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Executives

Christian Arnell – IR

Cloris Li – CFO

Xiqun Yu – Chairman and CEO

Analysts

Jared Cohen – JM Cohen and Co.

Laurence Udell – Udell Advisors

China Education Alliance, Inc. (OTCQX:CEAI) Q1 2013 Earnings Call May 16, 2013 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the China Education Alliance First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session.

(Operator instructions)

I must advise you that this conference is being recorded today, Thursday, the 16th of May 2013. I would now like to hand the conference over to your first speaker today, Mr. Christian Arnell. Thank you, sir. Please go ahead.

Christian Arnell

Good morning and good evening to all our participants. Welcome to China Education Alliance’s first quarter 2013 earnings call. You may find a copy of our earnings press release that we issued yesterday in the IR section of our website or through the newswires.

Joining me on the call today are Mr. Chairman and CEO, Mr. Xiqun Yu, and the Company’s CFO, Ms. Cloris Li. I will read through 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 Chairman Yu and Cloris will take your question.

I remind you today that 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 first quarter 2013 financial results conference call. The China economy remains soft during the first quarter where we saw increased competition in the domestic education business. While we expect the economy to remain soft in the near term, we are fully focused on finalizing our new information platform that will bring together teachers and students in a Web-based environment and allow them to communicate in a more convenient and efficient way. I’m optimistic about our future and our ability to achieve success as we leverage this new model for our online business.

The platform continued to undergo testing this quarter and we are pleased with the results so far, and that of our content partners. Our content partners added a wide array of new educational material, which I believe will significantly enhance user experience and improve the educational options available to students in China.

We are very eager to bring it to market this summer as we work through restructure our business and 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 first quarter. Cloris?

Cloris Li

Thank you. Now I would like to review the Company’s financials for the first quarter of 2013. Revenue for the quarter ended March 31st, 2013 was $2.4 million compared with revenue of $4.8 million during the same period in 2012, a decrease of 49%. The decline in revenue was primarily the result of a decline in revenue across all of our business.

We believe revenue was affected by external factors including the slowdown in economic growth within 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 the quarter ended March 31st, 2012.

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. With the launch of our new information platform later this year and the establishment optimization of the new and existing on-site training centers, we predict that our revenue will gradually recover.

Online education business revenue during the first quarter of 2013 was $0.6 million, a decrease of 69.6% when compared to $2.1 million during the same period last year. Training center business revenue during the quarter ended March 31st, 2013 was $1.8 million, a decrease of 33.9% from the same period last year, when compared to $2.7 million.

Total cost of revenue decreased 20.6% to approximately $2.1 million during the first quarter of 2013 compared to $2.6 million during the same period last year. Cost of revenue for the online education division decreased 23.3% to $1.4 million during the quarter ended March 31st, 2013, from $1.8 million during the same period last year.

The decrease was mainly attributable to the decrease in revenue. However, cost of revenue did not drop in direct proportion with the decline in revenue, as we had to purchase new study materials to maintain competitive. We incurred certain fixed cost to maintain the accuracy and competitiveness of our online materials.

Cost of revenue for the training center division decreased 14.8% to $0.7 million during the quarter ended March 31st, 2013, from $0.8 million during the same period last year. The decrease was mainly attributable to the decrease in teacher’s salary as our teachers are paid by the number of classes they teach.

Gross profit for the first quarter of 2013 was $0.4 million compared to $2.2 million for the first quarter of 2012. Selling expenses increased by 2.9% to $1.1 million in the first quarter of 2013, from $1.1 million in the same quarter of 2012. The increase in selling expenses was the result of the increase in advertising and marketing expenses.

Administrative expenses were approximately $1.6 million for the quarter ended March 31st, 2013, an increase of $1.0 million for the quarter ended March 31st, 2012. The increase was mainly due to the increase in research and development expenses related to the development of the website platform.

Net loss for the first quarter of 2013 was $3.7 million compared to net loss of $0.1 million for the first quarter of 2012. This translates to basic diluted loss per share of $0.35 for the first quarter of 2013 compared with loss per share of $0.01 for the first quarter of 2012.

Turning to our balance sheet, as of March 31st, 2013, the Company had approximately $71.3 million in cash and cash equivalent.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Jared Cohen from JM Cohen and Co. Please ask your question.

Jared Cohen – JM Cohen and Co.

Yes, just a few questions. One, can you give us a little bit detail where you spent the increase in advertising expense this quarter? Was it spent to market for the existing business or for the newer e-commerce business?

Cloris Li

Sorry for the delay.

Jared Cohen – JM Cohen and Co.

No problem.

Cloris Li

The advertising expenses were mostly directed to the on-site training, existing training centers that we’re promoting.

Jared Cohen – JM Cohen and Co.

Okay. Second, I noticed more, just detail-oriented that on your balance sheet, that in your property side, that in your furniture, because I saw that you didn’t really spend that much in terms of key PNE [ph]. Have you looked at the breakout that furniture and fixtures went by $2.4 million. I’m just wondering what that was. Just look at your 10-Q, because I noticed you didn’t spend that much in terms of capital expenditures.

Cloris Li

Okay. These furnitures, most of them are related to our own site training center setup, and a minor part of them is the office equipment.

Jared Cohen – JM Cohen and Co.

Okay, all right. And just, I guess, lastly, when will the announcement of the new e-commerce website to take place or when will you start marketing it?

Unidentified Company Representative

Mr. Cohen, let me translate that question to Mr. Yu first? Fair? Is that okay?

Jared Cohen – JM Cohen and Co.

Yes, sure. No problem.

Xiqun Yu

[Interpreted] Okay. Determining the online platform, it’s under the testing stage and we are expecting the announcement of the marketing for the online is going to start after September. And one of the reasons for continued testing is that because that platform is relatively sophisticated and the first stage of testing the numbers and the results were not here and they want to further optimize the platform before pushed towards the markets.

Jared Cohen – JM Cohen and Co.

All right. Okay, all right. Thank you very much.

Operator

Thank you. Your next question comes from the line of Laurence Udell from Udell Advisors. Please ask your question.

Laurence Udell – Udell Advisors

Hi. Could you try to give us more of a feel for what the new online system, what it will do, will it have – what type of information would carry, will be carried on and what type of user would be using it? Are you going to be giving documents and papers and things from the various different schools, professors? Who would the user be? In other words, try to give us – fill out what it is when you say it’s an online exchange? Will students take courses from it? Can they get credit for it or will it just be independent study? That type of thing.

Unidentified Company Representative

Okay. Mr. Yu to update, I need to translate that first.

Xiqun Yu

[Interpreted] Okay. Well, first of all, the online platform is going to be video-based online platform which the schools and the professors could provide their call-based video to their students. And it covers users from universities to training centers, to middle schools or primary schools.

Basically, it’s providing not only the materials, but also after-school services and teaching materials for students to teach – to learn by themselves. That’s the first one. And then for details for the school and product itself, there are some descriptions in the company’s 2012 annual report, which I encourage you to read a bit in the annual report.

And on the other hand, the online platform is also a cloud-based platform, which means different education institutions can post their courses and their education materials online for their own students or for other teachers.

And you can also – another analogy is going to be the Taobao or Alibaba for educational institutions, which means that the company, China Education Alliance provides a platform to all these educational institutions for them to provide or post their contents online in that style. And the company and the educational [inaudible] the BEU get a call of the revenues from all those educational institutions.

Laurence Udell – Udell Advisors

Okay. As it gets turned on, okay, how does the company get compensated for providing the network? Is it by the school, is it by the student, is it by both? And then, as it gets turned on, what would you consider to be a successful launch of the product and how many potential customers?

Try, if you could, give us some of the thinking as to why you launched it, how many people, students, schools it will be used, what you would consider to be a successful launch in terms of how many people or revenue or whatever, well, you’re going to measure it, in terms of going forward and sliding? As I understand it, this is a unique network.

Xiqun Yu

[Interpreted] Well, to answer your question, basically, the company hoped there’s thousands, so tens of thousands of schools to provide their content, to use this platform to continue their contents or provide their contents to their students. And the students would then buy the content of the educational products from the company from the schools. And I mentioned it as a very successful launch. That will be as long as there are schools to provide contents or actually enter into this kind of platform, that will be considered a success, because the students will come along as schools join in this platform.

And this platform actually provides different kinds of company. China Education Alliance provides different kinds of services. The first one is going to be the platform that’s just mentioned and the other one is going to be cloud-based storage, which means schools can provide videoconference and the company provides storage services. And then it’s going to be like Taobao, through the payments and the settlement services to the schools and students.

And the compensation model is going to be two different ways. The first one is going to be, if the students come along and purchase the content directly from the China Education Alliance, and then China Education Alliance is going to provide all those kinds of money. Then part of the money is to the schools. And the other model is going to be, the students purchase some sort of study cards or deposit cards from the school, and then they can use those cards on this platform. And then the school is going to give the company a part of the money.

Laurence Udell – Udell Advisors

Okay, thank you. Just one other point. Do you believe that there will be schools that will be offering online courses for credit over the network, that their students can actually take a course by being on the network and seen the video with the professor or would it just be ancillary to the exact learning?

Xiqun Yu

[Interpreted] Well, to answer your question, actually, the decisions made by the schools who launched their courses or opened their courses on this platform and sell on the company. But the company would gather all the study data and send it back to the schools and have different kind of administrative platforms and functions for the schools to sell off or authorize different user types or different functions for the students themselves. But at the end of the day, it is the school who makes the decision on whether the credit is going to be considered as part of the courses or not.

Laurence Udell – Udell Advisors

Okay, and I would ask one more thing, and that is, will you please try to keep the shareholders informed more about it as the launch starts and as people sign up, the period, so that we could – I mean, stockholders would like to have some ability to measure the progress. And I would hope that you would do a little more public relations in terms of how the company is succeeding in this across. In other words, like periodically tell and come out and say we’ve launched the product, we have X number of subscribers, 25 schools, 50 schools, 1,000 schools, whatever the numbers may be.

And with that, I’ll relinquish the line, but I would hope that you would try to be a little more productive in terms of giving the shareholders a view of what’s happening with the company.

Xiqun Yu

[Interpreted] Okay. So the company will seriously consider your suggestion and also we’d like to do – we consider very seriously as to how launch these products and disclose information properly in the future.

Laurence Udell – Udell Advisors

Okay. I think it would be important because once he launches it, I would expect he would want to advertise it and bring out its success just as like I do with Google or, say, how many subscribers they have, how many people have signed up, okay? That alone becomes its own advertising. But thank you, and let’s look forward to a very fruitful new beginning.

Xiqun Yu

Thank you very much.

Operator

Thank you. Next, we have a follow-up question from the line of Jared Cohen. Please ask your question.

Jared Cohen – JM Cohen and Co.

Okay, just two questions. One, just want to confirm now, all the lawsuits have been settled and there’s nothing else out there? That’s the first one.

Cloris Li

[Interpreted] Okay. Just to confirm you, all the lawsuits have already been settled and all the payments have already been made by the insurance company, and you would be able to find information from the 8-K of the company as well.

Jared Cohen – JM Cohen and Co.

Okay. And just secondly, just with the existing business of online and the training center. Can you give us an idea both sequentially what type of, I guess, the easiest way, quantitative, what type of increase and even in this quarter, what you’re seeing qualitative, or is the company seeing some type of increase in business both in terms of users or – both with the online or in the training or subscriber, people going online and in the training centers?

Xiqun Yu

[Interpreted] Okay. Regarding the online business, actually, it was not ideal in the past quarter. And one of the most important reasons is because, in the past, the company subtracts it what’s based on brand value and the names of the companies. But right now, because of everything that happened in the past, it creates some difficulties for the company to market it out in the business. And also, some of the competitors provide some free materials to the students as well, which also caused part of the difficulties for the company in terms of competition.

And so the training center also faced fierce competition in the market as well. Competitors like New Oriental with relatively good brand name and brand value is also entering into this market recently, and that creates some competitions to the company’s business. But the company was taking proactive measures to try to solve that.

The new online platform is going to be launched in the future and, hopefully, they would provide – the company provides more testing resources and promotion and marketing to gather more students, trying to get more students online. And the company also launched more training centers, on-site training centers like the ones in Beijing and trying to make the business grow again.

Jared Cohen – JM Cohen and Co.

Okay. Can you give us an idea how the centers in Beijing were doing more recently? Are they starting to see a little bit of a turn in their business?

Operator

Please hold the line. The conference will resume shortly. Continue to standby the conference will resume shortly. And your conference resumes.

Xiqun Yu

[Interpreted] Well, the company already established more than 10 training centers in Beijing, and it’s a relatively vast expansion. And after the company builds its presence in the Beijing market, they were intended to expand to national-wide more parts in the future.

Jared Cohen – JM Cohen and Co.

All right, thank you.

Operator

Thank you. (Operator instructions) There are no further questions. At this time, I would now like to hand the conference back to Mr. Cloris Li for closing remarks. Thank you.

Cloris Li

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

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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