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Executives

Zhengdong Zhu – Chief Executive Officer

Ping Wei – Chief Financial Officer

Analysts

Mark Marostica – Piper Jaffray

Ella Ji – Oppenheimer & Co. Inc.

Chao Wang – Bank of America Merrill Lynch

China Distance Education Holdings Limited (DL) F1Q13 Earnings Call February 27, 2013 8:00 AM ET

Operator

Good evening, ladies and gentlemen, and thank you for standing by for the China Distance Education Holdings Limited First quarter Fiscal Year 2013 Earnings Conference Call. Today, you will hear from Mr. Zhengdong Zhu, Chairman and CEO of the company and Ms. Ping Wei, the CFO. During the prepared remarks, all participants will be in a 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 second quarter of 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 statements. Further information regarding this 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 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 ir.cdeledu.com.

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

Zhengdong Zhu

[Foreign Language]

Thank you everyone for joining us on our first quarter fiscal 2013 results conference call. Our operating results were released earlier and are available on the company’s website as well as on newswire services.

[Foreign Language]

We are very pleased to report another strong quarter with continuous growth in net revenue, income, and non-GAAP, non-APQE course enrollments.

[Foreign Language]

Total net income from continuing operations increased 31.3% during the first quarter to US$13 million exceeding our guidance. On the operational front, total course enrollments reached 898,000 in the first quarter, an increase of 8.4% year-over-year.

[Foreign Language]

Excluding online APQE course enrollments, other enrollments increased 15.3% year-over-year. We also generated US$1.5 million of net revenue and US$4 million of free cash flow in the quarter.

[Foreign Language]

Such strong performance reflects the enduring market response to our premium courses and services, as well as the outstanding user experience offered by our online learning platform, including our mobile learning system.

[Foreign Language]

To-date, virtually all our students can view our lecture-led, high-definition audio-video courses, practice exam prep, accesses questions, I’ll take more exams through downloaded contents on their own computers to regular internet or from their mobile devices.

[Foreign Language]

We have successfully introduced high-definition audio-video courses, accesses questions and query boards, which is a bullying board where students can of course, study questions that can be answered in writing by our in-house [5.47 periods]. Our streamline learning functions of our online learning system to our mobile learning platform. This platform is shared and used by all our [studying] verticals and are well received by the market. In fact, by the end of this quarter, we have recorded over 1 million turnout of our mobile applications.

[Foreign Language]

As already an online education company and a industry leader, we’re constantly looking for ways to leverage our technological strength to provide students with more comprehensive and effective course products and services.

[Foreign Language]

Our commitment to invest in technology ensures that, we have to provide the best-in-class user experience. At the same time, the quality of our course offering and the result we deliver for our students always remains a co-value we’ve provided for our students.

[Foreign Language]

Going forward, we will continue to provide the high quality courses for our students and very actively speaks students’ feedback and with our students interest in new learning function as we further fine queue our existing online and mobile learning system to meet the demands of our faster growing ever-changing dynamic learning market.

[Foreign Language]

Let me now walk you through our verticals in more detail; starting with our accounting vertical on Slide 7.

[Foreign Language]

Our high-quality course offerings delivered through our innovative learning systems continue to attract new and returning students. This not only enlarges our student base, but also enables us to increase average student payments generated new growth, as we position our self as a premium quality, premium pricing online education provider.

[Foreign Language]

Online CPA enrollment for this quarter increased 85.8% year-over-year, as we continue to increase our market presence.

[Foreign Language]

Our APQE enrollment in the first quarter decreased by 39.3% year-over-year. As we discussed in last quarter’s conference call, entry level and intermediate level APQE exams for 2013 will once again be held in October. As such, we anticipate that a bulk of APQE enrollments will come in during Q2 and Q3 of fiscal 2013, bulk of revenue for APQE is expected to be very low in Q2 and much higher in Q3 and Q4 of this year.

[Foreign Language]

However, for fiscal year 2012, lot of the exams were also held in October low test we initially anticipated to be held in May till end of March, by which time the vast majority of enrollments for the 2012 test has already came in. This resulted in much higher GAAP revenue for Q1 and Q2 in fiscal 2012.

[Foreign Language]

As APQE contributed about 17.3% of our total cash revenue for fiscal 2012, such flat duration impose enrollment, cash revenue, and GAAP revenue timing, challenges quarterly comparisons between the 2012 and 2013 fiscal year.

[Foreign Language]

However, our full year basis, we anticipate APQE cash revenue and GAAP revenue to grow at a healthy pace at over 15% annually.

[Foreign Language]

Accounting continuing education enrollments increased 12.9% for the quarter. Our other online accounting test preparation enrollments increased by 39.5%.

[Foreign Language]

ASP for online CPA and APQE courses increased 18.1% and 20% respectively year-over-year, demonstrating the strength of our brand and the value that our students placing our results R&D services, which enable us to charge a prime price for some of our most popular courses. In fact, in December, we’ve raised same class ASP for APQE regular classes again for 17.6% in average.

[Foreign Language]

ASP for other online accounting test preparation courses went up by 8.9% year-over-year, while ASP for accounting continuous education courses was down by $1.24 year-over-year as we continue to adopt our aggressive pricing strategy to increase market share as a just US$13 million annual user market.

[Foreign Language]

Regarding our non-accounting verticals on Slide 8, online healthcare test-preparation enrollments increased by a healthy 14.9% year-over-year. ASP for online healthcare test-preparation courses increased by 10.5% year-over-year, as we continue to further penetrate the US$2.5 million annual test taker market.

[Foreign Language]

We anticipate that growth in this vertical will further accelerate as we enter into a busy exam registration season. Online healthcare continuing education course enrollments decreased by 32.5%, in the quarter, due to the delayed timing of enrollments.

[Foreign Language]

Online construction engineering test preparation course enrollments increased by 119.8% year-over-year, while ASP increased by (inaudible). Online construction continuing education enrollments grew by 9.3% year-over-year, while ASP remained flat.

[Foreign Language]

In recent years, we saw steady growth in this test market, as the government strives to implement three-year quality controls over the construction and building industry. In fact, this market is already at about over 2 million test takers per year. We expect to continue to see strong enrollments and revenue growth in this vertical in the foreseeable future.

[Foreign Language]

Moving to our self-taught education segment, we’re very pleased to report another quarter of strong growth as enrollment increased 54.2% year-over-year, while ASP remains stable.

[Foreign Language]

Finally, in the first quarter, we generated US$0.7 million of revenue from Yucai, our business start-up training subsidiary representing a 30.4% increase from the same period last year.

[Foreign Language]

This completes my update on business operations.

Now, I will turn the call over to Wei Ping, our CFO to walk you through our financials.

Ping Wei

Thank you, Mr. Zhu. As Mr. Zhu mentioned, growth very much characterized to the first quarter of fiscal 2013. Effective cost and expense controls and the scalability inherent in our business model has also allowed us to deliver healthy margins in the quarter.

We remain confident in the outlook for market demand and our ability to meet that demand. And while we will continue to invest prudently in our content and services to enhance our offering, we believe that we are well positioned in fiscal 2013.

Now, let me walk you through our key financial metrics for the first quarter on Slide 10. Please note that all my discussions below will be about our continuing operations, except where explicitly explain otherwise.

Total net revenue for the first quarter was US$13 million, representing an annual increase of 31.3%. Net revenue from online education services, books and reference materials and other sources contributed to 82.9%, 5.9%, and 11.2% of total net revenue respectively.

Online education services net revenues were US$10.8 million, an increase of 39.2% from the prior period. The strong increase was due to a healthy revenue increase across our accounting test preparation, healthcare and construction engineering verticals, and the recognition of delayed APQE and CPA courses revenue relating to the delayed exams in 2012.

Such increase was partially offset by a decrease in revenue of our accounting continuing education courses due to reduced in pricing as we seek to aggressively extend that market.

Net revenues from books and reference materials were US$761,000, a decrease of 20.5% from US$957,000 in the first quarter of fiscal 2012. Net revenues from other sources were US$1.5 million, an increase of 21.4% from the prior period. The increase was mainly a result of increased revenue in offline business start-up training courses provided by Zhengbao Yucai and other offline supplementary training courses.

Cost of sales for the quarter was US$6.1 million, representing an annual increase of 32.1%. The increase in cost of sales was primarily due to increase the salaries and related expenses, lecturer fees, and expenses incurred by our offline business start-up training courses and other supplementary training courses. Such increase was partially offset by a decrease in cost of books and reference materials.

Gross profit for the quarter was US$6.9 million, an increase of 30.6% from US$5.3 million in the prior year period. Gross margin for the first quarter was stable at 53%. Total operating expenses for the quarter was US$5.2 million, a slight increase of 3.7% year-over-year.

Selling expenses amounted to US$2.8 million for the first quarter of fiscal 2013, a minor decrease of 3.1% year-over-year, primarily as a result of decreases in commission to our distributors and decreases in advertising and promotional activities, due to shift of seasoning course promotions. Such decrease was partially offset by an increase in salaries and related expenses.

G&A expenses were US$2.5 million, an increase of 12.7% year-over-year, primarily due to increases in salaries and related expenses, professional fees, and share-based compensation expenses.

Income tax expenses were US$416,000, compared to US$86,000 in the prior year period, primarily due to the increase in EBIT income in this year. Net Income was US$1.5 million for the first quarter of fiscal 2013, compared to US$367,000 in the prior year period. Net income margin was 11.4%, as compared to 3.7% in the prior year period.

Now, let’s turn to cash flow on Slide 11. Net operating cash inflow was US$5.3 million for the first quarter of fiscal 2013, compared to US$5 million in the prior year period. The inflow was primarily the result of net income before non-cash items generated in the quarter, increase in accrued expenses and other liabilities, and deferred revenue. Such inflow was partially offset by the increase in prepayment and other current assets, other non-current assets, and the decrease in income tax payable and refundable fees.

Turning to our balance sheet on Slide 12, cash and cash equivalents, term deposits and restricted cash as of December 31, 2012 decreased to US$46.2 million as compared to US$57.7 million as of September 30, 2012 primarily due to a dividend payment of US$16.1 million and capital expenditures of US$1.1 million. And that decrease is partially offset by US$5.3 million of cash flow generated from operating activities in the quarter. This completes my financial overview.

Now, I will turn the call back to Mr. Zhu for the final remarks on our strategy and business updates, as well as financial guidance for the full year and second quarter. Mr. Zhu, please?

Zhengdong Zhu

Thank you, Ping.

[Foreign Language]

With steady growth experienced in the fourth quarter, we expect to see robust enrollment and revenue growth on a yearly basis as we stay focused on further penetrating the market of our estimated 35 million plus students in our core segments that encompass accounting, healthcare, and construction engineering test-preparation, career development and continuous education courses.

[Foreign Language]

We also plan to simultaneously expand into the much larger general online education market through our open-platform, which already increased traffic and generated a small amount of revenue in the first quarter. We believe the open-platform provide us with a strong foundation upon, which we can readily incorporate and rollout new courses and services provided by our partners.

[Foreign Language]

Turning to our business outlook.

[Foreign Language]

With the 2013 fiscal year, we’re estimating total net revenue in the range of US$63.5 million to US$66.5 million, representing year-over-year growth of approximately 21.2% to 27.6%.

[Foreign Language]

For the second quarter of fiscal 2013, we estimate total net revenue in the range of US$12.9 million to US$13.5 million, representing year-over-year growth of approximately 5% to 10%. Excluding APQE revenue contributions of US$3.4 million in Q2 2012 and are estimated to US$1.9 million for Q2 2013, estimated revenue other than APQE is expected to grow at 24% to 30% for Q2 2013.

[Foreign Language]

That concludes my prepared remarks. Thank you for your time. Operator, we are now happy to take questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question.

Mark Marostica – Piper Jaffray

Yeah, my first question relates to your focus on the accounting vertical. I’m just curious the percentage of revenue you are now driving the accounting vertical overall. And then compare that to a year ago? And also are you anticipating entering into any new verticals in the balance of fiscal 2013?

Ping Wei

Okay. Mark, I will take the question directly without translating to Zhengdong first. First of all, accounting vertical contributes to anywhere between 50% to 60% of the company’s total revenues. It is relatively stable for last year and expected to be about – at above the same level for this year as well.

Well, historically though, accounting vertical used to account for almost 90% of our total revenues (inaudible) from a longer-term perspective, accounting has deceased, it’s relatively important to company’s overall revenue gradually. But we had a particularly strong year in 2012 on accounting, and we expect accounting vertical to continue to grow pretty strongly as well. So I would say healthcare and construction software will still grow faster than accounting this year.

In terms of new verticals, we said last year that we will continue to focus on accounting healthcare construction and engineering as three main professional verticals we provide test-prep, career development, and continued eduction courses, and that will still be the same for this year and the year near future.

Will we be entering into new verticals? Yes. But right now the strategy has, while with the turning on healthcare and construction engineering, we are offering our own premium quality course content in our in-house content learning related services and general services. With newer verticals, we are more interested in growing markets through open platform.

Now, the open platform initiative is still at very early stage. So, the next question is, we are excluding verticals other than the three main ones, are you going to continue to slow the 10 verticals you are already in? And the answer is also, yes. Why we are not focusing on growing those 10 verticals? We have been fairly sort of – fairly the talent pools and the management – pretty strong management team who takes care of not only the core offerings, but also the other offerings as well. And we are seeing healthy growth in the low non-core, but still sort of in existing other verticals, such as law, such as and other verticals as you’ve heard from our sort of, through those narratives.

Mark Marostica – Piper Jaffray

Great, thanks.

Ping Wei

Did I answer your question, Mark.

Mark Marostica – Piper Jaffray

Yeah, you definitely did. Thank you for the color there. And just to explore a little bit more deeply into the accounting vertical specifically accounting continuing education pricing coming down in the quarter there. Can you give us a sense of your overall view of why continuing education continues to be an area where you feel you need to lower price to grab market share, CPA enrollments up real high, APQE continues to grow, I guess on the normalized basis, right, we removing the shift in schedule, in other accountings you seems to be growing quite well to, I’m just curious why is that continuing education lagging a little bit and why do you feel the need to lower price?

Ping Wei

Okay. I’m going to have [Liny] translate the question, because it’s a financial and strategic question, I’ll have Zhengdong answer part of – most of it.

Unidentified Company Representative

[Foreign Language]

Zhengdong Zhu

[Foreign Language]

Well, Mark, first, the market for accounting continuous education is already 13 million. We have 13 million working professionals in accounting industry, unless the accounting continuous education, we only enrolled about 1.3 million students.

Zhengdong Zhu

[Foreign Language]

From the market penetration perspective you can see, we still have a lot of rooms to grow in this accounting continuous education market. Well, the reason, we adopt a low pricing strategy is, because that is for us to attract new students, to let them know about our high-quality courses, and then we aim to train the students take our test preparation courses in accounting vertical, which is our course trend.

To increasing enrollment and the ASP in the test preparation courses, that will also drive revenue growth.

[Foreign Language]

While in all, the main reason we’re doing continuous – we are expanding the continuous education market is to increase our brand awareness, to increase our enrollment in accounting vertical, and in accounting vertical test preparation market and then increase our revenue.

Ping Wei

And to supplement that, first of all, test prep market has a much higher ASP and also very lucrative market for us and we have market dominance. But 13 million of professional market versus only $500,000 of test prep enrollments at this time. It clearly makes this in a sort of easy math.

Secondly, also a one more point is while our ASP on accounting continuous education seems to be trending lower. The market price offer to continuous education students are not necessarily lower, because you understand that, usually the ASP for our course offerings are result of two things; one is our less price, and second is, actually discount we offer to our distributors.

And in this case, a big portion of this ASP decrease is actually we’re giving some of our profits to our distributors. So our distributors are motivated to promote our process to retail market. From retail perspective, we’re not lowering our price that much. So I’d say, also I don’t think market needs to be worried that will lower our prices a lot and because of that in the future that we need to recover our price charge, it will be limited.

Mark Marostica – Piper Jaffray

Okay. Thank you for the explanations, it’s helpful. And then the last question relates to your mobile strategy. And I think you’ve been asked on this a call before, but just an update on your mobile monetization strategy and what if any revenue contribution you’re leading from mobile today?

[Foreign Language]

Zhengdong Zhu

[Foreign Language]

Right now, we still think that the mobile strategy is just an extension of our education.

[Foreign Language]

Right now actually, we don’t care about kind of way actually we generate revenue directly from mobile applications. Our main focus is still that through the mobile application, we can attract more enrollments from the existing verticals.

[Foreign Language]

Now, our application products can be categorized into one is exam courses related for exam hall. If our students download our application once, so our goal is to the number of downloads is near the number of enrollments.

[Foreign Language]

Another one is used for professionals in each industry. Some of the application is about industry information related or access questions.

[Foreign Language]

Another one is, general applications such as personal care, and we are aiming for millions of downloads for that kind of applications.

[Foreign Language]

Now, in general our strategy towards mobile application is due to increase our company awareness and the brand to help to drive traditional online course enrollments and revenue growth.

Mark Marostica – Piper Jaffray

Thank you very much. I’ll turn it over.

Ping Wei

Thank you, Mark.

Operator

Thank you. Our next question comes from the line of Ella Ji from Oppenheimer. Please ask the question.

Ella Ji – Oppenheimer & Co. Inc.

Hi, good evening. And my first question is a follow-up of…

Ping Wei

Hi, good evening, Ella.

Ella Ji – Oppenheimer & Co. Inc.

Hello.

Ping Wei

Hi.

Ella Ji – Oppenheimer & Co. Inc.

Can you hear me?

Ping Wei

Yes.

Ella Ji – Oppenheimer & Co. Inc.

Okay. So my first question is a follow-up. Regarding the continuing education enrollment for this quarter, I saw it’s about 14% year-over-year, and this is relatively speaking a little below the historical level, especially given that to the December quarter should be a peak season. So could you explain that?

Ping Wei

Okay. I’ll take that question directly. It’s a combination of sort of changes in timing of accounting continuous education enrollment. Yeah, however, what happened is then in the past accounting continuous education is very much concentrated in December quarter, because each and every sort of like a good majority of our partners choose to end the courses by December 31.

Now, we find that puts a lot of pressure on our servers as well as on our customer services et cetera, on our in-house resources. So we try to push different partners to have different deadlines to actually have it more even out. So having said that sort of both from calendar year and fiscal year perspective, we are seeing very healthy enrollment growth and we believe for fiscal year 2013, we will expect the same. So in short, yes, the 14% kind of enrollment was sort of historical low. But on annual basis, we expect it to go back to probably between 20% to 30% kind of level at the least.

Ella Ji – Oppenheimer & Co. Inc.

Okay, thank you. And in terms of seasonality, this 20% to 30% annual growth, when should we expect to see that, in which quarter?

Ping Wei

The heavy quarter will be June quarter and then September quarter. Usually, March quarter is pretty slow.

Ella Ji – Oppenheimer & Co. Inc.

Okay, got it.

Ping Wei

Yeah.

Ella Ji – Oppenheimer & Co. Inc.

And then the next question is, now because of APQE’s change of schedule, so your revenue seasonality changed from historical. So could you also talk about how that’s going to impact your margins? Do you also see the margins in operating expenses move in the same way as the revenue seasonality or do they have any differences?

Ping Wei

Okay. Well, let me answer you first and take one step back and talk about APQE season as sort of a quarterly distribution first. Then I will move on to the margin part. Ella, will that be okay with this?

Ella Ji – Oppenheimer & Co. Inc.

Yeah, sure, go ahead.

Ping Wei

Great, okay. In terms of APQE, we already indicated in our press release that we’re expecting major shipping revenue timing particularly for Q2. Like last year, Q2 was 36% of full year revenue, while this year, we only expect it to be around 12% of total APQE annual revenue. So you can see it’s a significant sort of a difference in terms of distribution.

Now, naturally, the next question will be “How will APQE revenue be distributed among the various quarters of this year?” We think that for Q2, it will be around 12% of annual revenue, while for Q4 of fiscal year 2013, it will be about like anywhere between 35% to 40% of total APQE revenue in that quarter.

Now the impact to our sort of quarterly distribution of total revenue, the biggest difference or the significant difference in sort of, in quarterly redistributions also between Q2 and Q4. You can see based on last year revenue numbers. Last year, Q2 revenue was about 24% of total annual revenue and Q4 was about 32% of total revenue.

For this fiscal year though, while Q1 and Q3 probably will be more or less at above the 7% of total annual revenue as last year, ballpark, probably will take 1% or 2% for each quarter. Q2 for this year probably will be about four to five percentage points lower in terms of annual contribution, while Q4 will be that percentage points higher. So that basically means about 36% around that number of total annual revenue for fiscal year 2013 will be in Q4 of this fiscal year, while last year was only about 31%, 32%.

Now the impact to bottom line or to the margin, the unique model of our sort of online business is that most of our cost and expenses are relatively fixed. It does not fluctuate with revenue numbers. So it’s almost like you can expect pretty normal costs of sales and SG&A sort of distributions among four quarters as compared to priors. And so that basically means and even more dramatic impact to quarterly distribution of our expected bottom line for fiscal year 2013.

Now just one more thing at the EBIT margin level; last year in Q2, the company looked to modify our online distribution, the business model we have, our revenue model we have with our online distributors. The aim was to change from commission-based model to revenue sharing model and only record net amount of revenue generated from online distributors as revenue.

However, as a result – not before, however, as a result, in Q2 of last year, we recorded virtually zero or near to zero online sales commission from distributors that is in the selling expenses. Now what happened after the end of Q2 last year was after there is discussion we had with Deloitte & Touche, while from tax perspective and from business arrangements.

We actually changed the model to revenue sharing rather than commission-based from business perspective, from accounting perspective, unfortunately we still have to record the full amount we charged our students as revenue, and the amount we shared with our distributed has to be still recorded as sales commission. So what happened last year, as a result, this year Q2 we expect to occur about over US$1 million of sales commission in our selling expenses.

So Q2 selling expenses will be much higher as compared to Q2 of last year. However, if we add that $1 million to last year’s base numbers, I would say, we are still growing at a normal pace. Now while the last year’s Q2 selling commission will go a big part in Q3 of last year’s selling expenses. So you should expect a pretty sizable or close to that amount of selling commission decrease in this year in Q3 as well.

So in another word, there will be a selling expense sort of a quarterly redistribution this year as compared to last year between Q2 and Q3 in the amount of about US$1 million as well. I hope I did not confuse you Ella.

Ella Ji – Oppenheimer & Co. Inc.

No, no. It’s actually, you explained it very well. I got it.

Ping Wei

Thank you. Thank you.

Ella Ji – Oppenheimer & Co. Inc.

Yeah, so we should expect this 2Q 2013 margin year-over-year comparison to be relatively speaking negative because of shifting revenue and also higher selling expenses.

Ping Wei

Yeah.

Ella Ji – Oppenheimer & Co. Inc.

But in 3Q and 4Q margin comparison should be positive?

Ping Wei

Yes, yes.

Ella Ji – Oppenheimer & Co. Inc.

Yeah.

Ping Wei

And I would say, yeah, selling expenses also a bit of shifting between quarters as well unfortunately.

Ella Ji – Oppenheimer & Co. Inc.

Yeah.

Ping Wei

Thank you.

Ella Ji – Oppenheimer & Co. Inc.

Yeah, yeah, I got it. Yeah, that’s very good, very helpful. Thank you. And then my last question is I think you mentioned construction in the nearing now the market size or market demand is expanded. So could you comment on your sales channel of this business? How are you prepared to take advantage of this growing market?

Ping Wei

Okay, we’ll translate the question and have Zhengdong Zhu address the question.

[Foreign Language]

Zhengdong Zhu

[Foreign Language]

Generally speaking, the structure of professional exams and test in construction and engineering is very similar to accounting industry. We can use older technologies and experience in accounting to be used in construction and engineering courses.

Ella Ji – Oppenheimer & Co. Inc.

Okay. And then I think you also would use a third-party distributor…

Ping Wei

Yeah.

Ella Ji – Oppenheimer & Co. Inc.

…to help. Is that right?

Ping Wei

Yes. So in construction and engineering vertical, we would also use both online and offline distribution network to distribute our courses. And simultaneously, as you noticed that we have been generating a higher percentage of total revenue from direct student payment.

So in terms of distribution or marketing, Internet-based market is also gaining more importance and that’s why we’re generating more direct student enrollment revenue year-over-year. So we will also be promoting our courses with our construction and engineering verticals online as well.

Ella Ji – Oppenheimer & Co. Inc.

Got it.

Ping Wei

So it means that you usually see with the Internet-based marketing.

Ella Ji – Oppenheimer & Co. Inc.

Okay. And then for your like third-party distributor, are they the same as your accounting test-perp distributor or are they different?

Ping Wei

About the same.

Ella Ji – Oppenheimer & Co. Inc.

Okay. All right.

Ping Wei

Actually, you mean companies or more sort of financial arrangements?

Ella Ji – Oppenheimer & Co. Inc.

Company, the distributor?

Ping Wei

Some of our distributors sell more courses in more than one vertical while we also have industry specific distributors.

Ella Ji – Oppenheimer & Co. Inc.

Yeah, okay. Okay, got it. Thank you and congratulations on a very strong quarter.

Ping Wei

Thank you, Ella.

Operator

Thank you. The next question comes from the line of Chao Wang from Merrill Lynch. Please ask your question.

Chao Wang – Bank of America Merrill Lynch

Hi, good evening. I just have one question. So I noticed that some other Chinese education companies reported lowering revenue growth, which coincides with also flowing population growth in China. So wondering if you have any comments on that and also do you think it has any expectation on your segment? Thank you.

Ping Wei

That’s a very interesting observation. I will do the translation and I think Zhengdong will address the question.

[Foreign Language]

Zhengdong Zhu

[Foreign Language]

Well, the market target growth of our company is really for young professionals and working professionals. The target market is actually different from those components, which are targeting co-educate.

[Foreign Language]

In order to check and maintaining students, we always believe that the quality of our courses is the key, where we will focus on the quality of our courses and as it relates, the quality of background of our lecturers to bring the best courses for our students, as well as in addition, we will still focus on doing more innovative products and services to our students to apply more advanced technologies in online education or that we have the traditional features of education company, which is focused on quality and result.

And as an online education company, we will be focusing on developing new technologies and new learning tools for our student to combine those two together; we believe that we will be able to maintain the incremental revenue growth.

Ping Wei

And actually, I’d like to add one point. The demographic change and the professional demographic is also two are different things. You know China very well. You probably also noticed that China is an under professionalized country. And China has the overall GDP growth and per capital GDP growth, we actually believe demand for professionals actually continue to increase and it’s so far away from saturation that it’s not even a remote concern at this time for us.

When China had seen arrow whereby professionals are having a lot of difficulties in finding jobs and there is oversupply of professionals in China. I’d say that’s where we need to worry about our sort of market saturation or sort of revenue growth. And that time, I would say it’s pretty remote down the road.

Chao Wang – Bank of America Merrill Lynch

Okay, got it. Thank you very much.

Ping Wei

Yeah, thank you.

Operator

Thank you (Operator Instructions). All right, as there no further question at this time, I would now like to hand the conference back to the management for closing.

Ping Wei

Okay. On behalf of the management and we’d like to thank you again for joining us today and we look forward to updating you on our progress in the near future. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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