Charm Communications Inc. Announces Unaudited First Quarter 2012 Results

BEIJING, May 17, 2012 /PRNewswire-Asia-FirstCall/ -- Charm Communications Inc. (NASDAQ: CHRM) ("Charm" or the "Company"), a leading advertising agency in China, today announced its unaudited financial results for the first quarter ended March 31, 2012.

First Quarter 2012 Highlights

• Turnover in the first quarter of 2012 grew 6.1% year over year to $210.4 million
• Revenues for Charm's advertising agency business grew 44.6% year over year to $10.3 million in the first quarter of 2012
• Revenues for Charm's media investment management business declined 58.9% year over year to $22.2 million in the first quarter of 2012 mainly due to a change in the Company's media asset mixture to reduce exposure to regulatory risks
• Revenues in the first quarter of 2012, as a result of the above, declined 46.1% year over year to $33.5 million
• Gross profit for the first quarter of 2012 declined 33.7% year over year to $9.8 million due to lower contribution from the media investment management business
• Net income for the first quarter of 2012 declined 90.0% year over year to $0.8 million
• Non-GAAP net income, which excludes share-based compensation expenses, amortization of intangible assets and impairment on investments, declined 79.1% year over year to $1.9 million in the first quarter of 2012
• Basic net income per American depositary share ("ADS") for the first quarter of 2012 was $0.01, compared to $0.20 for the first quarter of 2011 and $0.38 for the fourth quarter of 2011

"We achieved robust growth in our core advertising agency business, despite the softer-than-usual advertising environment in the first quarter," said Mr. He Dang, Charm's founder, chairman and chief executive officer. "We will continue to enhance the services and capabilities of our agency services with investments in talent and infrastructure, especially in the faster-growing digital space."

"Although we reduced our exposure to satellite channels in our media business, the joint impact of macro uncertainties and regulatory changes was greater than anticipated and resulted in weaker sales. In this challenging macro environment, our goal is to minimize our short-term media inventory risk while looking opportunistically for long-term media partners, especially as media prices begin to rationalize," concluded Mr. Dang.

Mr. Wei Zhou, Charm's chief financial officer, added, "We saw solid turnover growth in our television and internet agency businesses as a result of strategic investments to enhance our services and capabilities. Looking ahead, 2012 will remain a key investment year for Charm, as talent and infrastructure remain the key building blocks to support our long-term growth."

First quarter 2012 Results

Turnover (non-GAAP)

The Company uses turnover (non-GAAP), defined as total customer advertising spending placed through or with Charm, to reflect the scale of its business.

The 6.1% year-over-year increase in total turnover was mainly due to the increase in the number of advertising clients and the increase in advertising spending from existing clients. The 17.4% quarter-over-quarter decrease in turnover was largely attributed to the decline in the media investment business as well as seasonal factors.

The 30.5% year-over-year increase in the advertising agency business, or agency business, turnover was mainly due to the increase in the number of new agency clients and the increase in advertising spending from existing agency clients. The 0.5% quarter-over-quarter decline in turnover was mainly attributed to slightly weaker demand in the first quarter due to seasonal factors. In the first quarter of 2012, Charm's agency business had 160 advertisers, compared to 153 advertisers in the fourth quarter of 2011 and 140 advertisers in the first quarter of 2011.

The revenue extraction rate, which is defined as revenue divided by turnover, was 5.5% for the agency business, compared to 4.9% for the first quarter of 2011 and 6.2% for the fourth quarter of 2011. The year-over-year increase in the revenue extraction rate was mainly due to the increased advertising spending on non-CCTV media platforms, internet and satellite channels, which have a higher extraction rate. The quarter-over-quarter decrease in the revenue extraction rate was mainly due to strong, seasonal-related placements in the first quarter on China Central Television ("CCTV"), which generally has slightly lower extraction rates compared to other media platforms. Charm expects the revenue extraction rate to increase as the Company expands its full-service offerings across all media platforms under Charm Advertising and ramps up digital media offerings under Charm Interactive and Charm Click.

The 58.9% year-over-year and 66.2% quarter-over-quarter turnover decrease (equivalent to GAAP revenue) in the media investment management business, or principal media business, which operates under the Shangxing Media brand, was mainly due to the dropping of several media assets in order to modify the Company's media inventory mix and reduce risks associated with uncertainties in the satellite market following recent regulatory changes. For the first quarter of 2012, Charm had 150 advertisers for its principal media business, compared with 325 advertisers for the first quarter of 2011. The decline in advertisers is mainly due to the dropping of Hubei Provincial Economic TV, which had a large number of small advertisers.

Revenues

The increase in agency revenues is consistent with the changes in turnover. The decrease in principal media business revenues is consistent with the changes in turnover while the quarter-to-quarter decrease in branding and identity services is primarily due to decreased client demand for creative services due to seasonal factors in the first quarter of 2012.

Gross Profit

Charm mainly attributes the year-over-year decrease in cost of revenues to the dropping of several media assets in order to modify the Company's media inventory mix due to uncertainties in the satellite market following recent regulatory changes. The year-over-year decline in gross profit was due to a lower contribution from the media investment management business.

Operating Profit

The 48.2% year-over-year increase in selling and marketing expenses was primarily due to the continued investment in the Company's digital business, including increased headcount at Charm Interactive and Charm Click. The 23.1% quarter-over-quarter decrease in selling and marketing expenses was primarily due to seasonal factors as fewer marketing events were held in the first quarter of 2012.

General and administrative expenses in the first quarter of 2012 grew 20.0% year over year and decreased 36.5% quarter over quarter to $2.1 million. The year-over-year increase was mainly attributed to investment in infrastructure to support long-term growth, such as office expansion and information technology ("IT") systems.

Net Income

*The Company's non-GAAP net income excludes share-based compensation expenses, amortization of intangible assets and impairments on investments.

Each ADS represents two common shares. The weighted average shares used to compute basic net income per ADS for the first quarter of 2012 is 39,068,333. As of March 31, 2012, 38,967,941 ADS were issued and outstanding.

Cash Flows and Cash Position

Net cash outflow from operations for the first quarter of 2012 was $4.7 million, which is mainly due to deposits made for new CCTV media inventory. As of March 31, 2012, the Company had cash and cash equivalents of $132.5 million, compared to $139.4 million at the end of the fourth quarter of 2011.

Customers

In the first quarter of 2012, Charm's agency business had 160 advertisers, compared to 153 advertisers in the fourth quarter of 2011 and 140 advertisers in the first quarter of 2011.

In the first quarter of 2012, Charm's principal media business had 150 advertisers, compared to 325 advertisers in the first quarter of 2011

Employee Headcount

As of March 31, 2012, the Company had 764 employees, compared to 691 employees as of December 31, 2011.

Recent Business Developments

In February 2012, Charm was named CCTV's "Top Advertising Agency" for the ninth consecutive year and tenth overall, extending its dominant run as the go-to agency for advertisers on China's largest television network.

In March 2012, Charm Click received the 2012 Discovery Award from Baidu, Inc. ("Baidu"), the leading Chinese-language internet search provider, as well as the 2011 Outstanding Partner Award from Taobao, China's largest e-commerce marketplace operator. The awards were based on the number of Charm Click clients, the volume of billings and the effectiveness of the SEM solutions delivered to both Baidu and Taobao in 2011.

In April 2012, Charm paid a cash dividend of US$0.16 per ordinary share, which is equivalent to US$0.32 per ADS. In the future, Charm's Board of Directors will evaluate the Company's dividend policy on an annual basis.

In April 2012, Charm established a three-year sponsorship and promotional agreement with various Chinese Winter Olympic sports associations, including China's ice hockey, curling, short-track speed skating, figure skating, and freestyle skiing teams. The cooperation initiatives will be managed by Charm's new sports marketing department, which is led by Mr. Lei Wu, a veteran of the sports marketing business and who joined Charm from the CCTV Sports and Entertainment Group.

In May 2012, Charm signed an exclusive advertising agency agreement with Beijing Television ("BTV") to operate on its sports channel ("BTV-Sports"), effective June 1, 2012 to December 31, 2014. BTV-Sports is a 24-hour sports channel broadcasting to the greater Beijing area with programming that includes live and recorded popular athletic events such as the English Premier League, UEFA Champions League, the Chinese Basketball Association and the (U.S.) National Basketball Association. Charm expects the initial payment and ramp-up period to impact the Company's second quarter results.

Charm won the following accounts in the first quarter of 2012:

• Charm Advertising won the overall television media business for TCL and Baihe.com
• Charm Interactive won the full digital campaign for AAE Travel, a joint venture between the world's leading online travel company, Expedia, and award-winning low-cost airline, AirAsia
• Charm Click won the search engine marketing businesses for Tommy Hilfiger and MG Cosmetics

Business Outlook

*The Company's non-GAAP net income excludes share-based compensation expenses, amortization of intangible assets and impairments on investments.

The Company bases these estimates on a foreign exchange rate of RMB6.30 to US$1.00. This forecast reflects the Company's current and preliminary view, which is subject to change.

Non-GAAP Financial Measures:

To supplement the unaudited condensed consolidated financial information presented in accordance with Accounting Principles Generally Accepted in the United States of America ("GAAP"), the Company also provides the following non-GAAP financial measures: "turnover," which is defined as total customer advertising spending placed through or with Charm, and "non-GAAP net income," which is defined as GAAP net income excluding stock-based compensation expenses, amortization of intangible assets and impairment on investments.

The non-GAAP financial measures are provided to enhance investors' overall understanding of the Company's current and past financial performance in ongoing core operations as well as prospects for the future. These measures should be considered in addition to results prepared and presented in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. Management uses both GAAP and non-GAAP information in evaluating and operating the Company's business internally and therefore deems it important to provide all of this information to investors.

Cautions on Use of Non-GAAP Measures

In addition to Charm's consolidated financial results prepared under US GAAP, the Company also provides non-GAAP financial measures, including "turnover" and "non-GAAP net income." The Company believes that the non-GAAP financial measures provide investors with another method for assessing its operating results in a manner that is focused on the performance of its ongoing operations.

Management believes investors will benefit from greater transparency in referring to these non-GAAP financial measures when assessing the Company's operating results, as well as when forecasting and analyzing future periods. However, management recognizes that:

• these non-GAAP financial measures are limited in their usefulness and should be considered only as a supplement to the Company's GAAP financial measures;
• these non-GAAP financial measures should not be considered in isolation from, or as a substitute for, the Company's GAAP financial measures;
• these non-GAAP financial measures should not be considered to be superior to the Company's GAAP financial measures; and
• these non-GAAP financial measures were not prepared in accordance with GAAP and investors should not assume that the non-GAAP financial measures presented in this earnings release were prepared under a comprehensive set of rules or principles.

Further, these non-GAAP financial measures may be unique to the Company, as they may be different from non-GAAP financial measures used by other companies. As such, this presentation of non-GAAP financial measures may not enhance the comparability of the Company's results to the results of other companies. Readers are cautioned not to view non-GAAP results on a stand-alone basis or as a substitute for results under GAAP, or as being comparable to results reported or forecasted by other companies.

A reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure or measures appears at the end of this press release.

Conference Call

Charm's management team will hold an earnings conference call at 8 a.m. U.S. Eastern Time (8 p.m. Beijing/Hong Kong Time) on Thursday, May 17, 2012.

Dial-in details for the conference call are as follows:

A replay of the call will be available from 1 a.m. May 18, 2012 until May 25, 2012 U.S. Eastern Time. Dial-in details for the replay are as follows:

Additionally, an archived webcast of this call will be available on the Investor Relations section of the Charm web site at http:/ir.charmgroup.cn.

About Charm

Charm Communications Inc. (NASDAQ: CHRM) is a leading advertising agency group in China that offers integrated advertising services with particular focus on television and the internet. Charm's integrated advertising services include full media planning and buying, as well as creative and branding services. Charm has built a full service digital advertising platform, which offers digital campaign capabilities across all key digital media, including search engines, display portals, online video sites and social networking services. Charm also secures advertising inventory and other advertising rights, such as sponsorships and branded content, from premium media networks and resells to clients as part of its integrated media offerings. Charm's clients include China's top domestic brands, as well as some major international brands, across a wide range of industries. Since 2003 Charm has been the top agency every year for China's leading television network, China Central Television (CCTV). For more information, please go to http://ir.charmgroup.cn.

Safe Harbor Statement

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in 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" and similar statements. All statements other than statements of historical fact in this press release are forward-looking statements and involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements are based on management's current expectations, assumptions, estimates and projections about the Company and the industry in which the Company operates, but involve a number of unknown risks and uncertainties. Further information regarding these and other risks is included in Charm's filings with the U.S. Securities and Exchange Commission, including its registration statement on Form F-1. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that such expectations will turn out to be correct, and actual results may differ materially from the anticipated results. You are urged to consider these factors carefully in evaluating the forward-looking statements contained herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by these cautionary statements.

For investor and media inquiries, please contact:

In China:

Mr. Kevin Sun
IR Department
Charm Communications Inc.
Phone: +86-10-8556-2527
Email: ir@charmgroup.cn

In the U.S.:

Ms. Jessica Barist Cohen
Ogilvy Financial, New York
Phone: +1-646-460-9989
Email: chrm@ogilvy.com