iKang Healthcare Group (KANG) Q4 2017 Earnings Conference Call Transcript

iKang Healthcare Group (NASDAQ: KANG)
Q4 2017 Earnings Conference Call
Jun. 22, 2018 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and thank you for standing by for iKang's fiscal fourth-quarter and fiscal year 2017 earnings conference call. At this time, all participants are in a listen-only mode. After managements prepared remarks, there will be a question-and-answer session. Today's conference is being recorded.

I would now like to turn the meeting over to your host for today's conference, Christy Xie, director of investor relations.

Christy Xie -- Director of Investor Relations

Thank you, operator. Good morning and good evening. Welcome to iKang's fiscal fourth-quarter and fiscal year 2017 earnings call for the period ended March 31, 2018. I am Christy Xie, director of investor relations, and with me today on the call are Mr. Lee Zhang, our chairman and CEO, and Mr. Luke Chen, our CFO. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call.

By now, you should have received a copy of our press release that was distributed on June 21, 2018, after market-close, Eastern Time. If you haven't, it is available on the Investor Relations section of our website. Before we get started, let me review the forward-looking statements regarding this conference call; that is, statements related to future, not past events often address expected future business and financial performance and financial conditions and often contain words such as "will," "estimate," "project," "potential," "plan," or "goal." iKang may make also written or oral forward-looking statements in other reports, in presentations, in materials delivered to shareholders, and in press releases. In addition, iKang's representatives may make oral forward-looking statements.

Forward-looking statements by their nature address matters that are indifferent degrees, uncertain, such as statements about the company's goals and strategies; its future business development, financial condition, and results of operations; its ability to retain and grow its customer base and network of medical centers; the growth of and trends in the markets for its services in China; the demand for and market acceptance of its brand and services; competition in its industry in China; relevant government and policies and regulations relating to the corporate structure, business industry; fluctuations in general economic and business conditions in China. Further information regarding these and other risks is included in iKang's filing with the Securities and Exchange Commission. iKang undertakes no duty to update any forward-looking statements, except as required under applicable law. During this call, we will be referring to GAAP and non-GAAP financial measures.

We believe that non-GAAP measures are more representative out of how we measure the business internally and they are reconciled to GAAP in the tables attached to our press release, which can also be found on our Investor Relations website. Please note, that all numbers are in U.S. dollars and all comparisons refer to year-over-year comparisons unless otherwise stated. With that, I will turn the call over to our chairman and CEO, Mr. Lee Zhang. Lee, please go ahead.

Ligang Zhang -- Chairman and Chief Executive Officer

Thank you, Christy, good morning and good evening. Thanks to all of you for joining us on this call. I hope you had the opportunity to look at the earnings release we published and the presentation that we will use to comment on our results. Both are available for downloading from our website.

Again, all numbers are in U.S. dollars and all comparisons refer to year-over-year comparisons unless otherwise stated. I will begin the call today with a few opening remarks regarding our results, followed by highlights of a key business and a corporate development. And after that, Luke will provide details on the financial side before opening the floor to questions.

iKang closed its fiscal year 2017 well-positioned for strong and sustained growth in the years ahead. We have exceeded the top end of our revenue guidance, with RMB 3.74 billion for the fiscal year ended March 31, 2018. There are few key takeaways from our fourth-quarter and our full fiscal-year results that speak to the work we have been doing to position our business for the future. Some relate to the anticipating and accommodating the underlying trends in our industry and some relate to our focus on strong execution.

The first important fact to note is the continuous enhancement in our gross profit and our growth [ph] margin from a strong traction of revenue growth. Please go straight to Slide 4 for the highlights of the fiscal first quarter and the full fiscal year ended at March 31, 2018. Net revenue up 48.8% for the quarter and 29.4% for the full year with robust performance across all our business segments, as well as promising trends for our value-added services. Gross profit of 803.7%, with gross margin at 15% of fourth quarter, as compared to 2.6% in fiscal fourth quarter 2016.

For fiscal year 2017, gross profit is up by 37.3%, with growth margin further enhanced to 42.3%. This growth demonstrates the benefit our investment in delivering high-value-added services and deriving solution for [Inaudible] expanding customer base. Next, is the growth in our core and new businesses. We have our gross [ph] revenue base and a broadening of all service offerings continues to drive our growth significantly.

Over the last several years, we have built up our capacities in value-added services leveraging on our expanding network of medical centers through self-construction and acquisition. We continue to invest in service offerings and a solution in those areas in which there is a significant customer demand such as [Indiscernible], dental services, and other services including in vitro diagnosis and genetic testing. Third, our nationwide networks creates a strong platform for our business growth slower -- come to relation in Tier 1 cities and the penetration into low-tier cities. On Slide 5 with a total of 112 operating medical centers, our network of 33 of China's most affluent cities as of March 31, 2018.

Our expansion into the fast-growing Tier 2 and Tier 3 cities is particularly exciting, as shown on Slide 6, with the averaging -- with coverage accounting for 55% of our network and contributing 36% of the total revenue for fiscal year 2017, as compared to 51% of our network and contributing 30.3% of the total revenue in fiscal year 2016. Fourth, the significant increase in quality corporate and the increased customer base reflecting only in customers visits but also in ASP. On Slide 7, for fiscal year 2017 the individual customers have shown a solid growth of 34.9% in visit with corporate customers maintaining a steady growth of 15.4%. The ASP growth hasn't been strong with a plenty of ASPs for individual customers at 2.2% and corporate at 6.3% in terms of year-over-year growth.

On a full-year basis, customer visits have increased by close to 17.9% to 6.59 million. The underlying fact driving this growth has been the increasing awareness and a demand not only for preventive healthcare but also value-added services. As many of you know, iKang has made substantial investments in broadening our value-added services offering of the past several years in anticipation of changing trends in both customer demand and the way business is transacted in our industry. Working the benefit of this investment with increasing revenue contribution and its positive impact on growth profit and the growth margin.

An example of this is on Slide 8, which has demonstrated the increasing demand for our premium service and our high-end customers after which the revenue from our three MRI centers has doubled over fiscal year 2017. This differentiated our brand strategy, looked extremely well and the right amount resonates with the change in needs of different customer segments. Last, but not least; on Slide 9, the launch of iKangCare+ and iKangPartners+ plans has been a game changer for us and has backed us to create a potentially powerful ecosystem with the preventive healthcare service in China and well-positioned as a leading service provider to capitalize on opportunity from changes that have taken place in our industry. What is notable about this is that we are now able to leverage the expertise and offerings from growing the partnerships and integration across our broadest customer base.

The marked opportunities we see are enormous. To this end, we have further expanded the ecosystem by advancing initiatives to continue the enhanced customer's engagement and a service delivery. The progress so far has to be encouraging as shown in Slide 10. Dental services have expanded their coverage covering 24 cities with 50 clinics and over 300 chair.

Since its launch in 2015, Doctor Referral Apps services have significantly increased in its coverage with 842 hospitals in 105 cities and over 108,000 doctors representing a year-over-year increase of a 40 -- 417%, 119% and 2,085% respectively. iKang App recorded over 3.3 million registered users and over 4.3 million retrieved reports. The outpatient service has increased better serving over 60,000 customers in full fiscal year 2017. For the fiscal year, we are pleased with our results and the progress in excluding our long-term growth strategies.

The continued expansion of customer base nationwide network value-added service offerings and the partnership have given us additional operates and that as a week in Tier 2 scaled our business. With that, I will turn it over to our CFO, Luke Chen, for the financial review.

Yang "Luke" Chen -- Chief Financial Officer

Thank you, Lee. Moving to the financials on Section 2 from Slide 12 to 22 as the details for the fourth-quarter and fiscal year 2017 ended March 31, 2018 are available in our earnings release. I would like to highlight the key business and the financial metrics and the focus on year-over-year comparisons, with all the numbers in U.S. dollars unless otherwise stated.

If you have not already done so, I would encourage you to download from the investors section of our website in the financial slides we posted concurrent with our press release earlier today. For the quarter, net revenue was $89.5 million, up 48.8%. On RMB basis, the growth would be 37.3%. On a fiscal-year basis, net revenue was $563.9 million, growing 29.4% or 27.8% up on RMB basis.

Revenue from medical examinations in the quarter were $66.1 million, up 43.9%, accounting for 73.8% of total net revenues. On a fiscal-year basis, revenue grew 25.2% to $451 million. Revenues from disease screening in the quarter were $10.1 million, up 71.1%, representing 11.3% of total net revenue. On a fiscal-year basis, revenue grew 58% to $55.2 million.

Revenues from dental services in the quarter were $4 million, up 128% to account for 4.4% of total net revenue. On a fiscal-year basis, revenue from dental service grow 100.3% to $17.3 million. Revenues for other services in the quarter were $9.3 million, up 42.1% and accounting for 10.5% of total net revenue. On a fiscal-year basis, revenue for other service grew 27.2% to $40.4 million.

Other services mainly included services such as outpatient service, medical consultancy services, and vaccination services. Turning to the cost of revenue on Slide 14. Cost of revenue in the quarter was $75.2 million, an increase of 28.4%. Cost of revenue for fiscal year 2017 were $325.7 million, up 24.2%.

Gross profit in the quarter rose by 803.7% to $14.3 million and gross margin was 16%, as compared to 2.6% in the same quarter last year. On a fiscal-year basis, gross profit was $238.3 million, representing 37.3% increase. Gross margin for the period was 42.3%, as compared to 39.8% in the same period last year. Gross margin was improved as expected as a result of improved ASP and the improved utilization of existing medical centers.

Turning to Slide 16, for detailed breakdown of our operating costs. In the quarter, total operating expenses were $91 million, up 150.4%. On a fiscal-year basis, operating cost was $225.9 million, representing 40.9% increase. Selling and marketing expenses for the quarter were $25.1 million, up 40.5%, representing 28% of net revenues as compared to 29.7% in the same quarter last year.

On a fiscal-year basis, selling and marketing expenses were $96.9 million, up 30% accounting for 71 -- 17.1% of total net revenues, the same as 17.1% in the same period last year. We have been keeping the same level of investment in sales and marketing to be competitive. G&A for the quarter was $65.2 million, up 266.7%, representing 72.8% of net revenue as compared to 29.5% in the same quarter last year. On a fiscal-year basis, G&A expenses was $126.3 million, up 52.5%, representing 22.4% of net revenue as compared to 19% in the same period last year.

Excluding share-based compensation expenses of $33.7 million for this quarter and $34.8 million for this fiscal year, G&A expenses was $31.5 million for the quarter, up 82.2%, representing 35.2% of net revenue as compared to 28.7% in the same quarter last year. On a fiscal-year basis, G&A expenses excluding share-based compensation was $91.4 million, up 30.1%, accounting for 16.2% of net revenue as compared to 18.6% last year. With the further expansion of the scale of our business, our operating efficiency has improved with our operating leverage. Continuing on Slide 17, our net operating loss for the quarter was $43.1 million, up 25.6%.

On a fiscal-year basis, non-GAAP income from operations was $47.2 million, up 209.7%, with operating margins at around 8.4% as compared to 3.5% in the same period last year. Slide 18 shows our non-GAAP EBITDA loss for the quarter was $32 million, up by 31.8% as compared to non-GAAP EBITDA loss of $24.3 million in the same quarter last year. On a fiscal-year basis, non-GAAP EBITDA was $89.4 million, up 69.8% as compared to non-GAAP EBITDA of $52.7 million in the same period last year. Non-GAAP EBITDA margin for the period was 15.8%, as compared to 12.1% last year.

Moving to the Slide 19, non-GAAP net loss for the quarter was $33.8 million, up by 3% as compared to non-GAAP net loss of $32.8 million in the same quarter last year. On a fiscal-year basis, non-GAAP net income was $17.5 million, up 288.1%, as compared to non-GAAP net loss of $9.3 million in the same period last year. Non-GAAP net income margin for the period was 3.1% as compared to non-GAAP net margin loss of 2.1% for the same period last year. Please refer to the table in the earnings release on Slide 22 for the reconciliation between EBITDA and net income on a GAAP to non-GAAP basis.

A quick note on our cash and bank balance in Slide 20. As of March 31, 2018, the company's cash and cash-equivalents, restricted cash, and term deposits totaled $62.9 million, as compared to $77.7 million as of December 31, 2017. That concludes my remarks. And I turn it back to Lee for closing remarks.

Ligang Zhang -- Chairman and Chief Executive Officer

Thanks, Luke. The achievement we have seen across our fiscal year 2017 has sustained our confidence in continuing to execute our strategy of revenue expansion and a service diversification through iKangCare+ and iKangPartners+ plans. This, in turn, build our long-term position as China's leading provider of applied preventive healthcare services. Looking ahead, we remain focused on driving improved execution advancing strategical investment and the strengthening of foundation for long-term sustainable growth.

Questions and Answers:

Operator

Thank you. [Operator instructions] First question comes from the line of Peter Halesworth of Heng Ren. Please ask your question.

Peter Halesworth -- Heng Ren Partners -- Portfolio Manager

Yes. I have two questions. First is, when will the go-private plan be officially announced? And you previously stated third quarter, that's in a few weeks, so I'd like to know more specifics on that. And the second question is, which investors would be getting carried through or rolled over? How does an investor apply for this privilege? Is the privilege only available for an exclusive club, and why aren't all significant investors being invited to roll over? If it's not available to all significant investors is this discriminatory, or possibly illegal by not disclosing the roll-over terms and how this privilege is provided? We're a significant shareholder, and -- as are others -- who've not yet been approached.

Some clarity and disclosure on this would be appreciated. Thank you.

Ligang Zhang -- Chairman and Chief Executive Officer

This earning call is [Inaudible] for the very purpose of updating [Inaudible] -- update the financial results, and also opportunity to update investors on performance and progress. And as we spoke before, it is not our place for the management to comment as a special committee its response for matters related to the privatization initiative. And we believe when there is more information available on the progress of a privatization and the dispatch committee [ph], and the company will release the information.

Operator

Thank you. Our next -- [Operator instructions] There are no questions at this time. Please continue. I would now like to hand the conference back to our speakers for today.

Thank you.

Yang "Luke" Chen -- Chief Financial Officer

Yes, thank you very much for joining this conference call. We wish you a good day and a good evening.

Operator

[Operator signoff]

Duration: 27 minutes

Call Participants:

Christy Xie -- Director of Investor Relations

Ligang Zhang -- Chairman and Chief Executive Officer

Yang "Luke" Chen -- Chief Financial Officer

Peter Halesworth -- Heng Ren Partners -- Portfolio Manager

More KANG analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.