China Digital TV Holding Co., Ltd. ( STV)

Q3 2010 Earnings Call Transcript

November 16, 2010 7:00 pm ET

Executives

Henry Fraser – Brunswick Group

Dong Li – President and Chief Marketing Officer

Eric Yuan – IR Officer

Zhenwen Liang – CFO

Analysts

Philip Wan – Morgan Stanley

Jie Liu – Auriga

Sam Lawn – Oppenheimer

Presentation

Henry Fraser

Hello everyone and welcome to China Digital TV’s third quarter 2010 earnings conference call. The company’s earnings results were released earlier today, and are available on the company’s IR website at http://ir.chinadtv.cn, as well as on newswire services.

Today, you will hear from Mr. Dong Li, China Digital TV’s president, who will give an overview of the quarter, followed by the Company’s head of investor relations, Mr. Eric Yuan, who will discuss the financial results. After their prepared remarks, they will be joined by China Digital TV’s chief financial officer, Mr. Zhenwen Liang, to answer your questions.

Before we continue, please note that the discussion today will contain certain forward-looking statements made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

Further information regarding these and other risks and uncertainties is included in our registration statement on Form 20-F and other documents filed with the U.S. Securities and Exchange Commission. China Digital TV 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 China Digital TV’s investor relations website. I will now turn the call over to China Digital TV’s president, Mr. Li.

Dong Li

Thank you, Henry. Hello everyone.

We are pleased to report that in the third quarter we achieved 21.1 million US dollars in revenues, exceeding our high-end guidance and hitting a record high. Encouraged by government policies related to three network convergence and ongoing industry consolidation, we saw Chinese cable operators continuing to accelerate investment in digitalization projects over the quarter. As a result of the active industry environment, we shipped about 3.95 million smart cards in the third quarter. At the same time, we expanded our lead over competitors, capturing about 55% market share in CA card shipments during the quarter, according to data compiled by an independent market research firm.

I would like to take you through some policy updates before turning to the operational results.

During the last quarter, the 12 pilot cities and regions in the three-network convergence project submitted their convergence plans to the central government. The plans covered both practical implementation and industry supervision issues. At the same time the national tax bureau published a tax incentive notice, granting digital cable operators in 11 provinces including Shanghai, Chongqing and Jiangsu, exemptions from business tax for three years beginning 2010 for their basic digital TV subscription revenues. We believe this policy will further encourage cable operators to promote digitalization.

We believe China Digital TV is well positioned for long-term development in China’s pay-TV industry with its broad operator customer base, deep understanding of the industry and advanced content protection technologies. In our view, for the fourth quarter of this year and the first half of 2011, operator demand for CA products will remain relatively strong.

I would now like to talk about operational developments in more detail.

We are pleased to see continued strength in our smart card business and milder ASP erosion. As we previously indicated we believe the degree of decline in ASP in year 2010 will be within 10% compared with 2009. A significant portion of new orders for smart cards is coming from third and fourth tier cities in China, which have been buying large volumes of smart cards over the past two quarters, bringing total smart card shipment growth in the first nine months of 2010 to 57% year-over-year.

We have been making exciting progress on a number of fronts over the last quarter…

First, our integrated chip product for set-top boxes, which we commercialized in the second quarter, began generating revenue in the third quarter. Given the encouraging customer feedback we've received, we believe this product should make a meaningful contribution to revenue over the next few quarters.

We also made some progress with our overseas business, signing a contract with an operator in Myanmar in the third quarter. In 2011, we will continue to seek opportunities in emerging markets including Latin America, South East Asia, Central Asia and Eastern Europe.

Furthermore, at a recent exhibition, we launched our self-developed Pro DRM product that supports interactive TV applications on IPTV and two-way digital cable platforms. The new product is now undergoing testing by a national operator and will be ready for use in commercial projects in the coming quarters. This progress demonstrates China Digital TV’s ongoing efforts to leverage our unique position in the industry to expand our product line and meet operators’ needs in the post-digitalization era.

I will now hand the call over to Eric Yuan, our head of investor relations to discuss our financial management.

Eric Yuan

Thank you, Mr. Li. Hello everyone.

To reiterate Mr. Li’s points, we’ve had three strong quarters in a row, and we are reasonably confident about our business outlook in the near future. In the third quarter we added 20 new hires in China, focusing on the new business initiatives and bringing the total headcount to 540. We expect that our operating expenses will increase modestly in the coming quarters as we continue to hire talents for our new businesses. At the same time, we will make efforts on multiple fronts to enhance overall efficiency to support profitable growth.

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