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Trunkbow International Holdings Ltd. (NASDAQ:TBOW)

Q3 2013 Earnings Call

November 15, 2013 8:00 AM ET

Executives

Brandi Floberg – IR

Qiang Li – CEO and Co-Founder

Alice Ye – CFO

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2013 Trunkbow International Holdings Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today, 15 November, 2013.

I would now like to hand the conference over to your host today, Ms. Brandi Floberg. Thank you. Please go ahead, ma’am.

Brandi Floberg

Thank you, operator. Good day, everyone, and once again, thank you all for joining us today for the Trunkbow’s third quarter 2013 earnings conference call. Joining me on today’s call are Mr. Qiang Li, Trunkbow’s Founder and CEO; and Ms. Alice Ye, the company’s Chief Financial Officer.

We’ll begin today’s call with some comments in Chinese from Mr. Li, who will provide a high level overview of the quarter along with some key highlights and other recent developments in the company’s business. Following Mr. Li’s remarks, I’ll provide an English translation, before turning the call over to Alice, for a review of the third quarter financials. After management’s prepared remarks, we’ll open the call for your questions.

Before we begin, I’d like to remind you that certain statements that are not of historical fact made during the course of this conference call about future events and projected financial results constitute forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. You should note that the company’s actual results may differ materially from those projected in these statements due to a variety of factors affecting the business.

Forward-looking statements are subject to both risks and uncertainties. A discussion of the factors that may affect future results is contained in our filings with the U.S. Securities and Exchange Commission. We undertake no obligation to correct or update any forward-looking statements provided, as a result of new information, future events, or changes in our expectations

With that said, it is now my pleasure to turn the call over to Mr. Li, Chief Executive Officer of Trunkbow. Mr. Li, please go ahead.

Qiang Li

[Foreign Language]

Operator

Brandi, please go ahead.

Brandi Floberg

Thank you. Okay. Thank you, Mr. Li. I will read some translations.

Hello and thank you, everyone for joining us today. We are pleased to make continue advancements this quarter with growing profitability to our company and progressing our strategy to expand our mobile payment solutions business.

For the third quarter, we recorded net income of $4.1 million or $0.11 per share on revenues of $6.2 million which included 24% year-over-year increase in our MPS business. Our strategy to build our mobile payment solutions is on ongoing. We continued to transition our business to a revenue sharing and transaction based model that generates behind predictable revenue stream.

Adoption remains the primary hurdle for us to gain traction with MPS. However, trends in China’s mobile payments market are encouraging and we are delving our merchandise with high profile businesses looking to penetrate the m-commerce market.

During the quarter, we signed an additional 30 merchants for MPS installation. We have a total merchant installed base of over 5400, including approximately 180 merchants who are implementing our mobile applet solutions. As we continue to delve this network, we are actively increasing our revenue sharing power from MPS platform in preparation for a growing mobile payment community. The prospects are very encouraging. And we believe we are taking the right steps to position our company for a long-term growth.

The initiatives in network we are delving today placed on par with the forefront of the mobile’s payment movement. It’s important to remember that mobile commerce is still in its infancy in China. According to China’s Network Information Center, m-commerce accounted for less than 5% of total online retail transaction values in 2010. However, if we look at the online payment trends, we are seeing a clear increase in China for the fast growing online retail market is [ph] due for development of online payment options. We believe that mobile payment systems are in policy.

In conjunction with our efforts to expand our MPS business, we are simultaneously building our eCloud business as an additional revenue stream.

Concession for our first data center in Guangzhou is now in the final stages, and we expect to launch these services in early 2014 to support incremental monetization opportunities.

A second data center will be in Shanghai and we continue to plan for this center to be fully operational in 2014. As we discussed on prior calls, China’s cloud growing market that extends our reach beyond retail and merchant target from our MPS offering. Our e-cloud capabilities are designed to extend our footprint to address the needs of broader industries including healthcare, power, telecommunications and finance.

Our e-cloud business is one our core focuses, we plan the partner with experienced operator to penetrate this market while we continue to see a great deal of opportunity to grow our business and leverage our core competencies.

In addition, the e-cloud business will also enable us to offer customers a broad range for MPS services including wholesale services POS based solutions, the Trunkbow-UnionPay m-commerce applet and our online to offline payment platform. We are extremely excited about this offering and we expect this business to maybe a major growth driver for Trunkbow over the longer term.

Services for our e-cloud business will be formed for shorter payment terms of 90 to 150 days which [indiscernible] constrains in our operating cash flow, improves our collections and reduce spend to DSOs in future period. Collections of our accounts receivable has also improved in recent months.

As of November 14, 2013, we requested approximately $10.3 million of accounts receivables that were outstanding as of September 30.

We are very confident about our business and prospects for growth with our promising MPS and complementary e-cloud business. At the same time, we are focused on limiting our costs in operating expenses to best align our current business for maintaining flexibility to accommodate our expected growth as MPS solutions began to take shape among China’s rapidly evolving mobile Internet culture.

Before I turn the call over Alice, I know that many of you are eager for an update on our potential privatization. While we understand you may have questions from this topic, we don’t have a lot of information to share at this moment. Until the special committee that the board has formed to evaluate the initial proposal is able to make recommendation, we are limited on what we can say. But we are making steady progress in our due diligence and we will update you as soon as we can. In the meantime, we appreciate your patience and continued support.

With that I will turn the call over to our CFO, Ms. Alice Ye for the review of our third quarter results. Alice, please go ahead.

Alice Ye

Thank you, Mr. Li and thank you Brandi.

For the third quarter we generate gross revenue of $6.2 million compared with $9 million in the third quarter of 2012. The decline in revenue was mainly attributable to a decrease in system integration revenues related to the software sales our MPS technology.

On a segment basis, gross revenue from our MPS business was $5.5 million compared with $8.5 million in the third quarter of 2012. The decline in MPS revenue was primarily related to reduced sales of our MPS software related to our SMS/phone-call management and mobile business card offerings.

MPS gross revenue totaled $0.7 million compared with $0.6 million in the third quarter of last year. The increasing MPS revenue was primarily related to an increase in the sale of MPS software systems.

Cost of revenue for this quarter totaled $0.7 million compared with $1.9 million in the third quarter of 2012. The decrease in cost of revenue was primarily attributable to the reduction in the sales of MPS integration, which in turn reduced our equipment cost. Gross profit in the third quarter of 2013 was $5.4 million compared with $7 million in the third quarter of 2012. As a percentage of net revenue, gross margin was 88.5% in the third quarter of 2013, compared with 78.6% in the year ago period. The increase in gross margin was primarily to the decrease in system integration revenues which carry a higher hardware cost.

Operating expenses were $0.7 million compared with $3.3 million in the third quarter of last year. The decreasing operating expenses was primarily attributable to a reversal of $1 million in the allowance of doubtful debt and the lower advertising promotion expenses as well as the continuing implementation of our cost control measures.

Operating income for the third quarter was $4.7 million compared with $3.7 million for the third quarter of 2012. Net income attributable to the company was $4.1 million or $0.11 per share for the third quarter of 2013. This compares with the net income of $3.2 million or $0.09 per share in the same period of 2012. The per share calculations for both periods are based on $36.8 million basic and diluted shares outstanding.

Now, on to our balance sheet items. As of September 30, 2013, we had $1.9 million in cash and cash equivalents. Inventories increased by approximately $3.1 million from $5.5 million as of December 31, 2012 to $8.6 million as of September 30, 2013 and our total current assets grew from $84.8 million on December 31, 2012 to $88 million on September 30, 2013.

Accounts receivable totaled $50.8 million as of September 30, 2013, compared with $46.2 million on December 31, 2012. We had collected approximately $10.3 million outstanding September 30th receivables as of November 14 and we continue to work improving our collections process to reduce receivables in our DSOs.

Working capital as of September 30, 2013 totaled $57.2 million, up from $60 million as of December 31, 2012, and total stockholders’ equity was $99.3 million as of September 30, 2013, compared with $95.4 million at the end of 2012.

That concludes our prepared remarks. Operator, we would now like to open the line for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) There are no further questions at this time.

I will now like to hand the conference back to today’s presenter. Please continue.

Brandi Floberg

Thank you everyone for joining the call today. If you have any questions, please contact Trunkbow’s Investor Relations partner, The Piacente Group. Thank you.

Alice Ye

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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