TCTM Kids IT Education Inc (TCTM) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Full Year of 2021 Tarena International, Inc. Earnings Conference Call.

(Operator Instructions)

I must advise you that this conference is being recorded today, March 16, 2022. I'd now like to hand the conference over to your first speaker today, Ms. Sylvia Yang, Investor Relations Manager. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Tarena's earnings conference call for the fourth quarter and full year of 2021. 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 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 fourth quarter and full year of 2021 and give revenue guidance for the fourth quarter of 2022. After their prepared remarks, 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 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 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.

(foreign language)

[Interpreted] Thank you, Sylvia, and thanks to all the shareholders to participate in our call. Thank you very much for your attention and your support.

We are pleased to announce Tarena's results for the fourth quarter of 2021. We are delighted to see that in the fourth quarter of 2021 both of our childhood and adolescent quality education and adult professional education businesses reached their highest amount of quarterly cash collection during the year of 2021. As a result, our net cash provided by operating activities in the fourth quarter of 2021 achieved RMB 129.5 million, and our total cash and cash equivalent balance increased to RMB 430.4 million as of December 31, 2021.

At the same time we are glad to see that our total net revenues were RMB 655.3 million, which was higher than the guidance we gave in the last quarter. The total net revenues in the fourth quarter of 2021 increased by 0.8% as compared to the total net revenues of RMB 650.3 million in the same period of last year, and increased by 6.5% as compared to the total net revenue of RMB 615.2 million in the third quarter of 2021. Operating loss decreased by about 29.1% to RMB 60.4 million in the fourth quarter of 2021 from RMB 85.1 million in the same period of last year.

Operating margin improved by 3.9 percent points to 9.2% in the fourth quarter of 2021 from 13.1% in the same period of 2020. Net loss after deducting the income tax expense of RMB 125.7 million was RMB 182.5 million in the fourth quarter of 2021. The increase in income tax expenses was mainly because we have made appropriate provision allowance against the deferred income tax assets, which was derived from the utilized tax loss as it was more likely than not that the unutilized tax loss will not be utilized within the 5-year deduction period. Meanwhile, the number of total headcount decreased by 1.7%, to 10,009 in the fourth quarter of 2021 from 10,181 in the same period of last year. The productivity per capita on an annual basis increased by 37.1% to RMB 236,000 in 2021 from RMB 172,000 in 2020.

Our total revenues increased by 25.7% to RMB 2,386.5 million in 2021 and from RMB 1,897.9 million in 2021 as we have achieved a steady growth in net revenues and have implemented effective measures to control costs and expenses, and our operating loss decreased significantly by 54.2% to RMB 369.1 million in 2021 from RMB 806.4 million in 2020. Operating margin improved by 27 percent points to 15.5% in 2021 from 42.5% in 2020.

Now I will walk you through our 2 businesses operations in the fourth quarter of 2021. First of all, let's look at the performance of our adult professional education business. Optimizing the business structure, reducing costs and uplifting the operational efficiency and productivity has always been the business strategies of our adult professional education business. Due to the number of learning centers have been reduced by 4 by the end of the fourth quarter of 2021 as compared to that by the end of the same period of 2020, student enrollments decreased by 14% and to 30,200 in the fourth quarter of 2021 from 35,100 in the same period of last year. Net revenue from adult professional education business dropped by 9.4% and to RMB 319.3 million in the fourth quarter of 2021 from RMB 352.4 million in the same period of last year.

However, we have achieved gratifying improvement in the average annual net revenue per single learning center, which increased by 16.1% to RMB 11.3 million in 2021 from RMB 9.7 million in 2020. We have also made significant progress in managing costs and operating expenses by significantly optimizing the personnel-related costs, general and administrative expenses dropped by 61.1% in the fourth quarter of 2021 as compared to that in the same period of 2020.

The post graduate job placement rate still maintained at a level of over 90% in the fourth quarter of 2021. Outstanding tutoring quality and effectiveness continued to build our long-term competitive advantage in the market.

Net revenue from adult professional education business increased by 1.2% to RMB 1,150.2 million in 2021 from RMB 1,136.1 million in 2020. Cost of revenue dropped by 2.6% to RMB 409.3 million in 2021 from RMB 420.3 million in 2020. Gross profit increased by 3.5% to RMB 740.9 million in 2021 from RMB 715.7 million in 2020. Gross margin improved by 1.4 percent point to 64.4% in 2020 from 63% in 2020.

Next, I'd like to share with you the performance of our childhood and adolescent quality education business. In 2021, we achieved great development in customer acquisition, operation, product structure and business process optimization in our childhood and adolescent quality education business. These achievements resulted in the net revenues have been increased significantly. Cost of revenues and operating expenses have been properly and effectively managed and operational efficiency has been improved to a greater extent in 2021.

Net revenues from childhood and adolescent quality education increased by 12.8% to RMB 336 million in the fourth quarter of 2021 from RMB 297.9 million in the same period of last year. Student enrollments increased by 17.9% to 151,300 in the fourth quarter of 2021 from 128,300 in 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 22.3% to approximately 42,800 in the fourth quarter of 2021 from approximately 35,000 in the same period of last year.

In the whole year of 2021, net revenue from childhood and adolescent quality education increased significantly by 62.3% and to RMB 1,236.3 million from RMB 761.8 million in 2020. The number of new contracted students, including new registered students and renewal students was approximately 143,100, up about 38.4% from last year's 103,400, of which the proportion came for students renewal and word-of-mouth promotional activities continued to increase, reaching 70.8% in the fourth quarter of 2021 compared to the full year rate of 66.4% in 2020. The high rate of student satisfaction guaranteed that the renewal rate of students who have enrolled for more than 1 year exceeded over 83.2% in 2021. Students enrollments were 178,400 in 2021, up 26% year-over-year.

The number of learning centers increased to 238 in the fourth quarter of 2021 from 236 in the same period of 2020. Student enrollment per learning center increased to 753 in 2021 from 625 in 2020. Average annual net revenue per single learning center increased by 55.4% to RMB 5.22 million in 2021 from RMB 3.36 million in 2020.

In the fourth quarter of 2021, with the growth of net revenue, cost of revenue increased by 25.5% year-over-year and gross profit decreased by 4.7% year-over-year. Gross margin was 35.6% in the fourth quarter of 2021. In 2021, the increase in net revenue was 62.3%, outweighing the increase in cost of revenue of 22.5% and skyrocketing in the gross profit by 285.3% year-over-year. Gross margin increased by 20.8% points to 35.9% in 2021.

Our childhood and adolescent quality education online business has continued to grow, with revenue of RMB 111.5 million in 2021, which represented an increase of 3.2% from last year, and accounted for about 9% of the total net revenue of childhood and adolescent quality education in 2021.

Looking back on 2021, our abilities to develop and deliver products based on the online merge offline, which is OMO model, strong offline learning centers operation capabilities and the customer acquisition capabilities have continued to enhance our core competitive advantages. Meanwhile, our measures to optimize business structure and uplift operational efficiency enabled us to cope with the negative impact arising from the sporadic occurrence of COVID-19 cases.

So looking ahead, based on what we have achieved in 2021, we will continue to uplift our operational efficiency. And at the same time, we will enhance our business growth capabilities and adhere to the strategy of long-term sustainable development, we strive to achieve the goal of turn from net loss to net profit as soon as possible.

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

Thank you, Nancy. Now I would like to take you through the fourth quarter and full year of 2021 financial highlights. Total net revenues increased by 0.8% to RMB 655.3 million in the fourth quarter of 2021 from RMB 650.3 million in the same period of 2020. Net revenue from travel and adolescent quality education business increased by 12.8% to RMB 336 million in the fourth quarter of 2021 from RMB 297.8 -- RMB 297.9 million in the same period of 2020.

The increase was primarily due to increase in student enrollments from 128,300 in the fourth quarter of 2020 to 151,300 in the same period of 2021. Net revenue from adult professional education business decreased by 9.4% to RMB 319.3 million in the fourth quarter of 2021 from RMB 352.4 million in the same period of 2020. The decrease was primarily due to decrease in student enrollments from 35,100 in the fourth quarter of 2020 to 30,200 in the same period of this year.

Cost of revenues increased by 12.4% to RMB 327.7 million in the fourth quarter of 2021 from RMB 291.5 million in the same period of 2020. The increase was primarily due to increase in personnel-related costs resulting from the growing number of teaching staff and our and childhood and adolescent quality education learning centers and increase in social security fees which were exempt according to the preferential policies and enacted by the government during COVID-19 pandemic in the fourth quarter of 2020, but were not exempt in the fourth quarter of 2021.

Gross profit decreased by 8.7% to RMB 327.6 million in the fourth quarter of 2021 from RMB 358.8 million in the same period of 2020. Gross margin, which is equal to gross profit divided by net revenues was 50% in the fourth quarter of 2021 compared to 55.2% in the same period of 2020. The decrease in gross margin was primarily attributable to the increase in total cost of revenues, outweighing the increase in total net revenue in the fourth quarter of 2021.

Total operating expenses decreased by 12.6% to RMB 388 million in the fourth quarter of 2021 from RMB 443.9 million in the same period of 2020. Total non-GAAP operating expenses, which excluded share-based compensation expenses, decreased by 12.1% to RMB 383.6 million in the fourth quarter of 2021 from RMB 436.4 million in the same period of 2020. Total share based compensation expenses allocated to the related operating expenses decreased by 41.3% to RMB 4.4 million in the fourth quarter of 2021 and RMB 7.5 million in the same period of 2020.

Selling and marketing expenses decreased by 0.7% to RMB 221.8 million in the fourth quarter of 2021 from RMB 223.3 million in the same period of 2020. The decrease was mainly due to a decrease in personnel-related costs, resulting from a drop in the number of sales staff, which was partially offset by the increase in sales promotion fee in the fourth quarter of 2021 as compared to the same period of 2020.

General and administrative expenses decreased by 32.2% to RMB 132.5 million, in the fourth quarter of 2021 from RMB 195.3 million in the same period of 2020. The decrease was mainly due to decrease in personnel related costs as a result of decrease in the number of staff and one-off income recognized resulting from the receipt of the settlement payment from the Buyer Group Parties of the proposed privatization transaction in the fourth quarter of 2021.

Research and development expenses increased by 33.3% to RMB 33.7 million in the fourth quarter of 2021 from RMB 25.2 million in the same period of 2020. The increase was mainly due to an increase in personnel-related costs in the fourth quarter of 2021. Operating loss was RMB 60.4 million in the fourth quarter of 2021 compared to operating loss of RMB 85.1 million in the same period of 2022 -- of 2020.

Non-GAAP operating loss, which excluded share-based compensation expenses, was RMB 56.5 million in the fourth quarter of 2021 compared to non-GAAP operating loss of RMB 77.5 million in the same period of 2020. The company recorded income tax expenses of RMB 125.7 million in the fourth quarter of 2021 compared to income tax expenses of RMB 7 million in the same period of 2020. The increase in tax expenses was mainly due to an increase in provision allowance related to the deferred tax assets, which was derived from the unutilized tax loss as it was more likely than not that the tax loss will not be utilized within the 5 years deduction period.

As a result of the foregoing, net loss was RMB 182.5 million in the fourth quarter of 2021 compared to a net loss of RMB 94.7 million in the same period of 2020. Non-GAAP net loss, which excluded share-based compensation expenses, was RMB 178.6 million in the fourth quarter of 2021 compared to non-GAAP net loss of RMB 87.1 million in the same period of 2020.

Loss per ordinary shares was RMB 3.22 in the fourth of 2021 compared to loss per ordinary shares of RMB 1.72 in the fourth quarter of 2020. Non-GAAP loss per ordinary shares, which excludes share-based compensation expenses, was RMB 3.16 in the fourth quarters of 2021 compared to non-GAAP loss per ordinary share of RMB 1.58 in the fourth quarter of 2020. Net cash inflow from operating activities in the fourth quarter of 2021 was RMB 129.5 million. Capital expenditures in the fourth quarter of 2021 were RMB 21.4 million.

Now I'm going to take you through the full year of 2021 financial highlights. Net revenues increased by 25.7% to RMB 2,386.5 million in 2021 from RMB 1,897.9 million in 2020. Net revenue from childhood and adolescent quality education increased by 62.3% from RMB 761.8 million in 2020 to RMB 1,236.3 million in 2021. The increase was mainly due to increase in student enrollments of child and adolescent quality education from 141,600 in 2020 to 178,400 in 2021.

Net revenue from adult professional education business increased by 1.2% from RMB 1,136.1 million in 2020 to RMB 1150.2 million in 2021. The increase was mainly attributable to increase in unit price of tuition fee and certificate revenue, whilst partially offset by decrease in student enrollments from 83,400 in 2020 to 72,100 in 2021. Cost of revenues increased by 12.6% to RMB 1,201.4 million in 2021 from RMB 1,066.8 million in 2020. The increase was mainly due to increase in personnel-related costs resulting from the growing number of teaching staff and increase in social security fee, which will exempt according to the preferential policies enacted by the government during COVID-19 pandemic in 2020, but were not exempted in 2021.

Gross profit increased by 42.6% to RMB 185.1 million in 2021 from RMB 831 million in 2020. Gross margin, which is equal to gross profit divided by net revenues, was 49.7% in 2021 compared to 43.8% in 2020. The increase in gross margin was primarily attributable to the increase in total net revenues outweighed the increase in cost of revenues in 2021 and the effective cost controls we have implemented in 2021. Total operating expenses decreased by 5.1% to RMB 1,554.2 million in 2021 from RMB 1,637.4 million in 2020.

Total non-GAAP operating expenses, which excluded share-based compensation expenses, decreased by 4.1% to RMB 1,535.2 million in 2021 from RMB 1,601.6 million in 2020. Total share-based compensation expenses allocated to the related operating expenses decreased by 46.9% to RMB 19 million in 2021 from RMB 35.9 million in 2020.

Selling and marketing expenses decreased by 3.1% to RMB 878.1 million in 2021 from RMB 906.3 million in 2020. The decline was mainly due to a decrease in advertising expenses in 2021. General and administrative expenses decreased by 9.6% to RMB 570 million in 2021 from RMB 630.6 million in 2020. The decline was mainly due to a decrease in personnel-related costs and welfare as a result of decrease in number of staff. And one-off income recognized resulting from the receipt of the settlement payment from the Buyer Group Parties of the proposed privatization transaction in 2021.

Research and development expenses increased by 5.6% to RMB 106.1 million in 2021 from RMB 100.5 million in 2020. The increase was mainly due to increase in personnel-related costs in 2021. Operating loss was RMB 369.1 million in 2021 compared to operating loss of 806.4 million in 2020. Non-GAAP operating loss, which excludes share-based compensation expenses was RMB 350 million in 2021 compared to non-GAAP operating loss of RMB 770.1 million in 2020.

The company recorded an income tax expense of RMB 114.1 million in 2021 compared to income tax benefit of RMB 35 million in 2020. The increase in tax expenses was mainly due to increase in provision allowance made to the deferred tax assets, which was derived from the unutilized tax loss as it was more likely than not that the tax loss will not be utilized in a 5 years deduction period. As a result of the foregoing, net loss was RMB 475.8 million in 2021 compared to a net loss of RMB 771.2 million in 2020.

Non-GAAP net loss, which excludes share-based compensation expenses, was RMB 456.7 million in 2021 compared to non-GAAP net loss of RMB 734.9 million in 2020. Loss per ordinary shares was RMB 8.43 in 2021 compared to loss per ordinary shares of RMB 14.11 in 2020.

Non-GAAP loss per ordinary shares which excluded share-based compensation expenses, was RMB 8.1 in 2021 compared to non-GAAP loss per ordinary shares of RMB 13.44 in 2020. Net cash inflow from operating activities in 2021 was RMB 8.6 million. Net cash inflow from investing activity in 2021 was RMB 33.7 million. The net proceeds from disposal of properties and long-term investments were RMB 94.6 million and the capital expenditures were RMB 67.7 million in 2021.

In terms of financial guidance, based on our current estimates, total net revenues for the first quarter of 2022 are expected to be in the range of RMB 580 million to RMB 610 million, which represents an increase of 8.6% to 14.2% as compared to net revenues in the first quarter of 2021. After taking into consideration the seasonal fluctuation and likely continued impact of the COVID-19. This guidance is based on the current market condition and reflects the company's current and preliminary estimates of the 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. Thank you.

Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions)

We don't have any questions at the moment. Presenters, please continue.

Yes. I think during the moment, why don't we Nancy to add.

(Operator Instructions)

[Interpreted] So this is Nancy. And first of all, I'd like to thank all of our investors for joining the call. Actually, we did quite well in 2021, even though there are sporadic fluctuations and occurrence of COVID-19, but we still achieved good growth for our 2 business i.e., the childhood and adolescent quality education business as well as very good growth for our good performance for our adult professional education business throughout 2021. In the future, we will continue to optimize our business structure, to always trying to lower the cost, and we are very confident that we can achieve a very healthy and sound growth for our 2 businesses in 2022.

Okay. So in 2022, we will continue to improve our operational efficiency and our core goal is to make profits, and our overall strategy, our overall objective is to achieve long-term sustainable development. Even though that our adolescent and childhood business are in different stage than our adult professional education business. So that is why we have different strategies for these 2 businesses.

For example, for our childhood and adolescent quality education business, that's been going on for more than 6 years. And right now, what we are focusing on is to achieve a profitable business model. And in the Q4 of 2021, we're already making profit for our childhood and adolescent quality education business. And we are -- going forward, we will continue to improve our business development -- by the way, the business has already developed for our childhood and adolescent business, and we have already achieved a very significant loss reduction for this business. And judging from the record of our January in 2022, we have already making profits for our childhood and adolescent business. And in the future, we will continue to hone in our childhood and adolescent quality education business.

Regarding our adult professional education business, it is a business that's going on for more than 20 years. It enjoys a very mature business model. And going forward, we will continue to optimize our adult business structure, continue to improve our capability to improve its profits. And by the end of 2024, even though that the number of learning centers have been reduced by 4 by the end of Q4 of 2021, we still can achieve a positive revenue throughout the year for our adult business as well as significant improve of -- improvement of our gross profit and the improvement of revenue per single learning center. And judging by the record of our January performance in 2022, the gross profit of our adult professional education business reached around 70% and the profitable level reached around 30%.

And the revenue guidance that we gave you based on the Q1 of 2022 is significantly higher than the same period of last year. Even though that the performance of Q1 in 2022 was slightly impacted by the China's Lunar New Year happened in February, which was quite seasonal. We are fully prepared to welcome other breakthroughs. For example, breakthroughs of our net revenue throughout the year in 2022 because we have already achieved a very sound and sustainable growth model for our 2 businesses.

So I'd just like to take this opportunity to thank all of you for your long-term attention as well as your patience and your support. Just trying to ask, are there any other questions?

(Operator Instructions) We have a question from [Dave Shirk] from (inaudible).

[Interpreted]

First off, I want to congratulate on Tarena's good performance in the Q4 of 2021, which is quite commendable. My question is regarding rebound of COVID-19. Due to the outbreak of the COVID-19 in Beijing, yet again this year, a lot of off-campus training institutes have been caught off and shut down will this impact our off-line learning centers?

[Interpreted]

So thank you for that question. And this is Nancy, the CEO of Tarena International, Inc. And thank you very much for that question because it is quite normal that we see this rebound of COVID-19, and we only need to look at it with a detached mind and to look at it as a normal thing going on in China, in Beijing. And for us, we are an educational company, and we are providing good educational products as well as high-quality education service. So no matter what's going on in the world, in the society, we still need to provide high-quality service for the sustainable growth of our kids and for our adults.

So that is why the core competitive edge for Tarena has always been a sound and sustainable growth model. So we are very fortunate that our all of our business, our adult business as well as our childhood and adolescence business can be transferred online because for programming education course, it is in its nature that it can be taught online.

So let me dive a little deeper about the advantage of our curriculum. First off, we've been doing OMO, the online merge offline, online programming training for around 16 years, we have accumulated a lot of experience in this regard.

During the pandemic in 2020, our adult professional education business offline was totally transferred to online and with very good and very positive feedback from our students, and also we can maintain a very stable job placement rate.

So far, 80% of our offline childhood and adolescent programming course has been transferred to online, and this rate has continued, except for our robotic training course. We also have already come up with a very effective transfer plan to transfer our offline robotic cores to online. Meanwhile, we also will abide by the regulations of China.

We also know that because the Chinese government has issued a policy to shut down a lot of schools and try to shut off a lot of off-campus training institutes. On March 15, the Education Bureau of Beijing municipal government has also released another document titled the 2022 Key Point for informatization and cybersecurity for the education in Beijing.

So these documents or this policy encourages off-campus institutions to come up with online merging offline learning products to deliver good learning practice and good high-quality learning products for the students.

Our childhood and albescent quality education business can be taught either offline or online. And I think that this will be our core competitiveness in the future. And also in the future, where artificial intelligence will be the mainstay of education.

So I think that the COVID-19 is like a double-edged sword. It is both an opportunity but also a challenge for us. We are fully capable to cope with the impact of COVID-19, and we are very confident that we will enjoy better performance in the future. And to sum up, I want to thank you for this question again.

(Operator Instructions)

We don't have any other questions at the moment. Presenters, please continue.

Thank you, Amber. If there are no further questions asked, then we would like to conclude it 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 IR website at ir.tedu.cn. Thank you.

Thank you.

Take care.

All right. Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.

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