Telestone Technologies (NASDAQ:TSTC)

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Zack Buckley Q&A

2010年8月18日下午两点Zack Buckley

1． Can you give me some background on the company?

介绍公司基本情况

We had introduce to you.

2． What does the company look like in the next 3-5 years?

公司未来三到五年的计划是什么？

In the next 3-5 years TSTC will continue to develop more application services on the WFDS unified access network platform to provide competitive solution for our customers.

The carriers are facing the integration directives for triple-play for telecommunication, wideband internet access and television access. They will need our brand-new solution of WFDS to meet the demands of triple-play and services integration over the next five years. What is more, the WFDS can provide a basic platform for IOT(the internet of things) which stands for a big industry with more than one hundred billion RMB market in China and is supported by the Chinese government with supportive policy. To share the big market we have planned to integrate more sensors and application into our WFDS unified access network, such as social service of meter-reading for water and Gas in building, video monitor for social safety and etc.

3．Can you explain your segments?

请介绍公司的业务领域

We are the provider of access network solutions in telecommunication industry, and our segments are Access solution innovation, Equipment R&D and manufacturing, Project engineering and services. Currently, WFDS represents about 20.0% to 30.0% of our revenues with traditional RF based technology making up the difference.

4． What are the competitive advantages of TSTC?
公司的竞争优势是什么？

We are confident to be technologically ahead of competitors on both sides: our R&D capability and our standard on the WFDS.

Firstly we own a R&D team with over 100 specialists and 60 engineers, some of them are industrial experts in telecommunication. Our focus and main field is in providing access network solutions, and we can also do equipment R&D and system engineering and services.

Secondly, in the field of unified access network and WFDS We have received 13 patents, 17 in later stages of approval…for a total 52 patents. In this way we can protect our WFDS technology with the application standard. We can Can integrate several types of systems into one fiber network.

5． How can you ensure that you will continue to be technologically ahead of competitors?
公司如何保持在技术上超前于竞争对手？

Just like above answers, our technical advantage is our specialists R&D team, our WFDS is the only solution for all service access network and it has got the FCC certification. These superiorities will gain us more market shares.

6． Will you expand internationally?
公司会进行海外扩展吗？

We have set up a subsidiary in the US this year. And also we have sales representative in Russia, Vietnam, and south America, and we plan to set up branch in Europe. Our goal over the next three to five years is for international sales to comprise 30.0% of revenue compared to its current contribution of about 5.0%.

7． If you had to invest in a small Chinese company other than your own, what would it be?

如果你投资一家小型的中国公司，除了你拥有的这家，会选择哪家？

We don’t invest in any company, but if we need, we will do acquisition or merger. There are two kinds of company in our consideration, one is technical kind of company and the other is marketing company.

8． Why are the accounts receivable so high?
为什么应收账款这么高？

9． When will they get paid off?
应收账款何时能够结清？

On June 30, 2010, Telestone had $101.0 million in receivables as compared to $89.0 million as of December 31, 2009. The amount of accounts receivable is directly related to the projects the Company secured from China’s Big 3 telecommunication companies. Accounts receivable days sales outstanding (DSO) for the second quarter of 2010 was 483 days. DSOs reflect the nature of the Company’s business conducted with China’s largest state-owned telecommunication companies and to date the Company has not experienced any significant bad debts. On an annualized basis, the Company’s average DSO is approximately 12-months, which has been consistent with its business operations with the state-owned telecommunication companies in China since it began project work in the industry in 2005. In response to investor concerns about DSO’s, the Company has added a series of directives to encourage timely collection of invoices to their sales managers performance reviews in to keep the DSO’s of their project based business at 12 months which has been the company’s standard after embarking on its fast-growth path. A potential contributor to decreasing DSO’s may be Telestone expansion to export markets whereby it only sells its components to installers and engineering companies, like the recently executed contract with Quell Incorporated in a Houston – based hospital. Since export sales are conducted on wire transfer or letter of credit with 30-90 days terms, as this mix of revenues and DSO aggregate with DSO’s of their project business, overall DSO’s should decrease based on the mix of revenues for each segment.

10. Why were your second quarter net income results substantially less then the 2009 comparable period? Second quarter expenses were high and net margins were low.

Expenses were high because we invested in the 2nd quarter. The first half of the year is the tender season. The 3rd and 4th quarter is when all the projects finished and we can book revenues. We are confident that we will reach our guidance. Our revenues grows a lot in the 3rd and 4th quarter. If you reference last year, the situation was the same. It is the cyclical nature of the business.

11. Can you see this trend changing at some point? This could improve the overall valuation multiples of your stock.

Now we are developing our oversea market. We have partners there who provide engineering and we provide the products and technology, which we make direct sales of products and can make the payment by TT. This can improve the DSO.

12. I am curious why the analyst has not factored this into their estimates. I am assuming you informed them of the cyclical nature of your business. Was your decision to increase investment a last minute choice?

We have told the analyst about our business model, but we are not sure if they can understand it under China's background. And for each project, we make budget beforehand and we will carry on according to the budget. So there would be no last minute situation for us.

13. Please address non-recurring revenue.

Non recurring revenue includes governmental subsidy