China Digital TV Holding Co., Ltd. (NYSE:STV)
Q2 2014 Earnings Conference Call
August 19, 2014 08:00 PM ET
Yi-ke Hong - Brunswick Group LLC
Nan Hao - Investor Relations Manager
Lu Zengxiang - Chief Financial Officer
Good evening and welcome to the China Digital TV’s second quarter 2014 earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.
I would now like to turn the conference over to Yi-ke Hong. Please go ahead.
Thank you, operator. Hello everyone and welcome to China Digital TV’s second quarter 2014 earnings conference call. The company’s earnings results were released earlier today, and are available on its IR website at ir.chinadtv.cn, as well as on newswire services.
Today, you will hear an overview of the quarter and a discussion of the company’s financial results. After the company’s prepared remarks, China Digital TV’s acting CEO and CFO Dr. Lu Zengxiang will be available to answer your questions.
Before we continue, please note that the discussion today will contain certain 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, the company’s results may be materially different from the views expressed today.
Further information regarding these and other risks and uncertainties is included in the company’s registration statement on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. China Digital TV 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 China Digital TV’s investor relations website. I will now turn the call over to China Digital TV’s acting CEO and CFO, Dr. Lu Zengxiang.
Thank you. Hello everyone and welcome. I’d like to begin today’s earning’s call by discussing the overall developments in China’s cable TV market during the second quarter.
Cable TV users in China increased by 6.3 million during the second quarter to over 184 million, with the digital conversion rate reaching 87.8%, according to Zhongguang Luoda. Within this increase, 5.3 million were people new to digital cable TV, while 1.0 million were purchases of second terminals.
Since late June, China’s top media regulator, The State Administration of Radio Film and Television (SARFT), has issued several official documents designed to strengthen its oversight over OTT services and promote the use of TVOS systems as the mandatory OTT STB system. In a document issued on July 11, the SARFT banned view-on-demand and rewind functions on Internet TV and halted some built-in applications on Internet set-top boxes. This move will clearly have some impact on OTT content, and we may start to see Internet TV users go back to watching traditional cable or digital live TV. This in turn could see increased engagement with TV-based games and other applications, which could create opportunities for China Digital TV to expand our cable user base and develop VAS.
Turning now to our quarterly performance. In Q2, China Digital TV shipped approximately 3.55 million smart cards, in line with our expectations. For the first half of 2014, in total we’ve shipped approximately 7.1 million smart cards. Jiangsu, Zhejiang, Sichuan, Shandong and Jiangxi were all particularly strong markets for China Digital TV’s smart card shipments in Q2, which underpinned our continued market leadership. In the second quarter, we had a smart card market share of 51% in China, according to Zhongguang Luoda.
Looking ahead to the second half of 2014, we expect to see steady demand for smart cards in China, particularly in China’s most populous provinces, such as Jiangsu, Zhejiang, and Henan
In the second quarter, smart card ASPs continued their decline, falling 7.8% year-on-year, which was in line with our expectations. Again, this was largely down to the increased bargaining power of provincial cable operators.
Turning now to International Markets. We continue to make good overall progress in developing international markets. In Q2, we shipped approximately 278,000 smart cards to overseas markets, basically flat compared to last year. In total, for the first half of 2014 we shipped 600,000 smart cards outside of China. While Southeast Asia remains our key overseas region, we are also now looking at opportunities to cooperate with several cable operators in emerging markets.
Looking now at value added services. During the second quarter, value added services, or VAS, also remain an important part of our diversification strategy.
In cloud computing, we signed a cooperation agreement on mobile cloud games with Jiangsu Mobile, to develop games on OTT set-top boxes as well as 4G cloud games on mobile phones. We expect the OTT business to go to market in the second half of this year, and it should cover approximately 2 million users. We expect 4G cloud games to come out a little later, likely in the first half of 2015.
Finally, also this quarter we won a bid to establish a streaming platform to optimize the boot screen on set-top boxes for Shandong Network TV. This will cover broadband users on China Telecom and Unicom in Shandong Province. We are in the process of deploying an initial 1,000 concurrent nodes.
Overall, we expect to see continued demand for our smart cards domestically, and the development of international markets and our progress on value added services should allow us to maintain steady growth.
Before we discuss our financial performance in more detail, I would like to quickly run through the progress made in the asset restructuring with Cinda Investment and the reorganization of our corporate structure that took place in the quarter. We believe these put the company on firmer ground for future growth and will allow us to improve shareholder value.
Regarding the Cinda Investment agreement, as of today, the initial due diligence has been completed and the related parties are in the process of revising the assets restructuring plan and drafting the related audit and assessment reports. And as for the reorganization of our corporate structure, that has now been completed. In addition, in order to secure shareholder value, China Digital TV’s board of directors has engaged US lawyers and independent financial advisors to professionally evaluate this transaction.
We have to remind all investors that there will be significant difficulties and uncertainties in completing the asset restructuring, which is pending the entry of definitive transaction agreements, and is also subject to applicable approvals by the board of directors and shareholders of the relevant parties involved as well as regulatory clearance. The Restructuring will terminate if it has not been completed by December 31, 2015.
I will now hand the call over to Nan Hao, our investor relations manager, to discuss our financial performance in more detail.
Thank you. Hello everyone. Now to the financial highlights for Q2. Please note that, unless otherwise stated, all monetary amounts are in US dollars.
In Q2 2014, China Digital TV shipped approximately 3.55 million smart cards, compared to 3.58 million for the same period in 2013 and 3.56 million in Q1 2014.
Net revenues in Q2 2014 were 17.2 million, a decrease of 5.8% from the same period in 2013 and a 5.6% decrease from Q1 2014. The year-over-year decrease was primarily due to a decrease in revenues from the sale of smart cards as a result of decreased average selling price [ASP], which was partially offset by an increase in revenues from services, such as licensing income. The quarter-over-quarter decrease was mainly due to a decrease in revenues from other products, such as surface mounted chips, as well as a decrease in revenues from the sale of smart cards as a result of decreased ASP.
Now let me go through the major revenue components for the quarter. Revenues from smart cards and other products were 15.9 million, a decrease of 9.1% from the same period in 2013 and a decrease of 7.1% from the first quarter of 2014. The year-over-year decrease was primarily due to a decrease in revenues from the sales of smart cards as a result of decreased ASP. The quarter-over-quarter decrease was mainly due to a decrease in revenues from other products, such as surface mounted chips, as well as a decrease in revenues from the sales of smart cards as a result of decreased ASP. Sales of smart cards and other products accounted for 91.4% of total revenues in the second quarter of 2014, compared to 92.3% in the preceding quarter.
Revenues from our top five customers accounted for 23.7% of total revenues, compared to 25% in Q1 2014. Revenues from services were US$1.5 million in the second quarter of 2014, an increase of 52.6% from the same period in 2013 and an increase of 5.4% from the first quarter of 2014.
Gross profit in Q2 2014 was 12.6 million, a decrease of 9.9% from last year and a decrease of 11.9% from Q1 2014. Gross margin was 73.3% in Q2 2014, compared to 76.7% in Q2 2013 and 78.6% last quarter. The year-over-year and quarter-over-quarter decreases in gross margin were primarily due to an increase in cost of revenues, attributable to inventory write-downs with respect to multimedia home entertainment boxes.
ASP of smart cards in Q2 2014 decreased by 3.6% sequentially, while unit costs remained stable compared to the first quarter of 2014.
Operating expenses in Q2 2014 were US$9.3 million, a decrease of 12.3% from the same period in 2013 and a decrease of 11.2% from Q1 2014.
Income from operations in Q2 2014 was 3.3 million, a 2.4% decrease from last year and a 13.9% decrease from last quarter. Operating margin in Q2 was 19%, compared to 18.3% during the same period in 2013 and 20.8% in Q1 2014.
Income tax expenses in the second quarter of 2014 were US$0.3 million, compared to US$2.1 million in the same period of 2013 and US$0.9 million in the first quarter of 2014. In June 2014, the Company completed an internal reorganization. As a result of the reorganization, income tax expenses were reduced due to the deductible investment losses arising from the equity transfers under the reorganization. And also, there was a tax rate difference, the Company accrued income tax expenses at a rate of 10% in the second quarter of 2014, compared to 15% in the second quarter of 2013. In the fourth quarter of 2013, the Company's PRC operating subsidiary, Beijing Super TV Co., Ltd., was designated as a "key software enterprise" for the tax years of 2013 and 2014 by the relevant PRC government authorities and, as a result, was entitled to a preferential income tax rate of 10% in each of those years. As the Company accrued income tax expenses at a rate of 15% in the first three quarters of 2013, the accrued income tax expenses were partially reversed in the fourth quarter of 2013. The year-over-year decrease in income tax expenses in Q2 was mainly due to the above two reasons. The quarter-over-quarter decrease in income tax expense was primarily due to the Company reorganization.
Net income attributable to China Digital TV Holding Co., Ltd. in the second quarter of 2014 was US$4.4 million, an increase of 8.4% from the first quarter of 2014.
Non-GAAP net income attributable to China Digital TV Holding Co., Ltd., defined as net income excluding certain one-time or non-cash expenses, such as share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments, in the second quarter of 2014 was US$4.7 million, an increase of 96.0% from the same period in 2013 and an increase of 6.3% from the first quarter of 2014.
Turning to our balance sheet. As of June 30, 2014, China Digital TV had cash, cash equivalents and restricted cash totaling 37.6 million. In Q2 2014, cash flow generated from operations was approximately 1.7 million
Now, let me provide you our business outlook. Based on information available as of Aug 19, 2014, China Digital TV expects smart card shipments for Q3 2014 to be in the range of 3.6 million and 3.9 million. Net revenues for Q3 2014 are expected to be in the range of 15.4 million and 16.6 million.
Thank you for listening. We will now take your questions.
(Operator Instructions) The question comes from [Johnny LynnLin of JD Max] [ph]. Please go ahead. Johnny LynnLin of JD Max, your line maybe muted. Please un-mute your line.
Hi. Yes. Can you provide update on the VIE restructuring, please?
Okay. We have already dissolved the VIE structures in the second quarter.
You said already completed the VIE restructuring?
Yes. We have already completed the VIE restructuring.
Okay. Do you have any updates on the Cinda investments in your company?
Well, actually, I have already mentioned just now, the initial due diligence has been completed and the related parties are in the process of revising the assets restructuring plan and drafting the related audit and assessment reports. This is the latest progress so far for the transactions.
Okay. Thank you very much. That's all.
Also, in order to secure shareholder value, China Digital TV’s board of directors has engaged US lawyers and independent financial advisors to professionally evaluate this transaction.
Okay. What's the timeframe for that? Do you have update for that?
So far, we don't have plan for when the transaction will be completed.
We will let us know - once we have certain progress and we will announce the news as soon as possible once we confirm the total progress.
Okay. That's all my questions. Thank you.
Okay. Thank you.
We show no questions at this time. I would like to hand the conference back over to Nan Hao for closing remarks.
Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Thank you for your continued support and we look forward to talking with you in the coming months.
Thank you. Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may all now disconnect your lines.
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