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eFuture Q3 Results

November 7th, 2008 · No Comments

This company is hardly, if at all, affected by the global crisis (growth is still between 50-100%), reaffirms it’s earlier guidance, shows that the apparent slow-down in software sales the previous quarter (which we worried about, as it drives service income a year later) was an incident and, will purchase up to 15% of it’s outstanding shares as management feels that “the current share price does not reflect the value of the business”. They have $4.8M in cash and cash equivalents, so plenty of fire power. Not all was good news though, but this is mostly incidental.

Is there a downside? Actually, yes.

1) They made a net loss this quarter ($4.2M), which is more than total revenue of $4.0. However, almost all of the loss, however large was incidental (without it, the loss would have been just $0.3M, according to the company). For instance:

  • $3.2M of the net loss was related with the amortization of the notes payable ($2.7M) and loan cost ($0.5M). There is now only $1.0M of those convertible notes left. Interest payments were $1.2M in the quarter, and should almost disappear the next quarter, which also happens to be by far the strongest quarter.
  • $0.5M was due to amortization of acquired software technology
  • Delayed reimbursement of expenses related to an upgrade in their financial information system in Q2
  • Gross profit was $1.9M and excluding amortization of acquired technology it would have been larger, $2.4M

2) We don’t like the operational development too much:

  • There was a loss from operations (albeit minuscule, just $0.04M) and operational margins were negative (at -1%, contrary to positive gross margins at 47.9%). This is somewhat disappointing and, in fact, just a little puzzling. Perhaps somebody asks management about this tomorrow in the CC.
  • However, here as well there are ‘mitigating circumstances’, most of it related to the acquisition of a company, like amortization of acquired software (12%); amortization of intangibles (3%); share based compensation expenses (3%). Without these, adjusted net operating income would be 14%
  • Another big factor is related to the strong seasonality, as they scale up very significantly in the fourth quarter in terms of sales, but the rest of the year they can’t scale down a lot on the cost side. This can be seen by the very small operating profits in both Q2 2008 and Q3 2007, for instance, which are comparable quarters, so it’s not too worrisome.

However, we feel confident that the next quarter, which traditionally is by far the most important quarter, will boost stuff enough to end the year (in fact, we would argue that this is a rare company that could benefit from reporting just twice a year, as quarterly results are somewhat erratic and there is strong seasonality in the results, almost all profits come from the fourth quarter, although that will decrease as service income will grow disproportionally):

  • Our big worry the last quarter, a slowdown in software sales, turned out to be a one-time event as these were very robust at 77..5%. This is important because the company wavers service cost for new clients for a year but then collects a monthly fee after the first year, so software sales drive service income one year out, and these not only have higher margins, they’re also recurring revenue.
  • Their B2B and SaaS initiatives started to provide revenue, we have discussed these initiatives at considerable length previously and have high hopes for them
  • The company is situated in one of the last strongholds of that endangered species, the consumer. China is losing export fast, due to the global slowdown, but it’s smartly stimulating domestic demand which plays exactly into the strength of this company, whose major clients are in the retail and ‘fast moving consumer goods’ sectors. Retail spending is still growing at 20% in China.
  • They have almost completely taken out the convertible notes (the major reason of the loss this quarter), which should substantially reduce interest payments, which were a whopping 30% of the revenue this quarter at $1.2M
  • The are proposing to buy back up to 15% of outstanding shares. We don’t think shareholders will vote against this, to put it mildly. They have only 3,356,057 shares outstanding 15% of that amounts to almost half a million, that should provide some nice support at least, perhaps even a little more.
  • Valuation, as far as this matters in today’s market, is of course quite ridiculous at just under $20M, which puts them at one time sales, and that for a fast growing software company with almost $5M in cash, hardly any debt left, and they will be profitable for the year.
  • They also have deferred contracts with unrecognised revenues approximating $13.8M, so any slowdown in China will hardly be felt for a while and can be smoothed out.

So far our comments, here is the PR (the highlights are from us):

eFuture Announces Third Quarter 2008 Unaudited Financial Results

Thursday November 6, 5:00 pm ET

  • Company records year-over-year revenue growth of 66%, maintains full-year revenue and EBITDA guidance
  • BEIJING, Nov. 6 /Xinhua-PRNewswire/ — eFuture Information Technology Inc. (Nasdaq: EFUT – News; “eFuture” or the “Company”), a leading provider of software and services in China’s rapidly growing retail and consumer goods industries, today announced its unaudited financial results for the third quarter ended September 30, 2008.

Financial Highlights for the Third Quarter of 2008:

  • Total revenues for the third quarter of 2008 were RMB27.4 million (US$4.0 million), an increase of 66.4% from the third quarter of 2007.
  • Software sales revenue for the third quarter of 2008 was RMB16.6 million (US$2.4 million), an increase of 77.5% from the third quarter of 2007.
  • Service fee income for the third quarter of 2008 was RMB8.1 million (US$1.2 million), an increase of 155.6% from the third quarter of 2007.
  • Gross profit for the third quarter of 2008 was RMB13.1 million (US$1.9million), an increase of 87.3% from the third quarter of 2007. Excluding amortization of acquired technology, gross profit for the third quarter of 2008 would have been RMB16.4 million (US$2.4 million), an increase of 85.3% from the third quarter of 2007.
  • eFuture completed the conversion of US$4.0 million of convertible notes related to a US$10 million private placement in 2007, leaving the Company with outstanding convertible debt in the principal amount of US$1.0 million and warrants outstanding that will expire on September 9, 2012.
  • As of September 30, 2008, eFuture had deferred contracts with unrecognized revenues of approximately US$13.8 million
  • “A number of large contracts completed during the quarter, combined with our acquisition of Guangzhou Royalstone in the third quarter of 2007, drove strong growth of 77.5 percent year over year in our core software license business,” said Ms. Ping Yu, eFuture’s chief financial officer. “While our five-point improvement in gross margin compared to the year-ago period is evidence of our effective cost control measures, we reported a loss on our bottom-line, which was primarily due to one-time expenses related to the conversion of convertible notes during the quarter. We are pleased that we now have only US$1.0 million of outstanding convertible debt principal, and we expect our high balance of deferred revenue and the sizeable number of software license and service deals closed during the quarter will translate into significant revenue growth in the fourth quarter, which has traditionally been our strongest quarter.”

Operational Highlights for the Third Quarter of 2008

  • Sales contracts increased 26.9% to RMB34.3 million (US$5.0 million) from RMB27.0 million in the third quarter of 2007.
  • [Part of these seem to fall under the next quarter as they have $4.0M in revenue but $5.0M in sales contracts, and that is not their only revenue source.]
  • Service sales contracts increased 270.3% to RMB11.4 million (US$1.7 million) from RMB3.1 million in the third quarter of 2007.
  • Signed a contract to provide its eFuture ONE POS-ERP Sales Counter Management System to L’Oreal (China) Co. Ltd. at more than 20,000 sales counters across China.
  • Signed a contract to provide its eFuture ONE CRM Customer Relationship Management system to Yansha You Yi Shopping City Co., Ltd. The system will provide customer data analysis capabilities and is designed to increase customer value and improve sales and market differentiation.
  • Signed and completed a contract to provide its eFuture ONE POS-ERP Retail Management System to China Sport Industry Group Co., Ltd.’s 2008 Beijing Olympics stores.
  • Signed a contract to provide its mySHOP Retail Business Management System 3.0 to Tiens Group Co., Ltd’s six distribution centers, 100 subsidiary stores, 100 direct-sales stores and 1,000 franchised chain stores.
  • Rolled out the bFuture software-as-a-service (“SaaS”) customer relationship management platform to additional Beijing Wangfujing Department Store (Group) Co. Ltd. stores. — Deployed SaaS B2C stores for five department stores. eFuture’s bFuture SaaS-B2C database currently holds over 70,000 items and receives over 200 orders each day. Over 1,000 suppliers offer merchandise through these online stores.
  • “Despite downward pressure on the Chinese economy as a result of severe snow storms, a devastating earthquake and the negative impacts brought about by the global financial crisis, China’s retail consumption still grew at 22 percent in the first nine months of 2008,” said Mr. Adam Yan, eFuture’s chairman and chief executive officer. “Our large and diversified install base, which includes department stores, fast-moving consumer goods companies, grocery stores, logistics companies, specialty retailers and small-to-medium businesses, has enabled us to continue meeting growth targets despite macro uncertainties. I am confident that eFuture will weather this storm effectively and emerge well positioned to win a greater share of business when the global economy returns to a healthier state.”
  • Yan continued, “In our core business of software solutions, our focus in the third quarter remained on the smooth integration of our acquired businesses, packaging our product offering and building a cohesive workforce that is able to deliver world-class solutions that help retailers and suppliers cut costs and improve competitiveness.
  • In business-to-business services, we focused on improving our sales force and building out databases and other modules as we prepare for a nationwide rollout of our China Jindian platform early next year.
  • In our SaaS business, we rolled out our bFuture supply chain management platform to additional Wangfujing Department Store Group stores in Beijing, and the system now enables over 2,000 suppliers to effectively streamline and exchange information and manage work processes. In 2009, we plan to further leverage our dedicated software sales team to bundle SaaS products with our POS-ERP software for retailers and attract more suppliers to join the bFuture online SCM platform.”

Financial Results for the Third Quarter of 2008

Revenue

  • eFuture reported total revenues of RMB27.4 million (US$4.0 million) for the third quarter of 2008, a 66.4% increase from RMB16.4 million in the third quarter of 2007.
  • Software sales revenue in the third quarter of 2008 increased 77.5% to RMB16.6 million (US$2.4 million) from RMB9.4 million in the third quarter of 2007. Software sales contributed 60.7% to total revenues in the third quarter of 2008, compared to 56.9% in the third quarter of 2007. The year-over-year increase was primarily due to high demand for the Company’s software solutions, which is typically strongest in the second half of the year as companies spend the bulk of their IT budgets.
  • Hardware sales revenue in the third quarter of 2008 decreased 32.3% to RMB2.7 million (US$0.4 million) from RMB3.9 million in the third quarter of 2007. Hardware sales contributed 9.7% to total revenues in the third quarter of 2008, compared to 23.8% in the third quarter of 2007. The Company noted that reselling hardware is not its primary focus, but that from time to time it bundles hardware with its software solutions in response to customer requests.
  • Service fee income in the third quarter of 2008 increased 155.6% to RMB8.1 million (US$1.2 million) from RMB3.2 million in the third quarter of 2007. Service fee income contributed 29.6% to total revenues in the third quarter of 2008, compared to 19.3% in the third 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, as well as the introduction of revenue derived from the Company’s B2B services and SaaS products.

Gross Margins

  • Gross profit for the third quarter of 2008 was RMB13.1 million (US$1.9 million), an 87.3% increase from RMB7.0 million in the third quarter of 2007. Excluding amortization of acquired technology, gross profit (non-GAAP) for the third quarter of 2008 would have been RMB16.4 million (US$2.4 million), an increase of 85.3% from the third quarter of 2007.
  • Consolidated gross margin for the third quarter of 2008 was 47.9%, compared to 42.5% in the third quarter of 2007 and 57.1% in the second quarter of 2008. The lower gross margin quarter over quarter was primarily due to delayed reimbursement from operating expenses, of which eFuture has a 1-month turnover policy. In the second quarter of 2008, the Company upgraded its financial information system and a portion of operating expenses occurring in the second quarter were delayed until the third quarter of 2008 for reimbursement. Additionally, margins decreased quarter over quarter due to the percentage of total revenue derived from service fee income, which has a higher gross margin than software and hardware sales revenue. Excluding amortization of acquired technology, gross margin (non-GAAP) for the third quarter of 2008 would have been 60.1%, compared to 53.9% in the third quarter of 2007 and 65.0% in the second quarter of 2008.

Operating Expenses

  • Research and development expenses for the third quarter of 2008 were RMB0.2 million (US$0.03 million), or 0.8% of total revenue, compared to 0.4% of total revenue in the third quarter of 2007 and 0.9% in the second quarter of 2008. The lower proportion of research and development expenses to total revenues in the third quarter of 2007 was primarily a result of the Company’s focus on integrating similar versions of software recently acquired at that time rather than spending on research and development.
  • General and administrative expenses for the third quarter of 2008 were RMB6.8 million (US$1.0 million), or 24.9% of total revenue, compared to 19.8% in the third quarter of 2007 and 33.4% in the second quarter of 2008. The lower proportion of general and administrative expenses to total revenues when compared to the previous quarter was largely due to a decrease in the provision for bad debt expenses, which was a result of the Company’s improving accounts receivable collection.
  • Selling and distribution expenses for the third quarter of 2008 were RMB6.3 million (US$0.9 million), or 23.1% of total revenue, compared to 19.5% in the third quarter 2007 and 17.7% in the second quarter of 2008. The increase was largely driven by the delayed reimbursement, of which eFuture has a 1-month turnover policy. In the second quarter of 2008, the Company upgraded its financial information system and a portion of operating expenses occurred in the second quarter were delayed until the third quarter of 2008 for reimbursement.
  • Total share-based compensation expenses in the third quarter of 2008 were RMB0.8 million (US$0.1 million).
  • Operating loss in the third quarter of 2008 was RMB0.3 million (US$0.04 million) compared to operating income of RMB0.5 million in the third quarter of 2007 and operating income of RMB1.2 million in the second quarter of 2008. Operating margin was -1.0% in the third quarter of 2008, compared to 2.8% in the third quarter of 2007 and 5.1% in the second quarter of 2008.

Net Income

  • Net loss for the third quarter of 2008 was RMB28.9 million (US$4.2 million), compared to a net loss of RMB0.6 million in the third quarter of 2007 and net income of RMB2.8 million in the second quarter of 2008. Basic and diluted losses per share for the third quarter of 2008 were each RMB9.21 (US$1.35). The net loss was primarily attributable to the impact of acquisitions, one-time conversion expenses related to the conversion of a portion of US$10 million in convertible notes completed in third quarter of 2008, and payment of operating expenses incurred in the second quarter of 2008.
  • Amortization of acquired software technology was RMB3.3 million (US$0.5 million);
  • interest expense was RMB8.1 million (US$1.2 million);
  • amortization of discount on notes payable was RMB18.4 million (US$2.7 million) and
  • amortization of loan costs was RMB3.4 million (US$0.5 million).
  • Excluding these expenses, net loss in the third quarter of 2008 would have been RMB2.3 million (US$0.3 million), or RMB0.79 (US$0.12) per basic share. The Company noted that 90% of the US$10.0 million of senior convertible notes have been converted as of September 30, 2008. As of the end of the third quarter of 2008, eFuture had outstanding convertible debt in the principal amount of US$1.0 million and Series A and Placement Agent warrants outstanding to purchase 184,077 and 73,291 ordinary shares, respectively, that will expire September 9, 2012; Series B warrants to purchase 230,097 ordinary shares expired unexercised on September 9, 2008.
  • Adjusted net loss (non-GAAP) for the third quarter of 2008 was RMB5.5 million (US$0.8 million), compared adjusted net income (non-GAAP) of RMB4.4 million in the third quarter of 2007. Adjusted diluted losses per share (non-GAAP) for the third quarter of 2008 were RMB1.76 (US$0.26), compared to an adjusted earnings per share (non-GAAP) of RMB1.6 in the third quarter of 2007.
  • [In a correction, they changed this to:] Adjusted net loss (non-GAAP) for the third quarter of 2008 was RMB5.5 million (US$0.8 million), compared to adjusted net income (non-GAAP) of RMB3.0 million in the third quarter of 2007. Adjusted diluted losses per share (non-GAAP) for the third quarter of 2008 were RMB1.76 (US$0.26), compared to adjusted earnings per share (non-GAAP) of RMB1.09 in the third quarter of 2007

EBITDA

  • Adjusted EBITDA (non-GAAP) for the third quarter of 2008 was RMB5.3 million (US$0.8 million), compared to RMB4.7 million in the third quarter of 2007 and RMB4.9 million in the second quarter of 2008.
  • [In a correction, they changed this to:] Adjusted EBITDA (non-GAAP) for the third quarter of 2008 was RMB5.3 million (US$0.8 million), compared to RMB3.3 million in the third quarter of 2007 and RMB4.9 million in the second quarter of 2008

Cash Flow and Capital Expenditures

  • As of September 30, 2008, the Company had RMB32.7 million (US$4.8 million) in cash and cash equivalents. Cash provided by operating activities at the end of September 30 of 2008 was RMB-3.6 million (US$-0.5 million). Capital expenditures at the end of September 30 of 2008 were RMB7.4 million (US$1.1 million)”.
  • As of September 30, 2008 the Company had 623 employees, compared to 579 employees as of June 30, 2008.

Business Outlook for 2008

  • As of September 30, 2008, eFuture had deferred contracts with unrecognized revenue of approximately US$13.8 million. eFuture expects its full-year 2008 total revenue to be in the range of approximately US$19 to US$20 million, representing annual growth of 65 to 74% over 2007. The Company expects full- year 2008 adjusted EBITDA (non-GAAP) to be in the range of approximately US$5 million to US$6 million, representing annual growth of 72% to 106%. This forecast is a current and preliminary view and is subject to change.

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