Executives
Jie Chen - Investor Relations
Dr. Tan Zhi - Chief Executive Officer
Daniel M. Wu - Chief Financial Officer
David Zhu - Senior Vice President, Internet Advertising
Jason N. Jiang - Executive Chairman of the Board
Analysts
James Mitchell - Goldman Sachs
Jason Brueschke - Citigroup
Jason Helfstein - Oppenheimer
Richard Ji - Morgan Stanley
C. Ming Zhao - Susquehanna Financial Group
Eddie Leung - Merrill Lynch
Wallace Cheung - Credit Suisse
Tian Hou - Pali Capital
Rebecca Jan - Deutsche Bank
Paul Wuh - Lehman Brothers
James Lee - Sterne, Agee & Leach
Focus Media Holding Limited (FMCN) Q2 2007 Earnings Call August 17, 2008 9:00 PM ET
Operator
Good day, ladies and gentlemen, and welcome to the second quarter 2008 Focus Media Holdings Limited earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Jie Chen, Investor Relations Manager. Please proceed, Madam.
Jie Chen
Thank you. Welcome to Focus Media's second quarter 2008 earnings conference call. Today our management will discuss the company’s financial results for the second quarter of 2008 and business outlook for the third 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 [inaudible]. After management updates you on our second quarter operational and financial performance, we will open the call for questions.
This call is also 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 expectations of the development of our networks and our outlook for the third quarter 2008, for example.
You can also identify forward-looking statements by terms such as "will," "expects," "anticipates," "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, the limited operating history for our current operations and 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 businesses, 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 second quarter results.
Dr. Tan Zhi
We saw strong revenue and earnings growth in the second quarter of 2008. As a result of our focus on core businesses, our operating cash flow, and free cash flow increased significantly from the previous quarter. Although our business was negatively impacted by the earthquake in May, business conditions rebounded quickly in June. In addition, we have expanded our network capacity significantly in the second quarter. For example, our digital poster frame installation has exceeded 25,000 units and is well on its way towards our goal of 50,000 to 60,000 installation base by the year-end.
While we continue to see strong advertising demand from consumer goods advertisers in China, in particular, non-Olympic-sponsor advertisers are increasing their advertising spending in the later half of the year after the Olympic Games. Our large scale and highly effective media coverage of high-end urban consumers in China differentiates us from the competition. Our outlook for the remainder of 2008 and 2009 is getting stronger.
Now I’ll let Daniel update you on the second quarter financials.
Daniel M. Wu
Thank you, Dr. Tan. Our total revenue excluding sales tax for the second quarter of 2008 reached $211.7 million, an increase of 106.8% from the same period in 2007 and 31.1% from the previous quarter. Second quarter revenue includes $135.4 million from our digital out-of-home advertising business and $76.1 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 $135 million in the second quarter of 2008, up 76.2% as compared to $76.9 million in the second quarter of 2007 and 24.4% sequentially.
Within our digital out-of-home advertising business, the revenue from our commercial location network in the second quarter was $81.1 million, up 58.9% year over year and 29.9% quarter over quarter. The revenue from our in-store network was $17 million, up 135% year over year but down slightly due to our continuing effort to optimize the combined in-store network coverage during the integration of CGEN acquisitions. The revenue from our poster frame network in the second quarter was $37.3 million, up 101.2% year over year and 27.9% quarter over quarter. The commercial location network, in-store network, and poster frame network contributed 59.9%, 12.6%, and 27.5% of the total digital out-of-home advertising revenue in the second quarter respectively.
Advertising service revenue from our Internet advertising business was $76.1 million in the second quarter of 2008, an increase of 201.7% compared to $25.2 million for the
second quarter of 2007, and an increase of 53.6% compared to $49.6 million for the first quarter of 2008.
Gross profit for the second quarter of 2008 was $89.4 million, representing an increase of 61.5% compared to $55.3 million for the same period a year ago and a 36.5% increase compared to $65.5 million in the first quarter of 2008.
In the second quarter, gross margin for the company was 42.2% on a GAAP basis, as compared to 40.5% in the first quarter of 2008. Excluding non-cash share-based compensation expense of $0.4 million and acquisition-related intangible asset amortization expense of $7.2 million in the cost of revenues, gross margin on a non-GAAP basis was 45.8% in the second quarter of 2008 compared to 45.2% in the first quarter of 2008.
In the second quarter of 2008, excluding non-cash share-based compensation expense and acquisition-related intangible asset amortization expense, our digital out-of-home gross margin on a non-GAAP basis increased to 56.4% from 53.5% in the first quarter, and our Internet advertising gross margin on a non-GAAP basis was 26.9% compared to 26.3% in the first quarter of 2008. This is disclosed in a footnote in the attached earnings release table.
Second quarter operating expenses totaled $46.1 million. Our operating margin in the second quarter on a GAAP basis was 20.6% compared to 16.3% in the first quarter of 2008. Excluding non-cash share-based compensation expenses and acquired intangible asset amortization expense, operating margin on a non-GAAP basis was 30.3% in the second quarter of 2008, compared to 28.2% in the previous quarter.
Total intangible amortization expense for acquired assets in the second quarter of 2008 resulting from historical acquisition was $10.4 million. Non-cash share-based compensation expense was $10.4 million in the second quarter of 2008 as well.
Total income tax expense was $8.8 million. We also incurred an additional $0.6 million in charges related to the continuing restructuring of our wireless advertising business. The detail of this $0.6 million is also broken out in the footnotes in the attached earnings table.
GAAP net income for the second quarter of 2008 was $36.1 million. Non-GAAP net income, excluding non-cash share-based compensation expense, amortization of intangible assets due to acquisitions, and one-time items in the second quarter of 2008 was $57.5 million, or $0.44 per fully diluted ADS.
Now I would like to provide Focus Media's business outlook for the third quarter of 2008. Please note that the following outlook statements are based on current expectations. These statements are forward-looking and actual results may differ materially.
The company estimates its total revenue for the third quarter of 2008 will range from $225 million to $235 million. Third quarter 2008 net income, excluding share-based compensation expense and amortization of intangible assets resulting from acquisitions, this is on a non-GAAP basis, is expected to be between $70 million to $72 million, or $0.53 to $0.54 per fully diluted ADS based on 133 million average total ADS equivalent shares outstanding.
Thanks very much. Now we’ll open the call for your questions. Operator, please.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of James Mitchell with Goldman Sachs. Please proceed.
James Mitchell - Goldman Sachs
Could I ask a couple of questions? One is about the CapEx of $30 million in the quarter -- I think originally you had guided for around $50 million to $60 for the full year, so I was wondering what you would now guide to. And it looked like some of the CapEx was the Beijing [inaudible] network, so I was wondering when that would contributed to revenue.
And then the second question was on the poster frame business. It looked like your revenue was growing roughly in line with your capacity from first quarter to second quarter. I thought it might grow a little fast, just given the seasonality but I wonder if you could shed some light on that business. Thank you.
Daniel M. Wu
I’ll answer the first question and the second question a little bit, and then I’ll have Dr. Tan give you an update on the poster frame business.
First of all, second quarter CapEx was a little bit high as we said previously on the previous calls, that we expect our CapEx budget to be front-loaded towards the first half of the year. In the second quarter, we incurred roughly about more than $7 million -- between $7 million to $8 million in CapEx relating to our LED business. This is including the Beijing LED network payments, investments, as well as investment of the LED in Shanghai.
So these CapEx, it’s relating to the LED business in our network. We don’t expect for the remainder of the year it will continue to be significant.
And also, as we continue to expand our digital frame network, both in our residential network and the commercial network, the cash outflow is a little bit ahead of the installation because we have to pay first, then we receive shipment, then we will install. Then later on, it will become available for sale inventory.
So actually, the installed base is higher than the published number. The number we published, 25,000 digital frames, these are available for sale inventory. So given that, we expect, although in the first half of 2006 we have spent roughly about $45 million in CapEx, we still are sticking to our previous expectation of $50 million to $60 million in CapEx for the full year. Of course, if the business conditions continue to improve, we may actually increase this budget but at this time, based on our internal estimate, management estimate, we still expect for the later half of the year, the CapEx number will come down and the full year we expect no more than $60 million in CapEx, in cash outflow.
The second question related to the poster frame, the revenue growth and available for inventory for sale and installed base of the media is not necessarily proportionally linked, because the revenue growth is dependent on how our advertising people go out to sell business. The inventory available for sale is end of the quarter at this particular time, how much inventories we have installed become available for sale. So actually, at the end of April, end of May, end of June, the number is different. It is actually increasing over the quarter. And the installed base is how much digital frames we have installed in our network but maybe some of them are not available for sale due to some of the residential occupancy percentage have not reached their level we expect or we feel comfortable charging our advertiser for those inventories.
So these two numbers not necessarily is a direct proportion, so you actually can see in Q1 versus Q4 of last year, the total inventory for our non-digital frames actually increased about 40% -- digital inventory increased about 100% but revenue actually, compared to end of last year, was not increasing at this particular range. So as we said, these numbers are not directly proportionally linked.
I’ll have Dr. Tan give you a quick update on the frame media business progress.
Dr. Tan Zhi
I just want to add one thing -- that the reason we do expansion is not only because we will need those frames in the future but also we want to prevent any competitors that come into the market, because we want to -- we have to notice that the cost of each frame we rent is relatively pretty low. In order to prevent any competitor coming in, we want to have a full-scale expansion in the tier one cities and the tier two cities. We really depend -- the development speed is really dependent on the real estate business growth, same kind of rate. And also, we expanded to tier two, tier three cities, so the utilization rate is lower. It doesn’t mean we cannot sell that much -- it is really because we want to expand our coverage.
Daniel M. Wu
Okay. Just one slight additional point on the margin, since you mentioned about poster frame network, if you think about once those frames become installed and available for sale, we actually incurred cost, both in terms of rental as well as in terms of CapEx depreciation. If you look at the frame media business growing very quickly and even with those low utilization, relatively lower utilization Dr. Tan mentioned, the cost is already built into the business because even for the inventory we are not selling, we have to pay for the fixed cost for the network.
So going forward, if we continue to increase our revenue and utilization, those costs are already built into our previous numbers, so that’s why we are comfortable the margin will continue to grow sequentially going forward in the remainder of the year as our revenue picks up.
So building the capacity is a way for us to get market share as well as build the potential growth of this business.
James Mitchell - Goldman Sachs
Daniel, you stole my follow-up question; so the sequential decline in gross margins for that business is principally due to the land grab and the costs leading the revenue, rather than due to the earthquake?
Daniel M. Wu
Yes, because the earthquake -- the only thing -- the earthquake doesn’t affect the cost. The only thing it affects is the revenue so we actually had a revised guidance provided to you in I think the beginning of June. So if you look at that, we already take that fully into consideration so if you look at from the end of December of 2007, relatively speaking, to the points we announced our earnings at the end of June of 2008, the inventory of our frame media business has expanded very, very dramatically. The non-frame media, the non-digital frame actually expanding inventory more than 50%. The digital inventory actually increased by more than 150%.
So given the large quick increase of the inventory, we do have to incur costs. These are fixed cost networks. We have to incur the rental payment as well as the network depreciation relating to those increased inventories. So although our revenues are very healthy and growing very quickly, so we do have a slightly negative impact in Q2. But going forward, all those costs because they are already built into, are relatively flat. Going forward, on the same installation basis, so if we continue to improve revenue, the marginal gross margin improvement will be very possible.
James Mitchell - Goldman Sachs
Thank you.
Operator
Your next question comes from the line of Jason Brueschke with Citigroup. Please proceed.
Jason Brueschke - Citigroup
Thank you. Good morning, everyone and congratulations on the rebound in the business you guys were able to pull off in June. I have a couple of questions, the first a big picture question -- there’s been growing concern about the demand outlook in advertising in China after the Olympics as the Chinese economy is showing some signs of strain. I know that Tencent and Sina, for example, both gave a relatively cautious outlook after the Olympics for the Internet, and qualitatively in the prepared remarks you had indicated that you thought the demand outlook was going to be strong in the second half of ’08 as well as 2009. Could you maybe give us some more color on what you are seeing with respect to the demand outlook? I know you are a very large company, you’ve talked to a lot of advertisers, both with respect to the Internet side but also with respect to the digital out-of-home business. Thanks, and then I have two quick follow-ups.
Dr. Tan Zhi
We see that even the Olympic Games are happening right now, we see many, many of our advertisers are not spending money during the Olympics because for those non-Olympic sponsors, they are waiting for doing that to catch up their advertising budget. So we see some big strong demand for those advertisers doing advertising business with us after the Olympics. That’s why we feel that we have received some answers from our sales team, so we do believe that we will have a strong growth post-Olympics for our business.
Jason Brueschke - Citigroup
Dr. Tan, if you look out into 2009, so I can understand there’s the I don’t want to compete with the official sponsors, I’m going to delay it slightly and come in in Q4 effect for the non-official sponsors, but there’s certainly -- by all indications, there are stresses in the economy. What makes you confident that your business is well positioned say after you get that post-Olympic effect? So in 2009, what makes you confident and help us feel confident that the advertising demand will be strong?
Dr. Tan Zhi
Let me say this -- overall, the whole market in China I think is about RMB200 billion market, advertising market in China. Next year, even if in the situation, if -- I say if -- the economy is slowing down, those people will [concern] on the effectiveness. For the overall market, Focus Media only will spend a small percentage on the overall budget, advertising budget. So our effectiveness will show some strong demand for those advertisers.
I do believe when the market is in a good time, they will spend their advertising everywhere. When the market and economy is not good, they have to be cautious. They have to find the right way to spend their money and we are the best effective way for them to do advertising. That is why we received some comments from the advertising side.
One example is the [inaudible] on the automobile industry. When the competition gets heated up, when the pricing is an issue, then they were looking for us because we are helping them to [inaudible] money, to do business. That’s one thing I see and that is one comment that we received from our sales force.
Jason Brueschke - Citigroup
Great, that’s helpful. And then a quick --
Daniel M. Wu
Jason, one second. David Zhu is with us as well. Since you asked about Internet advertising, we have David Zhu to add a couple of comments.
David Zhu
You mentioned the demand after the Olympics -- yes, I totally agree with Dr. Tan’s comments on that. Most of the advertisers now during the Olympic Games are the sponsors of the Olympics. But these advertisers are a small percentage among all the advertisers, so we’ve got the information that those unsponsored advertisers do not want to spend money now, just noisy enough among this lot of sponsors. So after the Olympics, those non-sponsors will spend money after that. So we see that will be the growth for the next, the second half of the year. Thank you.
Jason Brueschke - Citigroup
David, just a quick follow-up -- because of your ownership of so much of the interactive agency business, are you in position to see demand sooner than your clients, Sina and Tencent for example? Is that one of the reasons why there might be what appears to be a slight disconnect between what you are seeing and being [inaudible] about their cautious position that they’ve given recently?
David Zhu
Yes, we -- [the amount of agencies] for the digital Internet business, yes, we are closer with the advertiser, so for those they do not spend the money now, they have a plan to place the ads after the Olympic Games. Thank you, Jason.
Jason Brueschke - Citigroup
All right, and Daniel, just a very quick question for you, Daniel -- accounts receivable, you had said that some of the increase we saw in Q1, and they remain at pretty high levels because of CGEN -- could you give us an update on how the CGEN accounts receivable work-down has gone and what we should be expecting for the third quarter? Thanks.
Daniel M. Wu
Sure. Let me speak overall accounts receivable and then we will talk about CGEN a little bit more. I think overall accounts receivable remain relatively high if you look at it, 124 days. This is actually driven by Internet advertising business. As we said, the Internet advertising business is a longer receivable cycle business but do keep in mind, the Internet advertising business, they have accounts payables so the risk is not very high because they -- on the other side, they have 90 day accounts payables which they pay to the inventory providers.
So our Internet advertising business accounts receivable is relatively high in Q2 but typically cash collection in the Internet advertising business is more heavily weighted towards Q4 and Q1, given the typical trend of the industry. We have not seen any deterioration of accounts receivable in the Internet advertising business because most of the customers are repeat customers, and agency customers, as we said, have typically have longer receivable cycles.
Relating to CGEN, we are going through, due to competitive reasons, the accounts receivable was handed over to us after the acquisition so we are going through each of those accounts receivables. We did incur some provision of bad debt but those would not impact the P&L because those accounts receivable occurred prior to the acquisition of Focus Media. So the in-store business, as you know, we are in the process of restructuring this business, since we had talked about CGEN, although the gross margin in this in-store business is not very pretty in the second quarter, but we do expect the third quarter and fourth quarter, the gross margin will improve materially because several of our large location rental contract negotiations have been completed.
So given that, our current focus for the in-store business including CGEN is more in focus of the rental re-negotiation and reducing cost structure and not really focused on growing revenue that fast, so we really see those accounts receivable situation is going to improve dramatically short-term, but it is not deteriorating. It’s actually stabilizing and moving in the right direction.
So there is still negative impact to our day sales in the in-store advertising business, including CGEN business but given the numbers relatively speaking are small versus the overall business, the impact is not as strong as the longer receivable cycle of our Internet advertising business.
Jason Brueschke - Citigroup
Great, perfect, thank you, guys.
Operator
Your next question comes from the line of Jason Helfstein with Oppenheimer.
Jason Helfstein - Oppenheimer
Thanks, a few questions, since you already hit the DSO question -- can you give us some color on what tier two utilization was in this quarter versus last year for the commercial location network?
And then, kind of a similar type of discussion; on the digital frames, what was the utilization in the tier one cities in this quarter versus last quarter? Thanks.
Daniel M. Wu
Sure, Jason. We actually, starting from a few quarters ago, we stopped providing utilization numbers because those numbers don’t make a lot of sense, especially -- you know, it depends on how you define tier two because in China, there are many, many cities over multi-million population and it really depends on how you define which city is a tier two or tier three or tier four. But overall speaking, outside of Beijing, Shanghai, Guangdong, Shenzhen, the demand growth is very healthy, our business growth is very healthy. But do keep in mind in some of those cities, our cycle advertising for commercial location network cycle is 12 minutes, some of them are 15 minutes, some of them are 18 minutes. So 100% utilization at a 12 minute cycle and 100% utilization at 18 minute cycle is totally different because it really depends on what cycle time you use in a particularly city.
So what I can say is revenue contribution outside of Beijing, Shanghai, Guangdong, Shenzhen, in both of our digital out-of-home networks are growing and growing very meaningfully but we really cannot provide you a particular number in terms of relatively speaking how the utilization number was, unless we look at city by city -- each city on its own individual basis.
Jason Helfstein - Oppenheimer
Maybe you can talk about digital posters on a revenue standpoint -- so of the $18 million, $19 million increase from one quarter to 2Q in commercial network, which is where I believe the digital -- or actually, take it back, because some of the -- I guess you have digital posters now split in between commercial and in elevator, so can you talk about of the $18 million or $19 million increase in commercial and of the $8 million increase in poster, how much of each of that was driven by digital posters?
Daniel M. Wu
Driven by digital poster?
Jason Helfstein - Oppenheimer
Correct.
Daniel M. Wu
Jason, we actually don’t sell digital poster as a separate network. So do keep in mind how the sales structure was formed, we have 250,000 non-digital posters. Then we have 25,000 digital posters. 25,000 digital posters each equivalent three times the inventory, so the inventory is 75,000. So if you add the 250,000 plus the 75,000 digital poster inventory, we have about 330,000 inventory, okay? But those inventories are sold together, so we basically go to an advertiser, whether it’s Volkswagen or Audi, they will buy inventories from the entire network based on demographic selection of the audience. So when we sell particular contracts, there are some contracts in the digital -- they are part of the advertisers, the display of digital, there are some advertisers that display on non-digital, so really given the digital expansion very quickly and it changes every day, we cannot right now provide you a particular breakdown of those numbers but digital of course helps us to get additional traction with advertisers.
Dr. Tan Zhi
Most of the contracts are mixed with our traditional and 2.0 frames.
Jason Helfstein - Oppenheimer
Okay, just lastly, just there was no commentary in the press release about your full year guidance, so should we assume that it remains unchanged, your full year guidance from the last quarter?
Dr. Tan Zhi
Yes.
Operator
Your next question comes from the line of Richard Ji with Morgan Stanley.
Richard Ji - Morgan Stanley
Good morning. I have a couple of questions. Let me start with your 3Q guidance and you provided a relatively strong 3Q outlook with margin improvement. I’m just wondering whether that is a result of your recent sales force restructuring which helped your company focus more on the profitability, or we should expect some advertising price hike in the coming future.
Dr. Tan Zhi
Let’s just say overall the [profitability] is affected by the restructuring and also part of the effect by the rebound after the earthquake, so overall, this mixes together I think but the sales since the restructuring does help the profitability for sure, yes.
Richard Ji - Morgan Stanley
Should we expect further advertising price increase as in June?
Dr. Tan Zhi
The pricing?
Richard Ji - Morgan Stanley
Yeah, advertising price increase.
Dr. Tan Zhi
We have increased our pricing for the commercial location on July 1st, so we do not expect another price increase in Q3. And we also increased our poster frame network pricing January 1st, so we do not do that in the middle of the year either.
Richard Ji - Morgan Stanley
Thank you. Second question is regarding your online business, and obviously this business reaccelerated quarter on quarter, and this is [inaudible] discounted rate from the advertising media supply, and have we also secured a more premium advertising inventory during the quarter? And I’m also curious to find out what is the rough revenue contribution from your pay-for-performance advertising as well as your video or rich media advertising. Thank you.
David Zhu
For the inventory, actually we don’t -- have too much inventory on hand. Most of the business we are doing now is the agency business. We do not secure the inventory on-hand before hand.
For the rich media on the network, we don’t provide the more specific numbers or revenue split on this segment but we see this strong growth for those video and the rich media business now and for the future. Thank you.
Richard Ji - Morgan Stanley
Thank you, David. My last question is regarding your top advertising category. Could you also update us what is your top three advertising categories by sales and by growth and how should we expect the growth trajectory post the Olympics? Thank you.
David Zhu
Richard, you mean the whole company of Focus Media or just the online business?
Richard Ji - Morgan Stanley
I’m talking about overall, I’m sorry. Thank you.
Dr. Tan Zhi
Overall, basically it is slightly different from each sector. Again, for the commercial location and the [inaudible] top line would be automobile, finance, and -- just a second. In the commercial location and in the [inaudible] part, number one would be cosmetics, those fashion cosmetics part; number two would be the automobile and number three would be fast-moving consumer goods.
In addition to this in fact we also have a couple of areas developed pretty fast, such as the financial sector, banking, insurance, security, those parts. We also contribute a lot for the overall.
Daniel M. Wu
This number fluctuates each month so roughly speaking, that’s what we have.
Richard Ji - Morgan Stanley
That’s great. Thank you.
Operator
Your next question comes from the line of Ming Zhao from SIG.
C. Ming Zhao - Susquehanna Financial Group
Thank you for taking my questions. Good morning, everyone. Sorry, Daniel, [inaudible] for a number of questions here. First of all, if I look at your goodwill on the balance sheet, it increased by $75 million quarter over quarter. Can you provide us some color on that and what would that part [lead to]?
Daniel M. Wu
Sure. This is relating to the Allyes earn-out payment, as we have discussed many times in previous calls. In Q2, end of Q2, we issued 2 million additional ADRs to Allyes shareholders, given that their performance exceeded the earn-out target in 2007, so once the audit reports are provided and we issue those share payments and that particular payment will increase as well for the Allyes acquisition.
So if you look at average shares outstanding, we guided, it’s 133 million shares outstanding relatively speaking to 131 million shares outstanding at the end of Q2. That is because of those 2 million additional shares we have issued to Allyes shareholders as an earn-out payment.
C. Ming Zhao - Susquehanna Financial Group
Okay. So also, if I look at your cash flow statement, you had incurred $19.2 million for [inaudible], and $11.7 million for prepayment to acquire [inaudible]. Are some of these are related to the earn-out? And if you could provide us some update on what remains of your maximum earn-out payment in the future --
Daniel M. Wu
Sure. I think first of all, disposal of subsidiary cash payment is relating to the wireless restructuring we incurred in Q1. So if you look at Q1, we have provided more than $70 million for the restructuring expense for the wireless business and when we in Q2 start going through those restructuring, when we dispose of the wireless subsidiaries, there are cash payments we need to provide. They have employees, they have things they have to terminate. So some of the cash remaining on those subsidiaries, we actually just use that for those purposes, so when those subsidiaries such as [inaudible] from our -- from Focus Media as there is a cash out-flow but that has been fully provided in the Q1 earnings charge we took related to the wireless business. So this is one-time and if you look at so far, we have terminated nearly all of those wireless subsidiaries, except one we are still under negotiation. So we don’t -- this is one-time and we don’t expect it to be material in the future, so this $11.7 million cash out-flow relating to the [disposal of subsidiaries].
The acquisition payment, purchase of subsidiaries net of cash acquired, these are relating to the earn-out payment of historical acquisitions we made in our poster frame business, as well as the commercial location business. And as we disclosed in the guidance we provided to everyone in the beginning of the year, we expect the full amount in 2008 between $0 million to $100 million of course is more close, given their performance, they are doing very well so it’s not going to be closer to zero but closer to the upper end.
So if you look at Q1 and Q2, of course Q1 we had the acquisition of CGEN, which is not relating to the earn-out payment but we continue to expect a similar level of earn-out payment in the next few quarters, as well as in 2009, we expect zero to $100 million in earn-out payments relating to those historical acquisitions in the Internet sector, in the frame media tier two sector, and relating to our outdoor billboard acquisitions in the commercial location sector.
So these acquisition payments will slow down dramatically in 2010 because most of those current acquisition earn-outs expires at the end of 2009 based on the performance target or beginning of 2010 based on their performance target.
C. Ming Zhao - Susquehanna Financial Group
Okay, very clear. Just lastly, last quarter the company still had some [inaudible] the wireless business, so this quarter, there’s no separate line for that. Is this included in that other revenue or --
Daniel M. Wu
No. Good point, Ming. We do have still have a wireless advertising business. It’s more focused on R&D. We still have the operation. We have a team look at this business because we do believe, similar to Google and [Viacom], we do share their belief that wireless advertising in the future will be a very important advertising sector. So this quarter, the wireless business revenue is very small. It’s roughly in the range of $350,000, so it’s a very small number. Given it’s such a small number and we basically lump it together with the commercial location business in our reporting, given it’s small, so we can’t break out this number as a separate line.
But going forward, we are still evaluating what will be the most appropriate business model for our wireless advertising business. Currently, our wireless advertising business is much more focused on interactive marketing, so everything we do is with customer consent.
C. Ming Zhao - Susquehanna Financial Group
Okay, great. Thank you very much.
Operator
Your next question comes from the line of Eddie Leung with Merrill Lynch.
Eddie Leung - Merrill Lynch
Good morning. I have a couple of questions. The first one is if you could talk a little bit more about the potential of your outdoor LED business and perhaps the potential market size in the cities that you operate and when we should expect the revenue to rev up faster?
Daniel M. Wu
For the outdoor LED business, it’s a new business. Right now it’s still not a material factor in our commercial location business and given the Beijing network has just been initiated, we don’t have a particular number for you for this -- for the potential outlook of this market. But we do believe we are focused on continuing to expand our LED network in the key cities. We do not look at less important cities. We all look at the key tier one cities to expand this business. Once they become a relatively meaningful number, then we will provide you a better outlook.
Eddie Leung - Merrill Lynch
And how many people are working for that LED [business]?
Dr. Tan Zhi
This part of the business, we are still in the evaluation stage and we are trying in several major cities to install a couple of [inaudible] and at the same time, we use our commercial locations personnel to do sell, installation, and the maintenance. And so until this part of the business becomes really meaningful, until then we don’t think we can make a decision right now it’s going to be big or not. So we are in the studies state, I should say that.
Eddie Leung - Merrill Lynch
Understood. My last question is perhaps can you guys use this opportunity to clarify on some of the [inaudible] of all your different segments?
Daniel M. Wu
I’m sorry, can you repeat your question?
Eddie Leung - Merrill Lynch
Just could you elaborate more on the potential regulatory risks of your various segments? Because that seems to be a real concern for some investors, so I’m thinking could you guys use this opportunity to address that.
Dr. Tan Zhi
At current, our business, I don’t think we have incurred any regulatory issue on that, the different sectors -- Internet and commercial location and residential area, we do not have such a risk.
Eddie Leung - Merrill Lynch
Thank you.
Operator
Your next question comes from the line of Wallace Cheung.
Wallace Cheung - Credit Suisse
Good morning. Just two key questions; first of all, regarding the earthquake impact, can you comment actually with business lines mostly negatively impact and which lines actually [inaudible] was a factor and how is the trend on a month-by-month basis say in the second quarter, if possible, in the third quarter, in July as well?
Second question is regarding the operating expenses. Can you comment on the trend in the second quarter, like why the G&A expenses went up a lot? And how can you manage the sales and marketing expense -- it’s actually down about 8%? And can you comment on the third quarter trend as well? Thank you.
Daniel M. Wu
Wallace, you are very difficult to hear but let’s try to answer your question first. If we miss anything, please let us know.
Dr. Tan Zhi
The earthquake effect overall not by region, only small -- we have a couple of cities affected but in terms of revenue, its effect overall because of some of, as we said before, some advertisers are spending money on donations instead of the marketing budget, so that affects the overall country in terms of the overall [inaudible] for that. I don’t think we had such experiences where each certain region, we did not [get affected most]. Only maybe Chengdu but that’s a small portion in terms of our overall revenue.
For country wide, we did close down, shut down of some of our advertising because of the government requirement during that week, so we do not have any specific region [affected the most though].
Daniel M. Wu
And also, relating to the operating expenses, second quarter sales and marketing expense as a percentage of revenue is 12.9% versus 13.9% in Q1 and it is actually improving a little bit. And relating to the G&A expense, the second quarter is 9.8% versus 11.5% in Q1, so it is also improving a little bit. Of course, this is due to our revenue continuing to increase. We continue to gain operating leverage.
So not sure if we covered all of your questions, Wallace
Wallace Cheung - Credit Suisse
Sorry, my voice is not high enough. Just one quick follow-up again regarding the earthquake impact -- so assuming most of these cities under the impact have already back to the normal operation, so should we at least assume that the first quarter revenue should assume there could be at least a few more days or even a week additional revenue up from the second quarter? Thank you.
Daniel M. Wu
First of all, the cities affected are very limited. It’s just Sichuan, Chengdu and [inaudible]. So they do have a few days, the network got very affected by the earthquake very significantly, so the third quarter we do expect, as we said in the second quarter we had national mourning days for a three-day period, the commercial location network was shut down nationwide, so we do expect we have a few days extra in Q3, as you pointed out.
Wallace Cheung - Credit Suisse
Okay. Thank you very much.
Operator
Your next question comes from the line of Tian Hou with Pali Capital.
Tian Hou - Pali Capital
Good morning. My question is regarding the LED business in Beijing. We haven’t really heard you talk about that before so do you mind to give us some details? For example, when did you get approval from the Beijing Government? How many LEDs approved? How many have you sold and when do you expect to generate revenue from that, et cetera, et cetera? And also, you also mentioned some new LED installation in Shanghai. Would you please also give us some color on that? And then I will have another follow-up question. Thank you.
Dr. Tan Zhi
Again, the LED business is relatively small, [inaudible] a small portion, a small number, insignificant to the overall numbers. That’s one. Second is that we are still in the process of evaluating whether this business will be long-term business for us, therefore we cannot give the details for this. We have some [test spots] in Beijing and in Shanghai but they are just too small to talk about just yet. Sorry about that.
Tian Hou - Pali Capital
It’s okay. What I really want to ask is there are lots of arguments saying the LED business got impacted and actually -- you actually not get impacted, you actually gained something, get new approval so that’s where I’m coming from, so it’s okay if you can’t --
Daniel M. Wu
This is a little bit different. In China, there are regulations which restrict outdoor billboard business. As you are aware of during the last few years, there was a large amount of inventory in the outdoor billboard business, those are more traditional billboard business. I think Jason has said before on the calls that even, of course the restriction of the billboard business makes sense. It happens in every single country, even in the U.S. but digital billboard does actually add to the landscape, actually if they are non-obtrusive and they are effective, we actually do believe the government will support it.
If you look at during the last 12 months in Shanghai, there are actually many more digital billboards get set up in Shanghai and those basically indicate really there’s for the digital side, there’s not necessarily basically a reduction of inventory effort by the government.
Tian Hou - Pali Capital
Okay. Thank you. And the other thing is, would you please talk about your overseas business?
Daniel M. Wu
We don’t have an overseas business because overseas, our strategy is we do have alliance, so we do have franchise partners. We only receive a very small amount of franchise fees. We did have a very significant franchise fee in Q1 but as we said in previous conference calls, these are not -- it’s non-recurring, so we do have a lot of alliances in different parts of the world but we don’t expect material revenue from those alliances.
Our focus is still China and Focus Media believes China’s advertising market is fast growing and very large. It would be a waste of management resources if we start moving overseas. Thank you very much.
Tian Hou - Pali Capital
Thank you.
Operator
Your next question comes from the line of Rebecca [Jan] with Deutsche Bank.
Rebecca Jan - Deutsche Bank
Good morning. I have two questions. First of all is regarding your sales force restructuring. You mentioned previously that you are restructuring your sales force, linking their commissions to more -- to focus more on the profitability than your revenues. Just wondering, could you give me some idea, quantitatively what’s the impact on your gross profit margins, as well as your operating expense in the previous quarter as well as in the quarters coming?
Dr. Tan Zhi
I thought you said two questions. Do you want me to answer this one first?
Rebecca Jan - Deutsche Bank
Okay, my second question is regarding your share buy-back.
Dr. Tan Zhi
Okay, let me answer the first question and then you can answer the second one, which is the much easier one. The first one, the sales force restructuring, I am happy to tell everybody that the sales structure, the sales force restructuring has been done and effective July 1st. Since then, we do see a big improvement in the efficiency and because currently, we have the sales team, we have the new structure. We also have good sales policy effective July 1st. And as you can see, we have focused the guidance, or given the guidance for Q3, which is really in part a contribution from those restructuring. We also see a good team morale improvement, as well as the efficiency, profitability, everything.
So everything comes together. That’s why we gave pretty good Q3 guidance, so I do see the improvement in a big way.
Daniel M. Wu
I’ll talk about share buy-back. As you are aware, based on SEC regulations, the company cannot buy back shares after quarter end before earnings announcement due to inside information, and also we cannot file our 10D5 during that particular period. So the company has announced a few weeks ago we will start a buy-back program up to $100 million. We have already appointed a dealer to help us to set up this particular program. We are starting this program right after the earnings announcement when the window opens, so that’s where we are.
Rebecca Jan - Deutsche Bank
Thank you.
Operator
Your next question comes from the line of Paul Wuh with Lehman Brothers.
Paul Wuh - Lehman Brothers
One question I had for you guys was you had mentioned that automotive, cosmetics, and fast-moving consumer goods were the top three categories in terms of your advertisers. What percentage of total revenue did that represent?
And my second question is regarding the in-store business. It seems that the gross margins were negative during the quarter. Do you still expect that gross margins could rebound to 30% by the fourth quarter or should we be looking at more conservative numbers for that business?
Dr. Tan Zhi
Let me answer the first question and Daniel can update you on your second one. In terms of the top category, top three or four categories really contribute about 25% to 30% of our overall revenue. Basically most of them were percentage wise pretty small [inaudible] well -- top line is about 25% to 30%.
Daniel M. Wu
Relating to the in-store business, we said earlier on the call that we have already settled a few large location contracts with store owners, so we expect the benefit will reduce our cost for the in-store advertising business in Q3 and Q4 meaningfully, so we still stick to our target.
Paul Wuh - Lehman Brothers
And your target is 30% gross margin by the fourth quarter?
Daniel M. Wu
Yes, 32%, 35% gross margin in Q4.
Paul Wuh - Lehman Brothers
Okay. And then a follow-up question also -- Daniel, I think you mentioned again but I just wanted to clarify, on your earn-out payment for this year, is it still guidance of -- do you still expect it to be around $80 million?
Daniel M. Wu
We said between zero to $100 million. It depends on the performance of the acquired subsidiaries. So far I think in Q1, we incurred roughly about $20 million and in Q2, we incurred roughly about $20 million, so we still expect some payment in Q3 and Q4, but Q3 the payment might be, given the current outlook schedule, maybe less and Q4 may be slightly higher than $20 million.
Paul Wuh - Lehman Brothers
Okay, so roughly you would say roughly around 80 would be a good guess for this year?
Daniel M. Wu
Yeah, it really depends on the performance of those subsidiaries. I cannot give you a particular number specifically because it is really based on the audit report of those subsidiaries during the previous 12 month period.
Paul Wuh - Lehman Brothers
And a similar number would be for next year, you would think?
Daniel M. Wu
Yeah, zero to 100 -- depends on the performance of the subsidiary.
Paul Wuh - Lehman Brothers
Also on your guidance for third quarter, Daniel, you are basically showing on the high-end, 11% quarter over quarter increase in revenues, versus you had a 31% increase from the first to the second quarter. Why do you think that the growth in the third quarter --
Daniel M. Wu
Yeah, I think if you just go back and look at historically Focus Media, if you think -- I’m sure you know -- I understand you just started following Focus Media but if you go back to 2005, 2006, Q1 is always the weakest season. The pick-up of revenue in Q2 versus Q1 is always the strongest, barring acquisitions. So it’s very easy to understand because Q1, you have the Chinese holiday, Chinese New Year impact and also it’s the slowest season for advertising in China. So Q2 obviously is the most important. There is a very significant jump in Q2 versus Q1. So this is consistent with the historical business of Focus Media.
Paul Wuh - Lehman Brothers
Basically my question was more specific to this year, that you might have some positive impact from the Olympics, especially for [inaudible], I would think, so --
Daniel M. Wu
Yeah, there’s some positive impact but do keep in mind, they are a lower margin business so if you look at Q2, the revenue growth of our [OES] business is very, very strong. So of course there will be some Olympic impact but historically if you look at the digital out-of-home business, it is consistent with the trend we experience historically.
Paul Wuh - Lehman Brothers
So basically third and fourth quarter will be similar levels then, based on your guidance for your full year guidance?
Daniel M. Wu
I don’t know what your question is about.
Paul Wuh - Lehman Brothers
If you have $850 million guidance for the full year, then that would imply -- and what you gave for the third quarter, that would imply something like 240 or so for the fourth quarter.
Daniel M. Wu
You can do this calculation but I don’t encourage you to use the upper range because when management provides guidance, we provide you a range and the range is our current best estimate. Of course, our effort is to exceed our range to bring additional good news to the investors but whatever you want to do in your calculation is fine, but I think we are sticking to our full year guidance, as we said earlier.
Operator
Your next question comes from the line of [inaudible] with Needham & Company.
Unidentified Analyst
Thanks for taking my question. I was just wondering if you guys could quantify what the earthquake impact was during the quarter. I think you guys had mentioned in the past that it could have been as much as $20 million and $10 million for the rest of the year. I was wondering if you could give some color on that. Thanks.
Daniel M. Wu
First of all, you know, we don’t have -- we already gave you the reason why the earthquake, but we cannot give you hey, this guy was going to advertise if there wasn’t an earthquake and that guy did not advertise because of the earthquake. So it’s an estimate made by the management, where we gave you the logic in the previous call why the earthquake impacted our business. We gave the reason that during the national mourning period, our commercial location network was closed for three days.
So those are impacts, so I really -- you know, we also experienced a significant impact in May in our revenue but June, the business had rebounded very quickly, so it moved back relatively speaking to normal levels.
So I think I would encourage you to look at the guidance we have provided rather than go back to look at what if there was no earthquake, what are you going to do -- nobody can predict that.
Unidentified Analyst
Thank you.
Operator
Your next question comes from the line of James Lee with Sterne Agee.
James Lee - Sterne, Agee & Leach
I have three questions here, first regarding wireless -- can you just update how much is on balance sheet for your wireless assets? And do you plan to do any re-evaluation of those assets?
And secondly is regarding your in-store business; Daniel, you have said before the cost is relatively fixed. I was wondering, could you use the cost of services second quarter to model for the rest of the year?
And lastly, a question for Dr. Tan -- I just want to get a clarification on your comments about 2009. It seems like you indicated that the slowing economy is certainly on the minds of the advertisers but you feel confident that even if that’s the case, the shifting to a more targeted cheaper platform will be a point in your favor. You seem to indicate that the sentiment from the advertiser in general is neutral to cautious and your assessment is if that’s the case, this could be benefiting your platform. Thank you.
Hello?
Daniel M. Wu
Let me answer the first two questions and then Dr. Tan will address the 2009 demand question for you.
First of all on the book, we still roughly have about $15 million in intangibles in goodwill for the wireless business. We expect this value of the wireless business continue to be on the book because we do have a profitable and small, relatively small amount of revenue and we said we continue to focus on some of the new wireless business model based on [inaudible] and they are more focused on interactive marketing and working together with our other media networks, other digital out-of-home network. So we still remain comfortable with the remaining value of our wireless business but of course, this is all contingent of our future business performance. So it’s a very small number but we do still have it.
And also, if you look at our notes, footnote number eight in the back of our earnings release, we disclosed what are the impacts of those wireless restructurings and we still have some reserve relating to the unsettled disposal of -- one unsettled disposal of subsidiaries. We are still negotiating with this particular subsidiary to reach a settlement, so we feel comfortable with the reserved amount we have taken in Q1 and of course, there are still some intangibles that remain on the book of Focus Media. It’s roughly about $15 million.
And for in-store, we actually said earlier we have already reached agreement with a few large storeowners, so the cost of the in-store business will actually go down in Q3 and Q4, so I would encourage you to wait until our earnings announcement next quarter to look at the margin of this business but given those revised rental contracts has already been agreed, so we can tell you we do expect the cost of the in-store network will drop in Q3 and Q4 for this business.
So I’ll give you to Dr. Tan.
Dr. Tan Zhi
We feel the confidence on 2009 based on two factors, I think. Number one is that we -- this year, China’s advertising budget is about RMB230 billion and in the last three years, the increase every year is about 15% to 20% the last several years. But conservatively speaking, if market [inaudible] goes well, if the economy [situation is going down], it is at last a 10% increase for next -- for overall budget.
However, those increases will be, if the market goes well, economy is good, everybody will be benefiting. If not, if the economy is not good, then people will take on the effective media to do business and we have been viewed by most advertisers as the most effective media for them to do business. Therefore, as a last -- for example, as Q3 of this year, as we talk to our advertisers, we have received the message from them that they want to spend money wisely if the economy goes well. Therefore, they will use us as a major advertising channel. So that’s one part.
Second is that right now, we do have a better structure, better system, and best sales team in place. The message I received from my sales team is that they are very confident to achieve the goals set this year, and also we are in the process to define what we are going to do next year. And in fact, we are starting very early, trying to get this as early as possible, the [sense we received] where it’s very confident, very strong and therefore our management team is very confident about 2009.
So I cannot give you a number but the feeling I’ve received is very good. Thank you.
Daniel M. Wu
Thanks, everyone, from staying up Sunday night in the U.S. and thanks to everyone for joining the call early in the morning in Asia. Have a good day. Thank you. Operator.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.
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