China Digital TV Announces Unaudited First Quarter 2014 Results

BEIJING, May 21, 2014 /PRNewswire/ -- China Digital TV Holding Co., Ltd. (NYSE: STV) ("China Digital TV" or the "Company"), the leading provider of conditional access ("CA") systems and comprehensive services to China's expanding digital television market, today announced its unaudited financial results for the first quarter ended March 31, 2014.

Highlights for the First Quarter2014

• Net revenues in the first quarter of 2014 were US$18.2 million, representing an 8.7% decrease from the same period in 2013 and a 29.8% decrease from the fourth quarter of 2013.
• China Digital TV shipped approximately 3.56 million smart cards in the first quarter of 2014, compared to 3.71 million in the same period in 2013 and 4.95 million in the fourth quarter of 2013.
• Gross margin in the first quarter of 2014 was 78.6%, compared to 73.4% in the same period in 2013 and 76.4% in the fourth quarter of 2013.
• Diluted earnings per American depositary share (one ADS representing one ordinary share), or ADS, in the first quarter of 2014 were US$0.07, compared to US$0.13 in the same period in 2013 and US$0.17 in the fourth quarter of 2013.

"We are pleased to report that China Digital TV's first quarter 2014 smart card shipments and net revenues were in line with our guidance," said Mr. Jianhua Zhu, China Digital TV's chairman and chief executive officer. "Our traditional smart card business saw relatively steady shipments on an annual basis on the strength of solid domestic demand from Jiangsu, Guangdong, Jiangxi and other key regions of China. In the first quarter, China Digital TV continued to maintain a strong leading position in the Chinese smart card market with a 52% share."

Mr. Zhu continued, "As part of our diversification strategy to increase our focus on value-added services, we signed strategic cooperative cloud computing services agreements with cable operators including Beijing Gehua and Jishi Media. In an important step, we began signing contracts with IPTV operators to deploy our cloud computing platforms, including with the Guangdong and Fujian branches of China Telecom, during the first quarter. In addition, we also continued our cooperation with Xiaomi to support its smart-TV products with DVB and OTT services. China Digital TV will continue to seek cooperation with more smart-TV manufacturers and cable operators to achieve mutually beneficial results, while simultaneously growing our international smart card business, where we continue to see encouraging progress."

Mr. Zhenwen Liang, China Digital TV's chief financial officer, commented, "Effective execution by our team reduced our overall operating expenses and increased our operating margins compared to the same period last year. We will continue to evaluate the best ways to manage our operating expenses and improve our overall efficiency. China Digital TV also recently issued our fifth special cash dividend to shareholders as part of our ongoing efforts to maximize shareholder value, and we will continue to evaluate our policy in this area in the quarters ahead."

First Quarter 2014 Results

(Note: Unless otherwise stated, all financial statement measures stated in this press release are based on generally accepted accounting principles in the United States ("U.S. GAAP").)

In the first quarter of 2014, China Digital TV generated net revenues of US$18.2 million, a decrease of 8.7% from the first quarter of 2013 and a decrease of 29.8% from the fourth quarter of 2013. The year-over-year decrease was primarily due to decreases in revenue from the sales of smart cards and services, which were partially offset by an increase in revenue from other products, such as surface mounted chips. The quarter-over-quarter decrease was primarily due to a decrease in net revenues from sales of smart cards caused by seasonality associated with the Chinese New Year holiday.

In the first quarter of 2014, revenues from the Company's top five customers accounted for 25.0% of total revenues, compared to 25.8% in the fourth quarter of 2013.

Revenue Breakdown

Revenues from smart cards and other products were US$17.1 million in the first quarter of 2014, a decrease of 5.4% from the same period in 2013 and a decrease of 31.2% from the fourth quarter of 2013. The year-over-year decrease was mainly due to a decrease in smart cards shipment volumes, which was partially offset by an increase in sales of other products such as surface mounted chips. The quarter-over-quarter decrease was primarily due to a decrease in smart card shipment volumes caused by seasonality associated with the Chinese New Year holiday. Sales of smart cards and other products accounted for 92.3% of total revenues in the first quarter of 2014, compared to 95.0% in the fourth quarter of 2013.

Revenues from services were US$1.4 million in the first quarter of 2014, a decrease of 31.5% from the same period in 2013 and an increase of 8.0% from the fourth quarter of 2013. The year-over-year decrease was primarily due to a decrease in revenue from head-end system integration, which was partially offset by increases in revenues from royalty income and licensing income. The quarter-over-quarter increase was mainly due to an increase in revenue from royalty income. Revenues from services accounted for 7.7% of total revenues in the first quarter of 2014, compared to 5.0% in the fourth quarter of 2013.

Gross profit in the first quarter of 2014 was US$14.3 million, a decrease of 2.3% from the same period in 2013 and a decrease of 27.9% from the fourth quarter of 2013. Gross margin, which is equal to gross profit divided by net revenues, was 78.6% in the first quarter of 2014, compared to 73.4% in the same period in 2013 and 76.4% in the fourth quarter of 2013. The year-over-year and quarter-over-quarter increases in gross margin were primarily due to decreases in cost of revenues, attributable to decreased inventory write-downs with respect to integrated chips and multimedia home entertainment boxes.

In the first quarter of 2014, the average selling price of smart cards decreased by 7.1% compared to the fourth quarter of 2013. In addition, the unit cost of smart cards decreased by 2.1% compared to the fourth quarter of 2013.

Operating expenses in the first quarter of 2014 were US$10.5 million, a decrease of 13.9% from the same period in 2013 and an increase of 3.5% from the fourth quarter of 2013.

• Research and development expenses in the first quarter of 2014 were US$4.0 million, a decrease of 18.1% from the same period in 2013 and a decrease of 1.9% from the fourth quarter of 2013. The year-over-year decrease was primarily due to decreases in personnel related expenses resulting from lower headcount, project development expenses, share-based compensation and office rent. Research and development expenses remained relatively stable quarter-over-quarter.
• Selling and marketing expenses in the first quarter of 2014 were US$4.1 million, an increase of 2.0% from the same period in 2013 and an increase of 3.8% from the fourth quarter of 2013. The year-over-year and quarter-over-quarter increases were mainly due to increases in marketing expenses.
• General and administrative expenses in the first quarter of 2014 were US$2.4 million, a decrease of 27.0% from the same period in 2013 and an increase of 13.3% from the fourth quarter of 2013. The year-over-year decrease was mainly due to a decrease in allowance for doubtful accounts. The quarter-over-quarter increase was primarily due to an increase in personnel related expenses resulting from increased headcount.

Income from operations in the first quarter of 2014 was US$3.8 million, a 55.9% increase from the same period in 2013 and a 60.8% decrease from the fourth quarter of 2013.

Operating margin, defined as income from operations divided by net revenues, in the first quarter of 2014 was 20.8%, compared to 12.2% in the same period in 2013 and 37.3% in the fourth quarter of 2013.

Interest income in the first quarter of 2014 was US$0.7 million, a 76.9% increase from the same period in 2013 and a 17.1% increase from the fourth quarter of 2013.

Income tax expenses in the first quarter of 2014 were US$0.9 million, compared to US$4.5 million in income tax benefits in the same period of 2013 and US$1.1 million in income tax expenses in the fourth quarter of 2013. In the first quarter of 2013, the Company's PRC operating subsidiary, Beijing Super TV Co., Ltd., was designated as a "key software enterprise" for the tax years of 2011 and 2012 by the relevant PRC government authorities and, as a result, was entitled to a preferential income tax rate of 10% in each of those years. As the Company accrued income tax expenses at a rate of 15% in 2011 and 2012, the accrued income tax expenses were partially reversed in the first quarter of 2013. The quarter-over-quarter decrease in income tax expenses in the first quarter of 2014 was mainly due to a decrease in taxable income.

Net loss attributable to noncontrolling interest in the first quarter of 2014 was US$0.2 million, a decrease of 65.9% from the same period in 2013 and a decrease of 12.0% from the fourth quarter of 2013. The year-over-year and quarter-over-quarter decreases were largely due to decreases in net losses recorded by the Company's majority-owned subsidiaries.

Net income attributable to holders of ordinary shares in the first quarter of 2014 was US$4.1 million, a decrease of 48.3% from the same period in 2013 and a decrease of 59.6% from the fourth quarter of 2013.

Non-GAAP net income attributable to holders of ordinary shares, defined as net income excluding certain one-time or non-cash expenses, such as share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments, in the first quarter of 2014 was US$4.4 million, a decrease of 50.5% from the same period in 2013 and a decrease of 58.0% from the fourth quarter of 2013. For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP measures" set forth at the end of this release.

Balance Sheet and Cash Flow

As of March 31, 2014, China Digital TV had cash and cash equivalents and restricted cash totaling US$83.5 million. In the first quarter of 2014, cash flow generated from operations was approximately US$4.5 million.

Unaudited Additional Information

The Company sets forth at the end of this press release unaudited additional information relating to the financial results for its CA business, which consists of smart card products and related other products, such as surface mounted chips, as well as related services; and other business, which consists of other products, such as multimedia home entertainment boxes and cloud computing, as well as related services. In the first quarter of 2014, revenues from the Company's CA business were US$18.3 million, accounting for 98.7% of total revenues, and revenues from other business were US$0.2 million, accounting for 1.3% of total revenues. Gross profit of the CA and other business in the first quarter of 2014 were US$14.3 million and US$0.004 million, respectively.

Business Outlook

Based on information available as of May 20, 2014, China Digital TV expects smart card shipment volumes in the second quarter of 2014 to be in the range of 3.5 million to 3.8 million. Net revenues in the second quarter of 2014 are expected to be in the range of US$15.4 million to US$16.6 million.

Conference Call Information

The Company will hold an earnings conference call at 8:00 p.m. on Tuesday, May 20, 2014, U.S. Eastern Time (8:00 a.m. on Wednesday, May 21, 2014, Beijing/Hong Kong Time).

Conference Call Dial-in Information

Please dial-in 10 minutes before the call is scheduled to begin and provide the passcode to join the call.

A replay of the call will be available for one week between 11:00 p.m. on May 20, 2014 and 11:59 p.m. on May 27, 2014 U.S. Eastern Time.

Replay Information

In addition, a live and archived webcast of this conference call will be accessible through the Investor Relations section of China Digital TV's website at http://ir.chinadtv.cn.

Safe Harbor Statements

This announcement 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. Such forward-looking statements are made under the "safe harbor" provisions of the 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," "may," "should" and similar expressions. Such forward-looking statements include, without limitation, statements regarding the outlook for the second quarter of 2014 and comments by management in this announcement about trends in the CA systems, digital television, cable television and related industries in the PRC and China Digital TV's strategic and operational plans and future market positions. China Digital TV may also make forward-looking statements in its periodic reports filed with the 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. Statements that are not historical facts, including statements about China Digital TV's beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from projections contained or implied in any forward-looking statement, including but not limited to the following: competition in the CA systems, digital television, cable television and related industries in the PRC and the impact of such competition on prices, our ability to implement our business strategies, changes in technology, the progress of the television digitalization in the PRC, the structure of the cable television industry or television viewer preferences, changes in PRC laws, regulations or policies with respect to the CA systems, digital television, cable television and related industries, including the extent of non-PRC companies' participation in such industries, and changes in political, economic, legal and social conditions in the PRC, including the government's policies with respect to economic growth, foreign exchange and foreign investment.

Further information regarding these and other risks and uncertainties is included in our annual report on Form 20-F and other documents filed with the Securities and Exchange Commission. China Digital TV does not assume any obligation to update any forward-looking statements, which apply only as of the date of this press release.

About China Digital TV

Founded in 2004, China Digital TV is the leading provider of CA systems to China's expanding digital television market. CA systems enable television network operators to manage the delivery of customized content and services to their subscribers. China Digital TV conducts substantially all of its business through its PRC subsidiary, Beijing Super TV Co., Ltd., and its affiliate, Beijing Novel-Super Digital TV Technology Co., Ltd., as well as subsidiaries of such affiliate.

For more information please visit the Investor Relations section of China Digital TV's website at http://ir.chinadtv.cn. The information contained in that website is not a part of this announcement.

For investor and media inquiries, please contact:

In China:

Nan Hao
Investor Relations Manager
Tel: +86-10-6297-1199 x 9780
Email: ir@chinadtv.cn

Josh Gartner
Brunswick Group
Tel: +86-10-5960-8600
Email: chinadigital@brunswickgroup.com

In the United States:

Cindy Zheng
Brunswick Group
Tel: +1-212-333 3810
Email: chinadigital@brunswickgroup.com

Reconciliation of Non-GAAP Measures

Non-GAAP net income attributable to holders of ordinary shares excludes certain one-time non-cash expenses, such as share-based compensation expenses, amortization of intangible assets acquired from business acquisitions and equity method investments. The Company believes that the non-GAAP net income provides meaningful supplemental information regarding the Company's performance and liquidity by excluding certain non-cash expenses that may not be indicative of its operating performance from a cash flow perspective. The Company believes that both management and investors benefit from referring to this additional information in assessing the Company's performance and when planning and forecasting future periods.