Noah Education Holdings Ltd. (NYSE:NED)
F2Q 2014 Results Earnings Conference Call
February 27, 2014, 07:30 AM ET
Dong Xu - Chairman and Chief Strategy Officer
Dora Li - Chief Financial Officer
Good morning and good evening, ladies and gentlemen. Welcome to Noah Education Holdings Limited Second 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 second 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 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 sections of the company’s final prospectus or 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 we refer to year-over-year comparisons against second quarter 2013 unless otherwise stated.
I would now like to turn the call over to Noah’s Chairman and Acting CEO, Mr. Dong Xu. Mr. Xu will speak through his interpreter in English. Please go ahead.
Thank you for joining us today in our second quarter fiscal 2014 earnings conference call. I hope you all had a chance to read our earnings press release. We are pleased to announce that we have again exceeded our revenue guidance this quarter and recorded a 12% revenue growth. We have achieved this through our primary and secondary schools operation, which were our major revenue growth driver this quarter and also the continued ramp up of our kindergarten utilization.
Our priority for fiscal 2014 is to continue growing organically. Apart from ramping up the utilization rates of our existing kindergarten and schools we are also working hard to roll our two to three kindergartens in Guangdong and Zhejiang provinces by the third quarter of fiscal 2014, with the prospect of expanding our existing network to 51 kindergartens.
Before I turn to Dora to walk you through our financial performance let me update you on the corporate developments over here. On December 24, 2013 the company announced a receipt of going private proposal at US$2.80 per ordinary share and US$0.80 per ADS from a consortium which includes certain existing shareholders like myself. For this purpose the Board of Directors has formed a special committee consisting of four independent Directors to consider and evaluate this proposal.
Subsequently on January 10th this year the company announced that the Special Committee appointed Duff & Phelps Securities, LLC as its financial advisor and Latham & Watkins as its legal advisors respectively to assist the special committee in its work. To date the special committee has not set a definitive timetable for evaluation of this proposal and does not intent to announce development until an agreement has been reached.
Last but not least I would like to reiterate that we remain committed to build Noah as a leading education service provider and support the lifelong education aspirations of China. We are confident that our current position would enable Noah to achieve further growth and success in the future.
I will now hand over to our CFO, Ms. Dora Li.
Thank you. As the details of the financial results for the second quarter fiscal 2014 are available on our earning 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 second quarter fiscal 2013 unless otherwise stated. We are very pleased to report that Noah continued to grow in the second quarter, with year-over-year improvements in top line and the profit.
On slide five, net revenue for the quarter was up 12% to RMB70 million. The increase is driven mainly by the organic growth from existing schools. If we breakdown the net revenue by business segments for the quarter revenue from kindergarten operations was about RMB36 million, accounting for about 51% of net revenues.
Revenue from the kindergarten operations was flat due to the fact that four months of revenues from September to December 2012 from DDK Consulting and Xiaoxiao Consulting were recognized in the second quarter of fiscal 2013 when we completed those two acquisitions in that quarter. If we compare them under an apples-to-apples approach, for instance revenue from October to December our kindergarten operations will have recorded a 7.2% revenue growth.
Revenue from primary and the secondary school operations was up 37% to RMB25 million accounting for 36% of net revenues. The increase was due to revenue contribution from the ramping up school and expansion of existing mature schools. For the quarter, revenue from the Yuanbo Education operations has increased 10% to RMB9 million accounting for 13% of net revenues.
On slide six, gross profit for the second quarter was up 14%. The increase in gross profit was primarily driven by the strong recurring revenue contribution of the primary and secondary school operations. Gross profit margin for the quarter was 46.4% compared to 45.5% in the second quarter of fiscal 2013. The increase in margin was mainly due to revenue expansion and expected cost amendment in the midst of wage inflation environment. Our second quarter is traditionally a strong quarter but as our investment continues to grow we expect the full year margin to be in the lower 40% range.
We can take a closer look at slide seven for our cost structure which continues to strengthen further. As a percentage of revenue general and administrative expenses improved to 45% from 46%. Sales and marketing expenses largely remained flat at 2%. R&D expenses improved to 0.8% from 1%.
On a separate note the decrease of the net operating income for the quarter was mainly due to the earn-out payments to Yuanbo original shareholders based on revised contingent payment conditions.
On slide eight net income for the quarter was RMB10 million. Basic and diluted earnings per share for the quarter increased to $0.17 from $0.13 in the second quarter of fiscal 2013. Non-GAAP net income excluding share-based compensation expenses for quarter as shown on slide nine were RMB10 million. This translates to non-GAAP basic and diluted earnings per share of $0.17 for the second quarter.
Moving to our balance sheet summary on slide 10, cash and cash equivalence and short-term investments amounted to RMB532 million on December 31, 2013 compared with RMB572 million on September 30, 2013. In addition deferred revenue related to tuition fees and franchising fees was RMB12 million on December 31, 2013 compared with RMB72 million at the end of September 2013. This revenue will be booking in the following quarters according to the course schedule.
In terms of per share value our cash per share at the end of December 31, 2013 was US$2.40. Cash plus real estate at carrying value was US$2.85 per share and net asset value per share was US$3.33.
On slide 11 you can see that operating cash use was RMB30 million. Free cash outflow for the quarter was RMB38 million compared to an outflow of RMB30 million in the same quarter last year. We continue to deploy our cash to invest in organic and accretive growth. In the past 12 months we have generated about RMB91 million cash from our operations while CapEx for organic growth was RMB47 million and investment for modern acquisition was RMB2.5 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 our update on our three business services. Now slide 13, slide 13 demonstrates revenue mix for Kindergartens which now stands at 51%, our biggest revenue contributor.
This segment has enormous potential for both acquisitive and organic growth as you can see further on slide 14. We have 48 Kindergartens in our network, operated by Yuanbo Education, Wentai Education and the Little New Star. We are mostly located in three regions, Guangdong Province, Hunan Province and Yangtze River Delta region.
We have seven Kindergartens that are in the effective ramp-up period with less than two years of operating history. Total enrollment from our Kindergartens operations was over 12,700. In terms of utilization the overall average rate attendance was 83% while the average utilization rate for the seven ramp-up Kindergartens with less than years operations improved from 15% to 48% year-over-year. The 41 mature Kindergartens were at 88%. In addition to the seven ramp-up stage Kindergartens we plan to rollout two to three Kindergartens in Guangdong and Zhejiang provinces in the next quarter.
On slide 16 our primary and secondary school operations consist of five schools all operated by Wentai and located in Guangdong Province. The total enrollment was up 5% sequentially to approximately 6,000. The utilization rate for the school at ramp-up stage was 63% while the four mature schools were 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 segment.
Our supplemental education operations include 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 3,300.
Looking ahead on Slide 17, our guidance for the third quarter of 2014 which is based on organic growth, we expect the net revenue to be in the range of RMB54 million to RMB57 million, a 16% to 23% 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 to questions I would like to recap the consistently strong growth in our business and financial performance. With enormous growth in the education market our future opportunities and the prospects are very good. Noah is strategically positioned to reap the benefits of this growth.
This concludes our presentation. We would like now open the call for questions. Operator, please?
Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from [Jun Ji] a private investor. Go ahead please.
Hello. Congratulations. So my first question is about the revenue of the company. So according to my calculation the equity per share is $3.5 and also there was a group who wanted to buyout the company in 2012. They offered $3.5 per share [and got declined]. So now the management want to buy the company for $2.8 per share. So do have you any comment on this price I think this price is much lower than the real value of the company. Thank you.
Thank you for questions. The company received this proposal in December last year and then the Board of Directors formed a special committee and the special committee is still evaluating the proposal. And at this moment we can just tell you we will update you when the special committee completes their evaluation and reach their decision.
Okay. Thank you.
(Operator Instructions). The next question is from [Anup Bhargava], private investor.
Hi. When do you expect the special committee to reach a decision?
At this moment we do not have any [indication] or specific timeline from the special committee and we definitely will update you once they have reached their conclusion.
(Operator Instructions). At this time there are no further questions in the queue. So I would like to hand the call back 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 our business growth and operational efficiencies to achieve profitability in the following quarters. That concludes the call. Thank you for joining us today. Have a nice day.
Ladies and gentlemen, thank you for your participation in today’s conference call. You may now disconnect your lines and have a nice day.
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