Yueda Digital Holding, Inc. (YDKG) Q1 2015 Earnings Report, Transcript and Summary

Good morning all sites and welcome to the AirMedia Group, Inc. First Quarter 2015 Earnings Conference Call. [Operator Instructions] Now I'd like to hand the call over to Mr. Raymond Huang, Senior Director of Investor Relations for the Company. Thank you. You may now begin.

Hello everyone. Thank you for joining AirMedia's first quarter 2015 earnings conference call. Today Herman Man Guo, our Chairman and CEO, will present highlights for the first quarter 2015, and Richard Wu, our CFO, will provide details on our financial results. Following their prepared remarks, the management team will be available to take your questions. Before the management's presentations, please allow me to read you our Safe Harbor statement. During this conference call, representatives of the Company will make certain forward-looking statements. These statements are based upon management's current views and expectations with respect to future events, and are not a guarantee of future performance. Furthermore, these statements are by their nature subject to a number of risks and uncertainties that could cause actual performance and results to differ materially from those discussed in the forward-looking statements. AirMedia does not undertake any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law. Please refer to AirMedia's filings with the SEC, including its Form 20-F for discussions of important factors that could affect future results. Our press release and this call include a discussion of unaudited GAAP financial information as well as some unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. The press release is available on the Investor Relations section of AirMedia's website at ir.airmedia.net.cn. I will now turn the call over to our Chairman and CEO, Herman Man Guo.

Thank you, Raymond. Good morning and good evening everyone. I'd like to share with you our Company's [inaudible]. As you know, we endeavor to transform into a leading in-flight and on-train Wi-Fi operator in China. As for our current advertising business, noticed the wide valuation gap between China's local stock exchanges and the U.S. stock exchanges and would like to capitalize on the sale of our advertising business at a much more attractive valuation to companies in China so that we can focus our resources on the exciting Wi-Fi business. We are excited about the agreement with Shenzhen Liantronics Company Limited to sell 5% equity interest of our advertising business for a consideration of RMB150 million in cash. We are in the process of restructuring our advertising business according to the aforementioned agreement. We also intend to sell the remaining equity interest of our advertising business in the foreseeable future and in discussion with potential buyers. In the transaction with Liantronics, we obtained a call option to reserve the ability to evaluate other potential offers and enter into -- in transactions with party or parties that will give us the most satisfactory terms. Several unrelated parties have expressed interest in buying equity interest of our advertising business. We also made progress in turning around the Company. In the first quarter we divested two of our three major unprofitable product lines. The first quarter is usually the weakest quarter of our year in advertising industry. Our divestiture of two unprofitable product lines helped us reduce the loss of adjusted EBITDA attributable to AirMedia Group Inc.'s shareholders in the first quarter of 2015 year over year and quarter during a softer economic environment and advertising market. As for another unprofitable product line, our gas station media network, we saw a decrease in revenues from the product line in the first quarter, which, coupled with larger amounts of depreciation of LED screens installed in gas stations, resulted in more losses from this product line. Although we expect revenues from this product line to increase with the expansion of the network of LED screens, as we are focusing more on Wi-Fi business, we intend to take more active action to reduce the loss from this product line. We made solid developments in our on-train Wi-Fi business. We recently obtained exclusive rights to install and operate Wi-Fi systems on the ordinary trains operated by Shanghai Railway Bureau and Jinan Railway Bureau. We expect to continue to obtain more concession rights and further improve our market position in on-train Wi-Fi business. We have obtained a leading position and believe we have become the top one operator in the market of one of on-train Wi-Fi businesses in China. We expect to start to install Wi-Fi systems on ordinary trains operated by Shanghai Railway Bureau in 2015. We expect to install and operate Wi-Fi services on more high-speed trains and ordinary trains in 2015, as well as to start monetizing this unique Wi-Fi gateway and platform. With that, I'd like to pass the call to Richard Wu, our CFO, to review our financial results in greater detail.

Thank you, Herman, and thank you everyone for joining our first quarter 2015 financial review. We are happy that our top line results exceeded guidance. Net revenues decreased by 4.4% year over year and 8.4% quarter over quarter to $60.3 million, exceeding the upper end of the Company's previous guidance by $4.3 million. Our divestiture of two unprofitable product lines was instrumental for us to achieve improved adjusted EBITDA. In addition, our divestiture of TV-attached digital frames only had two months impact in the first quarter of 2015. It is expected to have full-quarter positive impacts on our earnings in the following quarters. Our intended sale of our advertising business is expected to strengthen our cash position and provide capital support for our new Wi-Fi businesses. Now let me go through the details of our fourth quarter financial results with you. Total revenues for the first quarter of 2015 reached $61 million, representing a year-over-year decrease of 3.8% from $63.4 million in the same period one year ago and a quarter-over-quarter decrease of 9.7% from $67.5 million in the previous quarter. The year-over-year and quarter-over-quarter decreases were primarily due to decreases in revenues from most product lines other than other revenues in air travel which partially resulted from the divestiture of TV advertising screens in airports and TV-attached digital frames. Let's go through each product line. Revenue from digital frames in airports for the first quarter of 2015 decreased by 9.2% year-over-year and by 14.5% quarter-over-quarter to $32 million. The year-over-year decrease was primarily due to a soft advertising market and the divestiture of TV-attached digital frames. The quarter-over-quarter decrease was partially due to a seasonally weak quarter in the first quarter of 2015 and the divestiture of TV-attached digital frames. During the transition period of the divestiture, some advertising contracts signed by AirMedia's sales team were carried forward after the share transfer. As a result, AirMedia still booked revenues from these contracts in the line of revenues from digital TV screens in airports. Revenues from digital TV screens in airports for the first quarter of 2015 decreased by 24.4% year-over-year and by 52.2% quarter-over-quarter to $2 million. The year-over-year and quarter-over-quarter decreases were primarily due to the divestiture of digital TV screens in airports. Revenues from digital TV screens on airplanes for the first quarter of 2015 decreased by 15.6% year-over-year and by 6.6% quarter-over-quarter to $3.6 million. The year-over-year decrease of revenues from digital TV screens on airplanes was primarily due to a soft advertising market and a decrease in advertisers' demand for digital TV screens as a result of more choices of in-flight entertainment. The quarter-over-quarter decrease of revenues from digital TV screens on airplanes was primarily due to a seasonally weak quarter in the first quarter of 2015. Revenues from traditional media in airports for the first quarter of 2015 decreased by 9.8% year-over-year and 4.3% quarter-over-quarter to $13.2 million. The year-over-year decrease was primarily because AirMedia had terminated the operations of all billboards and painted advertisements on gate bridges. The quarter-over-quarter decrease was primarily due to a seasonally weak quarter in the first quarter of 2015. Other revenues in air travel for the first quarter of 2015 increased by 322% year-over-year and by 223.9% quarter-over-quarter to $5.4 million. The year-over-year and quarter-over-quarter increases were primarily due to revenues from Jinsheng Advertising for operating TV-attached digital frames and digital TV screens in airport businesses under entrustment pending the completion of transfer of relevant concession rights. Revenues from the gas station media network for the first quarter of 2015 decreased by 18.3% year-over-year and by 22.4% quarter-over-quarter to $2.2 million. The year-over-year decrease was primarily due to a soft advertising market. The quarter-over-quarter decrease was primarily due to a seasonally weak quarter in the first quarter of 2015. Let's move on to other lines in the income statement. Cost of revenues for the first quarter of 2015 was $58.6 million, which reflected a year-over-year increase of 2.4% from $57.2 million and a quarter-over-quarter decrease of 5.2% from $61.8 million in the previous quarter. The year-over-year increase was primarily due to higher concession fees, which were partially offset by lower agency fees for third-party advertising agencies. The quarter-over-quarter decrease was primarily due to lower concession fees and lower agency fees for third-party advertising agencies in the first quarter of 2015. Cost of revenue as a percentage of net revenue in the first quarter of 2015 was 97.2%, up from 90.9% in the same period one year ago and 94% in the previous quarter. Concession fees for the first quarter of 2015 increased by 7.5% year-over-year and decreased by 1.5% quarter-over-quarter to $45.8 million. The year-over-year increase was primarily due to newly signed or renewed concession rights contracts during the period. The quarter-over-quarter decrease was primarily due to the decrease in concession fees of certain concession rights of digital TV screens in airports and TV-attached digital frames, which have been transferred to Jinsheng Advertising. Until all relevant concession rights are transferred, AirMedia still needs to book the concession fees of concession rights of digital TV screens in airports and TV-attached digital frames which have not been transferred to Jinsheng Advertising. Concession fees as a percentage of net revenues in the first quarter of 2015 was 76.0%, increasing from 67.6% in the same period one year ago and 70.6% in the previous quarter. The year-over-year increase of concession fees as a percentage of net revenues was primarily due to the fact that net revenues decreased while concession fees increased. The quarter-over-quarter increase of concession fees as a percentage of net revenues was primarily due to the fact that net revenues decreased faster than concession fees in the first quarter of 2015. Total operating expenses for the first quarter of 2015 were $7.5 million, which decreased by 31.1% from $10.9 million one year ago and 48.7% quarter-over-quarter from $14.7 million in the previous quarter. Net loss attributable to AirMedia's shareholders for the first quarter of 2015 was $5.7 million, compared to net loss attributable to AirMedia's shareholders of $3.5 million in the same period one year ago and net loss attributable to AirMedia's shareholders of $11.2 million in the previous quarter. The year-over-year increase in net loss attributable to AirMedia shareholders was primarily -- was partially due to income tax expenses of $1.9 million in the first quarter of 2015 compared to income tax benefits of $4,000 in the same period one year ago. Non-GAAP adjusted EBITDA attributable to AirMedia's shareholders, which is EBITDA attributable to AirMedia's shareholders excluding share-based compensation expenses, was a loss of $317,000, compared to adjusted EBITDA attributable to AirMedia's shareholders of a loss of $422,000 in the same period one year ago and adjusted EBITDA attributable to AirMedia's shareholders of a loss of $4.2 million in the previous quarter. Next, let's talk about the balance sheet. Cash and cash equivalents, restricted cash and short-term investments totaled $64.3 million as of March 31, 2015, compared to $99.6 million as of December 31, 2014. The decrease from December 31, 2014 was partially due to the equity investment of $8.1 million in the capital injection of Sinopec Marketing Corporation Limited and the repayment of short-term loan of $3 million. The total -- the capital expenditure for the fourth quarter of 2015 was $5.2 million. AirMedia currently expects its net revenues for the second quarter of 2015 to range from $57 million to $61 million, representing a year-over-year decrease of 7.3% to 0.8% from the same period in 2014 and a quarter-over-quarter decrease of 5.4% to a quarter-over-quarter increase of 1.2% from the previous quarter. AirMedia currently expects its concession fees to be approximately $45 million in the second quarter of 2015, representing a quarter-over-quarter decrease of 1.7% from the previous quarter. Moderator, would you please open the call for questions.

[Operator Instructions] Your first question comes from the line of Xin Wang from BOCI. Go ahead. Thank you.

Good morning management. Thank you for taking my questions. I have two questions. The first one, you mentioned that you would take more active action to reduce the loss of your gas station media business. So, could you please elaborate more details on what these actions are? And how to improve the utilization rate of your media resources, you know, regarding your gas station media business? Thank you. This is my first question.

Okay. Let me translate to Herman first. Yes. The more active action means that we kind of expanded our options for working with strategic partners who have demand for advertising spending on our gas media network, and also the cooperation would expand from business cooperation to strategic investment type of arrangements. So we are, yeah, in discussion with them. That. In terms of how to utilize or increase the utilization rate of our media resources in the gas station media sector, so, basically, one, we have beefed up our sales efforts, our new sales of VP has been onboard for about two months, so, definitely that would be a big plus for the sector. And secondly, we have noticed that the previous customer base of this network have not been -- grown fast enough, so we have expanded for the customer portfolio basically into the new area, online car rental companies, the other like services like Internet of Things related digital companies who have shown strong interest in this offline advertising spending as well. So I think through expanding our customer segments or targets, that would help, hopefully increase our utilization rate and the top line as well.

I'd like to add one point. With the expansion of our network of LED installed in the gas stations, we can take more orders from the advertisers for their national campaign. So in that way, also increase the utilization rate.

Thank you. My second question is that you mentioned that you will see the remaining advertising business in the foreseeable future to focus on Wi-Fi business. So, may I know your thoughts on the timing? Like will you wait for attractive valuation, or when your Wi-Fi business revenue is big enough to maintain the comparatively stable overall revenue size, and then gradually sell the remaining outdoor advertising business? Thank you.

Okay, let me translate first. So, yeah, basically this is a decision by the Board of AirMedia to basically divest our existing advertising business, leveraging on the valuation gap between U.S. and China stock markets valuations. And in terms of the switch to the Wi-Fi business, also it's a decided direction which we have been aggressively tapping new concession rights contracts, as you can see from time to time we do have new basically high risk in the resource development area. And the revenue in terms of the ramping up and growing of that, I think it's two separate decisions that the Board of AirMedia have decided to pursue simultaneously. And yeah, we will not wait until our Wi-Fi revenue size grows to a certain sizable, yes, stage. No, that's two separate directions that we are aggressively pursuing at this time.

Thank you.

Thank you.

[Operator Instructions] We have a question from the line of Wei Fang from CLSA. Go ahead please.

Thank you. Thanks for taking my question. First question, regarding the sale of your equity interest, just follow up the previous question. I'm still wondering, how much do you -- can you or maybe are you willing to sell? Not sure if it can reach to 50% of your shares.

Okay. Let me translate first. Yes. So we have decided to sell more than 50% equity of our advertising business for the cash, the cash portion. That's the minimum requirement of Board, expectation for us. And as for the remaining portion, we are flexible in getting equity of the counterparty, hopefully to generate a high return going forward.

Okay, got that. So let me just clarify. So you're willing to sell more than 50% of your shares for cash, right?

Yeah, for the cash portion, yes. Right.

And in case there are interested parties, they want to invest with both cash and equity, you -- that's not your priority, you want to put the priority on cash first, right? Cash transaction?

Yes. That's correct.

Okay, got that. Thank you. And another question. You kind of mentioned that the quarter-over-quarter cash balance decreased about $30 million, right, and then you kind of mentioned your $8 million investment in the Sinopec deal and also the CapEx of -- organic CapEx $5 million and also $3 million for the loan payment. I think there was still another maybe $50 million difference [inaudible] where those rest going [ph].

Yeah. That's true. So, basically the Sinopec advertising sales investment and also loan repayment, there's actually $11 million. The other include, so we have support -- provided cash to our joint venture Wi-Fi company, Guangzhou Meizheng, yeah, Wi-Fi business, so they have gradually concluded more contracts with Railway Bureau which do require upfront deposit, security deposits, and even concession fee payments, which Meizheng entity, the Wi-Fi entity still doesn't have enough cash. So, AirMedia has to support into a company loan. That's about the $6 million to $7 million. And also our -- basically the proposed divestiture of the TV screen at airports and TV-attached digital frames, although we have basically a rent, the non-consolidation and basically attachment [ph] or other sourcing arrangement with them, unfortunately, cash flow from those two segments were very slow. Most of the concession fees have to [inaudible] AirMedia and also most of their expenses have to be arranged through inter-company arrangements. So that's also consumed our cash. And finally, our top line, as you are aware, had been decreasing, also collection has been slowing down compared to fourth quarter, which has resulted in net cash collection reduction. So, all those three combined, so that's why the gap from $99 million to currently, yes, $76-plus million. So that's basically the reason.

Okay. Thank you for the clarification. Yeah, thank you. That's all my questions.

Thank you.

Thank you.

Thank you. [Operator Instructions] Thank you. We have no further questions at this time, so I hand back to our hosts for closing remarks.

Okay. Thank you for joining our call. Talk with you next time. Thank you.