Nine Energy Service, Inc. (NINE) Q2 2013 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the Ninetowns’ First Half 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today Tuesday, September 16, 2013. I would now like to hand the conference over to your first presenter for today, Ms. Daisy Wang. Thank you ma’am, and please go ahead.

Thank you, operator. I would like to welcome everyone to Ninetowns’ first half 2013 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 will 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 only speak 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 first half 2013, I would like to briefly review Ninetowns’ current positioning and business outlook on Slide 3. By leveraging our solid foundation in technology and longstanding expertise, gains through our core enterprise software segments, we have strategically expanded our scope of services to encompass three main business units in various stages of development. This includes our core enterprise solutions, which enable over 147,000 enterprises to accelerate the declaration process by using our import and export e-filing services. Our food-related business and our property development business, our B2G Enterprise Software segment continues to be our primary revenue driver. However, we have made significant progress in recent years in development and growth of our newer business initiatives. Our strategy remains consistent to maintain stable results in our B2G segment, while at the same time, prudently allocating resources to steadily grow our newer business initiatives. Let’s take a closer look at recent developments in each of our business segment, starting with our B2G business on Slide 5, facing a rapidly traded global trade environment and the continuing microeconomic headwinds in China, we sold 1,041 iDeclare software packages, and 9,484 iDeclare service contracts in the first half of 2013. While sales of iDeclare packages and iDeclare service contracts increased on a year-over-year basis, sales of service contracts for free software users declined. This resulted in a year-over-year increase in enterprise software revenue and a decline in software development and services revenues. Jack will provide a detailed review of our financials shortly. Moving to our e-grocery segment on Slide 7 to 8, we are pleased with the steady progress of this segment, which has delivered healthy growth in recent reporting periods. For the first half of 2013, the e-grocery segment contributed $3.2 million in revenue or approximately 38% of our total net revenues, up from approximately 25% in the first half of 2012 driven by an increase in the volume of orders placed by our customers. We continue to optimize the service and product offering of our food-related business with a focus on introducing high quality and higher margin products with the aim of increasing our gross profit over time. This segment is now contributing a meaningful proportion of our total net revenues, and we expect this contribution to continue to grow in the future. Overall, we are very encouraged by the consistent performance and steady growth of this business segment to-date and remain confident in its future growth prospect. 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, our real estate market, 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. Over 10 years of experience in technology and IT industry, we believe we are well positioned to capture this new opportunity. As of June 30, 2013, 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 the Yizhuang district of Beijing, Huainan in Anhui Province, Dalian in Liaoning Province and Binzhou in Shandong Province. Of these four projects in the first half of 2013, we are constructing the Dalian site in line with our development schedule. The timelines for the remaining three projects remain in line with management expectation. These three other projects are currently in pre-construction and final stages as we continue our study, research, and design efforts, while also monitoring the development of official government real estate policy, which continues to evolve. While still in an early phase, we believe the long-term prospects for this business segment remains favorable given the continued demand and opportunity 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, 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 first half of 2013 was $8.4 million, an increase compared to the first half of 2012. Enterprise software revenue for the first half of 2013 was $4.9 million, representing a 3% increase year-over-year. Software development service revenue for the first half of 2013 was $0.2 million, representing a 59% decrease year-over-year. Net revenue for the e-grocery food business was $3.2 million for the first half of 2013, an 81% increase compared to the first half of 2012. Gross margin for the first half of 2013 was 68%, a decrease from 76% from the first half of 2012. The decrease was mainly due to the increase in revenue from our food-related business as a percentage for the – of the company’s total net revenue as gross margin for our food-related business is lower than gross margin for the company’s other business. Deferred revenue as of June 30, 2013 was $1.9 million compared to $2.2 million as of December 31, 2012. Next slide shows our costs in comparison to prior periods. For the first half of 2013, sales and marketing expense was $1.9 million, a decrease of 2% from the first half of 2012. General and administrative expense for the first half of 2013 was $5.8 million, representing a decrease of 11% from the same period of 2012. This decrease was primarily due to decrease in staff cost and legal and the professional fees. Research and development expense for the first half of 2013 decreased by 2% to $1.1 million compared to $1.1 million for the first half of 2012. As a result, total operating expense for the first half of 2013 were $8.8 million representing a year-over-year decrease of 8% from $9.2 million in the first half of 2012. Slide 14 shows our bottom line. Operating loss for the first half of 2013 was $3.1 million, decreased from an operating loss of $4 million in the first half of 2012. Other income for the first half of 2013 was $5.7 million as compared to other income of $12.8 million for the same period in 2012. The decrease in other income primarily consists of the decrease in gains of sales of short-term investments. As a result, net income for the first half of 2013 was $2.4 million compared to a net income of $8.7 million for the first half of 2012. Basic net income per ADS for the first half of 2013 was RMB0.39 and diluted net income per ADS was RMB0.36 compared to basic and diluted net income per ADS of RMB1.47 and RMB1.35 for the first half of 2012. We continue to maintain a healthy and debt-free balance sheet with a cash and bank deposit balance of $31 million at the end of this period. Now, I would like to turn the call back to our Chief Financial Officer, Mr. Tommy Fork for the closing remarks. Please go ahead, Tommy.

Thank you, Jack. In conclusion, we believe that our performance in the first half of the year [harnessed] (ph) the progress we have made on our strategy to develop a more diverse revenue base consisting of complementary business, which (inaudible). As such, we have concluded the first half of 2013 with a stable financial position of profit by a healthy balance sheet. However, as recently announced, we expect our overall financial performance to be adversely affected by recent changes to the Catalogue of Import and Export Commodities Subject to Inspection and Quarantine by the Entry-Exit Inspection and Quarantine Authorities. As these rule changes directly impact the market opportunity for our B2G segment which facilitates the processing of the required import/export declarations and approvals for the quarantine inspection, we are in the process of reviewing our options in response to these new rule changes, while recognizing that such options may be limited. Despite the continued challenges that we face in our enterprise software business segment, we believe we are well-positioned to capture the growth opportunities in our new business segment over the long-term. That concludes our formal remarks. We will be happy to take any questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And there are no questions from the phones. At this time, I will now hand back to today’s presenters to continue. Again, there are no questions from the phone, please continue.

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 meantime, please feel free to contact us for any questions. Thank you.

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