Full Transcript of 24/7 Media’s 3Q05 Conference Call — Prepared Remarks (TFSM)

Here’s the entire text of the prepared remarks from 24/7 Real Media’s (ticker: TFSM) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Noah Schankler, Investor Relations
David Moore, Chairman and Chief Executive Officer
Jonathan Hsu, Chief Financial Officer

Analysts:

Joe Maxa, Dougherty & Co, Analyst
Stewart Barry, ThinkEquity Partners, Analyst
George Mihalos, Gilford Securities, Analyst
Aaron Kessler, Piper Jaffray, Analyst
Sameet Sinha, Kaufman Brothers, Analyst
Jeff Osher, JMP Securities, Analyst

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to 24/7 Real Media's third-quarter 2005 results conference call. Operator Instructions I would now like to turn the conference over to Noah Schankler, Director of Corporate Development. Please go ahead.

Noah Schankler, Director of Corporate Development

Thank you. Hello and welcome to 24/7 Real Media's third-quarter results conference call. On the line today are Chairman and Chief Executive Officer David J. Moore and Chief Financial 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. The Company makes these statements as of November 3, 2005 and 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 and depreciation. A he supplemental schedule to the Company's earnings release provides a reconciliation of non-GAAP to GAAP financial measures. All non-GAAP financial measures are provided as a complement to the Company's GAAP results, and the Company encourages investors to consider all 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.24/7RealMedia.com.

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

David Moore, Chairman and Chief Executive Officer

Thank you, Noah, and good morning, everyone. Once again I'm pleased to have the opportunity to report on another strong quarter for 24/7 Real Media. The momentum we achieved during the first half of the year was maintained in the third quarter, enabling us to generate exceptional operating results with strong sequential and year-over-year growth throughout the Company.

Q3 revenue of 35.1 million exceeded our guided range of 32 million to 33 million, driven primarily by a significant increase in the adoption of our search engine marketing managed services offering during the quarter. Pro forma operating income of $0.05 per share was a considerable improvement over the 0 per share reported for this period last year.

Cost containment and sales, marketing and administrative expenses continued to reflect the operating leverage inherent in our operating model. The ability to allocate these resources to our forward-looking technology development efforts without compromising our commitment to positive results for our shareholders allowed 24/7 Real Media to continuously improve upon our leading technology platform.

I'm very pleased to announce that as of this morning 24/7 Real Media is once again listed on the NASDAQ National Market, ending three years on the small cape market. This listing more appropriately reflects the continued growth and cash flow generated by our operations and signals to our shareholders the seriousness of our efforts to become the market bellwether of our extended sector.

The third quarter also witnessed the formation of a landmark strategic partnership between 24/7 Real Media and Dentsu, Japan's largest and most prestigious advertising agency. Headquartered in Tokyo the joint venture K.K. 24/7 Search will bring together 24/7's operational and technological SEM expertise and Dentsu's local market clout, along with a client roster of over 6000 advertisers.

The joint venture, which is 51% owned by 24/7 Real Media, is led by Jay Woo Chung, head of our Asian operations. Utilizing besides D&A the only global SEM platform employing Japanese keywords to address the Japanese paid search market, our shared goal for this JV is to become the definitive choice for any advertiser looking to tap into this fast-growing marketplace.

It bears repeating that the Japanese market for online advertising is second only to the U.S. marketplace in annual dollars spent. And the allocation to paid search has been growing even more rapidly in that country than it has here in the United States. Estimates for 2005 are for total search spending in Japan of about 550 million, growing to over $1 billion annually in 2008. Currently nearly half of all advertisers running the paid search campaign are doing so without the assistance of an agency or an SEM service provider such as K.K. 24/7 Search. This represents a tremendous opportunity for a new company to develop a proprietary client list beyond that initially contributed by Dentsu.

To that end, I'm pleased to report that we have had great success in our efforts to bring on board some of the brightest individuals currently involved in the relatively new Japanese SEM market. The JV has recently moved into its new downtown offices and with the assistance of locally deployed 24/7 Real Media employees is building out the ideal business offering for this market. Now with any new business initiatives, there will be some hurdles to overcome through 2006, but internally we all recognize the long-term importance of this market to 24/7 Real Media and are committed to superior execution.

Jon will provide some financial color on the joint venture during his comments later this morning, but I would like to emphasize that our Pacific Rim venture is just the most recent example of 24/7 Real Media's management team executing upon it strategic roadmap for growth and profitability.

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

Jonathan Hsu, Chief Financial Officer

Thanks, David, and welcome to all of you on the call.

I would like to begin by stating that 24/7 Real Media is in its best financial shape ever. Cash flow from operations during Q3 was a record $4.9 million. Our balance sheet continues to strengthen, providing 24/7 Real Media with good financial flexibility to pursue operational and strategic goals such as the formation of our joint venture with Dentsu.

Let me now review our financial results in more detail. Total revenue for the third quarter ended September 30, 2005 rose 69% to 35.1 million from third-quarter 2004 revenue of 20.8 million and climbed 4% sequentially from the strong results posted during the second quarter of 2005. We achieved pro forma operating income of 2.3 million for the third quarter or $0.05 per diluted share. GAAP not net loss for the third quarter of 2005 was .8 million or $0.02 per share compared with a loss of 1.7 million or $0.04 per share in the year ago period.

Media Solutions revenue, which includes revenue from the 24/7 Web Alliance and other media services, climbed 29% to 15.5 million in the third quarter of 2005 from 12.1 million in the same period a year ago. Gross margins were sequentially stable at 32.4% and in line with the guided range of 30 to 32%.

Search Solutions contributed $13.7 million to revenue in the third quarter of 2005, up 234% from 4.1 million in the same quarter of 2004. Blended gross margins in the segment were 27%, reflecting a significant outperformance in the lower margin full-service SEM work performed during the quarter. Technology Solutions revenue rose 26% to 5.8 million in the third quarter of 2005 from 4.6 million in the same quarter of 2004 as we continued to capture market share gains from some of our peers and grow overall impression. Gross margins for the segment were 82.9%.

Beginning with this most recent quarter, 24/7 Real Media is consolidating the financial results of our 51% owned subsidiary, K.K. 24/7 Search, and our reported filings. 100% of the revenue and costs from the venture will be reported in our 24/7 Search division with Dentsu's 49% share of the after-tax earnings or losses stated as minority interest on the consolidated income statement.

Moving forward, our stated guidance beginning with yesterday's release and this call will include expected results from operations of the joint venture. Despite the tremendous opportunities presented by the Japanese market, I would note that the impact on our consolidated results for 2006 will be tempered by the startup nature of the joint venture. We expect the joint venture to contribute between 5 and $10 million to revenue and gross margins consistent with our other global search operations. During this year long startup phase, the joint venture will have a neutral impact to our overall Company's fiscal year 2006 pro forma operating income.

I would now like to update Company guidance for anticipated fourth-quarter and full-year 2005 and 2006 financial results. The Company expects revenue in this fourth quarter of between 36.5 and 37.5 million, the midpoint of which represents an increase of 35% over fourth quarter of 2004 revenue of 27.5 million. The Company expects diluted pro forma operating income per share in the fourth quarter of 2005 to be $0.06 per share. Based on these expectations for Q4, the Company currently anticipates full-year 2005 revenue to be in the range of 134.5 million to 135.5 million, the midpoint of which represents an increase of 58% from revenue of 85.3 million in 2004. The diluted pro forma earnings per share guidance for the year is now $0.18.

Based upon the inclusion of K.K. 24/7 Search and our updated outlook for overall operations, we are increasing guidance for 2006 at this time. We are currently anticipating revenue for full-year 2006 in the range of 175 to 185 million with diluted pro forma earnings per share of $0.30 to $0.32.

I will now turn it back over to Dave.

David Moore, Chairman and Chief Executive Officer

Thank you, Jon. Mary, our operator, will now open up the call to questions. Mary?

Related:

• The Q&A from this call is here.
• All Internet Stock Blog articles on 24/7 Real Media.
• A list of full conference call transcripts available on the Seeking Alpha Network.
• The complete list of Internet stocks (and links to articles about them) covered by The Internet Stock Blog.

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