iSoftStone Reports Financial and Operating Results for the Second Quarter 2013
BEIJING, Aug. 27, 2013 /PRNewswire/ -- iSoftStone Holdings Limited ("iSoftStone" or "the Company,"NYSE: ISS), a leading China-based IT services provider, today reported its unaudited financial and operating results for the second quarter ended June 30, 2013.
Second quarter 2013 results
- Net revenues increased 15.9% to $106.7 million in the second quarter 2013 from $92.0 million in the second quarter 2012.
- Gross profit increased 12.3% to $33.9 million in the second quarter 2013 from $30.2 million in the second quarter 2012.
- Net loss in the second quarter 2013 was $1.9 million compared with a net income of $3.6 million in the second quarter 2012.
- Non-GAAP net income (note 1) decreased 23.1% to $6.3 million in the second quarter 2013 from $8.2 million in the second quarter 2012.
- Diluted earnings per American Depositary Share ("ADS") were a loss of $0.03 in the second quarter 2013 and an income of $0.06 in the second quarter 2012. Each ADS represents 10 ordinary shares.
- Non-GAAP diluted earnings per ADS (note 1) were $0.11 in the second quarter 2013 compared with $0.14 in the second quarter 2012.
- Total number of employees increased 19.6% to 15,966 as of June 30, 2013 from 13,348 as of June 30, 2012.
First half 2013 results
- Net revenues increased 13.5% to $202.5 million in the first half 2013 from $178.4 million in the first half 2012.
- Gross profit increased 11.7% to $64.7 million in the first half 2013 from $58.0 million in the first half 2012.
- Net income decreased 83.9% to $1.1 million in the first half 2013 from $7.0 million in the first half 2012.
- Non-GAAP net income (note 1) decreased 23.4% to $11.9 million in the first half 2013 from $15.5 million in the first half 2012.
- Diluted earnings per ADS were $0.02 in the first half 2013 compared with $0.12 in the first half 2012. Each ADS represents 10 ordinary shares.
- Non-GAAP diluted earnings per ADS (note 1) were $0.21 in the first half 2013 compared with $0.26 in the first half 2012.
Mr. T.W. Liu, iSoftStone's Chairman and Chief Executive Officer, said, "Our top line performance was largely in line with our expectations for the second quarter of 2013. Despite continuing to face challenging market conditions and cost pressures, we remained focused on the three previously identified strategic efforts: namely, smooth operations of ISST, our joint venture with Huawei, capturing business opportunities in the domestic BFSI sector and continue investment in our SMART business capabilities. We strived to grow our business while seeking to improve our margins and cash flow in the short term. We will also continue to invest in emerging technologies including mobile, big data, and cloud computing, which help clients expand and accelerate their businesses and position us to drive our own business growth in the longer term."
Results of operations for the second quarter 2013
Net revenues
Net revenues increased $14.6 million or 15.9% to $106.7 million in the second quarter 2013 from $92.0 million in the second quarter 2012, mainly due to relatively stronger demand for IT services from clients in Greater China, partially offset by lower demand from some global clients, primarily in Europe and the United States.
Net revenues by service line
We derive net revenues by providing an integrated suite of IT services and solutions, including (a) IT services, which primarily includes application development and maintenance ("ADM"), as well as R&D services and infrastructure and software services, (b) Consulting & Solutions, and (c) Business Process Outsourcing ("BPO"), services. The following table shows our net revenues by service line.
| US$ in thousands, except % |
2012Q2 |
% |
2013Q2 |
% |
|
| IT services |
|||||
| ADM |
29,321 |
31.9% |
38,426 |
36.0% |
|
| R&D |
25,892 |
28.1% |
25,963 |
24.3% |
|
| Infrastructure and software |
3,928 |
4.3% |
980 |
0.9% |
|
| IT services, total |
59,141 |
64.3% |
65,369 |
61.2% |
|
| Consulting & Solutions |
29,710 |
32.2% |
36,627 |
34.3% |
|
| BPO services |
3,162 |
3.5% |
4,661 |
4.5% |
|
| Total net revenues |
92,013 |
100.0% |
106,657 |
100.0% |
Net revenues from IT services increased $6.2 million or 10.5% to $65.4 million in the second quarter 2013 from $59.1 million in the second quarter 2012 mainly due to increased business volume from our largest communication client and other banking clients in China. Net revenues from Consulting & Solutions increased $6.9 million or 23.3% to $36.6 million in the second quarter 2013 from $29.7 million in the second quarter 2012, mainly due to continuous revenue generated from a public sector consulting & solutions project won in the first quarter 2013, partially offset by the decreased demand from certain technology and communication clients. Net revenues from BPO services increased 47.4% to $4.7 million in the second quarter 2013 from $3.2 million in the second quarter 2012 mainly due to new project wins.
Net revenues by geographic markets
We classify our net revenues by the following geographic markets: Greater China (which includes China, Taiwan, Hong Kong, and Macau) and Global (which includes the United States, Europe, Japan, and others), based on the headquarters locations of our clients. The following table shows our net revenues by geographic markets.
| US$ in thousands, except % |
2012Q2 |
% |
2013Q2 |
% |
|
| Greater China |
55,912 |
60.8% |
73,448 |
68.9% |
|
| Global: |
|||||
| United States |
23,078 |
25.1% |
20,995 |
19.7% |
|
| Europe |
6,532 |
7.1% |
5,163 |
4.8% |
|
| Japan |
5,995 |
6.5% |
6,202 |
5.8% |
|
| Others |
496 |
0.5% |
849 |
0.8% |
|
| Global total |
36,101 |
39.2% |
33,209 |
31.1% |
|
| Total net revenues |
92,013 |
100.0% |
106,657 |
100.0% |
Reflecting our growth in and enhanced focus on the Chinese market and the country's relative economic strength, in the second quarter 2013, net revenues in Greater China continued to grow more than the net revenues in the Global market. Our net revenues from Greater China clients increased $17.5 million or 31.4% to $73.4 million in the second quarter 2013 from $55.9 million in the second quarter 2012 mainly due to increased business volume from our largest communication client and other banking clients in China and continuous revenue generated from a China public sector consulting & solutions project won in the first quarter 2013. Net revenues from U.S. clients decreased $2.1 million or 9.0% to $21.0 million in the second quarter 2013 from $23.1 million in the second quarter 2012 mainly due to reduced demand from a major client in the U.S. market. Net revenues from European clients decreased 21.0% to $5.2 million in the second quarter 2013 from $6.5 million in the second quarter 2012 due to reduced demand from two European clients. Net revenues from Japanese clients increased $0.2 million or 3.5% to $6.2 million in the second quarter 2013 from $6.0 million in the second quarter 2012 mainly due to rebounded demand from a Japanese technology client.
Net revenues by client industry
We focus on serving clients in four target industry verticals, each with large and growing demand for IT services and solutions: technology; communications; banking, financial services and insurance ("BFSI"); and energy, transportation, and public sector. The following table shows our net revenues by client industry.
| US$ in thousands, except % |
2012Q2 |
% |
2013Q2 |
% |
|
| Technology |
27,181 |
29.5% |
24,854 |
23.3% |
|
| Communications |
33,404 |
36.3% |
38,827 |
36.4% |
|
| BFSI |
19,235 |
20.9% |
23,048 |
21.6% |
|
| Energy, transportation, and public |
7,066 |
7.7% |
11,261 |
10.6% |
|
| Others |
5,127 |
5.6% |
8,667 |
8.1% |
|
| Total net revenues |
92,013 |
100.0% |
106,657 |
100.0% |
Net revenues from technology clients decreased $2.3 million or 8.6% to $24.9 million in the second quarter 2013 from $27.2 million in the second quarter 2012 due to reduced demand from a major technology client in China. Net revenues from communications clients increased $5.4 million or 16.2% to $38.8 million in the second quarter 2013 from $33.4 million in the second quarter 2012 due to increased business volume from our largest communication client in China, partially offset by the decreased demand from a major communication client in United States and two European clients. Net revenues from BFSI clients increased $3.8 million or 19.8% to $23.0 million in the second quarter 2013 from $19.2 million in the second quarter 2012 attributable largely to IT services projects for domestic banks, partially offset by reduced revenue from a global financial institution client. Net revenues from energy, transportation, and public sector clients increased $4.2 million or 59.4% to $11.3 million in the second quarter 2013 from $7.1 million in the second quarter 2012 due to recent winning of a new public sector consulting & solutions project. Net revenues from all other industries increased $3.5 million to $8.7 million in the second quarter 2013 from $5.1 million in the second quarter 2012, mainly resulting from three new project wins from a Chinese commercial properties development company, a global human resources solution company and a global BPO company.
Net revenues by five largest clients
Net revenues from our five largest clients totaled $52.9 million or 49.6% of total net revenues in the second quarter 2013 compared with $41.0 million or 44.6% in the second quarter 2012.
Net revenues by pricing method
We provide our services on a time-and-expense basis, a fixed-price basis, or for certain BPO services, on the basis of volume of work processed for our clients. The following table shows our net revenues by pricing method.
| US$ in thousands, except % |
2012Q2 |
% |
2013Q2 |
% |
|
| Time-and-expense basis |
34,528 |
37.5% |
38,668 |
36.3% |
|
| Fixed-price basis |
56,934 |
61.9% |
66,706 |
62.5% |
|
| Volume basis (BPO) |
551 |
0.6% |
1,283 |
1.2% |
|
| Total net revenues |
92,013 |
100.0% |
106,657 |
100.0% |
Net revenues from time-and-expenses basis projects increased $4.1 million or 12.0% to $38.7 million in the second quarter 2013 from $34.5 million in the second quarter 2012. Net revenues from fixed-price basis projects increased $9.8 million or 17.2% to $66.7 million in the second quarter 2013 from $56.9 million in the second quarter 2012.
Cost of revenues, gross profit, and gross profit margin
Cost of revenues increased $10.9 million or 17.7% to $72.8 million in the second quarter 2013 from $61.8 million in the second quarter 2012 primarily due to organic growth of service delivery employees and acquisition of a number of delivery teams from industry peers to enable and match the growth of our business.
Gross profit increased $3.7 million or 12.3% to $33.9 million in the second quarter 2013 from $30.2 million in the second quarter 2012. Gross profit margin decreased to 31.8% in the second quarter 2013 from 32.8% in the second quarter 2012 primarily due to an increase in salary and compensation costs as a result of annual salary increases for delivery personnel effective since February or April 2013 and acquisition of delivery teams from industry peers for the future growth.
Operating expenses
Operating expenses increased by $4.5 million or 17.4% to $30.2 million in the second quarter 2013 from $25.7 million in the second quarter 2012 primarily due to (1) higher salary and compensation expenses as a result of annual salary increases for operations personnel; (2) higher rental and office reallocation expenses in connection with relocating our headquarters in Beijing and terminating rental contracts in Tianjin and Changsha; and (3) higher professional expenses, mainly legal fees related to some ongoing litigations.
Other expense
We recorded an other operating loss of $4.1 million in the second quarter 2013. The Company acquired 100% equity interest of Beijing Ruantong Xutian Technology Development Co., Ltd. ("Ruantong Xutian") who owned the facility that the Company leased as its headquarters in August 2012 (please refer to the Recent Developments section for more details) and consolidated its financial statements starting from the second quarter 2013. According to relevant U.S. GAAP literature ASC 805-10-55, Business Combinations, the preexisting rental contract was deemed in effect terminated from the consolidated point of view and a loss ("preexisting contract loss") equal to the deposit amount of $4.1 million was recognized in the second quarter 2013.
Income (loss) from operations
Loss from operations was $0.7 million in the second quarter 2013 compared with an income of $4.3 million in the second quarter 2012 due to the factors explained above.
Non-GAAP income from operations (Note 1) decreased $1.4 million or 15.4% to $7.5 million in the second quarter 2013 from $8.9 million in the second quarter 2012 due to higher operating expenses explained above.
Interest expense
Interest expense was $1.7 million in the second quarter 2013 compared with $0.3 million in the second quarter 2012. Interest expense in the second quarter 2013 and 2012 was incurred on bank borrowings and the increase was due to more bank borrowings to fund our working capital, office building and business acquisition needs.
Income taxes expense (benefit)
Income tax benefit was $0.6 million in the second quarter 2013 compared with an income tax expense of $0.5 million in the second quarter 2012. The Company was in a loss position in the second quarter 2013 due to the factors explained above. Due to the impact of the aforementioned preexisting contract loss and other non-deductible expenses expected to be incurred as we continue to evaluate a possible going-private proposal (please refer to the Recent Developments section for more details), our and our peers' estimated effective tax rates for 2013 are expected to be less comparable than in prior periods.
Net income (loss)
Net loss in the second quarter 2013 was $1.9 million, compared with net income of $3.6 million in the second quarter 2012 due to the factors explained above.
Non-GAAP net income (Note 1) decreased $1.9 million or 23.1% to $6.3 million in the second quarter 2013 from $8.2 million in the second quarter 2012.
Earnings per ADS
Basic earnings per ADS were a loss of $0.03 in the second quarter 2013 and an income of $0.06 in the second quarter 2012.
Diluted earnings per ADS were a loss of $0.03 in the second quarter 2013 and an income of $0.06 in the second quarter 2012.
Non-GAAP diluted earnings per ADS (note 1) were $0.11 in the second quarter 2013 and $0.14 in the second quarter 2012.
Cash and Cash Flow
As of June 30, 2013, we had a cash balance of $82.8 million. Our net cash used in operating activities in the second quarter 2013 was $22.9 million. Our net cash used in investing activities in the second quarter 2013 was $59.2 million, including $7.7 million of capital expenditures. Within the capital expenditures, $1.4 million related to the leasehold improvement of the newly acquired office facility in Beijing. In the second quarter 2013, we borrowed $59.6 million of short-term bank loans and $14.6 million of long-term bank loans to fund our growth and office building and business acquisition and repaid $8.8 million of matured short-term bank loans.
Days sales outstanding, or DSO, was 192 days for the second quarter 2013 and 171 days for the second quarter 2012. DSO is calculated by dividing average accounts receivable, net of deferred revenues, by the period's gross revenues, and multiplying by the number of days in the period. The longer DSO in the second quarter 2013 was mainly due to faster revenue growth from domestic China clients, especially the clients in BFSI and public sectors, which tend to have longer payment cycles.
Results of operations for the first half 2013
Net revenues
Net revenues increased $24.2 million or 13.5% to $202.5 million in the first half 2013 from $178.4 million in the first half 2012 due to relatively stronger customer demand for IT services in Greater China, partially offset by lower demand from some global clients, primarily in Europe and the United States.
Net revenues by service line
The following table shows our net revenues by service line.
| US$ in thousands, except % |
First Half 2012 |
% |
First Half 2013 |
% |
|
| IT services |
|||||
| ADM |
58,471 |
32.8% |
70,921 |
35.0% |
|
| R&D |
52,837 |
29.6% |
49,371 |
24.4% |
|
| Infrastructure and software |
5,686 |
3.2% |
2,587 |
1.3% |
|
| IT services, total |
116,994 |
65.6% |
122,879 |
60.7% |
|
| Consulting & Solutions |
55,285 |
31.0% |
70,261 |
34.7% |
|
| BPO services |
6,083 |
3.4% |
9,387 |
4.6% |
|
| Total net revenues |
178,362 |
100.0% |
202,527 |
100.0% |
Net revenues from IT Services increased $5.9 million or 5.0% to $122.9 million in the first half 2013 from $117.0 million in the first half 2012 mainly due to increased business volume from our largest communication client and other banking clients in China. Net revenues from Consulting & Solutions increased $15.0 million or 27.1% to $70.3 million in the first half 2013 from $55.3 million in the first half 2012 mainly due to revenue generated from public sector consulting & solutions projects won in the first half 2013, partially offset by the decreased demand from certain technology and communication clients. Net revenues from BPO services increased 54.3% to $9.4 million in the first half 2013 from $6.1 million in the first half 2012.
Net revenues by geographic markets
The following table shows our net revenues by geographic markets.
| US$ in thousands, except % |
First Half 2012 |
% |
First Half 2013 |
% |
|
| Greater China |
107,351 |
60.2% |
139,202 |
68.7% |
|
| Global: |
|||||
| United States |
45,303 |
25.4% |
40,286 |
19.9% |
|
| Europe |
12,311 |
6.9% |
10,394 |
5.1% |
|
| Japan |
12,275 |
6.9% |
10,988 |
5.4% |
|
| Others |
1,122 |
0.6% |
1,657 |
0.9% |
|
| Global total |
71,011 |
39.8% |
63,325 |
31.3% |
|
| Total net revenues |
178,362 |
100.0% |
202,527 |
100.0% |
Our net revenues from Greater China clients increased $31.8 million or 29.7% to $139.2 million in the first half 2013 from $107.4 million in the first half 2012 mainly due to increased business volume from our largest communication client and other banking clients in China and continuous revenue generated from a China public sector consulting & solutions project won in 2013. Net revenues from U.S. clients decreased $5.0 million or 11.1% to $40.3 million in the first half 2013 from $45.3 million in the first half 2012 mainly due to reduced demand from a major client in the United States. Net revenues from European clients decreased $1.9 million or 15.6% to $10.4 million in the first half 2013 from $12.3 million in the first half 2012 due to reduced demand from two European clients. Net revenues from Japanese clients decreased $1.3 million or 10.5% to $11.0 million in the first half 2013 from $12.3 million in the first half 2012.
Net revenues by client industry
The following table shows our net revenues by client industry.
| US$ in thousands, except % |
First Half 2012 |
% |
First Half 2013 |
% |
|
| Technology |
52,077 |
29.2% |
48,239 |
23.8% |
|
| Communication |
66,342 |
37.2% |
72,630 |
35.9% |
|
| BFSI |
35,020 |
19.6% |
41,780 |
20.6% |
|
| Energy, transportation, and public |
14,839 |
8.3% |
25,423 |
12.6% |
|
| Others |
10,084 |
5.7% |
14,455 |
7.1% |
|
| Total net revenues |
178,362 |
100.0% |
202,527 |
100.0% |
Net revenues from technology clients decreased $3.8 million or 7.4% to $48.2 million in the first half 2013 from $52.1 million in the first half 2012 due to reduced demand from a major technology client in China. Net revenues from communication clients increased $6.3 million or 9.5% to $72.6 million in the first half 2013 from $66.3 million in the first half 2012 due to increased business volume from our largest communication client in China, partially offset by the decreased demand from a major communication client in United States and two European clients. Net revenues from BFSI clients increased $6.8 million or 19.3% to $41.8 million in the first half 2013 from $35.0 million in the first half 2012. Net revenues from energy, transportation, and public sector clients increased $10.6 million or 71.3% to $25.4 million in the first half 2013 from $14.8 million in the first half 2012, which was largely due to recent winning of some new public sector consulting & solution projects. Net revenues from all other industries increased $4.4 million to $14.5 million in the first half 2013 from $10.1 million in the first half 2012 resulting from three new project wins from a Chinese commercial properties development company, a global human resources solution company, and a global BPO company.
Net revenues by five largest clients
Net revenues from our five largest clients totaled $101.2 million or 50.0% of total net revenues in the first half 2013 compared with $81.6 million or 45.8% in the first half 2012.
Net revenues by pricing method
The following table shows our net revenues by pricing method.
| US$ in thousands, except % |
First Half 2012 |
% |
First Half 2013 |
% |
|
| Time-and-expense basis |
63,917 |
35.9% |
74,905 |
37.0% |
|
| Fixed-price basis |
113,259 |
63.5% |
125,538 |
62.0% |
|
| Volume basis (BPO) |
1,186 |
0.6% |
2,084 |
1.0% |
|
| Total net revenues |
178,362 |
100.0% |
202,527 |
100.0% |
Net revenues from time-and-expenses basis projects increased $11.0 million or 17.2% to $74.9 million in the first half 2013 from $63.9 million in the first half 2012. Net revenues from fixed-price basis projects increased $12.3 million or 10.8% to $125.5 million in the first half 2013 from $113.3 million in the first half 2012. Net revenues from volume basis projects increased $0.9 million or 75.7% to $2.1 million in the first half 2013 from $1.2 million in the first half 2012.
Cost of revenues, gross profit, and gross profit margin
Cost of revenues increased $17.4 million or 14.4% to $137.8 million in the first half 2013 from $120.4 million in the first half 2012 primarily due to organic growth of service delivery employees and acquisition of a number of delivery teams from industry peers to enable and match the growth of our business.
Gross profit increased $6.8 million or 11.7% to $64.7 million in the first half 2013 from $58.0 million in the first half 2012. Gross profit margin decreased to 32.0% in the first half 2013 from 32.5% in the first half 2012 primarily due to an increase in salary and compensation costs as a result of annual salary increases for delivery personnel effective since February or April 2013 and acquisition of delivery teams from industry peers.
Operating expenses
Operating expenses increased $7.5 million or 15.2% to $56.6 million in the first half 2013 from $49.2 million in the first half 2012 primarily due to (1) higher salary and compensation expenses as a result of annual salary increases for operations personnel; (2) higher rental and office reallocation expense in connection with relocating our headquarters in Beijing and terminating rental contracts in Tianjin and Changsha; and (3) higher professional expenses, mainly legal fees related to some ongoing litigations.
Income from operations
Income from operations decreased $4.6 million or 55.2% to $3.8 million in the first half 2013 from $8.4 million in the first half 2012 due to the factors explained above and the preexisting contract loss included in other expense.
Non-GAAP income from operations (note 1) decreased $2.5 million or 14.4% to $14.6 million in the first half 2013 from $17.0 million in the first half 2012.
Interest expense
Interest expense was $3.0 million in the first half 2013 and $0.6 million in the first half 2012. Interest expense in the first half 2013 and 2012 was incurred on bank borrowings and the increase was due to more bank borrowings to fund our working capital, office building, and business acquisition needs.
Income taxes expense (benefit)
Income tax benefit was $0.3 million in the first half 2013 compared with an expense of $1.2 million in the first half 2012.
Net income
Net income decreased $5.8 million or 83.9% to $1.1 million in the first half 2013 from $7.0 million in the first half 2012 due to the factors explained above.
Non-GAAP net income (note 1) decreased $3.6 million or 23.4% to $11.9 million in the first half 2013 from $15.5 million in the first half 2012.
Earnings per ADS
Basic earnings per ADS were $0.02 in the first half 2013 and $0.12 in the first half 2012.
Diluted earnings per ADS were $0.02 in the first half 2013 and $0.12 in the first half 2012.
Non-GAAP diluted earnings per ADS (note 1) were $0.21 in the first half 2013 and $0.26 in the first half 2012.
Cash and Cash Flow
As of June 30, 2013, we had a cash balance of $82.8 million. Our net cash used in operating activities in the first half 2013 was $40.3 million. Our net cash used in investing activities in the first half 2013 was $66.5 million, including $14.6 million of capital expenditures. Within the capital expenditures, $3.1 million related to the leasehold improvement of the newly acquired office facility in Beijing. In the first half 2013, we borrowed $66.0 million under short-term bank loans and 14.6 million under long-term bank loans to fund our growth and office building and business acquisition and repaid $10.4 million of matured short-term bank loans.
Days sales outstanding was 194 days for the first half 2013 and 167 days for the first half 2012.
Recent Developments
Announced Receipt of Non-binding "Going Private" Proposal
On June 6, 2013, the Company announced that its Board of Directors had received a preliminary non-binding proposal letter, dated June 6, 2013, from Mr. Tianwen Liu, the Company's CEO and the chairman of its Board of Directors, and ChinaAMC Capital Management Limited, an alternative investment platform and affiliate of China Asset Management (Hong Kong) Limited, which in turn is a wholly owned subsidiary of China Asset Management Co., Ltd. (collectively, the "Buyer Group"). According to the proposal letter, the Buyer Group is interested in acquiring all of the Company's outstanding ordinary shares, including ordinary shares represented by the Company's ADSs (each representing ten ordinary shares of the Company), at a price of $0.585 in cash per ordinary share or $5.85 in cash per ADS (the "Proposal").
The Company's Board of Directors formed a committee of independent directors (the "Independent Committee") on July 8, 2013 to evaluate the Proposal. The Independent Committee has retained a financial advisor and legal counsel. No decisions have yet been made with respect to the Company's response to the Proposal. There can be no assurance that any definitive offer will be made, that any agreement will be executed, or that this or any other transaction will be approved or consummated. The Company does not undertake any obligation to provide any updates with respect to this or any other transaction, except as required under applicable law.
Completion of Acquisition of Ruantong Xutian
On May 1, 2013, a wholly-owned PRC subsidiary of the Company, iSoftStone Information and Technology (Group) Co., Ltd. ("iSoftStone WFOE") entered into a share purchase agreement with two independent third parties ("Sellers") to acquire 100% of the equity interests of Ruantong Xutian. Ruantong Xutian owned the facility that the Company previously leased as its headquarters. The facility has an area of approximately 43,200 square meters and can host up to 4,000 seats.
On May 27, 2013, iSoftStone WFOE completed the acquisition of Ruantong Xutian. In exchange for the 100% equity interest of Ruantong Xutian, the company assumed liabilities of $31.6 million of Ruantong Xutian and agreed to pay $52.3 million in cash to the Sellers, of which $49.0 million was paid in the second quarter 2013 and the remaining $3.3 million is expected to be paid in the fourth quarter 2013.
Relocation of Headquarters Office
Following the completion of the acquisition of Ruantong Xutian, the Company moved into its new headquarters office in Beijing in June 2013 and terminated the rental contracts of the old headquarters and other rented offices in June 2013.
Outlook for the third quarter 2013
In light of the going-private proposal received during the second quarter of 2013 and ongoing work being performed by the Independent Committee, iSoftStone has decided to provide guidance for the next quarter but will not provide guidance for an annual outlook.
For the third quarter 2013, iSoftStone expects to achieve the following targets:
- Net revenues for the third quarter 2013 to be at least $115 million.
- Net loss for the third quarter 2013 to be at most $1.2 million.
- Non-GAAP net income for the third quarter 2013 to be at least $2.3 million.
- Non-GAAP diluted earnings per ADS for the third quarter 2013 to be at least $0.04, assuming 59 million average ADSs will be outstanding in the third quarter 2013. One ADS represents 10 ordinary shares.
Non-GAAP measures
To supplement our financial results presented in accordance with U.S. generally accepted accounting principles ("GAAP"), we use various non-GAAP financial measures that are adjusted from results based on U.S. GAAP to exclude share-based compensation, amortization of intangible assets from acquisitions, and changes in fair value of contingent consideration in business combinations and a preexisting contract loss related to the acquisition of our Beijing headquarters facility in May 2013.
Reconciliations of our non-GAAP financial measures to our U.S. GAAP financial measures are shown in tables at the end of this earnings release, which provide more details about the non-GAAP financial measures.
Our non-GAAP financial information is provided as additional information to help investors compare business trends among different reporting periods on a consistent basis and to enhance investors' overall understanding of the historical and current financial performance of our continuing operations and our prospects for the future. Our non-GAAP financial information should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for or superior to U.S. GAAP results. In addition, our calculation of this non-GAAP financial information may be different from the calculation used by other companies, and therefore comparability may be limited.
Note 1
Our non-GAAP information (including non-GAAP operating expenses, income from operations, net income, and diluted earnings per ADS) excludes share-based compensation, changes in fair value of contingent consideration in connection with business combination, amortization of intangible assets from acquisitions, and preexisting contract loss. For reconciliations of our non-GAAP measures to our U.S. GAAP measures, please see the reconciliation tables at the end of this earnings release.
Conference Call on August 27, 2013
iSoftStone will host an earnings conference call and live webcast covering its second quarter 2013 financial results on August 27, 2013 at 8:00 a.m. Eastern Daylight Time (New York), which is also 8:00 p.m. in Beijing and Hong Kong on August 27.
The dial-in details for the live conference call are:
| U.S. toll-free |
1 866 519 4004 |
| U.K. toll-free |
080 8234 6646 |
| Norway toll-free |
8001 0719 |
| Netherlands toll-free |
0800 022 1931 |
| China toll-free mobile |
400 620 8038 |
| China toll-free land line |
800 819 0121 |
| Hong Kong local |
852 2475 0994 |
| Hong Kong toll-free |
800 930 346 |
| U.S. toll |
1 845 675 0437 |
| International toll |
+65 6723 9381 |
| Conference ID |
2883 8343 |
| Participant password |
ISS |
A live and archived webcast of the conference call will be available on the Investors section of iSoftStone's website at www.isoftstone.com. To join the webcast, please go to iSoftStone's website at least 15 minutes before the start of the call to register and download and install any necessary audio software.
A telephone replay of the call will be available about two hours after the conclusion of the conference call through 11:59 p.m. Eastern Daylight Time on September 3, 2013. The dial-in details for the telephone replay are:
| U.S. toll-free |
1 855 452 5696 |
| United Kingdom toll-free |
0 808 234 0072 |
| China toll-free mobile English |
400 120 0932 |
| China toll-free mobile Mandarin |
400 120 0931 |
| China toll-free land line English |
800 870 0205 |
| China toll-free land line Mandarin |
800 870 0206 |
| Hong Kong toll-free |
800 963 117 |
| Singapore toll-free |
800 616 2305 |
| Japan toll-free Japanese |
012 095 9102 |
| International toll |
+61 2 8199 0299 |
| U.S. New York toll |
1 646 254 3697 |
| Conference ID |
2883 8343 |
Safe harbor statement
This news release contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include our preliminary unaudited results for the second quarter 2013, our financial outlook for the third quarter 2013, the success of our strategy of focusing on key business drivers (including focusing on growing our ISST and domestic BFSI businesses, continued investment in our SMART business capabilities and investments in emerging technologies) while at the same time focusing on improving our profit margins and operating cash flows despite a challenging global economic environment and slowdown of the Chinese and global economics, and the anticipated benefits of the recent acquisition of, and relocation to, our new Beijing headquarter facilities.
Our forward-looking statements are not historical facts but instead represent only our belief regarding expected results and events, many of which, by their nature, are inherently uncertain and outside of our control. Our actual results and other circumstances may differ, possibly materially, from the anticipated results and events indicated in these forward-looking statements. Announced results for the second quarter 2013 are preliminary, unaudited, and subject to audit adjustment. Our purchase of Beijing headquarters and IT operations building may not achieve lower immediate and long-term costs of ownership versus leasing. In addition, we may not meet our financial outlook for the third quarter 2013, continue to execute our strategy, including expanding our business drivers, focusing on cash flow and margin improvement, and investing in technical competencies and domain expertise to support future growth, or otherwise grow our business in the manner planned, successfully complete planned acquisitions, strategic investments or joint ventures or recognize the anticipated benefits of our acquisitions, strategic investments or joint venture, on a timely basis or at all. Our clients may vary their purchasing patterns in response to the economic environment in Greater China and globally. In addition, other risks and uncertainties that could cause our actual results to differ from what we currently anticipate include: our ability to effectively manage our rapid growth; intense competition from China-based and international IT services companies; our ability to attract and retain sufficiently trained professionals to support our operations; and our ability to anticipate and develop new services and enhance existing services to keep pace with rapid changes in technology and in our selected industries. For additional information on these and other important factors that could adversely affect our business, financial condition, results of operations, and prospects, please see "Risk Factors" that begins on page 7 of our 2012 Annual Report on Form 20-F that we filed with the U.S. Securities and Exchange Commission on April 24, 2013, which can be found on our website at www.isoftstone.com and at www.sec.gov.
All projections (including our third quarter 2013 financial outlook) in this release are based on limited information currently available to us, which is subject to change. Although these projections and the factors influencing them will likely change, we undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Such information speaks only as of the date of this release.
About iSoftStone Holdings Limited
Founded in 2001, iSoftStone is a leading China-based IT services provider serving both greater China and global clients. iSoftStone provides an integrated suite of IT services and solutions, including consulting & solutions, IT services, and business process outsourcing services. The company focuses on industry verticals that include technology, communications, banking, financial services, insurance, energy, transportation, and public sectors.
iSoftStone's American depositary shares began trading on the New York Stock Exchange on December 14, 2010.
For more information, please visit www.isoftstone.com.
iSoftStone Holdings Limited
Mr. Jonathan Zhang
Chief Financial Officer
[email protected]
Christensen
Mr. Tom Myers
[email protected]
Beijing +86 139 1141 3520
| iSoftStone Holdings Limited |
||||||||
| Unaudited Condensed Consolidated Statement of Operations |
||||||||
| (US dollars in thousands, except per share data) |
||||||||
| Three months |
Six months |
|||||||
| ended June 30 |
ended June 30 |
|||||||
| 2012 |
2013 |
2012 |
2013 |
|||||
| Revenues |
94,021 |
106,841 |
181,793 |
203,009 |
||||
| Business tax |
(2,008) |
(184) |
(3,431) |
(482) |
||||
| Net revenues |
92,013 |
106,657 |
178,362 |
202,527 |
||||
| Cost of revenues |
(61,835) |
(72,778) |
(120,403) |
(137,784) |
||||
| Gross profit |
30,178 |
33,879 |
57,959 |
64,743 |
||||
| Operating expenses: |
||||||||
| General and administrative expenses |
(16,169) |
(20,702) |
(30,814) |
(37,396) |
||||
| Selling and marketing expenses |
(8,192) |
(8,405) |
(16,136) |
(15,892) |
||||
| Research and development expenses |
(1,363) |
(1,090) |
(2,219) |
(3,335) |
||||
| Total operating expenses |
(25,724) |
(30,197) |
(49,169) |
(56,623) |
||||
| Change in fair value of contingent consideration in |
(111) |
(17) |
(510) |
(122) |
||||
| Other expense, net |
(117) |
(4,411) |
(178) |
(4,463) |
||||
| Government subsidies |
93 |
91 |
309 |
233 |
||||
| Income (loss) from operations |
4,319 |
(655) |
8,411 |
3,768 |
||||
| Interest income |
140 |
158 |
515 |
488 |
||||
| Interest expense |
(284) |
(1,714) |
(571) |
(2,963) |
||||
| Income (loss) before provision for income taxes and |
4,175 |
(2,211) |
8,355 |
1,293 |
||||
| Income taxes (expense) benefit |
(465) |
563 |
(1,167) |
266 |
||||
| Income (loss) after income tax before loss in equity |
3,710 |
(1,648) |
7,188 |
1,559 |
||||
| Loss in equity method investments, net of income |
(84) |
(231) |
(233) |
(437) |
||||
| Net income (loss) |
3,626 |
(1,879 ) |
6,955 |
1,122 |
||||
| Less: Net income (loss) attributable to noncontrolling |
35 |
(150) |
76 |
(244) |
||||
| Net income (loss) attributable to iSoftStone |
3,591 |
(1,729) |
6,879 |
1,366 |
||||
|
Earnings (loss) per share (In US$) |
||||||||
| Basic |
0.01 |
- |
0.01 |
- |
||||
| Diluted |
0.01 |
- |
0.01 |
- |
||||
| Earnings (loss) per ADS (In US$) |
||||||||
| Basic |
0.06 |
(0.03) |
0.12 |
0.02 |
||||
| Diluted |
0.06 |
(0.03) |
0.12 |
0.02 |
||||
| Weighted average shares (In thousands) |
||||||||
| Basic |
562,906 |
571,784 |
560,767 |
570,224 |
||||
| Diluted |
583,677 |
581,822 |
587,462 |
580,646 |
||||
| iSoftStone Holdings Limited |
|||||||
| Unaudited Condensed Consolidated Statement of Comprehensive Income |
|||||||
| (US dollars in thousands, except per share data) |
|||||||
| Three months |
Six months |
||||||
| ended June 30 |
ended June 30 |
||||||
| 2012 |
2013 |
2012 |
2013 |
||||
| Net income (loss) |
3,626 |
(1,879) |
6,955 |
1,122 |
|||
| Other comprehensive income, net of tax of nil |
|||||||
| Changes in cumulative foreign currency translation |
(1,880) |
2,779 |
(2,470) |
3,567 |
|||
| Comprehensive income |
1,746 |
900 |
4,485 |
4,689 |
|||
| Less: comprehensive income (loss) attributed to the |
16 |
(68) |
56 |
(154) |
|||
| Comprehensive income attributed to iSoftStone |
1,730 |
968 |
4,429 |
4,843 |
|||
| iSoftStone Holdings Limited |
|||
| Unaudited Condensed Consolidated Balance Sheets |
|||
| ( US dollars in thousands) |
|||
| December 31 |
June 30 |
||
| 2012 |
2013 |
||
| Cash |
116,597 |
82,836 |
|
| Restricted cash |
8,743 |
11,559 |
|
| Accounts receivable, net of allowance |
202,202 |
252,375 |
|
| Other current assets |
19,772 |
30,725 |
|
| Total current assets |
347,314 |
377,495 |
|
| Property and equipment |
67,768 |
136,688 |
|
| Land use right |
3,202 |
39,445 |
|
| Intangible assets |
5,945 |
4,519 |
|
| Goodwill |
26,983 |
31,548 |
|
| Other non-current assets |
15,298 |
11,927 |
|
| Total assets |
466,510 |
601,622 |
|
| Accounts payable |
21,895 |
23,046 |
|
| Deferred revenue |
9,693 |
7,580 |
|
| Short-term borrowings |
54,012 |
113,240 |
|
| Other current liabilities |
43,878 |
56,919 |
|
| Total current liabilities |
129,478 |
200,785 |
|
| Long-term borrowings |
- |
42,298 |
|
| Other non-current liabilities |
4,048 |
10,932 |
|
| Total liabilities |
133,526 |
254,015 |
|
| Shareholders' equity (Note a) |
330,073 |
340,825 |
|
| Noncontrolling interest |
2,911 |
6,782 |
|
| Total liabilities and shareholders' equity |
466,510 |
601,622 |
|
| Note a: |
|||
| As of June 30, 2013, the number of ordinary shares issued and outstanding was 576,017,931. |
|||
| iSoftStone Holdings Limited |
|||||||
| Unaudited Condensed Consolidated Statement of Cash Flows |
|||||||
| (US dollars in thousands) |
|||||||
| Three months |
Six months |
||||||
| ended June 30 |
ended June 30 |
||||||
| 2012 |
2013 |
2012 |
2013 |
||||
| Cash flows from operating activities: |
|||||||
| Net income (loss) |
3,626 |
(1,879) |
6,955 |
1,122 |
|||
| Adjustments to reconcile net income to net cash used in operating activities: |
|||||||
| Share-based compensation |
3,831 |
3,481 |
6,870 |
5,389 |
|||
| Depreciation and amortization of property and equipment |
2,325 |
3,285 |
4,562 |
5,932 |
|||
| Amortization of intangible assets |
820 |
767 |
1,454 |
1,455 |
|||
| Amortization of land use right |
18 |
81 |
36 |
99 |
|||
| Provision of allowance for doubtful accounts |
154 |
203 |
93 |
257 |
|||
| Loss on equity method investments |
84 |
231 |
233 |
437 |
|||
| Loss on disposal of property and equipment |
68 |
66 |
113 |
101 |
|||
| Changes in fair value of contingent consideration in connection with |
111 |
17 |
510 |
122 |
|||
| Preexisting contract loss |
- |
4,106 |
- |
4,106 |
|||
| Changes in operating assets and liabilities: |
|||||||
| Accounts receivable |
(30,235) |
(30,915) |
(48,831) |
(47,443) |
|||
| Other assets |
3,872 |
(5,222) |
(1,109) |
(8,234) |
|||
| Accounts payable |
3,895 |
(247) |
(31) |
(4,945) |
|||
| Other liabilities |
1,569 |
3,105 |
139 |
1,348 |
|||
| Net cash used in operating activities |
(9,862) |
(22,921) |
(29,006) |
(40,254) |
|||
| Cash flows from investing activities: |
|||||||
| Purchase of property and equipment |
(3,717) |
(7,668) |
(9,205) |
(14,626) |
|||
| Purchase from sales of long-term investments |
577 |
- |
577 |
- |
|||
| Consideration paid for business acquisitions |
(1,750) |
(49,049) |
(1,750) |
(49,049) |
|||
| Restricted cash |
3,069 |
(2,445) |
718 |
(2,817) |
|||
| Net cash used in investing activities |
(1,821) |
(59,162) |
(9,660) |
(66,492) |
|||
| Cash flows from financing activities: |
|||||||
| Proceeds from exercise of options |
224 |
411 |
1,793 |
521 |
|||
| Capital contribution from noncontrolling interest shareholder |
- |
- |
436 |
4,025 |
|||
| Proceeds from short term borrowings |
- |
59,550 |
1,585 |
65,978 |
|||
| Proceeds from long term borrowings |
- |
14,623 |
- |
14,623 |
|||
| Payments of short term borrowings |
- |
(8,774) |
(1,585) |
(10,381) |
|||
| Deferred and contingent consideration paid for business acquisitions |
(197) |
(1,208) |
(3,980) |
(2,328) |
|||
| Net cash provided by (used in) financing activities |
27 |
64,602 |
(1,751) |
72,438 |
|||
| Effect of exchange rate changes |
(144) |
372 |
(707) |
547 |
|||
| Net decrease in cash |
(11,800) |
(17,109) |
(41,124) |
(33,761) |
|||
| Cash at beginning of period |
71,872 |
99,945 |
101,196 |
116,597 |
|||
| Cash at end of period |
60,072 |
82,836 |
60,072 |
82,836 |
|||
| iSoftStone Holdings Limited |
|||||||||||||
| Reconciliation of Non-GAAP financial measures to comparable GAAP measures |
|||||||||||||
| (US dollars in thousands, except per share data) |
|||||||||||||
| 1. Reconciliation of Non-GAAP financial operating expenses, income from operations, and net income to comparable GAAP measures. |
|||||||||||||
| Three months |
Three months |
||||||||||||
| ended June 30, 2012 |
ended June 30, 2013 |
||||||||||||
| GAAP |
Adjustments |
Non-GAAP |
GAAP |
Adjustments |
Non-GAAP |
||||||||
| Operating expenses |
(25,724) |
4,234(a) |
(21,490) |
(30,197) |
3,815(c) |
(26,382) |
|||||||
| Income (loss) from operations |
4,319 |
4,577(a)(b) |
8,896 |
(655) |
8,185(c)(d) |
7,530 |
|||||||
| Net income (loss) |
3,626 |
4,577(a)(b) |
8,203 |
(1,879) |
8,185(c)(d) |
6,306 |
|||||||
| Six months |
Six months |
||||||||||||
| ended June 30, 2012 |
ended June 30, 2013 |
||||||||||||
| GAAP |
Adjustments |
Non-GAAP |
GAAP |
Adjustments |
Non-GAAP |
||||||||
| Operating expenses |
(49,169) |
7,580(e) |
(41,589) |
(56,623) |
6,057(g) |
(50,566) |
|||||||
| Income from operations |
8,411 |
8,593(e)(f) |
17,004 |
3,768 |
10,784(g)(h) |
14,552 |
|||||||
| Net income |
6,955 |
8,593 (e)(f) |
15,548 |
1,122 |
10,784(g)(h) |
11,906 |
|||||||
| Notes: |
|||||||||||||
| (a) Adjustments to exclude share-based compensation of $3,697 and amortization of intangible assets from acquisitions of $537 from the unaudited condensed consolidated statements. |
|||||||||||||
| (b) Adjustments to exclude share-based compensation of $133, amortization of intangible assets from acquisitions of $99, and changes in fair value of contingent consideration connection with business combinations of $111 from the unaudited condensed consolidated statements. |
|||||||||||||
| (c) Adjustments to exclude share-based compensation of $3,363 and amortization of intangible assets from acquisitions of $452 from the unaudited condensed consolidated statements |
|||||||||||||
| (d) Adjustments to exclude share-based compensation of $119, amortization of intangible assets arising from acquisitions of $128, changes in fair value of contingent consideration in connection with business combinations of $17, and preexisting contract loss of $4,106 from the unaudited condensed consolidated statements. |
|||||||||||||
| (e) Adjustments to exclude share-based compensation of $6,617 and amortization of intangible assets from acquisitions of $963 from the unaudited condensed consolidated statements. |
|||||||||||||
| (f) Adjustments to exclude share-based compensation of $252, amortization of intangible assets from acquisitions of $251, and changes in fair value of contingent consideration connection with business combinations of $510 from the unaudited condensed consolidated statements. |
|||||||||||||
| (g) Adjustments to exclude share-based compensation of $5,150 and amortization of intangible assets from acquisitions of $907 from the unaudited condensed consolidated statements. |
|||||||||||||
| (h) Adjustments to exclude share-based compensation of $240, amortization of intangible assets arising from acquisitions of $259, changes in fair value of contingent consideration in connection with business combinations of $122, and preexisting contract loss of $4,106 from the unaudited condensed consolidated statements. |
|||||||||||||
| 2. Reconciliation of diluted EPS to Non-GAAP diluted EPS |
|||||||||||||
| Three months ended June 30, 2012 |
Three months ended June 30, 2013 |
||||||||||||
| GAAP measures |
Adjustments |
Non-GAAP measures |
GAAP measures |
Adjustments |
Non-GAAP measures |
||||||||
| Weighted average ordinary shares outstanding used in computing diluted EPS |
583,677 |
- |
583,677 |
581,822 |
- |
581,822(a) |
|||||||
| Diluted earnings per share (in US$) |
0.01 |
0.01 |
- |
0.01 |
|||||||||
| Diluted earnings per ADS (in US$) |
0.06 |
0.14 |
(0.03) |
0.11 |
|||||||||
| Six months ended June 30, 2012 |
Six months ended June 30, 2013 |
||||||||||||
| GAAP measures |
Adjustments |
Non-GAAP measures |
GAAP measures |
Adjustments |
Non-GAAP measures |
||||||||
| Weighted average ordinary shares outstanding used in computing diluted EPS (in thousands) |
587,462 |
- |
587,462 |
580,646 |
- |
580,646 |
|||||||
| Diluted earnings per share (in US$) |
0.01 |
0.03 |
- |
0.02 |
|||||||||
| Diluted earnings per ADS (in US$) |
0.12 |
0.26 |
0.02 |
0.21 |
|||||||||
| Note: |
|||||||||||||
| (a) In the earning release for the first quarter 2013, we estimated 59.0 million average ADSs or 590 million shares would be outstanding in the second quarter 2013. The difference from the estimate to the actual number of 581.8 million shares was primarily due to the impact of existing stock options resulting from a lower stock price than our original estimates. |
|||||||||||||
SOURCE iSoftStone Holdings Limited
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