AsiaInfo Holdings, Inc. Q4 2008 Earnings Call Transcript

Feb.12.09 | About: AsiaInfo Holdings, (ASIA)

AsiaInfo Holdings, Inc. (NASDAQ:ASIA)

Q4 2008 Earnings Call Transcript

February 11, 2009 7:00 pm ET

Executives

Sheryl Zhang – Director, IR

Steve Zhang – President and CEO

Wei Li – CFO

Analysts

Brendan Barnicle – Pacific Crest Securities

Karl Keirstead – Kaufman Brothers

Sean Jackson – Avondale Partners

Donald Lu – Goldman Sachs

Kun Tao – Roth Capital Partners

Operator

Welcome to today’s AsiaInfo quarter four 2008 earnings announcement call event. 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. Ms. Zhang, please begin.

Sheryl Zhang

Thank you, Wendy. Hello, everyone, and welcome to AsiaInfo's fourth quarter and full year 2008 earnings conference call. Today, Steve Zhang, AsiaInfo’s President and Chief Executive Officer, will review business highlights achieved during the quarter and discuss strategy; Wei Li, AsiaInfo’s newly appointed Chief Financial Officer, will discuss financial results and give first quarter 2009 guidance. Steve 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 31, 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 the AsiaInfo website, www.asiainfo.com. Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in US dollars.

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

Steve Zhang

Thank you, Sheryl. Hello, everyone, and thanks for joining the call. I’m very proud of AsiaInfo’s success in year 2008. We met our revised fourth quarter guidance posting year-over-year net revenue growth of 45%, leading to an impressive 39% gain in net revenue for the full year. We also made progress in improving operating efficiency in 2008, with operating margin of net revenue growing from 9% in 2007, which is excluding a one-time gain on escrow, to 12% in 2008. This all comes against the backdrop of a world economy that is in distress.

Fortunately, we are seeing no signs of a spending pullback from Chinese telecom operators and we are executing according to plan. In fact, we managed not only to deliver our financial targets, but also to seize opportunities presented by the long awaited telecom industry restructuring announcement in May. This included new gains in market share and contracts for system upgrades and integration services, which we expect to lead to even more opportunities down the road.

During 2008 we proved our ability to deliver innovative and reliable solutions that meet and anticipate the needs of Chinese telecom operators. We rolled out our online charging system software and made major upgrades for our CRM and the billing platforms to support the bundled fixed line broadband and mobile services that we expect carriers would be offering after restructuring and we attempt [ph] to software customer loyalty. Recently, we have seen carriers, particularly China Telecom, beginning to market those bundled services.

A few notable contracts signed in 2008 include a contract with China Mobile in March to develop about 15 in Henan Province, China’s most popular province with more than 40 million mobile subscribers and a penetration rate of only 31%. The scalability of our solutions is the key factor of winning this contract. And we brought the system online at the end of December after successfully migrating approximately 41 million mobile subscribers from the old [ph] to systems.

We also signed contracts with China Telecom to develop billing and CRM systems for Heilongjiang and Henan subsidiaries and to develop BI systems for Beijing, Heilongjiang and Henan subsidiaries, which enables the operator to accommodate mobile broadband and fixed line operations. And in November we signed a contract with China Unicom in Zhejiang Province to develop a BI system, which deepened our relationship with the carrier and led the groundwork for future value-added services and business intelligence related projects.

Perhaps also the most notable accomplishment in 2008 has been the diversification of our revenue stream. New tenders opened by industry restructuring and the conservative effort by our sales and marketing teams have enabled us to expand our revenue from China Telecom account to make up 7% of our total net revenue for full year 2008. We expect to continue diversifying our revenue base in 2009, as three integrated carriers look to software solutions to differentiate their offerings and in essence the customer experience. But beyond software solutions, China’s operators are increasingly seeking out the services of our qualified team to help them maximize their business intelligence capabilities as they prepare for more intense competitive environment.

Accordingly in 2008, we set up HD [ph] for billings operation consultancy, which specialize in data analysis and helping our customers to run their sales and marketing campaigns more effectively. For example, in 2008 we sent a team into (inaudible) mobile, and within four months they were able to double (inaudible) mobile and on that usage by figuring out how to actually selling users or those users with whom that (inaudible) capable, but we are not using the feature. In this way, we are able to leverage our business intelligence installation base to derive additional revenue and at the same time add significant value for our customers.

Now I would like to take a minute to discuss each of our three main accounts and where we see opportunities for AsiaInfo in 2009. For China Mobile we are continuing to add TD-SCDMA functionality to their existing vast installations, which we hope to have completed by the end of the first quarter, as China Mobile hopes to launch its 3G service commercially in May.

China Mobile is in a situation where they have two rival carriers who are certainly much more competitive than they were six months ago. And China Mobile realized early on that a distinct advantage in IT will be crucial to their long-term competitiveness. And we see more opportunities in the future as they invest to maintain their leading market position. More specifically, China Mobile hopes to finish the first phase of its next generation BOSS by the end of 2009, and we see numerous opportunities for upgrades among our installation base throughout the year.

Conversely, the other carriers will have to make significant investments to catch up in the IT space. We are making steady progress with China Telecom and expecting to make up a larger percentage of our net revenue in 2009. It now looks like in the first quarter China Telecom is going to push for upgrades to support the integrated bundled services and open up billing and CRM billings in additional two provinces. We will announce the results if and when we formally sign the contracts.

In the China Unicom space, we have started upgrading our installation base for the next generation BSS, which Unicom had delayed as they awaited the announcement of restructuring. In the first quarter we are participating in billing for next generation BSS in 11 additional provinces, and we will announce those results if and when we sign the final contracts.

We won tender in the fourth quarter to build out billing and CRM systems for Unicom’s Zhejiang and Hunan subsidiaries, as well as a BI system for the Zhejiang subsidiary. Later in the year we expect Unicom to open up several billings for business intelligence systems. We are also delivering a trial OCS for Unicom in Zhejiang Province. The trial is going to complete and we hope to have it completed by the end of the first quarter. Unicom hopes to have a national OCS deployment in 2009. And after the trial, we anticipate that we will be well positioned to win tenders for the rollout to other provinces.

Finally, I would like to note the performance of our Lenovo-AsiaInfo business unit. World on IT security industry does not enjoy the same strong macro catalysts as the telecom industry. I’m happy to report that our Lenovo-AsiaInfo management was able to quickly adapt our strategy to win several significant government contracts during the quarter. And we deal with reliance [ph] of small to medium enterprise sales channels. In 2009 they will continue to execute under this strategy, and I’m confident in the division’s ability to perform at the (inaudible) the macroeconomic backdrop.

Again, thank you for your ongoing support for AsiaInfo. I would now like to introduce our newly appointed CFO, Wei Li, who will go over our financial performance in the fourth quarter and the full year 2008 and give guidance. Wei?

Wei Li

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

Our fourth quarter net revenue for the telecom business increased 46% year-on-year and 16% sequentially, bringing full year growth to 38%. The increase reflects strong uptake for our telecom services solution among all three carriers. And as Steve mentioned, we also saw increase in this year for consulting service, particularly in China Mobile carrier, as the operators turn to AsiaInfo for integration service and for our expertise in analyzing and utilizing data generated by our business intelligence solutions. Gross profit as a percentage of net revenue for the telecom business was 53% in the fourth quarter compared with 54% a year ago and 22% in the previous quarter. Gross profit as a percentage of net revenue was 54% for both 2008 and 2007.

Fourth quarter net revenue for the Lenovo-Asia division increased 45% year-over-year and 34% sequentially, making for the 40% full year growth. The year-over-year growth is attributable to the continuous improvement of the division from several contracts with government entities that drove sequential growth in addition to normal seasonality, which is stronger in the second half of the year. Gross profit as a percentage of net revenue for Lenovo-AsiaInfo was 68% in the fourth quarter compared to the 54% in the year-ago period and 65% in the previous quarter. For the full year, gross profit of net revenue for Lenovo-Asia was 66% compared to 62% in 2007.

As per [ph] the gross profit as a percentage of net revenue for the company was 56%, unchanged from the year-ago period and compared to 54% in the previous quarter. As we have mentioned before, gross profit as a percentage of net revenue were traditionally around 65% and this is the benchmark we continue using going forward.

As Steve mentioned, we are encouraged about improving operating efficiency in 2008. Operating income increased 55% year-over-year and 47% sequentially during the fourth quarter and 51% for the full year. Sales and marketing expense increased 35% year-over-year and 11% sequentially in the fourth quarter and 32% for the full year. Our sales team has made significant gain this year, particularly in signing a new contract with China Telecom as well as other market share gains, as Steve has discussed. The result also advent [ph] in strong performance of IT securities despite challenging market conditions.

And G&A expense increased 95% year-over-year and 76% sequentially in the fourth quarter and 34% for the full year. The year-over-year increase is mainly driven by increase in professional service rate as well as the reversal of the bad debt provision in the fourth quarter of 2007 and third quarter of 2008. R&D expense increased 39% year-over-year and 8% sequentially in the fourth quarter and 29% for the full year. The increase was consistent with continued investment in the research and development and other development type of solutions (inaudible) of China Telecom operator.

The total operating expense increased 44% year-over-year and 17% sequentially during the fourth quarter and 31% for the full year, posting lower increase than the total and (inaudible). As a result, our operating margin of net revenue was 15% in the fourth quarter compared with 14% in the year-ago period and 12% in the previous quarter, making the full year operating margin of net revenue 12% compared with 11% in the previous year. This metrics are expected to go of 11% to 12% operating margin of net revenue for the full year, a result of our conservative effort to improve operating efficiency as well as improving economy of the year [ph]. Lastly, operating margin of net revenue also included a $2.7 million one-time gain on settlement of escrow, without which it would have been approximately 9%.

Now let’s move to other income. The other income for the fourth quarter was a loss of $5.1 million compared with a gain of $1.5 million in the year-ago period and $2.3 million in the previous quarter. For the full year, other income was $2.8 million, a decrease of 70% from $9.4 million in 2007. The loss in the fourth quarter, and a result of full year decrease, is largely driven to $6.7 million in non-cash impairment charge recognized in the fourth quarter related to certain short-term investments in stock funds and a long-term investment.

And our net income, excluding share-based compensation expense, amortization and the impairment charge, an after-tax dividend income and gain on discontinued operations, our non-GAAP net income was $10.2 million in the fourth quarter of 2008 or $0.23 per basic share versus $8.3 million or $0.18 per basic share in the year-ago period and $7.6 million or $0.16 per basic share in the previous quarter. The non-GAAP net income for the full year was $29.1 million or $0.66 per basic share versus $20.1 million or $0.46 per basic share in 2007.

The DSO in the fourth quarter of 2008 was 99 days versus 113 days in the previous quarter. Operating cash flow for the quarter was net inflow of approximately $26 million. Operating cash flow for the full year was approximately $31 million. During the fourth quarter of 2008, we have repurchased 2.5 million shares, bringing the total share repurchase to 2.8 million in the full year of 2008.

Moving back to the balance sheet, our total cash position, including cash, cash equivalents, restricted cash, and short-term investments, was $213.3 million at the end of fourth quarter. Deferred revenue at the end of fourth quarter was $44.4 million, an increase of 33% and 17% when compared with December ’07 and September ’08 balance.

For first quarter 2009 guidance, we expect net revenue to be in the range of $43 to million to $45 million, or 40% to 46% year-over-year growth, and fourth quarter net income per basic share to be around $0.12 to $0.13.

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

Steve Zhang

Thank you, Wei. Once again, I’m pleased with our ability to execute and delivery solid results in 2008. With compelling industry growth catalysts for telecom software solutions business, including a long awaited 3G rollout and strong indications that carriers will continue their spending plans, I’m confident about our prospects in 2009 and look forward to delivering another year of consistent and reliable growth.

Thank you for your continued support on AsiaInfo. I would now open the call for questions.

Question-and-Answer Session

Operator

We will now begin our question-and-answer session. (Operator instructions) Our first question is from Brendan Barnicle from Pacific Crest Securities. Please go ahead.

Brendan Barnicle – Pacific Crest Securities

Great. Thank you very much. I was wondering if you could give us any more breakdown on what you thought the – in terms of the revenue guidance between software and product solution and the services revenue.

Steve Zhang

You mean going forward?

Brendan Barnicle – Pacific Crest Securities

Yes.

Steve Zhang

I think it will probably in the same breakdown as in 2008.

Brendan Barnicle – Pacific Crest Securities

And specifically in Q1, would that be somewhat similar to Q4 where you got increase in services revenue or Q1 a year ago?

Steve Zhang

I think it will be – you can average all of our 2008 numbers and we will be in that percentage breakdown.

Brendan Barnicle – Pacific Crest Securities

Okay, great. And Steve, you mentioned I think on the call like kind of 13 new contracts that you would be bidding for. I think they were 11 that you mentioned in China Unicom and two at Telecom. Are there any other big contracts that could be coming up as well for bid in the first six months?

Steve Zhang

There will be also – in China Telecom, there will be an addition of five OCS contracts up for bidding in the first quarter or the second quarter. That bidding process was delayed from last year. In China Mobile we participate in many upgrade contracts, but those are basically we are negotiating, but with our installed base we are not participating in getting new customers.

Brendan Barnicle – Pacific Crest Securities

I’m sorry, that was the five are for Telecom, right?

Steve Zhang

Yes, that’s for the OCS contracts, online charging system.

Brendan Barnicle – Pacific Crest Securities

And as you look at all these, so we’ve got I guess like about 18 contracts. What’s the range of the sizes of these initial contracts?

Steve Zhang

Some of them are big, some of them small. For example, the next generation billing contracts for China Unicom, each province, I would say, roughly in the range of $1.5 million to $2.0 million. And for China Telecom’s OCS, it’s relatively smaller, only $0.5 million per installation.

Brendan Barnicle – Pacific Crest Securities

And then you had – I think there were two other contracts that are contracts of Telecom?

Steve Zhang

Yes, China Telecom is opening up two more provinces for billing, and we are participating in that bidding process.

Brendan Barnicle – Pacific Crest Securities

Would those be similar in size to the Unicom contracts?

Steve Zhang

Yes, it’s roughly the same size.

Brendan Barnicle – Pacific Crest Securities

Okay. And then any help you can give us on investment income, that was such a wildcard this year as we think about what the model for Q1 and maybe how to think about ’09?

Steve Zhang

You mean that – you’re asking income guidance for 2009?

Brendan Barnicle – Pacific Crest Securities

Right. And Q1, any help you can give us there?

Wei Li

Let me answer the question. Normally we don’t really give guidance for investment income. But also, as we know, this really depends on the overall market condition, which has been very volatile in the recent quarters. If I look at the general trend, we do see the investment income to be flat compared with 2008.

Brendan Barnicle – Pacific Crest Securities

Okay. Flat with last quarter ’08, okay. And as I think about Q1, should we be modeling – should it look no longer be negative like it was in Q4? Should it be flat with last year?

Wei Li

Q4, it’s really driven by non-cash impairment charge, which we should not expect to repeat quarter-after-quarter.

Brendan Barnicle – Pacific Crest Securities

Okay. I think that does it for me. Thank you.

Operator

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

Karl Keirstead – Kaufman Brothers

Yes, hi. Thanks for taking my call. I had a question first about the 3G rollout. And Steve, I’m wondering if you could just describe a little bit more on how it affects demand? Is it incent to carriers to upgrade your billing systems as they move to next generation services, or will they build separate mobile data services platform that AsiaInfo could ultimately participate in, maybe a little color?

Steve Zhang

Okay. For 3G-related services, we are seeing – first of all, we need to make upgrades to our billing system to support from the newly launched data services on the carrier 3G network. And we expect to finish our upgrades for all three carriers by the end of the second quarter. From the carriers – for example, China Mobile, we need to even finish by the end of the first quarter because they have a very urgent schedule to launch those services. And additionally, we are also participating in some of the mobile data service platforms bidding process. For example, we are participating in China Unicom to work on their device management platform. We are also working with both China Telecom and China Unicom in participating in a bidding process for mobile e-mail application platforms. But we don’t know when this contract will be decided, and it probably will – it won’t happen until the end of the first quarter.

Karl Keirstead – Kaufman Brothers

Okay, great. Thanks, Steve. And then my second question is, Steve, on the last earnings call, you expressed a rough target for 30% revenue growth in ’09. Is that a target you still feel comfortable with?

Steve Zhang

We only gave our first quarter guidance. And as you can see over the last several years, we have been able to achieve 30% growth. And given the strong industry catalysts, especially the 3G rollout, we feel comfortable with this target.

Karl Keirstead – Kaufman Brothers

Okay. And then the operating margin front, is it also fair to assume that you can continue to expand your operating margins in 2009?

Steve Zhang

I think we are pleased with our operating margin of net revenue. For the fourth quarter 2008 it was 15% and for the full year it was 12%. I think we see our stated 2008 target of 11% to 12%. And we expect to see continuing improvement on that in 2009 with our – internally we now set a target of 12% to 14% for the full year.

Karl Keirstead – Kaufman Brothers

Okay, great. Thanks. And then if I might, one question for Wei Li. Welcome to the call. I have a question about the balance in Chinese equity funds. Obviously that was an issue that created a one-time charge. Can you give us an update as to what the balance is as at the end of fourth quarter? I think it was $11 million at the end of the third quarter. Thank you.

Wei Li

The total balance fund, you mentioned that we have two types; one is the bond funds and stock funds. (inaudible) at the end of December, it’s about $28.6 million, which is very few percentage of the total cash balance. All that get [ph] about 13% of total cash balance.

Karl Keirstead – Kaufman Brothers

Okay, great. That’s very helpful. Thank you.

Operator

Our next question is from Sean Jackson from Avondale Partners. Please go ahead.

Sean Jackson – Avondale Partners

I wanted to dig down a little bit on your visibility on your China Mobile business again. You mentioned that with that customer there are many upgrade contracts that are happening. What is the catalyst for those through ’09? And also with regard to the TD-SCDMA rollout that they have been claimed to help them with it in the first quarter, how is it derived from that?

Steve Zhang

Sean, hi. Can you repeat your question? The connection wasn’t that very good.

Sean Jackson – Avondale Partners

Okay, I’ll repeat it. It rolls around the visibility of your China Mobile business. You said that you intend to have some upgrades of contracts in ’09. Can you just explain and give more detail on what the catalyst is for those upgrades?

Steve Zhang

Okay. We are negotiating with China Mobile for two kinds of upgrades in 2009. The first one is relatively smaller in size. It’s the upgrade to support their TD-SCDMA business launch. And as we are negotiating the contract, we are also in the process of delivering the upgrades on solutions. The second upgrade we are negotiating with China Mobile is to upgrade our current billing and CRM infrastructure to a new China Mobile technical certification for NG-BOSS. That stands for next generation business operation support systems. And among our installed base, we already finished the negotiation in five provinces, and we are in the process of another four provinces negotiations. Throughout the year we need to gradually do module-by-module upgrades to move our China Mobile installations to this NG-BOSS infrastructure.

Sean Jackson – Avondale Partners

Okay. How long will that take place? I mean, how – is that a whole 2009 time frame till you get to every province or is it to go beyond that?

Steve Zhang

I think they will probably last until the first half of next year, the delivery process.

Sean Jackson – Avondale Partners

Okay, thank you. And also on your diversification in ’09, approximately what percent of revenue do you anticipate both Telecom and Unicom bring? And how does that compare with what it was in ’08?

Steve Zhang

We don’t give that kind of detailed breakdown for 2009, but it’s our basic drill [ph] that we want our revenue coming from China Telecom and China Unicom growth rate much higher than our overall revenue growth rate.

Sean Jackson – Avondale Partners

Okay. Thank you very much.

Steve Zhang

Thank you.

Operator

Our next question is from Donald Lu from Goldman Sachs. Please go ahead.

Donald Lu – Goldman Sachs

Hey, Steve and Wei Li. Hi. My first question is on the China 3G. When do you think China Telecom and China Unicom and China Mobile will start their real 3G service and offering numbers – phone numbers to subscribers?

Steve Zhang

Based on what our discussion is on the three carriers, they have all internally set the launch target date, which is May 17, which is Worldwide Telecom Day, and we are all working to get our IT systems ready for that date.

Donald Lu – Goldman Sachs

I see.

Steve Zhang

Of course, all the three carriers not only need to get their internal IT system ready, but they also need to get their network equipment operated on [ph] and their mobile data service platform to be ready operated on. So we expect for the next six to nine months we’ll be very busy

Donald Lu – Goldman Sachs

Right. My next question is the pricing environment in China. Is your billing rate trending up or down or stable in 2009?

Steve Zhang

Well, 2009, we don’t know the results yet. For 2008, we are seeing a stable and a little bit upward trend for charge rates.

Donald Lu – Goldman Sachs

Right. Okay. And the wage pressure should be quite moderate this year. Are you planning to raise salary for this year?

Steve Zhang

I think you are right. I think the wage inflation or the pressure is coming down compared with last year. And for 2009, I think it will depend – internally we have a budget of 5% salary increase.

Donald Lu – Goldman Sachs

Okay. Can you give us the headcount breakdown in Q4, like between delivery staff and others, and also the target for this year?

Steve Zhang

At the end of year 2008 we had lastly 3,400 people. I think the 400 people is in our IT security systems. 3,000 is on our telecom solutions business.

Donald Lu – Goldman Sachs

Okay.

Steve Zhang

And in the 3,000 telecom solutions business, I think it’s over 2,000 is on our delivery side.

Donald Lu – Goldman Sachs

Okay. And how is the – the plan for 2009?

Steve Zhang

The plan for 2009, let me see –

Wei Li

We still think we only give the (inaudible) guidance. For the Q1 ’09, we’d probably add approximately 200 people.

Donald Lu – Goldman Sachs

Okay. Yes. My next question is on the operating expense. Is there a target for the total operating expense for this year?

Steve Zhang

For the operating expense I think, in my question to Karl, we are looking to our target for the year for operating margin of net revenue is between 12% to 14%.

Donald Lu – Goldman Sachs

I see. Okay. And what was the professional fee in the G&A last quarter? Is that a one-time item?

Steve Zhang

Yes, it’s a one-time expense related to (inaudible) S3 filing that we take to the legal and auditing firms.

Donald Lu – Goldman Sachs

Right, right. How is that deal coming along? When the deal will be carried out?

Steve Zhang

We believe the S3 filing is still in process of being reviewed by SEC. And we are still waiting for the review to be finished.

Donald Lu – Goldman Sachs

Okay. Yes. My final question is on this – your stock investment. I think the China, Asia market has rebounded nicely. Would you be (inaudible) of your investment any time soon?

Steve Zhang

It’s under our discussion, but we cannot comment on the specifics.

Donald Lu – Goldman Sachs

Okay, great. Thank you very much. And welcome, Wei Li. Thank you.

Steve Zhang

Thank you.

Operator

Our next question is from Kun Tao from Roth Capital Partners. Please go ahead.

Kun Tao – Roth Capital Partners

Hey, congratulations on the quarter. My first question, going back to the 3G sales, 3G rollouts, so I think that most carriers will expect May 17, so does that mean you have revenue already contributed to maybe in Q2 for the 3G rollout?

Steve Zhang

I didn’t quite catch your question. Can you repeat it again for us?

Kun Tao – Roth Capital Partners

Yes. My question is, related to 3G revenue contributions, should you expect starting Q1 and maybe Q2 you already have those revenue because of this 3G rollout.

Steve Zhang

I think the 3G-related revenue will come in all the four quarters next for the full year. I mean, for the first half, we need to do a lot of upgrade for our billing systems and for the second half we need to – this is a very rough project. We don’t have much time. In the second half, we need to do a lot of the incremental changes to improve the installation. We also are adding a lot of features to support the bundle, integrate [ph] the service bundles that carriers will launch in the first – second half of the year.

Kun Tao – Roth Capital Partners

Yes. We have – those carriers, actually China has there announced probably $58.5 billion related to this 3G rollouts. What’s your expectation in terms of hardware and software slate?

Steve Zhang

That’s a very difficult number to break down. I can not comment on that.

Kun Tao – Roth Capital Partners

Okay, all right. And my next question is, going back to – lot of people talk about in terms of restructuring for all those three carriers. There might be a little bit slowdown in overall expenditures because they need to settle down those restructurings. Obviously for Asia it won’t be the case because you have additional revenue from China Mobile and China Telecom. So overall, do you see any slowdown maybe in the first quarter or second quarter of this year due to the restructuring?

Steve Zhang

Actually, no, I think – well, restructuring has almost been completed. And we expect to see small opportunities for us down the road. Each operator currently bid for sharing [ph] building our infrastructure to support real integrated service. So we are working with each operator to upgrade their existing infrastructure to accommodate this newly acquired business. We’ll be also helping them migrate, acquire users over to their existing systems and integrate our fixed line broadband wireless business over the duration of 2009. In fact, I think increasing competition among operators in 2009 will drive more demand for IT solutions in the long run. And we are confident we can leverage our industry-leading position to get more market share.

Kun Tao – Roth Capital Partners

All right. Do you have a breakdown in the fourth quarter, the revenue from those three carriers?

Steve Zhang

In the fourth quarter 2008, China Mobile contributed 56% of revenue, China Unicom contributed 15%, and China Telecom contributed 9%.

Kun Tao – Roth Capital Partners

All right, thank you. Last two questions. What’s your gross margin expectation in Q1? Do you think it will be better than Q4 or maybe slightly lower?

Steve Zhang

If you look back over the last ten quarters, our gross margin has been in the range of 54% to 56%. Basically it’s 55% plus or minus 1% or 2% range. So going forward in 2009, it’s – maintaining that gross margin will continue to be our target.

Kun Tao – Roth Capital Partners

Okay, all right. My last question is, do you have any – are you talking to any acquisition targets in terms of maybe different products, fixed line products or anything in 2009?

Steve Zhang

We are looking at several parties because, as you know, those companies we’re negotiating tend to be very long and difficult. And we don’t want to comment on the specifics at this moment.

Kun Tao – Roth Capital Partners

Okay. Do you expect anything to happen in 2009?

Steve Zhang

We don’t want to comment on that at this point because we don’t want to tie our hands. We are in the process of negotiating several deals, but whether we can be successful or not, it’s hard to say.

Kun Tao – Roth Capital Partners

All right. So the negotiation is in the same production line or the software or data sector obviously (inaudible) mainly go to the fixed line operations?

Steve Zhang

It’s still more fully its surrounding telecom solutions.

Kun Tao – Roth Capital Partners

Okay. All right. Thank you very much.

Steve Zhang

Thank you.

Operator

There are currently no questions in queue. (Operator instructions) As there are no further questions, we will now begin closing comments. Please go ahead, Ms. Zhang.

Sheryl Zhang

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

Operator

Ladies and gentlemen, this concludes our conference call. Thank you all for attending.

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