Global Sources Ltd. Q1 2008 Earnings Call Transcript

| About: Global Sources (GSOL)

Global Sources Ltd. (NASDAQ:GSOL)

Q1 2008 Earnings Call

May 22, 2008 8:00 am ET

Executives

Merle Hinrichs - Chairman and CEO

Eddie Heng - CFO

Christiane Pelz - IR, Lippert Heilshorn & Associates

Analysts

Jason Brueschke - Citigroup

James Lee - Sterne Agee Capital Markets

Operator

Welcome to the Global Sources First Quarter 2008 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded May 22, 2008.

I would now like to turn the conference over to Ms. Christiane Pelz. Please go ahead ma'am.

Christiane Pelz

Thank you operator, and I would like to thank everyone again for joining us today for the Global Sources first 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 www.GlobalSources.com. If you would like to be added to our distribution list or if you would like additional information about Global Sources, please call Lippert Heilshorn & Associates (LHA) at 415-433-3777.

There will be a telephone replay of this call available until May 26th, 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 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 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.

I would also like to remind you about regulation FD restrictions. The company's official spokespeople to the investment community are Merle Hinrichs; Eddie Heng; James Strachan, Executive Vice President of Corporate Development; and Suzanne Wang, General Manager of Corporate Investments.

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

Merle Hinrichs

Thank you, and thank you all for joining us today. I would like to first start to discuss this recent Sichuan earthquake. All on our minds and our hearts certainly go out to the thousands of people whose lives have been totally devastated by this event. And I also want to first share with you how Global Sources is assisting with the relief effort. We have announced a corporate contribution of RMB 500,000 and a commitment of RMB 250,000 in addition to that, to match donations from our team members.

We have also expanded the donation drive to include our community of suppliers, buyers and investors by providing them with links on our website to certain charitable organizations to whom contributions can be made.

From a business perspective which is on the minds of many investors, I am sure we do not expect any particular impact. Global Sources has a very small number of customers in this area. And all of our team members and their families in the vicinity are safe. So, with that, now let me turn to our first quarter results.

Our first quarter kicked off 2008 on a very, very exciting and positive note. Our revenue for the first quarter $40.6 million was 16% compared to the first quarter last year, driven by the strong performance of our online services and exhibitions.

Online services grew 27% to $21.9 million. Online revenue from China grew by 38% compared to the 30% growth we had reported for the fourth quarter of 2007, versus the fourth quarter of 2006.

These results were due in large part to the successful market response to Global Sources Online 2.0, our new Six-Star supplier ranking system, as well as the new pricing and service packages that we introduced in January. Underlying all of this, is our market leadership and helping buyers distinguish between verified and unverified suppliers.

For exhibitions, revenue grew by 24% to $6 million, due to the very successful international IC-China shows. These shows were the largest in the events history, featuring over 1,400 booths, that was up 37% from 2007. Eight of the world ten largest semiconductor companies were exhibitors this year.

And as expected, our print services lagged behind the strong growth in online, and exhibitions and were down approximately 1% to 11.6%. While our English-language export focus titles performed well, our Chinese-language titles including Electronic Engineering Times for China and the Chief Executive China Publications continue to be slow.

Our April, China Sourcing Fairs in Hong Kong had more than 6700 booths, and that was up approximately 6% compared to last year and in addition we achieved a greater revenue per booth.

Attendance from the high import growth countries such as Brazil, India, Poland, Russia and Thailand grew considerably, while attendance from North America slowed.

After Eddie covers our first quarter 2008 financials and financial guidance for the first half of 2008, I will address the overall economic situation and our business outlook. Eddie?

Eddie Heng

Thank you, Mr. Hinrichs. I will review the first quarter 2008 compared to the first quarter of 2007.

Revenue was $40.6 million compared to $34.9 million, up 16%. The main growth drivers for the quarter were our online services and our trade shows. Online services revenue was $21.9 million, up 27% to $17.2 million driven by Global Sources Online 2.0 and our new Six Star packages and China where online sales grew by 38%, accelerating from the 30% we reported on our last call regarding the performance for the first quarter of 2007.

Exhibition revenue was $6 million, up 24% compared to $4.8 million driven by the strong growth and success of the international IC China conference and exhibition event. These were the only shows held in the first quarter. Print services revenue was $11.6 million, 1% lower than last years quarter.

China sales, which comprised 59% of total revenue, were up 30%. Operating expenses were $32.1 million compared to $28.3 million. As anticipated the increase was due to the expanding sales representation and our investment in information technology infrastructure, content development and marketing to buyers and suppliers. Although operating expenses in the first quarter included a credit of $1.6 million was non-cash stock based compensation expenses.

I would like to remind you that the non-cash compensation charge is a charge in our income statement and the corresponding credit through our additional paying capital accounts in our balance sheet. And there is no impact on shareholders equity. However, in this quarter, since it is a credit in our income statement, there will be a corresponding debit throughout additional paying capital account in our balance sheet.

Debt net income was $8.2 million, or $0.17 per diluted share. This compared to first quarter of 2007 GAAP net income of $6.5 million or $0.14 per diluted share. Non-GAAP net income was $6.6 million or $0.14 per diluted share. This compares to non-GAAP earnings per diluted share of $0.15 for the first quarter of 2007.

And now, onto our balance sheet review: Cash and securities on March 31st 2008 totaled $213.4 million, compared to $167.2 million on March 31st, 2007. It is our policy to keep these as liquid securities and cash equivalent. Accordingly, approximately 80% of the $213.4 million is in short-term US Treasury bond. Short and long term deferred income and customer prepayments were $96.1 million at March 31at 2008, up 26% and up 16% sequentially compared to 31st, December 2007

Total assets were $295.2 million compared to $233 million a year ago. Also, we do not have any long term debt or bad debt. Daily sales outstanding or DSO were 12 days compared to 16 days at the end of last year's first quarter. And shareholders equity reached $172.5 million.

We generated $15.7 million in cash from operations during the first quarter of 2008. In February, our Board of Directors authorized a program to buyback up to $50 million of Global Sources common shares. As of today, we have not repurchased any shares.

Now, I will review our financial guidance for the first half of 2008. As a reminder, in the first quarter of 2008, we introduced non-GAAP figures that exclude non-cash stock-based compensation.

For the six months period ending June 30, 2008 we have increased our guidance for both revenues and earnings. We anticipate the following: Revenue is expected to be in the range of $102.6 million to $103.6 million, representing growth of between 17% and 18%, as compared to the same period in 2007. GAAP earnings per diluted share are expected to be in the range of $0.34 to $0.36, as compared to $0.23 in the first half of 2007.

Non-GAAP earnings per diluted share are expected to be in the range of $0.33 to $0.35, as compared to $0.34 in the same period of 2007. As per our policy the valuation on non-cash stock-based compensation, expenses are based on historical share price, which for this guidance is as at May 12, 2008.

Finally, we are committed to providing a high degree of transparency to our shareholders and investment community.

Accordingly, I am pleased to report that our auditors have expressed an unqualified opinion on our internal control over financial reporting for the year 2007, which represent compliance with Section 404 of the Sarbanes-Oxley Act.

In addition, we are pleased to have again received award from Investor Relations Global Ranking, (IRGR), for the best IR website, corporate governance section, and financial disclosure procedures in the small mid-cap category. And now, I would turn the call back to Mr. Hinrichs.

Merle Hinrichs

Thank you, Eddie. I would like to now comment on the demand and supply situation facing China's export manufacturers. As mentioned on my last call, our business has countered cyclical aspects to it. And to date our numbers are demonstrating this strength. While others are experiencing flatter declining business, the number of our online customers is growing and the number of boost at our shows in April was higher than ever. In addition, as Eddie mentioned, our deferred income and customer prepayments are showing very healthy growth; 26% compared to the same quarter last year, and 16% sequentially or compared to the fourth quarter of 2007.

Our value proposition remains strong for both buyers and sellers and becomes even more important during an economic slowdown. Suppliers need our services. They need to grow revenues or alternative revenues. The key issue for suppliers, in order to remain successful and to survive in a difficult market, is to open new markets by generating a steady flow of quality sales leads. This, in today's market, includes high growth areas such as Eastern Europe, Latin America and the Middle East.

From the buyers prospective, in a slowdown, buyers still need to fill their retail shelves, with appropriately designed products, and at appropriate price points. They have to source and we are here to make that job easier for them.

Global Sources differentiates itself in the market by being the only company enabling suppliers to create and deliver integrated marketing campaigns which address suppliers' primary needs; which are lead generation, brand and differentiate from competitors; and third, face-to-face opportunities at our trade shows and the highly successfully private sourcing events that we hold.

In the future, we expect trade shows and online services to drive our growth. And we plan to expand through vertical specialization and geographic expansion. As an example, we are particularly excited about the plans for the 2009 International IC-China Conference and Exhibition. This event is being expanded from four cities to six. By adding Xi'an and Wuhan and in addition to the spring show, we have new shows that are being added in the fall.

Regarding our online revenue, we expect our growth to remain strong for a variety of reasons. We believe Global Sources Online 2.0 is delivering, by far, the best premier search experience in our industry. During the last seven months, we have more than doubled the amount of product and supplier content that we provide to buyers.

Our leadership in supplier verification is addressing perhaps the most important issue facing buyers today. We are benefiting also from an expanding sales representation with our sales representative companies. And we are on track to add approximately 500 new sales team members, during the first half of 2008 alone.

And in summary, we had truly a very exciting and successful quarter. Our market focus and services are unique and highly differentiated. Furthermore, we believe we have a huge market opportunity, with virtually unlimited growth prospects in various vertical markets and market segments and applications.

I would now like to turn the call over to the operator for questions-and-answers. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from the line of Jason Brueschke with Citigroup.

Jason Brueschke - Citigroup

Thank you. Can you hear me?

Merle Hinrichs

I can hear you loud and clear Jason.

Jason Brueschke - Citigroup

Alright, thank you Merle. First off, congratulations Merle, Eddie, and everyone on a great quarter. We had a little technical difficultly getting into the call, so I only have a couple of questions. I apologize because we have to drop off and get back on.

Well, the first question I would like to talk about is the success of your online business. You have identified a number of the reasons regarding the web 2.0 initiatives and the hiring of the sales force. Clearly, you guys executed well in what appears to have been a challenging quarter with the snow storms or what have you.

What I am wondering, and you may have touched on this on your prepared remarks. But how has the new Six Star system factored into the acceleration in your online revenues that you have seen in the last quarter?

And could you maybe comment in particular about the success that you may be having with the traction with the new lower-priced One Star entry level system, and how that is doing? And then maybe also comment on whether you are seeing any early success and your ability to up-sell those one star customers to higher star packages. Then I have a couple of follow-up questions. Thanks.

Merle Hinrichs

Okay, well, thanks Jason for joining us to this evening. The success has been quite surprising and astounding. In fact, the Six Star package, we simplified the offering substantially. I think that was one of the reasons, and it made it much easier for the sales organization to present it. As you will recall, not only did we add a One Star, which is an introductory offer, but we also reconfigured the offering and the upper offerings of what we provide.

So, we think that this is really meeting market needs. The One Star, as you know, is provided by a different sales group and that is going very strong. We see no reason that it will slow. We are not providing any particular numbers on it at this juncture. Up selling has just started this last month, because we only started in January.

So, we are only in the very early stages of up selling these accounts which we -- we don't think that we will have too much difficulty with because the second and third and four Star offer are at a substantially greater value, and of course at a higher price, but substantially greater value. So, we think it is sustainable. It is certainly going to be, or quickly expanded to many other regions in China, and we are experiencing a traction in all of the offices which is being offered.

Jason Brueschke - Citigroup

Well and maybe a quick follow-up on that first question and that would be: compared to the way you priced your online services previous to the breaking including six star ranking, does the existence of the new star system allow you to go after a completely different customer segment that you are able to go after in the past?

And what I’m wondering is, are you targeting completely brand new customers that you've never targeted in the past, or is there some combination of your going back to customers that maybe you had talked to in previous years? For whatever reasons they didn't feel they could, maybe, meet a higher price point, and going back now with the lower introductory price point with the idea to kind of get them hooked to understand the value? And then up selling, is it more of the lateral or are we really kind of going after Greenfield opportunities with the one star system?

Merle Hinrichs

It is both, Jason. It is indeed a new market, a new market opportunity. More importantly, it is those companies that have wanted to try our services, know the quality of our services, and know how we differentiate in that quality from a professional point of view. But the price point to the previous price points we are a bit high. They felt they were hesitating. With this price point and this new price point of the one star, it gives an opportunity to try it out, and to see if it fits, and to see if it works for them, and you can see the uptick of it has been fantastic. So, I think we are spot on with the offer and both the price of the offer, and of course the services behind that offer.

Jason Brueschke - Citigroup

Great, perfect. Maybe shifting gears from my second question. You may have touched on this in the very early remarks. I know you did comment on the earthquake. But am I correct that you held one of the IIC China Trade Shows actually in Chengdu, which of course is in the Sichuan province where the earthquake happened. Could you kind of verify whether that is in fact the case, and to the extent that is correct?

Could you maybe comment on what you anticipate may be the effects on that particular trade show say year from now? If you plan to hold that again there, I think it may have been in February. And I have had a couple of investors' questions about your exposure to the earthquake and this is one that that has come up. So, if you could maybe comment on that, it would be helpful.

Merle Hinrichs

Yeah. It is correct. We held that, we are concerned about, of course, the future for the entire area. And, we will need to reevaluate that in the forth coming months. The new shows, of course as we mentioned, will be held in Xi'an and Wuhan, which were already starting that wholesales process.

So I think Jason, the answer is, it has, the earthquake has been - with it, I mean earthquake was started one week ago. So, it is early and the review and evaluation stage as to exactly, whether or not that we will go head with it or not. Next?

Jason Brueschke - Citigroup

Okay, Yeah and then maybe, could you maybe quantify just in general, is that a material part of the trade show revenues in the quarter that comes out of Chengdu or is it something that's not material or anyway is it manageable just as you think offers next.

Merle Hinrichs

It is not material. As you know, it was new. So, it was relatively minor. But, as you have seen in the numbers, we were up some 37% for the IC trade shows. So we are getting a lot of traction for that show in particular. And, we are adding the passive components to it, which is also quite exciting.

Jason Brueschke - Citigroup

Okay, perfect. And then maybe, I will take this as my last question and then I will get back in the queue. I heard a number of investors ask me in the last couple of months about just the whole, what is the nature of e-commerce? And I thought it might be helpful to ask you in a public forum. And the relative question is, when I look at your revenues, you have trade show business, you have online, really advertising revenues at the moment are on the international side. But, you have also launched a domestic Chinese language site.

And certainly, it is my understanding that in kind of that 37 year history of the company, you have never really charged a transaction fee associated with any of the services that you have provided. But there is certainly may be some potential to do a transaction fee on may be the domestic side going forward.

Could you maybe give me your views as to what extent you are an e-commerce company today, to what extent that you think that you or this business model can lend itself to being an e-commerce company in the future, That would be very helpful? Thanks.

Merle Hinrichs

Thank you. Jason. First of all, let me give you my definition of an e-commerce service. It is a service where a fee or commission is charged for a specific transaction. It could be an auction service, but it is for a specific function with which a product is sold or a service is sold or marketed. But, the earning of the portal is definitely a fee and a fee on that transaction.

Now, our revenue is derived from providing comprehensive marketing services, including the online service. In fact, the majority of our revenue comes from online services. So we have called it, of course it is a marketing service as opposed to an e-commerce service. Our competitors, who provide basically the same service, have referred to their revenue from precisely the same of value proposition as e-commerce.

So, if it is based on my definition e-commerce then I think that, referring to market services is quite misleading if not suspect. However, if the competitors’ definitions are correct and mine is wrong, then we should be referring to GSOL today as an e-commerce company as well.

And if a change of reference to our company is as an e-commerce company would make our company more exciting to perspective investors or to a community of investors, and attract a larger fee ratio, our value, we probably should do that sooner or later.

Anyhow, my view is that there is a clear differentiation between marketing services, whether those marketing services are paid for by click, by subscription, by banners, or by posting websites versus the e-commerce service. I am sure that many of you, many of the analysts that are on the call have views on this and I would be very pleased to hear your thoughts on whether or not we should also be reporting our revenues as e-commerce revenues as our competitors report theirs. Okay.

Jason Brueschke - Citigroup

Yeah Merle, maybe we need a follow-up to that. I think that's where this question came from the investors whom I have talked to have raised it. And maybe, just as a follow-up, I know that my personal views are.. it's probably more challenging on the international trade related to marketing to capture a transaction fee, at least if you don't have any type of a pipe volume type transactions, maybe if you are doing kind of one-offs or more kind of almost glorified C2C, there is probably a potential for transaction.

But could you maybe comment, as you guys move into the domestic B2B market, whether you think that that may lend itself to more e-commerce, even under your own definition, maybe because the transaction sizes are smaller. And therefore, people who are transacting online may not resort to a bank or a letter of credit for some type of a payment system. But is there an opportunity for you as a company to maybe capture transaction fees domestically, even if maybe it is not as likely on the international side? Thanks.

Merle Hinrichs

Our entry into this market is, first of all, to provide a comprehensive marketing service as we do for both international suppliers and buyers. We think that we are well on the way of doing that and doing it in a very specialized way, with which indeed we will differentiate our services from the services that already exist. That can lead to considering transactional services down the line. But again a transactional service would be in our definition and for our community a B2B transaction.

A lot of the sites in China today provide B2C. There are US sites that provide B2C. The B2B transactions would be our particular focus. And I think that it would be a while before we would be looking to provide that because it is complex, the software is extremely complex, and to engage all of the participants, i.e. the banks and the other services and a B2B transaction process, is quite complex.

Jason Brueschke - Citigroup

Okay, great. I will let somebody else ask about the trade shows, and I will get back in line. Thank you.

Eddie Heng

Thank you.

Operator

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

James Lee - Sterne Agee Capital Markets

Congratulations on a very good quarter and my question is also relating to online business. Maybe Merle, you can give some additional color about the business to talk about what the strength is, where do you see the early adopters for your entry level pricing product maybe talk about what verticals and what specific geographic area where you seeing strength and hitting to 2Q, can you talk about what special, specific initiatives you are doing, maybe promotions to drive that part of the business? Thank you.

Merle Hinrichs

Okay. Well, as I mentioned a little earlier for Jason's question, the adapters really do fall into two groups. One is companies who would have had not previously considered us, and we are making huge inroads in that area.

And there are those companies, which were either reluctant or hesitated because of the previous price point. This is giving them an opportunity to enter and to try based on an introductory price. And we think that it is going to be extremely meaningful and helpful to gain traction for the star two, star three and star four packages which we are already -- which we are also offering.

Geographically, the focus has been China and we will continue to be, so though this we will be providing this service in other areas as well. And so, we are in very, very early stages of this, but it is looking quite good, and I think that it is more than sustainable and we will gain momentum as we go along.

We are marketing of course through the sales organization which we are growing. We are doing, of course, a lot of online marketing. We are certainly participating in different shows and our own show of course as well, more importantly. So, I think we are fully engaged in rolling this all out.

James Lee – Sterne Agee Capital Markets

Okay, and Merle, I am hoping to get a little more specific on the online business, maybe you can talk about what specific verticals, where there is a manufacturing or maybe electronics? Any specific verticals that jump out to you as early adopted in your product, maybe to strength, of course, the Board; and maybe a specific region into China, where we are having more success in the first quarter? That will be helpful.

Merle Hinrichs

James, we are the dominant player in the electronics industry from the conception of electronic products right through to the export of those products in China.

So, the uptick in the China electronics vertical has been substantial, but I would not say that it is more than what it is for the other verticals that we provide as well. They have all done quite well. And we continue to roll this out to new areas and as quickly as we can, as quickly as we can train our staff and company to extend our management to extend it. So, I think this is about as detailed as I can get at this time. James.

James Lee – Sterne Agee Capital Markets

Eddie, can you talk about the EPS out-performance in the 1Q, and what was the main driver, because of that? Is it because you have done a better job in controlling spending, or is it the function of timing where some of the expenses are shifting into second quarter? Thanks.

Eddie Heng

Okay, thank you James for the question. James I think the main driver for the better EPS for this Q would be the higher revenue that we achieved. We also have been able to come to cut some cost reduction on our community cost. Our spending on our event cost was fairly lower than expected. So basically, I think it is the higher revenue that we achieved for the quarter.

James Lee – Sterne Agee Capital Markets

Okay, great. Thank you.

Eddie Heng

Thank you.

Operator

(Operator instructions). There are no further questions at this time. Please proceed with your presentation or any closing remarks.

Merle Hinrichs

I want to thank you all for being with us this evening, and we will look forward to presenting another outstanding quarter the next time we have our webcast. So thank you, thank you again very much. 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 line.

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