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Edited Transcript of DL earnings conference call or presentation 20-Nov-19 1:00pm GMT

Q4 2019 China Distance Education Holdings Ltd Earnings Call

Beijing Nov 21, 2019 (Thomson StreetEvents) -- Edited Transcript of China Distance Education Holdings Ltd earnings conference call or presentation Wednesday, November 20, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark A. Marostica

China Distance Education Holdings Limited - Co-CFO

* Ross Warner

- Representative

* Zhengdong Zhu

China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO

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Conference Call Participants

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* Gregory R. Pendy

Sidoti & Company, LLC - Consumer Analyst

* Shen Yuan

CVC Capital - Analyst

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Presentation

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Ross Warner, - Representative [1]

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Good evening, and thank you for joining us for the China Distance Education Holdings Limited Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. On today's call are Mr. Zhengdong Zhu, Chairman and CEO; and Mr. Mark Marostica, co-CFO. (Operator Instructions) Following management's prepared remarks, we will open the call for questions. Before we start, we 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. The outlook for the first quarter and full fiscal year 2020, oral statements from management on this call as well as the company's strategic and operational plans, in particular, the anticipated benefits of strategic growth initiatives, including the promotion of the company's lifelong learning ecosystem, cost control, year-over-year improvement on operating margins, strengthened revenue and profitability, among other things, may contain 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. Further information regarding this and other risks is included in the company's annual report on Form 20-F and in other documents of the company as filed with the Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

As a reminder, this conference call is being recorded. In addition, the presentation we will be referring to during the course of the call can be downloaded from the company's investor relations website. Further, a webcast of this conference call and an earnings highlights video presentation will also be available on the company's IR website at ir.cdeledu.com.

I will now turn the call over to Mr. Zhu. Mr. Zhu, please go ahead.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [2]

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(foreign language)

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Ross Warner, - Representative [3]

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[Interpreted] Thank you, everyone, for joining our fourth quarter and fiscal year 2019 earnings conference call. Our operating results were distributed earlier via Internet Newswire services and are also posted on our website, where a slide presentation is available as well.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [4]

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(foreign language)

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Ross Warner, - Representative [5]

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[Interpreted] If you will now refer to the presentation, I will begin on Slide 4 with an overview of our financial results.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [6]

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(foreign language)

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Ross Warner, - Representative [7]

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[Interpreted] Our fourth quarter fiscal 2019 net revenue and non-GAAP net income attributable to CDEL were up 28.1% and 48.8%, respectively, on a year-over-year basis. Sustaining the strong top and bottom line growth momentum we achieved in the third quarter fiscal 2019. Our better-than-expected fourth quarter revenue growth, which exceeded the high end of our guidance range was primarily attributable to continued strength from our industry-leading accounting vertical together with higher-than-anticipated revenue from our legal vertical.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [8]

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(foreign language)

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Ross Warner, - Representative [9]

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[Interpreted] Cash receipts from online course registration in the fourth quarter were up 21.6% year-over-year, which contributed to the robust growth of cash receipts of 33.1% in fiscal 2019. Due in large part to our accounting vertical, and in particular, the continued popularity of our longer duration premium and elite classes. These classes offer our students more value-added services, such as closer oversight from our tutors, employment guidance services, personalized learning reports and longer study periods, among other things. Such premium and elite classes are priced at relatively higher price points than our regular classes and have driven strong cash receipt growth.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [10]

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(foreign language)

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Ross Warner, - Representative [11]

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[Interpreted] Total enrollment for the quarter was over $1.1 million, up 40.6% year-over-year, primarily driven by robust growth in accounting continuing education course enrollments. As a comprehensive, lifelong learning provider, we deliver not only leading exam preparation classes for our students but also various other educational offerings, including professional continuing education for certificate holders and practitioners to further enhance their knowledge and expertise in addition to satisfying PRC regulatory requirements. Moreover, our growing pool of continuing education course enrollments effectively expands our customer base, thus, providing us with further growth opportunities in the future.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [12]

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(foreign language)

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Ross Warner, - Representative [13]

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[Interpreted] Our accounting ecosystem, for example, now encompasses a full complement of services; including professional certification, exam preparation and continuing education services; practical accounting training and employment guidance services; job internship arrangement services; tax training, advisory and consulting services; accounting and related advisory services to SMEs as well as books and reference materials. With this full complement of services targeting multiple stakeholders, including working professionals, college students and SMEs, our accounting ecosystem underpins the solid cash receipt growth our business is producing. With our accounting vertical as a blueprint, we aim to develop similar ecosystems across other industry verticals, such as engineering and construction and legal, all in an effort to expand the overall growth opportunities. .

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [14]

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(foreign language)

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Ross Warner, - Representative [15]

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[Interpreted] In an effort to appeal to a broader student population and expand our addressable markets, we recognize that different students have different learning styles and preferences. And as such, we offer students multiple learning modalities, including prerecorded online audio/video courseware, live streaming as well as our own in person instructor-led course offerings. It is through this enduring commitment that we have been able to demonstrate an ability to both capitalize on growth opportunities and effectively adapt to the shifts in education market dynamics. .

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [16]

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(foreign language)

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Ross Warner, - Representative [17]

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[Interpreted] With an increasing number of our students relying on mobile devices to complete at least a portion of their overall study time, we have been consistently upgrading and enriching our mobile educational products and services to meet students' diversified learning needs and to provide a superior and comprehensive learning experience. As of September 30, 2019, China Distance Education offered 69 mobile apps and recorded cumulative downloads of 60.9 million, up from 57.6 million as of June 30, 2019. In the fourth quarter, daily traffic to our mobile website continued to increase with daily active users in our accounting, healthcare and engineering and construction verticals increasing by 19.2%, and 2.3% and 54.9% year-over-year, respectively.

Our mobile apps offer students rich content and a variety of features, emphasizing dynamic communication and interaction, so as to enhance our students' learning experience.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [18]

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(foreign language)

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Ross Warner, - Representative [19]

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[Interpreted] With our 20-year track record of operation and sterling brand image in the professional online education space, we are attracting a growing number of students to our lifelong learning ecosystem. Meanwhile, we are proactive with our student acquisition strategy and employ multiple formats and platforms in an effort to reach a broader student audience. The recent Double 11 shopping festival is a testament to these ongoing efforts, and we are pleased to report that during this year's Double 11 event, we achieved record cash receipts from course purchases and books and reference materials sales on our official website and flagship stores on jd.com and Tmall. Also on the Double 11 shopping festival, our flagship accounting store ranked #1 among all education businesses on Tmall, based on sales and volume. This impressive sales performance reflects the enormous popularity of our courses and products as well as the strong confidence and trust our students place in us. In addition, we are pleased to report that our first quarter fiscal 2020 cash receipts from online course registration through the end of last week were up approximately 30% year-over-year on a constant currency basis. .

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [20]

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(foreign language)

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Ross Warner, - Representative [21]

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[Interpreted] Turning to Beijing Ruida, our leading provider of exam preparation services for participants in China's legal professional qualification examination, as previously disclosed, we completed the acquisition of an additional 9% equity interest in Beijing Ruida on August 7, 2019, bringing the company's total equity interest in Beijing Ruida to 60%.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [22]

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(foreign language)

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Ross Warner, - Representative [23]

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[Interpreted] This concludes my update on our business operations and strategy. I will now turn the call over to Mark, our Co-CFO, to walk through key operating metrics and financials.

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [24]

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Thank you. Before I discuss the details of our fourth quarter financial performance, I want to provide a few highlights regarding the improvement in our profitability. In the fourth quarter of fiscal 2019, our non-GAAP gross margin was 63.2%, up from 51.2% in the year ago period, while our non-GAAP operating margin came in at 30.9%, up from 23.9% in the prior year period. Please note that non-GAAP figures noted in our earnings release and discussed on this call exclude share-based compensation expenses, impairment loss of long-term investments and impairment of goodwill.

The underlying drivers of the significant improvement in our profitability are twofold. First, solid fourth quarter top line growth of 28.1% year-over-year; and second, the continued successful implementation of certain expense control measures, including strict headcount and office space control and leverage of our cost structure, which has been a key focus of the company throughout fiscal 2019.

Now let me summarize some of our key operating metrics on Slide 6 and 7. Enrollments in our Online Accounting Test Preparation courses were down 7.3% year-over-year in the fourth quarter, primarily due to declines in Certified Public Accountant or CPA enrollments as well as intermediate accounting professional qualification exam, or APQE enrollments. That said, enrollments in accounting test preparation, premium and elite courses drove accounting test cash receipts growth of 31.2% year-over-year in the quarter.

Enrollments in our accounting continuing education courses increased by 119.4% year-over-year in the fourth quarter of fiscal 2019, primarily due to a resumption of accounting continuing education in certain jurisdictions that began in the second quarter of fiscal 2019.

Total Online Accounting Test Preparation ASPs increased by 41.5% year-over-year in the fourth quarter as ASPs increased significantly in our CPA, APQE and other accounting test preparation courses mainly due to a greater mix of relatively higher priced, longer duration premium and elite classes. The ASPs for accounting continuing education courses decreased by 20% year-over-year in the fourth quarter. All told, our fiscal year 2019 cash receipts for our online accounting courses were up 40.2% year-over-year.

Enrollments in our Online Healthcare Test preparation courses in the fourth quarter of fiscal 2019 decreased by 21.1% year-over-year. ASPs for our healthcare test preparation courses increased by 34% year-over-year in the fourth quarter, mainly due to a greater mix of relatively higher priced, longer duration premium and elite classes. Our fiscal year 2019 cash receipts for our online healthcare courses were up 15.4% year-over-year.

Enrollments in our online engineering and construction or E&C test preparation courses decreased by 20% year-over-year in the fourth quarter. Enrollments in our E&C Continuing Education courses decreased by 26.9% year-over-year in the fourth quarter, primarily due to seasonality.

ASPs for our E&C test preparation courses in the fourth quarter increased by 26.7% year-over-year, primarily due to a greater mix of relatively higher priced, longer duration premium and elite classes.

The ASPs for E&C continuing education courses decreased by 1.2% year-over-year in the fourth quarter. Our fiscal year 2019 cash receipts for our online E&C courses were up 13% year-over-year.

Let's look at some of our financial metrics next. To be mindful of the length of our earnings call, I'll focus on key financial highlights and encourage listeners to refer to our earnings press release and financial filings for further details.

Non-GAAP gross margin was 63.2% in the fourth quarter of fiscal year 2019 compared with 51.2% in the fourth quarter of fiscal year 2018. The year-over-year expansion in gross margin was primarily due to decreased salaries and related expenses, decreased rental and related expenses and relatively lower growth in lecture fees, amortization of intangibles and other direct expenses partially offset by increases in cost of books and reference materials.

Non-GAAP selling expenses increased by 13.1% to $16.1 million in the fourth quarter of fiscal year 2019 from $14.3 million in the prior year period, driven primarily by increases in advertising and promotional expenses, rental and related expenses and other miscellaneous selling expenses. Partially offset by the decreases in commissions to agents and salaries and related expenses.

Non-GAAP general and administrative expenses increased by 25.6% to $6.6 million in the fourth quarter of fiscal year 2019 from $5.2 million in the prior year period. The increase was mainly due to the provision for doubtful debts, related to both the company's investee company, Hangzhou Wanting Technology Co., Ltd. and the sale of learning simulation software.

Overall, the non-GAAP operating income for the fourth quarter of fiscal year 2019 was $21.2 million, up 65.8% year-over-year.

Income tax expense was $6 million in the fourth quarter of fiscal year 2019 compared to $1.7 million in the prior year period, primarily due to an increase in taxable income.

Non-GAAP net income attributable to CDEL was $18.6 million in the fourth quarter of fiscal year 2019, up 48.8% compared with non-GAAP net income of $12.5 million in the prior year period. During the fourth quarter, we incurred a $6.9 million impairment loss from long-term investments due to impairment of the value of the company's investments in investee companies, Hangzhou Wanting Technology and Amdon Consulting of $6.4 million and $500,000, respectively.

We also recorded impairment of goodwill of $1.5 million in the fourth quarter due to impairment of the value of the company's business start-up training services segment.

Now turning to our full year results. I'll just quickly summarize the revenue, non-GAAP operating income and non-GAAP net income growth for fiscal year 2019. We encourage you to refer to our earnings press release for further details, regarding our full year financial results.

Total net revenues increased by 27.1% to $211.8 million in fiscal 2019 from $166.7 million in fiscal year 2018. Fiscal year 2019 non-GAAP operating margin was 12.4% compared with 11% for fiscal 2018.

Net income attributable to CDEL was $21.3 million for fiscal year 2019, an increase of 82.8% year-over-year. Non-GAAP net income attributable to CDEL was $27.6 million for fiscal year 2019, an increase of 71% from fiscal year 2018.

Now let's turn to Slide 11 to review our cash flow. Net operating cash inflow increased by 20.2% to $20 million in the fourth quarter of fiscal year 2019 from $16.7 million in the prior year period. The operating cash inflow was mainly attributable to net income before noncash items generated in the fourth quarter of fiscal year 2019.

The decrease in deferred tax assets, other non-current assets, and the increase in accrued expenses and other liabilities, income tax payable and refundable fees also contributed to the operating cash inflow. The operating cash inflow was partially offset by the increase in accounts receivable, prepayments and other current assets and a decrease in deferred revenue.

Cash and cash equivalents, restricted cash and short-term investments as of September 30, 2019, increased by 2.9% to $128.5 million from $124.9 million as of June 30, 2019, mainly due to the operating cash inflow generated in the fourth quarter of fiscal 2019.

The increase was partially offset by the repayment of an offshore loan of $6 million and capital expenditures of $2 million. Our debt to total capital ratio was 24% as of September 30, 2019, down from 36% as of September 30, 2018. This completes my financial overview. I will now return the call to Mr. Zhu for concluding remarks as well as financial guidance for both the first quarter and for fiscal year 2020. Mr. Zhu, please.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [25]

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Thank you, Mark. (foreign language)

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Ross Warner, - Representative [26]

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[Interpreted] Overall, we are pleased to conclude fiscal year 2019 with strong fourth quarter results. In fiscal year 2019, we posted accelerating year-over-year total enrollment growth in each subsequent quarter, coupled with solid growth in cash receipts from online course registration. Driving strong top line growth and non-GAAP operating margin expansion. We are excited to begin fiscal 2020 with a robust portfolio of highly sought after professional educational offerings, expanding 4 key industry verticals, accounting, health care, engineering and construction and legal, together with a more efficient cost structure, we believe we are well positioned to continue to successfully execute our business strategy of balancing growth with strengthened profitability.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [27]

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(foreign language)

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Ross Warner, - Representative [28]

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[Interpreted] As a leading provider of online professional education we remain dedicated to continual enhancement of our lifelong learning ecosystem across multiple industry verticals, enriching and diversifying our course offerings and applying leading-edge technology aimed at developing best-of-breed learning solutions, all in an ongoing effort to drive positive learning outcomes for our students, while striving to be their partner of choice in their journey of lifelong learning and career advancement.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [29]

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(foreign language)

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Ross Warner, - Representative [30]

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[Interpreted] Turning to guidance. For the first quarter of fiscal year 2020, the company expects to generate total net revenue in the range of $51.1 million to $53.3 million, representing year-over-year growth of approximately 20% to 25%.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [31]

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(foreign language)

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Ross Warner, - Representative [32]

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[Interpreted] For the fiscal year 2020, the company expects to generate total net revenues in the range of $254.2 million to $264.8 million, representing year-over-year growth of approximately 20% to 25%.

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Zhengdong Zhu, China Distance Education Holdings Limited - Co-Founder, Chairman of the Board of Directors & CEO [33]

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(foreign language)

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Ross Warner, - Representative [34]

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[Interpreted] This concludes my prepared remarks. Thank you for your time. Operator, we're now happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Greg Pendy from Sidoti & Co.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [2]

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I guess the first one, just trying to understand the revenue guidance, both for the quarter and then for the full year 2020. It seems like the first quarter is 20% to 25% as is the year 20% to 25%. So just trying to understand, I mean, are we going to start to see the quarterly cadence, I guess, in 2020, a little bit more smoother as we anniversary the adoption of ASC 606.

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [3]

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Hi Greg, thanks for your question. Yes, I think you're right on. In the early part of fiscal 2019, as we were pivoting to the sale of longer duration premium and elite classes, you saw a much wider spread between cash receipt growth and GAAP revenue growth. And we ended the year with 33% cash receipt growth and more meaningfully, 25% online education services growth. So we believe, as we look into fiscal '20, as you -- I think aptly pointed out, now that we've anniversaried the pivot to the longer duration classes that we've been selling. We likely see that spread start to be reduced between cash receipt growth and online education services growth in particular.

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [4]

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Okay. That's helpful. And then just bigger picture, I guess, on the income statement, I appreciate the revenue guidance, but how should we be thinking about the margins maybe on the gross margin side? And how you're looking at the SG&A side between the balance of, say, marketing and commissions to agents, as we think about 2020?

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [5]

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Sure. As you look to 2020, we do believe we were going to continue the momentum in terms of profitability improvement that we saw kick into gear in the back half of fiscal '19. So all told, we do expect that fiscal '20 will end with operating margins that are in the area of mid-teens, which will be a significant improvement. A couple of key drivers there that you touched on. First, gross margin. Gross margin was up quite significantly in fourth quarter on the back of reduced salaries and rent expense year-over-year, the salaries being down year-over-year tied to our disposal of our interest, 60% interest in the tax goal back in December quarter of fiscal 2019. And then the rent expense, of course, down year-over-year as we've exited certain lease space here at our Haidian headquarters and move staff to lower cost space in Anhui Qiao that sets the stage very nicely as we enter into fiscal 2020 for gross margins to see some nice expansion throughout the year. And I would believe that we'll end the year with gross margins likely in the 55% to 60% range as a result of the cost structure been quite honed on that side of the fence.

As I look down, the rest of the P&L, G&A, of course, has consistently been a line item where we're able to glean some leverage because G&A, traditionally, houses a lot of fixed cost. So we'll likely see some modest leverage there.

Selling expense is an interesting line item, too. I mean a good -- half of selling expense comes from commissions paid to agents and advertising. And so the market being as competitive as it is, it's probably not going to get any less competitive, we'll continue to spend in the area of variable student acquisition costs and selling expenses. So that's a line item that we'll probably see a little bit of deleverage on, but all told, the leverage we'll see from gross margin expansion and from leverage on G&A will outweigh any additional incremental spend on the selling side, in our view, driving the margin expansion that I talked about. Does that help, Greg?

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Gregory R. Pendy, Sidoti & Company, LLC - Consumer Analyst [6]

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Yes. That helps a lot. And then if I could just get one more in. Just moving on to the balance sheet. It looks like you allowed some of your short-term bank borrowings to expire? I'm assuming if they're in short term, your whole short-term bank borrowings will expire throughout the year. Is that something you'll consider as each maturity comes up to maybe kind of trim those short-term bank borrowings versus the restricted cash?

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [7]

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Yes. I mean that's exactly right. And we began that in earlier this year as well. Continued, of course, with a $6 million loan paydown in the fourth quarter. As you see us work our way through fiscal '20, we will continue to deploy capital to pay down our debt obligations as they become due. The goal being, as we exit fiscal '20 to extinguish the debt on the balance sheet, and likewise, remove the need for restricted cash.

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Operator [8]

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(Operator Instructions) The next question comes from the line of Shen Yuan from CVC Capital.

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Shen Yuan, CVC Capital - Analyst [9]

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Mr. Zhu, I do have 2 questions for you. Well, the first question would be that in the accounting vertical, well, we're curious about the breakdown in each category is saying that you have CPA, you mentioned that you have a longer product line. And I believe you have those entry-level accounting training, et cetera.

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [10]

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Sorry, I'm not catching your question. Could you repeat, please?

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Shen Yuan, CVC Capital - Analyst [11]

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Yes. Sure. So my first question would be that in the accounting vertical, I'm curious about the breakdown of each category of each certification, including CPA, the entry level and medium level accounting, the Chinese qualification?

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [12]

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Sure, sure. We don't provide a specific breakdown of each line item regards to our revenue structure. So what we have provided, I think, it's quite generous in terms of each of the verticals and their contribution in terms of cash receipts.

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Shen Yuan, CVC Capital - Analyst [13]

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Yes. Because you specifically mentioned about the growth was like mainly generated from the longer period of accounting courses. I believe it's CPA courses, right?

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [14]

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Right. When you look at the different duration courses, we're clearly seeing the lion's share of the growth of cash receipts from our longer duration courses, and that applies to accounting in a big way. So our premium courses, which are courses that are longer than 1 year in accounting, our specific courses that are driving the cash receipt growth that we talked about earlier.

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Shen Yuan, CVC Capital - Analyst [15]

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Okay. Well, the second question will be that the plan and the blueprint in accounting market. And is there any specific plans? Do you plan to -- currently, you have accounting, you have law, you have construction, right? Do you have any plans to expand into other categories?

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [16]

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Certainly, part of our growth, historically, from day 1 has been to replicate the business model from what was one time an accounting only business to champion other verticals. And I think that shows the power of the model in which we are able to replicate a business processes internally, our marketing infrastructure, our technology infrastructure across verticals. Now having said that, we have no specific plans to announce today regarding any other verticals. We certainly will keep the market abreast of any movement or a decision on our part, if we so choose to move into a new vertical.

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Operator [17]

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(Operator Instructions) If there are no further questions, I would like to turn the call back to management for closing remarks.

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Mark A. Marostica, China Distance Education Holdings Limited - Co-CFO [18]

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Thank you, operator. On behalf of the management team, we thank you for joining us today, and we look forward to updating you on our progress.

[Portions of this transcript that are marked

[Interpreted] were spoken by an interpreter present on the live call.]