ANALYSIS: CLPS Guides Revenue Upward but Net Results Disappoint

CLPS says its current fiscal year revenue will increase markedly but the stock has seen significant swings as net results disappoint.

Author: Donovan Jones   

Short Take

CLPS Inc. (Nasdaq: CLPS) recently reported financial results for the first half of its current fiscal year.

The firm provides IT software and services to Chinese banks and financial institutions.

Management has switched to a semi-annual reporting cadence and the stock has seen high volatility since the firm's IPO as its US GAAP financial results have worsened.


Shanghai, China-based CLPS was founded in 2005 to sell IT outsourcing services and custom software development primarily to financial firms seeking to improve efficiencies and add functionality to their service offerings.

Management is headed by Chairman and President Paul Yang.

CLPS has created a suite of outsourced software competencies aimed at the financial services industry, including development, testing, localization, BPO, and training services.

Customer Acquisition

Management targets Chinese financial services firms presumably via direct sales and inside sales efforts, since it views the growth prospects within China will continue their strong trend upward in the future.

In addition, the firm says it has been 'working with a number of Chinese banks to assist them in leveraging blockchain technology.

Using this technology, a loyalty reward solution was developed allowing domestic banks to track and trace transactions in real-time. It was recently implemented in Jiangnan Rural Commercial Bank. Also, the pilot phase of this solution was completed for Taicang Rural Commercial Bank.'

Market And Competition

According to a 2018 Brookings Research note, the Chinese financial services industry is still underdeveloped but has 'leapfrogged from cash to mobile payments, bypassing the payment cards system.'

With the rise of the use of mobile phones and major FinTech startups, existing, legacy banks have realized that their offerings are less relevant and are in need of a significant upgrade.

CLPS aims to capitalize on this need by providing next-generation software and services to these incumbent bank entities.

Management cites a 2015 Wind Terminal forecast showing a significant rise in demand for banking IT services in the coming years:

(Source: CLPS F-1)

However, IDC analyst Frank Fang said the following about the Chinese banking industry's outlook from 2016 to 2020:

"China's banking industry is facing three major challenges - economic slowdown, interest rate liberalization reform, and internet finance, accompanied by dramatic changes in the banking business environment. Digital transformation has become an irreversible trend in the industry. As bank customers improve their management sophistication with changing needs for banking IT solutions, China's banking industry IT solutions market will step into a period of consolidation while maintaining stable growth. Specialized services will remain a major trend in the market and solutions delivery will shift from the software plus service model to a service-dominated model. IT solutions providers are advised to continuously build their expertise, capabilities, and process standardization."

Major domestic competitive vendors that provide outsourced IT services and software include:

  • Shenzhen Forms Syntron Information

  • Sunline Tech

  • Amarsoft

  • CSII

Offshore competitors include:

  • Wipro (WIT)

  • TCS Consultancy

  • Infosys (INFY)

Recent Performance

CLPS' topline revenue has grown steadily. Note that in 2H 2018 the firm switched from quarterly reporting to semi-annual reporting:

(Source: Seeking Alpha)

Gross profit increased steadily during 2018:

(Source: Seeking Alpha)

Operating income swung sharply from positive to negative in the second half of 2018:

(Source: Seeking Alpha)

Earnings per share also swung heavily negative in the second half of 2018:

(Source: Seeking Alpha)

In the past 12 months, CLPS's stock price has fallen 52.6 percent, as the chart below indicates:

(Source: Seeking Alpha)

Since CLPS's IPO in the spring of 2018, the firm's stock has seen marked swings in value.

After Q2 2018, management stopped quarterly reporting and earnings calls and switched to half-year reporting.

Following this change, the firm reported sharply worse operating and earnings per share results, likely causing the stock's precipitous fall from previous levels to as low as $2.25 in late 2018.

In February 2019, the stock rebounded sharply to its previous highs, only to fall back to its current level of just over $6 per share.

In its most recent guidance in May 2019, management forecasted topline revenue growth and non-GAAP net income growth of 30 to 35 percent for the fiscal year.

However, investors appear to be more concerned with the firm's net results, so management will likely need to address these issues for the stock to rebound.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)