Focus Media Holding Limited Q1 2006 Earnings Conference Call Transcript (FMCN)

Focus Media Holding Limited (FMCN)
Q1 2006 Earnings Conference Call
May 18 2006, 9:00 pm EST

Executives

Jie Chen - Investor Relations Manager
Daniel Wu - CFO
Jason Jiang - CEO

Analysts

Jason Brueschke - Citigroup
Safa Rashtchy - Piper Jaffray
Lu Sun - Lehman Brothers
Kit Low - Goldman Sachs
Richard Ji - Morgan Stanley

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Focus Media first quarter 2006 earnings conference call. (Operator instructions) I would now like to turn the call over to Ms. Jie Chen, Investor Relations Manager. Please proceed.

Jie Chen

Thank you. Welcome to Focus Media’s first quarter 2006 earnings conference call. Today our management will discuss the Company’s financial results for the first quarter of 2006 and business outlook for the second quarter of 2006.

With me here are Jason Jiang, Chairman of the Board and Chief Executive Officer; and Daniel Wu, Chief Financial Officer. After Daniel updates you on our first quarter operational and financial performance, we will open the call for questions. This call is also broadcast through Internet and available through our Investor Relations Web site, ir.focusmedia.cn.

Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements that are subject to risks and uncertainties. The statements include, but are not limited to, statements regarding Focus Media’s business objectives and plans, expectations of the development of our networks and our outlook for the second quarter 2006, for example.

You can also identify forward-looking statements by terms such as: will, expects, anticipate, future, intends, plans, believes, estimates and similar statements. The accuracy of these statements may be affected by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated.

These risks and uncertainties include, but are not limited to: our limited operating history of our current operations and the short history of the out-of-home audiovisual advertising sector, which may make it difficult for you to evaluate the desirability and prospects of our business; the integration of acquired businesses; competition from present and future competitors in China’s growing advertising market; and other risks outlined in our filings with the SEC, including our registration statement on Form F-1.

We do not undertake any obligation to update this forward-looking information, except as required under applicable law. Now I will turn the call over to our CFO, Daniel Wu, for a summary of the first quarter 2006 financial results.

Daniel Wu

Thank you, Jie. Good morning, and good evening ladies and gentlemen. I am extremely pleased to report to you our record financial results for the first quarter of 2006.

Our total revenues have reached $33.1 million, an increase of 34.7% from the previous quarter, and 246.1% from the same period last year. Our first quarter revenue includes $21.5 million from our commercial location business; $5.3 million from our in-store business; $6.1 million from our in-elevator poster frame networks; and $0.3 million from advertising equipment sales to our regional distributors.

First, let me review in detail the results of our commercial location network. Total advertising revenues from commercial location networks in the quarter were $21.5 million. As we have completed the consolidation of Target Media's commercial location networks, the total number of LCDs and PDP screens in our commercial location network in our directly controlled cities have increased to 71,230 as of March 31, 2006 from 45,049 as of December 31, 2005.

Our commercial location network has covered 86 cities in China, including 50 directly operated cities and 36 through regional distributors. Our Premier Channel A, which primarily consists of office building locations in the Focus Media commercial location network prior to the Target Media acquisition contributed 91.2% of the total commercial location network revenue.

Here is the operating data for our Premier office building, Channel A, which is more comparable to historic commercial location operating data. Total network capacity of our Premier Channel A increased to 10,717 time slots, due to the network expansion into new cities. Total number of time slots sold on our Premier Channel A in the first quarter was 3,904 a decrease from 4,648 time slots in the previous quarter due to the two-week long Chinese New Year holiday in the first quarter. During this period, most of our office buildings were closed for business.

Average advertising revenue per time slot, or ASP in the Tier 1 cities -- this is also for the Premier Channel A -- was 11,760 in the first quarter of 2006 compared to 10,553 in the fourth quarter of 2005 up 11.4%. ASP for the Tier 2 cities, which are cities excluding Beijing, Guangzhou, Shanghai and Shenzhen was 2,656 compared to 2,045 in the fourth quarter of 2005, up 29.9%.

The blended ASP for the entire network for Premier Channel A was 4,882 compared to 4,461 in the fourth quarter of 2005, up 9.4%. Advertising revenue from Tier 1 cities in the Premier Channel A includes Beijing, Guangzhou, Shanghai and Shenzhen, accounts for approximately 58.9%.

Here are the results of our in-store network. Our in-store network generated $5.3 million in the first quarter of 2005, increased by 59.6% from $3.3 million in the previous quarter. Our in-store network has continued to expand during the first quarter of 2006. Currently at this time we have installed 5,916 additional LCD and PDP displays in the retail stores, while the total number of display units in stores reached 33,765.

Also we have already covered 5,218 retail stores, including 809 hypermarkets, 1,126 supermarkets and 3,283 convenience stores. Most significantly we have shown great progress in terms of the sales of time slots in the in-store network. Our gross margin for the in-store network has reached 24.9%, up from 4.6% in the previous quarter.

Advertising sales revenue for our poster frame network, which are poster frames placed in the elevators of residential complexes in the first quarter was $6.1 million. The number of frame slots -- this is on a monthly basis -- sold in the first quarter was 90,262.

The network capacity is calculated based on the number of frame slots available for sale in the first quarter of 2006 for the poster frame network was 208,659. The network occupancy rate was 43.3. Average advertising revenue per frame slot sold was $63 in the first quarter.

During the first quarter, we added 200 seats to renew advertising customers, bringing the total number of cumulative advertisers on the Focus Media network to over 1,800. In addition, approximately 340 advertisers have purchased frame slots on our poster frame network.

Gross profit for the first quarter was $18.5 million, representing an increase of 23.5% over the previous quarter of $15 million; a 193% increase compared to $6.3 million for the same period last year.

Gross margin for the first quarter was 55.8%, down from 50.9% for the previous quarter, due to the first quarter seasonality of the Chinese New Year holiday, and consolidation of Target Media and Framedia operations.

The gross margin of commercial location networks in the first quarter was 62.9% as compared to 70.3% in the first quarter of 2005 due to the seasonality in the first quarter and combining Target Media's operations in March.

For the in-store network, gross margin was 24.9% in the first quarter of 2006. For the Framedia network, gross margin was 60.5% in the first quarter of 2006.

First quarter operating expenses totaled $9.5 million as compared to $6.1 million in the previous quarter. The increase includes $1.0 million in intangible amortization resulting from acquisitions, primarily because of the Target Media and Framedia acquisitions; $1.5 million in stock-based compensation expense under FAS 123-R. Of course, the G&A expense also increased due to the consolidation of Framedia and Target Media operations.

Sales and marketing expense in the first quarter totaled $4.1 million or 12.2% of the revenue. Operating margin in the first quarter were 27.3%. Excluding non-cash based stock compensation expense and acquired intangible amortization expense, the non-GAAP operating margin would have been 34.7%.

GAAP income for the first quarter of 2006 was $9.6 million, $29.4 million, up 257% from $2.6 million for the same period a year ago. Non-GAAP net income, excluding non-cash share-based compensation expense and amortization of intangible assets resulting from acquisitions in the first quarter of 2006 was $11.9 million.

Non-GAAP net margin in the first quarter was 35.9%. As of March 31, 2006 the Company had a cash and bank balance of $41.9 million. In the first quarter, we have entered into a definitive agreement to acquire 100% of Dotad. The Dotad acquisition closed on March 21, 2006. The number is not reflecting this in our financials, but Dotad's financials will be consolidated into Focus Media starting in the second quarter of 2006.

Also, on April 26 Focus Media announced the launch of our outdoor LED advertising network. This business will also contribute to our second quarter revenues and also earnings.

Now I would like to provide Focus Media business outlook for the second quarter of 2006. Please note that the following outlook statement was based on current expectations. These statements are forward-looking and actual results may differ materially.

We expect the total revenue for the second quarter to be between $48 million and $50 million. Second quarter net income, excluding share-based compensation expense and amortization of acquired intangible assets is expected to be between $18 million and $19 million.

Thank you very much. We will open the call for your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Brueschke - Citigroup.

Jason Brueschke - Citigroup

Thank you, good morning, Jason, Daniel and Jie and congratulations on a really unexpectedly fantastic quarter, guys.

Daniel Wu

Thank you.

Jason Brueschke - Citigroup

A couple of questions. Let me maybe start with some more fundamental questions, and it involves your customers and advertising budgets. You are a very young company and you have an original business model, and one would naturally expect that early on the advertising you are getting is coming from the discretionary portion of advertisers' budgets. But that as your network matures and becomes more familiar, that you would move more into the mainstream of an advertiser's budget, which gives you access to better pricing power and simply more revenues.

Could you comment, talking about both the commercial network and your in-store network, where you are in this process? Do you think you have moved largely now into the mainstream of advertising in China? Or is it still early and that is something that we can still expect to be a driver sometime in the future?

Daniel Wu

Let me do the translation for Jason. [Translation]

Jason Jiang

Translation

Overall, Jason believes what he said is exactly true; that advertisers more and more nowadays look at Focus Media as a regular channel for advertising. Let’s talk about both the commercial location network and the in-store network.

For the commercial location network, we actually continue to allow work with our existing clients to expand our share of the advertising budget, as you see for the top 5 in 2004, we have not lost any in 2005, and spending also ties the top 5 in 2004, has increased by more than 150% in 2005.

So we would be able to tend to our customers and continue to expand our share of their budget and become a regular advertising channel for those customers.

At the same time, for the commercial location network, we are doing regular road shows throughout the country to expand our customer base. As you see, the customization nowadays, which is also very strong because the regular road show will promote Focus Media and add new customers to our platform.

On the in-store network, 2005 and 2006 is more similar to the commercial location network of about two years ago. In 2005 and right now, 80% to 90% of the customers would be able to retain, continue their long-term, one-year budget with us for the in-store network advertising.

So for the focus of in-store network, we just continue to expand our control [inaudible] basically is to expand into new stores and expand out our screen coverage in the existing stores, as well as the other focuses attract new advertisers, because this is a very new channel, so it is still not as mature as the commercial location network.

We see going forward, there is a lot of growth potential, both in terms of new customer addition and also expanding the network coverage to serve existing customers for the in-store network. Thank you very much. Hopefully that translates Jason’s answer.

Jason Brueschke - Citigroup

A quick follow-up to that. So I understand that basically what you are saying is the in-store network is conceptually about two years behind, and as we look at Premiere channel A’s ASP’s, they are around $11,760 versus only $69 presently for the in-store network. As we think about the potential power of the commercial network to really be additive to your revenues and earnings, say over the next two to three years, is your expectation that eventually we should get close to a similar ASP for the in-store network as we are say today with Premiere Channel? Or is it going to be slightly more, or slightly less? Just help us know how a point of sale, which I know is very attractive to advertisers, how those ASP’s are likely to trend. Thanks.

Daniel Wu

Good question. I think, Jason, maybe we did not explain to you before very clearly. The commercial location network are sort of city basis, but the in-store network are sort of store basis, so the average add people to commercial location network, which is the main channel A, $11,000 you are referring to, is the average block of city bases.

For the in-store network, the $69, the average ASP is on a store basis, so it is a $69 per ASP per week per store, so it is not comparable to the commercial location networks.

If you think about it from an advertiser point of view, for the commercial location network, they purchased advertising by city. So for Shanghai, there is more than 5,000, 6,000 screens in Shanghai displaying this in Shanghai. They had to buy in one network.

For in-store networks in Shanghai, there could be 100 or 200 hyper-markets, and they will buy this selectively based on their product reach. Does that make sense?

Jason Brueschke - Citigroup

That is a good clarification, so let me come at the same question a different way. Given how early you are, should we expect the per store basis, is this something that is going to go up ten-fold over the next few years, or does that $69 per store go up tri-fold? How should we be thinking about modeling this and the potential? We are so early and it is a completely different network. How should we conceptually think about really the potential growth in the ASP’s per store then for this business?

Daniel Wu

[Translation]

Jason Jiang

[Response in Mandarin]

[Translation]

Let me translate for Jason. As you know, the in-store network is new for focusing there based on a new network in China. We typically priced it competitively against TCPN. We think comparative commercial location is roughly about half of the local TCPN. Based on that, we [inaudible] a quarter of the typical local TCPN. Of course, because it is new, we also provide a lot of data to our customers. Going forward, we believe the price will have more pricing power. Of course, as we talk about before, every six months we will be reviewing our pricing structure and potentially see if we can make any price increase or price adjustments.

Keep in mind that TV price is also going up in China, but TV ratings have gone down. So we believe our media will become very competitive going forward. There is one very important distinction here. In a commercial location, because we charge by city, so basically when we expand the network in the city, we expand the reach of ads. So from an advertisers point of view, they may be paying more money to focus here, but in terms of TCPN basis, it is the same.

But in the in-store networks, because how we price the slots, we price it by store basis, so it is not by city basis. So for the store addition, basically we will have more stores we will be able to sell to advertisers, but does not increase the average selling price per slot per store for this particular slot, for the stores where they have.

So there is a key difference between how we price those two networks and that will affect how you project your model going forward. Jason, does that make sense?

Jason Brueschke - Citigroup

Yes, that is a great answer. Thank you very much. I will get back at the end of the queue and let some other people ask questions, but congratulations on a great quarter, and especially fantastic guidance, guys.

Operator

Your next question comes from . Please proceed.

Safa Rashtchy - Piper Jaffray

Good morning, Jason, Daniel, Jie, and congratulations on a good quarter. A couple of questions. I wonder if you could give us some color on how we should look at the margins going forward. I believe you noted that the margins were lowered because of integration issues with -- not issues, but integration process with target media. The margins were lower, quite a bit from last quarter. How should we look at that going forward?

Can you give us some breakdown, at least qualitatively, of the margins of each of the businesses that you have [only credit]?

Daniel Wu

Safa, I think if you look at the gross margin at 55.8%, compares lower than first quarter of 2005. I am sure you are aware of this, and mostly because the low margin in the commercial location network, because of two weeks Chinese holiday in China in the first quarter, and the office buildings are closed. We cannot charge time for advertising into the building.

For the commercial location network, the gross margin was 62.6%, compared to 70.9% in the first quarter of 2005. This actually, if you go back a year ago and look at Q1 of 2005, this is very comparable, more comparable to Q1 of ’05.

Then, for the in-store networks, gross margin had already moved up significantly from 4.6% in the first quarter of 2005 to 24.9% in the first quarter. That shows our strong operating leverage with the fixed cost of the network.

For the framing business, the gross margin was 60.5% in the first quarter of 2006.

Safa Rashtchy - Piper Jaffray

So the Target Media did not pull the margins down then?

Daniel Wu

Actually, Target Media did have a negative impact on the margin, because their business basically due to their position, they have a lower gross margin business. So if you look at both Target Media, they do have a negative impact on the margins. Keep in mind going forward, there is not going to be a Target Media anymore because their network already quote, unquote Ron Warding, disseminated, take apart by Focus Media and set up all those additional channels.

So if you see, of course, given the impact of Target Media, they are going to be a positive effect on the discount level as well as how Focus Media networks sell to advertisers through channels.

So if you look at overall, the effect of lower gross margin of historical Target Media business be offset by Focus Media’s stronger business leverage in terms of margin. So that is why going forward, we continue to expect our margin for commercial location networks will move back to the historical level, which will be above 70%, as we discussed on our last conference call.

Safa Rashtchy - Piper Jaffray

Just staying with the margin question, can you give us your long-term expectations for the stores with in-store network, as well as for the LED’s?

Daniel Wu

In the long term, I think for the commercial location network, it is obvious we have about 70%. We believe the acquisition of Target Media will have a better positive effect because the majority of [targeted] sales, which is the location cost, will be somehow limited -- the rate of inflation will be limited due to the acquisition. So we believe we potentially can achieve higher than what we have achieved historically with the commercial location network.

For the in-store network, we believe eventually this will be a 40% operating margin by the end of 2004 because of the fixed-cost nature of our business. So today, our gross margin already reached about 25%. As we continue to move through the quarters, we believe the gross margin will continue to increase.

Of course, as Jason said, as long as the focus in the in-store network is continued, we expand our network footprint by expanding into new storefronts. That would incur additional fixed costs as well, but we believe as we are [talking] about a year-and-a-half from now, the in-store network should be more than 40% operating margin to Focus Media .

For the Premier business, as you see today, the occupancy rate is 43.3%, and the gross margin is 60%. So this also makes for business, as we continue to increase our occupancy rate, we believe that during the year, gross margin will continue to increase as well.

For the LED business, we believe this business, when we reach mature, will have an operating margin over 40% as well, but it is very new. We just launched this on May 1, 2006. We believe it is going to take a year, two years before we get to that level.

Safa Rashtchy - Piper Jaffray

Thank you. If I may just switch now on a follow-up, an entirely different area. You have acquired a number of businesses, some of them entirely new operations, like the Framedia, and the LED, and you expansion plans into the electronic billboards beyond that, and then to wireless.

I wonder, Jason, can you give us some qualitative comments as to how you feel about the management bandwidth that you have to handle this? If you could give us some color on some of the integration issues you are seeing, where do you think you are with being able to manage this, and is this enough for you, or do you feel that you can actually handle some more acquisitions?

Daniel Wu

[Translation]

Jason Jiang

[Response in Mandarin]

[Translation]
Safa, first of all, regarding management bandwidth, if you see the acquisition we made, such as Framedia and [Sodat], we basically kept all of their original management teams, who are the experts in their sector. So through the acquisition, we not only acquired the business, but we also acquired people, talent as well.

There is a lot of sharing, knowledge sharing and cross training among various management teams, because we are actually selling our entire media of an integrated media platform to our customers.

So far, we actually have not run into any problems in integration. Actually, we believe the experience the share of knowledge has been very smooth.

For acquisitions, Focus Media will continue to look at new media opportunities, but today, as of for 2006, we will focus on the five media that we already have today, because this is still an integrated media coverage for people’s out of home lifestyle in China. We believe we are pretty happy with where we are regarding the coverage of different various new media.

Of course, as you know, the mobile advertising as well as LED advertising has a lot of growth potential, which we will be focusing on in 2006. This does not rule out any small acquisitions we may make in the sectors we already have. Of course, the company pays very close attention to any new media development in China and potentially if there is anything which may make sense and have media synergies with our existing media platforms, we may make such acquisitions.

Safa Rashtchy - Piper Jaffray

Thank you very much.

Operator

Ladies and gentlemen, your next question comes from Lu Sun of Lehman Brothers. Please proceed.

Lu Sun - Lehman Brothers

Thank you. Good morning, everyone. Congratulations on a great quarter. I actually have two questions. One is on your new business, the Focus Wireless business. Can you give us some basic metrics regarding revenue drivers for this business?

Also, I think the last time we talked to management, there seemed to be a new direction for this business, i.e., some direct marketing for the traditional sectors in addition to its existing SP customers. Can you tell us more about the development in that business?

My second question is on the cost side. What kind of ballpark year on year increase do you expect for the rental costs for both the commercial network and also the in-store network for 2006? Thank you.

Daniel Wu

[Translation]

Jason Jiang

[Response in Mandarin]

[Translation]

Lu, let me translate for Jason. For Focus wireless, if you see the WAP market in China is actually experiencing explosive growth. According to data provided by China Mobile, currently there is about 70 million to 80 million WAP users, expected to grow to double that number in about a year. Focus Media Wireless, which is Dotad, had a lot of experience with WAP push, because they are one of the largest -- they are actually the largest WAP ads integrated platform in China. So they actually have a database which tracks WAP users phone model, areas, and their usage patterns. Such as, for people who use, we can identify the users who use a multimedia phone or you use a business phone, so we can deliver different WAP ads to those people.

At this time, we are actually going through the model, in addition to delivering WAP push messages for WAP service providers, we are signing partnerships with WAP service providers in terms of delivering banner ads and other ads through their WAP portals. We have already planned over among the top 30 WAP service providers, we have signed over a dozen of them to provide the service together with them, and we believe those service in the future will become part of the revenue driver going forward.

In terms of rental costs, for the commercial location network, given the acquisition of Target Media, we do not believe there will be any significant growth in terms of rent going forward, because on the one side, we will be adding new buildings, reaching new channels, but on the other side, we are reducing our rent costs with our existing network as well, so we are renegotiating some of the rental agreements with the data owners.

So we believe the dominance of Focus Media will actually help us in terms of limiting the future growth of the rental cost. We think this rental cost will not be increased significantly.

For the in-store network, it is entirely different, because in-store network is very new to us. We will continue to expand into new stores. Of course, in China, there are many, many hyper-markets, but each store still has higher negotiating leverage versus a single boutique, so we believe the store cost going forward will actually continue to increase gradually. Also, as you see, all hyper-markets in China are expanding very aggressively. As they expand into new stores, we will actually incur additional cost for deploying our network into those new stores. But on the other side, those new stores will bring in new revenue under our contract with our customers.

So we believe actually going forward, as we already covered the majority of the major large hyper-market chains, we do not believe there is going to be a significant increase in cost, but we believe in-store network costs will continue to rise.

Lu Sun - Lehman Brothers

Thanks so much.

Operator

Your next question comes from Kit Low of Goldman Sachs. Please proceed.

Kit Low - Goldman Sachs

Good morning. Quick question on the -- mainly on the accounts payable. The accounts payable has gone up quite considerably. If you could shed some light on what is behind this?

Daniel Wu

Which item are you talking about?

Kit Low - Goldman Sachs

If you look at your balance sheet, the account payables for…

Daniel Wu

Right, you mean current identity, right?

Kit Low - Goldman Sachs

Yes, exactly.

Daniel Wu

This has to do with acquisitions. We still owe an installment for the Target Media acquisition.

Kit Low - Goldman Sachs

Oh, this is related to Target Media, okay, great. On the effective tax rate, what sort of rate should we be looking at for this year? It looks like it has gone up to about 6.7%.

Daniel Wu

Yes, the current quarter, the tax was slightly higher because of some deferred tax asset situation, but we believe for the entire year, the income tax will be about 5% effective tax for 2006.

Kit Low - Goldman Sachs

Great. Lastly, if you could help investors to take a look at, in terms of your CapEx plan for 2006, is there to be any change beside what you have guided previously?

Daniel Wu

No change from the guidance. We believe our CapEx in 2006 will be roughly $20 million to $25 million. About $10 million will be for in-store network, maybe $5 million to $6 million for the commercial. Then the rest will be for other business. Framedia was maybe $1 million a year. Digital billboard is really going to account for the rest. It really depends on how quickly we can deploy the digital billboard network.

Kit Low - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Richard Ji from Morgan Stanley. Please proceed.

Richard Ji - Morgan Stanley

I have two questions. One is that, this was effective from early March, you value-add five specialty channels on top of your in-store network, commercial location, etc. Can you help us understand a little better about the pricing structure for these five specialty channels, relative to your existing network?

Daniel Wu

Actually Richard, we actually launched the channel on March 1, 2006 and the channels, together with the old Target Media network, which started to be consolidated in March as well, contributed about 8.8% of our commercial agent network revenue.

In terms of price, those networks also sold our city bases, so in terms of the event price, it really depends on how big the network is. You actually can get a list of the prices through our website. It is under products. You can find each of those channels in each of the cities, how is this channel priced?

Typically, I would say 20% to 25% of the typical channel we have in the major cities.

Richard Ji - Morgan Stanley

A related question. What we see on your website, is that going to be a nominal price or may it also include a discount?

Daniel Wu

The prices on the website are all rack prices on the rate card. So it really depends on the particular customer, how many weeks he signs up, how important this customer is, whether it is by multiple channels and also how many seconds he tries.

Richard Ji - Morgan Stanley

My final question is also related. Before the Target Media acquisition, you used to have a channel discount for media buyer, and the ad agencies. So what is the current development there, in terms of getting back your channel discounts?

Daniel Wu

I am not sure exactly that is correct, but I will ask Jason to answer that question.

Jason Jiang

[Response in Mandarin]

Daniel Wu

Richard, I am sure you got most of this, but I will translate for the people who do not have the benefit of the Chinese language. What Jason said, before the Target Media acquisition, we did provide some discounts to the agencies because Target Media was discounted very, very heavily. Our discount is less significant than Target Media, but due to competition we do have to provide some deep discounts.

Actually, this situation has improved quite significantly after the Target Media acquisition, so it has improved in March and April. Of course, we don't want to just eliminate the discount, because of the customer relationship issue. We will gradually bring up the discount level of Focus Media, especially for some long-term ties on Focus Media, we will move a small step at a time.

But we are going forward. This overall discount level of location networks will actually be reduced. So that is actually already reflected in the ASP where we reported in our financials, because ASP are the numbers reflecting the price we actually receive after discount.

Richard Ji - Morgan Stanley

Thank you, very helpful.

Operator

Your last question comes from Jason Brueschke - Citigroup.

Jason Brueschke - Citigroup

Thank you. I just wanted to ask a couple of quick follow-ups. Maybe asking one off of Richard's last question. Part of the strategy segment in the network was to be able to attract new customers who would be more attracted to the segment data, the more tailored the network, as opposed to a general city.

Can you maybe give some color on the early success that you may have had in attracting some brand new advertisers to the networks?

My next question is, can you give us an update on your competition with [Cegen]? There have been some press reports about possible litigations, things like that.

The final question is, the outdoor LED market obviously is going to be in the land grab phase. We are getting to where a very limited number of locations are critical. Can you talk about your success in tying up those limited number of locations and how that strengthens you going forward? Thanks.

Daniel Wu

[Question translated into Mandarin]

Jason Jiang

[Response in Mandarin]

Daniel Wu

Jason, let me translate for Jason Jiang. First of all for the channels, we do have a lot of the new customers we have been able to attract to those new channels, such as for Golf Channel we have Volvo. Volvo was not advertising, but Golf Channel is great for them.

For Fashion Network we have XO, all of those customers have expanded their advertising into the Fashion Network. Visa, for example, Visa is now expecting to, in our commercial location network, has expanded into China as well.

Also, if you think about Target Media, a lot of Target Media buildings actually are in high end residential buildings, so we do have some of our [FSTG] advertisers as well as some large electronics stores, retail chains, want to advertise in that particular network. We believe that strategy of expanding channels does bring a lot of value to our advertising clients.

Regarding the competition with [Cegen], Jason made two points. First of all, the only store [Cegen] has, the flagship store, will be [Catapult]. The reason why Focus Media actually did not bid aggressively with [Cegen] on [Catapult] is because first of all we feel the rental costs asked for is a little bit unreasonable. We want to run a profitable business.

Second, because of the network location, how the displays are located in the stores. [Catapult] has a different point of view. Focus media believes all of the [inaudible] available, but in [Catapult] it is slightly different. They need to control the screen writing source, so we believe that is going to significantly impact the advertising effectiveness.

Thirdly, the [Catapult] contract is only two years, so we actually want to have longer contracts. We believe actually [Cegen], it is apt to become a significant cost component of their business. Focus Media today, we are making money in a higher market. But [Cegen], you can check with them. We believe they are still not at that breakeven level yet.

We believe for Focus Media, if you think of the stores we cover, including [Lota], [BuyMore], [Stop and Shop], China Resource [Vanguard], all of these major chains already with Focus Media. And the advertising customers, we have attracted many of the major advertisers. Those advertisers are not [Cegen]'s customers.

So on the second point with [Cegen], we believe that the lawsuit by [Cegen] has no merit, because this is really -- they already launched a lawsuit with [BuyMore] and they want the court to support their contract with [BuyMore], but [BuyMore] Actually terminated the [Cegen] contract because they believe [Cegen]'s distribution network through ADSL is in violation of Chinese law. So actually the court supported this decision, so [Cegen] is no longer with [BuyMore].

On the outdoor LED display, as Jason you pointed out, it is a very attractive area and we do see a lot of people getting into this business. There are a couple of points we would like to highlight.

First of all, this requires a lot of capital. So Focus Media, of course, we are a publicly listed capital, we have capital to compete. Second, we have one of the strongest sales and marketing teams in China. Thirdly, we have Focus Media brand. Actually, if we look at how Focus Media could approach this market, in addition to the large digital billboard we also are looking at very unique ways in China to maximize the digital media effect.

So if you look at how we set up this LED network along major shopping districts, there actually are a lot of people in those office buildings near those areas, such as [inaudible]. When they get off work, there is no way they can find a taxi. They have to wait for a taxi for a long time. So in that time, it would be ideal to be advertising to that audience. So we believe in China there are many, many unique ways which are different from other companies we can use to maximize the benefit of digital media.

So going forward, we continue to look at large LED outdoor displays in this business, and move aggressively but also we look at other ways to use digital billboards to reach our target audience. Hopefully this answers your questions?

Jason Brueschke - Citigroup

They do. Thank you very much. Very thorough.

Jason Jiang

Thank you, Jason.

Daniel Wu

Thank you very much. Thanks everyone.

Jie Chen - Investor Relations Manager

Thank you. That concludes today's conference call. We look forward to speaking with you again next quarter.

Daniel Wu

Thanks, guys.

Jason Jiang

Thank you.

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