Acorn International, Inc. (NYSE:ATV) Q4 2012 Earnings Call March 19, 2013 8:00 AM ET
Samuel Patterson – IR Manager
Don Yang – CEO
Geoffrey Gao – VP
Hello, ladies and gentlemen, and welcome to Acorn International’s Fourth Quarter and Full-Year 2012 Earnings Conference Call. This is Denise and I’ll be the operator for this conference call. All telephone lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question.
Now, I would like to transfer the call to the moderator, Mr. Samuel Patterson, IR Manager of Acorn International.
Good morning, everyone. Thank you for joining us today for our fourth quarter and full-year 2012 earnings conference call. With me today are Mr. Don Yang, our Chief Executive Officer; and Geoffrey Gao, our Vice President. After our prepared remarks, we will open the lines for question. Mr. Robert Roche, our Chairman of the Board of Directors will participate in the Q&A section of this call.
As a reminder, this conference call is being recorded. A live webcast and replay of this conference call will be available via the Investor Relations section of our website at ir.chinadrtv.com. Before we continue, I would like to remind you that the discussion today will contain certain forward-looking statements. These forward-looking statements include among others those regarding Acorn’s anticipated business outlook, strategies, future revenue mix and operating results. A number of the potential inherent risk and uncertainties that Acorn’s businesses involve are outlined in the Company’s public filings with the U.S. Securities and Exchange Commission. As such, actual results may be materially different from the views expressed or anticipated results described today.
Acorn International does not undertake any obligation to update any forward-looking statement except as required by applicable law. I would like to introduce our CEO, Mr. Don Yang, who will provide introductory remarks.
In 2012, net revenues were $242.6 million, down 33% compared to 2011, primarily due to lower sales of mobile phones, electric learning products and cosmetics products. We were able to partially offset these declines with exceptional performance from our Yierjian line of fitness products which accounted for a quarter of the year’s gross revenue and was the main driver behind the 2.5% increase in gross margin.
Despite the improving gross margin and tighter control over our operating expenses; the lower revenue base resulted in a larger than anticipated net loss in 2012. Our financial results were also impacted by higher cost for television air time. In response, we adjusted our media-spending strategy by promoting our most profitable products categories on the TV channels that has generated the most productive results. As a result of higher advertising cost and lower sales volumes, our gross profit of advertising expenses ratio declined to 1.90 compared to 2.28 in 2011. With media cost expected to increase again in 2013, we will continue our efforts to optimize our media spending.
Now I’d like to discuss the key products sold on our various platforms which represent the core of our business. Mobile phone sales were $64.7 million and accounted for about 27% of total gross revenues in 2012, down 51% compared to 2011, primarily due to decreased demand for existing mobile phone models and lower than expected sales of the newer mobile phone models. However, we do intend to maintain our presence in the mobile phone market and launch new products that meet our margin requirements. We are currently planning on introducing mobile phones with larger screens and other high-performance models in 2013.
Our popular line of Yierjian fitness products performed well in 2012, accounting for 26% of the year’s gross revenue and making a positive contribution to gross margin. In 2012, we extended the line to include an exercise bike and an electronic abdominal exercise belt. We expect Yierjian to be one of our major sales drivers in 2013. And we will introduce several new product upgrades over the next few months. We will allocate a healthy amount of media spending to Yierjian to drive sales and build upon our growing reputation as one of China’s top fitness brands.
Sales of cosmetic products were disappointing in 2012, accounting for only 2.9% of gross revenues and declining 71% from 2011. We’ve recently developed a new brand image for our line of Aoya cosmetic products and expanded its product lines. We are optimistic about the future performance of Aoya and we will feature it prominently on our direct TV sales channels. We will also develop a cost-effective Internet distribution channel to support Aoya cosmetics products that will come online in the coming months.
Sales of our electronic learning products primarily sold via our distribution platform contributed $41.3 million or 17% of gross revenue in 2012 and declined about 34% year over year. This was a year of transition for this product category as we began phasing out older products and offering model with mobile Internet interactive features in the latter-half of the year. Based on positive consumer response to our new products, we will broaden our marketing efforts to include advertising on our direct TV sales channel which we expect to have a meaningful impact on sales in 2013. We have plans to enhance our distribution network this year by adding new distributors, providing them with better support and ceasing cooperation with underperforming distributors.
Other direct sales including Internet sales, outbound calls, third-party bank channels and catalogs declined about 41% in 2012. The decline was primarily due to the lower sales from the third-party bank channels, outbound calls and catalogs. Other direct sales are an important element of our direct sales platform allowing us to leverage our TV media platform and maximize our media spending.
Going forward, we expect the two key drivers of other direct sales to be the Internet and outbound calls. We’ve recently improved our outbound call center operations by putting systems in place that make up selling easier, offering sales incentives and increasing staffing levels. We have also cleared out older inventory to keep the product offerings fresh.
Based on the Insurance Business Cooperation Agreement with Sino-US United MetLife Insurance Company Limited, we are jointly marketing and selling short-term accident and health insurance products with MetLife through various channels and expect to further expand our insurance business in 2013.
In summary, we are optimistic about the future of our business and we have a solid plan in place to increase our top line and improve profitability in 2013. We have a number of product upgrades and new product launches planned on our most profitable categories. We will continue to optimize our media spending, improve our distribution channels and identify cost efficiencies across the organization.
We want to thank our shareholders for your continued interest and support. I would now like to turn the call to Mr. Gao for a detailed discussion of our financial results.
Thank you, Sam. Hello, everyone. I will now proceed with presenting our financial performance for the fourth quarter and full-year 2012. Before that, I would like to remind you that because of seasonality in the sales of some of our products, we primarily focus on year over year instead of a sequential quarterly comparison.
Total net revenues were $59.1 million for the fourth 2012, down 32.4% from $87.5 million for the first quarter of last year. Direct sales contributed 82.7% to total net revenues of $48.9 million for the fourth quarter of 2012, a decrease of 32.7% from $72.6 million for the same period of last year; mainly due to a decline in sales generated from mobile phones, consumer electronics, and collectibles.
Distribution sales net revenues decreased 31.3% year-over-year to $10.2 million from $14.9 million for the fourth quarter of 2011. Electronic learning products accounted for 73.1% of total distribution sales. The year-over-year decline was primarily due to the transition to device incorporating mobile Internet interactive features beginning in the third quarter of 2012.
Cost of sales for the fourth quarter 2012 was $33.4 million, a 31.4% decrease from $48.8 million for the fourth quarter of 2011, primarily due to the decrease in sales.
Gross profit for the fourth quarter of 2012 was $25.7 million, a decrease of 33.7% compared to $38.7 million for the fourth quarter of 2011. Gross margin was 43.4% in the fourth quarter of 2012, compared to 44.3% in the same period in 2011. The decrease in gross margin was largely due to lower price offered on old inventory in the electronic learning products, collectibles, and consumer electronic product categories.
Advertising expenses were $15.3 million for the fourth quarter 2012, down 12% from $17.4 million for the fourth quarter of 2011.
Other selling and marketing expenses decreased to 26.5% to $12.1 million from $16.5 million for the fourth quarter of 2011. The decrease in other selling and marketing expenses were smaller than the declining sales mainly due to the larger contribution of fitness products to total revenues, which have high delivery cost as well as the increase in labor cost of sales and marketing personnel.
General and administrative expenses were $7.2 million for the fourth quarter of 2012, a 26.8% decrease from $9.8 million in the fourth quarter of 2011 due to more effective credit controls on local delivery companies.
Other operating income, net, was $0.8 million for the fourth quarter of 2012, compared to $3.1 million in the third quarter of 2011 due to lower subsidy income compared to the same period of last year.
As a result, operating loss was $8.2 million, compared to an operating loss of $1.8 million in the fourth quarter of 2011.
Other income, primarily from interest income was $0.9 million as compared to $1.0 million in the fourth quarter of 2011.
Share-based compensation was $121,645 for the fourth quarter of 2012 as compared to $23,852 in the fourth quarter of 2011.
The Company recorded an income tax expense of $2.0 million in the fourth quarter of 2012, compared to $0.1 million in the fourth quarter of 2011.
Net loss attributable to Acorn was $9.4 million as compared to a net loss of $1.0 million in the fourth quarter of 2011.
Diluted loss per American Depository Share (NYSE:ADS) was $0.30, compared to diluted earnings per ADS of $0.03 for the fourth quarter of 2011.
Now I will briefly discuss our full year 2012 results. Our net revenue was $242.6 million, a decrease of 33% compared to $362.1 million for 2011. Direct sales contributed to 79.8% or $193.6 million of the total net revenues for the full year 2012. A decrease of 33.6% from $291.5 million for 2011, mainly due to a decline in sales generated from mobile phones, cosmetics, and consumer electronics.
Distribution sales net revenues declined 30.6% year over year to $49.0 million from $70.5 million for 2011, primarily due to a decrease in the demand and price discounts offered to distributors on older models of electronic learning device prior to the launch of new model incorporating mobile Internet interactive features in the third quarter of 2012.
Gross profit for 2012 was $110.6 million, a decrease of 29.1% compared to $156.1 million for 2011. Gross margin was 45.6% for 2012 compared to 43.1% for 2011.
Operating loss was $21.9 million for 2012 compared to operating income of $1.1 million for 2011. Net loss attributable to Acorn was $17.9 million compared to net income of $5.1 million for 2011.
Diluted loss per ADS was $0.60 for 2012, compared to diluted earnings per ADS of $0.17 for 2011.
And as of December 31, 2012, Acorn’s cash and cash equivalents including restricted cash and short-term investment totaled $101.5 million, as compared to $122.7 million as of December 31, 2011. The Company expects to utilize $8.6 million in cash to satisfy previously announced share repurchase obligations in the first quarter of 2013.
Business outlook. Based upon current trends, the Company expects for the full year 2013 revenues between $219 million and $310 million and a net income between $0 million and $2 million. These estimates and actions are subject to change. Also, I would like to remind you that our operating results in each period are impacted significantly by the mix of products sold in the period and the platforms on which they are sold.
In 2013, we expect new fitness and electronic learning products along with sales of our expanded Aoya cosmetics line and the mobile phone to drive overall revenue growth. We will seek to further improve the effectiveness of our media spending by promoting our most profitable products and working with the most productive TV channel partners. In addition, we believe recent enhancement to our Internet and outbound calls channels along with planned improvements to our distribution channels to contribute to overall revenue growth, Acorn’s management will continue to enhance cost efficiencies across organization with the goal of improving profitability.
With these remarks, I would like to conclude our formal presentation. We will now be happy to take your questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If your question has been answered, you may withdraw from the queue by pressing star then two. At this time we will pause momentarily to assemble our roster. And once again, it is star then one to ask a question. And again, it is star then one to ask a question.
At this time we will take a question. We have no questions in the queue. I would like to turn the conference back over to Mr. Patterson for his closing remarks.
Thank you everyone. With that, I will conclude our call today. I would like to remind you that an archived webcast on this conference call will be available on the Company’s website at ir.chinadrtv.com, under the Investor Relations section. For additional questions, please feel free to contact any member of our investor relations team at email@example.com. Thank you all again and have a great day. Good bye.
The conference has now concluded, thank you for attending today’s presentation. You may now disconnect.
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