Global Sources Q2 2006 Earnings Conference Call Transcript (GSOL)

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Global Sources, (NASDAQ:GSOL)

Q2 2006 Earnings Conference Call

August 10, 2006, 8:00 a.m. EST

Executives

Moriah Shilton, Investor Relations

Merle Hinrichs, Chairman and Chief Executive Officer

Eddie Heng, Chief Financial Officer

Analysts

Andy Van Vleck, WR Hambrecht

Dick Wei, JP Morgan

Greg, Highland Capital

Jason Brueschke, Citigroup

John Mow, Roth Capital Partners

Ted Pedro, JK Associates

Presentation

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Global Sources Second Quarter 2006 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following today’s presentation instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press the * followed by the 0. As a reminder, this conference is being recorded today, Thursday, May 11, 2006. I will now turn the conference to Moriah Shilton of Lippert/Heilshorn. Please go ahead.

Moriah Shilton, Investor Relations

Thank you, Eric, and I’d like to thank everyone again for joining us today for the Global Sources Second Quarter 2006 Earnings Conference Call. With us on the call today are Merle Hinrichs, Chairman and Chief Executive Officer; and Eddie Heng, Chief Financial Officer. If you have not yet received the press release, it is now available at the Company’s web site at www.globalsources.com. If you would like to be added to our distribution list or would like additional information about Global Sources, you may call Lippert/Heilshorn & Associates at 415-433-3777. There will be a replay of this call available until August 14th 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, I would like to remind you 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 SEC. 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.

I would now like to turn the call over to Mr. Hinrichs. Please go ahead, sir.

Merle Hinrichs, Chairman and Chief Executive Officer

Thank you, Moriah, and thank you all for joining our call today. We had a successful second quarter of 2006. Total revenue was $44.8 million and that was up 41% over the prior year’s period. Revenue growth was driven by our China Sourcing Fairs and strongly supported by online and current revenue growth. Our April China Sourcing Fairs held at our new venue in Hong Kong grew almost three fold compared to the tradeshows conducted in April 2005 in Shanghai. Our online revenue grew 18% and print revenue grew 16% over last year’s period. Our non-financial metrics also continue to show very impressing growth. There were more than 530,000 active buyers in our independently certified community at June 30, 2006; that’s up 22% compared to the total at last year’s quarter end.

Lead generation through global sources online alone, which we measure as requests for information from buyers to suppliers, totaled over $7 million with the 12 months ending June 30, 2006. This was a dramatic 50% increase over the same period last year. Before I turn the call over to Eddie, I will comment on our China Sourcing Fairs Global Sources Direct and discuss our relationship with HC International.

Our April China Sourcing Fairs were very successful and the success is drawing and contributing to our other lines of business. The spring China Sourcing Fairs generated $16.4 million, and that was up to $12 million compared to last year’s spring shows. We expect all three shows in October to be bigger than those that were held in April. The shows are clearly demonstrating the impact our integrated marketing services are having on our buyer and supplier customers. There is a combination of online magazines and trade shows facilitates all stages of the buying process, from awareness right through to negotiation and the purchase decision. It is this combination that enables us to provide suppliers what is by far the most expensive end-to-end integrated marketing communications offerings in our business.

Now, I’d like to briefly update you on Global Sources Direct. Global Sources Direct is our direct online sales initiative whereby we sell wholesale lots on consignment for manufacturers in China. We view Global Sources Direct as an important and strategic long-term opportunity. We are working today on building the management team, attracting more suppliers, and developing the best product mix. We had recently hired a senior manager for this division. We also are continuing to expand both the number of products on the site and the number of suppliers. We are investing in various aspects of the operation.

Today, I will also update you on our recently announced relationship with HC International, which is two fold. First, we have an investment of approximately 13% of HC shares; second, we are pursuing a business relationship and have already begun working on some of the opportunities we have identified. We are very excited about our investment in HC International and between now and June 2007 we will evaluate how we can work together most effectively. This of course is a process and it is still too early to make any commitments on the final outcome. I’ll provide more detail on our upcoming China Sourcing Fairs, Global Sources Direct and HC International relationship shortly, but first I’d like to ask Eddie Heng, our Chief Financial Officer, to present his review of the financials and provide third quarter and full year 2006 guidance. Eddie…

Eddie Heng, Chief Financial Officer

Thank you, Mr. Hinrichs. Good morning or evening to all of you on this call. Second quarter revenue was $44.8 million compared to $31.7 million in prior year's quarter. Please note the shape in the timing of our IIC China show from second quarter last year to first quarter this year, which makes the quarter not directly comparable to last year. This year, IIC China generated $3.7 million in revenue. In 2005 the IIC China show was held in April and its revenue of 3.1 million was recognized in the second quarter. The main growth driver was our exhibition, which grew 117% compared to prior year’s quarter.

Online services revenue was $15.7 million compared to $13.3 million in the prior year's quarter. Print services revenue was $12.4 million compared to $10.7 million in the prior year's quarter. China sales comprised 53% of total revenues and were $23.8 million compared to $15.4 million in prior year's quarter.

Operating expenses were $41.6 million compared to $26.9 million in prior year's quarter. The anticipated increase was due to sales cost related to generating the higher revenues, event production and promotion costs for the China Sourcing Fairs held in this quarter, and investment in our trade show infrastructure.

Net income was $4 million, compared to $4.5 million in prior year's quarter. Earnings per diluted share were $0.10 compared to $0.12 in prior year's quarter. For the six-month period ended June 30, 2006, compared to the same period in 2005, the results are as follows: revenue was $74.9 million compared to $54.5 million. Revenue from Mainland China continues to represent approximately 53% of total revenue.

Operating expenses were $67.3 million compared to $47.7 million last year. Net income was $8.4 million compared to $6.5 million, and earnings per diluted share were $0.22 compared to $0.18.

On to our balance sheet review; cash and securities on June 30, 2006, totaled $137.6 million. Short and long-term deferred income and customer prepayments which include online, print, and tradeshows, and which are all collected in cash was $59.2 million at June 30, 2006, compared to $37.8 million at June 30, 2005. The majority of the 56% increase reflects growth in our tradeshow business. This substantial growth is an indicator of our underlying revenue momentum.

Total assets were $195.7 million compared to $147.7 million a year ago. Also, we do not have any long-term debt or bank debt. Day sales outstanding or DSO were 18 days compared to 19 days at the end of last year’s second quarter. Shareholder’s equity was $110.2 million compared to $91.4 million a year ago.

Now, I will review our financial guidance for the third quarter and full year 2006. Before I give the guidance, I’d like to remind you of how our tradeshows will impact our revenue and profitability, and explain some of our seasonality. Revenue from tradeshows is recognized in a month in which the event occurs, which creates greater seasonal revenue fluctuations as virtually all of our largest tradeshows are expected to be held in April and October of each year. In addition, our online and trade publication advertising revenue is seasonal and tends to be highest in the fourth quarter of each calendar year. The net result is that the second quarter and first quarter revenues are likely to be substantially higher than the first and third quarter revenues; in addition, we anticipate 2006 China Sourcing Fairs revenues to be roughly equivalent to our investment in them.

For the third quarter of 2006, we anticipate the following: third quarter 2006 revenue is expected to be in the range of $27.5 million to $28.5 million. This compares to revenue of $25.4 million reported for the third quarter of 2005 and reflects an approximate 8% to 12% increase. Third quarter earnings per diluted share are expected to be in the range between $0.08 and $0.09. This compares to EPS of $0.06 reported for the third quarter of 2005 and reflects an approximate 33% to 50% increase. For the full year 2006, we anticipate the following: revenue for the full year 2006 is expected to be in the range of $151 million to $153 million. This compares to revenue of $112 million reported for 2005 and reflects an approximate 35% to 37% increase. Earnings per diluted share for the full year 2006 are expected to be in the range of $0.42 to $0.45. This compares to EPS of $0.36 reported for 2005 and reflects an approximate 17% to 25% increase.

Before I turn the call back to Mr. Hinrichs, I would like to note that on July 3rd Global Sources was selected to be included in the new NASDAQ Global Select Market. Based on financial and liquidity requirements, the NASDAQ Global Select Market has the highest listing standards of any exchange in the world.

Now, I’d like to turn the call back to Mr. Hinrichs.

Merle Hinrichs, Chairman and Chief Executive Officer

Thank you, Eddie. We are most pleased with being selected for the NASDAQ Global Select Market and earlier in the year as the number one investor relations website for small and medium cap companies in our region. Both demonstrate we are meeting all standards of financial health and disclosure that are very important to our investors.

I am now going to elaborate on the China Sourcing Fairs Global Sources Direct and our relationship with HC. Let me begin with our China Sourcing Fairs. As I mentioned earlier, we expect all three shows in October to be bigger than those in April. Gifts and Home Products Show, which is by far our biggest show, we will exceed the 3700 booths we had for the spring show in April.

In fashion accessories, we are expecting growth from approximately 500 booths we had in April. We are expanding into another hall and we have added a pavilion for underwear and swim wear. Also for electronics and components, we will have more booths in October than the 1700 booths we had in April. Consumer electronics and in-car electronics will be particularly strong exhibition areas, and we’ve added pavilions for both global positioning systems and health and personal care electronics.

For our China Sourcing Fairs, we are establishing a strong reputation for attracting a high quality buyer audience. Then, the marketing and pre-registrations are looking good, and I have to share with you the type of buyers that will be in attendance. These range from BestBuy, Black & Decker, Carrefour, Circuit City, Coles Myer, Disney, El Cortes Ingles, IKEA, KarstadtQuelle, Kingfisher, Metro, NEC, Nike, Phillips Radio Shack, Samsung, Sears, Staples, Tesco, Tommy Hilfiger, and Wollworths to name just a few. We are able to attract these large and well known buyers plus thousands of others because of the quality of suppliers that buyers find on Global Sources Online, in our magazines, and at our China Sourcing Fairs.

Our focus is to introduce suppliers that can meet the export needs of buyers, and we qualify our suppliers in three ways: first, through extensive personal visits, a total more than 60,000 per month in Greater China alone; second, through strict verification, our 150-person plant services team works closely with each supplier to verify all product and supplier information that appears in our media; third, through financial commitment. Our suppliers pay us what are probably the highest rates in our industry and are a clear indication of their commitment to exports and their wish to meet buyer needs.

Looking to 2007, we will expand geographically with a new China Sourcing Fair to be held in Dubai in June. In the past five years, Dubai has imported more than $12 billion worth of goods from China, and it is the world’s third largest re-export hub after Hong Kong and Singapore. Lastly, with regard to China Sourcing Fairs, I want to share a way for you to experience the shows without being there. In our second quarter 2006 earnings release, there is a link to short videos for you.

Next, as I promised on the call, I’ll provide more detail on Global Sources Direct. We are investing in an exciting new business and are innovating to stretch far beyond what most other B2B media companies have done, to the point where we are not only simply connecting buyers and suppliers but are instead selling and facilitating the distribution of products on behalf of sellers. Global Sources Direct is addressing the needs of a wide variety of buyers including experienced importers and low volume buyers that if typically not imported in the past or large buyers that want to test the product line. The model is new largely because the majority of manufacturers in China do not produce for inventory. Furthermore, most of these companies’ systems are not set up to sell by the container load. Our value add is to enable them to sell smaller lots of standard items to a large number of overseas customers. They can realize higher per unit margins than they normally receive. Thus, they don’t need to invest in SAF and other resources required for this model.

We are proceeding steadily yet carefully with Global Sources Direct and we are pleased with our progress. We anticipate investing approximately $1.1 million in Global Sources Direct in 2006 and expect Global Sources Direct to conclude transactions valued at approximately $2 million. We continue to test and sell through various channels, including the eBay channel, and we continue to work on developing relationships with suppliers on marketing and on automating our systems. With Global Sources Direct, we have a position of growing brand recognition and increasing expertise in online merchandising sales, a rapidly expanding sector of internet commerce.

Let me shift now to HC International. First, I realize many of you have questions about HC International as a company. I respectfully ask you to direct your inquires to HC International as we cannot answer on their behalf of course. As many of you know, Global Sources has spent many years building our role as a facilitator of two-way B2B trade with Greater China with two distinct segments of business. The first segment is our core business, which is facilitating trade from Greater China to the world with English language media. The second segment of our business facilitates B2B trade in the other direction, or from the world to China, primarily with Chinese language media.

And now through our own initiatives and by our new HC International relationship, we are building the third segment of China to China whereby we’ll be assessing companies or assisting companies engaged in domestic China B2B business. With the HC International business relationship our near-term focus is to identify opportunities to leverage the respective resources of the two companies. In the longer term, the intention is to provide end-to-end integrated multi-channel solutions including both export and domestic B2B. The combination of HC International and Global Sources has a potential to become a very successful relationship that can provide a full range of services to China manufacturers -- for those who wish to export, those who wish to import, and those companies engaged in domestic business.

In summary, we are extremely pleased with the success of our China Sourcing Fairs with our revenue growth and with the overall outlook for our business. We have a highly differentiated offering. We are uniquely capable of helping suppliers conduct integrated marketing campaigns that reach their prospects at all stages of the buying process. Moreover, we envision our growing strength with tradeshows and our growing presence in China will build and enhance our differentiation. This provides a solid platform for long-term revenue and earnings growth.

I’d now like to turn the call over to the operator for questions and answers. Operator…

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question please press the * followed by the 1 on your pushbutton phone. If you like to decline to the polling process, press the * followed by the 2. You’ll hear a three-tone prompt acknowledging your selection. If you are using a speaker phone you will need to lift the handset before pressing the numbers. One moment please for the first question. Our first question comes from Andy Van Vleck with WR Hambrecht; please go ahead.

Andy Van Vleck, WR Hambrecht

Good morning, Merle and Eddie, I’m actually calling in from the East Coast at this time because I couldn’t handle the 5 a.m. conference call in San Francisco. I wanted to congratulate you on another strong quarter and the guidance both top and bottom lines are better than I expected. I’m continually surprised by the growth in online and print revenue. I realize the tradeshows have been kind of stealing the limelight in terms of revenue growth, and I notice that online revenues were up 18% this quarter year-on-year and print was up 16%. That comes on the back of 15% growth in the first quarter, which I to be honest didn’t think was sustainable because in prior years I believe it was single digit growth in these business lines. Can you explain what’s going on and why we got the burst again this quarter? I think it’s important for investors to know because these business lines have in the past been driving operating profits, so if it does continue I would expect a widening of margins.

Merle Hinrichs, Chairman and Chief Executive Officer

Thank you, Andy. One primary reason is the integrated marketing services that we are providing today are really coming into their own, and with the move into Hong Kong where we now can accommodate a far larger number at the tradeshows, of course, also helps us facilitate that many more companies both online and in print, and I think our audience of suppliers have finally realized how important this is to be able to promote their presence at a show and then to have an active presence at these shows to present their products and meet buyers face to face. Also on the buy side, and I think there’s a reason that we have been able to increase the number of RFIs, buyers when they attend have the opportunity to really see the quality of suppliers that we are providing to them, and as you will appreciate having been in China as much as you have is how important this is. This is a huge country, there are literally thousands and thousands of suppliers, and it’s a major task for our buying community to be able to work through who is qualified and who is not. And at Global Sources, as I mentioned earlier, we spend a lot of time and a lot of effort to meet with every single supplier to make sure that those products are available or being made available at the same quality standards and that the exporters or the manufacturers are capable of and involved with exportation. But I think it’s finally really hitting on all cylinders and we see this sustainable for the long term. Thank you, Andy.

Andy Van Vleck, WR Hambrecht

Thank you, again congratulations on the HC Investments. As you know, if you read my report I’m a big fan and I couldn’t stop writing about it after digging into HC and the synergies are obvious and numerous, so I do hope you go through that ongoing transaction.

Merle Hinrichs, Chairman and Chief Executive Officer

Thank you, we are working on it.

Operator

Our next question comes from Dick Wei with JP Morgan; please go ahead.

Dick Wei, JP Morgan

I had two questions and the first one is more on the financial side. I’m just wondering, what is the sustainable operating margin or gross margin for the exhibition business?

Merle Hinrichs, Chairman and Chief Executive Officer

Operator, I cannot hear Dick. I can hear a mumble but I cannot hear the question, could you repeat it for me?

Dick Wei, JP Morgan

Basically, if I look at the (inaudible) I saw it was around 53% for this quarter versus 20% for the prior quarters before. I don’t know if this is the right way to look at the operating margins for the exhibition business?

Merle Hinrichs, Chairman and Chief Executive Officer

Eddie, did you hear the question and if so would you take it please?

Eddie Heng, Chief Financial Officer

Dick, we don’t provide the breakdown of our exhibition business in each of the direct costs. In our financial statement you’ll total cost and that includes our exhibition business too, but that is a direct cost for event production or the cost impact. And also within community costs too there is a promotional cost which is the costing of that event. So, for competitive reasons unfortunately we prefer not to provide detailed breakdowns of our gross margins for each of our other services.

Merle Hinrichs, Chairman and Chief Executive Officer

And your second question, Dick?

Dick Wei, JP Morgan

The second question is basically the seasonality of the online advertising and the print media; I mean for the print side in the first quarter it was seasonality, but for online it is not viewed in a similar rate; I just wonder what is the typical seasonality for the two services?

Merle Hinrichs, Chairman and Chief Executive Officer

Dick, there is more or less seasonality for the online and the print and of course it is for the tradeshows, but there is some seasonality. There is some seasonality by product and there’s a product within different seasons. So, the stronger periods of course are the spring of the year through early summer and then of course the fall, but that is then repeated in our business for years and I think the comparables from quarter to quarter are actually quite accurate. We don’t have to ship, like for example the IIC show, we actually moved from one month but it was reflected in the first quarter versus the second quarter, which shows greater seasonality, but that doesn’t really happen and is not applicable to the online or the print. Does that answer the question, Dick, I’m having a little trouble hearing you, but I hope that answers your question?

Dick Wei, JP Morgan

It does and I just want to further clarify, for this quarter the online advertising revenue went up by 12%, but in the second quarter sequentially it grew to only 4%, so I’m just wondering if there’s some kind of slow down or are there just different kind of advertisers advertising online from different quarters?

Merle Hinrichs, Chairman and Chief Executive Officer

Eddie, I am really having difficulty with the quality of the call, if you understand could you answer it.

Eddie Heng, Chief Financial Officer

I couldn’t understand it clearly. It was breaking up too.

Dick Wei, JP Morgan

I probably will call back.

Merle Hinrichs, Chairman and Chief Executive Officer

Thank you Dick, I’m sorry for the quality of the line. Can we take other questions please?

Operator

Our next question comes from Greg with Highland Capital; please go ahead.

Greg, Highland Capital

Hi, good morning. Just following up on what’s already been stated, why are you indicating for 2006 for the China Sourcing Fairs revenue will equal the Chinese Sourcing Fairs investment if you are actually leveraging the business model? And then going forward in 2007-2008, should we expect to see that the cost for the sales team, the event production and promotions will decline, when can we really expect the Hong Kong shows to become profitable?

Merle Hinrichs, Chairman and Chief Executive Officer

First of all, I think we feel it has been quite an accomplishment to be where we’re at financially on these shows, especially given that this April was the first show that we held in April in Hong Kong. With each show we receive a greater contribution to our bottom line of course, and in a perfect and theoretical world our success to date should enable us to improve on margins going forward. We’ve been a building our sales force and infrastructure and achieved the largest first-time show in Hong Kong and we’re looking to sell over 12,500 some booths for the year 2006, which I’m sure you’d agree is a tremendous undertaking. Looking to 2007 and beyond, I think the primary way for us to make money in the future is number one of course to sell more booths and to improve yields across all three shows as well as ad shows like the Dubai show, and I don’t want to be lost…regarding Andy’s question, is that there is all the integrated marketing and sales opportunities would go along with this, so that’s unique in itself. There’s great synergy with the other media, and the very positive face-to-face experience of the China Sourcing Fairs is certainly bolstering in brand and many of buyers have certainly come to rely upon more media to work through the development of their own trade. So, we are very happy, management is delighted with the outcome in this last half, and we’re building on that and gaining momentum. Thanks for your question.

Operator

Our next question comes from Jason Brueschke with Citigroup; please go ahead.

Jason Brueschke, Citigroup

Thank you. I had trouble just like Dick. Let me also add my congratulations on the quarter as well and let me ask a couple of questions that kind of go into some of your opportunities. Here’s the first one. We’ve talked about the cross-selling opportunities and it appears that you’re getting pretty good traction already, could you tell us how early you are in the efforts with these cross-selling opportunities or with respect to your install base of customers, are we 10% of the way there, are we 50% of the way there, a rough idea might be very helpful? Also, could you maybe give us at least qualitatively an idea of how much leverage there is in cross-selling a product to an existing customer whether that be an online ad or a tradeshow relative to the cost involved to sell or land a green field or a new customer?

Merle Hinrichs, Chairman and Chief Executive Officer

Let me take the second question, the qualitative aspects of this. Of course, we are always looking for new clients to join one of the media, because once we have a new client then we can up sell them into another media and success leads of course to success. So, this is really quite important. It’s far less costly to build upon a client and develop the client than to prospect for a new customer in any business, and this business is not exclusive. It’s expensive to find new customer and to build them. So, we very much look to develop long-term relationships with our online advertisers or print advertisers and of course the tradeshow advertisers. With regard to your fist question and where we are at in building this? I think that this year — as I mentioned there are two elements of it — one is with the Hong Kong facility we now have a much larger numerical number of companies that we can provide the China Sourcing Fair experience to and of course up selling them into the other media. On the opposite side, of course the print and online have clients which do not participate in the China Sourcing Fair, and they indeed are good prospects for the fair. These three media as you can appreciate work extremely well together, because with the online and with print, specifically with the online, we can promote the show, we can promote the products that the customer is looking to place at these shows, which we do, and we can also assist the client in making pre-show meetings, in other words we provide the buyer an opportunity to post a request to meet with that supplier at the show. So, the quality of the traffic of the show for the supplier is much increased. So that kind of service, integrated service, is quite meaning to our sales side or to our Chinese customer, the combination of making sure that they’ve got the right product in place and that they understand what they need to do at the tradeshows, all of it is well integrated and very, very meaningful to the supplier; there’s a quality of service but the quality of the buyers that are participating. Does that clarify that Jason?

Jason Brueschke, Citigroup

Yes, it’s very helpful. Two more questions. Let me ask you about the October China Sourcing Fair, although you haven’t quantified it you seem extremely bullish on the growth in the October sourcing fairs compared to April, can you help me understand what’s behind the growth, is it additional sales and marketing efforts that’s causing this, is it word of mouth, is it the sales force is now better that’s actually selling the tradeshows, is it this cross-selling effort that you talked about? I’m not only trying to understand kind of how you’re getting better at selling the tradeshows but I also am trying to really make sure that the kind of growth from the very first one to the second will continue to the third, the fourth, and so on into the next couple of years. Thanks.

Merle Hinrichs, Chairman and Chief Executive Officer

Well, first of all this is the first show in Hong Kong. There were a lot of unknowns, a new location in Hong Kong. There were questions about that location, questions about transportation, questions about the traffic, etc. So, from an external point of view these questions are now behind us. We resolved the traffic problems, we resolved the participation problems, and all three shows were very successful, far more successful than what we had anticipated them to be. So, the confidence level for future shows at that location and with all the support services there are no longer questions, that’s behind us. That’s number one. Number two of course, our sales organizations because of that have a lot more confidence along with our suppliers, and we will continue to build on that. We have amongst our customers — we don’t publicize this — but we have a lot of customers that went from one booth to two booths to fourth booths and upgraded their presentations. We expect in the not distant future that we will run out space, there will be an expansion to the exhibition center hopefully in another two years or so. We have different time slots that we can grow into, but I think that Asia World Expo has a maximum capacity of about 4000 booths per show at any one particular time. We can expand upon on that by going into different time slots. So, we will grow the shows in terms of number of booths, we will grow the shows certainly within the quality, presentation, etc., we will grow the shows in terms of the infrastructure, and of course we will grow the shows in terms of yield. Of course management is at that every day of week to try to improve on it.

Jason Brueschke, Citigroup

No doubt it must be nice to be talking so soon after the April shows about the prospects of maxing out the Asia World Expo considering how much larger it was than your Shanghai sales. Let me ask you one last question and that concerns the China to China trade segment. Ali Baba seems to be particularly strong in this market segment and as a domestic Chinese company it has a reputation of knowing the domestic market very well. Could you maybe help us understand how this budding partnership with HC International will help you compete in this market segment and whether you guys have any specific strategies that you can give at this time at least to go after Ali Baba, which seems to be one of the clear market leaders in this segment? Thanks.

Merle Hinrichs, Chairman and Chief Executive Officer

Well, as you know, HC is and has been very specialized in domestic B2B and has been the leader in that area. If I can just give you some numbers on this; as we work through and we look for how and where the synergies are, and if we took 2005 for example and the two companies, Global Sources and HC, we were one at that time, we would have had 72 industry-focused websites along with all the print, and remember HC has also a print component and equally important they have a research component at HC, which of course we will look to leverage as well. With the 72 websites that I referred to, we’d be serving approximately 4 million suppliers and we have an audience of about 950,000 buyers combined, and we would have exposures for those qualified suppliers to some 230 countries. In 2005, if the companies would have been combined at that time the total revenue would have been about $150 million. We believe that the combination of the companies will give both the momentum and the audience requirement that we will both be able to grow quite rapidly. HC of course has been traditionally at the medium to the smaller end of the scale and Global Sources has most certainly been at the upper end of the supplier scale looking for the quality of suppliers that can meet international requirements. At the end of the day, we could well be the largest pure B2B play in China, certainly not getting into things that Ali Baba is getting into. So, we’re fine with being the largest, I hope that it will be the most professionally managed as well, and by specific and well-developed services to the China suppliers as well as suppliers within the Greater China market.

Jason Brueschke, Citigroup

That’s exactly what I was looking for, was those types of specifics and how that positions you in this market. So, that’s it and again congratulations on a great quarter.

Operator

Ladies and gentlemen, if you have any additional questions at this time, please press the * followed by the 1 on your pushbutton phone. If you are using a speaker phone please lift your handset before pressing the numbers. The next question comes from John Mow of Roth Capital Partners; please go ahead.

John Mow, Roth Capital Partners

Congratulations on your second quarter. I have a question on your cash balance given your strong quarters, and I’ve seen last year you were bringing very strong cash and right now you cash and investments are equivalent to about $137 million. My question is what is you plan using this cash going forward?

Merle Hinrichs, Chairman and Chief Executive Officer

John, one of the requirements of course will be should we proceed with HC. We will need and use a large percentage of the funds to finance that activity, and we have not decided at this point as to how we will finance that entire transaction but we’ll do so closer to the date that we decide to proceed. So, there will be a specific use for the funds and we continue of course to look for other opportunities the moment that would be available. Thanks John for joining us.

Operator

Our next question comes from Ted Pedro with JK Associates, please go ahead.

Ted Pedro, JK Associates

Good morning, one question. It seems that reading the Wall Street Journal today the drums are beating in Congress again to lean on China to revalue currency, and Paulson is supposedly involved in this effort. If that were to occur, how would that impact your business?

Merle Hinrichs, Chairman and Chief Executive Officer

Ted, it would have to be a very substantial appreciation of the Renminbi for that to impact our business. Greater China is the dominant provider of consumer products now for global markets, one. Second is that as this appreciates the raw materials which are used for product manufacturing will decrease proportionately. There will be a ratcheting up in terms of the FOB prices, but that will be across the board for all buyers, whether it be Wal-Mart of the small buyers, and ultimately it will be reflected in the consumer prices in the market place. We don’t expect a huge adjustment. I think that the basket of currencies set up by the China authorities need the best way to approach this in terms of steady appreciation over time. We would expect to continue to see that take place, but it will take years of gradual appreciation. So, one, it would have to be very substantial which we do not think will take place, two is I think it is being well managed, and third that it will be an increment that all buyers would have to be faced with, not just our segment.

Ted Pedro, JK Associates

How wold you define substantial?

Merle Hinrichs, Chairman and Chief Executive Officer

Something like 20%. I give a figure of 20% that there maybe certain specific sectors that are more problematic or that their rates would be at least more substantial that there would be an adjustment downward, but for most of the general merchandize there will not be that kind of impact simply because that raw materials, of course being a large component with it, is cheaper at least with the price Renminbi.

Ted Pedro, JK Associates

I guess my second question is, you guys have been doing an enormous amount of work laying the groundwork in the near fairs and the online, and the shareholders have been very patient and the stock is now $9, is it reasonable to assume that sometime in 2007 or second half of ’07 we might really begin to see everything come together and ramp in terms of earnings?

Merle Hinrichs, Chairman and Chief Executive Officer

I think we’re seeing that already in the first half. We’re quite excited about of course the bolster through the next half and of course onward. We are certainly managing as best we possibly can to make that happen. Price and the market of course we don’t comment on and of course what we all appreciate is not in many cases the macroeconomics or the sentiment towards this existing vertical, something beyond our…(inaudible), but we have every intent of making this very profitable for us and continue to grow us revenues in all sectors and adding services as we move on.

Operator

At this time, I’m showing no further questions in the queue.

Merle Hinrichs, Chairman and Chief Executive Officer

Well, I want to thank you again for joining us today. This is an exciting time for Global Sources and we look forward to of course reporting to you on our third quarter and the October China Sourcing Fairs. Also, I want to note that Global Sources will be presenting at the Roth Capital Conference on September 6th in New York City. Ken Wong and I will be in New York and we certainly welcome the opportunity to meet with you. So, if you are interested please call Lippert/Heilshorn & Associates to arrange your time. Thank you for participating again.

Operator

Ladies and gentlemen, this does conclude the Global Sources Second Quarter 2006 Earnings Conference Call. You may now disconnect, and thank you for using AT&T Teleconferencing.

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