eFuture (EFUT) post stellar Q1 results

Things keep marching on very well, while the share price remains stuck. One has to realize that Q1 is traditionally the weakest quarter by far, as is witnessed by the fact that this quarter they had only $2 in revenues but last year they produced $12M over the whole year. Nevertheless, revenues increased 92.8% for the quarter year-on-year (YoY)!

By the way, this seasonal nature will be reduced as a result of their business model, in which the more stable service contract revenues follow the more seasonal new sales by a year.

For Q1, excluding amortization of acquired technology top line and gross margins are powering ahead:

  • Revenue’s increased 92.8% YoY
  • Gross margins increased to 61.2% (from 51.1% in Q1 2007).

Of course, with the seasonal lull in sales, the first quarter is never a profitable one because of the largely fixed cost nature of the business. So they reported an 1.3M net loss, but this was bloated by one time amortization of acquired technology from the acquisitions completed in 2007 of $0.6M , bad debt expenses of $0.3M  as a result of a large increase in accounts receivable at the end of the quarter. This amounted to 16cent per share.

What we are especially happy with is the following:

  • Total new orders increased 350% to 117 orders from 26 in the first quarter of 2007. This really bodes well. These new orders will have a kick in effect a year from now, as the service contract kick in (new orders get a year’s waver from service cost). We are actually inclined to argue that this is perhaps the single most important metric of the company.
  • “During the first quarter, we placed particular emphasis on integrating our acquisitions completed in 2007 into a single platform,” Mr. Yan continued. “We worked to smoothly incorporate culture, strengthen back-office resource integration and improve processes to streamline internal operations and reduce software deployment costs. This organic growth strategy has translated into a 12% increase in gross margins, excluding amortization of acquired technology”
  • Guidance is up to $19-20M in revenue for the year
  • They have 8.5M in cash and cash equivalents
  • Their B2B websites will start to contribute to revenues in Q3.

Bottom line:

  • The company keeps giving conservative guidance and then exceeding it
  • The company is executing well on it’s strategy and seems to have integrated its acquisitions well. Through those, it has placed itself well to profit from market growth
  • The company grows at a fast, 50%-100% pace, and still has significant market opportunities ahead of it, supply-chain management (SCM) is still in it’s early adoption stages in China.
  • Sooner or later, this stock will get a valuation more befitting its potential. Needless to say we think that such valuation is significantly higher than where we are today.

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