Noah Education Announces Unaudited Second Quarter Fiscal Year 2011 Financial Results

Education services revenue increased 264% year-over-year

SHENZHEN, China, Mar. 1, 2011 /PRNewswire-Asia/ -- Noah Education Holdings Ltd. (NYSE: NED) ("Noah" or "the Company"), a leading provider of education products and services in China, today announced its unaudited financial results for the second quarter ended December 31, 2010.

Second Quarter Fiscal 2011 Financial Highlights

• Net revenue for the quarter decreased by 58.6% to RMB64.2 million (US$9.7 million), compared with RMB154.9 million in the second quarter of fiscal 2010
  • Net revenue from the Electronic Learning Product (ELP) business was RMB43.1 million (US$6.5 million), a 71.1% decrease from RMB149.1 million in the second quarter of fiscal 2010
  • Net revenue from the education services business was RMB21.1million (US$3.2 million), a 264% increase compared with RMB5.8 million in the second quarter of fiscal 2010
• Gross profit was RMB17.0 million (US$2.6 million), a 76.9% decrease compared with RMB73.5 million in the second quarter of fiscal 2010
• Operating loss was RMB63.6 million (US$9.6 million), compared with operating income of RMB10.1 million in the second quarter of fiscal 2010
• Net loss was RMB53.4 million (US$8.1 million), compared with net income of RMB15.4 million in the second quarter of fiscal 2010
• Basic and diluted losses per share were RMB1.44 (US$0.22) respectively, compared with basic and diluted earnings per share of RMB0.40 and RMB0.39 respectively for the second quarter of fiscal 2010. Non-GAAP basic and diluted losses per share, excluding share-based compensation expenses, were RMB1.38 (US$0.21) respectively, compared with basic and diluted earnings per share of RMB0.47 and RMB0.46 respectively for the second quarter of fiscal 2010

Commenting on the results, Mr. Xu Dong, Noah's Chairman and Chief Executive Officer, said, "In the second quarter of fiscal 2011, we witnessed a very strong performance within our education services business, as revenue for this segment grew 264% year-over-year and exceeded our guidance. Little New Star continued to progress nicely with 13 franchised schools added to its network in the second fiscal quarter, while Wentai Education has been actively pursuing targets to expand the number of schools under management. Wentai Education's management team has demonstrated very impressive execution ability since joining Noah, with four established kindergartens currently under conversion and three new schools or kindergartens scheduled to open by September 2011. Given this positive momentum, by the end of 2011 we expect the number of Wentai schools to be double that of the 10 schools in operation at the time of the acquisition in July 2010. This rapid ramp up is representative of the robust growth prospects present in the education services space as well as our intent to capitalize on these opportunities. In addition to driving growth from both Little New Star and Wentai Education, we remain committed to executing on our strategic initiative of acquiring other complementary businesses that will further strengthen our footprint within China's fast growing, highly fragmented and underpenetrated education services space.

"The shift in the nature of our vendor relationships continued to adversely impact sales within our ELP business during the quarter; however, we proactively took measures to ensure our balance sheet remained fundamentally sound. Our ardent focus on collections enabled us to reduce our accounts receivable by RMB57 million in the quarter, and our initiative to offload more mature devices resulted in a RMB16 million decline in total inventory levels compared to the balance as at September 30, 2010. In light of the changing dynamics within the ELP industry in China, the shifting demand to more versatile and integrated mobile devices and our ability to effectively compete in this space in recent quarters, we have decided to consider strategic alternatives for our ELP business. Mr. Benguo Tang, one of Noah's founders, has recently submitted an indicative non-binding offer to purchase the business and its operating assets, and the Board has established a special committee dedicated to evaluating both this offer as well as other viable options. Though we are still in the process of determining the most appropriate next step, we believe that our decision to shift our focus increasingly to education services will ultimately provide for healthier, long-term revenue streams and growth opportunities.

"Looking ahead, we are encouraged by our recent performance within education services and are confident in our long-term outlook as we move towards a business model completely centered on this more stable, higher-margin and high-visibility segment. As we work through this transitional period within the ELP business and evaluate our strategic alternatives, we anticipate a continued strong performance from what will now be our core focus. For the third quarter of fiscal 2011, we expect to achieve RMB22-23 million in revenue from education services, which represents 105%-115% year-over-year growth."

Second Quarter Fiscal 2011 Unaudited Financial Results

Net Revenue. Net revenue for the second quarter of fiscal 2011 was RMB64.2 million (US$9.7 million), representing a 58.6% decrease compared with net revenue of RMB154.9 million for the second quarter of fiscal 2010.

Net revenue from Noah's traditional ELP business was RMB43.1 million (US$6.5 million), representing a 71.1% decrease from RMB149.1 million in the same period of the previous fiscal year. Net revenue from the education services business was RMB21.1 million (US$3.2 million), a 264% increase compared with the second quarter of fiscal 2010. Net revenue from the Little New Star ("LNS") business was RMB8.4 million (US$1.3 million), a 44.8% increase compared with RMB5.8 million for the second quarter of fiscal 2010. Net revenue from Shenzhen Wentai Education Industry Development Co., Ltd ("Wentai Education") was RMB12.7 million (US$1.9 million).

The following table provides a breakdown of sales volume and net revenue for Noah's traditional ELP business in the second quarter of fiscal year 2011:

Cost of revenue. Cost of revenue for the second quarter of fiscal 2011 was RMB47.2 million (US$7.2 million), representing a 42.0% decrease from RMB81.4 million in the second quarter 2010. The decrease in cost of revenue for the second fiscal quarter 2011 was mainly due to the decline in sales within the ELP business.

Gross Profit and Gross Margin. Gross profit in the second quarter of fiscal 2011 was RMB17.0 million (US$2.6 million), compared with gross profit of RMB73.5 million in the second quarter of fiscal 2010. The gross margin for the second quarter of fiscal 2011 was 26.4%, compared with 47.4% in the second quarter of fiscal 2010. The decrease in gross profit margin was primarily driven by lower average selling prices across the ELP business due to the increasingly difficult competitive landscape as well as Noah's decision to offload inventory at discounted prices to maintain an appropriate inventory level.

Operating Expenses. Total operating expenses for the second quarter of fiscal 2011 were RMB84.0 million (US$12.7 million), representing a 16.5% increase from RMB72.1 million in the second quarter of fiscal 2010. The increase was mainly due to a rise in general and administrative expenses as a result of an additional bad debt write down of RMB17 million (US$2.6 million) relating to the ELP business and RMB5.1 million (US$0.8 million) in general and administrative expenses from Wentai Education, which was acquired in July 2010.

Research and development ("R&D") expenses for the second quarter of fiscal 2011 were RMB13.4 million (US$2.0 million), representing a 4.0% decrease from RMB14.0 million in the second quarter of fiscal 2010. The total decrease in R&D expenses was mainly attributable to a reduction in product development and third party software and content development expenses.

Sales and marketing expenses for the second quarter of fiscal 2011 were RMB32.1 million (US$4.9 million), a 20.1% decrease from RMB40.2 million in the second quarter of fiscal 2010, mainly due to reduced spending on advertising and marketing.

General and administrative ("G&A") expenses for the second quarter of fiscal 2011 totaled RMB38.4 million (US$5.8 million), a 115.4% increase from RMB17.8 million in the second quarter of fiscal 2010. The increase in G&A expenses was mainly attributable to an additional bad debt write down of RMB17 million (US$2.6 million) from the ELP business and RMB5.1 million (US$0.8 million)  from Wentai Education, which was acquired in July 2010.

Loss from Operations. Operating loss for the second quarter of fiscal 2011 was RMB63.6 million (US$9.6 million), compared to operating income of RMB10.1 million in the second quarter of fiscal 2010.

Other Income, Net. Interest income was RMB0.6 million (US$0.1 million) in the second quarter of fiscal 2011, compared to RMB2.7 million in the second quarter of fiscal 2010. Investment income was RMB2.2 million (US$0.3 million) in the second quarter of fiscal 2011, compared with RMB0.5 million in the second quarter of fiscal 2010. Other non-operating income was RMB8.6 million (US$1.3 million) in the second quarter of fiscal 2011, compared with RMB0.5 million in the second quarter of fiscal 2010. Other non-operating income includes RMB8.2 million (US$1.2 million) from foreign exchange gains in the second quarter of fiscal 2011, primarily due to the impact of the US dollar depreciation on intercompany loans.

Net Income/Loss. The Company reported a net loss of RMB53.4 million (US$8.1 million), or a loss of RMB1.44 (US$0.22) per basic and diluted share respectively, for the second quarter of fiscal 2011. This compares with net income of RMB15.4 million, or RMB0.40 and RMB0.39 per basic and diluted share respectively, for the second quarter of fiscal 2010.

Net loss excluding share-based compensation expenses (non-GAAP) for the second quarter ended December 31, 2010 amounted to RMB51.1 million (US$7.7 million), or losses of RMB1.38 (US$0.21) per basic and diluted share respectively.

Liquidity. As of December 31, 2010, Noah had cash, cash equivalents and short-term investments of RMB495.7 million (US$75.1 million). This compares with cash, cash equivalents, short-term deposits and short-term investments of RMB538.3 million as of September 30, 2010.

Business and Operational Highlights

Education Services.

• LNS added 13 franchise schools in the second fiscal quarter of 2011, and Noah plans to actively expand this network even further going forward.
• Wentai Education's management team is actively pursuing targets for new schools or kindergartens to bring under management. As of February 28, 2011, Wentai Education had entered into definitive agreements to convert four additional established kindergartens. These deals are expected to close by the end of third fiscal quarter 2011. The management team is also working with real estate developers to open three additional schools or kindergartens by September 2011. Noah anticipates that Wentai Education will have at least 20 schools and kindergartens under management by the end of 2011, representing twice the number of schools and kindergartens at the time of the close of the acquisition in July 2010.

Electronic Learning Products.

• Business update: The Company released the NP7700, a high-end digital learning device featuring a flat panel screen, in January 2011. Initial demand was above the Company's expectations and this product has met consumer demand for modern and sleek devices.  During the quarter, Noah focused on the collections process to reduce overall accounts receivable and inventory levels in order to maintain a healthy balance sheet during this transitional period.
• Distribution Channel Update: Noah continued to work to restore the effectiveness of its distribution network and, during this transitional period, has placed increased focus on collections and on building relationships with vendors possessing the most consistent and timely payment records. This contributed to a RMB57 million reduction in accounts receivable in the second fiscal quarter.
• Receipt of Offer for ELP business: Taking into account the evolving market conditions, shifts in consumer demand for more versatile and integrated devices, as well as Noah's desire to focus more heavily on the education services space, the Company is considering various strategic alternatives for the ELP business. Noah has received an indicative non-binding offer (the "Offer") from Mr. Benguo Tang, one of Noah's founders, to acquire the ELP business and operating assets (excluding cash and the office building in Chengdu) for a preliminary price range of RMB90 million to RMB120 million. In connection with the submission of the Offer, Mr. Tang has resigned from his role as Noah's President and Chief Operating Officer ("COO") and the Board has appointed Mr. Ruchun Zhang as the interim President and COO of the Company, effective on February 24, 2011. On February 15, 2011, the Board established a special committee to fully evaluate all strategic alternatives and options relating to the ELP business.

Financial Outlook for Third Quarter of Fiscal 2011

Based on current estimates and market conditions, Noah expects to generate in the range of RMB22 million (US$3.3 million) to RMB23 million (US$3.5 million) in revenue from education services for the third quarter of fiscal 2011.

This forecast reflects Noah's current and preliminary view, which is subject to change.

Conference Call

Noah's senior management will host a conference call at 8:00 a.m. (Eastern) / 5:00 a.m. (Pacific) / 9:00 p.m. (China) on Tuesday, March 1 to discuss its second quarter fiscal 2011 financial results and recent business activities. The conference call may be accessed by calling:

Please dial in 10 minutes before the call is scheduled to begin.

A telephone replay will be available shortly after the call until March 8, 2011 by dialing the following numbers:

A live webcast and replay will be available on the investor relations page of Noah's website at http://ir.noahedu.com.cn.

Statement Regarding Unaudited Financial Information

The unaudited financial information set forth above is subject to adjustments that may be identified when audit work is performed on our year-end financial statements, which could result in significant differences from this unaudited financial information.

Currency Convenience Translation

For the convenience of readers, certain RMB amounts have been translated into US dollars at the rate of RMB6.6 to US$1.00, the noon buying rate for US dollars in effect on December 30, 2010 for cable transfers of RMB per US dollar as certified for customs purposes by the Federal Reserve Bank of New York.

Use of Non-GAAP Financial Measures

In addition to consolidated financial results under GAAP, the Company also provides non-GAAP financial measures, including non-GAAP net income which excludes non-cash share-based compensation. The Company believes that the non-GAAP financial measures provide investors with another method for assessing the Company's operating results in a manner that is focused on the performance of its ongoing operations. Readers are cautioned not to view non-GAAP results on a stand-alone basis or as a substitute for results under GAAP, or as being comparable to results reported or forecasted by other companies. The Company believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the performance of the Company's liquidity and when planning and forecasting future periods.

About Noah Education Holdings Ltd.

Noah is a leading provider of education products and services in China. The Company's core offering includes the development and marketing of interactive educational courseware content, electronic learning products (ELPs), software, as well as the provision of education services. Noah combines standardized educational content with innovative digital and multimedia technologies to create a dynamic learning experience and improve academic performance for children in China. The Company has developed a nationwide sales network, powerful brand image, and accessible and diverse delivery platforms to bring its innovative content to the student population. Noah offers education services in China via Shenzhen Wentai Education Industry Development Co., Ltd ("Wentai Education"), a company focused on early childhood, primary and secondary education services, as well as providing English language training for children under the brand Little New Star in its directly owned training centers and franchised training centers. Noah was founded in 2004 and is listed on the New York Stock Exchange under the ticker symbol NED. For more information about Noah, please visit http://www.noahedu.com.cn.

Safe Harbor Statement

This press release contains forward-looking statements that reflect Noah's current expectations and views of future events that involve known and unknown risks, uncertainties and other factors that may cause our 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 our actual future results may be materially different from and worse than what Noah expects.  Information regarding these risks, uncertainties and other factors is included in Noah's most recent Annual Report on Form 20-F and other filings with the SEC.

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