Focus Media Holding LTD Q4 2005 Earnings Conference Call Transcript (FMCN)

Focus Media (FMCN)
Q4 2005 Earnings Conference Call
March 7th 2006, 8:00 PM EST

Executives

Jie Chen - Investor Relations Manager
Daniel Wu - CFO
Jason Jiang - CEO

Analysts

Safa Rashtchy - Piper Jaffray
Kit Low - Goldman Sachs
Jason Brueschke - Citigroup
Sean Quek - Credit Suisse First Boston
Chang Qi- Forum Technology Resources
Marissa Ho - Credit Suisse
William Bean - Deutsche Bank

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Focus Media Q4 and full year 2005 earnings conference call. (Operator instructions) I would now like to turn the call over to Ms. Jie Chen, Investor Relations Manager. Please proceed.

Jie Chen

Thank you. Welcome to Focus Media's fourth quarter and full year 2005 earnings conference call. Today our management will discuss the Company's financial results for the fourth quarter and full year of 2005 and business outlook for the first quarter of 2006.

With me here are Jason Jiang, Chairman of the Board and Chief Executive Officer; David Yu, President and Co-Chairman of the Board; and Daniel Wu, Chief Financial Officer. After Daniel updates you on our fourth quarter and full year 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 networks and our outlook for the first quarter 2006, 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; and other risks outlined in our filings with the SEC, including our registration statement on Form F-1. We do not undertake any obligation to update 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 the fourth quarter and the full year 2005 financial results.

Daniel Wu

Thank you, Jie. Good morning, and good evening for the people in the U.S. I will do the conference and then Jason and David will be available for Q&A. This is Daniel Wu. I'm extremely pleased to report to you our record financial results for the fourth quarter of 2005. Our total revenues have reached $24.6 million, an increase of 109% from the same period, previous year and 26% from the previous quarter in 2005, which is third quarter of 2005.

Our fourth quarter advertising service revenues was $24.1 million for the quarter, including $20.7 million from our commercial location networks and $3.3 million from our in-store business.

First, let me summarize the results of our commercial location networks. Our commercial location networks continued to show strong growth in the fourth quarter. The advertising service revenue from commercial location network, as we said, was $20.7 million for the fourth quarter, up 19.9% from $17.3 million for the previous quarter, which is in the third quarter of 2005. Revenue from tier 1 cities, including Beijing, Shanghai, Guangzhou and Shenzhen accounted for approximately 65.1% of the total commercial location network revenue. Tier 2 cities contributed approximately 34.9%. Most importantly, the total number of 30-second equivalent time slots in our commercial location network was 4,648 increased from 4,240 time slots in the previous quarter.

Advertising service revenue per slot, which we normally call ASP, in the tier 1 cities in the fourth quarter of 2005 was $10,553. It is a 15.8% increase from the level in the third quarter of 2005. ASP from tier 2 cities was $2,045 which is approximately a 10% increase from the third quarter of 2005. The blended ASP, which combines the tier 1 cities and tier 2 cities for the entire network was $4,441 [sic - see press release] compared to $4,077 in the third quarter of 2005.

The increase in ASP in the fourth quarter of 2005 is largely due to the rate increases we had in 2005. The total network capacity of commercial location networks increased to 9,028 for the fourth quarter, up from 8,348 in the third quarter. We continue to see strong demand in our commercial location networks in tier 1 cities, and demand in tier 2 cities also picked up significantly.

The network utilization rates in tier 1 cities remains above 98.9% and also, the average utilization rates in the tier 2 cities was 43.9% compared to 42.4% in the previous quarter. The overall network utilization rates for the commercial location networks increased to 51.5% compared to 50.8% in the previous quarter, taking into consideration the increased capacity in the network.

During the fourth quarter for the commercial location networks we added 10,970 LCD screens and [PDP] panels. The total number of displays in stores in our commercial location network has reached 48,226 which includes 45,049 in our directly operated cities, and 3,177 through our regional distributors.

Our commercial location network continued to expand in the fourth quarter of 2005. Now our commercial location network operates in 58 cities throughout China, including 26 directly operated cities, and 32 cities via our regional distributor. Please also note that Target Media acquisition was closed in February, so those numbers have not taken into consideration the network of Target Media.

Here are the results of our in-store network. Our in-store network generated $33.3 million in revenue in the fourth quarter of 2005, an increase of 82.9% from the previous quarter. Our in-store network has continued to expand during the fourth quarter. We installed an additional 7,788 LCDs and PDP panels in the retail stores at point-of-sale, and the total number of stores we cover increased to 4,130 retail stores, which include 744 hypermarkets, 1,068 supermarkets and 2,318 convenience stores as of December 31, 2005.

Our advertising network continued to attract international and domestic major brand advertisers. We added 327 new customers, bringing the total accumulated number of advertisers in On Focus Media's network to over 1,500.

Gross profit for the fourth quarter was $14.8 million, an increase of 29% over the previous quarter's $11.5 million and a 69% increase compared to $8.8 million for the same period a year ago.

Gross margin for the fourth quarter was 60.3%, up from 59.1% for the previous quarter. The gross margin for the commercial location network in the fourth quarter is also above 70% at 70.3%.

Fourth quarter operating expense totaled $6 million, compared to $5 million in the previous quarter. Operating expense as a percentage of total revenue in the fourth quarter of 2005 was 24.2%, compared to 25.9% in the previous quarter.

G&A, general and administrative expense, in the fourth quarter of 2005 was $2.6 million, or 10.5% of total revenue. Selling and marketing expense in the fourth quarter of 2005 was $3.4 million or 13.7% of total revenue.

Net income for the fourth quarter of 2005 was $9.4 million USD. This is higher than the Company's previous guidance issued in the third quarter conference call. Sequentially, fourth quarter net income increased by 32.2% compared to net income of $7.1 million in the third quarter of 2005. The effective income tax rate was 2.1% in the fourth quarter of 2005. Net margin in the fourth quarter was 38.3%, up from 36.6% in the previous quarter, the third quarter of 2005.

For the full year, Focus Media has achieved record results. The reported revenue is $68.2 million, an increase of 133% compared to $29.2 million in 2004. Total advertising revenue for the full year 2005 was $66.9 million compared to $26.3 million for 2004. For the year ended December 31, 2005 the advertising service revenue from our commercial location networks was $61.4 million and also, the advertising service revenue from our in-store networks was $6 million.

2005 US GAAP operating profit was $22.8 million, a 75.9% increase from $13 million in 2004. Net income in 2005 was $23.5 million, $0.55 [sic - see press release] per fully diluted ADS.

In order to provide investors with Focus Media's operating results in a manner that focused on the performance of ongoing operations, the Company also reports non-GAAP financial measures. The non-GAAP financial measures are reported excluding non-cash stock-based compensation and intangible amortization resulting from past acquisitions.

The non-GAAP 2005 net income was $24.7 million, as compared to a loss of -$10 million in 2004. As of December 31, 2005 the Company had a cash balance of $36.7 million compared to $22.7 million as of December 31, 2004.

Now I would like to provide you with Focus Media's business outlook for the first quarter of 2006. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and actual results may differ materially.

We expect that total revenues for the first quarter of 2006 to be between $28 million and $30 million. That is total revenue net of business tax. First quarter 2006 net income is expected to be between $8.7 million and $9.1 million, excluding stock-based compensation and intangible amortization resulting from historical acquisitions.

Now I will open the call for your questions. Operator, please open the call.

Question-and-Answer Session

Operator

(Operator instructions) Safa Rashtchy - Piper Jaffray, please proceed.

Safa Rashtchy - Piper Jaffray

Good morning and congratulations on a great quarter. My question has to do with your in-store network. You obviously had strong momentum since the end of the quarter, and then you have extensively expanded the presence in the stores. What sort of growth or contribution can we expect from the in-store displays? Not just for Q1, but throughout the year. Is it ramping faster than you had been expecting?

Daniel Wu

Safa, I will answer this question. This is Daniel Wu here. Thank you very much for joining the call. For the in-store business, as you see, the percentage contribution from the in-store business has increased in the fourth quarter of 2005 compared to the previous quarter. We continue to expect the percentage contribution of in-store business will increase versus our historical commercial location business, because in-store business is a new business and we believe the network right now is still the utilization of the network can be picked up.

We do see very strong demand. We actually are not offering the outlook for the entire year, so I cannot break down that number for you. But we do believe going forward the in-store networks in 2006 will contribute more meaningful revenue in terms of a percentage compared to the commercial location network going forward.

Take into consideration that when we report the future quarters, we are basically reporting three lines. One is the commercial location network, one is the in-store network and the other one will be the print media acquisition which we closed in January 2006.

Safa Rashtchy - Piper Jaffray

As a follow-up if I may, can you give us some color, Daniel, essentially as you are aggregating these businesses with different growth rates and different market structures, I understand margins are generally improving in both in-store as well as in Target Media. Could you give us a sense of say on the Target Media combination, to your own network, will we have a comparable standard margin in Q1 or Q2? Second, how fast do you expect in-store margins to improve?

Daniel Wu

Safa, to answer your question first of all on the Target Media acquisition, we believe we can compete as the Target Media acquisition closes on February 28th -- sorry, it is a little bit noisy. As the Target Media acquisition closes on February 28th of 2006, we believe integration of Target Media can be completed in very short time, which we expect to be fully integrated; the two businesses fully integrated starting from the second quarter of 2006.

If you think about Target Media, their business is very similar in nature. We have discussed extensively in the previous calls in terms of our integration plans. We believe when Target Media integrated to our business, we believe we can maintain the historical, modeling characteristics of our commercial location network. We believe the commercial location network will continue to enjoy gross profit, approximately 70%, combining Target Media and Focus Media.

If you look at in-store networks, this quarter we made very significant improvements in in-store networks. As you see, on a quarterly basis the gross margin of in-store networks is positive. So in-store networks, take into consideration of the high fixed costs we have to pay to the stores and the fixed cost depreciation of the network. Given the current level of sales occupancy of the in-store network, we already can see positive gross profit contribution from the in-store network.

We believe going forward, as we continue to pick up the occupancy rates, continue to improve the utilization of the in-store networks, that contribution of that will be more significant.

If you look historically, given as you pointed out, given the different maturity stage of the media, commercial location network took us approximately two-and-a-half to three years to reach the current maturity. It depends on the city; Guangzhou may be faster, other cities may take a little bit longer. We believe similar media growth, we will be able to see that from the in-store networks. So when we say in two-and-a-half years time from the launch of the network, which we launched in April of 2005, we probably would be able to see similar operating margin contribution from the in-store networks versus our commercial location network. So in the long term, we believe that business will become a more stable network. The contribution of that will be significant as well.

Safa Rashtchy - Piper Jaffray

Great, thank you very much. Good quarter.

Daniel Wu

Thank you.

Operator

Your next question comes from the line of Kit Low - Goldman Sachs.

Kit Low - Goldman Sachs

Hi, good morning. Thanks for taking my question. Just two questions. First of all, on the 1Q guidance on the revenue line, if you could shed some light on the breakdown between Office Network, Focus Media and anything at all from Target Media and hypermarkets.

Daniel Wu

Good question. Actually, in the press release we love breaking out those three sectors because at this time, first of all Target Media would be sold as one business together with Focus Media's network. So the Target Media and the Focus Media would be in the commercial locations. Print media would break out separately. We, at this time, are not providing separate guidance, top line and bottom line for those three separate businesses.

We believe there is a lot of cross-media synergy among the three. At the time we are not providing that specific guidance.

Kit Low - Goldman Sachs

For a general sense, have you factored in much of the Target Media contribution during 1Q, or should we expect very minimal.

Daniel Wu

Target Media contribution is normal, let's put it this way. First of all, take into consideration 1Q is seasonally weak for the advertising business, in our business because the Chinese New Year effect is basically taking two to three [years], the office buildings are closed so we cannot charge people for advertising. Similar happens to Target Media's business, because their business is 100% focused on the commercial locations.

Target Media's contribution in terms of revenue and net income has been factored into our guidance for one month of March. We closed on February 28th, so from March 1st until March 31st, those numbers had been taken into consideration into the guidance we have provided here.

Kit Low - Goldman Sachs

Okay, great. Thanks. Just one other simple question. In terms of ASP trends for hypermarkets, what was the ASP achieved in 4Q and what should we expect for '06? The trend?

Daniel Wu

Good question. We will be providing that on the next quarterly conference call. Of course, the ASP as you see for the hypermarkets, generally speaking, is increasing because we had a rate increase for the hypermarket business starting from January 1st of 2006. We will be reporting the ASPs and also the utilization rates starting from the first quarter of 2006. The reason why we are not reporting right now is, as you see, we are expanding the network very rapidly, so by providing those numbers it might be a little bit misleading. We believe in the first quarter the network is more stabilized so we will be able to report those numbers to you more meaningfully.

Daniel Wu

Sure, thanks Kit.

Operator

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

Jason Brueschke - Citigroup

Thank you. Good morning, and let me add my congratulations as well.

Daniel Wu

Thank you, Jason.

Jason Brueschke - Citigroup

I have a series of questions around pricing. You had indicated when you announced the acquisition of Target that you were going to be forming a committee such that pricing between the two companies, would be decided.

Could you give us a sense of how pricing has increased by virtue of the fact that Target Media is now not a competitor out there offering significant discounts below what Focus Media was charging?

And qualitatively, what should we expect with respect to discounts from the rate card and how those might moderate going forward, post the acquisition of Target?

Daniel Wu

Sure, Jason. I will ask our CEO, Jason Jiang, to answer this question. Let me quickly translate for Jason.

[Question Translated in Mandarin]

Jason Jiang

[Response in Mandarin]

Daniel Wu

Let me translate for Jason Jiang. This is Daniel Wu here. Of course, actually starting from March 1, 2006 all of the price quotes we provided to our advertising clients go through the original Focus Media pricing control team. The sales and marketing people are all integrated already, so their sales people, their sales teams, are selling Focus Media network and our sales teams are selling their network as of today. All of the prices are consistently provided to our advertising clients, and also it requires approval from a centralized sales management team.

We believe that the discount rate in the future will improve, however because historically it takes time so it takes time for the customers to get used to the new pricing structure, so it will be a gradual process. But we do believe in the trends, the discount level historically provided -- especially Target Media provided to their clients -- will be reduced going forward.

Jason Brueschke - Citigroup

Great, thank you. My next question is, in the press release you announced your intentions to segment the commercial network into a series of sub-networks -- transit channel, a health care channel et cetera. Could you tell us first when you expect to take those sub-networks to market in terms of selling them to clients?

Secondly, could you give us some indication of what the likely increase to total revenues in tier 1 cities you are likely to enjoy? What I mean by that is, for example, I think in Q3 your tier 1, average 30-second time slot was around $35,000. As you sub-segment the commercial network, where do you think, at least in the tier 1 cities, that $35,000 for a 30-second could go to?

Daniel Wu

Jason, I will ask Jason Jiang this question.

[Question Translated in Mandarin]

Jason Jiang

[Response in Mandarin]

Daniel Wu

Jason Jiang said we have started selling those channels we discussed in the press release from March 1st of 2006. We do see actually there are customers, selective customers, who are more specifically interested in the elite channel, for example, the high end consumers and also for the fashion channel or health care channel, for example.

It is a gradual process to actually work together with advertisers and our sales and marketing team to provide them information, to understand the demographic characteristics of those specific channels. So we believe, of course at this time, most of the advertisers would still want to advertise in Focus Media's office building channel, and Target Media's office building channel. But going forward, we think all the channels, given our sales and marketing effort, will attract more and more demographic-specific advertisers, so we will be able to increase our ASP in the next few quarters by filling those networks.

Jason Brueschke - Citigroup

Great. And a final quick question for you, Daniel. In an answer to Safa's second question, you indicated that you expect the combined network of Target and Focus Media to be able to achieve the approximately 70% gross margins. Is that your goal for the end of the year, 2006? Could you at least give us some indication of when you think you will be able to get the combined networks to have equivalent gross margins that you currently enjoy?

Daniel Wu

We think actually we can achieve that very quickly. The first quarter guidance, as you see, the operating margin is lower than the fourth quarter, this is because of the seasonality in the first quarter. I am sure you guys are all familiar with our business model in the first quarter, the margin tends to be lower because the two weeks holidays which we still have to pay the fixed costs of the network and also building rentals, without as much revenue contribution.

So without taking into consideration of the first quarter, we believe actually in the second quarter we can achieve the historical gross margin we have enjoyed. The first quarter gross margin you have to compare with the historical first quarter growth margin Focus Media has been able to enjoy in 2005 and 2004. We think the gross margin will be back to the normal level in the second quarter of 2005.

Jason Brueschke - Citigroup

Fantastic, Daniel, that's great news. Thank you.

Daniel Wu

Sure.

Operator

(Operator instructions) Your next question comes from the line of Sean Quek - Credit Suisse First Boston. Please proceed.

Sean Quek - Credit Suisse First Boston

Hi Jason, David and Daniel. Just one quick question, actually. On the CapEx side you plan to spent $20 million this year. Can you give us an idea of where that is going to?

Daniel Wu

Sure. I will answer the question very quickly. The $20 million, we expect that maybe $5 million to $6 million goes to commercial location network, and for in-store networks it will be $10 million in CapEx, which is the same as we previously guided. The remaining $4 million to $5 million will be going to new businesses, such as one of the businesses the Company is focusing on to launch in 2006 will be the outdoor digital LED billboards. So it really depends on how quickly we can launch that business, and it depends on how many key places we can sign up with the [inaudible] owners. We will adjust that part of the CapEx, but otherwise certainly it is slated for about $4 million to $5 million.

Sean Quek - Credit Suisse First Boston

Thanks.

Daniel Wu

Sure.

Operator

Your next question comes from the line of Chang Qi- Forum Technology Resources.

Chang Qi- Forum Technology Resources

Good morning and congratulations.

Daniel Wu

Thank you.

Chang Qi- Forum Technology Resources

Daniel, for the Dotad acquisition, can you share with us your valuation metrics?

Daniel Wu

Great. Finally, this question comes up. I thought nobody saw that news announcement. Dotad acquisition is a very, very important acquisition for Focus Media. I do want, before we talk about how we value that business, what multiple we had paid, I want Jason to spend a few minutes just giving you a quick reason why we made this acquisition at this time.

[Question Translated in Mandarin]

Jason Jiang

[Response in Mandarin]

Daniel Wu

Thanks, Jason. First of all, let me translate for Jason. Focus Media, as we talked about many, many times with investors, we are more focused on lifestyle media, people's out-of-home activities during daytime, the urban consumers in China. Advertisers moving from media-centric thinking to a customer-centric thinking, they are more focused to discover what are the media's interaction points with the consumers, for the target audience.

Focus Media's current business covers many, many of those points which is office buildings, shopping malls, beauty parlor, golf clubs, airport, hotels. However, we actually -- why we are so focused on mobile advertising is because between those points, we need to find a good media to cover people moving between point to point, in other areas.

Mobile phone advertising is one of the ideal advertising media for this purpose, especially given the large 3G networks in China. We believe the digital technology will enable mobile media to become more of the mainstream media going forward. One of the very, very important things is to differentiate mobile media with other media, unlike the Internet, unlike traditional media, mobile media have a targeting feature. Basically you can track each user -- every mobile phone has an ID, through a mobile phone to other things. So it is a way to do one-on-one advertising customization. Given that ID, unlike the Internet, you log on and people will see your webpage. Unless they give you that information, you do not know who is visiting the page. But with mobile, you can track the specific behavior of this particular mobile user using a historical database of historical behavior of this particular user.

So as you see, the acquisition of Dotad is a first step Focus Media has made towards that direction, because we do believe that in future this will be a very, very huge market and a very important media we need to be a leader of.

Dotad itself, let me give you a quick overview. It is more like a mobile advertising agency right now, very similar to Double Click or OES business model, currently limited to service providers, SPs. They work with China Mobile and China Unicom to allow the mobile SPs to deliver messages or ads to users through their platform.

So Dotad right now is already the number one leader in the market, serve all of the top 100 mobile service providers or their customers. They control, based on traffic on a daily basis, they control 80% of the WAP ad serving market in China. They also have -- it is a technology-based company, they own their own technology. They have the software, they have the platform servers and they historically, by being a leader in that particular business, they have built a database of 70 million WAP users in China with a digital ID. The digital ID in that database can track the historical purchasing behavior of those WAP buyers.

What Focus Media is going to work with Dotad is in the future, we will help, we will work closely with Dotad to expand the advertising client base of Dotad from the current SP -- mobile service providers -- to more traditional advertisers.

And also, if you take into consideration the limited network capacity of China Mobile and China NetCom, a large number of mobile users. Targeted ad delivery is very, very important in the future for mobile advertising business. So we believe the database that they have built historically is extremely valuable when combined with Focus Media's understanding of the advertising market and our ability to sell advertising using the new platform.

So to summarize, let me quickly summarize on the valuation matrix. We look at Dotad. This Company is a reorganization, a restructure of a historical business. In 2005, historically they have achieved approximately $2 million in net profit from their current mobile ad serving platform. We believe their business will continue to grow in 2006, and by combining with Focus Media's advertising media network, and our ability to identify customers and provide integrated media solutions to our tradition advertisers, we believe we can see significant upside from this particular business. Especially we believe when the 3G networks are launched, this will become a dominant leader in the mobile ad serving market in China.

That summarizes -- a long answer. I am sorry about taking so much time.

Chang Qi- Forum Technology Resources

That's great. Actually, I would like you to maybe elaborate more regarding their revenue model. Maybe you can discuss, last year's relationship with China Mobile, China UniCom -- it looks their customers are those wireless value-added service providers. So when they get revenue -- I don't know how the revenue comes from, how they get revenues for the parties. Can you elaborate more?

Daniel Wu

Sure. Their revenue model is very simple, but their revenue model is also changing. Historically, when you provide service to SPs, there are many, many SPs in China, mobile service providers in China. The SPs will use Dotad in box platform, deliver their messages or their ringtones or their advertising for mobile games to customers over China Mobile or China NetCom's network.

So what Dotad has done is they have signed up long-term contracts with China Mobile and China Unicom to guarantee the mobile traffic which they aggregate from the mobile service providers. Basically aggregating a fee for delivering those mobile ads to those customers by being the --let's say the middle person for this project.

Going forward, what the business model is shifting towards is, given the cumulative experience and market dominance in the web ad serving market, Dotad will work with Focus Media to identify particular demographics to deliver more ads from more traditional advertisers to those particular demographics.

Let's say, one of the things Jason talked about is with Dotad's database, we will be able to define a group of users, a specific group of users with a particular model of mobile phone and a particular advertising message for a new brand or a new mobile phone can be delivered through this platform to those mobile phone users with out-of-date mobile phone models. This is just one area. There are many areas. If we can segment those 70 million WAP users in China, if we can identify the specific demographic features of those WAP users with our technology, we will be able monetize the value of those potential users.

Also, given the digital networks of mobile networks continue to improve, we believe more and more businesses will start building their own WAP site. Right now if you look at a lot of the WAP ads, it is just branding. Going forward, we believe more companies, especially the technology companies, will develop their own specific WAP sites. We can work with Dotad to actually capitalize from the advertising dollars spent by those two companies on promoting their company's business. That is a summary of near term and future business model of this business.

Chang Qi- Forum Technology Resources

Right. And when do you think this acquisition will close and contribute to your earnings?

Daniel Wu

We target to close it within the second quarter of 2006. So it will be contributing to our business in the second quarter of 2006.

Chang Qi- Forum Technology Resources

All right. Thank you.

Daniel Wu

Sure, thank you. Good question.

Operator

Your next question comes from the line of Marissa Ho - Credit Suisse.

Marissa Ho - Credit Suisse

Hello Jason, David and Daniel. Congratulations on both your fourth quarter results and also the Dotad acquisition.

Daniel Wu

Thank you.

Marissa Ho - Credit Suisse

We all saw the release, we are just waiting in line to ask our questions. I guess I have a couple of questions on that particular transaction. The first one is, I would love to hear your view on consumer acceptance of this kind of forward advertising model? For example, out of the current 70 million users you have in the Dotad database, how many of those users do you think will be relevant to you? I mean, are you able to generate revenue? Because I imagine that some of the users may have some kind of resistance to getting advertising this way. That is my first question.

The second one is, would you be able to tell us a little bit more about the revenue base of Dotad in 2005? Also in your announcement, you talk about certain earn out provisions in '06 and also '07, basically accumulating to your $30 million acquisition consideration. Can you also disclose on the earn out provisions on '06 and '07?

Daniel Wu

Sure. I will ask Jason to answer the first question. I will answer the second.

[Question Translated in Mandarin]

Jason Jiang

[Response in Mandarin]

Daniel Wu

Let me translate for Jason. Among the 70 million database WAP users we currently have, we believe at least 40 million to 50 million will be potential users of our service. The most important thing of delivering adds, as Marissa, you pointed out, is to make sure the information that is delivered to them is relevant information. It is not garbage.

So for example, the database we have developed will be able to track the most models of mobile phones, areas of the mobile phones depends on the phone numbers that they have. So we will be able to deliver based on historical purchasing behavior to a group of, let's say a mobile phone user who often downloads MP3. We can work with SonyEricsson to deliver a new mobile phone coupon or ad to this particular mobile phone user which has great, newest MP3 feature, with a link to allow him to participate in certain promotional programs on the SonyEricsson WAP site, such as a random award or some kind of club.

So as long as the information which is delivered to them is relevant information, we believe the ad effectiveness of that will improve. Keep in mind the current ad service through our ad serving platform, many of them are actually subscribers. Basically when they subscribe to a ringtone from a mobile service provider, when Dotad delivers that particular product to them, they would be able to track what are the historical interests of this particular user.

What Jason views the current WAP market is very similar to a few years ago when Internet started. We first of all believe given the business, right now China Mobile is moving towards a monthly rate for charging the WAP user, rather than a minute-based rate system. We believe, based on China Mobile's forecast the WAP users will increase dramatically in urban areas, because those are the more fashionable phones targeting younger people in the more wealthy region of China. So we believe those demographics are very attractive. And also, these phone users are actually -- can accept, have high propensity for new technology, so they can accept technology faster.

One thing Jason also mentioned is McDonald's. We are talking to McDonald's in terms of exploring different ideas of delivering coupon ads to the younger part of these WAP users. All of these things we believe are just starting, but eventually when the technology continues to improve, when the WAP users in China continue to improve, we believe this will be a huge potential market for Focus Media.

Jason, to answer your second question in terms of the historical numbers and earn out provisions we have with Dotad with this acquisition. Dotad, as I mentioned, it was restructured off of the historical business. Previously, in 2005 the historical business, WAP ad serving business, achieved approximately $2 million in net income. We actually have an earn out provision in the contract. The formula is a little bit more complicated. Roughly, there are some adjustments, but roughly the earn out target is $5 million in 2006. The 12 month forward-looking from April of 2006. So from April 1st of 2006 to March 31st, 2007 the earn out provision is $5 million. So the next 12 months following that it is $8 million with certain adjustments.

Marissa, does that answer your question?

Marissa Ho - Credit Suisse

That $2 million for 2005, is that net profit?

Daniel Wu

Yes, net profit.

Marissa Ho - Credit Suisse

Do you have a revenue number you can tell us?

Daniel Wu

Approximately $7 million.

Marissa Ho - Credit Suisse

Right.

Jason Jiang

[Response in Mandarin]

Daniel Wu

Jason would like to add a point on Dotad. Jason believes mobile advertising business going forward will have many forms and many different technologies which enable ad serving for this very attractive demographic, the China mobile phone users. The acquisition of Dotad is one of the forms Focus Media believes will become very important going forward as the user base, database of unique mobile WAP users are very, very valuable to Focus Media, but it is not the only way Focus Media is going to go forward with the mobile advertising business. Focus Media will continue to identify new interesting business models in developing our creating our dominant position in the mobile advertising market going forward.

So we believe there are other models we will continue to explore, and once we have a business model established, we will be discussing it with you.

Marissa Ho - Credit Suisse

Can I just ask one more follow-up question?

Daniel Wu

Sure.

Marissa Ho - Credit Suisse

For the Dotad business, do you see this as a structurally higher margin business compared to what you think you have got under Focus Media at this point? Or do you think that the margin could be lower, given that you are obviously quite dependent on the telecom providers like Unicom and China Mobile?

Daniel Wu

Very good question, Marissa. I think historically, we think Dotad margins, as you said, there are -- one side of their business is China Mobile and China Unicom. These are key reach network owners. I think in the long term, Dotad margins, based on their historical business may be lower than our media business on a mature level. So their operating margins may be [13%] or slightly higher than that, but the value of that business, not just in terms of operating margin contribution. The value of that business is what Focus Media can generate in terms of mobile advertising revenue from the existing technology and the existing database platforms. We believe by adding Focus Media and Target Media's resources, it is 1+1= more than 2 situation. So the revenues we can bring to Dotad's platform and additional revenue we can generate will create a new market, basically similar to -- somehow similar to how Focus Media started commercial operations, that was three years ago.

So once this new market is being developed, first of all, Focus Media will have a dominant position and will also enhance the business lines, operating margin and we believe in the future, the market of Dotad is better than what they have at this time.

Marissa, does that answer your question?

Marissa Ho - Credit Suisse

Yes, yes. Thank you.

Daniel Wu

Sure.

Jason Jiang

[Response in Mandarin]

Daniel Wu

Jason wants to add a point. When Dotad right now, servicing the mobile service providers, because the mobile service providers is delivering the content to the end users, so they only charge mobile service providers maybe $0.04 to $0.05 a message. However, when Focus Media works together with Dotad, we will be able to develop our own mobile advertising market, more focused on the traditional advertisers. When we deliver those ads, the potential revenue we can generate from delivering those messages to them can be as high as $0.08 to $0.10 a message. Especially if you have more demographic focus profile for delivering those messages, the rate is actually much higher than traditionally they would be able to achieve delivering ad servicing for the mobile SP.

Operator

Your next question comes from the line of William Bean of Deutsche Bank. Please proceed.

William Bean - Deutsche Bank

Hi. Just getting back to your traditional business, I had a couple of questions. This is more of an update question. If you could just give us a sense of how ad buyers view of how your different medias have changed over the last quarter or so in terms of business, store, elevator, billboard, et cetera and outdoor. How are you seeing the advertisers change there?

The second question is that split between direct and if the agencies are getting more involved. Thanks.

Daniel Wu

[Question Translated in Mandarin]

Jason Jiang

[Response in Mandarin]

Daniel Wu

Daniel Wu here. First of all, Jason said in terms of the advertisers, as you see at the beginning of 2005 to the end of 2005, the number of cumulated advertisers in our network has doubled. That actually, if you see during the last few quarters, more and more advertisers have recognized Focus Media's commercial location network as a mainstream media. Especially for the office building, if it is up to any advertisers, all of the advertisers believed the effectiveness of this media -- actually, we have now launched a major account.

For new media areas, such as the in-store network and also the mobile phones, it takes time for us to develop that media with initiatives from the major advertisers. We believe going forward as the advertising is more focused on the demographic specific target audience, those media will become very, very attractive for the advertisers.

In terms of direct versus agency, currently there is not much change between the price split of the agency, roughly 50/50. Maybe in the future, it will pick up slightly, but that is significant.

William Bean - Deutsche Bank

And then just finally on the WAP acquisition, could you just give us a sense of this $10 million and revenue, how much was through free WAP sites and how much through pay?

Daniel Wu

[Question Translated in Mandarin]

Jason Jiang

[Response in Mandarin]

Daniel Wu

Historically, given the business model, most of the subscribers, end users, want to pay for a service through a mobile phone, so that mobile service providers deliver that service through the Dotad, MBOX capital. So the majority of the revenue coming from page services; a web ad for free web is very small.

That is why we are working with Focus Media is the market we are delivering with the targeting ad servicing business for the traditional media. It is more focused down to the other part of the business.

William Bean - Deutsche Bank

So generally the ads are served up on WAO sites where users have to pay for the picture, and using downloads.

Daniel Wu

Most recently, historically that was the majority of the business.

William Bean - Deutsche Bank

Thanks a lot, guys.

Daniel Wu

Thank you.

Operator

And our last question comes from Sean Quek - Credit Suisse First Boston.

Sean Quek - Credit Suisse First Boston

Hi, Daniel. On the Dotad acquisition again, can you tell us in the form $5 million, $6 million) or other [inaudible] How much of that is actually going to come from the increased incremental business that Focus Media has, into the new business. Or, is that primarily driven by organic growth at Dotad?

Daniel Wu

Currently, I would say the majority of that is driven by the organic growth of the existing business, because the new business we spent a lot of time talking about today, it is just like Focus Media starting commercial locations three years ago. There is no defined market. We believe that business will become very significant in the future, but it may take time to ramp up. It takes time to educate advertisers and provide advertisers support for the media. So we have not factored in a lot from -- actually we have not factored in significant contributions from the new business model we are talking about.

Keep in mind, you know, part of the earn out provision, which is part of the payouts to Dotad's current shareholders is based on the performance in the earn off period. So they are also very conservative in terms of how to understand the market, what they can achieve, because that is directly relevant to how much they can receive from Focus Media.

Sean Quek - Credit Suisse First Boston

Sure. Just to follow on that, so basically you are paying 6X forward earnings for a business that is growing more than 100% year-over-year? Because I mean, if you are looking at $2 million profits in '05 and $5 million profits in '06, 150% growth and you are paying 6X multiple? That is my first question.

The second question is, past your traditional support, your traditional TV panel business, the focus has been gaining share primarily from the traditional ad TV business. Where do you see the budget from advertisers coming from? Do you expect it to be coming from the out of the pie or are you expecting that to come from the Internet part of the pie, for example? Thanks.

Daniel Wu

Sure. I will answer the first question and then Jason can answer the second. I think that mathematically, I think your calculation is right, Sean. It is a 6X forward looking, but keep in mind the value Focus Media brings to this transaction is more important to have Focus Media's understanding of the market, our experience in New Media industry and shared vision between the management of Dotad and also the management of Focus Media with Jason.

Let me just quickly give you some color into where Dotad management is coming from. The CEO and Chairman of Dotad, [Shi Mato] graduated in 1990 from Polytech University. He is a long-time entrepreneur, he has had a very successful business before, and he started this business in 1999 to focus on the mobile value-added service market. And [inaudible] has a marketing degree in [inaudible] University Computer Science. He also worked at Microsoft China Research Institution. The other team management, [Wong Tangui] was COO in Ken Mobile. Ken Mobile is the number one mobile ad provider in Japan.

So all of those management team are very young people, very dynamic, understand their market very well and actually share a lot of similar vision with Jason. So Focus Media is not just buying this thing based on a financial valuation. By bringing Focus Media's understanding of the media and our other media platforms, the current management of Dotad believes the value of Focus Media brings to the table is much more significant versus the financial reward they are receiving.

I do want to turn the question back to Jason.

[Question Translated in Mandarin]

Jason Jiang

[Response in Mandarin]

Daniel Wu

Sean, let me translate for Jason. Jason said of course you are exactly right, in the future we believe that mobile ad market will work with some ads, as such it will be coming from, a lot of it will come from the Internet, given the current trend we are seeing historically with this particular market. But still, a lot of advertisers do have a discretionary spending of 5% to 10% of their budget. They are looking more at innovative new media ideas, so we believe in terms of the budget it will be coming from there.

Jason wanted to take one step back to quickly expand on the outer. It is for Focus Media, traditional commercial location network, as you said, it is getting a lot of ad budget from TV, but the [inaudible] media business and with the [inaudible] media business getting a lot of budget, actually, from the bus shelters and bus exterior. Then if you look at the in-store network, it is getting a lot of budget from point-of-sale and also in the future, as we talk about [OFB] business, we believe that a lot of ad budget will be coming from the outdoor field boards, the digital field boards.

So believe actually Focus Media, we are building a lifestyle of multiple platform media, new media while focusing on targeting specific demographics. So the budget from different media Focus Media controls today was coming from different sectors.

Sean Quek - Credit Suisse First Boston

Thanks, this is very useful.

Daniel Wu

Sure, sure. No problem.

Jie Chen

Okay, thank you. That concludes today's teleconference on fourth quarter 2005 results. I know there is a lot of interest on our acquisitions so please feel free to contact us.

Daniel Wu

Thank you for the long conference call, I thank you for staying with us and we will talk to you guys next time.

Jie Chen

Thank you.

Jason Jiang

Thank you, good bye.

Operator

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect. Good day.

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