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China Techfaith Wireless Communication Technology Limited (NASDAQ:CNTF)

Q3 2012 Results Earnings Call

November 21, 2012 8:00 AM ET

Executives

David Pasquale - Global IR Services

Ouyang Yuping - Chief Financial Officer

Jay Ji - Senior Vice President

Analysts

Joe Cappello - Analyst

Shawn Allen - Private Investor

Operator

Good day, ladies and gentlemen. And welcome to the Q3 2012 China Techfaith Earnings Call. My name is [Marie], and I will be your operator today. At this time, all participants are in listen-only mode. And we will conduct a question-and-answer session toward the end of this conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now, I’d like to turn the call over to David Pasquale of Global IR Services. Please proceed, sir.

David Pasquale

Thank you, Operator. Welcome everyone to China Techfaith's third quarter 2012 financial results conference call. Joining us from the company today are the company’s Chief Financial Officer, Ms. Ouyang Yuping; and SVP, Mr. Jay Ji.

We will have time for your questions after review of the quarter’s results and the company’s outlook. If you have not yet received a copy of today’s results release, please email Global IR Partners at cntf@globalirpartners.com, or you can get a copy of the release off of the Investor Relations section of Techfaith’s website.

The company’s attorneys advise this call will contain forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intend, plans, believes, estimates, confident, outlook, and similar statements.

Among other things, the business outlook and strategic and operational plans of Techfaith and management’s comments contain forward-looking statements. Techfaith may also make written or oral -- looking statements in its period reports to the U.S. Securities and Exchange Commission on Forms 20-F and 6-K, et cetera, and in the annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors, or employees to third parties.

Statements that are not historical facts, including statements about Techfaith’s beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

Potential risks and uncertainties include but are not limited to those outlined in Techfaith filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F.

Techfaith does not undertake any obligation to update any forward-looking statement except as required under applicable law. All information provided on today’s conference call is as of today’s date.

References to U.S. GAAP are to generally accepted accounting principles as practiced in United States of America and references to dollars are to the lawful currency of United States of America.

At this time, I’d like to now turn the call over to SVP, Mr. Jay Ji. Please go ahead, sir.

Jay Ji

Thank you, David. And welcome to our third quarter 2012 financial results conference call. I hope that everyone had a chance to review our press release. Overall, the third quarter developed as expected.

This is encouraging to us given the volatility and steep decline we experienced at the start of the year, and while we are encouraged, we do not expect business levels to improve dramatically over the near-term.

The reason is that, the broader environment remains challenging environment and we are not certain, if the market will remain stable as we move through December. We expect continued pricing pressure and high competition on smartphone and gaming areas of our business. But we also expect revenue levels and margins in the niche and enterprise segments we are targeting to have some degree of stability.

Longer term basis, we remained confident in our ability to successfully navigate through this period based on our ability to do so in prior years. It is hard to say, where we are at in the cycle but we have now gone through three quarters of one of the toughest declines we have seen in long time. That would lead us to believe we should start to see some improvement as we move through in 2013 absent any further drop off in the global economy.

In terms of Q3, our revenue for the third quarter came in at US$31.5 million. As noted, this was in line with our prior guidance between the range of US$30 million to US$35 million.

The stability in our enterprise and niche market segments is reflected in our gross margin for Q3, which improved to 22.8% from 22.6% in Q2 on the slightly lower revenue level. Favorable product mix combined with operating efficiencies helped us improve gross margins and generated net income US$900,000.

In terms of segments in Q3, our ODP business contributed 42.2%, our gaming business contributed 21.9% and our branding business brought us 35.9%. We remain focused on building brand awareness, on developing unique Android smartphones for the enterprise outdoor and healthcare markets.

We are also looking to further expand our user base for our gaming business and working to further strengthen our international sales. One example of our strategy and success is seen in our ruggedized devices, Jungle and TITAN, which have been well received by customers in the European Union, South Africa, Russia, Latin America, Hong Kong and more.

We also continued to expand our presence overseas by participating in various other divisions, such as the Consumer Electronic Show in Las Vegas, 3GSM in Barcelona, GITEX in Dubai and CommunicAsia in Singapore. These high visibility events are important platforms for us to reach both existing and potential customers.

We have also found them to be very helpful in increasing awareness of TechFaith among potential partners, looking for a strong China partner. We plan to launch new models at the various events, including new ruggedized smartphones and the co-developed healthcare smartphones. These devices are uniquely positioned in the market at attractive price points.

The feature sets distinguish between from other models and give them more universal appeal. We expect a positive reception for our new models and have ability to work with customers to tailor to any specific need or market requirements.

From a strategic standpoint, we believe the increase in user base for our mobile games, motion games and Disney theme games, will in turn create more opportunities for our branded mobile devices and help us further expand our presence in both our domestic China market and overseas.

Now, let me turn the call over to our CFO, Ouyang Yuping for further review.

Ouyang Yuping

Thank you, Jay. Thank you to all for joining our third quarter earnings call. Let me quickly review some key operating points and our outlook before taking Q&A.

Revenue for the third quarter was US$31.5 million, compared to US$32.4 million in the previous quarter and US$80.6 million in the same quarter last year. Our ODP business contributed US$13.1 million or 42.2% of the revenue.

Our brand name mobile phone business contributed US$11.3 million or 35.9% of the revenue. Our gaming business contributed US$6.9 million or 21.9% of revenue in the third quarter.

As Jay noted earlier, we see some stability but expect a continued challenging business environment. Our gaming business, for example, has experienced further decline in the most recent quarter.

This was due to both overall weaker demand and business transitioning from hardware-centric cell with controllers to the current online and software model. Overall, gross profit for the third quarter of 2012 was US$7.2 million compared to US$7.3 million in the previous quarter and US$19.1 million in the same quarter last year.

Our operating expenses was US$5.1 million, 39% decrease compared to US$8.3 million in the previous quarter and a decrease of 56.9% compared to US$11.8 million in the same quarter last year. This reduction is mainly due to lower bad debt expenses and lower selling and marketing expenses.

In terms of our balance sheet, we ended the third quarter with a balance of US$265 million in cash and cash equivalents. This compares to US$262 million at the end of Q2. In terms of specific guidance, as noted in our press release, we currently expected total revenue in the third quarter of 2012 to be in the range of $US30 million to $US35 million.

Operator, that concludes our formal comments. We are now ready to take any questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Okay. We have a first question and it comes from the line of [Joe Cappello] [ph]. Please go ahead.

Unidentified Analyst

Good morning. I heard an analyst on the TV the other day. Actually, I heard him on two different programs and he is pretty hard on your company. He is projecting -- this guy has got a pretty good accuracy rate on picking lot of stocks or single, double digits going into three digits area there. He said that he believes that your company is going to be the next Apple of China, which is kind of nice to hear from your standpoint. But it’s -- I don’t know he can predict that when you got guys like Samsung and Apple out there that you have to compete with that number. That’s first thing I want to say but I hope the gentlemen is right for your sake.

And on your name I think maybe you should shorten your name to like Apple’s -- Apple, Samsung, Motorola. China Techfaith Wireless kind of like it’s got a negative connotation with the word China in there and TechFaith sounds like it’s a religious organization. So I think I probably come up with a one name and one sellable name for your company, make it lot shorter and sound a little bit better.

Jay Ji

Yeah. We think your advice is very, very good.

Unidentified Analyst

Thank you.

Jay Ji

We do need a very short and good name.

Unidentified Analyst

Yeah.

Jay Ji

Maybe our company is more recognizable and we are working on that probably very shorter term. We are going to have our new symbol and name comes out.

Unidentified Analyst

Yeah. Just one name would be nice, just like Apple.

Jay Ji

Yeah.

Unidentified Analyst

Just short and sweet right to the point, and as far as the gentlemen predicting your company being the next Apple of China, any comment on that, which should be kind of nice for your sake?

Jay Ji

We had -- we are glad to hear that and we are always trying our best to be the number one.

Unidentified Analyst

But by the way…

Jay Ji

In the communication industry.

Joe Cappello - Analyst

By the way, this guy is a very reputable analyst by the way. He is not some shoe-string analyst. This guy knows what he’s talking about. So, I wish you the best on that. It would be nice to see your stock go from a penny stock what it is now to at least US$100 a share hopefully more than that you know.

Jay Ji

Thank you. Thank you.

Operator

(Operator Instructions) Now, we have another question and it comes from the line of [Shawn Allen] [ph]. He is a private investor. Please go ahead.

Shawn Allen - Private Investor

Yeah. Hi. Good morning and thank you for your time. I’m just my question is for you this morning, do you guys have any plans to update or upgrade your company’s website and if so what are your plans for that?

Jay Ji

Right. Yeah. We do have a couple of different website, for our website we are going to update that and also we have other websites for our products and games as well. But for the games mostly is in Chinese and that we are going to have the English version as well. So, we make sure our company’s website a bit [linearly] [ph] and make sure it’s -- update it very often.

Operator

(Operator Instructions) ladies and gentlemen, I would like -- now like to turn back to your host.

Jay Ji

Thank you everyone for participating in today’s call. We look forward to speaking with you on our next quarter results calls. Please feel free to follow-up with us, if you have any additional questions. Happy Thanksgiving Day to everyone. Have a great holiday and bye-bye.

Operator

Thank you, ladies and gentlemen. That concludes your conference call for today. Thank you for joining us and you may now all disconnect.

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