SGOCO Group's Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov.21.13 | About: SGOCO Techn (SGOC)

SGOCO Group, Ltd. (NASDAQ:SGOC)

Q3 2013 Earnings Conference Call

November 21, 2013 08:00 ET

Executives

Serena Wu - Investor Relations Manager

Johnson Lau - Chief Financial Officer

Analysts

Jose Dans - Private Investor

Steven Cohen - Alpha Partners

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SGOCO Group’s Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be provided at that time.

At this time, I would now like to turn the conference over to Serena Wu, Investor Relations for SGOCO. Please go ahead.

Serena Wu - Investor Relations Manager

Thank you, operator. Good morning, everyone and thank you for joining us on SGOCO’s third quarter 2013 earnings conference call. My name is Serena Wu and I am the Investor Relations Manager of the company. Also joining me on today’s call is Mr. Johnson Lau, CFO of SGOCO Group.

Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements, which are subject to risks and uncertainties. Our earnings release issued on November 20 and our SEC filings, including our most recent Annual Report contain additional information about factors that could cause actual results to differ from the management expectations. All amounts noted in this conference call are in U.S. dollars unless otherwise noted. The company does not assume any obligation to update information discussed in this conference call or in its filing.

Now, I would like to turn the call over to Mr. Johnson Lau, CFO of the company.

Johnson Lau - Chief Financial Officer

Thank you, Serena and hi everyone. First off, I would like to say that we are very pleased with our performance over this quarter. The third quarter from July to September is usually a slow season for China’s display market in general, but we are glad to see that our sales performance over the quarter remained strong. During the quarter, SGOCO was able to deliver 65% top line growth and a substantially improved bottom line performance when compared with the same period last year. These positive results were driven by our continued effort to transform our business to move up the value trading. Our new strategic focus on building our distribution network has allowed us to be able to mitigate the pricing pressure in the overall display market during the third quarter. And as a result, our margins were able to remain at a sustainable level.

I am also pleased to share with you the news that the company has progressed well in implementing our previously disclosed four point strategic initiatives, which primarily focused on strengthening our brand and product portfolio, expanding our distribution channels and developing solution-based services for high growth industries. Our coil business in the third quarter was substantially improved from the same quarter last year whereas increased sales order from existing customers continue to grow at an encouraging pace.

Revenue from SGOCO Brand and Licensed Brands increased 36% year-over-year and revenue from key accounts sales remained on a solid growth and increased about 125% in sales from last year. Our new area of high growth such as new products and new business initiatives in the commercial market also continued to gain exciting momentum. Demo showcase and pilot sales program and orders in hand of the new signature products All-In-One and Parts-In-One PCs are fully within our expectations. We expect them to contribute more to revenue in the coming two to three quarters. For the rest of 2013 and into 2014, we will continue to evaluate and implement the strategies that are designed to strengthen our industry solution-based capabilities and to expand our client base and geographical reach. In the long-term, we will continue to make necessary investments in our business to grow revenue by identifying many more growth catalysts in the display market and developing them to position.

We will leverage on our multiple brand advantages, you need market knowledge, strong sales and distribution network and flexible product development capability to expand and extend our offerings providing products and solution-based services to serve retail and commercial customers in various industrial verticals. While 2013 is a year for SGOCO to transform and invest in high growth business. I believe 2014 will be an exciting year of momentum to reflect the results of our efforts.

Now I will hand over the call to Serena who will walk you through the financial results on behalf of the management. Serena?

Serena Wu - Investor Relations Manager

Thank you, Johnson. For the third quarter of 2013 our total revenue was $43 million, up 65% from $26 million in the third quarter of last year. The increase was mainly due to the sales orders, sales rebound of flat panel monitors as compared with the same quarter of last year. As a revenue breakdown for the quarter, $24 million or 56% of total revenues were generated from SGOCO Brand and Licensed Brands product sales. $19 million or 44% of total revenues were generated from key account sales and the revenue contribution from other application products is less than 0.1% and is considered insignificant at this time.

Gross profit for the Q3 increased 268% to $3.5 million from $0.9 million year-over-year. Gross margin for the quarter was 8.1%, as compared to 3.6% for the same period of last year. The increase was mainly attributable to the company’s efforts in streamlining its operations, while minimizing costs.

As a breakdown for our margin profile in the third quarter, SGOCO Brand and Licensed Brands had a gross margin of 8.5% and key account sales had a gross margin of 7.5%. Selling expenses increased 22% year-over-year to $0.3 million from $0.2 million in the third quarter of 2012. The increase was mainly due to a rise in transportation costs from increased product sales during the third quarter and increase sales staff costs in association with the growing sales team in our Shenzhen and Beijing offices.

G&A expenses decreased 48% year-over-year to $0.8 million from $1.5 million for the third quarter of 2012. The decrease of G&A expenses was due to a decrease of legal and professional fees in relation to the company’s temporary trading halt and the change of auditors in 2012.

Operating income for Q3 was $2.5 million – $2.4 million excuse me compared to an operating loss of $0.8 million for the third quarter of 2012. Operating margin was 5.7%, improved from a negative 2.9% in Q3 of last year due to the increase of revenue and reduction of G&A expenses. Net income for Q3 was $2.2 million compared to a net loss of $1.1 million in the third quarter of 2012. The net income margin was 5% versus a negative 4.2% year-over-year. We reported earnings per share at $0.12 for the quarter compared to a loss per share of $0.06 year-over-year.

Now moving to the balance sheet, as of September 30, 2013 the company held $13.7 million in cash and cash equivalents, as compared to $11.5 million at the end of 2012. As of September 30, 2013, our inventory increased to $25.7 million from $5.7 million at the end of 2012. The inventory build out is mainly attributed with our anticipation of upcoming sales orders including the Golden Week sales in China’s national holiday in October. As of September 30, 2013 we had working capital of $85.7 million with the current ratio of 3.49.

Now with that, I would like to conclude the management presentation and open up the floor for questions and answers. Operator, please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of (indiscernible). Please go ahead.

Unidentified Analyst

Hi, Johnson. Can you give me some color going into 2014 and when do you see growth, what’s your short-term and long-term plan for growth?

Johnson Lau

Okay, thank you for your question. SGOCO is going to focus on our previously expected strategies as previously mentioned. We will, moving forward, develop few areas, just like we will increase our brand portfolio. Currently, we are working to negotiate with some sort of top tier brand to expand our brand portfolio which will help us to serve more core tier and large distributor for our business growth in more long-term. And also we are working very hard to work on the AIO products, but AIO PCs and also other application specific products, that we will be able to enhance our product portfolio. Also we are working for to enhance the e-commerce performance what we have here as we say and this stuff will help us to get in more long-term growth and to enhance our profitability and revenue growth in 2014 and onwards. And right now for the upcoming sales order and what we see from the market, we expect 2014 to be within our market expectation. Did I answer your question?

Unidentified Analyst

Yes, thank you very much.

Operator

(Operator Instructions) And your next question comes from the line of Jose Dans, a Private Investor. Please go ahead.

Jose Dans - Private Investor

Hello, how are you doing? I am trying to find out what’s going to be the expectation for the holiday season since we know holiday season has a lot of buying electronic device, I would like to know what’s the expectation, what we might see on the holiday season?

Johnson Lau

Excuse me, would you like to parting your question, the line is quite bumpy, I am sorry. Would you mind to repeat your question please? The line is not quite clear.

Jose Dans - Private Investor

Yes.

Johnson Lau

Okay.

Jose Dans - Private Investor

Yes, I am sorry. I was asking since we know holiday season usually sell all electronic device going up, what would be the expectation for the holiday season that is new coming up now?

Johnson Lau

Okay. I presume you are talking about winter holidays in December and November, right?

Jose Dans - Private Investor

Yes, sir.

Johnson Lau

Okay. Well, actually in China, because we are primarily focused on the local market in China, our peak season is primarily on the October Golden Week season is our national holiday. That’s fully within our expectation on the sales and that’s the reason why we expect our inventory. For November and December, based on our current sales order, it sounds good and the first one, we have been expecting some sort of growth from the third quarter on that. And what’s more important to say is we feel that total amount for the second half we believe that will be better than the last year’s second half revenue growth on it. That’s what we have been expecting.

Jose Dans - Private Investor

Okay, thank you.

Operator

(Operator Instructions) Your next question comes from the line of Steven Cohen from Alpha Partners. Please go ahead.

Steven Cohen - Alpha Partners

Hi, good morning, how are you?

Johnson Lau

Nice, fine, thanks.

Steven Cohen - Alpha Partners

Good, the earnings were so good, have you thought about extending the life of the warrant in order to get the exercise amount maybe getting a little bit more time, so I mean you can see this roughly around $5 million or $6 million you can get from your warrant exercise?

Johnson Lau

Well, thanks for the question. Actually we realized the warrant is outstanding with nothing so significant at the moment. And your question is where we will go and I think it’s worthwhile for the management to consider about this.

Steven Cohen - Alpha Partners

Alright very well, I think considering what you are anticipating for next quarter, you are probably going to get all the money and it’s obviously much more effective than going through a private grade, the fees that were associated with that this is much less expensive way to raise money.

Johnson Lau

What’s next question?

Serena Wu

I am sorry do you have another question for us?

Steven Cohen - Alpha Partners

No I do not. Thank you very much.

Serena Wu

Thank you very much.

Operator

(Operator Instructions)

Serena Wu - Investor Relations Manager

Okay, well, thank you everyone for joining us on the conference call today. If you have any follow-up questions please feel free to contact us by the email or by the phone number provided through our website at www.sgocogroup.com. We look forward to speaking with you again. Thank you and good-bye.

Operator

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and you may now disconnect.

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