China Online Education Group
Q3 2020 Earnings Call Transcript

Published: 24 Nov 2020

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group’s Third Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I will now turn the call over to your host, Ms. Judy Piao, Investor Relations for the company. Please go ahead, Judy.

[Judy Piao:]

Thank you. Hello, everyone. And welcome to the third quarter 2020 earnings conference call of China Online Education Group, also known as 51Talk. The company’s results were issued via newswire services earlier today and are posted online. You can download the earnings press release and sign up for the company’s distribution list by visiting the IR section of its website at ir.51talk.com.

[Jack Huang:]

Okay. Hello, everyone. Thank you very much for joining our earnings conference call. We are pleased to report another robust quarter of solid financial and operating results. Our third quarter performance proves the merits of our strategy focused on the K-12 one-on-one mass market offerings in non-Tier-one cities and showcases our ability to execute our initiatives. Highlights of the quarter included net revenues reaching RMB538.5 million, up 31.8% year-over-year, surpassing the top end of our guidance with contributions from our K-12 one-on-one mass market offerings growing by 46% year over year to hit RMB471.8 million. Moreover, the number of active students on our platform in the third quarter grew to 338,000, up 30.9% compared to the third quarter in 2019. In the third quarter, our gross billings reached RMB728.4 million and growing 33.1% year-over-year, of which our K-12 one-on-one mass market gross billings grew 37.2% to RMB692.2 million. Clearly families across China are gaining greater familiarity and comfort with online learning channels and recognizing the strong value we provide. As they do, they are sharing their positive experiences with their friends and our high-quality brand reputation is spreading.

[Min Xu:]

Thank you, Jack. We continued our growth momentum in Q3 achieving solid topline increment, coupled with another quarter of profitability, our fourth consecutive profitable quarter. As the demand for online education continues to accelerate, our strategy to pursue balanced growth is delivering as planned. As an example of this can be seen in our decision during the quarter to increase non-GAAP sales and marketing expenses by 31% year-over-year to capture certain market opportunities and increased non-GAAP product development expenses by 13% year-over-year to further improve our technology platform and curriculum. Despite the increase in expense, we still recorded profitability this quarter, with non-GAAP net income coming at RMB38.5 million. Excluding the RMB15 million favorable impacts of Coronavirus relief policies in third quarter, our non-GAAP net profit margin would have been 4.4%.

[Operator:]

Thank you. Our first question is from Vincent Yu from Needham & Company. Please go ahead.

[Vincent Yu:]

Thank you. Thank you for -- thank you management for taking my question. My first question is, how should we think about the active student trends and the gross billing trends in first quarter and -- the fourth quarter and the first quarter, things such as the tough comp and the potential year-over-year decrease? Second question is the student behavior areas in terms of like user timestamp, the number of classes taken per students compared to last year during the summer break? Third question is as we approach 2021, can we share some color on what will likely to drive 51Talk’s growth in next year? Thank you.

[Min Xu:]

Okay. Thank you, Vincent.

[Jack Huang:]

Yeah. What I said

[Min Xu:]

Okay. Yeah.

[Jack Huang:]

[Min Xu:]

Yeah.

[Jack Huang:]

[Min Xu:]

Yeah.

[Jack Huang:]

Okay.

[Min Xu:]

All right. So Jack will talk about the -- some trend and I will fill in some of details. So number one, we’re seeing -- we’re doing quite well in Q3 and Q4. We’re -- 51Talk as a company is well established and we have a very good brand and have a very good reputation among our students and parents. And so, in Q3, we start to take some measures, actually we mentioned this before we start to cut our course package size in order to lower the total price to -- in order to drive the user growth. So this is very important for us. For example, in Q3, the new paying students’ number for our K-12 business increased more than 68% year over year. So this is a very significant growth. And in Q4, we plan to continue to execute on this strategy. We will continue to cut our course package size and so what in order to target our customers in tier-two and tier-three cities. And so, if you look at 2021 growth and because we have confidence in our student’s retention, so what we’re continued to do is that we will continue to execute our strategy to decrease the package size and to drive the user growth. As you know that in this quarter, in Q3, 68% of our new users are from referrals. So the bigger our user base is the more students we’re going to get from referral. So we believe this is a great strategy for us. So that’s a kind of concluded Jack’s comments and I’ll give you some comments on the active students, as well as the gross billing trend in Q4 and maybe in Q1. So basically if you see that our active students we will continue to have a very healthy growth in Q4 and Q1 and we believe that the trend will continue. And even in Q1 because we believe our engagement, use our student’s engagement really helping us to improve their retention. And in addition, because we’re driving user growth, so there are more and more new users coming on to our platform and so naturally they’re going to start with new active students. So we believe with our strategy to continued user growth our active student’s growth will continue to be very healthy. And in terms of the gross billing, as I mentioned, as Jack mentioned earlier, so we are actually looking at to decrease our average package size. So, you’re likely going to see that our average order size will decline maybe 20% year-over-year in Q4, which is a pretty steep decline. However, our net paying students number are likely going to grow more than 45% year-over-year.

[Vincent Yu:]

Yes. Very helpful. Thank you, Jack. Thank you, Min.

[Min Xu:]

Yeah. No problem. Thank you, Vince.

[Operator:]

The next question comes from Fawne Jiang from Benchmark. Please go ahead.

[Fawne Jiang:]

Jack, Min, hello. Just quickly translate my questions. Still regarding your active student growth, it was very impressive growth in past quarters. Just wonder what’s the user profile for your new acquired active user and particularly your strategy in terms of how you continue to drive the growth of new users as well as the retention of the new users?

[Jack Huang:]

Okay.

[Min Xu:]

All right. So for -- in terms of the student profile for the new students, there’s no big difference compared to last year. It’s very similar. We’re still seeing more than 70% of students coming from non-tier-one cities. However, there is one change that is obvious that we’re seeing tier-one market we’re seeing a very nice user growth acceleration. And we believe it’s for two reasons. Number one, there’s few customers looking for good values in tier-one cities. And also number two reason is that it takes a while for the tier-one city customers to find out that some other products they cannot deliver as good results as by one top product. So, it takes a while for them to figure that out and switch to our platform. So, this is why we believe this tier-one user growth acceleration will continue as we continue to improve our product quality and service quality. And so in terms of what we’re doing in terms of sales to really drive the acceleration. So, as we mentioned before, we’re putting higher priority on user growth than the gross billing growth. So, it’s actually quite easy. In terms of KPI, we just give user growth a higher weight than the gross billing and it naturally drives the our sales to, trying to drive the user growth. In terms of user retention and we are actually starting an initiative to improve the service quality of our student’s success team and it is very important for student success team will work very closely with parents and students to help them improve their learning experience to make sure they have good results and as a result, we’re expecting good renewal rates. We’re expecting good referral rates. And as we continue to cut the size of our first order, you can naturally see that the renewal order size should increase, and at the same time, the renewal rate should increase. So as a result, you actually should see our students lifetime value should increase that way. However, we are facing a challenge that is when we continue to drive our new user growth, suddenly our student success team does not have the capacity to service a much bigger user base. So we are working very hard to help improve their efficiency and to add headcount in order to make sure they can deliver a very high service standard and service quality to our students. So this is a challenge we’re going to tackle in the coming two quarters.

[Fawne Jiang:]

It is clear. Thanks for the color. Congrats for a strong quarter.

[Min Xu:]

Thanks, Fawne.

[Operator:]

As there are no further questions now, I’d like to turn the call back over to the company for closing remarks.

[Judy Piao:]

Thank you once again for joining us today. If you have further questions, please feel free to contact 51Talk’s Investor Relations through our website, 51talk.ir.com or The Piacente Group Investor Relations. Thank you.

[Operator:]

This concludes this conference call and you may now disconnect your lines. Thank you.