First Quarter 2010 Financial Highlights -- Revenues increased 68.9% YoY to $25.3 Million -- Attributable Net Income Increased 67.2% YoY to $6.3 million -- Fully Diluted EPS was $0.12 vs. $0.08 a year ago -- New Record High Backlog of $46.5 Million -- Raises FY10 Revenue and Adjusted Net Income Guidance
"Our first quarter results are highly encouraging as we continued to demonstrate successful execution of our strategy and made a number of milestone accomplishments," commented Mr. Jiang Huai Lin, Chairman and CEO of China Information Security Technology. "We signed new contracts with clients in 23 provinces and cities valued at $30.6 million during the quarter. The first quarter is typically the slowest season in terms of both revenues and contract volumes, but we were still able to successfully increase the total value of signed contracts by 65% from the first quarter of 2009 and hit a new record high for backlog of $46.53 million at the end of the quarter.
"We continue to strengthen our position in the industry by winning national contracts. Shortly after the quarter end, the State Grid Corporation of China ("SGCC") selected us as one of only two GIS platform software suppliers for the build-out of the nationwide Smart Grid in China. We believe that this win proved our high barrier-to-entry and our sustainable competitive advantages in the GIS industry, which in our observation, is on the cusp of taking off, as GIS can be used similarly in the managements of railway systems, land and real estate, water resources, as well as urban planning and emergency relief, etc. We also won one-third of the market share in the initial roll-out of China's National PGIS Standardization Project by signing contracts with 6 cities and provinces including Shanghai for the installation of our core police-use GIS platform. As one of the largest cities in China and an emerging global financial center, we expect that Shanghai will serve as an anchor city for our further expansion into Eastern China. We intend to secure future opportunities in the market by utilizing our strong R&D capabilities, great reputation and the ongoing support from the Chinese government for domestic GIS products.
"We are highly optimistic about the prospects for our industry. Our offerings address the fundamental human needs of health and security when China's massive urbanization turned such simple needs into luxuries. Our GIS products improve the efficiency in the use of natural resources and disaster relief while the world is experiencing heightened resource shortages and increasingly more frequent and more severe natural disasters. The Chinese government has demonstrated an unwavering long-term commitment to invest in public security, public healthcare and the management of natural resources as well as disaster-relief. We believe that we are strategically positioned to capture these opportunities by leveraging our standard setting position in the GIS sector along with our proven track record in delivering high quality information systems in the digital security and digital hospital areas. We are confident in our ability to deliver superior long-term shareholder value and we look forward to driving the growth of our Company."
Total revenues were $25.3 million in 1Q10, an increase of 68.9%, or $10.3 million over 1Q09. During the current quarter, Huipu, which was acquired in October 2009, contributed $4.97 million to revenues. Excluding the impact from Huipu, organic revenue growth was 35.8%. This organic growth rate reflected strong business momentum as well as weakness in the same period in the prior year as a result of the global financial crisis.
Software sales were $15.2 million in 1Q10, an increase of 68.4% from 1Q09. Software sales constituted 60.0% of total revenue, roughly in line with 60.2% during the same period in the prior year, reflecting the Company's continued commitment to its core competency in software. Excluding the impact of Huipu, software sales were 74.7% of organic revenues.
Sales of hardware products were $6.3 million in 1Q10, an increase of 125% from 1Q09. $4.3 million was contributed by Huipu in 1Q10. Excluding the contribution from Huipu, sales of hardware products decreased by 28.9% for the first quarter of 2010 from the same period in 2009 as the Company is focused on higher valued added product sales within Huipu.
Sales of system integration services decreased by 5.8% in 1Q10, as compared to the same period of 2009. Sales of system integration services as a percentage of revenue declined from 19.7% during the three months ended March 31, 2009 to 11.0% during the current quarter. Excluding the impact of Huipu, system integration was 13.7% of organic revenues. Such a decline was due to the timing of certain projects.
Other revenue increased to $1.0 million or 417.7% in 1Q10. Other revenue was mainly derived from maintenance services in the three months period ended March 31, 2009, while in the same period of 2010, in addition to maintenance services, the Company also generated $623,000 royalty income from Huipu by licensing other manufacturers to use the HPC trademark to monetize HPC's intellectual property.
DIST accounted for 47.8% of the total revenue while GIS and DHIS represented 42.0% and 10.2% respectively. Excluding the impact of Huipu, the segment weights were 47.3%, 40.1% and 12.6% respectively, compared to 50.2%, 39.1% and 10.7% of total revenue for the three months period ended March 31, 2009. The shifts in segment weights were due to the GIS and DHIS segments outpacing DIST in their growth momentum. This is a direct result of the Company's focus in the last few years on targeting at areas with the highest barriers-to-entry and developing sustainable competitive advantages in the GIS and DHIS segments, in anticipation of accelerating market growth in the coming years. As such anticipation starts to be realized, CIST believes it has been well positioned to capture growth opportunities and will be directing more resources to these two segments going forward.
Gross Profit and Gross Margin
Gross profit was $11.1 million in 1Q10, an increase of 48.6%, or $3.63 million, from 1Q09. Gross margin was 43.9% in 1Q10. Huipu yielded a gross margin of 28.9%, which exceeded the Company's original goal. Excluding the impact of Huipu, gross margin of organic business was 47.7%. The decrease in gross margin from the 50% level during the same period one year ago was primarily due to the decrease in gross profit margin from software sales and system integration, partially offset by an increase in the weight contributed from the software business relative to the organic business.
The decrease in gross profit margin in software sales resulted from outsourcing activities as the Company focused on the most critical software business activities. For the three-month period, the Company outsourced some non-essential and labor-intensive parts of software projects such as on-site installation for customers in order to stay focused on scalable core activities with the existing work force. Although the near-term impact of this strategy on our profitability was a decline in gross margin from 70.0% in the three months ended March 31, 2009 to 57.8% in the current period, the Company believes the focus on the highest value-added components in house can accelerate revenue growth in the long run and is accretive to long-term shareholder value. Also contributing to this decline was the fact that during the three months ended March 31, 2009, the Company benefited from some projects that yielded higher-than-average profitability.
The gross margin decline of system integration was due to the concurrence of several large projects during the current period, which generally offer lower profit margin than smaller ones.
Income from Operations
Income from operations was $6.6 million in 1Q10, an increase of 57.4%, or
$2.4 million in 1Q09. The operating margin decreased by 190 basis points from
27.8% in the first quarter of 2009 to 25.9% in 1Q10. The decrease in
operating margin was primarily due to the decrease in gross profit margin
during the current period, partially offset by an improvement in the operating