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China Information Technology Updates on 4Q and Year End 2012 Results [Manufacturing Close - Up]
[April 30, 2013]

China Information Technology Updates on 4Q and Year End 2012 Results [Manufacturing Close - Up]

(Manufacturing Close - Up Via Acquire Media NewsEdge) China Information Technology, Inc., a provider of information technologies and display technologies based in China, announced its financial results for the fourth quarter and fiscal year ended Dec. 31, 2012.

In a release dated April 22, the Company said that highlights include: -Revenues decreased by 5.9 percent YoY to $29.4 million -Gross profit decreased by 8.7 percent YoY to $8.5 million -Operating loss of $45.4 million mainly due to increases in goodwill and other long-lived impairments and bad debt reserves -Net loss of $48.5 million; adjusted net loss of $23.1 million -Fully diluted net loss per share of $1.79; -Adjusted fully diluted net loss per share of $0.86 -Cash flow from operations decreased 89.0 percent to $1.0 million Year 2012 Financial Highlights -Revenues decreased 24.6 percent YoY to $86.4 million -Gross profit decreased 53.7 percent YoY to $20.5 million -Operating loss of $85.7 million -Net loss of $89.6 million; adjusted net loss of $46.8 million -Fully diluted net loss per share of $3.32; -Adjusted fully diluted net loss per share of $1.73 -Cash flow from operations decreased 157.1 percent to a cash outflow of $9.3 million Jiang Huai Lin, Chairman and Chief Executive Officer of the company, said, "During 2012, challenging macro environment and tight government fiscal policies in China continued to have a negative impact on our businesses, especially in our government-client based IT segment. Although our revenues for the full year 2012 decreased by 24.6 percent as compared with 2011, we continued to reap from our business transition strategy with tremendous efforts being invested in the display technology segment during past quarters. Our digital technology business continued to make more significant contributions to our overall sales mix, representing 53.8 percent of total revenue for the year, versus 40.5 percent in 2011.

"Despite overall revenue decline, our DT business maintained its sales volume of the previous year. We secured and completed numerous important contracts in our DT segment under China's "Digital Campus" initiative, including a $10 million contract with education clients in Anhui Province. We expect our robust implementation of this pilot project will lead to greater opportunities with rollout of more education information technology initiatives in China. According to Chinabaogao.com, the IT spending in China's education industry reached RMB 43.9 billion in 2012, with a 20.9 percent annual growth rate. Furthermore, by leveraging our strong capabilities in software development to broaden and enhance our DT product features, and by introducing web-enabled services, including an advanced cloud distribution system embedded in our digital signage panel products, we are well positioned to meet the anticipated demand of our emerging markets.


"In our IT segment, despite significant downturn of our traditional core digital public security business, we achieved healthy year-over-year growth in our GIS and DHIS sections, as we continued to win contracts related to China's "Smart Grid", "Map World" and health and medical reform initiatives. We also look to capture other IT market opportunities in China such as the newly launched "Smart City" plan, an initiative that focuses on the technologies of the Internet of Things and cloud computing and also embraces sectors such as transportation, healthcare and public security. According to CCID Consulting, the IT spending of China's Smart City initiative will reach RMB 170 billion by 2014.

"The year of 2013 will be important for us as the company expects to finish the final phase of its strategic transition process. We also expect in the second half of the year to see momentum picking up in some of the new key sectors especially digital education. We have been channeling resources within our operations to synergize different elements between our DT and IT segments in an effort to create innovative and value-added product offerings. A good example is our new integrated offerings which comprise enhanced display technologies, proprietary software, and web technologies that will provide our customers with seamless and fully-integrated hardware, software, and cloud-based services that will allow the company to enhance profitability and generate recurring revenues." Fourth Quarter 2012 Results Revenue For Q4 2012, revenue was $29.4 million, compared to $31.2 million in Q4 2011, a decrease of $1.8 million, or 5.8 percent. The decline in total revenue was primarily due to the continued slowdown in projects for the Company's government customers, which have traditionally been its core customer base; and secondarily due to the Company's conscious effort to realign its business operations between IT and DT and between government and non-government customers.

Product sales decreased by $1.0 million, or 7.0 percent, to $13.3 million in Q4 2012, as compared to $14.3 million in Q4 2011. Product sales constituted 45.3 percent of total revenue during the current period as compared with 45.7 percent during the prior year. The 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 34.4 percent to $6.1 million in Q4 2012, from $9.3 million for the three months ended Dec. 31, 2011, mainly due to the continued sluggishness in the Company's government client sector in light of the challenging government fiscal policies and our more stringent client acceptance policies. Software sales constituted 20.7 percent of total revenue, as compared to 29.8 percent during the prior year.

Sales of system integration services increased by 30.7 percent to $9.8 million in Q4 2012, as compared to $7.5 million in Q4 2011. As a percentage of revenue, it increased to 33.2 percent during Q4 2012 as compared with 24.0 percent during Q4 2011.

Other revenue was $217,899 in Q4 2012, an increase of 25.9 percent, from $173,101 in Q4 2011.

Gross Profit and Gross Margin Cost of revenues decreased $1.1 million, or 5 percent, to $20.9 million in Q4 2012, from $22.0 million in Q4 2011. As a result, gross margin was 28.8 percent in Q4 2012, a decrease of 88 basis points, from 29.6 percent in Q4 2011.

The decrease in the overall gross margin resulted from a number of factors, including revenue shifting from the IT segment to the DT segment, lower software revenues, lower system integration gross margins, and lower prices of LCD TV products, while the cost of manufacturing rose during Q4 2012.

Administrative Expenses Total administrative expenses increased by $18.8 million, or 160.0 percent, to $30.5 million in Q4 2012, from $11.7 million in Q4 2011. As a percentage of revenue, administrative expenses increased to 103.7 percent in Q4 2012, from 37.5 percent for Q4 2011.

Notable changes that resulted in increased administrative expenses included: (1) an increase of $13.3 million in provision of accounts receivable; (2) an increase of $4.1 million in impairment of purchased software; and (3) an increase of $2.8 million in depreciation and amortization expenses. The increase in the provision of accounts receivable was due mainly to the continued sluggishness in the Company's government client sector relating to the digital public security business in light of the challenging government fiscal policies. The impairment of purchased software reflected the declining market value of certain purchased software in light of the protracted challenging environment in the Chinese government software segment.

Research and Development Expenses Research and development expenses decreased to $0.9 million in Q4 2012 from $1.5 million in Q4 2011, a decrease of $0.6 million, or 40.6 percent. As a percentage of revenue, research and development expenses decreased to 3.0 percent in Q4 2012, from 4.8 percent in Q4 2011.

Selling Expenses Selling expenses increased $1.2 million in Q4 2012, or 52.2 percent, to $3.4 million, from $2.3 million in Q4 2011. As a percentage of revenue, selling expenses increased to 11.7 percent for Q4 2012, from 7.2 percent in Q4 2011. This increase was primarily due to the Company's efforts to introduce new products during the quarter.

Impairment of goodwill In light of the negative impact as a result of the falling economic growth, stringent macro policies, and declining industry trends especially in the traditional hardware display sector, the Company tested its goodwill for impairment during the second quarter of 2012 and the fourth quarter 2012. After analyzing the various operations and reporting units, the Company came to the conclusion that a goodwill impairment loss was probable, and consequently recognized a goodwill impairment loss of $19.0 million during Q4 2012 based on its best estimation.

Loss from Operations Loss from operations was $45.4 million in Q4 2012, representing an increase of loss in an amount of $39.2 million, from a loss of $6.2 million in Q4 2011.

Net Loss Attributable to the Company As a result of the foregoing factors, net loss attributable to the Company decreased by $41.6 million to a loss of $48.5 million in Q4 2012, from $6.8 million in Q4 2011.

Cash and Cash Equivalents As of Dec. 31, 2012, the Company had $10.7 million in cash and cash equivalents, and $10.3 million in restricted cash, as compared to $14.0 million in cash and cash equivalents, and $12.5 million in restricted cash as of Dec. 31, 2011. During Q4 2012, cash provided by operating activities amounted to $1.0 million, a decrease of 89.0 percent from $9.1 million in Q4 2011.

Year 2012 Results Revenue For FY 2012, revenue was $86.4 million, compared to $114.5 million for FY 2011, a decrease of $28.2 million, or 24.6 percent. The decrease was primarily due to challenging macro environment and difficult fiscal environment faced by many public sector clients as a result of the Chinese government's implementation of macroeconomic tightening policies, which led to a slowdown in projects for government customers, which traditionally have been the Company's core customer base; and, secondarily, due to the Company's conscious effort to realign its business operations to create a better revenue mix between IT and DT segments and between government and non- government customers.

Product sales decreased by $0.75 million, or 1.60 percent, to $45.7 million for FY 2012, as compared to $46.4 million for FY 2011. Product sales constituted 52.9 percent of total revenue during 2012 as compared with 40.5 percent during 2011. The increase in product sales as a percentage of total revenue primarily reflected the Company's successful marketing campaign in promoting new DT products, its ability to win significant large DT projects in the emerging China digital education market during 2012.

Software sales decreased by $20.7 million, or 52.7 percent, to $18.60 million for FY 2012, from $39.3 million for FY 2011. Software sales constituted 21.5 percent of total revenue during 2012, compared with 34.3 percent during 2011. The decrease was mainly due to the Chinese government's continued austere fiscal policies and the curtailment of the massive government economic stimulus package, which led to a slowdown in software projects for our government customers. 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 $6.8 million, or 24.5 percent, to $20.9 million for FY 2012, as compared to $27.7 million for FY 2011. As a percentage of revenue, it was 24.2 percent the same as in 2011. The decrease was mainly the result of the relatively sluggish macro-economic growth in 2012 and a lack of new large system integration solutions engagements in connection with large projects comparable to the Shenzhen Summer Universiade, which was held in August 2011.

Other revenue increased from $1.1 million for FY 2011 to $1.2 million for FY 2012, an increase of $0.1 million, or 5.7 percent. Other revenue was mainly derived from maintenance services.

Cost of revenue and gross profit Cost of revenue decreased by $4.3 million, or 6.2 percent, to $65.9 million for FY 2012, from $70.2 million for FY 2011. As a percentage of revenue, cost of revenue increased to 76.3 percent for FY 2012, from 61.3 percent for FY 2011. As a result, gross profit as a percentage of revenue was 23.7 percent for FY 2012, a decrease of 1,496 basis points from 38.7 percent for FY 2011.

The decrease in gross profit margins resulted from several factors. First, in the year ended Dec. 31, 2012, the Company continued its efforts to increase DT solutions as a percentage of total revenue. The percentage of DT revenue increased from 40.4 percent for FY 2011 to 53.8 percent for FY 2012. The significant increase in contribution from DT revenue resulted in a decrease in gross profit margin for FY 2012, as DT solutions business generally has lower average gross margins than other segments of our business. Secondly, 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 34.3 percent for FY 2011 to 21.5 percent for FY 2012. Our software business typically command higher gross margins that other business segments.

Administrative expenses Administrative expenses increased by $41.8 million, or 183.5 percent, to $64.6 million for FY 2012, from $22.8 million for FY 2011. As a percentage of revenue, administrative expenses increased to 74.8 percent for 2012, from 19.9 percent for 2011. Notable changes that resulted in increased administrative expenses included: (1) an additional $2.2 million in inventory write downs; (2) an increase of $20.1 million in provision of accounts receivable; (3) an increase of $1.2 million in depreciation and amortization expenses; and (4) an increase of $11.8 million in impairment of purchased software. DT segment's inventory was written down mainly because the business has been shifting away from the traditional LCD business which has been facing a global decline. The increase in the provision of account receivable was due mainly to the continued sluggishness in the Company's government client sector relating to the digital public security business in light of the challenging government fiscal policies. The impairment of purchased software reflected the declining market value of certain purchased software in light of the protracted challenging environment in the Chinese government software segment.

Research and development expenses Research and development expenses increased by $0.5 million, or 10.5 percent, to $5.0 million for FY 2012, from $4.5 million for FY 2011. As a percentage of revenue, research and development expenses increased to 5.7 percent for 2012, from 3.9 percent in 2011. Such increase was primarily due to the Company's efforts to develop new products as well as to improve the future profitability of existing products.

Selling expenses Selling expenses increased by $2.3 million, or 30.1 percent, to $9.8 million for FY2012, from $7.5 million for FY 2011. As a percentage of revenue, selling expenses increased to 11.3 percent for FY 2012, from 6.6 percent for FY 2011. This increase was due to new product launches, increasingly nationwide market expansion, which requires increased travel, promotional, and telecommunication expenses, as well as increased total compensation to sales and marketing staff.

Impairment of goodwill In light of the negative impact as a result of the falling economic growth, stringent macro policies, and declining industry trends especially in the traditional hardware display sector, we tested goodwill for impairment in the fourth quarter of 2012. After analyzing the various operations and reporting units, the Company came to the conclusion that a goodwill impairment loss was probable, and consequently recognized a goodwill impairment loss of $26.8 million for FY 2012 based on its best estimation.

Net loss attributable to the Company Net loss attributable to the Company was $89.6 million for FY 2012, as compared to a net income of $7.9 million for FY 2011.

Cash and Cash Equivalents During the year ended Dec. 31, 2012, net cash used in operating activities was $9.3 million, as compared to an operating net cash inflow of $16.3 million in the same period of 2011. The decrease was primarily due to business operational loss during the year ended Dec. 31, 2012.

China Information Technology, Inc., through its subsidiaries and other consolidated entities, specializes in geographic information systems, digital public security technology, and hospital information systems.

((Comments on this story may be sent to newsdesk@closeupmedia.com)) (c) 2013 ProQuest Information and Learning Company; All Rights Reserved.

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