Summary
SUMMARYThis summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in the ADSs, you should carefully read this entire prospectus, including our financial statements and related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We are a leading software developer and information technology, or IT, services provider targeting the financial services industry in China. We develop and deliver a comprehensive range of software solutions with a focus on meeting the rapidly growing IT needs of financial institutions in China. According to IDC, an independent market research company, we were the third largest “banking IT solution provider” in China measured by market share in 2006.
We offer select software solutions in the following broadly defined categories: channel-related solutions, business-related solutions, management-related solutions and other value-added solutions, covering major categories of information technology requirements for financial institutions in China.
We provide both custom-designed and standardized software solutions that are integrated into our clients’ existing IT hardware and software infrastructure. We additionally provide IT and maintenance services to our clients.
Our clients are primarily leading banks in China. We have extensive client relationships with three of the four largest state-controlled national banks, namely, China Construction Bank, Agricultural Bank of China and Bank of China. We have provided in recent years services to eight of the 13 national commercial banks, China Postal Savings Bank, leading city commercial banks in China, and two of the largest life insurance companies in China, namely, New China Life Insurance and China Pacific Insurance Group.
We operate five delivery centers located in Xiamen, Beijing, Shanghai, Chengdu and Guangzhou, two research centers located in Xiamen and Shanghai and 34 ATM service centers in 20 out of 31 provinces in China. We have sales offices in Xiamen, Beijing and Shanghai. As of September 25, 2007, we had 1,094 employees in China.
Our total revenues grew from $15.2 million in 2004 to $43.2 million in 2006 and our net income grew from $6.6 million in 2004 to $8.3 million in 2006. Our total revenues for the three months ended March 31, 2007 and June 30, 2007 were $8.8 million and $16.1 million, respectively, and our net income for the three months ended March 31, 2007 and June 30, 2007 were $768,000 and $4.9 million, respectively. Our total share-based compensation costs in 2005 and 2006 and for the three months ended March 31, 2007 and June 30, 2007 were $37,000, $12.9 million, $235,000 and $262,000, respectively. Effective April 1, 2007, we changed our fiscal year from a calendar year to a fiscal year ending March 31. Our revenues are generally lower in the first and second calendar quarters due to seasonal fluctuations partly as a result of our clients’ budgeting and spending cycles.
Consistent with our growth strategy to enhance our solution and service offerings and access additional clients, we acquired in 2006 Advanced Business Services (Beijing) Co., Ltd., or ABS, an integration services provider located in Beijing. In May 2007, we entered into an agreement to acquire FEnet Co., Ltd., or FEnet, a software developer focused on business intelligence. We expect to complete the acquisition in October 2007, after which we will have a total of 1,355 employees. We believe we are well-positioned to serve the evolving needs of our clients and capitalize on the growth opportunities in China’s financial services IT market.
Financial services institutions globally have spent heavily on IT for many years. In the fast-paced, competitive financial services industry, companies are increasingly relying on flexible and reliable IT infrastructure to gain competitive advantages. According to IDC, global banking and insurance IT spending reached $124.9 billion and $43.8 billion, respectively, in 2006 and is expected to grow at a compound annual growth rate, or CAGR, of 6.4% and 5.6%, respectively, to reach $170.7 billion and $57.5 billion, respectively, in 2011.
China’s GDP has been growing at a rapid pace and China’s financial services industry has also experienced rapid expansion. Similar to their global peers, Chinese financial services institutions, particularly banks, have been increasing IT spending to manage both growth and growing business complexity. According to IDC, total IT spending by China’s banking industry reached RMB36.6 billion ($4.8 billion) in 2006, up 15.4% from 2005. Compared to developed economies, China’s financial services industry is unique in many aspects, including business organization, operating procedures, customer preferences and level of sophistication in products and services. In addition, the regulatory environment in China is also in a state of change, and the Chinese government has introduced a number of key reforms in the sector. As a result, China’s financial services industry need highly specialized IT products and service providers who understand China’s domestic market and regulatory environment.
IT spending in China’s financial services industry is migrating from data concentration to application integration and financial product innovation. As financial services institutions continue to improve their IT infrastructure, the share of hardware in total spending will decrease while that of software and IT services will continue to grow. According to IDC, spending on banking IT hardware from 2007 to 2011 is projected to grow at a CAGR of 8.0% whereas spending on banking packaged software and spending on banking IT services are projected to grow at a CAGR of 21.7% and 22.3%, respectively.
We believe the following strengths differentiate us from our competitors, enabling us to attain a leadership position in the financial services IT market in China.
Our goal is to become the leading software developer and IT services provider for the financial services industry in China and globally. We intend to achieve this goal by implementing the following strategies:
We believe our primary challenges are:
In addition, we face risks and uncertainties that may materially affect our business, financial condition, results of operations and prospects. Thus, you should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in the ADSs.
The following are certain estimated revenue amounts and gross margin percentages for the three months ended September 30, 2007. Estimated revenue results are based on our U.S. GAAP books and records and estimated gross margin percentages are based on our estimates as we have not completed our quarterly closing. Our actual operating results, upon completion of the period, will be subject to the completion of our normal quarter-end closing procedures and could differ materially. For additional information regarding the various risks and uncertainties inherent in estimates of this type, see “Forward-Looking Statements.”
We estimate that our total revenues, excluding revenues from FEnet, for the three months ended September 30, 2007 will range from approximately $19 million to $20 million, which is an increase of 42.4% to 49.8% from $13.3 million in the corresponding period in 2006. We estimate that our software development revenues, excluding revenues from FEnet, for the three months ended September 30, 2007 will range from approximately $17.2 to $18.2 million, which is an increase of 62.6% to 72.0% from $10.6 million in the corresponding period in 2006. Because we did not have VSOE or evidence that costs of PCS were immaterial, software development revenues for the three months ended September 30, 2006 included $2.1 million of revenues for services that had been provided in previous periods.
We estimate that the gross margin percentages for our non-outsourcing operations in the three months ended September 30, 2007 will not be less than the 71.5% comparable gross margin percentage for the three months ended June 30, 2007.
We expect that a smaller percentage of our total revenues will come from our two largest clients, China Construction Bank and Agricultural Bank of China, compared to results from the quarters ended March 31, 2007 and June 30, 2007, with a significant increase in revenues from Bank of China and national and city commercial banks.
An entity controlled by our chairman and largest shareholder previously sold share interests in approximately 3.3 million of our ordinary shares to some of our officers and employees at $7.24 per share in exchange for promissory notes aggregating $23.9 million. Upon consummation of this offering, those promissory notes will be forgiven in full and we will incur a share-based compensation charge of $23.9 million.
See “Recent Developments.”
Our primary operating subsidiary, Xiamen Longtop System Co., Ltd., or Longtop System, was established in Xiamen, China, in July 1996. Longtop Financial Technologies (BVI) Limited, or Longtop BVI, our holding company incorporated in the British Virgin Islands in October 2000, acquired all of the equity interests of Longtop System in October 2004. In preparation for our initial public offering, we incorporated Longtop Financial Technologies Limited in the Cayman Islands on August 7, 2007. Longtop Financial Technologies Limited became our ultimate holding company when it issued shares to the existing shareholders of Longtop BVI on September 5, 2007 in exchange for all of the shares of Longtop BVI held by those shareholders. Neither of these corporate reorganizations resulted in a change of control of Longtop System or its subsidiaries in China.
The following diagram illustrates our corporate structure as of the date of this prospectus.
We conduct substantially all of our business through Longtop System. We also conduct a portion of our business through Advanced Business Services (Beijing) Co., Ltd. and Guangzhou FEnet Information Technologies Co., Ltd.
Longtop System is the 100% beneficial owner of Xiamen Longtop Technology Co., Ltd., Xiamen Longtop Information Technology Co., Ltd., Beijing Longtop Technology Co., Ltd. and Shanghai Longtop Information Technology Co., Ltd. We formed Xiamen Longtop Technology Co., Ltd. in November 1996 to provide services to non-financial clients and formed Xiamen Longtop Information Technology Co., Ltd. in October 2004 to provide ATM maintenance services. Aggregate revenues from Xiamen Longtop Technology Co., Ltd. and Xiamen Longtop Information Technology Co., Ltd. for 2006 and the three months ended March 31, 2007 and June 30, 2007 constituted less than 10% of our revenues. Beijing Longtop Technology Co., Ltd. and Shanghai Longtop Information Technology Co., Ltd. have been inactive since inception, and Shanghai Longtop Information Technology Co., Ltd. is in the process of being liquidated. We formed Guangzhou FEnet Information Technologies Co., Ltd. as a wholly-owned subsidiary of Longtop BVI in July 2007 to primarily offer business intelligence solutions.
We established in February 2006 Longtop International Holdings Limited, or LTI, with three other shareholders to provide outsourcing services. We acquired the interest of these other shareholders in January 2007. We acquired Minecode LLC through LTI in March 2007. In July 2007, we disposed of our interest in LTI and Minecode LLC for strategic business purposes. Our revenues for the three months ended March 31, 2007 and June 30, 2007 include $1.0 million and $4.5 million in outsourcing revenues.
Our principal executive offices are located at 15/F, Block A, Chuangxin Building, Software Park, Xiamen 361005, People’s Republic of China. Our telephone number at this address is 86 (592) 2396 888. Our registered office in the Cayman Islands is located at Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands. Our telephone number in the Cayman Islands is 1 (345) 949 1040.
Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our website is www.longtop.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the U.S. is Law Debenture Corporate Services Inc., located at 4th Floor, 400 Madison Avenue, New York, New York 10017. Law Debenture’s telephone number is 1 (212) 750-6474.
In this prospectus, unless the context otherwise requires, “Longtop,” “we,” “us,” “our company,” and “our” refer to Longtop Financial Technologies Limited, its predecessor and its subsidiaries and affiliated entities; “China” or “PRC” refers to the People’s Republic of China, excluding Taiwan, Hong Kong and Macau; “shares” or “ordinary shares” refers to our ordinary shares; “ADSs” refers to American depositary shares, each representing one ordinary share; “Renminbi” or “RMB ” refers to the legal currency of China; and “$,” “dollars” or “U.S. dollars” refers to the legal currency of the United States.
This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. Unless otherwise stated, all translations from Renminbi to U.S. dollars in this prospectus have been made at the rate of RMB7.6120 to $1.00, which was the noon buying rate as of June 29, 2007 in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. We make no representation that the Renminbi or dollar amounts referred to in this prospectus could have been or could be converted into dollars or Renminbi, as the case may be, at any particular rate or at all. See “Risk Factors—Risks Related to Doing Business in China—Fluctuation in the value of the Renminbi may reduce the value of your investment.” On September 28, 2007, the noon buying rate was RMB7.4928 to $1.00.
The following assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.
The following summary consolidated statements of operations data and other consolidated financial data for the years ended December 31, 2004, 2005 and 2006 and for the three months ended March 31, 2007 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the three months ended March 31, 2006, June 30, 2006 and June 30, 2007 have been derived from our unaudited financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial data. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the periods presented. You should read this Summary Consolidated Financial Data together with consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.
We have changed our fiscal year from a calendar year to a fiscal year ending March 31, effective April 1, 2007. We prepared audited financial statements for the three months ended March 31, 2007. Because we changed our fiscal year to end on March 31, we have not combined our financial information for the three months ended March 31, 2006 and 2007 with our financial information for the three months ended June 30, 2006 and 2007 and have instead presented those periods separately. The three months ended June 30, 2007 correspond to the first fiscal quarter of our fiscal year ended March 31, 2008.