TCTM Kids IT Education Inc (TCTM) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter of 2020 Tarena International, Inc. Earnings Conference Call. (Operator Instructions) And please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker for today, Ms. Amanda Wang, IR Director. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Tarena's earnings conference call for the third quarter of 2020. The company's earnings results were released earlier today and are available on our website, ir.tedu.cn, as well as on Newswire services.

Today, you will hear from Mr. Yongji Sun, our CEO; Ms. Nancy, Ying Sun, our Senior VP; and Mr. Kelvin Lau, our CFO, who will take you through the company's operational and the financial results for the third quarter of 2020 and give revenue guidance for the fourth quarter. After their prepared remarks, Mr. Sun, Nancy and Kelvin 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 provision 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 include 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.

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

I will now turn the call over to Mr. Yongji Sun, the CEO of Tarena.

Thank you, Amanda, and thanks, everyone, for joining us today. We are delighted to announce our results for the third quarter of 2020. We had a real recovery quarter with an inspiring performance. Our total net revenue in the third quarter of 2020 was CNY 620.8 million, which was higher than the guidance of CNY 570 million to CNY 600 million that we provided. Compared to the total net revenue of CNY 659.2 million in the third quarter of 2019, the total net revenue in the third quarter of 2020 decreased by CNY 38.4 million or 5.8%. The net loss in the third quarter of 2020 was CNY 63.9 million as compared to the net loss of CNY 110 million in the same period of 2019.

Net revenue from K-12 education business increased by 146% from CNY 117.7 million in the third quarter of 2019 to CNY 289.6 million in the same period of 2020. The number of student enrollments for K-12 education increased by 62% from 75,800 in the third quarter of 2019 to 122,800 in the same period in 2020. The number of new students recruited for K-12 education increased by 8.2% from 23,100 in the third quarter of 2019 to 25,000 in the same period in 2020.

Net revenue from adult professional education business decreased by 38.8% from CNY 541.5 million in the third quarter of 2019 to CNY 331.2 million in the same period of 2020. The number of student enrollments for adult professional education business decreased by 29.4% from 54,400 in the third quarter of 2019 to 38,400 in the same period in 2020. The number of new students recruited for adult professional education business decreased by 45.3% from 27,600 in the third quarter of 2019 to 15,100 in the same period in 2020.

As the COVID-19 pandemic has been properly controlled and contained in China, most of the social and economic activities have been resumed in the third quarter of this year. Our adult and K-12 learning centers have been reopened gradually and resumed in-class lessons since June of 2020. We have been implementing stringent costs and expenses control policies and procedures since the beginning of this year. All these actions have brought improvement to our operational and financial performance in the third quarter of this year.

Despite our net revenue dropping by 5.8% in the third quarter of this year, our operating loss decreased by 52.6% from CNY 119.4 million in the third quarter of 2019 to CNY 56.6 million in the same quarter of 2020. The total operating expenses decreased by 17.6% percent from CNY 493.5 million in the third quarter of 2019 to CNY 406.5 million in the same period of 2020.

Our total head count decreased by 13.6% from average 11,474 in the third quarter of 2019 to average 9,917 in the same period of 2020. Productivity per capita increased by 8.9% from CNY 57,500 in the third quarter of 2019 to CNY 62,600 in the same period of 2020.

We have started to close or merge those nonprofitable adult learning centers since the second half of last year. The number of adult learning centers decreased from 134 in the third quarter of 2019 to 106 in the same period of 2020. The student enrollments per adult learning center increased from 338 in the second quarter of this year to 362 in the third quarter of this year. The number of K-12 education learning centers increased from 209 in the third quarter of 2019 to 236 in the same period of 2020. The student enrollments per each K-12 learning center increased from 431 in the second quarter of this year to 520 in the third quarter of this year.

In the coming quarters, our strategies are twofold. Firstly, we will continue to uplift the efficiency of our operation to improve our margins. Secondly, in order to strengthen our market-leading position and expand our market share, we will focus on further streamlining our product lines, optimizing online and off-line programs and curriculums and further improving our tutoring qualities and user experience.

With that, I will turn the call to our Operations Senior VP, Nancy Sun, who will present to you some details of our operating performance in the third quarter of this year.

[Interpreted] Thanks, Yongji. Hello, everyone. Nice to meet all of you again, and I'm going to present to you with information regarding our operation performance in the third quarter of this year.

First of all, I would like to update you the impact of COVID-19 pandemic on our business. In July and August, except for Beijing, Harbin and Dalian, our adult and K-12 off-line 2C learning centers have resumed their in-class sessions. Starting from September, the direct impact of COVID-19 pandemic on our learning centers in all cities in China, including Beijing, Harbin and Dalian, has basically faded out.

Next, please let me share with you some operational information of our adult education business. As I have mentioned in the prior earnings release conference, our operational strategy for adult education business is profit maximization. In the past more than 1 year, we have been optimizing our operational efficiency. Despite that our operation scale have shrunk, the profitability of our adult education has been elevating. Adult education business returned to be profitable in the third quarter of this year. The gross margin increased from 70% in the third quarter of last year to 71.3% in the same period of this year, increased by 1.3%.

Net revenue in the third quarter of this year decreased by 38.8% to RMB 331.2 million compared to net revenue in the same period of last year. Cost of revenue in the third quarter of this year decreased by 41.6% to RMB 95 million compared to cost of revenue in the same period of last year.

Student enrollment decreased by 29.4% from 54,400 in the third quarter of last year to 38,400 in the same period of this year. The number of new students recruited decreased by 45.3% to 15,100 in the third quarter of this year compared to the number of new students recruited in the same period of last year. The decrease was mainly due to the significant decrease in number of learning centers. Moreover, due to the COVID-19 pandemic, we were not able to execute most of our summer education student recruitment activities.

The average 6-month and 3 months post-course job placement rates were 89% and 82%, respectively. By the end of September 30, 2020, the 3-month post-course job placement rate for most of the students who attended our online lessons during the COVID-19 pandemic period was 74%. Our online tutoring experience and capability, which has been accumulated for more than 18 years, can provide a very solid foundation for our future adult education business development.

Now I would like to give you some taste of our K-12 education operation. In the third quarter of this year, our K-12 education business achieved significant growth in net revenue, optimization of cost structure and improvement of operational efficiency. Gross margin increased to 39.3% in the third quarter of this year from a gross margin of minus 4.1% in the same period of last year.

Net revenue increased by 146% from RMB 117.7 million in the third quarter of last year to RMB 289.6 million in the same period of this year. K-12 education net revenue contributed 46.6% of the total net revenues in the third quarter of this year. The number of new contracted students, including newly registered students and renewal students, increased by 12.5% to 31,400 in the third quarter of this year compared to the number of new contracted students in the same period of last year. As of September 30, 2020, our student enrollments were 122,800, increased by 62% compared to the student enrollment in the same period of last year. About 83% of those students who have been studying our K-12 education programs for more than 1 year have completed the renewal in the third quarter of this year.

Cost of revenue increased by 43.6% to RMB 175.8 million as compared to the cost of revenue in the same period of last year. There were 2 reasons for the increase in cost of revenue. First, the number of learning centers increased significantly from 209 in the third quarter of last year to 236 in the same period of this year. Second, as the impact of COVID-19 pandemic has started to fade out, all learning centers have resumed their normal operations. The increase in cost of revenue was in line with the growth of students enrollment and net revenue.

Our sales and marketing side for K-12 is also going quite well. The average acquisition cost, including -- excluding personnel-related salary and welfare expenses per each new contracted student, decreased by 29.9% as compared to the relevant cost in the same period of last year. Moreover, 41.4% of the total number of students who have paid tuition fees in the third quarter of this year came from student renewal or word-of-mouth promotional activities. This ratio increased by 5% as compared to the same ratio in the third quarter of last year.

Our K-12 education online business also demonstrated a steady growth in the third quarter of this year. Net revenue of K-12 education online business increased by 180.8% in the third quarter of this year compared to the net revenue in the third quarter of last year. Online business revenue represented 11.6% of the total K-12 education revenue.

Lastly, I would like to give you a brief conclusion and outlook. Our results showed that operating loss in the third quarter of this year decreased by 52.6% as compared to operating loss in the same period of last year. The net cash outflow from operating activities in the third quarter was RMB 11.7 million, which was much lower than the net cash outflow from operating activities of RMB 183.6 million incurred in the first half of this year. In the third quarter of this year, we can see that our adult education business has returned to be profitable. And the operation performance data, including student recruitment, net revenue and cost of revenue and operating expenses, were quite stable.

Our K-12 education business achieved an outstanding result in the third quarter. K-12 education contributed 46.6% of the total net revenues, and the gross margin increased to 39.3% in the third quarter of this year from a minus 4.1% in the same period of last year.

Regarding the outlook for the next quarter, after taking into consideration of the seasonal fluctuation factors, we expect that our total net revenues will drop in the fourth quarter as compared to the total net revenues in the third quarter. However, we expect that the numbers of student recruitment and renewal of our K-12 education will be better than the numbers in the fourth quarter of last year. Furthermore, in the fourth quarter, we expect that our cost of revenue and operating expenses may remain stable, and the student enrollment of K-12 education will continue to grow.

With that, I would like to take this opportunity to thank all of you for your support and your attention. Now let me hand over to Kelvin, our CFO, who will share with you our 2020 first half financial highlights. Thank you.

Thank you, Nancy. Now I would like to take you through the third quarter of 2020 financial highlights. Total net revenues decreased by 5.8% to RMB 620.8 million in the third quarter of 2020 from RMB 659.2 million in the same period of 2019. Net revenue from adult education business decreased by 38.8% to RMB 331.2 million in the third quarter of 2020 from RMB 541.5 million in the same period of 2019. The decrease was primarily due to decline in student enrollments of adult education by 29.4% from 54,400 in the third quarter of 2019 to 38,400 in the same period of 2020.

Net revenues from K-12 education business increased by 146% to RMB 289.6 million in the third quarter of 2020 from RMB 117.7 million in the same period of 2019. The increase was primarily due to increase in student enrollments of K-12 education by 62% from 75,800 in the third quarter of 2019 to 1,022 -- 122,800 in the same period of 2020.

Cost of revenues decreased by 5% to RMB 270.8 million in the third quarter of 2020 from RMB 285.1 million in the same period of 2019. For adult education business, cost of revenue decreased by 41.6% to RMB 95 million in the third quarter of 2020 from RMB 162.6 million in the same period of 2019. The decline was primarily due to the decrease in numbers of learning centers, which resulted in reduction of personnel-related costs and rental expenses. For K-12 education business, cost of revenues increased by 43.6% to RMB 175.8 million in the third quarter of 2020 from RMB 122.5 million in the same period of 2019. The increase was primarily due to addition of new learning centers, which resulted in additional personnel-related costs and rental expenses.

Gross profit decreased by 6.4% to RMB 350 million in the third quarter of 2020 from RMB 374.1 million in the same period of 2019. Gross margin, which is equated to gross profit divided by net revenues, was 56.4% in the third quarter of 2020 compared to 56.8% in the same period of 2019.

Total operating expenses decreased by 17.6% to RMB 406.5 million in the third quarter of 2020 from RMB 493.5 million in the same period of 2019. Total non-GAAP operating expenses, which excluded share-based compensation expenses, decreased by 15% to RMB 399.3 million in the third quarter of 2020 from RMB 469.5 million in the same period of 2019. Total share-based compensation expenses allocated to the related operating expenses decreased by 69.6% to RMB 7.3 million in the third quarter of 2020 from RMB 24 million in the same period of 2019.

Selling and marketing expenses decreased by 12.2% to RMB 239.2 million in the third quarter of 2020 from RMB 272.3 million in the same period of 2019. The decline was mainly due to a decrease in marketing activities and promotional spending and decrease in personnel-related expenses resulting from lower head count in the third quarter of this year.

General and administrative expenses decreased by 26.8% to RMB 143.1 million in the third quarter of 2020 from RMB 195.6 million in the same period of 2019. The decline was primary due to a decrease in personnel-related expenses resulting from lower head counts in the third quarter of this year, and there were onetime investigation-related professional expenses incurred in the third quarter of last year.

Research and development expenses decreased by 5.1% to RMB 24.3 million in the third quarter of 2020 from RMB 25.6 million in the same period of 2019. The decline was mainly due to a decrease in personnel-related expenses resulting from lower head counts.

Operating loss was RMB 56.6 million in the third quarter of 2020 compared to operating loss of RMB 119.4 million in the same period of 2019. Non-GAAP operating loss, which excluded share-based compensation expenses, was RMB 49.2 million in the third quarter of 2020 compared to the non-GAAP operating loss of RMB 95.1 million in the same period of 2019.

The company recorded income tax expenses of RMB 10.1 million in the third quarter of 2020 compared to a RMB 1.1 million income tax benefit in the same period of 2019. As a result of the foregoing, net loss was RMB 63.9 million in the third quarter of 2020 compared to the net loss of RMB 110 million in the same period of 2019. Non-GAAP net loss, which excluded share-based compensation expenses, was RMB 56.5 million in the third quarter of 2020 compared to the non-GAAP net loss of RMB 85.7 million in the same period of 2019.

Loss per ADS was RMB 1.96 in the third quarter of 2020. Non-GAAP loss per ADS, which excluded share-based compensation expenses, was RMB 1.32 in the third quarter of 2020.

Net cash outflow from operating activities in the third quarter of 2020 was RMB 11.7 million. Capital expenditures in the third quarter of 2020 were RMB 13 million.

Cash and cash equivalents and time deposits, including current and noncurrent and restricted cash, decreased by 39.7% from RMB 621.2 million as of December 31, 2019, to RMB 374.7 million as of September 30, 2020. The decrease in cash and cash equivalents and time deposits, including current and noncurrent and restricted cash, was mainly due to net cash used in operating activities, which mainly composed of net loss of RMB 676.5 million incurred in the first 9 months of 2020, and was partially offset by the increase in total deferred revenue of RMB 377.4 million.

In terms of financial guidance, based on our current operations, total net revenue for the fourth quarter of 2020 are expected to be between RMB 540 million to RMB 570 million, after taking into consideration the seasonal fluctuation factors and likely continued impact of the COVID-19. This guidance is based on the current market conditions and reflects the company's current and preliminary estimates of market and operating conditions, which are subject to change, particularly due to the potential impact of COVID-19 on the economy in China and elsewhere in the world.

This concludes my financial highlights section. Operator, we are ready for questions. Thank you so much.

(Operator Instructions) No questions at the moment. Please continue.

Let's wait a bit.

Okay. Thank you, operator. If there's 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 IR directly by emailing at ir.tedu.cn. Should you have any questions or request for additional information, we encourage you to visit our Investor Relations site at ir.tedu.cn. Thank you.

Thank you. Ladies and gentlemen, that concludes the conference for today, and thank you for participating. You may now all disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]