Vimicro Announces Unaudited Third-Quarter 2014 Financial Results

Third-Quarter 2014 Financial Highlights

– Third-quarter revenues of $27.6 million, up 14.3% year-over-year; year-to-date revenue up by 57.9%

– Quarterly Gross Margin at 39.4%, as compared to 39.5% year over year, and 37.8% quarter over quarter

– Quarterly Non-GAAP net income of $3.5 million, up 75.4% year over year

– Non-GAAP diluted EPS at $0.12 per ADS reported for the quarter, up 100% year over year

-Year-to-date Non-GAAP net income of $3.0 million, non-GAAP diluted EPS at $0.11 per ADS

BEIJING, November 11, 2014 /PRNewswire/ — Vimicro International Corporation (NASDAQ: VIMC) (“Vimicro” or the “Company”), a leading video surveillance technology and solution provider in China, today announced financial results for the third quarter ended September 30, 2014.

Vimicro Logo

Third-Quarter 2014 Results

Net revenue in the third quarter of 2014 was $27.6 million, as compared to net revenue of $24.2 million in the year-ago quarter and $24.0 million in the second quarter of 2014. Surveillance revenues were $23.9 million in the third quarter, representing 86.6% of total net revenues and up 28.2% year over year. Gross profit in the third quarter was $10.9 million, as compared with $9.5 million in the year-ago quarter and $9.1 million in the second quarter of 2014. The gross margin in the third quarter was 39.4%, as compared to 39.5% in the year-ago quarter and 37.8% in the second quarter of 2014.

Operating expenses in the third quarter were $6.5 million, as compared to $8.8 million in the year-ago quarter and $10.3 million quarter over quarter. Research and development expenses were $1.3 million for the quarter net of $3.6 million government grants applied (research and development expenses would have been $4.9 million without government grants for the quarter), as compared to $4.1 million year over year and $1.8 million quarter over quarter. Sales and marketing expenses were $2.7 million for the quarter, as compared to $2.2 million year over year and $2.4 million quarter over quarter. General and administrative expenses were $2.4 million in the third quarter, as compared to $2.5 million year over year and $6.1 million quarter over quarter.

Operating income was $4.4 million in the quarter, as compared to the operating income of $0.7 million in the year-ago quarter and the operating loss of $1.2 million quarter over quarter.

The equity in profit of an equity investee was $0.5 million, as compared to $1.9 million year over year and $1.8 million quarter over quarter. This equity pick-up is from the Company’s joint venture, Shanxi Zhongtianxin Science and Technology Co. Ltd.

In the third quarter of 2014, non-GAAP net income attributable to Vimicro International Corporation was $3.5 million, or approximately $0.12 per ADS on a diluted basis, as compared to a non-GAAP net income attributable to Vimicro of $2.0 million, or $0.06 per diluted ADS in the year-ago quarter. Non-GAAP net income attributable to Vimicro International Corporation in the third quarter of 2014 and the year-ago quarter excludes $0.1 million and $0.2 million of non-cash, share-based compensation, respectively. GAAP net income attributable to Vimicro in the third quarter was $3.3 million, or $0.12 per diluted ADS, as compared to net income of $1.8 million, or $0.06 per diluted ADS, in the year-ago quarter.

Balance Sheet

As of September 30, 2014, the Company had cash and cash equivalents of approximately $27.6 million and restricted cash of $0.03 million, totaling $27.6 million. Total current assets were approximately $142.5 million, and Vimicro had working capital of approximately $64.1 million and $29.9 million of long-term bank loans and liabilities on its balance sheet, as of September 30, 2014.

Dr. John Deng, Vimicro’s Chairman and Chief Executive Officer, commented, “We are very pleased to report a solid financial and operational result for the third quarter. For the nine-month period ended September 30, 2014, we achieved significant non-GAAP net income of $3 million and $0.11 per diluted ADS, while maintaining a decent revenue growth of 57.9% on a year-over-year basis, driven by strong growth in our video surveillance business. With continued contract wins from our traditional territories such as Shanxi Province, and entrance into new geographic base such as Hunan Province, we are seeing greater demand for SVAC-compliant video surveillance products across the country. We are confident that our financials will continue to show satisfactory results going forward, while benefiting from China’s mega-trend of expedited adoption of domestic IT technology and national standard. As a co-leading developer of SVAC national video surveillance standard and the only proven provider of SVAC-compliant technology and solution, Vimicro will capitalize on its first-mover advantages to further establish itself in China’s robust video surveillance market. “

Recent Events:

-Multiple wins of competitive bid in Taiyuan City, Shanxi Province, to provide SVAC-compliant video surveillance system and products totaling to$52.2 million;

-Winning of competitive bid in Chenzhou City, Hunan Province, with contract value of $29.2 million signaling the first city-wide adoption of SVAC national standard in Hunan Province;

-Our joint venture, Shanxi Zhongtianxin Science and Technology Co. Ltd., securing a $65 million revolving line of credit, to enable Vimicro to maintain the current pace of market expansion in China’s robust video surveillance market;

-Strategic cooperation with Inspur (Langchao), a leading server and storage equipment manufacturer and cloud computer solution provider in China, to jointly tackle China’s video surveillance market in areas of solution and application development, maintenance and services, sales and marketing;

-Ranked number four in the newly released Top 100 Security and Surveillance Manufacturers in China, behind the top three companies of Hikvision, Dahua, and Huawei;

-The release of next generation of our flagship Starlight Camera at 2014 International Exhibition on Public Safety and Security in Beijing;

-A series of investor events in China, including participating in Industrial Securities TMT Investor Forum in Shenzhen and non-deal roadshow in Shenzhen, Shanghai, and Beijing, following initial coverage by Industrial Securities in China

Business Outlook

For the fourth quarter of 2014, the Company expects the total net revenues in the range of $30 million to $32 million.

Conference Call Information

The Company will host the conference call at 8:00 a.m. (U.S. Eastern Daylight Time) / 5:00 a.m. (U.S. Pacific Daylight Time) / 9:00 p.m. (Beijing / Hong Kong time) on Tuesday, November 11, 2014 to discuss its third-quarter 2014 financial results.

To participate in the conference call, please dial one of the following numbers five to ten minutes prior to the scheduled conference call time. The conference call ID number is 9708621.

4001 200 539 (China)

+852 5808 3202 (Hong Kong)

1855 298 3404 (United States)

+1 631 5142 526 (US-New York)

+65 6823 2299 (Singapore/International)

If you are unable to participate in the call at this time, a replay will be available starting at 12:00 Eastern Daylight Time on Tuesday, November 11, 2014, through 23:59 a.m. Eastern Daylight Time on Monday, November 17, 2014. To access the replay, dial 4001 842 240 (China) or 1866 846 0868 (United States). The replay call ID number is 9708621.

This conference call will also be broadcast live over the Internet and can be accessed by all interested parties by clicking on: http://www.media-server.com/m/p/y4bp6czb. Please access the link at least fifteen minutes prior to the start of the call to register, download, and install any necessary audio software.

About Vimicro International Corporation

Vimicro International Corporation (NASDAQ: VIMC) is a leading video surveillance technology and solution provider that designs, develops and markets a full range of video surveillance products and solutions to governments, private enterprises, and consumers in China. Vimicro co-developed SVAC (Surveillance Video and Audio Coding), the national video surveillance technological standard, which demonstrates its unique strengths in proprietary multimedia IC technology, making it a leader in China’s fast-growing security and surveillance market. Vimicro is headquartered in Beijing, China and has subsidiaries and offices throughout China and in Silicon Valley. Vimicro’s ADSs each represent four ordinary shares and are traded on the NASDAQ Global Market exchange under the ticker symbol “VIMC.”

Forward-Looking Statements

This announcement contains forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates,” “confident” and similar statements. Among other things, the quotations from management in this announcement, as well as Vimicro’s expectations and forecasts, contain forward-looking statements. Vimicro may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission on forms 20-F and 6-K, etc., in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about Vimicro’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following: the Company’s ability to develop and sell new mobile multimedia products; the expected growth of the mobile multimedia market; the Company’s ability to increase sales of notebook camera multimedia processors; the Company’s ability to retain existing customers and acquire new customers and respond to competitive market conditions; the Company’s ability to respond in a timely manner to the evolving multimedia market and changing consumer preferences and industry standards and to stay abreast of technological changes; the Company’s ability to secure sufficient foundry capacity in a timely manner; the company’s ability to effectively protect its intellectual property and the risk that it may infringe on the intellectual property of others; and cyclicality of the semiconductor industry. Further information regarding these and other risks is included in Vimicro’s annual report on Form 20-F filed with the Securities and Exchange Commission. Vimicro does not undertake any obligation to update any forward-looking statement, except as required under applicable law. All information provided in this press release is as of the date hereof, and Vimicro undertakes no duty to update such information, except as required under applicable law.

Non-GAAP Measures

To supplement the consolidated financial statements presented in accordance with GAAP, Vimicro uses non-GAAP measures of non-GAAP income/(loss) from operations, non-GAAP net income/(loss) from operations attributable to Vimicro International Corporation and non-GAAP net income/(loss) from operations attributable to Vimicro International Corporation per diluted ADS, which are adjusted from the most directly comparable financial measures calculated and presented in accordance with GAAP to exclude share-based compensation expenses. These non-GAAP financial measures are provided to enhance investors’ overall understanding of the Company’s financial performance as they exclude share-based expenses that are not expected to result in future cash payments. The non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. A limitation of using these non-GAAP financial measures is that these non-GAAP measures exclude share-based compensation charges that have been and will continue to be significant recurring expenses in its business for the foreseeable future. Vimicro believes that both management and investors benefit from referring to these non-GAAP measures in assessing the performance of Vimicro’s liquidity and when planning and forecasting future periods. These non-GAAP financial measures also facilitate management’s internal comparisons to Vimicro’s historical liquidity. Vimicro computes its non-GAAP financial measures using the same consistent method from quarter to quarter. The accompanying tables have more details on the GAAP financial measures that are most comparable to non-GAAP financial measures and the related reconciliations between financial measures.

Currency Translation

This announcement contains translations of certain RMB amounts into U.S. dollars. Unless otherwise noted, all translations from RMB to U.S. dollars are based on the applicable exchange rates quoted by the People’s Bank of China, Assets and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at historical exchange rates, and revenues, expenses, gains, and losses are translated using the average rate for the period. Translation adjustments arising from these are reported as foreign currency translation adjustments and have been shown as a component of other comprehensive income or loss in the consolidated statements of comprehensive income.

VIMICRO INTERNATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Amounts expressed in thousands of U.S. dollars, except number of shares and per share data)

September 30,

June 30,

2014

2014

(Unaudited)

(Unaudited)

ASSETS

Current Assets

Cash and cash equivalents

27,585

22,445

Restricted cash

31

20

Accounts and notes receivable, net of provision

25,453

18,767

Amounts due from related parties, net of provision

64,542

40,093

Inventories, net

14,544

18,789

Prepayments and other current assets, net of provision

10,394

8,829

Total current assets

142,549

108,943

Investments in an equity investee

2,191

4,163

Property, equipment and software, net

28,536

28,003

Land use rights

15,249

15,291

Other assets

1,638

1,673

Total assets

190,163

158,073

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable

30,648

26,148

Amounts due to related parties

6,549

6,302

Taxes payable

12,280

8,334

Advances from customers

2,041

3,656

Accrued expenses and other current liabilities

4,715

4,529

Deferred government grant

22,237

5,537

Total current liabilities

78,470

54,506

Deferred government grant-non current

1,497

1,497

Deferred tax liabilities

14

14

Product warranty

2,365

1,644

Long-term bank loan

13,003

13,002

Other long-term liabilities

13,003

13,002

Total liabilities

108,352

83,665

Equity

Ordinary shares

14

14

Additional paid-in capital

153,398

153,844

Treasury stock at cost, net

(13,425)

(16,377)

Accumulated other comprehensive income

10,132

10,122

Accumulated deficit

(89,098)

(92,426)

Statutory reserve

2,782

2,782

Total shareholders’ equity attributable to Vimicro International Corporation

63,803

57,959

Noncontrolling interest

18,008

16,449

Total equity

81,811

74,408

Total liabilities and equity

190,163

158,073

VIMICRO INTERNATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Amounts expressed in thousands of U.S. dollars, except number of shares and per share data)

Three months ended

Nine months ended

September 30,

September 30,

2014

2013

2014

2013

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Net revenue

27,600

24,153

68,041

43,098

Cost of revenue

(16,722)

(14,621)

(42,550)

(27,824)

Gross profit

10,878

9,532

25,491

15,274

Operating expenses:

Research and development, net

(1,304)

(4,053)

(6,939)

(9,239)

Selling and marketing

(2,744)

(2,241)

(7,537)

(6,913)

General and administrative

(2,407)

(2,536)

(10,892)

(8,189)

Total operating expenses:

(6,455)

(8,830)

(25,368)

(24,341)

Income/(Loss) from operations:

4,423

702

123

(9,067)

Other income/(expense):

Interest expense, net

(41)

(176)

(76)

(141)

Foreign exchange (loss)/gain, net

(3)

219

(518)

842

Gain on disposal of equity interest

1,319

Other, net

4

52

77

62

Income/ (loss) before income taxes and equity in profit
of an equity investee:

4,383

797

925

(8,304)

Income tax (expense)

(44)

(252)

Income/ Loss before equity in profit of an equity investee

4,339

797

673

(8,304)

Equity in profit of an equity investee, net of tax

547

1,947

2,684

1,623

Net income/ (loss)

4,886

2,744

3,357

(6,681)

Net (income)/loss attributable to noncontrolling interest

1,558

923

787

(399)

Net income/ (loss) attributable to Vimicro
International Corporation

3,328

1,821

2,570

(6,282)

Income/ (loss) per share

Basic

0.03

0.02

0.03

(0.05)

Diluted

0.03

0.02

0.02

(0.05)

Income/ (loss) per ADS

Basic

0.14

0.06

0.11

(0.22)

Diluted

0.12

0.06

0.10

(0.22)

Weighted average number of ordinary shares Outstanding

Basic

95,883,071

114,892,652

95,801,223

115,082,848

Diluted

111,272,732

122,741,628

106,605,080

117,699,174

Weighted average number of ADS outstanding

Basic

23,970,768

28,723,163

23,950,306

28,770,712

Diluted

27,818,183

30,685,407

26,651,270

29,424,793

Other comprehensive income/ (loss), net of tax

Foreign currency translation adjustment, net of tax of nil

11

84

(1,097)

483

Other comprehensive income, net of tax

11

84

(1,097)

483

Comprehensive income/ (loss)

4,897

2,828

2,260

(6,198)

Comprehensive loss/(income) attributable to noncontrolling interest

1,559

1,003

939

(62)

Comprehensive income/ (loss) attributable to Vimicro International Corporation

3,338

1,825

1,321

(6,136)

Components of share-based compensation expenses are included in the following expense captions

Research and development, net

(76)

(55)

(170)

(206)

Selling and marketing

(17)

(18)

(54)

(62)

General and administrative

(45)

(82)

(202)

(239)

Total

(138)

(155)

(426)

(507)

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