPM-based display advertising did suffer a seasonal pausing of the breath in Q1, and I think many of the bell weathers within the industry certainly reported on that fact.

I think a lot of the solid performers within the media business that maybe some competitors might have experienced were those primarily focused on performance-based display advertising.

Aaron Kessler - Piper Jaffray

Great. Thank you.

Operator

Your next question comes from the line of William Morrison with JMP Securities.

William S. Morrison - JMP Securities

Good morning. David, I was wondering if you could comment just on the strategic initiatives you are looking at with Lehman. If you have an idea of whether or not, or a preference, I should say, of selling the business as a whole or would you be open to selling individual pieces of the division separately? For instance, maybe just comment a little bit more about the process and give us a sense of where you are at and what kind of feedback you’ve been having, and then I have a follow-up. Thanks.

David J. Moore

I think it is pretty hard to give you a lot of granularity here, Bill, but needless to say, as we mentioned earlier with the various acquisitions that have taken place, with Digitas and Reprise and DoubleClick and Right Media, we’ve experienced a lot of inbound activity. Our focus continues to be on what is best for our shareholders and that’s the reason we have engaged Lehman.

William S. Morrison - JMP Securities

And one quick follow-up on the media side, was the softness related to -- it sounds like you are saying the softness was related to industry-wide softness. I’m curious if there were also any individual customer issues in the quarter. I believe [Leico] started selling direct in January. I’m just curious if that had an impact on the media side. Thanks.

Jonathan K. Hsu

Bill, there were no endemic changes to our business. We really do believe that it was something that was experienced, having talked to a number of other industry participants on both sides of the house, many people anecdotally said that after a very heavy Q4, where there were a lot of budget flushes for CPM display advertising, a lot of agencies seemed to take the first couple of weeks off in January and just were slow out of the gate. Fortunately, we do see a pick-up in activity as we go throughout Q2 and the pipeline going into the back half of the year looks pretty strong.

William S. Morrison - JMP Securities

Thanks.

Operator

Your next question comes from the line of Stewart Barry with Think Equity.

Stewart Barry - Think Equity

Good morning. Jonathan, do you expect media gross margins to improve from first quarter levels?

Jonathan K. Hsu

Yes, I think as North America and Europe activity picks up and Korea continues to perform, gross profit margin percentage should normalize.

Stewart Barry - Think Equity

And do you expect potential buyers or partners to look at your search business on a gross revenue or net revenue basis? If you look at it on a net revenue basis, it is about 17% of overall company revenue, but if you look at it on a gross revenue basis, it is about half of company revenue. I guess what I’m getting at is who does that affect your multiple and how would you position the company, given that agencies tend to go for lower multiples than technology companies?

Jonathan K. Hsu

I think that as Dave mentioned, it would be hard and probably inappropriate for us to comment on any specific alternatives that we might be considering. I would say that we’ve always believed that since we are at the early stages of a shift of media revenue and advertising revenue into digital forms, whether they be display advertising or search, that anyone with strong technologies, as well as embedded, established footprints for those technologies that have proven to be scalable have a lot of inherent value.

We have always believed that those with that type of strategic access for technology will have a lot of value, either on a standalone or within a larger business.

Stewart Barry - Think Equity

Finally, to what extent does your relationship with Dentsu preclude or complicate potential partnerships or deals with Dentsu competitors?

Jonathan K. Hsu

Fortunately, it doesn’t. We feel very comfortable and very appreciative of the relationship that we have with Dentsu and we continue to work very closely with them. As Dave mentioned, a good team led by Dave just celebrated the opening of a significant new office in Korea with Dentsu last week.

Stewart Barry - Think Equity

Great. Thank you very much.

Operator

Your next question comes from the line of Sameet Sinha with Kaufman Brothers.

Sameet Sinha - Kaufman Brothers

Good morning. Just a quick question; you raised guidance and you also spoke about strength in the second half. Can we assume that the strength is coming from first, the media business, which is accelerating, and secondly, the opportunities that are created by the Yahoo! DoubleClick merger?

Jonathan K. Hsu

Certainly. I think that we do have a good pipeline going into the back end of the year and that pipeline is one that is growing quite significantly. I think that when you take a look at the sales cycles, in general media has the shortest sales cycle, search has a medium sales cycle, and technology has a longer sales cycle, just because of the nature of the engagement.

So certainly as we enter the back half of 2007 and look forward to 2008, I think that there can be cyclical upturns in both media and then in search, and technology will continue with slow, steady build that we are going to continue trying to take advantage of what we believe is a significant opportunity in the marketplace.

Sameet Sinha - Kaufman Brothers

Any comment on any impact from the proliferation of the user-generated content and how that’s impacted CPMs during the quarter, if any?

Jonathan K. Hsu

It has not had any specific impact within this quarter. I think in general, user-generated content represents a large proportion of available inventory on the overall broad Internet, and I think that the proliferation of many new business models are really formulating in order to address it, but there has been really no specific impact on CPMs due to any spikes or decreases in user-generated content in the short term.

Sameet Sinha - Kaufman Brothers

Okay, and one final question; can you talk about the change in share base calculation, provide more color on that part?

Jonathan K. Hsu

Certainly. I think previously we utilized the full amount of restricted shares in our fully diluted share count as they were granted. We were guided to revise to use the treasury stock method in this quarter and to change that on a look-back basis as well, which is more consistent with GAAP and it is also the methodology we currently use for options.

So it does have, essentially there is a tax benefit that is presumed to use to repurchase shares.

Sameet Sinha - Kaufman Brothers

Thank you.

Operator

Your next question comes from the line of Chad Bartley with Pacific Crest.

Chad Bartley - Pacific Crest

Good morning. Thank you. I wanted to go back to your full year earnings guidance. Despite the weakness in Q1 and even your Q2 outlook, the full year implies a strong ramp in margins and earnings in the second half, and I just want to be clear on what is driving that? Is it better gross margin? Is it pulling back on the sales and marketing investments? Because that incremental margin really needs to ramp to get there. Thanks.

Jonathan K. Hsu

I think that it is going to be primarily improvements in our overall margin, with media margins normalizing, as well as revenue continuing to ramp through the back end of this year and that will drive improvements in operating leverage.

I will just say that if you look back historically over the last several years, there has been an historical dramatic improvement in Q1 to Q4 operating margins in each of the last several years.

Chad Bartley - Pacific Crest

Okay, and then, if I may, in terms of the second half revenue ramp, is a large part of that in the technology line? Is that where you are seeing the pipeline and the impact from the proposed acquisition of DoubleClick by Google?

Jonathan K. Hsu

I think that there will be some improvements and enhancements to technology. As I previously mentioned, technology does tend to have a longer sales cycle so much of the improvement will also come from media and search.

Chad Bartley - Pacific Crest

Thank you.

Operator

Your next question comes from the line of Youseff Squali with Jefferies & Company.

Youseff H. Squali - Jefferies & Company

Thank you very much. It looks like you had the same type of challenges in CPM-based premium inventory as Yahoo! did this quarter. I was wondering, why do you expect that to change short term? And since there is more and more demand for performance-based advertising, I was wondering if you guys had any plans to move into the CPA based model in your media business?

Jonathan K. Hsu

Why don’t I speak to the first and allow -- turn it over to Dave to speak to the second item.

With regard to what we are seeing in the pipeline, we are seeing already a pick-up in activity. As I mentioned, I think that many people, and including the bell weather, Yahoo! did report, especially in the North American and European regions, a lackluster or slow start out of the gate for the year, but based on the activity flow that we are seeing here, we are certainly encouraged by the pipeline building.

David J. Moore

From a performance-based perspective, much of our CPM-based advertising still has a performance equation to it. Now, if you look at it from the publisher’s perspective, the CPA type of advertising is probably or is the worst way to monetize page views on their behalf. So if you’ve got a lot of additional inventory, it certainly is better than nothing at all but that doesn’t provide much of a cost-per-thousand to websites that sell advertising in that fashion.

So while we’re keeping a close eye on that sector, at this stage of the game we have no plans to move into it.

Youseff H. Squali - Jefferies & Company

Okay, and then Jonathan, can you clarify something on your share count? What’s the fully diluted share count, including everything -- restricted stock, warrants, options, basically what a buyer would use in their valuation analysis?

Jonathan K. Hsu

Well, I’m not certain what a buy would consider because obviously it will be up to them how they treat restricted stock and options for employees, but our fully diluted share count for Q1, for purposes of our pro forma share count, which is something that we point to as representative of the outstanding shares for the company, is $55.4 million.

Youseff H. Squali - Jefferies & Company

That does not include restricted stocks, right? The invested portion?

Jonathan K. Hsu

Well, I think that there are approximately 1 million shares of restricted stock in that share count already, based on the treasury method.

Youseff H. Squali - Jefferies & Company

Got it, and lastly, maybe David, is there a timeline you’ve given the bankers for this mandate, or is it kind of open-ended?

David J. Moore

Suffice to say, again, very tough to comment on any timelines or participants.

Youseff H. Squali - Jefferies & Company

Okay, thanks a lot.

Operator

Your next question comes from the line of Edward Woo with Wedbush Morgan Securities.

Edward Woo - Wedbush Morgan Securities

It’s good to see your cash balance going up, even though you made the investment of $5 million. Do you know how much more you’ll be investing the rest of the year, and can we assume that China will be the next place you open up your office?

Jonathan K. Hsu

There will be no additional investment required. The $5 million that we invested, as well as matching the $5 million that Dentsu invested, capitalized the holding company, which is charged with opening up operations in five markets in total throughout Asia. It has $10 million of capital to work with so I think that for the foreseeable future, there will be no additional investments necessary.

Edward Woo - Wedbush Morgan Securities

Great, and do you think we should see any meaningful contribution starting next year?

Jonathan K. Hsu

I think that as we rolled out into Korea, which is the second-largest advertising market currently throughout Asia-Pac, as we go through 2008 and 2009, we do significantly believe that there will be meaningful activity within those joint ventures, but I do want to remind everyone that on this new joint venture, which addresses Korea, China, India, Taiwan and Thailand, we are not consolidating the results from that joint venture because we own specifically 50% of the joint venture and are equal partners with Dentsu.

Edward Woo - Wedbush Morgan Securities

Great, thanks.

Operator

Your next question comes from the line of Yun Kim with Pacific Growth Equities.

Yun Kim - Pacific Growth Equities

Thank you. Can you explain the dynamics behind the gross margin on your media side of the business in the quarter? Especially in regard to the seasonality? It seems like there was some level of a fixed cost in that business for the gross margin to decline quite a bit.

Jonathan K. Hsu

Thanks for the question. Gross margin deterioration in Q1 for the global media business was only due to a mix shift with Korea over-performing and North America and Western Europe under-performing. Because North America and Western Europe carry in general higher gross margins than Korea does, the mix shift negatively affected gross margin percentage. We expect this gross margin percentage to normalize as we go into Q2 and beyond, so we do expect the gross margin percentage to increase back up.

Within each country, gross margin percentages were steady.

Yun Kim - Pacific Growth Equities

Okay, great, and then in terms of the strategic options you guys are exploring, obviously with the possibility that the company can be acquired, would that uncertainty actually hurt your business opportunity out there in the near-term, rather than help you? How do you manage that risk of trying to take advantage of the opportunities that you see out there in your pipeline?

David J. Moore

Well, there certainly is an advantage to a shorter process than a longer process, from an operational perspective. So to that end, our preference would certainly be for shorter so that that situation is avoided.

Yun Kim - Pacific Growth Equities

Great. Thank you very much.

Operator

Your next question comes from the line of Clay Moran with Stanford Group.

Clayton F. Moran - Stanford Group

Good morning. Could you -- you talked about the Google DoubleClick deal, possibly giving you some opportunity strength in your pipeline. Could you just tell us which segment you see that business in and give us a theoretical example of what it would look like? Thanks.

Jonathan K. Hsu

Certainly. DoubleClick has two areas in which 24/7 is competitive. One is on their dart for publishers business, or DFP, which is the majority of market share and the market leader within our ad serving and analytics for publishers segment, competes directly against our technology business. And then the performance search unit within DoubleClick also competes against our global search franchise.

I believe in both areas there are significant organic opportunities to gain significant market share, given that DoubleClick is the market leader in both segments. There are many customers within DoubleClick’s current portfolio who in many of their actions publicly have put themselves on the other side of the fence against Google, and so we have a strong believe that those types of large clientele would be very welcome of an alternative to a Google DoubleClick combination.

Clayton F. Moran - Stanford Group

Thank you.

Operator

Your next question comes from the line of Jordan Rohan with RBC Capital Markets.

Jordan Rohan - RBC Capital Markets

Thanks. I have two questions. The first is, you guys are announcing the hiring of an investment bank to explore strategic alternatives as if it were a new or a recent occurrence, yet sources, even public sources, have indicated that the company’s been shopped for months, dating back to at least February. Can you comment on why you decided to announce it now and didn’t announce it back in the last quarterly conference call?

Second question is Microsoft is now in discussions with Yahoo! about joining the Right Media exchange. This could change the dynamics of the exchange business to have more than just user-generated content. Do you think this is a longer term secular threat to the CPM-based ad resale business?

Jonathan K. Hsu

Let me try to address both of your questions, Jordan. With regard to public process, obviously it would be inappropriate for us to comment about the timing or nature. Suffice it to say, the acquisition of DoubleClick from Google was a very recent phenomenon and certainly has spurred a great amount of corporate activity in this sector.

And then within the Microsoft/Yahoo! dynamic, obviously we don’t have any specific insights into what they may be considering, but the initial reaction to your question is that it should have no impact on the strength of and the market proposition that existing networks provide.

Operator

Your next question comes from the line of Joe Maxa with Dougherty & Company, and that will be your last question.

Joe A. Maxa - Dougherty & Company

Thank you. Jon, I was hoping you could break out your geographic revenues, as you’ve done typically?

Jonathan K. Hsu

Sure, I’d be happy to do so. In the most recent quarter, total U.S. revenues increased 16% year on year; U.K. revenues increased 23% year on year; and Korea revenues increased 53% year on year, and the Asia-Pac as a whole, inclusive of Japan and Australia, nearly doubled year on year.

Joe A. Maxa - Dougherty & Company

Thank you. And then, looking down the road, what are your expectations? I know you say Asia-Pac is really the future. Where do we see maybe that geography get up to 50% of your revenue? Is that two or three years down the road?

Jonathan K. Hsu

I think that is certainly an interesting dynamic and within the realm of reasonable possibility as we look forward. I think that we’ve been very bullish on the Asia-Pac region for several years now. That’s why we are fortunate enough to have a significant partnership with Dentsu and then reinvest into that partnership to address the rest of the Asia-Pac market.

But I think that a big catalyst for the overall growth of Asia-Pac will be the emergence of mainland China as being an advertising powerhouse. I think as we exit ’08 and go into ’09 and ‘010, with those two events being framed by the Beijing Olympics and the Shanghai World Fair, I do think that significant amounts of all advertising will be flowing into China and that will certainly benefit anyone who has digital assets to bring to bear there.

I think that that’s probably a very good timeframe to consider a significant ramp-up within Asia-Pac, beyond what we even have today.

Joe A. Maxa - Dougherty & Company

So in the near term, are you still looking for this near doubling of growth?

Jonathan K. Hsu

We are certainly very bullish on Asia-Pac, as evidenced by our Q1 performance in Asia-Pac. I do think that our operations and franchises there are in line for a very, very strong year.

Joe A. Maxa - Dougherty & Company

Thanks a lot, Jon.

Operator

There are no further questions in the queue. I will now turn the call back over to Mr. Dave Moore for closing remarks.

David J. Moore

Thank you, Lauren, and thank you, everyone, for listening this morning. This is certainly an exciting period for all participants in the digital marketing sector, and particularly for 24/7 Real Media. I look forward to speaking with you again during our next call.

Operator

This concludes the presentation. You may now disconnect and have a great day.

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