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Focus Media Holding Limited (NASDAQ:FMCN)

Q4 2008 Earnings Call Transcript

March 23, 2009 9:00 pm ET

Executives

Jing Lu – Director, IR

Alex Yang – Acting CFO

Michael Xu – VP, Finance

Jason Jiang – Chairman & CEO

James Jiang [ph] – CFO, OS [ph]

Analysts

Jason Brueschke – Citigroup

Richard Ji – Morgan Stanley Research Asia Pacific

Eddie Leung – Banc of America Merrill Lynch

Paul Wuh – Nomura International

Chunming Zhao – SIG

James Mitchell – Goldman Sachs & Co.

James Lee – Stern, Agee Capital Markets

Kar Kwong – Needham & Co.

Dick Wei – JP Morgan

Gene Munster – Piper Jaffray

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Focus Media Holding Limited Earnings Conference Call. My name is Michelle, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. (Operator instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Ms. Jing Lu, IR Director of Focus Media. Please proceed.

Jing Lu

Thank you, everyone. Welcome to Focus Media’s fourth quarter and full year 2008 earnings conference call.

Today, our management will discuss the company's financial results for the fourth quarter and full year 2008 and business outlook for the first quarter of 2009. With me here are Jason Jiang, Chairman and Chief Executive Officer; Alex Yang, Acting Chief Financial Officer; Michael Xu, Vice President of Finance, and James Jiang [ph], Chief Financial Officer of OS [ph].

After management updates you on our fourth quarter and full year operational and financial performance, we will open the call for questions. This call is also broadcasted 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, the expectations of the development of our networks and our outlook for the first quarter of 2009 for example. You can also identify forward-looking statements by terms such as will, expects, anticipates, 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 for our current operations and the short history of the new digital media sector, which may make it difficult for you to evaluate the viability and prospects of our business, the integration of acquired business, competition from present and future competitors in China's growing advertising market, and other risks outlined in our filings with the Securities and Exchange Commission, 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.

Okay, now I will turn the call over to our CFO, Alex Yang, for a summary of the fourth quarter and full year 2008 financial results.

Alex Yang

Hello, everyone. This is Alex Yang, acting Chief Financial Officer of Focus Media.

First of all, let me address the basis of presentation of our earnings release. On December 9, 2008, Focus Media announced the restructuring of its CGEN in-store advertising network and the termination of its remaining wireless advertising interactive marketing business. Subsequently, on December 22 of 2008, Focus Media announced the sale to SINA Corporation of substantially all of the assets of its out-of-home digital networks, including LCD networks, Poster Frame networks and In-Store networks.

As a result of the above transactions, these lines of businesses have been accounted as discontinued operations in accordance with US GAAP in the financial statements. Certain results for the total company, however, have been provided to assist the readers in understanding the overall results of the company relative to the guidance for the fourth quarter of 2008 that was provided by us on November 10, 2008. As such, the term "Total Company" as used in this press release includes both continuing and discontinued operations of the company.

Now let me highlight for you the financial performance of Focus Media for the full year 2008. Total company net revenue was 790.2 million, representing an increase of 56% compared to full year 2007 net revenue of 506.6 million. Total company non-GAAP net income was 223.8 million, representing an increase of 17% as compared to full year 2007 non-GAAP income of 190.6 million.

For the fourth quarter 2008, total company net revenue was 192.1 million, which declined 15% from 224.8 million for the third quarter of 2008 and meeting the company's previous guidance for the fourth quarter of 2008 of between 190 million and 200 million. Advertising revenue from LCD display network was 65.3 million for the fourth quarter of 2008, an 18% decline from 79.6 million for the third quarter of 2008.

Advertising revenue from our poster frame network was 39.2 million for the fourth quarter of 2008, an 11% decline from 44 million for the third quarter of 2008. Advertising revenue from the movie theater and outdoor billboard networks was 21.6 million in the fourth quarter of 2008, representing a 10% increase from 19.6 million in the third quarter of 2008. Internet advertising service revenue was 62.4 million for the fourth quarter of 2008, a 12% decline from 70.8 million for the third quarter of 2008.

Total company non-GAAP gross profit for the fourth quarter of 2008 was 87.9 million, representing a 24% decline from 116.2 million for the third quarter of 2008, mainly attributable to the 15% sequential decline in revenue. Non-GAAP gross profit for the LCD display network for the fourth quarter of 2008 was $43.9 million, representing a 23% decline from 56.9 million for the third quarter of 2008.

Non-GAAP gross profit for the poster frame network for the fourth quarter of 2008 was 23.8 million, representing a 20% decline from 29.8 million for the third quarter of 2008. Non-GAAP gross profit for the movie theater and outdoor billboard networks for the fourth quarter of 2008 was 7.3 million, representing a 3% increase from 7.1 million for the third quarter of 2008. Non-GAAP gross profit from our internet advertising services for the fourth quarter of 2008 was 12.3 million, representing a 27% decline from 16.8 million for the third quarter of 2008.

In the fourth quarter of 2008, total company general and administrative expenses and selling and marketing expenses amounted to 42.8 million compared to 41.2 million for the third quarter of 2008. Total company non-GAAP net income for the fourth quarter of 2008 was 50 million compared to 71.4 million for the third quarter of 2008.

Now I would like to provide Focus Media’s business outlook for the first quarter of 2009. Please note the following outlook statements are based on current expectations. These statements are forward looking and the actual results may differ materially. The company estimates that net revenues from continuing operations mainly consisting of internet advertising business and the movie theater and the outdoor billboard network are expected to be no less than 55.5 million, and net revenues from discontinued operations, mainly consisting of LCD displays, poster frame network and in store network are expected to be no less than $65.7 million.

Finally let me give you an update on our previously announced merger agreement with SINA. The transaction is subject to customary closing conditions and certain regulatory approvals and expected to be completed in the first half of 2009. Under the terms of the agreement, upon closing, SINA will issue 47 million newly issued ordinary shares to the company as consideration for the acquired assets. The company will then distribute the SINA shares to its shareholders shortly after the closing.

This is all for my summary of the fourth quarter of 2008 financials. Before we answer the questions, as you may read from our fourth quarter payments, company conducted non-cash and goodwill impairments in its business lines. Now I would like to ask our Financial VP, Michael Xu, to give some details of the write off and charges, so you may get a more clear picture on this regard inaudible].

Michael Xu

Thanks, Alex.

Yes, let me take a few minutes to explain what constitutes the major impairment charges. So in Q4 of 2008 month we incurred about US$827 million of non-cash impairment charges and other write offs. The major items are, first of all, we have goodwill impairment charges totaling US$593 million, which consists of two items, one is the impairment charge, goodwill impairment charge by our Internet advertising agency business amounts to US$219 million and the other is by the Frame Media business. That goodwill impairment charge is 374 million. And the other major item is the restructuring loss due to our termination of CGEN business, which amounts to US$190 million. And the third major item is off of the fixed assets. The write off, the total amount is about US$18.7 million. And pretty much, also in December 9, we announced we are going to dominate the wireless business, the remaining parts of the wireless business, so the total impairment charge, the total charge related to the termination of wireless business is about US$18 million. So that is the – those items consists of the vast majority of 827 million impairment charges and write-offs. So I hand it back to Alex.

Alex Yang

Okay, Lu?

Jing Lu

Okay. Now we open the call for your questions.

Question-and-Answer-Session

Operator

(Operator instructions). Your first question comes from Jason Brueschke with Citigroup. Please proceed.

Jason Brueschke – Citigroup

Thank you. Good morning, everyone. A couple of questions, maybe I don’t know if Michael or Alex, you are the right ones for this. Could you maybe give us some explanation as for why there is the write off with respect to the Internet division? Kind of that would be the first. And then second of all, could you maybe comment in light of these write offs, did that impact in any way the tax treatment that the SINA deal is likely to get for your shareholders with respect to the SINA shares and could you just maybe generally give us your views on how or I guess the efforts that you are doing to work with the taxing authorities and what you think the tax treatment will be? And then I have one or two follow up questions.

Michael Xu

So Internet write off is related to basically goodwill impairment charge from accounting perspective is due to your profitability projection for the future period, at the time of acquisition and your current expectation for the profitability of the company of the business for the future. So based on that comparison, we found out that Internet’s free cash flow forecast will be less than we expected when we acquired those Internet companies. So for this reason we make about 290 million of impairment charges on goodwill. So it is completely non-cash item. And as for the second question, you're talking about tax consequence. I guess your question is related to US tax consequences, is that right?

Jason Brueschke – Citigroup

Yes.

Michael Xu

Okay. So at the moment we are still reviewing the US tax consequence for the shareholders if we distribute our shares to each individual shareholders. At the moment, we don't have final conclusion yet, so for this reason, I think probably we need to wait for another one week or two to clarify from our tax consultants. So at the moment I can't give you a responsible answer at the moment.

Jason Brueschke – Citigroup

Okay, thanks. And my two other questions are, could you give us an update on where we are, where the Chinese government is with the tax, sorry the anti trust review, have they completed the information gathering phase or is that still ongoing? And to the extent that they have finished that and have started the deliberative process, when do you expect that we could get a decision from them? And then my second question is, could you maybe help us understand with respect to the Q4 results, how much of the sequential weakness across most of your businesses was due to the macro environment, and I guess this is with respect to your Q1 guidance as well, and how much of it would you attribute to say the disruptions that are going on, the natural disruptions going on within Focus Media around the restructuring and the proposed spin off with SINA? Thanks.

Michael Xu

Okay. I'm going to hand over the questions to Alex and Jason. Alex is going to answer your first question and Jason probably will give you some flavor for future outlook.

Alex Yang

Jason, it’s Alex here. I thought I will address the first question regarding the anti trust deal (inaudible). From our viewpoint, SINA and Focus Media have submitted all the applications documents to the related authority, but now we have not yet got yet officially – we have not got an official response from the related authority when they can accept our – when they can accept our application, but we are quite confident that we're likely to have – we are likely to have some positive response by the end of this month and we believe we can – we believe we can obtain approval in the first half of 2009, okay? Is there any doubt on this question?

Jason Brueschke – Citigroup

No. I mean that answered it, that you expected at least some – I guess my question would be, would you communicate the positive in this response to the Street that you get before the end of the month?

Alex Yang

I think we can – I think of course we will not object to disclose any response to the market front (inaudible).

Jason Brueschke – Citigroup

Okay.

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

Okay, let me translate what Jason said. Basically, Jason said, first of all, the major negative impact coming from the sudden change in our business environment, when the business environment tends to adverse direction, the first thing to be cut is the advertising budget. So the transaction with SINA will only play a minor role in our Q4 shortfall in earning and also in the decline of the top line revenue.

Jason Brueschke – Citigroup

All right, thank you.

Jason Jiang

Thank you.

Operator

And your next question comes from Richard Ji. Please proceed.

Richard Ji – Morgan Stanley Research Asia Pacific

Hi Jason, Alex and Michael. I have two questions. And first, starting with your 1Q09 guidance, you obviously offered a pretty soft 1Q 09 guidance, and can you help us understand better whether this is largely due to, Michael, still down weak seasonality or other factors that we are not aware of? And more importantly should we e considered the write off as largely over or should we be budgeting both write off in 1Q 09?

Michael Xu

I think relative to the soft guidance for Q1 is mostly related to two factors, one is the seasonality issue. And as you know Q1 is traditionally our weakest quarter in the year and secondly this year the Chinese New Year is exceptionally early and for this reason of course our revenue delivery schedule and also from the new order, the amount of the new order will be affected. And also because of the, of course, the other reason is the uncertainty about the future. Basically at the moment advertisers when they see the uncertainty in the future, they don't commit budgets in Q1, and traditionally they commit budgets in Q1, but this year, it seems the scenes are quite different. And as for the whether we're going to have future write offs, I believe at the moment, we are pretty confident in the next, in the near future, no such thing will happen. However, you know the economy is still in a very slippery ground, if we see the economy further, going further south, I can't rollout a possibility of further write off, but at the moment we're quite confident that no such instances will happen in the near future.

Richard Ji – Morgan Stanley Research Asia Pacific

Yes. Have we also seen a significant pickup in the advertising field in March?

Michael Xu

I think for this question probably Jason is the best person to answer.

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

So, it is Michael to interpret for Jason, Jason just said because of the uncertainty in the economy and most of our advertisers are reluctant to commit their budgets at the very beginning of the year as they used to do in the previous years. However as we have seen, the economy, we began to see some recovery of the economy, of the general economic situation and we believe in Q2 our top line revenue will be much better. However, we can't comment we can't give you specific number. So by the way, Jason also mentioned that in Q1, some of the – some of our multinational customers haven't committed their annual budgets yet, so this will also affect our outlook to the future.

Richard Ji – Morgan Stanley Research Asia Pacific

And another follow up question is regarding your proposed merger. Obviously one complication again fourth and trying to step up and in the merger process, can you comment on what is your perceived role or force in the proposed merger?

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

Basically Fuzan [ph] is financial investors and is very normal they hold position in any specific company, but we don't believe that Fuzan’s holding will have any significant impact to our day-to-day operations.

Richard Ji – Morgan Stanley Research Asia Pacific

All right, thank you.

Jason Jiang

Okay, thank you.

Operator

And your next question comes from Eddie Leung with Banc of America Merrill Lynch. Please proceed.

Eddie Leung – Banc of America Merrill Lynch

Good morning. Alex, Jason, Michael, James and Jing. I have two questions, the first one is related to your acquisition earn outs, how much would be the acquisition earn out remaining associated with discontinued operations as well as for the continued operations? Thank you.

Alex Yang

This is Alex Yang. I think in addition of the discontinued part, Focus Media has ongoing acquisitions, around 10 acquisitions on Framed Poster regard and certain four and five small acquisitions on our LCD display. And regarding the earn out, I think the maximum allowed is around US$150 million. The US$150 million is on discontinued operations. And on the continued operations, it is around US$130 million.

Eddie Leung – Banc of America Merrill Lynch

Got that. And my second question is related to the billboard and movie theater pieces, it seems like the fourth quarter revenue growth, I think it is the only (inaudible) growth in the fourth quarter, can you share with us why it seems to be more stronger than most other pieces, and is it just because of seasonality and how should we look at the seasonality of this piece going forward? Thanks.

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

So Jason said for the outdoor billboard business, we normally sign a contract at the very beginning of the year and the contract normally are year-long contracts. So they have, outboard billboard business has a very long, has very strong backlog, and the sudden drop in the overall economic situation won't affect its revenue recognition. And for the movie theater business, the growth is mainly attributable to the strong growth in the movie theater business. In the past year, the growth of the ticket sales has been was about 50% as well as the population going to the movie theater. As a result more advertisers began to put their advertisements in the movie theater sector. So this also the main reason for the movie theater to have a healthy growth in Q4. And by the way, Q4 normally is the strongest quarter for movie theaters because hit box movies were normally showed in Q4 in China.

Eddie Leung – Banc of America Merrill Lynch

And then fourth question, could you share with us the outlook for these two business lines in 2009?

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

Jason said we believe that movie theater, we're going to see healthy growth in movie theater sector because the overall trend is very obvious that more movies theaters are built in China and more people are going to movies theaters. And for the outdoor billboard business, we can say it is, the performance of this line of business very much depends on overall economic situation. If we see the economic situation improve in Q2 and after, definitely this business, you're going to see a very healthy growth in this line of business. Otherwise, probably you're going to see the same situation as the other sectors, other lines of business.

Eddie Leung – Banc of America Merrill Lynch

Understood, thanks.

Jason Jiang

Okay, operator?

Operator

Your next question comes from Paul Wuh with Nomura International. Please proceed.

Paul Wuh – Nomura International

Hi. There has been a lot of talk about the management departures. Did Dr. Tan actually leave with any managers from Frame Media and if so do we know where he went?

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

Currently Dr. Tan is in the home to take rest, but he is still the Executive Director for the company, and he is still giving – he is still involved into the company operations, but not as active as he used to be. Currently Jason is in charge of overall is in charge of day-to-day operations of in-store business, free media business and LCD business.

Paul Wuh – Nomura International

Could you also discuss the write-downs for the frame media business. I think you said it was US$374 million, is that correct? And if so why was this amount so large?

Michael Xu

Okay, yes, you are right. The write off is about US$374 million. The main reason is when we acquired the business, we have at the time when we acquired the business, the forecast is much higher than our current forecast. So that's the only reason why we write off so big a amount.

Paul Wuh – Nomura International

Then if that's the case, then will that jeopardize your acquisition or the asset sale? In other words, from SINA’s perspective as well, you're now buying something that is worth a lot less than when they signed the, deal because you're now saying that will it is worth at least $374 million less than before, is that large enough of an amount for SINA to say, look, we need to reconsider if you want to be this deal at all?

Michael Xu

Well, from our perspective, first of all, I can't interpret from SINA's perspective, but on the other hand, I would say we have given a much lean balance sheet to SINA, and I don't think for this line of business, there is any opportunity for further write down, because goodwill has completely write off. So I don't – if I were acquirer, I would consider it actually a positive factor.

Paul Wuh – Nomura International

Right. So there's no one right on for both frame media or the commercial business or the in-store, there is no most goodwill left in any of these three businesses, is it what you're saying?

Michael Xu

No. Actually I'm saying in the LCD line up, sorry in the poster frame business, there is no more goodwill left, and for LCD, we do have goodwill, but LCD, just like I said a few minutes ago, we don't say in the near future we're going to have any further write off for the goodwill, but we can't guarantee if the economy situation further deteriorates significantly there will be no write down or write off.

Paul Wuh – Nomura International

Do you know how much good will is remaining in the assets that you are selling to SINA, how much goodwill is remaining on the LCD business?

Michael Xu

Well, I think this number will be more clear at the time when we publish the consolidated financial statements, but at the moment, the rough number is about US$400 million.

Paul Wuh – Nomura International

US$400 million will be part of the goodwill that will be going over to, just around US$400 million in goodwill from the LCD business would go to SINA?

Michael Xu

Well, I think this one is more complicated than the book number indicated because once SINA acquired the company, they're going to have their own way, they're going to do – they are going to do their own acquisition accounting. So how much good will go to SINA really depends on the evaluation. So I can't speculate how much good will go to SINA.

Paul Wuh – Nomura International

Right. So from your point of view, it is around $400 million on your books currently in goodwill for the LCD business?

Michael Xu

Your understanding is correct.

Paul Wuh – Nomura International

Okay. Thank you very much.

Operator

And your next question comes from the line of Chunming Zhao with SIG. please proceed.

Chunming Zhao – SIG

Okay. Thank you for taking my questions. Good morning guys. I think in the past you have provided us the cash flow statement and this quarter you didn't, so I just want to ask you the cash flows from operating activities for both the continuing operations and discontinued assets. Also what were the CapEx for these two different operations in the fourth quarter? And I have a follow up on that.

Michael Xu

Okay. So I think we can – I can provide a few numbers to help you get a flavor of the cash flow situation. So basically the cash collection for the fourth quarter is probably the strongest among the past four quarters. The total cash collection for the whole company I mean for the combined for both consolidated and the remaining business is about 17 billion RMB, which is about US$250 million. And from the CapEx for the company in Q4 is about US$6.5 million, and we paid about 17.5 million for earn outs, and we also spent about 17 million for the repurchase of the shares in open market. So I guess these two numbers can help you to get a sense of operating cash flow. By the way you can check if you look at our balance sheet our cash balance has increased significantly from Q3 to Q4.

Chunming Zhao – SIG

Yes, I noticed that. I just wanted to understand that for the discontinued assets, they generated about 42 million non-GAAP net income, I wondered how much they generated on the cash front?

Michael Xu

Well again for the accounts receivable, the remaining business, you asking about discontinued or continuing?

Chunming Zhao – SIG

Yes, I'm actually interested in both parts.

Michael Xu

Okay. For the cash collection from AR, the remaining business collected about – the AR collection for the remaining business is about 786 million RMB, which is about US$110 million. And for the consolidated assets, the collection is about 917 million RMB, which is about 134 million US dollars.

Chunming Zhao – SIG

Okay, so 110 million, 134 million, those are accounts receivables you're talking about. So what about the net income for the quarter and the change in the assets and liabilities, because with the impairment charge and write off are all non-cash items, right?

Michael Xu

Well, basically if I – the changes of liability and assets will depend on a few factors how we do the consolidated financial statements and at the moment our consolidated financial statements haven't been completely done yet, so I don't think I can provide you a better responsible answer for the specific assets, the changes of specific assets by consolidated or remaining business.

Chunming Zhao – SIG

Okay. So let me maybe ask on the total business not breaking down these business, you generated $22 million – increase of about $50 million cash, right, this quarter, and then you had a CapEx of 6.5 million, and then you have 17 million for these earn outs, so basically your operating cash for the total in 2006 was almost $70 million, is that correct?

Michael Xu

For the sake of time, how about we communicate off-line one by one. I think it is at the moment the time we are well running out of time. Thank you.

Chunming Zhao – SIG

Okay. What about tax rate? What will be the tax rate for the continuing operations going forward?

Michael Xu

Well for the continuing operations, in the past, in Q4 of in – in the whole year 2008, our tax – continuing operations tax rate is about 13% and depends on our future tax planning, I think our continuing operations tax rate should be still around the strange and moving up a little bit. So you can use 15% as the estimate.

Chunming Zhao – SIG

All right, thank you.

Jing Lu

Hello? Hello, operator? Hello? Hello? Hello, operator? Are you there?

Operator

Yes, ma’am. James Mitchell, please proceed.

James Mitchell – Goldman Sachs & Co.

Sure. This line is actually rather noisy, so I apologize if you can't hear me. Could you talk about who's going to run the residual focus business assuming the divestiture goes through? And then also on the income statement, it looks like the residual businesses had a gross profit of about $20 million and then operating expenses of about $26 million, is there anything unusual which distorted profitability down in the fourth quarter?

Michael Xu

So Jason is going to answer your first question and I will follow up for the second one.

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

So David Yu, the current CEO of the Internet business will be in charge of – is still in charge of Internet business.

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

So David is going to be in charge of the remaining businesses. And sir, can you repeat your second question?

James Mitchell – Goldman Sachs & Co.

Yes. I just wanted to check what the non GAAP operating income or loss was for the remaining business in the fourth quarter, is it like the gross profit was about $20 million and you had OpEx of about $26 million, did you report a non-GAAP operating loss in the quarter and if so was there anything unusual about the quarter on a non GAAP basis?

Michael Xu

On the operating expenses side, we have several items hitting our GAAP number. If you go to our a consolation schedule, you can see that. So basically we have 3.2 million of fixed assets write off which hit our operating expenses from CGEN. And also we have about – or we also have about US$3 million CGEN related charges, which is pretty much – which pretty much included in the 193 million of charges, CGEN restructuring loss. So those items of course have distorted our Q4 operating expenses number.

James Mitchell – Goldman Sachs & Co.

Okay. And then what happened to your retail advertising, supermarket advertising business? So you have this kind of given up on CGEN and also giving up on the rest or you continue to operate the non-CGEN portion but at a much lower revenues run rate?

Michael Xu

We do have organic – I mean our in house in store business and it is still running by us and we don't have intentions to discontinue this business.

James Mitchell – Goldman Sachs & Co.

But why has it become so small all of a sudden?

Michael Xu

Yes. Because CGEN is a bigger part and once we discontinue the CGEN, then of course the in store business compared with previous number will be much smaller. But in store business run rate, I mean the organic in-store business run rate from Q2 to Q3 to Q4 – compared with Q3, the number doesn't drop very much, drop a lot.

James Mitchell – Goldman Sachs & Co.

Okay, thank you.

Operator

And your next question comes from the line of James Lee with Stern, Agee Capital Markets. Please proceed.

James Lee – Stern, Agee Capital Markets

Can you guys give more color regarding being accounts receivable reductions, how much of that is coming from collections improvement, all that, and how much of that is coming from the write off of accounts receivables? And my second question is regarding expense trends and going into 1Q especially related to G&A and sales and marketing, number one, let’s go back historically, should be assumed the delta between 3Q and 4Q, are the expenses going to SINA side of the business, and maybe can you help us understand going forward any cost-cutting initiatives you are expecting to implement during 1Q? It seems like going into 1Q you should continue producing negative income. Thank you.

Michael Xu

Let me answer your first question. Regarding to the AR, the number I quoted a few minutes ago actually already excludes AR from CGEN. So basically the reduction of – okay, let me recapitulate a bit, so in Q3, if you compare Q3 ending balance of AR and Q4 ending balance of AR, about 200 million RMB, which is about US$25 million reduction is from CGEN because we disposed that business, and the rest are coming from cash collections.

James Lee – Stern, Agee Capital Markets

So (inaudible) write off regarding any other business that you are currently running right now?

Michael Xu

No, we haven't have – other than CGEN’s disposal, we haven't had any write offs. I'm actually AR – disposal of CGEN AR is not a part of the write off, and for the remaining business and consolidated business, we don't – we haven't had any major write-offs for the AR and actually you can see from actually our bad debt provision hasn't changed, has been stable compared with Q3. And your next question is, sorry I didn't…

James Lee – Stern, Agee Capital Markets

The next question is regarding number one, the G&A and sales and marketing, the delta, what is that going to SINA, and also going forward to 1Q, are you doing any cost-cutting initiatives? It seems like if you don't, the net income for 1Q will continue to be negative?

Michael Xu

The delta, yes you are right, the delta is going to go to SINA, but just one reminder, that some of the operating – we put some of the impairment into the operating expenses, so if you look at – I guess you're talking about you're talking about non-GAAP operating expenses or talking about the GAAP operating expenses?

James Lee – Stern, Agee Capital Markets

Non-GAAP.

Michael Xu

Okay. So for the non-GAAP part, the delta close to SINA. As for the cost-cutting measures, I think probably Jason wants to make a few comments.

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

Jason says in our business, the sales and marketing expenses pretty much are variable to the revenue up and down of the revenue. So if the Q4 number, if our Q1 top line dropped to the level of guidance, basically you're going to see corresponding drop in our sales and marketing expenses. As for the G&A, we are taking measures to reduce the cost. However, on a non-GAAP basis, we don't believe even at the current level, you're going to see non-GAAP loss in Q1.

James Lee – Stern, Agee Capital Markets

Can I have Jason's follow up question regarding Fuzon when he said that he expected Fuzon to continue to be a financial investor, is that his own assumption or did Jason actually approach them or did they approach you to sort of work something in between?

Jason Jiang

(Spoken in Foreign Language)

Michael Xu

We haven't had a formal competition with Fuzon about their holding in our company shares. The statement I just made it is a judgment.

James Lee – Stern, Agee Capital Markets

Okay, thank you.

Jason Jiang

Okay, thank you.

Operator

And your next question comes from the line of Kar Kwong with Needham & Co. Please proceed.

Kar Kwong – Needham & Co.

Hi. Thanks for taking my questions. I was just wondering some housekeeping questions what is in other revenues and what was in the other non-operating expense?

Michael Xu

Let me answer this question. The other revenue is mostly for example like terminating the wireless business and the revenue from CGEN which we have already terminated but for accounting purposes because one of CGEN’s entities is still retained in the company, we cannot treat it as discontinued operations. So but this other revenue, although in the continuing basis, probably will not extend into the future quarters.

Kar Kwong – Needham & Co.

And so what was the other non-operating expense?

Michael Xu

Non-operating expenses is mostly say for example like let me – you're talking about that 4.1 million, is that right?

Kar Kwong – Needham & Co.

That’s right.

Michael Xu

Okay. Those operating expenses are mostly for example like if we have any non-operating fixed assets been disposed of, or we have like reductions – or we have like foreign exchange gain or loss will be non-operating expenses.

Kar Kwong – Needham & Co.

Okay. And so projecting going forward, we should project some form of interest income there instead of an expense? Is that all right?

Michael Xu

Yes, we also – also I forgot to mention, we also have interest income in this line of business, in non-operating expenses. So this one is a net amount. So it also includes for example like government subsidy, something like this.

Kar Kwong – Needham & Co.

Okay. And in terms of your largest verticals, what are they now?

Michael Xu

I'm sorry?

Kar Kwong – Needham & Co.

Your largest verticals, your I guess exposed to your Internet business and your movie and billboard business, what verticals are the most important verticals?

Michael Xu

I think probably this question Jason is the best person – sorry, James is the best person to answer.

James Jiang

Hi, Kar. I think for the remaining business, the largest sector with regard to verticals is Internet business.

Kar Kwong – Needham & Co.

Right. Within the Internet business, which verticals are the most important?

James Jiang

I think then you would be looking at OS, which is like a all rounder player, roughly constitutes about 45% of the total Internet business. Then you have the game, online game business, which is around 25% of the total revenue, and car verticals, which is roughly around 13 to 15%.

Kar Kwong – Needham & Co.

Okay. And if I could get some clarity on the earn out numbers you gave earlier, are these the maximum amounts that you could potentially pay and how likely are you to hit these earn out targets, and are they already on the balance sheet?

Alex Yang

I think the earn out amount I mentioned just now is the maximum amount we are likely to pay, that is the maximum amount.

Kar Kwong – Needham & Co.

Okay. And I guess you guys have written some stuff down, are you likely to hit these amounts or…

Alex Yang

These amounts are not exactly in the balance sheet.

Kar Kwong – Needham & Co.

So are you likely to have to pay the maximum amounts given that you guys have written down a lot of these, have taken a lot of write downs, I was wondering if it affects what you guys are probably going to end up paying?

Alex Yang

I think the write down of the goodwill of this business cannot lead us to say we are not likely to pay the maximum amount. But I would say based on the current marketing conditions I think we are likely to pay the less amount we expected.

Kar Kwong – Needham & Co.

All right. Thanks a lot. Thanks for answering my questions.

Operator

Your next question comes from Dick Wei with JP Morgan. Please proceed.

Dick Wei – JP Morgan

Hi. Thanks for taking my questions. I have two questions. First one is, regarding your first quarter guidance for continued operations around US$55 million, how much is coming out from the Internet business versus the (inaudible) still going to be flattish Q over Q?

James Jiang

Hi Dick. This is James. I think I have already answer this question. I think for the Internet business, you will be looking at Q1 sales between 295 million to 300 million RMB, which is around $43 million to around $44 million. The remaining is coming from the billboard and also the movie theaters.

Dick Wei – JP Morgan

All right, great. And my second question is that Mr. Jiang is going to remain as the CEO and Chairman of Focus while also working with SINA, is that the arrangement currently?

Michael Xu

Jason’s answer is temporarily he is going to remain as the chairman of the remaining business after the SINA Focus deal closes. But his main focus will be helping the consolidated business to operate.

Dick Wei – JP Morgan

Great. Thank you very much.

Jing Lu

Hello, everyone. For time limits, the next will be the last one we take questions. Sorry for that.

Operator

And your next question comes from the line of Gene Munster with Piper Jaffray. Please proceed.

Gene Munster – Piper Jaffray

Good morning. Thanks for taking my questions. As far as the businesses that will be going over to SINA, can you talk a little bit about the margin profile, the gross margin profile of those businesses, and also the DSO profile of those businesses?

Michael Xu

So Gene, your question actually is about gross margin of the business goes to SINA and also the DSO – the DSO profile for the business goes to SINA, is that right?

Gene Munster – Piper Jaffray

That's correct.

Michael Xu

Yes. So the gross margin for LCD business is about 67% and poster frame network business gross margin is 61%. The two numbers I quoted just now are non-GAAP numbers. And for the DSO, I would say the DSO number probably – first of all, I will give you DSO number, and secondly I would say the DSO number for LCD business in Q4 is about 117 days and the DSO number for Q4, for the frame business in Q4 is about 125 days. But I would say the DSO is not very accurate indicator for our AR situation. Basically DSO number is much more quarterly analyzed, DSO number is much more sensitive to the numerator than denominator – much more sensitive to numerator than denominator. So but if you look at cash collection numbers, you're going to see that cash collection in Q4 for the consolidated business is about 30% larger than Q3. So namely to be more specific, cash collection for the consolidated business is about 917 million RMB in Q4 versus less than 700 million in Q3 RMB. So I think that when you put cash collection and DSO number together, probably you will get a better picture of our AR situation.

Gene Munster – Piper Jaffray

Great. Thank you.

Michael Xu

You're welcome.

Jing Lu

Okay. Thank you all. That concludes today's conference call. See you next quarter.

Alex Yang

Okay, thanks.

Jason Jiang

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.

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Source: Focus Media Holding Limited Q4 2008 Earnings Call Transcript
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