Remark Holding's (MARK) CEO Shing Tao on Q3 2017 Results - Earnings Call Transcript

| About: Remark Holdings, (MARK)

Remark Media, Inc. (NASDAQ:MARK)

Q3 2017 Earnings Conference Call

November 13, 2017 04:30 pm ET

Executives

Shing Tao - Executive Chairman and Chief Executive Officer

Doug Osrow - Chief Financial Officer

Analysts

Darren Aftahi - Roth Capital Partners

Mike Malouf - Craig-Hallum Capital

George Kafkarkou - Private Investor

John Grimley - TJW Capital

Operator

Good afternoon, everyone and welcome to the Remark Holdings Third Quarter 2017 Earnings Conference Call. My name is Talari [ph] and I will be your operator this afternoon. Joining this presentation are Remark Holding's Chairman and CEO, Shing Tao and CFO, Douglas Osrow. Following the remarks, we will open the call for questions.

Some of the statements made today may be forward-looking statements. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Any forward-looking statements reflect Remark Holdings' current views, and Remark Holdings expressly disclaims any obligation to update or revise any forward-looking statements after the date hereof. This disclaimer is only a summary of Remark Holdings' statutory forward-looking statements disclaimer, which is included in full in its filings with the SEC.

Also, please note that the company uses financial measures not in accordance with generally accepted accounting principles, commonly known as GAAP, to monitor the financial performance of operations. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the reported financial results as determined in accordance with GAAP. To support the company's views of adjusted EBITDA later in this call, a reconciling table is provided at www.remarkholdings.com, and a similar reconciling table will be included in the company's Form 10-Q filed with the SEC. I would now like to turn the call over to CEO, Shing Tao. Please go ahead.

Shing Tao

Thank you for taking the time to join us. We are very pleased with our artificial intelligence platform otherwise known as KanKan continued its strong growth in 2017 fourth quarter which allows us to exceed our 2017 guidance and more importantly continue the very strong momentum into 2018 where our current internal forecast are set at $30 million or greater in 2018. I'll go into details on how we will achieve this a little later on.

KanKan is unique in its breadth and depth as an AI platform. We're not just an AI-based FinTech company, we're not just facial objection recognition company, we're not just a natural language processing company. We're a company that provides a combination of AI technologies that solve problems for our customers in one solution. As you know the strength of any artificial platform is a function of how comprehensive the data that change the models are. Almost four years ago, we laid the vision to you in building a technology platform within Remark Holding then not only allowed us to create a moat [ph] around our business, but more importantly to become a leader than a follower.

We took a few years first create the technology and second, used the technology to amass the data. From that point our technology was able to turn the unstructured data into data we can use because we took those long-term strategy to build the platform with the best foundation we have become one of the leaders in the Artificial Intelligence field. Our products are built and owned by us and one of the key pillars to the strength our foundation is the ability to create monetizable products quickly and efficiently in many industry.

Going into 2018, we're very proud we're executing on that vision and more importantly look forward to the many challenges ahead of us in keeping that position. To better serve our customers and provide better products and services in various areas under KanKan. We formed two business units. KanKan's FinTech business unit and KanKan AI and Data Solutions business unit. I'll briefly go over each business units focuses and their status.

First, KanKan FinTech business unit. The core value KanKan's FinTech is built off of our AI based risk management models trained based on social data, shopping data, location data, financial data and other related public available data. Since our last quarterly call, we've expanded our suite of solutions. First, quality lead acquisition; second, social credit score and risk management; third, social listening and loan monitoring and fourth, professional debt collection. This expansion allows our SaaS based FinTech platform to provide a complete consumer financing solution to our customers whether they need us to help them with one more areas or the entire platform to support their consumer loan business.

Combining KanKan's data marketing power, KanKan's unit social unique credit check, we were now able to provide our financial institution customers with high quality, high conversion and low default rate loan customers, which allows us to take a percentage of the overall loan amount made. This is a tremendous opportunity as we can now benefit from the $300 billion industry in just consumer loans alone in China which is growing at 30% annual growth rate. In the third quarter, we have started to execute our lead gen business by helping our customers loan out over RMB100 million with an extremely low default rate. We're excited to see 10 additional similar financial products in the pipeline in Q4 of 2017. With an expanded partnership with Alibaba and other financial institution. We'll continue to improve our models and create new FinTech products to serve our customers better.

Now moving onto KanKan's AI and Data Solution business unit. KanKan's AI solution business unit focuses on providing our customers with big data, customer vision and natural language processing base products and solution. The three core areas that KanKan's AI business is based on, is one deep learning base facial recognition, porn detection and filtering. Two; AI-based image object recognition and three natural language processing. The uniqueness of KanKan's AI is that we can quickly train specific models with relatively small amount of data samples which makes us extremely flexible and efficient to apply our solutions to customers business with a fast time to market. KanKan's AI platform develops new features and monetizable products every few weeks.

With the development of new AI model, KanKan's AI has been adopted in many verticals including security, public safety, education, travel, food management, social media and etc. KanKan's AI solutions that we provided have led to recently announced contracts. Sina Weibo's mobile app number one. This app uses our leading 110-dot 3D Facial Tracking technology to provide the most smooth and accurate 3D augmented reality experience to all of Sina's Weibo's users. Number two, the Open Kitchen project by the China's Food and Drug Administration. KanKan's Smarteye [ph] system will be used in first 200 restaurants in Shanghai this year and over 2,000 plus in 2018 to enforce food safety policy for restaurants.

This is from a leading solution provider based in China, awarded multi-million dollar contract to KanKan for our powerful computer vision technology that can automatically tag, and index live or achieve video content via real-time object recognition. There are over 15 signed contracts of MoU's in the pipeline for our fourth quarter 2017 and 2018. And more companies are testing our technologies. Many of them will result in multi-million dollars in revenues.

As for KanKan's big data business. We recently announced the partnership with Acxiom one of the world's largest data service company. And we're working together to provide the best data solutions for high value customers in and outside of China. With the showcase of our data and AI capabilities we're expecting more data companies like Acxiom, Epsilon to join KanKan's data platform and work with us to provide revolutionary data solutions. As it relates to KanKan's IP, we have filed 22 AI-related patent in Q2 and Q3 and we're building up our IP portfolio quickly for the remainder of 2017 and coming 2018 to continue to be the leader in the AI space.

As a testament to our achievements we're invited to speak at the World Internet Conference in Wuzhen, China in early December. This is widely considered to be the most prestigious internet conference in China. In conclusion, the massive growth we're experiencing in 2018 and looking into 2019 will be driven through organic growth. We're not relying on acquisitions to achieve the numbers we've set in front of you today.

Now moving to Vegas.com. Briefly and Doug will go over the financials highlights. VVC [ph] saw the largest improvements in the conversion in the company history. Conversion improved 30% year-over-year for our Vegas.com business. These improvements in conversion were a key catalyst in driving our ticketing business to its single best month ever. In August 2017 we sold more show tickets to consumers than any other month in the history of the company. In fact, every month in the third quarter of 2017 ranked in our top four months all-time in show tickets sales. Not to be outdone the conversion improvements also aided our hotel business. Our hotel vertical experienced the single largest improvements during the month of August growing room night sales at our fastest pace ever. Overall this lead to an increase of 25% in transactions over the same period a year ago. This improvement also represents the largest growth in transactions in our history.

Finally, a brief update on Sharecare. Sharecare was ranked amongst the fastest growing companies in North America on Deloitte's 2017 technology list by growing its revenue by 398% between 2013 and 2016 Sharecare receiving official ranking of 242 among the private and public technology companies on the Fast 500. Doug?

Doug Osrow

Thanks, Shing. After the market closed we issued a press release announcing our results for the third quarter and nine months ended September 30, 2017 a copy which is available in the investor relations section of our website. Now to our results. Our net revenue for the third quarter of 2017 increased 28% to $19.4 million from $15.1 million in Q3, 2016. Of this amount revenue from our KanKan business accounted for approximately $2.2 million in the third quarter of 2017. For the nine-month period our net revenue increased 17% to $52 million from $44.4 million in the same period last year. KanKan revenue accounted for $3.2 million of our total net revenues in the first nine months of 2017.

Turning to our expenses, our total cost and expense for the third quarter of 2017 was $25.4 million which results from $19.3 million in Q3, 2016. For the nine-month period our total cost and expense was $68 million compared to $57.2 million in the same period last year. Our operating loss during the third quarter was $5.9 million which compares to $4.2 million in the third quarter of last year. For the nine months, our operating loss was $16 million which was increase from $12.9 million in the same period of 2016.

Our net loss for the third quarter of 2017 totaled $13.3 million or $0.58 per diluted share, this compares to a net loss of $15.3 million or $0.75 per diluted share in Q3, 2016 and finally for the nine-month period our net loss totaled $17.6 million or $0.70 per diluted share compared to $23.1 million or $1.15 per diluted share in the same period last year.

Now turning to our balance sheet, our unrestricted cash was $16 million at September 30, 2017 plus we maintain a restricted cash balance just shy of $11.7 million bringing our combined cash position to $27.6 million at quarter end. This compares to a combined cash position of $18.5 million at December 31, 2016. We've received many questions regarding with the impact of the tragic events on October 1, 2017 at had on our operating results. Above all, we want to thank all of those who reached to us to ensure that our employees were safe. The event did not impact the third quarter of 2017 as we reported an increase in EBITDA from the travel and entertainment segment of our business of almost 10% of approximately $2 million and it's also worth noting that Vegas.com had 19 of its top 20 show tickets sales days in its history since July 1, 2017.

While the tragic events effects are difficult to quantify in revenue and EBITDA. We believe we will report approximately $500,000 less in EBITDA from the travel and entertainment segment during the fourth quarter of 2017 then we had internally estimated prior to the event largely stemming from the supplier driven cancellations the week following October 1.

Shifting gears, I'd like to provide a limited view of certain of our positive expectations for 2018 starting with the travel and entertainment segment which we expect will generate growth revenue of more than $325 million and net revenue between $65 million and $75 million during 2018. We also anticipate their EBITDA margin will be between 10% and 13% of net revenue. More importantly for our KanKan business, we expect to report more than $30 million of revenue during 2018 which would quintuple the revenue we expect to report for all of 2017.

As I conclude my financial summary, I wanted to point out that I will be at Roth and the Craig-Hallum Conferences in New York this week. If anyone wishes to set up a meeting please contact me at your convenience and with that, I'd like to turn the call back to Shing. Shing?

Shing Tao

Thanks, Doug and with that, we're ready to open the call for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] we will take our first question from Darren Aftahi with Roth Capital Partners.

Darren Aftahi

Just a couple things, if I may. I know you said the $5 million in KanKan revenues looking, but does that kind of imply that you will be $6 million or better? And then I'm sort of curious about the composition of some of these fields. How much of the business is in the quarter or kind of going forward is starting to have a recurring component through it?

Doug Osrow

Darren, I'll start with the first part of the question. I believe you were asking about our $5 million revenue guidance for KanKan this year. I know we're implying that we will do $6 million, you cut out in the little bit of the question. So, I just wanted to confirm, that was your question.

Darren Aftahi

It was yes.

Doug Osrow

You were correct to assume that we were going to go from $5 million to approximately $6 million for the year of 2017. In KanKan and we expect again to quintuple that to north of $30 million net in 2018.

Darren Aftahi

And then I guess a couple more if I may. The composition on the KanKan revenue, what portion of that business is coming in or was in the quarter is recurring and then my other question would be around your $30 million, how much of that is sort of Asia Pac based as opposed to kind of any other geographies outside of Asia and are you seeing more inbound in increase that are sort of non-Asia in nature in terms of the KanKan business. Thanks.

Shing Tao

Number one it is recurring, the bulk of our revenue at this point is primarily is coming from FinTech and we see that as being a large growth driver for us. Really one on the FinTech side we mentioned about the food safety program that's going to be - these all businesses that would pay us on a recurring basis. The bulk of the business that we're seeing is primarily China-based having said that, AI obviously is a global force and we've been approached by a number of different companies from all the world whether it's from the US, Europe, Latin America, South East Asia in using that our technology that could be for a variety of things from FinTech to public safety and etc.

Darren Aftahi

And then maybe one more if I may. With Alibaba and Tencent, is any of that kind of revenue contemplated next year going deeper within those conglomerates versus kind of your initial foray, with each company this year?

Shing Tao

As you can imagine Alibaba and Tencent are so big, so it's pretty tough to navigate through China without somehow touching upon some like tentacles there in that sense, so yes is the short answer. But I think what's exciting is that a lot of the business that we're seeing is an addition to non-Alibaba or Tencent affiliated businesses.

Darren Aftahi

Great. Thank you.

Operator

[Operator Instructions] we will move next to Mike Malouf with Craig-Hallum Capital.

Mike Malouf

When you take a look at this ramp in KanKan it's pretty dramatic basically $1 million a quarter to $30 million a year. and I'm just wondering is that $30 million common, is that - how much visibility do you really have on that as we stand right now it's because we're still in November and can you give us a breakdown between how that breaks up between FinTech and then your AI and data solutions side of that [indiscernible]?

Shing Tao

We probably won't go into the breakdown of the segment, but it will be primarily FinTech driven. But in terms of the visibility it's very clear in front of us. We're looking to see the variables right now is, how do we take that $30 million and grow it even faster over the course of 2018.

Mike Malouf

So, this is basically it also has been one so far and that if you're able to win few business over the next six months or so that could be actually be accretive to that number.

Shing Tao

Yes absolutely. I mean - our position and where we stand right now going into almost the third week of November, how do we position ourselves in growing that number for 2018. The $30 million number that's we've used right now is not the maximum that we'll see in 2018, we think we have a high probability of growing that number, but there's still bunch of more things that need to be decided on.

Mike Malouf

Yes, that's great. Okay, thanks for the help. Appreciated.

Operator

Next, we'll move to George Kafkarkou, a Private Investor.

George Kafkarkou

I got a couple questions around KanKan. How many unique distinct KanKan products do we have today and how many do we anticipate to have six months from now?

Shing Tao

I'd say unique products publicly that we've released are roughly about 15 products. We have a lot of products that we come up with that go through the testing period with potential clients until they're ready to use our product we don't publicly release it, but we have a strong stable of AI-based products.

George Kafkarkou

Okay, so I mean I read an article I think it was Technode that came out last week. I think it was and that article stated that you guys have another 15 KanKan products coming, is that article accurate?

Shing Tao

That article is accurate. How we actually going to specifics? You'll see it - press obviously in terms of how what the - specific details of the product and how we monetize it. But the Technode article is accurate.

Doug Osrow

As you're well aware one of the things that makes, our AI technology so unique is how quickly we're able to scale and come up with new products because of the system that the team has developed.

George Kafkarkou

Yes, I'm perfectly aware of that Doug. Thank you. [Indiscernible] my next question, so listen we've got a world class platform that we can build KanKan products quickly literally in weeks that's very obvious. If you do the math, you guys build KanKan unique products in weeks. So how do you go about prioritizing which ones you want to build?

Shing Tao

Well it's tough, we obviously go for the ones that has the biggest market opportunity and then into industries where our present team can build, we don't have to go out and hire new people add any additional costs, we can already rely on our existing infrastructure to build those products. But as you can imagine when you're going into a world where every company no matter who you are and not matter what size, you need to have an AI strategy that bodes very well for us.

George Kafkarkou

Yes, okay. How do you guys experience feedback from the fact that, KanKan one of benefits is that, you can get access through the government firewall in China. Right? Conceptually that must be very appealing to big US brands. Can you just give us some anecdotes or feedback, or does that generate a lot of interest or is that just, wishful thinking on my behalf as an investor?

Shing Tao

I mean, it attracts interest of course but whether that interest can be translated into something that's monetizable for monetizable for western companies in terms of - in particular from the media size is a big question mark. We've gone down that part, we're talking to the largest kind of US media companies looking to go into China. I just found out that the numbers just don't add up for either side. So, we haven't really figured out a solution from that standpoint, but we will.

George Kafkarkou

Okay. What's the Aston Martin deal which was publicized in one of your excellent videos, was that a local Chinese Aston Martin [indiscernible] or was that from headquarters in the United Kingdom?

Shing Tao

That was working with the agency that does their advertising in China. The agency led product.

George Kafkarkou

Okay. I have another 10 questions. I would only ask one. How do you guys think about strategic alliances for KanKan? Have you been - do you guys get approached or - because the platform you have is incredible? One of the only weaknesses I would observe I could imagine is that, how much capacity do you guys have to utilize all the opportunities because it seems to me the opportunities are almost without limit in China, in Asia and probably in the US too. So, have you guys been approached or how do you guys think about strategic alliances without a big tech firm?

Shing Tao

Carefully. Obviously teaming up with a large strategic partners has their benefits to us. But I think we were always very careful. I think if you look at the landscape out there globally. A number of the hottest tech companies that are in the middle of legal issues have been because they've teamed up with large strategic partner. Right now, because both have two very different kind of motors on why they got into it and so we're very careful as well because our goal is to enhance to exponentially enhance the value of KanKan and obviously Remark while the other groups are probably looking more on how they can enhance their own, so it's two very different objectives.

George Kafkarkou

Yes, I mean one of the tremendous appeals for KanKan begins the whole landscape is the following. The big players of this world, the Google's, the Amazon's, the Apple's, even Facebook. The intent of their AI applications and focus and investment is to sell more of their products. Right? Microsoft, they just want to sell as much Azure as possible and they use AI investments to drive, drive that. It seems to me where rather unique but we're AI for AI-sake in terms of pure horizontal plays. Am I misreading that in anyway? Am I making that too simplistic you think or is that a fair reflection?

Shing Tao

I don't really know exactly their motive. I mean we can just see it through our lens. I mean at the end of the day. They create the AI. They're so big and they've so many different resources and so many different environments. So, it's very hard to place where, what direction they're going to first and foremost it's obviously to help their own businesses. But time will tell. From our standpoint we don't have the luxury of doing AI for AI-sake. We need to make money and so that's really the first and foremost goal that we go into.

Doug Osrow

And George, this is Doug. Happy to take more questions from you after the call. I just want to keep the call moving for people on the queue.

George Kafkarkou

Great quarter guys. Exciting times. Thank you so much.

Operator

[Operator Instructions] and we'll move next to John Grimley with TJW Capital.

John Grimley

George, asked a couple of questions I was going to ask. The one other question and I don't know how much you'll be able to say, but as we do some of the parts work on your company it can be a little tricky. Pretty clear some parts aren't being value, if we have the parts right. How should we be thinking about your Sharecare stake? Or what you can you tell us about? [Indiscernible].

Shing Tao

I mean we've always said that we don't look at our business as [indiscernible] parts of business, it's taken us a few years to get to where we're and where they're now as an integrated AI platform. Moving forward, whether the business that currently own or acquire in the future. It's all based on the same core technology of what's been built. As far as I'm concerned with what Sharecare and the Sharecare's business is very strong, when we look to monetize that stake. We have a lot of options on how and when we do it and we obviously wanted to get the highest value for it. As far as the way I personally look at it, it's just my own view is that it's just gravy [ph]. We're growing our business very fast as it relates to KanKan. Our core cash flow business EDC [ph] is very solid. So, this is when Sharecare does it I don't know, but we know it's going to be at high number and so when that time comes we'll probably adjust accordingly to it.

John Grimley

Got it. Okay, great. And the only other question I had, we can do it. I'll catch up with you guys offline just to go through some of the stuff in the queue. [Indiscernible].

Doug Osrow

Great, thanks john.

John Grimley

Thanks guys.

Shing Tao

Thank you.

Operator

That does conclude our question-and-answer session at this time. I will turn the call back over to our speakers for any final or additional comment.

Shing Tao

Thanks again for joining us for our call today. We appreciate your continued support and look forward to speaking with you on our next earnings call. Operator?

Operator

Everyone that does conclude our conference call for today. Thank you all for your participation and you may now disconnect.

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