TCTM Kids IT Education Inc (TCTM) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Tarena International, Inc. Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at any time.

I would now like to turn the call over to your host for today's conference, Ms. Helen Song, Tarena's Investor Relations Director.

Thank you, operator. Hello, everyone, and welcome to Tarena's Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. The company's earnings results were released earlier today and are available on our IR website, ir.tedu.cn, as well as our Newswire releases.

Today, you will hear opening remarks from Tarena's Founder, Chairman and CEO, Mr. Shaoyun Han; followed by our Chief Financial Officer, Dennis Yang, who will take you through the company's operational and financial results for the fourth quarter and fiscal year 2017 and give guidance for the first quarter and the full year of 2018. After their prepared remarks, Mr. Han and Mr. Yang will be available to answer your questions.

Before we continue, please note that the discussion today will 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. Tarena does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Also, please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The U.S. GAAP financial measures and information reconciling these non-GAAP financial measures to Tarena's financial results prepared in accordance with U.S. GAAP are included in Tarena's earnings release, which has been posted on the company's IR website at ir.tedu.cn.

Finally, as a reminder, this conference is being recorded. In addition, a webcast of this conference call is available on Tarena's Investor Relations website.

I will now turn the call over to Mr. Shaoyun Han, Tarena's Founder, Chairman and CEO. Mr. Han will speak in Mandarin, and Mr. Yang will translate.

(foreign language)

Thank you, Helen, and welcome, everyone, to our fourth quarter fiscal year 2017 earnings conference call.

(foreign language)

I'm very pleased to report that our net revenues in the fourth quarter increased by 33% to reach RMB 617 million, significantly recovered from previous quarters and exceeding the high end of our previously issued guidance. Our net revenues for the full year 2017 grew by 25% year-over-year to RMB 1,974 million.

(foreign language)

This quarter, we achieved solid performance in both professional education and kid educational business. First of all, we adopted active enrollment strategy in our professional education business to better cater for changes in the market. At the same time, by rolling out new courses and upgrading existing courses, we achieved 27.2% enrollment growth this quarter, which showed significant improvement compared with previous quarters. Additionally, through the positive investment in K-12 education programs in terms of network expansion, talent recruitment, new courses, research and development, we significantly increased its geographic coverage, the total number of learning centers as well as student enrollment. The faster growth in both professional education and kid education business lines have reflected our ability to achieve full year target in 2018 and laid a solid foundation on our growth outlook in the long run.

(foreign language)

Student enrollment growth is the primary factor contributing our net revenue growth in professional education. Total student enrollment in fourth quarter increased by 27.2% year-over-year to reach 34,223. Enrollment growth has obviously picked up from 17.5% in previous quarter. Our implementation of proactive advertisement and marketing strategies since August 2017 started to bear fruit this quarter. We're able to get more student enrollment with well-controlled acquisition cost that's achieving relatively fast business growth and maintaining our competitive advantage in the market.

(foreign language)

To meet growing demand in IT talents, the company has continued to launch new courses while upgrading existing platform. Currently, IT industry in the transition period. Looking forward, AI and its related field are expected to bring new growth momentum in employment market. Tarena has rolled out Python course in the last quarter and gradually built up a new curriculum system to cover these popular fields, including big data, Linux, cloud computing courses. These 3 courses, which are big data, Linux, together with Python, has shown robust growth and contributed a total of more than 3,700 student enrollment in the quarter, representing 300% year-over-year growth. We believe that continuous content development and introduction to new courses to capture the future trend in IT industry will keep Tarena abreast of changes in the market and continue to maintain our competitive edge in professional training programs.

(foreign language)

This quarter, we remain at moderate pace in opening new learning centers. Based on initiatives to expand center network and optimize existing learning centers, our total seat capacity reached 56,984 by the end of this quarter, up by 11.5% from the same period last year. We believe well-paced expansion in seat capacity will bring the recovery in our utilization rate since we take very positive view on IT professional education market in Tier 3 cities. We also aim to extend our presence and build up more seat capacity in Tier 3 and Tier 4 cities. In terms of professional education business, this quarter, we opened 11 new centers and merged 6. As a result, total number of learning centers reached 184 and covered 59 cities by the end of this quarter.

(foreign language)

Besides professional education business, K-12 education is another important business line to drive our future growth. This quarter, it continued to maintain robust momentum and enrolled 3,271 students, which represented 300% year-over-year growth. Our Tongchuang and Tongmei programs have quickly expanded into 24 cities, with 30 separate centers and 28 shared centers nationwide by the end of this quarter, among which, 6 separate centers are opened this quarter. While moderately opened independent centers, our K-12 education programs also leverage our sales and -- sales, marketing and teaching facilities with professional education business in order to achieve better financial returns.

(foreign language)

On Nanchang level, primary and secondary schools are expected to see education curriculum system upgrading, and key science technology courses are within the future direction. It also helps young people develop a variety of basic literacy. Therefore, more and more parents and students increased the recognition of science technology education courses. We believe the favorable market environment is the basis for our K-12 business to keep ongoing powerful momentum. Through extensive experience in IT education industry and active investment into teaching recruitment and content development, we expect to launch more K-12 courses in 2018. In meantime, we're committed to adopt new teaching model in K-12 education, which has one of business expansion and acceptance from parents and students. There were 70% of students continued to register after finishing their courses over the past year.

(foreign language)

In 2018, Tarena will accelerate the investment in the K-12 business in terms of new courses development, network expansion as well as talent recruitment, which will strengthen the foundation of K-12 to deliver sustainable growth in the future. We plan to open 60 to 70 new centers for K-12 business next year, making the total number of K-12 centers reach to 100 by the end of 2018. Although this initiative require more investment and may affect level in short term as the new centers are still in ramp-up period and have not been regular. There will be significant return on building competitive position in the market and driving powerful growth for this new business.

(foreign language)

Our non-GAAP operating margin in the fourth quarter and fiscal year 2017 were 16.1% and 12.5%, respectively, lower than the same period last year. This can be mainly attributable to K-12 business, which is still at fast-growing period and have led to operating loss in short term. For the benefit of long-term growth, it may temporarily affect our margins. On the other hand, as I have mentioned earlier, we undertake positive sales and marketing strategy and achieved recovered growth in student enrollment. But our quarter associated with the marketing efforts occurred ahead of revenue ramp-up and most of tuitions from new student enrollment in the fourth quarter will be recognized next quarter. This also will have some active impact on the overall margin level. Our CFO, Dennis, will elaborate on this further in his later remarks.

(foreign language)

To sum up, 2017 is an important year of investment. By proactively adjusting enrollment strategy and upgrading course portfolio, we achieved a solid performance in both professional education and K-12 education units. As we move forward into fiscal year 2018, we'll continue to strengthen our core competency as a top-level professional education service provider through our proprietary innovative curriculum development system, more strategic alliances with well-known international enterprises and joint major programs with universities and colleges. Furthermore, through more scientific allocation of teaching and marketing resources, continuous optimization of central network and upgrading seat utilization, we aim to focus the balance between expansion and operational efficiency in order to further improve our operational efficiency, increasing the major progress of new centers. At the same time, we'll continue to expand -- our expansion plan in K-12 business. The exciting growth performance in recent consecutive quarters reflected our ability to harvest from capacity expansion and new course development efforts. Our K-12 business is expected to deliver even higher revenue contribution in 2018 and gradually become important pillar for our business -- for our company. We believe that with these initiatives, Tarena has been well shaped for higher growth and sustainable profitability over the longer term.

(foreign language)

With that, I will now turn the call over to our CFO, Dennis Yang, to discuss the fourth quarter financial results and outlook for the first quarter and full year 2018.

Thank you, Han Shaoyun, and hello, everyone, on the call. We are pleased with recovered enrollment growth in professional education business and the exciting performance in K-12 business as well in this quarter. As you already have each numbers in press release, so I will review financial results for the quarter and fiscal year briefly by focusing on some important areas.

Let's start with net revenues. For the fourth quarter in 2017, our net revenue increased by 33% year-over-year to RMB 617 million. For the whole fiscal year 2017, net revenues grew by 25% year-over-year to RMB 1,974 million.

As the primary driver for the revenue growth, student enrollment and quarterly enrollment in the quarter increased by 27% and 26% year-over-year, respectively, to 34,223 and 35,145. For the fiscal year 2017, student enrollment and course enrollment increased by 20% and 18%, respectively.

In the fourth quarter, gross margin declined by 121 basis points year-over-year to 72.5%. Such a decrease is mainly due to lower gross margin from K-12 business as we opened 14 new independent learning centers in the past 2 quarters, and such new learning centers are far from reaching breakeven level. If we exclude K-12 impact, gross margin of other business for the quarter was 74.7%, which was at a similar level to that in the same quarter last year.

Seat utilization of other business for this quarter was 69.6%, and we are glad to see that because of enrollment growth recovery, the year-over-year decline of utilization rate narrowed to 210 basis points from 340 basis points in the previous quarter.

For the full year -- the full fiscal year, gross margin declined by 210 basis points, which comprise of 130 basis point margin drag from K-12 business and 80 basis points from other business due to lower seat resources utilization. We have already seen the recovery of other business gross margin, and we believe it can be further improved by remaining high seat utilization level and better facility staff productivity.

Next, let's move to student acquisition cost. Advertising spending per student enrollment in the quarter was RMB 2,191, which was 8.6% higher than the amount the same quarter a year ago. Considering seat resources were not fully utilized, we have started to adopt active enrollment strategies since August 2017, through which, we could recruit additional students to fill up our empty seats. Despite higher acquisition cost per student, we can make profit from those additional students as their tuition exceeded incremental variable cost with then to recruit them and provide services. We have seen improved seat utilization after we took such positive marketing strategy, and such a strategy will be adopted till utilization goes back to the normal level.

Apart from acquisition strategy, in order to improve utilization, we also slowed down adding new seats and optimizing seat resources in our current learning centers. Such additional spending per student acquisition made our operating margin decline by 500 basis points and 270 basis points for the fourth quarter and full year fiscal -- full fiscal year 2017, respectively. Looking ahead, we plan to further optimize acquisition channel mix, and after marketing strategy back to normal, we still target to remain advertising cost per student enrollment around RMB 2,000.

As we communicated in the previous quarter conference call, our typical K-12 course lasts for about 1 year. And during its ramp-up period, the operating losses of K-12 business result from that K-12 student acquisition cost occur ahead of revenue recognition. For K-12 business, the net revenue recorded in fiscal year 2017 and 2016 were [RMB 38 million] (inaudible) year-over-year growth of 384%. However, as most of K-12 learning centers are still ramping up, operating losses from this kid business were about RMB 71 million and RMB 30 million for the fiscal year 2017 and 2016, respectively, representing margin -- operating margin adverse impact approximately 300 basis points in 2017.

Our non-GAAP operating profit for fiscal year 2017 was RMB 247 million as compared to RMB 298 million in 2016. Such a decrease in non-GAAP operating profit were the combination of increase of profit from our other business and increase in losses from K-12 business. If we exclude K-12 losses, although the challenging market conditions of other professional education business in 2017 and the new partnership mode under the university channel made tuition revenue deferred into future years, our non-GAAP operating profit from our traditional business increased from RMB 311 million in 2016 to RMB 380 million in 2017.

Finally, here are some updates on our partnership with student loan providers. As we mentioned in previous quarter conference call, some changes in the policies of student loan providers brought temporarily adverse impact in our operating cash flows in the 1- to 2-quarter period. In the fourth quarter, the company added a couple of new partners to provide loans to our students, and we believe that we can (inaudible) loan processing and cash collection terms by maintaining selective loan providers. And therefore, we expect operating cash flow will be recovering in the coming quarters.

Looking forward to the first quarter of 2018, we expect most student recruited in the quarter won't start their study until March due to late timing of Chinese New Year in 2018. This brings an unfavorable impact in the revenue for the quarter because a smaller portion of tuition can be recognized as a revenue of those students recruited in the first quarter. Considering such a seasonal factor, we expect the total net revenues for the first quarter 2018 are expected to be between RMB 370 million and RMB 390 million, representing an increase of 11.2% to 17.2% on a year-over-year basis. We also expect the net revenues for the full year 2018 to be between RMB 2,300 million and RMB 2,450 million, representing an increase of 15.5% to 24.1% on a year-over-year basis. Operator?

(Operator Instructions) Our first question comes from Mariana Kou from CLSA.

I actually have 2 questions. The first one is on, I think, on the K-12 business. It's very exciting that I think we are seeing the student enrollment tripling. And also we have pretty big expansion plan for 2018. So just wondering, off the back of that, how much kind of margin pressure we should expect for the full year, and I suppose especially for Q1 since we just mentioned that Q1, because of the Chinese New Year, may have a bit of impact on the revenue? And the second question is more for housekeeping. On the utilization, I think just now management mentioned on the call that utilization rate decline is narrowing. Could you actually remind us what the utilization was in Q4 last -- for '16, and also -- and I guess for '17? And also confirm that K-12 is not included in the utilization calculation.

Your first question about the K-12 margin pressure, we actually set up a very ambitious K-12 expansion plan for 2018. The enrollment, we expanded double -- further double based on the enrollment we achieved in 2017. So the K-12 enrollment -- we expect the K-12 enrollment in 2018 will be more than 20,000. In terms of margins, the total loss we expect from K-12 in 2018 will be around RMB 150 million. So this is -- brings -- will bring further like 300 basis points margin pressure to our overall financials. This is the answer to your first question. And your second question about utilization, is it? So we calculate the utilization rate are not including K-12. So the seat utilization we disclosed in our press release and mentioned in our conference call just now are all out of training program utilization. So this is -- will be comparable between years. What else?

Yes, and just kind of to get the exact number, because I think last quarter the utilization I think we were discussing last quarter it was about 73.7%? That's Q3, and then so Q4 this 2017 would be at what level?

Yes, this is normally our core business have kind of a seasonality. Our third quarter most on the peak season during the year and the fourth quarter will be slightly down from the peak in the Q3. So if you want to compare on a year-over-year basis, you will see that the decline of utilization in the first quarter will narrow from 340 basis points last quarter to 210 basis points in the first quarter.

The next question comes from Greg Zhou from Crédit Suisse.

I actually have 2 questions. And the first question, can management talk about the growth strategy for K-12 in 2018 regard of organic growth as well as M&A? And can management share more color on the recent acquisition of the robotic K-12 education company, Rtec? What's the revenue size, and what's the estimated margins for that? And the expansion plan, the management mentioned to reach 100 learning centers for K-12 in 2018, does that include the new centers acquired from this company? And my second question is regarding the K-12 target and the competition as well. So management mentioned some color regarding the K-12 target for 2018, 2019 and 2020 for the following 3 years, and you lined up the recent accelerated plan just announced, will this target be -- will there be any change regarding this target?

Greg, your first question about the contribution from -- the K-12 in 2018 from organic growth or acquisition from some other K-12 business, currently, in terms of 100 learning centers we target to maintain by the end of 2018, the number is not included, the learning centers we acquired. I mean, it's not included, the 26 learning centers we acquired from Rtec. So based on our current budget and forecast, most of the K-12 business revenues in 2018 will come from organic growth. The revenue size of Rtec in 2018 will be around RMB 35 million to RMB 40 million. Your second question about 3-year plans for K-12.

(foreign language)

Let me translate. In 2018, we target 200% growth. In 2018, 2019?

2018.

2018. In 2019, 2020 we expect maintain a growth rate around 100%.

The next question comes from Lei Yang from CIMB.

I want to get some guidance on the overall margin trend for FY '18. And also on the professional training side, what's the new learning center expansion plan for FY '18? And also, the -- will you maintain the heavy marketing and the promotion policies for professional training in this year?

If you want to know our plan for opening new centers for our other business because of -- because we are entering Tier 3, Tier 4 cities, and we tend to open smaller learning centers. So if you look at the number of new learning centers, will be around 25 to 30 in 2018. But if you look at the number of seats, because of smaller learning centers, the smaller size of seats of each learning center, the total additions in our seats will be around 15% for 2018.

Okay. Can you give us some guidance on overall margin trends for this year?

I want to split the margin expectations into 2 pieces, our traditional other training business and K-12. I already mentioned the K-12 margin pressure for 2018 around 300 basis points. And we -- for other training business, our traditional sector, we expect the margin will be maintained at a similar level in 2017.

Your next question comes from Johnny Wong from Jefferies.

I just have 2 questions. Firstly, my question with regards to the new courses that are being offered in both the traditional and K-12 business. Can you give us a little bit more color, and especially in terms of the type of enrollment in the first quarter what have you seen in terms of sign up for traditional courses? That's the first question. Second question will be in terms of the revenue contribution for K-12. What are we expecting for that overall percentage contribution for K-12 in our 2018 revenues?

Johnny, for the first quarter 2018 other training enrollment has the late timing of Chinese New Year this year, so we actually -- most of the students recruit in the quarter will be March and probably further into April. So the Q1 enrollment growth will be between 10% to 15% versus we've already seen the pick-up of enrollment momentum after Chinese New Year. And right now, it's -- the peak season actually after Chinese New Year for our traditional sector. Your question about K-12 contribution, as I mentioned, the K-12 revenue recognizing them longer period. So I also want to cite 2 verticals. The first is cash revenue. The cash revenue in 2017 around RMB 100 million, which around -- which already around 4% to 5% of our total business. We were looking into 2018, the cash revenue could be around 250 million, which is around 10% of our total cash revenues for Tarena. So back to another vertical accounting revenue, 2017, the total K-12 revenue contribution around 2% to 3%. Next year 2018, the K-12 accounting revenue will be grow to 5%. Oh, I'm sorry. Johnny, around 6% to 7%. Sorry.

(foreign language)

As you compare the timing of Chinese New Year between 2017 and 2018, we'll see that in 2017, the Chinese New Year will be late January and as compared to the timing of Chinese New Year in 2018, February 16. So this brings kind of unfavorable impact on our revenue recognition in the first quarter 2018 because most of the students recruited in the first quarter will be started -- will be starting their study in March, not in February. So this isn't a factor. I would also want to add one more thing here is if you look at the timing of Chinese New Year, the Chinese New Year timing in 2018 will be very, very similar to the timing of Chinese New Year 2015. So if you kind of made kind of a comparison between the enrollment in the first quarter 2014 to see the kind of relation between -- such a relation of the timing of Chinese New Year will have kind of impact on the revenue recognition in the coming quarter.

(foreign language)

We enrolled -- we rolled out some new courses for our traditional other training business. We already mentioned we have some kind of -- some new courses, including Big Data, cloud computing and Python. All those 3 courses contributed more than 3,700 students in the first quarter. I want to -- particularly I want to say that the Python currently -- Python is a course we launched last quarter. But right now, Python already ranks the third in the -- of course offerings of Tarena in the first quarter.

Your next question comes from Alex Feng from First Beijing Company.

I have 2 questions. The first one is about the credit policy. I noticed that your account receivables doubled at the end of year. It's much more quickly than your revenue growth. So have you loosened your credit policy? And my second question is about competitive landscape. Could you give us more color of the competitive landscape in 2018 compared to 2017?

Hi, Alex. Let me address your first question. The increase of accounts receivables, this is kind of in direct relation to what I mentioned, the slowdown of class action from the loan providers due to the change in the policies of those providers. In order to expedite the cash collection, we already signed up more loan providers in the first quarter, so we can have a chance to have a better cash collection terms among those increasing loan providers. So we believe with the incremental loan providers make the big pool of available loan companies to provide loans to our students, the cash, the operating cash flows will be getting better in the coming quarters. I mean, the Q1 and Q2 2018, we will see that operating cash flow will be getting better. So when the operating cash flow is getting better, the account receivables will be greatly decreased accordingly.

(foreign language)

In 2017, for IT professional education market is quite challenging. There are some quality -- education quality issues happened for some small IT training institutions using recruitment channel. With -- those institutions won't have good control over their service quality, so they drove a lot of student complaints and a lot of adverse news pressing in 2017. So this is actually make the overall IT professional education business in 2017 will be very difficult. It's the same thing for Tarena and other players. So we already seen some other IT professional business provider in 2017. Their business is going down. They lose their momentum to grow their business. And some players, all the business go bankrupt. In 2018, we believe the market competition will be getting more favorable because some poor-performing players are out of market. And Tarena is one of those to maintain very high-quality and are still in the market to provide high standard service to our students.

The next question comes from Fiona Chan from Buena Vista Funds Management.

I just wanted to ask about the new announcement that the Ministry of Education and Ministry of Civil Affairs announced that they will be cleaning up, I guess, more of the informal education training organizations. Just wanted to ask if you think this will affect you guys and see that you're now focusing more on K-12 business.

Based on our understanding, we believe the new policy is more focused on those curriculum training business like English, Chinese and Math basically. Our K-12 technology courses are more focused on quality education. It's not included in curriculum training. So in our opinion, we don't see a very big adverse impact over our K-12 business from the new regulation. So we still put the positive expansion plan for our K-12 business in 2018.

(foreign language)

Mr. Han added 2 points. The first, because currently in the primary and secondary school, the government encourage the students to have some courses related to technology and science. So Tarena, with our K-12 course [count] we are able to partnership with the primary and secondary schools to provide those services in those schools. And second point Mr. Han mentioned is as new policies are more focused on curriculum courses, without those after-school curriculum training programs, the young kids may save more time. And it gives the kids the challenge to select multiple quality-oriented education programs that the kids shows interest. So Tarena's computer programming and robotics courses will be among those quality-oriented education programs.

The final question comes from Eric Qui from CCBI.

(foreign language)

Student enrollment, the course enrollment (foreign language).

(foreign language)

Let me translate the questions. There's kind of a mismatch between student enrollment and course enrollment in the third quarter and fourth quarter. So could you give some explanation on -- of those 2 enrollment correlation? And the second question is about the net revenues. Currently, we see that in 2017, the fourth quarter recorded the highest net revenue numbers higher than Q3, was the reason behind. Let me address these 2 questions. The first around the course enrollment. Course enrollment, we calculate based on the actual delivery of the courses. The student enrollments are those students record -- registered for our course. So between the 2 matrix, there are some impacts from suspension and resumption of study. For example, some students from university channel, we register some students but the students may suspend their study during the later date. For example, having final year in the school, they're coming back to our learning center and resume their study. So the student enrollment will be recorded many quarters earlier. Right now, in Q3 and Q4, our -- a number of the students from university channel resume their study and finish the course. So that drive up the course enrollment to [less than] bigger growth base. This is my answer to your first question. The second question is because in the previous quarter, previous 2 quarters actually, you will see that at the time, our enrollment growth is, to some extent, pretty flat. It's not very strong. In the second quarter, the enrollment growth is around 14.7%. And in the third quarter, enrollment growth is around 17.5%. This actually, the slight -- the enrollment growth have adverse impact on the revenue recognized in Q3. This is not a normal case. If you look at our financial in the past years, in 2014 through 2016, you will see the third quarter will be the biggest revenue contribution quarter basically. So 2017, just want to mention, it's very challenging. During the year, there's current changes in the market, and then Tarena also faced difficulties in the middle of the year. So we're starting to take proactive marketing strategy later on, and we will see that the student enrollment picked up in the fourth quarter. So this is actually the basic reason why we will see the fourth quarter revenue is greater than the third quarter revenue.

(foreign language)

Seat -- the last question, the reason for the decrease on seat capacity. We actually -- (foreign language)

We start to optimize the center network at the second half of 2017. So the total seat capacity has decreased a little bit Q-on-Q, but this increased by about 11.5% year-over-year. Thank you.

Now I revert the call to Ms. Helen Song, Tarena's Investor Relations.

Thank you, operator. If there are no further questions at present, we'd like to conclude by thanking everyone for joining our conference call. We welcome you to reach out to us directly by e-mailing ir.tedu.cn should you have any questions or requests for additional information. We encourage you to visit our Investor Relations site at ir.tedu.cn. Thank you.