Focus Media F3Q07 (Qtr End 9/30/07) Earnings Call Transcript

Nov.20.07 | About: Focus Media (FMCN)

Focus Media Holding Limited (NASDAQ:FMCN)

F3Q07 Earnings Call

November 19, 2007 8:00 pm ET


Jie Chen - Investor Relations

Jason N. Jiang - Chairman of the Board, Chief ExecutiveOfficer

Daniel M. Wu - Chief Financial Officer


James Mitchell - Goldman Sachs

Jason Brueschke - Citigroup

Richard Ji - Morgan Stanley

Eddie Leung - Merrill Lynch

C. Ming Zhao - Susquehanna

Jackie Chan - CIBC World Markets

Aaron Kessler - Piper Jaffray

Marisa Ho - Credit Suisse


Good day, ladies and gentlemen, and welcome to the third quarter 2007 FocusMedia Holdings Limited earnings conference call. (Operator Instructions) Iwould now like to turn the presentation over to your host, Ms. Jie Chen,Investor Relations Manager. Please proceed, Madam.

Jie Chen

Thank you. Welcome to Focus Media's third quarter 2007earnings conference call. Today, our management will discuss the company’sfinancial results for the third quarter of 2007 and business outlook for thefourth quarter 2007. With me here are Jason Jiang, Chairman of the Board andChief Executive Officer; and Daniel Wu, Chief Financial Officer. After Danielupdates you on our third quarter 2007 operational and financial performance, wewill open the call for questions.

This call is also broadcast through the Internet andavailable through our investor relations website,

Before we begin, I would like to remind you that during thecourse of this call, we will make forward-looking statements that are subjectto risks and uncertainties. The statements include but are not limited tostatements regarding Focus Media's business objectives and plans, theexpectations of development of our networks and our outlook for the fourthquarter 2007, for example. You can also identify forward-looking statements byterms such as "will,""expects," "anticipates," "future," "intends,""plans," "believes," "estimates" and similarstatements. The accuracy of those statements may be affected by a number ofrisks and uncertainties that could cause our actual results to differmaterially from those projected or anticipated.

These risks and uncertainties include but are not limited toour limited operating history for the current operations and short history ofthe audio-visual advertising sector, which may make it difficult for you toevaluate the viability and prospects of our business, the integration ofacquired businesses, competition from present and future competitors in China’sgrowing advertising market, and other risks outlined in our filings with theSEC, including our registration statement on Form F-1.

We do not undertake any obligation to update thisforward-looking information except as required under applicable law. Now, Iwill turn the call over to our CFO, Daniel Wu, for a summary of the thirdquarter 2007 financial results.

Daniel M. Wu

Thank you, Jie. I am pleased to report to you another recordquarterly results in the third quarter of 2007. Our total revenue, excludingsales tax, reached $151.4 million, increasing 149.6% from the same period lastyear and 33.6% sequentially. Our third quarter revenues include $94.7 millionfrom our digital out-of-home advertising business, $14 million from our FocusMedia wireless advertising business, and $42.5 million from our Internetadvertising business.

First, let me review in detail the results of our digitalout-of-home advertising business. Total advertising revenue from our digitalout-of-home advertising reached $94.7 million in the third quarter of 2007, up66.1% as compared to $57 million in the same period in 2006, and also increased23.3% sequentially.

Within our digital out-of-home advertising business, therevenue from our commercial location network in the third quarter was $64.6million, up 67.7% year over year.

The revenue from our in-store network was $71 million, as wecontinue to compete aggressively with our competitors in the in-store business.

The revenue from our poster frame network in the thirdquarter was $23.1 million, up over 100% year over year as the occupancy rategrew sequentially after taking into consideration the increase in capacity dueto the digital upgrade. So the business is growing and continues to gainmomentum.

The commercial location network, in-store network, andposter frame network contributed 68.2%, 7.5%, and 24.3% of the total digitalout-of-home advertising revenue respectively in the third quarter of 2007.

During the third quarter of 2007, Focus Media wirelessbusiness generated revenue of $14 million, up 298.9% from $3.5 million in thethird quarter of 2006. Advertising revenue for our Internet business, Internetadvertising business, was $42.5 million in the third quarter of 2007, up 68.5%sequentially.

Digital marketing service accounted for 94% of the totalInternet advertising revenue. Rich media, pay-for-performance, and technologysolutions accounted for the remaining 6%.

Gross profit for the third quarter of 2007 was $77.1million, representing an increase of 99.9% compared to $38.6 million for thesame period a year ago.

In the third quarter of 2007, gross margin for our digitalout-of-home business was 62.7%. Within the digital out-of-home business, thecommercial location network gross margin was 64.7%, in-store network grossmargin was 17.7%, and poster frame network gross margin was 71.1%.

Commercial location gross margin was negatively impacted bythe acquisition of leading outdoor billboard operator in China in the secondquarter of 2007, which operates over 200 highly attractive outdoor billboardlocations in major commercial centers in China. Excluding the non-digitaloutdoor billboard business, commercial location gross margin would have been74.6%. We plan to upgrade some of the sites to digital LED billboards uponexpiration of the current contracts with advertisers.

This acquisition provides Focus Media with a strongerstrategic position for the growth of our digital out-of-home business in thefuture.

The gross margin for our mobile advertising business was56.2% in the third quarter of 2007. The gross margin for our Internetadvertising business was 23% in the third quarter, lower than the previousquarter due to several small acquisitions in this quarter to strengthen themarket leadership of Allyes. We expect the gross margin of our Internetadvertising business to trend up going forward as we leverage Allyes’ strongtechnology platform to improve the business operation of these acquiredentities.

Blended gross margin for the company for the third quarterwas 50.9%, as compared to 54.6% in the second quarter of 2007, due to thecontribution of the lower margin Internet advertising business and in-storeadvertising business.

Third quarter operating expense totaled $30 million, including$1.1 million in acquired intangible asset amortization resulting fromhistorical acquisitions and non-cash share-based compensation expense of $4.4million. As a result, operating margin in the third quarter of 2007 was 31.1%,excluding non-cash share-based compensation expense and acquired intangibleamortization expense, operating margin on a non-GAAP basis was $36.4 million inthe third quarter.

Operating expenses in the third quarter of 2007 alsoincludes a one-time expense of approximately $2.1 million relating to therecent audit committee inquiry during the summer.

GAAP net income for the third quarter of 2007 was $46.6million, or $0.37 per fully diluted ADS, up 72% from $27 million for the sameperiod a year ago. Non-GAAP net income excluding non-cash share-basedcompensation expense and amortization of acquired intangible assets in thethird quarter of 2007 was $54.6 million, or $0.43 per fully diluted ADS.

Now I would like to provide Focus Media's business outlookfor the fourth quarter of 2007. Please note the following outlook statementsare based on our current expectations. These statements are forward-looking andactual results may differ materially.

We expect total revenue for the fourth quarter of 2007 to bebetween $160 million and $170 million; non-GAAP fully diluted earnings per ADSto be between $0.48 and $0.50.

Thanks very much. Now we’ll open the call for yourquestions. Operator.



(Operator Instructions) Your first question comes from the lineof James Mitchell with Goldman Sachs. Please proceed.

James Mitchell -Goldman Sachs

Thank you very much for taking my question this morning. Ihad a question just about the billboard acquisition you made during thequarter. I think you disclosed the gross margin including and excludingbillboard, which implies that billboard had maybe $5 million in cost. I wantedto check first whether the billboard business during the quarter was profitableand secondly, whether the billboard business was part of the reason why you hadincreases in sales and marketing costs and increases in receivables during thequarter versus the previous quarter. Thank you.

Daniel M. Wu

Let me answer that question. First of all, the billboardbusiness we acquired is a profitable business and actually, the acquisition wasalso based on similar patterns of Focus Media’s previous acquisitions based onmultiple year earn-out agreements. So they have to hit performance targets inorder to get paid in multiple installments going forward.

And their gross margin was roughly about 25%, which isnormal in the outdoor billboard industry in China. And the reason we acquiredthem, as we said in the press release, we really think the sites currently theyoperate are very attractive and potentially some important sites in majorcommercial centers can be upgraded to digital LED, which we believe is a muchhigher margin business moving forward. So we’ll be looking to those upgrades inthe future when the advertising contract expires.

The AR increase actually in our business is normal. If youlook at the DSOs for this quarter, it is roughly about -- it is higher thanroughly about 70 days in the previous quarter but within expectations of 70 to90 days on average we estimate for Focus Media's business.

So the overall AR increase was not relating to thisbillboard acquisition but it’s pretty much how the business operates goingforward.

So James, hopefully this answers some of your questions.

James Mitchell -Goldman Sachs

Sure. I was also just asking with the sales and marketing,whether the increase there was slightly due to the billboard acquisition orwhether it was fully organic.

Daniel M. Wu

It’s normally -- in the billboard business, we also paysales and marketing and in our industry, the sales and marketing average isroughly about 10% to 15%. It really depends on different business and differentsituations as we explained earlier. For example, the commercial locationnetwork when in the city we enter first, which we -- where the revenue base isvery small, we typically offer higher sales and marketing commissions; incities which are more mature, we offer lower.

So it’s a blended base of that. The outdoor billboardbusiness is nothing unusual out of that norm, so if you look at an overallsales and marketing expense of Focus Media this quarter, roughly about 12%,13%. So it’s on average how we expect going forward.

James Mitchell -Goldman Sachs

Okay. I guess the billboard business is sort of a land grabbusiness, like some of your other out-of-home businesses. Anyway, thank you.I’ll get back in the queue.


Your next question comes from the line of Jason Brueschkewith Citigroup. Please proceed.

Jason Brueschke -Citigroup

Thank you. Good morning, everyone. I have two questions,please. The first one is more of a general question involving gross margins. Asthe media market in China has really been expanding a lot in the last fiveyears, and obviously it’s very fragmented, and it’s apparent that Focus hasadopted a strategy of acting as a consolidator, at least in selective parts ofthis market.

My question within this context is how should we be thinkingof modeling the gross margins going forward? Since on the one hand, most ofyour targets have lower gross margins that [inaudible] before you acquire them,and notwithstanding the fact that you have an excellent track record of quicklygrowing those gross margins after the acquisitions, the timing of these dealscertainly makes modeling the gross margins more choppy.

So maybe for the next three or four quarters, can you giveus some general color on what we should be expecting on that front? And then Ihave a follow-up question. Thanks.

Daniel M. Wu

Sure. Thanks, Jason. Let me answer this question first and Ithink overall, Jason can help me relating to the strategic position for FocusMedia acquisitions going forward, relating to gross margin.

First of all, if you look at Focus Media's gross margin, howwe look at it is we actually look at each media individually. So if you look atthe gross margin for commercial location business itself, without the impact ofthe acquisition of digital out-of-home, digital billboard business, our grossmargin is pretty healthy. It’s close to our target of 75%.

So the acquisition of the outdoor billboard business, as wediscussed a little bit earlier, allows us to position ourselves to be able toupgrade those to digital sites once the contract with advertisers expires,because otherwise if we don’t get into those business, basically we have tocompete with existing billboard location operators for those sites. It makesthat business much more difficult and potentially costlier.

So the acquisition itself for us allows us first of all toexpand our presence, and second to get access to those sites through -- fromour point of view, it’s a more effective [means].

If you look at the in-store business, right now we do have alot of competition so the business as we talked about in the previous quarter,we do expect that business to be under pressure as long as the competitivesituation does not resolve itself, but it’s still a small percentage of theoverall business.

The gross margin is still 17% and that means basically we’restill making break-even or make a slightly small amount of money in thatbusiness.

The poster frame business is pretty healthy, how we look atit. Although we are already taking depreciation expense of the digital upgrade,the gross margin still stays about 70%. We expect long-term gross margin to be75%.

The mobile advertising business gross margin between 50% to60% and we expect that to be within range until the 3G upgrade of network hasbeen implemented by the mobile operators.

Internet advertising is actually the lower margin businessthat we entered recently. If you look at the business we got, we have acquired Allyesand a few others, basically allows Focus Media to strategically positionourselves for the growth of Internet advertising business.

We are currently in the process of aggregating traffic andestablish a dominant presence in the Internet advertising service business.Going forward with most of the acquisition already being completed, what weexpect to do is using our technology strength to do more targeted advertisinggoing forward.

So in the long-term, of course, Internet advertisingbusiness we expect, based on the current model, can move towards 35%, 40% inthe long-term, of course potentially be better. It really depends on how thepay-for-performance search business in China is going to take off, but also ifyou look at -- if you purely focus on gross margin, if we report gross marginon a net basis for that particular business, of course the revenue base will besmaller but net margin will be higher, as some of the U.S. comparable companiesdo in this particular business.

So Internet advertising is a business we are investing inright now but we really don’t think that that margin at this time is a goodrepresentation of the long-term gross margin of our Internet advertisingbusiness.

Just give me one moment. I’ll have Jason answer in terms ofthe strategic position going forward, in terms of how we look at our marginbusiness.

Jason N. Jiang(Translation)

In terms of acquisition strategy going forward, if you lookat Internet, we have done all the major acquisitions for the leading providerof Internet marketing services in China, so going forward the shift of focusand more focus on technology. So if there are good technology for Internetadvertising which will help us to improve our business operation of ourInternet advertising business, we potentially will consider acquisitions but ifyou think about those acquisitions, they are relatively much smaller in size.It’s basically if they are a good, emerging technology which we believe will behelpful to improve the operation of the business we already have, and also dokeep in mind Allyes is the leading provider of technology solutions forInternet advertising in China, given their large market share.

The second area is regarding the outdoor location,out-of-home locations. If you think about what we look at those, in China, thehigh traffic locations for out-of-home advertising, there is a scarcity ofresources, so it’s a very limited number of where you really can do it, wherethe value really can demonstrate itself and also be appreciated by theadvertisers.

So from a Focus Media point of view, given we are alreadythe largest digital out-of-home media provider in China, if there areopportunities for us to get into some of those highly attractive but limitedavailability of highly attractive locations through acquisition, we will beconsidering that because we believe in the long-term, as the China advertisingmarket continues to grow, the resource of locations is always limited, as thebest locations will actually attract the best advertisers which offer thehighest return for the advertising business.

So the way we look at it is although we have done thisacquisition in the second quarter, which expands our presence in the outdoorbillboard business, once the advertising contracts with those advertisers forthe existing billboards expires, we are looking to upgrade some of them todigital which we believe in the long-term the margin will be better. But alsoin the future, if there are good opportunities for us to do this, to get a holdof some additional highly attractive locations, we’ll consider that as well.

Jason, hopefully this addresses some of your questions.

Jason Brueschke -Citigroup

Very helpful. And my follow-up question, or my secondquestion actually has to do with the announcement in the press release that youwould consider possibly listing separately the wireless advertising division.We haven’t really gotten a lot on this business the previous three quarters asthe business has been growing around 300% year over year. It’s kind of asleeper business within the overall portfolio.

In light of this announcement that you would considerpossibly listing it, could you maybe update us and give us some color on thestate of the mobile handset advertising market in China, what your competitiveposition is? Or maybe just a few comments on how this business as you see itmay be differing from the wireless value-added services business of say aKongZhong or Hurray!, which most people might be more familiar with? Thank you.

Daniel M. Wu

Sure. Thanks, Jason. I’ll translate for Jason.

Jason N. Jiang(Translation)

First of all, regarding the wireless advertising businesswhich we operate, the biggest difference of versus some of the traditionalwireless value-added service providers KongZhong and Linktone, is that we donot receive payment from the consumers. We actually get paid by theadvertisers. So basically, it’s not we are being paid by the consumers throughChina Mobile. It’s not like China Mobile collects the fees and then pays us forthe service the consumer purchase.

But the relationship in our business is the advertiser paysus, then we pay China Mobile operators. So the consumer does not pay, so thebusiness model is very different.

If you look at the competitive landscape of this businessbased on industry research, we are roughly about 50% of the market and themarket today is roughly about $100 million in China. The remaining market isactually competing by a lot of smaller competitors, much smaller competitorsversus us, so if you look at this competitive landscape, the competitiveadvantage of Focus Media wireless advertising business is because we control adatabase -- we actually have a database of more than 200 million mobile usersin China, which allows us to do better targeting when we deliver ads to thosemobile users.

Targeting is extremely important for mobile advertisinggoing forward. Let me give you a couple of examples. First of all, let’s sayright now what we are doing is we can provide some WAP advertising business,people access WAP, and once they get on the WAP, the advertising they see isbased on an address, and this digital ID is actually stored in our database,which identifies their traffic patterns -- very similar to the Internetadvertising business.

Also, for example, we work with MSN not only on the Internetside, which Allyes worked with them, we also represent them on the wirelessbusiness, Wireless MSN, so we actually deliver ads through one of the largestwireless information platforms and that allows us to target a very attractiveprofile of consumers in China.

And also, we are also experimenting some location-basedbusiness with local regional mobile operators. For example, in the recent autoshow in Guangzhou, which is one of the largest auto shows in China, theconsumers walking through this auto show, they will receive three differentadvertisements. This is based on the location where they are at, and so theadvertising of course is relating to auto and it’s targeting a very attractivepotential group of consumers in China.

So all those ways of doing advertising is very similar tothe other part of the Focus Media business. If you look at the Focus Mediadigital out-of-home, look at Focus Media Internet advertising, it’s all aboutproviding highly targeted advertising for our advertising clients.

For this market, we believe going forward, given thecatalyst of 3G upgrade of China Mobile operators, we believe the market willgrow going forward at potentially up to 100% on a year-over-year. It’s a verysmall market right now; it’s only about $100 million but it’s a huge potential,taking into consideration that there are 500 million mobile users in Chinaversus only about 160 million Internet users in China.

So this advertising media based on our understanding of themarket will grow very, very fast going forward. That’s why we are considering apossible cut-out of this business, have a separate listing in differentexchange, so the business actually can be better appreciated by the investorswho are interested in investing in this business, and of course it allows us tocontinue to operate this business in this very fast growing business, through apotential consolidation going forward, as well if there is such opportunityexists for this business.

So this sort of was a long answer to your short question,Jason.

Jason Brueschke -Citigroup

It’s very, very helpful. I appreciate that.


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

RichardJi - Morgan Stanley

Good quarter, and I have two questions, starting with onlineadvertising. Obviously only two quarters after inception, online advertisingalready become the number two revenue driver for your company. And on thatnote, I’m just wondering about any revenue contribution from your recentacquisition. In other words, what is the organic growth for your Allyesbusiness?

And a follow-up question is again regarding the synergybetween your online business and Allyes business, and your other business --how much of the sales come from the direct sales from Allyes and how much ofthat comes from the cross-selling by your sales force in your other business?

Daniel M. Wu

I’ll answer the first question and then ask Jason to answerthe second. Let me answer the first question. The Allyes business actuallyquarter over quarter grew roughly slightly over 20%, so that business is alsogrowing very healthy and we believe fourth quarter will be another very goodquarter for Internet advertising based on the historical seasonality of thisbusiness.

So this business is growing very healthy. The additionalacquisition we talked about in the press release of some of the smalleracquisitions allows us to establish our market position in terms of attractiveverticals, such as auto, real estate, in-game advertising. Those are more like-- these companies are not in any way similar to the scale of Allyes and haveas strong a technology base as Allyes, but those advertisers, those Internetmarketing service companies already have their presence in a particularvertical industry. We believe those industries will be helpful to consolidateAllyes business going forward, so that’s why we make those smaller acquisitions.

I’ll ask Jason to help answer in terms of cross-sellingversus the sales by Internet advertising staff.

Jason N. Jiang(Translation)

I think if you look at the Allyes business, when we acquiredthem they principally operate in Beijing, Shanghai, Guangzhou and today, giventhe vast amount of advertising sales coverage of Focus Media, we have alreadystarted a joint sales effort with the Allyes sales team in six major cities inChina. But do keep in mind, the principal sales, the sales still covered by theAllyes sales marketing team, our sales marketing people is basically to helpthem to access to clients of Focus Media and help them to successfullyconverting clients or land clients through their competitiveness, competitiveInternet advertising business.

So it’s more like they are still driving the sales marketingeffort. We are helping them to get access to clients and converting clients.

But this effort has actually demonstrated tremendousresults, because you can see Allyes advertising clients this year has grownvery, very fast versus historical levels. If you think about the long-termFocus Media strategy for the Internet advertising business, we are not acontent based Internet advertising business. What we try to do is we try todrive a pay-by-performance based Internet advertising business.

The most important thing for pay-by-performance advertisingbusiness, which in the future we believe that’s the way the future Internetadvertising will be, because it’s a highly targeted feature of pay-by-performancebecause it delivers actual results for the advertisers.

We believe the most important key element for success in thepay-by-performance is to be able to aggregate a large amount of traffic,because if you do not have the traffic, then there is very limited reach forpay-by-performance and that’s not going to be very attractive for anadvertising perspective.

So going forward, Allyes will continue to focus notnecessarily through acquisition but acquisition is one of the possibilities,but we have done all the large acquisitions. But we also look at trying to workwith the web publishers to come up with plans or partnerships or ways toaggregate a large amount of traffic for Allyes technology platform to service.

So by doing that, we believe that will give us a very, verycomfortable platform to grow our pay-by-performance business.

Today, the sales marketing effort still increasingly drivenby the Allyes sales team because they have much more experience and knowledgein this Internet advertising business. But next year, starting from 2008, giventhe growth of our Internet advertising business, given the [inaudible] of ourtechnology deployment by Allyes, we are looking to actually start doing some ofthe standard based out into the advertising solution. So if there arestandard-based products which we will be able to deploy next year, then it’spossible we’ll leverage the near 2,000 sales marketing people within FocusMedia’s other business to help Allyes to sell those products to their clients.But still, this is the plan in the future.

Richard Ji - MorganStanley

Thank you, Daniel. My second question is regarding yourposter frame network. Obviously it shows a very robust growth and I’m justwondering how much of the revenue comes from your digital frame 2.0 andobviously the frame 2.0 will significantly increase your advertising inventoryfor the poster frame network. On the other hand, what is the pricing differencebetween frame 1.0 and frame 2.0?

Daniel M. Wu

Sure, let me answer this question. Actually, the way it isactually sold, if you think about our digital upgrade process, there is reallyno different price for digital and the traditional, except if an advertiserbuys digital, they actually only get 30 seconds out of the one-and-a-halfminute cycle.

So if you think about let’s say any advertiser, Volkswagen,if they come into Shanghai and want to do advertising, we may have 20,000,30,000 different frames in Shanghai. They will provide basically a demographicprofile of their preferred location. They do not usually advertise in all the30,000 locations. They would say I want this type of income level, it dependson the model of the car, I want to reach these areas, locations, or I have apreference to a certain type of people, a certain type of residence profile,like close to a college or those types of things.

Once they specific that profile, we go through our database,come up with maybe let’s say 5,000 locations where we think it’s suitable fortheir advertising and once they buy 5,000 locations, out of those 5,000locations maybe 10% of them have actually already upgraded to digital.

So they actually don’t pay a separate price for digital.They still buy those 5,000 locations but with the knowledge of those digitalsites potentially they have to share with two additional advertisers, they onlyget 30 seconds out of a one-and-a-half minute cycle. So there’s really nodifferent price strategy for the digital frame -- it’s just a continued upgradeof our network.

But of course, as the digital rollout is getting larger andlarger, the network itself actually can be sold separately, so there may beadvertisers -- there are advertisers coming to us and saying I only want to buydigital because my advertising is only we believe it’s not suitable for atraditional advertising, traditional paper-based advertising. Our advertising,we want to have this digital image. In those situations, we actually do sellbut of course the price will be the same as we published on the website, but ofcourse different discount levels are negotiated -- it depends on the actualsituation.

So this is how we sell the digital versus the traditionalfor the poster frame network. If you look at what we have reported, the digitalframe basically accounts for three kinds of capacity, so basically if you have100 traditional and you have 10 digital, then your capacity becomes 100 plus 10times three, so it becomes 130. So even with an increased capacity in ourbusiness, our utilization rate continued to go up sequentially versus lastquarter. So it basically shows the digital upgrade actually has a tremendousattraction to a lot of the advertisers and we really don’t see thoseadditionally created inventory left open because there are people taking upthose inventories because of attractiveness of the digital upgrade.

Richard, does that answer your question?

Richard Ji - MorganStanley

Yes, very helpful. Thank you, Daniel.


Your next question comes from the line of Eddie Leung withMerrill Lynch. Please proceed.

EddieLeung - Merrill Lynch

Good morning, Jason and Daniel. Good quarter. Questionsregarding your core office buildings network; could you give us an update onthe progress you have made in providing those customized solutions toadvertisers in terms of geographical segmentation? And what kind of lessonshave you learned from testing these new offerings in the past quarter?

Daniel M. Wu

Let me translate for Jason.

Jason N. Jiang(Translation)

A couple of examples we can give you, Eddie, is as follows;if you think about let’s say if there’s a real estate advertiser, he has a newresidential project in Shanghai, want to advertise in Shanghai, what we canactually allow him to advertise is he can actually only show the advertising inthe area near where their construction project is. So let’s say thisresidential project is in Pudong -- Shanghai is Pudong and Pushi -- so if theyare in Pudong, then he doesn’t have to pay for those buildings in Pushi to showthe advertising. He only needs to pay for those buildings in Pudong where wehave networks to show his particular residential project.

This particular coverage is maybe only about 20% of all thebuildings Focus Media has in Shanghai but typically the advertiser would haveto pay roughly maybe 40% versus the price others would have to pay for theentire Shanghai if he showed advertising in all those buildings.

So for us, it’s actually a better cost benefit on a perbuilding basis and allows us to achieve higher margin, but for him actually, hisadvertising is much more targeted because he doesn’t have to pay for thoseeyeballs in Pushi which potential be is the likelihood of becoming his customeris less.

So also, another example, let’s say Mercedes-Benz. IfMercedes-Benz only want to advertise in the top 100 buildings in major citiesin China, so he believes all his customers are in those top 100 locations inmajor cities in China, so of course we can charge him on average relative to --otherwise he would pay for the entire city, we’ll charge him a lower rate butbecause his advertising is only showing in those 100 buildings, the topbuildings in the city, we actually are able to achieve better revenue on a perbuilding basis for our network.

So this type of customer advertising is actually gainingmore and more traction because first of all, it’s very unique. You cannot do itwith newspaper. You cannot do it with TV, so it’s a highly targeted feature andallows Focus Media's media to become more competitive and be more customizedfor our advertising clients, and actually also allow us to improve our revenueand margin of our commercial location business going forward.

So this idea is very similar to all the other businessesFocus Media operates, if you think about we talked about pay-for-performancefor Internet advertising, it’s the same thing. It’s about targeting. If youthink about the digital upgrade of our frame 2.0, it’s the same thing. Itallows us to do much better targeting within the residential sector.

These are the things that are consistent with Focus Media’sstrategy of providing highly targeted advertising solutions for advertisers, sothat’s how we look at this particularly business.

Eddie Leung - MerrillLynch

Thank you. A very quick follow-up; are these solutionsavailable to most clients or just a selected group of advertisers?

Jason N. Jiang(Translation)

Today it’s still a small percentage of revenue but if youthink about not only do we need to provide a tailored solution for theadvertisers based on location profile of their requirements, but also let’s sayif this advertiser only advertises in Pudong, we need to actually find anadvertiser who will only advertiser in Pushi to balance out the utilization ofthe network, to maximizing the evaluation of the network.

So today, it’s still early stage but as more and moreadvertisers understand the attractiveness of this particular solution and asour sales and marketing people more and more actually understand the new salesapproach for these type of solutions for a group of advertisers, we believethese types of sales marketing will actually increase in the overall revenues,allow us to increase the margin of our commercial location network.

Eddie Leung - MerrillLynch

Thank you.


Your next question comes from the line of C. Ming Zhao withSIG. Please proceed.

C. Ming Zhao -Susquehanna

Thank you for taking my questions. Two questions; one is forJason, one is for Daniel.

Jason -- (translation not available). My first question iswhat cities are those billboards in, how many of them are from Beijing andShanghai, and when will those existing advertising contracts expire?

Jason N. Jiang(Translation)

For this company, the outdoor billboard company we acquiredin Q2 of 2007, the majority of their sites are actually located in Beijing,Guangzhou, Shanghai. Of course, they also have locations in major second tiercities, like Chengdu, [Zhuhai], those locations where -- at very highlytrafficked commercial locations in those particular cities.

Typical advertising contracts as in the China outdoorbillboard business is roughly about one year or two years, and of course someof the advertising contracts were already under execution when we acquired thebusiness, so they may have six months left. So once those current advertisingcontracts expire, we look at selectively upgrading those sites to digital ifthe opportunity presents to us.

So does this answer your question?

C. Ming Zhao -Susquehanna

Okay, that’s good. Another question for Daniel here; if Ilook at the cash flow statement, and try to understand this item, which is theprepayment to acquired subsidiaries. It’s about $25 million for the thirdquarter of ’07. My question is if I look at this item, this should be theamount that you -- sort of a deposit payment, but does that mean theacquisitions have been included in the third quarter’s revenue contribution?

Daniel M. Wu

Yes, first of all, the short question is the acquisition hasbeen concluded but do keep in mind, a lot of the acquisitions we’ve actuallydone on a multiple year earn-out basis, so that’s why it’s showing as a depositbecause it really depends on how they achieve their committed net incometarget, so that’s how they get paid.

C. Ming Zhao -Susquehanna

But why if the acquisition is completed, why is this not --unless there’s another line which is the purchase of subsidiaries, so myunderstanding would be if it is a closed acquisition, already closed, then whyshould we not put the amount into that line?

Daniel M. Wu

It’s different. I think the line you look at, purchase andsubsidiary net of cash acquired, it’s basically -- it’s the cash acquired. Butif you look at this deposit paid to acquired subsidiaries, let’s say if we buya company, let’s say for $1 million and we pay them 40% deposit, and if theyactually let’s say missed their earn-out target in the year one, we actuallycan potentially get back some of the money, so that’s why it’s showing adeposit paid to acquired subsidiaries.

C. Ming Zhao -Susquehanna

Okay. Thank you very much.


Your next question comes from the line of Jackie Chan withCIBC World Markets. Please proceed.

Jackie Chan - CIBCWorld Markets

My name is Jackie Chan on behalf of Jason Helfstein fromCIBC. We have a couple of questions regarding the quarter. First of all,[actual] announced rate card increases and how does the recent CCTV auctionimpact your view of 2008 pricing?

Daniel M. Wu

First of all on the rate card, we will do a rate cardincrease for January. We’ll put that on the website shortly. As we discussedpreviously, it would be similar as we did in 2007.

Regarding the CCTV impact, I’ll ask Jason.

Jason N. Jiang(Translation)

I think if you look at the CCTV rate card for 2008, actuallyit’s showing the fastest rate card increase historically. It actually providesus a very good comparable because TV advertising is our direct comparable mediain China, so if that’s the benchmark for all advertising.

So if CCTV actually expects a very good year, we expect thepricing environment for 2008 to be very healthy. We do expect to increase pricein January of 2008 10%, 15% for our rate card for the commercial locationnetwork, maybe higher for the other media and then of course in July, we alsotypically in the middle of the year before the Olympics in July, we’ll alsohave another rate card increase expected to be between 10% and 15%.

But in the Olympic cities, in key cities we expect thedemand of our advertising to be very strong during this period, especially in2008 before, during and after the Olympics. So during those periods, we believeour discount rate negotiation will be actually more favorable, so we willpossibly be able to reduce our debt count to achieve better advertising returnsfor our media in 2008.

Jackie Chan - CIBC WorldMarkets

Thanks. My next question is for Commercial Channel B, whichwas the bigger driver in the quarter, is it pricing or volume or both of them?

Daniel M. Wu

Commercial location Channel B is actually very similar. It’snot much different versus all our other commercial location network, so itself,we don’t -- given how we sell today, we don’t have a separate track of thisrevenue or ASPs by itself, because a lot of the sales are for commerciallocation [different channels on a [inaudible] basis], but it’s no differentfrom the average commercial location business we have.

Jackie Chan - CIBCWorld Markets

Thanks. And my final question is what was the pricing growthin the tier two markets?

Daniel M. Wu

As we explained earlier, tier two markets, there are so manydifferent tier two cities. If you look at Focus Media, we cover directly morethan 50 cities, so if using Beijing, Shanghai, Guangzhou, Guangdong are tierone, then tier two cities would be more than 40. In those 40 cities, thepricing is very different in each city. It really depends on the size of thecity, size of the network, how long we’ve been there, and also local economy ofthose cities.

For example in Chengdu, the price will be a lot higher thanXi'an, so I wouldn’t say the blended rate of tier two cities is a meaningfulindicator of how our business going forward, because the blended rate for alltier two cities really depends on the contribution of different revenue by eachof the tier two cities. But overall, as you see with the price environment veryhealthy, so we expect each of those cities continue to increase utilizationrates, we’ll have pricing power in those tier two cities.

Jackie Chan - CIBCWorld Markets

Thank you very much.


Your next question comes from the line of Aaron Kessler withPiper Jaffray. Please proceed.

Aaron Kessler - PiperJaffray

Just a couple of questions; first, on the online advertisingacquisitions, were those all technology related or were there any content-basedones? And we had heard you might have acquired [PC-Pop]. I don’t know if youcan indicate whether you did or not, and then I have one follow-up question.

Daniel M. Wu

What’s the company you said?

Aaron Kessler - PiperJaffray

[PC-Pop], I believe.

Daniel M. Wu

Okay. First of all, the online advertising, what we do, aswe talked about, we don’t do content. What we try to do is while the [inaudible]traffic we service web publishers, and so what we do is called Internetadvertising service. Basically we provide additional market solutions forwebsites. So we don’t get involved in content, as we’ve discussed several timesregarding our Internet strategy going forward.

Regarding specific acquisitions, we actually don’t open todiscuss that but [PC-Pop] is not one of the companies we acquired, but I don’tthink we want to discuss specifically what we are buying and what we are notbuying.

Aaron Kessler - PiperJaffray

Okay, and then as a follow-up question, last quarter Ibelieve you indicated you are going to stop giving the metrics for thecommercial segment and part of the reason was you are changing I guess thecycle times to more custom-based. What’s been the impact of that and what willbe the impact of the changing cycle times going forward here?

Daniel M. Wu

I think first of all regarding the customized solutions, wealready discussed earlier on the call when Eddie of Merrill Lynch asked thisquestion. Regarding the cycle times, we actually believe in the long-term if,based on the average standing time in the lift lobbies in China, major cities,the potential cycle time can get to about 18 to 20 minutes but right now, indifferent cities we have a different cycle time. It really depends on thedemand of the particular city, so hopefully that will answer your question.

Aaron Kessler - PiperJaffray

And would that drive an increase --

Daniel M. Wu

Hold on one second.

Jason N. Jiang(Translation)

In addition to the commercial location network expandingcycles in major cities, right now in some of the, the Beijing, Shanghai,Guangzhou centers, we already have a base time of 15 minutes. We also look atextending the coverage of the commercial location network consumers eyeballthrough addition of frame 2.0 digital frames in not lobby floors but on thesecond, third level, fourth level floors near the elevators. It allows usbasically in principle to use this different media, adding the media reach ofour commercial location network and providing additional exposure time ofeyeballs of those highly attractive consumers. So if you think about peoplewaiting for the lift twice a day, lunch and the morning, the peak times, whatwe try to do is to expand that eyeball exposure from roughly about 300 secondsto 600 seconds, so allow our advertisers to actually do better and increasingthe potential growth potential, revenue-generating potential of our media forthe commercial location business.

Aaron Kessler - PiperJaffray

And what’s the revenue impact if you’re going let’s say froma 12 or 15 minute cycle time to maybe an 18 to 20 minutes over time? What isthe revenue impact? How should we think about that?

Daniel M. Wu

Revenue impact is similar -- similar to what we have donehistorically. If you think about three years ago, our business was on asix-minute cycle in Shanghai, so we already increased for six minutes to nineminutes and to 12 minutes and now to 15 minutes. So if you think about thepublished price of those [inaudible], it allows us to use the price wepublished for every 30-second spot, continue to increase the price for30-second spot based on a similar rate of discount, so the ASP actuallyincreased on the same pace as the published increase of list price. But at thesame time, allows us to expand higher inventory because the cycle times arelong.

So really, what we are doing today is no different from whatwe did in 2004 and 2005 and 2006.

Aaron Kessler - PiperJaffray

Great. Thank you.


Your next question comes from the line of [Marisa Ho] withCredit Suisse. Please proceed.

Marisa Ho - CreditSuisse

I just have a quick couple of questions on the latestbillboard acquisition; assuming you start updating those billboard, I meanwithin about six months to about a year, how long do you think it is going totake for the whole conversion process to be finished? Are we talking aboutsubstantially all of the 200 billboards being converted to LED going forward?And what is the CapEx you are budgeting for the conversion?

Jason N. Jiang(Translation)

I think we just acquired this outdoor digital company inChina in the second quarter, so we are still in the process of evaluating alltheir sites. In terms of converting the traditional billboards to digitalbillboards, there are a lot of factors we need to take into consideration, suchas lighting impact on the surrounding neighborhood, such as weight tolerance ofthe current construction, the current building, electricity supply and ofcourse we need to get government approval if we convert a traditional poster toa digital billboard.

So all those things actually take time to work. Of course,it’s reduced -- the biggest entry barrier basically is access to the siteitself, so we are in the process of evaluating all those things throughout theoutdoor digital billboard network and we probably will be able to provide someidea in our 2008 guidance for CapEx in 2008. But at this time, we don’t have aspecific number which we can provide to you because all those things we’reevaluating right now site-by-site.

Marisa Ho - CreditSuisse

Excellent. Thanks so much.

Daniel M. Wu

Sure. Operator, I think that will end the call.


Thank you for your participation in today’s conference. Thisconcludes your presentation. You may now disconnect and have a good day.

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