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Executives

Jane Wang – IR Director

Steve Zhang – President and CEO

Wei Li – Chief Financial Officer

Analysts

Donald Lu – Goldman Sachs

Karl Keirstead – Kaufman Brothers

James Friedman – Susquehanna

Brendan Barnicle – Pacific Crest Securities

Sean Jackson – Avondale Partners

Kun Tao – Roth Capital Partners

Scott Sutherland – Wedbush Securities

Qin Zhang – The Royal Bank of Scotland

Meghna Ladha – Susquehanna

AsiaInfo-Linkage,Inc. (ASIA) Q2 2010 Earnings Call July 28, 2010 8:00 PM ET

Operator

Welcome to today’s AsiaInfo Second Quarter 2010 Earnings Announcement Event Call. I’m pleased to present Ms. Jane Wang, 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. Wang, please begin.

Jane Wang

Hello everyone, and well to AsiaInfo-Linkage second quarter 2010 earnings conference call. Today Steve Zhang, AsiaInfo-Linkage President and Chief Executive Officer will reveal business highlights from the quarter and discuss strategy. Wei Li, AsiaInfo-Linkage Chief Financial Officer will discus financial results of the second quarter 2010 and give guidance for the third quarter of 2010. And -- open the call to questions.

Before we continue please allow me to read you AsiaInfo-Linkage Safe Harbor statement. Some of the information we will discuss during this conference call is forward looking in nature and is subject to risks and uncertainties that may cause 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 matters as defined in Regulation G. The most directly comparable GAAP financial matters and information reconciling these non-GAAP financial matters to AsiaInfo-Linkage financial results prepared in accordance with GAAP are included in AsiaInfo-Linkage earnings release, which has been posted on the Investor Relations section of AsiaInfo-Linkage 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-Linkage President and CEO, Steve Zhang.

Steve Zhang

Hello. And thank you for joining the call today. We are pleased to report another strong quarter for AsiaInfo-Linkage. During the second quarter we met net revenue on GAAP EPS guidance and exceeded non-GAAP EPS guidance. We also achieved a growth margin of almost 60% and operating margin of approximately 22%.

Before I go into the details of the quarter and discuss some of the key projects we are working on, I want to first take this opportunity to highlight our closing of the Linkage merger. As you know we successfully completed our merger with Linkage on July 1st, forming the combined company AsiaInfo-Linkage.

So far both front and backend integration are progressing smoothly. We are pleased with the complementary nature of our sales teams and we have identified in the catalogue 80 AsiaInfo-Linkages solutions that our sales teams are being briefed on for selling in the second half of 2010.

As we have reiterated in the past the combined entity will create a leader in the IT software and solutions industry. We now both an expanded product offering, stronger R&D capabilities and complementary customer bases that will enable us to provide better class solutions and services to our clients. We have completed unification of our product catalogue with over 80 products for cross-selling and we have had success in cross-selling smaller solutions with shorter sales cycles.

For example China Mobile plan to use Jiangsu Province as the pilot site for internet data centre operation management platform. Historically, Jiangsu Mobile has been a Linkage client, so Linkage’s sales teams successfully sold Asia-Info solutions winning the agency contract up for bid, after the merger.

And to give another example, Linkage’s IT service management systems which falls under the OSS product lines has been shortlisted by China Telecom headquarters and shows good potential to contribute meaningful revenue as it can be implemented nation-wide.

This is only the beginning, as we are positioned to take up more cross-selling opportunities, by leveraging our sales catalogue of 80 products and solutions. We also plan to use our established au operators, our TDO model to increase contract size per customer.

Now moving onto our three main customer accounts. Starting with our China Mobile account, which comprises a significant amount of our net revenue, the demand backdrop is very healthy. Despite concerns that CapEx spending is slowing down, China Mobile is still spending on IT solutions to improve its customer data analysis and sales marketing systems.

We expect to sign almost all of the Next Generation 1 Phase II rollout of Version 2.0 contract by the end of the third quarter and we are busy designing the specs, together with China Mobile, for our Next Generation 2 Phase I rollout, our Version 3.0, to upgrade operator’s existing business operations support systems.

We expect IT spending to remain quite stable as a portion of the CapEx budget been on top of our services versus power continues to increase. We are also benefiting from China Mobile’s OpEx budget as we continue to work closely with the sales and marketing department to help design more targeted and effective sales and marketing campaigns. Our business operation consulting team is growing nicely as the carrier is beginning to spend to gain a better understanding of its key customers.

For China Unicom we are seeing opportunities to upgrade existing BSS systems in several provinces. Although there are some delays in the dealing of six Northern provinces BSS project, we do anticipate the RP process to commence in the fourth quarter. I want to emphasis that even though these projects are postponed, China Unicom has assured us that they are going to happen.

Another promising project that we are working on for both China Unicom and China Telecom is developing and improving the two carriers’ broadband access network. We have already signed a sizable contract with China Unicom to update its broadband backbone that will enable the company to handle more internet traffic.

With China Telecom, upgrades and new requirements for BSS are being demanded. The sales contract for building 3.0 systems and the CRM 2.0 systems should be completed between the end of this year and the first half of next year.

We have already chosen a pilot site for the upgrade, but we’ll first need to test the product before a nationwide launch. Testing out the new upgrade is tentatively set for late August or early September which is being organized by China Telecom.

I would also like to note that this has opened up opportunities for work on a number of optimization projects. In addition we are pleased to announce that in the first half of this year our Linkage sales team was able to increase our market CRM in two China Telecom provinces, Yunnan and Guizhou.

Looking at our Hangzhou Zhongbo business, our step of expanding beyond telecom into the cable industry, we have already increased market share this quarter by winning two new customers. The first is a Hubei provincial cable operator whose main business operation is in Wuhan, the capital city of Hubei. Wuhan is one of the 12 cities for integrating telecom cable and internet networks. The second is a Yunnan cable operator based out of Kunming.

As you may already know, the Chinese Government has emphasized the need for convergence of the highly fragmented cable industry and we believe our investment in Hangzhou Zhongbo places us in a favorable position to capitalize on the convergence.

Hangzhou Zhongbo for wide IT solutions such as business support systems, digital television support systems and the CRM systems for cable operators. We believe our cable business has the potential to increase more market share and grow around 30% in the year to come.

Now commenting briefly our international prospective growth. We have a number of projects in South East Asia that are building potential and with the sales and marketing expertise of our Singapore operation, combined with our leading IT product offerings we have been making productive strides forward.

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 numbers being discussed today are in U.S. dollars unless otherwise noted. Also, unless noted, the numbers I’ll discuss today represent AsiaInfo as a standalone company.

Second quarter, non-GAAP net revenue for the telecom business increased 21.3% year-over-year, nearly unchanged from previous quarters. The year-over-year increase reflects the extent of demand from telecom carriers in China and a steady inflow of contract tenders to upgrade and maintain existing installations.

Gross profit as a percentage of net revenue for the telecom business was 59% in the second quarter compared to the 54% in the year ago period, and 63% in the previous quarter. A year-over-year increase in the gross margin was primarily due to the strong contribution from the high margin software solutions and services projects in this quarter.

Second quarter net earnings for the Lenovo-AsiaInfo division increased 33% year-over-year and 83% sequentially, the year-over-year increase reflects the customer’s demand for professional consultants to assist in the installation and maintenance of IT solutions. Sequentially the notable increase is primarily due to seasonality, as sales in the Lenovo-AsiaInfo business unit are typically the weakest in the first quarter.

Gross profits for Lenovo-AsiaInfo was 71% in the second quarter, compared to the 56% in the year ago period and unchanged from previous quarters. Gross profit as a percentage of net revenue for the company was 61% in the second quarter, compared with 34% in the year ago period and 63% in the previous quarter.

We are encouraged with our improving operational efficiencies so far in this year, income from the operations in the second quarter increased 127% year-over-year and 33% -- 32% sequentially.

Sales and marketing expense increased 9% year-over-year and 5% sequentially in the second quarter. The year-over-year increase was mainly due to the higher sales commission that incurred upon signing the new contracts.

General expenses increased 26% year-over-year and decreased 47% sequentially in the second quarter. The year-over-year increase was largely a result of the merger related expense and the sequential decrease was primarily due to $3.5 million from merger related expenses incurred in the first quarter.

R&D expense increased 11% year-on-year and 9% sequentially in the second quarter, which mainly reflects our effort to develop best-of-class products to meet our demand of customers. The total operating expense increased 13% year-over-year and decreased 10% sequentially during the second quarter. The sequential decrease in total operating expense was primarily due to the non-recovery of the merger related expense and better provision in the first quarter.

Our operating margin of the net revenue was 22% for the second quarter, compared to the 12% year ago period and 18% in the previous quarter. The year-over-year increase in the sequential margin improvement was mainly the result of improving operating efficiency and reducing the sales costs. Other income for the second quarter was $1.4 million, a decrease of 19% from $1.8 million in the year ago period and an increase of 112% from the $665 K in the previous quarter.

Net income excluding the share based composition amortization of acquired intangible assets, after tax income and non-recurring merger related expenses are called non-GAAP net income was $17 million in the second quarter and $0.35 per basic share versus $11 million or $0.26 per basic share in the year ago period and $16 million or $0.34 per basic share in the previous quarter.

The effective tax rate for the second quarter was approximately 15.4% which increased slightly from previous quarters and for combined AsiaInfo-Linkage entity for the fiscal year 2010 now we are modeling approximately 15% tax rate.

The DSO in the second quarter was 117 days versus 104 days in the previous quarter. Operating cash flow for this quarter was a net outflow approximately $15.6 million, the negative operating cash flow was primarily the result of the annual bonus payouts and the seasonal collection slowdown.

Moving to our balance sheet as of June30, 2010 our cash, cash equivalents and restricted cash totaled $230 million and we have the short-term investment total of $44 million.

For third quarter 2010 guidance we expect net revenue for the combined company AsiaInfo-Linkage to be in the range of $109 million to $114 million. We expect third quarter 2010 net income attributable to AsiaInfo-Linkage per basic share and non-GAAP basis to be in the range of $0.34 to $0.37. For the full year we expect the net revenue to grow at 15% to 20% and net income attributable to AsiaInfo-Linkage per basic share and non-GAAP rate to be range $1.40 to $1.50.

As noted in the press release our net revenue guidance for the third quarter affected to the temporary project delays of China Unicom and China Telecom accounts. In addition, Linkage has posted strong numbers in the third quarter 2009, which makes a year-over-year comparison very challenging.

Although we can’t control these factors but we can run our business to the best of our capability. This is why we’ll focus on streamlining our process, achieve efficiency in our day-to-day operations, while controlling our costs to maximize profitability.

Now, let’s hand the call back to Steve for his closing remarks.

Steve Zhang

Thank you, Wei. Again, I’m pleased with our performance this quarter and the successful completion of our merger with Linkage. We have identified a number of our cross-selling opportunities and now beginning to executing on them. Demand is strong in our largest customer account and despite some temporary project delays we are confident that those projects will happen and we are well positioned to participate in them.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is Donald Lu from Goldman Sachs. Please begin.

Donald Lu – Goldman Sachs

Hey, good morning Steve and Wei. My first question is can you explain, Steve, that you commented earlier China Mobile is going to use Jiangsu Mobile for a particular internet project and how that class setting was done, et cetera?

Steve Zhang

Sure. Jiangsu Mobile used to be a Linkage customer and roughly in May, April the Linkage sales team learnt that Jiangsu Mobile in the process of requesting for RP to help them to IT system to manage its operation of its internet data centre.

Donald Lu – Goldman Sachs

Okay.

Steve Zhang

I think, Linkage doesn’t have this solution and the AsiaInfo’s marketing team are jointly working with the Linkage sales team to approach the customer with some meet our bid and in the end given the good references for our solutions, Jiangsu Mobile chose AsiaInfo-Linkage for this contract.

Donald Lu – Goldman Sachs

I see. And so what is the nature of this internet data centre? Is it on a provincial level or is that for the national service?

Steve Zhang

I think, at this point, it is in the provincial level.

Donald Lu – Goldman Sachs

Provincial

Steve Zhang

And Jiangsu is one of the largest and wealthiest province in China and their revenue accounts I think a third among all China Mobile subsidiaries, only after Guangdong and Shandong.

Donald Lu – Goldman Sachs

I see. And this is for mobile internet service?

Steve Zhang

This is to manage, to -- our internet data centre will be a regular internet data centre where they want to host services for their own mobile internet services, as well as, provide hosting service to other corporate customers.

Donald Lu – Goldman Sachs

I see. Okay. And your product is for the billing of the internet data centre?

Steve Zhang

It’s not for the billing. It’s mostly for the running and the monitoring the internet as a whole data centre operation. We provide this solution to China Netcom now it’s partnered with Unicom before to manage China Unicom’s data centre business.

Donald Lu – Goldman Sachs

I see, I see. So that’s like the traditional old AsiaInfo kind of…

Steve Zhang

Yeah. That’s the cross-selling where they are leveraging AsiaInfo strong solutions and pushing to Linkage’s customer base.

Donald Lu – Goldman Sachs

Got it. And, yeah, now into the guidance for the combined company, did you -- I just want to confirm, did you say the revenue growth for the combined company would be 15% to 20% this year and the EPS growth would be -- the EPS guidance is $1.40 to $1.50?

Steve Zhang

That’s right for the full year.

Donald Lu – Goldman Sachs

Okay. Can you give us what is the combined revenue for last year, for the combined company and also what is the total share count and maybe the…

Steve Zhang

I think, to answer your question, the total combined revenue for AsiaInfo-Linkage in 2009 is $377 million.

Donald Lu – Goldman Sachs

Okay.

Steve Zhang

What’s your second question, total number of shares?

Donald Lu – Goldman Sachs

Yeah. For the combined company what’s the equivalent total value of shares?

Steve Zhang

It’s $74.2 million.

Donald Lu – Goldman Sachs

$74.2 million total share account.

Steve Zhang

Yeah.

Donald Lu – Goldman Sachs

Okay. And can you let us know what is the AsiaInfo alone revenue growth for this year?

Steve Zhang

I think it’s probably also in the same range, 15% to 20%.

Donald Lu – Goldman Sachs

Okay. And s this -- assuming the China Unicom, China Telecom project would be delayed into push it out to next year?

Steve Zhang

The revenue recognition portion of those projects probably will be pushed out to next year.

Donald Lu – Goldman Sachs

Okay. Got it.

Steve Zhang

The project delay, as well as, China Telecom has introduced this pilot, the concept of a testing phase.

Donald Lu – Goldman Sachs

Sorry, what is the -- China Unicom we understand there is a some delays…

Steve Zhang

Yeah. China Telecom for the billing 3.0 and the CRM 2.0.

Donald Lu – Goldman Sachs

Yeah.

Steve Zhang

They introduced this concept of having pilot testing new solution.

Donald Lu – Goldman Sachs

I see.

Steve Zhang

And AsiaInfo-Linkage has been chosen to participate in the pilot testing phase. So the final contracts will be signed between the end of this year as well as the first half for all our provincial installations.

Donald Lu – Goldman Sachs

I see. Got it. And what’s the Linkage acquisition accretive and also by how much, is there a rough calculation there?

Steve Zhang

We believe the deal to be slightly accretive in 2010 and we said for the full year we expect our non-GAAP EPS per basic share to be in the range of 140 to 150.

Donald Lu – Goldman Sachs

140 to 150. Okay. Great. Thanks.

Steve Zhang

Thank you.

Operator

Thank you. Our next question is Karl Keirstead from Kaufman Brothers. Please go ahead.

Karl Keirstead – Kaufman Brothers

Yeah. Hi. I’ve got two questions Steve. On your last earnings call you expressed comfort with AsiaInfo’s standalone 2010 growth guidance of 25% to 30% and now it sounds like its 15% to 20%. But assuming there were no further Unicom delays it doesn’t sound like these telecom related issues are significant enough to cause such a significant step-down in your guidance from 25% to 30% down to 15% to 20%.

And I’m wondering did anything else occur between your last earnings call and this one to change your tone. Did China Mobile demand change, maybe a little color because the guidance revision looks large.

Steve Zhang

Karl, we don’t see much demand change on the China Mobile side. We also didn’t see much change on the China Telecom side, on the demand side. I think that the revenue guidance for the whole year, we lower the whole year guidance is because project delays in both China Unicom and the China Telecom accounts.

I want to emphasis those projects are still there. They are, just due to different reasons in different accounts, they are being pushed out a little bit causing us to not be able to realize the revenue for those new projects.

Karl Keirstead – Kaufman Brothers

Okay. So it sounds like the degree of push outs is now greater than you believed three months ago? And just, Steve, just so we can get comfortable with your guidance that those deals will get done, can you help us understand what’s behind these delays? What’s going on at Unicom and Telecom to cause these delays?

Steve Zhang

I think in the Unicom side, as we mentioned in the past, that they have a new people reshuffle and the new people need to get comfortable with the IT strategy and so far, we have been given the opportunity to participate in working on their data model for another six provinces BSS projects. So we know that six provinces BSS project should happen it’s just the timing, it’s taking a little bit longer than we originally expected.

Karl Keirstead – Kaufman Brothers

Okay.

Steve Zhang

On the China Telecom side, as I mentioned, there is no, not much demand change. It’s just that if we need to go through this pilot testing phase all of our contracts won’t get signed until we finish the pilot testing. So because of this extra step involved, the project -- the official signing of those projects are being pushed to the fourth quarter as well as the first half next year.

Karl Keirstead – Kaufman Brothers

Okay. And then if could ask one more Steve. Despite the revenue guidance revision, your non-GAAP earnings guide is still roughly in line with Street estimates and it hasn’t deteriorated. So how can you have such a strong revenue guidance downward revision and protect your margins? What’s the offset that’s allowing you to maintain your earnings? Thank you.

Steve Zhang

We have, as you can see, over the last three quarters even for AsiaInfo standalone, we have achieved very high operational efficiency, improving our operating margin from last year 15% to 18% in the first quarter, now in the second quarter our operating margin is 22%. And we are able to achieve the operational efficiency from both controlling our sales force, as well as leverage our mature products and the solutions.

Another reason for us to achieve higher margin this year is both AsiaInfo-Linkage in the past we were busy with getting into a lot of new customer base, as we explained to the investor community in the past when we get into the new customer bid the first year we tend to lose money. I think now we are turning the circle, now we are working with -- mostly working with our existing customers, the market and the follow-on business with existing customers are also better compared to when you first enter new business.

Karl Keirstead – Kaufman Brothers

Okay. Great. Thank you very much.

Steve Zhang

Thank you.

Operator

(Operator instructions) Our next question is James Friedman from Susquehanna. Please begin.

James Friedman – Susquehanna

Hi. Thank you for taking my question. I just want to get some more clarification about what physically we should be modeling for a full year 2010 revenue. You had suggested, Steve, that the combined number for 2009 would be $377 million, should use that?

Steve Zhang

Revenue based, right.

James Friedman – Susquehanna

Okay. So should we use that as the base and then multiply that by 15% growth at the low end?

Steve Zhang

Yeah. You can use that as a base and we have given a revenue growth range for 2010.

James Friedman – Susquehanna

Okay. So just to clarify, that means that you’re contemplating about $433 million of revenue at the low end for 2010?

Wei Li

Let me clarify for that calculation that’s assuming we consolidated all four quarters for Linkage side.

Steve Zhang

That’s for all the numbers.

Wei Li

That’s for all numbers. But we only consolidated Q3 and Q4.

James Friedman – Susquehanna

So, maybe to clarify this, could you give us a specific number instead of a growth rate that you’re contemplating for 2010 revenue for the combined entity?

Steve Zhang

For the combined entity, this is -- for the combined entity the pro forma revenue it will be in the $430 to $450.

James Friedman – Susquehanna

So $430 to $450 for the combined entity?

Steve Zhang

Yeah.

James Friedman – Susquehanna

Okay. Was there any change in the revenue recognition relative to Linkage?

Wei Li

No. We do not foresee any meaningful revenue recognition issues going forward.

James Friedman – Susquehanna

Okay. And so when you say 15% to 20% growth, that is the growth rate for the entities separately, as well as together, correct?

Wei Li

Together, yeah, separately and together, and also, again, the $430 to $450 is a pro forma assuming we consolidate all four quarters with Linkage result. But only consolidated two quarters Q3 and Q4.

James Friedman – Susquehanna

Right. Okay. All right. Thank you for taking my questions.

Operator

Our next question is Brendan Barnicle from Pacific Crest Securities. Please go ahead.

Brendan Barnicle – Pacific Crest Securities

Great. Thanks. Just to finish up on this whole round of thinking, so we don’t have anyway of getting what the Q1 and Q2 revenue contribution from Linkage would be? Is there anyway you could give us those numbers?

Steve Zhang

Wei, do you want to take that question?

Wei Li

Yeah. As of now they haven’t finished their review, so it’s totally, it’s our number, but the net revenue contribution for Linkage Q1 is roughly $38.6 and for Q2 is $41.5 million.

Brendan Barnicle – Pacific Crest Securities

Great. That’s helpful. And then we also saw a decline in gross margins, I think in sequentially from Q1 to Q2 what was attributing to that decline?

Wei Li

As we come back to Q1 earnings call, we understand that Q1 earnings result was not recurring and was due to the cultural mix as well as the hiring delay. And in Q2 we do hire the about 170 people and also the cultural mix of that tended to go back to normal.

Brendan Barnicle – Pacific Crest Securities

All right. Okay.

Wei Li

So Q2 was more in the range.

Brendan Barnicle – Pacific Crest Securities

Great. Thanks for that reminder.

Steve Zhang

Just to add to that Brendan, that historically our quarter one growth margin has always been good, higher compared to other quarters, due to quarter one there is a two-week vacation for Chinese New Year.

Brendan Barnicle – Pacific Crest Securities

All right. Right.

Steve Zhang

Yeah.

Brendan Barnicle – Pacific Crest Securities

Steve, what’s -- you’ve talked a lot about Unicom and the China Mobile delays and you sound very confident you’re going to still win these deals. But how are you getting confidence on the timing on when those may, actually, you know, the RPs comes out in Q4 and the awards will be in Q1 or how do we know it doesn’t continue to get pushed out a bit?

Steve Zhang

Well, that’s just based on our conversations with the China Unicom executives and also based on what we are being involved, our engineers are being involved at this point.

Brendan Barnicle – Pacific Crest Securities

Are there any requirements on China Unicom that would force them to get some of these projects done by a certain date, are there any government mandates that they’re facing?

Steve Zhang

Well, I think, they do experience some serious challenges in running their business at this point because they have standalone bidding for fixed line, for wireless, and they need to consolidate, to push for the convergence, especially given that the Chinese government is pushing also for the convergence of the cable, telecom and internet network.

Some of the cities are in the 12 cities chosen by the government to push for those convergences. So, for example, Beijing Unicom is to launch their IPTV services pretty soon. So I’m sure they need to do a lot of IT system upgrade to be able to handle bundled services.

Brendan Barnicle – Pacific Crest Securities

Okay. You earlier mentioned too that you were having more success on the marketing side at China Mobile. What percent of your business is now coming out of that marketing budget at China Mobile?

Steve Zhang

It’s still relatively small. I think it’s only, for total channel revenue contribute revenue, coming out from the margin, probably, let me calculate quickly, probably only around 5%.

Brendan Barnicle – Pacific Crest Securities

Okay. And then also you mentioned some of the cable wins. Any more visibility on when the government may decide what its new cable reorganization plan is going to look like?

Steve Zhang

I think they already made their wish public. They want to consolidate the cable market into one operative or one province. I think in some of the provinces they have already started that consolidation and it’s just going to take two to three years to finish the consolidation. The reason is that those are all government-owned entities and a lot of issues need to be resolved.

Brendan Barnicle – Pacific Crest Securities

And when is it most likely that you guys would step into the majority of your work on those reorganization instances?

Steve Zhang

I think that we are already starting to see those operators that want out to have technical difficulties with them, so that their platform can be upgraded or they want to build a new platform to support the large provincial based operation.

For example, we have already won the Hubei provincial cable operator’s business and as we mentioned, in the script that we also won Kunming. Kunming is the capital city of Yunnan Province. So normally when we enter capital city of the province, we’ll have a very good chance starting from there as a base to consolidate the whole province’s operation.

Brendan Barnicle – Pacific Crest Securities

Great. Thanks for answering my questions.

Steve Zhang

Thank you.

Operator

Our next question is Sean Jackson from Avondale Partners. Please go ahead.

Sean Jackson – Avondale Partners

Yeah. Thank you. Real quick on the products of Linkage and AsiaInfo, are there any -- Linkage that are being discontinued? In other words, if there’s overlap between some of these products, are you still selling them separately or is at some point one or a couple going to be discontinued?

Steve Zhang

There’s still some overlap. For those overlap products, those products already being installed at the customer base. We’ll continue to support this, old version of the products and going forward we’re in the process of trying to unify -- have a unified product catalogue and gradually having a unified product development team to develop the product.

Sean Jackson – Avondale Partners

Okay. Thanks. And also now, with the combined entity, who are your most vulnerable competitors going forward?

Steve Zhang

It will be different from comp-to-comp. I think in China Mobile, probably (inaudible) will be a very important competitor moving forward. In China Telecom it will be [DTEsoft]. In China Unicom most of the competitors are small, like Digital China, [Newsoft].

Sean Jackson – Avondale Partners

Right. Okay. And, excuse me if I missed this, did you give the contribution of each of the three main customers for the quarter?

Steve Zhang

I think they will disclose in the second quarter’s 10-K -- 10-Q the revenue contribution for AsiaInfo standalone in the future I think Q3 will beat revenue contribution for the combined entity from all three carriers.

Sean Jackson – Avondale Partners

Okay. So but the second quarter with just AsiaInfo alone is going to be disclosed in the Q?

Steve Zhang

I think, let me get you the numbers. For AsiaInfo standalone Q2 China Mobile contribute 66%, China Telecom contribute 4%, Unicom 17%.

Sean Jackson – Avondale Partners

Okay. You said Telecom was 4%?

Steve Zhang

Yeah.

Sean Jackson – Avondale Partners

Okay. Thank you. That’s helpful.

Operator

(Operator Instructions) Our next question is Kun Tao from Roth Capital Partners. Please go ahead.

Kun Tao – Roth Capital Partners

Thank you for taking my question. Steve I need your help on the numbers that you provided. You mention for 2009 revenue for the combined company was $377 million, okay, so -- so it’s okay, I think I can figure this out. I don’t want to waste time. So, on the project delay side, on China Unicom, so it’s a new province project or its existing customers’ project?

Steve Zhang

It’s a new customer project.

Kun Tao – Roth Capital Partners

New project and in 2010, in your revenue guidance, how much of the revenue you think will come from the new customers and how much will be from the existing customers?

Steve Zhang

Probably in our current forecasting…

Kun Tao – Roth Capital Partners

Yeah.

Steve Zhang

Our current forecasting revenue range, we are mostly revenue will be coming from our existing customers.

Kun Tao – Roth Capital Partners

From existing customers, right? Okay, and also go back to the numbers on your $377 million of revenue on 2009. If I look at your profit statement you filed earlier this year, Linkage for fourth quarter of 2009 was only $38.6 million, which was much lower than the first three quarters. Do you know why was that?

Steve Zhang

Actually, it’s not very much lower than the first three quarters. It’s just lower than their third quarter 2009. Their third quarter they have a big loss here because some of the large contracts for China Unicom, they need to recognize revenue in the fourth quarter.

Kun Tao – Roth Capital Partners

So for Linkage we can probably pattern out that the four quarters in each year will be pretty much flat instead of -- unless they have some extraordinary contracts, is that fair?

Steve Zhang

I think that we are still seeing sequential growth for Linkage business, for example, as we mentioned, their first quarter revenue is roughly $38.6, second quarter, of course those are still other numbers. The second quarter is $41.5.

Kun Tao – Roth Capital Partners

Okay. That’s for the 2010 or 2009, I didn’t?

Steve Zhang

2010. 2009 the numbers I think are also public given they filed that last year’s F1. You can get those numbers from the F1 they filed or you can talk to Wei to get those numbers.

Kun Tao – Roth Capital Partners

Okay. How would the Linkage, the combined company, what’s the gross margin effect just combining with Linkage? You think Linkage gross margin -- is their gross margin slightly high? Do you think there will be -- your combined company will be the same going forward or what’s the…

Steve Zhang

I think Linkage gross margin is the lower AsiaInfo-Linkage gross margin. For the combined company, the gross margin for the second half will be in the range of 50% to 55%.

Kun Tao – Roth Capital Partners

50% to 55%?

Steve Zhang

Yeah. I want to emphasize that the lower gross margin of Linkage doesn’t mean they have a lower operating margin. Actually the operating margin of the Linkage business is higher than AsiaInfo’s operating margin.

Kun Tao – Roth Capital Partners

Yeah.

Steve Zhang

It doesn’t, whether you put your costs or whether you categorize some of the costs as delivery costs or you categorize them as R&D costs.

Kun Tao – Roth Capital Partners

Okay. That’s very, very helpful. My last question, are you going to report going forward, you report three segment as AsiaInfo technology, Lenovo and Linkage, or you combine…

Wei Li

No. We’re going to report two segments.

Steve Zhang

Telecom business and the security business.

Kun Tao – Roth Capital Partners

So you will not list separately on Linkage?

Wei Li

No. We’re not.

Kun Tao – Roth Capital Partners

Okay. All right. That’s very helpful. Thank you for taking my questions.

Steve Zhang

Thanks.

Operator

Our next question is Scott Sutherland from Wedbush Securities. Please go ahead.

Scott Sutherland – Wedbush Securities

Hi. Great. Thank you. A couple of follow up questions on these contract delays, you just mentioned that China Unicom are new projects. So kind of want to get a feel if and when they do ramp, actually this year and starting next year, do you expect some margin pressure from the new customers and do you have any cost synergy that will offset that from the Linkage acquisition going forward?

Steve Zhang

I think we would try to combine our delivery team to work on those potential new projects and it will depend - the margins on those new projects will depend on the pricing for those contracts. I think we will leverage on the past success.

I think AsiaInfo-Linkage is the only vendor with mature solutions to target for this, six Northern provinces BSS challenges. So we believe that we have a very strong and impressive product suite that can be deployed at those customer base and we would leverage each side delivering resources to work on those projects when it happens.

Scott Sutherland – Wedbush Securities

I think you said in the past that you could see your business growing in excess of 20% for the next few years, correct me if I’m wrong. You are seeing some delays bringing it below a 20% growth rate, but if these are just delays, what’s your thoughts about getting back to above the 20% growth rate for a couple more years?

Steve Zhang

Well, I think, if we don’t account for those delays, so we’re also expecting growth rate this year to be above 20% and it just happened so we are seeing those delays in Unicom and China Telecom. Again I will like to emphasis that those delays, they are just delays. It doesn’t mean those projects are disappearing and that based on our conversation with the customer, they still have the budget and they still want to move forward. It’s just the pace of moving forward is slowing down.

Scott Sutherland – Wedbush Securities

Lastly, you mentioned in your press release some opportunities you start seeing in Southeast Asia. How big or material are these opportunities and when do you expect them to start generating revenue?

Steve Zhang

We should be starting seeing revenue contribution in second half this year. And we are already involved in several projects for testing our solutions and hopefully we can close down those projects in the second half. And I cannot give you a number right now because the volatility of the contract signing process.

Scott Sutherland – Wedbush Securities

Okay. Thank you.

Operator

Our next question is [Qin Zhang]. Please go ahead.

Qin Zhang – The Royal Bank of Scotland

Thank you for taking my question and congratulations on another solid quarter. I have one question. When will we achieve full integration of AsiaInfo and Linkage in terms of organizations and operations? And also, I noted that we recorded US$658,000 in merger related expenses in the second quarter in a total of $4.1 million in the first quarter, sorry, in the first half. And will we incur more merger related expenses or integration related expenses going forward? Thank you.

Steve Zhang

I think, I will answer the first part, I think probably, Wei, will answer the second part of your question. Our whole management team has already been working as the one organization and the integration on the first front has already been completed. And since we don’t have much overlap in sales and the service delivery team so the integration is relatively easier and as we mentioned, we also consolidate to have a single product catalogue.

Now we are in the process of integrating the backend system, for example, the financial systems, the sales contract approval internal systems. We already -- the whole company has moved on, has already consolidated all the email into one single email system and now we’re in the process of integrating the internal other office like contract approving, expense reporting, all those process in the process of moving forward. Wei, you want to answer the second question?

Wei Li

Yeah. And if we’re talking about external, like a safe consulting phase related emerge and we do not expect anymore happen going forward and internally we do not reinforce here any meaningful one-off merger related expense due to integration. So (inaudible) this we do plan to have the new incentive plan issued to the combined company’s employees, so that could increase the share base compensation but that has no impact on the longer base EPS.

Qin Zhang – The Royal Bank of Scotland

Could you comment on how much increase we will be expecting for your share base as a result of the incentive plan?

Wei Li

We haven’t formalized the plan yet, so we do not have this, any visibility at the moment.

Qin Zhang – The Royal Bank of Scotland

I see. Thank you.

Operator

Our next question is Meghna Ladha from Susquehanna. Please go ahead.

Meghna Ladha – Susquehanna

Yeah. Thanks for taking my question. Steve, the $1.40 and $1.50 guidance for 2010, what operating margin does that contemplate?

Steve Zhang

Operating margin I think is roughly 22% to 24%.

Meghna Ladha – Susquehanna

And where do you expect that to be in 2011 when we have the entire Europe Linkage?

Steve Zhang

We don’t have, I mean, 22% to 24% actually before the combined pro forma is in for Linkage for 2009 and ‘10.

Wei Li

And that number does not including the amortization of the acquired intangible assets due to the Linkage merge. Yeah, w are still in the process of the price allocation study. So then which could severely impact the operating margin GAAP basis operating margin, so right now, the 22% to 24% does not include that factor.

Meghna Ladha – Susquehanna

Okay. And then you give us the $377 2009 revenue, the growth rate assumption, so our calculation suggests that calendar 2010 revenue should be about $355 to $375 million in revenue. Does that sound right?

Wei Li

In the ballpark, right.

Meghna Ladha – Susquehanna

Okay. And then also with -- so you talked about revenue contribution from all carriers in the Q2, what’s your expectation in the second half, what the assumption of revenue from Unicom and Telecom?

Steve Zhang

We’ll disclose that when we report our third quarter revenue number.

Meghna Ladha – Susquehanna

Okay. And one more thing with the G&A, it declined significantly, sequentially. I might have missed this, but what was the reason of decline in G&A in the second quarter?

Wei Li

Sure. That was mainly due to the two non-recurring items happening in Q1. The first is the roughly $2.5 million merger related (inaudible) expense. Another is the respect of better provision, approximately $1.6 million.

Meghna Ladha – Susquehanna

Okay. Thank you.

Operator

Our next question is Donald Lu from Goldman Sachs. Please go ahead.

Donald Lu – Goldman Sachs

Yeah. Hi. I just want to have a follow-up question. Is your revenue guidance of $430 to $450 million in 2010 for combined company your net revenue or it’s a gross revenue?

Steve Zhang

That’s net revenue. Did that answer your question Donald? Hello? Hello?

Donald Lu – Goldman Sachs

Can you hear me?

Steve Zhang

Yeah.

Donald Lu – Goldman Sachs

Sorry. My second question is the margin, so based on the share count, et cetera, you gave us the net margin for this year for combined company is 24% to 25%. I just want to confirm that’s the margin…

Steve Zhang

Operating margin is the -- in the range that we gave for the operating margin is 22% to 24%.

Donald Lu – Goldman Sachs

Okay. Got it.

Steve Zhang

That’s also accounting for the merger-related amortization for the Linkage deal because I think KPMG is still in the process of reviewing the purchase price allocation and for the accounting treatment.

Donald Lu – Goldman Sachs

Okay. Yeah. That’s all my questions. Thank you.

Steve Zhang

Okay.

Operator

This completes the Q&A session. I turn back to Ms Wei and Steve.

Wei Li

Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact us. Thank you.

Operator

Ladies and gentlemen, this concludes our conference call. Thank you all for attending and goodbye.

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