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Executives

Christian Arnell – IR

Cloris Li – CFO

Xiqun Yu – Chairman and CEO

Analysts

Laurence Udell

China Education Alliance, Inc. (OTCQX:CEAI) Q4 2012 Earnings Call April 2, 2013 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the China Education Alliance Full-Year 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be presentation followed by question-and-answer session (inaudible). I now advise you that this conference is being recorded today, Tuesday, April 2, 2013.

I would now like to hand the conference over to your host today, Mr. Christian Arnell from Christensen. Thank you, please go ahead.

Christian Arnell

Good morning and good evening to all of our participants. Welcome to China Education Alliance’s full-year 2012 earnings call. You may find a copy of our earnings press release that we issued yesterday in the IR section of our website at chinaeducationalliance.com or through the newswire.

Joining me on the call today are Chairman, Xiqun Yu, the Company’s CEO; and Ms. Cloris Li, the Company’s CFO. I will read the prepared remarks for Chairman Yu in English, followed by an overview of the quarter’s financials with Cloris. The call will then be open to the floor for Q&A session where Yu and Cloris will take your question.

As a reminder, this conference call may include forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected.

There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in our company is included in our filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The Company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise except as required by law.

I will now read Chairman Yu’s prepared remarks in English.

Hello and welcome to China Education’s full-year 2012 financial results conference call. Our business continued to face significant challenges in 2012 due to the continuing economic uncertainty lingering over China’s economy, and more intense competition in the domestic education business.

With recent data showing that the economy maybe on the verge of an upswing and initial results beginning to emerge from the hard work we have put in to building a new model for our online business, I am optimistic about our future and our ability to improve our performance going forward.

I am very excited about the new online platform we have been developing for sometime now. Currently undergoing its final stage of testing, this new online platform is in essence an online model for educational content. Once officially launched later this year, users of this new digital marketplace will be able to browse and purchase educational products from China Education Alliance in addition to content from third-party developers and educational institutions.

A number of schools have already contributed content to the trial runs and I am satisfied with the progress accomplished so far. This will be the first platform providing such services in China. As the growth and adoption of e-commerce platforms in China continue to surge, I am confident that this new business model will significantly enhance user experience, substantially improve educational options for growing population of students, and give us a definite competitive advantage.

The implementation of our new online platform will help us to restructure our business and attract new students. While this investment will take time to fully yield results, I am excited about the future opportunity they will deliver. I am confident in our ability to prevail during these difficult times as we work to reaffirm our position as one of the leading educational resource and service companies in China.

Cloris will now provide a brief review of the Company’s financials for the year. Cloris?

Cloris Li

Thank you. Now I would like to review the company’s financials for the full-year 2012. Revenue for the year ended December 31, 2012 was $11.7 million, compared with revenue of $34.8 million in 2011, a decrease of 66%. The decrease in revenue during 2012 was a result of decline in revenue across all of our business.

We believe revenue was affected by external factors, including slowdown in economic growth within the PRC and increased competition. These factors contributed to the continuous decline in interest of existing and new students, which resulted in decrease in student enrollments and led to the decline in revenue as compared to last year.

We expect to improve the performance of our online education division in the future by providing students with more competitive up-to-date study materials and easy access. We have contracted technologies company to design a new web-based platform, providing video-based long-distance teaching services which encompass online community system and online teaching management systems.

Additionally, we are seeking to establish more onsite training centers and optimize the operation of existing training centers. As such, we predict that our revenue will gradually recover after we launch the new web-based platform and set up more training centers. Online education business revenue during the full-year 2012 was $4.5 million, a decrease of 77% when compared to $19.8 million during the same period last year.

Training center business revenue during the year ended December 31, 2012 was $7.2 million, a decrease of 52% from the same period last year when compared to $15 million. Total cost of revenue decreased 5% to approximately $10.1 million during the full-year 2012, compared to $10.7 million during the same period last year.

Cost of revenue for the online education division increased 4% to $7.2 million during the year ended December 31, 2012 from $6.9 million during the same period last year. This increase was primarily due to the purchase of new examination papers, tutorial materials, news servers and computers. In order to keep the online education material up-to-date and competitive, the Company must constantly purchase new study materials.

Cost of revenue for the training center division decreased 23% to $2.9 million during the year ended December 31, 2012, from $3.8 million during the same period last year. The decrease in cost of revenue for the training center division was primarily due to the decrease in revenue. However, cost of revenue did not decrease in proportion to the decrease in revenue as a result of an increase in salaries.

In order to improve the performance of the training center division, the Company offered higher salaries to retain reputable teachers. Increases in salary for non-faculty staff also contributed to increase in salaries paid. Gross profit for the full-year 2012 was $1.6 million compared to $24.1 million in 2011. Selling expenses increased by 46% to $5.8 million during the full-year of 2012 from $10.7 million during 2011. The decrease in selling expenses was mainly due to the decrease in revenue. The Company’s sales commissions decreased dramatically as a result of significant drop in revenues, however advertising expenses increased by $2.1 million or 326% due to the increase in promotional activities.

Administrative expenses were approximately $6.9 million for the year ended December 31, 2012, an increase from $5.5 million in 2011. The increase in administrative expenses was primarily due to increase in research and development expenses relating to the development of the web-based platform. Total administrative expenses were 59% of the total revenue. Net loss for the full-year 2012 was $14.1 million compared to net income of $6.1 million in 2011. This translates to basic diluted loss per share of $1.33 in 2012 that with income per share of $0.58 in 2011.

Turning to our balance sheet. As of December 31, 2012, the Company had approximately $64.2 million in cash and cash equivalents.

This concludes our prepared remarks. I would now turn over the call to the operator to begin the question and answer session. Operator?

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Laurence Udell [ph]. please ask your question.

Laurence Udell

Hi, thank you for having the conference call. Could you discuss – you made a press release yesterday that regarded the loan that you had with NIH [ph]. Could you discuss that please?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] We loan to NIH [ph] several years ago and now we decided to get the loan back. It is because of the following reason, even interest.

[Foreign Language – Chinese]

[Interpreted] The loan term was 10 years but for the security reason, we better get it earlier than 10 years.

[Foreign Language – Chinese]

[Interpreted] We wanted to make equity acquisition from – to NIH [ph] but currently we give up the plan, so we decided to withdraw the money back.

Laurence Udell

Okay. So does that mean that in addition to the $64 million, you have $72 million now because of the cancellation of the loan and the return of your money in cash?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] Hello, I think loan is the not included in the $64.2 million cash.

Laurence Udell

So that means that you now have more cash than you did at December ‘12, 31.

Cloris Li

Yes, because as of December 31, we had $64 million in cash and cash equivalents. And as of today, we have set out the principal repayment from the NIT which means we have almost $8 million more cash in like bank account.

Laurence Udell

Right, okay. Another question is the – can you just tell us what is going on with the class action suit, there is still one outstanding, am I correct?

Cloris Li

Now actually all the losses has been settled in March with tax affected and – and disclosed in 10-K in that legal sections.

Laurence Udell

Okay, all right. I didn’t read through the 10-K, okay. On the new exchange that you are setting up and that you expect to launch in the near-term, I am assuming it will be in the near-term. How is this differ from the – what you were using before where the students could logon and get papers and is there competition for that right now?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] For our earlier online system, it only had the examination paper from different schools, but the current online platform provide the dynamic system which allows the students can logon to the system and get more lectures from different reputable – more reputable schools, and also they can communicate instantly with the school teachers. The second point is that, now this is based on the cloud technology, so like cloud storage, so it has growth potential in the future for the competition on this area, currently there are not too many competitors are doing this kind of online platform. So we’ll be the first one to launch this online platform this year. So we have competitive advantage.

Laurence Udell

Okay. Is it your intention to get out of all the training centers?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] Hello, we are still doing the onsite training centers. So we are put our resources into two aspects.

[Foreign Language – Chinese]

[Interpreted] Yes, so we will keep to developing our onsite training center and add more training centers in the future. On the other side, we are developing our online platform. Does that answer your question?

Laurence Udell

Yes, but then that brings up another question and it seems that these training centers are doing so poorly, why, and they cost money to open up. Why would you want to continue expanding the training centers which seem to be doing poorly and not just concentrate your energies on the online platform?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] Our online platform will be launched maybe later than middle of this year or later this year. So we won’t give up our onsite training center for now, because the online platform and the onsite training center will be good supplementary, they can support each other because we have the same students group for both online and onsite training centers.

Laurence Udell

But the online centers will you hope will expand beyond your own training centers, am I right? Beyond your own students, you hope to attract other students?

Unidentified Company Representative

Will it attract other students with our online platform?

Laurence Udell

In other words the online exchange that he is developing that will you say will be launched in May hopefully, okay, is not going to be limited to just your students. It would, I assume it would be open to students from all over the country? Is that correct?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] Yes, it will competent to our onsite training centers students school as well and...

[Foreign Language – Chinese]

[Interpreted] So not only our students can yield little bit, also we can provide it to our partners also to say some educational institutions reaching also to their learning or lectures materials onto our online system and more students can use them.

Laurence Udell

Okay. So it is not just your students it’s for a national type of, or the many different schools could refer their students to it? Am I correct?

Unidentified Company Representative

And it also can also attract more students from our onsite training centers for sure.

Laurence Udell

Right. How much more expense do you have to make until you feel it is ready to launch?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] On the investment, we have finished 60% to 65%, so we still have some more to invest on like equipments and platform R&D and so on.

Laurence Udell

Okay, but you are testing it now?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] Yes, we have started testing and some of our systems do need to be further updated.

Laurence Udell

Okay. And how many centers do you have open now, training centers?

Unidentified Company Representative

You mean onsite training centers?

Laurence Udell

Yes.

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] R&D [ph], because we have merger some smaller training centers so currently we have no more than 20 onsite training centers and we will – we plan to add more training centers in the future. And because of the many market factors this process will be – it’s like a long-term process so.

Laurence Udell

So are there any centers that are making money now that have positive cash flow?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] Definitely yes, our training center in Heilongjiang is working very good and our expansion is Beijing also pretty good.

Laurence Udell

We have recently read it in articles here in the United States that Chinese college graduates cannot find jobs. Could you comment on that?

Xiqun Yu

[Foreign Language – Chinese]

[Interpreted] It’s a old story in China. It’s already emerged about five or six years ago that the college education in China does not – they learn from the college cannot be used in the work. So currently the situation is getting much better. The government is doing something to add more, put more positions, job positions in the market and also for those fundamental job positions in China it still requires lot of labors. So the unemployment rate is getting really better than last year, also say in the year before last year.

[Foreign Language – Chinese]

[Interpreted] Actually in China, the difficult thing is not to find a job but the difficult thing is to find a decent or good job in China that young people get to reaching around just keep changing their jobs. So finding is job is not a problem.

Laurence Udell

Okay, all right. Thank you, I’ll let somebody else ask some questions.

Xiqun Yu

Thanks.

Operator

Thank you very much. (Operator Instructions) There are no further questions. I would like to turn the call over to Cloris Li for closing remarks.

Cloris Li

Thank you all for joining today. We appreciate your support and look forward to updating you on our progress in our next earnings call. Goodbye.

Xiqun Yu

Goodbye.

Operator

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

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