Longtop Financial Technologies F4Q09 (Qtr End 3/31/09) Earnings Call Transcript

May.28.09 | About: Longtop Financial (LFT)

Longtop Financial Technologies Limited (NYSE:LFT)

F4Q09 Earnings Call

May 27, 2009 5:00 pm ET

Executives

Charles Zhang - IR Director

Weizhou Lian - Chief Executive Officer, Director

Derek Myles Palaschuk - Chief Financial Officer

Analysts

Karl Keirstead - Kaufman Brothers

Glenn Greene - Oppenheimer

Donald Liu - Goldman Sachs

Jonathan Miata - Analyst

Sean Jackson - Avondale Partners

Joseph Vafi - Jefferies & Company

Operator

Welcome to today's Longtop Financial Technologies fourth quarter and fiscal year 2009 Results Announcement Conference Call. I am pleased to present Mr. Charles Zhang, IR Director. (Operator Instructions) Mr. Zhang, please begin.

Charles Zhang

Good morning, everyone, and welcome to our fourth quarter and fiscal year 2009 earnings conference call. Joining me on the call today are Weizhou Lian, Chief Executive Officer, and Derek Palaschuk, Chief Financial Officer.

For today's agenda, management will discuss highlights of the quarter. This will be followed by a Q&A session.

Before we continue, I refer you to our Safe Harbor statement in our earnings press release which applies to this call as we will make forward-looking statements.

Also, as you are aware, at the request of [Tiger and Kessi], we have filed an S3 Registration Statement on May 15th, which is currently under review by the ICC and is not yet effective. None of our comments today should be considered an offer to sell securities. This announcement is being made in accordance with Rule 134 in the Securities Act. As required by Rule 134, this announcement is not intended to, and does not constitute any offer of any securities for sale.

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

I would now like to turn the call over to our CEO, Weizhou Lian, and I will translate Mr. Lian's comments.

Weizhou Lian (Translation)

Thank you for joining us for Longtop's fourth quarter and fiscal year 2009 earnings conference call. When we were preparing internally for this call, I was asked what excited me the most in the past quarter and what excites me the most for fiscal 2010. The answer to this question is that now it’s clear to me that even with the global economic crisis, there will be strong demand for Longtop's products and solutions in our fiscal 2010. I am confident that Longtop can achieve our fiscal 2010 revenue guidance of $142 million in revenue and $1.20 in adjusted earnings per share.

Let me now give you an update on our fiscal 2010 strategy as regards customers, products, and acquisitions. As in the past, we will continue to focus on the [inaudible] vertical.

With regard to customers, we expect healthy growth in all of our customer segments in fiscal 2010 and excluding the impact of SYSNET and RMB appreciation, we are guiding from software development revenue growth of 27%, since we have most of the major banking customers covered, we will continue to improve revenue per customer through cross-selling of products and delivering quality solutions.

Looking specifically at our customer segments, we expect the big four banks will grow by 24% year-on-year and be 45% of our software revenue, excluding the impact of SYSNET, and be 43% of our software revenue including SYSNET. We see the strongest growth from the bank that selected us as their number one IT strategic partner in November 2008, which will offset lower [inaudible] spending from one of the big four banks, which is doing extensive work on this -- for our banking system.

Growth from national commercial and city banks is strong as they replace core and other legacy systems to catch up with big four banks. We will continue to execute on our work with [Act One], one of China’s largest banks. We expect other banks to grow year-on-year by 30% and be 37% of our software revenue.

In the insurance sector, the latest IDC report shows that with the recent SYSNET acquisitions, we have become the number two largest IT solution provider in China’s insurance industry. Now our strategy is to focus on the five largest life insurance companies, the four largest property insurance companies, as well as the [inaudible].

A new trend is that the top life insurance and property insurance companies are penetrating into each other’s market sectors, representing brand new opportunities that benefit Longtop. We expect insurance to be 14% of our software revenue in 2010, up from 11% in 2009, with SYSNET to grow year-on-year by over 70%.

We continue to gain momentum in the enterprise sector with our treasury management solution. This customer segment will be our fastest growing area where we anticipate year-on-year growth of 150% in 2010. You may have seen that today we also announced the signing of our tobacco treasury management contract. This new customer has the potential to be one of our largest customers. Our treasury management system for the tobacco customer’s operations in one province was well-received and the customer is now considering deploying the system nationwide. Other than treasury management solutions, we see opportunities to cross-sell our business intelligence solution to enterprise customers.

Our product strategy for 2010 will be continue to deliver the highest quality service to maintain our leadership position. We also need to invest more in the R&D as our long-term objective is to be able to market more standardized solutions, [pertaining] specifically to our product lines.

Our key focus for new solutions is our CRM and risk management. We have launched our new CRM product and deployed a solution with [some of our] best customers. But this year, we developed China’s [inaudible] operational risk management system for another national commercial bank customer. We see strong demand for this solution.

The strong momentum for business intelligence solutions continues as the impact might affect our customers’ decision making. Our banking customers are increasingly relying on business intelligence to differentiate service offerings, make market decisions, improve overall service quality, and manage their operations. This is a key area where we are number one in China and have over 600 engineers. With the acquisition of [inaudible], testing will be a new focus for us this year.

A positive trend is that we have begun to win some consulting contracts with other banks. We won these contracts over international players that traditionally dominate this business. Improving our consulting abilities will be an area of investment for us this year. And finally, with strong demand for our next generation ATM software solutions in both big four and other banks.

Let me say a few words on our M&A strategy. Following the SYSNET acquisition, which will make us the number two player in the insurance sector, we currently don’t see any acquisition candidates of SYSNET’s size and we will focus on the integration of SYSNET. We will continue to look for smaller tuck-in acquisitions.

Overall, we believe we are much better positioned compared to a year ago in terms of branding, product offering, deliverability, and our win rate. Our stronger brand is also assisting with recruiting of higher level technical and sales people. Our competitive strength also brings more opportunities for Longtop to leverage international players, which has already resulted in partnerships with [inaudible] Corporation and [Vanguard] to implement and customize their products for Chinese customers.

Before I pass the floor to Derek, I would like to thank our customers, shareholders, and the employees for their support during fiscal 2009. Now I would like to turn the call over to Derek, our CFO.

Derek Myles Palaschuk 

Thank you very much, Lian. We are pleased to report a strong Q4 and fiscal 2009. You will recall we started our 2009 fiscal year with revenue guidance of $86 million, adjusted net income of $44 million, and adjusted EPS of $0.80. We ended the year with revenues of $106.3 million, adjusted net income of $51.6 million, and adjusted EPS of $0.98. Our full year adjusted gross margin of 69.2%, adjusted operating income margin of 49.4%, and adjusted net income of 48.5% were also where we had previously guided.

We are optimistic about 2010 and thus I would like to spend most of my prepared remarks on our guidance for 2010. Before I discuss our guidance, I would just touch on a couple of points.

Order intake was strong in Q4 and we have a healthy software development backlog of $19 million at March 31st, which is almost three times the backlog of $7 million we had a year ago. Even with Q4 being our seasonally slowest quarter for contract signing, we signed $14 million of new software contracts.

Our fully operating cash flow and our U.S. GAAP cash flow statement was $41.8 million, which was after deducting $5.2 million for the purchase of our land use rights in [Shaman]. Since we only have a land use right as opposed to ownership of the land, under U.S. GAAP this is considered an operating rather than an investing activity. Excluding the land purchase, cash flow from operations would have been $47 million compared to $34.4 million in fiscal 2008, an increase of 37%.

Now turning to our 2010 guidance, in looking at your year-on-year growth rates, please keep in mind the average exchange rate in fiscal 2009 was 6.87, and we are basing our guidance on 6.84 so that we won’t expect any up-lift from RMB appreciation in our year-on-year growth rate.

Our full-year guidance is $142 million in revenue, of which $122 million is software related and $20 million is from other services, yielding a year-on-year growth of 36% for total revenue, 36.2% for software, and 20% for other services. For Longtop, excluding SYSNET, our 2010 guidance would have been $133 million revenue, which is split into $116 million in software revenue and $17 million in other services. This would have been year-on-year organic growth in total revenue of 25.1% and 30.6% for software. From this you can see we are estimating SYSNET’s 2010 revenue of $9 million, of which $6 million is from software and $3 million in other services. We expect SYSNET to close in either Q1 or Q2 but this is subject to the relevant approvals.

Breaking this down by quarter, we expect software development revenues to be $23 million in Q1, a healthy increase of 43% from software development revenue of $16.1 million in the corresponding period a year ago. Other services revenue in Q1 will be $4 million and we are not expecting much organic growth from other services in 2010. The total Q1 revenue of $27 million excludes any revenue from SYSNET which can only be booked after closing.

As was the case in 2009, the first quarter will be our lowest revenue quarter in 2010 and we will have a significant ramp in Q2 and Q3, without significant increases in our cost base. We would expect total revenues of $36.5 million in Q2, $44.5 million in Q3, and $34 million in Q4, of which $31 million, $39 million, and $29 million respectively are from software.

We estimate SYSNET will contribute $2.5 million, $4 million, and $2.5 million in revenues in Q2, Q3, and Q4 respectively.

Including SYSNET, on a full-year basis we expect gross margins of 67%. For Longtop excluding SYSNET, our 2010 guidance for gross margins would have been 69%, which is the same as 2009, indicating a stable margin structure.

In 2010, we expect $67 million in adjusted operating income, which is a year-on-year growth of 27.6% and an adjusted operating income margin of around 47%. Excluding SYSNET, our 2010 adjusted operating income guidance would have been $65.5 million for year-on-year growth of 24.8%, which is $3.4 million than the First Call consensus figure of $62.1 million. Longtop standalone adjusted operating margin would have been 49%, which is equal to 2009, again indicating a stable margin structure. We expect SYSNET to contribute $1.5 million to operating income, most of which will be in Q3.

We expect adjusted operating income of $11 million in Q1, an increase of 21% from 2009, which is about $650,000 more than the First Call consensus figure of $10.35 million. Similar to 2009, our operating income will be heavily weighted to the back-end of the calendar year, where we expect adjusted operating income of $18 million in Q2, $24 million in Q3, and $14 million in Q4.

Assuming no further cuts in interest rates, we are forecasting a total of $4 million in other income for 2010, split evenly between the quarters.

Our effective tax rate on our adjusted net income for 2009 were 10.6% as compared to 9.5% for 2008. We would expect in 2010 our effective tax rate to be about 11% to 12%, similar to 2009. Quarter by quarter, our tax rate will be 15%, 0%, 15%, and 15% with Q2 2010 being the lowest due to a refund of $2.8 million in 2009 taxes for being a key software company.

For the full year, we expect $63 million in adjusted net income and $1.20 adjusted EPS, which is year-on-year EPS growth of 22.4%. This would be an adjusted net income margin of slightly more than 44% for fiscal 2010 as compared to 2009 of 48.5%. The decline in adjusted net income margin is related to SYSNET, which has a net income margin of around 11%, and lower interest income and the assumption of 11% tax rate in 2010, as compared to 10.6% in 2009. The decline is not due to Longtop's core business as the operating income margin excluding SYSNET is expected to be around 49% in 2010, which is equal to 2009.

While SYSNET is dilutive to margins, it is incremental to operating income and EPS.

For Q1, we expect adjusted net income of $10 million and $0.20 per share, which is down from Q4 2009 due to lower interest income and assumed higher tax rates. We expect adjusted net income of $19 million in Q2, $21.5 million in Q3, and $12.5 million in Q4, which is EPS of $0.36, $0.40, and $0.24 respectively in each of Q2, Q3, and Q4.

That concludes my presentation. I will now ask the moderator to open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Karl Keirstead, Kaufman Brothers.

Karl Keirstead - Kaufman Brothers

Good evening, good morning, your time. Thanks for taking my call. Derek, I just had a quick question -- could you offer non-cash intangible amortization and stock-based comp guidance for fiscal ’10 such that we might take this guidance and then back into what the GAAP estimates might look like? Thank you.

Derek Myles Palaschuk 

Sure. Karl, we are still -- we haven’t done the SYSNET intangible asset valuation so I don’t have the SYSNET numbers yet. Our stock-based compensation for the year will be somewhere around $6.5 million, and then for amortization of acquired intangible assets, you could probably use a figure of $3 million and then next quarter once we finalize the SYSNET intangible asset valuation, we can give more specific numbers on that.

Karl Keirstead - Kaufman Brothers

Okay, that’s great. That’s helpful and then perhaps one follow-up -- it looks like you are guiding in terms of the big four banks to about 24% growth, which looks like it’s consistent with the overall company growth but that is down from over 50% from the big four banks in this recently closed fiscal ’09 and I’m wondering is it a question of being conservative or is that one bank -- I think it’s the Bank of China that you cite creating a bit of a drag. Thanks for some insights there.

Derek Myles Palaschuk 

Karl, I’ll just have Charles translate that question for Lian and then I can give you part of the numbers and then Lian can talk about what is happening with the big four.

So Karl, the one thing is when you look at last year’s growth rate for the big four, call it 53%, that also excludes -- includes the exchange differences so really if you take off around 12%, then you are looking at somewhere around 40%, as you said, as compared to 24%, so that’s very healthy growth and we are seeing strong demand. We do give our guidance, especially this early in the year -- you know, we want to be very confident that we can hit our numbers and then maybe Lian will just give you a bit more color on what’s happening in the big four.

Weizhou Lian (Translation)

Lian is saying that we have seen strong demand in the big four banks. All of the banks are increasing their budgets. They are not being impacted by the global economic crisis. As we have said in the past, their spending budgets may vary -- some years they may grow more than others but they do continue to grow year-on-year. And part of this space spending, if you want to look at customer by customer, our biggest customer will not increase its spending as much this year as the previous year, and so that is having an impact on our overall growth. They will definitely increase their spending but not as high a rate as the previous year. And again, this is more part of their long-term spending plans rather than a short-term spending cut

Secondly, the banks that have selected us as a strategic partner, as their number one strategic partner last year, that will be the fastest increasing customer but they are not as big a percentage of our revenue as our biggest customer. Thirdly, with respect to the bank that, you know, working on its core banking system, we have been somewhat conservative in our guidance but recently we have seen a -- what’s potentially a very good opportunity that is not included in our current guidance. It’s our understanding that this bank will do the implementation of its core banking system on its own rather than continuing to use a western company as the implementation partner.

So we hope that they will consider partnering with local companies, so this is a potential opportunity for us that is not in our current guidance. Also, if this bank decides to do the implementation on their own, it will also increase the demand for other non-core banking applications which we would be able to provide. And again, this potential upside is not in our existing guidance.

And then lastly, we are seeing, as in the past, strong demand from the big four banks and we continue to see that in the future.

Karl Keirstead - Kaufman Brothers

Okay. Thank you so much. That’s great color.

Operator

(Operator Instructions) The next question is from Glenn Greene, Oppenheimer. Please go ahead.

Glenn Greene - Oppenheimer

Thank you. Good morning, everyone. I guess my first question just was wanting to get a sense for the revenue growth into fiscal ’10, sort of cuts more by solution type, sort of thinking about it by channel solution, business intelligence, CRM -- obviously you are getting a lot of traction with the treasury management system, but just a little bit more color by product and service area.

Derek Myles Palaschuk 

Let me first just give some of the numbers for that and then Lian will basically talk about what he is seeing in the demand by different product lines. So if you basically look at the breakdown of our solutions, about 10% of our revenue is from channel, 15% is from core bank -- actually, let me give you the exact numbers in the past year -- 12% was channel, 16% was core banking, 40% was management, and 31% was BI. And what we are forecasting, we’re not forecasting significant changes in [inaudible] and really the growth will kind of be consistent across all those lines. BI will probably draw a little bit faster, or actually BI will grow faster than some of the other solutions, maybe core banking will be a little bit less but then if we can also get into this big core bank, our core banking could also grow by a bit more. So let me just have Lian talk about the -- you know, more of the business highlights, what’s driving demand for each one of these areas.

Weizhou Lian (Translation)

A key point that Lian would like to make is that all four different product areas are growing very healthily and they will continue to grow. First, starting with business intelligence, this is really our killer application. We are the strongest of any company in China in providing BI solutions in terms of the size of our delivery team, our consulting abilities, our implementation abilities, and we see very strong demand from our customers as they need to understand more about their own customers’ behavior, management, sales, and other general areas related to their management.

Secondly with regard to management solutions, risk management will be the fastest growing area. This is also being driven by Basel II compliance for the large banks in 2011. Also the Chinese banking industry is concerned with what’s happened with the global crisis and to ensure that they have the proper systems in place. For the core banking, our core banking is mainly for very small banks. We don’t have a core banking solution for the big bank but an area that we see good growth is in the world trade finance sector. Also, there’s been some requirement for banks to consolidate their settlements and RMB settlement systems and we have a solution that can meet those requirements, so we see good growth in that area.

On the channel side, there will be good demand for our ATM monitoring platform, including demand from the big four banks. With respect to CRM, this is an area where the banks have invested a significant amount of money. What we’ve been finding is that some of the bigger banks that have used foreign products, they are not totally satisfied with the ability of these products to meet their requirements. On the other hand, some of the joint stock and city banks, they have been using local vendors, smaller local vendors, and these local vendors also haven’t been able to meet their requirements, so that we see that there’s room for Longtop, which has a very good solution that is being used by some of the big four banks, to capture what is a vacuum in the market right now.

So overall, we see good demand. Charles, did I miss --

Charles Zhang

Just one thing, is that with regard to the settlement and payment, previously Chinese banks just had separate settlement and payment systems for their foreign currency and RMB. A new trend is that they are going to consolidate the settlement payment system, consolidate the RMB and foreign currency settlement payment system. We see a few local companies in China have the capability to implement such products, which represent very good opportunities for Longtop. And another thing is that with regard to CRM, we have won a couple of new contracts for our self-designed CRM system.

Derek Myles Palaschuk 

And I’ll just add one other thing which Lian didn’t talk too much about but also we have recently signed the contract with the tobacco enterprise, and that will also be an area of very strong growth. We are quite excited about this contract because it’s our own proprietary solution and we have the ability to roll that out for different provinces, as well as the possibility over time to sell other Longtop solutions to this enterprise.

Glenn Greene - Oppenheimer

Do you see the opportunity to go beyond into other industries? Is it sort of a potentially a referenceable account for this treasury management solution to bigger, other enterprises in other industries, or similar [sub-type] solution? Or is this more of a one-off for this one company?

Weizhou Lian (Translation)

So the simple answer is yes -- first of all, for the tobacco customer, they have plenty of cash on their balance sheet, so they face the challenge of how to monitor, manage and increase value for the capital but this is actually the same challenge that all the big staple enterprises are facing in China.

Another thing is that for the tobacco contract, currently they are only focused on the surveillance of their capital. In the future, in phase two or phase three, we will provide more features in our system to help them to do the short-term investment and the real treasury management. Right now, we only do the treasury monitoring and surveillance.

So the answer is even in only in the treasury, in the tobacco industry we see tremendous opportunities and the system also has other opportunities in other industries and big enterprises.

Glenn Greene - Oppenheimer

That’s great. Thank you very much. I’ll jump back into the queue. Thank you.

Operator

The next question is from Donald [Liu], Goldman Sachs. Please go ahead.

Donald Liu - Goldman Sachs

Maybe I can just translate myself -- so my question is whether the Chinese Government’s IT stimulus package has any impact for Longtop and other software companies in China.

Weizhou Lian (Translation)

So first of all, with regard to the government’s most recent [plan] to support software and IT service companies, [inaudible] is that the government has realized the importance of the application software, where is our strength. We will definitely benefit from the new plan.  

One thing is that we expect there might be some tax subsidies. Currently the plan is very general. There’s no detailed subsidy plan in both the central government level and also in the provincial level. Where we have benefited is that we are qualified for high-tech and a key software company in China, so that will bring us the tax subsidy every year.

Another thing is that the government just launched a new plan to subsidy companies [who hire the new graduates], so for example, they will subsidy of a salary, several thousand RMB, if you can recruit and train new graduates, even though the new graduates only account for 30% or even lower of our total recruiting, we will definitely benefit from that find.

Donald Liu - Goldman Sachs

Okay, great. My next question is on the revenue guidance. That seems to include the [SYSNET] contribution but I assume that the balance sheet right now does not include SYSNET. If that’s the case, maybe you can -- maybe Derek, you can give us some color on the potential change, major change to the balance sheet.

Derek Myles Palaschuk 

Okay, Donald, I’m sorry -- the line wasn’t very clear. Can you just sort of repeat your question?

Donald Liu - Goldman Sachs

Sure, yeah. I assume your revenue guidance has included the contribution from the SYSNET acquisition, but I assume the balance sheet we see as of the end of last fiscal year does not include SYSNET. So my question is if that’s the case, maybe you can give us some color on what’s the major change to the balance sheet.

Derek Myles Palaschuk 

Sure, Donald. So what we’ve said about SYSNET is that we expect to consolidate it either later in our first quarter or sometime in the second quarter. We wouldn’t expect any revenue from SYSNET this quarter for the full year. What we would expect is $9 million in revenue from SYSNET and $1 million in adjusted net income.

In terms of the balance sheet, the total consideration for SYSNET is approximately $26 million, so there would be a cash outflow of that amount. Of the $26 million, approximately $8.5 million is based on earn-out and performance conditions over the next couple of years. And then in terms of -- you know, we’ll have an increase in receivables but that’s not going to be a significant impact because SYSNET’s revenue as a percentage of Longtop’s is not that significant.

Donald Liu - Goldman Sachs

Okay, great. Yeah, my last question is on the headcount -- any guidance on the headcount at the end of the fiscal year?

Derek Myles Palaschuk 

So at the end of March, we had in terms of software delivery engineers, and this excludes SYSNET, so we had about -- or actually we had 1,310 engineers, software delivery engineers on March 31st. In order to hit Longtop's organic growth, we wouldn’t have to add a significant amount of staff, probably around 200 engineers. So that would take us to somewhere around 1,500, probably around September, October, November time. And then for us to hire 200 engineers isn’t going to be an issue. And then with SYSNET, there will be around 300 software delivery engineers, so we will end the year somewhere around 1,800.

Donald Liu - Goldman Sachs

Okay, great. Thanks.

Operator

(Operator Instructions) The next question is from Jonathan [Miata] from [inaudible] Company. Please go ahead.

Jonathan Miata - Analyst

Good morning. The first question I had, Lian made an interesting comment around winning consulting business and some consulting contracts from the international competitors. I was wondering if he could provide some color as to whether or not that’s focused on one practice area, risk management, for example, or is that kind of evenly spread across your business?

Weizhou Lian (Translation)

The answer is in certain product solution lines, we are -- we really see we are improving our consulting capabilities. One thing is that for areas of data integration, data governance, and business intelligence, we are competing -- our win rate over international players is improving and our strength is on the -- for example, the credit card analysis and the risk models, the data models for risk management. And also we see our consulting capability in the CRM areas also catching up.

Jonathan Miata - Analyst

Okay. And then Derek, as you think about growth from the other bank customer base in fiscal ’10, roughly how much of that is from increasing same-store sales versus adding new banks to the customer roster?

Derek Myles Palaschuk 

Most of the growth will be from our existing customers for other banks because we are already working with three of the big four. We haven’t -- oh, sorry, your question was about other banks. So in terms of other banks, we are already working with some of the joint stock banks, a lot of the larger city banks and also some larger credit unions. So most of the growth will be from increasing revenue per customer.

Jonathan Miata - Analyst

Okay. Just the last question I had, Derek, in the prepared remarks you had talked about investing in R&D. How should we think about that? Should R&D actually increase as a percentage of revenue or be held constant with fiscal ’09?

Derek Myles Palaschuk 

With R&D, it will increase a little bit but not that significantly, maybe a percentage point or so from ’09.

Jonathan Miata - Analyst

Okay. Thank you very much.

Operator

The next question is from Sean Jackson, Avondale Partners.

Sean Jackson - Avondale Partners

Thank you. Can you talk a little bit more about the insurance side of things and the opportunity you see there? I think in the past you said one of the catalysts for the growth in the banks has been increased competition amongst the banks, as well as trying to comply with Basel II. Is there something similar in the insurance side that you can point to and say hey, this is going to be a catalyst for IT spending, beyond just the fact that they’ve under-spent in IT in previous years?

Weizhou Lian (Translation)

To answer your question, we believe that the key driver for insurance companies’ IT spending is that they are fixing to replace all of their IT systems. The IT service market in the insurance will [inaudible]. The same thing happened five years ago in the banking industry because during the year 2000 and year 2003, banks were consolidating all their data and their cost systems from other provincial level into their headquarters. That would drive all their core banking and all their auxiliary systems’ spending.

The insurance company is really experiencing the same investment cycle as the bank has done five years ago, so about five years ago, all the insurance companies began to invest in their provincial level systems. And during the past two or three years, they [inaudible] to consolidate all their data and their core insurance system on the headquarter level. Right now, their core system and all the legacy IT system cannot support their business development. So they have to replace all the legacy system, so it’s not a [inaudible] optimization or upgrade. It’s really a 100% replace the legacy system. So what we have with acquisition of SYSNET, they have a new, next generation core insurance business system and they are working with one of the large insurance companies to evaluate the system. So after the banks, the insurance companies replaced their core insurance system, we will see very strong growth from all sectors in the IT spending such as channel and business intelligence.

Sean Jackson - Avondale Partners

Okay, thank you. That was helpful. And lastly, Derek, what was the tax rate assumption again for fiscal year 2010?

Derek Myles Palaschuk 

The total for the full year is 11%, and then by quarter, it’s 15%, 0%, and then 15% and 15%. And the reason it’s lower in the second quarter is because we’ll receive a $2.8 million tax refund for taxes that we paid in our 2008 calendar tax year.

Sean Jackson - Avondale Partners

Okay. All right. Thank you.

Operator

(Operator Instructions) The next question is from [Joseph Vafi] from Jefferies. Please go ahead.

Joseph Vafi - Jefferies & Company

Good morning, gentlemen. Maybe we’ll start with one for Derek -- you know, if we look at the guidance here, it’s a good outlook for fiscal ’10. Can you compare your [inaudible] versus fiscal ’09 relative to the visibility you had then and now on the two-year sets of guidance?

Derek Myles Palaschuk 

Sure. Our visibility is similar and I would say that it’s very strong. If you look at what we’ve said for Longtop organically on our software business, as we said we would do $116 million in revenue this year. We had $19 million in backlog at the end of March, and that’s somewhere around 16% of our next year’s revenue. Then if you compare that to last year, we actually only had $7 million in backlog at the end of March and our guidance was for $76 million, so that’s 10%, so we have another 6 or 7% backlog billed at the end of March this year.

And then in terms of our front-log, as of the end of March, and we define front-log as projects that we’ve bid on and that we have either won or are very likely to win, or in some cases maybe the project is already getting started. That accounts for about 55% of our 2010 Longtop revenue, so if you add those two numbers, we are looking at over 70% which is either in backlog or what we call front-log, and that’s a very high certainty. So I would say that’s actually better than last year, largely because of the larger backlog that we have.

Joseph Vafi - Jefferies & Company

Okay. That’s helpful and then if we just look at that backlog number year over year, it’s up [inaudible]. Is there really any change that we should be aware of to the business model, maybe more recurring revenue that’s coming into backlog as we get to more custom solutions or how should we look at that backlog growth? Is it really truly apples-to-apples or are we seeing some change in the business model? Thanks.

Derek Myles Palaschuk 

In terms of the apples-to-apples, it is apples-to-apples. Our customized revenue this year was 65% of total software revenue and excluding SYSNET, because SYSNET will be mostly customized, you know, that percentage would be pretty constant this year, so there’s not a big change there. Part of the reason that the backlog number is up is that we have this strategic partner relationship with one of the big four banks. We’re doing bigger contracts. We’re becoming a more important partner for our customers but we are seeing some larger contracts. That’s helping to build the backlog.

Joseph Vafi - Jefferies & Company

Okay, very good. Thanks.

Operator

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

Charles Zhang

Okay. Thanks again, everyone, for joining our conference call. Please feel free to contact us if you have any further questions. Bye-bye.

Operator

Ladies and gentlemen, please note that a digital recording of the conference will be available for replay after the call completion for 30 days. To access the recording, please dial [inaudible] Global Conferencing on Hong Kong IDD, +852-3005-2020, or the toll free numbers, and key in the conference reference 136397 followed by the hash key when your call is connected. This concludes our conference call. Thank you all for attending.

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