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Pactera Technology International (NASDAQ:PACT)

Q4 2013 Earnings Call

February 27, 2014 8:00 pm ET

Executives

Tracy Zhou - Head of Strategic Development and Senior Vice President

Tiak Koon Loh - Chief Executive Officer and Director

Helena Chen - Interim Chief Financial Officer, Senior Vice President and Corporate Controller

Operator

Hello, and thank you for standing by for Pactera's Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host for today's conference, Ms. Tracy Zhou, Senior Vice President of Investor Relations of the company. Ms. Zhou, the floor is yours.

Tracy Zhou

Thanks, operator. Hello, everyone, and welcome to Pactera's Fourth Quarter 2013 Earnings Call. I'm joined today by Tiak Koon Loh, our Chief Executive Officer; and Helena Chen, our Interim Chief Financial Officer.

Before we discuss our results, I would like to remind everyone that the discussion today may contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 and within the meaning of Section 21E of the Securities and Exchange Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC. Pactera does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

In today's call, we will discuss various non-GAAP financial measures, as defined by the SEC's Regulation G. A reconciliation of the differences between GAAP and the non-GAAP financial measures can be found in our earnings release posted in the Investor Relations section of our website.

Also, please note that the company does not intend to disclose any developments relating to the proposed going-private transaction involving the company during this call while this transaction remains ongoing. As previously noted, there can be no assurance that this or any other transaction will be approved by the shareholders' meeting or consummated. In connection with the proposed going private transaction, the company has filed with the SEC a Schedule 13E-3 and amendments thereto, which included a proxy statement of the company. The Schedule 13E-3 and its amendments included a description of the merger agreements and contain other important information about the transaction, the company and the other participants in the transaction. The Extraordinary General Meeting of shareholders is to be held at 10 A.M., Beijing time on Thursday, March 6, 2014 at the company's office in Beijing, China to consider and vote on among other things, the proposal to authorize and approve the merger agreement, the plan of merger and the transactions contemplated thereby. Shareholders of record as of the close of business in the Cayman Islands on Wednesday, February 12, 2014, will be entitled to vote at the Extraordinary General Meeting.

I would now turn the call over to our CEO, Tiak Koon Loh. Tiak?

Tiak Koon Loh

Thank you, Tracy. Hello, everyone, and thank you for joining us today. Our fourth quarter net revenue was in line with guidance and with a moderate growth of 1.2% compared to fourth quarter of 2012 on a pro forma basis.

Excluding the impact from a major telecom client, we secured a 10.3% year-over-year revenue growth in spite of the adverse effect of the Japanese currency depreciation, which was 19% year-over-year. As MOE settles down, we see the impact of the productivity loss diminishing over time.

From service line perspective, Q4 consulting impacted solution services revenue resumed the highest growth rates among all the service lines and increased 32.4% compared to Q4 2012 on a pro forma basis. The results validate the view that we are on the right track investing in and expanding our offerings of value-added services. The decline in net revenue from R&D services was due to the decrease in the revenue derived from a major telecom client.

As previously disclosed, we've entered into several agreement with ChinaSoft and its affiliates in December 2013. We have sold and transferred certain of our outsourcing business with the company's major telecom clients to them. Such transfer has already been completed in the first quarter of 2014.

Excluding the impact from this telecom client, R&D services grew 10.3%. By industry verticals, BFSI continued to be the star performer with growth rate of 23.7% compared with the fourth quarter of 2012 on a pro forma basis. This is largely contributed by the expanding demand in regulatory compliance, additional technology from a domestic financial services client. We also noted the continuous growth from our European business for the past quarter. It achieved 23.9% growth rates year-over-year on a pro forma basis, mainly contributed by the growing client base in Europe. Excluding the impact from a major telecom client, our Greater China business increased 28.2% over the prior year.

However, we're disappointed with the U.S. business growth. The U.S. business is the largest sector in our overall portfolio, while it barely increased 2.5% year-over-year, primarily caused by the challenge we saw with a top client together with restructuring of business slowing down.

Looking back to the full year of 2013, we're seeing a steady recoveries of the business growth since the merger of equals between VanceInfo and HiSoft in November 2012. The full year revenue is slightly above the guidance, and the bottom line just beat our forecast, which reflect the impact of a number of factors, including the loss productivity due to the MOE integration; the strategic decrease in our major telecom customer; and lastly, the depreciation of the Japanese yen. Despite these challenges, we're continuously driving a growth in many of the service lines and markets and using multiple levers to improve the profitability.

Now, let me turn the call to Helena to walk you through our financial results.

Helena Chen

Thank you, Tiak. Hello, everyone. Let me take you through our financial highlights for the fourth quarter and the fourth -- full year 2013.

As Tiak has mentioned, our fourth quarter was in line with our November guidance at the closed at $181.5 million. Our top line momentum was continuously impacted by the headwinds from our major telecom customer and the Japanese currency depreciation. Excluding company's major telecom customer, net revenues for the fourth quarter of 2013 increased to 10.3% from pro forma net revenues in the same period last year.

Excluding the major telecom customer, Q4 2013 gross margin was in line with Q4 2012. Margin was improving sequentially over the last few quarters, with the impact from MOE integration diminishing over time. The Japanese yen has been on a downward change for some time and has likely impact on gross margin. The depreciation was approximately 19% on a year-over-year basis, which resulted in around 100 basis point impact on the margin.

Note that, the majority [ph] by the gross margin in Q4 due to the seasonality and the behavior of Chinese clients. Project confirmations and contracts will only happen towards end of the year, and the [indiscernible] project [indiscernible] year. This will result in Q4 margin improvement of around 100 to 200 basis points.

Then in Q1, due to the long Chinese New Year holiday, margin is expected to be lower. This is a seasonal change of our China business. And its impact our overall margins -- will be more as our China business grows. Our non-GAAP SG&A expense, as a percentage of revenues, has been reduced by more than 200 basis points compared to 23% in year 2012 on a pro forma basis. Non-GAAP SG&A expense resulted at 19.6% in Q4 2013. The saving was attributable to both optimization programs accomplished during the integration and the economics of scale from the recoveries and the growing revenue base.

Our DSO days in 2013 is 134 days compared to 117 days in 2012 on a pro forma basis, primarily due to the offline for payment cycle on our major telecom customer and the high growth in revenue from our China domestic business.

However, I would like to highlight the improvement of actual operation cash flow from positive $36 million in 2012 to positive $61 million in 2013, have reached the operation cash flow for Q4 2013 alone as positive $67 million as our operation gets integrated and stabilized. At our MOE disruption early part of the year, we will continue to focus on levers to improve our cash collection and working capital management.

As of December 2013, we had cash and cash equivalents of RMB 191.3 million, which includes restricted cash from deposits and the short-term investment. Considering the pending going-private transaction, we do not provide guidance this time.

With that, I will turn the call back over to Tiak for his closing remarks.

Tiak Koon Loh

Thank you, Helena. [indiscernible] keep going on as the plan, we will remain focused on executing the right strategy, support quality growth and maintaining a high level of customer satisfaction.

In closing, I want to say thank you to our shareholders again, we're very grateful for your support as always. That concludes our prepared remarks. We are now open to address a question. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

Tracy Zhou

Okay. Thank you, everyone, for joining us today. If you have further questions, please be free to get back to us. Thank you. Bye-bye.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.

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