Executives
Helen Plummer – IR Officer
Limin Li – Chairman & CEO
Dina Liu – CFO
Alfred Tong – Chief Marketing Officer
Analysts
Wallace Cheung – Credit Suisse
James Lee – Sterne Agee Capital Markets
James Marsh – Piper Jaffray
Thomas Chong – Banc of America
Spencer Leung – UBS
Philip Wong [ph] – Morgan Stanley
Paul Keung – Oppenheimer & Co.
VisionChina Media Inc. (VISN) Q4 2008 Earnings Call Transcript March 2, 2009 7:00 PM ET
Operator
Good evening. Thank you for standing by for VisionChina Media's fourth quarter and full-year 2008 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Helen Plummer, VisionChina Media’s Investor Relations Officer.
Helen Plummer
Hello, everyone. And welcome to VisionChina Media's fourth quarter and full year 2008 earnings conference call. The company's fourth quarter and full-year 2008 earnings results were released earlier today and are available on the company's IR website at www.visionchina.cn as well as on Newswire services.
For those of you who don’t know me, I recently joined VisionChina Media as the company’s Investor Relations Officer. I’m looking forward to speaking with many of you and working with you in the future. Today you will hear from VisionChina Media's Chairman and Chief Executive Officer Mr. Limin Li, who will talk about the industry, the company's strategy and business operations, and Ms. Dina Liu, Chief Financial Officer, who will discuss financial results and give first quarter and full-year 2009 guidance. After their prepared remarks, Mr. Li and Ms. Liu will be joined by Mr. Alfred Tong, Chief Marketing Officer, for the question-and-answer portion of the call.
Please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.
Further information regarding these and other risks and uncertainties is included in our registration statement on Form F-1 and other documents filed with the US Securities and Exchange Commission. VisionChina Media does not assume any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference will be available on VisionChina Media's Investor Relations website at www.visionchina.cn.
I will now turn the call over to VisionChina Media's Chairman and CEO, Mr. Li.
Limin Li
(Interpreted) Hello, everyone. And thank you for joining us today. I’m pleased to report that 2008 was a year of exceptional growth for VisionChina Media. Total revenues were up 254% year-over-year to $104 million. VisionChina Media is a much stronger company now than it was a year ago.
The impact of the global financial crisis is still spreading in China, and we expect 2009 to be a challenging year for all companies in China. While we continue to grow along a stable trajectory, we are feeling that our own version of the slow economic environment brought down by the fact of the American and European economies. Despite the environment, we are confident that when the effect of the Chinese government’s stimulus package begins to be felt, China will be one of the first economies to rebound. The long-term growth prospects of our business and the digital mobile television industry as a whole in China remain extremely strong.
During the fourth quarter, we carried over the momentum generated from the excitement of the Beijing Olympic Games to bring in total revenues roughly in line with that of the third quarter, an accomplishment of which we are very proud of. While the Chinese economy may bottom out in the first quarter, we are being more cautious.
Advertisers, both domestic and international, are taking a wait-and-see approach in determining the timing of their advertising budget. However, due to the structure of our model whereby roughly 30% of our advertisers locking their full-year spending during the first quarter, we do have greater visibility than many of our peers and expect that second half of 2009 to be stronger than the first.
Digital mobile television is gaining traction both in advertiser and user satisfaction. And we are witnessing increased acknowledgement from major international and domestic brands. As an example, in January alone Unilever spent about 10 million RMB advertising seven products on our platform.
Unilever is just one of the many advertisers marketing the fast-moving consumer brands that form the backbone of our advertising revenue stream. As companies look to reduce cost during slow period, we benefit from a diversified customer base that views our network as a well-targeted and cost-effective alternative to traditional television. In fact, many foreign and domestic advertisers have increased their spending with us since their initial trial period. Among these are KFC, Coke, Pepsi, (inaudible).
As mentioned in our press release issued earlier today, the independent research group CTR recently released phase two of their study of the Chinese outdoor media industry. This study underscored VisionChina’s ability to capture audiences and generate high advertising retention rates while maintaining a low CPM.
Our aim for the coming year is to continue investing in our network and extending our coverage into cities where it makes sense to establish a presence from a strategic financial standpoint. We remain ambitious in terms of the number of cities we are targeting, but we are focused on Tier I and Tier II cities that have high GDPs and large commuting population with high disposable income. We believe that as (inaudible) continue to expand in major cities and the government mandated stimulus package for infrastructure spending; we will be presented with valuable long-term opportunities.
While the road ahead may be a tough one, we remain optimistic about our strong fundamentals, our positioning and our industry in China. When the Chinese economy rebounds, we will emerge a much stronger company. Our long-term prospects remain exceptional and we are committed to delivering on our solid reputation as a dynamic and profitable company with excellent execution capabilities.
Now, let me turn the call over to our CFO, Dina, who will discuss our financials.
Dina Liu
Thank you, and hello. As Mr. Li just mentioned, the fourth quarter closed out another exceptional year for VisionChina. The vast potential of mobile digital television continues to captivate advertisers and audiences, as reflected in our strong results, across the five key metrics that we believe most accurately reflect our performance each quarter. They are total broadcasting hours, average selling prices, utilization rates, number of advertisers and number of direct sales force.
In the fourth quarter of 2008, network capacity, which is measured by total broadcasting hours, remained flat with the third quarter of 2008 at 31,834 hours, up from 23,908 hours in the fourth quarter of 2007. We remain flat sequentially because we did not enter into any new cities during the fourth quarter.
We expect network capacity in the first quarter of 2009 to increase as a result of us recently adding Hangzhou and Tianjin and additional lines of the Beijing subway to our network. For the full year, our network capacity reached 119,170 hours in 2008, an increase of 53% compared to 77,925 hours in the full year of 2007. The year-over-year increase was a result of adding four new exclusive contracts to our network, bringing our total cities from 14 to 17 during the year.
Our ASP, which is measured by average advertising service revenues per broadcasting hour, was $1,023 in the fourth quarter of 2008, an 8% decrease from $1,116 per broadcasting hour in Q3 ’08 and a substantial increase from $474 in the fourth quarter of 2007. The slight quarter-over-quarter decrease was primarily due to absence of the once in a lifetime event, that was the Beijing Olympic. The 116% year-over-year increase reflects growing acceptance by advertisers of digital mobile televisions as an accepted advertising platform in China. And according to the research by CTR, our CTM is still just approximately 20% of that of traditional TV, leaving us with plenty of room to grow.
Our average, we sold 8.83 advertising minutes per broadcasting hour in the fourth quarter of 2008 compared to 9.33 minutes in the third quarter of 2008 and 8.69 minutes in the fourth quarter of 2007. The slight 5% sequential decrease was due to a slight drop after the Olympics and the effect of the macroeconomic slowdown. The full year utilization in 2008 was roughly flat with 2007 because of a substantial increase in our network capacity that would take time to ramp up.
We ended the fourth quarter with 705 advertising clients, up from 635 at the end of the third quarter of 2008 and 300 at the close of 2007. Some of the notable additions to our roster of advertisers include domestic household name brands such as Titalo [ph] Food, Chengde LOLO Almond Juice, (inaudible) Chicken Stock and many others. In fact, in the fourth quarter, 93% of our advertisers were domestic brands while just 7% of our revenue was contributed by international brands.
International brands were big spenders during the Olympics, but in the post-Olympic quarter we have been pleased to see domestic companies for the lead of international brands and step up their advertising with us. However, in looking at our contract backlog, we do expect to see a return to our normal two-third domestic and a one-third international split over 2009.
As of February 27, 2009, last Friday, 129 multinational and domestic household brands had signed sales contract totaling approximately 400 million renminbi for ad placements in 2009. In previous quarters, food and beverage, OTC and household products were our top three verticals, and we expect this to remain the case in 2009. In the fourth quarter of 2008, these three groups accounted for more than 60% of our total revenue.
We ended 2008 with 300 sales people, flat versus the third quarter of 2008, but an increase from 120 at the close of 2007. Our year-over-year increase was a result of continued efforts to recruit and bring on board the best possible sales talent, each bringing an average of five years of media selling experience to VisionChina Media. We expect to see continued increases in direct sales force headcount during the coming year as we continue towards our goal of building one of the strongest in-house sales force in the industry.
Before moving on to our financials, I’d like to comment on the success of the sales force we attained through the acquisitions of six advertising agencies in 2008. As expected, we have brought a tremendous amount of experience and have picked our entire sales effort to a new level of professionalism. Our goal in 2009 is to further leverage their experience and scale to help us reach our sales target.
Turning now to our fourth quarter and full-year financials, total revenues in the fourth quarter grew 185.1% year-over-year to $34.3 million. Of this, advertising service revenues grew 193.1% year-over-year. For the full-year 2008, our total revenues increased 254.2% to $104.1 million. Our growth in revenue in 2008 demonstrates the growing acceptance of our platform by advertisers as well as the strengthening of our sales network and the capabilities across our ever-growing network.
Gross profit in the fourth quarter was $19.7 million, an increase of 157.8% over the fourth quarter of 2007. 2008 full-year gross profit increase 320% over 2007 to $63.0 million. The fourth quarter and full-year 2008 year-over-year gross profit increase clearly demonstrates the high operating leverage inherent in our fixed cost model. Advertising service gross margin and advertising equipment gross margin were 60.8% and 15.9% respectively for the full-year 2008.
Operating margin in the fourth quarter was 37.4% compared to 48.1% in the third quarter of 2008 and 41.7% in the fourth quarter of 2007. Our increased operating margin is a reflection of our consistent and ongoing tight financial control. Sales and marketing expenses as a percentage of revenue were 13.9% in the fourth quarter of 2008 compared to 14.9% in the third quarter of 2008 and up from 7.8% in the fourth quarter of 2007. Net margin was 43.3% in the fourth quarter of 2008 compared to 50.3% in the third quarter of 2008 and 47.7% in the fourth quarter of 2007.
Our basic and diluted EPS for the fourth quarter of 2008 were $0.21 and $0.20 respectively compared to $0.26 and $0.25 in the third quarter of 2008. Our fourth quarter net income, excluding share-based compensation expenses non-GAAP, was $15.3 million. Net income in the full-year 2008 was $46.8 million compared to $9.4 million in 2007. Basic and fully diluted net incomes per share for the full-year 2008 were $0.67 and $0.65 respectively.
We ended the quarter with cash and cash equivalents of $163.2 million, an increase of $22.2 million from the end of the previous quarter. The increase was mainly as a result of our $14.8 million profit and our successful reduction of our accounts receivable balance from $43.7 million as of the end of the third quarter of 2008 to $38.3 million as of the end of the fourth quarter of 2008. We are confident in the quality of our accounts receivables as they are comprised of strong international and domestic brands.
In 2008, we made provisions for bad debt of just $675,000, which is less than 2% of our total accounts receivable. Our net operating cash inflow totaled $25.1 million in the fourth quarter of 2008 and our days sales outstanding in the fourth quarter were 108 days. We will continue to execute on our stringent credit policies and tight credit controls while we accept advertisers and also while we collect outstanding receivables from them.
Moving onto our growth strategy, our strong balance sheet positions us well to play an active role in the industry consolidation that we feel is certainly to take place in 2009. During times of economic turbulence, smaller and weaker companies are sure to struggle. If we execute according to our strategy, we will leverage our strong balance sheet to take advantage of these opportunities and emerge from the turbulence a much stronger company. Whether we continue to use the cash on hand to grow organically or for M&A, we will be disciplined in our spending.
Take, for example, our recent bid for Shanghai Metro. We were outbid, but we feel that the price we offered for that contract, represented a fair value and met our internal investment criteria as well as the requirements and expectations of our shareholders. We are firmly committed to maximize the return for our shareholders and we will only enter into new such contracts that will have positive impact on our financial statement.
We will also plan to continue purchasing our own shares in the open market under our approved share repurchase program at appropriate time. During the fourth quarter, we have purchased 281,400 shares in the open market at an average price of $5.13 and a total consideration of $1.4 million.
Turning now to 2009 and our guidance, we estimate total revenues, which consist of advertising service revenues only in the first quarter of 2009, to range from $27 million to $30 million. First quarter 2009 net income, excluding share-based compensation expenses non-GAAP, is expected to be between $7.0 and $9.5 million. Margins will be negatively impacted by fixed media cost payments in the first quarter of 2009 due to three new exclusive agency agreements that we entered into during the first quarter to secure fixed cost capacity.
Excluding these incremental costs, we expect first quarter 2009 net income, excluding share-based compensation expenses non-GAAP, to be between $8.7 million and $11.2 million. We estimate total revenues in the full year of 2009 to range from $141 million to $157 million. Net income in the full year of 2009, excluding share-based compensation expenses non-GAAP, is expected to be between $46 million and $58 million.
We base these estimates on a foreign exchange rate of renminbi 6.8470 per US dollar. I’d like to note that our guidance is based on our current network of 18 cities as of the date of today’s earnings announcement and have already been secured by contract. If and when more cities are added, either organically or through M&A activity, it will impact our forecast. Please note that these statements are forward-looking and subject to change.
Thank you again for joining us today and we will now open the call to your questions.
Question-and-Answer Session
Operator
(Operator instructions) Your first question comes from the line of Wallace Cheung with Credit Suisse. Please proceed with your question.
Wallace Cheung – Credit Suisse
Good morning. Limin and Dina, congratulations on a good quarter.
Dina Liu
Good morning, Wallace.
Wallace Cheung – Credit Suisse
Okay. Two questions. Number one is regarding the operating metrics, it seems to be the advertisers number actually gone up, but if you look at some of these, say, other operating metrics like the sold ad minutes per broadcasting hour on the other hand is actually coming down a bit and the broadcasting hour is actually flat. So, does that mean that more advertisers still prefer to advertise on those higher revenue timeslot in major cities, right, I mean, it’s still quite difficult now some of these peripheral cities? That’s the first question. The second question is again regarding the reason sort of discussion on in Shanghai. For sure we agree – I personally agree on the management’s view to have a more disciplined financial metric [ph] in signing up new contracts. But at the same time, after the Shanghai subway deal, do you see there is any sort of opportunities in the Shanghai advertising market that you’re pursuing? Thank you.
Dina Liu
Wallace, I will take your first question and I will invite Mr. Li to take your second question on Shanghai. I’d like to invite Mr. Li to address the Shanghai contract.
Limin Li
(Interpreted) Wallace, hi. Our bid into Shanghai, as you know, there is one competitor who enters into the bid at a much our expected high price. However, they have not yet fully paid the deposits. We remain to be highly interested in the remaining Shanghai Metro business and will target to further penetrate into the Shanghai Metro market.
Dina Liu
Wallace, this is Dina. To answer your first question, the number of advertisers has increased in Q4 while the ASP and the utilization tax are (inaudible) in Q4. It just means that the average spending per advertiser is smaller comparing to previous quarters. At the end of the year, basically advertisers are looking at the remaining budget for the year and spend our platforms. And also because the economic slowdown that’s happening (inaudible) in China in Q4, some advertisers have cancelled some of the remaining contracts with us for the year, which was highly contributed to the sequential decrease in revenue.
Wallace Cheung – Credit Suisse
(Foreign Language) So my question is actually a follow-up on the Shanghai opportunities again. Basically, regarding the Shanghai bus regime, do you see any opportunity for VisionChina to enter the Shanghai bus media area? Thank you.
Limin Li
(Interpreted) (inaudible) needs digital mobile television company that operates in one city. We have been working better closely with them. Our network corporation, our (inaudible) has historically leveraged our national client base. At the moment, we will continue to cooperate with them and probably to a different level in the future.
Wallace Cheung – Credit Suisse
(Foreign Language)
Operator
Your next question comes from the line of James Lee with Sterne Agee Capital Markets. Please proceed with your question.
James Lee – Sterne Agee Capital Markets
Could you guys talk about the pre-selling activities a little bit? I was wondering what kind of success are you having, which led you to your very strong guidance of 2009, maybe comparing contracts a little bit, why you’re able to having much more success in pre-selling than your peers? And also maybe, Dina, you can help with the backlog, the number you read earlier. Can you give us a sense how backlog right now is something big maybe compared to last year?
Dina Liu
Hi, James. This is Dina. Regarding the contracts backlog for ’09, what we have found compared to last year is that more contract backlogs, okay, six months than last year. And as of the $400 million contract backlog we have signed up for 2009, 67% of that are six months and less, and then the rest are 12 months and longer. So what we have found is that a lot of our advertisers are taking a wait-and-see attitude. That’s why we are only willing to commit for mostly three-month and four-month pipeline. And then they are waiting to see when the visibility of the economy improves and they are willing to commit more budgets for the rest of the year. We are very pleased with the contracts backlog number we have so far given the challenging economic environment, because we have been pretty aggressive with our pre-selling activities offering them with the 2008 rate card. So unless there is some interest in hurries [ph], we need to sign up in trial platforms. Out of the 129 advertisers that have signed those contracts with us, 72 are new advertisers. They are the Tyco International and domestic branding who have never tried our platform before. They were testing last year, but this year they have committed their budget on our platform. So we are very pleased to see that. Comparing to last year at this time of the year, we choose our percentage of the revenues that we secured is – the percentage of the forecast revenues that we have secured, the percentage is slightly lower than last year given the uncertainty in the economy, but in terms of the absolute dollar amount, it’s about the same level, because most of our last year’s advertisers have not come in yet, but they have indicated to us that they will come in. So we are pretty cautious – comfortable with the revenue projection we have for ’09. And also we are pretty comfortable with the advertisers who have already signed contracts with us so far because they have to put down deposits with us to secure those good rates with us.
James Lee – Sterne Agee Capital Markets
All right, Dina, thank you so much. If I may ask a follow-up question, can you give us more color about maybe some of your pre-selling activities in the major market, maybe like Beijing, the bus system, how you’re doing that in general, if you could give us a sense of how you are doing in some of the major markets, especially Beijing being so important?
Dina Liu
Okay. What we have found from the advertisers (inaudible) is that they are very interested in Tier I cities. The interest in Tier I cities are much higher than Tier II cities as we expected. And also for Beijing, for example, large international and domestic brands, they are very interested in the prime [ph] time that we have. So, for example, for Beijing bus, the prime time is already booked or sold out for the year. So we are trying to – the good thing is that we have an added Beijing subway as a separate channel for inventories. So it offers us good opportunities to capture more revenue opportunities. And Alfred, do you have anything else to add?
Alfred Tong
And also in the year 2009 the traditional cost on Beijing TV, Beijing (inaudible). So that’s why a lot of advertisers they are speaking [ph] to any kind of opportunity to reduce the cost of maintaining the communication delivery. (inaudible) in the traditional media.
James Lee – Sterne Agee Capital Markets
If I may ask a last question here that’s regarding the Beijing subway system, I know you guys have about five out of eight lines in Beijing. Can you give us a sense – are there any more opportunities maybe in the near-term for you to potentially win additional contracts there?
Limin Li
(Interpreted) VisionChina’s goal is to continue to focus on the mobile digital television broadcasting. Currently in the Beijing subway, as you mentioned, we have total of eight lines, five of which do have the real-time broadcasting capability, which are the five which we acquired, whereas the other three are not currently mobile digital television who will continue to focus on opportunities. And once these three lines mature of a more mature technology, we will try our best to get access to these three Beijing subway lines.
James Lee – Sterne Agee Capital Markets
Thank you. Congratulations on a good quarter.
Dina Liu
Thank you, James.
Operator
Your next question comes from the line of James Marsh with Piper Jaffray. Please proceed with your question.
James Marsh – Piper Jaffray
Great, thank you very much. Two quick questions. One, just to follow up on the Beijing question between splitting the bus and the subway ad buys; could you tell me how you’re differentiating that, by price or service? Just how do you sell that to the advertisers? And then secondly, I was just wondering if you could give us a bit of an update on some of your competitors, what they are doing in this market and how they have been responding to the difficult market, et cetera? Thank you.
Alfred Tong
Regarding the Beijing bus – hello, this is Alfred again. I’d like to answer your question. Regarding the bus and subway, basically they have two different systems and basically the cost setting is based on the, what we call, CPM, the traffic role. So basically the phase of population [ph] is more or less the same as the traditional TV, but we set the priorities almost (inaudible) traditional TV cost. So there is a gap. Those two different (inaudible) advertisers.
Dina Liu
James, what Alfred is saying is that we have broadcast two separate channels to bus and subway. So they are of different content and then so we have (inaudible) to different advertisers. And also the advertising time in between the programming can be sold separately at a different rate card because the traffic will be different.
Alfred Tong
Traffic is different and also the general public profile (inaudible) a little bit different.
James Marsh – Piper Jaffray
Okay, thank you.
Operator
Your next question comes from the line of Eddie Leung with Banc of America. Please proceed with your question.
Thomas Chong – Banc of America
Hi, this is Thomas calling on behalf of Eddie Leung. I have two questions. The first one is, would you give us some color about roughly your distribution – I mean the contribution of your subway lines? And the second question is, will you give us some guidance on the CapEx for this year? Thanks.
Dina Liu
Hi, Thomas; this is Dina.
Thomas Chong – Banc of America
Hi.
Dina Liu
Your question to get the percentage of the revenue contribution by vertical?
Thomas Chong – Banc of America
Just for between the bus and the subway?
Dina Liu
I see, okay. For Q4, our bus revenue roughly 82% of our total revenues and the subway is the rest.
Thomas Chong – Banc of America
Okay. And regarding the CapEx guidance for ’09?
Dina Liu
We – based on the 18 cities that we have, we expect our CapEx not to be substantial because we have completed most of the installations on our – between our platforms. And for our distance, we are not really CapEx intensive. The only CapEx we have is the equivalent cost for the screen. For our business the largest cost is six media cost we pay to secure the advertising time, we do pass for roughly 78% of our cost of revenue.
Thomas Chong – Banc of America
Okay. Okay, thanks.
Operator
Your next question comes from the line of Spencer Leung with UBS. Please proceed with your question.
Spencer Leung – UBS
(Foreign Language)
Dina Liu
Good morning, Spencer.
Spencer Leung – UBS
Good morning. I have three questions. First of all, you mentioned a purchase of six ad agencies during the course of ’08. Can you remind us how much you spent and how many people you have to add? That’s my first question. And then secondly, I saw there is a $21 million in goodwill on balance sheet. What’s the cause of that? And then thirdly, accounts payable has declined in the fourth quarter. What was the reason behind that? And do we see – what trends do you see over the course of ’09? Thank you.
Dina Liu
Hi, Spencer, I will take up your questions. The acquisition consideration that we pay for those six ad agencies is based on the earn-out format. So it depends on how well they perform and we will pay accordingly based on predetermined ratio. And then there is a cash on the earn-out payment. So for 2008, the sales team has reached the target [ph] that we set for their performance. They have performed much better than we expected. In terms of the number of sales people, they have – we have brought in around 60 sales people as a result of the acquisition. So, to answer your question on the goodwill, the goodwill is a result of the purchase price allocation we performed after we calculate the total payouts we need to pay for 2008 and we allocate the total consideration importantly [ph] to intangibles, which consist of the customer list and other intangible assets. And then the rest we allocate to goodwill.
Spencer Leung – UBS
So how much more earn-out do you have to pay in ’09? And how much you’ve paid in 2008?
Dina Liu
Okay. Based on the cash flow projections that we have done for the acquisitions, we expect the cash flow impact from the acquisitions for the ’08, ’09 and ’10 will be positive. And then a large chunk of the earn-out payment will be paid in 2011.
Spencer Leung – UBS
Okay, thank you. And then my last question on accounts receivable – accounts payable, sorry?
Dina Liu
Accounts payable, we had $1.2 million accounts payable at the end of December versus $2 million accounts payable at the end of September. That doesn’t represent our normal trade payables.
Spencer Leung – UBS
Okay, thank you.
Operator
Your next question comes from the line of Philip Wong [ph] with Morgan Stanley. Please proceed with your question.
Philip Wong – Morgan Stanley
Good morning. Thank you for taking my questions. I have a follow-up on the Beijing subway. Could you update us the progress of this business line, for example, the sales contribution and the utilization rate and the likelihood of renewing the contract as they apply only one year short-term contract of this Beijing subways? And then I have another follow-up question. Thank you.
Alfred Tong
This is Alfred. I would like to answer your first question. Regarding the Beijing subway, we projected a revenue which played [ph] meaningful to our overall revenue stream. So – and even though we had the one-year contract that –
Limin Li
(Interpreted) Given VisionChina’s proven experience operating Beijing subways, we have all the criteria to be prepared to renew these Beijing subways and we are confident to continue renewal of such subway contracts.
Philip Wong – Morgan Stanley
Okay, thank you. And then my next question is, could you please remind me that if there are any major contracts expiring in ’09 or 2010? And what is your expected level of media cost as a percentage of sales going forward? Thank you.
Dina Liu
Hi, Philip. This is Dina to answer your question. In terms of the fixed media costs that we project for 2009, we expect it to be $42 million for 2009. And then to answer your question for whether there is any contract to expire at the end of 2009 on Beijing subway, there is only one contract, which is Hangzhou. Hangzhou, that we just signed up in Q1 this year.
Philip Wong – Morgan Stanley
Okay, thank you. That’s all my questions.
Operator
Your next question comes from the line of Paul Keung with Oppenheimer & Co. Please proceed with your question.
Paul Keung – Oppenheimer & Co.
Yes, hi. My question has to do with the competitive landscape. Just curious if in some of your other out-of-home digital outdoor industries we are seeing, the current environment sort of creating an environment where those that were too small or probably miss – over calculated what the right (inaudible) or having to walk away and again sort of (inaudible). I’m just curious whether you think that’s a case for you and your segment today. And the second question is, in looking – you've hired a couple times about the discount (inaudible) TV on your network. So I’m curious in your guidance for the year, what sort of assumptions you’ve made about price increases in ’09?
Limin Li
(Interpreted) The competitors continue to exist in the industry. And obviously VisionChina being the only listed company is the leader in this industry. We have established strong advertising client base. We have formed a nationwide network as well as we continue to focus on our real-time broadcasting technology. There are a few not-listed competitors who are being impacted by the economy where especially the advertisers are not increasingly focused on recognized brands as well as the real-time broadcasting capability. We believe that VisionChina is well positioned and we will take disciplined approach on any strategic move.
Alfred Tong
And well, this is Alfred. Regarding your question on the rate testing, normally we will test our rates twice a year, one in the middle of the year and the other at the end of the year. So we sell those really in the extent the same way as on traditional TV. As we mentioned early on, our cost right now is about (inaudible) traditional TV cost. But again, we will review our rate card according to the market demand, the acceptance level of our advertisers and also our air-time [ph] inventory utilization. So I’d say we’d like to review our rate card by the middle of this year and then to decide the incremental level.
Dina Liu
Hi, Paul, this is Dina.
Paul Keung – Oppenheimer & Co.
As for your guidance, they exclude – they just include a price increase then?
Dina Liu
Hi, Paul, this is Dina. I’d like to add two points to the discussion on the competitive landscape before I come back to your guidance question. On the competitive landscape, what we have seen so far is that some of the out-of-the-home players, private companies, they were out bidding their competitors before for some inventories. But what we have found that in such challenging economic environment, they were not being able to live up with their promises and commitments, maybe walking away from those contracts instead of honoring them. So – and also while we have seen that happening in – because it’s not one sector. It’s a threat across many sectors in out-of-home industries. The second point is that for the phase that we are operating in regional mobile television, they are only a few meaningful players. So if (inaudible) easy for us to consolidate the industry when our competitors get weaker. And then also we are able to achieve greater synergies as a result and emerge as a much stronger company after all this turbulence is over. And in terms of your question on the guidance, for the guidance that we give out, we are purely based on the contract backlog we have signed up so far and also from the indications on some of our advertisers about their intention to place ads with us. That’s how we work out our revenue guidance. And we have not factor into any rate card increase in 2009. If there is a rate card increase when we see appropriate, that’s going to keep us in the upside. Because I think we have various (inaudible) budgeting systems and our – the cost of visibility is very high. So once we are able to determine the revenue, we are able to get very comfortable on our bottom line guidance.
Paul Keung – Oppenheimer & Co.
Great, thank you.
Operator
Your next question is a follow-up question from the line of Wallace Cheung with Credit Suisse. Please proceed with your question.
Wallace Cheung – Credit Suisse
Hi, I’m sorry; I have a few more questions. Number one is, again, regarding your network expansion strategy, can you give us a bit more target like this year? Are you trying to expand to any kind of number of cities and in terms of bus? And also in the subway area, any further sort of expansion plans likely or even like within the same cities any number of more lines to be added? The second question is also regarding the kind of the guidance (inaudible) because Dina, you mentioned that around 129 advertisers have already signed the contract and around 72 actually new advertisers. That means only a few existing advertisers have renewed the contract. Maybe I get it wrong, but I appreciate if you can clarify my confusion. Thank you.
Dina Liu
Wallace, I will invite Mr. Li to answer your first question and then I would take up the second part of the question.
Limin Li
(Interpreted) We continue to focus on penetrating in China, mainly focusing on the first tier as well as the second tier cities with high GDP growth. So we can ensure network coverage for all advertisers in China. We continue to focus on the subway and bus lines. Our target is to get 70% market share in the bus operation for the mobile digital television and around 60% market share for the subways.
Dina Liu
Hi, Wallace, this is Dina. I will take your second question with Alfred. You are correct to say that out of the 129 advertisers who have signed contracts with us, 72 are new advertisers and 57 are from our existing advertisers. And I will ask Alfred to give some color on the status of the sales contract with the existing advertisers.
Alfred Tong
Yes. Based on the first quarter with our client, so right now it seems most of it recognized [ph] as it relates to a more short-term budgeting. So the only some of them – they can have (inaudible) on the long-term contract basis, but most of the time we would like to actually (inaudible) looking on the subway but in a more shorter period. So that’s why right now we signed 129 advertisers. Actually it’s pretty good I would say because as you know, most of them I think they are look in the budget on a quarterly basis right now.
Wallace Cheung – Credit Suisse
Thanks for the clarification. Just wanted to elaborate on backlog a little more. So basically we talk about 129 advertisers or it can be in the order backlog. Actually it means that these advertisers have signed some relatively longer term contract like, say, six to 12 months whereas we do see a lot of existing advertisers that they have been advertising in third quarter or fourth quarter. They are still coming back to you, but maybe come up with a more maybe shorter contract, maybe on a quarterly or monthly basis. Am I correct? Thank you.
Dina Liu
Wallace, for the contract backlogs that we have signed up so far, most of it are short-term, like 67% are less than six months. It’s only 20 – about 30% – 27%, 28% are 12 months and longer. So it is the trend that advertisers are only willing to commit on a short-term budget first and then they get [ph] wait-and-see attitude. And with our existing advertisers who place ads with us in previous years and quarters, a lot of them are still going to do the budgeting process and they have implicated to us that they are – they will continue to place ads with us when there is more visibility in the economy – in the state of the economy and also when they finalize their internal sales plan for the year as well.
Alfred Tong
Yes. Because as long as I know, most of them have already (inaudible) as one of the fixed media (inaudible) as a matter of once they finalize their budget gain, so they will place the ads on a fully ongoing basis.
Wallace Cheung – Credit Suisse
Thank you very much. That’s very helpful. Thank you.
Operator
And this concludes the question-and-answer session of today’s call. I would now like to turn the call back over to Helen Plummer for any closing remarks.
Helen Plummer
Thank you all for joining us today. If you have any questions, please don’t hesitate to contact us at ir@visionchina.cn. Thanks very much.
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