AsiaInfo Q4 2005 Earnings Results Conference Call Transcript (ASIA)

AsiaInfo (ASIA)
Q4 2005 Financial Results Earnings Conference Call
January 25th 2006, 7:00 PM.

Executives:

Eileen Chu, Investor Relations
Steve Zhang, President and Chief Executive Officer
Han Ying, Chief Financial Officer

Analysts:

Chang Qiu, Forun Technology Research
Tony Dean (ph), Fairlong Capital Management
Neil Jacob, Project Capital Management

Operator

Good day and welcome to today’s Fourth Quarter 2005 and Full Year Results Announcement Call. As a reminder, today’s conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Eileen Chu. Please go ahead.

Eileen Chu, Investor Relations

Hello everyone and welcome to AsiaInfo’s 2005 fourth quarter and full year conference call. Today Steve Zhang, President and CEO of AsiaInfo, will review some of our company’s business highlights and Ying Han, our Chief Financial Officer, will provide greater details on our financial results and provide guidance for the upcoming quarter. Mr. Zhang will then provide a few closing remarks and open the call to questions.

Before we continue, allow me to review our Safe Harbor Statements. During this conference call, representatives of the company may make forward-looking statements in an effort to assist you in understanding the company and its results. Please refer to AsiaInfo’s report filed with the SEC for discussion of important factors that could affect future results. Also, please take note that all figures mentioned during this conference call are in US dollars.

I will now turn the call over to AsiaInfo’s President and CEO, Steve Zhang.

Steve Zhang, President and CEO

Hello everyone and thank you for joining us. First of all, this was clearly attending in quarter for AsiaInfo, in particular for our Lenovo-AsiaInfo business unit. Before I discuss some of the positive key elements in our telecomm business during the quarter, I would like to address head-on some of the challenges that we have faced recently. As we’ve said in early January, shipments of Lenovo-AsiaInfo security software and the products were significantly like then we had anticipated. And as a result, Lenovo-AsiaInfo made only a nominal contribution to our overall net revenue during the quarter.

In addition to the resignation of former Lenovo-AsiaInfo head, we’ve been, that we are, we also announced in January, we have received the resignation around 50 Lenovo-AsiaInfo employees. We are however pleased to say that the large majority of Lenovo-AsiaInfo employees have decided to remain with AsiaInfo. We have initiated an internal inquiry into the facts surrounding the recent resignations and the lower than expected shipments in the first quarter. While it is too early to predict when our inquiry will conclude, I can tell you that we think this issue very seriously and we may take further actions as appropriate based on primary results of our inquiry.

It is important to note that the market for security products in China is expanding rapidly, with a compound annual growth rate 28% from 2004 on to 2009 according to the high receives. Our security offering continues to be highly regarded in the market, keeping in mind that this business was profitable for the first three quarters up 2005. And with frontiers and development teams under the highly qualified leadership of Tip Yang, a 10 year AsiaInfo referent, I’m confident that we were realized substantial of the Lenovo-AsiaInfo security business.

Even with these challenges, the news here in the first quarter was not all bad. In fact, this was a great quarter for core telecom business as Kerry (ph) had spent more of their CapEx budget on IT solutions, therefore increase our competitiveness and help reduce cost. And AsiaInfo’s leading thoughts on the BI solutions continue to be a key differentiator for us in this area, allowing us to grow telecom and software revenue 18% year-over-year.

During the quarter, we signed several significant telecomm contracts over $1 million and we made a break through in the China Telecom fixed network market, spending our contract with Changjiang Telecom for the BI software solutions.

Turning to new product, in the fourth quarter we introduced headphones to popular BOSS 1.5 system, including a monitoring management platform for billing and the revenue offering that we expect will lead to strong up sale opportunities with our existing BOSS customers. We also rollout a real time dealing system that Shanghai Mobile has already used, who substantially cut down its bad debt number and we expect to extend this solution to other carriers in 2006 as they seek to use intelligence IT solutions to boost their profitability. And in 2005, new government telephone registration regulation came into effect on the, under which all mobile users must be registered under their real name. They expect to see significant demand for our services; housing carriers comply with a new regulation. In fact, we are already working with Shanghai Mobile and the Guangxi Mobile to have moved many of their prepaid users on to our BOSS platform.

In the quarter, we made two strategic acquisitions in the telecom space, purchasing the telecom operation support business groups of Zheda Lande’s and Changjiang Technology. BOSS also feels open the door to increasing our telecom software market share especially in the key China telecom and China Unicom market.

Looking forward, we expect to see around 10% organic growth in our telecom business. But we will also remain on the look up for attractive telecom acquisitions that can be easily integrated and allow us to expand our market share. To sum up, the growth of China’s telecom industry continues to create more, many opportunities for us as carriers adapt to new technology, and upgrade their IT systems to increase competitiveness and the profitability. AsianInfo has a leadership position in this growing market as we continue to produce innovative value-adding telecom software solutions. We are confident that we will grow our existing telecom customers and continues to make break-through into new market area.

Now I would like to turn the call over to Ying to review the results for the quarter and the full year.

Han Ying, Chief Financial Officer

Thank you, Steve. This morning instead of repeating the numbers in our press release, I will provide some more information on certain key results for this fourth quarter and the fiscal year of 2005. I will also provide financial guidance for the first quarter of 2006. Due to the revenue top being the Lenovo-AsiaInfo security business as stated in our press release, dated January 4, 2006. That revenue for the first quarter declined to $15.5 million. This will prevent a decrease of 20% year-over-year and 18% decrease sequentially. Lenovo-AsiaInfo’s contributes into total net revenue this quarter was nominal compared to 26% last quarter. As Steve noted, we are currently conducting an inquiry into the events surrounding the revenue drop at the Lenovo-AsiaInfo. Today, our inquiry has uncovered that at least part of the revenue shuffle may have been due to an X2s presence. Given the quarter by sending employees of the, Lenovo-AsiaInfo security business unit. Our inquiry is up, is ongoing and again we may take further actions as appropriate based on cost, its results.

Turning back to our results, revenue from the software products and solutions in the fourth quarter decreased by 17% year-over-year; caused by the software in security revenue. Well our telecom base showed healthy growth on 18% of the total, the 24% year-over-year drop in service revenue was mainly caused by the Lenovo-AsiaInfo’s revenue shuffle. This shuffle also led to a 31% year-over-year decrease in gross revenue for the fourth quarter and the 57% drop in gross profit. This is in turn resulted in lower gross margin for the quarter of 24% compared to 39% in the year ago period and 47% in the previous quarter. Due to the resignations at Lenovo-AsiaInfo this quarter, we make specific positions to accounts receivable and inventories which increased the cost of software products and solution revenue and the general annual expenses respectively.

Freezer levels of recurring revenue in our telecom business led to a certain percent year-over-year decline in sales and marketing expenses for the fourth quarter. R&D expenses were up this quarter and so it continued to enhance investments in our value-added service business unit and the core telecom software solution. We expect to see revenue from the value-added services business probably is seen 2006.

During the fourth quarter, we pre-recorded $21.2 million non-cash charge for impairment of goodwill and acquire intangible assets related to the Lenovo-AsiaInfo business unit. And the decrease in revenue in the fourth quarter significantly affected the tarring value of the Lenovo-AsiaInfo. The impairment charge was determined by our independent appraiser based on the difference between the share value and current value of Lenovo-AsiaInfo. This impairment charge also part under long-term assets, to decrease by around 23 million. We posted a one-time loss of $11.7 million as we discontinued certain man power, that maybe loosing business including our sound management in outsourcing business, enterprise information system and the income of business here in this quarter. This one-time loss is mainly the write-off, some price of goodwill as related assets as well as different statement. These charges combined with the shortfall in Lenovo-AsiaInfo revenue resulted in the net loss per share for this quarter of 8610.

Moving to our balance sheet, our net operating cash flow for this quarter was $1.3 million, reflecting a continued improvements in the, in the accounts receivable system for ongoing business. Our accounts receivable decreased by roughly $9 million sequentially, due to the income collections and reduce power revenue. DSOs for this quarter, 157 days versus last quarter is 172 days.

Also during the quarter, we felt our, I finished within software and total 5% stakes in this company which account for the long-term investment of $1.7 million. Looking at the fiscal year of 2005, net revenue was $7 million to $8 million, a 22% increase year-over-year, but below the guidance we provided in January 2005 of $19 million. Lenovo-AsiaInfo contributed to 13.5 million, sorry. Lenovo-AsiaInfo contributed to 13.5% the total net revenue during this year lower than the previously expected contribution of 30%. Total net revenue from our telecom-brands however increased 13% compared to 2004. Revenue from telecom software products and solutions grow by 29% for this year. Gross revenue for the full year 2005 decreased by 8% compared to 2004. Mainly caused by, the 58% drop in first party however revenue inline with our strategy to focus on high margin advantage.

Accordingly, full year gross margin increased to 40% from 36% in 2004. Also, income for 2005 were impacted by the large one-time non-cash impairment charge incurred in the fourth quarter and the full year operating loss generally take by the Lenovo-AsiaInfo. As such, we reported an operating loss for the full year of $27 million compared to last year’s operating profit of $5.3 million. Accordingly, net loss for 2005 was $37.2 million or $0.83 per basic share. AsiaInfo’s full year’s net operating cash flow was $9.6 million driven by offering profit from our telecom business and continued improvements in our accounts receivable system.

I’ll now review AsiaInfo’s financial guidance for the first of quarter of 2006. Please note that the following outlook statements are based upon our current expectations. These statements are forward-looking and actual results may differ materially.

For the first quarter of 2006, we expect net revenue to be $16 million to $18 million. We anticipate that the credit balance will post an operating loss of $3 million to $4 million in the first quarter as a transition to our new management team. Therefore, we expect the loss per share; per basic share of $0.04 to $0.05 for the first quarter. We will not provide annual guidance for the whole company this year because of the higher percentage that’s deals surrounded Lenova-AsiaInfo unit. However, we had a very strong sales order performance in our telecom business in 2005. Giving us net revenue will benefit as we move into 2006 we feel confidence that our telecom business will gain deliver enhancing profitable growth in 2006, as it states in 2005.

Now let me turn the call back to Steve for his closing remarks.

Steve Zhang, President and CEO

Thank you, Ying. While also a big start on new challenges for AsiaInfo, we have also made some real achievements. We have become a linear organization, we have cut our extra layers of management consolidated our basis and increase the cost areas of our seasonal chain. And importantly, we are focusing all our efforts of the market, where we do best. And in track, by AsiaInfo’s ability as an organization, to adapt the changes and to face challenges. We have got a great management team that is fully committed to this company and I’m looking forward to results that can be proud of in 2006.

Finally, I’ve already expressed our gratitude to Ms. Chuang Wei Ying for her completed a productive, two-year term as a Director of AsiaInfo. Wei Ying made a great contribution to AsiaInfo as corporate governance serving on both compensation committee and nominating committee. We wish Ying all the best. Now Ying and I’ll be happy to take any questions if you have.

Questions & Answers

Operator

Thank you, sir. The question and answer will be conducted electronically, if you would like to ask the question, please do so by pressing “*