China Education Alliance's (CEAI) CEO Xiqun Yu on Q2 2014 Results - Earnings Call Transcript

| About: China Education (CEAI)

China Education Alliance, Inc. (OTC:CEAI) Q2 2014 Earnings Conference Call August 18, 2014 8:00 AM ET

Executives

Xiqun Yu – Chairman, President and Chief Executive Officer

Cloris Li – Chief Financial Officer

Analysts

Jared Cohen – JM Cohen & Co.

Operator

Ladies and gentlemen, thank you for standing by and good evening. Welcome to the China Education Alliance’s Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the managements prepared remarks, there will be a question-and-answer session.

Now, I would like to pass the call to the Company’s CFO, Ms. Cloris Li. Thank you, and please go ahead.

Cloris Li

Good morning and good evening to all our participants. Welcome to China Education Alliance second quarter 2014 earnings call. You may find a copy of our earnings press release that we issued last Thursday in the IR section of our website at www.chinaeducationalliance.com or through the newswires.

Joining me today on the call today is our Chairman and CEO, Mr. Xiqun Yu. I will read the prepared remarks for Chairman Yu in English, followed by an overview of the quarter’s financials. The call will then be opened to the floor for a Q&A session where Chairman Yu and myself will take your questions.

This conference call may include forward-looking statements made under Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we believe that the expectations reflected in our forward-looking statements are reasonable as of today, those statements are subject to risks and uncertainties that could cause the actual results to differ dramatically from those projected.

There can be no assurance that those expectations will prove to be correct. Information about the risks associated with investing in our Company is included in our filings with the Securities and Exchange Commission, which we encourage you to review before making an investment decision. The Company does not assume any obligation to update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise except as required by law.

I will now read Chairman Yu’s prepared remarks in English.

Hello, and welcome to China Education Alliance second quarter 2014 financial results conference call. The rise of e-commerce and cloud computing in China has created opportunities for China Education Alliance. We have spent the past few years building the online education platform, China Education cloud platform and are currently in the process of finalizing the platform.

It is designed to provide high quality educational materials from teachers and institutions to students regardless of their location. Such materials include live video, online exam, online Q&A, online assessments, et cetera. At this stage, the platform is undertaking the internal testing and many students and teachers have participated in the testing and they like the platform for its complete functions and advanced technologies.

I am now pleased to report that platform is expected to be officially launched by the end of September this year. And I believe it will truly give us a good reputation and market shares. During the initial operation of the platform, we will offer free access to the platform to teachers and students in the first six-months or a year to quickly develop the user base and establish a large database.

After this initial promotion period, we will share with teachers the platform usage fee and service fee paid by students. We believe that our revenue will improve following the promotion period of this platform. In addition, instead of setting up new training centers, we changed our strategy to focus on integrating and optimizing our existing resources in the training center division in order to maintain our current market share in an increasingly competitive environment.

Facing with fierce competition and changing market demand, our business has been experiencing a slowdown in the past few years. However, our management team has been trying their best to explore opportunities or adjust business strategy to improve our performance, including the development of a cloud-based online platform and the establishment and optimization of new training centers. We are hopeful that these efforts will lead to improved revenue and better business perspective in the near future.

Now, I would like to review the Company’s financials for the second quarter of 2014. Revenue decreased by $1.3 million or 69% to $0.4 million for the quarter ended June 30, 2014 from $1.9 million during the same period in 2013. Revenue from the on-line education division decreased by $0.6 million or 83%, to $0.1 million for the quarter ended June 30, 2014 from $0.8 million for the same period in 2013.

Revenue from the training center division decreased by $0.7 million, or 60%, to $0.5 million for the quarter ended June 30, 2014 from $1.1 million for the quarter ended June 30, 2013. The decline in revenue for quarter ended June 30, 2014 was a result of decline in revenue across all of our business. We believe the main reason was our continuously weakening brand recognition in the main targeted market and inability of our existing online education products to meet changing market demand.

In addition, the lack of this experience of newly opened centers in on-site training, limited expansion capacity, coupled with fierce competition from the top education brands make it very difficult to establish our brand value in a short period of time. Overall cost of revenue, decreased by $0.5 million or 27% to $1.5 million for the quarter ended June 30, 2014 from $2.0 million for the same period in 2013.

Cost of revenue for the online education division decreased by $0.3 million or 24% to $1.1 million for the quarter ended June 30, 2014 from $1.4 million for the same period in 2013. The decrease in cost of revenue was in tandem with decrease in revenue. However, cost of revenue did not drop in direct proportion with the decline in revenue as the Company had to purchase new study materials to maintain competitiveness. The Company also incurred certain fixed costs to maintain the accuracy and competitiveness of its online material.

In addition, in light of the launch of the platform by the end of September this year, the cost of revenue for online education division, mainly salaries and maintenance costs, is expected to increase for the following year. To effectively control cost of revenue for online education division, we will continue to closely monitor the variable costs while maintaining fixed costs at a stable level.

Cost of revenue for the training center division decreased $0.2 million or 34% to $0.4 million for the quarter ended June 30, 2014 from $0.6 million for the same period in 2013. The decrease in cost of revenue was mainly due to a decrease in teachers' salary as the Company's teachers are paid by the number of classes they teach and there was a decrease in classes offered during the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013.

Gross profit margin for the training center division decreased to 18% for the quarter ended June 30, 2013 from 50% during the same period in 2013 as cost of revenue did not decrease as much as revenue. Gross loss for the second quarter of 2014 was $0.9 million compared to $69,000 for the second quarter of 2013.

Selling expenses decreased by $51,000, or 4%, to $1.2 million in the second quarter of 2014 as compared with the second quarter of 2013. The decrease in selling expenses was mainly due to the decrease in labor costs as a result of cut down in the number of sales and marketing personnel.

During the June 30, 2014 quarter, we continued to focus on rebuilding our brand name and reputation, through advertising via media, online and on-site promotion, handouts, brochures, et cetera. We expect our selling expenses will increase, because we will incur marketing and advertising expenses to promote our new platform and to develop a large user base.

Administrative expenses was increased by $3.2 million 171% to $5.0 million for the quarter ended June 30, 2014 from $1.8 million for the quarter ended June 30, 2013. This was mainly due to the research and development expenses relating to the development of the web-based platform, office expenses and labor costs throughout the period.

In the future, we expect the administrative expenses to continue to increase because firstly, we will incur maintenance expenses on web-based platform after it being successfully launched. Secondly, we will incur expenses associated with the expansion of our on-site training centers for purposes of gaining more market share.

Net loss for the second quarter of 2014 was $7.4 million compared to net loss of $3.7 million for the second quarter of 2013. Basic and diluted loss per share was $0.70 for the second quarter of 2014 as compared to loss per share of $0.35 for the second quarter of 2013. Turning to our balance sheet, as of June 30, 2014, the Company had approximately $42 million in cash and cash equivalents.

This concludes our prepared remarks. I will now turn over the call to operator to begin the Q&A session. Operator.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Jared Cohen from JM Cohen & Company. Please ask you question.

Jared Cohen – JM Cohen & Co.

Hi, just a few questions. One, can you go in, because it’s been now a few years, with the why since you have been spending money on advertising, why the continuation of the loss of business both on the online and the training centers, because it’s now been three years since the start of the deterioration of your business.

Cloris Li

All right. Thank you, Jared. I’ll firstly translate your question in Chinese for Mr. Yu, then we will give you the answer shortly.

[Foreign Language]

Xiqun Yu

[Foreign Language]

Cloris Li

Hi, Jared. To answer you question is that we are trying to rebuild our brand name or our new brand name through the advertising and other media methods. If we don’t do it we will definitely lose, but if we continuously do it hopefully one day we will get the reputation back on track. As just like few years ago, we were a very profitable business with a good reputation, but because what’s happened in the past we can’t just let it die, we have to use all kinds of methods to trying to survive the brand back. That’s the answer from Mr. Yu.

Jared Cohen – JM Cohen & Co.

You have started a – you are under a new brand name versus the prior one?

Cloris Li

Yes, we have renamed our on-site training centers; which was stated in the annual report two years ago.

Jared Cohen – JM Cohen & Co.

Okay. I noticed that the cost went up incrementally, this goes into selling and administration, and you stated $1.3 million from Q2 to from Q1, was that mostly in R&D for the new website?

Cloris Li

Yes, mainly it’s the labor costs and other consulting expenses.

Jared Cohen – JM Cohen & Co.

Okay. And, once as you said, once the new website is up and running and I know the revenues is going to be deferred for the first six months to a year, but after that how will revenue – I know this is a long way-off, be recognized, there will be user fees, advertising or a combination of both?

Cloris Li

Okay, please hold. Let me translate first.

Jared Cohen – JM Cohen & Co.

Okay.

Cloris Li

[Foreign Language]

Xiqun Yu

[Foreign Language]

Cloris Li

Hi, Jared.

Jared Cohen – JM Cohen & Co.

Yes.

Cloris Li

To answer your question, how that platform works in the old days or in previously it’s divided into three areas; one is the use of contents, and second is used as a tool, and the third is used as a service provider. And our platform the one we designed is more like combined with tool and the service provider. Firstly, we need to generate our user database to establish a big enough database from our users by providing teachers and students with free access.

So after they have been used our web, our platform and they stick to it then we will start charging fees for it and the fees is mainly charged by the usage or the like the length of time they used our website or the material they put on our website for student to download or the student how many usage from students or how much they have downloaded from our website. All these service fees that we will be charge a certain amount of fees and split with institutions or teachers. That’s our main revenue coming from. The advertising part is some very small portion; it’s not a major revenue.

Jared Cohen – JM Cohen & Co.

Okay. And lastly in this transition how are you going to be managing your cash as this is going on your cash usage?

Cloris Li

Okay. Please hold. [Foreign Language]

Xiqun Yu

[Foreign Language]

Cloris Li

Hi Jared, to answer your question, during the transition period we would try every kind of method that we can to prove our on-site education division revenue. We are considering to combine the online and on-site together to promote on-site training center to increase the number of students we have at this time, and plus the platform when it’s launched we hopefully can generate the data base and user base very quickly, we may have the advertising company in both to promote our new product. If we can and the best thing could happen is we can start charging fees less than six months or a year soon as we can charge the fees then you can see the revenue coming from it.

Jared Cohen – JM Cohen & Co.

Okay. All right. Thank you very much.

Xiqun Yu

[Foreign Language].

Cloris Li

Thanks for your call.

Operator

Thank you. There are no further question at this time. I would now like turn the call back to Ms. Li. Thank you, please go head.

Cloris Li

Thank you all for joining today. We appreciate your support and look forward to updating you on our progress in next earnings call. Good bye.

Operator

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

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