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VisionChina Media Inc. (NASDAQ:VISN)

Q3 2012 Earnings Call

November 15, 2012 7:00 PM ET

Executives

Colin Wang – Director, IR

Limin Li – Chairman and CEO

Stanley Wang – CFO

Analysts

Chris Luan – Merrill Lynch

Wei Fang – CLSA

Gillian Chan – Morgan Stanley

Operator

Good evening and thank you for standing by for VisionChina Media’s Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the call over to your host for today’s conference, Mr. Colin Wang, Investor Relations Director for VisionChina Media.

Colin Wang

Hello, everyone. Welcome to VisionChina Media’s third quarter 2012 earnings conference call. The company’s third quarter 2012 earnings results were released earlier today and are available on the company’s IR website at www.visionchina.cn as well as on Newswire services.

Today you will hear from our Chairman and Chief Executive Officer, Mr. Limin Li, who will talk about our industry, our company strategy and business operations; and Mr. Stanley Wang, our Chief Financial Officer, who will take you through our financials and key operating metrics. After their prepared remarks, Mr. Li and Mr. Wang will be available for your questions.

Please note that today’s discussion will contain forward-looking statements made under Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our Annual Report on Form 20-F and other documents filed with the US Securities and Exchange Commission. VisionChina Media does not assume any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on VisionChina Media’s Investor Relations website at www.visionchina.cn.

I will now turn the call to our CEO, Mr. Li.

Limin Li

(Interpreted)

Hello, everyone, and thank you for joining us today. In the past seven years, VisionChina has undergone rapid growth in its early days and great expansion in recent years which has brought us both good and challenging time to company. Adapting our lessons learned through with the challenges for the current VisionChina Media operating environment has helped us to established revive the business initiative. They are guiding our future development. Our aim is to operate China’s largest nationwide mobile television broadcasting network.

In yet another economically challenging quarter was cautious sentiment in the advertising market. VisionChina Media has remained committed to achieving our overall internal targets. Total revenues in the third quarter of 2012 were up 18.2% quarter-over-quarter to $33.2 million, meeting with company’s guidance.

In the third quarter we firmly pursue our media platform optimization and cost control plans and restructure our acquired media assets that have high fixed cost and faster growing annual increases. In prior years, it’s terminated several unfavorable exclusive agency agreements acquired through Digital Media Group that had resulted in significant losses including those for the Hong Kong Airport Express line, Kowloon-Canton Through Train, Shanghai Intelligent Transport Information Signboards and Shenzhen Subway Line 1 in-train media assets.

In the third quarter we restructured the original exclusive agency agreement with Shanghai Metro TV which also – which was also acquired from Digital Media Group under the new contract, VisionChina Media pays media cost, pays only advertising minutes purchase, which releases us from unreasonably high fixed media costs and resulting gross loss in Shanghai.

The restructuring of our Shanghai Subway contract is an important step in our overarching plan to optimize media resources and control costs associated with our media platforms. We would continue to conduct close evaluations of our current media assets and engage in mutually beneficial negotiations with our local operating partners to assure a more favorable structure and provide a solid basis for our long-term growth while avoiding any negative impact on customer demand or our market presence.

Interesting and engaging content, whether it be satellite TVs most famous program Triple Growth making its first debut on our media platform or the mobile television industry’s latest fit for the voice of China air on Jun Satellite TV and our media networks remain vital to the success of TV media. Being the only outdoor extension of traditional TV, we are fully tapping into the potential of the TV content available on our media platforms. We’re also set up a programming innovation center and invite it to talented industry experts Mr. Huimin Zhang and Mr. Zhenhong Xie to join our company in the third quarter.

Their decade of extensive experience in TV programming innovation, large scale event planning as well as advertising marketing will be extremely beneficial to the development of our new programming innovation center.

Prior to joining VisionChina Media, Mr. Huimin Zhang, one of the key founding members of Huimin Satellite TV was also the head of its advertising department. During his tenure, overseeing the advertising department, its advertising revenue was ranked among the top eight provisional Satellite TV stations in China.

Mr. Zhenhong Xie is the Senior TV programming and innovation expert with extensive knowledge regarding television operations and comprehensive industry connections at home and abroad. He was also the programming director in two well known satellite TVs. A number of TV programs he produced and operated have received national prizes and are highly regarded within the industry.

We have continued to try and deepen our marketing compression with various leading satellite TV stations with the aim of leveraging these relationships to create incremental advertising sales opportunities for highly rated programs. Mr. Zhang and Mr. Xie are utilizing their professional experience and skills as well as their broad customer relationships and inventory connections to embrace a more sales driven corporation framework with various satellite TV stations.

Most recently we signed corporation framework agreements with satellite TV stations, including Hong Kong Satellite TV in contrast to our previous corporation with other satellite TV stations. This new agreement raised more emphasis on joint sales service and marketing of the programming content produced by both parties.

Joint efforts were also being made to promote programming innovations, large scale media events and sales and marketing campaigns with the goal of turning the new corporation model into a new revenue growth opportunity.

To build a sustainable business that delivers long-term growth, we continue to commit ourselves to technological innovations, one of the core values of our media platforms, for example our recent R&D project on dual display interactive system is undergoing the registration of national patent. This revolutionary technology enables the audience to interact with real-time mobile TV content using their mobile phones.

The audience can obtain product information, score free prices or discount coupons to interactive applications. Furthermore, this system can also identify customer preferences, collect customer information and provide location to other key customer consumption data. With this interactive system, our media network can provide advertisers with a comprehensive all-in-one media service from identifying target customers, boosting for an exposure and promoting products to long-chain marketing campaigns and influencing customer consumption behaviors, we are currently conducting OSI testing of the system in a few cities.

Thus far, payback has been very positive and advertisers and commuters will have been invited to join the test, have been thrilled by the new interactive experience. We believe this technology will generate other value added at Titan service and new business models with incremental revenue growth opportunities to support our long-term sustainable developments in the era of media technology innovation.

As an update, the national new media and advertising platforms officially authorized by China Ministry of Finance and the State Administration for industry and commerce, and solely led by VisionChina Media has entered the planning stage. This project would take full advantage of Shenzhen’s commitment to innovative enterprises and become the home to hundreds of new media and creative companies around the world, while establishing Shenzhen as an advertising industry hub it. VisionChina Media plans to become a strategic stakeholder of this company by investing and utilize advertising time and leveraging our massive media network to broadcast innovative advertising products while becoming a beneficiary of their long-term growth.

Finally, according to Zenith Optimedia’s latest research, 2012 is expected to be the industry’s slowest in terms of growth since 2001. Confronted by the challenges of a weak macro-economy and the temporary cautious advertising spending, we remain focused on optimizing our media cost structure and strengthening our unique advantage in content and advertising innovation.

Our ultimate goal to become China’s largest mobile television broadcasting network and create long-term value for our shareholders, we are determined to drive fewer engagements and generate sales revenue through creative programming and technological innovation while promoting a business model that position us well for the long-term growth.

I will now hand over the call to our Chief Financial Officer, Mr. Stanley Wang to discuss our financials and operating metrics in more detail.

Stanley Wang

Thank you Mr. Li. I will first go over our quarterly operating metrics. Our network capacity, which is measured by total broadcasting hours, was 40,963 hours in the third quarter of 2012, compared to 41,012 hours in the second quarter of 2012. Our average advertising service revenue per broadcasting hour was $748 in the third quarter of 2012 compared to $1,122 in the third quarter of 2011 and $658 in the second quarter of 2012.

On average, we sold 7.31 advertising minutes per broadcasting hour in the third quarter of 2012 as compared to 10.64 advertising minutes in the third quarter of 2011 and 6.56 advertising minutes in the second quarter of 2012. During the third quarter of 2012, 577 advertisers purchased advertising time on our advertising network, compared to 712 advertisers in the third quarter of 2011 and 558 advertisers in the second quarter of 2012.

In the third quarter of 2012, we sold approximately 300,000 advertising minutes in our network compared to 466,000 advertising minutes sold in the third quarter of 2011 and 269,000 advertising minutes sold in the second quarter of 2012.

We ended our third quarter of 2012 with 476 sales personnel, representing a net increase of 27 sales personnel compared to the end of the second quarter of 2012, the result of one of our cost control policies aimed at optimizing our ratio of sales people to advertising customers.

Turning now to our third quarter financial results, total revenue were $33.2 million in the third quarter of 2012. This represented a year-over-year decrease of 34% from the revenue of $50.2 million in the third quarter of 2011 and a quarter-over-quarter increase of 18.2% from total revenue of $28.1 million in the third quarter of 2012.

Advertising service revenue, which accounted for 99.3% of total revenue in the third quarter of 2012 was $33 million representing a decrease of 34.4% compared to the third quarter of 2011 and an increase of 17.4% compared to the second quarter of 2012 respectively.

Several factors led to the year-over-year decrease in advertising service revenue, including declining revenue contribution from the internet-based business sector, a slower than expected recovery in the advertising spending by the small and medium-sized clients in reaction to the rate count increase across our network in the fourth quarter of 2011, and the cautious sentiment of the current advertising market.

In the third quarter of 2012, we also generated revenue in respect of maintenance service provided to a supplementary company of $0.2 million, representing a 0.7% of our total revenue. There was no such maintenance revenue in the third quarter of 2011 or in the second quarter of 2012.

Media cost, the most significant components of advertising service cost, was $23.1 million in the third quarter of 2012, representing 77.8% of our total advertising service cost, compared to $26.4 million or 81.6% of our total advertising service cost in the third quarter of 2011 and $27.2 million or 81.4% of total advertising service cost in the second quarter of 2012.

Gross profits in the third quarter of 2012 was $3.4 million compared to a gross profit of $17.8 million in the third quarter of 2011 and gross loss of $5.4 million in the second quarter of 2012.

Advertising service gross margin was 9.8% in the third quarter of 2012 compared to the gross margin of 35.5% in the third quarter of 2011 and gross margin of negative 19.2% in the second quarter of 2012.

Selling and marketing expenses were $9.9 million in the first quarter of 2012, a decrease of 13.8% from $11.5 million in the third quarter of 2011 and a decrease of 8.8% from $10.8 million in the second quarter of 2012.

General and administrative expenses were $4.9 million in the third quarter of 2012, representing an increase of 55.9% from $3.1 million in the third quarter of 2011 and an increase of 17.7% from $4.2 million in the second quarter of 2012. The increase in general and administrative expenses compared to the third quarter of 2011 is primarily attributable to the increase in legal fee in connection to the pending litigation involving the selling shareholders and former managements of Digital Media Group. Also as an increase in provision made against the downfall accounts receivable.

We recorded a contingent loss of $1.4 million in third quarter of 2012 in connection with the pending litigation involve the selling shareholders and former management of Digital Media Group compared to $2.7 million in the third quarter of 2011 and $1.4 million in the second quarter of 2012.

Operating loss was $12.6 million in the second quarter of 2012 compared to an operating profit of $0.8 million in the third quarter of 2011 and operating loss of $200.8 million in the second quarter of 2012. The decline in operating performance compared to the third quarter of 2011, many result from the decrease in advertising service revenue.

The operating loss in second quarter of 2012 was primarily attributable to a non-cash impairment charge of $178.8 million as the result of a write-down of goodwill and intangible assets in connection with company’s acquisitions consummated in 2008 and 2010.

We recorded an interest expense of $0.8 million in the third quarter of 2012, compared to net interest expense of $0.6 million in the third quarter of 2011 and net interest expense of $0.4 million in the second quarter of 2012.

Net loss attributable to our shareholders, referred to as GAAP net loss, was $14.3 million in the third quarter of 2012. Basic and diluted net loss, per share on a GAAP basis in the third quarter of 2012 were $0.14.

In the third quarter of 2012, our non-GAAP financial measure net loss attributable to our shareholders excluding share-based compensation expenses, and provision for contingent losses in connection with the litigation were $12.7.

We had a cash and cash equivalent of $63.1 million as of September 30, 2012. Our net cash used in operating activities during the third quarter of 2012 was $26.2 million, approximately $13.5 million of which was payment to Shanghai Metro relating to a concession fee for the first six months of 2012 and the concession contracts. Depreciation and amortization was $1.1 million and capital expenditure was $0.3 million in the third quarter of 2012.

Turning now to our guidance, we estimated our advertising service revenue in the fourth quarter of 2012 to be between $26 million to $28 million as opposed to the guidance in previous quarter. The company estimates on these advertising service revenue in the fourth quarter of 2012 has reflected the effect of value added tax reform in PRC and it’s reduced by approximately 6% to exclude the VAT from these advertising service revenue. These estimates were based on an exchange rate of RMB6.319 per $1.

As a reminder, our guidance is based on our current network of 19 cities that as of today has already been secured either by exclusive agency agreements or joint venture contracts as well as based on our current assessment of the possible outcome of our pending litigation with the selling shareholders and former managements of Digital Media Group.

If the number of cities in our network expands or contracts, or if there was any progress in the pending litigations that affect our assessment of the possible outcome, our forecast can be affected.

Thank you again for joining us today. And now I will open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Chris Luan of Merrill Lynch. Please go ahead. Hello Chris, your line is open, please go ahead.

Chris Luan – Merrill Lynch

Sorry about that. So, you mentioned that 2012 has been the slowest growth in advertising, the general market for the last decade, 10 years or so. Can you just give us some kind of a general outlook for 2013 in terms of where you see that going in the general advertising and which segments or which businesses will do particularly well in 2013?

Stanley Wang

Okay. Hi, thanks Chris, thank you first for your question. We will do some translation for Mr. Li and he will take your question. Please hold a minute.

Limin Li

(Interpreted)

From the outlook of the current macroeconomic environment, it has been agreed that 2013 will still going to be another challenging year for the Chinese advertising industry.

And also we think, in the year of technological innovation from new media, we think all type of new media needs technological innovation to interact more effectively with audiences that they’re covering on the databases.

Based on the development strategies of the country, consumptions would definitely be one of the key factors to sustain the country’s economic growth in the next 20 years. So, anything related to daily consumptions we think will be the segment of the market that’s going to recover as the economy – recovery of the whole economy. As you know VisionChina connects to the massive amount of public transit on the daily basis. So, we are firmly confident that as the recovery of the economy as a whole, VisionChina would definitely benefit from the unique property that we are connected to the data consumption. Thank you.

Chris Luan – Merrill Lynch

Okay, thank you. Thank you for taking my question.

Operator

(Operator Instructions). Thank you. Your next question comes from the line of Wei Fang of CLSA. Please go ahead.

Wei Fang – CLSA

Hi, thank you so much for taking my question. Just one quick question. I noticed that your content media feel like this quarter declined meaningfully quarter over quarter. I was just wondering, is that because of you quit from the Shanghai market?

Stanley Wang

Fang, many thanks for your question. ESN business in the restructuring of the Shanghai contract actually contributes a majority part of our cost reduction in the quarter-over-quarter in Q3. And actually we restructured sized contracts in September. And then in the whole Q3 we actually paid 50% of the original cost as compared today to the other quarters in Q3 for the Shanghai Metro.

So, I’m actually, this actually we saw in the decrease in – around $3 million decrease in our media cost. And in Q4 and this, the restructuring of Shanghai accounted further – further contribute cost reduction in the media costs, we have a impact there so.

Wei Fang – CLSA

Okay, thanks yeah.

Operator

(Operator Instructions). Your next question comes from the line of Gillian Chan of Morgan Stanley. Please go ahead.

Gillian Chan – Morgan Stanley

Hi, thank you for taking my questions. I’m interested to know more about the interactive displays you mentioned. How does it work and how can users interact with the content and also when will it be launched on your network and what impact would be on the pricing for advertising? Thank you.

Stanley Wang

That question, we’ll translate this question with Mr. Li.

Limin Li

(Interpreted)

According to the technological innovation that connects the audiences, and the audiences with our mobile television screens and contents, it’s already been put into testing in couple of cities.

We have actually invited some advertisers and audiences to participate in the testing of this new technological innovation. And from the feedback – from their feedback, we have seen most of – all of them feel very excited about this new technology, apart from watching the content, real-time content from the TV, they kind of simultaneously receive discount information, product information. And they can also interact with the merchandize through their impact and programs on their mobile phone.

This technological innovation was actually achieved by displaying a barcode on the advertising content displayed on digital mobile television. And audiences will participate in the program, could also become the member of the program, so they can receive long-term product information and promotional information and discount coupons. And advertisers from participating in this program, they could receive consumer’s information that consuming preferences and LBS information and stuff like that.

We will continue to make strides in the development of technological innovation connected to our digital mobile television and nationwide network. We also would likely invite investors and analysts like you to come to our office to experience the new technology. Thank you.

Operator

(Operator Instructions). Ladies and gentlemen, there are no further questions at this time. I would now like to hand the conference back to the presenters. And that does conclude our conference for today. Thank you for participating. You may all disconnect.

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