Full Transcript of Hurray’s 3Q05 Conference Call - Prepared Remarks (HRAY)

Nov.27.05 | About: Hurray! Holding (HRAY)

Here’s the entire text of the prepared remarks from Hurray’s (ticker: HRAY) 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:

QD Wang, Chairman and Chief Executive Officer

Jesse Liu, Chief Financial Officer

Analysts:

Safa Rashtchy, PiperJaffray

William Bean, Deutsche Bank

Jason Brueschke, Citigroup

Chang Qiu, Forun Technology Research

Ming Zhao, Susquehanna

Operator

Welcome to our Third Quarter 2005 Earnings Conference Call. During this call, QD Wang, our Chairman and Chief Executive Officer and Jesse Liu, our Chief Financial Officer will discuss Hurray financial results for the third quarter of 2005 and business operations. After their remarks, we will open the call for your questions.

Before we begin, I would like to remind you that during the course of this call we will make forward-looking statements which are subject to risks and uncertainties. You can also identify forward-looking statements by terminology such as “will”, “expect”, “anticipate”, “future”, “intend”, “plan”, “believe”, “estimate” and similar statements. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but not limited to those outlined in our filings with Securities and Exchange Commission, including our registration statement on form F1. We do not undertake any obligation to update this forward-looking information, except as required by applicable law.

I would now like to invite QD Wang, our CEO to address you. Sir, you may proceed.

QD Wang, Chairman and Chief Executive Officer

Sure. Good evening and good morning to those from Asia. Thank you for joining us on Hurray’s third quarter 2005 earnings conference call. First of all, I would like to share with you Hurray’s third quarter 2005 financial highlights. Second, Jesse Liu, our CFO, will discuss our third quarter 2005 financial results in more details. Third, I am going to update you on our business strategies and operations and followed by a Q&A session.

Let’s start from our Q3 financial highlights. We are pleased with our third quarter operating results despite continued short-term weakness in the 2.5G market due to a slow CDMA user growth experienced by China Unicom. We’re particularly pleased with the progress in expanding our customer reach in service play phones and marketing and distribution channels it’s great to see that Hurray is growing again.

In the third quarter of 2005 total revenue was 60.5 million, representing 9.9% quarter-over-quarter growth and a 30.8% year-over-year growth. 2.5G service revenue was 9.2 million, represents 4.7% quarter-over-quarter growth and a 40.6% year-over-year growth. 2G service revenue was 6 million, represents 29.8% quarter-over-quarter growth and a 76.4% year-over-year growth. Software and system integration service revenue and existing inspiration service revenue was 1.3 million, decline of 18.7% quarter-over-quarter, but grew up 11.6% year-over-year.

Net income was 5 million, unchanged quarter-over-quarter, but growth up 6.2% year-over-year. Diluted earnings per ADS was $0.27.

Now let me invite Jesse Liu, our CFO, to give you more details about our financial results for this quarter.

Jesse Liu, Chief Financial Officer

Thank you all for joining our conference call. Without repeating QD’s highlights, I would like to give you the following details about our third quarter.

We’re up a total of 2.5G revenues 9.2 million. WAP revenues were 8.8 million, growth of 1.5% from 8.7 million in the previous quarter and a growth of 9.4% as compared to 8.1 million in the third quarter of 2004.

WAP revenues from China Mobile market were 2.9 million, an increase of 32% quarter-over-quarter and 78% year-on-year. WAP revenues from China Unicom market were 5.9 million, a decline of 8.8% quarter-over-quarter, and 8% decline year-over-year. WAP revenues from China Unicom market continues to be negatively affected by lack of user growth on China Unicom’s CDMA network since the beginning of the year and Unicom’s policy requiring that service providers offer certain free services on Unicom’s WAP portal to entice first time WAP users.

Of total 2.5G revenues, MMS revenue were 0.4 million for the third quarter compared to none in the previous quarters as MMS was fully commercially launched in the second quarter of 2005.

Java revenue is a bit significant for the quarter. Of total 2G revenues, US$6 million, SMS revenue was 3.3 million for the third quarter of 2005, representing an increase of 56% as compared to 2.1 million the previous quarter and an increase of 40.5% as compared to 2.9 million in the third quarter of 2004. Significant increase in SMS revenues in the quarter is mainly the result of our increased alternative marketing promotion effort.

IVR revenues were 2.3 million for the third quarter, a decline of 3.5% from 2.4 million for the previous quarter but a significant increase from 0.4 million for the third quarter of 2004. A slight decline of IVR revenues in the quarter was mainly because of a tighter offering of management of IVR promotional activities by service providers.

Of total 2G revenues, Color Ring Back Tone revenues were 0.3 million for the third quarter compared to none in previous quarters as our Color Ring Back tones which were launched at the end of first quarter 2005.

Software revenues were 1.3 million for the third quarter 2005, representing a decrease of 18.7% as compared to 1.6 million for the previous quarter. But, an increase of 11.6% as compared with 1.2 million for the third quarter of 2004. The quarterly decline of Software revenue is a result of mobile operators delaying expending of building out 2.5G or 3G data infrastructure into 2006 pending receiving 3G license.

Total gross margin was 51% for the third quarter of 2005 as compared to 59.7% for the previous quarter and 51% for the third quarter of 2004. Gross margins for 2.5G services were 61.9% for the third quarter of 2005 as compared to 59.5% for the previous quarter and 62% for the third quarter of 2004. The improvement in gross margins for 2.5G services was mainly incurred because of the increased contribution of WAP services offered to China Mobile’s network which generally have the higher gross margin, partially offset by the increased costs associated with the full commercial launch of MMS services in third quarter of 2005.

Gross margin for 2G services was 27% for the third quarter of 2005 as compared to 53.7% for the previous quarter and 15.6% for the third quarter of 2004. The decrease in gross margin for 2G services was mainly due to upfront costs associated with the increased alternative marketing effort for SMS and IVR services and the launch of Color Ring Back Phone Services in the quarter. Gross margin for these services are expected to improve over time as revenue scales up.

Software gross margins were 84.5% for the third quarter of 2005 as compared to 78% for the previous quarter and 84.9% for the third quarter of 2004. And the slightly improvements in software gross margin was due to our continued effort to minimize third party hardware sales and focus on our own software services.

Total gross profit was 8.4 million for the third quarter of 2005, representing a decline of 5.9% as compared with 8.9 million for the previous quarter and an increase of 9.5% as compared with $7.7m for the third quarter 2004.

Total operating expenses were 4.1 million for the third quarter of 2005, representing a decline of 8.5% as compared to 4.4 million for the previous quarter and an increase of 40% as compared to 2.9 million for the third quarter 2004.

Net income was 5 million for the third quarter of 2005, unchanged from 5 million for the previous quarter and an increase of 6.2% as compared to 4.7 million for the third quarter of 2004. Net margin was 30.5% for the third quarter of 2005 as compared to 33.4% for the previous quarter and 37.6% for the third quarter of 2004.

Fully diluted earnings per ADS were $0.22 based on a weighted average of 22.5 million diluted ADS for the third quarter of 2005. This figure compares to $0.22 diluted ADS earnings per ADS based on a weighted average of 22.3 million fully diluted ADS for the previous quarter. And $0.29 based on a weighted average of 16.5 million diluted ADS for the third quarter of 2004.

Now let me turn back to QD for update our business strategies and operations.

QD Wang, Chairman and Chief Executive Officer

Thank you, Jesse. Hurray has been focusing on following initiatives since first quarter of this year, especially in existing mobile operator marketing and distribution channels, establishing our alternative marketing promotion and distribution channels. Increase in service pay phones and customer reach and accelerating new product rollout through in house development and partnerships, especially in the area of music-related products. The following is an update of our progress in this area.

Total wireless value-added service revenues generated from China Mobile, China Telecom and China Netcom market grew 21.4% quarter-over-quarter and 113.2% year-over-year to 5.2 million. As a percentage of the total market value-added service revenues, it increased to 34.2% in the third quarter of 2005 from 31.9% in the previous quarter and 21.3% in the third quarter of 2004. In particular, WAP service revenue from China Mobile increased 32.1% quarter-over-quarter and 78.3% year-on-year to 2.9 million. We believe that we have reached the number three position on China Mobile’s WAP portal in terms of WAP revenue in September of 2005.

The Company’s SMS business resumed growth from newly established CRBT and MMS services started contributing to our total revenue growth. In addition, we have initiated services in China Telecom and the China Netcom markets and recorded $0.2 million revenues in the quarter.

Alternative marketing, promotion and distribution such as handset partnerships, Internet marketing alliance and direct media advertising has become more effective and generated 24% of 30.6 million of total wireless value-added service revenue for the quarter as compared to 6.6% in the previous quarter and zero percent in the third quarter of 2004.

Music-related revenue from ring tone, ring back tone and truetone download and playback in our WAP, MMS, IVR and the CRBT services has grown to approximately 35%, or 5.3 million of the total wireless value-added service revenues for this quarter. These are very important initiatives for us to build a solid and substantial foundation for our business going forward. We will continue seeking that in these areas for middle and long-term goals even though they may prevent us from maximizing WAP and nice margins in the near-term.

In addition, Hurray has taken significant steps since the second quarter in acquiring and building digital music production and distribution capabilities in house and through our partnerships. In the second quarter, Hurray launched a mobile music album before scheduled CD release. Hurray recently released a music single simultaneously over mobile and Internet platforms, jointly with the leading Chinese language Internet search company Baidu, skipping scheduled release altogether.

Also, Hurray signed up a finalist of "Super Girl", a pop idol TV competition in China to produce her first and future albums together with the well known Chinese movie and music production company Huawei Brothers.

Further, Hurray separately announced today that it has agreed to acquire a majority interest in the music business of Freeland group, a pioneer leader in Internet music production and distribution which produced famous pop stars such as Xiangxiang, Yang Chengang and Yang Yi. And recent top hits such as Mice Love Rice, Song of Pigs and Return My Love.

Hurray has a vision to become a leading digital music production and producing house in China. We are the first mover in all above strategic initiatives in China. It demonstrates not only our commitment to build Hurray’s brand name and capability for digital music content production and distribution, but also our drive to differentiate ourselves by offering mobile users in China what they truly want and are willing to pay for. That’s the digital music.

Thank you very much. Now, we would like to open up the call for your questions.

Question-and-Answer Session

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