China TechFaith Wireless Communication Technology's (CNTF) CEO Deyou Dong on Q4 2015 Results - Earnings Call Transcript

| About: China TechFaith (CNTF)

China TechFaith Wireless Communication Technology Limited (NASDAQ:CNTF)

Q4 2015 Results Earnings Conference Call

March 28, 2016, 08:00 AM ET

Executives

David Pasquale - Investor Relations-Global IR Partners

Deyou Dong - CEO

Ouyang Yuping - CFO

Jay Ji - SVP

Analysts

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2015 China TechFaith Wireless Communication’s Earnings Conference Call. At this time, all participants are in listen-only mode. After managements prepared remarks there will be a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded today, Monday, 28th of March 2016.

I would now like to turn the conference over to your host today, Mr. David Pasquale. Thank you. Please go ahead.

David Pasquale

Thank you, operator. Welcome everyone to China TechFaith’s fourth quarter and full year 2015 financial results conference call. Joining us today from the company our CEO, Mr. Deyou Dong; Chief Financial Officer, Ms. Ouyang Yuping; and SVP, Mr. Jay Ji.

We will have time for your questions after a review of the quarter’s results and the company’s outlook. If you have not yet received a copy of today’s results release, please e-mail Global IR Partners at cntf@globalirpartners.com or you can get a copy of the release off of the Investor Relations section of TechFaith’s website.

The company’s attorneys advise that this call will contain forward-looking statements. TechFaith may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission in its Annual Report to shareholders, in press releases, and other written materials and in oral statements made by its officers, directors, or employees to third parties.

These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intent, plans, belief, estimates, confident, outlook, and similar statements.

Statements that are not historical facts, including among other things, statements about TechFaith’s business outlook, strategic and operational plans, beliefs and expectations contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement.

Potential risks and uncertainties include, but are not limited to those risks outlined in TechFaith’s filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 20-F and other SEC filings. TechFaith undertakes no obligation to update any forward-looking statement except as required under applicable law. All information provided on today’s conference call is as of today’s date. References to U.S. GAAP or to Generally Accepted Accounting Principles as practiced in the United States of America and references to dollars or to the lawful currency of the United States of America.

At this time, I’d like to now turn the call over to SVP, Mr. Jay Ji. Please go ahead, sir.

Jay Ji

Thank you, David, and welcome to our fourth quarter 2015 financial results and full year conference call. We appreciate everyone taking the time to get an update on our company.

2015 was a challenging year for us, as continued macro weakness impacted our ODP business worldwide. During any period of weakness competition tends to get even more cut drop as companies like Xinhua [ph] market. We remain focused to this, but the world is pivoted. We delivered concrete progress on the development of our real estate portfolio in China, constant improvement in our entrepreneurial business and further growth in our ongoing operating cost.

Of note, with moment term exiting the year with rental income increasing in Q4, I will go through more details on this in a minute. But we expect our real estate portfolio to serve as covenant growth in revenue and profitability in 2016 and beyond.

We are also pleased with gains we made in our ODP business. We have not changed our focus in this segment. We continue to believe that our rich R&D and the design history can help us gain traction with customers that need still other devices.

Our focus has always been on lower volume order that carry higher volume prices and margin. Unfortunately when the broader economy is weak, businesses can pull off making investments in some of these devices. So at TechFaith we are encouraged by the positive response to our devise that are suited for specific enrollment and need.

For example, we continue to build on our success in the ruggedized area with tailored notebook and smartphones. In one case, we added functionality to test for flammable gas level. In another case, we designed in worker location service in the event, some level and support and emergency support was required. The advantages were both ruggedized with glamour glass. In the case of the smartphone, our commitment and user [indiscernible] they we do not want to be taken them on and off, reminisced to answer the phone, look something up.

The vast retailer has a touch, response reliably even when glass were used, other unique features, included water shock and fast resistance [indiscernible] of approval. These are all important for the right use in our worker place environment that has hazard. These are feature that are not available in the standard of the shelf model at a retail shop.

Another recent example was the major three year contract we announced in January of 2015. The three year contract is estimated at approximate US$30 million, under the agreement TechFaith will build and tailor made ready device starting in the first quarter of this year through the end of 2019.

The total value is estimated at approximate US$30 million over the three year period. The agreement is with an international customer, which provides growth trajectory and laboratory solution. There has been much circulation in the press about who the customer is. We are not able to name the customer because of sensitivity they have.

With that side, this was clear - this was clearly one of the biggest risks in the history of TechFaith and it served as another clear example of our ability to provide custom solutions to an important customer. We are seeing there are many opportunities of there, that still yield with our focus, we are going after the customer that still our model and that’s kind of help drive more of a rebound in our ODP business in 2016.

In terms of the fourth quarter results clearly had US$8.7 million. This was above our guidance range of US$6 million to US$8 million. The majority of revenue in Q4 came

from our ODP business which contributed US$7.5 million in the fourth quarter of 2015. This was up about 29% compared to US$12.8 million in the previous quarter.

We expect to see a further improvement in our ODP business in 2016 as we benefited from more enterprise orders win. We also expect to benefit from availability of our investment in 4G, making them to broadly use across all markets.

In terms of other segments, revenue from branded business was just under US$60,000 in Q4. This reflects the shift from 3G to 4G I mentioned. 3G revenue was not meaningful. This reflect the continued pressure in that business reached that to our next division to further gear down the operation, as building down our gaming business we will be able to remove what has been object on our profitability after several quarters of initial growth.

Given the lower revenue level and the weaker environment here, we took cost out wherever possible. We have also done an evaluation of all R&D projects to ensure that [indiscernible] than was our project that has the potential return.

We are not interested with the 14 development efforts that are not attractive to customer or in programs that have not already achieved the desired performance. We ended 2015 with our operating expenses 31% lower compared to 2014.

Our overall gross margin in Q4 was 25% compared with negative 3.7% in the previous quarter and 12.9% in the same quarter last year. The improvement in gross margin was due to increasing revenue from our higher margin business, along with positive impact of the completion of various non-recurring engineering projects. Well, we are encouraged by the improvement, we do not expect to see a further improvement in our gross margin at this high level in the coming quarter.

In terms of color on the full year, 2015 revenue was US$64.6 million compared to US$99.3 million in the year of 2014. Our ODP business was about US$51.7 million or 80% of total revenue in 2015 compared to US$80.5 million in 2014.

Our branding business revenue was US$8.5 million or 13% of our total revenue in 2015, compared to US$16.2 million in 2014. And with that said, revenue from our rental rate business added US$4.4 million or 7% of our total revenue in 2015, up from US$2.6 million in 2014.

The view as still remains our primary focus. We see this is as the major candidate to our results in 2016. We continue to develop and expand in 2015 with most base coming online with HangZhou and Shengyang Tech Park has largely been rented out, a structure of 16 buildings with approximate 73,000 square meters available has almost complete and [indiscernible] of our project and we commenced two construction of our High Tech Park.

We plan to have four buildings in our HangZhou High Tech Park with another three buildings in HangZhou and Shengyang High Tech Park. In addition, construction of six buildings in our Beijing Xi-Hong Tech Park has reached top roof level.

In summary, we are optimistic that our ODP business will improve over the next few quarters due to our recent unprecedented needs and upgrade of our smartphone and notebook portfolio to 4G from 3G, we also expect our real estate portfolio to be a positive driver for us in 2016.

We are pleased with our progress and positions entering 2016 we'll continue to work to realize a more appropriate valuation for our business and work to build value for shareholders.

Now let me turn the call over our CFO, Ouyang Yuping for more detail on our quarter and our outlook.

Ouyang Yuping

Thank you, Jay. Thank you to all for joining our fourth quarter and full year of 2015 earnings call. Let me quickly review some key operating points and our outlook before taking your questions.

Revenues for the fourth quarter was US$8.7 million compared to US$7.6 million in the previous quarter and compared to US$26.7 million in the same quarter last year. For the full year 2015 our ODP business contributed US$51.7 million or 80% of the revenue.

Our branded mobile phone business contributed US$8.5 million or 13% of the revenues. Our rental income contributed US$4.4 million or 7% of the revenue. Overall gross profit for the fourth quarter of 2015 was US$2.2 million compared to a loss of US$0.51 million and gross profit of US$3.5 million in the same quarter last year. Gross profit for the full year of 2015 was US$6.7 million compared to US$9.8 million last year.

Our operating expenses for the fourth quarter of 2015 was US$3.9 million compared to US$4.7 million in the previous quarter and compared to US$8.7 million in the same quarter last year.

Operating expenses for the full year of 2015 was US$18 million compared to US$26 million in 2014 and compared to US$22 million in 2013. We expect to drive operating cost lower for the full year 2016, as compared to the full year of 2015, as we benefit from the cost action we took in the second half of 2015.

Net loss for the fourth quarter of 2015 was US$2.4 million compared to net loss of US$5.2 million in the previous quarter and net loss of US$3.9 million in the same quarter last year.

The net loss reflect the negative impact of the US$3.4 million inventory obsolescence charge in the fourth quarter of 2015, which negatively impacted gross margin and net income

The inventory obsolescence charge is for the write-off component and devices being obsolete low in today's market and is the result of our continued evaluation of operating results for our low margin mobile handset business.

In terms of our balance sheet, we ended the fourth quarter and the year of 2015 with the balance of US$0.5 million compared to US$13 million in the previous quarter and US$176 million in 2014 The decrease in cash was due to the continue investment and expansion of our real asset portfolio.

For the fourth quarter we invested $2.7 million in the development of our real estate business. For the full year of 2015, we invested about US$150 million in the development of our real estate business. We have been able to fully fund the development of our real estate portfolio based on the free cash flow of our co business, along with the support of our strong balance sheet.

We have not used any dilutive transaction to raise funding for this strategic build-out and while both the company and shareholders have not seen the positive impact of our treatment in our share price, we are optimistic this we will change in 2016 as we secure additional leases and begin to recognize the related revenue of this sale of floors, it will become provable for investors to more hopefully value the assets we held.

Let me now move on to our next quarter outlook. In terms of specific guidance for Q1, 2016, as noted in our press release, we currently expect total revenue in the first quarter of 2016 to be in the range of US$8 million to US$10 million. This forecast is subject to change and reflects the earlier mentioned rapid technology co-changes and challenging business environment we reviewed earlier.

Operator, that concludes our formal remarks. We can now take any questions. Thank you. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Jorge Amigo [ph] from T Capital Management. Please ask your questions.

Unidentified Analyst

Hello, folks. This is John Romero speaking. I actually have two questions this morning. The first question is relating to – well, its not related to the buyback where the counter is, we have asked you guys to reinitiate the open buyback, those outstanding, but no one has – that has fallen on deaf ears, so I guess let me ask that question in another way.

I think it was in 2012, I think Chairman Dong had purchased shares in the open market, I don’t have the exact amount, I think its around hundred thousand shares or so. Is the present management - is the current CEO Mr. Dong willing to buy shares in the open market, what is the present management team willing to buy shares in the open market if the company is not willing to reinitiate the buyback? That’s my first question.

The second question is, could you provide status update on the sale of the floors on the Beijing Ring Road property, we would like to know how much is under deposit and when do you expect that transaction to close, just provide details on that? Thank you.

Unidentified Company Representative

Hi, I am Jimmy, I am the translator for Mr. Dong. Please hold on and let me translate the question for him. [Foreign Language]

Deyou Dong

[Foreign Language]

Unidentified Company Representative

Mr. Dong is saying that for the company to do the buyback, he will consider it when the company has small cash flow and for the – his personal buyback he has just recently opened his account in March and he will do so at the next open window period. For the second question, I would like our CFO, Ms. Ouyang Yuping to answer for you.

Ouyang Yuping

Hi. I understood you – the second question of [indiscernible] the sale of the four floors we disclosed in our previous 20-F filings. Actually this is – the four includes two contracts and for the fourth contract in May 2014 we entered into an agreement with Hangzhou, Shenyang, first packet for the sale of a floor in the building located in Beijing.

The transaction price was about US$6 million, but by now this transaction has not being completed. We continue to expect the customer will be able to close this deal, but we do not have the closing date and we are not certain how much longer it will take.

But for this transaction I could tell you that the deposit of the contracts amount has been fully accepted, received and for another three floors the contract was signed in December 2014 and the transaction price was approximately US$24.7 million, as of December 31, 2015 the transaction was not completed, we expect this transaction will be completed we think this year 2016 as we – just now that’s brought of the Hangzhou, Shenyang the customer approved this transaction in March.

And for this transaction, for those two transactions we had received a total amount of US$20.7 million from the customer and this amount is recorded in the other payables in our balance sheet. And if we close these two transactions, we expect to receive another $10 million from the customer. I hope this answer your question.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Rime Melati [ph] Please ask your question.

Unidentified Analyst

Yes. On the - back that you guys just did a reverse split, I keep hearing this talks around, I am going to say actually point blank, is it true that your company is on the verge of bankruptcy, because you got a lot internal problems over there, because the bankruptcy is not a word that show…

Unidentified Company Representative

Okay. Please hold, let me do the translation to Mr. Dong. [Foreign Language]

Deyou Dong

[Foreign Language]

Unidentified Company Representative

According to Mr. Dong, he himself didn’t heard about any bankruptcy problem the company is having or is the company any other serious problems.

Operator

Thank you. Our next question comes from the line of James Robert. Please go ahead.

Unidentified Analyst

Hey, guys. This is Patrick [indiscernible] had some one sign in for me. My first question today is to Deyou, you said you will be buying stock in the open market, can shareholders believe that you will follow through on this as soon as possible and you will report it?

Unidentified Company Representative

Okay. Please hold on Patrick, let me do the translation. [Foreign Language]

Deyou Dong

[Foreign Language]

Unidentified Company Representative

Okay. Mr. Dong has only manage to open a recent account a trading account in Hong Kong and he can only buy during the open window period.

Operator

Thank you. [Operator Instructions] We have a follow up question from the line of James Robert. Please go ahead.

Unidentified Analyst

Hey, guys sorry about that. Okay, so my question is did the price – the sales of the floors, did the pricing of those floors get readjusted, renegotiated, because I remember the 6.6 and 25.7 or something like that and I believe the numbers this year for that was different than that, so that’s one question. It’s great that you received more of a deposit, is that deposit non-refundable, if the buyer walks away.

And then lastly when do you expect to have government approval on the Beijing Park and what are your plans on that park and how does the approval process look like to you right now? Thank you.

Unidentified Company Representative

Our CFO will answer the first part of the question, while Mr. Dong answers the second part.

Ouyang Yuping

Hi, Robert. I think the slightly difference in the numbers might be caused by the change of the exchange rate from RMB to US dollar. And you asked, whether the deposit we received from the customer are refundable or not? Actually in the contract there was no firm regulations on whether it’s refundable or not. So if they walk away, this might be an argument between taxes with the buyer.

Ouyang Yuping

[Foreign Language]

Unidentified Company Representative

Okay. Mr. Dong is saying that, for the first building - will be – we will get a strategy from the government in April or May for the remaining eight, we are still at – handing over certification process and it is likely to completed in June through July. And upon approval from the government we intend to run part of the building and if the prices are suitable we will sell them all in the open market.

Operator

Thank you. Our next question comes from the line of Richard Relich [ph] from Bright Capital Advisors. Please ask your question.

Unidentified Analyst

Thank you. I have two questions. The first is when is the open window period for insider purchases, what are the dates for that. And the second is the idea of putting in more money to complete the project sooner and to allow it to be done less expensively, more efficiently, how has that worked out?

Unidentified Company Representative

So let me translate the question first. [Foreign Language]

Ouyang Yuping

Hi. I am Ouyang. And I am answering your first question about open window, the open window is as I mentioned of SEC rules on the management who is insider the traders and normally the window will open two days after we announce the quarterly results and to the end of the next quarter. So for this quarter as we announced that relate, so actually for the Q1 Mr. Dong might not have a few days to – can buy better stock.

Unidentified Analyst

Thank you.

Unidentified Company Representative

For the second Mr. Dong will answer in Chinese and I will translate for you.

Deyou Dong

[Foreign Language]

Unidentified Company Representative

Okay. Mr. Dong is saying that part of the money has been paid for the phase one project for the Hangzhou, Shenyang and Xi-Hong Mentioned. This is already completed, so we need to pay them, for the remaining it is for the fiscal of the project. It has been progress, has bee slow, but that has not been much purchased. The reason for the slow progress is mainly due to winter and major events in cities such as Hangzhou where the government has stopped construction because of certain major sporting events in that city.

Operator

Thank you. Our next question comes from the line of Kim Chin [ph] Please ask your question.

Unidentified Analyst

Yes. I too keep hearing that your company is under verge of bankruptcy, could you [Technical Difficulty]

Operator

Our next question comes from the line of James Robert. Please go ahead.

Unidentified Analyst

Hey, guys. One last question, so the quarter is almost over, the Q1 is almost over, you feel confident, what's the breakeven number for the company on the ODP side of the business?

Unidentified Company Representative

Mr. Dong will speak to you in Chinese and I will do the translation for him. Please hold on.

Deyou Dong

[Foreign Language]

Unidentified Company Representative

Mr. Dong is saying that there is few days before the quarter end, at this current moment the ODP business is not losing money, so the exact results it needs to wait for the full quarter to end.

Unidentified Analyst

Okay. Thank you very good, very nice.

Operator

Thank you. There are no further questions at this time. I would now like to turn the conference back to the presenters. Please continue.

Jay Ji

Thank you, everyone for joining us on today's call. We look forward to speaking with you on our next quarter results call. Please feel free to follow up with us if you have any additional questions. Have a good day. Bye-bye.

Operator

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

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