Executives
Kirsten Chapman – IR, Lippert/Heilshorn & Associates, Inc.
Merle Hinrichs – Chairman and CEO
Eddie Heng – CFO
Analysts
Catherine Leung – Citigroup
John Ma – Roth Capital Partners
James Lee – Sterne Agee Capital Markets
Dick Wei – JP Morgan
Thomas Chung – Merrill Lynch
Keith Cheung [ph] – BNP
Peter Treadway – Tracer Capital
Global Sources Ltd. (GSOL) Q2 2008 Earnings Call Transcript August 14, 2008 8:00 AM ET
Operator
Welcome to the Global Sources second quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. (Operator instructions) As a reminder, this conference is being recorded today August 14, 2008.
I would now like to turn the conference over to Kirsten Chapman. Please go ahead ma'am.
Kirsten Chapman
Thank you Regina, I would like to thank everyone again for joining us today for the Global Sources second quarter 2008 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 globalsources.com. 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 August 18, and the dialing instructions are included in the press release. The replay will also be available on the investor relations page at 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 based on assumptions are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today.
These factors are explained in detail in the company’s filings with the Securities and Exchange Commission. Global Sources do not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Now it’s my pleasure to introduce Mr. Hinrichs, Chairman and Chief Executive Officer. Please go ahead sir.
Merle Hinrichs
Thank you, Kristen and then thank you all for joining our call today. We had a very successful second quarter that was on target with our plans and are expectations. Our revenue of $63.7 million was up 21% compared to the second quarter last year. This was driven by the strong performance of our online services and our exhibitions. Online revenue grew by 30% to $24.1 million representing the third successive quarter of accelerating growth.
Exhibition revenue grew by 21% to $25.3 million and print revenue grew by 6% to $12.8 million. We attribute our strong online revenue growth to various factors including the market positive reaction to the Global Source Online 2.0 and its industry leading services then health buyers distinguish between verified and unverified suppliers.
The repacking and reprising of our services for suppliers around are Six Star System and of course the expanding of our sales organization. We continue to see a very large market opportunity in China and other developing markets and expect our strong online revenue growth to continue, our online services are a profitable business for us that wants ongoing investment to take full advantage of this opportunity.
As such we are investing in IT infrastructure, content aggregation and marketing to buyers and suppliers and sales representation, for our sales representation plan to continue there expansion in the second half beyond the 500 sale team members who were added in the first half. Our exhibition revenue growth was due to successful China Sourcing Fairs in Hong Kong in April. Where we had over 6700 booths and our second year with China Sourcing Fairs in Dubai were we sold 800 booths.
However we expect the overall exhibition revenue growth for the second half to moderate, booking for our electronic and component show have been excellent and we are 100% sold out for October. We will shortly be announcing plans to add additional space next October which will allow us to accommodate more exhibitors next year.
However, the Gifts & Home Product show is likely to be the weakest, we will continue our sales activity until mid September, but this show has been recently challenged by increased capacity at the Canton Fair and we do expect the reduction in the number of booths sold. Also we are anticipating growth from new shows that we are investing and during the second half, example being the first ever China Sourcing Fairs in India, which takes place in November and our second time shows in Shanghai in December.
Looking forward to the second half we have now reached fairly significant point in time with regard to the growth trajectories of our three top-primarily lines of businesses. Online has become the primary growth driver and is expected soon to be the majority of our revenue. However, exhibitions are moderating and we anticipate a print or a decline in print.
For the second half of 2008 we expect the revenue mix to be approximately 53% online, 25% in exhibitions, 20% in print and the remainder of 2% in other. That would represent a big shifts from the second half of 2007 when the revenue mix was 42% online, 27% in exhibitions and 28% and the remaining 3% was other.
Our revenue mix is healthy blends of services that is evolving inline with the markets needs and release our plans. The Six Star pricing program we introduced last January has been extremely successful and effective July 1; we refined the packages we offered to suppliers with the objective of boosting overall growth. We added a second online only package and we’ve reduced the size of the print advertisements in the rest of the packages. After Eddie reviews our second quarter 2008 financials and financial guidance for the second half of 2008 I will make some concluding remarks, about the direction of the business before the questions and answers. Eddie please
Eddie Heng
Thank you, Mr. Hinrichs. I will review our financial results for the second quarter of 2008 compared to the second quarter of 2007. Revenue was $63.7 million compared to $52.5 million, up 21%. Online revenue has been growing and has segregates our review between. Online revenue grew 21% in the fourth quarter of 2007, compared to fourth quarter of 2006, 27% in the first quarter of 2008 compared to the first quarter of 2007 and now 30% in the second quarter of 2008 compared to second quarter of 2007.
Online revenue from China, our primary market had also been growing at an accelerating rate. Online revenue from China grew 30% in fourth quarter of 2007 compared to fourth quarter of 2006, 38% in the first quarter of 2008 compared to the first quarter of 2007 and now 40% in the second quarter of 2008 compared to the second quarter of 2007.
Exhibitions revenue was $25.3 million up 21% compared to $20.9 million driven by the strong growth of the China Sourcing Fairs. Print services revenue was $12.8 million, an increase of 6% as compared to last year’s quarter. Sales on China is comprised 66% of total revenue, were up 29%. Operating expenses were $54.4 million compared to $47.4 million. As anticipated the increase was due to an increase in revenue, expanding sales representation and our investments in information technology infrastructure, content development and marketing to buyers and suppliers.
Total operating expenses in the second quarter included $1.5 million of non-cash stock based compensation. I would like to remind you that the non-cash compensation charge is a charge to our income statement, and a corresponding credit through our additional paying capital accounts in our balance sheet. Hence there is no impact on shareholders equity, however in this quarter since it is in expense in our income statement, there will be a corresponding credit to our additional paying capital account in our balance sheet.
Debt net income was $8.4 million, or $0.18 per diluted share compared to $4.2 million or $0.09 per diluted share for the second quarter of 2007. Non-GAAP net income was $9.9 million or $0.21 per diluted share. This compares to non-GAAP earnings per diluted share of $0.19 for the second quarter of 2007. For the six months period ended June 30, 2008 revenue was $104.3 million compared to $87.5 million in the six months period ended June 30, 2007.
GAAP net income for the six month period ended June 30, 2008 was $16.6 million or $0.35 per diluted share, compared to $10.7 million or $0.23 per dilutes share for the six month period ended June 30, 2007. Non-GAAP net income was $16.5 million or $0.35 per diluted share, compared to $15.9 million or $0.34 per diluted share for the six month period ended June 30, 2007.
Now onto our balance sheet review; Cash and securities on June 30 2008 totaled $220.6 million, compared to $173.5 million on June 30, 2007. It is our policy to keep these as liquid securities and cash equivalent. Accordingly, approximately 73% of the $220.6 million is in short-term U.S. Treasury bond.
As some advance notice, during the third quarter we will finalize transactions that will use approximately $50 million of our cash balances, properties of office space in Shun Cheng and Hong Kong. Short and long term deferred income and customer prepayments were $86.8 million at June 30, 2008, up 19% compared to $72.9 million at June 30 2007.
Total assets were $294.7 million compared to $242.4 million a year ago. Also, we do not have any long term debt or bank debt. Daily sales outstanding or DSO were 13 days same as June 30, 2007 and shareholders equity reached $182.5 million.
We generated $26.2 million in cash from operations during the six month period ended June 30, 2008.
Now I’ll review our financial guidance for the second half of 2008. As a remainder, non-GAAP figures exclude non-cash stock-based compensation. As for our policy the evaluation of non-cash stock-based compensation expenses for this guidance is based on our historical share price at the close of August 5, 2008. For the quarter ending September 30, 2008 we anticipate the following.
Revenue is expected to be between $38.5 million and $39 million representing growth of between 14% and 15% as compared to the same period in 2007. Due to additional plan investments and lower interest income in second half of 2008. GAAP earnings per diluted share are expected to be in the range of $0.02 to $0.03 as compared to $0.11 in the third quarter of 2007. Non-GAAP per diluted share are expected to be in the range of $0.04 to $0.05 as compared to $0.13 in the same period of 2007.
For the six month period ending December 31, 2008 we anticipate the following. Revenue is expected to be in the range of $108 million to $109.5 million representing growth of between 14% and 16% compared to the same period of 2007. Due to the additional plan investments and lower interest income in the second half of 2008. GAAP earnings per diluted share are expected to be in the range of $0.23 to $0.25 compared to $0.28 in the second half of 2007.
Non-GAAP earnings per diluted share are expected to be in the range of $0.27 to $0.29 compared to $0.39 in the same of period of 2007. As such we are projecting full-year revenue to be in the range of $212.3 million to $213.8 million, growing approximately 17% as compared to $182.1 million for 2007. GAAP EPS between $0.58 to $0.60 as compared to $0.61 for 2007 and non-GAAP EPS between $0.62 to $0.64 as compared to $0.73 for 2007 and now I’ll turn the call back to Mr. Hinrichs.
Merle Hinrichs
Thank you, Eddie. We are serving a steadily increasing number of customers, both on the sale and the buyer side, and we see a strong ongoing need for our services and in particular, we are focused on helping suppliers market themselves more effectively to respond to the market conditions, and to diversify their exports to the many rapidly growing developing markets.
Global Sources continues to differentiate itself by being the only company that enable suppliers to create integrated online tradeshow and print marketing campaigns that deliver quality sales leads, branding and differentiation and a face-to-face opportunity for both our buyers and our suppliers, and we do that not only in our tradeshows, but also private sourcing events.
We’re extremely pleased with the development, the positioning and the diversification of our products and based on the very promising online results we have achieved, we intend to continue to invest. Today we see tremendous future in market opportunities for Global Sources for both the English language, which export focused and for the Chinese language media, which serves the China’s domestic market.
Before I open the call to questions, I would like to thank once again our suppliers and employees who rally to assist the victims of the recent earthquakes and Sichuan together with our employees we contributed over $2 million RMB and in addition many of our customers donated thousands of dollars worth of products to people who are in dispirit need.
I now like to turn the call over to the operator for questions and answers. Operator
Question and Answer Session
Operator
(Operator instructions). One moment please for the first question. Our first question is from Catherine Leung with Citigroup. Please go ahead with your question.
Catherine Leung – Citigroup
Hi, thank you for taking my question I have two main question one is more bigger picture on the macro environment and the second one is more on the company specifically. The first the macro environment, would you be able help us understand a little bit better what the current met our requirement and may be totally when you negotiates with your suppliers and your customers.
What is now kind of their perception, what is sentiments there in terms of the willingness, to commits budgets with the company, and have you been seeing any changes in the industry dynamics in terms of the budgets the customer are willing to commit, the pricing the amounts are any color there if you appreciates and secondly on the company, I would like to follow up on the third quarter guidance.
I know that in the prepared remarks you lead us to two additional planned investments and lower interest income in the second, would be able to elaborate a little bit more on what type of planned investment that you’re plan to makes in rest of the year? Thank you.
Merle Hinrichs
Catherine, thank you for the questions and joining the call. First, on the macro environment, it really is a three faceted type of the question and the first two points are dealing with specifically the buy side and the sell side. With a the case of our buyers we really served two different markets, we serve the developing world and we serve the developed world and as you know Catherine in the developed world it has been a pretty demolishes period many of the markets the U.S. market, the European market have been slowing, merchandisers are pressed to buy more carefully they buy shorter runs, they buy cheaper products to fill their shelves and all of this of course has it’s impact upon our advertisers or our suppliers.
Equally so there have been a number of new buyers from the developing world like Russia and Brazil and Middle-East that have coming into the market who have new demands for often similar products and often different products which of course our suppliers have to adjust too, and we try to assist them both the buyers and the suppliers to reach a point that matches both their particular needs. I think we’re doing a very good job of that.
On the internal side of this of course we have continue to invest and this comes through answering your, the second part of your question. We have continue to invest in our sales organization, as you know we’d launched the GSOL 2.0 late last year and we started recruiting in January and February heavily.
So the majority of the sales organization that are selling this new products are relatively new and of course are challenged with a very new environment which they are selling, now not only they are challenged but of course our older advertising sales reps are also challenged with this environment, because the advertisers the suppliers of course are faced with increased cost, increased commodity cost, increased labor cost and as you know many of the previous export incentives in China have been withdrawn. So, they are definitely being more careful with their spent, they are more careful of their commitment and you asked about a commitment.
The length of commitment of is typically the same, but often the amount that they are prepared to commit to is less. So, I think that we’ve been very well positioned or reposition our products very well by introducing GSOL 2.0 because it had does provide an opportunity for these customers to start at lower price point and then build up to different services, which we provide both in the tradeshow business as well as in print. So, thank you Catherine
Catherine Leung – Citigroup
Thank you, can I just have a follow up to your response that I may.
Merle Hinrichs
Yes.
Catherine Leung – Citigroup
So you mention that the length of the commitment is typically the same, but the amount that they are prepared to maybe less, with the introduction of the Six Star packages have you seen within your existing customer base some customers choosing to now paid for the lower Star package when they were before willing to pay for a higher price package given in terms of technical development going on?
Merle Hinrichs
We have not seen any trade downs, in our existing client base, but we certainly have seen lower price selection for new customers that have come in. So, for older customers they really haven’t traded down their packages, but for new customers they have selected a lower price point.
Catherine Leung – Citigroup
And what I was really trying to understand with my second question is, you do see pretty material margin contraction guided for in the third quarter of this year and I’m trying just to understand better whether these planned investments or increasing cost are leading for this margin contraction. Has this been within the expectations of the company, or is the company has looking at them with the closed market environment, taking advantage taking opportunity of new areas of investment?
Merle Hinrichs
Of course with the online services only, our margins can improve. What has been the surprise I think to everyone and very, very difficult to have anticipated is what has happened to the consumer market and to the China export market over the last let’s say nine months, and the softening of it. So, I think that we’re on track for both of the achieving the objective of the GSOL 2.0 and of course offering a price point that is a bit lower than what we have previously offered without the print component, but the impact of the macro part of the market has been a bit greater than what we could have anticipated.
Catherine Leung – Citigroup
Just to make sure that I have this clear. The margin contractions, so is that largely because the cost base is largely fixed and the revenue or growth..
Merle Hinrichs
Sorry, Catherine you’re breaking up.
Catherine Leung – Citigroup
No, I just wanted to clarify, so that I’m not misinterpreting what you had said.
Merle Hinrichs
Yes.
Catherine Leung – Citigroup
The margin contraction in third quarter and for actually for the second half, is that largely because the cost based is fixed and revenue growth in not ramping as fast as you may have expected, maybe when you start the budget for this cost base?
Merle Hinrichs
It is primarily because the revenue has not ramped. Our costing, only a portion of our costing has fixed, because our sales representatives are impart the sale representation and our teams are paid on a varied and a commission base.
Catherine Leung – Citigroup
Thank you. I’ll go back in the queue.
Merle Hinrichs
Thank you.
Operator
Our next question comes from the line of John Ma of Roth Capital Partners. Please go ahead with your question.
John Ma – Roth Capital Partners
Good evening Merle, good evening Eddie.
Merle Hinrichs
Good evening John.
John Ma – Roth Capital Partners
Can you here me?
Merle Hinrichs
Yes, I can.
John Ma – Roth Capital Partners
I have a few questions, if you can bear with me. Number one is I think that its something on everybody’s mind is, how did the Olympic Games effects your operations anything?
Merle Hinrichs
Well, of course everybody in China is not only fascinated, but of course quite interested in the outcome and I think it is in passing, it’s since temporary if at all. Bit of a distraction John, but not a major one.
John Ma – Roth Capital Partners
So, I’m glad to hear that. The other question relate to, you discussed briefly in your press release talking about repackaging and then re-pricing , are you lowing down your price on your One Star or Six Star, can you give a little more detail on that?
Merle Hinrichs
No, we have not lowered any price on, but it is what we announced to be earlier. So, there has not been any lowering of the price.
John Ma – Roth Capital Partners
Okay and now we assume you have said you will rapidly expand your sales presence in China and I assume that you will also do more domestic B2B, if so your competitors is charging like a 2000 RMB per year. How do you reach profitability with such a price competitive environment?
Merle Hinrichs
On our China GSOL our price point today is very, very competitive. As some future time, we have some 140,000 companies now listed on our China GSOL. We have commenced selling that only in the first quarter of this year. It is improving we have some 900,000 products on that product on the China GSOL now. The product is very competitive and we look forward continued growth throughout the remainder of the year and certainly into 2009.
John Ma – Roth Capital Partners
The question is, I am just curious, are you continuing your share buyback?
Merle Hinrichs
Of course we have made arrangements internally for share buyback, but we have not exercised that option.
John Ma – Roth Capital Partners
Okay and you discussed about the, you talked about the ratios and some weakness, now how above cancellation you see cancellation from the customer?
Merle Hinrichs
We haven’t seen a major cancellation, as you know we everyone that buys the booth has to make a down payment. So, it’s not easy for these companies just simply to walk way from their down payments. That’s not something that they want to do nor would we want them to do that.
John Ma – Roth Capital Partners
Okay and my last questions to Eddie, I’m just curious and why this quarter in particular the translation loss is quite larger than it used to be compared to previous quarter and how do we interpret that?
Eddie Heng
John, this is a result of our customer prepayment that we have recorded previously at the historical rate and now we going to translate based on the current prevailing exchange rate.
John Ma – Roth Capital Partners
Okay. Now going forward in this future quarter’s, we see the Transition Law in normal range in previous quarters or we see that spending…
Eddie Heng
I expect that to be declining as render rate starts to stabilize. Okay that’s fair. John.
John Ma – Roth Capital Partners
Thanks for your answer.
Eddie Heng
Welcome.
Merle Hinrichs
Okay thanks John, and thanks for joining our call.
John Ma – Roth Capital Partners
Thanks.
Operator
Our next question comes from James Lee with Sterne Agee Capital.
Merle Hinrichs
Hi, James.
James Lee – Sterne Agee Capital Markets
Thanks for taking my question. I hope can sort of give more color, just want to follow-up on Catharine’s question and especially on the investment going into second half. It’s just seems like a little bit higher than our expectation. Did you actually increase the spending budget versus what you have before, and if so maybe you guys can quantify what the additional spending are and also can you give us a sense when we can start seeing synergy for the online services in other words, when can we expect the moderation of expenses as a percentage of revenues? Thanks
Merle Hinrichs
Okay, the investments James are really very focused upon the sell side of the organization for both, the EGSR or the English GSOL, as well as the China GSOL. That’s one and of course the IT infrastructure and I need just to say along with the growth in the sales organization, there are other aspects of the infrastructure that we have to invest in, so, that’s on the export side.
On the China side of the organization, as you recall we launched a publication called Elegant Living and are some investment that is associated with that. We have not really pullback any of the plans that we have had to grow our sales organization, we believe that the market will return, and that we will be much, much better positioned to take advantage of that when it happens by having a even in much larger and formal organization in place, and then what we have today.
On the synergy side, and when you can expect some diminution in cost, certainly when the market comes back and the volume returns you will see that. You will all see, also see a diminution in the overall print cost or the cost of print for the export portion of the business, when that happens, and you will start to seeing at sometime in this next year.
James Lee – Sterne Agee Capital Markets
A follow up question for you Merle. Can you help me understand a little bit of maybe I didn’t asked my question clearly and I apologize if that’s the case. Was there actually increase in budget, in second budget into the second half versus what we have budgeted before, as you get more aggressive on the spending from ..
Merle Hinrichs
No, we have not, John got more aggressive, it’s been really, we’ve been just executing to the budgetary plans we’ve had. In some areas we’ve made adjustments of course you make adjustments in your expenditures as you go along where you didn’t get faster traction, but everything that we’ve planned to do earlier in the year we are continuing to execute to that plan.
James Lee – Sterne Agee Capital Markets
Helpful, and lastly, Merle maybe it will be very helpful since the margin profile was kind of weak for 3Q guidance, many be you can get a stand over a longer term given what the mix revenues might be may be in the two to three years I’m sure majority of the revenues is going to be online services, can you give us sense with the long term margin picture, is like for the company. So, we can anticipate when the online services become more mature when its critical mass and at that point in time. Given that mix of revenue what the operating margin picture looks like that will be great….
Merle Hinrichs
James, of course we don’t give any numerical guidance on this, but you can appreciate that our plan is to reduce our overall cost and improve our margins basically a online service only you can improve margins reducing the print will improve margins growing in our trade show area and trade show businesses will improve margins and as soon as the market comes back we will be able to do all of that and we will be doing at as we proceed with the plan this year, but I think it will be much more apparent as you have suggested in a year or two years that are certainly will be in Q3 or Q4 this year.
So, we are in a, James I would say that we are in really an exceptional position. We have continued to grow the operation. Of course there has been a slight decline in our sales volume, and it’s understandable in the circumstance, but we have a very solid management. We’ve been in circumstances like this before and we’ve seen the turnaround that we simply wanted to be in the right place so, with the right products with which we’ve launched this last year to take full advantage of that turnaround.
Operator
Our next question comes from the line of Dick Wei with J.P. Morgan. Please go ahead with your question.
Dick Wei – JP Morgan
Hi, Merle, Eddie thanks for taking my questions. I guess just any particular industry that you see more impact, in terms on the MECO front and then in the last question you’ve mentioned about when the markets are come back, do you have any sense or guidance when would that happen? Thanks
Merle Hinrichs
Dick thanks for joining the call, it’s good to have you. We believe that the industry that has been the industrial vertical that has been probably hit the hardest is the general merchandise or gift merchandise which has had very low margins to stark with. So these manufactures have been more seriously hit by the increase of labor cost. Its just common sense that, that would be the case in this kind of market and condition and of course there is another factor while the Gifts & Home Products show is a bit weak in this the second half and as we mention, or as I mention earlier in my prepared remarks is that the electronics show has been very strong and has been less sensitive and has not been as weak as the gift product segmentation.
Now as to when this market is going to turnaround, I would like to think that it will start that that turn sometime in the early part of this next year and that would be my guess. We certainly hope that that is the case, but I haven’t seen any indication to confirm that as of date and if you see anyone Dick you tell me or you seeing please tell, please let me know.
Dick Wei – JP Morgan
If I may just refer to my first part of the question, if you can show us for the ’09 part any of the I mean industry that is more willing for you just coming to sign up to ’09 services or any one you see cancellations for the ’09 part that would be great? Thanks.
Merle Hinrichs
We don’t see a specific vertical relationship to us specific vertical, but we do know that there are sectors as I am just mentioned earlier that are certainly more hit by this increasing in cost and so they let say a gift exporter would take maybe a smaller package than let say an electronics exporter or manufactures that would be more the case.
Dick Wei – JP Morgan
Okay, great thanks Merle, Eddie. Thanks.
Operator
Our next question comes for the line of Thomas Chung with Merrill Lynch. Please go ahead with your question.
Thomas Chung – Merrill Lynch
Hi, thank you for taking my questions. I have two questions. The first is, can you tell us how many additional sales force will there be in the second half of the year and my second question is, can you give us some more color about the competitive landscape of your different line of business in a second half this year? Thanks.
Merle Hinrichs
Thomas, your first is the additional number of what?
Thomas Chung – Merrill Lynch
The sale force.
Merle Hinrichs
Okay.
Thomas Chung – Merrill Lynch
In the second half of this year.
Merle Hinrichs
We are on schedule to add up to probably over 2000 this year; we are at about 1300 in terms of the sales organizational now, so we are continually to expand that that organization. We with regard to the competitive issue of course, we have competitors like all businesses and all sectors. We competitors in the exhibition businesses, we have competitors in the online business; we have competitors in the print business.
We have been very successful, I think of putting together a package which meets the needs of our suppliers in a way that truly differentiates our product and we have a very, as so a highly trained group of management that have a hand on approach in assisting our suppliers and with the GSOL 2.0 of course where we have a highly specialized offering, a very comprehensive offering.
We’ve added latterly thousands and thousands of products and thousands of suppliers, we’ve rank them, we’ve verified them. There is simply no other competitor that even comes close to the range and the depth of our offering and today our pricing points are very, very competitive indeed and I’m sure that you can see that we are picking up tracking and we are much, much more competitive today then what we were let’s a year or two year ago. So, I think we are in a very, very strong position and as we’ve said earlier that has much more to do with the macro market issues of the day and then it has to do with the packaging or the internal issues.
Thomas Chung – Merrill Lynch
Okay, thanks.
Merle Hinrichs
Okay.
Operator
(Operator instructions) Our next question comes from Keith Cheung [ph] with BNP. Please go ahead with your question.
Keith Cheung – BNP
(inaudible)
Merle Hinrichs
Keith, can you speak up a little bit I’m having difficult to hearing you?
Keith Cheung – BNP
Can you hear me?
Merle Hinrichs
Yes, I can Kenneth please go ahead.
Keith Cheung – BNP
Just a quick question I just want to get some clarification on the first quarters guidance, from the EPS number you said some sort of one of expense press release to significant drop of the EPS number, can you explain a bit more? Thanks.
Merle Hinrichs
Eddie, do you want to?
Eddie Heng
Yes, hi Ken.
Keith Cheung – BNP
Hi.
Eddie Heng
Well, we’ve mentioned earlier that we are investing toward that, as a result that the investment cost is causing a impact on our EPS, but also the reduction of interest income, we are expecting a drop of interest income about $1.3 million. As you know that the U.S. Treasury bond yield has been quite low compared to last year, so that is going to cost most about $1.3 million drop in the EPS.
Keith Cheung – BNP
Okay. Just about the investment income. How about any margin conception or any other increase in expenses?
Eddie Heng
Well, the increasing expense as I mentioned early our investment for developing our sales representation, IT infrastructure, content development. These are investment that we’re putting in for the group of the online business, and the Chinese GSOL.
Keith Cheung – BNP
Okay, thanks.
Eddie Heng
Thank you, Keith.
Operator
Our next question comes from the line of Peter Treadway, with Tracer Capital. Please go ahead with your question.
Peter Treadway – Tracer Capital
Hi, good evening. I’ve two questions, one was I was just trying to understand that the sales line. I was under the impression that that was all commission based so that revenues fell off the sales should as well. So can you talk about the fixed, variable component, and then the second thing was if I am right most of your currency comes in RMB and then you’re reporting in dollar. So, can you talk a little bit about currency neutral growth both in Q2 and then I guess in your guidance as well or how you’re thinking about effects impacting your revenues in your guidance? Thank you.
Merle Hinrichs
Okay, thanks Peter, and thanks for joining the call. I’ll take the first part of this, and Eddie you can take the second, okay?
Eddie Heng
Sure, thank you.
Merle Hinrichs
On the fixed and variable Peter, of course all of the sales organization, you hire a sales person, there is a basic salary with which you have to provide and there is also other infrastructure issues, when you hire ten sales reps of course you need to have management, and of course there is a sales costs, which is typically more fixed for the sales management side than for the representative, specifically in representative overtime we will be then commissioned and the commission will grow and the fixed portion of it will decline.
So, over this a six-month or a 12-month period what we are looking for is that the variable share of the total sales costs will increase as a portion of the sales costs and the fixed portion will decline. So, whenever you’re investing and building a sales organization, the first costs that is allocated to it is usually the fixed portion with, which then declines in our organizational set up overtime, this that helped.
Peter Treadway – Tracer Capital
That’s great. Thank you.
Merle Hinrichs
Right, Eddie, on the currency.
Eddie Heng
Hi, Peter. The RMB, revenue, in China we collect them in advance. So, when we collect in advance the transaction for that you convert them into our recent historical rate. The reason being that we refuse to collect them in RMB we will then subsequently remit that amount to us and we then only to outside of the China in U.S. dollars to re-recognize the gains as that we received the funds. So, that will be a gain on the fund transfer. As such in revenue is neutral because we record that based on a historical rate.
Peter Treadway – Tracer Capital
So, everything is done on the historical rates, you are saying?
Eddie Heng
Yes.
Peter Treadway – Tracer Capital
Okay.
Eddie Heng
Thank you.
Peter Treadway – Tracer Capital
Thanks.
Operator
Your next question comes from the line of Catherine Leung with Citigroup. Please go ahead with your question.
Catherine Leung – Citigroup
Hi, I Just have another follow-up on the industry related performance, you mentioned that the general and the gift merchandising industry has been hit the hard as compared to say the electronics show based on the observation from how other tradeshows has been selling? Can you maybe help us understand a little bit better because our initial impressions may have been that higher ticket items, which may include electronics and are there any of these electronic items are also part of discussion you expense? Do you have any of insight as to why the electronic industry seems to be holding up relatively better than the general and the gift merchandising market? Is it simply because of the margin as you, which you’ve mentioned?
Merle Hinrichs
Well, Catherine I think that is the most important part of this issue and also in the electronics industry there is a lot of new product entry not to say that there is in the gifts as well, but in the electronics industry a new entry will fetch a higher price point and a typically a better margin, so that is probably one of the primary reasons. The gifts segmentation has always been a low margin relatively high volume portion or high volume business.
So this is not new, we’ve seen this before there are typically a smaller operators involved with the gift business and they are with the larger businesses associated with our electronics industry and I think that they’re more vulnerable. The gift business is definitely more vulnerable and they are the quickest of course to try to pullback on any of their costs whether that costs be in infrastructure or whether it would be in promotional cost or an exhibition costs. This is not a new trend, we would expect that this would turnaround as soon as the market starts turning around or there is indication of it’s such. I cannot give you a numerical evaluation of this Catherine, but this is just what we see from the changes within the industries we served.
Catherine Leung – Citigroup
Oh, yes, yes I was looking actually for calculative, for the qualitative color.
Merle Hinrichs
Qualitative color on percentage wise.
Catherine Leung – Citigroup
But you provided exactly what I was looking for.
Merle Hinrichs
Okay. Thank you.
Operator
Ladies and gentlemen that is all the time we have for today. Please proceed with your presentation or any closing remarks.
Merle Hinrichs
Thank you operator and I want to thank everyone for joining us today. We look forward to indeed another strong quarter and speaking with you at the next call. I think the company has better positioned than we’ve ever been in the past as I have mentioned and I think we’ve had a season management team of that have seen similar issues and problems and economic slowdowns in the past and we’ve been more than capable of managing the business and managing through the changes that have been required and ready of course for the up tick when indeed it comes.
Global Sources is scheduled to present at the following conferences should you be interested and attending in the Citigroup’s 15th Annual Global Technology Conference in New York that takes place on Wednesday, September 3, and The Sterne Agee Best Ideas Conference in Milwaukee on September 17 and the Roth Capital Groups, China comes to Vegas Conference, November 19 through the 21, 2008, we will be at all three of those and we’d love to meet up with you if you were interested in attending.
All for now, thank you again and we’ll be talking with you next quarter. Bye
Operator
Ladies and gentlemen that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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