China Distance Education Holdings' (DL) CEO Zhengdong Zhu on Q4 2016 Results - Earnings Call Transcript

| About: China Distance (DL)

China Distance Education Holdings Limited (NYSE:DL)

Q4 2016 Results Earnings Conference Call

November 30, 2016, 08:00 AM ET

Executives

Zhengdong Zhu - Chairman and CEO

Mark Marostica - Co-CFO

Analysts

Gene Munster - Piper Jaffray

Zoe Zhao - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by and welcome to CDEL Fourth Quarter Financial Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday 30 of November, 2016.

I would now like to hand the call over to the management. Thank you. Please go ahead.

Unidentified Company Representative

Good evening and thank you for standing by for the China Distance Education Holdings Limited fourth quarter and fiscal year 2016 earnings conference call. On today’s call are Mr. Zhengdong Zhu, Chairman and CEO and Mr. Mark Marostica, co-CFO. During management’s prepared remarks, all participants will be in a listen-only mode. Following management’s prepared remarks, we will open the call for questions.

Before we start, we would like to remind listeners that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. The outlook for the first quarter of fiscal year 2017 and oral statements from the management on this call as well as the company’s strategic and operational plans, in particular the anticipated benefits of the company’s investment in strategic growth initiatives, as well as the acquisition of Xiamen NetinNet and the listing and plan share issuance f Zhengbao Yucai on China’s New Third Board, among other things 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 statement. Further information regarding this and other risks is included in the company’s annual report on Form 20-F and in 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 call is being recorded. A summarized presentation, which we will refer to during the course of the call can be downloaded from the company’s IR website. In addition, a webcast of this conference call 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. Mr. Zhu, please go ahead.

Zhengdong Zhu

[Foreign Language] Thank you, everyone for joining our fourth quarter and fiscal year 2016 financial results conference call. Our operating results were released earlier and are available on our company website as well as from the Internet newswire services.

[Foreign Language] I will begin on slide 4 with an overview of our results.

[Foreign Language] We finished fiscal year 2016 on solid footing. In the fourth quarter our total net revenue increased by 7.5% year-over-year to $38.2 million, exceeding our guidance range of $35.6 million to $37.4 million.

For the full-year fiscal 2016 net revenue increased by 8.7% year-over-year to $117.5 million, exceeding our guidance range of $114.8 million to $116.6 million. Revenue growth from our accounting and engineering and construction verticals, books and reference materials and Xiamen NetinNet were the primary drivers of our fourth quarter performance.

[Foreign Language] As we look back over fiscal 2016, while our total cash receipts from online course registration were up only 8.1% year-over-year in fiscal 2016 on a constant currency basis, we were pleased to see a recovery in the growth of cash receipts from our accounting vertical, which were up 16.2% year-over-year in fiscal 2016 on a constant currency basis.

And despite a significant decline in cash receipts from our licensed pharmacist test preparation courses due to the uncertainty surrounding the related exam policy, cash receipts from our healthcare vertical were up 20.8% year-over-year in fiscal 2016 on a constant currency basis, excluding cash receipts from licensed pharmacist test prep courses.

[Foreign Language] Reflecting our continued strong cash flow during fiscal 2016 and in consideration of our deploying $40 million for our share repurchase program and $32.5 million for the acquisition of Xiamen NetinNet, I'm pleased to announce our Board of Directors has approved a special cash dividend of $11.25 per ordinary share or $0.45 per ADS on outstanding shares distributed to shareholders of record as of the close of trading on January 6, 2017. This marks the sixth consecutive year we have paid a dividend to our shareholders.

While we traditionally had an annual review process of our excess cash for our dividend payout, we recognized that as our business continues to grow the working capital inflows and outflows of our business may enable us to review our excess cash position on a more frequent basis. We believe returning capital to shareholders through our dividend is an effective use of capital to maximize long-term shareholder value.

[Foreign Language] We also saw steady progress in our strategic growth initiatives, the highlight of our fiscal year 2016 centre around the successful listing of our subsidiary, Zhengbao Yucai on China’s New Third Board, and our strategic acquisition of Xiamen NetinNet.

[Foreign Language] We've spoke extensively about the merits and synergies of both of these initiatives throughout the year.

[Foreign Language] In brief, among other things we expect the successful listing of Zhengbao Yucai on the New Third Board will strengthen our domestic branding effort, provide access to the Chinese capital markets and enhance our operational focus by allowing our US listed company to be laser focused on the professional education business, while Zhengbao Yucai will focus on college education opportunities.

[Foreign Language] In October we further executed on this growth initiative with Zhengbao Yucai announcing a share issuance plan to raise approximately $12 million. We plan to use the proceeds for working capital and business development, which importantly includes mergers or acquisitions of complementary businesses focused on China's college market.

[Foreign Language] Our successful acquisition NetinNet acquisition in May, 2016 brought us the leading learning stimulation software provider in practical accounting related learning solutions for China's college market, with more than 1600 college customers NetinNet opens cross-selling opportunities with our college cooperation program, as well as integration opportunities with our existing online accounting offerings.

[Foreign Language] We are very pleased that NetinNet integration is progressing well and moving ahead on track. For example, in our effort to serve not only college students with NetinNet learning stimulation software, but accounting professionals as well, we recently launched a series of web-based practical accounting training courses which integrate learning modules of Xiamen NetinNet accounting software with our online platform.

This is a superb example of how we are able to successfully leverage NetinNet's content and pedagogy with our online platform to provide the best of breed career enhancement training opportunities for accounting professionals.

[Foreign Language] The key takeaway from both of these highlight initiatives in fiscal 2016 is our diligent effort to expand our portfolio of products and services and accelerate growth into educational areas, while at the same time driving incremental growth in our core verticals. These two activities in fiscal 2016 clearly showcased our balance growth strategy.

[Foreign Language] We've also taken initial steps into the online IT professional education and training industry with a small investment in an online IT professional education company as previously disclosed.

[Foreign Language] So as we look ahead, to fiscal 2017, investors can see our framework for growth, while our overall strategy focuses on organic growth and internally developed programs we will be keen to seek new acquisition targets and strategic investment opportunities, which we believe will create new complementary avenues of growth.

[Foreign Language] I'll wrap up this portion of my prepared remarks by providing a few growth highlights of our fourth fiscal quarter.

[Foreign Language] Total course enrolment is the basic growth metric that drives our business. Our total course enrolments for the fourth quarter grew by 12% year-over-year, contributing to a record high of 3.7 million total course enrolments in fiscal year 2016, which were up 12.5% year-over-year.

Our continued enrolment growth serves as an important benchmark which validates that China Distance Education is widely recognized in the market as a trusted partner to help students achieve their study and career goals.

[Foreign Language] In addition, we continue to make progress expanding our K-12 teacher continuing education offering and now have signed agreements with 11 jurisdictions, up from nine jurisdictions last quarter.

[Foreign Language] Mobile technology usage is also an important metric for us to better understand how our students learn on our platform. As evidenced by the strong adoption of our mobile platform, mobile technology is clearly transforming the lives of today's working professionals.

As of September 30, we offered 62 mobile apps and recorded cumulative downloads of 19.6 million, up from 17.4 million as of the end of June 2016. In the fourth quarter, daily active users in our healthcare vertical increased 45.7% year-over-year and daily active users in our accounting vertical were relatively flat compared to the fourth quarter of fiscal 2015.

[Foreign Language] Our college cooperation program is another growth initiative that broadens our ecosystem into the college market. In September, the program launched into its second academic year of operation within 368 participating colleges. We believe this program has a long run way of growth ahead, and we are just in the early stages, as our college cooperation develops we see right potential for growth and synergies with our core business.

[Foreign Language] Turning to our open learning platform, in the fourth quarter total cash registration revenue from this segment decreased 14% year-over-year to $1.9 million, resulting in a total cash registration revenue from our open learning platform of $8.9 million in fiscal year 2016, which was up 7.8% year-over-year.

[Foreign Language] This concludes my update on business operations and strategy. I will now turn the call over to Mark to walk you through our key operating metrics and financials.

Mark Marostica

Thank you, Mr. Zhu. First, I’ll provide a few financial highlights for our fourth quarter followed by a discussion of our fourth quarter operating and financial metrics.

Let me begin by quickly summarizing some of our key operating metrics on slides seven and eight. In the fourth quarter overall enrollments in our online accounting courses were up healthy 14.4% year-over-year, driven primarily by 17.4%, 16.4% and 16% enrolment growth for online APQE, CPA and accounting continuing education courses respectively. Other online accounting test prep course enrolments were down 8.9% year-over-year in the fourth quarter.

In fiscal 2016, total enrolments in online APQE, CPA and accounting continuing education courses increased by 1.3%, 18.2% to 17.3%, respectively, while other online accounting test preparation courses – excuse me, test prep course enrolments were up 4.5% year-over-year.

The ASP increase for CPA test prep courses in the fourth quarter was mainly due to enrolment mix. The flat fourth quarter ASPs for our APQE test prep courses and accounting continuing education courses were primarily due to depreciation of the renminbi.

The 49.6% year-over-year growth of ASPs for other accounting test prep courses in the fourth quarter was primarily due to a greater portion of relatively higher ASP tax advisor enrolments. Enrolments in online healthcare test preparation courses in the fourth quarter decreased by 8.6% year-over-year, mainly due to the uncertainties around the exam policy for license pharmacist, which was released in mid-July as previously discussed.

Likewise, the total enrolments in online healthcare test preparation courses for the full year – full fiscal year 2016 grew by only 2.1% year-over-year. ASPs in our healthcare vertical decreased by 5.6% year-over-year in our fourth quarter, mainly due to enrolment mix and the depreciation of the renminbi.

In the fourth quarter, enrolment in our online engineering and construction test prep courses increased slightly by 1.6% year-over-year. E&C test preparation enrolment growth continued to be sluggish, primarily due to a challenging economic backdrop for Chinese construction industry. However, our E&C continuing education course enrolments increased by 63.9% year-over-year.

ASPs for E&C test preparation courses and E&C continuing education courses in the fourth decreased by 13.2% year-over-year and 12.8% year-over-year, respectively, mainly due to enrolment mix and the depreciation of the renminbi.

Now let's turn to slide 10 to look at some of our financial metrics. To be mindful of the length of our earnings call, I'll focus on key financial highlights and encourage listeners to refer to our earnings press release for further details.

Before I get started, I would like to note that the further deprecation of the renminbi against the US dollar continued to affect our results in the fourth fiscal quarter. The average exchange rate in the fourth quarter of fiscal 2016 was 6.6639 compared with 6.3033 in the prior-year period representing renminbi depreciation of 5.7%.

While fourth quarter net revenues increased 7.5% year-over-year, fourth quarter organic revenue growth excluding recently acquired Xiamen NetinNet was up 2.1% year-over-year.

Non-GAAP gross margin was 65.9% in the fourth quarter of fiscal 2016, compared with 66.5% in the fourth quarter of fiscal 2015. The year-over-year decrease in gross margin was attributable to increased salaries and related expenses, cost of books and reference materials, rental and related expenses, as well as expenses associated with Xiamen NetinNet. The decrease in gross margin was partially offset by decreased lecture fees.

Non-GAAP selling expenses increased 42.6% to $6.2 million in the fourth quarter of fiscal 2016 from $4.3 million in the prior year period. The increase was primarily driven by increased salaries and related expenses, increased advertising and promotional expenses, and increased commissions to online agents, together with expenses associated with Xiamen NetinNet.

Non-GAAP general and administrative expenses increased 17.1% to $4.4 million in the fourth quarter of fiscal 2016 from $3.8 million in the prior year period. The increase was mainly due to increased salaries and related expenses, as well as expenses associated with Xiamen NetinNet. As a result of the foregoing, the non-GAAP operating margin for the fourth quarter of fiscal 2016 was 39.5%, down from 43.8% in the prior year period. Excluding operating results from Xiamen NetinNet, the fourth quarter non-GAAP operating margin was 42.1%.

In the fourth quarter of fiscal 2016, we recorded a foreign currency exchange gain of $243,000 related to our overseas renminbi bank loan and loans from our PRC subsidiaries due to the depreciation of the renminbi versus the US dollar. We recorded a foreign currency exchange gain of $532,000 in the prior year period.

Income tax expense decreased 13.1% to $2.7 million in the fourth quarter of fiscal 2016 from $3.1 million in the prior year period. The decrease was mainly due to a decrease in taxable income. Our effective tax rate in the fourth quarter were 17.8%.

Net income decreased 9.5% to $12.2 million in the fourth quarter of fiscal 2016 from $13.5 million in the prior year period. Non-GAAP net income decreased 9.2% to $12.7 million in the fourth quarter of fiscal 2016 from $14 million in the prior year period.

Now turning to our full-year results as shown on slide 11, I'll just quickly summarize the revenue, non-GAAP operating income and non-GAAP net income growth for fiscal 2016. Total net revenues increased by 8.7% to $117.5 million in fiscal 2016 from $108.2 million in fiscal 2015. Without the impact of the depreciation of the renminbi against the US dollar, fiscal year 2016 revenue and non-GAAP operating income increased 14.2% and 13.8% year-over-year, respectively.

Turning to organic growth, fiscal year 2016 net revenue and non-GAAP operating income increased 11.2% and 16.2% year-over-year, respectively, excluding both the operating results of Xiamen NetinNet and the impact of the renminbi depreciation against the US dollar. And as a result our fiscal year 2016 non-GAAP operating margin improved 118 basis points year-over-year. Looking ahead, we will continue to balance our efforts to drive growth with a keen focus on profitability and prudent cost control.

Net income was $26.3 million for fiscal year 2016, an increase of 7% year-over-year. Non-GAAP net income was $28.3 million for fiscal year 2016, an increase of 7.4% from fiscal 2015. Please refer to our earnings press release for further he details regarding our full-year financial results.

Now let’s turn to slide 12 to review our cash inflow. Net operating cash inflow increased 18.5% to $5.8 million in the fourth quarter of fiscal 2016 from $4.9 million in the prior year period.

Cash and cash equivalents, term deposits, restricted cash and short-term investments as of September 30, 2016 decreased slightly by 2% to $70.5 million from $71.9 million as of June 30, 2016, mainly due to the repurchase of ADSs on the open market of $4.2 million, a long-term investment of $600,000, and capital expenditures of $1.8 million. This decrease was partially offset by cash inflow generated from operating activities in the fourth quarter of $5.8 million, which was up 18.5% year-over-year.

In conclusion, we are pleased with the overall performance in past fiscal year, as our discipline financial and cost management continue to bear fruit. Looking ahead, our priority remains balancing our efforts to drive growth with a keen focus on profitability and prudent cost controls.

This completes my financial overview. Now I will return the call to Mr. Zhu for concluding remarks, as well as financial guidance for the first quarter of fiscal 2017. Mr. Zhu, please?

Zhengdong Zhu

Thank you, Mark. [Foreign Language] As China's leading online education provider with 16 year track record, China Distance Education is ideally positioned to benefit from the high demand for quality educational content and services aimed at driving career enhancement opportunities, the rapid development of China's Internet industry and the growing attraction towards online learning, our commitment to providing our students with best-in-class courseware and services to support their lifelong learning goals underpins our growth strategy.

[Foreign Language] As fiscal 2017 begin we look forward to executing our growth strategy and maximizing shareholder value by leveraging our strong educational brands across our core verticals, expanding our course offerings and driving growth across multiple initiatives, including the K-12 teacher continuing education, our open learning platform, mobile related products, big data solutions and our college cooperation program.

In addition, we will continue to seek attractive merger or acquisition target and strategic investment opportunities to complement our business and drive incremental growth and synergies with our core business.

[Foreign Language] Turning to our outlook. We expect to generate total net revenues in the range of $28 million to $29.2 million for the first quarter of fiscal 2017, representing a year-over-year increase of approximately 15% to 20%.

[Foreign Language] This concludes my prepared remarks. Thank you for your time. Operator, we are now happy to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Gene Munster from Piper Jaffray. Please go ahead.

Gene Munster

Good evening and congratulations. Couple of questions, first, if you could talk a little bit about the ASP trend, it sound like things were positive in the September quarter and how we should think about ASPs fluctuating throughout the next year?

And second is strategically you've been doing more whether through share buyback or M&A and partnerships, and was curious that how you think about those going forward? Thanks.

Mark Marostica

Thank you for your questions, Gene. On your questions on ASPs, we have deliberate strategy with regards to looking at our ASP increases in the out years and its strategy whereby we look at raising prices in the area 15% to 20% every second year. Of course, we do that on a selective basis looking at the market dynamics, competitive landscape. So that is our strategy, we continue to follow that strategy going forward.

And then regarding your question with regards to M&A, I think I'll turn that over to Zhengdong.

Unidentified Company Representative

[Foreign Language]

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

Overall strategy of the company from day one we focus on building lifelong comprehensive online learning.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

We always focus on where we have vertical strength and advantages. For example, accounting, healthcare, E&C verticals, we are focusing on building lifelong learning in those verticals.

In addition, we do expand into new verticals over time. Right now for example, IT training, teachers learning, et cetera.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

So our focus is always the verticals we have strengthen, we've viewed our competitive advantages off and we will focus on those for the long run as well.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

In fact, with all the acquisitions, mergers, share buybacks and all the things we've been doing, we have always been focusing on those types of core strategies that we actually have never changed.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

I want to add a bit of explanation on our dividend, we – it’s the sixth year that - we've been paying a dividend. We always look at our company strategy, cash needs, cash generation, market conditions, et cetera to assess whether to pay dividend and how much to pay.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

Going forward, we will look at our cash flow more frequently and look at the cash – excess cash generation and cash need more frequently as well to decide on whether and how often we pay dividend.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

Thank you.

Gene Munster

Thank you.

Mark Marostica

Thank you, Gene.

Operator

All right, thank you. [Operator Instructions] Our next question comes from the line of Zoe Zhao from Credit Suisse. Please go ahead.

Zoe Zhao

Hi, management. Thank you for taking my question. I have three questions here. Number one is what is our core revenue growth target, excluding the Xiamen NetinNet integration for FY '17?

The second question is regarding the competition in the healthcare segment, we've actually seen some of your peers such as the [indiscernible] so those are offering free online courses, and then charged tuition off-line, so how do we think about their strategy versus ours?

And the third question is around sales and marketing spending, we've noticed that the marketing spending actually picked up a bit this quarter. So what is our user acquisition strategy or the sales and marketing strategy in general? [Foreign Language]

Mark Marostica

Thank you for your question Zoe. I will take your question on fiscal '17 guidance, as well as selling and marketing question that you had. First regarding guidance, as you noted in our release we are not offering fiscal '17 guidance this year.

Our business as you know is quite dynamic and as we evolve and launch new business initiatives, make acquisitions and the like, we believe leading quarter guidance is more valuable to investors and that's what we want to focus on.

In addition, let’s not forget the renminbi movement that’s taking place and that is a foot at the moment, and it’s so very difficult to predict in the coming quarters let alone for the full fiscal year.

In regards to selling and marketing spending, as you noted it was up quite handily this quarter, primarily due to an increased level of advertising and promotional spend in the quarter. But when you look at the full-year results, our advertising and promotional spend was up about 9% year-over-year, which is generally in line with revenue.

And so you know, when we see a situation like we saw in the fourth quarter where our selling and marketing and advertising and promotion spending hasn't kept pace with revenue for strategic reasons, we'll look for opportunities to invest in strengthening our brand on the advertising side, which we did just so in the fourth quarter. Thank you.

Now, I'll turn it over to Zhengdong, the question in regard to healthcare competitive landscape.

Unidentified Company Representative

[Foreign Language]

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

We respect all our competitors and however, we are not afraid of competition and we don’t believe any of the competitors are real threat to us at this time.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

The markets we are aimed, in particular healthcare is actually very big market, a healthy competition is not only beneficial to our students, also beneficial to us as a company.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

We believe in very different business models sort of focusing on in-depth operations and offering value to students will all generate good results.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

Be it the pre recorded courses that which was our traditional strength, real time broadcasting courses that we offer as well or free online, like fee paying or fee charging offline those are basically just various models of our offering courses and services to students, it’s a time and results only can actually dictate what is the most suitable and best model.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

We have been in this industry for 16 years, all these years there is always new comers, new technologies, new training methodologies coming to play in this market place and that keep us on our toes to continue to be innovative and to continue to progress and making programs to offer ever better qualities of services and products.

Zhengdong Zhu

[Foreign Language]

Unidentified Company Representative

We believe with all the experiences and our diligence we will stay and remain leader in this space. Thank you.

Zoe Zhao

Thank you. If I may just follow up, another question, how much cash do we have offshore? [Foreign Language]? Thank you.

Mark Marostica

Yes, our cash offshore is quite small around 5% of our total cash.

Zoe Zhao

Okay. I see. Thank you.

Operator

All right, thank you. [Operator Instructions]

Mark Marostica

Okay, thank you. On behalf of the management team, we thank you for joining us today. We look forward to updating you on our progress.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may now disconnect.

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