FTLK Funtalk China Holdings Limited (MM)

BEIJING, March 11, 2011 /PRNewswire-Asia-FirstCall/ -- 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 third fiscal quarter ended December 31, 2010 ("3Q FY2011").

"We are very pleased with Funtalk's strong financial performance in the third quarter of fiscal year 2011 that clearly exceeded our previously stated guidance," commented Mr. Fei Dongping, chief executive officer of the Company.  "Our total revenue grew more than 86% year-over-year, driven by the excellent growth in our retail business as we continued the strong momentum in our retail expansion.  During the quarter, we added 56 locations to reach a total of 718 locations, from 662 locations in the previous quarter and only 446 locations a year ago.  Riding on the strength of our retail business, our priorities remain focused on driving volume growth while steadily and sustainably improving operating profitability.  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 plan to add 450 to 550 net new locations per year."

Third Quarter Financial Results

The Company reported consolidated net revenue of $300.2 million for 3Q FY2011, representing an 86.6% increase from the third fiscal quarter of 2010 ("3Q 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 3Q FY2011 was $170.2 million, representing an 84.2% increase from 3Q FY2010. This growth in the retail segment was primarily driven by the increase in the number of retail subsidiaries, with a total of eleven retail subsidiaries covering 718 locations in 3Q FY2011 compared to seven retail subsidiaries covering 446 locations in 3Q FY2010. Newly acquired subsidiaries contributed approximately $14.3 million to the Company's retail segment revenue in 3Q FY2011.

Wholesale distribution revenue for 3Q FY2011 was $130.0 million, representing a 90.0% increase from 3Q FY2010.  The increased wholesale distribution revenue was primarily attributable to a 76.7% increase in the total volume of mobile phones sold and an 8.6% increase in average selling prices of mobile phones.  

In 3Q FY2011, retail sales volume of 3G products accounted for 20.9% of the total units sold in the Company's retail sale business, compared to 23.1% in the three months ended September 30, 2010.  In 3Q FY2011, wholesale distribution of 3G products accounted for 54.9% of the total units sold in the Company's wholesale distribution business, compared to 30.2% in the three months ended September 30, 2010.

Gross profit for 3Q FY2011 increased 74.2% to $50.4 million, or 16.8% of total revenue, compared to $28.9 million, or 18.0% of total revenue, in 3Q FY2010.  Gross margins for the wholesale distribution segment and retail segment were 16.1% and 17.3%, respectively, for 3Q FY2011, compared to 18.6% and 17.5%, respectively, for 3Q FY2010.  The slight decrease in overall consolidated gross margins was primarily driven by the receipt of one-lump-sum annual pre-tax vendor rebates in the distribution segment during 3Q FY2010.  Starting April 2010, such pre-tax vendor rebates will be receivable by the Company on a quarterly basis.  

Selling and distribution expenses were $19.6 million for 3Q FY2011 compared to $7.4 million in 3Q FY2010. The increase was primarily due to the increase in rental expenses resulting from the acquisitions of retail chains in FY2011 and the expansion of the Company's direct sales force for the retail segment in 3Q FY2011. General and administrative expenses were $11.0 million for 3Q FY2011, representing a 111.8% increase from $5.2 million in 3Q 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 35.5% to $22.1 million in 3Q FY2011 from $16.3 million in 3Q FY2010. Correspondingly, operating income margin, calculated based on income from operations as a percentage of net revenues, decreased to 7.4% in 3Q FY2011 from 10.1% in 3Q FY2010.

Income tax expense was $5.9 million for 3Q FY2011 compared to a $4.6 million tax expense for 3Q FY2010. The effective tax rate was 31.5% for 3Q FY2011 compared to 30.8% in 3Q FY2010, as certain expenses were not tax deductible in 3Q FY2011.

Net income attributable to the Company was $12.7 million, or 4.2% of total revenue, for 3Q FY2011, representing a 34.5% increase from $9.4 million, or 5.9% of total revenue for 3Q FY2010. 3Q FY2011 diluted earnings per share ("EPS") was $0.22 based on a diluted share count of 58.9 million shares compared to 3Q FY2010 diluted EPS of $0.19 based on a diluted share count of 50.4 million shares.

As of December 31, 2010, the Company's cash balance (including pledged deposits) was $61.8 million.  The Company's accounts receivable was $74.5 million, representing a decrease of 7.4% from the accounts receivable balance of $80.5 million as of March 31, 2010.  The accounts receivable (including notes receivable) turnover days for 3Q FY2011 was 24.8 days compared to 42.7 days in 3Q FY2010.

Recent Development Initiatives

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.

In November, 2010, the Company acquired 100% equity of Hubei Feon Telecommunications Technology Co., Ltd., a retail chain with 14 outlets in Hubei province.

In December, 2010, the Company entered into an agreement on acquiring 100% of equity of Jinan Dawo Technology Co., Ltd., a retail chain with 65 outlets in Shandong province. This retailer benefits from strong cooperation and support from China Unicom, one of the three largest Carriers in China.  This acquisition is expected to be completed in the fiscal fourth quarter 2011.

Business Outlook for Fourth Quarter of FY2011

The Company expects its revenue for 4Q FY2011 to be in the range of $280 million to $300 million and its net income attributable to the Company to be in the range of $10.0 million to $12.0 million.  The Company expects a revenue split of approximately 55% for its retail business segment and 45% for its distribution business segment in 4Q 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.

Correspondingly, the Company expects FY2011 revenue of approximately $1.1 billion and FY2011 net income attributable to the Company to be in the range of $42 million to $44 million, as compared to its previous FY2011 outlook of $1.0 billion to $1.2 billion and $40 million to $45 million, respectively.  Such projections are based on the Company's current views on operating and market conditions and are subject to change.  

"Continuing on our consistent track record, Funtalk's third quarter FY2011 performance marks another quarter of sound execution of our business plans.  We plan to continue with our core growth strategy to further deepen and strengthen our partnership with mobile carriers, and expand our multi-brand portfolio in our distribution business.  At the same time, we remain nimble and will make both the strategic and necessary operational improvements in order to deliver superior financial results to our shareholders.  I'm confident that Funtalk is firmly on track to achieve another strong year in FY2011," 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 Friday, March 11, 2011.  Listeners may access the call by dialing #1-201-689-8471. 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 March 18, 2011 by dialing #1-858-384-5517. The conference ID number is 368620.

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)

SOURCE Funtalk China Holdings Limited