Four Seasons Education (Cayman) Inc (FEDU) 2018 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for the Four Seasons Education's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Ellen Wang, Investor Relations Manager for the company. Please go ahead, Ellen.

Ellen, your line is open. Please go ahead.

Hello, everyone, and welcome to the Fourth Quarter and the Fiscal Year 2018 Earnings Conference Call for Four Seasons Education.

The company's results were issued via internet services earlier today and are posted online. You can download the earnings press release in the site for the company e-mail distribute list, by visiting the IR section of its website at ir.sijiedu.com.

Mr. Peiqing Tian, our Chairman and Chief Executive Officer will start the call by providing an overview of the company and the performance highlights of the quarter with English interpretation. Ms. Joanne Zuo our Director and Chief Financial Officer will then provide details on the company's financial results and the business outlook before opening the call for your questions.

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. Looking-forward 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 prospectus 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 applicable law. Please also note the Four Seasons Education's earnings press release and this conference call includes discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Four Seasons Education press release contains a reconciliation of unaudited non-GAAP measures to the most directly comparable GAAP measures.

I will now turn the call over to our CEO Mr. Tian. Please go ahead.

(foreign language) Thank you, Ellen, and hello everyone. Thank you for joining us for our fourth quarter and fiscal year 2018 Earnings Conference Call.

(foreign language) In light of the tightening regulatory environment for the after-school education market, we are pleased to deliver a solid performance for the fourth quarter with net revenue growth of 40% year-over-year. We have also reached the 25.4% to the enrollment growth compared with the same period of last year, as we continue to expand our learning center networks outside Shanghai and extend our cost offerings to broader age groups with diversified subjects coverage.

(foreign language) In terms of grade level extension, we have now provided multiple subject courses in our middle school program, which remains a key focus of our advancement. A secure environment demonstrates our superior quality in course design and the teaching effectiveness, and reflect huge underlying demand for the knowledge enhancement and test preparation services for the high school entrance exams. For kids at kindergarten, we have entered into an acquisition agreement to acquire 90% equity shares of a renowned early childhood education provider in Shanghai for a total consideration of over RMB 100 million to spearhead our efforts to penetrate into pre-school tutoring market.

(foreign language) Regarding course offering diversification, we have established a dedicated team for Chinese and English course development and the faculty training capacity to support our course delivery of each subject. Regarding our existing English base and math teaching capacity, we launched SAT, A-level classes that target students in pursuit of studying abroad. In addition, we have proactively launched the different kinds of interest [invasive] short classes to enrich our educational services and drive revenue growth during softer seasons.

(foreign language) I will now walk to development front, we have made strategy on learning center expansion outside the Shanghai area with newly registered learning centers in Fuzhou city and Shenzhen. In preparation to expand our footprints nationwide, we have been using up and strengthening our management and south team during the fourth quarter. In the meanwhile, our listing position as a public company makes it easier for us to broaden cooperation and attract the students to your expensive process. We have also centralized our training and management of teachers to ensure we maintain our strong teaching capability and the high quality of our education and service during our expansion.

(foreign language) Before turning the call to Joanne, I'd like to share some updates on the policy headwinds in our initiatives. At the end of this February, the Ministry of Education released a new policy that aims to further elevate the study burden on primary school students. After the release of the new policy, we conducted a comprehensive review of our teaching materials and plan to ensure our class contents meet regulatory requirements. Actually, we already have our regular review proceeding in our operating system to replace (inaudible) topics with popular topics and solutions in our teaching plans. With our strong teaching capability, we are able to always provide students with different approaches to solutions using the knowledge within their grade level instead of using knowledge that should be taught at higher levels.

(foreign language) As mentioned in the third quarter, we continue to launch initiatives to keep our resilience during the regulatory tightening periods, including emphasizing our middle school programs, which suffers less influence from the new regulation and have significant market demand. As we carry out our cost service defining process, we actively promote synchronous learning classes to help students review and reinforce the knowledge delivered at school. Followed by our successful winter camp program, we further enhanced our collaboration with East China Normal University to launch our math lab program, which we believe will boost our brand awareness and increase our market penetration into schools. We expect to officially open our first math lab center in the second half of calendar 2018.

(foreign language) In conclusion, we are glad our results show we are delivering our mission by working with the government in the reputable systemic institutions. That is to nurture students interest in math and enhance their logical and reasoning capabilities, while providing diversified course and subject offerings to help our students achieve excellence in the academic studies and to better prepare them for future development.

(foreign language) With that, I will now turn the call over to our CFO, Joanne Zuo, who will discuss our key financial results.

Thank you, Mr. Tian, and hello everyone. As noted, we delivered a strong conclusion to the fiscal year, despite of the fact, that our top line was impacted by the release of policies of law on promotion of nonpublic schools. Adherence to these policies led to the delayed opening of our new learning centers and postponed their enrollment process, while also restricting enrollment of some newly launched courses to only existing students.

As mentioned in last quarter, in December 2017, a new policy was released, which included limitations on certain types of after-school academic related competitions. This new policy also negatively influenced our enrollment in January and February. We attempted to offset the revenue impact of those factors by promoting our diversified cost offerings. While those promotions impacted the gross margin in the short term, we believe that approach will deepen our students' engagement with us and provide long-term benefits. On the operating front, we continue our strategy of expanding our service territory and are making investments to support those efforts.

We experienced a higher sales and marketing expenses in the quarter as we worked to promote student enrollment outside of the Shanghai area, and invested in our marketing team to facilitate our nationwide expansion. We also invested in new product launch including our math lab program in cooperation with East China Normal University to further enhance our brand awareness and penetration into local schools. While these upfront investments impacted the fourth quarter financials, we believe they better position us to capture the tremendous opportunity in the after school education market in China.

Now, I'd like to walk you through more details on our fourth quarter fiscal 2018 financial results.

Our revenue increased by 40% to RMB 67.2 million for the fourth quarter of fiscal year 2018 from RMB 48 million in the same period of last year. Primarily due to the price increase of regular programs increased revenue contribution from the Ivy Program, revenue contribution from the small-class for regular programs, development of middle school and non-math programs as well as expansion of the physical learning center network.

Cost of revenue increased by 41.8% to RMB 29.5 million for the fourth quarter of fiscal year 2018, from RMB 20.8 million in the same period of last year, primarily attributable to costs associated with the increase in staff count as well as learning centers' rental, utilities and the depreciation costs.

Gross profit increased by 38.6% to RMB 37.7 million for the fourth quarter of fiscal year 2018 from RMB 27.2 million in the same period of last year. Gross margin was 56.1% for the fourth quarter of fiscal year 2018 compared with 46.6% in the same period of last year. The decline in gross margin was primarily due to the expansion of new centers and faculty team, which incurred certain upfront costs as well as the discounts granted to students to promote the middle school and non-math programs.

General and administrative expenses increased by 60.5% to RMB 24.4 million for the fourth quarter of fiscal year 2018 from RMB 15.2 million in the same period of last year, primarily attributable to share-based compensation expenses of RMB 5.7 million and professional services expense of RMB 2.6 million as well as an increase in rental costs associated with the relocation of the company's headquarters.

Sales and marketing expenses increased by 96.8% to RMB 11.5 million for the fourth quarter of fiscal year 2018 from RMB 5.8 million in the same period of last year, primarily due to the increase in headcount for sales and marketing and business development teams from 15 as of February 28, 2017 to 57 members as of February 28, 2018, and the increase in expenses related to promotional activities and share-based compensation for sales and marketing staff.

Operating income decreased by 71.1% to RMB 1.8 million for the fourth quarter of fiscal year 2018 from RMB 6.1 million in the same period of last year. Adjusted operating income, which excludes share-based compensation expenses, increased by 12% to RMB 8.1 million for the fourth quarter of fiscal year 2018 from RMB 7.2 million in the same period of last year.

Net interest income increased by 215.7% to RMB 2.1 million for the fourth quarter of fiscal year 2018 from RMB 0.7 million in the same period of last year.

Income tax expenses decreased by 81.9% to RMB 0.7 million for the fourth quarter of fiscal year 2018 from RMB 3.7 million in the same period of last year.

Net income reached the RMB 2.7 million during the fourth quarter of fiscal year 2018, down 17% from RMB 3.3 million in the same period of last year. Adjusted net income, which excludes share-based compensation expenses and the fair value change of warrant, increased by 106.7% to RMB 9 million from RMB 4.4 million in the same period of last year. Adjusted net margin was 13.4% compared with 9.1% in the same period of last year.

Basic and diluted net income per ADS attributed to ordinary shareholders was RMB 0.09 and RMB 0.08, respectively, compared with RMB 0.09 and RMB 0.09, respectively, for the same period of last year. Non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders was RMB 0.22 and RMB 0.20, respectively, compared with RMB 0.13 and RMB 0.13, respectively, for the same period of last year.

Cash and cash equivalents as of February 28, 2018, the company had cash and cash equivalents of RMB 583.3 million, an increase of 152.6% compared with RMB 231 million as of February 28, 2017. Primarily due to the net proceeds of RMB 594.6 million from the company's initial public offering. The increase was partially offset by RMB 125.8 million dividend distribution and investment of RMB 158.2 million in funds for more efficient cash management.

To be mindful of the length of our earnings call for the fiscal year 2018 financial results, I will encourage listeners to refer to our earnings press release for further details. Looking forward, for the first quarter of fiscal 2019, we currently expect to generate revenue in the range of RMB 89.4 million to RMB 92.8 million, representing year-over-year growth of approximately 30% to 35%.

The above outlook is based on the current market conditions and reflects company's preliminary estimates of the market and operating conditions, and customer demand, which are all subject to change.

This concludes our prepared remarks. We would now open the call to questions. Operator, please go ahead.

(Operator Instructions) The first question today comes from Nicky Ge with China Renaissance.

(foreign language) My first question is that the total math market in Shanghai after the tightened regulations, what management see the growth rate in the Shanghai market right now? And second question is about our full year revenue guidance. Could the management give us a guidance on the fiscal '19 revenue guidance?

(foreign language) Let me translate first. The CEO said basically, in his view, he will break the after-school tutoring market into primary school and nonprimary school segment. Basically, we believe that math for primary school, this segment is mostly and actively influenced by this policy because competitions are not allowed and in CEO's opinion, he don't expect -- he doesn't expect the market -- the overall market to increase for the coming year. (foreign language) But we're very positive on middle school market. We don't think it's significantly impacted by this new policy and we have invested tremendous efforts in the segments and we have seen strong growth in middle school program business, and this will become our key growth driver for our revenue this year. We expect to generate 40% to 45% year-over-year growth for this coming fiscal year.

The next question comes from (inaudible) Zhong with Morgan Stanley.

(foreign language) I will translate this. With regards to the -- to be acquired early education -- a childhood education company, could we get some details on the company such as the key focus of the company in terms of subject and current financials, number of learning centers and when the acquisition process will be completed? The second question is on the slow learning center process, what's the status on government approvals now? Has the process being restarted? And how many learning centers are we expecting to open in financial year '19?

(foreign language) Just let me translate for CEO. As you know, that we are trying to broaden our age coverage. When we were in IPO our business is heavily concentrated on primary school, but now we are expanding to middle school and to pre-K. For middle school, we're going to -- we already assembled a team, but for preschool kindergarten students, we used this acquisition. The company acquired its -- it has been operated in Shanghai for over 10 years and it's one of the best-known brands. The reason that we acquired them is because we believe there is -- there will be significant synergies for us because they focused preprimary school, pre-K 12 students this will become a key resource for -- an important students (inaudible) their graduated students can become our students, basically extended our lifespan of students. And secondly, is they are very strong into our language while we are very strong at logical thinking and reasoning. This is -- we also have our own pre-K programs. We believe this even on the content is also very good synergies between these 2 companies. (foreign language) And to your question when we are going to consolidate financials, we believe you will see the consolidation -- the consolidated financials in the first quarter. (foreign language) On your second question on the license, in end of March and early April, the government started to accept applications for the permits, because prior to this for education companies, they do not need this permit and with this new regulation for companies they need to apply for this permit. And we have already submitted our application and we believe we will get our submits -- the permits very soon. And once the headquarter gets this permit, or the learning centers, they only need to file with the government and don't need to apply for a new permit.

(Operator Instructions) The next question comes from Charlotte (inaudible) with Citi.

(foreign language) Okay, let me translate my questions. My first question is regarding the enrollments breakdown for fiscal year 2018. Can management share with us how many student enrollments for Shanghai and how many for cities out of Shanghai? And your expectations for next year? And my second question is regarding the guidance for 2019.

Yes, Charlotte. To your question on the year-over-year growth, we expect this year to generate top line 40% to 45% growth. And therefore, for enrollments, we cannot disclose the numbers for fiscal year '18 yet, right. I mean, we are doing the fourth quarter earnings call. Basically for fourth quarter, still substantially from Shanghai [spot] enrollments outside Shanghai generated roughly 8% to 10% of enrollments. But we do expect that our business outside Shanghai will grow at a faster pace than our business in Shanghai, so we expect contribution -- revenue contribution and the enrollment contribution from business outside Shanghai will be higher in fiscal year '19 than fourth quarter of fiscal year '18.

As there are no further questions now, I'd like to turn the call back over to company -- to the company for any closing remarks.

Ellen, do you have any closing remarks or would you like me to close the call?

If no further questions, then we close the call. Thank you, operator.

This conference has concluded. Thank you for participating. You may now disconnect.