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AsiaInfo Holdings, Inc. (NASDAQ:ASIA)

Q2 2006 Financial Results Earnings Conference Call

July 26, 2006 8:00 pm ET

Executives

Eileen Chu - Investor Relations

Steve Zhang - President and Chief Executive Officer

Ying Han - Chief Financial Officer

Analysts

Dean Chun - Faralon Capital Management

Chang Qiu - Forun Technology Research

Presentation

Operator

Welcome to today’s AsiaInfo Q2 2006 results announcement call. I am pleased to present Ms. Eileen Chu. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question-and-answer session.

Ms. Chu, please begin.

Eileen Chu

Thank you. Hello everyone, and welcome to AsiaInfo’s 2006 second quarter conference call. Today, Steve Zhang, President and CEO of AsiaInfo, will review some of AsiaInfo's business highlights for the most recent quarter; and Ying Han, AsiaInfo's Chief Financial Officer, will provide greater details on the financial results, as well as guidance for the upcoming quarter. Mr. Zhang will then provide a few closing remarks and open the call to questions.

Before we continue, allow me to review our Safe Harbor statement. During this conference call, representatives of the company may make forward-looking statements in an effort to assist you in understanding the company and its results. Please refer to AsiaInfo’s reports filed with the SEC for discussions of important factors that could affect future results. Also, please take note that all figures mentioned during this conference call are in U.S. dollars.

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

Steve Zhang

Hello, and thank you for joining us. I am pleased to report today that AsiaInfo met net revenue guidance for the second quarter as we continued to see steady growth in our core telecom business and better-than-expected improvement in our security product and services business.

During the quarter, we deployed software solutions that not only help improve the services telecom carriers provide to their customers, but also help optimize our operations by providing a thorough understanding of their increasingly diverse customer segments.

For example, during the quarter, we developed a customer maintenance platform to help Shanghai Unicom better understand customer needs, enabling them to make better business decisions and to fine-tune their marketing strategies. We also built network support maintenance systems for China Mobile’s headquarters and a fixed office for [Winslow] Subsidiaries that provides real-time monitoring assistance to increase operating efficiencies.

Also, we established a joint lab in conjunction with China Mobile and the Beijing University to promote the development of mobile communications data warehouse technology in China.

These projects are examples of how AsiaInfo is leveraging our leading R&D and [inaudible] insider knowledge of China’s telecom industry to deepen our relationships with the carriers and provide them with solutions that help them win customers, increase profitability, and stay ahead in China’s increasingly competitive telecom industry.

In the months and quarters ahead, we believe that Chinese telecom carriers will continue to focus on differentiating their services and improving customer service. AsiaInfo is in a unique position to benefit from this long-term trend. I believe that we will continue to see strong order flow as carriers increasingly see the benefit of AsiaInfo’s leading telecom software solution offerings in the areas of billing, network support, [inaudible], and next-generation data services.

In addition to the organic growth in our telecom business, we will continue to consider acquisitions that can be easily integrated and allow us to expand our market share at an attractive price.

In the past quarter, we have seen success with this strategy, capturing market share in key China adcom, China telecom, the Shanghai mobile market, and will remain on the lookout for attractive candidates that meet our criteria.

As I mentioned earlier, Lenovo-AsiaInfo security business showed steady improvement, again performing better than expected for the quarter. We remain optimistic about the IT security market in China and we will continue to closely monitor the performance of this business and keep you updated.

Finally, as we noted in our press release, Ying Han, our CFO, has decided to retire from the role of CFO by the end of the year to spend more time with her family and attend to personal matters.

I speak for the entire AsiaInfo family when I say Ying has done a truly wonderful job for AsiaInfo over the past eight years. She will be greatly missed but she leaves a solid foundation of corporate governance [and transparency] and a strong finance team behind her. We are glad she has agreed to stay on as a consultant.

We are also grateful that, beginning over a year ago, Ying began a plan for her succession by bringing Eileen Chu on board as director of investor relations. We have every confidence in Eileen’s capabilities, experience and background, and believe that she is the best candidate for the CFO role.

Let me now turn the call over to Ying, who will review the quarter’s financial highlights.

Ying Han

Thank you, Steve. Good morning. Rather than repeating all the numbers in our press release, I will provide some additional information on [inaudible] for the quarter. I will also discuss guidance for the second quarter.

Second quarter [inaudible], software products and solutions revenue rose 23% year over year, and 3% sequentially, driven by new solutions provided to our customers.

Telecom service revenues continued to decrease, as we focus on high margin software solutions, leading to net revenue growth in the telecom business of 4% year over year and flat on a sequential basis.

Lenovo-AsiaInfo’s net revenue increased 22% sequentially, reflecting the on-track recovery of the [inaudible].

Gross margin for the group increased sequentially and decreased year over year due to a fluctuations in third-party hardware [inaudible].

Total group operating expense for the quarter were down 9% year over year and 14% sequentially. This reflects the decrease in general and admin expenses, largely due to the collections of one bad debt and the partial reversal of the bad debt provision in our Lenovo-AsiaInfo business, as this business continues to recover.

Without the impact of bad debt collections and provisions, our general and admin expenses are typically sustained as an average of $2.22 million.

Sales and marketing expenses increased marginally both year over year and sequentially, as we revved up our sales efforts in the security business.

In line with our strategy to invest in our R&D capabilities and position AsiaInfo for future market opportunities, R&D expenses during the second quarter were up 27% year over year and 9% sequentially.

During the quarter, our telecom [business] posted a contribution profit before corporate G&A expenses of $3 million, while Lenovo-AsiaInfo posted a contribution lapse before corporate G&A expenses of $0.8 million, a $1.8 million sequential decrease due to the continued recovery of [inaudible].

Operating cash flow for the quarter was $0.1 million. Our operating cash flow for the first-half of the year was $7.3 million.

Moving to our balance sheet, out total cash and tax equivalents plus [inaudible] investments decreased sequentially approximately $9.5 million to $125.9 million, reflecting acquisitions made during the quarter to the value of $4 million and the share repurchase to the value of $6.7 million.

Both notes receivable and accounts receivable decreased sequentially due to continued collection efforts.

DSO’s increased slightly to 141 days compared to the last quarter of 134 days, due to a sequential decrease in third-party [hour] revenues. The sequential decrease in [inaudible] rate was also due to a drop in third-party [hour pass-through].

[inaudible] decreased from $11 million as of March 31, 2006, to $1.2 million as a result of [inaudible] stock retirement. During the second quarter, we purchased 1.1 million shares. We previously announced a share repurchase program for completion on July 18th this year.

I will now read you AsiaInfo’s financial guidance for the third quarter of 2006. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and actual results may differ materially.

Revenue [inaudible] in the third quarter are expected to be $20 million to $22 million. We expect third quarter earnings per basic share to be $0.02 to $0.03.

We anticipate that Lenovo-AsiaInfo's security products and services business will continue to increase revenues and decrease operating loss.

Following on Steve’s kind words, I would like to take this opportunity to thank the board for their trust and support, as well as all of my colleagues who have worked with me over the past eight years.

This has been a great honor to work at AsiaInfo. Though I am looking forward to beginning another chapter in my life, I am also sad to leave a company that has been so important to me.

My successor, Eileen Chu, has been with us for over one year in the investor relations group, and brings a strong background and experience working with pubic companies as an auditor with Ernst and Young.

After closely working with Eileen, [inaudible] AsiaInfo’s finances, I am very confident in her ability to succeed in her new role.

Finally, let me say that with a clear strategy of growth, a healthy balance sheet, and an extremely confident successor in Eileen Chu, I am confident that AsiaInfo is in a strong position to grow.

I am very happy to continue to be involved with AsiaInfo in my new role as a financial consultant.

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

Steve Zhang

Thank you, Ying. The second quarter of 2006 was another encouraging period as we continue to execute on our strategy of focusing on our high margin [inaudible] business line. In our telecom software business, we are competent that our leading software solutions offering is well-aligned to put industry trends for more [inaudible], vast service offerings, and more reliable, more helpful customer services. We will continue to work closely with our telecom customers and leverage our leading technology and lots of market insight to create solutions that help them become more productive, more competitive, and more profitable.

The overall trend in China’s telecom industry is towards greater competition, which in turn will continue to drive the speed of innovation among the carriers. When the 3G licenses are granted, this competitive trend will intensify and AsiaInfo will be ideally situated with established relationships and with our solutions for the [3G].

Today, we are confident that our current strategy is a fair one to put AsiaInfo firmly on a profitable growth [step]. I thank you for your continued support and will look forward to keeping you up to date on our progress in the weeks and months ahead.

I will now open up the call to questions.

Question-and-Answer Session

Operator

We will now begin our question-and-answer session.

(Operator Instructions)

Our first question is from John Ping at Faralon Capital Management. Please go ahead, Mr. Ping.

Dean Chun - Faralon Capital Management

Hi, actually this is Dean Chun. First of all, Ying, thank you so much for your good work over the years, and best of luck. We will miss you, but congratulations. It is a good start for the next step.

Ying Han

Thank you.

Dean Chun - Faralon Capital Management

Good luck.

Ying Han

Thank you.

Dean Chun - Faralon Capital Management

Secondly, I just want to get some clarification. First of all, it seems like the revenue -- we have seen some good growth in the business. That is great, and Steve, congrats. But I want to get some help in understanding, in the first quarter you were guiding people $1.1 million of operating loss in the Lenovo business. Is that correct?

Ying Han

Yes, about $1 million lost.

Dean Chun - Faralon Capital Management

Yes, and we have about $1.8 million in the actual number, is that correct?

Ying Han

No, the actual number is $0.7 million, 756K.

Dean Chun - Faralon Capital Management

Okay.

[Multiple Speakers]

Ying Han

…the $1.8 million is the actual loss in Q1 of 2006.

Dean Chun - Faralon Capital Management

Got it. I was looking at the wrong number, sorry. Ying, when do you think you will be able to break even in this business? Can you give us some help on that?

Ying Han

I think probably before the end of this year.

Dean Chun - Faralon Capital Management

Before the end of this year? Do you think you will keep some of the business and it will turn profitable? How should we think about this business long-term?

Steve Zhang

Good question. We are still evaluating our alternatives, and our current thinking is for the securities [inaudible], we will continue to keep the security business, because with [inaudible] and market, it is actually turning around.

Dean Chun - Faralon Capital Management

Right, right. Well, apart from that, congratulations on turning the business around and I will leave the floor to the next person.

Steve Zhang

Do you have a question?

Dean Chun - Faralon Capital Management

No, I am done. Thank you.

Operator

Our next question is from Chang Qiu from Forun Technology Research. Please go ahead.

Chang Qiu - Forun Technology Research

Good morning, Steve and Ying. Also, I will say thank you to you, Ying -- thanks a lot for the last few years, for your work, for all the [inaudible].

Ying Han

Thank you. Thank you very much.

Chang Qiu - Forun Technology Research

Just one question for you, Steve. It looks like recently both China Mobile and China Unicom, they generally changed the form of the -- the [inaudible] of the [inaudible], towards the SMSS, DMMS -- I just wonder whether for those change, whether you get more work from them.

Steve Zhang

You mean the policy change regarding the wireless added services?

Chang Qiu - Forun Technology Research

Right, because it looks like when they do those changes, they need to change in their [inaudible], in the [call] systems too, right?

Steve Zhang

We think we will benefit from the change. Actually, we see some orders coming in the second-half of the year for a centralized account and billing system.

Chang Qiu - Forun Technology Research

Okay. In terms of the two sectors, you mentioned the local security business will be basically continuously coming back, and you basically anticipate a sequential increase in both sales and also earnings, right?

Ying Han

Yes.

Steve Zhang

Right.

Chang Qiu - Forun Technology Research

How about your core telecom sector, in terms of sequential growth?

Steve Zhang

I think we will continue to see sequential growth in our core telecom business.

Ying Han

If we meet the high-end of the guidance we just provided, that will show 10% year-over-year growth, and also sequentially.

Chang Qiu - Forun Technology Research

Okay, because your sequential growth in the second quarter, and also year-over-year growth in the second quarter looks higher than [inaudible], that is why I wonder whether for the third quarter, do you guide a sequential growth or not?

Ying Han

We guide sequential growth for the revenue.

Chang Qiu - Forun Technology Research

Okay, that [inaudible]. Essentially, you are guiding for sequential growth for the third quarter for both of your businesses?

Ying Han

Yes.

Steve Zhang

Right.

Ying Han

Right.

Chang Qiu - Forun Technology Research

So at this time, [inaudible] coming at the end of July, do you have the definitive [inaudible] guide for the whole year?

Steve Zhang

We will continue to provide quarterly guidance. We are confident that we will achieve our total year budget. In this call, we do not want to provide the full-year guidance but we will continue to provide the quarterly guidance.

Chang Qiu - Forun Technology Research

Okay, that is fair. Thank you.

Operator

There are currently no more questions in queue.

(Operator Instructions)

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

Eileen Chu

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact myself or any of our investor relations representatives. Thanks, and have a nice day.

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