Full Transcript of Focus Media’s 3Q05 Conference Call — Q&A (FMCN)

Here’s the entire text of the Q&A from Focus Media’s (ticker: FMCN) Q3 2005 conference call. The prepared remarks are 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.

Q&A

Operator

Operator Instructions And your first question comes from Jason Brueschke with Citigroup.

Q - Jason Brueschke

First of all, congratulations Jason and Daniel on a fantastic first quarter as a publicly traded company. I have-- maybe just start with two questions. My first question is you've increased the cycle time in all of your Tier II cities from 9 to 12 minutes. Could you maybe discuss how the split between your distributors and Focus Media of those additional 3 minutes are going to be allocated in those cities going forward?

A - Daniel Wu

Okay, and your second question.

Q - Jason Brueschke

The second question is about concentration-- actually; let me ask about ASPs. It's kind of a two-part question. Have we seen a bottom for your overall ASPs from here? You're going to be increasing your cap ex pretty substantially, or should we see that go down and then could you maybe give us, just tell us how the absolute pricing in Tier II cities is going? I realize its less than Tier I cities, but are we seeing a strengthening in Tier II relative to Tier II cities, say earlier in the year?

A - Daniel Wu

I will ask Jason to answer the first question and I'll answer the second question.

A - Jason Jiang

foreign language

A - Daniel Wu

Let me answer this question for Jason. We actually, when increased the cycle time from 9 minutes to 12 minutes on July 1st for all the Tier II cities, we did inform our franchise, our distributors that we are increasing the cycle time to 12 minutes. We encouraged them to follow our practice of increasing the cycle time from 9 minutes to 12 minutes but it's their discretion, so many of the-- several of the distributors did increase the cycle time to 12 minutes and some of the distributors actually still operate 9 minute cycle. For the distributors which have increased the cycle time from 9 minutes to 12 minutes we share 2 of 9, so it's proportionately to Focus Media as free minutes so we can sell on their network, so if that answers your first question. And for the second question regarding ASP. Let me answer that question. If you see the Press Release we put out, this press release we specifically provided information for the Tier I cities and Tier II cities. As you see for the Tier I cities, the ASP in the third quarter of 2005 actually increased by 7% to approximately $9,115 U.S. so if you see, that is partly due to the high utilization rate, also due to the price increase we put in effect on July 1st for the Tier I cities. So for Tier I cities we expect to continue to see the trend of ASP moving in the positive direction, as we have also implemented-- we have announced that we have another price increase starting from October 1st, 2005. So for the rest of the Tier II cities, as you see the ASP actually lowered, but if you look at capacity rate you can find the absolute increase of time slots are from the Tier II cities are much more from the absolute increase of time slots sold in third quarter of 2005 from Tier I cities, so because we're selling more time slots in the Tier II cities because the average selling price in Tier II cities are lower, so that's why our blended ASP actually went down in third quarter. Going forward, we think-- at this time Tier I cities contribute 66.7% of our total advertising service revenue for the commercial location network. We think going forward you will still going to see Tier II cities will increase the revenue contribution to the commercial location network going forward. However, for the Tier I cities and both Tier I cities and Tier II cities, as you see we have continued to have pricing power. We've been able to continue to increase our price, so we think for each of those sub segments you will see pricing increases going forward and we'll be able to achieve higher ASP. Just looking at the absolute dollar of-- we'd be able to achieve on the second tier cities, that's actually varies widely so you can have a city, which-- well in the major cities if you can see actually our rate card is on our Web site. You can see more of the major cities in the Tier II cities can be at the same price. It's very close to center in terms of price, but there you can see maybe another less important Tier II city, or a Tier II city we just start the network that the advertising rate locally is maybe only one-fifth or one-sixth of Shenzhen, so it's a huge discrepancy between Tier II cities just because that's how Chinese economy is and it also depends on how big the city is, how mature the network is and how local economy well being of that particular city, so you can get all the rates for all the cities from our Web site and discounts apply similarly.

Q - Jason Brueschke

Daniel, I think what I'm trying to get is the equivalent of a same store sale number in let's say a retail context, which would be take a major Tier II city, well take any Tier II city and compare it to itself say in Q, the pricing you were doing in Q1 versus the pricing you're doing now, so not within the high and low of the overall Tier II, but a specific city. Are we seeing strengthening in individual cities? Is it flat or are we seeing any weakening in individual cities in the second tier?

A - Daniel Wu

Okay, I'd like to make a couple points. First of all, you see in this quarter Tier II cites overall contribute a higher percentage of revenue versus the previous quarter, so the previous quarter Tier II cities contribute about 30% of our total revenue and this quarter they contribute 33% of the total revenue or advertising service revenue in commercial location network, so overall the Tier II revenue, as percentage of total revenue is increasing, so the revenue contribution over there is strengthening. And also we do see significant pickup of advertising demand from major advertisers who are more interested in focusing on the major Tier II cities, so that's why if you also can see is we have implemented a price increase on October 1st for some of the-- even for some of the major Tier II cities the price increase is more significant versus the Tier I cities, so hopefully that sort of answers your question that way.

Q - Jason Brueschke

Yes, it does. Thanks a lot.

Operator

Our next question comes from Kit Low with Goldman Sachs.

Q - Kit Low

Congratulations on a good quarter. Two questions, first question in regards-- along the way was the first tier city ASP, I believe on July 1st you increased your rate card by 10% and the effective increase coming out for ASP turns out to be only 5%. I'd just like to understand. Is this because of partial implementation during the quarter because you are using an inventory using the old rate cards, or is it because you're offering deeper discount? That's why the effective increase is lower than the rate card increase? That's the first question.

A - Daniel Wu

Let me answer that first question very quickly. This is because for the contract we signed with advertisers prior to July 1st, we have to keep the original advertising rates, so that's why those contracts, as you see, on average our advertising contracts are 8 weeks or 12 weeks, so and also the Tier I cities they in the second quarter was sold near capacity as well, so typically the advertisers would sign a contract with us 2 to 4 weeks ahead of broadcasting of the advertisement. So of course there's a delayed effect of price increase on our revenue, so also that we have discussed with the Streets that the price increase of October 1st will also have a delayed effect because due to it's for the reason.

Q - Kit Low

So in terms of this delay would it be somewhat similar, which means that in this case on July 1st then you got 5%, that means that there's basically about 6 to 8 week delay? Is that a good assessment?

A - Daniel Wu

Yes, that's a good assessment, but I don't want to sort of imply that October because will it have the same absolute same effect because the October price increase is actually is larger versus July 1st and I do want to be a little bit more conservative on that.

Q - Kit Low

Okay, I understand. Thank you.

A - Daniel Wu

Do you have another question, Kit?

Q - Kit Low

That's fine. I think I answered my own questions now.

Operator

Our next question comes from Safa Rashtchy from Piper Jaffray.

Q - Paul Beaver

Congratulations on a good quarter. This is Paul Beaver for Safa Rashtchy. Regarding your guidance that you provided for the fourth quarter, does that include the Framedia acquisition and can you also just go over the guidance that you did provide when you had your-- when you announced the Framedia acquisition?

A - Daniel Wu

Okay, this guidance does not include Framedia acquisition because Framedia consolidation will start-- we expect to close the transaction December 31st, 2005, so Framedia's financials at earliest will be consolidated into Focus Media's number starting from next year-- beginning of next year, so that does not include Framedia acquisition. And then your second question was the Framedia guidance?

Paul Beaver? Yes.

A - Daniel Wu

Okay, we actually have not provided Framedia guidance on the call for the Framedia acquisition. Framedia, we expect that business to in terms of-- you can sort of read from the acquisition structure. If you see the acquisition PE was 11 times US GAAP EPS, then if you see the minimal and maximal, sort of there's and indiscernible with a minimal of 88 million, so this sort of gives you a sort of rough estimate in terms of how we look at Framedia can contribute to our business going forward, but we will provide guidance for the consolidated entity Focus Media plus Framedia on the next conference call for the fourth quarter of 2005.

Q - Paul Beaver

And Framedia has similar margin structure to you?

A - Daniel Wu

Framedia has similar margin. Their gross margin-- look at their current business. Their gross margin may be slightly lower than our commercial location business, but their operating margin is-- their operating expense is also lower, so on the operating level we think its Framedia has similar margin as Focus Media.

Q - Paul Beaver

Okay, thank you.

Operator

Our next question comes from Andrew Poleir (ph) with Nick Burke Global Securities (ph).

Q - Andrew Poleir

Yes, gentlemen, congratulations on a good quarter. Just another question on Framedia, do you expect to be able to cross sell advertisement on both forms of media, or are they going to be-- is there some risk of cannibalization?

A - Daniel Wu

Okay, I'll ask Jason to answer this question. Hold on one second.

A - Jason Jiang

foreign language

A - Daniel Wu

Jason said, basically if you look at Framedia, their advertising business is more focused on the residential building complex and for Focus Media we're more focused on the commercial area, so for any advertiser they look at potential target audience. Residential and commercial are the two areas which are most important and which they need to cover absolutely, so for Focus Media or Framedia each of our sales team approach advertisers. If we can offer an integrated solution to allow to provide the advertisers ability to target audience both in the residential area and the commercial area, that actually is a very effective and powerful from an advertisers point of view, so we believe actually combining the residential Framedia network and the Focus Media commercial location network it's very effective to attract advertisers to this media platform. And also, on the other hand the second point Jason made is if you look at many of the advertisers we have relationships with, they also have non-digital budget, so they not only-- you know they use their TV commercial on the Focus Media network, but they have other form of commercial in place somewhere else and by providing the venue to advertise through Framedia's network and residential area, so we can actually get to the other part of the advertising budget. So this actually shows by consolidating multiple media it gives Focus Media more, let's say, power or makes Focus Media more important in front of our advertising clients and also in front of advertising agencies. So we believe actually the effect that Framedia will have a significant media synergy with Focus Media's current business and we believe this is going to be a positive impact on the business, rather than any cannibalization.

Q - Andrew Poleir

Thank you.

Operator

Our next question comes from Ming Zao with Susquehanna Financial Group.

Q - Ming Zao

Congratulations, two questions. First question, just continuing with a previous question, you mentioned that there might be a 4 to 6 week delay in terms of the contract pricing, so you have raised the price by pretty big rate beginning October 1st, so I mean the ASP looks like it should be growing by 20% in the fourth quarter, but your guidance pretty much assumed the same growth rate on the revenue side. Are you conservatively assuming that you're not expecting the time of slot to increase?

A - Daniel Wu

Okay, Ming, a couple points. First of all, the price increase we implemented on October 1st for the pier 1 cities is only 20%, but only for selected Tier II cities there's 30, 40%, so that's-- and all-- in some of the Tier II cities actually the increase is less, so let's first of all clarify that point. Second, in terms of the delay effect, the advertising contracts are typically 8 weeks or 12 weeks, not 4 to 6 weeks and typically when advertisers-- they sign contracts. They need to sign contract maybe 4 weeks ahead of time for the broadcasting or the advertisement and typically when there's a price increase they will tend to sign before the price increase, so they can lock in the lower rate, so it's I would say the ASP estimate of, you know, based on your knowledge is maybe a little bit too aggressive. We think the Street analysis is more reasonable.

Q - Ming Zao

Okay. The second question about your accounts receivable, it's increased significantly this quarter. Could you give us some comments on the accounts receivable and particularly do you have customers from the local handset makers who recently have reported some bad numbers. Is that the reason we should be worrying about?

A - Daniel Wu

We actually don't see any unusual signs from accounts receivable. Accounts receivable actually increased proportionately with revenue. Our DSO is still at 75 days and typically you see in China is, you know, some of the accounts receivable will actually get collected before end of the year more likely and we don't see any specific accounts receivable problematic from local handset manufacturers because keep in mind in Focus Media network in terms of time slots right now it's in a very high demand, so people if they think this is a very important media they need to pay us because otherwise if they delay their AR payment then they won't be able to get on the slot, so this is something we think we have more leverage with our customers and so far we have not run into any accounts receivable problems. The accounts receivable problems with our advertising clients, at 75 days between 50 to 90 days is very typical in China as an industry norm.

Q - Ming Zao

Okay, great. Thanks.

Operator

Our next question comes from Sean Queix ph with Credit Suisse First Boston.

Q - Sean Quex

Congrats on a strong quarter. Just in terms of your advertising clients, you increased the number of new advertising clients quite significantly during the quarter; can you give us some color in terms of what core cost sectors are they coming from and the split between local and international? Thanks.

A - Daniel Wu

Sean, to answer your question here. For the advertisers we added in the third quarter it's approximately 50/50 in terms of domestic and international split and in terms of the sectors where the advertisers are from we actually didn't notice a sign of increasing of fast moving consumer goods advertisers, even not only for the in-store network, which is pretty obvious, but also for the commercial location network. That is probably the reach of our network is being recognized as adequate or as sufficient for those consumer, fast moving consumer goods advertiser, brand advertisers the major brands. For example, Colgate, the toothpaste and also the detergent from P&G and we did-- we actually have them major fast moving consumer goods to advertise our Focus Media network because they think the reach of those Focus Media network has reached a level, which effective for their advertising strategy.

Operator

Our next question comes from William Bean with Deutsche Bank.

Q - William Bean

A couple of questions here-- first of all could you give us a little bit more granularity in terms of Tier II? You've expanded into a number of cities, maybe break it down between Tier II through tier three and tier four through six and any numbers you could give that would be great.

A - Daniel Wu

In terms of what number? I'm sorry in terms of the network size or in terms of what--

Q - William Bean

Network and sales.

A - Daniel Wu

Tier II growth in China you know it's a very, very, let's say diversified country so the Tier II cities currently we have 23 city wide networks and 4 of them are Tier I cities so Tier II cities are 19 of them. If you look at the 19 Tier II cities, there are approximately 5 or 6 cities which are more significant contributors to our business versus other cities, cities such as major proper venture capitals like Nanjing, Chengdu, Shenzhen, and Changzhou. These cities are very, very important in terms of contribution to our business but there are many other cities if you look at a map such as some of the let's say Kunming, or some other cities which are less important for in terms of revenue contribution. This has to do with a few factors. First of all it has to do with how big the city is. Advertisers look at the population of the city, the economy, local economy, at the welfare of the city and also in terms of how long Focus Media has been there. It's because if we've been there longer so we build advertising client base and it's more accepted the advertising network is more accepted by the local media, local advertisers, so all those factors contribute to the revenue contribution of any particular Tier II city. So if you do want to sort of-- I think probably to answer your question directly, the easiest way to look at it is the rate card we have on our Web site. So if you look at the rate card, the rate card basically shows the different rates we apply to each sub group of Tier II cities.

Q - William Bean

So for Tier II would you say the top 6 in Tier II is maybe 80% or 70% of revenue or--?

A - Daniel Wu

Yes, I would say the top Tier II cities contribute maybe 60-70% of the Tier II city revenues so it's very similar to how Tier I-- if you look at the Tier I contributes 66.7% of the revenues.

Q - William Bean

Okay great and the second question is on the in-store you said your customers were very pleased with the feedback. How exactly are you or they measuring that?

A - Daniel Wu

This very similar to our previous experience with the commercial location network. Advertisers, they typically what they do is they spend some money. Then they will engage a third party or their internal people to do market research. The market research is basically-- you know one of the very typical market research is they send people to do surveys of traffic in the store in terms of the recall rate of the ad, in terms of and also they look at the improvement, the impression or the image of their brand and also they look at the same store sales. There are many, many different ways they look at the effectiveness of advertising with Focus Media's in-store network. Once they complete those research, sometimes they share with us those research and they come back to us. They want to spend more money so that's our advertising with Focus Media's in-store network. So we have seen the research feedback from our advertising clients are very, very positive so we are actually very happy to see those results.

Q - William Bean

Okay and then just the last quick question, could you just give us a sense, an update on sales direct versus agency?

A - Daniel Wu

It's approximately 50-50.

Q - William Bean

So no change.

A - Daniel Wu

It's split.

Operator

Our next question comes from Chang Creed with Forerun Technology Research.

Q - Chang Creed

Congratulations with a very good result. I have a few questions. First one you mentioned demand for your indiscernible is very high and my question is that because clients are waking up to your advertising format or it's because generally the advertising environment is quite healthy?

A - Daniel Wu

The demand in Tier I cities is very high? Was that your question? I'm sorry.

Q - Chang Creed

Well it looks like you said demand in Tier I is high and that demand in Tier II cities are picking up so my question is regarding the general advertising environment. Are the people spending more with you, cut spending say with the other medias?

A - Daniel Wu

I think overall if you look at all the research data that overall advertising environment in China is positive. It's growing. The advertising market is growing at 15-20% based on a number of different attributes by market research firms. The specific segments may vary so overall we operate in the LCD out of home audio video segment. We believe our segment is growing very rapidly and the advertisers see the Focus Media as a very, very important complimentary network versus TV so Focus Media provides our advertising clients a way to reach their target audience during the daytime at various locations versus TV, typically seen at nighttime and at home, and also given the increasing of pay channels or cable channels and given the increased penetration of the Internet, people are watching less and less TV. So we do see for out of home this particular segment where in we think this segment is a demand extremely strong. But I can't speak for the rest of he specific segment but overall China advertising industry is growing.

Q - Chang Creed

Okay the other question is you know you did the two small acquisitions in the third quarter and also you signed up two distributors too. What's the revenue contributions from these acquisitions and distributors?

A - Daniel Wu

Very small. If you overall the two distributors would if you think-- let me talk about two distributors. The two distributors once with our distributor agreement, they have to apply for local business license. Then they have to spend money to set up their network, to install the machine before they can sell advertisements so typically there is a six-month lagging effect before they actually can contribute or generate any revenue and for distributors their revenue is not consolidated with Focus Media. It's their own investment. It's their own network. We only get 2 minutes out of the 9 minutes advertising cycle for free so it's almost nothing. So for the two acquisitions Signal acquisition was the acquisition of their lease contract so we basically acquired their building and for Shengyang it's a regional distributor originally a part of Focus Media's network. We consolidated that business into ours so both of those acquisitions doesn't contribute meaningfully to our business.

Q - Chang Creed

Okay so in that way for the fourth quarter guidance basically if there are any more acquisitions like this, that will not be contributing much either?

A - Daniel Wu

Yes.

Operator

Your final question for today is a follow-up from Jason Brueschke with Citigroup

Q - Jason Brueschke

There was an earlier question regarding cannibalization and the Framedia acquisition. I want to maybe ask the other side of that, which is considering the cross-selling opportunities. Could you maybe discuss the size of the Framedia sales force and whether you're currently training your sales force to sell Framedia in advance of the closing and also comment on will your distributors in your network in your Tier II cities also be selling the Framedia product going forward after the beginning of the new year as well? Thanks.

A - Daniel Wu

I will get your answer to the question. Just give me a minute. Jason, this is the answer to your question hopefully. First of all we actually are working at the time very closely with Framedia sales marketing team. Their sales people are about 200-300 people and we actually have our-- internally Focus Media has our own training department and our department actually, including Jason himself, is heading there this week to provide training to Framedia sales and marketing team. And also our internal media circulation such as our Focus Media Media Weekly and also our on-line education platform is also open for Framedia sales people to learn of our business and for them to bring up the level of their sales marketing team. To answer your second question regarding the distributor on whether its readers are selling Framedia. Framedia business mostly at this time are focused on Beijing, Shanghai, Guangzhou and Shenzhen and Nanjing and Wuhan. That's their current network so there is a very-- you know all those networks are part of Focus Media's directly owned network so we don't think the distributors will actually be part of that because Framedia has not expanded to those cities.

Q - Jason Brueschke

Do you have plans going forward to take Framedia into your second and third tier cities?

A - Daniel Wu

That is actually Framedia's strategy going forward. I think their strategy first of all is to penetrate before they continue to expend their penetration in Tier I cities, which is Beijing, Shanghai, Guangzhou, Shenzhen and Wuhan and Nanjing. Those are their major cities and also part of this strategy is to expand to more important Tier II cities but still I think I have actually answered this particular question in the Framedia acquisition call. If from Framedia's strategy point of view, they have partnerships or they have relationships with over 20 smaller Framedia type operators in less important individual cities so they have access to those inventories at their attractive price so if they need to enter those cities they actually have-- they don't have any fixed costs. They can buy inventory from the local operator in those particular cities, which at this time Framedia believes that strategy is very, very cost effective for them. So in the future Framedia as the business continues to grow and the first city penetration reaches its peak, Framedia may consider to expand into additional cities beyond Beijing, Shanghai Guangzhou, Shenzhen and Wuhan and Nanjing and those strategies have not been finalized at the time.

Q - Jason Brueschke

Great, thank you guys.

A - Daniel Wu

Thank you.

Jie Chen, Investor Relations Manager

Thank you. That concludes today's taped conference on our third quarter 2005 results. We look forward to speaking with you again next quarter. Thank you.

Daniel Wu, Chief Financial Officer

Thanks everyone.

Operator

Thank you, ladies and gentlemen, for your participation. This does conclude your program.

Related:

• The prepared remarks from this call are 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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