David Pasquale - Global IR Partners
Jimmy Tan - IR
Ouyang Yuping - CFO
China Techfaith Wireless Comm. Tech. Ltd (CNTF) Q1 2013 Earnings Call May 21, 2013 8:00 AM ET
Good day, ladies and gentlemen and welcome to the China TechFaith First Quarter 2013 Conference Call. My name is Charlene and 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 this conference. (Operator Instructions). 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.
Thank you, Operator. Welcome everyone to China TechFaith’s first quarter 2013 financial results conference call. Joining us from the company today are the Company's Chief Financial Officer, Ms. Ouyang Yuping along with Mr. Jimmy Tan from Investor Relation. SVP Mr. Jay Ji is unable to join us on today's call due to a family emergency.
We will have time for your questions after a review of the quarter’s 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 email@example.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. Among other things the business outlook and strategic and operational plans of TechFaith and management quotation contain forward-looking statement.
TechFaith may also make 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. 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 or the Generally Accepted Accounting Principles as practiced in the United States of America and references to dollars are the lawful currency of United States of America.
At this time, I would like to now turn the call over to Mr. Tan from Investor Relations. Please go ahead, sir.
Thank you, David and welcome to our first quarter 2013 financial results conference call. I hope that everyone had a chance to review our press release. Overall the first quarter developed in line with prior guidance with revenue level at $28 million, compared with $31 million in the previous December quarter.
The decline in revenue is primarily due to the revenue decline from the company game business segment. While the first quarter results are in line with our guidance, we are clearly disappointed. We do not think this reflects the long term potential of our business. We also do not see our market evaluation for it reflects our existing SF base or deeper balance sheet or our proven due to successfully navigate business cycles.
We have had many conversations with investors seeking more clarity on our existing asset base. As we continue to outline, the projects are under various stages of development. When we started the facility expansion, our revenue base was more than double the current level and we were on growth track.
We have modified our expectations as our business continues to evolve. The fact remains though that we own a considerable assets in our facilities, land rights and facilities under development. We are moving forward totally with the development. This is currently represented on our balance sheet under the $10.6 million in land use right and $39 million construction in progress balance at the end of Q1.
The value of the building with own that are reconstructed is $40.9 million. Presently 18 buildings are in the process of construction, three buildings are operationally ready and one building is currently occupied. We will think seek out the options best able to increase value for TechFaith and our shareholders.
In line with our historical conservative approach, we remain focused on our cost control measures as we seek to run a lean organization and work to all state manufacturing cost increase. These helps us to achieve profitability in Q1 despite a lower revenue base. Revenue from product sales also increase by $2 million compared to the fourth quarter of 2012.
Our long term focus remains on building global brand awareness, enhancing our brand image and expanding our range of ruggedized unique mobile devices to specify different levels of niche segments. Concurrently TechFaith also continue to enhance its enterprise solutions to better suit the needs of different industry if the opportunities are attractive.
Mobile phones are clearly not going away and the volumes out of Asia are surging pace on recent reports. It was recently noted by strategy analytic step for the first time. Asia accounted for more than half of the branded Smartphone sales of 52%. Growth is coming in China from smaller Chinese brands gaining around in the low end. While we are encouraged by the growth reports, we are focused on higher margins Smartphone and feature phone segments. We think that this is the best position for TechFaith from a strategic view.
Our goal is to return to sustain profitable growth by marketing the niche segments we can compete in rather than trying to drive pollute in the ultra competitive; ultra low margin, low end of the market where there is minimum brand premium.
In terms of our game segment, revenue from our motion game business was $3.4 million in the first quarter of 2013. The decline was mainly due to our shift from our hardware sales to software applications and download upper games as we move to expand our installed user base. There are some bright spots and we hope to return the gaming segment to a revenue profit growth drive by expanding our user base based on favorable interest in our product.
Now let me turn the call over to our CFO Ouyang Yuping for further review.
Thank you, Jimmy. Thank you to all for joining our first quarter earnings call. Let me quickly review some key operating points and our outlook before taking Q&A. Revenue for the first quarter was $28.2 million, compared to $31 million in the fourth quarter of 2012 and $42.7 million in the first quarter of 2012. Gross margin for the first quarter of 2013 was 16% compared to 19% in the previous quarter.
We are working to improve our gross margin back to a more normal life corporate average later this year. Our long term gross margin target remains in the low to mid 20% level. Our lower revenue base continues to pressure our margin as does the mix. We have tried to offset some of that pressure through cost reductions.
We will continue to focus on this moving forward. To give you more color on the first quarter our ODP business contributed $14.5 million or 51% of the total revenue. Our brand in mobile phone business contributed $10.3 million or 37% of the revenue. Our gaming business contributed $3.4 million or 12% of our total revenue in the first quarter.
Overall gross profit for the first quarter of 2013 was $4.6 million compared to $5.9 million in the fourth quarter of 2012. Our operating expenses was $4.2 million, lower by 46% compared to $7.9 million in the previous quarter.
In terms of balance sheet, we ended the fourth quarter with a balance of $261 million in cash and cash equivalent. Long term debt balance at March 31, 2013 was just $290,000. On per ADS basis we ended the first quarter with a balance of cash and cash equivalents per ADS for $4.9.
Jimmy just gave additional insight earlier regarding the asset we're carrying. In terms of specific guidance, as noted in our press release, for the second quarter this year we currently expect total revenue in the second quarter of 2013 to be in the range of $28 million to $33 million, with gross margin in the range of approximately 16% to 21%. This forecast reflect the continued competitive pressure and challenging business environment we reviewed earlier.
Operator that concludes our formal comments, we are now ready to take any questions. Thank you.
(Operator Instructions). Our first question is from the line of Markus Templeton, Kaiser Trading (ph). Please go ahead.
I had a question regarding the cash balances. Are there any future plans, you said obviously the stock is trading at a significant discount, the 490 in cash. Are there any plans?
As we mentioned in our Annual Report, currently we have some development project in China and for those development project we expect to invest about $150 million over the next four years.
Can you give a little bit more detail regarding that as far as development projects? For the buildings?
For the buildings, currently we have free land to be developed now. One is located in Hangzhou and one is located in Beijing and the third one is located in Shenyang.
Thank you. We have no further questions, I would like to turn the call back over to management for closing remarks.
Thank you everyone for participating in today's call. Overall we are making progress, but there are no quick fixes. We continue to execute on our business, but remain cautious in our expenditures. Our strong balance sheet give us the ability to withstand the volatile market and should give shareholders confidence in long-term prospect. 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. Bye-bye.
Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.
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