Colin Wang – Director, IR
Limin Li – Chairman and CEO
Scott Chen – CFO
Philip Wan – Morgan Stanley
Eddie Leung – Bank of America
Wallace Cheung – Credit Suisse
VisionChina Media Inc. (VISN) Q4 2009 Earnings Call Transcript March 2, 2010 8:00 PM ET
Good evening and thank you for standing by for VisionChina Media’s fourth quarter and full year 2009 earnings conference call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to your host for today’s conference, Mr. Colin Wang, Investor Relations Director for VisionChina Media.
Hello, everyone, and welcome to VisionChina’s fourth quarter and full year 2009 earnings conference call. The company's fourth quarter earnings results were released earlier today and are available on our 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. Mr. Lee and Mr. Chen will answer questions after their prepared remarks.
Please note that today's discussion will contain certain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our 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 US Securities and Exchange Commission. VisionChina Media does not assume any obligation to update any forward-looking statements except as required under applicable law.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call 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.
[Interpreted] Hello, everyone, and welcome to our call. I would first like to take a moment to express my sincere appreciation for the ongoing support of our investors since our IPO more than two years ago.
2009 was a challenging year, both for the global economy and VisionChina. Despite external pressures, we have maintained an unwavering focus on our long-term strategy, our commitment to execution and to improve executive capability. These coupled with the healthy internal financial control system have allowed VisionChina to stay on financial footing while focusing on long-term growth and success. Today I’m pleased to announce year-over-year revenue growth of 16%, with total revenue reaching $120.69 million. In addition, non-GAAP net income reached $33.7 million beating the high end of our guidance.
2009 saw a decrease in market demand, with many companies keeping a conservative outlook towards marketing and advertising. At the same time, the economic crisis is challenges for smaller and weaker competitors who have resulted to irrational pricing strategies in their attempt to survive.
In 2009, we saw valuations return to more rational levels, a way both to leverage the opportunity by taking a number of important steps in media network expansion and industrial consolidation. Upon our successful merger with China’s largest subway mobile TV advertising operator Digital Media Group, VisionChina now has the most comprehensive subway mobile TV advertising network in China holding almost 100% of the subway media assets.
In 2009, we also signed exclusive contracts to expand our bus mobile TV advertising network in some of China’s top cities such as Huangdao, Xiamen [ph], Xinjiang [ph] and Changzhou. As a result, VisionChina has created largest outdoor digital mobile TV advertising network in China with aboveground bus networks in 20 cities and belowground subway networks in eight cities. According to a third-party research report from CCID Consulting in October 2009, VisionChina held 76.8% market share in the wireless broadcast and mobile TV market in China and is the undisputed leader in China’s mobile TV industry.
With a more complete media network and an improved team and increased executive capability, VisionChina has that new vantage point and is well positioned to negotiate with advertisers in 2010. With the experience of last year’s economic crisis, advertisers remain somewhat cautious that seem positive in their expectations of an economic recovery in 2010. Although post acquisition integration and additional media costs that will bring short-term cost pressure, we remain confident in VisionChina’s long-term sustainable development as a result of our unique out-of-home TV media platform and massive daily audience coverage with powerful dissemination capability.
Turning now to other exciting news. In addition to Unilever, we are seeing more and more multi-national brands such as Procter & Gamble, L'Oreal and Amway beginning to place advertising orders on our mobile TV networks. Moreover, DMG’s platform has emerged as a great complement to our original bus TV network and has brought (inaudible) industry brands like Volkswagen and Ford as advertisers. In previous calls, I have mentioned the opportunities that exist, some satellite TV station placing advertisements with us. As an update, (inaudible) satellite channels have already started advertising (inaudible).
As all of you may know, China will host a highly anticipated Shanghai World Expo and Guangzhou Asian Games in 2010. A CTI report shows that 24.9% of Tier 1 city residence watched the 2008 Olympic Games live on our public transit platforms. Given our market position in these cities, we are excited about the potential of these events and expect to again fully benefit from the vast business opportunities and demonstrated the unique social value of our media platform.
On a macro level, subway started quickly becoming the mainstream of China’s public transit system development and will lead to groundbreaking business opportunities. The government supports on the extensive development of new method public transit systems in many large cities across China creates vast and long-term growth opportunities for VisionChina.
With five years experience, we are pleased to see that mobile TV as a new media is becoming more and more popular with the clients. We firmly believe that our well-defined strategy and proven ability to execute will help us meet the challenges and capture opportunities that lie ahead as we continue to generate value for our shareholders.
I’ll now hand over the call to our Chief Financial Officer, Mr. Scott Chen, to discuss our financials and operational metrics in more detail.
Hello, everyone, and thank you for joining us today. We are pleased with our accomplishments for the fourth quarter of 2009 and we are excited about the synergies in store for us 2010 from our acquisition of DMG. I will begin with an overview of our fourth quarter and full year 2009 performance and we’ll then discuss some important factors affecting our current business outlook for the first quarter of 2010.
So turning now to our fourth quarter and full year operating results, in the fourth quarter of 2009, network capacity, which is measured by total broadcasting hours in our network, increased to 36,250 hours, up from 34,778 hours in the third quarter of 2009 and up from 31,834 hours in the fourth quarter of 2008. We entered Xiamen in the fourth quarter of 2009 resulting in an expansion of our total network capacity. Our average advertising service revenue per broadcast hour was $796 per broadcasting hour in the fourth quarter of 2009 compared with $845 in the third quarter of 2009.
In terms of ASP, we are also optimistic that in 2010 we will see a significant turnaround in the pricing environment. We are also confident that the increased scale brought by our acquisition of DMG as well as major marketing events such as the 2010 Shanghai World Expo should provide increased control of pricing in our industry.
On average, the company sold 6.93 minutes -- advertising minutes per broadcasting in the fourth quarter of 2009 compared to 6.86 minutes per broadcasting hour in the third quarter of 2009 and 8.83 minutes per broadcasting hour in the fourth quarter of 2008. The quarter-over-quarter increase was due to the company’s strategy to increase sales volume during the quarter ahead of the integration with DMG. The year-over-year decrease is primarily due to the large sales volume related to the 2008 Olympic Games in the prior year.
In the fourth quarter of 2009, the company has sold a total of 251,210 advertising minutes in our network compared to 238,484 minutes in the third quarter of 2009. 354 brands placed advertisements in the fourth quarter of 2009 compared with -- up from 334 in the third quarter of 2009. New advertisers in the fourth quarter included international brands such as Amway and Tsingtao Beer. The addition of these new clients reflected our continuing focus to attract large scale nationwide advertisers.
We ended the fourth quarter of 2009 with 368 sales personnel, representing a net addition of 22 sales personnel over the quarter and an increase of 68 sales professionals from 300 professionals in the end of the fourth quarter of 2008. Our people will extremely pour [ph] into us and we will continue to recruit qualified sales personnel in our industry and continue to hold our sales force to stringent performance standards.
Now turning to our fourth quarter and full year financial results. Total revenues for the fourth quarter of 2009 were $31.8 million, an increase of 3.4% from $30.8 million in the third quarter of 2009. For the full year of 2009, our total revenues increased 16% to $128.7 million. Gross profit in the fourth quarter of 2009 was $14.5 million, a decrease of 5.5% from $15.4 million in the third quarter of 2009.
The quarter-over-quarter decrease in gross margin was primarily a result of an increase in media buying in behalf of our customers on media platforms outside of our exclusive network. Such media buying services were provided to certain customers in order to enhance customer relationships ahead of our integration with DMG. 2009 full year gross profit decreased 5.4% over 2008 to 50.9 -- $59.6 million.
The year-over-year gross profit decrease was a result of an increase in our media costs, which is comprised of planned increases in certain concession costs and an increase in buying our platforms outside of our exclusive network. As we continue to expand our exclusive network in 2010, we anticipate that media buying outside of our exclusive network will decrease.
Operating profit in the fourth quarter of 2009 was $6.3 million, a decrease of 13.9% from $7.3 million in the third quarter of 2009. The decrease was due to the increase in our cost of sales and an increase in G&A expenses for the fourth quarter resulting from M&A related professional fees. Operating profit in the full year of 2009 was $20.7 million, a decrease of 36.1% from $42.4 million in 2008. The year-over-year decrease was primarily due to higher media costs and higher sales and marketing expenses during a challenging economic and competitive environment in 2009.
Net income attributable to VisionChina Media’s shareholders in the fourth quarter of 2009 was $5.6 million, a decrease of 21.6% from $7.2 million in the third quarter of 2009 due to the factors mentioned above. Net income attributable to VisionChina Media shareholders for the full year of 2009 was $26.6 million, a decrease of 43.2% from $46.8 million in 2008 due to increasing costs and expenses mentioned previously, but exceeded revenue growth for the year.
The company’s fourth quarter 2009 net income attributed to VisionChina Media’s shareholders, excluding share-based compensation expenses and amortization of intangible assets, our non-GAAP net income was $7.2 million. For the year, the company exceeded non-GAAP net income guidance through efficient cost control.
Basic and diluted net income per share for the fourth quarter of 2009 were both $0.08, a decrease from $0.10 for both in the third quarter of 2009. Basic and diluted net income per share for the full year 2009 were both $0.37. Net cash inflow totaled $20.5 million for the fourth quarter of 2009. Cash flows from operating activities increased $18.5 million from $8.1 million in the third quarter, primarily due to strong cash collection of account receivables. The company had cash and cash equivalents of $68.8 million as of December 31st, 2009.
Now moving on to our growth strategy. Our acquisition of DMG represents the company’s first step towards industry consolidation. Our consolidation strategy is different from past transaction in our industry and that we are fully integrating the acquired business rather than maintaining DMG as a separate entity. As a result, we have also chosen not to rely on earn-out payments to achieve short-term financial gains from the acquisition.
By fully integrating the acquisition, we have greater control over advertising pricing, media operations, client selection, and sales commissions. All of these factors, we believe, will result in greater long-term growth for our business.
And now turning to our guidance. According to the business conditions in the first two months of 2010, revenue for the first quarter of 2010 is expected to be no less than $22 million. Now there are a number of factors that will negatively impact our revenue in the first quarter of 2010, and I’d like to discuss them briefly now.
First, price increases for traditional television advertising this year, particularly during the New Year holiday, limited some of our large customers a bit to place advertising on our platform during the quarter and delayed client spending. The holiday period is a peak season for traditional television advertising and therefore the competitive impact on our business is greater during this period. As mentioned by Mr. Li, we do see year-over-year increases from a number of our large major customers, including Unilever, Amway, Procter & Gamble.
Second, the company has known the end of our earn-out arrangements related to prior acquisitions. As the arrangements draw to a close, revenue contribution and revenue visibility from these acquired entities may decrease. As a group, the acquired entities continue to contribute revenue and new clients, and we will continue to monitor progress closely going forward.
Third, the integration of DMG has resulted in a restructuring of pricing and sales commission structure for the business. This restructuring is necessary for long-term growth, but has resulted in near-term disruption in subway advertising revenue. By fully integrating the DMG acquisition and not relying on revenue earn-outs, the company seeks to build long-term synergies from the acquisition, and our long-term plans for the business remain in place.
And finally, seasonally slow advertising sales during the Chinese New Year holiday period had a negative impact on revenue during the quarter. The negative impact of these factors will be short-term in nature, and we expect revenue visibility to increase in the coming quarters, probably in the first quarter. As a result of these negative impacts on revenue, the company’s gross margin will also be negatively impacted in the first quarter as the company’s decision to pursue industry consolidation has led to an increase in our media costs.
The company bases the above guidance estimate on a foreign exchange rate of 6.836 renminbi per US dollar. Please note that these statements are forward-looking and subject to change. The prospects for VisionChina do remain very strong, and we among the management team are excited about the opportunities available to us in the current marketplace through our acquisition of DMG.
We look forward to updating you on the progress of our acquisition and of our business throughout the year. Thank you again for joining us today. I’ll now open the call to questions.
(Operator instructions) Our first question comes from the line of Philip Wan with Morgan Stanley. Please proceed.
Philip Wan – Morgan Stanley
Good morning, Limin and Scott. Thank you for taking my questions. I’d like to drill down a little bit on your first quarter guidance. Would your guidance be excluding the DMG business? And after two years, specifically after Chinese New Year, what is the trend of advertising spending or orders from the customers? And then I have a follow-up. Thank you.
So you like to know what the contribution from DMG will be in the first quarter?
Philip Wan – Morgan Stanley
Okay. Right now it’s a little bit difficult because just so we clarify here, the guidance that we’re giving in terms of revenue is based off of our current backlog -- current contract backlog that we’re viewing right now as of the beginning of March. So this backlog does continue to build. And so this is a moving target for us. The backlog at this point is still a little bit -- is still difficult to break down between our platforms, between our bus platform and our subway platform. As a business though, looking at the lines that are a part of the DMG acquisition, we do expect that the contribution from the DMG lines to be on the order of $4 million to $5 million for this quarter.
Philip Wan – Morgan Stanley
Okay. So if we compare this guidance versus first quarter 2009, we still see a significant year-over-year decline. And also we had a very low base in the first quarter 2009. So just can you give us some more color on how we are seeing -- why we are seeing a significant decline? Is it we have the large customer not renewing -- renewing advertising contracts with VisionChina or the customers react (inaudible) with this price increase in the beginning of this year?
Yes. It’s a very good question. I think we need to take some time here to review each one of the factors that we are seeing and try to quantify as much as possible to make sure that everyone understands why there is a difference between what we are seeing in this quarter compared to the year-ago quarter in 2009. So let’s take, for instance, the first factor we mentioned here that our customers -- certain number of our large customers are holding back spending for this quarter based on some price increases for traditional television.
Now to explain that clearly, traditional television, as we’ve seen at the end of last year, did increase their prices for the year. Traditional television during the Lunar New Year season is -- let's say, the Lunar New Year season is a peak season for traditional television advertising in China. So the price increases that traditional television implemented during the first quarter, particularly during February, had a very large impact on a number of our large clients.
Again, a number of our large clients are clients that are trying to target their television advertising budgets. So these clients, during the first quarter, they want to advertise on traditional television, particularly during the holiday programming season. Any increases in pricing on those platforms will, it seems, have had a negative impact on their spending on our platform.
Now, we believe this is a short-term issue. We believe that based off of the guidance that we had gotten from a number of our large clients, the ones where we have seen decreased spending particularly in the month of February, that those clients have committed to us budgets that are larger than last year. For example, our clients like Unilever; Amway, which is a new client; Procter & Gamble, which is a new client. These are all clients that are committing larger amounts this year than they had in the past on our platform or on DMG’s platform.
In the first quarter, particularly in February though, because of the price increases in traditional television for Chinese New Year programming, they have delayed their spending on our platform beyond the first two months of this year. That has wounded our visibility from these clients, and we believe that that will have a significant impact on our first quarter revenue. And we believe that this is a difference between this year’s first quarter over the last year’s first quarter. So, is that point clear?
Philip Wan – Morgan Stanley
Right. Just a quick follow-up, just in the beginning, we saw that the increase -- price increase in traditional television TV choose some of the TV advertising prices to new media, including VisionChina. So, are we not seeing this happening or we have a different -- the advertisers still remain -- will remain on traditional TV going forward, and so we won’t see an increase as expected from TV advertising pricing [ph]?
Yes, that’s a good question. When these price increases were first announced, we did have an expectation that the price increases would benefit new media. Now in general, for the year, we do believe that that’s true. What we’ve seen in the first quarter, again particularly in February, though is that because the Chinese New Year season is so important to traditional television advertisers, advertisers for that period were willing to spend more on traditional television, meaning that they were allocating more budget to traditional television just to advertise for that period and subsequently have delayed spending on our platforms. Now that’s what we’ve seen so far this year.
Our expectation for the full year remains the same. We do expect that because of price increases on traditional television, advertisers are seeing that the returns on traditional advertising may not be as high this year and they will be much more willing to advertise on new media platforms. Based on some budget indications from, again, some of our large key clients, the ones that have delayed spending -- again, clients like P&G, Amway, Unilever, KFC, these are all brands that have indicated to us increased spending for the quarters subsequent to Q1. And so we believe that this does indicate for our business a willingness to increase their spending on new media platforms. We believe that what we saw in February was a short-term phenomenon, again, driven by Chinese New Year. And the desire for advertisers to focus on traditional television for that period of time.
Philip Wan – Morgan Stanley
Lastly, and then I’ll get back to the queue, you mentioned that those larger customers, like Unilever, P&G (inaudible) increase spending in 2010, can you quantify what’s the percentage increase that they were likely to spend for this year compared to last year?
It’s typical to quantify exactly. We have indications that, for instance, clients like P&G and Unilever and Amway, I do expect their quarter-on-quarter increase in spending will be roughly about 20% to 30% for each of those customers.
Philip Wan – Morgan Stanley
Quarter-over-quarter meaning second quarter versus first quarter?
Second quarter versus first quarter, yes. That varies customer by customer, but at least on that order of magnitude of increase in spending for the second quarter. So that’s what gives me confidence at this point to say that what we saw in February was a short-term phenomenon. We do expect that we will be able to benefit from the increase in traditional television pricing in the subsequent quarters. Before we end our discussion here, Philip, I think I should complete the answer to your first question. This traditional television advertising price increase was one factor that accounts for the year-over-year difference in our current revenue guidance. We have a number of other factors here. I’ll just run through them briefly and (inaudible) have any questions.
The second factor here that I mentioned was the earn-outs that the company previously had in place for prior acquisitions. These earn-outs are coming to an end. This is of course by design. I for one do not believe in the benefit of long-term earn-outs. I think there are better ways to incentivize sales forces and to incentivize management. So I think it is a good thing that these earn-outs are coming to an end. We do see continued contribution from these acquired entities.
In fact, our new client win, Procter & Gamble this year, was from one of the acquired entities. And so I’m confident that these acquired entities will continue to contribute to our business going forward. They have already been fully integrated, but the fact remains that as these earn-outs come to an end, I do believe that there will be some degree of revenue -- the decrease in revenue and decrease in revenue visibility that we have previously enjoyed when these earn-outs were in place.
Again, I think this is a near-term factor. I think this is a hiccup in our growth trajectory. I do believe that the macro environment for sales this year will allow us to grow through the end of these earn-outs. Again, I think, like we’ve said, the revenue contribution from the existing clients from these acquired entities does continue, although perhaps maybe at a slower pace. I would like to see March data come through before I provide a little bit more clarity on this. And we do see -- continue to see new client wins from these acquired entities as a group. We will continue to monitor them, but in the near term, I do think that this will have an impact. And again, I think this is something that’s for the benefit of the long-term development of the company to end all these earn-outs during the coming quarter.
The third factor that has impacted our year-over-year revenue guidance is the integration of DMG. I think a lot of investors are looking at DMG to immediately contribute revenue, and it is. Obviously there are some integration issues that we are dealing with. And I think these things need to be dealt with in an orderly manner. We have to remember here that we are integrating this acquisition fully. This is different than prior acquisitions in our industry. We’re not maintaining this as a separate entity. We are not incentivizing the management separately with additional earn-out arrangements. This is not the way we are looking to build our business.
We want to have full control of pricing. We want to have full control over the sales commission structure. We want to have full control over the sales force. And so in order to do that, we’ve had to make, again, significant adjustments in the pricing policy for the assets that were acquired through the DMG acquisition. We’ve had to make significant adjustments in the sales commission structure to make sure that the entire sales force’s commission is compensated in a uniform manner. And so again, I believe that this is a necessary adjustment that we have to make into the business. It doesn’t change our long-term outlook for the business. It certainly doesn’t change our full year outlook for the business.
On a rolling 12-month basis, our projections -- our initial internal projections for the business still remain the same. I just believe that they have been pushed out by one quarter because of the restructuring that we have to put in place for this business. So I think an easy analysis would be to just take our Q1 revenue. Look at our current Q1 guidance, look at our potential contribution from the DMG business, I think there is a delta that can be calculated between the two quarters.
And these three factors, I think, after careful analysis of our current business over January and February, these are the conclusions that we are not going to be down this quarter in terms of revenue. It looks like there is near-term -- or short-term seasonal factors based off of Chinese New Year and increases in traditional television pricing. I think there is a one-time effect because of the end of our earn-out payments from prior acquisitions. And I think there is also a delay in the benefits from our DMG acquisition, again, due to what we think are necessary changes in the pricing and commission structure for that business, which we think will have had pushed back our projections for the DMG business by one quarter. Hopefully, that clears up questions about the differences quarter-over -- year-over-year for the first quarter.
Philip Wan – Morgan Stanley
That’s helpful. I’ll get back in the queue. Thank you.
Thank you, Philip.
Our next question comes from the line of Eddie Leung with Bank of America. Please proceed.
Eddie Leung – Bank of America
Hey, good morning, guys. Just a question on one of the factors you mentioned about earn-outs, could you let us know that how much proportion of your revenues in the first quarter or in 2009 are related to the earn-out structure? Thanks.
Yes. For the earn-out related revenue has been a decreasing percentage of our business over the year 2009. For the fourth quarter, earn-out related revenue accounted for about 35% of our total revenue. As the earn-outs end, I think it’s less and less significant to specifically break out revenue contributed by those acquired entities. That’s the long-term goal of ending these earn-outs is to integrate all those sales -- the sales force into our company, evaluate them all on the same commission structure, on the same compensation structure, and have a unified sales team.
Now, I guess going forward what we I’m seeing right now is that there will probably be a decrease in some amount of revenue from the result of the earn-out ending. Now, it looks like in this quarter, again, just based off of the data for the first two months, that could be on the order of -- I'm just ballparking my number -- probably on the order of maybe $4 million to $6 million decrease in contribution from what was previously earn-out related revenue. I think that’s a one-time hit. I think after the earn-outs end and all the sales forces are compensated on a uniformed structure, I do expect that we will be able to resume growth in our customer base and in our revenue base in a uniform manner.
I do think that I’m encouraged by what I’ve seen in terms of developments in the first quarter for our acquired entities as a whole, meaning that the existing customers that these acquired entities brought in do continue to spend. KFC obviously was a very large customer that was brought in as a result of the acquisition of these entities in 2008. That’s a client that does continue to spend. That is a client that has projected to increase spending in the second quarter. New customer wins, including Procter & Gamble, again as a result of the sales teams that were brought in from these acquired entities, that’s a very large win for us at the beginning of this year. And again, that spending will increase in the subsequent quarters after Q1.
So just to be clear, this is not a situation where as the earn-out and the revenue from these acquired entities are going to end completely. That’s not the case at all. Revenue contribution will continue. New client contribution will continue. But I think it is prudent to expect that as the earn-outs end -- again which is something that the management is at the goal of our strategic management of our sales force, that as these earn-outs end, I think it is prudent to expect that there will be some near-term drop-off in revenue.
Eddie Leung – Bank of America
Got that. My second question would be related to your cost structure. (inaudible) full year guidance on the revenue side. But could you share with us some of your full prospectus related to your cost structure? Are we going to see any cost control measures given the near-term issues? Thanks.
Yes. At this point, our major change in our cost structure is going to be the acquisition of DMG. On a combined basis, our media costs will be roughly $22 million, $23 million for the quarter. Our entire cost of goods sold, including business tax and other elements of COGS, will be approximately $29 million. So this is going to be a significant increase. Again, this is a significant increase that we’ve consciously undertaken as part of our strategy to consolidate the industry. This DMG acquisition, we believe, does provide long-term benefits. And so we are willing at this -- we are willing to accept these near-term disruptions in our business because we do believe that they will continue to provide long-term benefits for us.
So at this point, we’re not considering any sort of major cost reductions. We believe that we do need to give some time to fully realize the benefits from this acquisition. And so in terms of blending [ph] the size of our platform or eliminating the scale of our business operations, we don’t see that that’s necessary at this point or prudent, because we do think that we do need to get some time to realize the synergies from this business. Just going back to the cost structure, aside from media costs, I think it is important for us to discuss our sales -- SG&A. Traditionally in the past we’ve provided revenue guidance and we’ve also provide non-GAAP net income guidance.
This quarter we’ve chosen not to do that yet, because we are still going through our financial analysis for the financials for DMG. So we haven’t yet determined definitively the amount of intangibles that we’ll have to put onto our balance sheet. So the amount of intangibles amortization is still not set yet. So we’re not able to, at this point, provide exact non-GAAP net income guidance. But in order to provide for the current year on our cost, we do expect some amount of increase in our G&A expense resulting from our intangible amortization. Right now, I’d like to just give a very high level estimate of probably additional $1.5 million intangibles amortization per quarter going forward. And so that will bump up our overall SG&A expense going forward. So the increase in (inaudible) costs, the increase in our SG&A resulted to intangible amortization. Those are the main differences in our cost base going forward as a result of this acquisition.
Eddie Leung – Bank of America
Got that. Thank you.
Our next question comes from the line of Wallace Cheung with Credit Suisse. Please proceed.
Wallace Cheung – Credit Suisse
Hi, good morning. (Foreign Language)
Just quickly two questions. Number one is, on a full year basis, are we going to expect the merged entity is going to have higher revenue than VisionChina on (inaudible)? And in terms of the incremental growth from the -- incremental revenue from DMG, are we going to have (inaudible) as what we have at the original assets? And that’s my first question. I think the second question is, in terms of the advertiser mix, from an industry group perspective, say, fourth quarter ’09 and then moving on to first quarter 2010, are we going to have some major change? And then also, can you also provide the mix between the domestic and international clients from fourth quarter ’09 to first quarter 2010? Thanks very much.
Okay, Wallace. The question about full year growth, we’ve taken a hit here in the first quarter, but we do expect for the full year that we will end up at a higher price than in 2009. I think that’s definite. What we are seeing right now is, again, I think in terms of our DMG acquisition, probably about a one quarter delay in our original plan for the growth of that business. We had hoped that we will be able to hit the ground running and be able to operate that business at the peak level that it existed previously. We’ve obviously had to take a step back.
So for instance, that business was probably operating at its peak level, about 60 million RMB per quarter. This quarter, I think we’ll come out somewhere between 30 million to 40 million RMB per quarter. Again, that’s something that we think is a short-term, probably a one quarter delay in our revenue ramp. The reason for that, again, is because it was a fairly large price differential between the original assets we’re charging for the media platform and compare to what we are now charging for that platform. So there had some pushback from some existing clients. We think that that’s temporary.
Some clients may decide that they want to wait a month or so, wait a couple months or so before they come back to the platform. But we do believe that the sort of hardball practice by some of the customers is just short-term. And we do expect them to come back as we go through it. Again, I’d like to see March data before I really -- before we provide clear guidance for what we expect Q2 performance for the business to be. I think March will be very key for us because I think that’s essentially the first full month that we will have business as usual for this business. January, I think, was affected by these pricing changes. February was obviously affected by Chinese New Year holiday. March, I think, is going to be the first full month of business as usual for the DMG asset.
The other factor affecting the integration of DMG is also just the sales force integration. Along with the lower pricing that the business was running at, there was also a different commission structure for that business, a commission structure that didn’t incentivize the sales force in the same way that our sales force is trying to incentivize, meaning that we incentivize our sales force based off of volume and pricing. And so we want to make sure that our sales force achieves the best pricing for us in monetizing our advertising assets.
That’s something that wasn’t in place before at DMG that cost some disruption among sales people in moving them to a new commission structure. But again this is for the long-term benefit of the business. This is something that we feel is necessary. We could have chosen to do this differently. We could have chosen to not integrate the business and keep it standalone as usual, and it would have been running. We would have been able to hit the ground running. But I think keeping (inaudible) business, keeping – having that in place is not for the long-term benefit of our combined business. And we are willing to take a near-term hit here to make sure that we lay the proper groundwork for growing this business.
For our organic business, yes, we do believe that we’re going to be able to grow year-on-year. I think what we saw here in the first quarter is a short-term phenomenon. Again, we’ve seen it from indications from advertisers that spending will resume in the second quarter after -- from our large customers spending resumed in the second quarter after the rate that we’ve seen here in the first quarter due to the Chinese New Year holiday. We also do expect that our combined sales force, now that we have the DMG sales force in place on our commission structure, now that we have our previously acquired teams on our commission structure without earn-out incentives, add the sales number now on a unified platform, we’ll be able to contribute in a uniformed manner to our growth this year. And it will result in full year growth year-over-year.
In terms of ad mix, your second question, Wallace, the business for us here continues to be very consumer brand focused, very focused on our traditional areas of retail products, food and beverage, household products, over-the-counter pharmaceuticals. We do see some changes as a result of the expansion of our platform. So notably Mr. Li has mentioned, new large client wins as a result of our integration with DMG. So now that we have a larger platform, now we have a larger presence in subways, we have been able to expand our client base and win new clients that previously were not looking at our platform. So those include, for example, Procter & Gamble, Amway, L'Oreal, Avon, Nivea. We believe that this is a very strong (inaudible) clients that gives us lot of confidence that we will be able to increase the percentage of our revenue from large multi-national brands, which we think will help drive our growth for 2010.
Right now, I’m not able to provide I think a percentage breakdown, because I think we -- again, I’d like to see more data for this quarter before I provide an accurate breakdown. But the trends are very clear. We’re going to have more contribution from large multi-nationals. We’re going to have more contribution from large household products brands. In addition, Mr. Li has also mentioned some interesting new tactics for us, like autos. Auto client wins, they are something that’s new for us and is a direct result of our expansion in the subways. Some of these auto brands now do view us as an attractive demographic to advertise to their customer base. And so that’s an area that although small in the first quarter, we do see that as an area for growth going forward.
Wallace Cheung – Credit Suisse
Thank you. Just quickly, how much will be the impact of Shanghai Expo to your sort of full year numbers?
Yes. For the reasons we mentioned about, guidance visibility for the first quarter is going to be short. And so I’d like to put a number on that. I’d like to be able to quantify the upside from Shanghai Expo. But right now it is fairly difficult. The reason for that is that the programming for Shanghai Expo still has not been set yet. Those plans for programming for Shanghai Expo coverage have nothing communicated to us. We think there is a number of reasons for that. One is, this is a long-term event. It’s not like the Olympics that was fairly short-term and fairly scheduled, regularly scheduled.
And so the coverage that’s going to be broadcast for the Shanghai Expo is going to be very different in the type of coverage that it has for the Olympics. Until we get that coverage plan for the media coverage, it is going to be a little bit difficult for us to finalize discussions with our clients for Shanghai Expo advertising spend. We do expect that during the month of March, now that we’ve come out of Chinese New Year holiday, as we have March and April leading into the Shanghai Expo, that’s when we will see an acceleration of our discussions for media spend in Shanghai ahead of the Expo. And so I’d like to keep in touch with you and provide that -- quantify that impact as we get through the next month or so.
Wallace Cheung – Credit Suisse
Great. Thank you very much.
Due to time constraint, that concludes today’s Q&A session. I would now like to turn the conference back over to management for closing remarks.
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