Good evening and thank you for standing by for China Digital TV’s second quarter 2013 earnings conference call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections you may disconnect at this time.
The company’s earnings results were released earlier today, and are available on the company’s IR website at ir.chinadtv.cn, as well as on newswire services.
Today, you will hear an overview of the quarter and a discussion of the company’s financial results. After the company’s prepared remarks, China Digital TV’s chief financial officer, Mr. Zhenwen Liang will be available to answer your questions.
Before we continue, please note that the discussion today will contain certain forward-looking statements made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s results may be materially different from the views expressed today.
Further information regarding these and other risks and uncertainties is included in the company’s registration statement on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. China Digital TV does not assume any obligation to update any forward-looking statements except as required under applicable law.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on China Digital TV’s investor relations website. I will now turn the call over to Mr. Lei Zhang, who will read remarks on behalf of China Digital TV’s president, Mr. Dong Li.
Mr. Lei Zhang
Thank you. Hello everyone and welcome.
I’d like to start today’s earning’s call with a discussion of overall developments in China’s Cable TV market during the second quarter.
Cable TV users in China increased by 7 million during the second quarter to nearly 160 million, with the digital conversion rate reaching 74%, according to Zhongguang Luoda, a third party research firm. As digital conversion approaches completion in China, the industry shift toward high definition is gaining momentum, spurring a new pipeline of demand for our smart cards.
Another trend driving smart card demand is the need for multiple set top boxes to service households with multiple TVs. During Q2 the number of households using more than one set top box reached one million in China and we see this trend continuing now that analogue broadcast is phasing out.
At the same time, network consolidation has also created some challenges across the industry. The strengthening of the position of provincial cable operators has resulted in pressure on pricing, affecting ASP.
Turning now to China Digital TV’s quarterly performance…
In Q2, China Digital TV shipped a total of 3.6 million smart cards. We saw steady demand for smart cards during Q2 in Zhejiang, Jiangsu, Guangdong and Shandong provinces, which are all areas where we have very strong market share.
While we did very well in many of our key markets, we did see some impact from increasing pricing pressure in some provinces, leading to a market share of 53% in Q2, according to Zhongguang Luoda.
Looking ahead to the second half of 2013, we expect to see an increase in card shipments, particularly in Sichuan, Heilongjiang and Jiangxi.
In the second quarter, we saw ASP, for smart cards decrease by 1% sequentially. While this was consistent with recent trends, it was also partially the result of the aforementioned increased bargaining by provincial cable operators following the completion of network consolidation. We expect this to continue for the remainder of the year, in line with our previously discussed projections.
Turning now to International Markets…
We continue to make good overall progress developing markets abroad. Taiwan, in particular, holds good promise and we are already receiving orders on a relatively small scale from local companies such as China Network Systems, a multiple system operator with millions of cable TV subscriber household.
I’m pleased to tell you that despite the economic slowdown in India that somewhat impacted our overall progress, NSTPL, the project in partnership with Motorola, received approval and 100,000 surface-mounted chipsets were issued. In short, we believe that the overall economic slowdown in India should not affect our long-term plans, which remain on track.
Looking now at value added services…
During the second quarter, we saw a continuation of the intelligentization of the market that we mentioned last quarter. Following our earlier agreements with Xinjiang, Shijiazhuang, Qingdao and Jiangsu, in Q2, we signed an agreement with Dalian to establish a cloud computing system.
Changes in the way that users access content are also affecting the cable TV industry. As users increasingly view content from smartphones and tablets, rather than televisions, broadcast and cable operators are facing increasing challenges from non-traditional competitors like IPTV and OTT services. This shift toward multi-screen usage is partially affecting the demand for set-top boxes.
To provide a solution for users who want to access content via these new terminals through their existing cable systems, in Q2, we helped cable operators to deploy head-end system integration in Jinzhong, Zibo and Dandong for our Network Broadcast Platform, or NBP. This allows users to watch 50 channels of live TV on their IOS devices over their home WiFi network.
Overall, we stand to benefit from industry advancements. We expect the increasing penetration of Internet TV and the growing use of multiple screens for viewing content, including TVs, smartphones and tablets, to further boost VAS demand. Over the long-term, we believe that intelligentization will be a key driver of our value-added services business.
I will now hand the call over to Nan Hao, our investor relations manager, to discuss our financial management.
Mr. Nan Hao
Thank you. Hello everyone.
During the second quarter, China Digital TV was able to meet our revenue guidance despite a range of industry challenges. We continued to see steady demand and performance in several key provinces and are beginning to see conversion to high definition drive demand for our smart cards.
Turning to the financial highlights for Q2. Please note that, unless otherwise stated, all amounts are in US dollars.
In Q2 2013, China Digital TV shipped approximately 3.58 million smart cards, compared to 3.74 million for the same period in 2012 and 3.71 million in Q1 2013, for reasons already discussed.
Net revenues in Q2 2013 were 18.2 million, a decrease of 22.5% from the same period in 2012 and an 8.6% decrease from Q1 2013. The year-over-year decrease in net revenues was mainly due to a decrease in the sales of other products, such as surface mounted device chipsets and multimedia home entertainment boxes, as well as smart cards. The sequential decrease was primarily due to a decline in revenues from head-end system integration and sales of smart cards.
Now let me go through the major revenue components for the quarter.
Revenues from smart card and other products were 17.5 million, accounting for 94.7% of total revenue, compared to 89.7% in Q1 2013.
Revenues from other products were 1.1 million, accounting for 6.0% of total revenue, a 14.0 % increase quarter-over-quarter.
Revenues from our top five customers accounted for 23.3% of total revenues, compared to 18.3% in Q1 2013.
Revenues from services were US$1.0 million in the second quarter of 2013, a decrease of 34.7% from the same period in 2012 and a decrease of 52.7% from the first quarter of 2013. Service revenues accounted for 5.3% of total revenues in the second quarter of 2013.
Gross profit in Q2 2013 was 14.0 million, a decrease of 22.1% from last year and a decrease of 4.5% from Q1 2013. Gross margin was 76.7% in Q2 2013, compared to 76.4% in Q2 2012 and 73.4% last quarter. The year-over-year increase in gross margin was primarily due to an increase in the proportion of total revenues accounted for by net revenues from smart card sales, which have a higher gross margin than other products. The quarter-over-quarter increase in gross margin was primarily due to an increase of gross profit related to a higher total cost of revenues in last quarter.
ASP of smart cards in Q2 2013 decreased by 0.9% sequentially, while unit costs increased by 4.9%.
Operating expenses in Q2 2013 were US$10.6 million, an increase of 0.8% from the same period in 2012 and a decrease of 12.9% from Q1 2013.
Income from operations in Q2 2013 was 3.3 million, a 54.9% decrease from last year and a 37.4% increase from last quarter. Operating margin in Q2 was 18.3%, compared to 31.5% during the same period in 2012 and 12.2% in Q1 2013. The year-over-year decrease was primarily due to a decrease of net revenue. The quarter-over-quarter increase in operating margin was primarily due to a decrease in operating expenses, such as general and administrative expenses and selling and marketing expenses.
Income tax expenses in the second quarter of 2013 were US$2.1 million, compared to US$1.8 million in income tax expenses in the same period of 2012 and US$4.5 million in income tax benefits in the first quarter of 2013. As the management determines to distribute part of the retained earnings of the Company’s PRC subsidiaries, the Company has accrued and recorded withholding taxes for such undistributed retained earnings since the third quarter of 2012. The US$4.5 million in income tax benefits in the first quarter of 2013 was mainly due to a change in the income tax rate applicable to the Company’s PRC operating subsidiary, Beijing Super TV Co., Ltd. In the first quarter of 2013, the subsidiary was designated as a “key software enterprise” for the tax years of 2011 and 2012 by the relevant PRC government authorities and, as a result, was entitled to a preferential income tax rate of 10% in each of those years. As the Company accrued income tax expenses at a rate of 15% in 2011 and 2012, the accrued income tax expenses were partially reversed in the first quarter of 2013.
Net income attributable to China Digital TV Holding Co., Ltd. in the second quarter of 2013 was US$1.8 million, a decrease of 77.3% from the first quarter of 2013.
Non-GAAP net income attributable to China Digital TV Holding Co., Ltd. defined as net income excluding certain one time or non-cash expenses, such as impairment loss on long-term investments, share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments, in Q2 2013 was 2.4 million, a decrease of 70.3% from the same period in 2012 and a decrease of 73.2% from the first quarter of 2013.
Turning to our balance sheet...
As of June 30, 2013, China Digital TV had cash and cash equivalents and restricted cash totaling 60.1 million. In Q2 2013, cash flow generated from operations was approximately 5.8 million
In Q2, our accounts receivable net was 39.1 million, compared with 38.3 million at the end of 2012. This was resulted from the increased bargaining power of cable operators following the completion of the provincial network consolidation.
Now, let me provide you our business outlook.
Based on information available as of Aug 20, 2013, China Digital TV expects smart card shipments for Q3 2013 to be in the range of 3.6 million and 3.9 million. Net revenues for Q3 2013 are expected to be in the range of 16.7 million and 18.1 million.
Thank you for listening; we will now take your questions.
The question-and-answer session of this conference call will start in a moment, in order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed.
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