Comtech Group, Inc. Reports Record Quarterly Results
biz.yahoo.com
Wednesday August 9, 4:01 pm ET
- Second Quarter Revenue Increases 65.6% to $41.6 million; Net Income up 40.5% to $3.6 million
- For the Sixth Consecutive Quarter the Company Achieved the Highest Quarterly Revenue in its History and for the Fifth consecutive Quarter Achieved Record Net Income.
- Company Increases 2006 Annual Revenue Guidance to $155 million from Earlier Guidance of $135 million to $140 million
SHENZHEN, China, Aug. 9 /PRNewswire-FirstCall/ -- Comtech Group, Inc. (Nasdaq: COGO), a leading provider of customized module design solutions as well as other engineering and business services for more than 200 domestic and international technology product manufacturing companies based in China, today announced financial results for its second quarter which ended June 30, 2006. All results are reported in U.S. dollars (USD).
The Company reported record revenue of approximately $41.6 million, up 65.6 percent compared to $25.1 million reported in the second quarter of 2005. The Company experienced continued growth in all three of the Company's primary markets: mobile handset, telecommunications infrastructure equipment and digital consumer electronic products which was driven by the expanding Chinese economy, increasing Chinese consumer disposable income and the further expansion of domestic Chinese telecommunication vendors into new and emerging international markets. The Company's engineering services segment, which was launched earlier this year, contributed $1.5 million in revenue, which was 50.0 percent higher compared to the $1.0 million reported in the first quarter of 2006. Net income for the quarter was approximately $3.6 million, up 40.5 percent from the $2.6 million reported for the same period last year. Earnings per share or ("EPS") on a U.S. GAAP basis was $0.11 with pro forma EPS (excluding share-based compensation expense) of $0.12.
Key Financial Indicators
(all numbers in thousands, except per-share amounts)
Q2 2006 Q2 2005 Percent
Change
Consolidated Revenue $41,588 $25,107 65.6%
Cost of Revenues $33,901 $20,676 64.0%
Gross Profit $7,687 $4,431 73.5%
Total Net Operating Expense $3,688 $1,480 149.2%
Income from Operations $3,999 $2,951 35.5%
Net Income $3,600 $2,562 40.5%
EPS Diluted $0.11 $0.10 10.0%
Pro forma EPS Diluted $0.12 $0.10 20.0%
(excluding share-based expense)
(1) The US dollar amounts are calculated based on the conversion rate of
US $1 to RMB 7.9943 as of June 30, 2006 and US $1 to RMB 8.2765 as of
June 30, 2005.
(2) Included in the Q2 2006 net income was an amount of $388,000 for
share-based compensation cost to reflect the adoption of Statement of
Financial Accounting Standards No.123 (revised 2004), Share-Based
Payment ("SFAS 123R"), effective January 1, 2006. Excluding the
share-based compensation cost, the Company would have reported a net
income of $4.0 million or a $0.12 net income per diluted share in Q2
2006.
Second quarter highlights include:
-- Revenue increased both sequentially and year-over-year with the
consumer electronics product lines, which mainly encompasses home
entertainment electronics, experiencing the highest growth of
55.7 percent and 427.8 percent respectively.
-- To meet increasing demand both domestically and internationally for
engineering services the Company has doubled the number of provinces in
China they now serve to six and are close to finalizing additional
agreements to open offices in Malaysia, Thailand and Indonesia.
-- The Company announced several new contract wins covering multiple
industry verticals during the quarter with major OEM's including;
Huawei, ZTE Corporation and a leading domestic IPTV vendor. These new
contracts will enable the Company to diversify revenues and address the
fast growing domestic Chinese consumer market while providing tangible
future revenue growth drivers.
Recent Developments:
Subsequent to the end of the second quarter, Comtech extended its relationship by finalizing a new purchasing agreement with ZTE Corporation, China's second largest telecom manufacturer to provide customized module design solutions for ZTE's next generation optical telecom solutions. ZTE has been a customer of Comtech for nine years but this new contract is important as it validates the Company's designs in the evolving marketplace, helping to secure future business as well as provide added visibility to Comtech in the second half of 2006. Management expects this business to total at least $5.0 million in combined revenues for the third and fourth quarter of 2006, representing continued momentum when compared to the first half of the year.
Financial Results:
Revenue for the second quarter was approximately $41.6 million, an increase of 65.6 percent compared to $25.1 million in the second quarter of last year. The composition of revenues was: $16.1 million, or 38.7 percent of total sales for mobile handset sales representing a 22.0 percent increase, $14.6 million, or 35.1 percent of sales for telecommunications infrastructure equipment representing a 44.6 percent increase, and $9.5 million for digital home entertainment products and others, or 22.8 percent of total sales which is up significantly versus minimal revenues last year. The Company's new engineering business services revenues contributed $1.5 million for the quarter as compared to $1 million in the first quarter of 2006.
Cost of revenues, which includes the cost of components from suppliers and the direct cost of services, were $33.9 million compared to $20.7 million during the comparable quarter last year representing an increase of 64.0 percent. Gross profit for the quarter was approximately $7.7 million, up 73.5 percent compared to $4.4 million during the comparable quarter last year. Gross margins were 18.5 percent representing an increase from 17.6 percent during the year ago period. Gross margins for each business segment remain stable and within anticipated ranges with the increase in gross margin compared to last year due to the ongoing benefit from increasing engineering service, and digital home entertainment revenue during the quarter.
"I am pleased with our results for the quarter as we recorded the highest revenue and net income in the Company's history. Our revenues during the second quarter were positively impacted by strong growth in our telecommunications infrastructure equipment product offering and continued strong sales within our digital consumer electronics product offering," commented Jeffrey Kang, Chairman and Chief Executive Officer. "During the quarter, we experienced a measurable increase in orders from key customers such as Huawei and ZTE driven by the growth in the Chinese economy, particularly consumer spending and the further expansion of domestic Chinese telecom vendors into new and emerging international markets. We are well positioned to capitalize on these secular trends by focusing on the fastest growing areas within the technology sector while maintaining a diversified revenue base of customers to ensure that we are not overly exposed to a downturn in one particular industry. The second quarter provides a tangible example of this as we posted another quarter of record revenues and net income despite a softening in the global macro environment. We believe the second half of 2006 should continue to remain strong and we are forecasting better results in the second half of 2006 as compared to the first."
Selling, general and administrative expenses were approximately $2.5 million, up 127.3 percent compared to $1.1 million in the second quarter last year. The increase versus the prior period was a result of overall growth in the business, additional headcount attributable to the Company's new service and product offerings, expenses related to the opening of new offices in different locations for engineering services as well as expenses related to Sarbanes-Oxley 404 compliance. Research and development expenses increased by 239.0 percent as compared to second quarter last year to $1.2 million for the quarter as the Company continues to add research and development personnel and engineers and to invest in developing new and higher margin products. Specifically, the company has increased the total number of employees from approximately 200 people as of December 2005 to approximately 500 people by the end of second quarter, 2006. The 150 percent increase in personnel is mainly related to engineers for the service business. Most of these newly hired engineers are still undergoing training and are awaiting final qualification before beginning new engineering service projects. In addition, the Company opened three additional local offices in China as well as preparing to set up a new facility in Thailand for the expansion of the engineering services businesses which also impacted expenses. These new offices and facilities the Company believes are one-time front end loaded startup costs. Management expects to begin generating a return on these investments starting in the fourth quarter of 2006 and then more significantly in 2007.
Income from operations was $4.0 million representing a 35.5 percent increase from $3.0 million in the second quarter last year. As a result of higher operating expenses including the non cash stock based compensation and the costs associated with expansion of the engineering service business, operating margins declined to 9.6 percent from 11.8 percent in the second quarter last year. Excluding the share-based compensation, operating margin would have been 10.5 percent during the second quarter 2006. The effective income tax rate for the second quarter of 2006 was 6.9 percent, compared to 7.4 percent for the same period of 2005. Minority interest for the second quarter was $0.2 million up from the $0.1 million in the second quarter last year due to an increase in earnings by the non-wholly owned subsidiaries.
Net income for the second quarter was $3.6 million, or EPS of $0.11 on a U.S. GAAP basis compared to net income of $2.6 million, or $0.10 EPS in the second quarter last year. Included in the second quarter 2006 net income was an amount of $388,000 for share-based compensation cost to reflect the adoption of SFAS 123R, effective January 1, 2006. Excluding the share-based compensation cost, the Company would have reported net income of $4.0 million or $0.12 diluted earnings per share for the first quarter. The weighted average number of shares used in the calculation of diluted EPS was 33.8 million compared to 26.8 million shares in the prior-year second quarter. The increase in weighted average shares was mainly due to the additional shares issued in the secondary registered offering completed in July 2005.
"While our existing business is growing strongly, we are actively preparing for our next stage of growth," Mr. Kang continued. "Based on strong indications from our current customers we made the conscious decision to increase spending to expand our engineering services operations and are optimistic on the prospects of winning new business in these locations. We expect to begin generating a return on these investments in the second half of 2006 and then more significantly in 2007."
For the six month period ended June 30, 2006 the Company reported revenue of $75.6 million, an increase of 64.7 percent compared to the $45.9 million reported during the first half of 2005. Gross profit was $14.2 million, an increase of 86.8 percent compared to $7.6 million reported during the first half of 2005. Gross margin was 18.8 percent of sales, compared to gross margins of 16.6 percent for the same period last year. Selling, general and administrative expenses, including research and development expense, were $6.0 million and increased 150 percent as compared to $2.4 million for the same period last year. Income from operations was $8.2 million, an increase of 57.7 percent from the prior year period. Operating margins declined by 0.4 percent as compared to the same period last year to 10.9 percent as a result of higher operating expenses. Excluding share-based compensation expenses, operating expenses in the first half of 2006 would have been higher than the comparable period last year. The Company had an effective tax rate of 8.6 percent as compared to 7.8 percent the same period last year. Minority interests increased by $0.7 million as non-wholly owned subsidiaries such as Comtech Broadband and Shanghai E&T generated higher revenues and profits. Net income for the period was $6.9 million, or $0.21 per fully diluted share compared to $4.5 million, or $0.17 per fully diluted share the same period last year which was due to the increase in gross profits offset by higher expenses and an increase in the weighted average number of shares outstanding during the periods. During the first half of 2006, the Company incurred $0.7 million in non cash stock based compensation compared to none in the same period last year.
Balance Sheet:
The Company completed the quarter with $20.3 million in cash, down $3.0 million from March 31, 2006. Cash outflows from operations for the six month period ended June 30, 2006 was $1.9 million which included an increase in bills receivable of $4.3 million. Bills receivables can be discounted to banks for cash at any time, but this would give rise to certain financial expenses since these bills receivable are discounted before the maturity date. Had the Company chosen to discount bills receivables at the end of the quarter, cash flows for the quarter would have been positive. Total debt as of the end of the second quarter was $3.6 million and decreased by $1.9 million as of the end of last quarter. The Company continues to be in a strong financial position with a current ratio of 4.1 to 1. Shareholders equity improved 7.8 percent to $73.2 million as compared to the end of June 30, 2006.
Business Outlook:
Management is increasing its 2006 revenue guidance to $155 million from the earlier guidance of $135 to $140 million, representing a 45 percent growth versus 2005 and maintaining pro forma earnings per share (excluding share- based compensation expense) of $0.52 for the full-year of 2006, representing a 44 percent growth versus 2005.
Mr. Kang concluded, "We remain confident in both our short term and long term business prospects as we remain focused on the fastest growing and most profitable portions of the consumer technology market in China. Macro indications continue to point towards long term growth for Chinese consumer spending and based on our ability to consistently identify additional growth opportunities within each of our businesses we believe Comtech is well positioned to benefit." |
