VisionChina Media Q3 2009 Earnings Call Transcript

VisionChina Media Inc. (VISN)

Q3 2009 Earnings Call

October 29, 2009 8:00 pm ET

Executives

Helen Plummer - Investor Relations Officer

Limin Li - Chairman of the Board, Chief Executive Officer

Scott Chen - Chief Financial Officer

Alfred Tong - Chief Marketing Officer

Analysts

Eddie Leung - Banc of America

Phillip Won - Morgan Stanley

Wallace Cheung - Credit Suisse

Ming Zhao - SIG

James Marsh - Piper Jaffray

Jenny Zhan - GMO

Presentation

Operator

Good evening and thank you for standing by for VisionChina Media’s third quarter 2009 earnings conference call. (Operator Instructions) I will now turn the call over to your host for today’s conference, Ms. Helen Plummer, Investor Relations Officer for VisionChina Media.

Helen Plummer

Hello, everyone and welcome to VisionChina Media’s third quarter 2009 earnings conference call. The company's third quarter earnings results were released earlier today and are available on the company's IR website at www.visionchina.cn, as well as on Newswire services.

Today you will hear from our Chairman and Chief Executive Officer, Mr. Limin Li, who will talk about our industry, our company's strategy, and business operations and Mr. Scott Chen, our Chief Financial Officer, who will take you through our financials and key operating metrics. After their prepared remarks, Mr. Lee and Mr. Chen will be joined by Mr. Alfred Tong, our Chief Marketing Officer, for the question-and-answer portion of the call.

Please note that today's discussion will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in our annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. VisionChina does not assume any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a webcast of this conference will be available on VisionChina Media's Investor Relations website at www.visionchina.cn.

I will now turn the call over to our CEO, Mr. Li.

Limin Li (Translation)

Thank you all for joining us today. In the third quarter, VisionChina Media has remained strong and committed to the market. We have achieved our internal targets and third quarter revenue remained stable with the last quarter at $30.8 million, while non-GAAP net income reached $9.1 million, beating the high-end of our guidance by 9%. Despite economic uncertainty, VisionChina has sustained healthy growth by utilizing our solid financial standing and excellent executive capabilities.

In the past two weeks, we have taken a number of historical steps in media network expansion and the industrial consolidation. By carefully executing against our strategic expansion consolidation plans, VisionChina will be the undisputed leader in bus and subway markets across tier one, tier two cities in Mainland China.

On October 15th, we announced our intention to acquire DMG, China’s largest subway mobile TV advertising operator, in the first quarter of 2010. The merger will create China’s and possibly the world’s largest seamless outdoor digital mobile TV advertising network, reaching the above ground bus networks and the below ground subway networks of cities nationwide, and will extend our mobile television advertising network outside of Mainland China to Hong Kong for the first time.

On October 16th, we announced the signing with Xiamen local TV stations, successfully extending our expansive mobile TV advertising network into the primary market of our competitors in Southeastern China.

On October 18th, we signed a three-year extension to our exclusive mobile TV advertising contract to operate in Hangzhou, a top ranked metropolitan, completely eliminating any remaining competition in that city.

On October 21st, we added Metro Line Number 5 to our existing subway network in Guangzhou, a line that will connect commuters directly to the center of activity for the Asian Games in November 2010, and positioning ourselves extremely well to benefit from the opportunities presented by the games.

According to a third-party researcher, Analysis International’s latest report, VisionChina and DMG had 50.7% and 9.8% share of China’s mobile TV advertising market respectively in the first half of 2009. Upon closing of our merger with DMG, VisionChina should have almost 100% of subway media assets in China and over 60% market share of China’s mobile TV advertising market.

The series of network expansion and industrial consolidation activities should also benefit us well during the 2010 Shanghai World Expo. Based on our experience and achievements during the 2008 Beijing Olympics, we are confident that we will again be in a position to fully realize the benefits of operating in the same time and place as major cultural events like Shanghai World Expo and Guangzhou Asian Games. More and more advertisers are showing interest in our unique model as the only comparable supplement to traditional TV. As I mentioned last quarter, we are making progress with satellite TV’s intentions to buy advertising time on our network. We have entered substantive negotiations with a number of satellite TV channels and look forward to keeping you updated on our progress in this area.

For the rest of 2009, although we are striving to gain advertising clients’ remaining budgets, we feel advertising budgets will remain conservative and competition will remain intense.

However, the historical steps we have recently taken to expand our network and consolidate our industry will further solidify our lead market position and allow us to begin negotiations with clients on their advertising budgets in 2010.

According to the Ministry of Housing and Urban rural development, the total number of subway and other lines in China will reach 158 by 2015, including those completed and still under construction. Governmental policy strongly supports the extensive development of new massive public transit systems and large scale urban subway construction. This creates vast growth opportunities for VisionChina.

With our strong management team, excellent executive ability, and continuously expanding media networks, we firmly believe that when the Chinese economy begins to rebound at a more noticeable pace, VisionChina will emerge a stronger company and one that continues to create value for shareholders.

I will now hand over the call to our Chief Financial Officer, Mr. Scott Chen, to discuss our financials and operating metrics in more detail.

Scott Chen

Hello, everyone and thank you for joining us today. As we predicted at the end of the last quarter, the challenges we faced in the first half of the year continued in the third quarter of 2009. Despite that, our mobile digital television platform continued to expand and attract new and returning national and international advertisers. We are pleased with our accomplishments this quarter and we are also very excited about our recently announced intent to acquire DMG in the first quarter of 2010.

Upon closing this deal, the combined company will operate bus networks in 19 of China’s most affluent cities, including Beijing, Guangzhou, and Shenzhen. And we will also operate in exclusive subway networks in 8 cities in China, including all four of China’s tier one cities, as well as Hong Kong’s airport express line.

We are confident that combining our leading position on buses with DMG’s market leadership in subways will revolutionize the digital outdoor mobile television and advertising industry in China.

We have recently appointed an internal team that I will lead to oversee the integration of the two companies. We will work hard to recognize the vast synergies that are inherent in the combination of two such similar operating platforms. Additionally, DMG brings complementary assets such as content production and IT capabilities that we look forward to exploring.

On the cost side, we are also working hard with DMG representatives as we begin the bidding process for important upcoming subway contract bids, including the bid for the Beijing Subway Network that will take place in November 2009.

Immediately following our announcement of the deal, we began working with DMG to begin engaging our customers in 2010 sales discussions, the preliminary results of which have been positive. It is already clear to us that our advertising clients see the value added to our network by our acquisition of DMG. For example, at our October 15th press conference in Shanghai, a number of our key advertising clients attended and addressed the media on our behalf, including senior representatives from Yum! Brands and Unilever, and four A agencies such as OMD and Kinetic.

Each of the clients expressed optimism about the synergies of the merger and the broader options that the combined platform will provide to them. Such immediate positive feedback gives encouraging and confirms our belief that acquiring DMG is the best option for our company, our advertisers, and our industry as a whole.

Turning to our third quarter operating results, in the third quarter of 2009, network capacity, which is measured by total broadcasting hours, increased to 34,778 hours, up from 34,399 hours in the second quarter of 2009 and up from 31,834 hours in the third quarter of 2008. We did not enter into any new cities in the third quarter of 2009 so there was relatively little change in our network capacity.

Our ASP, which is measured by average advertising service revenue per broadcast hour was $845 per broadcasting hour in the third quarter of 2009, a slight 2.3% decrease from $865 per broadcasting hour in the second quarter of 2009. This sequential quarterly decrease was primarily due to a continued industry competition.

In terms of ASP, we are optimistic that in 2010, we will see a more significant turnaround in the pricing environment. We are also confident that with a better overall economic environment, the increased scale brought by our acquisition of DMG and major market events such as the 2010 Shanghai World Expo, we should be able to steadily increase control of our industry pricing.

On average, the company sold 6.86 advertising minutes per broadcasting hour in the third quarter of 2009, compared to 6.4 minutes per broadcasting hour in the second quarter of 2009 and 9.33 minutes per broadcasting hour in the third quarter of 2008. The quarter over quarter increase was the result of diligent sales efforts during the quarter, with economic and competitive challenges.

The year-over-year decrease was primarily a reflection of the comparison with the outstanding Olympic performance experienced in the third quarter of 2008. In the third quarter of 2009, the company sold a total of 238,484 advertising minutes in our network compared to 220,063 minutes in the second quarter of 2009.

Of our vast roster of advertisers, 334 brands placed advertisements in the third quarter, compared with 274 in the second quarter of 2009. New advertisers in the third quarter included international brands such as Samsung, Nikon, and Bausch & Lomb, as well as top domestic brands such as leading retailer, [inaudible], and financial services provider, China Merchants Bank. These big client wins reflect our continuing focus on large scale nationwide advertisers.

We ended the third quarter of 2009 with 346 sales people, a net addition of 9 sales people over the quarter and an increase from 325 at the end of the third quarter of 2008. Our people are extremely important to us and we continue to recruit the very best sales people available in our industry and to continue to hold our sales force to the highest performance standards.

Turning now to our third quarter financials, total revenues in the third quarter of 2009 remain flat with the second quarter of 2009 at $30.8 million. Gross profit in the third quarter of 2009 was $15.4 million, a decrease of 6.3% from $16.4 million in the second quarter of 2009. A slight decrease was a result of an increase in our media costs, which is comprised of planned increases and certain concession costs, and an increase in media buying in non-exclusive cities.

Operating profit in the third quarter of 2009 was $7.3 million, a slight decrease of 0.7% from $7.4 million in the second quarter of 2009. The slight decrease was due to the increase in our cost of sales, which exceeded decreases in both sales and marketing and G&A expenses for the quarter.

Net income attributable to VisionChina Media shareholders in the third quarter of 2009 was $7.2 million, representing a slight increase of 1.6% from $7.1 million in the second quarter of 2009. During the quarter, we clearly demonstrated our ability to control expense effectively to meet market conditions.

The Company's third quarter 2009 net income attributable to VisionChina Media's shareholders, excluding share-based compensation expenses and amortization of intangible assets, or non-GAAP net income, was $9.1 million. Our non-GAAP net income per share was $0.125, which exceeds our previous guidance.

Basic and diluted net income per share in the third quarter of 2009 were both $0.10, unchanged from $0.10 for both in the second quarter of 2009.

Net cash inflow totaled $4.2 million in the third quarter of 2009. Cash flow from operations increased to $8.1 million from $7.7 million in the second quarter. The Company had cash and cash equivalents of $112.7 million as of September 30, 2009.

Turning now to our guidance, we reiterate the full-year guidance provided previously and expect total revenues to range from $121 million to $124 million. The Company expects net income attributable to VisionChina Media's shareholders for the full year of 2009 excluding share-based compensation expenses and amortization of intangible assets, or non-GAAP net income, to be between $31.0 million and $33.0 million. We base these estimates on a foreign exchange rate of RMB6.840 per $1.00.

I would like to note that our guidance is based on our current exclusive network of 19 cities which have already been secured by contract as of the date of today’s earnings. If and when more cities are added, either organically or through M&A activity, it will impact our forecast.

I would also like to note that we anticipate closing our deal with DMG in the first quarter of 2010 and therefore there is not impact from our DMG deal included in our estimates for the fourth quarter.

Please note that these statements are forward-looking and subject to change.

The prospects for VisionChina remain very strong and we among the management team are excited about the opportunities available to us in the current market and through our acquisition with DMG. We look forward to updating you on the progress of our integration with DMG.

Thank you again for joining us today and I will now open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Eddie Leung with Banc of America.

Eddie Leung - Banc of America

I have a couple of questions on your -- the first one is could you tell us why the location costs went up a little bit in the third quarter? It seems like you guys did not sign any new contracts in the third quarter, so I’m wondering where the increase in locations cost came from.

And the second question is could you share with us the top customers categories and the percentage of sales from each category? Thanks.

Scott Chen

Thank you, Eddie. In terms of the media costs, you are right -- we didn’t enter into new cities but quarter to quarter, we do always have certain fluctuations in our media costs, from two sources. One, we do have planned increases due to just natural step-ups in some of our contracts. Our contracts are arranged with natural step-ups throughout the course of their life and so in any given quarter, we do have visibility over that part of our costs and so particularly in our Guangzhou bus contract, also in our -- there was contract also in [Ngbol], where they had natural step-ups in the concession costs and those are things that we actually had factored into our previous estimates for the quarter.

One area where media costs in this quarter did increase a bit was some purchases in media buying in cities where we don’t have exclusive agreements. So for example, some of our clients may want to place advertising in certain cities that are outside of our current network. For example, Shanghai, there was also Hangzhou and Xiamen, and these types of cities that were in the third quarter not in our network but obviously due to our announcements over the past couple of weeks, these three cities are now in our network, or at least will be following the DMG acquisition. And so this type of media buying in cities where previously were not in our network did increase a little bit beyond our projections in the third quarter. But again, our strategic moves over the past few weeks have increased our network. We have identified the cities that we wanted to be in for next year and we acted upon them. And so that part of our media costs will be under our control going forward.

In terms of our customer breakdown, for the third quarter our platform remained relatively stable. Historically, we have always been very strong in the retail sector in the consumer goods and household products. In the third quarter, large industry segments continued to be the food and beverage sector, which is about 24%; pharmaceuticals was about 18%, household products 8%, fashion was about 8% as well. So these are all historically the sectors that have been very, very strong for us and they continue to be so this quarter.

Eddie Leung - Banc of America

Right, and my last question would be could you share with us whether you expect the DMG deal would be accretive from the first quarter or it may take time for you guys to generate the synergies both on the cost side and on the revenue side, so could you -- I know the deal hasn’t been closed yet but some of the guidance would be very helpful. Thanks.

Scott Chen

I can appreciate that question. That is something that we are working on very closely right now. We do have internal targets about the level of accretion for the DMG acquisition next year. I would still like to gauge a little bit more of our feedback from our clients through the next couple of weeks before we come out with more definitive guidance on the level of accretion for 2010 due to the acquisition. So it is something that we are working on and we will look to get that to the analyst community very, very shortly. Certainly I think by the time we get to December, we should have a very clear view on that. So if you would just give us a few more weeks, we will provide that to you.

Eddie Leung - Banc of America

Understood. Thank you. I’ll go back to the queue. Thanks.

Operator

We’ll hear next from Phillip Won with Morgan Stanley.

Phillip Won - Morgan Stanley

I have a couple of quick questions. Number one is in terms of your new customer, could you please give us some color on which sectors were they coming from? And number two is could you give us some color on the -- you mentioned [inaudible] in 2010 and any color on which is the fastest growing sectors, and also companies -- are they domestic companies or international companies?

And then my third question is about the pricing trends -- could you give us some updates on the situation about the pricing competition from your peers and your expectation on pricing going forward in 2010. Thank you.

Scott Chen

Thank you, Philip. In terms of the sectors for our new customers, again we’ve been very strong historically in the retail segment but we do have a continuing focus on attracting large scale customers, customers that are going to advertise across multiple cities on our network. So in terms of the new customer wins in the third quarter, we mentioned a few names. They range from retailers like [Meters Banwi], which is a major retailer in Shanghai. We also had Samsung, which is a large obviously electronics conglomerate; Nikon, another electronics company. But we also have financial services companies like China Merchants Bank. So historically we have been a very, very strong focus in consumer retail. We are trying to diversify that a bit into financial services and other types of products. You know, one other area that we have seen some movement in recently for the third quarter is also Internet. Internet is becoming a more and more attractive media in China and a lot of Internet companies are actually advertising now on our network as well to help them to differentiate their Internet platforms.

So these are areas that we have seen some recent activity in. In terms of recovery, again our main focus has always been on consumer retail clients. Those are the industries that play very well to us on our platform. I think as an indication of which sectors are doing better, I think perhaps food and beverages, household products. Those are the ones that are probably experiencing I guess the first signs of industry recovery in terms of advertising spending. Those are again products that have historically played very well on our platform.

But overall though, I would say that as a group our clients tend to move very much in unison. We don’t see too much variation between the different types of retail and consumer product segments among our customer platform. That’s just again because our platform tends to be very, very uniform in terms of our client base.

In terms of domestic international, again I don’t think there is much differentiation between the large domestic and large international brands that we are focusing on. Again, our clients -- we have always had a very big focus on making sure that we attract large-scale customers, whether they be domestic or international and again, they tend to move as a group very much in unison, the large scale customers, so -- but we can't make too much differentiation between the domestic and international customers among our client base.

And then in terms of pricing trends, competition in the third quarter continued, much as it has throughout the year, from our competitors in mass transit advertising. Again, we tried to continue to differentiate our services from our competitors. We definitely feel our digital broadcast network is differentiated from other types of mass transit advertising and so we are still continuing to try to differentiate ourselves among our clients. The pricing pressure is still there but I think our operating data shows that we have been very, very effective in dealing with that pricing competition. We have experienced a slight decrease in our average pricing this quarter. That was partly because of competition but that was also partly because of our internal strategy. We wanted to make sure that we could attract a wider client base ahead of next year’s 2010 advertising budget discussions, and so pricing was somewhat tweaked this quarter in order for us to gain access to new clients that we wanted to bring on ahead of our 2010 budget discussions.

But I think overall, the third quarter showed that we were able to hold our own versus our competitors. We are definitely taking very, very strategic steps in this past few weeks to deal with our industry competition going forward and the key is we just want to make sure that we are very well-positioned for 2010 with a broader platform, with more pricing power, just so that we can leverage the turnaround in advertising that will be coming in the future.

Phillip Won - Morgan Stanley

Very helpful. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Wallace Cheung with Credit Suisse.

Wallace Cheung - Credit Suisse

I just wanted to make sure that I get a better sense about the overall market and what about the growth of the advertising market next year? Because generally speaking, I think a couple of clients are actually preparing for next year budget and I think you have been discussing with clients -- is it already getting a better sense about the visibility and potential growth of the market about -- especially in the outdoor space?

Also, I wanted to ask about, a question about the -- regarding the guidance, next year is actually -- the fourth quarter, the non-GAAP net profit seems to be a bit low if we just look at the net profit numbers. Is there any specific reason? Is it because you are just being conservative or because of cost numbers a bit high? Thank you.

Scott Chen

I’ll start with the guidance question first. Taking our full-year numbers and backing out the performance for the first three quarters, we do come up with a number for our fourth quarter performance that on the net income side perhaps looks a little bit low.

For now, we just want to be conservative. We definitely have demonstrated in the third quarter our ability to manage our costs and our expenses and so we will continue to do that in the fourth quarter. We are confident that we will be able to meet our guidance and be able to adjust expenses and costs accordingly to match market conditions.

But for now, for the fourth quarter, we are going to leave the guidance the way it is. We feel it is a bit conservative but again to provide us operating flexibility as we prepare for next year, I think that is prudent for us to just to be a little bit conservative with our guidance and we are going to leave it the way it is for now.

In terms of market growth, we have begun to have conversations for 2010 with our advertising clients. Initially, we have seen that actually a lot of clients are interested, a lot of new clients are interested in our platform. A lot of clients are actively seeking us out to discuss our rate card for next year.

There’s some industry dynamics that are going on here. There’s some regulations that came out earlier this year that restrict traditional television advertising for next year and so that is having an impact on pricing for traditional television. That has led customers to come actively seek our platform as an alternative to traditional television and so that is how we are -- that is how we are comfortable in saying that we have seen an increase in interest in our platform for next year. We are continuing the discussion and so we will continue to finalize that level of increased demand but preliminarily, there are more clients that are interested in our platform in part because of the restrictions on traditional television going forward.

And so we are very confident as we go into next year. We will certainly continue to discuss the 2010 budgets with our clients over the next couple of weeks and through November, and continue to build our prospects for next year.

As for the overall industry demand, I will ask Alfred to provide some comments on what he is seeing within the marketplace.

Alfred Tong

And to echo Scott’s point of view, according to the [inaudible] research, when we compare the same period from January to September this year versus last year, the total advertising market up about 12%. This is [inaudible] is early this year, which between 10% or 15%. So I think this year probably we are still -- we’ve seen the [inaudible] of 12% to 15%. So it is quite hard to tell the [inaudible] over market with how much it will be increased but as what Scott mentioned, because of the new advertising TV regulation, we find that most of the TV stations already in [trade media] rate by 20% to 30%, so we estimate next year probably the overall advertising market will still [jump up] more than 15%. And we’ve been [inaudible], again [inaudible] is still the key portion of the player in the market. So as Scott mentioned, [inaudible] -- basically there are four categories which was the key players, which was pharmaceutical product, food and beverage, cosmetic, and also retail business. We believe that these four categories are still the key component of the [print] advertising market and we think those categories, again beverage, food, and also [inaudible], right now we see a very good increasing in terms of the spending chance.

Wallace Cheung - Credit Suisse

Thank you. I have two follow-up questions -- number one regarding the latest [inaudible] policy -- sure, tier pricing has gone up but that could be a potential to impact, right? Number one is like the case of last year, the rising of the CTV pricing is actually lead to some of the customers spending more on the TV rather than all other media. For sure on the flip side, maybe there will be other clients actually jumping away from the TV side and spend more on the outdoor side, like the Vision Channel. Which possibility is much higher?

And also again on the profit guidance, the relatively lower profit fourth quarter, does it relate to relatively higher media costs because of escalating terms or also including maybe the Xiamen contract? Maybe also does it relate to some potential provision before the end of the year? Thank you.

Alfred Tong

Let me answer the first question -- so we believe that even -- right now we know that every -- not just CCTV but also provincial TV, plus satellite TV, they already [inaudible] 20% to 30%. And based on a lot of dialog with our clients, they feel really interested to [buy with us] for this year contract, so we are still very confident that there is still room to -- [inaudible], some data support, okay? In terms of our [inaudible] -- so not talk about Q2, we have more than 70% contracts which is less than three months and now we lower than this to only 58%, which means more inclined they are going to place a longer contract cost year 2010. So this means we have still a lot of room to grow and we are now working on the rate card for next year’s inflation.

Scott Chen

To answer your question about the guidance for next year, again we are being conservative here and we are just holding our previous guidance. For the fourth quarter, we do see on the media cost side, some organic step-up for the quarter. I am projecting probably about $600,000 in terms of step-up for media costs, and so that does factor into it a bit for our guidance for the fourth quarter.

Another area again that we’ve done very good in maintaining our sales and marketing expense and G&A for the quarter, but our original guidance for the year did have some buffer in there built into for perhaps some increases in sales and marketing expense before the end of the year, so that is an area that we will continue to monitor. That could have the potential for increasing in the fourth quarter as we again continuously try to ramp up our sales activity ahead of next year and also in the face of our competitors. But sales and marketing expense is one area that could increase somewhat and we have allowed for that in our budget.

In terms of your question about bad debt expense, we have not accounted for or projected any increase in our bad debt provisions. We feel we have a very tight control over that going forward.

Wallace Cheung - Credit Suisse

Thank you very much.

Operator

Our next question comes from the line of Ming Zhao with SIG.

Ming Zhao - SIG

I just have a few housekeeping questions. Scott, can you give us some number in terms of the cash flow from operating activities in this quarter?

Scott Chen

Ming, can you repeat that again? Cash flow from operating activities?

Ming Zhao - SIG

Operating activities in the quarter.

Scott Chen

Cash flow from operating activities for the quarter was $8.1 million.

Ming Zhao - SIG

Okay, thank you for that. Also, I remember last time you talked about close to $70 million maximum earn-out payment out there, yet before you do all those acquisitions recently. Did you incur any payment this quarter? If you could give us an update about that figure, it would be greatly appreciated?

Scott Chen

For the third quarter, there was a $3 million payment for previous acquisitions. That $3 million payment was actually paid in the very, very early days of July. That was a payment that didn’t quite make the cut-off for second quarter. So that was the last payment, $3 million. There’s no more scheduled payments for the remainder of this year.

Ming Zhao - SIG

Okay, so for next year, the max is still around $69 million?

Scott Chen

Yeah, the projected pay-outs for next year is $69.4 million.

Ming Zhao - SIG

Okay, and last question is you will have some cash outflows for the DMG acquisition next year, possibly in the first quarter. Do you think you have enough cash or do you have access to let’s say a bank loan or other financing means in order to manage your cash?

Scott Chen

Yes, that’s a very good question. We are actively monitoring our cash position but we are very, very comfortable in our current cash position. Yes, we do have access to bank financing. That is something that we think is very valuable to us. We are a profitable company. We do have strong cash flow from operations. We do have the ability to leverage bank financing -- that is something that I think puts us at a competitive advantage versus our peers. And so yes, we are exploring that. You know, we are always very cognizant of the importance of cash and so we wouldn’t have entered into the DMG transaction without a careful plan to manage our cash position.

Ming Zhao - SIG

Great. Thank you very much.

Operator

Our next question comes from the line of James Marsh with Piper Jaffray.

James Marsh - Piper Jaffray

I was wondering if you could touch on the concession contract pricing. Obviously you have signed a new three-year extension with one municipality. You’ve also been looking at others for the upcoming year and I just wanted to get a sense for where those rates have been going -- have they been coming down, going up, remaining largely the same? Any change there?

Scott Chen

In terms of concession costs, we are still in a situation in the industry where there are competitors and so for the recent concessions that we have signed, they were strategic moves on our part. They were strategic moves to enhance our network and broaden our network into a handful of very specific cities that we felt were of strategic importance to us. And so by nature, if they are strategically important to us, they are also strategically important to our competitors and so in order to secure those cities, there have been some concessions on the cost side, meaning that we did have to accept a slightly higher cost in order to get those cities. But we do feel that strategically in the long run, that cost will pay off for us. The value brought to our network by broadening our network we feel is worth the near-term step-up in concession costs.

Over time though, again we are taking steps that we feel are very, very tangible to help consolidate the sector and to eliminate the fragmentation in our industry. That over time we feel will help to rationalize the concession base, the concession costs for our industry. And so we feel like we are being leaders here at making sure that we are controlling the cost and getting ahead of the costs.

For the near-term though, again the strategic cities that we have signed are strategic to other cities, other competitors and so in the near-term, the ones that we have signed at least do have some step-ups in concession pricing.

James Marsh - Piper Jaffray

Okay. Thank you, Scott.

Operator

Our next question comes from the line of Jenny [Zhan] with GMO.

Jenny Zhan - GMO

I have a question regarding to your contract -- how much percentage of your concession contract will expire in the next 12 months? Maybe more precisely, probably by the end of next year, and how much percentage step up you expect next year?

Scott Chen

Jenny, for our concession contracts, we do have a broad portfolio of cities and platforms now. The ones that expire within the next 12 months, the major ones we’ve been discussing publicly are the Beijing Subway Contract. That will come up at the end of this year. Mid-next year, there is also a Shenzhen Subway contract that will come up for bid in the middle of next year.

In terms of what the step ups will be for these renewals, it remains to be seen. We still have to -- we are just about to enter into the discussions for the Beijing Subway. Shenzhen Subway obviously we won't get to until next year. But certainly we are very, very confident in our ability to manage any increases in the cost space, particularly for these contracts because now we have announced the DMG acquisition and so on the subway side, given our position in the industry, our dominant position in the industry, we do feel that we will have the ability to control that concession cost space going forward.

In terms of our organic network, obviously the concession costs that we already have in our contract bank, there are organic step-ups in the concession costs. I think conservatively we are internally projecting about a percentage increase for our concession costs off of our current contracts of somewhere in the -- probably 10% to 15% range for next year. Again, that’s a manageable increase in costs. That is something that is very clear to us and we can certainly plan for it.

So given our organic cost base, given the fact that we are certainly being very active in consolidating our industry, we have confidence in controlling our current cost base, we have confidence in being able to manage any increases from a contract window going forward as well.

Jenny Zhan - GMO

Thank you.

Operator

We have no other questions at this time. I would now like to turn the call back over to Helen Plummer in investor relations.

Helen Plummer

Thank you all for joining us today. If you have any other questions, please do not hesitate to contact us at [e-mail]. Thanks so much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!