China Education Alliance Releases First Quarter 2011 Results

Financial Highlights for the First Quarter ended March 31, 2011

• Total revenue decreased 18.8% year-over-year to $7 million.
• Gross profit declined to $4.6 million or to 66.0% of sales, compared to $6.8 million, or to 79.3% of sales last year.
• Non-GAAP net income was $0.5 million compared with $3.7 million last year. On a GAAP-basis, net loss was $0.5 million compared with net income of $3.7 million last year.
• Non-GAAP fully diluted earnings per share were $0.02, compared with EPS of $0.12 per fully diluted share in the first quarter of 2010.

"As a result of the unfounded allegations made against the Company at the end of 2010, we faced a difficult quarter with numerous challenges to retain our high-quality teachers and attract new students. Our business relies on our reputation in the market and these allegations hindered our business performance considerably. We implemented strategic promotional and marketing campaigns to improve our corporate brand image and to restore our reputation, and we are beginning to see a stabilization in the business," said Mr. Xiqun Yu, Chairman and Chief Executive Officer of China Education Alliance.  "We remain confident in growing our core business and seeking new opportunities to expand our platform as we continue to explore M&A opportunities."

First Quarter 2011 Review

China Education Alliance reported total revenue of $7.0 million for the first quarter ended March 31, 2011, a decrease of $1.6 million or 18.8%, compared to revenues of $8.6 million for prior year period. Revenues were impacted by false accusations which led to a significant decrease in student enrollment and unfavorable conditions with daily operations.

Revenues for the online education business decreased 25% to $3.9 million from $5.2 million in the first quarter of 2010, partially offset by a 6% increase in revenues for the training center which generated $3.0 million in the current quarter up from $2.9 million in the prior year.  Other revenue declined 90.6% to $49,973 due to the Company's decision to increase its focus on examination preparation and vocational training.

Overall cost of sales increased to $2.4 million in the first quarter of 2011, compared to $1.8 million for the prior year. The increase was mainly due to the increase in daily expenses for promotion and marketing activities as a result of the accusations and partially due to higher depreciation charges related to an online system and class related materials.

Gross profit was $4.6 million in the first quarter 2011 compared with $6.8 million in the prior year. As a percentage of sales, gross margin was 66.0% in the quarter, compared with 79.3% in the first quarter of 2010.

Gross profit in the online division decreased to $2.2 million compared with $4.1 million in the same period prior year, or to 56.8% as a percent of sales in the first quarter of 2011 from 78.7% in the same period prior year due to lower online revenues and higher costs. Gross profit for the training center increased 6% to $2.4 million compared with $2.2 million in the year ago period. Gross margin as a percentage of sales in the division remained relatively stable at 77.7% compared with 77.9% in the year-ago period.  

Selling expenses increased 8% to $2.4 million due to higher advertising expenses and expenses associated with discounts and promotions offered to agents and the parents following negative allegations. The Company intensified marketing activities to increase favorable publicity and to restore market confidence.

Administrative expenses increased to $2.4 million for the first quarter of 2011 compared with $0.5 million in the prior year. The increase was primarily due to the issuance of 465,338 shares of common stock at $2.39 per share to employees under the 2009 Incentive Stock Plan. Depreciation and amortization increased to $0.3 million, up from $0.2 million last year.

On a non-GAAP basis, net income was $0.5 million in the first quarter of 2011, or $0.02 per fully diluted share, compared with $3.7 million, or $0.12 per fully diluted share last year. On a GAAP basis, the Company had a net loss for the first quarter of 2011 of $0.5 million, or a loss of $0.02 per fully diluted share, compared with first quarter of 2010 net income of $3.6 million, or $0.12 per fully diluted share.

Recent Developments

• The Company was selected to design and develop the "China Future-Youth Elite Project", a nationwide prestigious talent training program to cultivate promising youths in the development of social responsibility and leadership.
• The Company held its 3rd annual preliminary China Middle School Students Academic Competition where 300,000 students from 27 provinces competed in mathematics, physics and chemistry abilities.
• The Company purchased a 60% equity interest in Harbin Tianlang Culture and Education School  (or "Tianlang"), an institution with 5,000 students and an annual profit of RMB10 million, for RMB35,000,000.
• The Company and Nanchang Institute of Technology (or "NIT") established Nanchang Institute of Technology College of Vocational Training to provide employment-oriented vocational training to students in NIT and Jiangxi province.

Business Outlook

"We will continue to focus on designing and providing premium online education and vocational training services with our high-quality teachers and exclusive training materials. We plan to establish 50 additional training centers in 10 different cities in China this year. We also expect to grow organically as well as through mergers or acquisitions if we can find quality businesses at attractive valuation levels that fit our overall business strategy," said Chairman Yu.

2011 Guidance

The Company expects full year 2011 total revenues to be between $47 million and $52 million.

Financial Position

As of March 31, 2011, China Education Alliance had approximately $67.8 million cash and cash equivalents, a slight decrease of $3.3 million from $71.1 million at December 31, 2010. Working capital was $69.1 million, a decrease of $3.5 million from working capital of $72.6 million at December 31, 2010. The Company believes that current working capital and borrowing capabilities are adequate to cover its planned operating and capital requirements. Cash provided from operating activities was $0.5 million in the first quarter of 2011, compared with cash provided from operating activities of $4.2 million in the prior year period.  

Conference Call

China Education Alliance will host a conference call and live webcast at 8 a.m. Eastern Daylight Time (EDT) (8 p.m. Harbin/Beijing time on Tuesday, May 17, 2011).

The dial-in details for the live conference call are as follows:

A live webcast of the conference call will be available in the investor relations section of the Company's website at: http://www.chinaeducationalliance.com/index.jsp A telephone replay of the call will be available 1 hour after the end of the conference for seven days.

The dial-in details for the replay are as follows:

About China Education Alliance, Inc.

China Education Alliance, Inc. (http://www.chinaeducationalliance.com) is a fast-growing, leading, China-based company offering high-quality education resources and services to students ages 6 to 18 and adults (university students and professionals) ages 18 and over. For students ages 6 to 18, China Education Alliance offers supplemental, online exam-oriented training materials and onsite, exam-oriented training and tutoring services. The company provides online, downloadable famous-teacher resources and onsite, personalized instruction. All resources and tutoring services are provided by famous teachers within mainland China. The purpose of online exam-orientated resources and onsite tutoring is to help Chinese students (ages 6 to 18) pass the two most important and highly competitive exams in their educational career: the senior high school entrance and college entrance exams. For graduates and professionals age 18 and over, China Education Alliance provides vocational training including IT and several professional training programs.

Forward-Looking Statements

Statements contained in this press release, which are not historical facts, are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, expectations of signing new customers and contracts, developing new products, projected revenues and earnings, and the success of new products. These forward-looking statements are based largely on current expectations and are subject to a number of known and unknown risks, uncertainties and other factors beyond our control that could cause actual events and results to differ materially from these statements. These statements are not guarantees of future performance, and readers are cautioned not to place undue reliance on these forward-looking statements, which are relevant as of the date of the given press release and should not be relied upon as of any subsequent date. China Education Alliance undertakes no obligation to update the forward-looking information contained in this press release.