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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 Fiscal Year 2018 and the Fourth Quarter Ended June 30, 2018. At this time all participants are in a listen-only mode. There will be a presentation follow by a question-and-answer session. [Operator Instructions] Please be advised that this conference is being recorded today, August 15, 2018, Beijing Time.
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.
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 ended quarter results, Mr. Steven Wang will 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 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 the 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 those set forth herein 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 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 developments during this quarter. Industrial automation recorded a 46.2% year-to-year in quarterly revenue at $68 million and new revenue and new contract recorded a 30.2% and 16.0% year-to-year growth respectively. Management continued to execute the low-to-high end market expansion strategy for Process Automation business.
Contract growth in chemical and petrochemical remained healthy. Major contracts include a DCS, SIS, ITCC and AMS solution for Shandong Haiyou Chemical's 1 million tons delayed coking equipment project, and a DCS solution for Suzhou Sinye Materials Technology Corporation Ltd covering its furan, cold-core, and sulfonic nickel curing agent project. We signed several additional contracts for the milestone Zhong'an United Coal Chemical Project, where we applied our comprehensive solution to many new equipment for the first time.
On power, despite the slowdown of the coal fire industry, growth in thermal power and new energy remained healthy. We continued to maintain our market share in high end coal fire market, while actively expanding market for multiple product lines. Major contracts signed include a DCS solution for Shenhua Wucaiwan 2X660MW power station and a DEH solution for Datang Pingluo 2X660MW turbine unit.
We continued to address service and upgrading demand from the entire customer base. Our data-based value-added solution, including energy saving, control optimization and information security, et cetera have received growing acceptance from customers of several industries. With our widespread national service network, we are capable of communicating with and delivering to our customers from various industries regular and value-added customized services and products they need.
Rail business recorded a 37.6% year-to-year decline in quarterly revenue at $40.4 million, while quarterly new contract decline year-to-year by 16.8%, at $58.1 million. Annually, new contracts increase year-to-year by 24.2%, while revenue increase year-to-year by 22.4%. Breakthrough was made as we signed a C2 track circuit contract for Guiyang Southwest line. New contracts were also signed on subway SCADA for Beijing Subway Line 17 and Line 19.
As for the ATP product line, CRC started the bidding of C3 ATP in early June, but contract has not been signed yet. We continued to strengthen our marketing capacity through reviewing and updating strategic partnership and improving local service network coverage, and signed several maintenance contracts covering both on-board and on-ground equipment.
Management team will adhere to the diverse strategy to creating 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 Process Automation business through EPC projects and direct sales. Contracts were signed on DCS, DEH, BATCH, et cetera solution with customers from India and Southeast Asia. The M&E business, performed by Concord and Bond, recorded a 45.1% year-to-year growth in quarterly revenue, at $42.9 million, and a 150.9% quarterly new contract growth, at $40.0 million. Annual M&E revenue and new contracts recorded 21.0% and 134.5% year-to-year growth respectively.
Effort on improving management and risk control in this fiscal year has taken effect and will be ongoing. 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 Steven Wang, who will read the financial results analysis.
Thank you, Mr. Shao. I'd like to share some highlights for the fiscal year quarter ended June 30, 2018. Comparing to the prior fiscal, the total revenues for the fiscal year 2018 increased from $431.9 million to $540.8 million, representing the increase of 25.2% integrated contract revenue increased by 21% to 466.5 million, product sales revenue increased by 23.2% to $40.2 million, and service revenue increased by 147.3 million to $34.1 million.
The company's total revenue can also be presented segments as follows. For fiscal year 2018, industrial automation $224.8 million, rail transportation automation $198.6 million, mechanical and electrical solution $125.2 million, Total revenue $540.8 million. Non-GAAP gross margin was 38.2% for the current fiscal year as compared to 32.7% for the prior year. The non-GAAP gross margin for integrated contracts, product sales, and services were 32.8%, 73.2%, and 71% for the current fiscal year, as compared to 28.2%, 69.5%, and 70.8% for the prior year respectively. The gross margin fluctuation was mainly due to the different revenue mix with different margin.
Selling expenses were $27.2 million for the current fiscal year, representing an increase of $2.8 million or 11.2%, compared to $24.4 million for the prior year. Non-GAAP G&A expenses were $45.1 million for the current fiscal year, representing an increase of $1.3 million or 2.9%, compared to $43.8 million for prior year. R&D expenses were $36.6 million for the current fiscal year, representing an increase of $6.5 million or 21.6%, compared to $30.1 million for the prior year, mainly due to increased research and development activities.
The VAT refunds and government subsidies were $24.5 million for the current fiscal year, as compared to $29.8 million for the prior year, representing a $5.3 million or 18% decrease, primarily due to decrease of government subsidies.
The income tax expenses and the effective tax rate were $22.2 million and 71.1% for the current fiscal year, as compared to $14.4 million and 71.3% for the prior year period.
The non-GAAP net income attributable to Hollysys, was $108.9 million or $1.78 per diluted share based on 61.2 million diluted shares outstanding for the current fiscal year. This represents a 55.4% increase over the $70.1 million or $1.16 per share, based on 61 million diluted share outstanding in the prior year.
Operating results for the fourth quarter ended June 30, 2018. Comparing to the fourth quarter, our supplier fiscal year, the total revenue for the quarter ended June 30, 2018, increased from $130 million to $147.2 million, representing an increase of 6.7%. Integrated contract revenue increased by 5.5% to $131.6 million, product sales revenue increased by 30.4% to $11.1 million and service revenue decreased by 4.4% to $4.5 million.
The company's total revenue can be presented in segments are as follows. For the Q4 of 2018, industry automation $64 million, railway transportation automation $40.4 million. Mechanical and electrical solution $42.9 million, total revenue is $147.2 million.
Non-GAAP gross margin was 39.6% for the quarter as compared to 39.1% for the same period of prior year. The non-GAAP gross margin for integrated contract product sales and services were 35.7%, 72.4% and 73.2% for the quarter, as compared to 35.7%, 71.5% and 69.9% for the same period of prior year respectively. Gross margin fluctuation was mainly due to the different revenue mix with different margins.
Selling expenses were $6.5 million for the quarter, representing a decrease of $0.1 million or 1.2% compared to $6.6 million for the same period of prior year.
Non-GAAP G&A expenses were $14.4 million for the ended June 30, 2018, representing a decrease of $0.2 million or 1.5% compared to $14.6 million for the same quarter at the prior year. R&D expenses were $8.6 million for the quarter, representing an increase of $0.6 million or 7.5% compared to $8 million for the same quarter of the prior year.
The VAT refunds and government subsidies were $4.1 million for the quarter as compared to $6.5 million for the same period in the prior year, representing a $2.4 million or 37.9% decrease, primarily due to the decrease of government subsidies. The government effective income - the income tax expenses and effective tax rate were $4.6 million and 14.2% for the quarter ended June 30, 2018, as compared to $5.4 million and 19.9% for the comparable prior year.
The non-GAAP net income attributable to Hollysys was $28.6 million or $0.46 per diluted share based on 61.3 million diluted shares outstanding. For the quarter ended June 30, 2018, this represented a 26.5% increase over the $22.6 million or $0.37 per share based on 61.3 million shares outstanding in the prior year.
Contracts and backlog highlights. Hollysys achieved $181.2 million new contracts for the quarter ended June 30, 2018. And the backlog as of June 30, 2018 was $569 million.
Cash flow highlights. For the fiscal year June 30, 2018, the total net cash inflow was $64.4 million. The net cash of operating activities was $122.2 million. The net cash of investing activities was $50.4 million. The net cash used in financing activities was $12.2 million. For the quarter ended June 30, 2018, the total net cash inflow was $24.1 million. The net cash of operating activities was $45.1 million. The net cash of investing activities was $6.4 million. Net cash of financing activities was $4.7 million.
Balance sheet highlights. The total amount of cash and cash equivalents were $262.1 million, $238 million, $197.6 million as of June 30, 2018, March 31, 2018, June 30, 2017 respectively. For the fiscal year ended June 30, 2018, days sales outstanding was 174 days, as compared to 201 days from the prior year, and inventory turnover was 58 days, as compared to 51 days from the prior year.
For the three months ended June 30, 2018, DSO was 166 days as compared to 153 days for the prior year period and 196 days for the last quarter. And inventory turnover was 59 days as compared to 50 days for the prior year period and 63 days for the last quarter.
Thank you, Steven. At this time, we would like to open up for Q&A session. Please note that for Chinese speaking participants, we can also do the Q&A in Mandarin and we'll provide translation. Operator, please.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Lingxin Kong from CICC. Please ask your question.
The first question is focused on the gross margin for fiscal year 2018. And we could see the integrated contract gross margin from 28% raised to 33% and beyond the raise is that to the mix of the different projects. What these and other reasons for this matter. And also we could see the railway transportation compare IA the gross margin higher. But last fiscal year for example the railway transportation revenue goes down, but steel from that point to now, we could see the IA compare increase a lot, but still the mix, the gross margin maintain a high basement like this fiscal year 38.2%. So just to give us a hint about the gross margin.
Second one, question is about the guidance, there has no guidance for the fiscal year 2019 and could you give us a little bit more landscape about future? Thank you.
The first question about the gross margin, in this fiscal year still making high basement Beyond the mix reasons, we also have the other two reasons. The first one is railway transportation compare the percentage of total revenue contribution still high and this caused the gross margin higher than the other business. And also, this fiscal year the M&E business, also the gross margin improved - a little bit improvement. So, that's why the whole gross margin still maintained a good level.
And the second question about guidance, the first thing we can see there from technical - technically to predict one year a little bit hard for the current circumstances. For example, like the external environment, the policy, the other things. And the second one is internally element because our current management team is thinking about the long-term strategy and sometimes for achieve long-term strategy or target would not compensate on the short-term of the numbers. So, that's the reason. Thank you.
The question is about the high-speed rail revenue, the percentage of this fiscal year compared to last fiscal year increased, but could you provide the data about that product?
And the answer is, currently I have no data on hand, but you can calculate by the financial result. Thank you. Operator, next one.
Thank you. Your next question comes from the line of Varun [indiscernible] from JPMorgan. Please ask your question.
Hi, everyone. Thanks for the call. So, my question is, we have recently seen CRC coming up with a blue sky plan. So, I wanted to get a sense from you, what impact do you expect to see on Hollysys from that particular plan in terms of train procurement going forward? And how does that impact the new order contracts for your company? And also, if you can - if it's possible to provide some guidance on new orders in second half of this year, like second half calendar year 2018, what is your thoughts on that? Can we see increased procurement coming in and that getting translated into higher growth in new orders? That would two.
Okay, thank you.
Right now the China Railway Corporation is entered a reform of the structure and also operating things. And that's why the bidding process be influence by this fact. And also if you see the 2018 calendar year, actual should be getting the contract, but a lot of bidding postponed to the second half of the calendar year. And that's why we think the second half year would performance better from the order than the first half. For example, like the HB [ph] contract and we will sign a contract before September 30th.
And also at end of the year, no matter from the 200 or 300, the 300 still have some orders and the 200 is under research and development of new models. But at the end of this current year will be finished, but rather or not is for open the bidding for at the end of fiscal year or at the beginning next calendar year is hard to make a prediction.
So concluding, I mean, it's hard to prediction of the bidding process, but we believe the current information that CRC want to enlarge the investment to CNY 800 billion and for this calendar year. So that's why we are positive for the orders, but the timeline would be fluctuate. Thank you.
Your next question comes from the line of Gary Chong from Haipong Capital [ph]. Please ask your question.
Thank you. The first question about the industrial automation, from last fiscal year to right now, the new contract that is increasing very fast, so what about the future momentum. It's can we time [ph] this momentum. And the second question about the business trade conflicts between United States and China, along these go further is there any influence from your customer side or how much it could be influenced and from which effects. The third question is about the gross margin, you said that M&E have big step improvement about gross margin is it sustainable and why? Thank you.
The first question is about the industrial automation. And this kind of increase because we internally strengthened our management skill and also we focus on target more about the high-end of the market. And also this including the recent intellectual projects emphasized by the Central Government and to all enterprises. And through the improvement of management skills and capability, we believe we can maintain the momentum.
And the second question about the conflict - business conflict between China and the United States, the influence really have, but more positive to us. For example, raised the tax, the import tax about the DCS and PLC products from outside. And this that build momentum for us to penetrate the market. And also the Central Government emphasize on the procurement the local company, domestic company should emphasize on the house made IP and proprietary technology. That's why no matter from the procurement basic technology or products we are all made by our house. So this is also good for us.
The third question about the gross margin, the M&E. The last fiscal year the concord [ph] some product raised costs. So lead to the whole gross margin down. And through our internal improvement and we strengthened control about the project. And this fiscal year why the M&E recover to a normal about 10% gross margin, and this is sustainable. Thank you.
The first question is about the - adding about the second - the trading conflicts, raised the import tax is that are for Hollysys, but the customer side do you see any slowing down because from customer side they are more cautiously to do like enlarge the production, like raise the spend, like all those things. So maybe shows that slowing down by customer. And the second question is about the industrial automation fourth quarter gross margin.
The first question about our customer side, we are doing the engineering project, actually these projects were funded several years ago and that's why right now the complete influence not transferred to that right now. So we see - you have to see the future reset maybe the second half of the calendar year or next calendar year we can see the influence. This is kind of delay about the - our business. And the second question.
The IA gross margin fourth quarter still maintain a good level, so no any sharply influence. Thank you.
Okay, thank you.
Thank you, everyone, for joining us on the call today. If you haven't got a chance to raise your question, we will be pleased to answer them through follow-up contacts. We look forward to speaking with you again in near future. Thank you.
That does conclude the conference the today. Thank you for participating. You may all disconnect.