ChinaCache International's (CCIH) CEO Song Wang on Q2 2014 Results - Earnings Call Transcript

Start Time: 20:07

End Time: 21:01

ChinaCache International Holdings Ltd. (NASDAQ:CCIH)

Q2 2014 Earnings Conference Call

August 19, 2014 08:00 PM ET

Executives

Song Wang - Founder, Chairman and CEO

Ken Zhang - President

Jing An - CFO

David She - VP of Finance

Analysts

Kai Qian - CICC

Liping Zhao - CICC

Operator

Good afternoon. My name is Jason and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the ChinaCache Second Quarter 2014 Earnings Conference Call. All lines has been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I’d now like to turn the call over to David She, VP of Finance for ChinaCache. Sir, you may begin your conference.

David She

Hello everyone and welcome to ChinaCache Second Quarter 2014 Earnings conference call. We distributed our earnings release earlier today. If you have not received a copy, you can find it in the Investor Relations section of our Web site.

Today you will hear from Mr. Song Wang, our Founder, Chairman and CEO; Dr Ken Zhang, our President; and Ms. Jing An, our CFO. There will be a question-and-answer session following management’s prepared remarks.

Before we proceed, 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 are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC. ChinaCache does not undertake any obligation to update any forward-looking statements except as required under relevant law.

Our earnings press release and this call includes discussion of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures and is available on our Web site.

As a reminder, this conference call will be recorded. In addition, a live and archived Webcast of the conference call will be available on our Web site.

I’ll now turn the call over to our CEO Mr. Wang, who will make his remarks in Chinese, and then I’ll provide an English translation.

Song Wang

Good morning ladies and gentlemen. Thank you for joining us to discuss our second quarter results. I’m very pleased that during the second quarter of 2014 ChinaCache again achieved strong growth in total revenue, reflecting our position as the leader of the Internet content and application delivery services in China, along with the strong demand for our advanced technology and services.

Our net revenue for the second quarter exceeded the top end of our guidance range, reaching RMB346.3 million, representing a 34.4% year-over-year increase with adjusted net income in the second quarter reaching RMB11.6 million. In addition, we continue to see healthy growth in our customer base.

The first half of 2014 exceeded our expectations and we’re highly confident that ChinaCache will continue upon its growth trajectory for the remainder of 2014 and onwards. I’d like to thank all of our dedicated employees and management team for their tremendous contributions in these efforts.

During the second quarter, we continue to see deepening evolution of the Internet with mobile users and mobile traffic rising rapidly. In Internet we continue to penetrate and restructure traditional industry such as travel, dining, and education. Internet giants such as well as emerging vertical industry leaders continue to realize strong growth during the second quarter and are accelerating their deployments on mobile portals.

The fast growth in mobile data traffic and the evolving industry landscape, all very much depend on stability and optimization of the Internet infrastructure. This presents tremendous growth opportunities for ChinaCache.

Next, I’d like to comment upon some important operating developments during the second quarter. First of all, we continue to push forward our cooperation with China Telecom, to jointly construct CDN networks. So far over 1,000 China Telecom employees have received training and we’ve also completed a construction of 5 out of 13 service nodes in Phase 1 of the joint efforts, with plans underway for Phase 2 and Phase 3.

The partnership is very important to both parties. Traditional carriers need to transition from voice transmission to data transmission and continuously optimize their broadband network, whereas ChinaCache could capitalize on large carriers branding bandwidth resources and customer base to strengthen and expand the structure and efficiency of our CDN platform.

As the Internet infrastructure continues to evolve, the partnerships between CDN service providers and domestic and global carriers such as our cooperation with China Telecom are expected to be an important trend.

As part of our strategic efforts to grow internationally and become a global leader in content delivery, we’ve now three key additions -- sorry two additions and one now to our management team during the second quarter.

We appointed Yali Liu as our Vice President, Global Business Development where she leads our business development activities with carriers, content providers, media, and enterprise customers globally. Yali was previously with Verizon and played a key role in expanding Verizon’s data services to more than 140 countries.

We also appointed René Bos as our Vice President of Global Corporate Development where he [ph] [spree] at our worldwide marketing initiatives. René comes to ChinaCache from leading international market research company such as SSI and Nielsen where he assumes high level management responsibilities.

Lastly, we have just hired [ph] [Mr. Hao Guoqiang] as Vice President of Carrier Development. Mr. Hao has over 18 years of experience at China Mobile and has very deep understanding in telecom carriers. This will be very beneficial for our future business development efforts with carriers.

We believe the appointment of Yali and René and Mr. Ho and their vision and experience will enable us to better explore the opportunities to work with carriers and other partners both domestically and globally.

Next, I would like to report the ChinaCache Atecsys Cloud Data Center project is underway with intense construction activity and the entire building foundation of the project has been completed. We expect the initial construction to be completed by end of this year and the first building be put into service next June.

ChinaCache Atecsys Cloud Data Center is the first of its kind in data center industry, except itself apart from traditional service providers with its fast turnaround time which mitigates reliance on future leasing income to recoup investment outlay and the provision of continued total solution support after sale which brings recurring revenue streams with enhanced customers (indiscernible).

With the dramatic increase in information flow as well as storage needs, large scale Internet firms and traditional enterprises see more and more urgent need to build their own computing power. However, there is no customized products currently available that is similar to our Atecsys project.

By purchasing the customized data center from ChinaCache, our customers lock in the future covenant cost, hedge the increasing land and power costs expected on their leasing model and benefit from holding the data center as a long-term asset. We are very optimistic about this innovative business model.

In June, we were delighted to successfully host a 2014 GCDN Conference, in Beijing for the second consecutive year. GCDN is one of the most influential conferences in our industry today both within China and internationally. The conference highlights CDN as the key carrying and [ph] [dispatching] service infrastructure across all major Internet industry verticals.

This year we also expanded the conference agenda to include more keynote speeches and panel discussions on important industry trends such as mobile Internet, cloud computing, online broadcasting and videos and Internet connected vehicles.

For immediate pass in fast growing Internet phase, we’re also noticing some important trends in video business segment. Video accounts for more than 50% of total Internet traffic in both China and the U.S. While we’re seeing tremendous growth for Internet video portals, many national and provincial level TV stations are also getting us -- sending us their own new media departments in an effort to transform from a traditional media into an internet outlet as a emerging broadcast channel is becoming an important settlement supplements or even over turning power to radio and television broadcasting.

TV stations traditionally sell the copyrights to Internet channels, but now are switching to broadcasting on their own Web site sometimes exclusively for popular content. We believe the transitioning of traditional media will be the expansion and deepening of the exploited growth for Internet videos. And our value is thus demonstrated by addressing the needs of these traditional media of their transition towards Internet media, lowering their transition costs and ensuring stable and cost effective content distribution. This trend is very similar to the past TV stations such as ESPN and HBO went through in U.S and Europe.

We are also delighted to have some dramatic change in the gaming sector. In 2013, a global market site for console games exceeded RMB160 billion and accounted for over one-third of the entire electronic game space. However, in China console games were prohibited by government policy in 2000 and this prohibition was just lifted in January of this year.

We have recently launched support for Microsoft Xbox (indiscernible) in August. We also expect Sony PlayStation 4 to be released in China soon and we will also be conducting a networking support.

As console games continuously become more high-definition interacted and bigger in size, we expect tremendous growth in content dollars and we have significant experience addressing these needs. Looking into September and fourth quarter were also exciting major handset releases and corresponding software upgrades. As a result of this development, I’m very much confident in ChinaCache subsequent growth.

With the support from both the industry and the government, we believe that CDN technology as an upgrade to basic telecom service will continue to thrive. We believe the core value of the CDN technology is to lower the entry barrier for our customers into the Internet industry and provide a total solution platform based on CDN services as well as Big Data and cloud computing.

With our nationwide service mode coverage, precise data analysis based on our Content-aware Networks is becoming an important direction for developing value added services. ChinaCache is determined to help optimize the performance and reliability of the Internet infrastructure, enhance the competitiveness of Chinese Internet companies and continuously improve the overall experience of Internet users.

Before I turn the call over to our President, Ken Zhang, I want to highlight our announcement earlier today that we have appointed Jing An, as our Chief Financial Officer. Jing has been a valuable member of our management team who joined the Company in early 2013, during what has been a critical high growth period for ChinaCache. Jing has demonstrated strong operational leadership and provided strategic guidance on our most important development initiatives. We are very confident in her ability to help manage and direct our future growth.\

Now Ken will discuss technology and operations in the second quarter.

Ken Zhang

Thank you. I’m very pleased that during the second quarter we continue our growth momentum and achieved the profitability again. These performances reflect our ongoing improvement, our operating efficiency and the cost expenses control. We will also continue to strive for progress in many important areas including R&D, product offering, as well as execution ability.

Next I will provide some updates of some important operational highlights. During the second quarter, remember our enterprise customers continue to grow rapidly, increasing 16.6% over the first quarter.

Revenue from Enterprise segment is 12% of Company’s top line. As we previously stated, increasing the number of enterprise customer is a important aspect of our growth strategy as a company in traditional industry such as China medical, media, automobile, education and travel. In brief, the internet technology and as the CDN penetration deepened, we believe this customer segment to [ph] [outplay] increasingly important role in our business. And we know this generate significant higher market.

As an example, in Q2 we signed contract with Hunan TV, a traditional TV broadcast service provider now distribute the content through the internet. So the end-user can watch same video content either from with TV screen or from iPhone and iPad. ChinaCache provides total network service to ensure a good end-user experience.

Total video business growing rapidly as we ramp up with bandwidth increased more than 20% over the last quarter. During the second quarter, we also continue our focus on improving internal operational efficiency, in particular, cost of structure optimization, bandwidth resource optimization.

ChinaCache relies on its nationwide service node to provide content delivery and in the beginning of the year we’re consolidating, rebuilding, and optimizing all our service nodes into our portfolio over large, medium, and small nodes.

We upgraded the large and medium nodes, while result in higher flexibility and higher redundancy and enhance a better delivered capacity. This will also lower procurement costs and a more efficient bandwidth usage.

With small service nodes while ensure geographic coverage and service, dealer backup. We are in the process of this restructuring program and we expect its full operation by end of 2014. It should reduce in percentage our cost of sale in longer term.

In the second quarter we participated in the Credible Cloud Conference and were awarded the Credible Cloud Certificate. This certification is the only official certification in the cloud computing business and has provided a foundation for the entire cloud computing ecosystem in China. In essence, cloud computing large scale data processing and high IO throughout based on cloud infrastructure.

Apart from all the [ph] [solid] and computing needs, the high IO throughout are distributed making CDN an integral part of the public cloud. From another perspective, public cloud service providers are also helping educate the market and enhance the penetration of CDN service in China.

With our nationwide CDN network, our Content-aware Networks is capable of generating and analyzing a huge quantity of valuable data. These will drive our value-added service in the future. For example, we conduct analysis of network performance; analyze the behavior statistics of Internet users.

During the second quarter, we were selected by media portal such as CNTV, paid in TV station SoHo, and the (indiscernible) TV for both live streaming and on-demand replay of the world cup series.

In addition, we also use our CDN at Big Data platform to analyze Internet traffic and in monitor data to measure the most active region and the most watched team and the most active moments. The level of data analysis capability will be our foundation for developing a series of value-added services.

During the second quarter, we were also selected by JD.com to support its June 18 Shopping Festival. We successfully enabled JD.com to withstand several service requests on during 10 AM, 10 PM and 12 AM peaks, thereby ensuring a smooth page view, ordering, and the payment process.

I’d also like to mention the opportunity that the booming mobile Internet has created for us. Based on market research, mobile Internet user reached 652 million in China by end of 2013. Furthermore, adoption of 4G LTE technology and the innovation in mobile application create even greater pressure on the [ph] [backbone] of telecom infrastructure. These require CDN to play even bigger role in (indiscernible) packing to alleviate pressure of the [ph] [backbone] system.

Our strategy include: first, working with equipment supplier such as Nokia and Ericsson to store more and more content inside mobile networks, including radio base station. Second, the use of CDN technology together with Big Data and cloud computing to analyze user behavior and even optimize the entire network. Third, we optimize the presentation of mobile content based on perceived end-user device, which creates a bottleneck in the last month.

In addition, in order to capitalize the booming 4G business, ChinaCache is exploiting a potential opportunity to cooperate with business partners and (indiscernible) their different technologies. During our GCDN Conference in second quarter, ChinaCache signed a strategic framework agreement with [ph] [T-Mobile], a U.S based mobile internet solution provider to jointly develop a mobile service platform specifically addressing the business environment in China and key demand of the end-user. We will focus on video application and believe this product has significantly improved mobile end-user experience.

With intensive discussion about SPN, and future internet developer in China, ChinaCache has been invited to participate in a number of this kind of forums. We believe CDN is the initial stage of future SPN and our strategy to build Content-aware Networks service while be able to support our faster developing internet market in China.

I will now turn the call over to Jing, our CFO, to discuss the second quarter financial results. Please?

Jing An

Thank you, Ken. Hello everyone and thank you for your participation. Today my presentation will start with a review of second quarter 2014 results followed by our guidance for the third quarter of 2014. We will then open the call for questions. Please note that the denominating currency is RMB unless otherwise specified.

ChinaCache achieved a strong top line performance during the second quarter with net revenue increasing 34.4% year-over-year to RMB346.3 million from RMB257.7 million in the second quarter of 2013. On a sequential basis, revenue in the second quarter increased by 6.9% over the first quarter of 2014.

We beat our original guidance by 0.4% as we showed stronger-than-expected business, with particular strength in the media entertainment and enterprise verticals, each increased by one percentage point of revenue.

Second quarter gross margin was 30%, decreasing by 0.3 percentage point from 30.3% in the first quarter. Bandwidth and co-location charges were in line with other revenue growth. The slight decrease in market mainly reflected the increase of labor costs and other costs as other operating expense.

In the second quarter we achieved operating income for -- of RMB1 million compared to the RMB0.2 million in the previous quarter. Non-GAAP operating income which excludes the share-based compensation expenses was RMB4.1 million compared to RMB3.7 million in the previous quarter and a non-GAAP operating loss of RMB3.7 million in the second quarter of 2013. We are very pleased that with our strong top line growth, we’ve maintained strict control over operating expenses throughout the Company.

Looking at operating expenses, our general and administrative expenses of the second quarter were RMB37.5 million or 10.8% of net revenue compared with RMB37.2 million or 11.5% of the net revenue in previous quarter. The decrease in general and administrative expenses as a percentage in revenue was primarily due to the economy of scale as our top line expense.

Sales and marketing expenses as a percentage of revenue were 10.2%, less compared to 10.1% in the prior quarter. Sales and marketing expenses in RMB increased by 8.2% to RMB35.4 million in Q2 from RMB32.7 million in Q1 is mainly due to hosting of the global CDN Conference, in June.

R&D expenses for the second quarter were RMB30 million or 8.7% of net revenue compared with RMB28.2 million or 8.7% of net revenue in the prior quarter. We continue to remain dedicate to our research and development efforts as our long-term growth driver and in fact the R&D cost remain stable.

Our total operating expenses were RMB102.9 million or 29.7% of revenue compared to RMB98.1 million or 30.3% of the revenue in the prior quarter. This decrease in percentage will reflect our commitment on controlling expenses and improving our internal operating efficiency.

Looking at the bottom line, I’m very pleased with our performance for the second quarter. After a solid first quarter, we realize the profits again in the second quarter with adjusted net income reaching RMB11.6 million compared to RMB2.7 million in the prior quarter. Adjusted net income is defined as net income before share-based compensation expenses, foreign exchange loss or gains, and penalties and uncertain tax positions.

Our GAAP net income in the second quarter was RMB6.9 million compared with RMB6.3 million in the first quarter. Our non-GAAP diluted earnings per ADS in the second quarter were RMB0.40 compared to RMB0.11 in the first quarter. GAAP diluted earnings per ADS in the second quarter were RMB0.26 compared to RMB0.25 in the first quarter.

Adjusted EBITDA was RMB28.5 million in the second quarter, an improvement of about 12.1% from RMB25.4 million in the prior quarter. Adjusted EBITDA margin for the second quarter was 8.2% versus 7.9% in the prior quarter. Adjusted EBITDA is defined as EBITDA excluding share-based compensation expenses and foreign exchange loss or gain.

I’ll conclude my portion of today’s call with our third quarter guidance. We expect our revenue to be between RMB375 million and RMB380 million representing 36.2% to 38% in growth over the third quarter of last year and 8.3% to 9.7% growth over the previous quarter. In conclusion, I want to emphasize that our results and our guidance demonstrated our commitment to long-term profitable growth.

Now, let’s open the call for questions. Operator, can you start off the Q&A?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from Kai Qian from CICC.

Kai Qian - CICC

[Foreign Language] I have three questions. The first one with the top line growth and we’re very glad to see a very strong momentum in top line growth and the guidance for the third quarter -- the next year and for the sound growth in the top line growth. And my second question is for cost. And the cost consolidated in the (indiscernible) pretty good and I want to see any (indiscernible) for the -- looking forward in the Q3 and full-year and if any further like cost control in the coming quarter? And my third question is for tax, so any guidance about the tax in the second quarter and this year? Thank you.

Jing An

Okay. I will start with your first question about the top line growth. The growth was across the board and media and entertainment which is (indiscernible) the enterprise sectors, digital sectors were the main growth driver of the second quarter and each of the revenue contribution of this two quarters -- sorry, of this two sectors increased by one percentage points. So and we -- actually we’ve recently saw a boost in our enterprise business from the media industry as more and more traditional TV stations are using online channels to grow across their shows. So to compete with online video companies, all of this traditional TV stations they require professional service and solutions from ChinaCache to provide an overall guaranteed services user experience for example like flexibility to watch programs online in real time, playback or even just to watch (indiscernible) clips. And so, I think it was in the coming quarter or later half of this year the -- growth will fuel (indiscernible) across the board as the internet traffic in China is growing rapidly and -- but most of the -- I think the most of the growth is coming from the video, gaming and e-commerce. That’s three vertical.

Ken Zhang

Yes. Hi, Kai, it’s Ken here. I can (indiscernible) I think as I’ve said the traditional industry is coming very strong from the beginning of the year and we see more and more as we’ve said a traditional TV stations now use Internet technology and to distribute its content through the Internet. This is changing really, really fast. So we see strong growth there. So we categorize them by the (indiscernible) and the application to video more related to (indiscernible).

Jing An

Okay. And about your second question about expenses, OpEx control, we are so happy to see that the OpEx efficiency is continue -- gradually improved and that’s really from two factors. The first is economy of scale and the second thing is about the better control, cost control. And in the near future and in the long-term, actually very [ph] [minor] --we’re still in the very early stage of the industry and the Company commit to continually invest for the future growth. So we will try our best to keep the trend and hopefully we can gradually -- continually improve the efficiency.

Ken Zhang

As I mentioned in my part of speech, we have continued restructuring of our service as a whole network, all the service nodes as I said the large, medium, small nodes -- service nodes and we actually centralize our purchase -- bandwidth purchasing in few places and this actually in the longer term we can reuse this bandwidth for all application. So this will increase the bandwidth utilization in the longer term. So as I’ve said, by the end of the year with restructuring will be in full completion. So I believe these will further increase the bandwidth utilization efficiency, lower the cost of sale (indiscernible) as I’ve said in my presentation.

Jing An

Okay. In terms of your -- the income tax, there is a fluctuation as the second quarter of 2013 there is a benefit -- is a tax benefit, which is from the true-up of the income tax and the second quarter of this year is about the deferred tax. So we have -- so generally our tax (indiscernible) is stable. So for the purpose of the modeling, I suggest 15%.

Kai Qian - CICC

Okay. [Foreign Language]

Operator

Your next question comes from Liping Zhao of CICC.

Liping Zhao - CICC

Hi. Thanks for taking my questions and congratulations for a strong quarter. I have two questions. The first one is related to the so-called big node project. Has the project completed by Q2 and can we expect to see improvement on the gross margin going forward because I suppose we will have less bandwidth cost and less depreciation cost? And what will be the other impacts on the Company operations and that -- this is my first question and I’ll have a follow-on question later.

Jing An

All right. In terms of the resource management system, which we call it super node system and by the end of the second quarter, about we finish the half of the program. And now 50% of CDN traffic goes with the new system, which help us compared with the first quarter help us save bandwidth cost by one more percentage points. So we will see -- in the near future we will see the benefit.

Ken Zhang

Yes, the improvement will come in gradually and of course we have much higher ambition.

Liping Zhao - CICC

Okay. Thank you. My first question -- my second question is related to the cooperation with China Telecom. As Mr. Song Wang mentioned that there are over 1,000 CT employees have finished the 20, I’m wondering whether we have seen any revenue from the CT Corporation so far? And Ken mentioned earlier that the enterprise -- number of enterprise clients increased over 15%, so I’m wondering whether there are any like clients from the CT Corporation as well or there are only like organic growth?

Song Wang

[Foreign Language]

Liping Zhao - CICC

Okay. Thank you very much. That’s all my questions. Thank you.

David She

Liping, I will translate for Mr. Wang’s remarks on your question about China Telecom. So the cooperation we believe now it’s still at the early stages of trading and preparation and construction. So right now we don’t have revenue contribution, significant revenue contribution and we believe we will gradually see the revenue coming from this cooperation commencing the fourth quarter. Thank you.

Operator

(Operator Instructions) I’m showing that there are no further questions. Ladies and gentlemen, do you have any closing comments?

Ken Zhang

Okay. So I will do the conclusion. I think in conclusion, I want to thank all our employees who helped to deliver a great quarter and all our shareholders and partners for their continued support. There are lot of promising opportunity in this fast growing industry. We are very excited for our prospect in 2014 and we’re making significant progress in all our business segments including enterprise, mobile Internet technology. At the same time we continue to focus on our delivery -- deliver a healthy and robust financial and leading the Company to a long-term profitability and growth. Thanks for your time today and we’re looking forward to seeing you on our next quarter call. Thank you.

Jing An

Thank you everyone.

Operator

That concludes the ChinaCache second quarter 2014 earnings conference call. You may now disconnect.

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!