Subaye, Inc. (Nasdaq: SBAY) (“Subaye” or the “Company”) announced its financial results for the fiscal year ending September 30, 2010. Chairman Cai stated ” We are very pleased with our 2010 results and the significant progress we have made in several areas.  I understand that investors will be disappointed to see a GAAP net loss for 2010, but I will explain why I believe that figure is not an appropriate way to assess our results or the strength of our business.  Let me first address the strategic initiatives we achieved in Fiscal 2010.  With the recently completed sale of our non-core and lower margin businesses, we have successfully repositioned our business and are now focused on the fast growing and high margin cloud computing and video marketing business in China. From an investor relations perspective, we have also taken steps that institutional investors have suggested will enable our stock to achieve a higher valuation multiple.  We recently retained Pricewaterhousecoopers to be our auditor for Fiscal 2011.  We had no disagreement with our current auditors but elected to change auditors because we realize U.S. investors are increasingly focused on the quality of a company’s auditor and many investors told us they perceived Pricewaterhousecoopers to be a stronger auditor.  We have also improved our internal reporting process so that we can now report our quarterly and annual results early.  Finally, we have increased and improved our communication with U.S. investors as we believe SBAY is a misunderstood company.  We look forward to further improving our investor relations in the coming year and hope that investors will begin to understand our strong competitive position in the rapidly growing cloud computing market in China.”

James Crane, Chief Financial Officer, stated “Our Fiscal 2010 was very strong, but there were several items that masked the underlying strength of our results.  Our revenues increased 46.4% to $39.1 million. Importantly, this growth resulted from an increase in pricing and increased customers (resulting from further penetration of existing markets and to a much lesser extent penetration in markets we have only recently entered).  On the cost side, our results this year included a number of items that were non-cash, non-recurring or discretionary.  Our non-cash expenses included $5.9 million of depreciation and amortization as well as $7.6 million of stock based compensation.  We incurred a $6.2 million non-cash, non-recurring impairment charge which is discussed below.  We also incurred $22.1 million of growth oriented marketing expenses to help us penetrate attractive new markets.  In Q4 of last year, we made the strategic decision to dramatically increase our marketing expenses in new markets because we wanted to capitalize on the tremendous growth opportunities available to us. As a result, in Q4 we incurred growth oriented marketing expenses of $14.1 million, significantly higher than the marketing promotions we had incurred in the first three quarters of FY 2010.  Had we not elected to significantly increase our marketing in Q4, we would have exceeded our net income guidance (excluding the impact of the one time impairment charge). As significant shareholders in SBAY ourselves, we did not make such a large investment without studying these markets in detail.  Ultimately, we concluded that increasing these marketing expenses would generate a very strong return on investment for SBAY shareholders.  Unfortunately, GAAP accounting requires us to expense the entire $22.1 million even though very little of the money had actually been spent by our marketing agents as of September 30, 2010.  In addition, as with any new marketing campaign, it typically takes some time before new marketing results in increased revenue and profitability.  As a result, our financial results for FY 2010 reflect significant marketing expenses for which we have yet to receive any financial benefit.  As a result of the success of our FY 2009 marketing expenses, we are highly optimistic that these FY 2010 marketing expenses will generate significant additional revenue and profitability next year.  Importantly, because of the fixed cost nature of our business, the gross margin on new customers is typically higher than for existing customers.  Considering the large marketing expense in Q4, we expect that our marketing expenses in the next two quarters will be significantly lower.  In Q1 2011 and Q2 2011 we will assess the effectiveness of the FY 2010 increased marketing expenditures.  If we see we are getting a good return on our investment, we will consider investing in more marketing.  However, if we are not generating our anticipated return on investment then our full year marketing expenses for FY 2011 will be significantly less than they were in FY 2010. Considering all of the non-cash and non-recurring items that impact our income statement, we believe a more appropriate way of assessing Subaye’s performance, is by examining our Adjusted EBITDA, as outlined below.  As you can see, our Adjusted EBITDA and Adjusted EBITDA margins both increased significantly.”

Chairman Cai stated “I also wanted to update investors on the Aixi.net acquisition which we closed on October 25, 2010. While the benefits of this acquisition are not reflected in the results we are reporting today, we are extremely pleased with the acquisition and its profitability is exceeding our internal projections.  We look forward to updating investors on this and other business matter during the course of 2011.”

Recent Growth in Customer Base

As of November 30, 2010 and October 31, 2010, we had 14,209 and 13,700 customers, respectively. As of November 30, 2010 a total of 3,123 customers were former Aixi.net customers that are now using Subaye’s BCP.

Pending Product Launches

On December 28, 2010, Subaye will launch the Chinese version of its 3D online mall. On January 28, 2011, Subaye will launch the international version of its 3D online mall.

On January 15, 2011, Subaye will launch its Groupbuy web portal.

On February 28, 2011, Subaye will re-launch its investor relations website.

A mobile version of Subaye’s BCP is also in process and is expected to be launched in July 2011.

Financial Results

Net Revenues Increased by $12.4 million or 46.4%:

Revenues were $39.1 million for the year ended September 30, 2010 as compared to $26.7 million for the year ended September 30, 2009. The increase of $12.4 million is due to the significant growth in our customer base in Guangdong Province, the expansion into new markets throughout China and as a result of a significant increase in our average revenue per customer rate. During the year ended September 30, 2010, we generated revenues from three products offered through our various web properties. Revenues for Online Video, the Cloud Product and the Bundled Cloud Product, totaled $24.8 million, $7.4 million and $6.9 million, respectively. During the year ended September 30, 2009, we generated revenues from two products offered through our various web properties. Revenues for Online Video and the Cloud Product totaled $22.3 million and $4.4 million, respectively. On September 1, 2010, we began offering the Bundled Cloud Product to our customers. The Online Video and Cloud Product are no longer available to our customers. The Bundled Cloud Product is the second version of our cloud computing solution. It includes significant enhancements to the Cloud Product and also includes the video marketing services previously marketed as Online Video. As of September 1, 2010, we began charging our customers approximately $410 per month for access to the Bundled Cloud Product. During the fiscal year ending September 30, 2010 we charged our customers an average monthly fee of $129. We have committed to a business model that will focus on generating a high average revenue per customer rate while also further expanding our customer base throughout China to new markets. We anticipate significant demand for CRM products in China in the coming years and are committed to ensuring our CRM products, namely the Bundled Cloud Product, can control a significant portion of the CRM market within China.

Costs of Sales Increased by $2.3 million or 38.3%:

Costs of sales were $8.3 million for the year ended September 30, 2010, as compared to $6.0 million for the year ended September 30, 2009. The increase of $2.3 million is due to the issuance of stock based compensation to certain sales agents we began using to develop business in new markets in China during 2010. A total of $1.8 million in stock based compensation and $0.5 million in one-time cash bonuses were issued to the sales agents and members of our internal sales and customer service team. Amortization expense for websites and computer software totaled $5.9 million in both 2010 and 2009, respectively.

Gross Margin Increased by 1.3%:

Gross margin was 78.8% for the year ended September 30, 2010 as compared to 77.5% for the year ended September 30, 2009. Gross margin increased as a result of our success in generating additional revenues from new customers with a higher effective gross margin, approximately 81.5%. This is a result of the fact that the majority of the components of our costs of sales consists of amortization and depreciation of websites and software. As a result, our costs of sales should generally remain fixed from period to period, unless we acquire additional websites, software or other items that should be included in costs of sales.

Marketing Promotion Expenses Increased by $15.4 million or 230.1%:

Marketing promotion expenses were $22.1 million for the year ended September 30, 2010, as compared to $6.7 million for the year ended September 30, 2009. During 2010, we utilized $22.1 million for marketing promotions with our Agents in twenty two (22) new markets in mainland China. The majority of the marketing promotion expenses were incurred in the fourth quarter of the fiscal year ending September 30, 2010. In Q4 of FY2010 we incurred $14.1 million in marketing promotion expenses in nineteen (19) new markets in mainland China. The marketing promotion expenses are necessary to expense in full and immediately, in order for the Company’s accounting to be in compliance with GAAP. However, we generally do not expect marketing promotions to result in an immediate benefit that will be visible as a significant increase in revenues. The marketing promotion expenses have caused the Company to report a significant net loss from continuing operations for the year ended September 30, 2010. We anticipate the marketing promotion expenses incurred in 2010 will significantly increase our future revenue and profitability in future periods. We are highly optimistic that these marketing expenses will result in significant revenue and profitability next year.  Importantly, because of the fixed cost nature of our business, the gross margin on new customers is typically higher than for existing customers.  Considering the large marketing expense in Q4 2010, we expect that our marketing expenses in the next two quarters will be significantly lower.  In the middle of next year we will assess the effectiveness of this year’s increased marketing expenditures.  If we see we were getting a good return on our investment, we will consider investing in more marketing.  However, if we are not generating our anticipated return on investment then our full year marketing expenses for FY 2011 will be significantly less than they were in FY 2010.

Advertising Expenses Increased by $2.6 million or 515.2%:

Advertising expense totaled $3.1 million for the year ended September 30, 2010, as compared to $0.5 million for the year ended September 30, 2009. During 2010, we entered into a localized online advertising contract with a third party for a total of $3.0 million. During 2010 and 2009, advertising expenses associated with search engine advertising totaled $0.1 million and $0.5 million, respectively.

Other General and Administrative Expenses Increased by $2.4 million or 49.0%:

General and administrative expenses totaled $7.3 million for the year ended September 30, 2010, as compared to $4.9 million for the year ended September 30, 2009. During 2010 and 2009, amortization of stock based compensation included in other general and administrative expenses total $5.8 million and $1.4 million, respectively. During 2010, a total of $0.2 million, $2.4 million, $2.2 million and $1.0 million was expensed for stock based compensation issued to our agents, independent third party service providers, as one-time bonuses to members of management and for management and director compensation under certain employment or consulting contracts. During 2010 and 2009, we paid salaries to our employees of $0.7 million and $0.2 million, respectively. Other significant general and administrative expenses for 2010 and 2009 included professional fees, rent expense, among others.

Impairment Loss Increased by $6.2 million or 100.0%:

Impairment loss totaled $6.2 million for the year ended September 30, 2010, as compared to $0 for the year ended September 30, 2009. During the year ended September 30, 2009, we paid deposits of $8.1 million to three manufacturers in connection with inventory supply agreements. The inventory supply agreements were negotiated with the intent of using high volume price discounts in order to supply our potential online mall customers with low price inventory. The supply agreements were renegotiated in June 2010 and approximately $1.9 million of our original deposits were refunded to us. We are unsure if the remainder of the deposits will ever be recovered or if inventory will ever be delivered from the manufacturers. As a result, we have conservatively recorded a full reserve for the balance of the deposits as of September 30, 2010.

Net Loss From Continuing Operations Increased by $16.5 million or 191.8%:

The net loss from continuing operations for the year ended September 30, 2010 totaled $7.9 million. Net income for the year ended September 30, 2009 totaled $8.6 million. The net loss from continuing operations for 2010 is a result of the significant increase in marketing promotion expenses and a non-cash, non-recurring impairment charge.

Liquidity

As of September 30, 2010, we had a cash balance of $7.1 million and no debt.  On November 23, 2010, we received $6.6 million of cash for the sale of discontinued assets. Our accounts receivable are in good shape and we have historically not had any difficulty collecting our receivables on a timely basis.

2011 Guidance

Subaye reaffirms guidance for fiscal year 2011 of revenue of $71.3 million and net income from continuing operations of $29.2 million. Net income guidance includes non-cash expenses totaling $12.9 million for depreciation and amortization and stock based compensation as well as $17.0 in marketing promotions costs for FY 2011.  FY 2011 Adjusted EBITDA is projected to be $58.1 million for FY 2011. The expected growth in 2011 will come continued growth in our existing markets as well as contributions from new markets that we have recently entered.  Using the 9.4 million shares outstanding as of December 22, 2010, earnings per share for fiscal year 2011 would be $3.12. We do not anticipate marketing promotion costs will be significant in the first half of fiscal year 2011.

Business Outlook

Subaye’s goal for 2011 is to continue to expand aggressively into the new markets in China where we are already active and depending upon our success in those markets, we will enter into additional identified markets. We have committed significant resources and spent significant capital entering these new markets. We now have to deliver the growth that should result from our spending and the allocation of our resources to these particular markets in general. We believe the demand for cloud computing products potentially represents the single most significant market opportunity of all internet-based businesses in China in the next several years. We believe we can continue to grow at a significant pace as a result of maintaining a high quality product offering in a product space and geographic area that is exhibiting signs of significant growth in the years ahead.

About Subaye, Inc.

Subaye, Inc. is a leading online business services provider in China engaged in enterprise cloud computing and video marketing business solutions. Subaye’s online business services include business to consumer (B2C) ecommerce, emanagment solutions, emarketing solutions, eservice solutions and video search engine optimization. For further information on Subaye, Inc., please visit http://www.subaye.net.

Forward-Looking Statements

Certain statements contained herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about Subaye, Inc.’s industry, management’s beliefs and certain assumptions made by management. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Because such statements involve risks and uncertainties, the actual results and performance of the Company may differ materially from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Subaye, Inc.’s operations are conducted in the People’s Republic of China (“PRC”) and, accordingly, are subject to special considerations and significant risks not typically associated with companies in North America. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political and social conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation. Other potential risks and uncertainties include but are not limited to the ability to procure, properly price, retain and successfully complete projects, and changes in products and competition. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made here. Readers should review carefully reports or documents the Company files periodically with the Securities and Exchange Commission.

About Non-GAAP Financial Measures

To supplement our consolidated financial statements, which statements are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measure: adjusted EBITDA. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision making and as a means to evaluate period-to-period comparisons. Our management believes that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenses and expenditures that may not be indicative of our recurring core business operating results. These non-GAAP financial measures exclude from our operating performance not only non-cash charges, such as stock-based compensation, but also discrete cash charges that are infrequent in nature. We believe that both management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparisons to our historical performance and liquidity as well as comparisons to our competitors’ operating results. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business. The accompanying tables have more details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

SOURCE Subaye, Inc.