Michael Tao Song – Founder, Chairman and Chief Executive Officer
Carl Yeung – Chief Financial Officer
Andy Yeung – Oppenheimer & Co. Inc.,
Sky-mobi Limited (MOBI) F3Q13 Earnings Call February 4, 2013 8:00 AM ET
Good morning and good evening everyone, and welcome to Sky-mobi’s Fiscal Third Quarter 2013 Earnings Conference Call. With us today are Sky-mobi’s Chairman and Chief Executive Officer, Mr. Michael Song; and Chief Financial Officer, Mr. Carl Yeung.
Before I turn the call over to Mr. Song, may I remind our listeners that in this call management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission.
In addition, any projections as to the company’s future performance represent management’s preliminary estimates and Sky-mobi assumes no obligations to update these projections in the future as market conditions change.
To supplement its financial results presented in accordance with IFRS, management will make reference to certain non-IFRS financial measures, which the company believes to provide meaningful additional information to understanding Sky-mobi’s operating performance. A table reconciling non-IFRS financial measures to the nearest IFRS equivalents can be found in the earnings press release issued yesterday.
For those of you unable to listen to the entire call, a recording will be available via webcast at the Investor Relations section of Sky-mobi’s website at www.sky-mobi.com/en.
And now, it’s my pleasure to turn the call over to Sky-mobi’s Chairman and CEO, Mr. Michael Song.
Michael Tao Song
Welcome everyone and thank you for joining us today. We are pleased to announce that our fiscal third quarter 2013 results came in ahead of our earlier guidance. For the quarter, we achieved RMB146.9 million in revenue, exceeding the high end of our guidance by 13%. Moreover, we realized 5.1% sequential growth despite of the continued decline in the feature phone market. As a result we’re driven by two partners, one increase the monetization in our mobile community and two, stabilization in the rate of decline for the feature phone market.
As we discuss the quarter today, I’d like to highlight two key areas in greater details. First, our protocol proxy it initials in addressing in the changing mobile phone landscape away from feature phone to increasing use of smartphones, and secondly our continued progress on the smartphone front. First, to adjust the rapid transition taking place of Chinese user increasing adopting smartphone in place of feature phones.
As you are aware, we have remained the focus on the increasing revenue contributed from our mobile community and increase the usage of K Currency, but also we have been able to successfully increase our average revenue per download.
In addition, as a mean of distribution, we have focused on the by passing traditional service provider, partners and building directly with the carriers. This has resulted in prudent these were certifications of revenue streams away from high [reliance of the apiece], as well as the improved margins. This successful offer has result in higher ARPU and improving fiscal results. We believe that our strong execution on the (inaudible) we lead out year ago on (inaudible) Maopao feature phone market and are beginning to payoff.
Moving to the more important Chinese smartphone market, we have made remarkable achievements in the past eight months since the launch of our smartphone products. To highlight our achievements more specifically, since our launch we have quickly accumulated over 10 million smartphone users. We are utilizing our smartphone application store, browser, game, and a game center and a PC assistant on a regular basis. Moreover, we were able to accelerate our growth by 200% during this quarter, achieving a remarkable user addition of 1,120,000 per day.
Going forward, we will expect to and continue to add more and more new smartphone user per day, but a more moderate growth rate due to current rate are out from smartphones. Nevertheless, this was a huge jump from 40,000 smartphone user per day from October of last year and a way to lead that growth mentally are leaded by our multi-prolonged effort in targeting Chinese smartphone users.
To further clarify this growth, Chinese smartphone market is increasing driven by low-priced devices that are priced between RMB300 to RMB1000, which is one of the finest growths in segment from the smartphone adoption. This is where Sky-mobi has been primarily focused on that particularly in stabilizing market share. This review has been two fold. One is focusing on the pre-installation, where we have doubled the number of handset partners to pre-install our smartphone product to over 160 partners. And two, the expansion of in-store service for downloading all apps and other service, where we have expanded our unique offline distribution with partners such as Sony.
By leveraging offline retail store footprint across China, we have dramatically increased offline percentage to contribute new smartphone user from only 3% last October over to 20% of this January. This are proving to vital distribution method of driving this Maopao users, which is located outside of major city centers and the lack of size to high quality and high speed well as network.
Giving the nature of this market, user behaviors and as well as dramatic growth in the user, we believe we are implementing the correct strategy and/or 3G quickly developed. We anticipate reaching inflection point of 28 million smartphone customers in the coming quarters and at which point we begin in monetization of additional content sales. As an anticipation of this, we have been actively building our content offering as our user growth has expanded. We are developing three mobile games in-house for smartphones and are currently in BETA passing. We also expanded our licensing additional content third-party developers. We are exciting to rollout this new (inaudible) and I believe will enable us to further monetize our large user base.
In summary, this recent development demonstrates that Sky-mobi has taken a unique approach in addressing the Chinese smartphone market, while adapting quickly and effectively to changing feature phones market. We believe this is one of our strength in succeeding in ever dramatic mobile phones into United States. With this early success, we look forward of reporting even more exciting progress in the quarters to come.
With that, we will turn the call over to Carl Yeung. And he will discuss our fiscal and our business outlook in more details. Carl, please.
Thanks a lot Michael. As Michael mentioned earlier, we are very excited to report revenues significantly ahead of our previous guidance. Despite the year-over-year decline in revenues, we achieved sequential growth and improvements across the board in terms of revenues, non-IFRS gross margin, non-IFRS profitability and ARPU, average revenue per user. More specifically, our revenue composition continues to improve with a high of 30% of revenues coming from higher ARPU associated with our Maopao Community and K Currency. The ARPU for the community increased by over 191% to RMB3.46 million from RMB1.81 million from a year ago.
This is the fifth consecutive quarter that we have experienced an increase in mobile community ARPU, since September quarter of 2011. This sustainable improvement further validates our strategy, providing us a strong foundation for future expansion in revenue and margins over the long run. The additional use of carrier direct payment channel bypassing the traditional SPs have not just increased our revenue per download to a new annual high of RMB0.155 that has also helped to improve our gross margins significantly by lowering revenue share with SP billing channel. We are also very encouraged that we generated both IFRS and non-IFRS net profit turning around from a net loss in the previous quarter.
Although we had a better than expected top-line performance, we’ve improvement in gross margin. We still maintain a conservative expense structure with a goal to main profits and positive cash flow were up keeping with a high level of investment into the smartphone market. Cash flow from operations were RMB27.4 million with an ending cash and term deposit balance of RMB604 million, or US$96.2 million or US$2.98 per ADR. Observing these favorable trends, we will be increasing our full fiscal year 2013 guidance, which will be discussed at the end of this call.
Now turning to our financials for the quarter, as a reminder, we disclosed revenue from two perspectives, by sources and by business units. In the interest of time, I’ll limit my discussion today to revenues by source. As we believe, it is a more useful way for investors in analyzing and understanding our collection model. The breakdown of revenue by business units can be found in the press release issued earlier today. In addition in the discussion and analysis, our cost of revenues and operating expenses primarily focused on non-IFRS results, as we feel that this is more useful for investors in understanding our operations and performance.
Our total revenue for the third quarter 2013 increased 5 percentage points sequentially to RMB146.9 million or approximately US$23.6 million. Revenues collected from carrier channels were RMB92.1 million, or US$14.8 million in the third quarter of 2013, representing 63% of total revenues. Sky-mobi had 2.2 billion user visits and 599.3 million downloads of applications and content from the mobile application store in the third quarter, down from 3.6 billion user visits and 718.4 million downloads respectively from the same quarter last year. The decrease in application store user activity and downloads was mainly due to the shrinking market share of feature phone as a percentage of overall mobile devices in China. Revenue collected from third party channels grew by 21% to RMB35.7 million or US$5.7 million, and that contributed 24% of total revenues.
Sky-mobi’s Moapao community had 13 million active members and 726.2 million member log-ins in the third quarter 2013, compared to 16.9 million active members and 1.1 billion member log-ins in the same quarter last year. Our average number of concurred online members remained stable at about 123,487, down slightly from 136,000 in the same quarter last year. The reduction in log-ins and average concurrent user or ACU, reflected our transition away from social media functions, which we found did not generate meaningful revenues towards social games, which we can monetize successfully.
Revenues from Maopao Community increased due to increased spending per active member, derived mainly from our two most popular social games, Fantasy of Three Kingdoms and Fairy Magic World. We expect that revenues collected from third-party channels will contribute a steady and increasing percentage of total revenues in future quarters, as we focus on growing our active mobile community member base and on diversifying revenue collection methods away from traditional carrier-based payment channels.
The cost of revenues in the third quarter of 2013 decreased 16% to RMB96.4 million or US$15.5 million as compared to RMB114.5 million a year ago. Total non-IFRS deposit revenues in the third quarter of 2013 also decreased 16% to RMB96.1 million or US$15.4 million as compared to RMB113.7 million in the same quarter last year. Non-IFRS cost associated with payments to industry participants decreased 18% to RMB85.4 million or US$13.7 million primarily due to decreased channel cost inline with a decline in revenues collected from carrier channels, costs savings on lower revenue sharing percentage from more direct cooperation with mobile operators and cost controls on purchasing feature phone mobile content for the Maopao Community.
Non-IFRS direct costs including salaries and benefits, depreciation, office expenses and utilities directly related to the operation of mobile application store and mobile community increased 15% to RMB10.7 million, or US$1.7 million, as compared to RMB9.3 million in the same third quarter 2012. The increase was primarily due to increased costs in connection with our Company’s strengthened efforts in maintaining revenues in the feature phone business, as well as developing overseas markets and other revenues.
Non-IFRS gross profit in third quarter 2013 decreased 5% year-over-year to RMB50.8 million or US$8.2 million. Non-IFRS gross margin in third quarter 2013 was 34.6%, up from 32% in the third quarter of 2012, mainly due to higher contribution from promotional income, which has a higher profit margin, as well as improved monetization efficiency on channel payments from mobile operators and reduced spending on feature phone mobile content.
Total operating expenses, primarily consisting of employee salaries and benefits, training expenses, travel, entertainment and office-related expenses decreased 3% year-over-year to RMB49 million or US$7.9 million. Non-IFRS operating expenses increased 16% year-over-year to RMB44.8 million or US$7.2 million. The increase in non-IFRS operating expenses was primarily due to our Company’s increased spending on research and development for the android platform and products.
Total headcount decreased 28% to 521 employees as of December 31, 2012. The decrease in headcount was primarily due to our organization restructuring, which rebalanced headcount between our smartphone and feature phone business and reduced resources in the feature phone sector due to the shrinking feature phone market. Non-IFRS operating income was RMB6 million or US$1 million compared to RMB15 million a year-ago.
Net profit in third quarter 2013 was RMB3.8 million or US$0.86 million as compared to a net profit of RMB6.4 million a year-ago. Non-IFRS net profit for the third quarter 2013 was RMB8.3 million or US$1.3 million as compared to RMB18.9 million a year-ago. Basic and diluted earnings per common share in third quarter 2013 were RMB0.01, which represented equivalent of RMB0.11 per ADS.
Non-IFRS basic and diluted earnings per common share in third quarter 2013 was RMB0.03, which represented the equivalent of RMB0.25 per ADS. Sky-mobi ended the fiscal third quarter with approximately US$96 million in cash, cash equivalent and term deposits and no debt. This equates to about RMB2.97 cash per ADS.
Turning to outlook, we continue to expect that Sky-mobi will focus on maximizing revenues in a declining feature phone market, by improving payment efficiency and increasing monetization. Our financial strategy is to invest responsibility in smartphones and to maintain a strong cash balance by using cash flow generated from our feature phone business to support the growth and development for smartphones.
For the fiscal fourth quarter 2013 ending March 31, 2013, we expect total revenues to be in the range of RMB113 million to RMB125 million. But we are raising our full fiscal year revenue guidance from the range of RMB545 million to RMB560 million to a new range of RMB555 million to RMB565 million.
Okay. With that, I’d like to open the call for questions. Operator, please.
Thank you very much sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Andy Yeung from Oppenheimer. Please ask your question.
Andy Yeung – Oppenheimer & Co. Inc.,
Hi, good evening, Michael and Carl. Congrats on a solid quarter. Thank you for taking my questions. My first question is about the android app store market, the overall android app store market in China is pretty fragmented. So can you give us your view in term of the competitive landscape in the android app store market? And how do you plan to differentiate yourself from other competitors such as 91.com and Qihoo?
Yeah, thank you Andy for the question. You’re very right. The android app store market in China is indeed very [firm active] as well as very competitive. But as you seen, we have successfully within a short eight month of launch to accumulate over 10 million android smartphone users and we’ve grown more than 200% since our last earnings call to now 120,000 new android users per day versus the last quarter of 40,000 android per day.
This really sort of tells that how we differentiate versus the competitors like 91 you mentioned and Qihoo. 91 and Qihoo mainly focused on the middle to high end segment of PC derived users, where we have a very unique offline strategy of approaching the storefronts, particularly example of partnership like Suning, as well as carrier-in-store, as well as 50,000 plus storefronts around China. This has become a very, very important source of new growth of android users for us.
In the last quarter call, about 3% of our new users per day a smartphone wise was coming from this offline store. Now, over 20% of new smartphone users are coming from this offline store. Now, another very, very differentiating factor is we work directly with handset partners and they don’t have the strength or experience or the relationship to do that.
In the last earnings call, we mentioned that we had 80 something of handset partners working with us on smartphones. This quarter, we’re happy to say that we have over 160 handset partnerships, and that’s why we’ve been going so fast on a new smartphone user base.
Going forward, the Chinese market is a market for low-end handsets, and this low-end segment is going to be dominated again by the white box manufacturers, which we have proven to have had enjoyed many years of success with them. And since we pre-installing with them, we’ll continue to grow that area and also distribution to these lower-end traffic user is very, very important and there we have a stronghold in working with the right partners too. And that is something that neither Qihoo, or 91, or Baidu or any other player you name it that is not doing.
Andy Yeung – Oppenheimer & Co. Inc.,
Got it. I think you mentioned that in terms of distribution strategies, or the channel strategy, you have both offline partnerships as well as OEM partnership to help you in the smartphone business. And so my follow-up on that is regarding your product strategy in the smartphone space. How is that different from your current strategy in the feature phones and also in terms of smartphone monetization? I think you mentioned that, once you reached 20 million user you may begin to monetize your smartphone user base. So what’s your smartphone monetization strategy? Is that mostly gaming? Thanks.
Yeah. Thank you, Andy for raising this very important question. In fact, since the last 12 months, we’ve been focused a lot on our product side. I guess the smartphone area is very different from feature phone. Specifically for the smartphone products, we focused a lot on our products for the offline store. It entails a system to manage and to operate the loading and unloading of apps as well as distribution to all the smaller places across the country. This is a product that we’ve invested heavily on over the last 12 months and it’s proven to be quite successful so far. On the feature phone side, we didn’t need to have this; all we have to do is embed with smartphone – the phone manufacturers than we are set. So this is a key product. So it entails a PC suite as well as a server and our backbone to make sure the apps are distributed to these stores effectively, as well as localized machines to make this work.
Once we reach a scale of 20 million users or more, again it’s gaming. It’s proven in the market that game provide a more effective monetization method. So we’re currently in house developing our own social games, which we are in embedded testing right now and once we reach a scale, we would start to monetize using game. If you hold on a second, our CEO Michael might like to add one or two points.
Andy Yeung – Oppenheimer & Co. Inc.,
Michael Tao Song
Okay, Yeung, you go ahead.
Okay. Yeah and Michele like to add that in the smartphone area one of the key strategy is to focus, and we would have reduced significantly the number of product lines versus the feature phone. For example, in the feature phone, we’ve done social media, social networking, we’ve done multimedia all sorts of stop. But right now in the smartphone it’s very, very simple. We focused our product on traffic accumulation and also on gains to market. That’s a very, very focused strategy for us. And then I’ll – to add this as a CFO, having it more streamlined and focused product for smartphone world, which also means financially we can be more efficient and therefore you’ve seen that we’re starting to begin to turn around from that launch from the last quarter, allowing us to have a much smaller cost base and expense base.
Right. Thank you very much. Is there a follow-up question for Mr. Yeung?
Andy Yeung – Oppenheimer & Co. Inc.,
No. That’s all. That’s very helpful. Thank you.
Thank you. (Operator Instructions) All right. We have no further questions. I would like to turn the call back to Mr. Song, please proceed. Right, ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.
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