Funtalk China Holdings Limited Reports Fiscal 2011 Second Quarter Financial Results

-- 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)