China Digital TV's CEO Management Discuss Q2 2012 Results - Earnings Call Transcript

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

Q2 2012 Earnings Call

August 21, 2012, 8:00 pm ET

Executives

Dong Li – President

Nan Hao - Head of Investor Relations

Josh Gartner – Brunswick Group

Presentation

Operator

Good evening and thank you for standing by for China Digital TV’s second quarter 2012 earnings conference call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the meeting over to your host for today’s conference, Mr. Josh Gartner.

Josh Gartner

Hello everyone and welcome to China Digital TV’s second quarter 2012 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. Nan Hao, who will discuss 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, Josh. Hello everyone and welcome.

I’d like to begin by sharing some updates on recent trends in China’s cable market. As cable network consolidation continues to move toward completion, we are seeing purchasing decisions increasingly being centralized at the provincial, rather than sub-provincial, level. As a result of this change, during the second quarter, we experienced some industry headwinds, primarily due to delayed purchases from a few provinces. However, we believe that the unmet demand for smart cards in these provinces will be fulfilled at a later stage.

In the second quarter, our shipment volumes were impacted by the industry-wide purchasing delays that I just mentioned. During Q2, smart card shipments were 3.74 million, compared with 4.64 million in the same period in 2011 and 3.70 million in the first quarter of 2012. During the second quarter, average selling price, or ASP, for smart cards decreased by 5.4% compared to Q1 2012. We maintain our expectation that ASP on an annual basis will be 5 to 8 percent lower this year compared with last year. In addition, the unit cost for smart cards decreased by 4.1% compared to the first quarter of 2012.

Despite industry headwinds in the second quarter, we remain confident in the long-term growth drivers of China’s cable sector. There are several trends that we believe give us reason to be optimistic about the sector going forward.

First of all, cable development and digitalization are progressing steadily. As of the end of Q2, 202 million households in China have cable. Within this group, about 125 million or 62% are digital cable TV subscribers, with 5.5 million households being added in the second quarter. We expect this growth momentum to continue over the next few years.

Secondly, in Q2, we saw a steady push for digital penetration in lower-tier cities and rural areas. We performed particularly well in Jiangsu, Heilongjiang, Guangdong and Shandong, which enabled us to maintain our leading position with a 58.4% share of China’s CA market, according to Zhongguang Luoda.

Third, looking ahead, the previously discussed trend of CA product purchasing decisions being made at the provincial level leads us to expect to see contracts in larger volumes from provincial cable operators. Specifically, in the first half of 2012, we signed framework contracts to provide smart cards to provincial or municipal cable operators in Sichuan, Henan, and Chongqing. Among the three networks, Sichuan and Chongqing cover 5 million cable households and 3 million terrestrial TV households, respectively.

Finally, in the near future, we expect the conversion from standard definition set top boxes to high-definition set top boxes will become a driving factor for demand of our CA products.

Beyond the traditional domestic market for our CA products, in Q2 we continued to make progress in international markets. We delivered another 380 thousand mounted device chipsets to our partner One Sky in Thailand during the quarter, bringing total shipments to date to almost 1.7 million units. We also received another mounted device chipset order of 500 thousand units from One Sky this quarter. Going forward we expect steady demand from this program. In Q2, China Digital TV also fulfilled its agreement to deploy a Malaysian ABN TV Station with CA head end systems and provide licensor software.

Another bright spot during the second quarter was the revenue growth from our other products, including our advanced multimedia home entertainment boxes, and surface mounted device chipsets. Emerging and growing demand for these products helped China Digital TV partially offset the impact of the delayed purchases in other areas. In Q2, revenue from other products reached 4.1 million US dollars, compared with 293 thousand US dollars for the same period last year. Sequentially, revenue from this category of products nearly doubled.

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