AirMedia Group's (AMCN) CEO Herman Man Guo on Q2 2014 Results - Earnings Call Transcript

| About: AirMedia Group (AMCN)

AirMedia Group Inc. (NASDAQ:AMCN)

Q2 2014 Earnings Conference Call

August 18, 2014 8:00 PM ET

Executives

Raymond Huang - Director, IR

Herman Man Guo - Chairman and CEO

Richard Wu - CFO

Analysts

Operator

Good morning, all sites, and welcome to AirMedia Group Incorporation Second Quarter 2014 Earnings Conference Call. For the duration of the presentation, all lines will be placed in listen-only mode. There will be opportunity to ask questions after the presentation, which instructions will be provided at a later stage.

Now, I would like to hand the call over to Mr. Raymond Huang, Senior Director of Investor Relations of the company. And I will be standing by for the Q&A session. Thank you. You may begin.

Raymond Huang

Hello everyone. Thank you for joining AirMedia's second quarter 2014 earnings conference call. Today, Herman Man Guo, our Chairman and CEO, will present highlights for the second quarter 2014; and Richard Wu, our CFO, will provide details on our financial results. Following their prepared remarks, the management team will be available to take your questions.

Before management's presentations, please allow me to read to you our Safe Harbor statement. During this conference call, representatives of the company will make certain forward-looking statements. These statements are based upon management's current views and expectations with respect to future events, and are not a guarantee of future performance. Furthermore, these statements are by their nature subject to a number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements.

AirMedia does not take any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law. Please refer to AirMedia's filings with the SEC, including its Form 20-F for discussions of important factors that could affect future results.

Our press release and this call include discussions of unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. The press release is available on the Investor Relations section of AirMedia's website at ir.airmedia.net.cn.

I will now turn the call over to our Chairman and CEO, Herman Man Guo.

Herman Man Guo

Thank you, Raymond. Good morning and good evening everyone. Although the second quarter was a challenging quarter for us, we are on the right track of turnaround. Revenues from our gas station media network grew 28.7% year-over-year, demonstrating that we are on the right direction to turn around this product line. However, its quarter-over-quarter growth did not reach our internal expectation due to some pull back of orders from advertisers as a result of some mechanical malfunctions of our LED screens. The malfunctions were caused by problematic design by our LED screen supplier of their inner structure. We anticipate restoring a majority of these LED screens to proper function by the end of the third quarter of this year. This small turbulence may impact our original break-even schedule for this product line, but is not expected to change its long-term growth prospects.

As of August 17, 2014, AirMedia operated LED screens in 490 gas stations in 12 cities, compared to 395 gas stations in nine cities as of May 11, 2014. Our nationwide network of LED screen in gas station has begun to take shape which will enable us to take orders for advertiser nationwide content [ph]. We expect to resume normal sales of advertisement slots on the LED screens and to see a big increase in sales from the product line in the fourth quarter of this year.

As for our interactive platform in airports, after Beijing, we launched our interactive platform on our TV-attached digital frames in two airports in Shanghai on June 20. We have received advertising orders on our interactive platform from various well-known international and domestic brands such as Baidu, Samsung, Sony, Auo, Lenovo, Chinese Merchant Bank and (inaudible). In particular, we have seen order from advertiser in mobile internet sector which rarely put orders with us before. We had this innovative product. We recently partnered with Dell, who we provide certain [inaudible] tablet as the [practice] [ph] for participation in [inaudible] our interactive platform. We expect that this to further improve the popularity of this product line.

We have recently strengthened our team of Wi-Fi business. Dr. Hung Zhuo [ph] who used to work for China Satellite Communications Company Linkit [ph] recently joined us to further enhance our team of Wi-Fi operation. Dr. Zhuo [ph] has been working in the field of in-flight communications for years, representing the top level in the field in China. He was invited as the industry expert in the recent trial of Chinese Airline's Wi-Fi. You can find [inaudible] new series featuring the [inaudible] theme as the industry guru.

We also recently have Mr. Steven Chin Tung Ya [ph] joined as the Vice President of Technology, who used to work as the Chief Technology Officer at the China HR.com [ph] for seven years. With the addition of industry and technical experts, we are developing the platform and portal for our in-flight Wi-Fi business. We have been in close talk with more airlines and the rail bureau to establish partnership to provide Wi-Fi services on the airplanes and the high speed trains.

With that I would like to pass the call to Richard Wu, our CFO to review our financial results in greater detail.

Richard Wu

Thank you, Herman. And thank you everyone for joining our second quarter 2014 financial review. Before I go through our results in detail, I would like to point out that our new business initiatives such as our in-flight Wi-Fi and on-train Wi-Fi business are at the stage of the investment which was reflected in an increase in our operating expenses. We believe we are investing in a company's future. We find these investments to be prudent and expect them to bring tremendous growth to the company in the future. We strive to turn around the company. We have been taking and we will continue to take steps to control our cost and expense. In the following weeks, we will review our concession rights contracts one by one to evaluate their economics.

Now let me go through the details of our second quarter financial results with you. Total revenues for the second quarter of 2014 reached the US$62.1 million representing a year-over-year decrease of 3.5% from US$64.3 million in the same period one year ago and a quarter-over-quarter decrease of 2.1% from US$63.4 million in the previous quarter. The year-over-year decrease was primarily due to decreases in revenues from traditional media in airports, which were primarily caused by AirMedia's termination of certain unprofitable or low-margin contracts. The quarter-over-quarter decrease was primarily due to decreases in revenues from most product lines other than other media, other revenues in air travel and gas station media network. Let's go through each product line.

Revenues from digital frames in airports for the second quarter of 2014 decreased by 6.1% year-over-year and by 9% quarter-over-quarter to US$32 million. The year-over-year and quarter-over-quarter decreases were primarily due to a soft advertising market.

Revenues from digital TV screens in airports for the second quarter of 2014 decreased by 8.3% year-over-year and by 10.2% quarter-over-quarter to US$2.4 million. The year-over-year and quarter-over-quarter decreases were primarily due to a soft advertising market.

Revenues from digital TV screens on airplanes for the second quarter of 2014 increased by 4.4% year-over-year and decreased by 18.8% quarter-over-quarter to US$3.5 million. AirMedia didn't renew its concession rights contract with Air China, which expired on December 31, 2012, but regained some advertising time on Air China's airplanes on August 1, 2013. The year-over-year increase in revenues from digital TV screens on airplanes was primarily due to the increase in revenues from digital TV screens on Air China's airplanes. The quarter-over-quarter decrease in revenues from digital TV screens on airplanes was primarily due to a soft advertising market.

Revenues from traditional media in airports for the second quarter of 2014 decreased by 22.3% year-over-year and by 2% quarter-over-quarter to US$14.3 million. The year-over-year decrease was primarily due to AirMedia's termination of certain unprofitable or low-margin contracts. AirMedia decided not to renew the concession rights contracts for the billboards and painted advertisements on the gate bridges of Terminal 3 in Beijing Airport in May and July 2013 after the expiration of the relevant contracts. The quarter-over-quarter decrease was primarily due to a soft advertising market.

Revenues from the gas station media network for the second quarter of 2014 increased by 28.7% year-over-year and by 4.5% quarter-over-quarter to US$2.9 million. The year-over-year and quarter-over-quarter increases were primarily due to increases in revenues from LED screens in the gas stations.

Let's move on to other lines in the income statement. Cost of revenues for the second quarter of 2014 was US$56.8 million, representing a year-over-year decrease of 5.4% from US$60.1 million in the same period one year ago and a quarter-over-quarter decrease of 0.7% from US$57.2 million in the previous quarter. The year-over-year decrease was primarily due to lower concession fees and lower depreciation in the second quarter of 2014. The quarter-over-quarter decrease was primarily due to lower agency fees for third-party advertising agencies in the second quarter of 2014. Cost of revenues as a percentage of net revenues in the second quarter of 2014 was 92.5%, down from 94.8% in the same period one year ago and up from 90.9% in the previous quarter.

Concession fees for the second quarter of 2014 decreased by 8.3% year-over-year to US$42.6 million, which remained relatively unchanged from the previous quarter. The year-over-year decrease was primarily due to the expiration of some concession rights contracts which AirMedia chose not to renew. Concession fees as a percentage of net revenues in the second quarter of 2014 was 69.2%, decreasing from 73.2% in the same period one year ago and increasing from 67.6% in the previous quarter. The year-over-year decrease of concession fees as a percentage of net revenues was primarily due to the fact that concession fees decreased faster than net revenues. The quarter-over-quarter increase of concession fees as a percentage of net revenues was primarily due to the decrease in net revenues.

Total operating expenses for the second quarter of 2014 were US$14.2 million, representing a year-over-year increase of 38.4% from US$10.3 million in the same period one year ago and a quarter-over-quarter increase of 30.1% from US$10.9 million in the previous quarter.

Net loss attributable to AirMedia's shareholders for the second quarter of 2014 was US$5.4 million, compared to net loss attributable to AirMedia's shareholders of US$4.9 million in the same period one year ago and net loss attributable to AirMedia's shareholders of US$3.5 million in the previous quarter.

Non-GAAP adjusted EBITDA attributable to AirMedia's shareholders which is EBITDA attributable to AirMedia's shareholders excluding share-based compensation expenses was negative US$3.7 million, compared to non-GAAP adjusted EBITDA attributable to AirMedia's shareholders of negative US$345,000 in the same period one year ago and non-GAAP adjusted EBITDA attributable to AirMedia's shareholders of negative US$422,000.

Next, let's talk about our balance sheet.

Cash, restricted cash and the long-term investments totaled US$113.2 million as of June 30, 2014, compared to US$113 million as of December 31, 2013. The capital expenditure for the second quarter of 2014 was US$14.3 million. AirMedia currently expects its net revenues for the third quarter of 2014 to range from US$65 million to US$67 million, representing a year-over-year decrease of 4.5% to a year-over-year decrease of 1.6% from the same period in 2013 and a quarter-over-quarter increase of 5.7% to a quarter-over-quarter increase of 9% from the previous quarter.

AirMedia currently expects its concession fees to be approximately US$43 million in third quarter of 2014, representing a quarter-over-quarter increase of 1.1% from the previous quarter, primarily due to new concession rights contract entered into during the quarter.

Moderator, could you please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Lee Fung [ph] from CLSA. Please ask your question.

Unidentified Analyst

Hi, thank you for taking my question. Just so quickly on the digital frame in airport, it seems to be a first quarter with year-over-year decline kind of in years, can you just help us understand besides the soft advertising environment, what's causing this decline? Thank you.

Herman Man Guo

The decline is mainly from the high-end consumer group like the high-end food and beverage which are top advertising category for us. We see the main decline from those high-end industries

Unidentified Analyst

Okay, got it, thank you. And maybe just one quick question follow-up. We see the sales and marketing expenses in the quarter rise quite a bit at 12% of total net revenue. Is that kind of new proxy for near term and also what's really driving this sales and marketing? Thank you.

Richard Wu

This marketing expanding on the interactive platform, transformation of our existing TV attached digital frames which currently are still at the initial stage of getting market awareness. And related with in addition to the spending on transformation of digital - TV-attached digital frames also increased our spending on the Wi-Fi related business.

Unidentified Analyst

Okay, maybe - is that what that you kind of disclose or break down by which part is the majority like the Wi-Fi versus the interactive?

Richard Wu

I would say for the net increase in marketing expenses in second quarter 60% were spent related with interactive platform and the other 30 plus or 40% were related with the marketing in Wi-Fi business for the net -- for the increase.

Operator

Thank you. (Operator Instructions) There are no further questions at this. I'll now like to hand the conference back to the presenters. Please continue.

Raymond Huang

Thank you for joining our call. We like to talk to you next time. Thank you.

Operator

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

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