Noah Education Holdings CEO Discusses F3Q2011 Results - Earnings Call Transcript

May.13.11 | About: Noah Education (NED)

Noah Education Holdings Ltd. (NYSE:NED)

F3Q2011 (Qtr End 03/31/2011) Earnings Call

May 13, 2011 8:00 am ET

Executives

Jerry He - CEO

Dora Li - CFO

Analysts

Ella Ji - Oppenheimer Funds

Howard Zhou - Roth Capital Partners

Operator

Good day, ladies and gentlemen, and welcome to the Noah Education's third quarter fiscal 2011 financial results conference call. (Operator Instructions) Joining the conference today are Mr. Jerry He, CEO; and Ms. Dora Li, CFO.

After the U.S. markets closed yesterday afternoon, Noah issued a press release announcing its third 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 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 known and unknown risks and uncertainties, many of which are beyond our control which may cause actual results to differ materially from any future results or achievements implied by such forward-looking statements.

The company's actual results could differ materially from those contained in the risk 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 CEO, Mr. Jerry He.

Jerry He

Thank you for joining us today on our third quarter fiscal 2011 result conference call. As you may have seen from our earnings release, our Education Services business continue to flourish during the quarter with revenue from this segment growing 115.5% year-over-year and the net income revenue and factor added 158.2% as our financial results as a group.

We were impacted by the performance of our discontinued ELP business. We are on track to complete the sale of this business by the end of this month. The disposal of the ELP business will not only enable us to focus on our strategic growth areas, but also strengthen our balance sheet and better support our cash flow levels going forward.

With the divesture of our ELP business at an advanced stage, our focus is on our education services segment. We are actively pursuing special opportunities within our existing brands and expect the number of Wentai Education Schools and their management to be at least 20 by the end of calendar year 2011, double of what it was when we completed the acquisition in July 2010. We look forward to taking advantage of future opportunities to expand the Wentai brand both of acquisitively and organically.

We also continue to execute our strategic imperative of acquiring complementary business. Last month, we entered into a definitive agreement to purchase 80% interest in kindergarten operator Yuanbo Education. We are confident the combination of the capital injected into Yuanbo Education as part of the acquisition. Together with our extensive education service and management experience, we lead today the continued growth of this business and making accretive through earnings in the fiscal ending June 2012.

I will give you a bit more color on our progress with both Wentai and the Yuanbo Education in just a few minutes. Before handling over to Dora, to walk through our financial results, I would like to reiterate there is a world opportunities that exists within China's fragmented and nascent education service market.

There is (inaudible) disposal of the ELP business. We are even more intensely focused on capitalizing our opportunities that exist within this fast growing market. Our strong balance sheet with cash, cash equivalents and short-term investments of US$75 million at end of the March support our financial strength to take advantage of opportunities as they arrive.

With that, I will now turn the call over to Dora to walk you though the details of financial performance for the quarter.

Dora Li

Thank you, Jerry. As shown on Slide 3, net revenue in the third quarter was down 71.3% year-over-year to RMB72.7 million due to ongoing challenges within our ELP business. However, as Jerry just mentioned, we continue to see a strong performance from our education service business with revenue of RMB23.1 million directly exceeding our guidance. This growth represents a 115.5% increase from the third fiscal quarter of 2010.

Taking a closer look at the segment on Slide 5. You can see its performance was supported by the contributions from Wentai education, which is fueling our growth as new schools come on board as well as stable performance from Little New Star.

It is important to highlight that in addition to expanding our education service revenues we are also driving profitable growth within our continuing operations. As we have mentioned before, one of our strategic reasons for pursuing the education service base is because of the visibility and more attractive margin profile of this business with year-over-year net income growth of 158.2% outpacing topline expansion this quarter. You can clearly see that we are capitalizing on this favorable industry trends.

Additionally, turning Slide 6, operating margins rose from 18.3% in first quarter of fiscal 2010 to 26.6% this quarter. Thanks to the increased contribution from Wentai and our efforts to maintain a lean operation structure, while net margin expanded to 23.5%.

Moving to Slide 8, operating expenses for the quarter totaled RMB71.9 million, down 34% year-over-year. The decrease in operating expenses was driven by 20.1% reduction in R&D expenses, as we had a fewer cost associated with product development and third party software and content development, as well as a 50.8% decline in sales and marketing expenses attributable to our reduced advertising spend.

Total G&A expenses were up 14.1% from third quarter of fiscal 2010 due to incremental expenses from Wentai Education present in all our books this quarter. Total operating loss was RMB43.3 million compared to operating income of RMB32.9 million in the first quarter of fiscal 2010.

Of the total operating loss of RMB43.3 million, RMB37.3 million was incurred by the discontinued ELP operations. And the remaining RMB6 million loss was incurred by continuing operations. However, the education service portion of continuing operations generated operating income of RMB6.2 million, a rise of 210% year-over-year.

Net loss of this quarter was RMB290.9 million or a loss of RMB8.04 per basic and diluted share compared to net income of RMB36 million in the year-ago period. Within this, net income from continuing operation was RMB2.3 million. Net loss from the discontinued ELP operations was RMB293.2 million, which includes an impairment loss of RMB221.7 million relating to the sale of this business.

Basic and the diluted earnings per share for continuing operation in the third fiscal quarter were RMB0.04. Although, it is important to note that this figure was adversely impacted by legal and financial advisory fees relating to the sale of ELP business. Excluding such fees pro-forma basic and diluted earnings per share for the third quarter for the continuing business were RMB0.10.

Moving to Slide 9, our balance sheet remains fundamentally sound with cash, cash equivalents and short-term investments totaling RMB491.2 million or US$75 million. The balance that amounted in April by approximately RMB40 million relating to the first payment concerning of the ELP business. Our solid cash position provides us with the financial muscle to capitalize on expansion opportunities within China's fragmented education service industry.

As Slide 10 shows, our stringent cash flow control policies resulted in cash flow from the operations totaling RMB9.8 million despite the loss incurred from the ELP business. That completes our financial review.

Now I will turn the call back to Jerry, and he will walk you through our strategy and operational progress in a bit more detail.

Jerry He

As you all saw from our financial result, our education services continue to see a robust growth this quarter. Much of this positive momentum was driven by Wentai education with stable support from our Little New Star franchise.

Turning to Slide 11, as I mentioned in the last quarter, we have signed definitive agreements to bring forth established kindergarten and the Wentai management. I am pleased report that the deal closed earlier this month. And the kindergartens are due to contribute to revenue in the quarter ending June 2011.

In addition, the one school and the two new kindergartens that we are working with real estate developers to open are still on track to commence operation by September 2011. And the contracts have now been signed to over three kindergartens and one school in 2012.

This combination of acquisitive and organic growth demonstrates our ongoing commitment to profitably growing our education service business. And we will continue to actively pursue acquisitions that complement our existing education service portfolio.

As for our Little New Star business, our Dudu Happy Reading program has generated over RMB2 million revenue since its inception in July 2010, further expansion a planned for fiscal 2012.

Moving to Slide 12, demonstrating our commitment in two strategic acquisitions and recognizing the attractive complementary target that exist in the fragmented education service industry in China. In our recent announcement to acquire an 80% interest in Yuanbo Education. The company operates and manages 16 kindergartens and economically developed and prosperous the Yangtze Delta region under the brand name Qingan.

Yuanbo school are focused on children aged two to six and offers world class courses from Taiwan, Germany, Italy and Canada. The brand has a total student enrollment of approximately 4,700 and over 600 staff members. Mostly like Wentai's niche offer of high-end education, Yuanbo education meets the demand of our high quality pre-school education in China.

We intend to fund the purchase of RMB102.4 million for our Yuanbo cash reserves. With that said, RMB50 million of this purchase price is to be used for expansion to illustrate our commitment to building and the achievements of the management team, which has successfully grown the business since its establish in 2001 and will retain a 20% stake, building it's track record of expansion.

Yuanbo Education is planned to extend its reach by opening additional kindergartens and are making acquisition across the Yangtze Delta region. With revenue of RMB35 million in 2010 for the kindergarten operator, we expect Yuanbo Education to contribute to Noah's net income starting for their next fiscal year following the close of the deal expected in by July.

We plan to maximize its contribution to Noah's bottomline by growing out our experience with Wentai Education and the Little New Star and Yuanbo Education's operational efficiencies. Of course, our intent and unwavering focus on education service is now made possible by the sales of our ELP business.

As you have seen from our offering, we are drivers in this division to First Win Technologies, which is wholly owned by Mr. Benguo Tang, who is our former President and COO and one of Noah founders, for a total consideration of RMB100 million. As that I mentioned earlier, we have already received the initial of payment of RMB40 million and we look forward to this transaction further strengthening our balance sheet and the cash position, so that we may pursue growth opportunities that arise in our continuing operations.

Turning to Slide 14, to promote continued profitable expansion of our education service business, we are assembling an experienced and dedicated education service management team. My new role of CEO enables me to intensify my focus on the education services portion of the business. And I am delighted that Dora Li has agreed to take her successful track record in senior finance role, which in Noah, and take out the role of Interim CFO.

We are looking to add a professional with strong background in education services management to Noah's senior management team. Several (inaudible) education service experience of Noah's senior leadership and management teams of our growing portfolio of education service and companies, which a provide a relative experience on which we saw.

We remain encouraged by the growth prospects within the education service sector. They are robust to extend our footprint and to drive revenue growth. These opportunities comes with high visibility and an attractive margin nature of this industry help ensure that at the same time we will improve our profitability and help drive value for our shareholders. We intend to leverage our financial spend and a successful track record to capitalize our acquisitive and organic growth opportunities we're seeing in the fragmented market.

Looking beyond the sale of ELP business, we are very bullish on growth opportunities and the prospects we see in our remaining education services segment. As shown on Slide 15, we anticipate education services revenue for the fourth quarter of fiscal 2011 to rise through RMB24.5 million to RMB 26 million. As therefore additional Wentai education kindergartens acquired during the third fiscal quarter making initial contributions. And then for the full year, we expect education services revenue to total RMB88.5 million to RMB90 million.

With that, I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from line of Ella Ji with Oppenheimer Funds.

Ella Ji - Oppenheimer Funds

I want to ask you about that I noticed that there is about RMB12.2 million in the G&A expenses for this quarter. What is the nature of that amount?

Dora Li

Actually the RMB12.2 million G&A expenses are incurred by the surveying subsidiaries under the holding group.

Ella Ji - Oppenheimer Funds

I am sorry I didn't quit get it.

Jerry He

That's basically the overhead cost from the holding company

Ella Ji - Oppenheimer funds

Overhead cost of the holding company, is that one-time or is that a recurring expenses?

Dora Li

It is recurring. We divest the ELP Business, but we still have some holding stocks remaining. So we still have the remaining overhead under the holding group.

Jerry He

That RMB1 million or RMB2 million is actually breaking down into two pieces. One is the overhead cost of work continue to incur going forward after divesting of the business. For examples, the rent of the head office and the salary of senior executive. But a part of that RMB12.2 million is associated with the divesting of the ELP Business. And there are three parts, we consider one-time, that amount to RMB5.4 million or so.

Ella Ji - Oppenheimer Funds

So RMB5.4 million is one-time only occurring this quarter and the rest of that you expect it will occur every quarter?

Jerry He

Not exactly. Because the nature of this expenses will recur going forward, but the amount may change after the divesting of the year. For example, the benefits now are basically occurring for all the employees of the company. For instance there is one-line item that's called expenses associated with the stock options going forward, because much fewer people working for the holding company, that expenses would go down at some point.

Ella Ji - Oppenheimer Funds

And I noticed that you actually occurred a operating loss for this quarter. So Jerry, could you comment, your margin outlook going forward? I mean excluding those one-time expenses in the overhead cost and going forward. Do you expect that you will achieve a profit? And if so, when do you think you can achieve profit?

Jerry He

If looked on what we did this quarter, the operating income before we take RMB12.2 million third quarter charge, it's positive, RMB6.2 million operating profit from Wentai and Little New Star. And we deducted one-time items from the (third) quarter overhead. We are very close to breaking even in terms of operating income.

And as I said earlier, we do expect a overhead from the (third) quarter would have go down going forward. So we do expect that as soon as the ELP Business closes, we do expect the operating income would be positive at that point.

Ella Ji - Oppenheimer Funds

And then could you comment on the seasonality of this new Noah with a mix of kindergartens English tutoring in the primary schools. What's the seasonality between the four quarters that we should expect?

Jerry He

For kindergartens in the schools, because we take, for example, Wentai we had a tuition as a beginning of this (inaudible) actually a little bit before that as well. But we do allocated the revenue stream overtime. So in that sense they relate to a seasonality associated with the tuition, but there are other fees that may have some seasonality.

So the scenario would be very little for Wentai, but stronger for Little New Star, because Little Star runs training centers that are correlated when the school starts. For example, when they have the summer breaks and winter breaks so there would be more students in those training programs.

Ella Ji - Oppenheimer Funds

So summer and winter break are high seasons for Little New Star?

Jerry He

In terms of the quarters, the September quarter and the March quarter would be higher. But for Wentai's business is relatively flat.

Ella Ji - Oppenheimer Funds

Like for Wentai, do you also recognize revenue during the summer and the winter break?

Jerry He

Not for the whole months. It's for the whole month. And if there is a break, then we would not recognize revenue for that month.

Ella Ji - Oppenheimer Funds

So maybe it will be a little bit light during the July and August months for Wentai.

Jerry He

Yes.

Ella Ji - Oppenheimer Funds

And then could you talk about, you said, you are in the process of assembling a new management team for in your company. Could you just give us a little bit of colors, what positions are you looking for? And how many employees do you have now and what's your target number of employees say by the next year?

Jerry He

After the close of the transaction, the employees within our headquarters, not including employee for Wentai and Little New Star, we would have less than 30 headcounts. Going forward we do expect the headcount will go up as we expand our education service company portfolio. But that would grow of course with the business.

And you are looking to how to assemble at least two teams. One is a team to integrate the operation of the acquired companies. Another team would focus on the research teaching content and the curriculum or so building the brand in our education service industry.

Ella Ji - Oppenheimer Funds

So those new teams, which line of expenses will they fall under?

Jerry He

They are also under the third quarter. Put into third quarter G&A.

Ella Ji - Oppenheimer Funds

And for those acquired companies for their daily operations and say student enrollment things like that. Is the existing management team still going to be responsible for those?

Jerry He

Yes.

Operator

(Operator Instructions) Our next question comes from the line of Howard Zhou with Roth Capital Partners.

Howard Zhou - Roth Capital Partners

First of all, could you break the annual gross margin for Little New Star and Wentai Education represented? And also could you give us just a quick reminder of how many kindergartens and schools that Wentai Education currently managed?

Dora Li

Let me give you the margin profile for Little New Star and Wentai Education. For this quarter, Little New Star gets a gross margin at 62% and Wentai Education has a gross margin at 47.5%. This is for Q3 fiscal '11. And the combined gross margin for education service is close to 54%. For this quarter operating margin for Little New Star is 18.3%.

Howard Zhou - Roth Capital Partners

I am just asking for the gross margin. And just quickly, how many kindergartens and schools Wentai is currently operating?

Dora Li

Wentai operates four schools and right now 11 kindergartens.

Howard Zhou - Roth Capital Partners

And then just wanted to touch on some outlook of your education service business? And you moved your thoughts to this business line, what type of gross rates are we looking for next year?

Jerry He

Gross rate or gross margin?

Howard Zhou - Roth Capital Partners

Gross rate.

Jerry He

We will update our forecast on our next conference call in August, but I'll give you a little bit of color at this point. We mentioned that we acquired four kindergartens for Wentai and we also announced the acquisition of Yuanbo education. Given the numbers we already have in hand, we do expect at least a topline growth of 60%, but more likely than not, it will be higher than that. But we would update you on the next call.

Howard Zhou - Roth Capital Partners

60% for the topline, right?

Jerry He

At least.

Operator

Ladies and gentlemen, with no further people in the queue, this does conclude our question-and-answer session. I would now like to turn the call back over to Mr. Jerry He for closing remarks.

Jerry He

Once again thank you for joining us today. And we look forward to seeing you again next time. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a good day.

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