Acorn International, Inc. (NYSE:ATV) Q4 2013 Results Earnings Conference Call March 18, 2014 8:00 AM ET
Samuel Patterson - IR Manager
Don Yang - Chief Executive Officer
Geoffrey Gao - Vice President
Hello, ladies and gentlemen and welcome to The Acorn International’s Fourth Quarter and Full Year 2013 Earnings Conference Call. My name is Amolin, and I will 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. Please note this event is being recorded.
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 2013 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 questions. 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 in 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 statements regarding Acorn’s anticipated future revenue mix and operating results.
A number of the potential inherent risks and uncertainties that Acorn’s business involves 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 statements except as required by applicable law.
I would like to introduce our CEO, Mr. Don Yang, who will provide some introductory remarks.
Thank you, Don. I will proceed by translating your introductory remarks. Now I will present the remainder of Mr. Yang’s remarks on his behalf. We closed the year with revenue below our expectations, primarily due to slower sales of Yierjian product line, which has entered the later stages of the product life cycle, and mobile phones.
Media efficiency of TV direct sales was adversely impacted by higher media costs. Meanwhile, we enjoyed a healthy increase in gross margin due to our kitchen and household product line, which accounted for 29.2% of gross revenue for the quarter. Electronic learning products also performed well, mainly due to growing market acceptance of newer models incorporating mobile internet interactive features, such as online tutoring services.
Gross profit over advertising expense, a benchmark we use to measure on multiple sales platforms was 1.64 in the fourth quarter of 2013, down slightly from 1.68 in the fourth quarter of 2012. This was primarily due to lower product sales in certain categories relative to the amount spent on television advertising, partially offset by the greater contribution of kitchen household products in the product mix.
I will now discuss the results and plans for some of the major product categories and provide some other important updates.
Kitchen and household products were the largest product category in the fourth quarter of 2013, generating revenues of $10.5 million and representing 29.2% of total gross revenue.
Our popular kitchen knife sets generated the majority of sales and we recently extended the product line to include a cooker set and memory foam mattress. We consider this a key product category and intend to test new kitchen household products in 2014.
Sales of electronic learning products, primarily sold via our distribution platform, was the second-largest product category in the fourth quarter of 2013, generating revenues of $8.1 million and representing 22.7% of total gross revenues. I am happy to report that the fourth quarter of 2013 marked the third consecutive quarter of year-over-year sales growth for electronic learning products following the transition through newer models incorporating interactive features throughout 2013.
We’re optimistic about this product category and we expect the positive trend in sales to continue. We plan to launch additional new products and expand our distribution network in 2014.
Collectible products were our third largest product category in the fourth quarter of 2013, with sales of $7.2 million, accounting for 20% of gross revenues. Revenues rose 28.3% from the fourth quarter of 2012 due to strong sales of our renminbi currency collectibles products.
Now, I’d like to discuss one of the most important issues facing the TV direct sales industry today. On January 1, 2014, new regulations issued by China’s State Administration of Press, Publication, Radio, Films and Television or the SAPPRFT became effective that strengthen the administration of infomercials broadcast via satellite TV channel. These new regulations prohibit satellite TV channels from broadcasting infomercials between 6 pm and 12 am and from broadcasting for more than one infomercial per hour.
In addition, each infomercial cannot be three minutes and infomercials with the same content or selling the same products cannot be broadcast for more than three times per day.
In response to the new regulations, we are refining our infomercials to make them more impactful in a shorter format, identifying products that are most conducive to the shorter format and increasing the number of products we market via TV direct sales platform.
While the new regulatory environment presents a major challenge for our company, we believe that our management team’s extensive media and branding expertise is a distinct advantage that will allow us to position ourselves -- position our TV direct sales platform for future success.
China’s e-commerce industry presents enormous growth potential and this will be a key focus area for us in 2014. We plan to expand our online presence, both on our own channel and on the platforms of leading Chinese e-commerce companies. We will also extend our product offerings to fashion products including celebrity branded and endorsed products such as shoes, apparel and jewelry in the coming months.
In closing, we’re driving upon our expertise in media and branding to position our TV direct sales platform for success within a new regulatory environment. We’re seeking to increase the effectiveness of our outbound telemarketing efforts by leveraging our extensive customer database. We will continue to leverage our other direct sales platforms especially our e-commerce and catalog business along with our nationwide distribution network of electronic learning products to drive sales volume in the year ahead. 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 on our financial results.
Thank you, Sam. Hello everyone. I will now proceed with presenting our financial performance for the fourth quarter and the full year 2013. Before that, I would like to remind you that because of seasonality in the sales of some of our products, we’re primarily focused on year-over-year rather than sequential comparisons.
Total net revenues were $35.7 million, down 39.5% from $59.1 million in the fourth quarter of 2012. Direct sales contributed to 74% or $26.4 million of total net revenues in the fourth quarter of 2013, a decrease of 45.9% from $48.9 million in the same period of last year, mainly due to lower sales of fitness products and mobile phones.
Net revenues from distribution sales decreased 9% year-over-year to $9.3 million from $10.2 million in the fourth quarter of 2012. Cost of sales in the fourth quarter of 2013 was $18.1 million, a 45.8% decrease from $33.4 million in the fourth quarter of 2012, primarily due to the decrease in overall sales.
Gross profit in the fourth quarter of 2013 was $17.6 million, representing a 31.4% decrease as compared to $25.7 million in the fourth quarter of 2012.
Gross margin was 49.3% in the fourth quarter of 2013 as compared to 43.4% in the same period in 2012. The increase in gross margin was largely due to the larger revenue contribution by kitchen and household products, which generally carry a higher gross margin in our product mix.
Advertising expenses was $10.7 million in the fourth quarter of 2013, down 30% from $15.3 million for the fourth quarter of 2012. Other selling and marketing expense was $13.4 million in the fourth quarter of 2013, up 10.4% from $12.1 million in the fourth quarter of 2012. The increase in selling and marketing expense despite a decrease in revenues resulted primarily from higher labor costs.
General and administrative expense was $8.4 million in the fourth quarter of 2013, representing a 16.8% increase from $7.2 million in the fourth quarter of 2012, primarily from consulting fees and contingencies for litigation.
Other operating income, net, was $0.9 million for the fourth quarter of 2013 as compared to $0.8 million in the fourth quarter of 2012. The operating loss was $14 million as compared to $8.2 million in the fourth quarter of 2012. Other income was $0.8 million as compared to $0.9 million in the fourth quarter 2012.
Share-based compensation was $107,000 in the fourth quarter of 2013 as compared to $121,645 in the fourth quarter of 2012. We recorded income tax expense of $0.5 million in the fourth quarter of 2013 as compared to $2 million in the fourth quarter of 2012. Net loss attributable to Acorn was $13.8 million as compared to $9.4 million in the fourth quarter of 2012.
Basic and diluted loss per ADS was $0.51, compared to basic and diluted loss per ADS of $0.3 in the fourth quarter of 2012.
Now, I will briefly discuss our full year 2013 results. Our net revenues were $184.7 million, a decrease of 23.9% compared to $242.6 million for 2012. Direct sales contributed 73.9% or $136.4 million of the total net revenues for the full year 2013, a decrease of 29.5% from $193.6 million for 2012, mainly due to a decline in sales generated from mobile phones, fitness products and other products.
Distribution sales net revenues declined a 1.4% year-over-year to $48.3 million from $49 million for 2012, primarily due to the transaction in electronic learning products from older models to newer models incorporating interactive features throughout 2013.
Gross profit for 2013 was $92.2 million, a decrease of 16.6% compared to $110.6 million for 2012. Gross margin was 49.9% for 2013, compared to 45.6% for 2012. Operating loss was $42.5 million for 2013 compared to a loss of $21.9 million for 2012. Net loss attributable to Acorn was $39.9 million compared to a loss of $17.9 million for 2012.
Basic and diluted loss per ADS was $1.41 for 2013 compared to basic and diluted loss per ADS of $0.6 for 2012. As of December 31, 2013 our cash and cash equivalents with restricted cash and short-term investment, totaled $82.9 million, as compared to $101.5 million as of December 31, 2012. The decrease in cash and cash equivalents was primarily due to the loss from operations for 2013 and the $9.6 million non-current and restricted cash, which was deposited to obtain long-term debt for a share repurchase transaction completed in March 2013.
Business outlook; now I will discuss our business outlook. As discussed in Mr. Yang's remarks, on January 01, 2014, new regulations issued by China’s SAPPRFT became effective which impose limitation on the length and frequency of infomercials aired on satellite television channels in China. The immediate impact has been a significant reduction in airtime for infomercials promoting Acorn's products. We are closely monitoring the impact of these new regulations and seeking to better position our TV direct sales business in light of the new regulatory environment.
Given the uncertainties surrounding the SAPPRFT regulations on our business, the company is not in a position to provide financial guidance for 2014 at this time.
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.
With these remarks, I would like to conclude our formal presentation. We would now be happy to take your questions.
Thank you. We will now begin the question-and-answer session. (Operator Instructions). Showing no questions at this time, I’d like to turn the conference back over to Mr. Patterson for any closing remarks.
Thank you everyone. With that I will conclude our call today. I would like to remind you that an archived webcast of this conference call will be available in the Investor Relations section of the company’s website at ir.chinadrtv.com. For additional questions, please feel free to contact any member of our IR team at email@example.com. Thank you all again and have a great day. Good bye.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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