Xueda Education Group (NYSE:XUE)
Q4 2013 Earnings Conference Call
FEBRUARY 26, 2014 7:00 PM ET
Ross Warner – Director, IR
Xin Jin - CEO
Christine Lu-Wong – CFO
Fei Fang - Goldman Sachs
Tian Hou - TH Capital
Howie Xia - YG Partners
Tze Chen – Manresa
Good day, everyone, and welcome to the Fourth Quarter and Full Year 2013 Earnings Conference for Xueda Education Group.
I will now turn the call over to Mr. Ross Warner, the company's IR Director. Please go ahead.
Hello everyone. Welcome to Xueda Education Group's fourth quarter and full year 2013 earnings call. Our earnings release crossed the wire a few hours ago and is available on newswire services and on our website. On our website, you'll also find a PowerPoint presentation to follow along with today's presentation.
Before starting, I will remind you that all statements included in this conference call other than statements of characterization of historical facts are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended, and as defined in the US Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future results and are subject to risks and uncertainties and as such our results may be materially different from the views expressed here today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Xueda does not undertake any obligation to update any forward-looking statements except as required under applicable law.
In today's call, we will discuss various non-GAAP financial matters as defined by the SEC's Regulation G. A reconciliation of the differences between GAAP and the non-GAAP financial matters can be found in our earnings release.
Speaking today will be Mr. Xin Jin, Xueda's Co-Founder and Chief Executive Officer, and Ms. Christine Lu-Wong, the company's Chief Financial Officer.
I will now turn the call over to our CEO, Mr. Xin Jin.
Thank you, Ross. Good morning and good evening everyone. Thank you for joining Xueda Education Group's fourth quarter and full-year 2013 earnings call. I can truly say that 2013 was a transformative year for Xueda. We began 2013 with a clear and focused goal to increase profitability. Today's results demonstrate we executed well against this goal.
A few highlights, for the fourth quarter year-on-year, gross profit increased 72% and gross margin increased 730 basis points. Compared to the year 2012, our 2013 year-end result delivered 580 basis points improvement in gross margin and 320% improvement in non-GAAP net income. These are solid results. And, as CEO, I'm especially pleased to deliver them to shareholders and appreciate the support the shareholders give us in 2013.
Starting 2014, Xueda is leaner and stronger than it has ever been. We are ready to build on our solid foundation and upgrade our organization with initiatives that will drive healthy growth and sustained profitability. We aim to capture the gains of 2013 and add to them to setting "Healthy Growth and Sustained Profitability" as our goal for 2014.
Let me share with you how we are thinking about 2014. We will continue to leverage the solid foundation we worked hard to establish in 2013 and use it as a springboard to further upgrade our business. We will continue to optimized and further extend our learning center network as well as continue to drive greater teacher and space utilization.
In addition, with our focus on student-centric model, we aim to provide our students with a wider array of products, while at the same time, to expand ways that we can deliver our tutoring services. From our base one-on-one model, we will offer more choices, alternatives and ways to meet our student's needs. I will now briefly explain three key initiatives we will put in place to support us in reaching our "Healthy Growth and Sustained Profitability" goal.
Broadly speaking, the initiatives fall into three categories: Smart Tutoring System, Product Expansion and Teaching Quality Improvement. These are by no means all of our initiatives. They are part of a comprehensive "mesh-of-effort" woven together to support our strategic end. Our new smart tutoring system is a profound development and milestone for Xueda. It upgrades the entire nerve system of our personalized tutoring model to a cloud-based mobile application delivery through the net that allows students to study anywhere, anytime.
I'm pleased to announce that by the end of March this year, after extensive development and testing, the entire Xueda curriculum will be deliverable to students in digital interactive format as part of our new Smart Tutoring System. We are presently wrapping-up final details from our piloting phase which has yielded strong praise from students, parents and instructors.
All Xueda instructors already have tablet-devices and are ready to teach and our learning centers are fully equipped to support an e-learning environment. Furthermore, our digital curriculum is enhanced with more than 10,000 short, 5-10 minutes videos. Embedded at key knowledge points, they give students precise, pinpointed help when needed. From our cloud-based smart tutoring system platform, all students will have the option to study with Xueda using their mobile device, or any online enabled device.
By blending the benefits of personal instruction in the learning center with the benefits of quick responsiveness of the digital interactive format, we can offer even higher quality tutoring service.
Here's how the Smart Tutoring System will work. For example, a Beijing seventh grader takes the on-line Smart Tutoring System assessment in algebra, and her results rank her in the lower 40th percentile of seventh graders nationwide. She enrolls in Xueda with the aim to improve her score and be accepted at a leading high-school near her home. With this clear information, our study counselor prepares a detailed personalized study plan and shows her how to download Xueda's student APP in iOS, Android or WeChat platforms.
She comes to the learning center twice a week and completes homework on the other days each week. Each time she completes an assignment, the interactive curriculum provides her instant feedback and her Xueda instructor sees immediately the exercises she answered correctly and those she did not. From these results, her instructor knows exactly where to focus attention for the next learning step. The instructor designs her next assignment or tutoring session to pinpoint the area where she needs the most help.
The time spent with her Xueda tutor and completing each assignment is highly efficient because it is highly focused on her specific needs. Each step in her study journey is monitored, recorded, and adjusted based on the results of her learning.
Using the Smart Tutoring System, she makes optimal learning progress. Additionally, using a Xueda student-specific APP, her parents can access and monitor her tutoring process with full transparency.
In essence, the Smart Tutoring System is really a personalized tutoring support system with all content in digital form, all tutoring activity recorded, all assessment tracked, and all results analyzed.
Utilizing the Smart Tutoring System as a cloud-based, mobile application delivery format is a profound development in the way we do business. By using it, we have the ability to improve "inquiry-to-sales" conversions, measure teaching quality, measure student's incremental progress, lengthen the time students stay with us, and increase customer satisfaction.
The second main initiative involves expanding our suite of products. Central to this initiative is our personalized small-group tutoring, which we announced last quarter.
Quite simply, parents and students like choices. Most parents seek Xueda for its high-quality, personalized one-on-one tutoring -- which is our hallmark. However, for some parents, the choice for their child to study in a small group of less than ten students may be more appropriate, given specific needs and situation. We are happy to provide this high-quality offering to them.
We are also expanding the choices we give to parents and students by expanding the number of subjects we offer in non-traditional subject areas. We call these, "enrichment offerings."
As Chinese families' incomes rise, we've seen emerging demand for subjects beyond those focused on standard test-prep. These families seek enrichment learning and opportunities that foster creativity. Tapping our deep curriculum development resources to create content to meet this niche demand was a logical extension for us. Enrichment subjects complement our traditional subject offerings and provide parents and students more choices and ways to meet their needs.
The third main initiative surrounds improving our Teaching Service Quality. We aim to improve the overall instructional quality by rewarding and incentivizing those instructors and study counselors who deliver exceptional results in the study process. Instructors and study counselors are the key interface with parents and students in the tutoring experience.
Through a comprehensive set of measures focusing on student results, advancement and enrollment retention we have created a performance-based system designed to recognize, reward and perpetuate teaching that delivers the best quality results to students. To be clear, this method of incentive and reward for instructors and study counselors is separate from the commission system used for our sales consultants.
As you can see by the size and scope of these three initiatives, they are sizeable and designed to create significant impact. Each requires significant effort and implementation does not happen overnight. We have been working on these initiatives for several months, and in late-November began in earnest the practical steps of field implementation.
As with anything new that is worthwhile, it often requires one step back to take two steps forward. By design, in December 2013, we shifted emphasis in our field operations to understanding the key initiatives of 2014, understanding how the initiatives were designed to operated and training staff how to effectively implement them. In many cases, people were going to meetings and trainings every day.
With this effort, we anticipated that during December and January, we would see a temporary slowing in our cash collections. We were willing to accept this knowing that we'd see a rebound in subsequent months. And, as expected, we are starting to see very positive trends in February.
To be clear, these initiatives will take some time to ramp in 2014.
In closing, what I have outlined here gives you a broad idea of the areas in which we will focus. In 2014, we will offer more choices, alternatives, and ways to meet customer's needs by offering more study subjects, one-on-one and small-group tutoring formats, as well as blended and traditional instruction delivery. We offer parents more reasons to choose Xueda and stay with us longer.
In 2014, we will also place "Healthy Growth and Sustained Profitability" as our clear and focused operational goal. I am confident that by pursuing these key areas of inflection, 2014 can be another transformative year and I look forward to delivering solid gains in the year ahead.
Now, I'll turn the call over to Christine to highlight our financial and operating results.
Thank you. Thank you, Xin. I'm excited to report today's results for the fourth quarter and full-year 2013 because they reflect our 2013 "Focus on Profit" strategy was successful and we have delivered on our promise to investors.
As Xin said, our operational goal for 2014 is to pursue "Healthy Growth and Sustained Profitability". What this means is that we want to capture and sustain the profitability gains we made in 2013 and also expand our learning center base by approximately 10%. We continue to believe this is a sound balance between growth and profitability.
Elaborating further on what Xin said, as we move to offer a much wider array of products, services, and choices, we have strategically steered our managers, consultants, counselors, and teachers to embrace our expanded vision.
Whereas in the past, we focused on maximizing one-on-one course hour delivery and collecting cash as pre-paid course hours, we now steer our focus on maximizing the length of time a student stays within our system and optimizing revenue opportunities for each student, depending on his or her individual needs.
Correspondingly, this shift also changes the way we monitor the business. In the past, we basically had a select number of subject courses delivered through a one-on-one instructional format. It was relatively simple to model the business around course hours, ASP, and student enrollment. However, as we expand our offering with a far wider suite of subjects, services, and instructional delivery formats, the old productivity metrics, which is "course hour delivery per instructor" and "course hour delivered per square meter of learning center" become less meaningful and less applicable.
For example, it could be entirely possible for a student to be enrolled for intense one-on-one Zhongkao tutoring starting from February. In July, with the Zhongkao finished, he switches to small group tutoring. Then over the winter break, he enrolls for study in two enrichment subjects. For this student, there could be at least three different types of course hours delivered for different tutoring needs. As we can see, it can quickly become confusing.
For this reason, starting with this report, we are transitioning to two simpler productivity metrics to better reflect our evolving student-centric operations. We will now track labor and space productivity using: one, net revenue per full-time instructor; and two, net revenue per square meter of learning center.
These simple, clean metrics cut across all service and delivery format lines. We believe they will succinctly provide management and investors a clear litmus reading of the Company's operational health.
Let me now go over the highlights of the fourth quarter and full-year 2013. Please note that all numbers I will discuss today are in U.S. dollars, unless otherwise noted.
First, please turn to Slide 6. Total net revenues for fourth quarter increased 15.9% year-over-year to $69.1million, from $59.6 million.
Our average hourly course fee for fourth quarter, or ASP, increased 11.4% year-over-year to $31.1 from $27.9.
Now, let's look at Cost of Revenues and Gross Margin details on Slide 7. Cost of revenues for the fourth quarter increased 6.0% year-over-year to $53.8 million, from $50.7 million, which was noticeably less than our revenue growth rate, and as such, our gross profit for the fourth quarter increased 72.2% year-over-year to $15.3 million, from $8.9 million.
Gross margin for the fourth quarter 2013 was 22.2%, improved from 14.9% in the year-ago-period. The 730 basis points improvement in gross margin was mainly attributable to an improved cost structure and better labor and space utilization efficiencies achieved throughout our learning center network.
Looking a bit deeper into our productivity at this point, let me run through the following for you on slide 8. In the fourth quarter, we opened net 21 new learning centers compared to the fourth quarter of 2012 during which we opened net four learning centers. For the fourth quarter, we had on average, approximately, 280,000 square meters of learning center space compared to approximately 289,000 square meters of learning center space for the year ago period.
For the fourth quarter, we had on average, approximately 8,100 full-time instructors, down from approximately 9,200 full-time instructors for the year-ago-period. For the fourth quarter, net revenues per full-time instructor was $7,360 compared to $5,810 for the year-ago-period. For the fourth quarter, net revenues per square meters of learning center was $250 compared to $210 for the year-ago-period.
Turning to slide 9. Non-GAAP general and administrative expenses were $10.8 million for the fourth quarter, compared to $12 million for the same period in 2012. As a percentage of total net revenues for the fourth quarter, year-over-year, non-GAAP general and administrative expenses came down to 15.7% from 20.1%.
Non-GAAP sales and marketing expenses were $7.9 million for the fourth quarter, compared to $6.8 million for the same period in 2012. The percentage of non-GAAP sales and marketing expenses of total net revenues for the fourth quarter was 11.4%, virtually flat from 11.3% for the fourth quarter of 2012. Non-GAAP net loss for the fourth quarter 2013 was a loss of $2.7 million, markedly improved from a non-GAAP net loss of $7.3 million for the year-ago-quarter.
Non-GAAP diluted EPS for the fourth quarter of 2013 was a loss of $0.04, far improved from a loss per EPS of $0.11 for the year-ago-quarter.
Now, let me walk you through a quick review of the full-year 2013 financial results. Please turn to slide 10. Total net revenues for the year increased by 18.4% year-over-year to $347 million from $293.2 million from the previous year. Average hourly course fee for 2013 increased to $30.3 year-over-year from $27.7 for 2012.
Gross margin for the year increased 580 basis points to 30.9% year-over-year from 25.1%. The improvement was fuelled by better labor and rental cost management as well as by opening fewer new learning centers. In 2013, we opened net 25 new learning centers compared to opening net 88 new centers in the year of 2012. For the year, teaching staff cost as a percentage of total net revenues fell to 49.5% from 53.6% in 2012. The sharp decline reflects our heighted attention to labor utilization throughout the year.
Total non-GAAP operating expenses for the year were $86.6 million compared to $74.4 million for 2012.
Non-GAAP general and administrative expenses of $46.9 million in 2013 were 13.5% of total revenues, down from 14.7% of total net revenues in 2012. Non-GAAP selling and marketing expenses for 2013 were $36.3 million, compared to $31.3 million for 2012.
Non-GAAP net income for the year increased 320% year-over-year to $21.5 million, from $5.1 million for 2012. Non-GAAP diluted net income per ADS increased 300% to $0.32 from $0.08 in 2012. Once again, the year-over-year improvement can be attributed to cumulative impact of the Company's 2013 "Focus on Profit" strategy.
Moving to the cash balance, please turn to Slide 11. As of December 31, 2013, cash, cash equivalents, short-term investments, totaled $246.7 million or $3.71 per ADS, compared to $215.4 million, or $3.31 per ADS, net of dividend payable in an amount of $22.7 million a year ago.
Before wrapping-up this financial review section, I am pleased to announce that as an expression of confidence in the future long-term prospects of the Company, as well as a firm display of commitment to returning value to our shareholders, the Xueda Board of Directors has approved a regular annual dividend payment of $0.16 per ADS, or $0.08 per common share. The annual dividend for 2013 will be payable on or about April 15, 2014, to shareholders of record as of the close of business on March 28, 2014.
Now, before I provide our financial guidance, let me outline our learning center growth plan for 2014 on Slide 12. For the year 2014, we anticipate opening a net 40-45 learning centers, with the majority of these centers to be opened in the first and fourth quarters of the year -- to take advantage of our second quarter high-season. We believe this rate of expansion allows for healthy, manageable growth and does not overburden rental and depreciation costs. For first quarter 2014, we plan to open roughly, net 20-23 learning centers.
We target new centers opening in both existing markets, to "fill-in" select geographies, and new markets, to expand our nationwide footprint.
Also, as we have pushed some of the fourth quarter 2013 learning center openings to first quarter 2014, and as Xin discussed earlier about our business initiatives, we strategically took time during the slower months of December and January to train our managers and staff on our new Smart Tutoring System, and as such, we anticipate our growth rate in 2014 will be more demonstrated later in the year.
Now our financial guidance on Slide 14: For the first quarter 2014, we currently forecast net revenues to be at least $83.9 million, or flat from Q1 last year. We estimate that non-GAAP diluted EPS to be at least $0.06, representing year-over-year growth of at least 20%.
In our estimate, we assume an effective income tax rate of 20% and weighted average ADS of 69.6 million.
For the full-year 2014, we estimate net revenues to be at least $394 million, an increase of at least 13.5% from the previous year.
For the full-year 2014, we estimate non-GAAP diluted EPS to be at least $0.42, compared to $0.32 from the previous year, representing a year-over-year EPS growth of at least 31%. This estimate assumes an effective tax rate of 20% and weighted average diluted shares of 70.3 million.
Please note that our guidance is based on the current market conditions and reflects the Company's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.
In closing, in the past 14 months since I've joined Xueda, we have worked hard to sharply focus on profitability, tightening processes and systems to be more rigorous, thorough and efficient. Our results today are testimony to the effort we have poured into reaching this goal. In many ways, I feel like we have stabilized a big ship and brought it to harbor.
Now, it is time to sail forward and demonstrate to shareholders that Xueda can grow at a healthy rate while at the same time sustaining profitability. Healthy growth and sustained profitability is our focus for 2014. I'm excited for the year ahead.
This concludes our prepared remarks. Operator, please open the call up now for questions.
(Operator Instructions). Our first question comes from the line of Fei Fang from Goldman Sachs. Please ask your question.
Fei Fang – Goldman Sachs
Hi, thank you for taking my question. Very strong results. Congratulations. It's great to see your regular dividend program on very encouraging gesture. Can you walk us through the procedure of transferring cash from the operating cash flow to VIE and then to offshore investors? And also, what will be the new effective tax rate on a going forward basis? Thank you.
Thank you, Fei. Thank you for joining the call. May I clarify the first question? I got your second question on effective tax rate. May I have you repeat the first question about the operating cash flow?
Fei Fang – Goldman Sachs
Sure, sure. So Christine, apparently, the future regular dividend will be financed by the domestic operating cash flow, so can you walk us through the procedure to transfer that cash?
I see, thank you.
Fei Fang – Goldman Sachs
All the way above to offer shareholders.
Great. That is a good question, Fei. So let me have a little background briefing on Xueda. Xueda has -- when we gone IPO in the year of 2010 and then we have our IPO posted from the offering and yet since Xueda has been generating healthy free cash flow during these years, so we had not touched our -- we not had the need to touch our offshore IPO proceeds.
So the cash right now, we have for dividend distribution can be still using our proceeds from the IPO and return it to our shareholders and I feel that the offshore IPO proceeds is quite generous. It is quite sufficient to supply at least if we don't change our dividend policy, at least for ten years, around ten years.
So I don't see there is any complication at this point, for dividend -- our domestic operations, cash flow offshore to fund the dividends. So that is my first answer.
In terms of effective tax rate, we will be around 20% for our 2014 which is significantly down from our 2013 effective rate which is about -- it is about 25% non-GAAP, these are non-GAAP effective tax rate.
Fei Fang – Goldman Sachs
Christine, I just want to clarify, so the effective tax rate guidance, that doesn't really incorporate any withholding tax regarding the potential cash transfer. Understood that there will not be any imminent transfer but since you have a record of dividend program, from just a technical perspective or auditing perspective, are you requiring corporate withholding tax provisions into the effective tax rate?
There would be a potential -- there would a potential in the coming year if we had a higher dividend policy because there could be an accrual needs from accounting, for accounting purpose, there might be a need, but we had not seen the needs at this point because we do have sufficient offshore dividend. However, even though in the worst case, in the worst case that we had to do the withholding tax, roughly this is the formula, roughly from our domestic generates business, we are still planning to invest the majority of our earnings, we invest into our current business.
And the -- there will be -- maybe a small portion, roughly, say around 10% we can use for dividend out to the -- to our parent company which is the payment company. And that was a very small portion of our earnings to be taxed subject to the dividend -- I mean, subject to the withholding tax for the dividend.
So that is how I see it. At this point, I totally understand where you are coming from but at this point, I don't see the regular dividend program will jeopardize our earning power.
Fei Fang – Goldman Sachs
Understood, and so now the follow up question is how do you think, Christine, how do you and Xin Jin think about the recent regulatory environment? You know, the government is setting up rules and procedures to encourage students to enroll in local schools in the neighborhood, so are we seeing any change regarding the demand for tutoring services? Thank you.
Okay, let me translate Xin's translation on the government policy question and the impact for the demand for tutoring services, what we are seeing the new current policy just came out around the elementary school entrance into middle school and some of the policy changes -- they will eliminate the elite student selection, they will also eliminate -- they will also recruit student, will reinforce the recruitment of the student with the neighborhood students and not select students from the elite students.
So for us, we see that the impact for tutoring services, it will be impacted more to these institutions who conduct preparation -- test preparation for entrance exams for elite programs, so that they can be picked by the focused school.
And it will also impact the tutoring institution who focus on competition for the elite students so we are seeing that. We are more focused on the subject matter, all subject and also, we are now open up into the enrichment program. For us, we see that this is reinforcing government -- it is reinforcing for all subject and all student policy so that all the student have the equal opportunity to go to their neighborhood school.
For us, this is a big step to opening up students to free-up their time instead of for them to compete for the focus school.
They are now free-up a lot of time and we can see that open up more demand for individuals, for individuals for their needs of the outside tutoring from the school.
Fei Fang – Goldman Sachs
Thank you, Christine. Thank you, Xin Jin. Very helpful.
Sure, you are welcome, Fei.
(Operator Instructions). Our next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.
Tian Hou – TH Capital
Good morning, Xin Jin, Christine, and so I got a couple of questions. One is about your growth -- you know, your growing rate and it seems like the guidance for Q1 and on the year-on-year basis, the growth wise was kind of weak and so I want to get a sense about the reason behind it.
And also as you are planning to open 40 to 45 new learning centers in 2014, I wonder what could be the full year, the growth objective so that is the question number one.
Number two, you know, I look at your operating margin and there was a 5 percentage of improvement over 2012, and the most of the improvement you know, are coming from the cost savings and so I wonder what are -- are there any potential room for us to do more cost savings? So what is the utilization of the teachers and how can we save more on rentals?
So that is the second question. So the third one, you know, I stop here and then you know, after you answer those two, I give you the third question.
Thank you. Tian, good morning, thanks for joining the call. We like to take your questions. So Xin Jin, maybe I start and you can jump in anytime to supplement what I have.
So Tian, yes, you have a very good question around the growth rate. First of all, our Q1 is a relative stable quarter and as I have mentioned earlier, we have pushed some of the fourth quarter 2013 learning center opening to the first quarter of 2014 and secondly, as we also strategically took time during the slower month of December and January to train our managers and staff on our new platform, our new learning and delivery platform, the smart tutoring system, it actually picked out some of our energy and our focus to the new adoption of the new system.
As such, our revenue growth rate in the first quarter of 2014 is flat but I believe it will be followed by accelerating growth rate in the subsequent quarters. And also, we had opened just a net of 21 new centers in 2013 fourth quarter and also will open around 20 to 23 new centers in Q1 of 2014. So these new centers could not contribute meaningful revenue in the first quarter or second quarter they opened.
However, they will ramp-up and I expect that these new centers will contribute to our revenue growth from the second quarter and on along with their ramp-up so that is why we had set the guidance on relative stable flat Q1 number but yet we are still confident that we have low teens. Now, we set guidance of 13.5% year-on-year for the full year. So that is the first question you asked.
For the second question, about the operating margin, mainly you are right that we had achieved significant improvement for our operating margin improvement in the full year of 2013 that is mainly driven by our gross margin improvement where we have focused on the efficiency and utilization for our people and our space. So with that, we are very glad that we had exceeded our expectation for gross margin expansion to our 2013.
As you have recalled, at the beginning of 2013, I only anticipated the gross margin to be in the mid to high 20s which is like in between of our gross margin of 29.5 in 2011 and then 25 in 2012. So we are anticipating and be catching up in between so in the mid to high 20s. But now, we have clearly -- we have over-achieved that goal.
So we think our current gross margin level at 30 -- close to 31% is solid and it is very healthy. We do not see pushing or squeezing the gross margin further will help for the sustainable growth of the Company. However, we do see additional upside for our blended growth margin as our small group business which has a higher gross margin becomes a significant component of our total business.
As such, even though we intended to open a net of 40 to 45 new centers in 2014, these will have some margin pressure. However, we will likely still maintain the current gross margin level because we are confident that we can continue to gain greater efficiencies from our existing staff and space which still have room for efficiency, to absorb the potential diluted effect of new learning center.
So in short, our gross margin, I anticipate it will be maintained flat from what we have achieved so far which is healthy already. And then where we are seeing the expansion from operating margin, will come through from our operating expenses leverage continue in this year of 2014. So I anticipate that will be how we -- that is our plan to expand our operating margins and then continue to improve it.
So those are the two questions for Tian, maybe we should, operator, open up for the next in queue and then if, Tian, you have further questions, you can come back to the queue.
Thank you. Our next question comes from Howie Xia from YG Partners. Please ask your question.
Howie Xia – YG Partners
Hi, good morning, Christine. Good morning, Xin Jin.
Hi, Howie. Good morning.
Howie Xia – YG Partners
I have two questions. One, just on your dividend growth so you -- you know, or the way you see a dividend grow in the future, so you declare this dividend right now and you know, you have given the 2014 guidance just on the per ADS non-GAAP earning, which you know, implies you know, mid-30% higher than this year's earnings.
So do you see dividend growing with this earnings at the same pace as in -- you know, this year, you have -- you declared a $0.16 dividend and that will grow by however many percentage earnings growth next year. Do you see that going forward or do you rather want to keep your dividend steady?
Thanks, Howie. Yes, definitely, we distribute our dividend payout starting in 2013. That is clear and confident for the Company that we are confident on our operating efficiency and also confident for our future growth.
So regarding in terms of is it going to be growth or not, currently our board of directors has approved for a record annual dividend for 16 cents, per ADS, and -- but surely, as our revenue and income continue to grow, we will evaluate and revisit the optimal dividend in the coming years. And so definitely, we are -- have a commitment to return the value to our shareholder and but this is subject to a revisit in the future.
Howie Xia – YG Partners
Right, Okay. That makes sense. And then I have a quick follow up. Just on revenue growth going forward, so if you look at you know, if you look at how the -- how the revenue growth has been trending right? Since say mid-2012, it has sort of trended, you know, from a year-on-year growth in the mid-30s to as of the recent quarter, about 16% and ASP kind of always been -- you know, I think on average, about 9%.
So if you look at the difference there between the revenue growth and the ASP growth which is really more of an implied volume growth that is a kind of drop from the 20% range to 4.5% in this past quarter and you know, you guys are guiding Q1 revenue to be flat. I'm sure ASPs continue to grow in high single digit, so that implies you know, in terms of hours or you know, the volume growth will be negative year-on-year.
And so you know, I'm just a little bit concerned about this revenue deceleration trend and you know, would you be able to kind of address that without adding new stores, you know, what does organic volume growth look like for this business?
Sure. In terms of the revenue growth, Howie, we had expressed the strategy change from the prior year high growth, like 40%, and 30% growth, in the beginning of 2013, we had already re strategized and making sure that there is a balance between the revenue growth and the profit growth and specifically, in 2013, we are focused on the profitability which we have delivered and we had performed.
In terms of 2014, we are guiding a low teens revenue growth mainly was one. ASP, we had not put in the high single digit increase on ASP as in the assumption. Even though in 2013, you see that we have a 9.3% year-on-year on the ASP, but part of it is contributed by the RMB appreciation so if we exclude the RMB appreciation factor, our 2013 ASP is 6.5%. So in our model, the ASP growth, we actually only put an assumption around 5% and not a high single digit percent.
So in terms of the volume, we will be still growing that is the first part. And then the second part is that as we are putting a lot of initiative into our platform which is our new system, our teaching quality, reinforcement and in terms of product line expansion, these will further fill up our demand which will drive the volume. However, these are new initiatives we have not put in the assumption for the volume growth driven by these new initiatives.
At this point, we are putting on the assumption on new center opening, we are putting on the assumption on the status-quo business model and so that we can definitely deliver and deliver our commitment for the revenue growth. All these other initiatives will definitely drive up more volume and more demand but those would be upside for us.
Howie Xia – YG Partners
Right, right. These initiatives like the Smart Tutoring Systems, are these real-time learning and delivery platforms? I mean I understand they can definitely drive revenue but on the other side, should we anticipate sort of any pressure on the margin side, you know, as OpEx could kind of creep up on these -- due to these new systems being put in place?
No, we have planned in quite considerably in terms of putting in these new initiative. As you can see, in the past year, in 2013, we have driven our SG&A leverage quite significantly. In the coming year, we would not plan to drive down the SG&A percentage of our revenue so deep because we want to leave some room for these new initiatives into the coming year, in 2014.
So to sum it up, after we implemented the Smart Tutoring System, after we invest on the teacher on the curriculum R&D, after we have expanded our product group, we still would anticipate the total SG&A as a percentage of revenue will be relatively lower from 2013 but not a lot lower, maybe around 100 to 200 basis points leverage which is totally doable.
Howie Xia – YG Partners
Got you. Appreciate it. Thank you.
Thank you. Thank you, Howie.
Our last question today comes from the line of Tze Chen from Manresa. Please ask your question.
Tze Chen - Manresa
Hi, Christine, good morning, thanks for taking my question and congratulations on a very strong execution in 2013. So I have two questions. The first question I have is that I see your net operating cash flow decreased both on a quarterly basis and you know, year-on-year quarterly basis as well as on a full-year basis.
So you know, I was wondering if that is related to the new strategy that you mentioned, you know, in your prepared remarks, and if so, of collecting less cash and maximizing the revenue, that is what I was referring to, and if so, I was wondering where -- you know, how do we think about net operating cash flow going forward.
And the second question I have is around student renewal rates. You know, I was wondering you know, what your student renewal rates were historically and why do you think, historically, they have been at that number and with a new strategy going forward, where do you think you know, student renewal rates will be? Thank you.
Hi, thank you for joining our call, Mr. Chen. I like to take your question.
First question you have regarding the operating cash flow, right? But would you mind just repeat your first question so, yes, please. Thank you.
Tze Chen - Manresa
Sure. No problem. Yes, so I was saying that net operating cash flow, you know, it seems to have decelerated, you know, both on a -- you know, quarter-to-quarter basis, and so in 2012 quarter 4, you have $15.9 million of operating cash flow -- net operating cash flow and in 2013, quarter 4 you have $9.1 million, right? And also on a full-year basis from 2012 to 2013 is decreased from $54.6 million to $46.8 million and so you know, I was wondering if you can comment a little bit more on that?
And also, please help me think about where I should -- how I should think about net operating cash flow for next year and beyond?
I see. Yes. Perfect. I got it. So in terms of the operating cash flow itself, we had decreased about -- we had decreased from $54.5 million in the year of 2012 to now, 2013 is $47.3 million. However, I have to remind that there is a component in our net operating cash flow, it is called the prepaid tuition.
And so if I carve out the prepaid tuition from the operating cash flow, maybe that will be another picture I can show you that overall, Xueda indeed has expanded or increased our net operation cash flow excluding the prepaid tuition.
For example, in the 2012, there are significantly more cash from the prepayment that is about $32 million of change of prepaid tuition. So if we exclude or carve out that $32 million, 2012, the net operating cash flow will be around $22 million.
However in the year of 2013, the net change from the prepaid tuition is actually almost close to $1 million only and so that means our net operating cash flow excluding the prepayment is about $46 million and so it is actually significantly double from $22 million to $46 million in terms of net operating cash flow excluding the prepaid tuition.
We consider those are the money that we cannot touch. Those are the money that from the student, eventually we have to convert it into revenue. So I hope this perspective give you more clarity in terms of how we generate operating cash flow.
In terms of 2014, actually, I am confident that we will be able to generating our more operating cash flow because one, we continue to make money because 2013 majority of our net operating cash flow are from the profit that we generated in this year and in 2014, we will continue to generate a profit as you can see from our guidance, EPS continues to grow around 31% and also in terms of our cash collection, I believe that we will have a ramp-up because right now, the fourth quarter, the cash collection is somewhat weak, the fourth quarter in 2013, because we look to as we have discussed, we looked to 2014 with a wide array of initiative and seeing that the profitability for the fourth quarter and full-year 2013 had significantly exceeded expectation.
However, we strategically decided to intensively train our managers and staff on using our new online real-time learning and delivery platform, the Smart Tutoring System in December and January. So these are one of the reasons that why we are seeing a slowing down in terms of cash collection in the fourth quarter.
However, when our staff become more familiar with the new system, we do expect our cash collection will rebound accordingly in the first quarter. As a matter of fact, now we have completed our training period all together. We are already seeing very positive trends since the return from Chinese New Year in February. We are already seeing significant improve on our cash collection already and we are also confident the first quarter will have a very healthy cash collection.
So in short, 2013, very healthy operating cash flow mainly driven from our own money, our net operating profit. 2014, I believe the cash collection will ramp up as we are seeing the sign already, so 2014 will be even better.
Thank you. Due to time constraints, we are unable to take any further questions so I would like to hand it back to today's presenters.
On behalf of the Xueda Education Group, thank you to everyone for joining today's call.
If you have further questions, please email us at firstname.lastname@example.org or contact us through any of the channels listed in the investor relations section on our website: www.xueda.com. This concludes our fourth quarter and full-year 2013 Earnings Call.
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