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Telestone Technologies Corp. (NASDAQ:TSTC)

Q3 2012 Earnings Call

November 19, 2012 8:00 am ET

Executives

John Harmon – Investor Relations, Senior Account Manager, CCG Asia

Jun Man – Manager, Office of the Board of Directors

Operator

Good day, and welcome to the Telestone Technologies Corporation Announces Third Quarter 2012 Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operations Instructions) Please note that this event is being recorded.

And I would now like to turn the conference over to John Harmon, CCG Investor Relations. Please go ahead.

John Harmon

Thank you. Good morning, and good evening to everyone in China. Welcome to Telestone Technologies’ third quarter 2012 conference call. With us today Telestone Technologies Chairman and CEO, Mr. Han Daqing; Chief Financial Officer, Mr. Xiaoli Yu, and Ms. Jun Man, Manager of the Office of the Board of Directors.

Before I turn the call over to Ms. Man, I would like to remind our listeners that management’s remarks in this call contain certain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions.

Therefore the Company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, due to such risks such as, but not limited to, changes in the Company’s products and sales and marketing strategy, targets of revenues, net income, sales of WFDS products, international sales, accounts receivable and DSOs, and other information detailed from time to time in the Company’s filings and future filings with the United States Securities and Exchange Commission. Although the Company believes that the expectation on such quarterly income statements are reasonable, there is no assurance, of such expectations will prove to be correct.

In addition, any projections as to the Company’s future performance represent management’s estimates as of today, Monday, November 19, 2012. Telestone Technologies assumes no obligation to update these projections in the future as market conditions change.

In this conference call, we will discuss adjusted non-GAAP financial measures. These adjusted financial measures, which are used as measures of the Company’s performance, should be considered in addition to, not as a substitute for, measures of the Company’s financial performance prepared in accordance with the United States Generally Accepted Accounting Principles or GAAP. The Company’s adjusted financial measures may be defined differently than similar terms used by other companies. Accordingly, care should be exercised in understanding how the Company defines its adjusted financial measures.

Reconciliations of the Company’s adjusted measures to the nearest GAAP measures are set forth in the section titled "Reconciliation of GAAP to Non-GAAP Results" in the earnings press release issued this morning.

For those of you unable to listen to the entire call at this time, today’s call will also be webcast and archive will be available for one day. Information on how to access the webcast is available in the press release issued this morning.

And now it’s my pleasure to turn the call over to Ms. Jun Man, Secretary of Telestone’s Board of Directors, who’ll read the remarks for Telestone’s Chairman and CEO Mr. Han.

After that, I will read Telestone’s financial commentary. Ms. Man?

Jun Man

Thank you, John. Welcome everyone and thank you for joining us. While we are disappointed in reporting a decline in sales and a loss in the third quarter, the loss was largely due to an allowance for doubtful accounts. This year, we have deliberately moderated our top line growth in order to improve collections, so that we can position Telestone for a return to growth and a renewed focus on U-DAS and TIPS technologies next year.

Telestone is currently successfully navigating about a technology cycle, as investment in certain wireless technologies wanes and new technologies such as TIPS start to draw, our customer interest. With China 4G deployment and unstoppable force, we believe Telestone is well positioned to benefit from this trend. The following are the key points in Telestone business performance in the third quarter of 2012.

Revenues were $17.4 million, a decrease of 41.2%, as compared to $29.6 million in the year-ago quarter. Gross profit was $6.8 million, as compared to $12.9 million in the year-ago quarter Net loss was $13.1 million, or $0.92 per diluted share. Non-GAAP net income, which excluded stock-based compensation and allowance for the doubtful accounts, which was $1.3 million, or $0.09 per diluted share.

With that, I will now turn the call to John Harmon at CCG for a review of financials in more detail.

John Harmon

Thank you. Revenues in the third quarter of 2012 were $17.4 million, a 41.2% decrease from $29.6 million in the year-ago quarter. The year-over-year decrease in revenue was primarily attributable to a slow start to 4G network construction, the maturity of 3G deployment, intensified competition, and the Company’s strategic moderation of growth in certain cities with longer accounts receivable collection periods.

Equipment sales decreased 48.5% to $5.9 million from $11.4 million in the year-ago quarter. Sales of professional services declined 36.7% to $11.5 million, as compared to $18.2 million in the year-ago quarter. Equipment sales declined by greater percentage in sales of professional services due to market share changes in a more competitive equipment market.

Sales to non-telecom operators and overseas customers amounted to approximately $2.9 million in the third quarter, or 16.4% of total revenue. Sales of WFDS-enabled products were $5.9 million, accounting for 33.8% of sales in the quarter, representing a decrease of 48.3% from $10.6 million, or 35.7% of sales in the year-ago quarter.

The significant decrease in WFDS sales was primarily due to the slow progress of the Integration of Networks initiative of China’s State Council, as well as slower-than-expected business development in the U.S., as carriers are cautious about ordering equipment from Chinese companies following a government reported questioning the security of telecommunications equipment produced by the Chinese manufacturers, sales of TIPS product was $2.5 million.

In the third quarter, revenue from the Big-3 telecom carriers, while the China Mobile, China Unicom, and China Telecom comprised 80.6% of total quarterly revenue as compared to 97.4% in the year-ago quarter.

Gross profit in the third quarter was $6.8 million, as compared to $12.9 million in the year-ago quarter. The gross margin decreased to 39.2% from 43.5% in the year-ago quarter, as traditional lower-margin products, including Sichuan Ruideng’s engineering integration services, still contributed a large percentage of the Company’s revenues.

Total operating expenses were $20.0 million, as compared to $6.2 million in the year-ago quarter. Sales and marketing expense was $2.8 million, a decrease of 22.5% from $3.6 million in the year-ago quarter. Research and development expense stayed roughly flat at $0.5 million or 2.8% of revenues for the quarter. However, general and administrative expenses were $16.6 million, as compared to $2.0 million in the year-ago quarter. The substantial increase in general and administrative expenses was primarily due to a $14.2 million allowance for doubtful accounts.

The operating loss was $13.2 million, as compared to operating income of $6.7 million in the year-ago quarter. The net loss was $13.1 million, as compared to net income of $5.2 million in the year-ago quarter. Diluted loss per share in the third quarter of 2012 was $0.92, as compared to diluted earnings per share of $0.42 in the year-ago quarter.

Non-GAAP net loss, which excludes $0.2 million of non-cash stock compensation expense and $14.2 million allowance for doubtful accounts, was $1.3 million, as compared to non-GAAP net income of $6.1 million in the year-ago quarter. The non-GAAP loss per diluted share was $0.09 versus non-GAAP earnings per diluted share of $0.50 in the year-ago quarter.

Next I’ll discuss the nine months results. Revenue for the nine months ended September 30, 2012 was $52.4 million, a 23.5% decrease from $68.4 million in the same period of 2011. Gross profit decreased 33.6% to $20.0 million from $30.1 million in the year-ago period.

Operating loss was $13.3 million, compared to operating income of $14.3 million in the year-ago period. Net loss was $13.9 million, or $0.98 per diluted share for the nine months ended September 30, 2012, compared to net income of $11.4 million or $0.92 per diluted share in the year-ago period.

Non-GAAP net income, which excludes $0.5 million of non-cash stock compensation expense and $16.1 million of allowance for doubtful accounts, was $2.7 million or $0.19 per diluted share, as compared to non-GAAP net income of $13.2 million or $1.07 per diluted share in the year-ago period.

Now I’ll turn into the balance sheet. As of September 30, 2012, Telestone had $9.3 million in cash and cash equivalents, as compared to $18.9 million on December 31, 2011. Inventory was $10.2 million on September 30, 2012 as compared to $6.8 million at the end of 2011.

Working capital was $112.2 million as of September 30, 2012, versus $126.7 million at the end of 2011. Telestone had $11.6 million in short-term debt, as well as $52.2 million in accounts payable at the end of third quarter of 2012. Shareholders equity including $1.5 million of non-controlling interests, totaled $130.2 million at the end the third quarter of 2012, as compared to $142.8 million at the end of 2011. Cash used in operating activities was $6.1 million in the first nine months of 2012, as compared to $17.4 million of cash used in operating activities in the year-ago period.

As of September 30, 2012, Telestone’s accounts receivable were $243.9 million, versus $251.5 million at the end of 2011. The accounts receivable turnover period days’ sales outstanding or DSOs for the quarter ended September 30 was 1,232 days. During the third quarter, Telestone collected $18.5 million in accounts receivable.

Now I’d like to offer some comments on Telestone’s business outlook. For the full year 2012, Telestone now expect revenues in the range of $71 million to $79 million, as compared to the previous estimate of approximately $117 million. Telestone’s updated guidance reflects the slow start of the carriers’ large-scale 4G network construction in China and some unexpected headwinds in the U.S., and therefore the Company has adjusted its business-development strategies there in the United States to focus on large orders from U.S. carriers. Telestone is currently soliciting bids for projects in Houston and Dallas, Texas as well as Mexico and Chile and we believe these initiatives will improve orders in the near future.

Thank you for listen. And we would now like to open the call to your questions, operator?

Operator

(Operator Instructions) I didn’t have questions at this time. This concludes the question-and-answer session. I’d like to turn the conference back over to Mr. Harmon for any closing remarks.

John Harmon

Thank you. I would just like to make a quick correction, I miss spoke in the financial section. The correct text should read the non-GAAP net income that was involved excluding $0.2 million of non-cash stock compensation and $14.2 million of allowance for doubtful accounts was $1.3 million those of net income. Thank you.

On behalf of Telestone Technologies’ management team, we would like to thank you for your interest and participation on this call. Thanks again for joining us, and this call is now concluded. Operator?

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Question-and-Answer Session

[No Q&A session for this event]

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