Ninetowns Misses on Higher Operational Costs; Guides Below Consensus; Stock Flat in After-Hours Trading (NINE 3Q05 Earnings)

| About: Ninetowns Internet (NINE)

Ninetowns (ticker: NINE) reported Q3 2005 earnings results that missed consensus estimates by $0.01. Key stats from the quarter:

Q3 Results
(all percentage changes and comparisons are year on year, unless stated otherwise, assumes RMB 8.0920 : US $ 1)

  • Total net revenue rose 15.0% to $7.3 million. Consensus estimate of $7.9 million.
  • Gross margin was 93.0% vs 98.1%.
  • Total operating expenses rose 87.0% to $3.1 million.
  • Selling expenses rose 111.4% to $1.0 million.
  • General and administrative expenses rose 69.6% to $1.9 million.
  • Research and development expenses rose 12.7% to $266,000.
  • Operating income fell 19.7% to $3.6 million.
  • Operating margin was 50.0% vs 71.7%.
  • Net income fell 3.7% to $4.1 million.
  • Net margin was 56.3% vs 67.3%.
  • Diluted EPS of $0.11 vs $0.15, and vs consensus estimate of $0.12.
Balance Sheet
(as of September 30, 2005, assumes RMB 8.0920 : US $ 1)
  • Cash and equivalents of $112.5 million.
Q4 Guidance
(assumes RMB 8.0920 : US $ 1)
  • Total net revenue of $6.4 - $7.2 million. Consensus estimate of $9.1 million.
  • Net income of $2.0 - $2.9 million.
  • Diluted EPS of $0.05 - $0.08. Consensus estimate of $0.08.

FY 2005 Guidance
(assumes RMB 8.0920 : US $ 1)

  • Total net revenue of $26.5 - $30.5 million. Consensus estimate of $31.74 million.
  • Operating margin of 52% - 58%.
  • Diluted earnings per share / ADS of $0.44 - $0.50. Consensus estimate of $0.50.
CEO Shuang Wang

"As expected, this was a transition quarter for us. I am proud of our employees and their ability to embrace the changes Ninetowns has been undergoing to jointly achieve success, especially on the sale of software maintenance renewal contracts. By working as a cohesive team, we were able to deliver tailored versions of iDeclare and iProcess that meet the State Administration for Quality Supervision and Inspection and Quarantine of the People's Republic of China's (the "PRC Inspections Administration") specifications, and to maintain our majority market share of close to 90%. We are working together with the PRC Inspections Administration in order to ensure a successful rollout of this software. We believe that by making basic versions of iDeclare and iProcess available, it will help accelerate the adoption of e-filings. More importantly, since we are providing the basic versions, we believe Ninetowns is in a strong position to provide ancillary services and support and product upgrades."

CFO Tommy Fork:

"We achieved the high-end of our revenue guidance but implementation costs were higher than expected, which resulted in our lower net income. We expect operating costs to remain high in the fourth quarter as we finalize the rollout of tailored versions of our software to the PRC Inspections Administration's specifications. In addition, we generated US$1.5 million in cash from operations in the third quarter, which helped to further strengthen our balance sheet. We ended the third quarter with US$112.5 million in cash and cash equivalents without any debt."

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