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Noah Education Holdings Ltd. (NYSE:NED)

F4Q12 Earnings Call

August 30, 2012 08:00 am ET

Executives

Dong Xu - CEO

Dora Li - CFO

Analysts

Kun Tao - Roth Capital Partners

Operator

Good morning and good evening, ladies and gentlemen. Welcome to Noah Education Holdings Ltd’s fourth quarter and full fiscal year 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 US markets closed yesterday afternoon, Noah issued a press release announcing its unaudited financial results for the fourth quarter and full 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 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 Factor 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.

Please take note that all numbers expressed in this conference call are in renminbi and all comparisons refer to year-on-year comparisons unless otherwise stated. I would now like to turn the call over to Noah’s Chairman and CEO, Mr. Dong Xu. Mr. Xu, please go ahead.

Dong Xu

[Foreign Language]

Thank you for joining us today on our fourth quarter and full fiscal year 2012 earnings conference call. I hope you’ve all had a chance to read our earnings press release.

[Foreign Language]

Our fourth quarter is traditionally one of our strongest quarters and I am very pleased to report that we delivered a year-over-year revenue growth of 58% exceeding the top end of our guidance by 20%.

[Foreign Language]

The robust topline growth was driven by our kindergarten operation, the largest contributor of all of our businesses with a year-over-year growth of 133% fueled by organic and acquisitive growth from Yuanbo Education.

[Foreign Language]

Excluding the impact from one-time impairment loss on goodwill and intangible assets, our operations also returned to profitability and recorded an operating income of over 6 million and achieved breakeven for the fiscal year.

[Foreign Language]

While Dora will try to walk you through our financial performance, I am excited to announce that we have expanded our kindergarten network through the acquisitions of DDK Consulting and Xiaoxiao Education. These acquisitions are in line with our kindergarten strategy which is vital entry point of our life long education model and accurately demonstrates our ability to execute to achieve a sustainable performance through organic and acquisitive growth. Kindergarten is the core of our three focus areas and will continue to be a key growth driver down the line.

[Foreign Language]

DDK Consulting and Xiaoxiao Education operated in the Zhejiang province around the Yangtze River Delta. DDK Consulting currently operates four kindergartens and one early childhood learning center and has a total enrollment of 1200. It’s total consideration is RMB 14.5 million.

[Foreign Language]

Xiaoxiao education is focused on operating kindergartens and children’s art and music training centers. It currently operates six kindergartens and one children’s art and music training centre and has a total enrollment of 1300. The total consideration of the acquisition is RMB 33.56 million

[Foreign Language]

Both transactions will be funded by our own cash reserves subject to customary closing conditions including regulatory approval. We expect revenue contributions from both acquisitions to come in the second quarter of fiscal 2013.

[Foreign Language]

Looking ahead, kindergarten will remain our focus area as we expect our top line to grow as the [ramp up] of kindergarten operations continue with utilization rate and operational efficiency is expected to improve further, we are confident that our gross margin will be sustainable at around 45% and operations will stay profitable as demonstrated in the previous quarter.

Our prudent business model is well aligned with the growth opportunity in the education space which enables us to generate a steady cash flow [throughput] our organic and acquisitive growth initiatives going into 2013.

[Foreign Language]

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

Dora Li

Thank you Mr. Xu. As the details of financial results for the fourth quarter and full fiscal 2012 are available in our earnings release, I would like to highlight a few key financial metrics and a focus on year-over-year comparison for the fourth quarter and the full fiscal 2012 with all numbers in RMB unless otherwise stated.

We're very pleased to report that Noah continued to grow in the fourth quarter with strong year-over-year improvement in both top line and the margins.

On slide five, net revenue for the quarter was up 58% to RMB47 million for the year. Net revenue was up 74% to RMB163 million. The strong improvement was mainly driven by the organic and acquisitive growth from our kindergarten operations across all brands and incremental revenue from the new school opened since September 2011.

If we breakdown the net revenue by business segment, for the quarter revenues from our kindergarten operations was up 133% to about RMB24 million, accounting for 51% of net revenue. For the year, revenue from our kindergarten operations was up 216% to RMB82 million, accounting for 50% of net revenue.

Yuanbo’s kindergarten contributed to about 60% of the growth. For the quarter, revenue from primary and secondary school operations was up 29% to RMB14 million, accounting for 29% of net revenue. For the year, the revenue was up 31% to RMB45 million, accounting for 28% of net revenue.

Revenues from supplemental education operations remain for the quarter was up 5% to RMB9 million, accounting for 19% of net revenue. For the year, the revenue was up 9% to [RMB46 million], accounting for 22% of revenue.

On slide six, gross profit for the fourth quarter was up 48% and 53% for the year. Gross profit margin for the quarter was 50% compared to 53% in the fourth quarter of fiscal year 2011. Gross profit margin for the year was 47% compared to 53.7% in fiscal 2011.

The contraction in margin was due to an extended portion of revenue from our kindergarten operations which accounted for 50% compared to 28% for the full fiscal 2011. As our kindergarten continues to improve their operational efficiency, we are pleased to see an improvement in gross margins from 38% in the first half to 43% in the second half of fiscal 2012.

We have incurred an impairment loss of RMB61 million for the fourth quarter and the full fiscal 2012 respectively, which is a non-cash impairment charge for Noah’s intangible asset and good will based on the Company’s intangible assets impairment, assessment and annual goodwill impairment test. The impairment charge reflects a material decline in fair value of the Little New Star and the Wentai Education business segment as of June 30, 2012.

We do not expect this non-cash impairment charge to have any adverse impact on our normal business operations, cash positions or cash flows from operating activities. Net of impairment loss and you will see a significant improvement across all expense line items as percentage of revenue R&D expenses improve to 1.8% from 2.1% in fourth quarter of 2011 and to 1.9% from 2.4% in full fiscal 2011.

Sales and marketing expenses improved to 3.4% from 3.9% in the first quarter and 3.7% from 4.3% in the full fiscal 2011. General and administrative expenses improved to 39.9% from 52.8% in the first quarter and to 51.4% from 70% in the full fiscal 2011.

Net loss for the quarter was $54 million basic and diluted loss per share per quarter was RMB1.57 compared to basic and diluted loss per share of RMB1.11 in the first of fiscal 2011.

Net loss for the full fiscal year was RMB48 million, basic and diluted loss per share was RMB1.47 compared to basic and net diluted loss per share of RMB0.78.

Non-GAAP net income excluding intangible assets and goodwill impairment and share-based compensation expenses for the quarter was RMB6.9 million. Non-GAAP net income for the full fiscal 2012 was RMB50 million this translates to non-GAAP basic and diluted earnings per share of RMB0.1 and RMB0.26 for the fourth quarter and full fiscal 2012 respectively.

Moving to our balance sheet summary on slide eight. Cash and cash equivalents and short-term investment amounted to RMB522 million on June 30, 2012 compared to RMB526 million on March 31, 2012.

Operating cash used in continuing operations was RMB2.3 million. We will continue to deploy our cash in the investment for new schools and kindergartens.

In addition, deferred revenue of RMB29 million compared with RMB45 million at the end of March 2012. Deferred revenue consists primarily of tuition and franchising fees collected and will be booked in the following quarters according to quarter schedule.

In terms of cash per share, our cash per share at end of June 2012 was at high as $2.25. Cash flow real asset value at book was $2.74 a share and the net asset value per share was $3.38.

Now, let me work you through our operations update, strategic priorities and then move on to outlook and guidance. Please refer to slide 11 for updates on our three business services. As of June 30, 2012, we have 34 kindergartens in our network, operated by Yuanbo Education, Wentai education and Little New Star. They are located in mostly three regions, Guangdong Province, Yunnan Province and the Yangtze Delta region.

Two of the kindergartens were in the process of finalizing their licenses and did not contribute to the top line during the quarter. Total enrolment was as of June 30, 2012 from our kindergarten operations was over 9100, up from 8900 at end of March 2012.

In terms of utilization, the average utilization rate for 7 kindergartens which are still in ramp up stage was 43%. Average utilization rate for remaining mature kindergartens was 94% at end of June 30, 2012. And the overall average utilization rate reached 86%. As per the rollout schedule, our current plan is to open three kindergartens in September, two under Yuanbo education and one under Wentai education. And the two will start to contribute to revenue from October onwards.

Our primary and the secondary school operations consists of 5 schools, all operated by Wentai and located in Guangdong Province. The total enrollment as of the end of June 2012 was approximately 4000.

The utilization rate for newly opened school at early ramp up stage was 18%. The average utilization rate from the mature school was 92%. The overall average utilization rate was 72%, and we plan to open one to two schools in September 2013, which will be a start of our fiscal 2014.

Our supplemental education operations include the operation of training centers, sales of teaching materials and the franchise fees from Little New Star. Our 13 training centers are located in the Yunnan and the Zhejiang province. The total enrollment as of the end of June 2012 is approximately 3,800. As we focus on expanding our portfolio in kindergartens, contribution to total net revenue from the supplemental education business has decreased from 35% to 20% over last year. We expect the supplemental education business to remain stable.

Looking into our financial outlook, on slide 14, for the first quarter of fiscal 2013, we expect net revenue to be in the range of RMB38 million to RMB 41 million and 11% to 20% year-over-year growth. Again, this does not reflect any contribution from additional schools or acquisitions.

Our net revenue guidance for the full fiscal 2013 is expected to be in a range of RMB184 million to RMB190 million, a 13% to 17% year-over-year growth. This reflect the current business of Wentai Education, Yuanbo Education and the Little New Star without factoring in any potential acquisitions or additional expansion plans.

That concludes our presentation and we would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions)

And you have a question from Kun Tao with Roth Capital Partners.

Kun Tao - Roth Capital Partners

First question is regarding your two new acquisitions, how much of revenue and what kind of [margins] that these two acquisitions will contribute to your fiscal 2013 numbers?

Dora Li

Hi, Kun this is Dora. Regarding the forecast for 2013, we just mentioned the current guidance only reflects our current unit plans without effecting any acquisitions or expansions and right now we are still in the closing process and subject to all the customary closing conditions, regulatory approval. So we will update you when conditions are ready and we may have to read up potential for our guidance after the closing.

Kun Tao - Roth Capital Partners

Okay. So when you close that we have more detailed information regarding how much of that margin?

Dora Li

I will update you by then.

Kun Tao - Roth Capital Partners

How about the margin so is it the similar margin that you guys have currently on hands versus the new ones?

Dora Li

Can you repeat question, your voice is not very clear?

Kun Tao - Roth Capital Partners

Okay. How about the margin still for the two companies what margins they are dealing currently?

Dora Li

Yeah actually, we say we will update you when you know after the closing and by then we will give more details on the two acquisitions.

Kun Tao - Roth Capital Partners

Okay, second question regarding your impairment loss. Can you provide more details when you do this impairment valuation, what exactly cost is take down the [valuation] in the goodwill. So what assets you actually evaluate and what cost effects that decreased in valuation?

Dora Li

Actually, the valuation, the impairment assessment is an annual exercise based on [GAAP] and the annual review for goodwill and intangible asset was conducted by an independent third-party. It reflects our (inaudible) of valuation of the fair value on Little New Star and Wentai. Also as mentioned, this is a non-cash item and it doesn’t have any impact on the fundamental of our business and the impairment mainly reflects the decline of fair value of Little New Star. We have already reached of about 80% of the goodwill for Little New Star and meanwhile, for Wentai and Yuanbo Education, they continue to grow healthy and we do not expect any significant write-off on them and for Little New Star as we mentioned, we already reached about 80% of its goodwill, so a [down] the road, we do not expect more significant impairment.

Kun Tao - Roth Capital Partners

Okay. And if you could explain a little bit, so on Little New Star I understand that the impairment is non-cash, but it must be something some like a reputation or something intangible that value decline, do you have was more specific reasons why it happened?

Dora Li

Well, I think the major reason is the impairment on Little New Star is you know although the business is stable, its growth is not as we have expected since the acquisition. So we take a better proven and conservative means to reassess its goodwill and intangible assets.

Kun Tao - Roth Capital Partners

Okay. My last question where is your margin expectations on your current guidance or for 2013?

Dora Li

Yes, we expect our overall gross margin will stay around 45 for 2013.

Kun Tao - Roth Capital Partners

You mean 45 in 2013?

Dora Li

Yes, around 45%.

Kun Tao - Roth Capital Partners

Okay, but you have actually your annual growth margin for 2012 was only 45, right?

Dora Li

Yes, we are still in the growing and we are still in the reinvestment, so we will continue to reinvest in our existing kindergartens to improve the utilization rate and so we expect the overall margin will be maintained around 45 on annual basis.

Operator

And at this time there are no further questions in queue so I would like to hand over the call back to Dora for closing remarks.

Dora Li

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 2013.

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

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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