TCTM Kids IT Education Inc (TCTM) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter of 2021 Tarena International, Inc. Earnings Conference Call. (Operator Instructions) I must also advise here that the conference has been recorded today, November 23, 2021.

I would now like to hand the conference over to first speaker today, Ms. Silvia Young, the Investor Relations Manager. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Tarena's earnings conference call for the third quarter of 2021. The company's earnings results was released earlier today and are available on our IR website, ir.tedu.cn as well as our Newswire services.

Today, you will hear from Ms. Nancy Ying Sun, our CEO; and Mr. Kelvin Lau, our CFO, who will take you through the company's operational and financial results for the third quarter of 2021 and give revenue guidance for the fourth quarter of 2021. After their prepared remarks, Nancy and Kelvin will be available to answer your questions.

Before we continue, please note that this 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 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 call 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 Ms. Nancy Ying Sun, the CEO of Tarena.

[Interpreted] Thank you, Sylvia, and thanks, everyone, for joining us today. We want to thank you all of our investors for your continuous support for us. So we are delighted to announce that Tarena's result for the third quarter of 2021 for everyone. Our total net revenues in the third quarter of 2021 was RMB 615.2 million, which is in accordance with the revenue guidance we have gained in last quarter.

In the first 3 quarters of 2021, our total net revenues have shown a significant increase of 38.8% to RMB 1,731.2 million from RMB 1,247.6 million in the same period of 2020. Gross profit margin has shown an increase of 11.6 percentage points to 49.5% in the first 3 quarters of 2021 from 37.9% in the same period of last year. From the beginning of 2021 to the end of this reporting period, gross profit has shown an increase of 81.6% to RMB 857.5 million from RMB 472.3 million in the same period of 2020.

Net revenues from childhood and adolescent quality education business increased by 14.8% from RMB 289.6 million in 2020 Q3 to RMB 332.6 million in 2021 Q3. The number of student enrollments increased by 19.6% from 122,800 in 2020 Q3 to 146,900 in 2021 Q3. The number of new contracted students, including new registered students and renewed students increased by 21.0% from 31,400 in 2020 Q3 to 38,000 in 2021 Q3.

Net revenues from adult professional education business dropped by 14.7% from RMB 331.2 million in 2020 Q3 to RMB 282.6 million in 2021 Q3. This is largely due to the number of student enrollments dropped by 13.0% from 38,400 in 2020 Q3 to 33,400 in 2021 Q3. However, we have seen an increase of 7.4% in number of student enrollments as compared to the student enrollment of 31,100 in 2021 Q2.

In the first 3 quarters of 2021, we have enacted and implemented a series of effective policies and measures to minimize the negative impact from the adverse weather conditions and COVID-19 pandemic on our business through continued efforts in optimizing the organizational structure, improving operational management efficiency and controlling costs and expenses, we have only seen a slight increase in our total cost of revenues and operating expense by 3.6% to RMB 2,040.0 million in the first 3 quarters of 2021 from RMB 1,968.9 million in the same period of 2020 on the premise that our student enrollment are increasing.

Our operating loss in the first 3 quarters of 2021 has significantly decreased by 57.2% to RMB 308.7 million from RMB 721.3 million in the same period of last year. Net loss in the first 3 quarters of 2021 was RMB 293.2 million, which was 56.7% less than the net loss of RMB 676.5 million in the same period of 2020. This was mainly due to the significant increase in total net revenues and the continued implementation of effective optimization and management of costs and expenses in the first 3 quarters of this year.

Our total number of employees rose by 4.2% from 9,905 at the end of 2020 Q3 to 10,321 at the end of 2021 Q3. The production capacity per capita increased by 47.0% to about RMB 169,000 in the first 3 quarters of 2021 from about RMB 115,000 in the same period of last year.

In 2021, we continue to focus on our core strategy of improving the operational and the management efficiency of our adult professional education learning centers. Since September 30, 2020, we have stopped the operation of 6 underperforming adult professional education learning centers. And this lead to in a decline in number of student enrollments by 8.9% to 55,400 in the first 3 quarters of 2021 as compared to the number of student enrollments in the same period of last year. However, net revenue per single learning center increased by 22.7% to about RMB 8.15 million in the first 3 quarters of 2021 from about RMB 6.64 million in the same period of 2020.

So the number of childhood and adolescent quality education learning centers has expanded from 236 at the end of 2020 Q3 to 238 at the end of 2021 Q3. The number of student enrollments per single learning center increased from 543 in the first 3 quarters of last year to 689 in the same period of 2021. Net revenues per single learning center rose by 86.3% from about RMB 2.04 million in the first 3 quarters of last year to about RMB 3.80 million in the same period of 2021.

Next, I will report and share with you the status of our operations in 2021 Q3.

During 2021 Q3, the sporadic occurrence of severe weather and COVID-19 cases have brought short-term impacts to some areas in China, which were mainly manifested in the suspension of off-line operations of some learning centers in certain cities, including Zhengzhou, Nanjing, Changsha and Wuhan City and et cetera. Our entire team has taken prompt and effective action. For example, we take some off-line teaching to online delivery. Up to now, the negative impact on our operations have been mostly eliminated.

Now I will discuss the operations of our adult professional education business.

From the beginning of 2021 to the end of this reporting period, our adult professional education business has continued to adhere to the business strategy of optimizing costs, increasing production capacity, healthy operation and steady development. Net revenues increased by 6.0% to RMB 830.9 million in the first 3 quarters of 2021 from RMB 783.7 million in the same period of 2020.

Meanwhile, cost of revenues decreased by 1.1% to RMB 297.9 million in the first 3 quarters of 2021 from RMB 301.2 million in the same period of 2020. Gross profit for the first 3 quarters of 2021 was RMB 533.0 million, which was 10.5% higher than the gross profit of RMB 482.5 million in the same period of 2020.

The number of adult professional education learning centers at the end of 2021 Q3 decreased by 6 as compared to the number of learning centers at the end of 2020 and the total learning center site areas decreased by 7.4% to 119,400 square meters. Our net revenues decreased by 14.7% to RMB 282.6 million in 2021 Q3 from RMB 331.2 million in 2020 Q3. However, by implementing effective control on operating expenses throughout the first 3 quarters of 2021, gross profit margin in the first 3 quarters of 2021 increased by 2.5 percentage points to 64.1% in the first 3 quarters of 2021 from gross profit margin of 51.6% in the same period of 2020.

We have also made good progress in optimizing the structure of operating expenses. Our operations team have increased the percentage of new students recruitment from underground promotion in university and one of our promotion activities resulting in a 10.2% reduction in selling expenses in 2021 Q3 as compared to the selling expenses in the same period of 2020.

Based on our strong teaching team and job placement service system, the 6-month post-course job placement rate of our students remained about 90% in 2021 Q3. A good security of job placement is the foundation for the sustainable growth of our business.

We are very pleased to see a series of government policies that encourage the development of adult professional education. Looking into 2021 Q4, we will continue to adhere to our business strategy of healthy operations and steady development as well as achieving better efficiency, developing new customer acquisition channels and improving profitability.

Okay. Next, I will discuss the status of our operation of childhood and adolescent quality education business.

With the implementation of the government double reduction policy, the development of education that truly supports the growth of children and teenagers will receive long-term support and encouragement from the government. We actively respond to the government policy and shall ensure that our operations would comply with all the relevant requirements. As you all know, our childhood and adolescence information technology quality education business has long been committed to being an expert in information technology education that every child can trust and becoming an IT education partner that every family can depend on. This is in compliance with the national policy.

In 2021 Q3, our childhood and adolescent quality education business has continued to improve in all levels of product and services, operations and customer acquisitions. In general, the net revenues increased significantly and with more effective control of cost of revenues and operating expenses, we have also achieved better operational efficiency.

By the end of 2021 Q3, the number of childhood and adolescent quality education learning centers was 238, which was 2 more than the number of learning centers at the end of 2020 Q3. In 2021 Q3, net revenues of childhood, adolescent quality education business increased year-over-year by 14.8% to RMB 332.6 million. The cost of revenues increased year-over-year by 15.7%. Gross profit increased year-over-year by 13.5%, and the gross profit margin reached 38.8%. The number of student enrollments increased year-over-year by 32.5% to 163,300 in the first 3 quarters of 2021 as compared to the number of student enrollments in the same period of last year.

In terms of revenue growth, the number of new contracted students, which includes -- including new registered students and renewal students increased year-over-year by 21.0% to approximately 38,000 in 2021 Q3 as compared to the same period of last year. The number of new contracted students, including new registered students and renewal students increased year-over-year by about 46.2% to approximately 100,000 in the first 3 quarters of 2021 from approximately 58,400 in the same period of last year. As our operational priorities are continue to optimize product, improve services and enhance student satisfaction, about 63.7% and 64.5% of new contracted students came from student renewal or word-of-mouth promotional activities in 2021 Q3 and in the first 3 quarters of 2021, respectively. Student's high satisfaction level led to a renewal rate of students who have or who have been studying our programs for more than 1 year, over 80%.

In 2021 Q3, we have continued to work on improving the efficiency of marketing activities and student acquisition. The average selling expense, excluding personnel-related salary and welfare expenses for each new contracted students was about RMB 1,063 in 2021 Q3, dropped year-over-year by 18.6%. In the first 3 quarters of 2021, the average selling expenses per each new contracted students was about RMB 1,175 decreased year-over-year by 26.4%.

Our childhood and adolescent quality education online business has continued to grow with revenue of RMB 28.5 million in 2021 Q3, which represented an increase of 3.1% from the previous quarter and accounted for about 8.6% of the total net revenue of childhood and adolescent quality education in 2021 Q3.

In 2021 Q4, we will continue to optimize our business model, enhance the services and reputation and increase efficiency so as to achieve a healthy revenue growth.

Looking ahead, under the favorable government policies on the adult professional education and childhood and adolescent quality education, we will continue to provide high-quality educational products and services, enhanced operational efficiency and maintain a healthy business growth. Offline user management and customer acquisition channels as well as online live broadcasting education programs will continue to be the 2 important basis for our development. We will adhere to our original vision of education dedicated to providing good educational products and continue to explore healthy business models to achieve business profitability as soon as possible.

I want to take this opportunity to thank you all again for your continued support. I'd like to turn the call to Kelvin, our CFO, who will share with you the third quarter of 2021 financial highlights.

Thank you, Nancy. Now I would like to discuss our 2021 financial highlights. Total net revenue decreased by 0.9% to RMB 615.2 million in the third quarter of 2021 from RMB 620.8 million in the same period of 2020. Net revenue from adult professional education business decreased by 14.7% to RMB 282.6 million in the third quarter of 2021 from RMB 331.2 million in the same period of 2020. The decrease was primarily due to decreasing student enrollments from 38,400 in the first quarter of 2020 to 33,400 in the same period of this year.

Net revenues from childhood and adolescent quality education business increased by 14.8% to RMB 332.6 million in the third quarter 2021 from RMB 289.6 million in the same period of 2020. The increase was primarily due to a increase in student enrollments from 122,800 in the third quarter of 2020 to 146,900 in the same for 2021. Cost of revenues increased by 11.5% to RMB 302 million in the third quarter of 2021 from RMB 270.8 million in the same period of 2020.

For adult professional education business, cost of revenues increased by 3.8% to RMB 98.6 million in the third quarter of 2021 from RMB 95 million in the same period of 2020. The increase was primarily due to increase in social security fees, which we assumed according to the preferential policies enacted by the government during COVID-19 pandemic in the third quarter of 2020, but will not extend in the third quarter of 2021.

For the childhood and adolescent quality education business, cost of revenues increased by 15.7% to RMB 203.4 million in the third quarter of 2021 from RMB 175.8 million in the same period of 2020. The increase was primarily due to increase in personnel-related costs resulting from growing number of teaching staff and our childhood and adolescent quality education learning standards and increasing social security fees, which we extend according to the preferential policies enacted by the government during COVID-19 pandemic in the third quarter of 2020, but will not extend in the third quarter of 2021.

Gross profit decreased by 10.5% to RMB 313.2 million in the third quarter of 2021 from RMB 350 million in the same period of 2020. Gross margin, which is equal to gross profit divided by net revenues, was 50.9% in the third quarter of 2021 compared to 56.4% in the same period of 2020. The decrease was mainly attributable to the decrease in net revenue from adult professional education, which results in decreasing its gross profit and gross margin in the third quarter of 2021.

Total operating expenses decreased by 1.2% to RMB 401.7 million in the third quarter of 2021 from RMB 406.5 million in the same period of 2020. Total non-GAAP operating expenses, which exclude share-based compensation expenses decreased by 0.4% to RMB 397.7 million in the third quarter of 2021 from RMB 399.3 million in the same period of 2020.

Total share-based compensation expenses allocated to the related operating expenses decreased by 45.4% to RMB 4 million in the third quarter of 2021 from RMB 7.3 million in the same period of 2020.

Selling and marketing expenses decreased by 6.5% to RMB 223.7 million in the third quarter of 2021 from RMB 239.2 million in the same period of 2020. The decrease was mainly due to decrease in advertising expenses in the third quarter of 2021 as compared to advertising expenses incurred in the same period of 2020.

General and administrative expenses increased by 5.9% to RMB 151.5 million in the third quarter of 2021 from RMB 143.1 million in the same period of 2020. The increase was mainly due to a onetime charge of the loss arising from the disposal of properties and partially offset by decrease in office and other miscellaneous expenses.

These certain development expenses increased by 9.5% to RMB 26.6 million in the third quarter of 2021 from RMB 24.3 million in the same period of 2020. The increase was mainly due to increase in social security fees, which were extended according to the preferential policies and enacted by the government during COVID-19 pandemic in the third quarter of 2020, but will not extend in the third quarter of 2021.

Operating loss was RMB 88.5 million in the third quarter of 2021 compared to operating loss of RMB 56.6 million in the same period of 2020. Non-GAAP operating loss with excluded share-based compensation expenses was RMB 84.4 million in the third quarter of 2021 compared to non-GAAP operating loss of RMB 49.2 million in the same period of 2020.

We recorded an income tax expenses of RMB 8 million in the third quarter of 2021 compared to income tax expenses of RMB 10.1 million in 2020. As a result of the foregoing, net loss was RMB 94.7 million in the third quarter of 2021 compared to net loss RMB 63.9 million in the same period of 2020. Non-GAAP net loss, which excludes share-based compensation expenses, was RMB 90.5 million in the third quarter of 2021 compared to non-GAAP net loss of RMB 56.5 million in the same period of 2020.

Loss per ADS was RMB 1.64 in the third quarter of 2021 compared to loss per ADS of RMB 1.16 in the third quarter of 2020. Non-GAAP loss per ADS, which excluded share-based compensation expenses was RMB 1.57 in the third quarter of 2021 compared to non-GAAP loss per ADS of RMB 1.02 in the third quarter of 2020.

Net cash outflow used in operating activities in the third quarter of 2021 was RMB 25.4 million. Net cash from investing activities in the third quarter of 2021 was RMB 28.6 million. The net proceed from the disposal of property and office equipment in the third quarter of 2021 was RMB 46 million and RMB 0.7 million, respectively.

Capital expenditure incurred on leasehold improvement and office equipment in the third quarter of 2021 was RMB 17.9 million. In terms of financial guidance, based on our current operations, total net revenue for the fourth quarter of 2021 are expected to be between RMB 610 million and RMB 640 million, after taking into consideration the seasonal fluctuation factors and likely continuous impact of 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 as 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.

(Operator Instructions) Your first question comes from the line of (inaudible).

Thank you for strong operating performance in 2021. It's good to see. I just have 2 main questions. The first is in prior years, you guys were repurchasing stock quite meaningfully. Is there any consideration given where things are trading right now to launch a share repurchase plan? And the second question is, do you have any guidance on when you expect to reach breakeven? And does the company have sufficient liquidity to get there?

[Interpreted] Okay, I'm going to answer your first question. It's a very good question. Regarding any repurchase plan -- share repurchase plan, I think up to now, we still haven't have any share repurchase plan on the table for discussion -- for the Board discussion. I think it's one of the very good options for us. Once we have any decision on any share repurchase plan, we will make an appropriate announcement. Up to now, at least at this moment, we don't have any share repurchase plan on the table.

Nancy is going to answer your second question.

[Interpreted] So just I'll try to answer your second question. First, let me rephrase your question. You're asking about when can we break even and also your question is also about our current or the status quo of our liquidity, right?

Correct. Yes.

[Interpreted] Well, first of all, let me say that to breakeven as soon as possible, it has always been the priority of the management. So because we have a very stable adult information technology education business, and we are looking at further improve our cost structure and improve our operational efficiency as well as improving our profitability.

So actually, we are doing quite good in several fronts. For example, one of our business is called the childhood and adolescent quality education business, our kid business, which also is another stream of revenue for us. It is a new business. Actually, this is a business in China starting in 2017, and we have been always the top leader in terms of the adolescent and childhood quality education business. And at the beginning of this year, we tried to explore opportunities to create new products and new services and now we can say that we are -- we are the veteran or we are very experienced in this industry. Starting last year, we began to think about how can we improve profitability for this business. And by that, first, we need to enroll more students in the classroom, we need to promote more service and more business, and also we provided a series of different short-term campus-based learning opportunities for those students to choose from. Those are some of the methods that we adopted to improve profitability for this business.

So from those efforts, as you can see, that we try our best to continue to improve our revenue in a very steady way. And looking to the future in order to improve the profitability of all of our business, really to continue to iterate and optimize our business models, decrease costs and optimize our expenditure, we actually made a lot of breakthroughs, which I'm very happy to share with you. For example, in the third quarter, we have restructured our organization structure. For example, we have restructured our group mix platform, and we will continue to do that in the future. In the meantime, we will continue to lower our cost, perfect our expenditure in order to improve profitability of this business.

Thirdly, I want to say that one of our core competitive edge is offline acquisition expenditure as well as offline centers operation. And we have accumulated a lot of good experience in terms of offline acquisition. And we will continue to do that, and we will continue to leverage this competitive edge in the future in order to lower the cost, improve our expenditure structure so as to improve our profitability.

And so lastly, I want to say that we will continue to lower the cost to perfect our expenditure because right now, our cash revenue, as you can see, are increasing. They are increasing a lot. So that means our operational liquidity right now is in a very positive situation. And this will be our top priority for the future months.

In addition, our operational management team is continuing to find the other financing methods. So that concludes my answer for you. Hopefully, I can answer your questions. And thank you again for your wonderful questions.

(Operator Instructions)

While we are waiting for questions from our guests. I think our CEO, Nancy, would like to give some of our report on the new announced government regulations. So Nancy, go ahead.

[Interpreted] So while we are waiting for more questions, let me first introduce how the double reduction policy impacts our adolescent and the childhood quality education business, which parts it impacts, how the management of our group see it and what is our strategy for it.

Actually, as you may know that the double reduction strategy or policy was issued by the central government in China on July 24, and the goal for this policy is to lower the burden of students and to lower the percentage of off-campus training and education in order to make sure that the household or parents are not so anxious about their kid's growth.

So during the implementation of this double reduction policy, this policy basically targets the off-campus curriculum-based education. And within this double reduction policy, a clearly delineated what it means to be curriculum education and non-curriculum education.

For example, sports, arts and information technology, these are disciplines or subjects that is in the category of non-curriculum based education which China or Chinese government encourage kids to take.

So the products that we provide, for example, information technology education, coding, programming and robotics, these are curriculums that are non-curriculum based education off-campus that we can provide.

And as you may know that China has always been try to nurture more IT talent, technology talent and innovation talent. So this is the focus of Chinese government for a very long time and continue to go in the future. So the core product that we can provide, for example, coding and programming, robotic curriculums, they're all fit national strategies.

During the implementation of the double reduction policy of China, there's also a series of regulations try to standardize off-campus, non-curriculum based operations. For example, there are regulations about criteria of different learning institutions. There are specific standards for the area of those learning sites as well as standardization on teachers' criteria, standardization on advertising, learn time and tuition fees.

So actually, you can see that all of the products we provide or all those standardization regulations and those policies issued by the central government is really beneficial for off-campus education to make it more sustainable, healthy and long-term. So our product, the childhood and adolescence quality education business meet all of those demands in terms of areas, in terms of teacher criteria, in terms of off-campus learning time. And also, we will continue to do that. Our product perfectly match the national policies.

In terms of the regulation, off-campus training or off-campus education advertising, actually, our commitment -- our major acquisition channel for our product is through offline activity and word of mouth. So government reparation had very little impact on our business.

And meanwhile, we will continue to adhere and implement national strategies as well as regulations on tuition fees and financial regulation. Even though that regulation is about 3 months and 60 class hours may have a slight impact on the per cap per student per core tuition fees.

However, the lowering of price is another incentive because the learning threshold is lowered and there will be more parents to try to choose our product.

Meanwhile, because of that precondition, our customers, our clients will have a higher demand in terms of product quality and service quality. So that's why we believe in our product, which is the travel and adolescent quality education business because it is offline. We provide it offline, we provide a mix of different kinds of products with a very high quality service. So this really perfectly match our customers' demand.

Our management teams will continue to study and learn the double reduction policy in the future in order to improve the quality of our product as well as our service based on those policy and regulation from the government in order give our kid a very good information technology and quality education.

Although this double reduction policy do have an impact on the number of off-capus learning institutions. However, looking the long term, those demand for high-quality service and learning products still remains. So we believe that the company can continuously to provide high-quality product and service, they will survive and they will thrive in this environment. And long before the implementation of this double reduction policy of China, we -- our management team has always look for high quality product and service for our kids to help them to better develop in the future to try to form a virtuous cycle.

Thank you very much for your attention for that. And that concludes my introduction about the double reduction policy and how it impacts our business. And we welcome you to raise any kind of questions.

(Operator Instructions) We don't have any other questions as of the moment. Presenters, please continue.

AJ, If there is no any questions, you can conclude it.

We have no questions at this point in time.

If there are no more questions, we can end the conference.

Yes.

Certainly. Thank you. Ladies and gentlemen, that does conclude our call for today. Thank you for your participation. You may all disconnect now. Thank you all. Thank you.

Thank you.