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Noah Education CEO Discusses F1Q2012 Results - Earnings Call Transcript

A kindergarten usually takes two years to break even and improve utilization for a certain level. Therefore, the gross margin during the quarter was impacted as new schools are not profitable yet. But in most cases, our kindergartens over-delivered. And as the new ones continue to ramp up, we are confident that gross margins will normalize at 50% level in the fiscal year.

Looking into detailed operating expenses, research and development expenses are up 26%. R&D accounted for 2% of net revenue compared to 3% during the same period in fiscal 2011.

Sales and marketing expenses for the quarter are up 49% year-over-year. Sales and marketing expenses accounted for 4% of net revenue compared to 5% during the same period in fiscal year 2011. The increase mainly reflected Little New Star's advertising spending used in promoting the brand. We expect the sales and marketing expenses, as a percentage to revenue, to maintain at a lower level in fiscal year 2012.

General and administrative expenses are up 57% year-over-year, mainly due to the incremental expenses from Yuanbo Education. There was also an RMB1.3 million one-time expenses for relocation of headquarters and the cost for stock attribution. As a percentage of revenue, general and administrative expenses were 60% compared to 67% in the same time in fiscal year 2011. The lower percentage reflected the improvement of operational leverage with the expansion of revenue scale.

Other operating income increased to RMB4.6 million from RMB0.05 million during the same quarter in fiscal year 2011. The increase was mainly attributable to rental income and the summer camp income.

Net income for the quarter was RMB1.8 million or basic and diluted earnings per share of RMB0.02. This compared to a net income of RMB8.4 million in the first quarter of fiscal 2011. There was a RMB9.4 million one-time foreign exchange gain as a result of U.S. dollar depreciation on intercompany loans leading to a much higher net income in the first quarter of fiscal 2011.

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