Funtalk China Holdings (NASDAQ:FTLK)

Third Quarter Financial Results

• The Company reported consolidated net revenue of $300.2 million for 3Q FY2011, representing an 86.6% increase from the third fiscal quarter of 2010 ("3Q FY2010"). The Company currently generates revenues from two business segments, retail and wholesale distribution of mobile phones and related services and accessories.
• Retail revenue for 3Q FY2011 was $170.2 million, representing an 84.2% increase from 3Q FY2010. This growth in the retail segment was primarily driven by the increase in the number of retail subsidiaries, with a total of eleven retail subsidiaries covering 718 locations in 3Q FY2011 compared to seven retail subsidiaries covering 446 locations in 3Q FY2010. Newly acquired subsidiaries contributed approximately $14.3 million to the Company's retail segment revenue in 3Q FY2011.

• Income from operations increased by 35.5% to $22.1 million in 3Q FY2011 from $16.3 million in 3Q FY2010. Correspondingly, operating income margin, calculated based on income from operations as a percentage of net revenues, decreased to 7.4% in 3Q FY2011 from 10.1% in 3Q FY2010.

• Income tax expense was $5.9 million for 3Q FY2011 compared to a $4.6 million tax expense for 3Q FY2010. The effective tax rate was 31.5% for 3Q FY2011 compared to 30.8% in 3Q FY2010, as certain expenses were not tax deductible in 3Q FY2011.

• Net income attributable to the Company was $12.7 million, or 4.2% of total revenue, for 3Q FY2011, representing a 34.5% increase from $9.4 million, or 5.9% of total revenue for 3Q FY2010.

• 3Q FY2011 diluted earnings per share ("EPS") was $0.22 based on a diluted share count of 58.9 million shares compared to 3Q FY2010 diluted EPS of $0.19 based on a diluted share count of 50.4 million shares.

"We are very pleased with Funtalk's strong financial performance in the third quarter of fiscal year 2011 that clearly exceeded our previously stated guidance," commented Mr. Fei Dongping, chief executive officer of the Company. "Our total revenue grew more than 86% year-over-year, driven by the excellent growth in our retail business as we continued the strong momentum in our retail expansion. During the quarter, we added 56 locations to reach a total of 718 locations, from 662 locations in the previous quarter and only 446 locations a year ago. Riding on the strength of our retail business, our priorities remain focused on driving volume growth while steadily and sustainably improving operating profitability. Going forward, we will continue to leverage our strong competitive position to further expand self-built stores and co-branded stores with carriers, as we plan to add 450 to 550 net new locations per year."

Business Outlook for Fourth Quarter of FY2011

The Company expects its

• revenue for 4Q FY2011 to be in the range of $280 million to $300 million
• net income attributable to the Company to be in the range of $10.0 million to $12.0 million.

The Company expects a revenue split of approximately 55% for its retail business segment and 45% for its distribution business segment in 4Q FY2011. Gross margin and operating income margin are projected to be in the ranges of 15.0% to 16.0% and 6.5% to 7.5%, respectively.

Correspondingly, the Company expects FY2011

• revenue of approximately $1.1 billion
• net income attributable to the Company to be in the range of $42 million to $44 million,

as compared to its previous FY2011 outlook of $1.0 billion to $1.2 billion and $40 million to $45 million, respectively. Such projections are based on the Company's current views on operating and market conditions and are subject to change.

"Continuing on our consistent track record, Funtalk's third quarter FY2011 performance marks another quarter of sound execution of our business plans. We plan to continue with our core growth strategy to further deepen and strengthen our partnership with mobile carriers, and expand our multi-brand portfolio in our distribution business. At the same time, we remain nimble and will make both the strategic and necessary operational improvements in order to deliver superior financial results to our shareholders.  I'm confident that Funtalk is firmly on track to achieve another strong year in FY2011," concluded Mr. Fei.

"We are very pleased with our strong performance in the second quarter," commented Mr. Fei Dongping, chief executive officer of the Company.  "We once again exceeded our revenue guidance, as total revenue grew more than 25% year-over-year.  We also achieved the highest quarterly gross margin in our retail history, and as a result, our net income more than doubled year-over-year.  We continued the strong momentum in our retail business segment, and increased our retail network to 662 retail stores in 109 cities across 14 provinces and 3 municipalities.  Going forward, we will continue to leverage our strong competitive position to further expand self-built stores and co-branded stores with carriers, as we march towards our goal of 2,000 stores nationwide by the end of our fiscal year 2013."

Second Quarter Financial Results

• The Company reported consolidated net revenue of $260.4 million for 2Q FY2011, representing a 25.4% increase from the second fiscal quarter of 2010 ("2Q FY2010").  The Company currently generates revenues from two business segments, retail and wholesale distribution of mobile phones and related services and accessories.  

• Income from operations increased by 72.6% to $21.3 million in 2Q FY2011 from $12.4 million in 2Q FY2010. Correspondingly, operating income margin, calculated based on income from operations as a percentage of net revenues, increased to 8.2% in 2Q FY2011 from 6.0% in 2Q FY2010.

• Income tax expense was $4.8 million for 2Q FY2011 compared to a $2.9 million tax expense for 2Q FY2010. The effective tax rate was 32.0% for 2Q FY2011 compared to 31.3% in 2Q FY2010, as certain expenses were not tax deductible in 2Q FY2011.

• Net income attributable to the Company was $9.8 million, or 3.8% of total revenue, for 2Q FY2011, representing a 113.7% increase from $4.6 million, or 2.2% of total revenue for 2Q FY2010. 2Q FY2011 diluted earnings per share ("EPS") was $0.18 based on a diluted share count of 53.0 million shares compared to 2Q FY2010 diluted EPS of $0.09based on a diluted share count of 51.1 million shares.

Business Outlook for Third Quarter of FY2011

The Company expects its revenue for 3Q FY2011 to be in the range of $260 million to $280 million and its net income attributable to the Company to be in the range of $9.0 million to $11.0 million. The Company expects approximately a revenue split of approximately 55% for its retail business segment and approximately 45% for its distribution business segment in 3Q FY2011.  Gross margin and operating income margin are projected to be in the ranges of 15.0% to 16.0% and 6.5% to 7.5%, respectively.

For FY2011, the Company reaffirms its revenue outlook to be in the range of $1.0 billion to $1.2 billion and its net income attributable to the Company to be in the range of $40 million to $45 million. The Company expects a revenue split of approximately 55% for its retail business segment and approximately 45% for its distribution business segment in FY2011.  Gross margin and operating margin for the full fiscal year are projected to be in the range of 15.5% to 16.5% and 7.5% to 8.5%, respectively.  Such projections are based on the Company's current views on operating and market conditions and are subject to change.  

"Funtalk's second quarter FY2011 performance marks another quarter of sound execution of our business plans.  As part of our core growth strategy, we plan to further deepen and strengthen our partnership with mobile carriers, and expand our multi-brand portfolio in our distribution business.  We are convinced that the combination of Funtalk's strategic partnership with China's mobile carriers, established broad network, and superior operational expertise will continue to drive greater 3G mobile product sales," concluded Mr. Fei.  

First Quarter Financial Results:

• The Company reported consolidated net revenue of $253.0 million for 1Q FY2011, representing a 28.0% increase from the first fiscal quarter of 2010 ("1Q FY2010).
  
• Net income attributable to the Company was $9.6 million, or 3.8% of total revenue, for 1Q FY2011, representing a 132.9% increase from $4.1 million, or 2.1% of total revenue for 1Q FY2010.
  
• 1Q FY2011 diluted earnings per share ("EPS") was $0.19 based on a diluted share count of 51.1 million shares compared to 1Q FY2010 diluted EPS of $0.09 based on a diluted share count of 45.0 million shares. 

Business Outlook: 

For 2Q FY2011:

• Revenue to be in the range of $240 million to $260 million.
  
• Its net income attributable to the Company to be in the range of $8.0 million to $10.0 million.
  
• The Company expects approximately even revenue split between its retail and distribution business segments in 2Q FY2011.

Gross margin and operating income margin are projected to be in the ranges of 13.5% to 14.5% and 5.8% to 6.8%, respectively.

For FY2011, the Company reaffirms its:

• Revenue outlook to be in the range of $1.0 billion to $1.2 billion.
  
• Its net income attributable to the Company to be in the range of $40 million to $45 million.
  
• The Company expects a revenue split of approximately 57% for its retail business segment and approximately 43% for its distribution business segment in FY2011. 
  
• Gross margin and operating margin for the full fiscal year are projected to be in the range of 15.0% to 16.0% and 8.5% to 9.5%, respectively.  Such projections are based on the Company's current views on operating and market conditions and are subject to change.  
     
  "Funtalk China's Fiscal Year 2011 is off to a strong start. With our leading nationwide distribution network for mobile communications products and services, we have gained strong momentum to help increase our market share in China's fast growing retail mobile phone market. Our strategically located retail outlets serve as a significant barrier to entry for prospective competitors, while our large scale enables us to gain favorable terms from handset manufacturers and mobile carriers. Moving forward, we will continue to expand our retail network in China and further increase our retail presence in existing covered areas, both organically and through acquisitions. Given the favorable trends and our strong competitive position, we aim to further enhance our brand awareness and significantly broaden to our value-added services. With our increased cash position and strong balance sheet, we are very confident in our ability to execute on our goal of reaching 2,000 retail stores within the next three years," concluded Mr. Fei.  
  

The Company's principal shareholders, Arch Digital Holdings Limited ("Arch") and Capital Ally Investments Limited waived their rights to receive up to an additional 23,000,000 earn-out shares in order to minimize potential dilution to Funtalk's other existing shareholders. In July 2009, pursuant to a merger agreement among the Company, Pypo Digital Company Limited, Arch, Capital Ally and certain other parties, the Company effected a business combination where Pypo Digital's then shareholders, Arch and Capital Ally, transferred all the issued and outstanding shares of Pypo Digital to the Company in exchange for 45,000,000 ordinary shares and 3,400,000 Class B warrants of the Company and the rights to receive up to an additional 23,000,000 ordinary shares under an earn-out provision in the merger agreement, based on the adjusted net income of the Company in the fiscal years 2010, 2011 and 2012. On June 30, 2010, Arch and Capital Ally signed a waiver letter to waive their rights to receive the earn-out shares under the merger agreement.

Mr. Fei Dongping, Chief Executive Officer of the Company, commented, "We greatly appreciate Arch and Capital Ally for their cooperation. By waiving their rights to receive the earn-out shares, Arch and Capital Ally removed a potential source of dilution for our other existing shareholders. We believe this also demonstrates Arch's and Capital Ally's increased confidence in our company's long-term outlook and their long-term support for our company's business plan."

The GeoTeam feels that more of these types of moves need to occur for investors to feel comfortable with the Chinese space again. Still this event was carried out by shareholders. The company needs to show further its commitment to shareholders by repurchasing stock.