HiSoft Reports Third Quarter 2011 Financial Results

BEIJING, November 15, 2011 /PRNewswire-Asia-FirstCall/ -- HiSoft Technology International Limited, ("HiSoft" or the "Company") (NASDAQ: HSFT), a leading China-based provider of outsourced information technology and research and development services headquartered in Dalian, China, today announced its unaudited financial results for the third quarter 2011 ended September 30, 2011.

Third Quarter 2011 Highlights

• Net revenues increased 51.5% year-over-year to US$58.9 million from US$38.9 million for the corresponding period in 2010
• Gross profit increased 44.6% year-over-year to US$20.9 million from US$14.5 million for the corresponding period in 2010
• Diluted net income per ADS(1) was US$0.14 compared to US$0.16 in the corresponding period in 2010
• Non-GAAP(2) diluted net income per ADS was US$0.26 compared to US$0.21 in the corresponding period in 2010
• Total employee headcount as of September 30, 2011 was 6,910.

"We continued to successfully execute our growth strategy in the third quarter, beating our guidance and reporting strong results across all service lines and major geographical markets," said HiSoft Chief Executive Officer Mr. Tiak Koon Loh. "We are particularly pleased to see momentum building from our efforts investing into higher value-added solutions, as we now record 20% of our net revenues being derived from the higher value-added solution services in our consulting and packaged solutions category. Growth in this category of solution services also helped contribute to our second consecutive quarter of improvement in operating profit margins."

Mr. Loh continued, "In China, our domestic business continued to experience triple digit growth fueled by increased penetration into new service areas with some of our larger clients. Finally, our strong quarter of results was rounded out by a return to normal levels of operations in our Japan business, which saw an acceleration of demand from the manufacturing sector for R&D services and recorded growth of 13% quarter-over-quarter."

Third Quarter 2011 Financial Results

Net Revenues

Net revenues were US$58.9 million for the third quarter of 2011, an increase of 51.5% year-over-year from US$38.9 million for the corresponding period in 2010. The year-over-year increase in net revenues was driven by strong demand across all service lines and major geographies.

Net Revenues by Service Line

HiSoft has two principal service lines: IT services and research and development ("R&D") services. The Company divides IT services into two categories: consulting and packaged solution services ("CPS") and application development, testing and maintenance services ("ADM").

Net revenues from IT services were US$34.1 million for the third quarter of 2011, an increase of 67.4% year-over-year from US$20.4 million for the corresponding period in 2010. Net revenues from R&D services were US$24.8 million for the third quarter of 2011, an increase of 34.0% year-over-year from US$18.5 million for the corresponding period in 2010. The Company's CPS services continue to show good growth potential, with revenues increasing 317.0% year-over-year. The year-over-year growth in CPS services was primarily driven by healthy revenue contribution from the acquisition of Nouveon Technology Partners, Inc. and strong demand from customers in the China domestic market.

Net Revenues by Geographic Markets

Based on the location of clients' headquarters, the United States and Europe, the Company's largest geographic market, accounted for US$35.0 million or 59.4% of net revenues during the third quarter of 2011, followed by 17.4% for Greater China, 17.1% for Japan, and 6.1% for Others.

Measuring the Company's revenues by geographic markets based on the location of the contract signing entities, Greater China accounted for 38.5% of net revenues in the third quarter of 2011, while the United States and Europe accounted for 27.5%, Japan accounted for 19.6% and Others accounted for 14.4%.

Largest Clients as a Percentage of Net Revenues

Revenues from the Company's top three clients, top five clients and top ten clients accounted for 26.0%, 34.5% and 49.5% of net revenues, respectively, during the third quarter of 2011, compared to 30.4%, 39.8% and 55.9%, respectively, for the corresponding period in 2010.

Gross Profit and Gross Margin

Gross profit was US$21.0 million for the third quarter of 2011, an increase of 44.6% year-over-year from US$14.5 million for the corresponding period in 2010. During the third quarter of 2011, gross margin was 35.6% compared to 37.3% for the corresponding period in 2010. The year-over-year decrease in gross margin was mainly attributable to the Company's investment in higher value-added service offerings.

Non-GAAP gross margin improved slightly from 35.6% to 35.9% driven by increased sales of CPS services with higher margins started to gain traction.

Operating Expenses

Total operating expenses, which include general and administrative expenses, sales and marketing expenses and change in fair value of contingent consideration payable for business acquisitions, were US$16.9 million for the third quarter of 2011, an increase of 76.3% year-over-year from US$9.6 million for the corresponding period in 2010. The year-over-year increase was primarily due to expenses related to the strengthening of sales teams, the addition of management capacity, increased costs related to being a publicly listed company and an increase in foreign currency loss.

Operating Income and Operating Margin

Operating income for the third quarter of 2011 was US$4.1 million, a decrease of 17.2% year-over-year from US$4.9 million for the corresponding period in 2010. Non-GAAP operating income for the third quarter 2011 was US$7.9 million, an increase of 23.0% year-over-year from US$6.4 million for the corresponding period in 2010.

Operating margin was 6.9% for the third quarter of 2011, compared to 12.6% for the corresponding period in 2010. Non-GAAP operating margin was 13.4% for the third quarter of 2011, compared to 16.5% for the corresponding period in 2010. The year-over-year decline in operating income and margin was primarily due to the Company's continued investment efforts to grow its higher value-added services business. Notably, non-GAAP operating margin improved sequentially from 11.2% to 13.4%, as sales of the higher margin solutions started to gain traction.

Provision for Income Taxes

The provision for income taxes was US$0.4 million for the third quarter of 2011, compared to a US$0.6 million provision for income taxes in the third quarter of 2010.

Net Income and Net Income per ADS

Net income attributable to HiSoft Technology International Limited was US$4.4 million for the third quarter of 2011, a decrease of 7.8% year-over-year from US$4.8 million for the corresponding period in 2010. Diluted earnings per ADS was US$0.14 for the third quarter of 2011. Excluding the impact of US$0.01 per ADS from foreign currency loss(3), it was US$0.15 for the third quarter of 2011, compared to US$0.16 for the corresponding period in 2010.

Non-GAAP net income was US$8.2 million for the third quarter of 2011, an increase of 31.0% year-over-year from US$6.3 million for the corresponding period in 2010. Non-GAAP diluted net income per ADS was US$0.26 in the third quarter of 2011. Excluding the impact of US$0.01 per ADS from foreign currency loss non-GAAP diluted net income per ADS would have been US$0.27 in the third quarter of 2011, compared to US$0.21 in the corresponding period in 2010.

Cash Management and DSO

As of September 30, 2011, HiSoft had cash and cash equivalents, restricted cash, and term deposits totaling US$125.2 million. Operating cash flow for the third quarter of 2011 was a net inflow of approximately US$1.5 million.

Days sales outstanding was 88 days for the third quarter of 2011.

Nine Months Ended September 30, 2011 Financial Results

Net Revenues

Net revenues were US$154.1 million for the nine months ended September 30, 2011, an increase of 48.0% year-over-year from US$104.1 million for the corresponding period in 2010.

Gross Profit and Gross Margin

Gross profit was US$53.0 million for the nine months ended September 30, 2011, an increase of 37.7% year-over-year from US$38.5 million for the corresponding period in 2010. For the nine months ended September 30, 2011, gross margin was 34.4%, compared to 37.0% for the corresponding period in 2010.

Non-GAAP gross margin improved sequentially from 34.1% to 34.8%.

Operating Expenses

Total operating expenses were US$42.5 million for the nine months ended September 30, 2011, an increase of 63.4% year-over-year from US$26.0 million for the corresponding period in 2010.

Operating Income and Operating Margin

Operating income for the nine months ended September 30, 2011 was US$10.5 million, a decrease of 15.9% year-over-year from US$12.5 million for the corresponding period in 2010. Non-GAAP operating income for the nine months ended September 30, 2011 was US$18.1 million, an increase of 9.7% year-over-year from US$16.5 million for the corresponding period in 2010.

Operating margin was 6.8% for the nine months ended September 30, 2011, compared to 12.0% for the corresponding period in 2010. Non-GAAP operating margin was 11.8% for the nine months ended September 30, 2011, compared to 15.9% for the corresponding period in 2010.

Net Income and Net Income per ADS

Net income was US$11.1 million for the nine months ended September 30, 2011, a decrease of 3.7% from US$11.5 million for the corresponding period in 2010. Diluted net income per ADS was US$0.35 for the nine months ended September 30, 2011. Excluding the impact of US$0.03 per ADS from foreign currency loss, it was US$0.38 for the nine months ended September 30, 2011, compared to US$0.46 for the corresponding period in 2010.

Non-GAAP net income was US$18.7 million for the nine months ended September 30, 2011, an increase of 20.3% from US$15.6 million for the corresponding period in 2010. Non-GAAP diluted net income per ADS was US$0.59 for the nine months ended September 30, 2011, compared to US$0.62 for the corresponding period in 2010. Excluding the impact of US$0.03 per ADS from foreign currency loss, non-GAAP diluted net income per ADS was US$0.62 for the nine months ended September 30, 2011, compared to US$0.62 in the corresponding period in 2010.

DSO

Days sales outstanding was 93 days for the nine month period ending September 30, 2011.

Outlook for the Full Year 2011

For the full year 2011, based on current market and operating conditions and current book orders, the Company expects:

• Net revenues to be at least US$216 million, representing an expected growth rate of at least 47.4% compared to 2010
• Non-GAAP diluted net income per ADS to be in the estimated range of US$0.90 to US$0.91, excluding foreign currency exchange gains or losses. This represents an expected growth rate of between 28.6% to 30.0% year-over-year, based on 31.6 million weighted average ADSs outstanding.

Due to continued volatility in the currency markets, the non-GAAP diluted net income per ADS outlook excludes impacts relating to foreign currency exchange gains or losses. In addition, the non-GAAP diluted net income per ADS outlook assumes an effective income tax rate of 9% to 10%.

These estimates are based on current market and operating conditions, are subject to change, and may be influenced positively or negatively by factors outside the Company's control, including but not limited to the recent volatility in macroeconomic events in the markets in which the Company operates.

Third Quarter 2011 Conference Call Details

HiSoft management will hold an earnings conference call at 6:00 p.m. Eastern Time on Monday, November 14, 2011, (7:00 a.m. Beijing/Hong Kong Time on Tuesday, November 15, 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 conference call will be broadcast live over the Internet and can be accessed by clicking the following link: http://www.mzcan.com/cancast/us/index.php?id=usHSFT_24&version=e

Additionally, an archived webcast of this call will be available on the Investor Relations section of the HiSoft website at http://www.hisoft.com.

About HiSoft Technology International Limited

HiSoft Technology International Limited (NASDAQ: HSFT) is a leading China-based provider of outsourced information technology and research and development services headquartered in Dalian, China. HiSoft provides its services to leading companies around the world through a combination of onshore and offshore delivery capabilities. HiSoft leverages its skilled technology specialists and client-centric delivery centers to offer customers reliable and high-quality technology solutions. For more information about HiSoft, please visit http://www.hisoft.com.

Safe Harbor Statement

This press release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "target," "going forward," "outlook" and similar statements. Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond HiSoft's control, which may cause HiSoft's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in HiSoft's filings with the U.S. Securities and Exchange Commission. HiSoft 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.

Non-GAAP Financial Measures

To supplement HiSoft's consolidated financial results presented in accordance with GAAP, HiSoft uses the following measures defined as non-GAAP financial measures by the SEC: Non-GAAP gross margin, non-GAAP operating income, non-GAAP net income and non-GAAP diluted net income per ADS and related margins which exclude share-based compensation expense, amortization of acquired intangible assets, change in fair value of contingent consideration payable for business acquisition and success fee related to business acquisition. Non-GAAP gross margin, non-GAAP operating income, non-GAAP net income and non-GAAP diluted net income per ADS 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.

HiSoft 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 gross margin, non-GAAP operating income, non-GAAP net income and non-GAAP diluted net income per ADS 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. The presentation of these measures should not be considered a substitute for or superior to GAAP results or as being comparable to results reported of forecasted by other companies. 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.