Nov 21, 2017
Executives
Kathy Bian - VP, Corporate Finance Albert Chen - CFO
Analysts
Michael Schmitz - Jayhawk Capital
Operator
Welcome everyone to China Cord Blood Corporation Earnings Conference Call for the Second Quarter of Fiscal 2018. All participants' lines will be placed on mute during the presentation after which there will be a question-and-answer session.
This conference is being recorded. Now, I would like to introduce Ms.
Kathy Bian, VP of Corporate Finance to begin the presentation.
Kathy Bian
Good morning, everyone. Welcome to our second quarter of fiscal 2018 earnings conference call.
A press release discussing our financial results has already been published 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 second quarter of fiscal 2018 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 second quarter fiscal 2018 earnings conference call.
During the second quarter, China Cord Blood recorded 23,647 new subscribers, representing a 31% increase year-on-year and a 5% increase quarter-on-quarter. As of the end of September 2017, our client base has reached over 620,000.
The overall results of this quarter exceeded our expectations and was led by strong performance in our Guangdong division which added the largest number of new subscribers. Our results were not only due to the management teams acumen in judging market trends in Beijing, Guangdong and Zhejiang but also demonstrates the success of the measures we have adopted to nurture the market and refine our frontline sales force.
The Guangdong market remained our growth driver during the second quarter, and the change to our sales team there has been effective in bringing more clients. Performance in Beijing continue to make steady progress due to brand recognition and a well maintained reputation over the past 15 years.
The Zhejiang team further enhanced our strong position in hospital channel and marketing initiatives have started to increase client subscriptions. Looking ahead, we still face various challenges including finding breakthroughs in an increasingly mature market with a flattening consumption growth curve leveraging existing resources to grow our sales team without impacting profitability and consolidating existing and new promotional platforms while integrating current and potential value added services.
Management is solving these challenges step-by-step, and the team remains committed to maintaining our leading position in the cord blood banking industry in China and globally. While we are pleased to see new subscriber growth, in our first two fiscal quarters, we remain cautiously optimistic for the second half of this fiscal year.
We appropriately [ph] adjust our new subscriber guidance for fiscal 2018 to between 80,000 and 84,000. As we continue to develop our core business, management will also explore investment opportunities to further boost revenue and profit growth.
This concludes my remarks regarding our second quarter fiscal 2018 financial results. I'd 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 second quarter financial performance in greater detail.
Albert Chen
Good morning, everyone. As mentioned in the CEO remarks, we achieved a pleasing results in the second quarter of fiscal 2018.
Revenue increased to RMB235 million from RMB184 million in the prior year period representing an increase of 27% year-over-year. Thanks to our strong performance in new subscriber recruitment and a resulting growth of our total subscriber base.
During the reporting quarter, we recorded 23,647 new subscribers representing a 31% increase year-over-year. As a result, revenues generated from processing fees and other services increased by 34% year-over-year to RMB154 million.
Revenue generated from processing fees and other services now accounted for 66% of total revenues as compared to 63% of last year. During the second quarter, 142 private cord blood units were reclassified.
As a result accumulated subscriber base was 620,680 as of September 30, 2017. Revenues generated from storage fees increased to RMB81 million as compared to RMB69 million of last year.
The storage fees related revenue now accounted for 34% of total revenue. Benefiting from economies of scales which was then partly offset by higher labor cost and raw material costs, total direct cost increased at a slower pace of 17%.
As a result, gross margin recorded two percentage point increase to 81%. Gross profit for the second quarter of fiscal 2018 increased by 30% year-over-year to RMB189 million.
During the second quarter, we continue to devote resources to expand coverage and increase brand awareness. We also step up marketing activities to serve as strong platforms for our frontline sales staff to reach out to our target clients.
The improved efficiency of our sales force led to successful business growth when we continue to recruit capable people an increased performance based compensation. As a result, our second quarter sales and margin expense increased to RMB56 million as compared to RMB40 million in the prior year period.
Meanwhile, we strive to balance revenue growth with rising sales and marketing costs; therefore, sales and marketing expenses remain in check at 24% which was largely at the same level as compared to fiscal 2017 yearly average. General and administrative expenses amounted to RMB53 million in the second quarter as compared to RMB48 million of the prior year period; mainly driven by an increase in share based compensation expense.
Through the implementation of tight cost control measures, general and administrative expenses excluding share based compensation expense record a significantly low increase as compared to revenue growth. Therefore, as a percentage of revenues, general and administrative expenses dropped from 26% of the prior year period to 23% in the second quarter of fiscal 2018.
Operating income for the second quarter of fiscal 2018 increased by 39% to RMB76 million. Despite the increase in sales and marketing expenses, the relatively stable general and administrative expenses facilitated three percentage points expansion in operating margin to 33% in the reporting quarter.
Depreciation and amortization expense were at a similar level to the prior year period and stood at RMB12 million. Share based compensation expense was approximately RMB20 million as compared to RMB16 million last year.
Operating income before depreciation, amortization and share based compensation expenses increased at a slower pace of 31% to RMB109 million in the second quarter because of the increase in non-share based compensation related sales and marketing expenses. The prior year period interest expense was largely related to the company convertible notes which were fully converted in April 2017, therefore, no interest expense was incurred during the second quarter of fiscal 2018.
Due to the increase in operating income and the absence of interest expense, income before tax for the reporting quarter increased to RMB83 million as compared to RMB30 million of last year. Income tax expense for the reporting quarter was RMB15 million, net income attributable to the company shareholders was RMB68 million, up from RMB17 million of last year.
Net margin for the second quarter of fiscal 2018 improved to 29%. Basic and diluted earnings per ordinary shares for the reporting quarter improved to RMB0.60 from RMB0.22 in the prior year period.
As of September 30, 2017, the company had cash and cash equivalent of nearly RMB3.9 billion, aggregate current and non-current deferred revenues were approximately RMB2.1 billion, net cash provided by operating activities for the reporting quarter improved to RMB215 million, and that too because of the absence of interest payment.
Kathy Bian
Operator, we may now go to the Q&A Session.
Operator
[Operator Instructions] We will now take our first question from Michael Schmitz from Jayhawk Capital. Please go ahead.
Michael Schmitz
Could you give us the breakdown in subscribers by province as you normally do?
Albert Chen
In terms of new subscriber breakdown, approximately 66% came from Guangdong province, 17% from Beijing and remaining from Zhejiang.
Michael Schmitz
Okay, great, thank you. And then also, in regards to the fourth province that you guys have a share in the Shandong province; you know, now that they are owned by the A-share listed company, the Nanjing Xinjiekou department store; their information is now publicly available on a quarterly basis.
I understand that from an accounting perspective, it's not included in GAAP and sales forth but have you considered adding that to your non-GAAP operating income disclosure about adding your share of that operating income in, like, for the first -- they do it on a calendar year basis but for the first nine months, they've generated US$120 million of revenue and about US$90 million of gross profit. And so -- to me that would be something that you should be making investors aware off.
Well, I guess my question is, have you considered adding that to your non-GAAP disclosures? Albert, are you still there?
[Technical Difficulty]
Operator
[Operator Instructions]
Kathy Bian
Sorry, I think we dropped the line. We're still here, please repeat your question.
Thank you.
Michael Schmitz
Okay. So I was -- my other question was related to the Shandong province that you guys also own 24% of -- and now that that is -- the other 76% is owned by the Nanjing Xinjiekou department store, the A-share listed company; their financial results are available on a quarterly basis.
So due the first nine months of this calendar year they have generated a US$120 million of revenue and just under US$90 million of gross profit; and so I didn't know if -- have you guys considered adding that to your non-GAAP disclosures. I understand that you -- does not reportable under GAAP earnings but in your non-GAAP disclosures, it looks like they are on pace this calendar year to generate close to US$90 million of net profit for the full year which will be about US$20 million to you guys, which would be pretty substantial number to be reported.
So I just wanted to know if you'd consider reporting that under your non-GAAP disclosures?
Albert Chen
I apologize for the technical issue regarding the connectivity. But with that aside, I think what's important is that our reported earnings are reported in conformity with the U.S.
GAAP and we try to do that and to the extent possible, we try not to deviate from the GAAP. And I think under the accounting standard, we are treating the investment in Shandong on the cost basis and if we have sufficient influences, then we may revisit or if there is anything change in the underlying assumption, then we may revisit how we're going to do the equity pickup or if there is any.
So I guess, I think it's -- I guess, if there is anything change which causes changes in the current memo, we'll definitely make it known to the market. But with that being said, please do be aware that you're comparing a company reporting on the U.S.
GAAP versus a company reporting different accounting standards, so things may not be apple-to-apple.
Michael Schmitz
Sure. And I think what you maybe referring to as the GAAP, I'll talk to you offline about before -- if the same power group which is the controller of the A-share listed company, they have 76%; if they complete their purchase from Golden Meditech and become the majority owner of China Cord, that might be a cost for revisiting to see what it is or under common control that might change the accounting treatment for that province for you guys as well, correct?
Albert Chen
Then we'll have to wait until that happen. While you're on the topic, I also want to highlight to the investment community and the shareholders and investors who are attending this call; I have seen the press release -- sorry, an announcement coming from Golden Meditech indicating that the transaction between Golden Meditech and Nanjing [indiscernible] is expected to be closed in December and January.
I think when that happened, I mean if there is changes in the fundamental, then we will -- again, we will see what impact is going to be. But one way or the other, if there is any changes in the fundamental that causes the assumption they need to be revised, it's a conservative change in accounting treatment.
So whether we're being consolidated or not is not the -- this is not the only factor.
Michael Schmitz
Understood. Thank you, Albert.
Operator
We'll now take the next question from [indiscernible], private investor. Please go ahead.
Unidentified Analyst
I had a question, if I could get a breakdown of the percent of subscribers choosing each payment plan during this quarter?
Albert Chen
Clients that choose normal payment is about 53%. People that elected, new subscriber who elected upfront payment is about 45%, and less than 2% of people elected the 60th program, yes, that's pretty much the breakdown and with a modest amount of promotion activities; so, yes.
Unidentified Analyst
Okay, thank you. And are there any plans to increase the pricing?
There hasn't been one in a few years now.
Albert Chen
Well, I mean, we constantly monitor our pricing and the relatively major effect that you may have on the market. But to be fair, I think at this juncture we have no definitive answer or definitive conclusion with respect to a further price adjustment.
Unidentified Analyst
Okay, thank you.
Operator
[Operator Instructions] At this point, there appears to be no further questions. I would like to hand the call back to Ms.
Kathy Bian.
Kathy Bian
Thank you, operator. This concludes our earnings conference call for the second quarter of fiscal 2018.
Thank you for your participation, and ongoing support. Have a great day.
Operator, you may now disconnect.
Albert Chen
Happy Thanksgiving.
Operator
Thank you. That will conclude today's conference call.
Thank you for your participation, ladies and gentlemen. You may now disconnect.