VisionChina Media's (VISN) CEO Limin Li on Q2 2014 Results - Earnings Call Transcript

Aug.20.14 | About: VisionChina Media, (VISN)

VisionChina Media Inc (NASDAQ:VISN)

Q2 2014 Results Earnings Conference Call

August 19, 2014, 8:00 pm ET

Executives

Shuning Yi - Investor Relations

Limin Li - Chairman of the Board, Chief Executive Officer

Stanley Wang - Chief Financial Officer

Analysts

Operator

Good evening and thank you for standing by for VisionChina Media's second quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. 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. Thank you. Please go ahead.

Shuning Yi

Hello, everyone and welcome to VisionChina Media's second quarter 2014 earnings conference call. The company's second 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 turn the call over to our CEO, Mr. Li.

Limin Li

[FOREIGN LANGUAGE]

Hello, everyone and thank you for joining us today. VisionChina's saw results in line with our expectations in the second quarter of 2014. Our total revenues reached to $30.5 representing a 37% increase from the first quarter of 2014. Additionally, in the second quarter, we realized GAAP profitability of $2.4 million. Our utilization rate also increased 23% from the first quarter of 2014. As a result of our media costs utilization and revenue growth our gross margin increased to 26.9%. Moreover, we strengthened our sales force and the resulting revenues contributed by each sales represented increase 40% year-over-year, which not only demonstrate the significant uptrends in our business but also renewed our commitment to our media costs utilization strategy.

In the second quarter, VisionChina Media continued to bring stronger brand influence and traffic value to game makers. We participated in China's Digital Entertainment Expo & Conference, also known as ChinaJoy in Shanghai in July in order to further strengthen our interaction and cooperation with game makers. Since our last appearance at ChinaJoy, more than 100 game products from Tencent, Baidu, Qihoo 360, China Mobile Games and Entertainment Group, among other companies have been promoted across our mobile TV network which has become highly recognized by the leading game makers for its low cost, high commercial rate and the power to influence.

VisionChina Media continues to deepen its cooperation with online game platforms. Taking Qihoo 360 as an example, VisionChina Media not only strengthened advertising of the top games awards for the mobile games giant, but also participated in activity planning and identifying a co-host in a new interactive program by Mike Liao. In advertising placement continued to grow in the second quarter and our revenues from makers in the second quarter increased 10% on year-over-year.

In terms of program content, VisionChina Media continued to strengthen its cooperation with CCTV, mainstream TV and high quality websites to provide unique guiding, marketing, advertising solution for advertisers. We believe in the concept of driving advertising value with quality content. A concept that VisionChina Media has always adhered to and believe that it will bring more profitable returns to its advertising business in the future.

For example, Hunan Satellite TV's Dad, Where we are going to?, is not only popular on TVs and online, but also attracts the attention of passengers on buses and subways. We attached (inaudible) advertisement to Dad, Where are we going to? and broadcast across our platform, which has attracted extensive attention. The advertising placement of this program increased by about 100% on year-over-year basis.

Meanwhile, we cooperated with mainstream online video website and launched amazing web TV to broadcast the hottest internet TV programs on our platform. The advertisement product that a company internet mainstream program such as (inaudible) has been warmly received by advertisers. VisionChina Media also strengthened activity marketing and look for other cooperative projects in addition to creating high quality programs revolving around the Chinese Super League and its expanding partners.

Recently VisionChina has become the partner of the eighth China Cup International Regatta and Blue [ph] festival, the 15th Western China International Fair, the fifth tour of Qinghai Lake International bicycle competition, Hunan radio and television, Dad, Where we are going to? national activity and other projects to drive the advertising sales of our platform. Under the market layout expanding through the above channels, the number of advertisers increased by 7% in the second quarter related to the first quarter. We remain confident in the growth of our business and believe we are on the right track.

As previously announced, in July we finalize the settlement agreement of all litigations arising from our November 2009 acquisition of Digital Media Group Company Limited. All claims have been dismissed and all closing conditions of the settlement agreement have been met. The former shareholders of DMG, Oak and Gobi will continue to support our development as the major shareholders going forward.

Turning now to our mobile Internet strategy. Yesterday the China's government approved the guidance for promoting the development of traditional media and new media. Xi Jinping, the President of China spoke about integration of traditional and new media outlet. And urged the media to intensify their Internet thinking, which is in line with VisionChina Media's long-term strategy of turning our current digital mobile TV network into China's largest Wi-Fi operator on public transit system.

We will provide a free mobile Internet gateway to passengers on buses through our self developed bus Wi-Fi technology and plan to provide news, games, videos, music and other mobile Internet value added service across the Wi-Fi platform. According to CTR Research, in 2013 370 million mobile phone users in China took the bus or subway as their main means of transport and usually take 42 minutes every day on the public transportation, of which 89.1% have data plans of only 30 megabyte to 300 megabyte per month.

As such, the Internet access rate of these passengers can be improved through a free network on public transit. In addition, for products promoting a mobile TV, the immediately available free network will be able to provide a convenient online purchasing options. Therefore, VisionChina Media's mobile Internet service not only presents our new business growth, but also promotes the growth of our traditional mobile TV advertising business. By integrating the two networks, we can provide customers with more value added services on the mobile Internet.

We have now completed the research and development and start testing our bus Wi-Fi equipment and plan to accelerate the construction of our bus Wi-Fi network. VisionChina Media is working with Huawei in a super Wi-Fi network construction of public transportation, including jointly establishing a Wi-Fi laboratory of transportation industry. Jointly driving and leading this development and commercial application of Wi-Fi and technology solutions for the transportation industry and promoting the sound development of China's Wi-Fi chain.

At the same time, Huawei also provides its self developed intelligence bus role to VisionChina Media to be used in the national public transportation Wi-Fi network construction. In terms of market development, we have obtained bus Wi-Fi operating rights in several major cities and have conducted preoperational testing with some bus companies in major city and are proceeding on schedule. In the next two years, we plan to install onboard Wi-Fi equipment on 150,000 buses in Tier 1 and Tier 2 cities in China to allow more than 100 million mobile phone (inaudible) to access free Wi-Fi on buses. We expect that our mobile Internet strategy will be key to our sustainable development in the near future and we will take off again as the first Wi-Fi network operator.

I will now hand over the call to our Chief Financial Officer, Mr. Stanley Wang, who will discuss our financials and operating metrics in more detail.

Stanley Wang

Thank you, Mr. Li. I will first go over our quarterly operating metrics. Our network capacity, which is measured by total broadcasting hour was 38,039 in the second quarter of 2014, compared to 39,495 hours in the second quarter of 2013 and 37,620 hours in the first quarter of 2014. Our average advertising revenue per block hour was $734 in the second quarter of 2014, compared to $665 in the second quarter of 2013 and $543 in the first quarter of 2014.

In the second quarter of 2014, we sold a total of approximately 329,000 advertising minutes in our network, compared to 271,000 advertising minutes in the second quarter of 2013 and 264,000 advertising minutes in the first quarter of 2014. On average, we sold 8.65 advertising minutes per broadcasting hour in the second quarter of 2014, compared to 7.13 advertising minutes per broadcasting hour in the second quarter of 2013 and 7.03 advertising minutes per broadcasting hour in the first quarter of 2014.

We ended the second quarter of 2014 with 330 sales personnel representing a net decrease of 28 sales people over the course of the first quarter. The result of one of our cost control measure and to optimize ratio of sales people to the advertising customers.

Turning now to our second quarter financial results. Our total revenue in the second quarter of 2014 were $30.5 million. Advertising service revenue, which accounted for 99.6% of our total revenue in the second quarter of 2014 were $30.4 million, representing an increase of 14.2% compared to that in the second quarter of 2013.

Media cost, the most significant component of advertising service cost was $18 million during the second quarter of 2014, compared to $17.9 million in the second quarter of 2013 and $18.5 million in the first quarter of 2014.

Gross profit in the second quarter of 2014 was $8.2 million, compared to gross profit of $4.5 million in the second quarter of 2013 and gross loss was $0.2 million in the first quarter of 2014. Advertising service gross margin was 26.9% in the second quarter of 2014, compared to 16.8% in the second quarter of 2013 and a negative 0.9% in the first quarter of 2014.

Selling and marketing expenses were $3.7 million in the second quarter of 2014, compared to $7.5 million in the second quarter of 2014 and $5.6 million in the first quarter of 2014. General and administrative expenses were $3.2 million in the second quarter of 2014, compared to $2.1 million in the second quarter of 2013 and $2.2 million in the first quarter of 2014.

Operating profit was $2 million in the second quarter of 2014, compared to an operating loss of $5.2 million in the second quarter of 2013 and an operating loss of $7.1 million in the first quarter of 2014. Our income tax expenses were $50,000 in the second quarter of 2014, compared to the $70,000 in the second quarter of 2013 and $30,000 in the first quarter of 2014. Net profit attributable to our shareholder, referred to as GAAP net profit, was $2.4 million in the second quarter of 2014. Basic and diluted net profit per ADS on a GAAP basis in the second quarter of 2014 was $0.48 and $0.42 respectively.

In the second quarter of 2014, our non-GAAP financial measure, net loss attributable to our shareholders excluding share-based compensation expenses and contingent loss related to litigation was $2.5 million in the second quarter of 2014, compared to a non-GAAP net loss of $5.1 million in the second quarter of 2013 and non-GAAP net loss of $7.2 million in the first quarter of 2014.

We had cash and cash equivalents of $31.8 million as of June 30, 2014 and our net cash used in operating activities was $6 million in the second quarter of 2014. Depreciation and amortization expense were $0.9 million and capital expenditure was $0.2 million in the second quarter of 2014.

Turning now to our guidance. Based on our business conditions seen thus far in 2014, we estimate our advertising service revenue in the third quarter of 2014 to be between $30 million to $31.5 million, representing a year-over-year growth of 6.5% to 11.8%. These estimates are based on a foreign exchange rate of RMB6.1614 per $1. As a reminder, our guidance is based on our current network that, as of the date of this press release, 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, management's forecast could be affected.

Thank you again for joining us today, and I will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of (inaudible). Please ask the question.

Unidentified Analyst

Thanks for taking my questions. I have a couple of questions. The first one is regarding the cooperation with Huawei. So how much cost do we had to bear? And how is the performance of your Wi-Fi on bus now? For example, how fast is the Wi-Fi speed when the bus is moving and how many users could connect to Wi-Fi at the same time? And then I have a follow-up. Thanks.

Stanley Wang

Thanks very much for the question. I will be taking your question. And we have a cooperation agreement with Huawei in July and we have a formed a strategic partnership with Huawei on various business area including Huawei will be one of our supplier in the Wi-Fi devices and also we have established a joint lab with Huawei in research and development in the Wi-Fi technology and the future Wi-Fi application in various different kind of locations including in the mass transit system of China. And then basically, as just said by Mr. Li, that we are going to expand our Wi-Fi network across the country, across China. So actually we have plans to fulfill a target of installing Wi-Fi devices for over 50,000 to 100,000 buses in the next two years. So basically we will incur a considerable amount of capital expenditure when we implement this strategy and establish the network, which basically in terms of our CapEx in the next two years, it will basically cost of approximately some RMB300 million capital expenditure in the coming three years. So in terms of the Wi-Fi network status, actually the Wi-Fi devices were actually tailor made, Wi-Fi device which contains high speed connection and also the local content cache on the hard drive which provide both the Internet connections and the value added services in the local drive. And then basically the connection speed is, we are using the currently HSPA+ which has a bandwidth of 42M bandwidth for the mobile connection and in the future, we will also use the LTE technologies to enable our passengers can use the Internet connection in the bus that actually we will convert such mobile connections into Wi-Fi connection in the bus for the passengers to use. And also, in the bus the passengers can also have the connection to use the local content within the high speed through our in bus router. So at the same time, currently, the Huawei's equipments allow the passengers in a bus to more than 40 passengers in the bus to connect to the devices at the same time.

Unidentified Analyst

Thank you. My second question is regarding the advertising sales breakdown by sector. So could you please give us some details on the sales breakdown and share with us your view about the outlook in the second half. Thanks.

Stanley Wang

I am taking your first question on the on the vertical mix of the advertising revenue. Basically the key industries of our advertising mix in the second quarter actually were quite consistent with the first quarter. The fast-moving consumer goods actually account for more than 50% of our total advertising revenue and the Internet together with gaming actually accounts for more than 15% of our total revenue, which add up together to accounts for nearly 70% of our total revenue. So basically in the rest of year, we see this mix of the industries. Basically we would continue and then as the mass transit media we will basically more focus on the brands and the verticals that has more connections to the major people. So we believe that we will continue to focus on the marketing on the FMCG vertical and also the Internet gaming vertical.

For the outlook of the second half of advertising market, I will hand over this question to Mr. Li.

Limin Li

[FOREIGN LANGUAGE]

For the second quarter, overall advertising market, although the overall market has shown certain especially for the traditional and certain new media, in overall market, which has shown some signs of recovery but we are still cautiously optimistic about the outlook in the second quarter because we still saw the advertisers were very cautious with very cautious sentiment when arrange their advertising spending in the second half. And then as for VisionChina, we will continue to implement our strategy to drive our topline by both our contents, different strategy, and also to diversify our advertising products to bring more value to the advertisers. And also we do think in bus Wi-Fi will be new growth point for the company in the future because this will enable us to bring a more comprehensive and integrated advertising solution to the advertisers.

Unidentified Analyst

Thank you. My last question, how to understand the year-on-year downward trend of advertisers' number? And are there any specific sectors' advertisers that are no longer our customers?

Stanley Wang

I would say, we have restructured a certain advertising agency contracts in the first half of the year that basically we have restructuring a couple of contract relating to Wuhan, Shenyang, Dalian and Changchun and even in (inaudible) and certain of the Tier 2 cities. And we also continue to move on restructure some other contracts to reduce the cost. One of the measures we take is to, we will restructure the agency's scope from both national, international customers plus local customers, local agencies and we will just disregard certain local customers market in those cities. So basically that means we will lose some of the low price SME, small and medium enterprises. This leads to, there are some certain change in the dollar change in our advertisers in year-over-year, but however the advertisers quality has been significantly improved because we have focused more on the international and national FMCG and Internet companies, which bring us a more efficient income and we have improved efficiency in our sales team.

Hello. (inaudible).

Operator

Thank you. (Operator Instructions). There are no further questions at this time. I would now like to hand the conference back Ms. Yi. Please continue.

Shuning Yi

Thank you all for joining us today. If you have any questions, please don't hesitate to contact us at ir@visionchina.cn.

Operator

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

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