China Distance Education's CEO Discusses F4Q2012 Results - Earnings Call Transcript

| About: China Distance (DL)

China Distance Education Holdings Limited (NYSE:DL)

F4Q12 Earnings Call

November 28, 2012 8:00 a.m. ET


Zhengdong Zhu – Chairman and CEO

Ping Wei – CFO


Mark Marostica – Piper Jaffray

Ella Ji - Oppenheimer

Sam Li - Goldman Sachs

Chao Wang – Bank of America Merrill Lynch


Good evening and thank you for standing by for the China Distance Education Holdings Limited Fourth Quarter Fiscal 2012 Earnings Conference Call.

Today, you will hear from Mr. Zhengdong Zhu, Chairman and CEO of the company; and Ms. Ping Wei, the CFO. During their prepared remarks, all participants will be in listen-only mode. After that, the company management will be available to answer your questions.

Before we start, we would like to remind listeners that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Among other things, the outlook for the first quarter and full fiscal year 2013 and oral statements from management on this call, as well as the company’s strategic and operational plans, contain 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. Further information regarding these and other risks is included in the company’s Annual Report on Form 20-F and other documents of the company as filed with the Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference call is being recorded. A summarized presentation can be downloaded from the company’s IR website and which we will refer to during the course of the call. In addition, a webcast of this conference call is available on the company’s Investor Relations website at

I will now turn the call over to Mr. Zhu to discuss the operational highlights. Mr. Zhu, please go ahead.

Zhengdong Zhu

[Interpreted] Thank you everyone for joining us on our fourth quarter fiscal 2012 results conference call. Our operating results were released earlier and are available on the company’s website as well as on newswire services.

Let’s turn to slide four. We concluded 2012 with a very strong fourth quarter performance and a significant drop in bottom line growth on a full year basis. Revenue from continuing operations increased 27.8% in the fourth quarter to $16.7 million exceeding our guidance and 25.4% on a full year basis to $52.1 million.

Non-GAAP net income from continuing operations increased 83.9% to $3.5 million in the fourth quarter and 27.6% to $8.1 million for the full year. On the operational front, enrollments from continuing operations also continued to grow at a healthy rate, up over 30% in both the fourth quarter and for the full year to 704,000 and 2,203,000 respectively. We believe our robust performance is especially significant given that the delayed timing of CPA and APQE exams has resulted in the deferral of about $3.1 million of related revenue and a similar amount of EBIT to fiscal 2013. Had the delay not occurred we would have achieved 32.9% revenue growth and 69.7% growth in non-GAAP net income from continuing operations for the fiscal year.

Our ability to deliver strong top and bottom line growth highlights the strength and resilience of our business model, our consistent focus on professional education and the progress we have made to develop high quality courses and educational services. Let me take a moment to reflect on our model and the progress we have made in our strategic and operational developments on slide five.

For the past few years we have made some important strategic decisions. One is that we are going to continue to focus on professional education, namely professional test preparation courses, continuing educational courses and life-long professional development courses. In particular, we will continue to focus our course offerings in accounting, healthcare and construction engineering.

We continue to offer our courses as a combination of lecture-led, pre-recorded high definition audio-video courses together with the best-in-class online learning support system which include exercises, tutoring support, mock exams and other simulation and learning management tools to help our students to study more effectively and efficiently. This comprehensive online learning system is also supplemented by additional in-person training courses where needed and other forms of tutoring and student learning support. This course format has proven to be highly effective.

Our work does not end at content and learning support however. Quality courses has to be delivered to our students in the most effective convenient and smooth way possible. As a online learning company we understand the role the technology plays in ensuring that our students receive a top-notch learning experience. As such we made a strategic decision years ago that we will formally focus on developing and maintaining a high-quality, regular and mobile based comprehensive online learning platform to ensure that wherever our students are and whatever platforms they use, they will have seamless access to our courses.

Today (inaudible) smart phones, tablets or regular computers; Microsoft, Apple and Android operating systems, we will ensure that students can stream our audio video courses online and downloaded them and practice exercise questions – ask questions, review course materials and perform other learning activities anytime, anywhere and we ensure that our system will always be up and be running smoothly.

As a core element of our business model and the key to our long term growth, we will continue to invest in leading edge technologies to provide our ever growing number of students with more convenient, more flexible, more interactive and more personalized courses.

Let’s turn to slide six. Our goal is to ensure the success of our students and we believe that delivering high-quality educational content and best supporting our students’ learning processes will drive students’ satisfaction, ensure that our students have the best chances to pass the exams they take our courses to prepare for and ultimately support our growth for the long term.

We believe that demand for high-quality online education is growing fast. People are eager to learn to attempt better opportunity in life. To address this demand, we have built over time the most powerful online delivery platform with our learning support systems and years of experience offering quality learning and the learning support to our students. We believe that our platform and our experience in offering online learning in different areas are truly invaluable element of our overall success. As such we have been exploring the best way to monetize such expertise in format of the open platform. We have made some initial progress in the past few years, including the introduction of third party course content and services to our student base. Such exploration will continue well into the next few years.

That said, we do not anticipate such effort will have a negative impact to our margins in the near future, as we will be utilizing our existing resources for such work. In the light of our performance and strategic progress that we have made in recent years, we entered fiscal 2013 with a high degree of confidence in our business operation and long term sustainability of our growth.

Let me now walk you through our verticals in more detail. Starting with our accounting vertical on slide eight. Online APQE enrolment in the fourth quarter decreased by 37.7% year over year. As due to the delayed exam timing, the post-exam enrolments were pushed into fiscal 2013 as exams were held in October. Nevertheless on a full year basis enrollments still increased by 6.8%.

In addition, we want to draw your attention to another related matter. It was announced that entry level and intermediary level APQ exams for 2013 will again be held in October rather than during late May as was the case prior to 2012. We anticipate that a bulk of APQE enrollments will come in during Q2 and Q3 of fiscal 2013, a half year delay from last year. As a result, we expect revenue contribution from APQE will decrease significantly during the first two quarters of 2013, but increase significantly during the second half of fiscal 2013.

In addition, a meaningful portion of anticipated 2013 APQE course revenue will be deferred into fiscal 2014. However as about US$3.1 million of 2012 APQE and CPA course revenue has been deferred into 2013, the net impact from the delayed exams in 2013 will only be revenue distribution across the four quarters and will not have a major impact on our anticipated full year growth rate.

Fourth quarter online CPA enrollments increased 107% year over year as the delayed announcement of exam policy for this year pushed some enrollments from Q3 into Q4. On a full year basis, enrollments for CPA increased by 5.2%. Considering that the exam environment such as the delayed timing of exam policy and the conversion of this year’s CPA exams to a computer based testing format seems to have pushed some students to the side lines. As we believe that the full year enrollment increase indicates that we expanded our market share in this exam this year.

Other online accounting test preparation enrollment increased by 3.2% in the fourth quarter and 20.8% for the full year while accounting continuing education enrollments increased a strong 44.2% for the quarter and 53.7% on a full year basis.

For the quarter ASP for online APQE courses decreased slightly by 1.7% year over year whereas online CPA ASP decreased by 25.5% year over year mainly as a result of students signing up for cheaper last minute crash courses and exam simulation system rather than full priced test preparation courses. On a full year basis ASP for online APQE and CPA courses increased by 19.8% and 15.1% respectively.

Let’s turn to slide nine about other non-accounting course offerings. We believe while we have a healthy growth across our non-accounting vertical ex-students continue to be attracted to our result oriented high quality courses and growing market presence in this non-accounting segment. In the fourth quarter, online healthcare enrolments increased by 12.1% year over year while ASP grew by 13.3% year over year.

Enrollment growth was even stronger in online construction engineering courses with test preparation enrollments increasing 96.6% year over year. In addition, online construction engineering enrollments grew by 150.1% year over year. While ASP for both courses decreased in the fourth quarter, we’re pleased with the strong increase in demand for these courses and believe that this segment will continue to maintain its strong growth in the coming years.

Moving to our self-taught education segment, we’re pleased to report another quarter of growth as enrolment increased 5.7% year over year. Finally, in the fourth quarter, we generated $0.4 million of revenue from Yucai, our business start-up training subsidiary representing a 19.7% decrease from the same period last year. The decrease was mainly a result of low cash collection as we do not recognize revenue until we can be assured that the collection is certain which could probably mean cash collected by the time of our results announcement.

Ping Wei

Thank you, Zhengdong. We delivered a very strong financial performance in the fourth quarter and fiscal year 2012 despite the delayed recognition of $3.1 million of revenue and an equivalent amount of pre-tax income to fiscal 2013 as a result of the delayed APQE and CPA exam timing. We believe our performance demonstrates that the benefit of our more diversified business platform, our focused revenue growth strategy and our successful efforts to prudently manage our costs and expenses.

As Zhengdong mentioned earlier, we’re very encouraged by our performance and as indicated in our full year guidance for fiscal year 2013, we’re confident in our ability to deliver continuous meaningful top and bottom line growth. Let me now recap our key financial metrics for the fourth quarter on slide 11. Please note that all my discussions after this will be about our continuing operations except where I say specifically was on a different basis.

Total net revenues for the fourth quarter was US$16.7 million, representing a year-over-year increase of 27.8%. Online education services net revenues for the fourth quarter were US$14.0 million, an increase of 41.4% from the fourth quarter of fiscal 2011. The strong increase was due to a health increase in revenue across our accounting and non-accounting verticals and the net impact of the delayed APQE exam.

After reallocating the online education course services deliverable of US$1.0 million to online education services net revenues, net revenues from books and reference materials for the fourth quarter of fiscal 2012 were US$1.1 million, as compared to US$1.3 million in the fourth quarter of fiscal 2011, which was after the reallocation of US$0.3 million of online education services net revenues.

Net revenues from others decreased by 13.7% to US$1.7 million for the fourth quarter from US$1.9 million in the same period last year. The decrease was mainly a result of decreased revenue in magazine content production services, offline business start-up training courses provided by Zhengbao Yucai and other offline supplementary training courses.

Cost of sales for the fourth quarter was US$6.8 million, representing a 7.6% increase year over year. Non-GAAP cost of sales for the fourth quarter was US$6.8 million, an increase of 25.8% over the same period last year. The increase in cost of sales was mainly due to increased server management fee, salaries and related expenses, lecturer fees, and expenses incurred by our offline supplementary training courses. Such increase was partially offset by a decrease in cost of books and reference materials.

Gross profit for the fourth quarter was US$9.9 million, a 46.6% increase from the same period last year. Non-GAAP gross profit was US$9.9 million, an increase of 29.2% year-over-year. Gross profit margin for the fourth quarter was 59.3% as compared to 51.7% in the fourth quarter of fiscal 2011. Non-GAAP gross profit margin for the fourth quarter was 59.3% as compared to 58.6% in the same period last year as we benefited the scalability of our model.

Total operating expenses for the fourth quarter were US$5.0 million, a 32.9% decrease year-over-year. Non-GAAP operating expenses were US$5.1 million, representing a year-over-year decrease of 1.4%.

Selling expenses amounted to US$3.2 million for the fourth quarter, representing an increase of 32.3% year-over-year. Non-GAAP selling expenses were US$3.3 million, a 51.5% increase from the same period last year primarily as a result of a significant increase in advertising and promotional activities, increased salaries and related expenses, and rental and related expenses. Such increase was partially offset by a slight decrease in commission to our distributors.

G&A expenses decreased 65.3% year over year to US$1.7 million. Non-GAAP G&A expenses were US$1.9 million, a 38.4% decrease year-over-year primarily due to decrease of bad debts provision of accounts receivable aging over one year, and decreased professional fees. Such decrease was partially offset by relatively lower growth in salaries and related expenses.

Income tax expenses for the fourth quarter were US$1.6 million, up from US$0.8 million in the same period last year primarily due to the accrual of withholding tax applicable to the profits of our PRC subsidiaries that we expect to distribute to our Hong Kong subsidiary.

Net income was US$3.7 million for the fourth quarter compared to net loss of US$1.2 million in the same period last year. Non-GAAP net income for the fourth quarter was US$3.5 million, compared to non-GAAP net income of US$1.9 million in the same period last year.

There was no net loss from discontinued operations for the fourth quarter of fiscal 2012 on a GAAP or non-GAAP basis as compared to net loss from discontinued operations of US$3.0 million in the same period last year and non-from discontinued operations of US$1.0 million in the same period last year.

Net income after including the results of discontinued operations was US$3.7 million for the fourth quarter of 2012, compared to net loss of US$4.1 million in the same period last year. Non-GAAP net income after including the results of discontinued operations for the fourth quarter was US$3.5 million, compared to non-GAAP net income of US$0.9 million in the same period last year.

A summary of our full year results is shown on slide 12. Total net revenues for the fiscal year 2012 increased by 25.4% year over year to US$52.1 million. Net revenues from online education services for the fiscal year 2012 increased by 30.8% to US$40.3 million. Net revenues from books and reference materials decreased by 6.4% year over year to US$4.4 million. In addition, net revenue from others increased by 22.4% year-over-year to US$7.4 million.

Cost of sales increased by 17.6% year over year to US$23.1 million for the fiscal year 2012. Non-GAAP cost of sales for the fiscal year 2012 was US$23.0 million, a 30.7% increase over the previous fiscal year. Gross profit increased by 32.3% year over year to US$29.0 million for the fiscal year 2012. Non-GAAP was US$29.1 million, a 21.4% increase from the prior year. Gross profit margin for fiscal year 2012 was 55.7%, increase from 52.8% in the fiscal year 2011. Non-GAAP gross profit margin for this year was 55.8% as compared to 57.6% in last year.

Fiscal year 2012 total operating expenses decreased by 15.2% year over year to US$19.6 million. Non-GAAP operating expenses were US$19.5 million, an increase of 8.4% from fiscal year 2011. 2012 selling expenses increased by 16.0% year over year to US$11.3 million while non-GAAP selling expenses were US$11.3 million, a 24.5% increase from the previous fiscal year.

G&A expenses for the full year decreased by 32.5% year over year to US$8.2 million. Non-GAAP G&A expenses were US$8.2 million as well, an 8.1% decrease from the previous year. For fiscal year 2012, income tax expenses were US$2.6 million compared to an income tax expense of US$1.0 million in fiscal 2011.

Net income was US$8.0 million for the fiscal year 2012 as compared to a net loss of US$0.5 million in fiscal year ‘11. Non-GAAP net income was US$8.1 million in the fiscal year 2012 as compared to US$6.4 million in prior year. Net income from discontinued operations was US$0.2 million for the fiscal year 2012, compared to net loss of US$3.3 million in 2011. Non-GAAP net income from discontinued operations was US$0.2 million for this year as compared to non-GAAP net loss of US$1.2 million for last year.

Net income after we include the results of the discontinued operations was US$8.2 million for this fiscal year as compared to a net loss of US$3.8 million for last year. Non-GAAP net income after we include the results of the discontinued operations was US$8.4 million for fiscal year 2012 as compared to non-GAAP net income of US$5.2 million in the fiscal year 2011.

Now let’s turn to cash flow on slide 13. Net operating cash inflow was US$2.5 million for the fourth quarter of fiscal 2012 as compared to a net operating cash inflow of US$4.4 million in the same period last year. Net operating cash inflow for fiscal year 2012 was US$14.6 million as compared to a net operating cash inflow of US$9.2 million in last year.

Turning to our balance sheet on slide 14, cash and cash equivalents, term deposits and restricted cash as of September 30, 2012 amounted to US$57.7 million as compared to US$55.6 million as of June 30, 2012 primarily due to US$2.5 million of cash flow generated from operating activities in the quarter, partially offset by US$0.2 million of CapEx and the repurchase of US$0.8 million worth of our shares as part of our share repurchase program. This completes my financial overview. Now I will turn the call back to Mr. Zhu for the final remarks on our strategy and business update as well as financial guidance for the first quarter and full year 2013. Mr. Zhu?

Zhengdong Zhu

Thank you, Ping. [Interpreted] Turning to our business outlook on slide 16, our results highlight the underlying strength of our operational platform and the revenues of our business model. In particular we generated another $12.9 million of free cash flow for this year. As I discussed earlier, our strategy going forward we will continue to focus very much on organic growth and we’re very confident that with our continued focus on technological advancement and our commitment to providing our students with the best possible user experience and high quality result-oriented services, our growth outlook is very positive.

As we have been generating positive cash flow for close to 10 years now, we do not anticipate a significant need to spend the cash we generated and we anticipate to continue to generate free cash going forward. In addition, we are always committed to increase shareholders’ returns. Our board has recently declared another special dividend of US$0.48 per ADS to our shareholders.

In addition, going forward the board has committed to review and decide whether to declare a dividend and how much dividend to declare every year basing their decision on our cash balance, our cash flow for the year, our company strategy and growth plans, cash needs to support such strategies and plans and other strategic initiative.

Moving to our guidance on slide 17, for the first quarter 2013 we expect our revenue from continuing operations to be in the range of US$12 to US$12.5 million as compared to net revenue from continuing operations of US$9.9 million in the fourth quarter of fiscal 2012, representing 21.2% to 26.3% year over year increase. This expectation is based on the assumption that without further delay APQE exams will be published in November 2012. Should the exam results be published in December or later, up to US$1.3 million of guided revenue could be deferred to the second quarter of fiscal 2013.

For the full year we expect to generate revenue from continuing operations in the range of US$63.5 million to US$66.5 million, compared to US$52.1 million in fiscal 2012. This range represents 21.2% to 27.6% year over year growth. These are our preliminary estimates and are subject to change.

Thank you for your time. We’ll now be happy to take your questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Mark Marostica from Piper Jaffray.

Mark Marostica – Piper Jaffray

My first question is in regards to your mobile strategy and I was hoping you could elaborate on it. Give us a sense also of usage of the mobile platform among your customers and a sense of how you’re monetizing mobile -- at the moment how you plan to monetize mobile? Thanks.

Ping Wei

I’ll translate the question and I will ask Zhu to take on this question. (Foreign Language)

Zhengdong Zhu

[Interpreted] Mobile based learning is a very good expansion and supplement to the existing regular online – regular internet based learning. It makes it possible and more convenient for our students to learn truly anytime, anywhere particularly for us more amount of – sort of time. Right now our main application is to further break down our online courses into smaller pieces and make them available to students so they can learn them via their mobile devices. In the future we will further develop other applications based on the demand of our students. We believe the rollout of mobile applications will further – help further increase the number of online course users. Right now we are not charging students separately for our mobile applications. It’s being part of our regular course package. In the future we will seek to charge students on other mobile based applications along. What we have been seeing is increasing number of students using our mobile devices or mobile applications on a weekly basis. Right now we still don’t have very detail statistics as to the usage yet. We will continue to invest in our mobile learning applications and probably we’ll invest more going forward.

Mark Marostica – Piper Jaffray

Great, thanks for the color on mobile. Regarding pricing in the quarter I believe Mr. Zhu made comments around the declines in pricing in accounting for CPA and APQE. I am curious were the pricing declines more a result of the timing shift for those exams or something more structural, and if you can give us a sense of your pricing plans in the accounting vertical going forward? And then separately, I also noticed in the prepared remarks construction engineering saw some price declines in the quarter. Perhaps if you could comment on causes of those declines and what your tasks (ph) are in pricing for construction engineering going forward too?

Ping Wei

Right, thank you Mark. I will take this question directly. First of all, the declines are – or not primarily -- especially for test prep courses they are all structure based rather than same course pricing based. That basically means both for APQE, CPA and construction engineering it’s the shift among different types of prices in the vertical rather than pricing. For example, CPA, it’s a very good example. In Q4 because it’s vehicle (ph) to the CPA actually the exam time, what we were selling more were two things – one is fast courses, that is much shorter and lower priced than course to help students pass exams. Another one that was actually very popular for students was actually our online test simulation system, that was only newly rolled out in Q4 and it was priced separately. Those are sort of low ASP courses that we were selling in the quarter.

Same thing with construction and engineering courses. Now with continuing education courses, it’s a different story. It’s based on our strategy, basically we’ve always had the strategy that is to lower ASP to expand market share. Both for construction engineering and for accounting continuous education, they are big markets. For example, accounting continuous education for certificate holders is estimate to be anywhere between 13 million and 15 million students a year and with us accounting wise, this fiscal year we only had 1.3 million enrollments in this year which is barely 10% of market penetration. With construction engineering it’s even lower penetration number. So we want to take as big a market share as possible not only because it’s recurring revenue, we do not have to invest in marketing dollars every year to generate continuous education revenues. Once students start to use them, they use them every year. Another important reason actually, with the low pricing strategy with continuous education is, these continuous education students become our future test prep students and test prep courses typically are much higher ASP students too. Hope that answers your questions, Mark.

Mark Marostica – Piper Jaffray

Yeah, very well, thanks for that. And then a couple other follow-ups, on the G&A line expenses came in below what we were estimating, having incurred less bad debt in the quarter professional fees. Can you help us understand what you saw in terms of one time-ish savings in the quarter on the G&A line, just to get a sense of how to model that one going forward?

Ping Wei

Actually for Q4 2011, there were US$950,000 of bad debt provision occurred in the quarter. And this quarter it was actually negative US$120,000. So the net impact on the bad debt provision is actually quite big. Now going forward our modeling basis, this quarter’s number probably is low but we actually think this quarter’s like, if you add the negative bad debt provisions it’s $2 million and we anticipate a stable sort of G&A number going forward. We will be – we probably will be spending more money next year simply because we are operating on a larger scale and with China sort of a heightened payroll level we probably will – also inflation level, we probably will need to adjust our employee salaries a bit more.

Having said that, I think we shouldn’t be expecting a large increase in G&A or basically our G&A expense increase together with actually other sort of operating expenses increase should be within our revenue growth rate which is basically 20-ish percent.

Mark Marostica – Piper Jaffray

Actually a good segway to my last question which is on margin, I guess what you are saying there is we should see relatively stable margin in fiscal ’13 versus ’12?

Ping Wei

Yes. I also wanted to expand on that point. Actually from margin perspective both on a gross margin and net margin level, 2013 we sort of have a consensus, strategic position that is, we do not seek to expand margins in 2013. Okay. We will aim to maintain the margin level we achieved this year on normalized revenue and income basis, i.e. revenue numbers should have been about $55 million and non-GAAP net income should come in around 10, we keep that about 18 or 19% non-GAAP net margin. So we aim to maintain that margin level going forward for fiscal year 2013.


And our next question comes from the line of Ella Ji of Oppenheimer.

Ella Ji - Oppenheimer

First, a quick follow up with the previous question regarding the lower ASP for APQE and CPA. I think you mentioned that students choose to go for cheaper last minute courses instead of full priced full term courses. So is this just a temporary situation because of this delay or this could be a long term trend?

Ping Wei

Yes, it’s going to be a temporary sort of trend for fourth quarter only. Most of Q1 2013 you will see our pricing stay at about the same level as fiscal – as most part of fiscal year 2012, not Q4 but previous quarters. But starting December 1, we’re actually raising prices on most our test prep courses again. So actually that’s part of the question. Mark’s question was not answered. So sorry for that, Mark. But going forward we’re raising prices again. (Multiple Speakers)

Ella Ji - Oppenheimer

10% to 15%?

Ping Wei

For some, and some actually is higher than 15%. So I would say average out to 10%, 15%.

Ella Ji - Oppenheimer

Let me just clarify that – so you expect the – going forward this like for like price decrease will be between 10% to 15% and you also expect students to go back to these normal full term courses instead of the last minute cheaper courses, is that right?

Ping Wei

That’s right. One thing that I don’t know though is how many students will sign up for our sort of online test simulation system because that is sold separately. And if we have lots of students signing up for that one, it could negatively affect our ASP. But if it’s significant we will break it out separately for you, so you can see them.

Ella Ji - Oppenheimer

And then next question is also a follow up regarding the margin trend. You mentioned that you do not seek to expand margins next year. So just wonder when you raise prices, normally your margin goes up and also together with the economy of scale, then could you talk about which areas are you going to spend the money? I think you also mentioned that this is not in a major investment area in the future. So can you just put us together the details for us here?

Ping Wei

Yes. Usually we talk about the scalability of our model and usually we also talk about in our spending there are relatively sort of fixed and personnel (ph) expenses, for example, rental, people’s salaries et cetera and then we also have more discretionary spending such as marketing. So where we spend more money, naturally we probably will focus more spending or more incremental amount of money we have to spend on marketing and branding. As you all know, we have very good content. Right now we have cutting edge sort of learning platform, and so the next thing naturally is to let as many people know about our offerings, the quality, our products as possible. Now marketing spending doesn’t actually directly tie to our revenue or enrolment growth because history has proven that even if we don’t do any marketing we still grow healthily. So why we are spending this money, branding always helps in longer term growth.

Ella Ji - Oppenheimer

And then my last question is regarding your dividend. So I just want to clarify that this will be an annual dividend – likely to be an annual dividend going forward. And also I noticed that you announced the dividend ahead of the earnings release, so just curious why do you announce it ahead of the earnings release instead of announcing simultaneously?

Ping Wei

I will answer the second part of the question first. Reason why we announced the dividend, the special dividend actually ahead of our Q4 results actually was to make sure the cash will reach all our shareholders’ accounts by end of this calendar year. As you know right now this fiscal cliff push tax cuts violation kind of talk and speculations in the U.S., a good portion of our shareholders are U.S. sort of tax payers. We do not want them to receive cash – dividend cash from us on January 1 of 2013 to find out that they need to pay 40% of the income tax on those dividends. So we chose to sort of pre-emptively announce the dividend policy and the dividend sort of payment two weeks earlier than our results so that we will have sufficient time to process the dividend payment and everybody will get paid this calendar year. That’s why we sort of announced earlier.

The second part of the question, whether we will be paying dividends every year going forward, our board made it very clear that we do not intend to keep piling up more and more cash on our balance sheet, unless we have a very significant strategic sort of need to. As you can see even after we declare – after we pay this amount of dividend now we will still have US$41-ish million of cash on balance sheet. So basically any new cash that’s generated going forward, if we don’t find it useful then, basically if we don’t need it to expand our operations to make more money for our shareholders, we will pay them all back to our shareholders in the form of annual dividend or special dividend. So yes, we will look at them every year and if there is no changing strategic direction going forward we will be paying dividends.


And our next question comes from the line of Sam Li from Goldman Sachs.

Sam Li - Goldman Sachs

I just have a couple questions, first one is regarding to your mobile strategy. Actually, I'm just wondering how you plan to monetizing this mobile strategy because I know the users just pay a single package, not paid individually for their mobile system, and also PC system. So I'm wondering how you monetize the mobile strategy. Do you have some other approach to monetize this, or something? Or maybe you can add some colors that will be quite helpful? And the second question is regarding to the geography breakdown of the users of your system. I'm just wondering, how do you see the geography breakdown of the users? Do you have some detail like this?

Ping Wei

Sam, thank you for the questions. I will translate the questions and get Zhu to answer them. [Foreign Language]

Zhengdong Zhu

[Interpreted] Yeah, right now the mobile application as extension of our regular courses and it’s rolled out to attract more students to our online courses. So it doesn’t bring extra revenue for us. But for certain particular applications, for example, in accounting we have rolled out the one exercise question per day kind of mobile application. This kind of application we may want to charge money for going forward. And that’s because we have a huge user base in the accounting vertical, we have the market influence, and we have the in-house content development and sort of depths of our accounting content. That makes it a very powerful value offering for our students. Therefore it is realistic for us to charge money on those applications.

Now in terms of generally monetizing the mobile applications, we still need to explore various sort of products and possibilities. Right now all our applications are still free.

I can only give you a rough idea. Basically what we see is – we actually have a quite a lot of students from the very well sort of developed coastal cities in areas like Jiangsu, Zheijang, Shanghai, Beijing, Guangzhou et cetera, Guangdong et cetera. But simultaneously we notice that we also have quite some students from the remote or less developed areas in China like inner China, the reason for such sort of popularity is because there is a general lack of qualified or high quality teaching – teachers in those areas. Students who want to get quality tutoring – sort of test prep courses were hard to find those online. So all in all our students are everywhere and actually some are even from outside China too.


Our next question comes from the line of Chao Wang from Merrill Lynch.

Chao Wang – Bank of America Merrill Lynch

My question is regarding your open platform. So what is your mid to long-term goal or expectation of this initiative? And how do you differentiate with other education platforms, such as Weiwei (ph) the newly listed company? And also, do you see any regulation risk since you have less control over the content on the platform? Thank you.

Ping Wei

Sorry, Chao, we don’t get the last part of the question, regulation –

Chao Wang – Bank of America Merrill Lynch

Yeah, you have less control on the content on the platform, so do you see any regulation risk?

Ping Wei

Okay. I will translate the question and I have Zhu to answer the question. [Foreign Language]

Zhengdong Zhu

[Interpreted] Chao, thank you for your questions. First of all, in terms of utilization for open platform, what I aim to achieve is whoever has some special knowledge or skills can offer their knowledge and skills on our platform and whoever has demand for knowledge or skills can hopefully find them from our platform. So we will get involved – we will look to get involved in industries we’re already as well as industries we are not in yet.

First of all, on sort of the advantage we have over probably other players is, first of all, we have across industry online education experience and we have years of it. We have always had very good control on quality of the courses and content we provide on our own content and we aim to make sure that even with third party content that will be offered on our platform we will make sure qualities are closely monitored and controlled. We will make sure we control the quality of the resources that’s put on our platform. Now actually to a degree mitigate regulatory risk as well. In the end, what students see are what’s offered by CDEL, so therefore it has to be with quality. This probably will be a key differentiating factor between us and other players.


(Operator Instructions) Thank you. We’ll hand back to the management for closing remarks.

Ping Wei

And thank you all for joining us today and we look forward to updating you on our progress in the near future.


Thank you ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.

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