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eFuture Information Technology Inc. (NASDAQ:EFUT)

Q1 2013 Earnings Conference Call

May 21, 2013 08:00 ET

Executives

Troe Wen - Secretary

Adam Yan - Chairman and Chief Executive Officer

Dehong Yang - President

Sean Zheng - Chief Financial Officer

Analysts

John Banks - BG Capital

Operator

Good evening and thank you for standing by for eFuture’s First Quarter 2013 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded.

I would now like to turn the meeting over to your host for today’s conference, Troe Wen, Secretary of the Board. Thank you. Please go ahead.

Troe Wen - Secretary

Hello, everyone. Welcome to eFuture’s first quarter 2013 earnings conference call. We distributed the earnings release earlier and a copy can be found on our website at www.e-future.com.cn.

Joining me on this call today are Adam Yan, Chairman and CEO; Dehong Yang, President; and Sean Zheng, CFO. Following the prepared remarks, Adam, Dehong and Sean will be available to answer your questions.

Before we continue, please note the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. eFuture does not undertake any obligation to update any forward-looking statements except as required under applicable law. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. A general discussion of the risk factors that could affect eFuture’s business and financial results will be included in certain filings of this company with the Securities and Exchange Commission, including its Annual Report on Form 20-F.

As a reminder, this conference call is being recorded. In addition, a webcast will be available on our website. I would like to point out that all the financial metrics, unless otherwise stated, will be in RMB and is compared on a year-over-year basis from 2012. I would now turn the call over to Adam Yan.

Adam Yan - Chairman and Chief Executive Officer

Thank you. Good morning and good evening, everyone. The Chairman would like the interpreter to speak on his behalf of the prepared remarks. First and foremost, on behalf of the Board and senior management of eFuture, I would like to express our gratitude towards Sean, our CFO for his tremendous contributions over the last 2.5 years. I wish him all the very best in his future endeavors.

Turning back to our business, first quarter 2013 marks our unwavering commitment to execute on the strategic imperatives of increasing wallet share and deepening business penetration. Overall, the business performance have been most encouraging with total backlog valued at RMB148.3 million, US$23.8 million as of end of March 2013. It represents an increase of 25% year-over-year. The total value of new contracts also increased by 25%.

Our software solutions business continued to prosper as we accelerate the expansion of our client base among medium to large local and multinational corporate enterprises through the provision of IT software solutions and consulting services to enhance the efficiency of front end supply chains for our customers, the signings of aigo Entrepreneurs Alliance and New Hua Du Supercenter Co., Ltd. It’s a strong testimony of our regional expansion strategy and the market position of eFuture as partner of choice for leading regional retailers. aigo is the leading consumer electronics company in China and New Hua Du is one of the largest supermarket operators with 123 stores in Fujian Province.

Further more Tier 2 and 3 city expansion strategy continued to reap rewarding results retails with growing client base from leading regional retail operators. Our engagement with clients such as Guofang Group further solidified our market position in these high growth regions. With growing demand for our full suite of solutions designed to optimize business efficiency, our pipeline has become much stronger and healthier as compared to last year. It provides a solid foundation for growth in year 2013.

Let me now hand over to Dehong to walk you through some of our operational updates over the last quarter. Dehong?

Dehong Yang - President

Thank you, Adam. Good evening everybody. Mr. Yang would also like the interpreter to speak on his behalf the prepared remarks. In our fourth quarter earnings call I have mentioned that we will focus on three growth areas in 2013. First, multinational companies in China and Chinese companies with nation wide network to increase business volume and size of contracts. Second, enhance our software solutions for store IT operation management such as cloud, big data and business analytics. And third, an integrated omni-channel solution.

To capitalize on these opportunities, we would continue to leverage and built on the regional sales platform gradually established over the last two years to further expand our sales team to cover multinational companies and major national corporate enterprises, whom have been actively growing the regional business operations in China. We also setup a separate sales team focused on selling business solutions and new service offerings for store IT operation management. Our goal is to build a strong sale and service network in China.

In this seasonally slow first quarter, we have continued our sales efforts to solicit new business, expand the geographic coverage of our sales activities, enhance our business intelligence mechanism to accurately report sales data and intensify training in areas of HPO, which we referred to high potential talents to be grouped for future leadership, leadership value-based selling and project management. The objective is to build a strong pipeline and getting ourselves ready at the start of this year.

I am pleased with the progress we made so far. The fundamentals underpinned the growth has been most encouraging as we continue to successfully shift our customer mix towards high-quality clients with greater business volume and higher contract value. The new contract value increased by 25%, which primarily driven by a few key business verticals, grocery stores up 38.7% and department stores up 38.4%. In support of this fast growing and ambitious business activity, our marketing plan in 2013 is tasked with an objective of building eFuture brand in China through a three-pronged strategy.

First, to establish an ecosystem of third-parties from respective industry business verticals and regional coverage as well as long-term strategic partners, such as IBM, Motorola and Oracle. Secondly, intensify marketing activities to expand our sales referral network, to optimize business opportunities and to strengthen our customer relationship to maximize penetration potential. Third, deploy both traditional and social media platforms to build thought leadership through quarterly publications. Practically, we planned to have 30 to 40 seminars throughout the year to discuss hot topics in our areas of expertise to further consolidate our leadership position in the market. We also expedite our marketing and sales effort to package and promote the integrated-only channel solutions and services to meet increasing demands from our customers to support the traditional as well as emerging and evolving new channels such as mobile and social CRM. We are excited with the opportunities presented to us. And we continue to execute our strategy to drive long-term business growth.

With that, I hand over to Sean to provide some color on the financials. Sean?

Sean Zheng - Chief Financial Officer

Thank you, Dehong. Now, I would like to walk you through our financial performance over Q1 2013. Total revenue for the first quarter increased 3% for RMB22.5 million. Breaking it down, in Q1, software license revenue decreased 21% year-over-year to RMB6.6 million. It was primarily due to increased revenue recognized in the logistics and the grocery industry and the partial revenue that was recognized in Q4 last year due to some project finishing early than expected. Software revenue increased 88% year-over-year for RMB4.2 million due to the completion of a large contract with existing client in the first quarter of 2013.

Service fee income decreased 7% for RMB11.7 million due to decreased revenue in customization service in grocery industry for seasonal reason and was partially offset by increased sales in maintenance and the consulting service. Gross profit for Q1 decreased 3% for RMB8.7 million, and the consolidated gross margin was 39% compared to 38% in Q1 last year. The improved gross margin was mainly due to the decreased amortization cost of self-developed software and acquired software, which comprised part of the cost of revenue, as some of the software had been fully amortized after the first quarter 2012.

For Q1, we reduced the operating loss of RMB7.3 million compared to loss of RMB5.3 million last year. Net loss for Q1 was RMB6 million compared to a loss of RMB4.9 million in the same period of last year. This translates into basic and diluted loss per share of RMB1.42 compared to loss per share of RMB1.19 last year. Adjusted net loss for Q1 was RMB4.5 million compared to loss of RMB1.4 million a year ago. Adjusted diluted loss per share was RMB1.06 compared to RMB0.34 in Q1 last year. Adjusted EBITDA for Q1 was minus RMB5.3 million compared to minus RMB1.3 million in Q1 last year.

Turning to the balance sheet, cash and cash equivalents decreased RMB35.8 million during Q1, 2013 to reach RMB43.6 million at the end of March. The decrease was mainly due to the payment of annual bonus for employee and the expenditure spent on customer projects. In terms of our total accounts receivable, the 6% decrease to RMB23.8 million on March 31, 2013 was due to the collection of trade receivables from the projects completed in prior quarters.

Lastly, I would like to take this opportunity to thank you Adam and every member in eFuture I am proud to have been part of this fast growing and the winning company. I wish everyone in the eFuture continued success. I now hand back to Adam to discuss the outlook and the guidance for next quarter. Adam?

Adam Yan - Chairman and Chief Executive Officer

We expect total revenue for the second quarter 2013 to total between RMB43 million and RMB48 million, representing a 9% to 22% growth as compared to the second quarter 2012. Adjusted EBITDA for the second quarter is expected to be in the range of minus RMB4 million to breakeven as compared to adjusted EBITDA of minus 20,000 in the second quarter of 2013.

I would now be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of John Banks from BG Capital. Please ask your question.

John Banks - BG Capital

Hey guys. I have just a couple of quick questions. The first one, congratulations, it looks like backlog is up and second quarter looks obviously pretty good. Can you give me some color going into more like a third or fourth quarter? Are we looking for what 15%, 20% growth this year or can we get a higher value than that? And my second part is just talk about how the cloud services, is going in myStore.com? Are we going to hear anything that this year?

Sean Zheng

We are now reaching – for the second quarter normally we don’t give the full year guidance. So far we are pretty confident for the guidance we provided for Q2 and we are also optimized for the full year. And then yes, we gave the guidance for the renewal, it crossed 9% to 22% for the second quarter this year.

Adam Yan

As the Chairman and CEO would like to take those questions on cloud, first we have -- as you have seen from the press release we sent out earlier that we are expecting more orders from customers, a development from what we wrote out so far, it has been well received by customers. Adam will also like to answer the questions on myStore. In the first quarter, we have successfully completed the first pilot for myStore. So far from the results of the pilot, the repeat project has been quite good. In June, we planned to launch the new version of myStore and we expect more retailers will join us in the pilot.

In last quarter I already described myStore as the one-on-one engagement platform for our retail customers between the sales rep and the customer. For consumers it’s a good platform to purchase goods as well as to engage in the social community. That is the update so far. Thank you.

John Banks - BG Capital

Okay, my final question for Adam. Just, this is quite a question I get most from my clients regarding the whole industry. Obviously China is a lot different from any place in the world. But SAP company came out and so they’re going to spend about $1.5 billion on acquisitions in China in the next two years, we have been hearing the Hong Kong players like (indiscernible), they are going to start seeing massive consolidation on the group. I guess my question with eFuture in generally if you look at the company it’s a niche for software players or IT player. In the U.S. most of these companies get bought out for anywhere between one and three times sales. Just we own I think own 1.2 million shares of eFuture, I think I have questions our clients is if eFuture got an offer for $75million, $80million, are they looking to sell which is you know $15-$18 bucks a share, what’s the maximum shareholder value for this company and is Adam willing to sell company in the next couple of years?

Adam Yan

At this stage we will not consider because we strongly believe that we will be able to create higher value for our shareholders in the long-term. And that’s the end of the answer.

John Banks - BG Capital

Okay. Thank you very much.

Sean Zheng

Thank you, John.

Operator

(Operator Instructions) As there are no further questions at this time, I would now like to hand the conference back to Mr. Adam Yan for his closing remarks. Thank you.

Adam Yan - Chairman and Chief Executive Officer

Thank you every one. And I look forward to updating you on our business and operational in the next quarter. Have a nice day.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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