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

Q1 2012 Earnings Call

May 22, 2012, 20:00 p.m. EDT

Executives

Yi-Ke Hong – Brunswick Group

Dong Li – President and CMO

Nan Hao – Senior Supervisor, IR

Operator

Good evening and thank you for standing by for China Digital TV's first quarter 2012 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms.Yi-Ke Hong.

Yi-Ke Hong

Hello everyone and welcome to China Digital TV's first quarter 2012 earnings conference call. The company's earnings results were released earlier today, and are available on the company's IR website at ir.chinadtv.cn, as well as on newswire services.

Today, you will hear from Mr. Dong Li, China Digital TV's president, who will give an overview of the quarter, followed by the Company's head of investor relations, Mr. Nan Hao, who will discuss financial results. After their prepared remarks, they will be joined by China Digital TV's chief financial officer, Mr. Zhenwen Liang, to answer your questions.

Before we continue, please note that the discussion today will contain certain forward-looking statements made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in our registration statement on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. China Digital TV does not assume any obligation to update any forward-looking statements except as required under applicable law.

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 will now turn the call over to China Digital TV's president, Mr. Li.

Dong Li

Thank you, Yi-Ke. Hello everyone and welcome.

In the first quarter, we were pleased to see steady revenue growth of 12.6% on an annual basis. Smart card sales remained a strong contributor to our overall revenue this quarter. This is as a result of cable operators' continued investment in digitalization projects. While digital conversion at the provincial level is now almost complete, we've seen a continuous push for digital penetration, particularly in lower-tier regions. As a result, we saw strong demand from several provinces, including Jiangsu, Guangdong, Zhejiang, Hubei and Shandong this quarter.

Supported by these drivers, smart card shipments reached 3.7 million in the first quarter, compared with 3.63 million in the same period in 2011, and 5.38 million in the fourth quarter of 2011. The quarter-over-quarter decrease was primarily a result of seasonality due to the Chinese New Year holiday in Q1.

During the first quarter, average selling price, or ASP, for smart cards increased by 3.7% compared to the fourth quarter of 2011. In addition, the unit cost of smart cards increased by 12.6% compared to the fourth quarter of 2011.

With steady shipments recorded in the first quarter, we have maintained our leadership position with a 58% share of the CA market, according to Zhongguang Luoda Consulting, a Beijing based research agency. This is a significant lead over all peers in China.

In addition to steady growth in smart card sales, we've also seen encouraging progress from our next generation products. This quarter, revenue generated from other products, including our multimedia home entertainment boxes, integrated chips and surface mounted device chipsets, was $2.1 million compared to $112 thousand from the same period last year.

Now, let me provide you some updates on China's cable TV market.

According to Zhongguang Luoda, by the end of Q1 2012, the total number of Chinese cable TV subscribers reached 200 million, of which about 110 million were digital subscribers. This represents a roughly 56% penetration rate for digital cable service. The remainder of the market that has not yet gone digital will continue to drive demand for our CA products. Furthermore, in the near future, the conversion from standard definition set top boxes to high-definition set top boxes will remain a driving factor for demand in China's digital TV market.

Beyond our CA products, this quarter we achieved encouraging progress from our value-added services, as well as from international market development. As we disclosed last quarter, China Digital TV started deploying cloud computing services in Nanjing city and is actively seeking partnerships with cable and telecom operators. In the first quarter of this year, we deployed a cloud computing system in Qingdao city. The project has entered its trial run and has deployed 800 concurrent knots.

In addition to working with cable operators, we also signed an agreement with a leading telecom operator in Shandong Province to help it run internal tests on the video cloud platform, covering a few thousand users. To date, 60 concurrent knots have been deployed and tests have been started internally. The primary benefit of the cloud computing system is to enable both cable and telecom operators to provide customized value-added services and diversified application to commercial and individual end users.

In international markets, we continued to explore opportunities and expand our overseas partnerships. In the first quarter, we furthered our cooperation with One Sky, the Thailand subsidiary of GMM Grammy Public Company Limited, with another mounted device chipset order of 600 thousand units. In addition to our partnership with One Sky, we remain committed to exploring new opportunities in international markets.

As a leading provider of conditional access systems to China's expanding digital television market, China Digital TV will focus on exploring emerging market trends relevant to our core CA business, both in China and in select global markets. In addition, we will keep investing in research and development to create next generation products and service solutions to capture further market opportunities.

I will now hand the call over to Nan Hao, our head of investor relations, to discuss our financial management.

Nan Hao

Thank you, Mr. Li. Hello everyone.

We delivered solid results in the first quarter of 2012, despite seasonal factors that typically affect sales in Q1. In the coming quarters we expect to see ongoing cable digitalization, especially in lower-tier markets, demand for our next generation products and services, and progress in international markets. To reiterate our view on 2012 developments, we believe our annual revenue for the year will be in line with 2011.

I will now continue with financial highlights for the first quarter of 2012. Please note that, unless stated otherwise, all amounts are in US dollars.

In Q1 2012, China Digital TV shipped approximately 3.70 million smart cards, compared to 3.63 million for the same period in 2011 and 5.38 million in Q4 2011.

Net revenues in Q1 2012 were US$21.8 million, an increase of 12.6% from the same period in 2011 and a 25.4% decrease from Q4 2011. The year-over-year increase in net revenues was primarily due to an increase in sales of other products, such as high-definition smart STBs, integrated chips and surface mounted device chipsets. The quarter-over-quarter decrease in net revenues was principally due to a decrease in the shipment volume of smart cards.

Revenues from our top five customers accounted for 22.7% of total revenues, compared to 25.8% in Q4 2011.

Gross profit in Q1 2012 was US$16.9 million, an increase of 10.0% from last year and a decrease of 28.5% from Q4 2011. Gross margin was 77.7% in Q1 2012, compared to 79.5% in Q1 2011 and 81.1% last quarter. The year-over-year decrease in gross margin was primarily due to an increase in the cost of other products. The quarter-over-quarter decrease was mainly due to an increase in the unit cost of smart cards.

ASP of smart cards in Q1 2012 increased by 3.7% compared to the quarter before, while the unit cost increased by 12.6%.

Operating expenses in Q1 2012 were US$8.8 million, an increase of 23.1% from the same period in 2011 and a decrease of 19.4% from Q4 2011. The year-over-year increase was mainly due to increases in marketing expenses, and increased headcount of our R&D and sales and marketing staff. The quarter-over-quarter decrease was mainly caused by the decrease in marketing expenditures and G&A expenses.

Income from operations in Q1 2012 was US$8.1 million, a 1.3% decrease from last year and a 36.3% decrease from last quarter. Operating margin in Q1 2012 was 37.4%, compared to 42.6% in the same period last year and 43.7% in Q4 2011.

Income tax expenses in Q1 2012 were US$2.2 million, an increase of 37.3% from the same period last year and a decrease of 26.7% from Q4 2011. The year-over-year increase was mainly due to an increase in non-deductible expenses from subsidiaries of the company. The quarter-over-quarter decrease was largely due to a decrease in taxable income.

Net income attributable to China Digital TV Holding Co., Ltd., in Q1 2012 was US$7.0 million, a decrease of 12.4% from the same period in 2011 and a decrease of 39.2% from Q4 2011.

Non-GAAP net income attributable to China Digital TV Holding Co., Ltd, defined as net income excluding certain non-cash expenses, including share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments, in Q1 2012 was US$8.1 million, a decrease of 4.5% from the same period in 2011 and a decrease of 40.4% from Q4 2011.

Turning to our balance sheet...

As of March 31, 2012, China Digital TV had cash and cash equivalents and restricted cash totaling US$261.3 million. In Q1 2012, cash flow generated from operations was approximately US$6.9 million.

In addition, as of March 31, 2012, the Company's accounts receivable totaled $32.4 million, compared with $24.5 million a year ago. The increase in AR, which is consistent with industry-wide trends, is the result of macro-economic conditions in China and the operating environment in the cable TV industry. While we expect this trend to continue, we remain focused on improving efficiency over the long term.

Now, let me provide you our business outlook.

Based on information available as of May 22, 2012, China Digital TV expects smart card shipments for Q2 2012 to be in the range of 4.4 million and 4.6 million. Net revenues for Q2 2012 are expected to be in the range of US$25.44 million and US$26.41 million.

Thank you for listening; we will now take your questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session of this conference call will start in a moment, in order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed.

(Operator Instructions).

With no further question at this time, we are now approaching the end of this conference. I’ll now turn the call over to China Digital TV’s Hao Nan for closing remarks.

Nan Hao

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

Operator

Thank you for your participation in today’s conference. This concludes the presentations, you may now disconnect.

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