Telestone Technologies Corporation Reports Results for the Second Quarter 2010

Company affirms guidance of $129.4 million in revenues and $22.9 million in net income for FY2010 based on growing 3G and WFDS(TM) order backlog for third and fourth quarter

Aug 12, 2010, 16:05 ET from Telestone Technologies Corporation

BEIJING, Aug. 12 /PRNewswire-Asia-FirstCall/ -- Telestone Technologies Corporation ("Telestone" or the "Company") (Nasdaq: TSTC), a leading developer and provider of telecommunications local access network solutions based in China, today announced its financial results for its second quarter ended June 30, 2010.

    Second Quarter 2010 Highlights
    -- Revenue was $16.6 million, up 37.0% from 2nd Quarter of 2009
    -- Gross profit was $7.5 million, up 49.8% from 2nd Quarter of 2009; gross
       profit margins were 45.1%, exceeding management guidance on gross
       profit margins of 42%
    -- Company increased sales and marketing efforts to secure higher margin
       WFDS(TM) projects and installations
    -- Net income was $1.7 million, down 12.8% from 2nd Quarter of 2009 as a
       result of increased SG&A expense in the quarter
    -- Earnings per diluted share were $0.16 based on 10.5 million fully
       diluted shares
    -- Company announced its first US-based WFDS(TM) contract for a
       Houston-based hospital on August 9, 2010, opening up international
       sales channel

    Summary of Financials

    Second Quarter 2010 Results
                             2Q 2010       2Q 2009           CHANGE
    Net Sales             $16.6 million  $12.1 million       +37.0%
    Gross Profit           $7.5 million   $5.0 million       +49.8%
    Net Income             $1.7 million   $2.0 million      (12.8)%
    EPS (Diluted)             $0.16          $0.19          (15.8)%

"We recorded 37% growth during the quarter as we significantly increased our orders and prepared for the ramp in new 3G and WFDS(TM) installations for the second half of the year," began Han Daqing, CEO and Chairman of Telestone. "We have made a conscious decision to focus our efforts on higher value, high-margin WFDS(TM) projects and have concentrated our sales team on this Company-wide goal. This focus requires an investment to market the benefits and cost savings of WFDS(TM) fiber optic installations to local branch offices of the 'Big 3' and building owners as well. Because our equipment allows carriers to generate incremental revenues from new services and reduces the operating costs of running multiple systems, we believe our WFDS products offer a compelling return for carriers, building owners and consumers alike. Our sales teams based at our 30 branch offices continue to make good progress, having collectively secured a solid backlog of both 3G and WFDS(TM) contracts and installations with the majority to be realized during the third and fourth quarter of 2010. Thus, we remain confident in meeting our revenue guidance of $129.4 million and $22.9 million in net income for the year."

Business Overview and Second Quarter 2010 Financial Performance

Telestone is awarded "last mile" local access network installation contracts from the "Big 3" telecommunication companies in China including China Mobile, China Unicom and China Telecom. Based on its network design for a particular building site, Telestone procures telecommunications hardware and utilizes local contractors to install 3/G and WFDS(TM) fiber optic local access networks for carriers. A majority of Telestone's project revenue is generated from its engineering and network design solutions for first-time installations or network upgrades. Telestone's projects in turn generate a combination of equipment and professional services revenues. To a lesser extent, the Company generates revenue from equipment-only sales or services-only sales.

Total revenues in the second quarter ended June 30, 2010 were $16.6 million, an increase of 37.0% from $12.1 million in the same period of prior year. Equipment sales of $7.1 million were driven by the Company's sales of 3G and WFDS(TM) local access network equipment used in installations. Additionally, $9.6 million in service revenues for project design and installation costs were achieved in the second quarter of 2010 compared to that of $5.0 million in the second quarter of 2009, representing a 91.6% increase. Revenues generated during the fiscal year are concentrated in the third and fourth quarter, when most of the "Big 3's" projects are completed and subsequently billed. Due to this seasonality, the Company normally records approximately 25% of its 2010 estimated revenues in the third quarter and approximately 50% of its 2010 estimated revenues in the fourth quarter for the year ending on December 31, 2010.

In the second quarter ended June 30, 2010 cost of operating revenues was $9.1 million. Costs of operating revenue include costs of materials used in OEM manufacturing of Telestone's 3G and WFDS(TM) product lines, costs of hardware components the Company purchasing from other suppliers, costs for project management and costs of installation at customers' sites. Corresponding gross profit was $7.5 million with gross margin of 45.1% for the quarter compared to gross margin of 41.3% in the second quarter of 2009. Gross margin for the 2nd quarter of 2010 exceeded management target of 42% and was positively impacted by higher-margin WFDS(TM) installations, which contributed gross margins of between 45-50%.

Selling, general and administrative expenses (SG&A) were $5.1 million, accounting for 30.4% of total revenues, as compared to $2.3 million or 19.2% of total revenues, for the corresponding period of 2009. The increase in SG&A expenses was primarily attributable to a 126% year-over-year increase in sales and marketing expenses which were $4.2 million during the second quarter of 2010 and are directly attributable to efforts to secure WFDS(TM) systems for 3G networks from the "Big 3" and also from building owners.

"We have trained our sales teams at all of our 30 branch offices to market the benefits of fiber optic systems and WFDS(TM) as the optimal local access network for cellular, voice, data and media integration in building sites," stated Han Daqing, "This has required an intense and focused effort on the part of our sales teams, supported by a growing number of reference projects, as we educate and empower our customers. We are also winning support from local city or provincial authorities who help promote WFDS(TM) installations in particular cities and provinces to support the Central Government convergence plan. We have seen growing interests in our products as we demonstrate the improved service quality and substantial cost savings and we can provide the customers with our state-of-the-art solution. The recent news about our WFDS(TM) system installation in the U.S. provides us a significant boost for our sales efforts both in the U.S. and China as we look to gain significant market share by capitalizing on our first-mover advantage," Han concluded.

Operating income in the second quarter of 2010 was $2.2 million, with operating margin of 13.4%, a decrease of 4.7% from $2.4 million in the same period of prior year. As detailed above, operating income and operating margins were affected by additional costs in SG&A incurred in the second quarter of 2010. We expect operating margins to benefit from WFDS as it grows.

For the three months ended June 30, 2010, net income was $1.7 million, representing a decrease of 12.8% from the same period in 2009. Based on 10.5 million shares, earnings per weighted average diluted share were $0.16 per share for the quarter, compared to $0.19 in the same period of 2009.

    Six Months ended June 30 Results
                                June 30, 2010    June 30, 2009      CHANGE
    Net Sales                  $27.8 million    $20.0 million       +38.6%
    Gross Profit               $12.4 million     $9.7 million       +28.1%
    GAAP Net Income             $0.6 million     $3.1 million      (81.1)%
    GAAP EPS (Diluted)             $0.06            $0.30          (80.0)%
    Adjusted Net Income(*)      $3.3 million     $3.1 million       + 6.5%
    Adjusted EPS (Diluted)(*)      $0.31            $0.30             0.0%

    (*) Adjusted net income reported by the Company in the first half of 2010
        excludes a non-cash stock-based compensation charge of $2.2 million
        related to the issuance of stocks to certain directors of Shandong
        Guolian Telecommunications Technology, and a one-time noncash
        stock-based compensation charge of $0.5 million for professional
        services rendered.

Total revenue for the first six months of fiscal 2010 was $27.8 million, an increase of 38.6% from $20.0 million in the same period of prior year. Revenues from WFDS(TM) installations accounted for approximately 21.0% of revenues in the first half of the year. China Mobile accounted for 63.4% of revenues, China Unicom accounted for 21.0% of revenues and China Telecom accounted for 13.3% of revenues for the first half of 2010.

Gross profit in the first half of fiscal year 2010 was $12.4 million, representing an increase of 28.1% from $9.7 million in the prior year's corresponding period. Gross profit margins for the first half of the year were 44.8% and exceeded guided gross profit margin expectation of 42% for the year.

Selling, general and administrative (SG&A) expenses in the first half of fiscal year 2010 were $10.7 million, compared to $5.3 million in the prior year's same period, as a result of increased sales and marketing costs incurred mostly in the second quarter of 2010. Additionally, during the first quarter of fiscal 2010 the general administrative expenses were allocated a non-cash charge of $2.7 million related to the issuance of stock to shareholders of Shandong Guolian Telecommunications Technology Limited in connection with Telestone's acquisition of the company in 2007 and professional services rendered. Excluding the effects of the non-cash charge, the SG&A expenses would have been $8.0 million.

Operating income in the first half of 2010 was $1.4 million, with operating margin of 5.1%, representing a 64.6% decrease from $4.0 million in the prior year's same period. Excluding the effects of the previously-mentioned noncash charge of $2.6 million, operating income was $4.1 million, representing a increase of 2.5% year-over-year. Adjusted operating income margin for the first six months of 2010 is 14.7%.

GAAP net income for the first half of fiscal year 2010 was $0.6 million, compared to $3.1 million in the prior year's corresponding period, representing a decrease of 81.1% year-over-year. Adjusted net income excluding the aforementioned non-cash expenses is $3.3 million, representing an increase of 6.5% year-over-year.

Earnings per weighted average diluted share were $0.06 based on 10.6 million diluted shares, while adjusted earnings were $0.31 per share.

Financial Position

As of June 30, 2010 Telestone Technologies had cash and cash equivalents of $7.7 million compared to $11.2 million as of December 31, 2009. Working capital was $64.0 million, increased from $60.8 million as of December 31, 2009.

On June 30, 2010, Telestone had $101.0 million in receivables as compared to $89.0 million as of December 31, 2009. The amount of accounts receivable is directly related to the projects the Company secured from China's Big 3 telecommunication companies. Accounts receivable days sales outstanding (DSO) for the second quarter of 2010 was 483 days. DSOs reflect the nature of the Company's business conducted with China's largest state-owned telecommunication companies and to date the Company has not experienced any significant bad debts. On an annualized basis, the Company's average DSO is approximately 12-months, which has been consistent with its business operations with the state-owned telecommunication companies in China since it began project work in the industry in 2005.

Current liabilities were $58.0 million compared to $51.7 million as of December 31, 2009. The Company had $5.9 million in short term loans as of June 30, 2010 and held no long term debt. Shareholder's equity was $68.4 million, a 5.1% increase from $65.1 million as of December 31, 2009.

Recent Events

August 9, 2010 -- Telestone announced that its Wireless Fiber Optic Distribution System (WFDS(TM)) has been selected as the local access network technology for installation at a Houston-based hospital in the USA. The project will be installed by an U.S. engineering firm, Quell Corporation, which won the contract after successfully demonstrating Telestone's WFDS(TM) functionality and cost savings to the hospital and other major US telecommunication companies. Telestone's equipment portion of the contract is valued at $2.0 million and is scheduled for delivery at the end of 2010.

2nd Quarter 2010 Earnings Conference Call

    To attend the call, please use the dial-in information below. When
prompted, ask for the "Telestone Technologies Corporation Q2 2010 Earnings
Call."

    Conference Date:            Friday, August 13, 2010
    Conference Time:            9.00 a.m. Eastern Time
    Duration:                   1 hour
    U.S. Participants:          800 860 2442
    International Participants: +1 412 858 4600
    Call Title:                 "Telestone Technologies Corporation Q2 2010
                                Earnings Call"
    Webcast:

http://www.videonewswire.com/event.asp?id=71702

Please dial in at least 10-minutes before the call to ensure timely participation. This call is also being webcast and can be accessed by clicking on this link http://www.videonewswire.com/event.asp?id=71702 .

About Telestone Technologies Corporation

Telestone is a leading innovator in local access network technologies and solutions. Telestone is a global company with 30 sales offices throughout China and a network of international branch offices and sales agents. For more than 10 years, Telestone has been installing radio-frequency based 1G and 2G systems throughout China for China's leading telecommunications companies. After intensive research on the demands of carriers in the 3G age, Telestone developed and commercialized its third generation technology for the local access network, WFDS(TM) (Wireless Fiber-Optics Distribution System), which provides a scalable, multi-access local access network solution for China's three cellular protocols. Telestone offers services that include project design, project manufacturing, installation, maintenance and after-sales support. Telestone Technologies has approximately 1,200 employees.

Safe Harbor Statement

This release contains certain "forward-looking statements" relating to the business of Telestone Technologies Corporation and its subsidiary companies. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions. Such forward looking statements involve known and unknown risks and uncertainties, including all business uncertainties relating to product development, marketing, concentration in a single customer, raw material costs, market acceptance, future capital requirements, competition in general and other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are or will be described in greater detail in our filings with the Securities and Exchange Commission. Telestone Technologies is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise. This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction.



                      Telestone Technologies Corporation
                   - CONDENSED CONSOLIDATED BALANCE SHEETS
                  - AS OF JUNE 30, 2010 AND DECEMBER 31, 2009
     - (Currency expressed in United States Dollars ("US$"), except for number
                               of shares))

                                           (Unaudited)

                                                    As of            As of
                                                   June 30,       December 31,
                                                     2010              2009
    ASSETS                                         US$'000           US$'000
    Current assets:
      Cash and cash equivalents                      7,738            11,233
      Accounts receivable, net of allowance        100,977            89,005
      Due from related parties                       1,963             1,963
      Inventories, net of allowance                  6,375             4,442
      Prepayments                                      758             1,223
      Other current assets                           4,204             4,574

      Total current assets                         122,015           112,440

    Goodwill                                         3,119             3,119
    Property, plant and equipment, net               1,202             1,181
                                                     4,321             4,300
    Total assets                                   126,336           116,740

    LIABILITIES AND STOCKHOLDERS' EQUITY

    Current liabilities:
      Short-term bank loans                          5,850             5,850
      Accounts payable - Trade                      18,532            15,678
      Customer deposits for sales of
       equipment                                     1,589             1,582
      Due to related parties                         6,326             4,947
      Income tax payable                             8,095             7,132
      Accrued expenses and other accrued
       liabilities                                  17,575            16,473

      Total current liabilities                     57,967            51,662

    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 June 30, 2010 and December
       31, 2009
      Issued and outstanding -10,558,264
       shares as of June 30, 2010 and
       10,404,550 shares as of December 31,
       2009                                             11                11
    Additional paid-in capital                      21,690            18,989
    Dedicated reserves                               5,024             4,807
    Accumulated other comprehensive
     income                                          5,682             5,682
    Retained earnings                               35,962            35,589

      Total stockholders' equity                    68,369            65,078

    Total liabilities and stockholders'
     equity                                        126,336           116,740



                      Telestone Technologies Corporation
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
             FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
    (Currency expressed in United States Dollars (US$), except for number of
                          shares) - (Unaudited)

                                       (Unaudited)            (Unaudited)
                                   Three months ended       Six months ended
                                         June 30,               June 30,
                                     2010        2009        2010        2009
                                  US$'000     US$'000     US$'000     US$'000
    Operating revenues:
     Net sales of equipment         7,060       7,142      12,160      10,405
     Service income                 9,559       4,988      15,591       9,621

     Total operating revenues      16,619      12,130      27,751      20,026

    Cost of operating
     revenues:
     Cost of net sales              3,998       4,741       6,868       6,639
     Cost of service                5,123       2,382       8,446       3,680

     Total cost of operating
      revenues                      9,121       7,123      15,314      10,319

    Gross income                    7,498       5,007      12,437       9,707

    Operating expenses:
     Sales and marketing            4,176       1,847       6,904       4,028
     General and administrative       882         478       3,816       1,321
     Research and development         191         193         415         329
     Depreciation and
      amortization                     81          84         152         174

    Total operating expenses        5,330       2,602      11,287       5,852

    Operating income                2,168       2,405       1,150       3,855
    Interest expense                 (134)        (89)       (260)       (130)
    Other income, net                 194          22         529         289

    Income before income taxes      2,228       2,338       1,419       4,014
    Income taxes                     (508)       (366)       (829)       (895)

    Net income                      1,720       1,972         590       3,119

    Other comprehensive income
    Foreign currency
     translation adjustment            --        (114)         --         131

    Total comprehensive income      1,720       1,858         590       3,250

    Earnings per share:

    Weighted average number of
     common stock outstanding
    Basic                      10,549,143  10,404,550  10,531,304  10,404,550
    Dilutive effect of
     warrants                          --          --      21,647          --

    Diluted                    10,549,143  10,404,550  10,552,951  10,404,550

    Net income per share of
     common stock
    Basic (US$)                      0.16        0.19        0.06        0.30
    Diluted (US$)                    0.16        0.19        0.06        0.30



                      Telestone Technologies Corporation
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
             (Currency expressed in United States Dollars (US$))
                              (Unaudited)

                                                          (Unaudited)
                                                     Six months ended June 30,
                                                       2010              2009
                                                    US$'000           US$'000
    Cash flows from operating activities
    Net income                                          590             3,119
    Adjustments to reconcile net income
     to net cash used in operating
     activities:
      Depreciation and amortization                     152               174
      Allowance for doubtful accounts                    --               283
      Stock-based compensation                        2,701                --
    Changes in assets and liabilities:
      Accounts receivable                           (11,972)           (8,644)
      Due from related parties                           --               398
      Inventories                                    (1,933)           (2,734)
      Prepayments                                       465            (2,743)
      Other current assets                              370               444
      Accounts payable                                2,854             7,325
      Customer deposits for sales of
       equipment                                          7               169
      Due to related parties                          1,379                34
      Income tax payable                                963            (1,321)
      Accrued expenses and other accrued
       liabilities                                    1,102              (798)

    Net cash used in operating activities            (3,322)           (4,294)

    Cash flows from investing activities
    Purchase of property, plant and
     equipment                                         (173)             (371)

    Net cash used in investing activities              (173)             (371)

    Cash flows from financing activities
    Repayment of short-term bank loans               (3,656)           (2,918)
    Short-term bank loans raised                      3,656             3,652

    Net cash from financing activities                   --               734

    Net decrease in cash and cash
     equivalents                                     (3,495)           (3,931)

    Cash and cash equivalents, beginning
     of the period                                   11,233             7,866

    Effect on exchange rate changes                      --               (33)

    Cash and cash equivalents, end of the
     period                                           7,738             3,902

    Supplemental disclosure of cash flow
     information
    Interest received                                    29                 7
    Interest paid                                      (195)              (65)
    Tax paid                                           (221)           (2,486)



    For further information, please contact:

    Company:
     Liping Zhang, Board Secretary
     Tel:   +86-10-8367-0088 ext. 1003
     Email: zhangliping@telestone.com

     Dan Feng, Assistant Secretary of the Board
     Tel:   +86-10-8367-0088 x1232
     Email: fengdan@telestone.com

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

SOURCE Telestone Technologies Corporation



RELATED LINKS

http://www.videonewswire.com/event.asp?id=71702