Sky-mobi Limited (MOBI) CEO Michael Song on Q4 2014 Results - Earnings Call Transcript

| About: Sky-mobi Limited (MOBI)

Sky-mobi Limited (NASDAQ:MOBI)

Q4 2014 Earnings Conference Call

May 27, 2014 8:00 a.m. ET

Executives

Michael Song - Chairman and Chief Executive Officer

John Bi - Chief Financial Officer

Analysts

Liping Zhao - CICC

Yu-Heng Fan - China Renaissance

Henry Guo - JG Capital

Operator

Good morning and good evening, and welcome to Sky-mobi’s fiscal fourth quarter and full year 2014 earnings conference call. With us today are Sky-mobi’s Chairman and Chief Executive Officer, Mr. Michael Song; and Chief Financial Officer, Mr. Mr. John Bi.

Before I turn the call over to management, may I remind our listeners that in this call, management’s prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission. In addition, any projections as to the company’s future performance represent management’s preliminary estimates and Sky-mobi assumes no obligations to update these projections in the future as market conditions change.

To supplement its financial results presented in accordance with IFRS, management will make reference to certain non-IFRS financial measures, which the company believes provide meaningful and additional information to understanding Sky-mobi’s operating performance. A table reconciling non-IFRS financial measures to the nearest IFRS equivalents can be found in the earnings press release issued earlier today.

For those of you unable to listen to the entire call, a recording will be available via webcast at the Investor Relations section of Sky-mobi’s website which is at www.sky-mobi.com.

And now, it is my pleasure to turn the call over to Sky-mobi’s CFO, Mr. John Bi. Please go ahead, sir.

John Bi

Thank you, operator. Welcome everyone and thank you for joining us. We are very pleased with our fiscal fourth quarter 2014 results.

Firstly, revenue of our fourth quarter 2014 increased RMB128.6 million, which exceeded the high end of our prior guidance by approximately 22% due to strong growth in our smartphone business.

Secondly, smartphone revenues increased quarter over quarter by almost 35% to RMB87.5 million, representing a historical high of 86.1% of the company’s total revenues.

Thirdly, on top of a sequential growth in revenues, we are very pleased to deliver an improved profitability with our gross margin expanding to 25% and non-IFRS net profit increasing by 11% to RMB8.9 million in the fourth quarter of 2014.

Finally, one point I would like to highlight in particular is that after four quarters of declined revenue, we have turned the corner and we are showing growth again in our top line. We believe that this strengthening top line growth driven by our growth in smartphone penetrations will continue going forward.

All those results were boasted by our committed focus on developing and expanding our smartphone platform over the past year. In particular, we accelerated the growth in a number of smartphone users which saw a 7-fold increase to over 147.3 million from only 20 million users a year ago. This growth was propelled by our unique multi-pronged approach for growing our smartphone user base, especially our collaborations with both telecoms operator and handset manufacturers continued to be the unique and (inaudible) drivers in attracting new users as well as facilitating our user migrations from feature phones to smartphones.

Now I would like to highlight a new update on this initiative. First, we have been deepening our collaborations with major telecom operators in China as their official business partners, to provide customized and tailor-made application installation services in the nationwide network of physical stores around China.

As of today, we are located in over 30,000 stores nationwide of both China Mobile and China Unicom with a particularly strong penetration into large provinces such as Zhejiang, Anhui, Hubei and several others. Benefitting from our expertise in mobile apps services and products which efficiently serve our partners’ customers, we continue to expand our partnerships with these telecom operators and are planning to continue to add a large number of stores to our overall distribution network.

We believe that we are building increasingly higher barriers to entry through our unique model which will further have strengthening our market leadership position. The handset manufacture industry consolidates in the 4G war of partnerships with leading handset manufacturers has become stronger than ever. The vast number of Chinese grass-roots first time smartphone users who are migrating to sub-1000 RMB 4G smartphones continue to enjoy and prefer our simplified user interface which mirrors the experience with feature phone capabilities. They also benefit from a wide array of featured products and [indiscernible] used interface.

Through those channels, we are able to continually and effectively attract new users at two different ends of the smartphone supply chain. Additionally, our diverse content offering has been increasingly recognized and enjoyed by our loyal and massive user base. Leveraging our user base and data advantage [ph] and unique payment solutions plus our ever growing distribution network of over 70 channels, including new channels such as [indiscernible] by two and others, we continue to enhance our position as a game distributor.

We are also committed to providing game developers effective and branded distribution channels plus long term profitability. One recent achievement of this is that with the Boo [ph], the first light PRG (sic) games the Well of Eternity or in Chinese [indiscernible] Apple’s App Store, which immediately ranks among top 3 free games.

Another game called Big Gaa [ph] was also well claimed a major game centers retaining a rating of 9 out of 10 from users. With these drivers, we have established a solid foundation in the smartphone market while maintaining strong cash flow from our feature phone business.

Looking forward, we remain focused on executing our smartphone strategy through first strengthening distribution effectiveness through network expansion and continuously growing the user base through offline store and pre-installed handset channels.

Secondly, further expanding our content offerings with more diversified licensed games from third party developers in China and overseas.

Finally, leveraging our sophisticated payment services to further enable monetization on smartphone platform. We believe that these initiatives will help build a part of renewed growth momentum and strong user base and a further laying the groundwork for expansion going forward.

With that, let’s go through our quarterly financials in great details. Before we get started, I would like to clarify that all the financial numbers we’re presenting today are in RMB amounts unless otherwise noted. Additionally, these costs we are highlighting, those are quarter-over-quarter and year-over-year comparisons as we feel this will give investors a full picture of all long [ph] story.

During the quarter, our total revenues were RMB128.6 million, an increase of 11.6% from previous quarter and a decrease of 20.1% year over year from RMB161 million.

Revenues from smartphone business were RMB87.5 million, account for 68.1% of our total revenues, a new record high of our company.

Feature phone business as a result of our company’s strategy of shifting the focus to smartphone markets, non-IFRS gross profit was RMB32.8 million compared to non-IFRS gross profit of RMB27.5 million in the previous quarter and RMB60.6 million the prior year period.

Non-IFRS gross margin was 25.5% compared to 23.8% in the previous quarter and 37.6% in the prior year period. This year-over-year decrease was principally due to the general decline associated with the feature phone business.

Total non-IFRS operating expenses were RMB27.8 million, an increase of 9.3% from RMB25.4 million in the previous quarter and an increase of 2.2% from RMB27.2 million in the prior year period. Excluding other income and expenses, which mainly consist of government subsidies, operating expenses remained flat due to the company's strengthened efforts in cost control.

Non-IFRS net profit was RMB8.9 million compared to non-IFRS net profit of RMB8.0 million in previous period and RMB33.9 million in prior year period.

Non-IFRS basic and diluted EPS was RMB0.04 or US$0.01 which represents an equivalent of RMB0.3, or US$0.05 per ADS.

We continue to implement cost control measures to maximize cash flow from our feature phone operations while allocating more resources to our smartphone business. We continue to maintain positive cash flow in our fiscal year 2014 and have RMB594 million in cash, bank deposits and monetary funds as of March 31, 2014.

Going forward, we will continue to invest responsibly in smartphone and maintain a strong cash balance and to leverage cash flow generated from our feature phone business to support the growth and developments for smartphone.

Turning to our business outlook for the fiscal quarter – for the fiscal first quarter 2015 ending June 30, 2014, we expected total revenue to be in a range of RMB135 million to RMB145 million.

With that, I would like to open the call for questions. Operator, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Na Yao [ph] from ICBC International.

Unidentified Analyst

Good evening, Michael, John. Thanks for taking my questions. I have two questions here. First, we noted the company reached JV cooperation with China Unicom, pre-installation applications and physical store. Could you give us more color on that, especially your unique [ph] pre-installation business, especially the coverage with major China telecom operators?

John Bi

Thank you, Na. I think we have – emphasizing the fact that we were a mobile apps platform company but – rather a game company, gaming is the most effective and proven business and the monetization models of our platform as I just mentioned several times and we will continue our dedicated efforts in order to make the platform stronger and more cohesive to monetize on the continuous growth of the user base. Well, when we talk about our collaborations of the offline pre-installations, well I think we have the primary vehicles to expand our user reach on OEM manufacturer side, the industry is going through some levels of consolidations due to the impact of LTEs. So since we have a very good working relationship with all those OEMs during the feature phone times, we still keep a very solid relation as this penetrates. Most importantly, I think when we look at the cooperation with the China’s telecom operators, the key drivers come from the [indiscernible] with all these major telecom operators, our penetration rates in the past four quarters have achieved 30% growth every quarter by quarter, reaching around total 30,000 physical stores nationwide.

Notably I think our collaborations with China Unicom had also delivered a very strong results as we just released our press release back to mid of March. So that give us another very high growth in March, we have seen a double of our physical stores penetration nationwide. So the numbers of stores is almost doubled and we think by the end of this year, we are going to reach around 100,000 physical stores nationwide. But as noted by the market, we have also established very strong partnership with BAT, Baidu, Alibaba and TenCent as their primary pre-installation channels for the grassroots in China.

You will see – as a good examples a light [indiscernible] names, you are very familiar with Fishing Joy 2, in Chinese [indiscernible] and also Landlords [Chinese], and also [Boris Landlords] [Chinese], all those popular games are in our pre-installed – so the pre-instalments volume on Baidu search and browsers, QQ browsers and other TenCent mobile managers in the past 3 months has proven we have a – we are a high value offline pre-install channels to all those big guys. So is that the answers, satisfies your questions?

Unidentified Analyst

Yes, thank you. My second question is regarding to your social games, you just mentioned that your newly launched social games called Well of Eternity and it’s doing very well on highlights [ph]. We would like to know what’s company’s view on the social game and also company’s expectations on the game’s revenue contribution? Thank you.

John Bi

Okay. So why not, let me just give the brief introductions of the Well of Eternity. Well, the Well of Eternity is developed by a world-class team specialized in the mobile game development. We have heavily involved in the very early stage of development processes, and we believe we are in the right time to acquire the exclusive license for publishing the game. Well in the perspective, that’s the first light PRG (sic) games, the game changers in the historical of proper game dominant markets, we believe it brings the most favourable and unique features of the PRG (sic) with the innovative light game experience. The revolutionary game experience makes it appealing in the market is, you will know that as we make the game much lighter, that means smaller size, low traffic consumptions and energy consumptions, as we always out of the kitties, we use the light social game. So we can perfectly in a single CPU and 200 [indiscernible] drives, all those add-up is very, very low end. So the innovative touch screen operating system also enable the MMO web game experience and the comprehensive and specialized [indiscernible] hub providing very exciting and very unique experience, also plus the signature, even those at stay hub such as PVP and PVEs, the play experience collaboratively will bring a very exciting game experience to the whole game.

So the Well of Eternity comes to app store on May 14, if I am not wrong, it was the overwhelming the favourable for our users and became the number 3 and number 6 the most download apps in the game and overall categories. So the game has achieved a phenomenal record in the PRG (sic) mobile game industries. We saw the public data shows there is a 48% of one day retention rates and 6% of the commercial rates and RMB120 ARPUs, so all those data is very, very appealing and attractive. So we are very satisfied with the results of the Well of Eternity and we also believe going forward, we’re going to sign the exclusive right of more light RPG games and also we’re going to bring all those games to our grass-roots users and enhance our more diversified content. We plan to bring those games in later quarter of this year and also we also have a plan to bring all the Well of Eternity to the Android platform the end of this June or early of July. So that is the current development of our social online games.

Unidentified Analyst

My last question is regarding to the financial impact on your mobile business because of [indiscernible], is there a new update there from the government to say that the China telecom implement value added tax nationwide, just – we would like to know what’s the financial impact on your mobile business?

John Bi

Oh, yes, that is a really very good questions. Well, we know – April 30, the ministry of finance state and the ministry of the taxation jointly announced a value added tax called the VAT policies will be implemented in the telecom industries, so effective on June 1, 2014. So to replace the previous business taxes, so the VAT rates for the basic telecom services is 11%, where the VAT rates for the value added telecom services is 6%. So since year 2012, our company internal taxation department has done a great work to study and on expanding the implementations of those new VAT policies.

So as know, our internally the business tax is a deductible of the gross revenue. After change to the VAT, net revenue is calculated by gross revenue divided by 1.06. So if we compare to historical business tax patterns, we foresee a overall decrease of net revenue after change of VAT levied reaching a range of 1.5% to 2% decrease of reported revenues in the second half of 2014. Furthermore, we anticipated an increase of gross margin at a range of 0.5% to 1% resulted by implied VAT. So that’s the overall assessments of the implication on the financials.

Unidentified Analyst

Thank you. One quick follow up on your guidance. How should we exact the company’s gross margins for the following quarters?

John Bi

Well, I think if you look at our gross margins, we do see a very specific patterns, it is a run rate. So when we tell all these financials and operationals it is the baseline, you do see we have options, we have potential hit games, following quarters, so if you look at the gross margin, it is run rate, that is a baseline story, so far we have achieved.

Operator

Thank you. The next question comes from the line of Liping Zhao from CICC.

Liping Zhao - CICC

Thank you for taking my questions. I also have two questions. The first one is related to the -- recently China launched so called clean up the internet campaign. And it is said that the next sector will be affected, will be the online games. So what’s the potential impact on the company in regards to the campaign? And my second question is related to the company’s strategy on single user game. Can you share with us the results of single user game in Q1 and what’s the recent divestment in April and May?

John Bi

Thank you for the questions. I think we all know that [indiscernible] things will be quite overwhelming in the past few months. I think the impact to our overall operation is very limited. Why? Number one, all our cooperations with the game developers and with all the channels are legitimate. Number two, our pre-install business has been worked with all the China telecom operators, that’s a very legitimate business, there is no an impact. Number three, we have long, long working relationship with all those telecom operators. So we have know exactly how to work with them, what is the best way to satisfy their requirements. So that has been same more than five to seven years experience to be in business with them. So in sum, we believe there is almost no impact to our all the new business in the (inaudible) activities. So let’s come to the second question.

So we have continued our light game strategies in a single user games. We are actively seeking mobile end games in the international market, kind of bring all those with potentials to China market. So I think as a game publishers, we have heavily involved in contributing to the game development and leveraging our long accumulated experience with all those grass roots. So with all those efforts we have yielded excellent operating results in Q1. So taking two examples of our two very popular games, one is called [Taking Breathing Sharks] and another one is Infinity Wars, the two mobile single user games distributed through our Maopao platform, those financial returns and pay you the conversion rate a high [indiscernible]. So building upon all those understandings of the grass roots through our dedicated efforts, we are able to identify the unique theme games with innovative features and deliver them in a user preferred platform such as the low data consumption and less (inaudible). So all those success have proven our strong execution and monetization capabilities that light game seems. So we have noticed the game life cycle of these two games has been extended longer than traditional two or three month period. We expected they will be around 10 months which is really because we have embedded all those consumer patterns of the grass roots in those two games and operate them very thoroughly. So to expand our reach to the entire mobile game value chains, we also published two single user games recently. One is called Big Gun and another one is called the Blood [indiscernible]. Both are exclusively published on Android platform. So we also expected a good success of these two games in near future.

Operator

Your next question comes from the line of Yu-Heng Fan from China Renaissance. Please ask your question.

Yu-Heng Fan - China Renaissance

I have one single question. So what’s the further R&D, research and development strategy for the company? Will company allocate more resources on game publishing or something related to that? Thanks.

John Bi

Thank you. I think we do have a strong presence in our game developers sectors. We do keep an in-house development team of around 50 personnel. The thing is we allocate a reasonable portion of our fortunes on the in-house R&D teams. Number one, we believe we need to have cultivate or expertise in the game – not only to buy – or only just to publish is not the whole [team we are going to foster]. So we do have that – we have that 50 personnel in-house team and we are willing to spend around that. And secondly, we believe we also have a strong interest in to develop the technology in the barriers of the function, for example, we do have a community in the feature phone times now migrate in the smartphone. So the community product in the smartphone platform has a lot of uniqueness, so our R&D capabilities to help them develop new functions, new user experience and new kind of exciting enjoyment of the content in the community, in the Android platform is another demonstration of R&D capabilities where we continue the success in the Android phone platform.

So in sum, we do have a reasonable and well controlled R&D spending for this year and we’re much more focused on the gaming and also focused on the expansion of our existing product.

Operator

Our next question comes from the line of Henry Guo from JG Capital.

Henry Guo - JG Capital

Just to follow up on guidance. On the margin, so could you, management, give us more color on the guidance for the – how we think of the guidance over the next several quarters, and what’s the investment plan from management in terms of the investment on the new growth drivers? Thank you.

John Bi

So your question is, you want to get management team more colors on the gross margin?

Henry Guo - JG Capital

Margin, yes, no, overall margin – operating margin, how we think of the overall operating margin for the next several quarters?

John Bi

Okay, so first of all, I have mentioned, we are going to have a very well control of working expenses. We believe that is around 20% of our overall top line and also that is a baseline as we mentioned earlier. If we have a hit of our options of our games, we will see a much higher margin. But also I think from R&D, from the sales and marketing side, we do have an expansion this year, why because first of all, we are going to strengthen our in-house game development capabilities. And second, we need to spend monies to publish, to make R&D, to make promotions of our games to get published. And also we need to promote our games in the third party channels. So that is why we see a reasonable and well controlled spending in the R&D and sales and marketing staff, but in general we will keep around 20%, 21% of our top line.

Operator

(Operator Instructions) With no further questions, I would like to turn the call back to the management. Please proceed.

John Bi

Thank you, operator. Thank you all for your interest in Sky-mobi. We are excited about the smartphone opportunities and believe we are uniquely positioned to execute our strategy. So with that, I want to thank you – thank everyone to join the call today and wish you everyone a very well for the week. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Thank you all for participating. You may all now disconnect.

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