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conference date: November, 2006
for quarter ending: September 30, 2006 (3rd quarter)
Overview: Improved revenues despite a dip in the China.com mobile services division. They are planning on using their cash to grow through acquisitions.
Basic data:
Revenue of $78.2 million was up 1.5% sequentially from $77 million and up 26.3% over year-earlier $61.9 million.
GAAP Net income of $3.1 million was up from a loss of $2.1 million year-earlier, but down sequentially from $7.9 million in the June 2006 quarter.
Cash ended at $191 million. That is down $24 million. Used cash for buyback program and acquisitions.
Guidance:
Guidance $302 to $307 million for 2006. $32 to $33.2 million net revenue. In 2007 revenues $401 to 411 million. $55 to $60 million net income. Claims most revenue growth will be organic.
Conference Highlights:
$168 million funds raised with convertible notes at 3.75% due in 2011. Allows to unlock value in subsidiaries by becoming convertible into shares at IPO price. $10.30 per share convertible price. Helps to reduce dilution if no IPO is consummated.
Why raise so much cash given balance sheet? Planning investment in R&D, sales infrastructure, and acquisitions.
China.com is becoming a new media company with online games, mobile value added, and Web presence. 3 new game releases during next 12 months. Mobile downturn during summer has been reversed (starting in September), so growing month by month. $16.9 million in revenues, up 42% year-over-year, but down 12% from $19.2 million sequentially. $3.2 million net income. Games 37 million registered users. Items sold 27.4 million. Acquired TimeHeart, which has P/E ratio of 4.5. China.com obtained new major ad clients. Launched $20.0 million Web 2.0 program. Online games revenue $8.4 million, Internet $2.1 million, mobile $6.4 million. [Mobile is down about 30% year-over year. The division is down year-over-year if you eliminate Yulang acquisition].
Software division is also seeking to continue acquisitions, especially ones that can be vertical market specialists. Consulting services is a growth opportunity. Record revenues for Q3. Acquired MVI technology - real-time performance management for process manufacturing in food, pharmaceuticals and chemistry. 237 new enterprise customers in quarter. Revenues: $11.9 million licence, $16.2 million service, $14.4 million maintenance, $19.1 million business services. $61.4 total division revenue, up 23% year-over-year (it was $57.7 last quarter; sequential growth was 6.5 %).
Q&A:
Basis of 2007 guidance? Software division has been adding new products with good customer response. 2007 visibility is because customers have shown high level of confidence. China.com now has all 3 segments growing, with monetization of "free" games going well. P/E ratios in mobile space are low because of regulatory changes, so good time to make acquisitions.
Acquisition strategy? Software acquisition has healthy pipeline, has learned to be very disciplined over the years.
Q4 software seasonality? Used to be 90% of deals initiated by CDC. Now 50% of leads are initiated by customers. Believes Q3 did not come at expense of Q4; sees very good Q4.
Geographic growth? Typically 50% in North America, stronger this Q3. Q3 typically seasonally weak in Europe. Expect growth in Asian market.
New cash (from convertibles) for deals already looking at? Sees strong acquisition pipeline, but also good structure for gaining extra cash. Allows them to look at bigger deals.
30% growth guidance for next year? Competitors going out of business regularly, so personnel can be hired readily. Software division is working to expand development and outsourcing capabilities in India.. Customers and employees are pounding on door. Games infrastructure will be global within a couple of years. Looking to more than double number of employees in games division in 2007.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2006 William P. Meyers