Hurray! Q2 2008 Earnings Call Transcript

Hurray! Holding Co., Ltd. (HRAY)

Q2 2008 Earnings Call

August 22, 2008 9:00 pm ET

Executives

Qindai Wang - Chairman of the Board, Chief Executive Officer

Xiaoqing Guo - Acting Chief Financial Officer, Vice President, Financial Controller

Analysts

Presentation

Operator

Thank you. Welcome to our second quarter 2008 financial results conference call. During this call, Qindai Wang, our Chairman and Chief Executive Officer, and Xiaoqing Guo, Vice President and Acting Chief Financial Officer, will discuss Hurray!'s financial results for the second quarter 2008 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 be making forward-looking statements, which are subject to risks and uncertainties. You can also identify forward-looking statements by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, 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 are not limited to those outlined in our filings with the Securities and Exchange Commission, including our registration on Form F-1.

We do not undertake any obligation to update this forward-looking information except as required under applicable law.

Now, I would like to invite Qindai Wang, our CEO, to address you. Please proceed.

Qindai Wang

Thank you, Stacy. Good evening and good morning to those from Asia. Welcome to Hurray!'s second quarter 2008 earnings announcement. First of all, I would like to share with you the financial highlights, following with our acting CFO, Xiaoqing Guo, will share with you the business results and later on, I would like to share with you the business highlights.

Now let’s start from the financial highlights. Total revenue in the second quarter of 2008 was $12.8 million, representing a decline of 3.7% quarter over quarter and 12.4% year over year, below our previous guidance of $13 million to $14 million.

Wireless value-added services revenues was $9.2 million, representing a decline of 16.5% quarter-over-quarter and 27.9% year-over-year.

Recorded music revenues, which are from our record label businesses was $3.6 million, representing a growth of 59.3% quarter-over-quarter and 95.4% year-over-year.

Net income was $1.6 million. Adjusted EBITDA was $0.8 million. Diluted earnings per ADS was $0.07.

I would like to say even we narrowly missed our guidance primarily due to the performance of our WVAS business which was impacted by the temporary suspensions of certain WVAS marketing campaigns since May due to the Sichuan earthquake. Also, our music business has been impacted in Q2 as many charity activities and donations to the relief efforts were organized for the earthquake.

Overall, we have further stabilized our WVAS business and continue to generate positive operating cash flow. Going forward, we will continue to further develop and promote our music and entertainment related business in China. With our strong cash position, we are confident to further execute our strategy to become a leading entertainment content production and distribution house in China.

Now I would like to turn it over to Xiaoqing Guo, our CFO, to give you the business results.

Xiaoqing Guo

Thanks, QD and thank you all for joining our conference call and now, I will go through the results for the second quarter of 2008.

Our total revenues were $12.8 million, representing declines of 3.7% from $13.2 million for the preceding quarter, and 12.4% from $14.6 million for the second quarter in 2007.

Total wireless value-added services revenues were $9.2 million for the second quarter, representing declines of 16.5% from $11 million in the previous quarter and 27.9% as compared to $12.7 million in the second quarter of 2007.

Recorded music revenues were $3.6 million, representing a 59.3% increase as compared to $2.2 million quarter over quarter and significant growth of 95.4% as compared to $1.8 million year over year.

Total gross margin was 36.4% for the second quarter of 2008 as compared to 36.5% for the previous quarter and 32.8% for the second quarter of 2007.

Gross margin for wireless value-added services was 29.8% for the second quarter of 2008, as compared to 35% in the previous quarter and 30.1% for the second quarter of 2007.

Recorded music gross margin was 53.4% for the second quarter of 2008 as compared to 43.8% in the previous quarter and 51.7% for the second quarter of 2007.

Total gross profit was $4.6 million for the second quarter, representing declines of 4% as compared to $4.8 million for the previous quarter and 3% as compared to $4.8 million for the second quarter of 2007.

Total operating expenses were $3.3 million for the second quarter of 2008, net of reversal of Unicom liability amount to $1.56 million, representing a decline of 30.2% as compared to $4.7 million for the previous quarter and 30.5% as compared to $4.7 million for the second quarter of 2007.

In the second quarter of 2008, we benefited from a waiver of $1.56 million in alliance membership fees we had accrued under a 2005 agreement with China Unicom in respect of promotional and marketing activities, which China Unicom has terminated. All waived fees have been reported as other operating income.

Income tax expense was $0.3 million in the second quarter of 2008, as compared to $0.7 million in the previous quarter and $38,000 in the second quarter of 2007.

Net income was $1.6 million for the second quarter of 2008.

In the second quarter of 2008, adjusted EBITDA was $0.8 million, a decline of 34.4% as compared to $1.3 million in the previous quarter and a decline of 27.7% as compared with $1.1 million in the second quarter of 2007.

Fully diluted earnings per ADS were $0.07. This figure compares to $0.22 for the previous quarter and $0.01 for the second quarter of 2007.

As of June 30, 2008, the company had $72.9 million in cash and cash equivalents.

Now I will turn to QD for business highlights.

Qindai Wang

Thank you, Xiaoqing. Now let me share with you the business highlights. Despite the previously mentioned impacts on our music business throughout Q2, we have consistently focused on developing our existing and new artists, as well as expanding our marketing and promotion channels. As part of our strategy to improve our music business through strategic initiatives and promotional activities, our affiliated music companies, Huayi Brothers, Freeland Music, New Run, and Secular Bird accomplished the following successes in the second quarter.

Huayi Brothers Music took part in many charity events and donations to the relief efforts for the earthquake in Sichuan province, and produced an earthquake relief song named 'We Have Love'. Meanwhile, Jane Zhang was named the 'Most Media Coverage Female Artist' on Forbes 'Top 25 Influential Stars from China' list. Concerts were also successfully held in Beijing for artists, including Yang Kun and Li Huizhen.

Freeland Music signed up a number of popular leading artists, including Ruby Lin Xinru, a Taiwanese actress and pop singer, who had her breakout role as a leading actress in the very popular television series Princess Pearl and its sequel, Princess Pearl II, and also Ni Hongjie, Chen Derong, and Meng Xi. The company also released a series of new songs, including 1 EP and 2 albums, and launched successful marketing programs to promote the new releases simultaneously over Internet and wireless platforms.

Freeland Music entered into a contract with Shanghai Dongfang Yanyi Company to organize the 2009 Andy Lau World Tour Concert next year and Freeland's affiliate, Fly Songs, successfully organized the China Gold Record Award concert in Beijing.

New Run has also achieved success in promoting the company's artists and brand name. New Run's artists, including Shi Mei, Chen Rui, and Nan He Wen Dou performed in Hengyang, Hunan Province, and they were involved in a charity to raise RMB250,000 for children living in extreme poverty. The company also established an in-house CRBT team, which effectively brought up our WVAS business, especially CRBT-related products, throughout Q2.

Secular Bird artists received 11 major awards at the first annual Guangdong Province Xinghai Music Pop Music Award Ceremony, a remarkable improvement in building up the company's brand name.

We also launched 5 new titles on China Mobile's game portal, including "Legend of The Night Assassin", "My 72 Transformations", and "Heavy Metal World 2". In Q3, we plan to launch 8 new title games next quarter.

For the business outlook, for the third quarter of 2008, Hurray! expects its total consolidated revenues to be between $12 million and $13 million.

That’s all for our presentation this morning. Now we would like to open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) There are no questions in the queue. I would now like to turn the call back over to management for closing remarks.

Qindai Wang

Could you ask if there are any further questions? Stacy?

Operator

(Operator Instructions) There are no questions at this time.

Qindai Wang

Sure. First of all, I would like to thank you for joining Hurray!'s Q2 2008 earnings announcement and looking forward, I think Hurray! has stabilized WVAS business and the music business, once we experience the most difficult Q2, Q3, we expect both music business and WVAS business to grow again starting from Q4 this year and we are very confident to convert to [inaudible] Hurray! from [inaudible] business into the entertainment content production and distribution house in China. So we are looking forward to talk with all of you in the near future. If you have any further questions, you can contact our IR manager directly or contact me directly. Thank you very much.

Operator

Thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect. Have a great day.

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