Sky-mobi Limited (NASDAQ:MOBI)
F2Q 2014 Earnings Call
November 18, 2013 8:00 a.m. ET
Michael Song - Chairman and Chief Executive Officer
John Bi - Chief Financial Officer
Good morning and good evening, everyone, and welcome to the Sky-mobi’s fiscal second quarter 2014 earnings conference call. With us today are Sky-mobi’s Chairman and Chief Executive Officer, Mr. Michael Song; and Chief Financial Officer, Mr. Mr. John Bi.
Before I turn the conference over to Mr. Song, may I remind our listeners that in this call, management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results might differ from those discussed today, and therefore we refer you to a more detailed discussion for the risks and uncertainties in the company’s filings with the Securities and Exchange Commission. In addition, any projections as to the company’s future performance represent company's preliminary estimates and Sky-mobi assumes no obligations to update these projections in the future as market conditions change.
To supplement its financial results presented in accordance with IFRS, management will make reference to certain non-IFRS financial measures, which the company believes provide meaningful additional information to understanding Sky-mobi’s operating performance. A table reconciling non-IFRS financial measures to the nearest IFRS equivalents can be found in the earnings press release issued yesterday.
For those of you unable to listen to the entire call, a recording will be available via webcast at the Investor Relations section of Sky-mobi’s website at www.sky-mobi.com/en.
And now, it is my pleasure to turn the conference over to Sky-mobi’s chairman and CEO, Mr. Michael Song. Sir, please go ahead.
Welcome everyone and thank you for joining us. Today I will like to begin by discussing several key highlights from the quarter.
First, we are very pleased that our fiscal second quarter 2014 revenues exceeded consensus and high end of our previous guidance by about 11%. Second, this strong performance was again driven by stronger than expected growth in our Smartphone business, which more than doubled quarter-over-quarter to over RMB 39 million or 34% of total revenue.
Third, one remarkable phenomenon behind this Smartphone business growth is users' incredible stickiness [ph] on the Maopao branded platform. As users upgrade their handset to Smartphones, they remain extremely heavy user of our Maopao community. Our CFO, John, will elaborate on this point certainly. Lastly, anticipating the continuous decline of feature phone market, we continue to effectively managing a positive cash flow level by leveraging this strong cash flow from the feature phone business and relocating this resource into the further development of our Smartphone business. Thus, minimizing the need of any other capital result [ph].
We believe that the competitive distribution channel and differentiated content offering are two key drivers for our solid Smartphone monetization. Regarding this distribution channel, we have continued to successfully execute [ph] on our unique strategy to expand our growth through the dissimilar [ph] distribution channels. One, pre-installation with Smartphone handset manufacturers. And two, physically locating inside stores, we can directly install mobile application on Smartphones. Through these two channels we are able to effectively check new user through different end of Smartphone [indiscernible].
Our unique strategy, we have allowed us to growth the number of Smartphone users over 73 million on our Maopao platform. Building upon our strong [indiscernible] we continue to expand these distribution channels by adding new partners on both end of the spectrum. On the manufacturer end, it goes [ph] to maintaining our close cooperation with exciting partners. We have expanded our reach by establishing strategic partners with one of China's major Smartphone manufacturer. As an example, we recently entered into the business agreement with [indiscernible], one of the top five manufacturers in China. [Indiscernible] will pre-install our Maopao branded product on their Smartphone beginning in November this year.
On the retail end, after successfully tying with Sony we have also been working aggressively with three major telecom carriers in China. We have build entry [ph] provision [ph] in China Telecom by signing a framework agreement. This agreement outlines specifics provisions [ph] that are designed to work with Sky-mobi. We are expanding tens of thousands stores to be part of our incremental channels as a result of this relationship. With China Mobile we entered into an agreement with a new provider [ph] carrier partner. Allow us to provide [indiscernible] Smartphone software sold at over 5,000 of their retail outlets.
We are proactive working with China Unicom in the south of China to add several thousand of stores to our overall distribution network in the near future as well. As you can understand, this type of partnership produces significantly high entry barriers that competitors cannot easily overcome. They require considerable resources including long negotiation leading times. A history of strong execution success and significant level of established [indiscernible] on delivering [indiscernible] aligned results. We believe that these channels will have us maintain this strong uptake rate of our app store platform as well as to have continued growth in our user base going forward.
Another key employment [ph] to strengthening our positioning in Smartphone business is our ability to provide enjoyable and entertaining content to our user. From the understanding of these systems in conception happens between the low cost Smartphone user and average high-end Smartphone user allow us to drive increased user stickiness and in turn deliver sustainable physical and operation growth. As an example we know that this quarter growth of mainstream China user migrating from feature phone are typically in playing simple and easy to games. We are concerned with exactly using their monthly plans and offering [indiscernible] and carrier payment system. But most critical, important aspect is there newly brought Smartphones normally and cannot power [ph] many of these games made for high end Smartphone due to low processing power.
To properly capture all [indiscernible] a large growth of user, we provide high -- we provide live applications and games that are easily for the low cost handset [indiscernible] as well, providing fun and useful application on such device. Well, [indiscernible] games, kind of remain our major revenue driver. We are also working to diversify our application offering that will have increased our users stickiness and increment to the long run. We believe the progress we have achieved from our strategy will remain a significant entry barrier for our competitors in the low-cost Smartphone area.
At this point I will like our CFO, John, to discuss our other business highlights as well as our fiscal results. John, please.
Thanks a lot Michael. It is great to be here at first earnings call with Sky-mobi. To begin with, we are very pleased with accelerating growth in our Smartphone business during the quarter. Since we began to monetize our Smartphone business last quarter, it has become an increasingly important contributor that drives our topline growth as well as overall user base expansion.
As Mike alluded to, our user has a strong attraction and attachment to our Maopao community. We found that our long time feature phone users are more comfortable using their familiar Maopao branded services after switching to a Smartphone. Those same users are quickly developing increased digital consumption habits through our Smartphone Maopao platform. As you know, our Maopao community is one of the top apps in the feature phone market where users play games and enjoy diversified national conferencing [ph]. Now since we launched an Android version of Maopao community, they have developed a variety of features allowing our roaming users to retain their game status [ph], virtual items [ph], and social relationships even with their phone upgraded through improved user migration and loyalty.
By making this migration simple and easy while to a large extant maintaining a similar style for our users, our dedicated team has developed a user-friendly interface that has significantly helped in retaining Maopao users. Because of that, our Smartphone Maopao community continues to grow in scale, contribution, and overall importance to our total Smartphone revenues. Benefitting from all the focus and expertise in Maopao content and distribution channels were both the feature phone and Smartphone business, we are reasonably confident that these growth trends will continue providing us with solid building blocks to future leverage our networks and expand our Smartphone business.
Reflecting all this achievement, we recognize that a vibrant and profitable ecosystem is what helped us to achieve the solid progress we have established on both of those fronts. Especially, we have developed a business model for our Smartphone business that aligns interest of our partners across the mobile internet value chain. We foster an efficient mobile internet ecosystem, lowering the cost of mobile application developments, increasing content providers reach. Sharing revenue streams we have with OEMs, [indiscernible], network operators and payment engines, through a way of arrangements collaborations on content development and revenue sharing.
We are also aligning with interests of our partners while ensuring strong and consistent support from all the major industry participants looking to China's low-cost Smartphone market. Using our live games platform as example, we provide a one-stop solution for game developers, to include key services such as product evaluation, comprehensive promotion, efficient payment systems, user data analysis, as well as up-to-date marketing caliber [ph]. Through these differentiated offerings to small and mid-sized content providers, we are increasingly becoming their preferred platform by attracting their demands for effective and branded distribution channels as well as long-term profitability.
Looking forward, we are very encouraged with our unique strategy to continue to penetrate China's low cost Smartphone sector which is expected to remain fast growing and largest Smartphone segment in China. According to [indiscernible] market research, China's Smartphone sales continue to be driven by a strong penetration [ph] of low priced phones. In the first half of this year, more than 50% of units sold were priced under RMB 1000 at retail level. And over 80% were priced under RMB 2000.
With this market backdrop, our users and strategic partners stand to significantly benefit from our efficient and profitable ecosystem. We believe that our Smartphone user visits and downloads will increase steadily in future quarters as we continue to expand our user base. So we are dedicated to further leverage our competitive advantage to better target these tremendous growth opportunities in China and continue to improve our monetization capability.
Now turning to our detailed financials for this quarter. As a reminder, we disclose revenue from two perspectives, by source and by handset. In addition, the discussion and analysis of cost of revenues and operating expenses are mainly focused on non-IFRS results as we feel that this is more useful for investors to be able to understand the operations and performance.
During the quarter our total revenues decreased 15.6% year-over-year to RMB 116.6 million. Revenue from Smartphone business were RMB 39.2 million, accounting for 24% of our total revenue. As we discussed earlier, we believe that our Smartphone users visits and downloads will increase in future quarters as we continue our efforts to expand our user base. Revenue collected from carrier channels which are mainly the application store revenues, were RMB 67.8 million, representing 58% of total revenue. The decrease in revenue collected from carrier channels was primarily due to few user visits and downloads from feature phone Maopao application store as a result of the ongoing decline in the feature phone market.
This decline was partially offset by increased revenue from Smartphone Maopao application store and higher monetization rate as a result of direct cooperation with mobile carriers. In our Smartphone business, we significantly increased user visits to over 700 million from over 9.6 million last year, and Smartphone application store downloads during that course increased to over 128.5 million from only 10.2 million a year ago.
Due to the substantial increase in user visits and downloads, our Smartphone Maopao applications generated approximately RMB 28.9 million during the quarter, representing 42.5% of total revenues collected from carrier channels. Revenues collected from third party channels, which are mainly the Maopao community revenues, for both feature phone and smartphones, were RMB 32.5 million and contributed 27.9% of total revenues in the quarter.
Revenues from the Maopao community decreased due to a decline in active members and log-ins on feature phones as a result of ongoing decline in the feature phone market, partially offset by an increase in active members and log-ins on smartphones and higher ARPU on our company's two most popular mobile social games, Fantasy of Three Kingdoms and Fairy Magic World.
Total non-IFRS cost of revenue decreased 14.7% to RMB 89.2 million. Non-IFRS cost associated with payment to industry participants decreased 13.2% year-over-year to RMB $81.5 million. This decrease was primarily due to reduced channel cost which were in line with the decline revenues and cost savings from dealing directly with mobile carriers, partially offset by increased content provider costs due to the higher sharing percentage with Smartphone content providers.
Non-IFRS direct costs decreased 27.3% to RMB 7.7 million. The decrease was primarily due to a reduction in overall headcount in our feature phone business which reflected our strategy to focus on Smartphone business. Non-IFRS gross profit decreased 22.4% to RMB 27.4 million Non-IFRS gross margin was 23.5%, down from 25.3% in prior year. This decrease was mainly due to increased Smartphone revenue with lower profit margins resulting from our company's higher revenue sharing percentage with Smartphone handset partners and content providers in order to expand our Smartphone user base as well as improve the offerings of content and applications to Smartphone users. As we discussed last quarter, we expect this to recover as we begin to monetize our live game platform and to develop a more cost effective to cooperate with Smartphone handset partners and telecom carriers.
Total non-IFRS operating expenses decreased 37.2% to RMB 26.7 million. The decrease in operating expenses was primarily due to the reduced overall headcount in connection with our company's strategic reorganization, which rebalanced headcount between Smartphone and feature phone businesses and reduced resources for the feature phone business. Non-IFRS net loss decreased to RMB 1.5 million from RMB 3.6 million in the prior year. Non-IFRS basic and diluted loss per common share was RMB 0.00 or US$0.00, which represents the equivalent of RMB 0.03 or US$0.01 per ADS.
We continue to implement cost control measures to maximize cash flow from our feature phone operations while allocating more resources to our Smartphone business. We continue to maintain positive cash flows with RMB 519 million cash and deposits as of September 30, 2013. Going forward, we will continue to invest responsibly in Smartphone and maintain a strong cash balance. We will continue to leverage cash flow generated from our feature phone business to support a growth environment of Smartphone business.
Turning to our business outlook. For the third quarter 2014 ending December 31, 2013, we expect total revenue to be in a range of RMB 90 million to RMB 100 million. With that we will like to open the call for questions. Operator, please.
(Operator Instructions) There are no further questions at this time. I would like to turn the call back to the management. Please proceed.
Thank you for your attention and your interest in Sky-mobi. We are excited that the next few quarters will be very important as we will work to transition on our business. So with that we want to thank everyone for joining the call today and wish everyone well for this week. Thank you.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for your participation and you may now disconnect.
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