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Telestone Technologies Corporation Announces Third-Quarter 2012 Results

   Telestone Technologies Corporation Announces Third-Quarter 2012 Results

PR Newswire

BEIJING, Nov.19, 2012

BEIJING, Nov.19, 2012 /PRNewswire-FirstCall/ -- Telestone Technologies
Corporation (NASDAQ: TSTC) ("Telestone" or the "Company"), a leading developer
and provider of telecommunications local-access networks in China, today
announced financial results for the third quarter ended September 30, 2012.

Third-Quarter 2012 Highlights:

  oRevenues were $17.4 million, a decrease of 41.2%, as compared to $29.6
    million in the year-ago quarter
  oGross profit was $6.8 million, as compared to $12.9 million in the
    year-ago quarter
  oNet loss was $13.1 million, or $0.92 per diluted share. Non-GAAP net
    income, which excluded stock-based compensation and allowance for doubtful
    accounts, was $1.3 million, or $0.09 per diluted share

Third-Quarter 2012 Results

Revenues in the third quarter of 2012 were $17.4 million, a 41.2% decrease
from $29.6 million in the year-ago quarter. The year-over-year decrease in
revenue was primarily attributable to a slow start to 4G network construction,
the maturity of 3G deployment, intensified competition, and the Company's
strategic moderation of growth in certain cities with longer accounts
receivable collection periods.

Equipment sales decreased 48.5% to $5.9 million from $11.4 million in the
year-ago quarter. Sales of professional services declined 36.7% to $11.5
million, as compared to $18.2 million in the year-ago quarter. Equipment sales
declined by more than sales of professional services due to market share
changes in a more competitive equipment market.

Sales to non-telecom operators and overseas customers amounted to
approximately $3.4 million in the third quarter, or 19.4% of total revenue.
Sales of WFDS-enabled products were $5.9 million, accounting for 33.8% of
sales in the quarter, representing a decrease of 44.4% from $10.6 million, or
35.7% of sales in the year-ago quarter. The significant decrease in WFDS sales
was primarily due to slow progress of the Integration of Networks initiative
of China's State Council, as well as slower-than-expected business development
in the U.S., as U.S. carriers are cautious about ordering equipment from
Chinese companies following a government report questioning the security of
telecommunications equipment produced by large Chinese manufacturers.

In the third quarter, revenue from the "Big-3" telecom carriers - China
Mobile, China Unicom, and China Telecom - comprised 80.6% of total quarterly
revenue, as compared to 97.4% in the year-ago quarter.

Gross profit in the third quarter was $6.8 million, as compared to $12.9
million in the year-ago quarter. The gross margin decreased to 39.2% from
43.5% in the year-ago quarter, as traditional lower-margin products, including
Sichuan Ruideng's engineering integration services, still contributed a large
percentage of the Company's revenues.

Total operating expenses were $20.0 million, an increase of 225.0% from $6.2
million in the year-ago quarter. Sales and marketing expense was $2.8 million,
with a decrease of 22.5% from $3.6 million in the year-ago quarter. Research
and development expense stayed roughly flat at $0.5 million, or 2.8% of
revenues for the quarter. However, general and administrative expenses were
$16.6 million, as compared to $2.0 million in the year-ago quarter. The
substantial increase in general and administrative expenses was primarily due
to a $14.2 million allowance for doubtful accounts.

The operating loss was $13.2 million, as compared to operating income of $6.7
million in the year-ago quarter.

The net loss was $13.1 million, as compared to net income of $5.2 million in
the year-ago quarter. Diluted loss per share in the third quarter of 2012 was
$0.92, as compared to diluted earnings per share of $0.42 in the year-ago
quarter. Non-GAAP net loss, which excludes $0.2 million of non-cash stock
compensation expense and $14.2 million allowance for doubtful accounts, was
$1.3 million, as compared to non-GAAP net income of $6.1 million in the
year-ago quarter. The non-GAAP loss per diluted share was $0.09, versus
non-GAAP earnings per diluted share of $0.50 in the year-ago quarter.

Nine-Month Results

Revenue for the nine months ended September 30, 2012 was $52.4 million, a
23.5% decrease as compared to $68.4 million in the same period of 2011. Gross
profit decreased 33.6% to $20.0 million from $30.1 million in the year-ago
period. Operating loss was $13.3 million, compared to operating income of
$14.3 million in the year-ago period. Net loss was $13.9 million, or $0.98
per diluted share for the nine months ended September 30, 2012, compared to
net income of $11.4 million, or $0.92 per diluted share in the year-ago
period. Non-GAAP net income, which excludes $0.5 million of non-cash stock
compensation expense and $16.1 million of allowance for doubtful accounts, was
$2.7 million, or $0.19 per diluted share, compared to non-GAAP net income of
$13.2 million, or $1.07 per diluted share in the year-ago period. Weighted
average diluted shares outstanding increased to 14.1 million shares from 12.3
million shares in the first nine months of 2011.

Financial Condition

As of September 30, 2012, Telestone had $9.3 million in cash and cash
equivalents, as compared to $18.9 million on December 31, 2011. Inventory was
$10.2 million on September 30, 2012, as compared to $6.8 million at the end of
2011. Working capital was $112.2 million as of September 30, 2012, versus
$126.7 million at the end of 2011. The Company had $11.6 million in short-term
debt, as well as $52.2 million in accounts payable at the end of third quarter
of 2012. Shareholders' equity, including $1.5 million of non-controlling
interests, totaled $130.2 million at the end the second quarter of 2012, as
compared to $142.8 million at the end of 2011. Cash used in operating
activities was $6.1 million in the first nine months of 2012, as compared to
$17.4 million of cash used in operating activities in the year-ago period.

As of September 30, 2012, Telestone's accounts receivable were $243.9 million,
versus $251.5 million at the end of 2011. The accounts receivable turnover
period (DSOs) for the quarter ended September 30 was 1,232 days. During the
third quarter, Telestone collected $18.5 million in accounts receivable.

Business Outlook

For the full-year 2012, Telestone now expects revenues of approximately $
71-79 million, as compared to its previous estimate of approximately $117
million.

"While we are disappointed in reporting a decline in sales and a loss in the
second quarter, the loss was largely due to an allowance for doubtful
accounts. This year, we have deliberately moderated our top-line growth in
order to improve collections so that we can position Telestone for a return to
growth and a renewed focus on our U-DAS (WFDS) and TIPS technologies next
year. Our updated guidance reflects the slow start of the carriers'
large-scale 4G network construction in China and some unexpected headwinds in
the US, and therefore we have adjusted our business-development strategies
there to focus on large orders from U.S. carriers. The Company is currently
successfully navigating a technology cycle, as investment in certain wireless
technologies wanes and new technologies such as TIPS start to draw customer
interest," commented Mr. Daqing Han, Telestone's Chairman and CEO.

"While we are disappointed in reporting a decline in sales and a loss in the
second quarter, the loss was largely due to an allowance for doubtful
accounts. This year, we have deliberately moderated our top-line growth in
order to improve collections so that we can position Telestone for a return to
growth and a renewed focus on our U-DAS (WFDS) and TIPS technologies next
year. Our updated guidance reflects the slow start of the carriers'
large-scale 4G network construction in China and some unexpected headwinds in
the US, and therefore we have adjusted our business-development strategies
there to focus on large orders from U.S. carriers. We are currently soliciting
bids for projects in Houston and Dallas, TX, as well as in Mexico and Chile
and we believe these initiatives will improve orders in the near future,"
commented Mr. Daqing Han, Telestone's Chairman and CEO.

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 and allowance for doubtful
accounts 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 and
allowance for doubtful accounts 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 Monday, November 19, 2012 at 8:00
a.m. Eastern Standard Time to discuss its financial results for the third
quarter ended September 30, 2012.

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 10021565.

A replay will be available for seven days starting on Monday, November 19,
2012, at 9:00 a.m. Eastern Standard Time and can be accessed by dialing (877)
344-7529. International callers should dial +1 (412) 317-0088. When prompted,
enter conference pass code 10021565.

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

Condensed Consolidated Balance Sheets


                                                 As of         As of
                                                 September30,  December31,
                                                 2012           2011
ASSETS                                           US$'000        US$'000
                                                 (Unaudited)
Current assets:
Cash and cash equivalents                        9,324          18,850
Accounts receivable, net of allowance            243,913        251,460
Due from related parties                         1,540          1,534
Inventories, net of allowance                    10,151         6,755
Prepayments                                      1,964          2,351
Other current assets                             4,510          2,797
Total current assets                             271,402        283,747
Goodwill                                         4,268          4,268
Property, plant and equipment, net               11,252         9,264
Lease prepayment                                 2,540          2,571
                                                 18,060         16,103
Total assets                                     289,462        299,850
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank loans                            11,606         14,941
Accounts payable – Trade                         52,231         46,450
Service cost payable                             39,589         35,254
Customer deposits for sales of equipment         2,515          2,684
Due to related parties                           1,838          1,831
Income tax payable                               19,042         18,695
Accrued expenses and other accrued liabilities   32,393         37,229
Total current liabilities                        159,214        157,084
Commitments and contingencies
Stockholders' equity:
Preferred stock, US$0.001 par value, 10,000,000
shares                                           -              -
authorized, no shares issued
Common stock and paid-in-capital, US$0.001 par
value:

Authorized – 100,000,000 shares as of September
30, 2012
  and December 31, 2011
Issued and outstanding – 12,333,264 shares as
of September 30,                                 12             12
 2012 and December 31, 2011,
respectively
Additional paid-in capital                       49,580         50,148
Dedicated reserves                               6,871          6,871
Other comprehensive income                       12,812         12,329
Retained earnings                                59,513         73,406
Total Telestone Technologies Corporation         128,788        142,766
stockholder's equity
Non-controlling interests                        1,460          -
Total equity                                     130,248        142,766
Total liabilities and stockholders' equity       289,462        299,850







Telestone Technologies Corporation

Condensed Consolidated Statements of Operations and Other Comprehensive Income


                                                                Three months ended        Nine months ended
                                                                September 30,             September 30,
                                                                2012         2011         2012         2011
                                                                US$'000      US$'000      US$'000      US$'000
                                                                (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)
Operating revenues:
 Net sales of equipment                                      5,889        11,443       15,373       27,269
 Service income                                              11,508       18,167       36,993       41,150
 Total operating revenues                                    17,397       29,610       52,366       68,419
Cost of operating revenues:
 Cost of net sales                                           3,466        6,475        9,128        15,611
 Cost of service                                             7,106        10,256       23,253       22,697
 Total cost of operating revenues                            10,572       16,731       32,381       38,308
Gross profit                                                    6,825        12,879       19,985       30,111
Operating expenses:
Sales and marketing                                             2,754        3,552        9,403        8,709
General and administrative                                      16,616       1,988        21,744       5,353
Research and development                                        483          510          1,513        1,378
Depreciation and amortization                                   190          118          583          340
Total operating expenses                                        20,043       6,168        33,243       15,780
Operating (loss)/income                                         (13,218)     6,711        (13,258)     14,331
Interest expense                                                (328)        (394)        (858)        (730)
Other income, net                                               425          108          709          432
(Loss)/Income before income taxes                               (13,121)     6,425        (13,407)     14,033
Incometaxes 73           (1,182)      (464)        (2,647)
Net (loss)/income                                               (13,048)     5,243        (13,871)     11,386
Net income attributable to non-controlling interests            (11)         -            (23)         -
Net (loss)/income attributable to
 Telestone Technologies Corporation                          (13,059)     5,243        (13,894)     11,386
 common stockholders
Other comprehensive income
Foreign currency translation adjustment                         (261)        804          483          2,715
Total comprehensive (loss)/income
 attributable to Telestone                                   (13,320)     6,047        (13,411)     14,101
 Technologies Corporation common
 stockholders
(Loss)/Earnings per share:
Weighted average number of common
 stock outstanding
Basic                                                           14,133,264   12,333,264   14,133,264   12,333,264
Effect of dilutive warrants and stock options                   -            4,947        -            10,448
Diluted                                                         14,133,264   12,338,211   14,133,264   12,343,712
                                                                US$          US$          US$          US$
Net (loss)/income per share of
 common stock
Basic                                                           (0.92)       0.43         (0.98)       0.92
Diluted                                                         (0.92)       0.42         (0.98)       0.92







Telestone Technologies Corporation

Condensed Consolidated Statements of Cash Flows


                                               Nine months ended September 30,
                                               2012              2011
                                               US$'000           US$'000
                                               (Unaudited)       (Unaudited)
Cash flows from operating activities
Net (loss)/income                              (13,871)          11,386
Adjustments to reconcile net income to net
cash used in operating activities:
 Depreciation and amortization               583               340
Loss on disposal of property, plant and        4                 3
equipment
Provision for slow-moving and obsolete         428               -
inventories
Provision for doubtful debt                    16,089            411
Stock-based compensation                       475               1,356
Changes in assets and liabilities:
 Accounts receivable                         (7,535)           (25,182)
 Inventories                                 (3,797)           (3,070)
 Prepayments                                 395               93
 Other current assets                        (1,700)           (2,643)
 Accounts payable                            5,594             284
Customer deposits for sales of equipment       (180)             189
Due to related parties                         -                 (1,916)
 Income tax payable                          272               2,451
 Service cost payable, accrued expenses and  (2,839)           (1,141)
other accrued liabilities
Net cash used in operating activities          (6,082)           (17,439)
Cash flows from investing activities
Proceeds from disposal of property, plant and  8                 -
equipment
Purchase of property, plant and equipment      (459)             (2,461)
Net cash used in investing activities          (451)             (2,461)
Cash flows from financing activities
Capital injection by non-controlling interests 395               -
Repayment of short-term bank loans             (8,842)           (7,029)
Short-term bank loans raised                   5,448             10,044
Net cash (used in) from financing activities   (2,999)           3,015
Net decrease in cash and cash equivalents      (9,532)           (16,885)
Cash and cash equivalents, beginning of the    18,850            31,020
period
Effect on exchange rate changes                6                 183
Cash and cash equivalents, end of the period   9,324             14,318
Supplemental disclosure of cash flow
information
Interest received                              65                30
Interest paid                                  (722)             (525)
Tax paid                                       (191)             (194)

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
                                                                                     Ended            Six Months Ended
                                                                                                      March  30,
                                                                                     June 30,
                                                                                     2012      2011   2012      2011
NetIncome ($13,059) $5,243 ($13,411) $14,101
Add back: Stock-based compensation                                                   159       452    475       1,356
Allowance for doubtful accounts                                                      14,219    411    16,089    411
Non-GAAP Net Income                                                                  1,319     6,106  3,153     15,868
Non-GAAP Diluted EPS                                                                 $0.09     $0.50  $0.22     $1.29





SOURCE Telestone Technologies Corporation

Website: http://www.telestone.com/english/index.asp
Contact: Company Contact - At Telestone Technologies Corporation, Ms. Jun Man,
Manager of the Office of the Board of Directors, or +86-10-6860-8335 x1104, or
manjun-z@telestone.com; or Investor Relations Contact - At CCG Investor
Relations, Mr. John Harmon, CFA, Sr. Acct. Manager, +86-10-8573-1014, or
john.harmon@ccgir.com, for TSTC