Noah Education Holdings Ltd. F2Q10 (Qtr End 12/31/09) Earnings Call Transcript

Feb.12.10 | About: Noah Education (NED)

Noah Education Holdings Ltd. (NYSE:NED)

F2Q10 (Qtr End 12/31/09) Earnings Call Transcript

February 12, 2010 8:00 am ET

Executives

Dong Xu – Chairman and CEO

Dora Li – VP, Finance, Controller

Jerry He – CFO and EVP

Analysts

Ella Ji – Oppenheimer

Operator

Welcome to the Noah Education second quarter fiscal year 2010 financial results 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 on February 12, 2010.

Joining the conference today are Mr. Dong Xu, Chairman and CEO; Mr. Jerry He, CFO and Executive Vice President; and Ms. Dora Li, VP of Finance, Controller.

After the U.S. markets closed yesterday afternoon, Noah issued a press release announcing its second quarter fiscal year 2010 financial results. The release is available on the company’s IR webpage at ir.noahedu.com.cn along with a 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 Litigation 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 Factor section of the company’s final prospectus or recent filings filed with the Securities and Exchange Commission. Unless required by law, the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I would now like to turn the call over to Noah’s Chairman and CEO, Mr. Dong Xu. Sir, please go ahead.

Dong Xu

[interpreted] Good morning, and to some, good evening. Thank you for joining us today for our second quarter 2010 results conference call. We delivered another solid performance this quarter with revenue growth of 14.5%, net income growth of 73.7%, and a 66.7% rise in basic earnings per share compared with the second fiscal quarter of 2009.

We achieved this growth during what tends to be our seasonally slow quarter and have made restructuring of our senior management team. Neither of these factors prevented us from executing our strategy and delivering on all of our guidance.

The key driver behind our success during the second fiscal quarter was our strategic initiative to move towards a more customer-focused product development and marketing strategy. The diversified product range not only drove up total revenue growth, but also strengthened our market position in the DLD and KLD markets during the quarter. We also continued to see benefits from our acquisition of Little New Star with revenue contributions from the English language training school group adding to Noah's strong performance.

Driven by a robust performance from our KLD business, we anticipate a very strong third fiscal quarter. In addition, we are exploring new avenues for expansion to fuel our longer-term growth. Our strategic investment in Franklin is well underway and Jerry will update you on this a little later.

I am pleased with our progress so far this year. As we move forward through 2010, we will continue to make financial and operational improvements that will ultimately drive growth and profitability. Last but not least, I would like to express my appreciation to Noah's management and staff for all their hard work.

Thank you again for joining us today. I will now hand over to Dora to review our numbers for the quarter.

Dora Li

Thank you, Chairman. We delivered a solid performance in the second quarter of fiscal 2010 in what is typically our seasonally slow quarter. As detailed on slide four, our net revenue increased by 14.5% year-over-year RMB154.9 million or $22.7 million, in line with our guidance.

Much of this success was driven by our strategic initiative to move towards a more customer-focused product development and marketing strategy. Net revenue was also boosted by the contribution from Little New Star. Gross profit, operating income, and net income, all increased year-over-year and I will talk about each of these in more detail in just a moment.

On slide six, we show some of the drivers behind our revenue growth. Our ELP business contributed RMB149.1 million in revenue, 10.2% higher than in the second quarter last fiscal year. Little New Star contributed RMB5.8 million to total revenue. As you can see from our historical performance, we have consistently grown quarterly revenues despite the seasonality that occurs in the second fiscal quarter each year.

Slide seven provides you with a bit more color into our growth in the ELP business. Our decision to expand our product range pushed up total ELP revenue by 10.2% during the second fiscal quarter. KLD sales increased by 35.7% to RMB50.1 million, boosted by the launch of a new high-end model. We are confident that rapid growth in this segment will continue throughout the rest of the current fiscal year and beyond, as we continue to launch more new models and expand our product portfolio.

DLD revenue for the quarter stabilized at RMB67.2 million as a result of three product launches during the first half of fiscal 2010. Revenue from E-dictionaries rose 25.2% on increase in ODM business due to our partnership with Franklin. Our strong positioning in the industry and a well-structured strategy for developing, marketing, and distributing products is clearly a sustainable and successful model as we have experienced a 34.4% compound annual growth rate in our ELP business since 2005.

Our gross profit increased 7.3% year-over-year to RMB73.5 million. This presents a gross margin of 47.4% compared to 50.6% the year before, reflecting the greater portion of KLD in the product mix.

Moving on to slide nine, we remain focused on one of our key priorities, making our business more efficient. Our operating expenses, as a percentage of total revenue, were down year-over-year to 46.6% from 53.6% in the same period in fiscal 2009. Our operating income grew 8.7% year-over-year to RMB10.1 million, while the operating margin was stable at 6.5% this quarter compared to 6.8% in the same quarter last year. Our disciplined and prudent spending is especially evident when considering we were able to reduce overall costs with sales and marketing expenses down 13.1% in the quarter to RMB40.2 million.

On slide 10, we have extracted the key line item from our income statement. The company reported net income of RMB15.4 million or $2.2 million for the second quarter of fiscal 2010. Basic earnings per share and diluted earnings per share were RMB0.4 and RMB0.39, respectively for the second quarter of fiscal 2010. This compares with net income in the second quarter of fiscal 2009 of RMB8.8 million and the basic and diluted earnings per share of RMB0.24.

Moving on to slide 11, as of December 31st, 2009, Noah had cash and cash equivalents, short-term bank deposits, and investments of RMB800.3 million or $117.3 million. This compares with cash and cash equivalents, short-term bank deposits, and investments of RMB828.1 million as of September 30, 2009.

We have a fundamentally strong balance sheet with ample cash and a low debt, which grants us the flexibility to execute on our strategic initiatives and to further invest in growth in the coming quarters.

I will now turn the call to Jerry, who will take – talk about our strategy and operational progress in a bit more detail.

Jerry He

Thank you. As Dora mentioned, this quarter, our revenue growth was driven by our move towards a more customer-focused product development and marketing strategy.

Within our KLD segment, we recently launched a high-end model that is premium in every way, premium content and premium quality and a premium price. This model has seen substantial demand, which helped us drive KLD revenue up 35.7% with average higher selling prices across the segment.

The launch of low, mid, and high-end products in the first half of fiscal 2010 helped stabilize revenue for our more mature DLD segment during the fiscal second quarter. These three new products, which accounted for 47% of total DLD revenue allowed us to capture users looking for economically priced models, as well as those looking for products with premium content set.

The growth in our E-dictionary business was aided not only by the launch of a high-end model, but also from an increased volume of ODM business, which extend from our partnership with Franklin.

So as you can see, our initiative to move towards a more customer-focused product development and the marketing strategy has yielded positive results. As we look forward to building on this momentum, during the third quarter of fiscal 2010, we will increase our marketing efforts to further drive sales of this new product. Just as with our existing products, this new model will benefit from our robust content development capabilities, extensive sales and marketing network, and a strong Noah brand name.

While ELP continues to serve as our core business and the primary revenue contributor, we are also making steady progress in leveraging synergies from our acquisition of Little New Star to increase our presence in the education services industry.

Since acquiring Little New Star in mid-2009, we have taken an active role in promoting the Little New Star brand name and expanding its franchise. As of December 31st, 2009, there were approximately 700 franchise schools, up from 641 at the time of the acquisition. In terms of direct-owned schools, the enrollment reached 4,000. Going forward, we fully intend to capitalize on the opportunities presented by fragmented education services market and a growing demand to further increase Little New Star and Noah's presence in the sector.

Moving on to slide 16, we are looking to our ELP business to generate organic growth whereas the focus within our education services business is on acquisitive growth. We are placing a great emphasis on content and customer service. We have also decided to significantly increase our investment in content and software development. We also have recruit – recruited a director of customer service to champion the initiative to enhance customer experience.

We also plan to rationalize the number of new product launches in order to maximize potential revenue for each individual product. At the same time, we are forging ahead with a more customer-centered and integrated R&D, marketing and sales approach. Overall, we are confident that our current product offering will enable us to deliver a strong performance during the high season in the third quarter of this fiscal year as initial feedback from our sales distributors in general was very positive.

Going forward, we anticipate a healthy growth from Little New Star with a near-term focus on expansion of our school network. We are currently on track to realize top line growth of over 30% in our education services business. We plan to focus more on cross-selling and the roll-out of DHR programs.

Going forward, we will seek to further capitalize on opportunities presented in the education services space. As I have already mentioned, we are pleased with our progress in expanding Little New Star's presence and believe there is room for further growth in the number of Little New Star schools.

We continue to explore additional acquisition opportunities in education services and I am pleased to report that we have a very strong pipeline. We are also very excited to embark upon our partnership with Franklin Electronic Publishers and expect to complete this deal by the end of February. Based on the initial ODM orders we have received from Franklin, we expect our ODM revenue to increase significantly in FY 2010.

In addition to our partnership giving us the right of first refusal as the preferred ODM for Franklin's products, another strategic advantage that this relationship provides is the ability to join force in various R&D projects. As such, we are currently collaborating with Franklin to produce a Chinese learning – Chinese language learning solution to be sold in international market.

Turning to slide 17, we have achieved consistent growth during the past few quarters. We saw weighted average growth rate for the last 12 months of 17.3% in revenue and 55.1% in operating income. Our assets and operations provide us with a solid foundation to drive additional growth and to further expand our presence in the growing educational services industry. However, acquisitive growth remains a cornerstone of our strategy.

As I mentioned last quarter, we are putting together a dedicated M&A team, which will seek to uncover opportunities for strategic acquisitions and partnerships with companies that will further us on our vision to become the leading provider of interactive educational content and education services provider in China.

Slide 18 shows our guidance for the next quarter and the remainder of the fiscal year. Taking into consideration these strategic initiatives and our proven track record, for the third quarter of fiscal 2010, we anticipate total revenue to be in the range of RMB282 million to RMB293 million, representing a 31.8% to 36.9% growth over the same quarter last year.

Within this range, the ELP portion of our business should contribute approximately RMB273 million to RMB282 million with Little New Star making up the remaining RMB9 million to RMB11 million. We also expect basic earnings per share to grow 21% to 35% over the previous year to about RMB1.16 to RMB1.3.

As we continue to execute on our operational and strategic initiatives set forth for this year, we are also reconfirming our guidance for the full year of fiscal 2010, which, as we told you last quarter, is RMB824 million to RMB855 million with basic earnings of RMB3 to RMB3.2 per share.

To conclude, our progress on the operational front has allowed us to deliver another strong set of financial results. We remain committed to further expanding our track record of successful execution. And as we are – as we are well positioned to further grow our core ELP business and expand into the education services business, I am confident that by executing on the strategic initiatives we have set forth, we will be able to further drive profitability and create long-term shareholder value.

Thank you again. Mr. Xu, Dora, and I will now be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Yes. (Operator Instructions). And our first question comes from the line of Ella Ji with Oppenheimer. Please proceed.

Ella Ji – Oppenheimer

Hi, good evening, everybody. It is very encouraging to see your newly introduced DLD product performed very well in the quarter. And I want to ask where is the demand coming from, is it from your competitors or existing customers upgrading their DLD or does that mean that the DLD market is still underserved? Thanks.

Jerry He

Hi, Ella. This is Jerry. How are you?

Ella Ji – Oppenheimer

Good. How are you?

Jerry He

Very good. It's a very good question, because last quarter – in the previous quarters, we have seen DLD business going down over 30% and I stated last quarter I expect the decline in DLD is not going to as strong and which we demonstrated this quarter; in terms of volume, it's down only 4.9%. That's – that proves that our strategy worked.

We introduced two new models in the first half of fiscal 2010, one towards a lower-end customer and one in the middle range. I think that one of the reasons – and we explained last quarter that in bad economy, people tend to trade down and we only have the high-end products, so we don't have anything at the lower end. Now, with the introduction of a lower-end product, which accounted for 25.4% of our DLD business in quarter that really demonstrated with the diversified portfolio, targeting at specific customer segments really worked.

Ella Ji – Oppenheimer

So in terms of the competitive landscape in this lower end of DLD products, are you having – are you seeing a lot of competition or is it – are you the pioneer in this market?

Jerry He

No. Actually, one of our competitors have always been at the low end. They were selling their product at a one-half to one-third of our top-end prices – top-end products. That – it has always been there; it's just that by introducing a low-end product, we are taking shares from them.

Ella Ji – Oppenheimer

Great. Good to know.

Jerry He

We are still maintaining our high-end customer base.

Ella Ji – Oppenheimer

Right. Great. Moving on to KLD products, actually your KLD revenue – sales revenue is below my expectation. Also, you delivered a strong pricing growth, but the volume growth is a bit lower than my expectation and it is also lower than your last quarter volume growth. So I want to ask about the elasticity of the KLD product. Is it because of your higher prices that’s maybe driving lower volume in this quarter?

Jerry He

This is mostly – there are two reasons. One, you talked about the increased percentage of year over is not a – that's because last quarter – because we launched KLD in August 2008. So the base for the same period was lower for last quarter, right?

Ella Ji – Oppenheimer

Yes.

Jerry He

The percentage-wise, it's going to be small because the base for the same quarter last year is bigger than the previous quarter. That's one. And two, this quarter, like I said earlier, it's a seasonally slow quarter. So the growth usually [ph] is lower in this slow season.

Ella Ji – Oppenheimer

Got you. Then, what's your expectation for your KLD growth in the next quarter, which is a seasonally strong quarter?

Jerry He

Yes. This – we spoke earlier about this, is that for the full fiscal 2010, we expect the KLD business to almost double. And therefore, with the introduction of new – newer – new high-end products in the KLD category next quarter, we expect the growth for next quarter is much higher than it is this quarter.

Ella Ji – Oppenheimer

Okay, great. Good to know. So in this quarter, your revenue mix between DLD, KLD, and E-dictionary is a lot different than your last quarter.

Jerry He

Right.

Ella Ji – Oppenheimer

So I want to ask about – how should we think about this going forward?

Jerry He

I think we talked about these three categories separately last time. I'm going to do the same thing here today. I think what we said is the E-dictionary is a relatively mature market and has been stable. And if you look at this quarter, it has been very stable, right? It's only – has gone up 2.9% year-over-year. So that is true. With the introduction of a higher-end E-dictionary, even though the volume did not go up a lot, but the sales, interest revenue went up significantly.

For the DLD business is a – compared to KLD, is – again, it's a more mature category. By introducing low end and the middle-range products, we were able to stabilize that category. But with KLD, it's still at a high-growth stage. So going forward, I think that trend would still continue, that is E-dictionary is going to remain relatively stable. But there is one factor in the E-dictionary because in the domestic market, it is stable.

However, with the increasing in our overseas market or ODM business, that portion – that category actually would go up next quarter as well. So DLD, again, is going to be relatively stable. And the KLD, like I said, is going to continue the growth significantly in the next quarter.

Ella Ji – Oppenheimer

Okay. Thank you for the color. Moving on to margins, I understand that you actually moved – shifted part of your sales efforts to fiscal third quarter. Can you help quantify how much of the year-over-year decrease in your sales expense is due to the timing shift?

Jerry He

There are two factors there. One is the timing shift. In that – this is a seasonally slow quarter. We look at the return on investment of the marketing spending is relatively low in this quarter. So that's one factor we intentionally controlled as the marketing expense in this quarter is lower.

And second is the shifting to the next quarter. That is because we are introducing new KLD models and also DLD models. We want to coincide the introduction of the products with the marketing spending. So did shift some of those to the fiscal third quarter. However, with the expected revenue growth from the third quarter, the – percentage-wise, sales and marketing expense would not go up compared to same quarter last year. But in absolute terms, it's going to grow significantly versus this quarter.

Ella Ji – Oppenheimer

Got you. And then lastly, I want to ask about your G&A expenses. You mentioned this high or bad debt provision. So can you provide more color on that? Are you seeing your bad debt going up as a trend? Thanks.

Dora Li

Hi, Ella. This is –

Jerry He

Dora would take this question.

Dora Li

This is Dora. So we are seeing the increase – the increase in this quarter G&A expenses due to part of the increase in bad debt provision. Actually, our debt – bad debt provision this quarter is not – in absolute numbers, not actual increase. It's just versus last quarter, because last quarter we have a – we have some – collected some money back.

So last quarter, the bad debt provision is a negative number. So this quarter – so compared with year-ago quarter, we are showing the bad debt on that – of that line item is increase. And actually, we are taking a strict – a more strict credit policy going forward. So we are expecting the bad debt provision will be on a controllable level.

Ella Ji – Oppenheimer

Okay. So do you think your bad debt is in control and you are not really seeing a lot of things happening on that end? Right?

Jerry He

Yes. Actually, I think Dora was saying that for the same quarter last year, instead of having the bad debt write-off, we had a reversal of bad debt provision. Therefore, if we look at our year-over-year comparison, we – if we have any bad debt this quarter, it looks like – as a big increase. But in terms of absolute number, it's under RMB1 million. So it's not really that big a deal.

Ella Ji – Oppenheimer

Okay, got it. Thanks for taking my questions and congratulations again.

Jerry He

Thank you very much.

Operator

(Operator Instructions). Please standby for your next question. (Operator Instructions). And there are no further questions in queue at this time. I would like to turn the call over to Mr. Jerry He, CFO and Executive Vice President, for closing remarks.

Jerry He

Great. Thank you very much for joining us today. I look forward to seeing you next time. The day after tomorrow is actually Chinese New Year and the Valentine's Day. I wish you a New Year filled with love and success. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.

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