Noah Education Holdings Ltd. (NED)

F1Q2012 Earnings Conference Call

November 18, 2011 8:00 AM ET

Executives

Jerry He – Chief Executive Officer

Dora Li – Chief Financial Officer

Analysts

Ella Ji – Oppenheimer

Kun Tao – ROTH Capital Partners

Presentation

Operator

Good morning and good evening, ladies and gentlemen. Welcome to Noah Education Holdings Limited First Quarter of Fiscal 2012 Financial Results 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. Jerry He, CEO; and Ms. Dora Li, CFO. After the U.S. markets closed yesterday afternoon, Noah issued a press release announcing its first quarter of fiscal 2012 financial results. The release is available on the Company's IR website at ir.noaheducation.com along with a 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 Factors section of the Company's final 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.

I would now like to turn the conference over to Noah's CFO, Ms. Dora Li. Ms. Li, please go ahead.

Dora Li

Thank you for joining us today on our first quarter fiscal year 2012 earnings conference call. I hope you all have had a chance to read our earnings press release. We are very pleased to report that Noah started the fiscal year 2012 with a strong quarter and accomplished a number of key milestones as guided.

First, revenue, up 74% year-over-year, reached the upper end of our guidance. Second, we executed the expansion plan to open five schools and kindergartens in the quarter. Third, net income turned positive.

Turning to the detailed financial results for the first quarter of fiscal year 2012. As they are available in our earnings release, I would like to highlight a few key financial metrics with you. All numbers will be in RMB unless otherwise stated.

Net revenue for the quarter was up 74% year-over-year. The strong growth was mainly driven by the contribution from Wentai Education, the stable growth of Little New Star, and addition of Yuanbo Education which only started contributing to the top line in August.

For the quarter, Wentai accounted for 47% of net revenue, Little New Star accounted for 41%, and Yuanbo 12%. You can imagine that the ratio will be somewhat different going forward when Yuanbo started to have contribution for the whole quarter.

Gross profit was up 38% year-over-year and the gross margin was 48% compared to 60% during the first quarter of fiscal year 2011. The decline in margin was due to a couple of reasons. First, we added five new schools in Wentai Education, Little New Star, and Yuanbo Education. And second, five out of 17 Yuanbo kindergartens are currently in ramp-up stage with less than two years of operating history.

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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