Focus Media: May Be Growing Fast But What About The Cash?

Focus Media (FMCN), who brands itself as China's leading multi-platform digital media company reported Q1 2008 operating cash flow at $7.6 million. Day sales outstanding ("DSO") was 127 days in the first quarter, mainly due to the consolidation of $40.7 million accounts receivables from CGEN Digital at the end of Q1 2008 and longer receivable cycles of Internet advertising business. As of March 31, 2008, the Company had cash and cash equivalents of $283.0 million. (Conference Call Transcript)

The company is clearly growing at exponential rates but an Achilles heel may be developing with the accounts receivable list growing and days sales outstanding heading the wrong way. A quarter is 90 days. So basically, on March 31 the company still had not been paid for sales from the last week of November 07.

I don’t care what you may say about cultural differences of operating in PR China, all business cultures understand cash. This company may have a big problem.

Disclosure: None

Comments

[PhillyD:]

They have had no cash flow problem so far ... they're raking it in large quantities (check out cash flow numbers) AND they have alot owed to it in A/R.

This company is a down and out bargin at this price ... has a HUGE MOAT in that there is no other company competing with it for the INDOOR display market. Their internet business is only icing on the cake and if that ever explodes well look at Baidu and others that have extremely high multiples built into its price. I'm sort of shocked that FMCN doesn't have a large P/E. It's prices more like a bank (in P/E world) than an exponentially growing player in the quickest growing economy in the history of the world that still has almost 1 billion more people to get into the middle class!

I'm long FMCN (for disclosure) and will be even longer come Monday morning.

Thanks for listening,

Phil

2008 Jun 08 02:32 PM

[punter888:]

Word on the street is that the real reason is regulatory problems. I sat in a meeting where the CFO noted that "Focus didnt' have the economies of scale to install an automated screen updating system. But, other industry partcipants I speak to say that apparently they do have the scale, and they do have such a system installed, and this requires a broadcasting license that they don't have. The hearsay/theory goes that they are being forced to turn off screens as a result of this, and talk of snowstorms/earthquakes... etc, is smoke and mirrors. Against this backdrop, George's comments resonate.....if they are having real problems on the revenue front, then the temptation of managers will be to fake revenues and worry about the bad debt provisions later. Although I haven't studied the A/R patterns of FOCUS, I take heed of Georges comments in that we shouldn't always be fooled into believing in "cheap PE's" etc when the E on which the PE is built isnt robust. Short positions in these situations, lookin beneath the surface and questioning the consensus, is where real fortunes are built.

2008 Jun 09 11:41 AM

[Rosezeee:]

On the recent conference call, Merrill analyst Leung questioned Daniel Wu about the Company's current level of DSO. Wu suggested CGEN was the reason for the increase. However, Wu also stated CGEN'S contribution to the Company's revenue and receivables during the first quarter was approximately $10.4 million and $45 million, respectively. If you exclude CGEN's revenues and receivables from the Focus Media's operations, DSO for the first quarter is approximately 125 days. That's up from 90 days in Q4 2007 and 85 days in Q3 2007.

Accordingly, Mr. Wu's response to your question does not square with the numbers. Hmmmmmmmmmmmmmm.

2008 Jun 10 06:02 PM

[HKI:]

Rosezee, I did the same analysis you did but got different numbers. The DSO excluding CGEN is 127 days which is similar. But I have 111 days for Q4 07, 102 days for Q3 07 and it does look to be up. The one thing missing in this analysis is seasonality as Q1 DSO has always been highest as you have the weakest quarter in revenue.

To adjust for this, I looked at DSO based on revenue in last 2 quarters and last 4 quarters. Here are the results for the last 5 quarters:

DSO based on current Q: 149, 96, 102, 111, 127
DSO based on 2Q: 145, 145, 159, 153, 132
DSO based on 4Q: 136, 127, 117, 118, 121

After adjusting for seasonality, the DSO looks to be flat or down. And Wu actually said on the call that Q1 is a seasonally weak quarter so he was spot on. This also refutes George's original comment that DSO is trending up. I do agree with the criticism that the absolute level of DSO is high though.

On the subject of AR, the other topic worth pointing out is that the US$40 mil of receivables for CGEN seems extremely high. A revenue in Q1 of US$10 mil but US$40 mil in AR? No collections for a year?

I am long FMCN

2008 Jul 10 01:53 PM