omniture

Funtalk China Holdings Limited Reports Fiscal 2011 Second Quarter Financial Results

2010-11-30 18:34 1091

-- 2Q FY2011 Revenues Increased 25.4% YoY to $260.4 Million --
-- 2Q FY2011 Retail Revenue Increased 41.8% YoY to $140.8 Million --
-- 2Q FY2011 Consolidated Gross Margin Increased 380 Basis Points YoY to17.3% --
-- 2Q FY2011 Net Income Attributable to the Company Increased 113.7%YoY to $9.8 Million --

BEIJING, Nov. 30, 2010 /PRNewswire-Asia/ -- Funtalk China Holdings Limited (the "Company" or "Funtalk China") (Nasdaq: FTLK), a leading China-based retailer and wholesale distributor of wireless communications devices, accessories and content, today announced its unaudited financial results for the second fiscal quarter ended September 30, 2010 ("2Q FY2011").

"We are very pleased with our strong performance in the second quarter," commented Mr. Fei Dongping, chief executive officer of the Company.  "We once again exceeded our revenue guidance, as total revenue grew more than 25% year-over-year.  We also achieved the highest quarterly gross margin in our retail history, and as a result, our net income more than doubled year-over-year.  We continued the strong momentum in our retail business segment, and increased our retail network to 662 retail stores in 109 cities across 14 provinces and 3 municipalities.  Going forward, we will continue to leverage our strong competitive position to further expand self-built stores and co-branded stores with carriers, as we march towards our goal of 2,000 stores nationwide by the end of our fiscal year 2013."

Second Quarter Financial Results

The Company reported consolidated net revenue of $260.4 million for 2Q FY2011, representing a 25.4% increase from the second fiscal quarter of 2010 ("2Q FY2010").  The Company currently generates revenues from two business segments, retail and wholesale distribution of mobile phones and related services and accessories.  

Retail revenue for 2Q FY2011 was $140.8 million, representing a 41.8% increase from 2Q FY2010. This growth in the retail segment was primarily driven by the increase in the number of retail subsidiaries, with a total of ten retail subsidiaries covering 662 locations in 2Q FY2011 compared to six retail subsidiaries covering 198 locations in 2Q FY2010. Newly acquired subsidiaries contributed approximately $50.2 million to the Company's retail segment revenue in 2Q FY2011.

Wholesale distribution revenue for 2Q FY2011 was $119.6 million, representing a 10.3% increase from 2Q FY2010.  The increased wholesale distribution revenue was primarily attributable to a 46.8% increase in the total volume of mobile phones sold, partially offset by a 28.2% decrease in average selling prices of mobile phones, primarily due to a higher mix of lower-end priced handsets.

In 2Q FY2011, retail sales volume of 3G products accounted for 23.1% of our total units sold in our retail sale business, compared to 22.3% in the three months ended June 30, 2010.  In 2Q FY2011, wholesale distribution of 3G products accounted for 30.2% of our total units sold in our wholesale distribution business, compared to 10.4% in the three months ended June 30, 2010.

Gross profit for 2Q FY2011 increased 61.2% to $45.1 million, or 17.3% of total revenue, compared to $28.0 million, or 13.5% of total revenue, in 2Q FY2010.  Gross margins for the wholesale distribution segment and retail segment were 14.2% and 20.0%, respectively, for 2Q FY2011, compared to 13.5% and 13.4%, respectively, for 2Q FY2010.  The increase in overall consolidated gross margins was primarily driven by the revenue generated from the sales of wireless operators' related products and services.  

Selling and distribution expenses were $16.4 million for 2Q FY2011 compared to $11.0 million in 2Q FY2010. The increase was primarily due to the increase in rental expenses resulting from the acquisitions of Shanghai Lezhiyu Telecommunications Equipment Co., Ltd. and Beijing Funtalk Golden Feon Telecommunications Equipment Co., Ltd. ("Beijing Golden Feon") and the expansion of the Company's direct sales force for the retail segment in 2Q FY2011. General and administrative expenses were $9.9 million for 2Q FY2011, representing a 96.0% increase from $5.0 million in 2Q FY2010. The increase was primarily due to an increased headcount and an increase in bank service charges associated with the expansion of the Company's operations.

Income from operations increased by 72.6% to $21.3 million in 2Q FY2011 from $12.4 million in 2Q FY2010. Correspondingly, operating income margin, calculated based on income from operations as a percentage of net revenues, increased to 8.2% in 2Q FY2011 from 6.0% in 2Q FY2010.

Income tax expense was $4.8 million for 2Q FY2011 compared to a $2.9 million tax expense for 2Q FY2010. The effective tax rate was 32.0% for 2Q FY2011 compared to 31.3% in 2Q FY2010, as certain expenses were not tax deductible in 2Q FY2011.

Net income attributable to the Company was $9.8 million, or 3.8% of total revenue, for 2Q FY2011, representing a 113.7% increase from $4.6 million, or 2.2% of total revenue for 2Q FY2010. 2Q FY2011 diluted earnings per share ("EPS") was $0.18 based on a diluted share count of 53.0 million shares compared to 2Q FY2010 diluted EPS of $0.09 based on a diluted share count of 51.1 million shares.

As of September 30, 2010, the Company's cash balance (including pledged deposits) was $54.8 million.  The Company's accounts receivable was $82.3 million, representing an increase of 2.3% from the accounts receivable balance of $80.5 million as of March 31, 2010.  The accounts receivable (including notes receivable) turnover days for 2Q FY2011 was 25.3 days compared to 30.8 days in 2Q FY2010.

Recent Development Initiatives

In July 2010, the Company's principal shareholders, Arch Digital Holdings Limited and Capital Ally Investments Limited, waived their rights to receive up to an additional 23,000,000 earn-out shares in order to minimize potential dilution to Funtalk China's other existing shareholders.

In August 2010, the Company acquired 100% of the outstanding equity interests of Beijing Golden Feon from an unaffiliated third party.  The consideration for this acquisition was RMB95.0 million (approximately $13.9 million) plus the net asset value of RMB6.76 million (approximately $1.0 million).

Effective September 27, 2010, the Company's Series A Units (OTC Bulletin Board: FTLZF) and Series B Units (OTC Bulletin Board: FTLHF) were separated on a mandatory basis into their component instruments.  As a result, beginning September 27, 2010, the Series A Units and Series B Units will cease trading and Unit holders' accounts, in lieu of the Units, will reflect ownership of the Ordinary Shares and Warrants.

On October 11, 2010, the Company entered into a warrant exchange agreement with each of Capital Ally Investments Limited ("Capital Ally") and ARCH Digital Holdings Limited ("Arch") , pursuant to which each of Capital Ally and Arch exchanged 113,062 of the Company's Class A warrants and 1,700,000 of the Company's Class B redeemable warrants, which represent all of the Class A warrants and Class B redeemable warrants that each Capital Ally and Arch held as of October 11, 2010, for 729,157 of the Company's ordinary shares (an aggregate of 1,458,314 ordinary shares).  No other consideration was paid for the exchange and no third parties were paid any fees in connection with the exchange.

On October 29, 2010, the Company completed a public offering of 7,000,000 ordinary shares and received proceeds before expenses of approximately $46.6 million.

Business Outlook for Third Quarter of FY2011

The Company expects its revenue for 3Q FY2011 to be in the range of $260 million to $280 million and its net income attributable to the Company to be in the range of $9.0 million to $11.0 million. The Company expects approximately a revenue split of approximately 55% for its retail business segment and approximately 45% for its distribution business segment in 3Q FY2011.  Gross margin and operating income margin are projected to be in the ranges of 15.0% to 16.0% and 6.5% to 7.5%, respectively.

For FY2011, the Company reaffirms its revenue outlook to be in the range of $1.0 billion to $1.2 billion and its net income attributable to the Company to be in the range of $40 million to $45 million. The Company expects a revenue split of approximately 55% for its retail business segment and approximately 45% for its distribution business segment in FY2011.  Gross margin and operating margin for the full fiscal year are projected to be in the range of 15.5% to 16.5% and 7.5% to 8.5%, respectively.  Such projections are based on the Company's current views on operating and market conditions and are subject to change.  

"Funtalk's second quarter FY2011 performance marks another quarter of sound execution of our business plans.  As part of our core growth strategy, we plan to further deepen and strengthen our partnership with mobile carriers, and expand our multi-brand portfolio in our distribution business.  We are convinced that the combination of Funtalk's strategic partnership with China's mobile carriers, established broad network, and superior operational expertise will continue to drive greater 3G mobile product sales," concluded Mr. Fei.  

Financial Information

The unaudited condensed consolidated statements of income and balance sheets accompanying this press release have been prepared by management using U.S. GAAP.  This financial information is not intended to fully comply with U.S. GAAP because they do not present all of the disclosures required by U.S. GAAP.  The March 31, 2010 balance sheet was derived from audited consolidated financial statements of Pypo Digital Company Limited, the Company's predecessor.

Conference Call

Management will host a conference call at 8:00 am ET on Tuesday, November 30, 2010.  Listeners may access the call by dialing #1-201-689-8470. To listen to the live webcast of the event, please go to http://funtalk.investorroom.com. Listeners may access the call replay, which will be available through December 7, 2010 by dialing #1-858-384-5517. The conference ID number is 361213.

About Funtalk China Holdings Limited

The Company is a retailer and distributor of wireless communications devices, accessories and content in 30 provinces in China. The Company has branch offices and regional distribution centers, operates a chain of mobile phone retail stores, and has an internet retailing platform.

Safe Harbor and Informational Statement

This press release includes forward-looking statements that involve risks and uncertainties. Forward-looking statements are statements that are not historical facts. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. The Company may not actually achieve the plans, intentions or expectations disclosed in the forward-looking statements, and investors should not place undue reliance on the forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements made by the parties as a result of a number of factors, some of which may be beyond the Company's control. These factors include the risk factors detailed in the Company's filings with the Securities and Exchange Commission. Further, the forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations, dividends or investments made by the Company or other parties. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

(Financial Statements Follow)

FUNTALK CHINA HOLDINGS LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)




Three Months Ended


Six Months Ended



Sep. 30, 2010


Sep. 30, 2009


Sep. 30, 2010


Sep. 30, 2009










Net revenues

$

260,406


$

207,721


$

513,447


$

405,451


Cost of revenues


-215,315



-179,751



-431,631



-353,074















Gross profit


45,091



27,970



81,816



52,377


Operating expenses:













Other operating income


2,546



437



5,125



1,153


Selling and distribution expenses


-16,428



-11,015



-30,332



-21,117


General and administrative expenses


-9,854



-5,028



-18,841



-8,846


Impairment loss on goodwill


-18





-18




Total operating expenses


-23,754



-15,606



-44,066



-28,810















Income from operations


21,337



12,364



37,750



23,567


Others, net


-1,932



-1,117



-189



-2,004


Interest income


61



101



106



132


Interest expense


-4,603



-2,159



-8,298



-4,119















Income before income tax, equity in loss of affiliated companies and non-controlling interests













14,863

9,189

29,369

17,576


Income tax expense


-4,758



-2,874



-9,016



-5,744


Equity in loss of affiliated companies




-3



















Net income


10,105



6,312



20,353



11,832


Net income attributable to non-controlling interests


-334



-1,739



-1,025



-3,156















Net income attributable to the Company

$

9,771


$

4,573


$

19,328


$

8,676















Basic net income per share

$

0.19


$

0.09


$

0.39


$

0.19















Diluted net income per share

$

0.18


$

0.09


$

0.37


$

0.18















Number of shares used in computing basic net income


50,637,855



48,598,314



50,050,616



46,808,989















Number of shares used in computing diluted net income


53,016,886



51,140,606



51,949,192



48,084,896



















FUNTALK CHINA HOLDINGS LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)





As of Sep. 30, 2010


As of Mar. 31, 2010


ASSETS








Current assets:








Cash and cash equivalents


$

31,445


$

26,616


Restricted bank deposits



23,370



8,860


Accounts receivable (less allowance for doubtful accounts of $587 for September 30, 2010 and $632 for March 31, 2010



82,291



80,457


Inventories



116,402



104,800


Notes receivable



2,647



5,125


Value added  tax  receivable



9,610



7,588


Receivable from a vendor



21,809



23,908


Other receivable



46,204



33,102


Amount due from a related company



13,270




Prepayment and other assets



29,767



23,388


Deferred tax assets



3,322



3,743










Total current assets



380,137



317,587










Non-current assets:








Property and equipment, net



23,540



20,468


Intangible assets



23,220



20,761


Goodwill



122,053



70,035


Deposits paid for acquiring new entities



14,133



29,480


Long term receivable



2,297




Other assets



3,626



2,869










Total non-current assets



188,869



143,613










TOTAL ASSETS


$

569,006


$

461,200














FUNTALK CHINA HOLDINGS LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)





As of Sep. 30, 2010


As of Mar. 31, 2010


LIABILITIES AND SHAREHOLDERS' EQUITY












Current liabilities:








Accounts payable (including trade payable of the consolidated VIEs without recourse to Funtalk China Group of $65,244 and $36,589 as of September 30, 2010 and March 31, 2010, respectively)


$

89,922


$

93,345


Notes payable (including notes payable of the consolidated VIEs without recourse to Funtalk China Group of $8,823 and $13,140 as of September 30, 2010 and March 31, 2010, respectively)



62,909



23,394


Provision for rebates and price protections



6,735



8,168


Advance payments from customers (including advance payment from customers of the consolidated VIEs without recourse to Funtalk China Group of $560 and $1,121 as of September 30, 2010 and March 31, 2010, respectively)



4,896



2,789


Other payables and accruals (including other payables and accruals of the consolidated VIEs without recourse to Funtalk China Group of $15,551 and $8,075 as of September 30, 2010 and March 31, 2010 respectively)



25,410



28,139


Income taxes payable (including income taxes payable of the consolidated VIEs without recourse to Funtalk China Group of $5,364 and $4,423 as of September 30, 2010 and March 31, 2010, respectively)



7,938



10,798


Amounts due to related parties (including amounts due  to related parties of the consolidated VIEs without  recourse to Funtalk China Group of nil and $11,719 as of  September 30, 2010 and March 31, 2010, respectively)



13,305



11,719


Short term borrowings (including short term borrowings of the consolidated VIEs without recourse to Funtalk China Group of $14,994 and $8,057 as of September 30, 2010 and March 31, 2010, respectively)



149,107



97,860


















Total current liabilities



360,222



276,212






Non current liability








Deferred tax liabilities (including deferred tax liabilities of the consolidated VIEs without recourse to Funtalk China Group of $1,436 and $830 as of September 30, 2010 and March 31, 2010, respectively)



6,055



4,296










Total non-current liability



6,055



4,296










Total liabilities



366,277



280,508










Total shareholders' equity



195,401



170,550






Non-controlling interests



7,328



10,142










TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY


$

569,006


$

461,200











Source: Funtalk China Holdings Limited
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