Noah Education Holdings Ltd. (NYSE:NED)
F3Q12 Earnings Conference Call
May 15, 2012 8:00 AM ET
Mr. Dong Xu – Chairman and CEO
Ms. Dora Li – CFO
Good morning and good evening, ladies and gentlemen. Welcome to Noah Education Holdings Ltd Third Quarter of Fiscal 2012 Earnings 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 Mr. Dong Xu, CEO and Ms. Dora Li, CFO. After the U.S. markets had closed yesterday afternoon, Noah issued a press release announcing its financial results for the third quarter of fiscal year 2012. The release is available on the Company’s IR website at ir.noaheducation.com 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 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 their 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 conference over to Noah’s Chairman and CEO, Mr. Dong Xu. Mr. Xu, please go ahead.
Thank you for joining us today on our third quarter fiscal year 2012 earnings conference call. I hope you’ve all had a chance to read our earnings press release.
I am very pleased to report that we have delivered another strong quarter, with revenue growing at 61% and exceeding the top end of our guidance by 16%. This is particularly encouraging, considering that the third quarter is traditionally (inaudible), due to the presence of the Winter break. And we were only able to rectify two months revenue.
The robust topline growth was given by our Kindergarten operation, the largest contributor of all of our businesses. The year-over-year growth of 220%, by organic and (inaudible) from Yuanbo. This impressive increase is a testimony to our growth strategy.
Kindergarten is a vital entry point for student’s lifelong education and will also form the entry base of our lifelong education model, which will pave the way for broader (inaudible) offerings in the future. Kindergarten is the core of our three focus areas and will continue to be a key growth driver down the line.
Well, we will further (inaudible) through our financial outcome, but I’d like to highlight that in this quarter, we were able to improve our growth margin to our guided level, while continuing to invest to ramp up our schools in Kindergarten. This improvement is mainly strength to the progress made by the Kindergarten operations.
Looking ahead, we are confident that we will see another strong performance in the fourth quarter in terms of revenue growth. And this will lead us to achieve our full year guidance of 56 to 76% increase in revenue. Meanwhile, we’ll continue to strike a sound balance between approved profitability and sustain reinvestment for growth. Through a continuous ramping up with the best new schools in Kindergarten, we aim to achieve higher utilization rate and operating efficiency in the next academic year.--
Dora Li, our CFO will now walk you through our financial and operational performance as well as guidance for the next quarter. Dora, please.
Thank you Mr. Xu. We are very pleased to report that Noah has continued its brand momentum into the third quarter of fiscal 2012, with prolonged year-over-year improvement, in both top line and bottom line.
Turning to the detailed financial results for the third quarter of fiscal 2012, as they are available in our earnings release, I would like to highlight a few key financial metrics with you. I’ll be focusing on a year-over-year comparison, and all members will be in RMB unless otherwise stated.
On slide four, net revenue for the quarter was up 61% to 37% million, despite only booking two months of revenue due to the Winter break. The strong improvement was mainly driven by the growth of our Kindergarten operations across all brands, which will breakdown the net revenue by business segments. . Revenues from our Kindergarten operations, was up 220% to about 21 million, accounting for 55% of net revenue. The total Kindergarten network increased from 10 in the third quarter of fiscal 2011 to 33 in third quarter of fiscal 2012, under the pre-existing Kindergarten continued to show healthy organic growth.
Revenues from primary and the secondary school operations were up 2% to 9 million accounting for 23% of net revenue. The motive gross was attributable to an increase in tuition fees and incremental revenue, from newly opened schools, all setting a slight decrease in enrollment from one existing school.
Revenues from supplemental education operations remain at a similar level at 8 million, accounting for 22% of net revenue. This was attributable to the closure of two of our training centers, which are subjected to relocation.
On slide 5, gross profit was up 39% and gross profit margins were 47%, compared to 54 during the first quarter of fiscal 2011, an increase from 45 in the second quarter, 45% in the second quarter of fiscal 2012. The year-over-year contraction in margin was due to an extended portion of revenues from our Kindergarten operations, which accounted for 55%, compared to 28% in the third quarter of fiscal 2011.
We are pleased to see an improvement in those margins, although the previous quarter as our Kindergarten continued to improve their operating efficiency and achieve a higher growth margin. As such, we have confidence that growth margin will continue to maintain at a level higher than 45%, with fiscal 2012.
Turning to slide 6, our operating expenses research and the development expenses are up 63% and accounted for 2% of net revenue, the same as the third quarter in fiscal 2011. We will continue to make future plan investments in our teaching material and account in development capabilities. And we expect to see a single level of R&D cost to total revenue.
Sales and the marketing expenses for the quarter were up 62% and accounted for 4% of net revenue, the same as the third quarter of last year. We expect the sales and the marketing expenses as a percentage of revenue to maintain at a comparable level, while we sustain our immediate fees in brand promotion.
General and administrative expenses were up 6%. As a percent of revenue, G&A was 57%, down from 86% compared to the same q rate in fiscal 2011. The increase was mainly due to incremental expenses incurred by Yuanbo Educations Kindergarten, and the newly opened school in the current fiscal year. To demonstrate that, operating expenses have mainly stabilized and operational leverage is in step with the scale of expanding revenue. We expect G&A expenses as a percentage of revenue to remain at a similar level.
Net income for the quarter was up 24% to 2 million. Earnings per share for the quarter were 0.04 compared to 0.02 in the third quarter of fiscal 2011.
Moving to our balance sheet summary on slide 7, cash and the cash equivalent and short term investment amounted to 526 million on March 31, 2012, compared to 505 million on December 31, 2011. Our operations have generated positive cash flow of 27 million. This was mostly attributable to tuition fees collection, which happened at the beginning of the school term in February.
In terms of per share value, our cash per share as the end of March 2012 was as high as $2.22. Cash plus real estate value at book was $2.72 per share and the net asset value per share was $3.25. In addition, deferred revenue was 43 million, compared with 25 million at the end of third quarter of fiscal 2011, and 24 million at the end of previous quarter. Deferred revenue consists primarily of tuition and the franchising fees collected and it will be booked in the following quarter, according to course and the contracts schedule.
Now, let me walk you through our operation update, strategic priorities and then move onto outlook and guidance. Please refer to the slide 10 for updates on our three business services. We have 33 Kindergartens in our network operated by Yuanbo, Wentai and the Little New Star. They are located in mostly 3 regions, Guangdong Province, Yunnan Province and the Yangtze Delta region. As of the end of March 2012, the total enrollment from our Kindergarten operations was over 8,900, up from 8,400 at end of December 2011.
In terms of utilization, the average utilization for 6 Kindergartens which are still in ramp up stage was 39%. Average utilization rate for remaining mature Kindergartens was 94%, as end of March of 2012. And the overall average utilization rate reached 85%, an improvement of 5% compared with last quarter.
As per the roll of schedule, our current plan is to open one to two Kindergartens in the first half of fiscal 2013, depending on the progress of approval. Please note that this number excludes any potential acquisition.
Our primary and the secondary school operations consists of 5 schools, all operated by the Wentai and located in Guangdong Province. The total enrollment as of end of March 2012, was over 3900, an increase of about 2%, compared with the same quarter in fiscal 2011.
This utilization rate for the newly opened school at early ramp up stage was 18%. The average utilization rate from a mature school was 92%. The overall average utilization rate was 72%, and plans to open one to two schools in September 2013, which will be the start of our fiscal 2014.
Our supplemental education operations include the operation of 3 centers sales of teaching materials and the franchise fees from Little New Stars. Our 13 Training centers are located in the Yunnan and the Shensi province. The total enrollment as of end of March 2012, is over 4,500, up from 4200 as end of last quarter.
As we mentioned earlier, two training centers were closed for relocation. But we are improving environment of an operating efficiency in other training centers to offset the decrease. And as mentioned we are also in the process, of finding the right location for our new centers.
On a particular note, Little New Star launched its 7th Nation Wide Reading Competition event at end of March 2012. Final round of competition will be held in August in Beijing. This is an event held mainly for kids studying in Little New Star franchise group. We expect that this campaign will attract a lot of attention and the publicity beyond Little Star, happening to promote the Little New Star brand nationwide.
To recap, we remain totally committed to our three core businesses which are Kindergarten, primary and the secondary schools and the supplemental education and that we will adopt different strategic initiatives to attain continued growth.
Kindergarten remains a core part of our business. We will continue to grow our Kindergarten operations organically through improving utilization, while seeking opportunities to expand our network through acquisitions and the (inaudible) prospect in the lifelong education value chains through incubation from Kindergarten.
Both, primary and the secondary school operation will strengthen collaborations with real estate developers in Guangdong, extending offerings in international programs and introducing foreign language courses, including Spanish, Japanese and French.
As for our supplemental education operation, our English training program offered by Little New Stars, is well placed and captures the potential in this segment. We’ll continue to enhance involvement as training centers, by opening new classes at a different time slot, and invest in R&D to expand our service offerings and the capabilities in the teaching material.
At the same time, we will provide more value added service to progress in relationship with our franchisees to ensure a strong channel for teaching material. Our strong balance sheets will also provide a financial strength not only in expanding our Kindergarten in the school network, but also our offerings in the private education space, complementing our organic approval and the effectively driving medium to long term growth through acquisitions.
Looking into our financial outlook, on slide 14, for the first quarter of fiscal 2012, we expect net revenue to be in the range of 37 to 39 million, a 25 to 32% year-over-year growth. Again, this does not reflect any contribution from additional schools or acquisitions. We reiterate fiscal 2012 guidance and expect net revenue to be in the range of 145 million to 165 million of 65% to 56% increase year-over-year. This reflects the current given plan of Little New Star, Wentai and Yuanbo Educations looks out factoring in any potential acquisition or additional expansion plan.
This concludes our presentation and we would like to open the call for questions. Operator, please.
(Operator Instructions) .At this time there are no questions in queue, so I would like to hand the call back to Dora, for closing remarks.
Thank you operator. Thank you all for your participation. In summary, we will strive to execute our program strategy, focusing 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 the next earning call. Have a nice day.
Ladies and gentlemen, thank you for your participation in today’s conference call. You may now disconnect. Have a nice day.