Full Transcript of Focus Media’s 3Q05 Conference Call — Prepared Remarks (FMCN)

Here’s the entire text of the prepared remarks from Focus Media’s (ticker: FMCN) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Jie Chen, Investor Relations Manager
Daniel Wu, Chief Financial Officer
Jason Jiang, Chief Executive Officer

Analysts:

Jason Brueschke, Citigroup, Analyst
Kit Low, Goldman Sachs, Analyst
Paul Beaver, Piper Jaffray, Analyst
Andrew Poleir (ph), Nick Burke Global Securities, Analyst
Ming Zao, Susquehanna Financial Group, Analyst
Sean Quex, Credit Suisse First Boston, Analyst
William Bean, Deutsche Bank, Analyst
Chang Creed, Forerun Technology Research, Analyst

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Focus Media Third Quarter 2005 Earnings Conference Call. My name is Amanda, and I will be your coordinator today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. If at any time you should require audio assistance, please key star followed by zero and an operator will be happy to assist you.

I would now like to hand the conference to your host for today, Ms. Jie Chen, Investor Relations Manager. Please proceed.

Jie Chen, Investor Relations Manager

Thank you. Welcome to Focus Media's third quarter 2005 earnings conference call. Today our management will discuss the Company's financial results for the third quarter of 2005 and business outlook for the fourth quarter of 2005.

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 third quarter operational and financial performance, we will open the call for questions. This call is also broadcast through Internet and available through our Investor Relations Web site, 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 in-store network and our outlook for the fourth quarter 2005, for example. You can also identify forward-looking statements by terms such as; will, expects, anticipate, 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 of our current operations and the short history of the out-of-home audiovisual advertising sector, which may make it difficult for you to evaluate the desirability and prospects of our business, competition from present and future competitors in China's growing advertising market, our limited ability to control and oversee the everyday business activities and regulatory compliance of our regional distributors and other risks outlined in our filings with SEC, including our registrations 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 our recent business highlights.

Daniel Wu, Chief Financial Officer

Thank you, Jie. I will go over the financial highlights. Then Jason and I will be available for Q&A. I'm pleased to report to you our record financial results for the third quarter of 2005. Our revenues have reached 19.5 million, an increase of 33.5% from the previous quarter and 146% from the same period last year. Our third quarter advertising service revenues was 19.1 million for the quarter, including 17.3 million from our commercial location business and 1.8 million from our in-store business.

First, let me summarize the results of our commercial location network. Our commercial location network continued to show strong growth in the third quarter of 2005. The advertising service revenue from commercial location network was 17.3 million for the third quarter, up 23.6% from 14.0 million for the previous quarter. Revenues from Tier I cities, including Beijing, Shanghai, Guangzhou and Shenzhen accounted for approximately 66.7% of our total commercial locations network revenue. Tier II cities, which all the other cities including all other cities except Beijing, Shanghai, Guangzhou and Shenzhen contributed approximately 33.3%.

The total number of thirty second equipment time slots sold out on commercial location network in the third quarter was 4,240, an increase from 3,057 time slots from the previous quarter. Average advertising revenue per time slot per quarter, which we call ASP, in the Tier I cities was $9,115 compared $8,476 in the second quarter of 2005. ASP for the Tier II cities was $1,859 compared to $2,118 in the second quarter. The blended ASP for the entire network was $4,077 compared to $4,573 in the second quarter due to the rapid increase in the time slots sold in the Tier II cities where the local advertising rates are lower than that of Tier I cities.

The total network capacity of commercial location network increased to 8,348 for the third quarter of 2005, from 6,737 in the second quarter mainly due to the extension of advertising cycle times from 9 minutes to 12 minutes in all the Tier II cities, as well as addition of two new regional distributors and the acquisition of non-regional distributors into our network in the third quarter of 2005.

We continue to see strong demand in our commercial location networking Tier I cities and the demand in the Tier II cities picking up rapidly. The network utilization rate in Tier I cities was up 98.5% for the third quarter of 2005 compared to 91.4% in the second quarter, while the average utilization rate in the Tier II cities was 42.4%, up compared to 34.9% in the second quarter. The overall network utilization rate increased to 50.8% compared to 45.4% in the second quarter of 2005.

During the third quarter for the network we also added 14,421 LCDs and PDPs flat panel displays into our commercial location network. The total number of displays installed in our commercial location network reached 37,352 display units, including 34,079 display units in our directly operated cities and 33,273 display units through our regional distributors.

Our commercial location network continues to expand. We have partnered with two new additional regional distributors for our commercial location network, including Tanghsxhai in Hobe province and Yenta in Bianjye province during this quarter. Now the commercial location network of Focus Media operates in 54 cities throughout China, including 23 directly operated cities. That's including the acquisitions of Shanyaung regional distributor and 31 cities via our regional distributors.

In the third quarter we further segmented our media channel and separate golf club network and airport shuttle bus network from the commercial location network. Both networks are sold as independent networks with nation wide coverage and the revenues are included in the commercial location advertising service revenue. Each sub-channel is more focused on specific demographics, which meet the requirements of selected advertisers.

Here are the results of our in-store network. Our in-store network generated $1.8 million in revenue in the third quarter, increased 435.3% from the previous quarter. We are glad to see profits in the month of September a single months profit from in-store network. Our in-store network has expanded significantly during the third quarter. We installed 7,282 additional LCD and PDP flat panel displays in the retail stores where the total number of displays installed reached 20,061 display units and we expanded our installation base to 2,702 stores, retail stores that include 553 hyper-markets, 877 supermarkets and 1,272 convenience stores.

In the quarter we also signed up several large hypermarket retail chains, such as Baja and also convenience store chains such as certain levels. On the other hand, we worked closely with advertisers to provide them with tailored advertising solution at customer's point of purchase and we received very positive feedback from our initial group of advertisers.

Our advertising network continued to attract international and domestic advertising clients for both the commercial location network and for the in-store network. During the third quarter we signed advertising contracts with 315 new customers including approximately 70 advertisers on our in-store network, bringing the total accumulated total number of advertising clients on Focus Media network to over 1,200.

Gross profit for the third quarter was $11.5 million, representing an increase of 30.2% over the previous quarter's 8.8 million and 100.063% increase compared to 5.6 million for the corresponding period a year ago. Gross margin for the third quarter was 59.1 compared to 60.0 from the previous quarter due to the increase in location and equipment depreciation cost from investment in our install network. However, the gross margin of our commercial location network remains about 70%, which is at 70.7% for the commercial location network.

Third quarter operating expense totaled 5.0 million representing a 17.3 increase from 4.3 million in the previous quarter. The increase in operating expense was mainly attributable to the increase in the number of employees from 1,649 end of June 30, 2005 to 1,975 as of September 30, 2005 and also due to the increase in selling and marketing expenses associated with the increase in revenue, in the advertising service revenue. The addition of employees are mainly for the installation and maintenance of our in-store network and the expansion of our sales marketing, sales team.

Operating expense as a percentage of total revenue in the third quarter was 25.9% compared with 29.5% in the previous quarter, as we continue to gain operational leverage. G&A expense in the third quarter was 2.3 million or 12% of total revenue compared with 16.1% of total revenue in the previous quarter. Selling and marketing expense in the second quarter was 2.7 million or 13.9% of total revenue compared with 13.4% of total revenue in the previous quarter.

Net income for the third quarter 2005 was 7.1 million compared to a loss of 1.0 million for the same period in 2004. Sequentially second quarter net income increased by 64% compared to net income of 4.3 million in the second quarter of 2005.

Our effective income tax rate was 1.2% in the third quarter, as several of our operating entities continue to benefit from exemptions under equitable tax regulations in China.

Net margin in the third quarter of 2005 was 36.6% up from 29.8% in the second quarter of 2005. As of September 30, 2005 the Company had a cash and bank balance of 84 million compared to 22.7 million, as of December 31st, 2004.

As our advertisers are increasing their spending on top Tier II cities and because of the initial success of our in-store network, Focus Media will increase our cap ex capital expenditure budget for 2005 from 20 million to 30 million. The additional capital expenditures will be for the in-store network deployment and also the network deployment in the top major Tier II cities.

Now, I'd like to provide Focus Media's business outlook for the fourth quarter of 2005. Please note 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 fourth quarter of 2005 to be between $22 million and $23 million. Fourth quarter net income is expected to be between $8.7 million and $9.1 million.

Now we will open the call for your questions. Operator?

Related:

• The Q&A from this call is here.
• All China Stock Blog articles on Focus Media.
• A list of full conference call transcripts available on the Seeking Alpha Network.
• The complete list of China stocks (and links to articles about them) covered by The China Stock Blog.

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