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Executives

Qindai Wang – Chairman, President and CEO

Vivian Guo – Acting CFO and VP

Analysts

Billy Collins [ph]

Hurray! Holding Co., Ltd. (HRAY) Q4 2008 Earnings Call Transcript March 5, 2009 9:00 PM ET

Operator

Thank you. Welcome to our fourth quarter and fiscal year 2008 earnings 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 fourth quarter and fiscal year 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 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. Please proceed.

Qindai Wang

Thank you. Good evening and good morning to those from Asia. Thank you for joining us on Hurray's fourth quarter and fiscal year 2008 earnings conference call. First of all, I would like to share with you Hurray's fourth quarter and fiscal 2008 financial highlights.

Second, Vivian Guo, our Vice President and Acting CFO, will discuss our fourth quarter and fiscal 2008 financial results in more details. Third, I am going to update you on our business strategy and operation highlights, following there is a Q&A session.

Let us start with our Q4 and 2008 financial highlights. Although we met our guideline in the fourth quarter of 2008, our overall performance was negatively impacted by the slow confirmation process due to the China Unicom restructuring. Revenue for the previous quarter of $3.9 million has been recorded but only $2.8 million was confirmed in the fourth quarter, which had a negative impact on our gross profit of $0.9 million in the fourth quarter.

Looking forward, we are enthusiastic about our focus on mobile entertainment strategy, and we believe the introduction of 3G will make mobile music, mobile games and videos more attractive and much easier to use. Certainly, we are focusing on developing more excellent [ph] mobile music, game and video services, which we have – (inaudible) to catch the potential market growth in the 3G age.

Highlights for the fourth quarter of 2008, total revenues were $14.4 million, an increase of 6.7% quarter-over-quarter and a decline of 9.2% year-over-year.

Total wireless services revenues were $11.5 million, an increase of 3.8% quarter-over-quarter and 4.2% year-over-year.

Recorded music revenues were $3.0 million, growth of 19.2% quarter-over-quarter and decline of 39.3% year-over-year.

Net loss was $9.2 million. Adjusted EBITDA, a net loss of $2.7 million. Diluted loss per ADS, $0.42.

Highlights for fiscal year 2008. Total revenue was $54.0 million, a decline of 10.9% as compared to $60.5 million for year 2007. Wireless services revenue was $42.7 million, a decline of 14.7 % as compared to $50.0 million for year 2007. Recorded music revenues were $11.3 million, a growth of 7.6% as compared to $10.5 million for year 2007. Net loss was $12.0 million, compared to net loss of $42.0 million for year 2007. Adjusted EBITDA was $0.6 million, as compared to $1.5 million for year 2007. Diluted loss per ADS, $0.55.

Now, let me invite Vivian to give you more detail about our financial results for the fourth quarter and the year 2008.

Vivian Guo

Thank you, QD, and thank you all for joining our earnings conference call. I would like to discuss the following details about our fourth quarter and fiscal year 2008.

Our total revenues for the fourth quarter ended December 31, 2008, were $15.4 million [ph], representing growth of 6.7% from $13.5 million for the preceding quarter, and a decline of 9.2% from $15.9 million for the same quarter last year.

Total wireless value-added services revenues were $11.5 million for the fourth quarter of 2008, representing an increase of 3.8% from $11.0 million in the previous quarter and an increase of 4.2% from $11.0 million in the same quarter of 2007. The increase was due to the strong growth in our IVR promotional activities.

Recorded music revenues were $3.0 million, representing an increase of 19.2% as compared to $2.5 million in the previous quarter and a decline of 39.3% as compared to $4.9 million in the same period of 2007, when we organized a major concert event.

Total revenues for fiscal year 2008 were $54.0 million, representing a decrease of 10.9% from $60.5 million for fiscal year 2007.

Total wireless value-added services revenue for fiscal year 2008 were $42.7 million, a decline of 14.7% as compared to $50.0 million in fiscal year 2007.

For fiscal year 2008, total recorded music revenues were $11.3 million, representing growth of 7.6% as compared to $10.5 million in 2007.

Total gross margin was 5.0% for the fourth quarter of 2008 as compared to 30.9% for the previous quarter and 28.5% for the same period of 2007. In addition to the factors mentioned earlier, we had strong growth in IVR services which are, however, low margin revenues.

Gross margin for value-added wireless services was 2.9% for the fourth quarter of 2008, as compared to 26.4% in the previous quarter and 26.9% for the same period of 2007.

Recorded music gross margin was 13.0% for the fourth quarter of 2008 as compared to 51.2% in the previous quarter and 32.0% for the same period of 2007.

For fiscal year 2008, total gross margin was 26.7% as compared to 29.6% for fiscal year 2007.

Gross margin for wireless value-added services was 23.0% for fiscal year 2008 as compared to 27.3% for fiscal year 2007.

Recorded music gross margin was 50.4% [ph] for fiscal year 2008 as compared to 40.6% for fiscal year 2007.

In the fourth quarter of 2008, we recorded a foreign exchange loss of $4.5 million, arising from the drop in the value of the Euro against the US Dollar.

Total operating expenses, which included impairment for goodwill of $1.0 million and write-down for intangible assets of $0.4 million, and a gain from reversed costs and litigation expenses of $0.6 million due to the expiry of the petition period, were $6.0 million for the fourth quarter of 2008, representing a decline of 31.1% as compared to the total operating expenses of $8.7 million for the previous quarter, which included a impairment charge of $4.2 million, and a decline of 83.8% as compared to the total operating expenses of $37.1 million for the same period of 2007, which included impairment charges of $31.1 million.

For fiscal year 2008, total operating expenses were $22.7 million, which included impairment for goodwill of $2.7 million and a write-down for intangible assets of $2.8 million, a gain on reduction of Unicom liability of $1.6 million and a gain from reversed costs and litigation expenses of $0.6 million due to expiry of the petition period, representing a decrease of 63.1% as compared to $61.5 million for 2007, which included impairment charges of $41.3 million.

The company again performed impairment testing on December 31, 2008, and recorded a further impairment charge of $12 million, related to goodwill and write-down $0.4 million for the intangible assets at the end of December 31, 2008, and additional gain of $47 from (inaudible) with the system integration business were recognized in the fourth quarter of 2008.

Net loss was $9.2 million for the fourth quarter of 2008.

For the fiscal year 2008, net loss was $12.0 million, compared to net loss of $42.0 million for the fiscal 2007.

Fully diluted loss per ADS was $0.42 based on a weighted average of 21.9 million diluted ADS for the fourth quarter of 2008, as compared to the diluted loss per ADS of $0.42 based on a weighted average of 21.9 million diluted ADS for the previous quarter, and a fully diluted loss per ADS of $1.45 based on a weighted average of 21.7 million diluted ADS for the fourth quarter of 2007.

Fully diluted loss per ADS was $0.55 based on a weighted average of 21.9 million diluted ADS for the fiscal year 2008. This figure compares to loss per ADS of $1.93 based on a weighted average of 21.7 million diluted ADS for fiscal 2007.

Lastly, as of December 31, 2008, the Company had $59.5 million in cash and cash equivalents.

For the first quarter of 2009, Hurray! expects its total consolidated revenues to be between $12 and $13 million.

Now, let me turn back to QD for updates on business strategies and operations.

Qindai Wang

Thank you, Vivian. By staying of the (inaudible) fourth quarter of 2008, Hurray! continued executing its strategy of developing proprietary contents and diversifying distribution channels, with the following business highlights: Hurray! launched 15 new titles on China Mobile's game portal. One of our mobile games, "Brotherhood of Soldiers", remained as the number one download mobile game on China Mobile's game portal throughout the fourth quarter of 2008.

In first quarter of 2009, we will launch 5 new titles. On October 28, two mobile games developed and published by Hurray! were named "Best Action Game" and "Best Adventure Game" at the 3rd China Outstanding Mobile Software and Mobile Games Appraisal Ceremony. Awards from these ceremonies are considered one of the most prominent awards in China's Mobile Games industry.

In addition, on December 26, 2008, Hurray! was named the "2008 Top 20 Chinese Mobile Game Enterprises" by one of China's top service provider websites, SPforum.net.

On November 2008, Hurray! newly signed local top-tier star, Xiaolu Li, released her debut single album, "Oriental Beauty". Subsequently was named "Best Crossover New Artist" and "Best Chinese Singer" at different award ceremonies, and was also conferred the 2008 Publicity Ambassador of China at the Korean Drama Awards.

Hurray! affiliated music companies, including Huayi Brothers Music, Freeland Music, New Run Enterprises, and Secular Bird, released a number of the new songs, including 9 albums, 2 compilations and 2 EPs, and launched successful marketing programs to promote new releases simultaneously over the Internet and wireless platforms.

Hurray! artists, including Jane Zhang, Yuan Shen and others received a number of awards for their outstanding performances at different prestigious music award ceremonies in Asia.

Huayi Brothers Music signed up a number of the new artists, including Jie Zhu, the national champion of the popular reality-competition show, (inaudible).

Freeland Music's affiliate, Fly Songs, organized a number of the very important live performances throughout the fourth quarter, including "The Celebration of Reform and Opening-up" Gala, "The 30th Anniversary of Chinese Television" Celebration and Eason Chan's live performance in Tianjin City.

In summary, Hurray! evolutioned to become a leading mobile entertainment service provide to produce, aggregate, operate, and distribute mobile music, mobile game, mobile videos in the future with a focus on developing more and more mobile music, mobile game, and Mobile video for that, and we like to enjoy potential growth in 3G age.

Thank you for joining our conference call. Now we are open for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Billy Collins [ph], please proceed.

Billy Collins

Hi, thank you. First question, what was depreciation and amortization in the quarter?

Qindai Wang

Depreciation and amortization; just hold on a second Billy, and our CFO, will give the answer.

Billy Collins

I was wondering if it was still around $800,000.

Qindai Wang

Depreciation and amortization.

Vivian Guo

Total depreciation and amortization is $0.7 million.

Billy Collins

$700,000 roughly.

Qindai Wang

$700,000.

Vivian Guo

Yes, yes.

Billy Collins

Okay, and in the December quarter what was the cash burn, how much cash you burnt?

Qindai Wang

How much cash burn in Q4?

Vivian Guo

We generated positive operating cash in the – cash decreased mainly due to (inaudible) $4.5 million, and in the aggregate for the (inaudible) new credit company for $2.5 million.

Billy Collins

What has the management done in terms of cost reduction, when the sales are going lower, how many cost reductions are being put into place?

Qindai Wang

Bill, actually we have cost reductions in – since last Q2 and Q3. Our (inaudible) and cost reduced in the last Q3 and Q4. And we have continuous cost reductions and cost optimizations with some of the (inaudible) lines. We like to focus our business on the mobile music, mobile game, and do some continued cost reduction for other product lines.

Billy Collins

Okay, so if the sale goes from the $14.5 million to the $12 million to $13 million next quarter, will the cost be declining also?

Qindai Wang

Our costs are declining quarterly, and the gross margin is pretty much stabilized.

Billy Collins

Okay, if that is the case how many sales does it take to reach EBITDA breakeven now? What is your EBITDA breakeven point?

Qindai Wang

It is pretty much – if the sales reach like, I would like to see if our sales reach like $16 million to $18 million, somewhere around there, and our gross margin was stabilized around like 20% to 24%, that is pretty much about the EBITDA breakeven point. But we can give you a more detailed information later on.

Billy Collins

Okay, so the breakeven point for sales is maybe 16 million, 17 million, to 18 million a quarter?

Qindai Wang

Yes, we are not allowed to forecast more than one quarter, but looking forward with 3G opportunity in front of us.

Billy Collins

Okay, and what is the seasonality to the sales, is there a seasonality to the sale that is meaningful?

Qindai Wang

Sorry, say that again Bill.

Billy Collins

I am wondering is there – if there is – if any of the quarters are larger in sales than the other quarters due to seasonality?

Qindai Wang

Yes, yes. Actually, basically for the music business first season is low season, actually third and first season for music is pretty much the good seasons. For wireless business actually first season, and also sort of the first season and second season. First season sort of a slow season. The second quarter and third-quarter usually are good quarters for wireless business. It is really subject to the distribution channels and user customers for each season.

Billy Collins

Okay, in the press release it is mentioned that China Unicom was slow in their restructuring, and that some sales were delayed, and that you lost about $900,000 of gross margin, is that going to be received in the March quarter, the kind of Unicom sales that were delayed in the December quarter?

Qindai Wang

I am not optimistic about this one. Actually, the China Unicom restructures and the split the CDMA system from China Unicom to China Telecom, and their original (inaudible) was moved to the China Telecom. They are rebuilding their new (inaudible) in China Unicom, and I don't think actually, I'm not optimistic of how we can track this number back. So, we actually don't give the high forecast for China Unicom’s revenue.

Billy Collins

Okay, lastly on your balance sheet, I think that the company has $2.70 a share, is that cash per share an unusual circumstance that the stock is around $1 a share. Has management – how many calls has management made to the SEC and contacted them over the stock being manipulated, because it is so far below the cash per share?

Qindai Wang

Actually, we did not actually like contact the SEC about this specified thing. And we are now actually consulting with our legal advice, but I think we're not allowed to comment about our stock price.

Billy Collins

Okay, so the company has not contacted them over the stock trading so far below the cash per share price?

Qindai Wang

Yes, you are right Bill.

Billy Collins

And what are management's comments regarding the stock being at around a dollar, and the cash per share being at $2.70, in terms of your comments for buybacks, and why you think, I mean, do you think, the stock is being manipulated and someone should be notified of that?

Qindai Wang

Bill, I'm sorry, as a management team, I don't think actually we are allowed to comment about the stock price.

Billy Collins

Okay, so there are no buybacks than right now than that the board has said we're going to do. Are there any buybacks?

Qindai Wang

No, not company buybacks, and was discussing (inaudible) meetings, yes, and if we have any such kind of discussions and any resolution from the board, we will let all of the investors know over the course of time.

Billy Collins

Okay, I'm not sure I heard that correctly, there are no buybacks authorized right now?

Qindai Wang

There is no buyback resolution issued by board at this moment, and I mean if there is any resolution coming out from the board regarding buyback, we will let investor know the first time.

Billy Collins

Okay, I'm curious as to why there will be no buybacks, if the cash per share is $2.70 and the stock is around a $1. I'm just wondering why there will be no buyback in place for buying the shares right now at $1.

Qindai Wang

Yes, Bill, and very good point. (inaudible) to our Board and we were discussing about it.

Billy Collins

Okay, so you don't think that the stock is being manipulated?

Qindai Wang

Sorry, I don't think I'm in a position to comment on Hurray's stock as a management team.

Billy Collins

Okay.

Qindai Wang

But thanks for your questions, Bill.

Operator

At this time, we have no additional questions in the queue. I will turn the call back to Mr. QD Wang.

Qindai Wang

Okay, thank you all for joining Hurray's conference call and we will continue to focus on our mobile entertainment strategies, especially try to develop our mobile music and mobile game business, and enjoy some good growth in the future through 3G age. We are looking forward to talk to you about the Q1, Q2 and full-year 2009 earnings, when earnings conference call comes in date. Thank you very much, bye-bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.

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