As Reported By The Associated Press - Kanbay 2Q Earnings Rise On New Clients

NEW YORK (AP) - Kanbay International Inc., a provider of outsourced information technology services for credit card issuers and financial firms, on Wednesday said second-quarter profit rose 13 percent as the company focused on expanding its client base.

Kanbay counts global banking giant HSBC Holdings PLC and investment bank Morgan Stanley Inc. not only as two of its largest investors, but also as the source of 80 percent of its business. The Rosemont, Ill.-based IT firm said it is now focused on expanding its customer base to fuel profit growth this year.

Related newsRussell Closes at Record High on Wall St. Police Arrest Ex-Bank of America Banker Wall Street Hopes New Data Will Fuel Rally Japan's Nikkei Index Closes Higher Scrushy Asks Court to Throw Out SEC Suit The company's solid second-quarter results demonstrate its newest strategy. Net income grew to $7.3 million, or 19 cents per share, from $6.3 million, or 21 cents per share, last year. Revenue rose 27 percent to $57 million from $44.8 million last year, despite the sale of Kanbay's products business.

The results were in line with analysts' expectations for profit of 19 cents per share, and sales came in slightly above Wall Street's consensus estimate of $56.1 million, according to a Thomson Financial survey. Earnings per share in the latest quarter are based on about 7.5 million more outstanding shares than in the year-ago period.

Despite the positive numbers, Kanbay shares were down $1.52, or 6.4 percent, at $22.07 in recent trading. However, Jefferies & Co. analyst Joseph Vafi believes the stock movement doesn't reflect dissatisfaction with the company's results.

"The quarter was a good one, and we expect a really strong second half for the company," said Vafi. "We're seeing the stock fall not on the fundamentals of the company, but on profit taking from some of the gains it had yesterday."

On Tuesday, Kanbay shares soared 11.7 percent to close at $23.59 on the Nasdaq Stock Market. The stock, which traded at a year-high of $31.87 in late December, is recovering from a sharp dip in mid-May and is down about 29 percent so far this year.

"We've provided guidance for revenue growth this year to be 25 percent, and its our third-party revenue growth that will contribute to this," said Chairman and Chief Executive Raymond Spencer. "We expect to grow revenue from all of our clients other than Morgan Stanley and HSBC by about 40 percent."

Spencer points to the strong growth seen during the second quarter as evidence. Kanbay's third-party revenue rose 7 percent sequentially and 41 percent year-over-year to $21.7 million in the latest second quarter.

The company also expects to see business increase this year despite consolidation trends that continue to sweep through the credit card industry. In early June, Washington Mutual Inc. announced a plan to take over Providian Financial Corp. for $6.45 billion, and weeks later Bank of America Corp. said it would acquire MBNA Corp. for $35 billion.

"This kind of consolidation is very good for us," Spencer said. "With consolidation comes a complex process of integrating the applications that the other companies ran. Frankly, there is very much a need for innovation within the credit card business."

Kanbay works with clients to advise them on technology -- including integrating applications and creating Web interfaces for call center representatives. This work can be deployed on a global basis, working through on-site client service teams and offshore development centers in India.

The company also continues to refocus on its core business of IT services, and is eyeing expansion in regions such as India and China. Spencer said he is well aware of the criticism that hangs over companies that outsource jobs, but said Kanbay's operation is designed to service global customers.

"We hire a lot of people locally in this country, and work hard to find people who have the technology and business knowledge that is essential for the work we do," he said. "We live in a global marketplace, and that's the reality that all businesses have to operate in."

Looking ahead, Kanbay said that revenue growth for 2005 continues to track as expected, and the company sees lower costs driving improved third-quarter operating margins.

The company continues to target 2005 earnings of $34.5 million, and third-quarter net income of $8.7 million. Kanbay also raised 2005 revenue guidance slightly to at least $235 million, with a target of $60 million in the third quarter.

On average, analysts are currently looking for slightly higher third-quarter revenue of $60.7 million and full-year sales of $234.7 million.

AP Business Writer Jennifer Malloy contributed to this report.