Meta Data Limited
Q2 2018 Earnings Call Transcript

Published: 6 May 2018

[Operator:]

Good day, and welcome to the OneSmart Second Quarter Fiscal Year 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Rebecca Shen, Investor Relations Director. Please go ahead.

[Rebecca Shen:]

Thank you, Operator. Hello, everyone, and thank you for joining OneSmart second quarter fiscal year 2018 earnings conference call. The company's results were released earlier today and are available on the company's IR Web site at www.onesmart.investorroom.com. On the call today are Mr. Xi Zhang, our Chairman and Chief Executive Officer; and Mr. Dong Li, our Chief Financial Officer. Xi will give a brief overview of the company's business operations and highlights. Followed by Dong will go through financials and guidance. They will both be available to answer your questions during the Q&A session. I will remind you that this call may contain forward-looking statements under the Safe Harbor provisions, the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations and current market and operating conditions that relates to events in that involves known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors, that is included in the company's filings with the US Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law. With that, I will now turn the call over to Steve. Please go ahead.

[Xi Zhang:]

Hi, everyone. Thank you for joining us and following our IPO end of March 2018 and we’re pleased to be part of a strong financial and operational result for the second fiscal quarter of 2018, and as the largest premium K-12 after-school education service provider in China, we continue to benefit from the faster growth of premium segment with the consumption upgrade in China. And I believe these strong quarterly results demonstrated our capabilities to further strengthen our leadership in the premium market and the effectiveness of our growth strategies, which focuses on three core areas

[Dong Li:]

Thank you, Steve, and hello, everyone. Please be reminded that our amounts quoted here will be in RMB and all percentage increases will be on a year-over-year basis unless otherwise stated. Please also refer to our earnings release for a detailed information of our comparative financial performance on a year-over-year basis. Financial results for the second fiscal quarter ended February 28, 2018. Net revenues were RMB663.5 million, an increase of 34.1% from RMB494.6 million during the same period last year. The increase was mainly driven by an increase in the students enrollment in both the company's premium tutoring services as well as premium young children education programs compared with those in the same period of last year. Monthly average student enrollment increased by 38.4% year-over-year to 102,613, of which monthly average student enrollments from premium tutoring programs and premium young children education services including HappyMath and FasTrack English, increased by 27.1% and 100.7%, respectively, from the same period of fiscal year 2017. With the integration of the FasTrack English program, we look into the acquired in January, we size the scale and builds rate of our premium young children education services to further [indiscernible]. Total number of consumed [indiscernible] increased by 30.9% year-over-year to RMB3.5 million. Operating costs and expenses for the quarter were RMB585.4 million, an increase of 29.4% from RMB452.5 million during the same period last year. Non-GAAP operating costs and expenses, which excludes share-based compensation expenses, were RMB581.4 million, an increase of 30% from RMB447.3 million during the same period last year. Cost of revenues increased by 36.4% year-over-year to RMB331.1 million. The increase was primarily due to an increase in rental costs and compensation to teaching staff and study advisors. Selling and marketing expenses increased by 14.3% year-over-year to RMB129.6 million. Non-GAAP selling and marketing expenses, which excludes share-based compensation expenses, were RMB129.4 million, an increase of 14.3% from RMB113.2 million during the same period last year. The increase was due to -- as a result of an increase in compensation for sales and marketing staff as well as higher rental expenses in support of the greater number of programs and service offerings compared with the same period last year. General and administrative expenses increased by 29.4% year-over-year to RMB124.8 million. Non-GAAP general and administrative expenses, which excludes share-based compensation, were RMB121.0 million, an increase of 32.4% from RMB91.4 million during the same period last year. The increase was due to among others, increases in compensation for general and administrative personnel, rental expenses, and service expenses. Total share-based compensation expenses, which were allocated to related operating expenses, decreased by 24.2% year-over-year to RMB4 million in the second fiscal quarter of 2018. Operating income for the quarter was RMB78.1 million, an 85.6% increase from RMB42.1 million in the same period of the prior fiscal year. Non-GAAP operating income, which excludes shared-based compensation, was RMB82 million, a 73.5% increase from RMB47.3 million during the same period last year. Operating margin for the quarter was 11.8%, compared to 8.5% in the same period of the prior fiscal year. Non-GAAP operating margin was 12.4%, compared with 9.6% during the same period last year. We managed to improve our operating profit margins by 330 bps year-over-year during the second fiscal quarter of 2018, despite the fact that we opened more study centers and expanded our classroom capacity by 24.9% year-over-year. Leveraging our strong brand influence, excellent teaching and service quality, and superior delicacy management capabilities, we expect to continue improving our operation efficiency and to attract the new students, word-of-mouth referrals, and cross-selling of additional subjects and services to existing students in a more effective way, which will lead to lower customer acquisition costs and higher student life-time revenue contributions as they progress through their educational lifecycle with us. Other income was RMB4.2 million, compared with RMB1 million during the same period last year. Income tax expense was RMB23 million, compared with RMB18.2 million during the same period last year. Net income attributable to OneSmart was RMB77.4 million, compared with RMB37.3 million during the same period last year. Non-GAAP net income attributable to OneSmart was RMB81.3 million, compared with RMB42.5 million during the same period last year. Capital expenditures for the second quarter of fiscal year 2018 were RMB87.8 million, an increase of RMB7.9 million from RMB79.9 million in the second quarter of fiscal year 2017. The increase was mainly due to leasehold improvements as a result of the opening of new learning centers and renovations of existing study centers. Financial position. As of February 28, 2018, the Company had cash and cash equivalents of RMB577.3 million and short-term investments of RMB537.2 million. The Company completed its initial public offering of 16,300,000 American depositary shares traded on the New York Stock Exchange on March 28, 2018. Proceeds from the offering were US$179.3 million before deducting underwriting discounts, commissions and offering expenses. OneSmart's prepayments from customers balance, which is cash collected from enrolled students for courses and recognized proportionately as the tutoring sessions are delivered, at the end of the second quarter of fiscal year 2018 was RMB 1,793 million, an increase of 44% from RMB1,245.3 million at the end of the second quarter of fiscal year 2017. Net cash provided by operating activities in the second quarter was RMB51.1 million. Net cash provided by investing activities in the second quarter was RMB39.4 million. Net cash used in financing activities in the second quarter was RMB333.7 million. Turning to guidance for fiscal year 2018. OneSmart expect net revenues to be between RMB2.75 billion and RMB2.88 billion, an increase of 33.6% to 40% from fiscal year 2017. This forecast reflects OneSmart's current and preliminary view, which is subject to change. In conclusion, OneSmart will continue to impact the [indiscernible] and training research and clinical development and to integrate the latest technology to strengthen the teaching and services capabilities and to enhance the overall learning experience of our students. We are confident that our clear growth strategy and increase in the diversified business portfolio, ideally positions OneSmart in a broader market to deliver more sustainable revenue and profitability growth for our shareholders in the long run. And this concludes our prepared remarks. I will now turn the call to the operator and open for questions. Operator, we are now ready to take questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Tallan Zhou with Deutsche Bank. Please go ahead.

[Tallan Zhou:]

Hey, management. Congratulations for the strong quarter. I have a couple of questions. So I’m going to go one-on-one. The first is a housekeeping question. Just want to know the breakdown of enrollment growth of Shanghai and then Shanghai learning center and one-on-one and one-on-three, this is my first question.

[Dong Li:]

Okay, sure. Okay, Zhou, so to give you the break down for our enrollment by city, okay, so in the second quarter of -- in the second fiscal quarter of 2018 the total monthly enrollment in Shanghai was 65,970, okay? And then as we had mentioned the total student enrollments of the quarter is 102,613, okay? So this the total enrollments number for Shanghai. And then getting back into one-on-one and one-on-three -- okay, so the total enrollment for one-on-one during the first -- during the second fiscal quarter of 2018, the one-on-one number is 59,860 for one-on-one. And then for one-on-three the number is 19,896.

[Tallan Zhou:]

Okay. Thanks, Li Dong. My second question, can you give us some color -- more color on the next quarter's GAAP op margin?

[Dong Li:]

Okay, sure. So [indiscernible] we are quite confident about the overall growth of the market and our guidance for the total revenues for fiscal year 2018 as we’ve mentioned is from RMB2.75 billion to RMB2.88 billion for the whole year. And we expect it to achieve strong growth in both top line and in the [indiscernible] as well. And as you can see, so we have achieved 35% revenue in the first quarter and in the second quarter on the top line. And we have achieved 330 bps margin increase in the second quarter. So actually we’re confident -- we are quite confident to deliver strong top line and bottom line increase both for the fiscal third quarter and for the first quarter as well.

[Tallan Zhou:]

Okay. So the last question I want to ask is about your online business. So can you speak more or you elaborate more on the online business? Thanks.

[Dong Li:]

Okay, sure. Our online, I think we had made quite a few I think important strategic investment on some of the online business. One of that the commotion is [indiscernible] online tutoring and we had a strategic investment in [indiscernible] online tutoring and the company has achieved a significant [indiscernible] doing the practice for years. For instance, in fiscal year -- in year 2018, [indiscernible] online tutoring, its total revenue has achieved 512% increase and its total cash revenue has achieved 307% increase year-over-year and its total student enrollment number I think raised by 266% year-over-year. And our main online [indiscernible] our main online strategy kind of doing a strategic investment like as [indiscernible] online tutoring actually has started with our cofounder Jackie Lee [ph]. We actually incubated his project then let it go independent [indiscernible] achieved enormous growth year-over-year. So that’s our online -- with all these strategic investment behind all of the major players in the industry.

[Tallan Zhou:]

Okay. Thank you, management.

[Dong Li:]

Thank you, Tallan.

[Operator:]

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

[Sheng Zhong:]

Hi. Congratulations on the result. I have three questions. The first one is a follow-up on our split of performance in the second quarter. So can you split out the revenue to Shanghai and the non-Shanghai region? And given our full-year outlook is on the top line is 34% to 40% year-over-year growth, how can we -- how should we look at the Shanghai and the non-Shanghai growth? And second question is in this quarter we have RMB11 million net loss to the non-controlling interest. So how should we look at this number and what do you expect going forward? And the last question is about regulation. Actually in Shanghai we see very intensive regulation and from this year the private school and public school -- primary school level they will have the same procedure on the student admission. So do you think that this will impact the young children program? And that actually the regulation was published in last February. So do you see any impact in your recent young children program enrollment? Thank you very much.

[Xi Zhang:]

Okay. Thank you, Sheng. Your first question is about the breakdown of Shanghai and non-Shanghai revenues. So I think if you view the total numbers, our total net revenues for the second fiscal quarter of 2018 was RMB663 million. And Shanghai contributed 60.2%, which is RMB399.7 million. And this is actually a decrease from 63.1% on Shanghai revenue contribution of the same quarter last year. And so -- and that [indiscernible] the non-Shanghai numbers, okay? And then we are giving the guidance for total revenue for fiscal year, but we didn’t give specific guidance for the revenue for the Shanghai. So in general we continue to expect strong momentum from revenue -- the Shanghai revenues year-over-year grow by 26% -- by 28% from the second quarter of last year and we continue to expect [indiscernible] in a very strong momentum. And your second question is about the RMB11 million net loss and -- so on those non-controlling -- from those [indiscernible] and controlling interest. I think for some of the learning centers that we have other minority interest in shareholders and some of this [indiscernible] interest in their given [indiscernible] you only had a [indiscernible] period of about like two to three years and we expect those learning centers will become material and become profitable at the end of year two or year three and the big [indiscernible] strong growth in some of the centers during the quarter. And in fact we are reviewing the performance of each of the learning centers on a quarterly basis. And we definitely have a question of making further business investment and decisions in terms of like how we’re going to do those learning centers full [indiscernible] after two to three years a [indiscernible] period and for instance we’ve [indiscernible] learning centers in [indiscernible] during the second fiscal quarter and that’s part of our performance [indiscernible] and we just want to make the right decisions for investors and for our shareholders. We have a [indiscernible] performance on a quarterly basis. So far we’ve seen most of the [indiscernible] we make very good progress. We do [indiscernible] after three or four years continuously, we’ve seen a positive result. We’ve [indiscernible] of that. So far most of our [indiscernible] and new centers are performing pretty well.

[Dong Li:]

That’s right. Okay. And your third question is about regulation in terms of the unified school admission process for primary school and [indiscernible] schools in Shanghai. And you can see we’ve achieved strong revenue growth and strong good enrollment growth in the second fiscal quarter of 2018 and we are now like -- and we still see strong momentum and strong growth in terms of the total revenues and student enrollment for the young children education, especially the HappyMath program. And we are beginning to see much new -- like new [indiscernible] regulation change.

[Xi Zhang:]

You got to tell young children business have been doing really well so far from a business [indiscernible] grow in the market. We don’t see any impact on us yet. And we expect that generally continuing like that. That is actually although we have been confident in our young children business. And based on three new stuff that will be VIP and the HappyMath program and [indiscernible] acquisition and integration of the FasTrack English program, we basically -- definitely are confident about the [indiscernible] of our young children education business.

[Sheng Zhong:]

Okay. That’s fair very helpful. Thank you very much. That’s very helpful.

[Operator:]

Okay. [Operator Instructions] okay. We have a follow-up from Sheng Zhong with Morgan Stanley. Please go ahead.

[Sheng Zhong:]

So I have a follow-up on the [indiscernible] you mentioned that you were large [indiscernible] in online, so you already talked about online. So can you tell us some updates on [indiscernible]? Thank you.

[Dong Li:]

So in the coming summer we are going to launch the OneSmart class and also that [indiscernible] another online program. So the early feedback because we do the internal consumer survey, the early feedback from customers are very positive. But we don’t have [indiscernible] data yet. We have to -- after this summer, we [indiscernible] the data, yes, to see how positive it is. But early feedback on consumers are very positive. And for -- and also for the OneSmart class, we especially focus on in cities where we have a strong branding. So we actually are going to launch it in Shanghai this summer, because we have the powerful brand. In Shanghai, we are [indiscernible].

[Sheng Zhong:]

Yes. So I remember previously we talk about some M&A pay in the future, so that will mainly on the group class. So it is still what the management is looking on?

[Dong Li:]

Yes, sure. We had -- we currently had a pipeline of potential like M&A [indiscernible] which are those regional leaders in terms of the K-12 tutoring class program or good -- or other leading tutors in certain cities or regions. And we are currently in serious discussion with some of the [indiscernible] and so hopefully we can have more information to share in the coming months. And then another thing to highlight is that we are quite disciplined in terms of the acquisition by [indiscernible] that we are talking to and we want to make sure that we didn’t overpay in terms of the [indiscernible] and we want to be accretive to our shareholders. We do it as a very strong pipeline and lastly we see a lot of potential kind of acquisition pockets and we’re in -- several of them we’re in serious negotiation now. And we do set very kind of a [indiscernible] issues here. So to make sure the acquisition we’ve kind of continued the most [indiscernible] to the shareholders.

[Xi Zhang:]

And we also had [indiscernible] with the team that already to integrate those class program after we acquire.

[Sheng Zhong:]

Great. Thanks. Very helpful. Thank you. Thanks again.

[Xi Zhang:]

Yes, thanks.

[Dong Li:]

Thank you, Sheng Zhong.

[Operator:]

Okay. [Operator Instructions] Okay. Our next question comes from [indiscernible] with UBS. Please go ahead.

[Unidentified Analyst:]

Hello, Steve and Li Dong. Thank you very much for the strong results. I have a few questions. So number one, we have to defer the revenue amount in the results. May I just know how -- when do we -- how long do we expect to recognize these deferred revenues? And secondly, could you give the break down on there. We have the enrollment break down by one-on-one and one-on-three? Do we have -- could you please give a revenue break down for those? And that’s it for now. Thank you.

[Dong Li:]

Okay, sure. So as of the end of February 28, 2018 our total prepayments from customers balance were RMB1,793 million which is 44% increase year-over-year. And your first question is about like how fast we’ve been recognize those prepayments from customers into our revenues? I think we definitely expect to recognize there is prepayments from customers within 1-year period and in the past I think it's over 70% -- or to 75% of the prepayments from customers balance as of the end of the fiscal year will be contributing to -- will be recognized in the next year. And then your second question is about the revenue break down of one-on-one and one-on-three for the second fiscal quarter of 2018. So the total revenue for one-on-one business for the second fiscal quarter is on these RMB453 million. And for the one-on-three business, it's RMB108 million which represented a year-over-year increase of 68% and -- okay, sure. I think that’s the break down for the one-on-one and one-on-three for the second quarter.

[Unidentified Analyst:]

Thank you. I also have a follow-up question. So I notice we added around over RMB450 million that in this quarter. So may I know what’s the use? What the use are for this [indiscernible] and do we -- what are further future financing plans going forward? Thank you very much.

[Dong Li:]

Okay, sure. We have incurred on the RMB450 million bank borrowings from Shanghai Pudong Development Bank in December 2017. And this is part of the -- our restructuring plan because we used this loan together with the proxies from the investment from our [indiscernible] investors to buy back [indiscernible] of the other -- of early [indiscernible] as part of the restructuring plan. And we do not [indiscernible] into any bank borrowings in the future and with the US$179 million IPO costs we just raised in March 2018. We [indiscernible] through fully repay this bank borrowings in early June.

[Unidentified Analyst:]

Okay. Thank you very much.