Telestone Technologies -19 Percent After Hours on Q2 2010 EPS (Nasdaq: TSTC)

After Market Movers

Telestone Technologies (Nasdaq: TSTC) is down 19% after hours, after posting an afternoon EPS release. In short, it looks as if unexpected spending on the SG&A line created, and then took, a better than forecast gross margin and turned it into net earnings that disappointed investors.

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Telestone Technologies (Nasdaq: TSTC) Down After Hours on Q2 EPS

This relatively small wireless equipment maker boasts customers including carriers: China Mobile (NYSE: CHL), China Unicom (NYSE: CHU), China Netcom, China Telecom (NYSE: CHA), China Tietong, China SATCOM, Beijing XiDian; and system integrators: Ericsson (Nasdaq: ERIC, Huawei, Lucent (NYSE: ALU), TD Tech, and Da Tang.

What Happened

Telestone Technologies (NYSE: TSTC) posted Q2 2010 EPS results after the close of trading in New York today. TSTC reported 37% revenue growth, to a small $16.6 million. The company noted its gross profit of $7.5 million, was up 49.8% against the prior year quarter, and represented a gross margin of 45.1%. Management noted that gross margin exceeded its guidance for 42%. However, it also reported that it spent more than expected in sales and marketing efforts to gain high margin WFDS (TM) projects, and so let down investors it seems. As a result, net income fell 12.8% from the prior year mark, to $1.7 million. EPS came in at $0.16, versus a comparable $0.19 in the prior year quarter.

Management confirmed its full year guidance, though, counting on sales efforts to pan out in the second half of the year.

Han Daqing, CEO & Chairman of Telestone said, "We recorded 37% growth during the quarter as we significantly increased our orders and prepared for the ramp in new 3G and WFDS(TM) installations for the second half of the year. We have made a conscious decision to focus our efforts on higher value, high-margin WFDS(TM) projects and have concentrated our sales team on this Company-wide goal. This focus requires an investment to market the benefits and cost savings of WFDS(TM) fiber optic installations to local branch offices of the 'Big 3' (China Mobile, China Unicom and China Telecom) and building owners as well. Because our equipment allows carriers to generate incremental revenues from new services and reduces the operating costs of running multiple systems, we believe our WFDS products offer a compelling return for carriers, building owners and consumers alike. Our sales teams based at our 30 branch offices continue to make good progress, having collectively secured a solid backlog of both 3G and WFDS(TM) contracts and installations with the majority to be realized during the third and fourth quarter of 2010. Thus, we remain confident in meeting our revenue guidance of $129.4 million and $22.9 million in net income for the year."

What We Like:

• Service revenues increased 91%. However, most of these are tied to installation, and will not see sources generate recurring income.


• Focusing on highest margin offerings, which will inevitably dominate the marketplace anyway. Better to be relevant than obsolete.

What's Troubling:

• The business model is back-end heavy due to client requirements, with 75% of revenues earned in Q3 and Q4. This uneven earnings stream poses risk, as end of year closings might miss on unforeseen events, complications with customers, or simply flawed forecasts.


• Company might have better forecast the SG&A spend for its end-goal strategy, and better managed sales efforts to not destroy value at the bottom line.

What's Important:

We should not let noise outweigh the big picture. Is this company going to continue to play a significant role in the expansion of wireless networks across China? If you believe the answer is yes, then perhaps quarterly missteps might be overlooked. I cannot answer that important question for you, as this is the first look we have given the company.

We would pose these important questions to management, that they might answer here if they please:

1. Can you better manage marketing?


2. Will there be a learning curve?


3. Is there leverage to be gained by money already spent to educate regulators and owners of multiple buildings?

We sometimes offer buy, sell or hold opinions on stocks, but this piece is meant to inform investors of the breaking news. The time required to work the due diligence to learn the Chinese telecom equipment market would keep us from forming an opinion in a timely fashion. We hope we have added value to your process just by working through this release and helping you to understand what might be driving the shares so deeply lower this evening. Perhaps we have helped you to see the big picture, and cleared the decision making process for you.

Company Description:

Telestone Technologies Corporation Ltd., headquartered in Fengtai Park in Beijing's Zhongguancun district, is a high-tech full-service coverage equipment and solutions provider in the wireless telecommunications industry. Telestone listed on NASDAQ (Code: TSTC) in 2004 . It has since has acquired two wholly-funded subsidiaries, Telestone Wireless Communication (Beijing) Co.,Ltd, mainly engaged in the system integration of wireless communications, and Telestone Communication Equipment (Shijiazhuang) Co.,Ltd, focusing on the R&D and production of wireless communication products.

Telestone employs a group of first-class wireless communication experts in China. It has two technical centers which are responsible for developing wireless equipment and researching technology solutions. Telestone has also established 26 representative offices throughout China which offer technical support as well as system integration services for the wireless communication marketplace. To date, Telestone holds intellectual property rights to 400 types of products in 8 different series.

How They Make Their Money:

Telestone is awarded "last mile" local access network installation contracts from the "Big 3" telecommunication companies in China including China Mobile, China Unicom and China Telecom. Based on its network design for a particular building site, Telestone procures telecommunications hardware and utilizes local contractors to install 3/G and WFDS(TM) fiber optic local access networks for carriers. A majority of Telestone's project revenue is generated from its engineering and network design solutions for first-time installations or network upgrades. Telestone's projects in turn generate a combination of equipment and professional services revenues. To a lesser extent, the Company generates revenue from equipment-only sales or services-only sales.

Corporate Website: Telestone Technologies



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