AirMedia Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: AirMedia Group (AMCN)

AirMedia Group Inc. (NASDAQ:AMCN)

Q4 2013 Earnings Conference Call

March 5, 2014 8:00 p.m. ET

Executives

Raymond Huang – IR Director

Herman Man Guo – Chairman and CEO

Henry Ho – CFO

Analysts

Wei Fang – CLSA

Betty Dai – Standard Chartered Bank

Ma Yu – ICBC International

Operator

Good morning, all sites, and welcome to the AirMedia Group Incorporated Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. [Operator Instructions]

Now I would like to hand the call over to Mr. Raymond Huang, Senior Director of Investor Relations of the company. And I will be standing by for the Q&A session. Thank you. You may begin.

Raymond Huang

Hello everyone. Thank you for joining AirMedia's fourth quarter and fiscal year 2013 earnings conference call. Today Herman Man Guo, our Chairman and CEO, will present highlights for the fourth quarter and fiscal year 2013, and Henry Ho, our CFO, will provide details on our financial results. Following their prepared remarks, the management team will be available to take your questions.

Before the management's presentations, please allow me to read to you our Safe Harbor statement. During this conference call, representatives of the company will make certain forward-looking statements. These statements are based upon management's current views and expectations with respect to future events, and are not a guarantee of future performance. Furthermore, these statements are by their nature subject to a number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements.

AirMedia does not undertake any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law. Please refer to AirMedia's filings with the SEC, including its Form 20-F for discussions of important factors that could affect future results.

Our press release and this call include a discussion of unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. The press release is available on the Investor Relations section of AirMedia's website at ir.airmedia.net.cn.

I will now turn the call over to our Chairman and CEO, Herman Man Guo.

Herman Man Guo

Thank you, Raymond. Good morning and good evening everyone.

In the fourth quarter of 2013, our total revenues increased by 13.8% quarter over quarter to $78.6 million. We became profitable again, with net income attributable to our shareholders in the amount of $1.5 million. With our turnaround strategy and new business initiatives, I expect the 2014 to be a year of [indiscernible]. I would like to update with you on both sets of our turnaround strategy and growth prospects.

Our turnaround is well on track. For the gas station media network, as of end of February we started operating LED screens in 300 gas stations in six cities. We expect to have a network effect when we have 500 operating LED screens in the gas stations by July of this year. And we expect this product line to break even in the third quarter of this year.

We also made exciting progress on TV-attached digital frames and digital TV screens in airports, which are our other two currently unprofitable product lines. We developed an interactive platform with a lucky draw system on our TV-attached digital frames and are experimenting with this new interactive platform at all the terminals of Beijing Capital International Airport. The interactive platform is built on our TV-attached digital frames and will integrate with our digital TV screen in airports in the future.

We have 438 TV-attached digital frames across Beijing Airport. By sending a text message or scanning a client's [indiscernible] QR code, air passengers can participate in the lucky draw. We have prepared our own proprietary support [ph] lucky draw which will significantly increase air passengers' attention.

Clients' products can reach air passengers through their mobile phones continually during the process. The interactive platform will also motivate air passengers to take certain [indiscernible] actions such as to download a client's mobile applications.

Before we experimented with the new interactive platform at the Terminal 3 of Beijing Airport, we had performed a [indiscernible] test at Section D of Terminal 3 and a operation [ph] test at Terminal 2 of Beijing Airport. We plan to heavily promote this new product starting in late March.

It is a process which enables us to move from out-of-home to mobile internet. The interactive platform will not only increase the media value of our products by attracting viewer attention, but also enable us to charge our clients performance based fee as measured by effectiveness [ph] in addition to the regular display fee.

Clients have expressed a strong initial interest in this new interactive platform and we are in the process of finalizing the contracts. We expect that we'll launch these products in more airports this year. If we manage to turn around one of our - all of the unprofitable product lines, they will contribute to our net income in 2014.

As for our growth prospects, our network of mega-size LED screens has become a more and more important product line in terms of our revenues and profits. This product line accounted for 17% of our total revenues in Q4 2013 compared with 10% in the same period one year ago. We expect to expand our network of mega-size LED screens to cover more airports. We expect the mega-size LED screens to continue to increase our revenues and profits in 2014.

Our in-flight internet business is expected to bring tremendous growth to the company. With the contract with Hainan Airlines Group, we now have a 15% market share. We are in competitive bids with [ph] more airlines for the in-flight internet products in order to obtain more market share. Due to the government approval process, we expect to start installing equipments on the airplanes of Hainan Airlines Group in late second half of this year. Before that, we do not expect to have heavy cash outflow from the in-flight internet side [ph].

With that, I'd like to pass the call to Henry Ho, our CFO, to review our financial results in greater detail.

Henry Ho

Thank you, Herman, and thanks to everyone for joining our fourth quarter and fiscal year 2013 financial review.

Herman has just elaborated on our turnaround progress and growth prospect. I want to follow on with a quick summary of our three key efforts with the goal of enhancing our company's value. First, the ongoing expansion of mega-size LED at airports adds competitiveness to our core media business at airports. Second, we have made progress in the turnaround of two unprofitable business lines, namely gas station media and TV-attached digital frames at airports. Third, our entry into in-flight internet business with the Hainan Airline Group is a start to develop a new business segment with long-term growth potential.

More, I have three highlights regarding measures to add value at specific business lines. Number one, by the time we complete our first phase of operating 500 LED screens at gas stations in July 2014 as planned, this new electronically operated media will have achieved a critical level to bring positive network effect. This will attract strong advertising demand for this target segment of car owners and passengers. We expect rapid pricing power and potential for higher timeslots utilization at our gas station media.

Number two, viewer's engagement, a key feature of interactive advertising, and our TV-attached digital frames at airports will increase upon the implementation of our new interactive platform. This transformation from a broadcast mode to an interactive mode fills the rising demand of advertising clients.

Number three, our new in-flight internet business will enhance passenger's experience and we expect it to open up a new avenue for long-term growth. We expect all the above to bring improved financial results in 2014.

Now let me go through the details of our fourth quarter financial results with you. Total revenues for the fourth quarter of 2013 reached $78.6 million, representing a year-on-year decrease of 6.7%, from $84.2 million in the same period one year ago and a quarter-over-quarter increase of 13.8%, from $69 million in the previous quarter. The year-over-year decrease was primarily due to decreases in revenues from traditional media in airports and digital TV screens on airplanes, mainly as a result of our termination of the operations of certain unprofitable or low-margin contracts. The quarter-over-quarter increase was primarily due to increases in revenues from most product lines, other than other media.

Let's go through each product line. Revenues from digital frames in airports for the fourth quarter of 2013 increased by 11.5% year over year and 15.6% quarter over quarter, to $45.4 million. The year-over-year increase was primarily due to additional revenues from the rapidly growing product line of mega-size LED screen, which added operations in additional airports. The quarter-over-quarter increase was primarily due to additional revenues from the rapidly growing product line of mega-size LED screens, advertisers' yearend budget flush, and a seasonably strong quarter in the fourth quarter.

Revenues from digital TV screens in airports for the fourth quarter of 2013 decreased by 5.6% year over year and increased by 41.6% quarter-over-quarter, to $5.1 million. The year-over-year decrease was primarily due to a drop in demand from advertisers, as a result of competition from AirMedia's other product lines and the fact that with the rapid development of mobile internet, more people now pay attention to their cell phones, instead of AirMedia's digital TV screens. The quarter-over-quarter increase was primarily due to advertisers' year-end budget flush and a seasonally strong quarter in the fourth quarter.

Revenues from digital TV screens on airplanes for the fourth quarter of 2013 decreased by 41.4% year over year and increased by 3.9% quarter over quarter, to $4.6 million. AirMedia did not review -- I beg your pardon. AirMedia did not renew its concession rights contract with Air China which expired on December 31, 2012, but regained some advertising time on AirMedia's airplanes on August 1, 2013. The year-over-year decrease of revenues from digital TV screens on airplanes was primarily due to the decrease in revenues from digital TV screens on Air China's airplanes. The quarter-over-quarter increase of revenues from digital TV screens on airplanes was primarily due to a seasonally strong quarter in the fourth quarter.

Revenue from traditional media in airports for the fourth quarter of 2013 decreased by 31.8% year over year and increased by 7.1% quarter over quarter to $14.2 million. The year-over-year decrease was primarily due to AirMedia's termination of certain unprofitable or low-margin contracts. AirMedia decided not to renew the concession rights contracts for most of AirMedia's traditional media in Shenzhen Baoan International Airport at the end of 2012, and the billboards and painted advertisements on the gate bridges of Terminal 3 at Beijing Airport in May and July 2013, after the expiration of the relevant contracts. The quarter-over-quarter increase was primarily due to advertisers' yearend budget flush and a seasonally strong quarter in the fourth quarter.

Revenues from the gas station media network for the fourth quarter of 2013 decreased by 7.1% year over year and increased by 34.7% quarter over quarter to $4.4 million. The year-over-year decrease was primarily due to temporary service suspension caused by the gap between the retirement of the old scrolling light boxes and the full operation of the replacing new LED screens in gas stations across many cities. The quarter-over-quarter increase was primarily due to advertisers' strong demand for AirMedia's already-installed LED screens in gas stations, as well as advertisers' year-end budget flush and a seasonally strong quarter in the fourth quarter.

Let's move on to other lines in the income statement. Cost of revenues for the fourth quarter of 2013 was $65 million, which remained relatively unchanged from the same period one year ago and reflected a quarter-over-quarter increase of 9.1% from $59.5 million in the previous quarter. The quarter-over-quarter increase was primarily due to higher concession fees and higher agency fees for third-party advertising agencies in the fourth quarter of 2013. Cost of revenues as a percentage of net revenues in the fourth quarter of 2013 was 84.1%, up from 79.1% in the same period one year ago and down from 87.4% in the previous quarter.

Concession fees for the fourth quarter of 2013 increased by 1.1% year on year and 6.7% quarter over quarter to $45.6 million. The year-over-year and quarter-over-quarter increases were primarily due to newly signed or renewed concession rights contracts during the period. Concession fees as a percentage of new -- sorry, as a percentage of net revenues in the fourth quarter of 2013 was 59.1%, increasing from 54.6% in the same period one year ago and decreasing from 62.8% in the previous quarter. The year-over-year increase of concession fees as a percentage of net revenues was primarily due to the fact that net revenues decreased while concession fees increased. The quarter-over-quarter decrease of concession fees as a percentage of net revenues was primarily due to the fact that net revenues increased faster than concession fees in the fourth quarter of 2013.

Total operating expenses for the fourth quarter of 2013 were $14.3 million, representing a year-over-year increase of 33.2% from $10.7 million in the same period one year ago and a quarter-over-quarter increase of 17.4% from $12.2 million in the previous quarter.

Net income attributable to AirMedia's shareholders for the fourth quarter of 2013 was $1.5 million, compared to net income attributable to AirMedia's shareholders of $3.4 million in the same period one year ago and net loss attributable to AirMedia's shareholders of $3.5 million in the previous quarter.

I will now go through some non-GAAP measures. These non-GAAP measures are calculated by excluding share-based compensation expenses, amortization of acquired and other intangible assets, impairment of goodwill and impairment of intangible assets from the corresponding GAAP measures.

Non-GAAP adjusted loss from operations was $1.4 million for the fourth quarter of 2013, compared to adjusted income from operations of $7.5 million in the same period one year ago and adjusted loss from operations of $3.1 million in the previous quarter. Adjusted operating expense was negative 1.8% for the fourth quarter of 2013, compared to 9.1% in the same period one year ago and negative 4.6% in the previous quarter.

Non-GAAP adjusted net income attributable to AirMedia shareholders was $2.1 million for the fourth quarter of 2013, compared to adjusted net income attributable to AirMedia shareholders of $4.4 million in the same period one year ago and adjusted net loss attributable to AirMedia shareholders of $3.1 million in the previous quarter.

Next, let us talk about our balance sheet. Cash, restricted cash and short-term investments totaled $113 million as of December 31, 2013, compared to $126.3 million as of December 31, 2012. There was an increase of $8.5 million in prepaid concession fees and an increase of $10.6 million in other current assets from December 31, 2012.

Capital expenditure for the fourth quarter of 2013 was $4 million, which was primarily for purchasing LED screens to be installed in our gas station media network.

AirMedia currently expects its net revenues for the first quarter of 2014 to range from $61 million to $64 million, representing a year-over-year decrease of 4.1% to a year-over-year increase of 0.6% from the same period in 2013, and a quarter-over-quarter decrease of 21.0% to 17.1% from the previous quarter.

AirMedia currently expects its concession fees to be approximately $45 million in the first quarter of 2014, representing a quarter-over-quarter decrease of 1.4% from the previous quarter.

Finally, moderator, could you please open the call for questions? Thank you, everyone.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from the line of Wei Fang from CLSA. Please ask your question.

Wei Fang – CLSA

Hi, thank you for taking my questions. Two quick questions. First is on, what kind of topline growth are you looking at right now for the whole year 2014? And secondly, I was just wondering, are you looking at any concession contract that potentially you are not likely to renew maybe in the next few quarters? Thank you.

Raymond Huang

Let me translate to Herman briefly.

Henry will answer your first question and Herman will answer your second question.

Henry Ho

Okay. Thank you, Wei. On the first question, well, we have two major changes that is happening. One is, on the gas station side, as we discussed earlier, in July we would have already achieved the 500 target in terms of number of LED screens at gas stations that will trigger we think a significant change in the structure of the earnings -- of the revenue.

Second is the small frame, which is the interactive platform that we are launching at the moment, and we're assessing the whole situation after the launch. And in the second quarter we will have a clear picture of the impact of the full year revenue growth. Now at the moment, as we mentioned earlier, there is a first quarter guidance, and then we will be updating you more as we see the developments to the business lines.

Now let us pass to Herman in terms of the major contracts that we may not be renewing.

Herman Man Guo

[Interpreted] On our total revenues for 2014, because currently we are experimenting with our TV-attached digital frames in Beijing Airport, clients expressed very strong interest and demand for this new interactive platform. But we will have a better, clear idea of what the revenue size it may bring to the company in the second quarter. So it is now relatively hard for us to give a guidance for 2014 total revenues growth.

And for the large contracts, we are -- currently, we have no large contracts we plan not to renew. We, this year, we are continuing to expand on mega-size LED network in the airports, and we will continue to stress our position in the digital frames.

Wei Fang – CLSA

Okay. Got it.

Raymond Huang

Thank you.

Operator

Your next question comes from the line of Betty Dai from Standard Chartered Bank. Please ask your question.

Betty Dai – Standard Chartered Bank

Thank you for taking my questions. I have two questions. The first is could you talk about the advertising outlook for 2014 based on your initial discussion with advertisers? And the second is you have achieved non-GAAP profitability fourth quarter 2013, so do you expect any volatilities along the road in terms of profitability or do you expect to sustain the profit level going forward? Thank you.

Raymond Huang

Let me translate to Herman first.

Herman Man Guo

[Interpreted] Overall the economy is -- we expect the economy to have a high growth this year, so the overall advertising we do expect to have a high growth for this year. For the different sectors, we see TV and traditional print media will have pressures this year and the out-of-home sector will have a moderate growth and internet or mobile internet will continue to have high growth for the advertising.

But for us, because we are currently trying to turn around the digital TV frame -- TV-attached digital frames and our gas station media network, those -- especially the TV-attached digital frames, our interactive platform is a combination between our out-of-home and the mobile internet, so that will be a new media format. We expect to have a better performance for the TV-attached digital frame starting from the second quarter, we will have better idea at that time. And for the gas station media network, we expect it to break even in the third quarter.

Even during the economic downturn period, the good media will continue to have a good performance that clients will still continue to have good demand for the good media. For example, our mega-size LED continue to have a 50% year-over-year growth each quarter which shows that even during the downturn period of -- the economy downturn period, advertisers will move their budgets from those non-effective media to the media which they believe are effective.

Henry Ho

This is Henry. This is for your first question regarding -- sorry, second question regarding the non-GAAP profit volatility. Let me address that from two angles. One is that, as you know, we have pretty high operating leverage so the cost is rising -- or falling less than the revenue. Revenue has higher volatility, so this is -- I think the key feature is trying to focus on the revenue side.

Second part of my answer is that we have three factors affecting us. One is the overall industry. As Herman mentioned, the economic -- the macroeconomic side is flattish that we see in the 2014 for advertising. And then it comes down to sub-sector, and there is one pattern which we think will repeat which is the seasonal pattern that the first quarter is always the weakest quarter and the fourth quarter is always the strongest quarter. That will come on top of your industry overall.

The first part is the company-specific side, and we think that we have a very positive outlook for this part. First of all is that as Herman mentioned, the good media is going to do better in that time. And we have been restructuring our media, and as an example is the mega-size LED in airports, we have been increasing that. That's what we call good media.

Second is that in the second quarter of this year, we will see a lot more clearer picture on the interactive platform at our TV-attached digital frame at airports. This could be a big revenue mover and I'm not making judgment at the moment but we have good indication that it will be a significant driver.

Then comes the third quarter and we are looking at the gas station media which then will have achieved critical mass of 500 LED screens and that could be another trigger for revenue growth so these are what I would look at as my outlook. The others are pretty stable. Thank you.

Betty Dai – Standard Chartered Bank

Thank you, Herman and Henry.

Herman Man Guo

Thank you.

Henry Ho

Thank you.

Operator

Your next question comes from Ma Yu from ICBC International. Please ask your question.

Ma Yu – ICBC International

Good morning, Mr. Guo, Henry and Raymond. Thanks for taking my questions. And I have a quick question on the update of your cooperation with the airlines on the in-flight internet business. Besides Hainan Airlines, have you reached agreement with any new airlines? And any recent updates for the cooperation with Hainan Airlines?

Hello? That is all my questions.

Raymond Huang

Yes, let me translate first.

Herman Man Guo

[Interpreted] The Wi-Fi equipment manufacturers, they're all trying to enter the China market. So we are in talks with different equipment vendors right now and they are actually lowering their original quotation to us. So we are trying to get the best deals as possible.

And we are also discussing with other airlines, try to get more this year, try to get more contracts with other airlines.

Henry Ho

It's Henry. And I'd like to add is, on the timing side, it's, the Hainan airlines, the operation is going on target. They are applying all the necessary approvals with the authorities, and we expect in the fourth quarter we will start to install these equipments on Hainan Airlines' airplanes. Thank you.

Ma Yu – ICBC International

Yeah, thank you. A following question, the first quarter guidance, could you give us more color, like a breakdown of the growth for the first quarter for this business segment?

Herman Man Guo

[Interpreted] For the first quarter guidance, we continue to expect the mega-size LED will have strong growth in the first quarter -- first quarter, yea. And our standalone digital frame will continue to have a moderate growth.

And for the traditional media, we leave the traditional media because we almost, in last year first quarter, we have gate bridges business which have about $8 million revenue in the first quarter last year. But right now it's only, because we terminate those non-profitable contracts, so the gate bridges business only have a small revenue contribution to the first quarter this year. So we will see traditional media have a decline year over year.

And for the TV-attached digital frame, the new interactive platform that we're experimenting in terminals in Beijing Airports, we will start to heavily promote this product in late March, so it will have -- start to have more revenue contribution in the second quarter and not in the first quarter.

And for the gas stations, because we are currently in the process of installing our LED in the gas stations, we start to have a network, in fact, after we have 500 LED installed in the gas stations. So we expect this product line to have more revenue contribution in the second quarter and third quarter. We expect the gas station to break even in the third quarter.

Ma Yu – ICBC International

Thank you. That's all very helpful. And I have a last question regarding the mega-size LED screens in the airport. What is the expectation on the revenue contribution from mega-size LED screens in the following quarter?

Raymond Huang

You mean the first quarter or?

Ma Yu – ICBC International

Yes, in the following quarter.

Raymond Huang

Okay. Okay.

Herman Man Guo

[Interpreted] Mega-size LED already are, in airports, already account for 17% revenue in the fourth quarter. So this year, because we are experimenting with the TV-attached digital frames, we expect it will bring more revenues from this product line. But how much it will be, we will have that idea in the second quarter. So if not considering the new revenues for the digital frames, we expect mega-size LED will have more revenue contribution, say we expect it will have more than 20% contribution this year.

Ma Yu – ICBC International

That's all my questions. Thank you very much.

Herman Man Guo

Thank you.

Operator

[Operator Instructions]

There are no further questions at this time. Please continue.

Raymond Huang

Thank you for joining our conference call and we look forward to talking with you next time. Thank you everyone.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!