Meta Data Limited
Q2 2021 Earnings Call Transcript

Published: 13 May 2021

[Operator:]

Hello, and welcome to OneSmart Second Quarter Fiscal Year 2021 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I now would like to turn the floor over to Ida Yu, Investor Relations with OneSmart. Please go ahead, Ma'am.

[Ida Yu:]

Thank you, operator. Good morning and good evening, everyone and thank you for joining OneSmart International Education Group Limited second 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 pleased to see the return of strength despite the challenges due to the COVID-19 resurgence in the certain cities along the Chinese New Year in general in 2021. Although premium strategist exclusion is where the seller enhancements made on product learning centers, services and the premium plan awareness. The upgraded and optimized product offerings have started to contribute to the remarkable top line growth which will lead to improvement in profitability in following projects. Our continued investment in technology benefits both, online and offline operations. We have revamped and built a strong digitalized operations to support standardization, efficiency and customer satisfaction. In addition, we are making great efforts for premium product building in the local markets to reach our target customers to be more effective. With that, I will now turn the call over to Greg who will provide you more details of our strategic achievements and updates from the company performance in Q2. Greg, please go ahead.

[Greg Zuo:]

Thank you, Steve. Hello, everyone. Thank you for joining us on today's earnings call. I'd like to start with comments on the overall performance before I go through individual presentation slides which were uploaded onto our company website earlier today. In our new phase of growth post-pandemic, we are delighted to see the return of a solid top line growth driven by strong demand for our core 1on1 tutoring products. We improved premium products and services and our enhanced student acquisition approach. Following the 20%-ish year-over-year growth in fiscal Q2, our company-wide cash sales growth has continued to trend up recording more than 100% year-over-year increase in the fiscal Q3 to date. The Go Premium Strategy that we launched in the beginning of fiscal 2021 has boosted our revenues for once in our VIP 1on1 program to growth driven by the year-over-year increase in volume, i.e. the consumed class units and the price.

[Ida Yu:]

Thank you, Greg. In the second quarter of fiscal 2021 cash sales totaled R&D RMB939 million, increasing 44.2% and 80.9% from the same period of fiscal 2019 and fiscal 2020, respectively. If excluding the impact of 1on3 program, cash sales increased 66.8% and 17% from the same period our fiscal 2019 and fiscal 2020 respectively. Net revenues were RMB932 million, an increase of 5.2% from RMB886 million during the same period last year. Excluding 1on3 programs, the net revenues showed an increase of 11.4% from fiscal Q2 of 2019. The year-over-year increase was mainly attributable to the growth in average price per class unit consumed, driven by a strong recovery in fiscal Q2 and our Go Premium Strategy post-pandemic. Cost of revenues increased by 2.5% year-over-year to RMB543 million, the year-over-year increase was mainly attributable to higher costs relating to an increase in cost units consumed and enhanced featured profiles and additional costs for learning center upgrades and online teaching operations to support our Go Premium Strategy. In fiscal Q2, gross profit was RMB389 million, a year-over-year increase of 9.2%. The gross margin was 31.8%, up from 40.2% in the same period last year. Non-GAAP selling and marketing expenses, which excludes share-based compensation expenses were RMB289 million accounting for 31% of net revenues of 40.7% of cash sales, an increase of 46.9% from RMB197 million, accounting for 22.2% for net revenues of 24.9% of cash sales during the same period last year. The year-over-year increase was primarily due to the strategic branding and offline marketing activities to reach target families in the execution of Go Premium Strategy, as well as the requirements of running major marketing campaigns in a timeline ahead of the Q3 and Q4 peak tutoring season, and the relatively low spending due to limited offline marketing activities during COVID-19 outbreak in fiscal Q2 last year.

[Operator:]

Yes, thank you. We will now begin the question-and-answer session. And the first question comes from Sheng Zhong with Morgan Stanley.

[Sheng Zhong:]

Hi, thank you for taking my question. I have two questions here. The first one is, glad to see the Go Premium Strategy going on well. And would you mind to give us more color about the 1on1 -- Elite 1on1 programs margin now? And what do you expect it to ramp up? And secondly is, on -- you have a very strong cash revenue growth. But in the meantime we also see the sales and marketing is also a little bit higher than the cash sales revenue growth. So can you shed some observation on the customer acquisition cost changed now from the market? The last question is, you -- you pay -- you repay some bank loans; so your cash balance now is lower. So -- and there are a lot of concerns on the regulation, especially on the tuition fee supervision. So, can share your view about how this regulation could impact your balance sheet and operations? Thank you.

[Greg Zuo:]

Thank you. So the first question regarding the Go Premium Strategy, what is the latest update on the Elite VIP product? So, as you noticed, we have provided a lot of details in today's earnings call regarding the well progress of programs that we launched. In essence, this program addressed better the customer needs by providing value-added services. The improved satisfaction rate helped us to generate pretty robust results, evidence not only the cash sales growth, the ASP gross, and additional purchase size equaled fees which we provided consistently last few quarters. So we'll continue to be very confident about the future of this strategy. Secondly, the Elite 1on1 product ramp up on margin; as we explained before, there is a hamlet between capital and revenue generation. So in the beginning of this year we started to sell this Elite VIP product. The sales was robust, however, it will take time for the new students under this program to continue the classroom and later on and then accumulate and reflect in the P&L, especially revenues. So in the coming quarter, Q3 and Q4, those are the fixed in terms of past units consumption, we expect the cash as well as fully reflect in the revenue and then will lead to margin color which will provide better view in the next couple of quarters. Your second question is regarding the sales and marketing percentage of revenue. Indeed, we mentioned with a breakdown of this cash sales revenue of 31%. For that number, just want to elaborate and specialize, only 14% is spent on marketing dollars, percentage of revenue. So that's relatively higher than previous quarter in terms of about 6%; as we explained just one because we have to spend to build the brand to support the Go Premium Strategy. Secondly, we need to spend ahead of the peak season which is Q3 and Q4. And three, just so you know, this additional 6% incremental gross marketing dollar only represent about RMB58 million; so it's a pretty modest increase to support our strategic growth. We expect on full year basis, again, as we said before, marketing percentage of -- we used cash rather than revenue, so marketing dollar percentage of cash sales could be remained to be 8% to 12% range; that number we mentioned before. So we expect on full year basis, we'll hit the goal in this range. Your third question is regarding cash balance which has dropped some portions as we explained to repay the debt we borrowed strategically to prepare for the COVID situations. So it was -- we communicated last quarter's earnings call that we will repay; so this reduction reflect that. So we'd pay back about RMB419 million for the total debt reduction. Under the regulatory environment, we would definitely take a very prudent approach in watching our cash liquidity situation. However, I want to elaborate; our cash sales momentum is quite strong, even as of right now, as we disclose to you our cash sales in the last two months, March and April, for more than 100% year-over-year. So we've continued to see pretty strong robust cash profiles. As you noticed for Q2, our net operating cash was RMB125 million for single quarter compared to a total of RMB241 million for the full year last year. So we are having a pretty robust net operating cash position here. So again, we will wait until the exact written regulatory requirement to be announced. But in the meantime, we're optimistic about our business demand and performance in the future.

[Sheng Zhong:]

Thank you.

[Operator:]

Thank you. And the next question comes from Felix Liu with UBS.

[Felix Liu:]

Hi, good evening, management. Glad to see the return to the positive growth on the revenue and the good guidance. My question is; first question is on your margin outlook for the second half. You commented that you expected your margin expansion for this type of cost . I understand the base was low due to COVID-19. So may I know, you know, could you give a little bit more color on the degree of margin expansion? Do we expect to see positive margin in the second half or the second half still be loss making? My second question is on regulation. I understand this time the government is doing a lot more strict on the enforcement side. So could you share any color on the percentage of teachers that have license, as well as the percentage of learning centers that are properly licensed? My third question on the -- is on our tuition. Again, this ties to the regulation. I think the government is imposing quite strictly the three month rule in terms of tuition prepayment. So may I know how long typically does the tuition prepayment you collect cover? I know your businesses as 1on1 is a little bit special, but I just want to know how much on average the parents paid for in their course package? And my last question is on the short-term borrowing. I noticed that the current balance of short-term borrowing on your balance sheet is slightly bigger than your cash balance. So may I know the due date of the short-term borrowings and any refinancing plans? Thank you.

[Greg Zuo:]

Yes. So thank you, Felix. We've got four questions here. Let me try to answer one by one. So first one is regarding margins. You mentioned that we may have a low base but as you know, up until Q2 of last year we do have -- we did have a strong quarter. So for this current fiscal year Q2, we achieved such expenses quite a good performance driven by the top line growth. Moving on to second half, we'll continue to see such a top line growth. We evidenced the by the cash sales which we said provided visibility for future revenue recognitions. So as we are showing you for the last few months, our cash sales trends continue to trending up which is pretty good sign. You mentioned we may see a loss making for the second half; currently for those are to comment on the probability but we don't think with such a strong top line growth we will continue to have much losses -- operating losses coming forward. Second question regarding regulations; as I mentioned earlier, it's hard to comment on regulation without knowing the exact written requirements to be announced by the government. But at the meantime, as you guys know, we hold very high standards on our learning environment, quality and services for our students. We are one of the highest standard in the industry, so we are pretty comfortable with the regulatory requirements; we'll continue to follow and complying with government regulatory requirements. The second -- the third question regarding tuition prepayments; yes, we comply with the local government's various requirements when it comes on the enforcement. So, we are not concerned at this point any changes on site of practice. The last question regarding the short-term borrowings; these short-term borrowings are two balances. One is our traditional revolving local banks about borrowings; these banks have been with us for years, they stayed with us throughout the COVID situations, so we have pretty stable and robust relationship with such bank relationships. As you know, in China, typically the local banks only lend on year-over-year basis, such -- as a result, we have to qualify this as a short-term borrowing rather than long-term but in reality, majority -- vast majority of these vendors have been working with us over the last few years. So we are pretty comfortable on the liquidity situation. Again, with our pretty strong operating cash flow we're generating; so we are comfortable on such position we have.

[Felix Liu:]

Great. Thank you very much. Very clear.

[Greg Zuo:]

Thank you, Felix.

[Operator:]

Thank you. And the next question comes from .

[Unidentified Analyst:]

Hello, this is . Thanks management for taking my question and congratulations on the strong quarter. My first question is about your learning centers expansion plan. Could you help us understand your learning center expansion plan over the next one to two years? That's number one. Number two is regarding the competitive landscape. Could the management share with us some colors on the competitive landscape and to share with us your thoughts? Thanks.

[Greg Zuo:]

Thank you for your questions. So the first question regarding learning center expansion plan for the next one to two years; we have a consistent learning center expansion which we roughly explained on our slides on Page 9. So, basically we'll continue to expand our 1on1 VIP center this year about 10% annualized expansion rates, we said in the earnings material that we've opened already about 20 learning center of which some of them have are flagship VIP learning centers. So we will continue such trends throughout the year. From next year or two, we probably will continue such a expansion plan maybe a little bit higher rate when the COVID situation normalizes. But again, let's wait and see the regulatory requirements and how that impacts our plan. On the second question regarding competitive landscape; yes, we -- as you see our very strong operational results this quarter, we expect our performance continue to be very strong, which is really a proof that our product and services is at the edge of competitive advantages over our competitors. We're very comfortable that will continue to generate such a advance in the future performance. Given the post-pandemic and the new environment of regulations, we feel -- in the mid to long-term we feel more positive in terms of the opportunity ahead, especially those market consolidation opportunities. With our strong performance, we expect to continue to consolidate the market shares, especially for the 1on1 personalized learning education market segment. Thank you for questions.

[Unidentified Analyst:]

Thanks. That's really helpful.

[Operator:]

Thank you. And as there are no more questions at the present time, I would like to return to floor to management for any closing comments.

[Ida Yu:]

Thank you, operator. In closing on behalf of the entire management team, we would like to thank you again for your participation in today's call. If you have any further enquiries in the future, please feel free to contact us. Thank you.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.