Accounting for Small Business

China Distance Education Holdings Limited ( DL ) Q4 2011 Earnings Call November 17, 2011 8:00 AM ET

Operator

Good evening. And thank you for standing by for the China Distance Education Holdings Limited Fourth Quarter and Fiscal Year 2011 Earnings Conference Call. Today, you will hear from Mr. Zhengdong Zhu, Chairman and CEO of the company; and Ms. Ping Wei, the CFO. During the prepared remarks, all participants will be in listen-only mode. After that, the company management will be available to answer your questions.

Before we start, we would like to remind listeners that this conference call contains forward-looking statements. These statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Among other things, the outlook for the first quarter of fiscal year 2012 and oral statements from management on this call, as well as the company’s strategic and operational plans, contain certain forward-looking statements.

Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statements.

Further information regarding these and other risks is included in the company’s annual report on Form 20-F and other documents of the company as filed with the Securities and Exchange Commission. The company does not undertake any obligations to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference call is being recorded. A summarized presentation can be downloaded from the company’s IR website and which we will refer to during the course on the conference call. In addition, a webcast of this conference call is available on the company’s Investor Relations website at ir.cdeledu.com.

I’ll now like to turn the call over to Mr. Zhu to discuss the operational highlights. Mr. Zhu, please go ahead.

Zhengdong Zhu

Thank you, everyone for joining us on our fourth quarter and fiscal 2011 results conference call. Our operating results were released earlier and available on the company’s website, as well as our new slide services.

We delivered better than expected revenue growth in the quarter and ended the year with a very strong cash position. Revenue for the fourth quarter before adjusting for revenue from a business segment that will be discontinued within a year stood at over US$7.3 million, exceeding our guidance range for the full year before adjusting for revenue from discounted operation revenue would have come at US$43.3 million.

After adjusting for the discontinued operation net revenue from continued operation increased by 18.2% for the fourth quarter to US$13.1 million and increase a solid 27.6% year-over-year to US$41.6 million on a full year basis.

Our performance throughout the year has been supported by steady enrollment growth in most of our online courses and healthy ASP growth across our core test-preparation courses. Our performance in the fourth quarter indicates that the underlying demand for our course — online courses will remain strong in the year ahead.

We have also made significant progress throughout fiscal 2011 on a number of key strategic initiatives, namely our effort to maximize a long-term growth potential of our business model and operating platform.

Fundamentally, our business model has not changed, CDEL has always been first and foremost educational content provider, delivering our high quality [through attracting] test-preparation courses, continued education courses and professional development courses and related services through our internet base online learning platform.

We also build centralized marketing distribution network, powerful content development and student service processes to ensure the quality of our courses and learning results of our student.

We will focus primarily on professional education, but we have recently expanding our service in such areas as K-12 after-school training to provide a broader offering of educational services to reach more students that seek high quality, comprehensive and lifelong learning programs.

As we have invested and grow our content delivery platform, we’ve also gained greater insight into how our unique platform can better directed to build sustainable long-term growth. As such we plan to direct more internal resources in this area going forward.

At the same time to focus our effort on our key businesses, we have decided to discontinue a certain segment of our business, more information on this decision will be publicized in due time.

Well, our GAAP financial results were negatively impacted in the fourth quarter and fiscal 2011 due to the strategic decision. We believe this realignment of our service offerings and resources will allow us to better focus on our key growth initiatives and on building shareholders value over the long-term.

We believe that our people exceed to the successful executing of our growth strategy and retaining and motivating our lecturers and staff is of high important. As such, we have decided to again modify the terms of our existing share options granted under the share initiative plan that we have adopted on 18 April, 2008, and grant additional options to our employees and lecturers as announced in our earnings release. We are confident in our prospects and remain committed to increasing value for our shareholders over the long-term.

Let me know walk you through our operational development for the quarter in more detail. Starting on slide five. Net revenue from continued operations increased 18.2% to US$13.1 million. Total cost enrollments from continued operations increased 33.7% year-over-year to 536,000.

Our results for the quarter was driven by especially strong enrollment growth from our continued education courses and continue momentum from non-accounting courses including healthcare and construction engineering courses.

For the full year net revenues from continued education increased 27.6% year-over-year to US$41.6 million and total cost enrollment increased 32.2% year-over-year to US$1.6 million.

Moving to our accounting vertical on slide seven. We had another strong performance from our online accounting vertical in the fourth quarter. The total accounting enrollment increasing 40.1% year-over-year, we experienced especially strong demand for accounting continued education courses, where enrollment increased 56.4% year-over-year, the overall market of accounting continued education is huge and we are pleased to see robust demand in this offering.

We also delivered solid growth in other accounting courses including accounting certificate exam test-preparation courses. Total other accounting enrollment increased 35.3% year-over-year in the fourth quarter.

The steady growth in enrollment was matched by strong ASP growth in most of our accounting test-preparation courses. ASP for other accounting courses grew 36.6% year-over-year, where ASP for APQE and CPA increased 22.4% and 72.4%, respectively year-over-year.

For accounting continued education we have maintained our competitive pricing strategy in order to gain further share in 13 million student strong market, which includes a high level of repeat customers.

We believe the growth in ASP [are expected] demonstrate the growing strength of our brand name and recognition of our high quality and results oriented service, differencing aiding us from other low price competitors.

Let’s turn to slide eight about other non-accounting course offerings. Our healthcare vertical maintained reaching of steady as enrollments grew by 17.6% and ASP increased 8.3% year-over-year. For the full year healthcare enrollment increased 17.8% resulting in total cash revenue increase of 31.9% as compared to fiscal 2010.

Looking ahead, we expect our healthcare vertical to continue growing fast as we continue to build brand awareness by promoting our products and services to a larger student base.

Enrollment for our construction engineering vertical decreased by 40.2% year-over-year due to the varying timing of construction continued education enrollment. On a full year basis enrollment and cash revenue increased 1.7% and 13.7%, respectively.

Also due to the delayed timing in continued education enrollments increased for 2011. We expect enrollment and revenue for construction engineering courses to grow fast in fiscal 2012, as we continue to build out our programs and gain market share in this vertical.

Moving to slide nine. Enrollment in self-taught higher education decreased 18.6% year-over-year to 19,000 mainly due to seasonality. Looking ahead, we are now focused on building our brand awareness and rolling out the programs in the provinces where we have signed contracts and we will work to continue to sign up new provinces to expand our market reach. As such, we expect enrollments to continue to grow steadily in fiscal 2012.

Moving on slide 10. This year we started testing the [vertical] by offering online and offline combined courses at higher ASP compared to our prior online courses to further broaden our program offerings in some of our main test-preparation verticals, such as accounting and healthcare.

For fiscal 2011 alone cash revenue generated from this new initiative other than Big Four coming from exceeded US$0.9 million.

However, as this program is still relatively new and due to the program design a portion of program revenue will not be recognized until fiscal 2012. This new initiative negatively affected our gross margin as lecture fees and related travel and rental experience — expanses increased significantly in this quarter.

Going forward, we will focus our offline offerings to only limited high-enrollment courses to fully unleash the potential of this comprehensive program offering and improve program margin simultaneously.

This quarter Yucai delivered healthy revenue contribution of US$0.5 million and came at profitable in the quarter as our hard work and historical investment in Yucai started to payoff. We expect revenue from Yucai business started gaining to continue to grow strongly in fiscal 2012 as we have laid a very strong foundation in 2011 by improving our course content, building a robust online sand-table simulation platform and maintaining strict focus on program delivery and cash collection.

Finally turning to slide 11. We continue to make progress in our online K-12 after school training vertical. As I noted earlier many of the investments we have made in recent years have been geared toward expanding our presence and enhancing our service offerings in the K-12 after school training vertical.

Our combined suite of services which include important courses TStudy digital class solutions and EduComp Smart Class content product provide us with a comprehensive set of interactive multimedia educational tools and content, which are complemented by our scalable online platform.

The rollout of this offering is moving forward in line with our expectations and we expect this program to start gaining growth momentum and a meaningful revenue contribution in fiscal 2012.

Finally, as our cash and bank deposit balance from continuing operations stood at historical high of US$60.3 million and we expect to continue to generate strong free cash flow in the foreseeable future.

The Board of Directors yesterday decided to declare and pay a special dividend of US$0.12 per ordinary share or US$0.48 per ADR to shareholders of record on 15 December, 2011 and we expect to pay the dividend around 25 December of this year.

We believe that this dividend is further proved of our focus on creating value for our shareholders and our commitment to giving back to our shareholders in any possible way.

This completes my update on business operations. Let me now turn the call over to Wei Ping, our CFO, to walk you through our financials.

Ping Wei

Thank you, Mr. Zhu. Before I get into details I would like to point out that throughout the financial discussions we’ll use non-GAAP measures. For the quarter and fiscal year 2011 non-GAAP cost and expenses generally

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