Zhengdong Zhu - Chairman and CEO
Ping Wei - CFO
Grace Lam - Citi
Mark Marostica - Piper Jaffray
Julie Chen - TriPoint
China Distance Education Holdings, Ltd. (DL) F2Q11 (Qtr End 03/31/2011) Earnings Call May 17, 2011 8:00 AM ET
Good evening, and thank you for standing by for the China Distance Education Holdings Limited second quarter fiscal 2011 earnings conference call. Today, you will hear from Mr. Zhengdong Zhu, Chairman and CEO of the company, and Ms. Ping Wei, the CFO. During the prepared remarks, all participants will be in listen-only mode. After that, the company's management will be available to answer your questions.
Before we start, we would like to remind the listeners that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Among other things, the outlook of the second quarter of fiscal year 2011 and oral statements from management on this call, as well as the company's strategic and operational plans, contain forward-looking statements.
Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements. Further information regarding these and other risks is included in the company's annual report on Form 20-F and other documents of the company as filed with the Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law.
As a reminder, this conference is being recorded. A summarized presentation can be downloaded from the company's IR website and which we will refer to during the course of the call. In addition, a webcast of this conference is available on the company's Investor Relations website at ir.cdeledu.com.
I will now turn the call over to Mr. Zhu to discuss the operational highlights.
Thank you, everyone for joining us on our second quarter fiscal 2011 results conference call. Our operating results were released earlier and available on the company's website as well as on Newswire services. We are pleased to report strong second quarter results with steady revenue growth exceeding our guidance range and increasing profitability on both our GAAP and on non-GAAP basis.
Our performance was driven by ASP and enrollment growth in our online verticals with especially from performance from our new verticals including healthcare and accounting continuous education. Good collection on our test preparation book sales also contributed to this quarter's revenue growth, as we recognized most of our book sales on a cash collection basis.
By delivering a second consecutive quarter of steadily improving financial and operational results, we are demonstrating the variability of our strategy to provide a comprehensive lifelong online learning system for students and professionals.
The investments we have made over the years to extend our reach across verticals from professional education to self-taught education in K-12 and business startup training have taken shape and are beginning to payoff. And we have recently entered into a new partnership, which greatly will open up new market opportunities and further strengthen our offering in existing markets.
By levering our stable IT platform and our centralized marketing, distribution and student service processes, we have begun to integrate this broad range of verticals and business line into a comprehensive offering. And basically, we are well positioned to deliver a new (phase) of growth with multiple revenue streams moving forward.
Well I would say, in our strategy modeled way, our investment progress provide us with increased confidence in our ability to do reportable growth in the near and the long-term.
Let me now walk you through our operational development for the quarter in more detail, starting on Slide 5. Net revenues for the quarter increased 27.2% year-over-year to US$1.5 million exceeding our guidance. And total cost enrollments were US$230,000, an increase of 12.3% year-over-year.
As noted, this result was supported by steady enrollments and ASP growth across our online verticals, especially healthy performance from our accounting certificate exams, accounting continuous education, healthcare and self-taught higher education courses, as well as effective cash collection.
I will discuss these items in more detail in the coming slides.
Starting with our accounting vertical on Slide 7. Our accounting vertical performed well in the second quarter, with total accounting enrollment increasing 10.2%, and accounting continuous education enrollment growing at impressive 54.9%. APQE exam was held last weekend. This quarter online APQE enrollments were lower than the same period of last year. However, on a test season basis, online APQE enrollments were comparable year-over-year.
This quarter online CPA enrollments increased about 20% as compared to the same period of last year. While we are precautious on all our enrollment chains and will appear a highly enrollment season for CPA exams, we are encouraged by the positive trend we have seen so far.
More importantly, we are happy to report to our investors that ASP increased by 23% across our online, regular and premium accounting test preparation courses, proving that with our premium chinaacc.com brand, we reduced prices and generated high ASP from online test preparation courses, differentiating us from other low price providers.
Let's turn to Slide 8, about our non-accounting cost offering. We have made steady progress over the past few quarters with our self-taught higher education vertical, evident by a 24.1% enrollment growth year-over-year, as we continue to expand our Study Process Monitoring Program.
We will continue to seek opportunities to expand the program and grow the program into more provinces and promote the program in a province that somehow started offering it. We are optimistic that this segment will continue to grow at an accelerated pace in the next few quarters.
Moving to Slide 9. As I noted earlier, our healthcare segment performed very well this quarter. Q2 online enrollments increased 25% year-over-year and ASP increased 8%. The consistent expansion of this is a testament to our unique business model, which allows directly develop and rollout new courses.
In fact, we have recently signed an agreement with the leading medical association in China, which provides ongoing skill assessment testing for medical professionals. As a part of the agreement, we will help to develop ongoing skill assessment test platform and work with them to deliver the assessment test preparation scheduled program.
While we are here in the early stages of development of this offering, we believe this represents an important step for CDEL as it marks our initial entry into the continuous education segment also healthcare industry. This agreement highlights the growing strength of our brand in the healthcare industry and our ability to introduce new courses on to our stable and comprehensive platform and would help to support the continued growth of this vertical in the years to come.
Enrollments in our construction engineering courses also increased this quarter. And well at a lower rate of 9.8% year-over-year due to the timing of our continuous education courses, which constitutes a large portion of our enrollment. ASP decreased 4.8% due to a larger proportion of the enrollments came from the lower ASP continuous education courses. We continue to expand our overall increase in construction enrollment on a full year basis.
Moving on Slide 10, we continue to make progress on our business start-up training program Yucai. We continue to successfully collect payments for the children services that we provided in previous quarters, including some amounts that were previously written off as bad debt.
Over the past two quarters, we have established a consistent track record of cash collection and revenue generation. In addition we have seen a good level of interest for both our training programs and the integrated hands-one business startup training platform.
In fact, in April, we ran the online road show, showing potential partners how we can help their students study their own businesses or enhance their ability to find jobs through our business start-up training. The feedback we received indicates a very high level of interest in programs we offer. And we believe that some of the interest could be translated into future corporations.
Looking ahead, we will continue to rollout the program in new cities and provinces and seek to establish new partnerships beyond the (inventory) of human resource and social security to further expand the program. We remain confident in the long-term potential from this segment and believe that the program is well positioned to deliver more material contributions in coming quarters.
Finally, turning to Slide 11.We continue to make progress in our online K-12 After School Training vertical. As we have always mentioned that at the early stage of developing our online and offline combined comprehensive learning system that serves both kids and their parents to help the students with their study needs.
This program is still under development at the moment. Nominating on this program, we are starting to offer more on-the-ground after school children courses. Such courses not only contribute to our revenue streams in the quarter, but also provide valuable content for our online offering. Finally, the distribution agreement we signed with TSTUDY will be operating under our K-12 vertical, elaborating the resources and the traffic form our summer school correlation project.
This completes my update on business operation. Let me now turn the call over to Wei Ping, our CFO to walk you through our financial.
Thank you, Chairman Zhu. We are very pleased with our performance in the second quarter, as they demonstrate the continued strength of our core online accounting courses and the going momentum behind our new initiative.
Our revenue growth exceeded our guidance for the second consecutive quarter and we again recorded positive net income growth. Our results were supported by improving cash collections and we recorded healthy cash flow from operations further strengthening our balance sheet.
As a result of our steady financial performance and healthy cash position, we extended our share repurchase program. We believe this position highlights our confidence in the long-term growth potential ahead of us and reaffirms our commitment to improving shareholder returns.
As we noted in our press release, we continue to see some impacts on increasing wages, as a result of the rising inflationary environment. And we are continuing to invest in our new growth initiative. Both of these factors will continue to put pressure on our margin. Going forward, we are carrying out a series of cost saving measures and will continue to maintain our strict focus on cost control to help mitigate the impact to our bottomline.
Let me now recap our key financial metrics for the second quarter on Slide 13. Total net revenues for the second quarter were US$9.5 million, representing a year-over-year increase of 27.2% from US$7.5 million in the second quarter of fiscal 2010.
Online education services net revenues for the second quarter of fiscal 2011 were US$6.7 million, an increase of 16% from the second quarter of fiscal 2010. This increase was a result of increased revenue in accounting certificate exams, accounting continuous education, healthcare and self-taught higher education courses.
Net revenue from books and reference materials increased by 146.6% to US$1.3 million for the second quarter of fiscal 2011 due to better than expected cash payment from customers. Net revenues from others increased 29.4% year-over-year to US$1.5 million for the second quarter of fiscal 2011 from US$1.2 million in the corresponding period of last year. The increase was a result of increased revenue in business start-up training courses provided by Yucai.
Cost of sales for the second quarter of fiscal 2011 was US$4.7 million, representing a 27% increase over the second quarter of fiscal 2010. Excluding share-based compensation, cost of sales for the second quarter of fiscal 2011 was US$4.4 million, an increase of 30.5% over the same period last year. The increase in cost of sales was primarily due to increased salary and related expenses, lecturer fees due to further expansion of our course offerings and cost of our books and reference materials due to the increase in sales.
Gross profit for the second quarter was US$4.8 million, representing a 27.3% increase from $3.8 million in the same period last year. Excluding share-based compensation, non-GAAP gross profit was US$5.2 million, an increase of 24.5% year-over-year.
Gross margin for the second quarter was 50.8% in line with the second quarter of fiscal 2010. Excluding share-based compensation, the non-GAAP gross margins for the second quarter of fiscal 2011 was 54.3% compared to 55.4% in the same period of 2010. The slight decrease in non-GAAP gross margin was primarily a result of increased sales of books and reference materials, which have a relatively lower margin.
Total operating expenses for the second quarter of fiscal 2010 were US$4.5 million, an increase of 21.9% year-over-year and a decrease of 10% from the first quarter of fiscal 2011. Excluding share-based compensation and write-off of purchased call option for acquisition of additional equity interest in Champion Xinlixiang in Q1 of 2011, non-GAAP operating expenses were US$4.0 million, representing a year-over-year increase of 23.2% and a sequential decrease of 6% over the first quarter of fiscal 2011.
Selling expenses amounted to US$2 million for the second quarter, representing a 16% increase year-over-year and 21.7% decrease sequentially. Excluding share-based compensation, non-GAAP selling expenses were US$1.9 million, a 17% increase from the same period last year and 21.8% decrease from the first quarter of fiscal 2011. And year-over-year increase was a result of more advertising and promotional activities, increased salary and related expenses, and commissions to our agents due to the increase in sales.
G&A expenses were US$2.6 million in the second quarter of fiscal 2011, representing a 26.8% year-over-year increase and 10.3% sequential increase. Excluding share-based compensation change, non-GAAP G&A expenses were US$2.1 million, an increase of 29.2% year-over-year, an increases of 14.4% sequentially. The increase in general and administrative expenses year-over-year was primarily due to increase salary and related expenses and professional fees.
Income tax expenses for the second quarter was US$0.1 million compared with income tax expenses of $0.8 million in the same period last year. Net income was US$0.4 million for the second quarter compared to a net income of US$0.2 million in the same period of 2010. Excluding share-based compensation, non-GAAP net income for the second quarter of fiscal 2011 was US$1.4 million compared to non-GAAP net income of US$1.1 million in the corresponding quarter in 2010.
Turing to our balance sheet on Slide 14. Net operating cash inflow for the second quarter of fiscal 2011 was US$2.7 million compared to a net operating cash outflow of US$2.6 million in the same period last year. Primarily due to contribution of net income before non-cash item and increase in differed revenue, partially offset by the increase in inventories and decrease in refundable fees.
Cash and cash equivalents and restricted cash as of March 31, 2011, increased to US$63.9 million from US$62.8 million as of December 31, 2010, as we continue to generate cash flow from operations. Partially offset by the purchase of property, plant and equipment intangible assets and repurchase of shares worth US$1.1 million as a part of our share repurchase program.
We firmly believe in our future and believe in creating long-term value for our shareholders. As such, with the support of a strong balance sheet, post quarter-end our board approved an expenditure buyback program for another US$10 million, making the total program US$20 million. We have been actively buying back shares under this buyback program.
By the end of this quarter, we have bought back 1.56 million of ADS or 6.22 million of common shares in total and we also continued our buyback program post quarter-end and 10b5-1 plan.
As of today, as a result of our share buyback program, our total share count now stands at about 133 million common shares or 33.3 million ADSs.
This completes the financial overview. Now, I will turn the call back to Mr. Zhu for the final remarks on our strategy and business update as well as financial guidance for the third quarter of fiscal 2011.
Thank you, Ping. In conclusion, we are pleased with the performance we have delivered so far in the first half of the year. Our improving financial results, the continued strength of our quarter one results and the progress we have made in our new business initiative demonstrate our progress in execution and the underlying strength of our business model.
The new verticals and revenue strength that we have worked to develop over the past few years are beginning to come online and we have confidence in the continuing growth of this initiative. Basically, we have been establishing a track record or consistent performance, and we are confident in our ability to deliver additional growth in the coming quarters.
As such, we expect our revenue for the third quarter to be in the range of $11.5 million to $12.5 million as compared to the net revenue of $10.3 million in the third quarter of the fiscal 2010, representing 12% to 21% year-over-year increase. This represents our current and preliminary view, which is subject to change.
Thank you for your time. We'll now be happy to take your questions.
(Operator Instructions) Your first question comes from the line of Grace Lam with Citi.
Grace Lam - Citi
I just want to ask two questions. Next quarter guidance, since the gross rate seems to be a little bit soft, could you give us more insight on why is it a little bit softer? And also in terms of margins, is there any measure that we can do to mitigate the increasing wage inflation?
Thank you, Grace, and it's great to talk to you again. In terms of your next quarter guidance, we have started to adopt a practice of guiding fairly conservatively as we can see starting the fiscal year. We basically more or less give our guidance for the past two quarters. And we stay conservative in our guidance for Q3 and Q4.
However, our actual performance is far better than the quarter. As we see the numbers come out, we may update you guys on that. And simultaneously also, I think we are comfortable with the quarter's guidance. But again, like I said, we would like to stay conservative at this moment. So that's the first question on quarterly guidance
And then the second question on margin, you are right. There are pressures, as we mentioned earlier because of the inflationary environment in China. Simultaneously, we are looking at various possible approaches or measures to mitigate that. At this time, we are not ready to disclose specific measures that we will take to mitigate risks, those from the pressure. But I can say those measures will be fairly sizable and should have a noticeable impact probably next fiscal year.
Your next question comes from the line of Mark Marostica of Piper Jaffray.
Mark Marostica - Piper Jaffray
My first question is in relation to CPA. I am curious, given that we were approaching the end of May, what your level of visibility is in enrollments in CPA. Obviously you have a good quarter for CPA, but we're kind of entering the heated-up test prep season for CPA. And I am just curious if you expect a continued growth here.
Well, so far on a year-over-year basis, enrollment remains stable, and we expect that all our enrollments will remain stable on a yearly basis. At the end of May, we have (inaudible) quite a bit in this year. So overall our cash revenue will increase during this fiscal year.
(Taking from our pending vertical) our overall outlook, previously we were mainly offering APQE and CPA courses. And now, we have a more broad range of product offering from accounting continues education, accounting certificate exams to actually job skill related accounting training process. Both the new business initiatives will grow at a double pace than the more mature courses.
So we take our favorable outlook for overall accounting vertical.
Just a few words to add a bit more to what Mr. Zhu said. First of all, we do have reasonably good visibility in most of our test prep courses. And the trend we see so far matches what Zhu mentioned as the macroenvironment. Simultaneously, the individual contribution of exams such as CPA and APQE is decreasing a lot in relative importance to our overall revenue generation.
I did a brief calculation for 2010. CPA, APQE contributed only about 30% to our total revenue, and the percentage is actually coming down to even lower numbers in fiscal 2011. So that actually proves the power of our model, that is diversification of our online offerings from accounting to a broader base of courses such as healthcare, construction engineering and other professionals.
So on one hand, there is a relatively flat environment for more mature exams like CPA and APQE in sort of a general macro-market situation we have right now due in fact that we are much more diversified now. And the fact that we can grow our ASP slowly, nicely is actually a testament to the power of our model and the stance of our brand name.
Mark Marostica - Piper Jaffray
Thanks for the color on the accounting vertical. I just wanted to touch on your point with regards to ASP increases. We're able to pass through some nice increases this quarter. I am curious, looking ahead, what your plans are for ASP increases going forward.
We will continue to raise ASP both on same cost level and revenue shift mix. We are actually seeing both in this quarter, as we mentioned earlier, overall ASP increased over 20% for accounting test prep. And at the same time ASP-wise, we raised ASP by about 15% this year, and it's well received by the market.
Going forward, 10%, 15% ASP increase on the more mature test prep courses is actually normal.
Mark Marostica - Piper Jaffray
And then one last question with regards to your comments on increasing wages and the company's plans to continuing to invest in growth initiatives. What you are thinking about operating margins for fiscal 2011 and even looking at the fiscal 2012? I know you don't give specific guidance, but can you give us a sense as to your impressions about how those metrics will trend?
Our online model actually has a lot of potential for leverage. As you noticed, quite a bit of our growth actually came from ASP increases. That basically means not much incremental costs and expenses associated with that.
So with that, on a non-GAAP basis, last year 2010 we delivered about 13% non-GAAP. This year, we are more or less comfortable with new line non-GAAP net margin as compared to 2009 rather than 2010. In 2009, on a non-GAAP basis, I believe we delivered about 17% bottomline margin. We are comfortable with that kind of range.
On the gross margin level, again on a non-GAAP basis, we are also comfortable with achieving similar kind of level as compared to 2010 actually, because the impact was less. So that's what we are comfortable with.
Our next question comes from the line of Julie Chen of TriPoint.
Julie Chen - TriPoint
I'd like to follow-up on ASP just for a little bit. Accounting has always been a premium course. Healthcare, you also have some kind of a premium pricing. With construction and engineering, it's one of your more discounted ASP. So moving forward, how should we think about the ASP, as you said, in your diversification process?
In terms of ASP moving forward, I would say with accounting, 10%, 15%, as I mentioned, on the test prep side. Continuous education, we probably don't move price much. Healthcare, we continue to raise, though I would say conservatively around 5%. We could do better, but conservative at 5%. And healthcare, we will continue to see enrollment growth for now.
As you said, we started relatively at a higher ASP. So even though we would have raised, we probably will be conservative here. Construction and engineering, we'll more be affected by the continuous education fees in terms of ASP. So it's like a basic composite or compound ASP basis. Construction and engineering, again probably there will be more of the enrollment growth, the ASP growth sort of story.
So I would say, flat ASP for construction going forward, 5% ASP increase for Healthcare, 10%-15% for accounting test prep, and then about flat with accounting continues ed.
Julie Chen - TriPoint
So in terms of diversification, if I may move on to the TSTUDY distribution agreement, TSTUDY it is a Korean-based education product. The Korean education and the Chinese education has a slight difference for the K-12. In terms of the content development, is there an in-house development effort to make the content more appealing to the Chinese population or are you just going to use whatever the Korean content is for the Chinese population?
Actually the TSTUDY is more of an e-learning toolmaker rather than content provider. That provides a sort of e-learning solutions, for example, Symphony classroom solution, Dotnote and for the individual-use solution and Tnote for the internet-based solution.
We will be promoting our own content and content developed by our partner, Educomp, with the tools. So rather than their content, we're using other content.
In terms of their system, their system is being localized as we talk. Symphony and Dotnote are both already in English and certainly in Chinese. Tnote will be in Chinese very soon. So that should affect us in rolling our TSTUDY product in China.
Julie Chen - TriPoint
So just for clarification, content development is of no cost to the company?
No additional cost to the company. It's already part of what we do.
Julie Chen - TriPoint
So moving forward to the revenue generation for TSTUDY, can you give some light in terms of distribution agreement, the sharing of the revenue per se, and when do you think that the revenue might start coming in for the company?
We're going to be very conservative. On our own set of projections and guidance, et cetera, we incorporate zero contribution from TSTUDY. We are optimistic about the future and potential of the TSTUDY, our product in China, but we're taking very conservative approach. We will tell the Street when the revenue materializes.
Julie Chen - TriPoint
And when do you expect it to materialize? You've signed a strategic agreement. Is it a six-month event or a one-year event, or is this a two-year event?
Unfortunately at this time, we've been considering various reasons including, for example, ability to preserve some competitive advantage and as well as sort of trying to be conservative. So having considered all those facts, we're not ready to discuss the potentials and the timeline of the TSTUDY rollout or the potential outcome.
The general comment I can make, though, is we are fairly optimistic of what the TSTUDY product can help us with.
Julie Chen - TriPoint
We're certainly looking at ways to put our shareholders cash to work to generate more returns for our shareholders. Having said that, we're trying to be very conservative in how we use our cash. Acquisition is always something we have in mind. But we are very selective and very conservative and prudent in approaching acquisition bucket. The short answer to your question is acquisitions, potential acquisitions.
(Operator Instructions) Your next question comes from the line of (Isabella Zo) with Oppenheimer.
I just wanted to ask about the enrolment. I noticed this quarter the enrollment growth seems like a little bit softer than last quarter. Can you add some more color on that? And also, what's your outlook for the enrollment growth for the next two quarters?
First of all, the enrolment growth was not exactly soft. But to answer your question anyway, we do see a bit of slowdown in APQE enrollment growth, and also the timing of some of self-taught higher education study process monitoring program enrollment are coming in a bit later than we expected. Basically timing difference on the self-taught higher education study process monitoring program and the softness in APQE enrollment, as sort of mentioned by the Zhengdong earlier.
Now going forward, we are comfortable with 10%-plus kid of enrollment growth for Q3 and Q4.
My next question is about Yucai. What's your outlook for Yucai's revenue contribution for fiscal year 2011 and going forward?
With Yucai, the expectation for this year, we mentioned earlier that possibly Yucai will contribute as much as 5% to 10% of our total revenue for fiscal 2011 and beyond. We actually still are very optimistic that this will be the case.
For full year 2011, I would say conservatively Yucai should contribute around $2 million. It's on track now. While six months ago, we can't say for sure; at this moment, we are much more comfortable and Yucai has started to provide visibility with the revenue generation capabilities. So comfortable with $2 million this year, and gross rate for fiscal 2012 should be fairly flat as well.
(Operator Instructions) There are no questions at this time. I would like to turn the call back over to management for closing remarks.
Thank you all again for joining us today, and we look forward to updating you on our progress in the near future. Thank you.
Thank you for participating in today's conference. You may now disconnect.