24/7 Real Media - TFSM - entire 4Q04 conf call transcript

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24/7 Real Media (ticker: TFSM)'s Q4 conference call transcript is not available from StreetEvents, so I'm providing it here in full. One of my goals is to make The Internet Stock Blog a valuable Internet stock research tool, which is why every post is categorized by ticker and the tickers are listed down the left-hand side of the page.

24/7 REAL MEDIA, #11023688
2004 Fourth Quarter Results
March 3, 2005, 8:30 a.m. ET

  Operator: Good morning, ladies and gentlemen, and welcome to the 24/7 Real Media fourth quarter 2004 results conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded on Thursday, March 3, 2005.

I would now like to turn the conference over to Mr. Noah Schankler with 24/7 Real Media. Please go ahead, sir.

N. Schankler: Hello and welcome. 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 March 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 10K and 10Q 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 proforma operating income may exclude charges associated with amortization of intangible assets, stock based compensation and depreciation. A 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, and a replay of the webcast of this conference call at www.247realmedia.com.

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

D. Moore: Thank you, Noah. Good morning, everyone. 2004 was a very exciting year for 24/7 Real Media. Not only did we deliver strong financial results but we also achieved a number of key strategic objectives during the year. We expanded into the Pacific Rim marketplace, acquired and integrated a critically acclaimed search platform and debuted our 24/7 On Target behavioral targeting solution for advertisers powered by our proprietary award winning ad serving and analytics technology, Open Ad System.

The fourth quarter was robust for the online advertising sector and our financial results reflect this strength. Revenues for the quarter were $27.5 million, a 109% gain over the prior year period.

Organic revenues for the fourth quarter grew 56% versus Q4 of 2003, pacing well ahead of the industry growth rate. Organic growth excludes the operations of both Real Media Korea and Decide Interactive, two strategic acquisitions which were completed and successfully integrated during 2004.

Proforma operating earnings for the fourth quarter were 3 cents per share representing our sixth consecutive positive quarter.

We began 2004 by completing our acquisition of Seoul based Real Media Korea, a leading internet advertising solution provider and the second largest Asian marketplace for online advertising. The August acquisition of Australia based Decide Interactive significantly enhanced our paid search capabilities and established a presence for 24/7 Real Media in the third largest market in the Asia Pacific region.

We have continued this regional expansion into 2005, capitalizing on our beachhead in Europe and Korea to launch a branch office in Tokyo. Under the experienced stewardship of Jay Woo Chung, President of 24/7 Real Media Asia, we expect to rapidly leverage our industry expertise to build out our presence in this exciting new marketplace.

Although the current internet advertising spend in the Asia Pacific region is relatively modest by U.S. standards, these markets represent some of the greatest future potential for the global internet advertising sector. We believe that expansion into these nascent but technologically developed markets is an important driver of sustainable long term increases in revenues and profits for the company.

In addition to expanding our geographic reach, our acquisition of Decide Interactive significantly enhanced our search capabilities. The search market is the fastest growing segment in online advertising and the acquisition of Decide significantly enhanced our stature in this market. Indeed, Decide's search platform, Decide DNA, has already been cited as a most advanced bid management tool in the recent Jupiter Research SEM search engine marketing constellation study.

We're happy to report that the integration of Decide was completed in fourth quarter and we have transitioned all of our existing search clients onto the Decide DNA platform.

Throughout 2004 we continued the development and roll out of our behavioral targeting solution named 24/7 On Target. Website publishers and advertisers on our network are starting to realize the benefits of this integrated offering and we will continue to lead and define this latest online advertising frontier.

Throughout 2005 and over the upcoming years, 24/7 On Target will help publishers track increased ad spending to their websites by harnessing the power of behavioral targeting to represent, market and sell under-used inventory.

Finally we closed the year by working with Lycos' new management to strengthen the partnership. We are confident that the new Lycos management team is undertaking the right initiatives to stabilize and grow their properties and we look forward to continuing to be their partner for many years.

Looking forward, the stage is set for 2005 to be another strong year as internet advertising continues to grow and gain broad acceptance among advertisers. The internet advertising segment still only commands less than 4% of domestic advertising spending even though internet use represents over 15% of all media consumption. We feel the narrowing of that gap represents an enormous opportunity for a company with the right business mix and our businesses all benefit from the growth of both the paid search and the overall internet advertising market. In particular, our strong search platform allows 24/7 Real Media to benefit directly from the global proliferation of search.

Now I'll turn the call over Jonathan Hsu who will take you through the financial results for the year.

J. Hsu: Thanks, David, and welcome to all of you on the call. As Dave mentioned in his opening remarks, 24/7 Real Media enjoyed a strong fourth quarter in 2004 benefiting from robust organic growth driven by positive industry fundamentals as well as increased contribution from a series of strategic assets acquired throughout the year.

We continue to see good performance across all operating units and geographies and we are maintaining a balanced view regarding operating expenses as we continue to rapidly expand our business, particularly our search operations.

Total revenue for the fourth quarter ended December 31st rose 109% to $27.5 million from the fourth quarter of 2003 revenue of $13.2 million and climbed 32% sequentially from the $20.8 million reported in the third quarter of 2004.

We achieved proforma operating income of $1.5 million for the fourth quarter or 3 cents per fully diluted share. GAAP net loss for the fourth quarter of 2004 was $2.8 million or 6 cents per share compared with a loss of $6 million or 26 cents per share in the year ago period.

For the full year ended December 31st, reported revenue was $85.3 million, an increase of 73% over revenue of $49.2 million for 2003. Our full year proforma operating income for 2004 was $2.4 million versus a loss of $670,000 in the prior year.

Before going into the segment results for the fourth quarter, I would like to remind everyone on the call that as of third quarter of 2004 we are reporting media solutions and search solutions as two separate divisions with technology solutions as our third reporting unit. This was due in part to the strategic and financial significance of the Decide Interactive operations acquired in August of 2004 as well as management's belief that search will continue to contribute an increasing portion of revenues and income to the overall company.

Media solutions revenue, which includes revenue from the 24/7 Web Alliance and other media services, climbed 137% to $15.4 million in the fourth quarter of 2004 from $6.5 million in the same period a year ago.

Gross margins increased to 33.8% from 23.9% in the third quarter primarily due to the positive contribution resulting from the amendment to the Lycos agreement and the renewed operating strengths from that partnership. Going forward into 2005, gross margins in this segment are anticipated to normalize to approximately 30%.

Average CPMs across the 24/7 Web Alliance were stable for the fourth quarter even as total impressions served across our network of sites increased significantly by 27% to 17.4 billion per quarter.

Search solutions benefiting from a full quarter of Decide Interactive operations contributed $6.8 million to revenue in the fourth quarter of 2004, up 148% from $2.7 million in the same quarter of 2003.

Gross margins were 37.9% for the quarter and we expect gross margins for this segment to be approximately 35% throughout 2005.

Technology solutions revenue rose 34% to $5.3 million in the fourth quarter of 2004 from $3.9 million in the same quarter of 2003 and increased 14% sequentially from the prior quarter. Gross margins were stable at 82.2%.

I would like to now provide guidance for the anticipated first quarter and full year 2005 financial results. The company expects revenue in the first quarter of between $26 million and $27 million, the midpoint of which represents an increase of 52% from the first quarter of 2004 revenue of $17.4 million.

The company expects diluted proforma operating income per share in the first quarter of 2005 to be between 1 cent per share and 2 cents per share. The company expects full year 2005 revenue to be in the range of $115 million to $120 million, the midpoint of which represents an increase of 38% from revenue of $85.3 million in 2004.

The proforma per share earnings guidance for the year as a whole is 13 cents to 17 cents.

I'll now turn the call back over to David.

D. Moore: Thanks, John. We'll now open up the call to questions.

Operator: Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question please press the star followed by the one on your pushbutton phone. If you'd like to decline from the polling process, please press the star followed by the two. You will hear a three tone prompt acknowledging your selection. Your questions will be polled in the order that they are received. If you are using speaker equipment you will need to lift the handset before pressing the numbers. One moment, please, for our first question.

Our first question comes from Joe Maxa with Dougherty and Company. Please go ahead with your question.

J. Maxa: Good morning and nice quarter, gentlemen.

Management: Thank you.

J. Maxa: The question I have is can you break out or give us a better idea of what your growth expectations are per business line in '05?

J. Hsu: Certainly. As you know, Joe, we are expecting robust growth across all three business lines going into 2005. Certainly search is a very important component of our overall strategy in 2005 building upon our leading search technology platform, Decide DNA. We expect search revenues to more than double going into 2005. We are certainly experiencing good volumes even as we enter 2005 thus far.

Our media businesses are experiencing good growth in each of the markets in which we have operations. We expect that business to also outpace the 15% to 20% growth rate of the segment. Certainly that is something that's going to contribute very well to our ongoing growth.

Our technology segment will also contribute double digit growth rates in excess of 15% year-on-year going into 2005 which outpaces the subsegment growth of technology.

J. Maxa: Great. On the search business you have various components of your search business and the agency business being the fastest growing but the lowest margin, if that's correct. How do you see that? I know you indicated your search margins would maintain 35% throughout the year. How do you offset the faster growing part of the lower margin with your other products?

J. Hsu: Certainly. Our two main components of search revenue are both growing very quickly. You're correct that the search SEM business does have the potential for explosive growth.

We continue to work very closely with the longstanding partnership with Overture, Yahoo! where we provide them a trusted feed and as you know that is high margin business. Additionally, because of the robustness and leading position of our search technology platform, we see many opportunities to license that search technology to other shops who don't have that proprietary technology.

J. Maxa: So that'll help the margins. Then there's been some talk about the pricing of paid search. I want to get your take on it as you see it in the first quarter so far in '05.

D. Moore: We have not seen any significant declines in pricing; however, if you look at what our goal is for the advertisers with whom we work, it's to achieve the greatest return on investment that we can which once we have that model in place, it really entices the advertiser to spend more money. So to the extent that there were any pricing declines that would just help us do a better job in terms of enhancing the ROI for the advertiser. To the extent that you can model out a self-liquidating proposition for the advertiser, they'll continue to spend a lot of money against that proposition.

J. Hsu: Also, Joe, it's important to note that because we are growing our search operation so quickly and because of how good our proposition is in the marketplace, we are actually seeing quarter-on-quarter increased search volumes versus Q4 thus far.

J. Maxa: Good. One last thing, can you break out what your Real Media Korea and your Lycos revenues were in the quarter?

J. Hsu: Certainly. For the quarter Lycos revenues totaled $2.7 million and Real Media Korea represented $3.1 million in the quarter.

J. Maxa: Thank you.

Operator: Our next question comes from Stewart Barry with Think Equity. Please go ahead with your question, sir.

S. Barry: Good morning, congratulations on a good quarter.

Management: Thank you, Stewart.

S. Barry: In your media segments you mentioned that CPMs were flat. I was wondering if you could extrapolate on the dynamic in the media segment that would lead to flat CPMs and what you might think in terms of CPM increases in '05 and beyond.

What percentage of your revenue came from Asia Pacific and what's an appropriate growth rate to attach to that region?

D. Moore: Stewart, I'll handle the first part and then leave the second part to John.

As we noted in our comments earlier, we increased the number of impressions significantly in fourth quarter for our media solutions division, delivering over 17.4 billion ads during the quarter, a 27% increase. So when you increase the amount of inventory to that type of magnitude, it's difficult to sell as far ahead of that inventory as you would like to.

So while pricing in the fourth quarter was good and we were able to get selective increases in CPMs on a site-by-site basis, the fact that we added 27% in terms of our total impression inventory diluted some of those price increases that occurred in fourth quarter.

J. Hsu: To answer the second part of your question, Stewart, Asia Pacific region which includes our Korean operations and our Australian operations, during Q4 contributed approximately 16% of our overall revenue. However, it's important to note that we opened up our Japan office a few weeks ago which is the second largest internet advertising market in the entire world and as we look forward to 2006 and beyond, we expect that revenues and profits from the Asia Pacific region will be an increasing percentage of the overall growth.

S. Barry: One last question. In the technology segment you mentioned that you expect to grow 15% plus in '05. How much of that depends on new business development, new agreements with publishers and how much of that is growth from existing agreements?

J. Hsu: As you know, Stewart, given the dynamics and economics of our technology business, a large majority of our revenue streams are locked in based on longer term contracts. We are certainly experiencing a good rate of client wins as well as organic growth within our existing client base. This is a number, as you can see, that we feel very comfortable that we can achieve going into 2005 and beyond.

S. Barry: Thanks a lot.

J. Hsu: Great.

Operator: Our next question comes from George Mihalos with Gilford Securities. Please go ahead with your question.

G. Mihalos: Hi. Congrats on a good quarter.

D. Moore: Thanks, George.

G. Mihalos: Just to double back in on the search margin side, is most of that tack increase that you're seeing just the result of working with larger partners on the SEM side, the Overtures of the world and so on and so forth?

J. Hsu: That's a good question, George. Certainly we are working with the leading advertisers globally and they are putting more and more dollars to work all the time onto the Decide DNA system. We do, in terms of the margin blend, take a fixed percentage on that SEM type of business, so certainly we expected that margin to be approximately 35% going into 2005.

G. Mihalos: What was the cash flow from operations during the fourth quarter?

J. Hsu: Excluding one-time payment for advanced royalties would be cash flow from ops in the quarter was approximately $600,000 to $700,000 of use.

G. Mihalos: Thanks.

J. Hsu: Great. Thank you.

Operator: Management, at this time we have no further questions. Please continue with any further remarks you would like to make.

D. Moore: Thank you for listening this morning. We accomplished a great deal during 2004 but we believe that the best times for 24/7 Real Media are yet to come. We believe 2005 is going to be strong year for the company and as we head into 2006 and beyond, we are well positioned to exert industry leadership and enjoy robust growth and operating leverage.

I look forward to speaking with you again during our next call.

Operator: Ladies and gentlemen, this concludes the 24/7 Real Media fourth quarter 2004 results conference. If you would like to listen to a replay of today's conference, please dial 1-800-405-2236 or 303-590-3000 and use the access code of 11023688.

We thank you for your participation. You may now disconnect and thank you for using ACT Teleconferencing.