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China TechFaith Wireless Communication Technology Limited (NASDAQ:CNTF)

Q4 2012 Earnings Call

March 12, 2013, 08:00 am ET

Executives

David Pasquale - Global IR Partners

Ouyang Yuping - CFO

Jay Ji - Director, IR

Analysts

Operator

Good day, ladies and gentlemen and welcome to the Quarter Four China TechFaith Earnings Call. My name is Ian; I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) And as a reminder, the call is being recorded for replay purposes.

I would like to hand the call over to Mr. David Pasquale of Global IR Partners. Please proceed, sir.

David Pasquale

Thank you, Operator. Welcome everyone to China TechFaith’s fourth quarter 2012 and full-year 2012 financial results conference call. Joining us today from the company are, Chief Financial Officer, Ms. Ouyang Yuping and SVP, Mr. Jay Ji.

We will have time for your questions after a review of the quarter’s and full-year 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 that 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, intends, plans, believes, estimates, confident, outlook and similar statements.

TechFaith may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on Form’s 20-F and 6-K, and it’s annual report to shareholders, in press releases and in 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 risks outlined in TechFaith’s filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F.

TechFaith undertakes no 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 the Generally Accepted Accounting Principles as practiced in the United States of America and references to dollars are to the lawful currency of United States of America.

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

Jay Ji

Thank you, David and welcome to our fourth quarter and full-year 2012 financial results conference call. Hopefully, everyone had a chance to review our earnings release.

This was a challenging year for TechFaith as we faced deep unit volume reduction in our mobile phone business. Competition remained high across the board which added further average selling price pressure. Adding to this difficult environment was continued headwind of a weak global economy.

Against that and [consumables] backdrop TechFaith worked to show our business up and to remain focused on our long-term initiatives. Areas we could control we did. This includes maintenance due to the operating control which led to a certain areas that percentage reduction in operating expenses for the full-year 2012. We also kept our gross margin healthy at 23% for the full-year.

We expect a high competition and challenges to remain in our core markets as we move through 2013. We have confidence in our ability to weather the storm, however, based on the scale of our ongoing operations, the help of our balance sheet and the company’s rich history of delivery and innovations to customers and carriers. Our focus is on driving an improvement in margin and profitability. This is in line with our overall growth of increasing shareholder value.

In terms of specific results, full-year 2012 revenue was $137.7 million compared to $323.8 million for the full-year 2011 and we experienced at the start of 2012 continue through the year we were negatively impacted by steep unit volume reduction in our mobile business and a shift to android based devices. We continue to make progress in our higher margin niche offerings but this was not enough to offset the material declines in the other segments of our business.

As a result of the material decline in unit and revenue, we experienced a net loss of $3.3 million in 2012, compared to net income of $27.1 million for the full-year of 2011. For the full-year 2012, ODP business contributed about 42% of our total revenue or about $57.8 million. This reflects the steep unit decline and the move to Android based devices I noted a second ago.

Geographically, after China, we have benefited from Latin America, the EU market, Russia and some East Asian markets. As a percentage of revenue, 93% of our revenue for the full-year came from the domestic China market and the 7% came from international markets. This compares last year when 98% of our revenue came from the domestic China market and 2% from international markets. We continue to build our brand internationally by participating in different exhibitions in Dubai, Singapore, Spain and the United States. We have also integrated all our branded mobile devices results under our 17FOX brand. This integration is expected to result in greater efficiencies such a consistent marketing campaign.

We also remain optimistic about the domestic China market. These are points how we are pointing to expansion of smartphone unit sales into China as a portion of total worldwide smartphones sales. The majority of the volume increased is in lower ASP smartphones; an area where do not compete given the low margin profile, but we are increasing sales in higher end smartphones and the niche mobile devices where we do compete. Adding to this are ongoing networks upgrade programs in China which better supported our niche applications on the higher ASP best suited to smartphones.

We also continue to have success and gain momentum in the niche segment, I just mentioned. This segment that you heard, specialize tailored offerings rather than mass market communications device and this has a rich history in design is able to tailor products for customers and the carriers going after the niche segment. This includes our expanding the line of ruggedized mobile devices, our new mobile healthcare devices and the customized under priced solutions for specific industry. We have several launches planned for 2013 as we continue to broaden and refresh our product line up to best meet the needs of the market demand.

Let me now turn to our game business. Our games business (inaudible) gross profit $11.4 million last year compared $21.2 million in 2011. We benefited from considerable hardware sales in 2011 that did not repeat at the same level in 2012. This primarily includes our motion sensor controllers. We remained and set it above the gaming segment given the size of the markets on the attractiveness of the user base. There are several areas that we think we can be successful and operate at profitable yield. For example, we recently announced that we will further enhance our technology in gaming with 3D motion sensing technology on the delivery platforms and games in China.

This will give gamers an even more unique and premier experience. As a result, we are optimistic about this opportunity in 2013. In summary, well the fourth quarter and the full year 2012 where challenging for us. We remain optimistic about the potential in our residential mobile device, mobile healthcare devices on the 3D motion sensing technology.

We have established core competencies and the product that (inaudible) in the market we are going after. We continue to back our strategy with a strict operating process and a sound financial management. On the (inaudible) we expect headwinds to remain in 2013. We are confident in our prospects and we remain focused on our opportunities ahead of us.

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

Ouyang Yuping

Thank you, Jay. Thank you for joining our fourth quarter and full-year 2012 earnings call. Let me quickly review some key operating points and our outlook before taking Q&A.

For the full-year of 2012, net revenue was US$137.7 million compared to US$323.8 million for the fiscal year 2011. As Jay mentioned, revenue was negatively impacted by a steep decline in unit volume, higher competition and a continued weak global economy.

For the full-year of 2012, our ODP business was about 42% of total revenue or about US$57.8 million. Our branding business was about 37% of our total revenue or about US$50.3 million for the full-year 2012. Our gaming business accounted for about 21% of our total revenue or about US$29.6 million.

Our overall gross margin was 23% for the full-year 2012 compared to 26% for last year. The main driver of the decline was the significant decline in revenue. Gross profit for the full-year 2012 was US$31.3 million compared to US$82.5 million.

For the full-year of 2012, total operating expenses were US$31.1 million or 38% decrease compared to US$50.1 million in 2011. The drop was mainly driven by our strong control on the sales and marketing activity. We also benefit from a reduction in bad debt expenses.

For the full-year 2012, income from operations was US$1.6 million compared to US$38.1 million for the full-year of 2011.

Net loss for the full-year 2012 was US$3.3 million compared to net income of US$27.1 million for the full-year 2011. For the fourth quarter of 2012, our net revenue was US$31 million compared to US$81.7 million in the same quarter last year.

As you will recall, we experienced a decline in our revenue from the US$18 million level to (inaudible) in the first quarter 2012. For the fourth quarter of 2012, our overall gross profit was US$5.9 million compared to US$19.1 million in the same quarter of last year.

For the fourth quarter of 2012, our operating expenses were US$7.9 million, US$15.9 million lower compared to the same quarter last year. The decrease was mainly due to strong controlling our operating expenses and expense on sales and marketing activities.

Loss from operations for the fourth quarter of 2012 was US$1.4 million compared to income from operation of US$3.9 million in the same quarter last year. Net loss for the fourth quarter of 2012 were US$3 million compared to net income of US$2.7 million in the same quarter last year.

Our balance of cash and cash equivalents at December 31, 2012 was US$258 million, up US$7 million compared to December 31, 2011. On per ADS basis, we ended the fourth quarter with 4.9 in cash per ADS.

In terms of specific guidance as noted in our press release for the first quarter of 2013, we currently expect total revenue in the first quarter of 2013 to be in the range of US$28 million to US$33 million. This forecast reflects the continued headwinds facing the industry we review earlier.

Operatorthat concludes our formal comments. We are now ready to take any questions, thank you.

Question-and-Answer Session

Operator

Thank you very much. So ladies and gentlemen, your question-and-answer session will now begin. (Operator Instructions) And we have a question for you. It comes from the line of Alex (inaudible). Please go ahead and join the call.

Unidentified Analyst

I have two questions; the first question is for you. Many people have sold your (inaudible) you said plenty of owns 22 office buildings in China including Beijing and Shanghai. Are they reported as cash or buildings in the balance sheet?

The second question is for [Defu], the (inaudible) in the past months and the half has being sold 20 pieces, 20 following pieces each priced at US$700. So for quarter that would be translate to $30 million, why growth forecast be so low, it would be US$28 million to US$33 million for next quarter, thank you?

Jay Ji

Okay, I will answer your first two questions. I do believe there are many of our investors with some information from our (inaudible) regarding our component business and there are some business resembles the building obviously does not belong to our list of companies (inaudible) bureau belongs to listed company you can read all of our press release. All those bureaus belong to the list of the company. Other bureaus don't belong to the list of the company. It’s not related to the list of the company at all. That's the first question.

The second question you mentioned that our CEO in his remarks said, we are selling one of our mobile models at a price around the US$700. That’s true. For the latest broadband mobile phones, we are selling it is true online stuff at a retail price around US$700 and we believe in future our sales promotion and the marketing activities, we hope we can sell that amount of this model set by our CEOs. But currently we didn't sell that amount.

Unidentified Company Representative

Thank you Alex is there another question.

Unidentified Analyst

I think on the (inaudible) the CEO said the [public] company does own those 22 buildings and not belong to other company. We have the record (inaudible) the second question I really don't have it that.

Ouyang Yuping

How many buildings?

Unidentified Analyst

22 buildings.

Ouyang Yuping

Yeah, exactly. Yes, the number is correct but not all the buildings is finished. Most of them is in the progress of construction.

Unidentified Analyst

Oh, that's better answer than the previous answer. So does that mean you have owned those building but some of them are under construction, that's correct?

Jay Ji

That's correct. When we finish the construction we are going to have 22 buildings belong to the list of the company, but probably you are going to see the (inaudible) bureau does not belong to the list of the company.

Operator

We have another question that comes from the line of John (Rolls). Please go ahead.

Unidentified Analyst

Yes, you reported very large cash balance, can you tell shareholders how you plan to use that cash balance to the benefit of shareholders.

Ouyang Yuping

We are very glad we have this kind of [cash] on our balance sheet and for our cash we are very careful especially after 2008 financial crisis. We are going to spend some of our cash on the building construction. At the same time we are using some cash for our operating and in future we need to be very careful to spend our cash as well probably if there are some good opportunities we may spend cash on that. But till now we don't have more information to spend the cash for others.

Operator

(Operator Instructions) We have a question from the line of Pete (inaudible).

Unidentified Analyst

I've been a shareholders and for my client for probably the last several years and I do appreciate the cash management that you guys have done, probably one of the more solid balance sheets that I can find out there. But the one issue is that’s not what drives a stock price, growth does and my question to you is, when do you expect any kind of growth in any category that we should be excited as shareholders?

Jay Ji

As we said, we're always focusing on our shareholders and the long-term value and also our company’s long-term profitability, and currently we have deals focusing on our company’s business. We will have to make our company’s business stronger and (inaudible). So hopefully in future, we're very hardworking, we can bring backup, bring back our shareholders confidence and also grow our company’s market capitalization.

Operator

Thank you again for your questions. (Operator Instructions) I have another question in the queue. This one is from [Joe Rizo], please go ahead during the call.

Unidentified Analyst

I have a question. You took an intangible write down of $3.1 million. So outside of that you had an operating profit of $1.1 million. Will you continue to write down your intangible asset at that same rate or how should we think about the operating profit for the next quarter because outside of that write down, you had an operating profit of $1 million and you are projecting around the same revenue. So can we expect an operating profit in this upcoming quarter?

Jay Ji

Joe obviously (inaudible) your discussion.

Ouyang Yuping

Currently by the year-end, we prepared an impairment of our intangible asset and we have got a 3.8 million impairment of intangible asset, and for this 3.8 million impairment in the fourth quarter, 2.1 million impairment is related to acquiring intangible asset used in our [ODB] segment and US$1 million impairment related to the trade names and customer base of branding segment. By now we think the acquired intangible assets value is recoverable in the future, so we do not expect more impairment in the first quarter of this year.

Operator

We have also, the question is from (inaudible). Please go ahead Pete in the conference.

Unidentified Analyst

If you are, if it's very important to have shareholder value and it’s your fiduciary responsibility to manage for the shareholders; I mean since you have been public, the stock was $20, now it’s near an all time low. Our market set an all time high and a lot of the China Company out there have broken 52 weeks highs on the upside and actually we are driving very good growth and I am just not seeing this from you guys at all.

The one thing I would like to see is something from a buyback, a dividend or even going private because its pretty debt money sit and watching a stock do nothing and the growth is just not there and that’s why I am kind of focused towards what area do you expect the growth to come from because you are not able to compete with Apple or Samsung in that area. So please give me an idea where in the next year or two the growth is coming from, thank you?

Jay Ji

From our business point of view, we are still very optimistic about our products. As barely our middle to high end ruggedized phone and also the healthcare mobile devices, and currently we are setting this kind of ruggedized phones to enterprise users, to customers and we are very glad of our current achievements and also this kind of products with higher margins that we expected. We don't want to compete in this kind of very, very top markets for the low end phones with tiny gross margin. So in future we believe our ruggedized mobile phones can be very good and also our healthcare phone is going to be shaped to the market probably in Q2 this year.

That’s our business and also for our game business we are going to promote 3D motion sensing technology devices for the TVs and this kind of product once we’ve launched can be very, very attractive for the market and most of the TVs we are going to install this kind of devices can be used at home, that's the business and also you mentioned and you suggest that our buyback and dividends and naturally we have discussed all this kind of (inaudible) many times. However, currently we still don't have plans for the buyback and dividends.

As we have said in the past many times, we are focused on our long-term investment in the companies of retail business. And also we continue to operate in this kind of mobile phone markets and games market. We are going to ensure our long-term business and the balance sheet health we are better able to navigate into the broader markets up and down. We are able to give partners confidence in working with our companies.

Operator

We have a further question from (inaudible). Please go ahead and join the call.

Unidentified Analyst

Jay, it appears that you invested approximately US$9 million in additional construction because the construction account increased by that much, can you give us some insight on to what those investments are and how much more you will have to make this year and what is the opportunity for generating profit and what is the value of that investment?

And then the second question I have is, can you tell us how much cash resides outside of China for the company? Thank you. Those are the two questions.

Jay Ji

Okay, I'll ask our CFO, Ouyang Yuping will give you an answer for our construction CapEx.

Ouyang Yuping

Currently we have three projects under construction. One is located in [Huang Jo]; one is located in [Shi Yan] and another one is located in Beijing and for about $10 million cash outflow used in the construction in the fourth quarter most of the cash outflow is used in the project in Beijing, and currently we have 16 buildings under construction in Beijing now.

And for the three projects located in [Huang Jo], [Shi Yan] and Beijing, we (inaudible) to expand maybe another US$150 million or US$200 million in the next four years. As these buildings are still under construction now and we cannot say when these buildings can generate revenue for us because we need to get some license before we can utilize these buildings. So it's still quite earlier to say when we can expand revenues from these buildings now.

Operator

Thank you very much. There are no further questions. So I would now like to turn the call back over to the management team for the closing remarks.

Jay Ji

Thank you, everyone for participating in today’s call. We look forward to speaking with you on our next quarter results call. Please feel free to follow up with us if you have any additional questions. Have a good day. Bye, bye.

Operator

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

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