Feb 26, 2019
Operator
Hello, ladies and gentlemen. And welcome to today’s Q3 Financial Year 2019 Global Cord Blood Corporation Earnings Call.
Throughout the call, all participant will be in listen-only mode and the presentation there will be a question-and-answer session. [Operator Instructions] I’d now like to hand the call over to our speaker today, Kathy Bian.
Kathy, please begin.
Kathy Bian
Thank you, Hugh. Good morning, everyone.
Welcome to our fiscal 2019 third quarter 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 interest of time, we will begin with our CEO’s remarks followed by a detailed report of our fiscal 2019 third quarter financials given by our CFO, Mr. Albert Chen.
Our management will be available to answer questions during the QA session. Today, on behalf of our CEO, Tina, I will read her prepared remarks.
Let’s begin our presentation. Good morning, investors and shareholders.
Welcome to our fiscal 2019 third quarter earnings conference call. Good morning investors and shareholders.
Welcome to our fiscal 2019 third quarter earnings conference call. Due to the lasting effect of an exciting consumer sentiment in the last quarter consumer behavior in the reporting period became more cautious.
Despite vigilance from the demand side, we managed to recruit 23,663 new clients. This represents a year-over-year decrease of 2%, but a quarter-over- quarter increase of 3%, in line with our expectation.
By the end of December 2018, our accumulated subscriber base had surpassed 728,000, further enhancing our leading position in the cord blood banking industry. The management team was able to successfully maintain steady operations in the reporting quarter and our overall margin remained stable.
Our three divisions continued their solid performance as they had in the previous two quarters. Guangdong once again led the growth of our business.
Beijing held a series of promotions and marketing activities to reward clients for their continued support over the past 16 years. Zhejiang passed the routine inspection from National Health Commission, and their work was again recognized by the inspection team.
During the reporting quarter, the Beijing and Guangdong governments rolled out specific policies to support stem cell processing, storage and treatment experiments based on stem cell technology and applications. We leveraged the opportunity to promote the potential use of cord blood stem cells to our target clients in order to stay on track with our conversion rate.
Looking into our fourth quarter of fiscal 2019, we expect that there will be fewer babies born in Beijing and Zhejiang as compared to the prior year period. Meanwhile the economy in China continues to trend up at a slower pace and uncertainties of global trade and industry regulation remain.
Taking these factors into consideration, we will continue to stand ready to further adjust our marketing strategy whenever necessary. We remain committed to achieving our new subscriber target for fiscal 2019 which is between 85,000 and 90,000.
Looking ahead, we will remain vigilant on macro economic trends, market conditions, industry policies and their impact on the cord blood storage business. At the same time, we will stay agile.
We will be ready to adjust our business in response to changes in the market and market demand. We will continue nurturing and penetrating existing domestic markets.
We will also carefully explore business opportunities to expand and diversify our revenue stream. This concludes my remarks regarding our fiscal 2019 third quarter results.
Thank you for your ongoing support of GCBC. I will now 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. Thank you for joining our call today.
During the third quarter revenue increased by approximately 4% year-over-year to RMB254 million and the increase was mainly attributed to growth from direct revenue, which partially offset by the year-over-year decrease in new subscribers. Storage revenue for the third quarter increased by approximately 19% year-over-year to RMB97 million.
And our accumulated subscriber base exceeded 728,000 by the end of December 2018. Storage revenue now accounted for approximately 38% of the total revenues up from 33% of last year.
In spite of the cautious market behavior in the reporting quarter, we managed to recruit over 23,000 new subscribers, which represented a 2% decrease year-over-year, but 3% increase quarter-over-quarter, which is on track with our new subscriber targets for the current fiscal year of 2019. Consequently the processing and other revenue for the third quarter amounted to RMB157 million.
Tracking revenue growth, third quarter gross profit increased by 4% year-over-year to nearly RMB206 million and gross margin improved slightly to 81%. Sales and marketing expenses in the third quarter increased by more than 8% year-over-year to RMB65 million.
During the reporting quarter, we increased the sales force to more than 750 people, representing over 20% year-over-year increase in terms of headcount. We also hosted and sponsored multiple conferences and exhibitions to promote industry advancement to our potential clients, as well as the broader medical community, pushing our sales and marketing expenses to more than 25% of revenues.
General and administrative expenses for this quarter increased by 21% year-over-year to RMB45 million, largely due to the absence of share based compensation expense. General and administrative expenses as a percentage of revenues was down to less than 18%.
Due to the absence of share based compensation expense, operating income increased by 18% year-over-year to RMB93 million despite higher sales and marketing spending in the third quarter. Operating margin improved to 36%.
Operating income before depreciation and amortization and share based compensation expense, which we refer to as non-GAAP operating income was RMB105 million. Non-GAAP operating margin was 41%.
Depreciation and amortization expenses in this quarter remained at RMB13 million. Share based compensation expense for the same quarter last year was approximately RMB20 million, whereas no such expense has been recorded since April 1st 2018.
In the third quarter we recognized RMB28 million in unrealized holding loss for equity securities as other expenses under the new accounting standard. Such mark-to-market loss was mainly attributable to our investment in Cordlife Group Limited.
In the same quarter of last year, we recorded a similar loss of RMB3 million but it was recorded as other comprehensive loss, which means it doesn't flow through the P&L. As the increase in operating income was hit by the mark-to-market loss, net income attributable to the company's shareholders for the third quarter of fiscal 2019 was RMB61 million.
Net margin for the reporting quarter was 24%. Total number of shares issued and outstanding as of December 31, 2018 was 121.55 million, basic and diluted earnings per ordinary share for the third quarter were RMB$0.51.
These are just the highlights of our third quarter results. We're now happy to take any questions that you may have.
Operator
Thank you. [Operator Instructions] Our first question is from the line of Mike Schmitz at Jayhawk Capital.
Please go ahead. Your line is now open.
Mike Schmitz
Hey, Albert and Kathy. Congratulations on another good quarter.
I have a couple kind of simple mechanical questions and then I got a follow up if you allow me to. The first question is could you provide the kind of percentage breakdown by province for the new subscribers?
Albert Chen
Hi, Mike. For the third quarter 64% of new subscribers were derived as from the Guangdong regions or from our Guangdong market, 15% from Beijing and the remaining from the Zhejiang market.
Mike Schmitz
All right. Thank you.
And then on the payment plan breakdown, could you just give me a quick rough number for how many new subscribers are taking the full upfront payment plan versus the kind of payment processing fee and the pay storage fees separately?
Albert Chen
No problem. For the third quarter approximately 55% of new subscribers elected the normal payment option, approximately 38% of new subscribers elected the upfront payment option also we call bullet payment option.
And the remaining are from other payment method like instalments and payment promotions.
Mike Schmitz
Okay. Great.
Thank you. And then maybe I missed this, but how are you guys providing any guidance yet for a number of subscribers for the fiscal 2020 year?
Albert Chen
Fiscal year 2020 we will provide the guidance in - when we announce the fourth quarter results. The current guidance is for the current fiscal year only and it is for the year ending March 31, 2019 and the new subscribers target is between 85,000 to 90,000, but this is only for the current fiscal year.
Mike Schmitz
Okay. Thank you.
And then you know, I know we kind of talk about this quite a bit, I do anyway. In terms of the Shandong province that you guys own 24% of that - you know, as we've discussed, really reflected anywhere in any of the financials, value wise or earnings wise, yeah, I guess I would ask again that you know, maybe we consider another kind of non-GAAP measure in addition to your non-GAAP operating income, but to provide kind of another non-GAAP number that could include some of the Shandong operations that would help give investors a better sense of the true value that's being generated by the company?
Albert Chen
Interesting, Mike. I think it is certainly very interesting propositions.
And let me let me take this back and see what the team thinks about it because this is a disclosure on the U.S. side which require Shandong to provide a U.S.
GAAP numbers and see whether I need to consult with them before we actually do such a thing. But it certainly is interesting proposition.
Mike Schmitz
Sure and like I said, I mean, I'm talking about a non-GAAP number, something that would be clearly labelled, it's not - you're not subject to U.S. GAAP standards, but - and I'm sorry, I have one final question, I'll let you go.
You reference the Cordlife Group Limited, you know, it's kind of been a drag on earnings the last couple of quarters because of the change in the accounting law. Am I correct that if that share price of that company were to go back up that would be an increase and a positive result to our – to the earnings of the company?
Albert Chen
I think one way or the other. As I mentioned in the earnings call, this is more or less a change in accounting presentations.
In the prior years the - I would say the mark-to-market impact was recognized in the other comprehensive sections of our payment of operations. And but because of the new accounting standards, the impact into flow through to P&L.
But one way or the other, I mean, this is not a reflection of the actual performance of the companies and this is more an accounting presentations. I guess, many sophisticated investors such as yourself will certainly look beyond that.
Mike Schmitz
Great. My question actually was referring more to like you know, it's not just a right - you know included if it marks down, but it also goes the other way.
So if the value would increase that would be a positive - you know, coming out...
Albert Chen
I'm certainly more than to see they certainly coming back up.
Mike Schmitz
But if it did though that would be recorded on the income statement in just the same way as…
Albert Chen
Yeah, there's still non-operational.
Mike Schmitz
Yeah, right. Understood.
All right. Thank you, guys.
Albert Chen
Thank you, Mike.
Operator
We are now over to the line of Jeff Neal at Merrill Lynch. Please go ahead.
Your line is now open.
Jeff Neal
Thank you. Good morning, Albert.
Good morning, Kathy. My questions relate to the rather significant increase in commission to salespeople or representatives that you have out in the field that occurred during the quarter.
Obviously this is a pretty big bump. Were there - was there any one province in which this hiring additional people was concentrated first of all?
Albert Chen
The expansion in sales force is more concentrated in both Beijing – as well in both Guangdong, as well as the Zhejiang province. It is – it goes beyond just to replenish some of the losses that we had in the prior quarters.
But they also reflect the fact that we want to - in a challenging market we don’t want to scale back our marketing effort. And so we are actually expanding our sales and marketing effort.
As you recall in our CEO’s remarks early on this earnings call, we did highlight the fact that we are based on what we have seen the data that is currently available to us, we are expecting the newborns to come down at least for the next couple of months. In light of that, we think that we should keep the - keep our marketing effort - actually we have to turn up our marketing effort just to make sure that we are penetrating further and deeper into the market.
So which is part of the reason why we are expanding our sales force. And while we - as you know we constantly adjust and rationalize our sales force.
I think right now we are kind of stabilizing at the current level. But if the markets have made a turn in favorable returns then we will not rule the possibility that we will adjust the size of our sales force again.
But meanwhile we are between the 730 to 750 range.
Jeff Neal
And does that represent - do you have these people in more locations or are you simply increasing the number of people per location. How - what is the dispersion of the sales force in that context?
Albert Chen
Actually a little of both, Jeff. In hospital, which we have a high conversion rate, we have increased the number of sales force, but they are also being allocated on five different shifts.
At the same time we are covering more - study more remote hospitals as well. So it's a little bit of both.
Jeff Neal
Okay. Thank you.
Operator
We now go over to Cyrille Pichot at Altimeo. Please go ahead Cyrille.
Your line is now open.
Cyrille Pichot
Hello. Thank you for taking my question.
Just a question more about capital markets. Based on my understanding with you know, by the discussion with Kathy Bian, especially, I understand that you would like to increase the liquidity and the shareholder basis of the stock.
So based on that and in the current context would you consider if - of course, this is legally possible to get a dual listing of Global Cord Blood in Hong Kong or in China. Maybe in China decision to compare in terms [ph] of the launch of the new tech board which is not yet launched, but it's in the process often potentially in few months now.
You will have the possibility potentially to have a dual listing. So just my question is that would you consider is that if it's possible?
Thank you.
Albert Chen
Thank you for the questions. I think in the context of whether the company should seek additional listing for the purpose of improving the publicity, as well as the liquidity of the company, I think to answer that question, I think we are considering multiple options.
Certainly having a more than one listing venue may help to bring in additional investor base, but at the same time there are cost associated with that. So to answer the questions is that, at the current juncture we are not considering seeking additional listing locations or having a few listing locations, but we did consider that proposal in the past, and we decided not to go along with it because of the costs associated.
But we will not rule the possibility that we may revisit the topic in the future if it deems beneficial to everyone.
Cyrille Pichot
Okay. Thank you.
Operator
Before going on to the question which is Kent McCarthy at Jayhawk Capital. [Operator Instructions] Mr.
McCarthy over to you.
Kent McCarthy
Hey, Albert. Hey, Cathy.
Most my questions have been answered. But is there any effort marketing wise to keep reading in the industry to expand product offerings to the - to the mother and you know any vertical expansion efforts?
Albert Chen
Hi, Kent. Excellent questions.
There has been - we are actually looking into that specific topic and see whether we can actually expand our revenue sources both onshore and offshore actually. On one hand just to expand the services, along the line where our existing client base will wait - will be able to benefit from, services that involve for example the well being of the mother, as well as the child is something that we look closely into.
A lot of people ask me whether the company is interested in diagnostic services. The question is yes, we have looked and - we have looked into it.
If it makes a lot of commercial sense, is something that we would definitely consider.
Kent McCarthy
Okay. Thank you.
Operator
We now go to Joshua Raizin at Cedar Street Management. Please go ahead.
Your line is now open.
Joshua Raizin
Hi. Thank you for taking my question.
You continue to have significant cash balances, which are throughout the metrics of the company on an earnings basis, which may limit some investor interest on their initial screen. How does the company think about this and what are the plans for these large cash balances?
Thank you.
Albert Chen
Thank you for the questions. As you know, starting from last year, the company has started giving out dividends.
And we also want to maintain a steady dividend stream as possible - as one a way to return to capital back to the investor. But at the same time from in terms of the company's long term development we retain part of the capital the fact from day-to-day operations.
We also retain capital for potential expansion need. Further to what just been - for instance I referred to Mr.
McCarthy’s questions a moment ago, we remain active in the space in the - on the M&A front and potential collaboration front to see whether we can – to see how we can best leverage our existing client base, as well as our industrial expertise. So I asked the question early on that whether or not we want to look into other related services, the answer is yes, we are actively looking into that and at the same time we also want to potentially diversify our revenue streams by going offshore.
So as you know, I mean, all of the company revenues are now currently to divide this from the PRC market. And with the PRC regulations subject to review at the end of 2020, we believe that it is only prudent for the company to expand our revenue streams rather than just being 100% focused within China.
So to answer the question is that, we – part of the capital is retained for the purpose of expansion, we will not rule the possibility of continuously returning capital back to the investor whether in the form of dividend or share repurchases. So that's what we are currently thinking about capital allocation.
Joshua Raizin
Okay. Thank you very much.
Operator
That was the question we have time for today. So Kathy back to you for any closing comments at this stage.
Kathy Bian
Thank you, Hugh. This concludes our earnings conference call for this quarter.
Thank you very much for your participation and support. Have a great day.
Q You may now disconnect. Thank you.
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