China Information Security Technology, Inc. Reports Third Quarter 2009 Financial Results

China Information Security Technology, Inc. Reports Third Quarter 2009
Financial Results
SHENZHEN, China, Nov. 9 /PRNewswire-Asia-FirstCall/ --

- 3Q09 Revenue Increases 32.7% YoY to $28.7 Million -
- 3Q09 Gross Margin Increases 110 basis points YoY to 52.7% -
- 3Q09 Operating Margin Increases 400 basis points YoY to 39.2% -
- 3Q09 Net Income from Continuing Operations Increases 26.6% YoY to $9.5
Million -
- Raises FY09 Revenue and Net Income Guidance -
- Issues FY10 Revenue and Net Income Guidance ¨C

China Information Security Technology, Inc., (Nasdaq: CPBY) ("China
Information Security," or the "Company"), a leading total solutions provider
of digital security, geographic information, and hospital information systems
in China, today reported its financial results for the third quarter ending
September 30, 2009.
Third quarter 2009
Third quarter 2009 revenue increased 32.7% to $28.7 million, from $21.6
million in third quarter of 2008. Software sales grew by $8.7 million, or
75.4% year-over-year, to $20.2 million, driven by the Company's continuing
efforts in promoting software sales in 2009. Reflecting the shifting of sales
activities toward software and reduced hardware sales to non-government
customers, revenues from hardware products and system integration services in
the third quarter of 2009 decreased by 22.5% year-over-year and 1.9% year-
over-year, respectively.
Beginning in the first quarter of 2009, the Company consolidated revenue
into three reporting segments: 1) Digital Information Security Technology
("DIST"), 2) Geographic Information Systems ("GIS") and 3) Digital Hospital
Information Systems ("DHIS"), to better reflect its operating structure.
DIST,
GIS, and DHIS revenues were $15.1 million, $9.8 million, and $3.8 million,
respectively, for the third quarter of 2009. During the quarter, the Company
signed new contracts totaling $30.1 million from customers in 14 provinces and
provincial cities. Of these contracts, 55% were won in the DIST sector, 30%
in the GIS sector, and 15% in the DHIS sector. At the end of third quarter
2009, the total value of the Company's backlog increased by $1.4 million
sequentially to $36.1 million, from $34.7 million in the previous quarter.
Gross profit increased $4.0 million to $15.1 million, from $11.2 million
for the same period last year. Third quarter 2009 gross margin of 52.7%
expanded 110 basis points year-over-year from 51.6%, benefiting from a product
mix change in favor of software.
Administrative expenses of $2.5 million in the third quarter of 2009
increased 10.5%, from $2.2 million during the same period of last year. As a
percentage of revenue, administrative expenses were 8.6% for the third quarter
of 2009, a reduction from 10.3% from the same period a year ago, as the
Company continued to gain leverage on operating costs. Research and
development expenses decreased to $0.69 million, compared with $0.75 million
in the prior year's third quarter. Selling expenses of $0.7 million increased
26.6% from the corresponding period in 2008. As a percentage of revenue,
selling expenses decreased to 2.5% for the third quarter, from 2.6% in the
same period of 2008.
Income from operations increased to $11.3 million, up 47.9% from $7.6
million a year ago. Accordingly, operating margins increased 400 basis points
to 39.2%, up from 35.2% for the same period in 2008, driven largely by an
improved product mix and gained leverage on operating expenses. Income tax
expense was $1.8 million, for an effective tax rate of approximately 16%.
Net income contributable to the Company increased $1.7 million, or 21.1%,
to $9.7 million for the three months ended September 30, 2009, from $8.0
million for the same period in 2008. Income from continuing operations
increased $2.0 million, or 26.6%, to $9.5 million, from $7.5 million for the
same period in 2008. As a percentage of revenues, net income contributable to
the Company decreased 330 basis points to 33.9%, from 37.2% for the same
period in 2008, primarily due to increased effective tax rate. Consequently,
earnings per diluted share in third quarter 2009 increased to $0.20, from
$0.17 in the third quarter of 2008. Excluding discontinued operations,
earnings per diluted share in the third quarter of 2008 was $0.16.
The Company's cash position at the end of September 30, 2009 decreased to
$14.5 million, compared to $19.4 million at the end of June 30, 2009. During
the quarter, accounts receivable increased by $7.1 million over the prior
quarter's level to $64.2 million. Meanwhile, during the first nine months of
2009, cash provided by operating activities was $8.3 million, more than
doubling cash provided by operating activities during the same period in 2008.
Working capital decreased by $1.9 million to $67.8 million, from $69.7 million
in the previous quarter. The Company has zero long-term debt.
Mr. Jiang Huai Lin, Chairman and CEO of the China Information Security,
commented, "We are very pleased with our strong financial performance during
the third quarter which we believe demonstrates the resiliency of our market
position and the strength of our brand and execution capabilities. Over the
past three months, we have seen accelerated momentum in our business pipeline,
culminating in our win of a record high value of new contracts this quarter
and resulting in record revenues and expanded backlog during the period.
Furthermore, we continued to enjoy strong repeat business, with 80% of revenue
coming from existing customers. Our national expansion goal is also on track,
where 40% of revenue during the quarter came from outside of Guangdong, with
the top non-Guangdong markets being Fujian, Beijing, Guangxi, Hainan and
Zhejiang. We now rank among the top 3 suppliers to the Shenzhen Municipal
Government and operate in 32 regions throughout China.
"Our technological leadership was further reaffirmed by our win of high-
level awards for innovation and technological breakthroughs in the surveying
and mapping industry this past quarter. We believe that our proven
capabilities in providing mission-critical security information systems, our
technical expertise in successfully implementing large-scale projects and our
competitive pricing continue to be winning criteria in customer contract
selection processes. As such, we remain confident with our business outlook
for the remainder of 2009 through the coming fiscal year."
Financial Outlook
For fiscal year 2009, the Company is raising its revenue projection to
$96-$100 million and pro-forma net income projection to the range of $28.5-
$30.0 million, excluding any non-cash expenses as a result of employee stock
awards and amortization of intangible assets associated with recent
acquisitions. This compares to the previous guidance of $94-98 million in
revenue, and $26.8-$28.0 million in pro-forma net income. Additionally, with
its higher visibility in the digital security, geographic information, and
hospital information market, the Company is issuing guidance for the full year
2010 with projected revenue to be $133-138 million and pro forma net income to
be $33.5-37.5 million.
Mr. Lin concluded, "Given our strong performance over the past two
quarters, we feel confident about our business outlook. We believe that we
have the strong foundation, adequate liquidity and sound business strategy to
continue benefiting from strong government support for our industry. We have
strategically established a portfolio of offerings in the public security, GIS
and digital hospital sectors, all of which are of top priority to the Chinese
government, particularly in light of recently announced projects to complete
the digital surveying and mapping of almost 300 Chinese cities and to set up
health archives for 900 million rural Chinese. We believe that our strong
industry reputation, successful execution record in Shenzhen City, and our
significant contract wins throughout the Guangdong province have validated our
current business strategy. Our goal is to replicate our success with our PGIS
programs in Guangdong province in other provinces and to become a national
standard setter in the digital security, geographic information, and hospital
information space. We are confident that as an emerging leader in each of our
business segments with distinct capabilities and first-mover advantages, we
are well positioned to grow with the market and capture a significant market
share."
About Non-GAAP Financial Measures
This press release contains non-GAAP financial measures for earnings that
exclude non-cash charges. China Information Security believes that these non-
GAAP financial measures are useful to investors because they exclude non-cash
charges that China Information Security's management excludes when it
internally evaluates the performance of the Company's business and makes
operating decisions, including internal budgeting, and performance
measurement,
because these measures provide a consistent method of comparison to historical
periods. Moreover, management believes these non-GAAP measures reflect the
essential operating activities of China Information Security. Accordingly,
management excludes the expense arising from certain non-cash charges when
making operational decisions. China Information Security believes that
providing the non-GAAP measures that management uses to its investors is
useful to investors for a number of reasons. The non-GAAP measures provide a
consistent basis for investors to understand China Information Security's
financial performance in comparison to historical periods. In addition, it
allows investors to evaluate China Information Security's performance using
the same methodology and information as that used by China Security's
management. Non-GAAP measures are subject to inherent limitations because they
do not include all of the expenses included under GAAP and because they
involve the exercise of judgment of which charges are excluded from the non-
GAAP financial measure. However, China Information Security's management
compensates for these limitations by providing the relevant disclosure of the
items excluded.
The following table provides the non-GAAP financial measure and the
related GAAP measure and provides a reconciliation of the non-GAAP measure to
the equivalent GAAP measure.

* Table 1
Q3 2009 Reconciliation of Operating, Net Income and EPS
to Exclude SBC and Amortization of Intangible Assets

3 Mos. Ended 3 Mos. Ended
30-Sep-09 30-Sep-08

Operating income 11,253,594 7,608,173
Stock based compensation ("SBC") -- 310,367
Amortization 439,840 299,378
Operating income (without SBC and
Amortization) 11,693,434 8,217,918

Net income contributable to the
Company 9,726,043 8,034,275
Stock based compensation ("SBC") -- 310,367
Amortization 439,840 299,378
Net income contributable to the
Company (without SBC and Amortization) 10,165,883 8,644,020

Weighted Average Number of Shares
Outstanding

Basic 47,536,883 46,066,067
Diluted 47,536,883 46,355,078

Earnings Per Share (without SBC and
Amortization)
Basic $0.21 $0.19
Diluted $0.21 $0.19

Conference Call
The Company will hold a conference call to discuss the financial results
at 8:00 a.m. ET on November 9, 2009. The Company invites you to join the call
by dialing 1-913-312-1276. A live webcast of the conference call will be
available at http://www.chinacpby.com . A replay of the call will be available
from November 9, 2009 to November 16, 2009. Listeners may access the replay
by dialing 1-719-457-0820, passcode: 7439029.
About China Information Security Technology, Inc.
China Information Security Technology, Inc., together with its
subsidiaries, is a total solution provider of digital security, geographic
information, and hospital information systems in the People's Republic of
China. Headquartered in Shenzhen, China, the Company's total solutions
include specialized software, hardware, systems integration, and related
services organized into three business segments - Digital Information Security
Technology ("DIST"), Geographic Information Systems ("GIS"), and Digital
Hospital Information System ("DHIS"). With its commitment to leading-edge
technology and quality assurance, the Company has won several government and
enterprise contracts throughout China. To learn more about the Company, please
visit its corporate website at http://www.chinacpby.com .
Safe Harbor Statement
This press release may contain certain 'forward-looking statements'
relating to the business of China Information Security Technology, Inc., and
its subsidiary companies. All statements, other than statements of historical
fact included herein are 'forward-looking statements' including statements
regarding: the general ability of the Company to achieve its commercial
objectives, including its ability to continue to successfully grow its
business and brand, continue its rate of contract wins and further strengthen
its competitive position; the ability of the Company to meet it's projected
financial outlook for the 2009 and 2010 fiscal year; the business strategy,
plans and objectives of the Company and its subsidiaries; and any other
statements of non-historical information. These forward-looking statements are
often identified by the use of forward-looking terminology such as 'believes,'
'expects' or similar expressions, involve known and unknown risks and
uncertainties. Although the Company believes that the expectations reflected
in these forward-looking statements are reasonable, they do involve
assumptions, risks and uncertainties, and these expectations may prove to be
incorrect. Investors should not place undue reliance on these forward-looking
statements, which speak only as of the date of this press release. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of a variety of factors,
including those discussed in the Company's periodic reports that are filed
with the Securities and Exchange Commission and available on its website
(http://www.sec.gov). All forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. Other than as required under the securities laws,
the Company does not assume a duty to update these forward-looking statements.
For more information, please contact:

Company Contact:
Iris Yan
China Information Security Technology, Inc.
Tel: +86-755-8370-4767
Email: ir@chinacpby.com
Web: http://www.chinacpby.com

Investor Relations Contact:
ICR:
Michael Tieu
Tel: +86-10-6599-7960
Email: michael.tieu@icrinc.com

CHINA INFORMATION SECURITY TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

September 30 December 31
2009 2008
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $14,464,105 $9,565,252
Short-term investments -- 5,835,838
Accounts receivable:
Billed, net of allowance for
doubtful accounts of $973,000
and $399,800, respectively 19,903,989 17,135,099
Unbilled 44,329,932 25,722,009
Bills receivable 47,333 4,481,340
Advances to suppliers 14,698,444 8,469,976
Amount due from related parties, net
of allowance for doubtful accounts
of $73,000 152,773 131,594
Inventories 8,474,861 7,107,537
Other receivables and prepaid
expenses 3,212,328 6,251,484
Deferred tax assets 358,894 --
TOTAL CURRENT ASSETS 105,642,659 84,700,129

Deposit for business acquisition 8,000,000 --
Deposit for software purchase 6,827,946 --
Long-term investments 2,910,834 3,078,405
Property and equipment, net 23,575,387 23,555,603
Intangible assets, net 12,310,355 13,115,151
Goodwill 23,777,671 24,018,894
TOTAL ASSETS $183,044,852 $148,468,182

LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term bank loans $11,460,765 $6,327,992
Accounts payable 16,535,342 10,707,728
Advances from customers 2,929,749 2,476,335
Amount due to related parties 576,401 486,136
Accrued payroll and benefits 1,432,503 1,319,386
Other payables and accrued expenses 1,951,755 2,553,019
Income tax payable 2,940,967 1,592,459
TOTAL CURRENT LIABILITIES 37,827,482 25,463,055

EQUITY
China Information Security
Technology, Inc. equity
Common stock, par $0.01; authorized
capital 200,000,000 shares; shares
issued and outstanding 2009:
48,803,211 and 48,797,211 shares,
respectively; 2008: 47,462,404 shares 222,529 209,121
Treasury stock, 6,000 shares, at cost (11,468) --
Additional paid-in capital 64,297,531 64,127,339
Reserve 4,964,597 4,964,597
Retained earnings 55,029,341 33,748,480
Accumulated other comprehensive
income 5,284,642 4,644,693
Total stockholders' equity of the
Company 129,787,172 107,694,230
Non-controlling interest 15,430,198 15,310,897
Total equity 145,217,370 123,005,127

TOTAL LIABILITIES AND EQUITY $183,044,852 $148,468,182

CHINA INFORMATION SECURITY TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)

Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
REVENUE
Revenue - Products $2,444,969 $3,156,801 $9,055,386 $15,401,636
Revenue - Software 20,178,136 11,500,973 45,111,089 24,004,363
Revenue - System
integration 5,927,117 6,044,848 14,454,193 16,853,547
Revenue - Other 130,459 918,518 828,116 1,470,661
TOTAL REVENUE 28,680,681 21,621,140 69,448,784 57,730,207

COST
Cost - Products 1,765,042 2,671,672 7,385,682 11,944,863
Cost - Software 7,365,142 2,219,517 16,059,719 4,443,653
Cost - System
integration 4,402,388 5,168,477 10,943,151 12,465,401
Cost - Other 28,112 409,646 190,220 685,223
TOTAL COST 13,560,684 10,469,312 34,578,772 29,539,140

GROSS PROFIT 15,119,997 11,151,828 34,870,012 28,191,067

Operating Expenses
Administrative expenses (2,462,872) (2,229,282) (6,983,595) (6,225,821)
Research and
development expenses (687,580) (748,853) (1,911,844) (1,978,326)
Selling expenses
(715,951) (565,520) (1,954,016) (1,572,729)
TOTAL Operating
Expenses (3,866,403) (3,543,655) (10,849,455) (9,776,876)

INCOME FROM OPERATIONS 11,253,594 7,608,173 24,020,557 18,414,191

OTHER INCOME (EXPENSE)
Subsidy income 158,520 194,662 674,379 264,342
Other income, net 2,654 70,633 167,174 112,052
Interest income 40,948 124,228 238,492 182,103
Interest expense (109,204) (75,121) (225,858) (83,008)
TOTAL OTHER INCOME 92,918 314,402 854,187 475,489

INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES 11,346,512 7,922,575 24,874,744 18,889,680

Income tax expense (1,797,945) (378,183) (3,478,141) (906,808)

INCOME FROM CONTINUING
OPERATIONS $9,548,567 $7,544,392 $21,396,603 $17,982,872

INCOME FROM DISCONTINUED
OPERATIONS (NET OF
INCOME TAXES OF $0) -- 557,420 -- 857,795

NET INCOME $9,548,567 $8,101,812 21,396,603 $18,840,667

Add/(Less): Net loss
(income) attributable
to the NCI 177,476 (67,537) (115,742) (177,069)

NET INCOME CONTRIBUTABLE
TO THE COMPANY 9,726,043 8,034,275 21,280,861 18,663,598

Weighted average number
of shares outstanding
Basic 47,536,883 46,066,067 47,531,327 45,766,974
Diluted 47,536,883 46,355,078 47,531,327 46,173,395

Earnings per share -
Basic and Diluted
Basic - From
continuing operations $0.20 $0.16 $0.45 $0.39
Basic - From
discontinued operations -- 0.01 -- 0.02
0.20 0.17 0.45 0.41

Diluted - From
continuing operations $0.20 $0.16 $0.45 $0.38
Diluted - From
discontinued operations -- 0.01 -- 0.02
0.20 0.17 0.45 0.40

CHINA INFORMATION SECURITY TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Unaudited)

Nine Months Ended
September 30,
2009 2008
OPERATING ACTIVITIES
Net income $21,396,603 $19,698,462
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for losses on accounts receivable 576,832 --
Depreciation 2,825,201 3,457,334
Amortization of intangible assets 1,305,550 811,553
Stock-based compensation 183,600 1,004,699
Gain (loss) on disposal of property and
equipment, net 33,966 (31,840)
Deferred income tax benefits (117,583) --
Impairment of long-term investment 184,397 --
Changes in operating assets and liabilities,
net of effects of business acquisitions
Increase in accounts receivable (17,231,581) (22,453,975)
Increase in advances to suppliers (6,177,155) --
Increase in other receivables and prepaid
expenses (1,315,827) (1,308,566)
Increase (decrease) in amount due from (to)
related parties 67,081 (53,268)
Increase in inventories (620,005) (6,131,919)
Increase in accounts payable 5,944,128 11,157,416
Increase (decrease) in advances from
customers 439,436 (2,329,126)
Decrease in other payables and accrued
expenses (507,220) (555,553)
Increase in income tax payable 1,338,726 712,348
Net cash provided by operating activities 8,326, 149 3,977,565

INVESTING ACTIVITIES
Deposit for business acquisition of Zhongtian -- (1,458,106)
Cash acquired in Geo acquisition -- 2,443,677
Cash acquired in Bocom acquisition -- 713,793
Consideration paid for acquisition of Geo -- (6,998,811)
Proceeds from sale of short-term
investments 5,863,600 --
Purchase of short-term investments -- (5,655,605)
Proceeds from sale of marketable securities -- 14,966,752
Refund of investment in former Joint
Venture 4,397,700 --
Proceeds from sales of property and
equipment 100,299 1,146,671
Dividends received -- 36,507
Purchases of property and equipment (3,682,753) (7,985,935)
Capitalized and purchased software
development costs (435,494) (1,751)
Deposit for software purchase (6,822,826) (4,751,591)
Deposit for business acquisition (8,000,000) --
Net cash used in investing activities (8,579,474) (7,544,399)

FINANCING ACTIVITIES
Borrowings under short-term loans 6,296,041 5,875,549
Purchase of treasury stock (11,468) --
Repayment of short-term loans (1,172,720) (1,086,312)
Net cash provided by financing activities 5,111,853 4,789,237

Effect of exchange rate changes on cash and
cash equivalents 40,325 596,353

NET INCREASE IN CASH AND CASH EQUIVALENTS 4,898,853 1,818,756
CASH AND CASH EQUIVALENTS, BEGINNING 9,565,252 19,755,182
CASH AND CASH EQUIVALENTS, ENDING $14,464,105 $21,573,938

Supplemental disclosure of cash flow
information:
Cash paid during the period
Income taxes $2,256,998 $195,271
Interest $209,639 $82,359

Revenues by segment for the three and nine months ended September 30, 2009
and 2008 are as follows:

Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2009 2008 2009 2008
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues(1)
DIST Segment $15,058,561 $13,299,204 $37,800,499 $33,840,228
GIS Segment 9,839,180 8,321,936 23,673,159 23,889,979
DHIS Segment 3,782,940 -- 7,975,126 --

$28,680,681 $21,621,140 $69,448,784 $57,730,207
Percentage to Revenue
DIST Segment 52.5% 61.5% 54.4% 58.6%
GIS Segment 34.3% 38.5% 34.1% 41.4%
DHIS Segment 13.2% 11.5%

(1) Revenues by operating segments exclude intercompany transactions.

SOURCE China Information Security Technology, Inc.

Iris Yan, China Information Security Technology, Inc., +86-755- 8370-4767,
ir@chinacpby.com; Investor Relations Contact: ICR: Michael Tieu,
+86-10-6599-7960, michael.tieu@icrinc.com