China Techfaith Wireless Beats By $0.04; Guides Above Consensus; Stock Up 12% in After-Hours Trading (CNTF 3Q05 Earnings) 12 comments
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Mobile handset designer China Techfaith Wireless (ticker: CNTF) reported Q3 2005 results that beat earnings per ADS estimates by $0.04. Key stats from the quarter:
Q3 Results
(all percentage changes and comparisons are year on year, unless stated otherwise)
- Net revenue rose 93.7% to $23.3 million, and rose 9.9% sequentially (due to increased number of models). There were no consensus estimates available.
- Design fee revenue rose 82.3% to $16.6 million, and rose 10.3% sequentially.
- Royalty income rose 383.0% to $4.1 million, but fell 8.1% sequentially.
- Component products revenue rose 26.4% to $2.6 million.
- Gross margin was 61.1% vs 57.0%.
- Total operating expenses rose 33.9% to $3.7 million, and rose 4.4% sequentially.
- General and administrative expenses rose 53.6% to $2.4 million.
- Selling and marketing expenses rose 84.8% to $364,000.
- Research and development expenses fell 6.1% to $961,000.
- Operating income rose 158.3% to $10.5 million, and rose 7.5% sequentially.
- Operating margin was 45.1% vs 33.8%.
- Net income rose 207.9% to $11.4 million, and rose 0.8% sequentially.
- Net margin was 48.8% vs 30.7%.
- Diluted earnings per ADS of $0.26 vs $0.11, and vs consensus estimate of $0.22.
Notes
- The Company derived 55.6% of its design fees and royalty income from international brand owners and 44.4% from domestic brand owners.
Balance Sheet
(as of September 30, 2005)
- Cash and equivalents of $135.2 million.
FY 2005 Guidance
- Revenue of approximately $90 million.
- Non-GAAP net income per ADS of at least $0.93 per ADS. Previous management guidance of $0.91 - $0.93. Consensus estimate of $0.91.
- GAAP net income per ADS of at least $1.01.
Chairman and CEO Defu Dong:
"We are pleased with our results for the third quarter of 2005. We continue to maintain a leadership position in the mobile handset design space while benefiting from general improvements in business fundamentals. Importantly, we continue to leverage our handset application software and design strengths to penetrate high growth and highly lucrative related markets, such as wireless modules, the ultra low cost handset market and embedded software for mobile applications."
CFO Eva Hon:
"This was an impressive quarter for us from an operations standpoint. We continued to leverage our relatively low operating costs while supporting a higher revenue base. Our gross profit margin increased to 61.1% in the third quarter of 2005, compared to 57.0% in the same period in 2004. The slight decline compared to the prior second quarter of 2005 was due to changes in the product mix, with higher sales of lower margin component products. We expect that our gross profit margin will improve going further as we benefit from the economies of scale of our expanding customer base. Operating profit margin increased to 45.1% in the third quarter of 2005, compared to 33.8% in the same period in 2004. We will continue to target both top-line growth and increased operating efficiencies, as we continue to successfully execute on our business strategy worldwide."
Related:
- All China Stock Blog articles on CNTF.
CNTF chart.
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This article has 12 comments:
After all, the earning report was nothing new. All the information in it was disclosed before. So, it was not a difficult task to figure out the numbers before the earning release. The management already told you everything about it well before Nov. 15. On this aspect, I have to say the stock could be rated the No. 1 manipulated stock of the year. Everyone who followed the stock closedly knows what I am saying. I have no interests to dismantle all the tricks played by someone. It was just disgusting as it could be.
But, I have to agree with goldenlion here. The cash side does not look at all. I have a strong feeling that it becomes very difficult for CNTF to get enough contracts to support the revenue number. The followings are the questions I want to ask the management next Monday on the investor conference. Here I invite you all to share your thought on one or more of these:
1. What happened to the cash? Why the cash flow from operation become so weak?
2. What happened to the advance from customers? Is it an industry trend that clients reduce or stop paying advance or what?
3. Why do we see a surge in the selling and marketing expense in 3Q 2005 as a percentage of the total revenue? Is it becoming more difficult to get customer?
4. And, why did the R&D expense drop this far in 3Q?
5. In what kind of currency do you hold your cash and where? How much interest do you earn on that pile of cash and why do we see a big drop in interest income in 3Q compared to 2Q?
6. What is your DSO? Does it deteriorate in the 3Q? How do you select domestic clients since they are not creditworthy? What will be the mix of revenue in the future?
7. What is your expected capital expenditure in the future?
8. How do you comment on CNTF versus competitor in India and Taiwan and other regions with quality and low-cost labor?
9. Do you have a plan to have your own brand name or be acquired by a brand owner in the future?
10. Do you plan to expand into other area of brain outsourcing?
Although those questions dealing with the financial strength side might be related to short-term things only, but a clear answer would make us feel much better.
After seeing the biggest gain in one day on a position I have ever held, I did some follow-up research that was long time due. I tried to be as neutral as I could be as I refrain from being too optimistic about the stock normally following a big reversal. Something unexpected came up and I believe it is material.
Remember CNTF's biggest client: NEC? They have a joint venture and CNTF takes care of most of the design work for NEC's models in China. According to the China Consumer's Association, NEC is the No. 1 on the complaint list. The complaints point to two areas: quality and repair. If you type "NEC handset quality" in Chinese in Google and Baidu, you will find out pages of links saying bad things about NEC models in China. It was shocking. I have to admit. But, apparently, it was not a joke. Customers complain about many design drawbacks including all kinds of problems you can think of. Some of them directly point to the design features and software bugs. Either the features were not useful or comsumers need to take software upgrades many times. Basically, the problems with the machine drive customers crazy. And, the bad customer service let them become outraged. I am not exaggerating this. Find someone who can read Chinese and let them type the keyword for you in Google and Baidu. The results speak for itself.
An excuse for CNTF could be the chaos inside NEC China. NEC China has huge internal HR problem. In one word, they spend more time on fighting against each other than on anything else. This has become so infamous that some insiders wrote a book on it. I immediately called one of my friends who is using a NEC model. He told me he changed the PCB within two months after buying it and then encountered a series of problems. He vows to never buy another model from NEC again. Then I arranged a meeting with an industry insider who gave me another excuse: NEC China is releasing models too quickly and did not give CNTF enough time on design work so the bugs are inevitable.
I have to admit if all these information were true, I would have had a second thought on the investment. I regret I did not call my friend and this insider before because I thought Japanese, especially NEC, is the leader on quality, so I do not have to worry about it.
I hope the managemet could give a clear answer to this. Actually, I contacted the IR immediately. She had no idea of what I was talking about. After seeing all the negative coverage on the web, her answer was those models were not designed by CNTF but she promised to check back on this. I know it was a lie or at least an ignorance. According to the industry insider, CNTF takes care more than half the pie. And, just to use common sense, if the pie is not big enough, why do they have to construct a joint venture on design? The question was why NEC is still using CNTF. The industry insider told me NEC China is a place where no one takes reponsibility for these issues.
It seems my marriage with CNTF will probably end very soon.
Puzzled by the fact that NEC models suck in China (a cold hard fact, at least according to MII and China's Consumer Association) and CNTF takes care of most of its design work anyway (proved by the joint venture), I dig deeper into the issue and found some interesting information.
According to a recent interview of NEC Telecom (China)'s CEO with Sina (you can get it on many web sources), the joint venture takes care of 70% of the design work for NEC globally including 3G. Basically, all the orders except those from Japan are now being designed by the joint venture. Congratulate to all the longs on CNTF: you can have an assurance on CNTF's future revenue. But, do you know why NEC Telecom (China) sticks with CNTF and ask the headquarter to move those work to China?
The CEO of NEC Telecom (China) was the general manager of Motorola (China). He become the CEO of NEC Telecom (China) in may 2004. Later that year, the joint venture was established. Remember CNTF was led by a bunch of Motorola guys? That may explain why NEC models designed by CNTF suck in China but CNTF still get orders. And, it also explains why it takes much longer time for CNTF to crack the nuts to get order from the top 6 vendors. If NEC Telecom (China)'s CEO does not come from Motorola thus having no tie with CNTF's leadership, will CNTF still get order from NEC? You tell.
Anyway, Mr. Lei Lu, the CEO of NEC Telecom (China) really helped a lot on CNTF's business. I am not an expert on plot-making. But, with a strong partnership producing underperforming models, everybody would ask why. I found the answer lies in the special relationship between some former motorola employees.
Maybe the big drop in stock price was for someone who has made special contribution to the firm but the firm can not publicly issue shares to or grant options to. So, how about a big whack on the stock price so you can buy cheap. And, as long as there are olders pouring in, you are always the firm's God.
I believe the stock is going to get even higher because the 6-month lock-up will soon expire in early December (it was postponed due to the 3Q earning release). But, I have to say I made a mistake even though I made money on this one. Looks like I'd better shut up.
After all, all the models designed by this firm are very unpopluar in China. NEC claims 3% of the Chinese market but manages to receive the most complaints compared to other brandnames. If you go into any retailor store and ask the salesman in China, they will tell how bad NEC models perform. Actually, Kyocera and Mitsibishi's models are manufatured by Wuhan NEC and designed by CNTF. And, their products are referred as having the same quality issues as NEC models. This is a fact that every cellphone salesman in China knows.
Please use some common sense: will you share your core R&D strength with someone else if they have enabled your core competitive advantage? Why not Nokia and Motorola share their design team with other brand owners? Will that bring more revenue to them or kill their edge? After all, the cellphone is far from a commodity. Superior qualify does not come in cheap. If CNTF is this great, why most of its clients enjoy a bad reputation on quality?
This timezero has got right on one thing: the stock price will still go up because the insiders need to sell high. They created a trough to allow their accomplice to get shares cheaper thus having more strength to pump up. But, the baloon will bust eventually. A company's product is the last thing to tell the truth.