Category: Services

HiSoft Reports Second Quarter 2010 Results

HiSoft Technology International Limited, ("HiSoft" or the "Company") (Nasdaq: HSFT), a leading China-based provider of outsourced information technology and research and development services headquartered in Dalian, China, today announced its unaudited financial results for the second quarter ended June 30, 2010.

Second Quarter 2010 Highlights
-- Net revenues increased 63.9% year-over-year to US$34.7 million for the second quarter of 2010 from US$21.2 million for the corresponding period in 2009
-- Gross margin for the second quarter of 2010 was 37.2%, compared to 35.8% for the corresponding period in 2009

    -- Income from operations increased 127.7% year-over-year to
       US$4.3 million for the second quarter of 2010 from US$1.9 million for
       the corresponding period in 2009
    -- Diluted earnings per ADS was US$0.17 for the second quarter of 2010,
       compared to US$0.09 for the corresponding period in 2009
    -- Non-GAAP diluted earnings per ADS(1) was US$0.24 for the second quarter
       of 2010, compared to US$0.09 for the corresponding period in 2009

    (1) Non-GAAP net income, Non-GAAP diluted earnings per ADS and related
        margins exclude share-based compensation expense, amortization of
        acquired intangible assets and change in fair value of contingent
        consideration payable for business acquisition. The non-GAAP measures
        and related reconciliations to GAAP measures are described in the
        accompanying sections of "Non-GAAP Financial Measures" and
        "Reconciliations of Non-GAAP Financial Measures to Comparable GAAP
        Measures" at the end of the press release.

"This was a very strong quarter as we continued along a robust growth trajectory," said HiSoft's Chief Executive Officer Tiak Koon Loh. "During the second quarter, we had positive momentum across all business sectors and higher levels of strategic engagement from our key customers. We are seeing a substantial increase in the volume of work coming from within the domestic China market. These results further substantiate the strength of the HiSoft model of leveraging best practices and know-how with our global clients to grow our domestic business with China enterprises."

HiSoft's Chief Financial Officer Christine Lu-Wong added, "We believe our second quarter growth is indicative of our strong position in the market. We recorded strong net revenues, generated strong operating cash flow and continued to maintain days sales outstanding at levels much lower than industry norms. Building upon this advantage, while maintaining disciplined cost control, will be our main priority in the quarters ahead."

Second Quarter 2010 Financial Results

Net Revenues

Net revenues were US$34.7 million for the second quarter of 2010, an increase of 63.9% year-over-year from US$21.2 million for the corresponding period in 2009. The increase reflects a strong demand for the Company's information technology and research and development services.

Net Revenues by Geographic Markets

Based on the location of clients' headquarters, the Company's largest geographic market, the United States and European markets, accounted for US$23.4 million or 67.3% of net revenues during the second quarter of 2010, followed by 21.3% in Japan, 6.5% in Greater China and4.9% in Others.

Measuring the Company's revenues by geographic markets based on the location of the contract signing entities, Greater China accounted for 32.8% of net revenues in the second quarter of 2010, while the United States and European markets accounted for 26.4%, Japan accounted for 25.8% and Others accounted for 15.0%.

Largest Clients

Revenues from the Company's top client and top five clients accounted for 13.9% and 44.8% of net revenues, respectively, during the second quarter of 2010, compared to 15.3% and 44.5% respectively, for the corresponding period in 2009.

Gross Profit and Gross Margin

Gross profit was US$12.9 million for the second quarter of 2010, an increase of 70.1% year-over-year from US$7.6 million for the corresponding period in 2009. During the second quarter of 2010, gross margin was 37.2%, compared to 35.8% for the corresponding period in 2009. The Company noted that gross margin was driven by strong net revenue growth and productivity improvement in service delivery during the quarter.

Operating Expenses

Total operating expenses, which includes general and administrative expenses as well as sales and marketing expenses, were US$8.6 million for the second quarter of 2010, an increase of 50.9% year-over-year from US$5.7 million for the corresponding period in 2009. The year-over-year increases included US$1.0 million share-based compensation expense, US$0.2 million amortization expense of intangible assets and US$0.2 million change in fair value of contingent consideration payable for M&A incurred in the second quarter of 2010.

Operating Income and Operating Margin

Income from operations for the second quarter of 2010 was US$4.3 million, an increase of 127.7% year-over-year from US$1.9 million for the corresponding period in 2009. Operating margin increased to 12.4% for the second quarter of 2010, compared to 8.9% for the corresponding period in 2009. The year-over-year margin improvement was primarily due to economies of scale in line with strong revenue growth.

Provision for Income Taxes

The provision for income taxes was US$0.7 million for the second quarter of 2010, compared to US$0.2 million for the corresponding period in 2009. For the second quarter of 2010, the effective tax rate was 14.7%, compared to 12.6% for the corresponding period in 2009. The increase in effective tax rate was due to a new tax circular: Further Clarification on Implementation of Preferential EIT Rate ("Circular 157"), issued by the State Administration of Taxation on April 21, 2010. Circular 157, appears to have the effect that an HNTE entity in a tax holiday period is entitled to pay tax at either the lower of 15% or50% of the applicable PRC tax rate. Circular 157 is unclear as to whether its effect is retrospective but the Company notes that the State Administration of Taxation has recently taken the position that the Circular applies only to tax years commencing from January 1, 2010. Depending on the interpretation of the circular by the local tax authority, the applicable tax rate for the Company's Beijing operating subsidiary in 2010 may increase to 12.5% from the 7.5% rate that the subsidiary used in the first quarter of 2010. The Company has now provided for a 12.5% income tax rate for the subsidiary in the first half of 2010 and will seek to determine the appropriate interpretation with the relevant tax authority during the second half of the year.

Net Income and Earnings per ADS

Net income was US$3.8 million for the second quarter of 2010, an increase of 122.7% from US$1.7 million for the corresponding period in 2009. Diluted earnings per ADS was US$0.17 for the second quarter of 2010, compared to US$0.09 for the corresponding period in 2009.

Non-GAAP net income was US$5.4 million for the second quarter of 2010, an increase of 187.1% from US$1.9 million for the corresponding period in 2009. Non-GAAP diluted earnings per ADS was US$0.24 for the second quarter of 2010, compared to US$0.09 for the corresponding period in 2009.

Cash and Cash Flow

As of June 30, 2010, HiSoft had cash and cash equivalents and restricted cash totaling US$51.9 million. Operating cash flow for the second quarter of 2010 was an inflow of approximately US$3.1 million.

Days sales outstanding was 85 days for the second quarter of 2010, compared to 82 days for the corresponding period in 2009.

First Half 2010 Financial Results

Net Revenues

Net revenues were US$65.2 million for the first half of 2010, an increase of 52.7% year-over-year from US$42.7 million for the corresponding period in 2009.

Gross Profit and Gross Margin

Gross profit was US$24.0 million for the first half of 2010, an increase of 56.7% year-over-year from US$15.3 million for the corresponding period in 2009. For the first half of 2010, gross margin was 36.8%, compared to 35.9% for the corresponding period in 2009.

Operating Expenses

Total operating expenses were US$16.4 million, an increase of 32.1% year-over-year from US$12.4 million for the corresponding period in 2009.

Operating Income and Operating Margin

Income from operations for the first half of 2010 was US$7.6 million, an increase of 162.8% year-over-year from US$2.9 million for the corresponding period in 2009. Operating margin improved to 11.6% for the first half of 2010, compared to 6.8% for the corresponding period in 2009.

Net Income and Earnings per ADS

Net income was US$6.7 million for the first half of 2010, an increase of 135.2% from US$2.9 million for the corresponding period in 2009. Diluted earnings per ADS was US$0.30 for the first half of 2010, compared to US$0.15 for the corresponding period in 2009.

Non-GAAP net income was US$9.3 million for the first half of 2010, an increase of 183.3% from US$3.3 million for the corresponding period in 2009. Non-GAAP diluted earnings per ADS was US$0.41 for the first half of 2010, compared to US$0.17 for the corresponding period in 2009.

Recent Business Developments

On June 30, 2010, HiSoft completed an initial public offering of a total of 8,510,000 ADSs at a public offering price of US$10.00 per ADS. The Company sold a total of 7,261,667 ADSs and the selling shareholders sold a total of 1,248,333 ADSs. Net proceeds to the Company from the offering were approximately US$66.4 million, after deducting underwriting discounts and commissions as well as offering expenses payable by the Company. These proceeds were received in July of 2010.

Outlook for Third Quarter and Full Year 2010

For the third quarter 2010, based on current market and operating conditions, the Company expects:

    -- Net revenues to be in the estimated range of US$35.5 million to
       US$36.5 million, representing an expected growth rate between 56.0% to
       60.4% year-over-year
    -- Diluted earnings per ADS to be in the estimated range of US$0.13 to
       US$0.14, representing an expected growth rate of between 30.0% to 40.0%
       year-over-year, based on 30.0 million weighted average ADSs outstanding
    -- Non-GAAP diluted earnings per ADS to be in the estimated range of
       US$0.17 to US$0.18, representing an expected growth rate of between
       54.5% to 63.6% year-over-year, based on 30.0 million weighted average
       ADSs outstanding

For the full year 2010, based on current market and operating conditions, the Company expects:

    -- Net revenues to be in the estimated range of US$139 million to
       US$142 million, representing an expected growth rate between 52.0% to
       55.3% year-over-year
    -- Diluted earnings per ADS to be in the estimated range of US$0.56 to
       US$0.59representing an expected growth rate between 55.6% to 63.9%
       year-over-year, based on 26.5 million weighted average ADSs outstanding
    -- Non-GAAP diluted earnings per ADS to be in the estimated range of
       US$0.74 to US$0.77, representing an expected growth rate of between
       76.2% to 83.3% year-over-year, based on 26.5 million weighted average
       ADSs outstanding

The diluted earnings per ADS outlook assumes an effective income tax rate between 13% to 15%.

Second Quarter 2010 Conference Call Details

HiSoft management will hold an earnings conference call at 8:00 a.m. US Eastern Time on August 19, 2010 (8:00 p.m. Beijing/Hong Kong Time on August 19, 2010). Management will discuss results and highlights of the quarter and answer questions from investors.

    The dial-in numbers for the conference call are as follows:

    U.S. Toll Free:            +1-877-887-1134
    International Toll Number: +1-412-317-0794

The conference call will be broadcast live over the Internet and can be accessed by clicking the following link: http://www.corpasia.net/cancast/us/index.php?id=usHSFT_8&version=e

Additionally, an archived web cast of this call will be available on the Investor Relations section of the HiSoft web site at http://www.hisoft.com .

About HiSoft Technology International Limited

HiSoft Technology International Limited (NASDAQ: HSFT) is a leading China-based provider of outsourced information technology and research and development services headquartered in Dalian, China. HiSoft provides its services to leading companies around the world through a combination of onshore and offshore delivery capabilities. HiSoft leverages its skilled technology specialists and client-centric delivery centers to offer customers reliable and high-quality technology solutions. For more information about HiSoft, please visit http://www.hisoft.com .

Safe Harbor Statement

This press release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "target," "going forward," "outlook" and similar statements. Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond HiSoft's control, which may cause HiSoft's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in HiSoft's filings with the U.S. Securities and Exchange Commission. HiSoft does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

Non-GAAP Financial Measures

To supplement HiSoft's consolidated financial results presented in accordance with GAAP, HiSoft uses the following measures defined as non-GAAP financial measures by the SEC: net income and diluted earnings per ADS which exclude share-based compensation expense, amortization of acquired intangible assets and change in fair value of contingent consideration payable for business acquisition. Non-GAAP net income and diluted earnings per ADS for prior periods have been reclassified so that the presentations are consistent. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

HiSoft believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance by excluding certain expenses and expenditures that may not be indicative of its operating performance. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company's performance and when planning and forecasting future periods. A limitation of using non-GAAP net income and diluted earnings per ADS is that these non-GAAP measures exclude the share-based compensation charges, amortization of acquired intangible assets and change in fair value of contingent consideration payable for business acquisition that have been and will continue to be for the foreseeable future a significant recurring expense in the business. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables have more details on the reconciliations between GAAP financial measures that are comparable to non-GAAP financial measures.


                    HISOFT TECHNOLOGY INTERNATIONAL LIMITED
              Condensed Consolidated Balance Sheets (Unaudited)
         (U.S. dollars in thousands, except ADS data and per ADS data)


                                                    June            December
                                                  30, 2010          31, 2009
    ASSETS
    Current Assets
    Cash and cash equivalents                       51,515            54,842
    Restricted cash                                    376               335
    Account receivable, net                         35,783            24,473
    Other current assets                            62,682             2,215
    Total current assets                           150,356            81,865

    Property, plant and equipment, net               7,176             7,203
    Goodwill and intangible assets, net             16,334            12,126
    Other long-term assets                           4,355             3,048
    Total assets                                   178,221           104,242

    LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities                             33,866            24,750
    (including current liabilities of
     the consolidated variable interest
     entity without recourse to HiSoft
     Technology International Limited of
     $228 and $227 as of June 30, 2010
     and December 31, 2009, respectively)
    Other liabilities                                1,810             1,401
    Total liabilities                               35,676            26,151
    Convertible redeemable preferred
     shares                                             --            89,031
    Total HiSoft Technology International
     Limited shareholder's
     (deficit)/Equity                              142,545           (10,940)
    Total liabilities, Convertible
     redeemable preferred shares and
     (Deficit)/Equity                              178,221           104,242



                   HISOFT TECHNOLOGY INTERNATIONAL LIMITED
          Condensed Consolidated Statements of Operations (Unaudited)
         (U.S. dollars in thousands, except ADS data and per ADS data)

                                   Three months ended      Six months ended
                                        June 30,               June  30,
                                    2010        2009        2010        2009

    Net revenues                   34,694      21,168      65,231      42,705
    Cost of revenues              (21,794)    (13,583)    (41,212)    (27,375)
    Gross profit                   12,900       7,585      24,019      15,330

    Operating expenses             (8,588)     (5,691)    (16,438)    (12,445)
    Income from operations          4,312       1,894       7,581       2,885

    Other income                      117          47         243         395
    Net income before income
     tax expenses                   4,429       1,941       7,824       3,280

    Income tax expenses              (650)       (244)     (1,078)       (412)
    Net income                      3,779       1,697       6,746       2,868


    Net income per ADS
    Basic                            0.18        0.09        0.32        0.15
    Diluted                          0.17        0.09        0.30        0.15

    Weighted average ADS used
     in calculating net income
     per ADS
    Basic                       5,085,958   4,507,097   4,909,644   4,495,370
    Diluted                    22,613,190  19,857,869  22,477,048  19,490,613



                   HISOFT TECHNOLOGY INTERNATIONAL LIMITED
    Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures
    (U.S. dollars in thousands, except per ADS data, ADS data and percentages)


                                   Three months ended       Six months ended
                                         June 30,               June 30,
                                    2010        2009        2010        2009

    GAAP operating income           4,312       1,894       7,581       2,885
    GAAP operating margin           12.4%        8.9%       11.6%        6.8%

    Adjustments:
     - Share-based
       compensation                 1,227         188       1,816         406
     - Amortization of
       acquired intangible
       assets                         200          --         363          --
     - Change in fair value of
       contingent consideration
       payable for M&A                205          --         349          --

    Non-GAAP operating income       5,944       2,082      10,109       3,291
    Non-GAAP operating margin       17.1%        9.8%       15.5%        7.7%

    GAAP net income                 3,779       1,697       6,746       2,868
    GAAP net margin                 10.9%        8.0%       10.3%        6.7%

    Adjustments:
     - Share-based
       compensation                 1,227         188       1,816         406
     - Amortization of
       acquired intangible
       assets                         200          --         363          --
     - Change in fair value of
       contingent consideration
       payable for M&A                205          --         349          --

    Non-GAAP net income             5,411       1,885       9,274       3,274
    Non-GAAP net margin             15.6%        8.9%       14.2%        7.7%

    Non-GAAP net income per
     ADS
    Basic                            0.26        0.10        0.44        0.17
    Diluted                          0.24        0.09        0.41        0.17
    Weighted average ADS used
     in calculating Non-GAAP
     net income per ADS
    Basic                       5,085,958   4,507,097   4,909,644   4,495,370
    Diluted                    22,613,190  19,857,869  22,477,048  19,490,613



                   HISOFT TECHNOLOGY INTERNATIONAL LIMITED
    Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures
    (U.S. dollars in thousands, except per ADS data, ADS data and percentages)

                                         Three months ended  Six months ended
                                                June 30,          June 30,
                                             2010     2009     2010     2009


    GAAP basic net income per ADS            0.18     0.09     0.32     0.15
    Adjustments:
     - Share-based compensation              0.06     0.01     0.09     0.02
     - Amortization of acquired
       intangible assets                     0.01       --     0.02       --
     - Change in fair value of contingent
       consideration payable for M&A         0.01       --     0.01       --
    Non-GAAP basic net income per ADS        0.26     0.10     0.44     0.17


    GAAP diluted net income per ADS          0.17     0.09     0.30     0.15
    Adjustments:
     - Share-based compensation              0.05       --     0.08     0.02
     - Amortization of acquired
       intangible assets                     0.01       --     0.02       --
     - Change in fair value of contingent
      consideration payable for M&A          0.01       --     0.01       --
    Non-GAAP diluted net income per ADS      0.24     0.09     0.41     0.17



    For investor and media inquiries please contact:

    In China:
     Mr. Ross Warner
     HiSoft Technology International Limited
     Tel:   +86-10-5987-5827
     Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

     Mr. Agustin Bautista
     Ogilvy Financial, Beijing
     Tel:   +86-10-8520-6166
     Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

    In the U.S.:
     Ms. Jessica Barist Cohen
     Ogilvy Financial, New York
     Tel:   +1-646-460-9989
     Email: This email address is being protected from spambots. You need JavaScript enabled to view it.