China Information Security Technology, Inc. Announces Record Second Quarter 2008 Results

Revenue Climbs 134.6% Year-Over-Year to $24.7 Million

SHENZHEN, China, Aug. 12 /Xinhua-PRNewswire-FirstCall/ -- China Information Security Technology, Inc., (NASDAQ: CPBY) ("China Information Security," "CIST" or the "Company"), a leading provider of Information Security and 3S (Geographic Information Systems - GIS, Global Positioning Systems - GPS and Remote Sensing - RS) services in China, today reported strong financial results for the second quarter ended June 30, 2008.

    Second Quarter 2008 Highlights
    On GAAP basis:
     -- Revenues increased to $24.7 million, from $5.4 million
     -- Gross profit rose to $11.1 million, from $4.8 million
     -- Operating income increased to $7.7 million, from $4.1 million
     -- Net income was $7.1 million, or $0.15 per basic and diluted share

    On a non-GAAP basis*:
     -- Revenues increased 134.6% year over year to $24.7 million, from
        $10.5 million
     -- Gross profit increased 103.6% to $11.1 million
     -- Operating income increased 99.7% to $8.3 million, with a 33.5%
        operating margin*
     -- Net income grew 67.9% to $7.7 million, or $0.17 per basic and diluted
        share*

        * Includes the consolidation of iASPEC and excludes Stock Based
          Compensation ("SBC") and Amortization of Intangible Assets. See
          Table 1 for a reconciliation of Net Income and EPS to exclude SBC
          and Amortization of Intangible Assets.

"We are pleased to announce record revenues in the second quarter of 2008, as product line extensions led to new contract wins and increased geographical presence in China," said Mr. Jiang Huai Lin, Chairman and CEO of the Company. "In addition, we achieved great improvement in our technological capabilities through the acquisition of two newly acquired patents and twelve new registered and copyrighted software products. At this point, we remain confident in meeting or exceeding our previously stated goals for the year 2008."

    During the quarter, the Company achieved the following milestones:

     -- Approval on May 21, 2008, to list its securities on The Nasdaq
        Global Select Market ("Nasdaq"). The common stock is now traded on
        Nasdaq under the symbol "CPBY"
     -- Successful expansion of its geographical presence to 20 provinces and
        provincial cities across China, including Guangdong, Inner Mongolia,
        Fujian, Shanxi, Beijing, Shanghai, Sichuan and Macao
     -- Signed new contracts in the second quarter with a combined value of
        $25.3 million, including a Police Geographic Information System
         ("PGIS") contract for Heyuan City, Guangdong Province, valued at
        $2.68 million, a PGIS contract for An'xi City, Fujian Province, valued
        at $1.55 million, a PGIS contract for the Shenzhen City Traffic Police
        Bureau in Guangdong Province, valued at $2.38 million, and the
        Intelligent Anti-Stowaway System contract for the Shenzhen General
        Station of Exit and Entry Frontier Inspection, valued at $2.3 million
     -- Significant improvement of its technological capabilities with two
        newly-acquired patents and twelve registered and copyrighted software
        products
     -- Successful passage of a Quality Assurance inspection by the Ministry
        of Public Security of the PRC for its Intelligent Border Control
        System, which is expected to enhance the Company's brand recognition
        and facilitate market expansion in the intelligent border control
        sector
     -- Achievement of an estimated $21.92 in backlog contracts, consisting
        of $15.34 million related to uncompleted contracts as of June 30,
        2008, and $6.58 million related to newly signed, but not yet
        implemented contracts

    Second Quarter 2008 Results

On a non-GAAP basis*:

Revenue in the second quarter increased to $24.7 million, up 134.6% from $10.5 million for the same period in 2007. This increase was primarily due to acquisitions of Information Security Software ("ISS"), Bocom Technology and Geo, product and geographical expansion, as well as the launch of several large-scale systems integration projects. During the quarter, the Company signed new contracts with over twenty provinces and provincial cities in China.

Gross profit in the second quarter of 2008 increased to $11.1 million, up 103.6% from $5.5 million for the same period in 2007. Gross margin for the second quarter of 2008 was 45.1% compared with 52.0% in the comparable period in 2007. This decline in gross margin was due to significantly higher costs for procured hardware and other subcontracting costs related to the implementation of several large-scale systems integration projects.

Administrative expenses increased to $2.3 million in the second quarter of 2008, from $0.6 million in the same period last year. The increase was mainly attributable to an increase in administrative staff and increased administrative costs such as salary, office operation expenses and legal and audit fees in connection with the expansion of the Company's operations during the 2008 period. In addition, $0.31 million of stock-based compensation was charged to administrative expenses in connection with the Company's 2007 Equity Incentive Plan. As a percentage of revenue, administrative expenses increased to 9.4% for the three months ended June 30, 2008, from 5.8% for the same period in 2007, which was generally in line with the increase in revenue.

Research and development expenses for the second quarter of 2008 increased to $0.5 million from $0.4 million for the same period of 2007. The increase in research and development expenses was mainly attributable to the consolidation of Geo.

Selling expenses for the quarter ended June 30, 2008 increased to $0.64 million, from $0.27 million and remained stable as a percentage of revenues.

Income from operations for the second quarter of 2008, increased to $8.3 million, or 99.7%, from $4.1 million for the same period in 2007.* Income from operations as a percentage of revenue decreased to 33.5% during the second quarter of 2008, from 39.4% for the same period in 2007. The decrease was due to higher costs for procured hardware and other subcontracting costs related to the implementation of several large-scale systems integration projects, and the increase in expenses due to expansion.

The Company's subsidiaries, Information Security Technology ("IST"), ISS and Bocom Technology, and its VIE, iASPEC are subject to EIT at a rate of 18% of assessable profits in 2008. Geo, iASPEC's newly acquired subsidiary, is subject to EIT at a rate of 15% of assessable profits as a High-Tech Enterprise. However, after offsetting accumulated losses from prior years, Geo had no assessable profit subject to EIT for the three months ended June 30, 2008. In addition, IST is a Foreign Investment Enterprise or FIE engaged in the advanced technology industry which entitles it to a two-year exemption from EIT followed by a 50% tax exemption for the next three years. Income tax expenses for the three months ended June 30, 2008 was $0.32 million.

Net income increased 67.9% to $7.7 million in the second quarter of 2008, or $0.17 per basic and diluted share, compared to $4.6 million during the same period of 2007, or $0.12 and $0.11 per basic and diluted share, respectively.*

     * Includes the consolidation of iASPEC and excludes Stock Based
       Compensation  ("SBC")  and  Amortization  of  Intangible  Assets.  See
              Table  1  for  a  reconciliation  of  Net  Income  and  EPS  to  exclude  SBC  and
              Amortization  of  Intangible  Assets.

        Six  Month  Financial  Results

        On  a  non-GAAP  basis*:
 


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