Nine Energy Service, Inc.
Q4 2006 Earnings Call Transcript

Published:

  • Operator:
    Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2006 results for Ninetowns Internet Technology Group Company Limited earnings call. My name is Melanie and I will be your coordinator for today. (Operator Instructions) I would now like to turn the call over to Ms. Lisa Zheng, Assistant Vice President of Investor Relations. Please proceed, Madam.
  • Lisa Zheng:
    Thank you, Operator. I would like to welcome everyone to Ninetowns' fourth quarter and full year 2006 results conference call. With me today are Mr. Shuang Wang, Chief Executive Officer; and Mr. Tommy Fork, Chief Financial Officer. After our presentation, we will have time for any questions. Before we begin the formal remarks, participants are advised that this conference call will include statements about future events and expectations, which are forward-looking statements. All forward-looking statements involve risks and uncertainties and actual results may differ materially from those discussed in or implied by such forward-looking statements. These forward-looking statements speak only as of the date of this presentation, and while we may update some statements from time to time, we assume no duty to update them to reflect new, changing or unanticipated events or circumstances and you should not rely on such forward-looking statements. In particular, the company expects to confront risks such as
  • Tommy Fork:
    Thank you, Lisa, and thank you all for joining us today. As we go through our remarks, I will reference our results presentation, which can be downloaded from our website, www.ninetowns.com/english. As you have learned from our results press release, we continue to operate in a very challenging environment. Our performance for the fourth quarter and full year 2006 continues to be severely impacted by the transition due to the free software provisioned by the PRC Inspections Administration. Decreases in enterprise software sales adversely affect our revenue mix and consequently, our margins. We will discuss this a little bit more later. In response to these challenges, we worked hard on a number of plans to revitalize our core B2G operations and to maintain the [inaudible] from our existing business. Please look on slide 3 of the presentation. Our teams saw progress across a number of key areas in this regard. First, we were able to expand our installed user base by enhancing our customer service support, thereby incenting more customers to adopt our paid service contracts. The advantages provided to our customers by the paid services include automatic restoration and industry specification updates, as well as a [inaudible] for [inaudible] customer support center, both of which have streamlined and solidified the overall users’ experience. As a result of our efforts, let me refer you to slide four of our presentation. We sold approximately 2,400 iDeclare packages and approximately 10,000 iDeclare service contracts during the fourth quarter. For the full year, we sold roughly 8,250 iDeclare packages and approximately 29,000 iDeclare service contracts. Also, as of the end of 2006, we have installed 20,500 free software under the PRC Inspection Administration’s directive. As we have highlighted on slide five, some of the various clients who purchased iDeclare package in the fourth quarter include
  • Operator:
    (Operator Instructions) Our first question comes from the line of Dick Wei with J.P. Morgan. Go ahead.
  • Dick Wei:
    Good morning, Tommy and Lisa. I have a couple of questions. My first question is in terms of the sales and marketing, R&D, and G&A expenses. They went up quite a lot in the fourth quarter. I just wonder what kind of trend do you expect to see in the first quarter ’07 and going forward? Also, if you can break out between the software business and the B2B business, that would be great.
  • Tommy Fork:
    Dick, for the expenses, because we are now developing the B2B platform, so we expect that would be slightly increased in Q1 of 2007. For the whole year 2006, we incurred total expenses of $14 million, of which $1.6 million would be attributable to the B2B platform development.
  • Dick Wei:
    So that is for the whole operating --
  • Tommy Fork:
    For the whole year.
  • Dick Wei:
    Okay.
  • Tommy Fork:
    We incurred about $14 million in total expenses, out of which about $1.6 million is for the B2B platform.
  • Dick Wei:
    Okay, great. Then, in terms of the gross margin level, I wonder, the reason for the decline, was it mainly due to the revenue mix between the two businesses, or is it there is some other reason for the margin to decline?
  • Tommy Fork:
    The main reason is the shift in sales in the revenue mix, because we had a decrease in the high-margin enterprise sales and decreased the total percentage of that enterprise software sales, so the margin is going down.
  • Dick Wei:
    Okay, and my next question is in terms of the B2B business, can you give us some update in terms of some of the progress you have made, like when revenues are going to start coming in or some of the operating metrics that you can share with us? Shuang Wang (Translation) We have been working on our B2B platform for the past year and we are still in the preparation stage right now. But we will be ready to announce to the market our development as soon as we are ready.
  • Dick Wei:
    Any expectation when we will see revenue, or would you rather not say at this time?
  • Shuang Wang:
    (Translation Not Provided)
  • Dick Wei:
    (Translation Not Provided) Thank you.
  • Lisa Zheng:
    Just to make sure everybody else hears, this is a new business, upcoming new business so we are not ready to disclose its revenue model yet, until we are ready.
  • Operator:
    Our next question comes from the line of Tim Shaw with Shaw Investments. Go ahead.
  • Tim Shaw:
    Good morning, everybody. A quick question; Tommy, if you can answer, in the third quarter conference call, you mentioned about 50% customers would be renewing 2007. Are you still on that pace and going to stick with that trend?
  • Tommy Fork:
    This is our original target but as the sales of the service contract have been affected by the free software at the beginning of the year, so we allow -- and also, during the year we over-met our sales channel, so there is some negative impact on that, so we allow approximately -- at year end, the ratio is approximately 25%. But we are still aiming at achieving the 50% in the coming year.
  • Tim Shaw:
    Okay, great, and just one question; what was your employee headcount at the end of the year?
  • Tommy Fork:
    It is about 650 staff.
  • Tim Shaw:
    Okay, and that was up from 446?
  • Tommy Fork:
    Yes.
  • Tim Shaw:
    Okay, very good. Thank you.
  • Operator:
    (Operator Instructions) Our next question comes from the line of Dick Wei with J.P. Morgan. Go ahead.
  • Dick Wei:
    I have a couple of follow-up questions. First is, do you have any expectations for the SGS business for 2007? Do you have a bit of a strategy at this point?
  • Tommy Fork:
    We expect the SGS sales will remain at a similar level as Q3 of this year. We do not expect any increase in SGS activity.
  • Dick Wei:
    What about the tax rate and capital expenditure expectations for ’07, and maybe for ’08?
  • Tommy Fork:
    As we are actively involved in tax planning, we expect the effective tax rate for 2007 will be below 5%. For the CapEx, we expect to have $1.8 million to $2.5 million in the coming year.
  • Dick Wei:
    Great, thanks.
  • Operator:
    Our next question comes from the line of Mitch Vitter with Maxim. Go ahead.
  • Mitch Vitter:
    Most of my questions tend to go with how poorly the stock has performed over the years. Has there been any thought of bringing in a new management team or potentially opening up an investor relations department in the United States, and/or using all that cash that you have to buy another company, or to expand in a different area? Because the shareholders are just paying a heavy price for owning shares in this company. Shuang Wang (Translation) We are constantly evaluating possible targets for acquisition. Now that we are engaged in both B2G and B2B business, there are more targets available for us to evaluate. As soon as we have some firm information, we will release it to the market.
  • Lisa Zheng:
    By the way, Mitch, we do have an investor relation consulting firm with an office in the U.S.
  • Mitch Vitter:
    I have never seen in any of the releases anything that -- any company in the United States.
  • Lisa Zheng:
    We just recently engaged them, so probably it is our fault that we have not told everybody.
  • Mitch Vitter:
    I mean, the whole trick of being a public company is enhancing shareholder value. You cannot disagree with that. It just does not seem like the company has been heading in the right direction. I am not an authority on what the problems are but it certainly seems like there are some issues in enhancing shareholder value. The stock has performed rather poorly. For a publicly traded company, the management team has a fiduciary responsibility to try to get that stock to perform better. Nobody could argue with that. Thank you very much and keep up the progress.
  • Operator:
    Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call back over to management for any closing remarks. Please proceed.
  • Shuang Wang:
    Thank you, Operator. Thank you for joining us today, everyone. While the conditions remain challenging, we are working hard as a management team to shape the future of our business and look forward to updating you on progress in the near future. Thank you.
  • Operator:
    Ladies and gentlemen, thank you for your participation in today’s conference. That does conclude this evening’s presentation. You may now disconnect.

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