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China Techfaith Wireless Communication Technology Limited (NASDAQ:CNTF)

Q2 2014 Earnings Conference Call

August 19, 2014, 8:00 AM ET

Executives

David Pasquale - IR, Global IR Partners

Jay Ji - SVP

Ouyang Yuping - CFO

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the China Techfaith Second Quarter 2014 Results Conference Call. My name is Caroline, and I'll be your operator for today. At this time, all participants are on listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, the call is being recorded for replay purposes.

And now, I'd like to turn the call over to David Pasquale of Global IR Partners. Please go ahead.

David Pasquale

Thank you, Operator. Welcome everyone to China TechFaith's second quarter 2014 financial results conference call. Joining us today from the company are Chief Financial Officer, Ms. Ouyang Yuping; and SVP, Mr. Jay Ji.

We will have time for your questions after a review of the quarter’s results and the company's outlook. If you have not yet received a copy of today's results release, please e-mail Global IR Partners at cntf@globalirpartners.com or you can get a copy of the press release off of the Investor Relations section of TechFaith's website.

The company's attorneys advise that this call will contain forward-looking statements. TechFaith may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission, in its Annual Report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties.

These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, confident, outlook and similar statements.

Statements that are not historical facts, including among other things, statements about TechFaith's business outlook, strategic and operational plans, beliefs and expectations contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties, a number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

Potential risks and uncertainties include, but are not limited to, those risks outlined in TechFaith's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 20-F and other SEC filings.

TechFaith undertakes no obligation to update any forward-looking statements except as required under applicable law. All information provided on today's conference call is as of today's date.

References to U.S. GAAP or to Generally Accepted Accounting Principles as practiced in the United States of America and references to dollars are to the lawful currency of the United States of America.

At this time, I would like to now turn the call over to SVP, Mr. Jay Ji. Please go ahead, sir.

Jay Ji

Thank you, David. And welcome to our second quarter 2014 financial results conference call. I hope that everyone had a chance to review our press release.

Overall, our second quarter results were in line with our expectations. On a business basis, growth in our brand name phone business was offset by declines in our ODP business. This reflects the continued intensive competition we are seeing in smartphone markets worldwide.

By maintaining our focus, we have been able to navigate the challenges well on our lower revenue base, and importantly we also remain focused on and continue to make progress on the development of our real estate portfolio. We launched this effort a few years back as a way to diversify our revenue and to bring in added balance and stability and predictability to our business. We continue to make considerable progress and view this as an important catalyst to unlocking value for the company and our shareholders.

In terms of specific results, Q2 revenue was $23 million, compared with $26 million in the first quarter of 2014, and $30 million in the same quarter last year. In addition to the intensive competition I just mentioned, results were impacted by a major enterprise order upgrading to new devices. We expect continued high competition and challenging marketing conditions moving forward.

Another bright spot for us in Q2, in addition to our real estate portfolio progress, was sales in our brand name business.

In terms of segments in Q2, our ODP business contributed 79.5% of total revenue, our brand name business contributed 19.3% of total revenue, and our game business contributed 1.2% of total revenue.

Revenue from our brand name business was $4.5 million in Q2. This is a 65% increase compared to $2.7 million in the previous quarter. This reflects the enhanced value our ruggedized brand has created in the niche outdoor segment. This type of local brand growth reflects broader trends in the mobile market. We caution that this growth is coming off of a small base, our results in the segment can fluctuate in any given quarter.

With the upside, we are seeing a fundamental shift where large dominator brands are no longer able to control our local markets just [indiscernible]. It was recently reported that Samsung was no longer the dominator brand in Mainland China, and is losing share in the large India markets. There was again many opportunities for local brands to build customer share with high-quality products at a fair price.

We are encouraged by this trend and seeing TechFaith there to potentially benefit over the next several quarters. We have already proven successful with our ruggedized handsets. We expanded that into tablets. We are now expanding our ruggedized concept into more mass market phones. We are also on track to launch our first ruggedized device later this year.

In terms of our game segment, revenue for the second quarter 2014 was $300,000, compared to $120,000 in the previous quarter. This reflects ongoing strategic shift in our gaming business. We continue to evaluate our options in this market. There are many positives in terms of market size, customer loyalty, average amount spent per customer on games, and the fact that is a very fragmented market worldwide. There are also many well documented challenges that make longer-term success very hard to achieve.

This change overnight with a [hard pattern] [ph], our platform becoming no longer popular. It is [indiscernible] to develop a content technology needed to offer gamers a better experience or they will not be interested and the price has to be attractive with gamers most often looking for companies to subsidize the hardware cost. So we continue to have gaming on our radar screen and continue to work to make it a successful revenue generator for us without investing heavily into it since we do not have any guarantee on our return for the company or our shareholders.

In line with our historical conservative approach, we remain focused on our cost control measures to help maintain a lean organization structure and look to offset manufacturing cost increases. This has helped us to improve our gross profit by 4.8%, compared to the previous quarter.

Our long-term focus remains on building global brand awareness, enhancing our brand image and expanding our product categories beyond the ruggedized smartphones to satisfy different level of niche segments. For example, we will also be expanding into the ruggedized wearables segment and the ruggedized extreme camera. There are many exciting devices being talked about on a daily basis, many devices have pretty new abilities to older devices and many are connected to the Internet or the so called Internet of things. This is a pretty new area so it is not known what actual customer demand will be for any of our device.

Consumer interest is hard to predict and many times interest will turn into [hate] that no one expected. This is not new and is the same environment handset developers have always operated in. With the roll out of ruggedized became a huge global success, Apple’s iPod, [indiscernible] music segment for TechFaith, the one thing we do know is that we have extensive technical design, marketing and support experience. We have a strong infrastructure in place and we have the financial strength to support new development and new launches, so we are hopeful that by leveraging our expertise, we can bring in device to market that are unique enough to stand out from the others.

Medical, outdoor and fitness are natural area for us to look at. We also continue to expand our presence by advertising in both traditional and new media. For example, our advertisements can be found in the [TWELV MAGAZINE] [ph] several airlines such as Air China and also our high speed railways. Our commercial advertisement can also be found on China Outdoor [indiscernible]. We are also marketing our activities and events through new media such as WeChat and Weibo. These high-profile advertisements are important in building our brand and reaching our target customers.

Now, let me turn the call over to our CFO, Ouyang Yuping, for more details on our quarter and our outlook.

Ouyang Yuping

Thank you, Jay. Thank you to all for joining our second quarter earnings call. Let me quickly reveal some key operating points and our outlook before taking Q&A.

Revenue for the second quarter was $23.1 million, compared to $26.2 million in the previous quarter and $30.2 million in the same quarter last year. Our ODP business contributed $18.4 million or around 80% of the total revenue. Our brand name mobile phone business contributed $4.5 million or 19.3% of the revenue and our gaming business contributed [$260,000] or 1.2% of the revenue.

As Jay noted, we continue to expect a very challenging business environment in the near future, which has a direct impact on both our revenue and profitability.

Overall gross profit for the second quarter of 2014 was $2 million compared to $1.9 million in the previous quarter and $3.4 million in the same quarter last year.

Our operating expenses for the second quarter of 2014 was $5.7 million, compared to $6.3 million in the previous quarter, and compared to $4.3 million in the same quarter last year. The sequential decline comes as we continue to monitor our cost while making targeted investments to strengthen our sales and marketing activities.

In terms of our balance sheet, we ended the second quarter with a balance of $253.9 million as compared to $258.5 million in the previous quarter. The slight decline is mainly due to land cost associated with our ongoing real estate portfolio development and payment for facility usage.

In Hangzhou, we have invested approximately $43 million in the construction of three buildings with a total area of 43,500 square meters.

In Beijing, we remain on schedule and target completion of the construction of 16 buildings by the end of this year. These 16 buildings will have a combined total area of about 73,000 square meters. By the end of second quarter this year, we have invested approximately $23.9 million for this project.

In Shenyang, we expect to complete one building with an area of 10,000 square meters in 2014. As of the end of Q2 2014, we have invested approximately $8.3 million for this project since we started.

Additionally, we expect our cash outflow for the real estate portfolio in the second half of this year to be around $60 million.

In terms of specific guidance for the third quarter of 2014, as noted in our press release, we currently expect total revenue in the third quarter to be in the range of $22 million to $24 million. This forecast reflects earlier mentioned continued competitive pressure and challenging business environment we revealed earlier.

Operator, that concludes our formal remarks, we can now take any questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) There’s no questions coming through, so now I would like to turn it back to management for closing remarks.

Jay Ji

Thank you everyone for participating in today's call. We look forward to speaking with you on our next quarter results call. Please feel free to follow-up with us if you have any additional questions. Bye-bye.

Operator

Thank you for your participation in today’s conference. That concludes the presentation. You may disconnect. Have a good day.

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