Nicholas Manganaro - IR, Ogilvy Financial
He Dang - Chairman and CEO
Cindy Wang - VP of Finance
Dan Yu - Credit Suisse
Charm Communications (CHRM) Q3 2013 Earnings Conference Call December 2, 2013 8:00 AM ET
Hello and thank you for standing by for Charm Communications’ Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today’s conference, Mr. Nicholas Manganaro from Ogilvy Financial.
Hello, everyone and welcome to Charm Communications’ earnings conference call for the third quarter ended September 30, 2013. The Company’s earnings results were released Friday and are available on the Company’s IR website at ir.charmgroup.cn as well as on newswire services.
Today, you will hear opening remarks from Charm’s Founder, Chairman and CEO, Mr. He Dang, followed by the Company’s Vice President of Finance, Ms. Cindy Wang who will provide a financial overview and guidance for the fourth quarter of 2013. After their prepared remarks, they will be available to answer your questions.
Before we continue, please note that the discussion today will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from management’s current expectations. Charm does not assume any obligation to update any forward-looking statements except as required under applicable law.
Also, please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The most directly comparable U.S. GAAP financial measures and information reconciling these non-GAAP financial measures to Charm’s financial results prepared in accordance with U.S. GAAP are included in Charm’s earnings release, which has been posted on the company’s IR website at ir.charmgroup.cn.
Please note that the company does not intend to nor it is obligated to provide any updates at this time regarding it receipt of a preliminary and nonbinding going private proposal. A special committee of the Company’s Board of Directors is working with its financial and legal advisors and is evaluating the proposal. As previously noted there could be no assurance that any definitive offer will be made, that any agreement will be executed for this or any other transaction will be approved or consummated. Lastly this conference is being recorded. An archived webcast of this conference call will be available on Charm’s Investor Relations website.
I will now turn the call over to Charm Communications’ Founder, Chairman and CEO, Mr. Dang, for whom I will read a translation.
Hello, everyone and thank you for joining us. In the third quarter the slight year-over-year decrease in our agency business was a result of spending cuts for one of our larger Vizeum clients. Nonetheless our overall agency business remains strong.
As part of the Kia Motors account we announced last quarter, we recently targeted new audiences through a combination of prints and outdoor advertising. By acquiring and growing new accounts we continue to strengthen our full media buying service capabilities, particularly with respect to our media buying platforms outside of television and digital. However, building these new platforms requires investment which impacted our third quarter revenue extraction rates. We believe the benefits of the strategy outweigh the short-term effects and will attract new and larger client accounts. For example, we are already working with the Industrial and Commercial Bank of China, China’s largest bank on a print media campaign.
Moving on to additional business which is Charm's core development area, Charm Click's total turnover in the third quarter grew 25% year-over-year. In addition to developing new technology, the Charm Click team has been strengthening its core competencies with respect to client service. Charm Click recently launched its 360 search optimization software system that is already generating positive feedback from clients. Moreover the team continues to cultivate opportunities from new and existing clients. For example, our work on behalf of the Shandong Tourism Bureau has grown from one city to 18 cities and counties across China. Also the success of a joint client promotion seminar between Baidu and Charm in Europe signals a good start for our Baidu Europe business next year.
With the tremendous rise of e-commerce in China, many of our traditional media clients have recognized the importance of digital marketing and have begun to reshape their marketing plans accordingly. In response, Charm Click has been developing innovative and integrated marketing products to build an e-commerce platform for such clients. By using search engine marketing technology to operate and promote the platform, we can help these clients raise their brand profiles across digital media. For example Charm Click and our Sports Marketing team are working jointly on behalf of Fast Moving Consumer Goods Client. This campaign will launch at the end of this year.
I am pleased to report that Charm won a number of industry awards in the third quarter, including three gold medals at this year's China Advertising Great Wall marketing awards, for our work on behalf of Jaguar Land Rover, Fen Jiu and Snow Beer. We also won a best commercial award at China's brand building case evaluation awards for work on behalf of China Telecom.
At China's annual CCTV primetime auction last month, Charm ranked first in terms of total successful bidding volume for the 11th consecutive year. Including pre-sales figures in the month leading up to the auction, the sales [wholes] were consistent with those of previous years and in line with our overall expectations, in terms of industry sectors, home appliances, food and beverage, transportation and e-commerce had strong showings.
Our media investment management business faced particular challenges in the third quarter due to a drop in television ratings for some of our media inventory. In September, viewership for China’s national game was not as high as originally projected and we also saw softness in ratings for CCTV-2. CCTV’s finance-oriented channel. Our regional media investment management business model is no longer ideally suited for China’s changing media environment.
When we did not have input regarding the content of a TV programs that we underwrite, it is difficult to accurately calculate the amount of advertising revenue in our investment return from such inventory. In response, we have and we’ll continue to reposition Shangxing Media as a media service agency rather than a seller of media inventory in order to balance our risk adjusted return.
Overall, our business continues to develop in China’s changing advertising environments. Going forward, we will continue to focus on our core competencies to help improve our overall profitability. We remain committed to our integrated service offerings particularly for large clients with diverse advertising needs who can best benefit from our broad expertise. At the same time, we will maintain strict cost controls and credit managements.
I will now turn the call over to Cindy Wang, our Vice President of Finance, who will discuss our financial results.
Thank you, Chairman, Dang and hello everyone. Before I go through the financials, I will discuss our three core business segments. Please note that I will be referencing some of our third quarter results using non-GAAP numbers to better convey our performance. We define non-GAAP turnover as total customer advertising spending placed through or with Charm to reflect the scale of our business.
In the third quarter of 2013, total turnover decreased 8.2% year-over-year and decreased 1.4% quarter-over-quarter to approximately $198.8 million. As Mr. Dang mentioned, the year-over-year decrease in turnover was mainly due to a decrease in spending by one of our large Vizeum client. The 1.4% quarter-over-quarter decrease in turnover was mainly due to a decrease in billings in our principal business. I will now breakdown our turnover by business.
Non-GAAP turnover for our agency business decreased 6.2% on a year-over-year basis, and decreased 0.5% quarter-over-quarter to $171.1 million in the third quarter. The decrease in agency business turnover was mainly related to Vizeum client I just mentioned.
The revenue extraction rate for the agency business which is defined as revenue divided by the turnover was 6.6%, compared to 7.5% in a year ago period and a 7.1% in the previous quarter. This decrease is from low extraction rate associated with recent client wins.
Turnover for our principal media business which operates under the Shangxing Media brand decreased 18.6% year-over-year and 6.1% quarter-over-quarter to $27.7 million. The decrease was mainly attributed to changes in TV ratings for media inventory we had previously underwritten.
Going back to GAAP figures, total U.S. GAAP revenues were $40.7 million in the third quarter, a decrease of 16.7%, compared to $28.8 million in a year ago period and a decrease of 5.1% compared to $42.9 million in the previous quarter. Revenues for our advertising agency business were $11.3 million in the third quarter, a decrease of 17.3% compared to $13.6 million in a year ago period, and a decrease of 7.3% from $12.2 million in the previous quarter. The decrease in agency revenues, were consistent with the decrease in both the revenue extraction rates and the agency turnover. The decrease in our principal media business revenues, were consistent with the changes in turnover.
Branding and identity services revenues were $1.6 million in the third quarter, an increase of 45.8% from $1.1 million in the year ago period and an increase of 46.8% from $1.1 million in the previous quarter. The increases in branding and identity services were primarily due to an overall increase in client demand for our creative service. Cost of revenues in the third quarter $27.3 million, a decrease of 20.8% from $34.5 million in the year ago period, and a decrease of 1.6% from $27.3 million in the previous quarter. The year-over-year decrease, in the Company’s cost of revenues were in line with the decrease in total revenues over the same period.
Gross profit in the third quarter was $13.4 million, a decrease of 7.1% from $14.4 million in the year ago period and a decrease of 11.5% from $15.1 million in the previous quarter. Gross margin in the third quarter was 32.8%, compared to 29.4% in the year ago period and 35.2% in the previous quarters. The decrease in gross profit was mainly a result of the decrease in revenues.
Selling and marketing expenses were $9.7 million in the third quarter, an increase of 2.8 percentage from $9.4 million in the year ago period and an increase of 7.3 percentage from $9.0 million in the previous quarter. The year-over-year increase in selling and marketing expenses was mainly due to higher travel related expenses in the third quarter during our prime peak season. Selling and marketing expenses represented 23.8 percentage of our total revenues in the third quarter compared to 19.3 percentage in the year ago period, and 21.0 percentage in the previous quarter.
General and administrative expenses decreased 19.1 percentage year-over-year and a 2.2 percentage quarter-over-quarter to $4.1 million, the decrease were mainly attributed to a decrease in bad debt provision in the third quarter.
General and administrative expenses represented 10.8 percentage of our total revenues for the third quarter, compared to 11.1 percentage for the year ago period, and a 10.5 percentage for the previous quarter.
Operating margin was $0.5 million in the third quarter compared to an operating loss of $0.2 million in the year ago period, and an operating profit of $1.7 million in the previous quarter. GAAP net loss was $0.6 million in the third quarter compared to net income of $0.1 million in the year ago period, and a net income of $1.2 million in the previous quarter.
Fully diluted net loss per ADS in the third quarter was $0.03 compared to a fully diluted net loss per ADS of $0.01 in the year ago period, and a fully diluted net gain of $0.02 in the previous quarter. Each ADS represents two common shares.
Our third quarter non-GAAP net income which excludes share-based compensation expenses and amortization of intangible assets was $0.5 million compared to non-GAAP net income of $0.8 million in the year ago period and a non-GAAP net income of $2.5 million in the previous quarter.
Net cash flow from operations in the third quarter of 2013 was negative $4.8 million. As of September 30, 2013, we had cash and cash equivalents of $91.1 million compared to $96.5 million as of June 30, 2013.
In terms of headcounts as of September 30, 2013; the Company had 749 employees compared to 784 employees as of June 30, 2013.
Turning now to our business outlook; we estimate our fourth quarter 2013 non-GAAP net income will be in the range of $2.75 million to $3.25 million. We base these estimates on a foreign exchange rate of RMB6.1 to $1 and that they reflect our current and preliminary view which is subject to change.
We will now open the line for questions but please note at this time we will not provide update regarding the preliminary and a non-binding fully private proposal, thank you. Operator, please go ahead.
Thank you. We will now begin the question and answer session (Operator Instructions). Our first question comes from the line of Dick Wei of Credit Suisse, please go ahead.
Dan Yu - Credit Suisse
This is Dan Yu, calling on behalf of Dick. I have two questions, my first question is about our 3Q advertising agency business, we see some YOY [indiscernible] drop in this quarter, I was wondering if it is because of the reduced budget of some specific accounts or the [visuals] (ph) and trend of a low budget allocation change from the TV to online video.
That's my first question and my second question is about the recent CCTV auction and we have seen in the auction that the gross rate YOY gross rate is relatively shy, so could management maybe give some color on this, also what is management's view of the overall TV advertising budget for the 2014, thank you very much.
Thank you Daniel, let me translate for Mr. Dang.
Let me translate for the first question, as explained earlier, the decline in agency business in the third quarter 2013, was mainly due to several key clients decrease media spending. For example, the largest client of Vizeum has decreased the advertising spending significantly and also for the online video we are seeing the media starts to be mature and although the competition remains very tight in the market, but we're starting to see the clients increase their spending as they realize the importance of this platform, but within a certain time period the online video still cannot replace the TV.
So in the recent CCTV auction, there are some changes. For previous year, for previous CCTV released our total bid under one day which is November 18th, but for this year CCTV changes this policy, they released certain auctions before November 18th especially for liquor industry, for financial industry including our biggest clients such as CICC, China Commercial Bank, Industrial and Commercial Bank.
The total amount of the pre-sale resources and the late auction resources have exceeded the past year auction results and beyond the industry from the auction, we saw a significant growth coming from the home applicants and CT automobile and e-commerce industries. This decreased from [indiscernible] but also there are some changes in CCTV policies. They change some agency company and they have more promotion events in August, so we also predict as we’ll see stable growth in the advertising market next year and serving the industry such as home audience, FMCG, automobile and e-commerce will maintain rapid growth.
Our industry [indiscernible] by the marketed environment such as [indiscernible] difference in spending, we’re also seeing advertisers focusing more on the performance result from advertising greater forms of advertising and special integrated advertising solutions.
Thank you. We will now turn the call back to Mr. Manganaro for closing remarks.
Thank you. This concludes today’s conference call. You may now disconnect.
Thank you. Ladies and gentleman that does conclude our conference for today, thank you for participating. You may all disconnect.
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