Sector financial performance:

This company, who primarily provides materials and tutoring service for students to improve performance in courses work and college admission tests and as well recruiting service for colleges, has been grouped into online learning-high school students sector in education industry.

It seems that demand for traditional textbook rental and sales is not strong and profitability has been shrinking in the past several years. Companies in this sector increasingly turned to service-related business to generate revenue and profit due to its high margin.

In the process of spinning off textbooks rental business, companies improved the gross margin (a typical gross margin is currently 72% up from 37%). Therefore, when SG&A as percentage of sales was also improved due to the increase in sales from online subscription while increased spending on general administration and technology-related staff’s expenses, the typical operating margin among those companies has gone down to about -4 from -22% about four years ago. Correspondingly, the income and cash flow gained growth significantly benefiting from improved margin and increase in sales of online service.

According to our analysis, the current companies’ enterprise price/sales ratio is 13 with an interest/EBITDA ratio of 47%.

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Company performance:

Revenue from materials rental business, which had been one of major sources of this company’s revenue, was gone in 2017 due to adjustment of business, after which part of the revenue from this segment has been converted in service revenue resulting in the decrease in total revenue but improved gross margin. Its core service business has gained organic growth in the past four years.

The first six months of fiscal 2018 compared with the same period of 2017

Net sales increased about 38% primarily due to increase in revenue of services.

Fiscal 2017 compared with 2016

Net sale was flat primarily due to decrease of 100% in rental and sales services offset by increase in service. The decrease in rental and sales is a result of adjustment of business operating. Revenue from its core business-service increased by 40% due to general increase in courses work related service and adjustment of business operating.

The first nine months of fiscal 2017 compared with the same period of 2016

Net sales decreased about 5% primarily due to decrease in rental and sales services. The decrease in rental is a result of adjustment of business operating. Revenue from its core business-service increased by 42% due to general increase in courses work related service, acquisition, and adjustment of business operating.

Fiscal 2016 compared with 2015

Net sales decreased about 16% primarily due to decrease in rental and sales services. The decrease in rental is a result of adjustment of business operating. Revenue from its core business-service increased by 37% due to general increase in courses work related service, acquisition, and adjustment of business operating.

Fiscal 2016 compared with 2015

Net sales decreased about 1% primarily due to decrease in rental. The decrease in rental is a result of adjustment of business operating. Revenue from its core business-service increased by 51% due to general increase in courses work related service, acquisition, and adjustment of business operating.

As a result of removing its textbook rental business, this company’s gross margin was improved significantly due to less books’ depreciation and order fulfillment costs (72% currently). During the same time, the SG&A as percentage of sales increased to 47 % in 2017 and then down back to 43% in 2018 and the technology expense as percentage of sales up to 33% in 2018. Its operating margin actually has been improved to -4% in 2018 (based on 12 months trailing data). Earnings and cash flow has been improved during this period as organic growth in its service business and adjustment in rental business.

Stock price

This stock currently has a companies’ enterprise price/sales ratio of 13 ($31.5). We think that its stock is being relatively overvalued considering that, while it seems it has successfully improved its margin and thus cash flow by transferring its rental business to third party, there is much uncertainty in the potential growth in its core business- online study service due to a lack of percentage by which its average 40% increase in service revenue in the past three years come from new subscriptions for its online service.