Four Seasons Education (Cayman) Inc (FEDU) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by for the Four Seasons Education's Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded.

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

Hello, everyone, and welcome to the Fourth Quarter and Fiscal Year 2020 Earnings Conference call of Four Seasons Education. 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 e-mail distribution list by visiting the IR Section of our website at ir.sijiedu.com.

Mr. Joanne Zuo, our Chief Executive Officer, will start the call by providing an overview of the company performance highlights for the quarter. Ms. Xun Wang, the company's Vice President of Finance, will 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 include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Four Seasons Education's press release contains 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, Ms. Zuo. Please go ahead.

Thank you, Olivia, and hello, everyone. Before providing an overview of our fourth quarter performance, we would like to extend our condolences to the families of those individuals who passed away due to the COVID-19. We are also profoundly grateful for the medical professionals, community staff and all those people who have fought against the coronavirus at the front line. I also want to thank all of our employees for their hard work and dedication that allowed us to overcome numerous challenges during this unprecedented time.

In the fourth quarter of fiscal 2020, we achieved a revenue growth of 10% year-over-year, a solid performance in light of the COVID-19 epidemic in China. After the outbreak of coronavirus, we immediately took precautionary measures to protect our students and employees. In response to the government's containment, we swiftly transitioned our offline courses of all academic subjects to online classes, ensuring our students were able to take courses online.

Our quick transaction to online classes has allowed us to successfully retain the majority of our students who registered for our offline courses to study with us online. Concurrent with the cost migration, we also provided a series of supplemental online services, such as the class replay, after class question-and-answer sessions and homework review all in an effort to facilitate a smooth user experience for students and parents.

Additionally, in collaboration with East China Normal University Press, we have officially launched One-lesson One-exercise online courses for primary school students during the fourth quarter. One-lesson one-exercise is a well-known and widely used reference book series. Our partnership with East China Normal University Press on the book series corresponding online courses is a clear testament to our curriculum development capability. This class series will also help us enhance our brand awareness to a broader student audience.

Besides our online classes, in the fourth quarter, our technology team has also established a more integrated operational system that is better organized and streamlines our resource of teaching staff, learning center operations, courseware production and technology. Such consolidated operations amplified the efficiency in our cost development, class monitor and internal training, thus set the foundation of an advanced online-merging-offline or OMO model.

Presently, we expect to reopen the majority of the offline facilities in June following the guidance from the government. Looking ahead, we plan to continue providing a considerable proportion of courses online when our offline learning centers reopen and resume course delivery.

Our online education provides students optimized learning experience and improves the study results with unlimited course replay and diversified supplemental services. In turn, it will significantly broaden our outreach to the market and effectively expand our student base. As a critical front of our OMO strategy, we will also increase our investment in online infrastructure, technology and content development. Overall, the COVID-19 epidemic presented challenges as well as the very moment where we have to accelerate the digital transformation of our operations to embrace online education.

During this epidemic period, we have completely transitioned our academic offline courses delivery and realized seamless online operations. These efficient operational adjustments allowed a more cohesive online and offline model, which would definitely benefit our business development in the long run.

Faced with extraordinary challenges brought back by the outbreak of COVID-19 in the last quarter of fiscal 2020, we successfully maintained the majority of our student base, sustained top line growth and expanded gross margin compared with the fourth quarter last year. Our resilient performances in the fourth quarter helped us conclude the fiscal year 2020 with a solid top line growth of 16% year-over-year. Such results demonstrates the strength of our education content, teaching capabilities, courseware and operations and more importantly our sterling brand image.

Through our strengthening online-merging-offline model, we remain dedicated to providing diversified course offerings to K-12 student groups with superior learning experience to improve the academic performance and cultivate the interest in learning.

With that, I would now turn the call over to our Vice President of Finance, Ms. Xun Wang, who will discuss key financial results.

Thank you, Joanne, and hello, everyone. In the fourth fiscal year, we promptly adjusted our operations in response to the COVID-19 in academics and efficiently maintaining our student base. In this quarter, our new enrollments decreased by 48% year-over-year because we started our course registration ahead of time, considering the early Chinese New Year Holiday in 2020. Consequently, a considerable number of enrollments were recorded during the third quarter. The COVID-19 outbreak also impacted our enrollment for the quarter. As a result, total enrollment of the second half of fiscal year 2020 was relatively flat compared with the year ago period.

Despite the challenging situation due to COVID-19, we still achieved about 10% year-over-year revenue growth to RMB 71.0 million for the fourth quarter, while continuing our stringent cost control and optional optimization to improve our profitability. Although we will face uncertainties as the epidemic situations develop, we are confident in the long-term potential of the after-school education market in China with our ever strengthening online facility in place and a more integrated OMO system, we are able to attract an even wider and larger student demographic to study with us.

Last but not least, our strong cash position and healthy balance sheet enables us to upgrade our online and offline facilities and make appropriate investments with sufficient capital support.

Now I'd like to walk you through further details of our fourth quarter of fiscal year 2020 financial results. Revenue increased by 9.8% to RMB $71.1 million for the fourth quarter of fiscal year 2020 from RMB 64.7 million in the same period of last year, primarily attributable to the healthy ramp-up of new learning centers opened by the company during the fiscal year 2019 and expanded cost offerings. Cost of revenue increased by only 0.6% to RMB 46.3 million for the fourth quarter of fiscal year 2020 from RMB 46.0 million in the same period of last year.

Gross profit increased by 32.4% to RMB 24.8 million for the fourth quarter of fiscal year 2020 from RMB 18.7 million in the same period of last year.

General and administrative expenses increased by 1.5% to RMB 39.8 million from the fourth quarter of fiscal year 2020 from RMB 39.2 million in the same period of last year.

Impairment loss on intangible assets and goodwill was RMB 145.4 million for the fourth quarter of fiscal year 2020 compared to RMB 0.6 million in the same period of last year, mainly due to the decline in reporting unit's fair value.

Sales and marketing expenses decreased by 15.0% to RMB 7.7 million for the fourth quarter of fiscal year 2020 from RMB 9.1 million in the same period of last year, primarily attributable to the decrease of advertising due to the impact of COVID-19.

Operating loss was RMB 168.2 million for the fourth quarter of fiscal year 2020 compared with RMB 30.1 million in the same period of last year. Adjusted operating loss, which is calculated as operating loss, excluding share-based compensation expenses, and impairment loss on intangible assets and goodwill was RMB 15.1 million for the fourth quarter of fiscal year 2020 compared with RMB 20.4 million in the same period of last year.

Other income, net was RMB 4.9 million for the fourth quarter of fiscal year 2020 compared with RMB 2.7 million in the same period of last year, primarily due to investment fair value changes.

Income tax benefit was RMB $15.7 million for the fourth quarter of fiscal year 2020 compared with RMB 8.1 million in the same period of last year, mainly from the tax effect of intangible asset impairment.

Net loss was RMB 145.4 million during the fourth quarter of fiscal year 2020 compared with RMB 18.5 million in the same period of last year. Adjusted net loss, which is calculated as the net loss excluding share-based compensation expenses, fair value change of the company's investments and impairment loss on intangible assets and goodwill net of tax effect was RMB 4.7 million compared with RMB 11.7 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 year 2020 were both RMB 3.11 compared with both RMB $0.36 for the same period of last year. Adjusted basic and diluted net loss per ADS attributable to ordinary shareholders for the fourth quarter of fiscal year 2020 were both RMB $0.07 compared with both RMB $0.22 for the same period of last year.

Cash and cash equivalents as of February 29, 2020, the company had cash and cash equivalents of RMB 404.7 million compared with RMB 439.6 million as of February 28, 2019.

Looking forward, for the first quarter of fiscal 2021, the company expects to generate revenue in the range of RMB 55.7 million to RMB 60 million. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of the market and operation conditions and customer demand, which are all subject to change, particularly in consideration of uncertainties related to the COVID-19 outbreak, among others.

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

(Operator Instructions) First question is from Joy Wei from 86Research.

My question is regarding the structural change of the after-school tutoring market. Could management share your views on the development of the online education market? Do you think online education will cannibalize the offline market? And what's your strategy to conform to this trend?

Thank you for the question. First of all, let me clarify, what do you mean by the change of the structure of the tutoring market, you mean the breakdown between online and offline?

Yes. Because online education market is growing very quickly. So it's like taking market share for the whole market.

Yes. Online tutoring has been growing very fast for year -- especially for the past 2 years and then COVID-19 definitely accelerated such growth. But we believe the results, the quality is still very different between online and offline. Taking this COVID-19 as an example, many parents realized that the results -- the effectiveness of offline is somewhat better, I would say, or at least they're very different from online. I think it's -- definitely the online portion will catch up, offline has its own strategy. And in our view, we believe the core essence of education is the content, the faculty, which lead to the results of the tutorial. Online or offline is just a method. That is why we believe that this -- the whole COVID-19 forced us to transform into an online model, and we adapted to this change very quickly. For us, it's a challenge and opportunity as well. As we pointed out early on that even that after we resume the offline facility delivery of coursewares we will still resume a significant portion of our delivery online. Going forward, online will be part of our business model, too. We believe online-merging-offline is what we will be good at because we have the best content. We have the best faculty. And online, offline are just 2 means to reach students.

Yes. That's helpful. And I have a follow-up question on your student acquisition strategy. So what will you do in the spring and also summer vacation period to acquire these students, considering that the spring semester is shortened?

Yes. As you know, in online, the tutoring business is basically, in most cases, once a week. So it doesn't matter that the summer break has shortened in a way. And for us, we heavily rely on word-of-mouth referrals. And the Four Season is already an established brand in Shanghai. As you may know -- as you may have noticed that historically and -- which is still the case that we have spent very little in marketing. All the students came up to us because of the word-of-mouth referral and because of our brand, which both is a testament to our teaching quality. So going forward, I think this still will be the main channel of student acquisition, which is our brand awareness and with word-of-mouth referrals. But we also started to invest more in marketing and advertising. Previously, we almost invested nothing, spent nothing, but we are going to -- and we are doing that, we will cautiously increase our spending in the advertising or other marketing methods that will help us to acquire students effectively.

Right, right. Could you remind us the referral rate of the enrollment? And also probably -- also the retention rate?

Sorry, we don't disclose that publicly. You can schedule a follow up call with our IR, and we can discuss later, and -- but we don't disclose those 2 metrics publicly for now.

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

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

This concludes this conference call. You may now disconnect your line. Thank you.