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Charm Communications Inc. (NASDAQ:CHRM)

Q4 2011 Earnings Conference Call

March 6, 2012 8:00 AM ET

Executives

Nicholas Manganaro – Ogilvy Financial

He Dang – Chairman and Chief Executive Officer

Wei Zhou – Chief Financial Officer

Analysts

James Marsh – Piper Jaffray

Chow Wang – Merrill Lynch

Amanda Chin – Credit Suisse

Dick Wei – JP Morgan

Tak Chung – George Y. Yiangou

Nancy Yang – Mirae Asset

Operator

Hello and thank you for standing by for Charm Communication’s earnings conference call. At this time all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Mr. Nicholas Manganaro from Ogilvy Financial.

Nicholas Manganaro

Hello everyone and welcome to Charm Communications earnings conference call for the fourth quarter and fiscal year ended December 31, 2011. The company’s earnings results were released yesterday and are available on the company’s IR website at ir.charmgroup.cn as well as on newswire services.

Today, you will hear opening remarks from Charm’s Founder and Chairman, Mr. Dang followed by the company’s Chief Financial Officer, Wei Zhou, who will provide a financial overview as well as guidance for the first quarter of 2012. After their prepared remarks, they will be available to answer your questions.

Before we continue, please note that the discussion today will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectation.

Charm does not assume any obligation to update any forward-looking statements except as required under applicable law. Also, please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The most directly comparable U.S. GAAP financial measures and information reconciling these non-GAAP financial measures, the Charm’s financial results prepared in accordance with U.S. GAAP are included in Charm’s earnings release, which has been posted on the company’s IR website at ir.charmgroup.cn. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Charm’s Investor Relations website.

I will now turn the call over to Charm Communications Founder, Chairman and CEO, Mr. Dang.

He Dang

[Interpreted] Hello everyone and welcome to our fourth quarter and full year 2011 earnings conference call. We were able to carry the momentum of our IPO in 2010 and deliver record setting results in our first full year as a publicly listed company. The overall scale of our business is measured by total advertising turnover or billings grew 37% to $875 million for the full year of 2011. A rate of growth of more than 2.5 times that of China’s overall advertising market. Moreover, we gained additional market share and further enhanced our position as China’s largest domestic advertising agency.

What I’m most excited about however is that we significantly expanded our integrated communication capabilities in the digital space. Where advertising turnover grew 6 folds compared to 2010. I’m also happy to announce that our net income grew at a healthy 25% to $48 million for the full year. As a result of this strong performance and to share our success with our shareholders, our Board of Directors have approved to payout 26% of our net income approximately $12.5 million of cash dividend. Going forward our board will continue to evaluate the possibility of future dividends based on our long-term capital requirements.

Looking at the overall advertising market we are seeing softness in the first quarter of this year due to seasonality punctuated by earlier than usual Chinese New Year in addition to other macroeconomic uncertainties. Another macro factor significantly impacting our business is the regulatory changes on satellite TV content and advertising time. The new regulations put to effect on January 1 and have slowed the rapid growth in the satellite TV sector, which we have (Inaudible) over the past few years.

Nonetheless with the Chinese government recently announcing the GDPs growth target of 7.5% for 2012 we still expect the overall advertising markets to grow in the low teens for 2012 or approximately 1.5 times that of GDP growth with the Olympics being a key catalyst in the second half of the year.

Charm had a strong start to 2012 with success at the Annual CCTV Primetime auction in November where we ranked number one in terms of the total amount of advertising spent on behalf of our clients for the ninth consecutive year. CCTV continues to be the leading television advertising platform that brands turn to when looking to reach the national audience in China.

Our expertise with respect to the CCTV will remain our core competitive strength as no other agency understands or leverages CCTV media better than Charm. We’ve been able to build on a solid foundation to establish our fully integrated advertising platform over the past five years. Our non-CCTV advertising turnover has increased from practically nil in 2006 to over 40% in 2011.

Looking ahead we will continue to execute on our long-term strategy of providing the whole service integrated advertising platform with a particular focus on the fast growing market. In 2012, we plan to invest more aggressively in new talent and infrastructure especially in continuing to build out our presence in the digital advertising space, which we see as the key growth driver going forward. We are confident our overall strategy will position us well for long-term growth.

Moving on to operating highlights for the fourth quarter, for Charm’s overall agency business we had a strong 24% year-over-year growth in total billings. But our net agency revenues grew even stronger 50% year-over-year due to the 6.2% revenue extraction rate we had in the fourth quarter of 2011 versus 5.1% in the fourth quarter of 2010. The increase in the revenue extraction rate reflects our ability to deliver integrated advertising solutions to our clients.

With Charm Advertising we had five new television media accounts including well known names like Guangdong Development Bank, Guizhou Xi Wine and the Shanxi Provisional Tourism Bureau. I’m particularly excited about the growth prospects in the travel and tourism space the space in which we began investing in 2010. As we continue to see particularly strong advertising demand from travel destinations across China we will continue to expand our travel and tourism team and strengthen our expertise in the industry.

In the fourth quarter, we hired Mr. (Inaudible) to head our newly created sports marketing division. Mr. (Inaudible) brings extensive sports business experience in television, event management and commercial sponsorships. We are confident in his ability to help us raise the bar and its emerging industry in China. Overall, Charm will continue to make strategic and opportunistic investments with key hires and business developments.

Our digital business we saw successful wins across Charm Click and Charm Interactive. For Charm Click we were able to win search campaigns for 11 new clients including Standard Chartered Bank, Midea, Forever 21, DBS China and (Inaudible). For Charm Interactive spending in a fast growing online video space grew 3 fold quarter-over-quarter. We expect this momentum to carry into 2012 especially as we integrate online video in the media planning schedules of some of our television advertisers.

Our advertisers interest in visual advertising continues to grow although we have been successful in building up our expertise and scale here over the past two years we must continue to expand our digital advertising platform. In the fourth quarter we made a key hire bringing in Mr. Tony Yu as our Chief Technology Officer. His in depth knowledge and hands on experience regarding internet trends in both China and the United States will help guide the expansion of our digital business. In 2012, we will invest aggressive in talent and technology infrastructure to ensure that we capture the long-term growth in this space.

For Shangxing Media, 2012 will be a year of transition as the regulatory changes taking effect in the first quarter have weakened the satellite TV market. In response to these challenges we proactively modified our inventory mix reducing our exposure to satellite channels and slightly increasing our exposure to the more stable programming on CCTV. We lowered inventory on Shangxing Satellite and for Shanghai Dragon Satellite and Hubei Provincial Economic channels we have eliminated inventory risk completely by changing to a non-exclusive agency model, which allows us to continue to work with both channels and advertisers without carrying inventory.

For accounting purposes turnover and revenue from Shanghai Dragon and Hubei Economic will shift to the new agency business. At the same time, we added Southern Satellite Channel, which broadcasts in Guangdong province a key market in China in terms of its size, Cantonese speaking audience and inventory on CCTV. Given the major changes already discussed along with the impact of the early arrival of the Chinese New Year the add on parts of our inventory negotiation process. We expect a weaker first quarter from our media business. Nonetheless we are confident that the business will continue to ramp up and normalize to the course of 2012.

Finally, I would like to reiterate what I’ve said last quarter regarding the continued growth in consumer spending and the strategic needs of advertisers and developing their brands and reaching new consumers. We believe this trend will continue and the turn into advertising market will be the long-term trajectory. At the same time we believe that Charm is uniquely positioned to benefit from this trend. As we are the leading domestic advertising agency with a focus on television and internet, which are the most important media’s tapping into this trend. We will continue to execute on our long-term strategy in this regard and make the necessary investments to provide us with the building blocks for future growth.

I will now turn the call over to our CFO Mr. Wei Zhou.

Wei Zhou

Thank you, Chairman Dang. Hello everyone on the call today. Before I go over to financials I would like to take you through our three core business segments to give you some specific updates on our progress. Please note that in the first section I will be referencing some of our fourth quarter and full year results using non-GAAP numbers in order to better convey the company’s performance. We define non-GAAP turnover as total customer advertising spending placed through or with Charm to reflect the scale of our business.

In the fourth quarter of 2011, turnover grew 28.1% year-over-year and 15.7% quarter-over-quarter to approximately $254.8 million. The year-over-year increase in turnover was mainly due to the increase in the number of advertising clients and an increase in ad spending from existing clients. The quarter-over-quarter increase in turnover was largely attributed to the increase in advertising agency spending on non-CCTV media platforms especially on the internet in the fourth quarter of 2011.

For the full year 2011 turnover grew 37.3% to approximately $875 million. I will break them down by business units. The non-GAAP turnover for the advertising agency business grew 24.5% year-over-year and 17.8% quarter-over-quarter so $189 million in the fourth quarter of 2011. The year-over-year increase in the advertising agency business or agency business turnover was mainly due to the increase in the number of new agency clients and the increase in advertising spending from existing agency clients. The quarter-over-quarter increase in turnover was mainly attributed to the increase in agency advertising spending on non-CCTV media platforms especially on the internet in the fourth quarter.

For full year 2011, the turnover for the advertising agency business grew 34% to approximately $635.7 million. In the fourth quarter of 2011 provided advertising agency services to 148 advertising clients accounts five of which were acquired in the fourth quarter of 2011. The revenue extraction rate which is defined as revenue divided by turnover for the agency business was 6.2% compared to 5.1% in the fourth quarter of 2010 and 5.8% in the third quarter of 2011. The quarter-over-quarter increase in revenue extraction rate was mainly due to the increase in advertising spending on non-CCTV media platforms especially on the internet, which has a higher extraction rate.

For example the internet agency revenues for the fourth quarter of 2011 accounted for approximately 20% of our total agency revenues compared to 5% in the fourth quarter of 2010. We expect the revenue extraction rate to increase as we expand our full service offering across all media platforms under advertising and ramp up digital media offerings under Charm Interactive and Charm Click.

The turnover for our media investment management business or principle media business, which operates under the Shangxing Media brand, grew 40% year-over-year and 10% quarter-over-quarter to $65.69. The year-over-year increase was mainly due to the addition of Hubei Provincial Economic TV. The quarter-over-quarter increase was mainly due to the strong demand from clients for Shanghai Dragon Satellite Channel as a result of seasonal factors. For the full year 2011, the turnover for the media investment management business grew 46.9% to approximately $238.8 million. For the fourth quarter of 2011, we had 303 advertisers for our principle media business compared to 282 advertisers from the fourth quarter of 2010.

Now going back to GAAP figures total U.S. GAAP revenues was $80.3 million for the fourth quarter of 2011 representing an increase of 41.7% compared to $56.7 million for the fourth quarter of 2010 and an increase of 14.4% compared to $70.2 million for the third quarter of 2011. For the full year of 2011, GAAP revenues grew 45.6% to approximately $280.1 million.

Revenues for advertising agency business were $11.7 million for the fourth quarter of 2011 representing a increase of 51.5% compared to $7.8 million for the fourth quarter of 2010 and an increase of 26.8% compared to $9.3 million for the third quarter of 2011. For the full year 2011, revenues for the advertising agency business grew 38.4% to approximately $34.3 million. Principle media business revenues were $65.6 million for the fourth quarter of 2011 representing an increase of 40% compared to $46.9 million for the fourth quarter of 2010 and an increase of 10.1% compared to $59.6 million for the third quarter 2011. For full year 2011, revenues for the principle media business grew 46.9% approximately $238.8 million.

Branding identity services revenues were $3 million for the fourth quarter of 2011 representing an increase of 42.5% compared to $2.1 million in the fourth quarter of 2010 an increase of 117.4% compared to $1.1 million in the third quarter of 2011. For the full year revenues for branding identity services grew 40.3% to $7 million.

Increase in both agency and principle media business revenues are consistent with increase in turnover. The increase in branding identity services is primarily due to greater demand for creative services as they increase their overall media spending in the fourth quarter of 2011. Cost of revenue for the fourth quarter of 2011 was $51.8 million compared to $34.6 million and $47.7 million for the fourth quarter of 2010 and third quarter of 2011 respectively. They mainly attribute the year-over-year increase to the addition of Hubei Provincial Economic TV and an increase in TV media cost for the two satellite channels and four CCTV programs.

The sequential cost increase is mainly due to the revenue increase. For the full year 2011, cost of revenues grew 58% to approximately $195.6 million. Gross profit for the fourth quarter of 2011 was $28.5 million representing an increase of 29% from $22.1 million in the fourth quarter of 2010 and an increase of 26.6% from $22.5 million for the third quarter of 2011. The gross margin for the fourth quarter of 2011 was 35.5% compared to 39% in fourth quarter of 2010 and 32.1% for the third quarter of 2011. The year-over-year gross margin decrease is mainly due to an addition of Beijing Gehua Cable TV network and Hubei Provincial Economic TV, which commenced operation in 2011 and operated at a lower margin during its initial phase.

For full year 2011, gross profit grew 23.2% to approximately $84.5 million the full year gross profit margin for 2011 was 30.2% compared to 35.7% for 2010. Selling and marketing expenses were $9.6 million for the fourth quarter of 2011 representing an increase of 75.8% from $5.5 million in the fourth quarter of 2010 and an increase of 44% from $6.7 million from the third quarter of 2011. The increase in selling and marketing expenses compared to the fourth quarter of 2010 was primarily due to increase in headcount at Charm Interactive and Charm Click. The 44% quarter-over-quarter increase in selling and marketing expense compared to the third quarter of 2011 was primarily due to increased infrastructure investments to support our long-term growth such as office expansion.

Selling and marketing expense represents 12% of our total revenues for the fourth quarter of 2011 compared to 9.7% for the fourth quarter of 2010 and 9.5% for the third quarter of 2011. For the full year, selling and marketing expense grew at 33.5% to approximately $27 million. G&A expenses were $3.4 million for the fourth quarter of 2011 compared to $2.5 million for the fourth quarter of 2010 and $2.6 million for the third quarter of 2011. Increases are in consistent with our overall investment in talent and infrastructure.

G&A expenses represented 4.2% of our total revenue in the fourth quarter of 2011 compared to 4.4% in the fourth quarter of 2010 and 3.7% in the third quarter 2011. For the full year 2011, G&A expenses grew 43.8% approximately $9.7 million.

Operating profit was $15.9 million for the fourth quarter of 2011 compared to $14.1 million for the fourth quarter of 2010 and $13.2 million for the third quarter of 2011. Full year 2011 operating profit grew 14.8% to $47.7 million. For the fourth quarter 2011, net tax expense of $465,000. GAAP net income was $15.7 million for the fourth quarter of 2011 representing an increase of 29.4% from $12.2 million in the fourth quarter of 2010 and an increase of 19.6% from $13.2 million for the third quarter of 2011.

Fully diluted net income per ADS for the fourth quarter was $0.36 compared to $0.29 and $0.31 for the fourth quarter of 2010 and third quarter of 2011 respectively. Each ADS represents two common shares. Our fourth quarter non-GAAP net income, which excludes share based compensation and impairments on investments was $17.1 million compared to $14.5 million for the fourth quarter of 2010 and $14.2 million for the third quarter of 2011.

For the full year of 2011, we have a tax expense of $2.2 million and GAAP net income of $48 million representing an increase of 24.8% from $38.5 million in 2010. Fully diluted net income per ADS for the full year 2011 was $1.12 compared to $0.98 in 2010. Our full year 2011 non-GAAP net income, which excludes share based compensation expenses and impairments on investments was $51.7 million compared with $42.8 million for 2010.

Cash flow from operation for the fourth quarter of 2011 was positive and as of December 31, 2011, we have cash and cash equivalents of $139.4 million compared to $136.2 million at the end of third quarter 2011. As of December 31, we have 697 employees compared with 687 employees as of September 30, 2011.

Turning to our business outlook, we estimate our total revenues for the first quarter of 2012 will range from $37 million to $38.5 million. First quarter of 2012 non-GAAP net income, which excludes share based compensation expenses and impairments on investment is expected to be between $1.5 million to $2 million. We base these estimates on a foreign exchange rate of 6.5 RMB per U.S. dollar. This forecast reflects our current and preliminary view, which is subject to change.

Thank you for joining us and then we will now turn the call over to operator who will open your line for question.

Question-and-Answer Session

Operator

(Operator Instructions) and your first question comes from the line of James Marsh of Piper Jaffray.

James Marsh – Piper Jaffray

Great, thanks for taking my question. Two quick ones here. The first, could you elaborate a little bit on what the government’s goal is on some of these working regulation changes in the TV area. And then secondly if you could just kind of help us quantify what that means for your business and how do you expect to respond and then I’ve got a second question.

Wei Zhou

Sure James, I think if you look at the regulations that came through mainly in November and December of 2011 there are two major regulatory changes. One is regarding contact, which strictly restricts satellite TVs ability to broadcast reality shows and variety shows during primetime hours. And no more than two of these kind of shows per week and the second major change is regarding advertising time, which cut out, which basically saying that all of the television channels in China cannot advertise during drama shows.

They may, they can advertise only before and after these shows but they cannot advertise during these shows. And from a effect on the market perspective it had two effects on the first is that due to sort of combination of the early arrival of Chinese New Year as well as the regulatory on content many of the satellite channels all the satellite channels have to essentially revise their programming lineup for the full year, which is done on an annual basis here in China. And that has led to an uncertainty in rating especially for the first quarter and for some of the new shows that have been replaced shows that were in place last year. And the second effect is regarding advertising time around these, around the dramas.

Some of these satellite channels had originally sold off on advertising slots in between these dramas so we have to go back or we have to go back to some of the advertisers to which we sold the time and then renegotiate or basically realign their ads along the new lineup or along before or after these shows rather than in between. So in effect what this caused is a lot of uncertainty and especially within the satellite TV market and with uncertainty the advertisers and in general tend to want to wait and see first how the rating of these shows will perform in the first quarter before they pulled the trigger on their budget. So from an impact on our business perspective we still expect the spending to come it’s just that the effect of the approximately for the overall satellite channel industry within the first quarter.

James Marsh – Piper Jaffray

Okay, that’s very helpful. And then second question obviously the Olympics as we found a global media event. I was just hoping if you could give us your opinion on how that could impact your business in the broader end market China?

Wei Zhou

Sure, I will turn that question over to Mr. Dang.

He Dang

James, I’m Mr. Dang’s translator. He thinks the Olympics will take place in late July early August so it will be in the third quarter of this year. And then we feel that what it’s going to do is it’s going to be a catalyst for a lot of advertisers to spend the money to capture the audience. And then but we believe that the impact this time around will in the London Olympics will probably last event the Beijing Olympics that took place in 2008 and then with its impact on the media or media spending we think that the main beneficiaries definitely will be CCTV, which will have the sole broadcasting rights to the Olympics here in China. We also believe in other media platform such as online video or portals knows how to access the Olympic content should feel a positive impact as well.

James Marsh – Piper Jaffray

Okay, fair enough. Well thanks very much guys.

Operator

(Operator Instructions) and your next question comes from Chow Wang of Merrill Lynch.

Chow Wang – Merrill Lynch

Hey guys, thanks for taking my question. I have a follow up question on the regulatory change. So first quarter weak guidance, is pretty weak, could you give us more color on that particularly how much is attributed to new policy and how much of that will to the weak overall advertising market?

Wei Zhou

Thank you, Chow. So I think it’s a two part question you asked I couldn’t we couldn’t hear you very clearly. I think the first part of the question is regarding the impact of the market and then the second is I didn’t catch the second part of the question.

Chow Wang – Merrill Lynch

I was just wondering the first weak guidance how much is attributed to the overall advertising market and how much is attributed to the new policy?

Wei Zhou

Sure, thank you. We think that the early arrival of our Chinese New Year this year has definitely impacted the spending, the historical spending patterns for a lot of our advertisers. Typically, most of our advertisers will have the month of January to decide their budget for the full year and then so that they will basically follow through with their spending in January as well.

But this year most of this decision actually got delayed to late February or which is when people sort of came back from Chinese New Year and then a lot of the advertisers at the same time took a sort of a wait and see attitude to wait for a especially for television to wait for the ratings to sort of materialize, or as I discussed earlier. So I think if you look at the results for some of the other media companies that announced their results so far most of them have projected almost a flat kind of a growth due to primarily seasonality or the effectiveness of this early Chinese New Year process.

And then if you look at our business right now then definitely other parts of the impact are two parts for our own. One is regarding the decrease from an inventory on the satellite channels, which had been a key growth driver for us historically and I think the second part is we will start in making investment in the digital space for the full year and first quarter is when we start making first start in that phase.

Chow Wang – Merrill Lynch

Got it and also could you give us guidance on different business line particularly as you mentioned as you invest much on the digital side. So, what’s the outlook for the Charm Interactive and Charm Click in the first quarter? Can you give any color on that?

Wei Zhou

I think if you look at the overall internet industry we definitely for 2011 saw industry growth of over 30% for the year and then for this year we seem various vortex of growth for the internet industry in the 20% to 30% range. I think for Charm we definitely expect our overall digital business inclusive of Charm Interactive and Charm Click to grow at a pace that is faster than the overall industry. And that is because these two business units have access or are tailored to business, media platforms within the digital business, that is faster growth versus overall internet industry and that is search advertising and online video advertising. If you look at the search industry and it continues to grow at a pace that is faster than overall internet industry in the 40% to 50% range and then for the online video I think we see estimates on the market of the growth for that in the 60% to 70% range.

Chow Wang – Merrill Lynch

Okay, thank you very much.

Operator

Your next question comes from the line of Amanda Chin of Credit Suisse.

Amanda Chin – Credit Suisse

Hi good evening Dang and Zhou. Thanks for taking my question. This is Amanda Chin from Credit Suisse asking question on behalf of Wallace Cheung. I have three questions here first could you give us more color on the full year outlook of 2012 and especially the margin trend? Thank you.

Wei Zhou

I think for the outlook for the full year I will turn the question to Mr. Dang and then for the margin trend I will take that question myself.

Amanda Chin – Credit Suisse

Sure, thank you.

Operator

(Operator Instructions).

He Dang

Amanda to answer your first question regarding the full year outlook well Mr. Dang sort of went over is that we expect the first quarter and then maybe part of the second quarter to be weaker than normal. Due to the seasonality changes that we’ve discussed and then but then also compared to sort of first half of last year we had a lot of advertising spending from different industries that are not present in the market this time around, such as group buying and then e-commerce and a lot of other internet companies.

But we expect this year to be more backend loaded in particular starting the third quarter driven by with the catalyst Olympics as we discussed. But the overall outlook as we discussed on the call we could still expect the full year advertising market to grow around the low teens. Regarding margin trends for Charm definitely I think our sort of gross margin trends should especially for the native business should follow that with strong pickup in the second half of the year versus the first half of the year.

Regarding the operating margins I think we should overall it should be fairly stable for the full year but because we are increasing investments in particular for digital platform in terms of the staff hiring as well as investment to technology and infrastructure we expect the overall margin to come down versus 2011.

Amanda Chin – Credit Suisse

Okay, thank you. And my second question what’s the extraction rate of internet agency recognize in the fourth quarter 2011 and how about the first quarter of 2012?

Wei Zhou

For the overall internet agency extraction rate that we’ve seen is somewhere in the 10% to 15% range and then that’s sort of typical for the industry here. We expect and we saw that last year and we expect that trend to continue this year.

Amanda Chin – Credit Suisse

Okay, then do you have any dividend payment applying 2012?

Wei Zhou

I think the dividend payment that we declared this time was a proof of reward because sort of you know very strong performance in other strong operating cash flow for the business. I think going forward you know we are bored well basically we’ve made the dividend policy as appropriate pretending on the company’s financial performance, operating needs, as well as long-term capital payments.

Amanda Chin – Credit Suisse

Okay, very helpful. Thank you Dang and Zhou take care.

Operator

Your next question comes from the line of Dick Wei of JP Morgan.

Dick Wei – JP Morgan

Hello. Hi, thank you for taking my questions. My first question is on the satellite TV side of the business. So far from the viewership of the rating perspective have we seen any I guess I want to re-seeing in terms of the new programming impact on the viewership and how would that going to impact the spending on satellite TV if you can pull by some initial thoughts that will be great. Thank you.

Wei Zhou

Dick, I will turn this question to Mr. Dang let me translate from Chinese to English. Dick, overall for the first two months because of the policies regarding particular content we definitely did not see sort of the historical ratings growth I would typically see at most of the leading channels. But overall we and overall I think on that has definitely impacted on the sales on most of these satellite channels as well. I think and I think you know the expectation is we will see a lot of these new programs we tried out. So that it will remain the sort of uncertainty I think for another period before sort of see significant changes.

Dick Wei – JP Morgan

Okay, great and so I guess for advertisers if they have to launch campaign at this time where would they shift to budget two or in other words who would be the biggest beneficiary from the, some of the satellite TV budget. Will it be more like the screens in focus media or will it be on the (Inaudible) if you can add some more color that will be helpful? Thank you.

Wei Zhou

Sure, I think for the ad spending I think there is two things that we are seeing one is that most of the advertisers that we’ve spoken to they haven’t really decreased their budget for the year. Most of them are taking a wait and see attitude in terms of the, in terms of finding the programs of the channel that have the content, or have the program that they want. A lot of the advertisers are taking away the attitude that being said because the barrier to advertise from a dollar in that perspective for online video and especially on the digital format is a lot lower versus traditional television.

We are seeing that a lot of the advertisers are becoming more interested or very interested in trying out online video. And that portion and the money typically will come out from the TV budget. And what Charm is doing is what we’ve done for 2012 sort of try to capture that growth it is in the TV planning schedules that we are planning out the media schedules for television advertising or actually including most of our online video partners as part of the media planning schedule. So that we hope that, we can be able to capture that growth and that’s part of the cross selling that we are doing between our traditional agency business and our digital business.

Dick Wei – JP Morgan

Alright, great. Thank you very much.

Operator

Your next question comes from the line of Tak Chung of George Y.

Tak Chung – George Y. Yiangou

And then I guess I just have a quick question. Just wondering in terms of how much business do you guys do in terms of the digital outdoor market? For example with focus media and I’m just wondering are you seeing how fast are you seeing that market can grow and are you seeing some shift in terms of TV budget shifting from TV to digital outdoor or digital screens. Thank you.

Wei Zhou

Thank you for the question. For us I think the two media that we are primarily focused on are television and internet. We see television taking over 60% of the sort of total average spending from a media perspective and internet is the fastest growing one. So those are the two areas that we are particularly focused on. We do some digital campaigns in particular to our joint partnership with Aegis media. As a whole we don’t have that much color on that industry.

Tak Chung – George Y. Yiangou

Okay and in terms of online video, in terms of which company do you think are well positioned? I’m just wondering whether in terms of some of the competitors like whether it’s Sohu, Youku or Tudou. Do you have a sense of which ones are gaining more market share or in terms of how fast the budgets are growing with those particular companies? Thank you.

Wei Zhou

Yeah, I think if we look at the overall industry is actually growing quite healthy from a overall sales perspective if you look at the rate cards we are pretty much all of the major online video players that had, that increased this year. And I think for each one I think we work with pretty much most of the top, pretty much all of the top five or top six online video portals. And then we allocates on spending a lot of times on combination and client preference, targeting from a geographic perspective as well as a demographic perspective.

As well as the type of content that they have then that goes back to client preference. So I think we see sort of the ad sales definitely growing quite robust but I think from the beneficiary of that trend I think you know most of them have you know a lot of work to do from a content acquisition perspective. But I think for Charm you know we stand to benefit (Inaudible) as well especially in net that we have a much higher revenue extraction rate for the agency business we do for online video versus traditional television.

Tak Chung – George Y. Yiangou

Okay, great. Thank you. That’s all the questions that I have.

Operator

(Operator Instructions) and your next question comes from the line of Nancy Yang of Mirae Asset.

Nancy Yang – Mirae Asset

Hi, thank you for taking my call. Do you think your backlog number this year is stronger than last year? How much of your base has brought ads in 2011 and how much from new customer? Also I have a quick follow up on industry and how quickly do you see the shifts on TV advertising to online video advertising the industry as a whole? Thank you.

Wei Zhou

Nancy, what’s the first part of the first question? What number? I didn’t catch it we didn’t catch it.

Nancy Yang – Mirae Asset

Do you think your backlog number this year is stronger than last year?

Wei Zhou

Okay, I will answer the first question and then I will turn to Mr. Dang for the second part of the question. For the first question from a visibility perspective I think the most important part of our business, which is the CCTV Primetime Auction, took place in November and there you know we contracted over 20 plus percent market share for that business. And then that CCTV as a whole makes up a substantial part of our agency business.

So I think we have a very strong visibility from that part of our agency business. I think for the media business it’s definitely not as centralized because we ended up finalizing the inventory a little bit late in the process versus last year. But in general I think we feel that for the media part of the business especially the TV part of the business we are pretty comfortable with the backlog that we have. And then for the answer for the second question I will translate it for Mr. Dang it’s regarding the transition or the shifted spending from television to online video right.

Nancy Yang – Mirae Asset

Yeah, to how quickly yeah.

Operator

And your next question comes from the line of Dick Wei of JP Morgan.

Wei Zhou

We are not finished with this question give us a second. From sort of if you look at the overall market and as we speak to lot of advertisers TV is still the dominant part of their advertising budget and a part of their media spending. If you look at the growth of the online video over the last few years it’s definitely been very rapid but from a reach perspective it still lags of that the reach of television.

However, what we are seeing right now because of the demographic for the online video is much younger audience so we feel that online video right now compliments the overall television spending quite well. And this is what I spoke about earlier in terms of us putting online video into some of the media schedules planning schedules for a lot of our advertisers. I think from the transition at the end of the day it comes down to the reach of the media I think it’s the reach or the number of users for the online video continues to grow at a rapid pace then it will definitely have a fracture impact.

But I think overall if you look at television right now especially the major nation channels like CCTV and a lot of the major satellite channels that’s still where advertisers spend their money from a branding perspective. I think online videos impact is may be on some of the lesser provincial and local television channel, which are more effective from a targeted reach perspective, which is an area that online video does a good job at.

Nancy Yang – Mirae Asset

Great, thank you.

Operator

And your next question comes from the line of Dick Wei of JP Morgan.

Dick Wei – JP Morgan

Hi, just a follow up if you don’t mind can you show a little bit of that for example the tire launches or new product launches for advertisers during Q1 and Q2 I guess how would they be allocating their budget uncertainty on the separate TV stations. I guess maybe somewhere to my earlier question I guess how much budget will be shifting to commence digital versus focus media and I’m just trying to understand to the perspective that how would it be impacting to the rest of the year. If their ratings doesn’t really change or there is no interesting programs to drive to dealership. Thank you.

Wei Zhou

Sure, I think the like we said earlier we expect the spending for the year to come definitely at a much stronger pace than the second half of the year. I think for our business as a whole satellite channels is only part of our business such that although such, if you look at sort of we are, our business is positioned right now I think especially for the media business, we are actually modifying our inventory mix such that we decreased some of the inventory for the satellite channels. And increased inventory on CCTV, which has a much more stable rating so we expect our media business to continue to ramp up for the year. So from a sort of a top line growth perspective we are still quite optimistic from that prospects.

Dick Wei – JP Morgan

Great, thanks very much. My last question is just on the pricing increase. Now what are we seeing the pricing increase for all the deal overall and maybe TV 2012. Thank you.

Wei Zhou

Yeah, I think most of the media in China take the CCTV Primetime auction as a reference point in when sort of setting up in terms of resetting their rate cards for the year. And the growth that we saw in the CCTV auction from the year-to-year perspective at the November was on 12.5% sort of marked. So as a reference point as the reach or the ratings of your channel increases faster than CCTV then you basically that rate of increase typically flows through if you add that on top of sort of the CCTV rates. So that’s you know we can’t speak for all of them but I think as you say the reference point that we turn to for media across the board.

Dick Wei – JP Morgan

Do you have any stance for what is kind of the rate increase for deal in particular or it’s difficult to generate.

Wei Zhou

It’s difficult to generate because a lot of these things are done on a setting from sort of a CPM perspective we did not see that sort of major increase. But then from sort of a pickup rate as well as sort of rate card we definitely see increase there.

Dick Wei – JP Morgan

Okay, great. Thank you very much Wei. Thank you.

Operator

At this time, I would like to turn the conference over to Mr. Nicholas Manganaro for closing remarks.

Nicholas Manganaro

Thank you, operator. This concludes the company’s earnings call. Thank you for your participation and please visit the company at its investor relations website ir.charmgroups.cn. Thank you.

Operator

Thank you for participating in Charm Communications earnings conference call. You may now disconnect.

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