Zst Digital Networks (PINK:ZSTN)

Third Quarter 2011 Results

ZHENGZHOU, China, June 8, 2011 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. (NASDAQ: ZSTN) ("ZST" or the "Company"), a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and provider of GPS tracking devices and support services for transport-related enterprises in China, has signed a Letter of Intent with EarthSearch Communications International, Inc. ("EarthSearch"), a subsidiary of East Coast Diversified Corporation (OTC.BB: ECDC) as the basis for further discussion regarding the terms and conditions that may apply in a formal agreement to be executed between both parties in the future.

Under any such formal agreement, ZST Digital would be granted Chinese distribution and marketing rights to EarthSearch's Logiboxx product, a proprietary technology for integrated wireless communication between GPS and RFID, and ZST would provide technical and administrative support for the product in China.

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "While our discussions with EarthSearch are still in a preliminary phase, we are interested in exploring the potential synergies between their Logiboxx integrated GPS and RFID solution and our own GPS fleet management technology. We continue to be on the lookout for partners with whom ZST can work together to achieve our long-term expansion strategy and create meaningful value for our shareholders. We feel that EarthSearch may be just such a partner, and we look forward to exploring possible cooperation with them in the future."

ZHENGZHOU, China, May 23, 2011 /PRNewswire-Asia-FirstCall/ --  ZST Digital Networks, Inc. (NASDAQ: ZSTN) ("ZST" or the "Company"), a major developer, manufacturer and supplier of digital and optical network equipment to cable system operators and provider of GPS tracking devices and support services for transport-related enterprises in China, today announced that several PRC regulatory bodies, including the Ministry of Transport, Ministry of Public Security, the State Administration of Work Safety and the Ministry of Industry and Information Technology, have issued new regulations relating to supervision of road transport vehicles in China.    

The new regulations aim to improve safety conditions for drivers employed by road transport enterprises, strengthen supervision of commercial road transport vehicles, and reduce traffic accidents.  As part of the new regulations, relevant commercial transport vehicles, including tour buses, minibuses and vehicles for the transport of hazardous materials, will be required to install and utilize GPS tracking and monitoring systems before December 31, 2011.  The regulations indicate that transport enterprises must install GPS systems that meet the relevant government requirements, and that the GPS systems must be linked to the national commercial vehicles network and control system. The installation of a GPS system will be required for all new commercial vehicles that go into operation from August 1, 2011 in order for those vehicles to receive a road transport permit.  Vehicles that have already received permits but that do not as of yet operate a GPS tracking and monitoring device will be encouraged to have GPS systems installed and linked to the national network and control system.  

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "We believe the new regulations announced by the government will encourage the long-term development of the commercial GPS market in China, and create further opportunity for our growing commercial GPS business segment. Given our focus on commercial road transport enterprises, and the comprehensive capabilities of our GPS tracking and monitoring systems and support services, we believe we stand to benefit directly from the implementation of these new regulations.  We will work closely with the relevant government bodies in Henan province and with our commercial GPS customers as the regulations go into effect to best position ZST Digital for the next phase of growth in the commercial GPS market in China."  

First Quarter Results:

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "We are pleased to report another strong top- and bottom-line performance in what is typically our slowest quarter of the year.  Our results extend our track record of consistent financial and operational execution, and demonstrate the strength of our strategy.  Our results for the quarter were driven by broad-based demand across our product segments, as we continue to benefit from positive macroeconomic trends and continued government support for the development of our end markets.  Sales revenue from our IPTV, GPS and cable TV network equipment segments accounted for approximately 39%, 28% and 33% of total net revenues, respectively.  In addition, GPS related service revenue increased over 300% year-over-year to $2.5 million, highlighting the rapid growth of this high margin segment.  

• Gross profit for the first quarter of 2011 was US$8.3 million, representing a 100% year-over-year increase
• Net income for the first quarter of 2011 was US$5.2 million, a year-over-year increase of 166% from US$2.0 million in the first quarter of 2010. Net margin was 15.5% for the first quarter of 2011 up from 11.6% in the first quarter of 2010.
• Diluted net income per share was US$0.45 in the first quarter 2011, compared to US$0.17 for the first quarter of 2010, based on weighted-average common shares outstanding of 11,628,328 and 11,650,442, respectively.

Full Year 2011 Outlook – For the full year 2011, the Company reiterates its estimates that revenues will range between US$160 million and US$175 million, and net income will range between US$28 million and US$30 million. This represents the Company's current and preliminary view, which is subject to change.    

Chairman's Letter

April 29, 2011

Dear Shareholders,

As I indicated in my letter to you on April 22, we intend to provide honest, factual information to our investors in a timely fashion. As such, I am writing to answer some of your recent questions regarding our operations and financial disclosure.

Differences Between SAIC and SEC Reports:

A number of you have asked why it is that our Chinese State Administration of Industry and Commerce (SAIC) and SEC reports do not match, and the answer is that the SAIC filings are a formality, for the purposes of business license renewal with the government, and are not audited. It is very common for Chinese companies to have differences between these two sets of financials and we would encourage our investors to focus on our audited SEC filings. Short-sellers, who profit from a decline in our stock price, often point to these differences as a way to undercut the credibility of a particular company, when in fact the real focus should be on audited, SEC filings. U.S. companies have one set of financials: audited SEC filings; Chinese companies have various other filings for a myriad of purposes, but the SEC filings remain the true measure of financial performance. Our SEC filings are audited by BDO China Li Xin D Hua CPA Co., Ltd., a BDO Member Firm, a very highly regarded firm, which continues to stand by our audited financials.

For more information on the inherent differences in the SAIC, State Administration and Taxation (SAT), and SEC filings, please refer to Roth Capital Partners' July 12, 2010 research note, titled "Comparing PRC Filings and SEC Filings – A Primer", which gives an overview of the reasons why the PRC filings often do not correspond to the SEC filings.

In an effort to give our shareholders an additional level of comfort, ZST Digital is voluntarily reviewing its 2008 and 2009 SAIC filings to determine if these filings can be amended so that they more closely track the SEC filings. We will provide you with an update when possible.

Purchase of Office Space

Like all fast-growing companies, we recently purchased additional office space, and we are pleased to answer your questions regarding these recent purchases. We were fortunate to be able to secure all the needed space in one building, which is the most efficient solution to our need for additional space; and in addition, we are fortunate to have secured both additional spaces at a cost below the average purchase price for comparable space on a per square meter basis. We purchased the 27th – 29th floors at an average price of 5,300 RMB per square meter (zoned for mixed commercial or residential development) in March 2010, with a subsequent purchase of the 3rd – 4th floors in December 2010 at an average price of 18,000 RMB per square meter (zoned for commercial use-only). Naturally, the commercial space on lower floors is more desirable and therefore commands a higher price as compared to the mixed-use upper level floors.

Some of you have also asked how we were able to purchase the property before the developers had obtained a sales license. Based on our knowledge of the property owners and their previous track record in real estate, we were confident that the license would be granted. Furthermore, through the structuring of a subscription agreement, which committed both buyer and seller to the transaction prior to the seller receiving a sales license, we were able to secure a more favorable per square meter price.

Please find below a summary of our research on prices per square meter in the

surrounding area. We have included contact information for each property in an effort to be as transparent as possible; please feel free to contact the property managers directly if you would like to confirm the data we have included herein or simply visit the follow website www.soufun.com,.

Comparable Real Estate:

Clarification Regarding Customer Base

Just as in any state, there are numerous government agencies and market opportunities, and we would like to clarify what our focus is within the Henan province. As far as we know, VCOM is leasing China Unicom's fiber optic network to develop the IPTV set-top box market in Henan province. VCOM's main customers are the Party development departments within the local governments, with the goal of providing a comprehensive educational system for party members. ZST's customers are local government departments, such as the Radio and Television Bureau; cable TV stations; and cable TV networks. The local governments in Yijan, Huaxian, and Kaifeng, for example, are some of our main customers for the set-top box division. Essentially, we serve a very different customer base as compared to VCOM.

Regarding our market opportunity with the Road Transportation Department of Shangqui City, we reiterate that the total number of commercial vehicles that will potentially use our technology is 60,000.

With regard to a specific customer, Henan Wanli, we have received some inquiries asking us to confirm whether or not this entity is a customer. To clarify, the Henan Wanli Group is comprised of numerous subsidiaries, one of which is Henan Wanli Auto Trade Co. We understand that with such a large number of subsidiaries it can be confusing, but we are hereby confirming that our customer is the Henan Wanli Auto Trade Co.

Some of you have asked what ZST Digital plans to do in response to the short-seller allegations against us. We are in the process of hiring an independent legal counsel to advise us on our rights, and continue to evaluate various legal options with respect to such baseless statements. We are focused on delivering operational and financial excellence for our shareholders, and we will not be distracted by unsubstantiated allegations made in an effort to financially profit from a decline in our stock price.

We are hopeful that the above answers effectively address your questions, and we will continue to communicate openly with our shareholders on an ongoing basis. We thank you for the support you have shown for ZST, and are looking forward to delivering value to you as a shareholder, as well as to our loyal customers in China.

Sincerely,

Fourth Quarter Highlights:

• Total revenue was US$46.0 million, an increase of 51% compared to the fourth quarter of 2009.
• Gross profit for the fourth quarter 2010 was US$12.4 million, an increase of 113% compared to the fourth quarter 2009.  Gross profit margin for the fourth quarter 2010 was 27%, compared to 19% for the fourth quarter of 2009.
• Operating income for the fourth quarter 2010 was US$11.0 million, an increase of 161% compared to the fourth quarter of 2009.
• Net income for the fourth quarter 2010 was US$8.5 million, an increase of 176% compared to the fourth quarter of 2009.
• Net income margin for the fourth quarter of 2010 was 18.5%, compared to 10.1% for the fourth quarter of 2009.
• Non-GAAP EPS of $0.73 vs. $0.28 the year before.

For the full year 2011, the Company estimates that revenues will range between US$160 million and US$175 million, and net income will range between US$28 million and US$30 million. This represents the Company's current and preliminary view, which is subject to change.  

Mr. Zhong Bo, Chairman and Chief Executive Officer of ZST, commented, "I am pleased to report a strong set of results exceeding our guidance for the fourth quarter and full year.  Our results were supported by continued growth across our three main product lines, IPTV set-top boxes, commercial GPS products and services and cable TV network equipment"

Third quarter 2010

• Revenue for the third quarter 2010 was US$38.5 million, representing an increase of 34.6% from US$28.6 million in the third quarter 2009.  

• Gross profit for the third quarter 2010 was US$10.0 million, representing a 108.6% year-over-year increase. Gross profit margin for the third quarter 2010 was 26.0%, up from 16.8% in the third quarter 2009.  

• Income from operations was US$8.8 millionin the third quarter of 2010, an increase of 98.3% compared to operating income of US$4.5 millionin the third quarter of 2009.

• Net income for the third quarter of 2010 was US$6.4 million, a year-over-year increase of 94.7% from US$3.3 millionin the third quarter of 2009.  Net margin was 16.6% for the third quarter of 2010, compared to 11.5% in the third quarter of 2009.

• Diluted net income per share was US$0.55in the third quarter of 2010, compared to US$0.39for the third quarter of 2009.

Fourth Quarter and Full Year 2010 Outlook –

• Revenue for the fourth quarter of 2010 will range between US$35 million and US$41 million.
• Net income for the fourth quarter of 2010 will range between US$5.5 million and US$6.5 million.  

• For the full year 2010, the Company estimates that revenues will range between US$125 million and US$130 million
• Net income will now range between US$20 million and US$21 million, up from the previously announced guidance of US$17 million to US$19 million.

ZST Digital Networks, Inc. announced that its Board of Directors has authorized the Company to repurchase outstanding shares of the Company's common stock in an amount not to exceed $1 millionin open market purchases, with block trades being permitted, from time to time in the discretion of the Company's management and as market conditions allow.

Mr. Bo Zhong, Chairman and Chief Executive Officer of ZST, commented, "The Board's authorization of the share repurchase program reflects our confidence in the favorable growth outlook for ZST. As we enter the second half of 2010, the demand for our products and services remains robust, supported by the continued expansion of our end markets. In addition, our strong second quarter 2010 results and the rapid development of our commercial GPS products give us confidence in the long-term growth prospects of our business. As such, we believe that current share price levels do not fully reflect the fundamental strength of our business and outlook. We remain committed to maximizing long-term shareholder value, and believe that our stable financial position and healthy balance sheet will allow us to execute a share repurchase program while continuing to invest in our business."

Second Quarter 2010 Financial Highlights: (On the way to conquering one of the road blocks we had mentioned)

•  Total revenue for the second quarter of 2010 was US$33.0 million, an increase of 39.6% compared to the second quarter of 2009.
• Gross profit for the second quarter of 2010 was US$8.2 million, an increase of 130.8% compared to the second quarter of 2009. Gross profit margin for the second quarter of 2010 was 25.0% compared to 15.1% for the second quarter of 2009.
• Operating income for the second quarter of 2010 was US$7.2 million, an increase of 111.6% compared to the second quarter of 2009.
• Net income for the second quarter of 2010 was US$5.2 million, an increase of 103.1% compared to the second quarter of 2009.
• EPS of $0.45 vs. 0.30
• Net income margin for the second quarter of 2010 was 15.7% compared to 10.8% for the second quarter of 2009.

Based on the current estimates, the Company approximates:

• Revenue for the third quarter of 2010 will range between US$34.0 million and US$37.0 million.
• Net income for the third quarter of 2010 will range between US$5.5 million and US$6.0 million.

The company has updated it guidance for the full year 2010 from what was previously announced on May 14, 2010 as a result of continuing strong demand for its products and services. The Company now estimates:

• Revenues will range betweenUS$125 million and US$130 million
• Net income will range between US$17 million and US$19 million.

The Company had previously expected that its revenues would range between US$115 million and US$125 million, and net income would range between US$13 million and US$15 million. This represents the Company's current and preliminary view, which is subject to change.

The GeoTeam® is still awaiting for the release of the the quarter's SEC filing for information on liquidity needs.

Mr. Bo Zhong, Chairman and Chief Executive Officer of ZST, commented, "I am pleased to report healthy results exceeding our guidance in what is typically the seasonally lowest quarter of the year. Our results were underpinned by a substantial increase in sales of our high margin commercial GPS tracking products and services with the previously announced signing of a major contract at the quarter end. As a result, revenue from our GPS segment accounted for approximately 16% of our total revenues at the quarter end and we expect this percentage to increase in the coming quarters. We are very pleased with the rapid growth of this newly launched product segment and believe we are well positioned to continue to penetrate the rapidly expanding commercial transport market in Henan.

We continue to experience healthy demand for our IPTV set-top boxes, supported by the government backed initiatives to increase digital cable penetration in Henan Province. As this initiative gathers momentum, we have seen a dramatic increase in order size for our IPTV products. This is clearly a positive trend in terms of the overall growth of the market, and as the leading IPTV provider in the Province, we stand to benefit from these policies over the long-term. In order to increase sales of our IPTV products outside of the larger cities in Henan Province, we introduced a Standard Definition IPTV product in the first quarter at a lower price point to complement our High Definition IPTV set-top box. While this has impacted our average selling price, it has also allowed us to tap into a large and expanding market opportunity, and we expect to see continued unit growth on a full year basis. We will continue to capitalize on these favorable trends by executing our strategy to increase sales in the IPTV set-top box market, expand our products and services, especially within the GPS market, and continue to build our brand and technology platform."

John Chen, Chief Financial Officer of ZST, commented, "We are pleased to report revenue and net income for the quarter ahead of our guidance, supported by the continued growth of our GPS sales and services. In addition, we delivered positive operating cash flow during the quarter, further strengthening our balance sheet. We believe the growing demand for our commercial GPS products and services will continue to make 2010 a transformative year for ZST Digital."

Second Quarter 2010 Outlook -

• Revenue:  Between US$28.0 million and US$31.0 million.
• Net income for the second quarter 2010 will range between US$3.0 million and US$3.5 million.

For the full year 2010, the Company reiterates its guidance-

• Revenues will between US$115 million and US$125 million
• Net income will range between US$13 million and US$15 million.

This represents the Company's current and preliminary view, which is subject to change.

John Chen, Chief Financial Officer of ZST, commented, "Our 2009 financial results reflect the continued growth in our core IPTV market, our primary revenue driver for the fourth quarter and full year 2009. As a newly public company, we experienced an expected increase in G&A expenses during the fourth quarter. However, we will continue to focus on maintaining effective cost control measures to enhance profitability. In addition, we believe there will be an overall improvement in both the gross and net margin in the fiscal year 2010 as we ramp up sales of our commercial line of GPS products and services. With strong demand in our core IPTV market and a growing opportunity in GPS, we believe we are well positioned to deliver healthy financial and operational gains in the coming year."

Based on the current estimates, the Company approximates that:

• Revenue for the first quarter 2010 will range between $12.0 million and $15.0 million.
• Net income for the first quarter 2010 will range between $1.4 million and $1.6 million.
• Full year 2010 revenues will range between $115.0 million and $125.0 million,
• Full year 2010 net income will range between $13.0 million and $15.0 million.

This represents the Company's current and preliminary view, which is subject to change.