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September 28, 2007

Focus Media Q2 2007 Earnings Call Transcript

Filed under: Conference Call Transcript — Tags: — admin @ 12:00 am

Executives

Jie Chen – Manager, Investor Relations

Daniel M. Wu – Chief Financial Officer

Jason N. Jiang – Chairman of the Board, Chief Executive Officer

Tan Zhi – President

Analysts

Jason Brueschke – Citigroup

James Mitchell – Goldman Sachs

Jason S. Helfstein – CIBC World Markets

Richard Ji – Morgan Stanley

Ming Zhao – Susquehanna Financial Group

Aaron Kessler – Piper Jaffray

James Lee – WR Hambrecht+ Co.

TRANSCRIPT SPONSOR
Wall Street Breakfast

Focus Media Holding Limited (FMCN) Q2 2007 Earnings Call September 27, 2007 9:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the quarter two 2007 Focus Media Holding 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 2007 earnings conference call. Today, our management will discuss the company’s financial results for the second quarter of 2007 and business outlook for the third quarter of 2007. With me here are Jason Jiang, Chairman of the Board and Chief Executive Officer; Tan Zhi, President; and Daniel Wu, Chief Financial Officer. After Daniel updates you on our second quarter 2007 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, expectations of the development of our networks and our outlook for the third quarter 2007, for example.

You can also identify forward-looking statements by terms such as will, expects, anticipate, future, intend, plans, beliefs, estimate and similar statements. The accuracy of these statements may be affected by a number of different risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. These risks and uncertainties include, but are not limited to, our limited operating history, broadcast operations and short history of the audio visual advertising sector, which may make it difficult for you to evaluate the viability and prospects of our business, the integrations of prior business, competition from present and future competitors in China’s growing advertising market, and other risks outlined in our filings with the SEC, including our registration statement on Form F-1.

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

Now I will turn the call over to our CFO, Daniel Wu, for a summary of the second quarter 2007 financial results.

Daniel M. Wu

Thank you, Jie. Good morning and good evening. I am pleased to report to you a record result in the second quarter of 2007 for Focus Media. Our total revenue, excluding sales tax, reached $113.3 million, increasing 126.3% from the same period last year, and 97.5% from the previous quarter. Our second quarter revenues include $76.9 million from digital out-of-home advertising business; $10.9 million from our Focus Media wireless business; and $25.2 million from our Internet advertising business.

As our digital media offerings to our advertising clients continue to expand, we’ll be reporting our advertising service revenues under three separate lines going forward. The first one is digital out-of-home, which includes our commercial location network; the commercial location network includes our premier office building channel A and other commercial locations and our other commercial location LCD channels, our outdoor LED network, and our movie theater network, et cetera. And also, digital out-of-home includes our in-store network and our elevator poster frame network. These two are out-of-home LCD and LED networks.

The second line will be mobile advertising revenue; the third one will be Internet advertising.

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 $76.9 million in the second quarter of 2007, up 64.4% as compared to $46.8 million in the same period in 2006.

Within our digital out-of-home advertising business, the revenue from our commercial location network in the second quarter was $51.1 million, up 67.8% year over year. The revenue from our in-store network was $7.2 million, up 10.8% year over year. The revenue from our poster frame network in the second quarter was $18.5 million, up 89.7% year over year.

The commercial location network, in-store network and poster frame network contributed 66.4%, 9.6%, and 24.1% of total digital out-of-home advertising revenue in the second quarter respectively.

Due to continuing expansion of our media offerings and strong demand from our customers, we have started to offer customized media solutions tailored to the needs of our large advertising clients. We have also extended the cycle time of our commercial location network in certain cities to more than 12 minutes, the cycle time we had before.

As a result, the number of 30-second equivalent time slots sold, which we historically call slots sold, and average revenue per 30-second equivalent time slot, which historically we call that ASP, for our networks are no longer as representative as before. Therefore, going forward, we will no longer provide such data in our earnings report.

During the second quarter of 2007, Focus Media wireless generated revenue of $10.9 million, up 253.8% from $3.1 million in the second quarter of 2006. Advertising service revenue from Allyes, principally from Allyes, was $25.2 million in the second quarter of 2007, of which digital marketing service accounts for 90%, digital marketing technology accounts for 3.4%, and digital performance media accounts for 6.6%.

Gross profit for the second quarter of 2007 was $61.8 million, representing an increase of 117.2% compared to $28.5 million for the same period a year ago.

In the second quarter of 2007, gross margin for our digital out-of-home business was 63.1%. Within the digital out-of-home business, commercial location network gross margin was 65%; in-store network gross margin was 28.4%; and poster frame network gross margin was 71.6%.

The gross margin for our mobile advertising business was 58% and gross margin for our Internet advertising business was 27.1% in the second quarter of 2007.

For the company as a whole, the blended gross margin for the company for the second quarter was 54.6%, as compared to 56.9% in the second quarter of 2006; lower, primarily due to the addition of the lower margin Internet advertising business to our revenue mix.

Second quarter operating expenses totaled $23.7 million, including $0.8 million in acquired intangible assets resulting from historical acquisitions and net, non-cash share-based compensation expense of $4.6 million. As a result, operating margin in the second quarter of 2007 was 33.7%, up significantly from 25.2% in the first quarter of 2007 and due to the first quarter seasonality, the margin in the first quarter was lower.

Excluding non-cash share-based compensation expense and acquired intangible asset amortization expense, operating margin on a non-GAAP basis was 40.4% in the second quarter of 2007.

GAAP net income for the second quarter of 2007 was $37.7 million, or $0.32 per fully diluted ADS, up 126.2% from $15.7 million for the same period a year ago. Non-GAAP net income, excluding non-cash share-based compensation expense and amortization of historical acquired intangible assets in the second quarter of 2007 was $45.3 million, or $0.38 per fully diluted ADS.

Now I would like to provide Focus Media’s business outlook for the third quarter of 2007. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and actual results may differ materially.

We expect that the total revenue for the third quarter of 2007 to be between $132 million and $135 million; non-GAAP fully diluted earnings per ADS to be between $0.41 and $0.43.

Due to higher-than-expected growth in our Internet advertising business, we also raised the full year 2007 revenue estimate to a range of $440 million to $450 million, as compared to the previously announced range of $390 million to $400 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jason Brueschke from Citigroup. Please proceed, sir. Mr. Brueschke, your line is open. You may ask your question. Mr. Brueschke, you may proceed with your question.

Jason Brueschke – Citigroup

Hello?

Daniel M. Wu

Yes, we’ve got you, Jason.

Jason Brueschke – Citigroup

Okay, sorry about that. First of all, good morning and let me just say congratulations on the completion of the audit committee investigation and that entire process. I’m sure you guys are glad that it’s over.

Let me just do a couple of questions. First of all, the audit committee expenses that you incurred for the accounting and the legal in the third quarter, Danny, could you give us some indication of the magnitude of those expenses and what impact they have or are likely to have on this EPS guidance that you gave?

Daniel M. Wu

Sure, because the audit committee inquiry or investigation has been concluded in the third quarter of 2007, so all the expense will be paid and partially has been paid and will be booked to the Focus Media third quarter 2007 financial statement.

The guidance we have provided already includes those expenses, taking into consideration those expenses. Those expenses is a reasonable amount, so we already take that into consideration but sorry, we cannot discuss specifically what the dollar amount is due to our agreement with the advisors.

Jason Brueschke – Citigroup

Okay, but the guidance that you gave is not — the pro forma guidance is not excluding those expenses? Those are included?

Daniel M. Wu

Yes, they are already booked into our Q3, so the guidance we are providing to you has taken into consideration those expenses.

Jason Brueschke – Citigroup

Thank you for that. My next question is regarding the customized advertising solutions for large advertisers, could you give us a sense of what exactly those are? And I presume that the expansion of the 12-minute cycle is probably happening in tier-one cities where you are probably having more demand from these large advertisers. Is that the case and is that why we are not getting the ASP metrics now going forward?

Daniel M. Wu

Yes, good point. I think, Jason, you hit it right on the spot. First of all, there are cycle times in certain cities, in addition to tier-one cities, we also expanding due to the strong demand also from some of the tier-two cities.

Second, let me give you an example; if you think about let’s say Mercedes-Benz. If they want to advertise with Focus Media commercial location network and they did, they probably don’t want advertising on all the 5,000 or 6,000 buildings we have in Shanghai. So they may come back to us, they say look, you know, because our brand image and because our highly selected target demographic for our viewers, potential buyers, we like to advertise in only the top 100 buildings, or top 50 buildings in Shanghai or in Beijing or in other cities.

So for us, we actually have to do that because we cannot just say hey, we cannot allow you to advertise in the top 50 cities. You have to advertise in all buildings. First of all, it’s not only a price issue but also a brand image issue. They may actually walk away from Focus Media.

So when we are offering those services, let’s say for certain customers, we offer a more targeted selection of locations. The previously provided slot capacity, 30-second equivalent time slot capacity, was based on the scenario that everybody will use the full city because when we define a 30-second slot, it was a 30-second slot in a particular city network. So Shanghai, you look at the entire city.

So when we let’s say have customers who are allowed or who have contracted with us to advertise in select buildings, the slot definition does not make sense anymore. So going forward, given the network is getting bigger and bigger, given our customer becomes more sophisticated and become larger, so there are always going to be such type of situations where the standard rate card format we provided to you on our website is no longer applicable.

So that’s why we stopped providing those slot information and utilization information and also ASP information to you because when those numbers are calculated historically, if applied to those new situations, will actually skew the number and make it incomparable for the new number to the historical period.

Jason, am I explaining this to you clearly?

Jason Brueschke – Citigroup

Yes, that makes total sense to me. I understand what you are doing and why it’s grapes and apples to oranges type of situation.

Daniel M. Wu

Okay. Thank you.

Jason Brueschke – Citigroup

Maybe to ask one last question; the Internet business is doing extremely well, much better than you had originally guided when you acquired Allyes. And it seems to me that this is kind of a consistent pattern with a number of your acquisitions, that once you acquire a company, the rate of growth seems to accelerate dramatically. Can you comment on what is underlying the growth in this business? Is it just the booming Internet advertising market in general ahead of the Olympics? Or is it more a function of putting them as part of the larger Focus Media network gives you various sales and marketing across the board? Could you add a little color on that? That would be helpful.

Daniel M. Wu

Jason, I am going to ask our CEO, Jason Jiang, to respond to your question, so let me translate for Jason first. Sorry, give me a moment.

Jason N. Jiang (Translation)

Of course, as you mentioned earlier, the overall Internet advertising industry in China is actually growing very rapidly, so that actually benefited us from the English point of view but most importantly, from our angle looking at this particular business, Focus Media today is the largest digital media group in China and if you look at — there are two areas we want to talk about.

One is if you look at customer base. Historically, Focus Media has more than 3,000 large and long-term customers, and Allyes, when we acquired them, they only had roughly about 300 customers. So after we acquired Allyes, the key focus is how to provide an integrated digital media solution to our customers through Allyes products and service offerings. So of course, by expanding the potential customer of Allyes they can address to, we actually will be able to increase their growth rate faster than they would be able to do as a standalone business.

The second point we would like to make is one thing we did is we actually have been looking at those Internet advertising businesses for a long time, so we do have some knowledge and some insight in terms of how to fine-tune those businesses. So after we acquired Allyes, we refined the Allyes business model, focusing on more targeted advertising delivery and also focusing on rich media and also focusing on performance media, which is cost-per-action based advertising business model.

So by focusing on those three areas, we actually are able to increase the margin of Internet advertising business of Allyes. Going forward, for the Internet advertising business, the focus will be two areas; one is to achieve higher growth, hopefully higher than industry growth for the Internet advertising industry, and also focus on improving the margin of the Internet advertising business of Focus Media.

Jason Brueschke – Citigroup

Great. Thank you, guys, and congratulations again on your results, given what had to have been very trying circumstances.

Operator

Your next question comes from the line of James Mitchell from Goldman Sachs. Please proceed, sir.

James Mitchell – Goldman Sachs

Thank you very much for taking the question, and I apologize, because the first one is kind of mechanical. I guess in the second quarter, you had $2.7 million in amortization of acquired intangible assets and I think in the past, that’s appeared under your other expenses line, between the gross profit and the operating profit, so next to G&A and sales and marketing. Is that number still appearing there or have you moved it up the P&L into the gross profits, because it looks like there has been some sort of shifting in gross margin versus operating margin.

Daniel M. Wu

Yes, that’s a very, very good point. If you go to note six of our financial statement, which we included in our press release, you will see that amortization of our acquired intangible assets actually this quarter was $2.7 million, which in the table where we did a reconciliation of non-GAAP and GAAP. The reason why is due to a different accounting treatment under the advisory of our public auditor, the auditing firm. Historically, in the U.S. actually a lot of companies have this practice as well. Historically, we’ve been grouping all our acquired, historically acquired intangible amortization expense under the operating expense, which is a lump sum.

But of course, you know those intangibles, when we evaluate those intangibles, they include various items, including customer base, technology, trademarks, and also existing contracts, so on and so forth.

So in the U.S., there are both practices. There are companies who break it down, there are companies who lump it together as one item in the operating expense. Under the advice of the public auditor, we actually feel it is more accurate going forward to break it into different intangibles and categorizing it under cost of sales and also in the operating expense, so that is why you see the number today in the operating expense is much lower than historical periods. But if you go to look at in ’06, as reported earlier, that particular number is more comparable to historical periods.

James Mitchell – Goldman Sachs

The $2.7 million is now fragmented between G&A, sales and marketing, cost of service?

Daniel M. Wu

Yes, it is between cost of sales and sales and marketing.

James Mitchell – Goldman Sachs

Between cost of sales and sales and marketing — and then the other operating income is tax rebates, the $1.1 million?

Daniel M. Wu

Yes, those are tax rebates. Historically, we actually put that into other income and given it’s become a recurring item, and under the advice of our public auditor, they believe it is much more appropriate under the newest guidelines of U.S. GAAP, we should include that into our operating expense.

James Mitchell – Goldman Sachs

I think it is much more appropriate but it makes my life harder. Just one other question for me then, on Allyes; you commented that you see margins expanding over time. I guess for the second quarter, it looked like it was a 27% or so gross margin for the business. Do you see that margin expanding relatively quickly or do you employ merger synergies, or do you see that margin expanding more gradually over time as you change the business model?

Daniel M. Wu

I think if you look at what we said in the press release, 90% of our Internet advertising business still is digital media service, which is interactive agency business, itself is a lower margin. I think we discussed a little bit on the call when we acquired Allyes, those margins can continue to improve as the revenue base becomes larger, revenue growth becomes larger, and also due to the larger media buying power of our Internet advertising business.

So coming back to your question, it is going to be a gradual improvement. Still today, the digital media services is still the majority of our Internet advertising business. Going forward, we see from two areas for the margin improvement. One is continued improvement of margin in the digital media service business, as we talked about earlier due to revenue base growth as well as media buying power and also increasing operating efficiency. But also, we see a change of the revenue mix in our Internet advertising business, because if you look at digital performance media itself is a high margin business, so as that particular business contributing more and changing the mix of those different contributions, we do see the margin of the Internet advertising business will improve. But those will be a gradual process.

James Mitchell – Goldman Sachs

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Jason Helfstein from CIBC World Markets. Please proceed, sir.

Jason S. Helfstein – CIBC World Markets

Thank you. A few questions, the first; you guys exceeded your guidance by about 7%, or the midpoint. Can you talk about which areas of the business were better than expected and I’m looking for some more color. I understand you don’t want to give us the metrics anymore from the commercial network business, but did the commercial network business exceed your prior expectations and if so, how much of that came from price and how much of that came from volume? And is there just a way to talk overall about the pricing that you are seeing going forward? And then I’ve got a follow-up.

Daniel M. Wu

Sure. If you look at this quarter, it is a very good quarter for Focus Media for the second quarter of the fiscal year. Of course, if you look at within our digital out-of-home business, what we talked about a little bit earlier, the Internet business doing well, the mobile business doing well, the majority of the revenue still coming from the digital out-of-home sector.

For the digital out-of-home business, the commercial location actually was doing extremely well, because as you see, we have a dominant position in that particular media. We have seen more and more advertisers realize the effectiveness of this media, understanding the highly targeted demographic we cover for consumers in China, so we do see more and more advertisers want to use this media and we continue to see fully sold out capacity in major cities, in addition to tier-one cities.

Based on that, we do see, of course, volume increase as well as more pricing power because as more and more customers want to use this media, and as our city network gets sold out, we will have more leverage when we are negotiating contracts with advertisers. So that is really what makes us do better this quarter than what we expected.

As you see, the in-store network, as Jason said in the press release, still a challenging environment, so we will be focused more on our expanding of the network and expanding the reach at this particular point in time. So there is not much upside that we can talk about from the in-store network.

Frame media, we talked about digital media, the digital frame media, which is doing extremely well and we continue to see that media will grow as we planned. Also, we do see a lot of potential growth in that particular media.

Jason S. Helfstein – CIBC World Markets

Okay, my follow-up then actually with respect to frame media, can you tell us how much revenue in the quarter came from the frame 2.0 initiative? And perhaps, is there a conversion ratio? So once a display converts, is it now three times the revenue, five times the revenue? And then, do you have a goal for how many digital frames you would like to have, either by the end of third quarter or by the end of the year?

Daniel M. Wu

First of all, if you think second quarter’s cut-off date is June 30, 2007, so if you think about we are, as we announced, we are upgrading to digital 2.0 in the middle of the second quarter. The digital frame 2.0 still contributing a very small percentage of the total revenue because we still, you know, are launching this particular network. By the end of August, we had launched almost 7,000 new digital frame 2.0 units, and especially focusing on the high end of the market.

We do see very positive customer feedback by upgrading those networks to digital, because it becomes a much better media and without reducing the reach and providing a very cost effective solution for a lot of advertisers. Also, it allows us to address a lot of the different advertising needs, such as advertisers who historically are doing two-dimensional advertising business.

So we do see for the network portion we have upgraded, we see very strong results and very strong feedback from the customers. We want to upgrade those very aggressively going forward, but it is also limited by our resources and also by the manufacturer of those machines.

We don’t have a target for you for Q3, but we will, as we talked about earlier, we have phase one, which is 10,000 units. We expect to complete phase one within this year and will launch phase two as soon as we complete our phase one installation.

Jason S. Helfstein – CIBC World Markets

Any comment on the conversion ratio on the 7,000 you’ve already done?

Daniel M. Wu

You mean conversion ratio, you mean customers?

Jason S. Helfstein – CIBC World Markets

No, in other words, how much higher revenue are you getting per display for digital than for non-digital?

Daniel M. Wu

We don’t have this particular breakdown but if you think about we are selling those digital frames same as non-digital, except the advertising itself will rotate on a 30-second basis, up to three separate advertisements per frame per week. So basically, if it is all sold out, the potential revenue from a digital frame will be up to three times. But as I said, right now, the second quarter cut-off date was June 30th, so we don’t have enough data to provide you, to answer your question.

Jason S. Helfstein – CIBC World Markets

Okay. Thank you very much.

Operator

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

Richard Ji – Morgan Stanley

Congratulations on your very good quarter. I have a few questions, and the first question is again from our channel check, we know the Olympics related advertising demand is very robust and have you been able to — typically you raise advertising rates in the middle of the year. Can you help us understand a little better how much of the advertising rate you have been able to increase so far?

Also, on the other hand, given the scale, given your scale and also the dominance, have you been able to scale back your discount level for the advertising agencies?

Daniel M. Wu

Let me ask Jason to answer this question for you. I will translate for Jason.

Jason N. Jiang (Translation)

Historically, with the increase in price twice a year, on January 1st and July 1st, we have done so in this year as well. Next year, we will continue to expect, because customers are already getting used to it, we continue to expect to have two price increases, at the beginning of the year and middle of the year on January 1st and July 1st.

For us, in terms of discount, if you look at how there is very strong demand for our commercial location network in the major cities, so we are, given the high demand and high use rate of our network, we are actually getting more and more customers start using our other channels, such as channel B and other, like the golf channels, shopping mall channels, and fashion channels, so on and so forth. So by doing that, we are also increasing the overall network revenue potential for Focus Media.

On your question regarding discounts, reducing discount is always a thing Focus Media wanted to do but that needs to be a gradual process. If you look at our comparable media, which are local TV in China, typically their discount rates are very, very high. We want to increase price and at the same time, gradually reduce discounts. But if you move too aggressively, although there is very strong demand, it may have a negative — let’s say it may affect our relationship with advertisers negatively.

We will use measured steps in terms of reducing discounts but we will continue to push up our listing price going forward.

Richard Ji – Morgan Stanley

My second question is regarding your in-store network, and obviously we see some seasonal rebound this quarter versus last quarter. Can you give us some highlight about the sell-through rate in this segment, as well as pricing trend, et cetera, especially given the competitive dynamics?

Daniel M. Wu

Let me translate for Jason.

Jason N. Jiang (Translation)

If you look at all the media offerings of Focus Media, in-store network is actually one of the areas which performs relatively weak. This is due to we do have a significant competitor in the market who are very aggressive in building their business and also, of course, there are mergers and acquisitions among the stores, including the acquisition by [Carapol] and also TrustMart, so all those things will result in larger market share for those store chains.

So that will give them more bargaining power for the store cost, location cost, which is different from our commercial location network where we don’t expect any of those scenarios. But in the in-store network, due to the concentration of stores, of course, they have more bargaining power. We talked about this many times in our previous calls with you.

If you look at our in-store business, we still see a strong customer pick-up and also demonstrated by revenue growth, so it is still a growing business. Going forward, we want to increase our intensity in our competitive strategy to competing with our competitors in this area. Of course, given today, we do have the largest in-store network but at certain major store locations, we want to be more competitive going forward when we are facing any competitive situation. Also, we want to increase the number of LCD screens we cover in some of the major stores to increase the customer, increase the result of our advertising effectiveness for our advertising customers.

Going forward, we are still very, very — we are a strong believe of the in-store advertising business. Going forward, our strategy will become a little bit more aggressive than historical levels.

Richard Ji – Morgan Stanley

Thank you.

Operator

Your next question comes from the line of Ming Zhao from SIG. Please proceed, sir.

Ming Zhao – Susquehanna Financial Group

Thank you. Good morning. I have a question on the gross margin of the commercial location. If we look at the year-over-year or quarter-over-quarter, apparently it’s growing. However, if I compare that with the low 70s in the third quarter and the fourth quarter, there is actually a big drop. Could you comment on that? What should we be looking for in the following quarters?

Daniel M. Wu

I think if you look at our business, actually if you go back to 2006 and 2005, and even 2004, this business is a fixed cost business, so in the quarter when we do see higher demand and high revenue, given the relatively fixed cost nature, the margin characteristics are different, so you cannot compare different quarter with different quarter for Focus Media’s commercial location business, just like you cannot compare Q1 and Q2.

I think the more appropriate comparison for you to make to make any understanding of how the margin trend of the business is compare quarter to quarter.

Ming Zhao – Susquehanna Financial Group

Okay, so you are talking about that —

Daniel M. Wu

So you should compared same quarter over last year is what I’m saying, not sequentially, or sequentially backwards. So when you want to make any conclusion of the margin characteristics of the business, you should compare Q2 of 2007 versus Q2 of 2006, because there is seasonality in our business.

Ming Zhao – Susquehanna Financial Group

All right, I understand that. All right, the second question I have is looking at the balance sheet, the good will — is this some of the earn-out payment? Also, why the share base you use for the second, for the third quarter EPS calculation has gone up?

Daniel M. Wu

Sure. Good question. I think first of all, the good will increase is due to some of the earn-out but also due to the Allyes acquisition. When we make acquisitions, we need to do basically purchase price allocation and some of the purchase price allocation, actually the majority of those purchase price allocations will go to good will. So that’s why those are the result — as you know, Focus Media has been quite accretive historically so that will result in a higher good will.

In terms of share count, if you remember, we had, when we acquired Frame Media, we had an earn-out agreement. The earn-out agreement basically saying within one year, if they reach a number of — I remember it was $8 million to $16 million, so if they reached the high end of their net income contribution, we’ll be issuing additional shares to Frame Media shareholders, and those shares were issued late in Q2. So if you look at Q2, the impact was not that significant. It’s because those shares were issued late in Q2. But in Q3, the share count will have a full quarter effect, so that is why we provide you guidance that the average share, fully diluted share outstanding when we calculating those guidance, we use a higher total number of shares outstanding, based on our knowledge of shares issued.

Ming Zhao – Susquehanna Financial Group

Okay, but back to the good will, I thought that the Allyes acquisition was closed in your first quarter. It’s already shown up in the first quarter’s good will increase. Why is it still here in the second quarter?

Daniel M. Wu

But you are comparing to the two columns, one is December 31, 2006 and June 30, 2007, right?

Ming Zhao – Susquehanna Financial Group

No, I’m comparing the Q1 versus Q2.

Daniel M. Wu

If you think about — we just talked about the earn-out of Frame Media, right? So the earn-out will result in a different valuation, so that will also increase the good will because the shares were issued after the end of Q1 of 2007. Does that make sense to you?

Because when we pay them additional consideration based on the earn-out, those will increase the total acquisition value of Frame Media, and that particular adjustment will hit in Q2 of 2007.

Ming Zhao – Susquehanna Financial Group

Okay, so it’s mainly due to earn-out rather than the Allyes, right?

Daniel M. Wu

Compared to March 31, 2007, you are correct, but I thought you were referring to the table we provided in the press release, which is comparing June 30, 2007 versus December 31, 2006.

Ming Zhao – Susquehanna Financial Group

Okay, I’m comparing Q1 versus Q2. Thank you very much.

Operator

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

Aaron Kessler – Piper Jaffray

A couple of questions; one, can you comment whether you made any acquisitions in the quarter? And then, wireless was really strong. Were there any acquisitions in that? If not, what is explaining the really strong growth in there? And then I have a couple of follow-up questions.

Daniel M. Wu

Yes, I think we do make acquisitions. If it is a material acquisition, we will provide you a public release but for smaller acquisitions, we don’t. But we would report that in our annual report at the end of the year.

The wireless growth is due to both organic growth and also acquisitions. As you know, we are right now in the process of building or developing our wireless advertising business. That business is a non-content based, advertising driven, location driven, or demographic driven, SMS, MMS based advertising business model and that particular business, we do see continued growth as more and more advertisers become more educated to this business model and see the effectiveness of this advertising.

As we also discussed in the last quarter conference call, it is difficult for us to give you the breakdown of organic versus acquisition because once we acquire a small player in this particular sector, those players’ network and as well as their distribution platform will be integrated into our existing larger network and platform. So it becomes one company, so it is very difficult to separate out what the contribution going forward from those small acquisitions.

Hopefully that addressed your question.

Aaron Kessler – Piper Jaffray

And then just a couple of follow-ups; on the acquisition front, did you acquire — we heard a rumor that you acquired iResearch. Maybe if you could confirm that. And then also, the guidance is all the upside from the Allyes segment, or is there some upside from the commercial and the wireless business as well in the guidance for Q3 and Q4 revenues?

Daniel M. Wu

First of all, I’ll talk about guidance first and then coming back to your first question, Jason is going to answer that question. For the guidance, as we said, the increase of the guidance is principally due to the faster growth of the Internet advertising business. That answers your second question.

Regarding iResearch, I will ask Jason to answer your question.

Jason N. Jiang (Translation)

Internet advertising business is a long-term strategy of Focus Media. iResearch, we did acquire the business but it is still run as an independent entity under Focus Media. That particular acquisition will allow Focus Media to have a better understanding of the Internet trend in China, understanding of the websites and also, as going forward, will have the important strategy of Focus Media’s Internet advertising is behavioral-based advertising, which is performance media.

By having iResearch, we will be able to have better insight into the development and also let’s say changing of the Internet industry in China, allow us to have a better decision-making power in our strategy going forward. So going forward, iResearch will continue to provide as it did before, a lot of the information to the public for fees, but iResearch will also do some specific proprietary studies just for Focus Media, to help us to improve the growth of our advertising business.

Aaron Kessler – Piper Jaffray

Great. Thank you.

Jason N. Jiang (Translation)

Just one last point, because you understand Allyes has a huge base of this software deployment and its user database, because the wide use of its software. One of the things we can do is iResearch will be able to better to focus on analyzing that user traffic and allow us to improve the advertising business model and advertising effectiveness of the Internet advertising on Focus Media’s business.

Aaron Kessler – Piper Jaffray

Thank you.

Operator

Due to time constraints, our final question will come from the line of James Lee from WR Hambrecht. Please proceed, sir.

James Lee – WR Hambrecht+ Co.

Is there any way you can elaborate on the growth driver of the mobile business a little bit? Obviously you made some acquisitions, you talked about that a little bit. Maybe you can talk about, is it more of the expansion of your sales people actually selling the mobile advertising product? Is it more of a geographic expansion, maybe entering into new cities? Or is it more the product expansion, like you talked about maybe adding location-based services into your product mix that’s helped in driving the mobile advertising revenues?

Daniel M. Wu

Sure. First of all, I apologize I wasn’t able to see you the last time you were here. We were very busy with a lot of things. On the mobile advertising business, we do think it is an early stage growth industry. The growth is mainly coming from, because we do have the single largest mobile advertising platform, the growth is coming from new customer acquisitions and by expanding into new industries or a new customer base through either organic growth, as well as acquisitions.

For example, by a small acquisition, a particular target who has strength in enterprise messaging systems, we will be able to integrate that into our platform, reducing the cost barrier and help them to better monetize their customer base by understanding or share the same vision of how the mobile advertising business is going to grow.

It is hard to — I’m not trying to avoid your question. It is coming from both customers, acquisitions as well as from the expansion into other industries.

Was that helpful? James? Hello? Operator? Operator? Did we lose James Lee? Hello?

Operator

His line is open.

Daniel M. Wu

He is not. Okay, so let me summarize for the call. First of all, I do want to emphasize today, with the acquisition of Allyes, with the continued expansion of digital frame 2.0, Focus Media is the largest digital media group in China today. Our three major business lines, including digital out-of-home, Internet advertising and wireless. We try our best to look at, to understand the customer’s need and provide integrated digital media solutions to our customers.

Today, if you look at Focus Media versus even two years ago when we went public, where the majority of the revenue from 90% coming from our commercial location network, or if you look at a year ago where the majority of the revenue was still coming from the commercial location network, in-store and frame 2.0, today our business is very different.

What we tried to build is the largest digital media platform in China for our advertising clients for any place, any screen, any time. Anyway, that concludes our conference call. Thanks very much for your time. Operator.

Operator

Ladies and gentlemen, this concludes the presentation. Thank you for your participation in today’s conference. Have a great day. You may now disconnect.

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