Aug 20, 2015
Executives
Kathy Bian - VP, Corporate Finance Albert Chen - Chief Financial Officer
Analysts
Scott Henry - ROTH Capital Jacqueline Ko - Primus Capital Jason Plagman - Jefferies Mike Schmitz - Jayhawk Capital
Operator
Welcome everyone to China Cord Blood Corporation's Earnings Conference Call for the First Quarter of Fiscal 2016. All participants' lines will be placed on mute during the presentation, after which there will be a Q&A session.
To allow everyone a chance to ask a question, please limit yourselves to one question at a time. Now, I would like to introduce Ms.
Kathy Bian, VP of Corporate Finance to begin the presentation. Hand over to you, Ms.
Kathy. Thank you.
Ms. Kathy?
Kathy Bian
Yes.
Operator
Yes. You can go ahead.
Kathy Bian
Hello.
Operator
The call has already begun. Thank you.
Kathy Bian
Great. Good morning, everyone.
Welcome to our first quarter of fiscal 2016 earnings conference call. A press release discussing our financial results has already been released and the copy is available on our company’s website.
During the call, our management team will summarize corporate developments and financial highlights of the quarter. A question-and-answer session will follow.
To allow everyone a chance to ask a question, please limit yourselves to one question at a time. Before we begin, please note that today's discussion will contain forward-looking statements that are subject to certain risks and uncertainties, and actual results could be materially different from these forward-looking statements.
Kindly refer to our SEC filings for detailed discussions for potential risks. In interest of time, we will begin with our CEO's remarks followed by a detailed report of our first quarter of fiscal 2016 financial performance by our CFO, Mr.
Albert Chen. Our management will be available to answer questions during the Q&A session.
Today, on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin our presentation.
Good morning, ladies and gentlemen. Welcome to our first quarter fiscal 2016 earnings conference call.
During the reporting quarter, the market contracted due to the Year of the Sheep continued and the market remained challenging. Despite the decline in birth rate, we manage to recruit more than 16,000 new subscribers, representing year-over-year increase of 3.5% and a quarter-over-quarter increase of 0.7%, which is in line with management expectations.
At the end of June 2015, the company’s accumulated subscriber base exceeded 450,000. The composition of new subscribers and payment mix across all geographic regions remained similar compared to those of fiscal 2015.
To mitigate the impact from market contraction, we will continue to deepen our existing channels and launch value-added products. Meanwhile, we will make great assets to utilize online/offline channels to increase lead generation for our umbilical cord blood offerings, contact frequency and improve our sales conversion ratio.
At the same time, we start to improve customer satisfaction and foster greater customer loyalty by creating parents-children communities. In addition, we are continuing to develop our team and marketing network for the Zhejiang market.
Looking forward, the management is determined to achieve our subscriber target for fiscal 2016 by capitalizing on the deepening of our existing sales channels and exploring new promotion platforms to offset any market contraction. This concludes my remarks regarding our first fiscal quarter financial results.
I would like to thank you for your ongoing support of CCBC. At this point, I will turn the call over to our CFO, Mr.
Albert Chen to review our first quarter financial performance in greater detail.
Albert Chen
Well, good morning, everyone. Thank you for joining our call today.
As highlighted in our CEO remarks, with the impact of the Year of the Sheep, the number of new born babies remained low. Work reported more of our marketing and sales effort to further penetrate into the markets and with these efforts we were able to recruit 16,090 new subscribers during the June quarter, compared to 15,548 new subscribers in the prior year period.
Driven mainly by the increase storage revenues, revenues for the first quarter amounted to approximately RMB165 million, an increase of approximately 8% from the prior year period. Year-over-year, revenues from storage fees increased by 24% to RMB58 million and accounted for approximately 35% of total revenues.
The accumulated subscriber base increased to more than 457,000 as of the end of June 2015. During the June quarter, revenues from processing fee increased slightly to approximately RMB107 million.
In terms of revenue mix, revenues from processing fees accounted for approximately 65% of our total revenue, compared to 69% in the prior year period. Gross profit for the first quarter amounted to approximately RMB129 million, representing 4% increase over the prior year period.
Gross margin was approximately 78%, compared to 81% last year. And the decrease in gross margin was mainly related to the increase in raw material costs.
In the first quarter, we recorded approximately RMB37 million in terms of sales and marketing expenses, compared to RMB32 million of last year. The increase was mainly due to our increased marketing and promotion activities to minimize the negative impact of the Year of the Sheep, as well as the inclusion of a share-based compensation expense.
No share-based compensation expense was incurred in the prior year period. Sales and marketing expenses accounted for approximately 23% of revenues, compared to 21% of last year.
G&A expenses rose to approximately RMB41 million from RMB29 million of last year. The increase was mainly driven by the recognition of the share-based compensation expense, which was approximately RMB10 million in the first quarter whereas no such expense was incurred in the prior year period.
G&A expenses accounted for approximately 25% of the first quarter revenue. Operating income for this quarter was RMB48 million, compared to RMB60 million in the prior year period, primarily due to the increase in sales and marketing expenses and recognition of share-based compensation expense as I just mentioned.
Operating margin decreased to 29% from 39% in the prior year period. Operating income before depreciation, amortization and share-based compensation expense amounted to RMB75 million compared to RMB72 million of last year.
EBITDA margin before share-based compensation expense was approximately 45% compared to 47% of last year. Interest expense incurred in the first quarter was approximately RMB26 million, which was in line compared to RMB25 million of last year.
Interest expense of both periods were related to the convertible notes. First quarter profit before tax amounted to RMB28 million.
Net income attributable to the shareholders was RMB14 million compared to RMB30 million of last year. Basic and diluted earnings per share for the first quarter were RMB0.19.
Net operating cash flow amounted to approximately RMB130 million in the first quarter of fiscal 2016. This pretty much wraps up our financial highlights and I think we will now turn to the floor for questions.
Kathy Bian
Jasmine, you may now start the Q&A session.
Operator
Thank you so much. [Operator Instructions] Our first question comes from the line of Scott Henry from ROTH Capital.
Your line is open. Please go ahead.
Scott Henry
Thank you and good morning. Just a couple questions.
For starters, could you talk about the subscriber mix in the quarter based on area?
Albert Chen
For the first quarter of fiscal 2016, new subscriber mix breakdown by regions, Guangdong remained the significant contributor for the quarter and accounted for approximately 60% in terms of new subscribers. Beijing being the second largest region accounted for approximately 27%.
The rest came from Zhejiang.
Scott Henry
I’m sorry. What was that Beijing number again?
Albert Chen
Beijing is about 27%.
Scott Henry
Okay. Great.
Thank you. And then just a couple other questions.
As the tax rate was high in the quarter, do you expect that to continue, was there something unique that drove that?
Albert Chen
The tax expenses were slightly higher this quarter because of the operational reason, because of relocation to a new facility in the Zhejiang province. But with that being said, you noticed that the effective tax rate for the company has been high because of portion of the company expenses, such as interest expense is actually not tax deductible because it’s actually incurred offshore.
Now excluding those offshore expenses, on average the effective tax rate should be around 20% and I think that should be a relatively stable trend.
Scott Henry
Okay. So just to be clear, what would you expect the tax rate to be in the next few quarters of this year approximately?
Albert Chen
I think for easy reference, the fourth quarter number of last year should be a good guiding point. And if not, you can, for example use the operating income from the EBITDA before share-based compensation expense at your base and apply probably effective interest rate about 20%.
Scott Henry
Okay. Great.
And then the final question. Gross margins got down slightly in the quarter, do you expect those to turn back up or how should we think about the gross margin line?
Thank you.
Albert Chen
The gross margin line should stay at the current level, or maybe edge slightly downwards because of higher raw material costs. Now, we have noticed a gradual increase in raw material expenses, actually starting from the third quarter of last fiscal year, which is the third quarter of fiscal 2015.
Now the reason for that is because aside from our Beijing bank, our Guangdong and Zhejiang facility has not yet received the AABB Accreditation and we are obviously in the process of applying for those accreditations. So there will be a transition period where we move from a semi-automated process to a fully automated process.
And by doing so we’ll incur a slightly higher raw material cost, which is the reason why you see gross margin kind of under modest amount of pressure, starting from the third quarter of last year. We are still in the transitional mode.
So, I guess you should see gross margin probably stay sideway or maybe edging down a little bit in the next couple of quarters but we don’t anticipate a material deterioration in the gross margin line.
Scott Henry
Okay. Great.
Thank you for taking the questions.
Operator
Thank you. [Operator Instructions] We will now move to our next question from the line of Jacqueline Ko from [Primus Capital] [ph].
Your line is open. Please go ahead.
Jacqueline Ko
All right. Thank you.
I noted your announcement on August 6, 2015, regarding a non-binding proposal from Nanjing Xinjiekou Department Store whereby you stated that it offers to acquire all of your China businesses. And your offer price is not less than RMB6.0 billion.
Can I have your view on the non-binding proposal and what’s do you see there so far? Thank you.
Albert Chen
Thank you for the questions. Well, first of all, allow me to say that given my current position they are a lot of things which -- a lot of comments which I’m not in appropriate position to give.
But to the extent possible I’ll try to answer your questions. And I guess, because the company has established a special committee back in April to evaluate the original proposal preferred by Golden Meditech.
And with a new offer coming in, I believe it is more appropriate for the special committee along with their financial advisor and their legal advisor to evaluate each and every one of these proposals. It is -- I believe, I trusted they would do their job properly and make sure that the process is fair and also [indiscernible] this definitive answer or definitive conclusions to each of this proposal.
But, I think, let say, if there is any material development on that side, I think the company, we will promptly announce it and make the market know about as well. So, I guess, if there are any major developments regarding any of this proposed offer, I guess, we’ll make a announcement promptly, so please refer to our public announcements in the future.
Jacqueline Ko
Thank you.
Operator
Thank you so much. Our next question comes from Brian Tanquilut from Jefferies.
Your line is open. Please go ahead.
Jason Plagman
Hi, Albert. This is Jason Plagman on for Brian.
One question on the sales and marketing expense, should we anticipate that that will continue at similar levels or continue to increase through the next, the rest of the fiscal year or what’s kind of the trajectory of that investment?
Albert Chen
Thank you for the questions. In terms of the sales and marketing expenses, we reported about RMB37 million in terms of sales and marketing expenses for this quarter.
Now part of the reason as I mentioned in my earnings financial highlight is, because of our continuous commitment and also devoting more resources towards developing our marketing channel. But also the other reason for the increase in sales and marketing expenses is because we start recognizing the share-based compensation expense as part of the component within the sales and marketing expenses.
Within that RMB37 million, you are basically looking at approximately, I think, it’s about RMB3.9 million related to the share-based compensation expenses. So if you actually excluding the share-based compensation expenses, the actual sales and marketing expense for the quarter is approximately RMB33 million that will probably put you at about 20% to 21% of revenue for this quarter.
I think -- to be fair, I think, you should kind of expect that we’re going to spend more and more resources, especially on digital marketing. But we do not anticipate a huge increase in sales and marketing expenses in terms of percentage of revenue.
So maybe you probably looking at a need -- the needle may move up about 1 percentage points over the course of next couple of quarters, but we will try to limit that because we’ll always try to balance the cause end and reward our relationship between whether or not to devote. We tried to devote more resources, but that at the same time, we try to avoid devoting excess amount resources within two short period of time.
So long story short, you can expect sales and marketing expenses as a percentage of revenue to gradually increase, but will not increase by huge amount as a percentage.
Jason Plagman
Great. That’s helpful.
And then, one other question, on the timing of the special committee’s review is -- has there been, how should we think about the timing of when there maybe additional news or the committee may make a recommendation?
Albert Chen
I -- unfortunately, I don’t think I have the information in hand to answer your question. But I think the special committee will take into account all of various factors and also make a careful analysis and evaluations.
As -- if I recall correctly, I think, in the latest press release they also mentioned that they are not actually in any obligation to actually report to the market unless there is a material development. So I just say that, I will actually humbly suggest that we wait for their -- we allow them to do their work and when the time comes that they have arrive at the final definitive answer, I guess, they will make the market know, at least they will make me know.
Jason Plagman
Okay. Thanks, Albert.
Operator
Thank you. [Operator Instructions] We will now move to our next question from Mike Schmitz from Jayhawk Capital.
Your line is open. Please go ahead.
Mike Schmitz
Good morning, Albert. Thank you.
I just wanted to, in addition to -- I know you’ve had a couple of question already about the proposed offers. One thing that hasn’t been discussed yet is the potential offer from the other Asia Company, Zhongyuan Union.
I know they are on record is bidding for the shares of China Cord that are owned by Cordlife Group in Singapore. And they previously made an announcement.
They hired an investment bank for a large acquisition that didn’t specifically mentioned China Cord that would value the company about $0.13 a share. But I didn’t know if you’ve received any kind of preliminary discussions with them.
I’m assuming there hasn’t been offer made because I assume it could be a material development. But can you comment on whether there is kind of any initial discussions going on with that company as well?
Albert Chen
I guess my understanding or I guess I pretty much have derived sources of information pretty much from the public domain and as far as I’m aware of that, I have not received such information.
Mike Schmitz
Okay. Thank you.
Operator
Thank you. [Operator Instructions] Thank you.
It appears there are no further questions at this time. I will now hand over the call to Ms.
Kathy Bian.
Kathy Bian
Thank you, Jasmine. This concludes our earnings conference call for the first quarter of fiscal 2016.
Thank you very much for participation and ongoing support. Have a great day.
Operator, you may now disconnect. Thank you all.
Operator
This concludes today's conference. Thank you everyone for your participation.