VisionChina Media Inc (NASDAQ:VISN) Q4 2011 Earnings Call March 13, 2012 8:00 PM ET
Colin Wang – IR Director
Limin Li – Chairman and CEO
Stanley Wang – SVP, Finance
Yu-Heng Fan – Morgan Stanley
Chenyi Lu – Cowen & Company
Wade – CLSA
Thank you for standing by and welcome to VisionChina Media’s Fourth Quarter and Full Year 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements 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 will now turn the call over to your host for today’s conference, Mr. Colin Wang, Investor Relations Director for VisionChina Media. Thank you, please go ahead.
Hello everyone and welcome to VisionChina Media’s fourth quarter and full year 2011 earnings conference call. The company’s fourth quarter and full year 2011 earnings results were released earlier today and are available on company’s IR website at www.visionchina.cn as well as on newswire services.
Today you’ll hear from our Chairman and Chief Executive Officer, Mr. Limin Li, who will talk about industry, company’s strategy and business operations, and Mr. Stanley Wang, our Senior Vice President of Finance who will take you through our financials and key operational metrics. After their prepared remarks, Mr. Li and Mr. Wang will be available for your questions.
Please note that today’s discussion will contain forward-looking statements made under Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our future results may be materially different from the views expressed today.
Further information regarding these and other risks and uncertainties is included in our Annual Report on Form 20-F and other documents filed with the US Securities and the Exchange Commission. VisionChina Media 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 VisionChina Media’s Investor Relations website at www.visionchina.cn.
I will now turn the call over to our CEO, Mr. Li.
(Interpreted) Hello everyone and thank you for joining us today.
2011 has been a year of positive growth for VisionChina Media with significant improvement across key financial and operating metrics. Total revenues generated in the fourth quarter broke the company’s record for revenues generated in the single quarter and still at US$53.4 million, an 18.9% increase year-over-year and 6.2% increase quarter-over-quarter.
Average advertising revenue per broadcasting hour also reached a new historical high of US$1,217 in the fourth quarter of 2011. Additionally, in the fourth quarter we successfully realized profitability of US$4.1 million and GAAP profitability US$1.7 million. Total revenues for the full year 2011 reached US$181 million, 31% increase over the previous fiscal year.
A year ago, we promised you we will control our media costs and no interest spent by more than 10% for the full year 2011 and we have delivered. We successfully limited 2011 annual media cost step up to just 5.3% much lower than the previous announced target. This was achieved through actively resource management and the restructuring of contract terms with various radio and broadcasting bureaus, and subway and bus companies.
In 2012, we will continue to pursue this effective cost control strategy optimizing our media network structure with a goal of limiting of year-over-year step up in media costs for 2012 to no more than 10% based on our existing media network.
Turning to our media network development, in addition to our strategic restructuring of media resources in our exclusive network cities, we further developed the new strategic initiatives to accelerate our media network expansion in the Tier-3 and Tier-4 cities, they are seeing rapid development and increasing market demand.
On top of our 20 current cities, secured either by exclusive agency agreements or joint venture contracts, we added 41 cities in our non-exclusive mobile television networks in 2011. This expansion of our nationwide media network and deeper penetration into Tier-3 and Tier-4 cities greatly enhanced our ability to support multinational and domestic brand in the product promotion and sales in those regions.
Every minute of advertising sold in these new cities generate gross profit and overall operational efficiency has increased greatly. The successful implementation of our media network extensive strategy has further solidified VisionChina Media’s undisputed market-leading position in China.
As CCTV’s only strategic partner in the outdoor TV media space, VisionChina Media’s strategic operation with CCTV has a continued into third year and a more comprehensive diversified cooperation framework has been embraced by both sides. In addition to taking part in CCTV’s annual advertising fly time auction, VisionChina Media has the only extension of traditional TV with nationwide scale with Shenzhen to broadcast almost all of the important TV programs and news events from all 30 CCTV channels, including a spring festival gala, touching the heart of China, the March 22, general production day programs among other.
Moreover VisionChina Media was authorized to broadcast public service advertisements to CCTV, VisionChina Media’s determination power, public credibility and social value have all been greatly enhanced through the broadcasting of this program that important to Chinese audiences, CTR, CMMS, and third party research organizations continue to conduct various independent analysis of our media platform and have further affirmed VisionChina Media’s unique status as an integrated all media platform with proven rates recall and conversion rates.
It is so up to advertising clients, such as Unilever, Tuwongwu (ph) Wey Wahaha (ph), 58.com, and other well known brands have gained fully utilized our nationwide media networks as an integrated media solutions for overall marketing and product motion. This strengthens our confidence that we will continue to see a greater recognition of our platform in the other sectors apart from our direct advertising, further our revenue growth opportunities.
Various departments in the Chinese Government have recently conducting enhancing studies on VisionChina Media’s unique market that combine counter and technological innovation, as a result we will have benefit from Federal policy and series of supported funding. Furthermore VisionChina has been authorized to lead the environment of a new national media and advertising platform located in Shenzhen. This project will be fully funded by central and municipal government.
In addition to strengthening external cooperation with CCTV and satellite TV stations to improve our programming and creativity, we have also been cooperating with China’s top education and research institutions to conduct technological research and developments on the core hardware of mobile television and have achieved breakthroughs in a number of technology applications.
Furthermore, this research result and technological innovations have brought us the China National Hi-Tech industry certification and allowed us to further benefit from certain favorable governmental policies. As our media network continues to expand and mature, our emerging technological developments will be converted into new business models and revenue opportunities.
Our ability to stay at full funds technological innovation in the mobile television provides a solid foundation to sustain VisionChina Media’s long-term growth in an era of technological innovation in our industry.
Turning now to our lawsuit against the former shareholders of Digital Media Group, I’m sure all of our investors are aware through our recent press release that Supreme Court of the State of New York has entered orders deciding the pending motion filed in connection to the lawsuit. Following the ruling by the court the former shareholders of Digital Media Group move for summary judgment. We noticed an appeal to the above ruling to the Appellate Division, First Department; the appeal has not been perfectly opted out.
VisionChina Media will continue to rigorously pursue our remaining contract plans and to stand against the claims asserted by the former Digital Media Group shareholders to safeguard for long-term interest of all of our valued shareholders while being open to any constructive dialog with the counterparty.
In December 2011, Mr. Yunli Lou and Mr. William Decker stepped down from their positions as independent directors following the expiration of their tenure on our Board of Directors. We are pleased that both will act as Senior Consultants to our company and we are grateful to Mr. Lou and Mr. Decker for their contributions to VisionChina Media.
It has been our honor to welcome to our Board as independent directors Mr. Daniel Shih, who has decades of experience in marketing and development management and Mr. Arthur Wong, a former Senior Audit Partner at Deloitte. We believe their collective experience and expertise will bring new insight and significant value to our company.
The increased focus on developing a consumption driven economic model is a good indication of the forthcoming continuous establishment of the consumer market as a leading media platform I China, connecting advertisers with hundreds of millions of mainstream consumer groups on a daily basis, VisionChina Media is well positioned to benefit from the impact of a revitalization of both counter industry and consumer market.
These positive factors as well as the strong momentum seen in our profitable fourth quarter of 2011, have given us confidence in our ability to achieve overall profitability for the full year of 2012 while continuing to create long-term value for our shareholders.
I will now hand over the call to our Senior Vice President of Finance, Mr. Stanley Wang to discuss our financial and operating metrics in more detail.
Hello everyone and thank you for joining today. As Mr. Li mentioned, we’re excited by the anticipated strong growth churn of our business and enhanced bottom line seen in the fourth quarter of 2011.
We continue to achieve record high total revenues and advertising service revenues during this quarter. With total revenue growth of 18.9% year-over-year and return into profitability in the fourth quarter of 2011 and recognized net income of $1.7 million US Dollar on a GAAP basis which was another strong improved result while, we do expect no weakness in the first quarter of 2012, but we are confident that a strong future lies ahead for VisionChina Media in 2012 and beyond.
Let me turn to the key operating metrics. Out total broadcasting hours 41,463 hours in fourth quarter of 2011, compared to 43,778 hours in the first quarter of 2011. The slight increase in our total broadcasting hours quarter-over-quarter reflects the full quarter impact of our choice not to renew one of our exclusive agreement. At the end of August 2011, we saw a termination of another exclusive agreement at the end of 2011, in accordance to our strict cost control policy.
Average advertising per broadcasting hour was US$1,217 in the fourth quarter of 2011, compared to US$1,122 in the third quarter of 2011. This was primarily attributable to the price increase in certain cities, where our networks have expanded due to opening of new subway lines or due to an increase in numbers of processing operations.
In the fourth quarter of 2011, we saw a total of approximately 371,000 advertising minutes in our network compared to 443,000 advertising minutes sold in the fourth quarter of 2011, and 466,000 advertising minutes sold in the third quarter of 2011.
On average we saw 8.95 advertising minutes per broadcasting hour in the fourth quarter of 2011, compared to 8.87 advertising minutes per broadcasting hour in the fourth quarter of 2010, and 10.64 advertising minutes per broadcasting hour in the third quarter of 2011.
A decrease in advertising minutes sold compared to third quarter of 2011 is primarily attributable to certain small and local advertising customers past on the opportunity to advertisement reversal in the fourth quarter as a reaction to the cost increase in some of the cities I just referred, which we are confident that these advertisers, we returned once they had time to digest their price increase and weigh the benefit of the enlarged market coverage covered by those prices.
We have seen this and not really played out before, where advertisers has returned in this quarter, returned in the quarter following a post price increase induced drop-off, our expenses seizing again in this turnaround.
We ended fourth quarter of 2011 with 530 sales personnel, representing a net decrease of 28 sales people over the course of the fourth quarter. The result of one of our cost of control policy aimed at optimizing our ratio of sales people to advertising customers.
Turning now to our fourth quarter and full year financials. Our total revenues in the fourth quarter of 2011 were US$53.4 million, a record high in our operating history. Advertising service revenue, which accounted for 96.7% of our total revenues in the fourth quarter, was US$51.6 million, representing an increase of 14.9% and 2.7% compared to that in the fourth quarter of 2010, in the third quarter of 2011 respectively.
For the full year 2011, our total revenues increased 31.2% to US$181.2 million. Media costs the most significant components of our advertising service cost was US$24.6 million in the fourth quarter of 2011, compared to US$26.5 million in the fourth quarter of 2010, and US$26.4 million in the third quarter of 2011. Media cost was US$103 million in the full year 2011, compared to US$97.8 million in the full year 2010.
In 2011, we are here to a strict cost control policy and achieve our internal target of limiting our annual Media cost increase to less than 10%. And Mr. Li mentioned, we have a guess that is less than 10% target for 2012.
Gross profit in the fourth quarter of 2011 was US$21.4 million compared to US$11.6 million in the fourth quarter of 2010, and US$17.8 million in the third quarter of 2011. Gross profit in the full year 2011 was US$52.6 million compared to gross profit of US$17.1 million in the full year 2010. Advertising service gross margin was 40.9% in the fourth quarter of 2011, compared to 25.9% in the fourth quarter of 2010, and 35.5% in the third quarter of 2011.
Advertising service gross margin was 29.2% in the full year 2011 compared to 12.4% in the full year 2010, the increase in our gross profit was primarily a result of stronger growth enhanced by effective cost control of media costs.
Selling and marketing expenses were US$14.5 million in the fourth quarter of 2011, compared to US$9 million in the fourth quarter of 2010 and US$11.5 million in the third quarter of 2011, the result of overall increase in marketing and promotion activities. Selling and marketing expenses in the full year 2011 were US$44.9 million compared to US$28.3 million in the full year 2010. The annual increase in selling and marketing expenses was due to an increase in market efforts that were well target and residing stronger growth.
General and administrative expenses were US$4.1 million in the fourth quarter of 2011, compared to US$2.3 million in the fourth quarter of 2010, and US$3.1 million in the third quarter of 2011. General and administrative expenses in the full year 2011 were US$13.2 million compared to US$9.5 million in the full year 2010. The annual increase was primarily attributable to the increase in legal fee in connection to the litigation with the selling shareholders and former managements of Digital Media Group, and so as the provision for certain doubtful accounts receivables.
We recorded contingent losses we cut our contingent loss of US$3.4 million in connection with the pending litigation with the selling shareholders and former management of Digital Media Group in the full year 2011, including US$700,000 in the fourth quarter of 2011, and US$2.7 million in the third quarter of 2010, sorry ‘11. There was no such contingent loss in the full year 2010.
Operating profits were US$2.4 million in the fourth quarter of 2011, compared to operating loss of US$56.3 in the fourth quarter of 2010, and an operating profit of US$800,000 in third quarter of 2011. Operating loss in the full year 2011 was US$10.4 million compared to an operating loss of US$166.6 million in the full year 2010.
In 2010, we recorded a non-recurring, non-cash impairment charges totaling US$145.7 million, including an impairment charge of US$89.1 million as a result of write-down of goodwill and intangible assets taken in the second quarter of 2010, in connection with three of the six advertising agencies we acquired in 2008 and impairment charges, and impairment charge of US$56.6 million, as a result of write-down of the goodwill and intangible assets taken in the fourth quarter of 2010 in connection with our acquisition of Digital Media Group.
Our income tax benefit was US$300,000 in the fourth quarter of 2011, compared to an income benefit of US$12.3 million, in the fourth quarter of 2010, and the income tax expense of US$1 million in the third quarter of 2011.
Our income tax benefit in the full year 2011 was US$800,000 as compared to an income tax benefit of US$18.2 million in the full year 2010. The income tax benefit recorded in the full year 2010 include the tax credits of US$12.2 million in connection to the affirmation in capital loss of intangible assets of which US$10.4 million was recorded in the fourth quarter of 2010.
And that income was attributable to VisionChina Media shareholders was US$1.7 million, in the fourth quarter of 2011, compared to a net loss attributable to the VisionChina Media shareholders of US$44.7 million in the fourth quarter of 2010, and the net loss attributable to VisionChina shareholders of US$800,000 in the third quarter of 2011. Basic and diluted net income per share in the fourth quarter of 2011, were both US$0.02.
Net loss attributable to VisionChina Media shareholders in the full year 2011 was US$12.5 million, compared to the net loss attributable to VisionChina Media shareholders of US$151.3 million in the full year 2010. Basic and diluted net loss per share in the full year 2011, were both US$0.12. The provision net loss in 2010 was primarily due to the impairment losses that, was offset by the related tax credits mentioned above.
Non-GAAP net loss attributable to VisionChina Media in the full year 2011 defined as net loss excluding share based compensation expenses, amortization of intangible assets and provision for contingent losses, in connection to the litigation were US$2.2 million compared to US$4.8 million non-GAAP attributable to VisionChina Media shareholders in the full year 2010, which is defined a net loss excluding share based compensation expense, amortization of intangible assets, impairment loss and income tax credit in connection to the impairment losses.
The company had a cash and cash equivalents of US$80.3 million as of December 31, 2011. Net cash provided by the operating activities in the fourth quarter of 2011 was US$7 million compared to the net cash use in the operating activities of US$10.7 million in the third quarter of 2011. Depreciation and amortization was US$2.8 million, and capital expenditure was US$800,000 in the fourth quarter of 2011 respectively.
Turning now to our guidance, we estimated our advertising service revenue during the first quarter of 2012 will be negatively affected by seasonality, consistent with the historical pattern will increase in the subsequent quarters. Based on the business condition seen thus far in 2012, we estimate our advertising service revenue in the first quarter of 2012 to be between US$27 million to US$28 million.
Non-GAAP net loss attributable to VisionChina Media shareholder for the first quarter of 2012 defined as net loss excluding share-based compensation expenses, amortization of intangible assets and provision of contingent loss in connection to the litigations is estimated to be between US$17 million to US$18 million. These estimates are based on a foreign exchange rate of 6.3523, US$1.
As a reminder our guidance is based on our current network of 20 cities that as of today have already been secured either by exclusive agency agreements or joint venture contracts and based on our current assessments of an outcome of pending litigation with selling shareholders and from the management of Digital Media Group. If the number of the cities in our network expands on contracts, if there is any progress in the pending litigation that affects our assessment of the possible outcomes, our forecasts will be affected.
Thank you again for joining us today. And I will now open the call for your questions. Operator, please proceed.
(Operator Instructions). Your first question comes from the line of Yu-Heng Fan from Morgan Stanley, go ahead please.
Yu-Heng Fan – Morgan Stanley
Hi, good morning, thank you for taking my questions. First of all, please help us understand your first quarter guidance you mentioned that there is some technology on which category do you see a particular weakness during the first quarter? And you also mentioned excess sales force to recover from second quarter. So, where do you see the course will come from? Thank you. Then I have a follow-up question.
First I’ll translate this question to Mr. Li and then we will answer your question. And answer to the first question is that we actually guided a relatively weak Q1 guidance because of the – several factors. The first one is seasonality. Historically Q1 is always the low season for us and also for the industry. So, this is basically we follow this in historical pattern.
And then, the second factor that affects our Q1 expectation is that we increased our advertising rates by over 10% in the tier 1 cities and 5% to 8% in tier 2 cities in December 2011. So, certain middle-size and smaller size little customers has always told the advertising spending seems our price increase.
So, basically this and also and the first quarter will affect our Q1 guidance and also come from the continuous low contribution of the internet business. As we guided our Q4 guidance in our last earnings call – we saw a significant decrease in our revenue contribution from the internet business. In the first three quarter of 2011, advertising spending from – the revenue contribution from the internet business accounted for over 12% of our total revenue.
In the fourth quarter, because of the internet business of the offsetting segments, especially quantify our information and it could by, and outstanding expenses become soft. So, we only saw a revenue contribution of 7% of the internet business to contribute to our total revenue. And we saw this trend has continued into Q1 and we expect that the internet business will only contribute around 5% of our total revenues in Q1. So, this again, we are experiencing a transition period to – of course we are hunting for more business opportunities and other things put from the other segments of internet and digital business. And now, this too has a very significant impact on our Q1 result.
As for the Q2, of course we would see a rebound from based on – first on from the historical presence and then secondly we still see a very strong growth from the – those traditional consumer goods industry. And then, and also we are talented from our contract we served, we have now a contribution of more than US$80 million of which about 10% – more than 10% were from internet business. This – gradually we saw it recover from discount and especially from the vertical e-Commerce was right and also certain online gaming companies.
And also, starting from Q2, we also would see an impact from a series of major sport events such as the – basically we have the say European Soccer Cup and also the Olympic games which is – we’re actually – we saw increasing spending of the advertisers starting from Q2. Mr. Limin have certain, another kind of add.
(Interpreted) First one, there are couple of factors that Stanley just mentioned which caused a relatively low Q1 revenue forecast. There are, couple of other reasons we would like to have. First, is that we are seeing some customers who used to form up an annual budget – annual advertising spending budget before the beginning of Q1. But turning to this year, we’re seeing that they have been relatively cautious in their spending towards the marketing and advertising promotion. And right now, and we are basically allocating the advertising spend on a quarterly basis.
Given the current situation we have, we also implemented new strategies in pitching for new clients. And as the only outdoor TV platform in China, we are now trying to with the help of third party research data we’re now trying to position ourselves as the odd media solution for overall clients marketing and product promotion. We were confident with new strategy implemented we can be able to find more revenue opportunities.
And also we’re going to fully leverage the corporation that we have had with CCTV and there is, other satellite TV stations, to increase our VisionChina Media platform’s public credibility, and also dissemination power and then to attract more customers. Thank you.
Yu-Heng Fan – Morgan Stanley
Thanks very much, that’s very helpful. And my follow-up question is regarding your media cost in the first quarter, working on sequential increase to extend of the first quarter?
The media costs has a sequential increase in first quarter, and because our position contracts they ended. So, in the first quarter, the – as the beginning of New Year so, we actually see a slight increase of our Media costing as compared to Q4. And, again, based on existing network, we currently project the full year increase of the media cost is no less than – is no more than 10%.
Yu-Heng Fan – Morgan Stanley
Okay. Thank you very much.
Okay, thank you.
Thank you. Our next question comes from the line of Chenyi Lu from Cowen & Company. Go ahead please.
Chenyi Lu – Cowen & Company
Great, thank you. I have two questions. First question regarding the advertising equipments sales this quarter. We received about US$1.8 million revenue for the quarter for 4Q, do you expect to see more revenue coming from the equipment sales in 2012, and I also have a follow-on question. Thank you.
This advertising, this advertising equipment sold is basically come from the – those revenues from the PID as system service revenue which is appeared, it means the passenger information and also system and we have been in case and contracting work, the metro companies, to help them to build up the PIDS systems as part of the – digital television system in distant way.
So, such service revenue we have – the revenue in Q4 depending on our service for lines starting from 2009, which completed in 2010, however at the time, according to the contract those revenue were not – do not meet the criteria of revenue recognition and at the time of the project completion. So, until the fourth quarter of 2011, all the contingencies eliminated so we recognized the revenue.
So, that would not be a much recurring item in the coming quarters. So, we have only one, surveillance with such construction service. So, I think in the coming 2012, this increment cost would be, will not be significant part of our top line.
Chenyi Lu – Cowen & Company
Okay, great. My second question regarding the gross margin trend in 2012. If you take out the advertising gross margin this quarter is relatively high. Can you give us a gross margin view in 2012 that would be great? Thank you.
Especially, for 2012, we actually see, we still see a very strong operating leverage that was traded. And then, the company, we are counted for a gross margin for the full year to be over 45%.
Chenyi Lu – Cowen & Company
Chenyi Lu – Cowen & Company
35%, okay, great. One more question. Regarding the sales marketing expense trend, this quarter, December quarter, the sales marketing expense was kind of high. What do you see in 2012, it would be great? Thank you.
Returning and the high sales and marketing expenses so, the project should be able to increase of sales marketing expense activities especially, the first thing is that we are – I talked about the decreasing the contribution in business and we’re hunting, following the new business opportunity in this area and we increased our marketing efforts. And also, especially in kind of the downside and we are making more investment in the relative services through these customers.
And also in Q4, and actually again in Q1, we have a more standing to secure our new contracts. So, basically the following, in Q2 and the coming quarters, we are still, as I – control in this part and we actually see CAD. In Q1, we actually see a decrease in trend of the selling expense and, for full year 2012, we target the selling expense as a percentage of revenue to be controlled at 20%.
Chenyi Lu – Cowen & Company
Okay, great. Thank you.
Thank you. Your next question comes from the line of James Lee from CLSA. Go ahead please.
Wade – CLSA
Hi, thank you. This is Wade, calling in for James. Thank for taking my question. I have only one question, so I notice that in this quarter, we paid about US$80 million, the short-term loan any particular reason that we want to payback this loan at this point then? Thank you.
Okay. Thank you for the question. And the US$83 million, actually in the cash flow and in the cash flow stream, we actually – we have repaid of the US$83 million, short-term loans. And including which US$43 million was the payment for offshore loans in US dollar which is secured by 100% RMB deposit in China. So this is basically the, and those deposits we used for security offshore loan was free.
So, basically this is actually an offsetting item between the received cash and the short-term loan. And the actual repayments of the – and we also repaid US$58 million for our – for one of our loans with Bank of China in December 2011. And then, again, we have a – again we draw down another US$25 million from another credit line we secure from the China construction bank. So, this is basically the movement in our loan position.
And additionally, the – we have a current in the pipeline to nearly to conclude the deal of a credit facility with Bank of China for another US$49 million credit facility or long-term loan which is we expect that this deal will be concluded in the near term.
Wade – CLSA
Okay, thank you.
And we have no further questions in queue. I’ll hand it back to Mr. Wang for closing.
Thank you all for joining us today. If you have any questions, please do not hesitate to contact us at firstname.lastname@example.org.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may all now disconnect.
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