Business Context and Reporting Period
Company: AirMedia Group Inc. (Nasdaq: AMCN), a leading operator of out-of-home advertising platforms in China targeting mid-to-high-end consumers.
Reporting Period: Second Quarter ended June 30, 2009.
Filing Date: August 17, 2009 (Form 6-K).
Business Overview: AirMedia operates digital TV screens in 41 major airports, digital frames in 28 airports, and in-flight screens on 12 airlines. The company is expanding into traditional media in airports and has secured rights to operate outdoor advertising at Sinopec service stations.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | Q1 2009 |
|---|---|---|---|
| Total Revenues | $36.8 million | $29.8 million | $32.8 million |
| Net Revenues | $36.3 million | $28.5 million | $31.7 million |
| Cost of Revenues | $36.8 million | $17.5 million | $25.9 million |
| Gross Profit/Loss | ($0.5 million) | $11.0 million | $5.8 million |
| Operating Expenses | $7.9 million | $5.0 million | $8.1 million |
| Operating Loss | ($8.4 million) | $6.0 million (Income) | ($2.3 million) |
| Net Loss (GAAP) | ($7.0 million) | $7.3 million (Income) | ($1.3 million) |
| Net Loss per ADS (GAAP) | ($0.11) | $0.11 (Income) | ($0.02) |
| Adjusted Net Loss (Non-GAAP) | ($5.4 million) | $8.5 million (Income) | $0.6 million (Income) |
| Cash & Short-term Investments | $118.9 million | $161.5 million (Dec 31, 2008) | $146.8 million |
Note: Non-GAAP measures exclude share-based compensation and amortization of acquired intangible assets.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 23.7% year-over-year (YoY) and 12.3% quarter-over-quarter (QoQ). Growth was driven by digital frames in airports (+50.3% YoY) and traditional media in airports (+5,361.5% YoY due to new operations in Beijing and Shenzhen).
- Profitability Decline: The company swung from a net income of $7.3 million in Q2 2008 to a net loss of $7.0 million in Q2 2009. This was primarily caused by a 110.4% YoY increase in cost of revenues.
- Cost Structure: Concession fees rose 146.5% YoY to $28.1 million, representing 77.3% of net revenues (up from 40.0% in Q2 2008). This increase is attributed to new concession rights contracts where fixed fees are incurred before revenues ramp up.
- Product Mix Shift: Revenues from digital TV screens in airports decreased 30.6% YoY as advertisers shifted budgets to digital frames, which offered higher discounts.
Guidance, Outlook, and Risks
Management Commentary
Management believes the worst impact of the economic slowdown is over, citing strong revenue growth despite the environment. The focus is shifting to increasing utilization rates of existing media resources. New investments in media resources are expected to generate returns after a lead-time.
Guidance
- Q3 2009 Revenue: Expected to range from $37.0 million to $40.0 million (9.8% to 18.7% YoY growth).
- Concession Fees: Expected to be at least $29.5 million in Q3 2009 and $35.5 million in Q4 2009 due to new contracts (e.g., Sinopec service stations, Guangzhou LED screens).
Risks and Contingencies
- Concession Fee Pressure: Fixed concession fees are rising faster than revenue generation from new assets, compressing margins.
- Economic Sensitivity: Reliance on advertising budgets which may fluctuate with economic conditions in China.
- Concentration Risk: Significant revenue dependence on the five largest airports and three largest airlines in China.
- Utilization Rates: Utilization rates for digital TV screens in airports and traditional media declined QoQ due to increased inventory availability outpacing sales.
Investor Verification Checklist
- Concession Fee Ramp-up: Verify the timeline for new concession rights (Beijing, Shenzhen, Sinopec) to reach revenue breakeven.
- Utilization Trends: Monitor if utilization rates for digital frames and traditional media can improve to offset the high fixed costs.
- ASP Compression: Assess the sustainability of Average Selling Price (ASP) declines in digital frames (-68.3% YoY) and its impact on long-term margin recovery.
- Liquidity Position: Confirm cash burn rate given the $7.0 million net loss and $118.9 million cash balance.
- Acquisition Integration: Track the closing and integration of the $7.8 million acquisitions (Dominant City Ltd. and Beijing Union of Friendship Advertising Media Co., Ltd.) expected in Q3 2009.