Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

AsiaInfo (NASDAQ: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.

Question-and-Answer Session

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 “*” key followed by the digit “1” on your touchtone telephone. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment, once again that “*” “1” to ask the question. We will proceed any order that you signal us and I’ll take as many questions as time permits, press “*” “1” if you do have a question, we’ll pause for just a moment.

Our first question comes from Chang Qiu with Forun Technology Research.

Q - Chang Qiu

Yeah good morning Steve and Ying.

A - Steve Zhang

Good morning.

A - Han Ying

Good morning.

Q - Chang Qiu

Ying, maybe a question for you first, could you for the Q4 result, could you, leak out that the contributions from AsiaInfo technology and the Lenovo-AsiaInfo just make you indeed to think you makes the revenue the operating earnings for each of this division?

A - Han Ying

Do you means in Q4, 2005?

Q - Chang Qiu

Right.

A - Han Ying

As we see that in our announcement they are, the Lenovo-AsiaInfo’s revenue contribution was nominal.

Q - Chang Qiu

And Ying, can you breakout some of that in that way revenue breakout I know lots of break in earnings breakout?

A - Han Ying

For the operating earnings, breakout, the overall operating expenses, tax-rate mainly impacted by the one-time charge, the write-off, impairment charge write-off and also the total loss, was the just continues to been it.

Q - Chang Qiu

Right, can you breakout into likely did in 10-Q for the two divisions?

A - Han Ying

We did not disclose our break down of the operating expenses as the details both inline to our business unit separately.

Q - Chang Qiu

And Ying, just like you did in the 10-Q in the earlier 10-Q, so you have, revenues operating expenses, cost-of-good sold and then you end up with, income numbers for each of the division?

A - Han Ying

And for the….

Q - Chang Qiu

For the fourth quarter, what would be the breakout on the expense part?

A - Han Ying

You mean that for the first quarter of 2005.

Q - Chang Qiu

That’s right.

A - Han Ying

The breakdown of the operating income….

Q - Chang Qiu

Right.

A - Han Ying

The operating income for our telecom business was about operating profit was about operating profit for telecom business, let me check the number, continue your questions and let me check in the number and to response to you later.

Q - Chang Qiu

Okay, yeah the later I have also ask you maybe breakout the full year guidance that also what’s the, revenue from the local AsiaInfo for that division?

A - Han Ying

The Q1 guidance for 2006?

Q - Chang Qiu

Right.

A - Han Ying

Because of the uncertainties of the security business unit there and the Lenovo-AsiaInfo, accelerate the mainly the revenue guidance is for our telecom business.

Q - Chang Qiu

So you don’t review anyhow guide to the any revenue for the local division?

A - Han Ying

We provide of our revenue guidance is, we hopefully that we have some revenues that generate from the Lenovo-AsiaInfo. Because the new management team really takes time, to stable the team. And to talk with customers to before they can get back to the normal business.

Q - Chang Qiu

Okay, okay in terms of our, the revenue shortfall from on the Lenovo-AsiaInfo division, I kind of a half, try to understand how come the revenue, crossing from it sounds like it sounds like $5 million per quarter run rate to almost to zero. How you are loss, going on that revenue, can you help me understand better that the process here?

A - Han Ying

Sure, sure, sure. For the current business, we had different business, all those I think, then AsiaInfo, for AsiaInfo we take about 6 to sorry, take about 9 to 12 months to recognize revenues for the contract that we have signed. That mainly, it’s a service contract, operator service contract. But for security service that, their software is a billing to the BOSS and the sales through the channel. Therefore, their revenue recognition here is a different way, so in case of inform, we our revenue recognizing policy for that business that one way shift, the software billing, the BOSS to the customers and transfer the ownership of that, goes to the customers. Then we recognize the revenue, that’s a very likely the personal computers sales model like, like the product sales model.

Q - Chang Qiu

I see….

A - Han Ying

Yeah it’s….

A - Steve Zhang

Also the recent revenue growth from around 5 million to very small numbers, other than the security issue is also in the beginning of quarter four, we are, we sold out that on consulting business, we sold out government, e-government of the business unit.

A - Han Ying

And, it’s a, it’s from the order placed by the customer that the sales channels through their shipment of this product that’s a typically area very short period.

Q - Chang Qiu

Okay, Steve for the 10% organic growth in the telecom software side, did you factored in any possible impact say, if China really grown to reach license or have any 3G related a few dollars of revenue cents, you might have be benefited or in anyway?

A - Steve Zhang

For 2006, the given factor in the 3G license impact because, we want to be a little bit a more conservative, because of the 3G license issued, timing is not known yet.

Q - Chang Qiu

Maybe you can, maybe I can ask this way, if you know the 3G is in the in the process of the rolling out, what kind of opportunity you see for AsiaInfo?

A - Steve Zhang

Well it would depend on timing, if the 3G license is that issued in the second half of this year. Any related opportunity won’t make much impact for this year, for to fixed revenue. However the opportunities we’ve see for 3Gs are the real time billing and more that’s for our introducing customers also we are seeking the new customers that the when they start offering 3G services, even though have the requirements for new billing and customer care systems.

Q - Chang Qiu

In terms of our competition, Levono, there is some discussion that, because I am adopt to both Chinese company and so that AMDOCs might be taking some of the higher end opportunities, so my question for you is, if you compare your offering to AMDOCs offering, where you think you’re stronger where or you’re thinking that you’re weaker?

A - Steve Zhang

Well, first of all, I don’t want to speculate, AMDOCs impact anything for AMDOCs definitely is a great company and however we’ve think our product and the services are servicing our customers well and we are very competitive in close pricing and functionality.

Q - Chang Qiu

Alright do you have any thinking on anyway to fend off any how to protect yourself?

A - Steve Zhang

You mean how to protect ourselves from, competitive strength from AMDOCs?

Q - Chang Qiu

Right.

A - Steve Zhang

Well, we have been competing against AMDOCs and Accenture and IBM for the last 3, 4 years. And they have been really made the much in progress in China, based on our conversation with our customers, if Lenovo-AsiaInfo is in a good position to, first of all keep our existing customer base and continue to grow our market share.

A - Han Ying

Chang due to the, year effect, to question of business, the income breakdown to telecom Lenovo-AsianInfo are you still on the line, hello?

Q - Chang Qiu

Yes, I am on line.

A - Han Ying

Yes, here is the number and then for the full year 2005, for the telecom been, for the AsianInfo and is how excluding the Lenovo-AsiaInfo our total net income of the full years is more than US$7 million. As a total net income and for the first quarter of 2005 our net income was almost breakeven.

Q - Chang Qiu

Okay.

Operator

And we’ll move on to Tony Dean (ph) with Fairlong Capital Management (ph).

Q – Tony Dean

Hi good morning and Steven thank you very much for holding the call. I have two questions, can you hear me?

A - Steve Zhang

Maybe if you could speak louder?

Q – Tony Dean

Okay, can you hear me now?

A - Steve Zhang

Yeah.

Q – Tony Dean

Thank you very much for holding the call. And I have 2 questions. #1 is a simple one, where do you stand in the share holder repurchase, share repurchase program, how many shares are authorized and then when can you start repurchasing, I get after earnings, after 10 days or something, you can start repurchasing. Secondly, I think, we got to the internal investigations. It sounds a little bit more serious than, just missing revenues and you also indicated earlier half of the revenue mix with future employee, something which I miss. Could you just elaborate a little bit about the internal investigation and what kind of consequences that you might find, and what access you might be able to take because this sounds more serious than just, missing numbers. Thank you.

A - Han Ying

What’s your first question?

A - Steve Zhang

About repurchase.

A - Han Ying

The question for the stock repurchase, can you repeat your question, sorry.

Q – Tony Dean

Yes, when can you start repurchasing share and how much do you intend to do that, given you have a pretty significant cash balance, which you intend to do more than what you have it now?

A - Han Ying

Okay, we started the repurchase last week, and we’ll stop the repurchase viewing a trading a window, which we will start when these operating earnings, earnings announcement, and then we will restart the purchase option to trading window and queue the, we have this total 90 days purchased area.

Q – Tony Dean

Got it, thanks.

A - Han Ying

And for the…

Q – Tony Dean

Trading window.

A - Han Ying

For the, full…

Q – Tony Dean

How long?

A - Han Ying

Excuse me?

Q – Tony Dean

The trading window opens from tomorrow.

A - Han Ying

30 days, 30 days.

Q – Tony Dean

Got it.

A - Han Ying

30 days after the earnings announcement.

Q – Tony Dean

Got it.

A - Han Ying

Thank you.

A - Steve Zhang

Now for your second question, while we didn’t used work investigations, inquiry, we are dealing those things at the reason behind the resignation of some of the few employees in our security business. And the actions, what kind of actions you will take after the inquiries will depend on the fact coming out from the inquiry?

Q – Tony Dean

Well what has Steve, what have caused such a inquiry since 90s down or the company has down for the diligence, when purchasing the divisions and suddenly a lot of people resigned simultaneously, that looks very strange, and revenue message is quite substantial, can you back to the know-ones that you know what, this is wrong and renegotiate the price?

A - Steve Zhang

Well we are keeping all the options open.

Q – Tony Dean

Okay and when do you expect to bring to conclusion such inquiry?

A - Steve Zhang

Hopefully in 3 weeks.

Q – Tony Dean

Great thank you very much.

A - Steve Zhang

As there is a Chinese New Year coming.

Q – Tony Dean

That’s right, all right, happy New Year to both of you thank you very much.

A - Steve Zhang

Thank you bye, bye.

Operator

Once again if you do have a question please press “*” “1”. We will now go to Neil Jacob with Project Capital Management (ph).

Q - Neil Jacob

Thank you, you actually answered both of my questions. So what, I guess one clarification on the repurchase, have you actually started repurchasing shares yet?

A - Han Ying

Yeah, we started it the last week already.

Q - Neil Jacob

Okay, and then your, you will continue starting, I guess the day after tomorrow.

A - Steve Zhang

Okay.

A - Han Ying

We’ll stop, we will stop the repurchase during the tend of treating window, which will be started one day after this, our net earnings announcement and we think 30 days.

Q - Neil Jacob

Okay thank you.

Operator

Once again, as a final reminder that is “*” “1”if you do have a question today. We will pause for just a moment. And there will be no further question at this time, Mr Zhang, I will turn the conference back to you for closing remarks.

Steve Zhang, President and CEO

Again, thank you for joining us today, if you have any further questions, please do not hesitate to contact to myself, Ying or any of our investor relations representative. Thank you. Bye, bye.

Operator

Once again that does conclude our conference, we thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AsiaInfo Q4 2005 Earnings Results Conference Call Transcript (ASIA)
This Transcript
All Transcripts