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

Q1 2014 Earnings Conference Call

May 15, 2014 4:30 PM ET

Executives

Jason Finkelstein – Director-Strategy and Investor Relations

Shane McMahon – Chairman

Weicheng Liu – Chief Executive Officer

Marc Urbach – President and Chief Financial Officer

Analysts

Jay Srivatsa – Chardan Capital Markets LLC

Operator

Good afternoon, everyone and welcome to the YOU On Demand 2014 First Quarter Investor Update Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

At this time, for opening remarks and introduction, I would like to turn the conference over to Jason Finkelstein, Director of Strategy and IR at YOU On Demand. Please go ahead, sir.

Jason Finkelstein

Thank you, operator and good afternoon, welcome to our first quarter 2014 earnings conference call. Joining me today, I’m pleased to have Shane McMahon, Chairman; Weicheng Liu, CEO, Marc Urbach, President and CFO.

We announced our financial results for the first quarter at approximately 4:00 P.M. Eastern Time today. The Q1 financial results and the webcast of this call are also available at the company’s corporate website at corporate.yod.com. One Shane, Weicheng and Marc complete their prepared remarks; we will open up the lines to analyst questions and then for the first time, starting with this quarter’s earnings call, continue the Q&A session with questions received via e-mail, both prior to and during the call.

As previously instructed, in our earnings call, dial-in information press release, please e-mail questions to ir@yod.com, and we will do our best to address as many as possible time committing. The webcast of today’s call will also be archived and available in the Webcasts and Events section of YOD’s corporate website for a minimum of 30 days.

We may need forward-looking statements during this call, regarding the company’s future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. These 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.

All information discussed on this call is as of today, May 15, 2014 and YOU On Demand undertakes no obligation to update any statements or expectations from prior conversations.

Regarding today’s agenda, Shane will begin with a quick overview of business development and our outlook for 2014. Weicheng will discuss our strategy and services and Marc will cover our first quarter financial.

Shane McMahon

Thank you, Jason and good afternoon everyone. And I’m pleased to introduce YOU On Demand’s CEO, Weicheng Liu who is joining us on our earnings call for the first time. And we all appreciate his efforts in joining us at 4:30 in the morning in Beijing.

We will get to the CEO and CFO remarks momentarily, but I wanted to briefly begin with some business development news, as well as the initiation of top line revenue guidance for 2014. Since its inception, when Weicheng, Marc and I started YOU On Demand, it has always been the company’s business plan to be on numerous platforms. we have been very fortunate that YOU On Demand has been able to expand this distribution platform into the IP TV, OTT and mobile spaces.

As we began to take full advantage of our new distribution opportunities, you will note later when Weicheng and Marc speak that we are more thing as a company and refocusing our efforts to bring the best end user experience to our customers, no matter how they act as a platform.

As it pertains to cable, we have had a much lower growth than originally anticipated, which Weicheng will speak to in a few moments. We continue to have our sales team target the numerous fragmented digital cable operators in China, so that we can further expand our range and prepare for the future as digital cable matures.

On the mobile side, which has now become a big focus for us, we have a two-pronged approach. first, is our agreement with Huawei, which allows us to get our App Free, installed onto a limited number of their smartphones including the Huawei Mate.

Huawei has been very pleased with those initial results, feedback from Huawei is that our video content with its progressive downloading in high-quality, as well as the best-in-class. We are currently in discussions with Huawei to further extend our relationship again, our service included on a lot more of their hardware by the end of this year 2014.

As I’ve been targeting mobile devices manufacturers directly, we have also been working diligently to partner with the telecom operators. In this scenario, we would bundle our service with our data or service plan. We are in the midst of an ongoing trial of our mobile and IPTV multi-screen service with a big Chinese provincial operator.

One slide, this will be a multi-screen service whereby people can sign up for our mobile service and be able to watch movies, not only on their smartphones, but for additional price under big screen TV at home via IPTV. We are anticipating to sign a full-fledged commercial agreement shortly and we will update investors accordingly.

On the OTT and internet TV side, we currently announced the launch of our service of the Xiaomi Box, as part of our OTT deal with Future TV. the user interface is beautifully designed, robust and very easy to use.

Our service has already rolled out to 1 million Xiaomi Box devices and that number will grow with additional sales of their box. In addition, as future TV expands their reach. We will look forward to ways to our corporate our service across more OTT as well as Internet-enabled televisions, some of which will be announced in the coming weeks.

With all that being said, we now feel comfortable, providing top line revenue guidance of $3 million for 2014 with revenue coming from multiple sources including digital cable, IPTV, mobile and OTT.

Before I turn the call over to Weicheng and Marc to provide, excuse me – much more detail about our company’s refocusing efforts, I wanted emphasize the potential size in the markets we are targeting, specifically with mobile and OTT.

China has nearly 1 billion mobile phone users and roughly 40% of them are already using smartphones. we believe the rest of the population will continue to make the same transition as faster 4G services rolled out and more affordably price, smartphones price below $50 come onto the market.

As far as OTT and Internet TV are concerned, China was some to over 618 million Internet users at the end of 2013 of 9.5% over 2012. So the market continues to grow in a very healthy rate. for a quick comparison, there are about 260 million Internet users here in the United States.

With that, I would like to turn it over to Weicheng, as he explains our plan to convert the users behind these numbers into You On Demand subscribers. take it away, Weicheng.

Weicheng Liu

Thank you, Shane. Well, so far, 2014 has already proven to be a busy year for us. our multi-platform strategy includes mobile, OTT, IPTV and Digital cable. However, as investors are aware. As on sale only recent fully we were operating gsoly in the digital cable space. Essentially as the B2B company.

By business-to-business, we mean that well, our service essentially makes this way that downstream to the Chinese consumers. YOU On Demand is essentially selling its service to Chinese digital cable companies who in turn are controlling the distribution and the marketing of our service in the ways they assisted.

In addition, because the B2B model, with the government owned digital cable space doesn’t provide us or entitle us to have that direct relationship with the end-users. We are not able to get access to the Holy Grail, the user data.

As we have been learning, we need to own the YOU On Demand customer experience from the moment, the signup for the entire time they are with us and be able to do so across multiple strengths, for mobile handsets and tablets to the big screen TV. This way, we will be able to better choose to tailor content to put on our platform. This valuable information will also help us determine how and where to best market our service, or determine which demographic is watching what, when and how. We can therefore make better informed strategic decisions that will allow our service to penetrate the market and help our subscriber numbers grow.

So well the digital cable space continues to slowly gain some steam, we have quickly and decisively turn both our attention and more company resources to the booming mobile, OTT and Internet TV spaces in China, with our new business to consumer model.

With this top ones YOU On Demand has the opportunity to communicate with and better serve our customers and end-users directly. This is a powerful opportunity in this age of the social media, social engagement and a data driven decision-making and is crucial to the future success of YOU On Demand.

As mentioned in the past, our strategy is to operate a successful multi-platform and a multi-screen entertainment distribution service. Our overall performance was largely driven by improving recognition of the YOD brand, which we are working diligently to be anonymous in the mind of the consumers with quality of programming and unparalleled voice.

The market for video entertainment is subject to continuous change and aggressive competition. Our primary competitors include companies that operate online video voice type in China, such as iQiyi, Youku, Tencent and Sohu. They all carry a very large amount of the video content, including Hollywood and domestic movies and they compete on the variety and freshness of the content, in order to drive Internet traffic to their websites. However, there are true customers are advertisers not the end-user consumers, this is where YOU On Demand is differentiating itself and where I would like to go into a bit more detail.

We are focused on creating the number one destination for true movie fans, that means no advertising interruptions, superb video and audio quality through the best and highest of performing content delivery networks and user interface that is truly best-in-class. Our service is a simple (indiscernible) one-stop shop for all things movie-related in China.

And what differentiates us from the aforementioned competitors is that we are empowering the user to extract value from our new lease in whole new ways. and at the same time, YOU On Demand will be extracting data from users. so we can better serve them in all aspects. We have been investing in research and development and have created some broader innovative technologies to provider consumers on unprecedented and unparalleled content consumption experience.

For instance, we have created the (indiscernible) technology that allows opinion leaders and more advanced users to create so-called layer-based, time-based and understanding-based commentaries and a fun fact that they can share with friends over the popular social media problems.

With all these new innovations built into our services, we aim to be the destination for movie pass, where subscribers to our service, not only come to watch the actual movies, but also to participate with other movie pass on a social level. And at the same time, further promote the value of the YOU Cinema movie services.

In summary, our company is transitioning from a pure content aggregation of distribution business into a business that was built around all things movie-related with innovations that are changing the way; people consume company to social connections among movie pass, also with the healthy balance sheet, including good cash position, and no debt. On our targeted operational expense reductions, we have the financial flexibility, invest in and to support our reposition business and to leverage our resources in a more focused and efficient manner around our growth initiatives.

Looking forward, I’m confident in what we are bringing to consumers and the strong connections we are making with them. I like where we are better yet, I like we will head it.

I’d like to turn the call over to Marc for our financials.

Marc Urbach

Good afternoon everyone. I’m going to summarize YOD’s financial and operating results for the 2014 first quarter and provide you with a brief update on our capital structure.

Revenues for the period ending March 31, 2014, were $138,000. as you recall, we launched YOD cable VOD business last year and revenues during that period were negative above expected, not only, was our brand name new customers, but the idea of offering movies on a transactional subscription basis in our mobile cable was very new concept in China. As pioneered, we also added challenge of educating our China-based MSO partners of our marketing best practices to help drive additional customer awareness and demand.

Prior to these challenges, there could be gaining factors for cable distribution, but we do continue to believe in a long-term liability in this platform of our business. It is important to keep in mind that we have a multi-platform strategy and the company’s recent entry into mobile space has been well received by consumers, as well as by our hardware and handset of Huawei. We also are getting traction in the OTT and IPTV sectors, is evidenced by the recent China news. As you know, we’re building unique brand and increased usage and experienced way of content and increasing months are all positive for YOD as we move forward.

Turning back to Q1, our gross loss amounted to $738,000, down from $848,000 the prior year. Moving down to income statement, we continue to be very mindful, keeping corporate overhead at minimal levels and 21.8% decline in total operating expenses to $102 million reflects success of the strategy. We’ll continue to focus on achieving maximum operating efficiency and strive the best line past levels YOD’s three months corporate structure. We reported reduced operating loss of $2.7 million, down from $3.4 million in the prior year-end. Our loss from continuing operations was $7.5 million, while overall net loss was $23.6 million was impacted by several one-time non-cash items, including the $16.4 million non-cash beneficial conversion feature incurred as part of our Preferred Series E share sale, as well as changes in the fair value of warrant liabilities and contingent consideration.

Just to reiterate the beneficial conversion feature over the non-cash charge relates to clients based on the GAAP requirements. The reported per share loss was $1.48 on fully diluted basis. Despite the relatively slow start to Q1, we are getting positive momentum in the first half of Q2 and as Shane mentioned, we are not comfortable using top line guidance of $3 million for the full year, up significantly versus less than $500,000 generated in all of 2013.

We believe that that was in revenue guidance provides investors with clear picture of how we see the balance of the year playing out and also reflects our growing confidence about the company’s multi-platform strategy indeed taking home. As mentioned on last quarter’s call, team leader’s increased capital investments resulted in a much stronger balance sheet. I mean R&D team has made significant technological contributions for us, including the special launch of YOU Cinema app on Huawei Mate. We do target achieving cash flow positive status during the first half of next year and will remain a lean corporate overhead run rate of approximately $8 million in insurance.

This concludes the management team’s prepared remarks. I’d like to turn the call back to our operator and open up the line for your questions. As a reminder, [Audio Gap] web questions at ir@yod.com.

Question-and-Answer Session

Operator

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

Jay Srivatsa – Chardan Capital Markets LLC

Yes, yes, thanks for taking the question. In terms of the guidance for the year, can you give us some sense on how to break that between the mobile and cable side of the business?

Marc Urbach

Sure.

Weicheng Liu

Jay, this is Weicheng. While for the moment, I thinks in terms of revenue, it is going to be probably for a short-term let’s say next three to six months, is going to be still half-half but beyond that I would see mobile OTT picked over run the cable side by probably very, very large market, because in the mobile side, if the growth is very, very high.

Jay Srivatsa – Chardan Capital Markets LLC

Okay. Focusing on the mobile side, given the differentiation that you highlighted in your script Weicheng, can you give us some sense on how the customer reception has been, now that you have the Huawei made out and what do you expect to have change to or tweak in order to make it more successful going forward?

Weicheng Liu

Yes, a very good question. Our Phase 1 [Telenor] (ph) rollout our mobile app on Huawei’s Mate found was purposely designed in such a simple way. So, we can capture users’ feedback and requirements. For instance we purpose the limit number of movies made available to this mobile consumer two movies per week. So, we can concentrate on things like how do they react long-form views and they were high quality progress of downloading feature building to that service and et cetera, there are many other sort of aspects of that service. And together with Huawei, we have done two rounds of user service. Without third one, the result of third one just came in early this morning is all (indiscernible) very, very useful user feedback and overall as very positive, very encouraging.

I can share some numbers here. Number one, the activation rate of the mobile app is more than 70%. So, people do like be able to conceive movie contents in such hand be a convenient way. And number two, this is going to surprising to everybody, 41% of the people actually finishing watching the entire movie on their large screen smartphone either, continuously or a multiple sessions or in multiple views. Early this morning, the napper came back well as the in third round of survey.

This was more focused on how likely people are willing to pay for the service 47% of the people responded, they would pay yes of course, (indiscernible). They laid down things like, what they like, what they did like, which is all very encouraging. That leads to a very detailed discussion with Huawei about a much broader kind is the rollout plan other Huawei phones.

Jay Srivatsa – Chardan Capital Markets LLC

Very good. So realistically, as you look at the end of the year how many forms beyond the Huawei Mate, do you expect to be able to be involved in?

Unidentified Company Representative

The current discussion is all around what Huawei decided is that discounts may selling like regard, like large number of phones like they plan to shift 80 million plus mobile phones worldwide for this year. And within that there is a special line-up product to Honor Series phones which is perfectly design for into that online marketing and distribution. This is per align we are looking at small number of models. As probably something like three, four models were focused and targeting in selling, selling mainly in pieces by the year-end or for next 12 months. And so, our product likely to be made available with those models.

Jay Srivatsa – Chardan Capital Markets LLC

All right. Thanks. I think Shane touched on the initiative that you are working with the telecom operators. Could you expand on that let us know how business model works with the telecom operators versus it means that Huawei type of customers.

Unidentified Company Representative

All right. With the telecom operators, we are indeed engaging with multiple (indiscernible) including sort of name in it sort of any rollout with one provincial operator where we not only have that mobile service, they also involve like a second screen offering on the big TV screen. With the mobile operators, we still had with the run to service as a B2C service, even Internet – sort of the mobile Internet that the nature of the mobile Internet, is opened as longer like picture contained within the cellular data network. In the mobile Internet space, now things are open, right, and people actually, 90% of the time they consume mobile phone video over at a Wi-Fi network, but they do need some of our data when they set down trend or they are in times there.

So that’s why I call, that’s where call it there is a nice (indiscernible) synergy for us to work together with the mobile operators, plus their marketing capability, their ability to collect money. But this is kind of a new model where we run the service end-to-end to integrate the billing with their back-end systems. So the mobile operators will be doing, number one, marketing the service to their mobile users; number two, collect money and in that way split, the billing, subscriber management is all time by us.

Jay Srivatsa – Chardan Capital Markets LLC

Very good and when do you hope to launch some of those services with the mobile operator?

Unidentified Company Representative

Well we’ve been in trail with one prudential operator already for several months their of course as you can understand but are cautious when you’ll face multiple millions of consumers, they’re very cautious about service quality, the support and everything. We have gone through several hurdles and uncomfortable with – we will definitely commercially launch in the service probably within two to three months or even sooner.

Jay Srivatsa – Chardan Capital Markets LLC

Okay. Last question from me, Marc you mentioned cash flow positive in Q1. What level of quarterly revenue run rate do you have to get to achieve that?

Marc Urbach

Excuse me; let’s turn to second slide.

Jay Srivatsa – Chardan Capital Markets LLC

Yes. the question was you motioned cash flow positive by Q1 of 2015, what level of revenue run rate on a quarterly basis do you need to hit to get to that?

Marc Urbach

Sure, we need to get with our, taking into account minimum guarantees and our other function costs that we have to pay this year, we have to get to about $3 million per quarter around to get to cash flow break-even.

Jay Srivatsa – Chardan Capital Markets LLC

Very good. Thank you. Good luck.

Unidentified Company Representative

Thank you Jay and thank you operator. Now let’s move into question that have been e-mailed to us by investors both before and during this call. As of your standard practice from this call going forward we’ve organized the questions by topic as we receive them.

Unidentified Analyst

First question, can you get into some detail on the marketing efforts being done, specifically as it relates to Huawei and mobile?

Well, we are working very closely for the Huawei, both on the product design, product respondent, as well as marketing. Huawei has a (indiscernible) what do we call (indiscernible) program were to have somewhat seven million to ten million what they call Huawei (indiscernible) and we market Huawei to people plus, we do things like promotion, marketing. I’ll give you one example, Transformer 4 is going to be heading Chinese theatre in the mid or late June and we’re to get Transform 1, Transform 2, Transform 3 ready. So, when people prepare to go watch this big blockbuster movie in the theatres, of course, we remind them, hey we have something if you want to go back and revisit or you never get chance to watch the very classic Transform 1, Transform 2, and Transform 3. That’s could just one we can answer, we can do definitely, we can do it a lot more than that.

Unidentified Analyst

Great, thank you. Can you provide more color on the UK’s rollout, are you still on target for (indiscernible)?

Unidentified Company Representative

Right. While your kids were working around the clock to get our product together. We have a very high standard (indiscernible) quality standard for ourselves. We have some amazing contents beyond that we are working with our partners and prepare for it service launching by end of the year. We’re on schedule, it’s a very ambitious plan, but I’m confident we will get there.

Unidentified Analyst

Great. Next question, there has been some high profile M&A investment activity in this space recently, can you comment on any interest in YOU On Demand by third parties.

Unidentified Company Representative

So, I can answer that. Obviously, we’re keeping close look in all the consolidations and different back positions are happening in this space. We’re certainly always open to listening to all sorts of potential partners than we have actively speak other partners out, but until there’s something eminently happening, we don’t necessarily provide the information on [Telenor] (ph).

Unidentified Analyst

Thank you. Next question, obviously there are well capitalizing very well established Internet video providers who provide ad-based content, can you explain how your service differs and how you think you can be successful against them.

Unidentified Company Representative

All right. I think we have touched this subject from the in the different sizes also by Shane and myself in our previous [Telenor] (ph) global presentation to the audience. Number one, and I think if you look at it, our position is different, right. Most of this, well literally everyone of this big Internet giant, they are very much a video media platform. Or they have to load nil a lot, lot of video contents because they have to satisfy their literal customers, the advertisers who are selling predicting I think from new cars, baby scoot you name a number of things. Now, that’s why when you look at their financial reports the one thing they report at the top ten customers, advertisers, right.

Then because of that they have to maintain a balance between the money they spend on (indiscernible) creating the superior user experience also we are doing and the cost where the money they can generate on the advertising site. And for while they refocus on providing the best possible service to the people who are willing to pay for our service. So, the model is temporary right, our cost can be easily contained as proportion to anyway, because of that – that is also the reason why Huawei choose to work with us, right. And we targeting let say 3% of the population so called up in a leader and the 20% of the movie fans or moviegoers and they target literally in a 110% of the people, because they can got out to watch anything under the platform in order to you get there customers pleased.

So, that’s it number one different. Because of that, we can focus on very different user experience and our new model its also different right. We not 100% just rely on the content itself we cover eight bunch of services. We basically selling let say a membership service people sign-up and then they can enjoy. The content will provide let say down the road pretty soon. People can buy movie tickets and select their seats on our mobile app. They can do a lot of things, they enjoy things movie spend games and all making friends within this circle, find common interest and so on and any other balance things we can do. So our focus to serve our target users.

Unidentified Analyst

All right. Great. Two more questions. Is domestic cup Chinese content also being offered on mobile and OTT?

Unidentified Company Representative

Yes, in short answer, yes. We are actually increasing the efforts to get the cover closer window, newer titles from the Chinese movie studios.

Unidentified Analyst

Great. I have last question this is for Shane. Did you on demand have any ideas about providing super views sport event it’s mainly in China market and so how long my such plans take materialize.

Shane McMahon

Well. First and foremost again we are focusing on movie content. Once we have the movie content done. Then, we will when they have the distribution platforms and the service being used more readily and more accessible. Then we will start to add all different types of content, which would also includes sporting events what have you such as WWE potentially MMA et cetera.

Operator

Great, thank you all. That’s all the time we have for questions today. Shane, would like to make any closing remarks.

Shane McMahon

Just I would like to thank everyone for joining us today. We are extremely excited and confident about the direction of the company is headed. And again I want to thank investors both past and present who have been part of our growth, and their supporting us. And Weicheng, Marc and I look forward to updating all of you on YOU On Demand’s ongoing progress when we host our 2014 Q2 call. So, like to say thank you again. And have a good evening.

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