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iSoftStone Reports Higher Revenue and Net Income for the Third Quarter 2012

BEIJING, Nov. 16, 2012 /PRNewswire/ -- iSoftStone Holdings Limited ("iSoftStone" or "the Company," NYSE: ISS), a leading China-based IT services provider, today reported its unaudited financial and operating results for the third quarter ended September 30, 2012.

Third quarter 2012 results

  • Net revenues increased 33.7% to $98.6 million in the third quarter 2012 from $73.7 million in the third quarter 2011.
  • Gross profit increased 30.9% to $34.7 million in the third quarter 2012 from $26.5 million in the third quarter 2011.
  • Net income in the third quarter 2012 increased 31.9% to $7.5 million from $5.7 million in the third quarter 2011.
  • Non-GAAP net income (note 1) increased 14.0% to $10.4 million in the third quarter 2012 from $9.1 million in the third quarter 2011.
  • Diluted earnings per American Depositary Share ("ADS") were $0.13 in the third quarter 2012 compared with $0.09 in the third quarter 2011. Each ADS represents 10 ordinary shares.
  • Non-GAAP diluted earnings per ADS (note 1) were $0.18 in the third quarter 2012 and $0.15 in the third quarter 2011.
  • Total number of employees increased 18.6% to 13,937 as of September 30, 2012 from 11,750 as of September 30, 2011.

First nine months 2012 results

  • Net revenues increased 40.2% to $276.9 million in the first nine months 2012 from $197.6 million in the first nine months 2011.
  • Gross profit increased 29.1% to $92.7 million in the first nine months 2012 from $71.8 million in the first nine months 2011.
  • Net income in the first nine months 2012 decreased 13.7% to $14.4 million from $16.7 million in the first nine months 2011.
  • Non-GAAP net income (note 1) increased 12.1% to $25.9 million in the first nine months 2012 from $23.1 million in the first nine months 2011.
  • Diluted earnings per ADS were $0.25 in the first nine months 2012 and $0.28 in the first nine months 2011. Each ADS represents 10 ordinary shares.
  • Non-GAAP diluted earnings per ADS (note 1) were $0.44 in the first nine months 2012 and $0.38 in the first nine months 2011.

Mr. T.W. Liu, iSoftStone's Chairman and Chief Executive Officer, said, "Although continually facing a global economic slowdown and geopolitical uncertainties, we have achieved another solid result for this quarter. Our net revenue grew at a healthy rate from last year's third quarter, and our profit margin and operating cash flow have continued to improve sequentially since our first quarter this year. All these achievements are the direct results of our successful execution of our key business strategy launched earlier this year.

"Looking forward, even though facing more challenges in the economic and geopolitical environment, such as potential escalation of the China-Japan standoff, slower economic growth in China, and deterioration of the European debt crisis, we strongly believe that if we stick to our current business strategy and execute well, we can be resilient to short-term pressure and achieve healthy long-term growth."

Results of operations for the third quarter 2012

Net revenues

Net revenues increased $24.9 million or 33.7% to $98.6 million in the third quarter 2012 from $73.7 million in the third quarter 2011, mainly due to strong demand for IT services from customers in Greater China and increased demand from some global customers, partially offset by decreased demand from some global customers, especially customers in Japan.

Net revenues by service line

We derive net revenues by providing an integrated suite of IT services and solutions, including (a) IT services, which primarily includes application development and maintenance, or ADM, as well as R&D services and infrastructure and software services, (b) Consulting & Solutions, and (c) Business Process Outsourcing, or BPO, services. The following table shows our net revenues by service line.

US$ in thousands, except %

2011Q3

%


2012Q3

%

IT services






    ADM

25,155

34.2%


33,996

34.5%

    R&D

22,265

30.2%


24,763

25.1%

    Infrastructure and software

2,831

3.8%


2,210

2.2%

IT services, total

50,251

68.2%


60.969

61.8%

Consulting & Solutions

20,275

27.5%


34,056

34.6%

BPO services

3,182

4.3%


3,538

3.6%

Total net revenues

73,708

100.0%


98,563

100.0%

Net revenues from IT services increased $10.7 million or 21.3% to $61.0 million in the third quarter 2012 from $50.3 million in the third quarter 2011. Net revenues from Consulting & Solutions increased $13.8 million or 68.0% to $34.1 million in the third quarter 2012 from $20.3 million in the third quarter 2011. The third quarter over third quarter growth was mainly contributed by wins of two new public sector consulting and solution projects and business intelligence projects for one China domestic bank. We expect that these types of consulting and solutions businesses will continue to be one of our growth drivers in the future. Net revenues from BPO services increased 11.2% to $3.5 million in the third quarter 2012 from $3.2 million in the third quarter 2011 mainly due to higher net revenues from our largest BPO client.

Net revenues by geographic markets

We classify our net revenues by the following geographic markets: Greater China (which includes China, Taiwan, Hong Kong, and Macau) and Global (which includes the United States, Europe, Japan, and others), based on the headquarters locations of our clients. The following table shows our net revenues by geographic markets.

US$ in thousands, except %

2011Q3

%


2012Q3

%

Greater China

43,638

59.2%


64,200

65.1%

Global:






    United States

18,315

24.8%


21,066

21.4%

    Europe

5,391

7.3%


7,175

7.3%

    Japan

6,109

8.3%


5,743

5.8%

    Others

255

0.4%


379

0.4%

Global total

30,070

40.8%


34,363

34.9%

Total net revenues

73,708

100.0%


98,563

100.0%

In the third quarter 2012, Greater China continued to outperform the growth of net revenues while the Global, especially Japan and Europe, underperformed the growth due to unfavorable macro-economic conditions. Our net revenues from Greater China clients increased $20.6 million or 47.1% to $64.2 million in the third quarter 2012 from $43.6 million in the third quarter 2011. Net revenues from U.S. clients increased $2.8 million or 15.0% to $21.1 million in the third quarter 2012 from $18.3 million in the third quarter 2011. Net revenues from European clients increased $1.8 million or 33.1% to $7.2 million in the third quarter 2012 from $5.4 million in the third quarter 2011. Net revenues from Japanese clients decreased $0.4 million, third quarter to third quarter, due to reduced demand from Japan customers.

Net revenues by client industry

We focus on serving clients in four target industry verticals, each with large and growing demand for IT services and solutions: technology; communications; banking, financial services and insurance, or BFSI; and energy, transportation and public sector. The following table shows our net revenues by client industry.

US$ in thousands, except %

2011Q3

%


2012Q3

%

Technology

20,423

27.7%


26,473

26.9%

Communications

29,697

40.3%


35,342

35.9%

BFSI                            

14,290

19.4%


22,407

22.7%

Energy, transportation, and public

4,524

6.1%


8,487

8.6%

Others

4,774

6.5%


5,854

5.9%

Total net revenues

73,708

100.0%


98,563

100.0%

Net revenues from technology clients increased $6.1 million or 29.6% to $26.5 million in the third quarter 2012 from $20.4 million in the third quarter 2011. Net revenues from communications clients increased $5.6 million or 19.0% to $35.3 million in the third quarter 2012 from $29.7 million in the third quarter 2011. Net revenues from BFSI clients increased $8.1 million or 56.8% to $22.4 million in the third quarter 2012 from $14.3 million in the third quarter 2011 attributable largely to business intelligence projects and IT services projects for two China domestic banks. Net revenues from energy, transportation, and public sector clients increased $4.0 million or 87.6% to $8.5 million in the third quarter 2012 from $4.5 million in the third quarter 2011 primarily due to wins of two new public sector consulting and solution projects. Net revenues from all other industries increased $1.1 million to $5.9 million in the third quarter 2012 from $4.8 million in the third quarter 2011, mainly resulting from a new project win from a global human resources solution company.

Net revenues by largest five clients

Net revenues from our largest five clients totaled $47.8 million or 48.5% of total net revenues in the third quarter 2012 compared with $32.1 million or 43.5% in the third quarter 2011. 

Net revenues by pricing method

We provide our services on a time-and-expense basis, a fixed-price basis, or for certain BPO services, on the basis of volume of work processed for our clients. The following table shows our net revenues by pricing method.

US$ in thousands, except %

2011Q3

%


2012Q3

%

Time-and-expense basis

27,366

37.1%


39,124

39.7%

Fixed-price basis

45,165

61.3%


58,568

59.4%

Volume basis (BPO)

1,177

1.6%


871

0.9%

Total net revenues

73,708

100.0%


98,563

100.0%

Net revenues from time-and-expenses basis projects increased $11.8 million or 43.0% to $39.1 million in the third quarter 2012 from $27.4 million in the third quarter 2011. Net revenues from fixed-price basis projects increased $13.4 million or 29.7% to $58.6 million in the third quarter 2012 from $45.2 million in the third quarter 2011.

Cost of revenues, gross profit, and gross profit margin

Cost of revenues increased $16.7 million or 35.3% to $63.8 million in the third quarter 2012 from $47.2 million in the third quarter 2011 primarily due to service delivery employees and facilities added to enable and match the growth of our business.

Gross profit increased $8.2 million or 30.9% to $34.7 million in the third quarter 2012 from $26.5 million in the third quarter 2011. Gross profit margin decreased to 35.2% in the third quarter 2012 from 36.0% in the third quarter 2011 primarily due to annual salary increases for delivery personnel effective since January 2012 or April 2012 and more higher-end delivery employees hired with the growth of business, which were partly offset by more government subsidies recognized as a percentage of net revenues and favorable business mix and efficiency improvements in the third quarter 2012.

Operating expenses

Operating expenses increased by $3.8 million or 17.7% to $25.0 million in the third quarter 2012 from $21.3 million in the third quarter 2011 primarily due to higher salary and compensation expenses and rental expenses in connection with expansion in the number of employees and in facilities to support the business growth and annual salary increases for operation personnel effective since January 2012 or April 2012.

Excluding share-based compensation and amortization of intangible assets from acquisitions, non-GAAP operating expenses (note 1) were $22.6 million or 22.9% of net revenues in the third quarter 2012 compared with $18.3 million or 24.9% of net revenues in the third quarter 2011. The decrease of operating expenses as a percentage of net revenues reflected our scale efficiencies realized.

Income from operations

Income from operations increased $3.4 million or 58.5% to $9.3 million in the third quarter 2012 from $5.8 million in the third quarter 2011 due to the factors explained above.

Non-GAAP income from operations (note 1) increased $2.9 million or 31.1% to $12.2 million in the third quarter 2012 from $9.3 million in the third quarter 2011.

Interest expense

Interest expense was $0.5 million in the third quarter 2012 compared with nil in the third quarter 2011. Interest expense in the third quarter 2012 was interest on short-term bank borrowings.

Income taxes

Income tax expense increased to $1.3 million in the third quarter 2012 from $0.4 million in the third quarter 2011 due to the expiration of tax exemptions and tax holidays in certain operating entities in China by the end of 2011. We currently estimate that the effective tax rate will be approximately 14.5% for the year 2012.

Net income

Net income increased $1.8 million or 31.9% to $7.5 million in the third quarter 2012 from $5.7 million in the third quarter 2011 due to the factors explained above.

Non-GAAP net income (note 1) increased by $1.3 million or 14.0% to $10.4 million in the third quarter 2012 from $9.1 million in the third quarter 2011.

Earnings per ADS

Basic earnings per ADS were $0.13 in the third quarter 2012 and $0.10 in the third quarter 2011.

Diluted earnings per ADS were $0.13 in the third quarter 2012 and $0.09 in the third quarter 2011.

Non-GAAP diluted earnings per ADS (note 1) were $0.18 in the third quarter 2012 and $0.15 in the third quarter 2011.

Cash and Cash Flow

As of September 30, 2012, we had a cash balance of $72.5 million. Our net cash used in operating activities in the third quarter 2012 was $4.5 million. Our net cash used in investing activities in the third quarter 2012 was $6.5 million, including capital expenditures of $6.7 million. Within the capital expenditures, $3.9 million was related to the leasehold improvement of a new office in Beijing in the third quarter 2012. In the third quarter 2012, we borrowed $22.7 million of short-term bank loans to fund our growth.

Days sales outstanding, or DSO, was 182 days for the third quarter 2012 and 155 days for the third quarter 2011. DSO is calculated by dividing average accounts receivable, net of deferred revenues, by the period's gross revenues, and multiplying by the number of days in the period. The longer quarterly DSO in the third quarter 2012 was mainly due to faster revenue growth from domestic China clients, especially the clients in BFSI and public sectors, who tend to have longer payment cycles.

Results of operations for the first nine months 2012

Net revenues

Net revenues increased $79.3 million or 40.2% to $276.9 million in the first nine months 2012 from $197.6 million in the first nine months 2011 due to strong customer demand for IT services in both Greater China and the United States.

Net revenues by service line

The following table shows our net revenues by service line.

US$ in thousands, except %

First Nine Months 2011

%


First Nine Months 2012

%

IT services






    ADM

67,207

34.0%


92,467

33.4%

    R&D

61,710

31.2%


77,600

28.0%

    Infrastructure and software

8,600

4.4%


7,896

2.9%

IT services, total

137,517

69.6%


177,963

64.3%

Consulting & Solutions

51,176

25.9%


89,341

32.3%

BPO services

8,886

4.5%


9,621

3.4%

Total net revenues

197,579

100.0%


276,925

100.0%

Net revenues from IT services increased $40.4 million or 29.4% to $178.0 million in the first nine months 2012 from $137.5 million in the first nine months 2011. Net revenues from Consulting & Solutions increased $38.2 million or 74.6% to $89.3 million in the first nine months 2012 from $51.2 million in the first nine months 2011. Net revenues from BPO services increased 8.3% to $9.6 million in the first nine months 2012 from $8.9 million in the first nine months 2011. The growth of net revenue was primarily due to deepening and broadening our engagements with existing clients and new wins of public sector projects in various tier-2 and tier-3 cities.

Net revenues by geographic markets

The following table shows our net revenues by geographic markets.

US$ in thousands, except %

First Nine Months 2011

%


First Nine Months 2012

%

Greater China

113,131

57.3%


171,551

61.9%

Global:






    United States

50,264

25.4%


66,369

24.0%

    Europe

15,705

7.9%


19,486

7.0%

    Japan

17,911

9.1%


18,018

6.5%

    Others

568

0.3%


1,501

0.6%

Global total

84,448

42.7%


105,374

38.1%

Total net revenues

197,579

100.0%


276,925

100.0%

In the first nine months 2012, Greater China continued to outperform the growth of net revenues while the Global, especially Japan and Europe, underperformed the growth due to unfavorable macro-economic conditions. Our net revenues from Greater China clients increased $58.4 million or 51.6% to $171.6 million in the first nine months 2012 from $113.1 million in the first nine months 2011. Net revenues from U.S. clients increased $16.1 million or 32.0% to $66.4 million in the first nine months 2012 from $50.3 million in the first nine months 2011. Net revenues from European clients increased $3.8 million or 24.1% to $19.5 million in the first nine months 2012 from $15.7 million in the first nine months 2011. Net revenues from Japanese clients were relatively even.

Net revenues by client industry

The following table shows our net revenues by client industry.

US$ in thousands, except %

First Nine Months 2011

%


First Nine Months 2012

%

Technology

59,278

30.0%


78,550

28.4%

Communication

77,205

39.1%


101,684

36.7%

BFSI

40,009

20.2%


57,427

20.7%

Energy, transportation and public

8,949

4.5%


23,326

8.4%

Others

12,138

6.2%


15,938

5.8%

Total net revenues

197,579

100.0%


276,925

100.0%

Net revenues from technology clients increased $19.3 million or 32.5% to $78.6 million in the first nine months 2012 from $59.3 million in the first nine months 2011. Net revenues from communications clients increased $24.5 million or 31.7% to $101.7 million in the first nine months 2012 from $77.2 million in the first nine months 2011. Net revenues from BFSI clients increased $17.4 million or 43.5% to $57.4 million in the first nine months 2012 from $40.0 million in the first nine months 2011. Net revenues from energy, transportation, and public sector clients increased $14.4 million or 160.6% to $23.3 million in the first nine months 2012 from $8.9 million in the first nine months 2011, which was largely due to recent public sector consulting and solution project wins in various tier-2 and tier-3 cities. Net revenues from all other industries increased $3.8 million to $15.9 million in the first nine months 2012 from $12.1 million in the first nine months 2011 resulting from new projects in the retail and manufacturing industries.

Net revenues by largest five clients

Net revenues from our largest five clients totaled $128.1 million or 46.2% of total net revenues in the first nine months 2012 compared with $85.8 million or 43.4% in the first nine months 2011. 

Net revenues by pricing method

The following table shows our net revenues by pricing method.

US$ in thousands, except %

First Nine Months 2011

%


First Nine Months 2012

%

Time-and-expense basis

77,326

39.1%


103,041

37.3%

Fixed-price basis

117,656

59.6%


171,827

62.0%

Volume basis (BPO)

2,597

1.3%


2,057

0.7%

Total net revenues

197,579

100.0%


276,925

100.0%

Net revenues from time-and-expenses basis projects increased $25.7 million or 33.3% to $103.0 million in the first nine months 2012 from $77.3 million in the first nine months 2011. Net revenues from fixed-price basis projects increased $54.2 million or 46.0% to $171.8 million in the first nine months 2012 from $117.7 million in the first nine months 2011.

Cost of revenues, gross profit, and gross profit margin

Cost of revenues increased $58.4 million or 46.5% to $184.2 million in the first nine months 2012 from $125.8 million in the first nine months 2011 primarily due to service delivery employees and facilities added to enable and match the growth of our business.

Gross profit increased $20.9 million or 29.1% to $92.7 million in the first nine months 2012 from $71.8 million in the first nine months 2011. Gross profit margin decreased to 33.5% in the first nine months 2012 from 36.3% in the first nine months 2011 primarily due to (a) annual salary increases for delivery personnel effective since January 2012 or April 2012, (b) more higher-end delivery employees hired starting from the third quarter 2011, and (c) expanded office facilities in several delivery centers, which were partly offset by more government subsidies recognized as a percentage of net revenues and favorable business mix and efficiency improvements.

Operating expenses

Operating expenses increased $16.3 million or 28.2% to $74.2 million in the first nine months 2012 from $57.9 million in the first nine months 2011 primarily due to higher salary and compensation expenses, and depreciation and office expenses in connection with expansion in the number of employees and in facilities to support the business growth and annual salary increase for operation personnel effectively since January 2012 or April 2012.

Excluding share-based compensation and amortization of intangible assets from acquisitions, the non-GAAP operating expenses (note 1) were $64.2 million or 23.2% of net revenues in the first nine months 2012 compared with $50.2 million or 25.4% of net revenues in the first nine months 2011. The decrease of operating expenses as a percentage of net revenues reflected our scale efficiencies realized.

Income from operations

Income from operations was $17.7 million in the first nine months 2012 compared with $15.8 million in the first nine months 2011 due to the factors explained above.

Non-GAAP income from operations (note 1) increased $4.8 million or 19.8% to $29.2 million in the first nine months 2012 from $24.3 million in the first nine months 2011.

Interest expense

Interest expense was $1.1 million in the first nine months 2012 and $1.4 million in the first nine months 2011. Interest expense in the first nine months 2012 was interest on short-term bank borrowings. Interest expense in the first nine months 2011 included imputed interest of $0.7 million accrued for our convertible notes and $0.7 million of interest on short-term bank borrowings.

Income taxes

Income tax expense increased to $2.4 million in the first nine months 2012 from $1.0 million in the first nine months 2011 resulting from the expiration of the tax exemptions and tax holidays in certain operating entities in China by the end of 2011. We currently estimate that the effective tax rate should be approximately 14.5% for the year 2012.

Net income

Net income decreased $2.3 million or 13.7% to $14.4 million in the first nine months 2012 from $16.7 million in the first nine months 2011. The decrease in net income was primarily due to a $16.3 million operating expenses increase, higher income taxes as explained above, and lower income from the change in the fair value of convertible notes derivatives of $2.8 million, partially offset by a $20.9 million gross profit increase as we continued to grow our revenues. All of our convertible notes were converted into ordinary shares by March 2011 and the conversions had no financial impact on the statement of operations of the first nine months 2012. The $16.3 million increase in operating expenses primarily consisted of $10.1 million in higher salary expenses for more employees added to support our expansion and $2.3 million in higher share-based compensation, which were due to granting more stock options and restricted shares to employees and consultants, and early vesting of certain restricted shares of some consultants.

Non-GAAP net income (note 1) increased $2.8 million or 12.1% to $25.9 million in the first nine months 2012 from $23.1 million in the first nine months 2011.

Earnings per ADS

Basic earnings per ADS decreased $0.04 to $0.26 in the first nine months 2012 from $0.30 in the first nine months 2011 which was primarily due to the decrease in net income in the first nine months 2012 and the increase of weighted average ordinary shares outstanding.

Diluted earnings per ADS decreased $0.03 to $0.25 in the first nine months 2012 from $0.28 in the first nine months 2011 which was primarily due to the decrease in net income in the first nine months 2012 and the increase of weighted average ordinary shares outstanding, offset by a lesser dilutive effect from the assumed exercise of share options and share units using the treasury stock method as a result of the decrease of stock price in the dilution calculation.

Non-GAAP diluted earnings per ADS (note 1) were $0.44 in the first nine months 2012 and $0.38 in the first nine months 2011.

Cash and Cash Flow

As of September 30, 2012, we had a cash balance of $72.5 million. Our net cash used in operating activities in the first nine months 2012 was $33.6 million. Our net cash used in investing activities in the first nine months 2012 was $16.1 million, including capital expenditures of $15.9 million.

Days sales outstanding was 169 days for the first nine months 2012 and 154 days for the first nine months 2011.

Recent Development

Lease of New Office Premises in Beijing

In August 2012, we entered into a rental agreement with Beijing Ruantong Xutian Technology Development Company Limited, to lease a new office premises with an area of approximately 43,200 square meters in Beijing China, which can host up to 4,000 seats. The new office will be used as our centralized company headquarters to replace existing multi-locations rented offices in Beijing and to meet the growth of our global operation and increase of the number of employees. The leasing period is ten years and the total rental expense for ten years is approximately $93.4 million. The rental deposit was $4.0 million of which $2.0 million was paid in September 2012. The first installment of the rental expense will be paid in the second quarter 2013. We expect to move into the new office in the first half 2013.

Outlook for the fourth quarter of 2012 and year 2012

For the fourth quarter 2012, iSoftStone expects to achieve the following targets:

  • Net revenues for the fourth quarter 2012 to be at least $102.0 million.
  • Net income for the fourth quarter 2012 to be at least $7.5 million.
  • Non-GAAP net income for the fourth quarter 2012 to be at least $11.0 million.
  • Non-GAAP diluted earnings per ADS for the fourth quarter 2012 to be at least $0.19, assuming 58.0 million average ADSs will be outstanding in the fourth quarter 2012. One ADS represents 10 ordinary shares.

For the year 2012, iSoftStone expects to achieve the following targets:

  • Net revenues in 2012 to be at least $379.0 million.
  • Net income in 2012 to be at least $22.0 million.
  • Non-GAAP net income in 2012 to be at least $37.0 million.
  • Non-GAAP diluted earnings per ADS in 2012 to be at least $0.63, assuming 58.5 million average ADSs will be outstanding in 2012. One ADS represents 10 ordinary shares.

The above quarterly and annual outlook of net income reflects an estimated effective income tax rate of 14.5%.

Non-GAAP measures

To supplement our financial results presented in accordance with U.S. generally accepted accounting principles ("GAAP"), we use various non-GAAP financial measures, which are adjusted from results based on U.S. GAAP to exclude share-based compensation, amortization of intangible assets from acquisitions, interest expense of convertible notes, changes in fair value of convertible notes derivatives and changes in fair value of contingent consideration in business combinations. Reconciliations of our non-GAAP financial measures to our U.S. GAAP financial measures are shown in tables at the end of this earnings release, which provide more details about the non-GAAP financial measures.

Our non-GAAP financial information is provided as additional information to help our investors compare business trends among different reporting periods on a consistent basis and to enhance investors' overall understanding of the historical and current financial performance of our continuing operations and our prospects for the future. Our non-GAAP financial information should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for or superior to U.S. GAAP results. In addition, our calculation of this non-GAAP financial information may be different from the calculation used by other companies, and therefore comparability may be limited.

Note 1

Our non-GAAP information (including non-GAAP operating expenses, income from operations, net income and diluted earnings per ADS) excludes share-based compensation, interest expense of convertible notes, change in fair value of convertible notes derivatives, changes in fair value of contingent consideration in connection with business combination, and amortization of intangible assets from acquisitions. For a reconciliation of our non-GAAP measures to our U.S. GAAP measures, please see the reconciliation tables at the end of this earnings release.

Conference Call on November 16, 2012

iSoftStone will host an earnings conference call and live webcast covering its third quarter 2012 financial results at 8:00 a.m. Eastern Standard Time (New York) on November 16, 2012, which is also 9:00 p.m. in Beijing and Hong Kong on November 16.

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

U.S. toll-free

1 866 519 4004

U.K. toll-free

080 8234 6646

Norway toll-free

8001 0719

The Netherlands toll-free

0800 022 1931

China toll-free mobile

400 620 8038

China toll-free land line

800 819 0121

Hong Kong local

852 2475 0994

Hong Kong toll-free

800 930 346

U.S. toll

1 718 354 1231

International toll

+65 6723 9381

Conference ID

4408 3592

Participant password

ISS


A live webcast and archived webcast of the conference call will be available on the Investors section of iSoftStone's website at www.isoftstone.com. To join the webcast, please go to iSoftStone's website at least 15 minutes before the start of the call to register and download and install any necessary audio software.

A telephone replay of the call will be available about two hours after the conclusion of the conference call through 11:59 p.m. Eastern Standard Time on November 23, 2012. The dial-in details for the telephone replay are: 

U.S. toll-free

1 866 214 5335

United Kingdom toll-free

0 800 731 7846

China north toll-free

1080 0714 0386

China south toll-free

1080 0140 0386

Hong Kong toll-free

800 901 596

Singapore toll-free

800 616 3021

Japan toll-free

005 3125 0015

International toll

+61 2 8235 5000

U.S. toll

1 718 354 1232

Conference ID

4408 3592

Safe harbor statement

This news release contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include our preliminary unaudited results for the third quarter 2012 and the first nine months 2012, our financial outlook for the fourth quarter and year 2012 and the continued success of our strategy (including the success of our focus on optimizing business mix, enhancing service capabilities, industry vertical focus, geographic balance, and improving profit margin and operating cash flow), and our ability to make continued long-term investments, particularly in light of a challenging global economic environment and slowdown of the China and global economy.

Our forward-looking statements are not historical facts but instead represent only our belief regarding expected results and events, many of which, by their nature, are inherently uncertain and outside of our control. Our actual results and other circumstances may differ, possibly materially, from the anticipated results and events indicated in these forward-looking statements. Announced results for the third quarter 2012 and the first nine months 2012 are preliminary, unaudited, and subject to audit adjustment. In addition, we may not meet our financial outlook for the fourth quarter and year 2012, continue to realize operational and delivery efficiencies and continued strong client demand or achieve a diversified revenue base, effectively capitalize on our growth opportunities and strategies, enter targeted markets, or otherwise grow our business in the manner planned, successfully complete planned acquisitions, strategic investments or joint ventures or recognize the anticipated benefits of our acquisitions, strategic investments or joint venture, on a timely basis or at all. Our customers may vary their purchasing patterns in response to the economic environment in Greater China and globally. In addition, other risks and uncertainties that could cause our actual results to differ from what we currently anticipate include: our ability to effectively manage our rapid growth; intense competition from China-based and international IT services companies; our ability to attract and retain sufficiently trained professionals to support our operations; and our ability to anticipate and develop new services and enhance existing services to keep pace with rapid changes in technology and in our selected industries. For additional information on these and other important factors that could adversely affect our business, financial condition, results of operations, and prospects, please see "Risk Factors" that begins on page 7 of our 2011 Annual Report on Form 20-F that we filed with the U.S. Securities and Exchange Commission on April 27, 2012, which can be found on our website at www.isoftstone.com and at www.sec.gov.

All projections (including our fourth quarter 2012 and year 2012 financial outlook) in this release are based on limited information currently available to us, which is subject to change. Although these projections and the factors influencing them will likely change, we undertake no obligation to update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Such information speaks only as of the date of this release.

About iSoftStone Holdings Limited

Founded in 2001, iSoftStone is a leading China-based IT services provider serving both greater China and global clients. iSoftStone provides an integrated suite of IT services and solutions, including consulting & solutions, IT services, and business process outsourcing services. The company focuses on industry verticals that include technology, communications, banking, financial services, insurance, energy, transportation, and public sectors.

iSoftStone's American depositary shares began trading on the New York Stock Exchange on December 14, 2010.

For more information, please visit www.isoftstone.com.

iSoftStone Holdings Limited

Mr. Jonathan Zhang
Chief Financial Officer
[email protected]

Christensen

Mr. Tom Myers
[email protected]
Beijing +86 139 1141 3520

Mr. Victor Kuo
[email protected]
Beijing +86 10 5826 4939

www.isoftstone.com

 

iSoftStone Holdings Limited

Unaudited Condensed Consolidated Statement of Operations

(US dollars in thousands, except per share data)










Three months ended


Nine months ended

September 30


September 30


2011


2012


2011


2012

Revenues

74,586


99,192


200,868


280,985

Business tax

(878)


(629)


(3,289)


(4,060)

Net revenues

73,708


98,563


197,579


276,925

Cost of revenues

(47,173)


(63,834)


(125,798)


(184,237)

Gross profit

26,535


34,729


71,781


92,688

Operating expenses:








    General and administrative expenses

(12,760)


(15,795)


(35,975)


(46,609)

    Selling and marketing expenses

(7,704)


(7,817)


(19,219)


(23,953)

    Research and development expenses

(808)


(1,431)


(2,699)


(3,650)

Total operating expenses

(21,272)


(25,043)


(57,893)


(74,212)

Change in fair value of contingent consideration in connection with business combination

(61)


(132)


(143)


(642)

Other income (expenses)

132


(476)


471


(654)

Government subsidies

501


172


1,541


481

Income from operations

5,835


9,250


15,757


17,661

Interest income

265


142


916


657

Interest expense

-


(530)


(1,406)


(1,101)

Change in fair value of convertible notes derivatives

-


-


2,832


-

Income before provision for income taxes and loss in equity method investments, net of income taxes

6,100


8,862


18,099


17,217

Income tax expense

(353)


(1,277)


(1,046)


(2,444)

Income after income tax before loss in equity method investments, net of income taxes

5,747


7,585


17,053


14,773

Loss in equity method investments, net of income tax

(84)


(115)


(342)


(348)

Net income

5,663


7,470


16,711


14,425

Less: Net income (loss) attributable to noncontrolling interest

88


(62)


170


14

Net income attributable to iSoftstone Holdings Limited

5,575


7,532


16,541


14,411









Earnings per share (in US$)








    Basic

0.01


0.01


0.03


0.03

    Diluted

0.01


0.01


0.03


0.02

Earnings per ADS (in US$)








    Basic

0.10


0.13


0.30


0.26

    Diluted

0.09


0.13


0.28


0.25

Weighted average shares (in thousands)








    Basic

553,711


566,978


544,278


562,853

    Diluted

592,847


578,041


596,263


584,337

 

 

iSoftStone Holdings Limited

Unaudited Condensed Consolidated Statement of Comprehensive Income

(US dollars in thousands, except per share data)










Three months ended


Nine months ended

September 30


September 30


2011


2012


2011


2012

Net income

5,663


7,470


16,711


14,425

Other comprehensive income, net of tax of nil








Change in cumulative foreign currency translation adjustment

2,721


3,074


5,726


604

Comprehensive income

8,384


10,544


22,437


15,029

Less: comprehensive income (loss) attributed to the noncontrolling interest

104


(1)


208


55

Comprehensive income attributed to iSoftstone Holdings Limited

8,280


10,545


22,229


14,974

 

 

iSoftStone Holdings Limited

Condensed Consolidated Balance Sheets

(US dollars in thousands)






December


September

31, 2011

30, 2012




(Unaudited)

Cash

101,196


72,459

Restricted cash

1,581


643

Accounts receivable, net of allowance

152,663


213,777

Other current assets

23,052


26,383

    Total current assets

278,492


313,262

Property and equipment

55,791


60,513

Land use rights

3,242


3,192

Intangible assets

4,688


6,920

Goodwill

24,597


26,891

Other non-current assets

11,246


12,718

Total assets

378,056


423,496





Accounts payable

15,924


13,788

Deferred revenues

8,387


7,107

Short-term borrowings

15,094


38,028

Other current liabilities

40,454


39,867

    Total current liabilities

79,859


98,790

Other non-current liabilities

3,438


4,012

    Total liabilities

83,297


102,802





iSoftStone Holdings Limited Shareholders' equity (note a)

293,160


318,603

Noncontrolling interest

1,599


2,091

Total liabilities and equity

378,056


423,496





Note a:




As of September 30, 2012, the number of ordinary shares issued and outstanding was 568,270,939.

 

 

iSoftStone Holdings Limited

Unaudited Condensed Consolidated Statements of Cash Flows

(US dollars in thousands)


Three months ended


Nine months ended


September 30


September 30


2011


2012


2011


2012

Cash flows from operating activities








Net income

5,663


7,470


16,711


14,425

Adjustments to reconcile net income to net cash provided by (used in) operating activities:








Share-based compensation

2,446


1,982


6,329


8,852

Depreciation of property and equipment

1,787


2,242


4,846


6,804

Amortization of intangible assets

706


981


1,998


2,435

Amortization of land use rights

-


18


-


54

Provision of allowance for doubtful accounts

590


138


1,589


231

Loss on equity method investments

81


115


339


348

Loss on disposal of property and equipment

206


45


256


158

Changes in fair value for contingent consideration in connection with business combinations

61


132


143


642

Changes in fair value of convertible notes derivatives

-


-


(2,832)


-

Imputed interest expense in connection with convertible notes

-


-


654


-

Changes in operating assets and liabilities:








Accounts receivable

(8,059)


(11,527)


(34,488)


(60,358)

Other assets

(5,667)


(4,065)


(10,545)


(5,174)

Accounts payable

(587)


(2,436)


(2,764)


(2,467)

Other liabilities

4,255


352


6,931


491

Net cash provided by (used in) operating activities

1,482


(4,553)


(10,833)


(33,559)

Cash flows from investing activities








Purchase of property and equipment

(25,332)


(6,665)


(42,543)


(15,870)

Cost of long-term investments

(7,669)


(1,429)


(12,036)


(1,429)

Proceeds from sales of long-term investments

-


1,836


-


2,413

Purchase of intangible assets

-


-


(107)


-

Consideration paid for business acquisitions

(2,880)


(405)


(3,138)


(2,155)

Consideration paid for acquiring of noncontrolling interest

-


(9)


-


(9)

Restricted cash

(166)


207


1,426


925

Net cash used in investing activities

(36,047)


(6,465)


(56,398)


(16,125)

Cash flows from financing activities








Proceeds from sale of ordinary shares

-


-


211


-

Payment of IPO Expense

-


-


(1,485)


-

Proceeds from exercise of options

463


74


3,252


1,867

Capital contribution from noncontrolling interest shareholder

349


-


349


436

Proceeds from short-term borrowings

-


22,672


-


24,257

Payments of short-term borrowings

-


-


(37,627)


(1,585)

Deferred and contingent consideration paid for business acquisitions

(47)


-


(2,371)


(3,980)

Net cash provided by (used in) financing activities

765


22,746


(37,671)


20,995

Effect of exchange rate changes

731


659


1,689


(48)

Net (decrease) increase in cash and cash equivalents

(33,069)


12,387


(103,213)


(28,737)

Cash at beginning of period

110,936


60,072


181,080


101,196

Cash at end of period

77,867


72,459


77,867


72,459

 

iSoftStone Holdings Limited

Reconciliation of Non-GAAP financial measures to comparable GAAP measures

(US dollars in thousands, except per share data)













1.    Reconciliation of Non-GAAP financial operating expenses, income from operations and net income to comparable GAAP measures














Three months ended
September 30, 2011


Three months ended
September 30, 2012


GAAP


Adjustments


Non-GAAP


GAAP


Adjustments


Non-GAAP

Operating expenses

(21,272)


2,933 (a)


(18,339)


(25,043)


2,428 (c)


(22,615)

Income from operations

5,835


3,432 (a)(b)


9,267


9,250


2,900 (c)(d)


12,150

Net income

5,663


3,432 (a)(b)


9,095


7,470


2,900 (c)(d)


10,370


























Nine months ended

                              September 30, 2011                              


Nine months ended

                              September 30, 2012                              



GAAP


Adjustments 


Non-GAAP


GAAP


Adjustments


Non-GAAP

Operating expenses

(57,893)


7,712 (e)        


(50,181)


(74,212)


10,008 (h)


(64,204)

Income from operations

15,757


8,588 (e)(f)


24,345


17,661


11,493 (h)(i)


29,154

Net income

16,711


6,410 (e)(f )(g)


23,121


14,425


11,493 (h)(i)


25,918

Notes:

(a) Adjustments to exclude share-based compensation of $2,346 and amortization of intangible assets from acquisitions of $587 from the unaudited condensed consolidated statements.

(b) Adjustments to exclude share-based compensation of $100, amortization of intangible assets from acquisitions of $338 and change in fair value of contingent consideration connection with business combinations of $61 from the unaudited condensed consolidated statements.

(c) Adjustments to exclude share-based compensation of $1,849 and amortization of intangible assets from acquisitions of $579 from the unaudited condensed consolidated statements.

(d) Adjustments to exclude share-based compensation of $133, amortization of intangible assets arising from acquisitions of $207 and change in fair value of contingent consideration in connection with business combinations of $132 from the unaudited condensed consolidated statements.

(e) Adjustments to exclude share-based compensation of $6,122 and amortization of intangible assets from acquisitions of $1,590 from the unaudited condensed consolidated statements.

(f) Adjustments to exclude share-based compensation of $207, amortization of intangible assets arising from acquisitions of $526 and change in fair value of contingent consideration in connection with business combinations of $143 from the unaudited condensed consolidated statements.

(g) Adjustments to exclude interest expenses of convertible notes of $654 and change in fair value of convertible notes derivatives of $(2,832) from the unaudited condensed consolidated statements.

(h) Adjustments to exclude share-based compensation of $8,466 and amortization of intangible assets from acquisitions of $1,542 from the unaudited condensed consolidated statements.

(i) Adjustments to exclude share-based compensation of $385, amortization of intangible assets arising from acquisitions of $458 and change in fair value of contingent consideration in connection with business combinations of $642 from the unaudited condensed consolidated statements.

 

2.    Reconciliation of diluted EPS to Non-GAAP diluted EPS




















Three months ended
September 30, 2011


Three months ended
September 30, 2012


GAAP




Non-GAAP


GAAP




Non-GAAP

measures


Adjustments


  measures  

measures


Adjustments


  measures  

Weighted average ordinary shares outstanding used in computing diluted EPS (in thousands)

592,847


-


592,847


578,041


-


578,041(a)

Diluted earnings per share (in US$)

0.01




0.02


0.01




0.02

Diluted earnings per ADS (in US$)

0.09




0.15


0.13




0.18













Note:                                                       












(a)   In the earning release for the second quarter 2012, we estimated 58.5 million average ADSs or 585.0 million shares will be outstanding in the third quarter 2012. The difference with the actual number of 578.0 million shares was primarily due to the partial delay of new option and share unit grants and the less impact of existing stock options resulting from a lower stock price than our original estimates.














Nine months ended
September 30, 2011


Nine months ended
September 30, 2012


GAAP




Non-GAAP


GAAP




Non-GAAP

measures


Adjustments


measures

measures


Adjustments


measures

Weighted average ordinary shares outstanding used in computing diluted EPS (in thousands)

596,263


-


596,263


584,337


-


584,337

Diluted earnings per share (in US$)

0.03




0.04


0.02




0.04

Diluted earnings per ADS (in US$)

0.28




0.38


0.25




0.44

SOURCE iSoftStone Holdings Limited

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