Focus Media Holding Limited Q1 2008 Earnings Call Transcript

Focus Media Holding Limited (FMCN)

Q1 2008 Earnings Call

June 5, 2008 9:00 pm ET

Executives

Jie Chen - Investor Relations Manager

Tan Zhi - Chief Executive Officer

Daniel Wu - Chief Financial Officer

Jason Jiang - Executive Chairman of the Board

David Zhu – CEO, Allyes

Analysts

Jason Brueschke - Citigroup

Ming Zhao – SIG

Aaron Kessler - Piper Jaffray

James Mitchell - Goldman Sachs

Eddie Leung - Merrill Lynch

Jason Helfstein - Oppenheimer

Wallace Chung - Credit Suisse

Tian Hou - Pali Capital

Jenny Wu - Morgan Stanley

Robert Day - World Asset Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2008 Focus Media Holding Limited Earnings Conference Call. (Operator Instructions) I would now like to turn the presentation over to your host for today, Ms. Jie Chen, Investor Relations Manager. Please proceed, ma’am.

Jie Chen

Thank you. Welcome to Focus Media’s Q1 2008 earnings conference call. Today our management will discuss the company’s financial results for the first quarter of 2008 and the business outlook for the second quarter of 2008.

With me here are Jason Jiang, Executive Chairman of the Board; Tan Zhi, Chief Executive Officer; Daniel Wu, Chief Financial Officer and David Zhu, CEO of Allyes.

After management updates you on our first quarter operational and financial performance, we will open the call for questions. This call is also being broadcast through the Internet and available through our Investor Relations website, 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; the expectation of development of our networks; and our outlook for the second quarter of 2008, for example.

You can also identify forward-looking statements by terms such as will, expect, anticipate, future, intend, plans, beliefs, 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 for current operations; the short history of the new digital media sector, which may make it difficult for you to evaluate the viability and prospects of our business; the integration of acquired 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 CEO, Dr. Tan Zhi, for a summary of the first quarter results.

Tan Zhi

Hello, everyone. As we announced on April 10 this year, our first quarter results were impacted by one-time charges from the restructuring of our wireless handset advertising business. As a result, we experienced our first quarterly loss since we became a public company in July 2005.

However, our digital out-of-home and the internet advertising business have continued to perform strongly in the first quarter. The feedback from our advertising clients for our digital frame initiative is also very strong. During the first quarter, we have added over 10,000 digital frames in commercial locations and residential poster frame networks.

The recent earthquake in Sichuan Province will have a negative impact on our operations in the second quarter, especially to advertising revenue from our networks in the earthquake region, namely Chengdu and Chongqing, which are the top tier 2 cities among our out-of-home advertising networks.

Although the damages to our networks is very limited, the advertising demand in the earthquake-affected region will directly impact our business in the second quarter. However, we believe that such impact is limited to the near term and we continue to look towards strong growth in the second half of 2008.

Now, I would like to turn it over to Daniel to update you on the first quarter financials.

Daniel Wu

Thank you. Our total revenue excluding sales tax for the first quarter of 2008 was $161.6 million, an increase of 214.7% from the same period last year. Our total revenues exclude $11.3 million of revenues from our mobile handset advertising business which is classified as discontinued operations according to U.S. GAAP. Including discontinued wireless advertising business, our non-GAAP total revenue in the first quarter of 2008 would have been $173 million.

First quarter revenues include $108.7 million from digital out-of-home advertising business; $0.2 million from our Focus Media Wireless and $49.6 million from our Internet advertising business.

First let me review in detail the results of our digital out-of-home advertising business. Total advertising revenue from our digital out-of-home advertising reached $108.7 million in the first quarter of 2008, up 113.4% as compared to $51 million in the same period in 2007.

Within our digital out-of-home advertising business, the revenue from our commercial location network in the first quarter was $62.3 million, up 96.8% year over year. Revenue from our in-store advertising network, including CGEN which we acquired in the beginning of the year was $17.3 million, up 160.2% year over year. The revenue from our poster frame network in the first quarter of 2008 was $29.2 million, up 130.3% year over year. The commercial location network, in-store network and poster frame network contributed 57.3%, 15.9% and 26.8% of total digital out-of-home advertising revenue in the first quarter respectively.

During the first quarter of 2008, Focus Media Wireless generated revenue of $0.2 million. This excludes discontinued operations which generated $11.3 million in the first quarter. Advertising service revenue from our Internet advertising business was $49.6 million in the first quarter of 2008, lower than $57.2 million in the fourth quarter of 2007 due to weak seasonality in Q1.

Gross profit for the first quarter of 2008 was $65.5 million, representing an increase of 129.7% compared to $28.5 million for the same period a year ago. In the first quarter of 2008, the GAAP gross margin for the company was 40.5% as compared to 47.8% in the fourth quarter of ’07, mainly due to seasonality and the contribution from the lower margin Internet advertising operations.

Excluding non-cash share-based compensation expense of $0.3 million and acquisition-related intangible asset amortization expense of $7.3 million in the cost of revenues, gross margin on a non-GAAP basis was 45.2% in the first quarter of 2008.

In the first quarter of 2008, excluding non-cash share-based compensation expense and acquisition-related intangible amortization expense, digital out-of-home gross margin was 53.9% and Internet advertising gross margin on a non-GAAP basis was 26.3%, lower than fourth quarter 2007 due to seasonality as well.

First quarter operating expense totaled $39.2 million, including $3.3 million in acquired intangible asset amortization resulting from historical acquisitions and non-cash share-based compensation expense of $8.3 million.

Our operating margin in the first quarter of 2008 was 16.3%. Excluding the non-cash share-based compensation expense and acquired intangible amortization expense, operating margin on a non-GAAP basis was 28.2% in the first quarter of 2008.

In the first quarter of 2008, due to restructuring of our mobile handset advertising business and termination of earnout-based acquisition agreements with certain mobile handset advertising subsidiaries, we have incurred $79.3 million in one-time charges. As a result, we incurred a loss of $53.8 million or $0.42 per fully diluted ADS on our GAAP net income for the first quarter of 2008. A detailed disclosure is in the footnote.

Net income, excluding non-cash share-based compensation expense, acquired intangible amortization expense resulting from historical acquisitions and a one-time restructuring charge -- these are all on a non-GAAP basis -- in the first quarter of 2008 was $44.8 million or $0.34 per fully diluted ADS.

Now I’d like to provide the Focus Media business outlook for the second quarter of 2008 and a revised business outlook for the full year of 2008. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and actual results may differ materially.

Due to the impact of the recent earthquake in Sichuan Province, our full year 2008 revenue guidance excluding the discontinued wireless advertising business is revised to range from $820 million to $850 million from the previously announced $860 million to $890 million.

Full year 2008 net income from continued operations, excluding share-based compensation expense, amortization of intangible assets resulting from acquisitions and the one-time impairment of goodwill and acquired intangible assets and other one-time charges to be between $240 million and $260 million, or $1.76 to $1.91 per fully diluted ADS based on 136 million annual average total ADS equivalent shares outstanding as compared to previous guidance of between $260 million and $280 million.

For the second quarter of 2008 the company estimates total revenue will be ranging from $190 million to $195 million. Second quarter net income on a non-GAAP basis -- that’s excluding share-based compensation expense and amortization of intangible assets resulting from acquisitions -- is expected to be between $54 million and $55 million, or $0.40 to $0.41 per fully diluted ADS based on 133 million average total ADS equivalent shares outstanding.

Thanks very much. We’ll now open the call for your questions. Operator, please.

Question-and-Answer Session

Operator

Your first question comes from the line of Jason Brueschke - Citigroup.

Jason Brueschke - Citigroup

My first question is to try to understand how to quantify where the new guidance is coming from. Daniel, if you could give us some numbers. The way I see it, mobile advertising which back in April was guided to be around $15 million for the full year looks like it’s going to be almost an effective write-off, so maybe $800,000. So there’s $15 million. The three days of mourning which hits the system across the board, I’m thinking it’s somewhere in the $5 million to $6 million range; and then the balance of that is probably the ongoing impact to Sichuan Province.

Could you maybe comment on those numbers so we can understand the breakdown of the $40 million?

A qualitative part of that question is could you help us understand qualitatively how important Sichuan is? I know Chengdu and Chongqing are big cities and important.

And maybe give us some color about what’s actually happening on the ground that’s affecting your business? We know that earlier this week New Oriental actually came out and surprisingly said their business, which is an education business, has been impacted especially in the last two weeks of May. I’m wondering if you could give some color about why you’re seeing it, what you’re seeing and maybe the timing of when you saw this impact from the earthquakes really starting to hit your business? Thanks.

Daniel Wu

Sure. Let me answer very quickly about some of the questions and Dr. Tan will answer some of the questions that you addressed relating to business trends.

First of all for the wireless business, we do expect going forward that the revenue from our wireless business will be very small because although we will continue to push out new business models, we will focus our advertising on the wireless handsets advertising front.

We do believe given the current stage of the network quality and the speed for data access on the wireless network that the business will be very challenging. We are actually not expecting too much revenue resulting from the wireless advertising business.

If we do better later in the year from new business or new business product launches, God bless but right now we don’t expect a lot of revenue coming from the wireless advertising business going forward. That’s why we’re taking a very significant write-off of this business in Q1.

Relating to the earthquake impact on our overall business, I will ask Dr. Tan to give us a quick summary.

Tan Zhi

The earthquake impacted us in the two regions. The number one reason is our sales in the region have been affected because of the earthquake last month and maybe next month.

The second part is related to those companies who before turned to advertising with us but have slowed down their advertising placement because they are putting some money aside to donate to the regions. Also at the same time, those days certainly affected the whole market, because a lot of advertising features are not suitable for the time being, that is part of it.

In order to quantify it, I believe we put $40 million down because we think Q2 will be affected by about $20 million and the Q3/Q4 together is about $20 million. We roughly estimated on those numbers.

Daniel Wu

Jason, I’m not sure if that answered your question. I think the timing of this, the impact of the earthquake is gradual. We won’t be able to predict it the day after the earthquake. Of course it’s over the last two weeks when we revealed the trend of the business and reviewed the advertising budgets with the advertisers, so we have come to the conclusion that the earthquake not only will impact directly in Q2 due to the three-day mourning period where we closed our network; actually the three-day effect is more of a week effect because it’s a three working day effect during the week but also it will somehow impact the rest of the year in Q3 and Q4 because the allocation of the budgets due to the recent events that happened in China.

Jason Brueschke - Citigroup

That’s all very helpful. A couple of qualifiers or follow-ups. So what I heard Dr. Tan say is that it’s not just limited to Sichuan Province; that the nature of advertising where you have set sales and you are trying to sell an image of positive or whatever doesn’t really fit with the national mood given the magnitude of the tragedy. Therefore, the impact to some of your advertising is actually not just being felt in the province but it’s being felt maybe more across China; and then there’s some of the budget effect as people donate money and it will come out of their advertising.

Is that the way to be thinking about why the magnitude of this number is probably larger than might otherwise be assumed if it was just limited to one province?

The other follow up is, could you maybe comment on is this effect that you’ve just described, is it hitting digital out-of-home and Internet equally or is one of those two business units being more or less effected by this trend or this development that you’ve described?

Tan Zhi

Yes. We believe the earthquake hit our digital out-of-home more heavily than the Internet. Basically the reason is as I have said before, many companies have to pull out their advertising to go back to review the features to make sure they are made to suit the environment. So that was hit more heavily than the Internet. Lately probably the Internet traffic is heavier than before because many people access the Internet; that may be different.

Daniel Wu

Jason, and also the comment you made previously relating to the understanding of Dr. Tan’s comments relating to the overall advertising spending is correct, it is a very accurate description of how we feel at the time.

Operator

Your next question comes from the line of Ming Zhao - SIG.

Ming Zhao - SIG

A couple of number questions, sorry about the details. First of all Daniel, when I look at your annual guidance, the share base you used is 136 million average share base and then I see you using 131 million for the first quarter and 133 million for the second quarter. To get to that average share base you are implying that the third quarter and fourth quarter you’re using 140 million shares which means a 7 million shares increase. Is my understanding correct? Can I maybe hear your explanation here?

Daniel Wu

This is very easy. It’s more tricky mathematically, but it’s easy to understand. The reason why it is a fully diluted share really has to do with taking into consideration ESOP. So where the stock price is really is going to affect the total number of fully diluted shares outstanding. So given the share price is very low today and all the stock options Focus Media issued to our employees and management in 2007 is below water, the impact of that is very, very small because you really don’t have that ESOP impact.

So if the share price goes up a little bit then the ESOP impact will actually be fully reflected in the fully diluted shares outstanding. So the reason, as you said, if the share price stays the same as where we are right now, probably the full year average shares outstanding on an ADS equivalent basis will be a lot lower than 136 because the only share we intend to issue in the later part of the year is relating to the Allyes acquisition as we discussed earlier. It is approximate 2 million ADS that will be issued towards the end of Q2. But in addition to that, we don’t expect any more shares.

So the reason why we stayed with 136 million is because when we provided the previous guidance in March for the full year we used 136 million. So we don’t want to change that number or otherwise it would result in additional confusion from people saying why is your fully diluted expectation for shares always changing?

But it’s always a function of the stock price. So if the stock price goes up in the later part of the year then our fully diluted shares outstanding can be a little bit closer to 136, but if the stock price stays at the current level, maybe the fully diluted shares outstanding for the full year, on average, will be lower than 136 million. Ming Zhao, do you follow me?

Ming Zhao - SIG

That’s very helpful. The second question is about the intangibles and the goodwill on your balance sheet. We see a net increase of about $146 million quarter over quarter and you have written off about $79 million due to the mobile business but you also added the CGEN acquisition related to goodwill and intangibles. So net-net we are looking at an increase of about $80 million to $90 million intangible or goodwill. Can we understand where this is from?

Daniel Wu

Yes. I think first of all, the goodwill reduction from the write-off of the wireless assets is smaller, because the $79.3 million not only including goodwill and intangible write-off, approximately about 30 or 40 but also including some write-offs marked to the assets and liabilities we have acquired through those acquisitions. Also some one-time charges related to terminating of those acquisition agreements.

So the increase of goodwill is resulting from the CGEN as you pointed out correctly, and also it’s relating to some of the smaller acquisitions we made in the early part of Q1 as we have disclosed in the 20-F filing in May for 2007 in Q1, we did make a couple of smaller acquisitions in the frame media area for the tier 2 cities. Those are before the May period and so those will also add up to the goodwill intangible. But overall that additional intangible is from those two areas.

Ming Zhao - SIG

Lastly, when we look at your cash flow statement you have about $85 million of cash outflow for the acquisition. Does that mean you have not paid in full the CGEN acquisition?

Daniel Wu

Yes. Your observation is very detailed and we really appreciate that. I think actually the reason why it’s only $84 million is when we consolidate a company, like let’s say when we buy CGEN, when we acquired CGEN actually CGEN had $60 million in cash on their balance sheet. So if you look at the cash flow item, it is a purchase of subsidiary net of cash acquired.

So basically when we buy a subsidiary when they have cash, that would be net of this particular cash flow item. The $60 million cash on the balance sheet of CGEN was actually used to pay for the we talked about there is a $30 million bridge loan, which CGEN acquired prior to their acquisition by Focus Media.

So if you go to the financing activity you see repayment of short-term debt. That is relating to the repayment of the loan and that particular transaction was completed in Q1, so that’s why there is this slight discrepancy in terms of the numbers. But we did pay $148 million to CGEN on January 2, 2008. Ming Zhao, do you follow me?

Ming Zhao - SIG

So actually, the real cash value paid to CGEN was actually below $168 million, is that right?

Daniel Wu

No, it’s not; it’s not. Basically we paid $168 million and we buy a company with neutral net assets, zero balance sheet, so they may have some cash on the balance sheet but they also have obligations they need to pay. So it’s not like we’re paying them less than $168 million, we actually paid the $168 million.

For example, the loan which CGEN borrowed prior to their IPO process, prior to the acquisition by Focus Media, it’s on the balance sheet. So basically although we acquired $60 million of cash from CGEN’s balance sheet on that closing date, $60 million will be paid out for those obligations. So we are actually paying $168 million cash, we’re not paying anything less.

Ming Zhao - SIG

I’ll follow up with you later. Thank you.

Operator

Your next question comes from the line of Aaron Kessler - Piper Jaffray.

Aaron Kessler - Piper Jaffray

First, I want to just go back to the revenues to clarify that and make sure we have that straight. I think you said the revenue impacting guidance is approximately $40 million. It sounds like Tan Zhi was saying that approximately $20 million will be from the earthquake impact in Q2 and then you have another $20 million impact from the earthquake in Q3 and Q4. It seems like you also originally estimated that the wireless would be roughly $15 million for the full year and now it’s basically low single-digits. I am just trying to put all those together, maybe you can clarify that.

Daniel Wu

Sure, Aaron. First, the impact is correct. Dr. Tan said the Q2 impact from the earthquake is approximately $20 million and Q3/Q4 residual impact due to the advertising budget issue we have discussed is approximately, combined together in Q3 and Q4, $20 million.

For the wireless guidance, do keep in mind that when we provide the wireless guidance we actually have not taken a write-off. So basically we don’t have this reclassification of discontinued operations. When we provide guidance for wireless to you, that is actually including the discontinued operations. So if the discontinued operations already takes $11.3 million out of the $14 million, $15 million the balance for the year for the wireless guidance, is very, very small if you recall correctly.

So the representation under the current financial statement is according to US GAAP because those operations had been discontinued so we will no longer be able to record those as part of the US GAAP revenue. So it’s been classified as discontinued operations but that is in addition to our revenue in Q1.

Aaron Kessler - Piper Jaffray

The in-store gross margins were roughly 5% on a non-GAAP basis. Should we start to see an improvement in those or a bigger improvement in Q2 to get to your 30%, 35% range by the end of the year for the in-store margins?

Daniel Wu

I think as of last year in Q4 of 2007 we actually had a negative gross margin. Q1 is a seasonally weak quarter for our digital out-of-home business. We already reached breakeven for the in-store advertising business. We continue to expect over the remaining year each quarter the gross margin for the in-store advertising business will improve. Our goal is to reach 35% to 40% by Q4 of 2008.

Aaron Kessler - Piper Jaffray

In the frame media business you added roughly 55,000 frames versus Q4. Were all these frames organic growth or were there any acquisitions there? Was there any specific areas that you added a majority of those frames in?

Tan Zhi

They are not from acquisition. They’re mostly from organic growth. A very small portion was from the merger/ acquisition which happened to be in Chengdu, only one city, a small percent. Mostly from organic growth.

Aaron Kessler - Piper Jaffray

Finally Daniel, can you give us a sense for the amortization maybe in Q2 or through the rest of the year?

Daniel Wu

I think we still maintain for our annual guidance if you recall in March, we talked about the acquisition-related intangible amortization of approximately $50 million and stock-based compensation approximately $35 million for the full year of 2008. We are still expecting that.

Aaron Kessler - Piper Jaffray

That would imply that the amortization would go up probably from Q1 to Q2, even though wouldn’t the write-off for the wireless business actually lower your amortization to some extent?

Daniel Wu

We don’t expect a very significant increase of intangible amortization from Q1 to Q2. The result is that there’s really -- you know, the company has stopped making acquisitions, so as we have no new acquisitions going forward, the amortization would stay pretty stable going forward.

Operator

Your next question comes from the line of James Mitchell with Goldman Sachs.

James Mitchell - Goldman Sachs

First question -- when I look at your online business, I think a lot of it is putting advertising on the big portals, like Sina and Sohu. And Sina and Sohu I think reported flat to slight Q-on-Q revenue declines for the first quarter, whereas your online business was down about 13% quarter on quarter. So I was wondering if that was because the smaller sites you serve are more seasonally affected than the bigger sites?

And then the second question I had is if I look at your EPS guidance, your non-GAAP net income guidance for the second quarter, it implies that the non-GAAP net margin will be fairly flat quarter on quarter, despite positive seasonality. Is that because the earthquake is actually affecting gross margins for your business because you are still incurring costs in the affected province but not generating revenue? Thank you.

Daniel Wu

Just one second. We’ll get David. I think that we will have David Zhu, who is here attending the meeting with us today, to address the first question relating to the Internet, and then I will take over and address the second question regarding the EPS for Q2.

David Zhu

For the -- we don’t have the number of Q1 last year, so if the year over year -- it’s a quarter over quarter yet normally the seasonality is something like a 10% over last -- Q4 of last year, so you see that being a big part of like Sina is something like flat. Yes, this number is -- I think it is the range which we can manage it. And you can see that from the second quarter, it will be a bit, you know, normally would be the peak season than the Q1.

James Mitchell - Goldman Sachs

So the reason why your revenue is down more than the big portals is because the small portals are more seasonal within the big portals?

David Zhu

Yes, normally for the small portals, the small websites, up and down, a little bit violent than the big portals.

James Mitchell - Goldman Sachs

Understood.

Daniel Wu

Jason, let me address the second question. I think your observation is correct relating to Q2 because if you do keep in mind a lot of our digital out-of-home business is a fixed cost business, so if there are -- if we lose actually one week in Q2, basically we lose about one out of -- you know, let’s assume there’s 13 weeks in Q2. We lose one of 13 of revenue, which is 7%, 8%. And we still have to pay for the rent and we still have to pay for the people. We still have to pay for the machine depreciation, so given the relatively fixed cost nature of our business, so if there is a particular one-time unusual impact in our business, our margin will be affected given that reason. So especially today, we are still in the base of expanding our network and we are not actually -- given the earthquake affect is more temporary, we are actually not slowing down, expanding in our digital frame initiative and other media expansion, so I think that is meeting investment. So in those -- for those reasons, second quarter guidance is relatively on the EPS side, it’s quite a conservative.

James Mitchell - Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Eddie Leung with Merrill Lynch.

Eddie Leung - Merrill Lynch

Good morning, guys. The question is on the cash flow -- can you provide the timing of the upcoming cash earn-out of your previous acquisitions?

Daniel Wu

Yeah, sure, Eddie. I think that we expect for the remaining of the year somewhere between $70 million to $80 million of payout, of cash payout for 2009; approximately maybe additional $100 million payout relating to the previous acquisitions. And do keep in mind those numbers can be zero because it really depends on the performance of those companies. Their net income contribution to the combined company would determine exactly how much they are going to get in terms of earn-out payment. Let’s say if there’s a particular operator in the local region, if their business got affected negatively by a particular event, let’s say earthquake, and they are not able to perform those deliverables, then of course our obligation would be relatively reduced as well.

So this is more of a rough estimate but we don’t expect to be more than that level and each -- the timing exactly which quarter that’s going to affect really depends on how quickly -- first of all it depends on what time they reach the 12 months or 24 months or 36 months earn-out period, so it first of all is a stage that determines that. The second is it depends after the date, we have to go through an audit of their financial statements. So it really depends on the timing of this particular process. When that process is completed, then we will be paying this. So it can be -- I don’t have a particular date for you because the audit could take two weeks or it can take six weeks, but we do expect for the remaining of 2008 to be approximately $80 million plus or minus 2009, from zero to $100 million as well.

Eddie Leung - Merrill Lynch

Understood. Very clear. And one last question for New Year’s; Daniel, could you also give us some guidance on the trend of DSO? Would days stay at this current level or would you expect them to improve once you integrate CGEN?

Daniel Wu

That’s a very good question. Our DSOs this quarter relatively speaking is very high. If you look at the absolute dollar of DSO went up about almost $45 million to $50 million and as we said in the press release, $40 million is due to the consolidation of CGEN. For CGEN, some of those -- actually the majority of those accounts receivables are relating to their business prior to the acquisition of CGEN, so if there is any bad debt relating to those accounts receivables prior to the closing of the acquisition, incur the price, the closing of our acquisition of CGEN, those would be adjusted through the acquisition agreement so it is not going to be impacting our P&L. But we do have to keep it on the books because those accounts receivable are still up to date and we have to consolidate the full financial statement of CGEN. So coming back to the point is going forward, we continue -- we will go through the normal effort and process to collect those accounts receivable from CGEN and just in case, if we cannot -- of course, at this time we fully expect to collect those but in case we cannot, there is any issue with those accounts receivable collection, that will impact the acquisition value rather than impacting the P&L of Focus Media.

Of course, after the closing of CGEN, any accounts receivable incurred will be our normal accounts receivable affecting as any other accounts receivable incurred by Focus Media.

So in Q1, also do keep in mind it is a seasonally weak quarter for us. But it is not necessarily a seasonal high cash collection quarter. So typically if you look at historical data, in Q1 of 2007 for our accounts receivable days, we also appear to be high and Q2, Q3, Q4 actually went down relatively speaking to Q1. So because the revenue base in Q1 is smaller because of the seasonality, particularly the seasonality in our digital out-of-home commercial location business, so that’s why the DSOs is a little bit longer than historical. But we do expect in Q2 it will go back to -- it definitely will go back down because first of all, as our revenue increases, the DSOs will reflect that, will reduce to reflect that and we will make an improvement in the cash collection for the CGEN outstanding accounts receivable account.

So far we have not, although the accounts of DSOs is a little bit higher in Q1, we have not seen any deterioration of accounts receivable, so we have not seen any difference in terms of accounts receivable collection over the last period.

Eddie Leung - Merrill Lynch

Understood. No more questions. Thank you very much.

Operator

Your next question comes from the line of Jason Helfstein with Oppenheimer.

Jason Helfstein - Oppenheimer

Thank you. Three questions, the first; can you give us some color relating to the first quarter for pricing and volume on the commercial location business? The second question relates to gross margins and the in-store business. That was a bit weaker than we thought. Perhaps just give us an expectation of how that’s going in the second quarter. I assume you are looking for gross margin improvement but any color you can give us would be helpful. And last point, and I think you already said it, that the earthquake does not impact your full-year outlook for the digital poster launch and you still expect to have well over 40,000 posters. Thanks. Bye.

Daniel Wu

Okay, the first question is relating to the commercial location network. Dr. Tan will give you a quick answer.

Tan Zhi

The pricing in Q1 relatively stays the same. I think with our new system, we may see some improvement in Q2, Q3, Q4, but Q1 it remains the same.

Daniel Wu

And we also, just a quick add-on, we also do expect to continue to increase price on July 1st of 2008 as planned, so the price increase will be posted on our website in a couple of weeks and it will be consistent with historical trends.

And relating to the in-store advertising gross margin, I think we are already seeing a very good improvement from the in-store advertising network, first of all because Q4 last year was negative. Second is Q1 is always a seasonally weak quarter. Do keep in mind, as we said the business model going forward, we don’t expect the costs for our locations, as well as network, the fixed costs of running this business will continue to go up. They will keep flat or gradually reduce as we renew those contracts with the location providers.

So as we continue to expect, revenue will be higher in the subsequent quarters for the remainder of 2008. We are confident that we will be able to grow the gross margin of the in-store advertising, so from our point of view, we really don’t think Q1 is any less, the gross margin we achieved which is 5% is any less than what we expected. Actually, we think it is doing very, very well, so we think in-store advertising business is on the right track.

The third one is relating to digital print rollout. As Dr. Tan said earlier, we expect for the full year on the residential part of the digital frame, we expect to have about 50,000 to 60,000 by the end of 2008. We continue to believe that that’s achievable and as you see the end of Q1, we already have more than 20,000 installed for digital frames.

Jason Helfstein - Oppenheimer

Thank you.

Operator

Your next question comes from the line of Wallace Chung with Credit Suisse. Please proceed.

Wallace Chung - Credit Suisse

Good morning. I think a fairly very major question regarding again on the earthquake --

Daniel Wu

I’m sorry. We can’t hear you. Can you repeat? Your volume was very low. Sorry.

Wallace Chung - Credit Suisse

Sorry about that. Again, the question relates to the earthquake again; can I understand a little more firstly regarding industry segmentation, which is most heavily affected? And do you expect that some of your clients actually have been suffering heavy [inaudible] and maybe in the future even will affect in the long-term revenue growth, say for example we heard that the [inaudible] sector has been heavily affected and reduce your advertising revenue maybe even lower.

And the second question is can you give us a little bit more color on the earthquake impact area, say for example the top four cities in China? How does it -- how has the revenue dropped in the last few weeks time, say in terms of the revenue -- I mean, guidance, say $20 million in the second quarter. How much of it is coming from the top four cities? And in fact, during the past two days, I walked around Beijing and saw some of the ads actually saying, I mean, you are showing off some of the automation to the [inaudible], kind of like. I mean, [inaudible] kind of automation. Is this something indicating that you have also some negative impact in the top four cities as well?

And finally is regarding your business segments. You mentioned the digital out-of-home business actually has slightly more impact than the Internet business, but then comparing with among the three individual segments within the digital out-of-home, which is most heavily affected? Is it more related to the [inaudible] TV or the stream media side? Thank you.

Tan Zhi

Our numbers show that there is no difference between the -- among all of the industries and they all affected across borders, and because all of the people in China at that time spent their time to donate money, spent time to help with those damaged regions, so they were across borders. We don’t seen any individual industry or sector affected heavier than others.

And also for the -- our business, the digital out-of-home part, they both are commercial and the results are similar -- meaning it’s a similar situation because all the custom advertisers are from the same [card]. Daniel.

Daniel Wu

Let me just add a couple of quick points. First of all, of course you know the earthquake affected within Sichuan, so of course Chengdu and Chongqing among our city networks, the demand in Chengdu and Chongqing are most affected. Of course, as Dr. Tan mentioned earlier, there are advertisers, some of the marketing budget is being spent so overall business gets affected, not only in Q2 but also slightly in Q3 and Q4.

And thanks very much for actually seeing our network and we do have some Red Cross advertising on our network but those are actually the network space we donated to Red Cross to show our support for the earthquake effort. So we do have -- do keep in mind we have a lot of ad inventories, so those inventories were not fully sold so we of course when we can, we also want to do some good things for society, so that’s why we are donating some of the space which we have not sold for advertiser to the Red Cross and other good will efforts for the earthquake relief effort.

Wallace Chung - Credit Suisse

Thank you very much for the answers. Just one quick follow-up question regarding donations -- so has Focus Media donated any kind of --

Daniel Wu

Yeah, the company has donated RMB1 million to the earthquake victims and also the employees and management of the company donated an additional RMB10 million to -- actually, no. Now more than RMB10 million to the earthquake relief effort.

Wallace Chung - Credit Suisse

And assuming it’s [inaudible]?

Daniel Wu

I’m sorry?

Wallace Chung - Credit Suisse

The 1 million is 10% of --

Daniel Wu

Yeah, yeah.

Wallace Chung - Credit Suisse

Thank you.

Operator

Your next question comes from the line of Tian Hou with Pali Capital.

Tian Hou - Pali Capital

Good morning. I have a couple of questions. The first one is among your Q2 guidance, is that possible for you to give some breakdown, like how much that revenue will come from Internet, how much will come from digital out-of-home, if it’s possible? And then I will have a follow-on question.

Daniel Wu

We typically don’t provide a breakdown and we don’t want to break the rules this time, so we provide the full company revenue and EPS guidance.

Tian Hou - Pali Capital

Okay. That’s fine. And then the second question is in your guidance, the previous guidance was 860 to 890. That guidance included the wireless revenue, right?

Daniel Wu

It include wireless discontinued operations because at the time, we had not taken in the fact that the wireless would be classified as discontinued operations and the revenue would be excluded from the U.S. GAAP reporting.

Tian Hou - Pali Capital

Correct, so now you have probably $11 million, right, just discontinued, so that $11 million should be dis-included from this 860 to 890 guidance, so your last was about 850 to 880, right?

Daniel Wu

On an equipment basis, that’s right.

Tian Hou - Pali Capital

Your new guidance is 820 to 850, so the difference is really for the continued business is really $30 million.

Daniel Wu

I think your observation is perfect. It is exactly right.

Tian Hou - Pali Capital

And then so second, third quarter and fourth quarter is supposed to be $10 million impact from earthquakes?

Daniel Wu

Roughly. You know -- that’s correct. It’s the right calculation. I think it’s always a range, so we saw roughly speaking the range but we do -- I think the essence you pointed out correctly, is third quarter and fourth quarter impact is much less than Q2.

Tian Hou - Pali Capital

Okay. Thank you. And the third question would be in the opening remarks, Dr. Tan said the impact will be limited in the near term and that we’ll see strong growth in the second half. I would like to have some sort of color on that and certainly we haven’t -- the second half hasn’t started but I guess the business will get some indication ahead of time, so is that possible for Dr. Tan to share with us some of those kind past indications which give him that kind of confidence that the second half could be strong growth?

Tan Zhi

As I said before, we estimated our impact would be $40 million in Q3 and Q4, and Q2 is more seriously than Q3 and Q4. The reason we get that way is because we have seen, for example, in China the whole country has donated about RMB40 billion to the region, to the damage to the region, as broadcasted by the CCTV. Among them, those 40 billion, 20 billion from those private enterprises. Those private enterprises plus other places, as we talk to those marketing people and also with some basic advertisers, they have allocated some of their marketing budget to do their relief fund, to donate the money in order to help those people who have damage to their home and their school and children, so that’s why we did a little estimation on those.

But we still believe that other than these factors, the whole industry will still grow healthily.

Tian Hou - Pali Capital

Okay. Thank you. That’s all my questions. Thank you.

Operator

Your next question comes from the line of Jenny Wu with Morgan Stanley. Please proceed.

Jenny Wu - Morgan Stanley

Thank you for taking my questions. First one, please elaborate more on the total revenue and the cost of contribution from CGEN for this quarter please? Thank you.

Daniel Wu

Sure. CGEN is roughly about two-thirds and our business about one-third. But a little bit less than two-thirds. They were about 60%; we’re about 40%.

Jenny Wu - Morgan Stanley

Okay, thank you. And how about the impact of [advertising] clean-up in Beijing and Shanghai cities?

Daniel Wu

The impact of, I’m sorry, what?

Jenny Wu - Morgan Stanley

We heard there is some clean-up for the outdoor media in Beijing and Shanghai recently. What is the impact on Focus Media’s business?

Tan Zhi

For us, we have no impact. In fact, we probably have some positive impact because there’s clean-up for the outdoor billboards only and not for in-door, inside the elevator, those. So we do not experience any impact on that part.

Daniel Wu

I think what you are referring to, the clean-up, is more relating to unlicensed, illegal sites which the outdoor billboard sites, and also those billboard sites at public areas, which had obstruction of the city view, so for example is the Beijing Airport Expressway. So in our business, we are not going to be affected because first of all we -- it doesn’t have any effect on the city landscape. We are inside the buildings. We are on private property. So as Dr. Tan said, the effect will only be because of the reduction of the outdoor inventory will help our business, because we are very efficient to reach consumers in China.

Jenny Wu - Morgan Stanley

Okay, thank you. My last question is regarding the Olympics and we are approaching the event. And has the management seen any new impact which is different from the company’s previous expectations?

Tan Zhi

We do not see major changes from our previous estimation. We continue to believe that.

Jenny Wu - Morgan Stanley

Okay. Thank you. That’s all my questions.

Operator

Your next question comes from the line of Robert [Day] with [World] Asset Management.

Robert Day - World Asset Management

Thanks for taking my call. Could you provide a little bit of color on the competitive environment and what you are seeing for contract renewals when you go out there? Are you seeing any competition and are you getting renewed at the same terms? Anything that you can provide on that would be great. Thanks.

Tan Zhi

For our digital out-of-home part, we do not see any competitors, or strong competitors or valuable competitors in our area, especially for those renewed contracts and extended contracts, we do not see that.

Robert Day - World Asset Management

So the terms that you are renewing at are the same as what you had previously?

Tan Zhi

Almost stay the same, as we estimated -- we do experience some annual rental increase of below 10% of those, but that’s normal. We do not see major changes.

Robert Day - World Asset Management

And you are not having to bid against another competitor when you go out there and renew then?

Tan Zhi

No, we do not need to.

Robert Day - World Asset Management

Great. Thank you.

Jie Chen

Thank you for participating in Focus Media's first quarter 2008 conference call. We will see you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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Comments

[PhillyD:]

That was really a great quarter for them and the only 'negative' news was their one time write-off. This caused a 15% reduction in the stock price? That seems absurd. They are growing rapidly and have a huge moat ... no competition for their indoor/private property business and the crazy gov't rules can't get them either.

I was Long FMCN before and I'm going back in for more on Monday morning. This will be over $50 by years end.

2008 Jun 08 01:45 AM