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| 8-K - TELESTONE TECHNOLOGIES CORP | v205038_8k.htm |
Telestone
Technologies Investor Conference Call
Participants:
Han
Daqing, Richard Wu, John Harmon
=======================================
Introduction
and Safe Harbor: John Harmon, CCG Investor Relations
Good
morning and good evening to everyone in China. Welcome to Telestone
Technologies’ investor conference call.
With us
today are Telestone Technologies’ Chairman and CEO, Mr. Han Daqing, and VP of
Finance, Mr. Richard Wu.
Before I
turn the call over to Mr. Han, I would like to remind our listeners that
management’s remarks in this call contain forward-looking statements which are
subject to risks and uncertainties, and management may make additional
forward-looking statements in response to your questions. Therefore, the Company
claims the protection of the safe harbor for forward-looking statements that is
contained in the Private Securities Litigation Reform Act of 1995. Actual
results may differ from those discussed today, due to such risks such as, but
not limited to, changes in the company’s product and sales & marketing
strategy, plans for proceeds from its recent share offering, plans regarding its
bank credit facility, targets for accounts receivable and DSOs, and other
information detailed from time to time in the Company's filings and future
filings with the United States Securities and Exchange Commission. Although the
Company believes that the expectations in such forward-looking statements are
reasonable, there is no assurance that such expectations will prove to be
correct.
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Therefore,
the Company claims protection under the safe harbor for forward-looking
statements that is contained in the Private Securities Litigation Reform Act of
1995. Actual results may differ from those discussed today, due to known and
unknown risks and uncertainties, including all business uncertainties relating
to product development, marketing, customer lists, raw material costs, market
acceptance, future capital requirements, competition in general, and other
factors that may cause actual results to be materially different from those
described herein as “anticipated”, “believed”, “estimated” or
“expected”.
In
addition, any projections as to the Company’s future performance represent
management’s estimates as of today, Thursday, December 9,
2010. Telestone Technologies assumes no obligation to update these
projections in the future as market conditions change.
For those
of you unable to listen to the entire call at this time, today’s call is also
being webcast and an archive will be available for one
year. Information on how to access the webcast is available in the
press release issued on December 6, 2010.
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And now
it’s my pleasure to turn the call over to Telestone Technologies’ Chairman, Mr.
Han.
Opening
Remarks: Mr. Han Daqing, Chairman and CEO
Thank
you, John.
Welcome
everyone, and thank you for joining us today. As many of you are
aware, on November 24, we completed a secondary offering of 1.675 million
shares, raising approximately $18.9 in net proceeds for the
company. There is also a 15% over-allotment that is valid for 30
days. I would like to state clearly that the purpose of the secondary
offering was to raise capital primarily for a facilities expansion, which should
greatly improve our future margins, rather than to enhance our balance
sheet. In our third quarter, we were solidly profitable, with more
than $12 million in net income. EBITDA was more than $14 million in
Q3, and amounted to nearly $15.5 million in the first nine months of
2010. The offering was priced at a discount to make it attractive to
investors and to take expected dilution into account, and our stock is down just
6% from where the offering was priced.
We are
holding this conference call today to update our shareholders on our plans and
strategy.
The
topics we plan to discuss today include the following:
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1.
|
Our
WFDS strategy and deployment
plans;
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2.
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Our
plans for the proceeds of our recent share
offering;
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3.
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Our
intentions for the recently secured bank credit
facility;
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4.
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A
discussion of our accounts receivable and days’ sales outstanding
(DSOs);
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5.
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A
reaffirmation of our 2010 guidance;
and
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6.
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Our
near-term investor-relations
strategy.
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Afterwards,
we will take questions from investors.
First of
all, I would like to provide an update on the company’s product
strategy. We are very enthusiastic about our Wireless Fiber-optic
Distribution System (WFDS) solution, which combines wireless and wireline voice,
data, and video within a single fiber-optic cable that runs through large office
buildings. Our solution offers huge savings to carriers by
eliminating the need for each carrier to install its own cables, repeaters and
amplifiers in order to provide a clear cell phone signal in an office
building. Now with WFDS, a single set of equipment can be shared
among multiple carriers for multiple services.
As the
sole provider of WFDS in China, we expect to benefit from the China State
Council’s directive in January 2010 to integrate the transmission of telecom,
TV, and radio. Moreover, our WFDS-Unified Local Access Network (ULAN) technology
has been approved by China’s “Big-3” telecom carriers—China Mobile, China
Unicom, and China Telecom. In the third quarter of 2010, WFDS
accounted for 23.5% of revenues, with 45-50% gross margins. We expect
WFDS to contribute as much as 40% of next year’s revenues.
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We are
also making progress in selling our WFDS products in international
markets. Telestone currently markets its products in 29 countries,
and we plan to use our existing sales network to market our WFDS
solution. On August 9, we announced a $2.0 million contract to deploy
WFDS at a hospital in Houston, Texas, which is being implemented in phases and
should be completed by early next year. The installation supports
several carriers including AT&T, Sprint, Verizon and T-Mobile, using a total
of seven wireless frequency bands. Moreover, installations of wireless equipment
are particularly challenging in hospitals, where there are signal transmission
challenges and sensitive medical equipment, and we hope that this project opens
the door to many similar projects in the future. WFDS installations
also drive sales of Telestone wireless repeaters and amplifiers.
Since our
WFDS customers are primarily building contractors, rather than telecom carriers,
we anticipate speedier payment, and over time, a reduction in our days’ sales
outstanding. Richard will give additional details later
on. I would also like to remind investors that WFDS represents a
technology platform, not just one product, and we have a strong product
pipeline, with other versions of our WFDS technology under
development. We are currently shipping WFDS-ULAN (for Unified
Local-Access Networks in buildings.) In the next six months, we plan
to offer WFDS-UOINS for small, medium, and large-size businesses, and within the
next 24 months, we plan to launch another version of the technology, WFDS-PINS,
for large industrial and commercial zones.
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Secondly,
I’d like to discuss how we intend to use the proceeds from our recent share
offering and our recent bank credit line. First, the share
offering: Based on our expectations for the success of our WFDS
products, we have decided to bring the assembly and test of some devices
in-house. Earlier this year, we purchased 15 acres of land in nearby Hebei
province, where we plan to build a manufacturing/assembly facility, an R&D
center, and a training center for customers and distributors. This
new campus will require approximately $12 million in capital
spending. We believe that we could increase gross margins on products
that we manufacture in-house to as much as 60% in three years, versus 30% or
lower margins today. The remaining proceeds will be used for working
capital or for acquisitions. Although it is too early to talk about
specific acquisitions, we are looking at a number of companies whose products
could complement our WFDS network.
On
October 4, we announced that we had secured a five year, RMB 300 million ($44
million) line of credit with the Bank of Beijing. This credit line
provides us greater flexibility in funding our working capital needs over the
next few years, and I would like to clearly state that the credit line is not
earmarked for funding facilities expansion or acquisitions. We are
not required to use any part or all of this facility and we will only do so an
as needed basis.
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Now I
will turn the call over to our VP of Finance, Richard Wu, who will provide an
update on the company’s financials and guidance.
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Investor
Conference Call—Financials: Richard Wu, VP of Finance
Thank
you, Mr. Han.
First, I
would like to discuss the schedule of our company’s accounts
receivable. Many investors have been concerned with the company’s
high level of accounts receivable. For instance, our Q3 accounts
receivable amounted to approximately $134 million, which represents 280 days’
sales outstanding. This level of receivables is related to the
purchasing patterns of our customers. It takes our customers about
three months to approve their budgets for the new calendar year, plus another
three months for construction to take place. Once construction is
completed, we expect our days’ sales outstanding to average about 180 days,
which is typical in China.
Our three
largest customers, China Mobile, China Unicom, and China Telecom, are large
state-owned entities that clearly have a high degree of
creditworthiness. To-date, we have not experienced any significant
write-downs or increases in bad-debt provisions.
With the
exception of 2008, which was unusual due to the merger of China Unicom and
Netcom, our DSOs have declined every year since 2007. In Q3 we
recorded DSOs of 280, which was lower than what we recorded annually for
2006-2009. Investors should be aware, though, that due to our
customers’ annual purchasing cycles, we anticipate DSOs to rise in
Q4. We are targeting DSOs in the range of 300-350 days for the 2011
business year, which would mark an improvement versus the 384 DSOs we recorded
in 2009. As the WFDS mix improves, we think our DSOs can decline
further.
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Our
emerging and growing WFDS business has DSOs more in line with industry norms, as
builders and international customers typically pay within 90 days. As
this business increases as a percentage of sales, we expect our DSOs to approach
our long-term target of 120 days. As Mr. Han commented, WFDS
accounted for 23.5% of Q3 revenues, and we expect WFDS to represent
approximately 40% of our revenues next year. Our WFDS products also
require less working capital per unit of revenue than our traditional wireless
equipment, and as the WFDS mix increases, we expect our working-capital
requirements to decrease.
Now
let me provide an update on our outlook
We are
reaffirming our prior guidance for the 2010 business year. We still
expect revenues of $129.4 million and $22.9 million of net income, which
translates to EPS of $2.17. This guidance represents 80% revenue and
nearly 80% EPS growth, which would mark a very strong year. The
guidance also translates to revenues of approximately $58.5 million, net income
of $10.3 million, and EPS of about $0.97 for the fourth quarter. Our
guidance implies slightly lower EPS in Q4 than the $1.14 we reported in Q3,
despite higher revenues, due to our expectation of a higher mix of equipment,
which carries lower margins than services, which were especially strong in
Q3. Our backlog as of September 30, 2010 was $61.5
million.
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In 2011,
we plan to do more to communicate with our shareholders and the
market. We appreciate your interest in the company.. If
you have any questions, please contact us or CCG, our investor-relations firm
for further information.
With
that, we would now like to open the call to your questions.
Operator?
(Q&A
session)
Closing
Remarks: Richard Wu, VP of Finance
On behalf
of the Telestone Technologies management team, we would like to thank you for
your interest and participation on this call. Thanks again for
joining us on this call.
Operator?
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