Wednesday 12 November 2008
Focus Media Slower Growth Show the Severe in Chinese Ad Industry
The global financial crisis has taken the toll of advertising industry in China, with Focus Media, the country’s leading digital media company yesterday announcing its third quarter 2008 results growing on a slower pace. The company also has seen advertisers cancelling and postponing contracts and holds a conservative outlook for the fourth quarter and 2009.
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Focus Media Slower Growth Show the Severe in Chinese Ad Industry
11 November 2008
The global financial crisis has taken the toll of advertising industry in China, with Focus Media, the country’s leading digital media company yesterday announcing its third quarter 2008 results growing on a slower pace. The company also has seen advertisers cancelling and postponing contracts and holds a conservative outlook for the fourth quarter and 2009.
The company recorded total revenues of US$224.8 million, up by 63.7% year-on-year, but a rather narrow quarterly growth at 6.2%. Advertising service revenue from in-store network was US$16.8 million, declining from US$17.0 million in the previous quarter. Internet advertising service revenue was US$70.8 million, down by 7.0% from $76.1 million in the second quarter.
Dr. Tan Zhi, CEO of Focus Media, said “we face an extremely challenging advertising environment” and “started to see clients cancelling and postponing advertising contracts since September.” He attributed this to the global financial turmoil and softening Chinese economy which have a negative psychological impact on corporate decision makers.
The online advertising spending has slowed after the Beijing Olympics. In addition, despite that the company have reduce location costs of in-store advertising business in the process of integrating CGEN, acquired by Focus in January, the sector still hasn’t been able to generate profits and needs to be further restructured in the fourth quarter.
Dr Tan said the decline of business have incurred “cross board”, and disclosed that some diary companies have terminated advertising agreements after the outbreak of the melamine scandal. “Normally, at this time of the year, we should be discussing next year’s budget with clients, but now we are talking about how to cope with the current situation and spend the left-over budget before the year end.”
The company set a conservative fourth quarter guidance of total net revenues ranging from US$190 million to US$200 million, and non-GAAP net income between US$60 million and US$61 million. Meanwhile, though the routine rate hike in January is still on the plan, the percentage of increase will be lower in 2009, according to Dr. Tan.
In addition, Focus expects its capital investment and pace of acquisitions to slow down materially in 2009. Daniel Wu, the CFO, disclosed that the capital investment will drop from US$65million this year to below US$30million in 2009.
Wu said the company has no material investment in 2009. “We have bought 20,000 to 30,000 digital frames for next year and will continue to install 1000 to 2000 units every month”, he said Focus would continue to expand its network coverage next year, but at a slower pace than 2008, and will terminate the areas with no and little economic value in order to optimize the network coverage.
The Focus model to attract target audience to watch commercials while waiting for the elevator or at time of boredom was once regarded as classic case study of the so-called “blue ocean strategy”. Over the last five years, the company has been expanding at a breakneck speed through aggressive acquisition, but now is facing “the most severe in the modern history of the Chinese advertising industry.”
Many young Chinese companies, such as Focus Media, born from China’s economic boom in the last decade, are now experiencing the first economic downturn. In the meantime, the global financial crisis will also serve as an acid test for the sustainability of their business models.
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