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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 001-15713
ASIAINFO HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 752506390
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
4TH FLOOR, ZHONGDIAN INFORMATION TOWER
6 ZHONGGUANCUN SOUTH STREET, HAIDIAN DISTRICT
BEIJING 100086, CHINA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE +8610 6250 1658
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price of the common stock on the Nasdaq National
Market System on March 11, 2001, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $188,740,800.
The number of shares outstanding of the Registrant's common stock, $0.01 par
value, was 41,045,277 at March 11, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated by reference to the Proxy Statement for the
Registrant's 2001 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this Form 10-K.
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ASIAINFO HOLDINGS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
PART II
Item 5. Market for Registrant's Common Equity and Related 22
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition 24
and Results of Operation....................................
Item 7A. Quantitative and Qualitative Disclosures About Market 40
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting 40
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and 41
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 42
8-K.........................................................
Signatures ............................................................ 43
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Except for historical information, the statements contained in this Annual
Report on Form 10-K are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
contains certain safe harbors regarding forward-looking statements. Certain of
the forward-looking statements include management's expectations, intentions and
beliefs with respect to our growth, our operating results, the nature of the
industry in which we are engaged, our business strategies and plans for future
operations, our needs for capital expenditures, capital resources and liquidity,
and similar expressions concerning matters that are not historical facts. Such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those expressed in the
statements. All forward-looking statements included in this document are based
on information available to us on the date hereof, and we assume no obligation
to update any such forward-looking statements. These cautionary statements are
being made pursuant to the provisions of the Reform Act with the intention of
obtaining the benefits of the safe harbor provisions of the Reform Act. Among
the factors that could cause actual results to differ materially are the factors
discussed below under the heading "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Factors Affecting Our
Operating Results and Our Common Stock."
In this report, "AsiaInfo," the "Company," "we," "us," and "our" refer to
AsiaInfo Holdings, Inc. and its subsidiaries.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading China-based company providing world class software products and
network solutions. Our software products and network solutions enable our
customers to build, maintain, operate and continuously improve their Internet
and communications infrastructure.
Our key customers are leading telecommunications service providers and Internet
service providers in China. Our major customers include China Telecommunications
Corporation (China Telecom) and China Mobile Communications Corporation (China
Mobile), each of which controls approximately thirty provincial subsidiaries
operating local telecommunications networks throughout China. Our other major
customers include China United Telecommunications Corporation (China Unicom) and
China Netcom Corporation (China Netcom).
We provide network solutions for large Internet and telecommunications projects.
We deliver Internet infrastructure solutions such as backbone and access
networks, operations support solutions using our proprietary and third party
software, service applications such as Internet protocol telephony, commonly
known as IP telephony, virtual private networks, and network performance and
security solutions. We designed and built ChinaNET, China's first commercial and
largest national Internet "backbone", meaning the physical network of cables and
computers that carries Internet traffic. We are in the process of designing and
building UniNET, China's second national commercial Internet backbone, for China
Unicom, CNCNET, China's third national commercial Internet backbone, for China
Netcom, and CMCCNET, China Mobile's commercial Internet backbone. We have also
built numerous provincial Internet backbones, including GuangdongNET, the first
and largest provincial commercial Internet backbone in China.
We develop and sell carrier-class, meaning high performance, highly fault
tolerant, software products tailored for the specific needs of the China market.
These products include real time, highly scalable Internet customer management
and billing software and carrier-scale messaging software for telecommunications
and Internet service providers, Internet content providers and wireless
telephony service providers. Our software can support millions of users and is
designed with open architecture to facilitate customization. We have
historically sold our software products as part of our network solutions
projects, but are increasingly marketing these products separately from our
network solutions projects.
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RECENT DEVELOPMENTS
NEW OPERATIONAL STRUCTURE. In January 2001, we announced the reorganization of
our operational structure into two strategic business units (SBUs): Software
Products and Network Solutions. The purpose of this reorganization is to
optimize the allocation of resources between these two growing business lines.
It also underscores how significant our software business has become in a
relatively short period of time, and the growing opportunities to sell our
software products separately from our network solutions projects. We anticipate
that the new structure will allow us to further leverage our existing
competencies while developing new areas of growth.
ESTABLISHMENT OF NETWORK SECURITY COMPANY -- MARSEC. In August of 2000, we
committed $2 million to fund the start-up of MarSec Holdings, Inc. ("MarSec"), a
network security company. We hold a 75% ownership stake in MarSec, while the
remaining 25% of the company is owned by MarSec's founders and employees. We
anticipate that this new venture will enable us to expand our high-end network
solutions to provide security services to leading telecommunications carriers
and Internet service providers in China. MarSec has entered into contracts to
provide Sichuan Telecom and Xizang Telecom, each a provincial subsidiary of
China Telecom, with network security services. Valued at approximately $175,000
in the aggregate, these two contracts highlight MarSec's initial success since
its inception.
GUANGDONG WANGYING JOINT VENTURE. Guangdong Wangying Information Technology
Ltd. (Guangdong Wangying) is a joint venture company providing systems
integration services and software products to Guangdong Telecom and other
customers in Guangdong province. We have contributed $145,000 for 40% of the
equity value of Guangdong Wangying and exercise sufficient control over the
joint venture to consolidate its financial results with ours. The other two
joint venture partners are Guangdong Wangxing Communication Technology Ltd,
which owns 30% of the company, and Guangdong Data Communication Network Ltd,
which owns 30%.
MERGER OF ASIAINFO TECHNOLOGIES AND ASIAINFO ZHEJIANG. In January 2001, we
merged one of our wholly-owned subsidiaries, Zhejiang AsiaInfo Telecommunication
Technology Co. Ltd. (AsiaInfo Zhejiang), with our principal operating
subsidiary, AsiaInfo Technologies (China) Inc. (AsiaInfo Technologies). AsiaInfo
Zhejiang, which we originally acquired in April 1999, was one of the first
entrants into the market for wireless customer management and billing software
in China. The purpose of the merger is to achieve further economies of scale in
the operations of the two subsidiaries.
APPLICATION INFRASTRUCTURE PROVIDER MODEL. In 2000, we invested $1.5 million to
develop an Application Infrastructure Provider (AIP) division, which will offer
application infrastructure services to Internet content providers, application
service providers and software vendors. Our AIP division rolled out its first
product offering, the i-jumper service, in November 2000.
INDUSTRY BACKGROUND
The telecommunications industry and the Internet in China have experienced rapid
growth over the past several years. In February 1999, the State Council of China
approved a plan to separate the telecommunications operations conducted by China
Telecom and its related entities along four business lines: fixed line
communications, wireless communications, satellite communications services and
paging. As a result of the restructuring, China Telecom currently operates only
fixed line networks and provides only fixed line telephony and data
communications services. China Mobile was established to operate the wireless
telephony business. The satellite communications business has been spun off into
a new state owned company, China Satellite Communications Corporation, and the
paging business has become part of China Unicom.
Today, all major sectors of the communications industry, including fixed line
services, wireless telephony services and Internet services, contain multiple
service providers. We expect service providers to invest in technology and
infrastructure and offer varying, customer-tailored services plans and focus on
customer
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care and support to remain competitive as new players continue to enter the
market. The following is a list of the major service providers in different
industry sub-sectors:
INDUSTRY SUB-SECTOR MAJOR SERVICE PROVIDERS
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Fixed-line telephony................ China Telecom and China Unicom
Wireless telephony.................. China Mobile and China Unicom
IP telephony........................ China Telecom, China Unicom, Jitong Communications, China
Netcom and China Mobile
Data communications and Internet.... China Telecom, China Unicom, Jitong Communications, China
Netcom and China Mobile
Sources: Internet Data Corporation (IDC) and AsiaInfo.
The Internet market in China has been growing rapidly due to increased access to
telecommunications services and declining personal computer prices. Internet
Data Corporation (IDC) estimates that Internet users in China will reach 15.6
million by the end of 2001 and 25.1 million in 2002, representing a compound
annual growth rate of 77.3% from 1999. The strong Internet growth in China is
expected to continue due to several factors. Relatively low personal computer
penetration rates in China, estimated at 2.3% for the year 2000, offer
significant growth potential for the Internet market. Declining personal
computer prices and the increased availability of lower cost Internet access
alternatives, such as WebTV, should further broaden Internet access. We expect
online usage charges to fall in China, which will increase Internet penetration
and usage.
INTERNET USERS IN CHINA
[Chart with the following data: 1999: 4.5 million, 2000: 9.0 million, 2001: 15.6
million, 2002: 25.1 million, 2003: 36.8 million, 2004: 51.2 million]
Source: IDC, June 2000.
While the above data from IDC suggest that Internet usage in China will grow at
a rapid pace, other sources of information suggest even stronger growth. China
Internet Network Information Center (CNNIC), a Chinese government sponsored
information agency, estimates that there were 8.9 million Internet users in
China in 1999 and 22.5 million in 2000. Furthermore, CNNIC estimates that there
were 3.5 million computers with Internet access in China in 1999, and 8.9
million in 2000.
The strong growth in the Internet market has led to heavy investments in data
services infrastructure. We expect that an increasingly large component of total
investment in the telecommunications industry will be Internet related.
Furthermore, we believe that future investments in data services infrastructure
will focus on broadband networks to accommodate multimedia and other potential
high-bandwidth applications,
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such as increasing commercial use of the Internet, the development of corporate
intranets, and the use of cable television networks to provide
telecommunications and Internet services. In addition, the wider application of
the Internet for commercial and consumer purposes has led to the global
emergence of convergent communications, which combine voice, data, video and
Internet services. Currently, the main convergent communications applications
include IP telephony and wireless data and Internet services. China Telecom,
China Unicom, Jitong Communications and China Netcom have all completed their
trial IP telephony programs and have begun to offer commercial services. China
Mobile began trial wireless data and Internet services in March 2000.
Since 1986, China has been engaged in negotiations with its major trading
partners in order to gain entry into the World Trade Organization, or WTO. China
entered into an agreement with the United States in November 1999, and a similar
agreement with the European Union in May 2000, regarding the terms of China's
eventual entry into the WTO. Pursuant to these bilateral agreements, China has
agreed, among other things, to allow up to approximately 50% foreign equity
participation in commercial enterprises in the telecommunications industry
within two years of accession to the WTO. China has also agreed that foreign
participation in Internet services will be allowed to increase at the same rate
as other key telecommunication services. China's eventual entry into the WTO
will depend on an affirmative vote of a majority of WTO members, which is
expected to be granted some time in 2001. If China's effort in gaining entry
into the WTO is successful, it is likely to introduce competition from foreign
Internet and telecommunications services providers. We believe that increased
competition will force service providers to accelerate their investments in
infrastructure and customer care in order to differentiate themselves and remain
competitive.
MARKET OPPORTUNITIES
We believe the important trends in the Internet and the telecommunications
industry in China, as described above, present major opportunities for us in the
following areas:
HIGH VALUE INTERNET-RELATED PROFESSIONAL SERVICES IN AN INCREASINGLY COMPLEX
NETWORK ENVIRONMENT. The deployment of Internet infrastructure in a complex,
multi-vendor environment requires significant expertise that usually is not
internally available to Chinese Internet and telecommunications services
providers. As a result, they increasingly rely on experienced information
technology, or IT, services companies to provide total solutions to their
Internet infrastructure requirements. We believe that as the Internet market
develops, our customers will increasingly require high value IT services such as
network design, network planning and project management, and new high-end
solutions such as virtual private networks, operation support systems and
wireless solutions.
REAL TIME, SCALABLE CUSTOMER MANAGEMENT AND BILLING SOFTWARE THAT MEETS SPECIFIC
REQUIREMENTS OF CHINESE SERVICE PROVIDERS. Increased competition has required
telecommunications and Internet service providers continually to introduce new
services and programs in order to meet the varying needs of their customers and
differentiate their services. Moreover, they have had to focus on customer
management and support in order to study customer behavior and enhance customer
satisfaction. Providers of Internet services further require the capability to
scale services to millions of users in order to facilitate the rapid growth of
their subscriber base. Finally, Internet service providers and
telecommunications carriers must be able to monitor customer activity and bill
customer usage on a real time basis. These mission-critical needs of Internet
service providers and telecommunications carriers cannot be met by traditional
customer management and billing solutions that are inflexible, capable only of
period processing and difficult to scale. We believe service providers in China
will increasingly require a real-time and scalable customer management and,
billing solution that is easily adaptable to a vast number of new products and
services, and addresses the specific requirements of the China market.
BROADBAND NETWORK AND CONVERGENT COMMUNICATIONS SOLUTIONS AND SOFTWARE. Rapid
growth of Internet and multimedia applications has created increasing demand
from service providers for advanced, high-bandwidth voice, data and video
network capacity. As a result, service providers are expected to
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accelerate significantly their investment in broadband solutions for their
backbone and access networks. Carriers with strong narrow-band strength are now
aggressively updating to broad-band networks with new telecommunication and
Internet service providers. This trend is providing us with opportunities to
showcase our network consulting services, billing software and application
software. In addition, the emergence of convergent communications has created an
increasing demand for convergent software and solutions. Service providers of
convergent communications services, such as IP telephony and wireless data
services, require customer management and billing software that is capable of
accounting and billing customers' voice, data and Internet usage using common
architecture. In addition, they need software products that enable them to
provide convergent communications applications such as unified messaging
products integrating email, voicemail, fax and messaging functions.
EMERGING WIRELESS DATA MARKET. With interest in the wireless data market
growing, China Mobile is now building its Internet and wireless data network to
accommodate convergent network businesses, including General Packet Radio
Service, or GPRS. We are currently designing and building China Mobile's
Internet backbone, CMCCNET, and will provide the billing and email software.
Like China Telecom, China Mobile has numerous provincial subsidiaries, which
operate local telecommunications networks. We anticipate that the development of
CMCCNET will lead these provincial subsidiaries to build out their local
networks in order to connect more users to CMCCNET. When provincial subsidiaries
of China Telecom built out their local networks, we were the logical choice to
provide them with network solutions and Internet-related software, since we had
designed and built China Telecom's Internet backbone, ChinaNET. We expect to be
similarly well situated to provide provincial entities of China Mobile with
software and services in connection with their Internet build outs. In addition
to the build out of China Mobile's provincial Internet and GPRS networks, China
Unicom has indicated that it intends to develop a wireless network capability
based on the Code Division Multiple Access, or CDMA, standard.
SOFTWARE AND SOLUTIONS FOR THE CABLE INTERNET MARKET. Although the cable market
in China is currently fragmented and decentralized, the Chinese government has
expressed its intention to establish a national cable network company that will
consolidate cable networks across China. In the meantime, cable television
operators in China have begun to offer Internet services by leveraging their
existing cable networks. We have already signed a contract with Sichuan
Broadcasting and Television Network Ltd. to provide them with our Internet
billing software, and anticipate further growth in software sales to this
market. In addition, we anticipate that the consolidation of the cable networks
in China will provide opportunities for us in the network solutions area.
OUR STRATEGY
Our strategy is to be the leading China-based company providing world class
software products and network solutions, and to continue to enable our customers
to build, maintain, operate and continuously improve their Internet and
communications infrastructure. The key aspects of this strategy include the
following:
CONTINUE GROWING OUR SOFTWARE BUSINESS IN ORDER TO MAXIMIZE OPPORTUNITIES IN THE
INTERNET SOFTWARE MARKET. We continue to execute on our strategy of growing our
relatively high-margin software business. During the fourth quarter of 2000, our
software business comprised 38% of our revenues net of hardware costs, as our
software products continued to be favored by both existing and new customers. As
further evidence of the emphasis we are placing on our growing software
business, we recently completed the reorganization of our network solutions and
software divisions into separate, strategic business units, or SBUs, allowing
each unit to focus on its core competencies and identify new customer needs,
while maintaining the synergies between these businesses. We anticipate that the
growth of our software business will lead to opportunities to sell these
products in various markets outside of China.
MAINTAIN OUR LEADING POSITION IN PROVIDING INTERNET INFRASTRUCTURE SOLUTIONS IN
CHINA. We are a leading provider of network solutions to the largest Internet
and telecommunications companies in China. Based on forecasted growth as
reported by IDC, as well as communications with our customers and government
agencies, we expect investment in China's telecommunications industry to
continue to grow rapidly,
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particularly in data services infrastructure and related areas. We expect most
of this investment to be made through our customers, which are the largest
Internet and telecommunications service providers in China. We believe that our
close relationships with our customers, our unique understanding of the China
market, our technical capabilities and our proven track record will allow us to
capitalize on these growth opportunities.
FOCUS ON HIGH VALUE INFORMATION TECHNOLOGY PROFESSIONAL SERVICES. Currently, we
offer our information technology professional services in the context of total
solutions, which include systems integration and customization of our
proprietary and third party software. We minimize our exposure to hardware risks
by placing orders from hardware vendors only against back-to-back orders from
customers and having the equipment delivered by the vendor directly to the
customers' premises. As the IT market matures in China, we are focusing on
providing our customers with high value IT professional services, such as
network planning, design and optimization, while gradually outsourcing lower end
services, such as hardware installation, and encouraging customers to purchase
hardware directly from equipment vendors. For example, in designing and building
UniNet on behalf of China Unicom, we have performed system design, system
architecture, project management and technology training, while outsourcing
hardware delivery and installation.
LEVERAGE OUR HIGH QUALITY CUSTOMER BASE TO GENERATE RECURRING REVENUES. We have
a high quality group of network solutions customers and, through our customers'
end users, one of the largest installed software customer bases (as measured by
the number of licensed end users) for leading telecommunications service
providers and Internet content and service providers in China. Our customers
include China Telecom, China Mobile, China Unicom and China Netcom, which
together have accounted for a majority of the investment in Internet
infrastructure in China. Our high quality customer base enables us to foster
close relationships with our customers and develop an in-depth understanding of
their specific needs. Furthermore, our customers may face significant costs and
technological risks by switching from our services and products to others. We
intend to generate recurring revenues from our existing customer base through
upgrades of their networks and implementation of new services and products,
including outsourced applications.
ATTRACT AND RETAIN HIGHLY QUALIFIED PERSONNEL. We intend to continue our
aggressive recruiting strategy to attract and retain the best and most qualified
personnel in the IT industry. In view of the specific needs of the China market,
we target our recruitment effort on Chinese who have information technology and
professional competence and extensive exposure to western education and
management practices. We believe that we have been able to attract and retain
qualified personnel by offering them the following key benefits:
-- attractive compensation packages, including stock options;
-- a challenging and rewarding work environment in which our employees
have opportunities to enhance their technical knowledge; and
-- the opportunity to work for a company with an attractive image in
China, which has been greatly enhanced by our listing on the Nasdaq
National Market in March, 2000.
Our current senior management consists of Chinese, all of whom were either
educated at western universities or worked for leading international IT
companies. We continue to recruit senior officers from the Silicon Valley to
spearhead our software product development.
OUR COMPETITIVE STRENGTHS
We believe that we are well positioned to continue meeting our customers'
Internet infrastructure and software applications needs in China. The key
factors that contribute to our strong competitive position are:
INTERNET TECHNOLOGY LEADERSHIP IN CHINA. Our engineering personnel have
state-of-the-art expertise in Internet-based information technologies in China.
This expertise enables us to design and implement
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Internet technology that employs high quality design and validated hardware and
software components, and to deliver solutions with high performance-to-cost
ratios for our customers.
COMBINED INTERNATIONAL AND CHINA EXPERTISE. Our senior management is a Chinese
team, a majority of whom have been educated in the United States or have worked
with leading multinational companies in or outside of China. They have an
in-depth understanding of the China market, combined with a knowledge of best
management practices gained from some of the world's leading information
technology companies. We have well defined performance evaluation and reward
systems and a strong emphasis on sound, accountable corporate governance. We
believe that the unique strengths of our management team make us one of the best
managed China-based IT companies and make us well positioned to anticipate and
capitalize on market opportunities for our business in China.
REAL TIME, SCALABLE AND ADAPTABLE PROPRIETARY SOFTWARE. Our proprietary
software allows service providers to monitor user activity and analyze service
usage data in real time. The real time feature enables service providers to
increase billing accuracy, accelerate the time-to-market for new services and
improve the effectiveness of marketing and targeting efforts. In July 2000, we
conducted a benchmark test on Sun Microsystem's platforms using Oracle's
databases with our customer management and billing software, AIOBS 5.6. This
benchmark test, conducted at Sun's Asia Pacific Benchmark Center in Tokyo,
demonstrated the superb scalability of this software. This scalability allows
Internet service providers to develop their Internet infrastructures
incrementally as their level of business grows, without the need for
architecture re-engineering or large-scale system replacements. We are modifying
our software products such that they are designed with fully documented, open
architecture that allows our customers, as well as third party systems
integrators and software developers, to integrate our software with existing
applications and services with minimal effort and programming overhead.
ESTABLISHED CUSTOMER RELATIONSHIPS. We have close relationships with all
leading telecommunications and Internet service providers in China and have
provided our services and products to most of them. Our in-depth understanding
of their requirements allows us successfully to deliver customized solutions and
maximize the opportunities created by increased investments in
telecommunications and Internet infrastructure in China. Moreover, we have a
strong research and development team based in China which allows us to respond
quickly and inexpensively to the needs of our customers in China.
STRATEGIC BUSINESS UNITS PROVIDING A TOTAL SOLUTIONS APPROACH. We recently
reorganized our operational structure into two strategic business units:
Software Products and Network Solutions. We expect this reorganization to allow
us to optimize the allocation of resources between these two business lines and
further leverage our existing competencies while developing new areas of growth.
The reorganization also underscores the growing significance of our software
business and the increasing opportunities to sell our software products
separately from our network solutions projects. At the same time, however, we
continue to provide our services in the context of total solutions, including
systems integration and software customization, to customers who prefer this
approach. This total solutions approach is favored by many Chinese customers and
allows us to build and maintain close, long term relationships with those
customers.
PRODUCTS AND SERVICES
OVERVIEW
We offer network solutions to the leading Internet and telecommunications
service providers in China to meet their network infrastructure requirements. In
addition, we develop proprietary software products to support the operations of
Internet service providers and other telecommunication service providers.
We offer total network solutions to our customers by leveraging our core
strengths in information technology services and maintaining close relationships
with multiple hardware and third party software vendors. Substantially all of
our network solutions business is accounted for by the various entities of China
Telecom and China Mobile, as well as China Unicom, China Netcom and Jitong
Communications.
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Our longstanding relationships with these customers and our understanding of
their specific requirements make us well positioned to respond to their requests
for proposals.
Our software products were historically marketed as a part of our network
solutions projects. However, the rapid growth of the Internet in China has led
to a sharp increase in demand for sophisticated Internet applications and
scalable software to support our customers' operations. As a result, we are
increasingly selling our software licenses separately from our network solutions
projects. We currently offer four main software products to our customers:
-- AsiaInfo Online Billing System (AIOBS) -- a customer management and
billing product for Internet service providers and IP Telephony service
providers;
-- AsiaInfo Billing and Customer Care System (AIBCCS) -- a customer
management and billing product for providers of wireless telephony
services;
-- AsiaInfo Mail Center (AIMC) -- a carrier-scale messaging product; and
-- AISerBase -- a high-end network management product.
We believe that our growing software business is a logical extension of our
network solutions business. Our network solutions projects give us an intricate
understanding of our customers' Internet infrastructure requirements and allow
us to understand the software requirements that are needed to support those
infrastructures.
NETWORK SOLUTIONS
Our highly-skilled network systems engineers and project managers are engaged in
providing total network solutions to our customers in China to meet their
Internet infrastructure requirements. Each project is staffed with a dedicated
team of project management professionals who work closely with our network
systems engineers. The engineers design and build each project, while the
project management professionals oversee budgetary matters, coordinate the work
force, ensure adequacy of resources and monitor progress and quality to ensure
the timely completion of each project. We expect that our existing capabilities
will enable us to rapidly design and implement broadband network infrastructure,
e-commerce solutions and high-end solutions such as virtual private networks,
operation support systems and wireless solutions, as demand for these services
increases in China.
Through a combination of one or more of the activities listed below, we offer
our customers turn-key network solutions:
INTERNET INFRASTRUCTURE SOLUTIONS. This core area of our current business
includes network access and backbone infrastructure design and implementation
for telecommunications service providers and Internet service providers. Our
Internet infrastructure solutions support a wide array of broadband network
technologies. We have designed and built the first commercial and the largest
national Internet backbone, and the largest provincial commercial Internet
backbone, and are in the process of building the next three largest national
commercial Internet backbones in China.
OPERATIONS SUPPORT SOLUTIONS. Operations support solutions allow our customers
to manage their network infrastructure utilizing our proprietary and third-party
software tools and applications. We design and implement network management
centers for our clients and install proprietary and third party software
products and customized software applications that allow our clients to perform
activities such as customer management and billing, services offerings and
promotions, provisioning and monitoring network utilization and customer service
levels.
SERVICE APPLICATIONS. We design and provide applications for Internet access,
IP telephony and virtual private networks that allow our clients to provide
commercial services to their customers. We also provide high volume messaging
services and web-based as well as other Internet applications.
NETWORK PERFORMANCE AND SECURITY SOLUTIONS. We conduct network performance
audits and tuning services to improve overall network performance. This involves
recommending more efficient bandwidth allocation,
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reducing network latency and response time for applications, and developing
software tools for security improvements.
All our network solutions projects involve one or more of the following
activities:
NETWORK PLANNING. We provide our customers with strategic and tactical reviews
of their current network operations and future network requirements. We do much
of this work before the customer awards the contract in order to assist them in
developing an appropriate request for proposal and to improve our chances in
winning the contract. The planning includes defining client business
requirements, developing appropriate information architectures and selecting
preferred technology.
NETWORK DESIGN. We detail the network specifications and implementation tactics
necessary to achieve our customers' objectives. We also consider how the new
technology will integrate with the customer's existing hardware and software and
how it will be managed on an ongoing basis. Examples of services include
defining functional requirements for the network and its components, development
of multi-vendor integration plans and design of customer-specific network and
services applications.
NETWORK IMPLEMENTATION. We install the recommended systems to meet our
customers' network requirements. Key activities include project management,
hardware and software procurement, configuration and field installation and
testing, building network management centers and development of customized
network and services management applications. We believe that our expertise in
integrating new systems without disrupting ongoing business operations of our
customers adds significant value and reduces risks.
NETWORK OPTIMIZATION. We maximize the efficiency of communications networks by
improving network utilization. Examples of our services include network traffic
analysis and identification of bottlenecks, recommendations for efficient
allocation of bandwidth, fault detection and isolation, performance testing and
tuning, and security auditing and improvement.
MAINTENANCE AND SUPPORT SERVICES. We provide maintenance and technical support
in connection with all of our network infrastructure and systems integration
projects, content and network access provider platforms, and our proprietary
software products. These services currently include assistance with the
implementation of new information technology functions and/or features,
configuration and programming services for new business processes, warranty
repairs, and assistance in the case of technology upgrading. We believe that our
policy of on-going maintenance and technical support will help foster long-term
relationships with our customers and create significant business opportunities.
TRAINING. We provide technical training for our customers and strategic
partners to increase their awareness and knowledge of Internet technologies in
the Chinese information technology market and to support the operations of our
customers' integrated network systems. Our training courses address issues
relating to daily operations of network systems. Specific topics include daily
network management tasks, advanced network troubleshooting, introductory network
framework reviews, and advanced planning and design.
SOFTWARE PRODUCTS
We develop, market and support customer management and billing software that
meets the complex, mission-critical provisioning, accounting, reporting and
marketing needs of Internet and telecommunications service providers. In
addition, we sell carrier-scale messaging products to telecommunications and
Internet service providers, as well as Internet content providers in China.
Recently, we introduced a service-oriented network management product, which
manages all aspects of a network environment.
ASIAINFO ONLINE BILLING SYSTEM (AIOBS). The latest version of our Internet
customer management and billing software, AIOBS 6.0, was released in November
2000. AIOBS 6.0 is a real time, scalable solution that enables Internet service
providers to address the critical business needs of customer management,
services support, and accurate and timely billing. First launched in 1996, the
third generation software
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product today offers tremendous improvements in architecture, functionality and
capacity. AIOBS 6.0 enables Internet service providers to:
-- manage, authenticate and register users, create user accounts, check
account status and activate services;
-- monitor and analyze user activity, "map" individual user consumer behavior
and perform audit trials on user accounts;
-- price and rate a broad array of services, discount services and promotions
using multiple bases and resources, such as time of usage, bytes
transferred, size of server storage and number of page views; and
-- perform billing operations based on flexible billing cycles and manage
user accounts receivable.
AIOBS 6.0 also allows service representatives and customers to access selected
user data to create, search and modify user accounts, change certain personal
information and perform other customer self-care functions using a browser-based
interface.
In addition, AIOBS 6.0 provides many features tailored to the China market,
including:
-- caller ID usage-based and restricted line services which allow telephone
customers to log on to the Internet without first registering with the
Internet service providers, with usage-based fees charged to their regular
monthly telephone bills, and to log on only from certain, specified phone
numbers;
-- a roaming service which allows registered customers from different
Internet service providers to log on to the Internet from each other's
territories, an important feature since most Chinese Internet service
providers operate and recruit users locally; and
-- a restricted credit (pre-paid card) service which allows customers to use
the Internet with monthly monetary or usage-based limits, with real time
cut-off the instant the credit limit is reached.
Our IP telephony customer management and billing software, introduced in June
1999, is an integrated part of the AIOBS multi-service customer management and
billing platform, catering to the specific needs of IP telephony service
providers. Its key features include multi-vendor gateway support, real-time
billing and service provisioning, flexible tariff plans and the ability to
bundle with other enhanced Internet services. IP telephony service trial
projects conducted by China Telecom, China Unicom and Jitong Communications
during 2000 were very successful. We expect the IP telephony market in China to
develop rapidly and capture an increasingly large portion of long-distance voice
traffic. We believe the fast growing IP telephony market in China offers us
growth opportunities because our software can provide IP telephony operators
with features not present in traditional, batch-oriented customer management and
billing software currently used by IP telephony service providers in China. In
addition, our product enables IP telephony operators to deliver new value-added
services faster and more efficiently.
We created new modules in AIOBS 6.0 to serve the billing requirements of
emerging telecommunications and Internet service providers in China, including
an Internet data center billing module, a cable Internet billing module and a
wireless Internet billing module. The convergence feature of AIOBS 6.0 enables
service providers to offer one-stop-shopping services and permits flexibility
for our customers' various billing schemes.
ASIAINFO MAIL CENTER (AIMC). Our flagship online messaging software, AIMC, is
carrier scale messaging software designed to support electronic mail systems
from small Internet service providers to large-scale mail hosting providers with
millions of mailboxes and thousands of domains. Its flexible design allows
service providers to offer web-based free e-mail, basic e-mail service and
premium business secure e-mail to end-users. The ability to scale both
horizontally and vertically allows rapid expansion when more capacity is needed.
The system is built to accommodate clustering technology and is highly fault
tolerant. In addition to major telecommunications and Internet service
providers, top Internet content providers such as chinadotcom and 21cn.com are
also among the key customers for AIMC.
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We have released two versions of our messaging software in 2000: AIMC 2.7 and
AIMC 2.9. New enhancements to AIMC 2.9 include secure email access and
transmission, personal digital assistant (PDA) email, and a built-in anti-virus
module. As email has become more common to Chinese businesses, dependable
security and anti-virus functions are critical. Furthermore, the fast growing
PDA market has introduced a new group of email users, for whom the PDA module of
AIMC was developed.
ASIAINFO BILLING AND CUSTOMER CARE SYSTEM (AIBCCS). Our wireless and
long-distance telephony customer management and billing software, AIBCCS, offers
real time, scalable solutions for customer management and billing operations of
wireless and long-distance telephony service providers, including:
-- customer management, together with customer service, hierarchies and rapid
report management;
-- call center support, including usage processing;
-- fraud detection and management;
-- billing and revenue management features, including accounts receivable and
collection; and
-- inter-carrier settlement.
With AIBCCS, we pioneered fraud management software market in China, which has
seen increasing customer demand. We believe AIBCCS is also the only customer
management and billing software used by Chinese operators that supports wireless
services based on the Code Division Multiple Access, or CDMA, standard in
addition to GSM, the prevailing wireless standard in China. As China Unicom has
expressed its intention to roll out a nation-wide wireless network using CDMA
technology, we are well positioned to provide customer management and billing
solution for this growing market.
AISERBASE. We recently announced the release of our new service-oriented
network management software product: AISerBase. Driven by an increasing demand
for sophisticated network management software, AISerBase offers high-end network
management features. Aiming to provide multiple services, network operators have
shifted network management emphasis from simple hardware management to service-
oriented value-added functions. AISerBase manages all aspects of a network
environment, including hardware, applications, services and customers at four
different layers: equipment, application, service and business.
Several unique characteristics of AISerBase differentiate it from other network
management software products. For large-scale networks, AISerBase groups and
manages systems by service category such as leased line services, dial-up
services and Web services. This structure enables operators to streamline
management processes and prioritize management tasks in an organized fashion.
More importantly, the service-oriented management structure offers flexibility
to operators to provide multiple services in a convergent environment.
Furthermore, while traditional network management software products only deal
with static network elements such as hardware, AISerBase also manages dynamic
factors such as usage patterns.
Benefiting from AISerBase, network operators, particularly telecommunications
carriers and Internet data centers, will be able to improve their service
offerings and quality in a number of ways. First, being highly automated,
AISerBase can significantly increase cost efficiency of network management
activities. The multi-vendor support feature also minimizes management expenses.
Second, by monitoring and assessing network traffic in real time, AISerBase
collects and analyzes statistical data on system by service category, which can
be used to manage service level agreements (SLAs) and make sound investment
decisions for network expansion. Third, AISerBase facilities many
customer-oriented value-added services such as customer self-evaluation on
service usage.
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RECENT NETWORK SOLUTIONS AND SOFTWARE CONTRACTS
In 2000 and early 2001, we have continued to execute on our strategy of becoming
the leading China-based company providing software products and network
solutions by winning a number of key contracts. Those contracts include the
following:
-- In February 2001, we announced a contract to provide Hebei Telecom, a
provincial subsidiary of China Telecom, with software products and
services to further enhance the capacity of its Internet infrastructure.
The contract is valued at $5.4 million in total. The expected revenues
from this contract, net of hardware costs, account for over 74% of the
entire contract value. In addition to our carrier-scale messaging software
(AIMC) and customer management and billing software (AIOBS), we will also
provide Hebei Telecom with our newest software product, AISerBase.
-- In February 2001, we announced a contract to provide Shanghai Online with
a full array of high-end network services, including network security
services, software professional services and system integration services.
The contract is valued at $1.4 million in total, 100% of which is for
services. A subsidiary of China Telecom, Shanghai Online is one of the
premier Internet service providers in Shanghai, the most developed
metropolitan area in China with a population of approximately 13 million.
MarSec has been chosen to provide network security services, including
security assessment, security system design and implementation, trouble
shooting and security support services.
-- In January 2001, we announced a contract with Shandong Telecom, a
provincial subsidiary of China Telecom, to provide software products and
services to further enhance the capacity of its Internet infrastructure.
The contract is valued at 4.7 million, more than 75% of which is for
software and services. This is the third expansion project to be conducted
by Shandong Telecom during the last twelve months, reflecting China
Telecom's drive to expand user capacity at the provincial and local
levels.
-- In December 2000, we announced a contract to provide Jiangsu Telecom, a
provincial subsidiary of China Telecom, with Internet messaging products
and services for its Phase III Internet infrastructure expansion project.
The contract is valued at $5.2 million in total, with software and
services accounting for 30% of the contract value. Under a similar
contract, we will provide Xizang (Tibet) Telecom with billing and
messaging software and services for its Phase I Internet infrastructure
project.
-- In December 2000, we announced a contract to provide Jilin Mobile, a
provincial subsidiary of China Mobile, with messaging products and
services for its local Internet infrastructure project. The contract
marked our continued success in the China wireless Internet market. Under
the terms of the contract, our leading messaging software was selected,
along with several compatible network management software tools. The
initial phase of the contract is valued at approximately $800,000 in
total, covering software and services only.
-- In November 2000, we announced a contract with China International
Electronic Commerce Center (CIECC), a commercial subsidiary of Ministry of
Foreign Trade & Economic Cooperation (MOFTEC), to provide integration
services and billing software to its national backbone project -- China
International Electronic Trade Network (CIETNet). The first phase of the
project is valued at approximately $840,000 over 50% of which is
attributable to software license fees.
-- In November 2000, we announced a contract to provide Liaoning Telecom, a
provincial subsidiary of China Telecom, with messaging products and
services for its Phase IV Internet infrastructure expansion project. The
contract is valued at $1.6 million in total, of which more than 74% is for
software and services.
-- In October 2000, we announced a contract to provide Sichuan Broadcasting
and Television Network Ltd., a provincial cable Internet operator, with
our billing and messaging software products. This contract marked our
breakthrough entrance into China's cable Internet market.
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-- In October 2000, we announced a partnership with JiTong Communications, an
emerging telecommunications services provider, by winning a contract to
provide system integration services for its IP infrastructure Phase II
expansion project.
-- In October 2000, we announced a $14.9 million contract with Beijing
Telecom, a provincial subsidiary of China Telecom, to further enhance the
capacity of its provincial Internet infrastructure. Net revenues after
hardware costs from this contract are expected to account for 47% of the
total contract value.
-- In September 2000, we announced that we will provide China Netcom with
Internet data center billing functionality through our AIOBS software
platform. The software will allow China Netcom to support thousands of
Internet data center users at a number of locations, as well as the
flexibility to implement a differentiating pricing scheme, a service
feature that has become critical in order for Internet data centers to
remain competitive.
-- In September 2000, we announced a $16 million contract to build, CMCCNET,
a national Internet backbone for China Mobile, which will connect the
country's 31 provincial capitals. Under the agreement, we will manage
overall network integration and our flagship software products -- AIMC and
AIOBS -- will be customized for the network. Sales of software and
services under the contract are expected to account for more than 30% of
the total contract value.
-- In September 2000, we announced a $1.6 million contract with Tianjin
Telecom to supply advanced billing and messaging software, while helping
to build the third phase of its Internet backbone in Tianjin, the fourth
largest city in China. The project is expected to improve significantly
the service quality of this provincial network. As key components of the
expanded infrastructure, the customer chose AIOBS and AIMC.
-- In May 2000, we announced that China Netcom had selected AIOBS in the
second phase expansion of China Netcom's IP telephony project. This
project will reach 100 major cities in China, covering an estimated 8
million pre-paid card users. AIOBS will support all of the Internet
services provided by China Netcom, including IP telephony, fax, 800 number
service, virtual private networks and voice-mail boxes.
-- In April 2000, we announced a contract to build a 311-city national IP
telephony network in China for China Unicom. The new network is expected
to be the largest IP telephony network in the world. Once completed, it
will be able to carry 8 billion minutes of long distance calls per year,
providing dial-up services to consumers and businesses through wire-line
as well as wireless connections.
-- In March 2000, we announced a contract with China Netcom to design and
build China's third national Internet backbone, CNCNET. CNCNET will be the
first nationwide IP over DWDM (Dense Wavelength Division) broadband
Internet backbone in China and is expected to support a wide range of
Internet-based voice, image, fax and data communications services and
value added services. In addition to the construction of the backbone, we
will support the network's customer management and billing needs with
AIOBS.
-- In 2000, we won various contracts for provision of our messaging software,
AIMC, to Internet content providers. 8848.net, China's largest e-commerce
portal, People's Daily Online, one of China's biggest news web sites and
Xin Hua News Agency, China's largest news and information gathering and
distribution center have all signed on for installation of the software.
STRATEGIC ALLIANCES
In 2000, we entered into a number of strategic alliances with key players in the
information technology industry. Those alliances included the following:
-- In September 2000, we announced the signing of a memorandum of
understanding with Ericsson to collaborate in simplifying customer billing
for mobile Internet users in China. As part of the alliance, we will
integrate our customer management and billing software, AIOBS, with
Ericsson's General
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Packet Radio Services (GPRS) and Wireless Application Protocol (WAP)
gateways. The GPRS system will enable service operators to offer Internet
based applications to mobile networks at a faster rate than current voice
application networks.
-- In June 2000, we announced a strategic alliance with Redback Networks, a
leading provider of advanced broadband networking solutions, to speed and
simplify the rollout of broadband services throughout China. As part of
the alliance, Redback will integrate its Subscriber Management System
(SMS) with our customer management and billing software, AIOBS. Together,
these products will offer telecommunications carriers, Internet service
providers and cable operators in China the most comprehensive solution to
acquire and manage thousands of broadband subscribers, and speed up
broadband providers' ability to roll out and test new services for
consumers.
-- In June 2000, we announced the successful integration of our IP telephony
billing software with the network access gateway of Huawei Technologies.
The bundling of these two products provides an end-to-end solution for IP
telephony service providers and offers value-added IP telephony services,
such as virtual private networks and 800 number services.
PRICING
We currently price our software products based on the number of user licenses
which our customers purchase from us. In addition to these license fees, our
customers purchase technology support services for which they pay a service fee
comprised of a fixed percentage of the total contract amount. We price our
customers for software customization on a time plus materials basis. The pricing
of our messaging software, AIMC, is based on the total number of mail boxes
purchased by our customers. However, the unit price for each mail box differs
among free web-based e-mail service, basic ISP-provided Internet
e-mail and business secure e-mail offerings.
Prices for our network solutions projects are calculated internally on an
estimated time and material basis, but are quoted to customers as a fixed fee.
Contracts for these projects are generally subject to competitive bidding
processes.
TECHNOLOGY
INTERNET AND IP TELEPHONY CUSTOMER MANAGEMENT AND BILLING SOFTWARE. Our
Internet and IP telephony customer management and billing software is designed
to allow maximum flexibility, scalability and performance. It has
state-of-the-art, four-tier client/server architecture. This multi-tier
architecture, coupled with the other technologies, gives our software the
following advantages:
-- FLEXIBILITY. Because we use a data dictionary-based data model to collect
data from databases and other resources, data definitions, such as new
entries of demographic information, can be customized without any code
modification.
-- MINIMUM INTERRUPTION OF EXISTING SERVICES. The system is built on dynamic
component modules which can be modified separately when a new product is
introduced and updated without system downtime.
-- EASE OF CUSTOMIZATION. Our software offers fully documented Application
Programming Interfaces (APIs) that support standard scripts. As a result,
our customers can build client applications without compilation and can
customize and write new user interface applications with minimum training.
WIRELESS AND LONG-DISTANCE TELEPHONY CUSTOMER MANAGEMENT AND BILLING
SOFTWARE. Our wireless and long distance telephony customer management and
billing software also utilizes state-of-the-art multi-tier architecture to
achieve flexibility, scalability and real-time performance. We are designing new
architecture to support convergent customer care and billing solutions for
combined Internet, IP telephony and traditional voice services. The technologies
we employ have given our wireless and long-distance telephony software
advantages such as well-designed applications for high performance under high
capacity subscribers and have enabled the software to ensure transaction
integrity.
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MESSAGING SOFTWARE. Our carrier scale messaging software supports service
providers with a large number of subscribers and large volumes of messages. We
use the following technologies to achieve scalability and optimize performance:
-- advanced software technology that allows AIMC to scale both horizontally,
by adding more servers, and vertically, by using higher speed or multiple
central processing units, to handle subscriber growth without compromising
system performance and hardware investment;
-- switching technology that distributes workloads in a manageable and
flexible fashion and allows customers to easily add, remove or reconfigure
running systems without downtime in a live production environment; and
-- storage area network (SAN) technology that offers speedy, reliable and
secure access to the data storage subsystem with ultra-high capacity
databases.
RESEARCH AND DEVELOPMENT
We are committed to researching, designing and developing information technology
solutions and software products that will meet the future needs of our
customers. In the information technology solutions areas, we focus our research
and development efforts on operation support solutions and broadband network
access and applications solutions. We are currently developing a number of
upgrades of our existing software products to enhance scalability and
performance and provide added features and functions. In addition, we are
designing a wide array of new software products to address our customers'
growing need for convergent communications, such as unified messaging products
and convergent network management solutions.
We closely monitor world-wide technological developments in our service and
product areas. In addition, we work closely with the research and development
teams of major international technology companies. Cooperation with global
technology leaders improves our access to the most sophisticated technologies,
which enables us to provide the latest and best solutions and products to our
customers.
The chief focus of our network solutions research is on new network technology
development and the evaluation of solutions based on multi-vendor products. The
focus of the software research is on architecture study, software development
platforms, commonly used libraries and other software management tools. We plan
to expand our research and development efforts further by adding more personnel
and financial resources and by setting up research and development departments
in selected regional offices.
CUSTOMERS
Our customers currently consist primarily of Chinese telecommunication service
providers and Internet service providers, including China Telecom, China Unicom,
China Mobile, China Netcom and various other Chinese Internet service providers.
In 2000, we have continued to diversify our customer base. For the full year
2000, China Telecom accounted for 36% of our revenues net of hardware costs,
compared with 80% in 1999, while China Unicom accounted for 29%, China Netcom
accounted for 13%, China Mobile accounted for 7%, and other customers accounted
for 15%. Our customer base is changing and diversifying quickly as the overall
China telecommunications market grows due to deregulation and significant
investment from several new players. This diversification not only reduces our
dependence on a small group of large customers, but also causes us to expect
strong and consistent growth in revenues net of hardware costs on a year over
year basis.
CHINA TELECOM. China Telecom has been our largest customer to date. As a result
of the restructuring of the telecommunications industry that began in February
1999, China Telecom operates only fixed line networks and provides fixed line
telephone and data communications services. China Telecom and its various
provincial subsidiaries accounted for almost all of our revenues in 1997 and
1998.
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CHINA UNICOM. China Unicom was established in 1994 and is the second-largest
national public telecommunications network in China. China Unicom also provides
a wide array of services, including long distance telephone services, local
telephone services, mobile communications services, data communications
services, communications value-added services and other communications services.
CHINA MOBILE. China Mobile was established in July 1999 to operate the mobile
telecommunications networks nationwide that had previously been operated by
China Telecom. China Mobile is the largest wireless telephony service provider
in China and, like China Telecom, has various provincial subsidiaries throughout
China, which are responsible for local networks.
CHINA NETCOM. China Netcom, the latest state-sponsored entrant into the Chinese
telecommunications market, was formed in 1999 to build and operate a high-speed
telecommunications network initially linking fifteen large Chinese cities. The
new network, one of the world's fastest fiber-optic backbones, is to be
constructed based entirely on IP technology. It will also take advantage of
existing cable television networks, which will be linked to the system via
fiber-optic and fixed-wireless technology.
SALES AND MARKETING
SALES
We market and sell our services and products primarily through our direct sales
force. Our direct sales professionals provide business consulting, promote
pre-sale activity and manage our relations with customers. We employ direct
sales personnel in regional offices in Beijing, Shanghai, Wuhan, Chengdu and
Guangzhou. The direct sales force is organized into individual account teams. We
use a team selling approach, whereby sales personnel work together with network
systems engineers and technical managers in analyzing potential projects and
marketing our expertise to potential clients. We have recently established our
Corporate Sales Division, which focus on sales initiatives to key accounts such
as China Telecom, China Mobile, China Netcom and China Unicom.
We identify and target market segments and select target sales opportunities on
a national level, and we also conduct sales opportunity studies to ensure that
adequate regional sales resources are available. Sales quotas are assigned to
all sales personnel according to annual sales plans. We classify market segments
and target opportunities on national and regional levels. This classification
helps us determine our primary sales targets and prepare monthly and quarterly
sales forecasts. We approve target projects, develop detailed sales promotion
strategies and prepare reports on order forecast, technical evaluation, sales
budgeting expense, schedules and competition analysis. After the report has been
approved, a sales team is appointed consisting of sales personnel, system design
engineers and a senior system architect.
Recently, we began a new initiative to penetrate the international market for
software products. As part of our new "sales channel strategy" we have set up
sales and presales teams to develop markets for our software products outside of
China.
MARKETING
Our marketing strategy focuses on building long-term relationships with our
customers, educating them about technological developments and generating their
interest in our services and products. Historically, our marketing and sales
efforts were combined. As our businesses expanded and the marketplace became
increasingly sophisticated, we established a dedicated marketing department in
1998. Currently, we have independent marketing departments for each of our two
strategic business units. These departments continuously analyze the needs of
our customers, our competitive environment, the market potential of our products
and services, and the effectiveness of our pricing and distribution channel
strategies.
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In addition to our marketing departments, we have a market communications, or
marcom department, which engages in a number of activities aimed at increasing
awareness of our products and services. These activities include:
-- managing and maintaining our web site;
-- publishing bi-weekly research reports and monthly customer newsletters;
-- providing free business consulting services;
-- conducting seminars and conferences;
-- conducting ongoing public relations programs; and
-- creating and placing advertisements.
In addition, we actively participate in technology-related conferences and
demonstrate our products at trade shows targeted at our existing and potential
customers.
COMPETITION
The Internet-related information technology services market in China is new and
rapidly changing. Our competitors in the market mainly include domestic systems
integrators such as Ztec, Autian and Holy Bridge. Although we are a leading
player in this market, there are many large multinational companies with
substantial, existing information technology operations in other markets in
China, which have significantly greater financial, technological, marketing and
human resources. Should they decide to enter the Internet-related information
technology services market in China, the competition will intensify.
In the customer management and billing software market, we compete with both
international and local software providers. In the online billing segment we
compete primarily with Portal Software, MIND and Ztec and in the wireless
billing segment we compete with more than ten local competitors. The messaging
software segment is a highly competitive market. Currently, we primarily compete
with Open Wave (formerly known as Software.com) and Netease. We believe that we
have competitive advantages in all of our product and service segments due to
our Internet technology leadership, combined international and China expertise,
established customer relationships and our high performance, scalable, flexible
software.
In view of the gradual deregulation of the Chinese telecommunications industry
and China's pending entry into the WTO, we anticipate continued growth and
competition in the telecommunications infrastructure industry and the entrance
of new competitors into the customer management and billing software market.
GOVERNMENT REGULATION
The Chinese government has generally encouraged the development of the
information technology industry, and the products and services we offer are not
currently subject to extensive government regulations.
The Internet and the telecommunications industry in which our customers operate,
however, has been subject to government regulation and control. Currently, all
large telecommunications and Internet service providers in China are state owned
or state controlled and their business decisions and strategies are affected by
the government's budgeting and spending plans. In addition, they are required to
comply with regulations and rules promulgated by China's Ministry of Information
Industry from time to time.
China recently published the Regulations of the People's Republic of China on
Telecommunications (the "Telecommunications Regulations") and the Notification
of Telecommunication Charge Structural Adjustment. The Telecommunication
Regulations are the first comprehensive set of regulations governing the conduct
of the telecommunications business in China. The principles expressed by the
Telecommunications Regulations reflect positively on China's commitment to
accede to the WTO. In particular, the Telecommunications Regulations have set
out in clear terms the framework for operational licensing, interconnection, the
setting of telecommunications charges and standards of telecommunications
services.
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With improved transparency and a pro-competitive regulatory environment, we
anticipate that investor confidence in China's telecommunications sector is
likely to grow. However, the Telecommunication Regulations do not address the
issue of foreign investment. Foreign investors are currently not permitted
independently to operate telecommunications networks or provide
telecommunications services, or manage an entity that operates a
telecommunications business in China. Draft regulations governing foreign
investment in China's telecommunications business were submitted by the Ministry
of Information Industry to China's State Council in August 2000. These
regulations have not yet been approved. However, pursuant to the terms of the
Sino-U.S. and Sino-E.U. bilateral agreements on China's accession to the WTO,
China will allow foreign investment in the telecommunications sector on a
gradual basis after WTO accession.
The Notification of Telecommunication Charge Structural Adjustment reduced
telecommunication service and Internet service fees such as Internet access fees
and leased line renting fees, permitting IP telephony operators, paging business
operators, web hosting service providers and certain other value added service
providers to set their prices based on their own cost structure and competitive
strategy. We believe this notification will have a positive impact on our
business because, with the decline in telecommunication and Internet services
fees, China's Internet population and tele-density are likely to grow, which in
turn will likely generate more demand for our products and services. In
addition, with declining leased line tariffs, more and more enterprises should
be able to afford to use the Internet as a business tool.
Notwithstanding the recent developments in China's telecom regulations, many
laws and regulations applicable to the Internet in China are still evolving and
unsettled. There are certain approval and registration procedures in place for
Internet users who wish to have access to Internet-related services. Foreign
companies are currently prohibited from engaging in Internet service provision,
Internet content provision and other value-added Internet related services in
China. Due to the increasing popularity and use of the Internet and other online
services, it is possible that more extensive and restrictive regulations may be
adopted with respect to the Internet and other related services. In September
2000, China's State Council approved the Administrative Measures on Internet
Information Services. The Administrative Measures on Internet Information
Services confirm China's continuing sensitivity to control and censor
information on the Internet. It remains to be seen how rigorously these new
regulations, especially the penalties provisions, will be enforced. In view of
China's pending entry into the WTO, we expect a majority of these restrictions
will be phased out and eventually eliminated. However, until then, a restrictive
regulatory environment for our customers could adversely affect our business.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Factors Affecting Our Operating Results and Our Common
Stock -- Laws and regulations applicable to the Internet in China remain
unsettled and could have a material adverse affect on the Internet's growth and
thereby have a material adverse affect on our business."
INTELLECTUAL PROPERTY
Our success and ability to compete depends substantially upon our intellectual
property rights, which we protect through a combination of copyright, trade
secret law and trademark law. We have filed five trademark applications with the
United States Trademark Office, two of which have been granted and three are
still pending. Our trademark application covering AsiaInfo's logo and design has
been granted by the Trademark Bureau of the State Administration of Industry and
Commerce in China. In addition, we have filed three trademark applications with
the Hong Kong Trade Marks Registry for AsiaInfo's logo, which are pending. We
have also completed the registration of the copyrights for 17 versions of our
software products with the State Copyright Bureau in China, including the AIOBS
series and the AIMC series. However, although we may apply for such protection
in the future, we have not applied for copyright protection in other
jurisdictions (including the United States). We do not own any patents and have
not filed any patent applications, as we do not believe that the benefits of
patent protection outweigh the costs of filing and updating patents for our
software products.
We enter into confidentiality agreements with our employees and consultants, and
control access to and distribution of our documentation and other licensed
information. Despite these precautions, it may be
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possible for a third party to copy or otherwise obtain and use our licensed
services or technology without authorization, or to develop similar technology
independently. Since the Chinese legal system in general, and the intellectual
property regime in particular, is relatively weak, it is often difficult to
enforce intellectual property rights in China. In addition, there are other
countries where effective copyright, trademark and trade secret protection may
be unavailable or limited, and the global nature of the Internet makes it
virtually impossible to control the ultimate destination of our products.
Policing unauthorized use of our licensed technology is difficult and there can
be no assurance that the steps taken by us will prevent misappropriation or
infringement of our proprietary technology. In addition, litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others, which could result in substantial costs and diversion of our
resources and could have a material adverse effect on our business, results of
operations and financial condition.
EMPLOYEES
As of December 31, 2000 we had over 650 employees. Our employees are represented
by a labor union and, thus far, our operations have not been significantly
disrupted by labor disputes.
We devote significant resources to recruiting professionals with both network
solutions and relevant industry experience. Most of our senior management and
technical employees are western educated Chinese professionals with substantial
expertise in information technologies systems integration and application
software development. We believe that our success in attracting and retaining
highly skilled technical employees and sales and marketing personnel is largely
a product of our commitment to providing a motivating and interactive work
environment that features continuous and extensive professional development
opportunities, as well as frequent and open communications at all levels of the
organization. As an incentive, we have created an employee stock option plan
that includes vesting provisions designed to encourage long term employment.
ITEM 2. PROPERTIES
Our principal sales, marketing and development facilities and administrative
offices currently occupy approximately 7,300 square meters in a new building
located in the Beijing Zhongguancun Science Park. The lease has a term of five
years, which expires in February 2005, subject to termination in 2003 if an
agreement on the adjustment of rent cannot be reached at that time. In addition,
we have regional field support offices in various cities in China, namely
Shanghai, Guangzhou, Chengdu, Hangzhou and Wuhan, as well as a regional office
in Santa Clara, California.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information concerning submission of matters to a vote of security holders is
incorporated by reference to the section entitled "Item 5. Other Information"
contained in our Amended Quarterly Report on Form 10-Q/A, filed with the
Securities and Exchange Commission on January 9, 2001.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the symbol
"ASIA" since our initial public offering on March 2, 2000. Prior to that time,
there was no public market for our common stock. The following table shows the
high and low sale prices per share of our common stock as reported on the Nasdaq
National Market for the periods indicated:
CLOSING PRICES
------------------
HIGH LOW
------ ------
(IN U.S. DOLLARS)
2000 (FROM MARCH 3)
First quarter............................................. 99.56 60.50
Second quarter............................................ 59.44 30.50
Third quarter............................................. 48.00 17.06
Fourth quarter............................................ 19.50 7.38
As of March 1, 2001, there were approximately 183 record holders of our common
stock.
We have never declared or paid any dividends on our capital stock. We do not
intend to pay dividends on our shares of common stock. We intend to retain all
future earnings, if any, for use in our business. Future cash dividends, if any,
will be at the discretion of our board of directors and will depend upon our
future operations and earnings, capital requirements and surplus, general
financial condition, contractual restrictions and other factors as the board of
directors may deem relevant. Any dividends we declare will be paid in U.S.
dollars.
As a holding company, our primary source of cash for the payment of dividends
are distributions, if any, from our subsidiaries. Our principal operating
subsidiaries were established in China and are able to make distributions of
profits to us only if they satisfy certain conditions under Chinese law,
including the satisfaction of tax liabilities, recovery of losses from previous
years and mandatory contributions to statutory reserves. In addition, loan
agreements and contractual arrangements we enter into in the future may also
restrict our ability to pay dividends.
On March 2, 2000, our Registration Statement on Form S-1 covering the offering
of 5,000,000 shares of our common stock (No. 333-93199) was declared effective.
The underwriters in the offering exercised an over-allotment option to purchase
an additional 750,000 shares of our common stock. The total price to the public
for the shares offered and sold was $138,000,000. The net proceeds of the
offering (after deducting expenses) was approximately $126,608,884. From the
effective date of the Registration Statement through December 31, 2000, the net
proceeds have been used for the following purposes:
Purchase and installation of machinery and equipment........ $ 5,316,681
Temporary investments, including cash and cash
equivalents............................................... 110,400,000
Investments in subsidiaries -- MarSec and Guangdong
Wangying.................................................. 1,144,949
Research and development and sales and marketing expenses... 9,747,254
------------
$126,608,884
============
The net proceeds will be used for general corporate purposes, including working
capital, and expenses such as research and development and sales and marketing.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses or products. None of the net proceeds of the offering
have been paid directly or indirectly to our directors, officers or their
associates, to persons owning ten percent or more of our common stock, or to our
affiliates.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data. You
should read this information together with our consolidated financial statements
and the notes to those statements included in this report, and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 24 of this report. The selected consolidated
balance sheet data and statements of operations data in the table below have
been derived from our audited consolidated financial statements. Historical
results are not necessarily indicative of the results to be expected in the
future.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS
EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Network solutions............. $ 159,505 $ 53,786 $ 41,964 $ 36,509 $ 14,781
Software license.............. 16,558 6,494 2,258 775 762
----------- ----------- ----------- ----------- -----------
Total revenues........ 176,063 60,280 44,222 37,284 15,543
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Network solutions............. 144,655 41,959 32,188 29,551 9,098
Software license.............. 43 4 1 5 -
----------- ----------- ----------- ----------- -----------
Total cost of
revenues............ 144,698 41,963 32,189 29,556 9,098
----------- ----------- ----------- ----------- -----------
Gross profit.................... 31,365 18,317 12,033 7,728 6,445
----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing........... 19,734 8,768 2,408 835 668
General and administrative.... 12,892 8,167 6,463 6,167 3,008
Research and development...... 5,974 2,838 1,436 394 321
Amortization of deferred stock
compensation............... 2,210 3,508 1,045 1,045 262
----------- ----------- ----------- ----------- -----------
Total operating
expenses............ 40,810 23,281 11,352 8,441 4,259
----------- ----------- ----------- ----------- -----------
Operating (loss) income......... (9,445) (4,964) 681 (713) 2,186
Other income (expense), net..... 6,865 352 477 31 35
Income tax expense (benefit).... 218 383 (256) 267 69
Minority interests in loss
(income) of consolidated
subsidiaries.................. 32 84 122 567 (482)
Equity in loss of affiliate..... - (35) - - -
----------- ----------- ----------- ----------- -----------
Net (loss) income............... $ (2,766) $ (4,946) $ 1,536 $ (382) $ 1,670
=========== =========== =========== =========== ===========
Net (loss) income per share:
Basic......................... $ (0.07) $ (0.34) $ 0.11 $ (0.03) $ 0.12
=========== =========== =========== =========== ===========
Diluted(1).................... $ (0.07) $ (0.34) $ 0.05 $ (0.03) $ 0.10
=========== =========== =========== =========== ===========
Shares used in computation:
Basic......................... 37,239,649 14,630,145 13,616,412 13,530,000 13,530,000
=========== =========== =========== =========== ===========
Diluted(1).................... 37,239,649 14,630,145 31,765,534 13,530,000 15,999,133
=========== =========== =========== =========== ===========
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YEARS ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
ADDITIONAL DATA:
Total revenues net of hardware costs........ $ 44,578 $ 25,221 $ 19,286 $ 11,684 $ 6,877
AS OF DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(AMOUNT IN THOUSANDS OF U.S. DOLLARS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................... $ 48,834 $ 25,404 $ 9,749 $ 24,066 $ 2,221
Total current assets(2)..................... 254,190 64,772 42,805 36,131 8,325
Total assets................................ 264,003 71,427 45,359 37,085 9,227
Total liabilities (excluding minority
interests)................................ 95,206 31,639 26,048 20,008 6,429
Total stockholders' equity.................. 168,609 39,788 19,247 16,179 1,333
- ---------------
(1) In 1997, 1999 and 2000 the diluted net loss per share computation excludes
shares of common stock issuable under stock option plans, upon the exercise
of warrants and upon the automatic conversion of our convertible preferred
stock which, if included, would have an antidilutive effect on the net loss
reported in these periods. See note 8 of Notes to Consolidated Financial
Statements for a detailed explanation of the determination of the shares
used in computing basic and diluted net income (loss) per share.
(2) Total current assets includes short-term investments, which, at December 31,
2000, totaled $110.4 million and consisted principally of certificates of
deposit issued by major financial institutions, having maturities of between
six and twelve months, together with $90.8 million deposited in money market
funds. In January of 2001 we invested $50.5 million of these assets into a
portfolio of short-term debt instruments having maturities of between three
and twenty-four months.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
We are a leading China-based company providing world class software products and
network solutions. Our software products and network solutions enable our
customers to build, maintain, operate and continuously improve their Internet
and communications infrastructure.
We commenced our operations in Texas in 1993 and moved our operations from Texas
to China in 1995. We began generating significant network solutions revenues in
1996 and significant software license revenues in 1998. While we source hardware
for our customers through our U.S. parent company, AsiaInfo Holdings, Inc., we
conduct the bulk of our business through our wholly-owned operating subsidiary,
AsiaInfo Technologies (China) Inc., which is a Chinese company.
Sales to China Telecom and its provincial subsidiaries accounted for
approximately 98%, 84% and 34% of our revenues in 1998, 1999 and 2000,
respectively. Our customer base is continuing to diversify and, at December 31,
2000, approximately 55% of our backlog net of hardware costs was attributable to
China Telecom, while 10% was attributable to China Unicom, 10% was attributable
to China Netcom and 16% was attributable to China Mobile.
We expect our business to continue to evolve as the Internet and
telecommunications markets in China change and expand. Recently, sales of
software products have been an increasingly significant contributor to our
business, accounting for 37% of revenues net of hardware costs in 2000. We
expect this trend to continue and intend to establish arrangements with foreign
companies to distribute our software products outside of China.
We believe that there are opportunities for us to expand into new business
areas. By the end of the first quarter of 2001, we expect to have invested a
total of $2 million in our majority-owned network security business, MarSec,
which focuses on high-end security services for our customers. MarSec generated
sales
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orders of approximately $175,000 in the fourth quarter of 2000, and we
anticipate that it will generate sales orders of approximately $3 million in
2001. Other new areas include our Application Infrastructure Provider (AIP)
business, in which we invested $1.5 million in 2000. In view of these recent and
potential future changes to our business, our historical financial data may not
be a meaningful basis upon which to evaluate us and our prospects.
REVENUES
Our total revenues have grown from $44.2 million in 1998 to $60.3 million in
1999 and $176.1 in 2000. We generate our revenues from our two principal
business lines: network solutions and software products. Although we account for
our network solutions revenues on a gross basis, inclusive of hardware
acquisition costs that are passed through to our customers, we manage our
business internally based on revenues net of hardware costs, which is consistent
with our strategy to focus increasingly on providing our customers with high
value IT professional services while gradually outsourcing lower end services
such as hardware acquisition and installation. This strategy may result in lower
growth rates for total revenues as against prior periods, but will not adversely
impact revenues net of hardware costs. The following table shows our revenue
breakdown by business line on this basis:
YEAR ENDED DECEMBER 31,
------------------------------------
BUSINESS LINE 2000 1999 1998 1997 1996
- ------------- ---- ---- ---- ---- ----
Network solutions net of hardware costs............... 63% 74% 88% 93% 89%
Software license...................................... 37% 26% 12% 7% 11%
Total revenues net of hardware costs................ 100% 100% 100% 100% 100%
=== === === === ===
As demonstrated by the foregoing table, software products have accounted for an
increasing portion of our total revenues net of hardware costs over the past
several years, increasing from 12% in 1998 to 26% in 1999 and 37% in 2000. We
expect that software products will account for a growing portion of our future
net revenues.
BACKLOG. Most of our revenues are derived from customers' orders under separate
binding contracts for hardware, network solutions and software products. These
contracts constitute our backlog at any given time. Revenues for hardware,
network solutions and software products are recognized during the course of the
relevant project, as described in more detail below. At December 31, 2000, our
backlog net of hardware costs was $36 million, approximately 62% of which
related to network solutions and 38% of which related to software orders.
NETWORK SOLUTIONS REVENUES. Network solutions revenues consist of hardware
sales for equipment procured by us on behalf of our customers from hardware
vendors, as well as services for planning, design, systems integration, training
and customization of our proprietary and third party software. We procure for
and sell hardware to our customers as part of our total solutions strategy. We
minimize our exposure to hardware risks by sourcing equipment from hardware
vendors against back-to-back orders and letters of credit from our customers. We
believe that as the Internet-related market in China develops, our customers
will increasingly purchase hardware directly from hardware vendors and pay us
separately for the full value of our professional services.
We generally charge a fixed price for our network solutions projects and
recognize revenue based on the percentage of completion of the project. Labor
hours are used to determine the stage of completion except for revenues
associated with the procurement of hardware on behalf of the customer. Such
hardware-related revenues are recognized upon delivery. Since a large part of
the cost of a network solutions project often relates to hardware, the timing of
hardware delivery can cause our quarterly revenues to fluctuate significantly.
However, this does not significantly affect our gross margin as hardware
revenues generally approximate the related costs. Our quarterly results are also
subject to fluctuations because a significant part of our network solutions
revenues are derived from a limited number of large contracts.
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There are three key milestones in the life of a network solutions project. The
first milestone occurs when the hardware is delivered, which is usually between
three and four months after signing the contract. The second milestone in a
network solutions project is at primary acceptance, which usually occurs around
five months after hardware delivery. The third milestone is project acceptance,
which occurs when the customer agrees that we have satisfactorily completed all
our work for the project.
SOFTWARE LICENSE REVENUES. Software license revenues consist of fees received
from customers for licenses to use our software products in perpetuity, up to a
specified maximum number of users. The customer must purchase additional user
licenses from us when the number of users exceeds the specified maximum.
Beginning with the year 2000, our software license revenues also include the
benefit of value added tax rebates on software license sales, which are part of
the Chinese government's policy of encouraging China's software industry.
Substantially all our software license revenues are derived from our customer
management and billing, and messaging software products. We recognize
substantially all software license revenues in conjunction with the revenues of
the related solutions project over the installation and customization period
based on the percentage of completion of the project as measured by labor hours.
The foregoing revenue recognition policies result in our recognizing certain
revenues even though we are not due to receive the corresponding cash payment
under the contract. In the case of hardware sales, the customer typically holds
back around 10% of the hardware contract amount at the time of delivery. In the
case of services, while there may be some down payment, most of the revenues
becomes billable at the time of primary acceptance. The unpaid amounts for
hardware and services become payable at the time of final project acceptance,
when payment of all unpaid contract amounts is due. When we recognize revenues
for which payments are not yet due, we book unbilled accounts receivable until
the corresponding amounts become payable.
COST OF REVENUES
NETWORK SOLUTIONS COSTS. Network solutions costs consist primarily of third
party hardware costs, compensation and travel expenses for the professionals
involved in designing and implementing projects, and hardware warranty costs. We
recognize hardware costs in full upon delivery of the hardware to our customers.
In order to minimize our working capital requirements, we generally obtain from
our hardware vendors payment terms that are timed to permit us to receive
payment from our customers for the hardware before our payments to hardware
vendors are due. However, in certain recent large projects, we obtained less
favorable payment terms from our customers, thereby increasing our working
capital requirements. We recognize compensation and travel costs for project
professionals as incurred. We accrue hardware warranty costs when hardware
revenue is recognized upon final acceptance. We obtain manufacturers' warranties
for hardware we sell, which cover a portion of the warranties that we give to
our customers. We currently accrue 1% of hardware sales to cover potential
warranty expenses. This estimate of warranty cost is based on our current
experience with contracts for which the warranty period has expired. See
"Factors Affecting Our Operating Results and Our Common Stock -- We extend
warranties to our network solutions customers that expose us to potential
liabilities."
SOFTWARE LICENSE COSTS. Software license costs consist primarily of packaging
and written manual expenses. Software license costs are negligible, since most
of the costs associated with creating and enhancing software are classified as
research and development expenses as incurred.
OPERATING EXPENSES
Operating expenses are comprised of sales and marketing expenses, research and
development expenses, general and administrative expenses, and amortization
expenses for goodwill and deferred stock compensation.
Operating expenses consist for the most part of compensation expenses, which
have risen as we have expanded and hired new personnel. In 1998, we undertook a
comprehensive review of human resource policies, including salaries paid by
leading multinational IT companies operating in China. This review resulted in a
special increase in salaries for most of our employees to bring their
compensation to market
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levels. Although we review salaries on an annual basis in order to ensure that
we remain competitive with the market, we do not foresee the need to make
material increases in the near term. However, we may be required to do so from
time to time in the future.
Research and development expenses relate almost entirely to the development of
new software and the enhancement and upgrading of existing software. We expense
these costs as they are incurred. As we expand our software business, we expect
these expenses to continue to increase.
We provide most of our officers and employees, and some of our directors, with
stock options. In the past, we granted a number of options with exercise prices
below the fair market value of the related shares at the time of grant, most of
which were issued prior to 1997. We do not, however, intend to issue options
below fair market value in the future. Therefore, our deferred compensation
expenses have been significantly higher historically than we expect them to be
in future years. The difference between the exercise price and the fair market
value of the related shares is amortized over the vesting period of the options
and reflected on our income statement as amortization of deferred stock
compensation. See note 13 to our consolidated financial statements included in
this report.
We make bad debt provisions for accounts receivable balances based on
management's assessment of the recoverability of revenues on a
project-by-project basis. Because of the generally high credit-worthiness of the
leading Chinese telecommunications service providers, who are our major
customers, we do not believe that we are exposed to significant bad debt risk.
Generally, a majority of our accounts receivable are paid within 90 days of
billing.
TAXES
Except for hardware procurement and resale, we conduct substantially all of our
business through our Chinese operating subsidiaries. Our Chinese subsidiaries
are generally subject to a 30% state corporate income tax and a 3% local income
tax. AsiaInfo Technologies, our principal operating subsidiary, is classified as
a "high technology" company and, as such, is entitled to preferential treatment
under Chinese tax law. AsiaInfo Technologies operated free of Chinese state
corporate income tax for three years, beginning with its first year of
operation, and was entitled to a 50% tax reduction for the subsequent three
years. The tax holiday for AsiaInfo Technologies expired on December 31, 1997
and the 50% tax reduction expired on December 31, 2000. However, AsiaInfo
Technologies recently received a continuation of its preferential tax treatment
from the local government for an additional three years, which will reduce its
effective income tax rate to not less than 10%. In 2001, we anticipate that the
effective corporate income tax rate applicable to AsiaInfo Technologies will be
10%. Changes in Chinese tax laws may adversely affect our future operations.
We are also subject to U.S. income taxes on our procurement activities in the
U.S. At December 31, 2000, we had tax loss carry forwards for U.S. income tax
purposes of approximately $700,000, which will expire between 2018 and 2020.
Sales of hardware in China are subject to a 17% value added tax. Most of our
hardware sales are made through our U.S. parent company and thus are not subject
to the value added tax. We effectively pass these taxes through to our customers
and do not include them in revenues reported in our financial statements. In
respect of revenue on software license, if the net amount of value added tax
payable exceeds 3% of software sales, the excess portion of value added tax can
be refunded immediately. The Company therefore enjoys an effective net value
added tax burden of 3% on software license revenues. This policy is effective
until 2010.
FOREIGN EXCHANGE
Substantially all of our revenues and expenses relating to hardware sales are
denominated in U.S. dollars, and substantially all of our revenues and expenses
relating to the service component of our network solutions business and software
business are denominated in Renminbi. Although, in general, our exposure to
foreign exchange risks should be limited, the value of our shares will be
affected by the foreign
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exchange rate between the U.S. dollars and Renminbi because the value of our
business is effectively denominated in Renminbi, while our shares are traded in
U.S. dollars. Furthermore, a decline in the value of Renminbi could reduce the
U.S. dollar equivalent of the value of the earnings from, and our investment in,
our subsidiaries in China.
CONSOLIDATED RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
REVENUES. Total revenues increased 192% to $176 million in 2000, from $60.3
million in 1999. Network solutions revenues accounted for $106 million of this
increase due in large part to the UniNET project, which we commenced in 2000 on
behalf of China Unicom. The UniNET project contributed $52 million in hardware
costs, which was 40% of our total hardware costs for the year. Revenues net of
hardware costs increased approximately 77%, from $25 million in 1999 to $45
million in 2000. Software license revenues were $16.6 million in 2000,
representing 37% of revenues net of hardware costs and a 155% increase over
software license revenues of $6.5 million in 1999. The growth in software
license revenues reflected the overall growth of the Internet-related software
market in China and our increased share of that market, which we believe is
attributable to our investments in software-related research and development and
sales and marketing. In addition, $1.3 million of the increase in software
license revenues was attributable to the value added tax rebates discussed above
under the heading "Taxes."
COST OF REVENUES. Our cost of revenues increased 245% to $144.7 million in
2000, from $42.0 million in 1999, primarily due to the high hardware costs
incurred in connection with the UniNET project, as discussed above. Total
hardware costs increased 275% to $131 million in 2000, as compared to $35
million in 1999. Our cost of revenues net of hardware costs increased 91% to
$13.2 million, as compared to $6.9 million in 1999, primarily due to an increase
in our high-end network solutions engineering personnel.
GROSS PROFITS. Our gross profit increased 71%, from $18.3 million in 1999 to
$31.4 million in 2000. As a partial result of high hardware costs related to the
UniNET project, gross profit as a percentage of total revenues decreased to 18%
in 2000, as compared to 30% in 1999. However, gross profit as a percentage of
revenues net of hardware costs remained relatively constant for 2000 at 70%, as
compared to 73% in 1999.
OPERATING EXPENSES. Operating expenses increased 75% to $40.8 million in 2000,
from $23.3 million in 1999.
Sales and marketing expenses increased 125% to $19.7 million in 2000 from $8.8
million in 1999, primarily as a result of our aggressive marketing of our
software products, which included the creation of a department devoted
exclusively to software marketing. Despite the steep increase in 2000, we expect
sales and marketing expenses to increase by only 15-20% year over year in 2001.
Research and development expenses increased 110% to $6 million in 2000 from $2.8
million in 1999, primarily due to increased expenditure on research and
development in the area of convergent billing software and the aggressive
upgrading of our AIOBS and AIMC software products. Our strategy for 2000 was to
accelerate spending in sales and marketing and research and development in order
to scale our business quickly and take advantage of the rapid acceleration of
the build out of China's Internet infrastructure. We expect to continue to
benefit from this investment in 2001. While we expect our research and
development expenses for 2001 to increase by 50-60% in absolute dollar terms, we
expect these expenses to remain constant as a percentage of net revenues, at
approximately 13%.
General and administrative expenses increased 58% to $12.9 million in 2000 from
$8.2 million in 1999. Included in this amount was $963,672 in amortization of
goodwill resulting from the acquisition of AI Zhejiang. The overall increase in
general and administrative expenses was partially attributable to increased
legal compliance and investor relations expenses related to our becoming a
public company in March of 2000. In 2001, we expect general and administrative
expenses to remain relatively constant in dollar terms.
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Amortization of deferred stock compensation decreased from $3.5 million in 1999
to $2.2 million in 2000 because deferred stock compensation arising from awards
in 1996 had been completely amortized and no new deferred stock compensation has
arisen since October of 1999.
OTHER INCOME AND EXPENSES. Other income and expenses, consisting primarily of
net interest income and expense, increased from income of $352,000 in 1999 to
income of $6.9 million in 2000, primarily due to interest income on the proceeds
of our initial public offering in March of 2000.
MINORITY INTEREST. In 2000, minority interest of $31,897 represented the
portion of our loss before minority interests attributable to the other
shareholders of MarSec and Guangdong Wangying.
NET (LOSS) INCOME. Net loss decreased to $2.8 million in 2000, from $4.9
million in 1999, because we began generating net income in the second quarter of
2000. For the second, third and fourth quarters of 2000, we had net income of
approximately $434,000, $415,000 and $1.0 million, respectively. We expect to
continue to generate net income in 2001.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
REVENUES. Total revenues increased 36.3% to $60.3 million in 1999 from $44.2
million in 1998. Network solutions accounted for $11.8 million of this increase,
primarily due to a greater number of projects in progress. Software revenues
accounted for the balance of the increase in total revenues. The growth in
software revenues reflected greater demand for our products and faster
development and installation of our products. AsiaInfo Zhejiang, which we
acquired in April 1999, contributed revenues of $3.2 million, a large part of
which were software license revenues.
COST OF REVENUES. Our cost of revenues increased 30.4% to $42 million in 1999
from $32.2 million in 1998, primarily due to the overall expansion of our
business and increased salary costs for our systems integration and design
engineering personnel. We periodically review our warranty cost estimates based
on historical data and in 1999 costs of revenues were reduced by $1.2 million as
a result of a revision to warranty cost estimates in line with our historical
experience, primarily contracts whose warranty period had expired in 1999. Gross
profit as a percentage of revenues increased from 27% in 1998 to 30% in 1999,
primarily due to these revisions to warranty cost estimates.
OPERATING EXPENSES. Operating expenses increased 105% to $23.3 million in 1999
from $1