They have strong results and are on their way to surpass $20M in revenue this year, almost triple figure growth.
- Total revenue for the second quarter of 2008 was RMB24.2 million (US$3.5 million), an increase of 103.9% from the second quarter of 2007.
- Service fee income for the second quarter of 2008 was RMB12.5 million (US$1.8 million), an increase of 568.2% from the second quarter of 2007.
- Gross profit for the second quarter of 2008 was RMB13.8 million (US$2.0 million), an increase of 115.0% from the second quarter of 2007. Excluding amortization of acquired technology, gross profit for the second quarter of 2008 would have been RMB15.7 million (US$2.3 million), an increase of 136.7% from the second quarter of 2007.
- Gross margin for the second quarter of 2008 increased to 57.1% from 54.1% in the second quarter of 2007 and 33.6% in the first quarter of 2008. Excluding amortization of acquired technology, gross margin (non-GAAP) for the second quarter of 2008 would have been 65.0%, compared to 56.0% in the second quarter of 2007 and 61.2% in the first quarter of 2008.
- Net income in the second quarter of 2008 was RMB2.8 million (US$0.4 million), compared to a net loss of RMB9.2 million in the first quarter 2008.
- Adjusted net income (non-GAAP) for the second quarter of 2008 was RMB7.2 million (US$1.1 million), compared a net loss of RMB0.2 million in the second quarter of 2007. Adjusted diluted earnings per share (Non-GAAP) for the second quarter of 2008 was RMB2.41 (US$0.35), compared to a losses per share of RMB0.07 in the second quarter of 2007.
- The company noted that 90% of the senior convertible notes associated with its US$10 million private placement in 2007 had been converted as of September 1, 2008.
- Sales contracts increased 127.1% to RMB41.5 million (US$6.1 million) from RMB18.3 million in the second quarter of 2007.
- Service sales contracts increased 510.5% to RMB11.6 million (US$1.7 million) from RMB1.9 million in the second quarter of 2007.
- Total new orders increased 50.3% to 281 orders from 187 in the second quarter of 2007.
- In April 2008, eFuture completed the acquisition of Proadvancer Systems Inc., a leading provider of logistics software and services in Mainland China and Asia, which eFuture expects to be accretive to its 2008 earnings per share.
- During the quarter, eFuture launched its http://www.bfuture.com.cn B2B software-as-a-service website connecting retailers to their suppliers and enabling them to more efficiently and effectively share information and manage work processes. In April, the company announced that Beijing Wangfujing Department Store (Group) Co. Ltd. had become the website’s first retail subscriber.
- During the quarter, eFuture completed function and stability testing of its http://www.jindian.com.cn B2B website for small to medium-size suppliers and retailers. The company additionally launched an operational pilot of the website in Qingdao in July 2008, in Shijiazhuang in August 2008 and expects to begin testing in Wuhan next month. The company expects to roll the website out nationwide in the first half of 2009.
- On September 3, 2008, eFuture signed an engagement letter with Grant Thornton LLP (“Grant Thornton”). eFuture’s audit committee has approved the engagement, and pending shareholder approval at eFuture’s annual shareholder meeting, Grant Thornton will replace Hansen, Barnett & Maxwell, P.C. as the company’s independent registered public accounting firm beginning in the third fiscal quarter ended September 30, 2008.
Their business model (in simplified form, read here for other aspects) is as follows: they sell software licenses (and hardware) and convert these in one year into a service contracts. So one can say that license sales drive service sales. So we’re a little curious about the break down in revenues.
Here is how their revenue streams break down
- eFuture reported total revenue of RMB24.2 million (US$3.5 million) for the second quarter of 2008, a 103.9% increase from RMB11.8 million in the second quarter of 2007.
- Software sales in the second quarter of 2008 increased 14.1% to RMB8.7 million (US$1.3 million) from RMB7.6 million in the second quarter of 2007. Software sales contributed 36.1% to total revenue in the second quarter of 2008, compared to 64.4% in the second quarter of 2007, reflecting an increasing percentage of revenue derived from maintenance and consulting services as eFuture’s customers have begun to pay for these services after an initial year of complimentary maintenance and consulting services.
- Hardware sales in the second quarter of 2008 increased 24.6% to RMB2.9 million (US$0.4 million) from RMB2.3 million in the second quarter of 2007. Hardware sales contributed 12.1% to total revenue in the second quarter of 2008, compared to 19.7% in the second quarter of 2007.
- Service fee income in the second quarter of 2008 increased 568.2% to RMB12.5 million (US$1.8 million) from RMB1.9 million in the second quarter of 2007. Service fee income contributed 51.9% to total revenue in the second quarter of 2008, compared to 15.8% in the second quarter of 2007. The increase was largely due to eFuture’s policy to provide complimentary maintenance for its products in the first year of operation, after which it begins to charge maintenance and support fees.
The one disappointment
- Software sales only increased by 14.1%. That could be a soft quarter, but nevertheless it’s a little disappointing. We hope that’s not becoming a trend. It’s the only blemish on an otherwise outstanding quarter, but potentially not an unimportant one, as these sales are the main driver of service growth a year from now, which is the main driver of increased margins.
However, positive points are:
- Increasing margins. Consolidated gross margin for the second quarter of 2008 was 57.1%, compared to 54.1% in the second quarter of 2007 and 33.6% in the first quarter of 2008. The increase in gross margin was largely due to an increase in the percentage of revenue derived from service fees, which has a higher margin than hardware and software sales revenue. This margin increase will last, because service income will keep on increasing at a (much) faster rate than license and hardware sales. They also apparently said on the cc that they are removing back office personnel because of overlap after take-overs. However, they’re also going to give their personnel a substantial wage increases of 10%+, which will decrease margins
- Net profits (US$0.4 million), compared to net losses of RMB1.1 million in the second quarter of 2007
- Bfuture.com. We understand that they are quite optimistic about the future of their SaaS website bfuture.com (for background see here). They get about $15 per month for subscriptions, and these could add up pretty quickly. If we’re not mistaken, the Wangfujing Department Store Group alone could bring something like 20,000 suppliers. We have always argued that these three B2B websites could new, and potentially big revenue streams
- Market growth, there also seems to have been much optimism on that, which hardly comes as a surprise. We have repeatedly stressed on this website that China’s domestic demand is really taking off, and EFUT’s core market is the retail sector. Supply chains usually have much room for improvement so we do not hesitate that there will be sufficient opportunities for their software.
- Market share. More surprising was the optimism on market share, they currently have 8% (it’s not quite clear what’s the base measure here, most probably supply-chain software and services in the retail sector) and they see that growing to a 18-20% share over the next three years. Probably, that means more acquisitions. The Chinese market is quite fragmented, plenty of opportunities left. So far, they have been executing these very well (margins is a give-away here) and their balance sheet is in fine form.
- EBITDA. The company expects 2008 adjusted EBITDA (non-GAAP) to be in the range of approximately US$5 million to US$6 million. On 3.27M shares, that could be almost $2 per share
- Cash. The company had RMB58.8 million (US$8.6 million) in cash and cash equivalents and short-term investments
- Unrecognized revenue. As of June 30, 2008, the company had deferred contracts with unrecognized revenue of approximately US$8.9 million. That’s quite a lot!
- Debt retirement. eFuture noted that 90% of the senior convertible notes associated with its US$10 million private placement in 2007 had been converted as of September 1, 2008. The company expects to incur expenses during the third quarter of 2008 related to the conversion of US$4 million in senior convertible notes during that period. eFuture noted that it has outstanding debt of approximately US$1 million and warrants outstanding that will expire September 9, 2012.
We haven’t heard the whole conference call yet (there might be an explanation for the soft license sales), so we’ll come back when we find out more. The shares are still very cheap:
- Revenue could easily surpass $20M this year (they do much better in the second half of the year), so at present, it just over 1.5 times sales. The company expects to do $19-20M in revenues this year
- Profits: they don’t give guidance on that, but considering the fact that this quarter (which is a weak one, seasonally) they managed to eak out a profit on just $3.5M of sales, we’re quite optimistic on the next to quarters when most of the revenue will be made. The leverage factor in software we like so much before is certainly there
- A profitable company with cash on it’s books and little (and decreasing, they ) debt, servicing rapidly growing market, it’s still a very good buy, even though it’s very hard to predict the day-to-day stock moves.