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Focus Media Holding Limited (FMCN)

Q4 2006 Earnings Call

February 26, 2007 8:00 pm ET

Executives

Jie Chen - Investor Relations

Daniel M. Wu - Chief Financial Officer

Jason N. Jiang - Chairman of the Board, Chief Executive Officer

Analysts

Jason Brueschke - Citigroup

Kit Low - Goldman Sachs & Co.

Safa A. Rashtchy - Piper Jaffray

Richard Ji - Morgan Stanley

William Bao Bean - Deutsche Bank

Jason S. Helfstein - CIBC World Markets

James Lee - W.R. Hambrecht Co.

Lin Chi

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Focus Media earnings conference call. My names is James and I will be your operator for today. (Operator Instructions)

I would now like to turn the call over to Miss Jie Chen, Investor Relations manager. Please proceed, Madam.

Jie Chen

Thank you. Welcome to Focus Media fourth quarter and full year 2006 earnings conference call. Today our management will discuss the company’s financial results for the fourth quarter and full year of 2006 and business outlook for the first quarter and full year of 2007.

With me here are Jason Jiang, Chairman of the Board and Chief Executive Officer; and Daniel Wu, Chief Financial Officer. After Daniel updates you on our fourth quarter operational and financial performance, we will open the call for questions.

This call is also broadcasted through the Internet and available through our investor relations website, ir.focusmedia.cn.

Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements that are subject to risks and uncertainties. The statements include, but are not limited to, statements regarding Focus Media's business objectives and sales, the expectations of the development of our networks and our outlook for the first quarter and full year of 2007, for example. You can also identify forward-looking statements by terms such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar statements.

The accuracy of these statements may be affected by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. These risks and uncertainties include, but are not limited to, our limited operating history for our current operations and our short history of the audiovisual advertising sector, which may make it difficult for you to evaluate the viability and prospect of our business; the integration of acquired business; competition for present and future competitors in China’s growing advertising market; and other risks outlined in our filings with the SEC, including our registration statement on Form F-1. We do not undertake any obligation to update this forward-looking information except as required under applicable law.

Now, I will turn the call over to our CFO, Daniel Wu, for a summary of the fourth quarter and full year 2006 financial results.

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Daniel M. Wu

Thank you, Jie. Good day, everyone. I am pleased to report to you another record quarterly result. For the fourth quarter of 2006, gross revenue, including business tax, reached $75.1 million. Our total revenue reached $68.3 million, an increase of 11.8% from the previous quarter and 177% from the same period last year. Our fourth quarter net revenue includes $42 million from our commercial location business, which includes our LED network and movie theater advertising business; $7.9 million from our in-store business; $13.8 million from our in-elevator poster frame business; and $3.5 million from Focus Media Wireless business.

First, let me review in detail the results of our commercial location business.

Total advertising revenue from our commercial location network in the quarter was $42 million. For our Premier Channel A, which primarily consists of the office building locations of Focus Media's commercial location network prior to the Target Media acquisition, total network capacity increased to 15,939 time slots as compared to 15,679 in the last quarter, as we acquired our regional distributor in Zhengzhou and also Shijiazhuang Hui Huang Advertisement Company.

Total number of time slots in our Premier Channel A in the fourth quarter was 8,533, increasing from 6,111 time slots in the previous quarter. In Tier-I Cities, namely Beijing, Shanghai, Guangzhou and Shenzhen, the time slots sold in the quarter were 1,247, which implies a network sell-out rate of 100%. Average advertising revenue per time slot for Premier Channel A in the Tier-1 Cities was $13,507 in the fourth quarter of 2006, compared to $12,797 in the previous quarter, up 5.6%.

Time slots sold in Tier-II Cities was 7,285, increasing from 4,879 in the previous quarter, representing a network sell-out rate of 49.4%. During the quarter, in addition to Tier-I Cities, five additional Tier-II Cities reached full capacity utilization, namely Nanjin, Chengdu, Wuhan, Changsha, Hangzhou.

Premier Channel A contributed 69% of the total commercial location revenue. Other channels, including Office Building Channel B, Elite Channel, our Travel Channel, our Fashion Channel, our IT Mall Channel and our Healthcare Channel together with our outdoor LED network and movie theater advertising business contributed the remaining 31%.

By the end of 2006, we granted licenses to approximately 10 overseas franchise companies to use Focus Media brand in operating local LCD networks in other countries, namely they are India, Malaysia, Indonesia, the Philippines, and the GCC region, Hong Kong, Taiwan and Singapore. Those licenses generated revenue of $0.7 million in the last quarter.

Here are the results of our in-store network. Our in-store network generated $7.9 million in revenue in the fourth quarter of 2006, increasing by 8.3% from $7.3 million in the previous quarter. In the fourth quarter, we further expanded the installed base of our hypermarkets to 1,100 hypermarkets from approximately 900 hypermarkets in the third quarter.

In the fourth quarter, time slots sold increased from 90,647 in the previous quarter to 97,774. Our in-store network sell-out rate was 30.7% in the fourth quarter. This calculation was based on the increased capacity. The average advertising revenue per 30-second time slot sold per week per store was $80 for the in-store network, the same as in the previous quarter.

Advertising service revenue from our poster frame network, mostly our poster frames in the residential market, in the fourth quarter of 2006 was $13.8 million, up 22.1% from $11.3 million in the third quarter of 2006. The number of frame slots on a monthly basis sold in the fourth quarter was 166,825, as compared to 160,437 in the previous quarter. Total number of frames available for sale increased to 99,784 at the end of December from 95,878 at the end of September, 2006.

The network occupancy rate was 56.7%, as compared to 60% in the previous quarter. This decrease in rate is also because the increase of the network we acquired during the quarter.

Average advertising revenue per frame slot in the fourth quarter was $83, up from $70 in the third quarter of 2006.

During the quarter, Focus Media Wireless generated revenue of $3.5 million, flat as compared to the third quarter of 2006.

Gross profit for the fourth quarter was $46.7 million, representing an increase of 17.2% from $39.9 million in the previous quarter, and an increase of 212% from $15.0 million for the same period last year.

The gross margin for the commercial location network, including our LED network and movie theater advertising business, in the fourth quarter was 73%, improved further from 71.4% in the previous quarter. The in-store network gross margin was 34.8% as compared to 36.4% in the previous quarter, as we continue to invest in new store networks.

The poster frame network gross margin was 75.4% as compared to 70.7% in the previous quarter. For Focus Media Wireless, gross margin was 63% in the fourth quarter due to a one-time rebate from one of the wireless mobile operators in China and as we continue to do more business with direct advertising customers rather than mobile value-added service providers. That is compared to 40.6% in the third quarter of 2006.

On a blended basis for the entire company, our gross margin for the fourth quarter was 68.5%, up from 65.3% in the previous quarter.

Fourth quarter operating expenses totaled $19.2 million, including $1.7 million in acquired intangible asset amortization resulting from historical acquisitions and non-cash share-based compensation expense of $3.3 million.

Selling and marketing expense in the fourth quarter totaled $8.7 million, including $1.2 million in stock-compensation, or the total $8.7 million is 12.8% of total revenue.

G&A expense in the fourth quarter was $8.8 million, including $2.1 million in stock compensation expense. As a result, operating margin in the fourth quarter of 2006 was 40.3% as compared to 42.3% in the third quarter 2006. This is partly due to the increase in the stock compensation charge due to the stock option we issued in November under the 2006 employee stock options line. Excluding non-cash share-based compensation expense and also acquired intangible asset amortization expense, operating margin on a non-GAAP basis was 47.9% in the fourth quarter of 2006.

GAAP net income for the fourth quarter of 2006 was $30.1 million, up 219.2% from $9.4 million for the same period a year ago. Non-GAAP net income, excluding non-cash share-based compensation expenses and amortization of acquired intangible assets resulting from acquisitions in Q2 of 2006, was $35.2 million.

In the fourth quarter of 2006, cash flow from operating activities was $47.1 million, an increase of 63.4% from $28.8 million in the previous quarter. Total depreciation expense in the quarter was $3.9 million.

For the full year, Focus Media reported total revenue of $213.3 million, an increase of 212% versus 2005. Operating profit in 2006 was $79 million. Full year net income in 2006 was $83.2 million. Net income in 2006 excluding non-cash share-based compensation expense and amortization of intangible assets resulting from acquisitions was $97.3 million.

As of December 31, 2006, the company had cash and cash equivalents of $164.6 million.

Now, I would like to provide Focus Media's business outlook for the first quarter and full year of 2007. Please note that the following outlook statements are based on current expectations. These statements are forward-looking and actual results may differ materially.

We expect that the total revenue for the first quarter of 2007 to be between $54 million and $56 million.

First quarter 2007 non-GAAP net income excluding share-based compensation expenses and amortization of acquired intangibles is expected to be between $20 million and $21 million. On a per share basis, it is $0.36 to $0.38 based on an estimated total ADS equivalent share outstanding of 55 million.

The company estimates the total revenue for 2007 to range from $350 million to $380 million. Net income of full year 2007 excluding share-based compensation and amortization of intangible assets resulting from acquisitions, on a non-GAAP basis, is expected to be between $164 million and $168 million. Based on an estimated 58 million total ADS equivalent share outstanding, per share earnings is expected to be between $2.83 to $2.90 on a fully diluted basis.

Thanks very much. Now I will open the call for your questions. Operator, please.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Jason Brueschke with Citigroup. Please proceed, sir.

Jason Brueschke - Citigroup

Thank you. First of all, congratulations Jason and Daniel on a very good quarter and a great year. I just have two questions at the outset. Could you discuss for us in detail the seasonality in Q1? I think we all know that there is seasonality and that it is probably heightened with your network, but maybe take us through some of the things that may particularly be going on with some of your individual networks?

Secondly, the Tier-II utilization rate was up nicely, just under 50% now. Could you also give us some color of what is going on here? Is it just reflecting better acceptance of your media? Is it better sales or is it just a better advertising environment spreading out to these second and third-tier cities, et cetera? Thanks.

Daniel M. Wu

Thanks very much, Jason. I will ask Mr. Jiang to answer the question relating to Tier-II Cities, and then I will come back with the seasonality explanation.

Jason N. Jiang (Translation)

For the Tier-II Cities, last year we did, the company, Focus Media organized a road show to promote our business in those cities. We explained to -- we just go there directly and meet with local advertisers and also bring our customers to those cities to see our network. That was very effective, and actually you see in this quarter, five of the Tier-II Cities we have a network in have already reached full capacity utilization. We expect more of the cities to start hitting full capacity utilization as Tier-I Cities in 2007.

In addition to that, we continue to see, besides the top 10, 12 cities, the Tier-II Cities, the other cities which we may call Tier-III Cities, the next 10, 15 cities, we see very significant pick-up in demand for Focus Media, the media network. So we continue to see very healthy growth in those cities. We expect in 2007, besides the top 10 or 12 cities, the next group of cities in the Tier-II Cities will continue to ramp up in terms of occupancy in those cities for Focus Media.

Daniel M. Wu

Let me talk about seasonality a little bit. There are two layers of seasonality we will want to make sure investors understand how Focus Media business in China. First one is in terms of the overall advertising seasonality in China. In China, overall advertising seasonality is typically weaker in Q1 and stronger in Q2, and Q3 would be relatively similar to Q2, and then Q4 is strongest. This has to do with a couple of reasons. One is because typically people at the beginning of the year do a lot of budgeting and do a lot of planning in terms of spending, and they are actually more -- more spending is actually budgeted for the later part of the year.

Also, during the first quarter there is a long Chinese New Year holiday and people basically take two to three weeks off going home. A lot of people in China live -- it takes us several days to go home, so those times actually makes the advertising market in China softer compared to the other quarters later in the year. This actually applies to, from our point of view, it applies to most of the advertising business in China.

Specifically for Focus Media, in the media we operate, there are some unique characteristics relating to the media we operate. For example, the commercial location network, roughly right now still the majority of Focus Media. It contributes more than 60% of Focus Media revenue. The commercial location network are LCDs in the office buildings and in the office buildings during that two-week period in Q1, the Chinese New Year holiday period in Q1, the entire office buildings are closed, so there is no traffic.

Of course, there are certain locations. We have screens in the shopping mall. They are still open. We have screens in the airport, but -- they are still open. But the majority of the screens are in the office buildings and the office buildings are closed, so there is no traffic. We cannot really sell those time slots to advertisers. There is no eyeball.

So in those cases, in Q1, for example, commercial location network, we typically lose 2.5 weeks, typically 2.5 weeks and sometimes up to three weeks get affected due to this particular location or placement of our LCD screens in this case.

For the residential market, of course it is less affected than the commercial location business, but it is still affected because the advertisers, they take time off. They take holidays. Also, a lot of local businesses do close, like restaurants, beauty parlors, schools, various local businesses who typically do advertising with our poster frame business do not actually open during the holiday.

Then, if you look at the in-store network, that probably is less affected seasonally, because typically the hypermarkets only close for one or two days in most of the locations in China, because people do shopping during the holidays. Also, people buy a lot of gifts during the holiday season, so we do see sometimes the stronger advertising demand for gift products actually offset some of the seasonal softness in Q1 for the in-store network.

So overall, Q1’s guidance is based on all of those factors taken into consideration and Q1 is typically, if you look at it historically, how Focus Media business operates, Q1 is typically a weaker quarter for the entire year.

That concludes my short explanation, Jason.

Jason Brueschke - Citigroup

Great. I will get in at the end of the queue, but again, congratulations.

Operator

Your next question comes from the line of Kit Low of Goldman Sachs. Please proceed.

Kit Low - Goldman Sachs & Co.

Good morning, Jason, good morning, Daniel. Thanks for taking my questions. Just a couple of quick questions. The first one is the -- maybe to help us, walk us through on how you guide for ’07 for the full year based on -- I mean, how much visibility of sales do you have based upon where you are today? I think there will be a lot of questions asked in terms of, given the visibility is usually eight to 12 weeks, on what do we use to basically guide for 2007 for the full year? We will start with that question first, I guess.

Daniel M. Wu

Let me answer that question. I think there are two ways to look at visibility. When we talk about on a quarterly basis when we are giving the guidance, if you keep in mind, we book revenue based on the advertising placement, not based on contract booking. So typically, when we provide guidance, half the quarter we already have the revenue booked because those advertisements are already showing. Then, for the later part of the quarter, there are a lot of contracts signed prior to the announcement date and we have those contracts and the only thing to book the revenue is to deliver the advertisings on our network. Of course, unless one of those days the network disappears, those revenues will be delivered because we will continue to operate our business.

When we provide full year guidance, as you understand, for the commercial location network, for example, most contracts are relatively shorter periods. They are 12 weeks, eight weeks, 12 weeks, 15 weeks, so we do not have those contracts booked. It is not like we have two-year or one-year long contracts. So how we do those guidance is -- I talked a little bit earlier when we talked about Jason’s question is typically, advertisers do a lot of media planning for 2007 at the end of 2006 and the beginning of 2007. We actually have a lot of dialog with advertisers during that period. Essentially, Focus Media right now has a lot of the clients, a lot of advertisers are repeat customers.

When we have to start off with them, they actually will have a full year budget. Some of the advertisers, it depends on case-by-case, will allocate a certain amount of money, a fixed dollar amount for our media and when we talk to them, sometimes those fixed dollar amounts are on a national level and we have to do each of the specific advertising contracts on local levels and also on a quarterly basis. So when we talk to them, we have an overall understanding in terms of -- from our customers -- in terms of what they plan to do during the year based on their marketing plan or based on their product launch.

So that is how we budget our 2007 and how we look at our business, 2007. That is how we provide visibility based on our conversations or based on our meetings with our advertising clients for the full year of 2007.

We cannot -- if you ask me about 2008, say what happens, I don’t know because those conversations do not happen until the end of 2007 or beginning of 2008.

Kit Low - Goldman Sachs & Co.

Okay, that’s very helpful. Thank you. Just a quick second question on the margins. On your 2007 non-GAAP earnings, the margin basically implies that based upon the top line growth -- I am taking the midpoint here -- the top line growth of about 67% but the non-GAAP margin in terms of expansion compared to ’06 is only about 20 basis points if I take the midpoint. Why is there such low operating leverage, if you look at it that way? Am I looking at it incorrectly?

Daniel M. Wu

I think if you want to look at that, first of all, the commercial location network, we already have a gross margin of 75%. We already have a gross margin of 73%. We expect those gross margins to pick up to 75% in the long term. If you look at today when we look at our residential market, it is already at 75%. We continue to see margin pick-up in the in-store network. Of course, we also continue to invest in the in-store network because that market still has room to grow.

We actually believe the margin today we have in most of the business, it is not going to go to 90%. It is unreasonable and that is how we look at our business in the long-term. We think the 2007 guidance in the margin is a reasonable estimate, based on a conservative basis.

Kit Low - Goldman Sachs & Co.

Thank you.

Operator

Your next question comes from the line of Safa Rashtchy of Piper Jaffray. Please proceed.

Safa A. Rashtchy - Piper Jaffray

Hello, Daniel, Jason, everyone. Congratulations. Just a couple of quick questions. Is there any seasonality or other factors in Q4 beyond your original expectations? It seems like the growth was solid but within your expectations, and maybe it was helped a little bit with the couple of licensing deals and other things. Could you give us a sense of how the quarter progressed towards the end of Q4? And I have a quick follow-up.

Daniel M. Wu

Actually, there is nothing unusual in Q4. I think if you look at the revenue in Q4, it is right, a little slightly above the mid-end of the guidance, and net income is above the upper end of the guidance. This is what we intend to do. Every time we want to provide guidance to you, we want to be as accurate as possible, otherwise we wouldn’t call it guidance. Of course, sometimes in a quarter we get hit by, towards the end of the quarter we are hit by one or two large contracts which make us do better, but otherwise, we think the guidance is for the purpose of providing the management’s best estimate how the quarter is going to go and we try to do our best to make the guidance as accurate as possible.

So there is really nothing unusual in Q4 of 2006.

Safa A. Rashtchy - Piper Jaffray

Okay. That is helpful. Congratulations on a great guidance. It hit our numbers. Just a couple of quick line -- your gross margins were pretty healthy and saw good increase. Again, is this what we could expect to be a sustainable level or were there any particular things that helped? Along with that, you mentioned the revenues for the first time from licensing the Focus Media brand to some international companies. Do you expect this to be a continuing operation and potentially increase or not?

Daniel M. Wu

I missed a couple of your words, so I am missing -- could you just repeat your question a little bit? I’m sorry.

Safa A. Rashtchy - Piper Jaffray

The first question was on the gross margin. I mentioned that you saw a healthy increase this quarter. Can we expect this level to continue? The last question was on the licensing fees that you recorded. Should we expect the licensing to continue in the coming quarters?

Daniel M. Wu

Okay. Thank you very much. Good questions. I think gross margin, as we said, for the commercial location network, in the long term we expect gross margin to be over 75%. Right now, it is 73%. We are making good progress towards that goal. Of course, this is subject to seasonality, as we discussed earlier.

For the residential market, we think the long-term gross margin will be 75%, but since we are already there, we think maybe we can continue to improve but of course, this is also subject to seasonality, you know, Q1, given in Q1 the fixed cost nature of our business.

In the in-store network, we think gross margins, there is room to improve. We want to move towards 55%, 60% by the end of 2007. We continue to try our best to move towards that point. Of course, additional expansion opportunities provided to us, we will take advantage of those. That will, of course, if we continue to invest more aggressively in the hypermarket, that will affect the gross margin, the timing of gross margin to hit that threshold. So we do expect in the long-term, gross margin for the in-store network to be 55% to 60%.

For the mobile wireless business, gross margin is roughly 40%. We think roughly 40% to 45% prior to 3G, so we continue to expect that.

So overall, on a non-seasonal basis, without factoring in the seasonality in the business, we think the long-term gross margin will continue to improve from the fourth quarter of 2006, but of course, taking into consideration seasonality, it can fluctuate quarter by quarter.

In terms of license revenues, that is a very, very small part of our business today. It basically is a way for Focus Media to build our brand and also it is a way for the friendly neighborhood countries who believe in this business model and who have a taste for building this type of business based on their local culture and local situation. They want to learn this business from Focus Media and they want to use the Focus Media brand to help them in terms of sales and marketing. We are more than happy to work with them.

So it is not like management has devoted any resources in promoting those businesses. We are not investing any money into those businesses. What they do is they come here to learn the business, we will provide some training, we provide them some know-how, sometimes we supply some equipment to them, and sell them on a cost plus basis. And they use our Focus Media brand in those countries. Of course, each country is more on an exclusive basis, so that we only partner with one party in those particular countries.

Those countries also, sometimes it -- it has to have some similarity to the Chinese market. For example, in Hong Kong and Singapore, they do have a long list of waiting times. Those businesses in those countries, our business in those countries makes sense. So that is why they are willing to partner with us. We do see some of the building, some of the operators in those countries already showing some success. As they continue to grow, we will enjoy maybe additional payment of license fees based on our agreement in each of those countries, the operators in those countries. But that is not going to be a significant part of Focus Media revenue going forward.

Safa A. Rashtchy - Piper Jaffray

Should we expect to have at least comparable levels in the coming quarters, or was it a one-time fee?

Daniel M. Wu

It is very hard for me to predict because the current quarter, there is a mix of one-time fees and ongoing fees. I would say do not even take that into consideration. It can be much lower in the next quarter. It really depends on how those partnerships continue to evolve and how their business evolves in their respective countries.

We have no control of those businesses and we have no inference on those businesses. Really, we do not view this as a meaningful contribution to Focus Media revenue in any -- not maybe many, many years later.

Operator

Your next question comes from the line of Richard Ji of Morgan Stanley. Please proceed.

Richard Ji - Morgan Stanley

Just two questions. The first question is regarding your ’07 full-year guidance. This is based on a purely organic growth rather than factoring in any further acquisitions, am I correct?

Daniel M. Wu

Of course.

Richard Ji - Morgan Stanley

Okay, that is one clarification. The other question regarding your in-store network, and I do know already the network sales dipped a couple of percentage points during the quarter. Also, the ASP remained largely flattish sequentially. Could you shed a little bit of color on this? What are the factors that contributed to this softening?

Daniel M. Wu

Let me comment on your first point. Of course, you look at the network occupancy rate, the gross margin dipped a little bit. That is just because we expanded the store network from 900 stores at the end of Q3 to 1,100 stores at the end of Q4. By entering those stores, it allows us to increase the capacity of the network, of course, and also they will increase our cost basis. As we enter the stores, we have to pay that additional fixed costs in rent as well as the network installation costs for those networks in those cities.

I will ask Jason to comment on the overall business in the in-store network.

Jason N. Jiang (Translation)

First of all, there is a couple of things you have to take into consideration when you look at the in-store network business for Focus Media in 2006 as well as going forward in 2007. First of all, in 2006, late part of 2006 and early, we continue to expect that 2007 is because there is a lot of falling entrants into the hypermarket business, and that is evidenced by Wal-mart acquisition. So all those things, most of the hypermarkets actually are taking on a very rapid store expansion plan. So as they are expanding the store, our partners, the networks we have signed contracts with, when they are expanding the store, we want to expand with them because we want to continue to establish our dominant market position in that particular business. So they are expanding their stores at roughly a rate of 20% on an annual basis. We continue to expand with them an in-store network in the new storefront they expanded.

But when you look at the contract front which generated Focus Media revenue, advertising contract front when we generate Focus Media revenue in the in-store network, because those are fast-moving consumer good contracts they are typically not particularly product driven. They are much longer in terms of -- as we discussed earlier, many of those contracts are one-year contracts or multi-year contracts sometimes, but mostly more of those are one-year contracts.

When we sign contracts with advertisers, they do not build into a factor -- you have 20% more stores, we will pay you 20% more in revenue because those stores, there is no way for them to project how many stores that we are going to have during a given year and there is no way for us to predict how many stores the hypermarket chain is going to expand in a given year.

So those contracts are typically fixed at the beginning of the year based on the current size of the network. Of course, when we renew the contract with them in the following year, we can actually ask for more revenue, more advertising revenue based on the larger network we have today.

So you do see, given the longer nature of the fast-moving consumer goods contract, we typically do have some sort of delay in terms of network build-out versus the revenue.

The last point we want to make is you do want to look at our business for the in-store network today versus where we are in 2006 and 2005. We started the business in the summer of 2005. We actually look at this business, although there is some competition at commercial location networks, we see very little competition in this in-store network. We do have some competition, but still the business is growing according to management plans laid out in mid-2005 when we launched the network.

Internally, it is still meeting our plans, how we are going to expand this business. We see very promising potential for us to grow this business long-term because we believe point-of-sale advertising is a must have and increasingly important for the fast-moving consumer goods manufacturers.

We think there is a lot of potential. We believe this business is exactly growing according to our initial plans and we do have the balance. We have the balance of the network expansion and network market position versus the revenue and margin, and we believe we manage those according to our previous plans and we are comfortable with that.

Operator

Your next question comes from the line of William Bao Bean of Deutsche Bank. Please proceed.

William Bao Bean - Deutsche Bank

Good morning, Daniel and Jason. This is Eddie in for William. Can you talk about your efforts to advertising mix? Do you see any trend there and what are the indications?

Daniel M. Wu

Let me translate for Jason.

Jason N. Jiang (Translation)

Actually, there is really not much change in terms of the type of the mix for our business, but there is one thing I want to mention. We do see more and more fast-moving consumer goods advertisers, like shampoo conditioning and dairy milk. These types of fast-moving consumer good advertisers are using our commercial location network. This is because the reach, based on a third-party independent market study, our commercial location network today covers roughly about 130 million urban consumers on a daily basis in China, and that is a very big reach. Once you have a large enough reach, you become an interesting media to the fast-moving consumer goods advertisers like [inaudible] and dairy product manufacturers.

So we do see those people are increasingly using Focus Media commercial location networks in addition to the in-store network. But otherwise, business is pretty -- not much dramatic change in terms of the customer mix.

Operator

Your next question comes from the line of Jason Helfstein of CIBC World Markets. Please proceed.

Jason S. Helfstein - CIBC World Markets

Thank you. A few questions. First question, your 2007 guidance, can you talk about what type of pricing range that assumes in Tier-I markets, if possible? Then I have two follow-ups.

Daniel M. Wu

Sure. We typically increase our price every six months. We do not provide a pricing guidance. It is really -- we increase the price for Tier-I Cities in the beginning of 2007. Possibly we will review our pricing structure in the middle of the year and we will decide what pricing action we are going to take. Really, we cannot predict specifically in terms of what we are going to do right now.

Jason S. Helfstein - CIBC World Markets

My follow-ups, if I did my math correctly, the outdoor LED network and movie theater advertising was about $13 million in the quarter. Is that correct?

Daniel M. Wu

We do not break out the revenue streams. I cannot comment on that. Those revenues are -- Focus Media revenue, we do not break out those revenues.

Jason S. Helfstein - CIBC World Markets

Just I want a clarification; you said in the press release that the outdoor LED and movie theater was 31% of the --

Daniel M. Wu

If you look at our press release, it is Office Building Channel B, which is the Target Media network we acquired, mainly those networks, and also our sub-channel networks, like the Elite Channel, Healthcare Channel, IT Mall Channel, Travel Channel -- all of those networks together with LED and movie theater advertising network are 31%.

Jason S. Helfstein - CIBC World Markets

Okay, that makes more sense. That number seemed too large -- a good business, but not that good yet. My last question is, how many shares did you have at the end of the quarter?

Daniel M. Wu

If you look at, we did an offering at the end of January and at the end of January, post-offering, the total shares outstanding is 55.6 million ADRs, and there is no change from that day to today in terms of shares outstanding, so today it is still 55.6. But at the end of the quarter, I think it was roughly about -- end of the quarter, December 31st, it was about 54 million shares outstanding, approximately.

Jason S. Helfstein - CIBC World Markets

And does your guidance assume the earn-out for Framedia is completed?

Daniel M. Wu

If you look at the guidance we provided, the full year guidance is based on 58 million shares outstanding for the full year and that is taking into consideration the earn-out for Framedia.

Operator

Your next question comes from the line of James Lee of W.R. Hambrecht. Please proceed. James Lee, your line is open for questioning. Please proceed.

James Lee - W.R. Hambrecht Co.

A quick question here; can you comment about pricing for the Tier-II markets? It seems like the ASP was down 15% quarter over quarter, if I calculated that correctly. Could you talk about, did you do any special promotion or discounts during the quarter to drive sales? I am just curious what the discount level is --

Daniel M. Wu

You mean the Tier-II market, right?

James Lee - W.R. Hambrecht Co.

Yes, Tier-II market.

Daniel M. Wu

I think we have talked about this many times. The blended rate, if you do math based on whatever ways you calculate, because we said Tier-I Cities contribute 58% of the revenue in Premier Channel A, if you do the math, you do see that -- and what you calculated is correct, but this has nothing to do with any promotion. It is because the mix of the rate in different cities.

Every single quarter, we try to explain this on the conference call. Each of the cities are different in terms of their population into the local economy. So just like TV stations, each of the cities, the ASPs are very, very different. Also, the rates are very different. You cannot look at all the Tier-II Cities, which is almost 50 cities, as one single unique city can look at from an average ASP point of view.

Because the top end cities in Tier-II, like Chengdu, their ASP in Chengdu can be 10 times more than the last city in the Tier-II, let’s say [inaudible]. Chengdu, the ASP in Chengdu can be maybe 10 or 20 times than the ASP in [inaudible].

So when you mix those cities together and when the rate of increase in slot sales in all those cities are different, the ASP will mix, the average ASP will be different, just like you are mixing Denver, Boston and New York together in the U.S. for TV rates. You can come up with different results quarter by quarter.

So if you look at the Tier-II Cities slot increase, which is the most important, it increased very rapidly in the last quarter. Some of those increases are coming from the lower ASP cities, because the top ASP cities already have a very high occupancy rate.

Also, do keep in mind in the cities, especially the cities outside of the top 10 or 12 cities in Tier-II Cities, the occupancy in those cities are still lower. We typically, given the lower occupants, given the fixed cost nature of our business, we offer a deeper discount when we want to launch business in those cities with lower occupancy rates.

So the blended ASP really for the Tier-II Cities, really is not an indication of how Focus Media business is. So what we tell you, if you want to focus on ASP, really there is no difference between Tier-I Cities and Tier-II Cities except some of the Tier-II Cities are two years behind Tier-I Cities, some of the Tier-II Cities are five years or 10 years behind Tier-I Cities. So you should look, if you want to focus on ASP, you should look at Tier-I ASP when the occupancy rate is 100% over the last let’s say many quarters.

If you want to look at how we increase the penetration into the Tier-II Cities, you should look at [inaudible]. Once those cities reach 100% occupancy rate, the Tier-II Cities, then if you look at ASP for those cities, that is more meaningful.

James Lee - W.R. Hambrecht Co.

Daniel, could you comment about the residential pricing ASP that went up pretty healthy, if my math is correct, 17% quarter over quarter? Is that purely based on price increase or there was less discount given in the quarter?

Daniel M. Wu

There was no price increase in 2006 for the residential market, except the beginning of the year. So there is really no price increase in Q4 in terms of rate card for residential market. This is purely because specific contract negotiations in this particular business segment and by reducing the discount we, on a blended basis, each contract is different on an average basis when we negotiate a contract with customers.

Do keep in mind, for Framedia, the explanation I give to you previously regarding Tier-II Cities really does not apply in Framedia because for the residential market, the price is based on a frame basis, not on a city basis, so each frame will have a price.

So to answer your question simply is basically this is because of pricing negotiation in Q4 with customers. It has nothing to do with a rate increase.

Operator

Your next question comes from the line of [Lin Chi]. Please proceed.

Lin Chi

Can you give some color on the recent developments in your LED and cinema networks, in terms of either the advertiser base, occupancy rate, and your client’s feedback towards this new network?

Daniel M. Wu

I think in the LED business, at the end of the quarter, we have over 200 LED panels in Shanghai. We continue to look for opportunities to expand this business into other parts of the country. We really have nothing to discuss in terms of the expansion of this network because we have not had any contracts signed as of today. So we cannot talk about -- we are not ready to talk about the occupancy rate, as well as ASP, but you can also look at the rate card on the website for the LED network. This is because they are still contributing a very small part of the revenue and it is still growing rapidly, and so the ASP occupancy really is not indicative. They are less than 5%, much less than 5% of Focus Media revenue.

For the movie theater business, we just started in October of 2006, so only for two quarters. There is really nothing to talk about. It is just a very small business, as we explained to you before, given the size of the market, the number of theaters in China, the number of Hollywood movies in China -- it is really a very small market and we continue to build this business going forward. But we do have a dominant position in this particular market and we believe in the long-term, it is a very promising market, but right now it is really too early to talk about.

Operator

We have no additional questions in queue.

Daniel M. Wu

If that is the case, thanks, everyone. Let’s conclude the call today and have a good day.

Jason N. Jiang

Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Good day.

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Source: Focus Media Q4 2006 Earnings Call Transcript
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