Interactive Q&A: Steve Zhang, CEO of AsiaInfo Holdings (ASIA)

This is the latest in Seeking Alpha's series of interviews with leading companies of interest to our readers. Ours are interviews with a twist: the respondent has agreed to answer questions and respond to comments not from a single interviewer, but rather from our community of readers and contributors.

This interactive Q&A is with Steve Zhang, CEO of AsiaInfo Holdings, Inc. (ASIA), a leading provider of high-quality telecom software solutions and security products and services to some of China's largest enterprises as well as many small and medium sized companies in China.

(See the latest ASIA earnings call transcripts and corporate web site for more background on the company.)

AsiaInfo has sponsored this interview (for sponsor information contact us here), which works like this:

• Steve briefly introduces himself and the issues he's focused on below.
• Readers and contributors can immediately start to post questions and remarks using the comment box below (Note: you need to sign up for free registration and be logged in to do so).
• Seeking Alpha editors will not filter or edit the questions and comments from readers, except to delete profane or hostile language.
• Steve will respond to the questions and remarks beginning Monday, July 30th. Readers can track his answers and respond to them during that period.

Yahoo Finance readers may join the Q&A by following this link.

Over to Steve:

• • •

My name is Steve Zhang and I'm Chief Executive Officer of AsiaInfo (ASIA).

Thanks to Seeking Alpha for creating the opportunity to open this dialogue.

First, I’ll give you a short background on AsiaInfo (ASIA).

AsiaInfo began operations in the United States in 1993. Originally organized as a Delaware corporation, the Company moved major operations to China in 1995 and played a significant role in the construction of the national backbones and provincial access networks for all of China's major national telecom carriers. Today, AsiaInfo has two major business lines: the telecom software solutions business and our IT security products and services business.

Telecom Software Solutions

We are a leading provider of telecom software solutions such as billing, customer relationship management systems, business operation support systems, and business intelligence solutions in China. We also offer a number of service applications such as e-mail, spam control, anti-virus and short messaging gateway. Our four main customers are China’s major national telecom carriers:

China Mobile (CHL) – the largest mobile operator in the world, with 316 million subscribers
China Unicom (CHU) – China’s second main mobile operator, with 147 million subscribers
China Netcom (CN) and China Telecom (CHA) – China’s two fixed line operators, with 339 million subscribers

IT Security Products and Services

Our second business is the provision of integrated security products that help enterprises to secure Internet access and communication channels.

I look forward to further discussing AsiaInfo’s role in the telecom and security markets, the competitive landscape, and our strategies for growth and expansion.

Please use the comment box below to post your questions.

Thank you,

--Steve

This Q&A represents the opinion of AsiaInfo Holdings, Inc. management and is not intended to be a forecast of future events, a guarantee of future results nor investment advice. Except for the statements of historical fact, information presented herein may constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. AsiaInfo Holdings, Inc. assumes no obligation to publicly update or revise any forward-looking statements provided in this Q&A, or to correct any erroneous information presented in any investor questions herein. A further list and description of these risks, uncertainties, and other matters can be found in AsiaInfo’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, and in the periodic reports on Forms 10-Q and 8-K filed with the United States Securities and Exchange Commission and available at www.sec.gov.

Comments

[mhousealum]

Hello Steve,

I am interested in what your projected growth rate will be for the second half of '07 and for full year '08? Also, do you feel the current stock price accurately reflects the growth of the company?

Thanks.

[SteveZhang, CEOof AsiaInfoHoldings(ASIA)]

Thanks for your question. While we don’t give annual net revenue or bottom line projections, I can give your our net revenue guidance for the third quarter and also give you some color on our historical growth rate.

We expect third quarter 2007 net revenue to be in the range of US$27 million to US$29 million, representing an increase of 15% to 23% year-over-year, and net income from continuing operations per basic share to be in the range of US$0.07 to US$0.08, representing an increase of 40% to 60% year-over-year.

Looking back at the past few years, our total net revenues from 2003-2006 grew at a compound annual growth rate of over 15%. Within this, our revenue for software solutions, which is our core growth driver, grew at a compound annual growth rate of approximately 32% during the same period.

As a matter of company policy, we don’t comment on the performance of our stock price.

- Steve

[David Zhang]

Steve,
Thanks for conducting this interview.
Can you elaborate on your recently announced acquisition? What was your thinking on this? Is it consistent with your overall acquisition strategy?
Thanks,
Josh

[SteveZhang, CEOof AsiaInfoHoldings(ASIA)]

Thanks for your question, Josh.

Our general acquisition strategy is to acquire small to medium sized enterprises in the telecom sector that provide similar products and services to AsiaInfo and have contracts with our target customers. These types of businesses can be easily integrated and allow us to expand our market share and customer base quickly. Over the past two years, we have had a lot of success with this strategy and have made four small acquisitions that have all developed into profitable additions to our company.

On July 19, 2007 we acquired certain assets of a telecom software company in Shenzhen that had existing telecom business support system (BSS) contracts with three provincial subsidiaries of China Unicom in Zhejiang, Hunan and Yunnan. This will significantly increase our share of the China Unicom BSS market from 5 provinces to 8 provinces and gives us the opportunity to generate ongoing revenues through delivery of new telecom solutions, system upgrades and system maintenance. This acquisition is in line with our Company’s acquisition strategy.

- Steve

[Joe Mama]

I would think that the inevitable Chinese telecom restructuring/consolid... will negativey affect ASIA being that all of the big four Chinese telecoms are your customers. Is that true? If so, what are you doing to prepare for that reality?

Joe

[SteveZhang, CEOof AsiaInfoHoldings(ASIA)]

Thanks Joe for your question.

The Chinese telecom industry has actually undergone restructuring activities in the past. Based on our experience, while restructuring may have a temporary impact on our revenues in the short-term, we believe that it will have a positive effect on the demand for AsiaInfo’s leading telecom software solutions in the medium to long term. Currently, the bulk of our telecom revenues are generated from contracts with the two mobile operators China Mobile and China Unicom. We believe that restructuring and the issuing of 3G licenses should result in at least one more operator being granted a mobile license and increase the competition for new and existing mobile subscribers. This should lead to greater spending on BSS system upgrades, and business intelligence and CRM solutions that help operators to identify key customer segments and differentiate their services. As a leading provider of these solutions, we are confident that AsiaInfo is well positioned to benefit from this growth.

To prepare for potential industry restructuring, we are strengthening our already strong relationships with the mobile and fixed-line players. Back in the 1990s AsiaInfo played an integral role in the development of national network backbones and provincial network infrastructure for all of China’s major telecom operators. Currently, we provide billing, BSS, business intelligence and CRM solutions for China Unicom and China Mobile, and we also provide broadband billing and network infrastructure services for the leading fixed-line operators. We are also working with fixed-line operators to help them prepare for potential mobile licenses. For example, we recently announced a contract with China Telecom to deploy an integrated account inquiry system in Zhejiang province, our first time selling this solution to a fixed-line operator in China. We are also working with China Telecom in developing their future prepaid billing systems.

- Steve

[Ralph F]

Steve,

Thanks for doing this interview. I have a few questions:

1. What do you think are your biggest growth opportunities in the next 12 months, in terms of products, customers and markets?

2. Which Chinese carrier do you think is best positioned in the market?

3. If you were a US investor in Chinese stocks, based on what you are seeing in China, which stocks would you buy for your own personal account?

Thanks!

[SteveZhang, CEOof AsiaInfoHoldings(ASIA)]

Thanks for your questions, Ralph. Let me address all three.

1. We believe there are four key areas that will drive AsiaInfo’s growth in the next 12 months – 3G licenses, business intelligence solutions, wireless value added services (VAS), and the rapid growth of mobile and broadband subscribers.

While we can’t say for sure when 3G licenses will be issued, we are confident that 3G will be a catalyst for growth. The official launch of 3G should lead to industry-wide BOSS upgrades and development to support new services and a growing user base. It should also lead to greater competition and greater demand for telecom software solutions as we believe that at least one fixed-line operator will be granted a mobile license. Recently, we were selected by China mobile as the exclusive BOSS provider for their extended TD-SCDMA trials in four provinces and three municipalities.

A second area of growth is in the business intelligence (BI) market. We believe that demand for BI solutions is the fastest growing segment in China’s telecom market as operators seek to learn more about their user base so they can develop targeted marketing plans and differentiate their services. Currently, we have approximately 50% market share in the BI market.

Third, the growing demand for wireless VAS such as push-mail, mobile music, and other data services will require telecom system upgrades to support the new services. For example, in January this year we announced a contract with China Unicom to develop their push-mail service.

Finally, the rapid growth of broadband and mobile subscribers in China will generate ongoing demand for broadband billing systems and upgrades to telecom systems. There were 59 million broadband subscribers at the end of June 2006, and the number has been growing at a compound annual growth rate of 32% for the past 5 years.

2. By number of subscribers and network infrastructure, China Mobile is definitely the market leader. In fact, China Mobile is the largest mobile operator in the world with over 316 million subscribers. China Mobile is a key customer of ours and their collaboration with AsiaInfo has helped them to make rapid progress in improving their and operational efficiency, service innovation, and marketing.

While China Mobile is the market leader, there are still many opportunities in the market for the other operators to gain market share and competitiveness. We believe software systems and IT infrastructure is the key weapon for them to catch up.

3. I’m afraid I can’t comment on this.

[Ralph F]

Thank you Steve!

[Lisa]

Hi Steve, thanks for answering our questions.

- On your enterprise security products, how do you plan to reach enterprises in China in terms of distrubution and reach?

- Can you tell us a bit about Internet access for enterprises in China: how easy is it to obtain, what is pricing like, and how reliable is it?

[SteveZhang, CEOof AsiaInfoHoldings(ASIA)]

Thanks for your questions, Lisa.

1. AsiaInfo has a nationwide sales network that includes distribution and direct sales teams. We also leverage our telecom sales force and cross-sell security solutions to our existing telecom customer base.

2. As for internet access, in China’s major cities China Netcom and China Telecom provide a range of internet services to their enterprise users that are comparable to the services available in the US. These services include ADSL, Ethernet and leased line. The pricing varies depending on the type of connection and package, and generally internet access is very reliable.

- Steve

[Hiren Doshi]

Hi Steve,

With increasing competition between the mobile operators and fixed line carriers in the 3G era, do you see operators demanding more exclusive arrangement with their software solution providers to safeguard their trade secrets ? If so, will it have adverse impact on Asia Info's ability to continue doing business with all 4 major players in the future ?

- Hiren

[SteveZhang, CEOof AsiaInfoHoldings(ASIA)]

Thanks for your question, Hiren.

In the telecom industry, it is very common for a telecom software solutions company to provide billing and other telecom solutions to competing customers. This is the case both in China and in all other mature markets around the world, so we don’t see this as a problem. In fact, we are confident that the 3G era and the increased competition that arises because of it will have a positive effect on AsiaInfo’s business development.


One of AsiaInfo’s key values is our ability to provide customized solutions that suit the specific requirements of our customers. For example, we currently provide billing solutions to nine China Mobile subsidiaries in different provinces, and while each solution is based on our core technology, the final solution for each customer is always designed to meet local requirements. As a result, each solution is often very different from the others.


Telecom operators come to AsiaInfo because we have the strongest technology and extensive expertise in understanding customer needs and end-user behavior to create a tailored solution. As a leading provider of telecom software solutions we are looking forward to the 3G era and the new opportunities that it will bring.

- Steve

[SeekingAlphaEditors]

This Seeking Alpha interactive Q & A is now closed for further questions. Thank you very much to Steve Zhang, and to all of our readers who participated.

~ The Seeking Alpha Team