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Sungy Mobile Limited (NASDAQ:GOMO)

Q4 2013 Earnings Conference Call

March 25, 2014 8:00 pm ET

Executives

Charles Eveslage - ICR

Yuqiang Deng - Chairman and CEO

Winston Li - CFO

Analysts

Evan Zhou - Credit Suisse

Yu-Heng Fan - China Renaissance

Alex Yao - JPMorgan

Alicia Yap - Barclays Capital

Operator

Good morning and evening and welcome to the Sungy Mobile's Fourth Quarter and Full Year 2013 Conference Call. All participants will be in listen only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Charles [indiscernible] from ICR. Sir, please go ahead.

Charles Eveslage

Thank you, operator. Welcome to Sungy Mobile's fourth quarter and full year 2013 earnings conference call. With us today are Mr. Yuqiang Deng, CEO of Sungy Mobile, and Mr. Winston Li, CFO. Following management's prepared remarks, we will conduct a Q&A session. Before we begin, I refer you to the Safe Harbor statement in our earnings release which also applies to our conference call today, as we will make forward-looking statements.

At this time, I would now like to turn the call over to Mr. Yuqiang Deng, Sungy's CEO.

Yuqiang Deng

Thank you. Good morning and good evening, everyone. Welcome to Sungy Mobile's first quarter or first call as a U.S. publicly traded company. Today, I would like to focus on three themes as we discuss our fourth quarter 2013 results and business outlook; first, our solid growth and our established leadership position as a leading global Android app publisher; second, our unique mobile product offering and core positioning in the global mobile Internet space; last, Sungy Mobile's strategic focus going forward.

To begin, for our first quarter as a publicly traded company, we delivered solid growth both operationally and financially. Our total revenues increased by over 63.5% year-over-year to RMB98.9 million for the fourth quarter of 2013. In addition, we expanded our profitability with adjusted EBIT growing by 228% year-over-year to RMB34.9 million. Moreover, for the first time in our Company's history, revenues from mobile app products and services accounted for over 50% of our total revenues, representing a major and increasingly promising growth driver of our overall business.

Supporting this growth is the strong momentum of our top-notch Android-based mobile app product, GO Launcher, as well as other GO series products. We are very proud that for the fourth quarter of 2013, we maintained our global leadership as the number three app publisher worldwide in terms of total downloads on Google Play, behind only Facebook and Google. In particular, our GO Launcher app has built up over 268 million users globally as of December 2013 and 46 million monthly active users for the fourth quarter of 2013. We believe these accomplishments highlight the richer functionality and superior user experience that our users find when using our mobile apps and services.

Now, let me move in on to my second point regarding our unique competitive products as well as our core positioning in the global mobile Internet space. As you may know, we started off our mobile Internet venture 10 years ago with the launch of 3G.cn, one of the first mobile Internet portals in China. In 2010, we became a first mover in the trend of mobile monetization in China by introducing our mobile reading service.

As smartphones emerged, laying the groundwork for a fruitful mobile app market to rapidly develop, we realized early on that we need to dominate the entry point to smartphones in order to fully capitalize on the astronomical growth of mobile apps that would ensue, and so we created a launcher product for the flourishing and lucrative Android app market which became the strategic engine of growth for our business and put us on the map in the global mobile app industry.

In conjunction with this product positioning, we set out to expand internationally in order to reach a global population of smartphone users through utilizing the powerful global distribution capabilities that are only available in the mobile Internet arena.

Through enabling our users to organize, manage and customize their apps and overall interface, our GO Launcher product uniquely embeds our brand in a daily smartphone experience and deepens our impact on our growing user base. As previously mentioned, benefiting from its richer functionality and app store ecosystem, GO Launcher thus quickly became the most downloaded launcher product on Google Play.

Building upon our success with GO Launcher, we further unveiled a broad portfolio of GO series apps and widgets, such as GO SMS Pro, GO Locker, that allow for the extensive personalization of Android smartphones. They also represent three of the 44 non-game products on Google Play and have achieved more than 50 million downloads to-date. Driven by the popularity of our apps, we are also able to cross-promote between our products and further expand our user base, creating a strong network effect on our GO platform.

Moving forward, Android home launcher applications continue to rise, significantly brightening our future business prospects. According to Flurry, a mobile analytics company, the usage of Android launchers reached 6.7 billion sessions worldwide as of March 7, 2014, already exceeding the total number for the entire year of 2013. This data point demonstrates the surging demand from smartphone users for tailored, innovative and easy-to-use solutions to improve their smartphone experience.

Leveraging our immensely popular launcher and other well-received customized products, we believe we are well-positioned to evolve from a business focused on the strategic entry point to smartphones, into a diversified GO-branded smartphone platform with expanding product and distribution capabilities.

Now, moving on to our future initiatives, for 2014 we aim to continue expanding our user base and strengthening our GO platform through the introduction of new innovative products and services, offering our growing user base an ever improving mobile experience.

First, we will continue to execute our international expansion plans. Following our recent acquisition of GetJar, we will focus on integrating our user accounts, customer services and mobile platforms as well as streamlining the operation of our two teams. In addition, we will leverage GetJar's state-of-the-art mobile data analytics capabilities to enhance our mobile advertising, research and development initiatives, serving to accelerate our product development process and strengthen our revenue generating capabilities.

Second, we will tap into the mobile game market through expanding strategic partnerships with mobile game developers and companies in China and overseas. With our unparalleled global exposure among Chinese Internet companies, we believe that our GO series brand has great potential to become a strategic value-add asset to mobile game platforms and companies worldwide, which are looking to expand into new markets.

Third, we will broaden our user reach in China's domestic market through localizing our flagship mobile products as well as partnering with app stores and other channels to further drive user adoption of our mobile products. With our expanded global leadership and these strategic initiatives, we are well-positioned to capitalize on an increasingly international and app-centric mobile Internet market.

I will now turn the call over to our CFO, Winston Li, for our detailed financial results.

Winston Li

Thank you, Yuqiang, and good morning, everyone. Before I get into our detailed results, I'd like to highlight that we further expanded our profitability with gross margins and adjusted EBIT margin improving up to over 75.1% and 35.3%, from 65.3% and 17.5%, respectively, in the same period of 2012.

This improvement demonstrates the cost advantages associated with our growing mobile app-centric business, which is less burdened by hard content costs and marketing spending than mobile Internet portal and the mobile reading businesses. Going forward, we aim to build upon our strong financial performance in 2013 and deliver revenue growth and margin improvement in the coming quarters by extending the reach of our dynamic mobile apps and products and executing our international expansion plans.

Now, I'd like to clarify that all the financial numbers we are presenting today are in renminbi amounts and all percentage changes refer to year-over-year changes, unless otherwise noted. With our quarterly financial highlights, for the fourth quarter of 2013, total revenues came in at RMB98.9 million, representing a 63.5% increase from the same period last year. Revenues from mobile application products and services increased by 230.7% to RMB50.9 million in the fourth quarter of 2013. This increase was primarily driven by a 407.6% increase in the marketing revenues related to our GO series products, and 97.7% increase in the revenues from paid downloads.

Revenues from mobile reading services increased by 15.9% to RMB26.3 million, driven by our efforts to build our multi-distribution channels. Revenues from mobile portal marketing services decreased to RMB14.5 million, primarily due to be expected ongoing shift in advertisers' preferred mobile marketing medium to individual mobile apps and away from mobile internet portals. Revenues from others, which primarily consist of promotion of third-party provided mobile applications or value-added services, increased by 22.5% to RMB7.2 million.

Gross profit increased by 87.8% to RMB74.2 million, whereas gross margin increased to 75.1% in the fourth quarter of 2013 from 65.3% in the same period last year. This increase in gross margin was mainly attributable to the improved cost efficiency resulting from the scale effect associated with our Company's growing business as well as our ongoing shift to higher-margin mobile application products and services.

Total operating expenses for the fourth quarter of 2013 increased to RMB52.8 million, primarily attributable to higher general and administrative expenses and research and development expenses which were associated with the growth of the Company's overall business. As a result of our increased gross margin and improved operating leverage due to our business expansion, our operating income increased by 103.5% to RMB21.4 million. Operating margin expanded to 21.6% from 17.4% in the same period last year.

Net income increased by 76.4% to RMB30.8 million. Net margin in the fourth quarter of 2013 increased to 31.2% from 28.9% in the same period last year. Adjusted EBIT increased by 228.9% to RMB34.9 million, with adjusted EBIT margin increasing to 35.3% in the fourth quarter of 2013 from 17.5% in the same prior last year. Adjusted net income increased by 151.2% to RMB44.1 million. Adjusted net margin increased to 44.6% in the fourth quarter of 2013 from 29% in the same period last year.

Diluted earnings per ADS increased to RMB0.76 from RMB0.13 in the same period last year. Adjusted diluted earnings per ADS in the fourth quarter of 2013 increased by 804.1% to RMB1.19. As of December 31, 2013, the Company had cash and cash equivalents of RMB759.4 million.

Now, let me quickly go into a couple of highlights for our full year results. For the full year 2013, we saw total revenues increase by 77.5% to RMB328.8 million, driven primarily by the 350.3% growth in the revenues from mobile application products and services to RMB153.4 million. Net income for the full year of 2013 increased by 505.3% to RMB91.8 million, with net margin increasing to 27.9% from 8.2% in 2012. Adjusted EBIT increased significantly to RMB107.7 million from RMB8.5 million in the prior year. Adjusted EBIT margin increased to 32.8% for the full year of 2013 from 4.6% in 2012.

For the first quarter of 2014, we currently expect our net revenue to be between RMB92 million and RMB95 million, representing year-over-year growth of approximately 55% to 60.1%. This forecast reflects our Company's current and preliminary view on the market and operational conditions, which are subject to change. Another thing I want to add is, this revenue guidance does not include the consolidation of recently acquired GetJar in the United States.

This concludes our prepared remarks for today. Operator, we are now ready to take some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Evan Zhou with Credit Suisse. Go ahead.

Evan Zhou - Credit Suisse

Congratulations on the first quarter results and a very solid quarter. I got two questions. First one is, could you maybe share some of the color on integration with GetJar, how is the progress after your announcement and what's our plan to integrate their app system into our own offering? That is my first question.

Yuqiang Deng

Thank you for your question. So regarding our integration with GetJar, following our acquisition in earlier February, in the first month we have been primarily focusing on integrating our product, integrating our technology and also the overall operation of our two teams. So this is going to be a long process and we are very confident in our overall progress.

And secondarily, we are very confident in GetJar's overall big data analytical skills and we are already under testing of a lot of their products' capabilities, and we can tell that by utilizing their data capabilities, we are very confident to improve our overall monetization capabilities.

However, it's going to be a long process to see some big improvement to bear fruit and we are confident that in the second quarter and third quarter, we are going to see some very evident results and improvement. To give you a small example, we already tested to optimize our overall advertising placement for our SMS product and we are seeing now around 20% to 30% overall improvement in our advertising effect. Thank you.

Evan Zhou - Credit Suisse

Great, thanks. The second question is about our advertiser [indiscernible] side. So, we've been registering pretty decent growth on the user side, [indiscernible] but I'm wondering like on the commercial side, what are the major advertisers that we are talking to and how do you see the actions from the advertisers for adoption of our overall [indiscernible]?

Yuqiang Deng

First of all, in the fourth quarter of 2013 we have already deepened our relationships and cooperation with a lot of e-commerce companies and Internet companies. For example, on Double 11, the biggest e-commerce sales day, we [indiscernible] and also Vipshop [were anniversaried] (ph). So we have those e-commerce companies to promote their sales on the big sales day.

And secondarily, in 2014 we are very confident in our overall business prospect. We are seeing a lot of Internet companies that have great international ambitions. For example, we are just talking working with [Youku-Tudou] (ph) and Qihoo 360, as well as some Internet disclosure companies like [indiscernible]. We have already entered annual contract with that [indiscernible] company. So, overall trend we believe that 2014 is going to be a better year than 2013, and we are very confident to benefit the bigger advertising budget shift to the mobile advertising market.

Evan Zhou - Credit Suisse

Great, that's very helpful.

Operator

Our next question is from Yu-Heng Fan with China Renaissance. Go ahead please.

Yu-Heng Fan - China Renaissance

Thanks for taking my question and congrats on the results. My first question is regarding your initiatives in mobile gaming publishing. Can you provide more color on how will you work with those Chinese mobile companies in the overseas gaming publishing, have you reached any kind of deals with those developers in the pipeline, and then I have a follow-up? Thank you.

Yuqiang Deng

Regarding our initiatives on the mobile gaming side, for this quarter we primarily focused on investing in casual game categories. We have already established a platform and we are also collaborating with other companies to co-operate, to operate those platforms. Later on, we are going to seek cooperation, partnership and investment to go into game publishing business, and by doing that we will broaden our business game category. It's also possible that we are going to pick exclusive license of certain popular games in the 2014. For the first quarter of 2014, we primarily focus on formulating our game-plan for the gaming business for the entire year and we are expecting to see some tangible results and growth starting from second quarter of 2014. Thank you.

Yu-Heng Fan - China Renaissance

Thank you, that's helpful. The second question is regarding the product roadmap for the GO series. So we see that some of the larger Internet companies in the USA have become more interesting in the launcher app recently. For example, Yahoo just recently acquired a launcher app developer. I wonder, other than the Chinese Internet companies, has the Company started to explore some kind of partnership with other international content provider or Internet service provider?

Yuqiang Deng

That's a very good question. Thank you very much. So in this year, we are going to deepen our partnership in overseas market. For example, in the Korean market we have already significantly deepened our relationship with local partners in Korea. We are going to further expand into that regional market and also to improve our overall modernization skills. We are also looking to further expand into European and U.S. market in 2014.

Yu-Heng Fan - China Renaissance

Thank you. I just have one housekeeping. So, the first quarter guidance does not include the consolidation of GetJar, am I correct?

Winston Li

That's correct.

Operator

Our next question is from Alex Yao with JPMorgan. Go ahead please.

Alex Yao - JPMorgan

Congratulations for the first financial results after a successful IPO. My first question is on the user growth side. The GO Launcher MAU grew about 9% to 10% from the third quarter 2013. Can you share with us, where do these incremental users come from? Are they coming from the more developed markets in U.S. or Europe or are they more coming from developing markets such as China or Korean? And also, could you share with us the split of users across these regions? Thank you.

Yuqiang Deng

First of all, regarding our user incremental growth in this quarter, overall we have seen a similar pattern of growth across the board. So basically, we are seeing faster growth in developing countries such as India and Russia. In the more developed markets such as U.S., the growth has been very stable. In Korea, we are seeing slightly decrease in that particular mature market. And as you know that overall our promotion of our particular product is based on user referrals, so the overall growth is very expected.

And regarding your second question about split of user growth across the regions, we are seeing 30% of our user growth is coming from China market with 70% from the overseas market. Among that 70%, about 50% users are from the U.S. and 10% from Europe.

Alex Yao - JPMorgan

That's very helpful. Second question is about the mobile application monetization strategy. You guys have planned a lot of new initiatives, for example the consolidation and the integration of GetJar, and so there could be a lot of new advertising product launch in the Western markets, and also the game publishing initiative in China. So can you share with us your revenue split from overseas market and the Chinese market now and what do you see the mix could be by the end of 2014?

Yuqiang Deng

So regarding your question about the revenue split, in fourth quarter of 2013, we received majority of our revenues for GO series products from overseas market, and China's market revenue growth continues to grow in the fourth quarter. It's primarily benefited from the peak sales season in e-commerce sector. In 2014, we expect that revenues from China's market continue to grow, primarily because of our rollout of our gaming business in China's market. However, we are not able to give a very specific revenue split estimate at this moment because we are just new to this business in China.

Alex Yao - JPMorgan

That's very helpful. Lastly, two quick financial questions. Why did cost of revenue declined slightly in this quarter, and also the R&D expense increased pretty substantially from the third quarter, can you share with us the reason behind this strong growth in the quarter and also is it going to be a continuing trend in the next few quarters?

Winston Li

Okay, for the first question, why the cost of revenues decreased slightly, that has something to do with both the significant growth in our GO series business and also has something to do with the mix of revenue sources. In the earnings release, you would see that our GO series business grows much quickly, and compared with the third quarter of this year, our mobile reading business revenue declined slightly.

So because this – if you recall that from IPO roadshow, for those friends who have paid attention to us at that time, the number one component for our cost of revenue is content acquisition cost. So that has always been the number one in terms of our revenue cost. So with the slight decrease of the mobile reading business, that's why the total cost of revenue declined. Make sense?

Alex Yao - JPMorgan

Makes sense. And what about the R&D expense?

Winston Li

The R&D expense, the increase in R&D expense mostly is coming from two angles. One is, we have increased the personnel in our R&D department. Therefore, our personnel cost for the R&D line increased quite significantly. And another one is the share-based compensation expense.

Alex Yao - JPMorgan

Got it. Very helpful. Thank you very much.

Operator

Next question is from Alicia Yap with Barclays. Go ahead please.

Alicia Yap - Barclays Capital

Congratulations on the first public results and thanks for taking my questions. Just like a couple of quick questions. Number one is, can you remind us the seasonality of your business, and for kind of like the slight sequential decline for 1Q guidance, is that mainly due to the very strong e-commerce promotion you had in the 4Q?

Yuqiang Deng

Yes, we actually see greater seasonality with our mobile portal business, as we understand that first quarter is typically our slow season for portal business across the entire industry. This is primarily because e-commerce sector reach tend to do more promotional at year end, so in the fourth quarter. And on the other hand regarding our mobile app services business, we do see that fourth quarter is kind of a peak season because of all the holidays in the international market. So that could – that already boosted our sales for the fourth quarter. So overall, that's the main reason behind our first quarter guidance being a little bit light compared to fourth quarter. Thank you.

Alicia Yap - Barclays Capital

Okay, thank you. And my second question is, other than the mobile games initiative, will we have other growth initiative of expansion plan target for the domestic China market? And then lastly, is there any target revenue percentage by the end of this year to be coming from total mobile revenues?

Yuqiang Deng

So first of all, regarding your question about our China initiatives, so in 2014 we will primarily focus on two things. First is to strengthen our R&D capabilities to further localize our mobile app products and services in China. And secondarily, we are going to deepen our partnerships with peak distribution channels in China. So that could help significantly broaden our user growth in this domestic market. And regarding your second question about the revenue split for mobile apps business, so this quarter our mobile app business already accounted for more than 50% of our total revenue, and by the end of 2014 we expect this segment is going to account for over 60% of our total revenue. Thank you.

Operator

The next question is from [indiscernible] with ICBC International.

Unidentified Analyst

Congratulations on the strong quarter. Actually you have answered some of my questions. I have follow-up questions on the extension of business in China. Can you give us more color on Company's expectation and the revenue contribution from China business, do you think that China market will contribute a significant value in the long run?

Yuqiang Deng

So regarding your first question about our partnership with China's distribution channels, so we are looking to strengthen our partnership with the biggest distribution channels in China. As you know, that would be [Youku-Tudou] (ph), Qihoo 360 and Tencent. We want to utilize their solid and strong distribution capabilities to help us reach out to more users in China. And in 2014, we are also looking to extend our [TIBCO] (ph) partnership by maybe exploring some new initiatives or other new formats of partnerships and we are happy to update with you our progress when we have better – we made some solid progress on that.

And regarding your second question on gaming front, so we do expect to partner with China's game publisher companies to expand our user growth and will reach our growth potential in this market to improve our overall modernization capabilities. We are open to acquire other companies or to invest in other big companies in this market, but at this moment we don't have much specific plan to offer but we are happy to update with you later. Thank you.

Unidentified Analyst

Thank you. One quickly follow up question, can you give us more color on Company's strategy on impending user activity for your GO Launcher product, and also do you have more details about the product pipeline for 2014?

Yuqiang Deng

So we do have very specific approach to further improve our user stickiness. First of all, we'll continue to improve our functionality and research and technologies to improve user interface and to further strengthen our user experience with our GO Launcher product as a whole. And secondarily, we are going to reach users' account system to allow users to put more personalization and their personal record into our system. And then by doing that, we are hoping to further embed our brand into users' overall smartphone experience. So, by doing that, we hope to further customize our product for our users. So that's your first question.

Regarding our product pipeline, so in 2014 we will be committed to further localize our flagship app for Chinese users. We are going to develop more customized products to cater to users, their using behavior in specific markets and regions. So, we are also open to explore further new products format as well. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Winston Li

For the next three days, we will be attending the Credit Suisse Conference in Hong Kong, and to the extent any investors or shareholders have more interest, have more questions, we'll be happy to meet you there. And again, thank you everybody for dialing in. Good luck.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your telephones.

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