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Telestone Technologies Corporation Announces Fourth-Quarter and Full-Year 2011 Results

BEIJING, March 30, 2012 /PRNewswire-Asia-FirstCall/ -- Telestone Technologies Corporation (NASDAQ: TSTC) ("Telestone" or the "Company"), a leading developer and provider of telecommunications local-access networks in China, today announced its financial results for the fourth quarter and full year ended December 31, 2011.

Fourth-Quarter 2011 Highlights:

    --  Revenues were $40.6 million, as compared to $60.8 million in the
        year-ago quarter
    --  Gross profit was $18.4 million, as compared to $26.9 million in the
        year-ago quarter
    --  Net income was $3.5 million, or $0.29 per diluted share; non-GAAP income
        was $3.8 million, or $0.30 per diluted share
    --  Completed the main structure of Phase I of the Telestone Intelligent
        Premises System (TIPS) Industrial Park project, located in Gu'an County,
        Hebei province
    --  Acquired 100% of Sichuan Ruideng Telecom Corporation for approximately
        $2 million in cash and 1.8 million restricted Telestone shares

Full-Year 2011 Highlights:

    --  Revenues were $109.1 million, as compared to $131.7 million in the
        previous year
    --  Gross profit was $48.5 million, as compared to $58.9 million in the
        previous year
    --  Net income was $14.9 million, or $1.21 per diluted share; non-GAAP
        income was $16.5 million, or $1.34 per diluted share

"We posted fourth-quarter results with solid sequential revenue and gross profit growth, as well as improved gross margin, although our fourth quarter faced a difficult year-on-year comparison," commented Mr. Daqing Han, Chairman and CEO of Telestone. "We are pleased to maintain a solid level of profitability in a challenging year for the telecom-equipment industry, due to a slowdown in 3G investment and a slow start to 4G investment. In 2011, we are proud that we have achieved a number of milestones that augur a promising 2012. Firstly, we continued to see solid momentum of Wireless Fiber-Optic Distribution System (WFDS) products, which has built a track record of proven applications in the international markets. Secondly, our newly launched proprietary TIPS platform continued to contribute to our top line. In addition, Phase I of our TIPS Industrial Park is complete, and we expect the facility to enter trial production in May 2012. Thirdly, we continue to see success in our efforts to diversify customer base, with sales to non-telecom-carrier customers growing to 4.1% of our total tales, compared to 0.5% a year ago. Finally, we acquired Sichuan Ruideng, which is an important strategic move in our business expansion strategy in the southwestern China market. Although visibility may still be a challenge for the next few quarters, we remain confident that we can continue to grow our business over the long term."

Fourth-Quarter 2011 Results

Revenues in the fourth quarter of 2011 were $40.6 million, a 33.1% decrease from $60.8 million in the year-ago quarter. The year-over-year decrease in revenue was due to a slowdown in investment in 3G wireless networks and a slower-than-expected start to investment in 4G networks.

Sales of professional services increased 13.1% to $28.6 million from $25.3 million in the year-ago quarter. Revenue from equipment sales declined 66.1% to $12.0 million, as compared to $35.5 million in the year-ago quarter. Sales to non-telecom operators and overseas customers amounted to approximately $1.0 million in the fourth quarter, or 2.4% of total revenue. Sales of WFDS-enabled products decreased 25.1% year over year to $9.6 million, accounting for 23.6% of sales in the fourth quarter.

In the fourth quarter, revenue from the "Big-3" telecom carriers -- China Mobile, China Unicom, and China Telecom -- comprised 97.6% of total quarterly revenue, compared to 99.7% in the year-ago quarter.

Gross profit in the fourth quarter was $18.4 million, as compared to $26.9 million in the year-ago quarter. The gross margin increased to 45.3%, flat with the year-ago quarter and up nearly 1.8 percentage points from the third quarter. The year-over-year gross margin increase resulted from a more favorable mix of higher-margin service revenue in the fourth quarter.

Selling, general and administrative (SG&A) expense was $2.2 million in the fourth quarter, or 5.4% of total revenue, down from $4.2 million, or 7.0% of total revenue, in the year-ago quarter. Research and development expense was $0.9 million, or 2.3% of revenues for the fourth quarter, as compared to $1.4 million, or 2.3% of revenues in the year-ago quarter.

Operating income was $5.4 million, as compared to $16.0 million in the year-ago quarter. The operating margin was 13.2% in the quarter, as compared to 26.3% in the year-ago quarter.

Net income was $3.5 million, down 71.2% from $12.3 million in the same period last year. Both basic and diluted earnings per share for the fourth quarter of 2011 were $0.29, as compared to $1.11 and $1.10 per share for basic and diluted earnings per share respectively in the same quarter of 2010. Non-GAAP net income, which excludes $0.2 million of non-cash stock compensation expense, was $3.8 million, down 74.6% from $14.8 million in the same quarter of 2010. Non-GAAP earnings per share were $0.30, versus $1.33 in the year-ago quarter.

Full Year 2011 Results

Revenue for the year ended December 31, 2011, decreased 17.2% to $109.1 million compared to $131.7 million in 2010. Gross profit decreased 17.6% to $48.5 million from $58.9 million in the prior year. Operating income decreased 36.9% to $19.7 million from $31.2 million in 2010. Net income decreased 40.2% to $14.9 million, or $1.21 per diluted share, compared to net income of $25.0 million, or $2.33 per diluted share, in 2010. Non-GAAP net income, decreased 45.2% to $16.5 million, or $1.34 per diluted share, compared to $30.1 million, or $2.82 per diluted share, in 2010. Weighted average diluted shares outstanding increased to 12.4 million shares from 10.7 million shares in 2010 due to the completion of a secondary offering in the fourth quarter of 2010.

Financial Condition

As of December 31, 2011, Telestone had $18.9 million in cash and cash equivalents, as compared to $31.0 million at the end of 2010. Inventory was $6.8 million on December 31, 2011, as compared to $3.1 million on December 31, 2010. Working capital was $126.7 million as of December 31, 2011, versus $109.6 million at the end of 2010. The Company had $14.9 million in short-term debt as well as $46.5 million in accounts payable at the end of fourth quarter of 2011. Shareholders' equity totaled $142.8 million at the end of 2011, as compared to $116.9 million at the end of 2010. Cash used in operating activities was $12.7 million during 2011, as compared to cash used in operating activities of $252,000 during 2010.

As of December 31, 2011, Telestone's accounts receivable were $251.5 million, versus $192.5 million at the end of 2010. The increase in receivables was mainly due to the account receivables generated from a rapid increase in sales in 2010, in which revenues grew 83.2% year over year. The accounts receivable turnover period (DSOs) for the year ended December 31, 2011 was 526 days, compared to 385 days for 2010. During the fourth quarter, Telestone collected $18.1 million in accounts receivable, bringing total collections to $66.5 million for 2011.

Business Outlook

For the full-year 2012, Telestone expects revenues to increase to approximately $117 million.

"Despite a lull in capital spending surrounding a transition in wireless technology from 3G to 4G, we remain optimistic regarding continued growth in 2012. We continue to expect the WFDS business will be our major growth driver, and we expect TIPS to begin to play a meaningful role in 2012. We will continue to invest in the development of innovative new products and services, while diversifying our geographic and customer mix. We expect that 2012 will be a rewarding year for Telestone and our industry," concluded Mr. Han.

Non-GAAP Financial Measures

This release contains adjusted non-GAAP financial measures. These adjusted financial measures, which are used as measures of the Company's performance, should be considered in addition to, not as a substitute for, measures of the Company's financial performance prepared in accordance with United States Generally Accepted Accounting Principles ("GAAP"). The Company's adjusted financial measures may be defined differently than similar terms used by other companies. Accordingly, care should be exercised in understanding how the Company defines its adjusted financial measures.

Reconciliations of the Company's adjusted measures to the nearest GAAP measures are set forth in the section below titled "Reconciliation of GAAP to Non-GAAP Results." These adjusted measures include adjusted net income, and adjusted diluted net income per share.

The Company's management uses adjusted financial measures to gain an understanding of the Company's comparative operating performance (when comparing such results with previous periods or forecasts) and future prospects. The Company's adjusted financial measures exclude certain special items, including stock-based compensation charge from its internal financial statements for purposes of its internal budgets. Adjusted financial measures are used by the Company's management in their financial and operating decision-making, because management believes they reflect the Company's ongoing business in a manner that allows meaningful period-to-period comparisons. The Company's management believes that these adjusted financial measures provide useful information to investors and others in the following ways: 1) in understanding and evaluating the Company's current operating performance and future prospects in the same manner as management does, if they so choose, and 2) in comparing in a consistent manner the Company's current financial results with the Company's past financial results.

The Company's management believes excluding stock-based compensation from its adjusted financial measures is useful for itself and investors, as such expense will not result in future cash payment and is not an indicator used by management to measure the Company's core operating results and business outlook.

The adjusted financial measures have limitations. They do not include all items of income and expense that affect the Company's operations. Specifically, these adjusted financial measures are not prepared in accordance with GAAP, may not be comparable to adjusted financial measures used by other companies and, with respect to the adjusted financial measures that exclude certain items under GAAP, do not reflect any benefit that such items may confer to the Company. Management compensates for these limitations by also considering the Company's financial results as determined in accordance with GAAP.

Conference Call

The Company will host a conference call on Friday, March 30, 2012, at 9:00 a.m. Eastern Time to discuss its financial results for the fourth quarter and full year ended December 31, 2011.

Mr. Daqing Han, Chairman and Chief Executive Officer and Ms. Xiaoli Yu, Chief Financial Officer will host the call.

The conference call may be accessed by calling:

    U.S. Toll Free:                   800-860-2442
    U.S. Toll / International:        412-858-4600
    Canada Toll Free:                 866-605-3852
    China North Toll Free:            10-800-712-2304
    China South Toll Free:            10-800-120-2304
    Hong Kong Toll Free:              800-962475

The conference pass code is 10006568.

A replay will be available for seven days starting on Friday, March 30, 2012, at 10:00 a.m. Eastern Time and can be accessed by dialing (877) 344-7529. International callers should dial +1 (412) 317-0088. When prompted, enter conference pass code 10006568.

About Telestone Technologies Corporation

Telestone is a leader and innovator in wireless local-access network technologies and solutions. The company has a global presence, with 30 sales offices throughout China and a network of international branch offices and sales agents. For more than ten years, Telestone has installed radio-frequency (RF)-based 1G and 2G systems throughout China for leading telecommunications companies. After intensive research on the needs of carriers in the 3G age, Telestone developed and commercialized its proprietary third-generation local-access network technology, WFDS(TM) (Wireless Fiber-optic Distribution System), which provides a scalable, multi-access local access network solution for China's three cellular protocols. Telestone also offers services including project design, manufacturing, installation, maintenance and after-sales support. The Company has approximately 1,500 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.

- Financial Tables Follow -

               Telestone Technologies Corporation

                   Consolidated Balance Sheets
                   (U.S. Dollars in Thousands)

                                                   As of December 31,
                                                      2011       2010

    Current assets:
    Cash and cash equivalents                      $18,850    $31,020
    Accounts receivable, net of allowance          251,460    192,487
    Due from related parties                         1,534      2,018
    Inventories, net of allowance                    6,755      3,123
    Prepayment                                       2,351      1,748
    Other current assets                             2,797      1,630

    Total current assets                           283,747    232,026

    Goodwill                                         4,268      3,119
    Property, plant and equipment, net               9,264      1,565
    Lease prepayments, net                           2,571      2,528

                                                    16,103      7,212

    Total assets                                   299,850    239,238


    Current liabilities:
    Short-term bank loans                           14,941      9,846
    Accounts payable - Trade                        46,450     40,685
    Service cost payable                            35,254     26,093
    Customer deposits for sales of equipment         2,684      2,089
    Due to related parties                           1,831      3,977
    Income tax payable                              18,695     13,760
    Accrued expenses and other accrued
     liabilities                                    37,229     25,938

    Total current liabilities                      157,084    122,388

    Commitments and contingencies

    Stockholders' equity:
    Preferred stock, US$0.001 par value, 10,000,000 shares authorized,
     no shares issued
    Common stock, US$0.001 par value:
    Authorized - 100,000,000 shares as of December 31, 2011 and 2010
    Issued and outstanding - 12,333,264 and
     12,233,264 shares as of December 31, 2011
     and 2010 respectively                              12         12
    Additional paid-in capital                      50,148     43,050
    Dedicated reserves                               6,871      5,115
    Other comprehensive income                      12,329      8,437
    Retained earnings                               73,406     60,236

    Total stockholders' equity                     142,766    116,850

    Total liabilities and stockholders' equity     299,850    239,238

                                Telestone Technologies Corporation

               Consolidated Statements of Operations and Other Comprehensive Income
                       (U.S. Dollars in Thousands, Except Per-Share Amounts)

                                                              Three Months Ended              Years Ended
                                                                 December 31,                December 31,
                                                                 2011          2010        2011          2010
    Operating revenues:
         Net sales of equipment                               $12,012       $35,482     $39,281       $65,160
         Service income                                        28,633        25,318      69,783        66,492

         Total operating revenues                              40,645        60,800     109,064       131,652

    Cost of operating revenues:
    Cost of net sales                                           6,666        19,785      22,277        36,494
    Cost of service                                            15,585        14,109      38,282        36,274

         Total cost of operating
          revenues                                             22,251        33,894      60,559        72,768

    Gross profit                                               18,394        26,906      48,505        58,884

    Operating expenses:
         Sales and marketing                                    2,196         4,230      10,905        15,579
         General and administrative                             9,779         5,131      15,132         9,661
         Research and development                                 935         1,421       2,313         2,052
         Depreciation and
          amortization                                            112           123         452           350

         Total operating expenses                              13,022        10,905      28,802        27,642

    Operating income                                            5,372        16,001      19,703        31,242

    Interest expense                                             (394)         (379)     (1,124)         (761)
    Other income, net                                             467          (348)        899           463
    Income before income taxes                                  5,445        15,274      19,478        30,944

    Income taxes                                               (1,905)       (2,961)     (4,552)       (5,989)

    Net income                                                  3,540        12,313      14,926        24,955

    Other comprehensive income
    Foreign currency
     translation adjustment                                     1,177         2,755       3,892         2,755

    Total comprehensive income                                  4,717        15,068      18,818        27,710

    Earnings per share:

    Weighted average number of common stock outstanding
    Basic                                                  12,372,716    11,112,989  12,343,127    10,692,440
    Effect of dilutive warrants
     and stock options                                          4,927       45,1848      8,5482       11,0422
    Diluted                                                12,377,643    11,158,177  12,351,709    10,703,462

    Net income per share of common stock

    Basic                                                       $0.29         $1.11       $1.21         $2.33
    Diluted                                                     $0.29         $1.10       $1.21         $2.33

           Telestone Technologies Corporation

         Consolidated Statements of Cash Flows
                 (Dollars in Thousands)

                                            Years Ended December
                                               2011        2010

    Cash flows used in operating activities
    Net income                              $14,926     $24,955
    Adjustments to reconcile net income to net cash used in
     operating activities:
         Depreciation and amortization          452         350
         Allowance for doubtful accounts      8,200       1,689
         Stock-based compensation             1,578       5,180
         Loss on disposal of property,
          plant and equipment, net                -           1
    Changes in assets and liabilities:
         Accounts receivable                (51,308)   (101,996)
         Inventories                         (2,463)      1,477
         Due from related parties               540           -
         Prepayment                             (28)       (482)
         Other current assets                    82       3,204
         Accounts payable                     1,819      24,448
         Due to related parties              (2,492)     (1,099)
         Customer deposits for sales of
          equipment                             444         451
         Income tax payable                   4,408       6,374
         Service cost payable, accrued
          expenses and other accrued
          liabilities                        11,106      35,196

    Net cash used in operating
     activities                             (12,736)       (252)

    Cash flows used in investing activities
    Purchase of property, plant and
     equipment                               (4,822)       (654)
    Additions of long-term land lease
     prepayments                                  -      (2,580)
    Acquisition of a subsidiary                 550           -
    Proceeds from disposal of
     property, plant and equipment                2           4

    Net cash used in investing
     activities                              (4,270)     (3,230)

    Cash flows from financing activities
    Issuance of common stock, net of
     issue costs                                  -      18,882
    Proceeds from short-term bank
     loans                                   18,086       9,846
    Repayment of short-term bank loans      (13,368)     (5,850)

    Net cash provided by financing
     activities                               4,718      22,878

    Net (decrease) increase in cash
     and cash equivalents                   (12,288)     19,396

    Cash and cash equivalents,
     beginning of year                       31,020      11,233
    Effect on exchange rate changes             118         391

    Cash and cash equivalents, end of
     year                                    18,850      31,020

The following table reconciles GAAP measures to non-GAAP measures:

                     Telestone Technologies Corporation
                 Reconciliation of GAAP to Non-GAAP Results
            (U.S. Dollars in Thousands, Except Per-Share Amounts)

                                             Three Months           Twelve Months
                                                 Ended                  Ended
                                             December 31,            December 31
                                            2011       2010       2011       2010
    Net Income                            $3,540    $12,313    $14,926    $24,955
    Add back: Stock-based
     compensation                            213      2,479      1,578      5,180
    Non-GAAP Net Income                    3,762     14,792     16,504     30,135
    Non-GAAP Diluted EPS                   $0.29      $1.33      $1.34      $2.82

SOURCE Telestone Technologies Corporation

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