TCTM Kids IT Education Inc (TCTM) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter of 2022 Tarena International, Inc. Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today August 16, 2022.

I would now like to hand over to your first speaker today, Ms. Sylvia Yang, the Investor Relations Manager. Thank you. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Tarena's Earnings Conference Call for the second quarter of 2022. 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 Ms. Ping Wei, our CFO, who will take you through the company's operational and financial results for the second quarter of 2022 and give revenue guidance for the third quarter of 2022.

After the prepared remarks, Nancy and Ms. Wei 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, everyone, for joining us today. I am pleased to announce that in the second quarter of 2022, both of our businesses continue progress soundly on a trajectory of sustainable growth, and we achieved an operating margin of 7.4%, we have generated a net profit from operations for 2 consecutive quarters, which represents a major turnaround from the same quarter of last year when we were incurring losses.

The group's gross profit margin reached 58.0%, which was 7.4 percentage points higher than the same quarter of last year. The adult professional education business maintained stable growth and the gross profit margin reached 70.5%. With the healthy growth of our childhood and adolescent quality education business, its gross profit margin also reached a record high of 47.1% in this quarter. (foreign language)

Our total net revenues in the second quarter of this year reached RMB 649 million higher than the revenue guidance we provided last quarter and represented 11.4% year-over-year increase from RMB 582 million in the same period of 2021. Our childhood and adolescent quality education business achieved a solid growth of 19.6% compared with the same period of last year. And the adult professional education business grew at a steady pace, achieving a growth of 3.3%.

While the outbreak of COVID-19 in the second quarter in Beijing, Shanghai and other cities brought a certain degree of challenge for our business growth with our long-term commitment to the integration of online and off-line services value system as well as the product strategy honed throughout the whole life cycle of our customers, our net operational cash flow turned positive compared to the same period of last year, reaching RMB 19.35 million by the end of the second quarter of 2022, the cash balance remained solid, reaching RMB 422 million.

In terms of cost control, by optimizing business management process, improving operational efficiency and implementing effective spending control, we achieved sizable improvement in our cost efficiency. In the second quarter of 2022, the company's cost of revenue decreased by 5.4% and gross profit reached RMB 377 million an increase of 27.9% compared with the same period of last year.

At the same time, we generated net profit of RMB 47.92 million in the quarter, while for the same period of last year. We were still having operational losses thanks to our strict expense control measures.

Next let me walk you through our childhood and adolescent quality education businesses. Net revenue from the childhood and adolescent quality education was RMB 346 million in the quarter, up 19.6 percentage point from RMB 289 million in the second quarter of 2021, accounting for 53.4% of our total business revenue.

Enrollment increased 25.9% to 176,500 in the second quarter of 2022 from 140,200 in the same period of 2021. In the second quarter of 2022, with steady growth of our revenue and effective cost control, our gross profit in the second quarter increased by 66.5% year-on-year, and our gross profit margin increased by 13.3 percentage points year-on-year to 47.1%.

In terms of customer acquisition, the number of renewal students increased by 81.6% this quarter, compared with the same period of last year. The number of students acquired by word-of-mouth referral and renewal students accounted for 79.9% of our fee paying students in the second quarter of 2022 up by 14.9 percentage points from 65.0% in the second quarter of 2021.

The total number of our fee paying enrollment in this quarter was 43,500 up by 33.8% from 32,500 in the second quarter of 2021. This indicates that high teaching quality and good learning results of our childhood and adolescent quality education have started to pay off rewarding us with strong word-of-mouth referral and repeat student enrollment growth. 78.8% of the students who have enrolled for more than 1 year have renewed their fees.

In terms of the operation of our centers, we continue to focus on improving the center operation efficiency thus optimizing the operation cost of centers and expanding the single center capacity. In the second quarter of 2022, the total number of centers providing the childhood and adolescent quality education business decreased from 235 at the end of the second quarter of 2021 to 227 at the end of the second quarter of 2022.

Meanwhile, the number of students enrolled per center increased from 595 last year to 767 in the second quarter of 2022. In the second quarter, average revenue per center rose to 22.8% from about RMB 1.23 million last year to about RMB 1.51 million in the same period of 2022.

Next moving on to our Adult IT professional education business. Optimizing content quality and core system, reducing cost and improving operational efficiency and effectiveness is the consistent goal and focus of our adult professional IT education.

In the second quarter of 2022, although offline courses were suspended temporarily in some of our urban centers due to the resurgence of the pandemic, our courses were delivered with high quality, thanks to our stable and mature online course delivery system. Simultaneously, since 2022, we have adhered to the lifelong learning product strategy and launched a broad selection of courses for students lifelong learning journey.

To that end, during this quarter, we reformed and updated our short-term courses like (inaudible) course and our (inaudible) industry certificate courses such as Red Hat and Huawei to encourage students to stay with us longer and sign up for more courses. This combination of high-quality education products and excellent delivery services enabled us to achieve net business revenue of RMB 303 million in the second quarter of 2022, up 3.3% and from RMB 293 million in the same period of 2021.

Gross profit of Adult Professional education business in the second quarter was RMB 213 million, up 8.7% from RMB 196 million in the second quarter of 2021. With the development trend of seeking progress while maintaining stability, the gross profit margin of our business increased to 70.5%.

Throughout the quarter, we continued to strengthen the management and control of cost and operating expenses, and the total cost and expenses for our Adult Professional education business decreased by 15.6% compared to the same period in 2021. By optimizing the online customer acquisition channels, and enhancing the lead conversion of the admission consultants, our customer acquisition efficiency has improved and the spending in customer acquisition decreased by 13.2% as compared with the same period of last year.

At the same time, the number of centers was optimized to 98 by the end of the second quarter in 2022. The average single center revenue increased by 2.3% from about RMB 3.00 million in the second quarter of 2021 to about RMB 3.07 million in the second quarter of 2022.

Despite a challenging macro environment in the second quarter, partially due to the COVID-19 pandemic, with the continuous improvement in the quality of our online course and services, we continue to receive favorable employer feedback and achieve good results from our students. The employment rate of our students within 6 months after graduation was 97 this quarter.

That concludes my review of the company's operations for the second quarter of 2022.

As you have learned from the press release this afternoon, the Board of Directors has appointed Ms. Wei Ping as the new CFO of the company. On behalf of Tarena, I would like to welcome Ms. Wei Ping to join us.

We believe that with her rich experience and professional ability in the fields of education and Internet, Ping will help the company make new milestones. At the same time, we thank Mr. Kelvin Wing Kee Lau for his dedication as CFO over the past 2 years.

Next, I will turn the call to Ping to walk you through the financials of the second quarter of 2022.

Thank you, Nancy. And hello, everyone. Now let me walk you through some of the financial highlights of this quarter. Please also refer to the press release for more information.

For the second quarter of 2022, the company recorded operating income of RMB 48 million or USD 7.2 million compared to operating loss of RMB 90.7 million in the same period of 2021. Non-GAAP operating income, which excluded share based compensation expenses, was RMB 49.2 million or USD 7.3 million in the second quarter of 2022 compared to non-GAAP operating loss of RMB 86.6 million in the same period of 2021.

This was achieved by a combination of healthy growth of total net revenues which was 11.4% of increase to RMB 648.8 million or USD 96.9 million in the quarter, from RMB 582.3 million in the same period of last year and well-executed cost controls during this quarter.

Due to these measures, cost of revenues decreased by 5.4% to RMB 272.3 million or USD 40.7 million in the second quarter of 2022 from RMB 287.9 million in the same quarter last year. Furthermore, total operating expenses decreased by 14.7% to RMB 328.5 million or USD 49 million in the second quarter of 2022.

From RMB 385.1 million in the same period of 2021. The main contributors of the cost and expense reductions include firstly closing of low-performing centers and optimizing headcount to improve efficiency. As a result, as Nancy mentioned earlier, our optimized learning centers for both childhood and adolescent quality education and Adult Professional education businesses have decreased to 227 and 98 centers, respectively, and our headcount decreased by 11.8%.

Secondly, optimizing spending on marketing and sales and keeping our focus to operational excellency, which is through focusing on quality of content, delivery and services. We continue to generate more word-of-mouth referral enrollments and higher lifetime value of our students. And finally, include efficiency and streamlined OMO strategy further helped with overall operational efficiency, resulting in lower general and administrative spending.

While a onetime provision for the expected settlement of a class action partially resulted in an increase in G&A expense in the second quarter. We expect G&A to stay at a low level in the next few quarters.

As a result of the foregoing, net income was RMB 47.9 million or USD 7.2 million in the second quarter of 2022 compared to net loss of RMB 76.7 million in the same period of 2021. Non-GAAP net income which excluded share-based compensation expenses, was RMB 49.1 million or USD 7.3 million in the second quarter of 2022 compared to non-GAAP net loss of RMB 72.5 million in the same period last year.

Now on EPS side, basic income per ADS was RMB 4.36 or USD 0.65 in the second quarter of 2022. Compared to loss per ADS of RMB 6.97 in the second quarter of 2021. Diluted income per ADS was RMB 4.29 or USD 0.64 in the second quarter of 2022 compared to loss per ADS of RMB 6.97 in the second quarter last year.

As of June 30, 2022, the total balance of cash, cash equivalents and time deposits increased by RMB 9.2 million to RMB 425.6 million or USD 63.5 million. The increase was mainly from net cash inflow from operating activities in the second quarter of this year of RMB 19.4 million or USD 2.9 million.

Capital expenditures in the second quarter were RMB 8.9 million or USD 1.3 million mainly from purchasing of office equipment and payment to renovate teaching centers. Share repurchase also contributed to the cash outflow in the quarter. And this concludes my financial highlights.

Now Nancy will share with you our business outlook for the second half of 2022 and give revenue guidance for next quarter. Nancy, please.

(foreign language)

[Interpreted] Thanks for Ms. Wei's summary of the financial performance for the second quarter of 2022. Now turning to the company's outlook for the next quarter.

In the second half of '22, we will continue to optimize our OMO based customer acquisition and product delivery system. Students with high-quality courses and better services to further enhance our competitiveness and earn our students' trust and confidence, generating more word-of-mouth and referral-based growth.

At the same time, we will continue to improve operational efficiency for us to maintain healthy and sustained profitability in spite of potential challenges of future pandemic outbreaks. In terms of financial guidance, based on the company's current estimates, our total net revenues for the third quarter of 2022 are expected to be between RMB 620 million and RMB 650 million, representing a year-over-year increase of 0.8% to 5.7% from net revenues for the third quarter of 2021.

The company's guidance reflects a preliminary estimate of our current market environment and company operating conditions based on current market conditions, which may change. Above is our outlook for the future and the revenue guidance. I would like to take this opportunity to thank you again for your following and support. We are now ready for questions.

(Operator Instructions) We have the first question coming from the line of (inaudible)

[Interpreted] So the first question is, first of all, let me say congratulations to the company to achieve continued profitability in the second quarter of 2022, especially during the pandemic period, the company can achieve continuous revenue growth and stay profit.

So we were wondering what will be the competitive edge of your company now? My second part of the question is, we observed that the policy environment is quite favorable to our business. So the future of our Adult Professional education business is very promising. So what is your opinion on the competition landscape?

I will get -- I will have our CEO Nancy to answer this question. Nancy?

[Interpreted] Thank you so much for the question. First of all, I'm Nancy, and let me take the first part of your question.

Over the past 20 years, we have gained very rich experience in terms of delivering training in adult IT professional education and also we emphasize on our OMO online merging offline education, we have very good customer acquisition experience. We have very good delivery of our product as well as the good design of our product-based interaction.

And also, we have very good R&D skills and know-hows in terms of multichannel customer acquisition, we're also very good at that as well. But we also are very good at our product design, product system iteration, and we are very good at our delivery.

So those are our competitive edge to be more specific. We are very good at word-of-mouth and renewal students when it comes to our childhood and adolescent quality education, and we are very good at job application for our Adult Professional education business, our graduate from our Adult Professional education business achieved good jobs.

So those are our competitive edge for our 2 businesses. And that is my answer for your first part of the question.

Let me take the second part of your question. Actually the -- actually, we've enjoyed very favorable policy support from the government in China which is really conducive to our professional education, which is also very conducive to the overall sound growth of this professional education industry.

We are very good at customer acquisition, also about product delivery at the back end, we were also very happy with our center operation, and we are also very good at product R&D. So those actually serves a very stable growth for our business.

In terms of our Adult Professional education, we not only have 2C business but also 2B business working with universities. So in terms of our 2C side, our enrollment actually contributed to more than 68% of our total revenue.

So those are our competitive edge, and that is why we are very satisfied with our -- and very promising about our future.

That concludes answer to both of your questions. Thank you very much again for raising that question.

(Operator Instructions) We do not have any other questions at the moment. Presenters, please continue.

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 relation site at ir.tedu.cn. Thank you.

Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may now disconnect your lines. Speakers, please stand by.

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