For such an optimistic and happy name, Hurray! Holding (NASDAQ:HRAY) sure delivered a painful earnings report to shareholders last week. The company provides ringtones, short message services, and other wireless services that allow cell-phone users to download pictures, play mobile games, and chat with other users. Its stock dropped nearly 15% in Friday trading, no doubt leaving a hefty mark on shareholders' portfolios. I think it was a little bit of an overreaction, but I can certainly understand the frustrations, given the difficult operating environment for value-added service providers in China.
Revenues for the first quarter were $16.6 million, up 11% year over year and mainly driven by Hurray!'s new recorded music division, which had revenues of $1.5 million. Revenues in the wireless services division and the software division were flat and down about 67%, respectively, year over year. Net income was an awful $900,000, down nearly 84%.
All this misery was tied to China Unicom (NYSE:CHU), one of the largest mobile phone network operators in China. Hurray! announced that China Unicom was fining it $400,000 for violating billing policies relating to inactive users, and suspending one of Hurray!'s most popular ringtone services for a month as a further penalty, which the company estimates will cost it $1 million to $1.5 million in the second quarter. (Apparently, such action is allowed in China.) This is on top of requiring Hurray! to contribute another $700,000 to a joint marketing fund that was established last summer as part of new policies that China Unicom laid down for its service providers. Evidently, Hurray! didn't accrue the required expenses because it never expected China Unicom to actually enforce the marketing agreement. Ouch.
Management's explanation for this was, essentially: We didn't understand China Unicom's rules for billing or expect to actually contribute to the fund. That doesn't exactly inspire confidence, but management did state that, going forward, both parties clearly understood the rules. Let's hope this is the case.
All this rules business aside, the wireless service sector in China looks rather compelling, especially Hurray! The company trades at a trailing P/E of only 4.5 and a price-to-sales of a little more than one when taking into account its cash position of $78 million, which accounts for roughly half of its market cap. Comparables like TOMOnline (NASDAQ:TOMO), KongZhong (NASDAQ:KONG), and SINA (NASDAQ:SINA) all trade at significantly higher multiples. As the Chinese mobile market moves from second-generation to third-generation mobile services, growth could return with a vengeance as new services are introduced. Furthermore, this company has the nice call option with the recorded music division, meaning I don't think the market is placing any value on the music business when instead it could be a nice profit center. The division's first song by the Huayi Brothers was promoted across online, offline, and wireless platforms, and sold a record-breaking offline amount of 300,000 songs. Not too shabby, even if I can't pronounce the band's name.
Will Hurray! be on investors' lips again? Maybe, but given the regulatory issues the company is facing, it might be wise to let management show it can successfully navigate these waters before investing some hard-earned dollars.
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Fool contributor Stephen Ellis does not own any companies mentioned in this article.
