Longtop Financial Technologies CEO Discusses F2Q2011 Results - Earnings Call Transcript

Nov.15.10 | About: Longtop Financial (LFT)

Longtop Financial Technologies Limited (NYSE:LFT)

F2Q2011 (Qtr End 09/30/2010) Earnings Call

November 15, 2010 8:00 am ET


Charles Zhang - Head of IR

Weizhou Lian - CEO

Derek Palaschuk - CFO

Wei Zhao - VP, Sales


Joe Vafi - Jefferies & Company

Karl Keirstead - BMO Capital Markets

Donald Lu - Goldman Sachs

Glenn Greene - Oppenheimer

Joseph Foresi - Janney Montgomery Scott

Tim Fox - Deutsche Bank

Chris Schulter - William Blair & Company

Jon Maietta - Needham & Company


Welcome to today's Longtop second quarter fiscal year 2011 results announcement. I am pleased to present Mr. Charles Zhang, Head of Investor Relations. (Operator Instructions)

Charles Zhang

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

Thank you for joining us for Longtop's fiscal second quarter 2011 earnings conference call.

Our strong performance is evidenced by 52.7% software development revenue growth in the first half of fiscal year. Roughly 37% was organic, and of course, the continuing strong demand for Longtop's solutions and our excellent executions were again increasing our full year revenue and adjusted net income guidance on the back of the success, and I'm highly confident we can achieve our revised guidance.

We now expect full year 2011's organic software revenue growth of at least 38% as compared to the 30% guidance we gave at the beginning of the year. While next year's IT budget has not been released, we are highly confident that we can achieve the 2012 fiscal year analyst consensus for revenue of $291 million.

I would like to take this opportunity to comment on some investor concerns following our recent research report on IT spending of one of our largest customers. I sympathize with our investors because there is contradicting information in the market.

Firstly, the third party report mentioned that revenue from this customer would be flat in our fiscal 2011 when compared to 2010. These rumors of the customer cutting spending with us has been circulating since the beginning of our fiscal year. Based on our revenue for the first half of the year, backlog and the frontlog, the only way there would be anything less than double-digit growth in fiscal 2011 for this customer was occurrence of a force majeure event resulting in our engineer's inability to deliver the service.

In fact, revenue from this customer for fiscal 2011 is well ahead of the guidance we gave at the beginning of the year.

Secondly, looking at next fiscal year, having worked with this customer for 16 years and regularly talking with them, it's also inconvincible for me result of force majeure event how our 2012 revenue could be half of 2011. Even though we don't have next year's budget, based on the project we are doing now and our preliminary discussions with our customer, I am confident revenue from this customer in fiscal 2012 will once more increase over 2011.

Thirdly, with respect to some of our customers doing more work in-house in the immediate future, it is not appropriate for us to comment on their IT development strategies, as this is a internal matter. I can tell our investors that none of our major customers have indicated to me or my (inaudible) that they will require less service from Longtop over the next few years.

On this call, I will also like to make a personal commitment to our investors that if we believe there is going to be a material, negative long term change in our major customer relationships, we would communicate this on a timely basis. We have always said, the spending could be cyclical from year-to-year and vary from customer to customer, but as a whole, demand is greater than supply.

Since our IPO in October 2007 we have been seeing the big four banks as a growth would grow by 20% CAGR over 5 years, and over the last 3 years the CAGR for our big four customers has been 38%. At the beginning of the year we guided 20% year-on-year growth for our big four customers, and after two quarters we see it will be around 30%. I am highly confident, over the next 2 years, our CAGR for our big four customers will be at least 20% we committed to in October of 2007.

Let me give you some customer highlights during this quarter. I am particularly pleased with the strong demand from our fastest growing big four bank customer which will continue over the next number of years.

We are making increasingly strong progress at several leading national joint stock banks and big city banks. We continue to increase our product penetration by cross-selling more solutions and our branding.

(inaudible) opportunity to provide solutions to smaller banks who are beginning to upgrade or replace their IT systems and investing in new applications, a number of years ago I thought their budgets were too small but this is no longer the case, opening another potential growth opportunity for us.

This quarter we have signed our first core insurance contract with a reinsurance company in China. We believe the overall core insurance upgrade demand represents important market opportunities. With the successful integration of Sysnet, I believe we are well positioned to benefit from the trend of higher ad spending in the insurance industry.

We continue to see potential from the Enterprise segment. In the second quarter, we launched our financial company core business system and won our first contract from a leading agro business enterprise in China.

With respect to our solution offerings, we will continue to execute our product strategy of delivering the highest quality service, to maintain our leadership position and focusing on improving our standardized solutions.

Business intelligence continues to be a strong demand across all customer segments, with revenue growing by 45.9% in the first half of the year.

I am particularly pleased, with the progress in our CRM solution. I believe CRM will become our next killer application after BI. Since 2006, we have been working with our largest customer and developing their retail banking CRM system. Most recently, the customer has decided to also work with Longtop in corporate banking CRM, where Longtop will replace the current service provider, and will provide future development and ongoing services.

Our strong experience and stability in CRM allows us to take over the system smoothly. We've also seen increasingly strong demand for our CRM solutions from other bank, insurance and the security customers.

On the core banking sides, Giantstone's core banking implementation is progressing well and the scope of their work is expanding. We have also started to increase sales and the consulting work for potential customers.

In the second quarter, we have one bid to provide call center solutions to a leading security company in China.

Since our last call we did in August, we haven't closed any new activation. We have a number of relatively smaller acquisitions in the pipeline with the focus on the securities industry.

As we move into the back-half of our fiscal year, there is no question about demand. We need to continue to focus our day-to-day execution, especially as Q3 2011 will be the busiest quarter for our delivery team, which at September 30, comprised of 3,061 engineers, up from 2,614 at June 30. We are also working hard, our cash collection to keep Longtop's DSO as its lowest level in our industry.

With that, I would like to turn the call over to Derek our CFO, and look forward to the questions during the Q&A.

Derek Palaschuk

Good day everyone, and thank you for joining our financial review. We are pleased to report a strong Q2, where we exceeded our software development revenue guidance by $2.8 million of which only 400,000 was due to acquisitions that closed in the quarter and were not included in previous guidance.

Our adjusted operating income of $28.7 million was $1.3 million more than guidance with a year-on-year growth rate of 38.4%. And adjusted EPS of $0.44 was $0.03 per share above our guidance. With regard to order intake and backlog, excluding Giantstone and companies acquired during the quarter, contracts signed during the quarter was a record $78.7 million, a year-on-year increase of 55.5%.

You'll recall that in our Q1 earnings call, we had mention that Q1 order intake was slow, due to the timing of contracts, not due to a slowdown in business, which has been demonstrated by the record huge Q2 contract signings. At September 30, we have software development backlog excluding Giantstone at $59 million, compared to $34 million at June 30 and $46.5 million at September 30, 2009, giving us good visibility on the rest of fiscal 2011.

I would now like to address our operating cash flow and accounts receivable. Our cash flow from operating activities was a healthy $31.6 million during the quarter. Our September 30, 2010 accounts receivable excluding system integration receivables were $74 million, up from $62.5 million at June 30 and $51 million at March 31.

The increase was primary due to receivables from acquired companies and higher business volumes, as DSO of 102 days is in line with last year's full year DSOs of 110 days. Because of the seasonality of our business, I believe, calculating quarterly DSOs can be somewhat deceiving, as the quarterly DSO calculation will be lower in Q2 and Q3, because of the higher revenue and increase significantly in Q4.

You can expect our total receivables to increase further, but the full year 2011 DSOs should be similar to the 2010 DSOs of 110 days. In summary, the trend is there are no significant changes, we have never had a significant bad debt and Longtop's DSOs are well below industry standard in China.

I would like to finish my prepared remarks with more details on our guidance. Due to strong demand for Longtop's services, our full year software development revenue guidance has increased from the $208 million we gave you last quarter, to $216.6 million which is organic year-on-year growth of 38%, up from the 30% we gave you at the beginning of the year.

Of the $8.6 million increase, $3.6 million is due to winning more projects than we guided for, of which approximately, $1 million will come in Q4. Approximately $2.5 million of the increase in guidance is due to the appreciation of the renminbi in Q3 and Q4. We are now assuming an average rate of 6.7 as compared to 6.82 earlier in the year. Approximately $2.5 million of the increase in guidance is for newly acquired companies, not included in last quarter's guidance.

Looking specifically at Q3, 2011, we increased software development revenue guidance by $2.5 million to $67.4 million yielding year-on-year growth of 45.3% of which 35% is organic growth. Half of the $2.5 million increase is due to the appreciation of the renminbi and half is due to newly acquired companies.

Similar to the last quarter, we less the guidance for the existing Q3 business unchanged, because of the magnitude of our Q3 revenue guidance. For Q4 2011, we increased software development revenue guidance by $3.3 million to $54.9 million for year-on-year growth of 48.1%, of which 36% is organic. The increase in guidance can be split approximately equally among an improvement in our organic business, renminbi appreciation and newly acquired companies.

We understand investors look unfavorably on companies whose margins are declining. And we have been saying, since our IPO, that slow and stable margin decline will be a trend with Longtop, as our focus is on driving both market share increases and adjusted operating income growth, as opposed to maintaining an adjusted operating margin in excess of 45%.

We are achieving this growth as our full-year adjusted operating income guidance is now $110 million, a robust year-on-year increase of 39.3%. Revised guidance is $3.5 million more, than the guidance we've provided last quarter. And $6.5 million more, than the guidance we gave at the beginning of the year.

Substantially, all of the increase and adjusted operating income is due to our organic business, except for $1 million due to the appreciation of the renminbi. Excluding the impact of the renminbi appreciation, we left Q3 2011 operating income guidance unchanged. And we increased Q4 2011 operating income guidance by healthy $1 million. Our Q3 adjusted operating income guidance is now $38 million and Q4 is $24.2 million.

There have been no significant changes in our overall spending or our adjusted operating margin structure. Excluding the impact, if any new acquisitions or potential organic investments and new businesses, such as the securities industry. We expect fiscal 2011 adjusted growth margins of 63% and adjusted operating margins of 45%, as compared to our earlier guidance of 66% for adjusted gross margins and 46% for adjusted operating margins.

The 300 basis points reduction in gross margin guidance is due to a combination of newly acquired companies that have significantly lower gross margins at Longtop, as well as stepping up investments in our solution offerings, as we expand our product line. We would like to emphasize that these investments in the gross margin lines payoff, as we now will expect fiscal 2011 research and development and sales and marketing expenses to be lower, so that our adjusted operating expenses as a percentage of sales for the full year should be around 18% of revenues as compared to the 20% guidance we provided at the beginning of the year.

The net difference of the lower gross margin and lower operating expenses is a 100 basis point decline in adjusted operating margin guidance to 45% for the full year, which can be largely attributed to new acquired companies.

We expect to get the 2010 calendar year tax department approval for being a key software company, which allows us to refund one-third of our main operating subsidiary's income taxes in January, 2011 rather than December, 2010. As a result, the benefit will be reported in Q4 2011, rather than Q3 2011, so we decreased our adjusted EPS guidance by $0.9 per share in Q3 2011 and increased Q4 2011 by the same amount.

That concludes my presentation, and will now ask to moderator to open the floor for questions.

Question-and-Answer Session


(Operator Instructions) We have a question from Joe Vafi from Jefferies & Company.

Joe Vafi - Jefferies & Company

I was wondering, maybe we could just thank you for the commentary on your largest customer, and maybe it looked like the big four banks did pretty well in the quarter. Maybe we could get a little bit more color on how the largest customer did indeed during the quarter.

And then just as a quick follow up, thanks for the outlook that that company would grow or that customer would grow in double digits for next year, but you know double digits could be 10% or 40%. Is there any way to get a better view and tighten that double digit range for next year? Thank you.

Weizhou Lian

So we already talked about our biggest customer, and no negative changes and only positive. Maybe I will just answer the second part of your question Joe, about to tighten the growth of our biggest customer.

So what we've always said is that the big four as a group, the CAGR will be at least 20% over the next two years. We basically had a five-year plan when did the IPO. So in terms of specifically narrowing that growth, it definitely wouldn't be 40%. It was 50% last year, but this to be well above 10%.

Where most of our growth will come from in the big four customers was with our second biggest customer. And there is a tremendous amount of opportunities in this customer, and very recently he has been in very close discussions with a lot other senior IT people, and this customer was recently IPO'd has plans to invest a lot and upgrade and replace a lot of parts of their core banking system.

So their plan is that basically they will allocate most of their internal resources to focus on the core banking upgrade. And what that means is they are basically telling us to prepare, because they want to give us a lot more of the auxiliary systems or non-core banking systems. And we've actually seen this type of upgrade cycle before in one of our other biggest customers, and this is why they are so interested in working with us, as basically they would like us to replicate for them what we've done with our biggest customer. And that includes consulting projects, selling them a lot of our products, and we'll have a very deep penetration with this bank.

So he sees a tremendous amount of opportunity over the next number of years because he believes this core banking upgrade will go on for at least two to three years. With respect to our third biggest big four customer, their core banking implementation has been going quite well, and as a result they have started investing more in the non-core banking systems, which we are doing. So this account is also growing quicker than we expected.

We've actually added four customers to the big four list. There is one bank in China which is the fifth largest bank in China, and there is some discussion whether it's really a big four bank or it's a joint stock bank, and because it so much figures on the joint stock bank and the size of its IT budget, it can almost be considered a big four bank.

So we've also made a lot of improvement this year in our penetration and our revenue with this account. And we also understand, based on recent discussions that this bank is also planning an upgrade of its core banking system which will also drive a lot of potential for us.

And then lastly, he is very happy to announce, when he checked his email this morning, he saw that we had formally signed our first contract, albeit a small contract with the largest bank in China. And that means we've been formally through all the contracting process through the various departments and that's approximately two months.


Next we have a question from Karl Keirstead of BMO Capital Markets.

Karl Keirstead - BMO Capital Markets

I have got a question about the $79 million in contracts signed during the quarter. A good number, Derek, but I have noticed that it didn't motivate you to increase your revenue guidance for the December quarter in terms of the existing business, and its looks like the flow-through to the March quarter is relatively modest. So it makes me want to ask how, when contracts signed ramp during the quarter like you had in September, how does that flow through in the next couple of quarters, or perhaps it is and there is some kind of offset. Maybe you could add a little color.

Derek Palaschuk

So what we've been saying about our Q3 guidance, even we said that last quarter is that it's really a big amount. Software revenue we're guiding for $67.4 million in revenues. And the demand is definitely there, but for us, it's the year end to get in all the contracts, issue all the invoices, so that's why we're being somewhat conservative, and we always are conservative on our guidance. So you shouldn't think about there being any indications of slowdown in demand because we always said, we look at the full year. And we started the full year saying that we are going to grow organically at 30%. Now we are way over that. We are basically at 37%, 38% for the full year.

We did increase our Q4 guidance, and this is basically organically the second time, that's two quarters in a row we've increased that as well, added $1 million to our Q4 operating income.

Karl Keirstead - BMO Capital Markets

And then Derek, has the tone of new contract signings that you experienced in the September quarter, has that so far stayed at roughly the same pace though the current quarter? I know we're only halfway through?

Derek Palaschuk

So normally what we would expect is, on a full year basis we would expect our contract signings, our bookings to basically follow our organic revenue growth, and I think that's what will basically happen for the full year. So that's why, when we look at the bookings of the first and second quarter together, it's a little bit over 40% year-on-year growth. If you compare the bookings in the first six months to the first six months the last year, the bookings are up a little bit over 40%. That will follow our revenue growth.


Next we have a question from Donald Lu from Goldman Sachs.

Donald Lu - Goldman Sachs

I am asking whether the recent tightening of Chinese banks has any impact to the industry per (inaudible) experience?

Weizhou Lian

As there there's no negative impact to the IT spending, we do see that the Central bank of China has increased the reserve ratio and also the quota for the new loans, but in terms of the impact of the IT spending, we have been always saying that there is no impact. And the reason for that is, number one, the absolute IT spending in China is only a very small percentage of your asset and earnings. And in some cases, we do believe that the potential tightening may help our business, because historically, all the Chinese banks were relying on the net interest income, and with this potential tightening, they are trying to diversify their product portfolio, invest in intermediate services and some new services which also require IT support, and we are well positioned in that area.

Donald Lu - Goldman Sachs

The new contract signed with ICBC, whether it's a software contract or is a system (indication) contract, and what's the implementation for the new contract?

Lian Weizhou

Firstly, it is a software contract albeit the contract signed is somewhere around RMB 1 million, it's for a CRM-like system. And they have basically 12 things and we are now working on one of them. For this contract we are working with a couple of departments of the customer including their purchase center, business department and also department.

One good thing is that after signing this contract we get into ICBC's top vendor list. And in the future we don't have to go through such a long complicated process, that we will reduce at the contract signing time, and also fix the price with the customer powered software development services.

We also have a couple of consulting contracts in our pipeline and we also with respect the new contract opened the door for our future opportunities with ICBC.

Derek Palaschuk

And I'll just add one thing Charles, that Lian Wiezhou mentioned is, part of the reason some of the consulting contracts aren't moving as quick as they could is because we have refused to reduce our price and the customer is trying to push our price down. But we have so much demand every time that we can adjust our price.


We have a question from Glenn Greene from Oppenheimer.

Glenn Greene - Oppenheimer

Just the first question going back to the strong contracting activity wonder if you could just give us a little bit of color across service categories, channel core banking, business intelligence, and maybe is the contracting activity increasingly skewed toward other banks? I know it seems strong across the board, but a little bit of color across bank segmentation?

Derek Palaschuk

So if we look at basically our solutions categories is, on an organic basis, core banking is currently growing the quickest. If you look at the first six months, it grew by a little over 100%, 106%. Most of that is because of Giantstone, but basically if you look at the other categories in our solution offering then you will see a similar trend to what's been happening in the past. And it's also important to look at the six month period. So for example BI gives up almost 46% for the first six months. And BI will continue to be the fastest growing solutions category for us, and part of that is because the early stage of development, also, there is a lot of different industries including the securities industry. We've also picked up some customers in that area.

And then management software and solution is the second-fastest, which somewhere around 40% growth for the first six months. And again the contracts, the bookings are basically falling, there's similar trend. And then Channel is growing a little bit slower at around 33%. But you also heard Lian Weizhou say in his script that in the medium term he believes that your CRM solutions will be our next killer application. So the contract process is following basically along the lines what you have seen in the first six months.

If you look at it by customer base is, your big four as we've said now and we said at the beginning of the year that they grow by at least 20%. And now we are saying that they're going to grow by at least 30%. And again the contract process is following that. The other banks will grow organically, at the beginning of the year we said around 30%, now basically somewhere close to 40% for other banks. And then insurance will grow somewhere around 40% this year organically, and then Enterprises over 100%. And again, the contract process is following that growth trend.

Glenn Greene - Oppenheimer

And then just one quick follow-up. I know it's early, but any way to give us sort of a prospect, pipeline or outlook for ITBC in fiscal '12?

Derek Palaschuk

What we've always said is that it's not going to be a meaningful customer. It will never be anywhere as large as our other big three customers including, Lian Wiezhou also mentioned the largest joint stock bank. But strategically it's important that it shows that Longtop has really advanced in the ability of us to provide quality solutions.


Next we have a question from Joseph Foresi from Janney Montgomery Scott Company.

Joseph Foresi - Janney Montgomery Scott

Just quickly on the margin side of things. Maybe if you can just give us any long term projections or outlook? I know you've talked about margin deterioration, but maybe you can just comment on what you are expecting on an annual basis going forward?

Derek Palaschuk

So what we've been saying for the last number of years is that we would expect organic revenue growth of 25%, and we would expect EPS growth of 20%. So if you model that out over the next couple of years, you'll maybe see a little bit over 100 basis points decline in our operating margin.

It's difficult for us to really go past two years because our business is growing so quickly. It's changing, but the key thing that we try and tell investors, if our margins are coming down faster, means that our operating income is growing quicker and we're entering other verticals. For example, we want to get into the securities industry.

So that's how we look at our margin profile.

Joseph Foresi - Janney Montgomery Scott

And then just a two-part quick one if I could sneak it in. Maybe you could break down backlog as to where you are seeing the pick-up with services? And just what RMB you're using for guidance going forward, what RMB rate?

Derek Palaschuk

So, in terms of the backlog, I guess I went though that with Glenn. It's very close to the overall growth and percentage. But we don't expect any significant changes in our customer growth or customer solution percentage offering for the rest of the years, that means especially backlog is in line with what we're seeing for the first six months. And then for the Renminbi is, we're using 6.7 for Q3 and Q4.


Next we have a question from Tim Fox from Deutsche Bank.

Tim Fox - Deutsche Bank

My question was around the visibility in the business. I know the big four banks have a very deliberate and formal process that you guys are involved with, as I said, IT budgets each year. And I was just wondering if you could comment, as you are growing the other bank category and the joint stock and big city banks, is there a similar level of co-operation between you and the banks relative to looking forward from a process perspective and setting IT budgets?

And how has that changed, if at all, your level of visibility heading into the following fiscal year?

Weizhou Lian

As you can tell, when Wei Zhao gets talking about sales, he gets very excited. So you picked the right topic for him. The visibility on the Big Four is very good, because of the sales process. And with respect to joint stock banks, he would also say the visibility is very good. If their management has a lot of ideas, they have a lot of business demands, they're definitely not reducing any of their spending or project, and they also have decent sized IT budgets of a few RMB100 million.

So the way we do it, we definitely have sales people covering all of the joint stock banks. And there's a very active communication similar to the Big Four Banks. And because of its active communication, combined with our very wide product offering and our cross selling ability, we have, what he would say, is very good visibility with the joint stock banks.

The larger city banks, they have smaller IT budgets. They're not as formal, basically in their IT planning process and decisions. And whereas the joint stock banks basically require a lot of different solutions. What we're finding with the city banks is basically their focusing their investment in four different areas. One is data related, one is core banking, risk management, as well as their loan management systems. So basically if we can focus in on these systems, then we can also have pretty good visibility. Though their efficiency is not as high and it can take longer to get projects, but this is also a newer customer base for us.

The smaller banks, we're just also starting to push down into the smaller banks, their spending is significantly lower. And basically what we use is, is we use a geographic method to cover them, in terms of organizing the sales team by its regional sales team. So we can have dedicated sales people to every customer, like we do to our other customer categories.

But what we also do is we have monthly reviews with the sales people, we have a monthly bid review that he reviews. And also every two weeks as a project review and we use the historical results on communications with our customers to also monitor the sales activity.


Next we have a question from Chris Schulter with William Blair & Company.

Chris Schulter - William Blair & Company

There you have $363 million in net cash on the balance sheet. I know you've wanted to do a sizeable acquisition in the securities industry for a while now. And it sounds like you're more focused on building those capabilities organically at this point. Maybe you can just give us an update on your capital allocation strategy.

Derek Palaschuk

So we haven't given up on the securities acquisition. And you're right, we are definitely investing organically. But we still are talking to a number of different companies. There's nothing substantially, a very large, lets call that $100 million acquisition in our pipeline. And that was part of reason we did the follow-on, but we weren't basically successful in that acquisition discussion.

Also our operating cash flow is very healthy, so it was over $31 million this quarter. And we will continue to generate a lot of cash from operations. So what we'll do currently is continue to basically use or keep our cash and continue to discuss acquisitions in the securities industry. And then I think you'll always see Wei Zhao is very conservative and he basically wants $150 million in cash as a buffer. So I think you'll always see us with a significant cash balance.

Chris Schulter - William Blair & Company

And just one other quick one, on the Giantstone business, it sounds like things are tracking for you well there. Maybe you can just give us a quick update on how you're tracking relative to the fiscal '11 earn-out target? And then any initial thoughts you have on how much work you expect from Giantstone in fiscal '12?

Derek Palaschuk

What we'll do is, Chris, have Wei Zhao give you an update on their business, and then I can talk about the earn-out amount.

Wei Zhao

Generally, Giantstone is moving to a very good direction. In terms of the Minsheng project, their current plan is to have the system running in changing branch, in parallel of their old system. And they don't think the system will be up and running, and changing to the call starting will last for about two months, and that's for their retail banking part. If the system is working well, then the Minsheng Bank will push the system to all the national branches.

But that means 50% of the system implementation is successful. And then for the corporate banking part, Giantstone had finished 90% of the implementation. And to make sure the retail banking to go live successfully, Minsheng Bank basically paused the development for corporate banking. After the launch of the retail banking part, we expect that Minsheng Bank will restart the corporate banking system.

So generally, the implementation with Minsheng is moving very smoothly and we are going to hire 95 new graduates for Giantstone that demonstrates their strong demand.

At the same time, they've started to provide consulting services for some of our big city commercial banks. And one of the Giantstone bank customer to provide consulting services as well as studying some of the module for the development for Minsheng Bank. We've started to see the call starting opportunities for Giantstone solutions.

Derek Palaschuk

And Chris, in terms of both the financial projects, let me review what we gave you early in the year. We basically said that Giantstone would contribute $15 million in revenue and about $3.75 million of net income. Now, we increased that to around basically $16 million last quarter and a little bit over $4 million in net income. And for the first six months, Giantstone contributed about $9 million of revenue and $2.5 million of net income.

So you can see they are well on their way to meeting their, basically the projections that we given in the street. And we also did mention that the projections we gave the street are lower that their earn-out target. And then the biggest thing with their earn-out targets will be giving in the contracts that they need, and if they get those, which they will get the contracts, than they should be able to meet their earn-out target.

The Giantstone is a very good example of how we've made investments in the gross margin lines. So all of the people that are working on the Giantstone for barking project, all of those costs are booked in cost of revenue, but as a lot of those people are doing R&D, and you can see we are also actually staffing up Giantstone with more people than the current core banking project. We are staffing it with more people than we need, provide a training platform for our next banking implementation, and then some of those people already basically doing pre-sales and consulting work.


Next we have a question from Jon Maietta with Needham & Company.

Jon Maietta - Needham & Company

For a couple of quarters we've talked about an effort around the securities industry. And I was just wondering, Derek, from an investment standpoint, is the level of investment that we are at today, around that effort sort of steady state or could that potentially ramp up a little bit in fiscal '12?

Derek Palaschuk

Entering the securities market is a very important strategic initiative for us. And I would say that we are just in the very early stages of the investment cycle and that includes both trying to acquire companies and also looking at some smaller companies now, as well as our own organic investments. But as we've said before is we would make up those investments through our existing banking and insurance business.

Jon Maietta - Needham & Company

And then just a follow up to that in terms of how you would address that opportunity. Is that primarily software and tools that would help with a front office effort in the securities industry or is that more back office and middle office-type related work?

Weizhou Lian

In terms of products and solutions, targeted areas, it’s definitely not the core trading system, and the reasons for that is there is very strong local competitors in this area. And it would also take a significant amount of development to our security system.

So basically we are focusing on the front end and the back end. In terms of the front end, we would call that a call center, e-solution, channel integration and CRM. And then on the back end, we would basically call that the data integration. And what's happening is that a number of the securities companies are starting to build out their data warehouses and try and centralize their data and do more data mining and understand their customer and other behavior better.

And this is important because basically the datacenters can tie into the CRM, into the call center, and we can basically help build a platform for them. The other thing that is positive for us is that the local competitors who are very, very strong in the trading system, aren't strong in the data integration part, so that is one of our key competitive advantages.

We are also looking at operational risk management systems, as well as systems to help them with managing their processes and other systems. And Charles, you want to add anything to that?

Charles Zhang

Yes, maybe a little bit. So we are trying to develop the process management system, help them to streamline their brokerage research and (brokerages). Another thing is that we try to use the CRM to connect from that application such as cost center e-solution and the back office datacenter. That way we'll be more focused on auxiliary systems instead of your cost (sheeting) systems.

Charles Zhang

So with that we would like close the floor for Q&A. And thanks again for joining us. And if you have any further questions, please feel free to contact myself or our CEO and CFO. Thank you for joining us again.


Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for attending.

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