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On August 16th, Beijing time, Focus Media released its first half-year results for 2022. Since some first-quarter operating indicators have been disclosed before, we mainly focus on the "worst" performance during the second quarter of the epidemic.
(1) The single-quarter revenue in the second quarter was 1.913 billion yuan, a year-on-year decrease of 49%, but exceeded Dolphin Analyst's previous expectations. Macro + regulation + epidemic, Focus Media became the most injured one. Among them, the revenue from internet advertisers fell by70% year-on-year in a high base, which is shockingly low.
(2) In terms of key tracking indicators, the gross profit margin of Focus Media fell sharply to 52% in the second quarter, almost the same as in the first half of 2020 when the epidemic hit. The gross profit margin of ladder media from the first half of last year dropped from 70% to 58.6%, while the gross profit margin of cinemas and other media quickly rebounded due to rent reductions and proactive location contraction, but this "falsely high" gross profit margin is only temporary, and it does not represent the level that can be achieved under steady state.
(3) In terms of expenses, the sales expenses with the highest proportion of Focus Media accelerated their decline in the second quarter, and layoffs were fierce. Other management and R&D expenses increased slightly or remained stable, and because their absolute values are not high, their changes have little impact on the final profit.
(4) However, it is worth mentioning that both the credit/asset impairment and financial expenses increased sharply year-on-year. The financial expenses were mainly affected by foreign exchange gains and losses in the first half of the year, but the credit impairment expenses indicate that some customers have begun to have problems with repayments. This was also something that Dolphin Analyst expected before. With drastic economic pressure and the winter of capital, survival problems have become a problem for many small and medium-sized enterprises. The advertising that was heavily invested in naturally became a bad account.
(5) In the end, under the situation of income lagging and forcibly shrinking expenses, Focus Media only squeezed out less than 300 million yuan in core operating profit (excluding investment income), a year-on-year decrease of more than 80%. This data is not enough for the same period last year. It is still in the single digits. Although there are warnings, it is still devastating.
(6) This time Focus Media did not provide any guidance in the financial report, but the situation in the second half of the year is still complex. It is recommended to pay attention to the performance conference call of the management team. Dolphin Analyst will also release the minutes of the meeting in the investment research user group and the Longbridge app for the first time. If you are interested, you can add WeChat account "dolphinR123" to join the group.
Dolphin Research View
Given the current economic environment, Focus Media's difficult days are also expected. Although the performance in the second quarter was unexpectedly disastrous, it will eventually pass. In Sullivan's report, Focus Media's absolute advantage on important ladder media locations represents the long-term logic of Focus Media that has not been broken. So for now, all that is needed is to endure the cold.
Perhaps in the short term, due to the fact that the Internet still chooses to "reduce costs and increase efficiency," Focus Media's performance will still be affected, but we see that Focus Media is expanding into other industries to make up for the headwinds in the internet advertising field. When it comes out of the worst period of the second quarter, all that can be expected is the warming up.
Detailed Interpretation of this Financial Report I. Revenue underperforms expectations due to "culprit" in the internet industry
Based on the semi-annual report, Dolphin Analyst found that Focus Media's total revenue for Q2 this year was RMB 1.913 billion, a YoY decline of 48.8%, slightly exceeding the expectations of the Dolphin team. Under the triple impact of macroeconomic factors, the pandemic, and tighter regulations, Focus Media has been hurt the most. Looking at the total revenue, Focus Media was almost on par with Q1 2020, the quarter that was hit hardest by the pandemic last year.
Breaking down the revenues by product, while building media, which accounts for nearly 94% of the total, still has traffic, its revenue has declined by 47% YoY. However, cinema advertising, which is subject to strict control, as well as other outdoor advertising in commercial centers, performed even worse, with a YoY decline of around 70%.
When focusing on different advertisers, the biggest drag on Focus Media's revenue growth in H1 was Internet companies, which saw a 70% decline in advertising spending with Focus Media. The change in client structure has brought risks of unstable clientele, which is worth noting. In the first half of last year, it was still the final period of investment expansion for internet companies. There was a continuous flow of financing and IPOs, and they were naturally generous in marketing and acquiring customers. Therefore, there was extra pressure on the high base this year. However, looking at MoM growth, revenue from the internet industry in the first half of this year of RMB 720 million is still significantly less than the RMB 1.8 billion in revenue in the second half of last year, when the industry was already hit by regulations.
The reasons for this are, in addition to the impact of the economic downturn and weak consumer spending power faced by all industries this year:
(1) Internet companies encountered difficulties in business development due to the end of the traffic dividend and stricter regulation last year, leading to abandonment by their investors. At the beginning of this year, in order to save themselves, they began to advocate "reducing costs and increasing efficiency," and the marketing budget was the first to be cut.
(2) Since the second half of last year, the education and gaming industries have been undergoing industry rectification, online education has been suspended, and gaming version numbers have not been issued, so the two major advertising gold mines have closed their wallets, resulting in a difficult situation for advertising platforms.
(3) In this case, Focus Media is suffering even more, because under a weakening economy and insufficient advertiser budgets, brand advertising is less cost-effective than performance advertising. Although the cost of online traffic is constantly increasing, for most struggling businesses this year, performance advertising is still more appropriate due to its ease of delivery and lower threshold for budgets.
However, on the other hand, if we compare the growth rate changes between 2H21 and 1H22, we will find that although there was a pandemic in the first half of the year, some industries have shown signs of recovery, such as transportation, real estate and home furnishings, as well as other miscellaneous businesses. For the daily consumer goods industry, which contributes the most to Focus Media, the decline is also relatively limited (around 10%), and not as terrible as expected. Looking ahead to the second half of the year, most Internet companies are likely to continue to focus on "reducing costs and increasing efficiency," but the pressure in the second half of the year will be less than in the "thunderous" contraction of the first half of the year. At the same time, game distribution has become more active since the April edition restart, and recent research shows that there has been a significant increase in investment.
2. Media placement expands against the trend in Q2
All advertising business is essentially traffic-based. For Focus Media, its traffic lies in the layout of ladder media placements through property leasing to occupy the closed environment that urban white-collar workers must pass through on their way to and from work.
During the last round of the epidemic in 2020, the competition for media placements between Focus Media and its peers was temporarily suspended. However, starting in 2021, Focus Media resumed its expansion with the recovery of the economy. Behind its seemingly quiet surface-level optimization, Focus Media is quietly expanding in the "inner layers" by closing low-efficiency sites while expanding new sites. In the second quarter, this expansion began to show.
Consistent with its previous approach, Focus Media is still making small-scale expansions of ladder media placements in second-tier and overseas cities. First-tier cities have seen a slight increase, while third-tier and lower-tier cities continue to be withdrawn due to low monetization efficiency and intense competition.
Data source: Company financial reports, Dolphin Research and Analysis.
If we compare the distribution of Focus Media's placement with that of one of its main competitors, "New Wave Media," we find that Focus Media's point-of-screen placement is not significantly better in terms of total quantity, especially in terms of New Wave's core competitive advantage: smart screen placement, where New Wave actually performs better. However, the main difference between the two lies in the distribution area, with Focus Media occupying office buildings in first- and second-tier cities, and New Wave focusing on community buildings.
New Wave's territory is the market that Focus Media hopes to further penetrate in the future, so expanding site placements against the headwind is not only to maintain its own competitiveness, but also to achieve the goal of quickly taking aim at its peers by relying on the industry's short-term decline.
3. Lowest profit margin in two years, but the darkest moment will pass
In recent years, under the uncertainties brought about by competition and the epidemic, Focus Media's gross profit margin has fluctuated greatly, largely due to the fact that the highest cost, rent, tends to be relatively fixed. Therefore, as long as there is pressure on the revenue side, the erosion of rent on profits is visible to the naked eye. But the other side of the coin is that when the income side recovers, the elasticity of profits will also be very considerable.
Currently, we are in a difficult period of low profits. In the second quarter, the gross profit margin returned to the level during the first half of 2020 when the pandemic broke out, while the net profit attributable to the parent company fell nearly 70% year-on-year. Although there has been a performance warning before, the final performance is at the middle level of the guidance, but if we look at the core operating profit (excluding investment income) alone, the year-on-year decline exceeds 82%.
From the perspective of gross profit margin, the main drag comes from the building media. Although the operating situation of cinemas and other media is worse, the contraction of screen locations is obvious, and some have rent reduction, so the erosion of profits is not so severe.
Under pressure of gross profit margin, Focus Media has adopted the method of quickly reducing the sales team to reduce unnecessary operating expenses. In the second quarter, sales expenses decreased by 42% year-on-year, further accelerating from the first quarter. However, due to the greater decline on the income side, the expense ratio did not see optimization, but rather further eroded the profit margin.
In addition, the credit impairment expenses increased significantly in the second quarter, with a year-on-year expansion rate of over 300%. This is also a warning sign that, with the continued economic pressure, there may be more small and medium-sized advertisers with poor management, making it difficult to collect payments and ultimately becoming bad debts.
Finally, the core operating profit was RMB 286 million, down 82% year-on-year. Only after disposing of some financial products and equity investments and significantly increasing investment income did it achieve a net profit attributable to the parent company of RMB 490 million in the second quarter, a decrease of 68% year-on-year, which is somewhat alleviated compared to the situation of the core operating profit.
Dolphin Analyst "Focus Media" historical article for earnings season
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深度
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