Full Transcript of Tom Online’s 3Q05 Conference Call — Prepared Remarks (TOMO)

Here’s the entire text of the prepared remarks from Tom Online’s (ticker: TOMO) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Rico Ngai, Senior Manager Corporate Communications
Wang Lei Lei, Chief Executive Officer
Jay Chang, Chief Financial Officer

Analysts:

Andy Collier, Analyst
William Bean, Deutsche Bank
Safa, Piper Jaffray
James Lee, DE Investment Research
Chang Qiu, Forun Technology Research
Richard Ji, National Bank Financial
Wallace Cheung, Credit Suisse First Boston
Lee Tae-jin, Analyst
Henry Kwon ph, Analyst

Presentation

Rico Ngai, Senior Manager Corporate Communications

Good day everyone. Thank you for taking part in this conference call. With us tonight are Mr. Wang Lei Lei, TOM Online’s CEO, and Mr. Jay Chang, our CFO, and Mr. Peter Schloss, our Chief Legal Officer. They will give a presentation later, followed by a Q&A session.

At first, I would like you to pay extra attention to page two of our slide presentation which says this presentation contains statements that may be viewed as forward-looking statements within the meaning of Section 27A of the US Securities Act. Such forward-looking statements reflect the current views of the Company with respect to future events and are not a guarantee of future performance. If you would like to see more details, please see the risk factor section of Company’s annual report on Form 20-F as filed with SEC.

Now, I would like to hand it over to Mr. Lei Lei. Wang Lei Lei, thank you.

Wang Lei Lei, Chief Executive Officer

Thanks Rico. Good evening and good morning to you all. And thank you for your interest in TOM Online and our third-quarter results.

I am very pleased to report another solid quarter of performance from TOM Online. Lets see the page four, our third quarter revenues is seated at the top end of our guidance range by over 5%, reaching US$46 million, which continues to position us as the leading wireless internet company in mainland China. This represented growth of 46% year-over-year and over 7% from the second quarter.

More importantly, our third quarter net profit was US$12.88 million representing over 76% growth from last year and about 26% growth from the second quarter.

Next page. The primary driver of this growth continues to be our focus to be the leading wireless internet company in China. We believe that our provisional excellence in the wireless internet market combined with the strong online presence of our portal has set us apart from many of our competitors.

Moreover, with mobile phone to internet penetration at a factor of four, we believe that the Chinese consumer’s primary interactive media device will be the mobile phone. And we remain excited about opportunities this presents us to not only deliver digital entertainment services to these users as we are doing today, but through our recent announcements with Skype and the UMPAY extend our market opportunities into payment on the communications as well.

I will hand the presentation over to Jay, our CFO, to discuss our results in more detail. Jay?

Jay Chang, Chief Financial Officer

Thanks Lei Lei, if you turn to page seven of the presentation. As Lei Lei mentioned, our third-quarter revenue exceeded the top end of our guidance by over 5% to reach US$46 million roughly. This is an increase of 46% over the same period from last year, and just over 7% from the previous quarter.

Gross profits for the quarter were US$20.3 million, representing a gross margin of around 44.1%. This was a significant improvement from our second quarter gross margins of 41.6%. This was partly due to a stronger performance in our ad business, but primarily due to 1.26 million gross profit benefits which you recognized in the quarter, arising from significantly better revenue confirmation rates from our mobile operator partners. Without this benefit, our gross margin would have been 43% roughly, but still a solid improvement from the last quarter.

Third quarter EBITDA was US$13.5 million, representing nearly a 50% increase from this period a year ago, and almost a 20% increase from the previous quarter. Third quarter net profits were $12.88 million, representing 76% increase from last year and about 26% increase from the second quarter.

In addition, we also benefited from the Renminbi appreciation under FASB 52 due to currency translation of our net non-Renminbi liabilities as at the end of the second quarter.

And lastly, our fully diluted per share ADS was US$24.05 per ADS compared to US$19.05 per ADS in the previous quarter.

Next slide. In terms of our revenue breakdown, our revenue growth in the quarter was driven primarily by our SMS, 2.5G and Online Advertising business, offset by a decline in our Colour Ringback Tones services, which I’ll explain a little bit. IVR and Indiagames were both basically flat from the second quarter.

In the third quarter, SMS revenues were up, were around US$17.62 million, representing an increase of about 14% from the second quarter. Growth in SMS was driven by new mobile music products, but also primarily by the better than expected revenue confirmations rates.

For 2.5G services, MMS revenues were US$3.1 million, up 17% quarter-on-quarter, as the impact of the MMS MISC migration has decided, while WAP revenues were US$8.4 million in the quarter, up 7% quarter-on-quarter. As the impact from the mobile operators’ silent user clean-up policy has also begun to moderate, but is still ongoing.

IVR revenues were $10.51 million, just up 2% quarter-on-quarter. And Indiagame revenues were also roughly flat quarter-on-quarter, at US$1.26 million roughly.

Online Advertising revenues grew 41% from the second quarter sequentially to US$2.6 million as our portal reform activities have begun to show good progress. But more importantly, our strategy to tailor our portal, this portal wireless business is also beginning to show results.

Colour Ringback Tones, however, were down nearly 30% quarter-on-quarter to US$2.3 million. During the quarter, we partnered very closely with China Mobile to promote free Colour Ringback Tone promotions in order to spur market awareness and usage of Colour Ringback Tones. This had a short term negative impact on our business as well as the overall market, but we believe our market share improves slightly to around the 20% level, and we are helping to lay the groundwork with the mobile operators to increase the usage of Colour Ringback Tone services in the future.

Next slide please, turning, next turning to operating expenses. For the third quarter, total OpEx was basically flat around US$8.76 million, from $8.45 million in the second quarter. We had a slight ph decline in sales and marketing expenses in the quarter, offset by small increase in the G&A expenses. The slightly higher G&A were driven primarily by another US$1 million accrual for planned 2005 management bonus, in preparation for our upcoming remuneration committee.

Next slide please. In terms of housekeeping for our net cash position, our balance sheet, our net cash position improved to about US$109 million from $97 million in the previous quarter, as this generates free cash flow and we also benefited from the Renminbi appreciating on our Renminbi cash assets.

Now I would like to turn the presentation back to Lei Lei to discuss some more important business trends we are seeing in our business today.

Wang Lei Lei, Chief Executive Officer

Thanks Jay. Before going to Q&A, I’d like to briefly discuss how TOM Online is leading change in how Chinese users consume and create digital entertainments, but leveraging our industry leading wireless distribution channels on our portal.

For the Page 12, as a percentage of our wireless internet revenues today, over 40% are music-related revenues. Which in our opinion, positions TOM Online as a leading mobile music service provider in China today. In addition to working closely and early with all other major international music labels in China, we believe a key reason for this leadership position has been our innovation to create a new channel for Chinese artists to promote themselves international audience and make money.

Through our, one of our branded sites, singer and song writers are able to use our internet platform to reach national audience. And by further leveraging our mobile distribution channels, make money through foremost ring tones, Colour Ringback Tones, IVR and the other music-related wireless services.

For example, to date, we have aggregate nearly 10,000 internet-created sounds. Out of that there is about 200 new sounds being added per day. More importantly, this has started to become an important part of our mobile music business with roughly 5% of our total wireless music-related revenues being generated from our range of Internet created sounds. Today, we expect this percentage to grow in the future periods.

Next page. Also through the success we have had with user generated mobile music and as part of our portal reform strategy, we are preparing other counter areas where users can create and make money doing so.

As mobile phone functionality improves and as 3G comes into the market, we believe that in addition to music, users will be able to use our online platforms to create content for leader ph share blogs. Video personalities award us a lot of the flash components, and to leverage our mobile distribution channel to change for this content, to charge for this contents, sorry.

And in all the discussions with the mobile creators, they estimate that in a few years, user generated content could make up as much as 40% mobile entertainment of content. And we want to be positioned as their leading partner in this area. Most importantly, this is an area where we believe our combined strength in mobile and Internet standards, apart from any of our other competitors.

Next page. So the Skype in addition, the third quarter we announced two new and an important new business initiatives. Firstly, as many of you know, we announced our 51% to 49% joint venture with Skype to be all of TOM/Skype in mainland China. As of the end of October we had over 5.2 million registered TOM/Skype users, up from the 3.4 million registered users at the beginning of the September when we announced the joint venture.

Our first target for Skype is to continue to grow the unit base and continue our discussions with the Chinese telecom operators on ways we maybe able to cooperate on Voice-over-IP value-added services. It’s our hope that over the coming quarters we will develop premium Skype services for the mainland China market, but we only to serve where the regulations allow us to do that.

For the mobile payment issue, UMPAY, in addition to Skype, we also announced our strategic cooperation with UMPAY to develop mobile payment services in China. For those of you who are not familiar with UMPAY, UMPAY was founded in 2003 by China Mobile and the China UnionPay as the only inclusive payment gateway between China banks, China’s bankcard system and the China Mobile.

We believe that this is largely, is an important milestone for our Company, as we hope that through this cooperation we will be able to complement our leadership in mobile content by broadening our service offerings for our users into mobile functions, firstly as payment as well.

Currently we are working closely with UMPAY to tailor the mobile payment experience to be easier to use, with a goal that it could become a cash replacement service some day. However, it’s still very early stage in our view and we do not foresee any meaningful revenues from these alliances in the near term. But delivers significant opportunity to work with UMPAY to link over 800 million bankcards in circulation through China Mobile’s over 230 million mobile phone subscribers.

Okay, we just go through the guidance. Jay?

Jay Chang, Chief Financial Officer

If you turn into the Page 17 of the presentation, if you have it up. Our current outlook for the fourth quarter is that our total revenues will grow roughly 2% to 4% from the third quarter to between US$46.75 million to US$47.75 million. This reflects stable performance in our SMS business, a growth in our 2.5G services as well as IVR. We also expect mid single-digit growth in our Online Advertising business quarter-on-quarter.

Operator, we are now ready to take questions.

Related:

• The Q&A from this call is here.
• All China Stock Blog articles on Tom Online.
• A list of full conference call transcripts available on the Seeking Alpha Network.
• The complete list of China stocks (and links to articles about them) covered by The China Stock Blog.

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