Patrick Yu - IR
Terence Yap - Vice Chairman & CFO
Liang Hsu - Brean Murray, Carret & Co, LLC
Andy Yeung - Oppenheimer & Co Inc.
Michael Kim - Imperial Capital
China Security & Surveillance Technology Inc. (CSR) Q2 2010 Earnings Conference Call July 26, 2010 8:00 AM ET
Greetings, and welcome to the China Security & Surveillance Technology Incorporated second quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Patrick Yu, from Fleishman-Hillard, the IR agency for China Security & Surveillance Technology. Thank you. Mr. Yu, you may begin.
Hi. Thank you, Jackie. Morning, everyone. Welcome to CSST second quarter 2010 earnings conference call. Here with me today are Vice Chairman and Chief Financial Officer, Terence Yap; Financial Controller, Jessica Cheung and the Head of Internal Control, [Kevin John].
Before we get underway, let me remind you that the press release, our financial information and the presentation slides used for this call are all available on the Investor Relations page of CSST website, which is http://irpage.net/csct/index.html.
I would also like to take a minute to review the company's Safe Harbor statements, which is found on slide two, which says that, this conference call may contain forward-looking statements concerning CSST's business which are intended to be covered by the Safe Harbor and forward-looking statements under the Private Securities Litigation Reform Act of 1995. The actual results may differ materially from the forward-looking statements depending on a number of risk factors including, but not limited to, general economic business conditions, new product developments, installations, market acceptance, additional competition from existing and new competitors, changes in new technology, and various other factors beyond the company's control.
All forward-looking statements are expressly qualified in their [entirety] by the cautionary statements and risk factors detailed in the company's filings with the SEC. CSST undertakes no duty to revise or update any forward-looking statements, except as required by applicable law.
Without further ado, I will now turn the call over to the CSST Vice Chairman and Chief Financial Officer, Terence Yap. Terence, please.
Thank you very much Patrick. Good morning everyone and for those in Asia, a very good evening. Before we get into the details, I would like to take just a couple of minutes to talk about what we are seeing in our business and the general economic environment. The market conditions for the surveillance and safety industry in China are generally consistent with what we saw in the past few quarters.
Demand for new products and services from corporate and government companies continue to grow well in China. We are pleased to report continued growth in sizeable government contracts in safe cities and e-cities project. So we continuously invest and grow in key areas, such as large-scale government projects and security service businesses.
Our goal is to become stronger financially and operationally with solid momentum in those areas that will lead to our future growth. That’s the game plan for this year and the game plan behind our achievement in the second quarter which are highlighted on page 3 of our earnings PPT slide. This quarter, we achieved strong total revenue growth to a tune of $168.35 million.
We delivered $0.23 of earnings per share which was up 76.9% year-over-year. We increased our gross margin and operating margin by 390 basis points and 570 basis points respectively and net income was up 174%. These results can be attributed largely to the following, but we had excellent momentum in the installation bit, which contributed more strongly for revenue growth and margin improvement.
We continue to execute on large-scale government projects from safety cities and e-cities in China. Installation segment revenue grew by 19.6%, the highest among all four segments. Gross margin of installation segment rose to 27.8%, up by 630 basis points compared to the same quarter of last year.
Secondly, we continue to look into the new business opportunities from both government and corporate sector while focusing on execution and operating efficiencies. We have already taken the lead in deploying and enhancing our industry leading products and solutions for government and private customers. We will continue to increase productivity by enhancing collaboration across our different operations, improving our strategic position and advancing our long-term growth potential.
Thirdly, our strategic efforts in targeting our established customer base to build on service business, was starting to be realized in this quarter. This is the first quarter we successfully report the revenues from the service segment, which recorded $3.35 million in revenue contribution. While the revenue contribution is relatively small on this page, we are encouraged by the growth in this segment which we believe will favorably provide us with higher margin recurring revenue in the long run.
To sum up this quarter, we delivered solid revenue growth and earnings per share with profit margin improvement. We also had good execution on the cost side and of course this momentum in our key growth guidance.
First of all, allow me to go through the financial results. With that review, I’ll walk you throughout second quarter financial result on slide 4.
Revenues, we experienced solid growth in revenues during the second quarter. The revenues totaled $168.35 million, up 18.6% from the same quarter in 2009. The revenue growth from the second quarter was broad-based with improvements across all major segments and continued growth in industry demand of surveillance and safety products of China. Our efforts to raise our brand awareness and increase our distribution channels in China over the past few years also contributed to the revenue growth.
Last but not the least; we had raised sufficient working capital for facility expansion in the China market.
Historically, our business has exhibited strong seasonality and based on our observations this will continue in 2010. As our customer mix continues to shift more towards the government sector and large scale installation project which take a longer time to reach completion. We expect the seasonality and earnings to be more heavily concentrated in the second-half of the year.
Our revenue mix remains heavily weighted towards our installation segment. Installation business growth in the second quarter was led by the continued growth of our products and services in China; generate revenues of approximately $129.35 million or 76.8% of our total revenues versus $108.14 million or 76.2% of the total revenues in the second quarter of last year.
The installation segment continues to be our biggest revenue generator. We believe this trend will continue in next few years. Our manufacturing segment generated revenues of $21.98 million representing a 13.1% of our total revenues for the quarter versus $20.49 million or 14.4% of our total revenues in the second quarter of 2009.
The distribution segment generated revenues of $13.67 million representing 8.1% of our total revenues in this quarter versus $13.29 million or 9.4% of our total revenues in the second quarter of 2009. I’m also encouraged to report that our service segment generated revenues of $3.35 million representing 2% of our total revenues in the second quarter of 2010. We have reported this segment separately from our installation segment for the first time to more easily report our progress. The service segment provides a full range of surveillance and safety services such as maintenance services, wholesale services, consulting services, software upgrading services, network alarm response services and security guard services. I think these results clearly demonstrated that our long term strategy to look into higher value security service business which provides us with recurring revenues is paying off.
Please refer to slide number 5. In discussing the customer mix in our revenues, the trend in revenue growth was fairly consistent with previous quarters, with government contributing 55% of our revenues and the corporate banker for about 45% of this quarter. Our projects in the second quarter included schools, museum, airports, hotel, real estate, bank, mines, railways, supermarket and entertainment venues. Organic revenue growth accelerated in this quarter as market demand continued to improve in China. Second quarter revenues were all organic, all our subsidiaries have been held for more than one year.
Including Coson which was acquired in January of 2009 and has surpassed one year anniversary. Organic revenues increased 32.2% year-on-year compared with $127.32 million or 89.7% of Q2 revenues in the second quarter of 2009. To further enhance cost efficiency and productivity among all acquired companies we were committed to first include the collaboration across all entities.
Gross profits and margin, please refer to slide number 6, our gross profit increased $12.32 million or 39.8% to $43.36 million for this quarter, from $31.02 million for the same period last year. Gross margin expanded 390 basis points to 25.8% in this quarter compared with 21.9% in the second quarter of last year, due to better margins of sizeable government contracts in the installation segment. We are glad to see that our relative strength in the government sector, industry leading solutions and well established brand awareness have given us consistently positive results in sizeable government project planning.
Gross margins of the installation segment, manufacturing segment and distribution segment were approximately 27.8%, 27.3% and 6.3% respectively, compared to 21.5%, 27.8% and 15.4% for the same period last year. A relatively lower margin in the manufacturing segment and distribution segment were offset by margin growth, installation segment which contributes a significant portion of revenue for the quarter. The gross margin for the service segment was approximately 16.7% for three months ended June 30, 2010.
We will maintain an upbeat outlook for the gross margin of the service segment as we continue to create a recurring business model with an expensive customer base. The increase in our overall gross margin puts us on a good path against our full-year outlook and reflects solid progress in our initiative to focus on large scale government projects.
Operating expenses, please refer to slide number seven, we continue to execute initiative to increase efficiency and drive productivity throughout the consolidation of all function and operations within the company. This strategy has worked well over the past few years and we continue to produce results over the next few weeks.
Selling and marketing expenses increased 3.3% year-over-year to $3.13 million. However, as a percentage of revenue, selling and marketing expenses dropped from 2.1% in the second quarter of 2009 to 1.8% in the second quarter of 2010. Excluding non-cash employee compensation, our general and administrative expenses decreased $0.54 million or 6.6% to $7.61 million for the second quarter of 2010 from $8.15 million for the same period in 2009.
As a percentage of revenue, the general and administrative expenses decreased to 4.6% for the second quarter of 2010 from 5.7% for the same period in 2009. The decrease in both dollar and percentage amount was mainly due to our concerted effort to enhance cost efficiency. Non-cash employee compensation for the three months ended June 30, 2010 increased to $5.05 million from $4.36 million for the same period in 2009.
During the second quarter of 2010, we granted an aggregate of 568,987 shares of restricted stocks to our employees and consultants pursuant to our equity incentive plan. We continue to view the share-based compensation as an important tool to motivate our employees in order to achieve company objectives and execute our strategy
Income from operation, slide number eight. In concert with solid gross margins and effective control of operating expenses, our income from operations saw a significant increase of 95.4% to $24.56 million for the second quarter of 2010 as compared to $12.57 million for the same period in 2009. Our operating margin was 14.6% for the second quarter of 2010 compared to 8.9% during the same period in 2009.
Interest expense, please refer to slide number nine. During the second quarter of 2010, we borrowed funds as 21 short-term loans from local banks, and incurred total interest expense of $3.06 million compared with $1 million interest expense for the same period of last year. Although our interest expense increased as a result of additional borrowing, we achieved an achieved significant cost savings and eliminated non-cash interest expenses incurred as a result of comparable note restructuring last year. Also interest expenses decreased from $6.58 million in the second quarter of 2009 to $3.06 million in the second quarter of 2010.
Income taxes, income taxes increased to $4.13 million for the second quarter of 2010 from $0.55 million for the same period of 2009. The effective tax rate was 18.8% in the second quarter of 2010 compared with 7.8% in the same period of last year. The increase was due to the fact that the income tax exemption of some of the major subsidiaries, including CSST PRC and [DM] expired at the beginning of 2010. On the other hand, although we continue to optimize tax planning on our various subsidiaries, we expect to see small fluctuations in the effective tax rate over the next few quarters due to certain non-cash expenses which are non-tax deductible.
Net income; please refer the slide 10. We experienced great growth in income and the underpinned by strong results across all business segments. Good execution of margins improvement and core company-wide cost initiative as well as a decrease in non-cash expenses as a result of the restructuring of our convertible notes.
Net income increased $11.31 million or 174% to $17.81 million for the three months ended June 30, 2010 from $6.50 million for the same period in 2009. Net margin was 10.6% for the second quarter of 2010 compared with 4.6% for the same period 2009. Fully diluted GAAP earnings per share were $0.23 in the second quarter of 2010 as compared with $0.13 last year.
We are very delighted to see the strong year-over-year growth EPS, despite the fact that our weighted average value per share count increased 32% to 76.01 million share in the second quarter of 2010 from 50.02 million share in the same period of 2009.
Non-cash expenses; please refer to slide number 11. For the second quarter of 2010, we recognized a total of non-cash items at $8.31 million, down significantly from $13.09 million from the same period in 2009. There were two main components of our second quarter non-cash expenses, which was depreciation and amortization of $3.26 million or $0.04 per diluted share, and non-cash employee compensation expense of $5.05 million or $0.07 per diluted share for the second quarter of 2009.
Redemption accretion on convertible notes, which was a non-cash interest expense was eliminated starting third quarter of 2009, due to the fact that we retired and restructured Citadel convertible notes during the third quarter of 2009.
Backlog; please refer to slide number 12. As discussed in the previous quarters, government contracts remain our key focus. As of June 30, 2010, our total backlog was $213.12 million, up from $199.72 million at the end of March 31, 2010. We expect the majority of the total backlog we realized within the next few quarters. Once again, we have not included Letters of Intents, framework agreements and those other agreements in our backlog, as they are subject to finding individual agreements to be entered into at a later date. These LOIs and framework agreements provide us with confidence in our 2010 guidance.
Balance sheet, please refer to slide 13. Our balance sheet remains solid because it’s a snapshot at any given moment in time. I’d like to address specifically only the line items that have significantly changed or that I believe could have material impact on our ongoing operations.
Debt ratio. As of June 30th, 2010, our total debt was $228.12 million, up from $205.84 million last quarter. Our debt ratio was 23.6% compared to 24.6% at the end of the first quarter. We continue to maintain a very healthy capital structure while fully utilizing the bank facilities with local banks.
DSOs. As of 30, June, 2010, our accounts receivable increased sequentially to $318.91 million, up from $300.25 million at the end of the first quarter. The increase in accounts receivables is in line with our healthy quarter-on-quarter growth in revenue. Our DSOs or days of sales outstanding decreased to 170 days. That’s 224 days from the precious quarter. We are pleased to see the decrease in DSO which reflected our improved selection process and remains comparable with the current level of accounts receivable.
We will continue to monitor the accounts receivable closely while capitalizing on our investment banking facilities with the Chinese bank.
Advances to suppliers. As of June 30th, 2010, advances to suppliers increased sequentially to $71.56 million, up from $54.04 million. The advance payment to the suppliers increased as we took on more large-scale projects and meant than share prudential pricing and delivery.
Inventory. As of June 30, 2010, our inventory increased to $80.39 million versus $73.47 million at the end of the first quarter. The increase was necessary to support the above mentioned backlog of the contract.
Working capital; Our working capital at the end of the second quarter was up in 2010, it was $363.08 million versus $291.12 million at the end of the first quarter. The increase was attributable in par to the increase of cash and cash equivalent, accounts receivable and advances to suppliers.
Cash, please refer to Slide 14. As of June 30, 2010, we had a cash balance of $208.07 million, up from $142.29 million as of March 31, 2010 and $154.48 million as of 31, December, 2009.
Net cash used in operating activities was $56.46 million in the first half of 2010, as compared to $17.76 million of net cash provided by operating activities in the first half of 2009. The decrease in net cash from operating activities was primarily due to increase in accounts receivable, inventories and advance to suppliers.
Net cash used in investing activities in the first half of the year was $32.3 million, compared to $7.44 million for the same period in 2009. This increase was primarily due to the increase of deposits for acquisitions of subsidiaries. The deposits for acquisitions are refundable. Net cash provided by financing activities in the first half of 2010 totaled $140.51 million as compared with $31.65 million for the same period in 2009. The net cash provided by financing activities was mainly attributable for the issuance of common stock of net proceeds of $64.57 million and additional bank loans raised in the first half of 2010.
Corporate development in the second quarter of 2010, with that I will discuss our recent corporate development. Please refer to slide 15.
Corporate developments in the second quarter was driven by the assets and investments we have made to capture growth opportunities and to deliver value to our client and shareholders. We achieved broad-based improvement in revenue growth across all segments. This improvement, together with a shift to higher value business and a focus on saving costs efficiency entirely, again delivered solid margin and profit performance.
We are getting excellent traction from our growth initiative, including the security service business and large-scale government projects. We continue to focus on building our security service business model from a security service [standpoint]. We believe the growth potential is substantial and believe the growth potential is essential.
With our extensive customer base in China, we are well positioned to benefit from the growth of the securities services market. Contract wins in large scale government projects exhibited momentum which gives us confidence that we will sustain our margin improvement on near-term revenue performance. Moreover, we continue to see new opportunities emerging from the corporate sector. During the second quarter, we successfully engaged a number of new customers including university and other educational institute.
On a financing front, we completed an underwritten public offering of 17.25 million shares of common stock on aggregate purchase price of $69 million at $4 a share. The net proceed to CSST from this transaction were approximately $54.57 million. The proceeds from the offerings will be used for no corporate purposes including future capacity expansion, strategic acquisition, capital expenditures and research and development expenditure. We are very glad to have completed the offering which further strengthened our financial position and provide us with more financial flexibility.
Outlook, please refer to slide 16. The opportunity to offer surveillance and safety products and the service in China is both enormous and inspiring. Favorable government policies have sort of many forward thinking leaders in the industry, government and commercial sectors to engage more and more safety solutions, to protect and manage their assets.
And [gradually] but not surprisingly it has the perfect growth for CSST. That is why I am optimistic about CSSTs ability to continue to lead in the industry within China. We are confident that we will continue to improve our revenue performance, capitalize on our business model and strategy focus to expand margin, grow profit, generate cash and return value to shareholders.
We have continued to build for the future and prepare our company for growth. Today, we believe our market leadership expands across each broadest portfolio of products and services in China. Our scale in China will provide meaningful and sustainable competitive advantage that we are going to capitalize for the rest of 2010.
With a sharp focus on high growth initiatives including security services and large government project and we are geared to further enhance cost efficiencies through greater collaboration across our different subsidiary. And integrate the business during the consolidation and acquisition in the pipeline. Even that we see in 2010 and our world across all business segments, we have updated our financial guidance. We expect to be for full year revenue in a range of $830 million to $850 million, earnings per share is expected to be in the range to $1.12 to a $1.16 with an average share count of approximately 90 million shares.
Let me close by expressing gratitude to our shareholders for unwavering support. I hope that you are pleased with how our company has performed thus far and evolving too. And I trust that you share our excitement about the role that we play in what promises to be a new and works for our industry and our business. Thank you.
Thank you Terence, [Jackie] we can open up the line for questions.
Thank you. We will now be conducting a question and answer session. (Operator Instructions) Thank you, our first question is coming from Liang Hsu of Brean Murray & Co.
Liang Hsu - Brean Murray, Carret & Co, LLC
My first question is on, concerning your Q2 revenue that came in about $10 million lighter than the consensus and I’m wondering how much the revenue, which originally expected to realize in the Q2 that got delayed in Q3 or Q4 and what seems to have caused the delay in completing and delivering the projects other than larger government projects suppose to take longer to complete.
I’m looking at your account receivables remained above $300 million so I assume there was no factoring in the quarter. So can we at least, assume partial of the reason that on the mix on the revenue side is your decision to intentionally holding back some project deliveries so to keep the quarter recoveries from under [content] levels without having to resort to the account receivable factoring? Thank you.
Thank you. First of all, allow me to remind everyone once again that we recognize revenues upon completion which means that it’s only when we finish a project the client signs up, then we are allowed to recognize the revenues incurred as part of FASB 104.
Secondly, let me also point that we don't actually provide quarterly guidance. Right at this point, we only provide full-year guidance of about $830 million to $850 million. So therefore forgive me for not providing quarterly guidance. So from our perspective, we have actually not split anything, because it’s not guided, but from our perspective because we only recognize revenues upon completion. So there maybe certain lumpiness, meaning if I don't complete the stage, then it will not be recognized. And once again we do not recognize revenues as a percentage. So there maybe opportunities that if I don't complete the project this quarter, then we will use it next quarter.
From our perspective, we are seeing that the project is taking a little bit longer than expected to complete, mainly because the projects are getting larger as well. Now as you can see from our backlog figures and of last year, our backlog actually jumped. This is an anticipation and as a result, the fact that we have actually signed quite a fair bit of a larger government contract and the factoring itself, the accounts receivable for financing can only be kicked in once we finish off the project.
So even though it's percentage wise completion, I cannot (Inaudible) that may take up a nice period of another one or two months depending on the banks. So there maybe lumpiness in AR, but once again they are controlling. Looking at our balance sheet, the AR increased about $65 million, but we actually managed to get collection and that's why our DSOs are down from 224 days to a 170 days this quarter. So from my perspective, my financial division and rest of my team will continue to proactively look at the various account receivable and we will definitely look at, this is certainly some of the key performance index on my side.
Liang Hsu - Brean Murray, Carret & Co, LLC
Thank you. But then just given the realized revenue in the first half and why you kept all four years revenue guidance unchanged, meaning implying that 65% of your guidance of your whole year’s revenue guidance has to be realized in the second half and which is higher than 2008 and 2009 levels. I noticed a backend loaded, but this percentage is higher than historical level. So, my question is how confident you are in meeting that guidance and why?
Once again you are right, we do have seasonality and Q1 is always quieter period for us. Now as I have mentioned in my Q1 conference call, Q1 was exceptionally seasonal mainly because of (Inaudible), so they actually impacted us for first half of the year. But given the framework agreements that we announced in Q1 for example Zhenjiang, Tongling, Changchun. That provides people with (Inaudible) On top of that, if you look at our backlog for this quarter, it’s now about $280 million.
So, given the pipeline visibility that we have announced over the past two quarters and of course as I have mentioned before and currently I do have pipeline visibility for next 12 to 18 months and that's the reason why I'm still maintaining my guidance for the full year of 2010, it is as high as (Inaudible).
Liang Hsu - Brean Murray, Carret & Co, LLC
Okay, fair enough. And in terms of the gross margins what are the realized on gross margins for the government versus on a corporate clients respectively during the quarter? And do you see the current revenue mix continue to improve, and to what ratio say, by the ended the year?
We have not guided in terms of the percentage difference in mix between government and corporate, but I have indicated in the past that the government sector will continue to fully grow and become, and it's [compared] with the revenue side. Even in the second quarter, we have seen government is about 55%. Now we only break down the revenues in terms of installation, manufacturing and distribution, and now services. And you're right, margins from government, we have not guided but we'll not disclose it here but generally, they are little bit more driven as I mentioned in the past as well.
Forgive me for not guiding the margins but I will indicate that 2009 Q2 was a profit period for us due to the financial crisis and we are seem to bottle-up. And as mentioned before, we have seen that margins have stabilized and we are now looking hard to improve that to increase and improve our operational efficiency and therefore improving our overall margins, not only on a gross margin but also on a net income basis.
Liang Hsu - Brean Murray, Carret & Co, LLC
But do you see the corporate side of gross margin also improve? Your operating gross margin they came in better than expectation, that is from the improvement of the mix or in terms of your component.
We are seeing gross margins in the corporate side stabilize, still small than the government sector. But once again, as I have mentioned in the past as well, management have two decisions to make, either to give up the corporate sector to maintain our margins or to bite the bullet and do the corporate business as well. Because, as you probably remember, phase one, phase two, phase three, we are right now in phase two of our business which is really in the installation part of business. The more we install, especially in the corporate side, in the government side, the more will result in the recurring revenue business which is in phase three of our business, to set us aside. So therefore, management decides to bite the bullet due to corporate even though at lower margins, because we find that these will provider us with a customer base for the services in the future.
Thank you. Our next question is coming from Andy Yeung of Oppenheimer & Company.
Andy Yeung -- Oppenheimer & Co Inc.
Hi, good morning. Congratulations on your very strong execution in the quarter. I have a couple of questions. The first question is about your corporate customers. Corporate sales appeared to have declined year-over-year in the quarter. It has been almost a year since the financial crisis has impacted the segment growth, and I think the same quarter was the last tough comparisons. So, when do you expect this segment to resume a rapid pace of growth?
We actually see our income is not applying. The corporate sector has also improved a little bit, is just a dollar amount contract-wise that’s due (Inaudible), at least to stabilize. Now we are actually seeing a pick up especially from the educational institutions. Not sure whether you remember, past few months, there have been incidents, tragic incidents in the primary schools and kindergarten, and that actually highlights the law of things in China. And over the past few months, we have actually seen an increase following the pick up from the law universities but also from the primary schools and the kindergarten.
So from our perspective, we do see that the corporate sector is slowly still growing, but because the dollar amount from the government sector is sill growing that’s why we think that government sector will continue to be a finished part of the business. It does not mean that the corporate sector is slowing down; it’s just that the dollar amount the contract value base is getting bigger from the government.
Andy Yeung - Oppenheimer & Co Inc.
Okay. And the next question is regarding your full year sales and earning guidance. Again why would you imply in the first half which is nice, compared to your historical levels. I think you have adjust some of this already, but can you give us some insight into why is your backlog not increasing, as you see you know second half to be stronger compared to historical levels?
Why we think that the second half is stronger than last year?
Andy Yeung - Oppenheimer & Co Inc.
Right, well basically we same quarters backlog hasn’t increased that much, but do you think that your guidance implies a very strong ramp-up in the second half? So, tell us what gives you that confidence that you see some definite increase in sales in second half of the year?
Right I mean we look at the volume and queue and we actually have a seasonality on the backlog number as well. Now typically, the backlog is only recognized for the next few quarters, and that actually gives us certain visibility.
Now from our perspective even for last quarter about 51% of our revenues are recognized within the same quarter. So therefore, as I’ve mentioned internally as a visibility pipeline for the next 12 months to 18 months. Now, if you recall last quarter Q1 and even end of 2009 we actually announced close to about $700 million worth of framework agreement and conducted in 10, which are not included in backlog. And these once they break out the favors we have been putting in backlog.
So these are already at the back of our pocket really. So that’s why from our perspective we are still remaining confident. Second half of the year is typically the strongest part of the year, given that the government will want to finish our budget, and set the financial ramp up as well.
I mean we can see that our revenue for refunds begin to ramp up which is also in line with the cost. Few years since now it was Q3, Q4 being the majority of revenues for the full year. So at this point of time given the backlog facility that we have, the pipeline visibility we have and the growth in industry that we are seeing, don’t forget the government actually announced the $20 billion spending in securities this year.
And we are seeing budgets are being thrown out the North Western region etcetera. So we are seeing contracts coming in, and that’s why thoroughly we have the revenues to maintain a guidance of 832 yen to $50 million.
Andy Yeung - Oppenheimer & Co Inc.
The last question is about your working capital and cash flow. Your DSO shows a healthy improvement and since your operating cash flow which actually I think to net captive in the quarter, so do you actually expect operating cash flow to remain constant for the rest of the year?
Well actually from our prospective the operating cash flow is going negative this quarter mainly, because of the AR or for the top of the year. From our prospective, that is my aim. My aim is to actually try to maintain operationally cash flow positive, but as we don’t have to rely on external funding.
And the control with DSO is certainly one of the assets that we have been trying to do, and as mentioned over the past few quarters as well that this certainly one of my key performance index.
And the AR and the IO can’t handle it doesn’t come through this, and if we can’t show our cash flow properly. Forgive me for not providing guidance officially, but internally we are trying to make sure that at least we have the cash flow profit for the full year of 2010 just like last year.
Thank you. Our last question is coming from Michael Kim of Imperial Capital.
Michael Kim - Imperial Capital
Hi Terence just going back to recurring services, can you talk a little bit about where you are focusing your efforts, whether it's on the monitoring side or on the field service? Do you talk about an array of services that you provided in the quarter? And also, yes thank you for breaking it out for the first time.
Yes, from our perspective we are fully integrated to our shareholders over the past year or so, more contribution from this. We decided to break out mainly because we are seeing traction and the service part of business we are trying to provide guiding and outsource monitoring as well, meaning for example, a retail shop after 10 o’clock at night, they close the shop. We provide the patrols, we provide the guards and the network control center.
So, we're trying to do that in several cities in China. And that is gaining traction; we are building our brand name. If you go to Beijing airport, you can see our diner at the terminal three. When you get out of Shenzhen airport, you'll see our banner at the airport. So we are pushing services business right now and because of the brand name that we have been building over the past few years from the installation business, we're seeing slowly people are now outsourcing both the guiding services and the monitoring services.
But the government side of business, we are seeing a slow traction coming in from the management side. But the services of the recurring revenue will come from three main areas or few areas namely from the maintenance, the outsourced guiding, remote monitoring and even on-flight monitoring and patrols. So, we'll continue to build upon all these areas of recurring revenue business opportunity in China.
Michael Kim - Imperial Capital
Okay. And then switching gears, it's been a little while since we’ve seen a fairly significant acquisition. Can you talk a little about strategic consolidation and some of the opportunities you see that continue to balance out your portfolio?
End of last year we which we announced about six acquisitions mainly in the services business and (Inaudible) though we have yet to close any of them. And we are not doing any negotiation. From our perspective, we will not see any major acquisition at all and most of the companies I think are also very small. And this is also part of our efforts to grow the services business in China, but bulk of our acquisitions have been in 2008.
So that’s why if you look at our revenues this quarter, half of our revenues are organic and especially, if you are going to grow strongly in terms of revenue so, at this point in time, all we can say is that we have announced six (Inaudible) share and we'll probably go close them, and then we may just slow down a little bit more as well in the acquisition. The market in China, we do see a lot of companies, some of them are trying to consolidate but, once again it all goes to our company in each market.
Michael Kim - Imperial Capital
Okay. And one last house-keeping question, I know that the tax rate can be a little bit of a moving target as based on your tax planning. Can you provide some guidance if the effective tax rate is the right range that you're thinking about going forward?
The official tax rate is about 25% in China. On a blended basis, we're definitely less than that. The current tax rate right now I would suggest is may be about a little bit higher. Given that some of the companies are addressing the two years, three years 505. So I would suggest that you be a little bit conservative.
Thank you. I’d like to hand the floor back over to management for any closing comments.
Ladies and gentlemen, thank you once again for participating on this conference call. We look forward to reporting our progress again in Q3 and thank you once again very much for your support. Thank you.
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.
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