NaaS Technology Inc (NAAS) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the RISE Education First Quarter 2019 Earnings Call. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, 17th of May 2019.

I would now like to hand the conference over to your first speaker today, Investor Relations Director of RISE Education, Ms. Mei Li. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to RISE Education's First Quarter 2019 Earnings Conference Call. Today, you will hear from Mr. Sun Yiding, CEO, who will give an overview of the company's strategy and recent developments, followed by Mr. Lu Jiandong, CFO and COO, who will go over our financial results in more detail.

Before we proceed, I would like to remind you that today's discussion may contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to our Form 20-F filed with SEC on April 19, 2019. We do not assume any obligation to update any forward-looking statements, except as required in the applicable law.

At this point, I'd like to turn the call over to Mr. Sun Yiding. Please go ahead.

(foreign language)

[Interpreted] Thank you, everyone, for joining us today. I will read through Mr. Sun's prepared remarks, will hear me in English. We are pleased to see the robust growth in our top and bottom lines for the quarter. Revenues came in at CNY 335 million representing an increase of 24.0% year-over-year. Our adjusted EBITDA margin was 24.0%. These strong results demonstrated just how effective our strategy is at generating sustainable organic growth and speaks highly of our corporate flexibility in adapting to a new regulatory environment.

The adjustable market for junior english language teaching in China remains massive and heavily under penetrated. Among China's population of children between the ages of 3 to 12, children from middle and upper class families represent the fastest-growing segment.

The junior ELT market in Beijing, Shanghai, Guangzhou and Shenzhen alone is expected to be worth of CNY 25 billion in 2020 and CNY 36 billion by 2022.

Third-party data confirms the enormous expansion potential capacity China's junior ELT market has when we work on the blueprint program to develop our strategy over the next 3 years. With such enormous growth potential, we believe the market will become increasingly concentrated over time as education companies with fully integrated online and off-line platforms, differentiated product offerings and a strong brand recognition take advantage to consolidate their market share.

The government's new regulations have also significantly raised the barrier to entry across the junior ELT industry and is expected to help support the healthy growth of the industry over the long run. As one of the industry's top players, I strongly believe that our fully compliant operation, experienced management team and the ability to retain and broaden our student base leave us ideally positioned to benefit from the growth of the industry and further consolidate our market share.

In the fourth quarter of 2018, we began collecting tuition in phases to comply with new government regulations. Our student retention rate in the first quarter of 2019 increased to 72%, highlighting how effective we are at enhancing the quality of our product and strengthening the parents' trust and loyalty.

Student enrollments were 16,522 during the first quarter, however, they aren't directly comparable to the same period of last year. As I mentioned during the last quarter earnings call, we raised the price of our courses on January 1 in Beijing, while in previous years, we increased our course prices in April. With Beijing being our biggest market and accounting for significant portion of the student enrollments, this price increase has pushed new and existing students to register their enrollments in the fourth quarter of 2018 rather than in the first quarter 2019. In the coming quarters, we will continue to work on the effective program to grow new student enrollments and to maintain our high retention rate.

Our focus for the remainder of the year will be on sustaining revenue growth, while taking advantage of market opportunities to diversify and accelerate this growth.

We plan to continue to maintain the pace of our capacity expansion and remain on track to add 11 new self-owned learning centers and 50 to 60 franchised learning centers throughout the year. We added 2 self-owned learning centers and 13 franchised learning centers during the first quarter and had added a 1 self-owned learning center and 6 franchised centers so far during the second quarter. Maintaining the pace of our expansion is key to supporting mid-20% organic revenue growth, driving long-term sustainable growth in enrollments and strengthening our nationwide presence.

Acquiring franchised learning centers forms an important part of our expansion strategy and is a key to accelerating revenue growth. We expect to consolidate the Shijiazhuang franchise business in the second half of 2019. We are closely monitoring and evaluating market where we already have a leading market position such as in Beijing-Tianjin-Hebei Economic Zone and the Pearl River Delta, and are in talks with a number of potential acquisition targets.

In addition to accelerating revenue growth through our expansion strategy, we continue to devote resources towards developing innovative education products with fully integrated online and off-line elements. We are upgrading content to incorporate more online components into our existing courses, offering students across a wide range of age groups a blended learning experience, in addition to our pure online products such as Can-Talk. The in-person touch of the off-line teaching between teachers and students cannot be entirely replaced, but can be empowered with intelligent technology such as voice recognition and self-adaptive learning.

As we discussed last quarter, Rise Club, our in-house developed online platform, helps to extend the learning experience beyond the classroom, facilitate the parent supervision and improve communication between the teachers, parents and the students. This mobile application shows personalized learning results of our students directly to their parents, further enhancing parent satisfaction.

We continue to invest in selling and marketing in a controlled and targeted manner to further increase new student enrollments. We constantly evaluate all marketing channels, both online and off-line, to ensure they are targeted and effective. We work hard to increase our conversion rates in order to generate a good return on our investment.

Additionally, we are leveraging technology to enhance the overall structure of our business so that we can carefully control cost and improve operation efficiency. We are investing in our IT infrastructure to ensure that it has ample resources to support the acceleration of our growth, and are upgrading the functionality of our platform.

Expanding our learning center network will put short-term pressure on our margins. Our newly opened learning centers are performing well and are on track to generate better utilization rates as they ramp up capacity and will mature over the next 3 to 4 years. Therefore, I'm pretty confident that our profitability will be improved over time. We were one of the first junior ELT companies to enter the market and have always pride ourselves on generating revenue growth that exceeds the industry average. We will continue to carefully balance revenue growth and long-term profit margins.

Before I hand the call over to Jiandong, I'd like to reiterate we are building this business for long term and I am confident that we have the right strategy in place to drive organic revenue growth of approximately 25% for the year, while having a good control of our EBITDA margins. Our goal for 2019 is to further enhance our brand and course curriculum, further leverage our technology to improve our product offerings and operational efficiencies. I strongly believe that this laser-like focus on growing the business over the long term will help us cement our leading position in the market.

This concludes the remarks of our CEO, Mr. Sun Yiding. I will now turn the call over to our COO and CFO, Ms. Lu Jiandong, to go through our financial highlights. Jiandong, please go ahead.

Thank you, Mei, and hello, everyone. Now I would like to go through our financial highlights for the first quarter of 2019. Before I begin, please note that all numbers stated here are in RMB terms.

In the first quarter of 2019, our total revenues increased by 24% year-over-year to CNY 335 million, the top end of our guidance. This was driven by a 23.7% year-over-year increase in revenues from our educational programs to CNY 286.6 million in the first quarter of 2019.

Starting from the first quarter of 2019, revenues from educational programs includes revenues generated by The Edge. Revenues from educational programs in previous quarters have been adjusted for consistency and comparisons. The increase in revenues from our educational programs was primarily attributable to an increase in the number of student enrollments for our regular courses as well as the stable and high retention rate of 72% we have attained this quarter. We expanded our self-owned learning center network from 64 as of March 31, 2018, to 78, as of March 31, 2019.

Franchise revenues increased by 35.3% year-over-year to CNY 38.2 million in the first quarter of 2019. This increase was primarily attributable to an increase in onetime franchise fees and recurring franchise fees associated with an increase in the number of franchised learning centers from 220 as of March 31, 2018, to 317 as of March 31, 2019.

Other revenues increased to CNY 10.3 million in the first quarter of 2019, up by 0.9% year-over-year from CNY 10.2 million in the same period last year.

Cost of revenues for the first quarter of 2019 increased by 23.1% to CNY 154.4 million from CNY 125.5 million during the same period of last year. Non-GAAP cost of revenues for the first quarter of 2019 increased by 23.6% to CNY 150.5 million. The increase was primarily due to increase in rental costs associated with the company's expansion of self-owned learning centers and personnel costs associated with an increase in teacher headcount and total teaching hours at the company's self-owned learning centers.

Gross margin for the first quarter of 2019 increased by 24.9% year-over-year to CNY 180.6 million. Gross margin improved to 53.9% during the first quarter of 2019 compared with 53.6% in the same period last year. Non-GAAP gross margin was 55.1% compared with 54.9% in the first quarter of 2018.

Selling and marketing expenses for the first quarter of 2019 was CNY 65.7 million, an increase of 35.3% year-over-year from CNY 48.5 million. The increase was primarily due to an increase in marketing channel expenses and the personnel costs associated with the company's expansion of self-owned learning centers, so as to increase the new student enrollments. Non-GAAP selling and marketing expenses as a percentage of total revenues was 19.3% as compared with 17.5% in the first quarter of 2018 and 20.3% in the second half of 2018.

General and administrative expenses was CNY 61.9 million, an increase of 13.9% year-over-year from CNY 54.4 million. The increase was primarily attributable to an increase in personnel costs and office expenses associated with the company's expanding business. Non-GAAP general and administrative expenses accounted for 17.6% of total revenues in the first quarter of 2019, a decrease from 19.4% in the same period last year.

Our operating income for the first quarter of 2019 was CNY 53 million. Excluding the impact of share-based compensation expenses and amortization of certain intangible assets acquired as part of the 2013 acquisition, non-GAAP operating income for the first quarter of 2019 increased by 24.3% year-over-year to CNY 60.7 million. Non-GAAP operating margin in the first quarter of 2019 is 18.1%, the same as the same period last year.

Other income for the first quarter of 2019 was CNY 7.9 million compared with CNY 10.9 million during the same period of the prior year.

Adjusted EBITDA during the first quarter of 2019 increased by CNY 11.6 million to CNY 80.5 million, an increase of 16.8% from CNY 68.9 million in the same period last year. Adjusted EBITDA margin was 24% in the first quarter of 2019 compared with 25.5% a year ago. The major impact on our Q1 adjusted EBITDA margin is the decrease of our other income from RMB 10.9 million in the first quarter of 2018 to RMB 7.9 million in the same quarter of 2019.

Net income attributable to RISE for the first quarter of 2019 was CNY 36.4 million, increased by 1.5% year-over-year to CNY 35.8 million. Non-GAAP net income attributable to RISE for the first quarter of 2019 was CNY 44 million, increased by 2.7% year-over-year from CNY 42.8 million. Non-GAAP net margin attributable to RISE was 13.1% for the quarter compared with 15.9% in the same period of last year.

Basic and diluted net income attributable to RISE per ADS were CNY 0.64 and CNY 0.63, respectively, for the first quarter of 2019. Basic and diluted non-GAAP net income attributable to RISE per ADS was CNY 0.77 and CNY 0.76, respectively, for the first quarter of 2019.

Turning to our cash flow performance in the first quarter. We generated CNY 5 million positive cash flow from operating activities during the first quarter of 2019 compared with CNY 198.4 million in the same period of last year. The decrease was mainly attributable to the annual increase in course prices in Beijing, which took place in January this year rather than in April in previous years, which resulted in students' early payment of tuition fees during the fourth quarter of 2018 before the price increase took effect, as well as the collection of tuition payments in 3-month installments rather than in full to comply with new government policies.

As of March 31, 2019, the company had cash and cash equivalents and restricted cash of CNY 1,293.1 million compared with CNY 1,316.8 million as of December 31, 2018.

As of March 31, 2019, total deferred revenue and customer advances were CNY 995.6 million representing a decrease of 4.2% from CNY 1,038.8 million as of December 31, 2018. The decrease was primarily due to the change of tuition fees collection schedule for K-12 tutoring courses.

Now let me provide you with our 2019 guidance. For the second quarter of 2019, we expect our total revenues to be in the range of RMB 369 million to RMB 375 million representing a year-over-year growth of approximately 23% to 25%. For full year 2019, we maintained our revenue growth guidance of approximately 25%. This forecast reflects our current and preliminary view on the markets and operational conditions, which are subject to change.

This concludes our prepared remarks. Operator, we would now like to open up the call for questions from our audience. For those who'd like to ask a question, please state your question in Chinese first and then in English. Operator, please proceed.

(Operator Instructions) Your first question comes from Melissa Chen from China Renaissance.

(foreign language) I have 2 questions. So the first question is on expansion plan. So can management help us to understand how many learning centers we're going to have for this year, including the self-owned learning centers and the franchised centers we're going to acquire?

And also the second question is on the sales and marketing. Can management give some color on the major channels for the sales and marketing expense, including online and off-line? And also what's the guidance for the full year sales and marketing expense?

(foreign language)

[Interpreted] To answer your first question, at the beginning of 2019, we already gave our full year guidance that for this year, we would like to add 11 self-owned learning centers and 50 to 60 franchised learning centers. We keep our expansion plan unchanged. For the self-owned learning centers, we will add those centers in Beijing, Shanghai, Guangzhou, Shenzhen. And also, we are looking at Kunshan a city close to Shanghai; probably based on our current status in the second half of this year, we will open a new center in Kunshan. So basically the expansion is on track of our expansion plans and everything is running as normal. We do not see any impacts from the regulation.

For the franchised business, the acquisition of Shijiazhuang business is progressing well. So based on my understanding, in second half of this year, we will consolidate its P&L into our financial statements. And we are keeping touch with some well-performed franchised partners and looking for the opportunity to acquire more franchised learning centers into our self-owned network, which will benefit to our top line and bottom line.

Okay. Thank you, Mei. Let me answer your second question with regard to selling and marketing channels as well as expenses as a percentage of revenue. Actually, we have both online and also off-line marketing channels. We actually tried to take a better advantage of our off-line network to increase the enrollments from the off-line channels. In terms of the off-line channels, we actually set up the marketing booth in the supermarket or outside of the schools as a way of distributing our lead-mates to attract the parents' attention. So this is pretty traditional and conventional way of the off-line channels. Meanwhile, we actually leverage our student base, the parents as a referral basis. We tried very hard to increase the percentage of the referrals from the parents as a percentage of our total leads generated. As of now, according to our operating statistics, we actually acquired students from the off-line channels, which accounts for more than 60% of the total enrollments.

For the online channels, we use, like, Baidu, Dianping, WeChat and also we try Xiaohongshu, the new media. While we are using the off-line channels, we actually monitor very closely the leads generated by different channels to make sure it can provide us with good quality leads, which can help to increase the overall conversion rate. So that actually answers your first part of the question.

The second part, with regard to the selling and marketing expenses throughout 2019, I can give you a guidance. In 2018, the total selling and marketing expenses accounts for 18.7% of our total revenue. This year, we'll further increase the selling and marketing expenses in order to further increase our total enrollments. We plan to increase roughly 1% in our total selling and marketing expenses, which gives us roughly, like, 19.5% as our total selling and marketing expenses throughout 2019. So if you look at our first quarter P&L, the first quarter non-GAAP selling and marketing expenses account for 19.3% of the total revenue generated in the first quarter. That serves as a guidance throughout the year 2019.

(Operator Instructions) Your next question comes from Felix Liu from UBS.

(foreign language) Let me translate myself. So the G&A ratio in this quarter is pretty good. So may I know if the declining G&A ratio can continue in the upcoming quarters? And what are the updated guidance for EBITDA margin in Q2 and full year?

Thank you, Felix. This is Jiandong. Let me answer your question. First of all, the G&A, you're right. In the first quarter, we managed to control our G&A in order to better leverage our scale. We'll manage to do so throughout the year and keep it at the current level. Roughly, I think it's a pretty healthy level on general and administrative expenses. Guidance for the margin, we actually didn't disclose our margins throughout the year, but basically you can derive the margin from the information I have already provided. We can manage to maintain -- other than selling and marketing expenses, we plan to increase by roughly 1% as compared to last year. And we managed to maintain all the other expenses at the same level as last year. So in short, we're pretty confident we are in good control of our margin, while we're trying to deliver top line growth by 25% organic growth, while at the same time we try to deliver a healthy sustainable margins at the same time. So we're in good control of our expenses and also try to deliver reasonable margin. Are you happy with this?

Yes. Actually, one additional question from me. (foreign language) Let me translate myself the additional question. So we know that ASP hike in Beijing in January has accelerated some of the enrollments. Now that we are several months after the event, may I know if the enrollment growth has normalized in the more recent months.

Thank you, Felix. Good observation. During the normal years, first quarter is generally our peak enrollment season. But this year is pretty unusual because due to the policy of adopting the 3-month tuition payment, we actually advanced the price increase from April to January for Beijing alone. As we have disclosed last quarter, part of the enrollment actually completed in the advanced enrollments in the fourth quarter of last year, which should have happened in the first quarter. So this is going to be a onetime hit in our total enrollment statistics, but the price increase for Shanghai, Guangzhou and Shenzhen remain the same. It happened on April 1 this year. So if you look at the components of the enrollments of both new students and also renewed students, in the first quarter, Shanghai, Guangzhou and Shenzhen actually maintained their normal momentum. The second quarter, April, May and June, is generally the low season for our business. And with the normalization of the prices, our enrollment for the second quarter as of today, stay on track, I can tell you.

Your next question comes from Sheng Zhong from Morgan Stanley.

(foreign language) Let me translate by myself. The first -- I have 3 questions. The first one is management sees the margin difference in Tier 1 and Tier 2 cities because it looks like we'll open more learning centers in Tier 2 and Tier 3 cities, including the self-operated and potential M&A funded franchisees.

And the second question is, Mr. Sun mentioned that there will be more investment in content, teacher training and technology investments. So are there any more details about this trend? And how much of the budget whether this will impact the general expense going forward?

And third one is about the retention rate. As the company changed the tuition fee collection to 3 months, so whether the retention rate going forward will gradually change to a quarter retention rate?

(foreign language)

[Interpreted] Thank you, Sheng. Let me answer your first question. For the profitability in the second- and third-tier cities, right now, we are running our business to the larger cities. We are going to open the new centers in Kunshan. Those second-tier cities, they are close to the bigger cities over the provincial cities. For example, Foshan is close to Guangzhou, the biggest city. Their level of affordability is similar. And Kunshan is close to Suzhou, Wuxi and Shanghai. So they are all economically stronger cities. We do not see much difference in terms of affordability. So how to run those cities is based on our management's capability.

Right now, we are also trying to manage smaller cities. We have pretty good experience to manage bigger cities like Beijing, Shanghai, Guangzhou, and we are moving down to the smaller cities. Right now, everything is on track. Our experience is quite good for us to running small cities, and also we are gaining experience. At a later time, we'll acquire more franchised learning centers.

(foreign language)

[Interpreted] For obtaining of the curriculum upgrade, in the next 2, 3 years' time, we are trying to build a blended learning experience. We're trying to integrate more online components into our existing off-line curriculum. We are trying to work out a blended learning experience for our students and customers. This will be our direction for the next 3 years. In terms of the budget, probably we are going to spend CNY 30 million for the 3 years' time, but -- because most of those budget will in the form of CapEx, so probably we do not see much impact on the expense side.

(foreign language)

[Interpreted] Right now, we are changing our collection policy to fully comply with government requirements. We collect tuition no more than 3 months' time in Beijing and Wuxi. But our courses are unchanged. We still have our course lasting approximately 1 year, also one of the KPIs for our key management, our teachers, and our school heads is still the retention rate, which measures how many students pay for the next full course, but not the next phase. We have another indicator to monitor that is how many students pay for the next installment. So far based on our observation, this is pretty good. We are very confident about the result of this payment in installments. And we are very confident, for this whole year, this will contribute to the whole year's retention rate. Basically we feel, this is a result of our parents' and students' satisfaction.

(Operator Instructions) Ladies and gentlemen, we have reached the end of our conference call. Thank you for participating. You may all disconnect.