Dear friends, good morning. Thank you for joining NetDragon Websoft Holdings Limited today for our 2021 interim results presentation. [Non-English content] Our presentation PPT will be broadcast on the live streaming platform. The PPT is also available for download on our company website at www.nd.com.cn under the investor relations tab in IR Website section. [Non-English content] Before the start of our presentation, please allow me to introduce the management who are joining us today. [Non-English content] Dr. Simon Leung, Group Vice Chairman and Executive Director. [Non-English content] Mr. Ben Yam, Group CFO. [Non-English content] Mr. Lin Chen, Group Senior VP. [Non-English content] Mr. Vin Riera, CEO of Promethean. [Non-English content] Now let's pass our time to Dr. Simon Leung to host our presentation today. [Non-English content]
Well, thank you. Good morning. As you can see, with my background, it is actually raining in Hong Kong, so a bit challenging. I hope you guys get to your office safely. Well, thank you for joining our call this morning. How I wish we can meet you face-to-face, but with COVID, this is actually where we have to make do. I have not traveled the last year and a half, which is very unusual. Happy to report we have a very strong finish with our first half in all sets of our businesses, gaming and education. We look at all the metrics that we track. Revenue is up, margin is up, cash is up, and profit is up. The team will take you through all this. Let us take a look at our performance in the first half.
Before we do that, let me introduce the team very quickly one more time. I will talk about the highlights. A lot of people having conversation and questions about China's new direction in terms of education, how it impacts education business. I'll talk through that very quickly. Vin will talk through the education business. Vin actually, in addition to Promethean, he has also taken over the Edmodo responsibility. We see the market actually moving towards blended solutions. It is the right time to combine Edmodo and Promethean. Vin is not only the CEO of Promethean, he actually is the CEO of the combined education business. Lin Chen will talk about the gaming business, and Ben will, of course, talk about the financials.
The board is actually talking about some of the shareholder enhancement value program that we're going to be rolling out in the second half, which is the most exciting part. That's coming at the back of very strong performance. We call it capital management. Okay, let's move on to slide number four. We talk about it's in the press release, but I'll just repeat a couple of the numbers. 19% year-over-year revenue combined growth, which is quite impressive. EBITDA is up quite a bit, 42%. Profit, both operating profit and net profit are up. Net profit up 28%. If you take a look at operating profit, it's actually up 59%. Slide number five, really great highlights as the team will go through it. In gaming, we're back to double-digit growth, which is very good in the current environment. Another highlight is actually our overseas growth, which is 29%.
In terms of education, continue to be very strong. Of course, that will improve our bottom line. Amidst the COVID challenges, logistic and freight is actually a very big challenge for us. I'm very happy to report the team has done a very good job in managing that, and then also managing the cost for freight and logistics. A quick word on our country strategy. We're continuing the rollout. We're picking up steam, continuing to work on countries like Egypt to add to it. We just signed an MOU with Thailand. We're going to pilot smart classroom capability, and then once that's completed, we're going to roll it out the rest of the country. I just hope COVID is not going to be there too.
Something that I'm very happy and excited about is we're going to be announcing a bunch of activities that's going to unlock the value of NetDragon on the back of many quarters of strong financial performance. Okay. Turning the focus on China a little bit. The market got very affected because of the change of education regulations. Overall market got impacted. I want to assure you guys is actually we are quite different from some of the other companies. I'm going to spend a couple of minutes taking you through it, or we can have more questions about it. We can go to slide number seven. The gist of this slide is actually to tell you the new policy actually doesn't affect our business, because we are not in the after-school children business.
As a matter of fact, because of the change, they put a lot more focus into the classroom, putting the right infrastructure in the classroom, putting a lot of comments and also putting a lot of focus in developing the teachers. In turn, it will benefit the students. Exactly, that is our strategy, which is blended learning solutions. The future of China education actually works very well with our strategy, which is a strategy we've been pushing since day one, and we have never changed. In a way, the market is coming to us in the rest of the world because of COVID, in China because of the new regulation and also COVID, I have to say. Let's go to page eight. Because of that, we are very clear in what we're going to be doing in China.
We have experiment quite a number of products and strategies is actually with the change of regulation. It is very clear to us our future belongs to the classroom and belongs to more like a B2G or B2B business. What we're going to do is actually we're going to be focusing on a couple of the strategies. As a result, we're going to be right-sizing our organization in China. With the right sizing, we can save some money that will go to the bottom line. I think that's very good for the investors. With that, on the bank of education, I'm going to hand it over to Vin Riera, and he's going to take you through both the Promethean business and the Edmodo business. Vin?
Great. Thank you. Good morning, everybody. I want to start by talking about the strong market demand that has been driven by COVID. COVID pushed the education segment into finding solutions for blended learning. That really led to an inelastic demand for our education products and within our portfolio. We see that the interactive classroom technology is a core part of blended learning. During the last 18 months, schools all over the globe bought more one to one devices. They bought more software programs. They looked at different ways of educating students in a blended learning environment. Our interactive front of class technology is at the absolute core of that. The demand for the higher-end technologies to support the blended learning solutions is evidenced in the results. I'll share that with you shortly. There's also a huge opportunity because there's a relatively low penetration of interactive devices globally.
About one-third of the classrooms have interactive displays on a global basis. That still means that we have significant opportunity not only to continue to replace legacy technologies in more mature markets, but also continue to go after the emerging markets, and win business and gain new share. Strong market demand is that this is the new normal of learning. The solutions that we're seeing that are being put in place around the globe are not short-term fixes for the next year or two. It's considered the new normal in how schools are going to continue to operate, not only from a face-to-face classroom setting, but also how they're going to operate in a blended learning environment. We have a very strong belief that blended learning is driving the demand today. It's also the future of our business.
From a market growth outlook, you'll see that the market grew between 2020 to 2021. It's estimated to grow 20%. We're obviously participating in that growth. We also see growth continuing on to 2022. Next slide, please. Some of the drivers that are helping with the growth of Promethean is our brand equity. I talk about this on every earnings call. Promethean has been in the education segment for over 20 years. We're well-known. We are well-respected. We have a following of teachers and administrators and IT professionals around the globe. That brand equity really helps open doors for us. The second thing is that we have a premium product. We price it and configure it specifically for education. There's so many different use cases for interactive devices.
We chose to focus our development and R&D efforts on front of classroom technologies and use cases and how they're used within schools or even within ministries of education in some of the emerging markets. We have a unique blended learning focus. We're very conscious of how our products are used in the classroom and how they are used in a traditional way where you have students in front of you, but also where you need to connect cameras, where you have to run different types of software in order to engage the students remotely. The final point is, we're able to cover the territory that we're able to cover because of the great relationship we have with our channel around the globe.
We're always building out and looking for white spaces that we could better cover with new channel relationships and making sure that as opportunities present themselves, that we're there and we're competing for those opportunities.
We take our relationship with our channel very seriously, and we invest in our channel to ensure that not only that we're successful, but they're also successful as well. The result of this is we've been able to expand our market share. Globally excluding China, in the second half of 2020, we are at 21%, first half of 2021, we are at 24.5%.In our top three markets, which are the biggest markets that we have outside of our emerging markets, we gain share in the U.S., U.K. and Germany respectively. Next slide, please. We have had both significant revenue and volume growth. Revenue growth on a half-over-half basis was 21%, on a year-over-year basis, 35.6%.The same thing goes for volume growth.
The market grew 6%, where Promethean grew 21.5%.We're seeing growth both in our number of units within the market and also top line revenue. Next slide, please. We continue to focus on operational excellence. Simon talked about this a little bit during his first set of comments, the supply chain and logistics have been extremely challenging for all businesses. We've put a lot of focus on how we can continue to operate efficiently, operate cost effectively, and make sure that we have products in our channel and with our distributors to be installed in schools. The first thing that you'll see here is that from a product mix standpoint, our ASP went up year-over-year. There's a couple of factors for that. The first is with blended learning solutions, schools are really looking to put in our higher end product.
Our higher end product is a faster product, it has more computing capability, it works effortlessly in a blended learning environment. It's not that our lower end product learning solution, but the higher end product certainly works effortlessly. It's also worth mentioning that there are significant funding streams in place globally that are fueling EdTech spending.
When there's money to spend, schools are looking for solutions that are sustainable solutions, not only for this year, but for the next few years. Gross margin went up, and again, back to our discipline on cost, making sure that we're planning appropriately for inventory and managing our supply chain and logistics down to every last penny to make sure that we're extracting the value that we need to out of that, and then passing that along to our customers as well. From an operation efficiency standpoint, OpEx as a percent of revenue went down from 27.2% to 23.6%.With that said, I'm going to turn it over to Lin to talk about gaming.
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Hey, [Non-English content] . Hello everyone, this is Ben. Let's get right into our financials for the first half. First of our income statement, our revenue growth was close to 19%, with gaming and education both performing exceptionally well. Our gaming revenue growth continued from the momentum we saw in the second half of last year with a 12% growth. Our education business recorded one of our strongest performances in recent years, with 23.7% growth on the back of two main drivers. One is overall market growth, and the second one is the fact that we've been increasing our market share, as Vin pointed out earlier. We are also seeing benefits from operating leverage as we continue to scale our top line while we manage our business with cost discipline.
As you can see here, all of our SG&A expenses as a percentage of revenue have all gone down compared to prior year. As a result, we are seeing 28% increase in net profits, 42% increase in EBITDA, and 26% increase in non-GAAP profits. In the meantime, we continue to maintain a very strong financial position as our net cash amounts to over CNY 4 billion. Next slide, please. On to the segmental financials. First on the education business. Our overall gross margin increased by 5.5 percentage points, and that's largely driven by Promethean's gross margin enhancement. It's also worthwhile to point out that our core segmental loss for the education business continues to trend down as I kind of guided earlier.
As you can see, going from CNY 377 million last year to CNY 266 million, going into the second half, we do expect the education loss to continue to narrow. Then on to the gaming business. Again, we saw double-digit growth in terms of both top line and bottom line on the back of relatively stable operating expenses. Next slide, please. Okay. The next part of this presentation is shareholder value enhancement, we're very excited to be announcing these measures. The goal here is really we're aiming to initiate these new capital measures to maximize capital return to our shareholders while allowing us to continue to invest in the future. Next slide. First to tee it up. NetDragon has been consistently growing our profitability and also our cash flow in the past several years, as many investors will know who follow us for many years.
In the meantime, we've also been generating growing free cash flow, as you can see here. In 2020, our free cash flow was close to CNY 1 billion, and in the coming years, we're fully confident that our free cash flow will continue to grow. Next slide. As we increased our earnings and free cash flow in the past several years, we've also been consistently increasing our cash return to shareholders via dividends and also share buyback. In 2020, we returned a total of HKD 355 million in terms of Hong Kong dollars to our shareholders, which increased by over 50% from 2019 and also represented 37% of our net earnings. Next slide. To break down the cash returns further, first we can talk about dividends.
As you can see, we've been declaring increasing dividends in the past several years, and we're also pleased to say that we're going to increase our interim dividends by 60% to CNY 0.40 per share. Next slide. In terms of the stock buyback, our board has authorized a committed stock repurchase program, whereby we expect to buy back our stock up to $300 million over the next three years. This is really a follow-through on our long-term commitment to maximize the value for our shareholders. We believe that given the level of our stock price at the moment and the fact that we've been consistently growing our business, our net profit and our cash flow in the past many years, this is a very optimal timing to initiate a stock buyback program of this scale.
On top of that, our decision to commit to this stock buyback program and also increasing our cash dividend really underscore our confidence in the long-term business outlook and also our future cash generation abilities. We're going to implement this buyback program while maintaining a very strong balance sheet and also liquidity profile. We also expect that we're going to return, in the next three years, a substantial portion of our free cash flow through a combination of this stock buyback and also dividends. Again, I would also like to emphasize that while we implement this program, we're going to continue to maintain a very strong net cash position. As at the end of the first half, our net cash is over CNY 4 billion, and that will enable us to be able to capitalize on strategic and also acquisition opportunities going forward.
With that, I'm going to pass the stage back to Simon, who's going to take us over the outlook.
Well, thank you, Ben. I can see some of you are still looking at page 37, doing a lot of math, right? Between the CNY 300 million and the CNY 600 million. Have fun on that one. Forecasting aside, I'm going to guide very briefly on the outlook. If you want to look ahead for the rest of the year, I think Lin Chen has done a really good job in articulating where we're going. We will continue to grow our gaming business, especially with the new game that is being launched in the second half. On the education side, I just have to say we are very confident that we're going to end the year on a very high note. One of the reasons is actually we have a very strong backlog going into the second half of the year on the back of a high-growth first half.
Very good news. I talked about it in our last meeting here. We believe our stock is actually quite undervalued. Our focus is to unlock the value of the company, then talk about a buyback, talk about increasing the dividend. On the dividend side, we basically are very confident that we'll continue that trend on the back of our good performance and good cash generation. I think one big one actually is to unlock the value is to think about the spinning off of our education business. We have commenced that planning. Actually, we started the process already. We'll update you in due course. Again, at the end of the day, we also execute our stock buyback plan in a very thoughtful way. This is another way to unlock the value and also return the value back to the shareholder in addition to our dividend.
With that, thank you for your patience. I hope you are okay with our performance in the first half. Looking forward to talking to you about our second half in about six months' time. With that, I'm going to open up for Q&A. Thank you.
Thank you, Dr. Leung and management. Now it's time for our Q&A section. You're welcome to raise questions in two ways. First, if you would like to raise questions through the teleconferencing system, you may press star one on your phone keypad and our operator will put you through. Star one on your phone keypad.
Second, if you would like to raise questions via our webcast platform, please click the question mark on the screen and type your question in the Q&A box. [Non-English content] We would like to welcome questions in both English and Chinese. [Non-English content] We welcome you to ask questions in English and Chinese. Let's welcome our first question. We have a question from the webcast platform. Can you please talk about the margin and the cash flow outlook of Promethean next year? Is there any room or further improvement on margin, and do you see inflation cost pressure?
Vin, you want to take that? It's okay. There's a loaded question about We're not going to talk about next year.
Yeah, that's okay.
Yeah.
Yeah. We're not going to give any guidance for next year.
Yeah. No, I think that's absent right now, so we're not going to talk about that now.
Either one of you take that question. Yeah.
Vin, do you want to take that first?
Yeah, let me go first. Okay. We still have issues in the supply chain that we're monitoring very closely. We're continually looking to source components to make sure that we have it ahead of when we need it. There's still challenges in logistics. There's still challenges in the supply chain. I'm optimistic that I think it's going to get better, but I don't think it's going to get better in the near term. I think we're going to continue to work through some of the challenges, and as we get into next year, I hope to be more forthcoming about some of the improvements that we're seeing when we talk again in six months. Between now and the next six months, I don't see major changes in the supply chain.
Actually, I do like to add a comment on that one. In terms of margin, the freight cost is only a part of it, right? It's actually the team is actually working very hard, not only on the freight charges, but also on the cost of the product, and also is actually on product mix and also on ASP. Again, if I can remind you of one of the charts that Vin showed, is actually our ASP is up.
Our gross margin is actually up. It's a combination of things that increase gross margin in our laser focus on improving it. Are there room to improve? The answer is yes, but there will be a lot of hard work, but I think the team can do it. What's the cash flow question again?
Yes. The cash flow question is the cash flow outlook and the margin outlook. Do you have further improvement on the margin? Would there be any inflation pressure for the material?
So I think we are.
Material cost.
Mixing the question big time. We answered the Promethean question on margin and everything. Ben is going to answer on the overall cash flow issue because that's both gaming and education. Ben.
Yeah. In terms of the cash flow, let me talk about cash flow from an overall perspective. As you can see, cash flow is directly related to revenue growth, right? As we look into the second half of this year, I think we'll be looking at sequential revenue growth. We're very confident, as Simon mentioned in the outlook, and also we're going to keep costs under control. With that, we are very confident that we're going to be able to continue to increase our cash flow, both in terms of operating cash flow and also free cash flow, in the second half of the year. That would be the cash flow question.
Okay. Yep. Thanks.
Thank you very much. Please allow me to introduce our way to raise question again through the teleconferencing system. If you would like to raise your questions through the teleconferencing system, please press star one on your keypad. [Non-English content] Our next question also comes from our online platform. It's a question about our educational business. Management mentioned that the spin off of our education business is on the way. Can you please share a little bit more about the detailed plan, timetable, or any progress?
No. Let's say we commenced the planning. I also said in my presentation, maybe I didn't make it clear. We'll update everybody in due course.
Thank you very much. Next we have a question from [Non-English content].
Okay. [Non-English content]
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[Non-English content ] Our next question is about our educational business. Our investor Okada would like to know about that for EdTech business, when would the pop-up classroom be starting, like launching in big scale?
That's the only question?
Yeah, that's the question.
Okay. I'll take that one. Actually we have done some pilot. Unfortunately, the COVID is actually not under control, so that is actually being put on hold at the moment. There's a whole series of other activities going on working with the Egyptian government. The answer to your question is actually we do not know at this point, but I can assure you that as soon as COVID is under control in Egypt, they will come back and look at how to roll out the pop-up classroom.
Thank you very much, Simon. Our next question comes from [Non-English content].
Okay. I'm going to take the first two, and then Lin Chen can talk about the third one [Non-English content]. Okay. [Non-English content]
Okay. [Non-English content]
Okay.
Thank you. [Non-English content] Please allow me to introduce how can you raise question by the teleconference system. If you would like to raise question through our teleconference system, please press star one. [Non-English content] Our next question comes from Anhao. With the fast growth in education business, would there be a chance that the overall gross profit margin may go down? Is the company comfortable with this? What would the company do to improve the overall margin?
Honestly, I don't know how to answer that question. The gross margin in our case is actually a complicated issue, right? Because there's different businesses. Our track record shows you we are doing very well in terms of gross margin, the controls of our margin is up.
The reason I laugh a little bit is actually because we have so many different businesses. The overall trend for our business in education is actually moving towards a mix of software and hardware and services. Because of that, I would expect the margin will improve because of the product mix. Because typically in software and services, your margin is actually higher than the hardware. That doesn't mean our hardware margin will go down. It's not our goal, I have to be very clear. Our goal is to improve our margin. We improve it by operating in excellence and also working on businesses that will give us a higher margin.
Yeah, well said.
Thank you very much. [Non-English content]
[Non-English content] Ben？
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[Non-English content] operator.
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[Non-English content] She would like to know that when will the monetization of Edmodo kick off? Is there any target on Edmodo's revenue go into 2021 and 2022?
Vin, do you want to take it or you want me to take it? Go ahead.
Yeah, happy to take it. We are working in a couple different areas on the monetization of Edmodo. The first is working on a product specific to ministries of education and countrywide rollouts. We've got a couple underway and a couple discussions that are underway and we're building pipeline there. The other thing that we're looking to do is monetize the community that we have and do so in a meaningful way. We have some product releases that are going to come out next year that are going to help us monetize the business. We have a couple different initiatives underway to monetize that business and that community.
For the record, actually, we are monetizing some of it, but we will scale it next year. That's the message from Vin.
Yeah.
Thank you very much. Our next question comes from Ken Yu. On the education business, what is the approximate gross margin hit being today from U.S. and China trade tariffs? While it's very difficult to forecast policy changes, is it possible that policy environment may improve in the future? She's curious that would the policy in the future be beneficial to us? Is there anything that would be beneficial to us from the operating environment?
The question is asking us to look at a crystal ball. I'll pass you on to Vin. He's better than reading the crystal ball than I am.
I don't know if I have a crystal ball. What I'll say is that we have seen relative to tariffs here in the U.S., we have seen our product being exempt from some of the highest tariff levels in the U.S., and I view that as a very positive sign, and I see no signs of that changing. That being said, I don't have insight into what future policies can be, but we certainly have not been harmed in any way incrementally from any tariffs that we've had to pay in the past.
I would like to add, I look at it slightly differently on this one, because the fact that if you look at our gross margin is actually improving. Actually that means Vin and his team are handling the tariff issue very well. If there are any changes in terms of getting rid of the tariff, there is only upside for us. Personally, I don't foresee an increase in tariff. I think we are in a pretty safe territory in terms of our costs.
Thank you very much. Due to the time limit, we would like to welcome our last two questions. [Non-English content ] Our next question comes from Ken Yu as well. How to think about our dividend policy going forward and its growth potential? Should investors expect dividends to grow at a similar pace as our free cash flow?
Well, as I said, we don't expect our dividend to go backwards, let's do it this way. I mean, we said it before, it is our commitment to return a lot of this value back to the shareholders. To do that, dividend is only one of the many ways. Share buyback is another one. We can't commit to anything, but we don't foresee that going backwards.
Thank you very much. Our last question. [Non-English content]
Lin Chen.
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Well, first of all, thank you for your time this morning. I hope you are happy with our report. A couple of key points I like to remind everybody is, the first one is when you look at our businesses, both gaming and education, we are a global business. We are not a China-alone business. We are very proud of our market position in China. At the same time, I think it's good to have diversity. I think the market is not rewarding us in terms of our global business. We work very hard to change that perception.
The other point I want to make is that if you look at the commitment we make in unlocking the value and then returning the value back to our shareholder between dividend, buyback, and also committing to spin off the company, that means we are very confident in our business going forward. Our buyback program is not a one year program, is that we are very clear that it's a three year program while we maintaining the right cash position to allow us to do something strategic. That tells you a little bit about the confidence of the team with our businesses, both gaming and education going forward. With that, we'll continue to work very hard to make you guys happy. With that, thank you for your time and I'm sure you have more questions, feel free to come to us with more questions. Thank you so much.
Thank you very much, Dr. Leung. Thank you, Ben, Lin Chen and Vin. This successfully concludes our presentation today. Once again, I would like to thank you all for joining us. If you would like to communicate with the management further, please contact us for one-on-one meeting arrangement. Thank you and we wish you all have a great day.
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Okay, thank you.