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ZST Digital Networks, Inc. (ZSTN) Announces Second Quarter 2010 Results

Press Release Source: ZST Digital Network, Inc. On Tuesday August 10, 2010, 8:30 am EDT

ZHENGZHOU, China, Aug. 10 /PRNewswire-Asia-FirstCall/ — ZST Digital Networks, Inc. (Nasdaq:ZSTNNews) (the “Company” or “ZST”), a major developer, manufacturer, and supplier of cable systems and commercial GPS products in China, today announced its financial results for the second quarter ended June 30, 2010.

    Second Quarter 2010 Financial Highlights
    -- Total revenue for the second quarter of 2010 was US$33.0 million, an
       increase of 39.6% compared to the second quarter of 2009.
    -- Gross profit for the second quarter of 2010 was US$8.2 million, an
       increase of 130.8% compared to the second quarter of 2009. Gross profit
       margin for the second quarter of 2010 was 25.0% compared to 15.1% for
       the second quarter of 2009.
    -- Operating income for the second quarter of 2010 was US$7.2 million, an
       increase of 111.6% compared to the second quarter of 2009.
    -- Net income for the second quarter of 2010 was US$5.2 million, an
       increase of 103.1% compared to the second quarter of 2009.
    -- Net income margin for the second quarter of 2010 was 15.7% compared to
       10.8% for the second quarter of 2009.

Recent Business Highlights

Mr. Bo Zhong, Chairman and Chief Executive Officer of ZST, commented, “We are very pleased to report a strong quarter of healthy top- and bottom-line growth, exceeding our guidance. Our robust results were driven by continued demand for our Cable TV equipment as well as better than expected growth from our commercial line of vehicle tracking and fleet management systems utilizing our GPS technologies. Revenue from our vehicle tracking GPS products and related services reached approximately $6 million for the quarter, representing 18% of our total revenues. As we have stated since the launch of this product line in late 2009, we believe there is a large and untapped market opportunity in Henan Province for vehicle tracking and fleet management systems utilizing our GPS technologies, and our results are beginning to reflect that fact. We are pleased with the market acceptance of our vehicle tracking products and services to date, and we will continue our efforts to penetrate this rapidly growing market.

“We also experienced strong sales growth from our Cable TV networking equipment, with revenues increasing 51% year-over-year. During the quarter, we continued to benefit from the ongoing government mandated efforts to integrate telecommunications networks, cable TV networks and Internet services in 2010, which has led to an increase in system wide upgrades by regional TV broadcast stations, the primary customers for our Cable TV networking equipment. Leveraging this product replacement cycle has been a core element of our strategy, and we are pleased to see continued traction on this front.

“Finally, we experienced healthy volume growth for our IPTV set-top boxes; however, the revenue from these products continued to be impacted by the increased percentage of lower priced Standard Definition IPTV set-top boxes in the mix. As of the quarter end, Standard Definition set-top boxes accounted for 58% of our IPTV set-top boxes sold, with the higher priced High Definition set-top boxes accounting for the remaining 42%. While we continue to expect pricing pressure and volume declines for our High Definition set-top boxes, we expect the overall performance from our IPTV segment to exhibit moderate growth, as strong demand and volume growth for our Standard Definition set-top boxes should lead to improved bottom line performance given the high gross margins generated by this product. Looking ahead, we will continue to capitalize on the favorable trends in our end markets by executing our strategy to increase sales across our product and service lines, especially within the vehicle tracking market, while further developing our brand and technology platform.”

John Chen, Chief Financial Officer of ZST, commented, “Our results for the quarter were driven by the continued execution of our strategy, with a focus on increasing sales of our fast-growing vehicle tracking products and services utilizing our GPS technologies and further penetrating the IPTV and Cable TV network equipment markets. We delivered strong margin expansion across our product lines, especially for our vehicle tracking products and services, which carry the highest margin within our product portfolio. In fact, sales of vehicle tracking hardware utilizing our GPS technologies and corresponding service contracts accelerated significantly throughout the first quarter, outpacing our expectations. In addition, we continued to maintain a strict focus on cost controls, which, when coupled with our relatively fixed cost base and our strong sales growth, amplified the impact on our bottom line. We believe that the growth in our vehicle tracking segment is sustainable given the accelerating demand we experienced during the quarter, and we will continue to focus on expanding our share of this high-margin market.

Second Quarter 2010 Unaudited Financial Highlights

Revenue

Revenue for the second quarter 2010 was US$33.0 million, representing an increase of 39.6% from US$23.7 million in the second quarter 2009. The increase in revenue for the quarter resulted from an increase in sales of Cable TV networking equipment and vehicle tracking products utilizing our GPS technologies and related services. The Company did not have any vehicle tracking related revenue in the same period of last year as the GPS related businesses were established in October 2009.

Gross Profit and Gross Profit Margin

Gross profit for the second quarter 2010 was US$8.2 million, representing a 130.8% year-over-year increase. Gross profit margin for the second quarter 2010 was 25.0%, up from 15.1% in the second quarter 2009. The year-over-year increase in gross margin was driven mainly by sales of vehicle tracking products utilizing our GPS technologies and related services and Standard Definition set-top boxes, which carry high gross margin relative to the Company’s other products. The Company introduced its Standard Definition set- top boxes in the first quarter 2010, and GPS related services in October 2009.

Operating Expenses

Total operating expenses for the second quarter of 2010 were US$1.0 million, representing an increase of 504.0% from US$170,000 in the second quarter of 2009. The year-over-year increase in operating expenses was a result of the overall growth in our revenue base.

Selling expense was US$109,000 for the second quarter of 2010, representing an increase of 115.1% from US$51,000 in the second quarter of 2009. Selling expenses consist mainly of shipping costs, after-sale service, and salary of sales staff. Selling expense in the second quarter of 2009 contained only salary expenses.

General and administrative expenses (G&A) for the second quarter of 2010 were US$840,000, up 587.6% from US$120,000 in the second quarter of 2009. The increase in G&A expenses was mainly attributable to the Company’s expanded operations and revenue base and additional expenses incurred as a result of being a publicly reporting company in the United States.

Research and development expenses (R&D) for the second quarter of 2010 were US$100,000, compared to nil for the second quarter of 2009. The investment in R&D was driven primarily by capacity increases to accommodate vehicle tracking product development utilizing our GPS technologies and continued development of IPTV set-top box products.

Income Tax

Income tax expense for the second quarter of 2010 was US$2.0 million, compared to US$840,000 in the second quarter of 2009. This increase was mainly due to the Company’s continued growth in pre-tax income primarily driven by the increase in sales revenue and increased gross margin.

Income from Operations and Net Income

Income from operations was US$7.2 million in the second quarter of 2010, an increase of 112.0% compared to operating income of US$3.4 million in the second quarter of 2009.

Net income for the second quarter of 2010 was US$5.2 million, a year-over- year increase of 103.1% from US$2.6 million in the second quarter of 2009. Net margin was 15.7% for the second quarter of 2010, compared to 10.8% in the second quarter of 2009.

Diluted net income per share was US$0.45 in the second quarter of 2010, compared to US$0.30 for the second quarter of 2009.

Balance Sheet

Cash and cash equivalents totaled to US$15.8 million as of June 30, 2010, attributable to the closing of the recent public offering in October 2009 and cash generated by the Company’s operations.

As of June 30, 2010, total trade receivables were US$28.9 million, an increase of 59.5% from US$18.1 million as of March 31, 2010, primarily due to the increase in revenue.

As of June 30, 2010, inventories decreased by US$0.39 million, or 43.6%, to US$500,000 from US$890,000 as of March 31, 2010, primarily due to increased sales of vehicle tracking products utilizing our GPS technologies and related services.

Third Quarter and Full Year 2010 Outlook

Based on the current estimates, the Company approximates that revenue for the third quarter of 2010 will range between US$34.0 million and US$37.0 million. The Company also estimates that net income for the third quarter of 2010 will range between US$5.5 million and US$6.0 million.

The company has updated it guidance for the full year 2010 from what was previously announced on May 14, 2010 as a result of continuing strong demand for its products and services. The Company now estimates that revenues will range between US$125 million and US$130 million, and net income will range between US$17 million and US$19 million. The Company had previously expected that its revenues would range between US$115 million and US$125 million, and net income would range between US$13 million and US$15 million. This represents the Company’s current and preliminary view, which is subject to change.

Conference Call

The Company’s management team will conduct a conference call on Tuesday, August 10, 2010 at 8:00 am (U.S. Pacific Time) / 11:00 am (U.S. Eastern Time) / 11:00 pm (HK / Beijing Time) to discuss its 2010 second quarter financial results and recent business activity. The conference call may be accessed by calling +1-866-519-4004 or +1-718-354-1231 (for callers in the U.S.), 800-819- 0121 (for callers in China), 800-930-346 (for callers in Hong Kong), +0808- 234-6646 (for callers in United Kingdom) or +65-6723-9381 (for other international callers) and entering pass code 92298808. Please dial in approximately 10 minutes before the scheduled time of the call.

A recording of the conference call will be available through August 24, 2010, by calling +1-866-214-5335 (for callers in the U.S.) or +61-2-8235-5000 (for callers outside the U.S.) and entering pass code 92298808.

About ZST Digital Network, Inc.

ZST Digital Networks, Inc. (Nasdaq:ZSTNNews) is a China-based company, principally engaged in supplying digital and optical network equipment and providing installation services to cable system operators in China. The Company has developed a line of IPTV devices that are used to provide bundled cable television, Internet and telephone services to residential and commercial customers. The Company has assisted in the installation and construction of over 400 local cable networks in more than 90 municipal districts, counties, townships, and enterprises. The Company has also launched a commercial line of vehicle tracking devices utilizing our GPS technologies and support services for transport-related enterprises to track, monitor and optimize their businesses. For more information about ZST Digital Networks, Inc., please visit http://www.shenyangkeji.com .

Statement Regarding Unaudited Financial Information

The unaudited financial information set forth above is preliminary and subject to adjustments. Adjustments to the financial statements may be identified when audit work is performed for the year-end audit, which could result in significant differences from this preliminary unaudited financial information.

“Safe Harbor” Statement

This release contains certain “forward-looking statements” relating to the business of the Company and its subsidiary companies. These forward-looking statements are often identified by the use of forward-looking terminology such as “believes,” “expects” or similar expressions. Such forward looking statements involve known and unknown risks and uncertainties, including, but not limited to, our ability to maintain and increase revenues and sales of our products; our ability to develop and market new products; our strategic investments and acquisitions; compliance and changes in the laws of the People’s Republic of China (the “PRC”) that affect our operations; our ability to obtain all necessary government certifications and/or licenses to conduct our business; vulnerability of our business to general economic downturn, especially in the PRC; adverse capital and credit market conditions; our ability to meet liquidity needs; and other risk factors detailed in reports filed with the Securities and Exchange Commission from time to time. 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 the factors discussed above and 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 the Company or to 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.

                ZST DIGITAL NETWORKS, INC. AND SUBSIDIARIES
                        Consolidated Balance Sheets
                             (In U.S. Dollars)
                                               December 31,        June 30,
                                                  2009              2010
                                               (Restated)       (Unaudited)
    ASSETS
    Current assets:
    Cash and cash equivalents                  $13,627,992       $15,781,269
    Accounts receivable                         24,885,497        28,944,450
    Inventories                                  1,245,803           502,051
    Advance to suppliers                         7,399,141         8,847,600
    Prepaid expenses                             1,064,499         1,039,356

    Total current assets                        48,222,932        55,114,726

    Property, machinery, equipment and
     software, net                                 875,806         2,347,573
    Intangible asset                               171,122           153,358
    Prepaid expenses - long term                   858,609           312,696

    Total assets                               $50,128,469       $57,928,353

    LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
    Accounts payable                              $700,940            $2,650
    Advance from customers                         376,586         1,070,466
    Accruals and other payables                    295,410           138,953
    Accrued payroll and related expense             66,370            98,845
    VAT payable                                    198,828           535,947
    Franchise tax payable                          162,100                --
    Income tax payable                             547,917           827,985
    Total current liabilities                    2,348,151         2,674,846

    Equity
    Common stock $0.0001 par value,
     100,000,000 shares authorized,
     11,650,442 and 11,650,442 shares
     issued and outstanding                          1,165             1,165
    Additional paid-in capital                  30,677,932        30,677,932
    Appropriated earnings                        3,328,345         3,328,345
    Retained earnings                           13,752,791        20,926,558
    Translation adjustment                          20,085           319,507
    Total equity                                47,780,318        55,253,507

    Total liabilities and equity               $50,128,469       $57,928,353

                    ZST DIGITAL NETWORKS, INC. AND SUBSIDIARIES
                         Consolidated Statements of Operations
                                 (In U.S. Dollars)
                          Six Months Ended June 30, Three Months Ended June 30,
                              2009         2010         2009         2010
                           (Unaudited)  (Unaudited)  (Unaudited)  (Unaudited)

    Revenues:
    Sales of products      $41,439,540  $47,993,924  $23,678,912  $31,566,021
    Sales of services               --    2,100,497           --    1,480,122
    Total revenue           41,439,540   50,094,421   23,678,912   33,046,143

    Cost of sales:
    Cost of products sold   34,950,607   37,581,909   20,106,328   24,757,120
    Cost of service                 --       91,640           --       42,143
    Cost of sales           34,950,607   37,673,549   20,106,328   24,799,263

    Gross profit             6,488,933   12,420,872    3,572,584    8,246,880

    Selling expense             69,243      376,279       50,671      108,974
    Research and
     development expenses           --      330,891           --       95,367
    General and
     administrative
     expenses                  477,238    1,565,765      121,459      835,155
    Merger cost                566,654           --           --           --

    Income from operations   5,375,798   10,147,937    3,400,454    7,207,384

    Interest income
     (expense), net            (72,514)      32,222        8,867       30,607
    Other income (expense)      (7,680)       2,401      (10,684)       2,401

    Income before income
     taxes                   5,295,604   10,182,560    3,398,637    7,240,392

    Income tax provision     1,487,315    3,008,793      836,706    2,036,280

    Net income              $3,808,289   $7,173,767   $2,561,931   $5,204,112

    Weighted average
     common shares
     outstanding - basic     7,954,507   11,650,442    8,264,003   11,650,442

    Earnings per share -
     basic                        0.48         0.62         0.31         0.45

    Weighted average
     common shares
     outstanding - diluted   8,116,641   11,650,442    8,434,621   11,650,442

    Earnings per shares -
     diluted                      0.47         0.62         0.30         0.45

    Comprehensive income:
    Net income               3,808,289    7,173,767    2,561,931    5,204,112
    Translation adjustment    (638,658)     299,422     (215,994)     249,390

    Comprehensive income    $3,169,631   $7,473,189   $2,345,937   $5,453,502

                     ZST DIGITAL NETWORKS, INC. AND SUBSIDIARIES
                             Statements of Cash Flows
                                 (In U.S. Dollars)
                                                  Six Months Ended June 30,
                                                   2009              2010
                                               (Unaudited)       (Unaudited)

    Cash flows from operating activities:
    Net income                                  $3,808,289        $7,173,767
    Adjustments to reconcile net income
     to net cash provided by (used in)
     operating activities:                              --                --
    Depreciation and amortization                    9,687           232,806
    Share-based compensation                            --            85,721
    Imputed interest                                31,413                --
    Changes in operating assets and
     liabilities:                                       --                --
    Accounts receivable                        (12,442,523)       (4,033,881)
    Inventory                                      185,069           738,848
    Advance to suppliers                         1,380,359        (1,439,433)
    Prepayments and other assets                   (64,246)          475,485
    Accounts payable                             5,595,654          (702,869)
    Accruals and other payable                      55,380            52,644
    Advance from customers                              --           698,373
    Taxes payable                                  480,931           281,860
    Net cash provided by(used in)
     operating activities                         (959,987)        3,563,321

    Cash flows from investing activities:
    Additions to fixed assets                     (782,334)       (1,664,612)
    Additions to intangible assets                (191,330)               --
    Net cash used in investing activities         (973,664)       (1,664,612)

    Cash flows from financing activities:
    Repayments for short term bank loans        (1,725,038)               --
    Net proceeds from sale of preferred
     stock                                       3,533,955                --
    Net cash received from financing
     activities                                  1,808,917                --

    Effect of changes in foreign exchange
     rates                                         218,161           254,568

    Net increase in cash and cash
     equivalents                                    93,427         2,153,277

    Cash and cash equivalents, beginning
     of the year                                 1,134,954        13,627,992

    Cash and cash equivalents, end of the
     period                                     $1,228,381       $15,781,269

    Supplemental disclosures of cash flow
     information:
    Cash paid for interest                         $84,894               $--
    Cash paid for income taxes                   1,094,566         2,734,435

    For further information, please contact:

    Company Contact:
     ZST Digital Networks, Inc.
     John Chen, Chief Financial Officer
     Email: jchen@shenyangkeji.com

    Investor Relations (HK):
     Taylor Rafferty, LLC
     Ruby Yim
     Tel:   +852-3196-3712
     Email: zstdigital@taylor-rafferty.com
     Web:   http://www.taylor-rafferty.com

    Investor Relations (US):
     Taylor Rafferty, LLC
     Mahmoud Siddig
     Tel:   +1-212-889-4350
     Email: zstdigital@taylor-rafferty.com
     Web:   http://www.taylor-rafferty.com

    Investor Relations (US):
     BPC Financial Marketing
     John Baldissera
     Tel: +1-800-368-1217
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