China Digital TV Holding Co. Ltd. (STV)

Q4 2010 Earnings Call

March 1, 2011 7:00 PM ET

Executives

Henry Fraser – Brunswick Group

Eric Yuan – IR Officer

Dong Li – President and Chief Marketing Officer

Zhenwen Liang – CFO

Analysts

Philip Wan – Morgan Stanley

Jie Liu – Auriga

Michael Olson – Piper Jaffray

Presentation

Operator

(Operator comments)

Henry Fraser

Hello everyone and welcome to China Digital TV’s fourth quarter and full year 2010 earnings conference call.

The company’s earnings results were released earlier today, and are available on the company’s IR website at 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 our CA business continued to see strong growth in the fourth quarter. Smart card shipment reached 6.1 million units and revenues were 32.8 million US dollars. Both are new records for the Company. This stellar growth, continuing a trend which started in the second quarter of 2010, was largely supported by industry players’ response to government policies encouraging three network convergence and provincial level cable network consolidation, which were announced in early 2010. We saw that particularly in the fourth quarter, which is typically the busiest season in our industry, a large number of our carrier customers increased their investment in transitioning to digital TV, especially in lower tier cities, and this led to a big increase in demand for smart cards.

In addition to benefiting from market trends, I’m pleased to say that China Digital TV outpaced the market with over 80% growth in card shipments and nearly 60% growth in revenues over 2010. Leveraging our broad and diversified customer base and effective execution, we closed the year with an even stronger market leading position. According to data from Analysys International, a Beijing-based market research agency, the number of households with digital cable TV service in China increased by 29 million to just over 92 million by the end of 2010 and the level of digital TV penetration increased to over 50%. Currently, most households subscribing to digital TV service only have one set-top box at homes. In the next few years, we believe having multiple set-top boxes per household will become more common, leading to additional demand for smart cards.

Looking at 2011, we believe our customers will continue to invest in digitalization projects actively and we have seen a healthy volume of orders coming in to date. However, we do not expect to repeat the same growth rate we had in 2010 because the base number is much bigger and cable operators will make investment at a more stable pace after the rush in 2010. We believe it is likely that smart card shipment in 2011 will remain at least as strong as the 2010 level, although of course there are uncertainties related to ongoing industry consolidation. Looking further into the future of China’s digital TV market, we are cautiously optimistic about potential developments.

On the one hand, clear trends toward high definition TV and web-capable TV will likely lead to increased demand for content protection and other technological solutions as operators increasingly introduce value added services and create new revenue sources. However, at the same time, securing funds for upgrading infrastructure and successful commercialization of new products will be big challenges. So, we see the next two to three years as a transitional period for the market, as well as for China Digital TV, as we work to enhance our product offering and continue to explore new business models. I would now like to turn to operational developments. During the fourth quarter, average selling price for smart cards increased slightly over the third quarter of 2010 due to lower priced cards accounting for a smaller proportion of total sales.

Meanwhile, the unit cost for smart cards decreased quarter-over-quarter -- leading to a higher gross margin. For 2010 as a whole, ASP decreased by 8.1%, inline with our previous forecast. In 2011, we expect to see a decline in ASP of around 5% compared with the level in 2010. Revenue from our integrated chip product remained small in the fourth quarter. Having said that, based on positive customer feedback, we are confident that this product should take off starting in the second half of 2011, and we believe it will contribute several million dollars to 2011 revenue. Our overseas business is still in the market cultivation phase and in 2011 we will continue to seek opportunities in Latin America, South East and Central Asia. Combined, the integrated chip and overseas CA business should account for 4-6% of revenue in 2011.

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