Meta Data Limited
Q4 2018 Earnings Call Transcript

Published: 3 Nov 2018

[Operator:]

Good day, and welcome to the OneSmart Fourth 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. Please go ahead.

[Rebecca Shen:]

Thank you, operator. Hello, everyone, and thank you for joining OneSmart's Fourth Fiscal Quarter 2018 Earnings Conference Call. The company's results were released earlier today and are available on the company's IR website at www.onesmart.investorroom.com. On the call today are Mr. Steve Zhang, our Chairman and CEO; and Mr. Dong Li, our Director and CFO. Dong will give an update on the company's business strategy, and I will give you a brief overview of the company's key business progress during the quarter, followed by Dong, who will go through the financials and give you guidance on the fiscal year 2019. Steve and Dong will be both available to answer your questions during the Q&A session that follows. I will remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and related events that involve 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 and uncertainties and factors is included in the company's filings with the U.S. 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 Dong. Please go ahead.

[Dong Li:]

Thank you, Rebecca, and hello, everyone. We are pleased to conclude the final quarter of fiscal year 2018 with strong top line growth as well as solid bottom line growth, which demonstrated our strong ability to execute our strategy and effectively manage our diversified business operations. For the fourth fiscal quarter of 2018, net revenues increased by 46.6% year-over-year to RMB 933.6 million, and non-GAAP net income attributable to OneSmart shareholders increased by 10.5% year-over-year to RMB 109.3 million. For fiscal year 2018, net revenues increased by 39.1% year-over-year to RMB 2.86 billion. This is close to the upper end of our revenue guidance for the fiscal year 2018. Non-GAAP net income attributable to OneSmart shareholders increased by 38.3% year-over-year to RMB 392.4 million. We will continue to leverage our operational excellence in managing premium education brands to expand into more market segments and new geographical locations in China. As the leading diversified premium K-12 education company in China, we are well positioned to benefit from the rapid growth of the premium education market and to further consolidate the fragmented market through both organic growth and acquisitions. Going forward, we will further accelerate our top line growth and enlarge our overall market share through the following expansion strategies. First, continuous opening of new learning centers and expansion of existing learning centers. In fiscal year 2018, total number of study centers increased to 315 as of August 31, 2018, which represents a total classroom capacity increase of 34.8% year-over-year. We remain determined to maintain total classroom capacity increase of at least to 25% to 30% in the next 3 years, which includes new learning centers and expanding classroom areas of some of the existing learning centers in existing cities. Second, attracting more students and increasing the cross-selling of the subjects to the students. For the fourth fiscal quarter of 2018, monthly average student enrollment increased by 49.9% year-over-year to 122,000. Third, incubating and investing heavily in new business operating both online and off-line. We continued to benefit from this consumption upgrade in Tier 1 and Tier 2 cities, where we are incubating and investing heavily in new online and off-line product offerings in order to deliver record top line growth over the next five years. For example, Yimi Online Tutoring, a leading premium online K-12 tutoring company, which we incubated and took a significant strategic stake, achieved accelerated growth since its inception. For the first nine months ended September 30, 2018, its gross billings and revenues increased by 336% and 342% year-over-year, respectively. We also strategically invested in UUABC, an online kid's English training service provider, and BestMath, an online kids mathematics training service provider, which will further expand our footprint in the online education market and form an integral part of our ecosystem. Fourth, pursuing more strategic investments and acquisitions when opportunities arrive. Lastly, we announced the strategic acquisition of a minority stake in Beijing Tus-Juren Education Technology Company Limited, a leading K-12 after-school education service provider with national influence. This investment is another landmark transaction, following our recent acquisitions of FasTrack English and Tianjin Huaying Education earlier this year. Juren Education and Tianjin Huaying Education are both highly respected education institutions, renowned for their high-quality teaching, curriculum development capabilities, experienced faculty and management team and strong brand recognition. Leveraging our refined operation management expertise, our strategic investment in Juren Education and our acquisition of Tianjin Huaying Education will further strengthen our capabilities in offering small class services and create great synergies with our existing business. We are confident that our expansion strategies are effective to drive the revenue and profit growth. And in the meantime, we will maintain a good balance between expansion and operational efficiency to deliver more sustainable value for our shareholders in the long term. I will now turn the call to Rebecca, who will give you a brief overview of our key business progress during the quarter. Please go ahead.

[Rebecca Shen:]

Thank you, Dong. The following are key highlights of the business during the fourth quarter of fiscal year 2018. OneSmart VIP business, which is exam preparation, overseas study consultation and study camps services. Despite the opening of 18 new OneSmart VIP learning centers in Shanghai over the past 12 months, OneSmart VIP business in Shanghai continues to achieve a healthy EBIT margin of above 40% during the quarter. In the meantime, we experienced extremely strong growth in markets outside Shanghai. Monthly average student enrollments increased by over 50% in the following 12 cities, most of which we entered just during the past two years

[Dong Li:]

Thank you, Rebecca. For fiscal year 2018, net revenues for the fourth quarter of 2018 were RMB 933.6 million, an increase of 46.6% from RMB 636.9 million during the same period last year, of which net revenues from OneSmart VIP business increased by 37.1% year-over-year to RMB 777 million. Net revenues from HappyMath increased by 63.9% year-over-year to RMB 117.2 million. The increase was mainly attributable to the rapid growth of student enrollments of our OneSmart VIP business and HappyMath. Monthly average student enrollments increased by 49.9% year-over-year to 123,000, of which, monthly average student enrollments from OneSmart VIP business and HappyMath increased by 31.9% and 67.2%, respectively. In addition, new student enrollments of our newly acquired FasTrack English increased by 75.8% year-over-year. Total number of study centers increased to 315 as of August 31, 2018, which represents a total classroom capacity increase of 34.8% year-over-year. Operating costs and expenses for the fourth fiscal quarter of 2018 were RMB 822.6 million, an increase of 55.7% from RMB 528.2 million during the same period last year. Non-GAAP operating cost and expenses, which excluded share-based compensation expenses, were RMB 795.8 million, an increase of 51.6% from RMB 524.9 million during the same period last year. Cost of revenues increased by 47.1% year-over-year to RMB 461.3 million, which was mainly due to an increase in rental costs and compensation to teaching staff and study advisors. Selling and marketing expenses increased by 85.7% year-over-year to RMB 193.8 million. Non-GAAP selling and marketing expenses, which excluded share-based compensation expenses, were RMB 193.5 million, an increase of 85.8% from RMB 104.2 million during the same period last year. The increase was mainly due to 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 to the same period last year. For a general and administrative expenses, it is increased by 52% year-over-year to RMB 167.5 million. Non-GAAP G&A expenses, which excluded share-based compensation, were RMB 141.1 million, an increase of 31.7% from RMB 107.1 million during the same period last year. The increase was mainly due to increase in compensation for general and administrative personnel, rental expenses and service expenses. Total share-based compensation expenses, which were allocated to related operating expenses, increased by 719.2% year-over-year to RMB 26.7 million in the fourth quarter of 2018. The increase was mainly due to amortization of the options that have become exercisable upon the completion of the IPO and new grants in 2018. Operating income for the fourth fiscal quarter of 2018 were RMB 111 million, a 2.1% increase from RMB 108.7 million in the same period last year. Non-GAAP operating income, which excluded share-based compensation, was RMB 137.7 million, a 23% increase from RMB 122 -- RMB 112 million during the same period last year. Operating margin for the quarter was 11.9% compared to 17.1% in the same period of prior fiscal quarter. Non-GAAP operating margin was 14.8% compared to 17.6% during the same period last year. Other income was RMB 15.5 million compared with RMB 9.9 million during the same period last year. Income tax expense was RMB 43.9 million compared with RMB 29.6 million during the same period last year. Net income, attributable to OneSmart shareholders for the fourth fiscal quarter of 2018, was RMB 82.6 million compared with RMB 95.7 million during the same period last year. Non-GAAP net income attributable to OneSmart shareholders was RMB 109.3 million, an increase of 10.5% from RMB 98.9 million during the same period last year. From the balance sheet, as of August 31, 2018, the company had cash and cash equivalents of RMB 847 million and short-term investments of RMB 1.5 billion. Capital expenditures for the fourth fiscal quarter of 2018 were RMB 77.5 million, an increase of RMB 39.1 million from RMB 38.4 million in the fourth fiscal quarter of 2017. The increase was mainly due to leasehold improvements as a result of the opening of the new learning centers and renovations of existing learning centers. Turning to guidance for fiscal year 2019. OneSmart expects net revenues to be between RMB 4 billion and RMB 4.15 billion, an increase of 40% to 45% from fiscal year 2018. This forecast reflects OneSmart's current and preliminary view, which is subject to changes and uncertainty. Before I conclude, I also wanted to take a moment to highlight our efforts to enhance our shareholders value. On October 5, 2018, we announced a share repurchase program of up to USD 30 million worth of our shares over the next 12 months, funded by an existing cash balance or future cash generated from operating activities. This repurchase program reflects confidence in our future prospects and our ability to create and retain long-term sustainable value for our shareholders. This concludes our prepared remarks. I will now turn the call to the operator and open for Q&A. Operator, we are ready to take the questions.

[Operator:]

[Operator Instructions] The first question comes from Sheng Zhong of Morgan Stanley. Please go ahead.

[Sheng Zhong:]

Hi, thank you for taking my question. So I have three questions here. One is, can you give us some breakdown of the VIP business growth in terms of one-on-1 and one-on-many? And second one is, in this quarter, you opened five VIP learning centers. This is a slower number than comparing with the previous quarters. So is there any specific reasons for the slower opening? And what is the capacity growth outlook for next year? And third one is, in your last year's revenue guidance, is it include a potential further M&A? So -- and if you can, can you give us some more color if you have further M&A plan? And what's the next year's margin guidance? Thank you.

[Dong Li:]

Thank you, Sheng Zhong, okay. So your first question is about our growth prospect of our one-on-one as well 1-on-many business in our VIP business, okay. So I think I can share a few numbers with you, okay. So for the overall OneSmart VIP business for fiscal year 2018 compared with fiscal year 2017, the one-on-one revenues grew at about 30% and for one-on-three and one-on-many grew at about 55%. So overall, our OneSmart VIP business achieved a very strong growth prospect. And also, in terms of the student enrollments as well as the total class units consumed, it also showed both our one-on-one and one-on-three business experienced very strong demand and very strong growth over the past fiscal year, okay. And your second question is about we opened five VIP learning centers, okay. Since the last quarter from June to August, actually, it's not a traditional quarter that we will -- we want to open more learning centers because it's surely the peak season for us to focus on the summer programs. And actually, it's one of the very strong revenue kind of ratings season for us. And also, don't forget, as of the end of 2018, the total number of our learning centers are -- already reached to 315 and of which the OneSmart VIP learning centers are -- I think the total capacity increase has already reached to about 35%. This is actually a very strong opening of our capacity expansion. So actually, we think we are at the right speed in terms of our learning center opening. So we think opening five VIP centers actually is part of our original plan, okay. And then, our guidance for our capacity expansion for the next years. As we have mentioned earlier, our -- we expect to increase our capacity by 25% to 30% in the next three years. So for fiscal year 2019, we -- I think we expect to increase another 140 centers altogether. And I think out of which, for VIP, we expect to open another 60 centers, and then for HappyMath, we expect to open around 30 more learning centers and then, 30 centers for FasTrack English. And also, this new category also included our newly acquired Tianjin Huaying Education, which, I think, they will also add another 15 learning centers in the next fiscal year. And your next question is about whether our guidance has included any M&A transactions, okay. So our top line guidance for fiscal year 2019, which is a 40% to 45% top line revenue growth had not included any potential M&As, but I think this increase has included the newly acquired, Tianjin Huaying Education, which, I think, will contribute about 3% in terms of revenue increase. So the 40% to 45% included the Tianjin Huaying but had not included any potential acquisitions. And I think your last question -- okay, and you -- another question is whether we had, like any potential M&A target. I think from the company's perspective, we had a pipeline of potential, like, targets that we would be considering the investment or potential acquisition, but we are still in the process of reviewing this. I think the company has a standard procedure in terms of sourcing potential investments and acquisitions. And also, we have our standard criteria in terms of which investments to move on. And I think we will likely know more information when these investments or acquisitions materialize. And your last question is on margin guidance, okay. So as we have mentioned, we expect our revenue to increase by 40% to 45% for fiscal year 2019. And then, on the non-GAAP net income, we expect it's going to increase by 20% to 25%. And then, I think on the margin side -- on the gross profit margin side, we expect to maintain a stable gross margin profit margin of at least about 50%. And on operating profit margins, I think there may be some pressure in the short term on the -- in terms of the selling and marketing and G&A because we want to further expand our capacity and open more new learning centers and expansion from existing learning centers. So - and also, we will continue to invest heavily and then spend more in terms of research and development, education technology, curriculum development material and also talent recruitment. So we think there might be a 100 basis point pressure on the operating profit margin. But we are confident that this is only temporary, and we will maintain a good balance between expansion and operational efficiency. And we, in fact, actually, the margins will go up and then we believe we will achieve like sustainable profit growth and margin expansion in long-term. I don't forget, for the - I think, for the VIP learnings centers in Shanghai over the past 12 years, even though we opened 18 new OneSmart VIP learning centers, our business, VIP business, in Shanghai still maintains a healthy EBIT margin of about 40% during the quarter. So actually, we are quite confident about our operation management capabilities. And we think even there might be a temporary short-term pressure on the operating margins, but it's just temporary. And in the long-term, definitely, there will be market expansion. So hopefully, this has answered your questions. Thank you.

[Sheng Zhong:]

Yes, that’s very helpful. Thank you very much.

[Operator:]

The next question comes from Felix Liu of UBS. Please go ahead.

[Felix Liu:]

Thank you, Li Dong. Thank you for taking my questions. My question is mostly on the regulation side. So with the recent stricter rules on teacher's licensing, learning center requirements and tuition prepayments, what are the impacts to OneSmart on these fronts? How many - what percentage of OneSmart teachers already have licenses? And what are the plans for those who don't? And what does management think about the three months - about the ban on tuition prepayments for over three months? Of course, does - how will that impact OneSmart's deferred revenue and cash flow? Thank you.

[Dong Li:]

Sure. Thank you, Felix. I think on the regulation side, as the Chinese government continues to enhance regulatory oversight, we expect the China after-school education market to further consolidate. And these regulatory efforts will promote an improved market standard, enhance the overall customer experience and support a healthy growth of the overall market in the long-term. I think, for OneSmart education, as a leading education service provider in China, we are fully supportive of this reform, and we are committed to build a high-quality and sustainable education platform for our students. I think because we were headquartered in Shanghai, which already had actually a very stringent in terms of the government regulation environment, so we believe we will be at a very high level in the industry to meet the government requirements. And in the meantime, I think despite there might be some regulatory uncertainties, we still think this is a good timing for top market leaders like OneSmart to further consolidate the fragmented industry and acquire more market share through both organic growth and acquisitions. So I think, in summary, at this stage, we do not foresee any mature impact on the -- from the regulation side our top line growth and operations. And I guess, just jumping to those -- a few detailed parts that you have mentioned. I think, first one, you mentioned on the teacher's license issue, I think currently, 60% to 70% of our teachers, they have the required teacher's license. And then, I think for rest of them, we already actually help the teachers to take the next teacher's license examination, I think, later this month. And also, we had already arranged, like, related training and after, like, assistance so that, we hope, the teachers actually become licensed. And then we believe, after another one or two teacher's qualification examination, we will achieve a close to like 90% or even 100% teacher's qualification rate, okay. So this is on the teacher's license side. And then, you also mentioned in terms of the three months' tuition like - okay, so I think from OneSmart's perspective, we are really supportive - really fully supportive of this requirement from the government. So basically, we - I think for our, like different business segment, including OneSmart VIP, HappyMath and FasTrack, we will like basically sign an agreement with the parents. And then, we will, like arrange the banking, the commercial banks, to provide an auto-pay- or auto-charge-like arrangement between us and the parent, so that the tuition will be deducted from the parent's bank account like every - on a quarterly basis. And then, I think internally, we will also arrange or like - we will also make like some adjustment in terms of our curriculum so that to be in compliance with this arrangement. Okay. So hopefully, this has already addressed your questions.

[Felix Liu:]

Yes, thank you, thank you very much.

[Operator:]

The next question comes from Tallan Zhou of Deutsche Bank. Please go ahead.

[Tallan Zhou:]

Hi, Li Dong. I have got a few questions. First is the breakdown for the profitability between the learning centers in Shanghai versus non-Shanghai. So you mentioned about EBITDA margin for the learning centers in Shanghai. Can you tell us about the non-GAAP OP margin for the Shanghai learning center versus those outside of Shanghai? And second is, of the more than 140 learning centers expansion next year, how many will be in Shanghai? And how many will be outside of Shanghai? The third question is about group class. I know company is working on that. And do you have a time line and also a revenue contribution target for group class? Thanks.

[Dong Li:]

Okay. Thank you, Tallan, okay. So your first question is about our like profit or margin like analysis for Shanghai and the non-Shanghai, right? Okay, I think I can share with you the Shanghai, non-Shanghai margin analysis later because I think, currently for Shanghai, we're generating like 40-plus - 40%-plus EBIT margin. And I think even for non-Shanghai, actually, the margin - the operating margin and EBIT margin actually have also achieved, like very good growth, like year-over-year. Okay. And your next question is - right, right. So for the 140 learning centers. So I think about 20% of them will be in Shanghai because don't forget, we are already operating in the 43 cities. And I think, out of 140 centers to be added, about like 70% to 80% of total learning centers will be in the top 10 cities that we operate, which include Shanghai but also include other cities like Hangzhou, Guangzhou, Shenzhen, Nanjing, like Suzhou, Wuxi, Shangzhou and Beijing. So I think out of 140, like 70% to 80% will be in the top 10 cities that we operate. And Shanghai will be contributing less than 20%. Okay. And so -- and then your last question is about the group class contribution for the top line revenues. Okay. So as we have mentioned, we acquired Tianjin Huaying, and we will start to consolidate the financial payments of Tianjin Huaying Education starting from September this year. And we expect Tianjin Huaying, which is mostly the group class business, I think it will add about 3% to 3.5% in terms of the top line contribution. So I think our guidance for our group class top line revenue will be about 3.5% for the next fiscal year.

[Tallan Zhou:]

Okay, thanks, Li Dong. Sorry, one more question, if I may. So do we see profitability - or do we see Beijing has improved the profitability? Or are they making breakeven for this year? And what about next year? Thanks.

[Dong Li:]

Yes. I think we definitely have achieved a very good improvement. Actually, I think our VIP business and our HappyMath business in Beijing has actually achieved very strong progress, okay. So for example, I think for our HappyMath business in Beijing, as we have mentioned, the business actually increased - the top line revenue for HappyMath in Beijing increased at a rate of like 214.5% year-over-year. And I think, for our VIP business, it also, like achieved close to 30% to 35% top line growth in Beijing. So overall, I think our business in Beijing actually is doing quite well over the past several years. And I think in terms of our profit margin in Beijing, actually it also improved significantly.

[Tallan Zhou:]

Thank you, thank you so much.

[Operator:]

The next question comes from Terry Weng of Blue Lotus. Please go ahead.

[Terry Weng:]

Thanks for taking my questions. Can we have a breakdown of margin on VIP 1-on-1 and 1-on-3 and also the HappyMath on this quarter? And also my second part - I have another question. Can you give us more color on the strategic cooperation with Juren Education? What kind of cooperation will happen in the future? Thank you.

[Dong Li:]

Okay. I think for the detailed margin breakdown and in terms of the detailed like financial and business data, I think we will share with you off-line, okay. I think I will address your question about the - our investment in Juren Education. So last week, we announced our investment of a minority stake in Juren Education. Juren Education is a leading K-12 after-school education service provider with national influence. And actually, I think Juren is a very highly respected education institution, and it is very famous for its high-quality teaching and its strong faculty and curriculum development capabilities. And I think the collaboration for us with Juren is mainly very good perspective. I think on one side, our investment in Juren Education will further strengthen our capabilities in offering small class services. And also, we think our collaboration with Juren Education will further help us build out our presence in Beijing in Northern China and even in the whole China market. This will help us to increase our overall market share. And certainly, I think on the curriculum perspective and in terms of like - we can leverage our refined operation management expertise and our Standard Operation Perfection System to help Juren Education to totally improve its performance, its business and operation and financial performance. So I think there are a lot of synergies that can be created between Juren and us. And also, we have done a cooperation agreement with Tsinghua TE Group, I think, which we will further build out strong collaboration with Tsinghua University and the Tsinghua TE Group in terms of mainly like international collaborations or -- and also cooperations in terms of like many other perspective. So actually, it's a very constructive investment into Juren Education.

[Terry Weng:]

Okay, thank you.

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Rebecca Shen for any closing remarks.

[Rebecca Shen:]

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 questions in the future, please feel free to contact us. Thank you.

[Operator:]

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