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AsiaInfo Holdings, Inc. (NASDAQ:ASIA)

Q3 2006 Earnings Call

October 25, 2006 8:00 pm ET

Executives

Eileen Chu - Investor Relations

Steve Zhang - President and Chief Executive Officer

Ying Han - Chief Financial Officer

Operator

Welcome to today's AsiaInfo Q3 2006 results announcement event call. (Operator Instructions) Ms. Chu, you may begin.

Eileen Chu - Investor Relations

Hello, everyone, and welcome to AsiaInfo's 2006 third quarter conference call. Today, Steve Zhang, President and CEO of AsiaInfo, will reveal some of AsiaInfo's business highlights for the most recent quarter. Ying Han, AsiaInfo's Chief Financial Officer, will provide greater details on the financial results, as well as guidance for the upcoming quarter. Mr. Zhang will then provide a few closing remarks and open the call to questions.

Before we continue, allow me to review our Safe Harbor Statement. During this conference call, representatives of the company may make forward-looking statements in an effort to assist you in understanding the company and its results. Please refer to AsiaInfo reports filed with the SEC for a discussion of important factors that could affect future results.

Also, please take note that all figures mentioned during this conference call are in U.S. dollars. I will now turn the call over to AsiaInfo's President and CEO, Steve Zhang.

Steve Zhang

Hello, and thank you for joining us. I'm pleased to report today that AsiaInfo exceeded net revenue guidance and EPS for third quarter, as we saw strong growth in both our telecom business and our security product and services business.

During the third quarter, AsiaInfo continued to leverage our leading technology, close relationships with the major telecom carriers and the familiarity with the needs of the telecom marketplace to secure telecom software, service contracts. We implemented telecom software solutions that enhanced the functionality and the capabilities of optical systems and allowed them to focus on developing their customer service offerings.

For example, for Shanghai Unicom, we constructed a phase two prepaid service and platform to provide a greater variety of prepaid services to customers and improve management of all prepaid data services.

We expanded [JBM] Mobile’s BOSS systems, integrating functions to increase their operating efficiency in an increasingly competitive of telecom market. Upgrades such as this are key to staying ahead of the competition, improving customer management and increasing profitability.

We had a new strategic plans to expand our share of the telecom market and during the third quarter we made a significant breakthrough into the China Telecom part of the system market by signing a contract with JBM Telecom to construct an online payment system and upgrade their business support system. JBM Telecom is one of China Telecom’s most important provincial subsidiaries with approximately 21.4 million fixed line telecom users and 3.4 million broadband users. We hope to develop them into a major client through the coming quarters.

We also secured security enhancement contracts with several China Mobile subsidiaries that will help them with SOX compliance. This is a new solution that we are optimistic that there are more opportunities in the SOX compliance space.

Going forward, we believe that there are excellent opportunities in the telecom market for leading software solutions, especially in the area of prepaid billing and customer relationship management. When the 3G era arrives all four of China’s major telecom operators will be competing for the same user base and we believe they will invest aggressively in those operation system upgrades to better analyze customer needs and differentiate their services.

During the quarter we added roughly 200 people, mostly to our software service and R&D team. This reflects the strong order flow we are seeing today and the opportunities that we see in the future. We’re continuing to add people as we see appropriate.

As I mentioned earlier, our security product and services business continues to recover with another good quarter as our sales team make further inroads into the market. During the quarter, we added [LuTiem] software to our security product offerings and we are looking forward to exploring this market.

Finally, I am pleased to let you know that Eileen Chu, our Director of Investor Relations, will be taking over as Chief Financial Officer from the 1st of January next year. Eileen’s transition has been progressing smoothly and we look forward to more strong financial management in the years ahead.

Let me now turn the call over to Ying for a review of this quarter’s financial highlights.

Ying Han

Thank you, Steve. Good morning. Rather than repeating all of the numbers in the press release, I will provide some additional information on key results. I will also provide guidance for the first quarter.

Third quarter telecom software products and solutions revenue rose 38% year over year and 11% sequentially as telecom customers have upgraded and expanded their BOSS capabilities and invested in more sophisticated technology. Telecom service revenue rose sequentially, primarily due to revenue from a maintenance contract with China Unicom. This led to net revenue growth in the telecom business of 28% year over year and 17% sequentially.

Lenovo-AsiaInfo’s net revenue decreased 4% year over year and increased 66% sequentially, reflecting a strong recovery in this business. Gross margins for Lenovo-AsiaInfo has also increased significantly from 15% in the second quarter to 42% in the third quarter, driven by strong revenue growth.

Gross margins for the group decreased year over year and increased sequentially. The year-over-year decrease was primarily due to [inaudible] in the third quarter that we passed through, and the sequential increase reflects the improving profitability of the security products and services business.

Total group operating expenses for the quarter were up 8% year over year and 22% sequentially. Sales and marketing expenses increased 16% year over year and 34% sequentially, due to increased sales incentives for strong sales performance in Q3 of this year and marketing activities during in the quarter.

Total general and administrative expenses for our business units decreased year over year as a result of lower overhead in the Lenovo-AsiaInfo business unit, and the collections for bad debt provisions.

Corporate G&A expenses decreased both year over year and sequentially as a result of continued increased efficiency of our internal admin processes. In line with our strategy to invest in the R&D capabilities of AsiaInfo for future market opportunities, R&D expenses during the third quarter were up 24% year over year and 9% sequentially.

During the quarter our telecom business posted a contribution profit before corporate G&A expenses of $3.3 million. Lenovo-AsiaInfo posted a contribution loss before corporate G&A expenses of $0.3 million, a $0.5 million improvement from the previous quarter. The contribution marketing for the telecom business decreased year over year due to increased headcount in our R&D and software service teams to prepare AsiaInfo to capitalize our future market opportunity.

Operating cash flow for the quarter was $0.9 million. Our operating cash flow for the first three quarters of the year were $8.2 million.

Moving to our balance sheet, our total cash and cash equivalents plus short-term investments decreased sequentially approximately $6.3 million to $119.6 million, reflecting acquisitions made during the quarter to the value of $3.6 million and the share repurchase for a value of $3.8 million.

Both notes receivable and accounts receivable rose sequentially due to increased sales activities during the quarter and also increased accounts receivables. This led to slightly higher DSOs for the quarter, which rose to 147 days compared to last quarter of 141 days. The sequential rise in inventories during the third quarter were mainly due to increased raw materials and finish goods in the Lenovo-AsiaInfo business unit.

During the quarter, we repurchased 0.7 million shares before our share repurchase program was completed on the 18th of July. All outstanding treasury stock were retired.

I will now give you AsiaInfo financial guidance for the fourth quarter of 2006. Please note that the following outlook statements are based on our current expectations. These statements are forward-looking and actual results may differ materially.

Revenues net of passthroughs in the fourth quarter are expected to be $24 million to $25 million and we expect fourth quarter earnings per basic share to be $0.04 to $0.05. We anticipate that Lenovo-AsiaInfo business will breakeven in the fourth quarter. Now let me turn the call back to Steve for his closing remarks.

Steve Zhang

Thank you, Ying. The third quarter 2006 was very positive as we implemented our strategy of leveraging our deep customer relationships and marketing solutions to drive growth. Going forward, there's a movement toward greater competition in China’s telecom industry as the major telecom carriers build operation systems in preparation for the 3G era. We are confident that our investment in R&D and the sales and service personnel will put us in a strong position to capitalize on this market opportunity.

We are similarly optimistic about the development of the IT security market in China and with our strong management team, expanded product line and the brand recognition, we look forward to even better results in the quarters ahead.

Thank you for your continued support of AsiaInfo. I will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) I don't have any questions in queue. Please go ahead now.

Steve Zhang

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact myself, Ying or any of our Investor Relations representatives. Thank you.

Operator

This concludes our conference call. Thank you for attending.

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