iSoftStone Reports Higher Revenue and Net Income for the Year 2012

BEIJING, March 8, 2013 /PRNewswire/ -- iSoftStone Holdings Limited ("iSoftStone" or "the Company," NYSE: ISS), a leading China-based IT services provider, today reported its unaudited financial and operating results for the fourth quarter and year ended December 31, 2012.

Fourth quarter 2012 results

  • Net revenues increased 21.4% to $104.2 million in the fourth quarter 2012 from $85.8 million in the fourth quarter 2011.
  • Gross profit increased 21.0% to $36.9 million in the fourth quarter 2012 from $30.5 million in the fourth quarter 2011.
  • Net income in the fourth quarter 2012 increased 235.1% to $7.7 million from $2.3 million in the fourth quarter 2011.
  • Non-GAAP net income (note 1) was $11.2 million both in the fourth quarter 2012 and in the fourth quarter 2011.
  • Diluted earnings per American Depositary Share ("ADS") were $0.13 in the fourth quarter 2012 compared with $0.04 in the fourth quarter 2011. Each ADS represents 10 ordinary shares.
  • Non-GAAP diluted earnings per ADS (note 1) were $0.19 both in the fourth quarter 2012 and in the fourth quarter 2011.
  • Total number of employees increased 16.0% to 14,512 as of December 31, 2012 from 12,510 as of December 31, 2011.

Year 2012 results

  • Net revenues increased 34.5% to $381.1 million in 2012 from $283.4 million in 2011.
  • Gross profit increased 26.7% to $129.6 million in 2012 from $102.3 million in 2011.
  • Net income in 2012 increased 16.2% to $22.1 million from $19.0 million in 2011.
  • Non-GAAP net income (note 1) increased 8.2% to $37.1 million in 2012 from $34.3 million in 2011.
  • Diluted earnings per ADS were $0.38 in 2012 and $0.32 in 2011. Each ADS represents 10 ordinary shares.
  • Non-GAAP diluted earnings per ADS (note 1) were $0.64 in 2012 and $0.57 in 2011.

Mr. T.W. Liu, iSoftStone's Chairman and Chief Executive Officer, said, "I am very delighted with the solid results we achieved during the fourth quarter and full year of 2012. The quarter met our expectation with stabilized margins and improved operating cash flow.

"Overall, 2012 was a solid year. Despite of the challenges for our business and the industry, we managed to respond effectively, by securing major partnerships such as Huawei JV, optimizing business mix, expanding key verticals, improving operational efficiencies, and boosting capabilities in emerging technologies and domain expertise.

"Going forward, although facing challenges of weakening overseas markets, constant cost pressure, and demand shift in emerging technologies, we will continue to execute our strategy, including expanding our business drivers, focusing on cash flow and margin improvement, and investing in technical competencies and domain expertise to support future growth. With the sound foundation strengthened in 2012, we are confident that our growth momentum will continue, and business quality will further improve in 2013."

Results of operations for the fourth quarter 2012

Net revenues

Net revenues increased $18.4 million or 21.4% to $104.2 million in the fourth quarter 2012 from $85.8 million in the fourth quarter 2011, mainly due to strong demand for IT services from clients in Greater China, partially offset by decreased demand from some global clients, especially clients in Japan and United States.

Net revenues by service line

We derive net revenues by providing an integrated suite of IT services and solutions, including (a) IT services, which primarily includes application development and maintenance, or ADM, as well as R&D services and infrastructure and software services, (b) Consulting & Solutions, and (c) Business Process Outsourcing, or BPO, services. The following table shows our net revenues by service line.

US$ in thousands, except %

2011Q4

%


2012Q4

%

IT services






    ADM

30,238

35.2%


34,589

33.2%

    R&D

23,951

27.9%


25,097

24.1%

    Infrastructure and software

3,436

4.0%


3,104

3.0%

IT services, total

57,625

67.1%


62,790

60.3%

Consulting & Solutions

24,863

29.0%


37,886

36.3%

BPO services

3,350

3.9%


3,543

3.4%

Total net revenues

85,838

100.0%


104,219

100.0%

Net revenues from IT services increased $5.2 million or 9.0% to $62.8 million in the fourth quarter 2012 from $57.6 million in the fourth quarter 2011. Net revenues from Consulting & Solutions increased $13.0 million or 52.4% to $37.9 million in the fourth quarter 2012 from $24.9 million in the fourth quarter 2011.The quarter over quarter growth was mainly contributed by wins of three new public sector consulting and solution projects and an increase in revenues from business intelligence projects for a China domestic bank. We expect that these types of consulting and solutions businesses will continue to be one of our growth drivers in the future. Net revenues from BPO services increased 5.8% to $3.5 million in the fourth quarter 2012 from $3.4 million in the fourth quarter 2011.

Net revenues by geographic markets

We classify our net revenues by the following geographic markets: Greater China (which includes China, Taiwan, Hong Kong, and Macau) and Global (which includes the United States, Europe, Japan, and others), based on the headquarters locations of our clients. The following table shows our net revenues by geographic markets.

US$ in thousands, except %

2011Q4

%


2012Q4

%

Greater China

52,394

61.0%


72,418

69.5%

Global:






    United States

21,107

24.6%


19,998

19.2%

    Europe

5,665

6.6%


5,562

5.3%

    Japan

6,417

7.5%


5,297

5.1%

    Others

255

0.3%


944

0.9%

Global total

33,444

39.0%


31,801

30.5%

Total net revenues

85,838

100.0%


104,219

100.0%

In the fourth quarter 2012, net revenues in Greater China continued to grow more than the net revenues in the Global market, especially with Japan and United States experiencing weaker macro-economic conditions than in Greater China. Our net revenues from Greater China clients increased $20.0 million or 38.2% to $72.4 million in the fourth quarter 2012 from $52.4 million in the fourth quarter 2011. Net revenues from U.S. clients decreased $1.1 million or 5.3% to $20.0 million in the fourth quarter 2012 from $21.1 million in the fourth quarter 2011 mainly due to reduced demand from one major client in the U.S. market. Net revenues from European clients decreased 1.8% to $5.6 million in the fourth quarter 2012 from $5.7 million in the fourth quarter 2011. Net revenues from Japanese clients decreased $1.1 million, year over year, due to reduced demand from Japan clients.

Net revenues by client industry

We focus on serving clients in four target industry verticals, each with large and growing demand for IT services and solutions: technology; communications; banking, financial services and insurance, or BFSI; and energy, transportation and public sector. The following table shows our net revenues by client industry.

US$ in thousands, except %

2011Q4

%


2012Q4

%

Technology

26,300

30.6%


25,685

24.7%

Communications

31,443

36.6%


37,201

35.7%

BFSI

17,914

20.9%


22,240

21.3%

Energy, transportation, and public

5,863

6.8%


12,629

12.1%

Others

4,318

5.1%


6,464

6.2%

Total net revenues

85,838

100.0%


104,219

100.0%

Net revenues from technology clients decreased $0.6 million or 2.3% to $25.7 million in the fourth quarter 2012 from $26.3 million in the fourth quarter 2011. Net revenues from communications clients increased $5.8 million or 18.3% to $37.2 million in the fourth quarter 2012 from $31.4 million in the fourth quarter 2011. Net revenues from BFSI clients increased $4.3 million or 24.1% to $22.2 million in the fourth quarter 2012 from $17.9 million in the fourth quarter 2011 attributable largely to business intelligence projects and IT services projects for three domestic banks. Net revenues from energy, transportation, and public sector clients increased $6.8 million or 115.4% to $12.6 million in the fourth quarter 2012 from $5.9 million in the fourth quarter 2011 primarily due to wins of three new public sector consulting and solution projects. Net revenues from all other industries increased $2.1 million to $6.5 million in the fourth quarter 2012 from $4.3 million in the fourth quarter 2011, mainly resulting from a new project win from a global human resources solution company and another new project win from a global BPO company.

Net revenues by largest five clients

Net revenues from our largest five clients totaled $50.7 million or 48.6% of total net revenues in the fourth quarter 2012 compared with $37.1 million or 43.2% in the fourth quarter 2011.

Net revenues by pricing method

We provide our services on a time-and-expense basis, a fixed-price basis, or for certain BPO services, on the basis of volume of work processed for our clients. The following table shows our net revenues by pricing method.

US$ in thousands, except %

2011Q4

%


2012Q4

%

Time-and-expense basis

29,935

34.9%


39,433

37.8%

Fixed-price basis

55,039

64.1%


64,050

61.5%

Volume basis (BPO)

864

1.0%


736

0.7%

Total net revenues

85,838

100.0%


104,219

100.0%

Net revenues from time-and-expenses basis projects increased $9.5 million or 31.7% to $39.4 million in the fourth quarter 2012 from $29.9 million in the fourth quarter 2011. Net revenues from fixed-price basis projects increased $9.0 million or 16.4% to $64.1 million in the fourth quarter 2012 from $55.0 million in the fourth quarter 2011.

Cost of revenues, gross profit, and gross profit margin

Cost of revenues increased $12.0 million or 21.7% to $67.3 million in the fourth quarter 2012 from $55.3 million in the fourth quarter 2011 primarily due to service delivery employees and facilities added and more travel to enable and match the growth of our business.

Gross profit increased $6.4 million or 21.0% to $36.9 million in the fourth quarter 2012 from $30.5 million in the fourth quarter 2011. Gross profit margin decreased to 35.4% in the fourth quarter 2012 from 35.5% in the fourth quarter 2011 primarily due to annual salary increases for delivery personnel effective since January 2012 and more higher-end delivery employees hired with the growth of business and office expansion, which were partly offset by more government subsidies recognized as a percentage of net revenues and favorable business mix and efficiency improvements in the fourth quarter 2012.

Operating expenses

Operating expenses increased by $2.6 million or 10.8% to $26.9 million in the fourth quarter 2012 from $24.2 million in the fourth quarter 2011 primarily due to higher salary and compensation expenses and rental expenses in connection with expansion in the number of employees and in facilities to support the business growth and annual salary increases for operations personnel effective January 2012 or April 2012.

Excluding share-based compensation and amortization of intangible assets from acquisitions, non-GAAP operating expenses (note 1) were $24.1 million or 23.2% of net revenues in the fourth quarter 2012 compared with $20.7 million or 24.1% of net revenues in the fourth quarter 2011. The decrease of operating expenses as a percentage of net revenues reflected our scale efficiencies realized.

Income from operations

Income from operations increased $9.0 million or 564.9% to $10.6 million in the fourth quarter 2012 from $1.6 million in the fourth quarter 2011 due to the factors explained above.

Non-GAAP income from operations (note 1) increased $3.7 million or 34.7% to $14.2 million in the fourth quarter 2012 from $10.5 million in the fourth quarter 2011.

Interest expense

Interest expense was $0.9 million in the fourth quarter 2012 compared with $18,000 in the fourth quarter 2011. Interest expense in the fourth quarter 2012 and 2011 were incurred on short-term bank borrowings and the increase was due to more short-term bank loans borrowed to fund our working capital needs.

Income taxes

Income tax expense was $1.9 million in the fourth quarter 2012 compared with a benefit of  $0.7 million in the fourth quarter 2011 due to the expirations of tax exemptions and tax holidays in certain operating entities in China by the end of 2011.

Net income

Net income increased $5.4 million or 235.1% to $7.7 million in the fourth quarter 2012 from $2.3 million in the fourth quarter 2011 due to the factors explained above.

Non-GAAP net income (note 1) was $11.2 million both in the fourth quarter 2012 and in the fourth quarter 2011.

Earnings per ADS

Basic earnings per ADS were $0.14 in the fourth quarter 2012 and $0.04 in the fourth quarter 2011.

Diluted earnings per ADS were $0.13 in the fourth quarter 2012 and $0.04 in the fourth quarter 2011.

Non-GAAP diluted earnings per ADS (note 1) were $0.19 both in the fourth quarter 2012 and in the fourth quarter 2011.

Cash and Cash Flow

As of December 31, 2012, we had a cash balance of $116.6 million. Our net cash provided by operating activities in the fourth quarter 2012 was $43.5 million. Our net cash used in investing activities in the fourth quarter 2012 was $12.9 million, including capital expenditures of $4.7 million. Within the capital expenditures, $2.4 million related to the leasehold improvement of the newly leased office facility in Beijing in the fourth quarter 2012. In the fourth quarter 2012, we borrowed $29.2 million of short-term bank loans to fund our growth and repaid $13.6 million of matured short-term bank loans.

Results of operations for 2012

Net revenues

Net revenues increased $97.7 million or 34.5% to $381.1 million in 2012 from $283.4 million in 2011 due to strong customer demand for IT services in both Greater China and the United States.

Net revenues by service line

The following table shows our net revenues by service line.

US$ in thousands, except %

2011

%


2012

%

IT services






    ADM

97,445

34.5%


127,056

33.3%

    R&D

85,661

30.2%


102,697

26.9%

    Infrastructure and software

12,036

4.2%


11,000

2.9%

IT services, total

195,142

68.9%


240,753

63.1%

Consulting & Solutions

76,039

26.8%


127,227

33.4%

BPO services

12,236

4.3%


13,164

3.5%

Total net revenues

283,417

100.0%


381,144

100.0%

Net revenues from IT services increased $45.6 million or 23.4% to $240.8 million in 2012 from $195.1 million in 2011. Net revenues from Consulting & Solutions increased $51.2 million or 67.3% to $127.2 million in 2012 from $76.0 million in 2011. Net revenues from BPO services increased 7.6% to $13.2 million in 2012 from $12.2 million in 2011. The growth of net revenues was primarily due to deepening and broadening our engagements with existing clients and new wins of public sector projects in various tier-2 and tier-3 cities in China.

Net revenues by geographic markets

The following table shows our net revenues by geographic markets.

US$ in thousands, except %

2011

%


2012

%

Greater China

165,525

58.4%


243,969

64.0%

Global:






    United States

71,371

25.2%


86,367

22.7%

    Europe

21,370

7.5%


25,048

6.6%

    Japan

24,328

8.6%


23,315

6.1%

    Others

823

0.3%


2,445

0.6%

Global total

117,892

41.6%


137,175

36.0%

Total net revenues

283,417

100.0%


381,144

100.0%

In 2012, net revenues in Greater China continued to grow more than the net revenues in the Global market, especially with Japan and United States experiencing weaker macro-economic conditions than in Greater China. Our net revenues from Greater China clients increased $78.4 million or 47.4% to $244.0 million in 2012 from $165.5 million in 2011. Net revenues from U.S. clients increased $15.0 million or 21.0% to $86.4 million in 2012 from $71.4 million in 2011. Net revenues from European clients increased $3.7 million or 17.2% to $25.0 million in 2012 from $21.4 million in 2011. Net revenues from Japanese clients decreased $1.0 million or 4.2% to $23.3 million in 2012 from $24.3 million in 2011.

Net revenues by client industry

The following table shows our net revenues by client industry.

US$ in thousands, except %

2011

%


2012

%

Technology

85,578

30.2%


104,235

27.4%

Communication

108,648

38.3%


138,885

36.4%

BFSI

57,923

20.4%


79,667

20.9%

Energy, transportation and public

14,812

5.2%


35,955

9.4%

Others

16,456

5.9%


22,402

5.9%

Total net revenues

283,417

100.0%


381,144

100.0%

Net revenues from technology clients increased $18.7 million or 21.8% to $104.2 million in 2012 from $85.6 million in 2011. Net revenues from communications clients increased $30.2 million or 27.8% to $138.9 million in 2012 from $108.6 million in 2011. Net revenues from BFSI clients increased $21.7 million or 37.5% to $79.7 million in 2012 from $57.9 million in 2011. Net revenues from energy, transportation, and public sector clients increased $21.1 million or 142.7% to $36.0 million in 2012 from $14.8 million in 2011, which was largely due to recent public sector consulting and solution projects wins in various tier-2 and tier-3 cities in China. Net revenues from all other industries increased $5.9 million to $22.4 million in 2012 from $16.5 million in 2011 resulting from new project wins with a global retail client and a global human resources solutions client.

Net revenues by largest five clients

Net revenues from our largest five clients totaled $180.0 million or 47.2% of total net revenues in 2012 compared with $122.4 million or 43.2% in 2011.

Net revenues by pricing method

The following table shows our net revenues by pricing method.

US$ in thousands, except %

2011

%


2012

%

Time-and-expense basis

107,261

37.9%


142,474

37.4%

Fixed-price basis

172,695

60.9%


235,877

61.9%

Volume basis (BPO)

3,461

1.2%


2,793

0.7%

Total net revenues

283,417

100.0%


381,144

100.0%

Net revenues from time-and-expenses basis projects increased $35.2 million or 32.8% to $142.5 million in 2012 from $107.3 million in 2011. Net revenues from fixed-price basis projects increased $63.2 million or 36.6% to $235.9 million in 2012 from $172.7 million in 2011.

Cost of revenues, gross profit, and gross profit margin

Cost of revenues increased $70.4 million or 38.9% to $251.5 million in 2012 from $181.1 million in 2011 primarily due to service delivery employees and facilities added and more travel to enable and match the growth of our business.

Gross profit increased $27.3 million or 26.7% to $129.6 million in 2012 from $102.3 million in 2011. Gross profit margin decreased to 34.0% in 2012 from 36.1% in 2011 primarily due to (a) annual salary increases for delivery personnel effective January 2012, (b) more higher-end delivery employees hired starting from the fourth quarter 2011, and (c) expanded office facilities in several delivery centers, which were partly offset by more government subsidies recognized as a percentage of net revenues and favorable business mix and efficiency improvements.

Operating expenses

Operating expenses increased $18.9 million or 23.1% to $101.1 million in 2012 from $82.1 million in 2011 primarily due to higher salary and compensation expenses and depreciation and office expenses in connection with expansion in the number of employees and in facilities to support the business growth, plus annual salary increases for operations personnel effectively January 2012 or April 2012.

Excluding share-based compensation and amortization of intangible assets from acquisitions, the non-GAAP operating expenses (note 1) were $88.4 million or 23.2% of net revenues in 2012 compared with $70.9 million or 25.0% of net revenues in 2011. The decrease of operating expenses as a percentage of net revenues reflected our scale efficiencies realized.

Income from operations

Income from operations was $28.3 million in 2012 compared with $17.4 million in 2011 due to the factors explained above.

Non-GAAP income from operations (note 1) increased $8.5 million or 24.3% to $43.3 million in 2012 from $34.9 million in 2011.

Interest expense

Interest expense was $2.0 million in 2012 and $1.4 million in 2011. Interest expense in 2012 was incurred on short-term bank borrowings. Interest expense in 2011 included imputed interest of $0.7 million accrued on our convertible notes and $0.7 million of interest on short-term bank borrowings. The increase of interest expense was due to more short-term bank loans borrowed to fund our working capital needs.

Income taxes

Income tax expense increased to $4.4 million in 2012 from $0.3 million in 2011 resulting from the expiration of the tax exemptions and tax holidays in certain operating entities in China by the end of 2011. The actual effective tax rate was 16.1% for 2012 and 1.6% for 2011.

Net income

Net income increased $3.1 million or 16.2% to $22.1 million in 2012 from $19.0 million in 2011 due to the factors explained above.

Non-GAAP net income (note 1) increased $2.8 million or 8.2% to $37.1 million in 2012 from $34.3 million in 2011.

Earnings per ADS

Basic earnings per ADS were $0.39 in 2012 and $0.34 in 2011.

Diluted earnings per ADS were $0.38 in 2012 and $0.32 in 2011.

Non-GAAP diluted earnings per ADS (note 1) were $0.64 in 2012 and $0.57 in 2011.

Cash and Cash Flow

As of December 31, 2012, we had a cash balance of $116.6 million. Our net cash provided by operating activities in 2012 was $9.9 million. Our net cash used in investing activities in 2012 was $29.0 million, including capital expenditures of $20.6 million. Within the capital expenditures, $6.3 million related to the leasehold improvement of a new office in Beijing in 2012. In 2012, we borrowed $53.5 million of short-term bank loans to fund our growth and repaid $15.2 million of matured short-term bank loans.

Days sales outstanding or DSO was 157 days for 2012 and 150 days for 2011. DSO is calculated by dividing average accounts receivable, net of deferred revenues, by the period's gross revenues, and multiplying by the number of days in the period. The longer DSO in 2012 was mainly due to faster revenue growth from domestic China clients, especially the clients in BFSI and public sectors, who tend to have longer payment processes.

Outlook for the first quarter of 2013 and year 2013

For the first quarter 2013, iSoftStone expects to achieve the following targets:

  • Net revenues for the first quarter 2013 to be at least $93.8 million.
  • Net income for the first quarter 2013 to be at least $2.4 million.
  • Non-GAAP net income for the first quarter 2013 to be at least $5.4 million.
  • Non-GAAP diluted earnings per ADS for the first quarter 2013 to be at least $0.09, assuming 58.5 million average ADSs will be outstanding in the first quarter 2013. One ADS represents 10 ordinary shares.

For the year 2013, iSoftStone expects to achieve the following targets:

  • Net revenues in 2013 to be at least $465 million.
  • Net income in 2013 to be at least $28 million.
  • Non-GAAP net income in 2013 to be at least $41 million.
  • Non-GAAP diluted earnings per ADS in 2013 to be at least $0.68, assuming 60 million average ADSs will be outstanding in 2013. One ADS represents 10 ordinary shares.

The above quarterly and annual outlook for net income reflects an estimated effective income tax rate of 15%.

Non-GAAP measures

To supplement our financial results presented in accordance with U.S. generally accepted accounting principles ("GAAP"), we use various non-GAAP financial measures, which are adjusted from results based on U.S. GAAP to exclude share-based compensation, amortization of intangible assets from acquisitions, interest expense of convertible notes, changes in fair value of convertible notes derivatives, and changes in fair value of contingent consideration in business combinations. Reconciliations of our non-GAAP financial measures to our U.S. GAAP financial measures are shown in tables at the end of this earnings release, which provide more details about the non-GAAP financial measures.

Our non-GAAP financial information is provided as additional information to help investors compare business trends among different reporting periods on a consistent basis and to enhance investors' overall understanding of the historical and current financial performance of our continuing operations and our prospects for the future. Our non-GAAP financial information should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for or superior to U.S. GAAP results. In addition, our calculation of this non-GAAP financial information may be different from the calculation used by other companies, and therefore comparability may be limited.

Note 1

Our non-GAAP information (including non-GAAP operating expenses, income from operations, net income and diluted earnings per ADS) excludes share-based compensation, interest expense of convertible notes, change in fair value of convertible notes derivatives, changes in fair value of contingent consideration in connection with business combination, and amortization of intangible assets from acquisitions. For a reconciliation of our non-GAAP measures to our U.S. GAAP measures, please see the reconciliation tables at the end of this earnings release.

Conference Call on March 8, 2013

iSoftStone will host an earnings conference call and live webcast covering its fourth quarter and year 2012 financial results at 8:00 a.m. Eastern Standard Time (New York) on March 8, 2013, which is also 9:00 p.m. in Beijing and Hong Kong on March 8.

The dial-in details for the live conference call are:

U.S. toll-free

1 866 519 4004

U.K. toll-free

080 8234 6646

Norway toll-free

8001 0719

The Netherlands toll-free

0800 022 1931

China toll-free mobile

400 620 8038

China toll-free land line

800 819 0121

Hong Kong local

852 2475 0994

Hong Kong toll-free

800 930 346

U.S. toll

1 718 354 1231

International toll

+65 6723 9381

Conference ID

9769 5192

Participant password

ISS

A live webcast and archived webcast of the conference call will be available on the Investors section of iSoftStone's website at www.isoftstone.com. To join the webcast, please go to iSoftStone's website at least 15 minutes before the start of the call to register and download and install any necessary audio software.

A telephone replay of the call will be available about two hours after the conclusion of the conference call through 11:59 p.m. Eastern Standard Time on March 15, 2013. The dial-in details for the telephone replay are: 

Safe harbor statement

U.S. toll-free

1 855 452 5696

United Kingdom toll-free

0 808 234 0072

China toll-free mobile

400 120 0932

China toll-free land line

800 870 0205

Hong Kong toll-free

800 963 117

Singapore toll-free

800 616 2305

Japan toll-free

012 095 9034

International toll

+61 2 8199 0299

U.S. New York toll

1 646 254 3697

Conference ID

9769 5192



This news release contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include our preliminary unaudited results for the fourth quarter 2012 and the year 2012, our financial outlook for the first quarter and year 2013 and the continued success of our strategy (including the success of our focus on optimizing business mix, expanding key verticals, improving operational efficiencies and boosting capabilities in emerging technologies and domain expertise, and improving profit margin and operating cash flow), and our ability to make continued long-term investments, particularly in light of a challenging global economic environment and slowdown of the China and global economy.

Our forward-looking statements are not historical facts but instead represent only our belief regarding expected results and events, many of which, by their nature, are inherently uncertain and outside of our control. Our actual results and other circumstances may differ, possibly materially, from the anticipated results and events indicated in these forward-looking statements. Announced results for the fourth quarter and year 2012 are preliminary, unaudited, and subject to audit adjustment. In addition, we may not meet our financial outlook for the first quarter and year 2013, continue to execute our strategy, including expanding our business drivers, focusing on cash flow and margin improvement, and investing in technical competencies and domain expertise to support future growth, or otherwise grow our business in the manner planned, successfully complete planned acquisitions, strategic investments or joint ventures or recognize the anticipated benefits of our acquisitions, strategic investments or joint venture, on a timely basis or at all. Our clients may vary their purchasing patterns in response to the economic environment in Greater China and globally. In addition, other risks and uncertainties that could cause our actual results to differ from what we currently anticipate include: our ability to effectively manage our rapid growth; intense competition from China-based and international IT services companies; our ability to attract and retain sufficiently trained professionals to support our operations; and our ability to anticipate and develop new services and enhance existing services to keep pace with rapid changes in technology and in our selected industries. For additional information on these and other important factors that could adversely affect our business, financial condition, results of operations, and prospects, please see "Risk Factors" that begins on page 7 of our 2011 Annual Report on Form 20-F that we filed with the U.S. Securities and Exchange Commission on April 27, 2012, which can be found on our website at www.isoftstone.com and at www.sec.gov.

All projections (including our first quarter 2013 and year 2013 financial outlook) in this release are based on limited information currently available to us, which is subject to change. Although these projections and the factors influencing them will likely change, we undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Such information speaks only as of the date of this release.

About iSoftStone Holdings Limited

Founded in 2001, iSoftStone is a leading China-based IT services provider serving both greater China and global clients. iSoftStone provides an integrated suite of IT services and solutions, including consulting & solutions, IT services, and business process outsourcing services. The company focuses on industry verticals that include technology, communications, banking, financial services, insurance, energy, transportation, and public sectors.

iSoftStone's American depositary shares began trading on the New York Stock Exchange on December 14, 2010.

For more information, please visit www.isoftstone.com.

iSoftStone Holdings Limited
Mr. Jonathan Zhang
Chief Financial Officer
ir@isoftstone.com

Christensen

Mr. Tom Myers
tmyers@christensenir.com
Beijing +86 139 1141 3520

Mr. Victor Kuo
vkuo@christensenir.com
Beijing +86 10 5826 4939

www.isoftstone.com

 

iSoftStone Holdings Limited

Unaudited Condensed Consolidated Statement of Operations

(US dollars in thousands, except per share data)










Three months ended


Year ended


December 31


December 31


2011


2012


2011


2012

Revenues

87516


104681


288384


385666

Business tax

-1678


-462


-4967


-4522

Net revenues

85838


104219


283417


381144

Cost of revenues

-55323


-67303


-181121


-251540

Gross profit

30515


36916


102296


129604

Operating expenses:








    General and administrative expenses

-14793


-16670


-50768


-63279

    Selling and marketing expenses

-8466


-8902


-27685


-32855

    Research and development expenses

-985


-1301


-3684


-4951

Total operating expenses

-24244


-26873


-82137


-101085

Change in fair value of contingent consideration in connection with business combination

-4826


-477


-4969


-1119

Other (expenses) income

-147


424


324


-230

Government subsidies

299


629


1840


1110

Income from operations

1597


10619


17354


28280

Interest income

202


118


1118


775

Interest expense

-18


-865


-1424


-1966

Change in fair value of convertible notes derivatives

-


-


2832


-

Income before provision for income taxes and loss in equity method investments, net of income taxes

1781


9872


19880


27089

Income tax benefit (expense)

727


-1926


-319


-4370

Income after income tax before loss in equity method investments, net of income taxes

2508


7946


19561


22719

Loss in equity method investments, net of income tax

-223


-289


-565


-637

Net income

2285


7657


18996


22082

Less: Net (loss) income attributable to noncontrolling interest

-19


-41


151


-27

Net income attributable to iSoftstone Holdings Limited

2304


7698


18845


22109









Earnings per share (in US$)








    Basic

0.00


0.01


0.03


0.04

    Diluted

0.00


0.01


0.03


0.04

Earnings per ADS (in US$)








    Basic

0.04


0.14


0.34


0.39

    Diluted

0.04


0.13


0.32


0.38

Weighted average shares (in thousands)








    Basic

555647


567693


547144


564070

    Diluted

586067


576572


592082


582402

 

 

iSoftStone Holdings Limited

Unaudited Condensed Consolidated Statement of Comprehensive Income

(US dollars in thousands, except per share data)










Three months ended


Year ended


December 31


December 31


2011


2012


2011


2012

Net income

2285


7657


18996


22082

Other comprehensive income, net of tax of nil








Change in cumulative foreign currency translation adjustment

3139


1483


8865


2088

Comprehensive income

5424


9140


27861


24170

Less: comprehensive income (loss) attributed to the noncontrolling interest

3


-23


211


33

Comprehensive income attributed to iSoftstone Holdings Limited

5421


9163


27650


24137

 

iSoftStone Holdings Limited

Unaudited Condensed Consolidated Balance Sheets

(US dollars in thousands)






December


December


31, 2011


31, 2012





Cash

101196


116597

Restricted cash

1581


8743

Accounts receivable, net of allowance

152663


202202

Other current assets

23052


19772

    Total current assets

278492


347314

Property and equipment

55791


67768

Land use rights

3242


3202

Intangible assets

4688


5945

Goodwill

24597


26983

Other non-current assets

11246


15298

    Total assets

378056


466510





Accounts payable

15924


21895

Deferred revenues

8387


9693

Short-term borrowings

15094


54012

Other current liabilities

40454


43878

    Total current liabilities

79859


129478

Other non-current liabilities

3438


4048

    Total liabilities

83297


133526





iSoftStone Holdings Limited Shareholders' equity (note a)

293160


330073

Noncontrolling interest

1599


2911

    Total liabilities and equity

378056


466510





Note a: 




As of December 31, 2012, the number of ordinary shares issued and outstanding was 569,206,989.

iSoftStone Holdings Limited

Unaudited Condensed Consolidated Statements of Cash Flows

(US dollars in thousands)








Three months ended


Year ended


December 31


December 31


2011


2012


2011


2012

Cash flows from operating activities








   Net income 

2285


7657


18996


22082

Adjustments to reconcile net income to net cash provided by (used in) operating activities:








   Share-based compensation

3002


2268


9331


11120

   Depreciation of property and equipment

2166


2364


7012


9168

   Amortization of intangible assets

1434


1013


3432


3448

   Amortization of land use rights

30


18


30


72

   Provision (reversal) of allowance for doubtful accounts

849


-22


2438


209

   Loss on equity method investments

226


289


565


637

   Loss on disposal of property and equipment

57


50


313


208

   Changes in fair value for contingent consideration in connection with business combinations

4826


476


4969


1118

   Changes in fair value of convertible notes derivatives

-


-


-2832


-

   Imputed interest expense in connection with convertible notes

-


-


654


-

Changes in operating assets and liabilities:








   Accounts receivable

-11959


13223


-46447


-47135

   Other assets

-149


4802


-10694


-372

   Accounts payable

4371


3925


1607


1458

   Other liabilities

3232


7433


10163


7924

Net cash provided by (used in) operating activities

10370


43496


-463


9937

Cash flows from investing activities








   Purchase of property and equipment

-1769


-4690


-44312


-20560

   Purchase of intangible assets

0


0


-107


0

   Payment of cost of long term investments

0


-103


-12036


-1532

   Proceeds from sales of long-term investments

270


0


270


2413

   Consideration paid for business acquisitions 

-1884


0


-5022


-2155

   Consideration paid for acquiring of noncontrolling interest

0


0


0


-9

   Restricted cash

-52


-8086


1374


-7161

Net cash used in investing activities

-3435


-12879


-59833


-29004

Cash flows from financing activities








   Proceeds from sale of ordinary shares

0


0


211


0

   Payment of IPO Expense

0


0


-1485


0

   Proceeds from exercise of options

780


7


4031


1874

   Capital contribution from noncontrolling interest shareholder

0


0


350


436

   Proceeds from short-term borrowings

14941


29229


14941


53486

   Payments of short-term borrowings

0


-13614


-37627


-15199

   Deferred and contingent consideration paid for business acquisitions

187


-1697


-2184


-5677

Net cash provided by (used in) financing activities

15908


13925


-21763


34920

Effect of exchange rate changes

486


-404


2175


-452

Net increase (decrease) in cash and cash equivalents

23329


44138


-79884


15401

Cash at beginning of period

77867


72459


181080


101196

Cash at end of period

101196


116597


101196


116597

 

iSoftStone Holdings Limited

Reconciliation of Non-GAAP financial measures to comparable GAAP measures

(US dollars in thousands, except per share data)













1.    Reconciliation of Non-GAAP financial operating expenses, income from operations and net income to comparable GAAP measures














Three months ended


Three months ended


December 31, 2011


December 31, 2012


GAAP


Adjustments


Non-GAAP


GAAP


Adjustments


Non-GAAP

Operating expenses

-24244


3,529 (a) 


-20715


-26873


2,727 (c) 


-24146

Income from operations

1597


8,914 (a)(b) 


10511


10619


3,542 (c)(d) 


14161

Net income 

2285


8,914 (a)(b) 


11199


7657


3,542 (c)(d) 


11199


























Year ended


Year ended


December 31, 2011


December 31, 2012


GAAP


Adjustments


Non-GAAP


GAAP


Adjustments


Non-GAAP

Operating expenses

-82137


11,241 (e) 


-70896


-101085


12,735 (h) 


-88350

Income from operations

17354


17,502 (e)(f) 


34856


28280


15,035 (h)(i) 


43315

Net income

18996


15,324 (e)(f)(g) 


34320


22082


15,035 (h)(i) 


37117













Notes:

(a)    Adjustments to exclude share-based compensation of $2,902 and amortization of intangible assets from acquisitions of $627 from the unaudited condensed consolidated statements.

(b)    Adjustments to exclude share-based compensation of $100, amortization of intangible assets from acquisitions of $459 and change in fair value of contingent consideration connection with business combinations of $4,826 from the unaudited condensed consolidated statements.

(c)    Adjustments to exclude share-based compensation of $2,143 and amortization of intangible assets from acquisitions of $584 from the unaudited condensed consolidated statements.

(d)   Adjustments to exclude share-based compensation of $123, amortization of intangible assets arising from acquisitions of $215 and change in fair value of contingent consideration in connection with business combinations of $477 from the unaudited condensed consolidated statements.

(e)    Adjustments to exclude share-based compensation of $9,024 and amortization of intangible assets from acquisitions of $2,217 from the unaudited condensed consolidated statements.

(f)     Adjustments to exclude share-based compensation of $307, amortization of intangible assets arising from acquisitions of $985 and change in fair value of contingent consideration in connection with business combinations of $4,969 from the unaudited condensed consolidated statements.

(g)   Adjustments to exclude interest expenses of convertible notes of $654 and change in fair value of convertible notes derivatives of $(2,832) from the unaudited condensed consolidated statements.

(h)   Adjustments to exclude share-based compensation of $10,609 and amortization of intangible assets from acquisitions of $2,126 from the unaudited condensed consolidated statements.

(i)     Adjustments to exclude share-based compensation of $508, amortization of intangible assets arising from acquisitions of $673 and change in fair value of contingent consideration in connection with business combinations of $1,119 from the unaudited condensed consolidated statements.

 

2.    Reconciliation of diluted EPS to Non-GAAP diluted EPS 

















































































Three months ended December 31, 2011


Three months ended December 31, 2012

































GAAP 




Non-GAAP 


GAAP 




Non-GAAP 

































measures


Adjustments


measures


measures


Adjustments

measures
































Weighted average ordinary shares outstanding used in computing diluted EPS (in thousands)

586067


0


586067


576572


0


576,572(a)
































Diluted earnings per share (in US$)

0.001




0.02


0.01




0.02
































Diluted earnings per ADS (in US$)

0.04




0.19


0.13




0.19











































































Note:











































(a)  In the earning release for the third quarter 2012, we estimated 58 million average ADSs or 580 million shares will be outstanding in the
fourth quarter 2012. The difference with the actual number of 576.6 million shares was primarily due to the delay of new option grants and
the less impact of existing stock option resulting from a lower stock price than our original estimates.













































Year ended December 31, 2011


Year ended December 31, 2012

































GAAP 




Non-GAAP 


GAAP 




Non-GAAP 

































measures


Adjustments


measures


measures


Adjustments


measures
































Weighted average ordinary shares outstanding used in computing diluted EPS (in thousands)

592082


3,458(a)


595540


582402


0


582402
































Diluted earnings per share (in US$)

0.03




0.06


0.04




0.06
































Diluted earnings per ADS (in US$)

0.32




0.57


0.38




0.64











































































Note:











































(a)  The adjustments represent addition of impact of convertible notes assumed to have been converted into ordinary shares at the beginning of the period (or at time of issuance, if later).

SOURCE iSoftStone Holdings Limited



RELATED LINKS
http://www.isoftstone.com

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