Longtop Financial Technologies F1Q10 (Qtr End 6/30/09) Earnings Call Transcript

| About: Longtop Financial (LFT)

Longtop Financial Technologies Limited (NYSE:LFT)

F1Q10 Earnings Call

August 18, 2009 8:00 pm ET

Executives

Charles Zhang - IR Director

Weizhou Lian - Chief Executive Officer, Director

Derek Myles Palaschuk - Chief Financial Officer

Analysts

Karl Keirstead - Kaufman Brothers

Jonathan Miata - Needham & Company

Joseph Vafi - Jefferies & Company

Donald Liu - Goldman Sachs

Andrew Kwan - Avondale Partners

Glenn Greene - Oppenheimer

Sean Jackson - Avondale Partners

Operator

Welcome to today's Longtop Financial Technologies first quarter fiscal year 2010 Results Announcement. I am pleased to present Mr. Charles Zhang, IR Director. (Operator Instructions) Mr. Zhang, please begin.

Charles Zhang

Thank you and welcome to our first quarter fiscal 2010 earnings conference call. Joining me 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.

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 fiscal first quarter 2010 earnings conference call. The strong start we have made in fiscal 2010 [in this quarter] was more that our customers’ demand for Longtop products and solutions continues to grow healthily without impact from the global economic crisis. We are again increasing our revenue and net income guidance on the back of this success and I am confident we can achieve our revised guidance.

Recently for calendar year 2008, we were named by IDC as the number one and number two market share leader in China’s banking and insurance IT solution markets. Our market share in banking was 5.7% and insurance was 10.7%, and I believe we are gaining market share. Longtop is the only company that is in the top 10 of both the banking and insurance categories.

Let me now give you an update on our [inaudible] progress as regards customers product and acquisition. Looking specifically at our customer segment, our strategy is to focus on the largest customers in each customer segment that we target. We believe this is the right strategy because the largest customers have the most stringent IT requirements, highest quality standards, and the largest [inaudible]. And it is easier to move from larger customers to smaller customers.

Demand from big four banks customers is progressing as we anticipated. The main development with the big four banks gives our last quarterly announcement is that one of the big four banks who is doing extensive work on its next generation core banking system selected Longtop as one of their strategic partners for software development. Our big four bank customers year-on-year growth rate was 20% and we expect our full year growth rate to be at least 20%.

As for the other bank segments, where we focus on national commercial banks and the larger city commercial banks, demand for our solutions is particularly strong as customers in this segment upgrade and replace their legacy systems to catch up with the big four banks. We are now reaping the benefit from having built up a strong high-end customer base with national commercial banks and larger city banks over the past two years to which we now begin to cross-sell our product and solutions.

As we expected, growth in the insurance customer segment was strong. Our organic software revenue growth from insurance was 177% year-on-year, reflecting the growth momentum in the relatively under-developed insurance IT solutions market. Longtop is now number two in the market, according to IDC, giving us a strong market position as the insurance sector is investing to catch up on IT infrastructure development.

We continue to gain momentum in the enterprise sector with our [inaudible] management solutions for the tobacco industry being successfully rolled out in Q1 2010. Given with what can be a very lengthy sales cycle, the enterprise market is exciting for us, given their large IT budget at the early stage of their development and the government support for improving IT systems in these large enterprises.

We are well on-track to execute our product strategy of delivering the highest quality services to maintain our leadership position and also investing more in R&D as our long-term objective is to be able to market more standardized solutions turning specifically to our product lines.

The strong demand for our business intelligence solutions continues as software revenue from this solution line grew by 94.4% year-on-year. According to IDC, we are the absolute market leader in this area with the market share of 31% in 2008. Even with our large market share, we still see tremendous opportunity in BI and we are continuing to expand our BI resources. At the end of June, we had over 900 staff, including SYSNET working on BI, which we believe is one of the largest, if not the largest group focusing on [inaudible] BI in China. Furthermore, we are making progress in improving our consulting capabilities in this area with consulting contract wins in this quarter.

We continue to gain momentum for our CRM solutions as we penetrate into other banks. This is another area, according to IDC, in which we are number one in China with the market share of 18%.

Risk management is another key solution area for us. We recently won a contract from a big four bank customer to provide consulting risk model design and development and by testing of their risk models for its risk management lab. We now have the overall design and implementation capabilities for Basel II compliance and are working with several big four and national commercial bank customers to implement their risk management system, covering market credit and operational risk. We have built a specialized team of over 200 [inaudible] with a combination of global [inaudible] and local delivery capabilities. With this, I believe we are well-positioned to capitalize on the growth opportunities in this market and make it an important future growth driver.

This quarter, we signed an extended contract with a national commercial bank customer in China to provide software testing services of the next generation core banking system. Our testing business will continue to grow but just as we’ve now fully integrated.

Settlement and payment, which is another area we see strong demand, we are also pleased to be the number one in this area with a 14.2% market share in 2008.

Let me update you on our [inaudible] activities. We are working on the SYSNET integration. We don’t have anything as large as SYSNET in our [inaudible] now and continue to selectively look for good product companies to acquire.

I believe we are well-positioned in terms of market leadership, branding product offering, delivery capability with over 1,800 software engineers, including SYSNET service quality and win rates. We are successfully recruiting high level technical and sales people on the strength of our brand. The combination of healthy organic growth and intelligent acquisitions has made us the market leader in the [inaudible] IT solutions market in China.

Now I would like to turn the call over to Derek, our CFO.

Derek Myles Palaschuk 

Good day, everyone and thanks for joining our financial review. We are pleased to report a strong Q1 in what is our seasonally lowest revenue and net income quarter. I will use my prepared remarks to touch on a few areas that are not detailed in the earnings release.

Our software development business is performing very well with year-on-year growth of 54%. Excluding the impact of the appreciation of the RMB, growth would have been 49%. With regard to order intake and backlog, excluding SYSNET, order intake was strong in Q1 with new software development contracts of $36 million, compared to $30 million in the year-ago period. We have a healthy software development backlog excluding SYSNET of $31 million compared to $19 million at March 31 ’09 and $21 million in the year-ago period.

Also, July 2009 was a record month for software development contract intake. One of the key messages we would like to leave you with today is the strength of demand for Longtop solutions.

Let me quickly touch on our other services revenue, which has been facing some margin pressure since the second half of fiscal 2009 due to our ATM and system integration business. We have always said our other services business, which is less than 15% of our revenue, is not a growth driver for us and strategically is mainly for providing another sales channel to our customers and helping meet some of their non-software needs.

Around 45% to 50% of other service revenue is from ATM maintenance. We mentioned previously with the acquisition of [Huawu Chung] in Q2 2009, the ATM business unit margins have been lower as well as there’s been some pricing pressure. The ATM business unit is profitable, an excellent sales channel for our ATM software, and one of the largest ATM maintenance platforms in China.

Twenty percent of our other services revenue is from system integration, which we book on a net basis. Over the past six months, we have seen significant reductions in hardware spending, which has resulted in a drop in high margin revenue and taking a long-term approach, we have not cut department costs, which are mainly headcount.

Our adjusted operating income of $11.6 million was ahead of guidance of $11 million, which was even better if you consider SYSNET gave us an approximately $600,000 loss and the $11 million guidance did not include a loss from SYSNET.

For our new acquisitions, there is almost always a delay in the timing of revenue recognition. SYSNET will be accretive for the full year and should be break-even in Q2 as we had guided last quarter.

Our adjusted diluted EPS of $0.20 was right on our guidance, even with a share count of 53.2 million shares, which was slightly higher than we had anticipated.

Our cash flow from operating activities showed a cash outflow of $7.9 million as compared to an outflow of $3.4 million in the year-ago period. As in previous years, our cash collection is heavily weighted to fiscal Q2 and Q3. For example, in 2009, our operating cash flow exceeds, excluding the purchase of our land use rights of $47 million, of which 80% came in our fiscal Q2 and Q3.

Our accounts receivable at $41.5 million is up from $29.9 million at March 31 and this trend is normal and our receivables will also increase in Q2.

Based on our guidance of $145 million in revenue, this works out to an annualized DSO of slightly over 100 days. As most of our customers are well-financed, state-owned enterprises, risk of non-payment is very low.

Let me conclude my prepared remarks with some additional color on our guidance.

Due to strong demand for Longtop services, our full-year revenue guidance has increased from $142 million to $145 million, of which $127 million is software related and $18 million is from other services, yielding year-on-year growth of 36% for total revenue and a robust 42% for software and 8% for other services.

We expect SYSNET, which closed on June 1, to contribute $9 million of revenue, which is the guidance we gave you last quarter. We estimate Longtop, excluding SYSNET will have 2010 revenues of $136 million, of which $120 million is software related, representing a year-on-year organic growth rate of 28% in total revenue and 35% for software revenue.

We increased Q2 revenue guidance by $1 million to $37.5 million and Q3 revenue guidance by $500,000 to $45 million from $44.5 million. Our margin structure is stable and as we mentioned last quarter, including SYSNET on a full-year basis, we expect adjusted gross margins of around 67%.

Our adjusted EPS guidance of $0.37 per share for Q2 is based on our expectation we will receive our income tax refund for being a key software company in Q2 2010. We will definitely receive the income tax refund, so any deferral into Q3 2010 would not impact full-year EPS guidance.

For the full year, we now expect $65 million in adjusted net income, which is $2 million more than previously guided. We have increased Q2 expected adjusted net income to $19.5 million, up from $19 million previously guided and $22 million in Q3, up from $21.5 million.

Based on a share count of 53.5 million shares, EPS in Q2 should be $0.37 and $0.41 in Q3.

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 from Kaufman Brothers.

Karl Keirstead - Kaufman Brothers

Thanks for taking my call. I had a question about the big four bank spending -- maybe I’m reading a little bit too into this but the CEO mentioned that growth in fiscal ’10 for the big four would be at least 20% and I think the guidance on the last call was 24% growth and I am wondering what might have moderated your outlook and perhaps you could give a little color by each of the three major banks? Thanks.

Charles Zhang

Let me translate this question for our CEO first and then if he is going to answer, I will translate again.

Derek Myles Palaschuk 

Hi, Karl. Let me just make a point on the guidance. For the big four, they are performing very well. I will let Lian give you a run-down basically by bank. We see no problem in hitting the 24% and actually in the next quarter, in this Q2, based on our backlog and strong demand, it will be over 24%, the year-on-year growth. Now I’ll just let Lian basically give you a walk through of what’s happening in each of the big four banks.

Weizhou Lian (Translation)

Lian basically went through the growth prospects of all the big four banks. First of all, he believes that the big four banks will continue to grow very healthily because the big four dominates the overall IT banking and spending in China and it represents the highest standard.

In terms of construction bank, we continue to see very healthy growth but if you compare this year’s growth with last year, there will be some declines. The reason for that is as we have seen in the last 10 years, there is always the investment cycle for the big four banks and last year, the construction bank is -- the growth is a record high. For that reason, we will see the growth rate is a little bit lower but we still see very healthy growth from CPB. [inaudible] bank is a very important growth driver for us because they are redesigning their overall IT infrastructure. They are redesigning their core banking, their data systems. So for that reason, we will see very strong growth in the next couple of years from [inaudible] bank.

Bank of China is much better than what we have exhibited a few quarters before. The reason for that is they have selected to build their new next generation core banking of your [inaudible]. They have terminated the service contract with the oversea vendor and then they have started all the auxiliary systems development. Another important progress in this quarter is that they have officially selected Longtop as their strategic software development vendor, so that will help us to improve our [inaudible] rate in the future.

The very good news for us is that we are making some material progress in the ICBC markets. We are in the process of becoming their preferred vendor. Hopefully we will get this data this year and this will help us to sell our products and solutions to ICBC. If we can receive this data, we can become a vendor of the largest bank in the world.

Karl Keirstead - Kaufman Brothers

Okay, great. That’s very helpful -- and if I can ask a follow-up, it’s about the decline in hardware revenues that you are suggesting you are seeing and [inaudible] of course said the same thing on their call. And my question is less about how that affects Longtop -- I think I understand that but Derek, maybe you could take a step and help explain what is going on that would cause hardware spending to be declining and yet you are painting a picture of pretty robust software and services spending -- I think it might be helpful to take a minute and explain that. Thanks.

Derek Myles Palaschuk 

Sure, Karl. Let me just [inaudible] financial, you know, how that is affecting our financials and then we will have Lian actually answer that question for you. So let me -- we just want to translate that for Lian, Karl -- just give us a second here, please.

You’re right, Karl -- the system integration doesn’t give us a big revenue contribution. It’s normally around $1 million a quarter. But actually it was around half of that this quarter, which is -- that’s $0.01 that drops to the bottom line. We didn’t factor significant revenue growth in system integration but there has definitely been a slow-down in their hardware spend and now we’ll just have Lian to basically give you his view of why we are so optimistic on our -- on what we see the demand for our software solutions, whereas hardware is declining?

Karl Keirstead - Kaufman Brothers

Thank you.

Weizhou Lian (Translation)

Let me translate what Lian has said -- he said first of all, even with the global economic crisis, we still see very strong growth in terms of China’s banking IT investments. According to IDC, the overall IT spending is going to be approximately 20% in the next 12 years but on the other hand, China’s banking industry is still in a very initial stage in the IT infrastructure, regardless of their very high market value. There is a lot of areas need to invest but they still stay in the early stage, focusing on the infrastructure investment. For that reason, you can see that the hardware investment accounts for over 60% of their overall IT spending and software spending is less than 30%. In that sense, Chinese banking industry is still in U.S. bank’s 1960s level and impacted by the financial crisis over the past -- over the last year. The banks in China has been taking a very cautious approach in making hardware investment and they significantly reduced their investment on hardware but on the other hand, for software and IT services, it’s very mission critical for the banks to improve their overall competitiveness and it’s [inaudible] as well. From that reason, the hardware is -- the impact of the financial crisis is minimal on the software side. So looking at our pipeline, we see that we are very confident for our software growth. And also with the recurring of the global economy and the Chinese economy, we believe that the banks’ hardware investment will recover as well. So we believe that our system integration business will be doing better in the next couple of quarters.

He wants to add the point that different categories of banks have different focus in terms of hardware and software, looking specifically at the big four banks, they have a pretty strong hardware infrastructure so they have been improving the percentage of software in their overall IT spending, so this is a clear channel for us and we’ll benefit from this chance. And for national commercial banks, we see strong growth from both hardware and software because they have a strong incentive to catch up with the big four, and for city commercial banks, especially for the small ones in this category, they still need to invest a lot on the hardware side. So overall because our customer is mainly on the high end of the spectrum, the chain of higher growth from software will benefit our business model.

Karl Keirstead - Kaufman Brothers

Okay. Thank you very much for the color.

Operator

The next question is from Jonathan Miata, Needham & Company.

Jonathan Miata - Needham & Company

Thank you very much. Derek, did SYSNET contribute to revenues at all in the first quarter?

Derek Myles Palaschuk 

SYSNET contributed about $200,000 in revenue, so the revenue contribution was immaterial and that -- and we started consolidating SYSNET on June 1st and it normally takes us a while, at least a couple of months or a quarter to get the revenue recognition and the contracts set up, so that’s why SYSNET basically contributed a $600,000 loss. But we were very anxious to close this investment. Now we have access to PICC China Life and we are working full speed on the integration.

Jonathan Miata - Needham & Company

Okay, and Lian in his prepared remarks mentioned that [inaudible] is taking market share. My question is where specifically does he feel that the most market share is being won? Is it at the high-end of the market with the big four or is it with the other banks or a combination of all of the above?

Weizhou Lian (Translation)

From the customer perspective, we are gaining more shares in all customer segments, including big four and especially in the national commercial banks where we see a very strong market share extension and as well as large city and commercial banks, and also insurance companies. And from the product and solution perspective, we are gaining shares for our product lines. He believes that this is very important because in each product line, we are gaining shares. For that reason, the market share expansion is sustainable and it is comprehensive.

He said if he market continues to consolidate, it’s more and more difficult for small vendors to survive in this market so most of the small vendors are gone. So we are gaining share from our major competitors and our market share is expanding -- on the other hand, their share is -- they are losing shares from our hand.

Derek Myles Palaschuk 

Jon, I’ll just add a little bit to that -- if you look at our growth rates, you know, you can see that other banks grew at almost 80%, insurance grew at over 200% and enterprise grew at over 100%, so those markets are definitely not growing at anywhere near those rates. And then one of the reasons that we are able to do this is because we’ve really significantly expanded our delivery capabilities. If you look a year ago, we had around 1,000 software delivery engineers and now, you know, you heard Lian say just for BI, we have almost 900 people working just in that area, so we are able to do much bigger projects and much more complicated projects and that is helping us gain market share. Now with 1800 engineers at the end of June, and in this last quarter, excluding [inaudible], we added over 100 engineers this quarter, which is the most we’ve added in basically any quarter over the last couple of years. So we are seeing a lot of demand -- we are aggressively hiring people and that’s giving us a bigger platform to meet the requirements of our customers.

Jonathan Miata - Needham & Company

Got it. Okay, and then just my final question -- in the prepared remarks, you had mentioned that July was a record month in terms of contract bookings and we saw some of those press releases previously. Anything in particular driving that activity? It seems like the demand is pretty broad-based. Is that accurate?

Weizhou Lian (Translation)

Let me translate what he said last first -- the reason for that is we are more competitive in all the product lines and each customer categories and we see strong growth and order intakes from all the customer segments. And because Q1 is always our lowest quarter for revenue and order intake, that’s the normal seasonality, so in the next couple of quarters, we’ll see stronger growth in terms of revenue and order intake.

And also because last year, because of the economic crisis, the banks are taking a very cautious approach in making their budget this year and they have delayed their budget timing for a month and right now, we see they are more actively making investment and improving their IT, so for that reason we are much more optimistic for the second half in the next three quarters of the year.

Derek Myles Palaschuk 

Jon, let me just make sure that the point about the banks budget process this year -- so what Lian was saying is that because of the global economic crisis, it took them longer to really fix their budgets and because of that, there was some delays in projects and getting contracts and now that is basically being flushed through the system, so there’s somewhat of a budget flush at this time, so we’ll probably see even more seasonality in our Q2 and Q3 than in the past year.

Jonathan Miata - Needham & Company

Okay. That makes sense. Thank you very much.

Operator

Your next question is from Joseph Vafi, Jefferies & Company.

Joseph Vafi - Jefferies & Company

Good morning. Maybe we could talk a little bit about the backlog here and the backlog conversion to revenue -- I know last quarter at the end of the March quarter, backlog had grown quite strongly year over year and just kind of what you are seeing now as the company gets larger in terms of how that backlog is converting to revenue and how that has changed over the last couple of quarters.

Derek Myles Palaschuk 

Let me take that -- so we definitely are seeing very strong growth in our backlog and if we looked at our backlog at the end of July, it was significantly higher than at the end of June and that’s the reason we mentioned that there had been a little bit of delays in getting the contract.

In terms of the conversion, it’s still a very short-term backlog conversion into revenue. You know, most of our backlog will come off in a couple of quarters and there hasn’t been any change to that. We have a very strong pipeline, a very strong front log and that gives us the visibility to be able to increase our revenue guidance for the full year.

Joseph Vafi - Jefferies & Company

Okay, and what was exactly the backlog at the end of the quarter?

Derek Myles Palaschuk 

The backlog at the end of the quarter was $31 million.

Joseph Vafi - Jefferies & Company

It was 31, and that’s versus -- was that versus 19 a year ago?

Charles Zhang

Twenty-one, Joe.

Joseph Vafi - Jefferies & Company

Versus --

Derek Myles Palaschuk 

Twenty-one, yeah.

Charles Zhang

Nineteen at the end of March 31st.

Joseph Vafi - Jefferies & Company

Okay. Okay, very good and then on SYSNET, you know, obviously -- you know, I guess until the contracts get transferred, et cetera, et cetera, we’re not really going to see any kind of -- well, we didn’t see any material revenue contribution from SYSNET. And obviously the guidance builds that in here moving forward -- is that something that you are confident that’s going to be happening here in the September quarter and can we kind of see a reversal of the cost and the revenue situation we saw in June?

Derek Myles Palaschuk 

Yeah, Joe we -- as I said, we were very anxious to close SYSNET, again because of basically the benefits and making us the number two in the insurance sector. So for Q2, we feel comfortable it should be break-even and then Q3, there’s going to be a big budget flush and what we found is the insurance sector is even more seasonal than the banking, so we feel pretty comfortable with those numbers.

Joseph Vafi - Jefferies & Company

Okay, and I guess though we should be expecting some catch-up revenue at some point now -- it’s not just seasonality. Is that the right way to look at it?

Derek Myles Palaschuk 

Correct and that flush should be in Q3.

Joseph Vafi - Jefferies & Company

Okay. And then how should we think about --

Derek Myles Palaschuk 

That’s fiscal Q3, Joe.

Joseph Vafi - Jefferies & Company

Right, exactly and then how should we think about amortization here on kind of a GAAP basis in terms of SYSNET moving forward?

Derek Myles Palaschuk 

It’s $0.5 million per quarter .

Joseph Vafi - Jefferies & Company

Okay. All right. Thank you very much.

Operator

Your next question comes from Donald Liu from Goldman Sachs.

Donald Liu - Goldman Sachs

(Translation not provided)

Charles Zhang

Donald, can you translate your question for everyone on the call first?

Donald Liu - Goldman Sachs

Sure, yeah. I think the company’s revenue guidance was for this fiscal year revenue growth of 37% and the big four supposed to grow 24%, 25%. So my question is what customers and products are going to grow a lot faster than the 37% this year?

Derek Myles Palaschuk 

And Donald, let me just -- a small point is that our revenue growth is actually for software is 42%, so that -- and our other service we are basically saying is flat, so that brings it down to 37%, so I think we should be really talking about the 42% and Lian --

Donald Liu - Goldman Sachs

Sure, sure.

Weizhou Lian (Translation)

And what Lian has said is that basically in terms of revenue mix, before it is going to account for 40% of our full-year software revenue and the balance of that will be from other banks insurance and enterprise, with that before we will grow at last 20% this year and for other banks and insurance, it will be definitely much, much higher than 20% and we see very high growth from enterprise as well. So that makes the 36% a -- 42% software revenue growth.

Derek Myles Palaschuk 

And Donald, just some general numbers that we mentioned last quarter is that enterprise growth, it will be well over 100%; insurance will be at least 70%, so those two are well over our 42% software growth level.

Donald Liu - Goldman Sachs

Great. Thanks. And my second question is can you give us the EPS guidance and also the margin guidance in GAAP numbers for this fiscal year?

Derek Myles Palaschuk 

No problem, Donald -- basically the main differences between our GAAP and adjusted income are the stock comp and the amortization on acquired intangibles. You know, so for the next three quarters, the GAAP adjustments will be around $2.1 million, so you can just use that for the next three quarters and then model it.

Donald Liu - Goldman Sachs

Okay, so that’s $2.1 million per quarter?

Derek Myles Palaschuk 

Yeah.

Donald Liu - Goldman Sachs

That’s the adjustment? Great. And the next question is on the standard products -- as I remember correctly, Longtop had some standardized products, new standard products in the pipeline and what is the outlook there? And also what is the growth margin outlook for the next year or two?

Derek Myles Palaschuk 

Donald, let me just take the gross margin question first and then Lian will talk about his plans for --

[Technical Difficulties]

-- we’re looking at 67%, so let me have Lian answer your question about the standardized products and pipeline.

Weizhou Lian (Translation)

Lian said from the product point of view, first of all we see very strong growth from BI but other than that, we see a very promising prospect for our CIM and risk management and especially for risk management, it is a very promising market for us and we are hopefully penetrated in all the areas of the risk management areas, including asset liability management, ALM, and retail banking risk management. We made a lot of breakthroughs in this area. Now we have a comprehensive capabilities including consulting, product and solution implementation and also we have some partnership with our overseas vendors. And we make breakthroughs in all customer segments, including the big four and the national commercial banks and the insurance companies.

Another key area is the [inaudible] management and the related area, such as the project monitoring, [inaudible]. We also see [inaudible] prospect for that.

Another thing is that we continuously improve our consulting capabilities and have signed several important contracts for that, and we outbid several global consulting companies in the marketplace and we see our capabilities is particularly strong in the data related consulting area and this is very high margin business.

Another thing is that for business intelligence, even though we say it is primarily customized solutions, but on top of the business intelligence, we have a couple application areas which we can standardize it, such as the analytical CRM and data related -- [inaudible] or credit card analysis. So for that part, so the application part, we can sell more packaged softwares as well.

Donald Liu - Goldman Sachs

Great.

Operator

Thank you. At this time, there are no more questions in queue. (Operator Instructions) Our next question is Andrew Kwan, Avondale Partners.

Andrew Kwan - Avondale Partners

Good morning. This is Andrew for Sean -- I just have a quick question in regard to the tax refund, that in terms of it falling from the second quarter into the third quarter or is it really just --

Derek Myles Palaschuk 

Sorry, Andrew, you’re breaking up -- can you ask your question again, please?

Andrew Kwan - Avondale Partners

Sure. I was trying to find out a little bit more information as to the tax refund and how it could possibly slip from the second quarter into the third quarter and if you could just provide a little bit more color on that.

Derek Myles Palaschuk 

Certainly -- so what this tax refund is, is one of Longtop's main subsidiaries is designated as a key software enterprise and the government will refund basically 33% of the taxes that the subsidiary paid in the last 2008 calendar year. And we account for that refund of taxes on a cash basis, so last year the refund came in September, so we are assuming the refund will come also in this September and if it doesn’t come in September, then it will definitely come in our third fiscal quarter and there is basically no risk that we are not going to receive it.

Andrew Kwan - Avondale Partners

Okay, great. Thank you.

Operator

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

Charles Zhang

Thank you, everyone for joining us. If you have anymore questions, please feel free to contact our CEO, Derek; our CFO; or myself. Thank you, everyone.

Operator

Ladies and gentlemen, please note that an additional recording for the conference will be available for replay after the call’s completion for 30 days. To access the recording, please dial [inaudible] Global Conference on Hong Kong IDD +852-3005-2020, are the toll free numbers and key in the conference reference 136397 and hash key when your call is connected. This concludes our conference call. Thank you for attending.

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