Hollysys Automation Technologies Ltd (HOLI) Q4 2019 Earnings Call Transcript
Image source: The Motley Fool.
Hollysys Automation Technologies Ltd (NASDAQ:HOLI)
Q4 2019 Earnings Call
Aug 14, 2019, 9:00 a.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for Fiscal Year 2019 and the Fourth Quarter Ended June 30, 2019. [Operator Instructions]
I would now like to hand the conference over to Mr. Arden Xia, the Investor Relations Director of Hollysys Automation Technologies. Thank you, please go ahead Mr. Xia.
Arden Xia — Investor Relations Director
Hello, everyone, and thank you for joining us. Today, our speakers will be Mr. Baiqing Shao, CEO of Hollysys Automation Technologies; Mr. Steven Wang, CFO of Hollysys Automation Technologies; and myself the IR Director of Hollysys.
On today’s call, Mr. Shao will provide a general overview of our business, including some highlights for the fiscal year 2019 and the fourth quarter. Mr. Steven Wang will discuss our performance from financial perspective, and we will answer questions afterwards.
Before getting started, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995. Forward-looking statements are the statements that are not historical facts, including statements relating to the expected growth of Hollysys’ future product introductions, the mix of products in future periods and future operating results. Such forward-looking statements based upon the current beliefs and expectations of Hollysys’ management are subject to risks and uncertainties, which could cause actual results differ from the forward-looking statements.
The following factors, among others could cause actual results differ from those set forth in these statements: business conditions in China and in Southeast Asia; continued compliance with government regulations; legislation or regulatory environments; requirements or changes adversely affecting the business in which Hollysys is engaged; cessation or changes in government incentive programs; potential trade barriers affecting international expansion; fluctuations in customer demand; management of rapid growth and transition to new markets; intensity of competition from or introduction of new and superior products by other providers of automation and control systems technology; timing, approval and market acceptance of new product introductions; general economic conditions, geopolitical events and regulatory changes; as well as other relevant risks detailed in Hollysys’ filings with Securities and Exchange Commission.
The information set forth herein should be read in light of such risks. Hollysys does not assume any obligation to update the information discussed in this conference call or in its filings.
Please note that all amounts noted in this conference call will be in US dollars, unless otherwise noted.
And now I’d like to turn the call to Mr. Baiqing Shao. Please go ahead, Mr. Shao.
Baiqing Shao — Chief Executive Officer
Thank you, Arden. Greetings, everyone. I would like to discuss some key events during this quarter.
IA business finished the fiscal year with revenue and contract at $233.8 million and $291.3 million, achieving 4% and 2.5% year-over-year growth respectively.
For the quarter, revenue and new contract were $66.6 million and $83.9 million, representing 4% and 0.9% year-over-year growth respectively. We continued our effort in market penetration and addressing the demand from current customer base. Within high-end coal fire market, we signed contracts to provide DEH to Guohua Jinjie 2 units 660-megawatt and Huaneng Shengli 2 units 660-megawatt power stations.
Despite slowdown in coal fire, we continued to explore opportunities in new energy, and managed to maintain our leading position, especially in garbage power. In the chemical and petrochemical industries, we have optimized our team to facilitate market penetration and comprehensive solution offering in different sub-verticals. Meanwhile, our milestone Zhong’an coal-chemical project is approaching its completion.
We provided a total over 70,000 DCS control points and the execution of the project last for more than two years. Our capability has been highly praised by our client and we believe this project will help build up our reputation as a competitive solution provider for large-size projects and high-end clients in the industry. The momentum of after-sales services continued, driven by the demand from rebuilding and upgrade. We are also improving international — internal coordination when connecting with our customer base.
Through visiting our customers — clients in a team of members from different product divisions, we hope to create better engagement and explore the opportunities of cross-selling. Furthermore, we are actively promoting our smart plant initiatives through direct communication with key potential clients, as well as open marketing activities involving clients, governments and other industry players.
Railway business finished the fiscal year with revenue and contract at $208.9 million and $360.3 million [Phonetic], recording 9.6% and 37.7% year-over-year growth respectively. For the last quarter, revenue and contract was 68.3 — $46.3 [Phonetic] million and $60.8 million, representing 19.6% and 4.6% year-over-year growth respectively. We signed several contracts to provide ATP advanced maintenance to local railway bureaus.
Going forward and giving a visible long-term railway construction plan, we will continue to adhere to the diversity strategy for stable and healthy growth and to improve our local service network for more value-adding and differentiated services. Our urbanization as an ongoing process, we will keep leveraging our strong R&D capacity and prepare for the application of various types of railway transportation systems in the future.
In the overseas business, M&E finished the fiscal year with revenue and contract at $127.6 million and $93.4 million, recording 1.8% year-over-year growth and 9.1% year-over-year decrease respectively. For the quarter, revenue and contract were $42.1 million and $25.2 million, representing 1.7% and 37% year-over-year decrease. Given the macroeconomic in Southeast Asia and the Middle East, risk control remains to be the key focus of our M&E business. Going forward, we will continue our effort in developing partnership with the key EPC players, and strengthening localization in manufacture, marketing and services.
With that, I’d like to turn the call over to Steven Wang, who will review the financial result analysis.
Steven Wang — Chief Financial Officer
Thank you, Mr. Shao. I’d like to share some financial highlights for the fiscal year and the quarter ended June 30, 2019. Comparing to the prior fiscal year, the total revenues for fiscal year 2019 increased from $540.8 million to $570.3 million, representing an increase of 5.5%. Integrated contract revenue increased by 0.2% to $467.4 million, product sales revenue decreased by 17.7% to $33.1 million, and services revenue increased by 105% to $69.9 million.
The Company’s total revenues by segments are as follows. For fiscal year 2019, Industrial Automation revenue, $233.8 million; Rail Transportation Automation revenue $208.9 million; Mechanical and Electrical Solutions revenue, $127.6 million; total revenue, $570.3 million.
Overall non-GAAP gross margin was 37.1% for the fiscal year 2019, as compared to 38.2% for prior year. The non-GAAP gross margin for integrated contracts, product sales, and services were 30.4%, 77.1% and 62.7% for fiscal year 2019, as compared to 32.8%, 73.2% and 71% for the prior year, respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margins.
Selling expenses were $28.9 million for fiscal year 2019, representing an increase of $1.8 million or 6.5%, compared to $27.2 million for the prior year. Presented as a percentage of total revenues, selling expenses were 5.1% and 5% for fiscal year 2019, and 2018, respectively.
Non-GAAP G&A expenses were $40.5 million for the fiscal year 2019, representing a decrease of $4.7 million or 10.3%, compared to $45.1 million for the prior year, which was primarily due to decrease of bad debt allowance. Presented as a percentage of total revenues, non-GAAP G&A expenses were 7.1% and 8.3% for fiscal year 2019 and 2018, respectively.
R&D expenses were $37 million for fiscal year 2019, representing an increase of $0.4 million or 1.1%, compared to $36.6 million for the prior year. Presented as a percentage of total revenues, R&D expenses were 6.5% and 6.8% for fiscal year 2019 and 2018 respectively.
Goodwill impairment charges was $11.6 million for the fiscal year of 2019. The VAT refunds and government subsidies were $30.7 million for fiscal year 2019, as compared to $24.5 million for the prior year, representing a $6.3 million or 25.7% increase, which was primarily due to an increase of the VAT refunds.
Income tax expenses and the effective tax rate were $18.2 million and 12.7% for fiscal year 2019, as compared to $22.2 million and 17.1% for the prior year. The effective tax rate fluctuation was mainly due to the different pre-tax income mix with different tax rates, as Company’s subsidiaries are subject to different tax rates in various jurisdictions.
The non-GAAP net income attributable to Hollysys was $126.2 million or $2.07 per diluted share for fiscal year 2019. This represents a 15.9% increase over the $108.9 million or $1.78 per share based — in the comparable prior year period. On a GAAP basis, net income attributable to Hollysys was $125.3 million or $2.05 per diluted share representing an increase of 16.9% over $107.2 million or $1.75 per diluted share for the comparable prior year period.
Contracts and Backlog Highlights: The backlog of — as of June 30, 2019 was $594.2 million. The detailed breakdown of the new contracts and backlog is as follows: new contract for fiscal year 2019; Industrial Automation $291.3 million, Rail Transportation $340.3 million; Mechanical and Electrical Solutions $93.3 million. Backlog as of — for June 30, 2019; Industrial Automation backlog $191 million; Rail Transportation $326.5 million, Mechanical Electrical Solutions, $76.6 million.
Financial highlights for the fourth quarter ended June 30, 2019, comparing to the fourth quarter of prior fiscal year, the total revenues for the three months ended June 30, 2019 increased from $147.2 million to $157 million, representing an increase of 6.6%. Broken down by the revenue types, integrated contracts revenue increased by 0.9% to $132.8 million, products sales revenue decreased by 46.6% to $6 million, and services revenue increased by 308.6% to $18.3 million.
The Company’s total revenues can also be presented in segments as follows: For the fourth quarter of fiscal year 2019; Industrial Automation revenue achieved $66.6 million; Rail Transportation Automation revenue $48.3 million; Mechanical and Electrical Solution revenue $42.1 million; total revenue $157 million.
Overall non-GAAP gross margin was 34% for the three months ended June 30, 2019, as compared to 39.6% for the same period of the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services were 29.9%, 66.3% and 52.9% for the three months ended June 30, 2019, a