ZST Digital Networks, Inc. Announces First Quarter 2010 Results

ZST Digital Networks, Inc. Announces First Quarter 2010 Results

Net Income Up 58.0% from the first quarter 2009 to $2.0 million

ZHENGZHOU, China, May 14 /PRNewswire-Asia-FirstCall/ -- ZST Digital Networks, Inc. (NASDAQ:ZSTN) (the "Company" or "ZST"), a major developer, manufacturer, and supplier of cable systems and commercial GPS products in China, today announced its financial results for the first quarter ended March 31, 2010.

First Quarter 2010 Financial Highlights

-- Total revenue was US$17.0 million, a slight decrease of
4.0% compared to the first quarter of 2009.
-- Gross profit for the first quarter 2010 was US$4.2
million, an increase of 43.1% compared to the first
quarter 2009. Gross profit margin for the first quarter
2010 was 24.5%, compared to 16.4% for the first quarter
2009.
-- Operating income for the first quarter 2010 was US$2.9
million, an increase of 48.9% compared to the first
quarter of 2009.
-- Net income for the first quarter 2010 was US$2.0 million,
an increase of 58.0% compared to the first quarter of
2009.
-- Net income margin for the first quarter of 2010 was 11.6%,
compared to 7.0% for the first quarter 2009.

Recent Business Highlights

-- As announced on April 21, 2010, the Company entered into agreements
with Henan Chong Hing Automobile Sales Ltd. and ShangQiu City Security
Services Ltd. to provide Global Positioning System ("GPS") hardware
installation and monthly call center services. The combined value of
the two contracts is approximately US$1.6 million (RMB11.3 million),
which includes first year service fees of approximately US$0.2 million
(RMB1.3 million).

Mr. Bo Zhong, Chairman and Chief Executive Officer of ZST, commented, "I am pleased to report healthy results exceeding our guidance in what is typically the seasonally lowest quarter of the year. Our results were underpinned by a substantial increase in sales of our high margin commercial GPS tracking products and services with the previously announced signing of a major contract at the quarter end. As a result, revenue from our GPS segment accounted for approximately 16% of our total revenues at the quarter end and we expect this percentage to increase in the coming quarters. We are very pleased with the rapid growth of this newly launched product segment and believe we are well positioned to continue to penetrate the rapidly expanding commercial transport market in Henan.

"We continue to experience healthy demand for our IPTV set-top boxes, supported by the government backed initiatives to increase digital cable penetration in Henan Province. As this initiative gathers momentum, we have seen a dramatic increase in order size for our IPTV products. This is clearly a positive trend in terms of the overall growth of the market, and as the leading IPTV provider in the Province, we stand to benefit from these policies over the long-term. In order to increase sales of our IPTV products outside of the larger cities in Henan Province, we introduced a Standard Definition IPTV product in the first quarter at a lower price point to complement our High Definition IPTV set-top box. While this has impacted our average selling price, it has also allowed us to tap into a large and expanding market opportunity, and we expect to see continued unit growth on a full year basis. We will continue to capitalize on these favorable trends by executing our strategy to increase sales in the IPTV set-top box market, expand our products and services, especially within the GPS market, and continue to build our brand and technology platform."

John Chen, Chief Financial Officer of ZST, commented, "We are pleased to report revenue and net income for the quarter ahead of our guidance, supported by the continued growth of our GPS sales and services. In addition, we delivered positive operating cash flow during the quarter, further strengthening our balance sheet. We believe the growing demand for our commercial GPS products and services will continue to make 2010 a transformative year for ZST Digital."

First Quarter 2010 Unaudited Financial Highlights

Revenue

Revenue for the first quarter 2010 was US$17.0 million, representing a slight decrease of 4.0% from US$17.8 million in the first quarter 2009. The decrease in revenue for the quarter resulted from a decrease in revenue from the Company's IPTV set-top boxes, offset by GPS products sales and services revenue of approximately US$2.8 million.

Gross Profit and Gross Profit Margin

Gross profit for the first quarter 2010 was US$4.2 million, representing a 43.1% year-over-year increase. Gross profit margin for the first quarter 2010 was 24.5%, up from 16.4% in the first quarter 2009.

Operating Expenses

Total operating expenses for the first quarter 2010 were US$1.2 million, representing an increase of 31.1% from US$0.94 million in the first quarter 2009. The year-over-year increase in operating expenses was a result of the Company's expanded operations and revenue base, expenses related to GPS product development as well as additional expenses incurred as a result of being a publicly reporting company in the United States.

General and administrative expenses (G&A) for the first quarter 2010 were US$0.73 million, up 105.4% from US$0.36 million in the first quarter 2009. The increase in G&A expenses was mainly attributable to the Company's expanded operations and revenue base and additional expenses incurred as a result of being a publicly reporting company in the United States.

Research and development expenses (R&D) for the first quarter were US$0.24 million, compared to nil for the first quarter 2009. The continued investment in R&D was driven primarily by capacity increases to accommodate GPS product development and continued development of IPTV set-top box products.

Income Tax

Income tax expense for the first quarter 2010 was US$0.97 million, compared to US$0.65 million in the first quarter 2009. This increase was mainly due to the Company's continued growth in pre-tax income.

Income from Operations and Net Income

Income from operations was US$2.9 million in the first quarter 2010, an increase of 48.9% compared to operating income of US$2.0 million in the first quarter 2009.

Net income for the first quarter 2010 was US$2.0 million, a year-over-year increase of 58.0% from US$1.2 million in the first quarter 2009. Net margin was 11.6% for the first quarter 2010, compared to 7.0% in the first quarter 2009.

Diluted net income per share was US$0.17 in the first quarter 2010, compared to US$0.16 for the first quarter 2009.

Balance Sheet

Cash and cash equivalents totaled to US$20.8 million as of March 31, 2010, attributable to the closing of the recent public offering in October 2009 and cash generated by the Company's operations.

As of March 31, 2010, total trade receivables were US$18.1 million, a decrease of 27.1% from US$24.9 million as of December 31, 2009, primarily due to increased sales of GPS products and services and a general improvement in the cash collection cycle.

As of March 31, 2010, inventories decreased by US$0.36 million, or 28.5%, to US$0.89 million from US$1.2 million as of December 31, 2009, primarily due to increased sales of GPS products and services.

Second Quarter and Full Year 2010 Outlook - Based on the current estimates, the Company approximates that revenue for the second quarter 2010 will range between US$28.0 million and US$31.0 million. The Company also estimates that net income for the second quarter 2010 will range between US$3.0 million and US$3.5 million. For the full year 2010, the Company reiterates its guidance, estimating that revenues will range between US$115 million and US$125 million, and net income will range between US$13 million and US$15 million. This represents the Company's current and preliminary view, which is subject to change.

Conference Call

The Company's management team will conduct a conference call on Friday, May 14, 2010 at 8:00 am (U.S. Pacific Time) / 11:00 am (U.S. Eastern Time) / 11:00 pm (HK / Beijing Time) to discuss its 2010 first quarter financial results and recent business activity. The conference call may be accessed by calling +1-866-519-4004 or +1-718-354-1231 (for callers in the U.S.), 800-819- 0121 (for callers in China), 800-930-346 (for callers in Hong Kong), +0808- 234-6646 (for callers in United Kingdom) or +65-6723-9381 (for other international callers) and entering pass code 73639754. Please dial in approximately 10 minutes before the scheduled time of the call.

A recording of the conference call will be available through May 28, 2010, by calling +1-866-214-5335 (for callers in the U.S.) or +61-2-8235-5000 (for callers outside the U.S.) and entering pass code 73639754.

About ZST Digital Network, Inc.

ZST Digital Networks, Inc. (NASDAQ:ZSTN) is a China-based company, principally engaged in supplying digital and optical network equipment and providing installation services to cable system operators in China. The Company has developed a line of IPTV devices that are used to provide bundled cable television, Internet and telephone services to residential and commercial customers. The Company has assisted in the installation and construction of over 400 local cable networks in more than 90 municipal districts, counties, townships, and enterprises. The Company has also launched a commercial line of GPS devices and support services for transport-related enterprises to track, monitor and optimize their businesses. For more information about ZST Digital Networks, Inc., please visit http://www.shenyangkeji.com/ .

Statement Regarding Unaudited Financial Information

The unaudited financial information set forth above is preliminary and subject to adjustments. Adjustments to the financial statements may be identified when audit work is performed for the year-end audit, which could result in significant differences from this preliminary unaudited financial information.

"Safe Harbor" Statement

This release contains certain "forward-looking statements" relating to the business of the Company and its subsidiary companies. These forward-looking statements are often identified by the use of forward-looking terminology such as "believes, expects" or similar expressions. Such forward looking statements involve known and unknown risks and uncertainties, including, but not limited to, our ability to maintain and increase revenues and sales of our products; our ability to develop and market new products; our strategic investments and acquisitions; compliance and changes in the laws of the People's Republic of China (the "PRC") that affect our operations; our ability to obtain all necessary government certifications and/or licenses to conduct our business; vulnerability of our business to general economic downturn, especially in the PRC; adverse capital and credit market conditions; our ability to meet liquidity needs; and other risk factors detailed in reports filed with the Securities and Exchange Commission from time to time. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including the factors discussed above and in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on its website (http://www.sec.gov/ ). All forward- looking statements attributable the Company or to persons acting on its behalf are expressly qualified in their entirety by these factors other than as required under the securities laws. The Company does not assume a duty to update these forward-looking statements.

Contacts:

Company Contact:
ZST Digital Networks, Inc.
John Chen, Chief Financial Officer
Email: jchen@shenyangkeji.com

Investor Contact (US):
Taylor Rafferty, LLC
Mahmoud Siddig
Tel: +1-212-889-4350
Email: zstdigital@taylor-rafferty.com
Web: http://www.taylor-rafferty.com/

Investor Contact (HK):
Taylor Rafferty, LLC
Ruby Yim
Tel: +852-3196-3712
Email: zstdigital@taylor-rafferty.com
Web: http://www.taylor-rafferty.com/

Investor Contact (US):
BPC Financial Marketing
John Baldissera
Tel: +1-800-368-1217

ZST DIGITAL NETWORKS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In U.S. Dollars)

December 31, March 31,
2009 2010
(Unaudited)

ASSETS
Current assets:
Cash and cash equivalents $13,627,992 $20,779,792
Accounts receivable 24,885,497 18,142,693
Inventories 1,245,803 890,441
Advance to suppliers 7,399,141 7,587,147
Other receivables -- 11,764
Prepaid expenses 1,064,499 1,017,409

Total current assets 48,222,932 48,429,246

Property, machinery, equipment and
software, net 875,806 2,361,819
Intangible asset 171,122 161,886
Prepaid expenses - long term 858,609 601,140

Total assets $50,128,469 $51,554,091

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $700,940 $31,951
Advance from customers 376,586 559,999
Accruals and other payables 295,410 376,135
Accrued payroll and related expense 66,370 108,385
VAT payable 198,828 204,042
Franchise tax payable 162,100 --
Income tax payable 547,917 473,574
Total current liabilities 2,348,151 1,754,086

Equity
Common stock $0.0001 par value,
100,000,000 shares authorized,
11,650,442 and 11,650,442 shares
issued and outstanding 1,165 1,165
Additional paid-in capital 30,677,932 30,677,932
Appropriated earnings 3,328,345 3,328,345
Retained earnings 13,752,791 15,722,446
Translation adjustment 20,085 70,117
Total equity 47,780,318 49,800,005

Total liabilities and equity $50,128,469 $51,554,091

ZST DIGITAL NETWORKS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In U.S. Dollars)

Three Months Ended March 31,
2009 2010
(Unaudited) (Unaudited)
Revenues:
Sales of products $17,760,628 $16,427,903
Sales of services -- 620,375
Total revenue 17,760,628 17,048,278

Cost of sales:
Cost of products sold 14,844,279 12,824,789
Cost of service -- 49,497
Cost of sales 14,844,279 12,874,286

Gross profit 2,916,349 4,173,992

Selling expense 18,572 267,305
Research and development expenses -- 235,524
General and administrative expenses 355,779 730,610
Merger cost 566,654 --

Income from operations 1,975,344 2,940,553

Interest income (expense), net (81,381) 1,615
Other income (expense) 3,004 --

Income before income taxes 1,896,967 2,942,168

Income tax provision 650,609 972,513

Net income $1,246,358 $1,969,655

Weighted average shares of common
stock outstanding - basic 7,641,573 11,650,442

Earnings per share - basic 0.16 0.17

Weighted average shares of common
stock outstanding - diluted 7,796,929 11,650,442

Earnings per shares - diluted 0.16 0.17

Other comprehensive income:
Net income 1,246,358 1,969,655
Translation adjustment (422,664) 50,032

Comprehensive income $823,694 $2,019,687

ZST DIGITAL NETWORKS, INC. AND SUBSIDIARIES
Statements of Cash Flows
(In U.S. Dollars)

Three Months Ended March 31,
2009 2010
(Unaudited) (Unaudited)

Cash flows from operating activities:
Net income $1,246,358 $1,969,655
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 5,085 177,478
Share-based compensation -- 42,624
Imputed interest 31,400 --
Changes in operating assets and
liabilities:
Accounts receivable (10,524,172) 6,742,705
Inventory 305,400 355,357
Advance to suppliers 2,226,258 (188,003)
Other receivables 5,594 (52,349)
Prepayments and other assets -- 290,642
Accounts payable 5,698,353 (668,999)
Accruals and other payable 522,386 (34,144)
Advance from customers -- 183,416
Taxes payable 250,440 (74,344)
Net cash provided by (used in)
operating activities (232,898) 8,744,038

Cash flows from investing activities:
Additions to fixed assets -- (1,640,318)
Advance made to ZST PRC shareholders (1,740,376) --
Net cash used in investing activities (1,740,376) (1,640,318)

Cash flows from financing activities:
Repayments for short term bank loans (219,724) --
Net proceeds from sale of preferred
stock 2,946,440 --
Net cash received from financing
activities 2,726,716 --

Effect of changes in foreign exchange
rates (7,092) 48,080

Net increase in cash and cash
equivalents 746,350 7,151,800

Cash and cash equivalents, beginning
of the year 1,134,954 13,627,992

Cash and cash equivalents, end of the
period $1,881,304 $20,779,792

Source: ZST Digital Network, Inc.

CONTACT: Company Contact: ZST Digital Networks, Inc., John Chen, Chief
Financial Officer, jchen@shenyangkeji.com; or Investor Contact (US): Taylor
Rafferty, LLC, Mahmoud Siddig, +1-212-889-4350; or zstdigital@taylor-
rafferty.com; or Investor Contact (HK): Taylor Rafferty, LLC, Ruby Yim,
+852-3196-3712, or zstdigital@taylor-rafferty.com; or Investor Contact (US):
BPC Financial Marketing, John Baldissera, +1-800-368-1217

Web site: http://www.shenyangkeji.com/

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