Yucheng Tech's POS revenue

I am always interested in recurring revenue business, debit/credit card transaction fee is one. Yucheng Tech (YTEC), the smaller rival of Longtop (LFT), is entering POS business this year. According to my friend Nawar Alsaadi’s analysis (quoted below):

“POS Revenue projections

The company mentioned in an investor presentation in February 2007 that the average business processed on a POS machine in China is 200,000 USD…Assuming an average transaction cost of 1.5% charged by the bank, the average revenue per machine will be $3000, and if we assume that Yucheng is awarded a 3rd of the transaction cost, this would net the company $1000 in transaction revenue per year. Thus, based on the company’s expected rate of merchant sign up, the company could generate as much as $50 million dollar in recurring transaction revenue by the end of 2009 as they sign up over 50000 merchants on their network…”

Two more questions for Longtop

1) Why it quit the outsourcing biz?
We know outsourcing is a typically low margin business. Interested readers can look at the VanceInfo (formerly WorkSoft), the first Chinese IT outsourcing company listed in Nasdaq. It did IPO recently.

Longtop should not get into the oursourcing business to begin with. I suspect the VCs suggested the company to quit the outsourcing business, and the company did so early this year. This move will improve the profit margin and it will look good on the finanial statement. More importantly, it will save the company resources and focus on its main business: the software and service for China financial industry.

As a side note, by quiting outsourcing Longtop may have avoided the effect of “slowdown” of US financial sector (depends on the type of customers they serve). From I heard from Cisco conference call a while back, the US financial indutry is cutting back on IT spending now.

2) Effect of tightening monetary policy
For example, the raise of bank reserve rate by People’s bank of China. The move was to make sure economy not overheat, and banks should be prudent on its lendings. This will not have effect on banks’ IT spending. Because the bank IT budget is separately from its bank reserve. As I said in my previous post, banks are increasingly rely on sophiscated IT systems for customer relations, marketing and sales, internal management, etc.