iKang Healthcare Group, Inc. (NASDAQ:KANG)
Q1 2014 Earnings Conference Call
August 26, 2014 8:00 am ET
Jessie Xin - Director of Investor Relations
Ligang Zhang - CEO
Yang Chen - CFO
Serena Shao - Bank of America Merrill Lynch
Shaojing Tong - UBS
Good morning and thank you for standing by for iKang's First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. I would now like to turn the meeting over to your host for today's call, Jessie Xin, Director of Investor Relations. Please go ahead, Ms. Xin.
Hello everyone and welcome to fiscal first quarter 2014 earnings call of iKang for the period ending June 30, 2014. I'm Jessie Xin, Director of Investor Relations, and with me today on the call are Mr. Li Zhang, our Chairman and CEO, and Mr. Luke Chen, our CFO.
As a reminder, today's conference call is being broadcast live through a webcast. In addition, a replay of the call will be available on the Web-site following the call. By now you should have received a copy of our press release that was distributed on August 26, 2014 after market close Eastern Time. If you have not, it's available on the Web-site in the Investor Relations section.
Before we get started, let me review the forward-looking statements regarding this conference call. [Indiscernible] forward-looking statements, these statements, including management quotes and business outlook, are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, estimate, project, predict, believe, expect, anticipate, intend, potential, plan, goal and similar statements.
iKang may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission, in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Such statements involve certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.
These forward-looking statements include, but are not limited to, statements about; the Company’s goals and strategies; its future business development, financial condition and results of operations; its ability to retain and grow its customer base and network of medical centers; the growth of, and trends in, the markets for its services in China; the demand for and market acceptance of its brand and services; competition in its industry in China; relevant government policies and regulations relating to the corporate structure, business and industry; fluctuations in general economic and business conditions in China.
Further information regarding these and other risks is included in iKang's filing with the Securities and Exchange Commission. iKang undertakes no duty to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.
During this call, we'll be referring to both the GAAP and non-GAAP financial measures. We believe the non-GAAP measures [more exactly indicate] (ph) of how we measure the business internally and they are reconciled to GAAP in the tables attached to our press release which can also be found on the Web-site in the Investor Relations section. Please note that all numbers are U.S. dollars and all comparisons we refer to are year-over-year comparisons unless otherwise stated.
With that, I'll turn the call over to our Chairman and CEO, Mr. Li Zhang. Li, please.
Thanks Jessie. Good morning and good evening to everyone. We are pleased to report another strong quarter and remain firmly on track to achieve our full fiscal year revenue growth of 40% to 43%. Our guidance on net revenue is between $283 million to $290 million, completely in line with the market expectations which come to an average consensus of $289.1 million determining the [indiscernible] of iKang, and in fact [set] (ph) the foundation for strong forward momentum in China's healthcare service industry.
We have issued a statement early this evening [some time] (ph) to clarify that the consensus estimates of iKang's net revenue for the fiscal year ending March 31, 2015 reported by Thomson Reuters was incorrect stated to be US$323, while the correct number should be US$289.1 million. Thomson Reuters corrected the consensus estimate number to the right one at around 1 PM Hong Kong time today, on August 26, 2014 today.
Today, I'm going to recap our business performance of the fiscal first quarter and discuss some of our key accomplishments and the developments. Our CFO, Luke Chen, will then provide a more detailed update and will provide some insight into the financials. Afterwards, Luke and I will take your questions.
For those who are new to our Company, we have included a [PPT] (ph) in our presentation which is available for download from the Investor Relations section of our Web-site. Again, our numbers are in U.S. dollars and all comparisons refer to year-over-year, unless otherwise stated.
Let's start with the performance highlights on Slide 5 of the PPT. We had a strong quarter. Net revenue was US$60.2 million, up 43.3%. Gross profit was $29.1 million, up 29.7%. Non-GAAP operating income was up $29.3 million and the non-GAAP net income up 37.5%.
Continuing on Slide 6, we are also very pleased with the solid performance across the board. Revenues generated from our major services saw significant growth across the quarter. Our customer base have also grown significantly, in part riding off the successful expansion on network base which had also increased by around 35%. We have also been busy this quarter acquiring and integrating statistical assets that complement our growth strategies, and this will further strengthen our position in various markets.
Our integration with the MediFast Hong Kong into iKang where both our operations [are consistent considerably] (ph) in Hong Kong, and our acquisition of Shanghai Huajian further strengthens our hold in the medical examination market in Shanghai, a key market for us in the future.
Moving onto Slide 7, you can see the tremendous traction gain being expanding our medical centers and the geographic coverage. As of June 30, 2014, we have a total of 50 self-owned centers, with three new additions from acquisition of Shanghai Huajian. We are right on path to achieve our target of adding 10 to 15 new medical centers by fiscal 2014 ending 31 March 2015.
In addition, the successful acquisition of Huajian further strengthens our leading position in the Shanghai market, one of the most strategic market for iKang, and offer tremendous opportunities to further expand our product and service offerings to the patients outside Shanghai.
Turning to Slide 8, for detailed data on customer visits and ASP, we are encouraged by the continued growth in this area despite it being a seasonally slow quarter. As of June 30, 2014, total number of visits reached 790,000 which is about like 35.1% year-over-year increase, of which about 700,000 were visits from corporate customers. In addition to the significant volume increase, our blended ASP of medical examination services has steadily increased by 3%.
With that, I will now turn it over to our CFO, Luke Chen, for the financials.
Thank you, Li. Moving to the financials, as the details for the first quarter results of 2014 are available in our earnings release, I would like to highlight the key business and financial metrics and focus on year-over-year comparisons, with all the numbers in U.S. dollars unless otherwise stated. If you have not already done so, I will encourage you to download from the Investor section of our Web-site the financial slides.
My prepared remarks will be focused [indiscernible] to the business and the financial review of fiscal first quarter of 2014 and it's [indiscernible] from slides 9 to 21. For the quarter, net revenue was US$60.2 million, up 43.3%. The result was driven by robust growth across all service categories. Revenue from medical examinations were $51.5 million, up 42.7%, accounted for 85.7% of total net revenues.
Revenues from disease screening were $4.2 million, up 34.4%, representing 6.9% of total net revenues. Revenues from other services were $4.5 million, up 61.5%, and accounted for 7.4% of total net revenues as compared to 6.6% in the same quarter last year.
The increase was mainly due to the revenue contribution from the acquisition of Yuanhua Medical Consultancy Services Shanghai Co., Ltd. in July 2013. Yuanhua provides medical consultancy, medical examination and disease screening services.
Taking into the account of seasonality, our growth rate in this quarter at 43.3% has actually accelerated as compared to 35.5% growth rate in the same quarter last year.
Turning to the cost of revenue on Slide 12, cost of revenues for the quarter was $31.1 million, increased by 58.9% from $19.6 million in the same quarter last year. There was large increase in third party outsourcing service this quarter which led to its cost increase accordingly. Third-party outsourcing service refers to our outsourcing service with the cooperative independent hospitals and medical examination centers in the cities where we do not have presence.
In addition to increased cost of material consumables and third party outsourcing service as a result of revenue increase, there were increases in the rental and staff costs as well as depreciation and amortization expenses associated with the new centers opened and acquired from June 30, 2013 to June 30, 2014.
As a result, if you turn to the next page, gross profit increased 29.7% to $29.1 million and gross margin for the quarter was 48.3% compared to 53.4% in the same quarter last year. The overall gross margin was mainly impacted by two factors. One, newly operating centers still at their ramping-up stage and they have relatively low gross margins. Two, the third party outsourcing service only had about 14.3% gross margin, which also diluted overall gross margin. As we mentioned in the past, it is of paramount importance to ready the medical centers for upcoming peak season and our expansion schedule resonates with this objective.
Turning to Slide 14 for a detailed breakdown of our operating costs, the total operating expenses for the quarter was $23.4 million, up 85.2%, which was mainly driven up by the share-based compensation expenses at US$7 million reported in the G&A expenses. As a percentage of total net revenue, G&A expenses accounted for 27% of total net revenue. We have added another bar to show the difference by excluding this share-based compensation expenses, the G&A expense line as a percent of net revenue would have been 15.2%, which is slightly lower than 15.6% in the same quarter last year.
Selling and marketing expenses is the second key cost component. It was $6.9 million, up 22.4%, representing 11.5% of net revenue, an improvement from 13.5% in the same quarter last year. The improvement reflected the operating leverage from the robust top line growth.
Continue on to Slide 15, you will note that we have added another bar to show the impact on the share-based compensation on our operating income and the margin. Excluding the impact from share-based compensation expenses at US$7 million, operating income would have been $12.6 million, an increase of 29.3%, with operating margin around 21% compared to 23.3% in the same quarter last year.
Slide 16 gives you an overview of our performance on non-GAAP basis. Non-GAAP EBITDA for the quarter was $16.3 million, up by 37.4%, and the non-GAAP net income was $8.9 million, up 37.5%. Please refer to the table in the earnings release or Slide 18 for the reconciliation between EBITDA and net income GAAP to non-GAAP basis.
Taking into account of the seasonality, our growth rate in this quarter at 37.5% has gone up as compared to 14.5% growth rate in the same quarter last year.
Let's jump to Slide 20, I'll quickly note our cash flow and working capital. As of June 30, 2014, the Company's cash and cash equivalents, restricted cash and term deposit totaled $192 million as compared to $46.2 million as of March 31, 2014.
To conclude, we had a solid performance in this quarter and are well prepared to consistently deliver growth. Our strong cash position also enables us to execute our growth strategies. That concludes my remarks and I'll turn it back to Li for concluding our presentation section before we open the call for Q&A. Li?
Thanks. We now confirm our annual top line guidance of $283 million to $290 million, representing 40% to 43% year-over-year growth. These robust results, strong business [transaction] (ph) and the continued success in acquisition and integration further validate our market leading position as the largest provider of private preventive healthcare services and reinforce our commitment to become a leading healthcare management service provider in China in the future.
We remain focused on executing our growth strategies to continue to building the preventive healthcare service platform; enhancing our high-end Evergreen brand; strengthening service infrastructure and expanding geographic coverage and value-added service offerings in the short term.
Over the middle to long term, we aim to expand into adjacent areas and develop IT infrastructure and solutions that will further enable us to capitalize on the tremendous growth opportunities in China's healthcare service segment. The senior management of the Company is fully committed to creating sustainable long term value to our shareholders.”
We'll now open the floor to questions. Operator, we are ready.
(Operator Instructions) Your first question comes from Serena Shao from Bank of America Merrill Lynch. Your line is open. Please go ahead.
Serena Shao - Bank of America Merrill Lynch
First of all, congratulations on the solid quarter. I actually have three questions here. So my first question is on your new medical center opening. It seems that you have already opened five new centers this quarter which is pretty good progress. Can you give us an outlook about how many medical centers you're going to open in the full year? I remember that you guys guided 10 to 15 medical centers. So [indiscernible], any update on that? Secondly, my second question is your other services which grew [very much] (ph) this quarter around 60%. Can you give us a bit of breakout like how much growth coming from the dental and how much coming from your new Evergreen [indiscernible] and any update on those new businesses? My last question actually is on the margins. I think as Mr. Chen just mentioned, your ASP actually increased by [$0.36] (ph), so then in this regard what's exactly the reason for your margin erosion in this quarter, could you update with a detailed explanation? Thank you so much, that's all of my questions.
I'm going to take the first two then leave the last one to Luke. So I'm going to take the first two then leave the third one to Luke. And for the internal medical centers, we are in line with the numbers and the guidance we have given during the last earnings call. So for the fiscal year of this year we are adding 10 to 15 new ones. So we finished up five. So we have 5 to 10 more to come up within this fiscal year.
And you just mentioned about Evergreen [inaudible] because Evergreen services are basically people have such a high expectation for the service quality. Also [indiscernible], it takes much longer time to get a full inspection. So we get [the license] (ph) basically in April 2014, we had the full inspection at the end of May. So the company starts operating Evergreen Beijing start of June, and for people already visiting Evergreen Beijing, we have three section, we have the [indiscernible] operating center and the [membership] (ph) side. So for the inspection and operating center, we start the full operation in June. And so we only have that short period of operation history.
For the membership side, we just started last week because there is in terms of the membership [section] (ph), we basically have the position of that section basically all in that section senior position. That takes some time to report of the training [indiscernible]. So while [indiscernible] it is just upgraded because the hardware there are [indiscernible], we are just upgrading the service lateral from iKang [indiscernible] to Evergreen side. So the fact is still has the operating [indiscernible] acquisition last year, but in terms of Evergreen service, we just started actually in this August.
So the dental side, in this quarter, basically for this our main goal is really making investment and try to turn small dental section with either correct [indiscernible] into dental clinic, but usually we don't have two or three chairs, rather we are adding basically to expand to five to eight chairs [indiscernible]. So in this quarter, past quarter, we added three, we added four for one. So by end of June we have 17 dental operations right now and for the whole year for the whole this year our plan is basically 20 in total. So by end of March 2015, we'll have like 33 dental centers with our medical center.
So once again, for the Evergreen, this is regarding people expecting like special high service but I could give you some color actually, it's a color of the service, and if you compare the ASP for iKang Evergreen, although it's a usual iKang site and it is much high, and if you look at the individual site, and the ASP for iKang Evergreen is about [seven] (ph) times of the regular one we have, and the [indiscernible] for the corporate accounts is about 2.5 times of the ASP from iKang Evergreen site.
So I think so far the feedback from customers are pretty positive. So I think we are on track and try to [indiscernible] in a strong brand name of that service and with Evergreen, and with dental side I think we are on track turning more dental section into dental clinics. So I'm going to turn it to Luke for the third question.
Sure. If you look at the margin, the margin for this quarter is 48.3% compared to 53.4% in the same quarter last year. The margin is not eroded because of the pricing as we just explained. The ASP for the medical examination is up 3% and overall blended ASP actually up 6%. So if you look at the cost structure, you would see the cost increase mainly in the medical consumables and also in service, which is 19.2% of net revenue as compared to 15.6% same quarter last year. The increase is mainly because the revenue increase in the third-party outsourcing service has been large this quarter and the third-party outsourcing cost we only have a margin around 14.3%. So that has an impact, around 2.5% margin impact this quarter.
Additionally, the addition on the new centers because they are still at ramping-up stage, so its fixed cost cannot be fully absorbed, which lead to lower margin. And our analysis shows all the new centers have a margin around 55% compared to 51% of the old or the existing centers. However, we think all these new centers expansion is very critical because that will enable us to increase our capacity in the peak season in order to achieve our future growth. That mainly explains the margin decrease.
Your next question comes from Shaojing Tong from UBS Bank. Your line is open. Please go ahead.
Shaojing Tong - UBS
I'd like to ask two questions. First question is about your pricing. I know you said you have been able to increase your corporate rate by about 3% this quarter and that is very encouraging. I would like to know more detail about how are you able to achieve this. Is that a change of customer mix or is that a change of your service mix or that is negotiation up for each contract's pricing? Second question is still related to your margins. How would – not too much focus on the quarterly margins because understanding that at your size and your development stage, quarterly volatility is inevitable, but generally the trend has been that your operating and net income margins on a non-GAAP basis has been improving. I think that is a logical trend because as you become bigger, the percentage of new centers as the total number of your business should continue to decrease, that should help you to improve margins. So for the full year, for this year, despite you have slightly lower than expected margin, are we still on track to improve the overall full-year margin?
I'm going to answer first one and then Luke is going to answer the second one. In terms of the increased ASP, I think mainly due to two reasons. Number one, because I think [internally] (ph) we are encouraging stronger management resulting [indiscernible] actually we have each of our region operations have slight [indiscernible] ASP increase on a unit basis. So that's [stuff] (ph) internally regularly pushing out to increase our ASP. That's number one. And each operation I think they are working as one team to improve that.
Second, I think also I think was the stronger brand name of company. I think also being a private company I think gave us some advantage to gain more confidence and attract more customers. I think [indiscernible] and also for the small and medium company because we have large customers, more company in a middle company side, I think in terms of the sort of the discount rate given, you can get to customers, we also start to implement much stricter in [indiscernible] department for certain based on [indiscernible] customer base at the [indiscernible] on management team.
Also we are in the middle of [indiscernible] service management software or [the SM] (ph) software to manage better. So I think the future, I think we are excited basically that ASP will still grow up gradually. Luke?
Let me take on the second question. We fully believe the scale matters in this and because the variable cost the consumers and the third party outsourcing cost only contribute 20% and the rest is basically like fixed costs. So the more company accounts we have, more volume, more business we get, the higher absorption on a fixed costs and high contribution of margins.
However, the new center expansion will impact the margin because this is a ramping up period. And the impact is very clear if you coupled with a seasonality issue as we can tell from this quarter. But when we move into second quarter from July to September and third quarter October to December, then we get into a peak season with higher utilization in our center and we really believe we will have much better margins, not only the gross margin but also the net margin. So overall on an annual basis, yes, we are still positive on the gross margin improvement as well as on the net margin improvement.
Shaojing Tong - UBS
Great. Thank you very much.
Thank you for your questions. There are no further questions at this time. I'd like to hand the call back to management for closing remarks.
Thank you very much for joining this conference call. With the tremendous opportunities in the private preventive healthcare segment and the significant momentum for our expanding network and the customer base, our prospects are exciting. We look forward to updating you on our progress in the next quarter and meeting you at the investor conference held by J.P. Morgan and Deutsche Bank in Boston and New York especially in September. We also encourage investors to come to us or our IR firm if you have any further questions. We wish everyone a good day and a good evening.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may all now disconnect.
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