Four Seasons Education (Cayman) Inc (FEDU) 2019 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 2019 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded.

I would now like to turn the call over to your host Ms. Olivia Li, Investor Relations Manager for the company. Please go ahead, Ms. Li. Ms. Li?

Hello, everyone, and welcome to the Fourth Quarter and Fiscal Year 2019 Earnings Conference Call of Four Seasons Education. The company's results were issued via Newswire services just earlier today and are posted online. You can download the earnings press release and sign up for the company's e-mail distribution list by visiting the IR section of our 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 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 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 provisions 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 these 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 that Four Seasons Education's earnings press release and this conference call includes discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Four Seasons Education's press release contains our 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, Mr. Tian. Please go ahead.

(foreign language) [Interpreted] Thank you, Olivia. And hello, everyone. Thank you for joining us for our Fourth Quarter and Fiscal Year 2019 Earnings Conference Call.

(foreign language) Interpreted The fiscal fourth quarter is a traditionally low season for our business. Nevertheless, we continued our strategy of extending diversified course offerings to the entire K-12 age groups. During the fourth quarter, we maintained our ongoing diversification efforts and recorded an increased proportion of revenue contribution from non-math courses and middle-school programs. It demonstrates that our growing strength in teaching capability for key subjects, beside math, has also gained greater reputation among students and parents. Additionally, with our learning centers ramped up, the revenue mix derived from outside of Shanghai is also increasing.

(foreign language) Interpreted Inspired by the enormous positive reception of our courses work from students and parents alike, we diligently selected a certain offer proprietary courses and educational content to establish our online presence. Students are now able to participate in Four Seasons' selected online courses including certain Ivy programs, as well as other interest-based classes. We will remain focused on developing high-quality courses and attractive educational content, while cost effectively operating our online courses.

(foreign language) Interpreted In the meanwhile, we continued the optimizing process of our learning center network in the fourth quarter. For more efficient resource allocation and strategic business planning, we combined certain learning centers with small growth flow areas into large centers and new places with upgraded facilities. In addition, based on comprehensive business consideration, in selected learning centers we also strategically provided more non-math courses and other various classes for students' all-around development.

(foreign language) Interpreted Turning to other initiatives and activities. As we have mentioned in prior calls, based on our strong foundation of teaching experience in math and other science subjects, we are pioneers in providing a variety of interest-oriented courses, including Sudoku, Rubik's Cube and the Bridge games as means of nurturing logic development and strategic reasoning. Our interest-oriented courses offerings differentiate us by delivering fun and educational learning experience to our students. In the fourth quarter, our teams also outperformed in various Sudoku or Bridge match. For example, our team won the top award in the first [year] of Bridge open in Shanghai.

(foreign language) Interpreted We also made considerable progress regarding our featured math lab program. For the course content segment, we finished the main course development work in the quarter and on the test and evaluation system front, we have been contently upgrading the self-test system with an enriched question library and well-tagged categorization. As the evaluation system becomes increasingly comprehensive with an extensive data set, it will also be able to intelligently generate the bespoke sets of test questions that help students improve academic performance according to the individual scholastic aptitude.

(foreign language)

Interpreted

Overall, we concluded the fiscal year 2019 with many achievements, despite changes in regulatory requirements in an already fast-evolving industry environment and the relatively weak performance of new learning centers during the ramp-up period. We have also been proactively adapting our business operation to this change and to better serve our students with premium educational content and enjoyable learning experience. We believe we are in the right trajectory to grow our business as we contently providing math and many more subject classes to students in different age groups.

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

Thank you, Mr. Tian. Hello, everyone. We continued to make positive strides in the fourth quarter, which traditionally is the weakest period of the fiscal year due to Chinese New Year holiday and winter break.

In spite of the softer top line performance for the quarter due to seasonality, we are pleased with the continuous diversification of revenue contributions from our different subjects and age groups, especially from non-math courses and the middle school program compared with a year ago period.

Looking back to the entire fiscal year 2019, we achieved year-over-year revenue growth of 11.7% and an RMB 35.6 million adjusted net income, amid in a tightening regulatory environment. More importantly, we have been steadily carrying out our own business transformation from a leading after-school math education service provider for elementary school students through our comprehensive educational provider with strong capacity and a specialty in math teaching. While our offering has broadened, our mission remains the same. We are dedicated to nurturing student interests in learning with enriched education offerings, while seeking quality growth and enhanced efficiency.

Now I would like to walk you through more details on our fourth quarter and fiscal year 2019 financial results. Revenue decreased by 3.7% to RMB 64.7 million for the fourth quarter of fiscal year 2019 from RMB 67.2 million in the same period of last year, primarily due to the decreased revenue contribution from competition-related programs as a result of changing regulatory requirement.

Cost of revenue increased by 55.9% to RMB 46.0 million for the fourth quarter of fiscal year 2019 from RMB 29.5 million in the same period of last year, primarily attributable to cost associated with increase in faculty staff cost and the learning centers' rental, utility and maintenance and then depreciation costs as a result of increased number of learning centers.

Gross profit decreased by 50.3% to RMB 18.7 million for the fourth quarter of fiscal year 2019 from RMB 37.7 million in the same period of last year. Gross margin was 28.9% for the fourth quarter of fiscal year 2019 compared with 56.1% in the same period of last year. The decrease in gross margin was primarily due to the expansion of new centers, which yield relatively lower gross margin during the ramp-up period and the increase in faculty staff cost.

General and administrative expenses increased by 63.0% to RMB 39.8 million for the fourth quarter of fiscal year 2019 from RMB 24.4 million in the same period of last year, primarily attributable to increased staff cost of RMB 4.8 million and RMB 1.8 million increase in depreciation, amortization cost and increased share-based compensation expenses of RMB 2.9 million.

Sales and the marketing expenses decreased by 21.1% to RMB 9.1 million for the fourth quarter of fiscal year 2019 from RMB 11.5 million in the same period of last year.

Operating loss was RMB 30.1 million for the fourth quarter of fiscal year 2019 compared with operating income of RMB 1.8 million in the same period of last year.

Adjusted operating loss, which excludes share-based compensation expenses, was RMB 21.0 million for the fourth quarter of fiscal year 2019 compared with adjusted operating income of RMB 8.1 million in the same period of last year.

Interest income decreased by 58.1% to RMB 0.9 million for the fourth quarter of fiscal year 2019 from RMB 2.1 million in the same period of last year, primarily due to the withdrawal of short-term deposit.

Other income, net was RMB 2.7 million for the fourth quarter of fiscal year 2019 compared with other expenses of RMB 0.6 million in the same period of last year, primarily due to fair value change of a 2-year PIMCO fund-linked note and the 1-year certificate on a mutual fund, both with 100% minimum redemption level at maturity that the company intends to hold to maturity.

Income tax benefit was RMB 8.1 million for the fourth quarter of fiscal year 2019 compared with income tax expense of RMB 0.7 million in the same period of last year. Income tax benefit for the quarter was primarily due to an RMB 4.7 million reversal of accrued income tax as the company's Wholly Owned Foreign Enterprise is able to enjoy a preferential tax treatment since it was recognized as a software enterprise by relevant PRC government agencies. Another RMB 3.6 million of income tax benefit was derived from positive change from previous uncertain tax position.

Net loss was RMB 18.5 million during the fourth quarter of fiscal year 2019 compared with net income of RMB 2.7 million in the same period of last year. Adjusted net loss, which exclude share-based compensation expenses and a fair value change of investments measured at fair value was RMB 12.2 million compared with adjusted net income of RMB 9 million in the same period of last year.

Basic and diluted net loss per ADS attributable to ordinary shareholders for the fourth quarter of fiscal 2019 was both RMB 0.36 compared with the basic and diluted net income per ADS attributable to ordinary shareholders of RMB 0.09 and RMB 0.08, respectively, for the same period last year.

Non-GAAP basic and diluted net loss per ADS attributable to ordinary shareholders for the fourth quarter of fiscal year 2019 was both RMB 0.23 compared with a non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders of RMB 0.22 and RMB 0.20, respectively, for the same period last year.

Cash and cash equivalents. As of February 28, 2019, the company had cash and cash equivalents of RMB 471.2 million, a decrease of 19.2% compared with RMB 583.3 million as of February 28 2018, primarily due to a RMB 144.1 million cash payments for the acquisition and the increase in short-term investment of RMB 33.7 million (sic) [RMB 32.7 million]. The decrease was partially offset by the operating cash inflow generated in the fiscal 2019.

To be mindful of the length of our earnings call for the fiscal 2019 financial results, I will encourage listeners to refer to our earnings press release for further details.

Looking forward, for the first quarter of fiscal 2020, we currently expect to generate the revenue in the range of RMB 83.8 million the RMB 86.4 million. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of market and the operating conditions and customer demand, which are all subject to change.

This concludes my portion of the prepared remarks. We will now open the call to questions. Operator, please go ahead.

(Operator Instructions) The first question today comes from Melissa Chen with China Renaissance.

(foreign language) So my first question is on our expansion plan. So for the following quarters, are we going to focus on utilization improvements for the existing learning centers? Or we're going to, like, open more new learning centers in Shanghai and non-Shanghai cities? And my second question, so on the regulation side, do we expect more regulatory uncertainties for the online education?

Thanks, Melissa. Let me answer your question. On the expansion (foreign language) In Shanghai, our focus would definitely be to -- we'll focus on ramping up the current learning centers. As you know some of the learning centers are relatively new and are relatively bigger than our previous learning centers. So we're focused on to improve the utilization rate of those new learning centers. So this is our focus for the, I will say, for the coming 2 to 3 quarters. Honestly, I don't expect to open up any new learning centers in the next couple of quarters in Shanghai. For learning centers outside Shanghai we'll be the same. We just opened some learning centers in Changzhou and Chongqing. And we will focus on those new areas, which we believe have a very big market potential.

Second, on the question of online, because we haven't really invested heavily online and we use -- we work with other party to offer our selected courses online. We don't expect there will be any material change on the online regulatory requirement. And honestly, we don't believe that change will have material impact on our business because online portion in our overall business is extremely small.

(Operator Instructions) Since there appears to be no further questions, I'd like to turn the call back over to the company for closing remarks.

Thank you, once again, for joining us today. If you have further questions, please feel free to contact Four Seasons' Investor Relations through the contact information provided on our website or the Piacente Group Investor Relations. Operator?

This conference has now concluded. You may now disconnect your line.

Thank you.

Portions of this transcript that are marked [Interpreted] were spoken by in interpreter present on the live call.