Operator: Good evening and thank you for standing by for China Digital TV’s fourth quarter and full year 2012 earnings conference call. At this time, all participants are in 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 Josh Gartner of Brunswick Group.
Thank you operator.
Hello everyone and welcome to China Digital TV’s fourth quarter and full year 2012 earnings conference call. The company’s earnings results were released earlier today, and are available on the company’s IR website at ir.chinadtv.cn, as well as on newswire services.
Today, you will hear from Mr. Dong Li, China Digital TV’s president, who will give an overview of the quarter, followed by the Company’s head of investor relations, Mr. Nan Hao, who will discuss financial results. After their prepared remarks, they will be joined by China Digital TV’s chief financial officer, Mr. Zhenwen Liang, to answer your questions.
Before we continue, please note that the discussion today will contain certain forward-looking statements made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s results may be materially different from the views expressed today.
Further information regarding these and other risks and uncertainties is included in the company’s registration statement on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. China Digital TV 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 China Digital TV’s investor relations website. I will now turn the call over to China Digital TV’s president, Mr. Dong Li.
Mr. Dong Li
Thank you, Josh. Hello everyone and welcome.
We’ll begin with an overview of China’s cable TV market and China Digital TV’s performance in the sector.
According to SARFT and Zhongguang Luoda Consulting, a Beijing based research agency, by the end of 2012, China had about 200 million households with cable TV. Of these, about 156 million, or 78 percent, have now converted to digital.
With steady demand for smart cards from cable operators, in the fourth quarter we saw our highest shipment volumes of the year, with demand mainly coming from Jiangsu, Shandong, Zhejiang, Liaoning and Sichuan provinces. This was primarily a result of normal seasonal factors, including local cable operators speeding up digitalization projects ahead of the year end, with demand strongest in second and third-tier cities.
During 2012, most provinces in China completed network consolidation. As a result, we saw shipment delays from some provinces like Zhejiang and Henan, particularly during Q2 and Q3. With the increase in card shipments during the fourth quarter, full year shipments totalled about 15 million. Demand was heavily driven by Jiangsu, Zhejiang and Guangdong provinces.
During 2012, we had good success winning bids from provincial cable operators. China Digital TV won bids in Sichuan, Henan, Shanxi, Zhejiang and Ningxia over the first three quarters of 2012, and added a successful bid in Shandong province in Q4. As cable network consolidation continues to move towards completion, we have seen the initiation of a new round of bidding for smart cards and believe that some of these new markets, where we have traditionally had less of a presence, hold good potential going forward. For 2013, we are focused on efforts to enter new provinces and markets.
Additionally, conversion to high-definition set-top boxes, and second and third terminal smart card demand remain positive trends in the industry. We believe that these areas will continue to contribute to China Digital TV’s CA products revenue stream over the long term.
Let’s now discuss China Digital TV’s fourth quarter 2012 operations.
In Q4, we shipped a total of 4 million smart cards and secured 59.1% market share in China Digital cable sector, according to Zhongguang Luoda.
During the fourth quarter, average selling price, or ASP, for smart cards decreased by 0.9% sequentially, in line with long-term trends. For 2013, we expect this to continue, and anticipate ASP will decrease by about 7% on an annual basis.
Turning now to our diversification strategy…
As we’ve discussed previously, China Digital TV is focused on diversifying our revenue streams through R&D investment and the introduction of next generation products and other value-added services to drive future growth. In Q4 we maintained the momentum that we built throughout 2012 in this area. I would like to highlight Q4 progress on two specific products.
First, we saw very encouraging development for our video on demand, or VOD, services during Q4. We are working with partners in Guizhou province to establish a VOD platform that would provide users with access both to movies and other forms of interactive entertainment. Similarly, we also established VOD platforms in other second and third-tier cities, and over time, we believe this could potentially be duplicated in other markets throughout China.
We also successfully launched our Network Broadcast Platform, or NBP, which allows users to watch 50 channels of live TV on their IOS devices over their home WiFi network. Users can connect our NBP product to their home cable systems and stream programming via our free IOS apps, which allows cable operators to provide a new way to attract users of other screen terminals than TVs. While shipments are currently relatively small in scale, we are optimistic about the potential for this product.
At the same time, in the fourth quarter, we expanded activity in international markets through our cooperation with Motorola and with NSTPL, India’s national cable operator, on establishing its CA system. We expect to begin card shipments in the second half of the year. Meanwhile, we are in the planning stages of opening a representative office in India.
Overall, we expect to see continued demand for our smart cards, and growth for our value added services and next generation products.
I will now hand the call over to Nan Hao, our head of investor relations, to discuss our financial management.
Mr. Nan Hao
Thank you, Mr. Li. Hello everyone.
As Mr. Li mentioned, the completion of provincial network consolidation in 2012 delayed some card shipments and impacted the top line contribution of our CA products. At the same time, we anticipate that the completion of network consolidation and ongoing progress in digitalization projects will have a positive effect on our cable TV-related value-added services business going forward. During 2012 we saw promising top-line growth from this area, and we expect this to continue into 2013.
Turning to the financial highlights for Q4. Please note that, unless otherwise stated, all amounts are in US dollars.
In Q4 2012, China Digital TV shipped approximately 4.07 million smart cards, compared to 5.38 million for the same period in 2011 and 3.84 million in Q3 2012, for reasons we’ve just discussed.
Net revenues in Q4 2012 were 23.2 million, a decrease of 20.6% from the same period in 2011 and a 13.7% increase from Q3 2012. The year-over-year decrease was primarily due to a decrease in the shipment volume of smart cards. Growth from both our CA card and other products businesses were responsible for the sequential increase.
Now let me go through the major revenue components for the quarter.
Revenues from smart card sales were 19.3 million, accounting for 81.8% of total revenue, a 4.7% sequential increase.
Revenues from other products were 2.8 million, accounting for 11.8% of total revenue, a 140.5% increase quarter-over-quarter. This increase is a reflection of our progress in diversification strategy, which Mr. Li just discussed.
Revenues from our top five customers accounted for 22.7% of total revenues, compared to 22.9% in Q3 2012.
Gross profit in Q4 2012 was 17.7 million, a decrease of 25.3% from last year and an increase of 14.4% from Q3 2012. Gross margin was 76.2% in Q4 2012, compared to 81.1% in Q4 2011 and 75.8% last quarter. The year-over-year decrease in gross margin was primarily due to a decrease in revenues from smart cards sales and a greater proportion of our revenue coming from other products, which have lower margins than smart cards. This is in line with our diversification strategy, which we believe will provide more revenue streams over the long term. The sequential increase in gross margin was mainly attributable to an increase in revenue from surface mounted device chipsets, which have a higher gross margin than other products, as well as an increase in revenues from smart cards sales.
ASP of smart cards in Q4 2012 decreased by 0.9% sequentially, while unit costs decreased by 11.3%.
Operating expenses in Q4 2012 were US$10.7 million, a decrease of 1.8% from the same period in 2011 and an increase of 2.4% from Q3 2012. The year-over-year decrease was primarily attributable to a decrease in G&A expenditures, while the sequential increase primarily relates to selling and marketing expenses.
Income from operations in Q4 2012 was 7.0 million, a 45.4% decrease from last year and a 39.7% increase from last quarter. Operating margin in Q4 was 30.1%, compared to 43.7% during the same period in 2011 and 24.5% in Q3 2012.
Income tax expenses in the fourth quarter of 2012 were US$4.6 million, an increase of 49.4% from the same period in 2011 and a decrease of 66.4% from the third quarter of 2012. The year-over-year increase related to tax liabilities that were accrued in relation to certain VAT refunds, and a deferred income tax expense accrued from the undistributed retained earnings of the Company’s PRC subsidiaries. These were partially offset by a decrease in taxable income. The sequential decrease was mainly due to the Company’s accrual of US$12.1 million in withholdings taxes in the third quarter of 2012 related to the undistributed retained earnings of PRC-located subsidiaries as a result of our determination to distribute part of these undistributed retained earnings during the quarter.
Net income attributable to China Digital TV Holding Co., Ltd. in the fourth quarter of 2012 was US$4.2 million, compared to US$11.5 million in the same period in 2011 and US$ 11.4 million net loss attributable to China Digital TV Holding Co., Ltd. in the third quarter of 2012. These both relate to the revenue trends that we’ve just discussed.
Non-GAAP net income attributable to China Digital TV Holding Co., Ltd. defined as net income excluding certain one time or non-cash expenses, such as impairment loss on long-term investments, share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments, in Q4 2012 was 4.4 million, compared to a US$13.6 million in the same period in 2011 and US$ 6.2 million Non-GAAP net loss attributable to China Digital TV Holding Co., Ltd. in Q3 2012.
Turning to our balance sheet...
As of December 31, 2012, China Digital TV had cash and cash equivalents and restricted cash totaling 130.7 million. In Q4 2012, cash flow used in operations was approximately 2.7 million.
Now, let me provide you our business outlook.
Based on information available as of February 26, 2013, China Digital TV expects smart card shipments for Q1 2013 to be in the range of 3.2 million and 3.5 million. Net revenues for Q1 2013 are expected to be in the range of 14.7 million and 16.0 million.
Thank you for listening; we will now take your questions.
The question-and-answer session of this conference call will start in a moment, in order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed.
After Q&A session
We are now approaching the end of the conference call. I will now turn the call over to China Digital TV’s Hao Nan for closing remarks.
Mr. Nan Hao
Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to talking with you in the coming months.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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