China Online Education Group
Q4 2020 Earnings Call Transcript

Published: 5 Mar 2021

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group's Fourth Quarter and Full Year 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 like to 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 fourth quarter and full year 2020 earnings conference call of China Online Education Group, also known 51Talk. The Company's results were issued by our 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:]

Hello, everyone. Thank you for joining our conference call. The growth momentum from the beginning of 2020 continued into the fourth quarter, reflecting solid strategic execution in our online K-12 English mass market offerings. Fourth quarter net revenues grew 34.7% year-over-year to reach RMB535.1 million. We also recorded historically high operating cash flow of RMB188.5 million. In addition, the number of new paying students grew over 70% year-over-year, boosted by our effective curriculum and improving service quality, while our active students reached 353,800, up 37.6% compared with the same period in 2019. Although 2020 presented an array of unforeseen challenges, our strong pre-established foundational groundwork allowed us to not only manage this to manage this period, but in fact, benefit from the shifting environment as we took advantage of new opportunities. Full year net revenues grew 38.9% to RMB2.1 billion. 2020 operating cash flow rose 80.8% to reach a historical high of RMB719.3 million, compared with RMB397.9 million in 2019, further strengthening our financial position for future growth. We also witnessed remarkable growth in new paying students, which increased 60% year-over-year. We are also very excited about our recent acquisition of GKid's product portfolio and industry-leading AI technologies. GKid offers innovative AI-driven online English courses through highly interactive animation and picture books for children with product offerings intended for those between the ages of three and eight.

[Min Xu:]

Thank you, Jack. We concluded a turbulent 2020 with solid operating and financial results, evidenced by sustained revenue growth and the first profitable year in our company history. We recorded non-GAAP net income of RMB173.7 million for 2020 compared to a non-GAAP net loss of RMB87.7 million in 2019. In 2021, our investment will be channeled toward the development of our curriculum, technology platform and brand as we look to capitalize our market dynamics, drive user growth and achieve a leading market position. Now let me walk you through our fourth quarter financial results. Net revenues for the fourth quarter were RMB535 million, a 35% increase from RMB397 million for the same quarter last year. The increase was primarily attributable to an increase in the number of active students.

[Operator:]

We will now begin the question-and-answer session. The first question comes from Vincent Yu with Needham & Company.

[Vincent Yu:]

Congrats on another profitable quarter. So I have three questions. One -- the first one is that we are seeing a large amount of capital being invested in the online education space, in particular by these unicorn start-ups. So are we seeing any new growth initiatives launched by these companies in real-time that may pose to our core business? And what's our strategy to address these new entries? Second question is about, in 2021, what we expect to see investment to be made in different online tutoring area by COE? And how should we think about the net margin for COE in 2021 versus last year? And third question is about -- tied to the second one. What are some of the areas we think should be a natural market for COE to enter, in addition to areas such as pre-K English learning.

[Jack Huang:]

Yes. So I appreciate the question. And so for the first question, we do see very intense competition in the online education space, and this is why you're seeing a lot of the players in this space are putting up a huge loss. However, we are actually one of the very few profitable company -- online education company. And if you look at the K-12 test preparation focus, the large class online education space as well as the pre K AI-based early education sector, a lot of companies are actually -- the competition in these two sectors are extremely intense. And we're actually in a different sector, which is the K-12 online English education sector, which is -- which we kind of -- is one of the earlier sector to really see a strong growth. So our sector is already -- is more mature than other sectors. There's already a very small number of players in our market, and we're one of the market leader. And obviously, if you look at the Q4 user growth in 2020, we're seeing user growth -- new user -- new paying user growth of more than 60%. And this is obviously the fastest-growing company in our sector. So we're very confident that we're going to do well in 2021.

[Jack Huang:]

Okay. So for the second question, so basically, we -- in 2021, our strategy is going to be focusing -- continue to focus on our core business of K-12 English education. And we want to continue our momentum of user growth in 2020. And we target to be the absolute leader in our sector in 2021. And so there are two areas we will put our investment and to achieve that goal. So number one is we're target to make sure to drive our user growth with better user experience in both products and services. So in order to do that, so we are going to invest more in R&D. And we have to say that our investment in R&D was not sufficient in early years. So we're going to fix this and put more into the development of our products and curriculum. And this will allow us to drive our user growth through user referral, but not just blindly putting in more marketing dollars. So as one of the example, we recently acquired GKid's product line and their industry-leading AI technology, so we will integrate the AI technology together with our one-on-one products to provide a holistic experience for our users and students. We're expecting to come up with a new product, which is a 5-minute AI pre-session before our 25-minute one-on-one foreign teacher session. We believe this is a very complementary product, which can really help our students to better enjoy their learning experience. So -- and the second area we plan to invest in is actually the branding

[Jack Huang:]

So for third question, we do see our current sector is a big market and still have a lot of room to grow. And so our top priority will still be in our current core market. However -- and also, we're quite confident that we can provide better products and services than our peers. Now however, we always look for opportunity to continue to expand our target market. Just for an example, our recent acquisition of GKid product is just an effort to kind of expand that market. We will -- based on GKid product, we will continue to develop AI product for pre-K students. And this is a pretty efficient way to expand our market. And we are also -- last year, we also kind of started our -- started exploring using off-line experience store as a new channel to reach to our target customers in lower-tier cities. And we've already set up more than 100 experienced stores throughout the country. And this is a very major initiative for online merge off-line effort -- strategy. And our COO, Liming Zhang, will elaborate more on our OMO strategy a little later. And as we continue to expand our active students from 350,000 to maybe someday we can reach more than 1 million students. And with that huge student base, we will always look for ways to explore their demand, and we will provide whatever they need, and we will just follow our students' demand. So I'll hand the call to Liming to offer you some more lights on OMO strategy.

[Liming Zhang:]

Sure. So since last year, we've already expanded our off-line experience store to more than 100 stores in roughly 20 provinces. So this is an experiment to find a way to better reach our potential customers in the lower-tier cities. So there are four ways we can make ourselves closer to our customers in the lower-tier cities. One is the customer acquisition is closer to our target market. And second, the brand awareness, it is with a physical store. You significantly increase your brand awareness in your target TAM. And then also the sales effort is kind of more closer to our customer with local people face to face instead of on the phone or on WeChat and the sales effort is closer to our customers and also the service and with a place to go to, to do child lessons or maybe even paid lessons and ask questions. And the service we can provide is closer to our customers. So this is a very meaningful effort for us to explore the off-line master to kind of expand our customer acquisition channels and exposures. And so we will continue to put more effort in our off-line experience store and look forward to having more impact and help 51Talk to reach more of the mass market customers.

[Operator:]

The next question comes from Fawne Jiang of Benchmark.

[Fawne Jiang:]

Congrats on solid quarter and a very strong finish of the year. Just want to follow up and dig a little bit more on your user behavior against curve. We're roughly one year after COVID. Just wonder, with the current online adoption curve among your students, I also noticed that your active students continue to accelerate. Just wonder what's the driver behind it. But in particular, what's the source of your future growth? Are we looking for more students from lower-tier cities? Or we are moving up into the higher-tier cities? And how you're planning to allocate your resources going forward?

[Jack Huang:]

Okay. So let's first talk about the customer behavior change after pandemic. So what we see, as you expected, the online adoption significantly increased for two reasons. One is because of COVID-19 impact. People have to go online. And the other one is actually the heavy investment of many test prep, large class education peers. They put in a lot of marketing dollars to really raise the awareness of online education. So this is a good thing because people are -- online education are turning from a new fancy way to do education and become a very familiar way, actually probably the preferred way, to learn and to take lessons. And many people just -- a lot of the parents are from just hearing online education through friends by -- and try it by curiosity, now many of the parents are becoming very mature shoppers of online education. Many of them are expert in comparison shopping, so they know a lot about every company. So this is a good thing, and the market is becoming more mature, which means that a lot of times may be advertising is not enough. And you have to meet your customers' demand you have to provide great product and great services. And that's the only way to generate customer loyalty and to guarantee the long-term customer satisfaction. So that's why we're putting a lot of -- we are going to put a lot of money in product development and services and to drive customer satisfaction and, in turn, drive user growth.

[Jack Huang:]

So now let's talk about the user growth. So we are seeing very strong user growth and accelerating user growth in second half 2020. And we believe there are three major drivers. Number one is the customers' satisfaction. So we mostly drive our user growth through referral. And one of the key reason is that our students' lesson consumption is roughly 13 to 15 per month, which is the highest in industry because the students are very actively taking the lesson, making progress, leading to better results and then leading to better customer satisfaction. So we believe it is one of the key. And second is the brand. And our brand is gaining momentum throughout the year. As you guys probably know, in the past few years, we've had a strong competition from many peers focusing on North American teachers. And in the past year, many of them stopped those very aggressive or excessive advertising, which is leading to our brand is actually -- our brand awareness is accelerating, and now we're becoming the biggest brand in our sector. And the third one is the operation strategy. And one of the operating strategy I want to point out is that, in the past year, we actively lowered the average package size. And by lowering the average package size, we lowered the barrier for many of our customers to buy our product. And one exciting thing we find out is that, after we lowered average package size, not only the lower-tier city markets are seeing very strong growth. We're seeing actually accelerate growth in the Tier 1 cities, which means like it doesn't matter what the market is. As long you have great product, great service and a reasonable price, you're going to see very strong long-term growth. Okay. So yes, so I'm not sure if we answered all your questions.

[Fawne Jiang:]

Yes, that's very helpful.

[Min Xu:]

Excellent.

[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 the contact information provided on our website or The Piacente Group's Investor Relations. This concludes the conference call. You may now disconnect your line. Thank you.

[Operator:]

Again, this concludes this conference call. You may now disconnect your line. Thank you.