Earnings Call Transcript - CLPS Q4 2021

Operator, Operator

Please standby. Hello, everyone. Welcome to the Second Half and Full Year Fiscal 2021 Earnings Conference Call for CLPS Incorporation. Please note that today’s conference is being recorded. At this time, I would like to turn the call over to Mr. Rhon Galicha from CLPS Investor Relations for opening remarks and introductions. Please go ahead.

Rhon Galicha, Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us on today’s call. CLPS Incorporation announced its second half and full year fiscal 2021 financial results this morning. The earnings release is now available on the company’s IR website at www.ir.clpsglobal.com. Before we continue, please note that our discussions today may include forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. As such, our results may be materially different from the views expressed today. Further information regarding these risks, uncertainties, assumptions and other factors that could affect our financial results is included in our Form 20-F filed with the U.S. Securities and Exchange Commission and other documents filed with the U.S. SEC. In that respect, I would like to read the following disclaimer applicable to such statements. Certain of the statements made in our discussion are forward-looking statements within the meaning and protections of Section 27A of the Securities Act of 1933 as amended and Section 20E of the Securities Exchange of 1934 as amended. Forward-looking statements include statements with respect to the company’s beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, uncertainties and other factors, which may be beyond the company’s control and which may cause the actual results, performance, capital ownership or achievements of the company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All such statements attributable to us are expressly qualified in their entirety with this cautionary notice, including, without limitation, those risks and uncertainties related to the company’s financial and operational performance in the second half and full year of fiscal 2021 and its expectations of the company’s future performance, its preliminary outlook and guidance offered in this discussion, as well as the risks and uncertainties described in the company’s most recently filed SEC reports and filings. Such reports are available upon request from the company or from the Securities and Exchange Commission, including through the SEC’s Internet website at www.sec.gov. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date hereof or after the respective days on which any such statements otherwise are made. All information provided today is of the date of this call, and CLPS does not undertake any obligation to update any forward-looking statements, except as required under the applicable law. With respect to any non-GAAP measures discussed during today’s call, the company reconciliation information related to those measures can be found in the earnings release issued earlier today. Now allow me to introduce the management team present on the call today. Mr. Raymond Lin, Chief Executive Officer and Director of CLPS, will start off the call with a review of recent company developments and operating results; followed by Ms. Rui Yang, Chief Financial Officer of CLPS, who will discuss financial results in more detail. Please note that all lines have been placed on mute to prevent background noise. Following management’s prepared remarks, we’ll open up the call for a Q&A session. Mr. Henry Li, the company’s Chief Operating Officer; and Mr. Wilson Wong, Executive Vice President of CLPS, will also join the Q&A session. With that said, I would now like to turn the call over to Raymond. Raymond, please go ahead.

Raymond Lin, CEO

Okay Rhon. Thank you, Rhon. Hello everyone and thanks for joining today's call. I hope each of you and your family are safe and well. In today's call I'm excited to tell you about our fiscal year 2021 performance, both in financial and business strategy, including our strategic pipeline which we are confident will further drive CLPS's sustainable growth. The financial performance going on during fiscal year 2021, both us and other profitable years as reflected in our financial results, both our top line and bottom line. Our revenue increased by 41% to US$126.1 million and our net income increased by 127% to $7 million year-over-year. Further details, my CFO, Rui, will share with you later. Now, let me talk about the strategies that contributed to our financial success this fiscal year. First of all, I'd like to thank our more than 3,000 staff, the backbone of the company's continued success. We greatly appreciate your dedication and I'm more than happy that our CLPS family is consistently growing every year. We are also hiring more talented personnel to meet the demand for IT professionals and ensure efficient IT services delivery to our existing and new clients. On a positive note, we achieved a number of advancements regarding the fulfillment of our company initiatives in fiscal 2021. We continued to execute our dual-engine development strategy through the improvement of our technology and product capabilities while maintaining the organic growth of our business. In February this year, we raised $16 million through a registered direct offering, which we partly utilized in various investments, M&A, joint ventures, financial and operational enhancements in the domestic and overseas markets, building on top of our existing working capital. CLPS has been committed to contributing to the digital trend of global finance. Let me highlight some initiatives we have undertaken. We acquired a stake of 53.33% in MSCT Investment Holdings Limited, a subsidiary of Minshang Creative Technology Holdings Limited, which is a Hong Kong-listed company. They have a range of banking system products. Our first project is to upgrade the loan system, which is important for overseas banks to meet government regulations. In the future, we may integrate this with our credit card system. Also, we are continuously upgrading various banking products. We have formed a joint venture with Columbus Century Development Company Private Limited, a blockchain technology solutions provider. This partnership aims to develop and upgrade blockchain-based digital asset solutions for financial institutions, such as custody, exchange, payment, and NFT distribution platforms, covering every category in finance, including wealth management and diverse investment transactions among others. To further expand our business in Southeast Asia, we leverage our highly skilled delivery team in Southeast Asia and our robust R&D team in China to gauge IT service demand from our clients in the region. Additionally, we are setting up CLPS technology facilities that will allow us to broaden our operational scope in this location. Our MSCT activities in key markets in Southeast Asia and the Asia Pacific, such as Singapore, Malaysia, India, Japan, Australia, and the Philippines will become more dynamic, positioning us well within these regions. Based on our experiences, we are investing to develop a new generation of credit card systems that provide comprehensive services for credit card issuance and lifecycle management. This system is designed to support a variety of issuers from small to large-scale financial institutions, banks, and credit companies. The architecture includes multiple cores, products, institutions, and languages while managing portfolios across countries and different issuers. This scenario-based engine allows for the mobilization of financial institution account structures and authorization management. Our system architecture, powered by distributed microservices, offers a cost-effective infrastructure with high availability. This API is an online portal supported by more than 1,200 ports and APIs, allowing any third-party system to trigger flexible integration services and access data. Currently, it is in its pilot phase, with a commercial version expected to launch early next year. With high rental rates in Hong Kong and Singapore, we have purchased office properties in prime business locations, creating a promising real estate investment asset to support our IT service delivery efficiently. In terms of R&D, we continue researching in the big data area, especially integrating AI technology into data connections, analytics, and decision-making to help our clients enhance sales and marketing efficiencies through systematic data handling. We plan to launch our big data products next year, targeting our brand customers in the insurance and automobile sectors. We will continue investing in areas like RPA, focusing on enhancing efficiency in client operations. During this recent 2021, we secured IT services contracts in the U.S., primarily in the e-commerce sector. Our IT services include big data management, data analytics, and payment risk measurement for international businesses. In the second half of fiscal 2021, our revenue from e-commerce grew by 100%. Our revenue in the automotive industry increased by 20% to $5 million during the remaining period of fiscal 2021. Our IT service consulting and solution services engage leading automotive companies, covering intelligent manufacturing, navigation systems, machine learning, vehicle central console systems, and new interlink vehicle projects. Moreover, we have undertaken initiatives to boost our business efficiency by restructuring the company's organizational framework and enhancing sales functions. Concurrently, we have brought in senior management with extensive experience, including top-tier financial executives to guide and streamline our business trajectory. As we move forward, we are committed to leveraging our strategic business insights, investments, and R&D efforts in advanced technology, such as big data, cloud, and blockchain, to enable our clients to achieve digital transformation. We are also innovating and streamlining our next-generation bank loan system, reforming old banking systems, but ensuring high degrees of automation and central control. Ultimately, we aim to centralize and simplify the risk control process. We are optimistic about driving our business potential across Southeast Asia and the U.S. to enhance our overseas revenues further. Lastly, on behalf of the CLPS family, I sincerely thank you for your continued trust and support as our honored shareholders. Thank you. Now, I would like to turn the call over to our CFO, Rui Yang, to discuss the second half and full year fiscal 2021 financial results. Okay, Rui, go ahead, please.

Rui Yang, CFO

Okay. Thank you, Raymond. I will now provide an update on our financial performance for the second half followed by our full year results for fiscal 2021. 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 second half of fiscal 2021, our revenues increased by $20.9 million or 44.6% to $67.7 million from $46.8 million. The increase in revenue was mainly due to an increase in revenue from IT consulting services. In particular, revenue from IT consulting services increased 43.2% to $65.2 million from $45.5 million. This growth resulted from increased demand for our services from existing and new clients, as well as improved service delivery capabilities. Revenue from customized IT solution services increased 81% to $2.1 million from $1.1 million, primarily due to demand from existing clients. Revenue from other services surged 139.5% to $0.5 million from $0.2 million, driven by heightened demand for other services, including headhunting. Gross profit rose 37.8% to $21.7 million from $15.7 million. Regarding operating expenses, selling and marketing costs increased 18.3% to $2.0 million from $1.7 million, primarily due to salary expenses related to hiring new staff to enhance service delivery capability. As a percentage of total revenues, selling and marketing expenses decreased to 2.9% from 3.5%, reflecting improved operational efficiency due to economies of scale. Research and development expenses rose 32.5% to $7.2 million from $5.4 million, mainly due to new research projects and ongoing R&D efforts in big data, cloud computing, blockchain, robotic process automation, and artificial intelligence. As a percentage of total revenues, R&D expenses decreased to 10.6% from 11.6%. General and administrative expenses rose 20.2% to $10.2 million from $8.4 million, primarily attributed to non-cash share-based compensation and personnel-related expenses. After excluding non-cash share-based compensation, non-GAAP general and administrative expenses increased 15.3% to $6.6 million from $5.7 million. Expressed as a percentage of total revenues, general and administrative expenses decreased to 15% from 18%, reflecting improved efficiency and refined management. Operating income soared 417.9% to $3.4 million from $0.7 million, with an operating margin of 5.1% compared to 1.4% in the same period last year. Total other expenses, net of other income, was $0.2 million compared to $0.5 million total other income in the prior year. Provision for income taxes rose by $0.8 million to $1.2 million from $0.4 million. Net income surged 166% to $2.1 million from $0.8 million year-over-year. After excluding non-cash share-based compensation expenses, non-GAAP net income grew by 53.7% to $5.7 million from $3.7 million. After excluding the impact of non-controlling interests, net income attributable to CLPS Incorporation's shareholders in the second half of fiscal 2021 was $2.0 million or $0.11 basic and $0.1 diluted earnings per share. After excluding non-cash share-based compensation, non-GAAP net income attributable to CLPS Incorporation's shareholders in the second half of fiscal 2021 was $5.6 million or $0.3 basic and $0.29 diluted earnings per share, compared to a non-GAAP net income attributable to CLPS Incorporation's shareholders of $3.5 million or $0.23 basic and diluted earnings per share. Now I will provide an overview of the full year fiscal 2021 results. For the year ended June 30, 2021, revenues grew 41% to $126.1 million from $89.4 million. This increase was primarily driven by IT consulting services, which increased 40.3% to $122.3 million from $87.1 million due to heightened demand from existing and new clients and improved service delivery. Revenue from customized IT solution services rose 69.7% to $3.1 million from $1.8 million, and revenue from other services increased 51.5% to $0.7 million from $0.4 million. Revenue generated outside mainland China rose 28.1% to $13.6 million from $10.6 million, reflecting our successful global expansion strategy. Gross profit increased 29.1% to $40.2 million from $31.1 million. Regarding operating expenses, selling and marketing expenses rose 22.7% to $3.8 million from $3.1 million, primarily due to salary increases as new staff were recruited to enhance service delivery capacity. Selling and marketing expenses, as a percentage of total revenues decreased to 3% from 3.4%, indicating improved operational efficiency. Research and development expenses increased 27.8% to $13.3 million from $10.4 million, reflecting the establishment of new projects and ongoing R&D in big data, cloud computing, blockchain, RPA, and artificial intelligence. As a percentage of total revenues, R&D expenses decreased to 10.6% from 11.7%. General and administrative expenses rose by 2.7% to $16.8 million from $16.3 million, mainly due to increases in non-cash share-based compensation expenses. After excluding non-cash share-based compensation, non-GAAP general and administrative expenses fell 6.2% to $11.8 million from $12.6 million. In terms of total revenues, general and administrative expenses decreased to 13.3% from 18.3%. Operating income experienced a remarkable increase of 161.2% to $8.4 million from $3.2 million, resulting in an operating margin of 6.6% compared to 3.6%. Total other expenses, net of other income, was $0.1 million, compared to $0.5 million of total other income in the prior year. Provision for income taxes increased by $0.5 million to $1.3 million from $0.8 million. Net income jumped 127.9% to $7 million from $3.1 million in the prior year period. Excluding non-cash share-based compensation, non-GAAP net income grew by $5 million or 71.5% to $12.1 million from $7.1 million. After excluding non-controlling interests, net income attributable to CLPS Incorporation's shareholders for the year ended June 30, 2021, was $6.8 million or $0.39 basic and diluted earnings per share, compared to $2.9 million or $0.20 basic and diluted earnings per share in the prior year. Excluding the impact of non-cash share-based compensation, non-GAAP net income attributable to CLPS Incorporation's shareholders for the year ended June 30, 2021, was $11.9 million or $0.69 basic earnings per share and $0.68 diluted earnings per share, versus $6.9 million or $0.47 basic and diluted earnings per share in the prior period. As of June 30, 2021, we held cash and cash equivalents of $24.7 million compared to $12.7 million as of June 30, 2020. The total number of employees reached 3,352, up 22% year-over-year. Revenue per employee increased by 15.5% to $37,600 per person, and net income per employee surged by 86.7% to $2,100 per person. Looking forward to 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

Thank you. We'll take our first question from Jaden Wing.

Unidentified Analyst, Analyst

Okay. Congratulations on the remarkable financial results. I have three questions. The first question is what is the reason tech company monopoly in China? There will be many more opportunities for new and smaller players in China, given your competitive advantage in providing IT services to overseas clients for their services in China. Has CLPS seen significant pickups since the last tech company clampdown?

Henry Li, COO

Hello. This is Henry Li, the company's COO. First of all, thanks for your question. Now let me answer these questions. Our strong financial numbers for the second half and the full year of fiscal 2021 show the consistent growth of all clients' demand for IT services, specifically in mainland China. Though, we have always pointed out that our global expansion strategy has been very effective, with revenue generated from outside China increasing by 28.1% year-over-year. It is undeniable that our revenue from mainland China significantly contributes to our aggregate revenue. Thus, we believe that it is not merely taking advantage of the large tech clampdown. It is about the competitive advantage that we have always maintained. In addition, the effectiveness of our dual-engine growth strategy diversifies our IT products, improves our delivery capabilities in domestic and international markets, and enhances relationships with our clients to increase our income, ultimately bringing more benefits to our investors and improving our overall valuation. As you have mentioned, given our position as a professional IT service provider, we explore this business opportunity as well. Thank you. I hope I answered your questions.

Unidentified Analyst, Analyst

Okay. My last question is, the company got a global contract in February 2021. However, the company name was not released. Can you provide an update on the cloud global contract? After working with this cloud for years, I'm wondering if they would consider using CLPS for their IT services, particularly their China cross-border transaction services and your crypto transaction platform. So companies set up linking crypto with Columbia earlier this year. Could you please provide an update? Does CLPS continue to exploit opportunities in digital currency management for financial institutions outside of China?

Wilson Wong, Executive Vice President

Hi. Thank you for the questions. This is Wilson. I would like to reiterate that due to the confidentiality agreement, we cannot disclose the name of the client. However, we will maintain that confidentiality to ensure our long-term and stable relationship with this client. We hope for your understanding of our standpoint. However, we are very pleased that our global expansion, specifically in the U.S. market, has already paid off because of the client we secured there. Regarding your questions, our business with this client is progressing well. In addition to the current IT consulting services we provide, we are also exploring possibilities for providing IT solutions services for this client.

Rui Yang, CFO

Yes. Hello. This is Rui. Let me also add that this client contributes to our e-commerce revenue in terms of operational area. In the second half of fiscal year 2021, our revenue from the e-commerce area increased by more than 100%. We believe that our strong delivery capabilities and advanced IT products will further strengthen our collaboration with clients. Yes, thank you for your question.

Operator, Operator

And we'll take our next question from Jacob Kurtz with Greenridge Global.

Jacob Kurtz, Analyst

Hi. So you guys have released a series of positive announcements this year. But the stock has continued to fall. Why do you think that is? And how do you guys think you're going to turn it around?

Rui Yang, CFO

Hello. This is Rui. Sorry, can you repeat your question?

Jacob Kurtz, Analyst

So you guys have released a series of positive announcements this year, but the stock has continued to fall. Why do you think that is? And how will you turn it around?

Wilson Wong, Executive Vice President

Rui, do you want me to answer the question? So, yeah …

Rui Yang, CFO

Yeah. Hello.

Wilson Wong, Executive Vice President

Yeah. Let me take the question. Some of the stock price movements are quite volatile, which generally relates to market behavior and material that has been disclosed. Regarding our strategy, as mentioned by Mr. Raymond, we will continue to implement our dual-engine strategies. We will deliver our results and communicate transparently to our shareholders. I hope I answered your questions.

Jacob Kurtz, Analyst

Yes. That is all. Thank you.

Operator, Operator

It appears we have no further questions at this time. I would like to turn the conference back to management for any additional or closing remarks.

Rhon Galicha, Investor Relations

Raymond, please go to your closing remarks. Raymond, would you like to do your closing remarks?

Raymond Lin, CEO

Yeah. Okay. No questions, right? Okay. Okay. 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, everybody. Thank you.

Operator, Operator

And that does conclude today's conference. We thank you for your participation. You may now disconnect.