Focus Media Q2 2006 Earnings Conference Call Transcript (FMCN)

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Focus Media Holding LTD (NASDAQ:FMCN)

Q2 2006 Earnings Conference Call

August 17, 2006 9:00 pm ET

Executives

Jason Jiang - Chairman of the Board and Chief Executive Officer

Daniel Wu - Chief Financial Officer

Jie Chen - Investor Relations Manager

Analysts

Jason Brueschke - Citigroup

Richard Ji - Morgan Stanley

Kit Low - Goldman Sachs

Safa Rashtchy - Piper Jaffray & Co.

Lu Sun - Lehman Brothers

Simon Cheung - Merrill Lynch

Marissa Ho - Credit Suisse

William Bao Bean - Deutsche Bank

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2006 Focus Media Holdings Limited earnings conference call. My name is Shamika and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Miss Jie Chen, Investor Relations Manager. Please proceed.

Jie Chen

Thank you. Welcome to Focus Media’s second quarter 2006 earnings conference call. Today, our management will discuss the company’s financial results for the second quarter of 2006 and business outlook for the third quarter 2006.

With me here are Jason Jiang, Chairman of the Board and Chief Executive Officer; and Daniel Wu, Chief Financial Officer. After Daniel updates you on our second quarter operational and financial performance, we will open the call for questions.

This call is also broadcasted through 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 development of our networks, and our outlook for the third quarter 2006, for example.

You can also identify forward-looking statements by terms such as will, expect, anticipate, future, intent, plans, beliefs, estimates, and similar statements.

The accuracy of these statements may be affected by a number of risks and uncertainties that could cause the 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 our current operations and the short history of [audio visual] in the Chinese sector, which may make it difficult for you to evaluate the viability prospect of our business, integration for [type] business, competition from present and future competitors in China’s growing advertising market, and other risk factors outlined in our filings with the SEC, including our registration statement on Form F-1.

We do not undertake any obligation to update this forward-looking information except as required under applicable law.

Now, I will turn the call over to our CFO, Daniel Wu, for a summary for the second quarter 2006 financial results.

Daniel Wu

Thank you, Jie. I am pleased to report to you our record financial results for the second quarter of 2006. Our total revenues have reached $50.6 million, an increase of 52.6% from the previous quarter, and 246.8% from the same period last year.

Our second quarter revenues include $31.1 million from our commercial location business, $6.5 million from our in-store business, $9.8 million from our in-elevator poster frame business, and $3.1 million from Focus Media Wireless.

Revenue from our Outdoor LED is reported under the commercial location business.

First, let me review in detail the results of our commercial location network.

Total advertising revenue from our commercial location network in the quarter was $31.1 million. During the second quarter, we continued to add new displays at desirable locations while optimizing the acquired network from Target Media, including cancellation of certain contracts with locations where rent is above our standard. As a result, the total number of LCD and PDP flat panel displays in our commercial location network in our directly operated cities has decreased to 69,446 as of June 30, 2006, from 71,230 as of March 31, 2006.

In the second quarter, we added five new regional distributors in our network. Today, our commercial location network covers over 90 cities in China, including 50 directly-owned cities and 41 regional distributors.

For our Premier Channel A, which primarily consists of office building locations of Focus Media commercial location network prior to the Target Media acquisition, contributed 78% of the total commercial location revenue.

Other channels, including Office Building Channel B, our Elite Channel, Travel Channel, Fashion Channel, Healthcare Channel -- all of which were launched on March 1, 2006, and also together with our outdoor LED network, which was launched on May 1, 2006, contributed the remaining 22%.

Total network capacity of our Premier Channel A increased to 11,314 time slots due to network expansion into new cities. Total network timeslots sold in our Premier Channel A in the second quarter were 5,369, increasing from 3,904 time slots in the previous quarter.

Tier I city occupancy rates was 92.8%, while Tier II city occupancy rates were 41.8%. In Tier I cities, mainly Beijing, Shanghai, Guangzhou and Shenzhen, the timeslots sold in the quarter was 1,158, increasing 21.3% from 955 in the previous quarter, whereas in the Tier II cities, which represents all other cities, including regional distributors, the timeslots sold was 4,211, increasing 42.8% from 2,949 in the previous quarter.

During the quarter, in addition to Tier I cities, I am glad to report two of our Tier II cities, namely Chengdu and Changsha, have reached full capacity utilization excluding national holidays in May.

Average advertising revenue per timeslot in Tier I cities was $12,320 in the second quarter, compared to $11,760 in the previous quarter, up 4.8%. ASP from Tier II cities was $2,293 compared to $2,656 in the previous quarter, down 13.7% due to a relatively higher percentage increase in advertising timeslots sold in Tier II cities, with smaller networks and lower advertising rates.

As a result, the blended ASP for the entire network was $4,455, down 8.7% from $4,882 in the previous quarter.

Advertising revenue from Tier I cities accounted for 59.6% of the Premier Channel A revenue.

Here are the results of our in-store network.

Our in-store network generated $6.5 million in revenue in the second quarter of 2006, increasing by 23.6% from $5.3 million in the previous quarter. In the second quarter, we further extended the installed base of hypermarkets to 872 from 809 hypermarkets in the previous quarter, due to network optimization and the cancellation of Target Media’s contracts with certain convenience store chains with relatively high rent. The number of supermarkets in our network decreased to 1,083 as compared to 1,126 supermarkets, and the number of convenience stores in our network decreased to 2,219 as compared to 3,283 as of March 31, 2006.

In spite of that, total number of displays installed in our in-store network further increased to 35,511, as compared to 33,765 in the previous quarter. Meanwhile, our in-store network occupancy rate increased to 33.5% in the second quarter, as compared to 31.2% in the first quarter. The average advertising revenue per 30-second equivalent timeslot per week per store was $75 in the in-store network in the second quarter, up from $69 in the previous quarter.

Advertising service revenue from our poster frame network in the second quarter was $9.8 million, up 61.3% from $6.1 million in the first quarter of 2006. The number of frame slots, calculated on a monthly basis, sold in the second quarter was 154,793, as compared to 90,262 in the previous quarter.

The network capacity calculated, also based on the number of frame slots on a monthly basis, available for sale in the second quarter was 243,959, up from 208,659 in the previous quarter.

The network occupancy rate in the second quarter was 63.5%, up from 43.3% in the previous quarter. The advertising service revenue per frame slot sold was $63 in the second quarter of 2006, down from $67 in the first quarter, due to a faster increase in the number of frame slots sold in cities with lower advertising rates.

During the second quarter, Focus Media Wireless generated $3.1 million in revenue. The total number of messages delivered by Focus Media Wireless was approximately 990 million in the second quarter.

During the second quarter, we added approximately 350 new advertising customers, bringing the cumulative total of advertising clients on the Focus Media network to over 2,000.

Gross profit for the second quarter was $29.8 million, representing an increase of 60.9% from $18.5 million in the previous quarter, and an increase of 232.1% from $9 million for the corresponding period a year ago.

The gross margin of the commercial location network in the second quarter, including network costs of the outdoor LED network launched in May, was 63.8% as compared 62.6% in the first quarter of 2006.

The in-store network gross margin was 32.9%, up from 24.9% in the previous quarter. The poster frame network gross margin was 71.2%, up from 60.5% in the previous quarter.

The gross margin on Focus Media Wireless was 26%.

On a blended basis, our gross margin for the entire company for the second quarter was 58.9%, up from 55.8% for the previous quarter.

Second quarter operating expense totaled $13.1 million, as compared to $9.5 million in the previous quarter. Operating expenses as a percentage of total revenue in the second quarter was 25.9%, as compared to 28.5% in the previous quarter.

G&A expense in the second quarter was $6.3 million, or 12.5% of total revenue, whereas selling and marketing expense in the second quarter was $5.3 million, or 10.5% of total revenue.

Intangible amortization from historic acquisitions was $1.5 million, or 3% of total revenue.

Operating margin in the second quarter was 33%, up from 27.3% in the previous quarter. Excluding non-cash stock-based compensation expense of $1.9 million and acquired intangible amortization expenses of $1.5 million, the non-GAAP operating margin would have been 39.7%.

GAAP income for the second quarter was $16.7 million, up 283.4% from $4.3 million for the same period a year ago.

Non-GAAP net income, excluding non-cash shared based compensation expense and amortization of intangible assets resulting from acquisitions in the second quarter of 2006 was $20.1 million.

Non-GAAP net margin in the quarter was 39.5%.

In the second quarter, cash flow from operating activities was $12.6 million, increasing 162.5% from $4.8 million in the previous quarter.

Day Sales Outstanding was 73 days. As of March 31, 2006, the company had a cash and bank balance of $122 million.

A few non-financial highlights.

In July 2006, we entered into a share purchase agreement with the shareholders of ACL, a British Virgin Islands company, to purchase 70% of the equity interest in ACL. ACL, through its affiliated PRC entity, leases screen time from movie theaters in cities throughout China, which then sells the time slots to advertisers. It has signed contracts with local movie theaters, covering approximately 80% of the high-quality screens in 26 major cities in China.

The targeted demographics of this media are typically young, wealthy, well-educated, urban consumers. It is also in the highly captive, non-intrusive environment for advertising delivery.

The transaction is expected to close on our about September 1, 2006, subject to customary closing conditions.

Now, I would like to provide Focus Media’s business outlook for the third quarter of 2006. Please note the following outlook statements are based on current expectations and these statements are forward-looking and actual results may differ materially.

We expect that the total revenue for the third quarter of 2006 to be between $58 million and $60 million U.S. dollars. Third quarter 2006 non-GAAP net income, excluding share-based compensation expense and amortization of acquired intangible assets, is expected to be between $26 million and $27 million U.S. dollars.

Thanks very much. Now we will open the call for your questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions)

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

Jason Brueschke - Citigroup

Thank you. I will limit it to two questions and get back in the queue. First of all, there is extremely good leverage in your Q3 guidance assumptions. Could you help us understand where that leverage is coming from? Is it control of operational expenses? Are you seeing -- is it a gross margin play as your utilization continues to build out, or both? Could you maybe also comment on what you think, looking out -- let’s say three years, what your target gross margins and operating margins are for your business? Thank you.

Daniel Wu

Thanks, Jason. I will ask Jason to answer the first question, and then I will get to the second question.

Jason Jiang (Translation)

After the acquisition of Target Media, and given the smooth integration of Target Media business, we actually believe going forward in the near-term, we do not see too much change in terms of a fixed cost structure, especially with the largest possible performance in our business are the rental payments to the buildings as well as the network depreciation. We do not see those change materially going forward in the next few quarters. That is why, as we continue to sell more slots in our network, as we continue to pick up and grow our revenue, we get leverage from that respect.

Going back to your second question regarding long-term, how Focus Media looks at our business. If you look at Focus Media actually is a selection of multiple medias, and we look at each of those media as a unique demographic-specific media. Of course, there are media cross-synergies about selling those media together.

If you look at the commercial location network, currently our gross margin is in the mid-60’s. We believe those gross margin will go about 70%, especially as we continue to increase the occupancy rate or network utilization rate.

Our Office Channel B, as well as our other channels, all of them were launched on March 1, 2006. As we continue to pick up the occupancy rate in those networks, we believe the gross margin will go about and trend about 70%.

Also, as you see this quarter, which is extremely exciting from our point of view, frame media already achieved 70%, which is earlier than we had expected. So the frame media business is already 70% gross margin business, and we believe that gross margin will continue to go up as they pick up the occupancy rate, because they also are in a similar fixed cost business model as Focus Media.

The in-store network made very good progress in terms of picking up the occupancy rate, as well as improved gross margin. As we have spoken with you previously, we expect the in-store network by the end of 2007 will reach 60% to 70% of gross margin as they continue to pick up the occupancy rate based on a fixed cost business model.

The wireless business is still very new to us. As we continue to add new business models to it, as we continue to leverage our advertising sales force, we believe that margin will also go up going forward.

In the long-term, if you look at the company business structure, we think it is, from our point of view, the operating margin after you look at the blended gross margin of multiple media, the operating margin will go above 40% to 45%. That is how we look at our business in the long-term.

Jason Brueschke - Citigroup

Thank you. One other question, Daniel, and that is you have announced that you are going to be moving into the movie theatre advertising. Could you maybe give us some metrics around that? What you paid to acquire this entity, what the revenue run-rate is, and finally, should we think of movie theatres as another channel within the commercial network, or should we be thinking of it maybe, is it significant enough to be like the poster frame network or the wireless network?

Daniel Wu

We actually, at this time, we will be reporting movie theatre business under the commercial location network. We believe that is a sub-channel of commercial location network. It is an extension from office buildings into movie theatres, another way to capture the eyeballs of attractive urban consumers.

Going forward, we will be reporting that other commercial network together in the other non-Premier A channels, so in together with, as a percentage together with the Office Channel B, Elite Channel, Travel Channel, Healthcare Channel, Fashion Channel, and outdoor network.

If it grows to a material level, then we may possibly break it out, but keep in mind this itself is a new business. I am sure you are very familiar with the China market. Right now, there is nobody doing it. This company is a relatively new company, but they are a very, very experienced management team in the advertising industry in this sector. They have signed up multiple year contracts with a three-year contract with many of the top movie theatres in China already and they are launching this business model during 2006.

We do not expect that they will contribute material revenue and net income in the first quarter after we acquire them, but we expect the revenue and the margin contribution will go up as we continue to move the business forward.

At this time, given the acquisition has not closed, we have not provided details in terms of the acquisition structures as well as revenue projection, but we will be more than happy to discuss this with you after the acquisition closes and after the business gets integrated into Focus Media.

Operator

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

Richard Ji - Morgan Stanley

I have two questions. The first question is regarding the churn for your ASP, and obviously we see some softness in ASP for your Premier Channel A for the quarter, and we obviously understand you are penetrating more into the second tier cities. Have you seen that ASP trend stabilize more recently?

Daniel Wu

Regarding ASP, actually we see very positive momentum on ASP. If you look at Tier I, which is Beijing, Shanghai, Guangzhou and Shenzhen, the ASP actually increased 4.8% quarter over quarter. The Tier II cities actually is a collection of around 80 cities, if you think about directly operated cities plus regional distributors, so there are many, many cities in Tier II cities.

In the first quarter, if you recall, in the previous quarter of 2006, the ASP in the second quarter went up dramatically from the previous quarter. I remember it is around 30%. That was because it is a seasonally soft quarter, and then, especially during holidays, which is surrounding the Chinese New Year, you really sell a lot of advertising in the top Tier II cities rather than the bottom Tier II cities.

So what happened in Q2, if you see the Tier II city timeslots sold went up more than 40% versus around 20% for Tier I cities. So the Tier II city timeslots sold actually went up at a very, very fast pace. Of course, the contribution from the growth in the Tier II city timeslots sold is both from the top Tier II cities as well as from the bottom Tier II cities.

Of course, in the advertising industry, in a city which is smaller, let’s say [Xianyang] or let’s say [Harbin] or [Xian], the advertising rate in those cities are actually lower versus a top Tier II city like [Zhengzhou] or [Jingzhou] or [Changchun].

So if you calculate our blended basis, that is why the Tier II city ASP went down slightly. Keep in mind it is sort of a unique situation between quarter one and quarter two, because quarter one you have this holiday there.

Going forward, as Tier II city occupancy will continue to pick up, we think on a blended basis, you would see Tier I city ASP will continue to go up, Tier II city will continue to go up, so on a blended basis, it is hard to tell, because the difference between Tier I city ASP and Tier II city ASP really in terms of blended is really dependent on what is the percent increase in Tier I city ASP versus the percentage increase in Tier II city ASP.

Richard, I am not sure if this answers your question, but it is a little bit long.

Richard Ji - Morgan Stanley

Sure, it did address my concern and all my questions. My follow-up question is also related, given the marketing dominance for your company, obviously another area that potentially you can hope for is that you may be able to scale back the discount, as the packing discount -- can you also help us to shed a little more light on that?

Daniel Wu

I will ask Jason to answer this question.

Jason Jiang (Translation)

I think if you look at Focus Media, what we did last year, we did see meaningful material improvement in terms of the discount level in the original Focus Media network.

I think where we are focusing right now is for the Target Media network we acquired from earlier of 2006. The focus is, of course, to increase the occupancy rate of the network we acquired, which mostly right now is Office Building Channel B, and while to reduce the discount level we offer [the rest of] the network to customers and to bring that discount level similar to what we have offered to customers in our Focus Media Premier Channel A network.

If you look at the overall advertising industry, our discount level we offer to our advertising clients is still higher, or more versus what TV is offering to their advertising clients. TV, the typical discount level is about 15%. Local TV in Beijing and Shanghai, the typical discount level is 30% to 40%. Our discount level is higher than those numbers, and we are making an effort to move towards the local TV discount level. Of course, there are a lot of things that we need to do, and it is a gradual process, but we believe we can move towards that level gradually.

Operator

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

Kit Low - Goldman Sachs

Two questions here. First, on frame media, if you could help us understand how much contribution in terms of -- also acquired through second quarter frame media has achieved in terms relative to the original target of $8 million net income? Start with that one, and then I will come back with a second question.

Daniel Wu

I think frame media, as you see, their gross margin is extremely strong. We actually do not report on the operating margin level for frame media, but if you look at how their business is trending, we do not think they have any problem of hitting the $60 million maximum payout level or [earn-on] level for 2006. They will be hitting the up target.

Kit Low - Goldman Sachs

Second question, in your 3Q guidance, what percentage of the revenue are you assuming in terms of the LED contribution in terms of third quarter? I know it is going to be small. I just want to get a rough sense of what the contribution, if you factor that in as part of your guidance as a revenue for the third quarter.

Daniel Wu

Relatively very small. At this time, as you see, as in our early press release, we are also expanding the LED network, the outdoor LED network, so it really depends on how quickly we can build up those networks. Right now, the company, the guidance policy is not breaking out business line by line, but it is a very small contribution, I would say.

Kit, I can add one point -- the outdoor LED business, although it was just launched, itself from our point of view it does not contribute negatively to our margin, so itself is a great business and it is already break-even from that point of view, so it is a very, from our point of view, it is a very strong media.

Operator

Your next question comes from the line of Safa Rashtchy with Piper Jaffray. Please proceed.

Safa Rashtchy - Piper Jaffray & Co.

Good morning. Could you talk about the parameters that you have considered in giving your guidance? It seems you a reasonably slower equation because, when compared to your past history, if you look at organic growth rate basis, are we kind of looking at larger numbers, or are there any other factors that might contribute to somewhat slower growth in Q3 compared to what you have seen in the previously years? I have a quick follow-up.

Daniel Wu

I will ask Jason to answer this question for you.

Jason Jiang (Translation)

To simply answer the question, if you think about the advertising industry seasonality, as we have disclosed several times in our perspective at the registration statement, we actually the first quarter, especially the summer season, July and August, are typically soft in terms of advertising industry spending in China. However, September is extremely strong, because before the October holiday there is a lot of advertising spending.

Overall, we think the advertising spending in the third quarter will grow as we have guided. We are comfortable providing that guidance, so that is why, taking into consideration of the softer July and August, and strong -- very strong -- September, that is why we are providing you this guidance, which we feel very comfortable.

Actually, if you compare this to historical levels, it is not much different. Keep in mind today Focus Media is five major medias, rather than one media, which if you look at 2005. So the frame business, the in-store business, the mobile advertising business -- all of them will contribute on a blended basis to the revenue forecast of Focus Media. We believe the current revenue guidance fits with the company profile and our management expectation of how the business will grow.

Safa Rashtchy - Piper Jaffray & Co.

That is helpful, thank you. A quick follow-up -- could you give us a blended utilization rate for the commercial network?

Daniel Wu

We would love to but we cannot, because the thing is, keep in mind the sub-channels are sold slightly differently from the Premier A Channel. Premier A Channel is historically we have been reporting Focus Media’s occupancy rate and also the utilization rate, and we continue to report those numbers. Those numbers are apple to apple.

If you look at Channel B, Travel Channel, Elite Channel, Healthcare Channel -- all those channels, some of them use different methods of calculating. For example, the Healthcare Channel, they are sold on a store basis, not by city basis. The LED network, there are two different networks in Shanghai, so if we provide you a blended number, it really does not make sense at all. That is why we continue to report the utilization rate, the occupancy rate as a network capacity rate for Premier Channel A, so you can use that as an indication of our overall business. But for the other five or six channels, we report as a percentage of revenue, so you can use that as a way how to look at our business. Does that make sense?

Safa Rashtchy - Piper Jaffray & Co.

That is fine. I understand. Thank you.

Operator

Your next question comes from the line of Lu Sun of Lehman Brothers. Please proceed.

Lu Sun - Lehman Brothers

Thank you. Good morning. I actually have two questions. The first question is on the revenue growth trends for each business line. Can you give us rough guidance on where you see the most growth, and also the lowest growth for your business lines going into the third quarter?

Also, secondly, you raised your prices for commercial network and also for in-store network at the end of June. How do you think ASP trends will likely be going into the second-half? When do you see those ASP increase to be reflected in the numbers, and will that have any negative impact on your utilization rate? Thank you.

Daniel Wu

I will ask Jason to answer this question. Hold on, let me translate.

Jason Jiang (Translation)

First of all, if you look at -- wanted to discuss about the price increase. As you recall, in 2005, Focus Media actually increased our price three times -- once at the beginning of the year, once in the middle of the year, and once in October. This time, we are only increasing price this year only so far two times, once in the beginning of the year and once with the recent price increases on July 1, 2006.

Given the high demand of our media, and given currently we continue to grow our occupancy rate in multiple in various cities and as well as in our in-store network, we do not believe those price increases will actually affect our continued growth in the occupancy rate going forward.

That is to answer your question on the price increase. If you think about the price increase really depends on the city, because each of the city, the price increase is slightly different. We believe the July 1st price increase, roughly maybe 50% of those effects will be reflected in Q3 and the remaining 50% will be reflected in Q4. That is the typical scenario based on historical experience.

In terms of the different segments, it is hard to speak on a quarter to quarter basis, but if you think about the LED business as well as the mobile advertising business, because their base number is very small, so we believe in the long-term they will grow at a much higher growth rate.

Of course, keep in mind, the LED business, for example, requires construction, so it is actually outdoor and on the [city street], so the construction will take time. We believe, as we have announced, we believe there is going to be a meaningful addition of LED screens by the end of 2006, some time in December of 2006, as well as there is a possibility we may add some additional LED screens in other cities outside of Shanghai before the end of 2006.

Once that construction has been completed, then we believe there is going to be a meaningful increase in capacity for the LED network in our business.

For the mobile advertising, it is also a fast-growing business. However, it does not have the explosive growth today because everybody is still waiting for the 3G network to be launched in China. We believe the mobile advertising itself, the business will have explosive growth after the 3G network has been adopted. We believe today it will continue to grow according to our expectations, but with the 3G adoption hopefully in 2008, then the mobile advertising business will take off more quickly.

Does that answer your question?

Lu Sun - Lehman Brothers

Yes, thank you. Can I just have a small follow-up on the wireless business? It seems like the margin for this business is relatively low compared to the other business. Is that just seasonal? Or also due to some unforeseen policy metrics that were introduced by China Mobile, or is this a normalized margin for this business?

Also, how much of your Focus Media wireless business as you come from non-SP business as you [inaudible]? Thank you.

Daniel Wu

Good question. I think for the wireless business, I think there are a couple of factors. If you think about the wireless business, we acquired DotAd for their legacy business, but that is not the reason why we acquired them. If you look at, we have discussed in the press release, we have built two new business models on top of DotAd’s historical business, which is one is DirectAd and one is DotAd. Both systems actually were launched in May and in June, so their contribution to the wireless mobile ad business is still very small. The majority of the contribution for mobile ad is still from the legacy business, which basically delivers WAP ads for SP.

So clearly, the non-SP accounts for roughly about 30%. We believe and will continue to build the DirectAd and DotAd businesses. Both businesses we believe have much higher margins versus their legacy business, they are more advertising driven, and we believe the mobile advertising margin will continue to go up as we continue to add high-margin business to their existing business platform.

Operator

Your next question comes from the line of Simon Cheung of Merrill Lynch. Please proceed.

Simon Cheung - Merrill Lynch

I have three questions. First, in terms of the revenue, I am just looking at your in-store and commercial network revenue together, growing at about 30% or 40%. Then you mentioned that the number of advertising actually grew about close to 20%. So net net, you are pretty much talking about revenue per advertiser increasing by about 15% or so.

I know that there could be a bit of seasonality here, but I just want to get a sense of whether you are seeing each of your advertisers actually spending much more than they previously had been doing, or is that just being captured by a small portion of your advertiser, i.e. the key driver is actually from the key advertisers…

Daniel Wu

I do not think your understanding is correct. Let me explain to you.

I think what we have been reporting is cumulative advertiser base. If you think about in Shanghai, for example, in any given week, the maximum number of 30-second timeslots we have is only 24 timeslots, 30-second timeslots. So of course maybe we will have 35 to 40 advertisers, some people buy half a spot.

The number we reported, the 2000 cumulative advertiser are a cumulative basis, so the 300 additions of the new advertisers is not the advertisers who do advertising on Focus Media networks during the quarter. You cannot derive the conclusion that using that number divided by the revenue to figure out the revenue per advertiser.

I do not think these two numbers have any linkage. Keep in mind, you should look at -- the reason why we report it as cumulative advertiser base is because if you look at basic TV, typical TV advertising in China attracts about 25,000 different advertisers, unique advertisers, in any given year, so Focus Media, as we discussed previously, we want to continue to build our cumulative advertiser base.

Keep in mind not every advertiser advertises with Focus Media every single week. For example, White Wine, Chinese rice wine, they only advertise during mid-Autumn Festival or Chinese New Year, so during the other season, they do not advertise. They do not spend much on advertising.

Hopefully that sort of explains the confusion you have in mind.

Simon Cheung - Merrill Lynch

Thank you. Secondly, just looking at your frame network, I am seeing quite a soft quarter on quarter increase in terms of revenue. I know that you actually made acquisitions, so I am wondering how much of that is actually driven by acquisitions and how much of that is actually by operating growth?

Daniel Wu

Good point. I think if you look at frame, total frames being stored, as we discussed, actually increased from end of Q1 as 74,353, and now it is 82,200, so those increased frames is partly from acquisition and partly from additional expansion into new residential complexes.

If you look at the impact of those acquisitions, it is very small. Mostly, it is from the increase in occupancy rate rather than from acquisitions.

Simon Cheung - Merrill Lynch

Lastly, I am also seeing that you actually have fewer panels in your in-store. You are basically saying you are cleaning up some of your panels because the rent is very high, originally from Target Media. I am just wondering how many of those are you expecting to come through in the coming quarters?

Daniel Wu

I think what you are looking at is probably the number of stores, not the panels, because the panels in the in-store network went up from 33,765 to end of Q1 to 35,511 end of Q2. I think the stores, if you look at we reported each hypermarket, supermarket and convenience stores. The material change is in the convenience stores.

If you think about when we acquired Target Media, approximately 1,000 convenience stores we took over from the Target Media network. Most of them, because we do not believe their contracts are favorable to Focus Media, we actually do not have much of those stores left in our current network.

The convenience store, the number of convenience stores we covered actually decreased from 3,283 at the end of Q1 to 2,219 end of Q2. That is what actually reduced, but the total number of panels actually went up, if you look at the data we provided in the early report.

Simon Cheung - Merrill Lynch

So we should not expect any further…

Daniel Wu

Yes, that is already done. The integration of Target Media network into Focus Media is already completed, so whatever the constant calculation of those contracts already done in April.

Operator

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

Marissa Ho - Credit Suisse

I just want to see whether you can give us a little bit of color about the margin and also the profitability structure of the movie theatre channel, and to what extent you expect the ongoing profitability of that channel to be different compared to your other commercial locations.

My second follow-up question is you have been adding a lot of new channels, and I just want to get a little bit further what Jason may have in mind going forward, and what new channels you might be interested in?

Daniel Wu

I will answer the first simple question. I will ask Jason to answer the more difficult question later.

I think the movie business, we expect gross margin will actually go more than 50%. More similarly, in the long-term, we believe those will be 40%. As we said, every media we want to get in needs to contribute 40% plus operating margin, so we believe the movie business in the long-term will contribute more than 40% operating margin.

Let me ask Jason to answer the second question.

Jason Jiang (Translation)

The philosophy behind Focus Media is if you look at urban consumers in China, there are about $12 billion or $13 billion of advertising dollars for those eyeballs. What Focus Media wants to do is we want to study where the eyeball is, what to maximize Focus Media advertising exposure to those eyeballs at different space and locations.

If you look at movie theatres, that is actually an ideal location to deliver high-tech advertising message to targeted consumers.

The second part of Focus Media’s strategy is about segmentation. I believe only when we are able to deliver accurate target demographics to advertisers, then advertisers will move their advertising dollars towards Focus Media, media segment. So accuracy segmentation is a very important driver for Focus Media going forward.

Focus Media going forward will continue to make investments or acquisitions based on these two principals, and at this time, we have no -- we have announced that we have nothing immediately on the plate. We will continue to look at the market for investment or acquisition opportunity which can maximize the advertising platform we can deliver to advertisers.

Marissa Ho - Credit Suisse

You have got new news for us in the next quarter?

Daniel Wu

I am sorry?

Marissa Ho - Credit Suisse

You have new news on acquisitions for us in the next quarterly conference call?

Daniel Wu

I do not know, because the thing is, if you see Focus Media look at those opportunities, actually on an ongoing basis, like the movie business. Last year, this business did not even exist. Now, we have this company go out to sign up those screens, and of course, the company has a very long advertising industry background, and so it has been able to do that, and it is a very attractive business model, so we make those acquisitions.

We continue to look at various outdoor, various advertising media and look for acquisition or investment opportunity. We believe, as you see going forward, Focus Media, all the medias in our media platform, have very high growth and we will continue to make investments through acquisitions to expand that platform.

Operator

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

William Bao Bean - Deutsche Bank

I do not know whether you have gone through this before, sorry if it is repetitive, but I was just looking through the release here, and your Tier I cities increased 21%. Is that from your A, or is that all channels?

Daniel Wu

No, that is Premier Channel A. You mean the timeslots sold, right?

William Bao Bean - Deutsche Bank

Yes, timeslots sold in Tier I cities, 21 -- so that is just Premier A. Are you…

Daniel Wu

All the operating data we provided are for Premier Channel A, which is consistent with the Focus Media original commercial location network, before the Target Media acquisition.

William Bao Bean - Deutsche Bank

Okay, and maybe I am a little confused here. So how are you getting the increased timeslots? Maybe you can…

Daniel Wu

Because Premier Channel A is 100% sold, right? But Q1, there was Chinese New Year holiday, so if you look at the previous quarterly release, the Q1 quarterly release, and remember the Q1 occupancy rate we reported for the Premier Channel A Tier I cities was 76.5%, so this quarter is 92.8% because last quarter you have three weeks of the Chinese New Year holiday effect.

William Bao Bean - Deutsche Bank

Got it, thanks a lot.

Daniel Wu

Sure. This quarter, we have the May holiday, so that is one week only.

Thanks very much, everyone, and thanks for joining the call.

Operator

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

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