China Distance Education Holdings Limited (NYSE:DL) Q2 2020 Earnings Conference Call - Final Transcript
May 22, 2020 • 08:00 am ET
Ladies and gentlemen, we will now begin the question-and-answer session.
Your first question comes from the line of Greg, Sidoti. Please ask your question.
Hey guys, thanks for taking my questions. First of all, I guess, just can you talk a little bit about the gross margin outlook and how to think about that going forward with the sort of pull-forward in demand. I think we are already anniversarying some of the rationalization on the real estate side, given the move last year. Is there anything left on that? How should we be thinking about the gross margin?
Yes. Thank you, Greg, for your question. Regarding gross margin, you can see that we have been quite successful in controlling our costs, particularly salary and related rental and related lecture fees. We maintained our headcount very steady and very stable and we continue to expect to do so, and we've been controlling our rent expense. In fact, in May, we have exited our leases of the third and fourth floors of our Haidian headquarter building in favor of a more reasonable rental expense at our MHL location. So, we continue to expect some savings on the rental side going forward.
Having said that, when we look to the third quarter, given the revenue decline expectation, we do expect a modest gross margin -- gross margins to come down a little bit compared to the year ago period given that revenue reduction. But keep in mind, COVID-19 is the reason for the revenue reduction and it represents a near-term jolt for the company. The long-term business fundamentals, as you can see over the last four quarters, a very nice operating margin expansion, are very much intact that we expect to resume a track of continuing to grow our profitability in the future quarters and years ahead as we get beyond COVID-19.
Great. That's helpful. And then, can we just move down to the SG&A side, how should we be thinking about the marketing, just given expectations going forward? And then, also on, maybe, commission to the agents?
Sure. In terms of selling and marketing expense, I mean, that is certainly one area where given the expected revenue decline in the third quarter, we can continue to look for opportunities to rationalize those expenses given the cash receipts' reality. And so, we will continue to manage those expenses effectively as we have done so in this most recent quarter. On the G&A side, we continued to manage those expenses very carefully as well. So, net net, I think when you look at the third quarter, we are likely in a position to still be profitable, but very slightly profitable, I think, on an operating basis, given the expected revenue decline in the third quarter.
Great. That's helpful. And then, just one more. Can you just talk big picture about maybe the price elasticity? I know this was an unexpected event, but we kind of went through some discounting and prior to that