Nine Energy Service, Inc. (NINE) Q4 2012 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the Ninetowns’ Second Half and Full Year 2012 earnings results conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advice you that this conference is being recorded today Thursday the 25th of April, 2013. I’d now like to hand the conference over to your first speaker for today, Ms. Daisy Wang, Ninetowns’ IR Manager. Thank you. Please go ahead.

Thank you operator. I would like to welcome everyone to Ninetowns’ second half and full year 2012 financial results and operational update conference call. With me today are Mr. Shuang Wang, Chief Executive Officer; Mr. Tommy Fork, Chief Financial Officer and Mr. Jack Jones, Financial Controller. After the presentation, we will open the line for questions. Before the end of this call, Mr. Tommy Fork, our CFO will give the closing remarks. Before we begin with the formal remarks, participants should be advised that this conference call would include statements about future events and expectations, which are forward-looking statements. All forward-looking statements involve risks and uncertainties and actual results may differ materially from those discussed in or implied by such forward-looking statements. These forward-looking statements speak only as of the date of this presentation, and while we may update some of such statements from time to time, we assume no duty to update them to reflect new, changing or unanticipated events or circumstances. Please be advised that you should not rely on such forward-looking statements. In addition, I would like to note that any references to dollars refer to amounts in U.S. dollars. For further information and to access the accompanying results presentation, please visit our English website at ir.ninetowns.com. Before providing an update on our results for the second half and full year 2012, I would like to briefly review Ninetowns’ current positioning and business outlook on slide 3. The core of Ninetowns’ business model remains our longstanding commitment to and proficiency in technology supported by our position as a leading business to government enterprise software provider, Building on our technological foundation, we have in recent years expanded the scope and depth of our services to capture new growth areas in commerce and real estate. In addition to our enterprise solutions, we have steadily expanded our food related business and are making progress in our real estate initiatives. We expect that our B2G Enterprise Software segment will continue to be our primary revenue driver. However, we have made significant progress in recent quarters in the development and growth of our newer business initiatives. Especially in our food related business. We should now account for over a quarter of our total net revenues. Our strategy remains consistent to maintaining stable results in our B2G segment, while at the same time, prudently allocating resources to focus on our new growth initiatives. We believe this strategy is delivering returns based on our positive results for the second half and the full year 2012. We will now review our business segments in more detail, starting with our B2G business on slide 5. Facing continuing macroeconomic headwinds, which have impacted the global trade environment we sold 473 iDeclare software packages and 12,641 iDeclare service contracts in the second half of 2012. For the full year, we sold 1139 iDeclare software packages and 20,824 iDeclare service contracts. Sales of iDeclare software packages were impacted by the lower level of import and export transactions as a result of slower overall economic growth in China. However, sales of iDeclare service contracts increased year-over-year in 2012 in light of the large installed base of customers requiring ongoing support and services. Moving to our e-grocery segment on slide 7 to 8, we have made significant progress and this segment is now making a material contribution to our results. For the full year 2012, the e-grocery segment contributed $3.7 million in revenue or approximately 26% of our total net revenues representing a 181% increase year-over-year. Throughout the year, we continued to optimize the service and product offering having established a stable and growing customer base in the Greater Beijing Metro area. We are now focusing our efforts on increasing sales and driving profitable growth. As part of this effort, we continue to introduce higher quality and higher margin products which we believe will allow us to drive further growth profit margin expansion over time. In addition, we will work to incrementally funding the business by developing clear product categories, optimizing the management of our suppliers and distribution chain and making ongoing updates and improvements to our website and online ordering system. We are encouraged by the consistent performance and steady growth of this business segment to-date and remain confident in this future growth prospects. Now, moving on to our Property Development business on slide 10, as we have discussed, we launched our Property Development business in the first half of 2011 in an effort to capitalize on the long-term growth opportunities in China’s rapidly expanding real estate market. Our specific focus is on the intersection of the technology and real estate markets namely, the newly emerging niche in the market that is seeking to integrate the internet of things and cloud computing related technology to enhance community life and urban development to build up smarter cities. With over 10 years of experience in technology and IT industry, we believe we are well positioned to capture this new opportunity. As of December 31 2012, we have four projects in the pipeline which include commercial, residential, industrial and mixed-use properties in various stages of development. These projects are located in Yizhuang district of Beijing, Huainan in Anhui Province, Dalian in Liaoning Province and Binzhou in Shandong Province. Of these four projects, we have begun groundbreaking and initial construction in Dalian for a mixed-use commercial and residential development. We are pleased with the progress to-date on this project and we will continue the construction process in 2013. Our three other projects remain in pre-construction and planning phases as we continue our study, research and design efforts, while also monitoring the development of official government real estate policies, which continue to evolve. We are still in an early phase; we have made good progress on this initiative to-date. We believe the long-term prospects for this business segment remains favorable, given the continued demand and opportunities in China’s third and fourth tier cities for innovative property development projects. Now, I would like to turn the call over to Mr. Jack Jones, our Financial Controller to give more color on our financial results. Please go ahead, Jack.

Thank you, Daisy and thank you all for joining us today. As we proceed through our remarks, again, I will reference our results presentation which can be downloaded from our website. As highlighted in slide 12 of our presentation, total net revenue for the second half of 2012 was $7.5 million, a 7% increase compared to the second half of 2011. Enterprise software revenue for the second half of 2012 was $4.9 million, down from $5.6 million in the second half of 2011. Software development service revenue for the second half of 2012 was $0.6 million, essentially flat as compared to the prior year period. Net revenue for the e-grocery food business was $2.0 million for the second half of 2012 compared to $0.6 million in the second half of 2011. Total revenue for the full year 2012 were $14.5 million, an increase of 20% year-over-year. Net revenue for the enterprise software sales for the full year 2012 was $9.6 million representing a 56% of total net revenue. Net revenue for the software development service for the full year 2012 was $1.2 million, representing 8% of total net revenue. Net revenues from the food related business for the full year 2012 was $3.7 million representing a 26% of total revenue. Gross margin for the second half of 2012 was 78%, a decrease from 88% for the second half of 2011. For the full year, gross margin was 77%, down from 86% in the full year of 2011. Deferred revenue as of December 31, 2012 was $2.2 million, compared to $2.3 million as of December 31 of 2011. Next, slide 13 shows our cost and in comparison to prior periods. For the second half of 2012, sales and marketing expense was $1.6 million, a decrease of 26% from the second half of 2011. The year-over-year decrease was mainly due to a decrease in overall compensation as the result of decrease in the number of sales and marketing personnel and advertising and exhibition expense. General and administrative expense for the second half of 2012 was $6.1 million, representing a decrease of 21% from the same period in 2011. This decrease was primarily due to increase in fixed depreciation expense, amortization of intangible assets, legal and professional fees and share-based compensation expense relating to share options, non-vested shares granted to our Directors, Executive Officers and certain employees in prior years, partially offset by increases in salaries. Research and development expense for the second half of 2012, increased by 39% to $1.3 million compared to $0.9 million for the second half of 2011. The increase was a result of an increase in the compensation of research and development personnel as a result of a general increase in research and development personnel headcount. Bad debts recovered were $0.6 million for the second half of 2012, compared to $0.6 million for the same period of 2011. This was due to payments received for accounts receivable from our three franchisees that had previously been included in our bad debt provision. The repayment results are similar between the second half of 2012 and 2011. As a result, total operating expense for the second half of 2012 were $8.3 million, representing a year-over-year decrease of 17% from $10 million in the second half of 2011. Slide 14 shows our bottom-line. Loss from operating for the second half of 2012 was $2.5 million, a decrease from an operating loss of $3.9 million in the second half of 2011. Other income for the second half of 2012 was $4.6 million, as compared to other income of $3.7 million for the same period in 2011. The increase in other income primarily consists of the higher margins of the sales of short-term investments. As a result, net income for the second half of 2012 was $2.1 million compared to a net loss of $0.3 million for the second half of 2011. Basic net income per ADS for the second half of 2012 was RMB0.36 equals to $0.06 in US dollar and diluted net income per ADS was RMB0.34 equals to $0.05 in US dollar, compared to basic and diluted net income per ADS of RMB0.04 and equals to $0.01 in US dollar for the second half of 2011. Now I would like to turn the call back to our Chief Financial Officer, Mr. Tommy for closing remarks. Please go ahead Tommy.

Thank you, Jack. In conclusion, we believe that our performance in the second half of the year, plus the merit of our strategy developed a more diverse revenue base consisting of complementing business which leverages our strength and knowledge. We will continue to execute our strategy in the year ahead as we seek to capitalize on the growth opportunities at the intersection of the technology, e-commerce and real estate markets in China. That concludes our formal remarks. We will be happy to take any questions.

(Operator Instructions) At this time there are no questions from the phone lines. I’d like to pass back to Ms. Daisy Wang, Ninetowns’ Investor Relations Manager. Please go ahead.

Okay, thank you operator. Thank you for joining us today everyone. We will continue to work to refine and maximize revenue from our B2G business while at the same time further developing our B2C food initiative and our new property development initiatives. We will continue to keep the market up-to-date on our progress. In the mean time, please feel free to contact us for any questions. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for all participating – all participants and you may now disconnect.