51Talk Online Education Group (COE) 2022 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group's Second Quarter 2022 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. I will now turn the call over to your host, Ms. [Ni Yan], Investor Relations for the company. Please go ahead, Ni.

Hello, everyone, and welcome to the Second Quarter 2022 Earnings Conference Call of China Online Education Group, also known as 51Talk. The company's results were issued via Newswire services earlier today and are posted online. You can download the earnings press release and sign up for the company's distribution list by visiting the IR section of our website at ir.51talk.com. Mr. Jack Huang, our Chief Executive Officer; and Mr. Min Xu, our Chief Financial Officer, will begin with some prepared remarks. Following the prepared remarks, there will be a Q&A session.

Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's Form 20-F and other public filing as filed with the U.S. Securities and Exchange Commission.

The company does not assume any obligation to update any forward-looking statements, except as required under the applicable law. Please also note that earnings press release and its conference call includes discussion of our audited GAAP financial information as well as unaudited non-GAAP financial measures. 51Talk's press release contain a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our CEO, Jack Huang. Please go ahead.

Thank you, Ni. Hello, everyone. Thank you for joining our conference call today. In the second quarter of 2022, we successfully completed the divestiture of our China Mainland business, and we are fully focused on our Overseas business going forward. Starting from the third quarter, 100% of the company's revenues will be derived from overseas markets. Furthermore, to reflect our overseas focus, we will hold an Annual General Meeting on September 30, to vote on the proposal of changing our legal name from China Online Education Group to 51Talk Online Education Group.

We are very excited to report another quarter marked by continuing top line growth of our overseas business. In the second quarter, our overseas business continued to see healthy and sustainable development. Our second quarter overseas business, net gross billing reached USD 7.8 million, representing 46.5% sequential growth. The number of our paying students reached 8,100 representing 25% sequential growth and the number of our active students with attended lesson consumption reached 14,900 representing a 60% sequential growth in the second quarter.

In addition, our overseas business achieved breakeven in cash flow during the 2 months of May and June. This reflects our strong execution of healthy growth strategy in overseas business, and we are looking forward to the future performance of cash flow. We are sorry to announce that our CFO, Mr. Min Xu, submitted resignation for today for personal reason and his last day will be September 30, 2022.

Our VP of Finance Ms. Chun Tang will assume the room of CFO for October 1, 2022. On behalf of the Board of Directors and myself, I would like to thank Min for his service over the past 4 years, leading our company to profitability by focusing on sustainable growth. We wish him the best in his future in endeavors. With that, I will now turn the call over to you Min. .

Thank you, Jack, for a nice words. I want to thank every 51Talk investor, employee, teachers, student, parent and partner for your support in the past 4 years, making my every moment as 51Talk a memorable one. Jack has led us through the most difficult time in 51Talk history, and I trust 51Talk under his leadership is only going to grow stronger, fulfilling our dream of helping everyone talk to the world.

My successor, Cindy, current VP Finance, has been with the company for 8 years and played an instrumental role in the company's IPO in 2016 and the turning Mainland China business profitable in Q4 2019. I'm confident that she will leverage her leadership and experiences and work with the team to reproduce the success in the overseas market.

So now let's take a look at Q2 numbers. The momentum of our overseas business continued into Q2 with gross billing reaching $7.8 million, surpassing the top end of our guidance of $7.5 million. We will continue on our pathway of sustainable growth and a focus on delivering a strong value proposition to our students in this rapid developing overseas market.

Please note that we completed the divestiture of our China Mainland business on June 30, and we'll focus on overseas market going forward. Since we started our overseas business in July last year, there is no comparable figure for Q2 last year. Net revenues for Q2 of Continuing business were $3.5 million, representing 87.7% sequential growth. Gross margin for the second quarter was 79.2%, Q2 operating expenses of Continuing business were $6.9 million, a 38.3% sequential increase from $5.0 million last quarter.

Q2 sales and marketing expenses of Continuing business were $3.6 million, a 79.3% sequential increase from $2 million for last quarter. Q2 product development expenses of Continuing business were $0.7 million, a 36.4% sequential decrease from $1.1 million for last quarter. Q2 G&A expenses of Continuing business were $2.6 million, among which $0.5 million were a onetime fee related to the divestiture of our China Mainland business. Excluding this onetime cost, Q2 G&A expenses would have been $2.1 million, G&A expenses for the Overseas business were $1.9 million in the first quarter of 2022.

Q2 operating loss of Continuing business was $4.1 million. Q2 net loss was $15.0 million. Net loss for Continuing overseas business and the discontinued Mainland China business were $4.6 million and $10.4 million, respectively. Q2 GAAP and non-GAAP EPS were both negative $0.67. The company's total cash, cash equivalents and restricted cash were $22.1 million at the end of the second quarter. Advances from students of Continuing business were $10.2 million at the end of the second quarter. Looking forward to the third quarter of 2022, we currently expect the net gross billing to be between $8.0 million and $8.2 million. The above outlook is based on our current market conditions and reflects the company's current and preliminary estimate of the market and operating conditions and customer demand, which are all subject to change.

This concludes our prepared remarks. We will now open the line for questions. Operator, please go ahead.

(Operator Instructions) The first question comes from Long Lin with the Benchmark Company.

So the company delivered better-than-expected revenue growth for the second quarter. Just wondering what are some of the key drivers behind that? And can management give a breakdown of your key market performance for the quarter?

(foreign language)

(foreign language)

Yes. So we believe -- the overseas market is still in the very early stage. And the growth -- strong growth we see in the past quarter or a few quarters really leveraged our success factors in our existing China market, and we believe the English training market is very different from other education products because the demand for English learning is a common demand for many countries and markets in the world, and we see a very strong demand in the overseas market. Jack, continue?

(foreign language)

So we do see very strong growth since we started our overseas business in July last year. And so the strong growth of the past year is actually a result of our expertise and experience in China market in the past decade. We -- in the best deck, we already accumulated a lot of knowledge in terms of technology, product development, in terms of Filipino teacher operation and K-12 curriculum and so as a result, we do have a very solid, very competitive product in our overseas market from the very beginning.

(foreign language)

So in terms of a market breakdown, majority of our gross billing, roughly 90% of our gross billings are from Southeast Asia and only 10% from outside of Southeast Asia.

That's very helpful. My second question is about the company's outlook. Can you provide like an outlook for the company's revenue growth and profitability in the second half '22 and next year? Does the company expect any macro impact on the overseas market?

I'll take this question. So we provided Q3 gross billing guidance, which is USD 8.0 million to USD 8.2 million. And if you look at Q4, it's likely going to be flat sequentially given the historical seasonality. But again, we're not giving our guidance right now. It just gives you some color on how to estimate Q4. And we do see many positive macro impact in our target market. For example, COVID-19 continues to boost online education needs over the world and the digitization process in Southeast Asia continued to have a very positive impact on our online education demand in our target market.

And we're very confident that the overseas market is going to be very, very attractive for us. And in addition, in terms of the online English training, we have a very, we kind of have a niche product, and we have very limited competition in our target markets. So our strategy is to continue to focus on our customer needs and satisfaction, which will, in turn, continue to drive the retention and referral and -- which are -- we believe are the key factors to drive our success in China market, and we believe it will do the same magic in the overseas market. I hope this answers your question.

(foreign language)

Okay. So Jack will add a little bit information on the profitability. And if we look at the student advance, we know that we're getting the cash first and then the revenue gets recognized after the lessons are consumed. So as a result, our business has a very unique pattern. If you look at our historical data, the company was established in 2011 and first achieved cash flow breakeven in 2016. That's a 5-year period. And then in 2018, we achieved a gross billing contribution positive, that's another 2 years. Then in 2019, Q4, we achieved GAAP profitability and that's about 1.5 years. So however, our pace of getting from the start of the business going to cash flow breakeven then go to gross billing contribution positive than to GAAP probability will be much accelerated in overseas market compared to the China market.

One of the key reasons is that because we've done this one thing and we have the experience, we have the expertise. We know how to do it. So -- if you look at -- we did -- even though we did our spinoff at the end of June, our reference date is end of April. So from end of April to end of June, we've already seen that the overseas market cash flow has achieved a breakeven. So -- and it is very likely that in Q3, we're going to target cash flow breakeven for Q3 too. So basically, we're out of the gate after only 1 year, starting our Overseas business, we already achieved a cash flow breakeven. And we do see -- we do see the time line for achieving gross billing contribution positive and GAAP profitability will be much more accelerated compared to the China market.

(Operator Instructions) As we are reaching the end of our conference call, I'd like to turn the call back over to the company for closing remarks. Ms. [Ni Yan] please go ahead.

Thank you once again for joining us today. If you have further questions, please feel free to contact 51Talk's Investor Relations through the contact information provided on our website.

The conference has now ended. You may now disconnect your line. Thank you.