Second Quarter 2011 Financial Highlights
- Revenues decreased 16.79% YoY to US$27.89 million
- Gross Profit decreased 29.03% YoY to US$ 11.92 million, with Gross Margin shrinking to 42.75 %
- Operating Profit decreased 54.98% YoY to US$ 5.46 million
- Non-GAAP Net Income decreased 43.03% YoY to US$ 5.63 million
- Non-GAAP Fully Diluted EPS was US$ 0.11
- Cash flow from operations was US$1.90 million vs. $3.45 million a year ago
Mr. Jiang Huai Lin, Chairman and Chief Executive Officer of the Company, commented, "We faced an unexpected slowdown in our business in the second quarter due to intensified monetary tightening policies implemented by the Chinese government in its attempt to curb rising inflation. In particular, the central government has slowed large investments in infrastructure projects in order to ease inflationary pressure on domestic commodities. As a result, our projects from government customers, which account for over half of our revenues, were affected. Still, despite the slowdown, we managed to win new contracts worth over $30 million during the quarter.
"Our ability to secure new projects during this difficult period is an affirmation of our status as a preferred provider of IT and DT products and solutions for our customers. Demand for our core IT offerings, which includes software, hardware and fully integrated solutions for Geographic Information Systems (GIS), Digital Public Security Technologies (DPST) and Hospital Information Systems (HIS), came from a broad geographic mix of customers, and included work for the Shenzhen Traffic Police Bureau, the International Summer Universiade games being held in August, and the Hong Kong-Shenzhen border e-Channel systems. Additionally, we continued to see significant growth in our DT segment, which includes products for GIS, DPST, HIS, education and media solutions, and consumer products. DT revenues contributed to roughly 40% of our total revenues in the second quarter, compared with 30% of total revenues in the first quarter of 2011. We strongly believe there will be continuing opportunities for us in both business segments. Meanwhile, our search for a suitable CFO is ongoing and we are actively engaged in vetting suitable candidates for the position. In the interim, our Board of Directors has appointed Mr. Zhao Zhi Qiang as the Company's Interim CFO effective as of August 5, 2011. Mr. Zhao has been the Company's Chief Operating Officer since November 2009, and has held several senior-level management positions at both the Company and its subsidiaries in the past. He has extensive experience in corporate operations and integration, strategic planning and human resources management.
"The impact from the government's continued attempts to tighten monetary policies is likely to carry on into the third and fourth quarters, and we expect this to affect our full year results. Despite the challenges of the current business environment, we believe our new business initiatives will help us offset some of the pressure and weather this difficult period. We are confident in our ability to overcome these new challenges by remaining focused on our business and executing our strategy."
Second Quarter 2011 Financial Results
For the three months ended June 30, 2011 revenue was $27.89 million, as compared to $33.52 million for the three months ended June 30, 2010, a decrease of $5.63 million, or 16.79%. The decrease was primarily due to the Chinese government's recent implementation of new monetary tightening policies, which led to a slow-down in projects for the Company's government customers, which generated over half of the Company's revenues during the three-month periods ended June 30, 2011 and 2010.
Product sales increased by $3.64 million, or 48.74%, to $ 11.11 million for the three months ended June 30, 2011, as compared to $7.47 million in the same period of 2010. Product sales constituted 39.85% of total revenue during the three-month period ended June 30, 2011, as compared with 22.29% during the same period ended June 30, 2010. The increase mainly reflected the Company's efforts to grow its Display Technology solutions segment.
Software sales decreased by $13.15 million or 58.69%, to $9.26 million for the three months ended June 30, 2011, from $22.41 million for the three months ended June 30, 2010. Software sales constituted 33.19% of total revenue, which decreased from 66.85% during the same period in the prior year.
Sales of system integration services increased by $3.65 million for the three months ended June 30, 2011, as compared to the same period of 2010. As a percentage of revenue, it increased from 10.4% during the three months ended June 30, 2010 to 25.59% during the current quarter. The increase was mainly the result of an increase in demand for system integration solutions in connection with the Shenzhen Summer Universiade, which will be held in August 2011, and new integration projects the Company secured during the fiscal quarter ended June 30, 2011, including a $3.5 million system integration contract with the Shenzhen Traffic Police Bureau.
Other revenue increased by $0.23 million, from $0.15 million in the three months ended June 30, 2010 to $0.38 million in the same period of 2011. Other revenue was derived from maintenance services during the current period while during the three months ended June 30, 2010, the Company also generated royalty income.
In terms of segment weights, IT segment accounted for 60.22% of revenues in Q2 2011, as compared with 82.36% in the same period last year. DT segment contributed 39.78% of revenues in Q2 2011, as compared with 17.64% in the same period last year. The revenue increase of DT segment and the decline in revenue from IT segment reflect two initiatives we are taking in fiscal year 2011. The first initiative is to grow the Company's DT segment in response to increased demand from the broader market for more specialized solutions. The second initiative is to be more selective with the acceptance of orders in an effort to improve the quality of earnings.
Cost of Revenue and Gross Profit
Cost of revenues decreased $0.75 million, or 4.51%, to $15.97 million, for the three months ended June 30, 2011, as compared with $16.72 million for the three months ended June 30, 2010. Gross margin was 42.75% for the three months ended June 30, 2011, a decrease of 737 basis points from 50.12% in the same period of 2010. The decrease in gross profit margins resulted from several factors. During the current quarter, the Company continued to grow its DT solutions, and the percentage of revenue increased from 17.64% during the three months ended June 30, 2010 to 39.78% during the three months ended June 30, 2011. The increase in contribution from DT revenues resulted in a decrease in gross profit margin for the three months ended June 30, 2011 . The gross profit margin for system integration business decreased from 83.63% during the three months ended June 30, 2010 to 30.33% in the three months ended June 30, 2011 primarily due to the high profit margin of certain projects in the 2010 period. However, gross margin from the Company's software business increased to 76.91% during the three months ended June 30, 2011 from 54.22% during the three months ended June 30, 2010 , primarily due to reduced production outsourcing. Following the contraction of software business described above, the Company's own resources were able to handle and complete most of the work, resulting in lower subcontractor fees for the three months ended June 30, 2011 .