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Executives

Dong Li – President and Chief Marketing Officer

Nan Hao – Senior Supervisor, IR

Josh Gartner – IR, Brunswick Group

Analysts

Mike Olson – Piper Jaffray

Philip Wan – Morgan Stanley

China Digital TV Holding Co., Ltd. (STV) Q2 2011 Earnings Call August 15, 2011 8:00 PM ET

Operator

Good evening and thank you for standing by for China Digital TV’s second quarter 2011 earnings conference call. At this time, all participants are in 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 would now like to turn the meeting over to your host for today’s conference, Mr. Josh Gartner.

Josh Gartner

Hello everyone and welcome to China Digital TV’s second quarter 2011 earnings conference call. The company’s earnings results were released earlier today, and are available on the company’s IR website at

ir.chinadtv.cn, as well as on newswire services.

Today, you will hear from Mr. Dong Li, China Digital TV’s president, who will give an overview of the quarter, followed by the Company’s head of investor relations, Mr. Nan Hao, who will discuss the financial results. After their prepared remarks, they will be joined by China Digital TV’s chief financial officer, Mr. Zhenwen Liang, 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, our results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in our 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 president, Mr. Li.

Dong Li

Thank you, Josh. Hello everyone and welcome.

In the second quarter we benefited from strong market demand for smart cards driven by provincial-level network consolidation in the cable TV industry. In particular, the most significant demand increases came from several provinces, including Jiangxi, Guizhou and Sichuan. As a result of this demand and our excellent execution, we were able to deliver strong results, both on the top and bottom lines. Smart card shipments reached 4.64 million in the second quarter, compared to 3.61 million in the same period in 2010 and 3.63 million in the first quarter. Net revenues grew 29.2% year-over-year and 28% quarter-over-quarter. Net income increased by 28.2% year-over-year and 42.6% quarter-over-quarter.

As a market update, SARFT has reported that by the end of June, overall cable subscribers in China had surpassed 200 million, an increase of 11.29 million from the start of the year.

As China’s overall cable and digital cable subscriber base expanded, our leading position in the market remained steady with a 60% market share during the second quarter, according to Analysys International. This excellent market position enabled us to benefit from strong demand in multiple regions, as China’s cable operators remained focused on investing in digitalization projects in preparation for cable TV industry consolidation and three network convergence.

Looking at the remainder of 2011, we believe that the policy environment will remain favorable, with continued strong political support for digitalization and cable TV network consolidation. We anticipate seeing continued progress on provincial cable TV consolidation throughout the remainder of this year and next year.

On three network convergence, cable and telecom operators in 12 trial cities are now allowed to apply to operate across platforms. The move marks the start of cable and telecom operators officially being allowed to compete against one another. Meanwhile, China Central Television’s national online TV platform, China Network Television, will launch IPTV services in China's network convergence trial cities in the second half of this year.

I would now like to turn to operational developments during the second quarter.

As you may be aware, one exciting piece of news on the R&D front is Intel Capital’s recent commitment to invest in one of our subsidiaries, JoySee. Intel’s investment and proprietary Intel Architecture technology, combined with our CA technology as well as smart TV and cable smart STB design knowledge, will help JoySee develop advanced, highly secure and reliable high-definition smart TV and set-top box products. In addition, China Digital TV is focused on using our excellent position in China’s pay-TV market and our steady progress on the R&D front to prepare for capturing opportunities in value added services.

Turning to international markets, we continue to explore opportunities and expand our footprint.

As an update, we have signed a new contract with a leading Thai entertainment company called GMM Grammy Public Company Limited to deploy our CA head end system and provide CA cards based on a Satellite platform. Currently, we have completed the deployment of the front end system, and have shipped a moderate volume of smart cards to the company.

During the second quarter, average selling price for smart cards increased slightly, by half a per cent, compared to the first quarter of 2011. We believe this is normal fluctuation. Overall, we maintain our expectation that ASP will decrease within 5% from the level at the end of 2010.

I will now hand the call over to Nan Hao, our head of investor relations to discuss our financial management.

Nan Hao

Thank you, Mr. Li. Hello everyone.

As Mr. Li said, the second quarter of 2011 was strong for us, and we expect to see continued solid results throughout the year driven by ongoing cable network consolidation.

Now, let’s look at our financial highlights for the second quarter of 2011. Before I proceed, please note that, unless stated otherwise, all amounts are in US dollars.

In Q2-2011, China Digital TV shipped approximately 4.64 million smart cards, compared to 3.61 million and 3.63 million smart cards shipped in Q2 2010 and Q1 2011, respectively.

Net revenues in Q2 2011 were 24.7 million, up 29.2% from last year, and up 28.0% from last quarter. This growth was largely due to increases in revenues from smart card sales.

Revenues from our top five customers accounted for 31.2% of total revenues, compared to 23.5% in Q1 2011.

Gross profit in Q2 2011 was 20.1 million, an increase of 33.6% from last year and a 31.0% increase from Q1 2011. Gross margin was 81.4% in Q2 2011, compared to 78.7% in Q2 of last year and 79.5% last quarter. The annual increase in gross margin was driven by margin improvements in both the smart card business and the system integration business. The quarter-over-quarter increase in gross margin was primarily due to an increase in average selling price (“ASP”) and a decrease in non chip costs of smart cards.

Operating expenses in Q2 2011 were 7.6 million, an increase of 23.5% from last year and an increase of 6.9% from Q1 2011. The year-over-year and quarter-over-quarter increases were primarily due to general and administrative expenses stemming from increases in share-based compensation expenses related to new options granted to employees in Q2 2011

Income from operations was 12.5 million in Q2 2011, a 40.6% annual increase and a 51.8% sequential increase. Operating margin was 50.6%, compared to 46.5% in Q2 2010 and 42.6% in Q1 2011.

Non-GAAP net income, defined as net income excluding certain non-cash expenses, such as share-based compensation expenses and amortization of acquired intangible assets from business acquisitions and equity method investments, impairment loss of cost method investment and withholding tax expenses, was 12.6 million in Q2 2011, an annual increase of 38.1% and a sequential increase of 48.0%.

Income tax expenses in Q2 2011 were 2.6 million, compared to 1.2 million in Q2 2010 and 1.6 million Q1 2011. The year-over-year and quarter-over-quarter increases were in line with increases in our taxable income.

Net income in Q2 was 11.3 million, an increase of 28.2% from Q1 2010 and an increase of 42.6% from last quarter.

Turning to our balance sheet...

As of June 30, 2011, China Digital TV had cash and cash equivalents, restricted cash and deposits with maturity over three months and short-term investments totaling 222.2 million. In Q2 2011, cash flows from operations were approximately 2.5 million.

Now, let me provide you our business outlook.

Based on information available on August 15, 2011, China Digital TV expects smart card shipments for the third quarter of 2011 to be in the range of 4.5 million to 4.7 million. Net revenues for the third quarter of 2011 are expected to be in the range of 24.01 to 25.01 million US Dollars, representing a year-over-year increase in the range of 14% to 18%.

Thank you for listening; we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Mike Olson with Piper Jaffray. Please proceed.

Mike Olson – Piper Jaffray

Hey, good morning. I just had one quick question for you regarding gross margin, gross margin was definitely up more than we expected on a year-over-year basis in the June quarter. Do you believe gross margin is going to remain in that kind of below 80% range in the second half of 2011 or should we expect it to be more in the high 70s? Thanks.

Dong Li

(Foreign Language - Chinese)

Nan Hao

Hi Mike. The impact of the gross margin caused from the two reasons. The first reason was the phase ASP from the (inaudible) cards. Actually the ASP from this quarter compared to the last quarter has remained almost the same in U.S. dollars and the other reason caused the gross margin increase was the unit cost of these cards. The unit cost of the cards this quarter was $0.18 and compared to the last quarter we have 8% decrease of the unit cost and for the average selling price we will remain stable at 5% increase within this year. So this is still future of – this is the trend of our gross margin.

Mike Olson – Piper Jaffray

Thank you.

Nan Hao

Hello, all right.

Operator

(Operator Instructions). Our next question comes from Philip Wan with Morgan Stanley. Please proceed.

Philip Wan – Morgan Stanley

Good Mr. Li, Mr. Hao and Mr. Liang, thanks for taking my question. Given the strong smart card shipment in the second quarter and the increasing demand from some provinces as you mentioned, could you share with us your expectations for the smart card shipment for the remaining of this year and also is there any target mandated by the Chinese government for this year or next year? Thank you.

Dong Li

(Foreign Language - Chinese)

Operator

(Operator Instructions)

Nan Hao

So before the call was dropped company’s President Mr. Li was in the middle of explaining second half shipment and government target for the second half of the year. I will turn the call back to Mr. Li, he can finish his answers.

Dong Li

(Foreign Language - Chinese)

Nan Hao

Hi Philip, I will answer the questions. For your first question we only forecast the third quarter card shipments from 4.5 million to 4.7 million and we have no plan to forecast the last quarter of the card shipments of the last quarter of this year. For your second question currently we don’t have any – heard any news from the government in regard of the card shipments digitalization policies target and we are still on the processing of the card shipments digitalization by the end of 2015. Hello, Philip. Hello.

Operator

I believe Philip is out of the queue. Philip has just joined again, we will go ahead join him back

Philip Wan – Morgan Stanley

Hello, can you hear me.

Nan Hao

Hello, Philip.

Philip Wan – Morgan Stanley

Yes, can you hear me?

Nan Hao

Philip do you have any another questions.

Philip Wan – Morgan Stanley

Yes, I do have a follow-up question regarding your new business what is your progress for your integrated chip solution?

Nan Hao

So you mean the all-in one chip, sorry.

Philip Wan – Morgan Stanley

Yes, and has it been included in your sales guidance for the third quarter?

Nan Hao

Okay. I will ask Mr. Li to answer this question.

Philip Wan – Morgan Stanley

Thank you.

Unidentified Company Representative

(Foreign Language - Chinese)

Dong Li

And Philip, I will answer the first question of yours. Basically for our OEM (ph) chips, we plan to have 30,000 or OEM chips will be trialed in different cities and currently for this OEM chips is still under technology verification in cable operator side and actually technology verification we are trying to have cooperation with cable operators to release this all-in one chips to the market and for your second question we will ask Mr. Li to answer your question.

Unidentified Company Representative

(Foreign Language - Chinese)

Dong Li

The forecast of the third quarter does not include any all-in chips cost or chip shipment.

Philip Wan – Morgan Stanley

Okay, thank you for your answer.

Dong Li

Okay, thanks Philip.

Operator

(Operator Instructions) We are now approaching the end of the conference call. I would now turn the call over to China Digital TV’s Head of Investor Relations, Nan Hao, for closing remarks.

Nan Hao

Once again thank you for joining us today and please don’t hesitate to contact us if you have any further questions. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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