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8-K - TELESTONE TECHNOLOGIES CORP | v194136_8k.htm |
EX-99.1 - TELESTONE TECHNOLOGIES CORP | v194136_ex99-1.htm |
EX-99.3 - TELESTONE TECHNOLOGIES CORP | v194136_ex99-3.htm |
Telestone
Technologies Corporation
TSTC
Q2 2010 Earnings Conference Call Script
Pertinent
Telephone Numbers
Presenter Dial In (U.S. Toll Free): 866.524.3159
Presenter International Dial in: +1.412.317.6759
Telestone Technologies Corporation (NASDAQ: TSTC)
Date: Friday,
August 13, 2010
Time: 9:00
am Eastern
Executives:
Han
Daqing, Chairman and CEO of Telestone
Ms.
Xiaoli Yu – CFO
Ms.
Liping Zhang – Board Secretary
John
Mattio – SVP, HC International
Operator
Good day
ladies and gentlemen and welcome to Telestone Technologies Corporation’s second
quarter 2010 earnings conference call. My name is (Operator Name) and I will be
your operator for today. At this time, all participants are in a listen only
mode. We will conduct a question-and-answer session after management’s
presentation, towards the end of this conference.
I would
now like to turn the presentation over to your host and presenter for today's
call, Mr. John Mattio from HC International, Investor Relations council for
Telestone. Please proceed John.
John
Mattio
Thank you
operator.
Good
morning everyone. Joining us today from China are Telestone’s CEO, Mr. Han
Daqing, the Company’s Chief Financial Officer, Ms. Xiaoli Yu, and Ms. Liping
Zhang, Board Secretary. I will
present to you shortly a review on the operational and financial results for the
company’s second quarter and six month results. After the
presentation, Chairman Han and Ms. Yu will then be available for your questions
during the Q&A session.
Before I
get started, I would like to remind our listeners that on this call management's
prepared remarks contain forward-looking statements which are subject to risks
and uncertainties, and management may make additional forward-looking statements
in response to your questions. Therefore, the Company claims the protection of
the Safe Harbor for forward-looking statements that is contained in the Private
Securities Litigation Reform Act of 1995. "Forward-looking statements" relating
to the business of Telestone Technologies Corporation and its subsidiary
companies 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, customer lists, 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”. Telestone Technologies Corporation is under no obligation to
update or alter its forward-looking statements whether as a result of new
information, future events or otherwise.
1
For those
of you unable to listen to the entire call at this time, an audio replay of this
call will be available for the next week. Information on how to access the
replay is available in the press release issued on August 12 and can also be
obtained from HC International upon request.
At this
time, I would like to introduce the Chairman and CEO, Mr. Han Daqing who would
first like to provide you with his thoughts on Telestone’s
performance.
Mr.
Han
“Thank
you, John. I would like to welcome our current and prospective
shareholders to this call and thank you for your interest in Telestone
Technologies. Based on what we have seen in aftermarket trading
yesterday in our Company’s stock, I would like to restate that we are 100%
confident we will meet our guided revenue target of $129.4 million and $22.9
million in net income by the end of the year. For those of you
who have been following us for some time, you are familiar that our Company
experiences strong seasonality by the end of the year when we book most of our
sales. Our sales teams have reported to us approximately $106 million
in back log estimates of projects we are confident to bill out in the
third and fourth quarter of this year, and, as we have focused on
higher-margin 3/G and WFDS sales this year, I am pleased to report that we have
met our gross margin targets of 42% for the quarter and six months. We are
equally confident the investments we made in marketing this quarter will pay off
in Q3 and Q4. Contrary to news of slowdown in the telecom space in
China, access network installations are peaking in demand and cell phone
subscribers grow daily in China. We believe we are uniquely
positioned to benefit from this ongoing growth as the total number of cell phone
subscribers in China approach 1 billion by 2011. We appreciate your support and
look forward to speaking to you again soon or hosting you at our facilities in
Beijing”
John
Thank you
Chairman Han. This is John Mattio
again. Before I begin, I would like to provide our prospective
investors and current investors joining us for the first time with an overview
of Telestone’s business.
2
Telestone
Technologies has been operating since 1997 when if first began network
installations of what are now called 1G and 2G local access networks for
cellular services. Telestone went public in 2004 and in 2005 began trading on
the NASDAQ. Telestone Technologies is a project Company that is
awarded ‘last mile’ local access network installation contracts from the "Big 3"
telecommunication companies in China. These companies are: 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 current 3/G and WFDS™ fiber
optic local access networks for carriers. A majority of the Company’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 service
revenues. To a lesser extent, the Company generates revenue from
equipment-only sales or services-only sales. There have been a number
of favorable trends in the industry as of late which lend itself to Telestone’s
proprietary network system, WFDS™. As cell
phone users increase, traditional booster antennae systems can not handle the
load of signals and thus local access networks must be installed in buildings to
provide sufficient signals strength. As major telecoms compete
for customers plus Beijing’s support for more telecom competition, certain
coverage areas once serviced by a single telecom must now open up their markets
to equal competition from all Chinese telecoms thus increasing the bandwidth
demands on systems. As a result, more buildings must install local
access networks. Lastly, Beijing is encouraging a convergence of all
three cellular signals in China and would also like to see other voice, data and
media services consolidate as part of its five year plan. Fiber
optics is one of the few systems that can support these drivers in the market
and Telestone is leading such installations with its wireless fiber optic
distribution system, know as W F D S.
I would
now like to detail to you the Company’s performance in the second quarter 2010
and the six months ended June 30th. First,
here are some highlights for the quarter.
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·
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Revenue
was $16.6 million, up 37.0% from 2nd
Quarter of 2009
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·
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Gross
profit was $7.5 million, up 49.8% from 2nd
Quarter of 2009 with gross profit margins of 45.1%, exceeding management’s
guided 42% gross profit margins
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·
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In
the second quarter, the Company increased sales and marketing efforts to
secure higher margin WFDS™ projects and installations which added to its
backlog of projects scheduled for completion and billing in the third and
fourth quarter of 2010.
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·
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Telestone’s
net income was $1.7 million, a reduction 12.8% from 2nd
Quarter of 2009 as a result of increased SG&A expense in the
quarter.
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·
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Earnings
per diluted share were $0.16 based on 10.5 million fully diluted
shares
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·
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Lastly,
on August 9th
Telestone announced its first US-based WFDS™ contract for a Houston-based
hospital on which was the first US installation for the Company after it
successful approval by the FCC in October of
2009.
|
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 revenues of $7.1 million were driven by the Company's
sales of 3G and WFDS™ local access network equipment used in installations.
Additionally, the Company recorded $9.6 million in service revenues for project
design and installations billed in the second quarter of 2010 compared to $5.0
million in the second quarter of 2009. This growth represented a 91.6%
increase. Revenues generated during the fiscal year ending
December 31 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
estimated revenues in the third quarter and approximately 50% of its estimated
revenues in the fourth quarter for of any given year.
In the
second quarter costs of operating revenues was $9.1 million. Costs of operating
revenue include;
First, costs
of materials used in OEM manufacturing of Telestone's 3G and WFDS™ product
lines
3
Second,
costs of hardware components the Company purchases from other
suppliers
And
lastly the costs for project management and 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’s target of 42% and was positively impacted by
higher-margin WFDS™ installations, which contributed gross margins of between
45-50%.
The
Company’ selling, general and administrative expenses or S G & A were $5.1
million, and accounted for 30.4% of total revenues, as compared to $2.3 million
or 19.2% of total revenues in 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™ systems for 3G networks
from the “Big 3” and also from building owners who also decide on the type of
network to be installed. The company invested in an aggressive
outreach and training program at all of its 30 branch offices to market the
benefits of fiber optic systems and WFDS™ as the optimal local access network
for cellular, voice, data and media integration in building
sites. This required an intense and focused effort on the part
of Telestone’s sales teams as they educated and empowered customers to see value
in WFDS systems. The company also invested in travel to local
government offices to obtain support from city or provincial authorities to help
promote WFDS™ installations in particular cities and provinces
throughout China. Telestone has witnessed growing interests in their
products after demonstrating the improved service quality and cost savings they
can provide customers with their state-of-the-art solution. The recent news
about Telestone’s WFDS™ system installation in the U.S. boosted such sales
efforts both in the U.S. and China and the company looks to gain significant
market share by capitalizing on our first-mover advantage.
The
Company’s 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 2009. As detailed earlier, operating income and operating
margins were affected by additional costs in SG&A incurred in the second
quarter of 2010 and the Company expects 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.
Now
onto a review of the first six months of 2010.
Total
revenue for the first six months of fiscal 2010 was $27.8 million and showed an
increase of 38.6% from $20.0 million in the same period of prior
year. Revenues from WFDS™ installations accounted for approximately
21.0% of revenues in the first half of the year. The Company
estimates this percentage will exceed 30% by year end. Of the
Company’s key customers, 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 the year \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 also exceeded guided gross profit margin expectation of 42% for the
year.
4
SG &
A expenses in the first half of fiscal year were $10.7 million, compared to $5.3
million in 2009. The increase was a result of additional sales and
marketing costs incurred mostly in the second quarter of 2010. Also,
during the first quarter of fiscal 2010, 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.
Telestone’s
Operating income in the first half of the year was $1.4 million, with operating
margin of 5.1%. Excluding the effects of the previously-mentioned
noncash charge of $2.6 million, operating income was $4.1 million, representing
an 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.
The
Company’s earnings per weighted average diluted share were $0.06 based on 10.5
million diluted shares, while adjusted earnings were $0.31 per share based on
the same share count.
Now
for an overview the Company’s balance sheet.
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. Its
working capital was $64.0 million, increased $3.2 million since 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. In
response to investor concerns about DSO’s, the Company has added a series of
directives to encourage timely collection of invoices to their sales managers
performance reviews in to keep the DSO’s of their project based business at 12
months which has been the company’s standard after embarking on its fast-growth
path. A potential contributor to decreasing DSO’s
may be Telestone expansion to export markets whereby it only sells its
components to installers and engineering companies, like the recently executed
contract with Quell Incorporated in a Houston – based
hospital. Since export sales are conducted on wire transfer or
letter of credit with 30-90 days terms, as this mix of revenues and DSO
aggregate with DSO’s of their project business, overall DSO’s should decrease
based on the mix of revenues for each segment.
5
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 which
the Company is pleased to report a 5.1% increase from $65.1 million
as of December 31, 2009.
With
that, I'd like to thank everyone participating in today’s call and for your
continued interest in Telestone.
For more
information on the Company we will gladly furnish you with our investor
relations packet which includes a PowerPoint presentation, company profile, and
company brochure. In addition, if you are new to the story and want to learn
more about our unique WFDS product we would be happy to send you a sales
brochure which details the attributes and functionality. Please feel free to
contact our investor relations company, HC International, for printed or
electronic information.
We will
now open the call to any questions you may have for the management team. Thank
you.
Q&A
1.
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How
much revenue comes from WFDS in your second
quarter?
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Answer:
It is 21% of the revenue in second quarter.
2.
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the
net equipment sales is year over year decrease, looking back to your last
4 quarters, you had over 50% at least, so what happened in your net sales
of equipment?
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Answer:
The first and second quarter are the tender season of the carriers, and they
make fewer equipment purchase compared to the second half of year when they
finished the tender. And in the first half year, the carriers still have the
equipment which they purchased last year to use.
3.
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What
is the split between equipment and service in the 2010 guidance of
revenue?
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Answer:
Normally, because we are project-based for the revenue, roughly, the equipment
sales and professional services sales are half and half.
4. If you
have half and half of revenue in the equipment and services, according to your
guidance and portion, you only did 20% of equipment revenue in the first half of
year, versus over 35% of equipment sales in 2007, 2008, 2009 in the first half
year, why there is such a downturn in 2010?
Answer:
normally in a project, the revenues from equipment and services are half and
half. But in some projects, the price of equipment is extremely low and we can
not make profit from that. Therefore, sometimes we give up such kind equipment’s
bidding from the carriers. And also in recent years, the margin of services
sales is growing and becoming higher than the margin of equipment sales, which
is the change of the business.
5.
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The
overall revenue of the first half year 2010 is 21% of the guidance, versus
28% in 2009 and 35% in 2008, so you have significant growth in the second
half of year in order to meet your guidance, where you see the growth, if
you think WFDS will grow significantly. Given WFDS has higher margin, do
you expect your margin will improve largely? Can we see that in the second
half year?
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6
Answer:
Yes. We can confirm that. Compared to the traditional technology, WFDS has
higher margin. Second quarter is the bidding season, we have taken most of
shares in the provincial level, and that is why we are confident to reach the
2010 guidance. Importantly, due to the success of trials we made on WFDS last
year, we have gained greater market shares from the carriers compared to the
last one or two years. .
6.
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So
you are confident that your gross margin will improve significantly in the
second half 2010?
|
Answer:
Yes. And the gross margin of WFDS is much higher than the traditional
technology.
7. What
is your backlog so far?
Answer:
That depends on our business process. First, we need to get shares from our
carriers in each province: we get projects and contact with building owners, and
we sign agreements with them on behalf of the carriers. And we will hand over
all the agreements to the carriers’ provincial branch and wait for the approval
and budget from their headquarters. When we get approval, we will start
engineering, and when we finish the project at the end of the year, the carriers
will do the inspection and acceptance, then we can book revenue and waiting for
the payment, which is the process.
8. What
is the dollar amount of projects are in your hand now?
Answer: I
have mentioned that in my speech, the backlog at this moment is at least 106
million.
9. How
soon do you think you can recognize that backlog?
Answer:
That is the process we need to follow as I mentioned above.
10. How
long the process will take?
Answer:
all our projects will be verified in Q3 and Q4 before the end of the year
2010.
11. Where
is your capital resource, which will support about 100 million revenue growth in
second half of 2010?
Answer:
Though we have a comparably long DSO, all the revenue will be collected in 12
months. Based on this, we get more credit from china banks, we can get
short-term loan once we need working capital. So this is not a big problem to
the company.
12. About
WFDS project, you signed a contract in the US. How much revenue you expect will
generate from the US market?
Answer:
It is hard to estimate at this moment. But we think in next 2 or 3 years, 1/3 of
the revenue will be generated from the US market and also from the South
American market.
13. Where
you are on the relation to with other international sales and sales
opportunities as the sort of relations you have in the US? Can you further flash
the detail on any relationships you’re building with companies in other
countries like the Quell relationship?
Answer:
Besides the relations we have in the US, we also set up relationships in South
America, like Brazil, Mexico and Columbia. We developed local partners and work
together with them, which is very efficient. In the next half year, we will set
up sales offices in Europe.
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14. What
is your DSO in Brazil and Columbia if it is equipment sales?
Answer:
There is no DSO in the equipment sales. Now we need to give them technical
support, and we believe we will gain more market shares in the
future.
15. Can
you please address the discount you may have to offer in your sales of equipment
to Quell and the related profit margins for those sales that compared to similar
sales on mainland China?
Answer: I
would like to tell you about the profit margin. In the US, the equipment-only
sales’ profit margin is about 50%. We are half price of the project competitors
in the US. In China, the margin of WFDS, both product sales and equipment sales
make the margin go well.
16. You
had significant SG&A cost related to the training for your sales agent for
WFDS in the second quarter; do you anticipate the same kind of expenses going
forward or fall significantly?
Answer:
At the beginning of our development of the market, the cost may be high. Once we
runs well, the sales cost will not be so high as that of the
beginning.
Closing
Remark
John
Mattio
On behalf
of the Telestone management team, we want to thank you for your interest and
participation in this call. Please visit our website at http://www.telestone.com We look
forward to updating you on our progress next quarter and seeing you at investor
conferences in China, the U.S. and hopefully at our facilities in the near
future.
8