Orsus Xelent (ORS) Reports Full Year 2008 Results

On Wednesday, Orsus Xelent Technologies, Inc. (ORS), a designer and manufacturer of mobile phones for the Asian market, announced its full year 2008 results.

Revenues for the full year ended December 31, 2008 grew approximately 20% to $107,827,000, compared with $89,923,000 in 2007. Full year net income grew 16.6% to $11,296,000 or $.38 per share, compared with $9,683,000 or $0.33 per share in the year ended December 31, 2007.

However, net income in the fourth quarter as well as the full year benefited from one time reversals in provisions for inventories and doubtful accounts as well as foreign exchange gains which for the year totaled $2,785,000, or 2.58% of full year revenues. Included in this total is a $2.4 million gain from the cancellation of a disputed debt to a Company supplier for which the statute of limitations expired.

Without the one time gains, 2008 full year net profit would have declined to $8,895,000 as compared with $9,683,000 in 2007.

The Company said the structural adjustment in the Chinese telecom industry necessitated implementation at the start of the year of the strategy to focus on marketing a greater number of lower end, low-margin handsets through its traditional channels. Against an industry background where full year sales of cell phones in China increased less than 2%, compared with double digit growth rates in prior years, the Company sold a record 1.06 million cell phone units in 2008, more than double the prior year. However, during the year 85% of products sold were priced below RMB 1,500 (about $200), while sales of high margin operator-tailored products were under 5% of the total. In 2007, the latter accounted for more than 40% of sales.

As a consequence, full year 2008 gross profit declined to $14.5 million compared with $15.7 million a year earlier. However, with close attention to cost control, 2008 pre-tax operating income of $11.4 million was about even with the prior year, which the Company believes reflects the stability of its operations even in extremely difficult conditions. It added that the profit margin in 2008 on net income of $11,296,000 (including “other income”) was 10.47% as net profit grew 16.6% from $9,683,000 in 2007, when the profit margin was 10.78%. Excluding “other income,” the Company said net profit margins were 8.24% for the full year, a decrease of 2.54% from 10.78% in 2007.

Outlook

Looking ahead, the Company said that the downturn in the world economy is likely to continue in 2009, making predictions difficult in what it sees as a very choppy environment, particularly in the first half of the year. For the full year, however, the Company is maintaining its forecast of growth in revenues of at least 15%. It is basing this forecast principally on the following:

• The Company’s main focus will be on continued marketing of its feature rich, more economical GSM phones for which it believes it has established a strong reputation with its Orsus brand for quality, appearance and technical ability. Further, it continues to strengthen its marketing effort in smaller cities and rural areas where it sees the best growth potential in the near term.
• A significant portion of the Company’s R&D and trading activity is focused on the development of 3G products. While off to a slow start nationwide in 2008, the Company sees a growing 3G push by the major telecom companies in 2009 and fully expects to participate in this new growth area with its own product launches, which it believes could contribute up to 15% of total sales.
• With increased stability in the telecom industry the Company sees an opportunity for 20% of its sales to come from higher margin custom collaborative efforts with the telecom operators.
• The Company has put much effort into work with China Multimedia Mobile Broadcasting (CMMB), and believes the new markets that will open in 2009 could account for 5% of total sales.

Overall, the Company believes it will continue to demonstrate in tougher times the characteristics that have fueled its excellent growth over the years, namely its flexibility, innovativeness and entrepreneurial drive. As the industry strengthens and the economy improves, it sees significant opportunity ahead in the vast Chinese telecom market. Despite the slowdown since June 2008, the Company sees enormous potential in this market. One key reason for this is the current market penetration estimate by industry sources of only about 47%, based on approximately 640 million current mobile subscribers. Various forecasters believe the number of subscribers will easily grow to more than 700 million in 2010.

Since the management changes, early April, the stock rose 56%. Although this may be a good point to take some profits of the table, the stock is still only trading at a P/E of 1.60. So we’re going to hold on to our shares a bit longer.

If the shares were to rise above $0.95, we would sell at least half of our position.