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Longtop Financial Technologies Limited (NYSE:LFT)

F1Q2011 Earnings Call Transcript

August 17, 2010 8:00 pm ET

Executives

Charles Zhang – IR

Weizhou Lian – CEO

Derek Palaschuk – CFO

Analysts

Karl Keirstead – Kaufman Bros.

Tim Fox – Deutsche Bank

Jon Maietta – Needham & Company

Donald Lu – Goldman Sachs

Jeff Rossetti – Janney Montgomery Scott

Glenn Greene – Oppenheimer

Operator

Welcome to today's Longtop first quarter fiscal year 2011 result announcement. I am pleased to present Mr. Charles Zhang, Head of Investor Relations. 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. Mr. Zhang, please begin.

Charles Zhang

Thank you, Larry. Thank you and welcome to our fiscal first quarter 2011 earnings conference call. Joining me on the call today are Weizhou Lian, Chief Executive Officer; and Derek Palaschuk, Chief Financial Officer.

For today's agenda, management will discuss highlights of the quarter. This will be followed by a Q&A session. Before we continue, I refer you to our Safe Harbor statement in our earnings press release, which applies to this call as we will make forward-looking statements.

Finally, please note that unless otherwise stated, all figures mentioned during this conference call are in U.S. dollars.

I would now like to turn the call over to our CEO, Weizhou Lian, and I will translate for Mr. Lian.

Weizhou Lian

[Interpreted] Thank you for joining us for Longtop’s first quarter 2011 earnings conference call. A strong start we have made in fiscal 2011 and the support was more that our customers strong demand for Longtop products and solutions is continuing without impact from the volatility in China or the global macroeconomic environment.

We are again increasing our guidance on the back of this success and I am highly confident we can achieve our revised guidance. We are now guiding for $100 million in adjusted net income, which is an important milestone for Longtop.

Recently, following [ph] the year 2009 we were again named by IDC as the number one and number two market share leader in China’s banking and insurance IT solution market, respectively. We are gaining market share and pulling further away from the competition in both verticals. Longtop remains the only company that is in the Top 10 of both the banking and insurance It solution market.

I will now give you an update on our quarterly progress as regards customers, products as well as M&A activity. With regard to customers (inaudible) we expect healthy growth in all of our customer segments and have increased our full year guidance for organic software revenue year-over-year growth to 32%, up from 30%. We see no pricing pressure from our customers, looking specifically at our customer segment.

Demand from Big Four banks customers continue to be strong and trends are all positive. As we already have more than 10 consultants working on Bi consultant projects with the Big Four banks that is still now our customer we expect to get our first consulting contracts before the end of Q2 2011.

A number of investors are telling us that they have heard our largest customer is considering taking more of the development and maintenance work on their core banking, loan management and other transaction related systems in-house and whether this will impact Longtop. Our customers’ IT development strategy is the internal matter. It is inappropriate for me to comment on their strategy.

However, I can say demand from our largest customer is soft [ph]. We have not experienced any unusual project delays or cancellation. Most of our work for our largest customer is on their (inaudible) action systems such as channel management and business intelligence solutions and we will continue to strive to improve our consulting and delivery capabilities in this area to provide the best services.

As for other segment, demand is particularly strong as national joint stock banks and big city banks are investing aggressively in IT to improve their overall competitiveness. The demand is also driven by the geographical expansion of traditional city banks. I am especially pleased with the progress at a leading national joint stock bank that awarded us an operational risk management contract for this year. With the successful delivery of operational risk management systems, we are now able to cross-sell more solutions to this customer, which previously was doing most of its IT work in-house. This is a good example how we grow our market share in this segment.

With the successful and full integration of Sysnet, we are better positioned in insurance IT solution market. To take advantage of the move at smaller insurance companies to upgrade their legacy core insurance systems, we hope to sign our first contract for our own internally developed core insurance solution this year.

We will continue to execute our product strategy of delivering the highest quality services to maintain our leadership position and focusing on improving our standardized solutions. Turning specifically to our product line.

Since the activation of the joint stock, we have become a leading core banking solution provider. According to IDC, our market share, including Zhongbo for core banking solutions increased to 8.3% in 2009 and ranked number one in the China market. Zhongbo current implementation is going according to the plan and we see increasing demand such that we are increasing our Zhongbo revenue guidance from $15 million to $16 million. We are working on recruiting more staff to meet demand and prepare for the second potential core banking implementation.

We see continuing strong demand for our industry-leading business intelligence or BI solutions. We are gaining market share. According to IDC, our market share in banking BI solutions increased to 44% in 2009 from 31% in 2008. Furthermore, our investment in BI related consulting has paid off with increasing contract wins in this quarter. Very recently we agreed to acquire a small BI consulting company, which will improve our BI related financial planning and business performance management consulting abilities.

We are also gaining market share for our risk management solution where we see strong growth potential. According to IDC, we are the number two market share leader in this market in 2009. Recently, we acquired a small company that was strong in risk management related business and IT consulting, which will further strengthen our ability in this area. We have also recently signed agreements to acquire a small company that does implementation of management consulting – management accounting software for banks, which is under our risk management department.

We see strong demand for our settlement and payment solution driven by the launch of R&D (inaudible) segment as well as the replacement of core segment systems by our existing customers.

We continue to gain momentum for our CRM solutions as we penetrate into other banks and insurance segment. This is another area according to IDC in which we are number one in China.

In addition to these small acquisitions referred to above planning update view on M&A activities. We recently sold part of our non financial services IT outsourcing services division and will now operate this business as a joint venture. We decided to operate this non FinTech IT outsourcing division as a joint venture because, number one, Longtop strategy is to focus on our core competency, which is the FinTech vertical. Secondly, the business was absolutely immaterial for our operating income. Thirdly, we wanted to maintain a significant ownership interest so that within Longtop Group, we would have the ability to understand and develop non FinTech outsourcing business. And finally, we believe with the local investor there is a potential to list the outsourcing business in China at some point in the future.

Turning into the securities industry, it’s taking longer than we would have initially thought and part of the reason is our conservative approach to acquire companies. We are now considering whether we should increase our organic investment in product development, delivery and sales abilities.

Overall, I am very pleased with the start to our 2011 fiscal year and with the solid foundation, we are well-positioned. Now, I will like to turn the call over to Derek, our CFO.

Derek Palaschuk

Good day, everyone, and thank you for joining our financial review. We are pleased to report a strong start to 2011. Excluding the acquisition of Zhongbo, which was not included in our earlier guidance, we exceeded our revenue guidance by $2 million, exceeded operating income guidance by $875,000 and adjusted EPS by $0.03 per share.

With regard to order intake and backlog, excluding Giantstone, order intake was healthy in Q1 with new software development contracts of $43 million compared to $36 million in the year-ago period, which is a 19.4% year-on-year increase.

At June 30th, we have software development backlog excluding Giantstone of $34 million compared to $25 million at March 31st and $31 million in the year-ago period. The 19.4% year-on-year increase in order intake and the 9.7% year-on-year increase in backlog is significantly lower than the Q2 2011 guided year-on-year organic revenue growth of 32.2% due to the timing of receiving contracts as opposed to an indication of a slowdown in business.

Based on our revenue and order intake in July, which was a record month for Longtop, we have excellent visibility into Q2 2011. Furthermore, for the next three quarters of fiscal 2011, we expect $10.7 million in revenue from Giantstone, most of which is backlog at June 30th.

I would now like to address our operating cash flow and accounts receivable. Our cash flow from operating activities showed a small cash outflow of $490,000 as compared to an outflow of $7.9 million in the year-ago period. At June 30, we are financing about $10 million in system integration receivables without liabilities to our suppliers, which also has a negative impact on our cash flow. As in previous years, our cash collection is heavily weighted to fiscal Q2 and Q3 and this in fact is the third year in a row where our first fiscal quarter cash flow has been negative.

Our June 30, 2010 accounts receivable including billed, unbilled and system integration were $72.5 million, which is up from $65.6 million at March 31st. The increase was due primarily due to Giantstone and Zhongbo receivable. Our Q1 2011 DSO, which excludes the $10.7 million in system integration receivables, but does include unbilled receivables was 108 days, which is slightly down from 2010 year amount of 112 days and is well within or better than industry standards in China.

I would like to finish my prepared remarks with more details on our guidance. Due to strong demand for Longtop services, our full-year revenue has increased from $225 million to $233 million, of which $208 million are software development related and $25 million is from other services, yielding year-over-year growth of 38% for total revenue and a robust 43% for software development revenue.

Our software development revenue guidance has increased by $4.3 million from $203.7 million to $208 million of which $1 million of increase is from Giantstone and $3.

3 million is organic. We now expect Giantstone to contribute $16 million in revenue for the full year, which is an increase or $1 million from our guidance last quarter.

We increased Q2 software development revenue guidance by $2.1 million to $52.7 million and total revenue is now expected to be $57 million. We increased Q3 2011 revenue guidance by $600,000 to $70.9 and increased Q3 2011 software development revenue guidance by $1.1 million to $64.9 million to compensate for the loss in some of our other services revenue resulting from the partial disposal of our non FinTech business.

We also increased Q4 2011 revenue guidance by $900,000 by increasing software development revenue to $51.6 million. We will stop consolidating our non financial outsourcing division in July, 2010, and as a result our increase in Q2 to Q4 revenue guidance of $3.6 million is all – none of that which is due to Zhongbo.

Even though our Q1 adjusted gross margin excluding Zhongbo was 130 basis points lower than our guidance we are well on track for previously guided full year adjusted gross margins around 66%, excluding the impact of any new acquisition.

Our adjusted operating margin excluding Zhongbo of 40.6% in Q1 was slightly better than guidance of 40%. We should end up the year at our previous guidance of around 46%, excluding any new acquisitions.

Our full year adjusted operating income guidance is now $106.5 million, which is $3 million more than the guidance we provided last quarter. We had increased Q2 adjusted operating income to $27.4 million, an increase of $1.2 million. Q3 2011 adjusted operating income guidance of $37.4 million remains unchanged and we increased Q4 2011 by $700,000 to $22.6 million.

For the full year, we now expect $100 million in adjusted net income, which is $3.5 million more than previously guided. We have increased Q2 expected adjusted net income by $1 million to $24.3 million. Q3 2011 adjusted net income guidance of $37.6 million remains unchanged and we increased Q4 guidance by $600,000 to $20.2 million.

That concludes my presentation. And we’ll now ask the moderator to open the floor for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is Kaufman Bros., Karl Keirstead. Please begin.

Karl Keirstead – Kaufman Bros.

Thank you. I’ve got two questions. One, on the mix of the revenues in the June quarter, if you strip out Giantstone from the software development revenues, you get to about $33.5 million. That’s down about 10% sequentially in a normally up sequentially quarter. And conversely the services revenues was very strong, so it feels like there is a mix shift in the June quarter. Derek, I am wondering if you could add a little color.

Derek Palaschuk

Thanks, Karl. So, the first thing is we always look at our revenue on a full year basis because it can be very lumpy and if you look historically, we’ve had some very, very high growth quarters, we’ve had some that are lower. And if we look at our full year revenue guidance for our software business, we are very comfortable with 32.4%, and if there was a – the organic revenue was still 35% in the first quarter, which is very healthy. There is no what we call a slowdown in demand, but it’s really more a timing of getting our contracts in. That’s for our core software.

With respect to our other services business, one of the main components in the other services is we acquired Zhongbo and we consolidated that revenue. So, if you took out the Zhongbo revenue, we grew about 100% in our other services, and that was mainly due to our ATM business, and again a lot of that is really the timing of getting our contracts in. So, again, just looking at the full year, it’s basically our other services businesses will be flat and most of the growth as it has been in the past will be in our core software business.

Karl Keirstead – Kaufman Bros.

Okay. And then just as a follow-up to that and only because you used the same language around the bookings in the June quarter, Derek, what exactly do you mean when you say timing of getting contracts in? Could you elaborate a little bit just so we are clear?

Derek Palaschuk

Sure. In order to recognize revenue under U.S. GAAP, we need to obtain the contracts, but we will start projects in advance of getting the contracts and we do this for our large and – customers we’ve been working with for a long time. For example, last quarter you’ll recall with Giantstone we didn’t book any revenue and the reason was that we hadn’t received any contract and then what happened this quarter we received a lot of contracts and so much in fact that the entire Giantstone Q2 to Q4 revenue guidance of $10.7 million is now all in backlog. So, the projects have started but we just need to get the contracts in.

Karl Keirstead – Kaufman Bros.

Okay. Derek, and –

Derek Palaschuk

And that’s why as we’ve already closed our July book and July, which shouldn’t be – this is the highest contract receiving month of the year, was higher than any month we’ve had historically in the past. And again, that just gives us a very good visibility that we now have.

Karl Keirstead – Kaufman Bros.

Okay, great and then just may be one clarification, Derek, the Zhongbo acquisition you made in the June quarter, that is not included in your guidance that gets you up to $233 million except for the contribution in the June quarter, is that correct?

Derek Palaschuk

Correct. So, Zhongbo is neutral to our guidance, and it’s almost coincidentally that. So there is two parts to our non FinTech outsourcing business. One was Zhongbo and the other is – you know, we’ve had around 130, 140 people doing some outsourcing work for Microsoft in the past. So basically we’ve spun all of that off and if you looked at the non FinTech revenue contribution in fiscal 2010 it was $3.7 million. So, that $3.7 million is basically going to disappear from our Q2 to Q4 of this year as well as Zhongbo. So, basically, all the increase in our guidance is due to our – basically our core existing business.

Karl Keirstead – Kaufman Bros.

Okay. Very helpful. Thanks and congrats.

Derek Palaschuk

Thank you.

Operator

The next question is Deutsche Bank, Tim Fox. Please begin.

Tim Fox – Deutsche Bank

Hi. Thanks for taking my question. I guess the first question around Zhongbo was more from a strategic perspective, what was the thinking originally around the acquisition albeit a relatively small acquisition, and then sort of quickly here turning around and selling it? Just what was the thinking around that originally?

Derek Palaschuk

Hi, Tim. I can take that. So, we’ve been experimenting and looking at the outsourcing business for some time and really as Weizhou explained we would like to have this capability or competency in our Group and – but we don’t see it as part of our core business, because our core business is basically working for the FinTech vertical in China. So, when we actually acquired Zhongbo, part of the intention was to set up a joint venture structure, but it took some time basically to get into our joint venture. So, when we acquired Zhongbo in April and we basically signed the agreements in July, so basically they were contemplated at the same time, but it took some time to get the agreement executed.

Tim Fox – Deutsche Bank

Got it. Okay. And may be for Lian Zhou, you mentioned a second potential core banking implementation. Just wondering if that’s the Giantstone core banking solution that you acquired or whether this is another partnership with a company like SAP?

Charles Zhang

Okay, Tim, let me translate that for Lian Zhou. I can now – let me translate that, Tim.

Weizhou Lian

[Interpreted] So, in terms of the second potential customer for our core banking solutions, we have a number of potential companies in the pipeline, including joint stock banks as well as large city banks. The solution that would be provided would be a combination of SAP plus Giantstone’s own property solution. SAP has some functionalities, but it is not enough to meet all of the requirements of the banking industry in China. So Giantstone has developed a lot of their own modules, which they’ve localized. So, if we go to a customer then we would basically sell them a complete package, which would include the SAP module as well as what Giantstone has developed their own proprietary modules and these modules have been localized for China and they are ready for use.

Tim Fox – Deutsche Bank

Thank you. Got it. Okay, and just one last follow-up for your, Derek, if I could. You mentioned DSOs were down from the full year number. How should we think about DSO across the balance of the year?

Derek Palaschuk

So, DSO won't decrease. We think it will be somewhere around where we were last year and if you look within our industry I think that’s better or as good as most companies and when we calculate DSO we include the billed AR and the unbilled AR. And then again we – historically, we’ve never had any bad debt and – or any significant bad debt. And it’s just a matter of the cash coming in, which will start in this quarter and the next quarter.

Tim Fox – Deutsche Bank

Got it. Thanks. Nice quarter.

Derek Palaschuk

Thank you.

Operator

The next question is Needham & Company, Jon Maietta. Please begin.

Jon Maietta – Needham & Company

Hi, thanks very much. Derek, just so I’m clear on the guidance, is it fair to say that the combination of the non FinTech IT outsourcing business plus Zhongbo is equal to or larger than the revenue contribution from iBoss Consulting and the other two small acquisitions?

Derek Palaschuk

So, we actually – we haven’t included the small acquisitions that we’ve done. We are just integrating those. And Lian Zhou mentioned a few of those in his script. So, we actually haven’t included those yet.

Jon Maietta – Needham & Company

Okay.

Derek Palaschuk

But well you are absolutely correct is that Zhongbo has no impact on the year-on-year growth rate because when we take out the Q2 to Q4 2010 non FinTech outsourcing that will basically be equivalent to what Zhongbo contributed in the first quarter.

Jon Maietta – Needham & Company

Got it. Okay. And then you had mentioned a potential investment around products for the securities industry. Do you have a sense as to timing on that or what that may look like from a quantitative standpoint on the P&L?

Charles Zhang

We’ll just translate that for Lian.

Jon Maietta – Needham & Company

Sure.

Weizhou Lian

[Interpreted] So, if you look at the securities industry, there is a lot of different products and that includes for the asset management companies, the brokers, the companies that trade fixed income and futures. They have a lot of different system requirements, trading, their sales systems, management and financial – and one of the key is the trading system. So, what we have been finding is that what’s really key to success, which is somewhat different than the banking and insurance where there is a lot of customization, there is (inaudible) product development especially you have to have products that are ready. It’s much more of a product – it’s an industry that requires products. You need to have very good product innovation. So, we need to establish these capabilities. So, one of the ways we are looking at that is starting to other than looking at companies to acquire or partners is to recruit teams of people that have the experience.

Jon Maietta – Needham & Company

Okay. That’s helpful.

Derek Palaschuk

And then, Jon, there is nothing in our guidance for securities for revenue, and it’s more of a investment that we are having to make in the product development.

Jon Maietta – Needham & Company

And that was my question. Would – could that potentially look like that investment on the P&L, would you take it as point of margin expansion invested in this type of a product or product suite?

Derek Palaschuk

It’s –we are very new to the securities industry and it’s something that we are constantly discussing. So it really – I don’t know the exact number right now, and then as we get further into the year. And depends on the opportunities we’ll have better visibility. Some of the – if we have to make some investment we would also try and make it up with some additional revenue as well. So, we are committed to the $100 million in adjusted net income.

Jon Maietta – Needham & Company

Okay. And then just my final question was around risk management since you’ve called that out and that’s been something I guess that Longtop has been talking about for may be a year or so. It seems like it’s been top of mind with customers for some time. And my question is could you share with us if some of the commentary that we’ve been reading in the newspaper here in the U.S. around nonperforming loans in China, is that a potential catalyst that could accelerate this opportunity or is it something where there is healthy demand regardless and the potential for nonperforming loans is not really an accelerator for risk management solutions.

Charles Zhang

Jon, let me translate that for Lian Zhou.

Weizhou Lian

[Interpreted] Okay. In terms of the nonperforming loan, you are right, the government – Chinese government has given a lot of emphasis to the nonperforming loans and basically all the nonperforming loans are coming from two aspects. Number one, over last two years, given the stimulus, $600 million stimulus package a lot of money has flowed into the real estate market and the government is taking steps to manage the real estate market. Secondly, there is a potential risk resulting from the loans made by the – loans made through the local government, the so-called local financing platform. And recently we have seen a headline that there is a pressure test [ph] has been made and it says that 25% of those local financing problem – financing platform may have a potential risk. But generally we believe that the nonperforming loans issue will have more lethal [ph] impact to big banks and the impact will mainly on the small banks, local banks and credit unions and we would expect the organization of the small banks market the impact on the big banks is more because they are helping – taking more good steps to manage their risk. And the government including the CDRC and the Central Bank also emphasizing, it’s also emphasizing the importance of risk management. And you are absolutely right, this is a good catalyst for the potential risk management market. That’s also why we said risk management will be one of the fastest growing area for Longtop. It’s also – IDC’s report also says risk management is with very strong potential.

Derek Palaschuk

And Jon, I will just maybe add to that. One of the – Lian Zhou has talked in the past over the last few years about building out our consulting capabilities. So, risk management is an area where we made a number of investments in consultants and these are business consultants, a number of them are PhDs from very well-known universities such a Yale in the U.S. So they are working with our customers, helping them, invite them also on setting up retail credit rating systems in a number of different areas like that, which will help with our sales of our IT solution.

Jon Maietta – Needham & Company

Okay, that’s very helpful. Thank you very much.

Weizhou Lian

Thank you.

Operator

(Operator instructions) Our next is Goldman Sachs, Donald Lu. Please begin.

Donald Lu – Goldman Sachs

(Foreign Language)

Charles Zhang

So, Donald’s question was just a follow-up to Tim’s question on the Giantstone core banking. So his question was what services are we providing the (inaudible) primary contractor and then who is going to implement the SAP module, is it SAP or Longtop?

So, Donald, let me translate that, so you don’t have to translate Lian Zhou’s answer.

Weizhou Lian

[Interpreted] So, in terms of the format of the contract SAP would sign a licensing contract directly with the joint stock bank. And as well they would also have a professional services agreement for them doing some of the implementation on their core banking module. Giantstone has its own customization and implementation contract because what Giantstone is doing is, in addition to helping with the SAP implementation, the majority of their work is actually developing the auxiliary and outer system that need to connect to the core banking system and a lot of these have to be tailored for the local requirement and that would be included in the contract that Giantstone has. Right now SAP has around 20 or so professionals as well as 30 to 40 people from partners at their (inaudible) contracts with other banks. We’d like to basically sell them a total package and be the primary contractor. But one thing is definitely clear is that we would leverage all of the work Giantstone has been doing in developing their own proprietary module.

Derek Palaschuk

Donald, maybe I can just add to that and – because core banking implementation is a big decision for many of our customers. Another strategy we may take is to upgrade our exiting core banking (inaudible) replace it. So, in – for this strategy we may gradually some modules developed by Giantstone gradually and then finally we can consider to replace the whole core transaction system using SAP’s core module.

Donald Lu – Goldman Sachs

Okay, great. (Foreign Language) I’ll translate myself. I am asking whether Giantstone’s product is more standard sized product or customized product.

Weizhou Lian

So, there will definitely be a lot of customization in any of the implementation and reason for that all banks are different. Right now we are doing work for a joint stock bank, but the big city banks who will be also our target customers will have different requirements, so there will definitely be a lot of customization, but having said that is basically because Giantstone will have a lot of experience and understanding of the process, it has built a lot of modules. A lot of that knowledge will be – not just the knowledge, but the source code and other aspects will be transferable to our next project. So, some of the modules may require less customization and also importantly because we have got – or Giantstone has basically gained so much experience and – by working on this such a large project for a number of years, will be able to go and provide consulting on systems, processes, to help the banks to also change their processes to be able to successfully implement these type of core banking solution.

Donald Lu – Goldman Sachs

(Foreign Language)

Charles Zhang

Donald, do you want to translate your question?

Donald Lu – Goldman Sachs

Sure. Yes. Lian Zhou just mentioned that Longtop would like to sign the main contract with the Chinese banks for SAP based core banking system. So I am asking what would SAP feel as a subcontractor in this case, as a very large company?

Weizhou Lian

[Interpreted] So, we haven’t signed a second contract through somebody this huge – a little bit or academic now. We’ll have to deal with them when we actually go to sign the contract, which is generally Lian Zhou’s understanding is that we’ve already discussed what that basically may seem – that they would be willing for us to be the primary contractor. We are also their implementation partner in Asia and China. We haven’t signed any formal document and given that how we split the responsibilities, we haven’t – we don’t have any documentation to it. But at the end of the day, what the bank’s customer says will also be important. So, for example, the bank says we sign – they want to sing with SAP then that we’ll do is to meet the customer requirement.

Donald Lu – Goldman Sachs

(Foreign Language)

Derek Palaschuk

Donald, maybe we can – Donald, can we move on because—

Donald Lu – Goldman Sachs

Oh, yes, sure, sure.

Derek Palaschuk

Sorry to cut you short, Don, but we’ve got a queue of people.

Donald Lu – Goldman Sachs

Absolutely. Thank you.

Weizhou Lian

Thank you.

Derek Palaschuk

Donald, thank you so much.

Operator

The next question is Janney Montgomery Scott, Joseph Foresi.

Jeff Rossetti – Janney Montgomery Scott

Hi, this is Jeff Rossetti on behalf of Joe Foresi. Thank you for taking my question.

Derek Palaschuk

Okay. Hi, Jeff.

Jeff Rossetti – Janney Montgomery Scott

Hi. Just regarding the Big Four banks, I just appreciate the background you provided in your prepared remarks. Just wanted to see if there is any change to your expectation for the Big Four banks to represent may be 38% of software development revenue in fiscal ’11, and as a follow-up wanted to see if you expect any material revenue from the contract you expect to sign with ICBC this quarter?

Charles Zhang

So, let me translate that for Lian Zhou, Jeff.

Weizhou Lian

[Interpreted] Okay, Lian Zhou just wants to answer your second question first. So, in terms of ICBC, we don’t expect a material contract. However, the work we are working for is high level consulting. We now – we have more than consultants working on the BI consulting projects, so generally in terms of the revenue contribution for fiscal ’11 it will be much like the other three Big Four banks. We hope that the first consulting contract will open the door for our other solution. In terms of the strategy with the Big Four banks, we’ll continue to execute our strategy because Big Four is key driver of China’s banking IT investment. And it’s also a key driver of Longtop’s growth. There is no change in our strategy with before.

Jeff Rossetti – Janney Montgomery Scott

Okay, thank you. And then on the insurance segment, I just wanted to see if you can may be provide an update on the stage of the investment cycle you see for software and IT services and what you might expect to see from that – from the – from your first contract that you discussed regarding your internally developed core insurance solution?

Weizhou Lian

So, in terms of the stage of the investment cycle in the insurance industry, it’s in a very – it’s in an early stage investment. They are a number of years behind banks in terms of their stage of the IT build out at least five years. So, for example, a lot of the insurance companies are building out their data centers doing data centralization and trying to consolidate their operations, which the big banks did a number of years ago. From a business side CRM, risk management, BI are all in high demand and they are just really starting to implement these, again, which the banks did a number of years ago. In terms of the size of the market, if you look at IDC it’s around 15% of what the banking industry is spending, but it’s going to have very high growth. And over the next number of years it’s – it will reach the size of the current banking industry. So, we are very excited about the opportunity in the insurance industry. And one of the key areas for investment will be in the core insurance area, the core systems. And a lot of the insurance companies were established in the last 10 years and the current systems are basically holding back their business growth. The older systems were developed on a lot of manual systems and with the growth in the Chinese economy and the requirement for new products, there is basically a bottle neck for the business development. So, when we acquired Sysnet, Sysnet has spent quite a bit of time developing both a life and property insurance core system. And we now we’ve started talking to – in a lot of detail to insurance companies who are very interested in the system.

Derek Palaschuk

Jeff, may be you can – we just move to next question. And we can follow-up with you later. Sorry to cut you short.

Operator

Our next question is Oppenheimer, Glenn Greene. Please begin.

Glenn Greene – Oppenheimer

Thank you. I think I will ask both of my question at once and just let you answer them. First, I guess, Derek, just going back to the – your backlog question, the issue of sort of the 10% year-over-year backlog growth in the context of your revenue growth outlook for the second quarter and even the full year outlook. And on the face of it, it looks somewhat concerning, but you should kind of suggested that why contracting was very strong. Could you give us a little bit more color there, perhaps you can quantify the July month bookings?

And then the second question relate to broadly competitive environment. Obviously, there has been a new IPO which – with a company that has a good one-third of their business in kind of the FinTech space. And (inaudible) reported this morning and talked a little bit more about more aggressive in the financial services vertical. I am just wondering if on a high level you can talk about the competitive environment and have things really changed. Thanks.

Derek Palaschuk

So, let me just answer the first one very quickly and then we’ll let Lian Zhou answer the second. So, in terms of quantifying is that they are very – most of our Q2 revenue that we’ve guided for on our – so our software guidance, which we actually took up by $2 million so now it’s $52.7 million. Most of that is already in the – in backlog. So we have very, very good visibility. And then maybe we’ll now Lian Zhou answer the – your next question.

Weizhou Lian

So, in terms of the – your question about the competitors is – you know if you look historically we believe that we are gaining market share from our old competitors. And of course there will be new competitors that are coming into the market now. So, there will be a new challenge for us. But the reason that I am confident that we can beat this challenge is that first of all we have the most – the widest and most diverse competitor base. And if you look at the new competitors in this area, they don’t have the list of customers that we have and this is a very important competitive advantage for us.

The second point, if you look at the product breadth that they have is we have also the widest product offering and solution offering. Perhaps some of our new competitors will be stronger than us in a few different products, but what we are finding is that the banks want more and more one-stop shopping and if they can rely more on a big vendor to meet all their needs and a reliable that will also help with the relationship. So, if you look historically since I’ve had the business, there has always been competitors coming in, but we don’t see any trend that we are overly concerned about because we are the biggest in the industry, have the broadest customers and the broadest product offering.

Glenn Greene – Oppenheimer

Great. Thank you.

Derek Palaschuk

Yes, thank you.

Charles Zhang

And let’s now finish here. Operator?

Operator

This concludes our conference call. Thank you all for attending.

Charles Zhang

Okay, thank you, everyone.

Derek Palaschuk

Thank you.

Charles Zhang

If you have any further follow-up questions, let us know.

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