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Executives

Dong Xu – Chairman and CEO

Dora Li – VP, Finance and Controller

Jerry He – EVP and CFO

Analysts

Howard Zhou – Roth Capital Partners

Ella Ji – Oppenheimer

Tony Kamin – Eastwood Partners

Noah Education Holdings, Ltd. (NED) F2Q2011 Earnings Call March 1, 2011 8:00 AM ET

Operator

Welcome to the Noah Education Second Quarter Fiscal 2011 Financial Results Conference Call. At this time all participants are in 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 CEO, Mr. Jerry He, CFO and Executive Vice President and Ms. Dora Li, VP of Finance and Controller.

After the U.S. markets closed yesterday afternoon, Noah issued a press release announcing its second quarter fiscal year 2011 financial results. The release is available on the company’s IR Web page at ir.noahedu.com.cn, along with the 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 the connection with today’s conference call. This call may contain forward-looking statements within the meaning of the Private Securities Litigation and Reform Act of 1995, including certain expectations and goals which are subject to numerous assumptions and risks.

Forward-looking statements involve unknown and known results, risks and uncertainties, many of which are beyond our control which may cause actual results to differ materially from any future results or achievements implied by such forward-looking statements.

The company’s actual results could differ materially from those contained in the risk factors 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 on our second quarter fiscal 2011 results conference call. As you may have seen from our earnings release, this quarter revenue from our Education Services business grew a very impressive 264% year-over-year and exceeded our guidance as our Little New Star brand experienced ongoing franchise expansion and as Wentai Education joined Noah for its first full quarter and turned in an impressive performance. In addition to this current results obtained this quarter in this segment, we also laid the ground works for future success as we significantly built out our pipeline of Wentai Education School.

The education services market in China continues to expand rapidly and see increasing demand, yet the industry remains fragmented and nascent. We recognized these opportunities and other market leader, we believe we are well positioned to capitalize on them. We are committed to our strategic initiative of driving growth through the acquisition of complementary businesses and remain proactive in speaking out prospects on this front. We have maintained a solid cash position which also affords the flexibility to invest in our future as opportunities arrive.

While we are encouraged by our performance in the education services side of the business, our group net revenue for the quarter increased 58.6% year-over-year to RMB64.2 million and we recorded a net loss of RMB53.4 million. These declines were driven by the ongoing restructuring of our distribution network against a backdrop of increasing competition and evolving consumer demand. We are confident of the fact that the challenges faced within the ELP business over the past several quarters have addressed – impacted our financial results and recognize that our current position does not adequately align us with our long term goals and objectives. As such, we have taken action to consider strategic alternative for our ELP business.

Among the alternatives, we’re evaluating, Mr. Benguo Tang, one of the company’s founders have submitted an indicative non-binding offer to purchase the ELP business and its operational asset. To fully understand the implications and benefits to this offer and to asses and explore other options of the ELP business, the board has established a special committee attached with this undertaking. This committee is fully dedicated to closely examining each option and choosing the route that will preserve the health of our business, the board of future growth initiative, and of course being the best interest of our shareholders.

Jerry will walk through the details of the offer and current process of selecting the most appropriate alternative to the ELP business in a few minutes, but rest assured that even as we work through this transitional period we remain committed to maintaining the financial and fundamental health of our business. We continue to work on our relationship with our distributors and are heavily focused on reducing inventory and account receivable level. And of course, on the education services side our effort to accelerate growth and expansion are unwavering. We look forward to placing increasing attention and focused on our education services business as we believe that our distinct opportunities for us to gain market share, drive growth and emerge as the leading provider in this space.

With that, I’ll now turn the call over to Dora to walk you through our financial performance for the quarter.

Dora Li

Thank you, Chairman. Starting from slide 3, as you have seen from our release net revenue in the second quarter was down 58.6% year-over-year to RMB64.2 million slightly below our initial guidance due to continued pressures in the ELP space. However, our education service portion of the business continued a strong growth trajectory exceeding our initial expectations.

Revenue for the quarter in this business was RMB21.1 million up 264%. Little New Star saw a 44.8% year-over-year rise in revenues as a franchise of network benefited from ongoing expansion. Revenue in the quarter for Little New Star was RMB8.4 million. Wentai Education added RMB12.7 million in its first full quarter post activation.

ELP revenues filed 71.1% year-over-year as we continue to reboot our distribution network and which needs a toughening landscape particularly as consumer demand shift towards integrated mobile devices. Additionally, revenue declined outpaced volume decline as we made the strategic decision to off-load more matured devices in order to maintain appropriate level of inventory and remain fundamentally healthy. Within our ELP business, KLD and e-dictionary contributed RMB14.9 million, RMB14 million and RMB14.2 million respectively.

Turning to slide 5, our gross profit in the second quarter was RMB17 million compared to RMB73.5 million in second quarter of fiscal 2010. Gross margin for quarter was 26.4% compared to 47.4% in the second quarter of fiscal 2010. Again, driven by lower ASPs as we saw competitive pricing pressure and also forged on with our initiative to off load older devices and keep the inventory at healthy level. This initiative is ongoing, so we do expect to see this trend of gross margin pressure carry over into next quarter.

Total operating expenses in the quarter grew 16.5% to RMB84 million mainly driven by 115.4% increase in G&A expenses to RMB68.4 million. As we wrote down RMB70 million in bad debt related to the ELP business and incurred RMB5.1 million in cost related to Wentai Education.

R&D expenses for the quarter declined 4% year-over-year, as we reduced our product development, third party software and a content development cost. And sales and marketing expenses also declined 20.1% from the second quarter of fiscal 2010 due to our reduced marketing and advertising activities.

Net loss for the quarter was RMB53.4 million for RMB1.44 per basic and diluted share compared to net income of RMB15.1 million in the year ago period.

Moving to slide 6, as we walk through this transitional period, we remain fundamentally strong and committed to maintaining a solid cash position on the balance sheet. In addition to our inventory reduction initiative which I have already mentioned, we are although strongly focused on the collection process and are taking very proactive measures to reduce our accounts receivable levels. As a result of these efforts, accounts receivable declined by RMB57 million in the quarter and inventory level were reduced by RMB60 million.

Cash and cash equivalents, short term bank deposits and investment of RMB495.7 million as of December 31, 2010. This compares with cash and cash equivalents, short-term bank deposits and investment of RMB538.3 million as of September 30, 2010. Though, our overall cash position was slightly reduced due to losses within our ELP business, we believe we remain very capitalize and have the financial flexibility to execute on our strategic imperative of acquisitive growth in the education service space.

That completes our financial review. I will now turn the call over to Jerry, who will talk about our strategy and operational progress in a bit more detail.

Jerry He

Thank you, Dora. As you can see from our results, revenues from our education service business more than tripled in the second fiscal quarter and exceeded our guidance. Those of our education of service brands expanded their footprint and we are pleased with their progress to date. In particular, Wentai Education has exhibited rapid expansions since joining Noah this past July. Wentai Management team has been very proactive in seeking out growth opportunities. And I’m pleased to report that we have entered into definitive agreement to being four established kindergartens and the Wentai Management.

All four of these deals are expected to cause by end of the fiscal third quarter and that we believe there will be ample opportunity for additional accretive growth such as this going forward. Furthermore, the Wentai Education Management team has also worked with real estate developers to open an additional three new schools by September 2011. Though, as you can see we have very solid pipeline schools that will be coming on board and adding to our revenue stream. At end of the calendar year 2011, we expect the total number of Wentai Schools and their management to be at least 20, double what it was when we completed the acquisition in July 2010. The rapid expansion of Wentai Schools is retentive of vast opportunities that exit into education services space in China. And we believe that Wentai reputation for academic excellence and a challenging curriculum is adherely positioned to meet the growing demand for top quality education used in China.

In addition to the success of Wentai, our Little New Star brand continues to expand at a healthy and a sustainable rate. We now have a total of 14 direct own schools and more than 700 of franchise schools including 13 that we just added in the second quarter of fiscal 2011. Just as we intend to capitalize on favorable industry dynamic streaks that of Wentai education, our plan was Little New Star is no different. We also planned to leverage Little New Star’s Dudu Happy Reading Program, which continues to gain traction and receive a high praise from participating schools, in order to further expand the reach of our franchise network.

We really are excited about our positioning we see in the education services space and the opportunities that continued to arrive. This market is so large yet fragmented in our offers stable recurring revenues, with a very attractive margin profile and we shift our focus more and more to our education service business. We intend to yield more proactively think out of ways to capitalize and a robust growth prospects.

Moving to slide 9, as Dora and our Chairman have already mentioned, this quarter we continued our efforts to rebuild our distribution network in the ELP business and made a top line competitive environment and an ongoing shift in demand as consumers now have more product choices including, integrated mobile and computer devices. Taking these changes into consideration and bringing in mind the fact that we will see more robust opportunities and a more stable revenue stream in the education services space. We have decided in recent months to consider and to pursue strategic alternatives for this area of the business. As I’m sure most of you have already seen we’ve recently announced that Mr. Benguo Tang, one of our founders have submitted an indicative long finding offer, with is a preliminary price range RMB90 million to RMB120 million to acquire our ELP business and its operating assets.

The board has established a special committee to evaluate this offer as well as all other alternatives including the solicitation of offers from other potential buyers, to determine which option were best maintained the health of the company and that enable us to better pursue our future goals and objectives.

We look forward to updating you on any forthcoming details as they become available. In connection with Mr. Tang’s offer, he has resigned from his current role as Noah’s President and COO, effective immediately although he will remain onboard in the capacity of Non-Executive Director. Mr. Tang will refrain from attending any Board meetings relating to the offer or other alternatives for the ELP business. The Board has appointed Mr. Ruchun Zhang a current Senior Vice President at Noah, as the Interim President and COO. We recognize the challenges we have faced with the ELP business in recent quarters and the impact they have had on both our top and bottom line and we have proactively taken steps to find the most appropriate of solutions deciding ourselves and the correct pact to profitability and growth. Although, we are still in the process of evaluating the best course for our ELP business, we understand opportunities and the outside potential that will arrive as we increase and shift our focus to education services business.

Moving to slide 10, although we are currently considering next steps for our ELP business in the interim, we are still fully committed to streamlining our cost basis and the preserving company’s cash. We are prudently reducing RMB expenses in order to optimize our current product line and implementing headcount reductions. In addition to this cost reduction initiatives as Dora mentioned before, we are also alternatively focused on selection process and the inventory reduction to maintain our solid balance sheet.

Net cash used in operating activity was RMB11.8 million, net operating loss of RMB63.6 million.

Looking ahead, as we walk through this transitional period in our ELP business, we remained very encouraged by the growth prospects in our education service space and of course for the third quarter of fiscal ‘11. We anticipated the revenue from this quarter of the business will be in the range of RMB22 million to RMB23 million as we continue to expand the both the Little New Star franchise and Wentai Education Network of schools.

With that, we would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Howard Zhou with Roth Capital Partners. Please proceed.

Howard Zhou – Roth Capital Partners

Hey, good evening everyone.

Dong Xu

Good evening.

Howard Zhou – Roth Capital Partners

First question for Mr. Xu. Just like to, the way you’re speaking more details on the last Friday’s announcement regarding this accounts offer to apply to ELP business and most specifically do you find this offer attractive and if there are any competing bid? And also could you provide some color on how soon do you expect the special committee will complete evaluation process?

Dong Xu

[Foreign Language – Chinese]

Jerry He

Thanks Dong. A miss chance operates – is constructed to our kind of business standards and we have established a special committee to evaluate this offer.

Dong Xu

[Interpreted] It’s hard to give you the exact timeline at this point. It depends on the third party financial advisor to give us guidance on the process. From the board’s perspective we hope we can get this done as soon as possible.

Howard Zhou – Roth Capital Partners

And is there anyone else who also competes for the supplementary offer?

Jerry He

We actually started a process back in October, we hired William Blair as our financial advisor, we solicited from about 90 potential financial and strategic investors. Out of 97 about 20 of them find NDA, but as of February 10, we did not receive any suitable bids. As you found out that we put our press release on Friday and we continue to work on additional bid for our potential buyers, but at this point we have not received one yet.

Howard Zhou – Roth Capital Partners

Okay. And move on to the next question, could you provide some color in terms of bad debt expenses, there is RMB70 million charges for the second quarter and what shall we expect from next several quarters?

Jerry He

The bad debt write-down for this quarter was 17 million which was mildly higher than what we had last year, because our last year was almost close to zero. Going forward, as we recovered our distribution network, we do expect, we will have to continue to write-down more accounts receivables as we – for the next quarter, we probably expect a similar level of write-downs.

Howard Zhou – Roth Capital Partners

Okay. And, that’s helpful. And lastly just, Jerry could you break how the gross margin for ELP and education service respectively for the quarter?

Jerry He

Sure. For the ELP business, the margin is relatively low. Just give me one second. For the ELP business it’s about 15.7%, for education service business it’s 48.5%.

Howard Zhou – Roth Capital Partners

Okay, great. All right, that’s all for my questions. I’ll jump back to the queue. Thanks.

Jerry He

Thank you.

Operator

Our next question comes from the line of Ella Ji with Oppenheimer, please proceed.

Ella Ji – Oppenheimer

Hi, good evening, everyone. First of all, regarding that offer from Mr. Dong, how will he pay for the proposed proceed?

Dong Xu

[Interpreted] We expect to be a cash transaction. But as you know it’s a matter of finalizes. So, it’s still open for discussion, but we do expect a cash transaction.

Ella Ji – Oppenheimer

And will he pay all the money in a lump sum amount or will he pay by installments?

Jerry He

For now because it’s a non-findings indicative offer, so it’s not a definitive agreement. So we don’t really have exact answer for your question, but we do want cash and or so pay in full.

Ella Ji – Oppenheimer

Okay. And have you ever, do you have like a back-up plan, if this deal falls through?

Jerry He

If the deal falls through, based on the numbers we have seen from the past quarters another alternative will be closed down to the business. So we can stop the bleeding going forward but we can focus, shift our focus from ELP business to education service business.

Ella Ji – Oppenheimer

Okay. And, then shifting gears to the education services, you said that Wentai will convert for additional kindergartens by next quarter. How much revenue will they bring to the platform and how much will you pay for the four kindergartens?

Jerry He

For the four kindergarten that – we signed a definitive agreement. The total consideration is about RMB25 million. For the four kindergartens, two of them are mature, two of them are relatively new, total number of students close to 900. For the full year, the revenue per student ranging from RMB12,000 to RMB15,000. So, in total if you do the math it’s probably a little over RMB10 million for a year. But we do expect that the two new to two new ones where most students are going forward.

Ella Ji – Oppenheimer

So, 900 students is the current total enrollments?

Jerry He

Already, it’s about 900.

Ella Ji – Oppenheimer

Okay. What’s the total capacity?

Jerry He

The total capacity, right now we have nine and we probably can add another 200 to 300.

Ella Ji – Oppenheimer

Okay, got it. I noticed that you actual occurred some bad debt for Wentai for this quarter, could you explain on that?

Jerry He

Bad debt for Wentai, no we don’t have any bad debt from Wentai.

Ella Ji – Oppenheimer

In your press release it reads, hold on one sec, in your press release in the G&A expenses –

Jerry He

That’s not a bad debt, that’s – because we’re talking about G&A. For the same year – for same quarter last year which is not having Wentai, right?

Ella Ji – Oppenheimer

Okay.

Jerry He

So we just added the G&A from Wentai, not a bad debt.

Ella Ji – Oppenheimer

Got it, got it, I was confused. Okay. And could you provide and some kind of outlooks for the revenue and the margins for your education services, if it becomes a standalone company?

Jerry He

I can speak in general for both the Little New Star and the Wentai education, because there are new mix of new schools – new schools and the mature schools, from mature schools the gross margin is close to 60. But I see there is a mix, the new ones especially if we just open one day, of course it’s a – it will have a loss. So the gross margin actually when we started a new Kindergarten Noah School that would be inactive. So we put those two together, it will take down to overall gross margin but for – as we introduced in the last quarter the average is around 50.

Ella Ji – Oppenheimer

That’s for gross margins. Do you have any rough estimates in terms of net margins let’s say for next year and forward for this segments?

Jerry He

Again, if we just look at in the towards – the net margins is stronger between 20% to 30% given that we continue to open new schools and new kindergarten going forward, the mix will change the overall number.

Ella Ji – Oppenheimer

Okay. And in terms of the pipeline is there any sort of long-term outlook, how in the long-term what would be a sustainable gross rate for this business?

Jerry He

As we experienced it for Wentai, as we talk about earlier we expect a number of school will double this year versus last year. I think that would trend to, we’re probably going to add another trend or so next year. That means we do expect number of schools for Wentai would be somewhere close to 30 by the end of 2012. For Little New Star the gross rate is lower because of lack of acquisitive growth, the organic growth there is around 20 or high teens, enters a top line.

Ella Ji – Oppenheimer

Okay, that’s helpful. And for the Little New Star I understand that the majority of Little New Star schools for now are franchise, is that right?

Jerry He

Yes.

Ella Ji – Oppenheimer

Will you consider converge them to more company owned once you become a standalone company?

Jerry He

We will consider that.

Ella Ji – Oppenheimer

Okay, great. That’s all my questions. Thank you very much.

Jerry He

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Tony Kamin with Eastwood Partners, please proceed.

Tony Kamin – Eastwood Partners

Hi, if you were to sell or close the ELP business given the size of the education business now and good gross margin, but how much would you be able to take your current G&A down? I’m trying to get at, has the board looked at sort of how many quarters it would take to rationalize your current cost structure without the ELP so that the education business could be self-sustaining?

Jerry He

That’s a very good question. Either we sell the business or we close down the business, the corporate overhead would go down significantly because the overhead would only include the fees and expenses associated with being a public company. In terms of the head counting that headquarter is going to be a much smaller number. So the cost for the overall public expenses, we do expect we’re probably going to cut it by half.

Tony Kamin – Eastwood Partners

Okay. Thank you.

Jerry He

Thank you.

Operator

We have no further questions at this time. I will now turn the call back over to Jerry He, for any closing remarks.

Jerry He

Thank you very much for joining us today. We look forward to speaking to you next time. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. Everyone may now disconnect. Have a great day.

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