Taomee Holdings Limited (NYSE:TAOM)
Q4 2013 Earnings Conference Call
March 12, 2014 07:00 AM ET
Angela Wang – Investor Relations
Benson Haibing Wang – Co-Founder, Director and Chief Executive Officer
Paul Keung – Chief Financial Officer
Roc Yunpeng Cheng – Co-Founder, Director and Chief Operating Officer
NA You – ICBC International
Ladies and gentlemen, thank you for standing by and welcome to the Q4 and Full Year 2013 Taomee Holdings Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session (Operator instructions). I must advise you that, this conference is being recorded today, Wednesday 12, March, 2014.
I would now like to hand the conference over to your host today, Ms. Angela Wang, Investor Relation Manager. Thank you and please go ahead.
Thank you, operator. Good morning and good evening, ladies and gentlemen. Welcome to the fourth quarter and fiscal year 2013 earnings conference call for Taomee Holdings Limited. Our earnings press release is distributed earlier today and you can find a copy in our IR website.
With me today are Mr. Benson Wang, our CEO; Mr. Roc Cheng, our President and Mr. Paul Keung, our CFO. Following their prepared remarks Benson, Roc and Paul will be happy to take up your questions. Before we continue please note that this discussion today will contain forward-looking statements which are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.
Potential risks and uncertainties include, but are not limited to those outlined in our annual report on Form 20-F and other documents filed with U.S. SEC. Taomee does not undertake any obligation to update any forward-looking statements except as required under applicable law.
Our earnings release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of our unaudited non-GAAP measures to the unaudited GAAP measures and is available on our IR website.
As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Taomee’s IR website.
Now I would like to turn the call to our CEO, Mr. Benson Wang.
Benson Haibing Wang
Thank you, Angela. Good morning and good evening to everyone on the call. Thank you for joining us today. Welcome to our Q4 and fiscal yearend earnings call. We are pleased with our team’s performance. Our total revenues increased 47% year-over-year to US$10.9 million, which exceeded our guidance and consensus estimate.
Our online business is entering a new period of growth and accelerated monetization. Q4 online revenues increased to 32% year-over-year. Our offline investments also continue to generate a strong revenue growth. Offline revenue increased 124% year-over-year.
Our web user community remains very healthy. Q4 active accounts numbered US$38.6 million this represents 12% year-over-year gross. Active paying users also increased in the quarter on a year-over-year basis. This is first time our paying accounts increased year-over-year for the quarter since 2011.
This improving operating metrics with the result of investments backdrop digit and initiatives that became in 2012 and 2013 and we are finally starting to see the results. The purpose of these investments was to strength our brands and to expand our reach into multi-platforms. This enable our franchises to penetrate and to reach users both online and offline.
Now, that we are satisfied with our penetration and reach. We have turned our attention towards accelerating our revenue and the profit grows for the long-term. And to begin our series of monetization phase on these platforms. Especially, on our investments in wireless online radio and interactive toys. For [indiscernible] number, we recently restructured our wireless division and launched that sothayozi [ph] that team will developing mainstream mobile games going forward the new mobile business were focused on developing profitable mobile games and then the long goal focuses slowly on making application to build our brands. The new wireless division is already making ways in the industry, recently the new sothayozi wireless division licensed the ARPG mobile game named Reverse World to Chukong, Chukong is the well known distributor of wireless games in China.
In the fourth quarter, the new division has also entered into a licensing agreement with Viacom. We are granted a three-year right to develop and operate a mobile game based on the famous Teenage Mutant Ninja Turtles franchises in China.
In addition to these partnerships, the team is also scheduled to develop several new mobile games fledged for commercial launch in either latest 2014 and/or 2015. Also in our online business, we established a joint venture to develop a family entertainment and education applications on mobile and multi-screen platforms, including Smart TV portal for children in mainland, China. It also leverages our investments in online video and content verification that began in 2012.
Turning to our offline businesses, we are very excited about our interactive toy businesses. There are new business was only launched in late 2012, but grew very fast in 2013, by leveraging our brands and cross media platform we expect our interactive toy business to continue to grow at a impressive pace. The team has developed a serious output profit for interactive toys based on our brands. We have immediately reinvested those profits into future growth.
Also in our offline business, we released the first season of Flower Fairy animation series on major cartoon channels throughout China, as well as on our online video website. Today Flower Fairy is one of the most popular online virtual franchisees in China among elementary and middle-school girls. Our playing book for Flower Fairy is very similar to how we launched the more and a sale in the past.
When you look at the States, rather we have taken over the latest three years, our strategy is simple. We leveraged our leadership and market share from online business to develop popular children franchises. Revenues and the profits from our Virtual Worlds founded our expansion and that expansion into new, but related territories such as toys, TV, feature films and education. We are encouraged by our recent progress on that pace we will always stay true to our core customers, our customers are our children, their parents, their teachers and other caregivers and finding new and better ways to serve them.
At this point however, I regret to announce that Paul Keung, my good friend and the company’s CFO will be stepping down from day to day operations in April. He has done an excellent job preparing this company for the future and he will remain a close friend and advisor to me and to the company.
Paul and I have been training this day for sometimes and we have a clear success in training already in place to ensure a seamless transition. We hope to announce a candidate of new CFO in the near future. Thank you Paul for your leadership, dedication and the commitment, we will miss you.
Now, let’s turn the call over to Paul.
Thank you, Benson. Toamee is an exciting company with the next future. And I’m at very pleased to address – actually played a part in its growth and development. As Benson mentioned, although I’m stepping down from day to day operations surely I will continue to work closely with him and the management and the Board to ensure very smooth transition with the incoming CFO. I will also prior to the new CFO to a completion filing of our 2013 yearend report and Form 20-F. now let’s over to the quarterly results. Before opening the line for questions.
Total net revenues increased 47% year-over-year to US$10.9 million, which is our strongest year-on-year core revenue growth since our IPO in 2011. Online revenues decreased slight but at sequentially to US$8.2 million from US$10.3 million in the prior quarter, due to seasonality but it increased 32% from US$6.3 million in the same quarter a year ago.
Key online operating metrics continue to show healthy growth in user activity. Quarterly active accounts declined quarter-on-quarter by 37% to US$38.6 million versus US$60.8 million pervious quarter but it grew 12% year-on-year. Active pay accounts declined sequentially by 25% to US$1.3 million but increased a modest 7% year-on-year.
This is our first quarter since 2011 that we have reported a year ago increase in quarterly active pay accounts, and trying to hope to see it again in 2014. Average revenue per user or ARPU is up flat sequentially at RMB37, up 23% year-on-year. Active accounts, active pay accounts and ARPU relate to our online virtual and do not reflect our non-virtual tractor across our platform and in terms that include traffic related to our online video and education and applications.
On a monthly average pay views and monthly average unique visitors to our non-gaming site exceeded RMB173 million and RMB29 million respectively in the fourth-quarter. For your off-line business, we achieved an impressive 124% year-on-year growth, reaching US$2.7 million interpreted US$1.2 million a year-ago quarter. Our interactive toy business continues to grow at triple digit rates as both toys and licensing business benefit from the launch of our Seer 3: Universal Force franchise that was launched in the summer across film, TV, book, Virtual Worlds and mobile games.
You will note that our offline revenues declined sequentially 51% from US$5.5 million in the prior quarter and that’s mainly because the film revenues were booked almost entirely in the third quarter. Total Q4 gross profit margin was 73.2%, an increase from 71.2% in the third quarter and flat with the year ago quarter last year. Online gross margin was 75.3% versus 79.6% in the third quarter and 74% in the fourth quarter of last year. Q4 gross margin for the offline business increased sequentially to 66.8%, versus 55% in the prior quarter, and slightly down from a year ago quarter of 69%.
Operating expenses for the quarter, product development expenses were RMB3.7 million up from the RMB3.6 million quarter-on-quarter, and up a 38% from RMB2.7 million in the same quarter a year ago, mainly due to higher payroll and share-based compensation.
In the fourth quarter, we modestly reduced our R&D headcount and for the upcoming quarters we expect our product deployment expenses to either remain stable or go just slightly on a sequential basis going forward. Sales and marketing expenses were 18% from RMB2.9 million in the third quarter to RMB2.4 million in the fourth quarter. This was up 17% from the fourth quarter last year and a sequential decline was due to the absence of film promotion costs for Seer 3 film in Q3.
G&A expenses in the fourth quarter were US$3.3 million down 12% from US$3.8 million in 2Q 2013, up 52% compared to US$2.2 million a year ago quarter. The year-on-year increase is mainly due to an increase in indirect tax costs related to inter-company service charges partially offset by a decrease in professional fees. Well said, another way the increase was largely due to the effects of indirect tax of pricing, which you will say levy on taxes are recognized on cost of G&A expense, but rather as other operating income.
So for example if you remove the effects of indirect tax costs or the trends related pricing costs, you know that our G&A was approximately US$2.4 million in the quarter compared to US$2.3 million in the prior quarter and down from US$2.7 million in the third quarter of this year.
In the quarter Q4, other operating income was US$3.7 million which primarily consisted of US$2 million of government subsidies and US$1.3 million of value-added tax of VAT rebates. For the fourth quarter 2013, profit from operations was US$2.1 million, up 20% sequentially for US$1.7 million in the third quarter of 2013 and 62% year-on-year from US$1.3 million in the same quarter a year ago.
Q4 GAAP diluted earnings per ADS basis were US$0.04 compared to US$0.06 in the same-period a year ago. Q4 non-GAAP net income was US$2.6 million compared to US$2.7 million in the Q4 2013. Also this quarter non-GAAP earnings per ADS on a diluted basis were US$0.07 compared to US$0.07 in a year ago quarter. Overall, our Q4 profits from operations increase quarter-on-quarter and year-on-year, but our full year profits from operations declined year-on-year probably due to a one-time impairment loss of US$1 million on general asset in 2013.
For the full year 2013 income tax expense was approximately US$1.4 million which compared to a benefit of US$900,000 in the full year 2012. The increase of tax expenses was mainly because we reorganized a one-time tax benefit in 2012 as the result of approval of the tax reductions in the prior year. And this year, we accrued deferred tax liabilities on undistributed earnings relate to our VI Entities in 2013.
Non-GAAP EBITDA which add-back stock-based compensation in other items including one-time impairments was approximately US$3.2 million in the fourth quarter and US$8.4 million for the full year 2013.
Turning to some other key financial figures, we finished Q4 with approximately US$117 million in cash and cash equivalents and short-term investments versus the US$118 million a year ago and there is no outstanding debt.
Total share-based compensation was US$600,000 in the fourth quarter compared to US$500,000 in the third quarter and US$500,000 in the fourth quarter last year. For 2013 stock-based compensation was US$2.1 million compared to US$2.2 million in 2012. CapEx was US$300,000 in the fourth quarter same as the same amount the same quarter last year. For the full year 2013 CapEx is approximately US$5.3 million up from US$1.7 million for the full year 2012. And finally, turning to the outlook for the first quarter on 2014, we’re expecting total net revenues to increase to by US$11 million to US$11.5 million which suggest the year end increase of 15% to 20%. The forecast is preliminary, and subject to change.
This concludes our prepared remarks today. I’d like to turn the call to the operator for questions. Operator, please open the call for questions.
Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session (Operator Instructions) Your first question comes from the line of Na You from ICBC International. Please ask your question.
NA You – ICBC International
Hi, hello Benson and Paul and also thanks for taking my question. I have two questions, first does that include the competitive landscape, more on this one identified is planning to build publicly in Hong Kong while strong and they appeared to be significantly larger than in the R&D and revenue. Would you give me more color on the difference for the two companies in operating and what’s your view on invitation from Viacom at some updates on Tencent?
Okay it’s a very interesting question. First of all I can’t comment on competition and sort of Bittten it’s not appropriate for us, but I can I guess I can make some observations based on information that you can try and gather publicly. I guess first from my understanding of the overall market. If you look at, you should look at the active accounts then the market for users they were in a slow of second quarter and fourth quarter because those are quarter when you can kind of that would feel for the user base and those periods as low as the peak during the first quarter and third quarter.
If you find that the user base is similar, then they would suggest that a significant overlap in the user base and also confirms that back we’ve done the path that most of the users of this Virtual Worlds essentially playing either ours or Viacom main Virtual World. Also getting virtually all elementary school and middle school kids are very similar with these two platforms. Second thing I would point out is, if you see any differences in active accounts over the busy summer holiday time of the year, those can be influenced by promotion activities and product launches.
Next thing I’ve to mention is in 2011, as you know, we had discuss that link in 2012 that we will reduce monetization in order to go user base, user engagement and build across the platform. In that, I think, you should be able to see from the numbers that our paying ratios and ARPU maybe slightly lower and that’s largely in part to some of the things that we’ve discussed over the last few years. The numbers trended down from 2011 and 2012.
I would also suspect that our business is somewhat different and we’ve not seen the virtual loss as prominent in the offline arena such as mobile and film and so this is another area that I think you could see some significant differences. In our past calls we noted that we spent US$3.5 million to US$4 million a year potentially in areas like online video and in mobile and education-related investments. We also noted in the past on our calls that we spent US$2 million to US$2.5 million a year in areas such as animation and online video. So these are some differences, I think, you can gather from the public information and from our past calls.
Roc Yunpeng Cheng
NA You – ICBC International
Benson Haibing Wang
Any more questions?
NA You – ICBC International
Thanks Paul and Benson. I have a following question regarding the [indiscernible] that impact took place any updates on the business segments and what’s your expectation around the contribution from this segment in the coming quarter and also following update the company’s mobile game business?
Okay I will answer that first and then hand it over to Benson. Regarding your question on updates for the interactive toy business and what we expect in revenue contribution, I can only say that, we will provide, as you know provided detailed guidance outlook for individual businesses.
I can tell you that our interactive toy business was formed in 2012. Our first major product launch of that division was in 2013 when we launched a series of interactive toys in conjunction with two to three Universal Force film over summer holidays. We mentioned in last call, last couple of calls at very good proof-of-concept where we launched Virtual World mobile games book, toys and some essentially within the same window period.
In 2014, as you may have seen, we’ve scheduled to release two major film releases and you can also expect a multiplatform cost media approach as it relates to interactive toy business. The business grew at very high growth rate in 2013 and we should also expect to see comparably high growth rates in 2014.
Roc Yunpeng Cheng
And then regarding your second question on the mobile game business what is the revenue contribution from mobile and I guess what is the outlook for there. Our mobile revenues I can only say this is in patches, it’s a very small portion of our revenue and less than 10% of our online revenues.
As Benson mentioned earlier, we structured our mobile business in November and a new deal called sothayozi and it is scheduled to launch a number of new mobile games and software application in late 2014 and in 2015. So not much you could say on the mobile in terms of outlook of that business.
Okay, thanks that’s all my questions. Very helpful. Thank you.
Thank you. Your next question comes from the line of [indiscernible] from Deutsche Bank. Please ask your question.
Hi, this is Irene [ph] from Deutsche Bank. I’m asking question on behalf of [indiscernible]. First of all, congratulations on your very strong quarter results, I have a very simple and a quick question, can I have your 2013 full year quarterly active account number and also your current market share and, last question is regarding your each Virtual Worlds’ revenue contribution percentage? Thank you.
Okay, I will take those questions I guess. On your first question, our full year quarterly active accounts that number is disclosed, I can read to you again in the active accounts in the quarter deal in calculation. So for active accounts in the first quarter was US$44 million, second quarter is US$41 million, third quarter is US$61 million and fourth quarter is around at US$39 million. So that gives an idea of the range of the quarterly active accounts where it’s essentially we define it as multiple logins and activations per month over that quarter.
And then if you look at your second question, current market share we don’t know what the market share, we do have our own idea, but I can’t tell you what the official third-party if there is one that does that. I can only tell you that from our experience, when we speak to our users and talk with them we do believe that in terms at a virtual traffic, users are users are very familiar with our, all of our major Virtual Worlds as well as those of our primary and maybe two primary competitors. So, if you look at on a user base it’s probably a lot of overlap if you look at our revenue base just you would have to adjust for a fact that the revenue strategy of the top two of your competitors are very different.
And then on your third question on Virtual Worlds by revenue by Virtual World we have not historically divided them, we did provide guidance during the IPO, then subsequently didn’t not segment them out but I can tell you that tier, the franchises Tier 1 and Tier 2 and all the universal alliance have a number of different updates and extensions to that brand is our largest and most successful franchise from the revenue online during IPO we did mention it was potentially more than half, you could probably suggest that’s probably close to that number today. The next and certainly I feel the second largest franchise was Mole's World. Today the second largest franchise is Gong Fu Pai and no longer Mole’s World is different point in that cycle. And so I mean that’s probably a good start to figure out our numbers. Hope that helps?
Okay, thank you. That’s helpful. Thank you very much.
Thank you. (Operator Instructions) Your next question comes from the line of David Bruce from [indiscernible]. Please ask your question.
Hi good morning – good evening, thanks for taking my question. I know there’s a difference in the number of paying users as a percent of active accounts between you and Viacom. I was wondering is there a difference in their games versus your Virtual Worlds that would explain that transperity? Thanks?
I don’t know where you are getting that number. You must – I guess now you’re having that some in investment world. In terms of the paying ratios probably may be looking at I can only say that our paying ratios historically were much higher in 2010, 2011. And then you’ll see there was a decline as you enter from 2013 and then we talked about it on our earnings call.
We’ve gotten those numbers. So for example, our ratio pay account per before active calculus 3.3% this fourth quarter versus 3.5% same quarter year ago and 2.8% the prior quarter. If you take the full year average, we’re about 3.8%, compared with 3.2% in prior year and close to 8% in 2011. So you can kind of see how this ranges, these percentages have changed from time, as you’ve been to different tactical and strategic reasons. And so that’s how we mainly do adjustable.
I would also mention that Benson and I in our prior calls did mention that our objective was to try traffic to a non-virtual, in the past, a strategy that we implemented in 2011 and 2012. And now as we are on 2013 Benson did mention today and in prior calls that we’re shifting our attention now. Now we’ve build the platform out towards monetization which is why you are seeing may be there is a different trend in numbers, as well as a number of restructurings in our businesses.
That’s interesting, okay thank you. If I could just ask one follow-up question, can I just, I know that you had some strategic cooperation. I’m wondering if there’s more of those coming up in the interim quarters…
Benson Haibing Wang
Okay, good question on strategic collaborations. I think you might be referring to fact in our press release, we mentioned a couple already, so in the press release we announce that – we announced our collaboration with Viacom, and we’ve negotiated that we’ll develop a mobile game for “Teenage Mutant Ninja Turtles”.
Partner with TMNT Viacom has scheduled to release a movie of related this franchise in the Paramount division sometime, it – next international win and obviously the franchise type potential in China become the animation would televise in the late 1980s and 1990 mainly in China.
And the other collaboration we did mentioned and I allude to and in the past is that we have a JV. We partner with the local partners to develop mobile and for TV channel for children’s animation interactive programming. The reason for that joint venture with these established large industry partners in China is because we are on own site and our online deal site is among the top sites in terms of traffic for 2015.
So these are two important collaboration and cost of our investments over the last two years. And I can allude to any more that we’ll announce but I can – you can probably see that once we can built out this cross media profit and build so called animation opportunities for us, opportunities whether it’s third party IP or opportunities whether it is local partners that becomes more clear more evidenced that we had to build the foundation in routes to last couple of years to allow these collaborations to happen today.
Great. Okay thanks very much.
Thank you. (Operator Instructions) There are no further questions at this time, I will now like to hand the conference back to today’s presenter, please continue.
Thank you for everyone on the call. I’m sad to say it’s my last one, but I’m still going to stay very close to Taomee and I love this place, before the CEO, I’m going to announce in the future, how we may meet again.
Benson Haibing Wang
Thank you, Paul and...
Thank you, bye, bye.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating, you may all disconnect.
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