VisionChina Media CEO Discusses Q4 2010 Results - Earnings Call Transcript

Executives

Colin Wang – IR Director

Limin Li – Chairman and CEO

Stanley Wang – VP of Finance

Analysts

Philip Wan – Morgan Stanley

Dick Wei – JPMorgan

Chenyi Lu – Cowen & Company

Eddie Leung – Bank of America Merrill Lynch

Steve Zhang – Macquarie

VisionChina Media Inc. (VISN) Q4 2010 Earnings Conference Call March 3, 2011 8:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 VisionChina Media earnings conference call.

My name is Jonathan and I will be your operator for today.

At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session after the prepared remarks. (Operator Instructions). As a reminder, this conference call is being recorded for replay purposes.

I’d now like to hand the call off to Mr. Colin Wang, Investor Relations Director. Please proceed, sir.

Colin Wang

Hello everyone and welcome to VisionChina Media’s fourth quarter and full-year 2010 earnings conference call. The company’s fourth 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. Stanley Wang, our Vice President of Finance, who will take you through our financials and key operating metrics. Mr. Li and Mr. Wang will answer questions after their prepared remarks.

Please note that today’s discussion will contain 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 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.

Limin Li

[Interpreted]

Hello everyone and thank you for joining us today.

I will first like to take a moment to express my gratitude to everyone on the call today for the continuous support of VisionChina Media.

2010 got us to a rough start for us. The first quarter was difficult and mainly due to the DMG acquisition and integration process, as well as the resulting cost increase. However, with determination, dedication and tremendous effort by our management team, we quickly overcame that difficult period and start significant increases in key operating and financial metrics for the next few quarters.

As you saw in our press release issued earlier today, I am pleased to announce that we saw record revenue in the fourth quarter of 2010 of $44.9 million, beating the high end of our guidance. In the fourth quarter of 2010, we also realized a sequential revenue increase of 18.4% over the third quarter of 2010 and a year-over-year increase of 41.4% over the fourth quarter of 2009. Non-GAAP net income reached $4.5 million, exceeding the top line of our guidance by 28.6%. Total revenue in 2010 reached $138.1 million, a 14.4% increase over last fiscal year.

According to recent independent research from Analysis International, VisionChina’s market share of China’s digital mobile wireless transmission broadcasting terminals is a remarkable 81.6% and our market share of Metro TV terminals is close to 100%.

In terms of media network expansion, we recently won the bid for Shenzhen's subway company's contract to exclusively operate on line 1, line 2, and line 5 of Shenzhen's subway system over the next five years, significantly improving our subway media network coverage in Shenzhen, one of China’s four Tier 1 cities, and demonstrating our leading position in the subway digital mobile TV network. As a result of a recent negotiations with the net new lines for Shenzhen, our average media cost per line was effectively lowered.

Towards the end of 2010, VisionChina began actively renegotiating with TV bureau and subway operating companies in different cities and provinces around our network, seeing reduction to our media costs. Due to our solid relations with these companies and our demonstrated dominance in the industry, we have made significant strides in cost control in several cities by restructuring our cooperation model. Our different local partners were largely very cooperative with these efforts. Going forward, we will continue to work with our local operating partners to further allow our media costs and have set a goal to reduce our full-year media costs in 2011 by no less $10 million compared to what we have previously expected to pay.

In 2010, the Shanghai WorldExpo and the Guangzhou Asian Games highlighted VisionChina’s advantage as the only outdoor extension of traditional TV. During the Shanghai WorldExpo and the Guangzhou Asian Games, utilization rate of the subway digital mobile TV platforms reached 70% and 100% respectively in those cities, demonstrating advertisers' and audiences’ recognition of the dissemination power and advertising value of our media platform.

Since the signing of a Memorandum of Understanding of strategic partnership with CCTV in the second half of 2010, we have begun to see the benefits of this partnership and our media platform has been highly recommended by CCTV at various locations. One important result is that we have come into full and direct contact with CCTV’s massive client base. Of the 40 winners of the several programs that were signed to us during the CCTV Annual Advertising Resources Public Bidding, 11 have already begun trial advertising placements with us. We are encouraged by these early results and believe this partnership will further expedite the expansion of our customer base.

In terms of content of platform, VisionChina has utilized a vast program database as well as the creative and production capabilities of various satellite TV stations, selecting the most viewed programs that are then tailor cut and played on VisionChina’s digital mobile TV network. The favorite content continues to attract the attention of large audiences who can experience China’s best TV shows just as they would on traditional TV and in this bolsters our advertising income. Advertising during these programs has become a valuable source of revenue.

In December 2010, renowned media giant, Focus Media Holdings Limited, China's largest lifestyle community digital out-of-home media company officially entered into a share repurchase agreement with the company, pursuant to which Focus Media will purchase the company’s newly issued common shares. Upon closing of this transaction on January 15, 2011, Focus Media became the second largest shareholder in our company as well as a strategic partner of VisionChina Media. Together, the two companies will provide advertisers with more comprehensive dissemination solution offerings, performing across media platforms that cover audiences throughout the day in order to attract more advertising budgets.

Turning to our recently filed law suit at the end of 2010, we filed a complained against the former shareholders of Digital Media Group or DMG. The complaint alleges that some of the defendants purposefully provide a fraudulent information about DMG’s financial conditions and performance. In light of this, we thought it will be prudent to take an impairment charge at this time on DMG’s goodwill and intangible assets to better reflect our current business. Since the acquisition, however, DMG’s operating efficiency has been greatly improved as a result of a carefully management and dedicated sales people. We do not anticipate any further impairment charges on the goodwill and the intangible assets of DMG in the future.

Looking forward to 2011, VisionChina has set clear goals as to strategy and [inaudible] results. We intend to improve our sales execution to upgrading our incentive programs and increase our media utilization to the greatest extent by intensifying marketing sales and promotional efforts. We have determined our 2011 sales target and have broken down the task that we must accomplish to reach those goals for each regional sales teams. We will also continue to actively lower media costs where appropriate. We are confident that VisionChina’s revenue will exceed industry growth and that we will achieve profitability in the year of 2011.

I will now hand over the call to our Vice President of Finance, Mr. Stanley Wang, to discuss our financials and operating metrics more detailed.

Stanley Wang

Hello everyone, and thank you for joining us today. As Mr. Li mentioned, the strong fourth quarter indicates an overall rebound in advertising industry and in our company’s operating performance. In particular, we are pleased with our significant improvement on amortization in the fourth quarter.

2010 is behind us now and our team is focusing on driving the business in 2011, and beyond. We are optimistic our ability to build on momentum as we saw in the second half of 2010. And also we are looking for to a solid full-year result of 2011, keeping in mind of the seasonality we see in the first quarter of every year.

Turning now to some of our key operating metrics, network capacity, which is measured by total broadcasting hours in our network was 50,019 hours, flat with the third quarter of 2010. Our average advertising service revenue per broadcasting hour was $859 per broadcasting hour in the fourth quarter of 2010 compared to $727 in the third quarter of 2010, and $796 in the fourth quarter of 2009. We are pleased to see a sequential increase in our average advertising service revenue per broadcasting hour of 18.2%, a very positive response to our outlook and aggressive marketing effort in this quarter. On average the company sold 8.87 advertising minutes per broadcasting hour in the fourth quarter of 2010, compared to 6.69 advertising minutes per broadcasting hour in the third quarter of 2010, and 6.93 advertising minutes per broadcasting hour in the fourth quarter of 2009. We are pleased to see the sequential hour trend in our network utilization and we believe we will continue to benefit on the ongoing improvement of utilization in the year 2011.

In the fourth quarter of 2010, the company sold a total of 444,000 advertising minutes in our network as compared to 335,000 minutes in the third quarter of 2010. 736 advertisers purchased advertising time on our advertising network in the fourth quarter of 2010 compared to 612 advertisers in the third quarter of 2010 and 354 advertisers in the fourth quarter of 2009. We had 238 new advertisers in the fourth quarter of 2010. We continue to see the majority of our advertisers hail on the fast-moving consumer goods sector, and in our view, these are most ideal customers because they have large advertising budgets and ongoing within the reach of massive audiences across the country.

We ended fourth quarter of 2010 with 585 sales personnel, representing a net addition of 35 sales personnel compared to the end of the third quarter of 2010. Our ratio of sales person to advertising client remains strong and we continue to provide incentive to all of our sales people with an emphasis on both sales volume and pricing.

Turning now to our fourth quarter and full-year financial results. Total revenue in the fourth quarter of 2010 was $44.9 million, an increase of 18.4% from $37.9 million in the third quarter of 2010. For the full year of 2010, our total revenue increased 14.4% to $138.1 million.

Gross profit in the fourth quarter of 2010 was $11.6 million, a significant increase of 69.8% from $6.8 million in the third quarter of 2010, and a decrease of 19.9% from $14.5 million in the fourth quarter of 2009. The quarter-over-quarter increase in gross profit was primarily due to the result of increase in revenue and better monetization of our existing advertising network. 2010 full-year gross profit decreased 71.4% from 2009 to $17.1 million. The year-over-year gross profit decrease was primarily due to a general increase in the media cost as the company expanded its network and new media platform that acquired from the Digital Media Group.

On December 27^th, 2010 we filed a law suit in the Supreme Court of New York County in the United States of America against the former owners of Digital Media Company Limited. The media company which previously split subway access with us across China, and was acquired by us in the first quarter of 2010. [inaudible] alleged that the former owners of Digital Media Group engaging in an unlawful scheme to induce the company through false, deceptive and misleading statement concerning Digital Media Group’s financial condition and performance, and to pay a grossly inflated price to purchase Digital Media Group’s shares.

The actual financial performance of Digital Media Group’s turned out to fall far below the financial protection provided to the company based on our such forced deceptive and misleading information. During annual closing process, the company carryout a test for impairment on both intangibles assets and the goodwill associated with the company’s acquisition of Digital Media Group. And the company noted the carrying value of goodwill intangible assets exceed their implied fair value of fair value. Based on the result of impairment test the company has decided to take a nonrecurring and noncash impairment charge on the goodwill and intangible assets of $56.6 million, resulting in a substantial operating loss in the fourth quarter of 2010.

Operating loss in the fourth quarter of 2010 was $56.3 million, primarily due to this nonrecurring and noncash impairment loss. If such impairment loss was excluded, the company would have made an operating profit of 250,000 in the fourth quarter of 2010. Operating loss in the full-year of 2010 was $166.2 million, primarily due to nonrecurring and noncash impairment charge of $89.1 million recorded in the second quarter as the result of write-down of goodwill and intangible asset in connection with the three of the six agencies acquired by the company in 2008, and the aforementioned $76.6 million impairment loss associated with acquisition of Digital Media Group.

Net loss attributable to VisionChina Media’s shareholders in the fourth quarter of 2010 was $44.7 million, again mainly due to the impairment losses as aforementioned. That loss is attributable to VisionChina Media’s shareholders in the full-year 2010 was $151.3 million, primarily attributable to the impairment charge totaling $145.7 million recorded by the company in 2010.

The company’s fourth quarter 2010 net income attributable to VisionChina Media’s shareholders excluding share-based compensation expenses, amortization of intangible assets impairment loss and income tax credit in connection with impairment loss, which as we refer as non-GAAP net income was $4.5 million compared to the non-GAAP net income of $1.1 million in the third quarter of 2010. The improvement in non-GAAP net income was mainly driven by our strong revenue growth in the fourth quarter. The company’s 2010 full-year net loss attributable to the VisionChina’s shareholders excluding share-based compensation and amortization of intangible assets and impairment loss and also intangible and also income tax credit in connection with impairment losses was $4.8 million compared to a non-GAAP net income of $33.7 million in 2009.

Basic and diluted net loss per share in the fourth quarter of 2010 on a GAAP basis were both $0.53 per share compared to the basic and diluted net loss per share of $0.02 in the third quarter of 2010. Basic and diluted net loss per share for the full-year 2010 were both $1.83. Net cash used in operating activities in the fourth quarter of 2010 was $0.5 million compared to $6.9 million in the third quarter. The company has cash and cash equivalents of $67.2 million as of December 31^st of 2010.

Based on business conditions seen, now we’re turning to our guidance. Based on the business conditions seen thus far and in the first two months of 2011, we estimate total revenue which consists advertising service revenue only, in the first quarter of 2011 to be $32 million to $34 million. First quarter 2011 net loss attributable to VisionChina Media shareholders excluding share-based compensation expenses and amortization of intangible assets we refer as non-GAAP net loss is estimated to be between $10 million and $12.5 million.

We estimate that the advertising service revenue during the first quarter of 2011 will be negatively affected by seasonality, which is consistent with our historical revenue pattern. However, we expect seasonal effect to be short term in nature, and the company expect that to growth in advertising service revenue to pickup from the different quarter and we look forward to see a strong revenue growth during 2011. The company bases its guidance estimate on a foreign exchange rate of RMB6.6118 per $1.

I would like to note that our guidance is based on our current exclusive network of 22 cities, which has already been secured by contracts as of the date of today’s earnings announcement. If more cities are added either organically or through acquisitions, it will impact our forecast. Please note that these statements are forward-looking and subject to change.

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

Question-and-Answer Session

Operator

(Operator Instructions). And your first question is from the line of Philip Wan with Morgan Stanley. Please proceed.

Philip Wan – Morgan Stanley

Hi, good morning Mr. Li, Mr. Wang, and also Colin. Thanks for taking my question. I have two questions. Let me start off with the first one about your top line forecast. I understand that visibility maybe limited as of now, but can you give us some color on your expectations for your top line growth for this year? Thank you.

Stanley Wang

Many thanks for your question. And actually as consistent of the historical revenue pattern, actually the Q1 revenue – the Q1 is relatively a weak quarter for the company and for the mobile digital television industry. And actually just like I mentioned in our previous talk that the historical pattern of revenue that we actually we foresee that in 2011 our revenue spread over quarters, we still follow the historical pattern we see in the past four years. And normally, in the Q1, revenue will account for around 15% to 17% of our total revenue – of our full-year revenue. So basically I think this will be the same for 2011. So actually we see over 40% year-over-year in our – actually in for Q1 guidance in 2011 as compared to 2010. So basically I think in the three year we’re still very confident that we have achieved the same level growth in our top line.

Philip Wan – Morgan Stanley

So that translates to about 40% or more, top line growth for 2011.

Stanley Wang

That is our current pattern. We actually foresee – that is the expectation we’re going to have.

Philip Wan – Morgan Stanley

All right, that's helpful, thank you. And then my second question is you mentioned about the media cost reduction in 2011. And I'm just curious if you could give us some guidance on the media cost for first quarter and also how should we look at the trend for the remaining year? Thank you.

Stanley Wang

I think, basically, I mentioned it, because the – now actually we have to carryout the media costs reduction measure for a – actually for several quarters and actually we now see some of the cities we have managed to cut down the cost in 2011, and actually just talked about by Mr. Li. And in the first quarter and in the – for the overall 2011, because the overall cost reduction negotiation is currently continued, and however, we have a very clear expectation for 2011 that for the year-over-year we will not foresee an increase of media costs over 10%. That means, we will control the increase of media cost less than 10% on a year-over-year basis.

Philip Wan – Morgan Stanley

Okay, that's helpful. Just a quick follow-up. For the first quarter should we see a flat media cost versus the fourth quarter's level, or slight increase?

Stanley Wang

I think there was – in some of the contracts there was a step-up in the media cost, so basically you can actually, I think, we expect a slight increase about 5% around – in the Q1 as compared to Q4.

Philip Wan – Morgan Stanley

Okay, thank you. I’ll get back in the queue.

Operator

Your next question is from the line of Dick Wei with JPMorgan. Please proceed.

Dick Wei – JPMorgan

Hi, thanks for taking my questions. First question is for the revenue outlook for this year. I wonder how would you balance between pricing and utilization. And secondly is what is the current visibility for the contract, or maybe the [inaudible] contract you signed, or any visibility into the full year, that would be helpful? Thanks.

Stanley Wang

Hi, thanks. Many thanks for the question. I think the first question is around how do you – what’s the main driver of the top line growth and how do we balance the pricing and the utilization. Currently, actually – we actually revised our rate card in December of 2010. Actually we didn’t have a price rise increase in our rate card in all capacities, and also the majority of the subway cities there is no price increase.

And for certain subway cities, actually we have a – we have increased our rate card because of it is expected there is some new additional subway launch we’ve added to our network and the cost expenditure increase in those platform, so the price has increased accordingly. So basically I think that management is planning for a high utilization rate during the 2011 and this is our main driver to grow our top line. And currently, the – in the Q4, the utilization minutes, actually which is 8.87 minutes per broadcasting hour and actually we actually foresee a significant growth and improvement further in 2011.

Dick Wei – JPMorgan

Great. And I wonder anything you can tell me on your visibility?

Stanley Wang

Okay. The visibility – actually based on the – based on the current contract bylaw and the framework agreement we signed with the our advertisers, basically up till this meeting we have a contract reserve of more than $72 million already.

Dick Wei – JPMorgan

Okay, great. And I think a little bit more question on the 2011. Any particular segment you are seeing stronger growth, or you expect to see stronger growth, I think, between bus and subway, and also like which industry category you expect to see stronger growth? Thanks.

Stanley Wang

We – actually we still expect it to – in 2011, we would still – actually we first talk about the historical pattern, because in the Q4 – in Q3 – Q2, Q3, and Q4 of 2010 actually the revenue split between the subway and bus is around 50 and 50. So we think in 2011, we may possibly still follow this pattern. But we also expect that in the subway sector they will have the most stronger potential than bus. But overall, the company strategy, the both side is very both important to us. So basically the marketing efforts will carryout on equally basis for the both sector.

And also on Tier 1or Tier 2 cities, actually we will think the growth – the driver growth also mainly come from the Tier 1 cities. And with Tier 1 cities now we can see that in the fourth quarter have a very strong growth in the utilization and the advertisers’ placement. So basically we will think Tier 1 cities will still be the major source of top line growth. And also Tier 2 cities are also making progress, but as compared – because the advertising spending on the Tier 2 cities network is relatively smaller so basically we think that Tier 1 will have more proportion.

Dick Wei – JPMorgan

Okay, great. Thanks a lot.

Operator

Your next question is from the line of Chenyi Lu with Cowen & Company. Please proceed.