We all hear news that suggests the current direction of the global economy.  Today the U.S. DJIA closed down 444.99 points at 7552.29.  The S&P 500 closed down 54.14 at 752.44.  With the grim feel in the U.S., I keep getting questions about the impact on outsourcing in China.  Rather than just relying on my anecdotes for this post, however, I wanted to try to present a slightly broader view.

There’s an old saying, “People lie, markets don’t.”  With that in mind, I took a look at VanceInfo’s (NYSE: VIT) recent market performance.  For those that weren’t paying attention, they released their Q3 results this week.  (Source: WSJ, subscription required)

VanceInfo (VIT) Third Quarter 2008 Financial and Operating Highlights (unaudited)

• Net revenues for the third quarter increased to $27.7 million, up 53.3% from the third quarter of 2007.
• Gross profit rose to $10.9 million, up 55.0% from the third quarter of 2007.  Gross margin improved to 39.3%, up from 38.9% in the same period last year.
• Operating margin was 15.5%, compared to 14.4% in the third quarter 2007.
• Net income was $4.3 million, compared to $2.9 million in the third quarter of 2007. Non-GAAP net income, which excludes share-based compensation expense, was $4.7 million, compared to $3.2 million a year ago.
• Diluted earnings per share (”EPS”) were $0.11, and adjusted diluted EPS (non-GAAP), which excludes share-based compensation expense, was $0.12 in the third quarter.
• Employees totaled 4,975, including 4,351 billable professionals, as of September 30, 2008.

The company also revised its guidance, upward:

• 2008 net revenues to be between $100 million and $101 million, representing a 59% to 61% increase from 2007.
• 2008 diluted EPS to be between $0.37 and $0.39 on a GAAP basis, and non-GAAP diluted EPS excluding share-based compensation to be between $0.4 and $0.43, based on 40.6 million total ADS-equivalent average shares outstanding.
• Fourth quarter diluted EPS to be between $0.10 and $0.12 on a GAAP basis, and non-GAAP diluted EPS excluding share-based compensation to be between $0.11 and $0.13, based on 40.9 million total ADS-equivalent average shares outstanding.
• Total headcount by the end of 2008 to be approximately 5,300.

Not bad, right?  Clearly they’re the leader among U.S. focused Chinese software outsourcing companies.  Now, remember that VanceInfo’s IPO price was US$8.50.  Today the stock closed at US$5.72, after trading as low as $5.52 intraday.  Since their IPO late last year, their stock has traded as high as US$13.98 on May 16.  I’m glad that I didn’t buy any at those levels.

I guess that the wisdom of the market is not currently in VanceInfo’s favor.  While it might be misleading to infer too much from one company’s performance, I submit that they are one of the best proxies that we have for the expected impact of the global economic turmoil on Chinese software outsourcing companies.

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