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YOU On Demand Holdings, Inc., (NASDAQ:YOD)

Q4 2013 Earnings Conference Call

March 31, 2014 4:30 PM EDT

Executives

Jason Finkelstein – Investor Relations

Shane McMahon – Chairman

Marc Urbach – President and Chief Financial Officer

Analysts

Jay Srivatsa – Chardan Capital Market

Brandon Primack – SeeThruEquity

Paul Packer – Globus Capital Partners

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the YOU On Demand 2013 Fourth Quarter and Year End Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Jason Finkelstein, Director of Strategy and Investor Relations. Please go ahead, sir.

Jason Finkelstein

Thank you, operator and good afternoon everyone. We appreciate your participation on YOU On Demand’s update call. Joining me today are Shane McMahon, YOU On Demand’s Chairman; and YOU On Demand’s President and CFO, Marc Urbach. Following the prepared remark, we will open up the line for question.

Today’s call may contain forward-looking statements related to the company’s future operating results. Listeners are cautioned that such statements are based upon current expectations and assumptions and may involve certain inherent risks and uncertainties within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements are not guarantees of future performance and actual results may differ materially from the expectations expressed, implied or forecasted.

Certain risks and uncertainties are detailed from time to time in the management’s discussion and analysis section of our corporate filings, copies of which can be obtained from the SEC or via our website www.corporate.yod.com. In order to provide a more meaningful comparison of our financial results, a discussion of the company’s consolidated results of operations utilizes pro forma 2012 financial information to exclude the impact of Shandong Media, which was deconsolidated effective July 1, 2012.

For more details please see Note 9 for the audited financial statements included in the recently filed 2013 10-K. All information discussed on this call is as of today March 31, 2014 and YOU On Demand undertakes no obligation to update any statements or expectations from prior conversations.

I would now like to turn the call over to Shane who will provide a brief overview of YOU On Demand business including recent corporate development and Marc will then follow out with an update on our financial results and capital position.

Shane McMahon

Thank you Jason and thank you everyone for being on the call today. The 2013 fourth quarter was another period of incremental progress for YOU On Demand. In addition to discussing 2013, I’ll also highlight several key developments that occurred during the first quarter of 2014 subsequent to the companies year-end.

First taking a closer look at Q4, is worth noting that our operating results underscore that there are still a lot of runway ahead of us for the digital cable over the top or OTT IP TV and mobile opportunities. We are in active discussions with our Chinese distribution partners and we look to continue to collaborating on what the initiatives that will further enhance YOU On Demand’s future results on these platforms.

As mentioned in the past, since our strategy is to operate a successful, multiplatform entertainment distribution service, our overall performance will largely driven by improving recognition of the YOU On Demand brand, which we are working diligently to become synonymous and then while let the consumer with quality programming and giving them choice all by increasing our distribution footprint.

A key and most recent vertical for us is mobile. Late in 2013 we forced an alliance with Huawei, China’s greatest smart producer and the worlds third largest maker of mobile handsets. We’re extremely proud to have been chosen by Huawei for the strategic partnership and the deal was a direct result of our CEO, Weicheng Liu, resolve to have YOU On Demand enter the mobile space in a big way.

China smartphone industry is growing very fast having recently read throughout the U.S. to become the world’s largest market. The Chinese domestic handset shipments are projected to grow at a 25% clip in 2014 to approximately 450 million units based on estimates from market research for an IVC. Understandably we view mobile as a huge opportunity which will become the center piece of consumer content consumption on multiple screens across multiple platforms.

Our success in this arena has also been accelerated by YOU On Demand strategic partnership with mobile video content and service provider C Media which further expanded that relationship with us last month. In February C Media elected to lead a planned Phase 2 investment in YOU On Demand which provided an additional infusion of $19 million raising the multi-tranche stake to an aggregate of $25 million.

In conjunction with this expanded ownership we were pleased to recently welcome three new directors; Mr. Jin Shi, Mr. Clifford Higgerson, and Mr. Arthur Wong to YOU On Demand’s growing board. We look forward to the future contributions and council from these three experienced executives.

As stated on the last quarters call, with the helpful assistance of C Media’s R&D check team, we launched the YOU On Demand smartphone application which now comes preloaded on Huawei made smartphones. Our user friendly app allows consumers to view full length movie titles under handsets. The made also known as the movie phone is being sold via Huawei B2C Vmall.com e-commerce platform and website, since it’s introduction back in Q4.

We receive a royalty fee for every subscription activated handset and also a benefit from future movie download via one off title purchases and subscription orders.

Our app is currently pushing two, three Hollywood movies per week to make owners to be a transactional Video On Demand, or TVOD, and we plan to launch a reasonably priced subscription based SVOD package very soon. We also wanted to announce here that we are currently moving along in the testing phase with mobile operators as part of an exciting initiative to bring the YOU Cinema app to customers of mobile service providers.

We’ll provide more detailed information as we move to the next phase. You’ll recall that Paramount was our first major Hollywood content partners who also forged on mobile agreement with us. This happened around the time of the Huawei handset launch. Disney also came up board last month. We are delighted to have access to the wealth of current library title symbol studios and plan to add additional mobile movie content and other forms of contents from partners down the road.

Speaking of high quality programming content, we also recently announced agreements with three of the world’s premier producers of family-friendly entertainment, Sesame Workshop, Nelvana Enterprises and HiT Entertainment. Later this year we plan to launch the You Kids On Demand Subscription platform which will future universally popular titles such as Sesame’s Elmo's World and Play With Me Sesame. Bob the Builder and Thomas and Friends from HiT. And Nelvana’s, Max & Ruby, Maurice Sendak's Little Bear and The Berenstain Bears.

To reiterate what I said on our Q3 call, this continues to be a learning process for YOU On Demand, our distribution and content partners and also for YOU On Demand’s growing base of customers that are accessing our programming via multiple platforms. We are proud to be one of the pioneers that created a Video On Demand business that was non-available in China, prior to our launch in 2013. Most of you on today’s call take these services progressive in the United States. What they have done around for more than two decades and now have become part of our daily life’s.

We are continuing to learn the types of content in our consumers launch and the delivering methods of platforms they prefer to receive it from. For example, we’ve been pleasantly surprised about the strong demand for indigenous Chinese cinema content which continues to sell low. We are also taking note of what the network which is equally important. With C Media’s financial, strategic and operational support, we are starting to reach cash flow positive and eventually we hope to be consistent profitability.

Marc Urbach, YOU On Demand’s CFO, and our supporting financing team both here and in China continue to be mindful of conservable managing corporate overhead levels within the content of You On Demand’s streamline operating structure. Eventually we may consider creating some of our own content as we have seen others do successfully such as HBO and NetFlix. But for now the company’s fair amount was working and we remain optimistic about the future as the You On Demand brand continues to grow in stature.

At this point I going to turn over to Marc Urbach who will cover the Company’s operating results and capital structure.

Marc Urbach

Good afternoon everyone. As you can talk to Jane’s comments 2013 was a building transformative year for You On Demand, in particular the past few months. After a lot of hard work by the entire team, we are pleased to have overcome many hurdles and obstacles along the way. We and our partners firmly believe that You On Demand is well positioned to leverage the many positive trends impacting the media and entertainment industry across China and the significant impact technology has and how confident its been.

We believe You On Demand is a very excelling business and we continue to gain traction from an expanded basis consumers they are seeking the best in entertainment content across video on demand and with our Huawei been announced by, we’re bringing consumers on to a platform is a perfect compliment which should benefit the company and stakeholders over the long-term.

Similarly we have increased capital investment for [indiscernible] and a long prudent financial help that we believe with service well as we target tubing cash flow positive status, we will not do this in future, do not comparatively believe and efficient operations as Shane elude to his remarks.

As far as financial, as important to note that YOU On Demand financial results for 2012 full year period, mainly reflect the operation for it’s now likely business Shandong Media. These results were deconsolidated as of July 1, 2012 kind of over that method.

In order to provide a more meaningful comparison of our financial results, our discussion of the company’s consolidated results and operations and MD&A or financial conditioning and results of operation section of 10-K utilizes pro forma 2012 financials information that excludes the impact of Shandong Media.

In further contribution from Shandong Media revenue for the period ending December 31, 2012 totaled $5000 that compares to revenue for the period ending December 31, 2013 of $0.3 million. increase in revenue attributes for the growth of our Video On Demand business. Our gross loss for the year was $3.8 million as compared to $2.3 million during the 2012. The increase in gross loss from this opportunity $590,000 or 26% is mainly due to an increase in amortization of constant costs partially offset by increased revenue related to our VOD business.

I also want to highlight the 2013 revenue do not reflect any contribution from our partnership with Huawei. As mentioned during our prior call, we anticipate seeing revenue from the Huawei at the end of the Q4 of this year, given the shift and the timing of agreement and its impact on revenue recognition over, our Q4 revenue from the business and shift will not begin to be reflected in our financial results until the first quarter of 2014.

Moving down to the income statements, total operating expenses for the full year decreased 27% to $94 million on a GAAP basis. The decline in operating expenses was largely driven by both our divestment of legacy Jinan Broadband and the expenses associated with the results, overall cost cutting initiatives we started in Q1 2013.

Going forward with continued focus on achieving great operating efficiency and expense reductions to best align our operating structure. We recorded a net loss for the full year of $8.2 million or $0.54 per share on a fully diluted basis. This compares favorably to a net loss of $51 million for 2012 or loss of $1.35 per share.

Turning to the balance sheet, YOD cash and cash equivalents down at December 31, 2013 rose to $3.8 million up from $3.3 million a year earlier. Please keep in mind this figure is not yet reflected additional $19 million cash diffusion from the C Media late investment roads which was received during Q1 2014.

Importantly, we also continue to have no long-term debt in our balance sheet with the exception of Shane McMahon, $3 million, which maintains the options to convert into share agreement with year.

With regards to guidance through the recent significant shift in our business and timing of revenue streams we're not providing guidance at this time. However, we plan to provide guidance in the near future as always first.

With the recent improvements to our balance sheet and senior repeat cash flow investments. Operating results expense reductions, our initial streamlining was zero debt on our balance sheet, which give you financial flexibility. Our NL corporate overhead run rate excluding constant costs primarily profit of $8 million, we do not expect as the shift double borrowing anything on proceeding.

While due to the investing and support our full Video On Demand business, mobile business from the business of the whole. We will focus on leveraging our viable resources including secret partnerships and relationship in an efficient manner to support both organic as well as content acquisition, acquisitions based growth.

In summary, we are pleased that we were able to [indiscernible] 2013 so far in 2014. We are now moving to more focused business, stronger balance sheet and improved operating structure that could see on corporate growth initiatives.

We are confident to leverage our brand and believe that we’re positioned on the right path for significant financial growth and operational success. This concludes our prepared remarks. So, if I could turn the call back over to the operator and open up the lines for question. Thank you.

Question-and-Answer session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Jay Srivatsa with Chardan Capital Markets. Please proceed with your question.

Jay Srivatsa – Chardan Capital Market

Thanks for taking my question. Shane on the Huawei’s handset, could you give us some update on how the update has been, how many paying subscribers you have and what’s you projection as you look through the rest of the year on that business.

Marc Urbach

I think maybe I’ll answer that just first one, Shane can jump in afterwards. My fix is everything is very new and we don’t actually want to – we want to go according to – we’re open up for making a duet and two Huawei is very protective of the information we putout. We’re still in the initial phase. The take rates have been pretty good. We’re excited about it and more importantly Huawei is very pleased about it. We are actively in talks right now. We’ve done about something our app on many more phones in Q2 and we’re excited about. As of now, until we’re in the first quarter we’re not thinking about any of the secrets with the mobile phones. I am not changing that [indiscernible].

Shane McMahon

Well, I think you covered very well.

Jay Srivatsa – Chardan Capital Market

Okay in terms of other handsets from Huawei and as well as other providers can you give us some sense on what the timing on that is, when should we expect some of the other guys to come on board.

Marc Urbach

Sure, what we’re talking actively and we’re actively testing it. The biggest movement, Shane mentioned but I definitely want to emphasis, we are actually actively testing on some of the service providers right now which should be the next big thing for us. So what’s on our app on mobile spaces which is great on their services and mobile services.

So we are excited about that, that should be Q2 to Q3 with some of the testing goes well. Similarly you got the model phones for Huawei will happen in Q2 or Q3 and then we are also talking to other hardware manufacturers, smart TV manufacturers and then pretty much anyone who can think will make sense to put our content.

Jay Srivatsa – Chardan Capital Market

Okay in terms of the mobile service providers did you want to try that opportunity, do you expect several handset providers that are catering to [indiscernible], mobile service provider to come on board or are you working with couple of them, any sense on the opportunity there will be appreciated.

Marc Urbach

So we are taking to many, we are actively testing specifically on one major players provisional level, we are works on the testing phase. But we hope to be on just as bigger platform as the [indiscernible] goes, so that actual testing now on based for testing pieces and whole products

Jay Srivatsa – Chardan Capital Market

Okay and then shifting over to your legacy business with the cable address, what things are at there and what are some your expectations in that area given that you are now focusing more on the handset side.

Marc Urbach

Shane again can jump in, but the cable people are having a little with their life there, they defenitly still have a little bit of government non-entrepreneurial period, it looks little bit slower than we thought. What we’ve done the time being from a business model standpoint is we’ve got them to give money upfront starting with shares, I’ll give what are essentially like a minimum upfront, so it’s a great person to catch standpoint as they kind of build out their infrastructure with the cable space.

So I still think, long-term we’re absolutely going to hopefully successful but I think that everyone can read and then with the speed which mobile is moving – mobile is going to move much faster but I think a long-term cable be there as well and we’re actively still driving the cable business development as this money coming in right now from it and we anticipate it coming in more year and in fact quarter-over-quarter growth with it every quarters you started in the middle last year, end of last year.

Jay Srivatsa – Chardan Capital Market

And the last question from me, since you’ve got a nice cash infusion can you give us an update on what their cash flowing is currently and when do you hope to get the cash flow positive or are these cash flow breakeven?

Marc Urbach

Sure, our cash story now is we’ve done a good job I think of minimizing costs. We’ve moved a lot of our operational side spoke over the time, unchanged and done a great job of kind of isolating what needs to be here and kind of what needs to be there and we were burning about $8 million a year for content cost. We just got 90 million in. So with our projected revenue we anticipate being cash flow positive Q1 and Q2 next year. Again our cost will increase that much and how big we get until we get to significantly bigger. But we’re optimistic and we are for the first time in since we bought the working on this, what we’re comfortable with wherever our cash is lying, don’t see raising money.

Jay Srivatsa – Chardan Capital Market

Great success. Okay, good luck.

Shane McMahon

Jay, I’ll add to it little bit. Again remember how we set the deals off, as you remember a lot of this based on revenue sharing, when we first created the business, all those that are small minimum guarantee, everyone is based on the rev shares. So whether it be the distributor, whether it be IPTV, OTT cable or from a mobile standpoint, they take a cut obviously the content operator takes a cut and YOU On Demand has a light healthy margin to make sure all of that happens correctly.

Jay Srivatsa – Chardan Capital Market

Great. Thank you good luck.

Shane McMahon

Thank you.

Marc Urbach

Thanks Jay.

Operator

And our next question comes from the line of Brandon Primack with SeeThruEquity. Please proceed with your question.

Brandon Primack – SeeThruEquity

Hi, guys, sorry if this was answered. I got cut off a little bit. I would just like to know little bit more about your thoughts on the [indiscernible] in March versus November and if you can talk about when we expect to see data regarding a specific wholesale numbers?

Marc Urbach

Well, we did jump on that a little bit and like I said, it’s been growing, Huawei is excited about it. We’re very excited about it. We will do that g0072owth like you said, the big next channel, the big next base that we’re look forward is Q2 or Q3 and we now have still around instead of one phone around multiple phones and have a very big audience on Huawei’s products to come, but the key things are very excited.

Shane McMahon

And Brand, this is Shane. To elaborate a little bit more, again Weicheng our CEO has done a fantastic job of bringing that deal in. And really what happened is that we’re waking a giant. Huawei has been much more B2B focused. They are now rolling out obviously for the consumer aspect and they are now looking at content specifically and doing a partnership with us to create more consumer based sales. So that’s one thing that’s happening. And Weicheng is currently continues to meet with Huawei and talk about expanding the possibilities as Marc said how we move away from one mile into several different including tablet and what have you. So, it’s been very advantageous. Huawei is giant ship that does move a little slowly, but cautiously. But when they do move that as in a something very coordinated and direct and we couldn’t be in a better position with them.

Brandon Primack – SeeThruEquity

Excellent. Now I know you just really talked about your UKs platform, but if you could give me some more color specifically with what the first round of content you plan on having on available and would you imagine revenues for sample content for free just some any kind of color you can give me around that launch?

Shane McMahon

I am sure, Shane again. Again, we’re still formulating what that was going to be again on the price point what it’s going to be. I am sure we once done so there will be some, let some free content to get people excited about it. And you know this is content that has been proven that works all over the world and we are very excited to be bring in our platform and doing or really watching the UK down. So, we will have more on that in the following quarters for you.

Marc Urbach

And I think that the real launch will be towards the second half of the year as well as when we went to last, we have a lot going on right now. But I think you said that that’s next biggest initiative and it should be Q3, Q4 range.

Brandon Primack – SeeThruEquity

Excellent. I appreciated guys, terrific year. And it’s sounds like you have a tunnel on your play. So best of luck and I’ll speak to you soon.

Marc Urbach

Terrific, thank you very much.

Operator

Our next question comes from the line of Paul Packer with Globus Capital. Please proceed with your question.

Paul Packer – Globus Capital Partners

Hi, guys. Marc, I think you mentioned that there was no better, the only that out there is maybe we should think that change may have a convertible. Shane can you just talk to your thoughts that there might be some mutual understand but your thoughts on what you might be thinking at?

Marc Urbach

We will manage our [indiscernible].

Shane McMahon

Hey Paul, it’s Shane. Really, I haven’t till the end of the year to obviously make a decision or whether I convert that or not. And quite frankly so been to haven’t really thought about. So as we continually make sure our business was successful and work on that to me that’s much more of an after thought if that gives you any comfort.

Paul Packer – Globus Capital Partners

Sure, okay. Everything you guys are doing? Thank you Shane.

Operator

And our next question comes from the line of [indiscernible] with Maxim Group. Please proceed with your question.

Unidentified Analyst

Gentlemen congratulations on your significant corporate developments and C Media strategic investments. In addition to bringing Kevin Lin, as our Chief Technology Officer and clearly that helps with us Huawei background and potentially open your doors to some of the major players over there. Are there any other high level hires in the works or plan?

Marc Urbach

So from an personal update Jason, it’s [indiscernible] but no to saying that that we should mention Kevin Lin how you cover that for us. I think Kevin has been great like you said was the Huawei deal he’s been helpful, because obviously we’re very comfortable with him and he stand for what we’ve been looking for and understand what – he gives us better look into what they want. So he’s been great. As far as our hires what we are looking all the time and we are taking all the expense we’re going to hire smartly. We have a big board meeting coming up next week in China where we’re going to kind of look through who makes sense and who doesn’t and we’ll also make sure that we will fill the needs we have in the smart way and a smart cost structure and what makes sense potentially for us.

Unidentified Analyst

Great, great. And just looking at the landscape you’re having a new board and new investors, are there any control issues between the China office and the New York office and how can you help us to understand how those two work together?

Shane McMahon

Hi, it’s Shane. There is no wishes whatsoever, we’ve been working together for quite sometime and has now expanded with the new board and C Media been involved, it’s really helped us. Part of the strategic plan when we created You On Demand from [indiscernible] was to incubate it here in New York, make it grow and then start putting more operational aspects in China obviously what makes sense because that’s where we do our business. And then we start building the team around that. So things have been going very well. Marc and I work around the clock. We like to say You On Demand is a 24x7 shop. Weicheng is anchoring the team at Beijing. Marc and I anchor the team here at New York and we obviously overlap from a time stamp point. So things are going extremely well and like Marc said, we have a board meeting coming up. It will be our first in Beijing and we are very excited about that.

Unidentified Analyst

Excellent, so it sounds like you are able to leverage your opportunity by moving stuff over there and well in your cost and what not, and really towering story. I appreciate that it, that’s all I have. Thank you.

Shane McMahon

Thank you.

Marc Urbach

Thank you.

Operator

Gentleman, that does concludes the Q&A. I would turn the call back over to you, please continue with your closing remarks.

Shane McMahon

Okay, I would like to thank everyone that was on the call for joining us today. And Marc and I look forward to updating everyone on You On Demand’s on-going progress when we host our 2014 Q1 call. Thank you guys very much. Bye bye.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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