RAE Systems Reports Record Third Quarter Revenue of $12.3 Million

Strong showing by RAE Systems' core business and its recently-acquired subsidiary boost revenue by 53.9% over Q3 2003


RAE Systems Inc., a global developer and manufacturer of rapidly-deployable, multi-sensor chemical detection monitors and networks for homeland security and industrial applications, has reported record revenue for the quarter ended September 30, 2004. The company reported revenues of $12.3 million compared to revenues of $8.0 million in the third quarter of 2003, an increase of 53.9%.

The growth in revenue was largely attributable to increased homeland security applications for wireless sensing solutions and radiation pagers. In addition, KLH, the Beijing-based distributor and manufacturer of security, environmental and personal monitors of which RAE Systems owns a majority interest, accounted for $2.4 million of the revenues for the quarter ended September 30, 2004. KLH's sales were concentrated in applications for the public infrastructure segment and in indoor air security, a significant concern given China's rapidly growing economy.

Gross margins for the quarters ended September 30, 2004 and 2003 were 61.4% and 58.8%, respectively. The increase was primarily attributable to increased sales of the Company's wireless sensing solutions, partially offset by KLH's lower margin sales. Net income for the third quarter of 2004 was $1.1 million, or $0.02 diluted earmings per share, as compared to net income of $725,000 for the same period in 2003, or $0.01 diluted earnings per share.

General and administrative expenses were $2.1 million for the quarter ended September 30, 2004 as compared to $1.3 million for the quarter ended September 30, 2003, an increase of 55.4%. The increase in general and administrative expenses was primarily attributable to the consolidation of KLH, a one-time post-merger KLH accounts receivable write-off, and increased costs associated with Section 404 of the Sarbanes-Oxley Act compliance activities.

Sales and marketing expenses were $2.8 million for the quarter ended September 30, 2004 as compared to $1.7 million for the same quarter in 2003, an increase of 64.6%. This increase was primarily attributable to the consolidation of KLH, increased infrastructure and marketing costs in the United States to enhance the sales of the Company's wireless sensing solutions, increased infrastructure costs in Europe to position the Company for future growth and increased commissions to our manufacturers' representatives for the sales of the Company's wireless sensing solutions.

Research and development expenses were $1.1 million for the quarter ended September 30, 2004. For the same period in 2003, research and development expenses were $717,000. The 48.3% increase was principally related to enhancements of the Company's wireless products and to develop RAEWatch, a wireless mesh network sensor system with a range of applications in cargo container security, transportation security and indoor air security.

For the quarters ended September 30, 2004 and 2003, the Company recognized tax expenses of $478,000 and $141,000, respectively. Income taxes were relatively low in 2003 due to prior year carryforwards that were used to reduce the effective income tax rate.

RAE Systems updates its prior 2004 guidance to between $43 million and $44 million.

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