AsiaInfo-Linkage Reports Unaudited Second Quarter 2011 Results

BEIJING and SANTA CLARA, Calif., August 5, 2011 /PRNewswire-Asia-FirstCall/ -- AsiaInfo-Linkage, Inc. (NASDAQ: ASIA) ("AsiaInfo-Linkage," the "Company," "we," "us" or "our"), a leading provider of telecommunication software solutions and services in China, today announced financial results for the quarter ended June 30, 2011.

"After a year following the close of the merger with Linkage, we are pleased to announce that the integration has been successfully completed," said AsiaInfo-Linkage Co-Chairman James Ding. "As of today, we achieved the goals set forth by the board of directors. With the dedicated effort from the integration committee and the entire management team, the Company has fully integrated customer facing sales and service organizations, human resource policies, and product and solution platforms. Moreover, the Company now operates on an integrated IT system and has standardized project management, accounting and financial reporting. As the task that it set out to perform has now been completed, the board of directors and management team has dissolved the integration committee."

AsiaInfo-Linkage's Executive Co-Chairman Libin Sun added, "Our stable financial performance throughout the past four quarters reflects the success of our integration efforts. With the completion of the integration process the Company will continue offering a comprehensive end-to-end telecom software solution and also focus on building new growth drivers and capitalizing on business opportunities that develop in the market."

"We are confident in the long term growth of the Company as the successful completion of integration serves to unlock AsiaInfo-Linkage's potential," said AsiaInfo-Linkage President and Chief Executive Officer Steve Zhang. "We are pleased with the steady stream of sales contracts in the second quarter of 2011 as our demand pipeline continues to grow. Competition only continues to intensify between China's telecom carriers as they increase investment in Internet-related services like e-channel and WIFI network solutions. Carriers' needs and requirements are increasingly more sophisticated as they look to differentiate themselves and retain loyal long-term customers, and this plays well to our Company's strengths. In the second quarter, we continued signing contracts with our customers, such as NG BOSS 3.0 upgrades with China Mobile, BSS software development contracts with China Unicom's six Northern provinces, billing and CRM upgrades with China Telecom, as well as a business operation support systems contract with Gehua Cable in Beijing. On the international front, we have witnessed steady progress in developing and delivering our CRM and BI solutions to U-Mobile in Malaysia as we continue to look for additional opportunities to build our brand abroad."

Mr. Zhang continued, "Our focus remains on increasing share of wallet with our existing telecommunications customers. We are confident in our ability to secure additional sales contracts in the second half of 2011 as we position ourselves favorably to grow and deliver long-term shareholder return."

Recent Developments

On July 1, 2010, AsiaInfo Holdings, Inc. ("AsiaInfo") completed its merger with IT software and solutions provider Linkage Technologies International Holdings Limited ("Linkage") and was renamed AsiaInfo-Linkage, Inc. Starting from the third quarter of 2010, AsiaInfo-Linkage's financial statements consolidated Linkage's operating results and financial position.

On December 1, 2010, AsiaInfo-Linkage announced the divestiture of its IT security business. Results for the IT security business have been retrospectively reclassified to discontinued operations, and AsiaInfo-Linkage no longer segments results between the telecom solutions business and the IT security business.

On January 30, 2011, AsiaInfo-Linkage announced that its board of directors authorized a stock repurchase program, under which AsiaInfo-Linkage may repurchase up to US$60.0 million in aggregate value of the outstanding common stock of the Company. As of June 30, 2011, the entire amount allocated to the program had been used for the repurchase of approximately 3.2 million shares. Since trading in the Company's shares commenced on the NASDAQ in 2000, AsiaInfo-Linkage has repurchased a total of approximately 15.4 million shares for an aggregate amount of approximately US$132.8 million.

In the second quarter of 2011, AsiaInfo-Linkage signed Business Support System ("BSS") Convergent software package contracts for six China Unicom subsidiaries in Beijing, Hebei, Henan, Heilongjiang, Liaoning and Shandong provinces. In addition, the Company signed a BSS Convergent implementation contract with Heilongjiang Unicom.

On July 29, 2011, AsiaInfo-Linkage announced the signing of a Business Operation Support Systems ("BOSS") contract with Gehua Cable, a leading cable television operator in Beijing.

On August 1, 2011, AsiaInfo-Linkage's board of directors and management team had come to an agreement that the integration of the two combined companies had been completed. The main areas completed during the integration included customer facing sales and service organizations, human resource policies, product and solution platforms as well as IT system, project management, accounting and financial reporting practices.

Second Quarter 2011 Financial Results

Total revenues for the second quarter of 2011 were US$116.2 million, an increase of 95.9% year-over-year and 1.5% sequentially. Meeting guidance, net revenue (non-GAAP) for the second quarter of 2011 was US$110.3 million, an increase of 89.8% year-over-year and 1.6% sequentially. The year-over-year increase was mainly due to the merger with Linkage and the sequential increase was the result of the steady demand for the Company's services and solutions from China's telecom carriers.

Gross margin for the quarter was 42.2%, compared to 58.1% in the year-ago period and 45.6% in the previous quarter. Gross margin of net revenue (non-GAAP)(3) was 49.5% in the second quarter of 2011, compared to 60.2% in the year-ago period and 53.2% in the previous quarter. The decrease in gross margin (non-GAAP) year-over-year primarily reflected the Linkage merger as the Company deployed additional research and development ("R&D") employees into client services, as disclosed in the previous three quarters, driving up cost of revenues. The sequential decrease in gross margin reflected an increase in headcount of delivery personnel for upcoming contracts in the Company's pipeline. In the second quarter the sequential decrease also reflected a US$1.9 million provision for anticipated loss from the BSS Convergent implementation contract signed with Heilongjiang Unicom.

Total operating expenses for the second quarter of 2011 increased 71.6% year-over-year and decreased 7.2% sequentially to US$34.6 million. The year-over-year increase was primarily attributable to the merger with Linkage. Sales and marketing expenses for the second quarter of 2011 increased 163.0% year-over-year and decreased 0.3% sequentially to US$19.2 million. The year-over-year increase was primarily attributable to the merger with Linkage, while the slight sequential decrease was primarily due to stricter expense control in the second quarter. General and administrative ("G&A") expenses for the second quarter of 2011 increased 26.2% year-over-year and decreased 29.8% sequentially to US$5.6 million. The year-over year increase in G&A expenses was primarily attributable to the merger with Linkage. The sequential decrease in G&A expenses was primarily due to a special bad debt provision of US$0.9 million in the province of Xinjiang recorded in the first quarter of 2011. R&D expenses increased 41.4% year-over-year and 18.9% sequentially to US$11.9 million. The year-over-year and sequential increases in R&D expenses are consistent with the Company's goal of investing in product development for current and anticipated overseas expansion and product standardization. In the second quarter, the Company received and recorded a government subsidy of US$2.1 million as a reward for its high-tech software innovation.

As a result of the aforementioned, income from operations for the second quarter of 2011 was US$14.5 million, an increase of 1.6% year-over-year and a decrease of 3.2% sequentially. Operating margin of total revenue was 12.5% for the second quarter of 2011, compared to 24.1% in the year-ago period and 13.1% in the previous quarter. The year-over-year decrease in operating margin was mainly attributable to the amortization of intangible assets acquired during the merger with Linkage.

Operating margin of net revenue (non-GAAP)(4) for the second quarter of 2011 was 26.6%, compared to 29.9% in the year-ago period and 27.4% in the previous quarter. The year-over-year decrease in operating margin of net revenue (non-GAAP) was primarily due to the increase in operating expenses as a result of the merger with Linkage.

Other income for the second quarter of 2011 was US$1.2 million compared to US$1.4 million in the year-ago period and US$1.5 million in the previous quarter.

As a result of the qualification as a High and New Technology Enterprise ("HNTE") of the Company's Nanjing subsidiary, Linkage-AsiaInfo Technologies (Nanjing), Inc. ("LKNJ") and our current expectation of renewing this status going forward, the tax rate applicable to LKNJ was reduced from the previous rate of 25.0% to a 15.0% preferential tax rate. This effect resulted in a US$20.6 million reduction in the deferred tax liability related to LKNJ's intangible assets amortization and a US$2.3 million reduction in the deferred tax asset related to welfare accrual, both of which were previously calculated at a tax rate of 25.0%. Including the above, the net tax effect was an income tax credit of US$16.5 million recorded for the second quarter of 2011 compared to an income tax expense of US$2.4 million in the year-ago period and an income tax credit of US$1.0 million in the previous quarter.

On a GAAP basis, in the second quarter of 2011, the Company recorded net income attributable to AsiaInfo-Linkage, Inc. of US$32.9 million, or US$0.45 per basic share, compared to US$13.9 million, or US$0.29 per basic share, in the year-ago period and US$17.8 million, or US$0.24 per basic share, in the previous quarter. The tax rate adjustment for LKNJ increased the Company's earnings per basic share by US$0.25.

In the second quarter of 2011, net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) was US$29.3 million or US$0.40 per basic share. Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) in the year-ago period was US$16.7 million or US$0.35 per basic share. Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) in the previous quarter was US$32.7 million or US$0.44 per basic share. Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) increased 75.0% year-over-year and decreased 10.4% sequentially. The year-over-year increase was primarily due to the merger with Linkage and the sequential decrease was mainly attributable to the "Key Software Enterprise" tax rate adjustment in the first quarter, which positively impacted first quarter 2011 net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP).

For the second quarter of 2011, AsiaInfo-Linkage had a net operating cash outflow of US$21.8 million mainly as a result of 2010 bonus payments made during the quarter amounting to US$35.5 million.

As of June 30, 2011, AsiaInfo-Linkage had cash and cash equivalents and restricted cash totaling US$204.3 million and short-term investments totaling US$32.8 million.

As of June 30, 2011, AsiaInfo-Linkage had gross accounts receivable of US$298.1 million compared to US$302.8 million as of March 31, 2011. Gross accounts receivable includes agent arrangements with International Business Machines Corporation or its distributors and for a few other hardware companies ("IBM-Type Arrangements"). Since these arrangements typically consist of back-to-back payment terms for certain products sold to AsiaInfo-Linkage customers, there is no impact on the Company's cash flow or days of sales outstanding ("DSO"). Net accounts receivable, which excludes IBM-Type Arrangement and IT Security business released account receivable, was US$220.7 million as of June 30, 2011, compared to US$216.9 million as of March 31, 2011. This slight sequential increase in net accounts receivable was in line with the Company's sequential growth in revenue. This resulted in the Company's DSO being 159 days as of June 30, 2011, flat compared to DSO as of March 31, 2011. A table presenting further information regarding the Company's gross accounts receivable, net accounts receivable, revenues and DSO is provided at the end of this press release.

First Half 2011 Financial Results

Total revenue for the first half of 2011 was US$230.7 million, an increase of 94.6% year-over-year. Net revenue (non-GAAP) for the first half of 2011 was US$218.9 million, an increase of 89.0% year-over-year.

In the first half of 2011, gross margin was 43.9%, compared to 59.5% in the year-ago period. Gross profit as a percentage of net revenue (non-GAAP) was 51.3% in the first half of 2011, compared to 61.9% in the year-ago period.

Income from operations for the first half of 2011 was US$29.5 million, an increase of 11.2% year-over-year.

In the first half of 2011, AsiaInfo-Linkage recorded net income attributable to AsiaInfo-Linkage, Inc. of US$50.8 million, or US$0.68 per basic share, compared to US$24.3 million, or US$0.51 per basic share, in the year-ago period, an increase of 33.3% year-over-year.

Net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) was US$61.9 million or US$0.83 per basic share in the first half of 2011, an increase of 20.3% year-over-year.

Business Outlook

AsiaInfo-Linkage expects third quarter 2011 net revenue (non-GAAP) to be in the range of US$115 million to US$119 million. The Company expects third quarter 2011 net income attributable to AsiaInfo-Linkage, Inc. per basic share (non-GAAP) to be in the range of US$0.34 to US$0.37.

Second Quarter 2011 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 Thursday, August 4, 2011 (8:00 a.m. Beijing/Hong Kong Time on Friday, August 5, 2011). 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 18495503.

A replay of the call will be available until 11:00 p.m. Eastern Time on August 11, 2011 by dialing one of the following numbers:

The passcode for the replay is 31856352.

Additionally, a live and archived webcast of this call will be available on the Investor Relations section of the AsiaInfo-Linkage website 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. The company was formed through a merger between AsiaInfo and Linkage on July 1, 2010. The combined Company 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 third party hardware costs that are passed through to our customers. We believe total revenues net of third party 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.

Reconciliation of net revenue (non-GAAP) to GAAP total revenues

(2) Gross margin of net revenue (non-GAAP)

Gross margin of net revenue (non-GAAP) is calculated by dividing gross profit, excluding third party hardware costs, amortization of acquired intangible assets, and share-based compensation expenses, 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 gross margin of net revenue (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 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.

Reconciliation of gross margin (non-GAAP) to GAAP gross margin

(3) Operating margin of net revenue (non-GAAP)

Operating margin of net revenue (non-GAAP) is calculated by dividing income from operations, excluding amortization of acquired intangible assets, share-based compensation expenses and non-recurring merger related expenses, 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 of net revenue (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.

Reconciliation of operating margin (non-GAAP) to GAAP operating margin

(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, non-recurring merger related expenses, after-tax dividend income and LKNJ 15% tax rate adjustment. 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.

Reconciliation of net income attributable to AsiaInfo-Linkage, Inc. (non-GAAP) to GAAP net income

(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, non-recurring merger related expenses, after-tax dividend income and LKNJ 15% tax rate adjustment) 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.

Reconciliation of net income (non-GAAP) per basic share to GAAP net income per basic share

Accounts Receivable, IBM-Type Arrangement Accounts Receivable, Revenue and DSO

Accounts receivable ("AR") balances included both billed and unbilled amounts. Revenue recognized in excess of billings is recorded as unbilled receivable. In addition to revenues from the sales of its goods and services and from hardware procured on behalf of customers, the Company generated service revenues by acting as a sales agent pursuant to the IBM-Type Arrangements. In December 2010, the Company disposed of its former IT Security business and, accordingly, no longer generates revenues from the sale of its information security products. The Company's DSO calculations are as follows as of the last day of the respective periods indicated where the AR and revenues below are arrived at after excluding the receivables attributable to the IT Security Business and the IBM-Type Arrangements and the revenues attributable to the IT Security Business, respectively:

1. Q1 2010 DSO = (Q4 2009 net AR + Q1 2010 net AR)/2/Q1 revenue x 90
2. Q2 2010 DSO = (Q4 2009 net AR + Q2 2010 net AR)/2/Q2 cumulative revenue x 180
3. Q3 2010 DSO = (Q4 2009 net AR + Q3 2010 net AR)/2/Q3 cumulative revenue x 270
4. Q4 2010 DSO = (Q4 2009 net AR + Q4 2010 net AR)/2/Q4 cumulative revenue x 360
5. Q1 2011 DSO = (Q4 2010 net AR + Q1 2011 net AR)/2/Q1 revenue x 90
6. Q2 2011 DSO = (Q4 2010 net AR + Q2 2011 net AR)/2/Q2 cumulative revenue x 180

The following table presents further information regarding the Company's gross AR, net AR, revenues, and DSO.

Cautionary Note Regarding Forward-Looking Statements

The information contained in this document is as of August 4, 2011. 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; 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, 2010, 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.