AsiaInfo-Linkage Reports Third Quarter 2010 Financial Results

BEIJING and SANTA CLARA, Calif., Nov. 2, 2010 /PRNewswire-Asia-FirstCall/ -- AsiaInfo-Linkage, Inc. (Nasdaq: ASIA) ("AsiaInfo-Linkage," the "Company," "we," "us" and "our"), a leading provider of communications software solutions and IT security products and related services, today announced financial results for the third quarter of 2010.

"We delivered solid results in our first quarter of consolidated reporting," said AsiaInfo-Linkage's President and Chief Executive Officer Steve Zhang.  "Full integration with Linkage is progressing according to plan and helping us to achieve new synergies and realize cross-selling opportunities.  At the same time, we remain focused on providing high-quality solutions and services to China's telecom carriers, highlighted by a recent contract win to develop convergent billing for Beijing Mobile.  On the international expansion front, this quarter we announced our entrance into the Southeast Asian market with a deal to provide a business intelligence system for the Cambodian telecom carrier, Mfone. This is a positive stride forward as we work with a long-term vision of gaining market share abroad. We are also optimistic about continued market share gains in new verticals such as the domestic cable software solutions market with two new billing and customer relationship management system contracts."

Third Quarter 2010 Financial Results

On July 1, 2010, AsiaInfo Holdings, Inc. ("AsiaInfo") completed its merger with IT software and solutions provider Linkage Technologies International Holdings Limited through the acquisition of 100% of the outstanding share capital of its wholly-owned subsidiary, Linkage Technologies Investment Limited ("Linkage") and was renamed AsiaInfo-Linkage, Inc. Starting in this quarter, AsiaInfo-Linkage's financial statements consolidated the operating results and financial position of Linkage and its consolidated subsidiaries.

Total revenues for the third quarter of 2010 were US$121.7 million, an increase of 91.5% year-over-year and 82.0% sequentially. Meeting guidance, net revenue (non-GAAP) for the third quarter of 2010 was US$112.8 million, an increase of 85.3% year-over-year and 72% sequentially. Our revenues for the third quarter of 2010 are not comparable to those of prior periods due to the merger with Linkage and we are not able to separately present the portion of revenues in this quarter contributed by AsiaInfo's historical business and Linkage's historical business as a result of our full integration strategy.  

Gross margin for the third quarter of 2010 was 43.9%, compared to 54.6% in the year-ago period and 59.4% in the previous quarter. Gross margin as a percentage of net revenue (non-GAAP)(2), which excludes amortization of intangibles related to the Linkage merger, was 51.8% in the third quarter of 2010, compared to 57.0% in the year-ago period and 60.6% in the previous quarter. The year-over-year and sequential decreases in gross margin (non-GAAP) primarily reflected the Linkage merger, as the Company deployed more of its R&D employees into clients service teams, resulting in relative higher cost of revenues, but lower R&D expenses.

In the third quarter of 2010, the telecom solutions business unit, previously called the AsiaInfo Technologies business unit and renamed after the merger with Linkage, which focuses on telecommunications software and services, contributed 90.8% and 92.2% to total revenue and net revenue (non-GAAP), respectively.  Total revenue for the telecom solution business unit increased 110.2% year-over-year and 86.3% sequentially to US$110.5 million.  Net revenue (non-GAAP) for the telecom solution business unit increased 102.1% year-over-year and 78.8% sequentially to US$103.9 million.  The increase in revenue was mainly attributable to the Linkage merger.

In the third quarter of 2010, the security business unit, previously called the Lenovo-AsiaInfo business unit and renamed after the merger with Linkage, which focuses on IT security products and services, contributed 9.2% to total revenue and 7.8% to net revenue (non-GAAP). Total revenue for the security business unit increased 2.3% year-over-year and 48.4% sequentially to US$11.2 million. Net revenue (non-GAAP) for the security business unit decreased 6.4% year-over-year and increased 18.8% sequentially to US$8.8 million.  The slight year-over-year decrease in net revenue (non-GAAP) was primarily the result of a decrease in large government contracts in the PRC this year and the sequential increase was partially due to seasonality, as sales in the security business unit are typically stronger in the second half of each year. Please refer to the end of this press release for condensed segmented financial results for AsiaInfo-Linkage's two business units.

Total operating expenses increased 40.4% year-over-year and 36.6% sequentially to US$34.4 million. Sales and marketing expenses increased 74.0% year-over-year and 80.7% sequentially to US$19.5 million.  The increase in expense was mainly attributable to the Linkage merger.  General and administrative expenses increased 5.9% year-over-year and decreased 13.1% sequentially to US$4.0 million. The sequential decrease in G&A expenses were mainly the result of a US$1.6 million credit to provisions for doubtful accounts resulting from the successful collection in this quarter of a previous doubtful trade receivable. Research and development expenses increased 0.3% year-over-year and 11.2% sequentially to US$10.9 million. The increase in R&D expenses is in line with the Company's long-term growth strategy to develop best-of-class products, solutions and upgrades to meet the demand of customers.

Income from operations for the third quarter of 2010 was US$19.1 million, an increase of 87.1% year-over-year and 31.2% sequentially. The increase in income from operations was mainly attributable to the Linkage merger.  Operating margin of total revenue was 15.7% for the third quarter of 2010, compared to 16.0% in the year-ago period and 21.7% in the previous quarter. Operating margin of net revenue (non-GAAP)(3), which excludes amortization of intangibles related to the Linkage merger, was 26.2% for the third quarter of 2010, compared to 16.8% in the year-ago period and 22.2% in the previous quarter.

Other income for the third quarter of 2010 was US$0.5 million, an increase of 2.1% year-over-year from US$0.5 million and a decrease of 62% from US$1.4 million in the previous quarter.

In the third quarter of 2010, AsiaInfo-Linkage recorded net income attributable to AsiaInfo-Linkage, Inc. of US$16.5 million, or US$0.22 per basic share, compared to US$9.1 million, or US$0.20 per basic share, in the year-ago period and US$13.9 million, or US$0.29 per basic share, in the previous quarter.

Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP)(4) was US$29.6 million in the third quarter of 2010 or US$0.40 per basic share. Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) during the previous year was US$13 million or US$0.29 per basic share. Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) in the previous quarter was US$16.7 million or US$0.35 per basic share. Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) increased 128% year-over-year and 76.9% sequentially.

As of September 30, 2010, AsiaInfo-Linkage had cash and cash equivalents and restricted cash totaling US$191.5 million and short-term investments totaling US$42.4 million. Operating cash flow in the third quarter of 2010 was a net outflow of US$1.6 million.

Business Outlook

AsiaInfo-Linkage expects fourth quarter 2010 net revenue (non-GAAP) to be in the range of US$119 million to US$123 million. AsiaInfo-Linkage expects fourth quarter 2010 net income attributable to AsiaInfo-Linkage, Inc. per basic share (non-GAAP) to be in the range of US$0.40 to US$0.43.

(1) Net revenue (non-GAAP), a non-GAAP measure, represents total revenue net of third-party hardware costs. A reconciliation of net revenue (non-GAAP) to GAAP revenue is provided at the end of this press release.

(2) Gross margin of net revenue (non-GAAP) is calculated by dividing gross profit, excluding amortization of acquired intangible assets related to the Linkage merge, by net revenue (non-GAAP). A reconciliation of gross margin of net revenue (non-GAAP) to GAAP gross margin is provided at the end of this press release.

(3) Operating margin of net revenue (non-GAAP) is calculated by dividing operating income, excluding the amortization of intangible assets related to the Linkage merger, by net revenue (non-GAAP).  A reconciliation of operating margin of net revenue (non-GAAP) to GAAP operating margin is provided at the end of this press release.

(4) Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) and net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) per share measures exclude share-based compensation expenses, amortization of acquired intangible assets, impairment loss on investment, non-recurring merger related expenses and after-tax dividend income. Reconciliations of net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) to GAAP net income attributable to AsiaInfo-Linkage, Inc., and of net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) per share to GAAP net income attributable to AsiaInfo-Linkage, Inc. per share, are provided at the end of this press release.

Third Quarter 2010 Conference Call Details

AsiaInfo-Linkage management will hold an earnings conference call at 5:00 p.m. Pacific Time / 8:00 p.m. Eastern Time on November 2, 2010 (8:00 a.m. Beijing/Hong Kong Time on November 3, 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:

The passcode for the call is 47953107.

A replay of the call will be available until 11:00 a.m. Eastern Time on November 10, 2010 by dialing one of the following numbers:

The passcode for the replay is 95652809.

Additionally, a live and archived web cast of this call will be available on the Investor Relations section of the AsiaInfo-Linkage web site at www.asiainfo-linkage.com.

About AsiaInfo-Linkage, Inc.

AsiaInfo-Linkage, Inc. (NASDAQ: ASIA) is a leading provider of high-quality software solutions and IT services in China's telecommunications industry. Following the merger between AsiaInfo and Linkage on July 1, 2010, AsiaInfo-Linkage leverages both AsiaInfo's and Linkage's leading market positions and complementary customer bases to provide a robust, comprehensive service offering primarily to China's telecom operators. AsiaInfo-Linkage's world-class R&D capabilities and extensive base of highly skilled engineers provide best-of-class solutions to help customers differentiate themselves from the competition.

For more information about AsiaInfo-Linkage, please visit www.asiainfo-linkage.com.

Reconciliation of non-GAAP Measures

This earnings release presents the following "non-GAAP financial measures" as defined by applicable U.S. securities regulations. The presentation of these non-GAAP financial measures is not meant to be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. The non-GAAP financial measures are provided as additional information to help both management and investors compare business trends among different reporting periods on a consistent and more meaningful basis and enhance investors' overall understanding of the Company's current financial performance and prospects for the future.  These non-GAAP measures have limitations, however, because they do not include all items of income and expenses that impact the Company's operations.  Management compensates for these limitations by also considering the Company's GAAP results.  The non-GAAP financial measures the Company uses are not prepared in accordance with, and should not be considered an alternative to measurements required by GAAP and should not be considered measures of the Company's liquidity.  Pursuant to relevant regulatory requirements, we are providing the following reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures.  

(1) Net revenue (non-GAAP)

AsiaInfo-Linkage's net revenue (non-GAAP) represents total revenue net of hardware costs that are passed through to our customers. We believe total revenues net of hardware costs more accurately reflects our core business, which is the provision of software solutions and services, and provides transparency to our investors. It is also the same measure used by our management to evaluate the competitiveness and development of our business.

(2) Gross margin (non-GAAP)

Gross margin (non-GAAP) is calculated by dividing gross profit, excluding amortization of acquired intangible assets related to Linkage merger, by net revenue (non-GAAP). We believe that this non-GAAP financial measure provides meaningful supplemental information regarding our performance by excluding certain expenses and income that may not be indicative of our operating performance. Management uses gross margin (non-GAAP) to gain a better understanding of the Company's comparative operating performance from period-to-period and as a basis of planning and forecasting future periods. Management believes this non-GAAP measure, when read in conjunction with the Company's GAAP gross margin and other GAAP financial metrics, provides useful information to investors by offering: a) the ability to make more meaningful period-to-period comparisons of the Company's on-going operating results; b) the ability to better identify trends in the Company's underlying business and perform related trend analysis; c) a better understanding of how management plans and measures the Company's underlying business; and d) an easier way to compare the Company's most recent results of operations against investor and analyst financial models.

(3) Operating margin (non-GAAP)

Operating margin of net revenue (non-GAAP) is calculated by dividing operating income, excluding the amortization of intangible assets related to Linkage merger, by net revenue (non-GAAP). We believe that this non-GAAP financial measure provides meaningful supplemental information regarding our performance by excluding certain expenses and income that may not be indicative of our operating performance. Management uses the operating margin (non-GAAP) measure to gain a better understanding of the Company's comparative operating performance from period-to-period and as a basis of planning and forecasting future periods. Management believes this non-GAAP measure, when read in conjunction with the Company's GAAP operating margin and other GAAP financial metrics, provides useful information to investors by offering: a) the ability to make more meaningful period-to-period comparisons of the Company's on-going operating results; b) the ability to better identify trends in the Company's underlying business and perform related trend analysis; c) a better understanding of how management plans and measures the Company's underlying business; and d) an easier way to compare the Company's most recent results of operations against investor and analyst financial models.

(4) Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP)

Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) excludes share-based compensation expenses, amortization of acquired intangible assets, impairment loss on investment, non-recurring merger related expenses and after-tax dividend income. We believe that this non-GAAP financial measure provides meaningful supplemental information regarding our performance by excluding certain expenses and income that may not be indicative of our operating performance. Management uses the net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) measure to gain a better understanding of the Company's comparative operating performance from period-to-period and as a basis of planning and forecasting future periods. Management believes the Company's net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) measure, when read in conjunction with the Company's GAAP net income measure and other GAAP financial metrics, provides useful information to investors by offering:  a) the ability to make more meaningful period-to-period comparisons of the Company's on-going operating results; b) the ability to better identify trends in the Company's underlying business and perform related trend analysis; c) a better understanding of how management plans and measures the Company's underlying business; and d) an easier way to compare the Company's most recent results of operations against investor and analyst financial models.

(5) Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) per basic share

Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) per basic share is calculated by dividing net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) (which as discussed above excludes share-based compensation expenses, amortization of acquired intangible assets, impairment loss on investment, non-recurring merger related expenses and after-tax dividend income) by the same number of weighted average shares outstanding used in the computation of net income per basic share. Management believes that net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) per basic share, when used in conjunction with the Company's GAAP net income attributable to AsiaInfo-Linkage, Inc. per basic share, provides useful information to investors for the same reasons discussed above regarding net income attributable to AsiaInfo-Linkage, Inc (non-GAAP). In addition, net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) per basic share allows investors to evaluate the Company's operating performance from period to period on a per share basis, thus providing a useful basis for assessing the Company's value on a per share basis.

Cautionary Note Regarding Forward-Looking Statements

The information contained in this document is as of November 2, 2010. AsiaInfo-Linkage assumes no obligation to update any forward-looking statements contained in this document as a result of new information or future events or developments.

This document contains forward-looking information about AsiaInfo-Linkage's operating results and business prospects that involve substantial risks and uncertainties. You can identify these statements by the fact that they use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Among the factors that could cause actual results to differ materially are the following: government telecommunications infrastructure and budgetary policy in China; our ability to maintain our concentrated customer base; our ability to successfully integrate the business of Linkage into ours; the long and variable billing cycles for our products and services that can cause our revenues and operating results to vary significantly from period to period; our ability to meet our working capital requirements; our ability to retain our executive officers; our ability to attract and retain skilled personnel; potential liabilities we are exposed to because we extend warranties to our customers; risks associated with cost overruns and delays; our ability to develop or acquire new products or enhancements to our software products that are marketable on a timely and cost-effective basis; our ability to adequately protect our proprietary rights; the competitive nature of the markets we operate in; and political and economic policies of the Chinese government. A further list and description of these risks, uncertainties, and other matters can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, and in our reports on Forms 10-Q and 8-K filed with the United States Securities and Exchange Commission and available at www.sec.gov.

For more information about AsiaInfo-Linkage, please visit www.asiainfo-linkage.com.

SOURCE AsiaInfo-Linkage, Inc.