AsiaInfo-Linkage CEO Discusses Q1 2013 Results - Earnings Call Transcript

Apr.29.13 | About: AsiaInfo Holdings, (ASIA)

AsiaInfo-Linkage, Inc. (NASDAQ:ASIA)

Q1 2013 Earnings Call

April 27, 2013 08:00 AM ET

Executives

Jimmy Xia - IR

Steve Zhang - President and CEO

Michael Wu - EVP and CFO

Analysts

Clara Fan - Jefferies

Joseph Yang - SIG

Kai Qian - CICC

Operator

Hello and welcome to AsiaInfo-Linkage First Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only. After management’s prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I’d now turn the call over to your host for today’s conference, Mr. Jimmy Xia, AsiaInfo-Linkage’s Head of Investor Relations. Sir, please go ahead.

Jimmy Xia

Thank you. Hello, everyone, and thank you for joining AsiaInfo-Linkage’s First Quarter 2013 earnings conference call. Today, Steve Zhang, AsiaInfo-Linkage’s President and CEO will review business highlights from the quarter and discuss Company strategy. Our Chief Financial Officer, Michael Wu, will discuss financial results for the first quarter and give guidance for the second quarter.

Before we continue, please allow me to read you AsiaInfo-Linkage’s Safe Harbor Statement. Information discussed during this conference call might be forward-looking in nature and is 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, 2012, and reports subsequently filed with the Securities and Exchange Commission.

Please note that some of the information to be discussed today 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-Linkage’s financial results prepared in accordance with GAAP are included in AsiaInfo-Linkage’s earnings release which has been posted on the IR section of the Company’s website.

Also, please note that the company does not intend to, nor is it obligated to disclose any developments related to receipt of non-binding Private proposals while this process remains ongoing. As such, the company will not comment on this process during this call. Our special committee continues to work with our financial and legal advisors in determining the best course of action for our investor base.

As previously noted, there can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated. 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 our President and CEO, Mr. Steve Zhang.

Steve Zhang

Hello, everyone, and thanks for joining us today. The timing of our board meeting and China's May Day holiday period forced us to hold our earnings call on a weekend so that we would be sure to complete our SEC filings in a timely manner, given our status as a Delaware corporation. We apologize for any inconvenience and thank you for your understanding.

In the first quarter of this year, we matched our top line guidance with non GAAP net revenue of $135.7 million, while non GAAP net income attributable to AsiaInfo-Linkage was $0.37 per basic share, excluding the positive impact from the recent granting of key software enterprise status (ph) which was retroactive for the year 2011 and 2012 and amounted to non-GAAP net income of $0.12 per basic share.

Non GAAP net income attributable to AsiaInfo-Linkage was $0.25 per basic share which, was in the high range of our guidance. The first quarter is typically a slower quarter for our business, mainly due to the way China's three telecommunication providers structure their software projects through the year. However that gave us an opportunity to follow through with the large number of projects that entered the delivery and implementation stages in the fourth quarter last year, while our top line year-over-year growth of 12% was in line with our expectations.

China's carriers continued to see large increases in data traffic across their networks in the first quarter. That growth has outpaced their growth related revenue which has put even greater emphasis on smart pricing and data traffic demonetization.

For China Mobile, alone we have already signed nine provincial networks to implement analytical solutions, to study their network usage pattern. The goal is to optimize the carrier's data traffic maintenance and the pricing strategies.

In terms of specific updates from the first quarter, for China Mobile we have done nine provinces for NG-BOSS 4.0 contracts and have already started on the delivery process. In terms of 4G upgrades, we are still working closely with China Mobile in planning and testing for the support of TDLTE. The system will ultimately feature new centralized components as well as upgrades to existing BOSS infrastructure at a provincial level.

We are also working with China Mobile to make their overall billing process more efficient, specifically by moving away from once per month billing cycle which creates bottlenecks at both their online and brick and mortar stores. We envision a process of five or more billing cycles per month.

The technology is in place, but part of the process for the carrier will be managing the expectations of end users and communicating to them the benefit of such a change. Longer term, we see similar opportunities with China's other two carriers.

For China Unicom, we are following up on supplementary work related for our major northern six provincial projects of last year. We are also making progress in our partner relationship management, or PRM project.

We expect to complete this by third quarter of this year, at which time carrier will be able to manage all of the third-party retail channels and have a centralized video obtainment and commission data. This type of shift away from decentralized provincial level systems is common among all three of China's carriers and will be a focus of much of our work in the years ahead.

For China Telecom, we have delivered our Billing 2.8 solutions to a total of eight provinces and deployed CRM 2.0 solutions across 11 provinces. We expect the rest of the province in a network to be completed within this year.

Our Differentiation Access and Application Control System, or DAAC system is being implemented for seven provinces currently. As mentioned last quarter, this technology enables broadband users to purchase additional bandwidth on a need-specific basis.

For our China Telecom business overall, in the first quarter, we saw large number of smaller contracts, that together exceeded our target for the client. One example is our current contract with Guangdong Telecom, the largest provincial network within China telecom group to help them understand their data traffic characteristics.

We have also been approached by a number of Mobile Virtual Network Operator licensing candidates in China. This growth opportunity still in its early stage, but we are confident that MIIT’s proposed addition of (inaudible) will be net positive for our business.

Regarding our overseas business, in the first quarter we move closer to our goal of completing GSM user base migration for Nepal Telecom by the midpoint of this year. As we do so, we are also identifying opportunities to expand the project scope across other areas of our business.

I will now turn the call over to Michael, our CFO, who will discuss our financial results in more detail. Michael?

Michael Wu

Thank you. Thank you, Steve and hello everyone. Please note that all numbers I will discuss today are in the U.S. dollars, unless otherwise noted. Total revenues for the first quarter of 2013 was $143 million, an increase of 60% year-over-year and a decrease of 14% sequentially.

Meeting guidance, net revenue, non-GAAP based for the first quarter of 2013 was $133 million, an increase of 12% year-over-year and decrease of 13% sequentially. This year-over-year increase was primarily the result of healthy demand from China’s three telecommunications carriers while the sequential decrease was mainly due to the seasonality of our business as the carriers determined their billing and the CRM software requirements for the rest of year as well as to the overall slowdown associated with the China New Year celebrations.

Gross margin for the quarter was 35%, compared to 39% in the year ago period and 41% in the previous quarter. Gross margin of net revenue non-GAAP was 41% in the first quarter of 2013, compared to 45% in the year ago quarter and the 47% in the previous quarter.

This year-over-year decrease in gross margin was primarily attributable to increase in headcount of approximately 1,070 professionals, including the reclassification of the approximately 180 R&D engineers into delivery team as well as general wage inflation increase in compensation cost.

The sequential decrease, primarily due to the seasonality of the Company’s business was decreased product delivery cost and it was partially offset by the reclassification of approximately 180 R&D engineers into delivery teams.

Total operating expenses for the first quarter of 2013 increased 2% year-over-year and decreased 11% sequentially to $47 million. The slight year-over-year increase was primarily attributable to the increased R&D expenses, which are related to the product development, product standardization and delivery improvements. That was partially offset by a decrease in sales and marketing expenses.

The sequential decrease primarily reflects a decrease in R&D expenses, mainly due to the reclassification of our R&D engineers into delivery teams, as well as a decrease in sales and marketing expenses mainly due to the seasonality of the Company’s business.

Sales and marketing expenses for the first quarter of 2013 decreased 9% year-over-year and decreased 24% sequentially to $19 million. The year-over-year decrease in sales and marketing expenses was primarily the result of strengthening of expense controls.

The sequential decrease in sales and marketing was mainly due to a decrease in total sale commissions, marketing related events, as well as an increase in amortization of intangible assets related to the Linkage merger.

General and administrative expenses for the first quarter of 2013 increased 10% year over year and 19% sequentially to $8 million. In the first quarter of 2013 we recorded an accrual of allowance of doubtful accounts of $1 million, which is an increase of $700,000 in a year-over-year basis and an increase of $2 million sequentially.

Third party professional service expenses increased about $2 million in the fourth quarter to $200,000 in the first quarter of 2013, which partially offset the increase of allowance of doubtful accounts of $2 million in the first quarter of 2013.

R&D expenses for the first quarter of 2013 increased 10% year-over-year and decreased 12% sequentially to $20 million. The year-over-year increase in R&D expenses was primarily driven by the anticipated overseas expansion, product standardization and delivery improvements, as well as the wage inflation which was partially offset by the re-classification of approximately 180 R&D engineers into delivery teams.

The sequential decrease in R&D was mainly due to a re-classification of approximately 180 R&D engineers into delivery related work, and in the fourth quarter of 2012 the company received and imported a government subsidy of $1 million, mainly in recognition of its high-tech software innovation, and we did not receive a government subsidy in the first quarter of 2013.

Income from operations for the first quarter of 2013 was $3 million, an increase of 13% year-over-year and a decrease of 80% sequentially. Operating margin of total revenue was 2% for the first quarter of 2013, compared to 2% in the year ago period and 9% in the previous quarter. The sequential decrease in operating margin was primarily due to the seasonality of our business.

Operating margin of net revenue non-GAAP, for the first quarter of 2012 was 11%, compared to 13% in the year ago quarter and 19% in the previous quarter. The year-over-year decrease in operating margin of net revenue non-GAAP was mainly attributable to the increase in employee headcount and compensation, and the sequential decrease was primarily due to the seasonality of our business.

In other income for this quarter, the first quarter of 2013 was $2 million compared to $4 million in the year-ago period and $3 million in the previous quarter. The year-over-year decrease in other income was mainly due to the sales of short-term investments in the first quarter of 2012, and sequential decrease in other income was mainly attributable to dividend income from specific investment product in the fourth quarter of 2012. In January of this year the company sold Lenovo Computer System and Technology Services Limited and recognized again $1 million on the sale of this continued offices.

In our first quarter of 2013, the company recorded net income attributable to AsiaInfo-Linkage Inc. of $14 million or $0.19 per basic share, compared to $6 million or $0.09 per basic share in a year ago period and $16 million or $0.21 per basic share in the previous quarter.

In our first quarter of 2013, net income attributable to AsiaInfo-Linkage Inc. non-GAAP was $27 million or $0.37 per basic share. The net income attributable to AsiaInfo-Linkage Inc. non-GAAP in a year ago period was $19 million or $0.27 per basic share.

The net income attributable to AsiaInfo-Linkage Inc. non-GAAP in the previous quarter was $13 million or $0.41 per basic share and net income attributable to AsiaInfo-Linkage Inc. non-GAAP increased 37% year-over-year and decreased 12% sequentially.

The effective tax rate for the first quarter of 2013 was approximately negative 127% and amounted to negative $7 million, which was primarily due to the recognition of Key Software Enterprise tax status for two of the company's Chinese subsidiaries which were actively granted for the year 2011 and 2012, which resulted in a positive impact of $9 million or $0.12 per basic share and lead to a tax benefit of $7 million or $0.09 per basic share recognized in a first quarter of 2013.

And taking into account the positive first quarter impact, which were active ranking Key Software Enterprises tax status for 2011 and 2012, we estimate our effective tax rate for the full year 2013 will be approximately 6% to 8%.

In our first quarter, we’ve hired approximately 160 additional engineers, bringing our total headcount to approximately 11,800 including trainee's professionals. The additional headcount has been passed primarily with R&D and delivery works.

As of March 31, 2013, AsiaInfo-Linkage had cash and cash equivalents and the restricted cash totaling $293 million and short-term investments totaling $39 million. Our operating cash flow in the first quarter of 2013 was $18 million, which was mainly due to the payment of hardware equipment on behalf of our carrier customers.

As a result, the inventory with respect to IBM-related business and overseas projects increased significantly in the quarter in preparation for near-term projects. As of March 31, 2013, AsiaInfo-Linkage account receivable of $292 million, compared to $286 million as of December 31, 2012 and $301 million as of March 31, 2012.

Gross AR includes agent agreements with International Business Machine Corporation, IBM or its distributors and a number of other hardware companies. Since this arrangement typically consists on back-to-back payment terms for certain product sold to AsiaInfo-Linkage customers, there is no impact on the Company’s cash flow or DSO.

Net AR, which excludes IBM-Type Arrangements was $256 million as of March 31, 2013, compared to $233 million as of December 31, 2012, and $222 million as of March 31, 2012. The combined trends in revenue growth and AR, resulted Company’s DSO being 154 days as of March 31, 2013, compared to 144 days as of December 31, 2012 and 155 days as of March 31, 2012.

In terms of guidance for the second quarter, we expect the second quarter 2013 net revenue on a non-GAAP basis to be in the range of $133 million to $137 million. We also expect the second quarter 2013 net income attributable to AsiaInfo-Linkage per basic share on a non-GAAP basis to be in the range $0.22 to $0.25.

I will now turn the call back over to Steve for his closing remarks. Thank you.

Steve Zhang

Thank you, Michael. To sum up we continue to provide key software and services to China's three telecom carriers in the first quarter. Through our continued discussions with the carrier's headquarter and the provincial level division makers, we see abundant demand for several of our products which will improve the carriers' operating efficiencies and the customer experience. At the same time we are in discussions regarding initiatives that could greatly change the telecommunication industry in China, particularly 4G and the roll out of (inaudible).

We will now open the call to questions. As a reminder please note that we will not comment on the privatization proposal or any other potential transactions involving the company at this time. Thank you.

Question-and-Answer Session

Operator

Thank you very much. We will now begin the question and answer session. (Operator instructions). The first question comes from the line of Clara Fan from Jefferies. Please ask your question.

Clara Fan - Jefferies

Hello. I have a few questions. Firstly you mentioned that you hired another 160 employees in first quarter. I believe that's mainly for R&D. I'm wondering what do we expect for the full year -- how many are we expecting to hire and what is the salary increment expected for this year?

My second question is, you mentioned about strengthening of expense control on sales and marketing. Can you give us a little bit more color on it and would that involve any reducing headcounts, and whether will have any other expense controls as well on like say G&A as well.

Steve Zhang

So 160 additional headcount was hired in this quarter is mainly focused on delivery of the contract that we signed the last quarter, in Q4, last that year, so to move the project implementation and recognize revenue. And right now, it's left for, around to 500 people would be in additional headcounts in the full year.

And your second question Clara is regarding the tight control of the sales and marketing expenses, which is a travel meeting and entertainment related. So are we stand are very clear and tightened budget. So that drives the decrease of sales and marketing expenses.

Clara Fan - Jefferies

Just want to make a clarification. So the 500 people is for full year FY'13, and what is the expected salary increment this year?

Steve Zhang

You said the wage inflation; the overall wage inflation?

Clara Fan - Jefferies

Yes.

Steve Zhang

It will be around 6%

Clara Fan - Jefferies

Okay. That's 500 employees for the full year, including first quarter?

Steve Zhang

That's correct.

Operator

The next question comes from the line of Joseph Yang from SIG. Please ask your question.

Joseph Yang - SIG

Can you remind us about why the decline of the sales revenue in this quarter?

Steve Zhang

That is mainly due to the seasonality of our business. The revenue declined sequentially because the Q4 is typically the strongest quarter of the company business. So sequentially that's pretty much reflected seasonality.

Joseph Yang - SIG

But how about the year-over-year decline?

Steve Zhang

The revenue year-over-year is actually increased by 12%.

Joseph Yang - SIG

I mean for service line only.

Steve Zhang

What’s your question I didn’t get it?

Joseph Yang - SIG

So by revenue breakdown, we have a software product and solution and the services, right? So my question was, why cost of service revenue declined in this quarter year-over-year?

Steve Zhang

That’s because in the quarter, in previous years we have won big projects. For example the major system integration project for the China Unicom Network integration project and this project, expansion of this project for 2013 has been delayed and pushed back into the second half of this year.

Joseph Yang - SIG

Okay. So can we expect this amount of revenue may be continue to decline second quarter, but recover in the second half?

Steve Zhang

Yes.

Joseph Yang - SIG

Okay. Last one from me. So what margin are we implied for the second quarter guidance?

Michael Wu

This around 14%. The gross margin is around 14% and the implied operating margin is 10.5% to 12% on non-GAAP base.

Operator

Thank you very much. (Operator Instructions). Your next question comes from the line of Kai Qian from CICC. Please ask the question

Kai Qian - CICC

I see because of control selling and admin costs in the first quarter, so how are you going to focus for the full year, how we keep this kind of the rates for the full year for the selling and admin costs? This is my first question.

And the second question is about the 4G, and you just mentioned, you are closing, talking about the solutions for the deals for China Mobile. So when will we see the big contributions from the three carriers of 4G, in this year or maybe much will be in the next year?

Steve Zhang

Your first question regarding sales cost control, I think it will be our full year target to try to contain our sales marketing cost. So we will continue to make sure, we have set a tight budget for this year and it is our priority that we stick to the budget.

And for the second question, we don’t see any revenue contribution from 4G this year because most of the projects are still ideas in a design stage. We are talking with our customers and most likely if there is any revenue contribution, it will come next year.

Operator

(Operator Instructions). There is no more questions from the telephone lines. I will hand the conference back the presenters.

Steve Zhang

Thank you so much for joining us for the day. This concludes the company’s earnings conference call. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!