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Pactera Technology International Ltd. (PACT)

Q4 2012 Earnings Call

February 27, 2013 7:00 AM ET


Sheryl Zhang – Associate VP, IR

Tiak Koon Loh – CEO

Sidney Huang – CFO


Moshe Katri – Cowen & Company

Amit Singh – Jefferies & Company

James Friedman – SFG

Dick Wei – JPMorgan

Joe Foresi – Janney Montgomery Scott

David Grossman – Stifel

Steve Zhang – Macquarie



Hello, and thank you for standing by for Pactera’s fourth quarter and full year 2012 earnings conference call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to your host for today’s conference Ms. Sheryl Zhang, Associate Vice President of Investor Relations of the Company. Ms. Zhang, the floor is yours.

Sheryl Zhang

Thank you, operator. Hello, everyone, and welcome to Pactera’s fourth quarter and full year earnings call. I’m joined today by Tiak Koon Loh, our Chief Executive Office, and Sidney Huang, our Chief Financial Officer.

Before we discuss our results, I would like to remind everyone that the discussion today will concern forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995 and within the meaning of Section 21E of the Securities and Exchange Act of 1934 as amended. Forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from our current expectations.

Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. Pactera doesn’t undertake any obligation to update any forward-looking statements except as required under applicable law.

In today’s call, we will discuss various non-GAAP financial matters as defined by the SEC’s Regulation G. Other consolidation of the differences between GAAP and the non-GAAP financial matters can be found in our earnings release posted in the Investor Relations section of our website.

I will now turn the call over to our CEO, Tiak. Tiak?

Tiak Koon Loh

Thank you, Sheryl. Hello, everyone, and thank you for joining us today. On a pro forma basis in the fourth quarter of 2012, we secured 17.9% year-over-year growth in spite of the adverse effect of the Japan currency depreciation and the strong headwind from our European business in our largest telecom brand.

We were very encouraged with the continued growth in our domestic business and the Asia South business, with strong year-over-year growth of 34% and 67.4%, respectively. Excluding the impact from our largest telecom brand, our domestic business grew 71.9%, which clearly showed our strategy to focus on more value-added services and industry solution in dealing great pressure in China.

By industry verticals, financial services continue to be on fire, tracking [ph] with our year-over-year growth of 47.2% and now representing 26.4% of our services portfolio. This is largely driven by the strong demand for our solution and services in the domestic banking sector. We grew at a phenomenal rate of 172.9% year-over-year.

The technology sector is beginning to see a growth of 16% as we deepened our penetration in a number of significant points. In the telecom sector, we saw revenue declined of 4.2% as we started budget cuts and contract delay with our top two clients in this sector.

As I look back to 2012 and how our results, our market leading year-over-year growth, revenue growth of 34.1% with decent operating cash flow. Our operating cash flow in the full year 2012 was $36.3 million, representing a growth of 49% compared to 2011. The fundamentals of our business are strong, which is illustrated by the growth in our number of significant clients from 65 to 85 in 2012. Among these 85 significant clients, 36 are Fortune 500 companies.

Next I’d like to discuss the progress of our integration, which obviously was a giant project to bring more than 23,000 staff under one operating and management infrastructure. We set ourselves a very aggressive of completing these by the second quarter of 2012 and I’m pleased to report that we are on track in almost every aspect.

We have completed the HR levering [ph] of our staff and then designed a new go-to market organization by both industries and geographies to better serve the needs of our clients. So far, we’ve not seen out of the normal turnover at director and above level and we experienced a voluntary attrition of only 4.5% in the last six months.

These achievements are lower than our pre-annual year one pre-attrition rate of 11.1% for the same level of staff in the first half of 2012. While the integration effort is progressing well, we do acknowledge this is far from complete.

Now, I’ll turn the call over to our CFO, Sidney Huang to walk you through our financials.

Sidney Huang

Thank you, Tiak. Hello, everyone. Let me spend the next 10 minutes to go through the fourth quarter financial results and 2013 financial outlook.

As Tiak has mentioned, our fourth quarter topline growth continued to be solid, led by our domestic financial services vertical. On the margins, however, the fourth quarter performance was shadowed by expectations. Consolidated Q4 gross margin was 33.5% and non-GAAP operating margin was 10.8%. These margins benefit from the fact that the consolidated financial results included only 52 days from VanceInfo since the merger closing, which is a seasonally strong period as compared to the proceeding 40-day period when there was a long national day in early October.

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