Telestone Technologies Corporation Reports Record Third Quarter 2009 Revenues and Earnings

BEIJING, Nov. 12 /PRNewswire-Asia-FirstCall/ -- Telestone Technologies Corporation ("Telestone" or the "Company") (Nasdaq: TSTC), a leading developer and provider of wireless communication local access network solutions based in China, today announced the Company's third quarter financial results for the quarter ending September 30, 2009.

    -- Third quarter 2009 revenues increased 124.7% to $18.9 million
       year-over-year; gross margins were 52.7%
    -- Third quarter 2009 net income increased 281.8 % to $4.2 million
       year-over-year with net margins of 22.3%; EPS was $0.41 vs. $0.11
       year-over-year
    -- For the nine months ended September 30, 2009, revenues increased 86.1%
       to $38.9 million year-over-year; net income increased 96.8% to
       $7.4 million year-over-year; EPS was $0.71 versus $0.36 year-over-year
    -- WFDS(TM) product represents about 20% of third quarter revenues
    -- Accounts receivable decreased 19.6% to $59.2 million for the third
       quarter ended September 30, 2009, compared to $70.8 million for the
       second quarter ended June 30, 2009
    -- Telestone reaffirms guidance of $70.0 million in revenues for 2009
       based on strong order bookings for the balance of the year.



    SUMMARY FINANCIALS

    Third Quarter 2009 Results
                                Q3 2009            Q3 2008       CHANGE
    Net Sales            $ 18.9 million      $ 8.4 million      + 124.7%
    Gross Profit          $ 8.9 million      $ 3.9 million      + 128.2%
    Net Income            $ 4.2 million      $ 1.1 million      + 281.8%
    EPS (Fully Diluted)           $0.41              $0.11       +272.7%

    Nine Month 2009 Results
                         First 9 months     First 9 months
                                of 2009            of 2008       CHANGE
    Net Sales             $38.9 million      $20.9 million        +86.1%
    Gross Profit          $18.6 million      $10.5 million        +77.1%
    Net Income             $7.4 million       $3.7 million       +100.0%
    EPS (Fully Diluted)           $0.71              $0.36        +97.2%

Third Quarter Financial Results

Revenues for the third quarter ended September 30, 2009 increased 124.7% to $18.9 million compared to same period of 2008. Telestone revenues are a combination of equipment and service sales. Equipment sales, which totaled $11.1 million, are attributed to the Company's shipments of its proprietary 2G and 3G local wireless access network equipment, manufactured for specific customer site installations. Service revenue, which totaled $7.8 million, is a combination of billable system integration and installation charges by Telestone's project design and implementation engineers. Total revenue growth for the quarter was directly attributed to the Company's sales of 2G and 3G network installations throughout China. In addition, a growing contributor to the Company's revenues is its Wireless Fiber Option Distribution System(TM) (WFDS(TM)) which accounted for about 20% of Telestone's revenues for the quarter. WFDS(TM) systems provide "multi-play" capabilities for media, voice, fax, closed circuit TV, data and all three protocols of Chinese cellular signals over a fiber optic cable routed directly into an installation site. WFDS(TM) is a certified-technology by the three Chinese telecommunications companies; China Mobile, China Unicom and China Telecom, and was recently approved by the FCC of the United States in September of this year. The certification by FCC can allow installation of WFDS(TM) based systems in the U.S.

"We are very pleased with our third quarter results, which represents a record and key turning point for our business. We are also proud that our customer base in China, including the three major telecommunication suppliers, have accepted our WFDS(TM) technology as a viable market standard for 3G products," opened Han Daqing, CEO and Chairman of Telestone. "We anticipate WFDS(TM) installations will continue to accelerate as carriers come to prefer its functionality advantage over the traditional 3G network equipment. We anticipate this trend will continue throughout the balance of the year and into 2010 as we gain further market shares," stated Han.

Costs of goods sold were $10.0 million in the third quarter of 2009 which yielded gross profits of $8.9 million. Costs of goods are comprised of components used in the manufacturing of Telestone's 2G and 3G product line and installation costs of project management and labor costs at commercial and residential customer locations. Specifically, cost of equipment sales totaled $7.1 million, yielding gross margins of 36.0% while cost of services totaled $2.9 million, yielding gross margins of 62.8%. Blended gross margins were 47.2% compared to 46.9% for the third quarter of 2008.

Total operating expenses for the quarter were $3.3 million, or 18.0% of revenues. Third quarter operating expenses as a percentage of revenues decreased 9.20 percentage points compared to the same quarter in 2008. The decrease in percentage for operating expenses is primarily due to the fact that expenses are rather fixed in nature. As a result, operating income increased 223.6% to $5.5 million in the quarter compared to $1.7 million recorded in the third quarter of 2008. Telestone maintains a 24% effective income tax rate for the quarter. However the taxes paid in the third quarter were not only for the net income in the quarter, but also including taxes due in previous quarters. As a High and New Technology Enterprise in China, the Company expects its income tax rate to be 15% for a three-year period.

Net income for the third quarter ended September 30, 2009 increased 281.8% to $4.2 million compared to $1.1 million in the third quarter of 2008. Net income margins for the quarter were 22.5% compared to 13.3% recorded in the third quarter of 2008. Earnings per share were $0.41 on 10.4 million fully diluted shares issued and outstanding, an increase of 272% compared to $0.11 reported in the third quarter of 2008.

Nine-Month Financial Results

For the nine months ended September 30, 2009, revenues increased 86.1% to $38.9 million compared to $20.9 million reported for the same period of 2008. The China-based telecommunications companies' goals to upgrade more than 200 cities in China to a 3G network platform by the close of 2009 was one of the principal drivers of this growth. As announced in January of 2009, Beijing has allocated $41 billion as part of a telecommunications stimulus package to upgrade China's more than 700 million cellular subscribers to a 3G network platform by 2013. Though Telestone has agent relationships in 28 countries worldwide and plans to continue increasing this component of revenue streams, over 98% of the nine months in 2009 revenues are China-based.

"Given our visibility into new orders, we are confident that continued strong demand in China will enable us to meet our $70 million in revenue guidance for the year," confirmed Han Daqing. "With more than 900 million cell phone subscribers forecasted by 2013 in China, the requirement to upgrade the networks to 3G creates a tremendous opportunity for the telecom providers and is our first priority. Securing the U.S.-FCC approval for our WFDS(TM) technologies will enable us to begin both marketing and commercialization roll-out efforts in the Americas. While we recognize China will be the principal growth driver for our business in the immediate future, we are also excited about capitalizing on growth opportunities in international markets to drive incremental sales and further diversify our customer base."

Gross profits for the nine month period ended was $18.6 million, representing a 77.1% increase over $10.5 million for the same period of 2008. Gross margins for the first nine months of 2009 were 47.8% compared to 50.4% for the same period of 2008.

Net income for the nine months period was $7.4 million, a 100% increase over the same period of 2008. Earnings per share for the period were $0.71 compared to $0.36 for the same period of 2008.

Balance Sheet and Cash Flow Discussion

As of September 30, 2009, Telestone Technologies had cash and cash equivalents totaling $5.3 million compared to $7.9 million on December 31, 2008. The Company maintained a current ratio of 2.0 based on $75.0 million in current assets and $38.1 million in current liabilities with a working capital position of $36.9 million. On September 30, 2009, Telestone had $59.2 million in receivables compared to $70.8 million on June 30, 2009, a reduction of accounts receivable by 19.6%, while revenues grew significantly. The Company was able to reduce its days of sales by185 days to 405. However account receivables older than a year become long-term receivables which were $18.8 million as of the end of September 2009. Even with that included, the total DSO is still lower than that of the second quarter of 2009. We expect our DSO number to be around 360 by the end of the year. Included in accounts receivable and DSO are 10% of Telestone customers' contract value to provide warranty service on installations for a twenty-four months period, a value which per GAAP must remain on the Company's accounts receivable until paid in full. For the nine months period of 2009, the Company recorded zero (0) bad debts.

Stockholders' equity was $59.9 million as of September 30, 2009, a 14% increase compared to $52.4 million as of December 31, 2008.

Conference Call

To attend the call, please use the dial information below. When prompted, ask for the "Telestone Technologies Call" and/or be prepared to provide the conference ID.

    Date:                           November 13, 2009
    Time:                           10:00am ET
    Conference Line Dial-In (U.S.): 1-877-941-8602
    International Dial-In:          1-480-629-9811
    Conference ID:                  4182022

Please dial in at least 10-minutes before the call to ensure timely participation. A playback will be available through November 20th, 2009. To listen, please call 1-800-406-7325 within the United States or +1-303-590-3030 when calling internationally. Utilize the pass code 4182022 for the replay.

About Telestone Technologies Corporation

Telestone provides Local Access Network Solutions, products and engineering integration to telecom carriers. In terms of 2G technologies, Telestone is a main supplier in wireless access coverage infrastructure building for the GSM and CDMA network base on its RFPA technologies primarily in the PRC. The products; repeaters, line-amplifiers, antennas and radio accessories are all based on RFPA technologies. After intensive research on the demands of carriers in 3G technologies, based on its strong R&D capabilities in both wireless and Fiber-Optics, Telestone has invented its WFDS unification local access network solution and products which are highly welcomed by all telecom carriers and property owners. Telestone also provides services that include project design, project manufacturing, installation, maintenance and after-sales services. Telestone currently has approximately 1,200 employees.

    For further information, please contact:

    Company:
     Ren Hu, Board Secretary
     Tel:   +86-137-1872-8163
     Email: arenhu@gmail.com

    Investor Relations:
    HC International Inc.
     John Mattio
     Tel:   +1-203-616-5144
     Email: john.mattio@hcinternational.net



       Appendix: Financial Statements of Telestone Technologies Corporation

                      Condensed Consolidated Balance Sheets

          (Dollars in thousands except share data and per share amounts)

                                                (Unaudited)
                                                   As of              As of
                                               September 30,       December 31,
                                                    2009               2008
    ASSETS                                         US$'000            US$'000

    Current assets:
    Cash and cash equivalents                        5,288              7,866
    Accounts receivable, net of
     allowance                                      59,208             62,136
    Due from related parties                         1,662              1,826
    Inventories, at lower of cost or
     market                                          6,930              7,843
    Prepayment                                       1,770              2,347
    Other current assets                                98              1,352

    Total current assets                            74,956             83,370

    Long-term receivables                           18,774                 --
    Goodwill                                         3,119              3,119
    Property, equipments and software,
     net                                             1,162              1,050

                                                    23,055              4,169

    Total assets                                    98,011             87,539

    LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:
    Short-term bank loans                            3,656              2,918
    Accounts payable ¨C trade                        15,338             11,776
    Customer deposits for sales of
     equipment                                       1,232                739
    Due to related parties                           1,708              1,673
    Taxes payable                                    6,700              6,805
    Accrued expenses and other accrued
     liabilities                                     9,480             11,197

    Total current liabilities                       38,114             35,108

    Commitments and contingencies                       --                 --

    Stockholders' equity:
    Preferred stock, US$0.001 par value,
     10,000,000 shares authorized, no
     shares issued                                                         --
    Common stock and paid-in-capital,
     US$0.001 par value: Authorized -
     100,000,000 shares as of September
     30, 2009 and December 31, 2008                                        --
    Issued and outstanding - 10,404,550
     shares as of September 30, 2009 and
     December 31, 2008                                  11                 11
    Additional paid-in capital                      18,989             18,989
    Dedicated reserves                               4,513              3,787
    Other comprehensive income                       5,677              5,573
    Retained earnings                               30,707             24,071

    Total stockholders' equity                      59,897             52,431

    Total liabilities and stockholders'
     equity                                         98,011             87,539



    Condensed Consolidated Statements of Operations and Other Comprehensive
                                    Income

                                      Three months ended  Nine months ended
                                           September 30,   September 30,
                                           2009    2008    2009     2008
                                         US$'000 US$'000  US$'000  US$'000
    Operating revenues:
        Net sales of equipment            11,099   5,797   21,504   12,112
        Service income                     7,792   2,610   17,413    8,832

        Total operating revenues          18,891   8,407   38,917   20,944

    Cost of operating revenues:
        Cost of net sales                 (7,099) (3,586) (13,738)  (7,116)
        Cost of service                   (2,878)   (879)  (6,558)  (3,281)

        Total cost of operating revenues  (9,977) (4,465) (20,296) (10,397)

    Gross income                           8,914   3,942   18,621   10,547

    Operating expenses:
    Sales and marketing                    2,007   1,430    6,035    4,028
    General and administrative             1,182     571    2,503    1,824
    Research and development                 138     208      467      461
    Depreciation and amortization             79      76      253      237

    Total operating expenses               3,406   2,285    9,258    6,550

    Operating income                       5,508   1,657    9,363    3,997
    Interest expense                         (40)   (112)    (170)    (255)
    Other income, net                         83     (28)     372      915

    Income before income taxes             5,551   1,517    9,565    4,657
    Income taxes                          (1,308)   (395)  (2,203)    (917)

    Net income                             4,243   1,122    7,362    3,740

    Other comprehensive income
    Foreign currency translation
     adjustment                              (27)     26      104    1,515
    Comprehensive income                   4,216   1,148    7,466    5,255

    Earnings per share:
    Weighted average number of common
     stock outstanding
    Basic                                 10,404  10,404   10,404   10,404
    Dilutive effect of warrants               --      20       --       59

    Diluted                               10,404  10,424   10,404   10,463

    Net income per share of common stock
    Basic and diluted (US$)                 0.41    0.11     0.71     0.36




       Condensed Consolidated Statements of Changes in Stockholders' Equity

          (Dollars in thousands except share data and per share amounts)

                                              Common stock
                                                              Additional
                                            Number of           paid-in
                                              shares    Amount  capital
                                                       US$'000  US$'000

    Balance at January 1, 2009              10,404,550     11    18,989

    Net income
    Foreign currency translation
     adjustment
    Transfer to dedicated reserves

    Balance at September 30, 2009           10,404,550     11    18,989



                                                       Other
                                                      compre-
                                         Dedicated   hensive  Retained
                                          reserves    income  earnings  Total
                                           US$'000   US$'000   US$'000 US$'000

    Balance at January 1, 2009               3,787     5,573    24,071  52,431

    Net income                                                   7,362   7,362
    Foreign currency translation
     adjustment                                          104               104
    Transfer to dedicated reserves             726                (726)     --

    Balance at September 30, 2009            4,513     5,677    30,707  59,897



               Condensed Consolidated Statements of Cash Flows

         (Dollars in thousands except share data and per share amounts)

                                               Nine months ended September 30,
                                                     2009               2008
                                                    US$'000           US$'000
    Cash flows from operating activities
    Net income                                        7,362             3,740
    Adjustments to reconcile net income
     to net cash provided by (used in)
     operating activities:
        Loss on disposal of property,
         plant and equipment                                              (15)
                  Depreciation and
                   amortization                         253               237
    Allowance for doubtful accounts                   1,163               337

    Changes in assets and liabilities:
                  Accounts receivable               (17,009)           (8,349)
                  Due from related
                   parties                              164                55
                  Inventories                           913               881
                  Prepayment                            577              (330)
                  Other current assets                 1253              (751)
                  Accounts payable                    3,562             1,693
    Customer deposits for sales of
     equipment                                          493               (64)
    Due to related parties                               35              (595)
                  Taxes payable                        (105)              (66)
                  Accrued expenses and
                   other accrued
                   liabilities                       (1,718)            3,335

    Net cash used in operating activities            (3,057)              108

    Cash flows from investing activities
    Purchase of property, plant and
     equipment                                         (366)              (32)
    Proceeds from disposal of property,
     plant and equipment                                 --                49

    Net cash used in investing activities              (366)               17

    Cash flows from financing activities
    Repayment of short-term bank loans               (2,918)           (2,142)
    Repayment of long-term loan from
     related parties                                     --               (27)
    Proceeds from new short-term bank
     loans raised                                     3,656             2,856

    Net cash used in financing activities               738               687

    Net increase (decrease) in cash and
     cash equivalents                                (2,685)              812

    Cash and cash equivalents, beginning
     of the period                                    7,866             5,473
    Effect on exchange rate changes                     107                42

    Cash and cash equivalents, end of the
     period                                           5,288             6,327

    Supplemental disclosure of cash flows
     information
    Interest received                                     7                23
    Interest paid                                       (76)              187
    Tax paid                                         (2,587)               54

SOURCE Telestone Technologies Corporation