Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

China Digital TV Holding Co., Ltd. (NYSE:STV)

Q2 2010 Earnings Call Transcript

August 17, 2010 8:00 pm ET

Executives

Henry Fraser – Brunswick Group

Dong Li – President and Chief Marketing Officer

Eric Yuan – Senior Manager, IR

Zhenwen Liang – Acting CFO

Analysts

Jie Liu – Auriga USA

Mike Olson – Piper Jaffray

Philip Wan – Morgan Stanley

Wallace Cheung – Credit Suisse

Operator

Good evening and thank you for standing by for China Digital TV’s second quarter 2010 earnings conference call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Henry Fraser from Brunswick Group.

Henry Fraser

Hello everyone and welcome to China Digital TV’s second quarter 2010 earnings conference call.

The company’s earnings results were released earlier today, and are available on the company’s IR website at ir.chinadtv.cn, as well as on newswire services. Today, you will hear from Mr. Dong Li, China Digital TV’s president, who will give an overview of the quarter, followed by the Company’s head of investor relations, Mr. Eric Yuan, who will discuss business updates and financial results. After their prepared remarks, they will be joined by China Digital TV’s acting chief financial officer, Mr. Zhenwen Liang, to answer your questions.

Before we continue, please note that the discussion today will contain certain 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 results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our registration statement on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. China Digital TV 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 China Digital TV’s investor relations website.

I will now turn the call over to China Digital TV’s president, Mr. Li.

Dong Li

Thank you, Henry. Hello everyone.

We are pleased to deliver strong financial results for the second quarter. Net revenues were $19.1 million dollars and we shipped 3.61 million smart cards over the quarter, both exceeding our high-end guidance. And we continued to capture market share -- achieving 55% market share in smart card shipments during the quarter, according to a third party market research firm. Also during the second quarter, new government policies and implementation guidelines continued to shed more light on cable network consolidation and three-network convergence.

Overall, the industry has begun to move beyond the “wait & see” attitude which slowed down the TV digitalization process last year. As a result, we are seeing accelerated cable network consolidation and increased investments by cable operators in TV digitalization projects. At the beginning of 2010, SARFT and other relevant governing bodies required that by the end of 2010 each province must establish a provincial-level cable operator. This provincial operator would gradually acquire local operators, eventually leaving only one cable operator in each province. To date, 19 provinces have established provincial-level operators, and the remaining 12 are preparing to do so.

Regarding three-network convergence, SARFT announced in June the first group of 12 cities that will participate in pilot schemes for the convergence project. These include first-tier cities such as Beijing, Shanghai and Shenzhen. In these pilot cities, cable operators and telecoms companies will be allowed to expand their scope of services and enter each others’ market spaces, providing triple-play services which bundle video, voice and internet services on a single network. Cities not involved in the pilot schemes will be keeping a close watch and innovative business models emerging from the pilot program may encourage cable network upgrades.

This is a very exciting time for China’s TV industry. We expect that the improved policy environment will continue to drive digitalization through the second half of 2010, and will drive demand for advanced technologies and premium content across multiple media platforms in the medium to long term. As the industry leader, I am confident that, by executing our strategy of enhancing our content protection business while investing in new businesses, China Digital TV will be well positioned to maximize opportunities during this next stage. I will now hand the call over to our head of investor relations, Eric Yuan, who will discuss operational developments in detail.

Eric Yuan

Thank you, Mr. Li. Hello everyone.

To expand on some of Mr. Li’s points – we are pleased to see that smart card shipments and revenues have recovered over the past three consecutive quarters from a low point in the third quarter of 2009. We believe that in the second half of this year, operators will continue to actively invest in TV digitalization projects and we are optimistic about shipment demand. Average selling price, or ASP, was largely stable in the second quarter at less than 1% below the Q1 level. We are confident that any ASP decrease in 2010 should be contained within our previous forecast of 10% below the 2009 level. Furthermore, we are excited to see that we are widening our market share gap with competitors.

Now, I’d like to take you through the progress and plans from our different business segments. First, we commercialized a new product for our CA business in China – the “all-in-one” single-chip solution, which we first mentioned last quarter. The “all-in-one” single-chip solution will effectively reduce set-top box production costs and facilitate convenient functionality upgrades without the need for the boxes to be replaced. This solution should meet the needs of cost conscious operators as well as makers of TV sets with preinstalled STB. We expect that this new product will generate moderate revenue in the second half of 2010.

We continue to invest vigorously in new businesses, through both R&D and opportunities to co-operate with other players in the industry value chain. On the content security front, we’ve expanded our R&D efforts to develop products for the IPTV platform. And in terms of value-added services, we are now narrowing our focus and exploring business models for offering video-on-demand services, TV gaming, and movie rental business. We are also developing an advanced interactive TV system backed by cloud computing technologies and expect a beta system to be deployed across a few trial sites by the end of the year.

Moving to our international markets - encouraged by our progress in Venezuela, we will keep increasing our sales efforts in Africa, the Middle East, and other Latin American markets. We will keep you updated on any major contracts signed over the remainder of 2010. Before going into financial highlights, I’d like to say that, while we are encouraged by the signs of healthy growth in digitalization in China, visibility is still limited since there are uncertainties relating to the changing industry landscape primarily caused by the ongoing consolidation among local cable operators. For the rest of the year, we will continue to focus on increasing operational efficiency through prudently managing operating expenses. We added 20 new hires in the first half of the year, which is less than 5% of our total headcount. Looking forward, we will continue to selectively hire talents to support our growth objectives.

Now, let me take you through financial highlights for the second quarter of 2010. Before I proceed, please note that, unless stated otherwise, all amounts are in US dollars. China Digital TV shipped approximately 3.61 million smart cards in the second quarter of 2010, a record for quarterly shipment in the Company’s operating history. As a result of strong smart card sales, net revenues in Q2 increased to 19.1 million, up 31.1% from last year, and 36.4% from last quarter. Revenues from our top five customers accounted for 28.9% of total revenues, compared to 27.1% in Q1 this year.

In Q2 2010, the average selling price of smart cards decreased by 0.8% compared to the first quarter of 2010. The unit cost of smart cards decreased by 2.7% compared to the first quarter of 2010. Gross profit in Q2 2010 was 15.1 million, an increase of 39.3% annually and 38.6% sequentially. Gross margin was 78.7% in Q2, compared to 74% in the second quarter of last year and 77.5% last quarter. The improvement in gross margin was primarily due to higher-margin smart card sales accounting for a bigger percentage of total revenues.

Operating income was 8.9 million in Q210, while operating margin was 46.5%, compared to 39.3% in Q209 and 37.4% in Q1 this year. Net income in Q210 was 8.8 million, translating to EPS of 15 cents. Turning to our balance sheet... As of June 30, 2010, China Digital TV had cash and cash equivalents, restricted cash and short-term investments totaling 237 million. In the second quarter of 2010, cash flow generated from operations was approximately 6.1 million.

Now, let me provide our business outlook. Based on information available as of August 17, 2010, China Digital TV expects smart card shipments for the third quarter of 2010 to be in the range of 3 million to 3.2 million. Net revenues for the third quarter of 2010 are expected to be in the range of 15.90 million to 16.87 million, representing a year-over-year increase of between 31% and 39%. Thanks for listening and we will now take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from the line of Jie Liu with Auriga USA. Please proceed with your question.

Jie Liu – Auriga USA

Hi, good morning. Congratulations on the strong results and the guidance. Two questions. The first is that in the press release you’ve said something about strong second half, but there may be some policy risks down the road. Could you maybe clarify that a little bit? Are you referring to some landscape changing policy at the central government level or you are talking more about local government policies?

Eric Yuan

Thanks, Jie. The President, Mr. Li, will answer this question. (Foreign Language)

Dong Li

(Foreign Language)

Eric Yuan

So the biggest impact in the second half of this year has mainly come from the consolidation in the provincial level, because during the consolidation process, some provincial operators may adjust their business plans and there is something related with the structural adjustment. And that may affect our business in the second half.

Jie Liu – Auriga USA

I see. So it’s actually just uncertainties surrounding the consolidation process, which is not new. Right?

Eric Yuan

Yes. That’s why we say the visibility at this point of time in still limited just because of the uncertainties over the consolidation.

Jie Liu – Auriga USA

Okay, understood. Okay. Regarding your all-in-one chip solution, does any of your competitors have a similar offering? If they are going to do that, how far behind do you think they are?

Eric Yuan

(Foreign Language)

Dong Li

(Foreign Language)

Eric Yuan

So, Jie, the all-in-one chip solution actually does not have a very high entry of barrier in terms of any technology expertise. But because of our very large market share in the CA market and that this solution actually need to work with the content protection module in the set-top box, and that is an advantage we think we have to market this solution to the cable operators who are cost-sensitive and want to cut their total purchasing cost.

Jie Liu – Auriga USA

Okay, understood. Great, thank you.

Eric Yuan

Thank you, Jie.

Operator

Our next question comes from the line of Mike Olson with Piper Jaffray. Please proceed with your question.

Mike Olson – Piper Jaffray

All right. Thanks very much, and good morning. A couple questions here. First, after following for four quarters in a row now, the gross margin has been increasing for the last three quarters. Do you expect it will continue to increase because of falling component costs or will it stay at this level? Just any directional guidance you can give for the next several quarters on gross margin?

Eric Yuan

Okay. Thank you, Mike. Our CFO, Mr. Liang, will answer the question. (Foreign Language)

Zhenwen Liang

(Foreign Language)

Eric Yuan

So Mike, basically two factors affect our gross margin performance. One is the ASP of the smart cards and the other is the unit cost of our smart cards. So in our experience in the first half of this year, actually the rate of ASP decline is milder than we had expected in the beginning of the year. So for the rest of the year, I think the company is quite confident that any decrease of ASP should be content within the 10% below the ’09 level. And for the unit cost part, we think we can continue to cut down the unit cost of smart cards even though actually the downside room of the unit cost is limited. So combining these two factors, we think at least for the rest of the year, our look forward about maybe two or three quarters, I think we can keep the gross margin about at 75%.

Mike Olson – Piper Jaffray

Okay. Thanks for the – yes, that answers my question. And then one other quick question. We’ve had a couple quarters in a row now where the services revenue has been below $1 million. Should we expect that revenue line will continue to be at that level because of less system integration revenue than last year, or will it start moving higher again in the coming quarters? So basically the services revenue, will it be moving back above $1 million or are we in some sort of more permanent situation where system integration revenue is lower?

Eric Yuan

Sure. Also, Mr. Liang will answer this question. (Foreign Language)

Zhenwen Liang

(Foreign Language)

Eric Yuan

Okay. So, Mike, the service revenue in the short-term, we will not see a very substantial pickup in the short-term.

Zhenwen Liang

(Foreign Language)

Eric Yuan

Well, in the longer term, since we are now developing some new services such as we plan to actually offer the VOD content and maybe the TV games and movie rentals, which we are now doing the experimental projects, which can contribute a meaningful revenue in the long-term, but we don’t expect that those businesses can contribute a very meaningful revenue in the short-term. Thank you.

Mike Olson – Piper Jaffray

All right. That’s it for me. Thanks very much.

Eric Yuan

Thanks, Mike.

Operator

Our next question comes from the line of Philip Wan with Morgan Stanley. Please proceed with your question.

Philip Wan – Morgan Stanley

Good morning, Mr. Li, Mr. Liang, and Eric. Thanks for taking my question, and congrats on the very strong quarter. And I just want to follow up on your new business. And based on your estimate, at what point should we see VAS start to pick up? And when will you start offering the services such as video-on-demand and TV gaming, as you stated earlier? And which service do you see with the highest potential to become a key revenue driver in this area? Thank you.

Eric Yuan

Okay. Thanks, Philip. I think our President, Mr. Li, will answer your question. (Foreign Language)

Dong Li

(Foreign Language)

Eric Yuan

So actually, when we talk about new business, we talk about two fronts. One is actually related with our core content protection business. Actually we are now developing a new product, which can be used beyond the cable platform. As I mentioned, the new CA products can be used in the IPTV and mobile TV platforms.

Dong Li

(Foreign Language)

Eric Yuan

So actually, some entities (inaudible) entities should start in ramping the IPTV head end infrastructure construction in the rest of this year.

Dong Li

(Foreign Language)

Eric Yuan

When we talk about the VOD or the TV gaming business, it is related with the content aggregation and the distribution. So they now look good at some applications backed by the so-called cloud computing technologies, which could be popular in – could be welcomed by the Chinese cable operators.

Dong Li

(Foreign Language)

Eric Yuan

We should start some beta testing partnered with the cable companies for these new services such as VOD and the TV gaming in the second half of this year.

Dong Li

(Foreign Language)

Eric Yuan

Some of the operators actually amount the 12 cities, 12 pilot cities in the first phase of the three network conversions. And this will have a material and long-term impact to our business. Thank you. Philip, does that answer your question?

Philip Wan – Morgan Stanley

Yes, very helpful. Thanks for the insights. And I just have a quick follow-up. Regarding the projects that you currently have with the Tsinghua University, what is the duration of the project? And is the investment cost recurring in the coming quarters?

Eric Yuan

The CFO, Mr. Liang, will answer this question. (Foreign Language)

Zhenwen Liang

(Foreign Language)

Eric Yuan

The cooperation [ph] with Tsinghua University is mainly about co-developing some interactive TV applications, which is actually in line with our long-term strategy.

Zhenwen Liang

(Foreign Language)

Eric Yuan

In terms of capital commitment, we will look at the development of what is the stage of these projects and will decide how much more time we need to contribute to these projects. Does this answer your question?

Philip Wan – Morgan Stanley

Okay, thank you. Yes. If we just look at one mid-term projection, like in the third quarter, should we expect any additional expenses related to these kinds of projects?

Zhenwen Liang

(Foreign Language)

Eric Yuan

Okay. There should be no additional investment in the third quarter.

Philip Wan – Morgan Stanley

Okay, very helpful.

Eric Yuan

No similar investment.

Philip Wan – Morgan Stanley

Yes. Thank you.

Operator

(Operator instructions) Our next question will come from the line of Wallace Cheung with Credit Suisse. Please proceed with your question.

Wallace Cheung – Credit Suisse

Hi, morning, Li Dong, Liang Zhenwen, and Eric. Congratulations on the quarter.

Eric Yuan

Hi, Wallace.

Dong Li

Hi.

Wallace Cheung – Credit Suisse

Hi. Just quickly, again on the new businesses, so do you need to seek for more partnership to involve into a lot of new businesses or do you have to hire a lot of headcount to provide all these new businesses for a lot of like cable TV operators? And the follow-up question will be, do we expect a lot of – significant cost increase in the next two quarters? Thank you.

Eric Yuan

Thank you, Wallace. Mr. Li will answer this question. (Foreign Language)

Dong Li

(Foreign Language)

Eric Yuan

I think when we’re talking about the new business, it’s more about the operation with the players in the industry valuation. I think we will be quite cautiously to add more people on our own. And so it should not incur a lot of additional costs in the near-term.

Wallace Cheung – Credit Suisse

Thank you. Just to be more precise, like one new business like the TV gaming, as an example, like that, so many on that game operators in China. Right? And we have a new platform, the cable TV, IPTV platforms. So are we going to build like STBs, trying to build something like technologies, (inaudible) chip set to line up the online game players – I mean, the operators, with the cable TV companies at the same time? Can you give us more details about it?

Eric Yuan

Sure, Wallace. Mr. Li will answer this question. (Foreign Language)

Dong Li

(Foreign Language)

Eric Yuan

Okay. So in regards to the TV game business particularly, actually we think our advantage is that we have a very extensive network and the cooperation – relationships with cable TV operators. And we have some technology expertise in the content protection and the content distribution. That is our advantages. But we won’t actually develop the game titles ourselves. And in that front, we think we will call operators with some incumbent game developers. It’s including the domestic online game operators.

Wallace Cheung – Credit Suisse

Just to be more precise, have you found any partnership already or do you have any testing CDs in China trying out the TV gaming business?

Eric Yuan

(Foreign Language)

Dong Li

(Foreign Language)

Eric Yuan

Yes, we are negotiating some cooperation – potential cooperation opportunities with I think the market for online game operators.

Wallace Cheung – Credit Suisse

Okay. Thanks very much for your answers and congratulations on a great quarter again. Thank you.

Eric Yuan

Thank you so much, Wallace.

Operator

We have no additional questions at this time. I would like to hand the call over to Mr. Eric Yuan, China Digital TV’s Head of Investor Relations, for closing remarks.

Eric Yuan

Again, thank you for joining us today. If you have any further questions. Please do not hesitate to contact our Investor Relations team by sending an email to ir@chinadtv.cn. Thank you.

Operator

Thank you for attending today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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

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

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

Source: China Digital Management Discusses Q2 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts