Pactera Announces Third Quarter 2013 Financial Results
Source: PRNewswire View: 238 Date: 2013-11-22

Pactera Technology International Ltd. (Nasdaq: PACT) ("Pactera" or the "Company"), a global consulting and technology services provider strategically headquartered in China, today reported its unaudited financial results for the third quarter of 2013 ended September 30, 2013.
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On November 9, 2012, HiSoft Technology International Limited ("HiSoft") and VanceInfo Technologies Inc. ("VanceInfo") announced the completion of merger of equals to form Pactera. HiSoft and VanceInfo’s financial results were consolidated into Pactera from the date of the completion of the merger.

Third Quarter 2013 Financial and Operational Highlights

• Net revenues for the third quarter of 2013 were $173.1 million,as compared to $79.6 million for the third quarter of 2012.

• GAAP diluted net income per ADS for the third quarter of 2013 was $0.03. Non-GAAP diluted net income per ADS[1] for the third quarter of 2013 was $0.18.

• Total full-time employees as of September 30, 2013 were 21,119, including 19,017 billable professionals.

[1] Non-GAAP gross margin, non-GAAP operating income, non-GAAP net income, non-GAAP basic and diluted net income per ADS and corresponding margins presented in this press release exclude share-based compensation expense, amortization of acquired intangible assets and land use right, merger-related transaction and integration costs, privatization-related costs, gain on disposal of VIE and change in fair value of contingent consideration payable for business acquisition and compensation expenses related to acquisition. The non-GAAP measures and related reconciliations to GAAP measures are described in the accompanying section of "About Non-GAAP Financial Measures" and the accompanying tables of "Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures" and "Reconciliations of Forward-Looking Guidance for Non-GAAP Financial Measures to Comparable GAAP Measures" at the end of the earnings release.

"We see continuous improvement in the third quarter of 2013," said Mr. Tiak Koon Loh, Chief Executive Officer of Pactera. "Net revenue is in line with our guidance, and excluding the impact from our major telecom customer and the adverse effect of Japanese currency depreciation, we’re seeing slow recovery in our top line growth as the gross margin held steady. Following the announcement on October 17th regarding signing of definitive merger agreement for our potential privatization, we are working towards bringing this to an expeditious closure. However, our top priority continues to remain on improving our key financial KPIs and driving sustainable growth in our business."
Third Quarter 2013 Financial Results

Net Revenues

Net revenues were $173.1 million for the third quarter of 2013 as compared to $79.6 million for the third quarter of 2012, reflecting a decrease of 1.5% from $175.8 million of the pro forma net revenues[2] for the corresponding period in 2012. Excluding the company’s major telecom customer, net revenues for the third quarter of 2013 would have increased 7.2% from the pro forma net revenues for the corresponding period in 2012.

Net Revenues by Service Line

Pactera has three service lines: Information Technology ("IT") services, research and development ("R&D") services and business process outsourcing ("BPO"). Pactera divides IT services into two categories: consulting and packaged solution ("CPS") services and application development, testing and maintenance ("ADM") services.

Net revenues from IT services were $104.7 million for the third quarter of 2013, which increased 9.7% from $95.4 million of pro forma net revenues for the corresponding period in 2012. The increase was primarily due to the increasing demand for and the expanded offerings by our CPS services.

Net revenues from R&D services were $65.9 million for the third quarter of 2013, compared to $76.6 million of the pro forma net revenues for the corresponding period in 2012. The decline in net revenues from R&D services was mainly due to a decrease in the revenue derived from our major telecom customer. Excluding the company’s major telecom customer, net revenues for the third quarter of 2013 would have increased approximately 9.5% from the pro forma net revenues for the corresponding period in 2012.

[2] Pro forma net revenues of the Company for the third quarter of 2012 assume that the merger occurred at the beginning of such period. The pro forma financial information is provided for information purpose only and does not purport to present what the actual results of operations would have been had the transaction actually occurred at the beginning of such period indicated nor does it purport to present the actual results of operations for any future period or financial position for any future date. Please refer to the accompanying tables at the end of the earnings release.

Based on the location of clients’ headquarters, net revenues from clients headquartered in the United States were $67.8 million or 39.1% of the net revenues for the third quarter of 2013, followed by 38.9% from Greater China, 9.8% from Europe, 7.0% from Japan and 5.2% from Asia South.

Measuring Pactera’s net revenues based on the location of contract signing entity, Greater China accounted for 60.6% of net revenues in the third quarter of 2013, while the United States accounted for 19.6%, Asia South accounted for 10.7%, Japan accounted for 6.9% and Europe accounted for 2.2%.

Net Revenues by Industry

Pactera classifies its clients into four industry segments: High Technology ("High Tech"), Banking, Financial Services and Insurance ("BFSI"), Manufacturing, and Other Industry Segments including Retail, Distribution, Travel and Transportation and Public Services ("Others").

Net revenues from Pactera’s top five and top ten clients accounted for 29.1% and 39.4% of net revenues, respectively, during the third quarter of 2013, compared to 35.4% and 44.1% respectively, on a pro forma basis for the corresponding period in 2012. The major telecom client is still shifting its outsourcing business to the joint ventures it formed, and the Company is cooperating with this process. Further details are still being discussed between the parties.

Gross Profit and Gross Margin

Gross profit was $50.8 million for the third quarter of 2013, compared to $28.3 million for the corresponding period in 2012. Gross margin was 29.3% for the third quarter of 2013.

Operating Expenses

Total operating expenses were $48.4 million for the third quarter of 2013 compared to $22.8 million for the corresponding period in 2012. Operating expenses in the third quarter of 2013 reflected $4.3 million of privatization-related costs and $0.6 million of merger-related expenses.

Operating Income (Loss) and Operating Margin

Operating income for the third quarter of 2013 was $2.4 million, compared to an operating income of $5.5 million for the corresponding period in 2012. Non-GAAP operating income for the third quarter in 2013 was $15.7 million, as compared to $11.4 million in the corresponding period in 2012.

Operating margin was 1.4% for the third quarter of 2013, compared to 6.9% for the same period in 2012. Non-GAAP operating margin was 9.1% for the third quarter of 2013.

Net Income (Loss) and Net Income (Loss) per ADS

Net income attributable to Pactera was $2.7 million for the third quarter of 2013, compared to a net income of $4.7 million for the corresponding period in 2012. Non-GAAP net income was $15.5 million for the third quarter of 2013, compared to $10.6 million for the same period in 2012. Non-GAAP diluted net income per ADS was $0.18 in the third quarter of 2013, compared to $0.25 in the corresponding period of 2012.

Cash Flow and DSO

As of September 30, 2013, Pactera had cash and cash equivalents, restricted cash, term deposits and short-term investment totaling $131.8 million. Operating cash flow for the third quarter of 2013 was a net inflow of approximately $23.4 million. Days sales outstanding ("DSO") was 138 days for this quarter and 135 days for the last 12 months on a pro forma basis.

First Nine Months of 2013 Financial Results

Net Revenues

Net revenues were $488.5 million for the nine months ended September 30, 2013 as compared to $216.8 million for the nine months ended September 30, 2012 and $493.9 million of the pro forma net revenues for the corresponding period in 2012.

Net Revenues by Service Line

Based on the location of clients’ headquarters, net revenues from clients headquartered in the United States were $194.1 million in the nine months ended September 30, 2013, followed by $186.0 million from Greater China, $46.1 million from Europe, $37.7 million from Japan and $24.5 million from Asia South.

Measuring Pactera’s net revenues based on the location of contract signing entity, Greater China accounted for 59.4% of net revenues in the nine months ended September 30, 2013, while the United States accounted for 20.7%, Asia South accounted for 10.4%, Japan accounted for 7.7% and Europe accounted for 1.8%.

Net Revenues by Industry

Net revenues from Pactera’s top five and top ten clients accounted for 31.4% and 40.9% of net revenues, respectively, during the nine months ended September 30, 2013, compared to 38.0% and 47.3% respectively, on a pro forma basis for the corresponding period in 2012.

Gross Profit and Gross Margin

Gross profit was $135.1 million for the nine months ended September 30, 2013, compared to $76.8 million for the nine months ended September 30, 2012. Gross margin was 27.7% during the nine months ended September 30, 2013.

Operating Expenses

Total operating expenses were $138.1 million for the nine months ended September 30, 2013 compared to $58.1 million for the corresponding period in 2012. Operating expenses in the nine months ended September 30, 2013 reflected $7.0 million of merger-related costs, mainly including professional fees, severance costs, facilities and system integration expenses, and $4.3 million of privatization-related costs, mainly including professional fees.

Operating Income and Operating Margin

Operating loss for the nine months ended September 30, 2013 was $3.0 million, compared to an operating income of $18.7 million for the corresponding period in 2012. Non-GAAP operating income for the nine months ended September 30, 2013 was $35.3 million, as compared to $30.3 million for the corresponding period in 2012.

Operating margin was negative 0.6% for the nine months ended September 30, 2013, and non-GAAP operating margin was 7.2% for the nine months ended September 30, 2013.

Net Income (Loss) and Net Income (Loss) per ADS

Pactera was at break-even level for the nine months ended September 30, 2013, compared to net income $17.1 million for the corresponding period in 2012. Non-GAAP net income was $37.1 million for the nine months ended September 30, 2013, compared to $28.7 million for the corresponding period in 2012. Non-GAAP diluted net income per ADS was $0.44 for the nine months ended September 30, 2013, compared to $0.67 for the corresponding period in 2012.

Recent Development

Upon the unanimous recommendation of a special committee of the Company’s board of directors consisting of independent directors and the approval of the Company’s board of directors, on October 17, 2013, the Company announced that it entered into a definitive merger agreement ("Merger Agreement") with a Consortium led by funds managed or advised by Blackstone (as defined below), including (i) Blackstone, (ii) certain members of the Company’s management comprising of Chris Chen, the Company’s non-executive chairman and Tiak Koon Loh, the Company’s chief executive officer and several other senior managers (the "Management") and (iii) GGV Capital and its affiliates ("GGV") (collectively, the "Buyer Consortium").

The Merger Agreement provides that at the completion of the acquisition, the shareholders of the Company will receive US$7.30 per common share (a "Share") or US$7.30 per American depositary share (an "ADS") of the Company (the "Transaction"). The price per Share and per ADS represents a premium of 39% over the Company’s closing price of US$5.26 per ADS on May 17, 2013, the last trading day prior to the Company’s announcement on May 20, 2013 that it had received a "going private" proposal from a consortium led by Blackstone, and a premium of 35% to the volume-weighted average closing price of the ADSs during the 30 trading days prior to May 20, 2013.

If the Merger closes pursuant to the Merger Agreement, the Company will become a privately-held company and its ADSs would cease to be listed on the Nasdaq Global Select Market. The Transaction is subject to various closing conditions, including a condition that the Merger Agreement be approved by an affirmative vote of shareholders representing two-thirds or more of the Shares present and voting in person or by proxy as a single class at a meeting of the Company’s shareholders convened to consider the approval of the Merger Agreement and the Transaction and a condition that the parties obtain antitrust approvals for the Transaction.

The Company will prepare and file with the U.S. Securities and Exchange Commission (the "SEC") a transaction statement on Schedule 13E-3, which will include a proxy statement of the Company. The Schedule 13E-3 will include a description of the Merger Agreement and contain other important information about the Transaction, the Company and the other participants in the Transaction.

Outlook for the Full Year 2013

For the full year 2013, based on current market and operating conditions, Pactera expects:

• Net revenues to be at least $668 million, compared to $673 million in 2012 on a pro-forma basis.

• Non-GAAP diluted net income per ADS to be at least $0.64, estimated based on 85.0 million weighted average equivalent ADSs outstanding.

These estimates are based on current market and operating conditions, are subject to change, and may be influenced positively or negatively by factors outside the Company’s control, including but not limited to macroeconomic events in the markets in which the Company operates. See "Safe Harbor Statement" below for additional information regarding forward-looking statements.

Conference Call

The Company will host a corresponding conference call and live webcast to discuss the results at 7:00 AM Eastern Standard Time (EST) on Thursday, November 21, 2013 (8:00 PM Beijing/Hong Kong time). Please dial-in five minutes prior to the call to register and receive further instruction.

The dial-in details for the live conference call are as below:
- U.S. Toll Free Dial-in Number: +1.866.519.4004
- International Dial-in Number: +65.6723.9381
- Hong Kong Dial-in Number: +852.2475.0994

Passcode: 92003432

The conference call will be available live via webcast on the Investors section of Pactera’s website at http://ir.pactera.com. The archive replay will be available on Pactera’s website shortly after the call.

A dial-in replay of the conference call will be available until November 29, 2013:

- U.S. Toll Free Dial-in Number: +1.855.452.5696

- International Dial-in Number: + 61.2.8199.0299

Passcode: 92003432

About Pactera

Pactera Technology International Ltd. (NASDAQ: PACT), formed by a merger of equals between HiSoft Technology International Limited and VanceInfo Technologies Inc., is a global consulting and technology services provider strategically headquartered in China. Pactera provides world-class business / IT consulting, solutions, and outsourcing services to a wide range of leading multinational firms through a globally integrated network of onsite and offsite delivery locations in China, the United States, Europe, Australia, Japan, Singapore and Malaysia. Pactera’s comprehensive services include business and technology advisory, enterprise application services, business intelligence, application development & maintenance, mobility, cloud computing, infrastructure management, software product engineering & globalization, and business process outsourcing.

For more information about Pactera, please visit www.pactera.com.

About Blackstone

The Blackstone Group L.P. (together with its affiliates, "Blackstone") is one of the world’s leading investment and advisory firms, with 25 offices around the world. Through its different investment businesses, as of June 30, 2013, Blackstone had total assets under management of approximately US$229.6 billion, including US$53.3 billion in private equity funds. Through June 30, 2013, Blackstone’s private equity funds have invested over US$43 billion in 175 transactions in a variety of industries and geographies in pursuit of Blackstone’s investment objectives. Blackstone’s private equity funds currently manage a global portfolio of investments in 75 companies, which in aggregate combine to represent approximately US$109 billion of revenues and over 734,000 employees. Our current global investment fund, Blackstone Capital Partners VI, is one of the largest private equity funds in the world with committed capital of US$16.2 billion.

Safe Harbor Statement

This news release contains forward-looking statements. These statements constitute "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates," "target," "going forward," "outlook" and similar statements, as well as the consideration of the going private proposal and the impact on the Company resulting from the success or failure of that proposal. Such statements are based upon management’s current expectations and current market and operating conditions, and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond Pactera’s control, which may cause Pactera’s actual results, performance or achievements to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, but are not limited to, the Company’s dependence on a limited number of clients for a significant portion of its revenues, uncertainty relating to its clients’ forming or plan to form joint venture with the Company’s competitors, the economic slowdown in its principal geographic markets, the quality and portfolio of its service lines and industry expertise, and the availability of a large talent pool in China and inflation of qualified professionals’ wages, as well as the PRC government’s investment in infrastructure construction and adoption of various incentives in the IT service industry. Further information regarding these and other risks, uncertainties or factors is included in Pactera’s filings with the U.S. Securities and Exchange Commission. All information provided in this news release is as of the date of this news release, and Pactera does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

About Non-GAAP Financial Measures

To supplement Pactera’s consolidated financial results presented in accordance with GAAP, Pactera uses the following measures defined as non-GAAP financial measures by the SEC: non-GAAP income from operations, non-GAAP net income and non-GAAP diluted EPS and related margins which exclude share-based compensation expense, amortization of acquired intangible assets and land use right, merger-related transaction and integration costs, privatization-related costs, gain on disposal of VIE, change in fair value of contingent consideration payable for business acquisition, and compensation expenses related to acquisition. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP or as being comparable to results reported or forecasted by other companies. For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP Financial Measures to Comparable GAAP Measures" and "Reconciliations of Forward-Looking Guidance for non-GAAP Financial Measures to Comparable GAAP Measures" set forth at the end of this earnings release.

Pactera believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance by excluding certain expenses and expenditures that may not be indicative of its operating performance. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company’s performance and when planning and forecasting future periods. A limitation of using non-GAAP net income and non-GAAP diluted EPS is that these non-GAAP measures exclude the share-based compensation charges, amortization of acquired intangible assets and land use right, merger-related transaction and integration costs, privatization-related costs, gain on disposal of VIE and change in fair value of contingent consideration payable for business acquisition and compensation expenses related to acquisition that have been and will continue to be, for the foreseeable future, a significant recurring expense in the business. Management compensates for these limitations by providing specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables have more details on the reconciliations between GAAP financial measures that are comparable to non-GAAP financial measures. The reconciliations of the forward-looking guidance for non-GAAP financial measures to the most directly comparable GAAP financial measures in the accompanying table include all information reasonably available to Pactera at the date of this earnings release.

For further information, please contact:

Tracy Zhou
Investor Relations
Pactera Technology International Ltd.
Tel: +86-10-5987-5138
E-mail: ir@pactera.com

SOURCE Pactera Technology International Ltd.

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