24/7 Real Media Q4 2005 Earnings Conference Call Transcript (TFSM)

March 2, 2006
8:30 a.m. EST

Executives

Noah Schankler - VP, IR
David Moore - Chairman & CEO
Jonathan Hsu - CFO

Analysts

Joe Maxa - Dougherty & Co.
Stewart Barry - ThinkEquity
Aaron Kessler - Piper Jaffray
Ahmed Conn - Jefferies & Co.
Clayton Moran - Stanford Group
William Morrison - JMP Securities
Sameet Sinha - Kaufman Brothers
George Mihalos - Gilford Securities
Stuart Kagel - Janco Partners

Presentation

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the 24/7 Real Media fourth quarter and 2005 results earnings conference call. (Operator Instructions). At this time I would like to turn the presentation over to the Vice President of Investor Relations, Noah Schankler. Please go ahead.

Noah Schankler

Thank you, operator. Hello and welcome to 24/7 Real Media's fourth quarter and fiscal year 2005 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, during both the Company's presentation and in to response to questions asked during the Q&A that follows. The Company makes these statements as of March 2, 2006 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 and depreciation. A supplemental schedule for the Company's earnings release provides a reconciliation of non-GAAP to GAAP historical 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 this webcast to this conference call at www.247RealMedia.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

Thanks, Noah, and good morning, everyone. 2005 was an outstanding year for 24/7 Real Media, and I would like to thank our employees, our clients, our partners and our shareholders for their strong support over the past 12 months. 24/7 Real Media is in terrific shape and is positioned for continued success.

During 2005, our revenue grew more than 50% organically year-over-year, as we capitalized on the strategic groundwork put into place during 2003 and 2004. We continued to enhance our leading global presence, opening new offices in Tokyo, Rome and Hamburg to tap into the attractive growth dynamics in global Internet advertising markets. Today, 24/7 Real Media is the only company in our sector to provide services to clients in each of the 10 largest digital advertising markets in the world. This broad geographic exposure has allowed 24/7 Real Media to increasingly benefit from the strength of global Internet advertising markets.

In the fourth quarter, revenues rose significantly to $41.7 million, outpacing our previously stated expectations of $36.5 million to $37.5 million. Pro forma operating income increased to $0.08 per share, beating our previously stated expectations of $0.06 per share, while GAAP net income was $0.03 per share. This 70% sequential increase in profitability on sequential revenue growth of 19% demonstrates conclusively the continued operational leverage inherent within our integrated businesses.

Our landmark partnership with Dentsu to exploit the fast-growing Japanese search engine marketplace is off to a strong start. Currently the Japanese joint venture employs 16 people who are focused exclusively on leveraging our proprietary Decide DNA search engine marketing platform, the only full-service solution effectively localized to operate in the Japanese language. Japanese market reception to the joint venture has been outstanding, and we are confident that Japan will be a more meaningful contributor to 24/7 Real Media's operational results in 2007 and 2008. John will provide additional guidance about the expected pace of operations and how we will be reporting this information later on this morning's call.

As we look forward to the upcoming years, there are three major market trends that will further drive growth in our sector.

1. Increased broadband penetration will encourage the development of richer ad formats, which in turn will greatly improve consumer response and attract more advertiser dollars.
2. Greater confidence with e-commerce will increase consumer Internet usage, prompting advertisers to allocate more resources against online purchase intent.
3. Globalization. The Internet has effectively made the world smaller. Successfully reaching global audiences, regardless of where they may reside, will increasingly be the goal of advertisers and content providers alike.

24/7 Real Media's market-leading technologies and unmatched global footprint will allow us to help clients and partners take advantage of these trends. We are uniquely positioned to lead the next phase of industry growth.

I will now turn the call over to Jonathan Hsu who will take you through the financial results for the quarter and the full year. John.

Jonathan Hsu

Thanks, Dave, and welcome to all of you on the call. Q4 was truly an outstanding quarter for 24/7 Real Media, capping off a very strong year. I would like to reiterate our thanks to our employees, clients, partners and shareholders for their continued support of our Company.

Total revenue for the fourth quarter of 2005 rose 52% to $41.7 million from the fourth quarter 2004 revenue of $27.5 million and climbed 19% sequentially from the $35.1 million reported in the third quarter of 2005. We generated pro forma operating income of $4 million for the fourth quarter of 2005, $0.08 per fully diluted share, compared to pro forma operating income of $1.5 million or $0.03 per share for the fourth quarter of 2004.
GAAP net income for the fourth quarter of 2005 was $1.3 million or $0.03 per share, compared with a net loss of $2.8 million or $0.06 per share in the year ago period.

For the full year ended December 31, 2005, revenue was $139.8 million, an increase of 64% over revenue of $85.3 million for 2004. Our full year pro forma operating income for 2005 was $9.9 million or $0.20 per share, a fourfold increase over the $2.4 million generated in the prior year.

GAAP net income for the full-year was breakeven, compared with a loss of $3.5 million or $0.10 a share in the year ago period.

Media Solutions revenue climbed 23% to $18.9 million in the fourth quarter of 2005 from $15.4 million in the same period a year ago. Gross margins for the quarter were 30.7%. Search Solutions contributed $16.4 million to revenue in the fourth quarter of 2005, up 141% from $6.8 million in the same quarter of 2004. Blended gross margins in the segment were stable at 26.2% as expected.

Technology Solutions revenue rose 23% to $6.5 million in the fourth quarter of 2005 from $5.3 million in the same quarter of 2004, as we continue to benefit from increasing impression volumes and market share gains. Gross margins for the segment were 83.2%.
As we stated last quarter, 24/7 Real Media is consolidating the financial results of KK 24-7 Search, our joint venture with Dentsu, in our reported filings. 100% of all revenue and costs from this joint venture are included in the results of our 24/7 search division. Dentsu's 49% share of the after-tax earnings or losses in the joint venture is reported as minority interest on 24/7 Real Media consolidated income statement. Our reported net income or loss will only include our proportionate share of the net income or loss of the joint venture as calculated in accordance with U.S. GAAP.

In order to provide the most accurate picture of the operational performance of 24/7 Real Media, our calculation of pro forma operating income will only include 51% of the pro forma operating income or loss of the joint venture. The reconciliation of pro forma operating income to GAAP operating income is provided as a supplemental schedule to our fourth quarter and fiscal year 2005 earnings release.

I would like to provide some additional information about the operations of the joint venture at this time. KK 24-7 Search was formed to provide SEM services to advertisers participating in the growing Japanese page search market. Utilizing the Decide DNA technology platform, the joint venture will provide these services primarily to two distinct categories of advertisers. (1) clients of Dentsu, and (2) independent or direct clients of KK 24-7 Search. The latter group are either operating without an agency of record, or employ the services of an advertising agency other than Dentsu. Direct clients will be targeted and serviced by dedicated account managers, fully employed by the joint venture.

According to U.S. GAAP and based in part upon the contractual relationships between 24/7's KK Search, Dentsu and their respected and shared clients, the joint venture will recognize all SEM revenue generated by Dentsu's clients net of search traffic costs. All billings from direct clients of KK 24-7 Search will be recognized on a gross revenue basis.

Overall, KK 24-7 Search is off to a better than expected start. Under the U.S. GAAP guidelines described earlier, we still expect that the joint venture will generate between $5 million and $10 million in recognized revenue. However, this revenue will be at a blended gross margin of approximately 60%, significantly higher than previously forecasted.

Based upon the smoother than expected start up and transition phase, we currently expect the joint venture to begin generating positive pro forma operating income in the third quarter of 2006. We are forecasting that the full year contribution of the joint venture will add $0.01 of pro forma operating income per share to 24/7 Real Media's results.

Because our joint venture with Dentsu has experienced initial success, and since market receptivity has been stronger than expected, we anticipate that the joint venture will be an important contributor to overall results in 2007 and 2008. Please keep in mind, however, that our joint venture in Japan is a new operation that started in November of 2005, and that visibility past 2006 is relatively limited due to the limited operating history.

I would now like to provide Company guidance for anticipated first quarter financial results and update our guidance for full year 2006. The Company expects revenue in the first quarter of between $40 million and $41 million, the midpoint of which represents an increase of 39% over first quarter 2005 revenue of $29.1 million. The Company expects diluted pro forma operating income per share in the first quarter of 2006 to be $0.06 per share.

Based on our strong start to 2006, the Company now anticipates full year 2006 revenue to be in the range of $185 million to $195 million, the midpoint of which represents an increase of 36% from revenue of $139.8 million in 2005. The diluted pro forma operating income per share guidance for the year is now $0.32 to $0.35. I will now turn it back over to Dave.

David Moore

Thank you, John. We will now open up the call to questions, operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Joe Maxa, Dougherty & Co.

Joe Maxa - Dougherty & Co.

Congratulations on a great quarter, guys.

David Moore

Thank you, Joe.

Joe Maxa - Dougherty & Co.

The Dentsu revenue that you recognized in Q4, was that a gross or net basis?

Jonathan Hsu

The majority of the operations from Dentsu in Q4 came from Dentsu clients, so the majority of them were recognized on a net basis. Just a de minimus amount of revenue that reflected about six weeks of operations in Q4.

Joe Maxa - Dougherty & Co.

You said profitability by Dentsu by Q3, if I heard correctly?

Jonathan Hsu

That is correct.

Joe Maxa - Dougherty & Co.

Your revenue expectations for Q1 are down sequentially from Q4. Should we interpret that as being seasonally weak in media, yet search should still see some sequential growth?

David Moore

In general we are guiding toward flat Q4 to Q1 performance, and I think what you see in the overall digital advertising industry from our extended competitors is that they are expecting a seasonally weak Q1. Based on the strength of our operations, we are not seeing that currently, especially given our international spread. So I would say that of the three business lines, the media business tends to be the most affected by the Q4 to Q1 seasonality, but we're seeing strength across all three business lines currently.

Joe Maxa - Dougherty & Co.

Great. Your full year expectations, can you help us put a framework on that as far as growth in your different product lines, you know ballpark?

Jonathan Hsu

We don't historically give specific growth numbers for each business line. As we have stated, our goal is to grow each business that we have faster than the underlying segment growth rate that is expected by the marketplace. I think that will definitely be the case in 2006.

One other factor that is contributing to this out-performance versus the industry is the fact that we had 57% of our revenues coming from international markets. As we have long asserted, the international market will consistently grow faster than the large and critical mass U.S. market.

Joe Maxa - Dougherty & Co.

Lastly, the volume is clearly up in all areas. Can you talk a little bit about pricing in your different segments?

Jonathan Hsu

Pricing is generally firm across all segments, so we are benefiting from both firm pricing trends and increased volume at this point.

Joe Maxa - Dougherty & Co.

Thanks a lot.

Jonathan Hsu

Thank you.

Operator

Our next question comes from Stewart Barry, ThinkEquity.

Stewart Barry - ThinkEquity

Good morning. Congratulations.

David Moore

Thank you, Stew.

Jonathan Hsu

Thank you.

Stewart Barry - ThinkEquity

The media gross margins came in a little bit from the third quarter. Can you explain that? What was the U.S. versus the international growth during the quarter?

Jonathan Hsu

Certainly. Media in gross profit dollar terms increased sequentially and year on year by great amount. The target gross profit margin that we experienced in Q4 is within our guided range. Our international media market tended to grow faster than the U.S. media market, which also experienced strong growth in Q4. Some of the international markets, particularly [Free Adu] experienced lower gross margins in their media business.

Regarding overall revenue spreads and growth, what we're seeing is that year-on-year growth in the U.S. was approximately 3% to 5%, and so the balance obviously in international is growing substantially more than that.

Stewart Barry - ThinkEquity

So in the media segments, should we use the fourth quarter as we look forward or look at the blended average for '05 in terms of our media gross margins?

Jonathan Hsu

I think that for all three of our business lines we're anticipating stable gross margin percentages and obviously significantly increased gross profit dollars in each of the three business lines.

Stewart Barry - ThinkEquity

Awesome, thanks.

Jonathan Hsu

Great.

Operator

Our next question comes from Aaron Kessler, Piper Jaffray.

Aaron Kessler - Piper Jaffray

Hi guys, good quarter.

David Moore

Thanks.

Aaron Kessler - Piper Jaffray

In the search business, can you comment on how many clients you added in the quarter, any customer losses? Also, how much of the revenue growth was from current clients versus new? Any countries in particular that were strong? Thank you.

David Moore

Sure, Aaron. In general, we don't release the metric in terms of number of new clients, but as you can surmise from our strong growth in the quarter, we did win a number of new clients and grew existing clients. I think that what people will observe is that our performance in our global search engine marketing business was much stronger than many of our competitors, private or public, in the marketplace. I think that that is reflective of both growing our current clients and adding a number of new clients throughout the quarter.

Aaron Kessler - Piper Jaffray

Great. Any countries in specific there were strong in the quarter? Can you talk a little bit about the U.K. market, which appears to be slowing for some companies?

Jonathan Hsu

You know, it is interesting. We do have a unique perspective as the only Company in our sector that covers the top 10 advertising markets globally. It was an interesting phenomenon, which we experienced stronger than expected performance in every market.

Aaron Kessler - Piper Jaffray

Great. Thank you.

Jonathan Hsu

Thank you.

Operator

Our next question comes from Yousif Swili with Jefferies & Co. Please go ahead.

Ahmed Conn - Jefferies & Co.

Hi guys. This is Ahmed Conn for Yousif Swili at Jefferies. Congratulations.

David Moore

Thank you.

Jonathan Hsu

Thank you.

Ahmed Conn - Jefferies & Co.

I have two questions. One was on the operating margin and one was regarding tax rate. So if I look at the operating margins, the sales and marketing and G&A, they were lower quarter-over-quarter, as well as year-over-year. Now looking forward, should we expect this to be some sort of a stable level, or should we be more like [inaudible]?

Jonathan Hsu

Yes, operating margins were stronger than expected in Q4, and one of the hallmarks of this Company is that we are very conscientious about every dollar on OpEx spent. So we did see stability within our OpEx line over the last several quarters. We do anticipate de minimus growth in OpEx over the upcoming quarters, and our goal is to demonstrate that continued operating leverage by growing revenue and gross profit dollars significantly faster than OpEx.

Ahmed Conn - Jefferies & Co.

Okay. On the tax rate, I think this quarter was close to 29%. So assuming it is profitable on a net income basis, is this at a stable rate, or how do you see this going forward?

Jonathan Hsu

We're in the process of completing our 382 study which will be filed in conjunction with our 10-K. We do anticipate that there will be a sizable usable net operating loss tax shelter. At this point we're not giving any specific guidance regarding the effective tax rate, but suffice it to say, we anticipate it to be quite low in 2006.

Ahmed Conn - Jefferies & Co.

Very good. Thank you.

Operator

Our next question comes from Clayton Moran, Stanford Group.

Clayton Moran - Stanford Group - Analyst

Thank you, good morning. You seem to be attributing your relative out-performance to your international exposure. Can you may be talk about if there is anything else that could be contributing, such as technology advantage?

David Moore

The technology advantage that we have with Decide DNA is one that exists both in the U.S. and outside of our country, in that we can handle both paid inclusion and paid per placement for on behalf of advertisers. As a result, we are very able to work with the advertisers to help them achieve better return on investments for their search advertising dollars. As a result of that, these advertisers tend to spend more money with us.

Clayton Moran - Stanford Group - Analyst

Is there anything on the media technology side, such as your behavioral targeting, that you would point to as an advantage?

David Moore

That certainly is an advantage here in the U.S. where it is widely deployed, we have found an ability to increase the cost per thousands on inventory that is sold in that fashion. I think that has continued to contribute to the strong performance that the media business has shown here in the U.S.

Clayton Moran - Stanford Group - Analyst

So going forward, any sustained out-performance you would attribute that more to just the international exposure, I guess, than the technology advantage? Is that correct?

David Moore

Well, technology drives the Company, and without it, we don't really have any products to sell. So yes, there are certainly advantages we have with our technology in media and search. However, I would say that the reason our performance has been as good as it has is because we have got some very capable executives that are executing well to plan.

Clayton Moran - Stanford Group - Analyst

Thank you.

David Moore

Thank you.

Operator

Our next question comes from William Morrison, JMP Securities.

William Morrison - JMP Securities

Good morning. A few questions. One, could you kind of walk through -- I guess I'm hearing your general guidance for gross margins in all the business lines kind of stable implied in your 2006 guidance, but you are expecting significantly higher margins on the Dentsu portion in the search business. I was wondering if you could kind of explain the difference there with what is going on in the current search business? Do you expect margins to go down? With 60% margins in the Dentsu, I guess I would expect the total margin in search to be going up in '06.

Secondly, Jon, I was wondering if you could walk through the free cash flow in the quarter and I guess more importantly in the year and what the CapEx was and the different components of free cash flow?

Lastly, David, I was wondering if you could explain some of the stuff in the footnotes surrounding stock-based compensation. It looks like there were some new programs installed, and if you could just kind of explain that and what we should expect in terms of that going forward?

Jonathan Hsu

Thanks, Bill. So there are three points that you would like us to address. Regarding the first one on Dentsu, the 24/7 KK Search gross margins as a percentage of the global total. As you can see by the revenue guidance that we have for Dentsu, our joint venture in Japan will be an important part of our overall operations going into 2007 and 2008. For the start-up year of 2006, it is a relatively small percentage of our overall global revenue. So even though it does experience a higher than expected gross margins, it will have a de minimus impact on the overall gross margin.

Regarding your question on free cash flow for the quarter, Q4, we generated $3.7 million in cash flow from operations, and for the year we generated $10.2 million in cash flow from operations. Our CapEx for Q4 was $1.3 million, and for full year '05 it was $6.2 million.

Regarding the question on stock-based compensation, there was -- as there always is -- an option and stock pool that is put into place to retain management and employees. I think in this a robust overall operating environment. The key competition will be for talent and not for business going in these next several years.

William Morrison - JMP Securities

Jon, just for '06, can you give us maybe a framework for capital expenditures?

Jonathan Hsu

Certainly. CapEx should be flat to down year on year, and that is reflective of the operating infrastructure that we have in place.

William Morrison - JMP Securities

Thanks a lot.

Jonathan Hsu

Thank you.

Operator

Our next question comes from Sameet Sinha, Kaufman Brothers.

Sameet Sinha - Kaufman Brothers

My questions are primarily on the search business. Are the customers that you are getting, are they more project-based? Are you seeing some people sign up for full year? Can you talk to those dynamics?

David Moore

Yes, we don't do a lot of project business at all. That would really tend to fall more into the SEO side of the equation. In fact, once we get an advertiser on our technology, it offers a very sticky situation for us in that we are able to increase the return on investment for that advertiser, which results normally in a higher spend so that we have those advertisers for the life of that particular product cycle.

Sameet Sinha - Kaufman Brothers

Great. You expect search gross margins to stay stable for '06, as Jon mentioned earlier. But the new clients are coming in at -- or new large clients -- come in at 15% gross margins. Are you assuming no large client wins in '06?

Jonathan Hsu

You know, obviously we have cited we expect the gross profit margin to be stable across our three business lines. Gross profit dollars, in the absolute sense, will continue to increase year on year significantly. I think that there are a number of dynamics that go into it, but suffice it to say that we are producing good returns for both existing clients and new clients, thus contributing to stable gross margins for our search business.

Sameet Sinha - Kaufman Brothers

Okay. My last question is, when you are talking to clients, are you getting a sense that they seem to be allocating more dollars towards brand advertising in '06 than in search? In other words, are you getting a sense of low margin utility from search, or does that need to be incrementally better?

David Moore

Well, our conversations with clients are demonstrating their appreciation for both the power of display advertising on the Web, as well as the power of search. Without knowing the benefits or the whereabouts of a product, you don't really know what to search for, and that is where display advertising is the push, whereas the search advertising is the pull for the product. We see both those segments continuing to be robust, and our clients are taking advantage of both our ability to deliver both.

Sameet Sinha - Kaufman Brothers

Thank you very much.

David Moore

Thank you.

Operator

Our next question comes from George Mihalos, Gilford Securities. Please go ahead.

George Mihalos - Gilford Securities

Congratulations on a nice quarter.

David Moore

Thank you, George.

George Mihalos - Gilford Securities

A couple of questions. On the Korean business side, it seems that the sequential growth there was very strong, much stronger than we have seen over the last several quarters. Can you speak perhaps to what goes behind that? Was there any contribution from search within the geography, and how should we view growth from Korea relative to media growth overall within your business?

Jonathan Hsu

Certainly, Korea did have a very strong Q4. I think that when people look at the macro economy of Korea, the macro economy of Korea did accelerate as we exited 2005. Certainly, as one of the leading participants in the digital marketing sector in Korea, we benefited from that trend and uplift. Additionally Korean global advertisers are starting to focus their advertising spend on the World Cup, which is a big objective for them over the next six months or so.

So the majority of Korea's revenues do come from our media business. There is a small but growing search part in it, and I think that when you look at Korea's performance in our overall growth dynamic, it will be reflective of the overall out performance of international for us, where all international markets are anticipated to outperform the critical mass but slower growing U.S. market.

George Mihalos - Gilford Securities

Okay. So you would expect it to grow sort of in line with the rest of your media business generally speaking?

Jonathan Hsu

That is correct.

George Mihalos - Gilford Securities

Can you talk a little bit about the competitive landscape in Europe perhaps specifically, given some comments by some of your competitors and peers?

David Moore

In Europe we do have one of the largest footprints in Europe compared to our competitors. Many of the people who are in our space really, when they talk about Europe, they are talking really maybe about the UK, maybe France. We do have very good coverage of all the major markets in Europe. In general, our European operations performed very well for full-year '05 and for Q4. So some of the anecdotal weakness that others might have experienced was not certainly seen by us.

George Mihalos - Gilford Securities

Okay and last question. Jon, I'm not sure if you have answered this already, but did you provide a breakdown between existing customers and new customers on the search side during 4Q?

Jonathan Hsu

As I commented on before, we don't specifically provide the metric, but we did win a number of new customers, and we grew existing customers search accounts. That is part of the reason why we were able to have such strong growth in the quarter for search.

George Mihalos - Gilford Securities

Thank you.

Jonathan Hsu

Thank you.

Noah Schankler

Operator, this is Noah Schankler. I think we have time for one more question.

Operator

Your final question will come from Stuart Kagel, Janco Partners. Please go ahead.

Stuart Kagel - Janco Partners

Good morning, guys. Great quarter.

David Moore

Thank you.

Stuart Kagel - Janco Partners

Would it be possible for you to give the geographic breakdown that you typically provide on the filings between the different countries and segments?

Jonathan Hsu

Certainly, Stuart. For the quarter, international revenues accounted for 57%. That means the U.S. accounted for 43% of our revenues. Europe in the aggregate was 35% of our total revenues, of which 18% came from the U.K. Asia Pacific accounted for 16% of our Q4 revenues, of which Korea accounted for 12%.

Stuart Kagel - Janco Partners

Are you going to be jiggering the geographic breakdown? I think usually you have done U.S., U.K., South Korea and other.

Jonathan Hsu

You know under regulations we have to break out specific countries when they become a larger part of our overall pie. We're providing the extra details that I have just outlined to increase visibility for everyone.

Stuart Kagel - Janco Partners

So there is not going to be a Japan number that would give us incremental color on Dentsu?

Jonathan Hsu

Well, I think that going into '07 and '08, we do anticipate Japan to be a more significant part of our overall buy, so we will have to make a determination at that time.

Stuart Kagel - Janco Partners

One of the things, obviously, I'm very pleased to hear that your gross profit margins on the Dentsu business are going to be higher. One of the things that I think would be helpful to understand longer term is any sort of color or insight onto how we should expect the Dentsu expense items below the gross profit line to scale over time. Obviously, you have doubled your margins. You went from a zero EBITDA contribution or expectation to call it $0.5 million EBITDA. I'm just trying to figure out the below the gross profit line.

Jonathan Hsu

So, as we demonstrated for our entire Company, we have been able to demonstrate good operating leverage in our operating model. We're ahead of our operating profit targets that we had set forth to everyone, and we have also demonstrated consistent cost control. We are very methodical about how we approach market. Based on the strong, better than expected initial performance of our joint venture, we do now anticipate pro forma operating profitability faster than we originally forecasted for the country.

We will be very measured in terms of how we layer on additional infrastructure for Japan. Suffice it to say that we are looking for a long-term benefit and to be the leading player in this sector over the next couple of years. So we will continue to approach this very methodically, but invest where necessary. And you can see that good balance in terms of what we're predicting for 2006.

Stuart Kagel - Janco Partners

So is there any metric, and realizing it is pretty nascent at this point, but is there any way to try and think about the cost per person to support this business? In other words, how many people -- if it is a $20 million business versus $5 million versus $100 million, is there any way that you can narrow down the way that we should be thinking about the below the gross profit line items associated with that, or is it just too early?

Jonathan Hsu

I think it is too early. Obviously we have experienced a very strong start to the operation, and as we get a couple more quarters under our belt, we will be in a better position to share with everyone the growth dynamic. But needless to say, we're quite optimistic about this very important part of our overall business over the upcoming year.

Stuart Kagel - Janco Partners

And then one last follow up. Was there any other incremental color from your recent visit to the Far East, anything else that Dentsu is hoping to pursue in the way of initiatives?

David Moore

Well, we had a productive trip. We did spend some time in China evaluating that marketplace in conjunction with Dentsu. We do see China as an important emerging market, but very small at this point. So we think we have plenty of time to get ready to attack it.

Stuart Kagel - Janco Partners

Great. Thank you very much. Congratulations again on a great quarter.

Operator

Gentlemen, at this time we have no additional questions. I will turn the presentation over to you for any closing remarks.

David Moore

Thank you all for listening this morning. The global Internet advertising market continues to be very strong as traditional advertisers embrace the transparency and accountability of our media. In this rising tide, 24/7 Real Media will continue to lead the way. 2006 will be a great year for our Company, our clients and our partners and our shareholders as we continue to make reaching desired audiences a measurable science. I look forward to speaking with you all again during our next call. Thank you.

Operator

Thank you, management. Ladies and gentlemen, at this time we will conclude today's teleconference presentation. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 with an access code of 11051620. We thank you for your participation on today's presentation. At this time, we will conclude. You may now disconnect, and please have a pleasant day.

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