China Distance Education Holdings CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: China Distance (DL)

China Distance Education Holdings Limited (NYSE:DL)

Q2 2012 Earnings Results Conference

May 17, 2012 08:00 am ET


Zhengdong Zhu – Chairman, CEO

Ping Wei – Chief Financial Officer


Mark Marostica - Piper Jaffray Asia Equity Research

Ella Ji – Oppenheimer & Co.


Good evening and thank you for standing by for the China Distance Education Holdings Limited Second Quarter Fiscal 2012 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 management will be available to answer your 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 provisions of the U.S. Private Securities Litigation Reform Act of 1995. Among other things, the outlook for the third quarter of fiscal year 2012 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 this 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 conference call. In addition, a webcast of this conference call is available on the Company’s Investor Relations website at

I will now like to turn the call over to Mr. Zhu to discuss the operational highlights. Mr. Zhu, please go ahead.

Zhengdong Zhu

(Interpreted) Thank you everyone for joining us our second quarter fiscal 2012 results conference call. Our operating results were released earlier and are available on the Company’s website as well as on newswire services.

We are pleased to report another quarter of strong top and bottom line growth with revenues exceeding our guidance and the continued expansion in both gross and net margins. In addition, we again delivered a strong increase in cash flow from operation.

Our results indicate that the demand for high quality online training and educational services remain strong, resulting [in-house] enrollment growth across our educational courses. We are also pleased to report a steady increase in average student payments across our key subject areas demonstrating the growing strength of our brand name in China’s education market, which is allowing us to charge premium prices.

We have made significant strategic and operational progress over the past few quarters, strengthening our core online verticals and expanding into new on and offline courses and additional value added services including our high definition courses and the mobile learning platform.

Together these actions have helped us pre-publish a more robust and a sustainable operational platform with multiple revenue streams. And given the fundamentally scalable nature of our business and our focus on maintaining effective cost controls, we have delivered yet another quarter of excellent financial performance.

We believe that the progress that we’ve made is sustainable and that we’re well positioned to deliver continuous growth over the long-term. However, as indicated in our earnings release, we expect to face some near-term challenges due to the delayed timing of certain APQE exams and the CPA exam policy information. I will return to this topic later in the call as we update you on our performance in our accounting verticals.

Let me now look through our operational developments for the quarter in more detail. Starting on slide 5, net revenues from continued operations for the quarter increased 36.7% year-over-year to US$12.3 million, exceeding our guidance. Net revenues for our education services were US$9.2 million, an increase of 36.4% as compared to the same period last year. Total cost enrollments from continuing operations were US$293,000, an increase of 27.7% year-over-year.

Our performance was supported by increased revenue across our major test preparation courses. And we continue to see a positive response to our high definition courseware and mobile learning platform, which have helped drive enrollment growth.

Let me now walk you through our verticals in more detail, starting with our accounting vertical on slide 7. Our online accounting vertical performed well in the quarter, especially in our test preparation courses with total enrollments increasing 20.6% year-over-year. Enrollments for accounting continuous education were comparable year-over-year as it is due to low season in continuous education courses.

We expect accounting continuous education enrollments to rebound in the third quarter of this fiscal year. Building on the positive pricing change from recent quarters, online APQE enrollments increased by a strong 54.5% year-over-year, while ASP for online APQE test preparation courses increased 31.1% year-over-year. Online CPA enrollments in the quarter increased marginally by 1%. ASP for online CPA test preparation courses increased 21.2% year-over-year.

Let’s turn to slide 8. On March 23, 2012 the Ministry of Finance decide to delay the entry and intermediary level APQE exams from May 12th and 13th to October 27th and 28th. The purpose of this shift in timing is to allow extra time for the government to pilot a computer-based testing system.

Also CPA exam guidance, the annual CPA exam policy, which online CPA exam timeline eligibility polices registration time etcetera, is yearly published towards the end of March each year. If you have not been published to-date already about seven weeks behind the usual schedule. As APQE and CPA are two of the main exams in our Company verticals. We expect that our short-term financial performance will be adversely affected.

Let’s turn to slide 9. For APQE exams due to the change with timing of exams, the recognition of about US$1.5 million of cash revenue collected before will be delayed from Q3 to later quarters. In total about US$1.8 million of collected cash revenue that would have been recognized as revenue in fiscal 2012 will be delayed to fiscal 2013.

In addition, with the change in the testing timeline, we expect a significant portion of APQE post-exam enrollments and revenue to be delayed into fiscal 2013.

Year late enrollments for CPA test preparation courses start to pick up – as exam policies for the year come out. With the delay this year, we did not see the anticipated volume increase. About 55% of our annual online CPA exam test preparation course enrollments happen in Q3 and Q4 last year, of which about 85% is usually recognized in the same fiscal year.

We believe that CPA exams for this year will most likely to happen probably in either October or November, a few months delay from the original timeline. Should that be the case, we anticipate that enrollments for the test season will still be comparable to last year albeit occurring at a later timing. If the exams happen in November, according to our estimates about US$2 million of revenue from this course offerings that otherwise would have been recorded in the fiscal year will have to be delayed to fiscal 2013.

Let’s turn to slide 10. In summary, the direct and indirect negative impact of APQE and CPA exams delay, our third quarter fiscal 2012 revenue will be at about 15% to 20% of Q3 revenue of last year or US$1.8 million to US$2.4 million.

We also estimate that such delay could potentially delay a total about US$4 million of revenue and a net income before income tax from fiscal year 2012 to fiscal year 2013. As our cost and expenses are mostly fixed in nature, hence the impact to our earnings before income tax will be at a similar level to the impact to our revenue.

We believe that both APQE and CPA exam will go back on track next year and that the impact to our operations and the financial results will be temporarily and primarily a difference in timing only.

Other accounting test preparation courses, excluding APQE, CPA exam and accounting continuous education are still doing very well, registering 47.4% enrollment increase and 6.8% ASP increase in the quarter.

Despite to the uncertainties surrounding CPA exam and the delayed timing APQE exam, we expect that the strong momentum in enrollment and revenue growth in our other courses in accounting verticals will continue.

Let’s turn to slide 11, about other non-accounting course offering. Following a very strong fourth quarter performance, our online healthcare segment again delivered healthy growth, maintaining a strong growth momentum driven by our high quality courses and superior online learning platform. Healthcare enrollments increased by 40.9% year-over-year, while revenue grew 16.2% year-over-year.

Online construction engineering test preparation course enrollments grew by 74.5% and ASP for construction engineering test preparation courses slightly decreased by 3.4%. Enrollment for continuous education courses for construction engineering (indiscernible) decreased by 27.7%, due to the timing of the roll-out of second quarter. We expect enrollments for continuous education courses to rebound in the next few quarters.

Finally, we are pleased to see a return to growth in our self-taught higher education courses with enrollment increasing 76.3% year-over-year, and ASP slightly decreasing 1.4%.

Moving on to slide 12. This quarter, we generated US$0.4 million of revenue from Yucai, our business start-up training subsidiary representing 53.8% increase from the same period last year.

The progress we’ve made demonstrates that this program offering, based on the idea of creating employments to entrepreneurship positions us well in the post-secondary school employment-ready training market, an area strongly supported by both the Ministry of Labor and Social Securities and from Post-Secondary colleges and universities.

This completes my update on business operations. Let me now turn the call over to Wei Ping, our CFO, to walk you through our financials.

Ping Wei

Thank you, Mr. Zhu. One clarification before I move on to the financials. In the healthcare discussion, Mr. Zhu mentioned a revenue growth of 16.2% year-over-year, that’s actually a GAAP revenue increase. Cash revenue increase is actually about 33%, and ASP in healthcare only decreased slightly.

Moving on to the financials, the strong momentum we’ve gained in recent quarters have helped to drive our revenue growth for the quarter and the scalability of our business model and our focus on prudently controlling our expenses have again allowed us to deliver continued margin expansion. While we expect the income from near-term turbulences as a result of the timing of APQE and CPA exams, we believe that we’re well positioned to deliver sustainable revenue and profitable growth in-line with our annual guidance.

Let me now recap our key financial metrics for the second quarter on slide 14. Total net revenues from continuing operations for the second quarter of fiscal 2012 were US$12.3 million, representing a year-over-year increase of 36.7% increase from US$9 million in the second quarter of fiscal 2011.

Online education services net revenues for the second quarter of fiscal 2012 were US$9.2 million, an increase of 36.4% from the second quarter of fiscal 2011. The increase was a result of increased revenue in all major test preparation courses. Such increase was partially offset by decreased revenue from accounting continuing education courses, primarily as it is low enrollment season for continuing education courses.

Net revenues from books and reference materials for the second quarter of fiscal 2012 were US$1.3 million after reallocating the delivery of online course services deliverables of US$0.2 million as online education services net revenues, almost unchanged from the second quarter of fiscal 2011.

Net revenues from others increased by 86.6% year-over-year to US$1.9 million for the second quarter from US$1 million in the same period last year, the increase was a result of increased revenue in courseware production services, offline business start-up training courses provided by Zhengbao Yucai and other offline supplementary training courses. Such increase was partially offset by decreased revenue from magazine content production services as we no longer provide those services to focus on our core growth areas.

Cost of sales from continuing operations for the second quarter of fiscal 2012 was US$5.32 million, representing a 23.0% increase over the second quarter of fiscal 2011. Non-GAAP cost of sales from continuing operations for the second quarter of fiscal 2012 was US$5.31 million, an increase of 32.7% over the same period last year. The increase in cost of sales was primarily due to the increased salaries and related expenses, and lecturer fees. Such increase was partially offset by decreased cost of books and reference materials.

Gross profit from continuing operations for the second quarter was US$7.02 million, representing a 49.3% increase from US$4.7 million in the same period last year. Non-GAAP gross profit from continuing operations was US$7.03 million, an increase of 39.9% year-over-year.

Gross profit margin from continuing operations for the second quarter of fiscal 2012 was 56.9%, compared to 52.1% in the second quarter of fiscal 2011. Non-GAAP gross profit margin from continuing operations for the second quarter of fiscal 2012 expanded to 57.0% as compared to 55.7% in the same period last year as we continue to leverage on our highly scalable online revenue model.

Total operating expenses from continuing operations for the second quarter was US$3.8 million, a decrease of 13.3% year-over-year. Non-GAAP operating expenses US$3.7 million, representing a year-over-year decrease of 2.2%.

Selling expenses from continuing operations amounted to US$1.72 million for the second quarter of fiscal 2012, representing 11.9% decrease year-over-year. Non-GAAP selling expenses from continuing operations were US$1.71 million, a 7.2% decrease from the same period last year, primarily as a result of decreased advertising and promotional activities and commissions to our agents as we continue to refine the collaboration model with our online distribution partners. Such decrease was partially offset by increased salaries and related expenses.

General and administrative expenses from continuing operations were US$2.1 million in the second quarter of fiscal 2012, representing a 14.4% decrease year-over-year. Non-GAAP G&A expense were US$2.0 million, an increase of 2.5% year-over-year, primarily due to the increased salaries and related expenses, partially offset by decreased professional fees.

Income tax expenses were US$0.7 million in the quarter, compared to US$0.1 million in the same period last year.

Net income from continuing operations was US$2.8 million for the second quarter of fiscal 2012, compared to US$0.5 million in the same period last year. Non-GAAP net income from continuing operations for the second quarter of fiscal 2012 was US$2.9 million compared to US$1.4 million in the same period last year.

Net income from discontinued operations was US$20,000 for the second quarter of fiscal 2012 compared to a net loss of US$10,000 in the same period last year. Net income was US$2.8 million for the second quarter of fiscal 2012 compared to net income of US$0.4 million in the same period last year. Non-GAAP net income for the second quarter of fiscal 2012 was US$2.9 million more than doubling the US$1.4 million from the same period last year.

Turning on to our cash flow on slide 15; net operating cash inflow for the second quarter of fiscal 2012 was US$4.8 million compared to a net operating cash inflow of US$2.7 million in the same period last year. The increase was primarily the result of increased profit generated in the quarter, decreases in accounts receivable and deferred cost, increase in income-tax payable and higher differed revenue and refundable fee balance resulted primarily from increased payments by our students to obtain our courses. Such increase was partially offset by increasing prepayment and other current assets and inventories.

By the end of Q2, we have already generated above US$9.7 million of net operating cash flow far exceeding our GAAP net income as we continue to generate very strong cash flow from operations and prudently manage our working capital, reducing the number of days AR outstanding. Free cash flow generated in the first half of fiscal 2012 has reached US$8.9 million a good indicator of our ability to generate cash for our shareholders.

Cash and cash equivalents, term deposits and restricted cash has reached US$54.5 million as at March 31, 2012 from US$49.7 million as of December 31, 2011, primarily due to the US$4.8 million of operating cash inflow generated from operations in the quarter partially offset by US$5.5 million of capital expenditures.

And this completes my financial overview. Now I will turn the call back to Mr. Zhu for the final remarks on our strategy and business updates as well as financial guidance for the third quarter and full year fiscal 2012. Mr. Zhu?

Zhengdong Zhu

(Interpreted) Thank you, Ping. In conclusion we are pleased to see that continued execution of our strategy and the enhancement we have made to our course and the services are translating into solid financial and operational performance.

Well the impact from the delayed APQE exams and CPA exam policy is significant for the remainder of the full year 2012. We believe that based on onetime events that will only impact the timing of revenue contribution. The overall market demand for our test-preparation courses remains healthy and we expect this market to continue growing over the long-term.

Accordingly for the third quarter we expect our revenue from continuing operations to be in the range of US$12.3 million to US$13.3 million, as compared to the net revenue from continued operations of US$12.1 million in the third quarter of fiscal 2011 recurrent in 2% to 10% year-over-year increase.

Despite this timing issue, given the strong performance of our other accounting and non-accounting courses and the ongoing diversification of our dividends we believe that we are well positioned to meet our previously issued revenue guidance for the full year which we expect will come in at 20% to 30% growth year-over-year. This represents our current and preliminary view which is subject to change.

Thank you for your time. We’d now be happy to take your questions.

Question-and-Answer Session


We will now begin the question-and-answer session. (Operator Instructions) The first question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question.

Mark Marostica - Piper Jaffray Asia Equity Research

Yes, thank you for taking my question. First question is in regards to the CPA exam policy delay, and I am wondering if you’ve been able to determine the underlying cause or reason for the delay in release of the policy?

Ping Wei

Mark the – what Mr. Zhu is that we think it is the administrative sort of authority wanting to make the exams better suitable for the future of the CPA profession and for the – to improve probably quality and sort of an – optimize the exam format et cetera. Hopefully the changes will make the exams better going forward. Now, I had a bit of and sort of a rumor or unproved and sort of an information to this.

There were some noises and publicities about that there were potentially CPA exam leak around the exam time last year in September and the government is paying a lot of attention to ensure that going forward the CPA exams and integrity and the authority would not be negatively affected again, so they maybe developing and enhancing the security of the exams. And this is actually a one-time only thing. It is not likely to be repeated.

Mark Marostica - Piper Jaffray Asia Equity Research

Okay, thank you for that color on the exam. My next question is related to the delays that you were talking about; I’m wondering also if any of the other exams unrelated to accounting may have similar delays although it doesn’t appear that that’s the case, but I just like to get your thoughts on that.

Zhengdong Zhu

So far we have not heard of similar delays affecting other exam areas.

Mark Marostica - Piper Jaffray Asia Equity Research

Okay. And then moving on to an item you talked about last quarter relative to the higher margin areas that you’re focusing on namely your mobile learning platform, mobile magazine, I’m just trying to get an update on those efforts and activities that would be very helpful. Thanks.

Zhengdong Zhu

The mobile learning platform, mobile learning magazine and other new technologies that we introduce into our existing courses we believe would help to enhance the attractiveness of our courses, make our courses more convenient and in the long run we believe it will make our courses and our course offerings more competitive on the market and that’s what Zhengdong has said and I’ll add a sentence to that, that basic – simultaneously mobile learning magazine is generating a small amount of revenue.

Mobile learning platform is part of our course offerings, we don’t charge separately for those in mobile learning. So, however this mobile learning and high definition courses et cetera are enabling us to charge a higher price on our course offerings and also a bit of operational updates on that front. Last time we were talking about operations, in the last quarter we had mobile learning on Android and Apple platform. Right now we have it on all four main smartphone platforms and in some tablets Android, Symbian, Microsoft, Windows Mobile and in Mango and Apple. So we’re on all four major platforms.

Mark Marostica - Piper Jaffray Asia Equity Research

Great, and thanks for the update. And then one last question, I’ll turn it over; you saw some very nice enrollment traction in the self-taught higher education this quarter, and I’m wondering if that business, if you can talk about the drivers of that and if you think that going forward we should see sustained growth in self-taught based on what you’ve just experienced. Thank you.

Zhengdong Zhu

Okay. First of all, the good results we achieved in this quarter in enrollment as the result of continued – and focus continued and development in the self-taught area. So going forward there in terms of drivers really just more enrollments in existing provinces, going forward we will continue to roll it out prudently and continue to expand in collaborations with more provinces and we think – we should see sort of sustainable and sort of continued flows in the self-taught area, not very sort of -- sort of super fast, but sustainable, reasonably fast growth.

Mark Marostica - Piper Jaffray Asia Equity Research

Great. Thank you, I’ll turn it over.

Ping Wei

Thank you, Mark.


Thank you very much. (Operator Instructions) The next question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Ella Ji – Oppenheimer & Co.

Hi. Thank you and congratulations on a strong quarter. So, my first question is regarding the delays in CPA and APQE exam. So do you expecting a US$4 million of impact on the revenue to be fully realized later or given this delay in timing, will you consider doing other promotional activities such as lowering the prices or the recognition of coupons in future? That’s my first question.

Ping Wei

Okay, I’ll translate the question and I’ll address the first part, and I’ll have Zhengdong address the second part.

So, let me answer the first question, first. Yes, we believe the US$4 million delay will be fully recognized into revenue in fiscal 2013. So, then move to Zhengdong to answer the second part.

Zhengdong Zhu

Okay. Well, it’s not very likely that we’ve lower price to promote enrollments even with the delay in the exam timing. However, we may consider introducing new products and other forms of advertisements or promotion, or sort of marketing activities to attract more enrollments. In terms of new products, we introduced a product called five-year test-prep course, which basically means if students register now, they’ll – the registration will allow them to take both this year’s test-prep course and next test season or next years test-prep course. This is to make sure that the last years post-exam registration will basically this in – usually with APQE exam happening in May like post-exam enrollment will go from May to September, which is actually a pretty sizable number like on a yearly basis. Last year the number was about 55,000 students.

Now to attract those students to enroll earlier rather than waiting till after end of October exam, the – this and that sort of two year course will enable the students who have otherwise have to wait till end of October or later to enroll even now to study – to get started, preparing for next years course. So, we hope that this will be convenient to students and we hope that with this course more students were enrolled with us at their regular times rather than waiting till end of this year’s APQE exam.

Ella Ji – Oppenheimer & Co.

Okay. So if they enroll now for two years, like would you provide a semester of price discount or any other benefit to attract them?

Zhengdong Zhu

Yeah the answer is, did I translate the question? Yes, I do. The answer is first of all, we don’t provide much discounts at all to any of our courses right now. And so, whatever price we sort of publish that will be the price typically students pay. They will be entitled to regular sort of promotional activities for example, if students spend certain amount without they automatically get a discount, that’s depending on the amount of money they spend with us. And simultaneously a student will enjoy similar services regular [wire] test prep for students will enjoy just for a longer period of time basing upon the day they registered here, they end up next years exam. But the quality and the scope of services will be the same.

From accounting perspective, we will be amortizing those cash collected or until sort of basically over the period from now or from the date of their registration till next years exam, which we expect to be for APQE entry level and intermediate level May of next year.

Ella Ji – Oppenheimer & Co.

Okay. My second question is about your margins. You achieved quite solid margin of growth this year, this quarter, despite some pressures in the salaries and also I think there were to be some investments in mobile applications. Ping, I’m wondering if you can talk about the outlook of margin period, in fact such area goes to the [spendable] I mean, excluding the delay of the exams negative impact? And also if you could talk about some drivers of the margin growth that would be very helpful?

Ping Wei

Okay. In terms of margin, let me sort of address in two ways. The first is, basically configuring the impact of the US$3 million to US$4 million of top and bottom line impact from the delay of the exams. Basically taking the US$4 million revenue out, for fiscal year 2012, we will still expect to achieve a similar level of annual growth margin and net margins this fiscal year. That basically means if we also achieved 20% of top line growth, we will also achieve 20% or better bottom line growth this year, which basically means last year we have – our non-GAAP net income from continuing operations are at about US$6.4 million.

So, you should be able to – we should be able to deliver a 20% higher net non-GAAP net income number in this year, even after we delay the recognition of about US$4 million of revenue into 2013. So, if we add back the US$3 million, US$4 million revenue back, if that’s the delay never happened, we would have achieved a significant growth in net margin expansion. The biggest reason is the scalability of our online models.

As you’ve noted in recent years, we can grow top line without much increase in like cost or SG&A. Now specifically for 2012 and the – at the gross margin level we – the lecturer fee and bandwidth cost is growing at a fast pace because of the new technology adopt will demand higher bandwidth and also demand high like sort of in a – more sort of skills in sort of higher level of skills in our teachers resulting us paying higher lecturing fee to the teachers. On the same number of hours teachers will [call] with us. So you should see – so our lecturer fee had increased quite significantly this year.

Other than that, all other lines on cost expenses, they’re more fixed in nature and they’re growing at a much lower – slower pace than our revenue and then our top line. More – to be more sort of specific, we actually expect – for the next two quarters, we actually don’t expect much increase in SG&A expenses or non-GAAP basis at all.

Ella Ji – Oppenheimer & Co.

Okay, great. That’s very helpful. Thank you.

Ping Wei

You’re very welcome.


(Operator Instructions) There is no further question at this time. I will now like to hand back to the speakers.

Ping Wei

Thank you all again for joining us today and we look forward to updating you on our progress in the near future. Bye.


Ladies and gentlemen, that thus conclude our conference for today. Thank you for participating. You may all disconnect.

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