VisionChina Media Inc. (NASDAQ:VISN)
Q1 2014 Results Earnings Conference Call
June 4, 2014 8:00 p.m. ET
Shuning Yi - Investor Relations
Limin Li – Chairman and CEO
Stanley Wang – CFO
Thomas Chong - Bank of China
Good evening and thank you for standing by for VisionChina Media’s first quarter 2014 earnings conference call. (Operator Instructions) 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 your host for today's conference, Ms. Shuning Yi, Investor Relations for VisionChina Media.
Hello, everyone and welcome to VisionChina Media's first quarter 2014 earnings conference call. The company's first quarter 2014 earnings results were released earlier today and are available on the company's IR website at www.visionchina.cn as well as on our newswire services.
Today you will hear from our Chairman and Chief Executive Officer, Mr. Limin Li, who will talk about our industry, our company's strategy and business operations; and Mr. Stanley Wang, our Chief Financial Officer, who will take you through our financials and key operating metrics. After their prepared remarks, Mr. Li and Mr. Wang will be available for your questions.
Please note that today's discussion will contain 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 official results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our annual report on Form 20-F and other documents filed with U.S. Securities and Exchange Commission. VisionChina Media 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 VisionChina Media's Investor Relations website, at www.visionchina.cn. I will now hand over the call to our CEO, Mr. Li.
[Interpreted] Hello, everyone, and thank you for joining us today. The first quarter of 2014 was a very important quarter for VisionChina Media. We achieved success in terms of our operating results, management and strategic transformation. As an old saying goes, well begun is half done, and we believe this goods start will lay a strong foundation for the longer-term growth of our core business as well expansion of our new business. I would now like to share with you some of our achievements from the quarter and our strategic plans for the rest of the year.
In terms of our core business of mobile television, we are delighted to have achieved total revenues of $21.9 million in the first quarter of 2014, which represented a year-over-year increase of 29% and beat the high end of our guidance. At the same time, our network utilization rate increased 34% year-over-year. These results were mainly attributable to the continued growth in advertising spending among our FMCG and Internet business-advertising clients, especially from the game industry.
VisionChina Media continuously pursues media platform optimization and cost control plans and in doing so has remained cost effective with competitive pricing. According to the company's strategy, we have expanded our media coverage to 89 bus cities and 20 bus subway cities to provide national mobile TV advertising placement solutions to our biggest clients. In addition, we implemented a contraction strategy for smaller underperforming business among our local advertising operations. With this successful strategy, we have greatly improved revenue per customer and enhanced our media network utilization. At the end of March, we renewed our exclusive contract with (indiscernible) bus mobile TV and lowered the company's media cost by 46.7% year-over-year without decreasing revenues in the region.
Looking ahead to the rest of 2014. We will continue to pursue a more favorable cost structure by renewing exclusive rights in more cities and utilizing our media cost and operating efficiency.
In the first quarter of 2014, revenues from gains accounted for 8% of our total revenue, representing a 90% increase quarter-over-quarter. We have become game operator's standard choice in most promotional platforms and we continue to improve their brand value and help to transform offline audiences to online users for the game operators. Furthermore, we promoted our advertising solutions at the third Global Mobile Games Congress, also known as CMGC, to tailor our serious gaming programs including top games awards for (indiscernible), China Mobile Games and Entertainment Group, Tencent and Baidu.
According to [CNN's] analysis, game target users are between ages of 15 and 34 and 52% of them take public transportation every day. Furthermore, the game players on buses and subways spend seven hours on games every week on average and have strong consumer demands from all kind of games. VisionChina Media strives to leverage its population coverage as well as riding time coverage to help gain operators reach their targeted users and convert passengers to game users. For instance, during the advertising placement [Happy Landlord] for China Mobile Games and Entertainment Group in Shenzhen, the game download figures significantly increased in Shenzhen. The average cost of getting a new user via our platform is only RMB4 to RMB6.
Closely following Baidu and Tencent, China Mobile Games and Entertainment Group entered into a comprehensive strategic cooperation with us to place advertising in 57 cities across our national media network.
Turning now to content innovation. VisionChina continues strategic cooperation with CCTV and mainstream TV closely. At the same time, we strengthened cooperation with the media Web sites in order to show the hottest programs and features on our mobile TV media network. Our unique infomercial products, guiding marketing along with other various programs provides a solution of high cost performance and attractive outdoor TV advertising. During the first quarter, guiding marketing's contribution to overall sales and quarter-over-quarter growth of 165%. It has become a strong growth driver of the company's core business.
VisionChina continues of the Chinese (indiscernible) also known as CSL, to provide high quality programs. At the same time we explore the potential for new marketing cooperation with CSL. We took full advantage of our marketing ability to leverage (indiscernible) and other well know enterprises to sponsor our CSL program of 2014. Our advertisers become CSL's official suppliers and partners and have maximized their brand value and achieved win-win solutions.
In terms of basic business development, looking ahead to the second quarter and rest of the year, with the improvement of our core business revenues in the first quarter and our continuous creative innovation, we believe we are well on track.
With respect to risk management, the company recently entered into a settlement with the selling shareholders of Digital Media Group to put an end to a long-standing dispute. The settlement agreement was approved by a general solution in the extraordinary general meeting on April 24, 2014. Currently, management is working with the other party on the closing of this settlement transaction. We expect the closing of this settlement transaction to take place by end of second quarter. This settlement embodies the strong confidence from management, shareholders and the creditors regarding the company's business prospects. With the litigation properly settled, management will be able to put a full focus and energy on our core advertising business and more importantly on the development of our new mobile Internet business line. As such we really see this as a new and exciting beginning for the company.
Regarding VisionChina's mobile Internet strategy. As one of the largest media network operators in China's urban mass transit system, VisionChina has accumulated more than nine years of operational experience and in-depth insight in audience characteristics of more than 570 million daily urban commuters across our current network. We observe that during the daily 60 to 90 minutes commuting time in mass transit vehicles, usage dramatically increased in the past 12-months with the penetration of smartphones. With the exciting opportunity established a sole and exclusive mobile Internet entry point in China's urban mass transit system by adopting Wi-Fi and other technology to provide high speed and economical mobile Internet and connection, VisionChina has taken strong strategic initiative research and development of mass transit Wi-Fi technology in devices. And at the same time we have secured a series of exclusive Wi-Fi connection contract in major cities in China.
In April of this year, with the support of senior officials of China ministry of industry and information technology, VisionChina and Shenzhen Kuang Chi Institute of Advanced Technology, jointly announced the establishment of a mass-transit wireless core technology laboratory. Kuang Chi is the leading Chinese research institute is the (indiscernible) RF Wi-Fi technology and currently holds various intellectual properties in the field of mass transit and Wi-Fi communication. VisionChina together with Kuang Chi will jointly contribute their respective strength, especially in R&D effort and future operation of VisionChina Media's national mass transit Wi-Fi network.
Also as an important milestone, VisionChina entered into a long-term strategic cooperation agreement with China Unicom's head office. As the leading WCDMA and LTE service provider, China Unicom will provide its premium wireless data service and take support of VisionChina's Wi-Fi network.
VisionChina Media also recently appointed Mr. Dennis Tianlin Deng as the Chinese chief strategy officer. Mr. Deng has over 20 years of extensive experience in the telecommunications industry and has served various major telecommunication enterprises as an executive in greater China and Asia Pacific regions. Prior to joining the Company, Mr. Deng served as a General Manager General Manager of Greater China for Alcatel Internetworking Inc. and Chief Executive Officer of Maxwell Technology in China. Mr. Deng received his bachelor`s degree in microwave communications networks from Beijing University of Posts and Telecommunications in 1984 and his master's degree in electrical engineering from the University of Calgary in 1990. Together with our management team, Mr. Deng will contribute through his expertise and leadership to drive implementation of the company's Wi-Fi strategy and related initiative.
On top of current national digital television on mass transit, VisionChina targets to run the largest mass transit Wi-Fi network in China. We expect this vision will become a realty in the possible future with the effort of our great team. I will now hand over the call to our Chief Financial Officer, Mr. Stanley Wang to discuss our financials and operating metrics in more detail.
Thank you, Mr. Li. I will first go over our quarterly operating metrics. Our network capacity which is measured by total broadcasting hours, was 37,620 in the first quarter of 2014 compared to 38,458 hours in the fourth quarter of 2013. Our average advertising revenue per broadcasting hour was U.S. $543 in the first quarter of 2014 compared to U.S. $394 in the first quarter of 2013 and U.S. $772 in the fourth quarter of 2013.
In the first quarter 2014, we sold a total of approximately 264,000 advertising minutes in our network, compared to 204,000 advertising minutes in the first quarter of 2013 and 352,000 advertising minutes in the fourth quarter of 2013. On average, we sold 7.03 advertising minutes per broadcasting hour in the first quarter of 2014, compared to 5.24 advertising minutes per broadcasting hour in the first quarter of 2013 and 9.16 advertising minutes per broadcasting hour in the fourth quarter of 2013.
We ended first quarter of 2014 with 358 sales personnel, representing a net decrease of 14 sales people over the course of the first quarter. This is the result of one of our cost control policy aimed at optimizing our ratio of sales people to advertising customers.
Turning now to our first quarter financial results.
Our total revenue in the first quarter in 2014 were U.S. $20 million. Advertising service revenue, which accounted for 99.3% of the total revenues in the first quarter of 2014, was U.S. $21.9 million, representing an increase of 28.5% compared to that in the first quarter of 2013.
Media cost, the most significant component of advertising service cost, was U.S. $18.5 million in the first quarter of 2014, compared U.S. $17.8 million in the first quarter of 2013 and U.S. $19.8 million in the fourth quarter of 2013.
Gross loss in the first quarter of 2014 was U.S. $0.2 million, compared to gross loss of U.S. $5.1 million in the first quarter of 2013 and gross profit of U.S. $7.6 million in the fourth quarter of 2013. Advertising service gross margin was negative 0.9% in the first quarter of 2014, compared to negative 30.2% in the first quarter of 2013 and 22% positive in the fourth quarter of 2013.
Selling and marketing expenses were U.S.$5.6 million in the first quarter of 2014, compared to U.S. $7.2 million in the first quarter of 2013 and U.S. $5.4 million in the fourth quarter of 2013. General and administrative expenses were U.S. $2.2 million in the first quarter of 2014, compared to U.S. $2.3 million in the first quarter of 2013 and U.S. $2.4 million in the fourth quarter of 2013.
Operating loss was U.S. $7.1 million in the first quarter of 2014, compared to the operating loss of U.S. $14.4 million in the same quarter of 2013 and an operating profit of U.S. $0.5 million in the fourth quarter of 2013.
Our income tax expenses were us $30,000 in the first quarter of 2014, compared to an income tax expense of U.S. $0.03 million and an income tax expenses of $0.2 million in the first and fourth quarters of 2013 respectively.
Net loss attributable to our shareholders referred to as GAAP net loss, was U.S. $7.5 million in the first quarter of 2014. Basic and diluted net loss per ADS on a GAAP basis in the first quarter of 2014 was U.S. $1.41. Net loss attributable to our shareholders referred to GAAP net loss, was U.S. $14.6 million in the first quarter of 2013. Basic and diluted net loss per ADS on GAAP basis in the first quarter of 2013 were $2.87.
In the first quarter of 2014, our non-GAAP financial measure, net loss attributable to our shareholders excluding share-based compensation expenses was U.S. $7.2 million in the first quarter of 2014, compared to non-GAAP net loss of U.S. $12.8 million in the first quarter of 2013. We had cash and cash equivalents of U.S. $37.1 million as of March 31, 2014 and our cash use in operating activities was U.S. $2.7 million in the first quarter of 2014. Depreciation and amortization was U.S. $1.0 million and capital expenditures were U.S. $0.4 million in the first quarter of 2014.
Turning now to our guidance. Based on business conditions seen thus far in 2014, we estimate our advertising service revenue in the second quarter of 2014 to be between U.S. $30 million to U.S. $31.6 million, representing a year-over-year growth of 12.4% to 18.3%. These estimates are based on a foreign exchange rate of RMB6.1145 per U.S. $1.00. As a reminder, our guidance is based on our current network that, as of the date of this report, has been secured by exclusive agency agreements or joint venture contract. If the number of cities in the company's network expands or contracts, or if there is any development that affects management's assessment of the expected settlement agreement, management's forecast could be affected.
Thank you again for joining us today. And I will now open the call for questions. Operator, please proceed.
(Operator Instructions) Your first question comes from the line of Thomas Chong of Bank of China. Please ask your question.
Thomas Chong - Bank of China
I have a couple of questions. The first question is about your mobile Internet strategy. Can management talk about the business models regarding the Wi-Fi. And (indiscernible) the cost and the CapEx involved as well as the number of cities that you guys plan to cover for this year and next year. And then I have a couple of follow-ups. Thanks.
Hi, Thomas. Many thanks for your question. Regarding the Wi-Fi, we have actually started to implement our Wi-Fi strategy recently. And currently we are basically working on to especially get our implementation of launching strategy as the start. First of all we are currently, establishing our national network and securing our Wi-Fi contracts with so many companies. And the second part, the [text] (ph) we are working on is, that we have put a lot of recourses in the R&D of the devices and we typically we will produce the first batch of our Wi-Fi with our own intellectual properties soon.
And then talking about the business model of the Wi-Fi. Basically, first of all in the mass transit systems, we are into establishing the mobile Internet entry point for the mass transit passengers. So basically our business model will include a high-speed Internet connection and also combined with the local contents including unlimited video, music and also including the game and app distribution. Which is basically -- we are aiming to establish a kind of platform based on the Wi-Fi technology in the mass transit. So the revenue may come from two aspects. One is the usage fee of the Internet connection and also from monetization of the distribution of contents. So actually currently we do not have a very specific revenue and cost estimate on this Wi-Fi social plan and because we have targeted our expansion strategy recently. But for sure we will cover our Wi-Fi network on the (indiscernible) that our current and advertising network has covered now and we will further expand to other important cities in China.
Thomas Chong - Bank of China
Thanks. And my second question is regarding the macro-advertising environment. Can management comment about how we should think about advertising sentiment this year compared to last year? And how should we look at this trend in the second half? Thanks.
Okay. I will translate this question to Mr. Li, and Mr. Li will take your question.
For the corporations since (indiscernible) advertising business in China in 2014 is challenging but still with flow of opportunities and prospects. From a macro perspective, the overall market sentiments from the advertisers are still very cautious because the overall macroeconomic slowdown and the uncertainties in the economic environments. So we can see that from the traditional industries the advertising spending were basically -- basically the growth is extinct but we can that still from some sectors of new economy, especially in Internet and perhaps specifically on gaming and mobile Internet advertising spending has already indicated a strong growth lasting from the previous year.
So from the advertising sector perspective, we can see that the outdoor advertising still can maintain a quite decent growth as we expect and also see again in our -- the starts we delivered in first quarter. However, for traditional media like paper media and some of the television media except for the media and satellite television and CCTV, there we have a difficult time.
Thomas Chong - Bank of China
Thanks. And a fourth question is, how we should look at the impact of World Cup to your second guidance and your third quarter, if there is any.
I think the World Cup will have a positive -- is a positive event. It's an event which is important for the company especially on the FMCG clients and the sports gear kind. So basically our second quarter guidance has basically reflected the increase -- the expected increase brought by the World Cup.
Thomas Chong - Bank of China
I see, thanks. And a question regarding the gaming sector. Given that in the first quarter gaming contributed about 8% of your total revenue, I just want to get a sense about what's the full year expectation about revenue contributed from gaming. And my last question is about user behavior in public transportation. So do you see people usually play games or shopping -- or do their online shopping in public transportation? If so, which one of them should we see high growth potential in advertising revenue for these two sectors? Thanks.
Thomas, first of all the gaming revenue accounts for around 8% for the first quarter of our total advertising revenue in the first quarter of 2014. And we actually expect -- because first of all the Q1 revenues was -- there is a seasonality effect for the traditional industries and segments. So we believe in the rest of the year and despite, without the seasonality impacts, the FMCG and other segments will get back to normal share in our total revenue. But however, we still foresee strong growth on the gaming. So in the rest of the year we are expecting that the gaming will account for approximately 5% of our total revenue. Basically our main revenue sources actually are from FMCG which accounts for more than 50% of total revenue.
And the second question is about the user behavior in the mass transit. According to the (indiscernible) research report, currently there's not only users in the mass transit basically, they are using 2G and also 3G connection which is in the Chinese telecommunication market the data traffic plan was still quite an expensive consumption especially for heavy usage of the data. It's not a really affordable expenditure for a number of people, especially for the working class. So basically according to the research report, main behavior in the mass transit were, first of all, the online behavior to be instant message and web browsing. And we can also observe some offline behavior like music and also the video, using the Smartphone offline watching videos when they are taking buses and subway. And also reading is more a part of the major behavior.
So we can see that the high-speed connection and demands for downloading game, apps and other content which is not feasible or not affordable under 2G and 3G environment connection actually exist and this is part which VisionChina's Wi-Fi can provide such service to the passengers to give these mass of people solution to meet their demands when they are in the mass transit.
Thank you. As there are no other questions on the line, I would now like to hand the conference back to your host for today. Please continue.
Thank you all for joining us today. If you have any questions, please do not hesitate to contact us at firstname.lastname@example.org.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.
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