Focus Media Q1 2009 Earnings Call Transcript

Focus Media (FMCN)

Q1 2009 Earnings Call

June 21, 2009 9:00 pm ET

Executives

Jing Liu - Investor Relations

Alex Yang - Acting Chief Financial Officer

Michael Xiu - Vice President, Finance

Jason N. Jiang - Executive Chairman of the Board

James Jung - Chief Financial Officer of OH YES

Analysts

Catherine Leung - Citigroup

James Lee - Sterne, Agee & Leach

Eddie Leung - Banc of America

Jenny Wu - Morgan Stanley

James Mitchell - Goldman Sachs

C. Ming Zhao - Susquehanna Financial Group

Tian Hou - Pali Capital

Spencer Leung - UBS

Jim Yun - Nomura

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Focus Media Holdings Limited earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. [Jing Liu], Investor Relations Director for Focus Media. Please proceed.

Jing Liu

Thank you. Thank you, everybody. Welcome to Focus Media's first quarter 2009 earnings conference call. Today our management will discuss the company’s financial results for the first quarter of 2009 and business outlook for the second quarter of 2009.

With me here are Jason Jiang, our Chairman and Chief Executive Officer; Alex Yang, Acting Chief Financial Officer; Michael [Xiu], Vice President of Finance; and James [Jung], Chief Financial Officer of [inaudible]. After management updates you on our first quarter 2009 operational and financial performance, we will open the call for questions.

This call is also broadcast through the Internet and available through our investor relations website, 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 second 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, the 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 businesses, 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.

Now, I will turn the call over to our acting CFO, Alex Yang, for an update in operational [inaudible].

Alex Yang

Thank you, Jing and good morning, everyone. This is Alex Yang, Acting CFO for Focus Media. Welcome to Focus Media's first quarter 2009 results conference call. To be honest, the first quarter of 2009 was the most challenging period we have ever experienced in Focus Media's operating history. The global financial crisis started in the second half of last year and has had a severely negative impact on the Chinese economy and the overall advertising market in China, especially on the [inaudible] of corporate decision-makers in China. They have become much more cautious in advertising spending and are unwilling to sign long-term contracts with full-year commitment. Our advertising revenue in the first quarter of 2009 declined sequentially and year over year in both of our continued operations and the discontinued operations.

First of all, I would like to talk more about the performance by industry in our out-of-home digital network. In the first quarter of 2009, we saw a sequential decline in advertising revenues in all the major sectors, including FMCG, transportation, financial services, and telecommunications, which collectively accounted for about 80% of total advertising revenue for the first quarter and about 73% of total advertising revenue in the year of 2008.

FMCG, relatively speaking, is a sector most [inaudible] economic downturn starting from the second half of last year, though the advertising revenue for FMCG still experienced a quarter over quarter decline of 32%, we did see a slight year-over-year increase of 2% in this sector. For the first quarter of 2009, FMCG sector has contributed about 44% of total advertising revenue in the out-of-home digital network compared to 32% for the year 2008.

The telecommunications sector, benefiting from the launch of 3G campaigns by China Mobile and the other telecommunication operators, performed relatively flat in the first quarter of 2009 sequentially, but declined by 47% compared to the same quarter of 2008.

The other two significant sectors, transportation and the financial services, are the sectors most hit by the economic downturn, and were down 50% and 48% respectively from the first quarter of 2008 and 39% and 63% respectively from the first quarter of 2008.

Entering into the second quarter, the market will continue to improve due to a series of [inaudible] issued implemented by the Chinese Government and we did see across-the-board recovery in all the sectors, especially we believe the trend for FMCG advertising growth will continue in the second quarter and in the meantime, the transportation sector is seeing stronger pick-up quarter over quarter. However, the year-over-year comparison in the second quarter is still very tough, even though we have seen some signs of recovery and bottoming.

Secondly, I want to share with you an update with regard to the [inaudible] of tier two [inaudible] media acquisitions. We kicked off the renegotiation earn-out payments with all the tier two Frame Media cities since early this year and up until now, most of the renegotiations have been completed recently. As a result of the renegotiations, we dragged down the [inaudible] we offered to this acquisition and would significantly reduce the maximum pay-out payment for this tier two Frame Media acquisition. Also pretty much the maximum earn-out payments for the -- for discontinued operations to approximately $120 million from originally disclosed $150 million.

Before I turn to [inaudible] for our financial review, I would like to give you an update on our previously announced merger agreement with Sina. The transaction is subject to customary closing conditions and the anti-trust from [inaudible] is still being reviewed. Right now, the [inaudible] is still in the process of reviewing the case and has not formerly issued a notice for the application acceptance yet. Therefore, we will not be able to close the deal by the end of the first half as we originally expected, and we expect that if everything goes smooth, so we expect to close the deal in the third quarter.

Now I will turn the call over to Michael [Xiu], our Financial VP, for the financial highlights of the first quarter of 2009.

Michael Xiu

Thanks, Alex and thank you all for joining our conference call today. First of all, let me reiterate the basics of our presentation to you all, as we have already disclosed in our earnings release.

As a result of the announced merger transaction with SINA, the assets of our digital out-of-home advertising networks, including the LCD display network, poster frame network, and the in-store display network, have been accounted for as discontinued operations. In accordance with U.S. GAAP, these assets to be sold to SINA as a business held for sale are not depreciated. Let me say again, are not depreciated or amortized, nor are they subject to the same impairment analysis as assets held and used in continued operations. Therefore, GAAP and non-GAAP financial measures for discontinued operations in the first quarter of 2009 [inaudible] factor in depreciation expenses, amortization of intangibles, impairment charges, if there’s any, due to write-down or write-off of [long-life] assets. The only reconciliation items between the non-GAAP and GAAP measures for the discontinued operations is stock-based compensation expenses.

With this in mind, I will walk you through our financial results for the first quarter of 2009.

Net revenue for continuing operations was $66.7 million, declining 24% from $87.2 million for the fourth quarter of 2008 and declining 14% from $78 million for the first quarter of 2008 and surpassing the company's previous guidance of no less than $55.5 million.

Net revenue for discontinued operations was $64.4 million, a sequential decrease of 39% from $104.9 million for the fourth quarter of 2008 and decrease of 23% from $83.6 million for the first quarter of 2008 and slightly below the Company's previous guidance of no less than $65.7 million.

Non-GAAP net income from continuing operations was $3.3 million compared to $5 million for the fourth quarter of 2008 $10.0 million for the first quarter of 2008.

Non-GAAP net income from discontinued operations was $16.3 million, [while if] assuming discontinued operations were depreciated as before, non-GAAP net income from discontinued operations would have been $7.1 million, compared to $42.7 million for the fourth quarter of 2008 and $35 million for the first quarter of 2008.

Now let me talk about our segmental revenue and gross profit for the Q109. Advertising revenue from the movie theater and outdoor billboard business was $19.2 million in the first quarter of 2009, representing a decrease of 11% from $21.6 million for the fourth quarter of 2008 and a 17% increase from $16.4 million for the first quarter of 2008.

Internet advertising service revenue was $47.1 million for the first quarter of 2009, a 25% decline from $62.4 million for the fourth quarter of 2008 and a slight decline of 5% from $49.6 million for the first quarter of 2008.

Non-GAAP gross profit for the movie theater and outdoor billboard network for the first quarter of 2009 was $6 million, representing a 17% decline from $7.2 million for the fourth quarter of 2008 and a 25% increase from $4.8 million for the first quarter of 2008.

Non-GAAP gross profit from our Internet advertising services for the first quarter of 2009 was $10.6 million, representing a 14% decline from $12.3 million for the fourth quarter of 2008 and an 18% decline from $13 million for 1Q08. While advertising revenue from LCD display network was $34.4 million for 1Q09, a 41% decline from $58.6 million for the 4Q08 and a 25% decline from $45.9 million for the 1Q08.

Advertising revenue from in-elevator poster frame network was $23.5 million for the first quarter of 2009, a 40% decline from $39.2 million for 4Q08 and a 20% decline from $29.2 million for the 1Q08.

The total non-GAAP gross profit for the LCD display network for the 1Q09 was $23.2 million, while if you are assuming the LCD display network was depreciation as before, non-GAAP gross profit for the LCD display network would be $19.4 million, representing a 55% decline from $43.5 million for the 4Q09 and a 39 decline from $31.9 million for the 1Q08.

Non-GAAP gross profit for the in-elevator poster frame network for the 1Q09 was $11.2 million. If assuming the in-elevator poster frame network was depreciated as before, non-GAAP gross profit for in-elevator poster frame network would be $8.7 million, a 53% decline from $23.8 million for the 4Q08 and a 56% decline from $19.8 million for the 1Q08.

With all those numbers, now I would like to provide Focus Media's business outlook for the 2Q09. Please note the following outlook statements are based on current expectations. These statements are forward-looking and actual results may differ materially.

The company estimates net revenues from continuing operations are expected to be no less than $69.0 million; net revenues from discontinued operations are expected to be no less than $81.5 million.

Thank you very much. Now we will open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Catherine Leung with Citigroup.

Catherine Leung - Citigroup

Good morning. I have two questions. Firstly, can you please give us a little bit more color on your third quarter and second half outlook, if possible, as well as the second quarter? Which verticals do you feel the most confident about and which do you still see the most caution?

And secondly, can you discuss any kind of disruption on your employees, especially the sales force front, due to the overhang from the uncertainty of the delay in the merger with SINA that you saw in the first quarter, as well as the second quarter this year? Thank you.

Alex Yang

Cathy, are you asking for third quarter or second quarter?

Catherine Leung - Citigroup

Well, second quarter, I mean, assuming that you have much more visibility in the second quarter and any visibility you have over the third quarter and maybe the second half would be great.

Jason N. Jiang (Translation)

First of all, Q1 is a very difficult quarter for us but in the second quarter, we see significant rebounds because of that economic stimulus package passed by the Chinese Government, and we assume Q3 will be about at the same level as Q2 unless other -- unless we see additional economic stimulus package. But let me say -- let me reiterate -- basically we are in a [inaudible] situation and everything can change overnight, so we are still very cautious about our Q3 results.

Your second question is related to the management change because of that SINA transaction and departure of Dr. Tan, is that right?

Catherine Leung - Citigroup

Well, it’s not so much the management turnover but given that there is some overhang in terms of what’s going to happen if and when the SINA merger goes through, has your sales force been kind of disrupted for motivation or their incentive to sell Focus Media advertising in the first quarter and also second quarter?

Jason N. Jiang (Translation)

If the deal was going to go through, Jason is going to stay with the combined company and help to integrate the [inaudible] assets with SINA and to help to further strengthen the business.

Currently the transaction is still in the process of approval by the relevant Chinese authorities, but the pending results -- but he doesn’t think the pending results has had any significant impact to our sales force in terms of morale or in terms of turnover and we -- the sales force still chases after orders as they used to and basically we don’t see any significant changes in our sales force.

Catherine Leung - Citigroup

Sorry, may I follow-up on the first question over the advertising outlook? I know that you mentioned in terms of the positive impact from the government stimulus, which of your verticals, of your main verticals do you think will benefit the most from, or has benefited the most from the Government Stimulus plans?

Jason N. Jiang (Translation)

Well, the transportation sector is obviously the one benefiting the most from the recent stimulus package and the FMCG sector always held well and relatively stable and Jason says basically he felt that the auto sector in terms of advertising demand actually performed better than we expected.

Catherine Leung - Citigroup

Okay. Thank you.

Operator

Your next question comes from James Lee with Sterne, Agee.

James Lee - Sterne, Agee & Leach

Thanks for taking my call. I wonder if Jason can talk about maybe the business activity by geographic region. We’ve heard from advertisers pretty consistently they are saying the inland cities are doing much better than tier one markets. I’m just wondering if you can confirm that to be the case. Are you seeing that maybe the narrowing of the spread between the utilization rate of tier one and tier two markets? And I’m just curious how much contribution do you have from tier two markets now? Thank you.

Jason N. Jiang (Translation)

Geographically speaking, Jason says that the top tier cities obviously perform better than the second tier cities. The top tier cities we define as Beijing, Shanghai, Guangzhou, Shenzhen. Shanghai is the one that performs best and Beijing follows.

As for the second question, let me answer your second question. We normally don’t disclose the utilization rates between the second-tier and the first-tier cities but what I can tell you is just like Jason said, the top tier cities obviously perform much better than the second tier cities, both for the LCD business segment as well as poster frame sectors.

James Lee - Sterne, Agee & Leach

And Michael, is there any way you can give a sense of the revenue contributions from the tier two markets?

Michael Xiu

Well, the revenue contribution from second-tier cities normally accounts for less than -- around 40% of the poster frame business, but in the tier-one cities, the contribution percentage actually dropped pretty significantly.

James Lee - Sterne, Agee & Leach

Okay. If I may ask a follow-up question regarding [OH Yes], it seems like your revenue decline is much greater than the media platform, like SINA and SOHU. Is there any company-specific issue that we should understand? Was there any sales turnover that happened during the quarter or are you sort of turning away from unprofitable business as you try to control costs? Any incremental color would be helpful.

James Jung

Let me address your questions in turn. First of all, why there is a Q-on-Q drop around 25% of the revenue, and we see actually the major sector of revenue decline came from the real estate, which is in line with in particular the industry trend. Second of all, in the first quarter specifics, we see quite a significant decline also in the core sector advertising, in the Internet sector as well.

With regard to your second question in terms of cost-cutting initiatives, definitely we are putting a very strong control over the internal cost controls we are looking at by vendor cost price reductions, as well as looking at media sectors as well. Is your question answered?

James Lee - Sterne, Agee & Leach

Can you also talk about maybe sales turnover? Is that a reason for the revenues to be weaker than maybe some of the media platform [of your peers]?

James Jung

Can you repeat?

James Lee - Sterne, Agee & Leach

I was wondering if sales turnover is a major issue that is contributing to a weak revenue results in 1Q.

James Jung

I don’t think sales turnover -- you mean the sales people turnover?

James Lee - Sterne, Agee & Leach

Yes, that’s right.

James Jung

We don’t see much of a sales people turnover in our business sector. The business actually is made up of eight entities that were acquired by Focus Media through between 2007 and 2008. The majority management, as well as the found of those businesses, still remain with the business. We see this as a quarterly normal practice because if you look at the 2008 versus 2007 Q1, you also see a 10% drop as well, while in mind that both the Olympics impact, as well as the economic downturn globally obviously worsened that impact for this Q1 compared to Q4 last year.

James Lee - Sterne, Agee & Leach

All right, thank you. I’ll get back in the queue. Thanks.

Operator

Your next question comes from Eddie Leung with Banc of America.

Eddie Leung - Banc of America

Good morning, everyone. I have two questions -- the first one is regarding the Shanghai Expo, should we expect any regulation change in Shanghai that may benefit or may hurt your business in 2010 because of the Shanghai Expo?

Michael Xiu

Actually, we already felt the impact from the regulation changes. As we have disclosed in our earnings release, first of all we have a [inaudible] which run on [inaudible]. We were ordered to stop doing any advertising work and we have already put the boat in the harbor and the operation already ceased. The net book value for that boat is about $12 million but the revenue contribution from that boat is really insignificant, roughly speaking about $300,000 in Q4, if my memory serves me right in this number. And we also were required to dismantle two blocks of LED display networks in [inaudible] in Shanghai but we run that -- we lease those LEDs from third-parties, so we -- it won’t cause any potential write-down or write-off. In terms of revenue contribution from those two blocks, I think it’s about $400,000 or $500,000 per quarter in Q4.

Other than that, because most of the regulations were aimed at outdoor advertisement, so I don’t think it will have any significant impact to our core business, which I mean LCD, poster frame, and in-store advertising networks.

Eddie Leung - Banc of America

Thank you. And my second question is regarding the cash flows in first quarter. Could you share with us the operating cash flows for the continuing business as far as the discontinued business in the first quarter? Thanks.

Michael Xiu

Well, we don’t have separate cash flow statements for the continuing and discontinued operations but based on the numbers, you can see the cash balance for the continuing operations pretty much stay flat and we do see a slight increase in terms of our cash balance for the discontinued operation.

And in terms of AR collection, we see significant -- basically the Internet sector [CSAR] balance dropped and our LCD network [CSAR] balance dropped. That means the cash collection is larger than its revenue but the other sectors, which I mean movie theater and outdoor billboard, as well as poster frame, pretty much their AR balance keeps pretty much -- pretty much are flat compared with Q4.

In terms of payments, we [don’t have] any significant CapEx in Q1 compared with the other quarters in 2008, I think which is about $6 million and as you know, we are running basically a -- other than the Internet business, we are running a fixed cost business, so AP, we have an accounts payable reduced in terms of accrued amount as well as paid amount, reduced significantly. That’s why you see on a complete total company basis, the operating cash flow generated from -- in Q1 is only about $23 million, which is significantly lower than the amount in Q4.

Eddie Leung - Banc of America

Got that. Thanks.

Operator

Your next question comes from Jenny Wu with Morgan Stanley.

Jenny Wu - Morgan Stanley

Thank you for taking my questions. The first one is a clarification -- Alex, you mentioned several verticals growth in Q1. That is for your discontinued business or just for the LCD displays?

Alex Yang

I think the sectors I mentioned in my address, it covers LCD and the poster frame business.

Jenny Wu - Morgan Stanley

Okay.

Alex Yang

Including all of our discontinued business.

Jenny Wu - Morgan Stanley

Okay. And the second question is regarding your margins and in 1Q, the top line growth is okay but the earnings is kind of short of our expectations, especially we see continued business was still loss-making. And I’m just wondering what caused those higher costs and expenses, and how about the coming quarters and for the full year of 2009? And basically what is the margin target for the continued and discontinued business in the long run, respectively?

Michael Xiu

Well, for the continued business, I think if you compare Q4 and Q1, the outdoor billboards and movie theater actually, I think the gross margin is pretty much flat, is that right? And our OpEx dropped by about $4 million from $12 million to $7 million -- $5 million, from 12 to 7. I’m talking about non-GAAP numbers. So the only one who -- the only sector we see margin deterioration is Internet. Well, for that one, I would confer to James to have more detailed explanation.

James Jung

Thanks, Michael. I think what you referred to is in Q1 for the amount of deterioration is that in Q1, we have taken some one-off hits on our bottom line, in particular related to the capitalized IPO expenses, first of all, as we see this pretty -- it will not be materialized in the foreseeable future. But second of all, the business actually took on very aggressive measures because of the economic downturn to look at some of the commitments that we made to our media with regard to committed purchase volume and then take also a very prudent view in terms of writing down a large amount in the case of non-completion, so this also [hit the margin].

As mentioned in the first Q results announcement that we are not really providing margin guidance at this point. It’s still very [much clear] but the point I want to make here is that the business will definitely take more aggressive measures to ensure that it is operating as well as reported on a more prudent basis. I’ll hand it back to Michael.

Alex Yang

I think in the long run, regardless of the discontinued business and the continued business, I think it is really hard for us to say what’s our margin target. Definitely of course we want to reach all of our margins but according to the changing economic environment and the intensive competition, so we can see the margin is a bit flat. I think in 2009, we intend to keep our margin flat. I think that’s our -- I think that’s our answer to your question.

Jenny Wu - Morgan Stanley

Okay, sure. Michael, you mentioned for 2009 margin, it will be flat. That means for the entire --

Alex Yang

This is Alex, not Michael.

Jenny Wu - Morgan Stanley

Okay, Alex. So you mentioned for 2009, margins will be flattish versus ’08. That is for the entire business or just for discontinued --

Michael Xiu

Let me clarify what Alex said -- Alex said we hope we could keep the margin flat. We are not making a prediction. I just want to make sure. We hope. Alex, the original words from Alex is we intend.

Jenny Wu - Morgan Stanley

So should we expect for the -- by the GAAP measurements, the net income will be positive for the rest of the quarters in ’09?

Michael Xiu

Could you repeat your question? I didn’t get it.

Jenny Wu - Morgan Stanley

So because for the continued business, 2Q by GAAP net profit is negative, so should we see that this will turn positive for Q3 and Q4?

Michael Xiu

Jenny, I don’t think we will make this type of guidance at this point.

Jenny Wu - Morgan Stanley

Okay, so my final question is regarding your digital frames and this [inaudible], this business used to be one of the major growth drivers for your poster frames, and now you mentioned [inaudible] of digital frames, so what is your plan for the future development of this sector and what is your plan to drive up the growth for this business? Thank you.

Jason N. Jiang (Translation)

By the end of 2007, we see a very high utilization rate for our poster frame business and that’s the reason why we decide to begin utilizing the digital frame, because that will significantly increase the inventory available for sale.

But in 2008, especially in Q3 and Q4, we have seen significant downturn in terms of advertising demand from our customers. However, for the same period, we also have a significant increase in the installation numbers for the digital frame, and in Q1, starting from Q1, we decided that under current utilization rates for the digital frame and for the -- I mean for the whole inventory of level for sales, we decided not to seek further expansion.

And by the way, one of the reasons -- another reason we decided I think [inaudible] used to say we decided to have digital frame is to pre-empt competitors from acquiring more locations. So the situation changed and we decided to cease the expansion of digital frame. And I don’t think in the foreseeable future we will continue the expansion.

Jenny Wu - Morgan Stanley

Thank you. That’s all my questions.

Operator

Your next question comes from James Mitchell with Goldman Sachs.

James Mitchell - Goldman Sachs

Thank you. A couple of questions -- I apologize if these were asked earlier. One question is with regard to your revenue for discontinued operations. Is there any surprising reason why that missed your initial guidance for the first quarter or just the general macro environment?

And then the second question is with regard to the deteriorating margins on your poster frame business -- could you talk about whether that’s revenue driven or whether that [inaudible] unexpected [order side]?

Final question, given your decline in revenue, do you expect to renew some of the location contracts as those come up for expire and renewal this year, or do you view this as a temporary economic driven downturn [so you’d] keep as much of your location contracts as possible? Thanks.

Michael Xiu

Let me try to clarify your question. Your first question is about the continued operations, is that right? The revenue for --

James Mitchell - Goldman Sachs

-- the revenue versus guidance for the discontinued operations in the first quarter.

Michael Xiu

Okay. The first quarter, the reason we missed the guidance by a slight margin is because we haven’t been able to get back the contracts we already signed. You know, according to U.S. GAAP, you must have contracts to recognize revenue even if you have already delivered the service and the contracts are in the customer place, although we are asking our sales to aggressively chasing after customers to give us back the contract so we can recognize revenue. But customers have their own schedule and while we are just short of like probably $1 million of contract back, but those contracts become the -- already become the backlog for Q2, so we are going to recognize revenue in Q2.

I think that’s the -- well, that’s the only and single reason for missing the guidance. And your second question is regard to the deterioration of the gross margin for [the frame media], is that right?

James Mitchell - Goldman Sachs

Yes, that’s correct.

Michael Xiu

Well, you know, we are in a fixed cost business. When the revenue dropped, of course the gross margin is going to be hit in -- I mean, basically gross margin is more sensitive to revenue drop than anything else. And by the way, in Q2, Q3, and Q4, we began to -- as I talked about a few minutes, in Q3 and Q4 we have installed quite a few additional frames and as a result, the -- well, I am talking about non-GAAP, assuming the depreciation already will hit our income statement, so those newly installed digital frames will begin to depreciate after installation and the [inaudible] will be carried forward into Q1 for a non-GAAP basis. And of course, that will further have -- it will further hit our P&L -- I mean, gross margin.

And your third question is related to the contract, whether we -- your question is whether we are going to terminate some of the contracts with Frame Media and whether the situation we see is temporary or is permanent -- is that right?

James Mitchell - Goldman Sachs

Yes, the question is about Frame Media but also the LCD TV business, and it felt like in 2006, 2007 there was a land grab for desirable locations. Are there some locations that you now think are not desirable, given the macro environment and you are willing not to renew the contracts, or do you want to hang on to as much as possible?

Alex Yang

Let me reply to your question -- I think in terms of LCD, basically we will not reduce and we will not terminate any LCD locations [inaudible]. I think LCD business is still very -- it’s our core business and we still want to -- we want -- I think we need to gain more media resources.

I think just regarding the Frame Media business, I think let me add one thing to what Michael said because as you know, we still have some small competitors in the Frame Media business, so in 2008 I think the cost of our Frame Media contracts is going a bit faster, so I think beginning from Q1 of 2009, we plan to renegotiate with landlords of some Frame Media business to reduce our Frame Media costs and even [inaudible] we think is insignificant locations. We plan to reduce or even to terminate some lease contracts on Frame Media business [inaudible].

Michael Xiu

Let me follow up on Alex’s question -- the termination of the contract is not -- we don’t think we are going to see the crazy market as you see in the 2007 and early 2008, and obviously in such more mature market situations, what we are going to do is reduce costs and as you always know, we are a fixed cost business. And the contract termination will be I think first of all, the contract termination is not in response to a temporary situation. In our opinion, the market won’t, just like I said, won’t be as crazy as it used to be. And that’s why we want to terminate all those inefficient property rental contracts.

Alex Yang

I think in general, I think these contracts is quite complicated because it’s something relating to our strategic plan. Sometimes it’s relating to our -- I think our competitive environment. I think that basically, as you know, I think the commercial building [for those] is quite limited, so we want to keep -- we want to retain every commercial building and the [inaudible] I think in China every day there is a lot of new [inaudible], so that needs to be evaluated. What’s the value of these communities to see we need to [inaudible] or to -- or maybe we will [give it up]. So I think that that’s just -- [inaudible] -- it’s just the daily normal operation judgment.

James Mitchell - Goldman Sachs

Okay. Thank you very much.

Operator

Your next question comes from Ming Zhao with SIG.

C. Ming Zhao - Susquehanna Financial Group

Thank you. I have two questions. The first question is if I look at your 2Q guidance --

Jing Liu

Hello? Operator, if we lost Ming, please take a question from the next one.

Operator

Your next question comes from the line of Tian Hou with Pali Capital.

Tian Hou - Pali Capital

Thanks. I just have two questions -- one, the first one is regarding your 2Q guidance for the continued business. Sequential wise, it grows like -- from a guidance point of view, it only grew like less than 4%. I just want to have more color on that and why the sequential growth is so low and compared with historical data. That’s the first question.

The second question is regarding your earn-out and you said there was some renegotiation going on and finished and going forward, are we going to expect more renegotiations in earn-outs or not? That’s the second question.

James Jung

Let me answer your question with regard to your outlook for Q2 sales. I think your question is why is it so low. To be very frank, I can show you some of the numbers that -- I think the guidance given out by SINA on a Q-on-Q sequential basis between 27% and 34% and by SOHU is between 11% to 15%, and our Q-on-Q Q2 growth is between 33% to 36%, while we represent quite a large proportion of the revenue or advertising revenue for the major quota, I think it is quite representative in terms of this sequential growth. And to give you more color, I think the Q2 growth would mainly be coming from the car manufacturers, or coming from in particular the FMCG as well as hopefully some coming from the real estate sectors.

I will hand it over to Michael.

Michael Xiu

I’ll turn it to Alex for the second question.

Alex Yang

Let me reply to the second question regarding the Frame Media renegotiations. I think basically our company has mostly finished all the renegotiations with the tier two Frame Media cities [inaudible] to track down our acquisition [inaudible]. So I think in the near future, I don’t think we will renegotiate -- we will renegotiate further. But I think [inaudible] has been determined to say the [PE] has been downward. But regarding to the -- I think for the final earn-out calculation, maybe there will be some minor change but it will not be material. So basically I can say the Frame Media earn-out [inaudible] has been completed.

Tian Hou - Pali Capital

Thank you.

Operator

Your next question comes from the line of Spencer Leung with UBS.

Spencer Leung - UBS

I have three questions -- what’s your full-year share-based compensation?

Michael Xiu

Can you speak louder? I can barely hear you.

Spencer Leung - UBS

Hello? What’s your full-year share-based compensation expectation? That’s my first question. And then also, I see in your first quarter results, you have a bit of impairment loss. Do we expect going forward we are going to see more for your -- more impairment loss?

And then thirdly, based on the cash balance on your balance sheet, were there any interest income? Thank you.

Michael Xiu

Your first question is regarding the whole year stock-based compensation expenses, is that right?

Spencer Leung - UBS

That’s right, yes.

Michael Xiu

Okay. Well, stock-based compensation expenses is a pretty stable number. The only -- I think once you determine the calculation methodology, the only variable is the --

Operator

Ladies and gentlemen, please stand by. Your speaker will be with you in a moment. Ladies and gentlemen, your conference call will now resume.

Michael Xiu

Well, let me go back to the start, the UBS question about stock-based compensation. Our stock-based compensation basically is very stable and in Q4, it was about $8 million and in Q1 it is still $8 million. So the only variable is I think is [future] rate but again, I really don’t want to make a prediction about the future. But just like I said, it’s basically it’s a stable expenses.

And what’s your second question? Can you repeat?

Spencer Leung - UBS

The second question, impairment loss, full year -- are we expecting further impairment loss?

Michael Xiu

Well, let me talk about -- we have to talk about the situation differently from continuing and discontinued operations. For the discontinued operations, because it is held-for-sale assets, assuming the deal didn’t get closed in -- first of all, as long as it’s held-for-sale, as long as -- and also, as long as the fair market value -- I mean, the consideration paid to us is larger than the book value of the carry-forward assets, there should be no impairment for the long-life assets. That’s why we are disclosing we -- the boat has already ceased operation and that’s why we tell you guys that we stopped. We will not seek further expansion of digital frame 2.0. However, you didn’t see an impairment on our income statement for the Q1 but I guess after talking about this, you can figure out by yourself.

And for the good will, this really depends on whether there are changes of consideration and whether we can close the deal. So as long as consideration is not changed, I don’t think there will be a further impairment for good will for the discontinued operations.

And for the continued operations, possibly it will generate further -- assuming we make further payments for the earn-out, it will immediately generate, and also assuming the forecast for the business hasn’t change, as long as we make additional earn-out payments, it will immediately create good will and be subject to impairment.

And your third question?

Spencer Leung - UBS

Regarding interest income, if there’s -- if your cash balance remained flat, should we see some interest income coming in?

Michael Xiu

Well, as long as we have a cash balance, there is going to be interest income.

Spencer Leung - UBS

Right. What was the amount in the first quarter?

Michael Xiu

Well, the fourth quarter is about -- let me see, $400 million. It is about $8 million divided by four, so $2 million -- roughly speaking, less than $2 million.

Spencer Leung - UBS

That’s for first quarter?

Michael Xiu

Yes.

Spencer Leung - UBS

Okay, thank you.

Operator

Your final question comes from the line of Jim [Yun] with Nomura.

Jim Yun - Nomura

Yes, good morning, everyone. Just a couple of big highlight, big macro type of questions for you -- when you look at for the rest of the year and you look at -- when you kind of take a poll of your customers, do you see that your display, the media business, becoming increasingly discretionary spending as visibility continues to be quite weak? And what I mean by that is if you look in the second half of the year, and as customers push out their revenues from first half to the second half, can we see some of these contracts heading into -- being pushed out into 2010? Is that a realistic possibility?

And the second question I had -- and please forgive me if you answered this question before -- is that I think I vaguely remember that Jason Jiang commented or was quoted on a previous news report that the deal between SINA and Focus Media maybe was being able to be finished by the end of June. Now, has something changed between when he made that comment or if he was misquoted, please forgive me -- has something changed between when he supposedly said that until now, when the deal is expected to be pushed out into the end of third quarter? I just wanted to get your -- we know SINA’s point of view. We just want to kind of get your point of view as well. I’ll stop there for now.

Jason N. Jiang (Translation)

Well, the demand from the advertising service is always there but obviously it’s a discretionary spending and in China particularly, you can’t cut human -- you can’t really cut headcount, you can’t really cut back your fixed asset spending for the -- you can’t dismantle your fixed assets as easily as cutting back the budget for advertisement. And Jason again, in the past two quarters, what we observed is our advertisers are very cautious, is basically it means two things. First of all, they don’t spend as much as they used to but on the other hand, they -- once they place orders, we don’t see -- because of their cautiousness, they don’t always cancel the orders. I mean, once the advertisement was scheduled, we seldom see the scheduling be cancelled or delayed.

And for the third quarter and fourth quarter, what we see is the -- from -- based on what we observed as of the moment, the economic situation is getting stable and we don’t see a huge pick-up but on the other hand, I don’t expect to see a significant delay or canceling of the orders.

Alex Yang

Let me answer your second question regarding the merger with SINA -- I think the most outstanding issue is still regarding with [inaudible]. I think as you know, we signed off the [inaudible] with SINA by the end of last year so we expect to close the deal in the first half of 2009 but I admit that the [inaudible] review takes much longer than we originally expected, so up until now, the [inaudible] has not yet accepted our application for anti-trust. So I think as [inaudible] stated in the SINA earnings call, we still expect to close the deal in the third quarter but currently we have no idea what is -- how this process will take the time.

Jim Yun - Nomura

Has there been any material difference between I guess what was supposedly quoted about less than a month ago, senior management saying that it may -- there’s a chance that it could get closed at the end of June and versus now, it’s going to -- a decision is going to be made by the end of September. Like, has there been anything more concrete than the fact that the government is still taking its time to approving or not approving the deal? I mean, has there -- I mean, can you share with us -- has there been any kind of a turning point over the last month from your standpoint?

Alex Yang

I think we still have some meetings, interviews with officials of the [inaudible] and I think according to the process, I think it’s confidential so I cannot disclose much at this point. So I just can say the review is still in process and we keep very close connection with the government authority and both SINA and Focus Media are doing our best to meet the requirements of the -- requirements from the government authority. So I think our plan is not changing but now we do not know how the time schedule will be. I think that’s my answer.

Jim Yun - Nomura

Okay, that’s perfect. Thank you, guys.

Michael Xiu

Just now I talked about our interest income, I said it’s less than $2 million -- just to clarify, the accurate number is $1.7 million, so you guys have the flavor.

Operator

At this time, I would like to turn the call back over to Jing Liu for closing remarks.

Jing Liu

Thank you, everyone. That concludes today’s conference call and see you next quarter.

Operator

We thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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