A tough first quarter for China’s Focus Media Holding, characterised by acting CFO Alex Yang as “the most challenging period we have ever experienced”, saw revenues shrink across the board as advertisers shied away from spending.
But the company anticipates modest recovery for the second quarter, particularly in the FMCG and transportation categories, thanks in part to the Chinese government’s economic-stimulus package.
Focus’s first-quarter financials are more difficult than usual to disentangle because of the expected upcoming sale of the bulk of its digital out-of-home business to Chinese Internet advertising giant Sina.
That deal is currently been scrutinised by the country’s regulators, a process that has pushed the expected completion date back as much as three months, to the end of the third quarter. But its imminence means that for its first-quarter results – and most probably for its second-quarter figures too, as the Sina transaction is unlikely to be completed before mid-year – Focus has had to divide its operations into those that are continuing post-Sina, and those that are the subject of the acquisition, which it is classing as discontinued.
Continuing operations – cinema, outdoor billboards, and online – showed net revenue of $66.7m, down 24 percent on the previous quarter and 14 percent on the same quarter in 2008, but still well above Focus’s guidance of $55.5m.
Discontinued operations – the LCD network that first brought Focus to the attention of the world’s out-of-home sector, the elevator poster-frame network, and in-store digital signage – brought in $64.4m, down 39 percent on the last quarter of 2008 and 23 percent on the year-ago quarter, and a little shy of Focus’s $65.7m guidance.
And more detailed examination confirms that most of the jewels in the Focus crown have become somewhat tarnished by economic conditions.
Of the continuing operations, cinema and billboards were up in revenue from the first quarter of 2008, while Internet sank slightly; all dropped, however, from the last quarter. And while cinema and billboards were still 25 percent more profitable than in the first quarter of 2008, Internet profits declined by 18 percent. All these continuing operations also declined in profitability compared with the fourth quarter. So while the picture against a year ago is mixed, compared with the end of 2008 the first quarter was grim indeed.
Likewise, the operations that Focus is selling to Sina all sank, in terms of both revenue and profitability, against both the year-ago quarter and the previous period. The gentlest declines in percentage terms were shown by the in-store business although it also remains the smallest of these three businesses, which are led in revenue terms by the LCD network.
Perhaps the most telling evidence of the downturn’s effect is that Focus appears to be pulling back from its once rapidly-expanding digital poster-frame business, among the operations it plans to transfer to Sina. Executives said that while the company would maintain its LCD advertising network at its full current extent, it would cease developing the poster-frame network because of low advertising bookings, and could even eliminate some locations.
For the next quarter, it is discontinued operations that Focus expects to thrive. It predicted that second-quarter net revenue from continuing operations would only inch upward quarter-on-quarter to $69m, while net revenue from discontinued businesses would grow by more than 25 percent to $81.5m.
And in a further irony, Deutsche Bank – which just weeks ago downgraded Sina stock from hold to sell – has raised its rating on Focus from hold to buy. Focus stock is traded on the U.S. NASDAQ exchange, as is Sina’s.
The bank said it expected this last quarter to represent the bottoming-out of Focus’s business, that 2010 profit from out-of-home operations could return to the levels of 2006, that the firm is trading at a low price-earnings ratio – and most significantly, that while it thinks the Sina deal may now be less likely to be completed, this could force Focus management to work harder at improving the performance of its out-of-home advertising properties.
“Continuing” and “discontinued”, Deutsche Bank appears to believe, could be very temporary terms indeed.