China Digital TV Holding Co., LTD. (NYSE:STV)
Q1 2014 Results Earnings Conference Call
May 20, 2014, 08:00 PM ET
Nan Hao - IR Manager
Yi-Ke Hong – Brunswick Group LLC
Dong Li – President
Good evening and thank you for standing by for China Digital TV’s first quarter 2014 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 will now turn the call over to Yi-Ke Hong of Brunswick Group.
Thank you operator.
Hello everyone and welcome to China Digital TV’s first quarter 2014 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 investor relations manager, Mr. Nan Hao, who will discuss financial results. After their prepared remarks, they will be joined by China Digital TV’s 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, the company’s results may be materially different from the views expressed today.
Further information regarding these and other risks and uncertainties is included in the company’s 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. Dong Li.
Mr. Dong Li
Thank you, Yi-Ke. Hello everyone and welcome.
Let’s start with a brief overview of China’s cable TV market and China Digital TV’s first quarter performance.
In the first quarter of 2014, China’s rural markets continued to be a key driver of demand of smart cards. While we saw normal seasonal slowness as a result of the Chinese New Year, there was steady overall demand during the quarter on an annual basis.
According to Zhongguang Luoda, during the first quarter 2014, total cable digital TV users in China increased by 7.1 million to 178 million, with the household penetration rate reaching 84.8%. Within this increase, there were 6.4 million people who are new users of digital cable TV, with another 770 thousand buying second terminals. This growth was slightly slower than Q4 2013, due to seasonal factors, which primarily affected the speed of households adding second TV set top boxes.
I would also like to update you on our participation in the China Content Broadcasting Network Exhibition during Q1. We were pleased that cable operators showed strong interest in our DVB+OTT solutions, our cloud computing platform, and our other new businesses. We believe that cable operators’ cooperation with OTT providers and cloud service providers is the result of challenges they are facing from IPTV and OTT services, providing us with additional opportunities. According to Zhongguang Luoda, overall during the first quarter, IPTV and OTT users increased to 31.6 million and 33.5 million respectively, including 3.2 million and 4.8 million new users, respectively.
Let’s now discuss China Digital TV’s first quarter 2014 operations.
In Q1, we shipped a total of 3.56 million smart cards, in line with our expectations. This relatively steady performance was largely driven by demand from our biggest customers in Jiangsu, Jiangxi, Guangdong, Sichuan and Zhejiang provinces. Our sales team continues to look for ways to capture opportunities in areas of China where digitalization has not yet been completed. For example, in Q1, we won a contract for a Gehua CA project. As a result, we expect the use of China Digital TV smart cards in the ongoing transition from standard definition TV to HD TV in Beijing, as well the completion of the conversion to digitalization for users who have not yet done so. Currently, there are 5 million cable TV users in Beijing, of which 3.8 million are using high definition digital TV, leaving more than a million that still need to be converted.
I’m also pleased to tell you that during the first quarter we secured a 52% market share in China’s digital cable sector, according to Zhongguang Luoda, continuing our long-term leadership position in the Chinese smart card market.
Intelligentization and the drive toward set top boxes replacement continue to show good long-term potential for our domestic smart card business. Further, we also view the continued move toward multiple TV set households as a positive tailwind for us.
With regard to pricing for smart cards, in the first quarter ASP continued its steady downward trend, decreasing by 7% sequentially, in line with our expectations. This was mainly attributable to operators adjusting the unit price of smart cards in the first quarter. We expect that unit prices will continue to be adjusted in Q2 and that it will reflect an approximately 7% decrease in ASP for the full year 2014.
Turning now to International Markets…
I’m pleased to tell you that we continue to make very encouraging progress internationally. We are seeing good demand from Myanmar, Thailand and Taiwan, with additional contracts signed with countries in Central Asia and South America. We believe that China Digital TV’s experience in the smart card market will position us well to compete beyond mainland China.
Looking at Value Added Services…
We made strong progress in the area of value added services, or VAS, this quarter. China Digital TV signed cloud computing strategic agreements with cable TV operators Beijing Gehua, Jishi Media in the areas of cloud games, and OTT multi-screen interactive offerings. These cooperative efforts will help us bring user experience in the areas of gaming, somatic gaming and education applications to a new level and further strengthen our TV services. We have already begun system deployment and expect the roll out to begin during the second quarter. Meanwhile, we also signed contracts with cable operators in Hebei, Anshan, Ningbo, Hunan and Chongqing. Most importantly, in Q1 we began signing contracts with IPTV operators in Fujian, Hebei, Guangdong and Shandong. In total, to date we have signed contracts that potentially cover up to 60 million cable TV users, and 8 million IPTV users. We believe this is a promising development in our cloud computer offer and an indication of the strength of our reputation in the market.
In addition, our collaboration with Xiaomi continues to go well. The strategic cooperation focuses on Jiangxi and Chengdu, and is part of our overall plan to develop our DVB+OTT to smart TV efforts.
With a solid base of demand for our smart cards at home, the developing prospects for the international smart card market and the continued strengthening of our value added services offer, we believe that China Digital TV is well positioned for future growth.
I will now hand the call over to Nan Hao, our investor relations manager, to discuss our financial management.
Mr. Nan Hao
Thank you, Mr. Li. Hello everyone.
Turning to the financial highlights for Q1. Please note that, unless otherwise stated, all monetary amounts are in US dollars.
In Q1 2014, China Digital TV shipped approximately 3.56 million smart cards, compared to 3.72 million for the same period in 2013 and 4.95 million in Q4 2013, for reasons we’ve just discussed.
Net revenues in Q1 2014 were 18.2 million, a decrease of 8.7% from the same period in 2013 and a 29.8% decrease from Q4 2013. The year-over-year decrease was primarily due to decreases in revenue from the sales of smart cards and services, which were partially offset by an increase in revenue from others products, such as surface mounted chips. The quarter-over-quarter decrease was primarily due to a decrease in net revenues from sales of smart cards caused by seasonality associated with the Chinese New Year holiday.
Now let me go through the major revenue components for the quarter.
Revenues from smart cards and other products were 17.1 million, a decrease of 5.4% from the same period in 2013 and a decrease of 31.2% from the fourth quarter of 2013. Sales of smart cards and other products accounted for 92.3% of total revenues in the first quarter of 2014, compared to 95% in Q4 2013.
Revenues from our top five customers accounted for 25% of total revenues, compared to 25.8% in Q4 2013.
Revenues from services were 1.4 million in the first quarter of 2014, a decrease of 31.5% from the same period in 2013 and an increase of 8.0% from the fourth quarter of 2013. Service revenues accounted for 7.7% of total revenues in the first quarter of 2014, compared to 5% in Q4 2013.
Gross profit in Q1 2014 was 14.3 million, a decrease of 2.3% from last year and a decrease of 27.9% from Q4 2013. Gross margin was 78.6% in Q1 2014, compared to 73.4% in Q1 2013 and 76.4% last quarter. The year-over-year and quarter-over-quarter increases in gross margin were primarily due to decreases in cost of revenues, attributable to decreased inventory write-downs with respect to integrated chips and multimedia home entertainment boxes.
ASP of smart cards in Q1 2014 decreased by 7.1% sequentially, while unit costs decreased by 2.1%.
Operating expenses in Q1 2014 were 10.5 million, a decrease of 13.9% from the same period in 2013 and an increase of 3.5% from Q4 2013. The year-over-year decreases were primarily due to decreases in personnel related expenses resulting from lower R&D headcount, and allowance for doubtful accounts of G&A. The sequential increase primarily relates to increased headcount of G&A and marketing expenditure of S&M.
Income from operations in Q1 2014 was 3.8 million, a 55.9% increase from last year and a 60.8% decrease from last quarter. Operating margin in Q1 was 20.8%, compared to 12.2% during the same period in 2013 and 37.3% in Q4 2013.
Income tax expenses in the first quarter of 2014 were 0.9 million, compared to 4.5 million in income tax benefits in the same period of 2013 and 1.1 million in income tax expenses in the fourth quarter of 2013. In the first quarter of 2013, the Company's PRC operating subsidiary, Beijing Super TV Co., Ltd., was designated as a "key software enterprise" for the tax years of 2011 and 2012 by the relevant PRC government authorities and, as a result, was entitled to a preferential income tax rate of 10% in each of those years. As the Company accrued income tax expenses at a rate of 15% in 2011 and 2012, the accrued income tax expenses were partially reversed in the first quarter of 2013. The quarter-over-quarter decrease was mainly due to a decrease in taxable income.
Net income attributable to holders of ordinary shares in the first quarter of 2014 was 4.1 million, a decrease of 48.3% from the same period in 2013 and a decrease of 59.6% from the fourth quarter of 2013.
Non-GAAP net income attributable to holders of ordinary shares, defined as net income excluding certain one-time or non-cash expenses, such as share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments, in the first quarter of 2014 was 4.4 million, a decrease of 50.5% from the same period in 2013 and a decrease of 58.0% from the fourth quarter of 2013.
Turning to our balance sheet...
As of March 31, 2014, China Digital TV had cash and cash equivalents and restricted cash totaling 83.5 million. In Q1 2014, cash flow generated from operations was approximately 4.5 million.
In this quarter, we added an additional table at the end of our earnings release which provides unaudited additional information relating to the financial results firstly for our CA business, which consists of smart card products and related other products, such as surface mounted chips as well as related services; and secondly other business, which consists of other products, such as multimedia home entertainment boxes and cloud computing, as well as related services. In the first quarter of 2014, revenues from our CA business were 18.3 million, or 98.7% of total revenues, and revenues from other business were 0.2 million, or 1.3% of total revenues. Gross profit of our CA business and other business in the first quarter of 2014 were 14.3 million and 0.004 million, respectively.
Now, let me provide you with our business outlook.
Based on information available as of May 20, 2014, China Digital TV expects smart card shipments for Q2 2014 to be in the range of 3.5 million and 3.8 million. Net revenues for Q2 2014 are expected to be in the range of 15.4 million and 16.6 million.
Thank you for listening; we will now take your questions.
The question-and-answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. [Operator instructions]
There are no questions at this time. As we are now approaching the end of the conference, I will now turn the call over to China Digital TV's Nan Hao for closing remarks. Please go ahead.
Once again, thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to talking with you in the coming quarters. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may all now disconnect. Good day to all.
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