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Q2 2008 ACORN INTERNATIONAL INC Earnings Conference Call - Final.

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Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Hello, everyone. This is Felicia. I will be the top operator for the conference call. I would like to welcome everyone to Acorn International's 2Q 2008 earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. Now I would like to transfer the call to the moderator, Ms. Chen Fu, Director of investor relations of Acorn International.

CHEN FU, DIRECTOR OF IR, ACORN INTERNATIONAL, INC.: Hello, everyone. Thank you for joining us today for the second quarter 2008 earnings call. With me today are Mr. James Hu, Chief Executive Officer and Mr. Gordon Wang, Chief Financial Officer. After prepared remarks we will open the line for questions. As a reminder, this conference call is being recorded. A live webcast and replay of the conference call will be available via investor relations section of our website at www.ChinaDRTV.com.

Before we continue I would like to remind you the discussion today will contain forward-looking statements. Forward-looking statements include, among others, those regarding Acorn's anticipated future media purchases, revenue mix and operating results. Acorn's business involves a number of inherent risks and uncertainties. As such, actual results may be materially different from the views expressed or anticipated results described today. A number of potential risks and uncertainties are outlined in the Company's public filings with the US Securities and Exchange Commission.

Acorn International does not undertake any obligation to update any forward-looking statement except as required by applicable law. On the call today we will also mention non-GAAP financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in the second-quarter 2008 earnings release that was distributed earlier.

Now please allow me to turn over the call to our CEO, Mr. James Hu.

JAMES HU, CHAIRMAN, CEO, ACORN INTERNATIONAL, INC.: (interpreted) Hello, everyone. Thank you for joining us today to review our second-quarter 2008 financial results. On behalf of Acorn I would also like to take this opportunity to express our appreciation for your continued support in the past. Today I will briefly highlight our key business development and update on overall TV shopping industry. Gordon will then take you through the financial performance.

CHEN FU: In the interest of time please allow me, Chen Fu, the Director of investor relations, to comment on the Company's operations on behalf of our CEO, James Hu.

The second quarter was an extremely challenging period. We experienced a normal seasonal slowdown and sales decline in two of our major product segments, namely mobile handsets and Ozing. This situation was compounded by the devastating Wen Chuan earthquake and the resulting effect on shipping and delivery and TV coverage that contributed to results that were lower than expected. Furthermore, the TV direct sales industry and the ELP product market, which our Ozing products compete in, stayed intensely competitive. The challenges we faced in the second half of 2007 still remain with us.

Despite efforts to scale back TV placement for handset products, we were not yet able to reverse the downward media return trend as growth and other product segment still cannot make up for the larger loss in the handset sector. Additionally, we made further staffing changes to the Ozing and [Meijing] business segments in order to realign group interest and address shifts in the competitive landscape. As a result of these issues, our business in the second quarter continues to go through adjustments from last year's effects.

However, we were pleased to see that other changes which we effectuated at the end of last year have taken off as planned. To address a fluctuation in our business from high turnover products such as handsets, management made a commitment at the end of 2007 to focus on building Acorn's branded continuity products. We were happy to see that our cosmetic business launched out of such a need has grown to become one of top three sales contributors in our direct sales business.

Second, we made initiatives to broaden our customer reach and improvements paying logistics. As such our third-party bank catalog sales and Internet channels have both performed well into the second quarter, albeit still at their small revenue scale. During the second quarter we have cumulatively issued 16 million credit card leaflets and generated sales of over $2 million, which was an increase of 132% from that in the first quarter of 2008.

For Internet business we continue to introduce additional branded products outside of scope of our TV inventory and cross promote and sell with our other sales channels such as TV, catalog and third-party bank. The growth in cosmetics, third-party bank catalog and Internet sales still cannot make up for the decline in the handsets and Ozing product segments. They represent important business developments in ensuring a more sustainable and stable marketing and distribution platform for Acorn in the long run.

Looking forward, we continue to face uncertainties in our business. The 2008 Beijing Olympics during the third quarter and its resultant changes in product delivery protocols will bring additional restriction and costs to operate our business. In addition, we will continue to develop and source new products in the jewelry and small home appliances sectors. We will continue to seek partnership with SMEs that offer high growth potential, high entry barrier for low competition products and services in China....

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