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AsiaInfo Holding, Inc. (NASDAQ:ASIA)

Q3 2008 Earnings Call Transcript

October 30, 2008, 8:00 pm ET

Executives

Sheryl Zhang – Director of IR

Steve Zhang – President and CEO

Eileen Chu – VP and CFO

Analysts

Donald Lu – Goldman Sachs

Karl Keirstead – Kaufman Brothers

Brendan Barnicle – Pacific Crest Securities

Sean Jackson – Avondale Partners

Julie Chen – CRT Capital Group

Operator

Welcome to today’s AsiaInfo Q3 2008 Earnings Announcement Event Call. I am pleased to present Ms. Sheryl Zhang, IR Director. For the first part of this call all participants will be in listen-only mode, and afterwards there will be a question-and-answer session. (Operator instructions) Ms. Zhang, please begin.

Sheryl Zhang

Thanks, Wendy. Hello, everyone and welcome to AsiaInfo's third quarter 200 earnings conference call. Today, Steve Zhang, AsiaInfo’s President and Chief Executive Officer, will review business highlights achieved during quarter and discuss strategy; Eileen Chu, AsiaInfo’s Chief Financial Officer, will discuss financial results and give fourth quarter 2008 guidance. Steve then will then provide a few closing remarks and open the call to questions.

Before we continue, please allow me to read you AsiaInfo's Safe Harbor statement. Some information we will discuss during this conference call is forward-looking in nature and subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31st, 2007, and other reports as filed with the Securities and Exchange Commission.

Also, please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to AsiaInfo's financial results prepared in accordance with GAAP are included in AsiaInfo’s earnings release, which has been posted on the Investor Relations section of AsiaInfo website, www.asiainfo.com.

Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

I will now turn the call over to AsiaInfo's President and CEO, Steve Zhang. Hi, Steve.

Steve Zhang

Thank you, Sheryl. Hello, everyone, and thank you for joining us today. We are pleased to see net revenue for the quarter grow to $43 million, an increase of nearly 45% year-over-year, which exceeded our guidance. Net operating income grew to $5.3 million, an increase of approximately 69% year-over-year. Both of these metrics are evidence that the fundamentals of our business remain strong. (inaudible) economic uncertainty affecting the market, we are running our business and executing according to our plan.

We have just over five months come by since industry restructuring was announced. The opportunities for our business are becoming increasingly clear. China’s three newly revamped operators are increasing expenditure on IT software and services in order to integrate newly acquired business lines and increase competitiveness as each moves towards its goal of becoming a fully integrated provider of fixed-line, broadband, and wireless services.

So, let me first breakdown our (inaudible) in more details. Each operator currently faces the challenge of building out infrastructure to support its fully integrated services. For example, China Telecom is now working to integrate the CDMA business it acquired from China Unicom with existing fixed line and broadband business. So they are building out their infrastructure.

Similarly, China Unicom is focused on building out its newly acquired fixed line and broadband infrastructure and integrating its entire business.

For China Mobile, the focus is slightly different. China Mobile is working to build-out TD-SCDMA infrastructure, which will probably be completed in early 2009. Right now we are working with them to add TD functionality to their existing IT infrastructure. In the future, they will be working to build out their broadband infrastructure and we hope to be involved in upgrading their existing infrastructure to support that as well.

In the quarters to come, we see opportunities for organic growth primarily in two areas. First, each carrier will have to operate a complete bundle of services, so each will have to upgrade its existing IT infrastructure to support that kind of activity. And second, increased competition among carriers will continue to drive spending on IT software and services that can help them differentiate their service offerings and increase marketing effectiveness.

It is still early to predict the details of how events will unfold, but we believe telecom industry restructuring and the eventual 3G rollout will bring more exciting opportunities. As discussed on the last call, a number of contracts were up for bidding in the third quarter and I am pleased with our accomplishments.

In our China Telecom account, nine contracts for billing solutions were up for bid. As we announced in August, we win two of those contracts in Heilongjiang and Henan provinces to develop billing and CRM systems. Bidding was also opened to build online charging system in five provinces, of which we win one contract.

Lastly, ten contracts for Business Intelligence solutions were opened for bidding and, as we just announced, we win three of them in Beijing municipality, and Henan and Heilongjiang provinces.

In the coming quarter, we expect to see opportunities continuing to arise from China Telecom’s aggressive build-out. We expect five provinces to open up for OCS bidding in either the fourth quarter of 2008 or first quarter of 2009.

On the China Unicom side, eight billing contracts and eight Business Intelligence contracts were up for bids. We are pleased with our win rates and we will announce the results officially soon. China Unicom has also opened up seven provinces for trial of OCS systems and AsiaInfo is one of the vendor that will be assigned a test set [ph].

For China Mobile, existing infrastructure needs to be upgraded. We are focusing our offers on upgrading their infrastructure for work with the TD-SCDMA systems they are rolling out. Over the course of the next six months, China Mobile will be expanding TD-SCDMA to 28 cities. As we already provide soft [ph] systems to China Mobile in 10 provinces, we expect to upgrade those systems to add TD capabilities.

I would also like to briefly discuss our recent investments in the wireless value-added service provider C [ph] platform. We have confidence in C [ph] platform’s business model and we expect our minority stake of about 20% to give us the opportunity to understand the internal workings of a successful wireless value-added service platform provider.

Traditionally, this space was dominated by the service providers. But as the operators became more sophisticated and the opportunities increased revenue, they built out their own value-added services and kept more of the profits. C [ph] platform helps operators to manage and operate their own value-added services for sharing the revenues. We believe that once China has (inaudible) integrated and competitive operators, a large portion of the future industry growth is likely to come from value-added services and the spending in the service in the Chinese mobile consumer will be crucial components of long-term success.

Despite uncertainty in financial markets around the world, our equity’s (inaudible) remained strong with continuous growth in both net revenue and operating income. We have spent over a decade adapting and competing in China’s rapidly evolving telecommunication market, and we are the market leader in BOSS systems with approximately 30% market share across 10 provincial China Mobile subsidiaries.

In Business Intelligence Systems, we hold approximately a 50% market share with complete installations at 15 China Mobile subsidiaries and the company’s headquarters.

And we have also deployed BSS systems in seven China Unicom subsidiaries and have approximately 6% market share of China Netcom’s broadband billing system.

I am confident that our strong cash position affords us the ability to continue leveraging our world-class telecom products and services and deep understanding of Chinese’s market into growth that delivers long term shareholder value.

Again, thank you for your ongoing support in AsiaInfo and now I would like to turn the call over to our CFO, Eileen Chu.

Eileen Chu

Thank you, Steve, and hello to everyone on the call. Please note that all numbers I will discuss today are in U.S. dollars unless otherwise noted.

Third quarter net revenues for the telecom business increased 42.4% year-over-year and 15.6% sequentially. Third quarter telecom software product and solutions revenue increased 49.4% year-over-year and 17.1% sequentially. The increases were driven by strong demand for our industry-leading telecom software solutions, notably in the China Telecom account, as operators move to build out IT infrastructure for their new business as well as differentiate their service offering and improve marketing effectiveness in response to increasing competition.

Thank you telecom service revenues increased 11.6% year-over-year and 14.4% sequentially as China’s telecom operators turned to our leading integration services. Gross profit as a percentage of net revenue for the telecom business was 51.8% in the third quarter of 2008 compared to 53.4% in the year-ago period and 54.2% in the previous quarter.

Lenovo-AsiaInfo’s net revenues increased 55.2% year-over-year and 86.6% sequentially. The year-over-year growth is attributable to the continuous improvement of the division. The significant sequential growth is largely due to seasonality as the second half of the year is traditionally [ph] strongest for the IT security business.

Gross profit as a percentage of net revenue for Lenovo-AsiaInfo was 65.1% in the third quarter of 2008 compared to 60.7% in the year-ago period and 64.6% in the previous quarter. Gross profit as a percentage of net revenue for the Group was 54.2% as compared to 54.6% in the year-ago period and in the previous quarter. As you can see, margins have remained relatively stable for the last few quarters.

As Steve mentioned, we are encouraged with our operating income, which increased 68.9% year-over-year and 48.8% sequentially to $5.3 million. The year-over-year and sequential increases are mainly a result of our concerted efforts to improve operating efficiency and improving economies of scale.

In addition, we are pleased without our operating margin of net revenue, which was 12.4% for the third quarter of 2008 compared to 10.6% in the year-ago period and 10.3% in the previous quarter.

Total operating expenses increased 37.5% year-over-year and 15.5% sequentially to $17.9 million, including non-cash stock-based compensation of $1.1 million, which was allocated to each expense line.

Sales and marketing expenses increased 38.2% year-over-year and 16.4% sequentially due to higher sales commission expenses accrued from successfully breaking into new accounts opened up by telecom restructuring. We continue to benefit from these investments and (inaudible) by our recently announced contracts for billing, Business Intelligence, and OCS systems, as well as strong growth in our IT security business.

G&A expenses increased 29.5% year-over-year and decreased 7.3% sequentially. The year over year increase was mainly due to allocated non-cash stock based compensation. The comparatively lower G&A expenses in the third quarter of 2007 was also due to a government incentive. The sequential decrease was mainly the result of lower bad debt provisions as a result of improving accounts receivable collection.

R&D expenses increased 39.4% year-over-year and 24.3% sequentially. The year-over-year and sequential increases are largely due to increases in R&D headcount and in line with our strategy of continually investing in R&D capabilities in order to develop best-of-class telecom solutions and position ourselves for future market opportunities.

Other income for the third quarter of 2008 was $2.3 million, a decrease of 49.6% year-over-year and 29.6% sequentially.

The year-over-year and sequential decreases were mainly due to decreased dividend income and gain on investments, which are based on the market performance. Other income for the nine months 2008 was $7.9 million, which is comparable to the year-ago period. Other income mainly represents the returns on our investments.

As of September 2008, AsiaInfo’s total short-term investments amounted to $34.8 million, which are recorded at market values using the specific identification [ph] method. Changes in market value are reflected in other comprehensive income.

Our effective tax rate was 19.6% during the quarter compared to 18.3% in the year-ago period and 23% in the previous quarter. Our effective tax rate for the first nine months of 2008 was approximately 19.7%.

Net income excluding share-based compensation expenses, amortization, and impairment charges, dividend income, and gain on discontinued operations, or non-GAAP net income, was $7.6 million in the third quarter of 2008, or $0.16 per basic share. Non-GAAP net income in the year-ago period was $4.8 million, or $0.11 per basic share. Non-GAAP net income in the previous quarter was $6.2 million, or $0.14 per basic share.

DSO’ in the third quarter of 2008 were 113 days versus 107 days in the previous quarter.

Operating cash flow for the quarter was a net inflow of approximately $716,000.

Moving to our balance sheet, our total cash position, including cash and cash equivalents, restricted cash, and short-term investments was $210.6 million.

Deferred revenue at the end of third quarter was $38 million, an increase of 107% and 6% when compared to the September 2000 [ph] balance and June 2008 balance, respectively.

For our fourth quarter 2008 guidance, we expect net revenues to be in the range of $47 million to $48 million, or 34% to 37% year over year growth, and fourth quarter EPS to be $0.14 to $0.16. Net income from continuing operations per basic share in the fourth quarter of 2007 was $0.15.

Our flat EPS assumption takes of a couple of assumptions into account. As noted in the press release, due to the current global market conditions, fourth quarter 2008 guidance includes our expectation of lower investment income. We also would like to point out that our effective tax rate in the fourth quarter of 2007 was a negative 1.4% due to a tax refund recognized in that period, which significantly affects our year-over-year EPS comparison.

And lastly, we have not yet received approval for our "New Technology Enterprise" and "Advanced Technology Enterprise" status, but expects to receive these statuses and to recognize a tax benefit when we do.

Now, let me turn the call back to Steve for his closing remarks.

Steve Zhang

Thank you, Eileen. We are pleased with our ability to execute our growth plan in the face of difficulties worldwide. As I mentioned, we see continued opportunity for growth as carriers finish building of their IT infrastructure and beginning concentrating on integrating their newly acquired businesses and migrating users to their existing systems.

Beyond that, the three post-restructuring telecom carriers will be looking for IT solutions to help them compete effectively and we are confident our world-class telecom products and solutions will be in high demand as the industry continues to evolve. Thank you for your continued support of AsiaInfo. And I will now open the call to questions.

Question-and-Answer Session

Operator

We will now begin our question-and-answer session. (Operator instructions) our first question is from Donald Lu from Goldman Sachs. Please go ahead.

Donald Lu – Goldman Sachs

Hi, Steve, Eileen, how are you? Good morning.

Steve Zhang

Good morning.

Eileen Chu

Good morning.

Donald Lu – Goldman Sachs

Yes, my first question is on the margin side. Can you give us – I don’t see the margin guidance in the Q4 –on the press release for Q4.

Steve Zhang

Our net – our operating margin of net revenue in the third quarter was 12.4% and we didn’t give out the guidance on the fourth quarter. I think it will be certainly higher than our Q3 net margin number.

Eileen Chu

Actually, historically, we never give out guidance on our operating margin, but, Donald, I think if you look at our, say 2007 quarterly operating margin, you can see that Q1 and Q2 is always our lowest season and Q3 and Q4 is our high season. So I think you can use that as a–

Donald Lu – Goldman Sachs

Sure. I was just trying to get some I guess additional information here. Another question is on the margin outlook for next year. Based on your current tender result at China Telecom, China Unicom, what is the – what is your current outlook for growth margins and operating margins for those new accounts?

Steve Zhang

As Eileen mentioned, we normally won't give our next quarter’s guidance. But for next year, traditionally we have been growing our revenues with the rate of 30% with a gross margin on net revenue pretty stable around 55%. And that’s our target also for next year.

Donald Lu – Goldman Sachs

Sorry, what is the target for operating margin for next year?

Steve Zhang

We are still working our next year’s budget at this time.

Donald Lu – Goldman Sachs

Oh I see. But you just said that gross – you have a gross margin target.

Steve Zhang

You can see over the last three, four years, our gross margin on our net revenue has been relatively stable around 55%.

Donald Lu – Goldman Sachs

Yes, so that will continue?

Steve Zhang

Yes.

Eileen Chu

Yes.

Donald Lu – Goldman Sachs

I mean recently we have heard in the China Telecom’s tender the price competition has been very severe. This Huawei basically offer free coupon for most of its – basically its doing it at a loss. Have you seen similar kind of cut throat competition or that there is real technology differentiating that competition scenario–

Steve Zhang

I think on the IT side, we didn’t see that kind of cut throat competition. It’s because China Telecom knows that lower price won't generate good results. So, we are happy with our tender results, and we are happy also with the pricing we got from China Telecom.

Donald Lu – Goldman Sachs

Okay. And, yes, my last question is, you have given us some very impressive design wins for China Telecom and China Unicom. For China Unicom, have they – are they going to start really considering you a supplier for their billing system in each provinces? I think they have – since they have just announced I think the leadership in each province.

Steve Zhang

I think as I mentioned in the last quarter’s conference call, China Unicom opened up eight provinces in the southern part of China for bidding. And the bidding was basically done and we expect to get the official results pretty soon. And I think we will announce the results when we get the official notification. And it should happen in this quarter. And I think we are continuing to aggressively pursue the Unicom opportunity and I think the challenge for China Unicom is in the northern provinces because they need to formulate a plan to integrate a very complex wireless billing system with a very complex fixed line billing system. And we are still working with our customers to formulate a design for that work.

Donald Lu – Goldman Sachs

Great. Thank you very much.

Steve Zhang

Thank you, Donald.

Operator

Our next question is from Karl Keirstead from Kaufman Brothers. Please go ahead.

Karl Keirstead – Kaufman Brothers

Yes, hi, thank you for taking my call. Steve, I had a question for you about all of these new deals that you’ve won from Telecom and that you are hoping to win from Unicom. I am wondering how many of those recent wins actually did you derive revenues from during the third quarter or do most of those recent wins not kick in and affect your P&L until the fourth quarter or the fourth quarter, may be you could talk a little about how we convert recent bookings into revenues?

Steve Zhang

First of all, for our China Telecom wins, probably we only derived 10% of the contract value in our third quarter. The majority of the contract hasn’t been – we haven’t start booking the revenue yet. And so the China Unicom, since we haven’t signed the official contract yet, we cannot book any revenue.

Karl Keirstead – Kaufman Brothers

Okay. So, if you’ve only booked about 10% of the recent contract value that you won–

Steve Zhang

Yes, third quarter–

Karl Keirstead – Kaufman Brothers

– and yet in the third quarter you mentioned that China Telecom was one of the main growth drivers, it must have been some existing deals that contributed to your growth. Could you talk a little bit about what drove Telecom so strongly in the third quarter?

Steve Zhang

For our China Telecom, we – remember we signed a deal in the second quarter to support their OCS deployment in Zhejiang province and Zhejiang is probably the second largest in terms of subscriber in the whole China Telecom group. So we are very close to get that project on line in production in the third quarter. So we are accruing that – booking the revenues of that contract. And we are also helping another subsidiary of China Telecom, Xinjiang Telecom, to get ready their CRM system to support the future CDMA business. So we are – one of the major reason our China Telecom revenue grew very quickly in the third quarter was we were starting to booking the contracts we signed in the first quarter and the second quarter.

Karl Keirstead – Kaufman Brothers

Okay. And, Steve, also I think you mentioned in the past that your big contract win earlier with China Mobile in the Henan province, you would cut over subscribers in the Novembers 2008 timeframe and that would give you a revenue boost. Is that still on target?

Steve Zhang

Yes, that’s still on target. We expect some time in November we will cut our one city in Henan province and basically once the first city is successfully cut over, we’ll – hopefully we can finish the cut over within the next two months. It’s one of the largest (inaudible) it has almost 32 million subscribers in the system.

Karl Keirstead – Kaufman Brothers

Okay. Thanks, Steve. And then a second different question, I am wondering, Steve, if you might talk a little bit about the macro economic conditions in China and how the carriers might be affected by the events going on in the United States and in Europe, if at all, and whether these macro economic effects are changing the carrier IT network spending plans at all, if you could offer some color. Thank you.

Steve Zhang

Okay. I think the macro economic challenges in china are mostly in the area that it’s – where the companies are export driven business. Because of the weak U.S. economy and the RMB –

(Technical Difficulty)

Operator

The next question is from Brendan Barnicle from Pacific Crest Securities. Please go ahead.

Brendan Barnicle – Pacific Crest Securities

Great, thank you very much. As you win these new contracts, I am trying to get a better sense on the profitability around the new contracts. You guys have been able to improve your margins considerably over the last couple of years. As you start to think about – as you are planning for next year, are we going to be able to see that same level of margin improvement or should we expect may be something more in the 100 to 200 basis point type range?

Steve Zhang

I think we are, over the last several years that we have been improving our margins. I think throughout the margin impairment over the last several years was driven the economies of scale and also better management on the cost side. I think going forward you’ll probably see our margin still improve, but not on the scale probably you have seen in the last several quarters, probably we’ll continue. Our long term margin target is 15%. I think I believe this year on a yearly basis our margin is probably between 11% to 12% and next year probably we’ll see another – while we don’t give the guidance, but we’ll continue to try and make our effort to improve our margins.

Brendan Barnicle – Pacific Crest Securities

And that 15% target, how many years do you think it takes until you get to that level, what would you project right now?

Steve Zhang

Probably, another two to three years.

Brendan Barnicle – Pacific Crest Securities

Great, thank you. As you are also preparing for these new contracts, are you – can you give us a little insight on how the hiring is going and how quickly you will be ramping, hiring in Q4?

Steve Zhang

Yes, I think I mentioned in the last quarter we see some challenge recruiting enough people. In the third quarter, we successfully added 250 people on our payroll and as we are looking at quarter four we expect another 150 people on our payroll.

Brendan Barnicle – Pacific Crest Securities

And the new contracts that you are signing as they benefit revenue and you project [ph] in the guidance, are they one-time in nature of should we expect these to be recurring sources of revenue?

Steve Zhang

As I answered the question to Karl, we only recognize a very small percentage of the revenue in the third quarter and so going forward we will start recognizing the revenue we recently announced. And as we are deploying those new projects, we already seeing – we are getting requirements coming – popping up from – on the up river [ph] side. So already are starting to negotiating follow-on projects – follow-on contracts to meet our demand.

Brendan Barnicle – Pacific Crest Securities

And historically see that you’ve looked at these follow-on contracts, and you think about those follow-on contracts now, did they – t those follow-on contracts tend to be as big or bigger than the first year’s contract or are they smaller and they diminish over time?

Steve Zhang

I think the follow-on contracts it’s very difficult to estimate a size yet since it’s basically new requirements coming in to implement new pricing plans, new bundled services, and I think it’s too early to predict the contract size because we are still trying to figure out the scope of the work.

Brendan Barnicle – Pacific Crest Securities

Also, Eileen, what percentage of these new contract wins is currently in deferred revenue and what should we – what percentage is still sort of off balance sheet?

Eileen Chu

We – sorry, Brendan, we don’t give a breakdown on that. I think as Steve has mentioned, the new contracts we announced with China Telecom, we have recognized 10% of the revenue in this quarter. So, you can assume that – it is reasonable to assume that the bulk of it is sitting in our deferred revenue right now.

Brendan Barnicle – Pacific Crest Securities

But as I think about the deferred revenue as a whole and not just the recent contracts but all the historical contracts as well, would we – I mean is it safe to assume that about 20% of deferred revenue reflects the total contract value that’s sitting off balance sheet or is there another number that we can use around that to get a best chance of how this can relate?

Eileen Chu

Again, we don’t give breakdown on that, but when we sign a contract, that is a sales order to us, and that is not reflected in our deferred revenues. When we record it in deferred revenue that’s the time when we collect the cash amount in advance of us doing any – completing any work at all. So that will be sitting in our deferred revenue. So, I think right now the amount that we have collected and reflected in our deferred revenue will be the contracts that we have collected amount – the money but we haven’t delivered the service. And if you look at the standard contracts, we always collect a certain percentage as advance payment. And then along the project we – when we deliver the project then we collect and then – another amount as the progress billing. So, it is really a rolling process. So I think it is difficult for me to tell you exactly how many percent of it is in the deferred revenue right now.

Brendan Barnicle – Pacific Crest Securities

Is there a way to get a sense of how big that off balance sheet piece is and relative to the deferred revenue, if it’s 2X or 1X or three times or something like that?

Steve Zhang

I think our standard contract terms is generally [ph] ask customer for 25% to 30% pre-paid.

Brendan Barnicle – Pacific Crest Securities

Great. Thank you. Then just lastly, Steve, any thing different on the competitive front?

Steve Zhang

Pardon.

Brendan Barnicle – Pacific Crest Securities

Anything new on the competitive front?

Steve Zhang

Not really. I think that we are still competing against the same old competitors we have been competing with that Linkage, Digital China, companies like that.

Brendan Barnicle – Pacific Crest Securities

And as those – in the past you’ve talked about may be doing some M&A. With the downturn in the market, have those companies’ valuations become attractive enough, those might look like good acquisition targets now?

Steve Zhang

I think we’ve public markets coming down. I think probably this asset’s owner need some time to adjust their expectations. So we have regular conversations, but it probably will take some time for them to adjust their expectations.

Brendan Barnicle – Pacific Crest Securities

Okay. And then lastly, Eileen, you had mentioned that interest income was going to be down sequentially from where it was last quarter. So should we be assuming may be something below $2 million in contribution or–?

Eileen Chu

Yes, Q4 2007 our interest – I mean, our investment return is approximately about $1.5 million – $1.6 million. So I think our expectation is to be lower than that.

Brendan Barnicle – Pacific Crest Securities

Okay. Great, thank you.

Eileen Chu

Thank you.

Operator

There are currently no question in queue. (Operator instructions) Our next question is from Sean Jackson, Avondale Partners. Please go ahead.

Sean Jackson – Avondale Partners

Yes, congratulations on the quarter. I am trying to get a better handle on the distribution of your revenue amongst the three carriers because it sounds like obviously China Telecom is becoming more important. Can you just go over approximately what that was in the third quarter and where you intend to see that not only in the fourth but really through 2009?

Steve Zhang

In the third quarter, China Mobile is still a majority of our revenue. It’s roughly 70% of our revenue contribution for our telecom revenue. And China Unicom plus China Netcom, since they only they have started to merge in the in the fourth quarter this year, in the third quarter China Unicom contributed 10% of the revenue, and Netcom contributed roughly 8%.

Sean Jackson – Avondale Partners

Okay. Are those percentages of the telecom revenue or–

Steve Zhang

Telecom revenue, the total telecom revenue.

Sean Jackson – Avondale Partners

Okay. And then 2009 can you – do you have any insight as to where do you think those percentages will go?

Steve Zhang

I think that long term trend definitely the contribution from China Mobile will be coming down. I think that the reason is the growth rates on the up – the two other carriers are faster because China Telecom and the new China Unicom needs a lot of more integration services to help them to do the newly acquired business integration.

Sean Jackson – Avondale Partners

Okay. And can you just give us some insight as to when you sign contracts like this China Telecom contract, win over a little bit before, but how long a period will you recognize revenue from that contract? And also does the margins on that contracts differ according to the time period?

Steve Zhang

Normally we – it will take us nine to 12 months to book the contract’s value as revenue. And since we are booking our – most of our revenue based on our project implementation plan, the resource we put in, the margins will be roughly evenly distributed along a project’s life time.

Sean Jackson – Avondale Partners

Okay, I think that was helpful. And also, the third-party hardware revenue, it jumps around quarter-to-quarter. Is it probably going to increase in the fourth quarter given that it was so low in the third or is there any visibility at all into that for you guys?

Steve Zhang

I think third-party hardware tends to fluctuate on a quarterly basis and we – that’s why we want you to focus our net revenue guidance.

Sean Jackson – Avondale Partners

Okay. And lastly, on your fourth quarter guidance, you talked a little bit about the tax rate and the possibility of getting a benefit. What tax rate are you using for the $0.14 to $0.16 guidance?

Eileen Chu

Well, looking at our nine months we are using – for the nine months our effective tax rate was about 20%. So I would also – for Q4, I would also suggest you use 20% on a conservative basis because I mean during the – during my – during the conference call I’ve also mentioned that that two special tax statuses in China, which we have been getting for the last five, six years, but the problem in China is you accrue your tax base on a tax rate and then when you get approval from the government on those tax statuses then you get a refund. But the problem is we can't control the timing of those approval even though we have been getting it for the last five years. So if we get a tax status approval then we will tax our refund for the previous quarters. And that will mean lower tax rate in Q4, but right now I think since we haven’t got it yet, so we use a higher tax rate on the prudent side.

Sean Jackson – Avondale Partners

Okay. Thank you.

Operator

Our last question is from Julie Chen from CRT Capital. Please go ahead.

Julie Chen – CRT Capital Group

Hi, Steve and Eileen. I just wanted to follow up on the C platform. Could you please help me understand the potential synergies coming from C platform investment exercise

Steve Zhang

First of all, it’s various small minority equity stake investment we are making in C platform. Secondly, I think the synergy is we share the same customer base and our business intelligence solutions will help them a lot in helping them to understand the consumer preference, which value-added services the consumers like and how to do the effective marketing to all those consumers. And that’s I think on the solutions side is the synergy and – but that’s the more demand from the value-added service side will also drive our Business Intelligence solutions sale. And I think another synergy is on the sales and marketing front is we share the same customer base and we can leverage each other to drive both our companies’ sales.

Julie Chen – CRT Capital Group

Thank you. So, let me try to understand just a little bit. In terms of sales and marketing, you are saying that there is certain synergy that comes out, so if I would envision how this will work, is that they would also potentially help AsiaInfo’s service and products while C platform penetrates the value-added services area of the telecom industry. Is that the right way of looking at it?

Steve Zhang

I think the right way to looking at that is in the – in certain customers where we have pretty strong customer relationship we’ll help C platform to penetrate into the account and in other customers where C platform has pretty strong customer relationship and installation base, it will help AsiaInfo to penetrate into those accounts.

Julie Chen – CRT Capital Group

Thank you. That’s very, very helpful. Thank you very much.

Steve Zhang

Thank you.

Operator

As there are no further questions, we will now begin closing comments. Please go ahead, Mr. Zhang.

Sheryl Zhang

Again, thank you for joining us today. If you have any further question, please don’t hesitate to contact us. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you all for attending.

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Source: AsiaInfo Holding, Inc. Q3 2008 Earnings Call Transcript

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