Comtech Group, Inc. Reports Record Quarterly Revenue and Profit; Revenues increase 73%, Net Income up 55% for the Fourth Quarter 2005
26 March 2006
Comtech Group, Inc. (Nasdaq: COGO), a service 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 fourth quarter and audited financial results for its full year period, which ended December 31, 2005. The Company reported record revenue of $33.6 million, up 73.3 percent, compared to $19.4 million reported in the fourth quarter of 2004 with growth in all three of the Company's businesses: mobile handset, telecommunications infrastructure equipment and digital consumer electronic products, which collectively the Company believes are among the fastest growing consumer markets in China. As a result of new proprietary product additions, gross margins increased 3.0 percent to 18.6 percent versus the fourth quarter of 2004. Net income for the quarter was $3.5 million or $0.11 per diluted share, up approximately 55.5 percent from the $2.3 million reported in the fourth quarter of last year. These results exceed the preliminary estimates provided by management on February 1, 2006, of approximately $33 million in revenue for the quarter and at least $0.10 per share.
Key Financial Indicators
(all numbers in thousands, except per-share amounts)
Q42005 Q42004 Percent
Change
Consolidated Revenue $33,648 $19,415 73.3%
Cost of Revenue $27,385 $16,387 67.1%
Gross Profit $6,263 $3,027 106.9%
Net Operating Expenses $2,488 $751 231.3%
Income from Operations $3,775 $2,276 65.8%
Net Income $3,506 $2,254 55.5%
EPS Diluted $0.11 $0.09 22.2%
(1) The US dollar amounts are calculated based on the conversion rate of
US $1 to RMB 8.0702 as of December 31, 2005 and US $1 to RMB 8.2765
as of December 30, 2004.
Fourth quarter highlights include:
* Achieved the highest quarterly revenue in the company history and the
highest quarterly revenue growth since the second quarter 2004 as the
Company experienced strong growth across all markets. Strong demand
for digital consumer electronics products helped drive the
improvement in gross margin.
* Comtech entered agreements with China Telecom and China Netcom for
the location based search products and services.
* Gross margins improved for the fourth straight quarter to 18.6
percent as compared to 17.7 percent during the third quarter 2005 and
15.6 percent in the fourth quarter 2004. The Company continues to
invest in expanding its proprietary offering in each of their key
markets.
Recent Developments:
As part of the Company's commitment to expand its business from providing customized design solutions and selling components to a more comprehensive organization providing engineering services and business services to its existing customer base, Comtech announced the acquisition of Huameng Engineering Services Ltd. on January 11, 2006 for $2.5 million (USD). Huameng is an emerging provider of technology, engineering and business services to established telecom equipment vendors in China. Huameng's primary customer is Huawei, which is complementary to Comtech's existing relationship with the global telecom equipment provider. Upon the closing of the acquisition the Company has changed the name of Huameng to COGO Engineering Service and will use this branding to market the service to both new and existing customers. Comtech expects to expand the current customer base while also moving into other geographic regions, such as Hong Kong, Thailand and Malaysia, where demand is high. With the acquisition, Comtech expects to benefit both from the recurring service revenue nature of the business, increasing overall visibility, and higher gross margins than existing businesses. Management expects the engineering service business gross margins to be in the 40-50 percent range and be a meaningful contributor to 2006 results.
"We continue to grow our core module design business while expanding our offerings to provide engineering and other business services to our existing customer base, which we anticipate will generate recurring service revenues and improve our gross margins," commented Jeffrey Kang, Chairman and Chief Executive Officer. "This was an important quarter from a strategic perspective as we officially launched our location based search product and prepared for a larger-scale rollout with our key partners in 2006. We expect during the first quarter we will begin to recognize revenue from the location based search business. Both the sale of the phone and the recurring monthly service revenue will improve our overall profitability as they carry higher gross margins than our existing businesses. In January we also announced the acquisition of Huameng and subsequently we have secured our first significant contract as a combined company valued at $1 million (USD) with Huawei, with the expectation of signing many other similar contracts throughout the year."
Mr. Kang continued, "Comtech's core asset is our large and long standing customer base; and our focus is to grow our business by serving our existing customers' needs. Providing engineering and business service to our existing customers is a natural extension of current operations for Comtech. We are excited to begin providing business service to our customers and receiving recurring service revenue. The overall technology market continues to remain strong, particularly in the telecom equipment, mobile and digital consumer electronics markets as our customers increase their presence not only in China but also internationally which will support continued growth in our customized module design business. Additionally, we have forged new relationships with suppliers such as Vishay to address other high growth markets for our customized design modules such as electronic automobile components. With these positive secular trends in place we believe that Comtech is well positioned for continued strong revenue growth and profits."
Financial Results
Revenue for the quarter was $33.6 million (USD), an increase of 73.3 percent compared to the $19.4 million reported for the fourth quarter of last year. The composition of revenues was: $15.4 million, or 45.8 percent of total sales, for mobile handsets representing a 43.9 percent increase, $11.8 million, or 35.1 percent of total sales, for telecommunications infrastructure equipment representing a 40.5 percent increase, and $6.4 million for digital home entertainment products and others, which is up substantially versus minimal revenues recorded for this division last year. Cost of revenues, which includes the aggregate purchase of components from suppliers, were $27.4 million compared to $16.4 million, an increase of 67.1 percent. Gross profit for the quarter was $6.3 million, up 106.9 percent compared to the $3.0 million for last year. Gross margins were 18.6 percent compared to 15.6 percent reported last year and 17.7 percent reported during the third quarter 2005 due to more in-depth designs and more favorable product mix during the quarter.
Selling, general and administrative expenses were $1.7 million, up 112.5 percent, compared to $.8 million reported last year. The increase was attributed to higher employee headcount and other related expenses to support our ongoing revenue expansion. Research and development expenses increased substantially by $0.8 million to $0.9 million for the quarter as the Company continues to invest in developing new and higher margin products. Income from operations was $3.8 million up 65.8 percent as compared to $2.3 million last year. Operating margins decreased to 11.2 percent versus 11.7 percent last year as the Company made increased investments in new businesses. The effective tax rate for the fourth quarter of 2005 was 6.4 percent, compared to 2.7 percent for the same period 2004. This tax is in addition to the Value Added Tax (VAT) of 17.0 percent deducted from the Company's gross revenues each quarter.
Mr. Kang continued, "During the fourth quarter of 2005, we had minority interest expense of $.2 million as compared to a $.1 million gain in 2004. As both of our new businesses, Location Based Search and COGO Engineering Services grow, we expect to see a continued increase in minority interest expense."
Net income for the fourth quarter was $3.5 million, or $0.11 per diluted share, compared to net income of $2.3 million, or $0.09 per diluted share last year. The Company had 32.8 million diluted shares outstanding as of December 31, 2005 versus 21.9 million as of December 31 2004. The 10.9 million increase in diluted shares was related to options granted to Company employees and a secondary offering completed in July of 2005.
For the full year 2005, the Company reported revenue of $107.4 million, an increase of 42.1 percent compared to the $75.6 million reported during 2004. Cost of revenue was $88.6 million, an increase of 38.2 percent compared to the $64.1 million reported last year. Gross profit was $18.8 million, or 17.5 percent of sales, compared to gross profit of 15.1 percent for the same period last year. Selling, general and administrative expenses, including research and development expenses, were $6.8 million as compared to $3.3 million for the same period last year. Income from operations was $12.0 million, an increase of 44.6 percent for the prior-year period. Operating margins improved for 2005 to 11.2 percent as compared to 11.0 percent last year, as increased gross margins offset the increase in operating expenses. The Company had an effective tax rate of 6.9 percent as compared to 3.5 percent last year in addition to the previously mentioned VAT tax. Minority interests increased by $0.2 million to $0.5 million as the Company's non wholly owned subsidiaries, in particular Shanghai E&T and Comtech Broadband, received higher income which resulted in the higher minority interest. Net income was $10.8 million, or $0.36 per diluted share, compared to net income of $7.5 million, or $0.34 per diluted share last year.
Balance Sheet
The Company completed the quarter with cash and cash equivalents of $22.0 million up from $5.0 million at the end of 2004 but down $6.1 million from the third quarter 2005. Cash increased as compared last year due to the completed secondary offering and positive net income throughout the year but was down from the third quarter due to cash used in operating activities and investments made for new businesses. The Company maintained bank borrowings of $4.4 million. The Company's balance sheet supported a current ratio of 4.3 to 1. Shareholders equity increased 179.1 percent to $62.8 million from $22.5 million as of December 31, 2004.
Business Outlook
Based on current visibility management is reiterating previous guidance for full year 2006 revenue of $135 million to $140 million, or 26 percent to 30 percent growth versus 2005 and pro forma earnings per share of at least $0.50 for the year. The pro forma adjustment to earnings per share excludes the non-cash impact associated with employee options and restrictive stock expense for the year.
"The outlook for our business remains strong and we remain confident in our opportunity to continue to grow revenues, penetrate new markets, increase recurring service revenue streams and improve profits," Mr. Kang continued. "We will also look to deploy capital wisely and diligently and where we see an opportunity for a significant return for our shareholders."
Teleconference Information
Management will conduct a conference call to discuss its financial results for the fourth quarter and full year 2005 at 4:30 EST on Thursday, March 23, 2006. Interested parties may dial 1-800-811-0667 if dialing domestically, or 1-913-981-4901 if dialing internationally, approximately 15 minutes prior to the start of the call. There will be a playback available until March 30, 2006. To listen to the playback, please call 1-888-203-1112 if calling within the United States or 1-719-457-0820 if calling internationally. Please use pass code 3771748 for the replay. This call is being web cast by ViaVid Broadcasting and can be accessed at Comtech's website at http://www.comtech.com.cn or ViaVid's website at http://www.viavid.net. The web cast can be accessed until April 23, 2006 on either site. To access the web cast, you will need to have the Windows Media Player on your desktop. For the free download of the Media Player please visit: http://www.microsoft.com/windows/windowsmedia/en/download/default.asp.
About Comtech
Comtech Group is a leading provider of customized module design solutions and has recently expanded its business to provide engineering and business services in China. Comtech serves as a gateway to leading electronics manufacturers in China. Comtech Group has focused on the mobile handset, telecom equipment end-markets, and the digital home entertainment products end-markets. Over the last three years, Comtech has worked with over 200 customers. Comtech's customer base includes most of the largest and best-known manufacturers in the mobile handset, telecom equipment and digital consumer electronics end-markets in China.
Safe Harbor Statement
This press release includes certain statements that are not descriptions of historical facts, but are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934. These forward-looking statements may include statements about our plans and objectives for future expansion, including into engineering and business service related market, anticipated margins for our business; general and cyclical economic and business conditions, and, in particular, Huameng business prospective; our digital consumer electronics, mobile and telecom business prospective; changes; and other statements containing forward looking terminology such as "may," "expects," "believes," "anticipates," "intends," "expects," "projects," "looking forward" or similar terms, variations of such terms or the negative of such terms. Such information is based upon various assumptions made by, and expectations of, our management that were reasonable when made but may prove to be incorrect. All of such assumptions are inherently subject to uncertainties and contingencies beyond our control and upon assumptions with respect to future business decisions which are subject to change. Accordingly, there can be no assurance that actual results will meet expectations and actual results may vary (perhaps materially) from certain of the results anticipated herein. For a further description of these and other risks and uncertainties see our most recent Annual Report filed with the Securities and Exchange Commission (SEC) on Form 10-K, and our subsequent SEC filings. Copies of filings made with the SEC are available through the SEC's electronic data gathering analysis retrieval system (EDGAR) at http://www.sec.gov.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per
share amounts)
At December 31,
2005 2005 2004
USD RMB USD
ASSETS
Current assets:
Cash and cash equivalents 21,945 177,098 5,007
Pledged bank deposits 5,042 40,692 --
Trade accounts receivable, net of
allowance for doubtful accounts of
USD929 (RMB7,495) in 2005 and
RMB3,833 in 2004 33,152 267,543 20,416
Bills receivable 6,803 54,905 9,344
Other receivables 1,197 9,657 262
Amount due from a minority shareholder 58 468 --
Inventories 13,725 110,763 1,921
Total current assets 81,922 661,126 36,950
Property and equipment, net 855 6,904 401
Other assets 112 905 --
TOTAL ASSETS 82,889 668,935 37,351
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 12,925 104,308 6,411
Bank borrowings 4,433 35,779 6,489
Amounts due to related parties 225 1,816 265
Income taxes payable 313 2,524 180
Accrued expenses and other liabilities 1,158 9,350 1,026
Total current liabilities 19,054 153,777 14,371
Minority interests 1,066 8,599 508
Commitments and contingencies -- -- --
Shareholders' equity:
Common stock (USD0.01 par value
- authorized 200,000,000 shares in
2005 and 2004; shares issued and
outstanding 31,445,058 in 2005 and
25,361,025 in 2004) 322 2,602 254
Additional paid-in capital 44,457 358,775 14,302
Deferred stock-based compensation -- -- (30)
Retained earnings 18,911 152,615 7,946
Accumulated other comprehensive loss (921) (7,433) --
Total shareholders' equity 62,769 506,559 22,472
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 82,889 668,935 37,351
COMTECH GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share amounts)
Three months ended Dec 31,
2005 2005 2004 2004
USD RMB USD RMB
Net revenue 33,648 271,548 19,415 160,686
Cost of revenue(27,385) (221,005) (16,387) (135,629)
Gross profit 6,263 50,543 3,028 25,057
Selling, general and administrative
expenses (1,657) (13,373) (824) (6,819)
Research and development expenses (853) (6,884) (61) (508)
Other operating income 22 180 134 1,110
Income from operations 3,775 30,466 2,277 18,840
Interest expense (31) (254) (73) (608)
Interest income 166 1,340 0 0
Income before income tax 3,910 31,552 2,204 18,232
Income tax (251) (2,025) (61) (501)
Income before minority interests 3,659 29,527 2,143 17,731
Minority interests (153) (1,237) 111 922
Net income 3,506 28,290 2,254 18,653
Earnings per share $ RMB $ RMB
- Basic 0.11 0.90 0.09 0.77
- Diluted 0.11 0.86 0.09 0.75
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share amounts)
Year ended December 31,
2005 2005 2004 2004
USD RMB USD RMB
Net revenue 107,350 866,332 75,587 625,656
Cost of revenue (88,583) (714,881) (64,127) (530,800)
Gross profit 18,767 151,451 11,460 94,856
Selling, general and
administrative expenses (4,829) (38,970) (2,549) (21,092)
Research and development expenses (1,962) (15,837) (739) (6,121)
Other operating income 22 180 134 1,110
Income from operations 11,998 96,824 8,306 68,753
Interest expense (218) (1,762) (260) (2,156)
Interest income 309 2,493 5 38
Income before income taxes 12,089 97,555 8,051 66,635
Income taxes (835) (6,736) (278) (2,300)
Income before minority interests 11,254 90,819 7,773 64,335
Minority interests (493) (3,977) (258) (2,133)
Net income 10,761 86,842 7,515 62,202
Earnings per share
Basic 0.38 3.08 0.35 2.87
Diluted 0.36 2.94 0.34 2.84
Source: prnewswire
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