Taomee Holdings' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.23.13 | About: Taomee Holdings (TAOM)

Taomee Holdings (NYSE:TAOM)

Q1 2013 Earnings Call

May 23, 2013 08:00 am ET

Executives

Benson Wang – Chief Executive Officer

Roc Cheng – President & Chief Operating Officer

Paul Keung – Chief Financial Officer

Na You – Investor Relations

Analysts

Zim Yin – Stifel Nicolaus

Andy Yeung – Oppenheimer

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2013 Taomee Holdings, Ltd. Earnings Conference Call. (Operator instructions.) I must advise you that this conference is being recorded today, Thursday, the 23rd of May, 2013. I would now like to hand the conference over to your first speaker today, Ms. Na You. Thank you, please go ahead.

Na You

Good morning and good evening ladies and gentlemen. Welcome to the Q1 2013 earnings conference call for Taomee. With me today are Mr. Benson Wang, our CEO; Mr. Roc Cheng, our President; and Mr. Paul Keung, our CFO.

As we proceed through our prepared remarks view the report and our presentation which can be found on our IR website. Following the remarks, Misters Benson, Roc and Paul will be happy to take your questions.

Before we continue I would like to remind you of this statement: the forward-looking statements are not historical facts but when stated represent only our beliefs regarding future events. Our actual results and financial condition may [differ materially] from the anticipated results and financial condition contained in these forward-looking statements.

We have issued a (inaudible) that is referenced in the presentation [and reports in US dollars]. Now I would like to turn the call to our CEO, Mr. Benson Wang.

Benson Wang

Thank you, You Na, and thank you everyone for joining us today. Last quarter we outlined our roadmap for 2013. We gave a clear picture of how we aim to leverage our cross media entertainment platform and how we begin to monetize it. This quarter we are happy to report that we have made solid progress in executing upon this strategy. Throughout 2013 we will continue to demonstrate how we are expanding the age range of our user base and improving the monetization capabilities of our robust platform.

During Q1 2013 we delivered total net revenues of $9.6 million, significantly beating our own guidance and the consensus estimates by approximately 16%. The outperformance was backed by solid growth in Seer, Gong Fu Pai and the Flower Fairy.

Several key operating metrics highlight our growth, including first we reached 44 million quarterly active users. Second ARPU increased by 6% to RMB 33 from a year ago. Also the number of downloads for the mobile applications operated by Taomee increased by 23% year-over-year to 3.7 million.

With that on today’s call we would like to discuss three key areas. First, I will provide an update about our online business and our progress towards expanding our game portfolio to target a wider age range of users; second, gross of our offline business that continues to add a number of new revenue streams and opportunities; and third, our CFO will discuss our initiatives to grow our cross-media platform with new product launches in preparation for the upcoming summer vacation.

As we discussed, we have been actively expanding our game portfolio to attract a wide age range of users, aiming to grow with our audience. We took two major approaches to accomplish this goal. First we are working on expanding the amount of time our users stay with our core characters and our game platform as they grow up from elementary into middle and high school.

In March we started a closed beta testing for Avatar Star, a cartoon style action game. In May we started closed beta testing for Heroes Alliance, the first of these games to have tested well with users between the age of 10 to 18. Looking ahead, we are excited about our pipeline which offers diversified entertainment content that’s based on children’s development from elementary school from adulthood while also giving [the same] character and the story franchises.

Second, we continued to make significant strides in expanding our offline basis and capitalizing on the growing monetization opportunities associated with our brand and the core characters. In particular, our self-produced TV show Taomee Dream School was rated as one of the top three cartoon programs in China. Our improving success continues to strengthen our overall brand equity and trust with children and their families throughout China, and we believe this will continue to drive our online and offline expansion over the coming years.

By leveraging our core competence in strong content development, innovative capabilities and our cross-media platforms we are committed to delivering on the expectation of entertainment to millions of children and families in China. Now I would like to hand the call over to our CFO Paul. Thank you.

Paul Keung

Thank you, Benson. Good morning, good evening to everyone on the call. On today’s call I will first walk through several operating metrics that highlight our expanded entertainment platform and then we’ll go through the financial performance for the quarter.

In Q1 2013 we experienced strong sequential and year-over-year growth in our non-gaming online services. Monthly average page views for non-gaming services was approximately 256 million. This is up 77% from the prior quarter. The growth in traffic was largely driven by the launch of Season 3 animation for Mole’s World and Season 2 for Seer which both began broadcasting on TV and streaming on our website in Q1.

Average monthly unique visitors, which does not include traffic in our virtual world, totaled about 31 million. This is an increase of 82% over the prior quarter. Our investment over the last two years to expand our connection to users beyond the virtual world is starting to pay dividends in terms of expanding our user base and user engagement levels; and more importantly to build long-term loyalty to our franchises.

During the quarter we also experienced year-over-year growth in active accounts in our newer franchises, specifically Gong Fu Pai and Flower Fairy. In mobile we added another 3.7 million users who downloaded applications. This is a very healthy figure considering we did not launch any new online virtual or mobile applications in the quarter.

Overall these metrics highlight the progress of our transformation as a cross-media platform. Our online brand influence is no longer largely dependent on our popular online virtual worlds for children. As you can see we now also have significant traffic and user engagement across various services like SMS and video. There is also now a sizable following using our applications on mobile devices.

Over the last several years we’ve leveraged the success of our virtual world to create a portfolio of online and offline experiences that build lifelong bonds with children of all ages. At the same time we also believe we’ve strengthened our business model by diversifying our revenue mix into offline.

As Benson highlighted at the beginning, we are pleased with the revenues in Q1 which were $9.6 million and were able to exceed our guidance and the consensus estimates. By business segment in Q1 2013, online business revenues were $8.2 million, up 31% from $6.3 million in the prior quarter and down about 12% compared to $9.3 million in the same period a year ago.

During the quarter we experienced the seasonal effects of Spring Festival on our results, and our active paying accounts actually jumped to 1.5 million from 1.2 million in the prior quarter. However, active paying accounts did continue to decline on a year-over-year basis, a trend that’s consistent with prior quarters due to the maturation of our virtual worlds and also because we’ve not launched any new virtual worlds in the last two recent quarters.

Average revenue per user, ARPU, was up slightly and that’s a trend I think should continue to improve on an annual basis. In addition we also started closed beta testing for two new online games, Avatar Star and Heroes Alliance. We have an exciting lineup of mobile applications and games for the second half of the year as well. Going forward we plan to continue our balanced focus on increasing profitability and user growth over the coming quarters.

Our offline revenues increased 28.5% year-over-year to $1.4 million driven by sales of our interactive toys and our merchandise licensing business. When you dig deeper into our licensing business there’s two developments I would like to highlight to you.

First, we renewed our theme park licensing partnership for another three years of [Tshishi Gu] which is a theme park located in Hangzhou, a few hours away from Shanghai. The theme mark and our Mole’s World pavilion there have attracted millions of visitors since its opening in 2010 and its success has helped us attract other theme park developers in greater China who are interested in licensing our characters. We are now evaluating a number of licensing projects in the theme park arena.

Second, the recent success of our interactive toy business as attracted new opportunities for us as well. We have recently entered into new partnerships with a number of large toy retailers including Ling Dong. Backed by such partnerships we remain confident in our ability of delivering double-digit growth in our offline business.

Next, let’s take a look at our gross profit margins in the quarter. Q1 gross profit margin was 76.3%, a decrease from 79.6% in the same quarter last year. It reflects growth in offline sales and also reflects an increase in offline revenues as a percentage of total revenues. Q1 gross margin for our online business was 78.6% compared with 81.4% in the same quarter last year. This was impacted by increased revenue contributions from our licensed games which accounts for a lower gross margin. Q1 gross margin for our offline business was 62.7% compared to 63.9% in the same quarter last year.

Moving on to operating expenses for Q1 2013, product development expenses remained stable at $3.3 million. This is relatively unchanged from the same quarter last year.

Sales and marketing expenses decreased 21.7% year-on-year to $1.7 million in Q1. The decrease was primarily due to lower advertising expenses for both online virtual worlds and mobile products. We did not schedule any web or mobile game launches in Q1 which contributed to the decline. In addition, if you exclude the animation stock-based compensation our sales and marketing expenses totaled about $1.3 million or about 16% of net online revenues for Q1 2013, also fairly consistent with historical ranges.

G&A expenses for Q1 were $3.0 million as compared to $2.7 million in Q1 last year. The year-on-year increase was mainly due to higher payroll expenses including share-based compensation. Our share of profit and equity methods investments was $300,000 in Q1 compared to about $200,000 in the same period a year ago.

Turning now to the profitability line items, in Q1 2013 net income was $1.0 million compared to $1.6 million in Q1 last year. GAAP diluted earnings per ADS was $0.03 compared with $0.04. Q1 non-GAAP net income was $6.0 million; that compares with $2.2 million in Q1 last year. For Q1 2013, non-GAAP EPS on a diluted basis was $0.04 and that compares to $0.06 in the prior year.

If you look at adjusted EBITDA which excludes stock-based compensation, that figure was $1.4 million in Q1. And we finished Q1 2013 with approximately $113 million in cash and cash equivalents on our balance sheet and again no outstanding debt. Total weighted average diluted ADSes were approximately 36.6 million in Q1.

Now let’s take a look at our guidance for the next quarter. We expect total net revenues to be between $9.0 million and $9.5 million as we continue to take a balanced approach to our growth as we discussed earlier. We also expect the mix of our online and offline business to remain somewhat consistent with the prior quarters – call it about 80% to 20% online to offline mix. Long term we expect the mix could shift closer to 50/50 as the offline business continues to grow.

Now moving on to discuss our future initiatives, with the encouraging quarterly results we are very confident in our ability to continue expanding our brand across an integrated media platform. I’d like to highlight several key initiatives as we prepare for new product launches in the upcoming summer.

This summer we’ll be launching Heroes Alliance. It’s a brand extension of Seer and will be launched across multimedia platforms. The new storyline will be founded in our virtual world, in a new film and in a new book series as well. This marks the first time in our history that we will launch a franchise of brand extension simultaneously across multiple forms of media.

We also made major investments in the mobile business and we expect to launch two to three mobile games in the second half of this year, both on the iOS and Android platforms.

Another thing I’d like to highlight this year is our movement into the offline promotional and marketing area. We will hold a series of 100 live events across primary schools and other schools throughout China this year. In fact, in recent months we held a series of live events across elementary schools here in Shanghai featuring (inaudible) Mole and Seer characters. The events have drawn wide support and attention and attracted many thousands of students to interact personally with the characters.

Overall with these initiatives we believe our continued efforts to enhance user engagement can help us to solidify the popularity of our characters and increase monetization opportunities going forward. We remain excited about the strong growth opportunities in front of us and the continued growth of our overall platform.

Thank you again for your participation on today’s call. Operator, we’re now ready for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions.) Your first question comes from the line of Zim Yin from Stifel. Please ask your question.

Zim Yin – Stifel Nicolaus

Good evening Benson, Roc, Paul and Na You. This is Zim Yin in for George Askew. I have several questions. First, what is the driver behind your ARPU in Q1 2013? Obviously it’s much more than your previous quarter, and going forward what is the monetization strategy to have a higher ARPU on a full-year basis in 2013? Thanks.

Paul Keung

Okay, I’ll answer that question directly related to the quarter and Benson can probably add a little more color to that. Specifically to ARPU it’s increasing as you mentioned than in prior quarters. One reason is we have been shifting recent product launches to those which attract a slightly older user. So if you look at our more recent franchises such as Gung Fu Pai versus the earlier versions of Mole’s World, that user base on an average age base is older. What tends to happen is as the users get older their spending and their ARPU tend to be higher.

Historically our users tend to be largely concentrated in the call it 7 years old to about 10, 11 years old age range. As you look at our pipeline in particular as we launch new franchises we’re really gearing up to age-up our franchises and to grow with our users. And so as we move into the 10 years old to 18 years old user group you’ll start to see ARPU improve and that’s why I think you’re going to start to see ARPU trend up and you’re starting to see early signs of that in this quarter.

Zim Yin – Stifel Nicolaus

Got it, okay. Can you give us more color on your offline partnership initiatives with toy retailers?

Paul Keung

Okay, as it relates to the offline partnerships with toy retailers I think there’s two things I can address there directly. One is in the interactive toy business we’ve launched our first set of trading cards that have the ability to play certain features and interact [virtually] in our online games. And that was just launched in March of this year, and that’s one reason why you’re seeing some revenue benefit in Q1 as I mentioned and you’ll see a much greater benefit as the year progresses.

The second thing is I did mention in my prepared remarks today that due to the success of that particular type of play feature we’ve been able to sign an expanded agreement with some new toy retailers. One I mentioned on today’s call is Ling Dong which is one of the largest toy retailers in China, and so that is another sign of progress as it relates to our ability to bring our stories and our characters from the virtual world into offline (inaudible) toys.

Zim Yin – Stifel Nicolaus

Any revenue kind of guidance for the offline business partnerships?

Paul Keung

What I can tell you is it’s all included in the offline business, so for the offline growth this year we’re still looking for that growth to be healthy double digits – call it 25% to 50% type of range.

Zim Yin – Stifel Nicolaus

Got it. One last question: it looks like your Q1 tax rate is around 26%. Any particular reason or what is the trend going forward for the tax rate?

Paul Keung

Okay. Tax rate, just to be very clear the actual income tax rate should be about 12.5% to 14.0% on an annual basis. One reason as you may know from your coverage is that stock-based compensation is one item that is not tax deductible as it relates to the China tax rate that is the official China tax rate for us for income tax. And therefore that does have an impact to the tax rate you calculate for the US GAAP reporting. The second thing is there’s a timing difference as it relates to quarter-to-quarter, so on an annual basis the tax rate should be as I mentioned 13% to 15%, in that range although you may be higher or lower in any given quarter.

Zim Yin – Stifel Nicolaus

Alright, thank you very much.

Operator

Thank you. (Operator instructions.) Your next question comes from the line of Andy Yeung from Oppenheimer. Please ask your question.

Andy Yeung – Oppenheimer

Hi, good morning Benson and Paul; thank you for taking my questions. My question is actually about your current product pipeline. When we look at the two games of Speedy Hunter as well as Avatar Star and also Heroes Alliance, how’s the response right now from your user base and what other games do you have in the pipeline for the rest of the year?

Paul Keung

I will turn that question to Benson. Speedy Hunter, Avatar Star and Heroes Alliance are still in the early closed beta stages. Benson?

Benson Wang

[speaks in Chinese]

Paul Keung

Okay. Currently Avatar Star and Heroes Alliance are in closed beta and based on the current results today we’re very pleased and satisfied with the results. Specifically with Avatar Star we noticed with the target users it’s really having a strong engagement with those target users, which are typically in the 10 years old to 18 years old age group.

And in specific to Heroes Alliance what’s particularly exciting is that that product will be launched concurrent with our film this year to launch across box offices in China this summer. Also the user reviews from our testing seems to be very effective and very successful with the target age group of 10 to 18 and we are seeing some return of users, age (inaudible) users who are coming back to enjoy that particular set of series and storylines.

And the style of play in both Avatar Star and Heroes Alliance is more similar to that of what many hardcore gamers enjoy and for a much more mature audience. And clearly it’s something that we’re pretty excited about. And from the early results of these products it’s very consistent with our strategy and what we’re trying to achieve within our game development, and you’re going to see improvement in the ARPU as these games progress. Thank you.

Andy Yeung – Oppenheimer

Great, thanks.

Operator

Thank you. Your next question comes from the line of Zim Yin with Stifel. Please ask your question.

Zim Yin – Stifel Nicolaus

Hi, just a quick question: what percentage of game [traffic] is actually coming from mobile and what is the trend of the percentage? Thanks.

Paul Keung

We actually look at them somewhat separately. You can think of our traffic today from the numbers we’ve given you, the three sets of numbers we’ve given you. One is in our virtual world, we gave you active accounts and that number is at about 44 million. If you look at the non-gaming part which includes the virtual worlds, I mentioned the page views are somewhere in the neighborhood of 250 million and the unique visitors somewhere north of 30 million.

And in terms of the mobile business we have about 19 million downloads to date, adding about 3 million to 4 million new downloads in each of the last two quarters and the daily actives, we’ve not given that before but it’s a healthy number – call it somewhere in the hundreds of thousands to millions, that number.

Benson Wang

[speaks in Chinese]

Paul Keung

And Benson wanted to add a quick comment as it relates to the mobile business. There’s a significant investment and focus in the mobile development pipeline this year. And if you look at our mobile strategy, some of the objectives that we’ve been very focused on is obviously to build out our brands in addition to expanding our user base and audience.

And concurrently, if you look at our strategy and our pipeline related to our online web games we’ll be launching two call it mid- to hardcore games this year. And if you look from a monetization standpoint our development is moving very rapidly and is vey focused on the hardcore game arena.

Zim Yin – Stifel Nicolaus

Thank you.

Operator

Thank you. (Operator instructions.) As there are no further questions at this time I would now like to hand the conference back to the CFO, Mr. Paul Keung, for closing remarks.

Paul Keung

Thank you, Operator, and thank you everyone for attending our call. We look forward to seeing you next quarter.

Operator

Thank you. Ladies and gentlemen, that concludes the conference call.

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