24/7 Real Media Q2 2006 Earnings Conference Call Transcript (TFSM)

| About: 24/7 Real (TFSM)

24/7 Real Media, (TFSM)

Q2 2006 Earnings Conference Call

August 3, 2006, 8:30 a.m. EST

Executives:

David Moore, Chairman and Chief Executive Officer

Jonathan Hsu, Chief Financial Officer, COO

Noah Schankler, IR

Analysts:

Aaron Kessler, Piper Jaffray

Clay Moran, Stanford Group

Stewart Barry, ThinkEquity Partners

Jordan Rohan, RBC Capital Markets

Stuart Kagel, Janco Partners

Bill Morrison, JMP Securities

Chad Bartley, Pacific Crest Securities

Sameet Sinha, Kaufman Brothers

Sasa Zorovic, Oppenheimer

William Lennan, Wedbush Morgan Securities

Joe Maxa, Dougherty & Co.

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the 24/7 Real Media 2006 Second Quarter Results Conference Call. At this time, all participants’ lines have been placed 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 * followed the 0 and the conference operator will assist you. As a reminder this conference is being recorded, Thursday, August 3, 2006. At this time, I would now like to turn the presentation over to Noah Schankler of 24/7 Real Media; please go ahead sir.

Noah Schankler, IR

Thanks, Andrew. Hello and welcome to 24/7 Real Media's Second Quarter 2006 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.

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 August 3, 2006, and except as required by law disclaims any duty to update them.

You should be aware the 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 to the Company's earnings release provides 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 the webcast of 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, Chairman and Chief Executive Officer

Thank you, Noah, and good morning everyone. I’m pleased to report that 2006 remains on pace to be a banner year for 24/7 Real Media as the operational strength of the first quarter has continued through the second quarter.

Revenues of $48.2 million were generated through robust growth in all three business segments and across our numerous operating regions. Pro-forma operating income of $0.09 per share exceeded our earlier expectations of $0.08 as the Company demonstrated industry leading organic revenue growth of 42%. The operating leverage inherent to our business model shows no signs of easing as we continue to produce ever greater results through the utilization of our proprietary world class technologies.

Revenue contribution from our international operations increased to 60% for the second quarter as faster growing economies of Europe and the Pacific Rim continue to validate our strategic exposures to these markets. Our South Korean operations continue to thrive in the resurgent local ad market once again posting year-over-year revenue growth in excess of 100% in the second quarter, on sequential growth of 20% over a strong first quarter.

European operations also witnessed strong growth versus 2005. In the U.K., revenue increased 37% year-over-year and Search operations in particular were bolstered by a number of significant client additions throughout the quarter.

In Japan our joint venture with Dentsu K.K. 24/7 Search a notable milestone during the second period reporting profitability a full quarter ahead of Company expectations. We and our partners at Dentsu remain aggressively focused on becoming the leading provider of SCM services to advertisers. Following on the successful release of Open AdStream 6.0, our next-generation ad management software, we continued our technological innovation through the introduction of a new major release of our SCM platform, Decide DNA 6.0. Decide DNA 6.0 is developed to meet the needs of the rapidly evolving and increasingly sophisticated functionality of the major global search engines and will enable 24/7 Real Media to quickly deploy these changes for the benefit of our customers.

Finally, I am pleased to announce the expansion of Jonathan Hsu’s position to now formally include the responsibilities of Chief Operating Officer of 24/7 Real Media. As our Chief Financial Officer, Jonathan has helped guide the company through an incredible period of growth and increased profitability. In this new joint CFO/COO role, Jon will apply the same diligence to the continued expansion of our global operations.

I’ll now turn the call over to Jon who will take you through the financial results for the quarter. Jon…

Jonathan Hsu, Chief Financial Officer, COO

Thanks, Dave, and welcome to all of you on the call. The second quarter results have clearly benefitted from the increasing value 24/7 Real Media brings to the global digital marketing landscape. Total revenue for the second quarter of 2006 rose 42% to $48.2 million from the second quarter 2005 revenue of $33.9 million, and grew 12% sequentially from the $42.9 million reported in the first quarter of 2006.

We generated pro-forma operating income of $4.8 million for the second quarter of 2006 or $0.09 per fully diluted share, compared to pro-forma operating income of $2.3 million or $0.05 per fully diluted share for the second quarter of 2005.

GAAP net income for the second quarter of 2006 was $0.5 million or $0.01 per share, compared with a net loss of $0.2 million or $0.00 per share in the year-ago period.

Turning to our business segments, Media Solutions revenue again climbed 28% to $21.3 million in the second quarter of 2006 from $16.7 million in the same period a year ago. Gross margins for the quarter were 32.3%. Search Solutions contributed $19.7 million to revenue in the second quarter of 2006, up 69% from $11.7 million in the same quarter of 2005. Gross margins in this segment were 25.1% reflecting the addition of several large and leveragible clients during the quarter.

Technology Solutions revenue growth continued to greatly uptake the overall markets surging 29% to $7.1 million in the second quarter of 2006 from $5.5 million in the same quarter of 2005. The rapid growth in this segment continues to be driven by major new wins and significant organic impression growths across our existing client base. As expected, gross margins for this segment increased to 80.2% during the quarter.

I would now like to provide Company guidance for anticipated third and fourth quarter financial results and update our guidance for full year 2006. Additionally, the Company is introducing financial guidance for full year 2007 at this time. The Company expects revenue in the third quarter of between $49 million and $50 million, the mid-point of which represents an increase of 41% over the third quarter of 2005 revenue of $35.1 million. The Company expects diluted pro-forma operating income per share in the third quarter of 2006 to be $0.09 per share. GAAP earnings per share are expected to be between $0.00 and $0.01 per share for the third quarter.

For the fourth quarter of 2006, the Company anticipates revenues of between $55 million and $59 million and diluted pro-forma operating income per share of between $0.11 and $0.12. GAAP earnings for the fourth quarter are projected to be between $0.01 and $0.02 per share. For the full year 2006, the Company currently expects revenue of between $195 million and $200 million, diluted pro-forma operating income of between $0.36 and $0.37 per share, and a GAAP net loss of between $0.12 and $0.14 per share.

At this time, the Company is introducing preliminary revenue guidance for full year 2007 of between $250 million and $260 million and diluted pro-forma operating income of between $0.51 and $0.55 per share.

We are again reiterating our previous guidance that our Japanese joint venture is expected to generate between $5 million and $10 million in recognized revenues and gross margins of approximately 50%. Additionally, we continue to forecast that our interest in K.K. 24/7 Search will contribute $0.01 of pro-forma operating profits to the full year 2006 consolidated operations of 24/7 Real Media.

I will now turn it back to David.

David Moore, Chairman and Chief Executive Officer

Thanks, Jon. We will now open up the call for questions. Andrew…

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we will begin the Q&A session. If you would like to ask a question please press * followed by the 1 on your pushbutton phone. If you like decline from a polling process, please press * followed by 2. Please ask one question and one followup and re-queue for additional questions. If you are using speaker equipment, we do ask that you please lift your handset before pressing the number. One moment please for the first question. Our first question will come from Aaron Kessler with Piper Jaffray, please go ahead.

Aaron Kessler, Piper Jaffray

Thanks, guys, and Jonathan congratulations on the expanded role. A couple questions; first, can you talk a little about the seasonality in the quarter, any impact on the World Cup that we saw and how did the end of the quarter shaped up? In terms of the Search clients, can you talk about how many wins you got in Europe and approximately how many clients you have today?

Jonathan Hsu, Chief Financial Officer, COO

Certainly, the second quarter we felt was a strong quarter for the Company continuing on the strong performance that we demonstrated in the first quarter. In general, the second quarter tends to be a seasonally strong quarter for our media business as well as our technology business, and then for the overall industry Search tends to have additional challenges in the second quarter. However, because of our new client wins and our growth, we were able to grow through that. Regarding specific questions about Europe and any anticipated seasonality that might be exacerbated by the World Cup, we were also very conservative and cautious going into the quarter regarding what impact if any that might have. But, as demonstrated by our 37% year-on-year revenue growth in the U.K., we actually had a very good second quarter in our international operations and in particular in Europe, and actually operations strengthened as we progressed through the quarter, though we exited the quarter with quite a bit of momentum. Regarding the number of wins, we don’t exactly provide that metric. It is unfortunate because we have won a number of major top tier clients throughout our global operations but particularly in Europe, and I think that right now we have somewhere in the mid 200-300 number of clients in Search, so the addition of additional clients only builds upon that base right now.

Aaron Kessler, Piper Jaffray

Great, thank you.

Operator

Your next question will come from Clay Moran with Stanford Group, please go ahead.

Clay Moran, Stanford Group

Thank you, good morning. Can you explain the visibility you have in each of your three segments that gives you the confidence to provide 2007 guidance? Secondly, can you talk about video advertising and what that represents for you today, what role you see yourself developing in that regard and how significant it is in your 2007 guidance? Thanks.

Jonathan Hsu, Chief Financial Officer, COO

Certainly, with regard to visibility, at this time last year we did provide financial guidance a year ahead of time for 2006, this time in 2005, and as we’re starting to demonstrate through our results here in 2006 we have a great detail confidence in our ability to project forward our operations. With respect to specific visibility in each of our business segments, in technology, we do have high levels of visibility where we enter any given quarter north of 80% to 85% of our revenues booked. Our pipeline is extremely strong in technology and these tend to be three-year contracts. Within Search, we are signing as I mentioned larger and larger deals with world class partners and those tend be longer contracts as well, upwards of a year commitment of spend. Our media business as most media businesses are in our industry tend to be more short-term oriented where you book about half your revenues for the quarter in the quarter. Since we’ve been in the business for 10 years now and have had four good years of steady macroeconomic conditions, we have great confidence that we are able to project forwards our ability to develop and grow our media revenue. In some regions we are actually signing on year long commitments especially in the cream market place. Let me defer to Dave to answer your question regarding video.

David Moore, Chairman and Chief Executive Officer

Video of course is one of the fastest growing areas of advertising on the web today. However, it’s still a comparatively small market to the display advertising market overall. It’s projected to do about $328 million of video advertising this year and of course that’s compared to a $5 billion plus display advertising market place. So, overall, we’re involved, we’re selling it, but it’s still at its early stages. Secondly of course, our OES technology handles all formats of rich media so that all our licensees have the ability to display it and of course we are beginning to sell it more frequently on our web alliance as well.

Clay Moran, Stanford Group

Was there any consideration for growth in video advertising in your ’07 guidance or is it significant in that number?

Jonathan Hsu, Chief Financial Officer, COO

It is still a small part of our overall revenue mix, but that could change. As you would suspect major content players globally, as evidenced by the declining upfront market for broadcast this year, have put more emphasis on digital video and monitization of digital video going forward. And as one of the few global players with a scalable proven platform, you would expect that we are very much involved in helping a lot of these large media companies shape the future in how they will address this uptake. So, there could very some very nice opportunities in that regard.

David Moore, Chairman and Chief Executive Officer

And of course in Korea most of the display advertising is rich media.

Operator

Thank you, our next question will come from Stewart Barry with ThinkEquity Partners, please go ahead.

Stewart Barry, ThinkEquity Partners

Good morning, congratulations. David, how do attribute the strength in the Media Solutions, is it a combination of pricing and volume? And then on the gross margin, it has a nice pickup, what do you attribute that pickup to?

David Moore, Chairman and Chief Executive Officer

I think our strength in our Media Solutions is attributed to the fact that more and more advertising budgets are being moved to online, and as a result we’re doing business with more and more customers. In fact, you may have seen today in the Wall Street Journal that Fosters Beer is moving all their advertising to the internet and not going to advertise on television at all. So, it’s another example of what’s happening in terms of the migration of blue chip advertisers who are taking money from other media and moving it to the web. In terms of the margins overall, we continue to perform at a very high rate for our web publishers, and as you know we are the protagonists for the publisher. We try to get the best rate from the advertiser that their audience will warrant. Whereas, you do have some other models out there that tend to be an arbitraged model where they buy inventory at the lowest possible price and then turn around and sell it at a higher price. At the end of the day the web publisher wants the highest net return for their inventory. We’re finding that we are generating a higher net return and as a result we can demand higher commission rates.

Stewart Barry, ThinkEquity Partners

Just one more question, Jonathan, could you help explain the relative weakness versus the first quarter in the Search margin?

Jonathan Hsu, Chief Financial Officer, COO

Certainly, Search gross margins as a percentage we understand are an important metric that others might look at. Obviously, internally, we are looking at the absolute number of growth margin dollars that are attributable to the business and how they leverage down to the bottom line. In the quarter, we did sign up a number of very large advertisers in Search that will continue to ramp up through this year and next year. And as demonstrated by our increasing operating leverage on the bottom line, these are profitable deals that are for the overall benefit of the Company. In fact, our operating leverage increased beyond our initial targets of $0.15 of every incremental revenue dollar. Year-over-year contributions to operating profit were 17.5% on a year-on-year basis, and on a sequential quarterly basis it was actually 23.4% of every incremental revenue dollar felt through the bottom line. So, we are managing very nicely to our bottom line leverage and as evidenced by our guidance going forward into 2007 we’re still showing very healthy increases in operating profit percentages.

Operator

Thank you, our next question will come from Jordan Rohan from RBC Capital Markets, please go ahead.

Jordan Rohan, RBC Capital Markets

I want to drill down a little more on the Search margin because I’m not sure you fully explained what’s going on. But, as I understand it a large percentage of the revenues of the European Union come directly from the kickbacks or commission that Yahoo and Google traditionally have paid to agencies. I also understand from very specific discussions with Yahoo and Google over there that these are going down materially and that there is some performance related portion to it and also that the overall commission rate is being cut in half or more, does this have anything to do with the margin compression, do you want to speak to that directly? Thank you.

Jonathan Hsu, Chief Financial Officer, COO

Sure Jordan let me address the followup question you have regarding some of the economics within our Search business. We are one of the largest if not the largest SCM providers across Europe and we do believe that we’ll continue to be one of the leading beneficiaries of the Search engines’ revised practices. When you take a look at what they are hoping to address over the intermediary and longer term is to shake out a lot of the mom and pop that exists within each individual market, and therefore they have redone their commission structure in order to incent the right behavior across Europe. As you know, the agency rebates are essentially an increase to the underlying cost in the media and if there are any changes in that, eventually they will be borne by the advertiser on any solutions that actually provide increased ROI such as Decide DNA 6.0. So, I think that we do believe and you will hear from Google and Yahoo over the long term that this is starting to clear up the competitive landscape throughout Europe and if you address your banking colleagues in a structured fashion that there a lot of small mom and pop SCMs that are either going out of business or suddenly up for sale, and we’re finding that it is clearing up the landscape and we’re able to win actually larger clients and this is going to benefit us in the long term.

David Moore, Chairman and Chief Executive Officer

And furthermore, in the U.S. we’ve never gotten a rebate from a Search engine. So, we’re very much used to dealing with that type of situation, which of course for a lot of SCMs in Europe this is the first time they are having to deal with it and it’s a tough problem for them.

Jordan Rohan, RBC Capital Markets

Okay, thank you very much.

Operator

Thank you, our next question comes from Stuart Kagel with Janco Partners, please go ahead.

Stuart Kagel, Janco Partners

Good morning guys. As a sort of followup on the Search question, the way that I understood it was that the commission was altering but there was sort of a bonus based on growth that gets dropped in with somewhat of a lag, so I just wanted to clarify that. And as a followup to your sort of operating leverage, obviously people talk about gross margins but your ability to bring in $0.175 of incremental to the EBITDA line I guess what I’m trying to understand is I believe that will be sustained, what would be the positive impact associated from Dentsu once it achieves scale in terms of what you think their incremental EBITDA margins might be? Thanks.

Jonathan Hsu, Chief Financial Officer, COO

Thank you, Stuart. So, your framing of the new commission structure at Google is correct. That actually washes out in the long term in terms of any financial impact and therefore any SCM that performs will get the added benefit of the cleaned up competitive blanket and we demonstrated that in the prior quarters through the addition of separate large new clients in our European operations. Regarding operating leverage, we are dropping 17.6% year on year on every incremental dollar invested, higher than we had initially targeted. That type of operating leverage is attributable to a number of different things, obviously we are continuing to leverage off our leading systems that we have in place. Number two, we are getting that leverage because we’re getting scale in each of these top 10 global advertising markets. In fact, our operating profit margin in this past quarter was a 323-bit increase over the comparable period last year. I think that most people are going to be pleasantly surprised by that continued strength of operating leverage. And finally regarding Japan, as we demonstrated in the second quarter and over the last seven or eight months of operations there, we have a dedicated committed partner, we are running the business with a firm view to be the dominant, largest, and most profitable SCM shop in Japan. Obviously that type of initial success only reaffirms our commitment and our partner Dentsu’s commitment to grow the Japanese market as well as explore other opportunities throughout Asia. I think that when you take a look at the contribution margins and as Japan becomes a larger part of the overall pie, not only will it serve to strengthen the top line growth, but certainly because of the higher gross margins it will serve to help us continue to drive that type of increases in operating leverage that we’ve been able to demonstrate over the last two years.

Stuart Kagel, Janco Partners

Great, thank you, and congrats again on the promotion.

Operator

Thank you, our next question comes from Bill Morrison with JMP Securities, please go ahead.

Bill Morrison, JMP Securities

Good morning, a couple questions. You mentioned several times through the call that you’ve added some large advertisers in the Search business and I was wondering if you just highlight a handful of those, maybe give us an example of the client wins. Secondly, I was wondering if you could tell us what you’re assuming for Dentsu in your ’07 guidance and what gross margins by segment you’re assuming for your ’07 guidance.

David Moore, Chairman and Chief Executive Officer

Thanks, Bill. From a competitive standpoint we just don’t release what advertisers we currently have under management. Jon…

Jonathan Hsu, Chief Financial Officer, COO

And regarding the Dentsu margin going forward as well as the margin within business segment going to 2007, we are not providing at this time specific guidance regarding gross margins going into ’07, but as implied by our forward-looking guidance on the profit line you can see an 11.8% operating profit margin going into next year, implying that we’re continuing to drive operating leverage throughout the model.

Bill Morrison, JMP Securities

Jon, can you give us a sense of what you’re assuming for revenue from Dentsu in ’07 in your guidance?

Jonathan Hsu, Chief Financial Officer, COO

Well, at this point we’re not going to comment on the revenue going into ’07 but we do expect that Dentsu will continue to be a growing part of the overall pie, building upon what is going to be a great growth rate for the rest of the business.

Operator

Thank you, our next question comes from Chad Bartley with Pacific Crest, please go ahead.

Chad Bartley, Pacific Crest Securities

Hi, thank you. I think you may have just addressed one of my questions, but two quick questions on the Search business; gross margin given the large customer wins, should we think about that 25% gross margin as kind of sustainable going forward? And I think you just indicated about 11.8% net margin or EBITDA margin in ’07, can you update us or give us a range what you think the realistic long-term target would be, is that the high end of it or is in the middle? Thank you.

Jonathan Hsu, Chief Financial Officer, COO

Certainly, with regards to specific gross margin questions, I think that when we take a look at every deal that we are presented with and we are being presented with a number of very interesting larger deals now, our more important metric is how we drive operating leverage to the bottom line. So, I think that as we continue going through a year, that will be our main focus. Regarding the long-term targets, we continue to wind up. So, in the year-on-year contribution of every incremental revenue dollar we’re dropping $0.176 I would think that over time our operating margin blends up increasingly to those contribution levels.

Chad Bartley, Pacific Crest Securities

So, that incremental margin you think is around 17%, kind of in that range?

Jonathan Hsu, Chief Financial Officer, COO

That’s right. Well, over time as we continue to scale it will continue to lever up. So, both our overall operating margins as well as our incremental operating margins will continue to blend up.

Chad Bartley, Pacific Crest Securities

Okay, thank you very much.

Operator

Thank you, our next question comes from Sameet Sinha with Kaufman Brothers, please go ahead.

Sameet Sinha, Kaufman Brothers

Good morning and congratulations, Jon. Just a couple of questions, first could you talk about the underlying dynamics in the international markets, it seems like you’re getting good growth with Europe and Asia-Pacific, can you tell us what’s exactly happening in the markets there and in your businesses?

Jonathan Hsu, Chief Financial Officer, COO

Sure, internationally we’ve always made a strategic call that the international markets would always grow faster over any intermediate or longer period of time; these would be the critical math of the more mature U.S. market, and I think that what we’ve been able to demonstrate and several of our colleagues in the industry are now starting to focus upon is that that strategic imperative is valid. In general, I think that the European macroeconomy is on stable ground and it continues to cycle up now, but the real strength macroeconomically is in the Asia-Pac region, and I think that a lot of buzz has been placed on China over the last several years. We made the countering call two years ago that Japan which is the second largest macroeconomic power in the world would come out of the 15-year down cycle. And I remember when Dave, myself, and many of our colleagues internally were making that proposition in ’04 several external parties were scoffing at that notion. I think that what people now see is that that notion was not only prudent but spot on and probably underestimated the strength of the resurgent Japanese economy, and we are first on the ground and have a leadership position in that market place. And you can see we were also early and right in the markets in Korea. I think Asia-Pac for our entire industry will be of increasing importance and I don’t think that there’s anyone within our industry or in the extended media and advertising industry that can deny that. I think that you’re going to see continued strength that will accelerate as we go into the ’08 Beijing Olympics and I think going over the long term just because of the incremental number of internet users, you’ll see Asia-Pac being at least a third of the overall global operations for the industry. With regards to how our operations address those opportunities, I just really think that there’s no one else in our extended industry that is as well positioned. With 50% of our revenues and people deployed outside of the U.S., we are by far the most internationally well-positioned company in our sector.

Sameet Sinha, Kaufman Brothers

And as this business grows as a better part of your overall Company, how should we think about margins, are they similar to lower/higher than the domestic margins?

Jonathan Hsu, Chief Financial Officer, COO

It certainly varies by country and by business segments, but in the aggregate they are very similar to the domestic margins top to bottom.

Operator

Thank you, our next question comes from Sasa Zorovic with Oppenheimer & Co., please go ahead.

Sasa Zorovic, Oppenheimer

Regarding international revenue at about 60%, could you break for us maybe into a little more of detail between Asia and Europe if you could give us some indication for particular countries, how much revenue is coming from those countries if you would?

Jonathan Hsu, Chief Financial Officer, COO

Sasa, in the quarter we can break out the major regions that we outline within our public filing. The U.S. accounted for $19.1 million worth of revenue in the second quarter, the United Kingdom accounted for $9.8 million, and I like to note that there’s been a lot of market noise in general about any perceived weakness in the U.K. or Europe for our industry, but our business grew 37% year on year and whatever noise that might be out there I think is based on a very erroneous assumption on the underlying strength of the fundamentals. Then our cream operations just had a blockbuster quarter and that continued on several quarters of strong performance; that produced $7.3 million in the quarter of revenue, up 107% year on year.

Sasa Zorovic, Oppenheimer

Could you then give us a then a little bit of the flavor of at least the countries, in particular Japan, Germany, France, at least the trends if not the numbers?

Jonathan Hsu, Chief Financial Officer, COO

No, I think that in general the trends for the macroeconomy and for our sector Japan is across the board on a resurgent uptake macroeconomically for our sector. Our assumption is that Search had been underdeveloped in the market place in Japan and would catch up with the U.S. over the next several years externally is starting to come true and that’s evidenced by our strong initial performance of our joint venture with Dentsu. Within continental Europe I think that in general continental Europe and our colleagues in Europe hate for anyone to refer to any part of Europe as one aggregate region. Continental Europe, though, tends to have more macroeconomic challenges than the U.K. per se. However, over the last several quarters with some of the political and economic reforms that are starting to take fold within the continent, you’re starting to see at least a stabilization of the overall impact. I think France will look to have a stable-to-stronger outlook going forward as an industry. The Spanish segment, which is often overlooked as one of the major economic powers throughout Europe, actually is quite a vibrant, open, externally driven economy, and I think that Spain is a bright spot within the continent.

Sasa Zorovic, Oppenheimer

Okay, and then have you noticed any competitive sort of changes particularly in Europe and Japan across your various business, if you could address that briefly please?

Jonathan Hsu, Chief Financial Officer, COO

Competitively in Japan there’s been no change in the competitive landscape. I think that based on our initial success it has attracted a number of outside competitors who tried to explore the market. Given one of the structural impediments to entry, which are relationship and obviously Dentsu is the big dominant player throughout Japan as well as technology, which means that in order for technology to address the local market it has to be doubled by and able to handle the character set. Those are significant obstacles to increase competition in Japan. Within other regions, the competitive landscape actually is starting to get better for any incumbent players. There is a tendency towards favoring scale, soak, and breadth especially with more advertisers going cross-market or inter-market. There are very few players who are actually able to fulfill just a quest out there. And then obviously I mentioned the shake out of some of the smaller, long and top shots across the board within each specific market.

Operator

Thank you, our next question comes from Bill Lennan with Wedbush Morgan, please go ahead.

William Lennan, Wedbush Morgan Securities

Thanks, I had a question about Dentsu; you’ve been giving us guidance for a couple of quarters now of $5 million to $10 million for 2006. I wonder if you can kind of take us down into the project plan and give us a couple of metrics or milestones that you achieved thus far in ’06 and what you hope to have done by the end of ’06, just help us have a few details on how that business is progressing besides the guidance? Secondly, as a followup on your open competition, some of your competitors are making a lot of noise about their designs on Europe and getting there either organically or through acquisitions, so could you give us a sense for your M&A appetite is for the next 18 months or so, particularly in Europe?

Jonathan Hsu, Chief Financial Officer, COO

Certainly, let me address the first. With regards to Dentsu, we also provided a very important milestone just in the highlights of this quarter that we turned an operating profit ahead of schedule within our operations there. I think that part of the challenge for U.S.-based institutional investors — and I do encourage everyone to do due diligence and understand the Japanese market a lot better so that they understand the inherent power of this relationship going forward — is that that although people focus upon results quarter to quarter, for someone of Dentsu’s world class caliber, when they take a look at a timeframe, they’re looking at multi-year timeframe to build out the dominant business. Dentsu is not in the practice of going and starting a business with anyone unless it dominates the market place. Although we are very proud of the progress we’ve made in the first seven or eight months of operation, and obviously from my venture capital investment banking background I’ve never seen a new operation in a foreign country from a standing start achieve that level of success that quickly, the fact is that we have a multi-year timeframe when we’re building out the project plan with Dentsu. And it is kind of non-synchronous with a lot of U.S.-based institutional investors to think about what’s going to happen three, five, ten years out. Well, I assure you that Dentsu has that type of timeframe and that type of will to drive success. And with regards to European competitive landscape and RF type for M&A, we’ve been in Europe for 10 years and to a large extent relationships count for a lot throughout Europe. We’re one of the few if only players that actually have a spread in all the major markets throughout Europe, and we feel very confident about our incumbent position there. With regards to M&A, interestingly when you’re taking a look at the valuation of multiples of some of the single country or 10 European players that are traded overseas, they are traded at significantly higher multiples than those companies enjoy here within the U.S. market place, mainly owing to the regulatory environment here in the U.S. And that’s why I think that when you take look at a lot of the new IPOs per se, they’re going directly to the London A markets because they’re getting these higher valuations and have less regulatory burdens.

Noah Schankler, IR

Andrew, this is Noah Schankler from the Company, I think we have about time for one more question.

Operator

Thank you sir and that question will come from Joe Maxa with Dougherty & Co., please go ahead.

Joe Maxa, Dougherty & Co.

Thanks, most of mine have been answered but I want to ask about head count, current head count and what your expectations are if you need to add many people to reach your guidance for next year?

Jonathan Hsu, Chief Financial Officer, COO

Yes, our head count is essentially flat still, ex-Japan, from over the last four to six quarters going to the overall operating leverage, strategic and tactical build that we set forth for the Company. We really do believe that we’re enjoying industry-leading operating leverage in how we have to scale the business. We have more than doubled and then doubled again the business on our experienced staff, and Dave and myself and the entire team is very proud of our team globally and the experience and commitment they have to the Company.

Joe Maxa, Dougherty & Co.

Okay, are you expecting that you don’t need to add many people in for next year?

Jonathan Hsu, Chief Financial Officer, COO

Yeah, I think that we’re going to continue along this methodology and first invest in the systems and then add people if necessary and where the opportunity warrants, but we’re going to be very measured in terms of our staff. We’ve been able to demonstrate that type of operating leverage and we expect that to continue.

Joe Maxa, Dougherty & Co.

Okay, great, last thing is cash flow from operations in the quarter.

Jonathan Hsu, Chief Financial Officer, COO

Cash flow from operations was $4 million for the quarter.

Joe Maxa, Dougherty & Co.

Thanks, Jon.

Operator

Management, at this time I’ll turn the conference over to you for any further remarks, please go ahead.

David Moore, Chairman and Chief Executive Officer

Thank you for listening this morning. The second quarter continues to build upon the momentum generated in the first quarter for 24/7 Real Media. 2006 is shaping up to be another record year for the company and we look forward to speaking with you again during our next call. Thank you for listening.

Operator

Thank you, management. Ladies and gentlemen, at this time we will conclude today’s teleconference. We thank you for your participation on the program. You may now disconnect and do have a pleasant evening.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged:
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.