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Recon Technology, Ltd (RCON)·Q1 2015 Earnings Summary

Executive Summary

  • Q1 FY2015 revenue fell 62.6% year over year to $0.699M, gross margin compressed to 14.3% (from 46.0%), and GAAP diluted EPS was -$0.14 as state-owned customers (CNPC/SINOPEC) reduced capex and delayed projects .
  • Management maintained full-year FY2015 growth outlook of at least 20% revenue growth, citing expected pickup in project completions and continued demand for furnaces and automation products .
  • Operating income swung to a loss of $(0.722)M; adjusted EBITDA was $(0.369)M and adjusted diluted EPS was -$0.09, driven by lower volumes and higher consulting/comp expenses; non-GAAP adjustments totaled $243,363 ($0.05 per share) .
  • Liquidity remains adequate: working capital ~$13.2M, current assets ~$20.5M, cash ~$1.0M, no long-term debt; short-term bank loans ~$1.3M and related-party borrowings ~$0.85M (plus a subsequent founder loan of ~$0.98M) .
  • Near-term stock catalysts: conversion of finished goods (~$2.4M inventory, ~20% furnaces shipped), backlog/project completions resuming, and validation of maintained FY2015 growth goal despite macro headwinds .

What Went Well and What Went Wrong

What Went Well

  • Maintained FY2015 growth outlook (“at least 20% year over year”) with plans to recover delayed projects; CEO: “we fully expect that projects…will be completed in subsequent periods” and anticipate “significant recovery and increase in revenues” .
  • Continued customer interest in furnaces and automation; management sees budgets shifting from exploration to production/development where Recon’s products can meet needs .
  • Balance sheet resilience: working capital ~$13.2M, current assets ~$20.5M, cash ~$1.0M, no long-term debt; subsequent founder loan further supports liquidity .

What Went Wrong

  • Top-line and margin pressure: revenue -62.6% YoY to $0.699M; gross margin 14.3% vs 46.0% last year, reflecting sharp volume decline and lower software mix .
  • Profitability deterioration: GAAP net loss $(0.676)M; operating loss $(0.722)M; adjusted EBITDA $(0.369)M; adjusted net loss $(0.433)M—driven by project delays and higher G&A (consulting, share-based comp, travel) .
  • Customer capex headwinds: CNPC and SINOPEC reduced exploration/production capex, causing postponements and fewer finished projects; management expects recovery later in FY2015 but near-term visibility was reduced .

Financial Results

Summary P&L vs Prior Year (Q1 FY2015 vs Q1 FY2014)

MetricQ1 FY2014Q1 FY2015
Revenue ($USD)$1.871M $0.699M
Gross Profit ($USD)$0.861M $0.100M
Gross Margin (%)46.0% 14.3%
Operating Income ($USD)$0.082M $(0.722)M
Net Income (GAAP) ($USD)$0.008M $(0.676)M
Diluted EPS (GAAP) ($)$0.002 $(0.14)
Adjusted Net Income ($USD)$0.136M $(0.433)M
Adjusted Diluted EPS ($)$0.03 $(0.09)
Adjusted EBITDA ($USD)$0.241M $(0.369)M

Note: Non-GAAP adjustments exclude special non-cash after-tax expenses totaling $243,363 ($0.05 per share) in Q1 FY2015 .

Sequential comparison vs Q4 FY2014: Q4 quarterly revenue and EPS were not disclosed in filings; the 10-Q provides balance sheet changes vs June 30, 2014 (end of FY2014) rather than Q4 P&L detail .

Segment and Mix Breakdown

CategoryQ1 FY2014 (RMB)Q1 FY2014 ($USD)Q1 FY2015 (RMB)Q1 FY2015 ($USD)
Hardware & Software (non-related parties)¥11,097,092 $1,790,? see total below; USD not individually provided¥4,245,509 $689,945
Service¥0 $0 ¥58,491 $9,505
Hardware & Software (related parties)¥415,618 $— (RMB disclosed) ¥0 $0
Total Revenue¥11,512,710 $1,870,951 ¥4,304,000 $699,450

Gross profit and margin detail:

MetricQ1 FY2014Q1 FY2015
Cost of Revenues ($USD)$1.014M $0.599M
Gross Profit ($USD)$0.861M $0.100M
Gross Margin (%)46.0% 14.3%

Operating expenses:

OpEx LineQ1 FY2014 (RMB)Q1 FY2015 (RMB)Q1 FY2015 ($USD)
Selling & Distribution¥1,353,922 ¥700,790 $113,887
G&A¥2,741,923 ¥3,703,291 $601,828
R&D¥692,600 ¥656,729 $106,726
Total OpEx¥4,788,445 ¥5,060,810 $822,441

KPIs and Balance Sheet Highlights

KPIQ4 FY2014 (As of Jun 30, 2014)Q1 FY2015 (As of Sep 30, 2014)
Cash & Equivalents ($USD)$2.94M $0.98M
Accounts Receivable (3rd party) ($USD)$7.08M $6.25M
Inventories ($USD)$2.33M $2.80M
Finished Goods Inventory ($USD)$—$2.4M; ~20% furnaces shipped
Current Assets ($USD)$21.67M $20.47M
Current Liabilities ($USD)$8.18M $7.28M
Working Capital ($USD)$13.5M ~$13.2M
Short-term Bank Loans ($USD)$1.62M $1.30M
Short-term Borrowings (Related Parties) ($USD)$0.85M $0.85M
Warrants Liability ($USD)$0.816M $0.771M
Weighted Avg Shares (Diluted)3.95M 4.76M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue GrowthFY2015Minimum 20% annual growth goal (corporate target disclosed in FY2014 release) At least 20% YoY revenue growth in FY2015 maintained despite weak Q1 Maintained
Long-term Revenue Objective2–3 yearsAim to double revenues over next 2–3 years (organic + acquisitions) Reiterated strategic goal to double revenues in 2–3 years Maintained
Operational OutlookFY2015Strong demand for furnaces/automation; growth in production-focused spend Expect significant pickup in project completions; demand shifting to production/development Qualitative reaffirmation
R&D FocusOngoingFracturing tools/services development Reducing high cost of fracking in China; confident in breakthroughs Expanded detail

No explicit quantitative guidance on margins, OpEx, tax rate, or dividends was provided .

Earnings Call Themes & Trends

Note: No Q1 FY2015 earnings call transcript was available in the document catalog; the company scheduled a call for Nov 14, 2014 and indicated playback would be posted on its website .

TopicPrevious Mentions (Q-2 and Q-1; Sept 2014 press releases)Current Period (Q1 FY2015)Trend
Customer Capex/MacroAnticipated strong FY2014 results; planning for acquisitions and organic growth; general reforms in China’s oil industry CNPC/SINOPEC reduced capex; project delays; expect recovery later in FY2015 Negative near-term, expected recovery
Product Demand (Furnaces/Automation)FY2014 growth driven by sharp increases in automation and furnaces revenue Continued interest; customers shifting budgets to production/development; finished goods include furnaces Positive demand, timing delayed
Fracturing/Downhole ServicesOngoing projects; expectation to grow fracturing services; partnerships (Baker Hughes) Focused R&D to reduce fracking costs; confidence in breakthroughs Strategic investment continues
Mix (Software vs Hardware)Higher-margin software contributed to FY2014 margin improvement Lower software revenue mix in Q1 drove margin compression Adverse in Q1
Liquidity/Capital StructureNo long-term debt; working capital ~$13.5M (FY2014) No long-term debt; working capital ~$13.2M; subsequent founder loan received Stable liquidity
Regulatory/ControlsN/ADisclosure controls deemed ineffective as of Sep 30, 2014 Control remediation needed

Management Commentary

  • “We fully expect that projects originally scheduled to be completed in the quarter will be completed in subsequent periods during the fiscal year… anticipating a significant recovery and increase in revenues” — Shenping Yin, Chairman & CEO .
  • “Despite reduced drilling and lower oil prices… we see continuing opportunity to expand our share of our customers’ budgets… shifting from exploration to increased production and development expenditures” .
  • “We are also focused on developing new products… a particular focus… reducing the high cost of fracking in China… confident of achieving breakthroughs” .
  • “An achievable goal for Recon is average annual revenue growth of a minimum of 20%… aim to double our revenues over the next two to three years” .

Q&A Highlights

No transcript available; the company scheduled a call for Nov 14, 2014 and referenced playback on its website, but we did not locate a published transcript in the document catalog .

Estimates Context

S&P Global consensus estimates for Q1 FY2015 revenue and EPS were unavailable; we were unable to retrieve estimates via Capital IQ. As a result, no comparison versus Street was possible for this quarter [GetEstimates error].

Key Takeaways for Investors

  • The Q1 reset reflects external capex cuts and project delays rather than demand destruction; management expects deferred projects to complete and revenue to recover over FY2015, maintaining at least 20% YoY revenue growth guidance .
  • Monitor conversion of finished goods (~$2.4M inventory; ~20% furnaces shipped) as a near-term revenue catalyst once project sites resume activity .
  • Margin trajectory hinges on mix shifting back toward software/automation and scale returning; Q1 gross margin compressed to 14.3% due to lower software contribution .
  • Balance sheet provides runway: ~$13.2M working capital, ~$1.0M cash, no long-term debt; short-term founder loan adds liquidity but watch related-party borrowings and warrants liability .
  • Non-GAAP adjustments were material ($243k; $0.05 EPS) — be mindful when interpreting adjusted EBITDA/EPS vs GAAP .
  • Customer concentration risk (CNPC/SINOPEC) and macro (oil price/Chinese reforms) remain key swing factors; any evidence of resumed capex should drive estimate revisions and sentiment .
  • Execution on R&D to reduce fracking costs and continued furnace/automation demand are medium-term growth levers; acquisitions remain a strategic option per management’s long-term doubling goal .