Global Sources Ltd. Q4 2007 Earnings Call Transcript

| About: Global Sources (GSOL)

Global Sources Ltd. (NASDAQ:GSOL)

Q4 2007 Earnings Call

March 11, 2008  8:00 am ET


Christiane Pelz – Lippert Heilshorn & Associates

Merle Hinrichs - Chairman and Chief Executive Officer

Eddie Heng, Chief Financial Officer


Jason Brueschke – Citi Investment Research

James Lee – Sterne Agee Capital Markets

John Ma with Roth Capital

Eddie Leung – Merrill Lynch


Welcome to the Global Sources Fourth Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Ms. Christiane Pelz.

Christiane Pelz

I would like to thank everyone again for joining us today for the Global Sources Fourth Quarter and Full Year 2007 Earning Conference Call. With us on the call today are Merle Hinrichs, Chairman and Chief Executive Officer and Eddie Heng, Chief Financial Officer. If anyone has not yet received the earnings press release it is now available at the company’s website at If you would like to be added to our distribution list or if you would like additional information about Global Sources you may call Lippert Heilshorn & Associates at 415-433-3777.

There will be a telephone replay of this call available until March 13 and the dialing instructions are included in the press release. The replay will also be available on the investor relations page of the company’s website for at least 30 days. Before I turn the call over to management let me remind you that this call will contain forward looking statements. Investors should be aware that any forward looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission. Global Sources does not undertake any obligation to publicly update or revise any forward looking statements whether as a result of new information, future events or otherwise. Also, management believes non-GAAP measures are useful measures and provide GAAP to non-GAAP reconciliation tables at the end of the press release. Effective March 11, 2008, Global Sources defines non-GAAP net income as net income excluding non-cash stock based compensation expense or credit, gains or losses on acquisitions and/or investments and/or impairment charges.

Non-GAAP earnings per diluted common share are defined as non-GAAP net income divided by the weighted average of diluted common shares outstanding. Now a discussion of our non-cash stock based compensation or non-cash stock based compensation expense calculations. Actual non-cash stock based compensation expense has historically been calculated based on the share price of the last business day of the quarter. In 2007 the company estimated non-cash stock based compensation expense using the stock price of the last day of the prior quarter.

For example using the September 28th stock price to estimate non-cash stock based compensation expense for the period ended December 31st. However, in 2008 the company plans to estimate non-cash stock based compensation expense using the stock price approximately ten calendar days prior to the earnings report press release. For example using the February 29th stock price to estimate non-cash stock based expense for this period. I would now like to turn the call over to Mr. Hinrichs.

Merle Hinrichs

Thank you all for joining our call today. For listeners new to Global Sources we are a leading provider of sourcing information for volume buyers and integrated marketing services for suppliers. Our focus is on facilitating trade with and within greater China. Our supplier customers typically have three primary objectives; lead generation, branding and differentiation, and opportunities for face to face meetings with buyers. With our integrated offering of online market places, trade shows and magazines we are able to meet all three of these needs.

Our multimedia solution clearly differentiates us from online competitors who only address lead generation. In addition, the company also serves a larger and more profound professional customer base than its competitors. We had a very good year in 2007; full year 2007 revenue of $182.1 million was up 16% compared to 2006. Income from operations which included non-cash stock based compensation expenses of $7.8 million was $23 million or up 27% compared to 2006. Operationally we are extremely pleased with our products and our position in the market and our opportunities for long term growth and continuing success.

We are executing our strategy to grow our online and trade show business and this includes investing to expand our product line and customer base. For our online business there have been five developments over the past six months that have positioned us extremely well for continuing growth in 2008. First, in October we launched Global Sources Online 2.0. It is the next generation sourcing service for our industry and it is the only site in our industry that delivers comprehensive search results as well as information on both verified and unverified suppliers.

Next, at the end of November we entered the China Domestic B2B market with the soft launch of China Global Sources Online. Third, in January for our export focused site Global Sources Online 2.0 we took our industry leading verification approach to an even higher level. We added a new Six Star interface for supplier’s websites. This enables buyers to screen suppliers according to the amount of third party verification and transparency the supplier is willing to provide. Buyers also will have access to a third party credit check report on almost all of the verified suppliers.

Fourth, also in January 2008 we introduced an end to end repackaging of our offerings to suppliers. Our Star packages now offer suppliers a wide range of new value propositions while also providing them with the unique way to differentiate themselves from their competitors. This includes an entirely new pricing structure offering both higher and lower priced alternatives to what we previously offered. Last, we announced that we expect a significant increase in our sales representation by June 2008.

Turning to trade shows, in 2007 we saw the successful results of the major expansion plans we began in 2005. We sold a record of 14,700 booths at our China Sourcing Fairs for the year. We concluded the largest ever China Sourcing Fair in Hong Kong with approximately 7,520 booths. The China Sourcing Fairs in Hong Kong in October achieved profitability for the first time since we launched the shows in the spring of 2006. This accomplishment was ahead of schedule.

We had a successful first time China Sourcing Fair in Dubai as well as two new shows in Shanghai for the China domestic market. As we speak our 13th Annual International Integrated Circuit Show is just wrapping up. Both sales were up by more than 35% and we will soon be announcing and exciting expansion plan for 2009 with shows being added to the fall and in additional locations. I will elaborate on these and other initiatives after Eddie Heng our CFO discusses our fourth quarter and full year 2007 financials and financial guidance for the first quarter and the first half of 2008.

Eddie Heng

As a reminder effective March 11, 2008, Global Sources defines non-GAAP net income as net income excluding non-cash stock based compensation expense or credit, gains or losses on acquisitions and/or investments and/or impairment charges. Global sources had a very good year financially with revenue growth up 16% and non-GAAP net income growth up 39%. I will begin my review with the fourth quarter of 2007 compared to the fourth quarter of 2006.

Revenue was $60.8 million compared to $52.3 million up 16%. The main growth drivers for the quarter were our online services and trade shows. Online services revenue was $20.5 million up 21% compared to $16.9 million. This was driven by mainland China where online sales grew by 30% and by Global Sources Online 2.0. Exhibition revenue was $35.5 million up 18% compared to $31.6 million driven by our China Sourcing sales. In October we had what were the largest and most successful China Sourcing Sales in Hong Kong yet.

Print service revenue was $13.5 million essentially flat with last years quarter. Although the revenue from our export focus print media was on target revenue from our Chinese language title were lower than expected. This is due to US based firm reacting to the US slow down. China sales, which comprise 63% of total revenue, were up 28% to $38.6 million compared to $30.1 million in the same quarter last year.

Operating expenses were $53.7 million compared to $44.9 million. The increase was due to several higher costs related to growth in our total revenue. Sales commissions paid to sales representatives totaled $3.2 million. Event hosting and buyer promotion costs totaled $1.1 million resulting from the increase in both number of booth size of our China Sourcing Sales and investments costs of $1 million for our new Global Sources Online 2.0. Finally, Global Sources Online and our other online initiatives.

Additionally, due to our higher stock price non-cash stock based compensation expenses increased to $3.6 million of which $2.4 million was related to sales expense. I’d like to remind you that the non-cash stock based compensation charge is a charge in our income statement and a corresponding credit through our additional pit in capital account on our balance sheet. There is not tax on shareholders equity. In the fourth quarter of 2007 we sold all of our equity interest in HC International Inc. for a gain of $2.4 million. We also recorded an impairment charge of $3.1 million for the write down of our investment in Blue Bamboo.

Initially we considered developing several of Blue Bamboo’s websites. However, during our planning process we decided that the best way to create value was to apply their resources to existing Global Sources property. The objective is to enhance and build up several of our Chinese language sites and to accelerate our revenue growth. Because we are not presently planning revenue from Blue Bamboo’s former property the investment requires a write down. As a result debt net income was $8.1 million or $0.17 per diluted share.

The compares to fourth quarter of 2006 debt net income of $15.3 million or $0.33 per diluted share which included a gain of $7.9 million related to the sale of shares of our subsidiary Fee Media Asia Limited and $1.2 million in non-cash stock based compensation. For the fourth quarter of 2007 non-GAAP net income was $12.5 million up 34% when compared to $9.3 million for the fourth quarter of 2006. Fourth quarter 2007 non-GAAP EPS was $0.26 up from $0.20 for the fourth quarter of 2006.

Finally, during the fourth quarter we regenerated $14.7 million in cash from operations an increase of 28% as compared to 2006. For the year ended December 31, 2007, compared to the full year 2006 the results are as follows; revenue was $182.1 million compared to $156.5 million. Revenue from mainland China represented approximately 60% of total revenue compared to 53%. Operating expenses were $159.1 million compared to $138.4 million last year. GAAP net income for the full year 2007 was $24 million or $0.51 per diluted share which included an impairment charge of $1.8 million on our HC International investment that was taken during the second quarter 2007.

The aforementioned gain of approximately $2.4 million from a sale of our equity interest in HC International the aforementioned gain impairment charge of $3.1 million for the write down of our investment in Blue Bamboo, and $7.8 million in non-cash stock based compensation expense. Two thousand six GAAP net income was $37.9 million or $0.60 per diluted share, 2007 non-GAAP net income was $34.4 million up 39% compared to $34.8 million for 2006. Two thousand seven non-GAAP EPS was $0.73 up from $0.53 for 2006. Now on to our balance sheet review.

Cash and cash equivalent on December 31, 2007, totaled $197.8 million. Short and long term income and customer pre-payment was $83.1 million at December 31, 2007 compared to $63.8 million at December 31, 2006. Total assets were $271.8 million compared to $230.9 million year ago. We do not have any long term debt or bank debt. Day sales outstanding or DSO were 15 days compared to 17 days at the end of last year’s quarter. Shareholders equity reached $164.7 million compared to $133.7 million. We generated $60.6 million in cash from operations during the full year of 2007.

Also, our Board of Directors authorized a stock buy back program of up to $50 million on February 4th. Since then we have been in a black out period but we plan to keep investors apprised of any repurchase activity during our quarterly conference calls. Now I’ll review our financial guidance for the first quarter and first half of 2008.

Starting with the first quarter of 2008 we are now introducing non-GAAP guidance figures that exclude non-cash stock based compensation as well as the impact of any acquisitions or investments. Management intends of this change is to provide investors with greater clarity on the operating performance of the company. Regarding revenue, we expect our online and trade show business to drive growth in the foreseeable future. We expect print to be soft although soft our focused media as doing much better than our Chinese language print media.

With that background we have been investing in growth initiatives for online and trade show business. In particular we are increasing our investment in expanding sales representation for our newly announced online and trade show initiatives. We are also investing in IT infrastructure, content development, buyer promotion and marketing to suppliers. While we believe this investment may impact earnings in the first quarter and first half of 2008 we expect that new products and sales efforts to positively impact our growth by 2009.

Due lastly to the severe winter where the conditions in China in January and because of the timing of increased sales representation we estimate the first quarter to be weaker than the second quarter. For the first quarter of 2008 we anticipate the following; revenue is expected to be in the range of $39.5 million to $40 million representing growth of between 13% and 15% as compared to the same period last year. GAAP earnings per diluted share are expected to be in the range of $0.15 to $0.16 as compared to $0.14 in the first quarter of 2007.

Non-GAAP earnings per diluted share which exclude a non-cash stock based compensation credit are expected to be in the range of $0.11 to $0.12 as compared to $0.15 for the first quarter of 2007. Based on the stock price of $12.20 on February 29, 2008 compared to December 31, 2007 stock price of $28.32 non-cash stock based compensation expense for the first quarter of 2008 is expected to be a credit of $0.04 per diluted share.

For the six month period ended June 30, 2008, we anticipate the following; revenue is expected to be in the range of $101 to $102.5 million representing growth of between 16% and 17% as compared to the same period in 2007. GAAP earnings per diluted share are expected to be in the range of $0.32 to $0.34 as compared to $0.23 in the first half of 2007. Non-cash stock based compensation expense is expected to be a credit of $0.02 per diluted share based on stock price of $12.20 on February 29, 2008 and compared to $0.07 in the same period of 2007.

Non-GAAP earnings per diluted share are expected to be in the range of $0.30 to $0.32. As a reminder it is our policy to obtain valuations for the non-cash stock based compensation expense or credit based on historical stock price. For this guidance was $12.20 on February 29, 2008. Using this historical price the six month period estimated to be a credit of approximately $0.02 per diluted share. For your reference and comparison purposes we have posted on our website in the investor relations section non-GAAP figures that exclude non-cash stock based compensation for the historical period 2005 through 2007. Now I’d like to turn the call back to Mr. Hinrichs.

Merle Hinrichs

As mentioned in my opening remarks in the past six months we have taken major strides to establish a foundation for the continued growth of our online businesses. This foundation addresses the core needs of our customers which require a bit of explanation. Overall our business begins with the buyer, to the extent that we can serve buyers needs and make them loyal users of our services we create an effective marketing environment for our suppliers. I also want to emphasize that our focus is on medium and large buyers.

We believe the 80/20 role applies in international trade whereby the top 20% of the buyers really account for more than 80% of the total trading volume. A primary value that we offer these buyers is the ability to help them identify suppliers who have the capabilities to meet their needs. This is not a simple task given the thousands of suppliers who can be found online today. For example, important first level screening criteria for buyers when short listing suppliers include an export track record, experience in producing customized OEM products for oversees buyers, adequate production capacity, compliance with standards and certifications.

The other primary issue on the minds of virtually all buyers today is the need to verify potential suppliers. This issue came to the forefront earlier this year when there were problems with suppliers not being able to meet US consumer product standards. Buyers want to know if the suppliers they find online are really who they say they are and that the experience, history, size and production capacity etcetera is claimed and is accurate.

It is against this backdrop of customer needs which one should view the various online initiatives we have announced during the last six months. In short, our new services provide buyers the following; comprehensive search results of products and suppliers no matter where the supplier may be on the internet. The primary filter of verified and unverified suppliers which additional third party verification information on suppliers including credit check reports on all verified suppliers and a Six Star Rating system that gives the highest number of stars to the suppliers who provide the most verification data to the buyer.

Since we launched Global Sources Online 2.0 last October we have just about doubled the amount of product and company content for buyers. From the supplier perspective we expanded the opportunities available to suppliers on GSOL 2.0 with new services and pricing. Our Star Packages is a system that ranks suppliers according to the depth of verified product and company information that they provide. At the high end the Six Star Package is designed to provide suppliers with an integrated lead generation and brand building campaign that includes two forms of third party verification data. This will also substantially differentiate these suppliers from their competitors.

At the other end with a One Star Package suppliers can take advantage of an introductory 12 month offer for Renminbi 38,880 or approximately US Dollars $5,400. As mentioned we also soft launched our site for the China Domestic B2B market on November 30th. This is a very large medium term business opportunity in which we are investing. For China Global Sources Online our initial focus has been on building content and traffic. At the outset we are enabling qualified suppliers to market themselves for free. After we establish clear leadership traction and specific verticals we plan to focus on monetization.

We are very pleased with our progress to date. As of the end of January 2008 we had almost 47,000 suppliers online with several hundred thousand product images and profiles.

Now let me shift to our trade shows, the face to face meetings where negotiations and sales really do happen. We continued to build on the success of our China Source Fairs and other trade shows through vertical specialization and through vertical and geographic expansion. For 2008 there are plans to increase our total number of shows from 22 to 32. This will include additional shows in Guangzhou, Hong Kong, Dubai and India. We anticipate greater revenue in 2008 from our trade shows from increased booth sales at existing and new shows and from increased revenue per booth.

We are also aiming to expand the use of our media and services in India through the company sales representatives who is expanding its sales team and has appointed a new chief representative. New and recently announced initiatives for India include introducing this Six Star marketing program to Indian exporters, private sourcing events held in Delhi on February 28th and 29th by our sales representative in India for five top global buyers, included Casino, Carrefour, El Corte Ingles, Markant and Sears.

The scheduled launch of the India Sourcing Fair and home products in Hong Kong from April 2009 and the scheduled launch of two new China Sourcing fairs electronics and components and hardware and building materials in Mumbai in November 2008 and to be managed by Pico Event Management. To summarize we have many key pieces in place for continued growth and success. We believe our products and services are finely tuned to address the deepest and most important needs of our customer base. We are supporting our products with increased sales representation and we have introduced new packages and pricing for suppliers.

Also, by providing the market with whatever combination they want of online, trade shows and magazines compared to our online only competitors we are uniquely capable of helping suppliers address each of their three primary marketing needs. Namely, sales lead generation, branding and differentiation from their competitors and face to face opportunities to meet with buyers to negotiate and receive orders. Indeed we are beginning the year with tremendous optimism but our products are position in the market and our growth prospects.

I’d now like to turn the call over to the operator for the Question and Answer Session.

Question-and-Answer Session


(Operator Instructions) Our first question will come from the line of Jason Brueschke with Citi Investment Research.

Jason Brueschke – Citi Investment Research

I have two groups of questions if I can. The first one involves the overall online business, mostly your paying customers engaged in export trade with the US and EU have you seen any cancellation in contracts or people deferring signing up as paying customers because of weakness in the United States? Could you also comment on how your business model with the fact that you are collecting a lot of these subscription fees annually up front and the refund policy are non-refundable policy how that helps you with your visibility as we may be entering into a period where the demand side of the equation from the West is at best uncertain?

Merle Hinrichs

We have had zero cancellations and we certainly have not have deferments based upon market conditions. We have deferments sometimes simply because clients can’t get the material together; operationally we have some deferments, certainly not that we have come across from a market problem. With regard to our subscriptions, all of our subscription fees are not refundable so when we look at prepayments basically that is a commitment for the following six or 12 month period. That is a very good indicator of course to our future sales growth and I think that you can evaluate that from the current balance sheet.

It looks quite strong, you are absolutely correct there is a great deal of uncertainty as to future demand and where that may come from. If you would like to ask a specific question in that area I’m more than happy to reply.

Jason Brueschke – Citi Investment Research

It’s more general. I know there are differences on both sides. Domestically in China with the export sector rising wages, rising Renminbi with commodity costs there have been reports in the press of companies either going out of business or moving further inland into China. That’s where I thought you might see some cancellations coming from its more just generalized. I think you’ve absolutely answered that you haven’t seen any weakness or negative effects.

My second line of questions concerns the new pricing strategy in the new products that you have. Could you comment more specifically on the following; how has demand or interest from clients been to the new pricing I would say for both your existing clients and maybe new clients that you are selling this unbundled or the new tiered Star system? Second, in my recollection this is the first time maybe ever that you had a lower price point product offering that’s below your chief competitor Alibaba could you comment on how the changes that you’ve made are affecting the competitive dynamics in the market?

Finally, could you address whether you are seeing any, what I’ll label, as cannibalization, there might be a better way to describe it but are you seeing any affects where clients who were taking a higher priced package now that you are offering six different price points that they may be dropping down and taking a lower priced offering from you. They remain a customer of yours the revenues that you are generating from that existing customer may be lower on a going forward basis. If you could comment on that it would be helpful?

Merle Hinrichs

The demand, of course, at the lower price point provides a larger number of companies to utilize our services. It is an introductory price; it is for a specific 12 month period. We are very careful to make sure that these One Star customers go through the same kind of verification system that we would put a Two Star to a Six Star supplier through for the simple reason we have a responsibility to our buyer to ensure that we are not presenting them with suppliers that can’t accommodate their particular needs whether that be meeting product standards or be able to meet customization of product or whatever that may be.

What we have already seen and we are very pleased with is we have seen companies which have entered a lower price point and then we have sold them up to a larger package. At the upper end we are very pleased because at the upper end of our pricing strategy is very customized services that we provide like the private sourcing events which I mentioned here in India in my prepared statement. That is a service which is very unique, very focused by product and by client and by location. We have greatly extended the type of services that we are providing but we have invested and continue to invest very heavily to ensure that we sustain the value proposition to our buy side which we think is absolutely critical.

What is problematic with the internet today is that a user has difficulty in validating the material the content or the references which are provided to them. Our new website does a very, very good job of that with the Six Star program which is, as I mentioned earlier, based upon the amount of data that a supplier is willing to provide to us. Then with a verify, that is what the Six Star is all about, then the unverified and the Web. One and one location a buyer can avail himself literally of every supplier that is available on the net and see the differences between those suppliers.

There is absolutely no other site out there that even comes close to being able to provide this depth of services. That covers most of the question that you asked.

Jason Brueschke – Citi Investment Research

A follow up, have you seen any change in the competitive dynamics or landscape. In many ways these are radically new actions by you if you look at the history that you’ve been doing. Qualitatively or if you analytically could talk about it, has there been any change from what your competitors are doing in the market to respond to your new initiatives that may require you in like kind to respond. Maybe if you could comment along those lines it would be helpful.

Merle Hinrichs

Internally there has been a huge amount of excitement about being able to provide this service to a much larger group at a lower threshold and then to trade them up. We are extending the sales organization to compliment that. I think that we definitely will see, as I already mentioned, a substantial increase in our content which we hope will be a very meaningful to our buyers. We don’t have just one competitor we don’t evaluate ourselves specifically with regard to how a competitor responds or doesn’t respond.

Our focus in launching our product or our price points are all based upon how we evaluate the buyer requirement or the supplier requirement. Most of our competitors follow what we do. Other than Ali, of course we have competitors in Hong Kong, the Trade Development Council, they have modified their site. We are seeing some changes on site modification already from various competitors that mimic or try to mimic some of the features that we are providing. That is indicative of competitors saying, “Maybe we should be doing something about this particular need or the buyer need.”

Suppliers, of course will respond to pricing points and I think that we are going to be very aggressive with the pricing points and we will certainly be taking market share away from competitors.

Jason Brueschke – Citi Investment Research

One last question or two about the trade shows. I know that you give formal guidance only out six months but it is my understanding that your sales force is selling the trade shows not only out an entire year but in many instances you already have begun selling trade shows for 2009. Could I get a qualitative comment, this is in light of my first question which is the concern about the economy that many investors may have. Could you comment on how far out you are selling these trade shows, is it April ’09, October ’09 trade shows? Comment on what the demand level that far out has already been, that would be helpful?

Merle Hinrichs

By far the largest number of shows that we sell forward will be for the next 12 months. Very few of our sales are for anything less than that and very few of the sales are for a lot more than that. We don’t release these numbers but it is a relatively small number that we would sell for 2010. Needless to say the clients of the perspective exhibitors are encouraged to commit for longer period of time and a greater number of booths in any one package and financially is rewarded for doing so. It is a substantial percentage but it is only within the next 12 months.

We have good visibility on that; we are certainly excited about the level of commitment that we are receiving for the new shows. Going from 22 shows to 32 shows this year is a major jump that jump is not based upon speculation it’s based upon what we have seen as the need amongst our suppliers. As you will note that many of the new shows are in new verticals and new areas. We regard the Middle East and Eastern Europe and these areas as a huge market opportunity for China manufactured products. The trade shows are strong and we are very, very excited about the new shows that are being launched.

Jason Brueschke – Citi Investment Research

Just a clarification, you said 12 months out you would already be selling the April ’09 even though it’s technically 13 or 14 months from now. Looking at that you are already selling the ’09?

Merle Hinrichs

Correct, we are selling into next year.


Our next question will come from the line of James Lee with Sterne Agee Capital Markets.

James Lee – Sterne Agee Capital Markets

Can you talk about the thought process behind the new pricing plan? It makes a lot of sense anyways that you guys are thinking about offering it new price friendlier plans for small and medium sized businesses in China. Can you talk about how you guys determined, how long was the process in terms of helping the customers to decide on the new pricing plan? What was the final conclusion about the entry pricing level at about $5,400 US, what made that determination, is that a consensus from talking to customers or is it based on Alibaba pricing?

Merle Hinrichs

We have spent almost two years developing the GSOL 2.0 website. A great deal of thought went into that, we were very concerned about the quality but we did want to lower the introductory price point. I use the word introductory, this price is providing our sales organization and our prospective suppliers with a lower price point but then we quickly, of course, look to up sell them not only online but also in the print and also into the trade shows. We are having good luck with this, good success with this. The pricing point is, as I said, introductory.

We will be reviewing that on a regular basis to see whether or not that price should be adjusted like all the other prices of course for all of our other products need to be adjusted. The thought process on it was, of course, looking at everyone out there, all of the services out there recognizing that the online pricing services are coming down generally but looking how that we can add value not only at the lower end but also to add value and substantially more value at the upper end.

It’s the old pyramid effect, we want to be able to bring people in at all levels and at all levels look to how we can trade them up. Trade them up for meaningful function and features and services. The market it constantly adjusting and so are our services and so are our prices. One of the things that you have seen with Global Sources we have been the leaders in this market for years and years and we continue to lead the product development.

We continue to lead in terms of user and functionality and we are very, very focused on the buy side for a specialized product and this was in your report that we are specialists as opposed to generalists and we try to adopt pricing points and features and functions which are specific to those needs. We have demonstrated yet again with Global Sources 2.0 that we are definitely in the front of all competitors in doing that.

James Lee – Sterne Agee Capital Markets

A follow up question, can you talk about the activities of the Chinese New Year to try to get a sense of how much business is picking up after the New Year holiday. In the general sense you could give us some sort of expectation in terms of how many new subscribers on the internet side of the business do you expect to add and what kind of margin do you expect to make on that part of the business?

Merle Hinrichs

With regard to the last question we don’t release those numbers specifically on metrics. I will say that the first two months of this year have been a very challenging period not just because of the vacation time or the Chinese New Year but because of the snow storms and the problems that has caused logistically for all of our suppliers literally. For the buy side and needless to say for our own sales organization. It’s indeed been a challenge, I hope we are through that and we are seeing with March and everybody getting back to work after Chinese New Year a decided pick up. Again, we don’t provide specific metrics on that.

James Lee – Sterne Agee Capital Markets

Can you talk about, in terms of your budget extension going through 2008 and maybe delta between 2007 can break it down between how you spend in sales organization versus marketing versus IT so we can get a sense how to better model that going forward?

Eddie Heng

We provided only guidance for the first half; we are not giving guidance for the full year.

James Lee – Sterne Agee Capital Markets

Could you talk just for the first half that would be helpful?

Eddie Heng

On our first half our sales cost we are budgeting 33% of our revenue and for our IT and general expenses close to about 33%.

James Lee – Sterne Agee Capital Markets

That 33% in sales and marketing how many sales people are you planning on or have you already added in the first quarter?

Eddie Heng

We are not giving any specifics on those sales numbers yet.

Merle Hinrichs

We do give a general number of sales reps that we have in the field. That is in the material that we have provided to you. As we have said earlier in our prepared comments that we are indeed investing and have budgeted substantial sums to increase both the marketing and sales representation for the new products which we are offering.

James Lee – Sterne Agee Capital Markets

One last question, I’m curious on the promotion side of the expense how you go about promoting the new internet product? Can you give a sense how you go about spending the money, do you spend mostly on the internet, website promoting your internet products or do you do offline even on TV or various magazines? What channels advertising spend do you go about spending it to attract new customers onto your internet platform?

Merle Hinrichs

That’s an interesting question because you know you can see all of the online providers using offline media to promote their products, everything from television to newspapers to radio to billboards to taxi cabs and what have you. We try to be very selective, we try to focus on media that we believe really provides us with a meaningful demographic group of either suppliers or buyers. We certainly, as you probably have seen, we have been investing much, much more in terms of advertising at airports and areas where we believe that we get a lot of buyer traffic. We get a lot of supplier traffic because suppliers are traveling all the time as well.

We certainly are investing more in media that our communities would have the greatest exposure to. We have enhanced that quite substantially. We are also growing in both telemarketing and in telesales. That’s an important element of how we are moving forward. It’s a very robust growth that we have in mind. We have such a variety of products to sell too.


Our next question comes from the line of John Ma with Roth Capital.

John Ma with Roth Capital

I have a few questions, number one, can you shed light on the trade show I know that you moved one show from Shanghai to Guangzhou? Can you share some thoughts on this?

Merle Hinrichs

This is the fashion accessory show, it wasn’t moved it is just an extension of the same show. We launched this show in Shanghai in December and it was a fabulous success we were very concerned regarding that time slot. As it worked out very well it fit right into some of the purchasing of both domestic and of course in Shanghai there’s an increasing number of foreign buying offices as well. If worked very well. Because it is domestic in part its not just international it does both, we wanted to open and to have a similar show in southern China and so that’s the reason for the Guangzhou show.

John Ma with Roth Capital

You mentioned you are not going to provide metrics but without metrics how do we gauge and track the progress of domestic B2B?

Merle Hinrichs

We plan on, as we grow in traction, we have already indicated in the prepared comments that we are up to over 47,000 registered buyers on our China GSOL site and we are literally hundreds of thousands of products and as the metrics mature we will then look at what we can provide and should be providing to you. We’ll update you as we go along and we’ll certainly be updating you on each quarter webcast.

John Ma with Roth Capital

Your print business has been flat for a couple quarters. What is your strategy going forward?

Merle Hinrichs

Good question. I mentioned to you when we had our conference earlier this month, this has been a bit of a surprise because our export side, both online and print and all of our trade shows are really quite strong. The weak area has been in our China language print media. That is where it has been the weakest for both our Chief Executive China product and our EET product. We are looking at how we need to shift, change, modify or reduce the commitment to that particular media in favor of others and still map against our user requirements.

With the Electronic Engineering title we have a very, very robust online service. With the Chief Executive China publication we have about 800,000 registered users for that title. We have close to 180,000 print users for CEC so it’s a huge community of users. There is definitely a shift which we, as the providers of the media, don’t believe is totally warranted by advertising agencies and advertisers in their shift from print to online. That’s what it is in today’s market.

We think that ultimately that there will probably be the pendulum will move back to print or increasingly move back to print but for the time being we are trying to decide on exactly whether we need modification, we need reduction or we need a bit of a refocus on what we are offering in these particular sectors.

John Ma with Roth Capital

We heard your competitors say a smaller media customers fair better actually compared to the large sized customers during this US slow down recession. What is your experience?

Merle Hinrichs

You have to have a size if you are going to participate in international trade you have to have a language capability, you have to have a financial capability, you have to be able to customize product, you have to be able to manufacture in container sizes, container quantities on a regular basis. You have to meet replenishment schedules; you have to be on time. All of this requires management skills, it requires a certain scale.

You take a customer like Markant or Sears or any of these customers they cannot take a risk with a small company who may be here today and gone tomorrow. It may not have the credit worthiness to stay in business because if they lose a supplier who they’ve committed an order to they are going to have an empty shelf. Buyers of any prominence absolutely cannot afford that. It is very; very simple, major buyers or medium sized buyers cannot take those kinds of risks.

As I said earlier it’s the 80/20 rule that 20% of the buying community will buy 80% of the product. We focus where the market is and that’s another reason why we are able to get a much higher yield and we don’t release all these yields but we get a higher yield from our clients i.e. the suppliers because we are not only able to introduce them to the right buyers online but we provide them face to face environment, face to face encounters.

We have the private sourcing events which are a one on one kind of situation, we have one to a few trade shows and we also have the much, much larger trade shows. Just as a note on that, a very differentiating feature of what we do is the buyers when they come to these trade shows they invest huge sums of money, i.e. their air tickets and the time which they are spending on the road to come to these trade shows and I can assure you are much more serious about concluding an order or getting a return on their investment than someone that is sitting in front of their PC and making an inquiry.

This is where the rubber really hits the road and I’m very please and I’m very proud with Global Sources that we have the range of product which is really designed to maximize our supplier’s opportunities to meet the range of buyers that we do. I think small suppliers, especially in a challenged market are indeed going to be in jeopardy and challenged.

John Ma with Roth Capital

My last question relates to India. In terms of pricing how does that compare to China?

Merle Hinrichs

Very similar, we try to sustain a one price policy in all areas. There is always going to be currency differences, one currency depreciates against another currency appreciating. We try to keep alignment within all jurisdictions. Its another reason too why this new Six Star pricing policy provides us a bit more flexibility at both ends of the spectrum for all markets not just China but for India and Hong Kong and Vietnam.


Your final question will come from the line of Eddie Leung with Merrill Lynch.

Eddie Leung – Merrill Lynch

I am wondering, did you guys share some of your experience from the past on how you guys can handle a down cycle. Obviously you guys have been through some economic cycles, given the weakness in the US economy and probably the trades won’t be as well. Could let us know some of the ways that you can mitigate the risks?

Merle Hinrichs

A good question. This is in some ways counter cyclical because, as you can appreciate, when you have a down turn in one area like the United States, you have a supplier who is looking to expand and to extend his exposure in other market to replace whatever demand that he is losing from the US market. For example, the European market has expanded in terms of the amount or the volume of procurement from China about 50% faster in the year 2007 than the United States.

If you look at the Middle East and if you look at South America if you look at Eastern Europe these markets are maturing and the demand from those markets is growing as well. There are a lot of market replacement opportunities for these suppliers and that’s what we provide them. We provide them an opportunity and a hope and an alternative a market for maybe a market that is not quite as strong as the one that they had been traditionally selling to.

We don’t expect to see a major down turn in our particular market, what we do expect to see is a need from the supplier to look at his product range, what he’s promoting, get very clear on which area he is focused on and then for us to interpret that in unique selling points for the market place to give him the traction in an area that would create demand for his product. Our business is all about generating demand, looking for alternative markets and in today’s situation that’s exactly what all of our suppliers need and all of our prospective suppliers need.


Please proceed with your presentation or any closing remarks.

Merle Hinrichs

Thanks to all of you for joining us today. I want to share with you that we are scheduled to be presenting soon at the Citigroup’s Fifth Annual Small and Mid Cap Conference in Las Vegas on March 17th that at 1:45pm I’ll be making that presentation. Susanne Long will be presenting at the JP Morgan Hong Kong China Small Cap Corporate Access Days on March 14th, that is in Hong Kong. In addition, we plan to conduct investor meetings on both the East and West coast here this week and next week.

For those investors that have questions or would like to get a hold of us please do so online or you can contact LHA here in the USA. Thank you very much for joining us and we’ll look forward to speaking with you at our next webcast.


Ladies and gentlemen that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.

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