YOU On Demand (YOD) CEO Mingcheng Tao on Q1 2016 Results - Earnings Call Transcript

| About: YOU On (YOD)

YOU On Demand Holdings, Inc. (NASDAQ:YOD)

Q1 2016 Results Earnings Conference Call

May 16, 2016 04:30 PM ET

Executives

Jason Finkelstein - Director, Strategy and IR

Bruno Wu - Chairman

Mingcheng Tao - CEO

Mei Chen - CFO

Analysts

Operator

Good morning. Good afternoon everyone and welcome to the YOU On Demand’s First Quarter 2016 Investor Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session.

At this time, for opening remarks and introductions, I’d like to turn the call over to Jason Finkelstein, Director of Strategy and Investor Relations at YOU On Demand. Please go ahead.

Jason Finkelstein

Thank you, operator. Good morning and good evening to all our listeners and speakers. Welcome to our Q1 2016 earnings conference call. Joining me today, I am pleased to have Bruno Wu, Chairman; Mingcheng Tao, CEO; and Ms. Mei Chen, CFO. Once all speakers have completed their prepared remarks, we will continue with the Q&A session with questions received via email, both prior to and during the call. The webcast of today’s call will also be archived and available in the webcast and events section of the YOD corporate website for a minimum of 30 days.

We may make forward-looking statements during this call regarding the Company’s future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. These risks and uncertainties are detailed from time-to-time in the management’s discussion and analysis section of our corporate filings, copies of which can be obtained from the SEC or via our website. All information discussed on this call is as of today, May 16, 2016, and YOU On Demand undertakes no obligation to update any statements or expectations from prior conversations.

Regarding today’s agenda, Mr. Bruno Wu will discuss some strategic alliances along with the vision of strategy for the Company for 2016 and beyond. And finally, Ms. Chen will cover our financials.

I would now like to turn the call over to Mr. Bruno Wu. Thank you.

Bruno Wu

Thank you. And thanks to everyone for joining our call. As mentioned on the previous earning call, the Company has set out to leverage and optimize its current operations as a premium content video on demand service provider in China only by evolving into a global B2B centric, but B2B2C mobile driven consumer management platform for both enterprises and consumers. By establishing world’s premier multimedia social networking and e-commerce-enabled network with the largest global effective connected user base, YOU On Demand, through its expanded, cloud-based, ecosystem of connected screens combined with strong partnerships with leading global providers, will be capable of delivering a vast array of YOD branded products and services to enterprises, customers and end-users and generate great amount of metadata.

As a reminder, the four business structure verticals that will drive the above strategy vision are pay content group, the multi-channel network group, the video commerce group, and consumer data management group. As evidenced from Q1 revenues, which are strictly legacy, pre- Sun Seven Stars era revenues, it is clear that YOU On Demand is still in the process of evolving towards this B2B2C platform and ecosystem. However, over the last 45 days YOD has announced some key business developments that I would like to own on both from a deal specific perspective and also to give investors and idea how we are building out our four verticals and the type of business deals and the collaborations YOU On Demand will be targeting as the year progresses.

First, we announced a two tiered deal with Frequency Networks. YOU On Demand via a joint venture with Frequency will now have an opportunity to expand, both our content offerings and global distribution footprint. As far as expanded distribution, the joint venture will provide Frequency’s white-labeled platform exclusively to the Asian regions including but not limited to China, India, Philippines, Malaysia and Vietnam, utilizing a B2B distribution model. The JV will provide customized services with the multi-screen capability to large and established operators in the region through its intelligent and smart content delivery network.

Frequency Asia programming will include more than 70,000 channels organized into 60 plus unique vertical categories. The viewing experience can be further optimized with personal feeds and channels driven by Frequency’s enhanced metadata format and proprietary recommendation and video search engine.

Then as far as global content channels, the JV will develop a stable of made-for-web channels with brand partners that integrates original and licensed content for categories including sports, fitness, music, food, tourism, science and many more. These channels will be rolled out globally across the JV's distribution partners that include major cable, satellite and mobile operators in the United States, Europe and Asia, and via direct-to-consumer apps for iOS, Android, Amazon Fire and other platforms. The JV will also integrate and distribute third party e-commerce, social networking and affiliate marketing capabilities into its branded and white-labeled service.

With the current addressable user base of approximately 150 million, we’re very optimistic about the potential of this joint venture and partnership. We also recently announced the strategic partnership with GoLive TV. The purpose and strategy of the YOD-GTV partnership are: one, to launch an overseas, which means outside of China content distribution business under the name Global On Demand GOD; and two, to expand YOD's current service and content offerings in China.

GTV has formed partnerships with almost every smart TV manufacturers in the region, for example, TCL, Toshiba, Haier and LeTv amongst many others, to distribute multimedia content. This partnership GTV currently services over 8 million smart TVs in China and GTV is targeting 12 million by the end of 2016. With the YOD-GTV partnership, YOU On Demand will gain immediate access to these smart TVs. As far as for overseas market, the YOD-GTV partnership will ensure YOU On Demand has steadily available distribution infrastructure in place for its global expansion plans.

Through joint bundled promotions, combining YOD's specialty self-branded channel categories including sports, fitness, music, food, tourism, science and much more, along with GTV's over 200 plus Chinese content channels, the YOD-GTV partnership will offer a massive library of domestic Asian entertainment, both in China and eventually abroad. Looking out to 2017, The partnership will begin offering channels and videos globally covering 10 different languages including Russian, German, French, Indian, Arabic, Spanish, Thai, Vietnamese, English and Persian as it pursues a global audience and footprint.

Finally, we recently announced the long awaited expansion of a distribution partnership with Huawei. Utilizing Huawei's InTouch Service Delivery Platform, the partnership will offer YOU On Demand the ability to improve the end-user experience, accelerate time-to-market of YOD's new services and increase revenue with tools and information that will boost YOD's ability to seize market opportunities and increase subscriber growth. The Huawei SDP partnership is a cooperative alliance that empowers telecom operators to distribute content, communication and entertainment services by hosting and offering end-to-end management services and a bridge to content owners and distributers, like YOU On Demand.

By providing an integrated broadcast control and content service platform along with video on-demand operations services, the Huawei SDP would be akin in functionality to Apple's iTunes distribution platform but with additional back-end billing and operational support. By leveraging this platform YOD and working under a revenue sharing model, it will be able to reach a wider audience of Huawei-related users and partners while simultaneously reducing its operating expenses.

The YOU On Demand branded zone will offer its licensed content through both a TVOD and SVOD option. The SVOD zone will provide a total of 384 SVOD Hollywood and Chinese movies, including up to 120 at any time with a guaranteed 20% refresh update every month.

In the next coming weeks, we’ll be announcing more deals similar in the nature to be free that I just discussed. Based on all these current and potential future business development deals, if all goes as planned, YOU On Demand will be able to increase number of adjustable user to approximately 600 million contracted by end of 2016. We will update investors on our progress through a running count on all future distribution networks, press releases that we announce.

With that I would like to turn the call over to Ms. Mei Chen, our recently hired CFO for financials.

Mei Chen

Good morning, everyone and thank you Bruno. Revenue for the three months ended March 31, 2016 was $1,270,000, as compared to $1,028,000 for the same period in 2015, an increase of approximately $242,000, or 24%. This revenue increase was primarily attributed to our new distribution channels on Over-the-Top platforms, the aggregate of which comprised 51% of total revenues in Q1 2016.

Since the second half of 2015, the Company has begun to focus on forming completions results distribution channels, which allow for in depth involvement in current duration, operations and marketing of the direct to customer content services. Revenue generated from this platform which involves service providers accounted for 42% of total revenues for Q1 2016.

Cost of revenues was $916,000 for Q1 2016, as compared to $1,043,000 for Q1 2015. The decrease of $127,000, or 12%, was primarily due to delays in expected revenue from specific content titles, which impacted our content license cost amortization pattern.

Our gross profit for Q1 2016 was $354,000, as compared to gross loss of $15,000 during the same period in 2015. The increase in gross profit of approximately $369,000 was primarily due to increase in revenues from new and existing distribution channels.

Selling, general and administrative expenses for Q1 2016, decreased approximately $283,000, to $2,165,000, as compared to $2,448,000 for the same period, 2015.

Salaries and personnel costs are the primary components of selling, general and administrative expenses, accounting for 33% of our selling, general and administrative expenses for Q1 2016. For the first quarter of 2016, salaries and personnel costs totaled $709,000, a decrease of $146,000, or 17%, as compared to $855,000 for the same period of 2015. The decrease was primarily due to staff reductions made as part of business transformation and realignment strategy, which will be a primary focus for the 2016 fiscal year.

The other major components of our selling, general and administrative expenses include marketing and promotion expenses, also technology cost, rent and severance. In Q1 2016, this cost totaled $1,466,000 a net decrease of $157,000 or 9% as compared to $1,593,000 for the same period in 2015. The decrease was primarily attributed to decrease in stock-based compensation expenses, technology outsourcing costs and other staff related costs.

Net loss was $2,272,000 for the Q1 2016 compared to $2,918,000 in the comparable 2015 period. Basic and diluted loss per share for Q1 2016 was 0.09 cents as compared to 0.12 cents loss per share in the same period in 2015. As of March 31, 2016, the Company had cash of approximately $12,035,000 and total current assets of approximately $15,619,000. More details of YOU On Demand’s Q1 2016 can be found in Form 10-Q of our Company filings, updates of which can be obtained from the SEC or via our website.

This concludes our management team’s prepared remarks. I’d like to turn the call back to the operator.

Question-and-Answer Session

Operator

Thank you. We will now turn the call back to Jason Finkelstein for additional investor questions for management.

Jason Finkelstein

Thank you, operator. So, our first question is for Bruno. In today’s earnings press release and then just again now on the call, it was mentioned that YOU On Demand has a goal of 600 million contracted and addressable users by the end of 2016. Can you delve further into that, what does that entail exactly, how is user defined, and how do you plan on ramping up that quickly by the end of the year?

Bruno Wu

Thank you, Jason. 600 million addressable users as to is a huge leapfrog, a huge jump on the several million users that while we used to cover before the new management took over. And it expands from several million that we had in China to 600 million we’re going to pass as the adjustable users connected worldwide. So, 600 million users worldwide would be number one contracted, in other words carrier, the B2B2C that be in the middle, in other words digital media operators whether they’re telco operators, whether satellite TV operators, whether cable TV operators, whether the OTT operators would be commit to -- for other users to be connected. So, it would be contracted by these carriers, by end of 2016, 600 million. Secondly, they would adjustable. In other words, these numbers -- these are users that we’re going to share and also have access to the metadata; we’re going to share data all the digital data with the carriers, so with promise. So, in other words, we have addressable information over every user. So therefore, this is how we define the 600 million and we hope that sooner or later, the market will start to evaluate YOD as internet company by value -- offers value and size of its addressable user base.

Back to Jason.

Jason Finkelstein

Thank you. As far as the new business model goes, how does YOU On Demand plans to attract customers and what do you anticipate the cost would be?

Bruno Wu

Well, mobile has the mainstream with connivance creating consumers, and we plan to use a variety of mobile channels and marketing techniques to bring and retain new customers. Before any traditional marketing happens, I’m a firm believer that embracing the customer experience is number one. Marketing user integrated tools to engage with customers, track the customer’s journey, measure their sentiment and loyalty, and match behavior with outreach tailored to meet their audience needs and interests. That quite frankly is the easiest path. But for customer, already bombarding with the information, a great customer experience is becoming baseline. That is why we have built out the YOU On Demand business model and ecosystem where we’re going to make ease of use and business vertical integration the number one priority. As integrated customer experience is essential that creates once most interaction rather than multiple cumbersome micro steps without the best customer experience marketing and in general is useless.

With that established, we’re going to rely heavily but not solely on the following. Number one, we’re going to make sure that our social media marketing messages are accompanied by ability to have short in the movement conversations with the customer we reach. That means we’ll be using social media monitoring tools, many of which are free, the response of social engagement and open up further dialogue with customers and use tagging and other viral inducing techniques that are so common yet effective into today’s social media landscape.

Number two, advocate marketing, as I said earlier with customer experience, if you give your customers an awesome with a product, you get referrals. There are countless examples of that both in the United States and China that do not need to battle [ph] up here. However, on top of that, the marketing to referral advocates, we believe is the more effective way to promote referrals than other forms -- incentives and the affiliate programs. The reason for that is because identifying influences and advocates is much easier than ever before through all of the social outlets and platforms.

An advocate marketing program in the more cost effective celebrity endorse type program has the influences good relationship with. Through positive experience with YOU On Demand, the broadcasting and product enjoyment through various social outlets. Quite frankly, I have relationship with many advocates with the huge social following as well as many celebrity friends whom I know they’ll be strong and influential people for YOU On Demand brand.

Content is king and that is something that will never change. Obviously content is not something we are lacking and we have to do a better job of using the content we have to sell as part of the promotion of the platform. This is nothing novel. We see Apple TV and Netflix doing it extremely effectively in the United States when they promoted brands almost solely with the content that is available on their platforms. We’ll get more creative, more participate and more effective using the content that is licensed to us that is cheered by many content producers with us obviously in a manner that conforms with the content owners’ requirements. Back to you, Jason.

Jason Finkelstein

Thank you. How does the new joint venture with Frequency Network benefit YOU On Demand? And how does the planned business model add shareholder value?

Bruno Wu

Well, number one, Frequency [indiscernible] users by its unique white-labeled model, and it's very powerful. Through that model, we are already reaching contracted 150 million users in the United States and we expect that number to grow north of 200 million users contracted by end of 2016. But the joint venture also calls for the same white-labeled partnership approach in Asia, which was attacking the Chinese market, Indian market, and hopefully certain Middle East market.

So with the Chinese market, of course we intend to reach 200 million or 300 million by end of this year, as a huge chunk of growth on the previous several million connected and to with India market, we also would like to cultivate and firm up the relationships with multiple major telecom carriers. So, we would -- it is the management goal to also to reach tens of millions of users by the end of this year. We’ll announce these deals as they get consummated as we go along.

So, this is the first angle of the joint venture. The second angle of the joint venture is we also for a content partnership, for web content channels, so the personalization of our optimization of future on the content would allow us to launch the areas what we call vertical units around different content verticals, for example sports, fashion, extreme sports, music, women interests, and so on so forth. So, the partnership with Frequency in summary is a very important step, not only for us to formulate and add on to what we call a multichannel network, which is the item number two of the four business groups that we talked about and then also expense and distribution to multiples of hundreds of millions on a worldwide basis. Back to you Jason.

Jason Finkelstein

On the last call, you spoke about a new vertical video covers and e-commerce. When is that going to be implemented or rolled out, and what specifics or what products will be sold through this new vertical?

Bruno Wu

Well, we are working day and night to enhance and establish our ecommerce vertical what we call video commerce vertical. There are four businesses components of that vertical, respectively the supply chain finance business, commerce, e-commerce marketing business, e-commerce medialization business, what we call visualization or media business for ecommerce and there was a lot of ecommerce that needed to be turned into video and visual, visually accessible. And certainly, e-commerce technical service, which we have many signed partnerships, and so we’re able to utilize several key and world leading e-commerce tools. So, in summary, we expect this side of business to be fully operational and start operating revenue, starting the month of July, in other words Q3. So, therefore for Q3 and on, we’ll see a dramatic improvement, a dramatic new addition of the Company’s revenue numbers. Back to you Jason.

Jason Finkelstein

Great. How will YOU On Demand differentiate itself from its competitors; what you believe is the competitive advantage here?

Bruno Wu

Well, there are few evolving secular trends going to China right now for example, even though we’re not becoming global Company. On B2C commerce continues to pick up pace while on the other decentralization of segmentation accelerates. China’s ecommerce market expand depth and width and the merchants, brands, shoppers are becoming more sophisticated. There’s a structural shift going on in China from C2C to B2C consumer to consumer -- from consumer to consumer to business consumer, driven by increase in consumer demand for better quality products, improved brand awareness and satisfactory user experience. As a comparison to U.S. market if you think about Amazon gradually gained market share from eBay. We believe that growth for successful platform needs to be on a category expansion, the adoption of metadata or big data, driven backend solutions, effective brand merchandising, improving merchant to customer experience that is where the expansion of YOU On Demand business model comes into play and how we plan on differentiating ourselves.

We believe that our existing video services have grown in strategic importance, not only as a major contributing revenue contributor and a business line but as effective traffic generator, marketing channel and social tool. Online video is a key part of China [indiscernible] lifestyle and indispensable entertainment outlet in the mobile internet era. Our established video input structure, new exclusive content and future content including but not limited to what [indiscernible] has brought under the YOU On Demand umbrella will be a key differentiator from our competitors who for most part solely operate in individual verticals without a strong video entertainment cohort.

We also believe that focusing on a revenue sharing model and strong partnership which allows us to move on effectively and more nimbly with similar competitors and we build our business model. For example we’ve fastly -- we’re very fast in terms of changing our revenue model from a cash purchase model to a revenue sharing model in terms of acquiring the content.

By moving YOU On Demand into a global mobile driven consumer management platform for both enterprise and customers where we’re establishing the world’s premier multimedia social networking and e-commerce enabled network, this will be cloud-based ecosystem of connected screens combined with strong partnerships with leading global providers, they will be capable of delivering a vast area of YOU On Demand branded products and services to each of the customers as well to end use consumers. Back to you Jason.

Jason Finkelstein

Thank you. So, you can imagine Bruno the stock prices are very important to our investors listening to the call. So, what are your plans for enhancing shareholder value going forward? And are there any plans generally for management to come to the U.S. to speak to investors?

Bruno Wu

Well, from an operation standpoint, we’re going to restrict industry entry by developing our business competitive -- in competitive advantages with the enhanced revenue dramatically and market share through innovation improvement in our business market awareness image, perception and value. We’re also going to retain expertise and key personnel with knowledge and expertise in the business. We’ve done that, we’re going to continue to do that. We’re going to build the world class, first class team.

We’re going to continually review cost basis and manage our business costs. We’re going to continually improve our business efficiency and effectiveness of the management decision making process with current business process and management, our partners and our stakeholders. And finally, we’re going to communicate as clearly as possible to our shareholders to reduce opportunities of misunderstandings and to set expectations. Part of the shareholder value process is of utmost significance to me and to other members of the management team who will be both monitoring it closely and be an active participant in its execution.

Jason Finkelstein

And then just the second part of that question, I mean can we expect sometime your management to come to the U.S., speak to investors, may be some conferences.

Bruno Wu

Yes, yes, more and more so. We intend to do that.

Jason Finkelstein

With some of the other movie production ventures, such as the recently announced launch of Peak Time Entertainment which is a new movie venture with Hollywood producer Arthur Sarkissian. How YOU On Demand fit and benefit as far as getting exclusives or on-demand distributions from the original titles that come from some of the other ventures that you participate in?

Bruno Wu

Well within the family of Sun Seven Stars entertainment, we have somewhere between 20 to 30, which I mentioned some partnerships engaged in film and television entertainment production. So certainly, we intend to make most, if not all, of the content on a exclusive basis and preferred basis by supplying them to YOU On Demand, that’s a big differentiator, because very few of the competitors in the space have in-house within the family type of premium top class passion as we do. For example, in the year 2016 to 2017 we have over 20 new movies that are going to productions with several hundred hours of TV drama that are going to production. So, we’re going to -- we intend to supply this all, most of it, if not all, if we can dictate some of the content, we do have to decide to support why this the quality of its content slightly different.

Jason Finkelstein

Thank you. So that’s all the questions we have time for. I want to thank everyone participating and listening to the call today. And we will see you all on the Q2 2016 earnings call, which will be held sometime in middle August. Thank you.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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