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Edited Transcript of CNTF earnings conference call or presentation 23-Aug-17 12:00pm GMT

Q2 2017 China Techfaith Wireless Communication Technology Ltd Earnings Call

Beijing Aug 28, 2017 (Thomson StreetEvents) -- Edited Transcript of China Techfaith Wireless Communication Technology Ltd earnings conference call or presentation Wednesday, August 23, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Pasquale

Global IR Partners - IR Contact

* Jay Ji

China TechFaith Wireless Communication Technology Limited - SVP and IR Director

* Ouyang Yuping

China TechFaith Wireless Communication Technology Limited - CFO

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Conference Call Participants

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* Jay Ramsey

* Matthew Larson

Wells Fargo - Analyst

* Richard Greulich

REG Capital Advisors - Analyst

* Alec Ebdane

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the First Half 2017 China TechFaith Wireless Earnings Conference Call. (Operator Instructions) I must advise that this conference is being recorded today, Wednesday, August 23, 2017.

I would like to hand the conference over to your first speaker today, Mr. David Pasquale. Thank you. Please go ahead.

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David Pasquale, Global IR Partners - IR Contact [2]

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Thank you, Operator. Welcome everyone to China TechFaith's first half 2017 financial results conference call. Joining us today from the Company are CEO, Mr. Deyou Dong; Chief Financial Officer, Ms. Ouyang Yuping; and SVP, Mr. Jay Ji. We will have time for your questions after a review of the first half results and the Company's outlook. If you have not yet received a copy of today's results release, please email Global IR Partners at cntf@globalirpartners.com, or you can get a copy of the release off of the Investor Relations section of the TechFaith's website.

The Company's attorneys advise that this call will contain forward-looking statements. TechFaith may also make written or oral forward-looking statements in its periodic reports to the U.S. 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. These statements are made under the Safe Harbor provisions of the U.S. 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", "confident", "outlook" and similar statements. Statements that are not historical facts, including among other things, statements about TechFaith's business outlook, strategic and operational plans, beliefs and expectations contain forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements. Potential risks and uncertainties include, but are not limited to, those risks outlined in TechFaith's filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 20-F and other SEC filings. TechFaith undertakes no obligation to update any forward-looking statement except as required under applicable law. All information provided on today's conference call is as of today's date.

And references to U.S. GAAP are to generally accepted accounting principles, as practiced in the United States of America, with references to dollars to the lawful currency of the United States of America.

At this time, I would like to now turn the call over to SVP, Mr. Jay Ji. Please go ahead, sir.

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Jay Ji, China TechFaith Wireless Communication Technology Limited - SVP and IR Director [3]

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Thank you, David, and welcome to our first half of 2017 financial results conference call. We appreciate everyone taking the time to get an update on our Company.

The big takeaways from the first half for TechFaith are, first, we remain on track with our plan to monetize our real estate portfolio. The sale of our Beijing high tech Park is the first major catalyst with other development expenses. We have already received about RMB400 million by June 30, 2017. We expect to receive the next RMB400 million by the end of the third quarter 2017. And the final RMB200 million will be received upon final construction and the transfer of relevant ownership certificates. Our success from securing land rights to permitting, construction, marketing and sales serves as a proof point for what we can do in the other cities we are building in. And our success with our Beijing high tech Park will be key to delivering a better return on our investments and to building shareholder value.

Second, revenue in our mobile phone business continues to reflect softening in the broader China smartphone market. The industry worked through an inventory correction in the past few quarters. In Q2, further impact was seen with lower demand. Some have attributed this to the build-up in demand around the latest iPhone launch. There has been talk in the market that OEMs are waiting for the latest iPhone launch to see what new design features customers like best. This way they can then copy into their own OEM models and then launch. But expectations for pickup in the second half of 2017 are modest. Pressure from the domestic China market is likely to continue along with pressure out of Europe. So we are working to return to growth in our mobile phone business, but remain conservative given the industry forecast.

The third takeaway is that we remain in control of our OpEx. We are focused on better matching our expenses to our revenue level and needs. This is true across our business. Our results in the first half were marked by a one-time impairment charge and certain bad debt expense.

Finally, we feel good about our operating position moving forward. We expect to benefit from continued success in our real estate business. We expect this will allow us to both strengthen our balance sheet and to reinvest into new growth opportunities. And while we are conservative in our outlook for the smartphone market, we have been doing this for such a long time that we know the highs never last forever and the market lows never last forever. So if we do not see an improvement in the second half of this year, we would expect to in the following year.

In terms of our actual first half of 2017 results, we achieved revenue of USD24.6 million compared with USD34.5 million same period last year and USD26.5 million the second half of 2016. As I just noted, the broader China smartphone softness impacted our revenue along with typical seasonality factors. We achieved a total gross margin of 18.1% compared to 15.9% in the same period last year and 26.3% in the second half of 2016.

As I noted earlier, we also remain focused on operating expense control. Total OpEx came in at USD9.4 million compared to USD10.1 million in the second half of 2016. The first half of 2017 includes a bad debt expense charge of USD1.4 million and a charge of USD1.8 million for the write-off of impairment of acquired intangible assets. The impairment charge relates to software license for mobile games that can be installed on our branded mobile phone. As the sales have declined, we wrote the value of the licenses down we were recognizing.

The big development for us, however, is the further progress of our real estate business. We previously entered into a share transfer agreement to sell our 100% equity interest in TechFaith's Intelligent Handset Technology Beijing Limited to Beijing Hongkungu Investment Company Limited for a total consideration of RMB1 billion, approximately USD144 million, payable in installments. The consummation of the transaction pursuant to the agreement is subject to certain customary closing conditions. We have already received about RMB400 million by June 30, 2017 and recognized a receivable of about RMB600 million, including RMB400 million in other current assets. As I noted earlier, we expect to receive the next RMB400 million by the end of the third quarter of 2017 with the balance of RMB200 million to be received upon final construction and transfer of relevant ownership certificates. After careful consideration, we determined that the timing was right for this transaction based on the current China real estate market environment and other data points.

We expect our real estate success to add revenue diversification and stability to the Company. We also continue to believe our real estate segment will ultimately serve as the catalyst to unlock value for both the Company and shareholders. In addition to Beijing, we are moving forward with our buildout in Hangzhou and Shenyang. We plan to have a total of four buildings in Hangzhou and three in Shenyang. There would be a second phase in Shenyang that would call for another four buildings, raising the total there to seven buildings. We will update investors as we move forward and achieve development targets.

The important point: our success in Beijing should serve as a clear example of the very high value we are creating in our real estate from the time we acquired land and usage right to the post-buildout stage.

Now, let me turn the call over to our CFO, Ouyang Yuping, for more details on our first half of 2017 financial results and our outlook.

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Ouyang Yuping, China TechFaith Wireless Communication Technology Limited - CFO [4]

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Thank you, Jay. Thank you to all for joining our first half of 2017 earnings call. Let me quickly review some key operating points before taking your questions.

Revenue for the first half of 2017 was USD24.6 million compared to USD26.5 million in the previous period and compared to USD34.5 million in the same period last year. Our mobile phone business contributed USD23.4 million or 95% of the revenue. Our rental income contributed USD1.2 million or 5% of the revenue.

Overall gross profit for the first half of 2017 was USD4.5 million compared to USD7 million in the previous period and net loss of USD5.5 million in the same period last year.

Our operating expenses for the first half of 2017 were USD9.4 million compared to USD10.1 million in the previous period and compared to USD5.7 million in the same period last year. As Jay noted, the first half of 2017 includes a bad debt expense charge of USD1.4 million and a charge of USD1.8 million for the write-off of impairment of acquired intangible assets. That was mainly related to software license for mobile games that can be installed on our branded phones. We will continue to look for other areas of lower operating expenses further. But based on our business level, we can support our current business without any major operating expenses additions in the second half of this year.

In terms of our balance sheet, we ended the first half of 2017 with a cash balance of USD5.6 million compared to USD9.2 million in the previous period and USD24.5 million in the same period of 2016. Our balance of prepaid expenses and other current assets were about USD97.5 million at the end of the first half of this year, as compared to USD40.9 million at the end of 2016. The increase was due to the receivables from the sale of our 100% equity interest in TechFaith Intelligent Handset Technology Beijing Limited to Beijing Hongkungu Investment Company Limited. And our balance of construction in progress increased to USD96.6 million from USD69.8 million at the end of 2016 as we continue our buildout of our real estate portfolio in Hangzhou and Shenyang. We expect to continue our successful strategy of building our portfolio assets and then monetizing the properties through lease, sell, or other vehicle.

In line with our strategy, earlier this year we announced the share transfer agreement to sell our Beijing real estate portfolio for a total consideration of RMB1 billion. As Jay noted, we are pleased to report that we have already received approximately RMB400 million of the proceeds as of June 30, 2017 and expect to receive approximately RMB400 million by the end of the third quarter this year, with the balance of RMB200 million to be received upon final construction and transfer of relevant ownership certificate. The transaction has progressed smoothly with both sides working to meet all obligations.

This is a very busy and exciting time for us. We expect our real estate success will serve as additional catalysts for our revenue and profit growth, and our success will allow us to build greater value for our shareholders. We believe our actions will benefit our long term business growth based on current China's real estate market, help to further improve our cash flow and reduce potential operational challenges.

Overall, we will continue to focus on delivering an improved return on investment to the Company and our shareholders, as we optimize our existing resources and infrastructures, and work to keep operating expenses under tight control to avoid any unnecessary risks and costs.

Operator, that concludes our formal remarks. We can now take questions. Thank you, Operator.

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions)

Your first question comes from the line of [Jay Ramsey]. Please ask.

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Jay Ramsey, [2]

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Yes, the sale of the Beijing assets have not increased shareholder value, nothing has happened since the announcement a few months ago. You all continually say that you're going to have or conduct initiatives that are going to increase shareholder value, yet nothing has actually worked. So that said, I respectfully request you initiate USD5 million share buyback, which is effectively 20% of the outstanding shares. I request that you do this in a respectable fashion. And if unwilling, please explain to all of your shareholders why you all cannot do this, because we do know in fact reducing the share count, this will be a tangible positive factor in increasing the share price. Thank you.

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Jay Ji, China TechFaith Wireless Communication Technology Limited - SVP and IR Director [3]

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Thank you for you to read this question again. We will have to bring up this issue to our Board meeting to discuss further and hopefully we can get back to you very soon.

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Operator [4]

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Thank you. The next question comes from the line of [Matthew Larson] of Wells Fargo. Please ask.

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Matthew Larson, Wells Fargo - Analyst [5]

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I'd like to follow up on the previous caller's question as well. Can you answer couple of questions for me? There's roughly like 10 million plus ADS' outstanding. Is that an appropriate number?

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Jay Ji, China TechFaith Wireless Communication Technology Limited - SVP and IR Director [6]

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Yes, we are -- can you repeat your question again please?

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Matthew Larson, Wells Fargo - Analyst [7]

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Yes, I'm just trying to get a handle on it. The market cap of the Company is roughly USD24 million or USD25 million, all right. And the sale of the Beijing assets you stated are USD144 million, so there's a disconnect there. And if you collected RMB400 million through the end of last quarter, I didn't really see that flow through the income statement, that would be almost USD6 a share. And so I was hoping that would see that on the income statement this quarter, which would highlight to investors, in general, the undervalue of China TechFaith.

And then of course if you close, as you stated, on another RMB400 million by the end of the third quarter and the final RMB200 million by the end of the year, that's close to USD14 a share, I'm rounding, in proceeds. Can you tell us how much of that is profit that would reflect in income?

And I think the idea at the previous caller wanted to highlight was that the share price has gone up a little bit, but it doesn't reflect at all the value of not only the Beijing real estate but any other assets you have -- currently you're working on in the real estate area, plus the residual of the handset and mobile business.

And so just to finish up with my comment, he mentioned USD5 million share buyback. I could suggest why not just pay a USD5 million dividend, which would be a very small amount of the proceeds and that's 20% return and it would definitely highlight to the public at large here in the U.S., the earning power and the assets in general that China TechFaith has. So it's a long question, but if you could comment, I'd appreciate it.

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Ouyang Yuping, China TechFaith Wireless Communication Technology Limited - CFO [8]

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Yes. For your question regarding our sale of our Beijing project, I would like to point out in the income statement, there is net income from operations disposed and it's about USD3.8 million. This is the result of this ownership transfer. And at the same time, you can seen the total consideration is about RMB1 million and we also mentioned in the call previous, we have already received RMB400 million, and there is another [RMB6 million] to be received. Among those RMB600 million, RMB400 million will be received within this year. So this is the reason why the accrued expenses and other current assets is increased this quarter. And in the balance sheet, you can also see in the long-term assets, there is other long-term receivables, it's about USD29.5 million. This is also related to this transaction.

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Jay Ji, China TechFaith Wireless Communication Technology Limited - SVP and IR Director [9]

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And also you finally mentioned, we probably -- you raised the proposal for us to pay some dividends, for example, primarily U.S. dollars or whatever. Just as I mentioned, we will have to bring this topic to our Board meeting to do further discussions. We will discuss all the possibilities for how we can bring our shareholder value back. So we can get back to you.

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Matthew Larson, Wells Fargo - Analyst [10]

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Okay. If I can just follow-up, because you can see what investors in the U.S. who have been with your Company for many years would be interested as to share in the [largest], the value that you've been able to realize, particularly with the real estate operations in your Company.

I mean I'm reading actually just from the news release that the Company is shifting away from its traditional focus on mobile solutions in handset markets into the real estate area. And typically, real estate companies would be selling a lot closer to book value, which then a lot closer than China TechFaith is, if my calculations are right, you're about 10% of book value. And a way to highlight that would be to share some of the proceeds with the shareholders. It would really bring to light the value of the Company.

So if you could do that or give an explanation why you wouldn't be willing to do that that would be helpful, because as an investor, if I'm not going to share in the benefits of the Company or if the Company is not going to highlight them to get the share price higher, one has to wonder whether it's an appropriate investment. Thank you.

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Jay Ji, China TechFaith Wireless Communication Technology Limited - SVP and IR Director [11]

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Thank you for your question again, and thank you for being with our valuable shareholders. And we would like to take your, all your comments into consideration for our future operations and for future strategies as well.

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Operator [12]

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(Operator Instructions) Your next question comes from the line of Richard Greulich of REG Capital Advisors. Please ask.

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Richard Greulich, REG Capital Advisors - Analyst [13]

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Thank you. I have two questions. The first is about a year and a half to two years ago, the Company had considered selling and exiting the mobile phone business. Is that still a consideration?

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Jay Ji, China TechFaith Wireless Communication Technology Limited - SVP and IR Director [14]

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No. Two and -- one and a half a year ago, we did consider to sell our mobile phone business. But after a few months, we need to modify, adjust our strategy. We still think the mobile phone business is very important business for TechFaith as [well] for Company's long history, we are very strong at mobile phone development side. So we want to still keep it for a while. So you can see from the revenue side, from the profit side, the mobile phone business is still very important for our Company as well.

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Richard Greulich, REG Capital Advisors - Analyst [15]

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Secondly, when you received the proceeds from the transfer of shares and possibly consider a share repurchase, how would you obtain the U.S. dollar denominated exchange in order to do that?

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Jay Ji, China TechFaith Wireless Communication Technology Limited - SVP and IR Director [16]

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Yes. So we do receive a lot of requests from our shareholders to the share buyback. Just as I mentioned, we would like to bring this issue to our Board meetings again to do for the discussion so not only this share put it back, also probably other possibilities, all we need to take into consideration. So we can get back to you.

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Richard Greulich, REG Capital Advisors - Analyst [17]

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But my question was how would you obtain, if you were to decide to do that, how would you obtain U.S. dollar denominated currency?

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Ouyang Yuping, China TechFaith Wireless Communication Technology Limited - CFO [18]

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Could you repeat your question again?

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Richard Greulich, REG Capital Advisors - Analyst [19]

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In order to repurchase shares, you would need U.S. dollar denominated currency to do that. So if you were to decide to repurchase shares, how would you obtain those U.S. dollar denominated assets?

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Ouyang Yuping, China TechFaith Wireless Communication Technology Limited - CFO [20]

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Yes, it's a good question. Because most of the consideration is received in RMB and received within China, so if we want to do the buyback or pay the dividend, there is an issue how to change this RMB into U.S. dollar. Yes, it's a good question.

Based on the current relevant regulation, as you know, most of our operations are operated within China and with a parent company in BVI or in Cayman. So we can -- under current regulation, we can pay dividend from the Chinese subsidiaries to their parent companies overseas. And with this method, we can request for change the RMB into U.S. dollar. Of course, there is tax consequence when we -- if we really want to do so, we need to pay 10% with whole tax for all these dividends when we pay from the Chinese subsidiaries to their parent companies overseas.

And yes, with this method, of course, we can change our RMB currency into U.S. dollar. But you know, there is some restrictions in the currency exchange. So maybe the -- we may face practical issues when we really want to do them. I hope this can answer your questions.

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Operator [21]

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Thank you. Next question comes from the line of [Alec Ebdane]. Please ask.

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Alec Ebdane, [22]

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Yes, this is [Alec Ebdane], thank you for taking my call. I have a question about how you're doing the accounting. I think this was referred to in an earlier question. It seems to me if you've gotten the equivalent of USD60 million, it seems like it would show up in the income loss statement. But there are different ways to do accounting. There is the full accrual method, the cost recovery method, the deposit method, installment method and so forth. And so I'm trying to figure out what method of accounting you're using such that that USD60 million is not showing up in the income loss statement. You pointed out that it is in the balance statement. But it's not showing up in the income loss statement, and that is what many investors look at. And so that's why the value of your stock is not being unlocked in the stock market. So that's my first question, if you would answer that.

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Ouyang Yuping, China TechFaith Wireless Communication Technology Limited - CFO [23]

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Thank you. Quite a question. It's quite a professional accounting question. And the sale of our Beijing real estate project is through that 100% equity ownership transfer, and we take this as discontinued operations. So we booked the net gain or net loss in the income statement rather than recognize total consideration as revenue and booked cost of sales separately in our income statements. So in the first half of this year's income statement, you can see there is USD3.8 million net income from operations disposed. And this is the net income related to the sale of the Beijing project. Can you understand? I'm sorry.

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Operator [24]

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Okay, thank you. This concludes our Q&A session for today. I would like to hand the conference back to our presenters.

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Jay Ji, China TechFaith Wireless Communication Technology Limited - SVP and IR Director [25]

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Thank you everyone for joining today's call. We look forward to speaking with you on our next half year result call. Please feel free to follow up with us if you have any additional questions. Have good day. Bye-bye.

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Operator [26]

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Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.