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China Techfaith Wireless Communication Technology Limited (NASDAQ:CNTF)

Q2 2013 Results Earnings Call

August 20, 2013 8:00 AM ET

Executives

David Pasquale - Global IR Partners, IR

Ouyang Yuping - Chief Financial Officer

Jay Ji - Senior Vice President

Analysts

John Sheehy - Private Investor

Operator

Good day, ladies and gentlemen. And welcome to the China TechFaith Second Quarter 2013 Conference Call. My name is Erica, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards end of this conference. (Operator Instructions)

I would now like to turn the call over to David Pasquale of Global IR Partners. Please proceed.

David Pasquale

Thank you, Operator. Welcome everyone to China TechFaith’s second quarter 2013 financial results conference call. Joining us today from the company are Chief Financial Officer, Ms. Ouyang Yuping; and SVP, Mr. Jay Ji.

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 cntf@globalirpartners.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 quotations contain forward-looking statement.

TechFaith may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on Form’s 20-F and 6-K, et cetera, and its annual report to shareholders, in press releases and 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. Forward-looking statements involve inherent risks and uncertainties, 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 does not undertake any 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 SVP, Mr. Jay Ji. Please go ahead, sir.

Jay Ji

Thank you, David. And welcome to our second quarter 2013 financial results conference call. I hope that everyone had a chance to review our press release. Overall, the second quarter developed as expected. Our revenue increased by 7% to US$30 million with major increase in the ODP segment. The growth in the ODP segment offset declines in our Game and Brand name phone segment.

Revenue in our Game segment in Q2 was US$1.6 million, compared to US$3.4 million in Q1. Revenue in our Brand name phone segment was US$8.4 million, compared to US$10.3 million in Q1.

We continue to adjust to the market in both Game and Brand name segments. The decline in the Game segment has been more thorough than the Brand name. Both segments faced steep competition, part of the Game segment is driven by popularity of Game titles, consoles or features and requires very high advertising and marketing support to even launch our product. We continue to explore alternative channels where we can repeat the success we had with motion games with higher margin strategy.

With that said, we do not expect business levels to improve dramatically over the near-term, the reason being that the broader environment remains very challenging. We are not certain that the market will remain stable over the next few months or decline further. Intensive competition and price pressure are expected to continue on both the smartphones and Game segments of our business.

On a longer term basis we remained confident in the niche segment motor we are pursuing. For example, our smart ruggedized devices have been popular and we were able to extend to other motors. The ruggedized offers suitable for both the consumer and the Brand segment, we believe in [the capabilities] of our product and our ability to capture new and existing opportunities.

In terms of Q2, our revenue for the second quarter came in at US$30 million. As noted, this was in line with our prior guidance to be in the range of US$28 million to US$33 million.

Our gross margin in Q2 decreased to 11%. And this was due to lower selling price of some of our mobile phone model to certain customers and higher design costs of certain models together with revenue decrease from both game and branded phone sale segment.

We reported a loss of $0.02 per basic and a diluted ADS. In terms of segments in Q2, our ODP business contributed 67% of total revenue. Our game business contributed 12% of total revenue. And our branded mobile phone business brought us 28% of total revenue.

We remained focused on building brand awareness, developing unique android software applications and ruggedized mobile devices to our consumers, enterprise and outdoor segments. Our ruggedized devices, Jungle and TITAN, have been well received by the market and we have continued to trend with new models such as J3 and J4.

We have also continued to expand our presence globally and domestically by participating in various international and domestic exhibitions. For example, in the second quarter, we participated in the Hong Kong Electronics exhibition.

We also participated in the Guangzhou telecommunication exhibition, Beijing Technology Week, Beijing Internet Conference and more. These high profile events are important in building our brand and reaching our target consumers. Additionally, we have organized several successful marketing events such as the 17FOX for the real estate competition. 17FOX outdoor celebrated a series of events and more.

Now, let me turn the call over to our CFO, Ouyang Yuping, for further review.

Ouyang Yuping

Thank you, Jay. Thank you to all for joining our second quarter earnings call. Let me quickly review some key operating points and our outlook before taking Q&A. Revenue for the second quarter was $30.2 million compared to $28.2 million in the previous quarter and $32.4 million in the same quarter last year.

Our ODP business contributed $20 million or 67% of the revenue. Our branded mobile phone business contributed $8.4 million or 27.8% of the revenue and our gaming business contributed $1.6 million or 5.5% of our total revenue.

Although we have seen some stability as Jay just noted. We continue to expect a very challenging business environment. For example, our gaming business experienced a steepest decline in this quarter. This was both due to overall weaker demand and business transitioning from hardware-centric controller sales to the current model focusing on building user base.

Overall, gross profit for the second quarter of 2013 was $3.4 million compared to $4.6 million in the previous quarter and $7.3 million in the same quarter last year. Our operating expenses was $4.3 million compared to $4.2 million in the previous quarter and49% decrease compared to $8.3 million in the same quarter last year. The reduction was mainly due to lower bad debt expenses and lower selling and marketing expenses.

In terms of our balance sheet, we ended the second quarter with a balance of $258 million in cash and cash equivalent. This is a slight decline of $3 million compared to the prior quarter. The slight decline is primarily due to our capital expenditure on equipment and facility constructions.

Additionally, we spend approximately $1 million on the continued development of our facility. You can see the balance of this asset increasing on our balance sheet.

In terms of specific guidance for the third quarter 2013, as noted in our press release, we currently expected total revenue in the third quarter to be in the range of $28 million to $33 million. This forecast reflect the earlier mentioned continued competitive pressures and challenging business environment we reviewed earlier.

Operator, that concludes our formal comments. We are now ready to take questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of David Meier with [Cardiff Capital]. Please proceed.

Unidentified Analyst

Yeah. Quick question, two questions actually. Given where the market GAAP and your cash position, are there any new plans that you have whether it be a buyback or something more drastic to -- for the market to recognize the intrinsic value there, the company trading so far below cash?

And secondly more direct question, can you address recent article. I think it was in [SinoTech Times] a few weeks ago that mentioned there was talks about one of your venture backers or venture backer out there in China, maybe IDT that was interested in buying your TV gaming business? Thank you.

Jay Ji

Thank you for your question. Let me answer your second question first. As in the past, TechFaith does not comment on market rumors or some strategic potential. In the case you mentioned of IDT, we were, kind of, still investing in our Game business several years back. We continued to have a very good relationship with IDT. And with regard to any potential offer later we have to ask our Board of Directors to discuss and evaluate, in such times we reached higher level that would we ask the Board to issue a public press release summoned at that time. So this is normal -- this is very normal as a public company.

So the first question you asked that our company management and the Board remain committed to keeping a strong balance sheet. This has allowed us to found a longer term initiative. And our balance sheet gives us leverage when dealing with our supply chain. And it gives us our customer confidence in TechFaith’s ability to support them. With regard to divest in cash flow buyback or repurchase, we do not have a plan for that at this time. Our focus is on supporting our existing business and for us to move to more stable and greener areas. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of John Sheehy. Please proceed.

John Sheehy - Private Investor

Hi, everybody. Thanks for taking my questions. First, I’d like to ask about the real estate projects, the construction in progress increased by only about $1 million during the second quarter. Can you give me an outlook for the remainder of the year of how much more money you plan to spend?

Ouyang Yuping

As we mentioned in our previous annual report, we expect to spend US$150 million in this year and next year. Actually, I cannot say how much we will spend for the half year by now, as some of the payment will depend on the progress of the construction and some necessary approval from the government. Thank you.

Operator

(Operator Instructions) We have a follow-up question which comes from the line of John Sheehy. Please proceed.

John Sheehy - Private Investor

Hi. Thanks for letting me back. Can you tell us the total floor area of the projects that you have under construction or completed projects in Beijing, Honcho and Shenyang?

Jay Ji

Actually, we have told this in last annual talk. We have 22 total buildings in Beijing, Honcho and Shenyang, four buildings have been completed and 18 buildings are at various stage of the construction process. Some of those buildings are expected to be completed in 2014.

Operator

(Operator Instructions) Okay. We have another follow-up question which comes from the line of John Sheehy. Please proceed.

John Sheehy - Private Investor

Thank you for letting me back. I will just one or two. I’ve got some independent information that the total floor area that you have under construction in Beijing is 350,000 square meters, in Honcho its 80,000 square meters and in Shenyang its 100,000 square meters, and I thought that people might be interested in knowing that?

I would also like to ask about the patent portfolio you have in the gaming business. There’s been some news that up until now sale of game consoles like Xbox, Wii and PlayStation has been banned in China, but that sales will be permitted if the consoles are constructed in the new free trade area in Shanghai? And I was wondering can those products be sold in China without accessing some of the patents that you have.

Jay Ji

First, we heard this news back a couple of days ago. So this kind of information we are not sure when it’s going to happen. In case if it is going to happen, we have our own patents. We are going to protect us. We are going to use our patent to -- as a weapon to protect us as well in future. We keep that in mind.

Operator

Okay. We have no further questions at this time. I will now turn the call back over to management for closing remarks.

Jay Ji

Thank you everyone for participating in today’s call. 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. Have a good day. Bye-bye.

Operator

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

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