China Digital TV Announces Unaudited Second Quarter 2015 Results

BEIJING, August 14, 2015 /PRNewswire/ -- China Digital TV Holding Co., Ltd. (NYSE: STV) ("China Digital TV" or the "Company"), the leading provider of cloud-based application platforms and conditional access ("CA") systems which enable China's digital cable television market to offer and secure diversified content services, today announced its unaudited financial results for the second quarter ended June 30, 2015.

"In the second quarter, we remained steadfast in executing our expansion into new frontiers," stated Mr. Jianhua Zhu, China Digital TV's chief executive officer. "Our asset restructuring has progressed according to expectations and we hope to complete it by the end of the year. However, regulatory uncertainties remain and there is no assurance that the deal will close according to schedule or at all. China Digital TV, however, remains firmly committed to both its traditional business and its emerging cloud platform business. On the cloud front, Beijing Gehua added approximately 200,000 new registered users in the second quarter bringing our total to over 500,000, and we also recently signed an agreement with a cable operator in the Xinjiang autonomous region. Our cloud platform is not only rapidly expanding but also beginning to serve as an ecosystem for content providers to channel their creativity and mutually benefit with end users, cable operators and platform providers like ourselves."

Mr. Zhu continued, "Although the traditional domestic smart card market continued to decline in line with expectations, we saw positive developments in the network broadcasting platform (NBP) business. We have built key partnerships with Hubei and Guangdong cable operators that will support future demand for our NBP product. Furthermore, we are in the midst of engaging other provincial cable operators to commence joint NBP projects in the quarters to come."

Ms. Yue Qian, China Digital TV's acting chief financial officer, commented, "Our business continues to evolve; our traditional business's performance was soft and we expect that the smart card business will continue to decline over the next couple of quarters. However, we see great potential with our NBP business, and continue to be impressed by the development of our cloud platform. With a healthy balance sheet and promising early stage progress in our investments in emerging frontiers, we remain confident regarding the prospects of our business."

Second Quarter 2015 Results^[1]

In the second quarter of 2015, China Digital TV's smart card shipments decreased by 40.6% to approximately 2.11 million from 3.55 million in the prior year period.

China Digital TV's net revenues decreased by 39.3% to US$10.4 million from US$17.2 million in the prior year period. The decrease was primarily due to a decrease in revenues from the sales of smart cards caused by the general market decline of the mature CAS business.

Revenues from the Company's top five customers accounted for 37.0% of total revenues, as compared to 23.7% in the prior year period.

Revenue Breakdown

Revenues from smart cards decreased by 40.6% to US$8.9 million in the second quarter of 2015 from US$15.0 million in the prior year period. The decrease was mainly due to a decrease in shipment volumes of smart cards. Sales of smart cards accounted for 84.5% of total revenues in the second quarter of 2015, as compared to 86.0% in the prior year period.

Revenues from other products decreased by 54.8% to US$0.4 million in the second quarter of 2015 from US$0.9 million in the prior year period. The decrease was mainly attributable to lower sales of surface mounted chips and multimedia home entertainment boxes. Sales of other products accounted for 4.1% of total revenues in the second quarter of 2015, as compared to 5.4% in the prior year period.

Revenues from services decreased by 19.8% to US$1.2 million in the second quarter of 2015 from US$1.5 million in the prior year period. The decrease was primarily due to the decline in licensing income, which was partially offset by an increase in head-end system integration. Revenues from services accounted for 11.4% of total revenues in the second quarter of 2015, as compared to 8.6% in the prior year period.

Cost of revenues from smart cards and other products decreased by 46.6% to US$2.0 million in the second quarter of 2015 from US$3.7 million in the prior year period. The decrease was mainly due to a decline in cost of revenues from smart cards resulting from decreased shipment volumes of smart cards, as well as a decline in cost of revenues from multimedia home entertainments and surface mounted chips resulting from decreased shipment volumes of both products. Cost of revenues from smart cards and other products accounted for 55.8% and 10.2%, respectively, of total cost of revenues in the second quarter of 2015, as compared to 55.9% and 23.9% in the prior year period.

Cost of revenues from services increased by 9.0% to US$1.0 million in the second quarter of 2015 from US$0.9 million in the prior year period. The increase was mainly due to an increase in cost of revenues from head-end system integration. Cost of revenues from services accounted for 34.0% of total cost of revenues, as compared to 20.2% in the prior year period.

Gross profit in the second quarter of 2015 decreased by 40.7% to US$7.5 million from US$12.6 million in the prior year period. Gross margin, which is equal to gross profit divided by net revenues, was 71.6% in the second quarter of 2015, as compared to 73.3% in the prior year period. The decline in gross margin was primarily due to a decrease in gross margin of smart cards, attributable to increased unit cost of smart cards, which accounts for a high proportion of total revenues.

In the second quarter of 2015, the average selling price of smart cards remained relatively stable, as compared to the prior year period. In addition, the unit cost of smart cards increased by 8.5%, as compared to the prior year period.

Operating expenses in the second quarter of 2015 decreased by 11.9% to US$8.2 million from US$9.3 million in the prior year period.

• Research and development expenses in the second quarter of 2015 decreased by 7.4% to US$3.8 million from US$4.1 million in the prior year period. The decline was mainly due to a decrease in personnel related expenses resulting from lower headcount.
• Selling and marketing expenses in the second quarter of 2015 decreased by 21.3% to US$2.6 million from US$3.3 million in the prior year period. The decline was mainly due to a decrease in marketing activities relating to the Company's CA business.
• General and administrative expenses in the second quarter of 2015 decreased by 5.6% to US$1.8 million from US$2.0 million in the prior year period. The decline was mainly due to a decrease in consulting expenses.

Loss from operations in the second quarter of 2015 was US$0.8 million, as compared to an income from operations of US$3.3 million in the prior year period.

Income tax expenses in the second quarter of 2015 increased by 242.4% to US$0.9 million from US$0.3 million in the prior year period. In June 2014, the Company completed an internal reorganization. As a result of the reorganization, income tax expenses were reduced due to deductible investment losses arising from the equity transfers under the reorganization. Additionally, there was a difference in tax rate, with the Company's PRC operating subsidiary, Beijing Super TV Co., Ltd., accruing income tax expenses at a rate of 15% in the second quarter of 2015, as compared to 10% in the prior year period. The increase in income tax expenses in this quarter was mainly due to these two reasons.

Net loss attributable to holders of ordinary shares in the second quarter of 2015 was US$0.7 million, as compared to a net income attributable to holders of ordinary shares of US$4.4 million in the prior year period.

Non-GAAP net loss attributable to holders of ordinary shares^[2] in the second quarter of 2015 was US$0.6 million, as compared to a non-GAAP net income attributable to holders of ordinary shares of US$4.7 million in the prior year period^[3].

Balance Sheet and Cash Flow

As of June 30, 2015, China Digital TV had cash and cash equivalents and restricted cash totaling US$68.5 million. In the second quarter of 2015, cash flow generated from operations was approximately US$6.6 million.

Business Outlook

Based on information available as of August 13, 2015, China Digital TV expects smart card shipment volumes in the third quarter of 2015 to be in the range of 2.4 million to 2.7 million. Net revenues in the third quarter of 2015 are expected to be in the range of US$11.1 million to US$12.4 million.

Conference Call Information

The Company will hold an earnings conference call at 8:00 p.m. on Thursday, August 13, 2015, U.S. Eastern Time (8:00 a.m. on Friday, August 14, 2015, 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 10:00 p.m. on August 13, 2015 and 10:00 a.m. on August 21, 2015 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.

About China Digital TV

Founded in 2004, China Digital TV enables television network operators to manage, extend and diversify content services across households and public areas in China. China Digital TV is the leading provider of cloud-based application platforms and network broadcasting platform ("NBP") services to Chinese cable operators, helping them to effectively bring mobile gaming apps and other entertainment options to household television sets, and extend cable programming outside the home to any mobile device. China Digital TV is also the leading provider of Conditional Access ("CA") systems in China's digital television market. CA systems enable television network operators to secure the delivery of content to their subscribers. The Company has existing cooperation with nearly all of China's cable television operators.

For more information please visit the Investor Relations section of China Digital TV's website at http://ir.chinadtv.cn.

Safe Harbor Statement

This announcement contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States 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 third quarter of 2015 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.

For investor and media inquiries, please contact:

China Digital TV Holding Co., Ltd.
Nan Hao
Investor Relations Manager
Tel: +86-10-6297-1199 x 9780
Email: ir@chinadtv.cn

ICR, Inc.
Charles Eveslage
Tel: +1 (646) 328-1950
Email: stv@icrinc.com

[1] 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").

[2] Non-GAAP net income (loss) attributable to holders of ordinary shares is defined as net income (loss) excluding certain non-cash expenses, such as share-based compensation expenses, amortization of acquired intangible assets from business acquisitions and equity method investments.

[3] 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.

Reconciliation of Non-GAAP Measures

Non-GAAP net income (loss) attributable to holders of ordinary shares excludes certain 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 (loss) provides meaningful supplemental information regarding the Company's performance 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.

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