VanceInfo Reports Solid Results for the Second Quarter 2011

BEIJING, Aug. 16, 2011 /PRNewswire-Asia/ -- VanceInfo Technologies Inc. (NYSE:VIT) ("VanceInfo" or the "Company"), an IT service provider and one of the leading offshore software development companies in China, today reported its unaudited financial results for the second quarter ended June 30, 2011.

Second Quarter 2011 Financial and Operating Highlights

• Net revenues for the second quarter 2011 increased to $68.2 million, up 31.8 % from $51.8 million for the second quarter 2010.
• Gross profit for the second quarter 2011 was $24.8 million, up 21.1% from $20.5 million for the same period in 2010. Gross margin for the second quarter 2011 was 36.4%.
• Net income in the second quarter 2011 was $7.1 million, compared to $7.2 million in the second quarter 2010. Non-GAAP net income(1) for the second quarter 2011 was $9.5 million, up 10.8% from the same period in 2010.  
• Diluted earnings per share ("EPS") were $0.16 and non-GAAP diluted EPS(1) were $0.21 for the second quarter 2011, reflecting weaker than expected performance from the Japanese business and the newly acquired Lifewood business process outsourcing ("BPO") business.
• Employees totaled 12,542, including 11,227 billable professionals, as of June 30, 2011.

"Our business remained solid in the second quarter, as we delivered strong top-line performance despite macroeconomic weakness that has caused uncertainty within our industry. The growth we achieved was largely driven by our ongoing efforts to diversify our business through the addition of new customers and expansion of our operations into new vertical markets," said Chris Chen, Chairman and Chief Executive Officer of VanceInfo. "While we have accomplished a great deal in the first half of 2011, we are faced with several challenges as well, with unprecedented margin pressure from the impact of broad-based wage inflation as a result of the rising inflationary environment in China. We remain committed to expanding our business through organic growth, complemented by selective acquisitions in key areas of our business, with a focus on keeping VanceInfo at the forefront of the industry and ahead of prevailing market trends. Although the near-term outlook for our industry lacks clarity, we are confident in the strength and potential of our business and believe that VanceInfo is well positioned for 2012 and beyond."

Second Quarter 2011 Financial Results

Due to the seasonal nature of its business, the Company presents its financial analysis on a year-over-year basis, comparing the second quarter of 2011 and the second quarter of 2010.

Net Revenues

Net revenues were $68.2 million in the second quarter of 2011, up 31.8 % from $51.8 million for the second quarter 2010.The increase in net revenues was primarily driven by continued growth of the Company's business in the U.S., Europe and Greater China (including Mainland China, Hong Kong, Taiwan and Macau) markets.

Net Revenues by Service Lines

The Company provides three broad sets of services: R&D Outsourcing Services, IT Services and Other Solutions & Services. R&D Outsourcing Services consists of research & development service line and globalization & localization service line. IT Services consists of enterprise solutions, application development & maintenance ("ADM"), and quality assurance & testing service lines. Other Solutions & Services consists of BPO and system integration ("SI") services and other solutions.  

Net revenues from IT Services represented 41.3% of the revenues, up 62.6% from the year-ago quarter. Net revenues from Other Solutions & Services accounted for 4.6% of the total revenues during the second quarter of 2011 and grew 174.8% compared to the second quarter of 2010. The growth in Other Solutions & Services was fueled by the recent strengthening of the BPO business through the Lifewood acquisition in April 2011.

Net Revenues by Geographic Markets

Based on the location of our clients' headquarters, Greater China is the Company's largest geographic market, accounting for $33.0 million or 48.4% of the net revenues in the second quarter of 2011, followed by 32.0% from clients headquartered in the United States, 16.1% in Europe and 2.8% in Japan.

Measuring the Company's revenues by geographic markets based on the location of the contract signing entities, rather than the location of the clients' headquarters, Greater China accounted for 73.7% of net revenues in the second quarter of 2011, while the United States accounted for 21.6%, Europe accounted for 2.2% and Japan accounted for 1.4% in the same period.

Net Revenues by Industries

Starting in 2011 the Company has begun disclosing its net revenue contribution by industry. The Company classifies its clients into four broad industry segments: Telecommunications ("Telecom"), High Technology ("High Tech"), Banking, Financial Services and Insurance ("BFSI"), and Others (including manufacturing, retail, distribution, travel and transportation and public services, etc.).

Largest Clients

Revenues from the top five clients totaled 53.5% of net revenues in the quarter, compared to 57.7% in the second quarter of 2010.

Gross Profit and Gross Margin

Gross profit in the second quarter 2011 was $24.8 million, an increase of 21.1% from $20.5 million in the second quarter of 2010. Gross margin was 36.4% in the second quarter 2011, compared to 39.7% in the second quarter of 2010. Excluding government subsidies of $0.3 million and $0.8 million, respectively, in the second quarter 2011 and 2010, gross margin declined 223 basis points in the second quarter of 2011, mainly attributable to the increasing pressure from wage inflation in the first half of 2011.

Operating Expenses

Selling, general and administrative expenses totaled $18.0 million for the second quarter 2011, up 46.4% from $12.3 million a year ago. The increase in selling, general and administrative expenses was due to continued investments in building solution-based capabilities and our newly acquired BPO business as well as higher share-based compensation due to substantially higher unit costs associated with the high strike price stock options granted in late 2010.

Operating Income and Operating Margin

Operating income in the second quarter 2011 was $7.7 million, compared to $8.3 million in the second quarter 2010. Non-GAAP operating income(1) in the second quarter 2011 was $10.0 million, compared to $9.7 million in the same period a year ago. Non-GAAP operating margin (1) was 14.7% in the second quarter 2011, compared to 18.7% in the second quarter 2010. Of the margin decline, approximately 200 basis points were attributable to (1) a weaker than expected operating loss from the Japanese unit due to the slower business activities after the earthquake, and (2) below average operating margin of our domestic financial services business and our newly acquired BPO business, both of which are still in the heavy investment phase.

Provision for Income Taxes

The provision for income taxes was $0.9 million in the second quarter of 2011, compared to $1.1 million in the second quarter of 2010. The effective tax rate was 10.7% for the second quarter 2011, compared to 13.1% for the corresponding period in 2010.

Net Income and EPS

Net income in the second quarter 2011 was $7.1 million, compared to $7.2 million in the second quarter 2010. Non-GAAP net income(1) was $9.5 million, up 10.8% from $8.6 million a year ago. Non-GAAP net margin(1) was 13.9% in the second quarter 2011, compared with 16.5% in the year-ago quarter.  

Diluted EPS and Non-GAAP diluted EPS (1) were $0.16 and $0.21, respectively, based on 45.8 million total ADS-equivalent average shares outstanding, for the second quarter 2011, compared with $0.17 and $0.20, respectively, for the second quarter 2010.

The non-GAAP measures and related reconciliations to GAAP measures are described in the accompanying sections of "About Non-GAAP Financial Measures" and "Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures."

Cash and Cash Flow

Starting in earlier 2011, the Company began disclosing its cash flow statement. As of June 30, 2011, VanceInfo had cash and cash equivalents, restricted cash, term deposits and short-dated(2) investments totaling $153.4 million. Operating cash flow in the second quarter of 2011 was a net inflow of approximately $9.6 million, compared with $4.8 million in the second quarter 2010. The Company spent approximately $21 million in cash under the share repurchase program during the second quarter of 2011.

Days sales outstanding ("DSO") was 128 days for the second quarter of 2011, improved from 136 days in the first quarter of 2011. DSO was 124 days for the trailing twelve months ended June 30, 2011, compared with 119 days for the trailing twelve months ended March 31, 2011.  Unbilled accounts receivable was 63% of the total receivable as of June 30, 2011, improved from 69% as of December 31, 2010.

DSO was calculated by dividing average accounts receivable, net of average advance from clients and average deferred revenues, by the period's gross revenues before business tax, and multiplying by the number of days in the corresponding period.

First Half 2011 Financial Results

Net Revenues

Net revenues for the first half of 2011 were $125.7 million, up 30.8% from $96.1 million in the first half of 2010.  

Net Revenues by Service Lines

Net Revenues by Geographic Markets

Based on the location of our clients' headquarters, Greater China is the Company's largest geographic market, accounting for $59.2 million or 47.1% of the net revenues in the first half of 2011, followed by 32.6% from clients headquartered in the United States, 16.2% in Europe and 3.2% in Japan.  

Measuring the Company's revenues by geographic markets based on the location of the contract signing entities, rather than the location of the clients' headquarters, Greater China accounted for 73.7% of net revenues in the first half of 2011, while the United States accounted for 21.8%, Europe accounted for 2.2% and Japan accounted for 1.6% in the same period.

Net Revenues by Industries

Largest Clients

Revenues from the top five clients totaled 54.7% of the Company's net revenues in the first half of 2011, compared to 57.9% in the same period in 2010.

Gross Profit and Gross Margin

Gross profit for the first half of 2011 was $46.3 million, an increase of 20.7% from $38.4 million in the first half of 2010. Gross margin was 36.9% in the first half of 2011, compared to 40.0% in the prior year period. Gross profit includes $1.5 million and $2.4 million of government subsidies in the first half of 2011 and 2010, respectively.

Operating Income and Operating Margin

Operating income in the first half of 2011 was $14.5 million, compared with 15.4 million in the same period last year. Non-GAAP operating income(1) in the first half of 2011 was $19.0 million, compared with $17.9 million in the same period last year. Non-GAAP operating margin(1) was 15.1% in the first half of 2011, compared to 18.7% in the year-ago period.

Net Income and EPS

Net income for the first half of 2011 was $14.1 million, compared to $13.8 million for the same period of 2010. Non-GAAP net income(1) was $18.6 million for the first half of 2011, up 14.0% from $16.3 million a year ago. Non-GAAP net margin(1) was 14.8%, compared with 16.9% in the first half of 2010. Diluted EPS for the first half of 2011 was $0.31, compared to $0.32 in the year-ago period. Non-GAAP diluted EPS(1) was $0.40 for the first half of 2011, compared to $0.38 for the first half of 2010.

Recent Developments

Acquisition of Remaining Equity in VanceInfo Australia

As disclosed previously, in September 2010, VanceInfo acquired a 20% equity interest in VanceInfo Technologies Australia Pty Ltd, or VanceInfo Australia (formerly named Salsatec Corporation Pty. Ltd.), an Australia-based IT services and solution provider for telecom and technology companies. In July 2011, VanceInfo completed the purchase of the remaining 80% equity interest in VanceInfo Australia. Under the terms of the acquisition agreement, VanceInfo will pay an initial consideration of approximately $0.64 million in cash. Contingent consideration will be paid based on VanceInfo Australia's financial performance in the next 24 months. The acquisition is expected to strengthen VanceInfo's business development and onshore delivery capabilities in the Asia Pacific markets.

Acquisition of DPC
In August 2011, VanceInfo acquired 100% equity interest in Beijing Data Pioneer Company Limited, or DPC, a China-based company providing IT consulting and services to Chinese domestic financial institutions. Under the terms of the acquisition agreement, VanceInfo paid an initial consideration of approximately $1.9 million in cash. Contingent consideration will be paid based on DPC's financial performance in the next 12 to 24 months. The acquisition is expected to strengthen VanceInfo's position in the domestic financial services sector. Over 120 professionals of DPC joined the Company in connection with the transaction.

Share Repurchase Program

In March 2011, the Company announced that its Board of Directors approved a share repurchase program, under which VanceInfo has been authorized, but is not obligated, to repurchase up to $40 million worth of outstanding American Depositary Shares ("ADSs") representing the ordinary shares of VanceInfo from time to time over the next 12 months. As of June 30, 2011, 865,955 ordinary shares had been repurchased through open market transactions for a total consideration of approximately $21 million under this program. The Company intends to resume the buyback activities following completion of the second quarter earnings process.

Outlook for the Third Quarter and Full Year 2011

For the third quarter of 2011, the Company expects:

• Third quarter 2011 net revenues to be between $69 million and $72 million, representing a 24% to 29% increase from the corresponding period in 2010.
• Third quarter 2011 non-GAAP diluted EPS(1) to be between $0.19 and $0.21, based on 45.4 million total ADS-equivalent average shares outstanding.  

For the full year 2011, the Company expects:

• 2011 net revenues to be at least $275 million, up at least 30% from 2010. 
• 2011 non-GAAP diluted EPS(1) to be between $0.84 and $0.90, based on 45.6 million total ADS-equivalent average shares outstanding.  
• The EPS outlook assumes an effective income tax rate of approximately 11% for full year 2011.
• The EPS outlook reflects continued uncertainties in the wage inflation environment and the timing of certain government subsidies due to a change in application process.
• The above guidance does not reflect the potential business tax exemption as discussed in our February earnings release. We have not seen any implementation details of the new policy directives, and the effective date of such exemption remains uncertain.

Conference Call

The Company will host a corresponding conference call and live webcast to discuss the results at 8:00 AM Eastern Daylight Time (EDT) on Tuesday, August 16, 2011 (8:00 PM Beijing/Hong Kong time). Please dial-in five minutes prior to the call to register and receive further instruction.

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

The conference call will be available live via webcast on the Investors section of VanceInfo Technologies website at http://ir.vanceinfo.com. The archive replay will be available on VanceInfo's website shortly after the call.

A dial-in replay of the conference call will be available until August 23, 2011 at

About VanceInfo

VanceInfo Technologies Inc. is an IT service provider and one of the leading offshore software development companies in China.

The Company ranked number one among Chinese offshore software development service providers for the North American and European markets as measured by 2010 revenues, according to International Data Corporation (IDC). This marks the fourth consecutive year that VanceInfo has been ranked number one by IDC in this category.

VanceInfo's comprehensive range of IT services includes research & development services, enterprise solutions, application development & maintenance, quality assurance & testing, globalization & localization and other solutions and services. VanceInfo provides these services primarily to corporations headquartered in the United States, Europe, Japan and Greater China, targeting high-growth industries such as telecommunications, technology, financial services, travel and transportation services, manufacturing, retail and distribution.

Safe Harbor

This news release includes statements that may constitute forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, should, expects, anticipates, future, intends, plans, believes, estimates, and similar statements. Among other things, the management's quotations and "Outlook for the Third Quarter and Full Year 2011" contain forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Potential risks and uncertainties include, but are not limited to, the company's dependence on a limited number of clients for a significant portion of its revenues, the economic slowdown in its principal geographic markets, the quality and portfolio of its services lines and industry expertise, and the availability of a large talent pool in China and supply of qualified professionals, as well as the PRC government's investment in infrastructure construction and adoption of various incentives in the IT service industry. Further information regarding these and other risks is included in VanceInfo's filings with the U.S. Securities and Exchange Commission. All information provided in this news release and in the attachments is as of August 16, 2011, and VanceInfo 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.

About Non-GAAP Financial Measures

To supplement VanceInfo's consolidated financial results presented in accordance with GAAP, VanceInfo uses the following measures defined as non-GAAP financial measures by the SEC: income from operations, net income and diluted EPS excluding share-based compensation expense, amortization of acquired intangible assets and change in fair value of contingent consideration payable for business acquisition. The non-GAAP income from operations, net income and diluted EPS 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. For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP financial measures to comparable GAAP measures" set forth at the end of this release.

VanceInfo 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 net income and diluted EPS 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. 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. The reconciliations of the forward-looking guidance for non-GAAP financial measures to the most directly comparable GAAP financial measures in the accompanying table include all information reasonably available to VanceInfo at the date of this press release. The table includes adjustments that the Company can reasonably predict.

SOURCE VanceInfo Technologies Inc.

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