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Focus Media Holding Ltd. Message Board

  • paultradestoday paultradestoday Nov 12, 2008 3:54 PM Flag

    CGEN is THE problem

    I've given this some thought.
    In-store analysis of the 9mos ending 9/30/08:

    Rev = $56.4 million

    COR = 48.8

    Gross profit = 7.6

    Net income therefore is less than ~ 4 million for the first 9 months (can’t calculate exactly) for combined in-store which includes the focus businesses before CGEN. (Unknown amount of exact contribution from any one piece of that pie.) So CGEN is probably even less.

    CGEN needs to exceed 9 million in Net Income in 2008 in order to get second payment of up to 90 mil. Less than $9 mil and they get 0. That will make the key people still running CGEN less rich. In fact FMCN could walk away from the whole mess according to language in the contract.

    The contract calls for CGEN’s management to run the business but since they are not making money to validate the earn out this may be an opportunity for FMCN to remove CGEN key management types with less expensive buyouts and to completely restructure and run the in-store business. It looks like in-store was and continues to be poorly run by the existing key players from CGEN. There are two payments of $90 million due in 12 month time frames starting Jan 08 based upon CGEN’s management meeting the $9 million minimum net income requirements.

    So my guess has the in-store running at 9 – 10 million/qtr net rev through 2Q09 (versus ~ $17million 3Q08) with removal of less profitable locations. This means removing 15 – 30% of the current displays (already amortized), a similar reduction in intangibles, people reductions, to contribute to the one time non-cash material adjustment in 4Q. This will take the board’s approval and some legal stuff because the contract says that FMCN can not impede the ability of CGEN to meet the 9million net income goal.

    This will start to help FMCN get back on tract. COMMENTS.

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    • Also, to place more credibility in my thesis: In-store DSO goes from 300 to 260...holy crap what an improvement!!! Most likely accomplished by writing off the bad debt beween 300 and 260. This will be taken out by end of year and overall DSO for the company will get down to less then 125 days (currently overall at 135).

      FMCN revenue recognition policy; must meet all:
      1. agreement exists with customer
      2. delivery of service occurs
      3. price is set
      4. collection of AR is resonably assured (interesting wiggle room)

      FMCN bills out 60-90 days after above (too slow in my opinion). So even if everything gets paid when billed the recognition of revenue is at least a quarter early. Reserves are established for uncollectables defined as greater than 6 months. CGEN AR was a mess one can only imagine what their policy was.

      • 1 Reply to paultradestoday
      • I really think mgt should restructure their overall AR policy. I agree even 125 days DSO is still too long a cycle. FMCN keeps saying their advertisng channels are of low cost (and effective) and their clients are mostly big companies (so they should not have problem to pay), so why not collecting money upfront? Given the downside economy trending, it may not be bad idea to provide discount pricing alluring to advance collection.

 

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