24/7 Real Media Q3 2006 Earnings Call Transcript

| About: 24/7 Real (TFSM)
This article is now exclusive for PRO subscribers.

24/7 Real Media, Inc. (TFSM)

Q3 2006 Earnings Call

November 2, 2006 8:30 am ET

Executives

Noah Schankler - Vice President, Investor Relations

David J. Moore - Chairman of the Board, Chief Executive Officer

Jonathan K. Hsu - Chief Financial Officer, Chief Operating Officer, Executive Vice President

Analysts

Aaron Kessler - Piper Jaffray & Co.

Sameet Sinha - Kaufman Brothers

Stewart Barry - ThinkEquity Partners

Youssef Squali - Jefferies & Co.

Chad Bartley - Pacific Crest Securities

Jordan Rohan - RBC Capital Markets

Joe Maxa - Dougherty & Company

William Morrison - JMP Securities

Operator

Good morning, ladies and gentlemen, and welcome to the 24/7 Real Media third quarter 2006 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.

(Operator Instructions)

As a reminder, this conference is being recorded today, Thursday, November 2, 2006.

I would now like to turn the conference over to Noah Schankler. Please go ahead.

Noah Schankler

Thank you, Heidi. Hello, and welcome to 24/7 Real Media's third quarter 2006 results conference call. On the line today are Chairman and Chief Executive Office, David J. Moore; and Chief Financial Officer and Chief Operating Officer, Jonathan K. Hsu; as well as General Counsel, Mark Moran.

Before we begin, the company would like to remind you that it will be making forward-looking statements regarding future events and future financial performance during both the company’s presentation and in response to questions asked during the Q&A that follows. The company makes these statements as of November 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 of 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 investment decisions.

You may find copies of the company’s SEC filings, its earnings release, including a reconciliation of non-GAAP to 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 call over to David Moore, Chairman and CEO of 24/7 Real Media. Dave, go ahead.

David J. Moore

Thanks, Noah. Good morning, everyone. Once again, I am pleased to report that 24/7 Real Media is on track for another year of record financial and organizational growth. Our operations are continuing to post sector-leading organic growth, and our strategic partnerships continue to perform well and bear additional opportunities.

Third quarter revenues of $49.1 million were in line with our previous guidance, and represented year-over-year growth of 40%, as we maintained momentum through what is traditionally a seasonally weak advertising period.

Pro forma operating income of $0.09 per share also met our earlier expectations.

Revenue contribution from our international operations increased to 61% for the third quarter, led by 50% year-over-year growth in the United Kingdom and 80% growth in Korea, our second- and third-largest markets, respectively. In Japan, our joint venture with Dentsu, K.K. 24/7 Search, continued to perform exceptionally well through the quarter, and we recently celebrated our one-year anniversary for this landmark deal.

Yesterday, we announced a significant expansion of our existing partnership with Dentsu. Due to the tremendous operating success of K.K. 24/7 Search and the deep relationship between Dentsu and 24/7 Real Media, our two companies have decided to actively move forward together to rollout our successful search engine marketing business beyond Japan into other critical advertising markets throughout Asia.

Over the course of 2007, Dentsu and 24/7 Real Media will use a newly funded holding company to establish search engine marketing operations in regions identified as strategically important to our shared growth strategy for digital advertising in Asia. Together, we have initially targeted the countries of China, India, Korea, Thailand, and Taiwan as logical extensions of our current operations.

Based on its population base and advanced technology infrastructure, we are convinced that Asia will eventually be the largest Internet advertising region in the world.

We are fortunate to have in Dentsu a partner that appreciates the value of securing long-term growth by building upon a solid foundation. Over the course of its hundred-plus year history, Dentsu has amassed an extensive network of world-class subsidiaries and affiliated companies to support its more than 6,000 global clients. In China, this includes Beijing Dentsu Advertising, which was recently ranked first by revenue amongst local agencies for the third consecutive year.

In each market, we will carefully evaluate the competitive landscape and paid search market dynamics to decide upon a business model which best leverages the relative strengths of our combined technical and operational knowledge.

Dentsu and 24/7 Real Media are committed to working closely together over the upcoming years to be the predominant market leader in this region. We have been privileged to experience first-hand the market reach and leverage that Dentsu commands throughout Asia, and we share our partners long-term view of building sustainable value creation.

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

Jonathan K. Hsu

Thanks, Dave, and welcome to all of you on the call. In a traditionally weak quarter for advertising, 24/7 Real Media operations performed solidly. More impressively, the organization was able to complete a very significant new venture with Dentsu, securing our long-term market relevance and setting the stage for shareholder value creation over the years to come.

Asia is the future, and 24/7 Real Media is ideally positioned to benefit.

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

Now, let me provide details about 24/7 Real Media’s third quarter performance.

Total revenue for the third quarter of 2006 rose 40% to $49.1 million from the third quarter 2005 revenue of $35.1 million. Again, we have grown pro forma operating income more than 100% year over year, generating $4.7 million in profits for the third 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 third quarter of 2005.

Our year-over-year incremental contribution margin was a robust 17.4%, as we continue to capitalize on the depth of operating leverage within the business.

GAAP net loss for the third quarter of 2006 was $1.4 million, or $0.03 per share, compared with net loss of $0.08 million, or $0.02 per share in the year-ago period.

Moving to our business segment, Media Solutions revenue, during a traditionally slow seasonal period, climbed 23% to $19.1 million in the third quarter of 2006, from $15.5 million in the same period of 2005. Gross margins for the quarter were 33.3%, up 100 basis points from the second quarter of 2006.

Search Solutions contributed $22.7 million to revenue in the third quarter of 2006, up 65% from $13.7 million in the same quarter of 2005. Blended gross margins in this segment were 23.4%. Search gross profits for the third quarter of 2006 were $17.5 million, representing 7.3% sequential growth from the same quarter of 2006.

Technology solutions revenue growth maintained its above market growth rates, surging 27% to $7.4 million in the third quarter of 2006 from $5.8 million in the same quarter of 2005. Gross margins in this segment have remained strong at 80.3% for the quarter.

Cash flow from operations, which has been significant throughout the year, totaled $4.2 million. Cash continues to build on 24/7 Real Media's balance sheet, reflecting the strong financial state of our company.

I would now like to provide guidance for anticipated fourth quarter financial results, as well as guidance for the full year 2006 and 2007. Please note that this guidance does not include any financial impact from the extended venture with Dentsu discussed earlier.

For the fourth quarter of 2006, the company anticipates revenue of between $55 million and $59 million, and diluted pro forma operating income of between $0.11 and $0.12 per share.

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 GAAP net loss of between $0.15 and $0.16 per share.

We are maintaining our revenue guidance for full year 2007 at $250 million to $260 million, as well as our diluted pro forma operating income guidance for 2007 of between $0.51 and $0.55 per share.

We look forward to providing additional financial insight on our new venture with Dentsu, including expected impact on 2007 and beyond during our Q4 earnings call, expected to be held in early March, 2007.

I will now turn it back to Dave.

David J. Moore

Thank you, Jon. We will now open up the call to questions. Heidi.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Aaron Kessler with Piper Jaffray. Please go ahead.

Aaron Kessler - Piper Jaffray & Co.

Thank you. Good quarter, guys. A couple of questions here. One, in terms of the seasonality of the business, you noted some seasonal softness. Did that come in line with the expectations? How has the business responded in September and October? Also, could you give us a sense for what Dentsu’s share is in the countries outside of Japan? Thank you.

Jonathan K. Hsu

Thank you, Aaron. Regarding Q3, normally, as we said in prior years, Q3 is a seasonally weak quarter, particularly in the media business. I think that the seasonality came in as we expected. In one region in particular, we had hoped that it would be a little stronger, and that region would be Europe. I do think that, as many people know, that in Europe many of the businesses, especially the advertising community, tends to take breaks during the summer season. I think that was certainly the case after the flurry of activity associated with this year’s World Cup held in Germany.

With regard to Dentsu, they do have market-leading positions in various countries throughout Asia. They are by far the strongest regional advertising agency and still the fifth largest advertising group worldwide. In China, they are consistently ranked number one by local billing volume, and within other local markets, they are a top three within each of the markets that we cited.

Having spent a lot of time with the Dentsu executive team over the past year, both David and I do know that they are very committed to working with us to build their market-leading positions, especially in the digital realm, throughout the Asia-Pac region.

Aaron Kessler - Piper Jaffray & Co.

Would you say Europe has increased in [inaudible] over the last couple of months?

Jonathan K. Hsu

I am sorry, could you repeat that?

Aaron Kessler - Piper Jaffray & Co.

Has Europe increased in line with your expectations since the seasonal softness?

Jonathan K. Hsu

I think that in general, as we know in Q3, Europe has gone through that seasonal weakness period and activity is picking up across the board.

Aaron Kessler - Piper Jaffray & Co.

Thank you.

Operator

Thank you. Our next question comes from Sameet Sinha from Kaufman Brothers. Please go ahead.

Sameet Sinha - Kaufman Brothers

[inaudible]

Operator

Pardon me, sir. We are having a difficult time hearing you. Could you pick up your handset? That line has dropped from the conference. Our next question comes from Stewart Barry with ThinkEquity Partners. Please go ahead.

Stewart Barry - ThinkEquity Partners

Good morning. David, I was wondering if you could speak to the emergence of online ad exchanges and whether that is an opportunity for 24/7 or a threat, just in the context that Yahoo! made an investment there. They are getting heavy BC funding, and that most exchange operators are just taking 10% of the advertising revenue to connect advertisers with publishers.

David J. Moore

We definitely think that online exchanges will continue to grow as the business of buying and selling advertising on the Internet continues to become more automated. I think as you know, Stewart, there is still a lot of manual labor involved in buying Internet advertising, as well as selling it. I think the exchanges are just one step toward the automation of the industry overall.

We are watching this very carefully. We certainly want to be able to interact with all those exchanges, and we think overall that the exchanges just help the Internet advertising industry grow a little faster.

Stewart Barry - ThinkEquity Partners

Jonathan, could you speak a little bit to search gross margins? There seems to be volatility there from quarter to quarter. Are we thinking about that the right way, or should we just be looking at a gross profit growth for the search business? If you look at gross profit growth, it was up 7% sequentially.

Jonathan K. Hsu

Certainly. Internally, we do focus on gross profit dollar growth as well as, more importantly, incremental contribution margins to the bottom line. There is volatility just because we are growing so much faster than the market, and we are being invited to participate in some of the largest search deals globally now. I think that from our standpoint, we look at gross profit dollar growth, which has been very strong, I think stronger than most people expect, as well as our incremental contribution margin for the overall company, which at 17.4% on every incremental revenue dollar, it is certainly stronger than also what most people expect.

Those are really the two relevant metrics that we track internally.

Stewart Barry - ThinkEquity Partners

Could you explain the drop in the gross margin sequentially in that business?

Jonathan K. Hsu

Right, that is just a revenue shift mix, where many of the larger new clients that we brought in are at a lower gross profit margin percentage, but are incrementally profitable overall.

Stewart Barry - ThinkEquity Partners

Finally, is the media business -- to what extent is web 2.0 type inventory a potential growth driver for the media business? Or is the media’s focus more on I guess “premium content publishers”?

David J. Moore

User-generated content nowadays is a large percentage of the overall inventory that is available, so it is certainly a part of just about every media network’s arsenal. However, I would say that there is still some issues, as we all know, with user-generated content that for some advertisers make it a medium that is not appropriate for them. As those controls and safeguards get put into place, I think that you will find that user-generated content becomes a lot more popular with the advertisers than it is today, so from our perspective, a combination of both the premium and the user-generated content is the right mix for us to grow our business.

Stewart Barry - ThinkEquity Partners

Great. 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. Just two quick questions. Could you compare and contrast on the trends and traction you see between the domestic and international market?

Second question is in the M&A opportunities. How do you view them currently? It seems like with the new partnerships across Asia, you would probably be focused on them for the near-term.

Jonathan K. Hsu

Sure. Why don’t I take the first question, and then I will defer to Dave to address the larger opportunities that we are seeing from an M&A perspective.

Our essential thesis of our company has always been that the international market will continue to grow faster than the critically important and critical size U.S. market. That is certainly the case with Europe and even more the case with Asia-Pacific.

Compared to most other -- all other competitors in our extended sector, we have the most international footprint. In fact, in this past quarter, international operators outside of the U.S. accounted for more than 61% of total revenue.

I think that we have always built a value proposition that in order to be relevant and a market leader long-term within our sector, you had to have that international footprint. In particular, I think people will see, over the upcoming years, that Asia-Pac will be the key region for outside growth over the years to come. That is just going to be turbo-charged with the upcoming Beijing Olympics in summer ’08, as well as the World Fair in Shanghai in 2010. I think that is one of the reasons why we are so pleased about this expanded relationship with Dentsu. It secures our long-term market leadership.

David J. Moore

From an M&A perspective, we always have our eyes open for acquisition opportunities, particularly within the technology sector. As you know, however, many of the private valuations today are very expensive overall and as a result, are not of great interest to us, in many cases.

At the same time, the last acquisition we made was in August of 2004. Since that period of time, we just focused on the blocking and tackling aspects of our business. I think that the results in that laser-like focus are speaking for themselves.

In short, we keep our eyes open, but we do not see any pressing need to make an acquisition at this time.

Jonathan K. Hsu

I do want to just follow-up and elaborate on just the partnerships, which you referred to. Obviously with our international footprint and distribution channel, the partnerships that we have with Dentsu, we are a very attractive platform for a number of smaller, single-product companies who are looking to expand globally. Certainly as our organic performance has continued to perform, and it only gets turbo-charged with these types of partnership announcements, many companies are now coming to us to see if they could fit within our global structure.

Sameet Sinha - Kaufman Brothers

Thank you very much.

Operator

Thank you. Our next question comes from Youssef Squali with Jefferies and Company. Please go ahead.

Youssef Squali - Jefferies & Co.

Thank you very much. A couple of questions. Jonathan, could you speak a little bit about your stock-based comp? It seems to be jumping around. It came in pretty high this quarter. Why is that? Then, what is baked into your Q4 guidance?

Jonathan K. Hsu

Certainly. As we have said, our stock-based comp is expected to be on a steady state basis of approximately $3.5 million per quarter. In this most current quarter, there was a one-time true-up of approximately $1.4 million related to FAS-123R estimates. Essentially, under this regulation, you have to make an estimate of expected employee turnover, and in our case, fortunately, our employee turnover was lower than we previously had experienced, based on our historical rates. So there was a true-up based on lower-than-expected employee turnover for Q3. So ex that, our stock-based comp for the quarter would have been $2.9 million. There were no new shares issued. Essentially, it was that.

Youssef Squali - Jefferies & Co.

So when you look at Q4, you are looking at the $3.5 million steady state number?

Jonathan K. Hsu

That is right.

Youssef Squali - Jefferies & Co.

Okay. What kind of growth assumption is baked in your media revenues for Q4 and for ’07?

Jonathan K. Hsu

Certainly we do not give specific guidance by business segment. We are always trying to design and run our business to grow above the underlying sub-sector growth rates. What we have seen so far in 2006 is that all three business segments have outperformed the underlying growth rate, so I think that will continue on a trend going into 2007.

Youssef Squali - Jefferies & Co.

Just on Q4, when you look at your media revenue this quarter, or your media growth this quarter, it was kind of lighter than I think the midpoint of your guidance would have implied. Do you see this as being kind of a low watermark at the 22%, 23%? Or at least for Q4, or is that not the case? Because last year, you actually showed a sequential decline Q3 to Q4.

Jonathan K. Hsu

Once again, I will defer to addressing any specific projections of growth rate. There were the seasonal weakness that is normally expected, but you always hope for better within the European markets. We do see activities picking up as of September, so we are fairly bullish about the prospects of our media business.

Youssef Squali - Jefferies & Co.

Fair enough. Lastly, we are still looking at the $5 million to $10 million from Dentsu, Japan?

Jonathan K. Hsu

We did not speak to that specifically in either our earnings release or in our script. We do believe that the joint venture continues to perform extremely well. Obviously Dentsu, based on the success of our joint venture, has made a 2.5 ex commitment more into forming this new joint venture and entrusting us with the rest of their search business throughout Asia.

We have spoken and worked with our colleagues at Dentsu, and they take a very long-term view of the operations, both in Japan and throughout Asia. Here is a company with a hundred-year history, so they understand that as a U.S. publicly traded company, we are under certain obligations and pressures to give clarity. They do encourage us, and all of our constituents, to think very long-term about Asia. But in short, the venture has performed very, very well throughout this year, and continues to be a profitable part of our overall business.

Youssef Squali - Jefferies & Co.

That’s great. Lastly, just on the U.S. revenue, could you talk about just the percentage, or your growth rate just on the U.S. revenue component? I know your international is what kind of differentiates you.

Jonathan K. Hsu

Our U.S. revenue growth rate of 24% for the quarter continues to be very solid. Our U.S. operations continue to be a very important driver of overall profitability and forms a great foundation for leveraging that base globally.

Youssef Squali - Jefferies & Co.

Fair enough. That’s great. Thanks a lot.

Operator

Thank you. Our next question comes from Chad Bartley with Pacific Crest. Please go ahead.

Chad Bartley - Pacific Crest Securities

Good morning. Thank you. A couple of questions on gross margin. Media has been increasing. I am curious if there is anything in the quarter that drove that, and whether you think it is sustainable.

Then, on search gross margin, would you guys venture a guess when that could stabilize? Could we see that continue to decline, relative to your overall growth in terms of driving incremental margin? Is it still possible for that to decline?

Finally, on the new Dentsu relationship with the extension, I know you guys do not want to quantify what that could be in ’07, but should we be thinking of this in terms of being smaller or bigger than Dentsu Japan in that $5 million to $10 million in guidance you guys were giving before? Thank you.

Jonathan K. Hsu

With regard to the gross margin questions, I think we have always believed that gross margin percentages are not really the most relevant metric in our business. It is really gross profit dollar growth as well as incremental contribution margins to the bottom line. Within that context, however, I do think, as much as we do not highlight the fact that search gross margin and percentages jump around, we do not really highlight the fact that media gross margins also jump around, particularly to the upside.

I think that within the search margin context, once again, we are focused on gross profit dollar growth. When we are now bidding on and winning these larger deals, they come at a smaller gross profit margin percentage but represent significant gross profit dollars, and therefore allow us to drive a lot of incremental margin to the bottom line and invest in a consistent theme for several quarters now.

With regard to the joint venture, obviously whether or not it is bigger than a bread box, I would defer that question to the beginning of next year when we have more planning with our partner, Dentsu.

I would say that over the long-term, and both ourselves and our partners, Dentsu, do view this as a multi-year strategy to be the dominant platform throughout Asia just by logic, because we are addressing five markets outside of Japan, and those economies will eventually be larger than Japan. I would suspect that that operation will be a very significant portion of our overall operations in latter years.

Chad Bartley - Pacific Crest Securities

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Jordan Rohan with RBC Investments. Please go ahead.

Jordan Rohan - RBC Capital Markets

It looks like you guys could really beef up some of the U.S. operations or product offerings. More specifically, it seems like in the search business, your business is probably skewed towards international. I understand that at some level, because of the commissions that Google and Yahoo! pay in Europe, but is there some way to enhance the percentage of your total search revenues that you get from the U.S.?

Secondly, it seems like your tech business is doing fairly well, but to my knowledge, the vast majority of those revenues are from a publisher side ad serving system. I am wondering if you think that your presence in the search management tool area will allow you to expand into an H&P sized ad serving tool anytime soon? Thank you.

Jonathan K. Hsu

With regard to U.S. growth, U.S. is still a very large component, 40% of our overall mix. It is an extremely profitable region in operations for us, and it is very well-run.

I think that rather than looking at our company as regional buckets, because I do not think that is the way the world economy is really evolving, we really see the global markets as one integrated economy. When you take a look at multi-nationals, whether they are based in Korea or in Japan or in Europe or in North America, these large multi-nationals are looking at multiple market buys, as well as partners who can satisfy and support them in these multiple markets. A lot of our focus is to win that type of business and develop those types of relationships, regardless of where they originate from.

So whether it is a Samsung in Korea or a J&J in the U.S. or Nestle in Europe, the fact is that we are looking at the global opportunities for our business. I think that the overall growth rate will reflect that for the company.

With regard to our technologies business, which has been consistently greatly outperforming the underlying sub-sector, a lot of the trends that we identified first and early and benefited from, which are price stability, volume growth, and continued market share gains, continued obviously throughout all three quarters of this year. That, combined with our international footprint and strong search business, certainly always provides us opportunities to consider product line extensions or major project introductions. Based on the strength and technical depth of our search business, as well as our technology platform, I think that a lot of this is really at our choosing right now, and we were fortunate to have that type of opportunity.

Jordan Rohan - RBC Capital Markets

Thank you.

Operator

Thank you. Our next question comes from Joe Maxa with Dougherty and Company. Please go ahead.

Joe Maxa - Dougherty & Company

Thank you. Could you just address the competitive environment, what you are seeing? Looking on your media side, your margins suggest that your pricing environment is pretty stable. Could you just talk to that?

David J. Moore

Sure. The marketplace, as you know, is very strong for Internet advertising. Search, of course, is the fastest growing segment still, but display advertising has continued to grow at a pretty good rate. We find ourselves with one of the largest networks in the United States that offers a very competitive value to the top 25 websites that are getting 85% to 90% of the dollars still, as compared to some of the other network properties that exist in the marketplace as well.

We think that advertisers are beginning to recognize that networks provide a great deal of value, and as some of the larger sites tend to begin to sell out in certain areas and raise prices based on supply and demand, the advertisers are understanding that they are not getting the same return on investment from those dollars that they could be securing if they were placing the monies with companies like ours. As a result, we are doing more and more business with more and more of what you would call the brand-oriented advertisers on the web today.

Joe Maxa - Dougherty & Company

Thank you. That is all I had.

Operator

Thank you. Our next question comes from Bill Morrison with JMP Securities.

William Morrison - JMP Securities

Good morning. Thank you. A few questions. First, Jonathan, I was wondering if you could just give us, if possible, the free cash flow for the three- and nine-month period, or alternatively, I guess the operating cash flow in cap-ex and we can make the calculation.

Then, secondly, following up on an earlier question on the ad exchanges, I was wondering, and I do not know if it is possible to do this, but could you describe or quantify what percent of your inventory on your publisher network in the media business would you consider kind of premium, high CPM inventory versus remnant inventory? That would be very helpful, and then I may have one follow-up.

Jonathan K. Hsu

With regard to cash flow, cash flow from operations in the quarter was $4.2 million. For the year-to-date, it totals $8.6 million. Cap-ex for the quarter was $1.1 million, and for the year-to-date for nine months, was $2.7 million. I will defer to Dave to address the ad exchange and inventory make-up.

David J. Moore

It is interesting. The term remnant really indicates that that inventory is not recognized by the website in terms of the type of audience that that inventory generates. As a result, it is very difficult to sell. The great thing about our network is that we are able to see audiences move from website to another. As a result, we are able to identify audiences that are in this so-called remnant space as valuable, and in turn sell them to advertisers and their agencies.

We really do not categorize premium versus something else. What we will do, though, is we are in a position to sell what I would call user content versus non-user-generated content. As I mentioned earlier on in the call, there are some advertisers that just do not want to be in user-generated content, so we are in a position to sell them the stuff that is not generated in that fashion.

In terms of percentage of inventory one way or another, we just do not release those types of figures.

William Morrison - JMP Securities

Okay, great. That is helpful. A couple of follow-ups. With the new partnership, I know you are not providing guidance or quantifying the opportunity, but I am curious, Jonathan, if maybe you could comment on the investment side. I would guess that you are going to have to make some product investments to enable the Decide platform, or I guess to upgrade the platform for new languages in these markets. Should we assume that the incremental margin next year might tick down as a result of some those investments? How should we think about those investments?

The last question I have is there have been obviously some legislative action around online gambling in the States. I was curious if you have any exposure to online gambling advertising on your network.

Jonathan K. Hsu

The last question first, it’s easy. No, we do not have exposure to online gambling, and the legislation does not affect us.

With regard to the joint venture, one of the interesting things that we have always said was a huge competitive advantage and one of the reasons why we are so bullish on our technology and our ability to scale and develop Asia, was that from the beginning, our Decide DNA platform was designed from the ground up to specifically handle any language character set, including all the languages throughout Asia. I think several major competitors have tried to break into the Japanese market in the same time period we have and have not been able to, unfortunately, get the technology working, whereas we, from out of the gate, we were able to handle the language character sets in Japan. As a result, our operations have really ramped up quite significantly in Japan in a short time period.

There will be little or no incremental development dollars needed to reconfigure the Decide DNA platform for other Asian languages. In fact, it is ready to go.

I think that we are pretty pleased, and this is one of the inherent strategic advantages that we offer everyone, especially throughout the Asia-Pac region, and I think this is why Dentsu was able to make such a huge commitment to us, making us the partner of choice as they address the Pan-Asian opportunity.

William Morrison - JMP Securities

Thank you.

Operator

Thank you. At this time, we have no further questions. I would now like to turn the conference back to management for closing remarks.

David J. Moore

Again, thank you for joining us this morning. We are very excited about our continued growth, and especially the future prospects for our newly expanded joint venture with Dentsu. We are in the midst of charging through the strongest operational period of the year, and look forward to reporting what should be another terrific quarter during our next call in early 2007.

Operator

Thank you. Ladies and gentlemen, this concludes the 24/7 Real Media third quarter 2006 results conference call. If you wish to listen to a replay of today’s conference, please dial 1-800-405-2236, or 303-590-3000, and enter access number 11073510. Once again, for a replay of today’s conference, please dial 1-800-405-2236 or 303-590-3000, and enter access number 11073510.

Thank you for your participation. You may now disconnect.

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!