TCTM Kids IT Education Inc (TCTM) 2022 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 2022 Tarena International, Inc. Earnings Conference Call. (Operator Instructions) I must advise you that today's conference call is being recorded today, March 28, 2023.

I would now like to hand the conference call over to your first speaker today, Ms. Sylvia Yang, the Investor Relationship 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 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 fourth quarter and full year of 2022, and give revenue guidance for the first quarter of 2023. After their 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.

[Interpreted] Thank you, Sylvia, and thanks, everyone, for joining us. The months around the end of 2022 was a challenging period for us as COVID-19 dynamics and the Chinese New Year temporarily impacted our daily operations. Our offline centers closed for almost 2 months as a large number of teachers and students have to suspend classes due to pandemic restrictions or illnesses. Meanwhile, some employees were also unable to work for a period of time. To varying degrees, this affected our offline customer acquisition, our online and offline core delivery and our off-line center services.

In this challenging business environment, we achieved a positive operating cash inflow of RMB 24 million, and a non-GAAP operating income, excluding share-based compensation expenses in the fourth quarter. This was due to our operational agility, our stable OMO based core delivery system and our consistent improvement of operational efficiencies. Our gross profit margin on the group level reached 58.4% in the fourth quarter, up 8.4 percentage points year-over-year.

Specifically, our IT professional education business remained stable, with a gross profit margin of 73.2%, rising by 8.1 percentage points year-over-year. Our IT-focused supplementary STEAM education business continued to demonstrate market resilience and business model scalability, registering an enrollment growth of 17% and a gross profit margin of 48.6% in the fourth quarter, up 13 percentage points year-over-year.

In addition, despite the challenges from external headwinds throughout 2022, we achieved a turnaround from a net loss to a net profit of RMB 85.23 million and a non-GAAP net profit of RMB 102 million for the year as a result of the continuous upgrade in our operating model, deliver quality and service capabilities.

Our total net revenues amounted to RMB 552 million in the fourth quarter, down 15.7% compared with RMB 655 million in the same period of 2021 due to the factors I mentioned earlier. Segment-wise, our IT-focused supplementary STEAM education revenue was comparable with that of the fourth quarter of 2021, while our IT professional education revenue declined by 31.6% due to the impact of macroeconomic headwinds.

With respect to cost control, during the period, we optimized our business management model to enhance operational efficiencies and effectively control expenses. In the fourth quarter, impacted by factors beyond our control, our revenue decreased. However, our cost decreased by 29.8% year-over-year. As a result, our gross profit -- our gross margin rose by 8.4 percentage points year-over-year in the fourth quarter. Additionally, operating expenses decreased by 15.7% year-over-year, substantially narrowing our operating loss by 92.4% year-over-year to RMB 4.57 million. Our non-GAAP operating income, excluding share-based compensation expenses, was RMB 233,000. Meanwhile, we realized an operating income of RMB 93.04 million for the full year of 2022, compared with an operating loss in 2021 as well as a non-GAAP operating income of RMB 109.6 million.

Next, let me walk you through our IT-focused supplementary STEAM education business. In the fourth quarter of 2022, net revenue from our IT-focused supplementary STEAM education program was RMB 334 million, comparable to RMB 336 million we recorded in the fourth quarter of 2021. This represented 60.5% of our total revenue during the period, an increase from the fourth quarter of 2021. Enrollment increased by 17% from 151,300 in the fourth quarter of 2021 to 177,000 in the same period of 2022. Thanks to our high-quality courses and delivery as well as our growing brand Meanwhile, with steady revenue growth and effective cost control at our centers, our gross profit rose by (inaudible) year-over-year in the fourth quarter, and our gross profit margin climbed by 13 percentage points to 48.6%.

On the customer acquisition front, our total number of fee paying students in the fourth quarter of 2022 was 38,200, a decrease of 10.7% year-over-year, as our student recruitment was affected by the temporary closure of our offline centers. However, our excellent course and delivery quality and our students learning results in IT-focused supplementary STEAM education, have translated into word-of-mouth referrals and an increase in the number of renewal students as a percentage of prepaying students, partially offsetting the decrease in customer acquisition due to limited standard access.

Meanwhile, thanks to our integrated online and off-line core delivery system and our nonstop OMO service model, we ensure high course and service quality to the maximum extent, despite the constraints imposed on our operations in the fourth quarter. In the fourth quarter, enrollment increased by 17% year-over-year. Notably, the percentage of renewal students who have enrolled for over a year continued to exceed 78.7% in the fourth quarter.

Regarding the operations for our centers, although some of them suspended operations due to the pandemic in the fourth quarter, we managed to improve operational efficiency while ensuring course and service quality. This helped us to reduce operating costs and expand single center profitability. At the end of the fourth quarter of 2022, the total number of centers providing IT-focused supplementary STEAM education services declined to 213 from 238 at the end of the fourth quarter of 2022, a net reduction of 21 centers. At the same time, the number of students enrolled per center increased from 336 in the fourth quarter of 2021 to 805 in the same period of 2022. In the fourth quarter, average revenue per center grew by 7.8%.

Next, moving to our IT professional education business. During the fourth quarter, the pandemic impacted societal mobility in general, affecting our enrollments and operations as well. To cope with the situation, we suspended the operation of some offline centers for a period. This had a significant impact on our operations in the fourth quarter. Specifically, net revenue for our IT professional education business dropped by 31.6% year-over-year. Of course, our centers have resumed full operations since the Chinese New Year holiday. In addition, we continued to facilitate stable operations by reducing costs and improving operational efficiency. In the fourth quarter, the total costs and operating expenses of our IT professional education business decreased by 23.7% year-over-year.

As society places more emphasis on digitalization and information-based development, we'll embrace new opportunities brought about by the digital economies during China's macroeconomic recovery. ChatGPT has setup a new wave of AI technology advancements worldwide, and its core generative AI model will promote the deployment of new technologies and influence how business and societies develop. We always stay abreast of the latest cutting-edge technologies and market demand and continuously innovate our courses, services and operations accordingly. Meanwhile, we have continued to explore the application of the latest technologies. Recently, we became one of the first approved ecosystem partners of the Ernie bot developed by Baidu. Through this collaboration, we will explore the application of smart dialogue technology in professional education, which marks the first application of the conversational language model in professional education in China. We believe that broader application and rapid development of AI technology are bound to drive the demand for high standard IT talent, and that they will fuel the development of the IT professional education industry. We will continue to stand at the forefront of technological innovations in the industry and continue to create value for our students and their employers with our industry-leading courses and delivery services.

That concludes my review of the company's operations for the fourth quarter and full year of 2022.

Next, I'll turn the call over to Ping to walk you through our financials for the fourth quarter and full year of 2020.

Thank you, Nancy, and hello, everyone. Now let me walk you through some of the financial highlights of the fourth quarter and fiscal year 2022. Please refer to the press release for more information as I'll try to be brief. For the fourth quarter of 2022, the company narrowed its operating loss to RMB 4.6 million or USD 0.7 million compared to an operating loss of RMB 60.4 million in the same period of 2021. Non-GAAP operating income, which excluded share-based compensation expenses, was RMB 0.2 million or USD 0.03 million in the fourth quarter of 2022, compared to non-GAAP operating loss of RMB 56.5 million in the same period of 2021.

The improvement in our operating profit was driven by our well-executed cost and expense controls during the quarter, although we faced challenges from temporary uncertainties in the business environment. Our total net revenues reached RMB 552.4 million or USD 80.1 million in the fourth quarter of 2022, of which net revenue from our IT-focused supplementary STEAM education business was RMB [334.1] million, representing about 60% of our total revenue.

Meanwhile, thanks to our effective control measures, our cost of revenues decreased by 29.8% to RMB 230.1 million or USD 33.4 million in the fourth quarter of 2022, from RMB 327.7 million in the same period of 2021. Total operating expenses decreased by 15.7% to RMB 326.9 million or USD 47.4 million in the fourth quarter of 2022, from RMB 388 million in the same period of 2021, as we achieved expense reductions across our organization.

The main contributors to the cost and expense reductions include the following: Firstly, we continuously closed the low-performing centers and optimizing personnel operations to improve efficiency. As a result, as Nancy mentioned earlier, our learning centers for both IT-focused supplementary STEAM education and IT professional education businesses decreased to 217 and 86 centers respectively, and our total headcount decreased by 20.5% year-over-year.

Secondly, we reduced sales and marketing personnel as well as marketing spending, while remaining focused on operational excellence by endeavoring to optimize the quality of our course content, delivery and services, we continued to generate word-of-mouth referrals and renewal enrollment and maximize the lifetime value for our students.

Thanks to the strong word-of-mouth referral effect, our enrollment show strong resilience despite social mobility restrictions during this exceptional period. As a result of the foregoing, we narrowed our net loss to RMB 17.7 million or USD 2.6 million in the fourth quarter of 2022 compared to a net loss of RMB 182.5 million in the same period of 2021.

Non-GAAP net loss, which excluded share-based compensation expenses, was RMB 12.9 million or USD 1.9 million in the fourth quarter of 2022, compared to non-GAAP net loss of RMB 178.6 million in the same period of 2021.

On annual basis, given our implementation of operational strategies, that emphasize the profitable growth of the company, net income for the year has reached RMB 85.2 million or USD 12.4 million, compared to a net loss of RMB 475.8 million for 2021. Non-GAAP net income was RMB 101.8 million or USD 14.8 million for 2022, compared to a non-GAAP net loss of RMB 456.7 million in the same period of 2021.

On the EPS side, basic and diluted loss per ADS was RMB 1.72 or USD 0.25 in the fourth quarter of 2022, compared to loss per ADS of RMB 16.12 in the same period of 2021. On an annual basis, basic income per ADS was RMB 7.64 or USD 1.11 in 2022, compared to loss per ADS of RMB 42.17 in 2021. Diluted income per ADS was RMB 7.23 or USD 1.05 in 2022, compared to loss per ADS of RMB 42.17 in 2021.

As of December 31, 2022, the total balance of cash, cash equivalents and time deposits, including current and noncurrent and restricted cash was RMB 380.5 million or USD 55.2 million, increasing by RMB 38.4 million from September 30, 2022. The increase was mainly due to RMB 24 million of operating cash inflow generated in the quarter and RMB 27 million of inflow from financing activities as we drew down on our credit facilities. Capital expenditures in the fourth quarter of 2022 were RMB 9.2 million or USD 1.3 million, mainly from purchasing IT equipment used in classrooms and payments to renovate learning centers.

This concludes my financial highlights section. And Nancy will share with you the business outlook and revenue guidance for the first quarter of 2023. Nancy, please.

[Interpreted] Thank you, Ms. Wei, for your summary of our financial performance for the fourth quarter and full year of 2022. Now turning to the company's outlook for 2023.

The pandemic evolved continuously from October 2022 through the Chinese New Year. As many of our teachers, employees, students and their families fell ill from December until around the Chinese New Year, we made the decision to suspend most of our new operations for January 2023, including the majority of our classes. That meant, we only maintained normal operations for approximately 2/3 of the first quarter of 2023. As a result, our first quarter revenue represents only about 2 months of revenue.

In addition, we estimate a RMB 280 million reduction in our cash receipts during this period compared with periods of normal operations. As customer payment precedes services rendered based on our operating model for both IT professional education and IT-focused supplementary STEAM education services, this results in later recognition of accounting revenue than cash resin -- given that IT professional education courses last 4 to 9 months, our GAAP revenue for subsequent quarters, particularly the first quarter of 2023, will also be affected.

Of course, we believe the impact of suspending our centers operations is temporary. By the end of the Chinese New Year holiday in early February, we fully resumed normal operations. And as the steady recovery of macroeconomic conditions fueled students' enthusiasm to enroll in our courses, we have seen an intense level of course sign-up. Moreover, we emerged from the top challenges stronger with an upgraded OMO based delivery system, as well as optimized customer acquisitions and operational capabilities, laying a solid foundation for our full year operations in 2023. This has given us confidence that from the second quarter onwards, our great performance since early February will offset some of the earlier adverse effects of external headwinds on the company's financials in 2023.

Accordingly, with respect to financial guidance, we estimate our total net revenues for the first quarter of 2023 to be between RMB 365 million and RMB 380 million, representing a decrease of 39.1% to 41.5% from the first quarter of 2022. The company's guidance reflects our preliminary estimate of the current market environment and the company's operating conditions, which may change.

Looking ahead, we are fully confident about the potential of the IT education services market, we'll continue to optimize our OMO based product delivery system and services and further improve our core and service quality to bring more value and a better experience to our students. We're optimistic about the rebound in enrollment and will consistently reinforce word-of-mouth referrals to drive growth in new repaying students and renewal students, while lowering customer acquisition costs. At the same time, we'll further enhance our operating efficiency and strive to achieve a new level of full year profitability with healthy and sustainable businesses and operations.

This statement is about our outlook for the future and our revenue guidance.

I would like to take this opportunity to thank you again for your attention and support. We're now ready for questions.

(Operator Instructions) Our first question today comes from Edward Reily from EF Hutton.

So I'm trying to reconcile the first quarter guidance with the fourth quarter results, given the environment kind of seemed the same. So there are virtually no classes in January, you said, but in the fourth quarter, it looks like you continued online classes during the lockdown. So I'm just kind of wondering if you could maybe provide some color on what gross margins might look like for the first quarter, given that you still had rental costs and probably some personnel costs in the quarter but limited revenue in January.

Right. Okay. I'll have Kathy translate the question first, then I will take the question.

(foreign language)

That's actually a great question, because as Nancy mentioned, we basically didn't have any nonessential classes open for January. And a lot of our staff had to take safety, et cetera. So overall, for first quarter, we won't be able to match the margin we achieved in Q1 of 2022. We are more looking for gross margin slightly below 40%. So that's the sort of what we expect. Now, you mentioned the personnel cost, the rent. We actually got some rental relief in Q4 and in the other quarters of 2022. We don't expect that to be repeated in January and 2023. So rent expense or cost for Q2 will be about the same. But the -- as the last year -- but we were so progressively improving efficiency and optimizing organization. So from personnel front, first of all, as I mentioned earlier, we already had 20% of headcount reduction during the year. So only -- so the first quarter of 2023, people-related cost will be much lower. One is with the 20% reduction in headcount; two is also some of them take sick leave. So overall on cost expense adding together, we should be able to save like more than a 100 -- probably around RMB 130 million to RMB 150 million of cost and expenses for the first quarter as compared to a normal quarter, so through all means. So while we will have a significantly lower top line revenue for the quarter, loss wise, we probably will be losing money for the quarter, but it won't be as significant. So -- also on a more sort of a longer horizon, we actually expect our full year sort of margin both on gross and net side will be sort of be better. And on operating income, absolute dollar number wise as well, we actually expect to -- for 2023, after Q1 and on annual basis, will be better than 2022. So I hope that answers your question, Eddie.

Yes. Yes, absolutely. And just some housekeeping. I'm wondering what enrollment was for the Professional segment in the fourth quarter? I might have missed it.

(foreign language)

Right. The enrollment for adult is around 27,000 give or take a few hundred. It's about 10% lower than the same period of last year. Primarily because of what we mentioned like from October onwards, social mobility is much lower as compared to a normal period.

Okay. Got it. And then students enrolled per center continues to grow pretty strong within adolescent segment. Should we expect this to continue going forward throughout 2023? And is there any specific target or capacity constraint that you have on the centers or the target in terms of what you're looking to hit versus its enrolled per center?

(foreign language)

Again, a very good question, Eddie. After we resumed normal operation in February, we do see fairly strong momentum with enrollment, et cetera. So we still expect that on a run rate basis, like for kids, especially an enrollment growth, probably high teen to even low 20 percentage points. Now the second part of the year is about whether the current number of centers will be able to accommodate this kind of enrollment growth? The answer for this year is, yes, for sure. And at the same time, so that's -- we have a fairly scalable model because we have an OMO model. While some of the students come to centers for classes, we have some of the classes taught purely online. We have some of the classes with combined online and off-line learning. So central utilization certainly has room for those enrollment growth.

At the same time, since the countries now go back to normal, we are exploring expansion plans with our children's center segments. As this -- as we are sort of operating in a huge market with great growth potential. And we certainly want to forgive the expansion opportunities due to any sort of -- because we want to just drive profit. So we want to drive sustainable profitable growth, so yes.

Okay. Got it. I mean should we expect total centers to continue to decline going forward, remain flat or -- it seems like there might be some growth there?

Right. For the first half of this year, I would say we probably will stay on a relatively stable numbers. And then heading into second half, yes, you should expect some growth in center numbers. Won't be a lot, like it will primarily drive (inaudible) growth from existing centers.

Okay. Got you. And then regarding some of the cost reductions taken during the year, how much of these reductions are permanent? Or should we expect costs to back to normal levels in 2023?

Right. Again, on the cost reduction side, you can see that both for the sales and marketing and for GA as well as cost of revenue, we actually did pretty -- achieved a sizable reduction from 2021 to 2022. On a going-forward basis, on cost of revenue side, like basically, we don't anticipate overall cost of revenue to be higher than 2022, simply because one, overall headcount reduction of 20% kicking full for this year; and secondly, for most part of this year, we will be running and operating our -- optimizing our operations with existing centers rather than into expansion, so there won't be more -- a lot more structural cost from that front. So basically, rent will stay pretty stable. And then on marketing side, again, headcount reduction achieved and marketing spending optimized. So what you will see as some additional spending at our scale growth as we generate more leads and convert more leads. But other than that, it will be fairly conservative control on spending.

On the sales and marketing side, I think actually on the G&A side, I think both will also deliver lower overall annual numbers as compared to 2022. Yes, I think the 10% to 15% savings on sales and marketing side. And on G&A, yes, I also mentioned on G&A, while overall, we probably would stay flat. But in 2022, they are about RMB 15 million of onetime expenses. One is to -- remember the onetime litigation settlement charge of USD 3 million, that's a onetime charge. And secondly, we have some provisions taken on balance sheet that's also a onetime thing. So I would say, G&A side will probably will stay flat compared to the excluding onetime G&A expense level for 2023.

Okay. Great. That's great color. And then I was wondering if you could maybe provide us with some details on what taxes might look like for the next year?

Tax?

Yes.

Are you asking about income tax?

Yes.

Okay. (foreign language) Yes. For 2022, we estimate our effective tax rate to be around 18%. But through sort of the -- we have various levels of tax rates for different legal entities within the organization. So for 2023, because of the mix shift, we actually expect around 16% of the effective tax rate for the year.

And ladies and gentlemen, we don't have any other questions at the moment. Presenters, please continue.

Are there more questions? Operator?

And we do have an additional question actually from (inaudible) from Super Bowl.

[Interpreted] And my question is, in the current market competition of both adult and children's education services, what are Tarena's differentiated advantages?

[Interpreted] Thank you for your question. Actually, in 2023 some changes have taken place in both children and adult education businesses. But Tarena has maintained our leading advantages mainly in 2 areas. Firstly, in terms of STEAM education, our advantages mainly lie in our diverse education scenarios and our high delivery quality. These 2 advantages will continue to help us win trust from our customers.

Secondly, again, in our STEAM education business, we have won increasing recognition and word-of-mouth from parents because of our highly professional services and growing brand influence.

Third, we have an expansive national offline customer acquisition network that have boosted our customer acquisition capabilities, and this will continue to be our advantage.

Fourth, our highly efficient operational system will continue to increase our competitiveness.

So we are fully confident about the development of our STEAM education business in 2023.

And now moving on to our advantages in IT professional education for adults, we have been developing our IT professional education business for 20 years. And over these past years, we have accumulated ample experience and insights into the changes of technology and market demand. Along with the birth of new technologies, always come changes in business models and the applications of technologies. And we have been able to keep abreast of these latest developments, including new technologies and new market demand, and we have rich experience in these areas.

Our stable and strong OMO based core delivery system and experienced teachers team, these are all our advantages in IT professional education.

I hope I've answered your questions. Thank you. Operator, there are no further questions.

I was just going to say that there are no additional questions at the moment, and you may continue.

Thank you, operator. As 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 request for additional information, we encourage you to with our Investor Relations site at ir.tedu.cn. Thank you.

Thank you all.

Ladies and gentlemen, that does conclude our call 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.]