Four Seasons Education (Cayman) Inc (FEDU) 2020 Q3 法說會逐字稿

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

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 Third Quarter 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.

Ms. Joanne Zuo, our Director and 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 know 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. We achieved another quarter of steady performance with revenue of RMB 103.5 million, representing year-over-year growth of 13.5% and adjusted net profit of RMB 14.5 million. The stable financial performance was attributable to our relentless efforts on growing the core business geared by the continuous ramp-up of our learning centers. During this quarter, we also maintained our momentum in diversifying course offerings to better address the different academic demands of students across the entire K-12 age groups.

Our development plan for the learning center network remained on track. In the third fiscal quarter, we opened 2 new learning centers in Jiangsu Province. As a result, the total number of learning centers increased to 55 in the third quarter compared to the preceding quarter. Going forward, we will concentrate our network-building efforts on economically dynamic markets. In the meantime, we continue to prudently optimize our learning center network on an ongoing basis as we explore better location and more favorable rental terms.

The steady ramp-up of our learning center and continuous optimization of our network will eventually fuel our revenue growth. Additionally, our online classes, as an efficient supplement to our offline courses, are well received by our students and have achieved a rapid development in the fiscal 2020 to-date. We have also been proactively explore new opportunities in the online education market.

Besides our organic business growth, we remained active in developing and cultivating various innovative educational products and activities that prominently differentiate ourselves among the K-12 after school education providers. Our interest-oriented courses have been well received by students from different age groups. Our math lab project, our flagship product, continued to gain the industry's attention. We have established a comprehensive math-based curriculum and evaluating system in this program, including cultural courses, experimental activity classes, mathematical games and the self-testing system.

As of the third quarter, we inked a collaboration agreement with multiple regular K-12 schools to introduce our math lab teaching materials and courses to their students, further enhancing Four Seasons Education's brand awareness in our targeting student group. In addition, our math lab project received a very positive feedback from educational professionals and participants in the 5th China Education Innovation Expo. These achievements demonstrate our commitment to education as well as our strong educational innovation capabilities, which, in turn, will further increase student engagement with us.

We will remain dedicated to curriculum development and technological innovation. Besides consistently improving our math lab project through consistently upgrading the self-testing system, we have been proactively exploring new opportunities to invest through investments in our online presence in the meanwhile. Also, we will keep cultivating our brand educational content and the teaching methods to consolidate our leading position and the brand reputation in K-12 education and the intellectual development.

We believe our enrollment growth, learning center network development, top line performance as well as positive progress of other activities in the third quarter all serve to illustrate the effectiveness of our strategy and the resiliency of our business model. With the right strategy and efficient execution in place, we are optimistic about our performance for the quarters to come. With the strength experienced in math education, proactive approach to diversifying course offerings, grade level coverage expansion as well as diligent network construction, we believe we are in the right trajectory to grow our business.

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. Our third quarter results were solid and in line with our expectations. We delivered revenue of RMB 103.5 million, representing year-over-year growth of 13.5%. This top line performance reflects the healthy ramp-up of our learning centers as a result of our established brand image among students and parents. Along with our cost control and optimization of operations, we realized operating income of RMB 10.9 million and continued to make positive strides in the third quarter. We are dedicated to optimizing our operations across all aspects on an ongoing basis in order to further improve our profitability. We are launching new -- launching prudent expansion plans.

Now I'd like to walk you through further details of our third quarter fiscal year 2020 financial results. Revenue increased by RMB 13.5 million (sic) [13.5%] to RMB 103.5 million for the third quarter of fiscal year 2020 from RMB 91.2 million in the same period of last year, primarily attributable to the healthy ramp-up of new learning centers which the company opened during fiscal year 2019. Cost of revenue increased by 17.2% to RMB 50.5 million for the third quarter of fiscal year 2020 from RMB 43.1 million in the same period of last year, primarily attributable to the increase in faculty staff cost.

Gross profit increased by 10.2% to RMB 53 million for the third quarter of fiscal year 2020 from RMB 48.1 million in the same period of last year. General and administrative expenses increased by 4.1% to RMB 33.4 million from (sic) [for] the third quarter of fiscal year 2020 from RMB 32.1 million in the same period of last year. Sales and marketing expenses increased by 5% to RMB 8.8 million for the third quarter of fiscal year 2020 from RMB 8.3 million in the same period of last year.

Operating income increased by 41.5% to RMB 10.9 million from the third quarter of fiscal year 2020 from RMB 7.7 million in the same period of last year. Adjusted operating income, which excluded share-based compensation expenses, increased by 1.5% to RMB 17 million from the third quarter of fiscal year 2020 from RMB 16.7 million in the same period of last year. Interest income net was RMB 1.5 million from the third quarter of fiscal year 2020 compared with RMB 1.2 million in the same period of last year.

Other income net was RMB 4.1 million for the third quarter of fiscal year 2020 compared with other expenses of RMB 2.6 million in the same period of last year, primarily due to investment fair value change and foreign exchange. Net income increased by 321.6% to RMB 11.3 million during the third quarter of fiscal year 2020 compared with RMB 2.7 million in the same period of last year.

Our adjusted net income increased by 6% to RMB 14.5 million compared with RMB 13.7 million in the same period of last year. Basic and diluted net income per ADS attributable to ordinary shareholders for the third quarter of fiscal year 2020 were RMB 0.24 and RMB 0.23 compared with RMB 0.06 and RMB 0.05, respectively, for the same period of last year. Non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the third quarter of fiscal year 2020 were RMB 0.31 and RMB 0.30 compared with RMB 0.28 and RMB 0.27, respectively, for the same period of last year.

Cash and cash equivalents. As of November 30, 2019, the company had cash and cash equivalents of RMB 564.6 million, an increase of 28.4% compared with RMB 439.6 million as of February 20 (sic) [28], 2018 -- 2019. To be mindful of the length of our earnings call, for the first 9 months of fiscal year 2020 financial results, I encourage listeners to refer to our earnings press release for further details.

Looking forward, for the fourth quarter of fiscal 2020, the company expects to generate revenue in the range of RMB 80.9 million to RMB 84.1 million, representing year-over-year growth of approximately 25% to 30%. The above outlook is based on current market conditions and reflects the company's preliminary estimates of market and operating conditions and the customer demand, which are all subject to change.

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

(Operator Instructions) The first question comes from Joy Wei of 86Research.

Congratulations on the solid performance. My questions will mostly -- okay. My questions will mostly focus on our future growth strategies. Firstly, on geographic expansion, could management share any metrics on the newly entered cities, including Chongqing, Shenzhen and Jiangsu? Like how many enrollment come from these 2 -- these 3 cities? Is the ramp-up pace better or worse than our expectation and also the reasons behind the results?

And secondly, what is the expansion plan in the coming quarters both in Shanghai and also the newly entered cities? What kind of measures will we take to promote our brand there? How will the development there impact our financials? And thirdly, a more general question on our growth strategies besides geo expansion. Can management share with us your plans on expanding course offerings in areas like more subjects or wider age groups or other models such as online education? Which one do you think will offer the most opportunities for Four Seasons Education? And how do we plan to grab the opportunities there? Any color would be helpful.

Let me take the first -- yes. Wang Xun, I can take the first crack and you can chime in or add on, if you want, okay? First of all, thank you. To your first question, sorry, we don't disclose the detailed enrollment of those learning centers, respectively. But in general, our centers in Chongqing and Jiangsu are getting mature and the results are well in line with our expectation. And I will say the -- in certain cities in Jiangsu, because we have several learning centers in Jiangsu, in certain cities in Jiangsu and in Chongqing, I will say, especially better than our expectation, the ramp-up is very well, in fact. Shenzhen center is really new, so it's still in the sort of development. It's at the very early stage of its cycle. So not much color on that yet. So we are in the process of recruiting the best team with the recruiting manager as well as our teachers to help us to grow our learning center in Shenzhen. That's the key city that we will focus our efforts on in terms of centers outside Shanghai. So that's to your first question.

I think the second and third question are related -- is basically our future growth strategy. To be honest, for the coming 2 quarters, I don't think we will open up a lot of new centers in Shanghai. And outside Shanghai, yes, maybe we will open 1 or 2. But given that the centers in Shenzhen is newly opened and it's pretty big, so we'll focus on try to ramp it up fast. And Shenzhen is a big market, and we believe that will help us address lot of growth, contribute to our total revenues. And in terms of diversifying our course offerings to different age groups and different subjects, yes, that's one of the key area that we have been focused on since our IPO. We will see a very good ramp-up, enrollment increase in our middle school programs as well as our prepaid programs. So that's one of the nice results that we see from age group expansion.

And the contribution from math to our total revenue -- it's getting lower and lower, which is also a result of our continuous efforts to expand our subject offerings. Now we offer -- even in primary school, we offer English, we offer literature even; and for our middle school program, we basically cover all the coverage -- cover all the subjects. And our content is getting mature and our teachers are getting mature. So hopefully, we will get a lot of -- we will get nice growth from those areas as well. Online is another area that we decided to focus and put a lot of efforts going forward. We believe that's one of the trend. And Four Seasons is very strong in content as well as faculty. To us, online is really just one of the means how to use digital means to let us -- to let our program to reach more students -- more target students. That's the way that we're going to work on hardly for the coming quarters.

The next question comes from [Maggie Jones] of Haitong International.

I have 2 here. The first is regarding the Shanghai latest regulation. Is there any tightening or change in the regulation law today? And my second question will be, the MOE recently released a new policy for the university enrollment program yesterday. So is it going to change the previous university independent enrollment program? And how do you see the second opportunities? And what might be some changes in the course offerings going forward?

Regarding your first question about the policy tightening, the (inaudible) has been out in Shanghai years ago. So we haven't seen any tightening. It's already being tightening up 2 and 3 years ago. And for the new (foreign language) basically, everybody is waiting to -- for the details to come. But just for us, we believe as long as there is scarcity of good education there, everybody will -- looking for opportunities to get better education opportunities. So we think the demand is still going to be solid. As to your second question on the new policy -- on the switch off, as you can see, just from my personal point of view, it's just that basically the whole evaluation system becomes more transparent and it focus more on those basic subjects like (foreign language). To us, we think it's actually -- it's a positive drive to the after school tutoring market.

Was there a follow-up, Ms. [Jones]? (Operator Instructions) The next question comes from [Hong Dau] of Guangzhou Securities.

My name is [Dau Hong] from Guangzhou Securities. So first, I want to congrats the management for such a solid operational performance. So my first question is, what's the structure among the 48% student enrollment increase? Like how much was from primary school, middle school and high school? How much was from math, English and other subjects? And my second question is, could you share more details about our math lab project? Like what's the target students? And also, could you talk more about our online strategy?

Wang Xun, why don't you answer the first question first, and I'll answer the next 2?

First, we are not disclosing such details by segment. But I can answer your question about the increase -- the reason of the increase. First, I think the most important reason is the healthy ramp-up of our learning centers. Second reason is that because you know the spring festival is earlier than last year, so we moved the recruitment schedule a little earlier than last year. So that's partially reason of the increase, okay? But mainly, it's because of the healthy ramp-up of our learning centers.

Yes. For the math lab project -- yes, the math lab has different parts. Yes, the math lab has different parts. It includes the math culture, the intellect of the math project as well as a math evaluation system. Our current strategy is to sell the math project to those standard K-12 schools, which, as I mentioned in our script, we have inked agreement with a few top schools in Shanghai. So their students will use our math lab and teachers will use math lab, which will help them to evaluate how the student's capability when it comes to math. And subsequently, we were offering those solutions, and our teachers will also have -- to some of the schools we actually also provide a follow-on sort of (inaudible). So that's how the math project is -- how the math project -- math lab project works now. But because it's new, so the business model is actually evolving. We will definitely cultivating the math lab to different needs of -- for the more schools that we're going to work with. So far, we actually have received a very positive feedback from the schools because we have a very solid and very large problem set database and our evaluation system is also very sort of precise and reliable.

On the online strategy, it's really new. We are still sort of in the internal discussion, and we're also in discussion with some big players in the market in terms of Internet traffic as well as content. So we're looking for different ways to provide -- because we believe our -- the core is very, very strong. The content -- when it comes to the content teachers, it's really just in -- for many -- which way that we can provide our content in a more economical way to more students, not just Shanghai, but nationwide. So this is one of the key strategy and key area that we're going to focus on for the coming quarters.

As there are no further questions now, I would like to turn the call back over to the company for 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 TPG Investor Relations.

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