We have established a nationwide sales coverage through our in-house sales team and distributors, which provides us with the depth needed to serve the largest broadcaster customers and the breadth to help us to reach the smaller local broadcasters.
Direct Sales
We sell our solutions, services and products to customers primarily through our in-house sales teams. As of June 30, 2015, we had 88 full-time in-house sales personnel. We compensate our sales personnel by means of base salaries and sales commission and reward them when they achieve or exceed their sales targets. We also explore new sales opportunities through other channels including industry forums and sales visits. Through our in-house sales efforts, our business department at the headquarters is able to monitor and evaluate major broadcasters’ plans to launch major projects, system upgrades, digitization or convergence. Our direct sales of products generally require 10 to 60 days to fulfill purchaser orders while our direct sales of solutions generally require four to six months to fulfill. Since February 2014, we began to utilize distributors to help us sell our solutions, services and products to markets and customers which our in-house sales teams elected not to focus on in the past, including most TV broadcasters below the provincial-level as well as other institutional TV operators. See “—Distribution Sales.”
Because most TV broadcasters in the PRC are state-owned entities subject to government, regulations and policies, most of our direct sales to new customers are made pursuant to formal bids. In general, the broadcaster submits its system requirements to a state-owned bidding company, which posts a request for bids at its website and specifies the financial and technical qualification requirements for bidders. We monitor new requests for bids and tailor our bidding proposals accordingly. We are generally required to submit our bid with a cash deposit in the amount of 1% of the estimated contract value, which is refundable in full if we fail to win the bid. If we win the bid, our cash deposit will not be refunded until we have installed and tested our products and/or solutions. After we are awarded the project as a result of our submission of a winning bid, we will enter into a project contract with the customer setting out key terms including consideration, scope of work, payment terms and technical requirements and specifications. See “—Customers” for further details. Although the bidding process is generally required for us to win new contracts, we also consider it a part of our sales and marketing efforts through which we can demonstrate our solutions, services and products to potential customers. Further, we also go through such formal bidding processes when our existing customers seek to upgrade the solutions and products they purchased from us within the life cycle of the solutions and products, which is normally three to five years for products and five to seven years for solutions, although we believe our chance of winning the bids is enhanced given our long-term relationship with an in-depth understanding of such existing customers. However, we typically need to renegotiate the contract terms for the upgrade.
After we have delivered our solutions and products to customers or have initiated our services, our dedicated technical support team provides on-site maintenance services in order to resolve any technical issues on a real-time basis.
Distribution Sales
Starting from February 2014, to complement our existing sales network, we introduced distribution sales which mainly focus on TV broadcasters below the provincial-level as well as other media operators including governmental agencies, schools and state-owned and private enterprises with needs for our solutions and products. As of December 31, 2014 and June 30, 2015, we had seven and 17 distributors, respectively. In 2014 and the six months ended June 30, 2015, sales to our distributors accounted for approximately 1.3% and 1.1%, respectively, of our total revenue. As of the Latest Practicable Date, we had 18 distributors covering eight provinces and central government-administered municipalities in the PRC.
We generally enter into standard distribution agreements with our distributors, typically for a term of one year, renewable at our discretion based on the performance and credit history of our distributors. The distribution agreements require our distributors to comply with our requirements in respect of, among other things, designated geographic coverage area, credit terms, return of goods, post-sales servicing, quality standards, confidentiality and promotion and advertising. Our distributors are also required to comply with our pricing policies for all of our solutions and products distributed by them. If a distributor fails to comply with the agreement, we have the right to terminate the agreement with such distributor immediately.
Through the distribution agreements, we further set certain sales targets on a quarterly or annual basis for our designated solutions and products and create incentives for our distributors to exceed such targets. For distributors who have successfully achieved or exceeded their quarterly or annual targets for our designated products or solutions, we typically award a certain percentage of the sales target amount for the relevant quarter or year to such distributors, who can redeem such awards either through limited reimbursements from us for any of their marketing expenses in relation to sales of our solutions and products or using the award amounts to count towards the following year’s sales targets. For distributors who have failed to meet their sales targets, we may choose to not renew our distribution agreements with them in the following year.
PRICING
To determine the pricing for our solutions, services and products, we generally take into account a variety of factors, including but not limited to, relationship with the prospective customer, the complexity and innovativeness of the solution, service or product to be provided, our competitors’ pricing for a similar project, procurement costs and expected manpower required, general market demand for such solution, service or product and the benchmark minimum profit margin that we consider to be acceptable. Our pricing policy is also responsive to the competitive landscape in our industry. Historically, the quality of our products and our long-standing customer relationships have allowed us to charge a substantial premium on our products.
SUPPLIERS
Catering to our customers’ needs, we design the hardware specifications of the servers and workstations for our solutions, services and products and perform most of the system integration in-house. We procure memory modules, network equipments and third-party software from well-known third-party suppliers. We typically purchase hardware components through the manufacturers’ approved distributors in China. We also purchase customized servers and workstations and software tailored to meet certain customers’ specific needs from third-party suppliers, primarily Hewlett-Packard. We negotiate the terms of such purchase contracts directly with the original hardware manufacturers. In January 2015, we entered into framework agreements on an annual basis with two major suppliers, who had long-term business relationships with us. Pursuant to such framework agreements, we made prepayments to such suppliers in exchange for discounts when procuring hardware components from them. If we are unable to procure a specified amount (which equals to the amount of prepayment we made to the supplier and the promised amount of discount the supplier offered to us) of software and hardware equipment from the supplier by the end of the contract term, there is no penalty and parties will negotiate to renew the framework agreement.
In 2013 and 2014 and the six months ended June 30, 2015, our single largest supplier represented 18.6%, 9.4% and 10.2%, respectively, of our total purchases. In the same periods, our five largest suppliers collectively represented 59.6%, 35.7% and 39.5%, respectively, of our total purchases. All of our five largest suppliers during the Track Record Period were independent third parties. As of June 30, 2015, we had on average more than five years of business relationship with our five largest suppliers in the first half of 2015. As of the Latest Practicable Date, none of our Directors, their close associates or any Shareholders who, to the knowledge of our Directors, owned more than 5% of our share capital, had any interest in any of our five largest suppliers. We did not experience any material supply shortages of software and hardware equipment during the Track Record Period.
In March 2015, one of our suppliers, China National Instruments Import & Export (Group) Corporation (中國儀器進出口(集團)公司) (“China Instruments”), purchased our digital broadcast automation solution on behalf of Armenia TV for a consideration of RMB11.2 million, representing approximately 3.4% of our total revenue in the first half of 2015. Our gross profit margin for this sale was 35.6%, which was in line with the overall gross profit margin of our solutions business. In 2014, our purchases from China Instruments, mainly for hardware components, amounted to RMB2.7 million, representing approximately 1.7% of our total purchases in 2014. During the Track Record Period and up to the Latest Practicable Date, we did not enter into any additional sales contracts with any of our suppliers.
We generally negotiate and place purchase orders for hardware components based on our customers’ demands. We believe that there are sufficient alternative hardware suppliers for us in case our current suppliers are unable to meet our needs. Generally, we purchase from our suppliers directly based on the prevailing market prices and are able to obtain volume discounts. Most of our supply contracts contain warranty provisions requiring the suppliers to repair free of charge any of their products that fail to meet the specifications for a period of one to three years from delivery. We have been granted credit periods of between 30 to 180 days by the majority of our suppliers. We generally make our payment by wire transfer.
We develop most of our software in-house and do not rely on outside suppliers. At our customers’ requests, we also customize third-party software and integrate it into our solution offerings.