Hurray! Q1 2009 Earnings Call Transcript

Hurray! Holding Co., Ltd. (HRAY)

Q1 2009 Earnings Call

May 21, 2009 9:00 pm ET

Executives

Christina Low - Investor Relations Officer

Songzuo Xiang - Chief Executive Officer, Director

Xiaoqing Guo - Chief Financial Officer, Vice President, Financial Controller

Analysts

Eddie Leung - Merrill Lynch

Jay Jun - OFC Capital

Presentation

Operator

Good day, ladies and gentlemen and welcome to Hurray!’s first quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Christina Low, Investor Relations Officer. Please proceed, Madam.

Christina Low

Thank you. Welcome to our first quarter 2009 financial results conference call. During this call, Dr. Songzuo Xiang, our Chief Executive Officer, and Xiaoqing Guo, Vice President and Chief Financial Officer, will discuss Hurray!'s financial results for the first quarter 2009 and business operations. After their remarks, we will open the call for your questions.

Before we begin, please note 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 SEC, including our annual report on Form 20-F.

We do not undertake any obligation to update this forward-looking information except as required under applicable law.

We would also like to state that the purpose of this call is to discuss this evening’s press release announcing Hurray!’s first quarter 2009 financial results and the company’s recent restructuring and cost control measures. As noted in the company’s May 14th announcement, the company [inaudible] various strategic alternatives to maximize shareholder value. However, the company is not in a position to comment on matters related to that evaluation at this time and will separately provide further updates when and if appropriate.

Now, I would like to invite Dr. Songzuo Xiang, our CEO, to address you. Please proceed.

Songzuo Xiang

Thank you, Chris. Thank you for joining us on Hurray!’s first quarter 2009 earnings conference call. First of all, I would like to share with you Hurray!’s first quarter 2009 financial highlights. Second, Xiaoqing Guo, our Vice President and CFO, will discuss our first quarter 2009 financial results in more details. Lastly, I am going to update you on our business strategies and operations, followed by a question-and-answer session.

Let’s start from our Q1 2009 financial highlights. With regards to the first quarter results, we missed our guidance primarily because of the reduction in our promotional activity for certain of our WVAS services, which however did not adversely impact gross profit.

The Company is involved in a review of all business lines and departments in a focused effort to position the Company so that it can achieve sustainable profitability in the current environment. In light of our current initiatives, the Company for the time being will no longer provide quarterly revenue guidance.

Highlights for the first quarter 2009 -- total revenue, $11.8 million, representing a decrease of 18.5% quarter over quarter and a decrease of 11.2% year over year, slightly below our previous guidance of $13 million.

WVAS revenues, $9.9 million, representing a decrease of 31.4% quarter over quarter and a decrease of 28.6% year over year.

Recorded music revenues, which are from our record label businesses, $3.9 million, representing an increase of 31.4% quarter over quarter and an increase of 33.9% year over year.

Net loss attributable to Hurray! Holding was $2.1 million.

Adjusted EBITDA a net loss of $1.6 million. Diluted loss per ADS, $1.09. That’s all.

So now, let me invite Xiaoqing Guo to give you more details about our financial results for the quarter.

Xiaoqing Guo

Thank you, Dr. Xiang, and thank you all for joining our earnings conference call. I would like to discuss the following details of our first quarter 2009.

Total revenues for the first quarter ended March 31, 2009 were $11.8 million, representing a decrease of 18.5% from $14.4 million for the preceding quarter, and a decline of 11.2% from $13.2 million for the same quarter last year.

Total wireless value-added services revenues were $7.9 million for the first quarter of 2009, representing a decrease of 31.4% from $11.5 million in the previous quarter and a decrease of 28.6% from $11 million in the same quarter of 2008.

Recorded music revenues, which represent revenues of our controlled music companies Freeland Music, Huayi Brothers Music, Hurray! Secular Bird and Seed Music, which was acquired on January 1, 2009, were $3.9 million, representing an increase of 31.4% as compared to $3 million in the previous quarter and an increase of 73.9% as compared to $2.2 million in the same period of 2008. The increase arose from the contribution from Seed Music of $2.2 million. Our other music companies experienced declines as the first quarter typically is a low period for this business.

On January 1, 2009, we closed the acquisition of Seed Music. The initial consideration was $1.9 million. We also subscribed additional shares for $600,038. Upon the closing, our interest in the company was approximately 61%.

There are further contingent payments according to the agreements based on Seed Music's operation performance. In addition, the non-controlling interests have options to sell their shares to us at a price based on a formula which includes Seed's operating performance. Therefore the non-controlling interests are presented as redeemable non-controlling interests on the balance sheet and such amount will be accreted to the redemption value if the redemption is probable.

Total gross margin was 16.4% for the first quarter of 2009 as compared to 5% for the previous quarter and 36.5% for the same period of 2008.

Gross margin for wireless value-added services was 17.5% for the first quarter of 2009, as compared to 2.9% in the previous quarter, in part because of the impact in the previous quarter of the reversal of revenue, and 35% for the same period of 2008.

Recorded music gross margin was 14% for the first quarter of 2009 as compared to 13% in the previous quarter and 43.8% for the same period of 2008.

Total gross profit was $1.9 million for the first quarter of 2009, representing a significant increase of 166% compared to $0.7 million for the previous quarter, and a decline of 60.2% as compared to $4.8 million for the same period of 2008.

Total operating expenses were $5 million in Q1, representing a decline of 16.4% as compared to the total operating expenses of $6 million for the previous quarter, which included impairment for goodwill of $1 million and a write-down for intangible assets of $0.4 million, and reversal of litigation costs of $0.5 million due to the resolution of the litigation, and an increase of 7.4% as compared to the total operating expenses of $4.7 million for the same period of 2008. Seed Music expenses amounted to $0.6 million.

An additional gain of $0.2 million from our discontinued systems integration business was recognized in the first quarter of 2009 due to additional cash received on the collection of the accounts receivable at the disposal date. Under the terms of our agreement, no further such amounts will be received.

Net loss attributable to Hurray! Holding was $2.1 million for the first quarter of 2009.

Fully diluted loss per ADS was $0.09 based on a weighted average of 22 million diluted ADSs for the first quarter of 2009, as compared to the diluted loss per ADS of $0.42 based on a weighted average of 21.9 million diluted ADSs for the previous quarter, and a fully diluted earnings per ADS of $0.22 based on a weighted average of 21.9 million diluted ADSs for the first quarter of 2008.

Lastly, as of March 31, 2009, the company had $60.2 million in cash and cash equivalents.

And now, let me turn back to Dr. Xiang for an update on business strategies and operations.

Songzuo Xiang

Thank you. By the end of the first quarter of this year, we continued executing our strategy of developing proprietary content and diversifying distribution channels with the following highlights.

Hurray! launched 9 new mobile games and mobile themes on China Mobile's portal, including "Dark Assassin 2" and "Tri-Eye Boy 1: The Beginning." In the second quarter of this year, we are launching 9 new mobile games and mobile themes.

In February, "Tri-Eye Boy" series 1, 2 and 3, one of our mobile game series, was voted "Star-Rated Mobile Games" at a mobile game user recommendation contest organized by China Mobile. The series was selected as one of the high-rated mobile games in China Mobile's G-plus game package.

Hurray! music companies released a series of new songs, including 6 albums, 2 EPs and 1 single, and launched successful marketing programs to promote the new releases simultaneously over Internet and wireless platforms. Subsequently, "J@M" by Jane Zhang, and Sheng Fang by Xinliang Gong became popular hits in the first quarter.

Hurray! artists, including Jane Zhang, Yu Quan, Kenji Wu and others received awards for their outstanding performances at various prestigious music award ceremonies in Asia, including "Best Local Female Singer" for Jane, "Annual Golden Song" for Kenji Wu, Yu Quan, and Wenjie Shang, and others.

Seed Music and New Run signed up a number of new artists, including Jianhao Wu, Subway Boy, and extra.

Now, we would like to open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mr. Eddie Leung with Merrill Lynch. Please proceed, sir.

Eddie Leung - Merrill Lynch

Good morning. Just I’m wondering on your wireless value-added services strategy -- we have been hearing from some of your competitors that it seems like the wireless value-added services industry has been in recovery and I’m wondering why it seems like you guys are withdrawing from that [piece], or actually is not and you guys will continue to invest in this [piece].

Songzuo Xiang

Thank you for your question. Compared to Q4 of 2008, considering the seasonality, our 2G WVAS revenue in Q1 of this year decreased a lot because the company began to make efforts to shrink the business of a low margin products [from them.]

Eddie Leung - Merrill Lynch

I understand. And in this case, could you share with us what are the areas in the partner space that you see -- you see there has been some momentum?

Operator

Your next question comes from the line of [Jay Jun] with OFC Capital. Please proceed.

Jay Jun - OFC Capital

I just have a question regarding the offer you received from best prospects -- it was never clear in any statement as to what you were discussing and there wasn’t any clear communication. Could you elaborate on that?

Christina Low

Jay, we’ve reminded all callers before we started the conference call that we are not going to comment on any deals in this conference call. The purpose of this call is actually to discuss Q1 results in 2009. Do you have any other questions?

Jay Jun - OFC Capital

Well, I was just wondering because there hasn’t been any clear communication at all and there’s been a lot of talk going back and forth, and I was just wondering what you guys were discussing for -- because you obviously haven’t actually replied to all the letters that’s being sent to you.

Christina Low

Sorry, we’re not in a position to discuss this matter within this call. Do you have any further questions?

Jay Jun - OFC Capital

Well, do you have any plans to discuss it at any time?

Christina Low

Yes, we will discuss when and if appropriate but not within this call.

Jay Jun - OFC Capital

Okay.

Operator

(Operator Instructions) With no further questions in the queue, I would now like to turn the call back over to Dr. Xiang for closing remarks. You may proceed, sir.

Songzuo Xiang

Thank you all.

Operator

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

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