500.com's (WBAI) CEO Vincent Law on Q2 2014 Results - Earnings Call Transcript

Aug.11.14 | About: 500.com Limited (WBAI)

500.com Limited (NYSE:WBAI)

Q2 2014 Earnings Call

August 11, 2014 8:00 am ET

Executives

Christian Arnell - IR

Vincent Law - Founder, Chairman & CEO

Zhengming Pan - CFO

Lei Zheng - COO

Analysts

Nick Ning - 86 Research

Sharon Ding - Deutsche Bank

Fiona Zhang - Oppenheimer

Operator

Hello. Welcome to the 500.com Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions).

Now, I would like to turn the conference over to Chris Arnell. Mr. Arnell, please go ahead.

Christian Arnell

Thank you, Operator. Hello, everyone, and thank you for joining us today for 500.com's second quarter 2014 earnings conference call. The company's results were released earlier today and are available on the company's IR website at 500.com as well as PR Newswire's wire services.

On the call today from 500.com are Mr. Vincent Law, Founder, Chairman and Chief Executive Officer; Mr. Zhengming Pan, Chief Financial Officer; and Mr. Lei Zheng, Chief Operating Officer.

Mr. Law will discuss 500.com's business operations and company highlights, followed by Mr. Pan who will go through the financials and guidance. They will be available to answer your questions during the Q&A session that follows.

I remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under law.

I will now read Mr. Vincent Law's prepared remarks form in English.

Hello everyone and welcome to 500.com's second quarter 2014 earnings conference call. I am extremely pleased to report a record quarter of solid growth across the board.

Net revenues increased 185.4% year-over-year to US$25.2 million as our growth momentum continued as a result of the 2014 FIFA World Cup. We had only weak guidance again with total purchase amount surpassing US$337 million, 199.1% year-over-year increase.

Traffic continued to grow during the quarter, particularly through our mobile channels. Active users surpassed 2.5 million, while purchases made through our various mobile channels increased accounting for 34.3% of total purchases made. This is the first time we have surpassed the one-third of total purchases mark, something we have been working very hard towards.

As a result, we will continue to invest in R&D and marketing, as we look for new ways to innovate our mobile services, and expand our user base to solidify our leading position in the market.

Revenues continued to increase as a result of our growing active user base, which increased 121.2% sequentially to 2.5 million.

While the World Cup has come to an end, we remain as focused as ever in our gearing up for the kickoff of the Premier League later this week. With football fever still high in China, we expect to see our growth momentum continue during the third quarter, with total purchase amounts between US$354.6 million and US$370.8 million, a 5.1% to 9.9% sequential increase or a 214.3% to 228.6% year-over-year increase.

To conclude, we are confident that the strategy we have in place will continue to increase shareholder value as we work to strengthen the sustainable foundation we have created as China's leading online sports lottery service.

Now, let me turn over to Zhengming, who will go through the financials for the quarter.

Zhengming Pan

Thank you, Christian. I like to begin by going over few of the operational metrics we started providing on quarterly basis.

Active new users increased 121.2% sequentially to just over 2.5 million. Active new users, which is defined as a user who made their first purchase during the current year increased by 193.1% sequentially. Active new users increased over three times during the quarter while our sales volume only doubled.

Our user base continues to diversify across three platforms we offer our products directly through. Active PC users total purchase amount increased 74.1% sequentially, while active mobile application and mobile website users total purchase amount increased 260.1% and 75.2% respectively. This demonstrates that while our PC platform continues to generate the most of purchase amount, our mobile platforms have enormous future growth potential having generated 34.3% of all purchase when compared to 26.4% in the previous quarter.

Accumulated downloads of our mobile applications exceeded 20 million during the quarter. Direct active users, which is defined as users who access our products directly through our PC, mobile app, and mobile website, increased 133.5% sequentially to 769,000. Third-party channels active users increased 115.8% to 1.8 million. While third-party channel active users far outnumber direct active users, their ARPU tends to be much lower, as they are generally casual users of online lottery service products.

87.5% of our total purchase volume is generated by users who access our data service directly, while the remaining 12.5% access our services through third-party channels.

Let me now walk you through the major financial items for the second quarter of 2014. Net revenue were US$25.2 million, a increase of 185.4% from the same period last year and a increase of 73.8% sequentially. Total purchase amount increased 199.1% year-over-year to US$337.4 million, an increase of 98.4% sequentially. The significant in net revenue and total purchase amount was mainly due to the kickoff of the FIFA World Cup in the middle of June and our increased marketing efforts.

In terms of GAAP reporting, we are required to report our revenues at the net level. In terms of day-to-day management, we pay close attention to total service fees, which is commission rate of the total purchase amount. In other words, this is the amount that we make out of the total purchase amount that we sell.

For the second quarter, total service fee generated from sports lottery product were US$35.7 million, which was a increase of 196.9% from the same period last year and a increase of 97.3% sequentially. The year-over-year increase and a sequential decrease was due to the year-over-year increase and a sequential decrease in total purchase amount.

Operating expenses were US$16.0 million, a increase of 104.9% from the same period last year, and a increase of 64.3% from last quarter.

Cost of services was US$2.3 million, a increase of 110.4% from last year, and 65.9% from last quarter. The increases were primarily due to the increase in the total purchase amount.

Sales and marketing expenses increased to US$8.1 million, a increase of 143.5% from the same period last year, and a 141.1% increase from last quarter.

General and administrative expenses increased to US$4.2 million, a increase of 75.2% from the same period last year, and a 9.2% increase from the previous quarter. Both the year-over-year and the sequential increases were due to the increase in share-based compensation expenses.

Service development expenses were $1.4 million, a increase of 41.9% from the same period last year, and a 23.9% from last quarter.

Operating profit increased 87.7% to $9.6 million sequentially.

Non-GAAP operating profit, which excludes share-based compensation expenses, was US$10.8 million, a 83.9% sequentially.

Net income was US$12.2 million during the second quarter of 2014. Non-GAAP net income which excludes share-based compensation expenses was US$13.4 million.

Basic and diluted earnings per ADS attributable to shareholders were US$0.37 and US$0.34 respectively. Non-GAAP basic and diluted earnings per ADS were US$0.40 and US$0.37 respectively.

As of June 30, 2014, the company had cash and cash equivalents, restricted cash and short-term investments of US$115.3 million compared with US$116.3 as of March 31, 2014.

With that, I would like to open the call up now for questions. Operator, please go ahead.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

And the first question comes from Nick Ning with 86 Research.

Nick Ning - 86 Research

Firs, in terms of -- on the trend of most backing products of 500.com post the World Cup, how has that compared to the sales during World Cup and before World Cup? Can you give us some color on that? Thank you.

Zhengming Pan

I've seen quite serious (ph) question this sales volume during the world cup comparing to before the world cup and after the world cup, is that right?

Nick Ning - 86 Research

I mean post -- after world cup means July and August, how do you guys see the trends right now? If we can compare that with --

Zhengming Pan

I think the -- during the second half of July and the first half today in August, the daily average volume increased significantly than the average daily sales volume in Q1. I think that's probably the right way to answer your question. And also remember now, there is no major football league games and while in Q1 all the major football leagues were in session. I think exactly -- I think we're talking about something more than 50% increase comparing to the average sales volume in Q1.

Nick Ning - 86 Research

Thank you. Then, how do you see the user attrition after world cup, I guess this event had brought in a lot of new users, but I guess some of them may leave us or reduce spending. And so how do you see their active use post the world cup?

Zhengming Pan

Yes, I think the sales volume have already probably told you some -- give you some color of the user retention rate, but honestly, we probably have to wait -- I don't have statistics in front of me because the major football leagues are -- have not started yet. We probably can provide more accurate statistics when the football sessions start. That's a, I think better reflection of the user retention rate.

Operator

Thank you. And the next question comes from Sharon Ding with Deutsche Bank.

Sharon Ding - Deutsche Bank

Hi, this is Sharon. I'm asking question on behalf of Alan Hellawell. First, congrats on the strong quarter and my first question is could you comment on the recent cooperation between you and China Mobile and what's the imbursed cash how you have the split between the cooperation and how -- yes, that's my first question.

Zhengming Pan

Okay, sure, let me answer your question one by one. The exact content between for our cooperation with China Mobile is that any China mobile users can redeem their mileage credit or mileage points for our lotteries -- for our sports lottery products while China Mobile will pay us in cash. I think that's the cooperation.

I think, more importantly, we look at this cooperation as a doorway for us to access China Mobile's huge user base, because I think two-thirds of China Mobile some 170 million users have ever used their online credit more. So we believe that would be a very, very important way for us to acquire new mobile users.

Sharon Ding - Deutsche Bank

Thanks. That's helpful. My second question is could you talk about the recent situation about the license especially in terms of mobile lottery on the web welfare?

Zhengming Pan

The mobile -- the new regulation actually -- the regulation -- the mobile sales of lottery was revised in late March, early April, which for the first time the definition of telephone sales of lottery included the sales via mobile applications so that's on the regulation side. And I think there is no detail so far had been no detailed rules as how this approvals will be implemented. At some point we believe that the Ministry of Finance will start to give -- to grant approvals for private companies for operators like us to start a mobile setup for the telephone sales of lotteries and it's possible that the new -- such approval will be given on a provincial -- province-by-province basis.

Sharon Ding - Deutsche Bank

Any idea if a rough timeline like by the end of this year or may be next year?

Zhengming Pan

It's really, really difficult to give such guess. It was, like a long before, expected that to happen before the World Cup but it did not. So honestly I cannot give any -- give you any date.

Sharon Ding - Deutsche Bank

And my next question is about the tax benefit, yes, we have like what's US$11 million this quarter, right? I wonder what the --

Zhengming Pan

Sorry, go ahead please.

Sharon Ding - Deutsche Bank

Yes, I wonder what the impact on the full year numbers and may be yes going forward in 2015?

Zhengming Pan

The tax rate -- the tax benefit actually had two parts for this quarter. The most important one is that we were named the key national software enterprises. So for last year and for this year our effective income tax rate would be 10% and actually we've reversed such tax provision for the last year, in this quarter so we will see a very big one-time tax gain this quarter.

The other part is actually also related to the tax rate change. We carry certain tax assets on our book and we do not -- on a conservative basis, we do not expect that we will enjoy this 10% preferential treatment forever. So we actually recorded a tax benefit for this part of the carried tax assets. So both these facts will be in certain sense one-off effect for this quarter but the 10% tax rate will be applicable for the full year, this year. For next year, really it depends on whether we can again be awarded this GE national software enterprises that --

Sharon Ding - Deutsche Bank

Okay. Great. So this is the annual basis approval, right?

Zhengming Pan

This is actually prior annual basis. So we sort of retroactively adjusted our tax rate for last year and recorded expenses this quarter.

Operator

Thank you. And the next question comes from Ella Ji with Oppenheimer.

Fiona Zhang - Oppenheimer

Hi, good evening. Thank you for taking my question. This is Fiona Zhang calling on behalf of Ella and I have two questions today. My first question is on the comparative landscape on the market. How do you expect your market share to trade post the World Cup and how would you maintain your competitive strength given this increasing competition? Thank you.

Zhengming Pan

We believe for the full year actually we believe we are actually going to continue to gain market share for the online sports lottery market for the full year. And in terms of our competitive landscape and also how we compete our competitors, this is actually a very good question. We have always been sort of characterize ourself as the most sophisticated and the professional service providers in the online sports lottery market. It will continue to be our most important strength in the future.

In addition to that given the fact that we attracted a lot of new users during the World Cup, the most important challenge for us is how to retain such new users. So for this year we also put a lot of focus on the interaction and the social character of our product. For example, during Q2 we introduced a free play game, we call it a crazy cash, basically we've divided a one single football match, a 90 minutes football match into 30 sections, each sections has three minutes. And any user can participate in this game by guessing what's going to happen in the next three minutes, by any winner would go into the next level and final, final winner will for each day we will give out a Mercedes Benz.

So by providing games in this type we are actually increasing the social and interaction feature into a normal lottery purchase process. We are turning a e-commerce transaction into a social activity.

So in short professional and social and interaction are the key focus for us this year.

Fiona Zhang - Oppenheimer

Okay that's very helpful thank you. And my second question is follow-up on the first question about the things going on post the World Cup. So I understand that the Premium League hasn't started or just started. Can you talk about like what's the ARPU like now compared to it was prior to the World Cup? And also just can you share with us some of your strategy particularly on your mobile side how do you get these new customers on the mobile side more engaged in your games? Thank you.

Zhengming Pan

Okay, first question we will probably won't give you the ARPU for July. But when you look at our Q2 number comparing to Q1 number, although we doubled more than doubled our active users, the ARPU is now 800 RMB versus 900 RMB in Q1 that's only represented only a very small percentage decrease. So both the user numbers and the ARPU we're at -- for Q2 user number increased significantly while the ARPU only decreased a little bit. So we probably going to -- we would continue to see a very strong performance in both the user numbers and the ARPU in Q3 although I cannot give you specific numbers. What's your next -- second question, sorry?

Fiona Zhang - Oppenheimer

Yes, my second question is on your mobile strategy like how do you --?

Zhengming Pan

Okay.

Fiona Zhang - Oppenheimer

Yes.

Zhengming Pan

Yes, it's similar to what I just responded to your previous question right. For example the same game I just introduced the crazy cash, it's only available on our mobile. So it does not even have a PC version. And also because this is a free game right we have already set certain conditions that a user can participate in such game for example you have to download our mobile app in order to participate in this game. And also you have to add our public account on the WeChat in order to get a pet qualified for this game. So all of our marketing strategies are I would say are focusing on the mobile side.

Operator

Okay. We have a follow-up question from Nick Ning with 86 Research.

Nick Ning - 86 Research

Hi, thanks for taking my follow-up question. So I have a quick question on the net revenue decrease. So in Q2 of this, particularly lower I guess that's due to the World Cup promotion. But going forward, how do you see the trend and statistically for the second half of this year? And from a longer perspective with sports lottery especially in games since you're enjoying a higher degree with a lower -- with a higher payout rate and on the lower degree, how do you see the mix, your change in the longer-term? Thank you.

Zhengming Pan

Okay, first of all, for this quarter, the tick rate is basically the same as Q1. I think there is a very slight change here because we now pay 100% of value added tax on our revenue. So comparing to both I think 60% value added tax comparing to Q1 so I think that's the only difference. I think the right way to calculate the tick rate is the total service fee received divided by the total purchase volume, not using the net revenue number.

So going forward, yes, we think basically it's going to stay stable but as you mentioned that the national sports lottery and restriction center may roll out the fixed odds single match lottery, which will increase the payout ratio from the count of 69% to 73%, and 2% of that payout increase would come from the distribution costs. We don't know exactly how this would impact our tick rate for now. But even that we can do a -- even the only 2% would be borne by us. We believe that's still a positive news by -- for the whole industry.

Here we can do a very quick calculation. Under the current scheme 69% payout ratio, US$100 would generate a total turnover of approximately US$320, if you know 100 plus 69 plus 69 times 0.69. And the total turnover would be US$320. And if the payout ratio is 73% then the total turnover will be approximately US$370 so that would be prevent a -- approximately 28% change in the total turnover. If I mean assuming that our payout -- our tick rate would decrease from 11% to 9% that's also slightly decrease for approximately 20%. So they probably cancel out each other.

But however, we estimate and also according to certain third-party research that the market sites have they support national lottery would increase dramatically. It is expected that the, sort of underground betting market in China is I mean, 10 times, 20 times, or even like according to certain research 50 times larger than the legitimate market. And there the most important competitive advantage for this underground betting is their payout ratio, they could go above, go as high as like as 85% or 88% comparing to 69% of that would be coming from the wrong lottery.

So I probably won't be able to give you exactly how large this market would be after this payout change. But we are pretty optimistic about the total market size increase if this new game rolls out.

Christian Arnell

Thank you. In closing, on behalf of the entire 500.com management team, we would like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting the company in China please let us know. This concludes our second quarter 2014 earnings conference call.

Operator

Thank you. The conference has concluded. Thank you for your participation. Have a nice 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!