'Service Fee Income': e-Future’s Cash Cow

I reported on the exponential growth of e-Future (EFUT) about a month ago. At the time, the run rate was as follows:

The company had 2.5M in revenue in the first 6 months of 2007, in the 3rd quarter they generated 2.2M, and on Dec 17th they estimated 4th quarter revenue of 4.6-5.3M.

Well, Wednesday night we heard from e-Future on their 4^th quarter and full year results and it was a blowout! In the forth quarter alone, they obtained 6.8M dollars in revenue. So the exponential growth rate went from 2.5M in revenue in the first 6 months of 2007, to 2.2M in the 3rd quarter, giving a total of 4.7M in 9 months, and then 6.8M in the last 3 months.

For the full year, their growth rate was 79%. On a non-GAAP basis, they made 0.87/share. On a GAAP basis, they lost 1.27/share due to the payment of debt and 4, yes f-o-u-r, acquisitions. Their head count now stands at 588 and margins and the closing of the gap between non-GAAP and GAAP will occur significantly in the 2^nd-4^th quarter of 2008. The reason for this is that they now have 588 employees, which they don’t plan to increase significantly while their revenue grows at least 50% to 17-18M in 2008, and let's not forget that they are conservative on their estimates (just 2 weeks before the year ended they estimated 9.3-10M and instead landed over 11M).

However, even as interesting and exciting as the number crunching is, that isn’t what needs to be pointed out. What is the most significant is the cash cow that EFUT is beginning to create. This cash cow is the service fees they obtain for the software contracts they provide to their customers. For each new customer e-Future obtains, it gets an upfront license fee and hardware/software purchase. Then they provide service for free for one year. After that year they obtain a monthly service fee. This monthly service fee is significant and the fact that they give a year free means that now is the ground floor for all of the new customers they obtained in 2006 and 2007. For example, the 4^th quarter had an increase of 648% in service fee income over the 4^th quarter of 2006. If we look at past results, we will see just how fast this can grow.

In 2006, they added 361 new customers. They got their first year free and didn’t start paying a monthly fee until sometime in 2007; most likely late 2007, due to most of their new contracts in 2006 being picked up in the last 4 months of 2006. Now, in 2008, all of those clients will be paying a monthly fee for the whole year. In addition, EFUT added 892 new customers in 2007, again mostly in the second half of 2007. Therefore, in the second half of 2008, these new clients will be paying a monthly fee, and most importantly, throughout all of 2009, all 1253 clients will be paying a monthly fee.

EFUT has 9.2M in cash which is more than enough to cover all of its debt and final installment of www.99114.com. In 2007, they had net cash generated of 2.3M and that number is only getting bigger. In the 4^th quarter and full year conference calls, management was asked whether their current cash on hand and cash flow operations would be sufficient enough for future acquisitions and operations, and they said 'yes'. It is always nice to see a company with a cash cow and no plans to sell more stock and hurt the shareholder. We are now at the ground floor of this opportunity, as they used 2007’s money to obtain significant acquisitions and pay off debt. They are now ready to begin reaping what they sowed.

One last observation about e-Future. They, unlike their U.S peers, do not gouge the shareholder with exuberant pay raises and stock options. In fact, for all of 2007, e-Future only had 300K in stock-based compensation and, according to Forbes, the executives make less than 50K/year while holding onto over 30% of the outstanding shares. That is refreshing to see every now and again.

Disclosure: Author has a long position in EFUT