Kanbay International Reports Third Quarter Results

As reported by PRNewswire, Revenue increased 18 percent year-over-year and 3 percent sequentially; Revenue excluding the impact of the sale of the products business increased 25 percent year-over-year and 7 percent sequentially; Diluted EPS climbs sequentially to $0.23

ROSEMONT, Ill., Oct. 27 /PRNewswire-FirstCall/ -- Kanbay International, Inc. KBAY, a global IT services firm focused on the financial services industry, today announced financial results for the third quarter ended September 30, 2005.

Third Quarter 2005 Highlights

-- Revenue rose to $59 million, up 18 percent year-over-year and up 3 percent sequentially -- Excluding the second quarter sale of the products business, total revenue increased 25 percent year-over-year and 7 percent sequentially -- Related-party revenue increased 20 percent versus a year ago and 10 percent sequentially; third-party revenue was up 14 percent year-over-year and down 7 percent sequentially -- Excluding the impact of the products business, third-party revenue was up 35 percent year-over-year and 1 percent sequentially -- Net income climbed 15 percent from last year to $8.7 million, or 23 cents per diluted share, and increased 20 percent sequentially -- Signed six new clients, including two Platinum accounts - on target to add 22 new clients for full-year 2005 -- Subsequent to quarter end, the Company was chosen as a preferred vendor in a major global sourcing RFP with a large insurance company

"I am pleased to report that in the third quarter we continued to execute effectively against our business plan," said Raymond Spencer, Chairman and CEO of Kanbay. "Our performance during the period was characterized by continued growth, new client wins, improved operating margins, continued strong related- party relationships, increased headcount and increased retention rates. Demand in the market remains strong, especially in our focus area of financial services. The fundamentals of our business are solid, with our attention to quality and client relationship management resulting in continued high client satisfaction. We continue to make progress in further enhancing our new business development capabilities."

Net income for the quarter was $8.7 million, up 15 percent year-over-year and up 20 percent sequentially. Diluted earnings per share totaled 23 cents in the third quarter, up 4 cents sequentially. Year-over-year EPS comparisons are impacted by the significant change in share count since the third quarter of last year, when Kanbay completed its public offering.

Kanbay's third-quarter revenue rose 18 percent year-over-year and 3 percent sequentially to $59 million. Adjusting for the sale of the products business in May, revenue grew 25 percent from a year ago and 7 percent sequentially.

Related-party revenue, which is revenue derived from HSBC, Morgan Stanley and their affiliates, increased 20 percent year-over-year and 10 percent sequentially as the Company established new relationships and expanded into new business units of these clients.

Third-party revenue, which includes all sources of revenue other than HSBC, Morgan Stanley and their affiliates, rose 35 percent year-over-year and 1 percent sequentially when excluding the impact of the sale of the products business.

There were three factors in the third quarter which negatively impacted third-party revenue growth. First, one of the Company's existing accounts made a strategic decision to purchase a package solution rather than have Kanbay develop a custom-built solution. This impacted growth in the third quarter and will also affect growth in the fourth quarter. However, the relationship with this large client remains strong, with revenue tripling in the past year. The Company does not feel that this client's decision to utilize a package solution is indicative of any trend among its client base or in the overall industry, and is still seeing strong demand for custom application development.

Second, Kanbay has a contract for providing application maintenance for a bank through a subcontractor agreement with a major multinational firm that has an outsourcing agreement with the bank. The bank terminated a portion of the outsourcing contract in the third quarter. While the prospects are good for re-engaging some or all of our staff at the bank, there will be a negative impact on revenue in the fourth quarter.

Third, while the Company continues to bring in new accounts at the rate it anticipated, the revenue growth in some of these accounts has been slower than expected for both the third and fourth quarters. In the third quarter, Kanbay added six new accounts, bringing its total client base to 61. The Company is on track to add 22 new clients during the year.

"We are pleased with the quality of our new accounts. The pipeline of opportunities in both new and existing accounts is very strong, which positions us well for next year," Spencer said.

Of the six new clients added this quarter, two are classified as Platinum accounts, resulting in 24 total Platinum accounts. Platinum accounts are clients that contribute more than $5 million in annual revenue or have the ability to do so within two years of becoming clients. Approximately 60 percent of the 14 accounts listed as Platinum a year ago contributed revenue of $5 million or more on an annualized basis in the third quarter, and the Company expects to roughly double the number of accounts contributing that level of revenue a year from now.

During the third quarter, Kanbay experienced particular strength in the insurance vertical, which now comprises 15 percent of revenue, up from 9 percent a year ago. Kanbay has targeted this area as a growth opportunity within financial services. Two of the new clients signed in the quarter are from the insurance industry, with one of them classified as a Platinum account.

Related to opportunities that the Company is experiencing in the insurance industry, subsequent to the end of the third quarter the Company recorded its first significant win in pursuing large Global Sourcing RFPs, a goal that Kanbay has been targeting this year. The Company views this success as a sign of the ongoing maturation of its sales, marketing, and branding efforts. The RFP was issued by a new client who is a large, multinational insurance firm headquartered in the U.S.

Financial Review

Gross margin rose 120 basis points sequentially and 20 basis points year- over-year to 47.3 percent, due mainly to the impact of non-recurring expenses in the second quarter combined with the elimination of the Company's lower-margin products business.

Operating margin rose to 18.7 percent, up 320 basis points sequentially and 130 basis points year-over-year. Non-recurring costs impacted the Company's second quarter, and operating margin growth was enabled by gaining economies of scale on support infrastructure along with the elimination of underperforming assets.

Kanbay ended the quarter with more than 5,000 associates globally, an increase of approximately 260 associates from the second quarter. Associate retention improved to 89 percent in the third quarter from 86 percent in the previous quarter. At the end of the quarter, approximately 84 percent of the Company's technical staff was located in India, up 1 percentage point from last quarter and up 4 percentage points from the third quarter of last year.

The third quarter tax rate remained consistent with the prior quarter at 26 percent, but rose from 19.6 percent a year ago due to a portion of the tax holiday in India expiring on March 31, 2005, and a change in regional distribution of earnings.

The build-out of the Company's campuses in Pune and Hyderabad is progressing on plan. Capital expenditures of $15 million are expected in the fourth quarter, with the completion of the purchase of the leased facility in Pune and construction costs associated with the Hyderabad campus and Pune learning center.

SG&A, excluding depreciation and stock compensation expense, decreased by $700,000 sequentially, from $15.1 million in the second quarter to $14.4 million in the third quarter. The Company incurred extra, one-time visa processing costs of approximately $1 million in the second quarter in order to ensure that it can support anticipated on-site staffing needs for next year and continue to enhance the domain knowledge of technical staff in India through on-site rotations. As a percentage of revenue, SG&A was 24.4 percent in the third quarter compared with 26.4 percent in the second quarter and 25.8 percent in the third quarter of last year.

"We continue to have a strong financial position," said Bill Weissman, Chief Financial Officer. "We remain debt-free and our cash and investments balance at September 30th was $80 million, up $7 million from last quarter."

Outlook

Given the impact of the factors mentioned above, Kanbay is targeting fourth quarter revenue of $58 million, and diluted earnings per share of 22 cents. For 2005, the Company projects net income of $32.4 million, or 86 cents per share, on revenue of $227.5 million. This is below prior guidance for 2005 net income of $34.5 million on revenue of $235 million.

"We remain confident in achieving our longer term revenue growth rates of at least 25 percent annually, including over 40 percent growth in third party revenue, despite some challenges in the short-term," Spencer said. "We expect demand within the financial services industry to remain strong throughout 2006 and believe our service offerings are well aligned with the needs of the industry. We continue to perform well against the goals we outlined at the beginning of the year, and are confident in Kanbay's business strategy and ability to execute going forward."