China Information Technology, Inc. Announces Fourth Quarter and Year 2011 Results

SHENZHEN, China, March 7, 2012 /PRNewswire-Asia-FirstCall/ -- China Information Technology, Inc. (Nasdaq: CNIT), a leading provider of information technologies and display technologies based in China, today announced its financial results for the fourth quarter and year ended December 31, 2011.

Fourth Quarter 2011 Financial Highlights

• Revenues decreased 49.0% YoY to US$31.2 million
• Gross Profit decreased 57.1% YoY to US$9.3 million
• Operating loss of US$6.2 million mainly due to write-downs in inventory and increases in bad debt reserves
• Net loss of US$5.7 million
• Cash flow from operations increased 12.9% to US$9.1 million

Year 2011 Financial Highlights

• Revenues decreased 30.1% YoY to US$114.5 million
• Gross Profit decreased 37.2% YoY to US$44.3 million
• Operating Profit decreased 77.6% YoY to US$9.5 million
• Net Income decreased 75.8% YoY to $8.6 million
• Fully Diluted EPS was US$0.29.
• Cash Flow from Operations decreased 39.4% YoY to $16.3 million

Mr. Jiang Huai Lin, chairman and chief executive officer of the Company, commented, "Earnings declined for both the fourth quarter and the 2011 fiscal year as the Company continued to navigate difficult market conditions.  Our year-end results fell below our November guidance, with revenue decreasing 30.1% to $114.5 million and net income decreasing by 75.8% to $8.6 million.  Our business was affected by several factors, the largest of which was the Chinese government's implementation of macroeconomic tightening policies.  This resulted in a significant slowdown in projects in our software business, which serves mostly government customers.  Another factor was our implementation of more stringent customer acceptance initiatives at the start of 2011 as we worked to improve the quality of our customer base and Days Sales Outstanding ('DSO') schedule.

"The decline in net income was primarily due to write downs on our display technology ('DT') inventory, following restructuring measures aimed at enhancing our competitiveness and innovation in that segment.  Global demand for LCD products was weak in 2011, which caused product sales to fall for most leading international LCD TV manufacturers.  The display industry is shifting towards newer technologies, including 3-D TVs, OLED screens, and interactive displays.  We believe the interactive display market, in particular, has enormous potential for applications ranging from corporate use to transportation, energy, healthcare, education, retail, entertainment, and many others.  We have been investing a great deal of energy and resources in developing new products featuring advanced, multi-functional interactive display technologies, and we are very excited about our move into this space.  The market opportunity for interactive display technology in China is great, and although we are still in the process of building critical scale, we believe we are on-track to become the front-runner in this new market.  Currently, only a few major players in this market have comparably strong hardware and software capabilities. 

"We have recently introduced, or expect to introduce in 2012, our new generation of advanced digital technology products including the new CNIT IT-Pad, a display device with a built-in, customizable computer, and a digital high-definition touch-screen tailored for 'interactive teaching,' and the CNIT DS-Pad, a multimedia advertising device that is customizable for use in various environments, with traditional or touch-screen technology.  We are also hard at work developing new proprietary technologies to enhance our leading position in China.  As of December 31, 2011, we had 118 registered and copyrighted software products, 21 pending applications, and held 17 patents.

"We were pleased to see an increase in sales of our system integration services, which grew 70.0% to $27.7 million.  This resulted from increased demand from the Shenzhen Summer Universiade in August 2011, as well as other new projects we secured during the year.  We will continue to focus on system integration, along with our geographic information systems ('GIS'), and hospital information systems ('HIS') segments, both of which are expected to have double-digit growth in 2012 as we continue to grow these businesses.

"Despite setbacks caused by a tough environment, we are excited about our future.  We expect 2012 to continue to be a transitional one, as we continue to move away from government public security projects and focus on our DT, GIS, and HIS businesses.  In addition, our DSOs are likely to be lower than in previous years because our DT business enjoys a shorter collection period.  These and other improvements, including our more stringent customer acceptance policies, have already started to yield results, especially in our operating cash flow.  While 2012 is still likely to pose many challenges, we are highly confident in the long-term value we are building for shareholders."

Fourth Quarter 2011 Results

Revenues

For 4Q 2011, revenue was $31.2 million, compared to $61.2 million in 4Q2010, a decrease of $30.0 million, or 49.0%.  The decline in total revenue was primarily due to the Chinese government's implementation of macroeconomic tightening policies, which led to a slowdown in projects for the Company's government customers, which have traditionally been its core customer base; and secondarily due to the weak global demand and challenging industry dynamics for flat-screen TV products.  Finally, in 2011 the Company liquidated some of HPC's inventory that is not aligned with the new strategic direction as part of the restructuring process.

Product sales decreased by $12.6 million, or 46.9%, to $14.3 million in 4Q 2011, as compared to $26.9 million in 4Q 2010.  Product sales constituted 45.7% of total revenue during the current period as compared with 43.9% during the prior year.  Product sales decrease was primarily due to the Company's strategy of shifting from low-end to high-end DT products and lower prices of traditional LCD TV products in the midst of a challenging global business environment.

Software sales decreased by 60.2% to $9.3 million in 4Q 2011, from $23.4 million for the three months ended December 31, 2010, mainly due to the Chinese government's implementation of macroeconomic tightening policies.  Software sales constituted 29.8% of total revenue, as compared to 38.2% during the prior year.

Sales of system integration services decreased by 13.5% to $7.5 million in 4Q 2011, as compared to $8.7 million in 4Q 2010. As a percentage of revenue, it increased to 24.0% during 4Q 2011 as compared with 14.1% during 4Q 2010.

Other revenue was $173,101 in 4Q 2010, a decrease of 92.6%, from $2.3 million in 4Q 2010.  Other revenue was mainly derived from maintenance services during the fourth quarter of 2011.

Gross Profit and Gross Margin

Cost of revenues decreased $17.7 million, or 44.6%, to $22.0 million in 4Q 2011, from $39.7 million in 4Q 2010. As a result, gross margin was 29.6% in 4Q 2011, a decrease of 559 basis points, from 35.2% in 4Q 2010.

The decrease in the overall gross margin resulted from a number of factors, including revenue shifting from IT segment to DT segment, lower software revenues, lower system integration gross margins, and lower prices of LCD TV products while the cost of manufacturing rose during 4Q 2011.

Administrative Expenses

Total administrative expenses increased by $3.9 million, or 50.6%, to $11.7 million in 4Q 2011, from $7.8 million in 4Q 2010.  As a percentage of revenue, administrative expenses increased to 37.5% in 4Q 2011, from 12.7% for 4Q 2010.  The increase was primarily due to an inventory impairment charge of approximately $4.5 million, and an increase of $3.2 million in bad debt allowance in 4Q 2011.

Research and Development Expenses

Research and development expenses increased to $1.5 million in 4Q 2011 from $1.0 million in 4Q 2010, an increase of $0.5 million, or 57.4%.  As a percentage of revenue, research and development expenses increased to 4.8% in 4Q 2011, from 1.5% in 4Q 2010.  The increase was primarily a result of the Company's efforts to improve product profitability and develop new products, especially in its DT segment.

Selling Expenses

Selling expenses increased $0.3 million in 4Q 2011, or 15.0%, to $2.3 million, from $2.0 million in 4Q 2010. As a percentage of revenue, selling expenses increased to 7.2% for 4Q 2011, from 3.2% in 4Q 2010.  This increase was primarily due to the Company's efforts to introduce new products during the quarter.

Income from Operations

Income from operations was a loss of $6.2 million in 4Q 2011, a decrease of $17.1 million, from $10.9 million in 4Q 2010.

Net Income Attributable to the Company

As a result of the foregoing factors, net income attributable to the Company decreased by $15.0 million to a loss of $6.8 million in 4Q 2011, from $8.2 million in 4Q 2010.

Cash and Cash Equivalents

As of December 31, 2011, the Company had $14.0 million in cash and cash equivalents, and $12.5 million in restricted cash, as compared to $18.2 million in cash and cash equivalents, and $8.3 million in restricted cash as of December 31, 2010.  During 4Q 2011, cash provided by operating activities amounted to $9.1 million, an increase of 12.9% from $8.08 million in 4Q 2010.

Year 2011 Results

Revenues

For FY 2011, revenue was $114.5 million, compared to $163.8 million for FY 2010, a decrease of $49.3 million, or 30.1%.  The decrease was primarily due to the Chinese government's implementation of macroeconomic tightening policies, which led to a slowdown in projects for the Company's government customers that have traditionally been its core customer base; and, secondarily due to the weak global demand and challenging industry dynamics for flat-screen TV products.

Software sales decreased by $51.1 million, or 56.5%, to $39.3 million for FY 2011, from $90.4 million for FY 2010.  Software sales constituted 34.3% of total revenue in 2011, compared with 55.2% in 2010.  The decrease was mainly due to the Chinese government's implementation of macroeconomic tightening policies and the curtailment of its large economic stimulus package.  These led to a slowdown in software projects for the Company's government customers.  In addition, during 2011 the Company instituted more stringent customer acceptance policies, which limited new projects to those with solid credit credentials and long-term business prospects in light of the unfavorable government fiscal environment.

Product sales decreased by $6.9 million, or 12.9%, to $46.4 million for FY 2011, as compared to $53.3 million in FY 2010.  Product sales constituted 40.5% of total revenue during 2011 as compared with 32.5% during 2010. The decrease in product sales primarily reflected 1) the Company's efforts to transition its DT segment from the increasingly competitive and low-margin flat-screen TV market into the multi-functional and interactive display technology markets, which caused total product unit sales to fall, and 2) lower pricing of the Company's traditional flat-screen TVs in the midst of increasing industry competition and weak global consumer demand for flat-screen TVs.

Sales of system integration services increased by $11.4 million, or 70.0%, to $27.7 million for FY 2011, as compared to $16.3 million for FY 2010.  As a percentage of revenue, it increased from 9.9% during 2010 to 24.2% during 2011.  Such growth primarily resulted from an increase in demand for system integration solutions in connection with the Shenzhen Summer Universiade, which was held in August 2011, and other new projects during 2011.

Other revenue decreased from $3.8 million in FY 2010 to $1.1 million in FY 2011, a decrease of $2.7 million, or 70.7%.  Other revenue was mainly derived from maintenance services in 2011, while in 2010, in addition to maintenance services, the Company also generated royalty income by licensing other manufacturers to use the HPC trademark.

IT segment accounted for 59.6% of total revenue for FY 2011, as compared with 69.4% for FY 2010.  DT segment represented 40.4% of total revenue for FY 2011, compared with. 30.6% for FY 2010.

Cost of Revenue, Gross Profit, and Gross Margin

Cost of revenue decreased $23.1 million, or 24.7%, to $70.2 million, for FY 2011, from $93.3 million for FY 2010.  As a percentage of revenue, cost of revenue increased to 61.3% during FY 2011, from 56.9% during FY 2010.

Gross profit decreased $26.2 million, or 37.2%, to $44.3 million for FY 2011, from $70.6 million for 2010. Gross margin decreased by 437 basis points to 38.7% in 2011 from 43.1% in 2010. 

The decrease in gross profit margin resulted from several factors.  First, in 2011 the Company continued its effort to increase DT solutions as a percentage of total revenues.  The percentage of DT revenue increased from 30.6% during 2010 to 40.4% during 2011.  The increase in contribution from DT revenues resulted in a decrease in gross profit margin for 2011, as DT solutions business has lower average gross margins than other segments of the Company's business.  Second, due to the Chinese government's implementation of macroeconomic tightening policies, the Company's government customers reduced software project orders.  As a result, the percentage of software revenue decreased from 55.2% during 2010 to 34.3% in 2011.  The decrease in contribution from software revenues resulted in a decrease in gross profit margin for 2011 as, on average, software projects have higher average gross margins than other segments of the Company's business.  Third, the gross profit margin for system integration business decreased from 49.3% during 2010 to 29.1% in 2011, primarily due to the high profit margin of certain projects in the 2010 period.  Finally, the Company lowered its LCD TV prices in the face of increased competition and weak global consumer demand, while costs of manufacturing continued to rise in 2011.  However, as the Company became more selective with its acceptance of orders in an effort to improve the quality of earnings, the gross margin for product and software sales were higher in FY 2011 compared to FY 2010.

Administrative Expenses

Administrative expenses increased by $4.2 million, or 22.3%, to $22.8 million for FY 2011, from $18.6 million for FY 2010.  As a percentage of revenue, administrative expenses increased to 19.9% for 2011, from 11.4% for 2010.

Research and Development Expenses

For FY 2011, research and development expenses increased by $1.5 million, or 48.6%, to $4.5 million, from $3.0 million for FY 2010.  As a percentage of revenue, research and development expenses increased to 3.9% for 2011, from 1.8% in 2010.  Such an increase was primarily a result of the Company's efforts to improve product profitability and develop new products.

Selling Expenses

Selling expenses increased $1.2 million, or 18.3%, to $7.5 million for FY 2011, from $6.4 million for FY 2010.  As a percentage of revenue, selling expenses increased to 6.6% for 2011, from 3.9% for 2010.  The increase in selling expenses reflects the Company's heightened efforts in national market expansion.

Income from Operations

Income from operations decreased by $33.1 million, or 77.6%, to $9.53 million for FY 2011, from $42.6 million for 2010.  Net income margin decreased to 7.5% in 2011 from 21.7% in 2010.

Net Income Attributable to the Company

Net income attributable to the company was $7.9 million for FY 2011, as compared to $34.4 million for 2010, a 77.0% decrease.  As a result, net margin decreased to 6.9% in 2011 from 21.0% in 2010.

Cash and Cash Equivalents

As of December 31, 2011, the Company had cash and cash equivalents of $14.0 million, compared to $18.2 million as of December 31, 2010.  Restricted cash was $12.5 million as of December 31, 2011, compared to $8.3 million as of December 31, 2010.  Cash provided by operating activities amounted to $16.3 million, a decrease of 39.4% from $26.9 million in the prior year.

Financial Outlook

For fiscal year 2012, the Company updates its guidance with projected revenue in the range of $110 million to $120 million and net income in the range of $3 million to $5 million.  As 2012 continues to be a transitional year for the Company, it expects to regain growth momentum in 2013 and improve on overall operating metrics.

Conference Call

China Information Technology will host a conference call and live webcast at to discuss these results on Wednesday, March 7, 2012, at 7:00am Eastern Standard Time (EST) (8:00pm in Beijing and Hong Kong).

The dial-in details for the live conference call are as follows:

Conference ID: 56650145

A live and archived webcast of the call will be available on the Investor Relations section of China Information Technology's website at http://www.chinacnit.com/.

A telephone replay of the call will be available beginning two hours after the conclusion of the conference call through 11:59 pm Eastern Daylight Time, March 14, 2012.

The dial-in details for the replay are as follows:

Conference ID: 56650145

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" including statements regarding: the financial outlook of the Company; the ability of the Company to secure future opportunities in the market by leveraging its R&D capabilities and reputation; the ability of the Company to develop new products and new markets successfully; the general ability of the Company to achieve its commercial objectives, including the Company's plan to sustain growth while creating shareholder value; the business strategy, plans and objectives of the Company and its subsidiaries; and any other statements of non-historical information. 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.

Supplemental disclosure of significant non-cash transactions:

On November 11, 2009, 550,965 shares of common stock were issued for the equity portion of the purchase price of approximately $8.46 million of Huipu.

In 2009, upon achievement of earn out targets by ISS, Bocom and Zhongtian, approximately 452,582 previously issued shares became no longer returnable and resulted in additional equity purchase consideration and goodwill of approximately $5,58 million

In 2010, upon achievement of earn out target by Zhongtian, 177,582 previously issued shares became no longer returnable and resulted in additional equity purchase consideration and goodwill of $1.85 million. Huipu achieved earn out target in 2010 and 165,289 shares will be issued for equity portion of purchase price of Huipu.

On February 8, 2011, the Company granted eligible employees a total of 125,000 shares of the Company's common stock under the China Information Technology, Inc. as compensation. The fair value of these shares of approximately $1.1 million, based on the quoted market price, was accrued as of December 31, 2010 as the compensation was for services provided in 2010.

On May 3, 2011, upon achievement of earn out targets by Huipu, the Company issued 165,289 shares of the Company's common stock in connection with the acquisition of Huipu.

On August 16, 2011, the Company issued a total of 925,926 shares of the Company's common stock at a conversion price of $5.4 per share as full repayment of shareholder's loan of $5.0 million.

On August 30, 2011, the Company settled the remaining potential earn out for 2011 and 2012 with Huipu's former shareholder and issued 344,354 shares of the Company's common stock in connection with the acquisition of Huipu .

SOURCE China Information Technology, Inc.