YOU On Demand Holdings' Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov.15.13 | About: YOU On (YOD)

YOU On Demand Holdings, Inc. (NASDAQ:YOD)

Q3 2013 Earnings Conference Call

November 14, 2013 04:30 pm ET

Executives

Jason Finkelstein - Director of Strategy and IR

Shane McMahon - Chairman

Marc Urbach - President and CFO

Analysts

Jay Srivatsa - Chardan Capital

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the YOU On Demand 2013, Q3 Investor Results Update Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Jason Finkelstein, Director of Strategy and IR at YOU On Demand. Please go ahead.

Jason Finkelstein

Thank you, operator and good afternoon everyone. We appreciate your participation on YOU On Demand’s update call. Joining me today are Shane McMahon, YOU On Demand’s Chairman; and YOU On Demand’s President and CFO, Marc Urbach. Following their prepared remarks we will open up the lines for questions.

Today’s call may contain forward-looking statements related to the company’s future operating results. Listeners are cautioned that such statements are based upon current expectations and assumptions and may involve certain inherent risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations expressed, implied or forecasted.

Certain risks and uncertainties are detailed from time to time in the management’s discussion and analysis section of our corporate filings, copies of which can be obtained from the SEC or via our website www.corporate.yod.com. All information discussed on this call is as of today November 14, 2013 and YOU On Demand undertakes no obligation to update any statements or expectations from prior conversations.

I would now like to turn the call over to Shane who will provide a brief overview of our business as well as recent corporate development and Marc will then follow with an update on our financial results and capital position.

Shane McMahon

Thank you, Jason. We all appreciate everyone being on the call with us today. Third quarter was another important period for YOU On Demand as we are still in the early evolutionary growth stage. Two events occurred subsequent to quarter end both of which are linked to our entry into the fast growing Chinese mobile entertainment space. I will be focusing much of my commentary on these recent milestones that we view as critical to both our near-term as well as the company’s future success.

You may recall that back in July leading Chinese mobile video service provider C Media made an initial strategic investment in YOU On Demand totaling $4 million. This capital infusion represented Phase 1 of a planned two phase funding, one of the agreements original terms C Media was also granted the options to make an additional investment of between $12 and $21 million by the end of October, subject to certain terms and conditions. As this grows in early November, C Media elected to make an interim $2 million convertible bridge note investment in YOU On Demand increasing their aggregate stake to $6 million.

The Phase 2 purchase price remained $1.75 per share and in addition to making this purchase of [Series E] preferred stock, C Media also granted a one month expansion for executing definitive documentation and satisfying the closing conditions set forth in our original agreement. The new target date for the balance of their additional Phase 2 investment, pursuant to the aforementioned conditions is December 4, 2013.

As stated in our last quarter’s calls, C Media's investment has a strong vote of confidence in YOU On Demand's business model and future growth potential. Their organization’s current aggregate investment of $6 million in addition to what we hope will be an incremental future investment of as much as $10 million would likely satisfy the company’s capital needs from the foreseeable future.

Importantly C Media’s initial cash effusion has already paved the way for our entry into the booming mobile video space as evidenced by our recently announced new agreement with Huawei, the second key event I will referred to earlier.

Marc provides some additional color on the financial implications on the Huawei relationship in his commentary shortly. Huawei is currently the third largest smartphone manufacturer worldwide and they are growing very fast. The state of the art cloud service provides a bridge between movie content and electronic devices operating greater flexibility and convenience for consumers to watch and enjoy movies on the small screen.

It goes without saying that we are truly delighted and honored to be their new partner in this exciting venture. Keep in mind this is overtaking the U.S. last year in shipment volume, China’s smartphone market is now the world's largest. Shipments are projected to grow 25% next year to about 450 million units from a forecast of about 360 million for this year, according to market research firm IDC.

Continuing and as recently announced YOU On Demand launched its brand new smartphone app called YOU Cinema, which allows users to watch full length feature films directly on their smartphone. Our partnership with Huawei has the YOU Cinema app pre-loaded on the Huawei Mate smartphone. The Mate along with the pre-loaded app just became available for initial sale orders earlier this week via Huawei's business to consumer site entitled vmobile.com their e-commerce platform.

The Mate has been marketed to Chinese consumers and branded as the movie phone. Huawei selected the Mate due to its incredible specs. The phone features a 6.1 inch full screen with 1280*720 HD resolution and Dolby 5.1 surround sound for superior movie viewing experience.

Owners of the new device would be the first to enjoy our YOU Cinema app which is bringing unprecedented mobile movie service with such titles such as G.I. Joe Retaliation and Star Trek Into Darkness. Initially the app will push two Hollywood blockbuster movies per week to consumers via TVOD and an additional SVOD package will be launched soon after.

Before I turn it over to Marc, I would like to provide you all with a quick brief high level summary of where we are and more importantly where we're headed. We are continuing [the process] of learning what types of content our consumers want and equally as important what does not work. We're also saying which delivery methods are preferred. We expect the mobile platform to be very well received and with key partners like C Media and Huawei collaborating with us YOU On Demand is excited to hit the ground running on this platform.

Lastly we believe our success with mobile as establishing ourselves as a leading entertainment distribution brand will help us drive additional interest to our other delivery platforms, including cable, OTT, and IPTV.

At this point we're going to turn it over to our CFO Marc Urbach.

Marc Urbach

Good afternoon, everyone. With now we required over the past nine months of operations to strengthening of our resources both on the lease front as well as financially and the expansion on some other many platforms we are more confident than ever before in our ability to essentially grow our business via multiple forms of delivery. Before taking closer look to third quarter financials it is important to note that the cash and cash equivalents balance as of September 30, 2013 of $1.2 million does not reflect the recent additional $2 million cash effusion from C Media, nor that include the $4 million balance payment received in fall related to the sale of our legacy Jinan Broadband assets. As far as cash, we are continually and diligently focused on keeping fixed overhead at the minimal levels and YOU On Demand is early stages in its operation.

Having initially anticipated launching our mobile initiative in Q3 as discussed, we ultimately launched November 11th with the first sales offering of the Huawei Mate movie phone preloaded with YOU On Demands, YOU Cinema App. So while we fully anticipate seeing initial revenue from Huawei agreement in Q4 this year, due to the aforementioned shift from the timing of agreement and its impact on revenue recognition over Q4 and full year, revenue will likely coming below prior guidance.

With regards to guidance through the recent significant developments in our business and revenue streams we're not comfortable to providing guidance at this time. However once visibility improves we’ll revisit be providing top-line guidance. We do want to confirm that we're still on track to be cash flow positive by the second half of 2014.

Looking to income statement, revenue for Q3 totaled $0.1 million while total operating expenses declined approximately 35% to just under $2 million as we were able to roll out cost cutting initiatives including headcount reductions and reduced professional fees. And as we’ve streamlined operations and leverage some new partnerships [reflect] to more than 30% reduction on operating loss to $2.6 million for the quarter. A one-time $5.6 million gain on the sales of company’s non-core Jinan Broadband assets result in a profitable the sales reported many time of approximately $3 million or diluted EPS of $0.14 per share based on $15.6 million weighted average shares outstanding at quarter-end.

Moving to the balance sheet, total assets were $16.5 million with liabilities amounting to $8.3 million and total equity was $3 million. This compares to $22.5 million in assets, $13 million in liabilities and total equity of $4.2 million as of December 2012 ending period and we seem to have no long-term debt on the balance sheet.

Looking ahead to reiterate what Shane said earlier, we are pleased with the very strong relationship YOU On Demand has been developing with C Media team over the past several months. We are excited about the opportunity to work with them going forward and achieving additional progress against our business plan over the coming months as we leverage their financial and technological resources.

In addition, we’ve been circling our balance sheet in recent quarters reflecting C Media’s growing capital investment plus additional $4.7 million cash infusion borrowing our divestiture of the non-core Jinan Broadband assets.

At this point, I’d like to turn the call to the operator so that Shane and I can answer your questions. Operator?

Question-and-Answer session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Jay Srivatsa with Chardan Capital. Please go ahead.

Jay Srivatsa - Chardan Capital

Thanks for taking my question. Congratulations on [anchoring] the contract with Huawei. Can you give us some details on the contract itself, how does the contribution work, is it per handset or download any details you can provide will be appreciated?

Marc Urbach

Sure. Hi Jay, it’s Marc. Just we have to be a little bit cautious because Huawei themselves are very concerned about what we put out there and don’t put out there. So I apologize, but the answer is not as detailed as it like to be. They kind of want to see us go over the first three to six months and understand what kind of traction we can get and what they’re going build through. But what I can say is that a little bit different than our other model is that we get an upfront fee per handset sold to [grey] plus we don’t get the same register that we got for our other platforms.

So the phones are to be sold on Monday so we should see media revenue ads on Monday and again as people watch more movies we’ll get more rev share as well. So it’s, let’s say up and beyond.

Jay Srivatsa - Chardan Capital

Okay. In terms of the content itself, is it all of your existing content from the Hollywood Studio, are there existing studios that you are providing content from or is it all of them. Can give us any details on how the content is going to be moved into the handset?

Marc Urbach

I think in the beginning in the commercial period for the first couple of months it will be two Hollywood movies per week pushed in these phones so we’ll have them automatically. And then as we, if they want to buy more they can then access that to get other content premiums other platforms. So they have access to all of our regular content plus new movies that come automatically.

Shane McMahon

Jay, it’s Shane. To further answer your question, the answer is yes; we are working towards [donning] those lines and crossing those fields with all of our studio partners that we currently have on board to be offer enough throughout the mobile opportunity.

Jay Srivatsa - Chardan Capital

Okay. And then in terms of other handset service provider opportunities, can you give us some insight as to whether are you working with the Weicheng in China or are you working with other branded guys then in terms of addressing the service provider market itself. Are you working with those guys, talking to guys, give us some update on what are some of the other aspects you are doing on handset side?

Shane McMahon

Well, it’s Shane again. One of the first things we want to do is respect Huawei first and foremost. They are at the first of the table and they also happen to be the world’s largest. I will say it’s a fact that once the New Cinema App which is already created is dealt to be very portable and can eventually be platforming if that’s something that we choose to do. So to let you know of that is exactly how it was engineered and designed. So from same point it can go into other carriers for example into their App Store or what have you.

But again this is brand new it’s launched on Monday we are looking forward to getting some results here. And more importantly looking forward to getting a lot of the data surrounding how things are viewed, how long people are watching, what the commentary is about what can be done better or this is the absolute best. So again, when there are infancy that’s an extremely huge thing and a big milestone for our company and that’s currently where we are.

Marc Urbach

Certainly now I have a little bit more -- last quarter as well and we’re feeling so proud, while we are happy about Huawei let’s say because we're looking at all other options and we are in talks with other operators. So we not just the manufacturers, we are profit sensibly with other operators, we hope to be in deals with them also as well in the coming months and quarters.

Jay Srivatsa - Chardan Capital

So this is not an exclusive with Huawei, is that right?

Marc Urbach

It is not exclusive, no, by our choice.

Jay Srivatsa - Chardan Capital

Okay, all right. Then in terms of the funding from C Media, what are the deliverables you need to provide or make happen between now and December to ensure the next tranche of funding gets submitted to you guys from C Media?

Marc Urbach

Sure. As you know we're dealing with large studios, we promised mobile rights for our studios, but we need to wrap up those deals, we are very closed or tied up with the Studio Legal Department, we are very confident that we're going to get deals done, because we agreed in principle and that's the last big hurdle. C Media has been very, still very excited there over and they just want to make sure that we have promised -- we have more warrants than we promised. So it's just a matter of going through a Studio Legal Departments are going to be actual contracts officially signed. We anticipate that by the end of this month.

Jay Srivatsa - Chardan Capital

Okay. Last question for me, in terms of your legacy business on the cable side, how is the subscriber update been so far for your SVOD service? And as you focus more on the handset side, how do you plan to emphasize or de-emphasize your cable SVOD offerings?

Marc Urbach

Just to be clear, again, we're not de-emphasizing our cable quite at all. We are platforming that, we're going to be add every platform we can and build the brand that can be seen overall sort of a platform. Our cable operator will have some maybe a little bit slower than we might have hoped, but still and we doubled quarter-over-quarter and we see [take] rates increasing and one point we’re with the Huawei now, our brand has been establishing stronger and we're going to look to do double and triple play at all the cable markets that we have with the Huawei deal. So we're going to going to all the operators and aggressively find attach something like that.

Jay Srivatsa - Chardan Capital

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of [A.J. Tandon with Cebru Equity]. Please go ahead.

Unidentified Analyst

Thanks for taking the question. Congrats on a quarter, a lot of exciting developments. So just a few quick questions for you. First, with the cash that you guys received from the Jinan sale, can you give us some color on, I mean uses, cash or any options that are now viable as a result of receiving that payment?

Shane McMahon

So as a small company we’re and as we said for the past few quarters, we are being very cautious with our spending, looking to be spent as effectively and efficiently as we can, money is within six months earlier, but still it’s always been our plans to get in next year. We are happy here relatively (inaudible) bank interest and we needed to play but it shouldn’t pent up quite at all and when we get the money as well, we're going to spend this money.

Unidentified Analyst

Got it. Thanks. It’s helpful. And then just the other question I have was just on the NASDAQ letter for the continued listing requirement, any update you can give us on that would be appreciated?

Shane McMahon

Sure. Just because wrapping up the quarter that was as much of anything than it was the U.S. GAAP issue. The deal was signed after the quarter was meant for U.S. GAAP standards. We had reported just a few operations. I think you take it off your balance and P&L (inaudible) recognized gains so because of that our equity is put below the $2.5 million threshold, but it assumes to be able to sign just four days after quarter, we were back in compliance.

That is not official until we filed this quarter unfortunately so we just filed the quarter. So we are back in to acquire from an equity standpoint. We also as our stock price has gone up over the past week after Huawei announcement, we are in compliance from a market cap standpoint with either one only matters, either one get the fair. So while I obviously can say that definitively we plan contacting that this week (inaudible) and we are very helpful that we are taking out the lots as quickly.

Unidentified Analyst

Got it. All right, great. Thanks guys and once again congrats.

Operator

(Operator Instructions). Our next question is a follow-up question from the line of Jay Srivatsa with Chardan Capital. Please go ahead.

Jay Srivatsa - Chardan Capital

Yeah, and thanks for taking my follow-up. Marc you mentioned cable business move slow in the uptick, it’s been what a quarter now, it’s very something things have been slower than excepted. What are some of the things what we can do in order to drive this growth and what are some of the measures you are taking to make them happen?

Marc Urbach

I will answer and maybe Shane can jump into and maybe little more his round. We think to continually educate them, keep them have a market, get proper placement for where it’s been installed on people cable, continue different good content and good content makes this and it is normally when we think it will keep going. Ultimately there is no argument that the – why we want to be on a platform because that’s a experience from a user standpoint in your house on a high speed and you keep delivery that’s a great problem. So it will be there but it don’t happen all the time, I mean it’s the completely new concept, but we do think that it’s going to get there, this might take a little bit longer than we hoped.

Shane McMahon

And Jay, it’s Shane. To further add, if you have Time Warner Cable, which I believe you do in New York, you will go on there tonight and you will still see advertorials if you will describing on how we are educating consumers about what to do, what not to do and how to order a movie and it’s very simply go to your remote, press OK button and then download a whole host of different movies and what have you. So that continually happens.

Marc Urbach

I am sorry, I think you have Time Warner here in California I forgot, but either way we’re going to have your cable system is, again they are constantly educating which is exactly what we will continue to do and drive that point home to a Chinese consumer. Remember again this is brand new, you have to really turn the clocks back to what the deal on the band was 10 or ever 15 years ago here on this country. We all have the advantage and take full advantage of it of being able to click a movie and buy it now, but again that’s as we know that is on our television set. Back in the day good news to be there, we will have to go to blockbuster or going to VHS even to be able to watch a movie.

Jay Srivatsa - Chardan Capital

All right. One more question on the mobile side, in terms of competitive landscape, what’s your sense in terms of what are some of the other companies that you want to start doing to grab the mobile market, do you see them being competitors going forward or that is very secured budget provision as early leader in this space?

Shane McMahon

We are definitely early leader, I mean when you are able to partner up and have the privilege of partnering on a Huawei, again this is their first entry into the marketplace doing long-term movies, I should say long run length content and specifically movies and they shows up. We are very honored with fact that Huawei kick pick you on demand to do that and their credit goes out to Weicheng Liu, our CEO, who was able to bring deal into the company.

So we feel again very honored and again we have someone like a Huawei knock on your door that way and you are able to do partnership with them, that’s the tremendous place to start. So without the linear questions, again we’re brand into this, we want to respect that relationship but again things were designed to move forward in a much bigger way in the mobile space.

Jay Srivatsa - Chardan Capital

Thank you.

Operator

There are no further questions at this time. I will now turn the call back over to you for closing remarks.

Shane McMahon

Again it’s a Shane, I just want to say thank you guys very much again on the call. Those who are listening and not asking questions, it’s a privilege to be Chairman of YOU On Demand. We are very excited about our opportunity as we entered into the mobile space. And again, we look forward to continuing to bring our progress as we move forward in China and just want to say, we will be talking to you end of Q4. Terrific, thank you guys very much.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day everyone.

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