- 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 -
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.
