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Edited Transcript of ATV earnings conference call or presentation 22-May-19 12:30pm GMT

Q1 2019 Acorn International Inc Earnings Call

Shanghai May 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Acorn International Inc earnings conference call or presentation Wednesday, May 22, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jacob A. Fisch

Acorn International, Inc. - President & CEO

* Martin Oneal Key

Acorn International, Inc. - CFO

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Conference Call Participants

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* Richard E. Greulich

REG Capital Advisors - President & CEO

* Elaine Ketchmere

Compass Investor Relations - Partner

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Presentation

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Operator [1]

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Good day and welcome to the Acorn International Quarter 1 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Elaine Ketchmere. Please go ahead, ma'am.

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Elaine Ketchmere, Compass Investor Relations - Partner [2]

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Good morning, everyone, and thank you for joining us today for the discussion of our unaudited financial results for the first quarter of 2019. With me today are Mr. Jacob Fisch, our CEO and President; and Mr. Martin Key, our acting CFO.

After our prepared remarks, we will open the line for questions. Before we continue, I would like to remind you that the discussion today will contain certain forward-looking statements. These forward-looking statements include, among others, statements with respect to the company's continued focus on growing e-commerce sales via streaming content and expansion on its own and third-party e-commerce B2C platforms in China and its plan for continued development of Acorn Entertainment and Acorn Streaming among others.

A number of the potential inherent risks and uncertainties that Acorn's business involves are outlined in the company's public filings with the U.S. Securities and Exchange Commission. As such, actual results may be materially different from the views expressed or anticipated results described today.

Acorn International does not undertake any obligation to update any forward-looking statements, except as required by applicable law. Furthermore, the unaudited financial information discussed today is preliminary and subject to potential adjustments. Adjustments may be identified when audit work has been performed for the company's year-end audit, which could result in significant differences from this preliminary unaudited financial information.

Now I will turn the call over to Jacob Fisch, Acorn's CEO and President, who will discuss some operational highlights for the quarter. Jake?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [3]

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Great. Thank you, Elaine. Acorn started 2019 on a positive note, posting revenue growth of 68.5% compared to Q1 2018 as well as improving gross margin and profitability at the operating level. Income from continuing operations was $500,000 in the first quarter of 2019, up from a loss of continuing operations of $39,000 in the first quarter of 2018.

In keeping with our strategy to liquidate noncore assets to generate free cash flow, we sold our prior principal office in Shanghai to a third party in late 2018 and realized a onetime gain of $3.8 million in the first quarter of 2019. Net income attributable to Acorn was $4.8 million, up from a net loss attributable to Acorn of $0.2 million in the first quarter of 2018.

During the quarter, Acorn's Babaka brand of posture correction products generated the highest quarterly sales in recent history. This was driven by expansion on third-party e-commerce B2C platforms and the successful promotion of core products through digital media in China.

Acorn Fresh, which offers high-quality fresh food products via e-commerce, also generated strong sales growth. Some recent business developments include the launch of AKOL, a new business unit that facilitates the development of local Chinese influencers to optimize their ability to convert Acorn's content and product sales.

In addition, we recently joined forces with a Chinese partner under the guidance of the Cultural Department of Zhejiang Province, under which Acorn Entertainment will begin to source opportunities for Western brands and talent for the development of content for The International Zhejiang Performing Arts, Music and Culture Center in Hangzhou, Zhejiang, China.

Earlier this week, our Board of Directors declared a cash dividend for 2018 of $0.05 per ordinary share or approximately $1 per ADS, each of which represents 20 ordinary shares and a quarterly dividend of 12 -- $0.0125 per ordinary share or $0.25 per ADS for the first quarter of 2019.

The Board of Directors also approved a dividend policy calling for a recurring quarterly dividend of $0.0125 per ordinary share or $0.25 per ADS subject to quarterly review approval and declaration by the Board.

These cash dividends build upon the company's prior shareholder-friendly policy of returning cash to shareholders via dividend and share repurchases that reflect the Board and management's confidence in our ability to generate excess cash while operating an asset-light business and helping achieve attractive growth. I'd also like to point out that they do not replace the possibility of special dividends from time to time.

Going forward, Acorn will continue to focus on building brands and growing e-commerce. To support this growth, we are also focused on the continued development of Acorn Entertainment and Acorn Streaming.

Now with trade tensions between the U.S. and China making headlines on a daily basis, I would like to reiterate a point that we made late last year. We currently do not anticipate any meaningful impact on -- from the trade war since we generate virtually all of our revenue within China.

With that, I will turn the call over to Martin to discuss our financial results for the quarter. Over to Martin.

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Martin Oneal Key, Acorn International, Inc. - CFO [4]

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Thank you, Jake. Total net revenues in the first quarter of 2019 were USD 9.2 million, up 68.5% from $5.4 million in the first quarter of 2018. This is primarily due to an increase in the e-commerce sales of Babaka-branded products as well as other products.

Gross profit in the first quarter of 2019 was $6.6 million, up 73.1% from $3.8 million in the first quarter of 2018. Gross margin was 71.8% in the first quarter of 2019, up from 69.9% in the first quarter of 2018 due to a higher proportion of sales from Babaka-branded products.

Total operating expenses in the first quarter of 2019 were $6.1 million, up from $3.8 million in the first quarter of 2018. The increase in operating expenses was due primarily to an increase in selling and marketing expenses for e-commerce sales, higher general and administrative expenses associated with incremental increases in personnel to support growth and a decrease in rental income following the sale of noncore assets in the second quarter of 2018.

Income from continuing operations was $0.5 million in the first quarter of 2019 as compared to a loss from continuing operations of $39,000 in the first quarter of 2018. Other income was $4.6 million in the first quarter of 2019, due primarily to a gain on the sale of the company's former principal office in Shanghai to a third party. This compares to other income of $50,000 in the first quarter of 2018.

Net income from continuing operations was $4.8 million in the first quarter of 2019 compared to net income from continuing operations of $16,000 in the first quarter of 2018. Net loss from discontinued operations, which reflects the sale of majority stake in the company's Hongjunxiang electronic learning products business to a third-party investor and operator in 2017, was $36,000 in the first quarter of 2019 compared to a net loss from discontinued operations of $0.2 million in the first quarter of 2018.

Net income attributable to Acorn was $4.8 million in the first quarter of 2019 compared to a net loss attributable to Acorn of $0.2 million in the first quarter of 2018. As of March 31, 2019, Acorn's cash and cash equivalents with restricted cash totaled $17.6 million. This compares to cash and cash equivalents with restricted cash of $20.2 million as of December 31, 2018.

Now I'll turn the call back over to Jake for the closing remarks.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [5]

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Okay. Thanks, Martin. So in closing, we got off to a strong start in 2019. Thanks to a great extent to our success in increasing revenues of our core products primarily through e-commerce channels. We will continue to leverage Acorn's 20 years of direct marketing expertise in China to build brands and expand e-commerce sales while developing Acorn Entertainment and Acorn Streaming.

With a healthy balance sheet, earnings growth and attractive target markets, we hold a positive outlook for the year ahead. We thank you for your support of Acorn, and that will conclude the prepared remarks of this section -- for the call, and I'll turn the call back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Richard Greulich with REG Capital Advisors.

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Richard E. Greulich, REG Capital Advisors - President & CEO [2]

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And first of all, I wanted to thank you for having a first quarter conference call. I know this is the first time in a couple of years you've had that and I really appreciate that. The question I had was, the loan receivable that went up now to about -- I think it's about $14 million. Now are those the 2 loans to the 2 different companies that Mr. Roche then has guaranteed, I think?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [3]

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It's to one company, Cachet Hotel & Resorts. And it was originally set at $10 million and expanded to a maximum capacity of $15 million.

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Richard E. Greulich, REG Capital Advisors - President & CEO [4]

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Okay. And what has Cachet been doing now? Really like...

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [5]

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At the hotel business. Yes, at the hotel management business and they manage hotels in China and around the world.

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Richard E. Greulich, REG Capital Advisors - President & CEO [6]

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And what is the outlook for them in terms of number of hotels that they'll be managing do you think over the next couple of years?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [7]

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That's tough for me to speak to, unfortunately, from this position. So yes, I can't offer too much there.

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Richard E. Greulich, REG Capital Advisors - President & CEO [8]

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Okay. The available for sale securities, I noticed, went up from the prior quarter from $38 million to about $39.5 million, assuming that's still Yimeng Software?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [9]

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That is, exactly.

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Richard E. Greulich, REG Capital Advisors - President & CEO [10]

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And has the determination been made yet whether that valuation is what will be at the end of the final audited numbers? Or is that still under review?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [11]

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No, I believe that's precisely the number that was in our 20-F, which was validated by the auditing on that report.

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Richard E. Greulich, REG Capital Advisors - President & CEO [12]

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Okay. And I assume there's no sales of those shares over the last quarter?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [13]

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There has not been.

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Richard E. Greulich, REG Capital Advisors - President & CEO [14]

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Okay. And were there any share repurchases of Acorn itself during the quarter?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [15]

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There have not been.

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Richard E. Greulich, REG Capital Advisors - President & CEO [16]

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Okay. Do you expect in the future to be starting to break out revenues by the different, I don't want to say, product categories or 3 different divisions, if you will, that you mentioned in the press release. Do you expect that to start breaking out revenues by those operations?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [17]

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I would expect to when they become material. At this point, they're very much in support of the primary e-commerce product business. And I believe they will continue to be, perhaps, an even larger or an increasingly important factor or driver of that e-commerce product business. And as we've indicated previously, they themselves could become a material driver of revenue. But at this point, they are not and therefore, they're not broken out separately.

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Richard E. Greulich, REG Capital Advisors - President & CEO [18]

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Okay. And the Babaka products, did the -- have you started to see any revenues from new product extensions in that area? Or are these pretty much the same products over the last 2 years?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [19]

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We've been launching new products and they are playing an increasingly -- the portion of revenue that they're generating is growing as a portion of the total, and we're continuing to actually look to expand that brand beyond just sort of simple brand extension but actually leverage the decade plus of brand recognition that, that brand has in this market to launch new product. So far, we've -- as we -- we've done quite well in growing that brand over the last several years.

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Richard E. Greulich, REG Capital Advisors - President & CEO [20]

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Two new items on the balance sheet and I assume this is as a result of the sale of the headquarters. You have a right-of-use assets of about $1.5 million and you also then have a lease liability of about the same number. Are -- did those relate to the sale of the headquarters?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [21]

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They don't. For a deeper information, I'll turn it to my finance colleagues. But my understanding basically is that this relates to -- we've moved into a -- into an office that we rent as opposed to own. And I think there may be some new accounting policy that had driven the creation of a separate line item, if you -- my colleagues are nodding. So if you have deeper questions on that, we can answer it, but it sounds like I've hit the nail on the head.

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Operator [22]

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(Operator Instructions) I am showing no further questions in the queue at this time.

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Elaine Ketchmere, Compass Investor Relations - Partner [23]

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Okay. Well, thank you, everyone, for participating in the call today. With that we'll conclude the call, and if you have any additional questions, feel free to contact us at ir@chinadrtv.com. And thank you and have a good day.

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Operator [24]

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Thank you, everyone. This concludes today's teleconference. You may now disconnect.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [25]

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Thank you.