Stock Update (NASDAQ:DSKY): iDreamSky Technology Ltd (ADR) Reports Second Quarter 2015 Unaudited Financial Results


iDreamSky Technology Ltd (ADR) (NASDAQ:DSKY), China’s leading independent mobile game publishing platform, today reported unaudited financial results for the second quarter ended June 30, 2015.

Quarterly Highlights

  • Total revenues were RMB392.7 million (US$63.3 million1), up 109.8% from the same quarter last year, and up 5.6% sequentially.
  • Gross profit was RMB152.7 million (US$24.6 million), up 90.0% from the same quarter last year, and up 6.5% sequentially.
  • Non-GAAP adjusted net income2 was RMB51.8 million (US$8.4 million), up 59.8% from the same quarter last year, and down 9.6% sequentially.
  • Average revenue per paying user (“ARPPU”) was RMB17.8 (US$2.9), up 48.3% from the same quarter last year, and up 11.9% sequentially.
  • Average monthly active users (“MAUs”) were 110.2 million, up 15.4% from the same quarter last year, and down 7.1% sequentially.
  • Average monthly paying users (“MPUs”) were 7.1 million, up 36.5% from the same quarter last year, and down 9.0% sequentially.

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1 The United States dollar (US$) amounts disclosed in this press release are presented solely for the convenience of the reader. The conversion of Renminbi (RMB) into U.S. dollars is based on the noon buying rate of RMB6.2000 to US$1.00 as published by the Federal Reserve Bank of New York on June 30, 2015. The Company makes no representation that the Renminbi or U.S. dollar amounts referred to in this release could have been, or could be, converted at such rate or at all. The percentages stated are calculated based on the RMB amounts.

2 Non-GAAP adjusted net income is net income adjusted by excluding share-based compensation expenses and share of loss from equity investments. Non-GAAP measures and related reconciliations to GAAP measures are described in the accompanying sections titled “About Non-GAAP Financial Measures” and “Unaudited Reconciliation of Non-GAAP Financial Measures to Comparable GAAP Measures” at the end of this press release.

Mr. Michael Chen, Chief Executive Officer of iDreamSky, commented, “We are very pleased to report our second quarter of 2015 results which demonstrated the core strength of our increasingly popular mobile game platform and our growing game publishing capabilities. Specifically, as compared to the same period of the prior year, our total downloads and activations increased by 37.1% and our average MPU increased by 36.5%, respectively, despite the tightening payment measures implemented by Chinese mobile carriers. The impressive results enabled us to continue to be the largest independent mobile game publishing platform in China, with a 28.2% market share in the industry by number of active users, according to Analysys International, an independent market research firm. In an effort to address the tightening policies on certain billing and payment channels, we adopted corresponding measures which allowed us to minimize the impact on our operations. In addition, we have expanded our strategic partnerships with major mobile carriers in China and deepened our cooperation with them.”

Mr. Jun Zou, Chief Financial Officer of iDreamSky, stated, “The second quarter of 2015 witnessed our continued improvement in financial performance and investment planning. Specifically, as compared to the same period of the prior year, our total revenues increased by 109.8%, our game revenues increased by 102.1%, and our non-GAAP net income increased by 59.8%, respectively. Additionally, we were able to grow our total number of games to 55, compared to 40 games as of the end of the same quarter last year. In order to further enhance our future growth potential, we made a strategic investment in Rumble Entertainment, a California-based game development company which is unique in its focus on the gamer audience and exacting standards around quality gameplay. This investment will enable us to license and publish Rumble’s flagship mobile gaming titles, including Kings Road, to the Asia market in the near future.”

Key Operating Data

  For the Three Months Ended
  June 30, 2014 March 31, 2015 June 30, 2015
(in millions, except RMB and dollar amounts and percentages)
Downloads and activations(1) 76.2 113.6 104.5
Average MAUs(2) 95.5 118.6 110.2
Average DAUs(3) 22.9 28.4 26.2
Average MPUs(4) 5.2 7.8 7.1
ARPPU(5) RMB12.0 RMB15.9 RMB17.8 (US$2.9)
Paying ratio(6) 5.5% 6.6% 6.4%

 

(1) “Downloads and activations” refer to a completed download and installation of one of Company’s mobile games that successfully connects to the Company’s SDK network through log-in or registration by a user.

(2) “MAUs” refer to the number of unique accounts that interacted with the Company’s SDK network in a particular month. Average MAUs for a particular period is the average of the MAUs in each month during that period. An individual who has more than one unique account that interacted with the Company’s SDK network is counted as more than one active user.

(3) “Daily active users,” or “DAUs,” refer to the number of unique accounts that interacted with the Company’s SDK network in a particular day. Average DAUs for a particular period is the average of the DAUs in each day during that period. An individual who has more than one unique account that interacted with the Company’s SDK network is counted as more than one active user.

(4) “MPUs” refer to the number of unique accounts through which a payment is made in the Company’s mobile games in a particular month. Average MPUs for a particular period is the average of the MPUs in each month during that period. An individual who has more than one unique account through which a payment is made is counted as more than one paying user.

(5) “ARPPU” refers to the average amount of the revenue generated from each of the Company’s paying users.

(6) “Paying ratio” for a given quarter equals to average MPUs divided by average MAUs for that quarter.

Operating Review

Users

  • Average MAUs in the second quarter of 2015 were 110.2 million, up 15.4% from 95.5 million in the second quarter of 2014 and down 7.1% from 118.6 million in the first quarter of 2015.
  • Average DAUs in the second quarter of 2015 were 26.2 million, up 14.4% from 22.9 million in the second quarter of 2014 and down 7.7% from 28.4 million in the first quarter of 2015.
  • Total number of downloads and activations was 104.5 million in the second quarter of 2015, up 37.1% from 76.2 million in the second quarter of 2014 and down 8.0% from 113.6 million in the first quarter of 2015.

The year-over-year increase in average MAUs and average DAUs for the second quarter of 2015 was primarily due to the continued popularity of the Company’s games as it continued to (i) offer new games and special editions of existing games to attract new users, (ii) improve in-game functionalities and increase gameplay options to maintain user interest, (iii) increase cross-promotion activities to enhance user engagement, and (iv) run promotional events to reward user loyalty, all of which contributed to increased user stickiness on the Company’s game platform. The Company’s diversified game portfolio also contributed to user acquisition and retention. As of June 30, 2015, the Company operated 55 games, compared to 40 games as of June 30, 2014.

In addition, the Company continued to introduce new platform services and enhance existing platform services, including leaderboards and user tournaments that facilitate and encourage in-game interaction, competition and social networking among users, which made the Company’s mobile game publishing platform more engaging to its users.

The sequential decrease in average MAUs and average DAUs for the second quarter of 2015 was due to seasonality, as compared to the second quarter of each year, users typically have more time to play games in the first quarter of each year, where there are more public holidays and school breaks. In addition, the effects of seasonality are more prominent for the Company’s casual games, which are played by more students than mid- and hardcore games are.

In the second quarter of 2015, the Company maintained its leading position as the largest independent mobile game publishing platform in China, with a market share of 28.2% by number of active users, according to Analysys International, an independent market research firm.

Monetization

  • Average MPUs in the second quarter of 2015 were 7.1 million, up 36.5% from 5.2 million in the second quarter of 2014 and down 9.0% from 7.8 million in the first quarter of 2015.
  • Paying ratio in the second quarter of 2015 was 6.4%, up 16.4% from 5.5% in the second quarter of 2014 and down 3.0% from 6.6% in the first quarter of 2015.
  • ARPPU in the second quarter of 2015 was RMB17.8 (US$2.9), up 48.3% from RMB12.0 in the second quarter of 2014 and up 11.9% from RMB15.9 in the first quarter of 2015.

The year-over-year increase in average MPUs, paying ratio and ARPPU for the quarter was primarily due to the Company’s increasingly deeper understanding ofChina’s mobile game market and its effective monetization strategies. The Company’s greater insights into user habits and preferences have strengthened its ability to identify new monetization points suitable for mobile users in China, to enhance and optimize its virtual goods merchandising strategy, and to maintain user engagement through improving its various platform services. The popularity of both the Company’s existing and new games was also a major factor for the enhanced monetization.

The sequential decrease in average MPUs for the quarter was due to seasonality and the same factor contributing to the sequential decrease in average MAUs and average DAUs as discussed above. Paying ratio has remained stable sequentially. The sequential increase of ARPPU was primarily due to increased revenue contribution by the Company’s mid- and hardcore games, which typically have higher ARPPU, in the second quarter of 2015.

Game Portfolio

As of June 30, 2015, the Company had a diversified portfolio of 32 casual games and 23 mid- and hardcore games, compared with 29 casual games and 27 mid- and hardcore games as of March 31, 2015.  In the second quarter of 2015, the Company introduced a number of new games, including Changing Universe (苍穹变), a 3D MMORPG fantasy game based on a popular online novel, and Monument Valley (纪念碑谷), a highly acclaimed mobile puzzle game. In addition, during the second quarter of 2015, the Company has obtained a number of IPs rights. For example, the Company has launched a new edition of its renowned endless running game,Temple Run 2, adding characters and elements from Helios (赤道), a crime thriller movie released in 2015. The Company has also obtained IP rights relating to Seer(赛尔号), a popular animated movie in China, including the right to use its characters and story plots.

In the coming quarters, the Company will continue its efforts in providing more interesting games and high-quality services to its growing base of users, including J-game, a 3D ARPG and MOBA game developed by a famous game developer, King of Battles (乱斗之王), a fighting game developed by the Street Fighter product team,Inside Out Thought Bubbles, a casual game based on Walt Disney movie Inside Out, and Toy Blast, a highly addictive collapse puzzle game developed by Peak Games.

In order to further enhance its ability to obtain high-quality games from overseas and expand its business internationally, in the second quarter of 2015, the Company has made a strategic investment in Rumble Entertainment, Inc., a California-based game development company with strong game development capabilities.

Financial Review

For the Three Months Ended
June 30, 2014 March 31, 2015 June 30, 2015 June 30, 2015
RMB RMB RMB US$
(in thousands)
(unaudited)
Financial Summary:
Total revenues 187,152 371,852 392,661 63,333
Gross profit 80,365 143,373 152,678 24,626
Operating income (107,765) 48,313 34,669 5,592
Net income (116,419) 37,210 21,754 3,508
Non-GAAP adjusted net income 32,439 57,364 51,833 8,360
Net income/(loss) attributable to Company’s ordinary shareholders (209,493) 37,375 21,832 3,521

Revenues

Total revenues for the second quarter of 2015 were RMB392.7 million (US$63.3 million), representing an increase of 109.8% from RMB187.2 million for the second quarter of 2014 and an increase of 5.6% from RMB371.9 million for the first quarter of 2015.

The year-over-year increase in second quarter of 2015 total revenues were primarily due to the significant increase in game revenues as a result of the continued popularity of the Company’s existing games, its enhanced game portfolio and effective monetization strategies. The sequential increase was primarily due to an increase in other revenues of RMB14.5 million, which mainly consisted of revenues generated from the Company’s mobile advertising services as a result of the development of its advertising business.

Cost of Revenues

Cost of revenues for the second quarter of 2015 was RMB240.0 million (US$38.7 million), representing an increase of 124.7% from RMB106.8 million for the second quarter of 2014 and an increase of 5.0% from RMB228.5 million for the first quarter of 2015. Cost of revenues as a percentage of total revenues for the second quarter of 2015 was 61.1%, compared with 57.1% for the second quarter of 2014 and 61.4% for the first quarter of 2015.

The increase in cost of revenues as a percentage of total revenues from the same period last year was primarily due to (i) higher content provider costs for the Company’s mid- and hardcore games, which had an increased contribution to the Company’s total revenues during the quarter and whose revenue are accounted for on a gross basis and (ii) higher accumulated amortization expenses associated with games launched previously. Cost of revenues as a percentage of total revenues for the second quarter of 2015 remained at a similar level as that for the first quarter of 2015.

Gross Profit

As a result, the Company’s gross profit in the second quarter of 2015 was RMB152.7 million (US$24.6 million), representing an increase of 90.0% from RMB80.4 million for the second quarter of 2014 and an increase of 6.5% from RMB143.4 million for the first quarter of 2015.

Operating Income and Non-GAAP Adjusted Operating Income

Operating income in the second quarter of 2015 was RMB34.7 million (US$5.6 million), representing an increase from an operating loss of RMB107.8 million for the second quarter of 2014 and a decrease of 28.2% from RMB48.3 million for the first quarter of 2015. Non-GAAP adjusted operating income for the second quarter of 2015, which is operating income excluding share-based compensation expenses, was RMB64.5 million (US$10.4 million), representing an increase of 57.2% fromRMB41.1 million for the second quarter of 2014 and a decrease of 4.5% from RMB67.6 million for the first quarter of 2015 .

  • Research and development expenses. Research and development expenses in the second quarter of 2015 were RMB27.8 million (US$4.5 million), which accounted for 7.1% of total revenues, compared with 6.0 % in the second quarter of 2014 and 7.1% in the first quarter of 2015. The year-over-year increase was primarily due to increased employee costs, in particular share-based compensation expenses.
  • Sales and marketing expenses. Sales and marketing expenses in the second quarter of 2015 were RMB39.0 million (US$6.3 million), which accounted for 9.9% of total revenues, compared with 9.2% for the second quarter of 2014 and 9.2% for the first quarter of 2015. The year-over-year and sequential increases were primarily due to increased spending on promotional activities for the Company’s mid- and hardcore games in the second quarter of 2015.
  • General and administrative expenses. General and administrative expenses in the second quarter of 2015 were RMB53.7 million (US$8.7 million), which accounted for 13.7% of total revenues, compared with 85.3% for the second quarter of 2014 and 9.3% for the first quarter of 2015. The year-over-year decrease was primarily due to the effect of the one-off share-based compensation expenses of RMB147.8 million incurred in the second quarter of 2014. The sequential increase was primarily due to (i) increased share-based compensation expenses incurred in the second quarter of 2015 and (ii) impairment loss recorded in the second quarter of 2015 as a result of the Company’s decision to terminate the operation of some underperforming games and not to launch games which the Company anticipated would not perform up to expectations.

Net Income and Non-GAAP Adjusted Net Income

The Company’s net income in the second quarter of 2015 was RMB21.8 million (US$3.5 million), compared with a net loss of RMB116.4 million in the second quarter of 2014 and a net income of RMB37.2 million for the first quarter of 2015.

Non-GAAP adjusted net income in the second quarter of 2015, which is net income excluding share-based compensation expenses of RMB29.9 million (US$4.8 million) and share of loss from equity investments of RMB0.2 million (US$0.0 million), was RMB51.8 million (US$8.4 million), representing an increase of 59.8% fromRMB32.4 million for the second quarter of 2014 and a decrease of 9.6% from RMB57.4 million for the first quarter of 2015.

Net Income/(loss) Attributable to the Company’s Ordinary Shareholders

Net income attributable to the Company’s ordinary shareholders for the second quarter of 2015 was RMB21.8 million (US$3.5 million). This compares to a net loss attributable to the Company’s ordinary shareholders of RMB209.5 million for the second quarter of 2014 and a net income attributable to the Company’s ordinary shareholders of RMB37.4 million for the first quarter of 2015.

Basic and diluted net income per ADS for the second quarter of 2015 were RMB0.52 (US$0.08) and RMB0.48 (US$0.08), respectively. This compares to basic and diluted net loss per ADS of RMB20.44 and RMB20.44, respectively, for the second quarter of 2014, and basic and diluted net income per ADS of RMB0.84 andRMB0.84, respectively, for the first quarter of 2015.

Non-GAAP basic and diluted adjusted net income per ADS for the second quarter of 2015 were RMB1.20 (US$0.20) and RMB1.16 (US$0.20), respectively. This compares to non-GAAP basic and diluted adjusted net loss per ADS of RMB5.92 and RMB5.92, respectively, for the second quarter of 2014, and non-GAAP basic and diluted adjusted net income per ADS of RMB1.32 and RMB1.28, respectively, for the first quarter of 2015.

Cash and cash equivalents

Cash and cash equivalents were RMB746.0 million (US$120.3 million) as of June 30, 2015, down 19.8% from RMB929.8 million as of December 31, 2014. (Original Source)

Shares of iDreamSky Technology closed yesterday at $12.12. DSKY has a 1-year high of $25.95 and a 1-year low of $6.64. The stock’s 50-day moving average is $11.77 and its 200-day moving average is $10.55.

On the ratings front, iDreamSky Technology has been the subject of a number of recent research reports. In a report issued on June 2, Rosenblatt Securities analyst Jun Zhang reiterated a Buy rating on DSKY, with a price target of $12, which represents a slight downside potential from current levels. Separately, on June 1, Piper Jaffray’s Gene Munster maintained a Buy rating on the stock and has a price target of $14.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Jun Zhang and Gene Munster have a total average return of -18.9% and 21.5% respectively. Zhang has a success rate of 14.3% and is ranked #3448 out of 3738 analysts, while Munster has a success rate of 61.5% and is ranked #4.

iDreamSky Technology Ltd through its subsidiaries is engaged in the licensing and operating of single player mobile games and mobile online games in the People’s Republic of China.