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Noah Education Holdings Ltd. (NYSE:NED)

F2Q12 Earnings Call

February 28, 2012 8:00 AM ET

Executives

Dong Xu – Chairman, CEO and Chief Strategy Officer

Dora Li – CFO

Operator

Good morning and good evening, ladies and gentlemen. Welcome to the Noah Education Holdings Ltd Second Quarter Fiscal 2012 Financial Results Conference Call. At this time, all participants are in a 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 Dong Xu, CEO; and Ms. Dora Li, CFO. After the U.S. markets closed yesterday afternoon, Noah issued a press release announcing its second quarter fiscal year 2012 financial results. The release is available on the Company’s IR website at ir.noaheducation.com along with a 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 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 fiscal prospectus and 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 conference over to Noah’s Chairman and CEO, Mr. Dong Xu. Mr. Xu, you may begin.

Dong Xu

Thank you for joining us today on our second quarter fiscal 2012 earnings call. I hope you had a chance to read our earnings press release. I am delighted to report another profitable and robust performance in the second quarter. The quarterly revenue up 113% year-over-year, exceeding the high end of our guidance by 21%. Excluding one-off items, we saw a positive operating income and a positive net income of RMB5 million which is the second consecutive profitable quarter.

The strong performance demonstrates the effectiveness of our strategy in delivering a broad education set of offering and we have been rewarded with a strong across the board performance in our businesses. By focusing on kindergarten, private primary and secondary schools and supplemental education services, we place ourselves in a unique position to come through growth prospects in an industry resilient to economic uncertainty. We advocate the principal of lifelong education and our strategic direction aims to excellently capture this opportunity.

Kindergarten is a vital entry point for students to begin their journey to open wider and more facility lifelong education. With the acquisition of Yuanbo, we have established a solid foothold in kindergarten services. We continue to see a rising demand for high quality pre-school education. And our kindergarten services are good place to further blossom our offerings as our students seek high education success all the way [ph].

Looking forward, we expect to see continued organic growth from the expansion of our three business services, and increasing progress with reinvestment to ramp up our new schools and kindergartens to enhance utilization and operational performance. The strong organic growth will be complemented by acquisitions which continue to drive further expansion in the federation of our growth. We remain highly confident that our visible and sustainable business model will enable us to maintain a position in the education market throughout 2012 and into the future.

Dora Li, our CFO will walk you through our financial and operational performance as well as guidance for the next quarter. Dora, please.

Dora Li

Thank you Mr. Xu. As Mr. Xu just mentioned, we are very pleased to see more continued strong momentum into the second quarter of fiscal 2012 with both top line and bottom line showing strengths. Turning to the detailed financial results for the second quarter of fiscal year 2012, as they are available in our earnings release, I would like to highlight a few key financial metrics with you. All numbers will be in RMB unless otherwise stated.

On slide four, net revenue for the quarter was up 113% year-over-year. The strong growth was mainly driven by organic developments of existing Wentai Education and Little New Star businesses, and a full-quarter revenue contribution from Yuanbo Education. If you recall, Yuanbo Education only started to contribute to our top line in August during our July to September quarter.

The revenue growth was higher than our guidance and was also partly due to the fact that the forecast is not factored in 1Q revenues as it only finalized all items in the second quarter. For the quarter, Wentai accounted for 54% of net revenues. Little New Star accounted for 23% and Yuanbo 22%.

On slide five, starting this quarter we will report our revenue in terms of business services namely, kindergarten, primary and secondary schools and supplemental education. Revenues from the kindergarten services this quarter was RMB23 million, up 315% year-over-year, accounting for 50% of net revenue. Revenues from primary and the secondary school services was RMB15 million, up 57% year-over-year, and accounted for 33% of net revenues. Revenues from supplemental education services was RMB7 million, up 21% year-over-year and accounted for about 17% of net revenue.

On slide six, gross profit was up 95% year-over-year, and gross profit margins was 44% compared to 48% during the second quarter of fiscal 2011. The contraction in margins was due to an expanded portion of revenues from kindergarten in our portfolio, and our reinvestment initiatives to ramp up the service utilization and operational performance in new schools and kindergartens.

As such gross margin will continue to maintained at the level higher than 45% for fiscal 2012. As Mr. Xu just mentioned, kindergarten formed the basis of our lifelong education offering and it’s broadened our venues into other segments in the education space. Kindergarten is also a highly fragmented market, it’s likely regulations [ph]. We believe this presence can excellence – presents an excellent opportunity for more to strengthen our presence in the segment.

Turning to slide seven, operating expenses. Research and development expenses are up 38% and accounted for 2% of net revenue compared to 3% during the same period in fiscal 2011. We will continue to invest in R&D to enhance constant development capabilities and expect to see a similar level of R&D cost to total revenues.

Sales and marketing expenses for the quarter were up 69% year-over-year and accounted for 4% of net revenue compared to 5% during the same period in fiscal year 2011. We expect the sales and marketing expenses as percentage of revenue to maintain at a comparable level.

General and administrative expenses were up 39% year-over-year. As a percent of revenue, G&A expenses was 52% much lower than 80% from the same time in fiscal 2011. It reflected operational leverage with the expansion of revenue scale.

On slide eight, excluding the one-off item, we would have an operating income of about RMB0.5 million. Net income for the quarter was RMB2 million as compared to RMB3 million in the second quarter of fiscal 2011. Excluding the one-off items, net income would have been RMB5 million. In the quarter, our balance sheet remained very strong.

Cash and cash equivalents, short-term bank deposits and short-term investments amounted to RMB505 million on December 31, 2011 compared to RMB500 million on September 30, 2011.

Operations have generated positive cash flow of RMB9.6 million. The second quarter of our fiscal year does not generate as much cash as our first quarter because tuition fees collection normally tied in with school terms in February and September. In terms of per share value, our cash per share at the end of December 2011 is $2.20 cash plus real estate value at book is $2.72 a share and net asset value per share is $3.35.

In addition, deferred revenue was RMB24.1 million primarily from tuition and franchising fees collected and booked in the following quarters. Now let me walk you through our operation updates, strategic for ARPUs [ph] and then move onto outlook and guidance. Please refer to the slide 12 for updates on our three business services. First, kindergarten, we have a network of 33 kindergarten with Yuanbo, Wentai and the Little New Star with a total enrollments close to 8,400 an increase of about 200% year-over-year.

Despite six of which are in ramp up stage, the average utilization was over 80%. We will not introduce any new kindergarten for the next quarter and opening schedule is tied to school terms. In the next two quarters to drive further growth, we will focus on ramping up new kindergarten to improve efficiency and margins.

On slide 13, we have five primary and secondary schools operated by Wentai, with a total enrollment exceeded more than 3,950 up 20% year-over-year. Apart from the recent new school opened in first quarter, all others displayed very healthy performance with utilization rate of 80% to 100%. In the coming quarters, we will focus on boosting the performance and utilization of the newly added schools.

Next slide. Supplemental education services which are primarily training centers, sale of teaching material and the franchise fees from Little New Star at this stage. Currently we have close to 4,000 enrollments in our training centers. We saw a solid performance of 21% increase year-over-year.

Now on slide 14 to recap. Our strategic direction remains unchanged. In the high growth and fragmented education service industry in China, we are in three education service segments; kindergartens, primary and secondary schools and the supplemental education. Kindergartens had become a core part of our business. We will continue to expand the kindergarten network and the leverage on this platform to capitalize on opportunities in the lifelong education value chain.

Our primary and secondary education will maintain the emphasis of English training and it will explore opportunities in offering international programs. On supplemental education, Little New Star’s English training program is well placed to capture the potential investments and it will continue our R&D investments to expand our service offerings.

Optimizing profitability to leverage operational efficiency will be our top priority. First, continue to reinvest to increase enrollment to maximize utilization. Second, broaden our service offering to enhance incremental revenue per student. And the third, accelerate internal integration to strengthen business competitiveness and operating efficiency.

Of course with our $80 million USD cash and cash equivalence and investments, we will certainly deploy our financial strength to further expand footprint in the education services space, complement organic expansion and to drive medium to long-term growth.

Looking into our financial outlook, on slide 16. For the third quarter of fiscal 2012, we expect net revenue to be in the range of RMB30 million to RMB 32 million, a 30% to 39% year-over-year growth. We reiterate our full fiscal 2012 guidance and expect net revenue to be in the range of RMB145 million to RMB155 million, a 55% to 66% year-over-year growth.

This reflects the current business plan of Little New Star, Wentai and Yuanbo Education, without factoring any potential acquisitions or additional expansion plans.

This concludes our presentation. And we would like to open to the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll pause for a just a moment to compile the Q&A roster. (Operator Instructions) Your first question comes from the line of (inaudible). OK sir, please repeat your question?

Unidentified Analyst

Okay, so my first question is I want to know how many kindergarten centers and other schools will be added in the remaining of 2012?

Dora Li

As we mentioned, yearly opened schools and kindergarten having with the school terms and in fiscal year 2012 we would do not expect to adding new schools or kindergartens.

Unidentified Analyst

I didn’t catch you clearly, so can you repeat it?

Dora Li

The opening schedule for schools and the kindergarten yearly tied in with the school terms yearly in February and September. So for the following two quarters in fiscal 2012, we do not expect to add any new schools or kindergarten.

Unidentified Analyst

Okay, thanks. And my next question is regarding the status of your new openings? So also can you tell me how many another kindergarten centers and other schools are in ramp up periods and how many are in mature period?

Dora Li

Right now we have totally seven schools and kindergartens with less than two years operating history in the ramp up stage.

Unidentified Analyst

Okay. So my last question is regarding your margin. So what is your gross margin and operating margin expectations in your guidance? Can you elaborate a little bit of that?

Dora Li

Right now we are focused – we’re in an expansion mode and focused on the growth. So our forecast is based on – is on our top line forecast. We’ll keep our – in terms of a gross margin, we are in an expansion mode as just mentioned and ramping from the kindergarten portion expanding, and we continue to reinvest in our new schools and kindergarten. So we expect the overall margin for fiscal 2012 will keep above at 45% level.

Unidentified Analyst

45% level, okay. So how about any operating margin expectations for the full-year fiscal year ‘012?

Dora Li

Excuse me, can you repeat the last question please?

Unidentified Analyst

Can you also comment on what is the expected operating margin for fiscal year ‘012?

Dora Li

We’ll focus on our growth and organic growth – will growth organically and as well as acquisitions or acquisition still will be focused on our top line.

Unidentified Analyst

Okay, got you. Okay, thanks so much. So that’s all my questions. Thanks again.

Operator

At this time, there are no further questions in queue so I would like to hand the call over back to Mr. Xu for closing remarks.

Dora Li

Thank you operator. Thank you all for your participation. In summary, we will commit to the execution of our strategy, focus on business growth and operational efficiency to achieve profitability in fiscal 2012.

That concludes the call. Thank you for joining us today and we look forward to updating you on our progress at the next earnings call. Have a nice day. Operator.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. You may now disconnect. Have a nice day.

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