Taomee Holdings Ltd (NYSE:TAOM)
Q4 2012 Earnings Call
March 14, 2013 08:00 am ET
Na You – Investor Relations Manager
Benson Haibing Wang – Co-Founder, Director and Chief Executive Officer
Paul Keung – Chief Financial Officer
Roc Yunpeng Cheng – Co-Founder, Director and Chief Operating Officer
Zim Yin – Stifel, Nicolaus & Co., Inc.
Andy Yeung – Oppenheimer Securities
Ladies and gentlemen, thank you for standing by and welcome to the Q4 2012 Taomee Holdings Limited Earnings Conference Call. At this point in time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advice you that this conference is being recorded today, Thursday, March 14, 2013.
I will now like to hand the call over to your first speaker for today, Taomee’s IR Manager, Ms. You Na. Thank you, please go ahead.
Thank you, Operator. Good morning and good evening everyone. Welcome to the fourth quarter and full year 2012 earnings conference call for Taomee.
Joining me on the call today are our CEO, Mr. Benson Wang; our CFO, Mr. Paul Keung and President of Taomee, Mr. Roc Cheng. As we posted yesterday, our prepared remarks, we will refer to our results presentation which can be downloaded from our IR website. Following the remarks Mr. Benson, Roc, and our CFO, Mr. Paul Keung will be happy to take your questions.
Before we begin, I'll refer you to the Safe Harbor statement in our earnings release which also applies to our conference call today as we will make forward-looking statements. Then I will hand over the call to our CEO, Mr. Benson.
Benson Haibing Wang
Hi everyone, thank you, You Na and thank you everyone for joining us today. To begin I would like to say that we are pleased with our 2012 performance and achievements in difficult but transformative year for Taomee. Last year we focused on growing our holdings footprint and on enhancing user engagement, while also expanding our content across our diverse cross media platform.
Throughout to state that this powerful and similar platform now have many highlights as follows. We reached more than 44 million quarterly active users in 2012. We had more than 15 million total mobile application downloads. We have over 250 morning content episodes that have been broadcasted on more than 113 channels including CCTV
We also have our only weekly TV program called Taomee Dream School Broadcasting on major TV channels in China. We depicted several major books, office films, which were shown on more than 2,000 screens in Mainland China and Taiwan with over 4 million movie garners who came to watch these films. We will continue strictly upon our strategy to expand Taomee from being China’s largest online community for children to become the largest cross media platform both on family entertainment in China.
Long-term, we expect to leverage this dictation into new online product, mobile games and the interactive toys driving new revenues streams and to create revenue growth.
We expect 2013 to be a breakout year as we aim to leverage our cross media platform in new ways and then you can (inaudible) this summer, we plan to launch our newest franchise in Chinese, then in French and then we’ll – all in English as Hero. They are launched and the conference distribution of Hero will be very different from our previews franchisees.
We will release original content through online and offline channels at the same time, while our success in the past years was based on first going online and then offline. We believe this new approach will provide our users and families with a more integrated experience. By providing children and the teenagers with a wide array of entertainment options, we believe we have the right reception to further build upon the trust and the loyalty that parents and the children have towards Taomee. This still – it will further help solidify the popularity of that (inaudible) and increase monetization opportunities going forward.
In addition, we have two other major initiatives that are part of our growth map for 2013. First, we have already begun to expand our game portfolio to attract a wider age range of users, including preteeners and the teenagers. Today a majority of our online users are between the ages of 6 to 11. We will leverage our published collection with younger fleet and the gross with them as they become teenagers and young adult.
This year we will launch several new online and mobile games on our platform for slightly older and a more experienced team, including both self developed and licensed titles. For example, our prudentially major began Hero’s earnings as well as a couple online action games we recently licensed and started to close the beta testing for that will attract the preteens and the teenagers.
Second, we will continue to expand our brand monetization. Last year we successfully expanded into the interactive toys and the mobile abilities and this new business are major growth strides for 2013. In addition, we have brought our relationship with major partners including P&G and (inaudible) to create a long spoke media integrated marketing solution. This type of relationships of last run way will produce growth.
And we are even more excited because we recently launched a new sales development TV program that would further expand this business. Thus said, we will stay focused on harvesting our extending monetization opportunities and remain opportunities and discipline towards further growth abilities. Having successful and huge strategy there in 2012 we are confident that this strong foundation will provide us with the right confirmation to strengthen our top and bottom line in the coming years.
Lastly I would like to personally introduce Roc Cheng, my fellow Co-founder to everyone on the call. We promoted Roc Cheng to President last December because of our expanding and diversified revenue stream we decided that I should remain focused on the challenges and development of our core online business and I will pass on my other day – today’s activities to Roc. Roc has joined us on today's call and he will also speak in future earnings conference calls.
Now, I would like to hand the call over to our CFO, Paul to discuss our operating results and future outlook. Thank you.
Thank you, Benson. Good morning and good evening to everyone. I'd like to walk you through our financial results for the fourth quarter and calendar year 2012. But to begin with, I would like to highlight on today's call some new operating metrics that we think better represent our standard entertainment platform that we built over the last several years as Benson discussed.
The reason for disclosing these metrics is that we’re seeing many users today interact with multiple virtual worlds, different types of online games all at the same time. In addition, during the off-peak periods when elementary, middle school kids have limited opportunities to be online, we’re starting to see a growing share of the time allocated to it’s online gaming activities away from online, then actually is towards social networking, video and mobile.
As a result, for today's call we will provide additional metrics that will be helpful to you in measuring our reach in all these footprint for increasingly important non-gaming relate channels and services.
For the fourth quarter 2012, monthly average page views for our non-gaming online services were approximately 145 million and monthly unique visitors was over 70 million. These figures have increased significantly and sequentially throughout 2012, as they were only launch in the late part of 2011. For the same period (inaudible) were self developed virtual worlds that exceeded 420,000.
Please note that this figure excludes any activities from virtual world’s license with third parties as well as casual web and mobile game usage and these figure is incremental and sizable and have been growing.
Fourth quarter active accounts increased 27% year-on-year, to $34.4 million demonstrating continued growth in reach in audience across our platform. In fact, if you look at the quarterly average active accounts in 2012, the increase was 54% versus the average in 2011.
Our fourth quarter net revenues were $7.5 million, which was at the high end of our guidance of $7 million to $7.5 million and slightly above the consensus. By segment, fourth quarter online revenues were $6.3 million compared to $7.5 million in the prior year period. The decline was largely due to decline in active paying accounts, which declined to $1.2 million from $1.7 million in prior period.
Fourth quarter offline revenues increased 11% to $1.2 million year-on-year, primarily due to the incremental revenue contribution and Company’s interactive poor trading business. The large sequential decline in offline revenues was a result of strong revenues in the third quarter from our films, Seer and Mole's World which combined earned nearly $2 million revenue.
On a full year basis, our net revenues decreased 11% to $40.2 million, down from $45.4 million in 2011. For the full year 2012, our net online business revenues were $32.2 million, decreasing 20% compared to $40 million in 2011. Our 2012 online business revenues declined to approximately 80% of our total net revenues versus 89% mix in 2011, highlighting our increased efforts in vacation revenue streams.
Meanwhile, our net offline business revenues grew 59% to $8 million as compared to $5.1 million last year. The year-on-year increase was mainly due to growth and contribution from a merchandized licensing, film and interactive toy business.
Now, let’s take a look at the gross profit margins for the quarter and full year periods. 4Q gross profit margin was 73.2%, a decrease of 81.3% the same quarter last year. 4Q gross margin for online business was 74% down from 82% in the same quarter last year. This was impacted by decline in online revenues due to our efforts and focus on increasing our user base.
4Q gross margin for offline business was 69% down from 75% in the same quarter last year. This was mainly due to increased revenue contribution from our lower margin interactive toy business. For the full year, gross profit margin was 75%, down from 83% in 2011, 2012 gross margin for online services was 78% compared to 85% in the prior year. Gross margin for the offline business were 62% down from 64% in 2011.
Moving to operating expenses; product development expenses decreased to 2.7 million in the fourth quarter down 12% year-on-year. This decrease reflected decrease in payroll expenses and lower share based compensation. And over the full year, product development expenses were actually up to 12.3 million from 10.3 million.
The full year increase reflects higher payroll expenses associated with higher head count mostly due to our investments in mobile and online services. Sales and marketing expenses were 2.1 million in fourth quarter 2012, an increase of 400,000 year-on-year. The increase was primarily due to motion expenses and animation expenses. For the full year sales and marketing expense increased by 59% to 6.3 million in 2011 versus 10 million in 2012.
If we exclude animation stock-based compensation, our sales and marketing expense as a percentage of net online revenues was approximately 20% in the fourth quarter and full year period. This compares to approximately 16% in the comparable same period in 2011.
G&A expenses in fourth quarter increased 2.6% to 2.2 million year-on-year. The year-on-year increase was primarily due to professional fees, partially offset by lower pay roll. For the full year, G&A expenses increased by 26.5% from 8 million last year to 10.1 million this year. The increase was primarily due to payroll expenses related to new hires, share based compensation, as well as incremental expenses related to being a listed company.
You will note also that other operating income for the fourth quarter was 2.8 million. This consists primarily of government subsidies. This figure is quite sizable and equivalent to our net income for the quarter. However, you should view this line on an annual basis, it’s difficult to predict from time to time, but over the long-term, and on an annual basis, it’s tentatively of total revenues.
Our share profit equity investment was 1.1 million in 2012 compared to 4.2 million last year. The decrease was mainly due to a realized one time gain of 3.7 million from the sale of a partial interest in Elyn Corporation, which we noted last year.
Now let’s turn our attention, net income, earnings per ADS, and adjusted EBITDA for the quarter and full year. Despite decline in online revenues, and major investments in both our online/offline businesses, we finished the quarter and full year with a GAAP and non-GAAP operating profit.
Fourth quarter GAAP diluted earnings per ADS was $0.06 up from $0.04 from the comparable period a year ago. Full year GAAP earnings per ADS was $0.24 compared to $0.56 in 2011. Fourth-quarter non-GAAP net income increased to $2.7 million compared to $2.3 million in the fourth quarter of 2011. For the full year, a non-GAAP net income attributable to shareholders of ordinary shares was $11.1 million compared to $17.6 million in 2011. Non-GAAP earnings per ADS for the fourth quarter and on a diluted basis increased to $0.07 compared to $0.06 in the fourth quarter of last year. For the full year non-GAAP earnings per ADS was $0.29 versus $0.51 in the prior year.
Stock based compensation in the quarter was approximately 480,000 and for the year it was about $2.2 million. Adjusted EBITDA which excludes stock based compensation was $2.8 million in the fourth quarter of 2012. For the full year adjusted EBITDA was $9.3 million. We finished account 2012 with approximately $190 million in cash on the balance sheet. We currently have no outstanding debt and capital expenditures for the year was less than $1 million. Total weighted average diluted ADS is approximately $37.4 million at the end of the quarter.
Turning to first-quarter 2013 guidance. We are expecting between $8 million and $8.3 million in total net revenues which translates to roughly 7% to 11% sequential growth. We are expecting a mix of online and offline revenues as a percentage of total net revenues to remain stable at roughly 80:20 for the first quarter.
Long-term this relationship closer to 50:50 as we continue to invest in new off-line monetization channels and given these businesses are in a very early stages.
We expect our headcount and cost structure to remain stable over the coming quarters and we will continue to develop our new products for online and mobile and we will continue to establish new and existing monetization growth in our interactive toys, retail and licensing business.
In closing, we are very excited about our prospects for 2013 and beyond. Our investments over the last 18 to 24 months to establish an expansive cross media platform is almost complete. As Benson mentioned earlier, we will showcase our cross media platform capability this year with the launch of Xia Zhuan, which is a major brand extension of Xia.
In our online business, having sacrificed short-term revenue growth in the past year, our investments in headcount and new talent and an establishment of the new pipeline of online mobile games and entertainment products, all we hope will bring new revenue streams, attractive revenue growth and attractive returns in the coming quarters.
These investments include broadening our online game and mobile portfolios to include Zhuan to attract in order preteen and teenage audience, which has a greater spending power and higher ARPU.
In our offline business, we have taken a step by step walk and talk approach to expanding our monetization opportunities. We started first with co-branding and consumer product licensing, focusing initially on books and simple product basin.
Today, we have expanded our offline revenues and key partnership revenues to include integrated marketing revenues, film and interactive toys. We believe that these combined efforts have positioned Taomee extremely well to begin leveraging our expensive technology and our cross media platform going forward.
Thank you again for participation in the call. Operator, we are now ready to take questions.
Sure. Thank you very much sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Zim Yin of Stifel, Nicolaus. Please ask your question.
Zim Yin – Stifel, Nicolaus & Co., Inc.
Okay, good evening Benson, Paul and You Na. This is Zim Yin on behalf of George Askew. Thank you for taking my questions. Can you talk about the offline business segment, it looks like the growth way has slowed down, for example in 4Q‘11 the growth rate was around 40% versus 11% of this quarter. Is it the case of seasonal factors, confliction or something else? Thanks.
It’s a good question Zim. I want to also point out that if you look at the full year growth, it’s about 59% year-on-year. I also want to point out that, when we gave an outlook for the full year, we mentioned growth north of 40%, so it didn’t – our point is that it’s very well relatively than we expected throughout the year. And I think you answered one question, yes there was some seasonality because as you sign some of the contracts, sometimes they may sign in the fourth quarter or in the third quarter and in this particular case there were a couple of major of these integrated marketing contracts signed in the third quarter.
That being said, we do expect the growth of our offline business in the coming quarters and tend to really look at on a full year basis on ‘13 to remain in a very healthy level. So much comparable to let’s say, what I guided last year and hopefully closer to where we finished this year.
Zim Yin – Stifel, Nicolaus & Co., Inc.
Okay. Thank you. My second question is, could you give us an overview of the current completion landscape up here and against et cetera? Thanks.
I want to pass that question to Roc, who will answer in Chinese and I will translate for him.
Roc Yunpeng Cheng
Thank you, Roc. Okay, so Roc said, over the last two years really what we’ve seen us do and our strategy is really consistent with how we have approached the competitive market, competition has been intense really for the last two years, and it hasn’t really subsided. What we’re doing is, number one we are very focused on growing our online user, our user engagement and our market share. And such a strategy includes demonetization and includes our expansion as well as new brands.
Secondly, as we talked about in the call today, we made a big investment including cross media platform. This really sets us apart from our online and offline competitors and if you think what that means, that includes our investment in TV film, our proprietary TV show Taomee Dream School, as well as our ability to expand our relationships with our partners in integrated marketing as well as the interactive toy business.
Zim Yin – Stifel, Nicolaus & Co., Inc.
Sure. Roc will answer that question. I will translate.
Roc Yunpeng Cheng
So, we are currently developing games today for wider age group for a variety of reasons. First, we’re finding our users are actually getting younger digging online in earlier age. Now also our existing base continues to grow up and become young adults. It is our responsibility and we believe in – we are excited to have the responsibility to offer healthy and suitable games for all ages. We believe in making games that are fun and maintain our trust with parents, teachers and caregivers that we’ve had and we've established over the last – since the genesis of our company. The game that you mentioned Cartoon Style, is a cartoon style action game. It's very unique. It brings some more tested, it's very entertaining for children, it's very healthy and it's a good complement and a good solution we believe to a lot of the games that are too violent and we believe unhealthy.
We want to highlight that these type of games that we bring to market is a good alternative to children and it's based on the same formal success that we build in a smarter games, if you think about Seer and Gong Fu Pai.
As a company we have a history of innovative games to market that children love and parents trust and we believe that could remains and always will be our core competency.
Zim Yin – Stifel, Nicolaus & Co., Inc.
Thank you very much.
Thank you very much. Your next question comes from Andy Yeung of Oppenheimer. Please ask your question.
Andy Yeung – Oppenheimer Securities
Hello, hi good evening Benson, Paul and Roc Cheng thank you for taking my questions. I have two questions. My first question is about your monetization strategy. In fourth quarters, we have seen reversions of the previous trend in terms of your ARPU which actually went up slightly – pretty nicely, but active account continued to decline. So can you help us understand going forward into 2013 what's your monetization strategies for you online business?
Hi Andy, regarding the question on monetization strategy, yes those are the trends that you do see. We are – if you think about pipeline for this year, we are launching a number of games as Benson mentioned which you will notice that the style is moving more towards to attract children who are really playing games of the ages of 10 and 15 and even older as they grow older. We've had some success down in the past. And so what you should see is a shifting and higher ARPU as those games continue to grow.
Well we worked that to success, if we have a new franchise that is for instance we launched a franchise for elementary school kids late last year, still in the early stages. If that certainly where in the next year or two would become very popular that will bring ARPU down, but short-term what I can see is we expect ARPU to grow, although we remain very focused at a very broad age group, a broadening age group I should say. As it relates to trends in 2013, our strategy at least short-term is we hope to stabilize the active accounts. We’re starting to see stabilization already some time this year, and we like our ARPU to grow and if you look at the pipeline, (inaudible) summer and for the second half.
Hello? Did you hear that?
Okay, I answered the question although. In the last sense, I believe I finished with 2013. We’re looking for active accounts – I am sorry active paying accounts, excuse me – active pay accounts to start to stabilize sometimes this year and given the mix of and the pipelines that we’ve discussed, we hope to see ARPU probably continue to tick up over time. And given the timing of the product launches, it’s something that you will see in a very short-term, but really more so in the summer month in the second half of the year.
Andy Yeung – Oppenheimer Securities
Okay. Got it. Great thanks. Next question is about your margins and OpEx, obviously for the past couple of years, you have been investing in your business, but we honestly see a pretty significant change in your OpEx expenses – some decline on a year-over-year and also on the quarter-over-quarter basis? And so can you help us understand does that mean, you were beginning to reduce some of the investments and some margin improvement in 2013?
Okay. I will answer that question first at a very high level and second we will go by the businesses that we have today. In terms of our marginal business, our greatest cause is investment in IP on a talent, and our headcount I think we were very open in market last year about making major investments in online services and in mobile. Our headcount today is 600 and 650 employees and we do not see increasing headcount in the sort of near-term foreseeable future. That is really what we have committed with in terms of what we see is the right amount of investment where we are today, which is why you are starting to see that cost on a sequential basis start to flattening out. I think we’re alluding to that.
Secondly, let’s do it by business. In our core web and virtual worlds business, you are seeing the investment there with a number of new games coming up and new virtual is coming out in the second half of the year. If the revenues grow, the margins will improve, as lot of the big investments is on self developed games. For the extent, we’ve made a growing commitment in the license games mainly because as you move into different genre, it makes sense to look at some license help up there. Now that may bring some of margins down on a stabilized basis, but overall, a growth in revenues will grow the margins.
As it relates to our offline business, the offline business is one where the licensing business is the highest margins. However, when we look at films, if it’s a hit film it can have a very high margin, but generally it’s a low margin business given where we are today. And as it relates to interactive toys that is inherently a lower margin business with EBITDA margins somewhere between 20% and 50% depending on which type of product you are looking at. So that is one way of thinking about the off-line business.
Thirdly is the mobile business, which we discussed in the past. The mobile business is a huge commitment and something that we’re very excited about. We have about 100 employees focused on our mobile business today. We've made a two to three commitment to bring number of products to market and incubate a very strong team. Currently last we spent as a I mentioned in the past close to $5 million on that business, and we just started monetization of business, late 2012 – late last year. And so if they continue to go at the pace we see, you start to see the losses in that business start to diminish and hopefully you'll start seeing attractive return sometime in the future.
Andy Yeung – Oppenheimer Securities
Great. And thank you Paul, that's very helpful.
Thank you very much. (Operator Instructions) All right, as there are no further questions at this time point in time. I'd like to hand the conference back to your presenter for this day, Ms. You Na. Thank you, please go ahead.
Okay, all right thank everyone for joining us on the call. We look forward to see you next quarter.
Thank you very much sir. Ladies and gentlemen that does conclude our conference for today, thank you for participating. You may now disconnect.
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