CNIT fourth quarter revenues increase 94.1% to US$61.22 million

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 fourth quarter and fiscal year ended December 31, 2010.

Fourth Quarter 2010 Financial Highlights

• Revenues increased 94.1% YoY to US$61.22 million
• Gross Profit increased 36.6% YoY to US$21.56 million
• Non-GAAP Operating Profit increased 33.3% YoY to US$13.18 million
• Non-GAAP Net Income increased 17.2% YoY to US$11.08 million
• Non-GAAP Fully Diluted EPS was US$0.21
• Cash flow from operations increased 156.3% to US$8.08 million

Full Year 2010 Financial Highlights

• Revenue increased 62.2% YoY to US$163.85 million
• Gross Profit increased 39.3% YoY to US$70.56 million
• Non-GAAP Operating Profit increased 32.8% YoY to US$47.01 million
• Non-GAAP Net Income increased 19.5% YoY to $38.5 million
• Non-GAAP Fully Diluted EPS was US$0.74
• Cash Flow from Operations increased 134.8% YoY to $26.95 million
• Updates FY2011 Revenue and Adjusted Net Income Guidance

"We are pleased to announce strong results for both the fourth quarter and full year 2010 and notable achievements across all our business segments.  In the fourth quarter we signed $39.6 million in new contracts, bringing the total value of contracts signed in 2010 to $151.5 million, up 35.8 percent as compared with the previous year," said Mr. Jiang Huai Lin, Chairman and CEO of the Company.

"Our GIS segment accounted for 43 percent of the total revenue of full year 2010. We expect the strong performance continues in 2011.  We are proud to be the sole software supplier of both GIS operating system and applications to Map World, which demonstrated the prowess of our GIS technologies for private sector users. Map World is China's first state-sponsored Web-based map service and was officially launched in January 2011 after beta testing.  It is a cloud platform for GIS basic data with numerous APIs to support secondary application developments, and is fundamental to the growth of both the 'Location Based Services' and the 'Internet of Things' industries in China going forward. We also continue to be one of the key participants of the Digital City project, which is expected to cover 100 more cities in 2011. In addition, we are one of the only two approved vendors of GIS platform software, together with ESRI, for the Smart Grid project conducted by the State Grid Corporation of China.  Current progress on the Smart Grid is gradual, however we expect it continues to serve as a long term opportunity.  As to our police-use GIS solutions, we continued to win new and follow-on contracts under China's National PGIS Standardization Project, according to its roll-out schedule."  

"Our DPST businesses represented 43 percent of total revenue in 2010.  Our DPST solutions and PGIS applications played a critical role at the 16th Asian Games held in Guangzhou in November 2010, the 2011 Shenzhen Summer Universiade, and Shanghai World Expo, one of the year's most high-profile global events.  The Expo's security command center installed our platform. It relayed prompt and accurate emergency response information for the event that hosted over 70 million visitors from around the world."

"As expected, installations of our DHIS technology continues to expand in key medical centers in Southern China.  Under our cooperation with the Guangdong Department of Health, our Medical Case Statistic Software aims to be adopted by about 2,000 hospitals in Guangdong within the next 5 years, which will make us the defacto standard setter for Guangdong Province."  

As mentioned during our third quarter conference call, we are developing a variety of products surrounding our display technologies for a number of industries such as education and media, as well as for consumers.  We have received positive feedback from our pilot customers, and expect these new products to grow meaningfully in 2011"

"Differentiating us from our competitors, we have continued to receive government recognitions.  In the third quarter, the local government granted us 100,000 square meters plot of land in the new development area with a favorable price, as an incentive to relocate our headquarters and boost the local economy.  Similarly, our newest subsidiary Huipu Electronics was recently awarded 'National High-tech Status.' As a result, all of our operating entities now enjoy this status and qualify for a more favorable corporate income tax rate at 15 percent."

"Looking ahead, our business is aligned with the top priorities of the Chinese government.  GIS, IT for public safety and HIS all fall under key development areas within China's 12th 5-year plan. In the coming years, we will continue to sharpen our edge as the standard-setter for all of our existing business segments, and diversify into the private sector with new display technology products and internet solutions.  We are even more confident we will expand our nationwide penetration strategy, while developing scalable and recurring revenue sources, providing lasting value to our shareholders, over the long term."  

Fourth Quarter 2010 Financial Results

Revenues

For Q4, our revenue was $61.22million, compared to $31.55 million in the same period of 2009, an increase of $29.67 million, or 94.05%.  The total revenue exceeded our plan primarily because progress on a few contracts was accelerated at client's requests.  In addition, our new offerings of display technology products, most prominently the interactive teaching series for the education industry turned out faster than expected.  Finally, we also liquidated some of HPC's inventory that is not aligned with the new strategic direction as part of the restructuring process.

As a result, product sales increased by $19.14 million, or 247.57%, to $26.87 million for the three months ended December 31, 2010, as compared to $7.73 million in the same period of 2009.  Product sales constituted 43.89% of total revenue during the current period as compared with 24.5% during the prior year.

Software sales increased by 24.81% to $23.36 million for the quarter ended December 31, 2010, from $18.72 million for the three months ended December 31, 2009. Software sales constituted 38.16% of our total revenue, as compared to 59.33% during the prior year.

Sales of system integration services increased by 89.79% for the quarter ended December 31, 2010, as compared to 4Q2009 because the accelerated projects were more heavily distributed to system integration than software. As a percentage of revenue, it remained relatively stable at 14.15% during 4Q2010 as compared with 14.47% during 4Q2009.

Other revenue increased by 333.26%, from $0.54 million in the quarter ended December 31, 2009 to $2.33 million in 4Q2010. Other revenue mainly derived from maintenance services and royalty income from Huipu by licensing other manufacturers to use the HPC trademark.

In terms of segment weights, GIS accounted for 39.12% of the total revenue while DPST and DHIS accounted for 43.49%, 10.68% for the three months ended December 31, 2010, respectively. DPST increased in weight during the quarter primarily because the majority of the accelerated projects belonged to this segment.  For 4Q2010, we added a new segment called Other Products and Services.  This segment represents a number of our new market initiatives under incubation in aggregate until a stand-alone new segment becomes material, at which point the new stand-alone segment will be separated from the "Other Products and Services" segment. For 4Q2010, this segment accounted for 6.71% of revenues and primarily represented the sales of our display technology products, including interactive teaching series for the education industry and TV series for the consumer market.

Gross Profit and Gross Margin

Our cost of revenues increased $23.89 million, or 151.53%, to $39.66 million, for the three months ended December 31, 2010, from $15.77 million in 4Q2009. As a result, gross margin was 35.22% for the three months ended December 31, 2010, a decrease of 1481 basis points, from 50.03% in 4Q2009.

The decrease in the overall gross margin resulted from a number of factors. First, during 4Q2010, our product sales increased in weight relative to total revenues largely due to the clearance of HPC's non-strategic inventory as well as our faster-than expected sales of display technology products.  Since the average gross margin of products is lower than the other categories of revenues, the overall gross margin declined.   Meanwhile, gross margin of product categories declined by 1047 basis points mostly because the clearance of HPC's non-strategic inventory was done at cost and the sales of the new display technology products did not enjoy economies of scale due to the low volume in the beginning.  In addition, we experienced decline of gross margins of software on a year-over-year basis. This is because we were engaged in larger software projects on average than 2009, and larger projects generally offer lower profit margin than smaller ones. The negative impact on gross margin from the above factors was partially mitigated by the improvement in profitability in system integration due to the stage of certain projects and the increased weight and profitability in other revenues as our maintenance and royalty income picked up.  

Administrative Expenses

Total administrative expenses increased by $2.11 million, or 37.3%, to $7.78 million for the three months ended December 31, 2010, from $5.67 million in 4Q2009. As a percentage of revenue, administrative expenses decreased to 12.71% in 4Q2010, from 17.97% for the same period in 2009, reflecting operating leverage.  

Research and Development Expenses

For the three months ended December 31, 2010, research and development expenses increased to $0.95 million, from $0.79 million in 4Q2009, a $0.16 million, or 19.5% increase. As a percentage of revenue, the research and development expenses decreased 0.97% to 1.55% for 4Q2010, from 2.52% in the same period of 2009. Such decrease was due to the fact that research and development investments made from prior years are yielding scalable effects in revenue growth.

Selling Expenses

Selling expenses increased $0.78 million for the three months ended December 31, 2010, or 65.6%, to $1.96 million, from $1.18 million in 4Q2009. As a percentage of revenue, our selling expenses decreased to 3.20% for 4Q2010, from 3.75% in 4Q2009.  Such a decline in weight is primarily caused by the higher-than-expected revenue during the quarter for the reasons discussed earlier.

Income from Operations

Income from operations was $10.87 million in 4Q2010, an increase of 33.63%, or $2.74 million from $8.14 million in 4Q2009. On a non-GAAP basis, operating profit was $13.18 million in 4Q2010 vs $9.89 million in 4Q2009, an increase of 33.34%. As a result, non-GAAP operating margin was 21.53% during the current quarter as compared with 31.34% for 4Q2009.

Net Income Attributable to the Company

As a result of the factors described above, net income attributable to the Company decreased $0.65 million, or 7.43%, to $8.16 million for the three months ended December 31, 2010, from $8.81 million in 4Q2009, primarily due to the increased effective tax rate under the tax unification program in China.  On a non-GAAP basis, net income attributable to the Company increased $1.63 million, or 17.24%, to $11.08 million for the three months ended December 31, 2010, from $9.46 million in the same period of 2009.

Cash and Cash Equivalents

As of December 31, 2010, the Company had $26.51 million in cash and restricted cash, as compared to $19.34 million as of December 31, 2009. During 4Q2010, cash provided by operating activities amounted to $8.08 million, an increase of 156.34% from $3.15 million in 4Q2009.

Fiscal Year 2010 Financial Results

Revenues

For the year ended December 31, 2010, our revenue was $163.85 million, compared to $101 million for the year ended December 31, 2009, an increase of $62.85 million, or 62.23%.  During the year, Huipu, which was acquired in October 2009, contributed $42.26 million to revenues. Excluding the impact of Huipu, organic revenue growth was 26.23%.

Software sales increased by 41.66% to $90.42 million for the year ended December 31, 2010, from $63.83 million for the year ended December 31, 2009.  Software sales constituted 55.19% of our total revenue, as compared to 63.20% during the prior year.  Excluding the impact of Huipu, software sales were 74.37% of organic revenues, which reflects our continued commitment to our core competency in software.  

Product sales increased by $36.54 million, or 217.72%, for the year ended December 31, 2010, as compared to $16.78 million in 2009 primarily due to the sales of display technology products and the liquidation of HPC's inventory described earlier.  Product sales constituted 32.55% of total revenue during the current period as compared with 16.62% during the prior year.  

Sales of system integration services decreased by 14.40% for the year ended December 31, 2010, as compared to 2009. As a percentage of revenue, it declined from 18.83% during the year ended December 31, 2009 to 9.94% during 2010. Excluding the impact of Huipu, system integration was 13.39% of organic revenues.

Other revenue increased by 179.60%, from $1.37 million in the year ended December 31, 2009 to $3.82 million in 2010. Other revenue mainly derived from maintenance services in the year ended December 31, 2009, while in 2010, other income consisted of both maintenance services and royalty income from Huipu by licensing other manufacturers to use the HPC trademark.

GIS accounted for 43.28% of the total revenue while DPST, DHIS and Other Products and Services represented 43.12%,11.09% and 2.51%, respectively. These compared to 36.46%, 53.66%, 9.88% and nil of the total revenue for the year ended December 31, 2009. The shifts in segment weights reflected the GIS and DHIS segments outpacing DPST in their growth momentum. This is the direct result of our focus in the last few years on targeting at 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.  The addition of Other Products and Services represents our new market developments, primarily in display technology products for this period.

Gross Profit and Gross Margin

As a percentage of revenues, our cost of revenue increased to 56.93% during the year 2010, from 49.89% in 2009. As a result, gross profit as a percentage of revenue was 43.07% for the year ended December 31, 2010, a decrease of 7.08%, from 50.15% in 2009.  Huipu yielded a gross margin of 16.81%. Excluding the impact of Huipu, gross margin of organic business was 52.19%, exceeding the organic gross margin of 51.84% in 2009.  Such an increase in organic gross margin is primarily due to the increased weight of software business relative to total organic business.

Administrative Expenses

Total administrative expenses increased by $5.97 million, or 47.18%, to $18.62 million for the year ended December 31, 2010, from $12.65 million in the year 2009. As a percentage of revenue, administrative expenses decreased to 11.37% for the year 2010, from 12.53% for the year 2009, reflecting operating leverage.

Research and Development Expenses

For the year ended December 31, 2010, research and development expenses increased to $3.02 million, from $2.71 million in the year 2009, a $0.31 million, or 11.5% increase. As a percentage of revenue, the research and development expenses decreased 0.84% to 1.84% for 2010, from 2.68% in 2009. Such decrease was due to the fact that research and development investments made from prior years are yielding scalable effects in revenue growth.

Selling Expenses

Selling expenses increased $3.22 million for the year ended December 31, 2010, or 102.77%, to $6.36 million, from $3.14 million in 2009. As a percentage of revenue, our selling expenses increased to 3.88% for 2010, from 3.11% in 2009.  The selling expenses outpacing revenue growth reflects our heightened efforts in national market expansion.

Income from Operations

Income from continuing operations increased $5.34 million, or 17.71%, to $35.47million for the fiscal year ended December 31, 2010, from $30.14 million for 2009. Operating margin decreased by 819 basis points to 21.65% in 2010 from 29.84% in 2009. On a non-GAAP basis, operating profit was $47.01 million in 2010 vs $35.40 million in 2009, an increase of 32.80%.  As a result, non-GAAP operating margin was 28.69% during 2010 as compared with 35.05% for 2009.

Net Income Attributable to the Company

Net income was $34.40 million for the fiscal year ended December 31, 2010, as compared to $30.09 million for 2009, a 14.31% increase, partially due to the increased effective tax rate under the tax unification program in China. As a result, net margin contracted by 880 basis points to 21 % in 2010 from 29.80% in 2009. On a non-GAAP basis, net income attributable to the Company increased $6.30 million, or 19.54%, to $38.52 million for 2010, from $32.23 million in 2009.

Cash and Cash Equivalents

As of December 31, 2010, the Company had $26.51 million in cash and restricted cash, as compared to $19.34 million as of December 31, 2009.  Cash provided by operating activities amounted to $26.9 million, an increase of 134.8% from $11.5 million in the prior year.