TCTM Kids IT Education Inc (TCTM) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Tarena International, Inc.

First Quarter 2018 Earnings Conference Call.

(Operator Instructions) Today's conference is being recorded.

If you have any objections, you may disconnect at any time.

I'd now like to turn the call over to your host for today's conference, Ms Lei Song, Tarena's Reporting Director.

Thank you, operator.

Hello, everyone, and welcome to Tarena's First Quarter 2018 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 on Newswire services.

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 first quarter 2018 and give guidance for the second quarter.

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 the 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, Lei, and welcome, everyone, to our first quarter 2018 earnings conference call.

(foreign language)

First of all, I'm very pleased to report that our net revenues in the first quarter increased by 22.1% to reach RMB 406 million, exceeding our previously issued guidance.

This quarter, while professional education business maintained a steady growth, significant progress was seen in the student enrollment and tuition cash receipt in K-12 programming education business.

We were 3,895 students during this quarter achieving 292% increase year-over-year.

Out of deferred revenue of RMB 500 million as of March 31, the balance from K-12 business was approximately RMB 70 million, taking 35% of the total amount.

We have already seen the K-12 business as a positive contributor to the company's consolidated cash flow and net revenues.

(foreign language)

With regard to education business segment, student enrollment growth is a primary factor contributing our revenue growth.

Total student enrollment in the fourth quarter of 2017 increased by 27.2% year-over-year, which laid a solid foundation for rapid growth in this quarter.

Enrollment in this quarter was affected by the late timing of Chinese New Year, achieving another year-over-year growth of 10.3% to 30,647.

In addition, IT training market was impacted by the adjustments in process and negative news from competitors in the industry, which also slowed down the growth for the market and resulted in the difficulties in our efforts to enroll students.

These challenges from the market existed in this quarter.

We believe that these factors are temporary since the market already started to improve, though the pace was slower than what we expected during last quarter.

(foreign language)

During this quarter, to meet growing demand IT talent, the company has continued to launch new course, while upgrading existing curriculum.

Currently, IT industry is in a transition period.

Looking forward, artificial intelligence and its related fields are expected to bring a new growth momentum in the employment market.

Tarena has rolled out Python course, Big Data course and Linux course, which show robust growth contributing the total of more than 4,700 student enrollment in this quarter, representing 406.8% year-over-year growth.

Tarena persists in development of IT courses and non-IT courses.

Currently, we are developing some non-IT courses, which are expected to be launched to the market by the end of this year.

Since last year, we promoted the advanced course modules and successfully introduced in market.

We're going to continue the efforts promoting the advanced course modules in order to accomplish the better service quality and to realize the increasing tuition revenue.

We believe that continuous content development and introduction of new courses to capture the future trends in the IT industry will keep Tarena abreast of the changes in the market and continue to maintain our competitive edge in professional training programs.

The upgrading structure of new courses and existing courses provides the opportunity for Tarena to increase our overall tuition level, which will help us to meet the full year revenue target.

(foreign language)

In this quarter, the company focus on resources as they bring them on opening new centers when considering resources from non-performing old centers.

We believe pace expansion in seat capacity will bring in recovery in our utilization rate.

Since we take valid positive view on IT professional education market in Tier 3 cities, we also aim to expand our presence and build up more seat capacity in Tier 3 cities.

During this quarter, we have started the initiative to restructure resources aiming to improve efficiency in those non-performing old centers and help them to improve their overall profitability.

Our total seat capacity reached 58,959 at the end of this quarter, up by 11.6% from the same period last year.

And in terms of professional education business, this quarter, we opened 19 new centers and closed or merged 3 centers.

As a result, the total number of learning centers reach 200 covering 61 cities by the end of this quarter.

(foreign language)

Next, I would like to report exciting progress in our kid education business during this quarter.

As mentioned previously, the student enrollment K-12 education business continues the rapid growth achieving around 300% year-over-year growth, reaching 3,895.

The company will accelerate its investment in K-12 education business.

We built 29 centers for kid education.

By the end of this quarter, kid education business reached 80 separate centers, 28 shared centers and learning sites; our business for K-12 have rolled out in 35 cities.

(foreign language)

In March 2018, the company completed the acquisition of RTEC.

RTEC is a local K-12 robot programming training provider with its business mainly in Hunan and Hubei.

On acquiring RTEC, Tarena added 21 learning centers in 3 cities, with more than 4,000 students.

In the future, the company will keep looking actively for merger and acquisition target companies.

In this way, the kids education business will expedite its organic growth of new centers.

(foreign language)

Based on a broad market and positive policy environment, Tarena will accelerate the investment into K-12 business in 2018 in terms of new courses, research and development, network expansion as well as talents recruitment.

Excluding acquired centers, we plan to open 60 to 70 new centers for K-12 in 2018, making the total number of K-12 centers reach more than 100 by the end of this year.

In the year of 2018, K-12 education business plans to enroll approximately 25,000 students, with tuition cash receipt of more than RMB 300 million, which takes more than 10% of Tarena's consolidated tuition cash received.

Although this initiative require for more investments and may affect the margin level in the short-term, have new centers in the ramp-up period and have not been breakeven.

However, given the broad market prospect and rapid business growth, K-12 business will provide a strong foundation for the company to grow in the coming years.

(foreign language)

Our non-GAAP operating loss in this quarter was RMB 150 million, lower than the same period of last year.

First quarter usually has lowest probability during the year due to the business seasonality.

The increase of operating loss compared to the same period last year were mainly caused by: on one hand, K-12 business which is at fast-growing period without reaching material level and led to operating loss in short-term.

On the other hand, in professional education field, as I mentioned earlier, seasonality and a slower-than-expected pace in market recovery impeded the operational efficiency brought by investing in course development and enrollment channels.

Lastly, in terms of professional education business, we have started to consolidate resources from non-performing centers in order to improve the utilization and recover business profitability.

However, the cost-saving effect, brought by these resources consolidation was not obvious in this quarter and it will be reflected in the coming quarters.

Our CFO, Dennis, will elaborate on this further in his later remarks.

(foreign language)

To sum up, I'm very pleased to see the increase in both revenue and enrollment for our professional education business.

The market increase in professional education business is moderate, and its recovery speed is slower than expected from last quarter.

In order to cope with the changing market, Tarena still continues its active marketing strategy started last quarter recruiting more sales personnel to achieve a reasonable increase in student enrollment.

In addition, the K-12 business becomes new highlight of business growth.

Based on a broad market, we'll further expand our center network, recruit talent and develop new courses.

During this quarter, we achieved significant year-over-year increase in a number of centers.

We rolled out -- in the quarter rolled out into new cities, student enrollment, tuition cash receipt as well as net revenues.

The solid performance and the growth in both professional and kids education businesses ensure to the company to meet its business target in 2018 and will lay a strong foundation for its longer-term growth.

(foreign language)

With that, I will turn the call over to our CFO, Dennis Yang to discuss the first quarter financial results and outlook for the second quarter.

Thank you, Han Shaoyun, and hello, everyone, on the call.

We are very pleased with enrollment growth in professional education business and exciting performance in K-12 segment in this quarter.

As you have the detailed numbers in press release, so I only review financial results for this quarter briefly and focus on those areas.

First let's just start with net revenues.

The first quarter 2018, net revenue increased by 22% year-over-year to RMB 406 million.

One major driver for net revenue growth is enrollment growth, because of strong enrollment -- student enrollment last quarter, in 2017, total course enrollment in the first quarter 2018 increased by 14% year-over-year to 27,893, which was the main contributor to net revenue growth this quarter.

However, the late timing of Chinese New Year holiday in 2018 reduced the post-holiday business days and adversely affected our student enrollment growth.

Therefore, the total student enrollment in the first quarter 2018, 30,647, or 10.3% year-over-year growth fell a little short of our enrollment growth expectation earlier.

Besides enrollment growth, ASP increase is another driver of our net revenue growth.

In this quarter, average revenue per course enrollment was RMB 13,772, which was 4% higher than the amount in the same period a year ago.

Such an higher ASP resulted from the increase of our standard tuition fees for selected courses in 2017 and the rollout of advanced course modules.

The company plan to raise tuitions further in 2018, and this will bring ASP a reasonable increase.

In the first quarter, gross margin declined by 940 basis point year-over-year to 52.2%.

The decline in gross margin was mainly due to the following 2 reasons: Firstly, deteriorated gross margin in adult business because of lower utilization in the first quarter as compared with the same quarter last year, and additional instructors and teaching assistants hired and placed in our new and existing learning centers since 2017 to ensure our high service quality.

Secondly, currently lower gross margin from K-12 business as we have opened 35 new learning centers in the past 2 quarters, and such new centers are far from reaching at ideal utilization level.

The company is making efforts to improve seat resources utilization.

On one hand, company tries to build up seat capacity in line with our enrollment growth expectation.

Our total seat increased by 11.6% in the past 1 year to 58,959.

The increase in seat capacity is largely aligned with the overall enrollment growth, and we believe the seat utilization will be gradually improved over time.

On the other hand, we are evaluating the low performing learning centers and plan to close or merge approximately 20 learning centers by the end of June.

The cost savings from the planned center optimization are expected to improve gross margin in the second half accordingly.

Seat utilization rate of adult business for this quarter was 68%, and we are pleased to see that year-over-year decline of utilization rate narrowed to 60 basis points from 210 basis points in the previous quarter.

And now let's move to student acquisition cost.

We communicated in previous quarters that IT professional trading market growth was slowing down in 2017 due to the phase-out of mobile development courses.

As Han Zong mentioned earlier, though the market has been recovering since late 2017, we observed the market recovery was not as fast as we expected earlier this year.

This brought difficulties in driving student enrollment growth.

And therefore, considering seat resources were not fully utilized, we continued to take active enrollment strategy to recruit additional students to fill up our empty seats.

Despite higher advertising cost per students, we can make profit from the additional student as their tuitions exceeded incremental variable costs we spend to recruit them and provide services.

We have seen improved seat utilization after we took the positive marketing strategy, and such a strategy will be adopted till utilization goes back to normal level.

I mentioned the market conditions and the marketing strategy make advertising cost per student enrollment go higher to RMB 2,412 in the first quarter of 2018.

Let's discuss a little bit about R&D expenses.

R&D expenses increased by RMB 21 million year-over-year and RMB 7 million quarter-over-quarter to RMB 40 million in this quarter.

The incremental R&D spendings for our research investments of multiple new courses in both adult and K-12 business sectors.

We believe these investments are crucial to make our courses the abreast of industry changes and continuously attractive to our -- to our students.

For K-12 business, the total tuition cash receipts were RMB 30 million, and net revenues recorded in this quarter was RMB 22 million representing a year-over-year increase of 164%.

As we communicated in the previous quarter conference calls, K-12 business is a fast-growing business segment.

For the full year 2018, we expect the K-12 enrollment to grow by 150% year-over-year and tuition cash receipt and accounting net revenues are both expected to grow up to -- to more than triple the amount in 2018.

We expect that out of our overall business, K-12 cash tuition contribution could reach to 12% and top line contribution reaches to 6% to 7% in 2018.

Despite the robust business growth, our typical K-12 course last about 1 year.

And during this ramp-up period, an operating loss of K-12 business comes from, while K-12 student acquisition cost occurred ahead of revenue recognized.

Non-GAAP operating losses from K-12 business was about RMB 35 million in this quarter.

Although, K-12 sector operating losses recently, we are confident that the K-12 business will be making profit in the long run.

Our non-GAAP operating losses for this quarter was RMB 153 million as compared to RMB 23 million the same quarter in 2017.

Such a decrease in -- such a increase in non-GAAP operating losses on the combination of the increase of losses from adult business due to lower gross profit and higher student acquisition cost and an increase in losses from K-12 business during its ramp-up period.

Looking forward to the second quarter of 2018, considering the student enrollment made in the first quarter, we expect that the total net revenues are between RMB 500 million and RMB 520 million representing an increase of 9.7% to 14% on a year-over-year basis.

So operator?

(Operator Instructions) Your first question comes from the line of Mariana Kou from CLSA.

This is Mariana.

I have 3 questions.

My first one is on the full year guidance.

We have a range of about 16% to 24%.

Just wondering if management could share with us a bit more breakdown between volume and ASP for enrollment growth versus kind of ASP expectation?

The second question is on Q1 margin.

If possible, you'll okay to kind of share with us a bit more details in terms of the breakdown either at the gross profit level or the non-GAAP -- I guess the non-GAAP op margin will be easier?

In terms of breakdown, I know utilization kind of fell by about 1 percentage point, but could we -- a bit more color on how much of that margin pressure that's coming from the professional education business and how much of it is from the kids business?

And I don't know if it is possible, but if possible, I'd also be interested in how much of that is actually contributed from the acquired business, the RTEC business?

And lastly, I guess, it's also on the margin, so just be curious on the full year margin outlook.

I know we kind of talked about some sort of margin pressure from K-12 that continue to amass, and if they're going to accelerate in terms of revenue contribution, but how should we think about the full year non-GAAP op?

Thank you, Mariana, for your 3 questions, let me tackle the first one.

You want to have ideas of full year guidance and as well on the enrollment and ASP increase.

For our adult business, the enrollment, we target out 15% for the full year.

And ASP maybe a little higher than what we thought earlier.

So the target already increased from 2%, 3% to 4% to 5%.

So this could add up to the adult business to reach 15% to 17% year-over-year growth.

But bear in mind that some of our adult business enrollment come from joint-major program.

We communicated earlier to market in last year of Q3, those enrollment could -- the revenue from those enrollment could be revenue over the longer term.

So some of the tuition for those group of students will not be recognized in 2018.

So with that adverse impact, that adult business will be very close -- probably the year-over-year net revenue growth very close to 50% in 2018.

In addition, the K-12, as Mr. Han mentioned, that we take initiative to make more investment in K-12.

Open more learning centers, and you may be aware that 29 center already opened in Q1.

So the opening K-12 centers generally higher -- or were faster than (inaudible).

So this may generate more revenues from K-12 as well as potentially the higher amount losses from K-12 as well for 2018.

So as of now, we believe there probably about RMB 150 million net revenues from K-12.

So it doesn't really start out to defer from our full year guidance -- revenue guidance.

Your second question about Q1 margin.

Well, let me tell you some more.

In gross margin, (inaudible) the impact of adult business and K-12 business.

The K-12, the low gross margin have impact on overall gross margin about 250 bps, so the rest of 640 bps resulted from adult business.

I mentioned in my -- just now that the adult business decline in gross margin coming from 2 reasons.

The first, lower utilization of seat capacity in Q1 2018 and more impact -- adverse impact coming from additional number of our faculty team, including instructors and teaching assistants in Q1 2018 as compared with the number of the faculty team a year ago.

So I have to say the most impact coming from the increasing number of faculty team.

This is instead of the margin impact on our gross margin.

In terms of operating margins, currently, I don't have this number of split on operating margin among K-12 business and adult business.

I can show that later if you want to have that number.

Your third question about the full year margin outlook, I should say that K-12 definitely as we change a little bit over our strategy to take more -- to want to take more investment in K-12 business in 2018.

So the overall losses on K-12 will be rather than we expected already this year.

So the total losses from K-12 will be RMB 200 million to RMB 220 million in 2018.

We believe this is the greatest number of losses from K-12 per year.

If you look into the losses for 2019, those K-12 losses will again narrow.

And in terms of adult business, as Mr. Han mentioned, there's a few difficulties in coming from the market.

The enrollment that -- our efforts to track (inaudible) but relatively low efficiency.

This could have some adverse impact on the adult business profitability as well.

So I'm afraid that for the full year 2018, the adult business, the operating margin -- non-GAAP operating margin will not be flattish, and that will be around 2% to 3% lower than the margin we achieved for adult business in 2017.

Mariana?

Your next question comes from the line of (inaudible)

I think you sort of partially answered my question at the end of your speech just now, but you mentioned that 2018 will see the highest -- the losses from the K-12 division.

And in 2019, you'll see less losses.

Does that mean you're sort of slowing down your expansion in K-12 in 2019 onwards?

And if so, when do you expect the entire division to sort of roughly breakeven?

I mean, will it be 3 years from now?

5 years from now?

That's it.

Okay.

Let me share some more color to you about the K-12.

The K-12, we are not planning to slow down our expansion.

But you may think about, if you look into 2019, Tarena have more, always learning centers for K-12 business.

So those -- those learning centers are making profit, and we added new learning centers that would be pretty more balanced than what it is in 2018.

So the losses can narrow in 2019, this is the reason behind it.

If you want to have idea when we can reach to K-12 segment breakeven, I will expect 2020 will be the year for the K-12 business reaching the breakeven.

Next question comes from the line of Alex Xie from Crédit Suisse.

So my first question is about your increased sales and marketing expense.

Can management show the breakdown out of pricing expense and the advertising cost per student enrollment?

And also, management has mentioned that you increased your sales and marketing personnel, so what about the personnel headcount increase in this quarter?

And what's your guidance going forward or your sales of marketing spending and sales of marketing headcount?

And my second question is still about your K-12 business.

So can management share with us how long that it takes for each new K-12 separate centers to reach higher utilization rate and to reach breakeven point just for each unit?

Yeah, those are my questions.

Let us check the numbers and get back shortly.

Let me start with your second question about K-12 business.

For learning center K-12 is likely going to take 15 to 18 months to reaching a breakeven.

And I can share with sort of analysis on inside.

We have around 12 to 14 learning centers, operated our learning center, operated more than 1 year.

For those -- for that group of K-12 learning centers, the month of April this year, for this group of learning centers ready to achieve mid single-digit profit.

Your first question about selling and marketing expenses.

If you look at the Q1 selling and market expenses, the most incremental cost went to personnel costs, the costs from 2017, we hired more salespeople, sales staff and placed them into our learning centers.

Year-over-year increase of sales personnel headcount about 50% to 70% in the past 1 year.

And if you look at quarter-over-quarter sales headcount increase, which was -- let me check the number, quarter-over-quarter increased about 8%.

So most of the sales -- staff forces -- sales forces are hired and placed in 2017.

So this is also the reason started -- the initiative started in Q1, but we internally review the operational efficiency of each learning center and tried to close or merged some of low performing centers.

(foreign language)

Let me summarize Mr. Han's point, and to the question number one 1 about selling and marketing expenses.

Historically, Tarena's sales conversion rate about 8% to 10%.

So that means out of the old sales leads we got -- about 90% of the sales leads we'll not converted -- could be converted into our paying customer.

So by thinking that, we have emphasis in our learning centers because of utilization in order to reach to an ideal level.

So by adding up new sales forces, even each new sales force could hire only 1 additional student, where it's difficult to make more money because the new student paid us on tuition CNY 20,000, we pay about CNY 8,000 to sales people, plus other teaching costs we spent to provide services and to making more money.

So this is the reason now behind why we increased the headcount for staff forces started in second half 2017.

For most of the newly hired on the sales team, which is not that experienced, so their productivity is not that high.

With the time, most of the newly hired sales team could become more experienced in the following quarters and their productivity could be improved as well.

So we will see that operational efficiency begin to improve over the quarters.

And may I have one more follow-up?

So I think the company has been promoting the new courses like Big Data and Python.

And is that new -- does that new courses require more sales and marketing resources than the existing courses?

And how about the conversion rates you mentioned for the new courses?

And is the current growth rate in line with management expectation or management expects the new courses contribution to be even higher by the end of this year?

Okay.

(foreign language)

If you look at the conversion of the new courses, that will be different amount, different courses.

For example, Python course, they're probably in the market.

So the conversion rate for Python courses are very high.

On the contrary, we have another course, CAD, computer-aided designing and one pilot course in this quarter and we experienced below average conversion rate.

For your second piece of question of new courses, especially, for those courses related to artificial intelligence, Big Data, cloud computing and Python, we believe the overall contribution from the 3 were artificially intelligent-related courses and were having greater contributions to our overall enrollment by the end of 2018.

And we also already seen the greater contribution quarter-over-quarter.

(Operator Instructions) There are no further questions.

I will refer the call to Ms Lei Song, Tarena's Reporting Director.

Thank you, operator.

If there are no further questions at present, we would like to conclude by thanking everyone for joining our conference call.

We welcome you to reach out to us directly by e-mailing at, 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.

Ladies and gentlemen, this does conclude our conference for today.

Thank you for participating.

You may all disconnect.