HiSoft Reports Fourth Quarter and Full Year 2011 Financial Results

BEIJING, Feb. 29, 2012 /PRNewswire-Asia-FirstCall/ -- HiSoft Technology International Limited ("HiSoft" or the "Company") (NASDAQ: HSFT), a leading China-based provider of outsourced information technology and research and development services headquartered in Dalian, China, today announced its unaudited financial results for the fourth quarter and full year 2011 ended December 31, 2011.

Key Highlights

Fourth Quarter 2011 as compared to Fourth Quarter 2010

• Net revenues were US$64.9 million, up 52.8%  
• Gross profit was US$23.5 million, up 53.3%
• Diluted net income per ADS(1) was US$0.22, compared to US$0.02
• Non-GAAP(2) diluted net income per ADS was US$0.31, compared to US$0.10

Full Year 2011 as compared to Full Year 2010

• Net revenues were US$219.0 million, up 49.4%  
• Gross profit was US$76.6 million, up 42.1%
• Diluted net income per ADS was US$0.57, compared to US$0.45
• Non-GAAP diluted net income per ADS was US$0.90, compared to US$0.70
• Number of significant clients with revenue contribution over US$1 million increased from 27 to 36
• Total employees as of December 31, 2011 was 7,321, compared to 5,521
• Revenue realization per employee for the full year 2011 was US$34,105, compared to US$31,387

(1) Each American depositary share ("ADS") represents 19 common shares.
(2) Non-GAAP gross profit, non-GAAP operating income, non-GAAP net income, non-GAAP basic and diluted net income per ADS and corresponding margins presented in this press release exclude share-based compensation expense, amortization of acquired intangible assets, change in fair value of contingent consideration payable for business acquisition, follow-on offering expenses and success fee related to business acquisition. These non-GAAP measures and related reconciliations to GAAP measures are described in the sections "Non-GAAP Financial Measures" and "Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures" located elsewhere in this press release.

"I am pleased to report another solid quarter of growth capping a year of exceptional progress. We surpassed our targets and finished the year stronger in our financial and operational metrics across all service lines, verticals and geographic markets," said HiSoft Chief Executive Officer Mr. Tiak Koon Loh.

Mr. Loh continued, "2011 was a transformative year for us as we invested to build our services portfolio of higher value-added solutions. Our robust results reflect the initial yield from this strategy as well as the disciplined execution to expand our significant client base, deepen levels of client penetration and accelerate inroads into Greater China, ending the fourth quarter with our domestic China business contributing 20.3% of our total revenues."

"Last year, the number of significant clients with revenue contributions over US$1 million increased by 33% to 36. We are particularly pleased with the full year revenue growth of our Consulting and Packaged Solution services, which climbed over 300% from 2010. Together with developments across the technology and BFSI industries, our revenue realization per employee reached US$34,105," he said.

Loh concluded, "Our strategic efforts in 2011 position us to enter 2012 with great momentum. We will remain focused on the execution of our strategy of expanding our services portfolio with higher value-added solutions and driving profitable and sustainable growth." 

Fourth Quarter 2011 Financial Results

Net Revenues

Net revenues were US$64.9 million for the fourth quarter of 2011, an increase of 52.8% from US$42.5 million for the corresponding period in 2010. The strong year-over-year growth in net revenues was driven by strong demand across all service lines and geographic markets.

Net Revenues by Service Line

HiSoft has two principal service lines: IT services and research and development ("R&D") services. The Company divides IT services into two categories: consulting and packaged solution services ("CPS") and application development, testing and maintenance services ("ADM").

Net revenues from IT services were US$39.7 million for the fourth quarter of 2011, an increase of 69.0% from US$23.5 million for the corresponding period in 2010. The Company's CPS services recorded year-over-year revenue growth of 268.0% supported by strong demand from customers in Greater China and the United States.

Net revenues from R&D services were US$25.2 million for the fourth quarter of 2011, an increase of 32.8% from US$19.0 million for the corresponding period in 2010.

Net Revenues by Geographic Markets

Net Revenues based on Location of Clients' Headquarters

Based on the location of clients' headquarters, the Company's largest geographic market, the United States accounted for US$30.3 million or 46.7% of net revenues during the fourth quarter of 2011, followed by 20.5% for Japan, 20.3% for Greater China, 7.5% for Europe and 5.0% for Asia South, represented by countries in the Asia Pacific region excluding Japan and Greater China, formerly referred to as "Other."

The Company's efforts to expand its service capabilities with higher value-added solution services continued to drive strong net revenue growth, particularly in Asia. In the quarter, Greater China and Asia South recorded year-over-year net revenue growth of 142.0% and 51.5%, respectively.

Net Revenues based on Location of Contract Signing Entity

Measuring the Company's net revenues based on the location of contract signing entity, Greater China accounted for 41.4% of net revenues in the fourth quarter of 2011, while the United States accounted for 22.8%, Japan accounted for 21.9%, Asia South accounted for 11.9% and Europe accounted for 2.0%.

In the fourth quarter of 2011, the Company achieved across-the-board, year-over-year net revenue growth based on the location of contract signing entity: the United States grew 51.5%, Japan grew 25.7%, Greater China grew 80.3%, Asia South grew 48.1% and Europe grew 0.5%.

Largest Clients as a Percentage of Net Revenues

Revenues from the Company's top three, top five and top ten clients accounted for 21.8%, 31.6% and 45.2% of net revenues, respectively, during the fourth quarter of 2011, compared to 28.4%, 38.2% and 54.1%, respectively, for the corresponding period in 2010.

Gross Profit and Gross Margin

Gross profit was US$23.5 million for the fourth quarter of 2011, an increase of 53.3% from US$15.4 million for the corresponding period in 2010. During the fourth quarter of 2011, gross margin remained relatively stable at 36.2% compared to 36.1% for the corresponding period in 2010.

Non-GAAP gross margin was 36.9% for the fourth quarter of 2011, improved from 36.6% in the corresponding period in 2010.

Operating Expenses

Total operating expenses were US$16.8 million for the fourth quarter of 2011, an increase of 12.2% from US$15.0 million for the corresponding period in 2010. Total operating expenses as percentage of total revenues improved to 25.9%, from 35.3% for the corresponding period in 2010. Excluding the bad debt provision of US$3.5 million recorded in the fourth quarter of 2010, operating expenses increased 46.1% year-over-year and operating expenses as a percentage of total revenues were 27.1% in the fourth quarter of 2010. The year-over-year increase was attributed to expenses linked to strengthening management and sales teams. There was also an increase in expenses associated with non-cash items, including share-based compensation expense for retention and incentive, the amortization of acquired intangible assets and the change in fair value of contingent consideration payable for business acquisition.

Operating Income and Operating Margin

Operating income for the fourth quarter of 2011 was US$6.7 million, an increase of 1,793.2% from US$0.4 million for the corresponding period in 2010. Non-GAAP operating income for the fourth quarter 2011 was US$9.7 million, an increase of 239.1% from US$2.9 million for the corresponding period in 2010. Excluding the bad debt provision of $3.5 million incurred in fourth quarter of 2010, the year-over-year improvements in operating income and non-GAAP operating income were 73.9% and 52.4%, respectively.  

Operating margin expanded to 10.3% for the fourth quarter of 2011, compared to 0.8% for the same period in 2010. Non-GAAP operating margin was 14.9% for the fourth quarter of 2011, compared to 6.7% for the corresponding period in 2010. Excluding the bad debt provision of US$3.5 million incurred in the fourth quarter of 2010, operating margin and non-GAAP operating margin for the fourth quarter of 2010 were 9.1% and 15.0%, respectively.

Provision for Income Taxes

Provision for income taxes was US$0.5 million for the fourth quarter of 2011, compared to a US$0.2 million provision for income taxes in the fourth quarter of 2010.

Net Income and Net Income per ADS

Net income attributable to the Company was US$6.8 million for the fourth quarter of 2011, an increase of 1,192.2% from US$0.5 million for the corresponding period in 2010. Diluted net income per ADS was US$0.22 for the fourth quarter of 2011, compared to US$0.02 in the corresponding period of 2010.

Non-GAAP net income was US$9.8 million for the fourth quarter of 2011, an increase of 223.0% from US$3.0 million for the same period in 2010. Non-GAAP diluted net income per ADS was US$0.31 in the fourth quarter of 2011. Excluding the impact of the US$0.01 per ADS from foreign currency loss, non-GAAP diluted net income per ADS was US$0.32 in the fourth quarter of 2011, compared to US$0.10 in the corresponding period in 2010.

Full Year 2011 Financial Results

Net Revenues

Net revenues were US$219.0 million for the full year 2011, an increase of 49.4% from US$146.6 million in 2010. This increase was primarily the result of expanded service offerings, which attracted new customers, deepened penetration with existing clients and supported the expansion of the Company's business in Greater China and Asia South.

Net Revenues by Service Line

Net revenues from IT services were US$126.1 million for the full year 2011, an increase of 64.1% from US$76.8 million for 2010. The Company's CPS services, comprising a portfolio of higher value-added solutions, recorded a 303.5% year-over-year increase.

Net revenues from R&D services were US$92.9 million for the full year 2011, an increase of 33.2% year-over-year from US$69.8 million for 2010.

Net Revenues by Geographic Markets

Net Revenues based on Location of Clients' Headquarters

Based on the location of clients' headquarters, the Company's largest geographic market, the United States, accounted for US$107.9 million or 49.3% of net revenues, during the full year of 2011, followed by 18.6% for Japan, 18.0% for Greater China, 8.6% for Europe and 5.5% for Asia South.

The Company recorded strong growth across all geographies. For the full year 2011, the United States grew 36.0%, Europe grew 38.8%, Japan grew 20.6%, Greater China grew 211.2% and Asia South grew 66.9% year-over-year.

Net Revenues based on Location of Contract Signing Entity

Measuring the Company's net revenues based on the location of contract signing entity, Greater China accounted for 39.8% of net revenues in the full year of 2011, while the United States accounted for 22.5%, Japan accounted for 21.8%, Asia South accounted for 13.6% and Europe accounted for 2.3%.

The Company achieved across-the-board, year-over-year net revenue growth based on the location of contract signing entities for the full year 2011: United States grew 45.0%, Europe grew 35.5%, Japan grew 21.1%, Greater China grew 78.8% and Asia South grew 41.4%.

Largest Clients as a Percentage of Net Revenues

Revenues from the Company's top three, top five and top ten clients accounted for 26.1%, 34.8% and 50.1% of net revenues, respectively, during the full year of 2011, compared to 30.3%, 40.4% and 56.8%, respectively, in 2010. The improvement in client concentration was primarily due to the Company's expanded client base.

The number of significant clients that contribute at least US$1.0 million to the Company's net revenues for the full year 2011 increased to 36 from 27 at the end of 2010.

Gross Profit and Gross Margin

Gross profit was US$76.6 million for the full year 2011, an increase of 42.1% from US$53.9 million for the full year 2010. For full year 2011, gross margin was 35.0%, compared to 36.7% for 2010. Non-GAAP gross margin was 35.4%, compared to 37.3% for 2010. The decrease in gross margin was partly due to wage inflation as well as reduced productivity and lost billings associated with the impact of the earthquake that struck Japan on March 11, 2011, and subsequent tsunami.  This decrease was partially offset by the growth in higher value-added service solutions of CPS services during the year.

Operating Expenses

Total operating expenses were US$59.4 million for the full year 2011, an increase of 44.7% from US$41.0 million in 2010. The year-over-year increase was primarily due to expenses linked to strengthening management and sales teams, including the promotion of key managers. There was also an increase in expenses associated with non-cash items, including share-based compensation expense for retention and incentive, the amortization of acquired intangible assets and the change in fair value of contingent consideration payable for business acquisition. Total operating expenses as a percentage of total revenues were 27.1% in 2011, compared to 28.0% in 2010.

Operating Income and Operating Margin

Operating income for the full year 2011 was US$17.2 million, an increase of 34.0% from US$12.8 million in 2010. Non-GAAP operating income for the full year 2011 came to US$27.8 million, an increase of 43.5% from US$19.4 million in 2010.

Operating margin was 7.9% for full year 2011, compared to 8.8% for 2010, Non-GAAP operating margin was 12.7% for the full year 2011, compared to 13.2% in 2010.

Provision for Income Taxes

Provision for income taxes was US$1.7 million for the full year 2011, compared to a US$1.9 million provision for income taxes for in 2010. The effective tax rate for the full year 2011 was 8.5%.

Net Income and Net Income per ADS

Net income attributable to the Company was US$17.9 million for the full year 2011, an increase of 48.5% from US$12.1 million in 2010. Diluted net income per ADS was US$0.57 for the full year 2011.

Non-GAAP net income was US$28.5 million for the full year 2011, an increase of 53.3% from US$18.6 million in 2010. Non-GAAP diluted net income per ADS was US$0.90 for the full year 2011, compared to US$0.70 in 2010. Excluding the impact of US$0.04 per ADS from foreign currency loss(3), non-GAAP diluted net income per ADS was US$0.94 for full year 2011, compared to US$0.70 in 2010.

In 2011, five board directors of the Company were awarded a total of 237,500 non-vested common shares and 475,000 stock options under the Company's existing remuneration and incentive plans. The weighted average fully diluted ADSs used in the calculation of net income per ADS was 31.5 million for full year 2011, compared to 26.7 million for 2010.

Cash Flow and DSO

As of December 31, 2011, the Company had cash and cash equivalents, restricted cash, and term deposits totaling US$136.8 million. Operating cash flow for full year of 2011 was a net inflow of approximately US$24.3 million.

Days sales outstanding was 92 days for the full year 2011.

(3) Foreign currency gains or losses relate to U.S. dollars transferred into China which is pending conversion to Renminbi as of the end of the relevant period

Outlook for First Quarter and Full Year 2012

For the first quarter 2012, based on current market and operating conditions and current book orders, the Company expects:

• Net revenues to be at least US$65 million, representing an expected growth rate of at least 46.7% year-over-year
• Non-GAAP diluted net income per ADS to be in the estimated range of US$0.24 to US$0.25. This represents an expected growth rate of 60.0% to 66.7% year-over-year, based on 31.7 million weighted average ADSs outstanding

For the full year 2012, based on current market and operating conditions and current book orders, the Company expects:

• Net revenues to be at least US$285 million, representing an expected growth rate of at least 30.1% year-over-year
• Non-GAAP diluted net income per ADS to be in the estimated range of US$1.14 to US$1.18. This represents an expected growth rate of 26.7% to 31.1% year-over-year, based on 32.0 million weighted average ADSs outstanding

The non-GAAP diluted net income per ADS estimates assume an effective income tax rate of between 13% to 15%.

These estimates are based on current market and operating conditions, are subject to change, and may be influenced positively or negatively by factors outside the Company's control, including but not limited to macroeconomic events in the markets in which the Company operates. See "Safe Harbor Statement" below for additional information regarding forward-looking statements.

Fourth Quarter and Full Year 2011 Conference Call Details

HiSoft management will hold an earnings conference call at 6:00 p.m. Eastern Time on Wednesday, February 29, 2012, (7:00 a.m. Beijing/Hong Kong Time on Thursday, March 1, 2012). Management will discuss results and highlights of the quarter and full year and answer questions from investors.

The dial-in numbers for the conference call are as follows:

U.S. Toll Free: +1-800-860-2442

International Dial In: +1-866-605-3852

The conference call will be broadcast live over the Internet and can be accessed by clicking the following link: http://www.mzcan.com/cancast/us/index.php?id=usHSFT_30&version=e.

A telephone replay will be available approximately one hour after the end of the call through March 8, 2012.

The dial-in numbers for the replay are as follows:

U.S. Toll Free: +1-877-344-7529

International Dial In: +1-412-317-0088

Conference Number: 10009249

Additionally, an archived webcast of this call will be available on the Investor Relations section of the HiSoft website at http://www.hisoft.com.

About HiSoft Technology International Limited

HiSoft Technology International Limited (NASDAQ: HSFT) is a leading China-based provider of outsourced information technology and research and development services headquartered in Dalian, China. HiSoft provides its services to leading companies around the world through a combination of onshore and offshore delivery capabilities. HiSoft leverages its skilled technology specialists and client-centric delivery centers to offer customers reliable and high-quality technology solutions.

For more information about HiSoft, please visit http://www.hisoft.com.

For investor and media inquiries please contact:

Ross Warner
HiSoft Technology International Limited
Tel: +86-10-5987-5865
Email: [email protected]

Safe Harbor Statement

This press release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "target," "going forward," "outlook" and similar statements. Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond HiSoft's control, which may cause HiSoft's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in HiSoft's filings with the U.S. Securities and Exchange Commission. HiSoft does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

Non-GAAP Financial Measures

To supplement HiSoft's consolidated financial results presented in accordance with GAAP, HiSoft uses the following measures defined as non-GAAP financial measures by the SEC: Non-GAAP gross margin, non-GAAP operating income, non-GAAP net income and non-GAAP diluted net income per ADS and related margins which exclude share-based compensation expense, amortization of acquired intangible assets, change in fair value of contingent consideration payable for business acquisition, follow-on offering expenses and success fee related to business acquisition. Non-GAAP gross margin, non-GAAP operating income, non-GAAP net income and non-GAAP diluted net income per ADS for prior periods have been reclassified so that the presentations are consistent. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

HiSoft believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance by excluding certain expenses and expenditures that may not be indicative of its operating performance. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company's performance and when planning and forecasting future periods. A limitation of using non-GAAP gross margin, non-GAAP operating income, non-GAAP net income and non-GAAP diluted net income per ADS and related margins is that these non-GAAP measures exclude the share-based compensation charges, amortization of acquired intangible assets and change in fair value of contingent consideration payable for business acquisition that have been and will continue to be for the foreseeable future a significant recurring expense in the business. The presentation of these measures should not be considered a substitute for or superior to GAAP results or as being comparable to results reported of forecasted by other companies. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables have more details on the reconciliations between GAAP financial measures that are comparable to non-GAAP financial measures.

SOURCE HiSoft Technology International Limited

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