Ninetowns slashes FY05 guidance as Chinese gov't orders company to develop competing products that could be distributed for free (NINE 2Q05 earnings results)

| About: Ninetowns Internet (NINE)

Ninetowns (ticker: NINE) reported Q2 2005 earnings results
that were in-line with consensus EPS estimates. Key stats from the quarter:

Q2 Results:
(all percentage changes and comparisons are year on year, unless stated otherwise)

  • Net revenue rose 38.4% to $7.8 million vs consensus estimate (1 analyst) of $7.0 million.
  • Gross margin was 90.5% vs 98.7%.
  • Selling expenses rose 16.1% to $636,000.
  • G&A expenses rose 43.9% to $1.4 million.
  • R&D expenses rose 210.5% to $267,000.
  • Operating income rose 22.3% to $4.7 million.
  • Operating margin was 60.8% vs 68.8%.
  • Net income rose 47.1% to $5.1 million.
  • EPS of $0.14 vs $0.13, and vs consensus estimate (2 analysts) of $0.14.

Balance Sheet

  • Cash and equivalents of $109.3 million as of June 30, 2005.

Q3 Guidance

  • Total net revenue of $7.1 - $7.4 million.
  • Net income of $3.8 - $4.3 million.
  • Diluted earnings per share of $0.11 - $0.12.

FY 2005 Guidance

  • Total net revenue of $26.5 - $30.5 million, vs previous guidance of $31.4 - $36.2 million.
  • Operating margin of 52.0% - 58.0% vs previous guidance of 65.0% - 70.0%.
  • Diluted earnings per share/ADS of $0.44 - $0.50 vs previous guidance of $0.60 - $0.70.

From Press Release

....On July 29, 2005, the Company received an invitation as part of an open bid process from the State Administration for Quality Supervision and Inspection and Quarantine of the People's Republic of China (the ''PRC Inspections Administration'') to submit a proposal for the development of software products that have basic functionalities similar to those of the Company's existing software products - iDeclare and iProcess. As a result, the Company believes that software products with functionalities similar to those of iDeclare and iProcess, developed at the request of the PRC Inspections Administration by the Company or another software developer, will likely enter the marketplace in the near future and be competitive with iDeclare and iProcess. Further, the Company believes the PRC Inspections Administration may distribute the software products developed in response to the bid process free-of-charge to end users.

....The lower estimate of the Company's earnings for full year 2005 is primarily the result of the expected impact on the Company's earnings related to the development of such competitive software products at the request of the PRC Inspections Administration. As previously disclosed, the Company currently generates substantially all of its total net revenues from either PRC government agencies or in connection with PRC government agency filings, and a change in the Company's working relationship with certain PRC government agencies (in particular the PRC Inspections Administration), whether as a result of a change in laws, policies, standards, rules, regulations or otherwise, may result in the loss of all or a substantial portion of the Company's total net revenues. The Company expects that the introduction of one or more competing software products and the availability of such software products free-of-charge to users will require the Company to shift its operating model significantly towards generating software service revenues as opposed to generating software sales revenues from sales of the Company's iDeclare and iProcess software products.

NINE chart.


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