Earnings Call Transcript - CLPS Q2 2022

Operator, Operator

Hello, everyone and welcome to the First Half of Fiscal Year 2022 Earnings Conference Call for CLPS Incorporation. Please note that there is a technical difficulty. I will turn the call over to Rhon Galicha from CLPS Investor Relations for opening remarks and introductions. Please note that today's call is being recorded. Please go ahead, Mr. Rhon.

Rhon Galicha, Investor Relations

Thank you, operator. Hello, everyone, and welcome to CLPS Incorporation's earnings conference call for the first half of fiscal year 2022. This morning, CLPS Incorporation announced its financial results for the first half of fiscal 2022, which are available on the company’s investor relations website at ir.clpsglobal.com. Before we proceed, I would like to remind you that our discussions today may contain forward-looking statements as defined under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties, which could result in actual outcomes differing significantly from those discussed today. For details on these risks and uncertainties, please refer to our Form 20-F filed with the U.S. Securities and Exchange Commission, along with other related documents. I would now like to present a cautionary disclaimer regarding these statements. Some of the comments we make during this discussion constitute forward-looking statements that carry certain protections under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements cover our beliefs, plans, objectives, expectations, and future performance and involve known and unknown risks and uncertainties beyond our control that may affect our actual results. Any statements made are qualified in their entirety by this cautionary note, which addresses various risks regarding our financial and operational performance and expectations for the future. All reports on these risks are readily available upon request or can be accessed through the SEC’s website at www.sec.gov. We are not obligated to revise or update any forward-looking statements after this call or on the dates of any such statements. The information presented today is accurate as of this call's date, and CLPS does not commit to updating any forward-looking statements unless required by law. For any non-GAAP measures discussed, reconciliation information is available in the earnings release issued earlier today. Now, I would like to introduce the management team participating in today's call. Mr. Henry Li, Chief Operating Officer of CLPS, will begin with a review of recent company developments and operating results, followed by Ms. Rui Yang, Chief Financial Officer of CLPS, who will provide more detailed financial results. Please be advised that all lines have been muted to minimize background noise. After management's prepared remarks, we will open the floor for a Q&A session, which Mr. Wilson Wong, Executive Vice President of CLPS, will also join. I will now turn the call over to Henry. Henry, please proceed.

Henry Li, Chief Operating Officer

Thank you, Rhon. Thank you, operator. Thank you all for joining the call today. In the first half of fiscal year 2022, CLPS has achieved impressive results, both from financial and business perspectives. We gained another period of solid market share, higher profitability, consistent strategic execution, and technological progress, which translated into stronger financial performance. Despite the ongoing pandemic, under the emergence of different variants like Omicron as well as the global economic uncertainties, we still achieved consistent positive growth trends and strong financial results during the first half of fiscal year 2022. We have been able to sustain success due to our experience and strong execution capability of high-quality IT services and our continued improvement and in-depth cooperation among our major clients in banking, wealth management, ecommerce, and automobile industries. As for the financial figures, Ms. Rui Yang will discuss them in detail later. But for now, please allow me to talk about the highlights of our business and operations during the period. Since CLPS listed on the NASDAQ market, we have achieved a year-over-year revenue growth rate of more than 30%. Thanks to our solid profitability, technical and innovation capabilities, as well as our ability to provide clients with high-quality and efficient IT services. Our existing clients still account for a large portion of our current business, proof of our competitiveness, which demonstrates that the IT services we provide to them are irreplaceable. We attribute this to our well-built and long-term business relationships with our clients. Furthermore, CLPS currently plays an important role in improving the performance of IT systems and providing diversified scenarios to effectively increase our clients' profitability and reduce operating costs. We are especially helpful in establishing a talent resource supply ecosystem for all clients through our professional IT talent training programs. The talent creation program, called TCP, and the talent development program, called TDP. All these factors ultimately led to strategic partnerships with clients, garnered client trust, and achieved great results. Now, I would like to discuss some key aspects related to our core business. First of all, our blockchain solution company LinkCrypto, based in Hong Kong, has been supporting overseas clients' business operations and IT system maintenance. It is also committed to promoting a non-fungible token or NFT platform, which has initially generated revenue during the first half of fiscal year 2022. We are proactively promoting it with potential clients in Hong Kong. Secondly, our joint venture company MSCT is implementing the loan for employee solution aimed at improving customer acquisition. This includes integration and back-office operations and management capabilities. This product will be marketed to more clients in Hong Kong and Southeast Asia. At the same time, we have begun research on developing the next generation of loan systems for banks and financial institutions so that our clients can leverage the new system for better business integration, unified operations management, intelligent liquidation and risk control, as well as quickly launching new business through APIs. Last but not least, our Qinson credit card company has significantly advanced during this period, maintaining competitive gross performance while strengthening the core products of its R&D team. Presently, we are in discussions with several overseas banks about potential partnerships related to our product. It is worth mentioning that since the digital renminbi gained traction in China, we have developed a turnkey solution in partnership with a leading bank in China, integrated with CLPS expertise in banking, finance, ecommerce, and mobile developments. This solution will enable banks and their customers to enjoy plenty of intelligent functionalities like smart contracts, online payments, flexible settlement, supply chain management, and marketing content, while providing safe, reliable, and flexible digital renminbi services. We have also rolled out a digital renminbi ecommerce platform to help our clients promote the use of digital renminbi. Let's talk about our Southeast Asia business. We continued to increase our investment and business presence in this market. Additionally, we have started entering the tourism and education industries. Technological innovation will be the driving force for growth in these two industries, as it will increase profitability and market share for clients. This cross-industry investment will also allow us to achieve cross-selling of products and a super precision effect. All these achievements and the progress I have shared highlight the competitive advantages of our business and the effectiveness of our strategies which will continue to drive the long-term value of our company. We are optimistic about achieving this goal through the synergy between our IT services and products, improving service delivery capability and enhancing operating efficiency. Thank you. Now, I would like to turn the call over to our CFO, Rui Yang, to discuss the first half of fiscal 2022 financial results. Rita, please go ahead.

Rui Yang, Chief Financial Officer

Thank you, Henry. I will now provide an update on our financial performance for the first half of fiscal year 2022. Please note that all numbers provided are in U.S. dollar terms, and that all comparisons are made on a year-over-year basis. In the first half of fiscal 2022, our revenues increased by $17.6 million or 30.2% to $75.9 million from $58.3 million. This increase in revenue was mainly due to an increase in revenue from IT consulting services. In particular, revenue from IT consulting services increased by 26.2% to $72 million from $57.1 million. The increase was due to the heightened demand from existing and new clients and our improved service delivery capability. Revenue from customized IT solutions services increased by 208.1% to $3.3 million from $1.1 million. The increase was primarily due to our strengthened relationships and expanded business scope with our existing clients. Revenue from other services increased by 236.7% to $0.7 million from $0.2 million. The increase was primarily due to the increased demand for other services, including consulting services. Gross profit increased to 20.7% to $22.3 million from $18.5 million. As for operating expenses, marketing expenses increased by 27.3% to $2.3 million from $1.8 million due to the increase in salary expenses as new staff were hired to improve the company's capability of service delivery to meet client demand. As a percentage of total revenue, marketing expenses decreased to 3% from 3.1%. The decrease was primarily due to the increase in operational efficiency as a result of economies of scale. Research and development expenses decreased by 32.2% to $4.2 million from $6.2 million. As a percentage of total revenue, research and development expenses decreased to 5.5% from 10.6%. The decrease was primarily due to optimizing our R&D staff structure by reallocating a number of staff to deliver customized IT solutions to meet increased demand for the service. As a result, the R&D salary expenses were shifted to costs. General and administrative expenses increased by 38.3% to $9.2 million from $6.6 million. As a percentage of total revenue, general and administrative expenses increased to 12.1% from 11.4%. The increase was primarily due to an increase of share-based compensation, new staff we hired, and a year-over-year increase in salary expenses. Operating income increased by 54.2% to $7.6 million from $4.9 million. Operating margin was 10% compared to 8.4% in the prior year period. Total other expenses net of other income was $0.2 million compared to $0.1 million of total other income net of other expenses in the prior year period. Provision for income taxes increased by $0.8 million to $0.9 million from $0.1 million, mainly due to certain subsidiaries making profits and using up recoverable losses. Net income rose by 31.2% to $6.5 million from $4.9 million over the same period of last year. After excluding the impact of non-cash share-based compensation expenses, non-GAAP net income increased by 39.1% to $8.9 million from $6.4 million. After excluding the impact of non-controlling interest, net income attributable to CLPS Incorporation shareholders was $6.3 million or $0.31 basic and diluted earnings per share compared to $4.9 million or $0.3 basic and diluted earnings per share in the prior year period. After excluding the impact of non-cash share-based compensation expenses, non-GAAP net income attributable to CLPS Incorporation shareholders was $8.7 million or $0.43 basic and diluted earnings per share compared to a non-GAAP net income attributable to CLPS Incorporation shareholders of $6.4 million or $0.39 basic and diluted earnings per share in the prior year period. As of December 31, 2021, we had cash and cash equivalents of $21.7 million compared to $24.7 million as of June 30, 2021. As of December 31, 2021, we had a total number of employees of 3,667, up 9.6% year-over-year. In the first half of fiscal 2022, revenue per employee was up by 18.8% to $20,700 per person. Net income per employee was up by 19.7% to $1,800 per person. Looking forward for fiscal year 2022, we expect total sales growth in the range of approximately 30% to 35%, and non-GAAP net income growth in the range of approximately 32% to 37%, compared to fiscal year 2021 financial results. This concludes our prepared remarks. Operator, we are now ready for questions.

Operator, Operator

We will now take our first question from Tony Xu. Please go ahead.

Unidentified Analyst, Analyst

Hello. Congratulations on your strong financial performance. I have two questions that I would like to further explore. The first one is, it seems that our business is growing in overseas markets. What's your strategy to keep the momentum? And second, what's the reason why your G&A expense has increased year-over-year?

Wilson Wong, Executive Vice President

Hi. This is Wilson. Let me take the first question. In regard to the growth in overseas markets, as mentioned earlier, we have achieved a 15.4% growth in our overseas revenues for the first half of fiscal year 2022, and we are further expanding our international presence and industry reach in new markets. We continue to invest in the Southeast Asia region, particularly in Singapore. In addition, our goal for 2022 is to attract more clients and create more business opportunities in the U.S. For the next question, I would like to have our CFO, Rita, answer that. Rita, I turn it over to you.

Rui Yang, Chief Financial Officer

Okay. Thank you, Wilson. About the second question regarding the increase in G&A expense, since we hired new staff and implemented strategies to further drive our business, salary expenses increased, and also share-based compensation increased during this period as well as the year-on-year salary expenses we paid to our staff. I hope we answered your questions. Thank you.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

And we will go ahead and move on to our next question from Rebecca Chang. Please go ahead.

Unidentified Analyst, Analyst

Thank you. My question is about your customized IT solutions services. You highlighted that revenue in this segment increased by more than 200%. What percentage do we expect to end, and what will drive this segment's growth going forward? Thank you.

Henry Li, Chief Operating Officer

Thank you. This is Henry. Let me take the questions. I think our dual-engine strategy is our core strategy to drive our future growth. Horizontally, we plan to achieve top-line growth by bringing in new clients and through overseas expansion, and vertically, we are expanding services and the business scope for existing clients. Our IT consulting services and customized IT solutions business are complementary, which will bring each other more opportunities going forward. Hopefully, this answered your question. Thank you.

Operator, Operator

And with that, that does conclude our question-and-answer session. I would now like to hand the call back over to Henry Li for any additional or closing remarks.

Henry Li, Chief Operating Officer

Thank you again for joining us on today's call, and we appreciate your ongoing support. We look forward to updating you on our progress in the weeks and months ahead. Have a good day. Thank you.

Operator, Operator

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.