Charm Communications' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.22.13 | About: Charm Communications (CHRM)

Charm Communications Inc. (NASDAQ:CHRM)

Q2 2013 Earnings Conference Call

August 22, 2013 8:00 a.m. ET

Executives

Nicholas Manganaro – Ogilvy Financial, IR

He Dang – Chairman and Chief Executive Officer

Wei Zhou – Chief Financial Officer

Analysts

Jake Lynch - Macquarie Securities

Operator

Hello and thank you for standing by for Charm Communications’ Earnings Conference Call. At this time, all participants are in a 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. I would now like to turn the call over to your host for today’s conference, Mr. Nicholas Manganaro from Ogilvy Financial.

Nicholas Manganaro

Hello, everyone and welcome to Charm Communications’ earnings conference call for the second quarter ended June 30, 2013. The company’s earnings results were released yesterday and are available on the company’s IR website at ir.charmgroup.cn as well as on newswire services.

Today, you will hear opening remarks from Charm’s Founder, Chairman and CEO, Mr. He Dang, followed by the company’s Chief Financial Officer, Mr. Wei Zhou, who will provide a financial overview and guidance for the third quarter of 2013. After their prepared remarks, they 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. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from management’s current expectations. Charm does not assume any obligation to update any forward-looking statements except as required under applicable law.

Also, please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The most directly comparable U.S. GAAP financial measures and information reconciling these non-GAAP financial measures to Charm’s financial results prepared in accordance with U.S. GAAP are included in Charm’s earnings release, which has been posted on the company’s IR website at ir.charmgroup.cn.

Please note that this conference is being recorded. In addition, a webcast of this conference call will be available on Charm’s Investor Relations website.

I will now turn the call over to Charm Communications’ Founder, Chairman and CEO, Mr. Dang, for whom I will read a translation.

He Dang

[Interpreted] Hello, everyone and welcome to our second quarter 2013 earnings conference call. The current dynamics of China's advertising industry offer many unique opportunities and we must stay at the forefront of these opportunities in aligning our products and service capabilities with the demands of our clients. At the same time the rapidly changing market and media environment also means that we must adjust our consumer and talent strategies to be in line with the structural shift in China's economy.

I am happy to report positive developments on both fronts in the second quarter. As demonstrated by our strong growth and key client wins. Strong growth in revenues in the second quarter was driven by a combination of above market growth from our digital business which was led by Charm Click, and strong demand for content marketing associated with our sports and entertainment products. We also made investments in these fast growing areas, in particular in strengthening our digital marketing products with online video and social marketing.

On the client side, we continue to add new accounts to our client base. Our highlight win for the quarter was the full media account for Kia Motors, which we won in a competitive pitch against both (inaudible) and local agencies. This client, which is now our biggest account, will strengthen our buying platform outside of television and the internet and help to build out our full media buying and service capabilities. Furthermore, this win will make us more competitive in future bids, especially as we enter the pitching season in the second half of this year.

Our overall agency customer spending was flat year-over-year as we were able to make up for the lower spending from clients in the financial services in alcoholic beverage sectors with new client wins in the food and beverage sectors. Moreover, we were able to increase our agency revenues by 24% due to a higher extraction rates. This increase was due to a greater proportion of higher margin products, such as digital marketing and content marketing as led by our sports marketing business unit. Following our sports marketing success with the summer Olympics last year, many of our clients have continued to take up this innovative product.

For example, China Telecom has integrated its key branding of message of, 'I am here live', for its 3G service, with many live sports broadcast on CCTV 5. We are confident in the client demand and future growth as we will rollout more of these types of products. Moving on to our digital business, led by our Charm Click business unit's 42% year-over-year increase in volume, our digital business continues to outperform. Charm Click had 105 accounts in the second quarter of 2013, up from 72 last year and 54 in the second quarter of last year.

We were very pleased to see the fast adoption of our Baidu Europe business as a result of our comprehensive training and preparation in the first quarter, leading to the addition of over ten accounts in the second quarter. Also we will be launching a search product aimed at ecommerce clients on Taobao, which we hope will be another key driver of growth for Charm Click. For Charm Interactive, we continue to strengthen our team and service offerings with the key hire of a former executive from Google to be the Vice General Manager of Charm Interactive North China reporting to Johnny Zhu.

We are also happy with the integration of the digital marketing products within our existing client teams, in particular online video and social marketing. For online video, we restructured internal media planning and buying to be part of our existing television media platform and have developed planning tools to help effect these changes. We also have a successful workshop with Youku Tudou with the goal of customizing online video products for our existing television advertisers.

We also recruited a social marketing team to join Charm Advertising in July. The team is lead by veterans from [Cena] and brings a full suite of social marketing products on the (inaudible) platform, including products and event marketing, EPR, social commerce and social CRM. Our clients are often overwhelmed by the multitude of products and services in the digital world. But we are confident in our ability to act as the bridge for our existing clients to help them navigate the complicated world of digital marketing.

Moving on to our media business, we saw a continued ramp up in sales with revenues increasing 21% year-over-year and 8% quarter-over-quarter. The growth was stronger with our non-CCTV media assets which [got] close to 30% quarter-over-quarter. Our teams have worked closely with the channel and program owners, and producers to develop targeted content marketing related products to win clients and sales. We have also aligned the sales teams with the agency businesses regional services centers in Shanghai and Guangzhou to optimize client communication and management. We firmly believe that these efforts will help us to turn around the margins for our media business.

Overall, we see our business continuing to evolve as we invest in products and talent to better serve our clients in this rapidly changing and sometimes difficult advertising environment. Nonetheless, we see integration as Charm's unique strength in the marketplace. Especially in capturing the larger blue-chip clients whose needs extend far beyond basic media buying. We are confident that this positioning will allow us to stay innovative and capture future growth. At the same time, we will also remain vigilant regarding cost controls and credit management to help improve and sustain our overall profitability.

I will now turn the call over to our CFO, Wei Zhou, who will discuss our financial results.

Wei Zhou

Thank you, Chairman Dang, and hello to everyone on the call. Before I go through the financials, I’d like to take you through our three core business segments to give you some updates on our progress to-date. Please note that in the first section, I’ll be referencing some of our second quarter results using non-GAAP numbers in order to better convey our performance. We define non-GAAP turnover as total customer adverting spending placed through or with Charm in order to reflect the scale of our business.

In the second quarter of 2013, turnover increased to 3.2% year-over-year and decreased 13.5% quarter-over-quarter to approximately $201.6 million. The year-over-year increase was primarily due to an increase in media investment business billings, which was primarily the result of addition of BTV-Sports in the middle of 2012. The 13.5% quarter-over-quarter decrease in turnover was largely attributed to decrease in advertising agency spending, mainly on CCTV, in the second quarter of 2013, which reflects the seasonal increase in CCTV related advertising spending associated with China's Spring Festival in the first quarter each year.

I will break down turnover by business. The non-GAAP turnover for the agency business was flat on a year-over-year basis, and decreased 16.3% quarter-to -quarter to $172 million in the second quarter of 2013. The decrease in agency business turnover was mainly due to seasonal factors associated with our CCTV business. In the second quarter of 2013, we provided advertising agency services to 190 advertising client accounts compared to 165 accounts in the second quarter of 2012, and 186 accounts in the first quarter of 2013. The most significant client wins in the second quarter included Kia Motors, and Haier Group, as Mr. Dang mentioned, plus Skyworth, Bright Dairy, China CITIC Bank, and Jianlibao Group.

The revenue extraction rate for the agency business which is defined as revenue divided by turnover was 7.1%, compared to 5.7% in the second quarter of 2012 and 7.9% in the first quarter of 2013. The increases were mainly due to growth from our digital business and strong demand for content marketing associated with our sports and entertainment marketing products, which typically have higher extraction rates.

Turnover for our principal media business which operates under the Shangxing Media brand, increased 20.8% year-over-year and 7.6% quarter-over-quarter to $29.6 million. The year-over-year increase was mainly due to the addition of BTV-Sports in the middle of 2012. The quarter-over-quarter increase was mainly due to enhanced sales efforts. In the second quarter of 2013, we had 212 advertisers for our principal media business, compared to 207 advertisers in the second quarter of 2012 and 196 advertisers in the first quarter of 2013.

Now, going back to GAAP figures. Total U.S. GAAP revenues were $42.9 million in the second quarter of 2013, an increase of 19%, compared to $36 million in the second quarter of 2012 and an increase of 12.4% compared to $38.1 million in the first quarter of 2013. Revenues for our agency business were $12.2 million in the second quarter of 2013, an increase of 24.4% compared to the $9.8 million in the second quarter of 2012, and an increase of 20.4% compared to the $10.1 million in the first quarter of 2013. The increase in agency revenues were consistent with the increase in the revenue extraction rate. The change in our principal media business revenues were consistent with the changes in turnover.

Branding and identity services revenues were $1.1 million in the second quarter of 2013, a decrease of 34.5% compared to $1.7 million in the second quarter of 2012, and an increase of 106% compared to $500,000 in the first quarter of 2013. The decrease in branding and identity services were primarily due to an overall decrease in client demand for creative services. Cost of revenues in the second quarter of 2013 was $27.8 million, an increase of 11.7%, compared to $24.9 million in the second quarter of 2012, and a decrease of 2.6% compared to $28.5 million in the first quarter of 2013. We mainly attribute this year-over-year increase in cost of revenues to the addition of BTV-Sports in the middle of 2013.

Gross profit in the second quarter of 2013 was $15.1 million, an increase of 35.6% from $11.1 million in the second quarter of 2012 and an increase of 57% from $9.6 million in the first quarter of 2013. Gross margin in the second quarter of 2013 was 35.2%, compared to 30.9% in the second quarter of 2012 and 25.2% in the first quarter of 2013. The increase in gross profit was due to a higher contribution from our principal media business.

Selling and marketing expenses were $9 million in the second quarter of 2013, an increase of 14.2% from $7.9 million in the second quarter of 2012, and an increase of 3.6% from $8.7 million in the first quarter of 2013. The year-over-year increase in selling and marketing expenses was primarily due to executive hires within our agency business. The quarter-over-quarter change in selling and marketing expense was relatively flat. Selling and marketing expenses represented 21.1% of total revenues in the second quarter of 2013, compared to 22% in the second quarter of 2012 and 22.9% in the first quarter of 2013.

General and administrative expenses in the second quarter of 2013 increased to 58.1% year-over-year, and 59.1% quarter-over-quarter to $4.5 million. The year-over-year and quarter-over-quarter increase in general and administrative expenses were mainly attributed to a bad debt provision of $1.6 million in the second quarter. General and administrative expenses represented 10.4% of our total revenues in the second quarter of 2013, compared to 7.8% in the second quarter of 2012 and 7.4% in the first quarter of 2013.

Operating profit was $1.7 million in the second quarter of 2013 compared to an operating profit of $300,000 in the second quarter of 2012, and an operating loss of $2.2 million in the first quarter of 2013. GAAP net income was $1.2 million in the second quarter of 2013, compared to a net income of $800,000 in the second quarter of 2012 and a net loss of $1.5 million in the first quarter of 2013. Fully diluted net income per ADS in the second quarter of 2013 was $0.02, compared to a fully diluted net income per ADS of $0.01 in the second quarter of 2012, and a fully diluted net loss per ADS of $0.05 in the first quarter of 2013. Each ADS represents two common shares.

Our second quarter non-GAAP net income which excludes share-based compensation expenses, amortization of intangible assets and the net change in fair value of the consideration payable and call option was $2.5 million, compared to a net income of $1.5 million in the second quarter of 2012 and a net loss of $800,000 in the first quarter of 2013. Net cash flow from operations in the second quarter of 2013 was positive. As of June 30, 2013, we had cash and cash equivalents of $96.5 million compared to $99.6 million at the end of March 31, 2013. In terms of headcount, we had 784 employees as of June 30, 2013, compared to 790 employees at the end of March 31, 2013.

Turning now to our business outlook. We estimate our third quarter 2013 non-GAAP net income to be in the range of $2.5 million to $3 million. We base these estimates on a foreign exchange rate of RMB6.1 per U.S. dollar, and it reflects our current and preliminary view which is subject to change.

I will now hand the call over to the operator, who will open the line for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Jake Lynch from Macquarie. Please go ahead.

Jake Lynch - Macquarie Securities

Can I ask on the pricing, just how the trends on going now and what you saw in the second quarter an what you may be expecting on the third quarter in terms of the ASPs on the per minute for the business there, for the MIM business.

Wei Zhou

Thanks, Jake. In terms of pricing I think from a rate card perspective, there was a small year-over-year increase. But from looking at sort of where we are in the second quarter or we are for the rest of the year, I think we have actually been able to hold our pricing relatively flat as compared to last year.

Jake Lynch - Macquarie Securities

And if I can just follow up, as we go into the bidding season with the auctions, do have any feel at this point or is it too early for what advertising budgets are going to be like, come November, amongst your customers, your clients?

Wei Zhou

Yeah, we just started having those conversations now. We actually held sort of [VIT] conferences for the key clients preliminarily at the end of August. So I think from (inaudible) to sort of general advertiser sentiment, I think still it's a little bit early to tell. But I think most of our existing advertisers as they have indicated a likelihood in terms of renewing their demand. But I think there will still be about a few months before we have a better picture in terms of where in November it's going to shape up.

Operator

(Operator Instructions) We have a follow-up question from the line of Jake Lynch from Macquarie. Please go ahead.

Jake Lynch - Macquarie Securities

Not trying to monopolize, but just if I have another moment. Is it possible to breakout the digital side of the revenue stream and give us a sense of how that is and whether that factor (inaudible) is tracking higher?

Wei Zhou

In terms of the digital -- you mean sort of breaking down by media types?

Jake Lynch - Macquarie Securities

Yeah. I mean if, correct me if I am wrong but that should be all in the IBC revenue, if I am not mistaken. And how much of that IBC would be coming from the digital side of things?

Wei Zhou

Yeah, for digital all of it is booked under the agency business.

Jake Lynch - Macquarie Securities

Okay. It's under the agency business. But the agency business is not just digital, correct?

Wei Zhou

Correct. That’s correct. For the agency business, breaking it down, I think from the revenue contributions perspective, it's around [60% to 70%] sort of related to CCTV. Around 20% related to non-CCTV television and then also around 20% is related to digital.

Jake Lynch - Macquarie Securities

That’s for the whole company, is that correct?

Wei Zhou

For all of our agency business. That’s correct.

Jake Lynch - Macquarie Securities

For all the agency business. Okay. All right, thanks. I am good on that.

Operator

Thank you. That’s the end of our question-and-answer session. I would like to ask if the management will like to have any closing remarks, if not, thank you ladies and gentlemen that does conclude our conference for today. Thank you for participating. You may all disconnect.

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