Ideanomics Inc (IDEX) 2015 Q2 法說會逐字稿

Good morning everyone and welcome to YOU On Demand's second-quarter 2015 investor earnings call. At this time for opening remarks and introductions, I would like to turn the call over to Jason Finkelstein, Director of Strategy and Investor Relations at YOU On Demand. Please go ahead.

Thank you, operator, and good morning. Welcome to our second-quarter 2015 earnings conference call. Joining me today, I am pleased to have Shane McMahon, Chairman; Weicheng Liu, CEO; and Grace He, VP of Finance.

We announced our financial results at approximately 7:05 AM Eastern Time. The 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 Grace complete their prepared remarks, we will open up the lines to analyst questions and then continue the Q&A session with questions received via email both prior to and during the call. The webcast of today's call will also be archived and available in the webcast and events section of 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 filings, copies of which can be obtained from the SEC or via our website. All information discussed on this call is as of today, August 13, 2015, 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 introduction and Weicheng will discuss trends and our strategy. Finally, Grace will cover our financials.

Shane, please go ahead.

Thank you, Jason. I am very pleased to announce another strong quarter of growth, with revenues in Q2 2015 of approximately $1.480 million. YOU On Demand saw year-over-year and quarter over growth of 710% and 44%, respectively. The increase in revenue was primarily achievable to the growth in the video streaming business on mobile and over-the-top, or OTT platforms. 2015 year-to-date revenues now stand at $2.508 million, surpassing total revenues for the entire year ended 2014 by $545,000 or 28%.

The entire team continues to execute on strategy, grow brand awareness and recognition, and further develop and enhance the YOU On Demand value proposition. We continue to navigate carefully and within the scope of the Chinese regulatory environment, and learn a tremendous amount about consumer video consumption habits. This leaves us well positioned with both our content lineup and wide distribution channels to continue capturing part of the ever-growing and massive media and entertainment market in China.

Anytime and anywhere started off as simply video distribution over digital cable. But for over a short amount of time, this morphed into IPTV, mobile Internet, smart TVs, railway Wi-Fi, and OTT. YOU On Demand is a company very adept at moving along with constantly changing technology and consumer preferences, and that gives us a tremendous opportunity to continue to grow market share.

With that, I would now like to turn the call over to YOU On Demand's CEO, Weicheng Liu.

Thank you, Shane, and thanks to everyone for joining our call. In China, the media and entertainment industry has seen tremendous growth in recent years, even outperforming the overall economy. Drivers of this growth have come from three areas which continue to expand at a tremendous pace: disposable income, government subsidies, and a new media adoption.

While the media and the entertainment industry continues to undergo a profound change in both commercialization and technology, the middle class continues to expand and disposable income has grown with it. As a result, millions of people are finding that they have extra money to spend after accounting for the costs of living.

China's new generation has had more education and more opportunities to work outside the factories than their parents and their grandparents did. So unlike in the US, where middle-aged adults make the most, in China, it is the younger people in the generation and usually the most tech savvy who make up the higher income brackets.

Not only do they have more money, but they are more willing to spend it as they have only known a Chinese economy where standards of living have been rising rapidly. And they want to live in the same manner and have the things that younger people do in other markets in the world.

In addition, the proliferation of broadband and mobile Internet users has been turbocharged by massive infrastructure and a backbone investment from Chinese policymakers, who are keen on finding ways to diversify China's economy and shift away from the country's heavy reliance on exports. All of this has created a very favorable environment in which YOU On Demand is now capitalizing on with both revenue and user growth as well as distribution expansion with new and current partners.

As YOU On Demand's business grows and evolves, each platform and distribution channel presents its own set of unique challenges, operating and marketing demands, and a customer base. Each also have their own set of standards, requirements, and a matrix. And as a relatively young company in an evolving industry, it may be difficult for us to give specific information or operational data in the context of how a particular arrangement or deal is doing.

I understand that this can cause frustration at times, but I am asking our investors to focus on several areas. First, our impressive deal flow and future deal flow; second, our strong growth on our top-line revenues; and third, the continued reduction in operating expenses as it directly relates to a more streamlined operating structure.

(technical difficulty) YOU On Demand is a starting to hit its stride. We are seeing encouraging consumer demand. We are refreshing our movie content offering monthly to give consumers the latest titles available as well as a strong selection of library titles. Our Android mobile app has both a strong rankings and reviews on consumer public app sites.

We are constantly upgrading both our service and user interface and working closely with our partners to ensure seamless compatibility with multiple platform types. And because of this strength and overall strengthening of the YOU On Demand brand, our range has grown beyond our beginnings on digital cable and are now be found almost everywhere: on mobile devices, IPTV, OTT set-top devices, computer trains, commuter trains, and smart TVs.

Our most recent announcement and expanded launch with Dr. Peng Group is off to a great start and the structure of the partnership is a good example of the direction YOU On Demand would like to take future distribution deals. As a recap, [entered] expanded cooperation and a special promotion, Dr. Peng Group is providing one year or two years of automatically activated and bundled utility service. Both [there's] 2 million purchasers of Dr. Peng's new Domy Box and the first 200,000 purchasers of the new Domy smart TV.

The fee for the YOU Hollywood service will be built into and included in the sales price of each individual piece of hardware. Upon the sale of the device, YOU On Demand will receive payment from Dr. Peng Group.

We find a deal like this to be very attractive for several reasons. First, subscribers are signing up for longer-term subscriptions as our service is bundled, and together to the longer terms of the broadband service provided. Second, YOU On Demand gets to re-up the balances to [offset] the distribution partners' marketing capabilities and a reach without having to increase our own budget.

So in this case, not only is our service being marketed through e-commerce and social platforms, but on top of that, at Dr. Peng Group's broadband service center, where there is a direct interaction between customer and sales associates, think of it in terms of the customer walking into a Verizon store to purchase a mobile plan and hardware or some smartphone to go with it.

Generally speaking, the direct-to-consumer face-to-face interaction in brick-and-mortar locations is very strong sales tool with higher conversion rates. And YOU On Demand get access to Dr. Peng Group's sales and service centers in [case it is].

Finally, this partnership with Dr. Peng is an expansion of that already existing partnership, signaling a great working relationship between the two companies. This is important because it allows YOU On Demand to expand with a partner, where months of work have already been put into infrastructure, and both companies are ready to live with each other's capabilities and protocols when it comes to delivery of radio content (technical difficulty) close. I'm very pleased that YOU On Demand got back on track with quarter-over-quarter sequential growth and investors should expect that trend to continue.

With that, I would like to hand it over to Grace to cover our financials.

Good morning, everyone. As Shane mentioned earlier in the call, with revenues in second quarter of 2015 of approximately $1.480 million, YOU On Demand saw year-over-year and quarter-over-quarter growth of 710% and 44%, respectively. The increase in revenue was primarily attributable to the growth in the video streaming business on the mobile and over-the-top platforms.

Gross profit for the second quarter of 2015 was approximately $651,000 as opposed to gross loss of $674,000 during the same period in 2014. The increase in gross profitability was primarily due to growth in revenue while maintaining tight control of costs. YOU On Demand's cost of revenue is largely comprised of content licensing fees and, to a lesser extent, costs associated with direct delivery of our content services, such as content preparation fees and government censorship clearance costs.

Selling, general, and administrative expenses for the second quarter of 2015 decreased approximately $612,000 to $1.659 million as compared to $2.271 million in second quarter of 2014. The decrease resulted predominately from resource shifts to China as part of our long-term cost savings and operations enhancement initiatives.

Salaries and personnel costs are the principal components of selling, general, and administrative expenses. While we added resources in the area of product development and operations in the second quarter of 2015, salaries and personnel costs decreased 6% as compared to the same period in 2014 due to our cost-saving initiatives.

Total operating expenses in the second quarter 2015 decreased 23% to $1.905 million from $2.486 million in the same period last year. Net loss was $1.324 million for the second quarter 2015 compared to $1.086 million in the comparable 2014 period.

Net loss for the second quarter of 2014 was primarily affected by nonoperating income of $1.502 million due to changes in fair value of warrant liabilities. We recognize certain warrants as derivatives liability and we measure these warrants at the end of every reporting period and upon settlement. The fair value change of these warrants is primarily affected by fluctuation in our closing stock price.

Net loss for the second quarter of 2015 was primarily affected by loss from operations of $1.255 million. Basic and diluted loss per share for the second quarter 2015 was $0.06 as compared to $0.05 loss per share in the same period in 2014. For the 6 months ended June 30, 2015, basic and diluted loss per share was $0.17 as compared to $1.50 loss per share for the same 6-month period in 2014.

As of June 30, 2015, the Company had cash and cash equivalent of approximately $6.9 million and total current assets of approximately $10.9 million. More details of YOU On Demand second-quarter financials can be found in Form 10-Q of our corporate [web] filings, copies of which can be obtained from the SEC or via our website.

This concludes our management team's prepared remarks. Now I would like to return the call back to the operator and open up the line for your questions. As a reminder, webcast participants are invited to email us their questions at ir@yod.com now.

(Operator Instructions) Jay Srivatsa, Chardan Capital.

Thanks for taking my questions. Congratulations on the numbers, Shane and Weicheng. Good numbers. Let me ask you: in terms of the split in Q2, can you help us understand how it broke out between mobile, cable, and OTT?

Thanks, Jay, for the question. In general, we generate our revenue roughly two-thirds of revenue come from the mobile and OTT. The rest will be -- come from IPTV and cable. We divide it that way because IPTV and cable are considered as closed network, where the [belly] and everything is more handled by the operators themselves.

So we are a pure content provider, whereas in the OTT space, we have our own DRM. We have more control over the -- how the content is consumed and we have the back-end data to analyze the user behavior. The mobile is even more of a direct-to-consumer service. So overall, there's like two-thirds come from the OTT and mobile.

And do you expect the similar split in the second half, or is that mix going to change?

I think generally that trend will continue. We might be able to do better in ITT respace, but I don't think that will change the overall kind of split.

Okay. In terms of this engagement partnership you have with Dr. Peng Group, I think in the press release you talked about roughly 3 million boxes and 500,000 TVs by end of the year. How much have you already recognized in the first half and how much is yet to be recognized in the second half?

Well, by far, we have not really recognized much from Dr. Peng, only some small numbers, because it took long preparation time. We also run two runs of trials on their broadband network and also, it gives for them to launch a service nationwide and it probably covers 20, 30 different cities. To get things going, it takes a while. So I think that most of the revenue will come in the second half of the year from Dr. Peng Group.

Can you give us some sense on what your revenue contribution is going to be from that business?

From this Dr. Peng Group or --?

Yes.

All right. Well, Dr. Peng Group is one of the major revenue contributor in the second half in the OTT space. I would put it in the top three, but it is hard for me to now give you a specific number. But we know for sure they set their own goals. We [have to] piggyback on that number. But by far, it is hard for me to give you a specific number on what sort of revenue number will come back. But definitely Dr. Peng Group is a major revenue contributor.

But you still feel comfortable with the 3 million box number and the 500,000 TV number in terms of just sales for the rest of the year?

Sorry?

The question is do you feel comfortable with the numbers that are on the press release, which is --

Their sales number and also our agreement basically there is a bundling arrangement in there. So we are closely watching how they do with the sales target they set for themselves.

Okay. Shifting over to your partnership with C-Media. I think last quarter, there was some discussion over your partnership and how that goes into long-haul trains and stuff. Can you give us an update on where things are with that?

Yes. Well, first of all, that project, it's going reasonably well. C-Media has deployed more than 100 trains of their Wi-Fi network onboard the long-haul trains and the high-speed trains. By the number we received, this was still in the trial stage. We tried to collect more user data and analyze it. We already started receiving some money from C-Media.

But in my view, this kind of train -- this Wi-Fi on the train is to YOD is more like a showroom or distribution channel. People take trains in a journey of 2 to 3 hours, sometimes bit longer. But out of the cabin environment, where people have this immersive environment they can enjoy a movie. And then when they get off the train, they take our service go with it. That is kind of our focus. We rather to consider that as the major distribution channel for YOD.

But said all that, the number of comeback from C-Media tells us roughly 50% of the passengers on trains will turn on their mobile phone or the tablets to connect to Wi-Fi. And out of that 50% passengers, 80%, 90% of people are actually watching the movie, the long-form video.

Okay. So roughly 100 trains have been deployed thus far. And what is your expectation in the second half?

In the second half, we don't yet have numbers from C-Media side. So we focus on improving and enhancing the operations side, and collect more user data back, and improve the service. The two companies are working closely, and I believe we will soon have some more announcement in terms of how the operation can benefit both companies onboard the train and offboard the train.

Okay. Shifting to the mobile side related to the handset business, specifically with Huawei, can you give us some sense on where things are with that? And any new customers you have signed up for providing that on the mobile platform?

Right. Huawei continues to be one of our key partners, strategic partners. We are working very closely with senior management of Huawei. At the same time, our team, especially our operating team, is working very hard with Huawei to get our app tested with more of their kind of the different models of the phones and they will get more users involved.

Huawei runs their own mobile app store and it is one of the top two on our list right now in terms of user activity and also the user feedback we collect. That is something we currently focus on and to improve the product in preparation for something more significant.

Okay. And then last question from me for Grace. Can you give us a sense on what the burn was in the quarter and what type of revenue run rate you need to breakeven?

Thanks for your question, Jay. Right now, our quarterly cash burn is approximately $2 million, so you can do the math. And right now, we are just focusing on growing the business, grabbing opportunities as they emerge. And we have been carefully managing our costs, which is clearly demonstrated in the decreasing operating expenses.

Of course, we are going to have to put in some investment in resources and in technology, but I believe we will be happy to achieve our business goals while achieving maybe a positive operating cash flow sometime next year.

Okay, thank you. Good luck.

I would now like to turn the call over to Jason Finkelstein for our emailed questions.

Thank you, Jay, and thank you, operator. So let's move it to some of the questions that have been emailed to us by investors, both before and during the call. And we've excluded anything already asked by Mr. Srivatsa.

So first, on a macro level, Weicheng, as far as the recent slide in the stock market in China, how is that going to affect consumer disposable income? Is YOD sensitive to this?

Well, it is a good question. We do not anticipate any meaningful effect -- or any effect at all -- on our business. Mainland China's box office receipts jumped up nearly 50% in the first half of 2015, about $3.3 billion in ticket sales in the first 6 months of the year. That is growth of 48.9% over the first half of 2014. Imported films accounted for roughly half of that.

As far as the recent slide in the Chinese stock markets, according to reports we have read, stocks makes up a mere 15% of household financial assets. Chinese households prefer to hold the bulk of their wealth in cash and deposit instead of equities.

Moreover, stock ownership is limited in China. Only approximately 9% of urban households own stocks. This figure is almost 50% in the United States. So the Chinese market's sort of stock market slump is not likely to derail the economy or consumer spending in China.

Specifically for YOD, our consumer base is primarily made up of young adults who are not yet of the age where their focus is on investing in the stock market. Instead, they are interested in enjoying the lifestyle their disposable income can bring, such as in the area of entertainment and technology.

Great. Thank you.

Does that answer your question?

Yes. This one is for Grace. Obviously, there has been a lot of news related to the recent devalue of the Chinese currency. What is YOU On Demand's sensitivity to all that?

Right now, it is a little too early to tell for us. We are operating RMB. We have some US dollar expenses and we do report in US dollars. So the devaluation will probably have some effect on our financial reporting. However, we are careful to manage our RMB cash reserves, so our impact is not expected to be significant at this point.

Okay. Has there been any progress on hiring or naming a new CFO?

We expect to announce the hiring of a CFO later this year, as we continue to interview candidates.

Okay. For Weicheng, what are the plans for enhancing shareholder value going forward, as the stock did not move that much as of late?

We plan to do this by solidly executing our business plan and realizing our long-term strategy. We pledge to improve our investor communication and information sharing, including speaking to institutional funds and analysts, and engaging with investors at conferences.

Our long-term strategy -- we have talked about this previously -- is basically focused on four components. The first is to build our business vertically by focusing on movies and premium contents. It is not just for the movie. We bring the best of movies, best of kid content to consumer households.

We build our product vertically, meaning anything movie-related upstream or downstream. We color focus and provide the users something beyond just watching a movie. So I think that we addressed that multiple times already. That is number one.

And the number two, we focus on expanding our existing distribution channels and by working with the most significant or most influential partners in the consumer space who can help us to reach consumers. This is the way we do business so we do not burn too much money on marketing and bandwidth as many other video companies. As you see, they tend to generate some sort of large revenue numbers, but also burn a lot of money. We don't.

Number three -- I need to check. But anyway, and I think we could have more discussion about the long-term strategy pieces. For now, and I think the best we could bring back to the investors. I know investors are concerned about how to improve the investor value proposition.

We definitely hear that message. We are working on it. We are improving our investors' communications and also -- but more importantly is to focus on executing our business; to continue to demonstrate to the market the solid numbers in both top line and hopefully prove the bottom line as well.

Great. Next question: as far as Future TV and the Samsung Smart TV deal, how far-reaching is that? Is the YOU On Demand service available for potential purchase on every Samsung TV sold in China?

We are available on all the Samsung Smart TVs which are partnered with Future TV. As far as I can recall, we are talking about a list of five or six top models, each selling probably -- has to be significant numbers. We don't yet have a specific number, but we know those are the top numbers.

We are one of the primary premiere paid services being offered along with other contents, including some free contents. Based on our current cooperation with Future TV, we expect the subscriber number to show steady growth with both Samsung Smart TV and some other devices will be announced soon.

Okay. And then as far as personnel costs, is there any plan or need to hire additional headcount in the US or in China?

Well, Jason, our headcount has been increasing in the area of product development and operations in China in proportion with the growth of our business. Due to streamlined operations having the team based here in Beijing, we have been able to manage the costs and expenses by bringing that under control. So as business grows, we should be expected to see that we will need additional resources.

Great. That is all the questions we have for today. Thank you again to our investors for joining us on this. We look forward to updating you on YOU On Demand's ongoing progress when we host our 2015 Q3 call. Have a great day, everyone.

Today's conference has concluded. Thank you for your participation and you may now disconnect your lines at this time.