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Executives

Christian Arnell - Investor Relations

Cloris Li - Chief Financial Officer

Analysts

Jared Cohen - JM Cohen & Co

China Education Alliance, Inc. (OTCQX:CEAI) Q3 2013 Earnings Conference Call November 15, 2013 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the China Education Alliance Third 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, Friday 15th of November 2013.

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

Christian Arnell

Thanks Han. Good morning and good evening to all of our participants. Welcome to China Education’s third quarter 2013 earnings call. You may find a copy of our earnings press release that we issued this morning in the IR section of our website at chinaeducationalliance.com or through the newswires.

Joining me today on the call are this company’s CFO, Ms. Cloris Li. Unfortunately, Mr. Xiqun Yu, Chairman and CEO of the China Education Alliance is unable to join us tonight as he is away in business.

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 a Q&A session where Cloris will take your questions.

I remind you 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.

Chairman Yu’s has referenced some prepared remarks in English, which I will now represent.

Hello, and welcome to China Education’s third quarter 2013 financial results conference call. I am pleased to report that we are now very close to finalizing the new web-based education platform that I believe will truly get us a leading position in China’s educational landscape. The rise of e-commerce impart computing in China has created opportunities for China Education Alliance and fill the gap by providing high quality education and materials for teachers and institutions to students regardless of their location. We China’s economy remains soft as growth slows, I believe that we are truly creating something new and unique that will differentiate ourselves from our competition.

We are currently in the process of fine-tuning various aspects of the platform, drives functionality and sales in order to meet, where we hope will be the significant demand for our marketplace. Once the platform goes live users will be able to sort through various functions as they create their own unique customized learning platforms, something that does not exist in the market today.

Work is progressing well and I hope to be able to officially launch in the near-term. I am proud of the effort our IT professionals and sales team are putting into lining up the highest quality educational products available while constructing a true dynamic communication medium. We have devoted a considerable amount resources towards developing the technology and infrastructure that is needed to sustain such an ambitious project and are eager to bring it to market.

Cloris will now provide a brief review of the company’s financials for the third quarter 2013. Cloris?

Operator

(Operator Instructions). Ladies and gentlemen Ms. Cloris Li has joined the call. Ms. Li please continue.

Cloris Li

Thank you. Now I would like to review the company’s financials for the third quarter of 2013. Revenue for the quarter ended September 30, 2013 was $1.6 million, compared with revenue of $2.1 million during the same period in 2012, a decrease of 21%. The decline in revenue for the quarter 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, untruthful allegations about our businesses and increased competition. These factors contributed to a decline in students which lead to a decline in revenue. Looking ahead 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 ease of access.

We have contracted technology companies and hired our own professional IT staff to design and build a new web-based platform providing video based long-distance teaching services which encompasses online community systems and online teaching management systems. Additionally, we have established ten new training centers this year in Beijing, and we adopted a new strategic business development plans for 2014 during the quarter which aims to optimize the operations of existing training centers and expand its market share. As such, we believe revenue will gradually recover following the launch of the new web-based platform and the establishment of more training centers.

Online education business revenue during the third quarter of 2013 was $0.5 million, a decrease of 17% when compared to $0.6 million during the same period last year. Training center business revenue during the quarter ended September 30, 2013 was $1.1 million, a decrease of 23% from the same period last year, when compared to $1.5 million.

Total cost of revenue to approximately $2 million during the third quarter of 2013, compared to $2.9 million during the same quarter last year. Cost of revenue for the online education division decreased 34% to $1.4 million during the third quarter of 2013 from $2.1 million during the same period last year. The decrease was primarily due to the temporary decrease in expenditures on purchase of new study materials during the second quarter of 2013 as a result of generating revenue from the online. As a result, the cost of revenue for the quarter decreased more than the decrease in revenue. The company will continue to closely monitor variable costs, while maintaining fixed costs at a stable level.

Cost of revenue for the training center division decreased 20% to $0.7 million during the third quarter of 2013 from $0.8 million during the same period last year. The decrease was mainly due to a decrease in teachers' salary as the company's teachers are paid by the number of classes they teach. During this quarter there was a decrease in number of classes offered when compared to the same quarter last year.

Gross loss for the third quarter of 2013 was approximately $0.4 million compared to gross loss of $0.8 million in the third quarter of 2012. Selling expenses increased by 42% to $3.7 million in the third quarter of 2013 from $2.6 million in the same quarter of 2012. The increase was mainly due to the increase in advertising and marketing expenses. We incurred advertising and marketing expenses of $2.8 million, an increase of $2 million or 69% due to increased marketing and sales promoting activities to build our brand name and reputation.

Administrative expenses were approximately $3.1 million for the quarter ended September 30, 2013, an increase from $2.8 million for the same quarter last year. The increase was mainly due to the increase in research and development expenses relating to the developments of the web-based platform, office expenses and labor costs throughout the period.

Net loss for the third quarter of 2013 was $7.8 million compared to net loss of $6.6 million for the third quarter of 2012. This translates to basic diluted loss per share of $0.74 for the third quarter compared with loss per share of $0.62 for the third quarter of last year.

Turning to our balance sheet, as of September 30, 2013, the company had approximately $62.3 million in cash and cash equivalents.

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

Question-and-Answer Session

Operator

Thank you, ma’am. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Jared Cohen from JM Cohen & Co. Please ask your question.

Jared Cohen - JM Cohen & Co

Yeah, just have a few questions. One, I know that the last quarter you had 35 centers, can you give us a count of the number of centers you have? And where, I know the centers are between Beijing and --. Are you seeing any increase in any of those centers of students anywhere where, you can start there?

Cloris Li

Hi Jared, thanks for the question. In the last conference call in which we had mentioned we have around 35 centers that’s basically around 10 of them in [Liaoning] over the Northern provinces and the rest of them are in Beijing which I think 12 of them were newly opened from end of last quarter and beginning of this quarter. And of course yes, we are trying to get more students joined us by opening more centers under the same brand name, early to, we are very stronger.

Jared Cohen - JM Cohen & Co

Okay. Now in this quarter you spent more on advertising, was that advertising spend in terms of for the learning center business or more for the e-commerce business that you’re getting ready to launch or a combination of both?

Cloris Li

The advertising we spent mostly for the onsite training centers. It’s like summer vacation promotion that we see during the quarter.

Jared Cohen - JM Cohen & Co

Okay. With this e-commerce website that you’re getting ready to launch, will that include both, in-house learning material and out-house and other learning material from other sources or what combination of different materials will include?

Cloris Li

It’s like we’re going to combine the old resources that we had from our online training centers, online education session. And of course we’re going to [impulse] the onsite training center in too by using the same platform as well. So we’re going to combine all our resources together on this platform. And of course we have third-party to join us to put their resources on our platform and use the platform as their tool to their students. So we’re going to charge the different fees for that as well.

Jared Cohen - JM Cohen & Co

Al right, so you will get income from outside, some fees from outside sources?

Cloris Li

Yes. We’re going to, like a managing company or like service provider for them. And of course we charge fees on that.

Jared Cohen - JM Cohen & Co

Okay. And lastly has anything ever happened because you’re going to start offering I guess material from your relationship from Texthelp. Has that ever materialized anything that’s going to start this past September?

Cloris Li

Texthelp is only a small part of what we do for the business. We are only distributing their products in China, we don’t really develop or anything else.

Jared Cohen - JM Cohen & Co

I know that, right. I was just wondering has that started or…?

Cloris Li

Yes, it’s started in July, mainly from July that we’ll start doing promotion and advertising for that product. And we’ll start selling it by then.

Jared Cohen - JM Cohen & Co

Okay. Al right, thank you very much.

Cloris Li

You’re welcome.

Operator

(Operator Instructions). Your next question comes from the line of Jared Cohen from JM Cohen and Co. Please ask your question.

Jared Cohen - JM Cohen and Co

Just one more question then, what do you think will be the key for the company to get really an upturn to revenue? It's been the last really now close to I think about 12 quarters now that it's been in the downturn. Is it going to be more advertising to letting the people know that the company is still around or will it be really the e-commerce website starting or a combination of both or…?

Cloris Li

We're trying to do both. First thing is to get the web-based platform launched and we can reorganize our resources to put on this webpage transform and we're trying to get the online education division revenue mainly generate from the transform and hopefully it can turn out business into gross profit. And on the other hand, we start doing the onsite training centers, like more than a year ago.

By opening more training centers to have our own (inaudible) and to build out onsite training centers reputation hopefully in short-term or not too far away, we can see the breakeven point and we can see the profit after that.

Jared Cohen - JM Cohen and Co

Take the training center business, is it just too cap or is it just let’s say in Beijing too difficult just being tough given the competition in that business?

Cloris Li

Yes because our company started from the online education from the very beginning and then onsite we did really focus on the early stage and until we got that allocation same about three years ago, we started to change the focus not only focus on the online Chinese center but onsite as well. So we're trying to gain the market share in as short as clearly that we can by opening more centers. And of course the competition is very tough in Beijing, especially those well-named centers, they’re really strong to compete with. I think where we stand today, it’s good. Our business, we're still opening more centers so (inaudible) and the operating teams (inaudible).

Jared Cohen - JM Cohen and Co

Is there any particular segment of the onsite centers or is it more vocational training or…?

Cloris Li

It’s like after class examination or separate training.

Jared Cohen - JM Cohen and Co

Okay. All right, thank you very much.

Operator

(Operator Instructions). There are no further questions at this time. I would now like to hand the conference back to Ms. Cloris Li, please continue.

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. Good bye.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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