Troe Wen - Secretary
Adam Yan - Chairman and Chief Executive Officer
Samuel Chen - Financial Controller
John Banks - BG Capital
e-Future Information Technology Inc. (EFUT) Q2 2013 Earnings Call August 13, 2013 11:00 AM ET
Good evening and thank you for standing by for eFuture’s second quarter 2013 earnings conference call. [Operator instructions.] I would now like to turn the meeting over to your host for today’s conference, Troe Wen, secretary of the board. Please go ahead.
Hello, everyone. Welcome to eFuture’s second 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 the call today are Adam Yan, chairman and CEO and Samuel Chen, financial controller. Following the prepared remarks, Adam and Samuel 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.
Thank you, Troe. Good morning and good evening. And now I would like my translator to help me read these prepared remarks. I’m pleased to report another solid quarter of 15% year over year top line growth, with both revenue and adjusted EBITDA well within our guidance range.
In the quarter, we have been encouraged by very positive progress across multiple fronts in both core business as well as our new business initiatives. First, on our core business, the top line increase in second quarter reflected only part of the new business we brought in for the quarter.
A significant portion of software and service revenue was not able to be recognized as a result of client postponements and shop opening schedules. The deferred revenue amounted to RMB20 million, which would have contributed to 52% and 43% growth for our software and service business on a year over year basis.
In addition, we have gained tremendous growth traction in our sales initiatives to expand the client base and service offerings in store IT operation management through smart technology such as cloud, data, and business analytics.
Our backlog has increased sequentially to RMB152 million. The backlog also reflects the impact on margins, as we have to incur investment and sales expense up front in order to secure contractual commitments from our clients, which could be one to two quarters later.
Our [second] focus on multinational corporations and China’s premier nationwide retailers has yielded tremendous results in the quarter with multinational revenue increased by 44% and nationwide Chinese retailer continues to penetration through network expansion into tier three and four cities.
In the second quarter, tier two and three cities already accounted for about 40% in our total revenue. Tier three cities witnessed an increase of 39% and tier four cities increased 44% in sales from the same period last year.
Low to medium [settlements] have also been growing rapidly, by over 100%. Since last year, we have expanded our sales network to smaller cities in China in order to capture the phenomenal business opportunities from urbanization and to expand our leading presence across different industry verticals.
On our new business initiative, I’m pleased to report that the progress on our new service offerings, omnichannel solutions, and myStore, have well exceeded management’s expectations. First, we have received great reception to our omnichannel solution and offline to online offering, which enabled clients to meet the emerging needs of businesses to connect and operate over the internet with mobile solution [unintelligible].
We have upgraded our total solution offering from offline to omnichannel, which includes offline stores, online stores, mobile stores, and social stores. This new offering is of tremendous value to traditional retailers as the trend to converging online and offline as one single platform continues.
This is part of our strategy aimed to deepen our relationship with and increase wallet share within our existing clients. As announced earlier, we have won cloud service contracts from SCA China, a world leading hygiene and [forest] products company’s China division, in the second quarter, to provide its China operation with Data Link services, a cloud-based distributor relationship management application.
I’m pleased to update you that our initial pilots have been completed, mostly with great success, and we have commenced the commercial launch of myStore. So far, we have signed a total of eight customers, with two top 30 retailers in China, with whom we will collaborate to launch myStore into their retail operation.
Again, myStore is a one-on-one engagement platform for retail consumers between sales reps and their customers, and a shopping social network between consumers and their friends and the mass consumer communities.
Our ongoing customer engagement and marketing efforts to strengthen the brand and support the sales team continues to gain momentum. In the second quarter, we have organized five conferences in Shenzhen, [Xi’an], [unintelligible], [unintelligible], and [unintelligible], covering all the fast-growing cities in north, south, east, west China. Moreover, our senior executives also presented in five larger scale industry conferences in [Futian], Beijing, Wuhan, [unintelligible], Hangzhou.
While we firmly believe that execution of our strategy remains on course, one of the leading strategic priorities has been our unwavering commitment to translate our sales success into solid and sustainable financial performance over the mid to long term.
To do this, we have to enhance both our revenue and cost structure. The management has been working on improving the revenue mix by shifting toward higher-margin business and expanding the portion of recurring revenue. These are critical building blocks to a sustainable and profitable business growth that would bring value to shareholders in the long run.
Now let me turn the call to Samuel to give you the financial update. Samuel?
Thank you, Adam. Again, our financial numbers reported will be in RMB. First of all, I would like to reiterate the fact that there was some delay in revenue recognition under the software and service revenue line as the result of clients’ postponements in shop opening schedule.
The deferred revenue amounted to RMB24 million, which could have contributed to 52% and 43% gross for our software and service business on a year over year basis. We expect the revenue will be gradually recognized in the second half of the year.
[unintelligible] in the second quarter, software license revenue decreased 17% year over year to RMB12.9 million, due to project delays, which amounted to RMB10.8 million. Hardware revenue increased 285% year over year to RMB12.3 million, due to the completion of a few one-off projects for three key customers in the FMCG sector.
Service fee income decreased 3% to RMB19.9 million, due to project delays, which amounted to RMB9.6 million. Gross profit for the second quarter decreased 1% to RMB13.8 million, and the consolidated gross margin was 31% compared to 35% in the second quarter last year.
The lower gross margin was mainly due to a RMB3.5 million noncash inventory impairment provision for accounting purposes under the cost of revenue line in service fee income. For the second quarter, we [unintelligible] to the operating loss of RMB5.2 million, compared to a loss of RMB5.4 million loss last year. That loss for the second quarter was RMB4.9 million, compared to a loss of RMB0.5 million in the same period last year.
This translated into basic and diluted loss per share of RMB1.16, compared to a loss per share of RMB0.12 last year. Adjusted net loss for the second quarter was RMB3.6 million, compared to an adjusted net income of RMB4.3 million a year ago. Adjusted diluted loss per share was RMB0.84, compared to adjusted diluted earnings per share of RMB1.02 in the second quarter last year.
Adjusted EBITDA for the second quarter was minus RMB3.4 million, compared to minus RMB22,000 in the second quarter last year.
Turning to the balance sheet, cash and cash equivalents decreased RMB39.9 million during the first half of 2013 to reach RMB39.5 million at the end of June. The decrease was mainly due to the payment of annual bonuses for 2012 for staff and the expanded expense on customer projects.
In terms of our total accounts receivable, the 11% decrease to RMB22.5 million on June 30, 2013 was due to our continuous efforts put into strengthening our balance sheet by improving on [unintelligible] receivable collection.
Lastly, our outlook on guidance. We expect a total revenue for the third quarter of 2013 to total between RMB14 million and RMB45 million, representing a 7% to 20% growth as compared to the third quarter of 2012.
Adjusted EBITDA for the third quarter is expected to be in the range of minus RMB3 million to minus RMB1 million, as compared to an adjusted EBITDA of minus RMB1 million in the third quarter of 2012.
Adam and I would now be happy to take your questions. Operator, please go ahead.
[Operator instructions.] We’ll first go to John Banks with BG Capital.
John Banks - BG Capital
My first question is, I’d say in the last four or five years you guys you been growing revenues anywhere around 20-25%. It’s pretty consistent. It’s been good, with all the headwinds in China. You’ve basically doubled your revenues over the last four or five years. I guess the question I have is, going forward, do we have the infrastructure or is the industry right? Can we see the [unintelligible] growth right up to like 35% to 50% per year?
John, firstly, thank you for your question. I’m afraid we are in a very good timing in terms of growth opportunities. What I see in the next two years is China is going to become one of the largest, if not the largest, digital retail markets in the world, and we have prepared for this over the last two years.
First, we have built the infrastructure as well as the offering for the omnichannel solution, and we have basically completed the preparation of it. What we see is there will be tremendous changes to the consumer behavior, and we will see that in the next five years. Most of the retailers, they will change from only single channel, either offline or online, to omnichannel, or multichannel.
As you know, eFuture has solutions offering offline services, but now we have expanded to providing solutions for online, social, and mobile. We have also upgraded the back end of CRM to fully support the omnichannel solutions for our customers.
As I reported in the last quarter, myStore has already pretty much launched the [unintelligible] over the last six months, and mostly are very successful. Now we have eight retail customers and amongst them, two are the top 30 largest retailers in China.
For the retailer, myStore is an excellent platform for the sales reps and also the sales reps’ customers, or VIPs, or members, to engage each other. For consumers, it’s also a very good shopping social network.
For consumers, myStore is also a platform of personal shopping. For the retailers, they can not only choose all the items they like from their favorite store, but also really pick up some shopping ideas from their friends, exchange intelligence, and put forward recommendations. So the omnichannel solution and myStore will be the key catalysts driving our growth in the future.
John Banks - BG Capital
My second question, going back to omnichannel and myStore, in the short term, is this like a complementary business? Or can this ramp big up going into the next six months to next year? Are we going to see material revenue from these divisions in the next six months to a year?
First, for the first quarter we have already completed the development of our omnichannel solution and are ready for commercial launch in the second half of the year. Now, you can see our clients, the retailers, whether or not they’re offline or online at the moment, they are in the process of transforming themselves as a single channel into all channel retailers, and we see that will be a tremendous growth opportunity for the future.
As you can see, there is a similar trend in the U.S., like Walmart and Macy’s in the United States, Tesco in the U.K. They are all accelerating and expediting their transformation or transition from a single channel to all channel solution. In China, we are the first one to launch this omnichannel solution for the retail sector.
We see the change is very fast in China, with [mcommerce], social networking, through integrating [unintelligible], using smartphones, to really accelerate the conversion. In order to fully support the launch of the omnichannel, we have set up a separate business unit, just to support the business development of omnichannel solutions.
John Banks - BG Capital
I know the company has grown pretty good and you’ve spent a lot of money on your infrastructure and employees, which is all very good for the company, and the company is approaching RMB50 million in sales. I’m just wondering at what point, on the cost structure, is the company going to start throwing up a dramatic amount of cash flow? Or is the company just more concerned about growing the company over cash flow?
For your question, there is RMB50 million in revenue. We are targeted to reach the number after two or three years. And the cash flow, there will be a RMB10 million increase compared to the cash and cash equivalents balance as of the end of 2012.
Which will make roughly about close to RMB89 million by the end of 2013. That’s really our target.
John Banks - BG Capital
Is Adam still looking to come to New York in the fourth quarter of this year?
[Operator instructions.] It appears we have no further questions at this time, so I’d like to turn it back to our speakers for any additional or closing remarks.
Thank you for joining us today, and we look forward to updating you on our progress in the next quarter. Good day.
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