Executives
David Pasquale – Investor Relations-Global IR Partners
Jay Ji – Senior Vice President
Yuping Ouyang – Chief Financial Officer
Analysts
Jay Goldstein – JBG Capital
China TechFaith Wireless Communication Technology Limited (CNTF) Q3 2013 Earnings Conference Call November 25, 2013 8:00 AM ET
Operator
Good day, ladies and gentlemen and welcome to TechFaith Wireless 3Q Earnings Conference Call hosted by David Pasquale of Global IR Partners. Throughout the conference your lines will be on listen-only. (Operator Instructions) And now I would like to hand the conference over to David. Please go ahead.
David Pasquale
Thank you, Operator. Welcome everyone to China TechFaith’s third quarter 2013 financial results conference call. Joining us today from the company are Chief Financial Officer, Ms. Ouyang Yuping; and SVP, Mr. Jay Ji.
We will have time for your questions after a review of the quarter’s 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 TechFaith’s website.
The company’s attorneys advise that this call will contain forward-looking statements. 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. Among other things the business outlook and strategic and operational plans of TechFaith and managements comments 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 on Form’s 20-F and 6-K, et cetera, and its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties.
Statements that are not historical facts, including statements about TechFaith’s beliefs and expectations are 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 outlined in TechFaith’s filings with the U.S. Securities and Exchange Commission, including in its annual report on Form 20-F.
TechFaith does not undertake any obligation to update any forward-looking statements except as required under applicable law. All information provided on today’s conference call is as of today’s date.
Finally references to U.S. GAAP or the Generally Accepted Accounting Principles as practiced in the United States of America and references to dollars are 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.
Jay Ji
Thank you, David. And welcome to our third quarter 2013 financial results conference call. I hope that everyone had a chance to review our press release, the big thing for us in Q3 was our ability to achieve positive net income relatively lower revenue phase. It reflects our effort to lower our breakeven point and to streamline cost we’re focused. We continue to operate as a leaner organization as we match our resources and the budget to the business environment. We expect our business environment to remain highly competitive and very challenging.
We expect intensive competition and price pressure to continue on all our business segments as we move forward. Our effort to counter this we continue to focus on customer opportunities where we have greater chance of winning and where we can achieve higher margins. For example, we remain focused on the niche segment model where our market recognized devices have been gaining popularity and we’re planning to introduce new company accessory.
This new combination will be suitable for both the consumer and the broad markets. We expect to maintain our focus on operation efficiency and the cost control for the foreseeable future as we do not expect the competitive environment will change as mentioned over the near term.
Moving on to results for the third quarter, our revenue decreased by 0.9% to around $30 million compared to the third quarter within that our ODP segment revenue was up 5.9%, the growth in the ODP segment continue to help offset gain on the branded phone segment, revenue in our game segment in Q3 was around $0.5 million compared to $1.6 million in Q2.
Revenue in our Brand name phone segment was $8.1 million compared with $8.4 million in Q2, both segments continue to face deep competition clearly the decline in the game segment has been marked significant, this reflects our shift from a hardware folks and move to our software and mobile platforms.
We continue to make adjustments and try to get the right to address opportunities that do exist. We have successfully done this in the past in gaming when we build out our most gaming volume.
The other area of interest in gaming is in recent regulatory changes. These changes make our intellectual property portfolio even more attractive to third parties and we are not moving out the potential or licensing or partnership. We took action a few quarters back to reduce the breakeven in our gaming business and had it done to about around $400,000 in Q3. This level current strategy in any given quarter, we are working on new launch our [indiscernible] service to support growth opportunities in gaming.
And importantly our overall operating collaborated gross margin in Q3 improved to 16% from 11%, the increase was due to our network and [indiscernible] impact of our marked ruggedized model, which allows us to reverse the loss from Q2, despite a despite a lower revenue level compared to the previous quarter.
In Q3, we reported a net income of US$260, 000. In terms of additional [indiscernible] in Q3 our ODP business took up 79% of total revenue. Our gaming business took up 1.6% of total revenues and our brand mobile phone business took up 27% of total revenue. Our ruggedized devices, TITAN and the Giant have been well received by the market and we have continued a trend with new models such as ZEUS and the JPAD.
We also continued to expand our presence globally and domestically by participating in various international and domestic exhibitions. For example, we have participated in North Asia expo in [indiscernible] Technology Week and Dubai Gitex Technology Week in the recent month.
Now let me turn the call over to our CFO Ms. Ouyang Yuping, for further review.
Yuping Ouyang
Thank you, Jay. Thank you all for joining our third quarter earnings call. Let me quickly review some key operating points and our outlook before taking Q&A. Revenue for the first quarter was US$39.9 million compared to US$30.2 million in the previous quarter and US$31.5 million in the same quarter last year.
Our ODP business contributed US$21.3 million or 71.3% of the revenue. Our branded mobile phone business contributed US$8.1 million or 27.1% of the revenue and our gaming business contributed US$0.5 million or 1.6% of our total revenue.
Overall, gross profit for the third quarter of 2013 was US$4.9 million compared to US$3.4 million in the previous quarter and US$7.2 million in the same quarter last year. Our operating expenses was US$4.7 million compared to US$4.3 million in the previous quarter and compared to US$5.1 million of the same quarter last year.
We continue to make further progress in the third quarter on the developments of properties in the portfolio we have detailed on prior calls, this is an important area for us with a potential to increase the value for TechFaith and, all of our shareholders, currently tax paid has a total of 23 buildings and most of which are still in the process of construction, 17 of the buildings are located in Beijing, three of the buildings are in Guangzhou, two of the buildings are in Shen yang, and one of the building is in Shanghai.
In terms of our balance sheet, we ended the first quarter with a balance of $267 million in cash and cash equivalents this is a 3.6% increase compared to $258 million compared to the previous quarter. This equivalent was $5.04 per public traded ADS, our book value per publicly traded ADS is approximately $6.53 based on this measure our share traded on the NASDAQ market are significantly undervalued and trade it out, we are in highly competitive market and expect that to remain the case, but we have created considerable asset value and the balance sheet value over the years.
We will remain conservative and focused on keeping operating cost low to maximize our profitability and cash flow generation while we operate the time to complete developments of the properties I just mentioned. Our goals remain to increase shareholders value in terms of capacity guidance for the fourth quarter 2013 as noted in our press release, we currently expect the total revenue in the fourth quarter of 2013 to be in the range of $28 million to $32 million.
This forecast reflects earlier mentioned continue positive pressure and challenging business environment with you earlier. Operator that concludes our formal comments, we are now ready to take questions. Thank you.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question is from the line of Jay Goldstein from JBG Capital, your line is open.
Jay Goldstein – JBG Capital
Yeah, Thank you, Thank you for taking my call, can you update us a little bit on the status of the patent position both in terms of the motion gaming technology and I guess about year old patent challenge with Samsung we haven’t really heard anything on it and I think you give us an overview of where things stand will be appreciated?
Jay Ji
Basically we have a lot of IPs not only for the games also for the mobile phones. For the same quarter last year that we are still going up – still ongoing we have not got any results yet and for the game piece we do have a lot of IPs in China, it’s not up for the [indiscernible] yet and we believe for the IPs in China can be a very good investment for two, three times as we are.
Jay Goldstein – JBG Capital
So are there been conversations with licensing opportunities, is that something that – is something we should be looking for in the near future or…
Jay Ji
Currently we don’t have this kind of discussion yet.
Jay Goldstein – JBG Capital
Okay.
Jay Ji
With any other companies.
Jay Goldstein – JBG Capital
And then secondarily as it relates to the real estate component, it looks as though there is $80 million carried on the balance sheet and obviously real estate is going up a lot in specified regions. How are we supposed to think about what the actual real estate value that you are holding is worth? And then secondarily, you’d mentioned that you had looked in your press release about potentially looking to sell unused real estate portions to maximize share holder value. Would you use the proceeds of the sold assets to buyback stock or a portion of your cash? At what point, can we think about maximizing share holder value as using the large real estate value relative to the size of the Company as represented by the stock price as well as the cash to create a more lion’s share prices as it relates to the cash on the real estate values combined?
Jay Ji
As you know we invest some money for some of our high-tech project. We didn’t finish some of the projects on the areas of [indiscernible]. And we expect to invest around about $150 million in next three years and based on current situation in China as well as the land shortage, we got some good policies from some local government for in terms of the high-tech project, and we believe well in future once all the high-tech project is done, the value – the market value can be very high. In terms of that can help us to maintain our company’s evaluations. So we think it’s kind of a good investment, but for short term, it’s still bit harder to see some income from this kind of high-tech projects, well in future probably we can sell some of the high-tech projects or rent.
Jay Goldstein – JBG Capital
Is there anyway for us to get a sense of what the value of the portfolio is worth today versus milestones for completion?
Jay Ji
The opportunity in China, the real estate industry – for us of the land tend to vary fast and increase a lot. For us, we still want to do some evaluation, but probably is not accurate. So we cannot give you evaluation for our high-tech projects now, because it’s not finished yet as well.
Jay Goldstein – JBG Capital
Of that $150 million commitment you referenced earlier, where do you stand in terms of how much you’ve already spent with respect to the $150 million and over what time period is it still another year and a half to spend the balance or where do we stand in terms of that?
Yuping Ouyang
For the $116 million, we will spend in the coming two years and probably by now we have from our balance sheet we can see that we have invested about $87 million in the property and construction in process.
Jay Goldstein – JBG Capital
How much was it $57 million or $87 million, I couldn’t hear sorry?
Yuping Ouyang
$150 million this is the amount, we will invest in the coming two years which means the 2013 and 2014 and the amount we have spent is $87 million.
Jay Goldstein – JBG Capital
Okay. So just about $63 million left or so?
Yuping Ouyang
No the $150 million is the additional we need to, we will invest.
Jay Goldstein – JBG Capital
Okay.
Yuping Ouyang
Based on our current construction plan.
Jay Goldstein – JBG Capital
Okay, so the total at the end of it will be $237 million.
Yuping Ouyang
Yes, yes, you’re correct.
Jay Goldstein – JBG Capital
Okay, Okay, thank you very much.
Jay Ji
Thank you.
Operator
Thank you. (Operator Instructions) Our next question comes from the line of Vini Veneti [ph], who is a Private Investor. Please go ahead.
Unidentified Analyst
Yes, I’ve been hearing a lot from you people about shareholder value and I get it beyond you when I think of shareholder value I look at stocks like Google who makes Android which is over a $1000 a share okay, I look at Apple which is triple digits for their shareholders, I look at stocks like Amazon, go on down the list NASDAQ the highest been in 13 years, stock market in this country has never been any higher over 16,000 and here we sit at a dollar, year-after-year-after-year and I’ve been hearing over these buildings it seem like year-after-year-after-year and it used to be a company out there called ShengdaTech out of China called SDTH and already talked about was real estate and buildings put all the money into it, guess where the company is today, it went bankrupt, it took everybody’s money, it was all a big ruse.
Can you explain little bit more about what you foresee for shareholder value for us investors out here, why we should even stick with this company because this is year after year it’s the same old thing your stocks at a dollar that never goes nowhere it is not even participating in the market and it’s pretty disgusting and pretty discouraging?
Jay Ji
I think it’s very normal that stock price for us fluctuate some times it’s not the trend that we can control and we do believe, we always keep our shareholders at very important position and we try our best to bring our company get bigger and bigger and its valuation is big as well and also we focus on what we can do, we are still working very harder to the mobile phones to our R&D and also to our ruggedized mobile devices, branded mobile phones as well. Even now we believe it’s tough for the stock prices, our share holders as well but we are confident to re-impact our shareholders, we are confident in future.
Operator
Thank you, we have no further questions in the queue. (Operator Instructions) Next question Jay Goldstein from JBG Capital. Your line is open.
Jay Goldstein – JBG Capital
Sorry, just one follow-up as it relates to the question that was just asked I understand in the past when people have asked you guys have said that you want to keep your balance sheet strong, but to the extent there is 80 some odd million in real estate which probably has a much higher value when translated into today’s dollars given that was done a while ago and now we have 260 some odd million in cash with basically a breakeven business and potential other revenue streams with gaming and anything that comes from Samsung being free. Why not just take a portion of the cash that seems well in excess of anything that would be reasonably needed and use it to buy even if it’s just a small percentage that it’s – I don’t think ever really seen a situation where the cash – the cash and the assets are just so far in excess of the stock price such that you know at what point in time do you guys say hey let’s take $50 million or $100 million or even a tranche of debt because it’s just so at a rack relative to the value of the stock and there is so much cash sitting there?
Operator
Jay, can you check if your phone is on mute.
Jay Goldstein – JBG Capital
Can you hear me now?
Jay Ji
Yes.
Jay Goldstein – JBG Capital
Yes, I can hear you sorry.
Jay Ji
Yes, so yes we do have very good cash position and we are very careful to spend our cash and we needed to – in future probably we need to run our cash flow – like M&A, some good opportunities, this kind of…
Operator
Jay, we’ve lost you again, can you check it…
Jay Goldstein – JBG Capital
No I’m listening I just – I think from the investors vantage point it’s great to keep your powder dry for M&A and so forth, but as we sit here today even just a small use of the cash to buyback stock, if the statement is we believe our shares are dramatically undervalued as you stated earlier in the press release, well there is something you can do about that and small expenditure on buying back some stock would go very significant way towards realigning the share price with the overall cash and asset position of the company.
Now if you just look at it from the standpoint of [indiscernible] $1.50 book value six and that’s assuming the real estate value that’s carried at submarket rates presumably. So it’s even higher I mean where are you going to be able to make an acquisition, where the deployment of your capital is going to be an 80% return on invested capital as it would be or even in a conservative scenario, if you deployed $50 million and bought back your stock and the stock would have doubled because of it. Where are you going to deploy $50 million and get instantaneous 100% return on invested capital, it would be very hard to do. So the point from the shareholder base is while you want to keep your power dry and your balance sheet strong, maybe there is a better balance that you could achieve from protecting shareholders that would more closely align the interest of your shareholder base with the interest of the company.
Jay Ji
Well, we will consider your suggestion, well at this time, we have not again any idea for shares to be projected at the moment, at the corporate level. We will definitely consider your suggestion.
Operator
I think we have no more questions in the queue at the moment. We’ll now turn the call back to the management for closing comment. Please go ahead.
Jay Ji
Thank you everyone for joining in today’s call. We look forward to speaking with you on our next quarter results. Please feel free to follow-up with us if you have any additional questions. Have a nice Thanksgiving Day. Bye-bye.
Operator
Ladies and gentlemen, that concludes your call for today. Thank you for joining. You may now disconnect.
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