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Global Sources Ltd. (NASDAQ:GSOL)

Q4 2006 Earnings Call

March 6, 2007 8:00 am ET

Executives

Moriah Shilton - Investor Relations

Merle Hinrichs - Chairman and Chief Executive Officer

Eddie Heng - Chief Financial Officer

Analysts

Jason Brueschke - Citigroup

John Ma - Roth Capital

Dick Wei - JP Morgan

Craig Swanson - Devon Capital

James Lee - W.R. Hambrecht

Peter Siris - Guerilla Capital Management

TRANSCRIPT SPONSOR
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Operator

Welcome to the Global Sources fourth quarter and year-end 2006 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Moriah Shilton. Please go ahead, Madam.

Moriah Shilton

Thank you, Judy, and I would like to thank everyone again for joining us today for Global Sources' fourth quarter and full year 2006 earnings conference call. With us on the call today are Merle Hinrichs, Chairman and Chief Executive Officer; and Eddie Heng, Chief Financial Officer. If anyone has not yet received the press release, it is now available at the company’s website at www.globalsources.com. If you would like to be added to our distribution list or would like additional information about Global Sources, you may call Lippert/Heilshorn & Associates at 415-433-3777.

There will be a telephone replay of this call available until March 8th. The dialing instructions are included in the press release. The replay will also be available on the investor relations page of the company’s website for at least 30 days.

Before I turn the call over to management, let me remind you this call will contain forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. Global Sources does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

During the call today, management will be using GAAP and non-GAAP figures. Management defines non-GAAP net income as net income excluding the gain on the sale of shares of a subsidiary and interest thereon, and the impairment charge on the international investment. Non-GAAP net income per diluted common share is defined as non-GAAP net income divided by the weighted average of diluted common shares outstanding. Management believes non-GAAP net income and non-GAAP net income per diluted common share are useful measures. Tables reconciling GAAP and non-GAAP measures are in the press release.

I would now like to turn the call over to Mr. Hinrichs. Please go ahead, sir.

TRANSCRIPT SPONSOR

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Merle Hinrichs

Thank you, and thank you for joining our call today. Last year at this time, I shared with you our expectations for 2006. It was to be a year of continuing investment, with focus on successful execution of our China sourcing fairs at our new venue in Hong Kong. It was also expected to be a year of substantial revenue growth. I am delighted to report we met and exceeded these expectations. Financially, we performed very well.

We ended 2006 with a very strong fourth quarter. Total revenue was $52.3 million, up 62% over the prior year’s period. This drove full year 2006 total revenue to $156.5 million. That was up 39% compared to last year.

Our major growth driver for both the quarter and the year was exhibitions revenue, which almost tripled in 2006, fueled by our China sourcing fairs. Also key contributors to our growth were our online and print businesses, which demonstrated solid year-over-year growth, up 20% and 13% respectively. For the year, China grew 50% compared to last year and accounted for 53% of our revenue.

2006 earnings per diluted share were $0.66. 2006 non-GAAP earnings per diluted share were $0.49. This compares to $0.32 for the full year of 2005.

Operationally, we strengthened all three revenue lines. Our China sourcing fairs were very successful at our new venue at the Asia World Expo. At the recent October China sourcing fairs, we sold more than 7,000 booths in total. For the full year of 2006, we sold nearly 13,000 booths for our China sourcing fairs. That was up approximately 3,500 in 2005. This is a tremendous achievement in the history of the trade show industry.

Key attendees at the fashion accessories events included Carrefour, Gap, Coles Myer, Sears, Target, Tesco, and key attendees at the electronics and components events were BenQ, Best Buy, Black & Decker, Canon, Carrefour, Phillips, Fujitsu, K-Mart, LG Electronics, Samsung, Sanyo, Salisbury’s, Target, Staples and NEC, to name a few. And finally, key attendees at the gifts and home products events included BenQ International, Sears, OfficeMAX, QVC, Staples, Coles Myer, Carrefour, El Corte Anglaise, Tesco, Proctor & Gamble, Dunlop, Laurelle and Amway.

We also continue to drive revenue growth in the online and print components of our business through new product launches, marketing and cross-selling. I am pleased that we were once again able to share our success with our shareholders through the bonus share distribution announced yesterday. The Board of Directors declared a one-for-ten bonus share issue on Global Sources' outstanding common shares.

Before I turn the call to Eddie Heng, our Chief Financial Officer, for his review of the financials and discussions of our first quarter and first-half of 2007 guidance, I wanted to share with you some recognition we received for investor relations. I feel these are important as I have a personal commitment to high standards of corporate governance, disclosure and transparency, as do our senior management and Board of Directors.

In 2006 and in 2007, we received awards from IR Global Rankings for our disclosure procedures and our investor relations website. In 2006, we were also informed by NASDAQ we had met the requirements for the NASDAQ Global Select market, a new segment of its market with the highest listing requirements.

I would now like to turn the call over to Eddie, after which I will provide an update on our growth strategy. Eddie.

Eddie Heng

Thank you, Mr. Hinrichs. Now I would like to review the fourth quarter 2006 compared to the fourth quarter of 2005. Revenue was $52.3 million compared to $32.3 million. The main growth driver was our exhibitions, which grew 241% compared to the prior year’s quarter.

Exhibition revenue in the fourth quarter of 2006 was $21.6 million compared to $6.3 million in the fourth quarter of 2005. Online services revenues was $16.9 million compared to $13.4 million. Print services revenue was $13.4 million compared to $12.1 million. China sales, which comprised 58% of total revenue, were $30.1 million compared to $17.8 million.

Operating expenses were $44.9 million compared to $28.5 million, due mainly to the large increase in exhibition revenues. Operating expenses were lower than guidance due to cost control and savings of approximately $1 million.

During the fourth quarter, we recorded a gain of $7.9 million on the sale of 199 shares of our subsidiary, eMedia Asia Limited and interest income thereon, and an impairment charge of approximately $743,000 on our HC International investment.

GAAP net income was $15.3 million, or $0.36 per diluted share. Non-GAAP net income was $8.1 million, or $0.19 per diluted share. This compared to fourth quarter of 2005 net income GAAP and non-GAAP of $4.5 million, or $0.11 per diluted share.

Now, for our full-year 2006 review, as compared to last year. Revenue was $156.5 million, compared to $112.2 million. Revenue from online services were $64.4 million compared to $53.8 million. Print services revenue was $48.7 million compared to $43.2 million. Exhibition revenue was $42.1 million compared to $14.3 million. Revenue from China represented approximately 53% of total revenue, compared to 50% in 2005.

Operating expenses were $138.4 million, compared to $99.3 million, due mainly to costs associated with increases in exhibition revenue.

GAAP net income for the year was $27.9 million, or $0.56 per diluted share. Non-GAAP net income for the year was $20.7 million, or $0.49 per diluted share. This compares to 2005 net income, GAAP and non-GAAP, of $13.4 million or $0.32 per diluted share.

Now, on to our balance sheet review. Special securities on 31st December, 2006 totaled $155.8 million. Short- and long-term interest income and customer prepayment, which include online, print and trade show revenue, and which are all collected in cash, was $63.8 million at December 31, 2006, compared to $53 million at December 31, 2005. The majority of the 20% increase reflects growth in our trade show business.

As a rule, interest income and customer prepayments will be relatively larger at the end of the first and third quarters, just prior to revenue recognition in the subsequent quarters due to our lapsed time [inaudible].

Total assets were $220.9 million, compared to $171.7 million a year ago. Also, we do not have any long-term debt or bad debt.

Day sales outstanding, or DSO, were 17 days, compared to 20 days at year-end 2005, and shareholders’ equity reached $133.7 million.

Now, I will review our financial guidance for the first quarter and first-half of 2007. I would like to remind how our trade shows are expected to impact our revenue and profitability. Revenue from trade shows is recognized in the month in which the event occurred, which creates significant seasonal revenue fluctuations. Except for our IRC China show, which is held in the first quarter, all of our larger trade shows are currently held in the second and fourth quarter of each year.

For the first quarter of 2007, we anticipate the following: revenue is expected to be in the range of $33.5 million to $34.5 million, representing growth of between 12% and 15%, as compared to the same quarter last year. Earnings per diluted share, both GAAP and non-GAAP, are expected to be between $0.11 and $0.13. This range represents growth between 10% and 30%, compared to $0.10 in the first quarter 2006.

For the first-half of 2007, we anticipate the following: revenue is expected to be in the range of $83.5 million to $86.5 million, representing growth of between 11% and 15%, as compared to $34.9 million in the first-half of 2006. Earnings per diluted share, both GAAP and non-GAAP, are expected to be in the range of $0.22 to $0.26. This range represents growth of between 10% and 30% as compared to $0.20 in the first-half of 2006.

In the first-half of the year, we plan to launch additional online marketplaces and associated magazines. In addition, our new China Sourcing Fair in Shanghai is scheduled for December 2007. As such, we expect organic growth for the second-half of 2007 to be greater than the first-half of 2007.

Now, I would like to turn the call back to Mr. Hinrichs.

Merle Hinrichs

Thank you, Eddie. I would now like to provide you with an updated overview of how we plan to grow over the next several years. Global Sources' growth strategy has four elements; increased market penetration, new product development, expansion into China’s domestic B2B market, and acquisitions or alliances.

With regard to the first element, increased market penetration, we have a large number of prospective customers and our market penetration plans include growing our China sourcing fairs, cross-selling to clients and achieving continued strong growth in China. We will seek to increase revenue by increasing both the number of booths we sell and the average revenue per booth. Exhibition revenue grew from 13% of total revenue in 2005 to 27% in 2006.

Another particular opportunity is the large number of new trade show only customers who are primary prospects to use our print and online services.

We also expect revenue from China to continue to grow faster than our overall revenue. In 2006, our China revenue grew by 50%.

The second element of our growth strategy is new product development. Our product development plans include increasingly specialized online market places, magazines and tradeshows, as well as entirely new media formats. For example, we recently announced online marketplaces and magazines titled Gifts and Premiums and Home Products. Another example is the scheduled spring 2007 launch of a new monthly magazine titled Security Products, to accompany a pre-existing online vertical.

Regarding trade shows, we plan to add a new China Sourcing Fair in Dubai in June, 2007, and a new China Sourcing Fair, underwear and swimwear, in the spring and fall 2007 in Hong Kong.

We are introducing new media formats in existing verticals. Recent initiatives include application websites for engineers, e-newsletters and webcasts.

Another important initiatives is developing a direct online sales component via Global Sources Direct. We are getting traction in our Global Sources Direct efforts. There are over 1,000 products now available on that site.

The third element of our growth strategy is expansion into China’s domestic B2B market. A primary objective is to become increasingly involved in serving China’s domestic B2B markets, which is an attractive growth market and a synergistic component to our existing businesses that serve China’s export and import sectors.

We intend to launch new online, print and/or trade shows in existing or related industry sectors. A focus will be on building a leadership presence and market sectors where we have scale, either with content, advertisers and/or buyers and users. These initiatives will also leverage our brands, content skills and community and build on our existing successes with Chinese language media. This includes the leadership position in magazines, websites and trade shows for China’s electronics industry.

We have been in this sector since 1985, have a substantial market share, a high web traffic, partnerships with two of the leading technology publishers in the U.S.A., and the leading semiconductor show. Our domestic China presence also includes Chief Executive China, the leading management magazine site for China.

We already have an established community of more than 1 million readers in China. This demographically rich database is comprised primarily of audited magazine subscribers and registered online users, and our Chinese language websites now attract more than 12 million page views every month.

We may also extend some of our existing English language verticals into the China domestic market. For example, we plan to extend our China Sourcing Fair franchise with the launch of two domestic shows in Shanghai in 2007, titled Fashion Accessories and Baby and Children’s Products. Effective 2008, we intend to hold each of these shows twice a year in Shanghai, once in June and once in December.

The fourth element of our growth strategy is acquisition and/or alliances. We will seek complementary businesses, technologies or products that we believe will help us maintain and achieve market leading positions.

As of December 31, 2006, we had an approximate 13% ownership position in HC International and an option deadline of June 20, 2007 to buy an additional 35% and trigger the requirement for a general offer.

In summary, it is our strategy to serve markets with online, print and trade show media for all segments of our businesses, greater China to the world, the world to greater China, and increasingly domestic China. We cross-sell our various media offerings to our customers, providing integrated marketing campaigns that address all stages of the buying process, from discovery, awareness, and inquiries right through to placing an order.

We are the only company that provides our served markets with all of the elements needed for an integrated marketing campaign, which we believe is a powerful differentiator. Our strong market position also serves as a platform to launch new products and services and to extend our existing products and services on a cost-effective basis. We will be constantly striving to upgrade and develop our portfolio of websites, magazines, exhibitions and services to expand the market and win the share.

We believe success with our growth strategy will enable Global Sources to achieve our financial objectives and deliver superior shareholder value.

I would now like to turn the call over to the operator for the question-and-answer session. Operator.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Jason Brueschke with Citigroup.

Jason Brueschke - Citigroup

I probably have three or four questions. I will probably just -- maybe I will just give them to you up-front.

Could you give us some color on how the April China sourcing fairs are shaping up, as well as the June Dubai show? That would be the first question.

The second question would be, we saw that there was some leverage in your exhibitions showing up in the fourth quarter, specifically your trade show revenues grew faster than, for example, your event product costs. Could you maybe give us some comments on how you think that is likely to extend into 2007, such that given that you’ve got four new trade shows, or China sourcing fairs, I should say, that you are planning on rolling out?

Ultimately -- this is the third one and I will get back in the queue, but could you give us an update on Global Sources Direct, and comment on whether the Tom online/e-bay joint venture, do you anticipate that to have any impact, positive or negative, on your efforts with Global Sources Direct? Thanks.

Merle Hinrichs

Color on our April CSF, we are making progress. We are making good progress on the show -- the shows, I should say. This is the second year and certainly the second show. We have, of course, we have the show in the second quarter and the fourth quarter. I think you can look at the advanced payment schedules and what have you to see the progress that we are making. We would like to of course add more shows as we go along in both these periods.

Dubai, as you will recall, we had about a 500 booth show. That was the maximum we could sell. We are let’s say about 80% to that level now and we have two or three months yet to go. We are quite happy with that show, given that it is our first and given that it is our first outside of the Asian area. We think the Middle East represents a huge market for the kind of products that our manufacturers can make available to that market.

In reference to your second question regarding leveraging, I think what you meant here by leveraging was leveraging for the other media. Is that correct, Jason?

Jason Brueschke - Citigroup

No, really just the leverage in the costs of the model, where you eventually will grow your earnings faster in the second-half of the life of a trade show business than you will during the -- we’ll call it the phase when you are trying to establish the show and ramp it up and the efficient start-up costs.

Merle Hinrichs

Well, we are very much still in the early stages, if you wish. The shows are new to Hong Kong, new to a venue. The venue is new. We were delighted with the successes that we have had with 2006 and I think that you will find that the 2007 will be certainly an improvement on 2006. The venue, of course, there were needless to say transportation and all sorts of issues -- all of that has been taken care of, ironed out and so I think that you will find that in 2007, and I certainly hope that you will be attending, that you will find more exhibitors and you will certainly find more attendees to all of the shows that we will be running in April.

I think that April, I think that the Fall shows will even show greater growth than the Spring shows will, and we will have a bit more time to prepare for those shows. The venue itself, as you know from living in Hong Kong, has really proven to be a fantastic location, a fantastic venue, built for exhibitions like we are holding and convenient for all.

Regarding Global Sources Direct, which was your third question, it is making good progress. We are within our budget and we have about, as I mentioned in my prepared remarks, we have over 1,000 products that are up. The e-bay and Tom online initiative really will have no impact on the e-bay relationship that we have, as the majority of the market that we address through GSD would be for the power-sellers, either in the U.S. or Europe. So we do not expect that to really impact the Global Sources Direct/e-bay relationship.

Operator

Your next question comes from John Ma with Roth Capital.

John Ma - Roth Capital

I have a couple of questions -- well, I have three questions. Number one, you have certain competitors entering into the enterprise software application area. I wonder what is your take on that and if that will be an area of your focus.

Number two, at the end of last year, we had a Taiwan earthquake and it disrupted the Internet access. I wondered if that affected your online marketplace business.

The third question is AWE, when it goes to the Phase II expansion, increasing capacity and would that be to secure more space in that area?

Merle Hinrichs

Let me take the last one first. AWE, yes, there is the expansion Phase II opportunity. It will certainly extend our opportunities in selling more booths and in running more shows. We have a very good working relationship with the management at AWE and we feel that just affords us an even larger upside for export-related shows in Hong Kong.

Regarding the Taiwan or the earthquake in Taiwan, well, I think that it impacted everyone that depends upon the net. We were able to most certainly survive it and it did not have a huge impact on the activities of the company.

Enterprise software, maybe I could get a little more clarification, John?

John Ma - Roth Capital

Let’s say like AdSoft entered the basically CRM and ERP online, like what Alibaba just recently launched.

Merle Hinrichs

This does not compete in our space. This is a -- enterprise software is software with which client-specific, which either clients download for processing their inquiries, et cetera, or processing the business manufacturing or what have you. We do not participate in enterprise software, so we do not regard this as competing in our space at all.

John Ma - Roth Capital

Also, can you give us -- I know it is still in the very early stage, but can you talk about the China Sourcing Fair in Shanghai; is it going to be at the new Shanghai exhibition center? It is a pretty big venue. Would you give us some idea how big your December show will be?

Merle Hinrichs

We hope it is going to be massive. The first one is the domestic show and we are using that facility for domestic shows moving forward. We feel that particular area for that particular time of the year is ideal. We feel that Shanghai is an ideal place for domestic shows, domestic product and distribution, as we have had previous experience in Shanghai.

We will launch the show and we will be evaluating what we will be able to do in 2008 in other product breakouts, and of course we will be looking at how we support those particular verticals with the other online or publishing services that we can. We are most certainly going to expand in the domestic area in the products and in the verticals that we have and we have knowledge of and we already have a lot of traction on, and a large customer base.

Operator

Your next question comes from Dick Wei with JP Morgan.

Dick Wei - JP Morgan

I have two questions. The first question is I am looking at your online and other media services, the revenue growth was round 16%, 17% for the whole 2006. This is really strong growth compared with probably a single digit or a flattish growth rate over the past couple of years. I wonder what was the main reasons for the accelerated growth in 2006? Is that mainly from the company operation side or if you can comment on the market growth rate, that would be good. Thanks.

Merle Hinrichs

Yes, we did have an excellent 2006. We look for a continuation of a strong 2007 in the online and print area. I would say that one is of course, all the cross-selling that we do across all of our media. Two is the increased sophistication in the China export market, where they are looking to upgrade and up-sell the products. They are looking for a little bit more sophistication and services in our export marketing services, and this is really where Global Sources excels. We have a, as I mentioned earlier in my prepared comments, we have a very high-grade group of readers, buyers who are anxiously looking for manufacturers that can serve their needs, meet their compliance requirements, and Global Sources is very active in trying to complement their particular needs.

So I think that we are indeed finding a large increase in our traffic, in the quality of leads, and we are seeing a result of that in our online and print sales. I am quite confident that this is going to continue for years in the future.

Eddie Heng

I would like to add too, that during the year, we also launched various new verticals and also that helped to support our growth on print and online services.

Dick Wei - JP Morgan

My second question is you mentioned earlier that the resources sold around 15,000 booths in 2006. I wonder what this -- right now, your estimated potential inventory for 2007. If you can give like a range over five years, that would be great.

Merle Hinrichs

We have, as we have mentioned before, we have around the 4,000 booth count per show and per event. We do not break out the revenue for exhibitions per show. We do give some numbers on, once we are through it, sold and sold that particular show. We will indeed do better and we have given guidance on that for this year, quite substantially, in fact.

Operator

(Operator Instructions)

Your next question comes from Craig Swanson with Devon Capital.

Craig Swanson - Devon Capital

Maybe I missed this, but can you explain why you are only giving guidance for the first-half of 2007?

Merle Hinrichs

Two things, two primary things; first of all, we have this 8C option and decision to make in June and this could have significant impact on our second-half. We have -- it is impossible for us to try to incorporate that in our guidance at this juncture and second is that the China Sourcing Fairs in April, we’re not complete and we will have a much better visibility on them for the second-half when we do our second quarter guidance franchisees the second-half of 2007.

Operator

Your next question comes from James Lee with WR Hambrecht.

James Lee - W.R. Hambrecht

I was wondering if you guys could talk about the seasonality in 1Q a little bit, maybe specifically if you guys can comment on the trend of the individual business segments, from online to offline and exhibition. Thank you.

Merle Hinrichs

The seasonality of this, James, is that we have our trade shows, the primary China sourcing trade shows, occur in the second and fourth quarter of the year. The revenue recognition takes place at that time. We accrue the revenue that is collected for those shows up to that show, just before the recognition. So you will see that accrual on our accounts and that gives the seasonality of the shows.

We certainly have, I mean traditionally, there is a larger revenue in the second-half of the year than the first of the year. That is primarily due because there is a very heavy buying season for consumer products generally for the year following, so there are suppliers that will do more promotional activity in the second-half than they would normally do in the first-half. That’s really already been built into our financial model.

James Lee - W.R. Hambrecht

Summarily, I assume most of the decline that we see from 4Q to 1Q is mainly due to revenue recognition of your exhibition to be held the second quarter. Do you also see maybe a slight sequential decline in your online and offline business? I’m just curious.

Merle Hinrichs

What I think you need to do, James, is to do a comparative not from Q4 to the first quarter, but to look at the first quarter on the first quarter of the previous year.

James Lee - W.R. Hambrecht

Okay, and a quick follow-up here; do you see any impact to your business due to Chinese New Year being later, maybe a couple of weeks later than usual in the first quarter of 2007? I’m just curious.

Merle Hinrichs

There is always an impact with Chinese New Year, because as you know, it is a big holiday in China. Yes, and of course, it impacts the amount of time that we have to sell our services. We struggle with it every year because it is a critical period. I do not think that this year is going to be necessarily any worse than last year was. Often, as you know, the time that the Chinese New Year falls varies quite substantially, so that can have an impact too. It has been factored in.

Operator

Your next question comes from Peter Siris with Guerilla Capital.

Peter Siris - Guerilla Capital Management

I have just one thing that confuses me about HC International. I apologize if somebody asked this, because I had to jump off just for a second, you took an asset impairment charge for your investment in HC in the fourth quarter, is that correct?

Eddie Heng

Yes, that is correct.

Peter Siris - Guerilla Capital Management

So that says that you wrote down the investment in HC by some small amount. Can you explain the asset impairment charge and how that might impact your decision that you have to make by the end of June?

Merle Hinrichs

Eddie, why don’t you take how it was calculated and I will take the latter part of the question.

Eddie Heng

Thank you. Peter, basically what we do, we fair value our acquisition that we bought from IDG. We fair value that purchase price to the market value on the date of the time section, which was on June 25th.

[Multiple Speakers]

Peter Siris - Guerilla Capital Management

So it is basically mark-to-market, Eddie, right? At the end of the quarter, you are marking it based on where the stock price is?

Eddie Heng

Yes.

Peter Siris - Guerilla Capital Management

Okay, so in essence, you are not writing -- you really are not technically writing it up or down. It is the stock price is either going up or down by a little.

Eddie Heng

Yes, during the date of the contract, the market price was slightly lower than what we paid for, so we fair value for the market price on that day.

Merle Hinrichs

Peter, regarding the second part of the question, this does not really impact what we do. We are waiting for the audited accounts from HC. They are due sometime in the middle of this month. Then we are going to be spending a lot more time evaluating how we should move forward with HC.

Peter Siris - Guerilla Capital Management

I also want to make a comment, because a couple of guys before were asking about quarterly earnings and progressions and stuff like that, and since I have owned this stock for a long time, whoever is looking at quarterly earnings, don’t look at it that way. You have to look at the prepaids on the balance sheet. That is my only comment. It is the only way I figured out how to understand this company. You have a lot of prepaids from the next coming shows, the earnings go up, right?

Merle Hinrichs

Correct, and we have made reference to that several times, Peter, but thank you for the clarification.

Operator

(Operator Instructions)

Your next question is a follow-up on the line of Jason Brueschke with Citigroup.

Jason Brueschke - Citigroup

The follow-up involves your strategy to expand the trade shows domestically into Shanghai and your possible acquisition of a larger stake in maybe ultimately all of HC International. Could you maybe just discuss in general terms what your domestic strategy is? It looks like you are setting yourselves up to have some very good cross-selling opportunities on the domestic front between what HC has in your trade show business, similar to what you guys are enjoying on the export, or the international focus between your comprehensive solution that you provide. Thanks.

Merle Hinrichs

Well, we are very excited about the China retail and domestic market. The Chinese consumers of course are spending more every year. They need to be serviced. They need product. Distributors are going to meet that requirement and we hope to be able to help meet the information requirements on sourcing those products, simply put.

We are going to be providing these shows and we are going to be providing product online and we will be providing Chinese publications which will suit the distributor and retailer requirements in China, not dissimilar to what we already are doing with our global Global Sources products in a different way. It’s a different market and there are different distribution requirements but we will be certainly morphing into that market and that market’s needs.

We already have the manufacturers. The manufacturers that are manufacturing product for and manufacturing to standards that are frequently higher than the standards for the products which are distributed in China, but distributing those products internationally. They are a right market for us to extend this service to them to market domestically.

We have seen that in other areas and as you already know, we have had many years of experience of doing Chinese sites, Chinese publications and of course, Chinese trade shows. For the titles we have done that, we have done it with the electronic engineering title, the electronic components title. We have an electronic design title, and then we have the largest management publication in China call Chief Executive China. All in all, there are over 1 million readers and we feel that we can leverage that community of users very effectively as well.

So the trade shows, the print and the online we feel will provide our customers in China the same kind of integrated marketing opportunity that it provides them overseas, and so this is just an extension on the franchise.

Does that help?

Jason Brueschke - Citigroup

That helps a lot.

Merle Hinrichs

Okay, let me just also mention Shanghai. Shanghai, we will use Shanghai as a site for the domestic shows. Of course, we will use other areas and locations depending upon requirements, but Shanghai is an excellent location for domestic shows.

Jason Brueschke - Citigroup

If I could just maybe ask a follow-up on this, and I am sure you have seen this, but anecdotally a number of domestic manufacturers that we talk to and people that source in China have been saying over the last year, 18 months that for some of the suppliers, it is becoming more difficult for them to get capacity from their manufacturers because those manufacturers are increasingly using their capacity to meet domestic demand, whereas say maybe three or four years ago, a larger or maybe all of that capacity was really domestically export-focused. Could you, from your vantage point, given all of your customers, could you comment on whether what I am seeing is maybe noise or is that really a trend that is happening? And then maybe comment on some of the natural leverage that you might have by virtue of the fact that a lot of these customers that have hereto before been export-focused, as they turn domestically, they are already in many cases your customers, and whether it was HC or doing it organically, you are in a pretty good position to take your expertise and knowledge about the China market and simply help extend that to the domestic markets. Thanks.

Merle Hinrichs

We do have a demand factor and you have a supply factor. On capacity, it is of course just looking at the capacity situation. Capacity varies across every industry and with every product, so it is a generalization to just simply say the capacity is lacking.

There is another motivator on the part of a lot of manufacturers though, that a domestic sale is a closer to market sale, a quicker to market sale. It also does not necessarily have the same level of standards or the same level of quality.

On the other hand, quite frequently there are credit problems and credit issues, so manufacturers are certainly looking at and Chinese manufacturers are certainly looking at the opportunities in the domestic market, and it varies by industry and it varies by product.

We have a large cross-section of products with our consumer product publications and we are looking at which of these particular product segments that we can develop domestically and which of these segments have the capacity, the interest levels, and the opportunities.

In publishing, fragmentation of market is very important to us, but also have the number of companies that have capacity to do so is important on the supply side. On the demand side, of course, we have to have that fragmentation and we have to have the demand for it. We definitely have the demand, the increasing demand in China. We feel that we are very much on the ground floor, that we have a sales organization that today is going out daily, meeting with these manufacturers, satisfying their export marketing requirements and at the same time in the future can be providing a domestic sale, domestic marketing opportunity for the same manufacturers.

So in summary, we feel that we are at the right place with regard to the market on both the demand and the supply side and we feel that we have got an infrastructure, a sales infrastructure that can satisfy that and we have the systems behind it, proven systems in the language and within the economy.

Jason Brueschke - Citigroup

Since this is a follow-up, I will take the liberty of asking one more question. My belief is that you guys have a pretty high filter when you are looking at potential customers on the manufacturing side, because part of the value that you add to your buyer community is sort of the case in that the people that you actually engage with on the manufacturing side are large enough, can engage in export trade, have the quality and the manufacturing capacity, the credit, et cetera. My belief is that you probably, as you are out selling, you probably encounter a lot of companies that in the past may not have met that high quality standard for export grade, but may be very well-suited to engage in the domestic market. The question is to the extent that is true, are there likely to be some very rapid, immediate we’ll call them let’s say customer wins and/or ability for you to grow the market on the domestic side very rapidly, by virtue of the fact that you have been in the export-focused business for so long?

Merle Hinrichs

We believe so, Jason. I think you made an excellent point and thank you. I think one of the significant differentiators that we have provided our buyers today is that every single company and every single product, or I should say single company, these companies we have met every single one of them.

We know that they are who they claim to be. We know that the products that they supply are products indeed that they are either manufacturing or distributing, and we have discussed with them in substantial detail what their unique selling points may be for the external market, or for the international market.

We have done that because we have known from years of doing work in this business that we cannot afford to disappoint the buyers when they visit the site or visit our trade shows or use our publications with suppliers that do not have the basic knowledge or are not able to export either the product or the product at the right quality or the product in the right capacity, the right volume.

This is, as I said, an extremely important differentiator and has differentiated Global Sources services from every other competitor in the marketplace.

We also do this and we will also plan on doing this for the domestic market, because as you know, there are sites that just allow people to post anything to the sites and there is no real verification or validation of that content. And the content is only as valuable as the effort that is put into it to make sure that it is accurate. So we will be doing that -- we have done that and continue to do that with our international services and we will be doing that for the domestic side of it as well.

We feel that the community of users, community of suppliers that we already have are extremely well-qualified to be extending their product and their product offerings to the domestic market, if they are not already.

Operator

At this time, there are no further questions. I will now turn the call back over to Mr. Hinrichs for any closing remarks.

Merle Hinrichs

Thank you. I would just like to comment that I will be addressing the JP Morgan Global Internet Conference here in New York this coming Monday and certainly welcome any of you to meet with you at that time, if you would like to participate.

Thank you again and we look forward to the next quarter’s call.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Source: Global Sources Q4 2006 Earnings Call Transcript

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