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Edited Transcript of ATV earnings conference call or presentation 7-Mar-19 1:30pm GMT

Q4 2018 Acorn International Inc Earnings Call

Shanghai Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Acorn International Inc earnings conference call or presentation Thursday, March 7, 2019 at 1:30:00pm 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 Q4 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.

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Elaine Ketchmere, Compass Investor Relations - Partner [2]

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Thank you, operator. Good morning, everyone, and thank you for joining us today for the discussion of our unaudited financial results for the fourth quarter of 2018. 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 belief it will continue to maintain positive income from continuing operations for the year 2019; the company's ability to maintain healthy margins, manage expenses and generate additional cash flow and the expectation that the company's focus on new media in China, along with further expansion on additional B2C e-commerce platforms, will continue to drive e-commerce sales in the future.

A number of the potential inherent risks and uncertainties that Acorn's business involve 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 those 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. And thank you, everyone and welcome to the call. The year 2018 was a successful one for both -- for Acorn, both financially and strategically. Throughout the year, we leveraged our 20-year history as a leading marketing and branding company in China to focus on new media in China, while simultaneously expanding our e-commerce B2C platforms and promoting our products through digital media in China.

By successfully implementing this strategy, we achieved profitability at the operating level for the full year for the first time in recent history. Revenue growth of 40.2%, combined with strong gross margin and significant operating leverage led to income from continuing operation of $2.9 million in 2018, up from a loss of continuing operations of $4.2 million in 2017.

Net income attributable to Acorn for 2018 was 21 -- $29.1 million, including a one-time gain of $30 million from the sale of non-core assets in May 2018.

We closed this year with solid performance in the fourth quarter. Our legacy Babaka brand of posture correction products continued to perform well and new product category, Acorn Fresh which sells premium imported food items to Chinese consumers saw monthly net revenue more than double from October to December. We recently began promoting a popular line of collectibles, which were historically sold offline via our digital content business, Acorn Streaming, in an effort to further drive online sales.

Acorn Entertainment, a social media business that helps western sport and entertainment talent and a diverse range of brands develop -- a deep and meaningful impact in the Chinese market continued to add clients to its roster, including fashion brands, Jay Godfrey and Go Fo as well as sustainable urban forestry firm Trella Urban Forestry Technologies.

In the year ahead, we plan to build our success in -- build on our success in 2018 by focusing on growing e-commerce sales via streaming content as we tap into this large and growing market in China.

We also seek to drive further revenue from Acorn Entertainment as well as Acorn Streaming, which is primarily focused on live streaming and pre-recorded video content creation and distribution.

Now I will turn the call over to our acting CFO, Martin Key, who will discuss our financial results in more detail.

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

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Thank you, Jake. So for Acorn, in the fourth quarter of 2018, total revenues were USD 8.4 million, up 65.7% from USD 5.1 million in the fourth quarter of 2017, which was primarily due to an increase in e-commerce sales of Babaka branded products as well as other products.

Gross profit in the fourth quarter of 2018 was USD 5.9 million, up 65.8% from USD 3.5 million in the fourth quarter of 2017. Gross margin was 69.8% in the fourth quarter of 2018, which is unchanged from the fourth quarter of 2017.

Total operating expenses in the fourth quarter of 2018 were USD 4.1 million, down 9.3% from USD 4.6 million in the fourth quarter of 2017, which is due primarily to lower general and administrative expenses, which were partially offset by an increase in selling and marketing expenses to support the e-commerce sales.

Income from continuing operations was USD 1.7 million in the fourth quarter of 2018 as compared to a loss from continuing operations of USD 1 million in the fourth quarter 2017.

Income tax expense was USD 0.3 million in the fourth quarter of 2018. This compares to an income tax benefit of USD 9.6 million in the fourth quarter 2017, which was due to a recording in the tax asset of USD 8 million from deductible loss and a USD 1.6 million write down that was previously accrued income tax expenses based on the full year financial performance.

Net income from continuing operations was USD 1.4 million in the fourth quarter of 2018. This compares to net income from continuing operations of USD 8.7 million in the fourth quarter 2017, which is primarily due to the previously-mentioned income tax benefit realized in 2017.

Net income from discontinued operations, which reflects the sale of a majority stake in HJX electronic learning products business to a third-party investor and operator in 2017 was USD 0.2 million in the fourth quarter of 2018 compared to a net loss through the continued operation of USD 1.2 million in the fourth quarter of 2017.

Net income attributable to Acorn was USD 1.6 million in the fourth quarter of 2018. This compares to net income attributable to Acorn of USD 7.5 million in the fourth quarter of 2017, which was primarily due to the previously mentioned tax benefit realized in 2017.

During the fourth quarter of 2018, the company repurchased 14,615 ADSs at an average price of $20.56 per ADS under the share repurchase program, which was approved by the Board of Directors on December 8, 2017.

Now turning to the full year financial results. Total net revenues were USD 28.4 million in 2018, up 40.2% from USD 20.3 million in 2017. It was primarily due to an increase in e-commerce sales, the Babaka branded products as well as other products.

Gross profit in 2018 was USD 20.2 million, up 42.3% from USD 14.2 million in 2017.

Gross margin was 71.1% in 2018, up from 70.1% in 2017. The slight increase in gross margin was due to a larger proportion of higher margin products in the product mix.

Total operating expenses in 2018 were USD 17.4 million, which is down 5.7% from operating expenses of USD 18.4 million in 2017, due primarily to lower general and administrative expenses and an increase in other operating income from loan interest income and net revenue from Acorn Entertainment, which were partially offset by an increase in selling and marketing expenses to support e-commerce.

Income from continuing operations was USD 2.9 million in 2018 as compared to a loss from continuing operations, of USD 4.2 million in 2017.

Other income was USD 30 million in 2018, primarily due to a gain on the sale of non-core assets as compared to other income of USD 7.6 million in 2017, which was primarily due to dividends and gains from sales of shares from E-Money Holding Company Ltd. formerly known as Yimeng Software Technology Company Ltd., which is a publicly-traded company in China.

Income tax expense was USD 3 million in 2018.

This compares to an income tax benefit of USD 7.9 million in 2017, which was primarily due to the previously-mentioned income tax benefit realized in 2017.

Net income from continuing operations was USD 30.3 million in 2018 compared to a net income from continuing operations of USD 15.9 million in 2017.

Net loss from discontinued operations was USD 1.2 million in 2018 compared to net loss from discontinued operations of USD 3.5 million in 2017.

Net income attributable to Acorn was USD 29.1 million in 2018 as compared to net income attributable to Acorn at USD 12.4 million in 2017. Net income for 2018 includes the one-time gain of USD 30 million from the sale of non-core assets, while net income for 2017 includes the one-time gain of USD 11.8 million due to dividends received and gains from the sales of E-Money shares along with an income tax benefit of USD 9.6 million in the fourth quarter of 2017.

As of December 31, 2018, Acorn's cash and cash equivalent with restricted cash totaled USD 21.1 million -- USD 20.1 million. And the cash balance at the end of 2018, reflects the payment of a special cash dividend of approximately USD 40 million in June 2018.

Cash and equivalents, with restricted cash, totaled USD 21.1 million as of December 21, 2017.

On December 10, 2018, we executed an agreement to sell Acorn's former principal office in Shanghai to a third-party for USD 6.7 million and received the initial payment of USD 5.1 million on December 24, 2018.

In addition to a tax asset of USD 8.2 million on the balance sheet that is already netted against deferred tax liability as of December 31, 2018, Acorn also has an aggregate net deductible loss of approximately USD 33.4 million, expiring within the next 5 years, which we will strive to utilize for our benefit going forward.

Now I will turn the call back over to Jake for some closing remarks.

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

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Great. Thank you, Martin. In closing, our strong performance in 2018 speaks to Acorn's success in leveraging our 20 years of direct marketing expertise in China to connect with Chinese consumers via new media, channels such as streaming and pay-to-view content to introduce successful new businesses such as Acorn Fresh and Acorn Entertainment and expand our B2C e-commerce channels to drive revenue growth.

We plan to build on this momentum in 2019. We thank you for your continued support of Acorn.

That concludes the prepared remarks section of this call, and now we will open the call for questions.

And I'll turn it back to the operator.

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Questions and Answers

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Operator [1]

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

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

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Congratulations on a terrific year and actually a perfect last 2 years now. I have couple of questions. The headquarter office sale, what was the book value period end? So would there be a gain or loss on that transaction?

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

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[Do you know the book value?] There is a -- I don't know if we have the book value number in front of us. We have to get back to you. So there is -- there are -- there is some tax associated with that, but we'd have to share that with you separately.

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

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Okay. There's a slight gain then on it. Okay. And I was trying to figure out where on the balance sheet that asset would've been listed? Was that under PP&E?

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Martin Oneal Key, Acorn International, Inc. - CFO [5]

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Yes.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [6]

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Yes, it was under PP&E.

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Richard E. Greulich, REG Capital Advisors - President & CEO [7]

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The loan to related parties, now it's up to 10 million, is there a limit or a target level at which you would kind of cap that off at?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [8]

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It is newly extended, so it's likely to go up to -- it can go up to $15 million.

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Richard E. Greulich, REG Capital Advisors - President & CEO [9]

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Okay. And is that personally guaranteed by Mr. Roche?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [10]

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I'd have to get back to you on the details of the loan. I can't remember, frankly, offhand what aspects of it were put in the disclosure. I believe it is going to be an appendix to the 20 -- 20-F or maybe, probably, it was an appendix last year to the 20-F, and then therefore, it would be again this year if indeed it was last year. And I need to have the lawyers tell me whether it needs to go in or not. And if it's in, it will have all the components attached to it I imagine.

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Richard E. Greulich, REG Capital Advisors - President & CEO [11]

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Yes. I just vaguely remember when it first started, I thought it was, but okay, I'll go back and check. Is there any strategy or any move afoot to expand the Babaka brand to other or related products?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [12]

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The answer is yes. We are, let's say, as an overall strategy looking to continue to grow that brand and we are looking at product extensions and new products introduced. This is something that we have been doing consistently over time. But I would say you're on the right track. We're putting more energy and focus into building up that -- the product category.

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Richard E. Greulich, REG Capital Advisors - President & CEO [13]

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And is there any move afoot to expand any sales in United States? I think I've seen some or maybe I looked at websites, but do you sell it into United States, that brand, at this point?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [14]

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We don't. We are a household name in China. We have such strong brand recognition. It's such a, I'd say, powerful meme and brand for us to try to build something like that outside of our home market would take a cost-benefit analysis. We don't see that we would likely do that. I mean, our business is very much China focused. That said, if something were to arise optimistically, we would take a look at it. There are competitive products on the market in U.S. and elsewhere. So I'd say, really short-term, it's pretty unlikely we would enter the U.S. market with that brand.

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Richard E. Greulich, REG Capital Advisors - President & CEO [15]

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To an outside observer, what you're doing is interesting and some of your other moves, but we -- -- I just have no idea when it's going to be enough to move a needle in terms of revenues? Could you kind of look forward over the next couple of years and maybe point to which ones are going to likely to be more significant than others?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [16]

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It's -- I would say, the whole -- the ecosystem that we're developing, I think, we'll move in step. So I think we're excited about the momentum of Acorn Fresh. However, on an absolute basis, it's still small, but it's growing very well. And I think there is great demand in the market in China among consumers to upgrade, despite the headlines that are fairly negative about China and general trepidation we're here on the ground and there is a demand for higher-quality food product, in particular, safe food. And we think we're right in the middle of that.

So we're quite pleased about what's happened so far. In terms of the financial impact, we need to, I'd say, let's wait and see and -- but we are very enthusiastic about that brand in particular, and frankly the type of the business that we're also in the process [implementing] and growing.

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Richard E. Greulich, REG Capital Advisors - President & CEO [17]

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Is it correct that there were no sales of Yimeng technology or Yimeng software shares during the quarter?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [18]

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That's correct, yes.

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Richard E. Greulich, REG Capital Advisors - President & CEO [19]

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And with the Chinese market, stock market, having gone down and then back up, has that affected much in terms of the way of where that, those shares are being quoted at this point, if not traded?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [20]

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I don't think so. I mean -- you may -- so the shares' price on the OTT platform went down quite a bit, I think starting about a year ago and that was driven maybe in part by the general overall direction of the e-Asia market. But also more significantly by issues around that particular platform. I think we reported previously that our view is -- the market on which those shares are traded, it's a very illiquid market and almost shouldn't be regarded as a public market, because of the illiquidity, as we understand it. And I mean, I suppose another factor to your question, to your point, our understanding of the Yimeng business is that it is a stock-trading business and therefore, somewhat affected in terms of its overall performance by the overall market condition.

So there are, I would say, there is some influence. I think some of it is very specific to how those shares are traded or however they're listed in the market itself. It's unclear whether the market price that is listed on the OTC is indicative or -- completely indicative of the fair value of the company. But we'll let the auditors basically tell us what that amount is, and that's what we've done in the past. And that's what's reflected on the balance sheet basically, if we go through the process of conducting valuation and then the auditors work with valuers and arrive at the value on balance sheet.

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Richard E. Greulich, REG Capital Advisors - President & CEO [21]

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Well, the $42 million that's shown on the preliminary balance sheet at the end of 2018, is this after the auditors have already taken a look at those valuation assessments?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [22]

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No. I mean, they -- this is not been audited, let's put it that way, the 20-F we published at the end of -- for last year, so if you're asking if there was a renewed that -- I guess that's the answer.

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Richard E. Greulich, REG Capital Advisors - President & CEO [23]

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Okay. And just the -- I'm not sure, but in the past, when -- has there been any major changes in the past from the unaudited preliminary balance sheet numbers to the final audited numbers at the end of the year for valuations like this for you?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [24]

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Sorry, for -- you're talking about Yimeng or the overall balance sheet?

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Richard E. Greulich, REG Capital Advisors - President & CEO [25]

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Well, for Yimeng's value on the Acorn balance sheet, when you have a preliminary balance sheet, has there been any significant changes over the past couple of years between the first preliminary balance sheet and the final audited ones?

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [26]

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I'd have to ask you to go back and look at that. I don't recall offhand. Candidly I don't -- don't recall that being one, but that doesn't mean that I'm incorrect and there wasn't one.

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Richard E. Greulich, REG Capital Advisors - President & CEO [27]

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Okay. And lastly, in the past, you generally have not had a first quarter financial release and just wait until the mid-year to begin your quarterly. Do you plan on -- if you're doing that again this year, and I would encourage you to have a first quarter release.

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Jacob A. Fisch, Acorn International, Inc. - President & CEO [28]

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We're intending to have the first quarter release. We are.

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Operator [29]

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(Operator Instructions) And with no further questions, we will move to conclude today's conference. Thank you all for your attention. All parties may now disconnect.