Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Dong Li – President and Chief Marketing Officer

Nan Hao – Head of IR

Zhenwen Liang – CFO

Analysts

Philip Wan – Morgan Stanley

Mike Olson – Piper Jaffray

China Digital TV Holding Co., Ltd. (STV) Q3 2011 Earnings Call November 22, 2011 7:00 PM ET

Operator

Good evening and thank you for standing by for China Digital TV’s third 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, Ms. Cynthia He.

Cynthia He – Brunswick Group

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

In the third quarter, we were pleased to see robust demand for our CA products, as provincial-level network consolidation and investment in digitalization projects continued to progress quickly. In particular, we experienced strong demand from several provinces, including Zhejiang, Heilongjiang, Jiangsu and Hubei. Our leading market position allowed us to capitalize on this development, producing strong Q3 results.

Smart card shipments reached 4.66 million in the third quarter, compared to 3.95 million in the same period in 2010, and 4.64 million in the second quarter. Net revenues grew 22.5% year-over-year and 4.7% quarter-over-quarter.

During the third quarter, China Digital TV retained a strong market position, holding 58% market share of CA card shipments, according to Luoda Consulting, a Beijing based research agency. As the leading industry player, China Digital TV continued to benefit from cable operators’ focus on investing in digitalization projects and ongoing provincial-level network consolidation.

During the third quarter, average selling price, or ASP, for smart cards decreased by 1.4% compared to the second quarter of 2011. We believe that ASP decline in 2011 will stay within 5% of last year's pricing level.

Let me provide a brief market update. According to Luoda, in the third quarter of 2011, the number of China’s digital cable TV subscribers reached 99 million. This included 4 million newly added digital cable subscribers, compared to 3.6 million newly added digital cable subscribers in second quarter of 2011.

SARFT has reported it will launch a direct to home, or DTH, project, which will cover China’s rural TV subscribers by 2015. SARFT has chosen NDS as its main foreign CA provider. While SARFT has not confirmed that it will also use a domestic CA provider, it is currently considering options. We will closely monitor SARFT’s DTH plans going forward and respond as appropriate.

Looking at the remainder of 2011 and over the longer term, we expect to maintain steady performance in our smart card business, while actively promoting the development of our value-added services, next generation products and integrated chips. We remain confident in our belief that our team’s experience and industry knowledge will keep us ahead of the development of China’s cable TV industry.

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

As we mentioned in the second quarter of 2011, Intel Capital invested in Joysee, a subsidiary of China Digital TV, to develop advanced, highly secure and reliable high-definition smart TV and set-top box products. We are pleased to report that we have made significant progress on this project. Joysee has successfully developed the prototype of a next generation product, which is currently under functional debugging.

In international markets, we continued to explore opportunities and expand our footprint. In the third quarter, our cooperation with the One Sky, the Thailand subsidiary of GMM Grammy Public Company Limited, made steady progress, with a moderate shipment of surface mounted device chipset, or SMD chipset for short. In addition, China Digital TV received a new order for SMD chipsets from One Sky in the third quarter to be delivered in the near future. We believe that this indicates a positive momentum in the development of our international business.

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 third 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 third quarter of 2011. Before I proceed, please note that, unless stated otherwise, all amounts are in US dollars.

In Q3-2011, China Digital TV shipped approximately 4.66 million smart cards, compared to 3.95 million and 4.64 in Q3 2010 and Q2 2011, respectively.

Net revenues in Q3 2011 were 25.9 million, up 22.5% from last year, and up 4.7% from last quarter. The year-over-year increase was primarily due to an increase in revenues from smart card sales. The quarter-over-quarter increase was principally due to an increase in sales of other products, such as integrated chips and surface mounted device chipset.

Revenues from our top five customers accounted for 29.7% of total revenues, compared to 31.2% in Q2 2011.

Gross profit in Q3 2011 was 20.8 million, an increase of 26.5% from last year and a 3.6% increase from Q2 2011. Gross margin was 80.5% in Q3 2011, compared to 78.0% in Q3 of last year and 81.4% last quarter. The year-over-year increase was primarily due to an increase in sales of smart cards and a decrease in the unit cost of smart cards. The quarter-over-quarter decrease in gross margin was primarily related to the decrease in average selling price, or ASP, and an increase in non-chip costs of smart cards.

Operating expenses in Q3 2011 were 9.6 million, an increase of 55.6% from same period of last year and an increase of 26.1% from Q2 2011. The year over year increase was mainly due to increases in the average salary of R&D staff, marketing activities expenses and headcount of sales and marketing staff, share based compensation expenses related to options granted to employees in the second quarter of 2011 in R&D and G&A. The quarter-over-quarter increase was principally attributable to R&D expenses for new projects development, share based compensation expenses related to options granted to employees in the second quarter of 2011 in R&D and G&A. Other primary factors included increased marketing activities from selling and marketing, as well as increased headcounts in R&D and selling and marketing.

Income from operations was 11.2 million in Q3 2011, a 9.2% annual increase and a 10% decrease from the second quarter of 2011. Operating margin was 43.4%, compared to 48.8% in Q3 2010 and 50.6% in Q2 2011.

Income tax expenses in Q3 2011 were 2.5million, compared to 1.5 million in Q3 2010 and 2.6 million in Q2 2011. The year-over-year increase was mainly due to increases in taxable income. The quarter-over- quarter decrease was largely due to the decrease in taxable income.

Net income attributable to China Digital TV Holding Co., Ltd., in Q3 was 10.3 million, an increase of 1.8% from the same period in 2010 and a decrease of 9.6% from the second quarter of 2011.

Non-GAAP net income attributable to China Digital TV Holding Co., Ltd, defined as net income attributable to China Digital TV Holding Co., Ltd excluding certain non-cash expenses, such as share-based compensation expenses and amortization of acquired intangible assets from business acquisitions and equity method investments was 12.2 million in Q3 2011, an annual increase of 18.2% and a decrease of 3.2% from the second quarter of 2011.

Turning to our balance sheet...

As of September 30, 2011, China Digital TV had cash and cash equivalents, restricted cash and bank deposits maturing over three months totaling 231 million. In the third quarter of 2011, cash flow generated from operations was approximately 5.8 million.

Now, let me provide you our business outlook.

Based on information available as of November 22, 2011, China Digital TV expects smart card shipments for the fourth quarter of 2011 to be between 4.6 million and 4.8 million. Net revenues for the fourth quarter of 2011 are expected to be between US$25.7 million and US$26.6 million. Projected results for the fourth quarter of 2011 are at the same level as the third quarter of 2011and represent a decline of between 19% and 22% compared with the fourth quarter of last year. The projected year-over-year decrease is due to a surge in smart card demand in the fourth quarter of 2010 caused by the 2010 deadline of cable network consolidation.

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

Question-and-Answer Session

Operator

Thank you. The question-and-answer session of this conference call will start in a moment.

If you wish to ask a question, please press star 1 on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed.

Your first question comes from the line of Philip Wan of Morgan Stanley. Please ask the question.

Philip Wan – Morgan Stanley

Good morning, Mr. Li, Mr. Liang and Nan Hao. Thanks for taking my question.

Could you please give us some color on what level of visibility in terms of smart card shipments for the next year do you have? And also, how should we look at the gross margin trend going forward as your new products such as integrated chips are starting to contribute more on product revenue? Thank you.

Nan Hao

Sorry, Philip, the sound quality is not very good. Can you just repeat your question?

Philip Wan – Morgan Stanley

Okay. My question is, could you please give us some color on what level of level of visibility in terms of smart card shipments for next year do you have? And also, how should we look at the gross margin trend going forward as your new products such as integrated chips are starting to contribute more on product revenue? Thank you.

Nan Hao

Okay. (Chinese Language Spoken)

Unidentified Company Representative

(Chinese Language Spoken)

Nan Hao

Hi, Philip. For your gross margin question, the gross margin will be -- have 5% decline. And from -- currently, because currently gross revenue will decline, and however, it’s quite difficult to give you an accurate, the numbers of the percent of decline.

And for the cards, the smart cards will also have declines in the future, and we will have the accurate forecast numbers by the next quarter.

Unidentified Company Representative

(Chinese Language Spoken)

Nan Hao

For this year, so, card sales, the first quarter, because of the seasonality reasons for the first quarter is every year the first quarter card sales will be less than the other quarters. And as you can see from our previous earnings release, the third quarter and the second quarter of this year will have the same level of card sales. And we have forecasted in the fourth quarter smart cards is also the same as the third quarter.

For next year’s card sales, because the customers have the network consolidation [process] and the grid network convergence [process], so we believe that the card sales of next year will be -- remain stable than compared to this year. And for cable digital TV industry, the next year the card sales will be -- also remain stable.

Unidentified Company Representative

(Chinese Language Spoken)

Nan Hao

For our new products, it’s still under developing. And from the next year, we expect to see the contribution from the (inaudible) difference and (inaudible).

Also, we announced that there was an investment from Intel to our subsidiary Joysee, and we also expect to see the new product by the 2012.

Philip Wan – Morgan Stanley

Thanks for the answers. Very helpful.

Operator

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone keypad, and wait for your name to be announced.

Your next question comes from the line of Mike Olson of Piper Jaffray. Please ask your question.

Mike Olson – Piper Jaffray

Hey, good morning. I just have two quick questions. The first question is, why does accounts receivable continue to rise so much in the last few quarters? Should we expect that it’ll be continuing to move higher? Are you guys having any difficulty getting payments from your customers? Or what’s causing that to happen?

Nan Hao

Okay. I would like Mr. Liang to answer this question.

(Chinese Language Spoken)

Zhenwen Liang

(Chinese Language Spoken)

Nan Hao

Okay, Mike. For your first question about the AR problem, because in China the loan policies is [scratching] hard for the cable operators, it’s quite difficult to get a loan from the banks. So they have a very high pressure from the loan. And another factor, because the same markets in China is (inaudible) and we also face competitive prices from the market. And for the cable operators, because of the price, so, cable operators, they always [give up] the very long-term payment accounts receivable, so that’s the other factor we have a very long AR period.

Mike Olson – Piper Jaffray

Okay. Thanks. And then the other question, just as far as the tax rate, what are you expecting the tax rate to be in Q4 and in 2012?

Nan Hao

(Chinese Language Spoken)

Unidentified Company Representative

(Chinese Language Spoken)

Nan Hao

Based on the government policy, remain up high for the 10% of the tax rate in the 2011, and then now we are applying for this 10% tax rate. And for our company, we do believe that we can apply for this 10% of tax rate in the 2011.

From the 2012, because we have, our company have some organizational changes, because we have subsidiaries of the company, like the cloud computing and Joysee, and for these companies, they have not turned over any revenues yet. So, as a whole, we, compared to 2011, the tax rates in 2012 will keep the same with 2011.

Mike Olson – Piper Jaffray

Okay. Thanks very much.

Nan Hao

Thank you.

Operator

Once again, if you wish to ask a question, please press star 1 on your telephone keypad, and wait for your name to be announced.

The next question comes from the line of Philip Wan of Morgan Stanley. Please ask your question.

Philip Wan – Morgan Stanley

Thanks for taking my follow-up question. You mentioned in your prepared remarks that the company will continue to seek investment opportunities. Could you talk about what are the potential areas that you’re looking at right now? And also, as there were some not-too-successful investments in the past, like the OpenV business, going forward, what are the criteria for the company while making investment decisions? Thank you.

Nan Hao

Philip, can you just repeat it again? Because the sound quality is not quite good.

Philip Wan – Morgan Stanley

Okay. You mentioned in your prepared remarks that the company will continue to seek investment opportunities. I'm just wondering, could you talk about what are the potential areas that you’re currently looking at? There were some not-too-successful investments in the past, like OpenV. Just wondering, going forward, what are the criteria for the company while making investment decisions? Thank you.

Nan Hao

Okay.

(Chinese Language Spoken)

Unidentified Company Representative

(Chinese Language Spoken)

Nan Hao

Okay. Since the company listed, we have already invested back the OpenV and [Clearly Joy] in Shanghai, and [Wudja]. And for the [Clearly Joy], they are -- they already have some sales for the products. And for the [Wudja], [Wudja] is focusing on the digital TV value-added services. And we also have -- we also saw some revenues from the [Wudja].

And in the following future of investments, we have some criteria that we need to follow. The first one is we’re going to see the technology companies to make the investment. And the second criteria is based on the digital TV industry and TV interaction industry.

Philip Wan – Morgan Stanley

All right. Thank you.

Operator

Once again, if you wish to ask a question, please press star 1 on your telephone keypad, and wait for your name to be announced.

We are now approaching the end of the conference call. I will now turn the call over to China Digital TV’s Head of Investor Relations, Nan Hao, for his 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.

The webcast replay will be available at China Digital TV’s official website, under IR section. If you have any additional questions, please feel free to contact us directly. Thank you.

Operator

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

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!

Source: China Digital TV Holding's CEO Discusses Q3 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts