VisionChina Media Inc. Q2 2010 Earnings Call Transcript

| About: VisionChina Media, (VISN)

VisionChina Media Inc. (NASDAQ:VISN)

Q2 2010 Earnings Call

July 28, 2010 8:00 pm ET


Helen Plummer - IR Officer

Limin Li - Chairman and CEO

Scott Chen - CFO


Philip Wan - Morgan Stanley

Dick Wei - JPMorgan

James Lee - CLSA

James Marsh - Piper Jaffray

Chenyi Lu - Cowen and Company

Paul Keung - Oppenheimer

Warren Wang - Hamon

Nan Li - SIG


Good evening and thank you for standing by for VisionChina Media's second quarter 2010 earnings conference call. (Operator Instructions)

I will now turn the call over to your host for today's conference, Mrs. Helen Plummer, Investor Relations Officer for VisionChina Media.

Helen Plummer

Hello, everyone, and welcome to VisionChina Media's second quarter 2010 earnings conference call. The company's second quarter earnings results were released earlier today and are available on the company's IR website at as well as on newswire services.

Today you will hear from our Chairman and Chief Executive Officer, Mr. Limin Li, who will talk about our industry, our company's strategy and business operations; and Mr. Scott Chen, our Chief Financial Officer, who will take you through our financials and key operating metrics. After their prepared remarks, Mr. Li and Ms. Chen will be available for your questions.

Please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our Annual Report on Form 20-F and in other documents filed with the U.S. Securities and Exchange Commission. VisionChina Media does not assume any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on VisionChina Media's Investor Relations website at

I will now turn the call over to our CEO, Mr. Li.

Limin Li

Hello, everyone, and thank you for joining us today. We are very happy to see that by the end of the second quarter of 2010, VisionChina Media had taken great strides to overcome some of the short-term difficulties seen in the last quarter.

In the second quarter, we achieved total revenue of $31.8 million, surpassing our expectations with a quarter-over-quarter increase of 36% and year-over-year increase of 3.3%. Moreover, we returned to positive gross profit in the second quarter, giving us even greater confidence in our future.

Several positive factors are providing further evidence that the negative environment of the first quarter was temporary and that VisionChina Media has entered new phase of sustainable growth. We are seeing gradual recovery in the outdoor advertising market, strong progress in our integration with DMG following the acquisition as well as rapid growth of our in-house sales team.

Since the opening of the World Expo in Shanghai, our 13-line Shanghai subway network has been transporting hundreds of thousands of international and domestic expo visitors each day. A variety of programs and real-time information about expo are being broadcasted on network, capturing our target audiences' attention and making VisionChina Media one of the most effective outdoor ad, mobile, television advertising platforms for advertisers in that city.

Price and utilization in our subway network have both increased significantly. And during the second quarter, the utilization rate during primetime hours on Shanghai subway reached 90% and average utilization in our Shanghai subway network was 59% as opposed to 36% in the first quarter of this year.

Just three days ago, Sinomonitor, one of China's leading marketing research agencies, announced that 90.3% of Shanghai residents received Expo related information through subway, mobile television and also noted that Shanghai residents are now more accustomed to obtaining relevant information from subway mobile televisions.

In addition to receiving information via our subway television network, the same group also received Expo related information from other media sources. 86.7% received Expo related information on traditional television, 55.9% through the Internet, 43.7% on bus mobile television, and 27.6% from other outdoor advertising.

Subway mobile television has become highly effective, delivering mass media to audiences that appreciate.

In the next decade, China is going to construct more than 158 new tracks nationwide, with most of them including digital broadcasting capabilities. As the leader in digital out-of-home broadcasting for subways and buses, we expect subway to be a strong growth point for our company going forward.

In terms of media resource expansion, in July, we successfully renewed our exclusive contract with Beijing Subway System for the next five years. This was a critical next step for VisionChina Media as the renewal further solidified the company's market leadership position allowing us to approach 100% of the subway mobile television market share in China.

The acquisition of the six advertising agencies we made in 2008 was a strategic decision during a period of rapid growth for the company. Over the past two years, these six advertising agencies have supplied a large number of quality clients and a significant part of company's advertising income and have been invaluable in training and upgrading our in-house sales teams.

However, after reviewing projected revenue contribution from the acquired agencies, we believe it is prudent to take an impairment charge at this time on three out of the six advertising agencies we acquired in 2008 to better reflect our current business.

Projected revenue contribution from the customers of the remaining three acquired agencies remains in line with company's expectations, and no impairment charge is being contemplated for these agencies.

At the end of the second quarter, together with several key employees and some major long term shareholders I entered into a subscription agreement to buy additional new shares of VisionChina Media. This reflects the faith that my employees, long term shareholders, and I have in the company's long term development, and at the same time allows us to support the company with a stronger cash reserve.

With the ongoing realization of post-acquisition synergy, the expansion of market size, and the strengthening of our market position, VisionChina's exclusive mobile television will continue attracting advertising clients. Our ability to grow a strong in-house team to build well established client base and expand our market share that will allow for steady growth in the second half of the year, creating value for our shareholders.

I will now hand over the call to our Chief Financial Officer, Mr. Scott Chen, to discuss our financials and operating metrics in more detail.

Scott Chen

Thank you, Mr. Li. Just a few comments before I take to you through our operating results and financial results. As just mentioned, we saw a broad rebound in the second quarter, which is driven by growth across our business, but particularly on the subway set of our business.

For the first time this quarter, we saw our subway business contribute nearly 50% of our total revenue. Of particular importance was the significant increase we saw in pricing and utilization on our DMG acquired subway lines, which demonstrates the strong synergies of our acquisition.

While our subway assets are performing strongly, unfortunately it is now clear that the future revenue visibility for three of the six advertising agencies acquired in 2008 has decreased compared to original expectations. While each of these three agencies continues to generate revenue, the certainty of future revenue particularly from historical clients is unclear.

This decrease in revenue visibility has led us to take a non-recurring non-cash impairment charge for these three advertising agencies. The remaining three agencies acquired in 2008 continued to perform in line with expectation and are not impacted by this impairment charge.

Now turning to our second quarter operating results, total broadcasting hours in the first quarter of 2010 increased slightly to 47,928 hours. Average advertising revenue per broadcasting hour rose to $636 in the second quarter compared to $470 in the first quarter of 2010. On average, the company sold 6.34 advertising minutes per broadcasting hour compared to 5.01 advertising minutes per broadcasting hour in the first quarter of 2010.

During the second quarter, 614 advertisers purchased advertising time on the company's advertising network compared to 419 advertisers in the first quarter of 2010. Each of these operating metrics demonstrates the strong rebound of our business versus the first quarter.

Now turning to our second quarter financial results, total revenues were $31.8 million in the second quarter of 2010, exceeding our guidance and achieving an increase of 36% from $23.4 million in the first quarter of 2010. Media cost, the most significant component of advertising services costs, was $23.3 million in the second quarter of 2010, representing a 1.2% of total advertising service costs.

Gross profit in the second quarter of 2010 was $3.1 million compared to a gross loss of $4.5 million in the first quarter of 2010. Advertising service gross margin was positive 9.8% in the second quarter of 2010 compared to negative 19.4% in the first quarter of 2010. The increase in gross margin was due to a significant increase in revenue during the second quarter.

Selling and marketing expenses were $7 million in the second quarter of 2010, an increase of 17.2% from $6 million in the first quarter of 2010. The increase in selling and marketing expenses for the second quarter is attributable in part to the corresponding increase in revenue for the quarter. General and administrative expenses were $2.4 million in the second quarter, an increase of 17.4% from $2 million in the first quarter of 2010.

Loss from equity method investments amounted to $0.09 million in the second quarter compared to $0.03 million gain in the first quarter of 2010. Operating loss was $95.5 million in the second quarter of 2010 compared with an operating loss of $12.5 million in the first quarter of 2010.

The operating loss in the second quarter of 2010 was primarily due to the non-recurring non-cash impairment charge of $89.1 million for three of the six advertising agencies acquired by the company in 2008. Again, the remaining three agencies acquired in 2008 continue to perform well and are not impacted by this impairment charge.

The company recorded net interest expense of $0.7 million in the second quarter compared with a net interest expense of $0.8 million in the first quarter of 2010. Net loss attributable to VisionChina Media shareholders, a GAAP metric, was $93.2 million in the second quarter. Again, the net loss in the second quarter of 2010 was primarily due to the non-recurring non-cash impairment charge of $89.1 million.

Basic and diluted net loss per share, a GAAP metric, attributable to VisionChina Media shareholders in the second quarter of 2010 were both $1.15. Net loss attributable to VisionChina Media shareholders, excluding share-based compensation expenses, amortization of intangible assets, impairment loss and income tax credit in connection with the impairment loss, a non-GAAP metric, in the second quarter of 2010 narrowed to $2.3 million compared to a net loss of $8 million in the first quarter of 2010 due to strong growth in quarterly revenue.

The company had cash and cash equivalents of $65.6 million as of June 30, 2010. The company's net cash use in operating activities in the second quarter was $14 million. Depreciation and amortization in the second quarter of 2010 was $4.4 million and capital expenditures were $1.1 million.

Now, turning to our guidance. The company estimates total revenues, which consist of advertising services revenues only, in the third quarter of 2010 to be between $36.7 million and $39.7 million.

The third quarter 2010 net income attributable to VisionChina Media shareholders, excluding share-based competition expenses and amortization of intangible assets, again a non-GAAP metric, is expected to be between a net loss of $1.1 million and a net profit of $0.8 million. These estimates are based on an exchange rate of RMB6.8086 per U.S. dollar.

The company noted its guidance is based on its current network of 23 cities that as of the release date have already been secured by contracts. If the company's network expands to additional cities either organically or through acquisitions, management's forecast could be affected.

Thank you again for joining today, and I will now open your call to questions.

Question-and-Answer Session


(Operator instructions) And our first question comes from the line of Philip Wan with Morgan Stanley.

Philip Wan - Morgan Stanley

Could you please share with us some more details about the Beijing contract renewal? For example, did you experience competition when it came to negotiation? And for example, what should we expect for cash downpayment as well as media cost step-up in the following quarter?

Scott Chen

I'll begin by answering that question, and I'll ask Mr. Li to provide more details about the renewal process. This has been a long process for us to renew the Beijing contract. We did put out a press release about two weeks ago to announce that we've secured a five-year agreement with Beijing. We are still in the process of discussing certain terms of the signed contract with them. So at this point, it's still not defined yet exactly when there will be cost increases associated with the new contract.

For the moment, we're still operating under the current contract, so that we've been operating since the beginning of the year, and costs have not increased. We have paid a deposit for the Beijing contract in connection with this new signed contract that we have entered into. The deposit is significantly less than we'd originally anticipated internally. The deposit that was paid so far, the total was a RMB3.5 million deposit plus a RMB1.5 million amount which is yet to be paid as part of that deposit.

Going forward, though, we do expect again that the new contract will come into effect following further discussions on certain key terms. But again, for the moment, we are still under the original contract that we've been operating under since the beginning of the year.

As for the competition of the Beijing assets, I'll ask Mr. Li to provide some comments on the negotiation process.

Limin Li

With the participation of three candidates in this open bidding process, we won the concession of the Beijing subway system for the next five years, allowing us to approach 100% of the subway mobile television market in China and giving us greater confidence in our future development.

We negotiated a new contract upon the expiration of previous short-period attention just to ensure the continuous operation of the Beijing subway system for us in Beijing. Currently, we're still in a negotiation with the Beijing subway authorities in more detail in terms of payment schedule and the program transmission, broadcasting transmission. And we are very, very confident that we will be able to sign a contract with better terms.


Our next question comes from the line of Dick Wei with JPMorgan.

Dick Wei - JPMorgan

I wonder, during the quarter, how much revenue is contributed from the Shanghai subway system or the Shanghai city. And could you classify like whether this could be called like a one-time spending from the World Expo related customers? And I guess, if you can give any visibility for beyond the World Expo, that would be helpful.

And secondly, for the rest of the three ad agencies, how much goodwill is related to those three agencies currently on the balance sheet?

Scott Chen

For Shanghai what we saw in this quarter, what was a significant increase in revenue. Revenue more than doubled in Shanghai during this quarter. We for the quarter generated above RMB$44 million in revenue from Shanghai, which was a significant increase from the previous quarter, and this is significantly more than Shanghai had generated in terms of quarterly revenue before the acquisition as well.

So for us we definitely do think that this demonstrates a significant amount of improvement in synergies in the operation of Shanghai since the acquisition with DMG.

In terms of goodwill, the goodwill remaining on our balance sheet from the remaining three agencies is about $47 million remaining in goodwill on our balance sheet related to the three agencies that had not been written down.

Dick Wei - JP Morgan

(Inaudible). Thank you. Scott, if you can also give some visibility on the company outlook for the rest of the year for Shanghai. Do you expect like a drop post-World Expo in Shanghai in Q4? Any color that you can share with us?

Scott Chen

Okay. Obviously, Shanghai is undergoing the Shanghai Expo right now. There is likely some impact the Shanghai Expo is having on the advertising market in Shanghai. But it's pretty clear from the operating that we see internally that the increase in revenue that we saw in the second quarter was driven by pricing and utilization gains. And we feel that those are sustainable after the Shanghai Expo.

We believe that the gains that we saw in the second quarter are not driven by one-time increases in advertising spending with ('83) Expo. We definitely do see that there are improvements in pricing, improvements in overall network quality in Shanghai, and just general growth in overall city passenger volume on Shanghai subway lines.

So these are things that we expect will continue following the Expo, and are not related to one-time pricing spikes that were related to the Expo.

Again, we do think that there are synergies that were derived internally from the DMG acquisition, and that's what's driven primarily the gain in Shanghai for the second quarter.


Our next question comes from the line of Eddie Leung with Bank of America.

Unidentified Analyst

This is Thomas calling on behalf of Eddie. Just a quick question. Can you provide us with a rough idea on the revenue contribution from the Tier 1 cities, as well as the utilization in Tier 1 cities? Thanks.

Scott Chen

Revenue contribution for the Tier 1 cities in the second quarter averaged about 67%, which is largely in line with what their contribution has been historically as well. Average pricing in the Tier 1 cities has increased for us in the second quarter versus the first quarter. Average pricing, as we measure revenue per hour has increased about 35%. So we do see a strong rebound from the first quarter.

In terms of utilization, the metric again that we used is minutes of broadcasting per hour. In the Tier 1 cities on average, it's a broad average, but on average it's ranged around 7.3 minutes of advertising per hour. Again that's an average representing a broad range. So that encompasses certain assets that are lower than that, certain assets that are significantly higher than that.

But on average, the utilization in the Tier 1 cities is averaging about 7.3 minutes of advertising per hour, which again is an increase over Q1 for the Tier 1 cities.


Our next question comes from the line of James Lee with CLSA.

James Lee - CLSA

Thanks for taking my question. My first question is regarding the Beijing subway deal. Scott, is there any way you can give a sense what is the media cost per year on the current agreement and the consensual agreement to maybe increase the overall cost? So is that something we should think about going forward as we model in the (out years)?

And also, I just want to get a sense of the acquired agencies and what's the growth rate year over year? Thanks.

Scott Chen

For the Beijing contracts we have signed a five-year agreement. There is recurring costs associated with that five-year agreement. The difficulty we're facing right now is that again there are certain technical aspects of the current contract that we're still in negotiation with. And so it is currently anticipated, in the current contract we signed a step-up in cost. But because of the technical aspects of the contract, we're still negotiating a final price with them.

We don't want to implement those discussions at this point by talking too much publicly about what the cost increase is. Again, for the moment, we are not paying any cost increases. We are still paying the costs that we have been paying since the beginning of the year under the original contract extension. Those payment terms have been extended at this point.

There is a cost increase baked in. The magnitude of that cost increased for the new contract. Again, it's still yet to be determined until we finalize negotiations with Beijing Metro. So we hope to be able to provide you more information about that probably in the coming months, because for the time being, again, we still aren't affected by the cost increases and we're going to be paying the original contract extension price that we have through 2010 upto this point.

I know that that's at this point a little bit vague, but again this is something that is still an ongoing work in progress and we don't want to influence our current instructions with Beijing by talking too much about potential cost increases at this point.

In terms of the acquired agencies, your question was, how much they've grown year-over-year?

James Lee - CLSA

No. What's the decline? What's the revenue decline year over year you're seeing from these three agencies? It would be great if you can give us a sense, a clarity, of what's the revenue contribution from the three that's remaining versus the three that's left?

Scott Chen

Okay. Well, the revenue contribution for the acquired agencies in the first quarter, according to data that we have collated from our sales force, the total contribution for the first quarter was about 29% of revenue. That's for the six agencies. When we're contemplating this impairment charge, it's not that the three agencies have ceased providing revenue. All the agencies are still contributing revenue.

What we've determined though is that going forward, the ability to project revenue for three of the agencies is much lower than in the past, and much lower versus expectations. And so that's why we are taking this right down at this time. But they all still do continue to generate revenue.

The six agencies as a whole contributed, again, according to our sales data, just under 30% of our total revenue, and that is down from last year.

James Lee - CLSA

Got it. Now, can we get a sense on the Beijing subway contract? Sorry if I didn't make myself clear. I was asking the media cost under the old agreement. How much you are paying for it?

Scott Chen

For all the assets in Beijing right now, we're paying, and again, this is under a number of different contracts because line 4 is separate from the rest of the Beijing system. Under the current agreement, we are paying approximately RMB$11 million per quarter. That's the current extension that we're paying.

Keep in mind though that this current extension does have a price that is lower than historical prices, meaning that before this extension was granted at the beginning of 2010, the Beijing assets were operated under a number of different contracts and those were operated separately by us and DMG.

Now last year, under these separate contracts, the total cost for the Beijing system, all the lines of Beijing, was a bit higher than what we are paying now. So what we are paying now is a preferential rate, and any increase in the new contract that we are going to sign is based off the increase of last year's rate rather than an increase based off of this current preferential rate.

James Lee - CLSA

Got it. Thanks so much.


Our next question comes from the line of James Marsh with Piper Jaffray.

James Marsh - Piper Jaffray

A couple of quick questions. One, Scott, I was hoping you had the year over year ad revenue per broadcast dollar numbers. I know you gave us the first quarter and second quarter, but I was hoping if you had those numbers on a year-over-year basis since they were helpful.

Scott Chen

Sure. Just give us a second to find the year-over-year comparison.

James Marsh - Piper Jaffray

I guess while you're looking at those numbers, maybe you could just talk a little bit about the difference between the selling process for subway and bus? And do you have sort of the same agency relationship on the subway side or is that more direct sales?

Scott Chen

Sorry, James. Can you repeat the last question? I apologize.

James Marsh - Piper Jaffray

Yes, the second question, just while you're kind of digging up the other information, I was hoping you could compare and contrast the selling process between the subway business and the bus business? Is it different? And then do you have more internal sales or is it still agency as well? I'm just trying to figure out how different they are.

Scott Chen

Yes, I'll provide some comments and then Mr. Li who has headed a sales force can provide some insight as well. From my observation, the sales force selling between bus and subway is no different. We do provide our internal sales teams with support for both businesses equally. In terms of sales, the percentage breakdown between direct customer discussions and agency discussions does not look to me any different.

The process is really determined by what customers want in terms of targeting their audience as opposed to the sales process itself. I'll pass it to Mr. Li. Perhaps he can give a little bit more insight about the differences, if any, in the sales process.

Limin Li

Both subway mobile television and bus mobile television fall into the category of public transit mobile television, and there is approximately 70% overlap in terms of audiences. There is also 70% overlap in terms of the advertising clients for the above-ground bus mobile television and below-ground subway mobile television.

Right now, the sales force is a combination of our in-house sales team and external advertising agencies, including foreign agencies. So we could effectively use the combination of above-ground population and below-ground commuters to improve our coverage and enhance our effective reach.

Scott Chen

James, getting back to your original question, advertising revenue per broadcast hour, are you asking for a year-over-year comparison?

James Marsh - Piper Jaffray

Yes, that will be helpful.

Scott Chen

Right. So our advertising revenue per broadcast hour in this quarter is $636. A year ago in the second quarter, it was $865. There is obviously a decrease here in our advertising revenue per broadcast hour. One thing to keep in mind is that this year the number of broadcasting hours has increased with the integration of DMG. And so that does affect the ratio to a certain extent. The amount of revenue that we're generating, again, is divided by a broader platform, a larger number of broadcast hours.


Our next question comes from the line of Chenyi Lu with Cowen and Company.

Chenyi Lu - Cowen and Company

I have a couple of quick questions. This quarter, you have 614 paying customers for the quarter, which is higher than the previous couple of quarters. My question to you is do you see the increase across the board, all the different market categories, and do you see a sustainable growth going forward in terms of customers.

Scott Chen

Chenyi, we have had a larger number of customers over the past two quarters. That has not changed the percentage mix by revenue, though, from our industry. So we do think that a larger number of customers is broadly based across our historical industry base. Our platform, because it's very focused on mass transit writers, our demographic is very much geared towards consumer brands marketing, household products, over-the-counter pharmaceuticals, retail and fashion. Those types of daily use products have always been very strong in terms of our customer base.

Going forward, yes, we do think that that is sustainable, because these sectors do represent the bulk of the advertising market in China. And so we do feel that we are very well positioned with our platform to attack this large opportunity in front of us.

Chenyi Lu - Cowen and Company

So would that also imply that the revenue growth should continue to be strong quarter-over-quarter starting from this quarter?

Scott Chen

Yes, we do think that with the pickup in our subway business after the integration with DMG, we do feel that we've rebounded from the first quarter. And yes, we do have a solid base of continued growth from this point forward. Again, at the same time, we're taking steps here to deal with the agency acquisition that the company made in 2008. By taking this write-down, we do hope that we are able to put those acquisitions behind us and continue a base of growth with those acquisitions as well from this point forward.

Chenyi Lu - Cowen and Company

So basically, would that also imply that you're getting more synergy from DMG acquisition right now, and also the revenue from Shanghai should continue to grow quarter-over-quarter beyond the Shanghai Expo?

Scott Chen

Yes, exactly. We do think that the growth in the subway business in the second quarter demonstrates the beginning of synergies that we're able to achieve with the DMG acquisition.

What we saw in the first quarter was advertisers pushing back on the pricing increases that we implemented across DMG's lines. We've seen customers come back to us now in the second quarter. And so we do think that this is the beginning of a phase of growth in the subway business resulting from the integration with DMG. And again, that process is just starting for us.

Chenyi Lu - Cowen and Company

Okay. I know you guys have a write-off of about $80 million. Can you give us the forecast going forward for this amortization of intangibles? Would that be lower than $3 million per quarter or would that be the same?

Scott Chen

It will be a bit lower. Let me calculate the exact number here. We're anticipating a decrease in our quarterly amortization expense of about $440,000 going forward.

Chenyi Lu - Cowen and Company

So that would imply about $2.8 million per quarter going forward, right?

Scott Chen

Yes, let me just check that figure. Yes, that's exactly right, about $2.8 million per quarter.

Chenyi Lu - Cowen and Company

And then your new guidance also includes this lower amortization as well, right?

Scott Chen

Yes, that's right.


(Operator Instructions) Our next question comes from the line of Paul Keung with Oppenheimer.

Paul Keung - Oppenheimer

We've asked this question in the past. I want to make sure you confirm here. Now you've seen this trend in your subway business. What percent of that business you're getting is actually coming from your customers' TV budget? And two, what percent do you think of your customers' spending is representing at this point? In other words, how many of these customers are really more on a trial basis going to subway and whether you've got penetration actually growing with some of your clients?

Scott Chen

Yes, those are very good questions, but unfortunately I think it's very difficult to generalize across our customer base, how much of our spending is coming from the TV budgets and what portion of their spending represents their overall budgets.

I think the second part of that question may be easier. What portion of their spending on our platform does that represent of their overall budgets? We still believe that the revenue being spent on our platform represents a relatively small part of the budgets of our key customers.

In this quarter, looking at our top 10 customers, it's very clear that we are enhancing our customer base and really attacking the key multinational and domestic household consumer products brands. So just a glance at our top 10 list quarter, it is a very strong group of customers. It's a very, what we feel, sustainable group of customers. And it's customers that do for the most part focus their advertising on traditional television.

So these are clients like Amway, Proctor & Gamble, Unilever, Sanjing Pharmaceuticals, GlaxoSmithKline. These are our top five customers this quarter, and these are, again, very well known brands that do focus most of their advertising on traditional television.

So the revenue that they're spending on our platform we still think is a very small part of their overall budget and a relatively small part of their TV budget in fact. We do think, though, that for customers like Amway and Proctor & Gamble and Unilever to continue to spend on our platform, they continue to grow their spending. It does mean that we are taking more and more revenue from their traditional television budgets. But obviously, at this point, it's difficult to gage exactly how much that is.

We still think as a ballpark that we're still in single digits of their overall ad budgets, single-digit percentage.

Paul Keung - Oppenheimer

And the next question relates to the Beijing subway. I know you can't provide the detail. But roughly at what point in time or what milestone would trigger switching to the new concession terms? At what point in the future should we expect it?

Scott Chen

The key terms that we're discussing right now, all regard service levels. So the digital broadcast network that we're operating in the Beijing subway network, the screens within that network have to maintain a certain amount of uptime in terms of the screen maintenance and the availability of the digital television signal. So those types of metrics.

We have internal quality control metrics that the metro system has to live up to. This type of service quality is something that we've been discussing with all of our subway partners, but we've been discussing this with Beijing for some time.

Once the Beijing metro achieves the level of service quality that we internally have set, that's the trigger for entering into the new contracts in full. Again, this is a discussion that we've been having with them for some time. We're working with them to make sure that our service standards are maintained.

Right now, it's anticipated that we'll be in this discussion for some time on a month-to-month basis with Beijing metro, to work with them on these service issues. It has an impact of revenue. Revenue in the second quarter here in Beijing has grown consistently from the first quarter. So we, at this point, are comfortable with our contract position in Beijing.

We're going to continue to work with them to enhance the service quality. On a month-to-month basis we're going to be reviewing the service quality and determining when is the appropriate time to switch to the new contract.

Again, the key points that we're discussing with them right now are service level and also some definitions about future expansion of the Beijing metro system. We are working with them on how to define the expansion of the Beijing metro system in terms of new lines as well as expansion to current lines, which again will have impact on the future costs associated with the Beijing contract.

I know that's a little bit vague, but hopefully that gives you a sense of some of the things that we're still discussing with Beijing metro. And again, hopefully we'll have more information to update again on a month-to-month basis.


Our next question comes from the line of Warren Wang with Hamon.

Warren Wang - Hamon

(Foreign Language)

Scott Chen

Just to review those questions, there were three questions there. The first one was relating to what our expectations were for the fourth quarter and for next year. Specifically for the fourth quarter, with the end of the Expo, would that have any impact?

And also next year, with the continued integration with DMG and the growth in the subway business, how that will impact our business?

The second question relates to our top 10 customers and a breakdown in terms of overall percentage of revenue. And the third question relates to our operating metrics and how much potential growth do we see in our operating metrics for the coming quarter.

Let me just take those questions one by one. In terms of the first question, what our expectations are for the fourth quarter and our expectations are for next year, in general, again, we provided guidance here for the third quarter. And so based off of our current visibility in our business, we are going to provide guidance on a quarter-by-quarter basis and not get too far ahead of ourselves.

But what we do expect for the remainder of this year, including the fourth quarter, is continued growth. We don't expect that the end of the Expo at the end of this year will have a negative impact on our business. Again, we feel that the growth in Shanghai that we saw in the second quarter was primarily driven by operational gains and pricing gains that we've implemented as a result of the DMG acquisition. And we don't feel that our results were overly impacted by the Shanghai Expo itself.

And so given that we're growing the business from the start of the acquisition at the beginning this year, we do think that we will be able to carry growth momentum through the second half of this year and into next year as well. We do believe that subways, particularly the Shanghai Metro System and Beijing Metro System, all these large metro systems, we do feel that that's a source of long term sustainable growth.

We do feel that the DMG acquisition was structured properly to provide us with a basis for growth, meaning that there are no earn-outs associated with an acquisition. And the sales teams from the DMG sales force have been integrated into our sales force.

So actually the integration was a full complete integration, meaning that individual sales people were combined into different sales teams. And so we actually don't have any more sales force that are strictly separate as part of DMG. Everyone has been consolidated; everyone's being compensated the same, and again there are no earn-outs associated with the DMG acquisition.

In terms of our top ten customers, again, we are very confident in our top ten customers and the quality that they represent. The major brands include Amway, Proctor & Gamble, Uniliver, Sunjing, GlaxoSmithKline, (Sin Tong), (inaudible) and young brands, McDonalds. These are very high quality brands in our top ten list. We feel these are very sustainable. And for the second quarter, they represented about 38% of our total revenue. And we do again feel that that's a very healthy percentage for our top ten brands. We do expect these brands to continue to invest with us going forward.

In terms of operating metrics, we have seen a significant improvement in our operating metrics in the second quarter. Again it is off of a low base in the first quarter, but across our bus and subway business in the second quarter we have seen average pricing gains and utilization gains. And so, again, the strength that we saw in the second quarter we do expect that to continue in the second quarter. That is accounted for in our guidance for the third quarter.

And so right now we do feel that the overall advertising environment is strong. We feel that integration with our subway assets with DMG has worked out very well this quarter, and we do feel that this is such a solid basis for new growth across all of our operating metrics in the second half of the year.


Our next question comes from the line of Nan Li with SIG.

Nan Li - SIG

I just have a quick housekeeping question. In terms of the earn-out payments relating to the acquisition of DMG, I remember last time you mentioned there is still like about $10 million that has not been paid yet. So I'm just wondering how much cash payment has been made in this quarter and how much would be made in the remaining of this year? Thank you.

Scott Chen

Yes. Actually there is no earn-out payments associated with DMG. Just to be clear, we have upcoming installments that are due to DMG, but they are not related to any earn-out mechanism. This is just an installment plan for the consideration that was entered into at the beginning of this year.

As the contract currently stands, there is $60 million in consideration left to pay for DMG. That's divided into two $30 million installments, each of those due at the one and two year anniversaries of the acquisition. So at the beginning of 2011 we will be paying $30 million in consideration to DMG. And at the beginning of 2012, we will be paying $30 million in consideration to DMG.

Just to be clear, again, the $30 million payments, there is the option for the selling shareholders of DMG to receive shares. Those shares amount to $10 million at each payment date. Again, that's an option on their behalf. But the protection mechanisms built into the original contract do stipulate a minimum floor price for those shares. And so that minimum floor price was set, back when the contract was signed in October.

So there are protections built into the original agreement. Those minimum share prices, we've publicly disclosed those back in October, but they are significantly higher than the current share price.


And ladies and gentlemen, I show no further questions at this time. I'd like to turn the call back over to Helen Plummer for any closing remarks. Please proceed.

Helen Plummer

Thank you all for joining us today. If you have any questions, please do not hesitate to contact me at


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