China Online Education Group
Q2 2019 Earnings Call Transcript

Published: 11 Sep 2019

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group's Second Quarter 2019 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 today, Ms. Judy Piao, Investor Relations for the Company. Please go ahead, Judy.

[Judy Piao:]

Hello, everyone and welcome to the second quarter 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.Mr. Jack Huang, our Chief Executive Officer; and Mr. Min Xu, our CFO will begin with some prepared remarks. Following the prepared remarks, Mr. Liming Zhang, our Chief Operating Officer, will also join the call for our Q&A session.Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.Forward-looking statements involve inherent risks and uncertainties. As such, the Company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the Company's Form 20-F and other public filings as filed with the U.S. Securities and Exchange Commission. The Company does not assume any obligation to update any forward-looking statements except as required under the applicable law.Please also note that 51Talk's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. 51Talk's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.I will now turn the call over to our CEO, Jack Huang. Please go ahead.

[Jack Huang:]

Okay. Hello, everyone. Thank you very much for joining us for our second quarter earnings conference call. We are pleased to report that second quarter financial and operating results continued their strong performance as we consistently implemented our strategy in K-12 mass-market one-on-one offerings, particularly in the non-tier-one cities. Both our net revenues and gross billings exceeded the high end of our second quarter guidance range. The strong results were firmly laid by our K-12 mass-market one-on-one gross billings, which reached RMB418.5 million representing a 50.5% year-over-year increase and accounted for 84% of our total gross billings.In addition to strong top-line performance, our balanced approach to both growth and profitability continues to bear positive results. Our non-GAAP net loss for the second quarter narrowed further to RMB26.7 million, from a loss of RMB59.5 million in the first quarter, representing an improvement in net margin to negative 7.6% from net negative 18.4%. This historically low non-GAAP net loss can be credited to our focus on teaching quality, student satisfaction, and our continued pursuit to optimize operational efficiency and improve profitability.In the second quarter, our gross billings from non-tier-one cities accounted for 72.4% of our K-12 mass-market one-on-one offerings stabilizing from the elevated level we achieved in the first quarter. Going forward, we will continue to strengthen our core K-12 mass-market one-on-one business in non-tier-one cities by offering high quality programs coupled with best-in-class technology.We aim to achieve better value, flexibility, and alignment with our customers needs and demands, all while boosting our profitability. I am very proud to share that we successfully provided over 90 [ph] million one-on-one online English lessons from our inception in 2011 to the end of August this year. This is a nice milestone to mark in our vision to empower everyone to talk to the world. Looking forward, we’re committed to providing our teachers with additional training, which we believe will further profit our pedagogy and the strengthened learning outcomes and cost effectiveness for our customers. As a leader in the online K-12 English education industry in China, we’re proud to have organized the recently completed China Youth Talk National Competition with high profile English language public speaking event, attracted over 100,000 students between four and 12 years old from all across the country.Students competed over eight-month period in oral presentations centered around China’s intangible culture and heritage. Finalists in the senior and junior divisions were evaluated by a panel of education experts based on their English Language presentation skills, overall communication abilities, and culture education. The finalists also participated in a study tour of the U.K. We’re very glad that we could be an essential part of an event that helps to build entrepreneurs [ph] through English language education, and we will seek additional opportunities that showcase our brand and our core competency in English education on a large scale. With that, I would now turn the call over to our CFO, Xu Min.

[Min Xu:]

Thank you, Jack. During the second quarter, we continued to execute and made progress in improving operational efficiencies and profitability. We achieved historically high operating cash flow of RMB99.2 million in the second quarter exceeding previous high of RMB67.3 million in the fourth quarter last year.Consolidated gross margin expanded by 3.9 percentage points year-over-year to 69.6%, driven by improvements in both one-on-one and small class gross billings -- gross margins. With our focused growth strategy targeting non-tier-one cities and continued optimization of operating efficiencies, we’re confident we can continue to deliver healthy growth and improve our profitability in the second half of 2019.Now, I’d like to walk through our second quarter 2019 financial highlights. Net revenues for the second quarter were RMB353.4 million, a 25.4% increase from RMB281.7 million for the same quarter last year. The increase was primarily attributed to an increase in the number of active students and to a lesser extent, an increase in average revenue per active student. The number of active students in the second quarter was 233,400, a 19.4% increase from 195,500 for the same quarter last year.Net revenues from one-on-one offerings for the second quarter was RMB320.3 million, a 26.0% increase from RMB254.2 million for the same quarter last year. Net revenues from small class offering for the second quarter was RMB33.1 million, a 20.4% increase from RMB27.5 million for the same quarter last year.Cost of revenues for the second quarter was RMB107.6 million, an 11.4% increase from RMB96.5 million for the same quarter last year. The increase was primarily driven by an increase in total service fees paid to teachers, mainly due to the delivery of an increased number of paid lessons.Cost of revenues for one-on-one offerings for the second quarter was RMB92.5 million, a 15.8% increase from RMB79.8 million for the same quarter last year. Cost of revenues of small class offering for the second quarter was RMB15.1 million, a 9.5% decrease from RMB16.7 million for the same quarter last year.Gross profit for the second quarter was RMB245.9 million, a 32.8% increase from RMB185.2 million for the same quarter last year. Gross margin for the second quarter was 69.6% compared with 65.7% for the same quarter last year. One-on-one offerings gross margin for the second quarter was 71.1%, compared with 68.6% for the same quarter last year. The increase was mainly attributable to

[Operator:]

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Roger Parodi from Silverhorn.

[Roger Parodi:]

Hello Jack, hello Xu Min. Do you hear me?

[Jack Huang:]

Yes, Roger.

[Roger Parodi:]

Congratulations for very strong results. First of all, I have two questions. You were able to keep your sales and marketing expenses at the very healthy level, it’s actually quarter-on-quarter there was not even an increase. And how do you protect now going into the second half of the year, and how you will be able to maintain this operational efficiency that we can clearly see here? The second question is from the strong cash flow that you were able to generate, which is quite outstanding. How do you foresee that, that you will, are there any one-off events that were contributing to this, or how do you see that in the second half, how will this further develop just as a rough guideline? These are the two questions.

[Jack Huang:]

[Foreign Language]

[Min Xu:]

[Interpreted] So thank you for the questions. So since last year, the company has been focusing on delivering healthy growth as well as operational efficiency. Of course, part of that is, very significant portion of that is sales efficiency. So, we did improve our sales efficiency compared to last year. Of course, one reason that we see the efficiency improvement is because in Q2, we spend less on branding expenses versus in Q1.For the second question, we’re very glad you know this our historic high operating cash flow, so we made a lot of adjustment to trying to achieve that. So one of the important adjustment, we’ve made in the past year is that we stopped the investment in the low margin American Academy business, and we continue to focus on our core business K-12 one-on-one mass-market, and we spent a lot of time on non-tier-one cities, and we’re glad to see the strategy is working and we did see good results and our core business as a percentage of -- as a percentage of total gross billings continue to increase in the past few quarters.And so if you -- so you can see that in the operating -- improvement in operating cash flow and narrow down of our net loss are the result of our consistent execution of our strategy. And also, you can notice that the operating cash flow improvement has been happening in the past three quarters. So for both Q4 2018, Q1 2019, and Q2 2019, we’re seeing significant year-over-year operating cash flow increase around 70 million. And so as a result, we are seeing this quarter’s operating cash flow is almost approaching $100 million.So, we’re very glad that our strategy and good execution really reached the good results.

[Roger Parodi:]

Understood, thank you. Thank you for explaining. Maybe if you allow a follow-up question. In the last call, you explained how your strategy is going towards lower tier cities. Is that -- are you still pursuing that strategy, and how does the competitive situation look like, and when you now go to the lower tier cities, you maintain that for the next quarter, so how do you -- are there any adjustments in that respect?

[Jack Huang:]

[Foreign Language]

[Min Xu:]

[Interpreted] So, we -- in the past few quarters, we continued to focus on the non-tier-one cities with our great Filipino teachers and so we continue to deliver non-tier-one city gross billing percentage of more than 70%, which significantly improved from year-over-year. And we also are putting lot of resources and continue to improve our curriculum, improve our product, so that they are more suitable for the non-tier-one city students and parents. And we’re seeing good results and we’re seeing the referral rate in the non-tier-city continue to increase.

[Roger Parodi:]

Okay, thanks a lot. That sounds encouraging. Thank you for these answers.

[Min Xu:]

Thank you, Roger.

[Operator:]

Thank you. [Operator Instructions] All right. As there are no further questions right now, I'd like to turn the call back over to the Company for any closing comments.

[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 at ir.51talks.com or the Piacente Group Investor Relations. This concludes this conference call. You may now disconnect your lines. Thank you.

[Operator:]

Thank you.