Executives
Jie Chen - Investor Relations
Jason N. Jiang - Chairman of the Board, Chief Executive Officer
Zhi Tan - President
Daniel M. Wu - Chief Financial Officer
Analysts
Jason Brueschke - Citigroup
Kit Low - Goldman Sachs
Aaron Kessler - Piper Jaffray
Jason S. Helfstein - CIBC World Markets
James Lee - WR Hambrecht+Co.
Richard Ji - Morgan Stanley
Eddie Leung - Deutsche Bank
Lin Shi - Lehman Brothers
Louis Corgan - Kingford Capital
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Focus Media Holding Limited (FMCN) Q1 2007 Earnings Call May 17, 2007 9:00 PM ET
Operator
Good day, ladies and gentlemen. I would like to welcome you to your first quarter 2007 Focus Media Holding Limited earnings conference call. My name is Alexis and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Jie Chen, Investor Relations Manager of Focus Media. Please proceed.
Jie Chen
Thank you. Welcome to Focus Media's first quarter 2007 earnings conference call. Today, our management will discuss the company’s financial results for the first quarter of 2007 and discuss our business outlook for the second quarter of 2007.
With me here are Jason Jiang, Chairman of the Board and Chief Executive Officer; Zhi Tan, Director of the Board and President; and Daniel Wu, Chief Financial Officer. After Daniel updates you on our first quarter 2007 operational and financial performance, we will open the call to questions. This call is also being broadcast through the Internet and available through our investor relations website, ir.focusmedia.cn.
Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements that are subject to risks and uncertainties. The statements include, but are not limited to, statements regarding Focus Media's business objectives and plans, expectations of the development of our networks and our outlook for the second quarter 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 short history of the outdoor audiovisual advertising sector, which would make it difficult for you to evaluate the viability and prospects of business, the integrations of acquired business, competition from 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 these forward-looking statements except as required under applicable law.
Now I will turn the call over to our CFO, Daniel Wu, for a summary of the first quarter 2007 financial results.
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Daniel M. Wu
Thank you, Jie. I am pleased to report to you a solid first quarter of 2007. Gross revenue, including various taxes, reached $63.3 million. Our total revenue excluding sales taxes reached $58.1 million, an increase of 75.4% from the same period last year. Our first quarter revenue includes $32.4 million from our commercial location business; $6.7 million from our in-store business; $12.7 million from our in-elevator poster frame business; and $6.0 million from our 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 first quarter was $32.4 million. For our Premier Channel A, total network capacity increased to 16,320 timeslots as compared to 15,939 timeslots in the last quarter. Total number of timeslots sold on our Premier Channel A in the first quarter 2007 was 6,414, down from 8,533 timeslots in the previous quarter due to the first quarter seasonality relating to the Chinese New Year holiday, but higher than 3,904 timeslots sold in the first quarter of 2006.
In Tier-I cities, namely Beijing, Shanghai, Guangzhou and Shenzhen, slots sold in the first quarter were 1,117 representing a network sell-out rate of 89.5%. Average advertising revenue per timeslot for Premier Channel A in the Tier-I Cities was $12,029 in the first quarter. Slots sold in the Tier-II cities were 5,298, representing a network sell-out rate of 35.1%, while average advertising revenue per timeslot was $1,684.
Premier Channel A contributed 70% of total commercial location revenues. Other channels, including Office Channel B, Elite Channel, Travel Channel, Fashion Channel, IT Channel, Healthcare Channel, together with our outdoor network and movie theater advertising network contributed the remaining 30%.
For our in-store network, total revenue was $6.7 million in the first quarter of 2007. In the first quarter, we further expanded the installed base of our hypermarkets to 1,196 hypermarkets from 1,100 hypermarkets at the end of last year.
Slots sold were 100,322 with a network sell-out rate of 27.8%, based on the increased capacity. The average advertising revenue per 30-second equivalent time slot per week per store was $67.
Advertising service revenue for our poster frame network in the first quarter was $12.7 million, up 108.8% from $6.1 million in the same period last year. The number of frame slots on a monthly basis sold in the first quarter of 2007 was 195,603, up 17.2% as compared to 166,825 in the previous quarter.
Total number of frames available for sale increased to 124,542 at the end of March, from 99,784 as of the end of December, 2006. The network sellout rate was 52.1%. Average advertising revenue per frame slot was $65.
During the first quarter, Focus Media Wireless generated revenue of $6.6 million, up from $3.5 million in the fourth quarter of 2006.
Gross profit for the first quarter of 2007 was $33.7 million, representing an increase of 82.1% from $18.5 million for the corresponding period a year ago. The gross margin for our commercial location network in the first quarter was 61.7%; in-store network gross margin was 24.7%; poster frame network gross margin was 66.9%; Focus Media Wireless gross margin was 56.5%. On a blended basis, our gross margin for the first quarter was 58%, as compared to 55.5% in the first quarter of 2006.
First quarter operating expenses totaled $20.5 million, including $1.9 million in acquired intangible asset amortization resulting from historical acquisitions, and non-cash share-based compensation expense of $4.5 million.
Selling and marketing expense in the first quarter totaled $9.9 million, including $2.1 million in stock compensation expense, or 17% of total revenue.
G&A expense in the first quarter was $8.7 million, including $2.2 million in stock compensation expense, or 14.9% of total revenue. As a result, operating margin in the first quarter of 2007 was 22.7%. Excluding non-cash based share compensation expense and acquired intangible amortization, operating margin on a non-GAAP basis was 33.8% in the first quarter of 2007.
GAAP net income for the first quarter was $16.3 million, or $0.15 per fully diluted ADS, up 72.7% from $9.4 million for the same period last year. Non-GAAP net income excluding non-cash based share-based compensation expense and amortization of intangible assets in Q1 of 2007 was $22.7 million, or $0.21 per fully diluted ADS.
In the first quarter of 2007, cash flow from operating activity was $24 million. Total depreciation expense was $3.8 million.
Now I would like to provide Focus Media’s business outlook for the second quarter of 2007. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and actual results may differ materially.
We expect that the total revenue for the second quarter of 2007 will be between $103 million to $107 million. Fully diluted earnings per ADS to be between $0.34 and $0.35.
Thank you very much. Now, we will open the call for your questions. Operator.
Question-and-Answer Session
Operator
(Operator Instructions)
Your first question comes from the line of Jason Brueschke with Citigroup. Please proceed.
Jason Brueschke - Citigroup
Thank you. First of all, good morning, gentlemen and congratulations on a fantastic quarter, as well as your outlook for the rest of the year. Let me just start with two questions and then I will get back in the queue.
The first one involves the Frame 2.0 announcement that you made this morning. Could you tell us if you have already tested a smaller batch than I think it’s the 10,000 you plan to roll out, and maybe what the results of that testing was? And then, give us some idea of what the revenue effects of this improvement is likely to be, as well as the associated costs. And then I will have another question on the frame media business.
Daniel M. Wu
Dr. Tan will answer the question.
Dr. Zhi Tan
We have tested on a small scale. Right now, we have deployed around 2,000 plus sets around the country. So far, we received very positive feedback from customers and from our agents. We believe this will be a very highly recognized product, both from the quality and from the service provided to the customer.
In terms of revenue, we cannot predict at this time about how much, but the one thing we want to remind you is that this product will be able to provide a multi-session advertising to our customers.
Daniel M. Wu
I think if you see from the press release, this product has been in the making for the last 15 months. Dr. Tan and his team have worked very hard during the last year-and-a-half to make this product available today for our media network. Overall, we have very high expectations of this business. Given we just initially launched this product, I think we are not providing specific revenue guidance from this product but we think it is going to contribute very positively for Focus Media this year as well as next year.
Dr. Zhi Tan
I would like to add a couple more points in terms of the technology. In terms of technology, it is a highly integrated, state-of-the-art of new technology. It includes wireless ethernet, high resolution TV, and remote control sensor control built in. We’ll be able to provide extremely good services to the customers, so we believe it will be a very positive product to the customer.
Secondly, it also provided some different kind of broadcasting ability to the customers. We not only provide a single picture but also provide multi-session, program defined. The customer can give us predefined on a scheduling basis. For example, the customer can define that Monday to Friday, 7:00 a.m. to 9:00 a.m. they will display one picture and from 9:00 a.m. to 5:00 p.m. display another picture. So customers can provide more, up to 1,000 pictures and preload it into the system, so greater definition is given to the system and it will display according to the customer’s definition, the schedule.
So we will have the ability to provide such flexibility to the customer.
Jason Brueschke - Citigroup
Great. I guess the follow-up question would be is, it seems like this is an ability to segment -- in the commercial networks, you segment in some ways according to your location. We have the Elite Channel, et cetera. This seems like you are going to be able to segment by time, and it would seem that you should be able to effectively achieve some type of peak time and non-peak times. My expectation would be that overall revenues probably are going to be higher because there will be certain either times of the days or days of the week where certain advertisers, say a movie that is being launched and wants to advertise a lot say on a Thursday and Friday ahead of the premiere, and you can do some peak pricing. Is that the way we should be thinking about the advantages of this technology?
Daniel M. Wu
What Dr. Tan just explained before is basically we have the technology of doing this. The technology today is available to do multiple frames for a single client during the same day or selectively at different times during the day or different times during the week.
The sales process is gradually refined today, so not saying today we want to do this today but we are capable of doing that. Potentially, that will provide us more capacity to sell and provide better customer service to advertising clients.
Today, we are actually allow each frame to carry three different customers at the same time. So basically, it’s the -- so there’s a revolving picture and three different clients can be carried on a single frame.
Jason Brueschke - Citigroup
My second question is just some general information about Frame Media in general. Could you tell us how many cities you currently are in, what your geographic expansion plans are for the rest of 2007, and maybe give us an idea of what we think the pricing as you move into more second-tier cities is likely to be? Thanks.
Dr. Zhi Tan
We have currently deployed about 15 cities, major cities in China, covering most of the major cities. Right now, the problem is Tier-II, Tier-III cities, there are not many buildings, high-rise buildings in residential areas. Therefore, we are limited not to our competitor but there is no market in that area. So we have pretty good coverage on those available residential buildings throughout the country.
Jason Brueschke - Citigroup
Great. Thank you.
Operator
Your next question will come from the line of Kit Low with Goldman Sachs. Please proceed.
Kit Low - Goldman Sachs
Good morning. Thanks for taking my question. A couple of quick questions; the first one relates to the guidance on second quarter. On the second quarter, if there is any way you could provide some guidance over what is the breakdown between the core business and OES contribution, both on the top line and especially in non-GAAP, in the bottom line. That would be helpful. We’ll start with that and see if we go to the next one.
Daniel M. Wu
Historically, we have not provided a breakdown of segments within the business when we are providing guidance. We are not going to do that on this call as well. I think traditionally, the company always provides guidance on a quarterly basis and at the beginning of the year on an annual basis. We are providing a total revenue guidance and EPS guidance.
OES business is trending very well and we see its growth, as we discussed on the closing call of our OES acquisition. Its growth momentum is very strong and we expect that to contribute significantly in our second quarter revenue and earnings. So that has been already incorporated in the guidance we provided.
Kit Low - Goldman Sachs
Thanks. The second quick question relates to the CapEx for the digital frames for frame media. What sort of CapEx expectations for this year on the back of that? Also, the depreciation sort of policy on the back of these frames, would that be consistent with what your current depreciation policy is?
Daniel M. Wu
Sure. I think first of all, at the beginning of the year when we provided you the CapEx guidance, $20 million to $25 million, we were not exactly sure what the launch date of frame media 2.0. So if we are going to launch in the middle of this year and expect installation continuing for the latter part of the year, we are probably going to have a few million dollar impact on our CapEx. Because if you think about those frames typically cost roughly about RMB5,000 a unit, and we also do an upgrade on the high-end of the market first and gradually push towards the lower end of the market, mid and lower end of the market. So the impact on CapEx will increase CapEx by $5 million to a few million dollars, depending on the deployment results and from the take-up by the advertisers.
The depreciation is very straightforward. We are going to keep this five years depreciation policy. It is the same as the LCD network we had on the commercial location business.
Kit Low - Goldman Sachs
Great. Thank you.
Operator
Your next question comes from the line of Aaron Kessler with Piper Jaffray. Please proceed.
Aaron Kessler - Piper Jaffray
A couple of questions; on the frame media, can you give us any sense for the timing of when you would expect rollout in terms of ’07 and ’08? And then, can you provide some color around the expense levels in Q2? With the higher revenues than we expected, it appears that you are modeling some higher operating expenses as well, or maybe some lower gross margins. Just a little guidance on that.
Finally, the in-store seemed a little weaker than our estimate. We though it would be a little stronger, given you still see some resiliency in the Chinese New Year and the in-store network. Was there anything specifically going on in the in-store network? Thank you.
Daniel M. Wu
Sure. Frame Media 2.0 rollout, as I said earlier, is going to be a gradual process. So we initially are going to launch about 10,000 and then gradually increase the number, depending on the customer up-take, and as well it depends on how the business we believe is going to evolve in 2007, 2008.
That will contribute to our 2007 and 2008 business. It is not additional market but it will gradually replace on the high-end of the existing market but it will increase the capacity as well as the advertisers’ effectiveness from an advertiser point of view to make this media more attractive to high-end, high-paying advertisers and increase their ROI.
On the margin, actually if you think about Focus Media business, in our business most of the media segments are a fixed-cost based business, so as we said, when the first quarter there is the Chinese New Year holiday, during which most people taking the time off, as there are no people in the office buildings, we do experience a little bit of softness, seasonality. So the margin we believe is normal. It does not reflect our long-term trend but it has more to do with the seasonality of the business.
I think the in-store business is trending well. It is also affected by seasonality because people do take some time off during Q1 and we continue to expect the in-store business this year to grow healthy. As you see, we continue to expand our coverage of the hypermarkets. We continue to expand the number of screens we installed in the network, so there is really no difference today for the in-store network, anything particular we need to highlight.
Aaron Kessler - Piper Jaffray
Finally, just on the wireless business, that appeared to be up about 50% sequentially, and also the margins were very strong. I think you indicated last quarter that the margins might tick down, given that there’s a one-time benefit last quarter. Can you just give us some commentary on the strength of the wireless business?
Daniel M. Wu
Sure. For the wireless business, we do see very strong momentum in 2007. If you think about the gross margin this quarter, actually it is lower than Q4 is because in Q4, we had a one-time rebate from one of the operators. Typically, those rebate fees are paid at the end of the year. So we believe today that the gross margin of the mobile business is sustainable going forward, and also if you look at the growth of the wireless business, it is due both to organic growth as well as some smaller acquisitions we made in Q1. That allowed us to consolidate the platform we have for advertisers to deliver SMS and MMS based messaging to targeted consumer groups based on different business models.
We believe this business will grow very healthy and after the 3G network is in place in China in a few years, we believe there are many more different business models that will be available for the wireless business to increase its advertising dollars.
Aaron Kessler - Piper Jaffray
Great. Thank you and good quarter.
Operator
Your next question comes from the line of Jason Helfstein with CIBC World Markets. Please proceed.
Jason S. Helfstein - CIBC World Markets
Thank you. Three questions; the first with respect to this quarter, very healthy utilization or occupancy growth this quarter, particularly in the Tier-I markets. Does that set you up for strong pricing in the second quarter? That’s question one.
Question two, we did notice, however, that the average direct cost or the margin per display for the commercial business did tick up more than we thought. We expected that to be flat to down. Any talk with respect to the margins in the commercial location network?
And then my last question, Daniel, can you remind us; the $1.4 million below the line, the other, what did that relate to and does that continue into the second quarter? Thank you.
Daniel M. Wu
First of all, regarding pricing going forward, Jason.
Jason N. Jiang (Translation)
First of all, to answer your first question, is we expect a very healthy pricing trend going forward, especially today we’re in the high-utilization cities versus the smaller cities we have on the network. We have already had the price ready and started talking to our clients. We will make an announcement and put it on our website very shortly for the price increase for the later part of the year. So overall, we believe the pricing trend is very healthy.
On the margin for the commercial location network, if you think about the margin compared actually quarter over quarter, it is quite similar to the first quarter of 2006. So we still expect long-term gross margin for the commercial location business without taking into consideration seasonality, we will be above 75%. So basically we think the commercial location network this quarter is affected by seasonality but otherwise, we continue to believe for the big cities, which we have very a high utilization rate today. The gross margin will be higher but for the smaller cities, where the utilization is relatively lower, within the cities we just started our network, the gross margin will be lower, given the fixed cost nature of the business.
But we believe the long-term gross margin of the overall commercial location network will be over 75%.
On the other expenses, we don’t believe that will re-occur. It is just certain, one-time related charges we have in various different businesses, and some of them to do with some of the write-down of the inventory costs and of that nature. So we don’t expect that to be a recurring cost.
Jason S. Helfstein - CIBC World Markets
I’m talking about there was other income, the 1.4. Below interest, 1.4.
Daniel M. Wu
Sorry. I though you said other costs. Other income, yes, that also has to do with certain subsidiaries and that is not going to be recurring income. It has to do with the consolidation of the business.
Jason S. Helfstein - CIBC World Markets
If I could follow-up on your margin answer, was there any spending with respect to the outdoor LEDs or the movie business that would have hurt the commercial location margin?
Daniel M. Wu
Not anything we are expecting in the near-term. We are expanding our LED network into additional locations. We continue to look to expand those businesses at new locations, new opportunities. Nothing we have announced yet but we don’t expect those things will have a significant impact on our gross margin for the commercial location network, given the business, those new businesses are relatively small compared to the existing revenue and margins.
Jason S. Helfstein - CIBC World Markets
Okay, last one and then I’ll let someone else go; are you reiterating your full year guidance, even though there was no commentary in the press release?
Daniel M. Wu
We don’t -- the company does not really reiterate guidance every call, so I think for this call, I think in the press release we said we are providing Q2 guidance. I think right now, it is just so close to the last time we talked about full-year guidance, so we really don’t want to make additional comments on the full-year guidance.
Jason S. Helfstein - CIBC World Markets
Thank you.
Operator
Your next question comes from the line of James Lee with WR Hambrecht. Please proceed.
James Lee - WR Hambrecht+Co.
Can you just elaborate about the mobile advertising business a little bit more? Can you talk about how many new customers you signed up in the quarter and how many customers you have in total? Also, can you comment about the corporate and commercial business a little bit? The dynamic is very different in this quarter, first quarter ’07 versus first quarter ’06 where your utilization rate at 1Q06 was 75%. Obviously you did very well, 89% but do you see a decline in pricing in this quarter versus the 11% pricing increase in 1Q06? Maybe you can sort of explain that dynamic a little bit. Thanks.
Daniel M. Wu
Sure. Your first question was relating to the mobile business. You broke up a little bit. I didn’t catch it.
James Lee - WR Hambrecht+Co.
Yes, it was mobile business.
Daniel M. Wu
Regarding the mobile business, we see there is really no account of the number of clients because there’s a lot of smaller clients and also a lot of direct clients so we don’t have -- it’s an extremely fragmented market. There are clients who pay us a few hundred dollars, there are people paying us $100,000. It is a very diversified client universe, so we really don’t have a specific number to provide to you in terms of the number of clients, but we do think the business is improving. Also, it is very different from the other mobile content business because we really don’t do any content. What we are providing is advertising platform for both service providers as well as direct advertising customers to provide advertising messages or services to their chosen client universe, either based on demographics or based on clubs, communities, or based on a certain type of group they involve in directly to their customers.
So it is a very diversified customer base, as well as diversified revenue models. I think that is going to be the trend going forward as well for the mobile advertising business.
For the commercial location business, thanks for noticing the utilization rate has picked up Q1 versus last year Q1. I think, of course, do keep in mind during the two-week Chinese New Year holiday, the office buildings close so really there is not much traffic in the office buildings. So sometimes, in order to sell in the softer Q1 season, you have to provide a little bit more discount to advertisers. So I think it is more of a balance, how we run our business, how we balance the utilization rate versus the discount, and I think this quarter we actually, given the discussion with different advertisers, we believe the balance we achieved this quarter allowed us to achieve a very good financial result. So that’s how it appears to be.
So it is not really, from our point of view, we don’t target a specific utilization rate or we don’t target a specific, of course, discount level should be lower, the better, but I think more importantly is we want to look at how many advertising dollars we can sell in any given quarter, given the fixed cost nature of the business.
James Lee - WR Hambrecht+Co.
Daniel, is it fair to say in this quarter, 1Q07, you changed your sales approach versus the first quarter of last year, where you become a little more flexible in pricing, being a little more aggressive in exchange for your customer taking more slots, therefore driving --
Daniel M. Wu
I think it is really not a trend. It is not a sales approach change. Really, our sales approach has not differed from the day we started Focus Media to today. It is just like different contracts we are negotiating, each of the contract how you are shifting your balance a little bit. It really has no shift or no change in sales approach.
James Lee - WR Hambrecht+Co.
Okay, and let me have a quick follow-up question on the mobile side. You say in the mobile, there are also smaller customers versus your core base in your other platform. I was just wondering, how much crossover do you have with your mobile platform versus your virtual advertiser on your commercial platform?
Jason N. Jiang (Translation)
Today, if you look at the mobile wireless business versus our main commercial location business, the mobile wireless business is more targeted advertising media, so the customers typically are on a local level and typically are much smaller in per contract size, in terms of revenue. The commercial location network, if you think about that, that covers 130 million urban consumers on a daily basis, so it is a very attractive platform for many large, multinational companies to do advertising for those highly attractive urban consumer eyeballs.
Today, we have started in this quarter to gradually educate our large clients to understand the effectiveness of mobile advertising. Today we do have some service plans to help those clients to test and also to try to use the mobile advertising to reach the target consumers they want to reach.
We believe in the long-term, especially with the improvement of the network with 3G, large clients will view mobile advertising as much more important, more and more important going forward as part of their advertising solutions. So going forward, we do believe there is going to be a certain benefit coming from providing this type of service, the mobile advertising service, to the large client universe we have. But today, the clients are very fragmented and are more on a local level. Today, those revenues, the local level, multi-revenue still accounts for the majority of the mobile advertising revenue.
Operator
Your next question comes from the line of Richard Ji with Morgan Stanley. Please proceed.
Richard Ji - Morgan Stanley
I have two questions. First, starting with poster frame advertising and obviously experienced robust growth, literally with sales doubling year over year above all other business lines. Can you help us to understand a little better how sustainable, especially in terms of your total number of frames available and also for the number of frames sold. The ’06 year is quite strong growth year over year and quarter over quarter. Can you help us to understand a little better how sustainable is that kind of growth going forward?
Daniel M. Wu
Sure. Dr. Tan will answer the question for you.
Dr. Zhi Tan
The number of frames available for sale this year increased due to some secondary cities, Tier-II city application. So we just put it into five-plus cities into our group, so that’s why we increased the number of frames.
In terms of revenue, we did see some good revenue come in but I don’t believe this is the same ratio for the quarter after that. But it is a good revenue stream for sure.
Daniel M. Wu
Richard, sorry, you were breaking up a little bit so I have to still translate for Dr. Tan because we can’t hear you very well, but if you can hear us, I think we continue to expect the number of frames to grow and also the revenue trajectory going forward, Dr. Tan said, would be less strong than Q1 because last year, Q1 actually was the first quarter we integrated Frame Media, so there is a slightly soft business in the first quarter where we integrated the business. So the relative comparison, it was a little bit easy for us.
Richard Ji - Morgan Stanley
My second question is regarding your ASP trend, especially in Tier-I cities and also for your in-store network. Obviously they both experienced some weakness during the quarter, other than the normal weak seasonality. How much of that price weakness is due to competition in your in-store network?
I’m also particularly interested about the discount you are currently giving away on leverage for your [inventory]? Hello?
Daniel M. Wu
One second. Let me translate for Jason.
Jason N. Jiang (Translation)
Richard, first we will talk about commercial location pricing. In Q1, if you do keep in mind we increased price on January 1, 2007, there are a lot of accounts, given that they know we have a price increased, have locked in last year’s price by signing contracts, advertising contracts in Q1. They signed a contract in November and December of last year, so they will be able to enjoy the benefit of the lower price we had last year.
Those contracts actually, we don’t sign those contracts anymore after the price increase, so all the contracts after January 1, 2007 are based on the new price. So that’s why relative to the listing price we have, there is the discount in Q1 is slightly higher, the relative discount based on the listed price we have on the website.
Also, we do have, and thanks for noticing, we do have a new, sort of let’s say one of the sales strategy, given we have multiple channels today in Q1 of 2007, so in this year in Q1 during the Chinese New Year holiday, we actually have a special promotion package basically combining multiple channels, including the Fashion Channel, the Elite Channel, the Office Building Channel together to sell to a client as a package. It actually contributed positively to the overall revenue but it is sold at a deeper discount because basically office buildings, there are not many people in the office building.
Earlier we talked about you see the utilization rate in the commercial location business in Tier-I was higher but the ASP was a little bit softer relatively to last year. We don’t expect those special packages to be offered during the year, except in the holiday period, such as the Chinese New Year holiday, on May 1st or October 1st.
So if you look at overall business for the commercial location business, we believe based on our experience the discount level we offer to businesses as well as clients are actually improving, so the discount levels are decreasing gradually. So we don’t see that has any -- if you think about we continue to push price increase, that’s because we do believe we have very good pricing comparison in this media versus other comparable media.
For the in-store network, we do have a tough competitor, which capped certain of a level of pricing power we have in the in-store network, but you do see the in-store network is growing, so we believe in-store network will continue to grow. Today it contributes 11.5% of Focus Media's overall revenue. We believe with the addition of OES in Q2, the percentage of the contribution for in-store network will be less than 10%.
So in-store network is a media which we face a competitor, which caps certain pricing power. So it is not -- the pricing power is not as strong as the commercial and poster frame business. But we are testing a few new business models for the in-store network. We believe these new business models will dramatically change the media attractiveness to advertisers and increase our revenue potential. Given the competitive nature of our business, we right now are not able to discuss that with you but once we have those new business models launched, we will report to you at the time we launch those businesses.
Richard Ji - Morgan Stanley
Thank you.
Operator
Your next question comes from the line of Eddie Leung with Deutsche Bank.
Eddie Leung - Deutsche Bank
Good morning. Three quick questions; the first one is will there be any short-term impact on revenues when you install those digital frames? How long does it take to get them up and running?
The second question is what would be the impact of OES on your DSO?
Finally, on the regulation side, do you see anything evolving that may have an impact on your business? Thank you.
Dr. Zhi Tan
Let me answer the first question. I don’t believe it will impact our revenue in the coming days, coming months. I still can see how we installed up to 2,000, 3,000 pieces already and our revenue in fact increased. As a result, each frame 2.0 will at this time is equivalent traditional 1.0 lines. So we will have tripled the revenue for that single installed poster frames. So we will enjoy more revenue coming in for the installation.
Daniel M. Wu
To answer your next question on OES, OES has a longer DSO versus the overall business of Focus Media. Do keep in mind in Q1, the DSO for Focus Media was relatively higher, 100 days. That is because the revenue was lower, affected by seasonality but cash received has not changed. It is pretty much steady over the year, so that is why relatively in a softer season, you see a longer DSO for Focus Media, but we expect long-term DSO to be within the expectation of 75 to 90 days, 60 to 90 days over the year. So it is really not much difference for Focus Media, but with the incorporation for OES financial statements, in the second quarter we expect the blended DSO may be slightly extended by a few days because all OES, given their large client base, are with agencies and those agency clients typically have longer DSO outstanding.
But we don’t think, given the size of the business, Focus Media relatively to the size of the business of OES, we don’t think that’s going to be a significant impact. Also, OES has a very little bad debt experience, given their business. So we don’t see that is going to have any material effect on the overall business of Focus Media.
The third question is relating to the regulatory environment. Today, we really don’t see anything regulatory that will potentially affect our business.
Operator
Your next question comes from the line of Lin Shi with Lehman Brothers. Please proceed.
Lin Shi - Lehman Brothers
Good morning. Thank you for taking my questions. My first question is on the gross profit margin of commercial location network. On a year-over-year basis, I noticed there is a slight drop, about 1.5% but on the other hand, we’ve seen an occupancy rate and ASP, both grew quite a bit on a year-over-year basis. Given the nature of the fixed cost business, I just wonder what’s the reasoning behind the gross margin decrease?
Daniel M. Wu
That’s very straightforward. It’s because last year we had many more, many less cities versus this year, and this year it is a much bigger network. I think that helps to hopefully answer your question. So there are many more cities, which Tier-III, Tier-4, Tier-5 cities which has a lower occupancy rate and therefore has a lower gross margin. So on a blended basis, it decreased slightly.
So on a city-by-city basis, the overall gross margins are improving.
Lin Shi - Lehman Brothers
But I assume with all the Tier-III, Tier-4 cities the rental expense would be very low?
Daniel M. Wu
Yes, it is a fixed cost business. In a city, if you do think about Focus Media, we started with Tier-I cities. If you go to [Xiamen] and if you go to [inaudible], their occupancy rate today is very, very low. So that’s what we have experienced many times. The occupancy rate for Focus Media network is not the same across all the different cities. In the big cities, like Beijing, Guangzhou, Shenzhen, seasonally adjusted it was 100%, sold out since 2005.
But in the cities in which we newly entered or cities in more remote areas, the occupancy rate is much lower. But it is a fixed cost business. The utilization rate is lower. Gross margin is lower.
Lin Shi - Lehman Brothers
Okay, thanks. My second question is, Jason seems to be a little bit conservative for the in-store network. I just wonder, is that because of the pressure from competition, or --
Daniel M. Wu
I think year over year, the in-store network is still growing very healthy and over 20%. As we discussed earlier, there is competitive pressure in the in-store business, but we continue to expect the in-store business to grow very healthy.
Jason N. Jiang (Translation)
If you look at the hypermarket business, in Q1 even in a soft season, we still achieved a 24.7% in terms of gross margin. Relative to the overall media sector in China, it is a very healthy gross margin. Of course, you say it’s lower than the commercial location business of Focus Media, lower than the poster frame business of Focus Media but that’s -- those are the strengths of Focus Media’s overall earnings and margin. In-store business does have competition and the margin is weaker than the commercial and poster frame, as we said earlier in the previous conference calls but still very healthy relative to other media platforms you see in China.
We think it is a good business and we will continue to want to grow that business and if the market environment changes or there are new business models we would be able to initiate and launch, we believe that business will grow very healthy.
Lin Shi - Lehman Brothers
Thank you. Also, for OES, have you seen any opportunity leveraging on the [inaudible]?
Daniel M. Wu
What? I’m sorry, you are breaking up a little bit.
Lin Shi - Lehman Brothers
After you integrate OES into your business, have you seen any good synergies in terms of sharing the client base and get a bigger share from the advertisers leveraging on the online and offline platforms?
Jason N. Jiang (Translation)
OES, if you remember when we acquired OES, OES has about 300 to 400 advertising clients and Focus Media last year had over 2,000 advertising clients. The OES office also only covers five to six cities in China versus Focus Media covering more than 40 cities.
So after the acquisition of OES, we have already started cross-selling efforts in the two businesses. So that reflected in two areas. First of all, OES already provided training to Focus Media's sales team, and when Focus Media's sales team, when we are visiting clients, we make a specific effort to introduce the new additional Internet advertising platform we provided as part of the solution to our advertising clients.
Once the advertiser shows interest, we will bring the experts of the OES sales team and send after-sales service support team to the client and they will initiate and continue with the advertising dialog. That’s number one.
Second is in the cities Focus Media covers but OES does not cover, we have certain -- OES has already started assigning people to those cities. Do keep in mind; when Internet advertising just started in China, most of the large advertisers on the Internet are the multi-nationals, such as autos and banks. But today, if you look at how the Internet business is growing, many Tier-II, Tier-III cities, there are a lot of clients who are a lot less sophisticated in terms of advertising who want to do advertising on the Internet. That allows OES to expand their business based on the platform Focus Media already built nationwide.
So from that point of view, we do expect Focus Media and OES will bring positive revenue and earnings synergies to the OES business and that’s why we think, as we said earlier, OES will contribute significantly to the future growth of Focus Media.
Thank you, Lin. Last question, please.
Operator
Your final question will come from the line of Louis [Corgan] with Kingford Capital. Please proceed.
Louis Corgan - Kingford Capital
I wanted to return to the question of DSOs. The press release indicates that the core DSOs were 100 days and looking at the year-ago period, you had one month of Target Media revenue and all of their accounts receivable, so even though it shows up that the DSOs a year ago were 100 days as well, it seems like the actual -- if you adjust for the acquisition, the DSOs would have been much lower.
So on an apples-to-apples basis, it looks like the DSOs were up quite a bit in this first quarter. At the same time, your pricing in the commercial building market was up just 2.3% year over year. And at the same time, the number of slots that were sold in the commercial Tier-I market was down 25% this year sequentially versus being down just 17% sequentially last year.
What I am trying to get at is it looks like you had a back-end loaded quarter, you reduced your prices and the number of slots sold still declined more in this first quarter than it did in the year-ago period, which I guess to me raises the question of is the demand in the marketplace as strong as we have all been lead to expect it will be, or are you really having to discount in order to -- you’ve increased your supply a great deal. Are you now having to discount in order to sell?
Daniel M. Wu
I think you are making a lot of assumptions in your analysis. I really do not know where you are going but I think these are two different questions regarding DSO and pricing. I think I answered both questions earlier, but let me repeat myself a little bit.
If you think about DSOs, first of all, we don’t see any difference in terms of cash collection from our advertisers in this quarter versus any previous quarters. So the advertising sales outstanding is normal. But today, the business is very different versus last year, given we have more business, we have Frame Media, we have Target Media integrated, we have the movie theater business, we have the LED business, we have the mobile advertising business.
So I don’t think a direct comparable, given you can strip out exactly what the impact of Target Media is relevant, but we don’t see any change of trends in cash received from advertisers. We believe the results of the increase of DSOs in this particular quarter is just due to lower revenue in the seasonally weak Q1 of every year. Also, going forward we expect Q1 of 2008 and 2009 will still have this effect, just given the seasonality of the business we are in.
Regarding the pricing and the realization revenue analysis, as we said earlier, as said by Jason, we negotiate contracts with clients contract by contract. There is really no change of sales approach.
What you have seen today in terms of revenue for the commercial location network, year over year the commercial location network grew by 50.8%. Although it is lower than Q4, it is due to seasonality and we do have some -- earlier we talked about some special promotion package we offer to clients for bundled channel sales during China’s two-week period of Chinese New Year. But these things, really there is no indication -- as we said going forward, we are not going to be offering those except during holiday periods.
So I do not follow your analysis but what is most important to me as the CFO for the company is the revenue this year versus first quarter of last year has grown significantly and commercial location revenue has exceeded our internal expectations. That’s why if you look at the guidance for Q1, it was $54 million to $56 million when we talked about it in the Q4 conference call, and actual revenue this quarter is higher than that number.
Thank you very much. Is that clear to answer your question?
Louis Corgan - Kingford Capital
I guess my follow-up to that would be was there something that would have made this first quarter more seasonal than last year’s first quarter?
Daniel M. Wu
No.
Louis Corgan - Kingford Capital
It was the same?
Daniel M. Wu
Yes. Last year, do keep in mind the integration of Frame Media, the integration of Target Media, we don’t have the wireless business, we don’t have the LED business, we don’t have the movie theater advertising business.
Louis Corgan - Kingford Capital
But focusing on the commercial Tier-I --
Daniel M. Wu
Yes. This quarter, there is no difference this quarter versus last quarter. There are some certain special packages, as we talked about, bundled sales, which we did not have multiple channels last quarter, in Q1 of 2006. Remember all these channels were launched in March of 2006.
Louis Corgan - Kingford Capital
Thank you.
Daniel M. Wu
Sure. Thank you. Thanks, everyone. I think we will conclude the call today. Operator.
Operator
Ladies and gentlemen, I would like to thank you for your participation in today’s conference. This now concludes the presentation. You may all disconnect and have a wonderful day.
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