First Quarter 2009
First quarter 2009 revenue increased 4% to $15.0 million, from $14.4 million in first quarter of 2008. Consolidated financial results of Zhongtian and Geo collectively contributed $2.5 million to the first quarter 2009 revenues. Software sales grew by $4.0 million, or 80%, to $9.0 million in the first quarter of 2009, as compared to $5.0 million in the same period a year ago. The strong year-over-year growth in software sales is driven by our continuing efforts in promoting software sales in 2009. Sales of hardware products and system integration services decreased by 38% and 35% respectively in the first quarter of 2009, as compared to the same period of 2008. The decrease in both sales of hardware products and system integration services was a result of shifting sales activities toward software during the quarter and reduced hardware sales to non-government customers with previously long payment terms.
Beginning in 1Q09, the Company consolidated revenue into three reporting segments: 1) Digital Information Security Technology ("DIST"), 2) Geographic Information System ("GIS") and 3) Digital Hospital Information System ("DHIS") to better reflect its operating structure. DIST, GIS, and DHIS revenues were $7.5 million, $5.9 million, and $1.6 million, respectively, for the first quarter of 2009.
During the quarter, the Company signed new contracts totaling $18.5 million from customers in 14 provinces and provincial cities, bringing to 28 the total number of cities in which it has a presence in China.
Of these contracts, 40% were won in the DIST sector, 46% in GIS sector, and 14% in the DHIS sector. At the end of first quarter 2009, the total value of the Company's backlog increased 11% sequentially to $34.2 million, from $30.7 million in the previous quarter.
Gross profit increased $1.4 million to $7.5 million, compared to $6.1 million for the same period last year. First quarter gross margin of 49.9% expanded 790 basis points year-over-year from 42.0%, benefiting from greater efficiencies and lower costs of software sales in large software projects.
Administrative expenses increased to $2.2 million in the first quarter of 2009, from $1.8 million in the same period last year. The increase in administrative expenses was mainly attributable to an increase of $0.3 million in bad debt provision, reflecting management's adoption of a more conservative approach in the treatment of accounts receivable.
Research and development expenses increased to $0.5 million, compared with $0.2 million in the prior year's first quarter, driven by the hiring of additional expert engineers and the development of innovative new products. Selling expenses increased to $0.6 million, from $0.4 million in the corresponding period of 2008, mainly due to the consolidation of Geo and Zhongtian, which collectively contributed $0.2 million during the quarter. As a percentage of revenue, selling expenses increased to 4.0%, from 2.9% a year ago.
Income from operations increased to $4.2 million, up 12% from $3.7 million a year ago. Accordingly, operating margins increased 200 basis points to 28%, up from 26% for the same period in 2008, driven largely by the significant expansion in gross margin in the first quarter of 2009. Income tax expense was $0.6 million, for an effective tax rate of approximately 13%.
GAAP net income increased 5.0% to $ 3.8 million, from $3.6 million for the same period in 2008. As a percentage of revenues, GAAP net income increased 20 basis points to 25.1%, from 24.9% for the same period in 2008. Consequently, earnings per diluted share in first quarter 2009 was $0.08, unchanged from the first quarter of 2008. GAAP results include: (1) approximately $0.4 million of non-cash expense related to amortization, and (2) approximately $0.2 million of non-cash expense related to employee stock compensation recognized pursuant to SFAS 123 (R).
Excluding these non-cash expenses (see "About Non-GAAP Financial Measures" toward the end of this release), adjusted net income grew 4.5% to $4.4 million, versus $4.2 million in the first quarter of 2008.
Adjusted earnings per diluted share was $0.09, unchanged from the first quarter of 2008, while diluted share count increased 1.7% to 47.5 million, from 46.7 million in the first quarter of 2008.
The Company's cash position at the end of March 31, 2009 was $7.0 million, compared to $9.6 million at the end of December 31, 2008.
During the quarter, inventory increased by $5.5 million, as the build-up of inventory was necessary in order to fulfill future obligations relating to the backlog of signed contracts. Accounts receivable increased by $3.3 million over the prior quarter's level to $46.0 million. Consequently, cash used in operating activities was $1.5 million. Despite the decreased cash position, working capital increased by $5 million to $64.2 million, from $59.2 million in the previous quarter. The Company has zero long-term debt.
Mr. Jiang Huai Lin, Chairman and CEO of the China Information Security, commented, "Though the first quarter has seasonally been a slow quarter for us because of the Chinese New Year holiday, the first three months of 2009 was even slower than anticipated, primarily due to the unexpected effect of the PRC stimulus plan on our operations. We had previously viewed the stimulus plan as a potential additional growth driver for our business. While this may subsequently prove true, the actual effect has been opposite thus far. We did not anticipate that the actual implementation of stimulus initiatives would result in the diversion of local government funding away from our core local projects, as local governments were obligated to allocate part of their spending to support those initiatives. While we continue to be pleased with our business opportunities, our product portfolio, our brand, and our leading market position, we believe that it is prudent for us to revise our year 2009 guidance to reflect the temporary deferment of local government spending."
For the full year 2009, the Company expects to achieve year-over-year revenue growth in the range of 10%-15% to a range of $94-$98 million and pro-forma net income in the range of $26.8-$28.0 million, excluding any non-cash expenses as a result of employee stock awards and amortization of intangible assets associated with recent acquisitions.
Mr. Lin concluded, "Despite our revised outlook for 2009, we remain confident in our ability to expand our market share in the DIST, GIS, and DHIS sectors in China. Through our strong research and development and unparalleled portfolio of successfully installed solutions, we have a strong foundation of leading technologies and marquee customer base to support our bids for a large share of several of China's key public initiatives. Our government customers continue to tell us about their intention to participate in the implementation of China's "Golden Shield" and "Golden Health" initiatives, and we continue to see sizable opportunities for our strong portfolio of products and services in all of our main three business segments -- DIST, GIS, and DHIS.
On the national level, we expect that the selection of our PGIS technology for use in standardizing PGIS technologies positions us for sizable opportunities in an estimated 100 provincial-level cities and municipalities over the next three years, and we expect that our successfully implemented Intelligent Border Control products serve as a model for other port cities in China and also in the civil-use sector.
Similarly, we expect that our implementation of our recently won the Phase II Shenzhen Residence Card Management project will serve as a model for large-scale rollouts, should the residence card program be extended to other cities in China. In addition, we believe that the exclusive selection of our patented Medical Case Statistics Software by the Health Department of Guangdong Province, though initially valued at $2.5 million, should drive large add-on opportunities as we complete the rollout to 1,000 hospitals by 2010. Additionally, we expect Shenzhen City will begin building infrastructure and security related projects for the 2011 World University Games, from which we anticipate important contract opportunities. We believe we are well-positioned to capture an increasing number of large projects on both national and local levels and we remain confident that we can continue to grow our business, expand our brand, profits, and ultimately our shareholder value."
About Non-GAAP Financial Measures
This press release contains non-GAAP financial measures for earnings that exclude non-cash charges. China Information Security believes that these non-GAAP financial measures are useful to investors because they exclude non-cash charges that China Information Security's 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 Security. Accordingly, management excludes the expense arising from certain non-cash charges when making operational decisions. China Information Security 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 Security's financial performance in comparison to historical periods. In addition, it allows investors to evaluate China Information Security's performance using the same methodology and information as that used by China Security'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 Security's management compensates for these limitations by providing the relevant disclosure of the items excluded.
The Company will hold a conference call to discuss the financial results at 9:00 a.m. ET on May 11, 2009. The Company invites you to join the call by dialing 1-913-312-6676. A live webcast of the conference call will be available at http://www.chinacpby.com . A replay of the call will be available from May 11, 2009 to May 18, 2009. Listeners may access the replay by dialing 1-719-457-0820, passcode: