China Distance Education Holdings Limited Reports Second Quarter Fiscal Year 2016 Financial Results

BEIJING, May 25, 2016 /PRNewswire/ -- China Distance Education Holdings Limited (NYSE: DL) ("CDEL", or the "Company"), a leading provider of online education in China focusing on professional education, today announced unaudited financial results for the second quarter fiscal year 2016 ended March 31, 2016.

Second Quarter Fiscal 2016 Financial and Operational Highlights

• Total course enrollments reached 593,000, an increase of 14.9% from the second quarter of fiscal 2015.
• Cash receipts from online course registration were $28.1 million, a 1.8% decrease from the second quarter of fiscal 2015. Excluding the impact of the depreciation of the Renminbi against the U.S. Dollar, cash receipts from online course registration increased by 2.9% year-over-year.
• Net revenue increased by 8.1% to $24.1 million from $22.3 million in the prior year period, in-line with the Company's guidance range of $24.1 million to $25.2 million.
• Gross profit increased by 22.9% to $13.7 million from $11.2 million in the prior year period.
• Non-GAAP¹ gross profit increased by 22.7% to $13.8 million from $11.2 million in the prior year period.
• Gross margin was 56.9%, compared with 50.0% in the prior year period. Non-GAAP¹ gross margin was 57.0%, compared with 50.3% in the prior year period.
• Operating income increased by 431.7% to $4.6 million from $0.9 million in the prior year period.
• Non-GAAP¹ operating income increased by 265.3% to $5.1 million from $1.4 million in the prior year period.
• Net income increased by 107.7% to $2.5 million from $1.2 million in the prior year period.
• Non-GAAP¹ net income increased by 73.1% to $3.0 million from $1.8 million in the prior year period.
• Basic and diluted net income per American Depositary Share ("ADS") were $0.073, compared with basic and diluted net income per ADS of $0.034 for the second quarter of fiscal 2015. Each ADS represents four ordinary shares.
• Basic and diluted non-GAAP¹ net income per ADS were $0.088 and $0.087, respectively, compared with basic and diluted non-GAAP¹ net income per ADS of $0.049 for the second quarter of fiscal 2015.
• Operating cash inflow decreased by 7.7% to $12.0 million from $13.0 million in the second quarter of fiscal 2015.

Mr. Zhengdong Zhu, Chairman and CEO of CDEL, said, "The second quarter revenue growth of 8.1% year-over-year was at the low end of our guidance range. Our revenue growth was primarily led by the healthcare and accounting verticals, and business start-up training services which delivered year-over-year revenue growth of 17.9%, 12.2% and 47.6%, respectively, partially offset by continued weak demand in our engineering and construction vertical, and a decrease in revenue from books and reference materials.

"However, our cash receipts from online course registration in the second quarter decreased by 1.8% year-over-year, primarily due to lower-than-anticipated cash receipts in our healthcare vertical, which decreased by 14.9% year-over-year. We believe the decrease in healthcare cash receipts was attributable to an earlier start to the enrollment season for our National Practicing Medical Doctor Qualification Examination test preparation courses, which kicked-off in the first quarter of fiscal 2016, and a late start to the enrollment season for our National Pharmacist Qualification Examination test preparation courses compared with the year-ago period. This decrease was partially offset by the growth in cash receipts from online course registration in our accounting vertical, which were up 10.4% year-over-year in the second quarter.

"In March 2016, we entered into a definitive agreement to acquire an 80% equity interest in Xiamen NetinNet Software Co., Ltd. ("Xiamen NetinNet") for a total consideration of RMB212 million ($32.6 million). Xiamen NetinNet is a leading learning simulation software provider specializing in practical accounting-related learning solutions for colleges and universities in China. We are delighted to announce that the acquisition of Xiamen NetinNet closed in April 2016. The acquisition of Xiamen NetinNet complements our suite of learning solutions for our growing College Cooperation Program, enabling us to offer comprehensive simulation-based learning opportunities to college students to master critical accounting skills. In addition, the acquisition provides both Xiamen NetinNet and us with unique cross-selling opportunities to bolster our business relationships with college partners. As always, we remain focused on providing the highest quality courseware and services to meet our students' needs as they progress in their careers." concluded Mr. Zhu.

Mr. Mark Marostica, Co-Chief Financial Officer of CDEL, added, "Our cost control initiatives during the second quarter contributed to broad-based margin improvement, as we proactively managed expenses while maintaining operating efficiency. As such, our non-GAAP gross margin increased 670 basis points year-over-year to 57.0%, and our non-GAAP operating margin reached 21.3%, a significant improvement compared with 6.3% in the year-ago period. Our efforts to balance profitability and revenue growth in the second quarter resulted in net margin improvement and non-GAAP diluted EPS growth of 77.6% year-over-year in the second quarter. We also demonstrated prudent use of capital in the quarter to develop our business with the acquisition of Xiamen NetinNet. As we previously disclosed, we anticipate the acquisition to be dilutive to our fiscal 2016 financial results, due to the seasonality of Xiamen NetinNet's business and amortization of intangibles attributable to the acquisition, yet slightly accretive to our fiscal 2017 financial results, based on our preliminary assessment.

"We expect our third fiscal quarter revenue to decline primarily due to a late start to the enrollment season for our National Pharmacist test preparation courses, and the corresponding decrease in healthcare cash receipts in the second fiscal quarter and in April 2016; together with softer-than-expected accounting cash receipts during the second fiscal quarter and April 2016. We will continue to focus on implementing prudent cost controls to cushion the impact of the anticipated third quarter fiscal 2016 revenue decline on our overall profitability."

Second Quarter Fiscal 2016 Financial Results

Net Revenue. Total net revenue increased by 8.1% to $24.1 million in the second quarter of fiscal 2016, from $22.3 million in the second quarter of fiscal 2015. Net revenue from online education services, books and reference materials, and other sources contributed 78.7%, 6.5% and 14.8%, respectively, of total net revenues for the second quarter of fiscal 2016.

Online education services. Net revenue from online education services was $19.0 million in the second quarter of fiscal 2016, a 12.2% increase from $16.9 million in the second quarter of fiscal 2015, mainly due to revenue growth in our accounting and healthcare verticals.

Books and reference materials. Net revenue from books and reference materials decreased by 26.1% to $1.6 million in the second quarter of fiscal 2016 from $2.1 million in the second quarter of fiscal 2015.

Others. Net revenue from other sources increased by 9.1% to $3.6 million in the second quarter of fiscal 2016 from $3.3 million in the second quarter of fiscal 2015, mainly due to higher revenue from business start-up training courses.

Cost of Sales. Cost of sales decreased by 6.7% to $10.4 million in the second quarter of fiscal 2016, from $11.2 million in the second quarter of fiscal 2015. Non-GAAP¹ cost of sales decreased by 6.6% to $10.4 million in the second quarter of fiscal 2016 from $11.1 million in the second quarter of fiscal 2015. The decrease was mainly due to decreased lecture fees, cost of books and reference materials, and other miscellaneous expenses. This decrease was partially offset by increased salaries and related expenses.

Gross Profit. Gross profit increased by 22.9% to $13.7 million in the second quarter of fiscal 2016 from $11.2 million in the prior year period. Non-GAAP¹ gross profit increased by 22.7% to $13.8 million in the second quarter of fiscal 2016 from $11.2 million in the prior year period. Gross margin was 56.9% in the second quarter of fiscal 2016, compared with 50.0% in the second quarter of fiscal 2015. Non-GAAP¹ gross margin was 57.0% in the second quarter of fiscal 2016, compared with 50.3% in the second quarter of fiscal 2015.

Operating Expenses.Total operating expenses decreased by 11.9% to $9.1 million in the second quarter of fiscal 2016, from $10.3 million in the prior year period. Non-GAAP¹ total operating expenses decreased by 12.2% to $8.7 million in the second quarter of fiscal 2016, from $9.9 million in the prior year period.

Selling expenses. Selling expenses decreased by 27.7% to $5.2 million in the second quarter of fiscal 2016 from $7.3 million in the prior year period. Non-GAAP¹ selling expenses decreased by 27.8% to $5.2 million in the second quarter of fiscal 2016 from $7.2 million in the prior year period. The decrease was primarily driven by decreased commissions for the Company's online distributors, and less spending on marketing and promotional activities. This decrease was partially offset by increased salaries and related expenses.

General and administrative expenses. General and administrative expenses increased by 25.3% to $3.9 million in the second quarter of fiscal 2016 from $3.1 million in the prior year period. Non-GAAP¹ general and administrative expenses increased by 30.6% to $3.4 million in the second quarter of fiscal 2016 from $2.6 million in the prior year period. The increase was due to increased professional fees, and other administrative expenses, and a decrease in the reversal of doubtful debts, due to collection, compared to the prior-year period.

Income Tax Expense.Income tax expense increased by 126.3% to $0.7 million in the second quarter of fiscal 2016 from $0.3 million in the prior year period, primarily due to an increase in taxable income.

Net Income. As a result of the foregoing, net income increased by 107.7% to $2.5 million in the second quarter of fiscal 2016 from $1.2 million in the prior year period. Non-GAAP¹ net income increased by 73.1% to $3.0 million in the second quarter of fiscal 2016 from $1.8 million in the prior year period.

Operating Cash Flow. Net operating cash inflow decreased by 7.7% to $12.0 million in the second quarter of fiscal 2016 from $13.0 million in the prior year period. The operating cash inflow was mainly attributable to net income before non-cash items generated in the second quarter of fiscal 2016. The increase in accrued expenses and other liabilities, income tax payable and deferred revenue also contributed to the operating cash inflow. This operating cash inflow was partially offset by the increase in accounts receivable, inventories, prepayment and other current assets, and the decrease in refundable fees.

Cash and Cash Equivalents, Term Deposits and Restricted Cash. Cash and cash equivalents, term deposits and restricted cash as of March 31, 2016 decreased by 19.8% to $109.0 million from $135.9 million as of December 31, 2015, mainly due to the distribution of dividends of $31.1 million, the repurchase of our ADSs on the open market of $8.2 million, the payment of acquisition deposit for Xiamen NetinNet Software Co., Ltd. of $4.9 million. This decrease was partially offset by cash flow generated from operating activities in the second quarter of $12.0 million and a capital contribution of $4.9 million raised by Zhengbao Yucai from issuing shares to selected employees.

Outlook

For the third quarter of fiscal 2016, the Company expects to generate total net revenues in the range of $27.3 million to $28.8 million, representing a year-over-year decline of approximately 5% to 0%.

For fiscal year 2016, the Company expects to generate total net revenues in the range of $108.2 million to $113.6 million, representing year-over-year growth of approximately 0% to 5%. The Company's prior fiscal 2016 full year total net revenue guidance range was $124.4 million to $129.8 million.

The above guidance reflects the Company's current and preliminary view, which is subject to change.

Conference Call

The Company will host a conference call at 8:00 a.m. Eastern Time on May 25, 2016 to discuss its second quarter fiscal year 2016 financial results and recent developments. The conference call may be accessed by dialing:

A telephone replay will be available two hours after the call until June 1, 2016 by dialing:

A live and archived webcast of the conference call will be available at http://ir.cdeledu.com.

About China Distance Education Holdings Limited

China Distance Education Holdings Limited is a leading provider of online education in China focusing on professional education. The courses offered by the Company through its websites are designed to help professionals seeking to obtain and maintain professional licenses and to enhance their job skills through our professional development courses in China in the areas of accounting, healthcare, engineering & construction, and other industries. The Company also offers other professional education courses for the national judicial examination, online test preparation courses for self-taught learners pursuing higher education diplomas or degrees, test preparation courses for university students intending to take the nationwide graduate school entrance exam, and online language courses. The Company also offers third-party developed online courses through its Online Open Learning Platform, a proprietary education platform that allows people to share their educational content or deliver live courses online. For further information, please visit http://ir.cdeledu.com.

Safe Harbor Statement

This announcement contains forward-looking statements. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as "will," "may," "should," "potential," "continue," "expect," "predict," "anticipate," "future," "intend," "plan," "believe," "is/are likely to," "estimate" and similar statements. Among other things, the outlook for the third quarter of fiscal year 2016 and fiscal year 2016 and quotations from management in this announcement, as well as the Company's strategic and operational plans (in particular, the anticipated benefits of the Company's acquisition of Xiamen NetinNet and the implementation of expense control initiatives and its intended effect on the Company's net margin improvement) contain forward-looking statements. The Company may also make written or oral forward-looking statements in its periodic and annual reports to the SEC, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are 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 statement, including but not limited to the following: our goals and growth strategies; our future prospects and market acceptance of the Company's courses and other products and services; future business development and results of operations; projected revenues, profits, earnings and other estimated financial information; projected enrollment numbers; plans to expand and enhance courses and other products and services; the anticipated benefits of listing of Zhengbao Yucai on China's New Third Board; competition in the education and test preparation markets; and Chinese laws, regulations and policies, including those applicable to the Internet, Internet content providers, the education and telecommunications industries, mergers and acquisitions, taxation and foreign exchange.

Further information regarding these and other risks is included in the Company's annual report on Form 20-F and other documents filed or furnished with the SEC. All information provided in this press release is as of the date of this press release. The Company does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

Statement Regarding Unaudited Financial Information

The unaudited financial information set forth in this press release is preliminary and subject to adjustments. Adjustments to the financial statements may be identified when audit work is performed for the year-end audit, which could result in significant differences from this preliminary unaudited financial information.

Use of Non-GAAP Financial Measures

To supplement the Company's consolidated financial results presented in accordance with U.S. generally accepted accounting principles, or GAAP, the Company uses the following measures defined as non-GAAP financial measures: non-GAAP net income, operating income, gross profit, cost of sales, selling expenses, general and administrative expenses, net income margin, operating margin, gross profit margin and basic and diluted earnings per ADS and per share. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. For more information on these non-GAAP financial measures, please see the table captioned "Reconciliations of non-GAAP measures to comparable GAAP measures" set forth at the end of this release.

The Company believes that these non-GAAP financial measures provide meaningful supplemental information regarding its performance and liquidity by excluding share-based compensation expenses. However, non-GAAP financial measures may not be indicative of the Company's operating performance from a cash perspective. The Company believes that both management and investors benefit from these non-GAAP financial measures in assessing its performance and when planning and forecasting future periods. These non-GAAP financial measures also facilitate management's internal comparisons to the Company's historical performance and liquidity. The Company computes its non-GAAP financial measures using the same consistent method from quarter to quarter. The Company believes these non-GAAP financial measures are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making. A limitation of excluding share-based compensation expenses from the above-mentioned line items and presenting these non-GAAP measures is that such charges may continue to be for the foreseeable future a significant recurring expense in our business. Management compensates for this limitation by providing specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying table at the end of this release provides more detail on the reconciliations between GAAP financial measures that are most directly comparable to non-GAAP financial measures.

Contacts:

(Financial Tables on Following Pages)

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