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VisionChina Media, Inc. (NASDAQ:VISN)

Q4 2013 Earnings Conference Call

March 17, 2014 8:00 p.m. ET

Executives

Colin Wang – IR Director

Limin Li – Chairman and CEO

Stanley Wang – CFO

Analysts

Operator

Good evening and thank you for standing by for VisionChina Media’s fourth quarter and full year 2013 earnings conference call.

[Operator Instructions] 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 your first host for today's conference, Mr. Colin Wang, Investor Relations Director for VisionChina Media.

Coling Wang

Hello, everyone and welcome to VisionChina Media's fourth quarter and full year 2013 earnings conference call. The company's fourth quarter and full-year 2013 earnings results were released earlier today and are available on the company's IR website at www.visionchina.cn as well as on newswire services.

Today you will hear from our Chairman and Chief Executive Officer, Mr. Limin Li, who will talk about our industry, our company's strategy and business operations, and Mr. Stanley Wang, our Chief Financial Officer, who will take you through our financials and key operating metrics. After their prepared remarks, Mr. Li and Mr. Wang will be available for your questions.

Please note that today's discussion will contain 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, our official results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our annual report on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. VisionChina Media 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 VisionChina Media's Investor Relations website, at www.visionchina.cn.

I will now turn the call over to our CEO, Mr. Li.

Limin Li

[Interpreted] Hello, everyone, and thank you for joining us today.

2013 was a year of considerable transition for VisionChina Media. We began to execute on a series of strategic adjustments surrounding our cost structure, media resource utilization, organization of marketing events, programming creation and technological innovation integration. We ended the year with a strong fourth quarter.

Total revenues in the quarter was $32.5 million, representing a 13.9% increase on a quarter-over-quarter basis and a 24.3% increase on a year-over-year basis. Our gross profit was $7.58 million in the fourth quarter, an increase of 9.5% on a quarter-over-quarter basis. We also achieved positive net income in a GAAP basis for this quarter.

I'm also glad to share some operating metrics for the fourth quarter with all of you. One, utilization reached 9.16 minutes per broadcast hour, an increase of 13.2% quarter over quarter and an increase of 55% year over year. Revenue per broadcasting hour reached $772, an increase of 12.4% quarter over quarter and an increase of 32.9% year over year. Revenue per salesperson was $84,000, an increase of 13.3% quarter over quarter and an increase of 43.4% year over year.

These results demonstrate our excellent execution capabilities of translating our operating strategy into actual financial results. On the back of our strong fourth quarter, we are confident that VisionChina Media will enter a period of prosperous development in 2014.

In 2013, our transition strategy focused on media resource optimization initiatives and cost control plans, with the goal of improving our gross margin. We have terminated several unfavorable high-cost exclusive agreements that were acquired previously and that had resulted in significant losses. We also optimized the cost structure related to our core media resources by paying media cost based on industry-specific exclusive agreements or based on customer demand for advertising minutes, in order to enhance network utilization and establish a more competitive media cost structure.

Apart from continuing the implementation of our proven cost structure initiatives, we are also deepening our penetration into new cities which allow us to expand our media coverage to 88 bus cities and 14 subway cities to support multinational and domestic brands in their product promotions and sales in those markets without increasing any of our fixed media costs.

While media cost showed an up-trend in China's media industry in 2013, we managed to achieve a year-over-year decrease of 24.9% in our media cost. We will continue to pursue a more favorable cost structure while improving gross margin and operating efficiency.

In 2013, we successfully participated in promoting live station [ph] events in China, raising our brand profile to unprecedented levels. We fully leveraged the benefits of the exclusive mobile TV strategic partner of the Chinese Football Association Super League and the China Cup International Regatta under a five-year term strategic cooperation agreement. In the first year of the agreement, VisionChina used combined promotion methods for various top sports events, providing high-quality programs and live broadcast across VisionChina's national media network.

We also launched interactive mobile applications, along with the official Weibo and WeChat accounts, to enhance the connectivity with fans. Events such as CSL that lasted for eight months with 214 matches have given us a broader range of resources to develop comprehensive coverage and marketing activities to enhance social response and awareness of our brand. The interactive promotional model and excitement generated by these events have also attracted attention of potential clients and marketers to place advertising orders on our media platform. We are confident in turning such cooperation models into new revenue growth opportunities.

And 2013 is also a year that VisionChina [indiscernible] different industrial conference and events, from Shenzhen, Hong Kong, Macau International Auto Show, to China Beauty Expo, China International Digital Entertainment Expo and Conference, and China National Sugar and Alcoholic Commodities Fair, et cetera. We participated in 11 national metro events, collaborating with digital TV, satellite TV and internet media outlets.

With this cross-media transmission, our media network provided advertisers with a comprehensive all-in-one media service solution, including real-time broadcasting, brand communication, news, interviews, marketing promotions, and the ability to influence targeted consumer behavior directly. Moreover, we had direct opportunities communicated to hundreds of leaders of these companies in each conference which effectively helped us to expand our customer coverage.

Our strategy to participate in these events with the ability to broadcast live and influence public opinion separates us from other outdoor media companies, and we plan to deepen our penetration in various industrial markets by bringing more business opportunities for our long-term growth.

In 2013 we've taken another step in enriching our cooperation with CCTV and satellite TV partners in programming and creative marketing. As the daytime outdoor extension of traditional TV, we have become a critical channel for traditional TV to promote their best-viewed programs in order to compete for audience share. As a result of these high-quality programs, our social influence, public credibility and the unique social value as a public media platform have been greatly enhanced. Furthermore, we took full advantage of our business partners' most influential programs by inventing a unique business model, guiding marketing, to promote customer brands with unique programs across our media network.

An example of [indiscernible] in this new model is for Ctrip.com. We broadcast specially featured segment of Chinese celebrity flash [ph] for our public transit media platform by having Ctrip as the program sponsor. The program gained a reach rate of 49%, which yields an average audience rating of 1.12% and to 2.02%, leveraging VisionChina's highly-effective broadcasting capability to support the marketing campaign. Ctrip's media exposure surpassed its competitors by 26,000 times.

With this unique marketing model, guiding marketing, our audience rating level those of China's top satellite TV stations and we provide advertisers the most cost-effective advertising solutions, through our [indiscernible] and media network. The guiding marketing mode revenues accounted for 10% of our total revenues in the fourth quarter of 2013. We believe it will become a new branding communication method for more and more mainstream advertisers.

2013 was also the year that our platform became the standard promoting package for internet gaming companies. In addition to our comprehensive cooperation with Tencent Games, we entered into an exclusive agreement with Baidu Games and China Mobile Games and Entertainment Group, also known as CMGE, to promote their gaming products across our digital television advertising network nationwide.

According to its [ph] own study and evaluation of its game, daily rating, its recognition rate reached 61.4% while the effective rate reached 40.3% after placing targeted ads in buses and subway cities across our media network. Moreover, its conversion rate was much higher than in previous where ads were not featured on mobile TV network. In all, 35.8% of audiences reached by the campaign came to [now] daily rating via our media platform. As such, VisionChina has become one of the most important offline advertising methods.

We are also the only promotional platform for CMGE's game Eternity Warriors 3. According to the research, the game's attention rate increased nearly 700% to 35,000 on the first day after placing advertising on our media platform. The mobile user's attention rate increased nearly 900% to 20,000. Not only that, the average cost of gaining a new user via our platform is only approximately RMB2 to RMB3 which is much lower than for traditional online promotions. While the game operators are in anxious competition in grabbing online promotional resources, we have become games operators' standard choice of promotional platform with our high conversion rate and overall cost effectiveness.

Our mobile internet strategy is just beginning. We believe there is huge potential for our nationwide public transit media network, with hundreds of millions of daily commuters and it will bring exciting opportunities and growth potential in the future. In addition to a dual-display interactive system we've introduced in our previous social events promotions, we've accelerated the experiment to apply mobile internet technology to our existing public transportation media network and started to track the marketing operation. Our goal is to build up long-term sustainable growth opportunities with this new business model.

Turning now to our lawsuit against the former shareholders of Digital Media Group, we've already had several positive settlement discussions with the selling shareholders. We hope to reach an agreement with the near future that will safeguard the long-term interests of all of our shareholders.

As we change our positioning from the mobile television advertising network to mobile television broadcasting network and from composite broadcasting by mobile TV to dual interactive between the TV screens and small screens, 2013 was a year of transition and progress for us. The complementary talent and collective experience of our management team that provided the company with a solid foundation during the transition period and form our new core competitiveness. With the improvement of our core business revenues and our continuous creative innovation, we are committed to gaining long-term growth for our shareholders.

I will now hand over the call to our Chief Financial Officer, Mr. Stanley Wang, to discuss our financials and operating metrics in more detail.

Stanley Wang

[Interpreted] Hello everyone, and thank you for joining us today.

As Mr. Li mentioned, the fourth quarter 2013 was not so strong [ph] for the company as we had been lowering our cost effectively in order to remain competitive in the market. We will continue to implement cost control strategy in 2014 to improve operating margins. While we do expect seasonal weaknesses in the third quarter of 2014, we are confident that a strong future lies ahead of VisionChina Media in 2014 and beyond.

Let me turn to the key operating metrics.

Our total broadcasting hours were 38,458 hours in the fourth quarter of 2013, compared to 39,930 hours in the third quarter of 2013. Average advertising revenue per broadcasting hour was $772 in the fourth quarter of 2013, compared to $687 in the third quarter of 2013.

In the fourth quarter of 2013, we sold a total of approximately 352,000 advertising minutes in our network, compared to approximately 300,000 advertising minutes sold in the third quarter of 2013. On average we sold 9.16 advertising minutes per broadcasting hour in the fourth quarter of 2013, compared to 5.91 advertising minutes per broadcasting hour in the fourth quarter of 2012 and 7.95 advertising minutes per broadcasting hour in 2013.

We ended the fourth quarter of 2013 with 372 sales personnel, representing a net decrease of 16 sales people, over the course of the fourth quarter, as a result of one of our cost control policy in optimizing our ratio of sales people to advertising customers.

Turning now to our fourth quarter and full year result financials.

Our total revenue in the fourth quarter of 2013 were $32.5 million. Advertising service revenue, which accounted for 96.3% of our total revenue in the fourth quarter of 2013, was $31.3 million, representing an increase of 24.3% and 13.9% compared to that in the fourth quarter of 2012 and in the third quarter of 2013, respectively.

For the full year 2013, our total revenue decreased 9.4% to $104.7 million. Media costs, the most significant component of advertising service cost, was $19.8 million in the fourth quarter of 2013, compared to $20 million in the fourth quarter of 2012 and $17.5 million in the third quarter of 2013. Media cost was $72.9 million in the full year 2013, compared to $97.1 million in the full year 2012.

Gross profit in the fourth quarter of 2014 were $7.6 million, compared to gross loss of $4,100 in the fourth quarter of 2013 and gross profit of $6.9 million in the third quarter of -- in the third quarter of 2013. Gross profit in the full year 2013 was $14 million, compared to gross loss of $6.1 million in the full year 2012.

Advertising gross margin was 22% in the fourth quarter of 2013, compared to negative 1.8% in the fourth quarter of 2012 and 9.8% in the third quarter of 2013. Advertising service gross margin were 13.3% in the full year 2013, compared to negative 5.8% in the full year 2012.

Selling and marketing expenses were $5.4 million in the fourth quarter of 2013, compared to $9 million in the fourth quarter of 2012 and $7.1 million in the third quarter of 2013, the result of overall decrease in marketing and promotional activities. Selling and marketing expenses in the full year 2013 were $27.3 million, compared to $43 million in the full year 2012. The decrease in selling and marketing expenses was primarily due to strict cost control measure executed by the company.

General and administrative expenses were $2.4 million in the fourth quarter of 2013, compared to $5.5 million in the fourth quarter of 2012 and $2.5 million in the third quarter of 2013. General and administrative expenses in full year 2013 were $9.3 million, compared to $18.4 million in the full year 2012. The decrease in general and administration expenses was mainly attributable to decrease in legal costs and bad debt expenses.

Operating profit was $0.5 million in the fourth quarter of 2013, compared to an operating loss of $16.4 million in the fourth quarter of 2012 and operating loss of $2.9 million in the third quarter of 2013. Operating loss in the full quarter -- in the full year 2013 was $22 million, compared to operating loss of $252.3 million in the full year 2012, primarily due to a non-cash impairment charge of $178.8 million as a result of a write-down of goodwill and intangible assets associated with the company's acquisition of the six advertising agency businesses in 2008 and the company's acquisition of Digital Media Group Company Limited which was completed in 2010.

Our income tax expenses were $0.3 million in the fourth quarter of 2013, compared to income tax expenses of $1.1 million in the fourth quarter of 2012 and an income tax expenses of $0.9 million in the third quarter of 2013. Our income tax expenses in the full year 2013 were $0.4 million, compared to an income tax benefit of $7.5 million in the full year 2012.

Net income attributable to VisionChina Media shareholder was $0.1 million in the fourth quarter of 2013, compared to the net loss of $17.5 million in the fourth quarter of 2012 and net loss of $3.7 million in the third quarter of 2013. Basic and diluted net income per ADS in the fourth quarter of 2013 were both $0.03. Net loss attributable to VisionChina Media shareholder in the full year 2013 were 24% -- or $24 million, compared to a net loss of $246.4 million in the full year 2012. Basic and diluted net loss per ADS in the full year 2013 were both $4.72.

The company's non-GAAP financial measure, net income attributable to VisionChina Media shareholder, excluding share-based compensation and provision for contingent loss in connection with the litigation, was $0.4 million in the fourth quarter of 2013, compared to the non-GAAP net loss of $15.3 million in the fourth quarter of 2012 and a non-GAAP loss of $3.5 million in the third quarter of 2013. The company's non-GAAP net loss attributable to VisionChina Media shareholders in the year 2013 was $21 million, compared to the non-GAAP net loss of $66.6 million in the full year 2012.

The company has -- had cash and cash equivalent of $38.9 million as of December 31, 2013, compared to $35.7 million as of September 30, 2013. Net cash provided by operating activities was $5.8 million in the fourth quarter of 2013, compared to the net cash used in operating activities of $2.3 million in the third quarter of 2013.

Depreciation and amortization was 1% -- or sorry, was $1 million, and capital expenditures were $0.2 million in the fourth quarter of 2013.

Turning now to our guidance. We estimate that our advertising service revenue during the first quarter of 2014 will be negatively affected by seasonality, which is consistent with our historical pattern, but still will increase in the subsequent quarters. Based on business conditions seen thus far in 2014, we estimate our advertising service revenue in the first quarter of 2014 to be between $20.5 million to $21.5 million, non-GAAP -- which representing an increase of -- which is representing a year-over-year increase of 20% to 26% as compared to the same -- as compared to the first quarter of 2013.

These estimates were based on a foreign exchange rate of RMB6.1232 per $1.

As a reminder, our guidance is based on the current network of 90 cities as of today has been already secured by -- via the exclusive agency agreements of joint venture contract, and based on our current assessment on the outlook of pending litigation with the selling shareholders and the former management of Digital Media Group. If the number of cities in our network expands or contracts, or if there's any progress in the current litigation that affects our assessment of the possible outcome, our forecast will be affected.

Thank you again for joining us today. And I will now open the call to your questions. Operator, please proceed.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

And there are no further questions from the phones at this time. I'll now hand back to today's presenters to continue.

Coling Wang

Thank you all for joining us today. If you have any questions, please do not hesitate to contact us at ir@visionchina.cn.

Operator

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

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