Camelot Information Systems' Management Discusses Q3 2013 Results - Earnings Call Transcript

Executives

John Harmon - CFA and Senior Account Manager, CCG Investor Relations

Franklin King - Interim Chief Financial Officer

Analysts

Camelot Information Systems Inc. (CIS) Q3 2013 Earnings Call November 25, 2013 8:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the quarter three 2013 Camelot Information Systems' earnings conference call. My name is Mina and I'll be your operator for today. (Operator Instructions) I would like to turn the call over to Mr. John Harmon. Please proceed, sir.

John Harmon

Thank you, Mina. Good morning to everyone in the U.S. and good evening to everyone in Asia. Welcome to Camelot Information Systems' third quarter 2013 earnings conference call. With me today is Camelot's Interim Chief Financial Officer, Mr. Franklin King.

Before we start the call, I would like to remind our listeners that management's remarks in this call contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions.

Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to such risks as, but not limited to future products and plans, customer relationships, competitive pressures, the IT spending environment and general economic conditions and other information detailed from time-to-time in the company's filings and future filings with the United States Securities and Exchange Commission. Although, the company believes that the expectations in such forward-looking statements are reasonable, there is no assurance that such expectations will prove to be correct.

As a reminder, GAAP-based measurements are described in the earnings release and used in preparing the company's financial statements. In the following discussion, we will refer to adjusted figure as they more accurately represents the company's business activities without the non-operational impact from acquisition and share-based compensation. Specifically, the adjusted figures exclude non-cash share-based compensation expense and amortization expense for acquisition-related intangible assets.

In addition, any projections as to the company's future performance represent management's estimates, as of today, Monday, November 25, 2013. Camelot assumes no obligation to update these projections in the future as market conditions change.

For those of you who are unable to listen to the entire call at this time, a webcast of this call will be available on the Investor Relation section of Camelot's website. Camelot would like to inform investors that at this time, the company is unable to answer any questions regarding the offer made by Camelot's Chairman and CEO; and other management team members to acquire the company's shares. Camelot's Chairman and CEO, Simon Ma is attending to other matters and will not be with us this morning. I will read Simon's comments and then Franklin King will discuss Camelot's financials.

Now, I will proceed with Simon's remarks.

Hello, everyone, and thank you for joining us on Camelot's third quarter 2013 earnings conference call. I would like to offer some comments on the general business environment and Camelot's performance in the third quarter. Then, I will offer some comments on the business environment for Camelot, as we look towards 2014.

We still believe the current business environment is challenging, even though in the third quarter of 2013 we posted solid revenue growth and revenues exceeded our guidance. We continue to see the effects of the current challenging economic environment in our EAS segment, because revenue growth rate was lower than that of our FIS segment.

Revenues in the EAS business line grew 9.4% year-over-year in the third quarter. Looking at the EAS industry verticals, revenues increased in the resources and energy vertical and in the vertical called other. However, revenues declined in the manufacturing and automotive and in the technology verticals. Revenues in the technology vertical declined due to the completion of some major projects.

We saw higher year-over-year revenues in the resources and energy vertical, with some small clients, for example, in coal mining and real estate have become large clients for Camelot. Revenues in the other verticals showed substantial growth in the quarter, driven by strength in distribution and retail this year.

The growth in the other segment also show the trend, where growth has shifted to come largely from small and medium-sized enterprises, which is offsetting flat-to-down revenues from state-owned enterprises, which are receiving over-subsidies and are likely to come under increasing competitive pressures.

Revenues in our FIS business line grew 18.6% in the third quarter, as banks continue to upgrade to the second generation payment system and branches are evaluating upgrades to their risk management system. We believe we are in the early stages of a major upgrade cycle in the banking sector.

Looking to next year, we expect some near-term turbulence and revenues due to flat-to-down IT budgets at state-owned enterprises, as they receive fewer subsidies and are likely to see to improve their cost structures. At the same time, we expect spending from private enterprises and emerging new competitors to offset the uneven spending from SOEs. Longer-term, we continue to expect to see strong demand for our services, as greater competition across Chinese economy, means a greater need for IT systems with increased efficiency and lower cost.

Now, I'll hand the call over to our Interim CFO, Franklin King, Franklin?

Franklin King

Thank you, John, and hello, everyone. In the third quarter of 2013, Camelot's net revenue increased 12.5% to $70.9 million from $63 million in a year ago quarter. Revenue exceeded our guidance of $65 million due to an increase in the new customers and a higher revenue per customer in our EAS business line. The third quarter of the year typically has a flat to slightly higher revenues than the second quarter.

Enterprise Application Services, EAS, net revenue increased 9.4% to $45.8 million from $41.9 million in a year-ago quarter. EAS revenue amounted to 64.7% of the net revenues in quarters. FIS net revenue increased 18.6% year-over-year to $25 million from a $21.1 million in a year ago quarter due to the banking upgrade cycle mentioned previously. FIS revenues accounted for 35.3% of the third quarter net revenues.

Cost of revenues increased 23.2% to $56.5 million from $45.8 million in the same period in 2012. Adjusted cost of revenue increased 23.3% to $56.5 million from $45.8 million in the same period in 2012. Adjusted cost of the revenue excludes $16,000 of the acquisition-related intangible amortization expenses. Cost of revenue increased faster than revenue due to operating cost.

Gross profit decreased 16.2% to $14.4 million from $17.2 million in the same period in 2012. Adjusted gross profit also decreased 16.3% to $14.4 million from $17.2 million in the same period in 2012. The gross margin was 20.3% in the quarter, as compared to 27.3% in the same period in 2012 for GAAP, and 27.4% on an adjusted basis.

Operating expenses were $16.4 million in the quarter, as compared to $49.1 million in the same period in 2012. Operating expenses in the same period of 2012 include charges of $6.6 million for the impairment of intangible assets and $29.6 million for the impairment of goodwill.

Adjusted operating expense was $15.9 million, as compared to $11.8 million in the same period in 2012. Excluding the impairment charges, operating expense increased year-over-year due to higher sales and marketing expense from higher revenues, higher general and administrative expenses from higher headcount, and higher research and the development expense for the solution development. Adjusted operating expenses exclude $197,000 of share-based compensation expenses and $287,000 of the amortization expenses for acquisition-related intangible assets.

Operating loss was $1.9 million, as compared to an operating loss of $31.9 million in the same period of 2012. Adjusted operating loss was $1.4 million, as compared to adjusted operating income of $5.5 million in the same period of 2012.

Net loss attributable to Camelot in the third quarter of 2013 was $1.7 million, or a loss of 0.04 per ADS as compared to new loss of $31.5 million in the year ago quarter or $0.71 per ADS. Adjusted net loss attributable to Camelot for the third quarter of 2013 was $1.2 million or $0.02 per ADS, as compared to adjusted net income of $5.8 million in the year ago quarter or $0.13 per ADS.

Now, I will summarize the results for the first nine months of 2013. In the first nine months of 2013, net revenues increased 5.9% to $193 million from $182.2 million in the first nine months of 2012. Revenues in the EAS business line was $124.4 million, an increase of 1.7% from $122.4 million in the same period of 2012. Revenues in the FIS business line was $68.5 million, an increase of 14.6% from $59.8 million in the same period of 2012.

Gross profit was $38.3 million, as compared to $46.1 million in the same period of 2012. The gross margin was 19.9% as compared to 25.3% in the same period of 2012. Most of the adjusted figure are similar to GAAP and are included in the press release.

Operating loss was $11.2 million in the first nine months of 2013 as compared to an operating loss of the $30 million in the same period of 2012. The operating margin was negative 5.8% as compared to negative 16.5% in the same period of 2012. Income tax expenses was $3.7 million as compared to $426,000 in the same period of 2012.

Net loss attributable to Camelot was $14.4 million in the first nine months of 2013 as compared to the net loss of $29.9 million in the same period of 2012 or loss of the $0.31 per dilute ADS as compared to a net loss of $0.67 per ADS in the same period of 2012. Adjusted net loss attributable to Camelot was $11.9 million or $0.26 per ADS in the first nine months of 2013 as compared to adjusted net income of $10.7 million or $0.24 per ADS in the same period of 2012.

Turning now to our balance sheet. As of September 30, 2013, Camelot had $59.3 million in cash and cash equivalents as compared to $95.5 million in cash, cash equivalent, short-term investment and term deposit, as of December 31, 2012. The decrease were primarily due to a $14.6 million net loss, a $22.7 million increase in accounts receivable and a $6 million decrease in other liabilities, offset by a $5.1 million increase in other assets during the first nine months of 2013.

Receivables increased by approximately $3.9 million from the second quarter and the days' sales outstanding, DSOs, was 216 days, an increase of 10 days from 206 days in a year ago quarter. DSO generally increased throughout the year following peak collections in the fourth quarters.

In the third quarter of 2013, we used $4.7 million of the cash in operation. We used $65,000 in investment and received $792,000 from financing for a total outflow of the $3.8 million. Camelot's headcount increased to 6,306 as of September 30, 2013, which includes 5,559, Information Technology professionals, as compared to 6,198 total employees and the 5,408 IT professionals at the end of the second quarter. Of the IT professionals, EAS employee headcount numbered 2,330 and FIS employee headcount numbered 3,229.

The team and I are now happy to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [ph] Graham Meharg from Loeb King.

Unidentified Analyst

My question is in regards to the definitive merger agreements signed in mid-September. And my question is, I saw that there was an amended proxy statement out, but there was really no regards as to timing. I think it was early sort of 2014. Could you guys give a little bit more detail as to when do you think the shareholders vote might be and sort of any potential regulatory approvals that might be needed? And then also as a follow-on, although it's stated, that's not conditioned on financing, I just want to know exactly sort of where we are in terms of any sort of marketing period?

John Harmon

I'm sorry, Graham, but Camelot's not going to answer questions about the merger at this time. Just please stay tuned for filings to show up with the SEC.

Franklin King

We can have something arranged.

Operator

There are no questions at the moment. Please go ahead.

Franklin King

Thank you, everyone for joining us today. And we look forward to updating you on our progress in the future. This concludes our conference call. Thank you and good bye.

Operator

Thank you very much, Franklin. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day. Thank you.

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