Our revenue declined in 2014 and may continue to fluctuate in the future.
In 2013 and 2014 and the six months ended June 30, 2015, our revenue amounted to RMB503.0 million, RMB406.4 million and RMB280.0 million, respectively; we recorded net loss of RMB12.2 million, net loss of RMB69.4 million and net profit of RMB27.0 million, respectively, for the same periods. We generated relatively low revenue and high net loss in 2014 as compared to 2013, primarily reflecting, among others, the completion of a number of large-scale projects in 2013, delays in procurement at some of our large customers, increasing competition in certain product lines and fair value losses on our redeemable convertible preferred shares. Our ability to grow our revenue depends on, among other things, relationship with our customer base, R&D capability, develop and upgrade solutions, services and products catering to our customers’ needs, the quality and timeliness of delivery of our solutions, ability to control expenses, the success of our [REDACTED] and joint ventures and the development and conditions of China’s digital video market. If we fail to increase revenue at the rate we anticipate, we may not be able to achieve or main profitability. We may also incur losses in the future for a number of reasons, including the other risks described in this document, and any unforeseen expenses, difficulties, complications, delays and other unknown events related to our business and operations.
Our significant outstanding billed receivables and turnover days of our average billed receivables may adversely affect our financial condition and results of operations.
We receive payments from customers by installments in accordance with the credit terms in our sales contracts. For further details, see “Business—Customers—Payment and Credit Term.” Any extended delay in payments by any major customer would have a material adverse effect on the aging schedule and turnover days of our trade and bills receivables. We classify our trade and bills receivables into billed receivables and unbilled receivables. Billed receivables are those for which the relevant milestones, such as delivery or completion of final inspection of our solutions, specified under the payment terms in solution sales contracts are reached. Unbilled receivables are those for which such milestones are not reached, and therefore we are contractually unable to collect payments in time as originally scheduled. As of December 31, 2013 and 2014 and June 30, 2015, our billed receivables were RMB70.9 million, RMB82.4 million and RMB88.8 million, respectively, and our average billed receivables turnover days were 50 days, 86 days and 112 days, respectively, in 2013 and 2014 and the first half of 2015. In addition, as of December 31, 2013 and 2014 and June 30, 2015, we determined trade receivables of RMB3.5 million, RMB12.4 million and RMB6.4 million,
respectively, as individually impaired. As a result, we recognized provision for impairment loss of RMB3.5 million, RMB7.8 million and RMB6.4 million, respectively, and bad debts written off of nil, RMB4.6 million and nil, respectively, for the years ended December 31, 2013 and 2014 and the six months ended June 30, 2015.
Our customers’ ability to pay may be impaired by a number of factors such as unfavorable market conditions for China’s digital video technology solution and services industry or deteriorating liquidity of our customers. The occurrence of any of these factors could affect our customers’ ability to make timely payments and we cannot assure you that our customers will make payment in full to us on a timely basis, or at all. Delays in receiving payments from, or non-payment by, our customers may adversely affect our cash flow position and our ability to meet our working capital requirements. In addition, customers’ defaults in making payments to us on our solution, service or product sales contracts for which we have already incurred significant costs and expenditures can reduce our financial resources that would otherwise be available.
If the digital video technology solution and services industry in China fails to grow as expected, our future growth, financial condition and results of operations would be materially and adversely affected.
Our solutions, services and products primarily serve the digital video technology solution and services industry in China, and historically, our revenue growth has been driven by the development of this industry and related technology spending by TV broadcasters and new media and other digital video content creators in China. The digital video technology solution and services industry in China may not continue to grow as projected or at all due to various factors, including:
• the lack of, or delays in, acceptance by the general public of digital video technologies, such as HD and 4K technology and their applications;
• the adoption of cloud-based computing as a platform for digital video content delivery; • the lack of, or delays in, the implementation of regulations and policies of the PRC
government relating to the digital video market in China;
• the lack of growth of TV broadcasters’ advertising revenues in China; and • the reflection of general economic conditions in China.
In addition, our future success significantly depends on the pace at which the TV broadcasters in China transition from analog to digital transmission and from standard to the 4K ultra-high definition standard. Such transition may be delayed by various factors, some of which are beyond our control. Such transition has resulted in increased demand of digital video content creators for more sophisticated solutions, services and products. However, these TV broadcasters may decide that the benefits of digitization and transition to 4K ultra-high definition standard are outweighed by the costs or other considerations. In particular, TV audience in China are accustomed to viewing TV content for
free or at relatively low prices, and may not be willing to pay for digital TV subscription, TV programs in 4K ultra-high definition or other value-added services. We cannot assure you that PRC TV broadcasters will continue to be successful in promoting digital TV subscriptions, TV programs in 4K ultra-high definition or other value-added services.
If the digital video technology solution and services industry in China fails to grow as expected, the related technology spending of TV broadcasters and new media and other digital video content creators may decline, which will in turn reduce the market demand for our solutions, services and products. As a result, our future growth, financial condition and result of operations would be materially and adversely affected.
We derive a significant portion of our revenues from our major customers in each period. Loss of our major customers could have a materially adverse effect on our financial condition and results of operations.
We have derived, and we expect to continue to derive, a significant portion of our revenue from a number of major customers. In 2013 and 2014 and the six months ended June 30, 2015, sales to our single largest customer represented 10.8%, 8.1% and 11.7%, respectively, of our total revenue and sales to our five largest customers accounted for 31.2%, 24.3% and 36.2%, respectively, of our total revenue. Since our customers may be at different stages of periodic system upgrade cycles during any given period, our largest customers typically vary from period to period. Our revenue in a single period could be significantly affected if one or more large customers cancel, delay or reduce their purchase with us. We derive a significant portion of our revenues from the installation of, and major upgrades to, our solutions and products for our major customers and we also provide a significant portion of our services to customers who have installed our solutions and products. The success of our business depends to a significant extent on being retained by our major customers to perform major upgrades.
We cannot assure you that we will be able to successfully retain our major customers. Our major customers may decide to cancel or reduce spending on digital video technology solutions or services due to a challenging economic or regulatory environments or insufficient consumer demand for digital video. As our solutions and products provide functions that are critical to our customers’ operation, any failure to meet a customer’s expectations could materially and adversely affect our ability to be selected as the technology provider for such customer’s future technology upgrade. Furthermore, our major customers may demand price reductions due to their limited budget or price reductions offered by our competitors. If we are unable to retain our major customers, our financial condition and results of operations may be materially and adversely affected.
Our m obile application business is relatively new with an evolving business m odel. If our new business fails to generate or increase its revenue at the expected level and pace, our overall growth and profitability would be adversely affected.
We recently entered into the mobile application business after launching Meicam (“美攝”), which had not generated revenue during the Track Record Period and bears risks and uncertainties that are unique to that business. Mobile application is a business that requires to make our technology accessible to a mass-market and generally young audience. This is different from our traditional core
market of TV broadcasters. The risks and uncertainties presented in this business include: (i) our ability to develop a viable revenue model in the foreseeable future; (ii) our ability to continue to increase our user base and activity level; (iii) our ability to develop additional functionalities and features; and (iv) our ability to strengthen the recognition of the “Meicam” brand. If any of these risks and uncertainties materializes, and we fail to achieve the level of revenue growth and profitability from this new business as expected, our overall growth and profitability would be adversely affected.
Our success depends on our ability to keep pace with the rapid changes in digital video technology and to provide innovative solutions, services and products in response to rapidly evolving market demand. Our failure to do so may have a materially adverse effect on our business, financial condition and result of operations.
The digital video technology solution and services industry is characterized by rapid technological improvements, evolving industry standards, changing customer preferences and frequent introduction of new solutions, services and products. Because of the development of digital video technologies and the progress of digitization and integration of traditional broadcasting networks and new media networks, video content distribution models and audience habits and preferences have changed dramatically in the last few years and may continue to change rapidly in the future. We may fail to predict accurately the future development trends, and such changes may deviate from our strengths, making our existing solutions, services and products obsolete or less relevant. Our brand image and reputation in the market and our future success will continue to depend on our ability to anticipate these changes and to develop innovative solutions, services and products to meet our customers’ evolving needs. We may fail to anticipate or respond to these new changes in a timely or cost-effective manner due to the complexity and sophistication of digital video technologies and our normal product development cycles. If we are unable to accurately predict market trends or adapt to evolving market demand, our ability to innovate and meet customer needs will suffer and our revenues and profitability as well as our reputation will be materially and adversely affected. Our failure to address these developments may also have a materially adverse effect on our competitiveness and our ability to meet our growth targets.
If we fail to protect our intellectual property rights, our business and competitive position would be severely harmed.
Our intellectual property is crucial to our competitiveness. As of June 30, 2015, we owned 334 patents registered with, and had 601 patent applications pending approval by the PRC State Intellectual Property Office and also owned 136 software copyrights registered with the PRC Copyright Protection Center. We rely on a combination of patent, trademark and copyright laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights and to meet the obligations we owe to third parties from whom we license intellectual property rights. Nevertheless, these afford only limited protection and it can be difficult and expensive to police unauthorized use of our proprietary technologies. In addition, intellectual property rights historically have not been enforced in the PRC as vigorously as in many other developed jurisdictions, and intellectual property theft is a serious risk for companies operating in the PRC. Moreover, litigation may be necessary to enforce our intellectual property rights, and could result in substantial costs, divert the attention and resources of our management and technical personnel and disrupt our business. The validity and scope of any claims relating to our patents or other intellectual properties may
involve complex technological, legal and factual questions and analyses and, as a result, the outcome may be highly uncertain. In addition, there is no guarantee that we would be able to detect unauthorized use of our intellectual property and halt such use through litigation. Failure to protect our intellectual property rights could have a materially adverse effect on our business, financial condition and results of operations and may severely harm our competitive position.
Certain trademarks we use to market our products under the brand of “新奧特” (“Xin’aote”), which is held by one of our related parties, Xin’aote Digital. We maintain trademark license agreements with Xin’aote Digital for the use of the “Xin’aote” trademark. For further details, see “Connected Transactions—Exempt Continuing Connected Transactions—Trademark Licensing Agreement.” If we fail to renew the authorization to use such trademarks or Xin’aote Digital suspends its authorizations of such trademarks to us, our business, financial condition and results of operations may be materially and adversely affected. We are also exposed to the risk that a third party successfully challenges Xin’aote Digital’s ownership of, or our right to use, the “Xin’aote” trademarks or if a third party uses the “Xin’aote” trademarks without authorization.
If we fail to expand our solution, service and product offerings or design and implement solutions to meet increasingly complex customer demands and attract new customers, our financial condition and results of operations may be materially and adversely affected.
We have been expanding, and plan to continue to expand, our product and service offerings in response to technological advances and customer demands and to attract new customers. Our solutions also face increasingly complex demands from our customers, which require us to integrate an expanding array of products at lower cost and higher performance. The success of our expanded solution, service and product offerings and our ability to attract new customers depends on our understanding of our customers’ operations, our ability to meet our customers’ demands in a cost-competitive and effective manner and our R&D capabilities to provide innovative and customized solutions, services and products for our customers. In particular, we may face a number of challenges relating to our solution, service and product offerings, including:
• understanding the needs of particular customers and customizing our solutions, services and products to meet their needs;
• integrating and customizing a rapidly growing number of solutions, services and products for our customers’ specific needs and under hardware constraints;
• predicting the trend of technological advance and developing new solutions, services and products;
• maintaining the quality of our solutions, services and products;
• controlling costs relating to hardware purchases and R&D activities; and
Failure to successfully market our expanded product offerings or implement large and complex solutions could damage our reputation, affect our ability to attract new customers or retain existing customers, which in turn will have a material adverse effect on our financial condition and results of operations.
We generally win solution contracts from new customers by bidding on major system installations and upgrades by TV broadcasters. The success of our business depends significantly on our ability to attract new customers for our solutions, services and products. We cannot assure you that we will be able to successfully attract new customers and diversify our customer base. Our prospective customers may decide to cancel or reduce spending on digital video technologies or services, and may demand price reductions. If we are unable to continue to attract a sufficient number of new customers or diversify our customer base, our business, financial condition, results of operations and prospects may be materially and adversely affected.
We operate in a highly competitive market, and our competitors may have various advantages, including the ability to draw upon a greater depth and breadth of resources than those available to us. Our failure to compete successfully in the market could have a material adverse effect on our business, financial condition and results of operations.
The digital video technology solution and services industry in which we operate is highly competitive. In particular, there is intense pressure on technology and service providers to innovate, expand functionalities, upgrade product lines, accelerate development of new solutions, services and products and reduce prices. We face competition from both domestic and international companies. Most of our sales to customers are made pursuant to formal bids. Customers consider many factors when evaluating our solutions, services and products comparable to those of our competitors, including innovation, ease of use, functionality, reliability, performance, compatibility, reputation, price, training and after-sales maintenance support. Relationships with current and potential customers and business track records in the digital video technology solution and services industry are also important in winning bids and securing future engagements. We may not be able to compete effectively against our competitors in all respects. For example, some of our major competitors, such as Sobey, may have greater R&D capabilities. Some of our competitors may also have longer operating history, better brand recognition, and superior financial, technical, marketing, distribution and support resources. They may also have track records in other related fields, such as computer-generated imagery, or CGI, technology, video production systems and high-end multimedia equipment, that may facilitate their marketing efforts. For instance, Dayang is one of our major domestic competitors, which had a 7.6% market share in the post-production industry in China in terms of 2014 revenue, according to the Frost & Sullivan Report. As a result, these competitors may be able to deliver more innovative solutions, services or products, penetrate the market more effectively, respond more quickly to new technological trends and changes in market demand, devote more resources to the development, marketing and sale of their solutions, services and products, or price their solutions, services and products more competitively than us. Our failure to compete successfully in the market could have a material adverse effect on our business, financial condition and results of operations.