Ideanomics Inc (IDEX) 2014 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the YOU On Demand 2014 first-quarter investor update call. (Operator Instructions). At this time, for opening remarks and introductions, I would like to turn the conference over to Jason Finkelstein, Director of Strategy and IR at YOU On Demand. Please go ahead, Sir.

Thank you, operator, and good afternoon. Welcome to our first-quarter 2014 earnings conference call. Joining me today I am pleased to have Shane McMahon, Chairman; Weicheng Liu, CEO; and Marc Urbach, President and CFO.

We announced our financial results for the first quarter at approximately 4 PM Eastern time today. The Q1 financial results and the webcast of this call are also available at the Company's corporate website at corporate.YOD.com. Once Shane, Weicheng, and Marc complete their prepared remarks, we will open up the lines to analyst questions and then for the first time starting with this quarter's earnings call continue the Q&A session with questions received via email both prior to and during the call. As previously instructed in our earnings call dial-in information press release, please email questions to IR@YOD.com and we will do our best to address as many as possible, time permitting. The webcast of today's call will also be archived and available in the webcast and events section the YOD corporate website for a minimum of 30 days.

We may make forward-looking statements during this call regarding the company's future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. These risks and uncertainties are detailed from time to time in the Management's Discussion and Analysis section of our corporate filing, copies of which can be obtained from the SEC or via our website. All information discussed on this call is as of today, May 15, 2014, and YOU On Demand undertakes no obligation to update any statements or expectations from prior conversations.

Regarding today's agenda, Shane will begin with a quick overview of business development and our outlook for 2014, Weicheng will discuss our strategy and services, and Marc will cover our first-quarter financials.

Thank you, Jason and good afternoon everyone. I am pleased to introduce YOU On Demand's CEO, Weicheng Lui, who is joining us on our earnings call for the first time and we all appreciate his efforts in joining us at 4:30 AM in Beijing.

We will get to the CEO and CFO's remarks momentarily, but I wanted to briefly begin with some business development news as well as the initiation of topline revenue guidance for 2014. Since its inception when Weicheng, Marc and I started YOU On Demand, it has always been the Company's business plan to be on numerous platforms. We have been very fortunate that YOU On Demand has been able to expand its distribution platform into the IPTV, OTT and mobile spaces. As we begin to take full advantage of our new distribution opportunities, you will note later when Weicheng and Marc speak that we are morphing as a company and refocusing our efforts to bring the best end-user experience to our customers no matter how they access our platform.

As it pertains to cable, we have had a much slower growth than originally anticipated, which Weicheng will speak to a few moments. We continue to have our sales team target the numerous fragmented digital cable operators in China so that we can further expand our reach and prepare for the future as digital cable matures.

On the mobile side, which has now become a big focus for us, we have a two-pronged approach. First, there's our agreement with Huawei which allows us to get our app preinstalled onto a limited number of their smart phones, including the Huawei Mate. Huawei has been very pleased with those initial results. Feedback from Huawei is that our video content, with its progressive downloading and high-quality, is one the best in class. We are currently in discussions with Huawei to further expand our relationship and get our service included on a lot more of their hardware by the end of this year, 2014.

Aside from targeting mobile devices and manufacturers directly, we have also been working diligently to partner with the telecom operators. In this scenario, we would bundle our service with their data or service plan. We are in the midst of an ongoing trial of our mobile and IPTV multiscreen service with a big Chinese provincial operator. Once live, this will be a multiscreen service whereby people can sign up for our mobile service and be able to watch movies not only on their smart phones but for an additional price on their big-screen TV at home via IPTV. We are anticipating to sign a full-fledged commercial agreement shortly, and we will update investors accordingly.

On the OTT and Internet TV sides, we currently announced the launch of our service of the Xiaomi box as part of our OTT deal with Future TV. The user interface is beautifully designed, robust, and very easy to use. Our service has already rolled out to 1 million Xiaomi box devices, and that number will grow with additional sales of their box. In addition, as Future TV expands the reach, we will look forward to ways to incorporate our service across more OTT as well as internet-enabled televisions, some of which will be announced in the coming weeks. With all of that being said, we now feel comfortable providing top line revenue guidance of $3 million for 2014 with revenue coming from multiple sources, including digital cable, IPTV, mobile and OTT.

Before I turn the call over to Weicheng and Marc to provide much more detail of our company's refocusing efforts, I wanted to emphasize the potential size of the markets we are targeting, specifically with mobile and OTT. China has nearly 1 billion mobile phone users and roughly 40% of them are already using smart phones. We believe the rest of the population will continue to make the same transition as faster 4G service is rolled out at more affordably priced smart phones price below $50 come onto the market.

As far as OTT and Internet TV are concerned, China was home to over 618 million Internet users at the end of 2013, up 9.5% over 2012. So, the market continues to grow at a very healthy rate. For a quick comparison, there are about 260 million Internet users here in the United States.

With that, I would like to turn it over to Weicheng as he explains our plans to convert the users behind these numbers into YOU On Demand subscribers. Take it away, Weicheng.

Thank you, Shane. Well, so far, 2014 has already proven to be a busy year for us. Our multiplatform strategy includes mobile, OTT, IPTV, and digital cable. However, as our investors are aware, up until only recently, we were operating solely in the digital cable space essentially as a B2B company.

By business-to-business, we mean that while our service eventually makes its way downstream to the Chinese consumers, YOU On Demand is essentially selling its service to Chinese digital cable companies who in turn are controlling the distribution and the marketing of our service in a way they see fit. In addition, because the B2B model with the government owned digital cable space doesn't provide us or entitle us to have a direct relationship with the end-users, we are not able to get access to the Holy Grail, the user data.

As we have been learning, we need to own the YOU On Demand customer experience from the moment they sign up for the entire time they are with us and be able to do so across multiple screens, from mobile handsets and tablets to the big-screen TV. This way, we will be able to better choose tailored content to put on our platform. This valuable information will also help us determine how and where to best market our service or determine which demographic is watching what, when, and how. We can therefore make better informed strategic decisions that will allow our service to penetrate the market and help our subscriber numbers grow.

So, while the digital cable space continues to slowly gain some steam, we have quickly and decisively turned both of our attention and more company resources to the booming mobile, OTT, and Internet TV spaces in China with our new business-to-consumer model. With these platforms, YOU On Demand has the opportunity to communicate with and better serve our customers than end-users directly. This is a powerful opportunity in this age of the social media, social engagement, and the data-driven decision-making and is crucial to the future success of YOU On Demand.

As mentioned in the past, our strategy is to operate a successful multiplatform and multiscreen entertainment distribution service. Our overall performance, while largely is driven by improving recognition of the YOD brand which we are working diligently to be analogous in the mind of the consumers with quality of programming and unparalleled voice.

The market for video entertainment is such it continues to change and aggressive competitors. Our primary competitors include companies that operate online video websites in China such as ITE, Youpu, Tencent, and Sohoo. They all carry a very large amount of video content, including Hollywood and domestic movies, and they compete on a variety and facets of the content in order to drive Internet traffic to their websites. However, their true customers are advertisers, not the end user consumers. This is where YOU On Demand is differentiating itself and where I would like to go into a bit more detail.

We are focused on creating the number one destination for true movie fans. That means no advertising interruptions, superb video and audio quality through the best and highest performing content delivery networks, and a user interface that is truly best in class. Our service is a simple, intuitive one-stop shop for all things movie related in China. And what differentiates us from the aforementioned competitors is that we are empowering the user to extract value from a movie in whole new ways. And at the same time, YOU On Demand will be extracting data from users so we can better serve them in all aspects.

We have been investing in research and development and have created some rather innovative technologies to provide consumers an unprecedented and unparalleled content consumption experience. For instance, we have created video augmentation technology that allows opinion leaders and more advanced users to create so-called layer-based, time-based and understanding-based commentaries and fun facts that they can share with friends over the popular social media platforms.

With all of these new innovations built into our services, we aim to be the destination for movie fans where subscribers to our service not only come to watch the actual movies but also to participate with other movie fans on the social level and at the same time further promote the value of the YOU cinema services.

In summary, our company is transitioning from a pure content aggregation and distribution business into a business that is built around all things movie related with innovations that are changing the way people consume content through social connections amongst movie fans, also with a healthy balance sheet, including a good cash position and no debt, and our targeted operational expense reductions. We have financial flexibility to invest in and support our repositioned business and to leverage our resources in a more focused and efficient manner around our growth initiatives.

Looking forward, I'm confident in what we are bringing to consumers and the strong connections we're making with them. I like where we are. Better yet, I like where we're headed.

I would like to turn the call over to Marc for our financials.

Good afternoon everyone. I'm going to summarize YOD's financial and operating results for the 2014 first quarter and provide you with a brief update on our capital structure.

Revenues for the period ending March 31, 2014 were $138,000. As you will recall, we launched YOD's cable VOD business last year and revenues during that period were negligible, as expected. Not only was our brand name new to customers but the idea of offering movies on a transactional and subscription basis in the home over cable was a very new concept in China.

As pioneers, we also have the added challenge of educating our China-based MSO partners about marketing best practice to help drive additional customer awareness and demand. The price of these challenges appear to be gating factors for cable distribution but we do continue to believe in the long-term viability of this platform of our business.

It is important to keep in mind that we have a multiplatform strategy and the company's recent entry into the mobile space has been well-received by consumers as well as by our hardware and handset partner Huawei. We also are gaining traction in the OTT and IPTV sectors, as evidenced by the recent Xiaomi news. As you know, we are building a unique brand and increased usage, and expansive array of content and increasing mind share are all positives for YOD as we move forward.

Turning back to Q1, our gross loss amounted to $738,000, down from $848,000 the prior year. Moving down the income statement, we continue to be very mindful of keeping corporate overhead at minimal levels and the 21.8% decline in total operating expenses to under $2 million reflects the success of this strategy. We will continue to focus on achieving maximum operating efficiency and strive to best align cost levels of YOD's streamlined corporate structure.

We reported reduced operating loss of $2.7 million, down from $3.4 million the prior year ended. Our loss from continuing operations was $7.5 million while our overall net loss was $23.6 million which was impacted by several onetime non-cash items, including a $16.4 million non-cash beneficial conversion future incurred as part of our preferred E trip sale as well as changes in the fair value of warrant liabilities and contingent considerations. Just to reiterate, the benefits of conversion feature was a non-cash charge related to the recent financing based on capital requirements.

The reported per-share loss was $1.48 on a fully diluted basis. Despite the relatively slow start to Q1, we are gaining positive momentum in the first half of Q2, and as Shane mentioned, we are now comfortable reinstating topline guidance of $3 million for the full year, up significantly versus the less than $500,000 generated in all of 2013.

We believe establishing revenue guidance provides investors with a clear picture of how we see the balance of the year playing out and also reflects our growing confidence that the company's multiplatform strategies are indeed taking hold. As mentioned on last quarter's call, increased capital investment resulted in a much stronger balance sheet and the R&D team has made significant technological contributions for us, including the special launch of the YOU cinema app on the Huawei Mate.

We continue to target achieving cash flow positive status during the first half of next year and will remain a lean corporate overhead run rate of approximately $8 million in the interim.

This concludes our management team's prepared remarks. I'd like to turn the call back to our operator and open up the lines for your questions. As a reminder , web (technical difficulty) questions at IR@YOD.com.

(Operator Instructions). Jay Srivatsa, Chardan Capital Markets.

In terms of the guidance for the year, can you give us some sense on how that breaks out between the mobile and the cable side of the business?

Sure the --

Jay, this is Weicheng. For the moment, I think, in terms of revenue, there's going to be probably for a short term, let's say next three to six months, it's going to be still half-and-half, but beyond that, I would see mobile OTT will takeover or overrun the cable side by probably a very, very large margin because, in the mobile space, the growth is very, very high.

Okay. Focusing on the mobile side, given the differentiation that you highlighted in your script, Weicheng, can you give us some sense on how the customer reception has been now that you have the Huawei Mate out? And what do you expect to have to change or tweak in order to make it more successful going forward?

Very good question. Our Phase I solid rollout our mobile app on Huawei's Mate phone was purposely designed in such a simple way so we can capture users' feedback and requirements. For instance, we purposely limit the number of movies made available to those mobile consumers to two movies per week so we can concentrate on things like how do they react to longform videos and the very high quality progress o downloading feature built into that service, and etc. There are many other aspects of that service. And together with Huawei, we have done two brands of user service. The third one, the result of the third one just came in early this morning, is all colored bring-back very, very useful user feedback and overall is very positive, very encouraging.

I can share some numbers here. Number one, the activation rate of the mobile app is more than 70%. So people do like to be able to consume movie content in such a handy and convenient way. Number two, this is kind of surprising to everybody, 41% of the people actually finish watching the entire movie on their large screen smart phone either continuously or in multiple sessions or in multiple views. Early this morning, the number came back while in the third round of survey. This was more focused on how likely people are willing to pay for the service. 47% of people responded they would pay, yes. Of course, they laid down things like what they like, what they dislike, which is all very encouraging. That leads to a very detailed discussion with Huawei about a much broader call it a rollout plan on their Huawei phones.

Very good. So realistically as you look at the end of the year, how many phones beyond the Huawei Mate do you expect to be able to be involved in?

The current discussion is all around what Huawei decided is best. This company is selling a very, very large number of phones. They plan to ship 80 million-plus mobile phones worldwide for this year. And within that, there's a special line of product called Honor series phone which is purposely designed for Internet online marketing and distribution. This product line, we're looking at a small number of models. It is probably something like three or four models. They're focused on targeting selling 20 million pieces by the year-end, for the next 12 months. And so our product is likely to be made available with those models.

Very good. I think Shane touched on the initiative that you're working with the telecom operators. Could you expand on that and let us know how the business model works with the telecom operator versus the handset Huawei type of customer?

Right, with the telecom operators, we are indeed engaging with multiple (technical difficulty) at the provincial level, including sort of an Internet rollout with one provincial operator where we not only have the mobile service, it also involves like a second screen offering on the big TV screen.

With the mobile operators, we still have to run the service at the B2C service, even Internet -- sort of the mobile Internet, the nature of the mobile Internet is open, is longer, like things are contained within the cellular data network.

In the mobile Internet space now, things are open, right, and people actually 90% of the time, they consume longform video over the Wi-Fi network. But they do need cellular data when they sit down on trains or they are in transit. So that's where kind of the there's a nice synergy for us to work together with the mobile operators, plus their marketing capability, their ability to collect money. But this is a new model where we run the service end to end and integrate the billing with their backend systems. So the mobile operators will be doing, number one, marketing the service to their mobile users, number two, collect money and that we split. The [pelling], the subscriber management, is all done by us.

Very good. And when do you hope to launch some of those services with the mobile operators?

Well, we've been in trial with one provincial operator already for several months. They're of course as you can understand very cautious when you face multiple millions of new consumers. They are very cautious about service quality, the support and everything.

We have gone through several hurdles, and I am comfortable with we will definitely commercially launch the service probably within two to three months or even sooner.

Very good. Last question for me. Marc, you mentioned cash flow positive in Q1. What level of quarterly revenue run rate do you have to get to achieve that?

I didn't hear what you just said, I'm sorry.

Yes, the question was you mentioned cash flow positive by Q1 of 2015. What level of revenue run rate on a quarterly basis do you need to get to that?

Sure. We need to get with our -- taking into account our minimum guarantees and our other assumption costs that we need to pay at the end of the year, we have to get to about $3 million per quarter around to get to cash flow breakeven.

Very good, thank you. Good luck.

Thank you, Jay, and thank you operator. Now, let's move into questions that have been emailed to us by investors both before and during this call. As will be our standard practice from this call going forward, we've organized the questions by topic as we receive them.

First question, can you go into some detail on the marketing efforts being done specifically as it relates to Huawei and mobile?

Well, we are working very closely with Huawei, both on the product design, product refinement as well as marketing. Huawei has a what we call loyalty program where they have somewhere between 7 million to 10 million what they call Huawei sands. And we market heavily toward those people, plus we do things like promotion, marketing. I'll give you one example.

Transformers IV is going to be hitting Chinese theaters in mid or late June and we are to get Transformer I, II, III ready so when people call it are prepared to go watch this big blockbuster movie in the theater, of course we remind them, hey, we have something you want to go back and revisit or you'd never get a chance to watch the very classic Transformer I, II, and III. That's just one example. We can -- definitely we can do a lot more than that.

Great, thank you. Can you provide more color on the YOU Kids rollout? Are you still on target for (technical difficulty) launch?

With YOU Kids we're working around the clock to get our product together. We have a very high standard, sort of quality standard for ourselves. We have some amazing contents, and we're working with our partners to prepare for the service launch by the end of the year. We are on schedule. It's a very ambitious plan, but I'm confident we will get there.

Great. Next question. There's been some high profile M&A and investment activity in this space recently. Can you comment on any interest in YOU On Demand by third parties?

Sure, I can answer that. Obviously, we're keeping a close look on all the consolidations and different acquisitions that are happening in the space. We're certainly always open to listening to all sorts of potential partners and we actively seek other partners out, but until there is something eminently happening, we don't necessarily provide that information until we know.

Thank you. Next question. Obviously, there are well-capitalized and very well-established Internet video providers who provide ad-based content. Can you explain how you service differs and how you think you can be successful against them?

All right. I think we have touched this subject in different places, both by Shane and myself, in our previous verbal presentation to the audience.

Number one, I think if you look at it, our position is different, right. Most of this, well, literally every one of these big Internet giants, they are very much a video media platform where they have to load up a lot, lot of video content because they have to satisfy their customers, the advertisers, who are selling (technical difficulty) from cars, baby food, you name it. Everything. Now, that's why, when you look at their financial reports, the one thing they report is their top 10 customers advertisers, right. Because of that, they have to maintain a balance between the money they spend on call it creating this superior user experience as we are doing and the cost or the money they can generate on the advertising side. And for YOD, we focus on providing the best possible service to the people who are willing to pay for our service.

So the model is simple, right. Our costs can be easily contained as proportional anyway. Because of that, that is also the reason why Huawei chose to work with us and we're targeting let's say 3% of the population so-called opinion leaders and 20% of the movie fans or moviegoers. And they target literally 110% of the people so they can grab to watch anything on the platform in order to get their customers pleased. So, that's the number one difference. Because of that, we can focus on and create a very different user experience.

And our new model is also different, right. We not 100% just rely on the content itself. We create a bunch of services. We're basically selling let's say a membership service, people sign up and then they can enjoy the content we provide. Let's say down the road, pretty soon, people can buy movie tickets and select their seats on our mobile app. They can do a lot of things. They can enjoy interesting movie themed games, making friends within this circle, or find common interests, and so on. I mean there are many things we can do. So, our focus is to serve our target users.

Great, two more questions. Is domestic Chinese content also being offered on mobile and OTT?

Yes, the short answer, yes. We are actually increasing our efforts to get the call it closer window, newer titles from the Chinese movie studios.

Great. And last question, this is for Shane. Does YOU On Demand have any ideas about providing pay-per-view sporting events to the mainland China market? If so, how long might such plans take to materialize?

Well, first and foremost, again, we're focusing on movie content. Once we have the movie content done, then we will -- and have the distribution platforms and the service being used more readily and more accessible, then we will start to add all the different types of content, which would also include sporting events and what have you, such as WWE, potentially MMA, etc.

Great, thank you all. That's all the time we have for questions today. Shane, would you like to make any closing remarks?

Just we would like to thank everyone for joining us today. And we're extremely excited and confident about the direction the company is headed. We want to thank investors, both past and present, who have been a part of our growth and have supported us. Weicheng, Marc and I look forward to updating all of you on YOU On Demand's ongoing progress when we host our 2014 Q2 call. So I'd like to say thank you again and have a good evening.