- 2Q09 Revenue Increases 4.4% YoY to $25.8 Million - - 2Q09 Gross Margin Increases 248 basis points YoY to 47.6% - - 2Q09 Adjusted Net Income Increases 7.6% YoY to $8.2 Million - - Cash Increases by $12.4 Million to $19.4 Million - - Reaffirms FY09 Revenue and Net Income Forecast -
Second Quarter 2009
Second quarter 2009 revenue increased 4% to $25.8 million, from $24.7 million in second quarter of 2008. Consolidated financial results of Zhongtian and Geo collectively contributed $2 million to the second quarter 2009 revenues. Software sales grew by $8.4 million, or 112% year-over-year, to $15.9 million, driven by the Company's continuing efforts in promoting software sales in 2009. Reflecting the shifting of sales activities toward software and reduced hardware sales to non-government customers, revenues from hardware products and system integration services in the second quarter of 2009 decreased by 62% year-over-year and 11% year-over-year, respectively.
Beginning in 1Q09, the Company consolidated revenue into three reporting segments: 1) Digital Information Security Technology ("DIST"), 2) Geographic Information Systems ("GIS") and 3) Digital Hospital Information Systems ("DHIS"), to better reflect its operating structure. DIST, GIS, and DHIS revenues were $15.2 million, $8.0 million, and $2.6 million, respectively, for the second quarter of 2009. During the quarter, the Company signed new contracts totaling $26.3 million from customers in 16 provinces and provincial cities. Of these contracts, 45% were won in the DIST sector, 45% in GIS sector, and 10% in the DHIS sector. At the end of second quarter 2009, the total value of the Company's backlog increased by $0.5 million sequentially to $34.7 million, from $34.2 million in the previous quarter.
Gross profit increased $1.2 million to $12.3 million, from $11.1 million for the same period last year. Second quarter 2009 gross margin of 47.6% expanded 248 basis points year-over-year from 45.1%, benefiting from greater efficiencies and lower costs of software sales in large software projects.
Administrative expenses of $2.3 million in the second quarter of 2009, was flat from the same period of last year. As a percentage of revenue, administrative expenses decreased to 8.9% for the second quarter of 2009, from 9.4% for the same period a year ago. The decrease in administrative expenses was mainly attributable to the decrease of non-cash employee compensation of $0.3 million compared with 2008 and the addition of administration expenses of Zhongtian of $0.15 million. Research and development expenses increased to $0.7 million, compared with $0.5 million in the prior year's second quarter, driven by the hiring of additional qualified engineers. Selling expenses of $0.6 million was unchanged from the corresponding period in 2008, despite an additional expense of $0.1 million due to the consolidation of Zhongtian. As a percentage of revenue, selling expenses decreased to 2.5% for the second quarter, from 2.6% in the same period of 2008.
Income from operations increased to $8.6 million, up 12% from $7.7 million a year ago. Accordingly, operating margins increased 229 basis points to 33.3%, up from 31.1% for the same period in 2008, driven largely by significantly lower costs for software sales. Income tax expense was $1.1 million, for an effective tax rate of approximately 12%.
Net income increased 10.6% to $ 7.8 million, from $7.1 million for the same period in 2008. As a percentage of revenues, net income increased 171 basis points to 30.2%, from 28.5% for the same period in 2008. Consequently, earnings per diluted share in second quarter 2009 increased $0.01 to $0.16, from $0.15 in the second quarter of 2008.
GAAP results for the 2009 second quarter include approximately $0.4 million of non-cash expense related to amortization. Excluding these non-cash expenses (see "About Non-GAAP Financial Measures" toward the end of this release), adjusted net income grew 7.6% to $8.2 million, versus $7.7 million in the second quarter of 2008. Adjusted earnings per basic and diluted share was $0.17, unchanged from the second quarter of 2008, while diluted share count increased 2.5% to 47.5 million, from 46.4 million in the second quarter of 2008.
The Company's cash position at the end of June 30, 2009 grew by $12.4 million to $19.4 million, compared to $7.0 million at the end of March 31, 2009. During the quarter, accounts receivable increased by $11 million over the prior quarter's level, to $57.1 million. Despite the higher accounts receivable, cash provided by operating activities was $5.5 million, or $7.0 million higher than the previous quarter negative cash from operations of $1.5 million. Accordingly, working capital increased by $5.5 million to $69.7 million, from $64.2 million in the previous quarter. The Company has zero long-term debt.
Mr. Jiang Huai Lin, Chairman and CEO of the China Information Security, commented, "I am very pleased by our second quarter results, which we believe continue to validate our growth strategy and demonstrate our sound execution. We expect to continue to successfully grow our business and our brand and further strengthen our competitive position. Over the three months since May, we have seen marked improvements across all of our business segments, as the rate of our contract wins has reaccelerated and our pipeline continues to expand. We believe that our strong reputation and proven capabilities in providing mission-critical security information systems and our technical expertise in successfully implementing large-scale projects continue to be winning criteria in the competitive selection process. Even in light of a higher emphasis on cost reduction in the current macroeconomic environment, we commanded firm pricing in competitive wins, as we continue to provide an unmatched value proposition. In light of the foregoing, we are currently optimistic about our business momentum for the remainder of 2009."
For the full year 2009, the Company reaffirms its revenue projection of $94-$98 million and pro-forma net income in the range of $26.8-$28.0 million, excluding any non-cash expenses as a result of employee stock awards and amortization of intangible assets associated with recent acquisitions.
Mr. Lin concluded, "With a noticeable improvement in our cash position and working capital, we believe that we have a strong foundation, adequate liquidity, and a sound business strategy to continue benefiting from strong government support for our industry. We maintain close relationships with our government customers who are credit worthy. Our products and services address both public and health security needs and are highly aligned with the Chinese government's priority to build safe and stable cities. In addition, the Guangdong provincial government has recently approved the rollout of the Residence Card System to the entire province, commencing on January 1, 2010. We believe that our solid industry reputation and successful execution record in Shenzhen City will provide us with first-mover advantage for these opportunities. As such, we remain confident that we can continue to grow our business, expand our brand, increase our profits and ultimately enhance our shareholder value."
About Non-GAAP Financial Measures
This press release contains non-GAAP financial measures for earnings that exclude non-cash charges. China Information Security believes that these non- GAAP financial measures are useful to investors because they exclude non-cash charges that China Information Security's management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of China Information Security. Accordingly, management excludes the expense arising from certain non-cash charges when making operational decisions. China Information Security believes that providing the non-GAAP measures that management uses to its investors is useful to investors for a number of reasons. The non-GAAP measures provide a consistent basis for investors to understand China Information Security's financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Information Security's performance using the same methodology and information as that used by China Security's management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment of which charges are excluded from the non- GAAP financial measure. However, China Information Security's management compensates for these limitations by providing the relevant disclosure of the items excluded.
The following table provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.
* Table 1 Q2 2009 Reconciliation of Operating, Net Income and EPS to Exclude SBC and Amortization of Intangible Assets 3 Mos. Ended 3 Mos. Ended 30-Jun-09 30-Jun-08 Operating income 8,597,615 7,672,046 Stock based compensation ("SBC") -- 310,367 Amortization 437,704 294,323 Operating income (without SBC and Amortization) 9,035,319 8,276,736 Net income 7,797,830 7,050,343 Stock based compensation ("SBC") -- 310,367 Amortization 437,704 294,323 Net income (without SBC and Amortization) 8,235,534 7,655,033 Weighted Average Number of Shares Outstanding Basic 47,536,883 45,738,420 Diluted 47,536,883 46,354,183 Earnings Per Share (without SBC and Amortization) Basic $0.17 $0.17 Diluted $0.17 $0.17
The Company will hold a conference call to discuss the financial results at 8:00 a.m. ET on August 06, 2009. The Company invites you to join the call by dialing 1-913-312-1430. A live webcast of the conference call will be available at http://www.chinacpby.com . A replay of the call will be available from August 06, 2009 to August 13, 2009. Listeners may access the replay by dialing 1-719-457-0820, passcode: 5824351.
About China Information Security Technology, Inc.
China Information Security Technology, Inc., together with its subsidiaries, is a total solution provider of digital security, geographic information, and hospital information systems in the People's Republic of China. Headquartered in Shenzhen, China, the Company's total solutions include specialized software, hardware, systems integration, and related services organized into three business segments - Digital Information Security Technology ("DIST"), Geographic Information Systems ("GIS"), and Digital Hospital Information System ("DHIS"). With its commitment to leading-edge technology and quality assurance, the Company has won numerous government and enterprise contracts throughout China. To learn more about the Company, please visit its corporate website at http://www.chinacpby.com .
Safe Harbor Statement
This press release may contain certain 'forward-looking statements' relating to the business of China Information Security Technology, Inc., and its subsidiary companies. All statements, other than statements of historical fact included herein are 'forward-looking statements' including statements regarding: the general ability of the Company to achieve its commercial objectives, including its ability to continue to successfully grow its business and brand, continue its rate of contract wins and further strengthen its competitive position; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. These forward-looking statements are often identified by the use of forward-looking terminology such as 'believes,' 'expects' or similar expressions, involve known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website ( http://www.sec.gov ). All forward- looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.
For more information, please contact: Company Contact: Iris Yan China Information Security Technology, Inc. Tel: +86-755-8370-4767 Email: email@example.com Web: http://www.chinacpby.com Investor Relations Contact: ICR: Michael Tieu Tel: +86-10-6599-7960 Email: firstname.lastname@example.org CHINA INFORMATION SECURITY TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 Revenue - Products $3,789,288 $10,055,786 $6,610,416 $14,599,260 Revenue - Software 15,921,487 7,513,656 24,932,952 12,503,390 Revenue - System integration 5,571,619 6,255,042 8,527,076 10,808,699 Revenue - Others 505,525 886,259 697,659 1,203,820 TOTAL REVENUE 25,787,919 24,710,743 40,768,103 39,115,169 Cost - Products sold 3,007,849 7,320,984 5,620,640 11,250,518 Cost - Software sold 5,993,637 1,005,674 8,694,577 2,224,137 Cost - System integration 4,395,011 4,722,151 6,540,763 7,296,924 Cost - Others 124,671 520,496 162,108 571,142 TOTAL COST 13,521,168 13,569,305 21,018,088 21,342,721 GROSS PROFIT 12,266,751 11,141,438 19,750,015 17,772,448 Administrative expenses (2,304,376) (2,323,421) (4,520,723) (4,076,156) Research and development expenses (720,411) (503,622) (1,224,263) (1,229,473) Selling expenses (644,349) (642,349) (1,238,064) (1,060,052) INCOME FROM OPERATIONS 8,597,615 7,672,046 12,766,965 11,406,767 Subsidy income 318,071 -- 515,860 69,680 Other income (expenses), net (16,845) 41,698 164,521 41,419 Interest income 120,627 31,272 197,544 57,875 Interest expense (56,443) (7,887) (116,653) (7,887) INCOME BEFORE INCOME TAXES 8,963,025 7,737,129 13,528,237 11,567,854 Income tax expense (1,091,800) (321,880) (1,680,196) (528,625) NET INCOME 7,871,225 7,415,249 11,848,041 11,039,229 Less: Net income attributable to the non- controlling interest (73,395) (364,906) (293,218) (409,906) NET INCOME ATTRIBUTABLE TO THE COMPANY $7,797,830 $7,050,343 $11,554,823 $10,629,323 Weighted average number of shares Basic 47,536,883 45,738,420 47,528,503 45,611,286 Diluted 47,536,883 46,354,183 47,528,503 46,090,091 Earnings per share - Basic and Diluted Basic -- Net income attributable to the Company's common stockholders $0.16 $0.15 $0.24 $0.23 Diluted -- Net income attributable to the Company's common stockholders $0.16 $0.15 $0.24 $0.23 CHINA INFORMATION SECURITY TECHNOLOGY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2009 AND DECEMBER 31, 2008 June 30, December 31, 2009 2008 ASSETS (Unaudited) CURRENT ASSETS Cash and cash equivalents $19,377,043 $9,565,252 Short-term investments -- 5,835,838 Accounts receivable: Billed, net of allowance for doubtful accounts of $975,000 and $399,800, respectively 24,354,691 17,135,099 Unbilled 32,779,489 25,722,009 Bills receivable -- 4,481,340 Advances to suppliers 11,550,390 8,469,976 Amount due from related parties, net of allowance for doubtful accounts of $73,000 20,092 131,594 Inventories 9,439,937 7,107,537 Other receivables and prepaid expenses 3,414,006 6,251,484 Deferred tax assets 270,397 -- TOTAL CURRENT ASSETS 101,206,045 84,700,129 Deposit for software purchase 4,779,563 -- Long-term investments 3,091,150 3,078,405 Property and equipment, net 21,467,263 23,555,603 Intangible assets, net 12,606,134 13,115,151 Goodwill 23,778,000 24,018,894 TOTAL ASSETS $166,928,155 $148,468,182 LIABILITIES AND EQUITY CURRENT LIABILITIES Short-term bank loans $7,496,675 $6,327,992 Accounts payable 15,213,545 10,707,728 Advances from customers 2,454,039 2,476,335 Amount due to related parties 553,640 486,136 Accrued payroll and benefits 1,087,747 1,319,386 Other payables and accrued expenses 2,367,199 2,553,019 Income tax payable 2,294,633 1,592,459 TOTAL CURRENT LIABILITIES 31,467,478 25,463,055 EQUITY China Information Security Technology, Inc. equity Common stock, par $0.01; authorized capital 200,000,000 shares; shares issued and outstanding 2009: 48,803,211 and 2008: 47,462,404 shares, respectively 222,529 209,121 Treasury stock, 6,000 shares, at cost (11,468) -- Additional paid-in capital 64,297,531 64,127,339 Reserve 4,964,597 4,964,597 Retained earnings 45,303,303 33,748,480 Accumulated other comprehensive income 6,483,705 6,048,243 Total stockholders' equity of the Company 121,260,197 109,097,780 Non-controlling interest 14,200,480 13,907,347 Total equity 135,460,677 123,005,127 TOTAL LIABILITIES AND EQUITY 166,928,155 $148,468,182 CHINA INFORMATION SECURITY TECHNOLOGY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2009 AND 2008 (UNAUDITED) Six Months Ended June 30, June 30, 2009 2008 OPERATING ACTIVITIES Net income $11,848,041 $11,039,229 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on accounts receivable 573,881 -- Depreciation 1,852,357 1,716,543 Amortization of intangible assets 865,710 512,177 Stock-based compensation 183,600 694,332 Gain (loss) on disposal of property and equipment, net 31,764 (31,840) Deferred income tax benefits (29,517) -- Changes in operating assets and liabilities, net of effects of business acquisitions Increase in accounts receivable (14,665,591) (12,297,321) (Increase) decrease in advances to suppliers (3,028,042) 322,702 (Increase) in other receivables and prepaid expenses (1,540,531) (243,512) Decrease in amount due from (to) related parties 177,621 -- Increase in inventories (1,657,773) (3,354,664) Increase in accounts payable 4,643,442 4,513,062 Decrease (increase) in advances from customers 4,469,480 (1,899,266) Decrease in other payables and accrued expenses (432,401) (449,708) Increase in income tax payable 695,912 364,236 Net cash provided by operating activities 3,987,953 885,970 INVESTING ACTIVITIES Cash acquired in Geo acquisition -- 2,443,677 Cash acquired in Bocom acquisition -- 713,793 Consideration paid for acquisition of Geo -- (6,998,811) Proceeds from sale of short-term investments 5,862,800 -- Purchase of short-term investments -- (5,655,605) Proceeds from sale of marketable securities -- 14,966,752 Proceeds received from discontinued operations in 2008 4,397,100 -- Proceeds from sales of property and equipment 100,225 1,146,671 Purchases of property and equipment (630,478) (7,644,057) Capitalized and purchased software development costs (308,484) (162,788) Deposit for software purchase (4,781,846) -- Net cash provided by (used in) investing activities 4,639,317 (1,190,368) FINANCING ACTIVITIES Borrowings under short-term loans 1,898,082 727,611 Purchase of treasury stock (11,468) -- Repayment of short-term loans (732,850) (1,086,312) Net cash provided by (used in) financing activities 1,153,764 (358,701) Effect of exchange rate changes on cash and cash equivalents 30,757 904,261 NET INCREASE IN CASH AND CASH EQUIVALENTS 9,811,791 241,162 CASH AND CASH EQUIVALENTS, BEGINNING 9,565,252 19,755,182 CASH AND CASH EQUIVALENTS, ENDING $19,377,043 $19,996,344 Revenues by segment for the three and six months ended June 30, 2009 and 2008 are as follows: Three months ended Six months ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues(1) DIST Segment $15,221,482 $11,396,259 $22,741,939 $20,541,024 GIS Segment 7,974,312 13,314,484 13,833,978 18,574,145 DHIS Segment 2,592,125 -- 4,192,186 -- $25,787,919 $24,710,743 $40,768,103 $39,115,169 Percentage to revenue DIST Segment 59% 46% 56% 53% GIS Segment 31% 54% 34% 47% DHIS Segment 10% -- 10% -- (1) Revenues by operating segments exclude intercompany transactions.
SOURCE China Information Security Technology, Inc.
Web site: http://www.chinacpby.com/