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Acorn International, Inc. (NYSE:ATV)

Q3 2013 Results Earnings Call

November 27, 2013 8:00 AM ET

Executives

Samuel Patterson - IR Manager

Don Yang - Chief Executive Officer

Geoffrey Gao - Vice President

Robert Roche - Chairman

Analysts

Operator

Hello, ladies and gentlemen. Welcome to Acorn International’s Third Quarter 2013 Earnings Conference Call. My name is Keith, and I will be your operator for today’s conference call. All telephone lines have been placed in mute to prevent background noise. After the presentation, there will be an opportunity to ask questions. Please follow the instructions given at that time if you would like to ask a question.

Now I would like to transfer the call to the moderator, Mr. Samuel Patterson, IR Manager of Acorn International.

Samuel Patterson

Good morning, everyone. Thank you for joining us today for our third quarter 2013 earnings conference call. With me today are Mr. Don Yang, our Chief Executive Officer; and Geoffrey Gao, our Vice President. After our prepared remarks, we will open the line for questions. Mr. Robert Roche, our Chairman of the Board of Directors, will participate in the Q&A section of this call.

As a reminder, this conference call is being recorded. A live webcast and replay of this conference call will be available in the Investor Relations section of our website at ir.chinadrtv.com.

Before we continue, I would like to remind you that the discussion today will contain certain forward-looking statements. These forward-looking statements include among others statements regarding Acorn’s anticipated future revenue mix and operating results.

A number of the potential inherent risks and uncertainties that Acorn’s business involves are outlined in the company’s public filings with the U.S. Securities and Exchange Commission.

As such, actual results may be materially different from the views expressed or anticipated results described today. Acorn International does not undertake any obligation to update any forward-looking statement except as required by applicable law.

I would like to introduce our CEO, Mr. Don Yang, who will provide some introductory remarks.

Don Yang

[Foreign Language]

Samuel Patterson

Thank you, Don. I will proceed by translating your introductory remarks. Now I will present the remainder of Mr. Yang’s remarks on his behalf. Our net revenues declined 19% in the third quarter of 2013, compared to the same period last year, primarily due to lower sales of fitness products and mobile phones compared to the same period last year, which offset the increase sales of electronic learning products and our new kitchen and household products.

As a result of lower revenue and higher advertising and selling expenses associated with the electronic learning products and our distribution channel, we reported a loss for the quarter.

I’ll begin by discussing the results and plans for some of the major product categories and then provide an update on our other initiatives. Sales of electronic learning products, primarily sold via our distribution platform were our best selling product category this quarter, generating revenues of $19.8 million and representing 35.2% of total gross revenues.

The third quarter is typically a seasonally strong quarter for electronic learning products sales and we made a large investment in television advertising to support our new models incorporating mobile interactive internet features. Although, electronic learning products sales grew 15.1% year-over-year, the product line performed below our expectations.

Gross profit over advertising expense, a benchmark we use to measure return on multiple sales platforms, fell to 1.67 in the third quarter of 2013 from 2.17 in the third quarter of 2012, primarily due to lower sales of electronic learning products relative to the amounts spent on television advertising.

We have dedicated considerable resources to transform our electronic learning products into an integrated learning platform with features such as online tutoring, a student social network service and access to online shops.

We have seen increasing customer acceptance of these new products and we are confident in our ability to scale up the sales in the future. We plan to make further enhancement to our online tutoring services and enhance overall market recognition of our electronic learning products.

Kitchen and household products were second-largest product category in this quarter, generating revenues of $14.5 million, representing 25.7% of total gross revenues. We introduced our new kitchen knife set in July, which quickly became one of our top 10 products and made a favorable contribution to gross margins.

We plan to build on this success by testing related products and category in the fourth quarter of 2013. We will continue to test kitchen and household products in the fourth quarter of 2013.

Collectible products were our third largest product category in the third quarter of 2013, with sales of $7.2 million, accounting for 12.8% of gross revenues. Revenues rose 41% from the third quarter of 2012 due to strong sales of our collectible watch.

In the fourth quarter, we plan to offer a Year of the Horse themed Chinese New Year collectibles along with Renminbi currency products and other accessories. Sales of our fitness products declined 70.2% year-over-year to $5.3 million or 9.4% of gross revenues.

Our Yierjian line of fitness products is entering the later stages of the product lifecycle and is experiencing a significant decline in sales. While it’s still a very small part of our business, we recently expanded our marketing coverage for short-term accident insurance to include most Chinese provinces and all direct control municipalities, through an agreement with Taiping Life Insurance, one of China’s leading insurance companies.

Now, I would like to briefly comment on the recent circular issued by China State Administration of Press, Publication, Radio, Films and Television, which limit the length and frequency of infomercials aired on satellite television channels effective January 2014.

We are currently evaluating the circular and its potential impact on our business and operations. We are in the process of forming new strategies and initiatives in response to the circular. Given the current regulatory environment surrounding television advertising, we expect to place a greater emphasis on other direct sales channels in the future.

Other direct sales including outbound calls, Internet websites and catalogs decreased 26.2%, compared to the third quarter of 2012. The decrease was primarily due to lower sales from outbound calls.

We are focused on making our call center operations more efficient and more effective. We continue to leverage our database of more than 16 million customers to develop targeted marketing campaigns to increase sales. We have recently employed data mining and SMS marketing campaigns with good results.

In closing, despite some headwinds during the quarter, we are encouraged by our progress in several areas. We introduced a successful new kitchen and household products and are confident that customer acceptance of our new electronic learning products with mobile interactive Internet features will accelerate in the future.

We also plan on testing new products in several categories to increase revenue in the coming quarters. We continue to focus on improving the efficiency of our call center operations and increasing the effectiveness of our outbound telemarketing efforts by leveraging our customer database to increase sales.

We want to thank our shareholders for your continued interest and support. I would now like to turn the call to Mr. Gao for a detailed discussion of our financial results.

Geoffrey Gao

Thank you, Sam. Hello everyone. I will now proceed with presenting our financial performance for the third quarter of 2013. Before that, I would like to remind you that because of seasonality in the sales of some of our products, we primarily focus on year-over-year rather than our sequential comparisons.

Total net revenues were $56.3 million, down 18.7% from $69.2 million in the third quarter of 2012. Direct sales contributed to 61.6%, or $34.7 million, of total net revenues in the third quarter of 2013, a decrease of 30.4% from $49.8 million in the same period of last year, mainly due to lower sales of fitness products and mobile phones.

Net revenue from distribution sales increased 11.0% year-over-year to $21.6 million, from $19.4 million in the third quarter of 2012. Cost of sales in the third quarter of 2013 was $28.8 million, a 24.5% decrease from $38.1 million in the third quarter of 2012, primarily due to the decrease in overall sales.

Gross profit in the third quarter of 2013 was $27.5 million, representing an 11.7% decrease as compared to $31.1 million in the third quarter of 2012. Gross margin was 48.8% in the third quarter of 2013, as compared to 44.9% in the same period in 2012. The increase in gross margin was largely due to the larger revenue contribution by kitchen and household products, which generally carry higher gross margin, in our product mix.

Advertising expense was $16.4 million in the third quarter of 2013, up 14.9% from $14.3 million for the third quarter of 2012.

Other selling and marketing expense was $15.4 million in the third quarter of 2013, up 14.7% from $13.4 million in the third quarter of 2012. The increase in selling and marketing expense despite a decrease in revenues resulted primarily from higher labor costs, and marketing expenses related to the electronic learning products.

General and administrative expenses were $7.3 million in the third quarter of 2013, representing an 8.0% increase from $6.8 million in the third quarter of 2012, also owing to higher labor costs.

Other operating income, net, was $0.5 million for the third quarter of 2013, as compared to $1.2 million in the third quarter of 2012.

The operating loss was $11.1 million, as compared to $2.2 million in the third quarter of 2012.

Other income was $0.9 million, as compared to $0.8 million in the third quarter of 2012.

Share-based compensation was $107,000 in the third quarter of 2013, as compared to $123,246 in the third quarter of 2012.

We recorded income tax expense of nearly $0.2 million in the third quarter of 2013, as compared to a tax benefit of $0.2 million in the third quarter of 2012.

Net loss attributable to Acorn was $10.5 million, as compared to $1.1 million in the third quarter of 2012.

Basic and diluted loss per ADS was $0.39 compared to diluted loss per ADS of $0.04 in the third quarter of 2012.

As of September 30, 2013, our cash and cash equivalents, with restricted cash and short-term investments, totaled $86.4 million, as compared to $101.5 million as of December 31, 2012.

The decrease in the company's cash and cash equivalents was primarily due to the loss from operations for the first nine months of 2013 and $9.6 million in non-current restricted cash, which was deposited to obtain long-term debt for a share repurchase transaction completed in March 2013.

Based on current trends, the company is maintaining it’s previously announced revenue guidance for the full year 2013 of between $190 million and $210 million and anticipates a net loss at or somewhat larger than its prior full year 2013 net loss guidance of $30 million. This estimates and actions are subjected to change.

Also, I would like to remind you that our operating results in each period are impacted significantly by the mix of products sold in the period and the platforms on which they are sold.

Moving forward, we plan to introduce new product in several categories. We will also make further enhancements to electronic earning products in an effort to scale up sales and enhance their overall markets recognition.

Meanwhile, we continue to focus on improving the efficiency of our call center operations and increasing the effectiveness of our outbound telemarketing effort and leveraging our customer database to increase sales.

With these remarks, I would like to conclude our formal presentation. We will now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) All right. There seems to be no questions at the present time, do you have any concluding remarks?

Samuel Patterson

Thank you everyone. With that I will conclude our call today. I would like to remind you that an archived webcast of this conference will be available in the Investor Relations section of the company’s website at ir.chinadrtv.com. For additional questions please feel free to contact any member of our IR team at ir@chinadrtv.com. Thank you all again. Have a great day. Good-bye.

Operator

Thank you. The conference has concluded. Thank you for participating. Have a nice day.

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