China Information Technology, Inc. Announces Third Quarter 2011 Results

China Information Technology, Inc. (Nasdaq: CNIT), a leading provider of Information Technology (IT) and Display Technology (DT) based in China, today announced its financial results for the third quarter ended September 30, 2011.

Third Quarter 2011 Financial Highlights

• Revenues decreased 35.0 % YoY to US$28.5 million

• Gross Profit decreased 55.0% YoY to US$9.5 million, with Gross Margin decreasing to 33.3%

• Operating Profit decreased 89.5% YoY to US$1.4 million

• Non-GAAP Net Income decreased 89.6% YoY to US$1.2 million

• Non-GAAP Fully Diluted EPS was US$0.02

• Cash flow from operations was US$7.2 million vs. US$18.9 million a year ago

Mr. Jiang Huai Lin, chairman and chief executive officer of the Company, commented, “We experienced another weak season in the third quarter of the year. As we expected, like many companies in China with public sector clientele, we also continue to be affected by the monetary tightening policies which the Chinese government enacted at the start of the year to ease domestic inflationary pressure. In particular our digital public security related business, which used to be a major contributor to our revenues, continued to suffer dramatically with the slowdown of major government projects. Our revenues in the third quarter declined 35.0% from the previous year, reflecting a sharp slowdown for our digital public security technology (DPST), geographic information systems (GIS) and hospital information systems (HIS) business lines. These three areas make up our core IT segment, which contributed $15.8 million, or 55.4%, of our total revenues in the quarter.

However, we strongly believe that the slowdown in our business this year is temporary, and that the effects of government policies will eventually ease. We have good relationships with many public sector organizations, including public security, traffic police, surveying and mapping and electric grid agencies throughout China, and hospitals in Guangdong, Guangxi, Hunan and Chongqing; we continue to work on GIS projects for China’s Shuohuang Rail, one of the main west-to-east coal transport lines in the country, while we focus on expanding our Internet-based global mapping project, Map World; and we also are continuing to work on penetrating our Geo brand in China's growing GIS market. We continue to have great faith in our technological capabilities. We expect our strong reputation and relationships will help many of our projects pick up again over the long-term.

In the meantime we will continue to manage this tough period by both maximizing commercial opportunities for our existing portfolio of products, and putting equal focus on our DT segment to offset some of the pressures resulting from the slowdown in government projects. During the quarter we launched a series of innovative new touch screen products, embedded with our core application and content software. We received positive feedback to these new products from a number of new clients from the education, media and commercial markets. Going forward we expect both our core IT and DT segments to help us realize more sustainable growth. Mr. Zhi Qiang Zhao continues to act as the Company’s Interim CFO, and we are actively engaged in vetting suitable candidates for the position. By continuing to seek opportunities for our core offerings while remaining flexible in our businesses, we are determined to weather and overcome the temporary challenges we currently face.”

Third Quarter 2011 Financial Results

Revenues

For the three months ended September 30, 2011, revenue totaled $28.5 million, compared with $43.8 million for the three months ended September 30, 2010, a decrease of $15.3 million, or 35.0% . The decrease was primarily due to the Chinese government’s implementation of monetary tightening policies, which led to a slowdown in projects for the Company’s government customers, which generated over half of revenues during the three-month periods ended September 30, 2011 and 2010.

Product sales increased by $0.4 million, or 3.2%, to $13.0 million for the three months ended September 30, 2011, as compared with $12.6 million in the same period of 2010. Product sales constituted 45.8% of total revenue during the three-month period ended September 30, 2011, as compared with 28.9% during the same period ended September 30, 2010. The increase mainly reflected the Company’s efforts to grow its DT segment, to meet market demand from non-government sectors.

Software sales decreased by $22.6 million, or 76.8%, to $6.9 million for the three months ended September 30, 2011, from $29.5 million for the three months ended September 30, 2010. Software sales constituted 24.1% of the Company’s total revenue, which decreased from 67.3% during the same period in the prior year. The decrease was mainly due to the Chinese government’s implementation of monetary tightening policies, which led to a slowdown in software projects for the Company’s government customers.

Sales of system integration services increased by $6.8 million, or 503.4%, to $8.1 million for the three months ended September 30, 2011, as compared with $1.3 million for the same period of 2010. As a percentage of revenue, system integration sales increased from 3.1% during the three months ended September 30, 2010 to 28.6% during the three months ended September 30, 2011. The  increase was mainly the result of an increase in demand for system integration solutions in connection with the Shenzhen Summer Universiade, which was held in August 2011, and new integration projects the Company secured during the second quarter of 2011, including a $2.4 million system integration contract for Shenzhen Police TETRA system.

Other revenue increased by $0.1 million, or 27.3%, from $0.3 million in the three months ended September 30, 2010 to $0.4 million in the same period of 2011. Other revenue was derived from maintenance services during the current period while during the three months ended September 30, 2010, the Company also generated royalty income.

In terms of segment weights, the Company’s IT segment accounted for 55.4% of revenues in Q3 2011, as compared with 79.6% in the same period last year, while its DT segment contributed 44.6% of revenues in Q3 2011, compared with 20.4% in the same period last year.

Cost of Revenue and Gross Profit

Cost of revenues decreased by $3.7 million, or 16.5%, to $19.0 million for the three months ended September 30, 2011, as compared with $22.7 million for the three months ended September 30, 2010. As a percentage of revenues, the Company’s cost of revenue increased to 66.7% during the three months ended September 30, 2011, from 51.9% in the same period of 2010. As a result, gross margin was 33.3% for the three months ended September 30, 2011, a decrease of 1,480 basis points from 48.1% in the same period of 2010.

The decrease in the Company’s gross profit margins resulted from the following factors:

• During the current quarter, the DT solutions business expanded from 20.4% of total revenues in the third quarter of 2010 to 44.6% in the third quarter of 2011. The DT solutions business has lower average gross margins than other segments of the Company’s business.

• As a result of the slowdown of software projects for government customers due to the Chinese government's implementation of monetary tightening policies, which caused the percentage of revenue from software sales to drop from 67.3% in the third quarter of 2010 to 24.1% in the quarter just completed. On average, software projects have higher average gross margins than other segments of the Company’s business.

• The gross profit margin for our system integration business decreased from 53.9% in the third quarter of 2010 to 26.4% in the third quarter of 2011, primarily because certain projects in 2010 had higher average gross margins

• Since the start of 2011, we have been more selective in our acceptance of orders in an effort to improve the quality of our earnings. As a result, the gross margin for software and product sales increased in the third quarter of 2011.

Administrative Expenses

Administrative expenses decreased by $0.3 million, or 4.9%, to $5.2 million for the three months ended September 30, 2011, from $5.5 million in the same period of 2010.

Research and Development Expenses

Research and development expenses increased by $0.2 million, or 18.0%, to $1.1 million for the three months ended September 30, 2011, from $0.9 million in the same period of 2010. As a percentage of revenue, research and development expenses accounted for approximately 3.9% of total revenue for the three months ended September 30, 2011, compared with 2.1% of total revenue for the same period in 2010. Such increase was primarily due to efforts to improve the profitability of existing product offerings as well as development of new products.

Selling Expenses

The Company’s selling expenses increased $0.1 million, or 7.9%, to $1.8 million for the three months ended September 30, 2011, from $1.7 million in the corresponding period of 2010. This increase was due to the Company’s increasingly nationwide market expansion, which requires increased travel and telecommunication expenses as well as increased total compensation to sales and marketing staff.

Income from Operations

Income from operations was $1.4 million in the third quarter of 2011, a decrease of 89.5% from $13.0 million in the same period in 2010.

Net Income Attributable to the Company

Net income decreased $9.7 million, or 91.3%, to $0.9 million during the three months ended September 30, 2011, from $10.6 million for the same period in 2010.

Net income attributable to the Company on a Non-GAAP basis was $1.2 million in the third quarter of 2011 versus $ 11.9 million in the third quarter of 2010, a decrease of 89.6% .

Cash and Cash Equivalents

As of September 30, 2011, the Company had cash and cash equivalents of $5.2 million, as compared with $18.2 million at the end of 2010.

Adjustment of Guidance

As a result of the significant slowdown in the Company’s IT business segment, the Company now adjusts its revenue guidance for the full fiscal year of 2011 to be between $100 million and $110 million, as compared with the previously announced revenue guidance of $165 million to $187 million. Adjusted net income is now expected to be between $15 million and $16 million, as compared with the previously announced revenue guidance of $42 million and $45 million, excluding any non-cash expenses as a result of employee stock awards, amortization of intangible assets associated with acquisitions and changes in fair value of contingent considerations.

The Company expects full fiscal year 2012 revenues to be between $110 million and $125 million. Adjusted net income for 2012 is expected to be between $9 million and $11 million, excluding any non-cash expenses as a result of employee stock awards, amortization of intangible assets associated with acquisitions and changes in fair value of contingent considerations.

About Non-GAAP Financial Measures

This press release contains non-GAAP financial measures for earnings that exclude non-cash charges. China Information Technology 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, because these measures provide a consistent method of comparison to historical periods. Moreover, management believes these non-GAAP measures reflect the essential operating activities of China Information Technology. Accordingly, management excludes the expense arising from certain non-cash charges when making operational decisions. China Information Technology 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 China Information Technology's financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Information Technology's performance using the same methodology and information as that used by China Information Technology'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, China Information Technology'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.

* Represents a gain from the change of fair value of the contingent consideration for the acquisition of Huipu Electronics (Shenzhen) Company Ltd. as at the respective reporting dates according to FASB ASC 805 – Business Combinations

Conference Call

China Information Technology will host a corresponding conference call and live webcast before the market opens on Wednesday, November 9, 2011 at 7:00 am Eastern Standard Time (EST) (which is also 8:00 pm in Beijing and Hong Kong).

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

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 Standard Time, November 18, 2011.

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

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 significance of the Company's new contract wins during the quarter; the ability of the Company to continue to strengthen its position in the industry by winning and successfully performing under national contracts; the significance of the Company’s business segments, the ability of the Company to secure future opportunities in the market by leveraging its R&D capabilities and reputation; 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 are 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: IR@chinacnit.com 
Web: http://www.chinacnit.com 

Christensen
Kathy Li
Tel: +1 480 614 3036
Email: kli@christensenir.com

Teal Willingham
Tel: +86 10 5826 4939
Email: twillingham@christensenir.com

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 Expressed in U.S. dollars
(Except for share amounts)
(Unaudited)

Supplemental disclosure of significant non-cash transactions:

On February 8, 2011, the Company granted eligible employees a total of 250,000 shares of the Company's common stock as compensation under the China Information Technology, Inc. 2007 Equity Incentive Plan. 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 Electronics (Shenzhen) Co., Ltd., a PRC company (“Huipu”), the Company issued 330,578 shares of the Company’s common stock in connection with the acquisition of Huipu.

On August 16, 2011, the Company issued a total of 1,851,852 shares of the Company’s common stock at a conversion price of $2.70 per share as full repayment for a shareholder’s loan of $5 million.

On August 30, 2011, the Company settled the remaining potential earn out for 2011 and 2012 with Huipu’s former shareholder and issued 688,707 shares of the Company’s common stock in connection with the acquisition of Huipu.