Acorn International Releases 4Q and Full Year 2012 Unaudited Results [Health & Beauty Close – Up]

Acorn International, Inc., a media and branding company in China engaged in developing, promoting and selling products through direct and distribution networks, has announced its unaudited financial results for the quarter and the full year ended December 31, 2012.

"Our full year results came in below our expectations, primarily due to weak demand and intense competition in China's mobile phone market that depressed mobile phone sales more than previously anticipated. We also experienced lower sales of electronic learning products as we transitioned the business to focus on models with mobile internet interactive features in the latter half of the year. We were able to partially offset these declines with exceptional performance from our line of fitness products, which accounted for 25.7 percent of gross revenues in 2012 and was the main driver behind the 2.5 percent increase in our gross margin. Despite our success in improving gross margin and controlling our operating expenses, the lower revenue base resulted in a larger than anticipated net loss in 2012," said Don Yang, CEO of Acorn.

"We are optimistic about the future of our business and have a solid plan in place to increase our top line and improve profitability in 2013. We expect fitness products and electronic learning products to continue to be major sales drivers in the year ahead and have a number of product upgrades and new product launches planned. Building upon the positive customer acceptance of our new electronic learning products, we will broaden our marketing efforts to include advertising on our direct TV sales channel which we expect to have a meaningful impact on sales in 2013. We have expanded our Aoya cosmetics line and have a number of new product launches planned in the coming months. In addition, based on the insurance business cooperation agreement with Sino-US United MetLife Insurance Co., Ltd. ("Metlife"), we are jointly marketing and selling short-term accident and health insurance products with Metlife through various channels and expect to further expand our insurance business in 2013. With media costs expected to increase in 2013, we will continue to optimize our media spending by focusing on the most profitable product categories and most productive TV channel partners. We expect the recent enhancements to our other direct sales channels, particularly Internet and outbound calls, and the improvement to distribution channels to help drive top line growth in 2013 and beyond."

In a release on March 19, the Company noted that total net revenues were $59.1 million for the fourth quarter of 2012, a decrease of 32.4 percent from $87.5 million for the fourth quarter of last year. Direct sales contributed to 82.7 percent, or $48.9 million, of the total net revenues for the fourth quarter of 2012, a decrease of 32.7 percent from $72.6 million for the same period last year. The decrease in direct sales levels mainly resulted from a decline in sales generated from mobile phones, consumer electronics and collectibles.

Distribution sales net revenues decreased 31.3 percent year-over- year to $10.2 million from $14.9 million for the fourth quarter of 2011. Electronic learning products accounted for 73.1 percent of total distribution sales. The year-over-year decline was primarily due to the transition to devices incorporating mobile internet interactive features beginning in the third quarter of 2012.

Cost of sales for the fourth quarter of 2012 was $33.4 million, representing a 31.4 percent decrease from $48.8 million for the fourth quarter of 2011, primarily due to the decrease in sales.

Gross profit for the fourth quarter of 2012 was $25.7 million, a decrease of 33.7 percent as compared to $38.7 million for the fourth quarter of 2011. Gross margin was 43.4 percent in the fourth quarter of 2012, as compared to 44.3 percent in the same period in 2011. The decrease in gross margin was largely due to lower prices offered on older inventory in the electronic learning products, collectibles and consumer electronics product categories.

Advertising expenses were $15.3 million for the fourth quarter of 2012, down 12.0 percent from $17.4 million for the fourth quarter of 2011. Gross profit over advertising expenses, a benchmark Acorn uses to measure return on its multiple sales platforms, was 1.68 in the fourth quarter of 2012, down from 2.23 in the fourth quarter of 2011.The decline was primarily as a result of higher media prices, as well as the decline in sales.

Other selling and marketing expenses decreased 26.5 percent to $12.1 million from $16.5 million for the fourth quarter of 2011. The decrease in other selling and marketing expenses was smaller than the decline in sales, mainly due to the larger contribution of fitness products to total revenues, which have higher delivery costs, as well as the increase in labor costs of sales and marketing personnel.

General and administrative expenses were $7.2 million for the fourth quarter of 2012, representing a 26.8 percent decrease from $9.8 million in the fourth quarter of 2011. The decrease in general and administrative expenses was mainly due to a $1.5 million decline in bad debt related to the receivables as a result of more effective credit controls on local delivery companies.

Other operating income, net, was $0.8 million for the fourth quarter of 2012, as compared to $3.1 million in the fourth quarter of 2011, due to lower subsidy income compared to the same period last year.

As a result, operating loss was $8.2 million, as compared to $1.8 million in the fourth quarter of 2011.

Other income, primarily from interest income, was $0.9 million, as compared to $1.0 million in the fourth quarter of 2011.

Share-based compensation was $121,645 for the fourth quarter of 2012, as compared to $23,852 in the fourth quarter of 2011.

The Company recorded income tax expense of $2.0 million in the fourth quarter of 2012 as compared to $0.1 million in the fourth quarter of 2011.

Net loss attributable to Acorn was $9.4 million, as compared to a net loss of $1.0 million in the fourth quarter of 2011.

Diluted loss per American Depositary Share ("ADS") was $0.30, as compared to diluted loss per ADS of $0.03 for the fourth quarter of 2011.

As of December 31, 2012, Acorn's cash and cash equivalents, including restricted cash and short-term investments, totaled $101.5 million, as compared to $122.7 million as of December 31, 2011. The company expects to utilize $8.6 million in cash to satisfy its previously announced share repurchase obligations in the first quarter of 2013.

Total net revenues were $242.6 million for the full year 2012, a decrease of 33.0 percent from $362.1 million for 2011. Direct sales contributed 79.8 percent, or $193.6 million, of the total net revenues for the full year 2012, a decrease of 33.6 percent from $291.5 million for 2011, mainly due to a decline in sales generated from mobile phones, cosmetics and consumer electronics.

Distribution sales net revenues declined 30.6 percent year-over- year to $49.0 million from $70.5 million for 2011, primarily due to decreased demand and price discounts offered to distributors on older models of electronic learning devices prior to the launch of new models incorporating mobile internet interactive features in the third quarter of 2012.

Cost of sales for 2012 was $131.9 million, a 35.9 percent decrease from $205.9 million for 2011. The overall decrease was primarily driven by decrease in sales and a shift in product mix.

Gross profit for 2012 was $110.6 million, a decrease of 29.1 percent compared to $156.1 million for 2011. Gross margin was 45.6 percent for 2012, compared to 43.1 percent for 2011. The increase in gross margin was largely due to a shift in product mix toward fitness products, which generally have higher margins.

Advertising expenses were $58.3 million for 2012, compared to $68.6 million for 2011. Gross profit over advertising expenses, a benchmark Acorn uses to measure return on multiple sales platforms, was 1.90 in 2012, down from 2.28 for 2011.

Other selling and marketing expenses decreased 15.9 percent to $50.3 million from $59.9 million for 2011. The decrease in other selling and marketing expenses was smaller than the decline in sales, mainly due to the larger contribution of fitness products to total revenues, which have higher delivery costs, as well as the increase in labor costs of sales and marketing personnel.

General and administrative expenses were $27.1 million for 2012, a 14.6 percent decrease from $31.7 million for 2011. The decrease was largely due to a $3.6 million decline in bad debt related to the receivables as a result of more effective credit controls on local delivery companies in 2012.

Other operating income, net, was $3.3 million for 2012, compared to $5.1 million for 2011.

As a result of all of the items above, operating loss was $21.9 million for 2012, compared to operating income of $1.1 million for 2011.

Other income, primarily from interest income and investment income, was $5.8 million, compared to $7.8 million for 2011.

The Company recorded income tax expense of $1.8 million for 2012 as compared to $3.1 million for 2011, mainly due to the $3.2 million valuation allowance provided for deferred tax assets and the $2.5 million released tax provision for uncertain tax benefits in 2012.

Net loss attributable to Acorn was $17.9 million, compared to net income of $5.1 million for 2011.

Diluted loss per ADS was $0.60 for 2012, compared to diluted earnings per ADS of $0.17 for 2011.

Based upon current trends, the Company expects for the full year 2013 revenues between $290 million and $310 million and net income between $0 million and $2 million.

Acorn is a media and branding company in China, operating one of China's TV direct sales businesses.

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