Hurray! Holding Co., Ltd. (HRAY)
Q3 2007 Earnings Call
November 19, 2007 9:00 pm ET
Executives
QD Wang - Chairman and Chief Executive Officer
Sean Wang - President, Acting Chief Financial Officer, ChiefOperating Officer
Analysts
Alicia Yapp - Citigroup
Analystfor C. Ming Zhao – SIG
Eddie Leung - Merrill Lynch
Helena Qiu - SBI E2-Capital
Operator
Welcome to our third quarter 2007 earnings conference call.During this call, QD Wang, our Chairman and Chief Executive Officer; and SeanWang, our President and Acting Chief Financial Officer, will discuss Hurray!’sfinancial results for the third quarter of 2007 and business operations. After their remarks, we will open the callfor your questions.
Before we begin, I would like to remind you that during thecourse of this call we will be making forward-looking statements which aresubject to risk and uncertainties. Youcan also identify forward-looking statements by terminology such as will, expects,anticipates, future, intends, plans, believes, estimates and similarstatements. The accuracy of thesestatements may be impacted by a number of business risks and uncertainties thatcould cause our actual results to differ materially from those projected oranticipated.
Such risk and uncertainties include, but are not limited to,those outlined in our filings with the Securities and Exchange Commission,including our registration statement on Form F-1. We do not undertake any obligation to updatethese forward-looking statements except as required under applicable law.
Now I would like to invite QD Wang, our CEO, to address you.Please proceed, sir.
QD Wang
Good evening and good morning to those from Asia. Thank you for joining us on Hurray!’s thirdquarter 2007 earnings announcement. First of all, let’s start with the financial highlights. Our totalrevenues were $13.6 million, a decline of 6.5% quarter over quarter and 23.9%year over year, and below our previous guidance of $15.5 million to $16.5 million.
Wireless value-added service revenues was $11.4 million, adecline of 10.7% quarter over quarter and 30.6% year over year.
Recorded music revenues, which are from our record labelbusiness were $2.2 million, a growth of 22.8% quarter over quarter and 47.8%year over year.
Software and system integration service revenues was $4,000.
Net loss was $11.5 million. Net loss include a goodwill impairment charge of $9.6 million on ourwireless business and a disposal gain of $0.03 million on selling of softwareand system integration services business.
Adjusted EBITDA was negative $11 million. Diluted loss per ADS was $0.53. Excluding the goodwill impairment charge andthe disposal gain on the sale of the software and system integration business,non-GAAP fully diluted loss per ADS was$0.09.
Q3 was extremely challenging for us because the operatingenvironment continued to deteriorate and we missed our revenue guidance. ChinaUnicom's new revenue confirmation policy had a major impact on our businesswith them and the recent changes in policies by regulatory authorities andoperators affecting particularly wireless applications for TV programs, as wellas WAP portal services, have further limited our ability to generate profitableWVAS business.
In light of these recent changes, we took an impairmentcharge of $9.6 million in this quarter. However, our efforts in carrying outour content strategy made further progress as our music business producedgrowth of 22.8% quarter over quarter and 47.8% year over year, generating revenuesof $2.2 million. We are confident about the prospect of transforming Hurray!into a leading entertainment production and distribution house in China.
Now I would like to turn it over to Sean for financialdetails and business highlights.
Sean Wang
Thank you, QD. I am going to give some detailed analysis onthe business results.
Total revenues for the third quarter ended September 30, 2007 were $13.6million, representing a 6.5% decrease from $14.6 million for the precedingquarter, and a 23.9% decrease from $17.9 million for the third quarter in 2006.
Total wireless value-added services revenues were $11.4million for the third quarter of 2007, a decline of 10.7% as compared with $12.7 million in theprevious quarter and decline of 30.6% as compared with $16.4 million in thethird quarter of 2006.
Recorded music revenues -- which represent revenues of ourcontrolled music companies Freeland Music, Huayi Brothers Music and Hurray!Secular Bird -- were $2.2 million, a growth of 22.8% as compared with $1.8million in the previous quarter and growth of 47.8% as compared with $1.5million in the third quarter of 2006.
Total gross margin was 23.5% for the third quarter of 2007as compared with 32.9% for the previous quarter and 37.5% for the third quarterof 2006.
Gross margin for wireless value-added services was 19.6% forthe third quarter of 2007, as compared with 30.1% in Q2 2007 and 36.9% for Q3 2006. Recorded music gross margin was 43.1%for the third quarter of 2007 as compared to 51.7% in Q2 and 45.1% for thethird quarter of 2006.
Total gross profit was $3.2 million for the third quarter of2007, representing a decline of 33.1% as compared with $4.8 million for the previousquarter and a decline of 52.5% as compared with $6.7 million for the thirdquarter of 2006.
Total operating expenses were $15.3 million for the thirdquarter of 2007, representing growth of 225.4% as compared to $4.7 million forthe previous quarter and growth of 179.5% as compared to $5.5 million for the thirdquarter of 2006. Total operating expenses included $9.6 million in goodwillimpairment charge for our wireless business.
Interest income for the third quarter of 2007 was $0.6million, the same as the previous quarter. Income tax benefit was $0.1 millionin the third quarter 2007, compared to income tax expense of $0.2 million inthe third quarter of 2006, and $0.04 million in the previous quarter.
Net loss was $11.5 million for the third quarter of 2007.Net margin was a negative 84.7% for the third quarter of 2007 as compared tothe previous quarter’s positive margins of 1.3% and 9.0% for the third quarterof 2006.
Adjusted loss before interest, tax, depreciation,amortization and stock- based compensation --adjusted EBITDA -- was $11.0 million for thequarter. Reconciliations of net loss under U.S. GAAP and adjusted EBITDA areincluded at the end of this release.
Fully diluted loss per ADS was $0.53 based on a weightedaverage of 21.8 million diluted ADS for the third quarter of 2007. This figure comparesto earnings per ADS of $0.01 based on a weighted average of 21.8 milliondiluted ADS for the previous quarter and earnings per ADS of $0.07 based on aweighted average of 21.7 million diluted ADS for the third quarter of 2006.
Excluding the goodwill impairment charge and the disposalgain on the sale of the software and system integration business, non-GAAPfully diluted loss per ADS was $0.09 based on a weighted average of 21.8million diluted ADS for the third quarter of 2007.
As of September 30, 2007, the company had outstanding 21.7 million basic ADS and 21.8million fully diluted ADS, excluding share options granted above the averagemarket value of Hurray! stock for the quarter, as their effect would have beenanti-dilutive.
As of September 30, 2007, the company had $64.8 million in cash and cash equivalents.
Now I am going to talk about business highlights.
The business highlights for this quarter in particular, wehave some gains in the music business. Hurray! released a series of new songs including two albums and two singlesand launched successful marketing programs to promote the new releasessimultaneously over Internet and wireless platforms.
"I Will Repay Love With Anything" ("Wo YongSuo You Bao Da Ai"), was awarded Best Film Song at the Hong Kong GoldenBauhinia.
Hurray! artists including Jane Zhang, Huizhen Li, Yu Quan,Wenjie Shang, Zheng Huang, and others were invited to the One-Year CountdownCelebration for Beijing Olympics, a very important event in China.The event was held separately in Beijingand Macao.
In addition, Huayi Brothers Music popular artist, JaneZhang, was appointed Ambassador of UNICEF in September, after her concert wassuccessfully held in Beijing onJuly 28.
New Run Entertainment had significant progress in thecompany's TV programs. Entertainment programs including "AngelSuperstar" ("Tian Shi Ming Xing Hui"), "Entertainment SuperSoldier" ("Zong Yi Qi Bing") and TV Series "When Snow Fallsin Love with Plum Blossom" ("Dang Xue Hua Ai Shang Mei Hua") areamong the most successful and highly rated TV programs of the company.
Hurray! signed up a number of new artists, including: BoranJing, the champion in "Go, Good Boy! 2007" and the "Most PopularStar on the Internet” by Huayi Brothers Music; Xinbo Fu by Huayi BrothersMusic; and Jing Hu and Ke Zhao by Hurray! Freeland.
Hurray! launched 14 new titles on China Mobile's gameportal, including "Loafter Swordsman2", "Space Fortress",and "Country Heroes".
The business outlook. For the fourth quarter 2007, Hurray!expects its total consolidated revenues to be between $13 million and $14million, reflecting the continued impact of tightened enforcement of policy andregulation changes previously announced by the Ministry of Information Industry(MII) and mobile operators.
Now I am going to talk about, in particular, the sale of softwareand system integration business. On October 8, 2007, the company announced the signing of definitive agreementsto sell its software and system integration business unit, Hurray! Times Communicationfor $4.8 million in cash to one of its primary institutional shareholders, TaiwanMobile Holding Co., a wholly-owned subsidiary of Taiwan Mobile which is a leadingtelecom service provider in Taiwan.
The total consideration is subject to adjustments based onthe financial performance of Hurray! Times' business in certain periods followingthe closing of the acquisition. The transaction is expected to close before March 31, 2008, subject to required Chinaregulatory approvals and other customary closing conditions.
In Q3 we took a goodwill impairment charge of 9.6. Now I amgoing to say the reasons for this impairment charge. In may, 2007, China Mobilebegan the operational practice of displaying a service fee reminder to WAPservice users when they request the download of a WAP page onto their mobilehandsets and seeking their confirmation before processing the download request.In addition, China Mobile started to place links to only its own WVAS offeringson the embedded menus of mobile handsets with customized software for ChinaMobile users.
In the past, such embedded menus on handsets featured linksto all popular products on China Mobile's networks, including the products ofthe group. The company believes the above changes by China Mobile could have anadverse impact on the company's WVAS business, in particular WAP business.
As of September 2007, the market capitalization of the companywas lower than net book value and an impairment indicator was shown. In view ofthe potential adverse impact of the above change and other changes mentionedearlier and the uncertainties in future operating environment, the Companytested the carrying value of goodwill for impairment as at September 30, 2007and recorded an impairment charge of $9.6 million for the three months endedSeptember 30, 2007 relating to the goodwill of the company's wirelessvalue-added service business.
The valuation was arrived at after using a combination of amarket value approach and an income approach. Any continued adverse changes inmobile operators' policies or in the competitive environment could lead toadditional impairment charges and the company is continually monitoring suchchanges to assess their impact.
Now, I turn this over to QD.
QD Wang
That’s all of our earnings announcement presentation. Now wewould like to open for questions.
Question-and-AnswerSession
Operator
Your first question comes from Alicia Yapp - Citigroup.
Alicia Yapp -Citigroup
Yes, good morning. I have two questions. First of all, canyou please update us on the overall regulatory environment? Specifically, willQ4 continue to be impacted by the change of the China Unicom policy? Can youhelp us understand the seriousness of the impact on your business as well asyour peers?
Sean Wang
The regulatory environment as we see it continues to bequite tight, and the change in China Unicom’s revenue confirmation policy had avery significant impact on our business. For Q3, because of the change in this policy and compared to the quarterbefore, no such change. As a result, ourrevenue from China Unicom decreased by $1.3 million, so that’s a huge hit on usjust because of the change in policy. Weexpect this new policy will be staying even until Q4, and we’re not so sureabout next year. But for Q4, this newpolicy will still be there.
QD Wang
We do believe actually, this policy will have the sameimpact to our peers in this market. Looking forward, Q4 like Sean say, the businesswill be impacted for such a policy. Looking forward starting from next year, we expect the WVAS environmentwill improve gradually quarter after quarter, and service providers workingsome front to grow their revenue gradually starting from next year.
Alicia Yapp -Citigroup
Can you just give us your Q4 guidance, it alreadyincluded the impact from China Unicom?
Sean Wang
Right, and Q4guidance we already factored in the impact from this change in ChinaUnicom’s revenue confirmation policy.
Alicia Yapp -Citigroup
My second question is regarding your announcement on themerger. Could you tell us the trailingrevenue run rate for Enlight Media and what expectations should we expect for2007 and 2008? Thank you.
QD Wang
Actually we are working on their numbers in ‘07 withDeloitte as the auditing company right now. Also we are on working on theguidance for ‘08 and we probably will have the auditors and more updatednumbers available but we don’t think we can talk specific numbers on this phonecall.
Alicia Yapp -Citigroup
What about the historical trailing revenue run rate?
Sean Wang
Enlight has been a very profitable company and they ofcourse, they had their share of ups and downs but the company has beenprofitable for the past four or five years. Especially the company was doing extremely well in 2003, 2004 and alsorecently they have been doing quite well. I think based on their past track record and their performance, we feelvery comfortable working with this company.
As QD mentioned, right now Deloitte is auditing their ‘07 financialsand also because we’ve signed the definitive agreement and the two companiesare in the closing process, we are going to be working on our 2008 financialsand I think once the closing is done we are going to tell the market what weexpect for this combined company.
QD Wang
Also right after this earning announcement, Sean, our CFO,will conduct road shows to talk with major investors as to what is going onhere. One thing I would like toemphasize here is based on their solid track record in the past three to five years,they were a profitable business. Alsobased on our estimation for 2008, avery promising year, the out years and the future three to five years, theentertainment content production and media industry will enjoy double-digit averagegrowth.
We feel very confident and we believe the combination of thetwo companies will bring both Hurray! and Enlight to the next layer to enjoymedium and long-term sustainablegrowth. But for its fiscal number wewill actually talk with all of the major investors and our research analysisfirms later on.
Operator
Yournext question comes from Analyst for C. Ming Zhao - SIG.
Analyst for C. Ming Zhao- SIG
Good morning, QD and Sean. Congratulations on your merger with Enlight Media. I also have afollow-up question about Enlight Media. Would you please give us more color onEnlight Media’s business model? Forexample, how does it share the revenue with TV stations?
QD Wang
Basically we would like to describe Enlight Media as thelargest private TV program, TV drama and outdoor largest events and activitiesof writers, producers, publishers, advisors in the Chinamarket. Actually in summary, Enlight isthe largest private entertainment content producer in the Chinamarket we ever met. Also, they have across-traditional media platform and they actually have a close relationshipand alliance with around 600 national, provincial and local TV channels andlocal radio channels, outdoor and [pay-per-meters] network in China. So we’d like to say they have the largest andfullest coverage traditional cross-platform media in China.
The combination of the two companies makes us feel very,very excited about our future and we would like to summarize in three majorpoints for this combination.
First, this combination helps Hurray! to a great extent totransform Hurray! from the [inaudible] business into the entertainment contentproduction and cross-platform media companies.
Second, the two companies actually have very much a complementarybusiness. Hurray! Has the largest music and wireless games content. Enlight has the largest TV program, TV drama,film, and largest outdoor events.
In terms of the platform, Hurray! is pretty good at thewireless Internet offline digital channel building. Enlight, like I mentioned before, has thelargest traditional media coverage including a few hundred TV channels, radiosand outdoor [pay-per-meters]. So put twocompanies together and we definitely will form the market leadership in termsof the entertainment content production and media company.
Looking forward, the media and entertainment industry andmarket will enjoy pretty good medium and long-growth gross especially with theOlympic year coming. We do believe thecombined company is well-positioned to fully take the opportunity to grow andalso can have with that, the opportunity to enjoy long-term sustainable growthas the entertainment and media industry grows in China.
Analyst for C. Ming Zhao- SIG
Do you know how many TV products Enlight Media has intotal? How many products are stillperforming? What’s the average lifecycle of Enlight’s Media TV products?
QD Wang
Actually, so far Enlight has six pretty good TV programs broadcastingthrough the BTV, the Beijing TV stations, through the CETV, the China EducationTV satellite channels, as well as a few other provincial satellite TV channels.Simultaneously, they are working on the two to three new TV programs and we’llactually have the broadcasting through the other provincial satellite TVchannels.
These six to eight TV programs also will go through, like wementioned before, a few hundred locals; we means provincial and municipal TVchannels to cover the whole of China.They also actually produced 200 hours of TV drama this year, and next year theyactually plan to produce more TV dramas, 250 hours or even 300 hours of TVdramas, and broadcasting through a few hundred TV channels.
This year, they also distributed wide picture movies. Nextyear they target to produce six to eight picture movies. That’s pretty muchabout the TV programs, TV drama and film. Simultaneously, they organized fivemore events: the award ceremonies that covers music, modeling, fashions, TVdrama and film in China.
Sean Wang
Enlight has some of the top-rated TV programs, such as TheMusic Chart program sponsored by Mengniu, the top consumer brand in China,and also a top-rated entertainment and news program, Big Star and of coursethey also have highly rated programs like Fashion Chart and TV Drama Chart. Sothose are really very popular programs here in Chinaand also the top ad dollar earners for Enlight.
Analyst for C. Ming Zhao- SIG
What are the top five TV station time is for Enlight Media? You just mentioned Beijing TV and who else?
QD Wang
Beijing TV and the China Education TV channel. They alsohave cooperation with Anhui TV and some other provincials, and they do workwith a lot of local television stations. Of course, the national channel, theyalso work with [inaudible] Satellite TV channel and [inaudible] Satellite TVchannel.
Operator
Your next question comes from Eddie Leung - MerrillLynch.
Eddie Leung - MerrillLynch
Very interesting merger. Two questions regarding the merger. I heard that for some of the content producers in China,one of the problems that they face is basically the distribution channels arethe TV stations. Can you talk a littlebit about if you see any synergies of Beijing’s Hurray! and Enlight on thatregard, and whether you think Hurray! will help and might see some of thedistribution problems that they may face?
On the integration plans regarding the two companies, haveyou guys figured out how you will structure the future company, presuming themerger goes through?
QD Wang
Actually the first question is very, very important for thecontent company actually how to find the right distribution channels and how tonegotiation with the distribution channels for the business part. Put two companies together, and we actuallyform the largest entertainment content company in China. We have the largest, probably, of TVprograms, TV drama, plus the largest music content, as well as the wirelessgame content.
Once you actually have more market share and become the largestand enjoys more popular entertainment content you will actually gain yourground to negotiation with traditional media or actually the digitalchannels.
For example and if you are the #1 TV program you have a muchhigher quality TV program as well as high quality, very popular music content,plus games. Here we put them altogether with traditional TV channels, forexample BTV, the Beijing TV stations. Our programs are much greater and have amore famous singer and stars and we have a more attractive game and so willmake our programs more attractive. Like Shanghai TV, like a Guangdong TV aremore interested such kind of things, such kind of stars. Sothis is good for us to negotiate and bargaining with our traditional TVchannels.
Simultaneously, once you have TV content, you have video content,you have a field content plus our music things and game things, it’s alsogaining Hurray! some good ground to negotiations with a wireless carrier likeChina Mobile, China Unicom where it’s a large entertainment content provider inChina now and we have the most popular not only music but also video, withEurope promoting 3D Olympic applications in China Mobile and China Unicom.
Also we’re working on more ground and have more opportunityto list our service to get more promotion results from China Mobile, ChinaUnicom to put through our services.
So the combination actually will benefit all our TV contentand music and wireless content and will put through our service ,through both traditionalTV stations and radio stations as real as wireless and Internet channels.
Sean Wang
Some people have suspected Hurray! was going to get out ofhigh speed business; that’s not true. Thecombination with Enlight will really help Hurray! to double that business andwe intend to be in this business, and we intend to grow this business,especially in the combined company with the content support and also otherchannels to promote our WVAS business. The way I see it, our WVAS business will benefit and will have somegreat growth again. We’re not going toget out of the ISP business; we’re going to continue that. We see that in a combined company, our businesswill benefit.
To your second question, talking about a merger of these twocompanies. We are going to work on thisright away. Yesterday we signed theagreement, and today we have started already trying to combine these twocompanies to get ready and apply for the necessary approvals with theauthorities. We target, as we mentioned,in the first quarter of next year to close the deal. So far, we feel pretty good about thetargeted closing time.
Operator
Your next question comes from Helena Qiu - SBI E2-Capital .
Helena Qiu - SBIE2-Capital
I want to know if you have some leeway with Beijing TV? I heard about some more restrictions aboutinteractive programs. Have you seenanything about this, and how are you going to start to see your JV with BeijingTV make a contribution to the company?
QD Wang
Actually there is a new policy coming out and perhaps, Iwill sum it up the for the TV shows, especially for the wireless interactive,or interactive TV shows, like the [inaudible]. We are currentlyevaluating the impact for our geo-based business, and we evaluate this geo-basedbusiness with the BTV right now. We probably will re-plan how we are going tocontinue this geo-based business and how we’re going to generate revenue underthe new policy and a new environment. We would like to share with you when wehave the new evaluations and the new proposals and the new plans about this JV.
Helena Qiu - SBIE2-Capital
So nowit’s impossible for you to launch the interactive TV programs, right?
QD Wang
It’s only actually for the TV show programs like American Idol,this type of TV program. For the generic type of TV program, you can still buildin some wireless interactive things.
Operator
At this time we have no further questions in queue. I wouldnow like to turn the call back over to Mr. QD Wang for closing remarks. Pleaseproceed.
QD Wang
Thank you for joining Hurray!’s Q3 2007 earning announcement.We are very excited about the merger with Enlight and we do believe this mergeractually will bring the synergies of the two companies, and looking forwardwe’re excited about the Olympic Games year. We believe the combined new companywill enjoy vast and significant growth next year, and also in the medium andlong term, sustainable growth.
We really like to share with all of the investors andresearch analysts from time to time about what’s going on about Hurray! andalso the combined new companies. Thank you.
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