NaaS Technology Inc.
Q1 2018 Earnings Call Transcript

Published: 12 May 2018

[Operator:]

Good morning and good evening everyone. Welcome to RISE Education's First Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. This call is also being broadcast live on the company's IR website. Joining us today are Mr. Yiding Sun, CEO; Ms. Chelsea Wang, CFO; and Ms. Mei Li, Senior IR Director of RISE Education. Following management's prepared remarks, we will conduct the Q&A session. Before we begin, I refer you to be Safe Harbor statement in the company's earnings release, which also applies to the conference call today, as management will make forward-looking statements. I will now turn the call over to Mr. Yiding Sun, CEO of RISE Education. Please go ahead, sir.

[Yiding Sun:]

[Foreign Language] Thank you, operator. Hello everyone. Welcome to our first quarter 2018 earnings conference call. This is Mei Li. I will now speak on behalf of our CEO, Mr. Yiding Sun. We are excited to start 2018 with strong financial and operating performance in the first quarter. Our total revenues in Q1 2018 increased by 28.4% year-over-year to RMB270.1 million and our non-GAAP net income attributable to RISE increased by 37.5% year-over-year to RMB38.9 million in the quarter. We also reported the highest level of monthly enrollment in our history in March 2018. As of March 31st, 2018, we have a total of 284 learning centers across 90 cities in Mainland China, Hong Kong, and Singapore, including 64 self-owned and 220 franchised centers. This robust growth in both top and bottom-line was primarily driven by the strong performance of our educational program in our self-owned learning centers. We are happy to see key operating indicators continue to exceed over the last year's achievement. Our net new student enrollment per self-owned centers per month increased to 33.9 students in Q1 2018 from an average of 33.6 per center per month during the full year of 2017. In addition, our student retention rate increased to 71% in the first quarter from 70%, 7-0, in the same period of last year, which is a testament to our commitment to product R&D and our unwavering focus on improving students' learning experience. Our newly opened self-owned learning centers in Q4 2017 are performing strongly, and we are on track to open another 13 to 15 self-owned learning centers in the remaining quarters of 2018. This will bring our total self-owned centers to 77 to 79 by the end of 2018 compared with a total 64 by the end of 2017. As a result of our solid expansion, we expect our total revenue growth to accelerate and achieve a 30% of year-over-year increase for the full year of 2018 while remained -- while maintaining relatively stable margins. Now, I would like to discuss the seasonality effect on both enrollments and revenues at our self-owned learning centers. Our total student enrollment for self-owned learning centers and online courses grew from 19,397 in Q1 2017 to 22,045 in this quarter, representing a 13.7% year-over-year increase. Our student enrollments in Q1 2017 accounted for 39% of full year enrollments in 2017. The higher base in 2017 was partly attributable to an earlier start to the Chinese New Year, which extended the recruitment time. We believe the enrollment contribution of this year's Q1 will revert back to more normalized range of around one-third of the full year enrollments. In addition, revenue growth in the quarter is below our 2018 full year growth guidance of around 30%. This is partly attributable to a shift in course hours from Q4 2016 to Q1 2017 due to hazardous weather conditions in Beijing, which caused a higher base for year-over-year comparison. However, all seasonal effects have been already factored in our previous estimates. Moving on to our franchised centers, we entered five new cities with a total of 14 new franchised learning centers in this quarter. We remain committed to ensuring that all franchisees in our learning center network operate at a high standard. As part of this effort, we organized our largest-ever franchisee annual conference in April 2018. During the conference, we shared our insights in brand development, quality control, and the successful operating strategies with 550 management executives from our franchised centers, a 20% higher attendance than last year. Building upon the success of our offline segment and substantial geographic presence that we have established, we continued our effort to expand our online business. After launching Rise Up in 2013 and Can-Talk in 2017, our online offerings have became -- have become an essential component of our industry-leading products. Based on our observation of our trials in 2017, we were encouraged by the enrollment contribution from our online segment. We expect our online offerings to attract additional interest from our existing RISE students in the following quarters. In addition to our traditional offline and online offerings, we continue to explore innovative products to further complement our nation -- national junior ELT platform. The acquisition of The Edge allows us to expand into the new market of high end test preparation as well as international schools and college admission consulting. As recently announced, we have established a strategic partnership with Enrollment Management Association to become the exclusive on-site learning institute in Mainland China regarding its Secondary School Admission Test or SSAT. The SSAT is a widely recognize as standardized test that will help not only our students, but all Chinese students who seek admissions into high-caliber international schools. The SSAT also serves as an official assessment tool, for us to evaluate the progress and achievements of our students while enrolled in our courses. We believe this partnership is a testament to the quality of our English education programs. And together with The Edge and Rise Up programs, we will have a more comprehensive offering for students in primary and middle schools. This quarter, on the product set, we continue to focus on launching new courseware while upgrading our existing ones and to ensure the best learning experience and outcome of our students. In the quarter, we upgraded the courseware of our S1 and Pre-RISE levels, moving online -- some of the offline hours for after-class exercises and supplementing the curriculum with various online products. This also makes the online curriculum more condensed. Specifically, we introduced Jolly Phonics, a series of programs that improve the reading and writing skills of students at S1 and the pre-RISE levels using a synthetic phonics approach. Jolly Phonics integrate teaching, practicing, gaming and family elements into the learning experience to enable children to begin building words as early as possible. We also launched [Indiscernible], the world's first English courseware designed to strengthen the children's interest in multicultural content and music. We introduced these two products to help extend the study time of our students in their homes to improve the transition from learning in classrooms to practicing at home. We believe that the family-involving nature of these two new products will further complement our flagship courseware and help motivate students and improve the level of parent engagement. Consistent with our planned use of our IPO proceeds, we invested heavily in our IT system in the first quarter of 2018. We built out a complete system engineering team and we'll continue to invest in talents with background in advanced technology. Year-to-date, we have strengthened our IT engineering team to 40 people compared with 15 at the beginning of the year. For this purpose, we have planned capital expenditure of 20 million, which has been reflected in our annual budget. Firstly, in 2018, we will build an intelligent learning platform, which will integrate online marketing, course registration, and foreign teacher management as well as reinforcing the tasks and the evaluation process between students, teachers and parents. Secondly, this year, we will build up our finance and HR functions into the ERP system and further improve the OA system. The self-owned learning centers have improved their operation through the COS operating systems and we have seen more and more franchised centers adopting it. In the quarter, we saw a record high number of our franchisees incorporating the COS systems in their learning centers. As we explained before, the COS system improves our franchise partners' ability to further improve their center operating capability as well as our ability to supervise the franchise business. The next phase of the COS system upgrade will be to include the Rise Start and online businesses. As we mentioned before, as one of our important strategies to grow the business, we introduced an initiative to acquire selected franchised centers and bring them into our self-owned learning center network. We are in the advanced stage of evaluating centers in two, three attractive provincial capitals and we'll keep everyone updated on our progress. Overall, we are pleased with the solid progress that we achieved this quarter in product innovation, learning center management, system development, competitive positioning, and online initiatives. We are confident that with our industry-leading education quality and innovation capabilities, we are well-positioned to capitalize on the fast-growing junior ELT market in China. This concludes the prepared remarks of our CEO, Mr. Yiding Sun. I will now turn the call over to our CFO, Ms. Chelsea Wang, to go over the financial highlights. Chelsea, please go ahead

[Chelsea Wang:]

Thank you, Mei and hello everyone. Before I begin, please note that all numbers stated are in RMB terms. As Mr. Sun mentioned earlier, our total revenues increased by 28.4% year-over-year to RMB270.1 million from RMB210.3 million in Q1 2017. This increase was primarily attributable to an increase of RMB47.5 million in revenues from educational programs. Revenues from educational programs increased by 26.6% year-over-year to RMB226.2 million in Q1 2018. Such growth was primarily attributable to an increase in the number of student enrollment, mainly due to a higher student retention rate of 71% in the quarter, and the expansion of our self-owned learning center network from 54 as of March 31st, 2017, to 64 as of March 31st, 2018. Franchise revenues grew by 14.7% year-over-year to RMB28.2 million in Q1 2018, primarily due to higher recurring franchise fees and a 30.4% increase in the number of franchised learning centers from 168 as of March 31st, 2017 to 220 as of March 31st, 2018. Other revenues increased to RMB15.7 million in Q1 2018 from RMB7 million in Q1 2017, primarily due to the revenue contribution from business assets acquired from The Edge Learning Centers Limited, or The Edge, and a 56.2% year-over-year increase in revenues from Rise Overseas Study Tour in Q1 2018. As we have indicated, due to seasonality impact, we had an exceptionally strong Q1 2017, which contributed to 39% of full year student enrollment in 2017. This resulted in a very high base for comparison of enrollment in Q1 2018. With four new self-owned centers opened in Q4 2017 and 13 to 15 new centers to open in 2018, we expect our enrollment and revenue growth to accelerate later this year, as evidenced by the fact that our Q2 enrollment growth is currently meaningfully above trend line. Cost of revenues increased by 30.3% year-over-year to RMB125.5 million, primarily due to increases in rental costs and personnel costs. Rental costs increased as we expanded our operation. The increase in personnel costs was primarily attributable to an increase of total teaching hours at our self-owned learning centers. Gross profit for Q1 2018 was RMB144.7 million, up 26.9% year-over-year, and gross margin for Q1 2018 was 53.6%. Selling and marketing expenses for Q1 2018 were RMB48.5 million compared with RMB31.3 million for the first quarter of 2017. General and administrative expenses for Q1 2018 were RMB54.4 million compared with RMB41.3 million for the first quarter of 2017. Adjusted EBITDA represents income before interest, tax, depreciation and amortization and share-based compensation. Adjusted EBITDA for Q1 2018 increased by 28.6% year-over-year to RMB68.9 million from RMB53.6 million in the same period of last year. Adjusted EBITDA margin remained stable at 25.5% in Q1 2018. Other income for Q1 2018 was RMB10.9 million compared with RMB0.2 million in the same period of last year. This is because in Q1 2018, we received a RMB10 million payment in reimbursement from our ADR Bank. Net income attributable to RISE for Q1 2018 increased by 26.7% year-over-year to RMB35.8 million. Non-GAAP net income attributable to RISE for Q1 2018 increased by 37.5% year-over-year to RMB38.9 million. Non-GAAP net margin attributable to RISE expanded to 14.4% during the quarter from 13.4% in the same period of last year. GAAP and non-GAAP diluted net income attributable to RISE per ADS for Q1 2018 was RMB0.62 and RMB0.67, respectively. Turning to our cash flow and balance sheet, we generated RMB198.4 million positive cash flow from operating activities through Q1 this year. As of March 31st, 2018, we had RMB1,054.6 million of cash and cash equivalents, restricted cash and short-term investments compared to RMB1,084.9 million as of December 31st, 2017. The decrease was mainly a result of four cash transactions. These transactions include, one, loan repayment of RMB75.9 million to CTBC in the first quarter of 2018; two, entrustment loan of RMB150 million granted to Lionbridge; three, final payment of termination fee to Bain Advisors of RMB20 million; and four, final payment of RMB16.6 million for the acquisition of The Edge. As of March 31st, 2018, total deferred revenue and customer advances balance increased to RMB1.07 billion, representing a 31.7% growth from RMB812.8 million at the end of 2017. Now, let me provide you with our guidance. For the second quarter of 2018, we expect our total revenues to be between RMB292.5 million and RMB297.1 million, representing a year-over-year growth of approximately 29% to 31%. This means in the first half year of 2018, total revenue is estimated to grow by 28.7% to 29.8% year-over-year. We expect adjusted EBITDA margins in Q2 2018 to be between 24.5% and 25.5%. Our full year 2018 revenue growth is expected to be around 30% with relatively stable EBITDA margin versus last year. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Operator, we would now like to open up the call for questions from our audience. For those who would like to ask a question, please state your question in Chinese first and then in English. Operator, please proceed.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.

[Sheng Zhong:]

[Foreign Language] I'll translate myself. So, I have two questions. One is the enrollment growth in -- from Q2 to Q4 is quite strong at 45%. So, -- well, can the management give some more color about the enrollment breakdown to online and offline growth? And also the kindergarten and primary, secondary enrollment And second question is our full year revenue guidance is 30% year-over-year growth. So, what the management see in the ASP trend and what's the reason behind. Thank you.

[Yiding Sun:]

[Foreign Language] Thank you for your question. Let me answer your first question. Firstly, because in the first quarter of 2018, our Chinese New Year is late, so due to this reason, the recruitment time is less than the previous year, which caused the enrollment growth is not that strong as normal. But we have seen that the market demand is very strong. And based on our observation of the ongoing recruitment process and enrollment growth, so we are very confident that in the following several quarters of enrollment growth, so we will kick up and accelerate them. For the online enrollment, in the last -- in the fourth quarter last year, we launched a new online product. And based on our observation, the enrollment growth is pretty good, especially in the first quarter of 2018. We see very strong enrollment growth. Our online product, including the Rise Up and Can-Talk, is an extension of our offline curriculum, also an extension from the primary school students to age -- from the primary-age students to middle school students. So, right now, we already see a very good start. We are -- based on our observation, we see that -- we are very confident that enrollment growth in the following quarters will grow robustly. And it will be -- the online part will be a very good supplement to our offline curriculum and to better support the students study at home. And for the online enrollment contribution, we -- right now, the contribution is -- the contribution as a total enrollment is improving. So, it's very encouraging. But considering the pricing of this online product that is lower than the overall -- offline product, the revenue contribution is lower than the enrollment contribution for the moment, but it will grow nicely.

[Chelsea Wang:]

Okay, Sheng. So, for your second question, let me answer you. So, regarding the revenue growth, the growth rate in the first quarter was about 28.4%. But for the overall, the whole year, we still expect to achieve around 30% growth for the whole year. We increased our ASP in April already. The range is also the same, between 3% to 5%. So, that is my answer.

[Sheng Zhong:]

[Foreign Language]

[Yiding Sun:]

[Foreign Language] In terms of the price increase, as normal, we raise our pricing in the April by raising the price by 3% to 5%. It's in line with our practice in the previous year. And the pricing strategy will be different based on the affordability and the competitiveness in each city. So, we don't think that the online contribution, with the continued increase of online enrollment, this will impact our ASP, the overall ASP. In our network, we have different products such as the online products, such as the Study Tour, such as short-term courses. So, we have a totally different pricing strategy, and online is a very good complement to our offline offering.

[Chelsea Wang:]

And Sheng, let me add on. When you calculate the ASP, I think you should not use student enrollments because it's our methodology. Our revenue recognition is readably recognized as courses are delivered after we collect the tuition and the fees.

[Operator:]

Thank you. Your next question comes from the line of Natalie Wu from CICC. Please ask your question.

[Natalie Wu:]

Hi. Good morning, Yiding Sun, Chelsea, and Mei. Thanks for taking my question and congratulations on a very solid set of results. Several questions from my side. Firstly, very quickly, what's the impact of new revenue standards and the ASC 606 for franchise revenue? What should be the growth if excluding this kind of the impact? And secondly, what's the -- actually, your sales and marketing expenses as a percentage of revenue, up by 8%-plus. So, just wondering, what's the driving force behind? And how should we look at the margin trend going forward? And lastly, just wondering, any impact from the recent regulation? Especially from -- on the front of further capacity expansion, will the regulation impact your new learning center opening plan or timing? I will quickly translate myself. [Foreign Language]

[Chelsea Wang:]

Okay, so let me answer your -- the first two questions. Regarding the ASC 606, it's the new standard for revenue recognition. And for RISE Education, it's a little bit impact our revenue recognition for the first up-front fee from the franchise partners. Because it's just about maybe 20% of our franchise revenue come from the first up-front fee, so the impact is not very -- it's immaterial actually. So, we have already reflect all the impact into our revenue recognition and the whole year estimation. So, that is the first question. And for -- your second question is about sales and marketing spending. For the first quarter, as we mentioned before, because we have some seasonality impact in the first quarter, so you can see that the enrollment in the first quarter is not very strong. So, we spent more sales and marketing expense in first quarter to ensure that from the second quarter, we can quickly catch up. So, that's why for the first quarter, the sales and marketing looks a little bit higher than our historical trend. But for the whole year, as a percentage of our total revenue, we will still keep, I mean, almost stable as last year.

[Yiding Sun:]

[Foreign Language] To answer your third question, yes, we noticed that the product of the law on the promotion on the private education recently came out. We have been closely monitoring the program implementation from the regulatory authorities. Overall, we are happy to see the continued reform in the education sector and RISE is a company that always pay great attention to regulatory requirements. And once you -- we will surely comply with the relevant rules and regulations. And we also noticed that the direction of this new policy is in line with the previous announcement. There's no change, so it's very greatly helped the -- it's a very great support from the government to the private-owned education organizations, especially for the organizations who run the business in the preschool education or education for all-round education -- education for all-round development. This direction is in line with our education philosophy. We always pay great attention to holistic education. We pay attention to -- we care -- the personal education and social education of our kids and holistic education. So, definitely, this will benefit our drive in the long run. And maybe you already noticed that in first quarter of 2018, it shows that our expansion process already accelerated. We do this expansion faster than previous years because we -- it's very fluent of us. The progress that we're getting license from different local authorities is very smoothly. So, we believe that this new -- the new policy in this education sector will benefit RISE in the long run.

[Natalie Wu:]

[Foreign Language] Very quick follow-up. For the newly opened learning centers, is there any new cities you've entered in the first half of this year or all limited with the existing cities?

[Yiding Sun:]

[Foreign Language] For the self-owned learning centers, we will add most of our -- we will add our self-owned learning centers in Beijing, Shanghai, Guangzhou, Shenzhen, Wuxi, Foshan. Those are first-tier cities, as we did before. And for the franchise business, we will enter the -- some of the new franchised centers will be located in the new cities. For example, the third- or fourth-tier cities in China.

[Natalie Wu:]

Very helpful. Thank you.

[Operator:]

Your next question comes from the line of Alex Xie from Credit Suisse. Please ask your question.

[Alex Xie:]

Hi, management, thank you for taking my questions. So, I think I have two questions. So, first one is maybe the -- can management share more about your source on the online education? Particularly, do you think there is opportunity in online education for students at higher grades? And second question is that the -- can management share some updates on your thoughts for M&A initiatives in 2018? As we can see, you have already done some M&A in the last quarter. So, what's the strategic rationale behind your M&A plans? And what's your criteria to select M&A targets? And let me conduct translation by myself. [Foreign Language]

[Yiding Sun:]

[Foreign Language] Let me answer this question. In 2015, RISE Education, we have always put our emphasis on online product. Since 2015, we have launched the online products across Rise Up for older age group students, so that students can learn English during their spare time. Rise Up, since its launch, has received very positive feedback from the parents and students. And we continue to see improvements in both revenue and student enrollments. Also, this is very good. We believe that -- we agree that the online is a very good approach to better complement the study demand of those older age students. So, they are more independent. And for another product, last year, we also launched a product that's called Can-Talk to target students in the age group of seven to eight years old right now. And this is an extension to our current offline product so that students can learn with online teachers as a supplement to their offline curriculum studies one. Right now, we are -- in 2018, we -- this is contact-based teaching program. In 2018, we already launched Level 1, Level 2, Level 3, Level 4 based on the different demand of different age groups -- different -- the students of different age groups. We use foreign teachers, native teachers from North America. And currently, the format model is one-on-one. We can fix the teachers, so every -- the parent and students won't worry about the change of teachers. And we believe that based on our experience, we feel this is a very good product. And while we extend it to the age group of over eight, it's also very helpful for our customers. Currently, this Can-Talk customers -- this Can-Talk product only targets our existing RISE students. But going forward -- the current recruitment cost is low. But going forward, we will have more opportunity to extend the customer base. And we will also find most appropriate approach to do the -- to acquire the students, the new students. [Foreign Language] For your second question about the education of -- earlier, we have mentioned that have initiative in order to better grow our business. We have an initiative to acquire selected franchise partners -- franchised learning centers into our self-owned learning centers. In the quarter, we're actively moving the process forward. And we are in the advanced stage of evaluating centers in two, three attractive provincial capital. And we will -- later, we will keep everyone updated on the progress. [Foreign Language] When we select franchise -- when we select the target, we're very cautious. We look at -- we only look at those well-performed targets. And we look at carefully about the enrollment growth, the brand name in the local market and the management capability of each partners. So, this is -- we will conduct this processing very cautiously.

[Alex Xie:]

Thank you. Thank you.

[Operator:]

Your next question comes from Nicky Ge from China Renaissance. Please ask your question.

[Nicky Ge:]

[Foreign Language] My first question is about our online business. Just want to know the current penetration of our existing students. And also, could management talk about the retention rate from online business? And my second question is about the expansion plan this year. Can management help me understand, what's the region for expansion for the rest of the year?

[Yiding Sun:]

[Foreign Language] Thank you for your question. For your first question, after we launched our online product, we noticed that the products have been well expected by our parents. They are very interested in this blended approach and they are very -- they feel this supplement to our online curriculum is very helpful for their kids' study. So, we are very confident about our new product's progress. For this year, we have internal target. For example, our enrollment from this online can reach around 4,000 student enrollments for this year. But in terms of your second question about the renewal rate, the retention, because it's a new product, so right now, we still are not -- we haven't experienced retention. It's not renewal time. So, based on our observation, the parents are -- because the parents are very -- they well accepted this product and enrollment growth keep going up, so we are very confident about the retention rates. And later, we can share more with you. [Foreign Language] In terms of the expansion, we maintain our plan to add 20% to 25% of new centers. So, for the self-owned learning centers, we will continue to add new centers in top-tier cities and economically well-developed bigger cities like Beijing, Shanghai, Guangzhou, Shenzhen, Wuxi, Foshan. We will add 13 to 15 new learning centers for 2018. So, you may notice that this is a faster -- our expansion accelerated -- will accelerate in 2018. For the franchise network, we will add 30 to 50 new learning centers. For example, in Q1, we already opened 14 new centers, and we entered five new cities through our franchise network from -- business. Especially -- in addition to our existing franchised cities, we also entered more -- lower-tier cities like the third and fourth-tier cities, including Nanning, Xinyang and lower-tier cities in Hubei province and Sichuan province. So, you may find that we have -- we are moving faster in the third and fourth-tier cities. This demonstrates the brand new venues in those cities and we are -- the brand name of RISE and the product -- the quality -- the product quality are well accepted by the local customers.

[Operator:]

Ladies and gentlemen, we have reached the end of our conference call today. Thank you all for joining us. You may now disconnect.