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China Digital TV Holding Co., LTD. (NYSE:STV)

Q4 2013 Earnings Conference Call

February 25, 2014 7:00 PM ET

Executives

Josh Gartner – Brunswick Group LLC

Dong Li - President

Nan Hao – Investor Relations Manager

Analysts

Operator

Good evening and thank you for standing by for China Digital TV’s fourth quarter and full year 2013 earnings conference call. At this time, all participants are in 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 will now turn the call over to Josh Gartner of Brunswick Group.

Josh Gartner

Thank you, operator. Good evening and thank you for standing by for China Digital TV’s fourth quarter and full year 2013 earnings conference call. At this time, all participants are in 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.

The company’s earnings results were released earlier today, and are available on the company’s IR website at ir.chinadtv.cn, as well as on newswire services.

Today, you will hear from Mr. Dong Li, China Digital TV’s president, who will give an overview of the quarter, followed by the Company’s investor relations manager, Mr. Nan Hao, who will discuss financial results. After the company’s prepared remarks, China Digital TV’s chief financial officer, Mr. Zhenwen Liang 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. Forward-looking statements involve inherent risks and uncertainties. As such, the company’s results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in the company’s registration statement on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. China Digital TV does not assume any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on China Digital TV’s investor relations website. I will now turn the call over to China Digital TV’s president, Mr. Dong Li.

Dong Li

Thank you. Hello everyone and welcome. I would like to start today’s call with an overview of recent developments in China’s Cable TV market.

According to Zhongguang Luoda, during the fourth quarter, China’s cable TV market increased by 9.9 million households, with the total number of smart cards shipped reaching about 10 million.

Additionally, for the full year 2013, households in China with cable TV reached 171 million, with total digital penetration reaching 81.4% by the end of the year. We also saw a steady increase in the number of smart cards shipped for second terminals in households throughout the year. Card shipments for multiple terminal households reached 4.6 million by the end of 2013. We believe that digitalization of multiple terminal households, and the ongoing conversion to high definition smart cards will be growth areas for China Digital TV going forward.

Turning now to the company’s performance, I am pleased to report that we continue to hold our strong position as the leader in China’s smart card market, which helped China Digital TV capitalize on the overall increased demand in Q4. During the fourth quarter of 2013, we shipped a total of 4.95 million smart cards, which was our strongest quarter since the fourth quarter of 2011. This was partially due to normal seasonal factors typically associated with Q4 and the period ahead of the Chinese New Year. Additionally, we also saw the release of some pent up demand from previous quarters in Henan and Fujian provinces drive higher shipments.

Shandong, Jiang Xi, Jiangsu, Guang Dong and Sichuan provinces were all particularly strong markets for China Digital TV’s smart card shipments in Q4. Our strength with these key customers helped us maintain a solid market share of 52.3% during the quarter. For the full year our market share was also more than 50%, as our shipments reached 17 million, an 11% increase compared with 2012.

Overall, we did very well with our top-5 provinces, whose orders accounted for nearly half of our total shipments during the quarter and 50% for the full year.

In addition to our biggest customers, we also made good progress developing newer long-term strategic relationships. For example, we began to receive smart card shipment orders from Henan province, which has good potential due to its large population in rural areas where there are lower levels of digital penetration.

During the fourth quarter, average selling price, or ASP, for smart cards increased by 5% sequentially. Meanwhile, on an annual basis, ASP for smart cards decreased by 6% for the quarter. For 2014, we expect this to continue, and anticipate ASP will decrease by about 7% on an annual basis.

Turning now to International Markets, our sequential and year-on-year growth in smart card shipments was also partially the result of the continued success of our internationalization efforts. In markets like Venezuela, Taiwan and India, we saw good growth in demand during the fourth quarter, and double digit growth for the full year 2013. Overall, we believe that these markets, among others, present good long-term opportunities for us to diversify our smart card business beyond our traditional stronghold in Mainland China.

Looking now at value added services, in addition to internationalization, China Digital TV views value added services and leveraging our core technology for new growth areas as important components of our long-term diversification strategy. I’m pleased to report that we made steady progress in Q4 in areas like cloud computing, and have deployed platforms in Kunshan and Changshu. Our success in these two cities was a continuation of our efforts throughout 2013 to develop new customers and strengthen our existing relationships.

I’m also pleased to report that in the fourth quarter we launched the interactive video on demand transmission channel IP Quadrature Amplitude Modulation or IPQAM. This platform is an important step forward for us. IPQAM is an indispensable piece of equipment that will be used in two-way network transformation and the interactive TV business. It facilitates TV signal processing for digital TV’s front-end broadcasting system, helping operators save and re-use signal resources. To date, we have made good progress in several cities in Fujian Province and plan to deploy the equipment province-wide this year.

Overall, we are excited about the achievements we made in 2013. Our traditional business reached the expectations that we had at the start of the year. At the same time we also proactively developed both new business areas, like value added services, and our overseas market presence as well. Looking at 2014, we will focus on maintaining and deepening our traditional strength in China’s smart card market, while also gradually growing our business in new products and services internationally. Similarly, we will place an emphasis on the Internet and mobile TV markets, where we could improve and leverage our existing products.

I will now hand the call over to Nan Hao, our investor relations manager, to discuss our financial management.

Nan Hao

Thank you, Mr. Li. Hello everyone. As Mr. Li mentioned, we had strong top and bottom line results due in large part to strong demand resulting both from seasonality and the release of pent up demand from 2012. These factors resulted in fourth quarter shipments significantly exceeding our expectations.

Turning to the financial highlights for Q4.Please note that, unless otherwise stated, all amounts are in US dollars.

In Q4 2013, China Digital TV shipped approximately 4.95 million smart cards, compared to 4.07 million for the same period in 2012 and 4.76 million in Q3 2013, for reasons already discussed.

Net revenues in Q4 2013 were 25.9 million, an increase of 11.9% from the same period in 2012 and a 12.1% increase from Q3 2013. The year-over-year and quarter-over-quarter increases were primarily due to an increase in the shipment volume of smart cards.

Now let me go through the major revenue components for the quarter. Revenues from smart card and other products were 24.9 million, accounting for 95% of total revenue, an 11.7% sequential increase.

Revenues from other products were 1.6 million, accounting for 6% of total revenue, a 57.4% increase quarter-over-quarter. This increase is a reflection of the progress in our diversification strategy.

Revenues from our top five customers accounted for 25.8% of total revenues, compared to 26.2% in Q3 2013.

Gross profit in Q4 2013 was 19.8 million, an increase of 12.2% from last year and an increase of 15.9% from Q3 2013. Gross margin was 76.4% in Q4 2013, compared to 76.2% in Q4 2012 and 74.0% last quarter. The year-over-year increase in gross margin was primarily due to an increase in revenues from sales of smart cards, as well as a decrease in the proportion of total revenues accounted for by revenues from other products, which have lower margins than smart cards. The quarter-over-quarter increase in gross margin was mainly due to an increase in revenues from smart cards sales and a lower inventory write-down as compared to the third quarter of 2013.

ASP of smart cards in Q4 2013 increased by 5.2% sequentially, while unit costs increased by 10.7%.

Operating expenses in Q4 2013 were US$10.2 million, a decrease of 5.1% from the same period in 2012 and a decrease of 9.2% from Q3 2013. The year-over-year decrease was primarily attributable to decreases in research and development expenses, selling and marketing expenses and general and administrative expenses, while the sequential decrease primarily relates to research and development expenses and general and administrative expenses, which was partially offset by increase in selling and marketing expenditures.

Income from operations in Q4 2013 was 9.7 million, a 38.8% increase from last year and a 63.2% increase from last quarter. Operating margin in Q4 was 37.3%, compared to 30.1% during the same period in 2012 and 25.6% in Q3 2013.

Income tax expenses in the fourth quarter of 2013 were US$1.1 million, a decrease of 76.7% from the same period in 2012 and a decrease of 50.4% from the third quarter of 2013. In the fourth quarter of 2013, the Company's PRC operating subsidiary, Beijing Super TV Co., Ltd., was designated as a "key software enterprise" for the tax years of 2013 and 2014 by the relevant PRC government authorities and, as a result, was entitled to a preferential income tax rate of 10% in each of those years. As the Company accrued income tax expenses at a rate of 15% in the first three quarters of 2013, the accrued income tax expenses were partially reversed in this quarter. The year-over-year decrease was primarily due to the preferential income tax adjustment in the fourth quarter of 2013, and a US$1.2 million in tax liabilities that were accrued in relation to certain VAT refunds in the fourth quarter of 2012. The quarter-over-quarter decrease was mainly due to the preferential income tax adjustment in the fourth quarter of 2013, which was partially offset by an increase in taxable income.

Net income attributable to China Digital TV Holding Co., Ltd. in the fourth quarter of 2013 was US$10.0 million, compared to US$4.2 million in the same period in 2012 and US$4.7 million in the third quarter of 2013.

Non-GAAP net income attributable to China Digital TV Holding Co., Ltd. defined as net income excluding certain one time or non-cash expenses, such as impairment loss on long-term investments, share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments, in Q4 2013 was 10.4 million, compared to a US$4.4 million in the same period in 2012 and US$5.2 million in Q3 2013.

Turning to our balance sheet, as of December 31, 2013, China Digital TV had cash and cash equivalents and restricted cash totaling 80.0 million. In Q4 2013, cash flow used in operations was approximately 9.9 million.

Now, let me provide you our business outlook. Based on information available as of February 25, 2014, China Digital TV expects smart card shipments for Q1 2014to be in the range of 3.5 million and 3.8 million. Net revenues for Q1 2014 are expected to be in the range of 16.4 million and 17.7 million.

Thank you for listening; we will now take your questions.

Question-and-Answer Session

Operator

The question-and-answer session of this conference call will start in a moment, in order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed.

We are now approaching the end of the conference call. I will now turn the call over to China Digital TV’s Hao Nan for closing remarks.

Nan Hao

Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to talking with you in the coming months.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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