Feb 27, 2018
Executives
Kathy Bian - VP, Corporate Finance Albert Chen - CFO
Analysts
Patrick Terrell - Terrell Group Management Mike Schmitz - Jayhawk Capital Adam Kies - Morgan Stanley
Operator
Welcome everyone to China Cord Blood Corporation Earnings Conference Call for the Third 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.
Now, I would like to introduce Ms. Kathy Bian, VP of Corporate Finance to begin the presentation.
Please go ahead.
Kathy Bian
Thank you, Anna. Good morning, everyone.
Welcome to our third 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 the potential risks.
In the interest of time, we will begin with our CEO's remarks followed by a detailed report of the third 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 Chairman and CEO, Tina, I will read her prepared remarks.
Let's begin our presentation. Good morning, ladies and gentlemen.
Welcome to our third quarter fiscal 2018 earnings conference call. During the third quarter, we recruited 24,229 new subscribers, representing a 22.9% increase year-on-year and a 2.5 increase quarter-on-quarter.
I am delighted to announce that as of the end of December 2017 our accumulated subscriber base exceeded 640,000, putting us among the top few global players in terms of scale. In the reporting period, we continue to extend our sales team and broaden our sales channels to counter the effects of slower growth as the market gradually matures in China.
The Guangdong team continued its client growth trajectory and renewed its AABB Accreditation reflecting our practice of adhering strictly to the high standards of quality control and operational management. The Beijing Division rolled out pilot programs targeting business partners and the high end Consumer Healthcare segment.
The Zhejiang team further enhanced its hospital channel and steadily improved client recruitment. During the third quarter, China's regulatory bodies issued new policies to guide and promote research on stem cell therapy.
In October the Ministry of Science and Technology circulated the 2018 guide for stem cell and transformation research pilot project to appropriate - to appropriate a special fund of 630 million renminbi to direct research on stem cell and stem cell transformation. In December, the China Food and Drug Administration permitted [ph] the guiding principles of cell therapy research and evaluation, which aims to strictly regulate cell therapy products to promote the healthy development of China's cell therapy industry.
According to the guiding principle, stem cell therapies must comply with all regulatory requirements and ensure the safety efficacy and quality of stem cells before launch, precisely what we have been doing for years. We believe that the introduction of these policies, especially the guiding principles will encourage the development of stem cell applications in China, thereby creating additional impetus for consumers to invest in Cord Blood stem cells storage.
We are pleased with our progress during fiscal year 2018, which has seen three consecutive strong quarters. Despite more cautious consumer budgeting and spending due to divergent economic expectations, our management team believes it is appropriate to revise up our full year new subscriber guidance to between 88,000 and 92,000, which better reflect our current expectations.
As you are already aware Nanjing Ying Peng Hui Kang Medical Industry Investment Partnership recently completed its transaction with Golden Meditech and Nanjing Ying Peng is now one of our significant shareholders. We also recently announced that we intend to change our company name from China Cord Blood Corporation to Global Cord Blood Corporation to better align with our strategic direction.
In the near term, we will continue to focus on strengthening our sales team, improving our conversion rate and testing the efficacy of new marketing channels. At the same time, we look forward to continuing our dialogue with all of our shareholders and seeking their support as the company continues to expand its geographical footprint and spectrum of service by pursuing opportunities along the industry value chain domestically and abroad to synergize with existing resources.
This concludes my remarks regarding our third quarter fiscal 2018 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 third quarter financial performance in greater detail.
Albert Chen
Good morning, everyone. As mentioned in our CEO remarks, during the third quarter of fiscal 2013 we continued our strong growth and achieved solid profitability.
Excluding the one-off items that were incurred in the prior year period, it is fair to say that third quarter fiscal 2018 performance was encouraging. In the third quarter of fiscal 2018, we added more than 24,000 new subscribers, up 23% year-over-year.
Revenues increased by 22% year-over-year to 245 million renminbi. As of December 31, 2017, the accumulated subscriber base surpassed 640,000 and this already taking into consideration the reclassifying of 4,598 private cord blood units to donated cord blood units during the reporting quarter.
As a result from the robust growth of new subscriber sign up, revenue generated from processing fees and other services in the reporting quarter increased by 26% year-over-year to 163 million renminbi. Revenues generated from storage fees increased by over 14% year-over-year to 82 million renminbi.
As a result of the growth in new subscriber numbers, revenue generated from processing fees and other services in the reporting quarter increased by 26% year-over-year to 153 million, revenues generated from storage fees increased by 14% year-over-year to 82 million. Gross profit for the third quarter of fiscal 2018 increased by 13% year-over-year to 198 million renminbi.
Gross margin remains solid at 81%. Gross profit last year amounted to 176 million renminbi, which included a 17 million renminbi one-time reduction of direct cost associated with an advisory service which we provided.
Excluding the impact of this reduction, gross profit for the third quarter of fiscal 2018 actually increased by almost 25%. Operating income for the reporting quarter was 78 million renminbi compared to 102 million renminbi of last year.
During the third quarter of the last fiscal year, we recorded other operating income of over 26 million renminbi, which related to a public bank collaboration project. No such income was recorded in the reporting period.
Excluding the 17 million renminbi reduction in direct costs and 26 million renminbi, other operating income from the collaboration project, pro forma operating income for the third quarter of fiscal 2018 was increased by more than 33%. And pro forma operating margin increased from 29% in the third quarter of last year to 32% of the reporting period, which were many attributable to a top line growth and margin improvement.
Depreciation and amortization expenses for the third quarter pf fiscal 2018 remained at 13 million renminbi, same as last year. Share based compensation expense increased to 20 million renminbi for the reporting quarter from 16 million renminbi of last year.
Operating income before depreciation, amortization and share based compensation expenses was 111 million renminbi compared to 130 million renminbi of last year. Once again, last year operating income before depreciation, amortization and share based compensation expenses includes one-time items.
On a pro forma basis removing - the removing the two one-time item, operating income before depreciation and amortizations and share based compensation expenses grew by approximately 27% year-over-year. Sales and marketing expenses for the reporting quarter grew to 60 million renminbi from 47 million renminbi of last year.
This is a result of high incentive costs, increased marketing and promotion activities and attempts to broaden our marketing channels. As a result, certain market expenses as a percent of revenue increased slightly to 25% from 23% of last year.
General and administrative expenses for the reporting quarter amounted to 57 million renminbi compared to 51 million renminbi of last year. The increase was mainly contributed by the write-off of 5 million renminbi account receivable, due to their reclassification as donated units, as well as higher share based compensation expenses.
That aside, we continue to keep other good G&A expenses items on a tight leash. Therefore, general and administrative expenses as a percentage of revenues decreased to 23% from 25% of last year.
Income before tax for the third quarter of fiscal 2018 increased by 17% year-over-year to 86 million renminbi because neither interest expense nor impairment loss on available for sale equity, securities was incurred during the reporting period. Income tax expense for the reporting quarter was 16 million renminbi compared to 17 million renminbi of last year.
Net income attributable to the company's shareholders for the reporting quarter increased to 70 million renminbi, up 25% year-over-year. Net margin for the reporting quarter increased to - increased to 29% from 28% of last year.
Basic and diluted earnings per ordinary share for the reporting period was RMB0.61 compared to RMB0.70 of last year, due to the issuance of additional shares when the convertible notes were converted in April 2017. As of December 31, 2017, our group had cash and cash equivalent of over RMB4 billion, aggregate current and non-current deferred revenues amounted to RMB2 billion, net cash provided by operating activities for the third quarter of fiscal 2018 increased to 183 million renminbi from 170 million renminbi of last year.
These are just some of the highlights of our financial results for the third quarter of fiscal 2018. We are happy to kick off the Q&A session now.
Operator
Thank you. [Operator Instructions] Your first question comes from Patrick Terrell from Terrell Group Management.
Patrick Terrell
Good morning, Albert. What a terrific quarter and year you've had.
I noticed that the cash has been piling up and I was wondering if there's been any discussion about putting a shareholder dividend in place or if that's been talked about at all to the board level?
Albert Chen
Thank you for the question. At the board level we have discussed about the Department of Capital, as well as the future development of the company, we'll make sure that the capital has been deployed in the appropriate - deployed in appropriate mechanics full for the growth of the company, as well as for the benefit of all shareholders.
Now in terms of whether or not the capital will be immediately used for dividends or share repurchases or other potential opportunities, we have not reach a announceable stage at this time, but we will sure keep the market abreast of the - any developments if we have any conclusions.
Patrick Terrell
Thank you.
Operator
Thank you, Patrick. Any more follow up questions?
Your next question comes from the line of Mike Schmitz from Jayhawk Capital. Please go ahead.
Mike Schmitz
Hi, Albert. Again, fantastic quarter, once again you guys have practice [ph] a series of these now which is just great to see.
A couple of administrative things, in terms of - could you update us on the breakdown by province of the new subscribers for the quarter?
Albert Chen
In terms of the new subscriber breakdown, roughly approximately two third of new subscribers came from the Guangdong market and the remaining basically is even split between Beijing, as well Zhejiang.
Mike Schmitz
Okay. And do you have any guidance that you can provide for the number of subscribers for fiscal 2019?
Albert Chen
We will provide the guidance when we announced the fourth quarter result for fiscal '18, which based on our prior practice we normally announce the fourth quarter results in June of each year. By then we will announce the full year - sorry the guidance for fiscal '19.
But for fiscal '18, as we highlight that in the CEO remarks, the guidance for fiscal '18 should be anywhere between 88,000 to 92,000.
Mike Schmitz
Okay. Thank you.
And finally I think - I know you've - I've discussed this before, but in terms of the investment the China Cord has in the Shandong province. Now that it's the 76% that we don't own is controlled by a public listed A-share company.
There are publicly available all numbers for their revenue and income and so forth and it looks like they're on track this year. You know this fiscal year if you match up the quarters with ours for about $180 million in revenue and $90 billion in net income of which we get about 24% which would be - it's clearly a significant amount than the investment for the - sort of China Cord.
And I understand there's maybe different accounting treatments for that might affect those numbers a little bit. So it may not be apples-to-apples.
But I would appreciate any comments you can make about that investment and you know, any possible you know, ongoing updates that you could provide to help investors understand the value that this represents to the company?
Albert Chen
Thanks for the question Mike. Well, first of all I mean, we are happy to see Shandong couple of them performing beautifully and I guess - but at the same time I think it's more important for us to make sure that our operation perform as well.
But with that being said, obviously, we are happy to see good numbers coming out from the Shandong cord blood bank. I understand that based on your interpretations of the numbers, I got the - I can't help to think that you'd like to look at the China Cord investment in Shandong cord blood bank, rather than from an accounting point of view you seem to be looking at it from a either an equity pickup perspective or you look at that from a sum of parts approach.
I think I should not discourage investor from trying to evaluate the company from different mechanics or different angles. But as you can see the accounting treatment is sometimes may - it may not be entirely the same as financial metrics which profession and process such as yourself were employed.
I guess this is all I can say for now Mike.
Mike Schmitz
Okay. So there is - okay.
I appreciate your help.
Operator
Thank you. There are currently no more questions in queue.
[Operator Instructions] Your next question comes from Jeff Smith from Mutual Tri-State [ph]. Please go ahead.
Unidentified Analyst
Yeah, I was curious what's your future plans in the next few months are to try and increase your market value? Your share price or any marketing plans that you have in the next few months?
Albert Chen
All I mean, in terms of the marketing or investor outreach, my colleague and I are actively looking to opportunities to reach and discuss with various investor, and also keeping an open dialogue with the investment community. I think for some [ph] conferences and also insets or [indiscernible] itself occasionally we have e-mails inputs and also we have - received where we go on calls with investors.
So the - I'll say the investment, the communication with the investment community is an ongoing work. So it doesn't end with the next couple months and we will continue to reach out to the investment community and make sure that the story of China Cord or Global Cord in the future is appropriate heard and discussed.
So to answer questions that we normally go on the road to three times a year and we meet with those investor and discuss with investors and shareholders on a routine basis, I mean, whenever people get some questions they just email me, I just all the time talk to them.
Unidentified Analyst
Okay. Thank you.
Operator
Thank you. Your next question comes from Adam Kies from Morgan Stanley.
Please go ahead.
Adam Kies
Hi. And congratulations again on a great quarter.
I had a question for you, I've found several phone calls, but along with the name change, the Global Cord Blood this is the first time I've ever heard you mentioned global growth and global business. Are there any plans upfront now for expanding your footprint globally out outside of China?
Albert Chen
Please understand we are under confidentiality obligation to answer any questions. So - but I think from a broad stroke perspective, we are actively looking into opportunities both inside and outside of China for the purpose of and reaching our service portfolio and the possibility to expand services beyond cord blood banking.
So this is one of the - I would say one of call focused on our growth side and which also is consistent with part of reasons why we change on. We intend to change our name from China Cord to Global Cord to better align with our future development directions.
Without giving away too much, I would say that we will still continue to focus on services which consists of - which synchronize with our core competencies and that is basically cord blood, stem cells related storage and postnatal or prenatal services.
Adam Kies
Thank you.
Operator
Thank you. There are currently no more questions in queue.
[Operator Instructions] Your next question comes from Jeff Neal [ph] from Merrill Lynch. Please go ahead.
Unidentified Analyst
Good morning, Albert and congratulations on the good quarter. One item of note, I think your expenses related to doubtful accounts increased this quarter.
Do you see that as a change in trend or was that more of a one-time expense? And correct me if I'm wrong.
Albert Chen
Hi, Jeff. This is - if you - I'm pretty sure that you have been tracking the company financial and operational performance for the past couple quarters, if not even longer, than you probably are aware that we are in the consumer businesses.
So basically on every accounting and on every period end we will review our account receivables and make sure that we have provide sufficient accounting provisions to ensure that the accounting statements consistent with GAAP. So based on our prior practice, I don't think this is a one-time event.
I think this is an ongoing effort to improve the cash conversion cycle to companies and as well as for people who just simply don't pay out. We just have to suspend our services just the way it is.
But with that being said, I mean, as you compare the amount of subscribers that we've written off or overdue amount versus the number of people had sign up outside the numbers seems to be within our management expectations. But please don't get mad - don't get don't get me wrong is that the we will continue to review our - the quality of our account receivables and if there is a need we will write off to all reclassified, our private cord blood units and donated cord blood units if necessary.
But so far I think if you look at the revenue, as well as the cash flow that we generated from operations, I think we are still in a very strong position.
Unidentified Analyst
Absolutely. With regards to new subscriber contributions, you referenced in the news release about provincial strength in Guangdong.
Could you provide it's an approximate percentage breakdown of new subscribers per province?
Albert Chen
It's about two third of our new subscriber for the third quarter of fiscal 2018 came from the Guangdong market and the remaining part is basically evenly split between Beijing and Zhejiang.
Unidentified Analyst
And with regards to - you also mentioned in the release the development of potential pilot programs outside of your main channel which is the hospitals. Could you give us a little bit more color on those initiatives please?
Albert Chen
Those are initiatives that target MNC with high expect concentrations or I'll say has a reasonable portion of them tied [ph] which in our view classified as a mid to the high income earning class. So instead of just going into hospital alone, we now reach out, I mean, to certain multiple national corporations as well to has presence in Beijing, Guangdong and Zhejiang namely Beijing.
And then for those companies or potential entities that got the higher concentration of experts and professionals those who will be our main target I should say.
Unidentified Analyst
Interesting. What would you say is on average when you guys pick up a new subscription?
How close is it to the point of birth? Approximately what week of pregnancy is your average subscriber becoming a subscriber?
Albert Chen
Normally, I would say that we are actually pretty late in this stage of pregnancy, when people sign up as our subscribers. But it also varies as well because we have handled clients where they are like - I don't know, hours away from the actual delivery time tool.
For example three or four months prior to their expected delivery time. So it varies.
Unidentified Analyst
Yeah, I would expect, but in general though it's later in the pregnancy as opposed to midway or something like that…
Albert Chen
Correct…
Unidentified Analyst
Later in the pregnancy cycle, because as you can imagine the couples will have lot in their mind at the early stage of the pregnancy. So they are relatively less receptive to add to our marketing effort.
Normally is later stage in the pregnancy cycle, sorry. Okay.
And just last and to confirm, I think I heard this earlier, you revised the total annual subscriptions in 20 17 fiscal year to a range of 88,000 to 92,000 is that correct?
Albert Chen
That is correct. And while Jeff you touched on the topic, you'll notice that this year we have kind of deviate from our prior practice.
Our prior practice normally that we announce the annual guidance in June of it - at the end of June in every year and normally we stick with it. But shying from a couple of quarters ago we start updating the numbers because we think that the market will appreciate more up to date guidance and also provide a better picture to the investment community as well.
So you are correct, that we have revised up our FY '18 guidance in terms of new subscriber numbers from original ranges 80 to 84,000, now is up to 88,000 to 92,000.
Unidentified Analyst
All right. Thank you very much Albert.
Albert Chen
Thank you for your question.
Operator
Thank you. There are currently no more questions in queue.
[Operator Instructions] At this point, there appears to be no further questions. I will now turn the call back to Ms.
Kathy Bian. Please go ahead.
Kathy Bian
Thank you, Anna. This concludes our earnings conference call for the third quarter of fiscal 2018.
Thank you all for your participation and ongoing support. Have a great day.
Anna, you may now disconnect. Thank you, all.
Operator
Thank you. Ladies and gentlemen, that does conclude our conference for today.
Thank you for participating. You may all now disconnect.