Cathy Mattison - Assistance Vice President, Lippert Heilshorn & Associates
Merle Hinrich - Executive Chairman
Connie Lai - Chief Financial Officer
Jared Schramm - ROTH Capital Partners
Global Sources Ltd. (GSOL) Q2 2013 Earnings Call August 15, 2013 8:00 AM ET
Welcome to the Global Sources' second quarter 2013 results conference call on August 15, 2013. (Operator Instructions) I will now hand the conference over to Cathy Mattison of LHA. Please go ahead, madam.
Thank you. And I'd like to thank everyone for joining us today for the Global Sources' second quarter 2013 earnings conference call. Speaking on the call today are Merle Hinrich, Executive Chairman; and Connie Lai, Chief Financial Officer.
If you have not yet received the earnings press release, it is now available at the company's website at www.globalsources.com. If you would like to be added to our distribution list or if you would like additional information about Global Sources you may call LHA at 415-433-3777.
A telephone replay of this call is scheduled to be available until August 23, 2013, and the dialing instructions are included in the press release. The replay is also scheduled to be available on the Investor Relations page of the company's website for at least 30 days.
Before I turn the call over to management let me remind you that this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission. Global Sources does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Management has provided certain measures that are not in accordance with international reporting standards or IFRS. Management believes non-IFRS metrics are useful measures of operations and provides IFRS to non-IFRS reconciliation tables at the end of the earnings press release. Global Sources defines non-IFRS net income as net income excluding non-cash SBC expense or credit; amortization of intangibles as it relates to certain equity compensation plans, profits or losses on acquisitions and investments net of transaction costs and related tax expenses; and/or impairment charges for all historical and future references to non-IFRS metrics.
Non-IFRS EPS is defined as non-IFRS net income divided by the weighted average of diluted common shares outstanding. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, impairment of goodwill and intangible assets, and profits or losses on acquisitions and investments net of transaction costs and related tax expenses. Management would like to remind you that the non-cash stock-based compensation charge is a charge to the income statement and a corresponding credit to additional paid-in capital; hence there is no impact on shareholders' equity.
I would also like to remind you about Regulation FD restrictions. The company's official spokespeople to the investment community are Merle Hinrich and Connie Lai.
And now, I would like to turn the call over to Mr. Hinrich. Please go ahead, sir.
Thank you. And thank you all for joining our call today. For the quarter our total revenue was $61.4 million and we posted an EPS of $0.46. In an environment of weak and uncertain global demand, our online operations remain challenged, while our exhibitions performed reasonably well.
During the quarter we had a busy period of trade show. Our April shows in Hong Kong featured approximately 6,700 booths, attendance exceeded 60,000; and include buyers from more than a 140 countries and territory.
We had our China Sourcing Fair in Dubai in May and in Miami in June. Due to ongoing unrest in the Middle East, the Dubai show did not perform as well as we had expected. On the other hand, we were pleased with the performance of the Miami show, which serves buyers in Latin America and the U.S.
The 13th International Fashion Brand Fair, which is known as the FashionSZshow was held in July, as the largest and most influential fashion exhibition in Southern China. The show enables mainland Chinese and international fashion brands to develop their business in mainland China. Although, the show's financial performance was disappointing, attendance was very strong and exceeded 70,000.
Private sourcing events were held from April through to the end of July 2013 for more than a 100 sourcing teams from very large buying organizations, including Amazon China, Monster Cable, Panasonic, Office Depot, Pacific Brands, Auchan, Bossini, J.C. Penney, RadioShack, Li & Fung and Metro, to name only a few. These events created more than 500 high quality one-on-one selling opportunities for Global Sources suppliers.
Now, I would like to turn the call over to Connie, after which I will conclude with our closing remarks. Connie?
Thank you, Mr. Hinrich. I will now review our financial results for the second quarter of 2013 as compared to second quarter of 2012. Total revenue was $61.4 million as compared to $66.8 million. Online revenue was $22.7 million as compared to $30 million. Exhibitions revenue was $33.3 million as compared to $30.5 million. Our exhibition revenue reflect the given accelerated factor with our China Sourcing Fairs in Miami moving to the second quarter in 2013 from the third quarter in 2012. Print service revenue was $3.5 million as compared to $4.4 million.
Total operating expenses were $53.6 million as compared to $56.8 million. We continue to focus on prudently manage our cost, while investing for the future. Interest income was $347,000 as compared to $246,000.
IFRS net income was $16.8 million or $0.46 per diluted share, which includes an $8.7 million profit on the sales of property, net of transaction costs and related tax expenses. And a write-down of approximately $2.5 million in consideration of the goodwill impairment charges related to the FashionSZshow. As Merle mentioned, the show did not meet expectations.
In the second quarter of 2012, IFRS net income was $9.7 million or $0.27 per diluted share. Non-IFRS net income was $11.4 million or $0.32 per diluted share as compared to $11 million or $0.31 per diluted share.
Adjusted EBITDA for the quarter was $13.2 million as compared to $12.8 million. Total deferred income and customer prepayments were $100.1 million as at June 30, 2013, as compared to $121.3 million.
Now for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. Revenue was $92.7 million as compared to $105.7 million. IFRS net income was $22.4 million or $0.62 per diluted share as compared to $12.8 million or $0.36 per diluted share.
Non-IFRS net income was $13.2 million or $0.37 per diluted share as compared to $14.6 million or $0.41 per diluted share. Adjusted EBITDA was $16.3 million as compared to $18.2 million.
Now, on to our balance sheet as of June 30, 2013 as compared to June 30, 2012. With respect to our cash position, we completed the sales of one of our properties in Shenzhen in the second of 2013 that increased our cash by $15.2 million and contributed capital gains of $8.7 million, net of transaction costs and related tax expenses.
Cash and securities as of June 30, 2013 totaled $135.1 million as compared to $106 million. Our total deferred income and customer prepayments were $92.4 million as compared to $112.2 million. Total asset as of June 30, 2013 were $337.9 million as compared to $310.2 million. Also we continued to have no short-term or long-term bank debt.
Days sales outstanding were 6 days as compared to 8 days. Retained earnings as of June 30, 2013, were $181.3 million as compared to $139.5 million. Total shareholder equity was $190.9 million as compared to $143 million.
Now, I'll provide our second half 2013 guidance. Under IFRS, for the second half of 2013 ending December 31, 2013, our revenue is expected to be between $101 million and $103 million as compared to $126 million for the second half of 2012. IFRS EPS is expected to be in the range of $0.32 and $0.36 as compared to $0.54 per diluted share in the second half of 2012.
Non-IFRS EPS is expected to be in the range of $0.36 to $0.40 as compared to $0.63 per diluted share for the same period in 2012. Adjusted EBITDA is expected to be between $19.7 million and $20.9 million as compared to $29.7 million in the second half of 2012.
Looking ahead, we expect our revenue and earnings to be impacted by the continued global economic uncertainty.
Now, I will turn the call back to Mr. Hinrich.
Thank you, Connie. I'll begin with some comments on the global consumer demand situation and the mainland China supply market condition, both of which substantially affect our core export business. Recent China custom figures have shown weak export.
Before the 5.1% increase for the month of July, June exports decline by 3.1%, including declines of 5.4% for the United States and 8.3% to the European Union. Exports for both of these markets have declined for each of the months of March, April, May and June.
On the supply market side, there are various challenges facing export. A credit squeeze is having a negative effect and is pushing up manufacturing cost. Expo Exporters have also had to manage cost increases in many areas of their businesses. These cost factors plus tightened competition have had many exporters struggling to adapt.
Another fact to follow this was slow overseas demand is causing supplier to be quite conservative with their marketing budget. In this environment, our focus is on constantly refining and enhancing the value we provide to help our customers buy or sell more effectively. For buyers, one of the biggest challenges is the overwhelming quantity of products and suppliers that are online. Accordingly our objective is to help them filter through the clutter and find the important product and the right supplier.
As I have mentioned in the past, our primary strategy is to address these buyer needs with a unique service that combines that best of tradeshows with the best of online. We called this initiative as, Find Them and Meet Them. Most professional buyers would agree that online marketplaces and tradeshow are each necessary, but insufficient on their own for successful sourcing. This leads to the obvious conclusion that an ideal service would be a blend of online and show.
So once again Global Sources is leading the industry by understanding and responding to customer requirements. We have been executing on our Find Them and Meet Them theme initiative in a variety of ways. Throughout buyers be most productive before show, we have online services that enable them to see products that are scheduled to be exhibited and to see the profiles of the exhibitors.
In fact, for our upcoming fall shows, we expect to have more 100,000 products from exhibitors online before the show. This is unique in our industry, if not worldwide. Buyers who cannot make it to the show can go online after the show to see the product that was shown, profiles of the exhibitors and exhibitors boost.
Also in sharp contrast with the online-only services, we enable buyers to find suppliers and then meet them, even at our big shows here in Hong Kong each spring and fall or at our regional shows in Miami, New Delhi, Johannesburg and Sao Paulo. The scheduled launch of product showcases at our upcoming shows is another way in which we are executing on our Find Them and Meet Them initiative.
We expected these to become an important and new feature of our show. In just 10 minutes, buyers will be able to see dozens of exciting sourcing opportunity. They will be able to view the featured products of dozens and in some cases hundreds of suppliers. All of the products will have been very carefully selected and many will be new products and the latest designs. Suppliers represented will include exhibitors at the show, plus advertisers not at the show. The services will be accompanied by robust, multitask enquiry service, which will deliver enquiries through exhibitors and advertisers and direct from the show.
Our Hong Kong Electronic Show held twice a year is at capacity. To accommodate that strong growth, we are launching a specialized mobile and wireless show in April 2014. It is expected to feature more than 800 booths at launch and pavilions will be included, include smartphones and tablet, accessory, mobile apps and application and other wireless devices.
The new show along with the complementary online marketplace and magazine is yet another new Find Them and Meet Them initiative. Buyers will be able to find suppliers in the medium of their choice and then meet the suppliers at the show. Accordingly suppliers will have a powerful, integrated and year-around marketing platform.
Finally, with regards to our export focused businesses from the supplier perspective nothing is more important to them than a buyer community they reach with their marketing investments. This is the strength of Global Sources and we continue to focus on giving suppliers access to a highly qualified influential and exclusive buyer community.
We have buyer communities for some 15 different vertical markets. 100% of the members are registered and 100% have been active within the last 12 months. Our over the communities include verified buyers who have all been qualified face to face at our tradeshows.
Now, I will turn to our operations to the domestic B2B market at mainland China. As discussed on our last call, this is an important and strategic direction. We have been steadily developing our presence and footprint. We have a community of more than 4 million users and we have positions in the semiconductor, auto electronic, fashion and management sectors. We intend to continue focusing on developing these market position while also continuing to evaluate other strategic M&A opportunities.
Lastly, we have a highly experienced management team, a very strong balance sheet and an uninterrupted 43 year track record of profitability. We believe we are well positioned to continue our success in the years ahead.
And with that, I would now like to open the call for questions.
(Operator Instructions) The first question comes from Jared Schramm from ROTH Capital Partners.
Jared Schramm - ROTH Capital Partners
Looking at the buy, given the turmoil in the region, if you could handicap more or so on a percentage basis, how this performed compared to your expectation? And then similarly looking at the Miami show, how that outperformed compared to your expectation?
Well, the Dubai show, Jared, really encompasses quite a large area, of that as you appreciate North Africa is important to that show and so the more immediate Middle-Eastern area. There just was not the, kind of, turnout that we had expected and there wasn't nearly the interest from the supply side I guess, primarily in anticipation or in concern or with concern of the impact that all this disruption was having in the Middle-East. So we have a strong position. It's a position that we are going to maintain, but it's a position also that we have to reevaluate in terms of the time and management focus.
The Miami show in its third year has been extremely successful. And they had about 20% increase, better than expected. And there was a improvement in attendance. As you may know these shows do take couple of years to get them up and running to sort of get them on the agenda of buyers that begin to know what they are and are more effective in using those shows. So overall, it's just adjusting to the market environment, so it's the business that we are in.
Jared Schramm - ROTH Capital Partners
And looking at cost reduction initiatives, you had some noticeable reductions in operating expense over the past few quarters. Is there any more opportunity for further reductions there or has most of the overhead that was pretty easy taking, ha been taken out of the business to date?
Well, I will comment first and then Connie will follow-up. Cost reductions are never easy, because you build up and your anticipation of using those expenditures for two different projects, et cetera. So we have pulled back. And one of the things within this industry is that we have variable costs better build and such as commissions and bonuses and this kind of thing.
So we can adjust our cost, and that by the way, that is quite a large component, as you can appreciated the sales cost on both the online services, defense services and the trade show issue. So those costs would come down rather naturally with a reduction in total revenue. But needless to say, as it progresses it becomes increasingly more difficult to cut. Connie, would you like to add to that.
I think totally agree with that comment. I think you highlighted, from Global Sources' perspective, we always try to strive the right balance between investing for the future as well as managing our recurring cost. So we always do whatever is necessary, we believe on the cost management front. And going forward, we intend to ensure that whatever we are doing is not going to jeopardize our ability to be successful in the future, when the market has really recovered.
Jared Schramm - ROTH Capital Partners
So would you use the most recent quarter Q2 as a good way to look at the rest of the year, as far as from an operating expense standpoint is concerned?
I think from the cost perspective we continuously evaluate whatever opportunities that it allow us to improve our efficiency to continue to try to align the cost again with revenue. But it's fair to say that there is always time leveraging cost management or as a impact on the credential. So we hope that we can continue to expect to weigh better cost management in the second half of 2013.
Well, I think that's fair to say that we're on target to maintain manage our cost along the areas that they are. And in certain areas we will pullback a bit more.
And looking at the shift in government personnel we've seen in the mainland China, specifically with the new premier. Does that give you any pause in regards to your business heading into the second half of 2013?
In fact, it is now, actually the tide is turning to probably favor a little bit of a improvement in the international trade and export. And we saw a pick up in the metrics for the month of July, which was encouraging. And I would just say that our business is predicated more on the international market for consumer product that is what drives it. China is by far the largest supplier, and when the international market receives, of course, it does have the export sector of China. The moment that market starts returning, it is going to of course improve China's export.
And as you know, the focus has been on upscaling and updating and improving our exports, not only to the developed markets, but also to the underdeveloped market. And I would say that the domestic market has been hit a bit as well in China, not purposely, but it is what has happened or transpired in the last year. I maybe just totally optimistic here, but I do believe that we'll be seeing the worst of this, this year maybe early next year, and then things should stabilize and return to a growth pattern.
Jared Schramm - ROTH Capital Partners
And then lastly here, just on the acquisition space as the cash balance again begin to bump up here. What are you seeing as far as attractive targets in this space to date?
Well, I can't speak to specific targets, but I think that there are one of the areas, which we have just entered is, the machinery sector. And we announced last spring, we are very excited about that particular vertical. It is an area that has substantial growth in the future as more and more manufacturers look to upgrade their manufacturing skills. And that particular acquisition is accretive to GSOL.
Jared Schramm - ROTH Capital Partners
And geographically speaking, any new territories you're looking into or the same ones that we've focused on the last several quarters?
There is two areas here, there is the domestic shows and there is international shows. Speaking about the domestic show, our first focus is always on shows with which we have an overlap in our footprint, either on the buy side or the sell side. Our footprint now is actually quite large. But for example, we wouldn't be looking at shows, and maybe let's say the cement industry or the aerospace industry. We look at shows which are typically in the consumer sector or the technology sector.
For the export markets, we try to look at markets, which have growth areas and indeed our China manufacture merchandise. Brazil, São Paulo, was a very good example of that. And is more certainly one of the success stories in our exhibition development.
There appear to be no further questions. Please continue.
Well, I would just simply like to close by saying, thank you all for joining our webcast this evening. We look forward to seeing you in the next quarter or hearing from you in the next quarter. Thank you very much and good evening.
Thank you. This concludes the Global Sources second quarter 2013 results conference call. Thank you for participating. You may now disconnect.