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China Information Security Technology, Inc. Reports Second Quarter 2009 Financial Results

- 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 -

SHENZHEN, China, Aug. 6 /PRNewswire-Asia-FirstCall/ -- China Information Security Technology, Inc., (NASDAQ: CPBY) ("China Information Security," "CIST" or the "Company"), a leading total solutions provider of digital security, geographic information, and hospital information systems in China, today reported its financial results for the second quarter ending June 30, 2009.

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."

Financial Outlook

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
    Basic                                        47,536,883       45,738,420
    Diluted                                      47,536,883       46,354,183

    Earnings Per Share (without SBC and
    Basic                                             $0.17            $0.17
    Diluted                                           $0.17            $0.17

Conference Call

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: ir@chinacpby.com
     Web:   http://www.chinacpby.com

    Investor Relations Contact:
     Michael Tieu
     Tel:   +86-10-6599-7960
     Email: michael.tieu@icrinc.com


                        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 -
     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

     expenses       (2,304,376)      (2,323,421)   (4,520,723)    (4,076,156)
    Research and
     expenses         (720,411)        (503,622)   (1,224,263)    (1,229,473)
     expenses         (644,349)        (642,349)   (1,238,064)    (1,060,052)
     OPERATIONS      8,597,615        7,672,046    12,766,965     11,406,767

    Subsidy income     318,071               --       515,860         69,680
    Other income
      net              (16,845)          41,698       164,521         41,419
     income            120,627           31,272       197,544         57,875
     expense           (56,443)          (7,887)     (116,653)        (7,887)
     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
     to the non-
     interest          (73,395)        (364,906)     (293,218)      (409,906)

     TO THE
     COMPANY        $7,797,830       $7,050,343   $11,554,823    $10,629,323

     number of
       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
     to the
     stockholders        $0.16            $0.15         $0.24          $0.23
    Diluted --
     Net income
     to the
     stockholders        $0.16            $0.15         $0.24          $0.23

JUNE 30, 2009 AND DECEMBER 31, 2008

                                                  June 30,      December 31,
                                                    2009            2008
    ASSETS                                       (Unaudited)
    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

    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

    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


                                                        Six Months Ended
                                                      June 30,     June 30,
                                                        2009         2008
    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

    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)

    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)
         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/