Telestone Technologies (NASDAQ:TSTC)

First-Quarter 2011 Highlights:

• Revenues were $17.1 million, an increase of 18.2% as compared to $14.5 million in the year-ago quarter
• Gross profit was $6.5 million, as compared to $6.6 million in the year-ago quarter
• Net income was $0.5 million, or $0.03 per diluted share; non-GAAP income was $0.6 million, or $0.05 per diluted share

"We posted solid revenue growth in the first quarter of 2012, which included one full quarter of revenues from Sichuan Ruideng Telecom Corporation that we acquired in November 2011," commented Mr. Daqing Han, Chairman and CEO of Telestone. "We were able to maintain profitability despite some lower-margin business and increased investment in our sales and marketing team. Thus far, 2012 is proving to be challenging year for the telecom-equipment industry, due to a slowdown in 3G investment and a slow start to investment in 4G. Although our business results will be difficult to forecast; we expect business conditions to remain challenging."

Business Outlook

For the full-year 2012, Telestone continues to expect revenues to increase to approximately $117 million.

"Despite a soft start to the year, we remain optimistic regarding continued growth in 2012. We also expect TIPS to begin to play a meaningful role this year. We will continue to invest in the development of innovative new products and services, while diversifying our geographic and customer mix. We continue to expect 2012 to be successful and significant year," concluded Mr. Han.

Fourth-Quarter 2011 Highlights:

• Revenues were $40.6 million, as compared to $60.8 million in the year-ago quarter
• Gross profit was $18.4 million, as compared to $26.9 million in the year-ago quarter
• Net income was $3.5 million, or $0.29 per diluted share; non-GAAP income was $3.8 million, or $0.30per diluted share
• Completed the main structure of Phase I of the Telestone Intelligent Premises System (TIPS) Industrial Park project, located in Gu'an County, Hebei province
• Acquired 100% of Sichuan Ruideng Telecom Corporation for approximately $2 million in cash and 1.8 million restricted Telestone shares

"We posted fourth-quarter results with solid sequential revenue and gross profit growth, as well as improved gross margin, although our fourth quarter faced a difficult year-on-year comparison," commented Mr. Daqing Han, Chairman and CEO of Telestone. "We are pleased to maintain a solid level of profitability in a challenging year for the telecom-equipment industry, due to a slowdown in 3G investment and a slow start to 4G investment. In 2011, we are proud that we have achieved a number of milestones that augur a promising 2012. Firstly, we continued to see solid momentum of Wireless Fiber-Optic Distribution System (WFDS) products, which has built a track record of proven applications in the international markets. Secondly, our newly launched proprietary TIPS platform continued to contribute to our top line. In addition, Phase I of our TIPS Industrial Park is complete, and we expect the facility to enter trial production in May 2012. Thirdly, we continue to see success in our efforts to diversify customer base, with sales to non-telecom-carrier customers growing to 4.1% of our total tales, compared to 0.5% a year ago. Finally, we acquired Sichuan Ruideng, which is an important strategic move in our business expansion strategy in the southwestern China market. Although visibility may still be a challenge for the next few quarters, we remain confident that we can continue to grow our business over the long term."

Business Outlook

For the full-year 2012, Telestone expects revenues to increase to approximately $117 million.

"Despite a lull in capital spending surrounding a transition in wireless technology from 3G to 4G, we remain optimistic regarding continued growth in 2012. We continue to expect the WFDS business will be our major growth driver, and we expect TIPS to begin to play a meaningful role in 2012. We will continue to invest in the development of innovative new products and services, while diversifying our geographic and customer mix. We expect that 2012 will be a rewarding year for Telestone and our industry," concluded Mr. Han.

BEIJING, Dec. 31, 2011 /PRNewswire-Asia-FirstCall/ -- Telestone Technologies Corporation (NASDAQ: TSTC) (the "Company"), a leading supplier of local access network solutions for communications networks in China, today updated its guidance for the business year ending December 31, 2011.

Telestone now expects revenues for the year ending December 31, 2011 to be 15% to 20% lower than in the 2010 fiscal year, or approximately $105.3 to $111.9 million, versus prior guidance of a 30% increase. The Company now expects net income within the range of $16.8 to $22.4 million, reflecting a margin of 16% to 22%, compared with prior guidance of approximately $27.5 million, which was based on 10% net-income growth.

Telestone's updated guidance reflects a change in investment direction among China telecom carriers, who are increasingly focusing their capital spending on next-generation technologies such as 4G wireless, and 2011 represents the last year of 3G deployment. This has delayed the 3G investment designated at the beginning of the year. Although the Company has won an increasing number of bids with the Big-3 carriers, delays in network construction have negatively affected its sales plan for WFDS products. This new guidance is also attributable to uncertainties surrounding auditing issues among the Big-3 carriers, which have complicated the process of doing business and extended payment terms with suppliers. These developments have substantially reduced the Company's visibility during the past few quarters and in the near term. Telestone plans to provide guidance for the 2012 fiscal year when visibility improves.

Third Quarter 2011 Results

First Quarter Results:

• Revenues increased 30.0% year-over-year to $14.5 million
• Gross profit increased 33.6% year-over-year to $6.6 million, with gross margin of 45.6%
• Operating income increased to $2.1 million, as compared to operating loss of $1.0 million in the first quarter of 2010
• Net income increased to $1.6 million, or $0.13 per diluted share, as compared to net loss of $1.1 million in the first quarter of 2010
• Non-GAAP income increased 40.8% year-over year to $2.1 million, or $0.17 per diluted share

"We are off to a good start in 2011 with solid growth in revenue and net income," stated Mr. Daqing Han, Chairman and Chief Executive Officer of Telestone. "We saw several positive developments in the first quarter of 2011, which is normally seasonally slow for the telecommunications-equipment industry and also included the Chinese New Year holiday. Our Wireless Fiber-Optic Distribution System (WFDS) technology based product and solutions continues to gain recognition in the market, demonstrated by the recent $10 million contract award for the Beijing-Shanghai high speed rail project. We continue to expect strong growth in 2011, while Telestone expands its focus on operations and collections to prepare for a stellar 2012."

For the full-year 2011, Telestone expects revenues to increase by about 30% to approximately $171 million. The Company expects full-year 2011 net income to increase by about 10% to approximately $27.5 million or $2.22 per diluted share. The relatively lower expected growth in net income is due to planned investment in expanding sales and marketing activities in order to achieve the Company's goals for international expansion and sales to non-telecom carrier customers, and this EPS figure also reflects a higher share count due to the November 2010 secondary offering.  Telestone continues to expect revenue from WFDS-based products to account for 40% of the company's total revenue in 2011 and also continues to expect revenue from international customers to account for 3% of total revenue in 2011.

In 2012, the company also expects revenues to double to approximately $342 million.

Fourth Quarter 2010 Highlights

• Revenue increased 84.5% year-over-year to $60.8 million
• WFDS^™ contributed $12.8 million, or approximately 21.1% of revenues
• Gross profit increased 126.9% year-over-year to $26.9 million, with gross margin of 44.3%
• Operating income rose 149.5% year-over-year to $16.0 million
• Operating margin increased to 26.3% from 19.5%
• GAAP net income increased 137.9% year-over-year to $12.3 million, or $1.10 per diluted share
• Non-GAAP income increased 184.8% year-over year to $14.8 million, or $1.33 per diluted share
• Raised $18.9 million in net proceeds through a public offering of 1,675,000 shares of the common stock, at a price of $12 per share, in November 2010

Full-Year 2010 Highlights

• Revenue increased 83.2% to $131.7 million
• WFDS™ contributed $30.2 million, or 22.9% of total revenues
• Gross profit increased 93.2% to $58.9 million with gross margin of 44.7%
• Operating income increased 98.0% to $31.2 million
• GAAP net income increased 99.0% to $25.0 million, or $2.33 per diluted share
• Non-GAAP net income increased 140.0% to $30.1 million, or $2.82 per diluted share

"We are pleased to report record fourth-quarter as well as full-year 2010 results with remarkable revenue and earnings per share growth," said Mr. Daqing Han, Chairman and Chief Executive Officer of Telestone. "During the course of 2010, our Wireless Fiber-Optic Distribution System (WFDS™) technology based system has received much market recognition and made a significant contribution to our Telestone's growth. The Houston hospital WFDS™ project also represented an important milestone for our international market-expansion strategy. With the recent award of the Beijing-Shanghai high speed railway project, we feel confident that our WFDS™ platform will remain a major element of Telestone's growth strategy," he continued.

"In addition, Telestone successfully expanded its footprint in the domestic market in 2010 with the opening of four new regional branches. We are also developing a new facility in Hebei province for manufacturing, R&D and training, which will improve our profitability even further and help us continue to develop innovative, industry-leading products," continued Mr. Han.

Business Outlook

"As a leading integrated equipment and engineering services supplier for 2G, 3G, and potentially, 4G-based systems in China, we maintain our positive view of the need to integrate telecom, TV and radio broadcasting and internet access networks during the next several years. Based on the rapid growth of our commercialized WFDS™ technology and applications in 2010, Telestone believes that the WFDS™ based solutions will receive even greater acceptance by China's telecom carriers in the future. We are on track to gradually deploy more customized WFDS™-focused products and network designs, which include WFDS™-UOINS (Unified Office Information Network System), WFDS™-UPCMS (Unified Premises Control & Management System), and WFDS™-UPINS (Unified Premises Information Network System), during the next two years.

"In 2011, we expect over 40% of revenues from the sales of WFDS™ products. We are also committed to significantly increase our sales to international customers in 2011. Our goal is to continue expanding our business in the U.S., and take advantage of other commercial opportunities in Europe, Southeast Asia, Africa, and Middle East. Our primary goal is to continue to expand our business and provide an attractive return for our shareholders," concluded Mr. Han.

GeoTeam Note:

Although 2011 EPS growth is expected to be negative, three out of the next 4 quarters are expected to grow at least around 20%. Account receivable standing will continue to be an issue.  The company did not issue any meaningful guidance, which could weigh on the stock.

Summary Financials

• Total revenues in the second quarter ended June 30, 2010 were $16.6 million, an increase of 37.0% from $12.1 millionin the same period of prior year. Equipment sales of $7.1 million were driven by the Company's sales of 3G and WFDS(TM) local access network equipment used in installations. Additionally, $9.6 million in service revenues for project design and installation costs were achieved in the second quarter of 2010 compared to that of $5.0 millionin the second quarter of 2009, representing a 91.6% increase. Revenues generated during the fiscal year 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 2010 estimated revenues in the third quarter and approximately 50% of its 2010 estimated revenues in the fourth quarter for the year ending on December 31, 2010.
  
• 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 $0.19in the same period of 2009.

"We recorded 37% growth during the quarter as we significantly increased our orders and prepared for the ramp in new 3G and WFDS(TM) installations for the second half of the year," began Han Daqing, CEO and Chairman of Telestone. "We have made a conscious decision to focus our efforts on higher value, high-margin WFDS(TM) projects and have concentrated our sales team on this Company-wide goal. This focus requires an investment to market the benefits and cost savings of WFDS(TM) fiber optic installations to local branch offices of the 'Big 3' and building owners as well. Because our equipment allows carriers to generate incremental revenues from new services and reduces the operating costs of running multiple systems, we believe our WFDS products offer a compelling return for carriers, building owners and consumers alike. Our sales teams based at our 30 branch offices continue to make good progress, having collectively secured a solid backlog of both 3G and WFDS(TM) contracts and installations with the majority to be realized during the third and fourth quarter of 2010. Thus, we remain confident in meeting our revenue guidance of $129.4 million and $22.9 million in net income for the year."

GeoTeam Note®:

TSTC's financial performance was clearly not up to investor expectations. This is a scenario we had brought up in our recent research notes on TSTC. On the bright side:

• It appears that the company invested funds in preparation for the remainder of the year.
  
• The company has still maintained guidance which implies that it will report EPS of about $1.85 for the last half of the 2010 year. TSTC reported EPS of $0.91 in the back half of 2009.

Based on the revenue Telestone expects to generate from its four new branches and updated business outlook, the Company is revising its 2010 Revenue Guidance from $118.0 million to $129.4 million, representing an 80.0% growth YOY. The Company expects to generate gross margins of at least 42.0%. Guidance is based on the following assumptions.

"We are pleased to have delivered significant growth in the first quarter of 2010," said Han Daqing, Chairman and CEO of Telestone. The first quarter is typically a time when we secure new contracts while billing out projects we finished in the previous year. During this first quarter, we saw an increase in sizeable orders for new projects using our WFDS(TM) solutions, notably for two major installations in Inner Mongolia and Sichuan. China Mobile, China Unicom and China Telecom, the "Big 3" carriers in China, continue to invest heavily in China's 3G network build-out and general telecom infrastructure as China's economy continues to grow. We believe the Big 3's focus on enhancing networks to support 3G and eventually 4G transmissions will continue to drive strong demand for our network services and WFDS(TM) solutions throughout 2010 and beyond, which is also supported by favorable government policies."

Telestone has provided 2010 Revenue Guidance of at least $108.0 million in revenues, 50% growth year over year.

Guidance is based on the following assumptions.

• the Company's performance in 2009, where our gross revenues increased over 100% from 2008 revenues,
• the favorable macroeconomic environment in China
• the Company's expectation that the integration of telecommunications, TV & radio broadcasting and internet access networks in China will begin implementation in 2010
• the Company's belief that it has advanced technology and production capabilities and strong R&D capability.

"We expect to significantly increase our income for the year 2010," stated Chairman Daqing Han. "We also anticipate that a higher percentage of systems installed by Telestone will be WFDS(TM) systems which command higher margins, and therefore, our annual gross margin will be at least same as or higher for 2010 than our annual gross margin for 2009, which is around 42%. With more than 900 million cell phone subscribers forecasted by 2013 in China, the requirement to upgrade networks to 3G creates a tremendous opportunity for the telecom providers and is our first priority. While we recognize China will be the principal growth driver for our business in the immediate future, we are also excited about growth opportunities in international markets," Han concluded.

Source: PR Newswire (March 31, 2010)

Guidance Report:

On July 10, 2008, Telestone projected an annual growth of net and gross profit of approximately 20% for 2008 as compared with 2007. At 2008 fiscal year end, the Company had not reached its projections in its guidance for 2008. Aside from the influence of Beijing's hosting of the 2008 Olympic Games in the middle of the year and the reorganization of operators in the end of the year, the failure to reach its projected profit was mainly due to the delay in execution of a large contract from Shandong Mobile.

''We expected large increases in the income for the year 2008, but due to the above factors, we did not reach our projected profits in our guidance. I, however, believe that our growth will increase in 2009. With the recent issuance of 3G licenses, we believe that China Mobile, China Telecom and China Unicom will invest approximately $41 billion in total for the construction of their own 3G networks. Telestone will benefit greatly from its advantages in technology and production. We are confident to reach our guidance for 2009.''

Source: PR Newswire (February 23, 2009)