Hurray! Q3 2008 Earnings Call Transcript

Hurray! Holding Co., Ltd. (HRAY)

Q3 2008 Earnings Call

November 20, 2008 9:00 pm ET

Executives

Qindai Wang - Chairman of the Board, Chief Executive Officer

Vivian Guo - Acting Chief Financial Officer, Vice President, Financial Controller

Presentation

Operator

Thank you. Welcome to our third quarter 2008 financial results conference call. During this call, Qindai Wang, our Chairman and Chief Executive Officer, and Vivian Guo, our Vice President and Acting Chief Financial Officer, will discuss Hurray!'s financial results for the third quarter 2008 and business operations. After their remarks, we will open the call for your questions.

Before we begin, I would like to remind you that during the course of this call, we will be making forward-looking statements, which are subject to risks and uncertainties. You can also identify forward-looking statements by the terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. Such risks and uncertainties include but are not limited to those outlined in our filings with the Securities and Exchange Commission, including our registration statement on Form F-1.

We do not undertake any obligation to update this forward-looking information except as required under applicable law.

Now, I would like to invite Qindai Wang, our CEO, to address you.

Qindai Wang

Thank you. Good evening and good morning to those from Asia. Welcome to Hurray!'s third quarter 2008 earnings announcement. First of all, I would like to give a quick review about the financial highlights. Total revenue was $13.5 million, representing an increase of 6% quarter over quarter and a decrease of 0.7% year over year, higher than our previous guidance of $12 million to $13 million. Wireless value-added service revenue was $11 million, representing an increase of 20% quarter over quarter and a decrease of 3% year over year.

Recorded music revenues, which are from our record label businesses, $2.5 million, representing a decline of 30% quarter-over-quarter and an increase of 11% year-over-year.

Net loss was $9.2 million. Net loss including impairment charge, $6.1 million in respect of music business, of which a goodwill impairment charge of $1.7 million, an impairment loss was [inaudible] in music [at the affiliate] of $1.9 million, as well as a write-off of $2.5 million of other acquired intangible assets from the music business, and a foreign exchange loss of $4.5 million on currency holdings. Adjusted EBITDA, positive $1.2 million. Diluted loss per ADS, $0.42.

Here I would like to emphasize excluding the impact of impairment charge and foreign exchange losses, we achieved positive EBITDA in Q3. This was primarily due to the growth of our WVAS business, which suffered in the previous quarter from the impact of the Sichuan earthquake and also benefited from the seasonal impact of summer holidays. Our music business also continued to be impacted by the [inaudible] on the successful Beijing Olympic Games, but since the beginning of the first quarter, we are gradually seeing a return of music promotions and events. We continue to focus on our new media strategy as we develop into a leading entertainment content production and distribution house in China.

Now I would like to turn to Vivian Guo, our acting CFO, to give you our business results in detail.

Vivian Guo

Thanks, QD and thank you all for joining our conference call and now, I will go through financial results for the third quarter of 2008.

Total revenues for the third quarter ending September 30, 2008 was $13.5 million, representing growth of 6% from $12.8 million for the preceding quarter, and a decline of 0.7% from 13.6% for the same quarter last year.

Total wireless value-added services revenues were $11 million for the third quarter of 2008, representing growth of 20.1% from $10.2 million in the previous quarter and a decline of 3% as compared to $11.4 million in the same quarter of 2007.

Recorded music revenues were $2.5 million, representing a decline of 30.2% as compared to $3.6 million in the previous quarter and an increase of 11% as compared to $2.2 million in the same period of 2007.

Total gross margin was 30.9% for the third quarter of 2008 as compared to 36.4% for the previous quarter and 23.5% for the same period of 2007.

Gross margin for wireless value-added services was 26.4% for the third quarter of 2008, as compared to 29.8% in the previous quarter and 19.6% for the same period of 2007.

Recorded music gross margin was 51.2% for the third quarter of 2008 as compared to 53.4% in the previous quarter and 43.1% for the same period of 2007.

Our total gross profit was $4.2 million for the third quarter of 2008, representing a decline of 9.9% compared to $4.6 million for the previous quarter and growth of 30.9% as compared to $3.2 million for the same period of 2007.

We recorded a foreign exchange loss of $4.5 million arising from the drop in the value of the Euro against the United States dollar in the quarter. Earlier in the year, we converted a substantial part of our dollar cash balances into Euro term deposits to improve yields as well as to protect against further dollar weakening.

The recent highly volatile markets have seen the dollar strengthen as investors and financial institutions deleveraged and we recorded a further exchange loss in the fourth quarter of $4.5 million. Currently have [inaudible] in United States dollars.

Total operating expenses, which included impairment charges of $4.2 million in respect of our music business, were $8.7 million for the third quarter of 2008, representing an increase of 166.8% as compared to the total operating expenses of $7.3 million for the previous quarter, which benefited from the reversal of [inaudible] to China Unicom of $1.56 million, and a decline of 43% as compared to the total operating expenses of $15.3 million for the same period of 2007, which included an impairment charges of $9.6 million for our wireless business.

During the third quarter of fiscal year 2008, we [performed impairment testing] for the music business due to the continued challenging business conditions and reductions in number of concerts and other music events because of the focus on the Olympic Games in Beijing, coupled with the decline in the market price of the company’s common stock. This resulted in a $2.5 million write-down of the intangible assets, which is included in the general and administrative line items, and $1.7 million impairment of goodwill in the unaudited condensed consolidated statements of operations.

The company used an income approach and market approach to determine the fair value. We also tested or invested in music [actually affiliate] for impairment and recorded a write-down of $1.9 million in the third quarter of fiscal year 2008.

The income tax benefit from the third quarter of 2008 was $0.4 million, as compared to income tax expenses of $0.3 million in the previous quarter and an income tax benefit of $0.1 million in the same period of 2007. And additional gain of $0.2 million [inaudible] of our [inaudible] business was recognized in the third quarter of 2008.

Net loss was $9.2 million for the third quarter of 2008. Adjusted EBITDA was $1.2 million for the quarter ended September 30, 2008, as compared with an adjusted income of $0.8 million in the previous quarter and adjusted loss of $1.3 million in the third quarter of 2007.

Fully diluted earnings per ADS were $0.42 with a weighted average of 21.9 million diluted ADS for the third quarter of 2008, as compared to the diluted earnings per ADS of $0.07 based on the weighted average of 21.9 million diluted ADS for the previous quarter and the fully diluted loss per ADS of $0.33 based on the weighted average of $21.7 million diluted ADS for the third quarter of 2007.

As of September 30, 2008, the company had $65.9 million in cash and cash equivalents.

Now I will turn to QD for business highlights.

Qindai Wang

Thank you, Vivian. I would like to share with you our business highlights. Despite the previously mentioned impacts on our music business throughout Q3, we have focused on developing our existing and new artists, as well as expanding our marketing and promotion channels. As part of our strategy to improve our music business through strategic initiatives and promotional activities, our affiliated music companies, Huayi Brothers Music, Freeland Music, New Run, and Secular Bird had the following successes in the third quarter.

Huayi Brothers Music and Secular Bird released a series of new songs, including 2 compilations and 5 singles, and launched successful marketing programs to promote the new releases simultaneously over Internet and wireless platforms. Subsequently, "You Are My Hero" by Yu Quan and "Listen To Me" by the compilation theme songs from the popular reality-competition show "Sprite My Show 2008" became popular hits in the third quarter.

Freeland Music signed up Jang Nara, a famous Korean artist, who had her breakout role as a leading actress in both Chinese and Korean popular television series Successful Story of a Bright Girl and Bratty Princess. The company also released an EP titled 'Most be Loved' by Zhao Ke in the third quarter. Freeland's affiliate, Fly Songs, is expected to organize a number of the live performances for popular Hong Kong artists in the next quarter, including Eason Chan's live performance in Tianjin City, Dave Wang Classic Performance in Zhejiang province, and et cetera.

We also launched 10 new titles on China Mobile's game portal, including "Crazy Bricks", "Extreme Snowboarding", and "The Adventure of Mayadi" in Q3. In Q4, we plan to launch 15 new titles.

For next quarter’s business outlook, for the fourth quarter of 2008 Hurray! expects its total consolidated revenues to be between $14 million and $15 million.

Hurray! also makes a strategic investment in Taiwan's Seed Music company. On September 24, 2008, Hurray! announced the signing of definitive agreements to make a strategic investment in Taiwan's Seed Music Group Limited. Seed Music Company is a very well-known music production and distribution company which focuses on artist development, music production and offline digital distribution of the music in Asia-Pacific, especially in Mainland China, Taiwan and Hong Kong. Its portfolio of artists includes some of the most popular and famous singers in the Asia-Pacific, such as Kenji Wu Ke Qun, and Guang Liang. Kenji Wu was nominated twice for the best Chinese male artist in Taiwan respectively in 2006 and 2007 Golden Melody Awards.

That’s pretty much about our presentation. Now we would like to open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Mr. Wang, there are no questions in the queue.

Qindai Wang

That’s okay. Thank you all for joining Hurray!'s 2008 Q3 earnings announcement and in summary, we would like to see Hurray!'s WVAS [business] is further stabilized and the music business through the most difficult Q2, the earthquake; Q3, the Olympic Games events, the music business start to return to the track. We are seeing the growth of music and WVAS start from Q4 and next year’s, we will continue to work on those two major business and make sure the back to the track and resume growth in the future.

Thank you all and expect to see all of you in Q4 earnings announcement. Bye-bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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