China Digital TV Announces Unaudited Third Quarter 2014 Results



BEIJING, November 19, 2014 /PRNewswire/ — China Digital TV Holding Co., Ltd. (NYSE: STV) ("China Digital TV" or the "Company"), the leading provider of conditional access ("CA") systems and comprehensive services to China’s expanding digital television market, today announced its unaudited financial results for the third quarter ended September 30, 2014.

Highlights for the Third Quarter 2014

  • Net revenues in the third quarter of 2014 were US$17.0 million, representing a 26.6% decrease from the same period in 2013 and a 1.1% decrease from the second quarter of 2014.
  • China Digital TV shipped approximately 3.35 million smart cards in the third quarter of 2014, compared to 4.76 million in the same period in 2013 and 3.55 million in the third quarter of 2014.
  • Gross margin in the third quarter of 2014 was 75.5%, compared to 74.0% in the same period in 2013 and 73.3% in the second quarter of 2014.
  • Diluted earnings per American depositary share, or ADS (one ADS representing one ordinary share), in the third quarter of 2014 were US$0.02, compared to US$0.08 in the same period in 2013 and US$0.07 in the second quarter of 2014.

"During the third quarter of 2014, shipments of approximately 3.35 million smart cards came in slightly below our expectations, as digital penetration increased," said Dr. Lu Zengxiang, China Digital TV’s acting chief executive officer and acting chief financial officer. "Net revenues were still in line with guidance due to an unexpected delivery of surface mounted chips and system integrations overseas. In the domestic market, steady demand for smart cards was driven by our major customers, including those in Jiangxi, Shandong, Guangdong, Sichuan and Jiangsu provinces."

Dr. Lu continued, "In newer market segments related to cable TV, we continue to push forward with our diversification strategy to provide value-added services. This quarter, we reached an agreement with multimedia company Shanghai Oriental Cable Network Co., Ltd. to provide a cloud service platform capable of covering 5 million cable TV subscribers. We also signed a contract with Jishi Media Co., Ltd. to provide new broadcast platforms. Overseas, we won a tender to supply 900,000 smart cards to CANTV, the leading integrated telecommunication service provider in Venezuela, for use on CANTV’s direct-to-home platform, which covers the entire territory of Venezuela. We’re pleased with our continuing progress in developing markets."

Dr. Lu added, "We’ll remain focused on maximizing efficiency in the coming quarters and are confident operating margins will improve as a result."

Third Quarter 2014 Results

(Note: Unless otherwise stated, all financial statement measures stated in this press release are based on generally accepted accounting principles in the United States ("U.S. GAAP").)

In the third quarter of 2014, China Digital TV had net revenues of US$17.0 million, a decrease of 26.6% from the third quarter of 2013 and a decrease of 1.1% from the second quarter of 2014. The year-over-year decrease was primarily due to a decrease in revenues from smart card sales. The quarter-over-quarter decrease was principally due to decreases in revenues from licensing income and smart card sales, which were partially offset by increases in revenues from sales of other products, such as surface mounted chips, as well as head-end system integration.

In the third quarter of 2014, revenues from the Company’s top five customers accounted for 20.8% of total revenues, compared to 23.7% in the second quarter of 2014.

Revenue Breakdown

For the three months ended

September 30,

June 30,

September 30,

2014

2014

2013

(in thousands of U.S. dollars)

Products:

Smart cards

$

14,382

$

14,990

$

21,315

Other products

1,556

946

1,001

Subtotal

15,938

15,936

22,316

Services:

Head-end system integration

713

255

286

Head-end system development

208

350

235

Licensing income

182

868

335

Royalty income

126

4

279

Other service

2

25

1

Subtotal

1,231

1,502

1,136

Total revenues

$

17,169

$

17,438

$

23,452

Revenues from smart cards and other products were US$15.9 million in the third quarter of 2014, a decrease of 28.6% from the same period in 2013 and relatively stable from the second quarter of 2014. The year-over-year decrease was primarily due to a decrease in revenues from smart card sales, which was partially offset by an increase in revenues from sales of other products, such as surface mounted chips. Revenues from smart cards and other products remained relatively stable quarter over quarter, primarily due to an increase in revenues from sales of other products, and a decrease in revenues from smart card sales. Revenues from sales of smart cards and other products accounted for 92.8% of total revenues in the third quarter of 2014, compared to 91.4% in the preceding quarter.

Revenues from services were US$1.2 million in the third quarter of 2014, an increase of 8.4% from the same period in 2013 and a decrease of 18.0% from the second quarter of 2014. The year-over-year increase was primarily due to an increase in revenues from head-end system integration, which was partially offset by decreases in licensing income and royalty income. The quarter-over-quarter decrease was mainly due to a decrease in revenue from licensing income, which was partially offset by an increase in head-end system integration. Revenues from services accounted for 7.2% of total revenues in the third quarter of 2014, compared to 8.6% in the preceding quarter.

Gross profit in the third quarter of 2014 was US$12.8 million, a decrease of 25.1% from the same period in 2013 and an increase of 1.8% from the second quarter of 2014. Gross margin, which is equal to gross profit divided by net revenues, was 75.5% in the third quarter of 2014, compared to 74.0% in the same period in 2013 and 73.3% in the second quarter of 2014. The year-over-year and quarter-over-quarter increases were principally due to decreases in cost of revenues. In the third quarter of 2013 and second quarter of 2014, higher cost of revenues was mainly attributable to inventory write-downs with respect to multimedia home entertainment boxes and integrated chips respectively.

In the third quarter of 2014, the average selling price ("ASP") of smart cards increased by 1.7% compared to the second quarter of 2014. In addition, the unit cost of smart cards increased by 5.5% compared to the second quarter of 2014.

Operating expenses in the third quarter of 2014 were US$10.5 million, a decrease of 6.3% from the same period in 2013 and an increase of 12.3% from the second quarter of 2014.

  • Research and development expenses in the third quarter of 2014 were US$4.7 million, a decrease of 11.9% from the same period in 2013 and an increase of 13.5% from the second quarter of 2014. The year-over-year decrease was primarily due to a decrease in project development expenses. The quarter-over-quarter increase was mainly due to an increase in personnel related expenses resulting from higher headcount.
  • Selling and marketing expenses in the third quarter of 2014 were US$3.4 million, a decrease of 4.5% from the same period in 2013 and an increase of 3.6% from the second quarter of 2014. The year-over-year decrease was mainly due to a decrease in marketing expenses. The quarter-over-quarter increase was primarily due to an increase in marketing expenses.
  • General and administrative expenses in the third quarter of 2014 were US$2.4 million, an increase of 3.6% from the same period in 2013 and an increase of 24.3% from the second quarter of 2014. The year-over-year increase was mainly due to an increase in consulting expenses, which was partially offset by decreases in share-based compensation expenses and allowance for doubtful accounts. The quarter-over-quarter increase was primarily due to an increase in allowance for doubtful accounts and consulting expenses. In the preceding quarter, a portion of bad debt provisions was written back as related accounts receivable had been received.

Income from operations in the third quarter of 2014 was US$2.3 million, a 60.6% decrease from the same period in 2013 and a 28.4% decrease from the second quarter of 2014.

Operating margin, defined as income from operations divided by net revenues, in the third quarter of 2014 was 13.7%, compared to 25.6% in the same period in 2013 and 19.0% in the second quarter of 2014.

Interest income in the third quarter of 2014 was US$0.1 million, a 73.8% decrease from the same period in 2013 and a 58.7% decrease from the second quarter of 2014.

Income tax expenses in the third quarter of 2014 were US$1.6 million, compared to US$2.1 million in the same period of 2013 and US$0.3 million in the second quarter of 2014. The year-over-year decrease was mainly due to a decrease in taxable income and in income tax rate. The Company’s PRC operating subsidiary, Beijing Super TV Co., Ltd. ("Super TV") accrued income tax expenses at a rate of 10% in the third quarter of 2014, compared to 15% in the third quarter of 2013. In the fourth quarter of 2013, Super TV was designated as a "key software enterprise" for the tax years of 2013 and 2014 by the relevant PRC government authorities and, as a result, was entitled to a preferential income tax rate of 10% in each of those years. As Super TV accrued income tax expenses at a rate of 15% in the first three quarters of 2013, the accrued income tax expenses were partially reversed in the fourth quarter of 2013. The quarter-over-quarter increase was primarily due to the Company’s reorganization in the preceding quarter. In June 2014, the Company completed an internal reorganization. As a result of the reorganization, income tax expenses were reduced due to deductible investment losses arising from the equity transfers under the reorganization.

Net loss attributable to noncontrolling interest in the third quarter of 2014 was US$0.4 million, a decrease of 24.5% from the same period in 2013 and a decrease of 13.0% from the second quarter of 2014. The year-over-year and quarter-over-quarter decreases were largely due to decreases in net losses recorded by the Company’s majority-owned subsidiaries.

Net income attributable to holders of ordinary shares in the third quarter of 2014 was US$1.5 million, a decrease of 68.4% from the same period in 2013 and a decrease of 65.9% from the second quarter of 2014.

Non-GAAP net income attributable to holders of ordinary shares, defined as net income excluding certain non-cash expenses, such as share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments, in the third quarter of 2014 was US$1.7 million, a decrease of 67.1% from the same period in 2013 and a decrease of 62.9% from the second quarter of 2014. For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP measures" set forth at the end of this release.

Balance Sheet and Cash Flow

As of September 30, 2014, China Digital TV had cash and cash equivalents and restricted cash totaling US$55.5 million. In the third quarter of 2014, cash flow generated from operations was US$1.2 million.

Unaudited Additional Information

The Company sets forth at the end of this press release unaudited additional information relating to the financial results for its CA business, which consists of smart card products and other related products, such as surface mounted chips as well as related services; and other business, which consists of other products, such as multimedia home entertainment boxes and cloud computing, as well as related services. In the third quarter of 2014, revenues from the Company’s CA business were US$16.8 million, accounting for 98.0% of total revenues, and revenues from other business were US$0.3 million, accounting for 2.0% of total revenues. Gross profit of the CA business in the third quarter of 2014 was US$12.8 million and gross profit of other business in the third quarter of 2014 was US$0.001 million.

Business Outlook

Based on information available as of November 18, 2014, China Digital TV expects smart card shipment volumes in the fourth quarter of 2014 to be in the range of 4.5 million to 5.0 million. Net revenues in the fourth quarter of 2014 are expected to be in the range of US$22.3 million to US$24.4 million.

Conference Call Information

The Company will hold an earnings conference call at 7:00 p.m. on Tuesday, November 18, 2014, U.S. Eastern Time (8:00 a.m. on Wednesday, November 19, 2014, Beijing/Hong Kong Time).

Conference Call Dial-in Information

United States Toll Free:

+1-877-870-4263

International:

+1-412-317-0790

Hong Kong Toll Free:

800-905-945

China Toll Free:

400-120-1203

Passcode:

China Digital TV Conference Call

Please dial-in 10 minutes before the call is scheduled to begin and provide the passcode to join the call.

A replay of the call will be available for one week between 9:00 p.m. on November 18, 2014 and 9:00a.m. on November 25, 2014 U.S. Eastern Time.

Replay Dial-in Information

United States:

+1-877-344-7529

International:

+1-412-317-0088

Conference ID:

10055855

In addition, a live and archived webcast of this conference call will be accessible through the Investor Relations section of China Digital TV’s website at http://ir.chinadtv.cn.

Safe Harbor Statements

This announcement contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are made under the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "may," "should" and similar expressions. Such forward-looking statements include, without limitation, statements regarding the outlook for the fourth quarter of 2014 and comments by management in this announcement about trends in the CA systems, digital television, cable television and related industries in the PRC and China Digital TV’s strategic and operational plans and future market positions. China Digital TV may also make forward-looking statements in its periodic reports filed with the Securities and Exchange Commission, in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about China Digital TV’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from projections contained or implied in any forward-looking statement, including but not limited to the following: competition in the CA systems, digital television, cable television and related industries in the PRC and the impact of such competition on prices, our ability to implement our business strategies, changes in technology, the progress of the television digitalization in the PRC, the structure of the cable television industry or television viewer preferences, changes in PRC laws, regulations or policies with respect to the CA systems, digital television, cable television and related industries, including the extent of non-PRC companies’ participation in such industries, and changes in political, economic, legal and social conditions in the PRC, including the government’s policies with respect to economic growth, foreign exchange and foreign investment.

Further information regarding these and other risks and uncertainties is included in our annual report on Form 20-F and other documents filed with the Securities and Exchange Commission. China Digital TV does not assume any obligation to update any forward-looking statements, which apply only as of the date of this press release.

About China Digital TV

Founded in 2004, China Digital TV is the leading provider of CA systems to China’s expanding digital television market. CA systems enable television network operators to manage the delivery of customized content and services to their subscribers. China Digital TV conducts substantially all of its business through its PRC subsidiary, Beijing Super TV Co., Ltd., and its affiliate, Beijing Novel-Super Digital TV Technology Co., Ltd., as well as subsidiaries of such affiliate.

For more information please visit the Investor Relations section of China Digital TV’s website at http://ir.chinadtv.cn. The information contained in that website is not a part of this announcement.

For investor and media inquiries, please contact:

In China:

Nan Hao
Investor Relations Manager
Tel: +86-10-6297-1199 x 9780
Email: ir@chinadtv.cn

Brunswick Group
Tel: +86-10-5960-8600
Email: chinadigital@brunswickgroup.com

In the United States:

Brunswick Group
Tel: +1-212-333 3810
E-mail: chinadigital@brunswickgroup.com

China Digital TV Holding Co., Ltd.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands of U.S. dollars, except share and per share data )

For the three months ended

September 30,

June 30,

September 30,

2014

2014

2013

Revenues:

Products

$

15,938

$

15,936

$

22,316

Services

1,231

1,502

1,136

Total revenues

17,169

17,438

23,452

Business and sales related taxes

(205)

(279)

(339)

Net revenues

16,964

17,159

23,113

Cost of revenues:

Products

(3,276)

(3,656)

(4,927)

Services

(886)

(924)

(1,089)

Total cost of revenues

(4,162)

(4,580)

(6,016)

Gross profit

12,802

12,579

17,097

Operating expenses:

Research and development expenses

(4,677)

(4,121)

(5,309)

Selling and marketing expenses

(3,368)

(3,250)

(3,528)

General and administrative expenses

(2,428)

(1,953)

(2,343)

Total operating expenses

(10,473)

(9,324)

(11,180)

Income from operations

2,329

3,255

5,917

Interest income

133

322

508

Other income

158

713

4

Income before income taxes

2,620

4,290

6,429

Income tax (expenses)/benefits

Income tax-current

(539)

(7,964)

(1,641)

Income tax-deferred

(1,051)

7,700

(508)

Net income before net income from equity method investments

1,030

4,026

4,280

Net income/(loss) from equity method investments, net of income taxes

93

(60)

(29)

Net income

1,123

3,966

4,251

Net loss attributable to noncontrolling interest

376

432

498

Net income attributable to holders of ordinary shares

$

1,499

$

4,398

$

4,749

Net income per share attributable to holders of ordinary shares

Basic

$

0.03

$

0.07

$

0.08

Diluted

$

0.02

$

0.07

$

0.08

Net income

$

1,123

$

3,966

$

4,251

Other comprehensive income/(loss), net of tax

Foreign currency translation adjustment

778

(116)

189

Comprehensive income

1,901

3,850

4,440

Comprehensive loss attributable to noncontrolling interest

361

427

494

Comprehensive income attributable to holders of ordinary shares

$

2,262

$

4,277

$

4,934

Weighted average shares used in calculating net income per ordinary share

Basic

59,410,254

59,291,789

59,110,789

Diluted

62,376,044

61,873,871

59,131,310

China Digital TV Holding Co., Ltd.

Unaudited Condensed Consolidated Balance Sheets

(in thousands of U.S. dollars)

September 30,

December 31,

2014

2013

Assets

Current assets:

Cash and cash equivalents

$

55,375

$

79,085

Restricted cash

154

919

Notes receivable

3,549

4,484

Accounts receivable, net

41,716

45,905

Inventories, net

6,243

5,027

Prepaid expenses and other current assets

6,999

4,032

Deferred costs-current

606

141

Deferred tax assets-current

3,284

2,546

Total current assets

117,926

142,139

Long-term receivable

90

224

Property and equipment, net

3,347

1,170

Intangible assets, net

464

6

Goodwill

1,417

563

Equity method investments

2,600

3,551

Deferred costs-non-current

438

214

Deferred tax assets-non-current

829

939

Total assets

127,111

148,806

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

3,339

2,207

Notes payable

406

884

Accrued expenses and other current liabilities

12,614

13,134

Dividend payable

57

Deferred revenue-current

5,990

6,542

Income tax payable

2,758

997

Deferred tax liabilities-current

2,469

8,222

Government subsidies-current

1,792

710

Total current liabilities

29,368

32,753

Deferred revenue-non-current

612

135

Government subsidies-non-current

4,436

4,946

Deferred tax liabilities-non-current

116

Total liabilities

34,532

37,834

EQUITY

China Digital TV Holding Co., Ltd. shareholders’

equity:

Ordinary shares

30

30

Additional paid-in capital

35,383

32,037

Statutory reserve

17,907

17,907

Retained earnings

11,440

31,122

Accumulated other comprehensive income

26,550

28,940

Total China Digital TV Holding Co., Ltd.

shareholders’ equity

91,310

110,036

Noncontrolling interest

1,269

936

Total equity

92,579

110,972

TOTAL LIABILITIES AND EQUITY

$

127,111

$

148,806

Reconciliation of Non-GAAP Measures

Non-GAAP net income attributable to holders of ordinary shares excludes certain non-cash expenses, such as share-based compensation expenses, amortization of intangible assets acquired from business acquisitions and equity method investments. The Company believes that the non-GAAP net income provides meaningful supplemental information regarding the Company’s performance and liquidity by excluding certain non-cash expenses that may not be indicative of its operating performance from a cash flow perspective. The Company believes that both management and investors benefit from referring to this additional information in assessing the Company’s performance and when planning and forecasting future periods.

For the three months ended

September 30,

June 30,

September 30,

2014

2014

2013

(in U.S. dollars, in thousands)

Net income attributable to holders of ordinary shares – GAAP

$

1,499

$

4,398

$

4,749

Share-based compensation expenses

173

218

433

Amortization of intangible assets from business acquisitions and equity method investments

52

37

54

Net income attributable to holders of ordinary shares-Non-GAAP

$

1,724

$

4,653

$

5,236

China Digital TV Holding Co., Ltd.

Unaudited Additional Information

(in thousands of U.S. dollars )

For the three months ended

September 30,

June 30,

September 30,

2014

2014

2013

Revenues:

CA

$

16,826

$

16,923

$

22,830

Others

343

515

622

Total revenues

17,169

17,438

23,452

Business and sales related taxes:

CA

(202)

(283)

(325)

Others

(3)

4

(14)

Total business and sales related taxes

(205)

(279)

(339)

Net revenues:

CA

16,624

16,640

22,505

Others

340

519

608

Total net revenues

16,964

17,159

23,113

Cost of revenues:

CA

(3,823)

(3,593)

(5,071)

Others

(339)

(987)

(945)

Total cost of revenues

(4,162)

(4,580)

(6,016)

Gross profit (loss):

CA

12,801

13,047

17,434

Others

1

(468)

(337)

Total gross profit

12,802

12,579

17,097

Operating expenses:

Research and development expenses

CA

(1,829)

(1,987)

(2,628)

Others

(2,848)

(2,134)

(2,681)

Total research and development expenses

(4,677)

(4,121)

(5,309)

Selling and marketing expenses

CA

(1,203)

(1,230)

(1,673)

Others

(2,165)

(2,020)

(1,855)

Total selling and marketing expenses

(3,368)

(3,250)

(3,528)

General and administrative expenses

CA

(1,301)

(1,349)

(1,222)

Others

(1,127)

(604)

(1,121)

Total general and administrative expenses

(2,428)

(1,953)

(2,343)

Total operating expenses

(10,473)

(9,324)

(11,180)

Income (loss) from operations:

CA

8,468

8,481

11,911

Others

(6,139)

(5,226)

(5,994)

Income from operations

$

2,329

$

3,255

$

5,917