ChinaEdu Corporation's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Sep.12.13 | About: ChinaEdu Corporation (CEDU)

ChinaEdu Corporation (NASDAQ:CEDU)

Q2 2013 Earnings Conference Call

September 12, 2013, 08:00 AM ET

Executives

Helen Plummer - Senior Investor Relations Coordinator

Julia Huang - Executive Chairman

Shawn Ding - Chief Executive Officer

Yixin Mei - Chief Financial Officer

Analysts

Mark Marostica - Piper Jaffray

Operator

Hello, and thank you for standing by for ChinaEdu’s Second Quarter 2013 Earnings Conference Call.

At this time all participants are in a listen-only mode. After management’s prepared remarks there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Helen Plummer, Senior Investor Relations Coordinator for ChinaEdu.

Helen Plummer

Hello, everyone, and welcome to ChinaEdu’s second quarter 2013 earnings conference call. The company’s second quarter earnings results were released earlier today and are available on the company’s Investor Relations website at www.chinaedu.net as well as on newswire services.

Today you will hear from our Executive Chairman, Julia Huang, who will talk about strategy, Mr. Shawn Ding, Chief Executive Officer, who will discuss our business operations, and Mr. Simon Mei, Chief Financial Officer, who will discuss our financial results in more detail. After their prepared remarks the team will be available to answer your questions.

I will now turn the call over to ChinaEdu’s Executive Chairman, Julia Huang.

Julia Huang

Thank you, Helen and thank you everyone for joining us today. Overall we are pleased with our operational and financial performance in the second quarter of 2013. We had another profitable quarter and are confident with the long-term success of the company. We concluded the Spring Semester for our core online degree program with growth that exceeded our expectations. Excluding one-time contributors to net revenue including certain technology services provided to our online degree program, our top line grew in-line with the growth we’re seeing on enrolled student population.

However we maintain a conservative outlook for the fourth semester as a whole as we remain committed to quality of the students we’ve enrolled. As we focus through the year our team will continue to execute on plans laid out at the beginning of the year. These plans include continuing to investment in development of new e-learning technology as well as the development of the interactive and mobile learning applications.

I would like to take this opportunity to update our investors on our proposal to go private that was announced on June 20, 2013. The proposal is currently moving forward. A special committee was formed consisting of the three Independent Board Directors of our Board. They are currently assessing the proposal with help from independent financial advisors as well as the independent legal team.

The Buyer group has been cooperating well with the special committee. The Buyer group is currently with bank's financing with various banks.

With that I will now turn the call over to Shawn.

Shawn Ding

Thank you, Julia. Ladies and gentlemen thank you for joining us today. Overall we are happy with our execution of plans laid by our Board and management team at the beginning of the year. The reflection of this was seen in our financial performance released earlier today.

In the Spring Semester of 2013 we had 221,000 students enrolled in our online degree programs which is 14.5% year-over-year growth. While comparing this year-over-year growth with the year-over-year growth seen when comparing spring 2012 versus spring ’11 student enrollment growth has slowed down from 21.4% to this year’s 14.5%. This is due to the fact that we have increased our focus on the quality of our student enrollment across the larger student banks.

The 2013 fourth semester is currently in the last stage of student enrollment based on preliminary numbers we believe that 2013 fall recruitment results will be in line with our expectations.

During the quarter there was some negative trends about online degree programs in general. China’s People's Daily, the most important government national newspaper published an article in early May questioned the quality of online degree programs. As a result we believe going forward there will be tight measures implemented to ensure the quality of online degree programs offered. While this might put pressure on enrollment growth in the short-term we’re quite confident about the quality of the online degree programs at the core of our business.

To ensure the ongoing quality of our online degree programs we’re now paying extra close attention to the quality of the students we enroll. By the end of second quarter of 2013 ChinaEdu’s learning center network was providing recruiting services for 23 universities with 125 operational learning centers of which 61 were proprietary centers and 64 were contracted centers.

We are continuously focused on improving our operational efficiency through process reengineering and standardization, enhancing growth and the positive impact that these changes have made and we are optimistic about the positive effect these will bring in 2013 and beyond. In the second quarter we continue to make investments in technology for both our degree and non-degree programs as we consider technology to be the cornerstone and key enable of our business.

The first phase of new platform will be operational in the fourth quarter of 2013. We will continue to invest further in 2014 in the development of technology systems and will meet the demand of online earning.

Our one-on-one online tutoring and physical schools are also performing well, in addition facing regulatory uncertainty we are aggressively developing online children products and we believe this will be important revenue segment for us in the long term.

Thank you and with that I will now turn the call over to our CFO, Yixin Mei.

Yixin Mei

Thank you, Shawn. Ladies and gentlemen, thank you for joining us today. Thanks to the strong reaction of plans laid out by our Board of Directors and the senior management team the second quarter's key financial enablers as top line, gross margin and operating margin all matched or beat our expectation.

Total net revenue was $22.9 million for the second quarter of 2013 exceeding the company’s guidance range for the quarter and representing a 21.9% increase from $18.7 million in the corresponding period of 2012. Excluding non-recurring revenue of $1.2 million including certain technology services provided to our online degree programs total net revenue increased by 16.1% to $21.7 million.

The adjusted total net revenue increase is in line with our online degree revenues due to increase of 14.5%. Gross profit margin continued to improve increasing from 66.3% in the second quarter of 2012 to 68.5% in the second quarter of 2013. Operating margin also improved from 19.7% in the second quarter of 2012 to 29.7% in the second quarter of 2013.

The increases in both the gross margin operating margin are mainly due to increased net revenue that has included some one time contributors as well as effects of cost controls across our company.

The number of the revenue students enrolled in our core online degree programs during the 2013 spring semester increased by 14.5% year-over-year to approximately 221,000 students.

We ended the second quarter with a strong balance sheet as well. As with June 30, 2013 we have approximately U.S.$74.2 million in cash and cash equivalents term deposits and short term investments on our books. Excluding bank loan of $46 million we had a net cash of $38.2 million at the close of the first half of 2013. Looking ahead we are confident that with the steady and healthy financial performance for the full year of 2013.

Now turning to guidance for Q3, we expect total net revenue in the third quarter of 2013 to range from U.S.$21.5 million to U.S. $22.3 million representing a 6% to 10% increase from U.S. $20.2 million compared to the corresponding period of 2012.

At this time we would like to open the call up to your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mark Marostica from Piper Jaffray. Please go ahead.

Mark Marostica - Piper Jaffray

Hi and good evening everyone. My first question is in regards to your comments around program quality for online programs and I am just curious whether or not the Chinese government has taken any formal steps or implemented any regulatory measures to address concerns on program quality and if not what you are doing differently internally to address these concerns.

Shawn Ding

Hi Mark, this is Shawn. I will take the question. As of today there has not been any measure officially announced by the Ministry of Education. However we have been working very closely along with other online degree institutions or colleges, together with the Ministry of Education in discussing and in designing different kinds of quality control measures. So we believe these measures will be announced and will be implemented in the very near future.

Julia Huang

Yeah and Mark in addition to Shawn just said because of this negative news on the daily, China People's Daily so we estimate in the short term we’re not going to see MOE are going to approve new schools because they do have a concern due to the publicity. So that’s why we for ongoing basis we take a more conservative approach in terms of projecting the growth.

Shawn Ding

Let me put this way Mark, that it’s our judgment so it’s not based on any official announcement from the MOE.

Mark Marostica - Piper Jaffray

Okay I understand, that's helpful. And then you mentioned the focus going forward on interactive and mobile technologies. Can you give us an update with regards to mobile in particular and where the company is focused, any current status around mobile development would be helpful. Thank you.

Julia Huang

We have both K-12 online after school programs and also we are newly developing and planning to develop an adult professional training or career oriented training website and along the process developing interactive website to do the traffic, we are also developing applications of using both Android and iOS systems.

We have seen our K-12 tutoring website, our tutoring application has been tracking pretty well on the mobile application. It has grown over couple of hundred versus last year. So we have seen our total WAT website as well as the iOS and the Android application has been growing significantly although the bases is relatively small but we have seen a good sign.

Mark Marostica - Piper Jaffray

Great. And then lastly if you can give us any thoughts regarding timing and next steps concerning the go private transaction, that would also be very helpful for us. Thanks.

Julia Huang

Mark right now everything is moving forward so we really cannot give you any certain timing because right now the Special Committee is in the process of reviewing all the material and working with the Financial Advisor and Legal counsel on what is required to move forward.

So there we cannot give you timing on what we’re trying to do. In terms of bank financing we’re still in the process of negotiations so we also cannot give you certain timeline at this point.

Mark Marostica - Piper Jaffray

Okay Thank you I’ll turn it over.

Operator

(Operator Instructions). I’ll now hand the call back over to Helen Plummer, Senior Investor Relations Coordinator for ChinaEdu.

Helen Plummer

Thank you again for participating in our second quarter 2013 earnings conference call. As always we appreciate your interest and support. If you have any questions please do not hesitate to contact us at ir@chinaedu.net. Thank you very much. And have a great day.

Shawn Ding

Thank you, everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!