Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Jimmy Xia - Manager, IR

Julia Huang - Chairman and CEO

Shawn Ding - President and COO

Lily Liu - CFO

Analysts

Mark Marostica - Piper Jaffray

Scott Schneeberger - Oppenheimer & Co.

ChinaEdu Corporation (CEDU) Q3 2008 Earnings Call November 25, 2008 8:00 AM ET

Operator

Welcome to the ChinaEdu Third Quarter 2008 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following management’s prepared remarks, we’ll hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded on November 25, 2008.

I would now like to turn the conference over to ChinaEdu's investor relations manager, Mr. Jimmy Xia. Please go ahead, sir.

Jimmy Xia

Thank you. Good morning and good evening. Thank you for participating in today’s call. Joining me today are Ms. Julia Huang, Chairman and CEO; Mr. Shawn Ding, President and COO; and Lily Liu, CFO.

After the close of the US markets on Monday, ChinaEdu issued a press release announcing its 2008 third quarter financial results, which is available on the company’s IR webpage at www.ir.chinaedu.net.

This call is also being broadcast live, over the Internet and a copy of the presentation that will be used for today’s call is also available on our website.

Before the management presentation, I would like to refer to the Safe Harbor statement in connection with today’s conference call. This call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties.

Forward-looking statements involve known and unknown risks, uncertainties, and contingencies, many of which are beyond our control, which may cause actual results, level of activity, performance, or achievements to differ materially from any future results, levels of activity, performance, or achievements expected or implied by such forward-looking statements.

The company’s actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including those described under the heading “Risk Factors” in the company’s final prospectus filed with the SEC and in documents subsequently filed by the company from time to time with the SEC.

Unless required by law, the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

I would now like to turn the call over to our Chairman and CEO, Ms. Julia Huang. Following our prepared remarks, we will be happy to take your questions. Julia?

Julia Huang

Thank you, Jimmy. Good morning and good evening. Thank you for joining us today. We are pleased to report our third quarter strong operational results with total net revenue of RMB82 million or US$12.1 million, which represents 25.4% of year-over-year growth.

Our core business, online degree programs, marks significant growth at the rate of 34.4% year over year. The solid revenue results exceeded our top line guidance, and were primarily driven by the strong growth in revenue from students in our online degree programs.

Our gross margin has also expanded in the year-over-year comparison. Online degree programs’ margin in this quarter was 70.5%, significantly higher than the 61.9% in the third quarter of 2007.

Similar to last year, we recorded our goodwill impairment charge in the international curriculum program. We will provide information later. However, our adjusted operating margin expanded significantly compared to the last year from 18% to 26%.

Here, I’d like to clarify adjusted measures for you. It is to exclude certain non-cash items, such as share base compensation, amortization, goodwill charge and one-time receivable write-off, which happened early in the third quarter of last year; and in currency exchange loss occurring this quarter.

Adjusted EBITDA increased significantly by 75.6% from RMB40 million in the third quarter of 2007 to RMB24.6 million this third quarter. Effective net income also increased significantly from RMB3.2 million in the third quarter of 2007 to RMB7.4 million in the third quarter in 2008 by 129%.

Let’s now turn to Shawn Ding our President and COO for business and operational highlights followed by Lily Liu our CFO for financial highlights. Shawn?

Shawn Ding

Thank you, Julia and thank you for joining us today. Since our last call, many events have transpired both in China and in the rest of the world. Businesses are facing tremendous challenges.

Even though ChinaEdu may also face enforceable difficulties, we are optimistic about the degree-education sector in China. We think it will remain strong, within an excellent outlook. We continue to focus our long-term organic growth through our superior service and products.

Let’s now start with the slide four of the presentation. As Julia just mentioned, we had another successful quarter lead by enrollment growth from our online degree program.

Our revenue student number grew from 100,000 students to 125,000 students, compared to the same quarter last year. This shows that our organic building growth engine is performing very well. Also in the quarter, we signed eight new partnerships with leading universities to provide recruiting and support services. By the end of the quarter we had 10 fully owned and 25 franchise learning centers in operation.

On the business development front, we are working very hard to develop a new school partner with a license from the Ministry of Education, and we are having ongoing communication with the Ministry of Education regarding approval of the three schools with which we have collaborative alliance relationships.

Overall, we are implementing various initiatives to improve operational efficiencies, and are building organic growth. We believe the work we are doing today will not only benefit our short-term financial results, but also our long-term business prospects.

Once again, the online degree program is our core business, and it’s our core focus. At this point, I would like to share some highlights on the recent development within our core business.

We recently signed a new ten-year exclusive joint venture contract with Guangxi Radio and Television University to develop a provincial level learning center network within the Guangxi Province. We believe this regional network will give us a dominating position in providing, recruiting, and other services in Guangxi Province. More important, this will help us develop a new business model to work with local radio and television universities, to set up a regional learning center network.

Secondly, we also signed a recruitment contract with Xiamen University, one of the leading universities in Fujian Province in South China to further leverage our learning center network.

In addition to the nine recruitment contract partners, our learning center network is also servicing five out of the nine collaborative alliance partners, or JV partners. Altogether, this brings our learning center network’s recruitment contract university partners to fourteen.

In addition to the Guangxi partnership network, we are also aggressively expanding our learning center network nationwide. We expect to have around 50 self-owned and franchised learning centers by the end of the year.

Moving onto slide 5, I would like to again emphasize our growth strategy for online degree programs. First of all, we will focus on growing our existing programs for nine licensed collaborative partners, and help the other three collaborative partners to receive MOE approvals.

Secondly, we will continue to develop new long-term exclusive, collaborative alliances with schools within the existing 68 schools that were licensed. We will also expand our learning center network by improving the execution of our current sites, as well as the expansion of geographic coverage. We will also seek to build more regional partnerships, like the one we have done in Guangxi province.

Expanding relationships through outside of the 68 universities to form partnerships, once Minister of Education, and restart the license approval process will also be important to us in the long run.

With this strategy, we believe we can build the companies’ long-term sustainable growth, as well as our continued dominant transition in China's online degree market.

So to slide 6, I hope I can further demonstrate our abilities to deliver, and the future potentials of ChinaEdu. ChinaEdu was founded in 1998 on the idea of providing online education in China. Over the past 10 years, we have grown along with the growth of the industry. We have long become the number one player in the online degree education market in China.

Our brand name, and all the intangible assets we have accumulated in the past 10 years, makes ChinaEdu the partner of choice in the online degree market. ChinaEdu has exclusive relationships with the nine of these 68 universities that were approved for online degree programs. As we mentioned before, we are similarly thought of as the largest student body in China with registered students well over 200,000.

ChinaEdu is the also the only player that has the inclusive collaborative alliance business model. ChinaEdu is the only player that provides a turnkey solution with fully vertical integrated functions. This would better serve not only our university partners, but most importantly the students. ChinaEdu is one of three institutions that have been given approval to establish a nationwide learning center network.

With these competitive advantages, we believe ChinaEdu is in a position second to none. We’re now focusing on growing within the online degree sector. We believe our market position, experience in technology, particularly our user base; will enable us to potentially capture opportunities in non-degree based online education areas as well.

Now, let me allow you to direct your attention to slide seven and allow me to give you an update on our emerging business slides. Our online tutoring program is focusing on operational improvements, particularly in the sales channel and the range of new products offered to students. In addition to passing ISO 9000 certification, our newly release product is starting to gain traction. Our preschool educational product called Yo-Yo-Bear was launched in the third quarter as well.

Our international curriculum programs have been steady in performance and the existing programs are in line with expectations. We are also seeking more international partnerships for future growth.

Our K-12 business is well on track and is expected to generate a steady revenue growth. The Anqing School’s new campus was finished. The first phase of Anqing new school was finished starting the fall semester enrollment. The second phase will begin soon. Anqing and Pingdingshan School operations are well underway.

Our Jingzhou school construction is still on hold. Considering the CapEx related issues we are open to strategic alternatives for this school. Many investors have asked about our plans for the learning center network.

So I’d like to take a minute and share with you our thoughts and the latest progress particularly on this issue. The development of our learning center network is a key strategic objective. It provides a strong vertical integration opportunity for ChinaEdu. And that we are actively pursuing the expansion of both fully owned and franchise learning centers.

These learning centers are in place to provide recruitment and support services for our online degree programs. This is dictated by the regulations of the online degree education authorities. These learning centers will also serve as channels for other business lines as well.

Additionally, the learning centers will help drive our top-line growth by capturing a material portion per student universities’ tuition revenue. We will continue to grow this part of our business. It is an integral part of our strategy and provides us with a significant competitive advantage.

As you can see from the timeline on this slide, we started to build the network in 2007. Due to the recruiting season, our learning centers started getting to full operation mode in Q4, 2007, but more so in the first half of this year, in the second quarter, in addition to the ten wholly owned and the twelve franchised learning centers. That’s what we had in the second quarter. By the end of the third quarter, we had 25 franchised learning centers. So that brings us to a total of 35 learning centers. Once again, we expect to have a total of 50 operations by the end of this year.

Due to the expansion, we also experienced a cost increase. The increased costs in Q3 were mostly attributable to the expansion of the learning centers, as all of the learning centers start to kick into operation for the fall enrollment season.

As we continue to expand our learning center network, costs and expenses related to it will increase accordingly. But strategically important as it is, we are watching carefully to make sure that it is accretive to our profitability. Therefore, we are controlling capacity and cost quite rigorously.

In short, we are taking an aggressive but conservative approach to building a strategically important service and recruiting network. In the ramp-up phase, we emphasize scale, but with tight control on cost and profitability. We will strike the balance for profitability.

To conclude my remarks, I would like to assure our investors that the management team at ChinaEdu remains focused on execution. We strongly believe that the best way to increase our shareholder value is by further strengthening the fundamentals of the business and generating solid growth.

With Lily Liu joining as our CFO, and Julia starting to devote 100% of her time to leading the company, our management team is well equipped to lead the company into the next phase of growth.

Now, Lily will review some of the key financial information from the quarter. Lily?

Lily Liu

Thank you, Shawn. Now, I will go through our major line items in more detail. First, let's talk about our top line net revenue on slide 10.

Our online degree program continues to be the core of our business. Net revenue growth for online degree programs was 34% year-on-year. Revenue contribution from online degree programs was 80% in the quarter, which was a slight increase compared to 74% in the third quarter last year.

Also in this quarter, our Anqing School completed phase one construction of the new campus, and therefore began fall recruiting, which had a positive impact on net revenue.

In the quarter, our 101 Online Tutoring business net revenue declined compared to last year. The businesses are undergoing internal reorganization. In the short-term, we may not be able to see an immediate increase in revenue. However, we continue to believe in the long-term growth potential of the business and have continued to invest in new products, as well as marketing and sales in the division.

Lastly, for the international curriculum program; net revenue declines slightly compared to 3Q ’07. We experienced a new regulatory environment since around the middle of 2007, which has impacted our revenue in the quarters since. However, we are seeking new foreign partners or international partners in order to be completely compliant and to maintain the growth in the business.

I want to note here that the quarter’s net revenue compared to the second quarter seemed to have increased significantly. It’s mainly due to summer student travel group revenue. This is usually student travel revenue generated during the winter and summer school holiday season.

Next, let’s take a look at our gross margin. Our gross margin on a year-to-year basis for each quarter has consistently expanded in 2008, compared to 2007. For R&D group programs this quarter compared to second quarter recorded a significant increase in cost of revenue, primarily due to third quarter increased costs in learning center network, as well as establishment of the new subsidiary at one of our JVs.

Now, let me talk about the other lines for the gross margin. Private schools recorded a higher cost of revenue due to a one-time special employee bonus. The normalized margin should be much higher than this quarter’s. For the 101 Online Tutoring business, gross margin has remained relatively stable.

International curriculum gross margin improved significantly, as we no longer have previous year’s one-time charges.

I would like to add a general comment here, you can see from the chart, just from the past three quarters that our gross margin actually fluctuates somewhat from quarter-to-quarter. There are certain seasonal patterns here. For example, quarter three gross margin, or third quarter gross margin, tends to be lower than the other quarters, due to higher marketing expense during the summer and certain graduation-related costs at the university. And that’s why you see a third quarter dip compared to first quarter and second quarter.

Now, let’s turn to slide 12, and I will talk about our operating income results. GAAP operating income was negatively impacted by a goodwill impairment charge of RMB17 million for the international curriculum program.

These impairments resulted from a couple of factors. First, compared to 2007, we reduced the growth potential of the program due to new regulatory restrictions for both FEC and BCIT, since around the middle of 2007. This caused a slight decrease in the number of partners at FEC and actually restricted expansion with the existing programs at BCIT for this year.

Secondly, for assessment of the fair-value of this division, a market-valuation of selected US competitors also weighed in and given the current market conditions, they lowered the valuation flows. US competitors also cause a lowered valuation for our division.

I want to mention that the management is actively seeking new international partners to get around the regulatory issues and for this division we are confident that a long-term growth potential can be maintained. Even after reduced growth, I also want to note that this program has always generated positive cash flows for the company.

In terms of the goodwill charge, we have been working with American Appraisal, and this number is a preliminary assessment for the third quarter. The finalized impairment charge for all of the divisions will be in place by the year end, in the fourth quarter release.

So excluding this non-cash goodwill impairment charge, on an adjusted basis, our operating results actually have improved significantly from third quarter in 2007. After adjusting for certain non-cash and the one-time charges, our adjusted margin improved from 18% to 26% this quarter.

For this quarter, in terms of the breakdown of the operating expense, I like to note that our sales and marketing expense increased significantly, compared to the third quarter last year, due to a TV marketing campaign for 101 Online Tutoring programs, and a one-time marketing event at one of our JVs. Otherwise, the other line items of the operating expense have remained relatively flat. Our G&A expense as well as our R&D expense have both decreased slightly, compared to the same quarter last year.

Now, let’s turn to our slide 13 and take a quick look at our EBITDA. Again, GAAP EBITDA was negatively impacted by the goodwill impairment charge. However, on an adjusted basis, our adjusted EBITDA increased significantly from RMB14 million in the third quarter last year to nearly RMB25 million this quarter. For the adjusted EBITDA margin, it also improved significantly from 21% last year to 30% this quarter.

For the net income, on slide 14. Again, I like to focus on adjusted measure, as I believe it’s a much better reflection of how our company’s operation has been performing. Adjusted net income worth RMB7.4 million, which is more than double, compared to RMB3.2 million the same quarter last year. If you look at the chart, even if I exclude the effect of interest income from IPO proceeds, our adjusted net income still increased by 57% compared to the same quarter last year.

Our net income and adjusted net income was impacted by the higher tax rate this year compared to last year. I am sure we have touched upon this issue in the past quarters. I would like to just reemphasize that. We are still in the process of applying for the high-tech tax status, which will allow us a statutory income tax rate of 15%, rather than 25% under the new tax law that came into effect this year.

The process is ongoing, as the government comes out with detailed rules for enterprises in each city. In the meantime, that is for all of 2008 where we still must use 25% to calculate our income and deferred tax. We're confident that we will eventually receive the tax status, the new tax status.

Regarding the 2008 statutory rate in Beijing, particularly in Beijing, the government still has not made a decision. Concerning the application, the process has been delayed due to a delay in the publishing of the detailed rule. So we're still waiting to hear from the government.

I also want to mention that minority interest of RMB7.4 million increased significantly from the same quarter last year, which was RMB5.1 million. This actually reflects significantly better profitability for our JV program.

So that's a quick walk through for our P&L line items for the quarter. Let's now take a quick look at our cash position and other balance sheet items.

We're pleased to report that facing this global financial crisis, ChinaEdu has a very strong cash position. Combined, if we look at cash and term deposit, term deposits are mostly six month CDs, was RMB60 million this quarter versus RMB63 million at the end of the previous quarter.

As you can see, we have increased the amount in term deposits, in order to better manage our idle cash. Generally speaking, our cash management policy is very conservative. We currently do not have any investment in risky investments. All of our cash is invested in safe principle, guaranteed products.

In the third quarter against the positive operating cash flow of RMB42 million, we had a few major cash outflow items, which I want to note here.

First, is open market share repurchase. Out of the US$5 million authorized, we used up about US $2.2 million in the third quarter. The total number of shares bought back so far was -- from the open market it was around 715,000 shares.

Second, major cash outflow was the mortgage repayment. We paid off the remaining mortgage on our headquarters, which is our headquarter real estate in Beijing that cost US $3.5 million and we no longer have long-term debt or any mortgage remaining.

The third item is a US $2.5 million of increase in PP&E., the two major items, one is the phase one construction at Anqing school, which we mentioned before. The second was the RMB5 million for a small real estate or for a small office for Xiamen University.

I want to emphasize that our business has consistently delivered positive cash flows and we are very comfortable with the amount of cash that we have at the company.

As for the rest of the balance sheet we can see that’s it pretty straight forward. A few items to highlight here, one particular item is the amount due from related parties. At the end of the third quarter this was RMB127 million and versus RMB169 million at the end of the second quarter. Internally, we believe this item is another measure that reflects our strong cash positions. This is cash that’s part at our JV universities that we have not yet collected.

And secondly, if you noted that historically if you’re looking further back in history, this item amounts due from related parties have fluctuated somewhat . It means that we usually take -- we pace ourselves in terms of collection. And also once the enrollment seasons commence there is going to be more cash coming into this item.

We consider the counterparty risk to be very small for the JV programs and sometimes we pace our collection also for certain tax planning purposes. So, I’ve said enough about this item. The key point is that this large number, we believe is another measure that reflects our strong cash position.

Another item to note on this table is deferred revenue. Our deferred revenue for the third quarter decreased considerably compared to the second quarter or the fourth quarter last year. This is due to seasonality of our business. Tuition is generally collected in spring semester or Q1 and fall semester, in other words Q4, which then generally gets amortized over the six months in each semester.

Otherwise, I think the last item I want to highlight again here is that our long-term debt has been paid off, that was the mortgage payment on real-estate.

So I think that’s a wrap-up for our P&L and balance sheet for the quarter.

Finally, let’s talk about our revenue guidance for the fourth quarter. We expect total net revenue to be in the range of RMB82 million to RMB85 million, and if we use 6.83 as the exchange rate, this translates to approximately US $12 million to US $12.4 million.

And lastly, I want to take this opportunity to share good news with all of you, which I’m sure many of you have seen from the press release that we did earlier, just prior to this call. That we bought back the outstanding shares owned by Tiger at $3.95 per ADR, which was the closing price on November 19th that was used for the transaction.

They also owned -- prior to this transaction, they also owned warrants to purchase approximately 1.8 million shares, and all of these warrants will be completely canceled in connection with the transaction. This transaction will cost us a total of US $11 million. We actually believe that at this market price, this presented a very attractive opportunity for us to accelerate our share buyback program, and this transaction will be immediately accretive to our EPS.

So that’s it. Thank you very much.

Question-and-Answer Session

Operator

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

Mark Marostica - Piper Jaffray

Thank you and a nice job on the quarter. First question, I have, is related to the three collaborative partnerships that you have that have not yet been approved by the Ministry of Education. Can you give us an update on the steps you are going through for approval, and when do you think those three will be approved?

Shawn Ding

Mark, this is Shawn. I know you were going to ask that, either you or someone else, but you asked first. Once again we do not have anything that we can definitively tell you today. It is still in the process, the Ministry of Education is working on a bunch of things to formulate a long-term strategy for continuous education, as well as online degree programs.

There are a lot of things going on right now and we are having a very close communication with them but I wish I can give you a more definitive answer but unfortunately not. At this point, what I can tell you is that we are working hard on that, it is very important to ChinaEdu with the three pending licensed universities, and it will give us additional organic growth opportunities. So it is on the top of our priority list, I can assure you that. We are very concerned about if and when we can get the license. We are confident that we will get them, though.

Mark Marostica - Piper Jaffray

Shawn, in order to influence the spring enrollments, when did those approvals need to actually be cemented, before fall enrollments?

Shawn Ding

Before February next year.

Mark Marostica - Piper Jaffray

Okay.

Shawn Ding

In that time…

Mark Marostica - Piper Jaffray

Okay, very good. Thanks.

Shawn Ding

…by the end of February…

Mark Marostica - Piper Jaffray

Okay. Just a second question, given that we are now into the fall recruiting season, curious as to what your sense is in terms of growth in the fall, relative to your expectations or any other color you can provide us on the overall growth trajectory in the fall?

Shawn Ding

Mark, obviously, we cannot give you any specific numbers at this time, but we feel pretty good about it.

Mark Marostica - Piper Jaffray

Okay, and on the learning center operation, I can see that you are very focused on expanding the number of franchises through the end of the year. Can you give us an update on profitability of the learning center operation at this point. What do you think the right balance of learning centers is to achieve your profitability targets?

Shawn Ding

Well, hope I did not confuse you by using the word balance. What I meant was that we are controlling the speed of growth. Because we want to have the wholly owned and the franchise learning centers to be profitable, to formulate the process to build and completely build the operational model, service model and to make them as solid as possible to pave the way for long-term future growth.

So, for example some of the learning center right now, we have right now are profitable. For those who want them to be more profitable, for those who have a shorter history they may at this point accumulatively are not profitable yet, but they will be profitable in 2009. So, with the limited resource that we can put into this operation, we do not want them to grow at a speed that is out of control. So that is what I mean by the word balance.

Mark Marostica - Piper Jaffray

Is your sense that once you reach the 50 number, that you will slow down the number of additional franchises or how are you thinking about the number of franchises in your network of learning centers?

Shawn Ding

No, I do not think we will slowdown though in 2009. We will grow and expand the franchise model in 2009. Actually, we are doing things and preparing for that right now. It is not like the number of how many learning centers will make us profitable or below that will make us lose money. It is really up to the individual learning centers operations that would determine the overall profitability.

So, if for example 80% of the learning centers are profitable then or 50% of the learning centers are profitable then the1 overall learning center network will be profitable. So we are focusing on individual learning centers operation efficiency.

Mark Marostica - Piper Jaffray

Shawn, and the one last question on this topic, can you give us a sense of time to profitability for your average learning center?

Shawn Ding

It really depends, if you ask me about average, I think it is about 12 months.

Mark Marostica - Piper Jaffray

Okay.

Shawn Ding

That is good enough for a guess.

Mark Marostica - Piper Jaffray

I have one last question perhaps directed for Lily; and that is one the goodwill impairment charge, can you give us a sense what that charge is after-tax?

Shawn Ding

The goodwill impairment charge.

Lily Liu

Let me take a look.

Shawn Ding

Mark, while Liu looks that up, let me go back to your last question. The learning centers, it really hard to give you an average timeframe that which our learning centers can be profitable and what time. It defers, because of the program its offering service to and it is because of the area it is in, so there are lots of the influential factors that are affecting the performance of that learning center. We have a learning center that is very profitable in three months, and that is also part of our network. I do not know if Julia had been looking to comment on that.

Julia Huang

Mark, the learning center business, we are expecting to get all the learning centers next year to breakeven or slightly profitable. That is our goal. Each individual one, especially during the early stage is depending on the size of the learning centers. So some of them, if the size is small in terms of rent, and people, they could be making profits slightly earlier, but the learning centers in major cities, which will have a big rent, it takes slightly longer.

Mark Marostica - Piper Jaffray

Okay, great. Thanks for the color.

Lily Liu

Mark, I want to address your question. For the goodwill charge, it is on the group level, so there is really no tax effect on the goodwill. If we were to calculate after tax goodwill charge, we should use a 25% statutory rate to calculate the after-tax charge.

Mark Marostica - Piper Jaffray

Fair enough. Thanks Lily.

Lily Liu

Sure.

Operator

(Operator Instructions) Your next question comes from the line of Scott Schneeberger of Oppenheimer. Please proceed.

Scott Schneeberger - Oppenheimer & Co.

Hey thanks. Good evening. First question, in the core business, could you speak about pricing strategy? The enrollments were very strong. I assume you are keeping pricing relatively flat, but just some comments on that please? Thanks.

Julia Huang

Scott, this is Julia. The price right now, or in the past few years is relatively flat. We raised prices in certain regions for our few school in the well-developed areas like Shanghai, Beijing, Guangdong provinces. At this stage, it is still at a stage that we are trying to increase more the number of students than to raise to price.

So for the areas which is more affluent, we may increase the tuition price for the top ranked schools, but for the less developed areas, we probably will keep the price flat. So the percent of increase is not going to be significant.

Scott Schneeberger - Oppenheimer & Co.

Okay, thanks. Shifting to LCs, just following-up on that topic, getting the 50, I assume that is all going to be franchised with subsequent 15. Any word on when you will be able to develop for the company owned LCs?

Julia Huang

The company owned LCs is only going to take the capital cities. There are each province capital so we are not going to aggressively expand unless the area we know that is going to have a sizable market.

Scott Schneeberger - Oppenheimer & Co.

Okay, fair enough. Within the online degree segment in cost of goods, I understand the cost increasing on the build out of the learning centers, I think – Lily you might have mentioned to a new sub added JV, could you elaborate on that please?

Shawn Ding

Scott, we did not really catch the question. Which sub-JV are you referring too?

Scott Schneeberger - Oppenheimer & Co.

You just mentioned in prepared remarks, I think it was in Lily's part, in the online degree, cost of goods, there was a new subsidiary added JV and you have mentioned that, and higher cost to the learning centers whereby why costs were up I was just curious if we could elaborate on what that new subsidiary JV was and what the quantification?

Julia Huang

That is see there actually is the subsidiary of a joint venture from Dongbei University of Finance and Economics. That is subsidiary is intent to do the training programs to the professionals like accountants and tax bureaus of Dongbei area. So we spent a lot of efforts in the training product development and also marketing events.

Scott Schneeberger - Oppenheimer & Co.

Okay. It sounds good. Is that going to the P&L weighted cost in fourth quarter as well and I assume with continued LC build out will contribute to a high level costs?

Julia Huang

Those I think the cost will go up as the revenue goes up. So we do not we will not expect the significant increase for the Q4. From our historical pattern typically Q4s cost of gross margins is slightly lower compared with the other three quarters.

Scott Schneeberger - Oppenheimer & Co.

Okay. You think it will be consistent with historical patterns.

Lily Liu

Yes, right. The higher share was on marketing expense for this quarter was due to – it was really a one-time marketing event for this new subsidiary.

Scott Schneeberger - Oppenheimer & Co.

Okay, thanks. Just a couple more and moving to some of the bit more emerging areas. In 101 you would mentioned the internal reorganization in that may take time, is what I wrote in my notes so I think you said some to that extent. How long for this reorganization process, just little more color there, thanks.

Julia Huang

We will expect there is some result coming out in a couple years because the arena is hard, it is difficult to make a time line for financial results but we are confident that after the re-org we should be more efficient and also we will build that strong sales team.

Scott Schneeberger - Oppenheimer & Co.

Okay. Thanks, so throughout ‘09 that is still going to be re-org and looking for financial results perhaps in 2010?

Julia Huang

The re-org should be done by a certain time next year, so we believe that we should deliver a stronger result afterwards.

Scott Schneeberger - Oppenheimer & Co.

Okay, thanks. Then finally, Jingzhou just you mentioned at your open to strategic alternatives. It sounds like you are backing off that a bit. Could you just take us a little deeper on how that is going to develop, thanks?

Julia Huang

Given the labor and construction cost, and other factors, we decide to temporarily hold off to continue on the construction for the Jingzhou project. So we will delay the project to next year.

Scott Schneeberger - Oppenheimer & Co.

Okay. Thanks and nice work.

Shawn Ding

Thank you.

Julia Huang

Thank you, Scott.

Operator

At this time there are no further questions. I would now like to turn the call over to management for closing remarks.

Julia Huang

Ladies and gentlemen, let me close by reiterating, how much we appreciate your interest and support. Chinese Education Industry is as likely as ever to succeed. We are committed to delivering consistent and strong results to growth and execution. We are confident that our strategy is the right one to keep us at top of our industry.

We look forward to keeping you appraised of our progress. Thank you and have a happy early thanksgiving and have a good day or good night.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: ChinaEdu Corporation Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts