eFuture: Improved Fundamentals Driving Growth

 |  Includes: EFUT, IBM, JDAS
by: Aaron Fletcher

Since I last posted on eFuture (NASDAQ:EFUT) in November we have seen significant improvement in the stock price, from a November closing low of 2.62 to its current price at 8.42. After EFUT announced its full 2008 year results, the company saw a significant increase in interest as investors realized that the company was once again able to book significant revenues in the 4th quarter of the year. Many investors and traders thought it was impossible for a company in book over 50% of its full year revenue in what was arguably the worst quarter for global growth in over 25 years and perhaps since the Great Depression.

EFUT, however, performed as expected. This simply highlights the lack of understanding of eFuture's operations, despite significant growth by the company and the investment category (domestic retail sales in China).

After 1st quarter earning of 2009 were released, we once again saw the lack of understanding of eFuture's fundamentals. There were some significant improvements in the company's fundamentals, yet these were overlooked by the headline number of 2M in revenue for the quarter. I will point out a number of divergences between company fundamentals and recent stock movement.

Before that however, it is important to recognize that EFUT's revenue was only 2M and in all eyes disappointing. I expected at least 2.7M in revenue. The company provided a couple of reasons for the low revenue (contracts added late in the quarter, low sales by two units in the company which have now improved as of the CC etc.) but most investors and traders will simply view those as excuses.

Therefore, I will not try to explain the relevance of their "excuses" and simply allow it to be what it is. Instead, I would like to focus on the improved fundamentals as these are the drivers of future growth.

The most obvious improvement was the increased guidance in revenue for the full year 2009 despite the weak 1st quarter result. Currently the company anticipates revenue of 28-29M which is an improvement of 38-40% over 2008. An uneducated observer may feel that it is impossible to increase revenue 40% for 2009 when revenue increase for the first quarter was flat. However, one is not recognizing that they now have a record backlog of over 9M in revenue of which 90% or more will be booked in 2009.

In addition, EFUT announced they have received several large contract and strategic alliance projects. Lianhua Supermarket is the Super Walmart of China and became a client of eFuture at the end of the 1st quarter. IBM (NYSE:IBM) and JDA Software (JDSA) have also resigned their alliance contracts with EFUT due to eFuture's brand recognition in China.

With the addition of new large clients, significant project backlog, the marketing muscle of IBM and JDA Software, and recent strategy of management to target tier 2 and 3 companies, it is quite easy to see that they will reach their projected target. It is also worth noting that eFuture management have underestimated their full year revenue guidance every year since they have been a publicly traded company.

The not so obvious improvements in fundamentals, but in many ways most important to future growth, are worth noting. The first was that during the conference call the CEO Adam Yan mentioned that during the first 5 months of 2009 EFUT saw a 117% growth in business with existing customers! This is a very important metric as it shows that not only is eFuture growing in name recognition and new clients, but that existing clients are very pleased with results and are coming back for more technology solutions for their business.

eFuture's management performed much better in the 1st quarter of 2009 than in 2008 at properly controlling net loss during their seasonally slowest quarter. In spite of flat revenue yoy they improved the bottom line 28.4% over 2008 and increased their margins yoy. This is a significant improvement and represents future growth coming from not only top line growth in revenue but also improved management of costs associated with revenue growth.

The third improved fundamental that came out of the last quarterly report was that eFuture has developed a couple of important new software offerings. The first is that they have bundled two pre-existing offerings to better penetrate department, shopping mall, and grocery stores by offering bFuture Software as a Service (SaaS) and Point Of Sale (POS) software together. eFuture has organically developed two new solutions through its research and development team: Customer ECG (electrocardiogram) solution and Just-In-Time Visual Supply Chain Process Management solution. The Customer ECG is a completely new program that will allow clients to manage customer loyalty by tracking spending patters of customers. The second solution in a new version of previously sold software and will most likely begin to see revenue from clients upgrading their software.

The final point to make on improved fundamentals is to recognize that many of eFuture's websites that offer SaaS have seen significant traffic increase in the 2nd quarter over the first quarter. According to Alexa.com, jindian.com.cn has seen an 810% increase in traffic over the last three months, bfuture.com.cn has seen a 30% increase, and 99114.com has seen a 29% increase and is currently ranked the 440th most visited site in China.

In terms of valuation, eFuture has 6.1M in cash on hand and only 1M in debt. With ~28-29M in revenue for 2009 and a current market cap of ~26M eFuture is trading under 1x Price/Sales ratio. EBITDA is estimated to be 5.1-6.1M for 2009. Since eFuture is a technology company their tax rate in China is only 15%. I estimate that of the 5.1-6.1M they will have net earnings (non-GAAP) of 3.5-4.3M which would be a EPS of 1.03 to 1.26 and indicate a forward PE of 6.5 to 8.

In addition, eFuture just announced a new accounting practice that will begin to level out quarterly earnings and make the stock more attractive to new investors. They will try to back date these changes to 2008 in order to have compatible yoy comparisons. eFuture has hired two very respectable firms to insure their accounting is accurate and drive away any fear that investors often have with Chinese stocks. The two companies are Ernst and Young which is one of the big four accounting firms and Grant Thornton which had ~4 billion in revenue last year.

Disclosure: Author is long EFUT