Executives
Jing Lu - 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
James Mitchell - Goldman Sachs
James Lee - Sterne, Agee & Leach
Jenny Wu - Morgan Stanley
Eddie Leung - Banc of America
Rebecca Jiang - Deutsche Bank
C. Ming Zhao - Susquehanna Financial Group
Tian Hou - Pali Capital
Spencer Leung - UBS
Wallace Cheung - Credit Suisse
Focus Media (FMCN) Q2 2009 Earnings Call September 20, 2009 9:00 PM ET
Operator
Good day, ladies and gentlemen, and welcome to the Q2 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 Lu, Investor Relations Director of Focus Media. Please proceed.
Jing Lu
Thank you, Operator. Welcome to Focus Media's second quarter 2009 earnings conference call. Today our management will discuss the company’s financial results for the second quarter of 2009 and business outlook for the third quarter of 2009.
With me here are Jason Jiang, Chairman and Chief Executive Officer; Alex Yang, Acting Chief Financial Officer; Michael [Xiu], Vice President of Finance; and James [Jung], Chief Financial Officer of AllYes. After management updates you on our second quarter 2009 operational and financial performance, we will open the call for questions.
This call is also broadcasted 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 third 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 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 second quarter 2009 results conference call. [We’ve been benefiting] from the [series] of the stimulus packaged issued by the Chinese Government. [Inaudible] of the advertising market improved significantly and the stock market and the real estate market also saw strong rebound in the second quarter of 2009. As a result, we saw significantly [inaudible] growth in advertising revenues in the second quarter in both our continued operations and discontinued operations and surpassed what we forecast in our first quarter 2009 earnings release. However, on a year-over-year basis, we still experienced quite a decline in advertising revenues in both of our continued operations and the discontinued business.
In the second quarter of 2009, secure growth has been seen [advertising] revenues in almost all of the major sectors in our discontinued operations, including FMCG, transportation, and telecommunications. FMCG, the largest revenue contributor to our discontinued operations, increased both on a [sequential] basis and a year-over-year basis by 27% and 3% respectively. Transportation and telecommunications sectors experienced the strongest pick-up in the second quarter of 2009 and sequentially increased by 55% and 50% respectively, despite experiencing a year-over-year decline. However, financial services sector, which got the most hit in the economic downturn, was the only sector still experiencing a sequential decline on a quarter over quarter basis and the pick-up underperformed in all the major sectors, even though we have seen a strong pick-up in advertising revenues from the first quarter in both of our continued operations and discontinued operations in the second quarter. The advertising environment in China is still changing and the visibility to the second half of this year is still very low, despite [from the] [inaudible] who are still facing competition in our [inaudible] business.
Overall, the year 2009 will be a difficult year for Focus Media.
Secondly, I would like to let you know that a [inaudible] in our continued business is underway now and as a result, [inaudible] subsidiaries in our Internet division and the traditional outdoor billboard division will be disposed.
Last -- before I turn to Michael for our financial review, I would like to give you an update on the previously announced merger agreement with SINA. As you know, the transaction is subject to customary closing conditions and the anti-trust review from the Department of Commerce in China. Right now, the Department of Commerce is still in the process of reviewing the case and has not formally issued a notice toward application acceptance yet. If the anti-trust approval is not received by the end of September 2009, several options will be evaluated between both parties, including an extension of the closing deadline for the transaction or changing the deal structure.
Now I will turn the call over to Michael Xiu, the VP of Finance for our financial highlights of the second quarter of 2009. Michael, please.
Michael Xiu
Thank you, Alex and thank you all for joining our conference call today. First of all, before I take you through the financial results of the second quarter of 2009, I have to address the basics of our presentation to you all one more time.
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 networks, have been accounted for as discontinued operations in accordance with U.S. GAAP. These assets are not depreciated nor amortized nor are the subject to the same impairment analysis as assets held and used in continued operations. Therefore, non-GAAP financial measures for the discontinued operations in the second quarter of 2009 includes not only the non-cash assets share-based compensation, acquired intangible assets, amortization expenses resulting from acquisitions, impairment charges of goodwill, acquired intangible assets and fixed assets but also depreciation expenses of fixed assets.
With this in mind, now I will take you through our financial results for the second quarter of 2009.
Net revenue for continuing operations was $82.1 million, increasing 23% from $66.7 million for the first quarter of 2009 but declining 23% from $107.2 million for the second quarter of 2008 and surpassed the Company's previous guidance of no less than $69.0 million.
Net revenue for discontinued operations was $89.2 million, a sequential increase of 39% from $64.4 million for the first quarter of 2009 but a decline of 15% from $104.5 million for the second quarter of 2008 and surpassing the Company's previous guidance of no less than $81.5 million.
Non-GAAP net income from continuing operations was $2.8 million, compared to non-GAAP net income from continuing operations of $3.2 million for the first quarter of 2009 and non-GAAP net income from continuing operations of $7.7 million for the second quarter of 2008.
Non-GAAP net income from discontinued operations was $25.4 million, a sequential increase of 66% from $15.4 million for the first quarter of 2009 and compared to the non-GAAP net loss of $23.0 million for the second quarter of 2008.
I will talk individually about the performance by business division.
For continuing operations, advertising revenue from the movie theater and outdoor billboard networks was $14.8 million in the second quarter of 2009, representing a decrease of 23% from $19.2 million for the first quarter of 2009 and a 26% decline from $20 million for the second quarter of 2008.
Internet advertising service revenue was $66.7 million in the second quarter of 2009, a 42% increase from $47.1 million for the first quarter of 2009 and a decline of 12% from $67.1 million for the second quarter of 2008.
Non-GAAP gross profit for the movie theater and outdoor billboard networks for the second quarter of 2009 was $4.7 million, representing a 22% decline from $6 million for the first quarter of 2009 and a 11% increase from $5.3 million for the second quarter of 2008.
Non-GAAP gross profit for our Internet advertising service for the second quarter of 2009 was $10.7 million, substantially unchanged from $10.6 million for the first quarter of 2009 but a 48% decline from $20.5 million for the second quarter of 2008.
For the discontinued operations, advertising revenue from the LCD display network was $53.7 million for the second quarter of 2009, a 56% increase from $34.4 million for the first quarter of 2009 but a 12% decline from $61 million for the second quarter of 2008.
Advertising revenue from the in-elevator poster frame network was $26.5 million for the second quarter of 2009, a 13% increase from $23.5 million for the first quarter of 2009 but a 29% decline from $37.3 million for the second quarter of 2008.
Advertising revenue from the in-store network was $9.0 million for the second quarter of 2009, a 43% decline compared with $6.3 million for the first quarter of 2009 and an increase from -- a 45% increase from $6.2 million for the second quarter of 2008.
Non-GAAP gross profit for the LCD display network for the second quarter of 2009 was $43.9 million, compared with $23.2 million for the first quarter of 2009, and also versus $47.2 million for the second quarter of 2008.
Non-GAAP gross profit for the in-elevator poster frame network for the first quarter of 2009 was $13.6 million -- I’m sorry, for the second quarter of 2009 was $13.6 million, versus $11.2 million for the first quarter of 2009 and also versus $24 million for the second quarter of 2008.
Non-GAAP gross profit for the in-store network for the second quarter of 2009 was $3.1 million, compared with $2.3 million for the first quarter of 2009 and compared to a gross loss of $2.7 million for the second quarter of 2008.
After talking about the actual performance of the second quarter 2009, I would like to switch the phone to Jason Jiang to give guidance for the Q3 of 2009.
Jason N. Jiang
I would like to turn to the guidance for the third quarter of 2009. Net revenues from continuing operations are expected to be between $46 million and $47 million; net revenues from discontinued operations are expected to be between $80 million and $81.5 million. Thank you very much. Now we will open the call for your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from the line of James Mitchell with Goldman Sachs.
James Mitchell - Goldman Sachs
Thank you for taking a few questions from me. The first one is with regard to poster frame business. It looked like the number of poster frames, both analog and digital, declined from the previous quarter. Is that because Focus is abandoning low margin locations or is it actually selling the bits of the poster frame business? And if it’s selling bits of the poster frame business, why didn’t we see any cash inflows from the sale?
And then secondly, when we look at the guidance revenue from continuing operations to decline very sharply in the third quarter, I assume that’s due to divestiture of assets. Should the divestiture of bits of AllYes and bits of the billboards improve the margins’ remaining operations or would the margins remaining operations remain close to current levels?
Michael Xiu
Give us one minute. Jason Jiang is going to answer the question. I will translate for him.
Jason N. Jiang (Translation)
In the past, we have seen some small free media -- I mean, the imitator of the frame media business model pop up and their competition has been irrational, mostly they are willing to sacrifice the stability of the market -- the pricing of the market to gain contracts and as a result ,we have seen our revenue decline substantially in Q2 and we expect such competition will continue for the next few -- one year or two. However, we are not -- however, we are confident over the long-term this kind of irrational competition won't be -- is not sustainable. And we -- and also on the other hand, yes, in the Q2, we have disposed one -- actually two small poster frame media business we acquired in the past, which also contributes to a minor degree to the decline quarter over quarter from Q2 to Q3.
Finally, we are also doing some optimization for our network and this will cause a temporary decline in our number of poster frame screens available for sale. However, it is our view that in the Q3 or Q4, by the end of Q3 or Q4, the number of the poster frames available for sale will come back to the Q2 level.
And your second question is regarding to the margin -- James, your second question is regarding to the margin of the remaining business, right?
James Mitchell - Goldman Sachs
Yes, so when we look at the third quarter you are guiding for a drastic decline in revenue from AllYes. Now, margins at AllYes was rather low in the second quarter. Should we expect -- are you selling the lower margin parts so that only the higher margin section remains?
Michael Xiu
I think probably James is the better person to answer this question.
James Jung
I think in the process of divestment, the company would be looking at certain low margin business to be sold off and in Q2, the margin deterioration actually came from that higher estimate we used in Q1 with regard to the overall rebate that the business is expected to get from the combined purchasing volume through the media. However, the divestment decision actually now will force the business to negotiate with media on an individual business. That’s why in Q2 there is a lower margin, if that answers your question. And also, we would expect to see some margin improvement in Q3 with the divestments.
James Mitchell - Goldman Sachs
Sorry, I’m being stupid -- so in Q1, you assumed a certain level of rebates from the advertisers because you had a certain number of I guess media properties in AllYes and now that you are selling some of the media properties, you are assuming a lower level of rebates?
James Jung
No it’s -- as you can see from the overall quarterly sales volume, it actually includes a large part from AllYes. Actually there is a volume decline from the divestment business which we cannot consolidate into the group sales, so that actually will also impacting on the overall volume rebate of the combined group basis.
James Mitchell - Goldman Sachs
Okay. You track the number of poster frames by I think 42,000 quarter on quarter. If you sold some of these 42,000 poster frames, where are the cash proceeds? In the cash flow?
Michael Xiu
Actually, we are not selling them out. We basically -- we are [inaudible] subsidiary to the original owner of the poster frame and what we gain is we will not pay them any earn-out in the future but on the other hand, we pretty much give the company for free to that -- to the original owner of that poster frame business.
Alex Yang
To make it simple, we say we just terminated acquisition because [inaudible] basically our acquisition model is [inaudible] [unaltered] base definition, so we just determine this agreement and they have this frame media, small portion of frame media business back to the original owner.
James Mitchell - Goldman Sachs
But you still had $60 million in earn-out payments?
Michael Xiu
You are talking about remaining or you are talking about [inaudible]?
James Mitchell - Goldman Sachs
Why don’t I get back in the question queue? I don’t want to monopolize the questions.
Michael Xiu
Okay. I think if you are talking about earn-out for the [inaudible] business, based on the -- I think last time we disclosed the earn-out number is about $120 million to $130 million and we already paid $43 million in the Q2, so what is left behind is about $80 million and due to the disposal of some of the subsidiaries, I think the earn-out, the leftover earn-out payment in the maximum amount will be about $70 million to $75 million. Does that answer your question, James?
James Mitchell - Goldman Sachs
Yes, it does. Thank you.
Operator
Your next question comes from the line of James Lee with Sterne Agee.
James Lee - Sterne, Agee & Leach
Thanks for taking my questions. I was wondering, I just want to follow-up on the prior question, maybe Jason can talk about some of the responses you made to your competitors’ irrational pricing. Are you also lowering prices to try to get market share or are you taking a step back, try to firm your pricing while losing some revenues? I’m also curious the downturn in 3Q and is that a one-quarter event or do you see that sustained for a while? And Michael may be answer this question -- once again for the discontinued business, how much depreciation/amortization you would have recorded if the business was continuing operating with Focus Media? Thanks.
Jason N. Jiang (Translation)
Our policy of facing the competition in the frame media business, we just are taking the following extreme measures. The first is we are not trying to lower our price, so the first thing is we are -- because as you know, the sales of the frame media is based on the slots, so in this case, some small competitors just own several buildings that are still eligible for sale of advertisement. So our policy is we are using the sale of the frame media on package -- package [inaudible] with the different series.
Secondly is because we own the Frame 2.0, we have -- because our -- we have generated a much advanced technology to give them more benefit for our clients. The third is because Focus Media owns the most high quality locations in the frame media business, so we own the majority advantages in the high-end markets.
So in these three ways, we think we can face this fierce competition. But of course, we do not intend to fight on pricing but of course sometimes, in some areas, we do not object to take some ways to lowering our price.
Michael Xiu
Let me answer your second question. You are talking about in the case the deal gets terminated, your question is actually in the case of the deal gets terminated, how much depreciation and amortization expense are we going to -- are you going to see for the discontinued operation, is that right?
James Lee - Sterne, Agee & Leach
That’s right.
Michael Xiu
Okay. Well, I can only give you a reference. You know, the depreciation and amortization expenses are very stable expenses so in Q4 we have about RMB57 million, which is about $8.3 million or $8.4 million, so you can -- I guess you can use that number as a reference. And for the amortization expenses, it should be around in the Q4, if my memory serves me right, it’s about $5 million. So in Q1, Q2, we haven’t made any amortization or depreciation expenses -- in the case of the deal gets terminated, the catch-up effect will be the number of quarters multiplied by the run-rate.
James Lee - Sterne, Agee & Leach
Okay, thanks and I just want to follow-up Jason’s prior answer regarding the competition in the frame media business -- can we get a sense where is the competition coming from? Is it in the tier one market or the smaller markets in general? And how much is your revenue exposure for tier one versus tier two? And also, if you could also answer the question regarding the downturn in 3Q being a one quarter event or is that going to be sustained for a while? Thanks.
Jason N. Jiang (Translation)
Your question actually consists of three parts. The first part is where is the competition coming from. Well, the competition is coming mostly from -- we have seen intense competition from both first-tier cities and second-tier cities as well but the competition is more intense in the first tier cities. And your question -- your second question is related to the contribution of the -- is that right, James?
James Lee - Sterne, Agee & Leach
That’s right.
Jason N. Jiang (Translation)
The second tier cities account for about 40% of the total frame media revenue and Jason believes that those kind of irrational competition won't be sustainable and we are taking a very aggressive approach in dealing with those competitors, basically if they drop the price, we drop the price too and we believe that over the long-term, those competitors will -- they will have a hard time to maintain their competitive position and we believe we can -- we will be the final ultimate winner of this competition.
Alex Yang
Let me add some to Jason’s address -- we think in the short term, it’s hard for us to evaluate how intensive of such competition is. We [inaudible] [certain loss] but this small competitors will [start heavy loss] because of course we own the most of these -- we own the most amount of market shares but what Jason said, in the long run maybe we say in two years or three years, this small competitors will have no chance of survival.
Operator
Your next question comes from the line of Jenny Wu with Morgan Stanley.
Jenny Wu - Morgan Stanley
I have three questions. First one, would you please update us what percentage of revenues were from multi-nationals and what percentage were from large corporations?
Michael Xiu
Well, our exposure to the multi-national companies is pretty significant. To put it this way, if you look at our four major verticals, I mean for the [carve-out] business, most of the -- I have to state the vast majority of the revenue are coming from multi-nationals.
Jenny Wu - Morgan Stanley
Okay. How about --
Michael Xiu
And the big companies.
Jenny Wu - Morgan Stanley
Okay, sure. And my second question is regarding the good will, how much good will [inaudible] for this [inaudible] and [inaudible] currently?
Michael Xiu
Can you repeat your question? I can barely hear you.
Jenny Wu - Morgan Stanley
[inaudible] Hello? Okay, how much good will [inaudible] balance sheet for your discontinued and continued business?
Michael Xiu
Okay, for the discontinued operations, we have about $400 million of goodwill sitting on the balance sheet. And for the continued operations, I think the number is no more than $30 million.
Jenny Wu - Morgan Stanley
Okay, sure. And my last question is that you mentioned that you are trying to negotiate down the rental costs in the last conference call. Any update on this and what is the trend for the rental costs going forward?
Michael Xiu
Well, you are talking about -- we have to talk about in the -- probably we will have to drill down the details a little bit. For the poster frame business, I don’t think the rental costs, you are going to see a significant drop for the rental costs. Originally our thought was we are going to aggressively pursue the cost reduction strategy on the poster frame business. However, due to the competition we have already experienced in the second quarter, and we -- our strategy is we will not -- our strategy is to maintain the size of the network as much as possible and as a result I don’t think the rental costs will be significantly reduced. Also, our competitors are trying to still -- are trying to steal the locations from us and I don’t think we are going to allow this to happen. And for the LCD network side, the network has always been very stable and I don’t see a significant down or significant up in terms of its rental costs.
As for the in-store network, you are probably going to see -- the in-store network, we are still in negotiations with some of the major chain stores so over the long-term, probably you are going to see the costs increase a little bit. You are probably going to see the cost increase significantly if we negotiate a one or two leasing contract with the major chain stores, such as Walmart, for example.
Jenny Wu - Morgan Stanley
Okay, thank you. And a follow-up for the second question about the goodwill, how much is subject to write-offs probably in this quarter and next quarter?
Michael Xiu
Well, let me put it this way -- the impairment is -- the goodwill impairment is a very dynamic calculation process and assuming we have -- basically it’s to compare your forecast for the future with the book value of the specific business units and I think I cannot give you a prediction because I don’t know the -- we don’t have -- we haven’t engaged a formal impairment task yet.
Jenny Wu - Morgan Stanley
Okay. Thank you very much.
Operator
Your next question comes from the line of Eddie Leung with Banc of America.
Eddie Leung - Banc of America
Good morning, everyone. I have a couple of questions. The first one is regarding your continuing business. Maybe I have missed it but should we still expect some cash earn-out for your continuing business? And if so, how much will it be? Thanks.
Michael Xiu
For the continuing operations, we have -- yes, after disposing of those companies, we expect to see some reduction in terms of cash earn-out payments. However, the deal -- I mean, all the contracts haven’t been finalized yet. It’s purely a negotiation between the company and its original shareholders. For example, some shareholders may request compensation for the termination of the contracts so at the moment, I really -- I cannot tell you a specific number [inaudible].
Eddie Leung - Banc of America
But what would be the maximum amounts that need to be paid?
Michael Xiu
Well again, you know the maximum amount last quarter we disclosed the number, will be $120 million and this quarter in Q2 we paid about $16 million so in the -- without disposal, you are going to see $100 million earn-out payment in the maximum. But with the disposal, I think the number will be significantly lower. However, the number is still very meaningful in the -- from companies and from an investors’ perspective. At the moment, we are still trying to quantify it, probably in the week or two timeframe, we can give you a more responsible answer but now, I’d rather not talk about it.
Eddie Leung - Banc of America
Got it, and my second question is regarding the restructuring process. How likely we will see more restructuring or the remaining business, say -- I’m just asking -- whether we would see some restructuring of the -- let’s say the movie theater or the outdoor business, et cetera or basically the restructurings has been finalized let’s say in the third quarter? Thanks.
Alex Yang
I think currently we have a plan to dispose the continued business like we terminated a lot of agreements with Internet business and the outdoor traditional billboard. It’s -- for the time being, we are not sure if we have a further dispose plan. Maybe it’s likely but at the time, we cannot give the definitive answer
Eddie Leung - Banc of America
I see. Thank you.
Operator
Your next question comes from the line of Rebecca Jiang with Deutsche Bank.
Rebecca Jiang - Deutsche Bank
I actually have one question. Could management elaborate a bit on their view of the advertising outlook for the second half? Have we seen ad spend bottom in the first half and how is the recovery so far? If we compare the year-on-year decline rate of ad spend, how would the second half look like when compared with first half? Thank you.
Alex Yang
Operator, could you mute that phone?
Michael Xiu
Yes, there is a lot of background noise.
Operator
Your next question comes from the line of Ming Zhao with SIG.
C. Ming Zhao - Susquehanna Financial Group
Good morning. Thank you for taking my question. Just a couple of follow-ups -- first on the restructuring of the continued operations. Can you give us some color as to what you are doing there? Are you -- because when we look at the guidance for that continued operations, it’s pretty much down by 40% to 50% in revenue. Do you dispose equally in the outdoor assets and in the Internet business unit? And what’s the purpose of that? Are you also terminating them for not paying the earn-outs or could we actually see some cash in-flow by selling those businesses?
Alex Yang
Let me answer your question -- I think as you know, we have been -- the guidance in Q3 of the 2009 Internet business or continued business is down [40% or 50%]. Our plan in Q3 is we will terminate some of our independent earn-out entities and in this way, we say we just terminate agreements and we will -- and maybe we will hold a minority equity in these companies. Originally we are maybe the 100% owners or even the majority shareholders. After the disposal, we will become the small shareholders of these companies. But maybe we cannot consolidate the [inaudible] of this Internet companies, so that’s why our Q3 guidance in Internet -- in continued business is much downturn. And in Q3, we have two or three outdoor -- traditional outdoor companies and in our plan we are trying to dispose of one outdoor traditional companies. I think we will use the same way to become the small shareholder from the 100% owners.
As to your question, of course after the disposal, we can save cash considerations and of course, yes, there are -- [inaudible] earn-out independent companies can be retained in the original companies or we can get back to Focus Media is still under the discussion because we have not finalized the negotiation and has not [inaudible] the agreements. That’s our plan.
Am I clear? Thank you.
C. Ming Zhao - Susquehanna Financial Group
Okay --
Michael Xiu
Ming, let me put a little bit more flavor to Alex’s answer -- in Q3, the declining of the revenue actually from two sources; one is the disposal of the subsidiaries in the Internet business as well as in billboard business. On the other hand, on the billboard side, I mean the remaining company for the billboard side for the remaining company, you are going to see a sequential decline in both -- in terms of top line as well as gross margin because their contract normally expires in the second quarter. I mean, the old contract and they haven’t signed up sufficient new contracts to make up the shortfall. So again, the decline in guidance is coming from two sides, from two sources -- one is disposal and the other is organic declining.
C. Ming Zhao - Susquehanna Financial Group
Okay. The next question is you updated us with the earn-out payment for the continued operations. Can you also update us on the earn-outs for the discontinued operations? I guess you just said you paid $43 million for that, so what’s the remaining earn-out maximum account there? And lastly, Rebecca just asked what’s your outlook for the second half in terms of advertising market -- have you seen any recovery? Maybe I’ll just ask the same question.
Alex Yang
I think on the first question regarding the cash earn-out payment in our discontinued operations, I think as Michael has just mentioned, we see now the maximum of the remaining cash consideration for our discontinued operation we think were no more than $70 million. We think $70 million.
C. Ming Zhao - Susquehanna Financial Group
That’s continued operations, right?
Alex Yang
I think we are talking about the discontinued. Continued or discontinued?
Michael Xiu
The $70 million is the discontinued operations.
C. Ming Zhao - Susquehanna Financial Group
Okay.
Alex Yang
$70 million is on the discontinued operations.
Michael Xiu
And for the continued operations, since we are still in negotiation with the disposed company’s shareholders, original shareholders, the number cannot be finalized at the moment. I probably -- we can probably give you a more responsible answer one week or two weeks after this call.
C. Ming Zhao - Susquehanna Financial Group
Okay, and finally the advertising outlook?
Jason N. Jiang (Translation)
We think compared to Q2, Q3 where we think we estimate Q3 will be flat compared to Q2 conditions. In Q3 July and August will be [inaudible] weak but September performance is quite strong because we know we have the long holiday in October and in Q4, we will [inaudible] speaking we think the December, the last month of the year, will be much stronger but as you know, we have the long holiday in October. We will lose one week’s time, so we think October and November will be a big week and will be much more pick-up in December.
So basically we think the recovery with the Chinese economy is still rebounding so we expect that we can see more market spend from the advertising market from the enterprise.
C. Ming Zhao - Susquehanna Financial Group
Thank you.
Operator
Your next question comes from the line of Tian Hou with Pali Capital.
Tian Hou - Pali Capital
Good morning. My first question is for the Q2 revenue for the discontinued business, I remember last conference you mentioned there were several contracts you guys couldn’t collect in Q1 and from your advertisers, so that will push back the Q2 backlog, so how much was that in your Q2 revenue?
Michael Xiu
Okay, well your question actually is regarding to -- your question actually is how much of the Q2 revenue is contributed by the backlog, is that right?
Tian Hou - Pali Capital
Correct.
Michael Xiu
Well, the amount is not that significant. I think in the Q2 compared with guidance, Q1 final results is about less than $1 million off from the guidance and we talk about before pretty much the shortfall is the backlog, so you can see that the contribution from the backlog is not really significant.
Tian Hou - Pali Capital
Okay. The second question is the maximum payout for the discontinued is 70 to 75. What is the schedule for that pay-out and is that going to be the next three quarters or four quarters?
Alex Yang
Let me answer your question. We think the earn-out payment for the discontinued operations will be scheduled in the -- we think we believe in the next one year. I think it is [inaudible] in one year.
Tian Hou - Pali Capital
So that means it will be end by the Q3 next year?
Alex Yang
Yeah, it will be definitely -- I think it will be ended by the end of 2010.
Tian Hou - Pali Capital
Okay.
Michael Xiu
We are actually talking about accounting [concept]. We are not talking about actual cash payments because by each burnout period end, we normally -- there is a half year to one quarter time lag between the -- when they earn the amount and when we pay the amount.
Tian Hou - Pali Capital
I see. There is another thing, I remember last quarter conference call you mentioned that the earn-out payment renegotiation in terms of what is the pay-out ratio, what’s the multiple of the PE, so what’s the purpose on that?
Alex Yang
I think as you see, we paid maybe around $15 million in Q2. I think this payment is based on our negotiation between the original shareholders of the Frame Media business. I think this amount is much less than we expected. Of course, just we mentioned we see the maximum for the remaining consideration for the discontinued business is $70 million to $75 million. We see that as the maximum so we are still maybe too -- we are still negotiating with these [entities]. We [inaudible] shareholders and [inaudible] you know we have to do some small dispose in relation of this business so we think this is the maximum amount. I think the actual payment will be less than this maximum but I think we can see the progress maybe in the next two quarters after negotiation. Thank you.
Tian Hou - Pali Capital
Thank you. That’s all my questions.
Operator
Your next question comes from the line of Spencer Leung with UBS.
Spencer Leung - UBS
Good morning, everyone. I have a few questions. First of all, to talk about restructuring of your frame media operation and we should expect in terms of the number of frames coming down, and then eventually the number of frames will get back to second quarter levels. What kind of restructuring are we looking at? Can you please share with us some details why we should see fluctuation in the number of frames available for sale?
And then my second question is about your cash level -- in the second quarter, we are seeing the cash level from your continued operation coming down to about $90 million. We are almost reaching end of third quarter now. Should we be expecting a further decline of your cash level in third quarter?
And then thirdly, with regard to the business that you have disposed in the second quarter, what was the amount originally paid to the seller? Thank you.
Alex Yang
Let me answer your first question and third. I think Michael can answer your second question. I think we are not -- I think maybe some misunderstanding here. We are not trying to restructure the frame media business. We said we were just restructuring the continued -- the Internet business. I think as you know our frame media business is our core business, so we will not do any restructuring here. [inaudible] and maybe some of the frames, the [number of frames down] is we are just disposed some small part of our frame media line that is not -- that in general is a very small cash flow and we think there is all certain -- we think the resources, the media resources is not valuable so that we disposed one or two small frame media companies. But basically we were still holding the most advantages in our tier one and tier two cities. Of course we will still want to expanding our network. I think that’s our best strategy.
So --
Spencer Leung - UBS
Sorry, just on that, I was more focused on your number of frames available for sale. You talked about in the near future we should be seeing that number coming back to second quarter. Are we expecting -- should we be expecting some expansion after disposal of one or two operations?
Michael Xiu
Let me put it this way -- of the reductions, if you -- in the earnings release we talk about we have about 30,000 units of frames left in Q2 than Q1. It is mostly caused by two reasons -- one is by disposal of the subsidiaries which is a permanent loss. It won't recover but the other 10,000, around 10,000 is coming from optimization of the network. I think over the next two or -- for the next two or three quarters, what we are going to do is we are going to continue to optimize our network and in some cases -- so you may see fluctuation but by the end of -- but most likely our sites will be maintained as it used to, I mean, compared with Q1.
So yes, you can -- we can hardly say it’s kind of an expansion. It’s simply a kind of optimization for the network.
Does that answer your question, basically about --
Spencer Leung - UBS
Sure.
Michael Xiu
Okay. And as for the cash position, I think for the next two or three quarters, since we no longer have [inaudible], we settled down the negotiation with the active shareholder of AllYes and billboard network and outdoor billboard. We won't be able to tell you how much cash will be -- what kind of -- whether we are going to see cash decline or cash increase. But just like we said, within two or three weeks time frame, probably I can give you a more responsible answer because the final payment, if there’s any final payment for those shareholders, we -- the number will be determined in the next one or two weeks.
Operator
Your last question comes from the line of Wallace Cheung with Credit Suisse.
Wallace Cheung - Credit Suisse
Good morning. I just wanted to clarify two questions -- number one on the guidance in the third quarter, regarding the discontinued operations, it looks like you are guiding roughly around 10% sequential decline. Can you go through or provide a little bit more color which particular line actually is declining? Is it more mainly coming from the frame media or all three lines are declining?
And the second point is as we are seeing both the continued and discontinued operation, the revenue guidance is on the down trend. Do we see any further cost down in the third quarter as such to maintain the margin of profitability? In particular, if there’s some restructuring is going -- ongoing in some of the business lines, are we going to see further bad debt provision or increasing bad debt provision? Thank you.
Michael Xiu
Okay, for your first question -- let me answer the second question first. For the continuing -- for the remaining part of continuing operations, I think the margin will be pretty much still the same as in Q2. The reasons are two reasons. First of all, yes, -- no actually just one reason. Internet business margin will be -- you are going to see some kind of improvement for the Internet business but for the remaining part of the outdoor billboard business, the margin you will see significant declines. The reason, as already said, it is because the long-term contract buyers and the new contract is not the -- the amount of new contracts are not sufficient to make up the shortfall.
In terms of operating expenses, absolutely the operating expenses will be less. However, if the reduction of operational expenses will be in proportion to the reduction of the revenue and gross margin, we don’t know yet because it is based on allocation. So in short, the gross margin for the continuing operations will be pretty much the same. The OpEx will be less; however, it may not be in proportion to the reduction of the top line.
And your second question is related to your decline for the -- related to the guidance. In Q3, I think we are -- our LCD business, you are going to see a flattish or slightly growth, very slight growth for the LCD business and for the in-store business, you are going to see a slight decline and most of the declines are coming from the poster frame business and the reason we have already said are due to the competition and to a minor degree due to the disposal of two operating units.
Wallace Cheung - Credit Suisse
Thank you for the very good answer. Just one quick follow-up on the margin -- again, can you also comment on the discontinued operation margin? Like, are we going to see, especially on the LCD TV margin actually sustainable at 90% sort of level going forward? And also the operating expenses given the fact that processing is under a little bit like downsizing right now -- you know, would it cost also reduce and further would there be any further bad debt provision [inaudible]? Thank you.
Michael Xiu
Okay. Well, you just mentioned 90% margin -- I don’t think we ever reached that level, so as we have already said, our business is very much a fixed cost business. So if the LCD business -- if the top line of the LCD business maintains the same or increase in the very small margin, the gross margin level for this particular business is going to be the same or will be improved a little bit. But the frame media gross margin will be significantly less in Q3 than in Q2 because again, our operating leverage is pretty high.
And for the operating expenses, I think operating expenses are rather stable over the long-term, other than one or two one-time items. For the bad debt provision, I would say because some of our customers are not in a really good position, we may experience more bad debt provision in the next one quarter or two. I think in -- starting from Q4 of last year, we have -- our bad debt provision has been in the upward trend. I think this trend probably will continue into Q3 and Q4 because we have seen some of the accounts receivable collection getting longer.
Wallace Cheung - Credit Suisse
Thank you very much on the good answer. I just -- you know, I made my mistake is -- I think the gross margin [is only 80%]. Thank you.
Operator
I would now like to turn the conference back over to Jing Lu for closing remarks.
Jing Lu
Thank you, everyone. That concludes today’s conference call. We are looking forward to speaking with you again next quarter. Thank you, all.
Operator
Thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect.
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