Noah Education Announces Unaudited First Quarter Fiscal Year 2011 Financial Results

SHENZHEN, China, Nov. 16, 2010 /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 first quarter ended September 30, 2010.

First Quarter Fiscal 2011 Financial Highlights

• Net revenue for the quarter decreased by 46.5% to RMB127.3 million (US$19.0 million), compared with RMB238.2 million in the first quarter of fiscal 2010, and in line with the Company's previously stated guidance of RMB123 million to RMB129 million
• Gross profit was RMB47.6 million (US$7.1 million), a 59.5% decrease compared with RMB117.5 million in the first quarter of fiscal 2010
• Operating loss was RMB33.4 million (US$5.0 million), compared with operating income of RMB32.5 million in the first quarter of fiscal 2010
• Net loss was RMB21.9 million (US$3.3 million), compared with net income of RMB37.8 million in the first quarter of fiscal 2010
• Basic and diluted losses per share were RMB0.58 (US$0.09), compared with basic and diluted earnings per share of RMB0.99 and RMB0.96 respectively for the first quarter of fiscal 2010. Non-GAAP basic and diluted losses per share, excluding share-based compensation expenses, were RMB0.52 (US$0.08), compared with basic and diluted earnings per share of RMB1.06 and RMB1.03 respectively for the first quarter of fiscal 2010

Commenting on the results, Mr. Xu Dong, Noah's Chairman and Chief Executive Officer, said, "In the first quarter of fiscal 2011, we commenced work on our road to recovery and began executing on our initiatives to restore our distribution channels, which allowed us to reach our guided revenue. We are making steady progress in our efforts to strengthen relationships with our distributors and we are seeing ongoing improvement in ELP sales.

"In addition to executing on these key initiatives, we understand the need to maintain a competitive product lineup, and in late August we introduced the NP2300, a high-end flat panel DLD featuring a sleek and modern design. We also made the strategic decision to offload some of our older inventory at discount prices. Though this adversely impacted margin levels this quarter, we believe appropriate inventory levels are an essential component of a fundamentally sound business. Though there remains much work to do in the restoration of our ELP business, we are committed to executing on the remedial measures we have put in place in order to ensure the long-term health and success of the Company.

"As we work to stabilize the ELP portion of our business, our expansion efforts have been centered on our education services segment, which offers a more attractive margin profile, higher visibility, and more stable, long-term growth prospects. Despite an adverse impact from an increase in value-added service tax and a decline in supplied teaching materials, the Little New Star business remains fundamentally strong as we expand the franchise and the Dudu Happy Reading program gains traction. After the closing of our recent acquisition, Wentai Education  opened a kindergarten in September 2010, with two more slated to open in calendar 2011. With a highly experienced management team at Wentai, we will continue to build the pipeline and expect to see accelerating growth commencing in fiscal 2012. We have already established a strong presence in the education services space through the Little New Star and Wentai Education brands, which positions us to capitalize on the vast opportunities in this rapidly growing, yet largely fragmented industry segment in China. We are committed to further executing on our strategic imperative to maximize the potential of these two franchises while simultaneously pursuing additional acquisitions to further strengthen our presence in this space and ultimately create sustainable, long-term shareholder value."

First Quarter Fiscal 2011 Unaudited Financial Results

Net Revenue. Net revenue for the first quarter of fiscal 2011 was RMB127.3 million (US$19.0 million), representing a 46.5% decrease compared with net revenue of RMB238.2 million for the first quarter of fiscal 2010.

Net revenue from Noah's traditional Electronic Learning Product (ELP) business was RMB107.6 million (US$16.1 million), representing a 52.2% decrease from the same period last fiscal year. Net revenue from the Little New Star ("LNS") business was RMB11.6 million (US$1.7 million), compared with RMB13.0 million for the first quarter of fiscal 2010. Net revenue from Shenzhen Wentai Education Industry Development Co., Ltd ("Wentai Education") was RMB8.1 million (US$1.2 million).

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

Cost of revenue. Cost of revenue for the first quarter of fiscal 2011 was RMB79.8 million (US$11.9 million), representing a 33.9% decrease from RMB120.6 million in the first quarter 2010. The decrease in cost of revenue for the first fiscal quarter 2011 was mainly due to the decline in sales within the ELP business.

Gross Profit and Gross Margin. Gross profit in the first quarter of fiscal 2011 was RMB47.6 million (US$7.1 million), compared with gross profit of RMB117.5 million in the first quarter of fiscal 2010. The gross margin for the first quarter of fiscal 2011 was 37.3%, compared with 49.3% in the first 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 old inventory at discounted prices to maintain an appropriate inventory level.

Operating Expenses. Total operating expenses for the first quarter of fiscal 2011 were RMB85.4 million (US$12.8 million), representing a 13.0% decrease from RMB98.2 million in the first quarter of fiscal 2010. The decrease was mainly due to a decline in the Company's sales and marketing expenses corresponding to the lower sales volume, partially offset by increases in research and development and general and administrative expenses.

Research and development ("R&D") expenses for the first quarter of fiscal 2011 were RMB15.0 million (US$2.2 million), representing a 21.1% increase from RMB12.4 million in the first quarter of fiscal 2010. Total R&D expenses include RMB0.5 million (US$0.1 million) from LNS and RMB0.06 million (US$0.01 million) from Wentai Education. Excluding expenses generated from LNS and Wentai Education, R&D expenses from the ELP business increased by RMB2.4 million (US$0.4 million). The total increase was mainly attributable to a RMB1.0 million (US$0.1 million) rise in recruitment at the Chengdu R&D center, a RMB1.4 million (US$0.2 million) increase in outsourced software development costs and a RMB0.6 million (US$0.09 million) increase in content development contracts, partially offset by a RMB0.4 million (US$0.06 million) reduction in rental and travel expenses. The increase in R&D expenses was primarily attributable to the Company's efforts to create next generation products, which will include interconnectivity and flat panel features.

Sales and marketing ("S&M") expenses for the first quarter of fiscal 2011 were RMB41.1 million (US$6.1 million), down 40.7% from RMB69.3 million in the first quarter of fiscal 2010, mainly due to reduced spending on advertising and marketing.

General and administrative ("G&A") expenses for the first quarter of fiscal 2011 totaled RMB29.0 million (US$4.3 million), up 76.7% from RMB16.4 million in the first quarter of fiscal 2010. The increase in G&A expenses was mainly attributable to a RMB6.9 million (US$1.0 million) bad-debt write-off and a RMB3.0 million (US$0.4 million) local tax expense in Chengdu, while there was a recovery of RMB1.1 million on bad debt provision in the first quarter of fiscal 2010.

Loss from Operations. Operating loss for the first quarter of fiscal 2011 was RMB33.4 million (US$5.0 million), compared to operating income of RMB32.5 million in the first quarter of fiscal 2010.

Other Income, Net. Interest income was RMB0.8 million (US$0.1 million) in the first quarter of fiscal 2011, compared to RMB2.9 million in first quarter of fiscal 2010. Investment income was RMB1.8 million (US$0.3 million) in the first quarter of fiscal 2011, compared with RMB1.1 million in the first quarter of fiscal 2010. Other non-operating income was RMB9.8 million (US$1.5 million) in the first quarter of fiscal 2011, compared with RMB0.6 million in the first quarter of fiscal 2010. Other non-operating income includes RMB9.4 million (US$1.4 million) from foreign exchange gain in the first quarter of fiscal 2011, primarily due to the impact of US dollar depreciation on intercompany loans.

Net Loss. The Company reported a net loss of RMB21.9 million (US$3.3 million), or a loss of RMB0.58 (US$0.09) per basic and diluted share, for the first quarter of fiscal 2011. This compares with net income of RMB37.8 million, or RMB0.99 and RMB0.96 per basic and diluted share respectively, for the first quarter of fiscal 2010.

Net loss excluding share-based compensation expenses (non-GAAP) for the first quarter ended September 30, 2010 amounted to RMB19.7 million (US$2.9 million), or a loss of RMB0.52 (US$0.08) per basic and diluted share.

Liquidity. As of September 30, 2010, Noah had cash, cash equivalents short-term investments of RMB538.3 million (US$80.5 million). This compares with cash, cash equivalents, short-term deposits and short-term investments of RMB572.2 million as of June 30, 2010.

Business and Operational Highlights

Education Services. LNS added 14 franchise schools in the first fiscal quarter of 2011, and Noah plans to actively expand this network even further going forward. The Dudu Happy Reading program continues to accelerate and expand as additional schools in China have signed on to roll out the program. Following the acquisition of its 70% economic interest in Wentai Education on July 29, 2010, Wentai Education's management team has already begun to pursue targets for new schools to bring under management. A kindergarten was opened in September 2010, with a major part of the tuition received to be recognized in the second quarter of fiscal 2011. As of November 9, 2010, Wentai Education had two additional kindergartens under conversion, which are expected to open in calendar 2011 and contribute to accelerated growth of this business commencing in the second half of fiscal 2011. Noah is in the process of implementing an Enterprise Resource Planning system at Wentai Education to enhance operational efficiency and internal control procedures, as well as to ensure Sarbanes-Oxley Act compliance.

Electronic Learning Products. The Company released the NP2300, a high-end Digital Learning Device featuring a flat panel screen, in late August that is intended to effectively capture the attention of users seeking more modern-looking, sleeker devices. This is in line with Noah's strategy to employ a heavily customer-focused development approach in order to introduce products that are aligned with the preferences of its target customer base. The Company does not plan to introduce additional KLD model in second quarter of fiscal 2011 based on the revised strategy to optimize product life-cycle and hence revenue potential.

Distribution Channel Update. Noah began to make progress on its initiatives to restore the effectiveness of its distribution networks. Revenue began recovering in the first quarter of fiscal 2011. While the Company continues to strengthen relationships with its distributors, it is actively working to develop the closest relationships with those possessing the most consistent and timely payment records, which will help further improve Noah's accounts receivable level.

Cost management initiatives. Noah expects to achieve RMB20 million in cost savings in fiscal year 2011 by instituting tighter cost controls, implementing headcount reductions across various departments, including sales and marketing, back office administration, production and research, and streamlining spending to ensure resources are appropriately allocated toward the higher-growth areas of the business. Noah expects to make selected headcount reductions in the second quarter of fiscal 2011. However, cost savings from these reductions will be realized beginning the third quarter of fiscal 2011.

Financial Outlook for Second Quarter of Fiscal 2011

Based on current estimates and market conditions, Noah expects to generate net revenue in the range of RMB73.5 million (US$11.0 million) to RMB80.5million (US$12.0 million) for the second quarter of fiscal 2011, which includes RMB55 million to RMB61 million from the traditional ELP business, RMB18.5 million to RMB19.5 million from Education Services. Basic loss per share in the second quarter of fiscal 2011 are expected to be in the range of RMB0.59 (US$0.09) to RMB0.67 (US$0.10).

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 7:30 a.m. (Eastern) / 4:30 a.m. (Pacific) / 8:30 p.m. (China) on Tuesday, November 16, 2010 to discuss its first 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 Tuesday, November 23, 2010 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 RMB6.6905 to US$1.00, the noon buying rate for US dollars in effect on September 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 and change in fair value of warrants. 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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