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Edited Transcript of ATV earnings conference call or presentation 4-Dec-18 1:30pm GMT

Q3 2018 Acorn International Inc Earnings Call

Shanghai Mar 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Acorn International Inc earnings conference call or presentation Tuesday, December 4, 2018 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elaine Ketchmere

Compass Investor Relations - Partner

* 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

* Tony Kamin

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Presentation

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Operator [1]

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Good day, and welcome to the Acorn International Q3 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference to 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 for the discussion of our unaudited financial results for the third 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'd like to remind you that the discussion today will contain certain forward-looking statements. These forward-looking statements include among others, statements regarding the company's belief it will reach positive income from continuing operations; operational breakeven for the year 2018; the hope that its recently signed cooperation agreement with Shanghai Media Group will allow for additional opportunities for its celebrity clientele and streaming content to reach Chinese audiences; the company's ability to maintain healthy margins, manage expenses and generate additional cash flow; the expectation that the company's focus on new media in China along with further expansion on additional e-commerce B2C platforms will continue to drive e-commerce sales in the future; anticipated trends and gross margins, including the company's expectation that gross margins may decline from current levels in the near and medium term as it expands into lower margin e-commerce platform; efforts to implement its proposed business plans, including tapping into new media and positive ROI conversion and reduction of operating expenses may not succeed as anticipated or at all. 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 statement, except as required by applicable law. Furthermore, the unaudited financial information discussed today is preliminary and subject to potential adjustments. Any adjustments may be identified when audit work has been performed for the company's year-end audit, which could result in significant differences from the 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.

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

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Great. Thank you, Elaine. Thank you, everyone, and welcome to the call.

During the third quarter of 2018, Acorn achieved sales growth of 38.1% year-over-year and was profitable at the operating level for the first time in recent history. Our gross margin increased to 73.2% and a significant operating leverage resulted in income from continuing operations of $1.5 million despite $0.7 million of nonrecurring expenses during the quarter. Profitable growth in certain of our legacy businesses, especially the Babaka brand, remained strong and continued into the fourth quarter as evidenced by the dramatic increase in Singles Day sales from RMB 7.8 million in 2017 to RMB 13.6 million in 2018. Net income was $3.8 million, up from $2.3 million a year ago.

During the quarter, our Acorn Entertainment business expanded its client roster to include U.S. sports, film and television and music celebrity talent as well as brands looking to expand their presence in China. Sales of Acorn Fresh, our e-commerce business that sells high quality frozen seafood directly to Chinese consumers, have been ramping, driven by, among other things, live streaming content supported by Acorn Streaming and Acorn Entertainment. Just a few weeks ago, we signed a cooperation agreement with media powerhouse Shanghai Media Group, and we are hopeful that it will allow additional opportunities for Acorn Entertainment, celebrity clientele and streaming content to reach Chinese audiences. We expect to focus on new media in China, along with further expansion of our e-commerce business to drive our growth. Going forward, we will continue to leverage our 20 years of experience as a leading marketing and branding company in China. The company continually evaluates new platforms of positive ROI conversion, including China's major e-commerce platforms as well as other niche digital platforms. Acorn currently expects to reach positive income from continuing operations, operational breakeven for the year 2018 for the first time in recent history.

Now, I'll turn the call over to our 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.

Our total net revenues were USD 8.3 million in the third quarter of 2018, which was up 38.1% from USD 6 million in the third 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 third quarter of 2018 was USD 6.1 million, up 39.6% from USD 4.4 million in the third quarter of 2017. The gross margin was 73.2%, which was up from 72.4% in the third quarter of 2017. This slight increase in gross margin was due to a larger proportion of higher margin products in the product mix. I'd like to point out that gross margin may decline from current levels in the near and medium term as the company expands into lower margin e-commerce platforms, among other reasons.

Total operating expenses in the third quarter of 2018 were USD 4.6 million, which is down slightly from operating expenses in the third quarter of 2017, due primarily to lower general and administrative expenses, driven partially by the net impact of onetime fees in both the third quarter of 2018 and the third quarter of 2017. This foregoing factor was partially offset by an increase in selling and marketing expenses to support e-commerce sales and a decrease in other operating income, due primarily to a loss of rental income following the sale of Bright Rainbow Investments Limited, which is a Hong Kong subsidiary that held certain fixed assets that generated rental income and partially offset by loan interest income and net revenue from Acorn Entertainment. Within general and administrative expenses, the company incurred a onetime tax consultancy fee of USD 0.7 million during the third quarter of 2018, which received a tax asset of USD 9 million and a tax refund of USD 1.1 million. Operating expenses for the third quarter of 2018 did not include any noncash share-based compensation as compared to USD 25,000 in share-based compensation in the third quarter of 2017.

Income from continuing operations was USD 1.5 million as compared to a loss from continuing operations of $0.2 million in the year-ago period.

Other income was USD 2.4 million in the third quarter of 2018, primarily due to income associated with the sale of noncore assets as compared to other income of USD 2.7 million in the third quarter of 2017, which was primarily due to dividends received from the Yimeng shares.

Net income from continuing operations was USD 3.6 million compared to net income from continuing operations of $2.8 million in the year-ago period.

Net income from discontinued operations, which reflects the sale of majority stake in the company's HJX electronic learning products business to a third-party investor and operator in 2017 was USD 0.2 million compared to a net loss from discontinued operations of USD 0.5 million in the year-ago period.

Net income attributable to Acorn was USD 3.8 million in the third quarter of 2018 as compared to net income attributable to Acorn of USD 2.3 million in the third quarter of 2017.

As of September 30, 2018, Acorn's cash and cash equivalents with restricted cash totaled USD 15.7 million. Cash and equivalents with restricted cash totaled $21.1 million as of December 31, 2017.

At September 30, 2018, the company owned 32,723,600 shares of Yimeng Software Technology Co., which is a publicly traded company in China, whose shares were valued at approximately $42.2 million based on the valuation as of December 31, 2017. The company may sell shares of Yimeng from time to time based on market factors and other investment and capital requirements.

During the third quarter of 2018, the company repurchased 65,067 ADS at an average price of $19.96 per ADS under the share repurchase program, which was approved by the Board of Directors on December 8, 2017.

Okay. Now turning to our 9 months' financial results. During the 9 months, our total net revenues were $20 million for 2018, up 31.6% from $15.2 million in the first 9 months of 2017. It was primarily due to an increase in e-commerce sales of Babaka products as well as other products.

Gross profit for the 9 months in 2018 was $14.4 million, which was up 34.5% from $10.7 million in the first 9 months of 2017. The gross margin in the 9 months of 2018 was 71.7%, which was up from 70.2% in the first 9 months of 2017.

Total operating expenses for the period were $13.3 million, which was down 3.6% from operating expenses of $13.8 million in the first 9 months of 2017, which was due primarily to lower general and administrative expenses, driven partially by the net impact of onetime fees in both the first 9 months of 2018 and the first 9 months of 2017, and an increase in other operating come, which was due primarily to loan interest income and net revenue from Acorn Entertainment, partially offset by a loss of rental income following the sale of Bright Rainbow Investments Limited, which I've mentioned is a Hong Kong subsidiary that held certain fixed assets that generated rental income. These foregoing factors were partially offset by an increase in selling and marketing expenses to support e-commerce sales. Within general and administrative expenses, the company incurred a onetime tax consultancy fee of $0.7 million during the first 9 months of 2018, and as previously mentioned, that achieved a tax asset of $9 million and a tax refund of $1.1 million. Operating expenses for the 9 months of 2018 included noncash share-based compensation of $375,963 as compared to $25,000 in share-based compensation in the first 9 months of 2017.

Income from continuing operations was USD 1 million as compared to a loss from continuing operations of USD 3.1 million in the year-ago period.

Other income was USD 30.1 million, primarily due to a USD 30 million gain on the sale of noncore assets as compared to other income of $11.6 million in the year-ago period, which was primarily due to dividends received and gains from sales of Yimeng shares.

Net income from continuing operations was USD 28.7 million compared to net income from continuing operations of USD 7.1 million in 2017.

Net loss from discontinued operations was USD 1.4 million compared to net loss from discontinued operations of USD 2.2 million in the first 9 months of 2017.

Net income attributable to Acorn was $27.3 million as compared to net income attributable to Acorn of $4.9 million in the same period last year. Net income for the first 9 months of 2018 includes the onetime gain of USD 30 million (sic) [USD 30.1 million] from the sale of noncore assets while net income for the first 9 months of 2017 includes a onetime gain of $11.8 million due to dividends received and gains from sales of Yimeng shares.

Now I'll 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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Thank you, Martin.

In closing, the third quarter was a positive one for Acorn in which we posted another quarter of strong sales growth and our first quarter of operating profitability in recent history. E-commerce has largely driven our profitable growth, and looking ahead, we will continue to leverage our 20 years of direct marketing experience in China to focus on expanding our new media focus, such as live streaming content, as well as plan for further expansion of our e-commerce business. We thank you for your continued support of Acorn. And this concludes the prepared remarks section of the call.

And we'll now open it up for questions. And with that, I'll turn it over 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 comes from Tony Kamin of Eastwood Partners.

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Tony Kamin, [2]

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It's very exciting to see the company profitable, and when I look at the 9 months' results with a loss of $1.4 million and you indicate you hope the company will be profitable for the year, that would suggest another quarter pretty much equivalent to this one as you know. So I guess, my question is, are we in a new normal now for the company? And is it just Babaka's strength? Or is it the company's ability now to have made this sort of multiyear transition from direct marketing to e-commerce and streaming and all that, that this finally has borne fruit? I'm trying to get at, is it more product-driven or is the company on a base level sort of refigured -- or figure out how to position itself for profitability?

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

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Thanks, Tony. I think it's both. I think -- I hope we are in a new normal. I hope that by turning this corner now, becoming profitable, that we don't look back. It is simultaneously possible that we will look to ramp up investment in certain new businesses. And that is something that we are going to have to look at now as -- and for the future. But for the core businesses, we turned the corner on profitability and we expect to continue. And to your question, e-commerce driven by Babaka brand is the key part of our revenue -- possible revenue growth. We are continuing to expand that brand. So I guess your -- and part of your question was -- I think about transition, we are firmly transitioned to being strong in the e-commerce phase in China. As far as the new media is concerned, we're entirely off of TV and everything we do is new media-driven. We're adding to that new media with the Acorn Streaming and what we're trying to do on the content side. But that very much is part and parcel and fully integrated with the e-commerce piece as well. So I think we're in a new normal, and I think we've turned the corner.

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Tony Kamin, [4]

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That's great. And it's exciting to hear you a couple of times mention that you're continuing to look at -- or are continually looking at other possible lines, I guess. So is that the way to think of it, that you're looking for other potential product lines that you could put through these e-commerce and streaming delivery systems?

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

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For sure. Product lines, we're expanding the platforms. China is, as I'm sure you're aware, an ever-evolving landscape. It's in so many ways ahead of the U.S. and elsewhere, and I think we're on top of it. And we are looking at really, as we say, any of these platforms that allow us to generate a positive ROI. We're not going to pursue a strategy of simply buying market share the way some of our competitors, I believe, do. We are still emphasizing profitable growth. And we can look both at expanding our line but also at expanding distribution channels.

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Tony Kamin, [6]

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Okay. Just a couple of more questions on -- so I want to make sure I understand the numbers. So the number of ADSs outstanding now is approximately $2.6 million, is that fair?

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

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Yes.

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Tony Kamin, [8]

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Okay. And so if I look at that, at approximately $25 a share, it gives you about a $65 million enterprise value. And when I look at cash of $15.6 million available for sale, securities of $42 million and $9.5 million in loans related -- loans to related parties, that's actually $67 million or slightly more. So if you look at kind of the subvalue of the company upon which -- I'm not holding you at annualizing at $1.5 million a quarter, but if you were to do that, the $6 million, that seems to be value if you take out the other things on the balance sheet at 0 or less. It seems like the company remains extremely undervalued, and so I guess I'd ask in terms of your plans to continue looking at things like share buybacks or other ways to continue to try to redeliver some of that value back to shareholders.

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

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100%, that seems to be a consistent theme on these calls when we're interacting with shareholders like yourself. And we are very attentive to it. And I can say we're -- it's on top of mind. So I -- we -- I think we're about through the share buyback plan that was authorized previously, but we'll continue to look at those and other similar options.

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Operator [10]

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Our next question comes from Richard Greulich, REG Capital Advisors.

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

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Jacob, much of what the company's strategy involves are asset-light businesses. But I was concerned about the fresh food venture. It's -- will that be an asset-heavy kind of business or not?

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

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It will -- no. I mean, there is a certain amount of working capital involved and inventory involved. But apart from that, I mean, we're not -- if you imagine that we're buying significant amounts of assets to support the business, the answer's no. There would be some investment, some -- a limited amount of capital investment perhaps, but -- and in addition to that, some inventory, but that's part and parcel with the rest of the e-commerce business. All of our businesses involves a certain amount of inventory. But apart from that, it would not be an asset-heavy business.

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

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Okay. And was there any sale of Yimeng Software during the quarter?

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

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There was none. There was none.

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

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Is that still an asset that you're looking to monetize at some point?

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

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The answer is -- I think that we might -- you might have asked a similar question during the last call. We're always looking, of course, to monetize in a way that would generate value for our shareholders. As I might have mentioned in the last call, this NEEQ, otherwise referred to as OTC, Beijing OTC Board, is not -- doesn't really operate like a public exchange, so the shares are incredibly liquid. There was a time when there was more liquidity and we are able to trade. It -- that's changed. And as you're probably well aware, the entire market in China has been down quite considerably. And on top of that, this particular product, the performance of the company tends to track the performance of the broader market. But -- so while we're always looking for opportunities, recently, opportunities have not presented themselves. And so for the moment, we are in a, I guess, buy-and-hold mode.

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Operator [17]

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(Operator Instructions) At this time, we have no further questions in queue.

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Elaine Ketchmere, Compass Investor Relations - Partner [18]

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Thank you, everyone, for attending the call today. With that, I will conclude our call. If you have any additional questions, feel free to contact us at ir@chinadrtv.com. And thank you all again and have a good day. Goodbye.

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Operator [19]

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Ladies and gentlemen, this concludes this teleconference. You may now disconnect.