China Information Technology, Inc. Announces Third Quarter 2010 Results

China Information Technology, Inc. (Nasdaq: CNIT), a leading total solutions provider of geographic information systems (GIS), digital public security technology (DPST) and digital hospital information systems (DHIS) in China, today announced its financial results for the third quarter ended September 30, 2010.

Third Quarter 2010 Financial Highlights

• Revenues increased 52.7% YoY to US$43.81 million

• Gross Profit increased 39.5% YoY to US$21.09 million

• Non-GAAP Operating Profit increased 24.5% YoY to US$14.55 million

• Non-GAAP Net Income increased 17.3% YoY to US$11.92 million

• Non-GAAP Fully Diluted EPS was US$0.23 vs. US$0.21 a year ago

• Cash flow from operations reached US$20.42 million

• Backlog of US$50.5 million representing 40.0% YoY growth

• Reaffirms FY2010 Revenue and Adjusted Net Income Guidance

• Issues FY2011 Revenue and Adjusted Net Income Guidance

Commenting on the Company’s third quarter earnings, Chairman and CEO, Jiang Huai Lin, said, “We are pleased to announce the results of another strong quarter.”

“We are fast becoming the IT partner of choice for many high profile government projects across China. In this past quarter alone, we won a record number of contracts from clients in 25 provinces and cities. Worth US$42 million in the aggregate, the contracts’ value represents a 40% increase compared to the same period last year.”

“The wins are indicative of both the continued demand for our unique technological expertise, as well as our brand’s growth in our core markets of geographic information systems, healthcare, and public security technologies. In addition, our key role in numerous state-level high profile projects, including China's State-sponsored Web-based Map Service ‘Map World’ and the 2011 Shenzhen Universiade, further reinforced our unmatchable brand name and core competency in our fields.”

“We own 110 software copyrights and 25 patents in China. Our technological expertise is further evidenced by the fact that six out of the seven operating entities under the CNIT umbrella enjoy the National High Tech Corporate status.”

“We updated our corporate name and ticker symbol, for the purpose of re-aligning our brand to match our expanded business scope. We also renamed our digital information security technology segment as digital public security technology (DPST) to better reflect the business of the segment.

We are well positioned as a leading provider in China’s high-growth information technology field and aim to create value for our shareholders over the long term.”

Revenues

For the three months ended September 30, 2010, revenue was $43.81 million, compared to $28.68 million for the three months ended September 30, 2009, an increase of $15.13 million, or 52.7% . During the current quarter, Huipu Electronics (Shenzhen) Co., Ltd., or Huipu, which was acquired in October 2009, contributed $8.23 million to total revenue. Excluding the impact of Huipu, organic revenue growth was 24.0% .

Software sales increased by 46.1% to $29.47 million for the three months ended September 30, 2010, from $20.18 million for the three months ended September 30, 2009. Software sales constituted 67.3% of the total revenue, decreased from 70.4% for the same period in the prior year. Excluding the impact of Huipu, software sales were 82.9% of organic revenue, reflecting the Company’s continued commitment to its core competency in software.

Product sales increased by $10.20 million, or 417.1% for the three months ended September 30, 2010, as compared to $2.44 million in the same period of 2009. Product sales constituted 28.9% of total revenue during the current period as compared with 8.5% during the same period in the prior year. Such an increase is due to the contribution from Huipu.

Sales of system integration services decreased by 77.3% for the three months ended September 30, 2010, as compared to the same period of 2009. As a percentage of revenue, it declined from 20.7% during the three months ended September 30, 2009 to 3.1% during the current quarter. Excluding the impact of Huipu, system integration was 3.8% of organic revenues.

Other revenue increased by 161.2%, from $0.13 million in the three months ended September 30, 2009 to $0.34 million in the same period of 2010. Other revenue mainly derived from maintenance services in the three months ended September 30, 2009, while in the same period of 2010, in addition to maintenance services, the Company also generated $0.18 million royalty income from Huipu by licensing other manufacturers to use the HPC trademark.

For the three months ended September 30, 2010, GIS accounted for 47.2% of the total revenue while DPST and DHIS represented 41.0% and 11.8% respectively. These compared to 34.3%, 52.5% and 13.2% of the total revenue for the three months ended September 30, 2009. The GIS segment increased by 109.9% compared with the same period of 2009, while the year-over-year growth ratios for DPST and DHIS segments were 19.3% and 37.1% respectively. The segment trends reflect the growth momentum in GIS and DHIS segments outpacing that of DPST. This is the direct result of our focus in the last few years on targeting areas with the highest barriers-to-entry and developing sustainable competitive advantages in the GIS and DHIS segments, in anticipation of accelerating market growth in the coming years. As such expectation starts to materialize, we believe we have been well positioned to capture the growth opportunities.

Gross Profit and Gross Margin

Gross profit increased $5.97 million, or 39.5%, to $21.09 million for the three months ended September 30, 2010, from $15.12 million for the same period in 2009. Gross margin was 48.1% in the third quarter of 2010, a decrease of 460 basis points, from 52.7% in the same period of 2009. Huipu yielded a gross margin of 9.7% . Excluding the impact of Huipu, gross margin of organic business was 57.0% .

Income from Operations

Income from operations increased $1.75 million, or 15.5%, to $13 million for the three months ended September 30, 2010, from $11.25 million in the corresponding period in 2009. Income from operations as a percentage of revenue decreased to 29.7% during the three months ended September 30, 2010, compared with 39.2% in 2009. On a non-GAAP basis, adjusted income from operations was $14.55 million, which increased 24.5% year-over-year.

Income Tax Expense

Income tax expense for the three months ended September 30, 2010 was $2.36 million, up 31.3% from $1.80 million for the same period in 2009.

Net Income Attributable to the Company

As a result of the factors described above, net income increased $0.88 million, or 9.1%, to $10.61 million during the three months ended September 30, 2010, from $9.73 million for the same period in 2009. On a non-GAAP basis, adjusted net income was $11.92 million, which increased 17.3% year-over-year.

Cash and Cash Equivalents

As of September 30, 2010, the Company had $25.84 million in cash and restricted cash, as compared to $14.46 million in the same period of 2009.

Net cash provided by operating activities was $20.42 million for the third quarter, making the total for the nine months ended September 30, 2010 $18.87 million, an increase of $10.54 million or 126.6% from $8.33 million net cash provided by operating activities for the same period of 2009. Such increase was attributable to the improvement in accounts receivable turnover as well as increases in accounts payable and advances from customers.

Financial Outlook

For fiscal year 2010, the Company reaffirms its guidance with projected revenue in the range of $141 million to $146 million and adjusted net income in the range of $35.5 million to $39.5 million. Additionally, with strong growth momentum and high visibility in its core business, the Company is issuing guidance for the full year 2011 with projected revenue in the range of $165 million to $172 million and adjusted net income in the range of $43 million to $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.

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 provides the non-GAAP financial measure and the related GAAP measure and provides a reconciliation of the non-GAAP measure to the equivalent GAAP measure.

Q3 2010 Reconciliation of Operating, Net Income and EPS
to Exclude SBC, Amortization of Intangible Assets and Contingent Consideration

* Represents a gain from the change of fair value of the contingent consideration for the acquisition of Huipu as at 09/30/2010, according to FASB ASC 805 – Business Combinations

Conference Call

China Information Technology will host a corresponding conference call and live webcast at 8:00 am Eastern Standard Time (EST) (9:00 pm, Beijing time).

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 from November 08, 2010 through November 16, 2010.

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 digital hospital information systems, with the goal of being the largest GIS software provider in China. Headquartered in Shenzhen, China, the Company's total solutions include specialized software, hardware, systems integration, and related services organized into three business segments -Geographic Information Systems (GIS), Digital Public Security Technology (DPST), and Digital Hospital Information Systems (DHIS). 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 ability of the Company to secure future opportunities in the market by leveraging its R&D capabilities and reputation; the continued support of the Chinese government for domestic GIS products; the general ability of the Company to achieve its commercial objectives, including the Company’s plan to sustain the 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  
http://www.chinacnit.com  

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

Teal Willingham
Tel: +86-010-5971-2001
Email: twillingham@christensenir.com
 

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
Expressed in U.S. dollars
(Except for share and per share amounts)

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (Unaudited)
Expressed in U.S. dollars
(Except for share and per share amounts)

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (Unaudited)
Expressed in U.S. dollars
(Except for share and per share amounts)

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (Unaudited)
Expressed in U.S. dollars
(Except for share and per share amounts)

CHINA INFORMATION TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (CONTINUED) (Unaudited)
Expressed in U.S. dollars
(Except for share and per share amounts)

On September 25, 2010, the Company granted eligible employees a total of 250,000 shares of the Company's common stock as compensation under the China Information Security Technology, Inc. 2007 Equity Incentive Plan (“The Plan”). The fair value of these shares of approximately $1.13 million based on quoted market price was recognized as stock-based compensation for the nine months ended September 30, 2010.

On January 12, 2010, the Company granted eligible employees a total of 213,363 shares of the Company's common stock as compensation under the China Information Security Technology, Inc. 2007 Equity Incentive Plan (“The Plan”). The fair value of these shares of approximately $1.3 million, based on the quoted market price, was accrued as of December 31, 2009 as the compensation was for services provided in 2009.

On February 2, 2009, the Company granted eligible employees a total of 60,000 shares of the Company’s common stock as compensation under the Plan. The fair value of these shares of $183,600 based on quoted market price was recognized as stock-based compensation for the six months ended June 30, 2009.

Selected information by segment is presented in the following tables for the three and nine months ended September 30, 2010 and 2009.