Searchmedia Holdings (NYSE AMEX:IDI)

Audited Financial Results for the Full Year Ended December 31, 2010

• Revenue increased 30.0% to $49.0 million in the full year of 2010 from $37.7 million in the full year of 2009 primarily due to the continued expansion of the Company's outdoor billboard, elevator and transit platform, an increase in the amount of contracts and the addition of the Company's newly acquired subsidiary, Zhejiang Continental. The Company grew its number of advertising contracts by 7.6% to 1,509 contracts from 1,403 contracts in the prior year period and witnessed increased average revenue per customer as well. Revenue of $49.0 million in the full year of 2010 differs from revenue of $51.7 million discussed in the Company's preliminary results announced on March 28, 2011, mainly due to a contract modification from one of SearchMedia's subsidiaries as well as incremental sales tax accruals.
• Gross profit increased 28.9% to $12.5 million from $9.7 million in the prior year period, reflecting growth proportional to that of revenue. Gross margin remained flat at 25.6% from 25.7% in the prior year period due to changes in the Company's revenue mix as well as costs associated with its network expansion. As the Company grows its occupancy rates and average revenue per contract, gross margins are expected to trend higher as well.
• Total operating expenses for the full year of 2010 were $16.7 million compared to $17.2 million for the prior year period. Sales and marketing expenses increased 32.4% to $4.5 million from $3.4 million in the prior year period, primarily due to a proportional increase in sales commissions as well as greater investment in marketing expenses to drive business expansion. General and administrative expenses were $12.2 million compared to $13.8 million in the prior year period, reflecting an increase in salary expense as a result of acquisition activity, higher share-based compensation expense, offset by lower professional fees and other expenses compared to 2009.
• Operating loss was $4.2 million compared to a loss of $7.5 million in the prior year period.

Other expenses for the full year of 2010 increased to $41.1 million from $10.8 million in the prior year period, primarily due to a loss on impairment of goodwill and intangible assets of $39.4 million in 2010 compared to $15.7 million in the prior year period. This asset impairment loss was incurred in conjunction with the Company's efforts to revalue historic acquisitions in order to lay a stronger foundation for future growth.

As a result, net loss for the full year of 2010 was $46.6 million compared to a net loss of $22.6 million in the prior year period. Net loss for the full year 2010 includes the impact of the following expenses, which management believes are unique to 2010 and not expected to impact the Company's financials on a normalized basis:

-- $39.4 goodwill impairment which reflects the writedown of goodwill from certain acquisitions completed in 2008; -- and $4.6 million related to restructuring the headquarter elevator business, abandonment of leases and extraordinary corporate expenses related to severance fees, headcount reduction, extraordinary legal and auditing fees and certain bad debt reserves. 

Net loss for the full year of 2010 also includes approximately $4.1 million of ESOP and intangible amortization charges.

• Excluding these items, the Company would have reported net income of $1.5 million.

Outlook

Paul Conway, Chief Executive Officer of SearchMedia, noted, "For the first quarter of 2011, we are pleased to announce that we expect all subsidiaries as well as the headquarter elevator business to be profitable. Moreover, we are extremely excited about the upcoming opportunities in China's media space and look forward to further building out our network through new concessions and accretive acquisitions."

SearchMedia Holdings Limited today provided preliminary unaudited financial results for the year ended December 31, 2010. 

For the year 2010, the Company expects net revenue to increase by 37% to approximately $52 million. Excluding the impact of acquisitions, the Company estimates organic revenue growth was approximately 25% for the year 2010. Revenue performance was driven primarily by growth in the Company's existing billboard businesses and high occupancy rates in the elevator business, as well as contributions from the Continental acquisition and a new bus concession. The Company also continued to sign new advertising contracts through the year with various auto, telecom, financial, travel, insurance and electronics clients, and witnessed increased average ad spend per client. 

The Company expects 2010 net income from acquired subsidiaries to remain stable on a year over year basis at approximately $9 million. Net income from acquired subsidiaries excludes the Company's headquarter elevator business and corporate expenses. In addition, net income from acquired subsidiaries in 2010 only included seven months of income from the Continental acquisition, which closed in June 2010. 

The Company's headquarter elevator business and corporate expenses incurred a net loss for the year 2010 of approximately $8 million. Approximately $3 million of this net loss reflects expenses related to restructuring the headquarter elevator business, and extraordinary corporate expenses related to severance fees, headcount reduction and extraordinary legal and auditing fees. In 2011, management believes the headquarter elevator business to be profitable, and expects recurring corporate expenses to be approximately $3 million for the year. 

SearchMedia expects to recognize goodwill impairment of $21 million for the year 2010, which reflects the writedown of goodwill from certain acquisitions completed in 2008. Excluding the impact of this goodwill impairment, the Company would expect to report net income for the year 2010 of approximately $1 million. Excluding the impact of the goodwill impairment and the $3 million related to restructuring the headquarter elevator business and extraordinary charges highlighted above, the Company would expect to report net income for the year 2010 of approximately $4 million. 

As of December 31, 2010, cash and cash equivalents totaled approximately $7 million.

Wilfred Chow, Chief Financial Officer of SearchMedia, commented, "We have begun to see visible improvements in our business as a result of the initiatives we have undertaken. Today, our elevator business has reached very high occupancy rates. We believe this achievement is a great testament to both the abilities of our management and the growth potential of our business. We have a comprehensive operation that is strong both locally and nationally in China, and one with excellent growth prospects. For the first quarter in 2011, we expect all of our subsidiaries and our headquarter elevator operation to be profitable. In addition, we continue to reduce costs throughout the Company."

November 1, 2010

Wilfred Chow, Chief Financial Officer of SearchMedia, commented, "We are pleased to have completed our annual report filing for 2009 today, which ends a transition process in which we carefully reviewed the Company's historical results. We are emerging a stronger, better organized company with a more robust finance division. Through this process we identified a number of unanticipated material weaknesses in our internal controls, which we have worked assiduously to correct. In addition to strengthening our procedures, we have hired additional accounting, internal audit and finance professionals, which augment support from external consultants. We believe the actions we have taken will make future financial reports more timely and effective."

Paul Conway, the Company's Chief Executive Officer, stated, "The first ten months of 2010, while extremely challenging, have also been productive. During this time we have bolstered our management team, pursued new concessions, made an accretive acquisition, and strengthened our internal resources to support future growth. Our base billboard business remains strong and we have seen solid growth in our transit and elevator business in 2010. We have also had significant advertising campaigns with certain auto, telecom, financial, insurance and electronics clients in 2010. In June, we successfully completed the acquisition of Zhejiang Continental Advertising Co., Ltd. ('Continental'), a profitable billboard company based in Zhejiang Province with over 10 years of operating history. We believe this was an important strategic transaction that enhanced the appeal of our outdoor media portfolio and strongly improved our ability to pursue additional concession opportunities within the attractive market of Hangzhou. In April 2010, we signed a one-year cooperation agreement to provide bus advertisements and signed a new unipole lease at the Beijing Capital International Airport, all of which began to contribute revenue late in the second quarter."

Chow continued, "This year we also put great emphasis on ensuring we have the best senior management team to lead SearchMedia going forward. This involved bringing in new leadership and it also required us to properly structure subsidiary agreements to ensure that key talent work together to achieve long-term goals. To this end, throughout 2010, we signed multi-year agreements with our seven largest subsidiary management teams aimed at encouraging focus on long-term performance goals. We also continue to evaluate promoting select talent from our subsidiaries to assume more responsibilities for the entire Company."

November 15, 2010

Paul Conway, the Company's Chief Executive Officer, stated, "The third quarter of 2010 was a productive quarter for us. Our billboard business remains strong and we have seen solid growth in our transit and elevator business. We have also signed significant advertising campaigns in the quarter with various auto, telecom, financial, travel, insurance and electronics clients. Furthermore, we are also excited to note that we are seeing a further increase in spending from our clients in the fourth quarter."

Wilfred Chow, Chief Financial Officer of SearchMedia, commented, "We are pleased to report our preliminary financial results for the nine months ended September 30, 2010. Throughout the past months, we have undertaken some key initiatives to strengthen our company and today, SearchMedia has grown into a stronger, better organized company."

Preliminary Unaudited Financial Results

For the nine months ended September 30, 2010, the Company anticipates $43 million in revenue and net income of $3 million. Non-GAAP net income excluding non-recurring and stock-based compensation charges is expected to be $6 million and net income from the Company's acquired subsidiaries is expected to be $8 million for the first nine months of 2010. These results reflect certain adjustments to the Company's first half preliminary unaudited results, which were made in coordination with its recently completed year end 2009 audit. The Company anticipates that it will recognize sequential quarterly revenue and net income growth throughout the full year of 2010. Further detail will be available upon the filing of the Company's first quarter 2010 financial report, which is expected to be completed by December 15, 2010.

Revenue and net income was driven primarily by growth in the Company's existing billboard and transit businesses and improvement in the elevator business, as well as contribution from the recent Continental acquisition and new bus concession.

Outlook

For fiscal year 2010, the Company is targeting revenue of approximately $61 million of revenue and net income from acquired subsidiaries of approximately $11 million. In addition, the Company expects net income excluding non-recurring and stock-based compensation charges to be approximately $8 million. Looking further ahead, based upon the underlying growth opportunities in its base business combined with the concession, acquisition and expansion opportunities that it is actively reviewing, the Company is targeting 2011 net income in the range of $17-20 million.

Searchmedia Holdings completes restatement:

On August 20, 2010, we announced that as a result of the continued internal analysis of our financial statements for the year ended December 31, 2009, the audit committee of our board of directors, based on management’s recommendation, determined that the historical financial statements of SearchMedia International for the years ended December 31, 2007 and December 31, 2008 should be restated. In reaching its decision to restate the 2007 and 2008 financial statements, the audit committee, among other matters, reviewed management’s analysis of SearchMedia International’s practices relating to the following:

  •   Revenue recognition and accounts receivable issues;

  •   Disclosure, approval, and documentation of transactions among entities related to prior owners of acquired subsidiaries (which we refer to as “related entity transactions”);

  •   Proper documentation of transactions;

  •   Recording of various erroneous transactions by certain employees;

  •   Recording of certain assets and other accounting irregularities related to acquisitions;

  •   Procedures related to diligence and approval of transactions; and

  •   Confirmation of payments related to acquisitions.

As a result of this analysis, we identified an overstatement of approximately $45.7 million in SearchMedia International’s previously reported revenue for the year ended December 31, 2008. On a restated basis, our net loss was $39.8 million in 2008. Restated total assets were $49.7 million in 2008.