Aug 23, 2016
Executives
Kathy Bian – Vice President-Corporate Finance Albert Chen – Chief Financial Officer
Analysts
Mike Schmitz – Jayhawk Capital
Operator
Thank you for standing by and welcome to the first quarter FY2017 China Cord Blood Corp. Earnings Conference.
At this time all participants are in a listen only mode. There will be a short presentation followed by a question and answer session [Operator Instructions] I must advise you that this conference is being recorded today Tuesday, August 23, 2016.
I’d now like to hand the conference over to [indiscernible] Kathy Bian. Please go ahead.
Kathy Bian
Thank you. Good morning, everyone.
Welcome to our first quarter fiscal 2017 earnings conference call. A press release discussing our financial results has already been released and a copy is available on our company’s website.
During the call, our management team will summarize corporate developments and financial highlights for the quarter. A question-and-answer session will follow.
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 of potential risks.
In the interest of time, we will begin with our CEO's remarks followed by a detailed report of our first quarter of fiscal 2017 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 2017 earnings conference call. During the first quarter demand for our cord blood banking services showed healthy improvement as the number of newborns in China grew compared to the same period last year.
We enhanced our marketing effort and refined our sales force resulting in an additional 16,637 new subscribers during the first quarter of fiscal 2017 which represents a quarterly increase of 3.4% over last year. The accumulated subscriber base for China Cord Blood now exceeds 520,000 as at the end of June, further reinforcing our leading position in the industry.
The geographic composition of our new subscribers remained similar to the past quarters. The market in Beijing showed signs of steady improvement after slowdown in the last few quarters due to the Year of Sheep impact.
Our performance in the Guangdong market was favorable as our successfully drove new subscribers due to our scale and experienced operational team. In Zhejiang, our market rollout continues to proceed as previously proposed.
Within our major markets, the composition of the new subscriber payment mix remained similar to prior quarters. With respect to an update on the overall market.
In the near term, China's overall economy continues to slow which could result in a more conservative attitudes towards the healthcare spending. Meanwhile the National Health and Family Planning Commission rolled out a detailed policy to further regulate the clinical applications of various stem cells.
We believe that in short term this action may cast doubt or cause an adverse impact on subscription levels of potential clients. However, we believe that such regulation when implemented would benefit the broader cord blood banking industry over the long run, by introducing channels and mechanics to curb violations and to correct unfair competition.
Looking ahead to the second quarter, our team is committed to tackle the challenges through greater awareness of our operations and emphasizing clinical benefit of storing umbilical cord blood stem cells. We will also continue to refine our sales force and fine tuning our marketing and promotional strategy to add new subscribers to our services.
We will strive to achieve our full year goal of 65,000 to 68,000 new subscribers through careful planning and prudent execution. This concludes my remarks regarding our first quarter fiscal 2017 financial results.
I'd like to thank you for your ongoing support of CCBC. At this point I would turn the call over to our CFO Mr.
Albert Chen to review our first quarter financial performance in greater detail.
Albert Chen
Good morning everyone. Thank you for joining our call today.
During the first quarter of fiscal 2017, the number of newborn babies recovered from the lower level of our last fiscal year. With this improving trend and our careful deployment of additional resources to further penetrate into our existing markets, we successfully recruited 16,637 new subscribers during the reporting quarter, representing an increase from 16,090 new subscribers of last year.
That was largely driven by our steady growth of storage revenues. Our total revenue for the first quarter increased by approximately 5% to RMB 173 million, as compared to RMB 165 million of last year.
The accumulative subscriber base expanded to 520,905 as of the end of June 2016. Accordingly, revenues from storage fees increased by almost 14% year over year to RMB 66 million.
Revenues from storage fees accounted for approximately 38% of total revenues as compared to 35% of last year. Revenues from processing fees for the first quarter remained stable at approximately RMB 107 million, representing approximately 62% of our total revenue.
In terms of gross profit. Gross profit for the first quarter increased by 5% year over year to approximately RMB 136 million, representing a gross margin improvement of approximately 50 basis points to 78.4%.
In the reporting quarter we recorded approximately RMB 38 million of sales and marketing expenses, a slight increase compared to RMB 37 million of last year. The increase was mainly due to our increased marketing and promotion activities to expand our Zhejiang operation and further penetrate into the Guangdong market.
As a percentage of total revenue, sales and marketing expenses were lower than last year, accounting for approximately 22.1% of revenues as compared to 22.5% of last year. G&A expenses were similar to the previous two quarters and amounted to approximately RMB 43 million as compared to RMB 41 million of last year.
G&A expenses as a percentage of revenues remained similar to the prior year level which is approximately 25% of revenue. Operating income for the first quarter increased to RMB 52 million, up from RMB 48 million of last year, representing a steady 8% year-over-year increase.
Such improvement was mainly driven by a combination of the market recovery and our ongoing sales and marketing effort to recruit new subscribers. Operating margin also improved; it improved by approximately 80 basis points to 30.1%.
Operating income before depreciation and amortization and share based compensation increased by roughly 7% year over year to RMB 80 million. In terms of the margin, it also represents an 80 basis point increase as compared to last year.
So operating income before depreciation and amortization and share based compensation expense, margin stood at about 46.1%. The interest incurred in the first quarter of fiscal 2017 was approximately RMB 29 million as compared to RMB 26 million of last year.
The interest expense for both periods were largely related to the convertible notes and the difference was due to the compounding interest effect of the convertible notes as well as the exchange rate weakness in RMB against the US dollars. First quarter income before tax was approximately RMB 28 million, similar to last year.
Income tax expense decreased to RMB 12 million from RMB 15 million in the prior year period, as Zhejiang Cord Blood Bank was qualified as a High and New Technology Enterprise in January 2016 which entitled it to a preferential income tax rate of 15%. As a result, net income attributable to the company's shareholders improved by about 16% to approximately RMB 16 million, up from RMB 14 million of last year.
Basic and diluted EPS for the first quarter increased also by 16% to RMB0.22. In terms of cash flows, net operating cash flow remained solid at approximately RMB 131 million, as compared to RMB 130 million of last year.
These are just a quick highlight of our first quarter results. We are now ready to turn to the floor for any questions.
Kathy Bian
Operator, we're now ready to start the Q&A session. Thank you.
Operator
[Operator Instructions] We will now take our first question from Mike Schmitz from Jayhawk Capital.
Mike Schmitz
Hi Albert, thanks guys for presenting results today. My question is about the restricted stock units, the 7 million shares or whatever that were issued a couple years ago.
The 20-F stated that management believes that it's still probable that the financial targets that are needed to invest all of the restricted stock units are still expected to be achieved. Can you confirm if this means you still expect the company’s growth for the three year period ending in fiscal year 2018 to reach the 10% to 15% compounded annual growth rate that you targeted, that you’ve provided on the first earnings call after they were announced originally?
Albert Chen
Hi Mike. Thank you for the questions.
I believe, well, first of all, the RSU itself is not just – the vesting condition of the RSUs actually varies based on the position of the individual grantees and each functions carry a slightly different valuation metrics. For example, the staff that’s responsible for the laboratory operations they are not looking at growth, they are actually looking at the success in processing rates and also our colleague on the front line who are mainly responsible for the recruitment of new subscribers, they are also looking -- they themselves are looking at new subscriber growth numbers as well as the payment option which for the clients that is high enough.
So the valuation metric is actually -- is not like you said 10% to 15% broad stroke growth target, that’s being applied standardly across the board. I seem to recall that 10% to 15% growth is what we as a company, we intend to achieve over the long run but it actually is not exactly the valuation metric or the vesting condition that’s being applied to the grantees, put it this way.
But to answer your questions, yes, we continue to grow. We will try very hard to achieve our various growth targets and we will intend to continue to grow the company.
Mike Schmitz
Yes, now I understand there's a lot of different conditions. I just -- when you were asked that question on that earlier call, a guideline you provided was the 10% to 15% growth, would lead to vest -- would probably be the vesting of all those restricted stock units.
So that's helpful. Because the other possibility I was thinking of as well, you’re thinking that it's probable that there will be a privatization event and if the RSUs would vest under some type of privatization event.
Could you comment on whether those would vest in a privatization event or would they just go away somehow?
Albert Chen
Actually at this stage, it’s hard to – I don’t know the exact treatment with respect to the RSU because it’s conditional – it’s not conditional -- since it’s not supposed to be conditional on the privatization and whether the privatization is going to happen or not, there's actually -- this remains to be seen. But I think the terms and conditions with respect to the RSU itself is already included in the scheme which is also being filed with the SEC.
I think in the RSU – RSU will trigger, for example, acceleration in vesting conditions such as liquidation, bankruptcy, a sale or merger and stuff like that. So there are various conditions which kind of alter -- which may alter the acceleration conditions or the vesting conditions of the RSU itself.
But whether the RSU would go away if a privatization is going to happen or first of all, we don't know if the privatization is going to happen. And secondly, let’s just say that I don't have any evidence to conclude that the RSU will go away or stay if the privatization does happen.
End of Q&A
Operator
[Operator Instructions] As there are no further questions, I will now turn the call back to you for any additional or closing remarks.
Kathy Bian
Thank you, operator. At this point there appears to be no further questions.
So this concludes our earnings conference call for the first quarter of fiscal 2017. Thank you all for your participation and ongoing support.
Have a great day. Operator, you may now disconnect.
Thank you.
Operator
Thank you. That concludes today’s conference call.
Thank you for your participation. Ladies and gentlemen you may now disconnect.