VanceInfo Reports Record Results in Fourth Quarter and Full Year 2010

BEIJING, Feb. 28, 2011 /PRNewswire-Asia/ -- VanceInfo Technologies Inc. (NYSE:VIT) ("VanceInfo" or the "Company"), an IT service provider and one of the leading offshore software development companies in China, today reported its unaudited financial results for the fourth quarter and full year ended December 31, 2010.

Fourth Quarter and Full Year 2010 Financial and Operating Highlights

• Net revenues for the fourth quarter of 2010 increased to $59.6 million, up 37.8 % from $43.3 million for the fourth quarter of 2009.
• Gross profit for the fourth quarter of 2010 was $22.3 million, up 36.5% from $16.3 million for the same period in 2009.
• Diluted earnings per share ("EPS") and Non-GAAP diluted EPS(1) were $0.19 and 0.22 for the fourth quarter of 2010, respectively.
• Net revenues for the full year 2010 were $211.6 million, up 42.9% from 2009.
• Operating margin for the full year 2010 was 15.1%, compared to 15.5% for 2009. Non-GAAP operating margin(1) for the full year 2010 was 17.5%, compared to 17.9% for 2009.
• Net income for the full year 2010 was $29.9 million, up 38.8% from 2009.  Non-GAAP net income(1) for the full year 2010 was $34.9 million, up 38.9% from 2009.  Diluted EPS and non-GAAP diluted EPS(1)  for the full year 2010 were $0.69 and $0.80, respectively.  
• Employees totaled 11,044, including 9,827 billable professionals, as of December 31, 2010.

"We are pleased that VanceInfo has concluded 2010 with a record quarter," said Chris Chen, Chairman and Chief Executive Officer of VanceInfo. "In 2010 we have invested in strengthening our capabilities, diversifying our businesses and enhancing our management. We will continue those efforts in 2011.  With adaptive business strategies and solid execution, we believe we will bring greater success and value to our clients and shareholders in the coming years."

Fourth Quarter 2010 Financial Results

Due to the seasonal nature of its business, the Company presents financial analysis on a year-over-year basis between the fourth quarter of 2010 and the fourth quarter of 2009 as in the following paragraphs.

Net Revenues

Net revenues were $59.6 million for the fourth quarter of 2010, up 37.8% from $43.3 million for the fourth quarter of 2009. The increase in net revenues was driven by diversified growth across all major service lines and geographic markets.

Net Revenues by Service Lines

The Company provides three broad sets of services: R&D Outsourcing Services, IT Services and Other Solutions & Services. R&D Outsourcing Services consist of research & development service line and globalization & localization service line. IT Services consist of enterprise solutions, application development & maintenance ("ADM"), and quality assurance & testing ("Testing") service lines. Other Solutions & Services consist of business process outsourcing ("BPO") and system integration ("SI") services and other solutions.  

Net revenues from R&D Outsourcing Services accounted for 57.8% of the total revenues during the fourth quarter of 2010 and grew 21.3% compared to the fourth quarter of 2009. Net revenues from IT Services represented 40.1% of the revenues, up 74.2% from the same period of 2009. The growth in IT Services has been fueled by continued expansion in ADM and Testing businesses with existing clients and fast increase of new customers.

Net Revenues by Geographic Markets

Based on the location of our clients' headquarters, Greater China (including mainland China, Hong Kong and Taiwan) is the Company's largest geographic market, accounting for $28.2 million or 47.3% of the net revenues in the fourth quarter of 2010, followed by 31.7% from clients headquartered in the United States, 15.3% in Europe and 5.1% in Japan.  The strong increase in Greater China business as compared to the fourth quarter of 2009 was due to continued growth from most major accounts in the region and the successful additions of new customers from diversified verticals.

Measuring the Company's revenues by geographic markets based on the location of the contract signing entities, rather than the location of the clients' headquarters, Greater China accounted for 73.6% of the net revenues in the fourth quarter of 2010, while the United States accounted for 20.9% and Japan for 3.5% in the same period.

Largest Clients

Revenues from the top five clients totaled 54.0% of net revenues for the fourth quarter of 2010, compared to 56.9% for the fourth quarter of 2009.  The reduced concentration reflects encouraging growth from a broader client base.

Gross Profit and Gross Margin

Gross profit for the fourth quarter of 2010 was $22.3 million, an increase of 36.5% from $16.3 million for the fourth quarter of 2009. Gross margin was 37.4% for the fourth quarter of 2010 as compared to 37.7% for the same period in 2009.  The slight margin decline reflects mainly the rising wage pressure during 2010.

Operating Expenses

Selling, general and administrative expenses totaled $15.3 million for the fourth quarter of 2010, up 52.1% from $10.0 million a year ago. The increase in selling, general and administrative expenses was due to enhanced sales efforts, the buildup of centers of excellence, additional investments in office expansion, staff training and recruitment of more management talents.    

Operating Income and Operating Margin

Operating income for the fourth quarter of 2010 was $9.0 million, up 24.5% from $7.2 million for the fourth quarter of 2009. Operating margin was 15.0% for the fourth quarter of 2010, compared to 16.6% for the fourth quarter of 2009. Non-GAAP operating margin(1) was 17.1% for the fourth quarter of 2010, compared to 19.4%(2) for the year-ago quarter. The margin decline was primarily attributable to the higher operational expenses as discussed above.    

Provision for Income Taxes

The provision for income taxes was $0.4 million for the fourth quarter of 2010, compared to $0.7 million for the fourth quarter of 2009. The lower effective income tax rate reflects the tax rate changes before and after the year end in calculating the deferred income taxes and is not indicative of the Company's 2011 income tax rate.

Net Income and EPS

Net income for the fourth quarter of 2010 was $8.4 million, up 26.2% from $6.7 million for the fourth quarter of 2009. Net margin was 14.1% for the fourth quarter of 2010, compared to 15.4% for the same period in 2009.

Non-GAAP net income(1) was $9.7 million for the fourth quarter of 2010, up 22.6% from $7.9(2) million for the fourth quarter of 2009. Non-GAAP net margin(1) was 16.2% for the fourth quarter of 2010, compared to 18.2%(2) for the same period in 2009.  

Diluted EPS was $0.19 for the fourth quarter of 2010, compared to $0.16 for the fourth quarter of 2009. Non-GAAP diluted EPS(1) was $0.22 for the fourth quarter of 2010, compared to $0.18(2) for the fourth quarter of 2009.

The non-GAAP measures and related reconciliations to GAAP measures are described in the accompanying section of "About Non-GAAP Financial Measures" and the accompanying table of "Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures."

Cash and Cash Flow

As of December 31, 2010, VanceInfo had cash and cash equivalents, term deposits and short-dated investments(3) totaling $181.7 million. Operating cash flow in the fourth quarter of 2010 was a net inflow of approximately $7.5 million. Capital expenditure totaled $3.3 million in the fourth quarter. 

Days sales outstanding ("DSO") was 119 days (4) for the fourth quarter of 2010 and 118 days(4) for the full year 2010.

Full Year 2010 Financial Results

Net Revenues

Net revenues for the year 2010 were $211.6 million, up 42.9% from $148.1 million in 2009.  

Net Revenues by Service Lines

Largest Clients

Revenues from the top five clients totaled 55.5% of the Company's net revenues in 2010, compared to 56.3% in 2009.

Gross Profit and Gross Margin

Gross profit for the year 2010 was $78.6 million, an increase of 40.6% from $55.9 million in 2009. Gross margin was 37.1% for the year 2010, compared to 37.8% for 2009.  The margin decline reflects primarily the tail effect of the pricing adjustments from certain large U.S. customers since July 2009, the expansion of U.S. onshore delivery team as well as the rising wage pressure in 2010.

Operating Expenses, Operating Income and Operating Margin

Selling, general and administrative expenses were $51.9 million for the year 2010, up 49.5% from $34.7 million in 2009. Operating income for the year 2010 was $31.9 million, up 39.3% from $22.9 million for 2009. Operating margin was 15.1% in 2010, compared with 15.5% in 2009. Non-GAAP operating margin(1) was 17.5% for 2010, compared with 17.9%(2) for 2009.

Net Income and EPS

Net income for the year 2010 was $29.9 million, up 38.8% from $21.5 million for 2009.  Net margin was 14.1% in 2010, compared to 14.5% in 2009.  Non-GAAP net income(1) was $34.9 million for the year 2010, up 38.9% from $25.1(2) million for 2009. Non-GAAP net margin(1) was 16.5% for the year 2010, compared to 17.0%(2) for 2009.  

Diluted EPS for the year 2010 was $0.69, up from $0.52 for 2009.  Non-GAAP diluted EPS(1) was $0.80 for the year 2010, up from $0.60⁽²⁾ for 2009.

Recent Developments

Acquisition of Remaining Equity in Viatt

As disclosed previously, in February 2010, VanceInfo made a loan of approximately $0.4 million, which was convertible into a 20% stake in Beijing Viatt Information Technology Co. Ltd, or Viatt, a China-based company providing IT outsourcing services to Chinese domestic financial institutions. In January 2011, VanceInfo acquired 100% equity interest in Viatt. Under the terms of the acquisition agreement, VanceInfo paid an initial consideration of approximately $1.5 million in cash. Contingent consideration will be paid based on Viatt's financial performance in 2011 and 2012. The acquisition is expected to strengthen VanceInfo's position in China's domestic financial services sector. Over 80 professionals of Viatt joined the Company in connection with the transaction.

Appointment of Executive Vice Chairman of the Board

On February 24, 2011, VanceInfo's board of directors appointed Mr. David Lifeng Chen as Executive Vice Chairman of the board, effective immediately. Mr. Chen has served as a director of our board since 2008. He is also the Co-President of VanceInfo overseeing the Company's strategic planning and business development.

Outlook for the First Quarter and Full Year 2011

The Company expects:

• First quarter 2011 net revenues to be between $56 million and $57 million, reflecting a stronger seasonality this year due to the increasing revenue contribution from the Chinese domestic clients.
• First quarter 2011 non-GAAP diluted EPS(1)  to be approximately $0.19, based on 45.5 million total American depository share(5)(“ADS”)-equivalent average shares outstanding. The lower EPS growth relative to the revenue growth reflects the higher average shares from the impact of the 2.53 million additional ADS issued through a block trade in November 2010 as well as the higher income tax rate in 2011 as detailed below.
• 2011 net revenues to be at least $270 million, representing at least 28% increase from 2010. 
• 2011 non-GAAP diluted EPS(1) to be at least $0.94, based on 45.8 million total ADS-equivalent average shares outstanding.  The lower EPS growth relative to the revenue growth reflects the higher share count and higher income tax rate in 2011.
• The EPS outlook assumes an effective income tax rate between 12% and 15%.  The higher end of the tax rate assumes that the Company’s main operating subsidiary will be taxed at a 15% income tax rate in 2011, although it may receive a potential tax rebate of 5% at the end of the year if the entity continues to be qualified as a Key Software Enterprise, a status that is subject to annual approval by the Chinese government.  The subsidiary has received such status in the past three years.
• The above guidance does not reflect the potential business tax exemption as stated in the recent government policy directives announced in early February.  The new policy directives aim to further promote the Chinese software industry and expand the business tax exemption on consulting and software testing revenues, which were not previously exempted.  However, the implementation details of the new policy may not be available for a while, and the effective date of such exemption remains uncertain.  Should the implementation guidance permit a retroactive effective date as of the beginning of 2011, the Company’s non-GAAP diluted EPS(1)  would be increased by $0.08 to $0.11 in 2011.

Conference Call

VanceInfo will host a corresponding conference call and live webcast to discuss the results at 7:30 AM Eastern Standard Time (EST) on Monday, February 28, 2011 (8:30 PM Beijing/Hong Kong time). Please dial-in five minutes prior to the call to register and receive further instruction.

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

The conference call will be available live via webcast on the Investors section of VanceInfo Technologies website at http://ir.vanceinfo.com. The archive replay will be available on VanceInfo's website shortly after the call.

A dial-in replay of the conference call will be available until March 7, 2011 at +1 888.286.8010 or +1 617.801.6888; passcode: 60385602.

About VanceInfo

VanceInfo Technologies Inc. is an IT service provider and one of the leading offshore software development companies in China. VanceInfo was the first China software development outsourcer listed on the New York Stock Exchange.

The Company ranked number one among Chinese offshore software development service providers for the North American and European markets as measured by 2009 revenues, according to International Data Corporation.

VanceInfo's comprehensive range of IT services includes research & development services, enterprise solutions, application development & maintenance, quality assurance & testing, globalization & localization and other solutions and services. VanceInfo provides these services primarily to corporations headquartered in the United States, Europe, Japan and Greater China, targeting high-growth industries such as technology, telecommunications, financial services, travel services, manufacturing, retail and distribution.

Safe Harbor

This news release includes statements that may constitute forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, should, expects, anticipates, future, intends, plans, believes, estimates, and similar statements. Among other things, the management's quotations and "Outlook for the First Quarter and Full Year 2011" contain forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Potential risks and uncertainties include, but are not limited to, the company's dependence on a limited number of clients for a significant portion of its revenues, the economic slowdown in its principal geographic markets, the quality and portfolio of its services lines and industry expertise, and the availability of a large talent pool in China and supply of qualified professionals, as well as the PRC government's investment in infrastructure construction and adoption of various incentives in the IT service industry. Further information regarding these and other risks is included in VanceInfo's filings with the U.S. Securities and Exchange Commission. All information provided in this news release and in the attachments is as of February 28, 2011, and VanceInfo 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.

About Non-GAAP Financial Measures

To supplement VanceInfo's consolidated financial results presented in accordance with GAAP, VanceInfo uses the following measures defined as non-GAAP financial measures by the SEC: non-GAAP income from operations, net income, diluted EPS and related margins exclude share-based compensation expense, amortization of acquired intangible assets, a non-recurring transitional loss associated with the Expedia account in the third quarter of 2009, and change in fair value of contingent consideration payable for business acquisition. The non-GAAP income from operations, net income, diluted EPS and related margins 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. For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP financial measures to comparable GAAP measures" set forth at the end of this release.

VanceInfo 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 income from operations, net income, diluted EPS and related margins 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. The reconciliations of the forward-looking guidance for non-GAAP financial measures to the most directly comparable GAAP financial measures in the accompanying table include all information reasonably available to VanceInfo at the date of this press release. The table includes adjustments that the Company can reasonably predict.