Ninetowns Digital Q2 Earnings Preview: YoY Revenue and EPS to Drop, Likely Already Priced In

| About: Ninetowns Internet (NINE)

The following earnings preview for Ninetowns Digital World Trade Holdings (NASDAQ:NINE) was written by Tim Shaw of Shaw Investments.

Ninetowns Digital is scheduled to release its 2nd quarter 2006 quarterly results after the close of market on August 17th. As stated by the NINE management, 2006 will be a transitional period, and as a result, will not be giving forward guidance with the quarterly release.

We are expecting a decrease in Yr / Yr revenue and EPS of around 6M and .08 respectively.

More important will be the progress of newer products, I-Process and I-Monitor. Management stated that by mid-2006, they will start charging for I-Process as an upgrade to the free version already given to customers, and announced that approximately 2,500 customers were using I-Process. Other areas of importance will be how the NINE's relationship with the PRC Inspections Administration is progressing, and whether anything is new regarding the possibility of an acquisition that could be accreditive to EPS in the future.

First Quarter 2006 Results

As expected, 2006 will be a transition period for Ninetowns. First quarter earnings revealed declining new software sales, and as discussed during the fourth quarter conference call, they have refrained from giving forward guidance.

Ninetowns reported 1st Q 06 revenues of 6.2M (down from 6.5M in the 4th Q and 7.7M in the 1st Q in 2005) and EPS of .08 (down from .09 in Q4 05 and .16 in Q1 05).

In the 1st quarter the company sold 1,500 I-Declare packages (down from 2800 in the 4th Q 2005) and 6,800 maintenance contracts (down from 12,800 in the 4th Q 2005).

Customers have deferred from purchasing Ninetowns' products in anticipation of the Chinese government's free software rollout. Management indicated that the government was about finished with the free software rollout in May. The company recognizes the revenue associated with new sales over a 12 month basis, so the revenue decline has not been as severe as the decline in new sales.

The company plans to upgrade customers with Ninetowns premium products after the government introduces the free software. A risk to the investment case is that the government might upgrade the software to include additional features similar to Ninetowns premium services.

Compelling Value

At this point we believe the investment risk has already been priced into the stock. Of the 124K companies using e-filing for import/export processes in China, Ninetowns currently does business with 90% of them. Gross margins are running around 94% and the company has 116M (3 plus per share) in cash and is debt free.

About the Author: Tim Shaw manages family money through Shaw Investments, LLC and seeks out value investment opportunities globally.

Disclosure: The author owns NINE shares.

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