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Noah Education Holdings Ltd. (NYSE:NED)

F2Q 2013 Earnings Conference Call

February 28, 2013 08:00 ET

Executives

Dong Xu - Chief Executive Officer

Dora Li - Chief Financial Officer

Operator

Good morning and good evening, ladies and gentlemen. Welcome to Noah’s Education Holdings Limited’s Second Quarter Fiscal 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, there will be a Q&A session. As a reminder, this conference is being recorded.

Joining the conference today are Mr. Dong Xu, CEO and Ms. Dora Li, CFO. After the U.S. markets closed yesterday afternoon, Noah issued a press release announcing its un-audited financial results for the second quarter fiscal 2013. The release is available on the company’s IR website at ir.noaheducation.com along with presentations for today’s call. This call is also being broadcast live over the internet.

Before management’s presentations, 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 Litigations Reform Act of 1995 including certain expectations and goals, which are subject to numerous assumptions and risks.

Forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond our control, which may cause actual results to differ materially from any future results or achievements implied by such forward-looking statements. The company’s actual results could differ materially from those contained in the Risk Factors sections of the company’s final prospectus or recent filings filed with the Securities and Exchange Commission.

Unless required by law, the company undertakes no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Please take note that all numbers expressed in this conference call are in renminbi and all comparisons refer to year-over-year comparisons unless otherwise stated.

I would now like to turn the call over to Noah’s Chairman and CEO, Mr. Dong Xu. Mr. Xu, please go ahead.

Dong Xu

Thank you for joining us today on our second quarter fiscal 2013 earnings conference call. I trust everyone has had a chance to read our earnings press release issued yesterday.

We will begin with slide three. I am pleased to report an excellent performance by Noah in the second quarter with strong growth achieved across the board in all our businesses. The quarterly revenue was up 40% exceeding the high end of our guidance by 8%. The strong growth was mainly attributable to the organic growth of our businesses and the revenue contribution of DDK Consulting and Xiaoxiao Consulting, as these two acquisitions were both completed in October 2012. As a result, the company achieved an operating profit of RMB9.6 million for this quarter and a net profit of 7.1 million, representing a year-over-year increase of 213%. Such a strong performance demonstrates the success of our strategy in delivering a broad education service offering with kindergarten as our focus.

As we had emphasized several times in the past, we believe kindergarten is the vital entry point for students beginning their life-long journey of education. With these acquisitions we have established a sizable foothold in this sector. And we believe that the demand will only continue to grow increasingly for high quality pre-school education services which our kindergarten services are well positioned to help us further broaden our offerings as our students seek higher education every step of the way.

At the end of December 31, 2012, we now operate a total 47 kindergartens of which two have just secured their licenses and 11 are still in the ramp up stage. Out of the five primary and secondary schools we operate, one school remains in the ramp up stage.

Looking ahead our focus remains the same. We will work hard to continue increasing the utilization rate of our schools and raise operating efficiency further, while we remain firmly on target to achieving breakeven at operating level for the full fiscal year 2013.

In the longer term we will continue to focus on driving the sustainable growth of the company organically and through prudent strategic acquisitions, which will give us further expansion and accelerated growth. Noah is in a much stronger position with our expanded school portfolio serving the lifelong education needs of the fast growing population in China. And we are confident that our visible and sustainable business model will reinforce our leading position in the education market throughout 2013 and beyond.

Dora Li, our CFO will now walk you through our financial and operational performance as well as guidance for the next quarter and our full year guidance for fiscal 2013. Dora, please.

Dora Li

Thank you, Mr. Xu. As the details of financial results for the second quarter of fiscal 2013 are available in our earnings release, I would like to highlight a few key financial metrics and focus on year-over-year comparisons for the second quarter fiscal 2013 with all numbers in renminbi unless otherwise stated. We are very pleased to report that Noah continued to grow in the second quarter and our operating costs are well under-control, which have further helped the company to achieve an operating profit in the quarter.

On slide five, net revenue for the quarter was up 40% to just under RMB63 million. Amongst 16% increase was driven by organic growth and the 23% increase by acquisitive growth from DDK and the Xiaoxiao Consulting.

If we breakdown the net revenue by business segment for the quarter, revenue from our kindergarten operations was up 60% to about RMB36 million, accounting for about 57% of net revenue. For the quarter, revenue from primary and secondary school operations was up 23% to RMB19 million accounting for 30% of net revenue. Revenue from supplemental education operation for the quarter was up 12% to RMB8 million, accounting for 15% of net revenues.

On slide six, gross profit for the second quarter up 43%. Gross profit margin for the quarter was 46%, compared to 45% in the second quarter of fiscal year 2012. The improvement in gross profit margin was primarily due to the revenue expansion. We mentioned our margin forecast at 40% to 43% for fiscal 2013.

At the operational level on slide 7, we continued to improve our cost structure. As a percentage of revenue, general and administrative expenses improved to 36% from 52%. R&D expenses improved to 1% from 2%. Sales and the marketing expenses improved to 2% from 4%.

On slide 8, net income for the quarter was RMB7 million. Basic and diluted earnings per share for the quarter increased to RMB0.13 million from RMB0.03 in the second quarter of fiscal 2012. Non-GAAP net income including share-based compensation expenses for the quarter as shown on slide nine was RMB8 million. This translates to non-GAAP basic and diluted earnings per share of RMB0.14 million for the second quarter.

Moving to our balance sheet summary on slide 10, cash and cash equivalents and short-term investments accounted to RMB487 million on December 31, 2012 compared to RMB590 million on September 30, 2012. In addition, deferred revenue was RMB24 million compared with RMB52 million at the end of September 2012. Deferred revenue consists primarily of tuition and the franchising fees collected and then will be booked in the following quarters according to call schedule. In terms of per share value, our cash per share at the end of December 2012 was $2.14. Cash plus real asset value at book cost was $2.69 per share and net asset value per share was $3.49.

On slide 11, you can see that operating cash provided by continuing operations was RMB2.8 million. We will continue to deploy our cash to invest in organic and acquisitive growth. During the past 12 months, we have generated over RMB50 million in cash from our operations while CapEx for organic growth were RMB29 million and investment cost for M&A were $42 million.

Now, let me walk you through our business and operations update, and then move on to outlook and guidance. Please refer to slide 13 to 15 for updates on our three business services. On slide 13, slide 13 demonstrates the gradual shift of our revenue mix towards kindergartens which now stand at 57%, up from 50% one year ago.

Moving on to slide 14, our kindergarten portfolio continues to expand through acquisitions and organic growth. As of December 31, 2012, we have 47 kindergartens in our network operated by Yuanbo Education, Wentai Education, and the Little New Star. They are mostly located in three regions: Guangdong Province, Hunan Province, and the Yangtze Delta region. Two of the kindergartens have recently secured licenses and have already started to contribute to the revenue and 11 kindergartens are in their respective ramp up periods.

Total enrollment as of December 31, 2012 from our kindergarten operations was over 12,000, up 13% compared to the last quarter. In terms of utilization, the overall average rate attained was 84%, while the average utilization rate for the 11 ramp up kindergartens was 52%. Those 36 mature kindergartens were 93% at the end of December 31, 2012. In addition to the 11 kindergartens, we planned to open two new kindergartens in the next quarter.

On slide 15, our primary and the secondary school operations consist of five schools all operated by Wentai located in Guangdong Province. The total enrollment as of the end of December 2012 was approximately 4,700. The utilization rate for the newly opened school at early ramp up stage was 38% while the four mature schools reached 96%. In addition, we planned to open one to two new schools in September 2013, which will be the start of our fiscal 2014. Our supplemental education operations includes the operation of training centers, sales of teaching materials, and the franchise fees from Little New Star. Our 11 training centers are located in Hunan and the Shanxi Province. The total enrollment as of the end of December 2012 is approximately 3,600. As we focus on expanding our kindergarten portfolio, contributions to total net revenue from the supplemental education business has decreased to 13% from 17% in the second quarter of 2012.

Looking ahead on slide 17, for the third quarter of fiscal 2013, we expect the net revenue to be in the range of RMB46 million to RMB51 million, a 23% to 37% year-over-year growth. Our net revenue guidance for the full fiscal 2013 is expected to be in the range of RMB206 million to RMB215 million, a 26% to 32% year-over-year growth. And again, this reflects the prevailing market conditions and anticipations of continued revenue contributions from DDK and Xiaoxiao, as well as the two new kindergarten openings as planned. Last but not least, we maintained our goal to achieve operating profit for the full fiscal year 2013. This concludes our presentation and we would like now to open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) At this time, there are no further questions in queue. So, I would like to hand over the call back to Dora for closing remarks.

Dora Li

Thank you, operator. Thank you all for your participation. In summary, we will strive to execute our program strategy, focusing on business growth and operational efficiency to achieve profitability in fiscal 2013. That concludes the call. Thank you for joining us today and we look forward to updating you on our progress at the next earnings call. Have a nice day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. You may now disconnect. Have a nice day.

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