Longtop Financial Technologies Limited F2Q10 (Qtr End 09/30/2009) Earnings Call Transcript

| About: Longtop Financial (LFT)

Longtop Financial Technologies Limited (NYSE:LFT)

F2Q10 (Qtr End 09/30/2009) Earnings Call

November 16, 2009 4:15 pm ET


Charles Zhang - IR Director

Weizhou Lian - CEO

Derek Palaschuk - CFO


Glenn Greene - Oppenheimer & Co.

Jon Miata - Needham & Company


Hello and welcome to today's Longtop Financial Technologies second quarter fiscal year 2010 results announcement. I am pleased to present Mr. Charles Zhang, IR Director. For the first part of this call, all participants will be listen-only mode and afterwards there will be a question-and-answer session.

Mr. Zhang, please go ahead.

Charles Zhang

Hello, everyone. I apologize to keep you guys waiting. It seems that our company system has some problem and now we're at work. Thank you and welcome to our fiscal second quarter 2010 earnings conference call.

Joining me on call 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.

As you are aware, the company has filed with [SEC] a share of registration statement of Form F-3 and a prospectus supplement – for a follow-on underwriting offering. None of our comments today should be considered an offer to sell securities. This announcement is being made pursuant to and in accordance with Rule 134 under the Securities Act. As required by the Rule 134, this announcement is not intended to, and does not constitute any offer for any securities for sale.

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 second quarter 2010 earnings conference call. Our strong performance evidenced by 55.6% software development revenue growth in the first half of fiscal 2010 and the scores the demand for Longtop's solution and that will continue to gain market share. We are again increasing our revenue and net income guidance on the back of this success. I am confidence we've achieved our revised the guidance.

I will now give you an update on our quarterly progress as regards customers, products, and acquisitions. With the most the comprehensive banking and the insurance customer base in China, we're even more optimistic they will work at the beginning of the year.

Looking specifically at our customer segments, we now expect the big four banks will grow by approximately 30% year-on-year and be around 40% of our software revenue in fiscal 2010. Our highest growth continues to come from one of the big four banks which selected us as is number one strategic partner for software development in November 2008 and we expect this trend to continue over the next few years as the bank is doing considerable amount of work on it's legacy system.

I'm also pleased that the other two big four bank customers are both growing by double-digit. We are continuing to work hard on the [last] of the big four bank which is not our customer and I hope before the end of our fiscal year, our first contract can be signed, while I do not expect this contract will be meaningful to our fiscal financial results. This will be a important milestone for us.

As for Other Bank our strategy of cross selling has been well executed. We continue to execute our work with S1, one of Thailand's largest banks. And the partnership has brought us a new follow on contract. We now expect other banks to grow by 45% to 50% year-on-year in fiscal 2010 as compared to the 30% guidance we gave at the beginning of the year. We now expect other banks to be 35 to 40% of our software revenue in fiscal 2010.

On the Insurance side, the largest insurance company is now investing heavily on their IT infrastructure; such as data centers, disaster recovery centers, technical support centers as well as back office processing centers. Based on what we witness in the banking industry, this IT infrastructure spending will be followed by an acceleration in software and services spending where the successful acquisition and integration of Sysnet we are well positioned. We now expect insurance to grow at around 100% year-on-year in fiscal 2010, as compared to 70% guidance we gave at the beginning of this year. Insurance will account for around 15% of our software revenue in fiscal 2010.

The Enterprise segment will be our fastest growing area, where we anticipate year-on-year growth of over 115% in fiscal 2010. We are continuing our rollout of treasury management solutions for the tobacco industry and we are now expecting new contracts for our tobacco industry asset monitoring solution. We have also started to implement a finance system for a subsidiary of a large auto group in China.

In the second quarter due to the strength of our BI solutions we made material progress in the security industry and won an important BI contact.

Turning specifically to our product lines, over the past six months we have been strengthening our BI leadership by enhancing our consulting facilities to compete with the global players rather than just focusing only on solutions, delivery and implementations. Our success is evidenced by our recent winning of our important data integration consulting project with the Big Four Bank where we were selected over our global competitors. We are very pleased to be the primary contractor and we have subcontracted some of the work to a global provider.

This demonstrates our customers' recognition of our capabilities in the high-end consulting areas.

We continue to gain momentum for our CRM solutions where the demand is pretty strong. Our comprehensive CRM solutions can be customized for all size of bank and we are also implementing third-party system for enterprise customers where we believe the potential for CRM is tremendous.

We are well, well positioned in the risk management area where more [hand over] companies that over comprehensive risk management solutions in China market.

Let me now update you on our M&A strategy where we have a number of potential companies in the pipeline. Through selective M&A, we now have opportunity to further strengthen and to solidify our position as the leading player in (inaudible) IT solution market. You can expect this acquisition could be larger than acquisitions that we have done in the past. The possible acquisitions are main reason we have decided to conduct a follow-on registered offering of our ADS.

Before I turn the call over to Derek, I would like to finish my comments by telling you another key highlight. For me this quarter, when investors ask me what is my biggest challenge at Longtop? I always reply my challenge is managing a much larger fast growing company from what I started 13 years ago.

Having recently completed our six months operational review, I was really impressed on the progress Longtop and our country-wide presence has made in improving communication, coordination and efficiency, which definitely has long way to go, but I believe we'll have the strongest management team in the industry which is the foundation for our continued progress.

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

Derek Palaschuk

Good evening, everyone. I apologize for the delay in the call, you can register that that was Longtop software. It would be much, much more reliable than our service provider for this conference call.

We are pleased to report a strong Q2 and once again increase our full year guidance. I will use most of my prepared remarks today to touch on areas that are not detailed in the earnings release.

Our software development business is performing well with year-on-year growth of 55.6% for the first six months. Excluding SYSNET, the growth would be a healthy 50.9% without any meaningful uplift from renminbi appreciation.

With regard to order intake and backlog, excluding Sysnet, order intake was strong in Q2 with new software development contracts of $50.6 million, compared to $38 million in the year ago period. We have a healthy software development backlog excluding Sysnet of $46.5 million compared to $31 million at June 30 '09 and $36 million in the year ago period.

Demand across all customer segments is strong and we see this trend continuing. Our adjusted software...

[Technical Difficulty]

Question-and-Answer Session

[Technical Difficulty]

...calendar quarter our fourth fiscal quarter. So for the Sysnet at the beginning of the year, the revenue guidance that we gave, the 9 million, we're very confident that we can achieve that.

Unidentified Analyst

I know you're talking about a pretty large acquisition here. I mean without going into any detail there obviously would be we looking for a company that would be similar industry to Longtop at this point or would be looking to expand out the business model from where we are right now. Thank you.

Weizhou Lian

[Foreign Language]

Derek Palaschuk

This is Derek. So this acquisition is in the finance, in the banking segment and the acquisition is going to basically compliment and is in the area of core banking. This company has its own core banking system as well as a lot of experience in implementing. Some foreign companies, core banking solutions, they have been very successful. We have a strong team and this is one of the holes in our product portfolio, which while this will be very complimentary it will also allow us to provide the services to other big banks. So Lian, said he is very excited about this opportunity.


Our next question is from Glenn Greene with Oppenheimer. Please go ahead.

Glenn Greene - Oppenheimer & Co.

I guess just a couple of questions on just sort of overall the gross margin trends you are seeing, I guess was a little bit surprising and how strong it was in this quarter. May be Derek, you could sort of talk about the [alloc] which you are seeing in the back half and any commentary why their margins were strong?

Derek Palaschuk

Sure Glenn. As we've basically indicated in our guidance for the full year we have added $60 million in revenue and $7.5 million in that income. So basically that shows you, we have a very stable margin structure. Our guidance for the year is for margins of 67%, which is what we said at the beginning of the year. The first quarter, we definitely had some, headwinds with our other services gross margin they were down to 20% and those have rebounded and we think they will be, somewhere for the rest of the year where they are at now.

On our software business is, there is absolutely no pricing pressure from our customers demand is much greater than supply. We also have, we are fully utilized. So, we wouldn't expect to see margin pressures and even with our stable margins we're continuing to invest in our business hiring more presales people are more BI consultants. You can see Weizhou Lian mentioned in the script that, for the first time ever, we basically won a project over a global service provider in the area of consulting.

Glenn Greene - Oppenheimer & Co.

Okay and then in a different direction you announced a win and I guess that's securities industry. I gather this is your first win sort of going into sort of that niche of the financial services. Could you talk a little bit more about the nature of the contract and just sort of one of many to come or how are you sort of thinking about the securities industry as an opportunity?

Derek Palaschuk

Let me check, I will let Lian go first.

Glenn Greene - Oppenheimer & Co.


Weizhou Lian

This contract was a very important milestone for Longtop. It was our first meaningful contract in the securities industry. It's a BI contract; we're helping them with data analysis and some other management applications. This customer is also an important player in this industry.

As you know we're number one in banking, number two in insurance, but in securities we basically have no presence and we just started. There is a lot of strong competitors in this area, but strategically this is a very important area for us to also cover the securities. One of the ways that we will enter the securities industry is through acquisitions and we'll also increase our internal investment in this area.

Glenn Greene - Oppenheimer & Co.

Then just back to, I guess the targeted acquisition, any way to sort of frame how big it is? I mean in terms of revenue or even ultimately what might you paid for the company?

Derek Palaschuk

Let me take that one, Glenn. So the acquisition will definitely be accretive and all the acquisitions we've done in the past have been accretive and that's an important part of our acquisition criteria. So that's the first key thing that we'll have it won't be dilutive to investors.

We just announced a plan follow-on, but in our guidance that we have given of $1.29 for the full year, there is nothing in our revenue or net income for this acquisition because we haven't closed it, we haven't signed agreements. So it will definitely strengthen our position in the core banking industry. It will be accretive and the company is very profitable.

One other thing, Glenn, sorry, it will be the largest acquisition we've done in terms of purchase price and profit contribution.


Our next question is from Jon Miata from Needham & Company. Please go ahead.

Jon Miata - Needham & Company

I think I missed a piece in your prepared remark where you touched on this potential acquisition. Did you happen to say whether it is a local company to China or if it was a global company?

Derek Palaschuk

It's definitely a local company in China.

Jon Miata - Needham & Company

With regard to the securities industry as you build out that vertical and compete in that industry vertical, does that require that Longtop higher developers with the different core competency likewise on the sales and marketing line? Will you have to beef up that effort?

Weizhou Lian

[Abrupt End]

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