SGOCO Group, Ltd.
Q4 2012 Earnings Call Transcript

Published: 22 Apr 2013

[Operator:]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the SGOCO Group Limited Fourth Quarter 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, April 22, 2013. I would now like to turn the conference over to Serena Wu. Please go ahead, Ms. Wu.

[Serena Wu:]

Thank you, operator. Good morning, everyone and thank you for joining us on SGOCO’s fourth quarter and fiscal year 2012 earnings conference call. My name is Serena Wu, and I am the Investor Relations Manager of the company. Also joining me on today’s call are Mr. David Xu, CFO of SGOCO Group, and Mr. (Tony Zhao), the Finance Manager of SGOCO Group. Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements, which are subject to risks and uncertainties. Our earnings release issued on April 19 and our SEC filings, including our most recent Annual Report on Form 20-F, contain additional information about factors, that could cause actual results to differ from management expectations. All amounts noted in this conference call are in U.S. dollars unless otherwise noted. The company does not assume any obligations to update information discussed in this conference call or in its filing. Now, I would like to turn the call over to David, the CFO of the company.

[David Xu:]

Thank you, Serena. We are very pleased to report a solid fourth quarter financial results and a reasonably good fiscal year results in the 2012. During the past fiscal year, we experienced increased competition in China’s general display market. In response to the competition, SGOCO chose to transition itself from a manufacturing focused business model to a business model, which focuses on research and developmen, sales and distribution, and to allocate its key resources to these areas. We are pleased to see the benefits of moving upwards in the value chain, and this benefit has started to reflect in our operational results in the fourth quarter 2012. In addition, we believe these operational improvements shown in the fourth quarter of 2012 will continue in 2013. Especially in 2013, we expect to sell more of our market-oriented, application-specific products. Those products are part of the solution products customized for large industrial, industry end users. Those customized solution products typically have higher gross margin than those of our standard product offering. Management believes that our renewed focus on this development and distribution will set a critical foundation for establishing SGOCO’s future market presence in China’s display market. With that, I will hand the call back to Serena, who will discuss in greater detail of our financial results. Back to you, Serena.

[Serena Wu:]

Thank you, David. For the fourth quarter of 2012, the company achieved solid financial and operational results. Our total revenues increased 144% to $63.4 million from $26 million in the third quarter. Of the total revenues in the fourth quarter, 64.8%, or $41.1 million were generated SGOCO’s own-branded sales and the remaining $22.3 million, or 35.2% of total revenues were generated from OEM businesses. Overall gross margin for the fourth quarter improved to 7.7% from 3.6% in the third quarter and a gross margin for SGOCO’s own-branded products improved to 7.9% in the fourth quarter from 4.8% for the third quarter. Selling, general, and administrative expenses for the fourth quarter decreased from $1.7 million to $1.4 million. SG&A expenses as a percentage of total revenues also decreased to 2.2% from 6.5% in the third quarter. The significant percentage decrease in the SG&A expenses for the fourth quarter was mainly because of the one-time fees related to the NASDAQ listing-related services were largely paid off in or prior to the third quarter of fiscal year 2012. Net income was $3.2 million for the fourth quarter with a 5% of net margin, which compares to a loss of $1.1 million quarter-over-quarter. Diluted earnings per share for the quarter were $0.19 as compared to a diluted loss per share of $0.06 for the third quarter of 2012. Now, before I move on to the full year 2012 results, I like to caution everyone that given the significant changes to our business model and the balance sheet after the disposal of our manufacturing facilities in the fourth quarter of last year, the year-over-year comparison of the financial results are less relevant and quarter-over-quarter results are more comparable. For the fiscal year 2012, SGOCO generated $166.7 million in revenues as compared to $313.1 million in 2011. The year-over-year sales decrease was primarily due to the change in client mix, reduction of sales volumes, and a decrease in average selling prices of our display products due to increased competition in the marketplace. The units sold in 2012 were 1.9 million as compared with 3.4 million units sold in 2011. During fiscal year 2012, our revenue consisted of 60.6% of sales from our own SGOCO branded products and 29.4% of sales from non-SGOCO branded products and OEM customers, which compares to 61.5% and 38.5% for our own-branded product sales versus non-SGOCO branded sales in the previous fiscal year. Cost of goods sold decreased 44.8% from $279.4 million to $154.2 million in fiscal year 2012. The decrease in the cost of goods sold was mainly due to reduced sales volume for our display products. After the sales of Honesty Group, our cost of goods sold consisted of the cost of finished products purchased from outsourced manufacturers, including our disposed manufacturing facility, Honesty Group and its subsidiaries. For fiscal year 2012, the amount of finished products purchased from Honesty Group and its subsidiaries was $119.3 million, or 77% of total purchases. Gross profit in fiscal year 2012 was $12.5 million, or 7.5% of total revenues as compared to $33.7 million, or 10.8% for the previous fiscal year. Overall gross margin during 2012 was negatively impacted by the increased fees charged by the Chinese authorities for recycling imported monitors. Additional costs for outsourcing manufacturing as we do not own any manufacturing facilities as well as price decreases in monitors in more serious market competition in China’s general display market. In response to the intense competition and pricing pressure, SGOCO has faced competitors through transitioning itself from a manufacturing focused heavy asset business model to a light-asset business model, then concentrate on the development and distribution of its own SGOCO brands and license brands. The gross margin for these own-branded products was 8.4% in fiscal 2012 as compared to 6.2% for OEM businesses. Going forward, the company also focuses on selling more application-specific products with higher gross margin. SG&A expenses for fiscal 2012 were $6 million, or 3.6% of total revenues, as compared with $7.5 million, or 2.4% of total revenues for fiscal 2011. And it’s noteworthy that in 2012, there was an approximately $1.7 million in one-time fee related to the company’s NASDAQ trading halt and a change in auditors in 2012, which represented around 1% of total revenue. As a result of the abovementioned factors, our net income for 2012 was $4.2 million as compared to a $16.6 million for the previous fiscal year. Net margins were 2.5% and 5.3% for the years ended December 31, 2012 and 2011, respectively. For fiscal 2012, SGOCO reported $0.25 in diluted earnings per share. Moving to the balance sheet, as of December 31, 2012, the company held $11.5 million in cash and cash equivalents. The company reported 3.86 in the current ratio and $78.1 million in its working capital. The strong balance sheet and cash position will continue to support SGOCO in the transition of its business model. For fiscal year 2012, our average receivables collection period was 87 days as compared to 44 days year-over-year. Inventory turnover days were 9 days in 2012, which shortened from 13 days in 2011. The longer AR days SGOCO provided to its distributors was largely due to the company’s effort in retaining quality distributors in the face of increased competition in China’s general display market. The improvement in inventory turnover was due to the smaller inventory position that the company is able to keep after the sale of Honesty Group as well as improved coordination between our sales and purchase departments. Overall conversion cycle in 2012 for AR and inventory was 96 days, which is within our targeted 80 to 100 days conversion cycle. With that, I would like to conclude the management presentation and open up the floor for questions and answers. Operator, please?

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And we have no questions at the moment. (Operator Instructions) There are no questions at this time. I will hand it back to the speakers.

[David Xu:]

Thank you everyone for coming today. This is David Xu, the CFO. And if you have other questions, please feel free to contact with our IR e-mail address, and you can also call us directly. Thank you for coming in today and we are looking forward to have a better 2013. Thank you.

[Serena Wu:]

Thank you, and have a good day. Bye.

[Operator:]

Ladies and gentlemen, this concludes the SGOCO Group Limited fourth quarter 2012 earnings conference call. Thank you for your participation. You may now disconnect.