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Asiainfo Holdings, Inc. (NASDAQ:ASIA)

Q1 2010 Earnings Call Transcript

May 3, 2010 8:00 pm ET

Executives

Sheryl Zhang – IR

Steve Zhang – President and CEO

Wei Li – VP and CFO

Analysts

Donald Lu – Goldman Sachs

Karl Keirstead – Kaufman Brothers

Brendan Barnicle – Pacific Crest Securities

Kun Tao – Roth Capital Partners

Scott Sutherland – Wedbush Securities

Jeffery Goldstein [ph] – Sunrise Investment [ph]

Operator

Welcome to today’s AsiaInfo’s first quarter 2010 earnings announcement event call. I am pleased to present Ms. Sheryl Zhang, IR Director. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question-and-answer session. Ms. Zhang, please begin.

Sheryl Zhang

Thank you, Alan. Hello, everyone, and welcome to AsiaInfo's first quarter 2010 earnings conference call. Today, Steve Zhang, AsiaInfo’s President and Chief Executive Officer, will review business highlights from the quarter and discuss strategy; Wei Li, AsiaInfo’s Chief Financial Officer, will discuss financial results for the first quarter 2010 and give guidance for the second quarter of 2010. And then we’ll open the call to questions.

Before we continue, please allow me to read you AsiaInfo's Safe Harbor statement. Some information we will discuss during this conference call is forward-looking in nature and subject to risks and uncertainties that may cause the actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and other reports as filed with the Securities and Exchange Commission.

Also, please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to AsiaInfo's financial results prepared in accordance with GAAP are included in AsiaInfo’s earnings release, which has been posted on the Investor Relations section of the AsiaInfo website, www.asiainfo.com. Finally, please note that unless otherwise stated, 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?

Steve Zhang

Hello, and thank you for joining the call today. As we enter into our 10th year anniversary as a public company, I am pleased to report yet another strong quarter for AsiaInfo. During the quarter we met net revenue and exceeded and exceeded EPS guidance, achieved a growth margin of over 60% and operating margin of approximately 18%. This is especially notable because it comes on top of 55% net revenue growth I the first quarter of 2009, and includes a $3.5 million merger-related expense.

Before we get started today, I would also like to highlight two important facts about the carrier CapEx and OpEx budgets. First, although overall CapEx budgets might be down year-over-year IT spending is rather stable and the portion of those budget in spend for software and services versus hardware only continues to increase.

Second, we continue to achieve healthy growth because the operators are spending from their OpEx budgets. For example, we are working very closely with China Mobile’s sales and marketing department to help them design and tailor their sales and marketing campaigns. This is becoming increasingly important as the competition among those carriers is becoming more intensive.

Moving on to our three customer accounts, without getting into the details of every system up for bid in our China Mobile account, let me put some things in perspective. For the past two years, we worked on the Next Generation BASS and the Business Intelligence Phase I rollout for China Mobile. One can look at this product as version 1.0, which has been completed. We are currently signing contracts for Next Generation 1 2 rollout, our version 2.0. And later this year we expect to start to sign contracts for Next Generation 2 1 rollout, our version 3.0.

Essentially, this means this means we secure a major upgrade every year. These upgrades make up a significant amount of our core revenues and the extra functions that we lay on top of our additional growth. In addition to our major upgrades there are projects such as our Business Operation Management Center, which are becoming increasingly important as China Mobile’s IT systems become more complicated and they need better tools to monitor their systems.

Another significant development that we are seeing across all three customer accounts is demand for various capabilities in order to offload data traffic from 3G networks on to WiFi networks. In the U.S., especially with the popularity of smartphones like the iPhone, we have seen data traffic grow exponentially putting pressure on 3G networks. In China, the carriers are trying to build thousands of WiFi hotspots so they can piggyback on the wireless LAN network avoiding the problems U.S. carries have faced.

We are in the process of building authentication systems to do the accounting, authentication, and authorization for those systems. This is a new project, and although it’s not a major solution in terms of revenue contribution, the product has a good margin.

As for China Unicom, we are working on upgrading BASS systems and providing ongoing services to allow the operator to better manage their network and optimize user experience. They are focused on investing in Business Intelligence systems and the BASS system to support bundled services and leveraging their strength in broadband services in Northern China.

With China Telecom, our priorities remain the same. First, upgrading their billing system to 3.0 standard and CRM system to 2.0 standard. And, second, developing leading analytical solutions, which continue to be in high demand as the carriers compete with one another to service and understand their customer spending behavior pattern.

Across all three operators, we are seeing a lot of demand for our business operation consulting team, which works to design more targeted and effective sales and marketing campaigns. As I mentioned earlier, this business is becoming increasingly important as operators look for ways to sell products into their existing customer base. Carriers are willing to spend to gain customer insight, a better understanding of the customer and which segment to sell product to.

Besides the consulting business, our outbound calling center business, SmartCall, helps carriers reach out to customers, and is the final component needed to execute marketing campaigns. We have been aggressively expanding this business and are confident that it will drive meaningful revenue down the road.

Now, I will like to turn our attention to our merger with Linkage. We are still working to close the deal and I want to pick up where we last left off last quarter. I mentioned, we hosted a internal management meetings with approximately 60 top managers from both companies to discuss our integration plan.

We also created five working groups, which are solely devoted to integrating our business and report to me on a weekly basis. These groups have done an excellent job pushing forward thus far. In fat, we have put a plan in place to integrate all of our employees into one IT system, including email, payroll, and the financial reporting.

On the sales and marketing side, our management structure has been established and we have resolved our sales overlap issues, which were very minimum. And I am very pleased to report that we have integrated our respective offerings into one unified product catalog, and we have selected around 80 solutions to cross-sell into our customer base. And our marketing team is currently working with our sales reps to package and sell those products.

And regarding our human capital, I am pleased to announce that we will be retaining nearly all of our key employees.

In short, integration is moving along smoothly. Sales and marketing have developed a unified product catalog, working together to look for ways to cross-sell products and we have retained nearly all of our key employees. After this merger, with the expected – with the expanded customer account base our strategy is to execute against our established Think, Build, and Operate, our TBO model to increase the contract size per customer.

I would also like to provide you with more information about our recent acquisition of Hangzhou Zhongbo. We are excited about this strategic acquisition marking the first steps of our expansion into the cable industry. The Chinese government has placed a greater emphasis on the convergence of the telecom, cable, and Internet industries in China, setting a goal of ‘one province, one network,’ within two years.

Just to give you a little more background, the cable market in China is incredibly fragmented with thousands of operators. Although our investment in Hangzhou Zhongbo is relatively small, this business already serves more than 20 broadcasters – operators, including Jiangsu Cable Company, which is the world’s second largest cable operator in terms of number of subscribers.

We expect this business to grow between 30% and 40% on an annual basis and are confident that Zhongbo’s experience with cable operators in China will enable us to (inaudible) upon the emerging opportunities in China’s cable industry.

This concludes my prepared remarks. Wei, the floor is yours.

Wei Li

Thank you, Steve, and hello to everyone on the call. Please note that all the numbers I will discuss today are in U.S. dollars unless otherwise noted.

First quarter non-GAAP net revenue for the telecom business increased 30% year-over-year and decreased slightly sequentially. The year-over-year increase reflects sustained global demand for all three telecom carriers as well as the result of inflow of service and maintenance contracts.

Gross profit as a percentage of net revenue for the telecom business was 53% in the first quarter compared to the 58% in the year ago period and the previous quarter.

First quarter net revenues for the Lenovo-AsiaInfo division increased 24% year-over-year and decreased 22% sequentially. The year-over-year increase is mainly due to our concerted [ph] effort to increase operation in this division, a sequential decrease is probably the result of technology in the fourth quarter is seasonally stronger in terms of sales for Lenovo-AsiaInfo business unit.

The gross profit as a percentage of net revenue for the Lenovo-AsiaInfo was 31% in the first quarter compared to 58% in the year-ago period and 70% in the previous quarter. Gross profit as a percentage of net revenue for the Company was 63% in the first quarter compared to the 58% in the year ago period and 61% in previous quarter. We are encouraged with our improved operating efficiency so far in early 2010.

Income from operation in the first quarter increased 78% year-over-year and decreased 73% sequentially. Sales and marketing expense decreased 2% year-over-year and 17% sequentially in the first quarter. The year-over-year and sequential decrease was mainly due to improved operating efficiency.

G&A expense increased 143% year-over-year and 88% sequentially in the first quarter. The year-over-year increase was primarily a result of $3.5 million in the cost of (inaudible) Linkage merger, and the $1.6 million bad debt provision for one project. The R&D expense increased 25% year-over-year and decreased 29% sequentially in the first quarter. This year-over-year increase mainly reflects R&D expense related to the development of Next Generation (inaudible) operating system [ph] and Next Generation (inaudible) as well investment in the (inaudible) of our product before the international market.

The total operating expense increased 31% year-over-year and decreased 6% sequentially during the first quarter. As a result, our operating margin of net revenue was 18% for the first quarter compared to 13% in the year ago period and 20% in previous quarters. (Inaudible) stated goal of achieving 17% to 18 % operating margin as of net revenue this quarter primarily due to improved operating efficiency.

The sequential decrease in the operating margin was the pressure [ph] due to technology of Lenovo-AsiaInfo business unit. The other income for the first quarter was approximately $700,000 compared to the $800,000 in the year ago period and $500,000 in the previous quarter. The net income excluding the stock-based compensation expense, amortization, and impairment charge, after-tax dividend income and gain on a discontinued operation, our non-GAAP net income was $16.2 million in the first quarter of 2010, or $0.34 per basic share versus $7.1 million, or $0.17 per basic share in the year-ago period, and $18.4 million, or $0.38 per basic share in the previous quarter. The company noticed that this including $3.5 million associated with the Linkage charge.

The effective tax rate for the first quarter of 2010 was approximately 13% and the for the fiscal year 2010 we are modeling at approximately 15% tax rate.

DSO in the first quarter was 104 days versus 90 days in the previous quarter. The company noted that DSOs particularly increased from the first quarter to the first quarter of each fiscal year as carriers spend the remaining balance of the project before year-end.

The operating cash flow for the first quarter was a net inflow of approximately $3.9 million.

Moving back to the balance sheet, as of March 31st, 2010, our cash, cash equivalents, and restricted cash totaled $252 million and we had short term investment of total $42 million.

For second quarter guidance we are expecting net revenue to be in the range of $65 million to $69 million, or 22% to 29% year-over-year growth. We are expecting second quarter earnings per basic share to be in the range of $0.26 to $0.29 or 63% to 81% year-over-year growth and earnings per basic share on non-GAAP basis to be in a range of $0.31 to $0.34 or 19% to 31% year-over-year growth.

Now let me turn the call back to Steve for his closing remarks.

Steve Zhang

Thank you, Wei. Again, I am very pleased with our performance this quarter and the progress made integrating AsiaInfo and the Linkage business. Thank you for your continued support of AsiaInfo. And I will now open the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is Donald Lu from Goldman Sachs. Please begin.

Donald Lu – Goldman Sachs

Hey, good morning, everyone. Yes, Steve, can you give us some insights on the merged company’s outlook for the year. I thought the merger is slated to complete by the end of last month, but I heard you said it’s still not closed. So may be you can give us some color on – about the revenue earnings for the whole year.

Steve Zhang

Donald, first of all we are pleased that our shareholders voted in favor of the merger by a overwhelming margin at our special shareholder meeting last Thursday, and we are still – currently working with Linkage to resolve other customary closing conditions and are hoping to close the transaction soon. And we’ll probably – we will give out the combined company’s revenue outlook and earnings outlook after we formally close the transaction.

Donald Lu – Goldman Sachs

Great. That’s fair enough. So, do we expect that to happen at the next conference call?

Steve Zhang

We won't comment on that.

Donald Lu – Goldman Sachs

Okay.

Steve Zhang

Hopefully much earlier than that.

Donald Lu – Goldman Sachs

Oh, excellent. Yes, my next question is I think for this last quarter and also the guidance for the second quarter, margin seems to be quite strong, and you commented (inaudible) due to efficiency improvement. Can you give us some color – is that the revenues per employee has increased or is that the employees’ compensation has decreased or is there some other reason for the improvement?

Steve Zhang

I think several reasons coming together drive our first quarter strong margin improvement. I think first of all the top line is driven by the – our Telecom Solution revenue. On the expense side, we did experience some seasonal delay in making new hires in the first quarter. Also, in the first quarter there was this Chinese New Year and everybody took a two-week vacation, so that also decreased our total expense. I think overall I think it’s top line growing faster than the expense growth.

Donald Lu – Goldman Sachs

Okay. And maybe you can give us the headcount numbers for – at the end of Q1 and also for the whole year.

Steve Zhang

I think at Q1 our formal headcount is 4348. That’s roughly an increase of 54 when compared to the end of quarter four last year.

Donald Lu – Goldman Sachs

Okay. Great. And how about the outlook for the whole year, I would assume at this point you should have a very good visibility into your customers’ projects for the year now?

Steve Zhang

Yes, I think actually our (inaudible) first quarter is so higher, 200 employees. But due to this delay most of the hiring will be – will happen in the second quarter.

Donald Lu – Goldman Sachs

Sure. How about the revenue growth for the year?

Steve Zhang

As we mentioned in our quarter one earnings conference call, our outlook for AsiaInfo standalone for 2010 is we grow the revenue in the range of 25% to 30%.

Donald Lu – Goldman Sachs

Great. So that target remains for this year?

Steve Zhang

Thus far, yes.

Donald Lu – Goldman Sachs

Great. Thank you very much. I will come back for – if there’s more questions. Congratulations.

Steve Zhang

Thank you, Donald.

Operator

The next question is Karl Keirstead, Kaufman Brothers. Please begin.

Karl Keirstead – Kaufman Brothers

Hi. Just a question about the revenue guidance for the June quarter. It looks like the 22% to 29% growth guidance is a modest deceleration from what you reported in the March quarter. And I am wondering, Steve if you could give any color – are there any revenue pressures or perhaps it looks like the non-software pieces of your revenue stream, what you call the services piece is coming in a little bit light. So, maybe you are intentionally changing the revenue mix to higher margin work. Maybe you could give a little color into the June quarter revenue guidance deceleration. Thank you.

Steve Zhang

Karl, we are happy with our Q2 revenue guidance. We don’t call it a deceleration. I think it’s still within our range for our total year new outlook. As we move ahead with company’s revenue base getting bigger and bigger some day, I don’t know when, the revenue won't be in the range of over 30%.

Karl Keirstead – Kaufman Brothers

Okay. So, there is no particular reason for the fall. There is no sort of one-off issues going on at all?

Steve Zhang

No, I think this is within our expectation, within our range for the whole full year.

Karl Keirstead – Kaufman Brothers

Okay. And then perhaps I could ask a followup. Just back to the question around the gross margins. They came in so much higher than your prior guidance and perhaps could you give a little more color as to what caused the margin upside in the quarter and it looks like you are assuming that the March higher gross margins can sustain itself in a 55% to 60% range. That seems to be an upward guidance revision from your previous statements. May be a little color would help.

Steve Zhang

As I mentioned in my previous answer to Donald’s question that the gross margin improvement in the first quarter is mostly due to the strong revenue growth and we also experienced some delay in hiring enough employees in the first quarter.

Karl Keirstead – Kaufman Brothers

Okay, great. And one last question, Steve, can you offer any color as to the reasons for the Linkage deal closing getting delayed? You seem to mention that there were some, if I heard you correctly, customer closing requirements, was that the issue, maybe you could elaborate?

Steve Zhang

No, I think most of the closing conditions that remain outstanding are legal issues requiring various parties to sign documents and take other steps to facilitate the closing. It’s not coming from the customer. We do not plan to go through a list of these items on this call.

Karl Keirstead – Kaufman Brothers

Okay. Now that’s good enough. Thank you very much.

Steve Zhang

Thank you.

Operator

Our next question is Brendan Barnicle, Pacific Crest Securities. Please begin.

Brendan Barnicle – Pacific Crest Securities

Thank you very much. I was wondering if we should be, as we think about the Q2 guidance, should we add – be adding anything back for one-time merger expenses?

Steve Zhang

I think for Q2 right now we don’t include any merger related expenses, right?

Wei Li

Yes, Q2 is – will be very minimal, if there is any.

Steve Zhang

We accrued most of the expense in our Q1 already.

Brendan Barnicle – Pacific Crest Securities

Okay. Thank you. And then on other income, that has stabilized over the last three quarters. Is it safe to assume that there is $500,000 to $600,000 quarter run rate is the right level for other income for the remainder of the year?

Wei Li

Yes. That is I mean assuming this interest rate no change that pretty much is the level of the – of income we should look at.

Brendan Barnicle – Pacific Crest Securities

Okay. And then lastly, Steve, on the cable opportunity, what are through remaining items? Does the government have to step in and lay out a new policy or an agenda the way that it did with the wireless reorg? And if so, can you go through what that process would be like? It seems like it would be quite different given the size and the number of those cable carriers versus what the situation was with the wireline and wireless carriers.

Steve Zhang

Yes, Brendan, I think as I mentioned in the earnings conference call, China’s cable market is very fragmented and they have the operator in the city levels, some have even in the county levels. And it doesn’t have much scale and it’s very difficult to compete – for them to compete against telecom carriers. So the Chinese government is trying to push the convergence of the cable, telecom network, as well Internet network. And in the same time they are pushing for the consolidation in the cable industry. They tried to push into something like you have one operator in one province so that they have the scale to compete against the telecom carriers.

Brendan Barnicle – Pacific Crest Securities

And so what do you envision as the timing, Steve, on when that may have happened, so that then you can step in and really start to provide the same sort of service that you provide to the wireless carriers?

Steve Zhang

Well, if I gave you a timeframe, probably it’s mostly a guess because this is mostly driven by the government policy and actions because all those cable operators are actually owned by the Chinese government. So, I think probably in the next two, three years, they will – in some of the provinces we already are seeing the consolidation starting already. In some other provinces we do hear the rumors and the – for this consolidation to happen soon.

Brendan Barnicle – Pacific Crest Securities

Okay and then what–?

Steve Zhang

If you want me to give you a timeframe, probably two, three years down the rope within the next–

Brendan Barnicle – Pacific Crest Securities

And then once that happens, what’s the size of the opportunity for you to go into a province and support them in their customer services, CRM, and BI, and everything else?

Steve Zhang

It’s still too early to tell at this point. And I think it will be less than the existing telecom carrier’s opportunity in the initial stage.

Brendan Barnicle – Pacific Crest Securities

Great. Thanks, Steve.

Steve Zhang

Thank you.

Operator

(Operator instructions) Our next question is Kun Tao from Roth Capital Partners. Please begin.

Kun Tao – Roth Capital Partners

Hey, thank you for taking my questions. First question regarding your guidance, do you have a split between your AsiaInfo Technologies and Lenovo business on your top line guidance?

Steve Zhang

We normally don’t – in our guidance for the next quarter, we don’t split the revenue between the telecom and the security business.

Kun Tao – Roth Capital Partners

So, it’s roughly in the ballpark of the previous quarter or the previous quarters, is that fair enough?

Steve Zhang

It’s similar to the percentage in our previous years.

Kun Tao – Roth Capital Partners

Okay. And in terms of – back to the cable network convergence, do you know who is the major supplier right now for those telecom, fragmented telecom carriers?

Steve Zhang

You mean in the cable industry?

Kun Tao – Roth Capital Partners

Yes.

Steve Zhang

There are many small companies and I even don’t know their English names, so – but there is only one telecom BSS [ph] vendor I know who are also in the cable industry, which is Digital China [ph].

Kun Tao – Roth Capital Partners

Okay, so other than Digital China, is there any major that big names in China right now that you think you are going to compete with?

Steve Zhang

I think there is another company in Guangdong which is also providing the CRM solution to Guangdong Mobile is also in this market. They are mostly a regional player in southern part of China.

Kun Tao – Roth Capital Partners

Okay, and okay, that’s fair enough. So, for G&A, excluding this $3.5 million nonrecurring acquisition cost, G&A cost also increased quite a bit compared to last year, which – so what’s your expectation on G&A expenses going forward?

Wei Li

And other than (inaudible) expense we also have another (inaudible) expenses while the bad debt provision for (inaudible) project which we have some issues on VAT, so we take a precaution there to do a the provision. So, it’s – other than two items, the G&A expense is relatively flat.

Kun Tao – Roth Capital Partners

Okay, so you are going to have probably you are similar to roughly three to four million excluding those expenses, is that right?

Wei Li

I think it’s $4 million.

Kun Tao – Roth Capital Partners

Okay. Okay, that’s fair enough. Just last question, in terms of gross margin, you’ve mentioned in the press release 55% to 60% still on the net basis, right?

Wei Li

Yes.

Kun Tao – Roth Capital Partners

Okay. And do you think – just last two quarters, the gross margin definitely was or were higher this 60%. So, what’s the upside or do you take a conservative estimate going forward or you think it’s just very reasonable?

Wei Li

No, I think going forward we still can see the gross margin in the range of 35% to 60% and Q1 we have, as Steve explained, it will more relate to the (inaudible) of hiring delay.

Kun Tao – Roth Capital Partners

So, but if I got it right, your $0.31 to $0.34 pro forma EPS, that’s not including any nonrecurring merger acquisition expenses. That seems very high in terms of net margin versus if you compare apples-to-apples versus 2009. So that – were did I get it wrong if you think about your 55% to 60% gross margin, but the net margin is a little bit higher than the average.

Steve Zhang

Kun, I think that we are trying to improve the operations efficiency not just in our service delivery cost but also sales and marketing, G&A and R&D, that’s why we are trying to improve our operating margins.

Kun Tao – Roth Capital Partners

Okay, so you –

Steve Zhang

Not just a focus on the gross margins.

Kun Tao – Roth Capital Partners

Okay. Okay, alright, thanks. Thanks for taking my questions.

Steve Zhang

Thank you.

Operator

Our next question is Scott Sutherland from Wedbush Securities. Please begin.

Scott Sutherland – Wedbush Securities

Great, thank you. And good morning, Steve and Wei.

Steve Zhang

Good morning, Scott.

Wei Li

Good morning.

Scott Sutherland – Wedbush Securities

Sorry to beat upon a little bit more on this margin in the Q2 guidance, you are guiding revenue up 5% to 12% sequentially and you are hiring about 5% more employees, so if you add may be 5% to you cost structure, guiding – the non-GAAP EPS flat seems a little bit conservative. Is there something we are missing here in the cost structure that’s non-employee related that cost will go up for?

Steve Zhang

No, I think the reason that the non-GAAP EPS guidance for the second quarter – because we took out the merger and acquisition related expense and we are seeing, we are trying to push our business team to hire as quickly as they can because there was some delay and there was some pressure on our delivery schedule in the first quarter. So, we start pushing our business team to accelerate the hiring plan and we want to make sure we accrue a model of the expense side conservatively.

Scott Sutherland – Wedbush Securities

Can I get the percentage of revenue by your top three customers?

Steve Zhang

You mean the–? For 2009 quarter one China Mobile is 66%, China Telecom is 9%, Unicom is 16%.

Scott Sutherland – Wedbush Securities

And may be a couple of more questions. You’ve talked and I think you get a lot of questions people are watching CapEx budgets. How much – you there is shift in IT software, but how much of your revenue can you get comes from the operating budgets of these carriers? And may be a followup question is what are you seeing on the international pipeline as you look out to 2011?

Steve Zhang

We are seeing 20% to 30% of our revenue coming on a recurring basis and that’s mostly coming from the carriers’ OpEx budget

Scott Sutherland – Wedbush Securities

Okay.

Steve Zhang

And we are – on the – your second question is international?

Scott Sutherland – Wedbush Securities

Yes.

Steve Zhang

Yes, we set up a subsidiary in the beginning of quarter four 2009 and they have been operating in that region in South Eastern Asian countries for two quarters. And we see quite a large opportunities in that region. But as you know the sales, the marketing sales cycle for BI tends to be long. So we – hopefully we will see some contracts coming in the second half of this year. And we are involved in several proof of concept trials opportunities from the customers – potential customers.

Scott Sutherland – Wedbush Securities

Great. Thank you and good job on the quarter.

Steve Zhang

Thank you.

Operator

Our next question is Donald Lu from Goldman Sachs. Please begin.

Donald Lu – Goldman Sachs

Hi, Steve. Can you elaborate on this new opportunity with the WiFi deployment in China. I do see here a lot of the semiconductor companies are very excited about these opportunities. Do you know approximately how much hot spots China Mobile will deploy? And also what’s the opportunity for AsiaInfo? Will this be a centralized bidding system for the China Mobile headquarter and would that equivalent long term to a one province kind of billing market size?

Steve Zhang

Sure. Good question, Donald. Actually, let me give you some background. All three carriers in China realize that with the popularity of smartphones as well as the data access cards to be used with laptops, they see quite a jump in their data traffic and in some areas the data traffic on the 3G network is driving down the customer experience. So they are building some of the WiFi hot spots to try to offload the data traffic from 3G network to the wireless LAN networks. I don’t know the numbers, how many hot spots China Mobile is planning to build nation wide, but we do see a big push to do this, this year. As a result and opportunity for us we are involved with China Mobile to help them to build on a provincial basis we call it AAA system, which stands for Authentication, Authorization, Accounting for this wireless LAN access and this will be combined with the billing system we already put in place to provide the logging, verification, authentication as well as accounting for the wireless LAN business.

Donald Lu – Goldman Sachs

Will the revenue each province for wireless LAN for WiFi similar to the broadband kind of market size or smaller I think?

Steve Zhang

You mean for us or for–?

Donald Lu – Goldman Sachs

Yes, for AsiaInfo.

Steve Zhang

–how many number of subscribers they want to support.

Donald Lu – Goldman Sachs

Okay. So initially it will be not be very significant and then–?

Steve Zhang

I think they are – at this point I don’t have the number with me what their plans support, subscriber number on a provincial basis. We will find out later on , give to you.

Donald Lu – Goldman Sachs

Sure, yes, another question is on the market share. I think after AsiaInfo merged with Linkage you are going to have over 50% share in China. Have carriers – I think I asked the same questions three months ago, but have you heard any new feedback from your customers and whether you can still gain new market share this year and if so where is the opportunity?

Steve Zhang

Well, I think I cannot really speak on behalf of all carriers. I think going forward we still see some opportunity to gain market share within China, but probably after 2010 it will be getting more and more difficult to continue to expand market share within China.

Donald Lu – Goldman Sachs

Okay. So this year there is still some opportunities?

Steve Zhang

Right.

Donald Lu – Goldman Sachs

Okay, great. Thank you.

Steve Zhang

Thank you.

Operator

(Operator instructions) Our next question is Karl Keirstead from Kaufman Brothers. Please begin.

Karl Keirstead – Kaufman Brothers

Hi, just two follow-ups, if I might. Steve, you mentioned a couple of times these hiring delays in Q1 and I am wondering did that have any effect on the implementation timeframe for projects and therefore did it have any effect on the revenues either in the March or the June quarter.

Steve Zhang

Well, it did have some little impact on our – on the revenue side, but not by a big amount. And normally the Q1 is a quarter we will tend to have difficulty in hiring new people because that’s the quarter the Chinese companies their – last year’s year-end bonuses.

Karl Keirstead – Kaufman Brothers

Okay.

Steve Zhang

So, the people probably – people would prefer to stay put before they get their annual bonuses.

Karl Keirstead – Kaufman Brothers

Okay, that’s great. And then a second question for perhaps both you and Wei and that is if I look back over history, in the last four to five years AsiaInfo has posted more than 50% of the non-GAAP in the second half of the year compared to the first half. Is there any reason why that roughly 40%-60% split first half versus second half would be vastly different this year? Thank you

Wei Li

I think the 40%-60% split you mentioned, if you take AsiaInfo standalone it’s more driven the Lenovo-AsiaInfo division. So, it’s – this year at a standalone base their direction wouldn’t change drastically.

Karl Keirstead – Kaufman Brothers

Okay, okay, thank you very much.

Operator

Our next question is Jeffery Goldstein [ph] from Sunrise Investment [ph]. Please begin.

Jeffery Goldstein – Sunrise Investment

Yes, hi Steve, my compliments on a great quarter. I want to know since you are talking about employees the acquisition of the Hangzhou Zhongbo, yes I think – were I think like 60 or 70 of them are engineers of the employees.

Steve Zhang

Right.

Jeffery Goldstein – Sunrise Investment

You are going to have – of those people.

Steve Zhang

Could you speak one more time, I didn’t quite catch your name and your question, the connection wasn’t louder?

Jeffery Goldstein – Sunrise Investment

Jeffery Goldstein.

Steve Zhang

Okay. Can you repeat that question?

Jeffery Goldstein – Sunrise Investment

The question is that you were explaining how the hiring was going to be difficult. You have acquired I think 60 to 80 engineers for Hangzhou Zhongbo. Are those employees yet, and if you do how are you utilizing them, if you don’t, when they are going to come on, how will you utilize them.

Steve Zhang

We acquired Hangzhou Zhongbo not just for their employees, so we also acquired their businesses. They were – actually the deal is also closing in May and so I think this 60 to 80 engineers we acquired from Zhongbo, they are already occupied with their existing business of supporting their cable industry.

Jeffery Goldstein – Sunrise Investment

So, they are not going to assist you?

Steve Zhang

Not in the short term, but we do see the hiring duration get improve in the second quarter.

Jeffery Goldstein – Sunrise Investment

Okay. Thank you very much.

Steve Zhang

Thank you.

Operator

(Operator instructions) There is appearing no questions. As there are no further questions, we will now begin closing comments. Please go ahead, Miss. Zhang.

Sheryl Zhang

Again, thank you for joining us today. If you have any further questions, please don’t hesitate to contact us. Thank you.

Operator

Ladies and gentlemen, this concludes our conference call. Thank you all for attending and good-bye.

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