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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the Hollysys Automation Technologies Earnings Conference Call for First Quarter of Fiscal Year 2019 Ended September 30, 2018. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded today, November 14, 2018, Beijing Time.
I would now like to hand the conference over to Mr. Arden Xia, Investor Relations Director of Hollysys Automation Technologies. Thank you. Please go ahead, Mr. Xia.
Thank you. Hello everyone, and thank you for joining us. Today, our speakers will be Mr. Baiqing Shao, CEO of Hollysys; and Mr. Steven Wang, CFO of Hollysys 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 first quarter of fiscal year 2019, 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 the Private Securities Litigation Reform Act of 1995. Forward-looking statements are 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 to differ from the forward-looking statements.
The following factors, among others, could cause actual results to differ from 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 businesses 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 transitions to new markets; intensity of competition from or introduction of new and superior products by other providers of automation and control system technology; timing, approval and the 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 the 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 information discussed in this conference call or in its filings. Please note that all amounts noted in this conference call will be in U.S. dollars, unless otherwise noted.
I'd now like to turn the call to Mr. Baiqing Shao. Please go ahead, Mr. Shao.
Thank you, Arden and greetings to everyone. I would like to discuss some key events during early this quarter. Industrial automation recorded a 0.4% year-to-year growth in revenue at $57.7 million. New contract recorded 9.9% year-to-year growth at $80.2 million. We continued to intend our here in high-end power industry to execute the low-to-high end market expansion strategy in chemical and petrochemical industries and to build and maintain our industry in other verticals.
In power, major contracts we signed include DCS solution for Guohua Jinjie two unit 660 megawatt power units and Shenhua Shengli two units and 660 megawatts power. Contract growth in chemical and petrochemical remained healthy. Major contracts include additional SIS contract for the milestone Zhong'an United Coal Chemical Project and additional DCS contract for SINOPEC's p-xylene project. In addition to the effort in gaining and maintaining market share in various industries, the company is paying adequate attention to the intelligence manufacturing based on sizable customer we have accumulated through decades, as it is a valuable asset for our long term sustainable growth. Leveraging our consistent emphasis on R&D, we continue to provide both regular and value-added services to our customers and to accompany them along the cause of better productivity. Our widespread national service network enables us to stay closer to the customers, to respond faster and to understand better.
Rail business recorded a 43.1% year-to-year growth in revenue at $50.4 million, while new contract increased sharply year-to-year at 866%, at $71.5 million. In high-speed rail business, new ATP contracts were signed this quarter, while CRC has published the bidding notice in mid-October for another 320 sets of ATP. Intake of heavy maintenance contracts are gradually seen as the ATPs are approaching their first 10 years maintenance cycle.
In subway business, we signed SCADA contracts on Shenzhen subway line 2 and line 8. Going forward, we will continue to strengthen our marketing capacity through reviewing and updating strategic partnership and improving local service network coverage for both high-speed railway and subway business. Management team will adhere to the diversity strategy to create revenue stream from more new products and services, and to maintain a stable and healthy growth into the future.
In oversea business, we continued to seek opportunities in industrial automation business through EPC projects and direct sales. Contracts were signed on DCS, DEH, BATCH, instrument integration et cetera solution with customers from India and Southeast Asia in coal fire, thermal power, chemical and construction material, etc.
M&E business, performed by Concord and Bond, recorded a 34.2% year-to-year growth in revenue, at $30.6 million, and a 32.0% year-to-year growth in new contract, at $14.8 million. M&E will continue to act as a pioneer of internationalization for Hollysys, with growing coordination to be built in between M&E and domestic business. Meanwhile, the economic and political circumstances in South East Asia and Middle East will continue to be closely followed.
With that I'd like to turn the call over to Steven Wang, who will read the financial results analysis.
Thank you, Mr. Shao. Comparing to the prior fiscal year, the total revenues for the three months ended September 30, 2018 increased from $116.5 million to $138.7 million, representing a 20.1%, integrated contract revenue increased by 21.9% to $116.7 million, product sales revenue decreased by 15% to $8 million, and service revenue increased by 35.4% to $40 million.
The company's total revenue presented by segments as follows. For fiscal quarter of fiscal year 2019, industrial automation revenue $57.7 million, rail transportation automation revenue $50.4, mechanical and electrical solution revenue $30.6 million. Total revenue $138.7 million. Our overall non-GAAP gross margin was 37.2% for the three months ended September 30, 2018 as compared to 36.6% for the same period of prior year. The non-GAAP gross margin for integrated contracts, product sales, and services were 30.8%, 75%, and 67.9% as compared to 29.3%, 71.8% and 71.6% for the same period of the prior year respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin.
Selling expenses were $7.7 million for the first fiscal year, representing an increase of $1.0 million or 15.1%, compared to $6.7 million for the same quarter of the prior year, mainly due to the increased sales activities. Selling expenses were 5.6% and 58% for the three months ended September 2018 and 2017 respectively.
Non-GAAP G&A expenses were $8.6 million for the quarter ended September 30, 2018 representing a decrease of $2.4 million or 19.3%, compared to $11 million for same quarter of the prior year, mainly due to the decrease bad debt allowances. Non-GAAP G&A expenses were 6.2% and 9.5% for the quarters ended September, 2018 and 2017 respectively.
R&D expenses were $8.8 million for the first quarter, representing an increase of $0.2 million or 1.6%, compared to $8.6 million for the same quarter of the prior year.
The VAT refunds and government subsidies were $3.5 million for the first quarter, as compared to $7.1 million for the same period in the prior year, representing a $3.6 million or 49.9% decrease, which was primarily due to the decrease of VAT refunds.
The income tax expenses and the effective tax rate were $5.5 million and 16.3% for the first quarter, as compared to $3.7 million and 14.9% for the comparable prior year period.
The non-GAAP net income attributable to Hollysys was $28.1 million or $0.46 per diluted share based on $61.3 million diluted shares outstanding for the three months ended September 30, 2018. This represents a 27.9% increase over the $21.9 million or $0.36 per share in the comparable prior year period.
Contracts and backlog highlights. Hollysys achieved $166.5 million new contracts for the three months ended September 30, 2018. And the backlog as of September 30, 2018 was $516.2 million, due to a breakdown of new contracts and backlog by segments as follows.
For the first quarter, industrial automation new contracts $80.2, rail transportation $71.5 million, mechanical and electrical solutions $14.7 million. Total new contracts $166.5 million. Backlog, industrial automation first quarter was $176.5 million, railroad transportation backlog $244.7 million, mechanical and electrical solutions $95 million. Total backlog $516.2 million.
Cash flow highlights. For the first quarter, the total net cash inflows was $11.2 million, operating cash flow was $36.6 million, investing cash flow was the $17, net cash of financing activities was $0.1 million.
Balance sheets highlights. The total amount of the cash and cash equivalents were $276.9 million, $265.7 million and $244.8 as of September 30, 2018, June 30, 2018 and September 30, 2017 respectively.
For the three months ended September 30, 2018, DSO was 170 days, as compared to 196 days for the comparable prior year period and 166 days for the last quarter; and inventory turnover was 51 days, as compared to 61 days for the comparable prior year period and 59 days for the last quarter.
At this time, I'd like to open it up for Q&A session. Please note that for Chinese speaking participants we ask also do the Q&A in Mandarin and we'll provide a translation.
[Foreign Language] Operator, please.
[Operator Instructions] Your first question comes from the line of Thomas Zhang from Morgan Stanley. Please ask your question.
[Foreign Language]
The first question is no matter year-on-year compared for the first quarter or quarter-over-quarter to compared the industrial automation rail, new contract actually impact a lot, but why the backlog feel compared decrease, it seems like not it makes equal?
The second question about the ATP question. The maintenance cycle for the ten years, after ten years is the CRC the only customers [Technical Difficulty] contracted privately or just a common standardized meeting and also what we do for the maintenance, is our entire product change or the components or the other things change gradually.
The third question is about R&D expense. Actually at the beginning of this year, you mentioned not give guidance, so I suppose that the expanse going to increase but right now the R&D as a percentage for the revenue decrease. So I want to ask about what about the coming one or two years this proportion and also how you manage the R&D?
[Foreign Language]
The first question about the backlog. Actually compared just an increase 3% to 4% but a new contract increase a lot because of this fiscal year according to the ASC 606 the new principal of the U.S. GAAP, we adopt from July 1st. Parts of today's contracted revenue recognition are chancing from special proposal matter into percentage of completion in light to several one off tax, our financials result including backlog. This part of influence around the 240 million China yen versus USD35 million roughly. And this is new standards also influenced just the balance sheet of accounts. So this is why this part you could see a little bit difference between new contract increase rate and also the backlog.
[Foreign Language]
The question still refers to the backlog numbers but actually the answer is that may influence just that 35 million and it's just the time of point of recognition revenue but actually the whole quarter recognized revenue just compare a little bit fast but this is influenced by our end customer, but we also followed by the percent of completion. So current base is still in the healthy range. Thank you.
[Foreign Language]
Okay. The maintenance about the high speed rail, it emphasis on the electronic components. And we discuss with the CRC, the only customer we settle down, all the providers settle down the same thing. 7 years to 10 years is our time for the maintenance and also replacement because we want to secure the relay of the whole railway operation. And CRC and our providers together to setup this rules that just between 7 to 10 years changing the internal components regularly. So that the large components do not change but inside of each unit and all components we gradually to change.
[Foreign Language]
[Foreign Language]
About that the R&D expense, actually before the yearly target, we give the range 6% to 8% of total revenues. This is still in a range. And from the actually value, you can see this still with a good number. And also we want to emphasis beyond the R&D, actually we also finished R&D activity by the other activities, for example, the investment or M&A potential to make the sufficient support for the R&D purposes.
[Foreign Language]
The last question, have you evaluate about in the past 10 years if you are start to do the maintenance or replacement, what about the price or the potential market value for those part?
[Foreign Language]
This parts, I have no effectively data for your reference but in future we will have to share to you for a better landscape. But generally speaking for the gross margin, we have no change. And also this kind of regularly it change the components, we also have our own price strategy. Thank you.
Thank you. Your next question comes from the line of Jacqueline Du from Goldman Sachs. Please ask your question.
[Foreign Language]
Okay. The first question is about the railway transportation, new order increase a lot. Could you separate that ATP, TCC maintenance and also any input about contracts? And the second and also right now would to see the trend for the open feeding or the competition of the construction for the rail is very - it's just start and what about the growth region for the whole 2019 calendar year?
And second question is about the IA, industry automation, new contract is $80 million level and this is still a good above. Could you explain a little bit about data verticals trend, I mean power, chemical, the others?
And the last question is about the power cases. This is represents the power industry and what about the copy or the solutions, a transit ability to the other areas after that range?
[Foreign Language]
The first question, we actually would not disclosed the separate down number toward the ATP, TCC maintenance. By the way, we included the track circuit contract at this quarter, just a high speed rail line.
[Foreign Language]
Okay. We also not disclose the number exactly, but I can tell you about the roughly range. No matter revenue on new contract within IA, the power around the 40% to 45% and also the same with the chemical, petrochemical and by the way power including that coal fire, thermal power and new energy, and the 5% roughly around from the new nuclear power and the 10 to 15 from others, like the methodology due to materialize those kind of industries. And the coal fire new contraction slowing down but from the actual value is still okay because we have tremendous placement of track records we can do that the other maintenance upgrading potential contracts. So this is the base spread of the industries.
[Foreign Language]
The highly allowed pace, we help them to finish the kitchen side automation work. This is including like the automatic preparing the soup area, it is like a different radiance to automatic integrated together and also the wash, include in the washing function. And we want to achieve the purpose of the highly allowed itself. They want to do the automation to do that standardized and also want to finish, that the increase of their satisfaction of the customer. And we already signed further contract with the other franchise, they want to through this case to deliver to the other franchise.
[Foreign Language]
I want to make emphasis on the [indiscernible] case. Actually there is significant because from the customers settle down the order from the half had and transferred to the kitchen side and the whole thing is the system execution and reflected the whole process is automatic. This is also through the MES, the whole production manufacturing process. And also can show objectives also including the solid material and the liquid material. So it's a kind of improve of our capability of the team to focus on the different situation of the working conditions to make the manufactory for intellectual manufactory product. So this is a very prudent and simply and also can free enforce our capability to provide more complex conditions automation work in future.
[Foreign Language]
And we very expected this party future performance and by the way, our return to my question about rail ATP, for example about to the 320 sets, how many do deliver currently and what about the price? And also the last thing is I also want to focus on the landscape or expectation for the whole 2019 calendar year performance, can you explain a little bit more about this? Thank you.
[Foreign Language]
The ATP contract for this calendar year 2019, right now have two batches of the bidding, one is all for 300, one is in August around - total around the 190 sets of the ATP and we won 52 sets. And the second batch in October 15 around 320 set. But right now, we not signed contract yet, so we cannot disclose its number. We'll see later and well do the press release for all.
And generally speaking, the high speed rail, the total investment no changing and also our market share very stable. So we are very optimistic for the 2019 whole fiscal year. And later, we will still provide a lot of service contracts and also new product contract as a supplement. Thank you.
[Foreign Language]
About the unit price are now changing right?
[Foreign Language]
The answer is, yes. Thank you. Due to the time constraint, we'll now take one last question.
Your last question comes from the line of Gary Cheung from Haitong International. Please ask your question.
[Foreign Language]
Okay. The first question about the U.S. new principal - the GAAP principle and this year to start a reflected from your financials. And could you give me a little bit about to the data before no change before about the backlog number, this could better for us to contrast the differences?
And the second question about the IA new contract, the revenue just compare increased flat and the new contract compared increased and the what about your sales area expenditure if there any other significant growth and also about the new order I want to say a new contract, I want to ask about there any cancel situation?
The last question you start at the 240 million China yen backlog influenced by the service contract and - but beyond this influence, we also could see the backlog a little bit pulling down, so is there any particular IA area industries not good right now?
[Foreign Language]
The question for the first one is we will - to answer the question about the comparison of that recovery result of the backlog. But actually I'm also emphasis, the 35 million still that make difference between - including the service contract. And also the second one for the new contract, we have - and even the backlog, we have no any cancellation. After this part is also stable. We have the latest cycle of the automation work by the way. And for the long term to see that the revenue and the backlog should be at the same trend, but the cost it will be differences but no line relationship between each other. I mean actually, it depends on the recognize revenue actually the percent of completion of our implementing work by the customer side.
And to the last question also including the same as the first two questions, beyond the 35 million influence maybe still have the currency exchange rate. If you are calculated these two things that our backlog actually compare increase 12%. This is a little bit soft than the revenue and also used you could use that, it's slowing down but actually this kind of fluctuation in the normal range just like what I said have no relationship, it just depends on different, by cost, it's just a difference depends on the percent of completion.
[Foreign Language]
The question is about the focus on IA industrial automation. And this part do you have seen any verticals with special decline or from a contract size need to the cancellation or the other things, just focus on the automation?
[Foreign Language]
And actually our IA, the customer side at in more than 90% already investment to finish the infrastructure and also finish the equipment procurement and so the last tab is automation, so that's why we need a very few I mean actually no any cancellation of the contract situation. And also the backlog - also the new contract in the past to 10 quarters, if you see the absolute value, normally in the range of $50 million to $60 million but this quarter is still above $80 million in the high range. So the momentum still very good by our side. And by verticals, it's just a matter that you go to material those industries still not good, but actually the main generator on the power and the chemicals, petrochemicals still strong with our side. This is also including you know we increased above the average of the industry growth, it also depends on our internally strengthen our penetration for the market share. So these elements influence the total momentum of the new contract of IA.
[Foreign Language]
And I want to make supplement about in this automation entire environmental market circumstances. Actually from our side that we are not seeing and it's declining of particular industry, so we still can maintain the momentum right now.
Thank you, Gary. Thank you every one for joining us on the call today. If you haven't got a chance to raise questions, we're pleased to answer them through follow-up contacts. We are looking forward to speaking with you again in near future. Thank you.
That does conclude our conference for today. We thank you for your participation. You may all disconnect.