Interactive Q&A: Adam Yan, CEO of e-Future Information Technology (EFUT)

This is the latest in the Seeking Alpha series of interviews with leading companies of interest to our readers. These, however, are interviews with a twist: the executive 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 Adam Yan, Chairman & Chief Executive Officer, e-Future Information Technology (NASDAQ: EFUT), a leading provider of integrated software and professional services for manufacturers, distributors, wholesalers, logistics companies and retailers in China's supply chain market. This interview works like this:

• Adam 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.
• Adam will respond to the questions and remarks beginning Wednesday, September 5th. Readers can track his answers and respond to them during that period, with the resulting dialogue remaining on the site.

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

Over to Adam:

Greetings and welcome, this is Adam Yan, CEO and Chairman of e-Future Information Technology. I would like to thank Seeking Alpha for providing this great opportunity to interact directly with current and potential shareholders and answer your questions.

Prior to founding e-Future, I was the General Manager and Chief Accounting software designer of the Banda Information Industry Center of the Haikou Financial Bureau in China. In my role as chief accounting software designer, I was responsible for developing system architecture for accounting policy of Chinese government.

I founded e-Future in 1997 to fill the growing need for integrated software and professional service solutions for players in China’s supply chain market.

On October 31, 2006, we successfully completed an IPO on NASDAQ capital market at $6 per share as the first Chinese supply chain management software company. We are also very pleased to have robust organic growth in 2006 as well as the first half of 2007. We believe that our rapidly growing brand recognition, understanding of the marketplace, and focus on providing the best service and client experience have allowed us to strengthen our competitive position in China's front-end supply chain management market.

e-Future is a leading provider of integrated software and professional services for manufacturers, distributors, wholesalers, logistics companies and retailers in China's supply chain market.

• We provide software products and services to over 800 clients, including over 500 retailers and over 200 distributors as well as Fortune 500 companies that do business in China.
• We have been selected to provide retail software and services for Procter & Gamble, Johnson & Johnson, Kimberly-Clark, Ford Motors, B&Q China, GUCCI China, Mickey's Space (Disney) stores, SOGO, Belle, Haier, CRC Wanjia, Suning, and Wangfujing among others.
• We are the top IBM premier business partner in Asia & Pacific as well as the VAR partner of SAP, ORACLE, Microsoft, Samsung and Motorola-Symbol.
• We have over 600 employees in 31 provinces of China with over 90 salespersons and 250 consultants and service professionals, who have an average of 5 years of industry experience, and over 260 programmers for research and development and software customization.

We are confident that we will have a successful FY 2007 by solidifying our core business, developing new business opportunities through our SaaS model, exploring further our B2B expansion plans, and seeking additional strategic industrial acquisitions. We expect to achieve at least 59% growth to $10 million of revenues for the full year 2007.

I'm happy to discuss a range of topics with Seeking Alpha readers, including:

• E-Future’s leading position as the front-end supply chain management software and service provider in China, especially in retail and the FMCG (Fast Moving Consumer Goods) markets
• The rapidly growing retail market in China and the factors driving the huge demand for e-Future’s products and services
• e-Future’s broad roster of clients, markets and premier partnerships
• Our 1st half 2007 results (you can find our transcript here) as well as our business outlook for FY 2007
• e-Future’s ongoing acquisition strategy
• The Company’s B2B platform expansion plans and other growth strategies

Please leave your questions by using the comment box below.

Thank you!

-- Adam

This Q&A represents the opinion of e-Future Information Technology 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 within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Such factors include general economic and business conditions, the ability to fund operations, the ability to forge partnerships and other factors over which e-Future Information Technology has little or no control. e-Future Information Technology 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.

Comments

[Aaron Singer]

Hi Adam,

I was wondering if you could give some details about e-Future's plans to acquire Crownhead Holdings.

How does Crownhead's services compliment your existing portfolio of services? Is there any overlap in customers? what is your strategy for integrating Crownhead into e-Future?

Thank you.

[Adam Yan]

These are very good questions, thank you, Aaron. The acquisition of Crownhead and its subsidiary Royalstone is a significant industrial consolidation in Chinese supply chain management sector. We will acquire Crownhead and Royalstone for an aggregate of $7.69 million in cash and $2.82 million in e-Future ordinary shares contingent upon Crownhead meeting certain earnings targets during the 17 month period from August 1, 2007 to December 31, 2008.

Crownhead and Royalstone are focused on providing software and service in Southern China and their customers are among China's Top 100 companies, such as China Resources Enterprise Ltd (one of top 4 retailers in China), Lianhua Shanghai (HK980, the largest supermarket group in China), China Petroleum-BP (the largest gas station chain in china), Belle (the largest woman shoes chain store in China) etc. They are occupying sizeable market shares in supermarkets, malls, and convenience stores. Its product line, Myshop, has been recognized for its competitive advantages in the retail industry. This acquisition strengthens our leading position geographically in Southern China and further expands our client base into supermarket sector.

Our integration strategy is to maintain Crownhead and Royalstone’s strong growth over the next half of year and stabilize and enhance their key management team and employees. Accordingly, we will rename our subsidiary, e-Future (Beijing) Tornado Information Technology, Inc. as e- Future Royalstone Information Technology Inc. (e-Future Royalstone), and Mr. Deliang Tong, Chairman and Chief Executive Officer of Crownhead, will be appointed as e-Future Royalstone's president . From next year, we will leverage and consolidate each others R&D teams to further increase the market share both in Northern and Southern China and penetrate more global accounts.

[Vincent]

I am an investor which is holding 4000 shares of EFUT. I bought these shares at the prices about $17.5-$18.15 when the company reported that got a new contract. But the stock price heading down after the news, dropping even more after the 1st half year earnings from $18s to under $12 recently. It seems that investors lost their confidence on EFUT. How can you explain the reasons? Thank you.

I am sorry, my English is not so good for writing in English, hopefully you can understand what I mean.

[Adam Yan]

Again, our commitment is to increase our shareholder’s long-term value. During the first half year, revenue continued to grow strongly in each of our core businesses including software sales and service fees including SaaS income. We continue to expand our client base in the Chinese market. Currently, when accounting for our recent acquisitions, we are now serving more than 800 clients. We are confident that we will have a successful year by solidifying our core business, developing new business opportunities through our SaaS model and exploring additional strategic acquisitions.
In these currently volatile markets, If you’re patient we believe you will benefit from the continued rapid growth of e-Future over the long run.

[Doug Roberts]

I appreciate hearing that sales will be up 59% in 2007, but eps would be even more interesting. I saw that EFUT lost money in the first half of 2007. What is the goal for earnings in 2007?

[Adam Yan]

Doug, although we continue to diversify across new industry sectors, our business has historically reflected the highly seasonal nature of the retailing industry in China. The first half of the year is typically the weakest period and the fourth quarter the strongest period. our Revenue is $2.5million, up 21% over 2006,orders increased 20% versus the prior year period. And the Gross Margin improved to 52%, compared to 47% in the first six months of 2006. Accordingly, the Gross Profit increased to $1.3 million, up 34% from the prior period.

In addition, during the first half of 2007 year, the loss we incurred is related to expenses and amortization from our $10 million private placement in March 2007 as well as strategic acquisitions in the first half of the year.
We don’t give out the guidance on the bottom line, but based upon our robust organic growth, developing innovative business models and selective strategic acquisitions, we are confident on our projection of at least 59% growth to $10 million of revenues for the full year 2007.

[Ralph F]

Hi Adam, many thanks for doing this Q&A with us. From your vantage point, which are the strongest areas of the Chinese economy? If you had to invest in a sector other than your own, which one would it be? And other than your own company, are there any other publicly traded Chinese stocks that you think we should take a look at?

[Adam Yan]

Hi Ralph, for the past twenty years, the Chinese economy has achieved a growth rate averaging nearly 10 percent per year. In overall size, China's economy today ranks as the fourth largest in the world in terms of gross domestic product. I believe there are many industries are very interested for you to take a look including Information and Communication Technologies, Financial Services, Healthcare, Energy, Telecommunication and Environment etc. For the specific company, the China section of Seeking Alpha provides you good information for investment ideas. Thank you.

[RobertCrenshaw]

Adam,

With the recent high profile cases in the US of recalled products from Chinese manufacturers, how is your company insulated from the potential backlash within the Chinese manufacturing sector and do you anticipate a slow-down in your growth (expected at 59% for 2007) as a result?

[Adam Yan]

Dear Robert, Despite all the press reports, U.S. imports of Chinese products have nearly tripled since 2000, according to the Commerce Department. The Sino-U.S trade gap set another monthly record for July despite new revelations about lead-painted toys, tainted pet food and toothpaste, defective tires, and other flawed goods.

China is now making product quality a serious priority. It is introducing its first recall system as well as cracking down on operators with shoddy products.
Many experts expect swift results. Instead of cutting corners, manufacturers can cut costs in other ways such as improved information management systems.

Accordingly, we have recently seen increased demand for our solutions and services particularly in the automotive, general household appliance and consumer goods industries. Therefore, we remain highly confident of our 59% forecast growth rate for FY 2007. Thank you.

[Ichsa]

On July 23, EFUT announce it has been selected to provide retail software outsourcing service for Jade Bird Sihua. On or around then, the share made a huge spike to almost $24 from $15. But since then, it's dropped below $12 where it currently stands.

Any insight as to why the markets seem to have discounted whatever news propped the stock up in the first place? Is there some stuff going on behind the scenes investors should know about?

[Adam Yan]

Dear Ichsa,

What your referring to “going on behind the scenes” is not particular just to E-future – it’s a macro event. I think you have to take a look at the global markets and the current subprime concerns in the US and its implications for international markets. Bourses are likely to remain jittery and volatile until these current concerns are alleviated.

[tech stockinvestor]

Adam, this is a very informative session. Thank you for doing this.

Now that e-Future is listed in the US, I was wondering if you had any plans to update your website and corporate image to appeal members of the US investment community. I don't understand Chinese, but I saw that your Chinese site also looks pretty old fashioned. I was surprised by how basic the English section of e-Future's website looked. Also, the information provided was extremely limited. Investors might be turned off by the image you are presenting on your website.

[Adam Yan]

Thank you for your comments.Actually, since August, we have already put effort on updating our website, the new website should be ready by the end of September.

[tech stockinvestor]

Hi Adam, thank you for the quick response. I didn't see your site before August, so I can't comment on that. I only just discovered you now on Seeking Alpha's homepage. Glad to hear that you are rolling out a new site in the near future.

[NJT]

Hi Adam, I was wondering if you could provide some insight into the current and future challenges of exporting back to Europe and the US, specifically regarding the food retail industry. It would interesting know of any infrastructures in place to support this. Many thanks for input.

[Adam Yan]

That's very timely question as those markets are continuing to develop their existing infrastructures. We are software provider to manufactures and retailers etc across industries, but most of them are focusing on the Chinese market.

[Vincent]

Dear Mr. Yan
Is it possible that I use Chinese to write my question here, Thank you!. By the way, EFUT has a very low float and outstanding shares. I doubt that the stock is being naked shorting by some people, have you or the mangement any protection if the stock is being naked shorted.

[Adam Yan]

Hi, Vincent, EFUT, as well as every other publicly traded issuer, has no protection against unsavory trading and naked shorting of its stock. They do however have recourse. Were the stock to appear on any threshold or failure to deliver lists (per the NASD), the company can investigate the improprieties through the proper channels, find the individual(s) responsible and put a stop to it. By the way, EFUT has over 1.75million float, which is over 60% of 2.63million outstanding. Thanks

[User 47298]

Hi Adam,

I've never heard of your company until this morning when I received my SA email alert and saw your Q&A. This interview is quite informative but I want real meat and potatoes about the competitive environment you face.

Can you explain who your main competitors are and what your competitive advantage is?

Cheers - Yale

[Adam Yan]

Hi, Yale, as I mentioned earlier, the Chinese retail market is still the beginning of transforming from a small-scale, highly fragmented, provincial operating model to a modern, large-scale cross-regional one. For the IT solution, there is no dominant competitor for e-Future. e-Future is Chinese domestic software provider with over 10 years of in depth understanding of manufacturers, distributors and retailers as well as customer behavior. Our front-end solutions, like CRM are more readily adaptable to the highly fragmented market for our clients. Regarding the global key accounts and top 500 retailer client base, we are more collaborate with international software companies SAP, JDA and Oracle etc as partners rather than competing with each other. For instance, SAP is very strong supply chain back-end data base management provider - which is a mature and efficient solution in the western markets. However, in China, they need to work with local front-end solutions providers such as e-Future to serve the retail environment. We have already successfully co-developed customized solutions for several key accounts with them.

For the regional market, our competitors are typically local median-size software firms. For instance, Crownhead and its subsidiary Royalstone are leading providers in Southern China, by our recent acquisition, we can now better serve our clients both in Northern and Southern china. Overall, we are the largest supply chain software provider for the retail and FMCC markets.

[Vincent]

Hi, Adam, as we know, the revenues for 1st half year was $2.5 million, revenues for the 2nd half year will be $7.5 million. It is 3 times more than the 1st half year, I wonder, how much do the total costs to be, in other word, is the balance positive or negative?

[Adam Yan]

Vincent, your revenue assumptions are correct. We are confident on our projection of at least 59% growth to $10 million of revenues for the full year 2007. This is driven by our robust organic growth as I mentioned earlier, the first half of the year is typically the weakest period and the fourth quarter the strongest period. And our recent acquisition of Crownhead and its subsidiary Royalstone in Aug 1,2007will also contribute significant revenue on the next half year of 2007.
Please refer to previous answers above to Doug F. and Sam M. as we have already addressed similar questions to yours in detail above. Thank you.

[volleyballmaniac]

You seem to be amassing a rather large amount of cash. I noticed that in Q4 2006 you received about 5 million dollars through financing.

What are you planning to do with this stockpile of cash? It would seem that you are saving it up for something. I am interested in knowing your intent.

You have very low operating costs, so I can only assume that you plan acquisitions in the near future.

Please inform.

Thanks.

[volleyballmaniac]

Hi Mr. Yan

1. I'm a little concerned with the Insider selling as of late. C Tech holdings recently sold 9 million worth of your stock as a Planned Sale (Source: Etrade). This leaves you with no institutional shareholders (Source: Etrade). Additionally, your COO recently sold a substantial stake (when compared to Market Cap).

Insider sells can sometimes signal that management does not have faith in the ability of the stock to rise in the near future. Can you please provide a comment on that?

2. Also, if it is not too much to ask, I am interested to know what your financial stake in the company is. The reason I am asking is because I try to invest in companies where the CEO has a substantial stake in the business. I understand if you feel this question is too personal, but I just thought I would ask.

3. My last question concerns your sales in regards to Software vs. Service revenues. I realize that a large proportion of your sales come from the initial purchase a company makes of your software. What I'm trying to find out is how much you expect to receive in Service Charges for that existing customer. Any real world numbers example you could give would be helpful.

For example: a typical company makes an initial purchase of $500K for your software, and then typically pays X amount of dollars per year for Service-related activities.

Thanks in advance for your time and diligence.

[astro]

I was wondering why EFUT uses unaudited financial statements.