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Executives

John Harmon - CFA, Sr. Account Manager

Simon Ma - Chief Executive Officer

Franklin King - Interim Chief Financial Officer

Analysts

Donald Madigan - Garden State Securities

Camelot Information Systems Inc (CIS) Q3 2012 Earnings Call December 13, 2012 8:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to Quarter Three 2012 Camelot Information Systems' Earnings Conference Call. My name is Denise, and I'll be your event manager today. Throughout the conference, you will remain on listen-only. (Operator Instructions).

Now, I would like to turn the presentation over to your host for today's call, Mr. John Harmon, Account Manager at CCG, Investor Relations. Please proceed, sir.

John Harmon

Thank you, Denise. Good evening to everyone and the U.S. and good morning to everyone in Asia. Welcome to Camelot Information Systems' third quarter 2012 earnings conference call.

With us today are Camelot's Chairman and CEO, Mr. Simon Ma and Franklin King, Interim Chief Financial Officer.

Before I turn the call over to Mr. Ma, I would like to remind our listeners that management's remarks in this call contains certain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the company claims protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risk, but not limited to future products and plans, customer relationships, competitive pressures, the IT spending environment and general economic conditions and other information detailed from time-to-time in the company's filings future filings with the United States Securities and Exchange Commission.

Although the company believes that the expectations of such forward looking statements are reasonable, there is no assurance that such expectations will prove to be correct.

As a reminder, GAAP-based measurements are described in the earnings release and used in preparing the company's financial statements. In the following discussion, we will refer to adjusted figures as they more accurately represents the company's business activities without the non-operational impact from acquisition and share-based compensation and amortization of intangibles.

Specifically, adjusted figures exclude amortization expense of acquired intangible assets, changes in fair value of contingent consideration for acquisition, goodwill and impairment charges and non-cash share-based compensation expense. In addition, any projections as for the company's future performance represent management's estimates as of today Thursday, December 13, 2012.

Camelot assumes no obligation to update these projections in the future as market conditions change. For those of you who are unable to listen to the entire call at this time, there will be a replay of the call available for the next week and the details are available in the earnings release that was issued this evening.

Now, it's my pleasure to turn the call over to Camelot's Chairman and CEO, Simon Ma. Simon?

Simon Ma

Thank you, John. Hello, everyone and thank you for joining us on our third quarter 2012 earnings conference call. I would like to offer some comments on our performance in the third quarter and I will offer comments on business opportunities for Camelot.

Although we missed our financial targets for the third quarter, the revenue shortfall was largely caused by external conditions. Camelot's business remains relatively solid in a soft economical environment.

We believe, we have not lost our market share rather we have fared better than competitors as we are a market leader. First, I would like to discuss our revenue performance for the quarter. I am sure that most of you are aware of the once-a-decade leadership change in China, in which a new generation of leaders assume power has also had an effect on managed date on the companies, which also experienced a management transition and many of these companies are our customers.

Although we anticipated this transition in general, one FIS business unit experienced delays in contract signing due to the leadership transition and we expect the delay to continue through the fourth quarter, therefore revenues came in lighter than our guidance, which flowed through our income statement leading to a lower than expected adjusted net income. The good news is that work on this project have been completed and we expect the contract to be signed in the fourth or first quarter next year. Despite the revenue shortfall, FIS revenues were up nearly 59% year-over-year and up slightly from the second quarter.

Second, I would like to discuss the impact of the slowing China economy on our business. Although, many economists and pundits have announced the bottom out of the Chinese economy, we continue to see softness in our customer base. This is evidenced the modest 1.8% growth in revenue in our EAS business line. Part of the slowness is due lower revenue in the resources energy sector, which was also influenced by the political transition and growth was also much more modest among our manufacturing and automotive customers.

Halfway through the fourth quarter, we continue to see a soft economic environment which we expect to persist entering next year. We believe our business remains fundamentally solid as we continue to strengthen our market position and market leadership and we expect to sign the delayed FIS contract in the fourth or first quarter next year.

We continue to make adjustment to our organization to streamline the entire process of service delivery. Our third quarter results show the early benefits of our actions taken early this year to focus the company on integration of our business. This year, we have completed building the backend functions of our new FIS subsidiary and we look forward to transferring the customer facing function early next year.

In addition, we continue to invest in applying new technologies to our solutions. We entered a partnership agreement with Huawei Mobile to provide solutions for mobile platform the project is on track and we have completed three off four projects on a platform have already gone live. In addition, we have also revised contracts with some of our subsidiaries including the offering of a performance to buy or hand some shareholders the smooth negotiation process as well as changing the ownership structure of Dimension.

Now, I'll hand the call over to our Interim CFO. Franklin King. Franklin?

Franklin King

Thank you, Simon, and hello everyone.

In third quarter of 2012, the net revenue increased 15.7% to $63 million from $54.5 million in the year ago quarter and the increase is slightly from $32.1 million in the second quarter. The seasonality of our business typically result in higher quarter revenue in the second half of the year.

Enterprise Application Service, EAS net revenues increased 1.8% year-over-year to $41.9 million in the quarter and also increased 1.6% from the prior quarter. The increase in quarterly EAS revenues was primarily due to strength in the area being offset by lower revenue from resources and energy customers.

EAS revenues amounted to 66.5% of net revenues in the quarter. FIS net revenues increased, as Simon said, 58.6% year-over-year to $21.1 million and increased 1.2% from the prior quarter. FIS revenues accounted for 33.5% of the quarter's net revenues.

Cost of revenues increased 5.0% to $45.8 million from $43.7 million in the year ago quarter. Adjusted cost of revenues increased 9.5% to $45.8 million from $41.8 million in the year ago quarter. Adjusted cost of revenues excludes $19,000 share-based compensation expense and $31,000 of acquisition related intangible expense.

Now switching to gross profit, the gross profit increased 59.0% to $17.2 million from $10.8 million in the year ago quarter. Adjusted gross profit increased 36.2% to $17.2 million from $12.6 million in the year-ago quarter. The gross margin was 27.3% in the quarter, as compared to 19.8% in the year-ago quarter. The adjusted gross margin was also 27.3%, as compared to 23.2% in the year ago quarter due to an improvement in utilization of the IT team.

Operating expenses was $49.1 million in the quarter, as compared to $57.2 million in the year ago quarter. Adjusted operating expenses were $11.8 million, representing a 9.7% decrease from $13 million in the year-ago quarter. Operating expenses declined year-over-year due to lower sales and marketing and general and administrative expenses. That's SG&A.

Adjusted operating expenses exclude $29.6 million of impairment of goodwill, $6.6 million of impairment of intangible assets, $482,000 of share-based compensation expenses and $487,000 of acquisition related intangible expense. The operating loss was $31.9 million as compared to an operating loss of $46.3 million in the year ago quarter. Adjusted operating income was $5.5 million, as compared to adjusted operating loss of the $0.3 million in the year ago quarter.

Net loss attributable to Camelot for the third quarter of 2012 was $31.5 million, as compared to a loss of $46.5 million in the year ago quarter. Adjusted net income contributable to Camelot for the third quarter of 2012 was $5.8 million, or $0.13 for ADS as compared to adjusted net loss of $0.5 million in the year ago quarter or loss of a penny per ADS.

Now, I would like to discuss the results for the first nine months of 2012. In the first nine months of 2012, net revenues increased 8.8% to $182.2 million from $167.4 million in the first nine months of 2011.

Net revenue in the EAS business line in the first nine months was $122.4 million, an increase of 2.6% from $119.3 million in the year ago period. Revenues in the FIS business were $59.8 million in the first nine months, an increase of 24.2% from $48.2 million the year ago quarter.

Gross profit was $46.1 million in the nine month period, as compared to $43.7 million in the year ago quarter. The gross margin was 25.3% in the first nine months, as compared to 26.1% in the year ago period. Adjusted gross profit was $46.2 million in the first nine months, as compared to $46.5 million in the year ago period. The adjusted gross margin was 25.4% in the first nine months, as compared to 27.8% in the year ago period.

The operating loss was $30.0 million in the first nine months, as compared to an operating loss of $39.9 million in the year ago period. Non-GAAP operating income was $10.6 million in the first nine months, as compared to $14 million in the year ago quarter. The adjusted operating margin was 5.8% in the first nine months, as compared to 8.4% in the year ago period.

Net loss attributable to Camelot was $29.9 million in the first nine months of 2012, as compared to net loss of a $41.3 million in the year ago period or $0.67 per diluted ADS as compared to $0.92 in the year ago period. Adjusted net income attributable to Camelot was $10.7 million, or $0.24 per ADS, in the first nine months, as compared to $12.6 million, or $0.24 per ADS, in the year ago period.

Turning now to our balance sheet. As of September 30, 2012, the company had $66.9 million in cash, cash equivalents, term deposits and short-term investments, as compared to $102.4 million in cash, cash equivalents and term deposits as of December 31, 2011. The decrease was mainly due to $29.9 million net loss, a $25.8 million increase in accounts receivable and a $10.6 million in repay of bank borrowing, offset by $29.6 million in impairment of goodwill, $6.6 million of impairment of intangible assets in the first nine months of 2012.

Receivables increased by less than $1 million from the second quarter. Day sales outstanding, DSOs, were 206 days, roughly flat with 205 days in the prior quarter. We are currently implementing a program that we tied up 14 of the sales managers' compensation to drive our DSO target and we expect to see an improvement in the fourth quarter.

In the first nine months, we invested $21.8 million of cash into operations. We received $17.3 million from investments and we invested $12.8 million into financing for a total outflow of $16.7 million.

Camelot's headcount increased to 5,966 as of September 30, 2012, which included 5,230 information technology professionals, versus 5,707 at the end of the second quarter. Of the IT professionals, EAS employee headcount was 2,249 and the FIS employee headcount was 2,981.

Now, I would like to offer guidance for the fourth quarter and the full year. We are cautious about the outlook for 2013, and we believe the China's economy reaching to the bottom. There are many uncertainties going forward and we expect slower customer activity in the third quarter will continue through the fourth quarter and into early next year.

For the whole year, we now expect $252 million and adjusted net income of $10.5 million, or $0.24 for EAS. Based on $44.4 million diluted ADS, which is below our previous estimation of the revenue, and approximately $266 million and adjusted income of $18 million or $0.38 per ADS.

For the fourth quarter 2012, we expect revenue of approximately $70 million and adjusted net loss of $0.2 million, or $0.00 per diluted ADS based on $44.4 million diluted ADS.

Now, I will pass the call back to Simon. Simon?

Simon Ma

Thank you, Franklin. We are operating third quarter in a middle of a political transition and soft economic environment. Though our results missed our targets, for the remainder of 2012, we expect a steady performance as we continue to improve our business structure and our operational efficiency.

Looking ahead to next year, we expect to build on a foundation we have laid to create award reading FIS subsidiary.

The team and I are now happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Donald Madigan from Garden State Securities. Please proceed.

Donald Madigan - Garden State Securities

Yes. Hi. Good evening, sir. I have been investing in your company from day one. And, I guess question, you announced the share buyback and I see in the present report that you did not buyback any shares. Is it your intention to repurchase shares? Because, the price per share, you have to understand people will contact me and ask me what's wrong. I really have read all your reports. I love your company. I have nothing, but you have lost respect for all of the people involved with IBM. I was with Big Blue back in the 1970, so I just don't understand with the share price so low that what do I tell clients as far as that goes? And, I would just like a little insight on your part of, where you are going from here.

Simon Ma

Donald, this is Simon. Thank you very much for making all these comments and all that. And, as a matter of fact, I am myself is much troubled about share price as you are.

Donald Madigan - Garden State Securities

I mean, I just want to tell you. I am in a different position. I am in the business 25 years. You are over a one side of the sector. I am on the other side, so now this respect you've just had, which is very interesting, but I am sorry to interrupt you but thank you.

Simon Ma

Yes, but we do discuss about share buyback programs in our board meetings and there were some concerns from our board members that the economy is now looking good and that we need to preserve our cash position and all that.

So, from time-to-time, we will discuss it, but I think we have not taken any actions, because, A, we have not reached to a conclusion whether this is a best time to do a buyback program or not, but we appreciate your comment and always keep those comments in our mind. We have to test those. Thank you.

Donald Madigan - Garden State Securities

Yes. Simon, can I ask just one more question?

Simon Ma

Yes. Sure.

Donald Madigan - Garden State Securities

I just wanted to ask you real quick. Is there any chance? Because, the valuation of your company is low, I mean, you are trading much below cash. Have you thought about taking the company private at all?

Simon Ma

Well, there are always a kind of talks and all that, but we are not seriously looking at it yet and it is certainly an option, but right now we are spending most of the time doing the business restructuring, so we didn't really have time to sit down and talk about it yet. Once we do and have something then we will announce it.

Donald Madigan - Garden State Securities

Thank you very much. Best wishes and good luck and have a very happy holiday season, okay?

Simon Ma

Thank you. You too.

Operator

(Operator Instructions). We have no questions at this time. (Operator Instructions). Now, I would like to turn the call back over to Mr. John Harmon for closing remarks.

John Harmon

All right. Simon was supposed to read this, but I'll read the closing remarks. Thank you, everyone, for joining us today and we look forward to updating you on our progress in the future. This concludes our conference call. Thank you.

Simon Ma

Thank you.

Franklin King

Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.

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