Kanbay International Reports Third Quarter Results
Revenue increased 18 percent year-over-year and 3 percent sequentially; Revenue excluding the impact of the sale of the products business increased 25 percent year-over-year and 7 percent sequentially; Diluted EPS climbs sequentially to $0.23
ROSEMONT, Ill., Oct. 27 /PRNewswire-FirstCall/ -- Kanbay International, Inc. (Nasdaq: KBAY), a global IT services firm focused on the financial services industry, today announced financial results for the third quarter ended September 30, 2005.
Third Quarter 2005 Highlights
- Revenue rose to $59 million, up 18 percent year-over-year and up 3 percent sequentially
- Excluding the second quarter sale of the products business, total revenue increased 25 percent year-over-year and 7 percent sequentially
- Related-party revenue increased 20 percent versus a year ago and 10 percent sequentially; third-party revenue was up 14 percent year-over-year and down 7 percent sequentially
- Excluding the impact of the products business, third-party revenue was up 35 percent year-over-year and 1 percent sequentially
- Net income climbed 15 percent from last year to $8.7 million, or 23 cents per diluted share, and increased 20 percent sequentially
- Signed six new clients, including two Platinum accounts - on target to add 22 new clients for full-year 2005
- Subsequent to quarter end, the Company was chosen as a preferred vendor in a major global sourcing RFP with a large insurance company
"I am pleased to report that in the third quarter we continued to execute effectively against our business plan," said Raymond Spencer, Chairman and CEO of Kanbay. "Our performance during the period was characterized by continued growth, new client wins, improved operating margins, continued strong related- party relationships, increased headcount and increased retention rates. Demand in the market remains strong, especially in our focus area of financial services. The fundamentals of our business are solid, with our attention to quality and client relationship management resulting in continued high client satisfaction. We continue to make progress in further enhancing our new business development capabilities."
Net income for the quarter was $8.7 million, up 15 percent year-over-year and up 20 percent sequentially. Diluted earnings per share totaled 23 cents in the third quarter, up 4 cents sequentially. Year-over-year EPS comparisons are impacted by the significant change in share count since the third quarter of last year, when Kanbay completed its public offering.
Kanbay's third-quarter revenue rose 18 percent year-over-year and 3 percent sequentially to $59 million. Adjusting for the sale of the products business in May, revenue grew 25 percent from a year ago and 7 percent sequentially.
Related-party revenue, which is revenue derived from HSBC, Morgan Stanley and their affiliates, increased 20 percent year-over-year and 10 percent sequentially as the Company established new relationships and expanded into new business units of these clients.
Third-party revenue, which includes all sources of revenue other than HSBC, Morgan Stanley and their affiliates, rose 35 percent year-over-year and 1 percent sequentially when excluding the impact of the sale of the products business.
There were three factors in the third quarter which negatively impacted third-party revenue growth. First, one of the Company's existing accounts made a strategic decision to purchase a package solution rather than have Kanbay develop a custom-built solution. This impacted growth in the third quarter and will also affect growth in the fourth quarter. However, the relationship with this large client remains strong, with revenue tripling in the past year. The Company does not feel that this client's decision to utilize a package solution is indicative of any trend among its client base or in the overall industry, and is still seeing strong demand for custom application development.
Second, Kanbay has a contract for providing application maintenance for a bank through a subcontractor agreement with a major multinational firm that has an outsourcing agreement with the bank. The bank terminated a portion of the outsourcing contract in the third quarter. While the prospects are good for re-engaging some or all of our staff at the bank, there will be a negative impact on revenue in the fourth quarter.
Third, while the Company continues to bring in new accounts at the rate it anticipated, the revenue growth in some of these accounts has been slower than expected for both the third and fourth quarters. In the third quarter, Kanbay added six new accounts, bringing its total client base to 61. The Company is on track to add 22 new clients during the year.
"We are pleased with the quality of our new accounts. The pipeline of opportunities in both new and existing accounts is very strong, which positions us well for next year," Spencer said.
Of the six new clients added this quarter, two are classified as Platinum accounts, resulting in 24 total Platinum accounts. Platinum accounts are clients that contribute more than $5 million in annual revenue or have the ability to do so within two years of becoming clients. Approximately 60 percent of the 14 accounts listed as Platinum a year ago contributed revenue of $5 million or more on an annualized basis in the third quarter, and the Company expects to roughly double the number of accounts contributing that level of revenue a year from now.
During the third quarter, Kanbay experienced particular strength in the insurance vertical, which now comprises 15 percent of revenue, up from 9 percent a year ago. Kanbay has targeted this area as a growth opportunity within financial services. Two of the new clients signed in the quarter are from the insurance industry, with one of them classified as a Platinum account.
Related to opportunities that the Company is experiencing in the insurance industry, subsequent to the end of the third quarter the Company recorded its first significant win in pursuing large Global Sourcing RFPs, a goal that Kanbay has been targeting this year. The Company views this success as a sign of the ongoing maturation of its sales, marketing, and branding efforts. The RFP was issued by a new client who is a large, multinational insurance firm headquartered in the U.S.
Financial Review
Gross margin rose 120 basis points sequentially and 20 basis points year- over-year to 47.3 percent, due mainly to the impact of non-recurring expenses in the second quarter combined with the elimination of the Company's lower- margin products business.
Operating margin rose to 18.7 percent, up 320 basis points sequentially and 130 basis points year-over-year. Non-recurring costs impacted the Company's second quarter, and operating margin growth was enabled by gaining economies of scale on support infrastructure along with the elimination of underperforming assets.
Kanbay ended the quarter with more than 5,000 associates globally, an increase of approximately 260 associates from the second quarter. Associate retention improved to 89 percent in the third quarter from 86 percent in the previous quarter. At the end of the quarter, approximately 84 percent of the Company's technical staff was located in India, up 1 percentage point from last quarter and up 4 percentage points from the third quarter of last year.
The third quarter tax rate remained consistent with the prior quarter at 26 percent, but rose from 19.6 percent a year ago due to a portion of the tax holiday in India expiring on March 31, 2005, and a change in regional distribution of earnings.
The build-out of the Company's campuses in Pune and Hyderabad is progressing on plan. Capital expenditures of $15 million are expected in the fourth quarter, with the completion of the purchase of the leased facility in Pune and construction costs associated with the Hyderabad campus and Pune learning center.
SG&A, excluding depreciation and stock compensation expense, decreased by $700,000 sequentially, from $15.1 million in the second quarter to $14.4 million in the third quarter. The Company incurred extra, one-time visa processing costs of approximately $1 million in the second quarter in order to ensure that it can support anticipated on-site staffing needs for next year and continue to enhance the domain knowledge of technical staff in India through on-site rotations. As a percentage of revenue, SG&A was 24.4 percent in the third quarter compared with 26.4 percent in the second quarter and 25.8 percent in the third quarter of last year.
"We continue to have a strong financial position," said Bill Weissman, Chief Financial Officer. "We remain debt-free and our cash and investments balance at September 30th was $80 million, up $7 million from last quarter."
Outlook
Given the impact of the factors mentioned above, Kanbay is targeting fourth quarter revenue of $58 million, and diluted earnings per share of 22 cents. For 2005, the Company projects net income of $32.4 million, or 86 cents per share, on revenue of $227.5 million. This is below prior guidance for 2005 net income of $34.5 million on revenue of $235 million.
"We remain confident in achieving our longer term revenue growth rates of at least 25 percent annually, including over 40 percent growth in third party revenue, despite some challenges in the short-term," Spencer said. "We expect demand within the financial services industry to remain strong throughout 2006 and believe our service offerings are well aligned with the needs of the industry. We continue to perform well against the goals we outlined at the beginning of the year, and are confident in Kanbay's business strategy and ability to execute going forward."
Conference Call Details
Kanbay management will host a conference call on October 27, 2005 at 8:15 a.m. (EDT) to discuss the Company's results of operations for the third quarter. To participate in the call, domestic callers can dial (866) 202-4683 and international callers can dial (617) 213-8846. The passcode for the conference call is 13473990. The conference call will also be webcast and accessible through Kanbay's website at http://www.kanbay.com.
Please access the website at least 15 minutes prior to the call to register and download any required software. A replay of the conference call will be available for one week, until 5:00 p.m. (EST) on November 3, 2005, by dialing (888) 286-8010 for domestic callers and (617) 801-6888 for international callers. The passcode for the replay is 76505324. A webcast replay of the conference call will also be available for two weeks following the call, until 5:00 p.m. (EST) on November 10, 2005, through Kanbay's website at http://www.kanbay.com.
About Kanbay International, Inc.
Founded in 1989, Kanbay International, Inc. (Nasdaq: KBAY) is a global IT services firm focused on the financial services industry. With over 5,000 associates, Kanbay provides its services primarily to banking institutions, insurance companies, credit service companies and capital markets firms. The company uses a global delivery model to provide application development, maintenance and support, software package selection and integration, business process and technology advice, and specialized services. Kanbay is a CMM Level 5 assessed company headquartered in greater Chicago with offices in the U.S., Canada, U.K., Australia, Hong Kong, Japan, Singapore and India.
Forward-Looking Statements
This release contains statements relating to projections or future results. These statements are forward-looking statements under the federal securities laws. We can make no assurance that any projections or future results discussed in these statements will be achieved. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. These statements are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from the statements contained in this release. For a discussion of important factors that could affect our actual results, please refer to our SEC filings, including the "Risk Factors" section of our Annual Report on Form 10-K for the most recently completed fiscal year.
Presentation of Non-GAAP Financial Measure
Kanbay presents revenue excluding the impact of the sale of the products business, which is a non-GAAP financial measure, in the text of this press release and the accompanying supplementary financial information. The Company's management uses revenue excluding the impact of the sale of the products business to evaluate the quarterly growth in the services business. In addition, this non-GAAP financial measure facilitates management's internal comparisons to competitors' growth in their services business. This non-GAAP financial information is provided as additional information for investors and is not in accordance with, or an alternative to, GAAP. In addition, the non- GAAP financial information provided may be different than similar measures used by other companies. However, the Company's management believes this non- GAAP measure provides useful information to investors, potential investors, securities analysts and others so each group can evaluate the Company's current and future growth in the services business in the same manner as management if they so chose. A reconciliation from revenue to revenue excluding the impact of the sale of the products business has been provided in the accompanying supplementary financial information.
Kanbay International, Inc.
Condensed Consolidated Statement of Income (Unaudited)
(dollars in thousands except per share amounts)
Three months ended Nine months ended
September 30 September 30
2005 2004 2005 2004
Net revenues-
related parties $38,790 $32,217 $107,329 $87,308
Net revenues-
third parties 20,161 17,756 62,100 44,420
Total revenues 58,951 49,973 169,429 131,728
Cost of revenues 31,069 26,412 89,895 69,326
Gross profit 27,882 23,561 79,534 62,402
Sales and marketing
expenses 4,701 4,912 13,915 13,061
General and
administrative
expenses 9,672 7,983 28,635 22,539
Stock compensation
expense 56 268 259 874
Total selling, general
and administrative
expenses 14,429 13,163 42,809 36,474
Depreciation and
amortization 2,452 1,638 6,493 3,860
Loss (gain) on sale
of fixed assets 2 54 231 34
Income from operations 10,999 8,706 30,001 22,034
Other income
Gain on sale of net
assets 270
Interest income and
other, net 339 65 963 103
Equity in earnings
of affiliate 433 625 1,110 2,009
Total other income 772 690 2,343 2,112
Income before
income taxes 11,771 9,396 32,344 24,146
Income tax expense 3,060 1,839 8,148 4,829
Net income 8,711 7,557 24,196 19,317
Dividends on preferred
stock - - - (277)
Income available to
common stockholders $ 8,711 $ 7,557 $24,196 $19,040
Income per share of
common stock
Basic $0.25 $0.24 $0.71 $0.77
Diluted $0.23 $0.22 $0.64 $0.62
Weighted average
number of common
shares
outstanding 34,443,660 31,135,821 33,917,665 24,587,344
Weighted average
number of common
and dilutive
shares
outstanding 37,701,410 34,479,921 37,575,604 31,131,587
Kanbay International, Inc.
Condensed Consolidated Statement of Financial Position (Unaudited)
(In thousands)
September 30, December 31,
2005 2004
Assets
Current Assets
Cash and cash equivalents $25,343 $29,126
Restricted cash 2,478 2,478
Short term investments 41,181 35,730
Trade accounts receivable 45,312 24,664
Other current assets 7,640 17,099
Total Current Assets 121,954 109,097
Property and equipment - net 34,836 20,891
Investment in affiliate 23,140 25,094
Long term investments 10,986 24,424
Other assets 7,567 660
Total Assets $198,483 $180,166
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $2,857 $3,973
Accrued and other current liabilities 25,635 33,113
Total Current Liabilities 28,492 37,086
Total Liabilities 28,492 37,086
Stockholders' Equity 169,991 143,080
Total Liabilities and Stockholders' Equity $198,483 $180,166
Kanbay International, Inc.
Condensed Consolidated Statement of Cash Flows (Unaudited)
(In thousands)
Nine months ended September 30
2005 2004
Operating activities
Net income $24,196 $19,317
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities 5,603 2,759
Changes in operating assets and liabilities
Trade accounts receivable (18,284) (21,291)
Other assets 9,508 (3,845)
Trade accounts payable (1,543) 728
Other liabilities (10,257) 14,879
Net cash provided by operating activities 9,223 12,547
Investing activities
Additions to property and equipment (20,136) (12,294)
Purchase of business, net of cash acquired (6,879)
Sale (purchase) of investments 7,986 (60,016)
Other investing activities 1,334 (1,569)
Net cash used in investing activities (17,695) (73,879)
Financing activities
Proceeds from IPO, net of costs 60,278
Proceeds from exercise of options and
stock purchase plan 4,624
Other financing activities 294
Net cash provided by financing activities 4,624 60,572
Effect of exchange rates on cash and
cash equivalents 83 (9)
Decrease in cash and cash equivalents (3,783) (769)
Cash and cash equivalents at beginning of period 29,126 17,419
Cash and cash equivalents at end of period 25,343 $ 16,650
Kanbay International, Inc.
Reconciliation from Revenue to Revenue Excluding the Impact of the Sale of
the Products Business
(in thousands)
(unaudited)
Three months ended Three months ended
September 30 June 30
2005 2004 2005
Total revenues $58,951 $49,973 $57,018
Less: Total revenues from
products business - (2,805) (1,721)
Total revenues excluding
impact of sale of the
products business $58,951 $47,168 $55,297
Three months ended Three months ended
September 30 June 30
2005 2004 2005
Net revenues - third parties $20,161 $17,756 $21,719
Less: Net revenues - third
parties from products business - (2,805) (1,721)
Net revenues - third parties
excluding impact of sale
of products business $20,161 $14,951 $19,998
