AsiaInfo Holdings Inc. Reports Operating Results (10-Q)
Asiainfo Holdings Inc. has a market cap of $1.12 billion; its shares were traded at around $23.77 with a P/E ratio of 28.3 and P/S ratio of 4.6. ASIA is in the portfolios of Ken Heebner of CAPITAL GROWTH MANAGEMENT LP, Paul Tudor Jones of The Tudor Group, Steven Cohen of SAC Capital Advisors, Chuck Royce of Royce& Associates.
Highlight of Business Operations: Except for certain hardware procurement and resale transactions, we conduct substantially all of our business through our Chinese subsidiaries and VIEs. Prior to the enactment of Chinas new Chinese Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, foreign-invested enterprises, or FIEs, were generally subject to a 30% state enterprise income tax plus a 3% local income tax. However, most of our operating subsidiaries in China, as FIEs, were entitled to tax holidays or certain preferential tax treatments, which thus reduced their effective rate of income tax to 15% or lower in some cases. Since the EIT Law became effective, all resident enterprises are subject to a flat 25% income tax rate, unless they are otherwise eligible for certain preferential tax treatments under the new rules.
Pursuant to the implementation rules to the EIT Law issued in December 2007, and the several subsequent transition rules, certain of our subsidiaries in China can continue to enjoy preferential tax rates, as long as they are qualified as high and new technology enterprises, or HNTEs. Some of our subsidiaries and VIEs in China became subject to a normal 25% income tax rate, while certain of our subsidiaries and VIEs in China remain eligible for the lower rates under the transition rules. The HNTE status allows qualifying entities to be eligible for a 15% tax rate for three years. At the conclusion of the three year period, the qualifying enterprise has the option to renew its HNTE status for an additional three years through a simplified application process if such enterprises business operations continue to qualify for HNTE status. After the first six years, the enterprise would have to go through a new application process in order to renew its HNTE status. As of December 2009, we had received certification of HNTE status for AsiaInfo Technologies, AsiaInfo Technologies (Chengdu), or AICD, and Lenovo Security, which allows for a reduced 15% tax rate starting January 1, 2009. Accordingly, we have used the reduced rate of 15% in the calculations of current and deferred tax balances for AICD. AsiaInfo Technologies was approved as a key software enterprise, and it is eligible for the preferential tax rate of 10% for 2008 and 2009 and 15% for 2010. Lenovo Security was subject to an applicable tax rate of 0% from 2005 to 2007 and 7.5% from 2008 to 2009. If Lenovo Security continues to maintains its HNTE status in 2010, then it will remain subject to an applicable tax rate of 7.5% in 2010.
Income taxes. Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits, by applying statutory tax rates applicable to future years. According to the new EIT Law, the transitional rules and relevant regulations, the eligible tax rate for AsiaInfo Technologies is 10% for 2009 and 15% for 2010 and 2011; the eligible tax rate for AICD is 15% for 2009 to 2011; and the eligible rate for Lenovo Security is 7.5% for 2009 to 2010, 15% for 2011. Unless otherwise specified, our other Chinese subsidiaries and VIEs are subject to the statutory tax rate of 25%.
Software products and solutions revenue was $57.8 million for the three-month period ended March 31, 2010, representing an increase of 36.1% over the comparable period in 2009 and a 13.4% sequential decrease. The year-over-year increase was mainly due to growth in both our telecommunications software business and our IT security business. The sequential decrease was mainly due to the seasonality of our IT security business. Telecommunications software products and solutions revenue for the three-month period ended March 31, 2010 was $53.8 million, representing a year-over-year increase of 36.5% and a sequential increase of 2.7%. Those increases were due to strong uptake for our software and service solutions among our top three telecommunications customers with an increasing number of contracts we have entered into to upgrade and maintain their existing systems. Software products and solutions revenue from our IT security business in the three-month period ended March 31, 2010 was $4.0 million, representing a 30.8% year-over-year increase and a 72.1% sequential decrease. The year-over-year increase was attributed to several major high-margin contracts signed with government agencies. The sequential increase was partially due to seasonality, as sales in our Lenovo-AsiaInfo business unit are typically weakest in the first half of each year.
Service revenue was $3.9 million in the three-month period ended March 31, 2010, representing an decrease of 21.9% over the comparable period in 2009 and a 27.5% sequential decrease. The decreases were primarily due to the fluctuation in revenue related to our IBM Arrangement related revenue in which we act as a sales agent in connection with sales of IBM equipment to certain of our telecommunications customers. Third-party hardware revenue for the three-month period ended March 31, 2010 was $1.8 million, representing a year-over-year decrease of 48.9% and a sequential decrease of 56.9%. Third-party hardware revenue has been generally decreasing for many years as we have gradually shifted our focus to our software product solutions business. However, from time to time we offer third-party hardware for certain projects in response to customer requests.
Our Lenovo-AsiaInfo business unit contributed $4.2 million, approximately 6.7% of our total revenue in the three-month period ended March 31, 2010, including a 6.9% contribution to software products and solutions revenue and a 1.8% contribution to service revenue. Overall, total revenue for our Lenovo-AsiaInfo business unit increased 10.4% over the year-ago period and decrease 71.7% sequentially. Our AsiaInfo Technologies business unit contributed $59.2 million, approximately 93.3% of our total revenue in the three-month period ended March 31, 2010. Overall, total revenue for the AsiaInfo Technologies business unit increased by 25.6% over the year-ago period and decreased 3.4% sequentially.
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