China Information Security Technology, Inc. Announces Second Quarter 2010 Results

SHENZHEN, China, Aug. 5 — (PRNewswire) — China Information Security Technology, Inc. (Nasdaq: CPBY) ("China Information Security," or the "Company"), a leading total solutions provider of Geographic Information Systems (GIS), digital public security and hospital information systems in China, today announced its financial results for the second quarter ended June 30, 2010.

    Second Quarter 2010 Financial Highlights
    -- Revenues increased 30% YoY to $33.52 million
    -- Gross Margin expanded 250 basis points
    -- Operating Margin expanded 290 basis points
    -- Attributable Net Income increased 19.9% YoY to $9.35 million
    -- Non-GAAP Fully Diluted EPS was $0.19 vs. $0.17 a year ago
    -- Cash flow from operations reached $14.80 million
    -- New Record High Backlog of $52.27 million representing 50.7% YoY growth
    -- Reaffirms FY2010 Revenue and Adjusted Net Income Guidance

"We continued to effectively execute on our business strategy which resulted in another promising quarter," commented Mr. Jiang Huai Lin, Chairman and CEO. "New contracts signed in the second quarter reached $39.3 million, up 49% from a year ago and our backlog once again hit a new record high of $52.3 million, up 50.7% from a year ago."

"We believe that contract wins this quarter continue to demonstrate our ability to penetrate new markets nationally and expand in key cities outside Guangdong province. In Shanghai, we are helping the Public Security Bureau manage public security at the 41st World Expo which we believe positions us well to further expand into Eastern China. We are also winning new business by integrating different technologies in our portfolio to create innovative and sophisticated solutions. One specific example is our win of the intelligent traffic management system for the 16th Asian Games in Guangzhou, which delivers highly efficient solutions to improve the quality of our day-to-day lives. Meanwhile, we continue to collaborate with the State Grid Corporation of China on the smart grid project, which is currently in the planning stage."

"We believe that the future of our industry remains bright as the Chinese government continues to demonstrate a long-term commitment to investing in public security, public healthcare and the management of natural resources and disaster-relief."


For the three months ended June 30, 2010, revenue was $33.52 million, compared to $25.79 million for the three months ended June 30, 2009, representing an increase of $7.73 million, or 30%. During the current quarter, Huipu, which was acquired in October 2009, contributed $4.26 million to total revenues. Excluding the impact from Huipu's revenues, organic revenue growth was 13.5% as the Company continued to focus on profitability and the reduction of lower-margin businesses primarily in product and system integration categories.

Software sales increased by 40.7% to $22.41 million for the three months ended June 30, 2010, from $15.92 million for the three months ended June 30, 2009. Software sales constituted 66.9% of the total revenue, which increased from 61.7% during the same period in the prior year, reflecting the Company's continued commitment to the core competency in software. Excluding the impact of Huipu's sales, software sales were 76.6% of organic revenues.

Product sales increased by $3.68 million, or 97.2% for the three months ended June 30, 2010, as compared to $3.79 million in the same period of 2009. Product sales constituted 22.3% of total revenue during the current period as compared with 14.7% during the same period in the prior year. Product sales excluding Huipu's product sales declined by 22.01% from the same period in the prior year to 10.1% of organic revenues. This reflects the Company's focus on higher value-added product sales with the Huipu acquisition.

Sales of system integration services decreased by 37.4% for the three months ended June 30, 2010, as compared to the same period of 2009. As a percentage of revenue, it declined from 21.6% during the three months ended June 30, 2009 to 10.4% during the current quarter. Excluding the impact of Huipu, system integration was 11.9% of organic revenues. The steady decline in weight of system integration business, which carries lower margin, reflects the Company's strategy of growing businesses with higher profitability.

Other revenue decreased by 69.6%, from $0.51 million in the three months ended June 30, 2009 to $0.15 million in the same period of 2010. Other revenue mainly derived from maintenance services in the three months ended June 30, 2009, while in the same period of 2010, in addition to maintenance services, the Company also generated $0.11 million royalty income from Huipu's licensing of its HPC trademark to other manufacturers. The Company believes this was an effective way to monetize Huipu's valuable intellectual property.

Regarding segment breakdown, for the three months ended June 30, 2010, approximately $15.68 million of revenues were generated by the GIS segment, $13.96 million by the DIST segment and $3.88 million by the DHIS segment. This compared with $7.97 million generated by the GIS segment, $15.22 million by the DIST segment and $2.59 million by the DHIS segment for the same period in 2009. The DIST segment decreased by 8.3% compared with the same period of 2009, while the year-over-year growth ratios for the GIS and DHIS segments were 96.6% and 49.7%, respectively.

GIS accounted for 46.8% of the total revenue while DIST and DHIS represented 41.6% and 11.6% respectively. Excluding the impact of Huipu, each of the GIS, DIST and DHIS segment represented 46.3%, 40.4% and 13.3% of total revenue, respectively, as compared to 30.9%, 59.0% and 10.1% of the total revenue, respectively, for the three months ended June 30, 2009. For the first time, the GIS segment exceeded that of the DIST segment and became the Company's largest business segment in the second quarter of 2010. As the Company's technologies continue to evolve, it will be able to integrate more and more DIST functions with those of GIS to create brand new capabilities for customers. Such new offerings contributed to the GIS segment, instead of to DIST, which explains the negative growth rate in the DIST segment. The shifts in segment weights also ultimately reflect the growth momentum in the GIS and DHIS segments outpacing that of the DIST as a result of the Company's focus in the last few years on targeting areas with the highest barriers-to-entry and developing sustainable competitive advantages in the GIS and DHIS segments, in anticipation of accelerating market growth in the coming years. The Company believes it will be well positioned to capture the growth opportunities as this expectation materializes.

Gross Profit and Gross Margin

Gross profit was $16.80 million in 2Q10, an increase of 36.9%, or $4.53 million, from 2Q09. Gross margin was 50.1% in 2Q10, an increase of 2.5%, from 47.6% in the same period of 2009. Huipu yielded a gross margin of 18.5%. Excluding the impact of Huipu's gross margin, the gross margin of the Company's organic business was 54.7%.

The improvement in gross margin resulted from several factors. During the quarter, the Company cut down on lower-margin product sales while benefiting from Huipu's higher-margin product contribution. As a result, the gross margin of products improved by 157 basis points. During the quarter, the Company continued to reduce the weight of the system integration business which typically carries a lower margin. The gross margin for this segment during the quarter was as high as 83.63% primarily due to the progress of certain projects. Meanwhile, the Company continued to increase the weight of its software business, which carries a higher gross margin. However, the gross margin of its software business declined to 54.22% from 62.36% a year ago primarily due to the Company's outsourcing of portions of its software projects commending in the first quarter of 2010. The Company believes that by outsourcing some of the non-essential and labor-intensive portions of software projects, it will be able to focus resources on the higher value-added components of the software business. This practice should enable more effective revenue growth and save operating expenses, which, overtime, will be accretive to long-term shareholder value.

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