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Sky-mobi Limited (NASDAQ:MOBI)

F4Q2013 Results Earnings Call

May 13, 2013 8:00 AM ET

Executives

Michael Song - Chairman and CEO

Carl Yeung - Chief Financial Officer

Analysts

Andy Yeung - Oppenheimer

Operator

Good morning and good evening, everyone. And welcome to Sky-mobi’s Fiscal Fourth Quarter 2013 Earnings Conference Call. With us today are Sky-mobi’s Chairman and Chief Executive Officer, Mr. Michael Song; and Chief Financial Officer, Mr. Carl Yeung.

Before I turn the call over to Mr. Song, may I remind our listeners that in this call management prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may take additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission.

In addition, any projections as to the company’s future performance represent management’s preliminary estimates and Sky-mobi assumes no obligations to update these projections in the future as market conditions change.

To supplement its financial results presented in accordance with IFRS, management will make reference to certain non-IFRS financial measures, which the company believes provide meaningful additional information to understanding Sky-mobi’s operating performance. A table reconciling non-IFRS financial measures to the nearest IFRS equivalents can be found in the earnings press release issued yesterday.

For those of you who are unable to listen to the entire call, a recording will be available via webcast at the Investor Relations section of Sky-mobi’s website at www.sky-mobi.com/en.

And now, it’s my pleasure to turn the call over to Sky-mobi’s Chairman and CEO, Mr. Michael Song.

Michael Song

Welcome everyone and thank you for joining us today. We are pleased that in fiscal fourth quarter 2013 revenue exceeded the high end of our previous guidance by almost 30%.

Fourth quarter, we achieved RMB161 million in revenues, up almost 10% from the last quarter. Moreover, we have efficiently improved our bottom line and margins with non-IFRS net profit increasing by nearly 17% per tonnage year-over-year. These results are testament to our proactive strategy to adjust the changing mobile phone landscape away from the feature phone to increasing use of smartphones.

On today’s call, I’d like to highlight two key areas in greater detail. First, our critical strategy in addressing the changing of mobile phone landscape away from feature phone to increasing use of smartphones, and secondly, we saw our solid world-wide and initially we build a team on the smartphone front. With each of these areas we will provide a brief overview and which will be further explained by our CFO, Carl with more operation details.

First, with our feature phone business, we have remained focused on increasing revenue contribution from our mobile community and increase the use of our key currency. This product has decreased in the member of active members and method logging in our mobile community which closely mirror the 1 billion decline in the feature phone markets, with field managing to deliver about 13 percentage year-over-year increase in revenues collecting from the third-party channel as we enhance our monetization efforts on our social networking platform. Carl will further discuss later.

Moving on to our second point, we continue to capitalize on the tremendous opportunity associated with China’s fastest growing smartphone sector, which is increasing driven by the tremendous growth and absorption of low end smartphones.

During this quarter, we accelerated growth in the member of smartphone user, which has more than once doubled to over 20 million users just in the positive environment. This remarkable achievement continue to the mostly -- the success of our multi program approach for the growing smartphone business.

In conjunction with the rapidly growing our footprint we have been actively building our content offer to include first in-house produced mobile game and license content from the third-party developers. Due to the strong growth we are almost at point where we have critical mass with our user base and there will be element we are able to rollout our market decision strictly on smartphones. Because of this, we have begun to provide smartphone metrics having to enable our view to monitor our progress on this front. Carl will discuss more shortly.

As a part of this initial monetization effort, we have just started live Mobile Gaming Platform designed for the low-priced device. The defining character for the live game suitable for the Chinese, for the China is a touch game with live 10 mega storage per [trend] using less than 10 mega of data traffic per month, while taking advantage of mobile operators solely in charge for payment. We are very excited about the tremendous business opportunities with this strictly primarily for the two reasons.

First, the live application and game fit for the user environment of limited storage and data advantage suited with low-cost the smartphone markets. By providing this live application and game to the market segment that has now been suitable are adjusted, we are better positioned to keep out with the rising demand for fun and easy entertainment inter-payment anywhere, anytime in the -- any smartphone in China.

From industry perspectively, mobile phone, mobile gaming, we presented the most popular user application for the mobile device in China, accounting for over 30% of customer total time than on the mobile device even they had on social network applications. In addition, mobile gaming is starting to generate over RMB20 billion in sales by 2013, making it one of the fastest growing sector in China.

Secondly, as we develop this platform, we will be able to fully leverage our strength and monetizing on the mobile Internet including distribution building channel, data analysis, as well as our partner with the small and medium-sized game developer.

This lead will enable us to take full advantage of mobile operator billing, an area where we have traditionally competitive and monetize or quickly expanding user base in effective manner suggesting our position of future growth.

We believe our strategy to focus on the low end segment of smartphone market will pay off as low to RMB700 smartphone market share of the all smartphone sold in China has almost doubled from 15.1% in October 2012 to 31.7% in March of this year.

Looking at this segment of low-cost smartphone will continue to grow to become most prevalent mobile device in China. We remain focused on the monetization opportunity above or in this segment and confident in our strategy to service this user, as we aim to stay in front of China evolving mobile marketplace.

With that, I will turn the call over to Carl Yeung. And he will discuss our fiscal and our business outlook in more details. Carl, please.

Carl Yeung

Thanks a lot Michael. As Michael mentioned earlier, we are encouraged by our better than expected topline performance and the substantial improvement in operating profit and margins we experienced over the past quarter.

In addition, through strategic analysis and disciplined investments, we continue to actively rollout our innovative growth initiatives that led to our improved quarter. As a result, we managed to maintain positive cash flow with our cash and deposits position growing to RMB608 million as of March 31, 2013.

To further elaborate on Michael’s points, a couple of more specific highlight on our quarterly results. Our revenue composition continues to grow and improve with a high rate of 27.2% of revenues coming from higher ARPU or average revenue per user associated with our Maopao Community.

The ARPU for the community increased by over 129% to RMB4.2 from RMB1.83 from a year ago. This is the sixth consecutive quarter that we have experienced an increase in mobile community ARPU.

More specifically, we saw continue increase in ARPU on two of our most popular mobile sort of games. We also realized higher user activity monetization rates as a result of our direct cooperation with wireless carriers and improved content installations.

On the distribution front, we strengthened our cooperation with telecom carriers during the fiscal year 2013. This has allowed us to collect proceeds directly from carriers while by passing traditional SP partners, resulting in diversified revenue streams, lower channel costs as well as improved margins.

On the content front, we have been continuing to improve and broaden our apps and services portfolio to include content rich applications, multimedia applications, social communities as well as social games title. In addition, we utilized various promotion enticements to improve user spending and interaction about services and contents.

We believe that this quarter’s result not only validated our strong execution in adjusting the macro decline in the feature phone market. They also improved the strength of our mobile game platform operation expertise, providing us strategic insights to further navigate the booming smartphone market in China.

Most specifically, regarding the progress on the smartphone business, our partnerships with over 160 handset manufacturers continue to provide immediate access to new users to direct pre-installations. This pre-installation continues to be the key in driving uptick of our application store platform and network of our smartphone user base.

In addition, our established offline presence through physical store fronts for application installation in partnership with Suning, one of China's largest consumer electronics and appliance retailers, as well as provincial carrier stores has become an increasingly important growth avenue which has resulted in over 140,000 daily smartphone user additions. Because of this fast uptick in our smartphone businesses beginning this quarter, we have started to disclose additional operating metrics for our smartphone operations.

We believe this additional disclosure will help investors to better understanding of progress and expanding our reach and audience footprint in the increasingly important smartphone business. Given our recent success in navigating the macro shift to smartphones in China, we remain cautiously optimistic as we continue to adjust our model to better target these new emerging opportunities and improve shareholder value over the long term.

Now, turning over to financials for the quarter. As a reminder, we disclosed revenue from two perspectives, by source and by business units. In interest of time, I’ll limit my discussion today to revenues by source as we believe it is a more useful way for investors in analyzing and understanding our collection models.

The breakdown of revenues by business units can be found in the press release issued earlier today. In addition in the discussion and analysis, our cost of revenues and operating expenses are mainly focused on non-IFRS results, as we feel this is more useful for investors in understanding our operations and performance.

Our total revenues for the fourth quarter 2013 decreased 10.1% year-over-year to RMB161 million or US$25.9 million. Revenues collected from carrier channels were RMB114.7 million, or US$18.5 million in the fourth quarter of 2013, representing 71.3% of total revenues.

Sky-mobi had 1.7 billion user visits and 443 million downloads of applications and content from the mobile application store in the fourth quarter. The decrease in revenue collected from carrier channels was primarily due to fewer user visits and downloads as a result of anticipated ongoing decline in the feature phone markets, which was partially offset by higher user activity monetization rate as a result of direct cooperation with wireless carriers and improved content installations.

Revenues collected from third-party channels grew by 12.8% to RMB34.5 million or US$5.6 million year-over-year and contributed 21.4% of total revenues in fourth quarter 2013. We collected most of our Moapao Community revenues through this channel.

Sky-mobi’s Moapao Community had 10.6 million active members and 608.2 million member logins during the fourth quarter 2013. Revenues from Moapao Community increased due to higher ARPU on two of the most popular mobile social games, Fantasy of Three Kingdoms and Fairy Magic World despite a decrease in number of active members and logins.

We also expect revenue contribution collected from third-party channels to steadily increase in the future quarters. Total cost of revenues in fourth quarter of 2013 decreased 17.8% to RMB100.6 million or US$16.2 million as compared to RMB122.5 million a year ago.

Total non-IFRS cost of revenues in the fourth quarter of 2013 also decreased 17.7% to RMB100.4 million or US$16.2 million as compared to RMB122 million in the same quarter last year. Non-IFRS cost associated with payments to industry participants decreased 16.6% to RMB93.4 million or US$15 million primarily due to decreased channel cost inline with a decline in revenues collected from carrier channels.

Cost savings on lower revenue sharing percentage from more direct cooperation with mobile carriers and cost controls on purchasing feature phone, mobile content for the Maopao Community.

Approximately, RMB2 million of accrued cost payable reversed into cost of sales in fourth quarter 2012 while no such reversal occurred in the third quarter 2013. Such accrued costs are not expected to recur in the following fiscal year.

Non-IFRS direct costs including salaries and benefits, depreciation, office expenses and utilities directly related to the operation of mobile application store and the mobile community decreased 30% to RMB7.0 million, or US$1.1 million in fourth quarter of 2013 as compared to RMB9.3million in fourth quarter 2012. The decrease was primarily due to a reduction in overall headcount in our company's feature phone market business, which was in line with our strategy to focus for smartphone market.

Non-IFRS gross profit in fourth quarter 2013 increased 6.3% year-over-year to RMB60.6 million or US$9.8 million. Non-IFRS gross margin in the fourth quarter of 2013 was 37.6%, up from 31.8% in the fourth quarter of 2012, mainly due to the higher contribution of promotional income, which has a higher profit margin, as well as lower billing and transmission failure rates and cost savings from direct cooperation with China Mobile on the game platform.

Total operating expenses, primarily consisting of employee salaries and benefits, training expenses, traveling, entertainment and office related expenses, decreased 35.5% year-over-year to RMB30.7 million, or US$4.9 million, primarily due to the decrease in headcounts.

Non-IFRS operating expenses decreased 32% year-over-year to RMB27.2 million or US$4.4 million. Total headcount decreased 16.3% to 489 employees as of March 31, 2013. This decrease in headcount was a result of the company's reorganization, which rebalanced the company's overall headcount to focus on smartphone application development and reducing resources allocation to the feature phone group.

Net profit in fourth quarter 2013 increased 151.7% to RMB30.2 million, or US$4.9 million from RMB12 million a year ago. Non-IFRS net profit for fourth quarter 2013 increased 69.3% to RMB33.9 million, or US$5.5 million from RMB20 million a year ago.

Basic and diluted earnings per common share in the fourth quarter 2013 were RMB0.12, which was represented equivalent of RMB0.95 per ADS. Non-IFRS basic and diluted earnings per common share in fourth quarter 2013 were RMB0.13, which represented the equivalent of RMB1.06 per ADS.

Turning over to outlook, we continued to expect that Sky-mobi will focus on maximizing revenue in a declining feature phone market by improving payment efficiency and increasing monetization.

Our financial strategy is to invest responsibly in smartphone and to maintain a strong cash balance by using cash flow generated from our feature phone business to support the growth and development for smartphones.

For a fiscal first quarter 2014 ending June 30, 2013, Sky-mobi expect total revenue to be in the range of RMB100 million to RMB115 million.

With that, I would like to open the call for questions. Operator, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andy Yeung for Oppenheimer. Please ask the question.

Andy Yeung - Oppenheimer

Hi. Good morning, Michael. Quick questions about your revenue guidance. When we are looking at your next quarter guidance, it’s seems to be pretty low compared to the outperformance in the March quarter, can you give us little bit more color in terms of where you expect the weaknesses will be and where you expect there is going to be an improvement?

Michael Song

Thanks for the question, Andy. Regarding next quarter guidance, I think we are trying to do this off of the fact on that -- in the past two quarter that we just announced we over achieved and we hope to continue this trend. So obviously, we want to give a guidance that we feel we will be responsible for and something that we can deliver such that this current guidance only reflects pretty much revenues only from features phones and what we would see is if smartphone revenues comes through, we would be able do deliver some upside.

Andy Yeung - Oppenheimer

Got it. And then in terms of your revenue collections amount the different -- sorry, like you situation of your apps and your AppStore, can you help us understand what’s the breakdown between the pre-installations? What is offline versus the user downloads?

Michael Song

Sure. At this moment for a feature phone market, it’s pretty much off-installation, as this is the main way for games through the handset because of their ecosystems. For a smartphone market, we achieved over 20 million of smartphone users in a relatively short period of time and we are adding currently about 140,000 new smartphone users a day. Of those 140,000 smartphone users, approximately 80% comes from pre-installation and approximately 20% comes from our offline program such as dealing, working with streaming and mobile operators and retail storefronts. Now, we expect the contribution to stay at the same, for maybe a quarter or so, and then the contribution from the offline component would likely grow higher, as we expand our partnerships with local carriers from one province to another.

Andy Yeung - Oppenheimer

I see. I see. Okay. Okay. And then when you look at the smartphone space, do you still can see yourself at the AppStore, or is more a game distributor and how do you overall you change like you are trying to monetize your smartphone business?

Carl Yeung

Okay. Andy, I think for the smartphone world, the market is different for feature phone. So there will be things that would continue to do the same but there are innovations that we have to adapt for the new market. First of all, Sky-mobi will continue to be app store. We would be the central hub to link the users, the carrier, the mobile handset manufacturer and the content provider who would be playing the central role and making sure payment goes to all the parties fairly and effectively.

So we would still serve as app store in the new smart phone market. But that’s not enough, we understand as Michael earlier mentioned that by 2015 they can possibly be RMB20 billion mobile game market therefore internally we’re also developing our own games. To capture some of this pie as the margins on the games development and we’re naturally be higher than the agent as an app store.

So we want to balance the two together to deliver a product or business where we have both a very strong channel to get access to our users as well as providing the service and the content to monetize the users.

Michael Song

So we would playing that fair.

Andy Yeung - Oppenheimer

Yeah. Okay. Great. Thanks that’s very helpful. Thanks Carl and Thanks Michael.

Michael Song

Thank you.

Operator

(Operator Instructions) There are no further questions on the line at this time, I’ll now like to hand the call back to today’s presenter, Mr. Yeung, please continue.

Carl Yeung

Thank you all for your attention and your interest in Sky-mobi. We expect the next few quarters to be very important as we work to Jiayuan’s transition of business model. We are excited about the smartphone opportunity and believe we are uniquely positioned to execute on our strategy. With that, I want to thank everyone for joining the call today and wish everyone well for the week. Thank you and good bye.

Michael Song

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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