Meta Data Limited
Q1 2021 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to OneSmart International Education Group Limited First Fiscal Quarter 2021 Earnings Conference Call. At this time all participants are in a listen only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your first speaker, Miss Ida Yu, Investor Relations, Senior Director of OneSmart International Education Group Limited. Thank you. Please go ahead.

[Ida Yu:]

Thank you, operator. Good morning and good evening, everyone. Thank you for joining OneSmart International Education Group Limited first fiscal quarter 2021 earnings conference call. The company's earnings results as well as supplementary slide presentation were released earlier today and are available on the company's IR website at ir.onesmart.org.

[Steve Zhang:]

Thank you, Ida. Hello, everyone. We are delighted to report good start in fiscal 2021. All the key metrics are recovering under year-on-year comparison . Our go premium strategy is executed well from check with significant enhancements were made on product, feature profiles, then incentives and the premium brand advantage . Our recently launched Elite VIP product has achieved a strong cash sales with distinct value-added premium offering empower learning ability and the School Admission planning; on top of the basic squad improvements feature. Our teachers profiles are continuously improving and that they are highly selected and well trained to satisfy students and parents evolving needs for academic achievement. By the end of January 2021, we have refurbished 83% Learning Center, the upgraded center study environment with the wider super experience to our product. In addition, we are making great efforts on premium brand building in the local market to more effectively reach our target customers. OneSmart plans with position of evidence about improved brand awareness in selected cities. With the consumption upgrade in China's education sector, the premium K-12 education sector is an enormous underserved market. We will continue to leverage our resourceful platform and our innovative products and services to capture growth opportunities. As a leading premium tutoring service provider, we are confident to expand our market share in this fast-growing sector to achieve RMB7 billion by 2026.

[Greg Zuo:]

Thank you, Steve. Hello, everyone. Thank you for joining us today. I would like to start with comments on the overall performance before I go through individual presentation slides, which was uploaded onto our company website earlier today. As we kicked off the new fiscal year 2021 in September, the pandemic has generally been under control and the business activity in China are getting back to normal level, thanks to the tremendous efforts made by the government and the people. OneSmart has also moved to a new phase of growth, post pandemic, and are proactively investing in our core business to build a long-term successful enterprise. Our companywide cash sales year-on-year growth has continued to trend up recording positive 14%, 23% and 37% in the December 2020, January 2021, and mid-February 2021, respectively. The balance of our prepaid tuition has reached all-time record level at RMB 2.75 billion by fiscal Q1. This is a result of strong demand, post normalized public school schedules, enhanced customer satisfaction driven by our premium initiatives, and our enhanced customer acquisition approach. The go premium strategy that we launched in the beginning of fiscal 2021 is structurally resetting the unit economics of our business model, making it more financially attractive in the future. For years with date, FY '21 the average unit price of new purchase of our core VIP segment was RMB 44,000 per student on average basis, representing 73% year-on-year increase from the same period of FY '20. They set up a much higher per student revenue that's a much more robust unit economics down the road. Encouraged by the initial success of the go premium strategy, and testified by the increased revenue profile, we will continue to invest in our core products, teacher credentials, learning center environment and build our premium brand. In the typical quarter one, our marketing expenses accounted for 8% of cash sales, which was in line with the pre COVID FY 2019 level. We primarily leverage off offline center presence, and the resources to more effectively attract customers through building a higher brand awareness and the creative local marketing activities, which mitigates the intensified online marketing competition in the industry. I will now turn to our earnings presentation slides. I first start with Page 7 to provide our operational achievements as illustrated on the presentation. First, we have upgraded offerings across VIP products, including the successful launch of Elite VIP product with value added premium offerings in learning ability, and the School Admission planning.

[Ida Yu:]

Thank you, Greg. Before we go through the key financial results, let's review the performance of our OneSmart VIP centers ramp up, as shown on Page 24. The performance has been solid and has a consistent trend as before. For VIP centers in Shanghai that have been operating for over two years, the center level operating margins turned 18% and high as 20% on the third year. For VIP learning centers in our top 10 cities outside of Shanghai, we have achieved a center level operating margin of 13% for those that have been operating for over two years, and 19% on the third year. While taking a view from city level, Shanghai has a higher percentage of matured centers with normalized operating margins. The VIP learning centers in the other top 10 cities are maturing after years of operation and enhanced the brand awareness, all in what we have achieved in Shanghai for more than 10 years. For the past 12 months, the total operating margin for VIP centers in Shanghai was 31% and 15% in the top 10 cities outside of Shanghai. We are optimistic that the solid growth in our existing key cities will optimize our group level profit growth and margin expansion as we take a more focused growth strategy. In the first quarter of Fiscal 2021, cash sales totaled RMB962 million, decreasing by 13.3% year-over-year, but increasing by 20.6% from the Fiscal Q1 of 2019. If excluding the impact of what 1on3 programs, cash sales is increased by 2.9% year-over-year, or increased by 14.9% from the Fiscal Q1 of 2019. Net revenues were RMB685 million at the high end of guidance, decreasing by 14.1% year-over-year, but increasing by 5.8% from the Fiscal Q1 of 2019. The year-over-year decrease was mainly attributable go to a drop in consumed class units as a result of the COVID-19 impact to students' study and exam schedule, partially offset by an increase in our ASP for class units consumed. If excluding the impact of 1on3 program, net revenues decreased by 1.9% year-over-year, but increased by 18.3% from the Fiscal Q1 of 2019. Cost of revenues decreased by 7.8% year-over-year to RMB477 million. The year-over-year decrease was mainly attributable to lower stock costs relating to a decline in class units consumed partially offset by the slight increases in rental costs and the depreciation and amortization costs relating to flagship VIP learning centers opening and upgrade in the key cities. In the Fiscal Q1, gross profit was RMB208 million with gross margin of 30.4%. The year-over-year decline in profit and margin was mainly due to one-off revenue drop caused by the impact of COVID-19. In addition, Fiscal Q1 is traditionally at low fees important for our business. Non-GAAP selling and marketing expenses, which exclude share based compensation expenses were RMB171 million, accounting for 25% of net revenues, or 17.8% of cash sales, a decrease of 12.3% from RMB195 million, accounting for 24.4% of net revenue, or 17.6% of cash sales during the same period last year. The slight year-over-year increase in ratio was timely due to more efficient selling spending, partially offset by proactive branding and the local marketing activities to reach target families in the execution of Go Premium strategy. General and administrative expenses increased by 0.2% year-over-year to RMB201 million. Non-GAAP G&A expenses which excludes share based compensation were RMB166 million, accounting for 24.3% of net revenues, a decrease of 3.7% from RMB173 million, accounting for 21.7% of net revenue during the same period last year. The year-over-year increase in ratio was primarily due to the lower revenue in the Fiscal Q1 as a result of seasonality. Let me now move on to cover some other key financial points for the first fiscal quarter of 2021. Capital expenditures for Q1 was RMB41 million, a year-over-year decrease of 45% from RMB19 million in the same period last year. Capital expenditures accounted for 6% of net revenues in Q1, representing a year-over-year decrease of 530 basis points from 11.3% in the same period last year. The decrease was mainly due to more selective expansion and upgrade in the key cities. OneSmart prepayment from customers balance, which represents cash collected from enrolled students for courses and recognized proportionately as the training sessions are delivered, reached all-time record high levels of RMB2.75 billion at the end of Fiscal Q1 2021, representing a sequential increase of 8.3% from the end of Fiscal Q4 2020 and a year-over-year increase of 13.5% from the end of Fiscal Q1 last year. As of November 30, 2020. The company had cash and cash equivalents, restricted cash and short-term investments of RMB1.45 billion. Based on the latest estimates, we expect to generate net revenues of RMB850 million to RMB950 million for the Fiscal Q2 of 2021, equivalent to 24% to 39% increase from the Fiscal Q1 of 2021. We expect our full year revenue to reach above Fiscal 2019 level. However, this outlook represents OneSmart current view, which is subject to change. This concludes our prepared remarks. I will now turn the call over to the operator and open for Q&A. Operator, we are ready to take questions.

[Operator:]

Today's first question comes from Felix Lu with UBS. Please go ahead.

[Felix Lu:]

Good evening management. Thank you very much for taking my question. So first, we're very glad to see the revenue returned to growth in your next quarter guidance. So I understand this is typically week season, but could you maybe share some color on the margin? You know, do we still expect to decline year-on-year or improve year-on-year for Q1 margin? And also you mentioned that you expect the full year revenue to return to pre COVID level? So what about margin, can margin return to pre COVID level as well? My second question is on capacity, I noticed that the number of VIP Learning Centers declined a little bit too Q-on-Q. So could you maybe share more color about the capacity expansion plan going forward? My third question is on balance sheet, I noticed that the cash and short-term investment has continued to come down now at RMB1.4 billion. And you're currently sitting at RMB2.5 billion current liability excluding prepayment from customers. So may I understand you know, could you help us understand the liquidity situation of your balance sheet? And do you see any risk or need to raise more funding? Thank you.

[Steve Zhang:]

Thank you, Felix. So thanks for the three questions, let me take them one by one. The first question is regarding the full review on margin and revenue recovery. So let me start with the overall comments that we have provided, and also the cash sales trends, the indicated data points that provided which provide a strong view of visibility for us to see the recovery of our business. So as we mentioned, the multiple reasons that behind the pretty strong top line growth for the second half, which supported by the cash sales trend, but most importantly, it's a result of our go premium strategy, when we improve the overall customer experience and our brand new images, which helped really for the retention of existing customer referrals and also new acquisitions. So with that, and in addition, we are able to increase the price now followed only the unique VIP product but also for the current - the regular VIP products. So as we improve those experiences, were able to charge a premium on those products. So we will show you the strong ASP increase year-on-year as it was. So this was support the revenue growth in the full year, as we mentioned, our guidance is for the full year is that we'll have revenue be more than the pre COVID FY '19 level, which is a roughly RMB4 billion. As you know, last year for FY '20 we had revenue of RMB3.4 billion only. So this represents a pretty strong sequential increase as well as a recovery trend. In terms of margin, as we explained in detail that Q1 is a thin and low season for us but also importantly we had to strategically invest in our business with the long-term growth prospects. So as you noticed we revamped our learning centers, we invest in our teacher credentials, we spend money on brand building, we improved the products dramatically. So all that will have a short-term impact on margin but as I mentioned, as the top line growth comes back, the margin will recover. So, it will be hard to predict exact margin level at this point, but we believe in the second half, the margin expansion will be quite notable. The second question regarding capacity. You noticed a few the drop on learning centers if you compare to Q4. The numbers of, we had a total of 480 Learning Centers by this quarter. So, our expansion plan is the one we mentioned, we will stick to about 10% expansion rate for the VIP business, we will have a very disciplined immodest expansion plan for the young children education business as that business still will take time to recover from the COVID. So for the VIP business, the 10% level is the full year. But for Q1, as you notice is from September to November. Some of our cities are still being impacted by COVID. So we actually add centers mostly in Q2 which we will report to you in the next quarter. As we also mentioned that some of our new openings will be flagship centers which you have visited before. And lastly, we did as we previously communicated and during the COVID period, we looked at our existing portfolio, look their performance in positive locations, and most importantly, whether those non-incentives still fit in our co premium strategy. So we were able to close down about four cities for the VIP business, which represent, which has about 14, 15 Learning Centers. So we did close some of those strategically to plow go premium strategy. So our focus again, for the full year will be 10% expansion rate, which is pretty healthy. But more importantly, we'll be at good adjustments to our Learning Center portfolio for the go premium strategy. Your last question regarding balance sheet. That's correct, you notice our cash balance RMB1.45 billion, which is very normal. If you move from Q4 basically that is the summer season takes us into our Q1 which is a low season. So a slight decrease from Q4 but reasonable pretty strong level at $1.45 billion. The liability to clarify our total debt by including onshore bank loans, offshore bank loans, offshore CB that we issued is about RMB2.15 billion. So we're in a slight net debt position, but we are very comfortable with. We don't have any concern on liquidity for the simple fact that the demands for our products are very strong, as evidenced by the cash sales trend. As you know, the tutoring business has a pretty good and strong cash profile or pattern, which means you can collect tuition upfront and you delivered those classes that will take consumed the cash. So at the moment with the RMB1.45 billion cash and cash equivalents at hands and with the current strong cash sales trend, we're pretty comfortable. And in fact, we are planning to pay down some of the debt over the next few quarters, as you probably already noticed that our total debt has come down about RMB180 million in this past Q1. We will probably continue to do that and the reason we had such a high level of debt, as we discussed earlier is that during the past year, we try to build up our safety cushion by raise a little bit in the event of the COVID-19 because back then nobody knows how the situation will unfold and more cash reserve will be good for the business. As the situation become under control and our cash flow has been robust, we will certainly start to reduce the debt positions. And with that, I hopefully answered your questions.

[Felix Lu:]

Thank you. Thank you very much. This is very clear. Thank you for taking my questions.

[Operator:]

Our next question today comes from Sheng Zhong with Morgan Stanley. Please go ahead.

[Sheng Zhong:]

Hi, good evening. Thank you for taking my question. A few questions from me. First one is want to follow up your Q2 guidance. So what the guidance to business lines, especially your VIP business growth outlook in Q2. And secondly, thanks for the update on your VIP Elite programs. And can you share some more color on your Elite program student profile? And the last one want to understand more about your enrollment recovery case? So normally, in the past, I think Q1 for VIP business, the Q1 enrollment is normally similar ways to Q4 in terms of average student enrollment mostly. So in this quarter, Q1 will see the similar trend. So can you give some breakdown on the Elite program, enrollment number and normal VIP? And help us to understand what the recovery trends you will see in the coming quarters. Thank you.

[Steve Zhang:]

Thank you. Appreciate your questions. So the first question regarding Q2 guidance. So we'll provide a guidance of RMB850 million to RMB950 million for the fiscal Q2 of 2021. Basically, between November and February, that represents a pretty strong sequential increase from the current Q1, which had revenue of only RMB485 million. So that represents a 24% to 39% increase. Also, we also noticed that the Q2 of last year, where revenue of roughly RMB885 million. So that also represents a pretty good picture of growth from year-on-year perspective. So we provided guidance based on our current performance status, and most importantly, the strong demand we absorb from the markets. In terms of breakdown by business lines, yes, as we explained in the PowerPoint presentations, the strong growth will be coming from the VIP business, rather than the other two. So we would expect very strong sequential yield quarter over quarter growth of the VIP business in Q2. So roughly we can provide about 80% of the revenue guidance will be from the VIP that's up from the 71% in the current Q1 earnings. And also for the online will be about 3% which is pretty - quite predictable. So the remainder will be the young children education business. We said for the full year basis, the guidance will be, the revenue will go beyond the pre COVID level. So as you notice there are two little uncertainty here. One is the COVID recovery and research and situation although we have pretty strong data points showing the growth and two is really our re-positioning or revamping our business model for the go premium strategy. The initial results are obviously very encouraging, as we explained to you. So for these two reasons, we may not provide as usually, in the past few years, the annual revenue guidance, but we're very confident the number will be above the RMB4 billion revenue of FY '19 the pre COVID level. So this is the first question. The second question is regarding the Elite program profile of our students. So that's great question. We actually spend quite some time to do consumer Study. So we, for example, we did a survey of more than 1000 students and families, before we designed the products. Industrial, we'll find out a few things that I want to share with you. In terms of growth demographics, the target stated for the Elite programs, attributes, particularly affluent middle class, families in major cities of China, they have pretty decent level of income. The families are highly appreciating the good education. They really pay attention and spend time with their child education as well. In terms of age, the students are typically the middle schools, middle schools in China and high school in China, which later stage of K-12 profile. Their goal, obviously, is to go to better schools for idea the top-ranking schools, whether they are the top-ranking high schools or the top-ranking universities here in China. So they're looking for one at the total solutions, one stop shop in terms of not only for score, improving tutoring services, but also the learning ability, we call this power learning abilities, which represent interest, the capability of learning. And but also, most importantly, is the School Admission planning packages as you notice. China currently is going through some School Admission reforms and the reform provides some uncertainties and questions and diaries even for the families. So to that demand we provide a comprehensive Elite program which addresses their School Admission planning needs. So in the understand lots of families, that the question is not that how cheap the product how, the attention not really on the cost side, but also but more importantly, they focus on whether you can provide a better teacher, your historical results of school improvements, your results of school admissions, your service quality, your products, your non-essential environments for that. So, all these studies, we designed to our current unique VIP program, which we are very proud to present here, but also very happy to share with you the initial good results. I will emphasize to you that as you probably also learned from the macro trends of China. So China has been undergoing consumption upgrades in many consumer sectors or service sectors, the same in education. If you can provide such an attractive elite and premium products, we believe the demand will be tremendous. As we explained in the previous earnings call, once more for those market leaders in the premium education in China, we only have less than 3% market share of the premium sectors. So we are very optimistic for the growth potentials, if we continue to nurture and develop these new products. But Lastly, I want to clarify that although Elite VIP program is very important to us, but majority of our VIP business, still the original regular VIP products, we did also improve and we revamped the products in terms of offerings, and teacher profile Learning Center environments. So as a result, we were able to also increased price for the other regular VIP products which for Q1, the overall ASP of sales for the VIP business has increased tremendously, roughly 24% year-on-year. So that's a pretty strong as we explained, as we having that new student coming in for class consumption that ASP increase will turn into revenue ASP increase which will help the margin point that I mentioned earlier. This is your second question regarding the Elite program profile. Your last questions regarding the monthly average enrollment. You were right that we have some decrease from Q1. So let me remind the numbers. For the VIP business Q1 FY '21 total monthly average enrollment was 76,000. The Q4 was 96,000, as you mentioned and Q1 FY '20 last year was 96,000 as well. The reason for the decrease I want to clarify with everyone, the main reason is really our strategic decision to cease offering of 1on3. For example, for the 76,000 of Q1, we only had about 8,000 1on3 students remained. As you know, we stopped selling the products in Q2 FY 2020. So as the quarter runs by, 1on3 students will gradually run off. But for Q4, the 96,000 I mentioned, they had 21,000 1on3 students. For the 96,000 for Q1 last year, we had 28,000, 1on3 students. But that explains the major gap of decrease of the average enrollment. I think there are some two other reasons behind the decrease

[Operator:]

Apologies, ladies and gentlemen. Today's next question comes from Joy Wei with 86Research. Please go ahead.

[Joy Wei:]

Thank you. I have a question regarding the long-term margin. We understand that the Go Premium strategy will help improve the lifetime operating margins. But do you have any quantitative colors considering the price increase and also teacher cost inflation et cetera, all these combined? And how and when will that be revealed on the company's financials in the following period? Thank you.

[Greg Zuo:]

Yes. Thank you for the question. I think we have talked a lot about margin today. We mentioned the topline growth, recover strong growth and then the ASP increase with reflecting our revenue in the 20-ish percentage growth year-over-year. We talked about our new launch of the actual product, which we explained earlier in last earnings call, it brings in better profitability profiles. But it will be hard to predict the timing of by when the margin will return to what level, but in general, two points I want to share with you

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Ms. Yu for final remarks.

[Ida Yu:]

Thank you, Operator. In closing, on behalf of the entire Management team, we like to thank you again for your participation in today's call. If you have any further inquiries in the future, please feel free to contact us. Now you may disconnect. Thank you.

[Greg Zuo:]

Thank you.