China Information Technology, Inc. Announces First Half-year 2013 Results

SHENZHEN, China, Aug. 30, 2013 /PRNewswire/ -- China Information Technology, Inc. (the "Company") (Nasdaq: CNIT), a leading provider of information technologies ("IT") and display technologies ("DT") based in China, today announced its financial results for the first six months ended June 30, 2013.

First half-year 2013 Financial Highlights

• Revenue year over year increased 26.1% to $37.3 million
• Gross profit year over year decreased 11.2% to $7.7 million
• Operating loss of $51.6 million, increased from an operating loss of $20.3 million for the same period of 2012
• Net loss of $50.5 million, increased from a net loss of $19.7 million in the comparable 2012 six-month period
• Adjusted net loss of $5.2 million, decreased from adjusted net loss of $8.3 million in the first six months of 2012
• Fully diluted net loss per share of $1.87, increased from fully diluted net loss per share of $0.73 in the six months ended June 30, 2012
• Adjusted net loss per share of $0.19, decreased from adjusted net loss per share of $0.31 in the six months ended June 30, 2012

Mr. Jiang Huai Lin, Chairman and Chief Executive Officer of the Company, commented, "The year of 2013 will continue to be a challenging transitional year as the Company experienced financial losses in the first half of the year. However, we believe our transition strategies have begun to see positive results. Our revenue increased 26.1% year-over-year in the first-half 2013 as our DT revenue increased by 95%, reflecting strong sales in our valued-added display products with integrated proprietary software. We have also reduced our adjusted net losses from $8.3 million to $5.2 million as we continued to focus on quality of earnings."

"Our early-mover advantage in the highly-functional display technology arena has generated robust results for the Company, especially in the area of digital education, as reflected in numerous contracts we have secured in the first half of the year, for example, a $4.5 million contract to provide our IT-Pad products embedded with proprietary software to the educational institutions in the city of Chongqing, and a $2.5 million contract to provide our smart interactive products to a communication client in Shanxi Province."

"Moreover, we are one of the few companies in China that have a comprehensive product suite for digital "smart" education. Building on our leading position and a broad array of product offerings in China's smart education sector, we have also introduced cloud-based services to China's education industry. Our proprietary "Smart EduCloud," consisting of "one web" - Cloud Learning Web (pubedu.com), "three apps" - Cloud Teaching, Cloud Learning and Mobile Campus Info, as well as an integrated campus management system with interactive touch display panel, which provides a reliable cloud platform that is able to link every school, class and student into one integrated network and serves as an important tool for the realization of China's smart education and digital campus initiatives. According to Chinabaogao.com, the IT spending in China's education industry reached RMB 43.9 billion in 2012, with a 20.9% annual growth rate. Relying on our solid industry reputation and outstanding product offering capabilities, we hope to capture important market opportunities as more education industry initiatives roll out in China."

"Building on the success of cloud-based services in digital education, we will continue to expand our cloud-computing expertise and introduce innovative product offerings to serve other high growth sectors. We believe our cloud-based business will be a forceful catalyst for sustaining growth momentum and enhancing financial performance over the long run."

First half-year 2013 Results

The following table sets forth key components of the Company's results of operations for the periods indicated, both in dollars and as a percentage of sales revenue.

Operating Segments

The Company reported financial and operating information in the following two segments:

Revenue

Revenue is generated from the sales of software and hardware products, fully integrated total solutions, and the related after-sales services. For the six months ended June 30, 2013, revenue was $37.28 million, compared to $29.56 million for the six months ended June 30, 2012, an increase of $7.72 million, or 26.11%. The increase was primarily due to the rapid sales growth of the IT-Pad and DS-Pad lines of products as the Company continues to focus on introducing value-added products and services that effectively integrate its expertise of both hardware and software businesses. The government sector continued to remain lackluster, thus leading to a decline in government revenue, which off-set some of the non-government revenue growth.

Specifically, the Company's product sales increased by $12.72 million, or 101.87%, to $25.21 million for the six months ended June 30, 2013, as compared to $12.49 million in the same period of 2012. Product sales constituted 67.62% of total revenue during the six month period ended June 30, 2013, as compared with 42.24% during the same period in 2012. The increase in product sales primarily reflected the Company's success in introducing and selling enhance-featured DT products, including the IT-Pad and DS-Pad lines in various industry sectors, especially in the rapidly growing China digital education market during the first half of 2013.

Software sales decreased by $1.30 million, or 15.29%, to $7.23 million for the six months ended June 30, 2013, from $8.53 million for the same period in 2012. Software sales decreased to 19.38% of total revenue, from 28.85% during the same period in the prior year. The decrease was mainly due to the continued challenging government sector as various levels of the government face austere fiscal constraints. In addition, the Company instituted more stringent customer acceptance policies, which limited new projects to those with more solid credit credentials and long-term business prospects in light of the unfavorable government fiscal environment.

Sales of system integration services decreased by $3.81 million, or 48.88%, to $3.99 million for the six months ended June 30, 2013, from $7.80 million for the same period in 2012. The decrease was mainly the result of the relatively sluggish macro-economic growth in the first half 2013 and a lack of new large system integration solutions engagements in connection with large IT infrastructural projects. As a percentage of revenue, system integration sales decreased from 26.39% during the six months ended June 30, 2012 to 10.70% during the six months ended June 30, 2013.

Other revenue increased by $0.11 million, or 15.48%, from $0.74 million in the six months ended June 30, 2012 to $0.86 million in the same period of 2013. The increase was mainly due to the increase in maintenance services during the current period.

The following table shows revenue, percentage of revenue, cost of revenue and gross margin, by category:

Cost of Revenue and Gross Profit

As indicated in the tables above, cost of revenue increased by $8.69 million, or 41.57%, to $29.60 million for the six months ended June 30, 2013, as compared with $20.91 million for the six months ended June 30, 2012. As a percentage of revenue, cost of revenue increased to 79.39% during the six months ended June 30, 2013, from 70.72% in the same period of 2012. As a result, gross margin was 20.61% for the six months ended June 30, 2013, a decrease of 867 basis points from 29.28% in the same period of 2012.

The decrease in gross profit margins, as displayed in the tables above, resulted from several factors. First, in the six months ended June 30, 2013, the Company continued its efforts to increase the DT solutions as a percentage of total revenue. The percentage of DT revenue increased from 43.46% for the six months ended June 30, 2012 to 67.26% for the same period of 2013. The significant increase in contribution from DT revenue resulted in a decrease in gross profit margin for the six months ended June 30, 2013, as the DT solutions business has lower average gross margins than other segments of the Company's business. Second, due to the sluggish government sector, the percentage of software revenue decreased from 28.85% for the six months ended June 30, 2012 to 19.38% for the same period of 2013. The decrease in contribution from software revenue resulted in a decrease in gross profit margin for the six months ended June 30, 2013 as on average, software projects have higher average gross margins than other segments of the Company's business. Third, the gross margin of software revenue decreased from the same period last year mainly as a result of smaller-scale projects versus the period last year.

Administrative Expenses

Administrative expenses consist primarily of compensation and benefits to the Company's general management, finance and administrative staff, professional advisor fees, audit fees and other expenses incurred in connection with general operations. Administrative expenses increased by $30.11 million, or 207.27%, to $44.65 million for the six months ended June 30, 2013, from $14.53 million for the same period of 2012. Notable change that resulted in increased administrative expenses was an increase of $32.72 million in additional provision for doubtful accounts receivables. The large provision taken on outstanding accounts receivables largely reflected the new Chinese government fiscal environment where budgetary constraints may hinder or significantly delay the payment by certain local government institutions for prior services provided to them.

Research and Development Expenses

Research and development expenses consist primarily of personnel-related expenses, as well as costs associated with new software and hardware development and enhancement. Research and development expenses decreased by $1.26 million, or 46.33%, to $1.46 million for the six months ended June 30, 2013, from $2.72 million for the same period of 2012. As a percentage of revenue, research and development expenses accounted for approximately 3.91% of total revenue for the six months ended June 30, 2013, compared with 9.19% for the same period in 2012. Such decrease reflected the completion of the more capital-intensive core technological developments in 2012 and the focus more on the less capital-intensive product customization to various industry-specific customers in the first half of 2013.

Selling Expenses

Selling expenses consist primarily of compensation and benefits to the sales and marketing staff, sales and after-sales traveling costs, and other sales-related costs. Selling expenses increased by $0.22 million, or 5.63%, to $4.09 million for the six months ended June 30, 2013, from $3.87 million for the same period of 2012. This increase was due to the Company's continued marketing and selling efforts to expand domestically in different vertical industries.

Impairment of property, plant and equipment

The impairment of property, plant and equipment was $9.1 million for the six months ended June 30, 2013, reflecting the declining market value of certain purchased GIS-related software in light of the protracted challenging environment in the Chinese government software segment.

Subsidy Income

For the six months ended June 30, 2013 and 2012, in connection with research and development activities in a designated locale, the Company received approximately $866,798 and $611,455, respectively, as a subsidy from the local governmental agency in China.

Income Tax Expense

Income tax expense for the six months ended June 30, 2013 increased by $0.99 million, from a tax benefit of $0.57 million for the same period in 2012. The increase was mainly due to the increase of income before taxes from PRC subsidiaries in the current period.

Non-controlling Interest

Net loss attributable to non-controlling interest of $2,476,147 for the six months ended June 30, 2013 represented the loss of $1,660,333 retained by the Company's variable interest entity, iASPEC Software Co., Ltd. ("iASPEC"), under the Amended and Restated Management Services Agreement with iASPEC, a loss of $689,244 from iASPEC's majority-owned subsidiary, Wuda Geoinformatics Co., Ltd., representing its 47.46% non-controlling interest, and a loss of $126,571 from iASPEC's majority-owned subsidiary, Shenzhen iASPEC Zhongtian Software Company Ltd., representing its 21.79% non-controlling interest.

Net Loss Attributable to the Company

As a result of the cumulative effect of the foregoing factors, net loss was $50.52 million for the six months ended June 30, 2013, as compared to a net loss of $19.71 million for the same period in 2012.

Cash and Cash Equivalents

As of June 30, 2013, the Company had $8.06 million in cash and cash equivalents and $18.23 million in restricted cash. For the six months period ended June 30, 2013, net cash used in operating activities was $13.52 million, as compared to net cash used in operating activities of $14.82 million in the same period of last year.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude non-cash charges. The Company believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that management excludes when it internally evaluates the performance of the Company's business and makes operating decisions, including internal budgeting, and performance measurement, as these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of the Company. Accordingly, management excludes the expense arising from certain non-cash charges when making operational decisions. The Company also 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 the Company's financial performance in comparison to historical periods. In addition, it allows investors to evaluate the Company's performance using the same methodology and information as that used by the Company'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, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded.

The following table presents the non-GAAP financial measures contained in this press release and the most directly comparable GAAP measures and provides a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures.

About China Information Technology, Inc.

China Information Technology, Inc., through its subsidiaries and other consolidated entities, specializes in geographic information systems (GIS), digital public security technology (DPST), and hospital information systems (HIS), as well as high-end digital display products and solutions in China. Headquartered in Shenzhen, China, the Company's integrated solutions include specialized software, hardware, systems integration, and related services to help its customers improve efficiency in information management. To learn more about the Company, please visit its corporate website at http://www.chinacnit.com.

Safe Harbor Statement

This press release may contain certain "forward-looking statements" relating to the business of China Information Technology, Inc., and its subsidiary companies. All statements, other than statements of historical fact included herein, are "forward-looking statements". These forward-looking statements, 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 further information, please contact:

China Information Technology, Inc.
Iris Yan
Tel: +86 755 8370 4767
Email: [email protected]
http://www.chinacnit.com 

SOURCE China Information Technology, Inc.

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