China Digital TV Holding's (STV) Management on Q3 2016 Results - Earnings Call Transcript

| About: China Digital (STV)

China Digital TV Holding Co., LTD. (NYSE:STV)

Q3 2016 Earnings Conference Call

November 15, 2016 19:00 p.m. ET

Executives

Nan Hao - IR Manager

Analysts

Operator

Good morning and good evening everyone, and welcome to China Digital TV's Third Quarter 2016 Earnings Conference Call.

[Operator Instructions] 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'd now like to turn the call over to your host for today, Mr Nan Hao, Investor Relations Manager at China Digital TV. Please go ahead, sir.

Nan Hao

Thank you, operator. Good morning and good evening everyone. Thank you for joining China Digital TV's third quarter 2016 earnings conference call.

With me here today, Mr. Zhenwen Liang, our CFO, who will answer your questions after the prepared remarks.

Before we begin, I refer you to the Safe Harbor Statement in our earnings release, which also applies for our earnings call today. As well, we will make forward-looking statements.

On behalf of our CEO, Mr. Jianhua Zhu, and CFO, Mr. Zhenwen Liang, I shall begin our presentation with highlights for the quarter, followed by a discussion about the financial results.

We are glad with the overall business performance in third of 2016. To begin with, let's first look at our traditional smart card business which accounted for 67% of the revenues during the third quarter.

Smart card shipments grew 12.7% year over year to 2.58 million units, as we achieved shipments growth both in the international and domestic markets. Smart card shipments to overseas customers accounted for 9% of total shipments during the third quarter, which was up from 7% last year.

We continue to see ASP pressures outpacing unit growth as anticipated, which led to a decline in smart card revenue of $8.1 million versus $9 million in the same quarter last year. Our smart card ASP came down 20.5% from a year ago, which was also adversely impacted by the depreciation of the RMB. Excluding the ForEx impact, smart card ASP declined in the mid-teen percentage, which was in line with our expectations.

Now moving on to our key growth business, Cyber Cloud. Our cloud platform again showed exponential growth over the quarter as our transition continues to bear fruit. During the third quarter, Cyber Cloud revenues grew substantially year over year and increased its geographic diversification. As we mentioned in the last earnings call, our cloud services have expanded into Tianjin and Sichuan [ph] provinces during the third quarter, which we expect to begin revenue contribution in the fourth quarter this year. In addition, we are on track to add Shenzhen, Yujia [ph] province and Anhui province to our network soon. We are excited about the further rollout of our cloud services throughout the nation and expect increased revenue growth from this area.

By the end of third quarter, total number of registered users on our cloud platform grew to 4.3 million, from only 1.5 million on year ago. Our ongoing marketing and promotional efforts for our games services continue to fuel our growth of cloud user base expansion. We are in the early stage accumulate a large base of users who want more home entertainment options, which we will provide through our network.

As of today, through partnership with cable TV operators, our cloud network now covers 100 million users in Beijing, Tianjin, Chongqing, Hubei and Sichuan, and . We see tremendous penetration potential in these exciting cities and provinces, as well as new opportunities from other regions to be added this quarter and going forward.

For content offers through the Cyber Cloud, we continue to explore the other applications outside of games, in fields like education, online shopping and entertainment, especially the virtual reality sales, which should contribute to the future growth of the Company as the Cyber Cloud platform expands, the user habits evolve with the offering.

We will continue to invest in the development of content which will further increase the attractiveness of our platform as a leading gateway for cloud-based entertainment into Chinese homes.

In addition, we would like to reiterate that our wholly-owned subsidiary Golden Benefit has entered into an equity transfer agreement with Buyer Group, as we referred to a press release on November 7, 2016. Under the agreement, the Buyer Group has agreed to acquire all of the equity interest in Super TV currently held by Golden Benefit. In essence, the Buyer Group has agreed to pay China Digital TV a consideration of RMB610 million in cash. The transaction will be considered and voted during the extraordinary general meeting on December 2016.

With that, we will turn to our financial results for the third quarter. Please note that, unless otherwise stated, all monetary amounts are set in U.S. dollars.

Total net revenue grew 12% year over year to $11.8 million in third quarter this year, similar with the prior quarter. Revenues from other services and other products increased but were partially offset by a decrease in smart card revenues.

Revenues from smart cards were $8.1 million in the quarter, as compared to $9 million in the prior-year period. The decrease was mainly due to the decline in average selling price of smart cards, which was down 20.5% year over year, including an adverse impact from RMB depreciation. Sales of smart cards accounted for 67% of total revenue in third quarter, as compared to 84.6% in the prior-year period.

Revenues from other products increased to $1.6 million in the third quarter from $1.3 million in the same quarter last year. The increase was mainly attributable to increased sales of set-top box with pre-installed smart cards, IPQAM and surface mounted chips. Sales of other products accounted for 20% of total in the third quarter, as compared to only 3% in the prior-year period.

Revenues from services increased by 18.1% year over year to $1.6 million in the third quarter from $1.3 million in the prior-year period. The increase was primarily attributable to the continuous expansion and monetization of our cloud platform, but partially offset by a decrease in smart card related revenues. Revenues from services accounted for 13% of total revenues in the third quarter, as compared to 12.4% in the prior-year period.

Cost of revenues from smart cards and other products increased by 22% year over year to $2.6 million in the third quarter from $2.1 million in the prior-year period. The increase was mainly due to the increase in cost of revenues from other products and partially offset by the decline in cost of revenues from smart cards. Cost of revenues from smart cards and other products accounted for 37.1% and 33.2%, respectively, of total cost of revenues in the third quarter, down from 58.7% and 6.9% in the third quarter last year.

Cost of revenues from services in the third quarter increased slightly by 1.5% year over year to $1.1 million, which accounted for 30% of total cost of revenues, down from 34.5% in the prior-year period.

Gross profit for the third quarter increased $8.2 million, compared to $7.4 million in the prior-year period. Gross margin was 70%, compared to 69% a year ago.

Operating expense in the third quarter came in at $8.9 million, slightly up compared to $8.4 million in the prior-year period.

Loss from operations in the third quarter was $0.7 million, as compared to loss from operations of $1 million in the prior-year period.

Income tax expenses for the third quarter decreased by 35.7% year over year to $0.4 million from $0.7 million in the same period last year. The decline was mainly due to a decrease in taxable income.

Net loss attributable to holders of ordinary shares in the third quarter of 2016 was $0.5 million. It remained relatively stable as compared to the same period last year.

Non-GAAP net loss attributable to holders of ordinary shares in the third quarter was $0.4 million. It remained relatively stable as compared to the same period last year.

As of September 30, 2016, China Digital TV had cash and cash equivalents, restricted and term deposits totaling $62.7 million on the balance sheet.

Now let me provide with you our business outlook. Smart card shipment volumes for the fourth quarter of 2016 are expected to be in the range of 3.2 million to 3.5 million. Net revenues from fourth quarter are expected to be in the range of $11 million to $12.6 million.

Now we are ready to your question-and-answer session. Please note that our CFO will answer the questions that you may have in Chinese and I will then translate into English.

Operator, we may now begin the Q&A session.

Question-and-Answer Session

Operator

We have no questions at this time. I'd now like to turn the call back over to Mr. Nan Hao for any closing remarks.

Nan Hao

Once again, thank you for all you joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support and we're looking forward to talking with you in the coming months. Thank you.

Operator

This concludes today's conference call. You may now disconnect your lines. Thanks for participating and have a pleasant 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!