Noah Education Holdings Ltd. (NYSE:NED)
F1Q 2014 Earnings Conference Call
November 21, 2013 7:30 AM ET
Dong Xu – Chairman, Acting Chief Executive Officer, Chief Strategy Officer and Founder
Dora Li – Chief Financial Officer
Good morning and good evening, ladies and gentlemen. Welcome to Noah Education Holdings Limited First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, there will be a Q&A session. As a reminder, this conference is being recorded.
Joining the conference today are Mr. Dong Xu, Chairman and Acting CEO and Ms. Dora Li, CFO. After the U.S. markets closed yesterday afternoon, Noah issued a press release announcing its unaudited financial results for the first quarter 2014. The release is available on the Company’s IR website at ir.noaheducation.com along with a PowerPoint presentation for today’s call. This call is also being broadcast live over the Internet.
Before management’s presentation, I would like to refer to the Safe Harbor statement in connection with today’s conference call. This call may contain forward-looking statements within the meaning of the Private Securities Litigations Reform Act of 1995 including certain expectations and goals, which are subject to numerous assumptions and risks.
Forward-looking statements involve known and unknown risks and uncertainties, many of which are beyond our control, which may cause actual results to differ materially from any future results or achievements implied by such forward-looking statements. The Company’s actual results could differ materially from those contained in the Risk Factors sections of the Company’s final prospectus or with recent filings filed with the Securities and Exchange Commission.
Unless required by law, the Company undertakes no obligations to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Please take note that all numbers expressed in the conference call are in renminbi and maybe refer to year-over-year assumptions comparisons rather are against first quarter 2013 unless otherwise stated.
I would now like to turn the conference over to Noah’s Chairman and Acting CEO, Mr. Dong Xu. Mr. Xu will speak in Chinese followed by his interpreter in English. Mr. Xu, please go ahead.
Thank you for joining us today in our first quarter fiscal 2014 earnings conference call. I hope you all had a chance to read our earnings press release.
We have consistently exceeded guidance for the past eight quarters. And I am very pleased to report yet again a 27 year-over-year increase of revenues. We have achieved this by our prudent execution of organic growth and acquisition strategy in what is a traditionally slow quarter into the summer break.
Our priority for fiscal 2014 is to continue growing organically. In terms of expansion, revenue expansion, apart from ramping up the utilization rate of our existing kindergartens and schools, we are also working hard in developing new stream of revenues.
We are diversifying our service offerings to provide early childhood education program and also leveraging our existing relationship with a real estate developers to explore opportunities to roll up new schools and kindergartens, particularly in Eastern China. With our strong cash position we are all so actively pursuing acquisition opportunities to expand our geographic reach in other parts of China.
Before I turn to Dora to walk you through our financial performance, I would like to reiterate that we remain committed to build Noah as a leading education service provider and support the life-long education exploration of the Chinese. With an expanded footprint, Noah is in an excellent position to achieve further growth and success to deliver long-term value for our shareholders.
I will now hand over to our CFO Ms. Dora Li. Dora please.
Thank you, Mr. Xu. As the details of the financial results for the first quarter 2014 are available in our earnings release. I would like to highlight the key financial metrics. Again, all numbers are in renminbi and we refer to year-over-year comparisons against first quarter 2013 unless otherwise stated. We are very pleased to report that Noah continued to grow in the first quarter with year-over-year improvement in top-line exceeding guidance.
On Slide 5, net revenue for the quarter was up 27% to RMB49 million, the increase was driven mainly by the organic growth from existing kindergartens and the schools and incremental revenue from acquisition of newly opened kindergartens.
If we breakdown the net revenue by business segments for the quarter, revenues from kindergarten operations was up 36% to about RMB22 million, accounting for about 44% of net revenue. The growth was mainly driven by incremental revenue contribution from DDK Consulting and Xiaoxiao Consulting, which were acquired in the second quarter of fiscal 2013.
Revenue from primary and the secondary school operations was up 45% to RMB17 million accounting for 35% of net revenue. The increase was due to revenue contribution from the ramping up school and improved utilization of existing mature schools. For the quarter, revenue from supplemental education operations was down 6% to RMB10 million accounting for 21% of net revenue. The decrease was primarily due to a decrease in tuition fee collected during the summer term.
On Slide 6, gross profit for the first quarter was up 12%. The increase in gross profit was primarily driven by the continued strong growth of the kindergarten as well as the primary and the secondary school operations. Gross profit margin for the quarter was 34%, compared to 39% in the first quarter of fiscal 2013. The contraction in margin was mainly due to the incremental cost incurred from DDK Consulting and Xiaoxiao Consulting and newly opened kindergartens, which is well within our expectation. We expect this to normalize in the subsequent quarters.
In addition, revenue contributed from kindergartens increased to 44% of total revenue in the first quarter 2014 from 31% in the same period last year. Our margin for the third quarter is typically lower since Kindergartens and school are on summer break, with no revenue being recognized.
At operational level on Slide 7, we continued to improve our cost structure as a percentage of revenue. General and administrative expenses improved to 48% from 56%. Sales and marketing expenses largely remained flat. R&D expenses down to 1% from 2%.
On Slide 8, net loss for the quarter was RMB0.4 million, our EBITDA improved to RMB3.7 million up from RMB2.3 million basic and diluted loss per share for the quarter was 0.02. Non-GAAP net loss excluding share based compensation expenses for the quarter as shown on Slide 9 was RMB0.4 million this translates to non-GAAP basis and diluted losses per share.
Moving to our balance sheet summary on Slide 10. Cash and cash equivalents and short-term investments increased to RMB572 million on September 30, 2013. In addition, deferred revenue related to tuition fees and the franchise fees was RMB72 million on September 30, 2013, compared with RMB37 million at the end of June 2013. This revenue will be booked in the following quarters according to the call schedule. In terms of per share value, our cash per share at the end of September 30, 2013 increased to US$2.56. Cash plus real asset value at carrying value also increased to US$3.02 per share and net asset value per share was US$3.60.
On Slide 11, you can see that operating cash provided was RMB 52 million. Free cash flow for the quarter was RMB42 million compared to an outflow of RMB3 million in the same quarter last year. We continue to deploy our cash to invest in organic and acquisitive growth. In the past 12 months, we have generated about RMB123.1 million cash from our operations, while CapEx for organic growth were about RMB37 million and investment for merger and acquisition were RMB28 million.
Now, let me walk you through our business and operations update and then move on to outlook and guidance. Please refer to Slide 12 to 15 for updates on our three business services. On Slide 13. Slide 13 demonstrates the gradual shift of our revenue mix towards kindergartens which now stand at 42%, up from 41% one year ago.
Moving on to Slide 14, we now have 48 kindergartens in our network up by 41% operated by Yuanbo Education, Wentai Education and Little New Star. They are mostly located in three regions, Guangdong Province, Hunan Province and the Yangtze Delta region. We have 11 kindergartens that are in their respective ramp up periods. And we have closed down one non-profitable kindergartens operated by Wentai as the lease contract expired.
Total enrollment from our kindergarten operations was over 12,700 up by 39%. In terms of utilization, the overall average rate attained was 83%, due to the increase of new kindergartens, while the average utilization rate for the 11 ramp up kindergartens improved from 41% to 50% sequentially. The 37 mature kindergartens were 93%.
On Slide 15, our primary and the secondary school operations consist of five schools all operated by Wentai and located in Guangdong Province. The total enrollment was up 18% sequentially to approximately 5,700. The utilization rate for the school at ramp up stage was up sequentially from 38% to 63%, while the four mature schools are over 100%. In fiscal 2014, optimizing the utilization of the ramping up school and enhancing profitability for the mature schools will be our top priority in this business segments.
Our supplemental education operations include the operation of training centers, sales of teaching materials and the franchise fees from Little New Star. Our 10 training centers are located in Hunan and Shanxi Province. The total enrollment is approximately 3,600.
Looking ahead on our guidance based on organic growth on Slide 17. For the second quarter of fiscal 2014, we expect the net revenue to be in the range of RMB66 million to RMB70 million, a 6% to 12% year-over-year growth. Our net revenue guidance for the full fiscal 2014 is expected to be in the range of RMB237 million to RMB251 million, a 12% to 19% year-over-year growth. Again, this is based on organic growth only. The forecast reflects the company’s current and preliminary view and is subject to change.
Before we open the call questions, I would like to recap the consistently strong growth in our business on the financial performance with enormous growth in the education market, our future opportunities on the prospect are limitless more strategically positioned to reach the benefit of this growth and we are confident that we can deliver continuously strong growth and generate long-term value to our shareholders.
This concludes our presentation; we would like now open the call for questions. Operator please.
Yes, thank you. We will now begin the question-and-answer session. (Operator Instructions). Please hold while we assemble our roster. (Operator Instructions). At this time, there are no further questions. So I would like to turn the call back over to Dora for any closing remarks. Actually we do have a question from Jung Ji [ph] Private Investor. Please go ahead.
Hello, congratulation for the strong quarter. So only have one question that, it seems now your second quarter revenue forecast is pretty low, I just want to know why and it seems like [ph] even according your organic growth should be in the range of 12% to 15% and your second quarter forecast only 5% to 11% so that’s my question. Thank you.
Thanks for your question. Yes, second quarter of fiscal forecast is purely our organic growth based on our current portfolio and it may have upward potential if utilization rate will [indiscernible] when we are going up and also there might be potential for new openings into our current portfolio. So I will like to see our current forecast is our base case scenario for the second quarter.
Okay, okay thank you. Actually I have another question. Excuse me. So you have so much cash there and have you ever considered to the cash dividend or to a stock repurchase?
Well, thanks for the question. Actually our company is still in the investor mode and our aim is to continue to grow our business and invest for the future. And you can see there are lot of opportunities in this market and we have too many potential to expand our business and the company is determined to grow our business through organic and acquisitive growth. So we believe through this strategy we can deliver a sustainable and profitable growth for the company for the future and we can deliver a long-term value to our shareholders. Thank you.
Okay. And it seems several days ago, [indiscernible] that provides free prepaid service. And any comment on this policy?
Pardon me; can you repeat your question again?
So I know that as far as I know, [indiscernible] have a new policy today all children can get a free prepaid kindergarten service. So I think that policy might have some adverse effect on your company or do you have any comment on that?
Okay I see, I see, I see, what your question is. I think in the general picture and the kindergarten market has great potential and in each individual province they may have slightly different policies towards the private kindergarten market. I believe most of the provinces they are encouraging the private kindergarten to grow and through different ways. I think even in Nanjing, even though they have you know the policy to provide the – like the free prepaid education, they will now provide different like subsidy strategies to the private kindergartens to help them to provide services for the kids. So in general I believe in addition you see that each of the one – policies in China I think will have great potential for that full potential for these segments as well.
Oh! yes, I noticed that is a pretty good news for you. So thank you and congratulation.
Thank you. (Operator Instructions). All right, at this time there are no further questions in queue. So I would like to turn the call back over to Dora for closing remarks.
Thank you, Operator. And thank you all for your participation. In summary, we will continue to execute our program strategy, focusing on business growth and operational efficiency to achieve profitability in the following quarters. That concludes the call. Thank you for joining us today and we look forward to updating you on our progress at the next earnings call. Have a nice day.
Thank you. That concludes today’s teleconference, thank you for your participation. Have a nice day.
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