China Distance Education Holdings' Management Presents at the Deutsche Bank Depositary Receipts Virtual Investor Conference (Transcript)

China Distance Education Holdings Limited (DL) Deutsche Bank Depositary Receipts Virtual Investor Conference June 19, 2013 10:45 AM ET

Executives

Ping Wei - CFO

Analysts

Zafar Aziz - Head of DR Market Solutions, Deutsche Bank Depository Team

Zafar Aziz - Head of DR Market Solutions, Deutsche Bank Depository Team

Hello and welcome to our next presentation by China Distance Education. My name is Zafar Aziz, Head of DR Market Solutions at Deutsche Bank Depository Team. Before I introduce you to the next presentation, a few quick points. Towards the end of the presentation there will be a Q&A session. Please click into the China Distance Education booth where representatives will be ready to answer your questions under the chat talk function.

Please also remember that after the presentation and the Q&A session, which should last around 15 minutes, you can continue asking questions. Otherwise if you wish to listen to the next presentation, please click back into the presentations area and click the next presenter. On a final note, all of today’s presentations will be recorded and are available via the Deutsche Bank website, www.adr.db.com two days after the event is closed.

At this point, Wei Ping, CFO, for the China Distance Education – to you Wei.

Ping Wei

Thank you for watching the company presentation for China Distance Education. Recorded in our own high-definition studio and produced by our in-house Courseware Department.

Before we start, please read through the Safe Harbor statement incorporated in this presentation. Who we are? We are the largest online education provider in China, based on annual paying enrollments. We focus primarily on online professional test preparation, continuing education, and professional development courses. The core verticals or professions that we offer courses in are accounting, healthcare and construction and engineering.

We were founded in 2000. Today, CDEL has become the most well-known and comprehensive online education brand in China, offering over 22,000 hours of audio-video courses, covering 13 verticals. We have grown fast. For the past 10 years we’ve grown our enrollments at a CAGR of 50%. In fiscal year 2012, our course enrollments have exceeded 2.2 million students.

Our success is because our high-quality online courses help students improve their passing rates on their exams and we help students become more employable. We are a hybrid company. On one hand, we are an education company that provides high quality content as any high quality education company. On the other hand, we’re very much an internet company as well.

We have developed a robust and powerful online learning platform. Our websites are most visited vertical portal websites for the core verticals that we offer courses in. Those websites attract over 1 million independent IP hit a day and close to a 100 million page view on a daily basis. In addition, by September 30, 2012 we have already over 19 million registered users. Our vision is to establish a life long and comprehensive online learning ecosystem for our students so that no matter what profession our students choose to go into, we will be there to help them pass exams to become professionals and satisfy continue education requirements to stay a professional of this standing.

Why do we present an unique investment opportunity? Firstly, China’s education market is huge and growing fast. CDEL is the leading online education provider in China. The leadership position is gained throughout constantly providing high-quality courses and superior services to our students, helping them to achieve superior results.

Our online model is highly scalable and replicable and now provides multiple delivery channels through which our students can access our diverse course offerings with great convenience and flexibility. Based on the strength of our offering and the results we help our students achieve, we have established well recognized and respected nationwide brands, which in turn help us further grow our businesses.

Our diversified course offerings not only help us address the need of a larger market, but also helps us mitigate potential risk in any given vertical and our management team has the deepest industry expertise and has been very stable.

Looking at some of the macro drivers behind our business and industry. A recent report show that by end of March 2013, only 30% of this year’s college graduate has found jobs, a bleak outlook for almost 5 million college graduates. At the same time, supply of qualified professionals especially the ones at senior level are still not keeping up with market demand. The disparity between these two we believe are professional qualifications and experiences.

So, it is a little surprise that according to CCID report commissioned by us, the professional education and test preparation market in China is estimated to continue to grow at a CAGR of about 26%. Also, according to CNNIC January 2013 report, there are in total about 420 million internet enabled mobile devices in China. Regular desktop and laptop internet users have exceeded 650 million in total as well, paving a great platform for our online education providers.

In addition, consumers in China are becoming more and more comfortable with the concept of e-commerce, further supporting the growth of our mainly online oriented services. We are the leader in online education space and we have grown fast. We have number one online market share of all our core verticals that we provide test preparation courses for, accounting, healthcare, construction and engineering, higher education for self-taught learners and law.

In particular, for accounting and healthcare verticals we each have over 70% online market share. We achieved our fast growth by focusing on providing high-quality courses and course related services to help our students achieve improve their results. We retain the best lecturers to record courses. As we’re online we only need a few lecturers for any course we offer. Courses recorded by those highly qualified lecturers are also put through strict quality control processes to ensure best quality possible and we adjust our lecture team based on feedbacks we received from our students.

We also provide a comprehensive service package to our students to help them study by there. We have a well trained pool of over 200 to this whose primary job is to answer any students study related questions. 100% of those questions are answered within 24 hours in writing and have gone through quality review before they’re released to the public to ensure quality.

In addition, over the years we accumulate a valuable database of SAQs, exercise questions, mock exams and answers. Such data are also made available to our students providing a one-stop shop for all our students learning needs. Our students have their personalized study account with us. They can manage all their study planning, progress and results online with their accounts. They can also interact with their peers through our online community.

We also have a customer service center that is accessible by phone 7/24, for any questions or issues our students may have. This comprehensive package makes our students learning highly effective and we constantly achieve 99% or higher student succession ratio. In addition, our students enjoy a passing rate that’s typically about 20 percentage points better than nationwide average. For example, the nationwide average passing rate for CPA exams are around 20% while ours has been as high as 40%.

We primarily focus on professional education for young adults aging 22 to 39 focusing primarily on accounting, healthcare and construction and engineering courses. Such focus ensures the high quality of our contents and services. In addition, due to the high scalability of our model, we can easily expand into other age groups. Newer areas we expanded into include, K-12 at school tutoring for kids and business start-up training and self taught test preparation and study process monitoring programs for post secondary students.

As we have build a powerful online learning platform, in recent years we realized that such platform will allow us to easily add third party content to our offerings as well and we have successfully introduced some third party contents to our platform to in retail course offerings. Our growth and extension are in part powered by our powerful online mobile learning platform. As you can see we offer our courseware and content across a wide spectrum of online and mobile platforms. We rolled out Apple IOS and Android based tablet and mobile versions of our courseware for our test preparation courses in 2012 providing our students with efficient and effective channels to access our content anytime, anywhere.

In addition, we have upgraded our core test preparation courses to include high definition courseware featuring film quality, high definition streaming video with teachers delivering their lecturers using an interactive digital blackboard. This provides students an interactive virtual classroom environment just like you see here with our corporate presentation.

We have also recently launched some free mobile learning support applications where we provide students with daily learning tips and exercises among other things. This free applications help attract more students to us and enhance our brand awareness. This new platforms and learning solutions are a major improvement to our traditional course format and have been very well received by the market, driving accelerated enrollment growth since their introduction.

We have developed strong brand recognition particularly in accounting, healthcare and other of our core verticals as a result of our constant focus on quality, results and student learning experience. Such brand recognition is proven by the awards we have received. This brand recognition helps us to grow faster and give us premium pricing power and our business is run by experienced and stable management team. As the newest addition, I have been with the company for over five years.

Next let’s take a look at CDEL’s growth strategy. First, we continued to increase enrollments and ASP in existing courses. Secondly, we will expand our course and content offerings in existing verticals and expand our course offerings into newer verticals. Thirdly, we aim to build a comprehensive lifelong learning program. Continuous education and professional development courses are a part of the lifelong learning program. This will enable us to generate more revenue from the same student and keep students with us longer effectively lowering student acquisition cost per student.

Finally, we will seek to grow our business through our online learning open platform whereby anybody with proprietary knowledge can offer courses and anybody with learning needs can get their desired courses through our platform effectively building an educational table leveraging on our strong understanding both of internet and of education.

As shown on the chart on the right hand side, while we are the leader in online education with number one market share our overall market penetration is still very low. For accounting our most mature vertical there are 4.6 million test taker a year, and also 13.5 million of continuous education students on a yearly basis.

We had only reached 11% market penetration on test preparation side last year a long way for us to grow enrollments. For healthcare and construction and engineering verticals each with over 2 million test takers a year and 6 million continuous education market a year we have just scratched the surface. We believe that our growth strategy will position us well to capitalize on a huge growth potential across our education verticals.

In summary, our core competencies are in providing high quality results oriented courses, course related services via our highly powerful online learning platform and giving student’s best in class learning experience to help them achieve superior results. We believe such model will drive sustainable long-term growth.

Now let’s take a look at our financial performance. We have just released our March 31, 2013 quarterly results on May 21. We have experienced strong growth in recent years. We have grown our revenue at a CAGR of 26% in the past three years. Our gross profit grew at a similar level and our net income grew even faster at a CAGR of 31% proving the highly scalable nature of our unique online learning model.

In the second quarter of fiscal 2013 our most recent quarter we reported $13 million of revenue as 5.4% increased from last year. As our cost and expenses are relatively fixed our net income decreased by about US$2 million on non-GAAP basis to about US$900,000. This was not because our growth slowed down, in fact in this quarter our operating cash flow grew at 44.4% and our online cash registration grew at 40% year-over-year.

The slow revenue growth was due to the delayed enrollment timing of six months of a major exam preparation course we provide, Accounting Professional Qualification Exam or APQE. Such delay pushed a significant portion of APQE GAAP revenue to the second half of this fiscal year resulting in 48% decrease in APQE revenue in the quarter. Excluding APQE other revenue for the quarter has grown at a normal pace of about 26.4%.

As you can see from this slide, while total cash registration receipts for the first two quarters of this fiscal year was down by 13% by May 16, year-to-date cumulative cash receipt for APQE has grown 35% over last year indicating that operationally APQE will perform strongly for this fiscal year contributing to a much stronger second half 2013 revenue growth. As most of our cost and expenses are either fixed or periodic in nature our bottom line for this quarter is much lower as well with the significant amount of profits delayed to later quarters of this fiscal year.

Our fiscal year ends on September 30, therefore Q1 was from October to December. Our business is seasonal primarily driven by exam dates. Most of the tests that we offer courses for are administered on annual basis. Test dates are primarily in the second half of our fiscal year or in October, so we typically require highest revenues in fiscal Q3 and Q4.

We have a strong balance sheet. As of March 31, 2013 we had US$53 million of cash and cash equivalents, term deposits and restricted cash and no debt, also we collect cash in advance in most cases and therefore having low collection risk. We have already generated US$12.3 million of free cash flow in the first two quarters of this year and anticipate to generate US$16 million or more free cash flow for this fiscal year.

Looking to our guidance, we expect fiscal year ’13 full-year revenue in the range of US$65.1 million to US$67.2 million, representing year-over-year growth of 25% to 29%. For Q3, 2013 we expect our revenue to come in between US$16.5 million and US$17.2 million, a 26% to 31% of year-over-year growth.

That concludes our presentation. Thank you.

Question-and-Answer Session

[No Q&A for this event]