Goldman Sachs analyst, company predicts revenue growth accelerates in third quarter

The Good Future (NYSE:XRS) released today the unaudited fiscal year 2014 for the second quarter as at August 31. In the second quarter, net revenues rose 35.1% to $92 million, up from $68.1 million a year earlier, while net profits for the good future grew 45.4% to $23.3 million, up from $16 million a year earlier.

After the release of the earnings, Joseph Kaufman, the CFO, attended the conference call, read the earnings and answered the analyst's questions.

The following is the main content of the conference call analyst question and answer session:

Fei Fang, Goldman Sachs analyst Fangfei: What is the driving force behind the growth in the third quarter, when companies forecast revenue growth in the third quarter to accelerate and profitability to remain stable? What will be the performance of the third quarter of the Beijing regional business?

Kaufman: We expect revenue growth in the third quarter to remain largely driven by cities outside Beijing, many of which have untapped market potential. The company's performance in both the second and third quarters will reflect a certain degree of time and principle of the company's entry into these areas. Good future into the new market are very cautious, such as opening a shop first, establish brand and reputation, to obtain good market reputation, and then increase market demand. In some ways, this strategy is being rewarded in cities outside Beijing, showing strong growth in enrollment and income.

Overall speaking, the company's development has ushered in a new stage, a good future brand, reputation and teaching quality has a certain reputation. The experience learned from Shanghai regional business firms is that only quality, not quantity, can truly achieve sustainable growth. Good future business in a region after a period of transition, has now returned to the growth track. Good execution is important, of course. The company has raised fees for small classes in some areas, including Beijing's summer semester, which will continue to affect third-quarter performance. In addition, the price of one-to-one courses in Beijing has risen since September. Companies have no forecasts for profit margins.

Fei Fang, Goldman Sachs analyst Fangfei: So what is the company's forecast for the growth of Beijing's regional business?

Kaufman: The company's price increase in the summer semester partly boosted single-digit growth in the second quarter in Beijing. The price increase will not have a big impact on the growth of Beijing's business in the third quarter. Beijing is our most mature market, we will also focus on the growth of business in other regions. The company will also invest in intelligent teaching, Internet Connection Sharing technology applications, improve interactivity, increase evaluation. One of the core values of the company is pragmatic, is to provide students with the best teaching, in the enrollment volume of the company more patience, it may also take several quarters to see the return of the Beijing area enrollment to the original level. In short, third-quarter companies expect Beijing's business will not grow significantly.

Fei Fang, Goldman Sachs analyst Fangfei: Beijing's reform of the college entrance examination will reduce the weight of English subjects in test scores, will this change affect the company's business or China's education industry?

Kaufman: We are assessing the impact of this policy, and the company has not yet had a significant impact on the change. The good future English course mainly assists the student from the preschool to the 12 grade English study, but not mainly for the entrance examination and the college entrance examination prepares, therefore at present stage should not have the influence to the company business. In addition, a good future for the Eastern School language for the new brand positioning, in increasing the company's business should have potential.

Morgan Stanley analyst: First question, what is the company's expectation of an increase in the teaching centre? What is the impact on enrollment and profitability? Second question, what is the future forecast for the third-quarter pricing trend?

Kaufman: The company's plan to increase the expansion of the teaching center is usually implemented in the first half of the year, the second half of the future will continue to increase the teaching center, but the speed and size of the classroom to see the use of some of the data we have been emphasizing, these determine how we increase the network. The company is currently planning to add more than 200 classrooms to small classes in the second half of the year, which is less than the first half of the year, but these increases still make sense for us. Investment in the new classroom is bound to generate costs and will have an impact on profitability, but if we can achieve the expected growth target for revenue, it will certainly offset those costs.

In addition, in addition to increasing the teaching center, Internet teaching Tools and a good future development of teaching content projects can also increase the company's business. I expected the company's profit margin to decline this year, but from the first and second fiscal quarter and the third quarter forecast, I expect the company's profit margin will be flat last year. Because the winter semester enrollment will not be clear until November, December, the fourth-quarter operation is not yet estimated.

The second question is that Beijing's one-to-one courses will rise from September 1 onwards, but future price movements are hard to predict because prices for different classes of courses have different discounts. The pricing strategy for one-to-one courses is not the same as in small classes, mainly because the amount of course purchases depends on demand. We expect the price of one one-on-one course in the third quarter to grow in single-digit numbers, the company will also assess small classes in the winter semester after the next summer semester to raise prices, this in different cities, the price increases are not the same, but the price increase will be mainly concentrated in the previous year did not raise prices of cities, such as Shanghai, Guangzhou, Shenzhen and other cities. At present, the company has not in which cities, when, how to raise the plan.

Ella Ji, an analyst at Oppenheimer in New York: Can you think that the revenue generated by a good future price increase in Beijing will be the main source of revenue growth for the company in Beijing? In addition, what method will the company adopt to resume enrollment growth in Beijing?

Kaufman: Indeed, in the summer semester Beijing's revenue growth is mainly due to price increases, and at present indications are the same for the fall semester. I can't predict the winter semester. The second question, in increasing the number of admissions, the company will make efforts in several areas, first of all, our teaching content, the company developed projects will introduce an intelligent teaching system to increase classroom interaction, the next six months, the company's teaching system will be upgraded from 2.0 to 3.0. Second, the company will focus on several older students who have not previously been concerned, including pre-school and high school students; Before I mentioned that the good future high school students retention rate has a good growth, this stage of student schoolwork more, so pay more attention to the good future learning efficiency, choose a good future also more for the students will not the wishes of the parents , which makes it possible for companies to expand this part of the business. Products, we not only focus on mathematics and science, but also in English and Chinese, these will also give us the opportunity to expand our business.

Ella Ji, an analyst at Oppenheimer in New York: What is the current classroom usage rate for the company? Can you provide detailed figures in Beijing, Shanghai and other areas?

Kaufman: We don't disclose this kind of information, but what we can introduce is that overall classroom usage is increasing in single-digit numbers, with some areas reaching 10%, prompting the company's accelerated expansion in the second quarter. Naturally, a large increase in the teaching center will lead to a decline in the use rate in the third quarter, but overall, in most cities, the company's classroom usage rate will increase this year than last year. The trend is also upward.

Ella Ji, a new york-based analyst: Will a good future price increase strategy lead to an accelerated upward trend in the average sales price (ASP) of courses in the fall semester?

Kaufman: The rise of the ASP should be more stable, the company's increase in small classes is in the summer semester, so the impact of the fall semester ASP only a pair of the price of a course, but generally speaking, one-on-one course business in the fall semester is not the most, this to the overall ASP only a small impact.

Jefferies analyst Clara Fan: What is the percentage contribution of the company's small classes, one-to-one courses and web-based courses to revenue? What is the percentage of enrollment on line and offline? In addition, can you introduce the company's online trading model?

Kaufman: Small classes contribute 78% revenue, one-on-one courses contribute 19%, web-based courses contribute 3%, and online courses contribute 11% of the enrollment, offline courses, and the Entity Curriculum Center contribute the rest of the enrollment. The second question, online courses, the company focuses on how to improve interaction with students, from development and application to improving content, and offering different pricing for different courses in different cities; on the whole, companies are more patient about increasing online users because they are just laying the groundwork for future stages of development. As I said, online trading can help companies do more to provide better and more efficient user services on different platforms.

Jefferies analyst Clara Fan: Does the company currently have an acquisition target?

Kaufman: There are no disclosures at the moment, but the company does look for the right opportunity to invest or to co-operate.

Jaffray analyst Mark Marostica: Good for the second quarter in Shanghai, and some of the company's competitors appear to be underperforming. What is the main driving force for the company's growth in Shanghai? Do you have any comment on the competitive situation in Shanghai?

Kaufman: Good future in Shanghai last year also experienced a trough, mainly because the company did not pay attention to the growth of enrollment, but pay attention to the quality of each class teaching, but this also allows the company to gain the praise of students and good quality of the future of teaching recognition. The company has added a large number of teaching centers and a reasonable allocation of one-on-one courses, in our view, management business growth, focus on quality, slow is fast. The second problem is that the market in Shanghai is more fragmented than in other cities, and there is no single big situation; From a competitive standpoint, no institution can be compared as a target, and consumers tend to choose different services in different institutions.

Jaffray analyst Mark Marostica: the market outside Beijing and Shanghai has contributed 35% of the company's revenue, a share that does not seem to have increased, will the ratio change in the future?

Kaufman: The increase in the Beijing course led to revenue growth, the Shanghai market also performed well, so the overall contribution rate of two cities is higher, while other cities, although the contribution rate is not high in Beijing and Shanghai, but the second quarter of the revenue increase of more than 100%. If the market in Beijing is good, the contribution rate in Beijing and Shanghai will increase further, but in the long run, the business of other cities will become the main driving force of the company's revenue growth. The market penetration rate in these cities is low, and the company will open a teaching center in new cities in the next 6 months, with one or two new cities to be stationed by the end of this year and one or two new cities in the first quarter of next year.