Steve Zhang: First of all, for our China Telecom wins, probably we only derived 10% of the contract value in our third quarter. We haven’t start booking the revenue yet. And so the China Unicom, since we haven’t signed the official contract yet, we cannot book any revenue.
Karl Keirstead (Kaufman Brothers): And yet in the third quarter you mentioned that China Telecom was one of the main growth drivers, it must have been some existing deals that contributed to your growth. Could you talk a little bit about what drove Telecom so strongly in the third quarter?
Steve Zhang: For our China Telecom, we signed a deal in the second quarter to support their OCS deployment in Zhejiang province and Zhejiang is probably the second largest in terms of subscriber in the whole China Telecom group. So we are very close to get that project on line in production in the third quarter. So we are booking the revenues of that contract. And we are also helping another subsidiary of China Telecom, Xinjiang Telecom, to get ready their CRM system to support the future CDMA business. So one of the major reason our China Telecom revenue grew very quickly in the third quarter was we were starting to booking the contracts we signed in the first quarter and the second quarter.
Karl Keirstead (Kaufman Brothers): I think you mentioned in the past that your big contract win earlier with China Mobile in the Henan province, you would cut over subscribers in the Novembers 2008 timeframe and that would give you a revenue boost. Is that still on target?
Steve Zhang: Yes, that’s still on target. We expect some time in November we will cut our one city in Henan province and basically once the first city is successfully cut over, hopefully we can finish the cut over within the next two months.
Brendan Barnicle (Pacific Crest Securities): I am trying to get a better sense on the profitability around the new contracts. You have been able to improve your margins considerably over the last couple of years. As you are planning for next year, are we going to be able to see that same level of margin improvement or should we expect may be something more in the 100 to 200 basis point type range?
Steve Zhang: Over the last several years we have been improving our margins. I think throughout the margin impairment over the last several years was driven the economies of scale and also better management on the cost side. I think going forward you’ll probably see our margin still improve, but not on the scale probably you have seen in the last several quarters, probably we’ll continue. Our long term margin target is 15%. I believe this year on a yearly basis our margin is probably between 11% to 12% and next year probably we’ll see another – while we don’t give the guidance, but we’ll continue to try and make our effort to improve our margins.
Brendan Barnicle (Pacific Crest Securities): And that 15% target, how many years do you think it takes until you get to that level, what would you project right now?
Steve Zhang: Probably, another two to three years.
Brendan Barnicle (Pacific Crest Securities): As you are also preparing for these new contracts, can you give us a little insight on how the hiring is going and how quickly you will be ramping, hiring in Q4?
Steve Zhang: Yes, I think I mentioned in the last quarter we see some challenge recruiting enough people. In the third quarter, we successfully added 250 people on our payroll and as we are looking at quarter four we expect another 150 people on our payroll.
Brendan Barnicle (Pacific Crest Securities): And the new contracts that you are signing as they benefit revenue and you project in the guidance, are they one-time in nature of should we expect these to be recurring sources of revenue?
Steve Zhang: We only recognize a very small percentage of the revenue in the third quarter and so going forward we will start recognizing the revenue we recently announced. And as we are deploying those new projects, we are getting requirements coming. So already are starting to negotiating follow-on contracts to meet our demand.
Brendan Barnicle (Pacific Crest Securities): You’ve looked at these follow-on contracts, and you think about those follow-on contracts now, did they tend to be as big or bigger than the first year’s contract or are they smaller and they diminish over time?
Steve Zhang: I think the follow-on contracts it’s very difficult to estimate a size yet since it’s basically new requirements coming in to implement new pricing plans, new bundled services, and I think it’s too early to predict the contract size because we are still trying to figure out the scope of the work.
Brendan Barnicle (Pacific Crest Securities): What percentage of these new contract wins is currently in deferred revenue and what percentage is still sort of off balance sheet?
Eileen Chu: We don’t give a breakdown on that. The new contracts we announced with China Telecom, we have recognized 10% of the revenue in this quarter. So, it is reasonable to assume that the bulk of it is sitting in our deferred revenue right now.
Brendan Barnicle (Pacific Crest Securities): As I think about the deferred revenue as a whole and not just the recent contracts but all the historical contracts as well, is it safe to assume that about 20% of deferred revenue reflects the total contract value that’s sitting off balance sheet or is there another number that we can use around that to get a best chance of how this can relate?
Eileen Chu: We don’t give breakdown on that, but when we sign a contract, that is a sales order to us, and that is not reflected in our deferred revenues. When we record it in deferred revenue that’s the time when we collect the cash amount in advance of us completing any work at all. So that will be sitting in our deferred revenue. Right now the amount that we have collected and reflected in our deferred revenue will be the contracts that we have collected the money but we haven’t delivered the service. And if you look at the standard contracts, we always collect a certain percentage as advance payment. And then when we deliver the project then we collect and another amount as the progress billing. So, it is really a rolling process. It is difficult for me to tell you exactly how many percent of it is in the deferred revenue right now.
Brendan Barnicle (Pacific Crest Securities): Is there a way to get a sense of how big that off balance sheet piece is and relative to the deferred revenue, if it’s 2X or 1X or three times or something like that?
|
