Noah Education Holdings, Ltd. F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

Noah Education Holdings Ltd. (NED)

F4Q08 (Qtr End 06/30/08) Earnings Call

August 21, 2008 8:00 pm ET

Executives

Sarah Kalhorn - IR, Ogilvy Financial

Dong Xu - Chairman and CEO

Rick Chen - EVP

Dora Li - CFO

Analysts

Heidi Poon - Thomas Weisel Partners

Scott Schneeberger - Oppenheimer

Presentation

Operator

Good evening and thank you for standing by Noah Education's Fourth Quarter and Full Fiscal Year Earnings Call. At this time all participants are in listen-only mode. After managements' prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections you may disconnect at this time.

I will now turn the call over to Sarah Kalhorn, Investor Relations Consultant from Ogilvy Financial to begin the conference.

Sarah Kalhorn

Hello everyone and welcome to the Noah's earnings conference call reporting results for the fourth quarter and full fiscal year ending June 30th, 2008. A press release detailing results was distributed earlier today. To find a copy of the release or to be added to Noah's distribution list, please go to the company's investor relations website at ir.noahtech.com.cn.

Joining the call today is Dong Xu, Noah's Chairman and CEO; Rick Chen, Executive Vice President; and Dora Li, CFO. After Mr. Xu's opening remarks, Mr. Chen will speak to some business highlights achieved during the third quarter, and Ms. Li, will discuss financial results and provide guidance.

After their remarks, the management team will be available to answer your questions. As a reminder, this conference is being recorded. In addition, a webcast of this call conference call will be available on Noah's IR website, again that website is ir.noahtech.com.cn.

Before we continue, I'd like to read through Noah's Safe Harbor statement. Today, we will make certain forward-looking statements that reflects Noah's current expectations and views of future events that involve know and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Noah has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. You should understand that actual future results maybe materially different from and possibly worse than what Noah expects. Information regarding these risks, uncertainties and other factors is included in Noah's filings with the SEC.

Please take note unless otherwise noted; all figures mentioned during this conference call are in US dollars. Mr. Dong Xu, our Chairman and CEO, will now make a few brief remarks that will be translated.

Dong Xu

[Interpreted].

Hello everyone, and thanks for joining on the call today. We are very pleased to announce strong results this quarter ending our fiscal year on a very positive note.

This is our second consecutive quarter of growth and it demonstrates that our company's strategy is on track. It's particularly gratifying that this is traditionally the company's slowest quarter, as students in elementary and middle schools tend to spend the spring studying for and taking standardized placement exams, rather than focusing on their normal coursework with help from the supplemental education material.

Our core business performed well in the fourth quarter, as demonstrated by solid growth in our product line. Likewise, our Access Noah In-school initiative is also progressing nicely, and we've made substantial progress in this marketing program. Rick Chen will talk in more detail about the progress with our Access Noah web 2.0 community developed over the quarter, which is leveraging the Noah brand to create an extensive online platform of offerings that we expect to attract students and teachers alike.

The Access Noah initiative is a vital part of our long-term strategy that aims to take Noah above and beyond simply being a leading player in the Chinese DLD market. Our vision is to grow our core business and expand our offerings to become a full spectrum education content and services provider, offering the best supplemental education services in content to meet the needs of students aged 5 to 19. This past quarter demonstrates that we are well on our way to achieving this goal.

Noah continues to be well positioned in what remains an extremely robust market. Despite some downward economic pressures in many industries, the supplemental education market in China is continuing to grow. We see $3 spent on supplemental education for every $1 on formal education. The average Chinese family spends a third of its income on education for their one child and such focus on education is vital regardless of economic condition.

The DLD market has a strong growth forecast and penetration levels are still low. We believe Noah is the best company to bring traditional learning content to Chinese students. And we remain the best positioned in China to combine content with technology to drive learning interest and improve learning efficacy. This is our core strength and the foundation of our future success.

I will now turn you over to Rick Chen, who will provide further details on Access Noah initiative.

Rick Chen

Hello everyone. Thank you for joining us today. Noah had another solid quarter and we're pleased by our results. Investments in traditional marketing such as TV advertisements as well new programs such as Access Noah had not only put sales back on track but also had bolstered consistent brand confidence and loyalty.

During the fourth quarter, we continued to place emphasize on our Access Noah program, the initiative that is allowing us to establish exclusive partnerships with primary and secondary schools across China. Through these partnerships, we are able to take Noah learning devices, content services on to school campuses and put our products directly into student tent.

In the fourth quarter, we expanded the number of schools in the program by approximately 25% to 700 schools reaching more than 1.6 million students across 600 schools at the end of the third fiscal quarter. Feedback from schools, teachers and students had been positive and encouraging.

During the last quarter, we have also established 50 experimental Access Noah classes in five provinces across China. Results from all the experimental classes have shown an increase in student test scores across academic subjects and improvements in learning behaviors. Ultimately, we plan to take Access Noah program into 5,000 schools and reach 10 million students across the country.

The Access Noah Online community, mentioned by our CEO, was also a focus of investment and recourses for us in the fourth quarter. We are excited about this next initiative for the Noah brand. Access Noah Online will be a web 2.0 portal that features personal and class profile pages, person-to-person and group-to-group message board, and a blackboard space where teachers can advise students and respond to students' questions.

Our online community is a social community concept with an educational focus tailored to primary and secondary Chinese students to study and social behaviors. Currently, in beta testing, we plan to launch Access Noah Online formally in the fall of 2008. This is an important step to demonstrate our position as a full spectrum education provider with the best education services and content available to meet students' needs today and tomorrow.

The online community carries the added bonus of opening up many other avenues for revenue generation as the user base grows. Through our online community, our In-school Program and our off-campus products and services, we are establishing continuous communication and exchange with and between teachers, students and parents. For tutoring centers, we continue to actively seek the right acquisition target in this space. But we have found [past tag] issues with targeted providers to be widespread and difficult to resolve. We remain committed to Noah's tutoring business and will also be looking to grow organically in this area.

I will now hand the call over to Dora Li, our CFO, who will take you through the quarter's financial highlights.

Dora Li

Thanks, Rick. Hello everyone. I would now lead you to sum up our key financial results for this quarter and the full year before giving guidance. I am taking your questions with Rick and Mr. Xu.

For the fourth fiscal quarter of 2008, we reported net revenue of RMB97.9 million or $14.2 million, a 17.9% increase over the net revenue of RMB83.1 million in the corresponding period last year.

Total sales volume of DLDs for the fourth quarter was about 78,700, an 11.7% increase from approximately 70,500 in the fourth quarter of 2007.

Gross profit in the first quarter was RMB50.1 million or $7.3 million, which was 51.1% of net revenue, compared to RMB37.6 million or 45.3% of net revenue in the corresponding period last year. The increase was primarily attributable to our focus on selling higher-end DLD and a decrease in the cost of raw material.

Operating loss for the quarter was approximately RMB1.7 million or $0.2 million, compared to operating income of RMB3.3 million in the corresponding period last year. This was primarily due to an increase in advertising spending, accrued auditing fees and a one-time RMB3 million donation to the Sichuan earthquake relief effort. We were very fortunate that the earthquake had relatively little material effect on our business. But our heart and soul will be with our countrymen. Noah Education, together with its employees, donated a total of RMB5 million to China Youth Development Foundation and the Red Cross Society of [PRC] to aid schools and children affected by the earthquake.

Excluding share-based compensation expenses, and the earthquake donation, operating margin for the quarter was 3.9%, compared to 6.6% in the corresponding period last year. Total share-based compensation expenses for this quarter, which were allocated to related operating costs and expenses, increased 10.3% to RMB2.5 million or $0.4 million, up from RMB2.2 million in the corresponding quarter last year.

In the quarter, we recorded approximately RMB18.8 million in other non-operating income, which was largely attributable to the foreign exchange gains from depreciation of the US dollar.

Net income for the quarter was RMB31.2 million or $4.5 million, a 681.6% increase over RMB4.0 million in the fourth quarter of 2007. Net income, excluding share-based compensation expenses, and the change in the fair value of warrants, a non-GAAP measure, was RMB30.1 million or $4.4 million, an increase of 382% year-over-year.

On March 27, 2008 we announced a stock buyback authorizing the company to repurchase up to $10 million worth of more ADS over a period of one year. As of June 30, 2008 the company had repurchased over $850,000 worth of more shares.

Now turning to our full year results. For the fiscal year 2008, Noah reported net revenue of RMB651.9 million or $95 million, a 17.4% increase from net revenue of RMB555.2 million in 2007.

Total sales volume for DLDs for the full year was approximately 589,000 units, an increase of 5.7% from about 557,000 units in the full year of 2007. E-Dictionary sales decreased to approximately 630,000 units, an 18.7% decrease from approximately 776,000 in the previous year. Sales results for both DLDs and E-dictionary were in line with the company's expectations.

Gross profit for fiscal year 2008 was RMB333.2 million or $48.6 million, which was 51.1% of net revenue, compared to RMB288.7 million or 52% of net revenue in 2007. We expect earnings to remain in the range of 51% to 52% for the foreseeable future.

Operating profit for the full year was RMB80.4 million or $11.7 million, which was 12.3% of net revenue compared to RMB67 million or 12.1% of net revenue last year. Operating profits, excluding the one-time earthquake relief donation was RMB83.4 million or $12.2 million, which was 12.8% of our net revenue.

Total share based compensation expenses, which were allocated to related operating costs and expenses, increased to RMB20.3 million or $3 million, which was up 37% from RMB14.8 million in 2007.

Net income for the full year was about RMB145 million or $21 million, an increase of 118% from RMB66.4 million in last year. Net income excluding share based compensation expenses and the change in the fair value of warrants, a non-GAAP measure, for fiscal year 2008 was RMB167.1 million or $24.4 million, an increase of about 105% year-over-year. Basic and diluted earnings per share for the full year were RMB4.14 or $0.60 and RMB3.95 or $0.58 respectively. Basic and diluted earnings per share, excluding share based compensation expenses and the change in the fair value of warrants were RMB4.77 or $0.70 and RMB4.56 or $0.66 respectively.

As of June 30, 2008, Noah had cash and cash equivalent of RMB305.2 million or $44.5 million, the company also had approximately RMB750 million or $104 million in both short-term bank deposits and short-term investments.

Turning now to our guidance. Noah expects net revenue for the first quarter of year 2009, which is July 1, 2008 to September 30, 2008, to be approximately RMB250 million compared to RMB247 million in the corresponding period as last year. Noah expects net income fourth quarter to be in the range of RMB48 million to RMB60 million, compared to RMB44.5 million for the corresponding period, last year. Please note that, the outlook figures are based on our current taxations. These statements are forward-looking and actual results may differ materially.

I will now open the call up for your questions.

Question-and-Answer Session

Operator

The question-and-answer session of this conference call will start any moment. (Operator Instructions). Your first question comes from the line of Heidi Poon with Thomas Weisel Partners. Please proceed with your question.

Heidi Poon - Thomas Weisel Partners

Thanks guys. I would just like to get a little bit more clarity on the Access Noah program, seems like it is getting more traction in terms of signing up new students. But could you give me a better sense of the revenue model of this program? Are we going to be able to see or are you going to breakout revenue related to this program, or is it just the way of thinking of it as another, sort of a more creative marketing program by Noah?

Rick Chen

Hi Heidi, this is Rick. The Access Noah program is really two-fold. One is really the offline part, the other one is the online part. So let me address the offline part first. It is, like you said, a very creative way for us to improve our self-marketing and open up other channels to move our DLD products in other product services on-campus. But also it helps students and teachers to sort of understand our product mix and the depth and the breadth of our content offering. And so, it will eventually help us to improve our offline off-campus sales with our product and services.

So we expect going forward in fiscal 2009, to have a separate line of the revenues generated from the DLD sales, through the Access Noah program. But, keep in mind that we can't sell the products on-campus. So, the sales are generated off-campus through the retail channels. But we are establishing a program that will track the incremental sales results going forward. So that is one part of the Access Noah program.

The other one, like I mentioned on the conference call, is the Access Noah Online Community program. And that is the business that's brand new to us and it's very similar to other social communities that are targeting different demographics. Our demographic is the 5 to 19 crowd. The goal is really is to establish a platform of communication between students, teachers and parents.

And the biggest model behind it is really a combination of lot of online, sort of like advertising, team function like sort of revenue generators. It's really a good combination of all of that. And we believe that we can generate substantial advertising and also e-commerce as well as gain functions like revenues from this online program in the fiscal 2009. And it will have a line item showing the progress from a revenue perspective from the Access Online program. So it's really two-fold.

Heidi Poon - Thomas Weisel Partners

Great, that's help. Another follow-up question just on the gross margin line. It looks like the June quarter went back to the historical range. In your forward guidance, could you give us a sense of where do you see gross margin will track based on your expectation for mixed or some of the product cost elements?

Dora Li

Hey, Heidi, this is Dora. Regarding the gross margins in the first quarter, we believe, we have said in this quarter our gross margin is still in line with our expectations. We sold some higher-end DLDs in this quarter and also we do enjoy the raw material cost reduction. We also had 6 million inventory write-off impact this quarter, which impacted the margins for this quarter. Going forward, we expect our margin will still remain in about 50% line, which we expect to be…

Rick Chen

I think the first quarter is very much in line with what we expected from our core business. We do believe though that the Olympics that is currently going on in China will have some impact on our sales result for the September quarter and our guidance fully reflect that.

Heidi Poon - Thomas Weisel Partners

Okay. I guess if I could really quick just follow up on that, how large is the Olympics impacts on the guidance? Can you quantify on the revenue?

Rick Chen

Well, we have seen some impact from the sales point of view because a lot of people are watching the game, attending the games and especially in the cities, where the games are hosted, in Beijing and other major cities, there is some impact on sales. But it's too early for us to quantify the impact at this point.

Heidi Poon - Thomas Weisel Partners

Okay. A better a way to ask that, do you think that any lost sales from effect of the Olympics will be made up in subsequent quarters?

Rick Chen

We certainly hope so.

Heidi Poon - Thomas Weisel Partners

Okay. Thanks. I will hop back in line for some more.

Rick Chen

Okay. Thanks.

Operator

(Operator Instructions). Your next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.

Scott Schneeberger - Oppenheimer

Thanks guys. With regard to the DLD sales, Rick, you had mentioned last quarter what your market share was. Do you think that you've maintained that? Has it increased, decreased? And could you speak a little bit with regard to your ASP on the DLD, how that compares to your competition and historically? Thanks.

Rick Chen

Okay, Scott. We don't have concrete data showing our increased market share in the past quarter, because typically we do that kind of research and survey every six months. So we don't have any concrete data showing we have gained market share over the last quarter. But from the feedbacks that we have gained from the sales channels and also the feedbacks that we have gained from all the information that we have gathered from our competitors, we do believe that we have gained market share over the last quarter.

And also, we have seen results reporting from our competitors across the board and we do believe that their weakness in the DLD business is another reflection of our strength and our leading market share in this space. As for ASP, I would turn the question over to Dora.

Dora Li

Well, in the past quarter our ASP is inline with our credit performance is because we are selling more higher-end DLDs in past quarters. So the ASP is being in a very strong level.

Scott Schneeberger - Oppenheimer

So, a positive mix shift occurring there as you're selling more of the newer versions with more content, and therefore the higher price.

Dora Li

Correct. And actually, in the past quarter the higher-end DLDs sales takes about close to 88% of our total DLD sales.

Scott Schneeberger - Oppenheimer

Okay. Thanks, there. And one final question if I can sneak it in. The tutoring centers, you had mentioned last quarter that you had two acquisition targets that in your diligence process had had some tax issues. And it sounds like no resolution yet, and that you'd be considering some organic growth. Can you just give us a little bit further color on what you foresee over the coming quarters with your tutoring center strategy? Thanks.

Dora Li

Regarding our tutoring center as Rick mentioned, we experienced some past tax issue with targeted acquisitions targets. For the following quarter, Noah has never give up the growth to our tutoring center business. And we think there are cautious measures to choose the right target. And we will continue to grow organically in this business line, so that is our future spreadsheet for our tutoring service business

Scott Schneeberger - Oppenheimer

Okay. Thank you.

Operator

(Operator Instructions). Please hold briefly for your next question. We are now approaching the end of the conference call. I will now turn the call over to Noah's Executive Vice President Rick Chen for his closing remarks.

Rick Chen

Thank you again for joining us today. If you had any further questions, please do not hesitate to contact us. We'll welcome the opportunity to answer any questions you have with regards to the conference call in the quarter. Thank you very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Comments

[User 34122]

Wow! NED has about US$150 MM in cash or short-term investments. The market cap is about US$200 MM. It has an trailing EPS of 58 cents. The guidance is for a flat revenue for 1Q (RMB250 MM vs. RMB247 MM) but 10 to 30% higher net income (RMB48 to 60 MM vs. RMB44.4MM).

Now, could anyone explain to me what is causing the dive of about 20% after the release?

2008 Aug 25 11:37 PM

[Directoy]

Noah Education a very Interesting Company with the right Community!

2008 Dec 31 10:20 AM