Longtop Financial Technologies Limited Announces Unaudited Financial Results for the Fiscal Quarter Ended September 30, 2010

HONG KONG, Nov. 14, 2010 /PRNewswire-Asia/ -- Longtop Financial Technologies Limited ("Longtop") (NYSE: LFT), a leading software developer and solutions provider targeting the financial services industry in China, announced today unaudited financial results for the quarter ended September 30, 2010, which is the second quarter of its fiscal year ending March 31, 2011.

FINANCIAL HIGHLIGHTS

• Total Software Development Revenues of US$55.5 million, an Increase of 50.0% Year-on-Year (YoY);
• Total Revenues of US$60.5 million, an Increase of 41.2% YoY;
• Adjusted(1) Operating  Income of US$28.7 million, an Increase of 38.4% YoY;
• Adjusted  Net Income of US$25.7 million, an Increase of 19.8% YoY;
• Adjusted Diluted Earnings Per Share of US$0.44, Three Cents Ahead of Company Guidance;
• Operating Cash flow of US$31.6 million, an Increase of 67.6% YoY;
• Full Year Revenue Guidance Increased to US$242.5 million and Adjusted EPS Guidance Increased to US$ 1.76  

(1) Explanation of the Company's Adjusted (i.e. non-GAAP) financial measures and the related reconciliations to GAAP financial measures are included in the accompanying "Non-GAAP Disclosure" and the "Consolidated Adjusted Statements of Operations".

"The financial results of the second fiscal quarter have exceeded our Company guidance. I am pleased to see the ongoing strength in demand from across the full spectrum of our customer base. The outstanding revenue contribution from Other Banks reaffirms the success over the past four years in diversifying and expanding our customer base as well as last year's acquisition of Giantstone and its core banking capabilities. We continue to be highly positive on our outlook for the second half of the 2011 fiscal year," commented Weizhou Lian, CEO of Longtop. "Longtop's growth momentum and expanding market leadership are based on customers' trust in our quality solutions and service, and we will work hard to continue to deserve their loyalty."

FISCAL SECOND QUARTER DETAILED FINANCIAL RESULTS

Revenue

Software development revenues of US$55.5 million in the second quarter represented an increase of 50.0% YoY and contributed 91.8% of total revenues. Giantstone, a leading core banking solution provider in China acquired by Longtop in the fourth quarter of fiscal 2010, contributed US$4.1 million in software revenues in the quarter ended September 30, 2010. Excluding Giantstone, software development revenues for the second quarter would have increased by 39.0%. Software development revenues, which were 86.2% of total revenues for the six months ended September 30, 2010, amounted to US$94.2 million, a YoY increase of 52.7%. Giantstone contributed US$9.3 million in software development revenues in the six months ended September 30, 2010. Excluding Giantstone, software development revenues in the six months ended September 2010 would have increased by 37.6%.

Revenues from other services in the second quarter were US$5.0 million, a decrease of 14.6% YoY. The YoY decrease in Other Service revenue is due to a decline in auxiliary services and the deconsolidation of the Non Financial Services IT Outsourcing Services Division on July 17, 2010, which went from being a wholly owned subsidiary to an equity-method investee. The 57.3% YoY increase in other services revenues for the six months ended September 30, 2010 was primarily due to US$2.9 million in revenue from the IT outsourcing business of Shenzhen Zhongbokechuang Information Technology Co., Ltd., or Zhongbo, which was acquired by Longtop in April 2010 and included within the Non Financial Services IT Outsourcing Services Division.

Software development revenues from the Big Four Banks in the second quarter were US$23.6 million, an increase of 32.8% YoY and US$38.6 million for the six months ended September 30, 2010, an increase of 33.9% YoY. Big Four Banks accounted for 41.0% of software development revenues for the six months ended September 30, 2010, as compared to 46.7% in the corresponding year ago period.

Software development revenues from Other Banks in the second quarter were US$22.2 million, a YoY increase of 78.2%, and US$40.6 million in the six month ended September 30, 2010, an increase of 85.7% YoY. Excluding Giantstone, software development revenue from Other Banks would have increased by 45.8% and 43.2% YoY for the three and six month ended September 30, 2010. Other Banks accounted for 43.1% of software development revenues for the six months ended September 30, 2010, as compared to 35.4% in the corresponding year ago period.

Software development revenues from Insurance in the second quarter were US$7.3 million, a YoY increase of 41.2%, and US$11.2 million for the six months ended September 30, 2010, a YoY increase of 42.3%. Insurance accounted for 11.9% of software development revenues in the six months ended September 30, 2010, as compared to 12.8% in the corresponding year ago period.

Adjusted Software Gross Margin was 68.4% and 66.5% for the three and six months ended September 30, 2010, as compared to 73.3% and 71.6% in the corresponding year ago period. The YoY decline in Adjusted Software Gross Margin was primarily due to: i) the inclusion of newly acquired companies including Giantstone, which have lower gross margins than Longtop; (ii) in order to meet customer requirements, a larger percentage of the workforce are being located in Beijing where costs per employee are higher; and (iii) additional investments in delivery capabilities for Longtop's expanded solution offerings.

Adjusted Operating Expenses of US$10.1 million were 16.7% of revenue for the three months ended September 30, 2010, as compared to 20.1% in the corresponding year ago period and less than Company guidance of 19.0%. Adjusted Operating Expenses increased by 31.2% YoY in the six month ended September 30, 2010, which was lower than the YoY total revenue growth of 53.3% during the period.

Operating and Net Income

Adjusted Operating Income of US$28.7 million in the second quarter represented an increase of 38.4% YoY and exceeded Company guidance of US$27.4 million. Adjusted Operating Margin of 47.5% in the second quarter was in line with Company guidance of 48% even with inclusion of the newly acquired lower margin businesses. Adjusted Operating Margin for the six months ended September 30, 2010 of 43.8% was lower than the corresponding year ago period due to the decline in Adjusted Total Gross Margin.

Adjusted Net Income for the quarter ended September 30, 2010, of US$25.7 million or US$0.44 per fully diluted share represented a YoY increase of 19.8% and exceeded Company guidance of US$24.3 million or US$0.41 per fully diluted share.  The YoY Adjusted Net Income growth of 19.8% in the second quarter of fiscal 2011 was less than the YoY Adjusted Operating Income growth of 38.4% primarily because Adjusted Net Income in the second quarter of fiscal 2010 included US$3.0 million (Q2 2011: US$0.0) for a refund of the previous calendar year's income taxes related to qualification as a Key Software Company.

Longtop recorded a US GAAP net loss of US$67.6 million for the quarter ended September 30, 2010, as compared to a US GAAP net income of US$18.9 million in the corresponding year ago period due primarily to a non cash  share-based compensation expense of US$79.5 million recorded in the second quarter of fiscal 2011. The US$79.5 million share-based compensation expense resulted in significant year-on-year increase in US GAAP cost of revenues and operating expenses which resulted in significant year-on-year declines in US GAAP gross margin and US GAAP operating income. In July 2010, a trust established by Bloomwell International Limited, which is wholly owned by Hiu Kung Ka (also referred to by his Mandarin name of as Xiaogong Jia), our co-founder and chairman of our board of directors, gifted Longtop shares with a value of US$79.5 million to a number of our current employees. The shares are fully vested with restrictions on sale over a period of time. Because Mr. Ka is considered a principal shareholder of our Company and Longtop will benefit from such incentive grants, for US GAAP reporting purposes we have recorded the US$79.5 million grant-date fair value as share-based compensation expense in the quarter ended September 30, 2010. The US$79.5 million share-based compensation expense did not increase the total shares outstanding and had no impact on the cash flow or net assets of the Company.  

Unrestricted cash balances at September 30, 2010, were US$379.0 million, giving the Company significant resources for potential acquisitions in the still fragmented financial IT services sector in China.  

"Our Company performance has once more exceeded guidance for both top and bottom line results. Our order intake, margins and cash flow from operations which was US$31.6 million significantly improved in the second quarter as we had anticipated. On the back of strong demand and execution, we are now raising our fiscal 2011 revenue guidance to US$242.5 million up from 225.0 million at the beginning of our fiscal year and Adjusted Earnings Per Share of US$1.76 up from US$1.64." commented Derek Palaschuk, CFO of Longtop.

BUSINESS OUTLOOK

Longtop anticipates, for the quarter ending December 31, 2010:

Total revenues, of US$73.5 million, Adjusted Operating Income of US$38.0 million, Adjusted Net Income of US$33.1 million and Adjusted Diluted Earnings Per Share of US$0.56. Giantstone is expected to contribute US$3.5 million of software development revenues.

Excluding the impact of new acquisitions, US GAAP net income is expected to be approximately US$26.8 million or US$0.46 per diluted share, which is US$6.3 million less than Adjusted Net Income due to Non GAAP adjustments normally made.  

For its fiscal year ending March 31, 2011:

Total revenues of US$242.5 million, Adjusted Operating Income of US$110.0 million, Adjusted Net Income of US$103,5 million and Adjusted Diluted Earnings Per Share of US$1.76. Giantstone is expected to contribute US$16 million of software development revenues.

Excluding the impact of new acquisitions, US GAAP net loss is expected to be approximately US$8.3 million, or US$0.18 per diluted share which is US$111.8 million less than Adjusted Net Income which includes the US$79.5 million share gift as well as the other Non GAAP adjustments normally made.

CONFERENCE CALL AND WEBCAST

Longtop's senior management team will host a conference call and audio web cast at 8:00 AM Eastern Time (or 5:00 AM U.S. Pacific Time and 21:00 PM Beijing/Hong Kong time) on November 15, 2010. The conference call will last for approximately one hour.

Additionally, a live and archived web cast of this call will be available on Longtop's website at http://en.longtop.com/

NON-GAAP DISCLOSURE ("ADJUSTED")

To supplement the unaudited consolidated financial statements presented in accordance with United States Generally Accepted Accounting Principles ("GAAP"), Longtop's management reports and uses non-GAAP ("Adjusted") measures of cost of revenues, operating expenses, net income and fully diluted net income per share, which are adjusted from results based on GAAP.  To supplement our financial results presented on a GAAP basis, we use the non-GAAP measures to exclude certain business combination accounting entries and expenses related to acquisitions, as well as other significant expenses including stock-based compensation, exclusion of which we believe is helpful in understanding our past financial performance and our future results. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-GAAP measures are among the primary factors management uses in planning for and forecasting future periods. Compensation of our executives is based in part on the performance of our business based on these non-GAAP measures.  Management believes these non-GAAP financial measures enhance the user's overall understanding of our current financial performance and our prospects for the future. Specifically, we believe the non-GAAP financial measures provide useful information to both management and investors by excluding certain items that we believe are not indicative of our core operating results. The presentation of this additional information is not meant to be considered superior to, in isolation from or as a substitute for results prepared in accordance with US GAAP. We encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures contained in this release and which we discuss below.  Readers are cautioned not to view non-GAAP results on a stand-alone basis or as a substitute for results under GAAP, or as being comparable to results reported or forecasted by other companies.  

Definitions of Non-GAAP Measures

Adjusted Cost of Revenue is defined as cost of revenue excluding, if applicable: (1) non-cash compensation expense and (2) amortization and charges for impairment of acquired intangibles.

Adjusted Gross Margin is defined as Total Revenue less Adjusted Cost of Revenue.  

Adjusted Operating Expenses is defined as operating expenses excluding, if applicable: (1) non-cash compensation expense, (2) amortization of acquired intangibles, deferred compensation arising on acquisition and goodwill and intangible asset impairment, (3) acquisition related expenses such as fees paid to investment bankers, due diligence and legal costs paid to third parties which would have, prior to April 1, 2009, been included as a cost of acquisition under GAAP; (4) post acquisition adjustments to the fair value of contingent consideration which would have, prior to April 1, 2009, been included as a cost of acquisition under GAAP or (5) gains or losses on the disposal of businesses or (6) one-time items.  

Adjusted Operating Income is defined as Adjusted Gross Margin less Adjusted Operating Expenses.

Adjusted Net Income is defined as Adjusted Operating Income plus/minus other income/(expenses), less income taxes, excluding if applicable: (1) one-time items and  (2) discontinued operations.  

Adjusted EPS is defined as Adjusted Net Income divided by diluted shares.

One-Time Items, if applicable, are excluded from Adjusted Operating Income and Adjusted Net Income.  These items are one-time in nature and non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years. GAAP results include one-time items.  

Expenses That Are Excluded From Our Non-GAAP Measures

Non-cash compensation expense consists principally of expense associated with grants, including unvested grants assumed in acquisitions, of restricted stock, restricted stock units and stock options. These expenses are not paid in cash, and we include the related shares in our fully diluted shares outstanding which, for restricted stock units and stock options, are included on a treasury method basis. Longtop's management believes excluding the share-based compensation expense from its non-GAAP financial measure is useful for itself and investors. Although share-based compensation is a key incentive offered to our employees and especially our senior management, and we believe such compensation contributed to the revenues earned during the periods presented and also believe it will contribute to the generation of future period revenues, as share-based compensation expense does not involve any upfront or subsequent cash outflow, Longtop does not factor this in when evaluating and approving expenditures or when determining the allocation of its resources to its business segments. As a result, the monthly financial results for internal reporting and any performance measure for commission and bonus are based on non-GAAP financial measures that exclude share-based compensation expense.   If we had included share-based compensation expenses in our Non-GAAP Adjusted Net Income in Q2 2011, Adjusted Net Income would have been US$89.1 million lower or Adjusted Net Loss of US$63.5 million for the three months ended September 30, 2010, and our Adjusted Net Income margin would have been negative.    

Goodwill and intangible asset impairment and amortization of acquired intangibles is a non-cash expense relating to acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as backlog, customer relationships, and intellectual property, are valued and amortized over their estimated lives. While it is likely that we will have significant intangible amortization expense as we continue to acquire companies, we have excluded the effect of amortization of intangible assets from our non-GAAP financial measures. Amortization of intangible assets is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of intangible assets contributed to revenues earned during the periods presented and will contribute to future period revenues as well.

Acquisition proceeds allocated to deferred compensation arises where a portion of the purchase price paid to shareholders is considered compensation expense rather than purchase price under US GAAP. Deferred compensation arising on acquisition is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Investors should note that the use of deferred compensation arising on acquisition contributed to revenues earned during the periods presented and will contribute to future period revenues as well.  

Prior to April 1, 2009, acquisition-related expenses such as fees paid to investment bankers, due diligence and legal costs paid to third parties, were capitalized as part of the cost of the acquisition. Subsequent to April 1, 2009, such costs are required to be recorded as an operating expense when incurred. These acquisition-related expenses are not related to the performance of our business lines, are inconsistent in amount and frequency and are significantly affected by the timing and size of our acquisitions.

Prior to April 1, 2009, contingent consideration was generally recorded as an additional purchase price when the contingencies resolved and the consideration became payable.  Subsequent to April 1, 2009, we are required to estimate and record the fair value of contingent acquisition consideration as of the acquisition date. Contingent consideration is re-measured at fair value in each reporting period with changes in fair value recognized in earnings. The contingent acquisition consideration is inconsistent in amount and frequency, and is significantly affected by the timing and size of our acquisitions.      

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

It is currently expected that the Business Outlook will not be updated until the release of Longtop's next quarterly earnings announcement; however, Longtop reserves the right to update its Business Outlook at any time for any reason.

This announcement contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including those with respect to our anticipated operating results for the quarter ending Sept 30, 2010 and fiscal year ending March 31, 2011, efforts taken to improve efficiency, strengthen management, manage the Company's growth and the Company's competitive position. In some cases, you can identify forward-looking statements by such terms as ''believes,'' ''expects,'' ''anticipates,'' ''intends,'' ''estimates,'' the negative of these terms, or other comparable terminology. Factors that could cause actual results to differ include the growth of the financial services industry in China; the amount and seasonality of IT spending by banks and other financial services companies; competition and potential pricing pressures; our revenue growth and solution and service mix; our ability to successfully develop, introduce and market new solutions and services; our ability to effectively manage our operating costs and expenses; our reliance on a limited number of customers that account for a high percentage of our revenues; a possible future shortage or limited availability of employees; general economic and business conditions; the volatility of our operating results and financial condition; our ability to attract or retain qualified senior management personnel and research and development staff; the outbreak of health epidemics; the relocation of our headquarters; People's Republic of China, or PRC, regulatory changes and interpretations; and other risks detailed in the Company's filings with the Securities and Exchange Commission. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about the companies and the industry. The Company undertakes no obligation to update forward-looking statements to reflect subsequent occurring events or circumstances, or to changes in its expectations, except as may be required by law. Although the Company believes that the expectations expressed in these forward looking statements are reasonable, they cannot assure you that their expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results. Our actual results of operations for the quarter and six month ended September 30, 2010, are not necessarily indicative of our operating results for any future periods. Any projections in this release are based on limited information currently available to us, which is subject to change.

About Longtop Financial Technologies Limited

Longtop is a leading software development and solutions provider targeting the financial services industry in China. Longtop develops and delivers a comprehensive range of software applications and solutions with a focus on meeting the rapidly growing IT needs of the financial services institutions in China. Longtop is the highest ranked Chinese financial technology provider on the Global FinTech 100 survey of top technology partners to the financial services industry. Independent research firm IDC has also named Longtop the No.1 market share leader in China's Banking IT solution market and the No.2 market share leader in China's Insurance IT solution market in calendar year 2009. Headquartered in Beijing, Longtop has six solution delivery centers, three research and development centers and 95 ATM service centers located in 27 out of 31 provinces in China. For more information, please visit: http://en.longtop.com/.

SOURCE Longtop Financial Technologies Limited

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