Meta Data Limited
Q3 2020 Earnings Call Transcript

Published: 18 Aug 2020

[Operator:]

Good day, and welcome to the OneSmart International Education Group Limited Financial Results for the Third Quarter of 2020 Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Ida Yu, Investor Relations Director. Please go ahead.

[Ida Yu:]

Thank you, operator. Good morning, good evening, everyone, and thank you for joining OneSmart International Education Group Limited third fiscal quarter 2020 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. Joining me on this call are, Mr. Steve Zhang, Chairman and Chief Executive Officer; and Mr. Greg Zuo, our Chief Financial Officer and Chief Strategic Officer. I'll 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 relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond 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 is included in the company's filings with the United States Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement, as a result of new information, future event or otherwise, except as required under the law. With that, I will now turn the call over to Steve. Please go ahead.

[Steve Zhang:]

Thank you, Ida. Hello, everyone, and thank you all for your interest in today's earnings presentation. The third fiscal quarter 2020 was most challenging one in our 12 years operation history. Strictly following local government guidelines, we have taken proper measures to protect health and safety of our students and employees. Meanwhile, our teachers and advisors dedicated to prepare our students, both academically and mentally for GaoKao and ZhongKao which are key milestones in every Chinese student’s lifetime. Our efforts have been much appreciated by students and their parents, Greg will give you more details later. Today, I'd like to take a few minutes to review our strategic focus we view. Consistently, our business and growth is guided by three priorities. Firstly, OneSmart has premium brand positioning. This is evidenced by a remarkable track record of OneSmart students’ academic excellence. College admission of OneSmart students is more than 50%, higher than national average. And high school admission rate of OneSmart students is 40% to 50%, higher than average of all China major cities. We invest in our premium quality of teaching services and learning centers to meet the growing needs. Secondly, we design our products and services oriented by customers. We respond to their increasing needs for personalized learning which is more caring and engagement. Personalized curriculum is designed for each individual student to make smart use of time and drive excellent results. Last but not least, we continuously upgrade our product and technologies, so we have learning experience and effectiveness. We have developed a robust teaching system, UPC, data-driven OMO tools and platforms, AI-powered OneSmart Online. All those priorities mentioned above will enable us to enhance the brand value to extend the shift further in major markets and penetrate into new markets in a disciplined manner. With that, I will now turn the call over to Greg, who will provide you more updates on the company performance. Greg, please go ahead.

[Greg Zuo:]

Thank you, Steve. Hello, everyone, and thank you all for joining us today. Let me start with the overall business update. The fundamentals continue to be solid with 1on1 demand becoming stronger. So our short-term operations had an impact by COVID-19. In Q1, the hardest hit quarter, all of our learning centers have been temporarily closed, while public schools in China have also been temporarily closed without reopen schedule being provided. All classes and customer acquisitions conducted through our online platform until late May. The latest update is, as of August 4th for more than 90% of centers have been reopened. However, we think the work is hard, we remain very positive for the long-term outlook due to four main reasons. First, the demand for highly effective and premium education services is increasing, and will gain market shares. Second, increasing numbers of consumers are better educated and become convinced that 1on1 format provides a better quality of education. Third, OneSmart’s upgraded services are receiving extremely positive feedback by parents and students. And fourth, industry consolidation opportunities arise for OneSmart, as a market leader in the premium 1on1 education service sector. Page 6 of our prepared presentation summarizes of our online and offline class offerings. Our 12 years’ solid offline operations cover premium K-12 1on1 after-school children and young children education aged from 3 to 18 years old. Premium education is propelled by online education technology. Once market is able to better serve customers with more flexibilities in study schedules, and teaching resources with less limitation on far flung locations. The combination of offline and online products and services have enhanced customer experience and loyalty, increased smart teaching and the management efficiency and supported by long-term healthy growth. Now please turn to Page 7, as shown on this page, OneSmart 1on1, our premium K-12 1on1 tutoring business has seen a solid V-shaped recovery backed by rigid demand. As of today, more than 90% of nationwide learning centers reopened. Students in the cities affected by the resurgence of COVID-19 will continue to have access to OneSmart Online to facilitate their ongoing education until further notice. After the GaoKao, cash sales have recovered to grow by 29% and 25% year-over-year in July and August to-date respectively. In fiscal year 2021, we're continuing our center upgrade and expansion in the top 20 cities. According to recent market studies, we have visualized the key consumption habits of our direct customers as shown on Page 8. They are mothers of K-12 students from affluent families in top 50 cities in China. They pursue a high quality lifestyle, they purchase iPhone, Estée Lauder and Louis Vuitton, they drive Mercedes-Benz, they stay in upscaled hotels such as Marriott and Hilton for holidays, they engage private art teachers, private sports coaches for their children, and they are a target customer for OneSmart 1on1 business. Based on one of the global leading consumer consulting firm’s analysis, so far, OneSmart serves only 3% of those target families. We still have a huge potential to expand our shares in the premium education sector, a large underserved addressable market. Page 9 shows a piece of good news from our OneSmart 1on1 learning center in Shanghai. We are proud to announce that student Yao has achieved top score in Shanghai GaoKao this year. He has been studying in OneSmart center for six years. Just quote this, his mother that’s saying, “We are grateful to OneSmart teachers for their dedicated efforts, especially during the pandemic this year. The personalized curriculum and the heartful teaching help my son to enhance his learning power and effectively improve his academic score.” Again, we congrats student Yao and his family on the excellent result. We believe more families across China will get engaged with OneSmart because of the result and great experience. As Steve mentioned earlier, we continue to solidify our premium positioning and premium pricing power through upgrade in products and services. On Page 10, OneSmart 1on1 Elite VIP program launched since the beginning of fiscal year 2020. We have started to upgrade our learning centers to offer larger classrooms with intelligent and interactive teaching tools and platforms. The better environments enable us to facilitate enjoyable study experiences. Under Elite VIP, our students will have highly selected teachers with extensive teaching experience to meet their higher requirements. Year-to-date, this newly launched product generated cash sales of RMB94.5 million representing 3% of OneSmart 1on1 business cash sales. VIP is priced 40% to 80% higher than our regular 1on1 class with high expected margins. We will continue to rollout in fiscal year 2021, starting in September and onwards. Our goal is to generate about 20% of OneSmart 1on1 business cash sales from Elite VIP program in the near future. Now let's move on to our younger children education business on Page 11. Its recovery has been slower compared with our K-12 1on1 children businesses due to later resumption of school activities for younger children in the third fiscal quarter. Most recently, we see a good signal of its growth momentum, cash sales recovered to grow by 12% year-over-year in August to-date. Based on our recent customer service, we believe the primary demand has shifted from elementary school admission preparation to the development of learning power for young children. We will adjust our product and service combinations to quickly capture the evolving needs in the coming years. In fiscal year 2021, starting September, we are going to upgrade products -- upgrade and open new centers in selected cities. We will also adopt product upgrade program under these two brands. Now move on to OneSmart Online business, as shown on Page 12. Our online classes provide convenience and complementary services to our children in a form of take-out services. For most of our customers, they become engaged with OneSmart education through our offline centers and most of classes are taken on weekends. However, with the introduction of OneSmart Online, those existing offline acquired customers are able to schedule their incremental online class throughout the entire week to achieve a higher frequency for better results with less limitation on operations. The additional online class offering will also drive our subject to student ratio, which is average subjects taken by each student. For example, if student takes math course in our offline center, while taking history course through our online platform. Currently, our subject to student ratio is about 1.3. And then we expect students would take additional subjects. Thanks to the convenience and high quality provided OneSmart Online as it rolls out. This is targeted to drive up the subject to student ratio to 1.7 as our target. In fiscal Q3 of 2020, online business generated RMB59 million in cash sales, a sequential increase of 128% growth accounting for 8% of total cash sales in the quarter. Net revenues from online business totaled RMB46 million, a sequential increase of 47% accounted for 6% of total net revenues. Those figures reflect pure online users only. If we add back online courses taken by offline students, cash sales and net revenue were RMB165 million and RMB54 million for fiscal Q3, representing 543% and 74% sequential growth respectively. Before Ida walks you through the financial results in more detail, I would like to elaborate on the one-off impairment loss in the fiscal Q3, as shown on Page 21. In Q3 we booked impairment loss of RMB335 million related to 15 investee companies. This was primarily caused by COVID-19 outbreak. We used prudent approach in evaluating financial performance of these investee companies and decided to mark down our investment amount by at least 80% for 14 of the 15 investee companies. We will continue to stick to a highly selective investment discipline and we’ll only consider opportunities that can immediately help the growth of our core business. After this mark down, our long-term investment balance dropped significantly to RMB1.1 billion at end of Q3 of fiscal year 2020 from RMB1.5 billion at the end of fiscal year 2019. The remaining investments are expected to be solid with more upside potential than downside in the future. In summary, under the unprecedented event of pandemic, the nature of our personalized education program demonstrated a clear V-shaped performance as students waited in fiscal Q3 for back-to-school and exam season to resume our services. As demonstrated by recent swift rebound, and the return of strong year-over-year growth in fiscal Q4, our business fundamentals remain solid, and the consumer demand for highly effective and premium education services is increasing. Currently, we expect fiscal Q4 revenue to grow 21% to 34% over fiscal Q3, and the margins to return to the pre-COVID-19 levels over the next few quarters. Looking forward, we expect strong revenue growth and the margin recovery in the fiscal year 2021 and beyond, primary underpinned by two major sectors. Firstly, the maturing of previously opened learning centers as 57% of them were opened in the last three years and are ramping up as planned. And secondly, the new offerings of upgraded premium products, which are bringing improved economics over the next few years. With that, I will turn the call over to Ida. Ida, please.

[Ida Yu:]

Thank you, Greg. In the third quarter of fiscal 2020, net revenues were RMB744.9 million, a decrease of 31.9% from RMB1,093.3 million during the same period last year. The decrease was mainly attributable to the temporary shutdown of our offline learning centers for COVID-19 related governmental requirements, offset by the incremental volume from online platforms. Cost of revenues decreased by 11 point -- 11% year-over-year to RMB482.6 million. We actively managed down the staff cost, rental cost and other related costs, partially offset by the increase in the depreciation and amortization cost related to our center expansion and upgrade prior to the pandemic. Selling and marketing expenses decreased by 17% year-over-year to RMB165 million. Non-GAAP selling and marketing expenses, which excludes share-based compensation expenses, were RMB164.8 million, a decrease of 17% from RMB198.5 million during the same period last year. The decrease was primarily due to our disciplined expense control and less cash sales generated during the quarter when all learning centers remained closed until late May 2020. General and administrative expenses decreased by 23.7% year-over-year to RMB174.7 million. Non-GAAP general and administrative expenses, which excludes share-based compensation, were RMB136.9 million, a decrease of 35.9% from RMB213.8 million during the same period last year. The decrease was primarily due to our expense control policy to keep a healthy financial condition during COVID-19. Let me now move on to cover some other key financial points for the third fiscal quarter of 2020. Capital expenditures for Q3 this fiscal year were RMB20 million, a year-over-year decrease of 45% from RMB37 million in the same period last year. Capital expenditures accounted for 2.7% of net revenues in Q3, representing a year-over-year decrease of 70 basis points from 3.4% in the same period last year. The decreases were mainly because we prudently managed our cash flow and temporarily suspended leasehold improvements due to COVID-19. OneSmart’s prepayments from customers balance, which represents cash collected from enrolled students for courses and recognized proportionately as the training sessions are delivered, were RMB2,359 million at the end of fiscal year 2020 Q3, a year-over-year increase of 6.4% from the end of fiscal year 2019 Q3. As of May 31, 2020, the company had cash and cash equivalents, restricted cash and short-term investments of RMB1,805 million. Based on our latest estimates, we expect to generate net revenues of RMB900 million to RMB1 billion for the fiscal Q4, representing a sequential growth of 21% to 34%. This outlook reaffirms our revenue guidance of RMB3,330 million to RMB3,430 million for the full fiscal year 2020. However, this outlook represents OneSmart's current view, which is subject to change because the COVID-19 impact is still ongoing, and its future development remains unclear. This concludes our prepared remarks. I will now turn the call over to operator and open for Q&A. Operator, we are ready to take questions.

[Operator:]

We will now begin the question and answer session. [Operator Instructions]. And our first question comes from Sheng Zhong of Morgan Stanley. Please go ahead.

[Sheng Zhong:]

The first question is, can I ask what’s the margin outlook for Q4? And secondly, your online business looks -- the trend is very good. And so, can you share some of the near-term target of the online business, maybe as a percentage of your VIP business? And do you see any cannibalization with your offline business? So, with the online business growth, what's your plan for the offline business capacity expansion in the rest of this year, and also in next year?

[Steve Zhang:]

Thanks, Sheng. I appreciate your questions. Thank you so much for joining this call. Let me take your questions one at a time. First question regarding margin outlook for Q4. So as we mentioned that we have received very strong cash sales in the recent months for July and August, those are actually a record number historically for us. So that indicates very strong demand in our core business, especially after ZhongKao and GaoKao. So with that, we provided a guidance of RMB900 million to RMB1 billion revenue for Q4. So, as we also mentioned earlier that during the COVID-19 period, we have done an excellent job in terms of cost and expense control, so which means we have now a leaner cost structure. So, we are pretty optimistic on our margin outlook for Q4. It would still be hard to provide exact margin number as a guidance. But if you use Q4 results as a proxy, which as you know, we generated RMB745 million in revenue and a small operating loss of RMB39 million for non-GAAP operating losses. If our revenue can increase and generate RMB900 million to RMB1 billion, we expect pretty sizable positive operating income for fiscal. So for your second question regarding OneSmart Online, our target share, and in terms of percentage of our offline 1on1 business, let me elaborate that. OneSmart Online will continue and grow as part of our core business strategy. We appreciate its value in terms of providing convenience and complementary services to our existing students and potential new students. So, currently, as you know, in Q4, OneSmart Online took about 8% of our cash sales. We expect consumer to continue the experience of OneSmart Online, its quality, and good earnings results. So with that market share we expect to continue to grow in the future. We don't have an internal target, but we will let consumers to decide to let the convenience and value drive its growth. But in any case, OneSmart Online will create incremental growth for us going forward, which means it can serve additional demand for additional customers in the future. So we're very thankful to our team building OneSmart Online especially during the COVID-19 period. Your third question regarding potential cannibalization with the offline operations. So we -- I think that's a fair question, I think we have observed and studied similar situations in other players of the industry who experienced the same thing. That clearly was a problem. But let me elaborate, let me emphasize that. The OneSmart 1on1 business serves a different demand, especially online channel. It provides convenience, provides flexibility and more choices for our students. So, we have explained in the previous earnings call that OneSmart Online will provide complementary services to the existing students as well as provide access to us for additional new students in the areas that our offline centers couldn't recover yet. So, having that in mind -- so we have clearly organized our teams in the format that, for example, for the mid of the week additional higher frequency online class demand, we have our existing offline team to handle those businesses. Clearly that alignment of interest, there’s no conflict. But for additional new customers that where our existing learning center cannot serve, we have a separate team to run the business because it clearly has different nature. We have clearly separated two teams in terms of geographic division. So that really helps us to avoid any cannibalization and potential conflict. So, so far we have been operating pretty smoothly in that. We don't see any major internal conflicts and then cannibalization from a customer perspective. Your fourth question is regarding capacity expansion plan going forward. For the near future as we mentioned, our strategic focus is in the VIP program. So in Q4, and fiscal year 2021, we will continue and spend a lot of time to upgrade our learning center, open new VIP learning centers as well as open more VIP classrooms for our students. That's a clear focus. But in terms of number of learning center expansions, we have two separate expansion strategy. For the 1on1, we have been very clear. We want to further continue to grow our top 20 cities so we can achieve economies of scales in those 20 cities. So we will continue to open more learning centers in the new fiscal year for the 1on1 business. But for young children education programs, as we mentioned earlier, it took a little long time to resume its normal operations as the COVID-19 impact and public school reopening schedule being a little bit behind schedule. So our priority is to fill in existing centers for the young children. But in the meantime, we will also upgrade our young children programs by opening some VIP learning centers as well as upgrade some classrooms. So this summarizes our expansion strategy going forward.

[Operator:]

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

[Felix Liu:]

My first question is regarding to our growth trajectory from here. I understand that Q3 has been negatively impacted by COVID-19. But do you expect the revenue level to return back to normal going forward? What are the recovery trajectory for the top-line as well as the margin? My second question is on consumer preference post COVID-19. We hear some competitors saying that a portion of the parents are now becoming more open to the online format. Is that consistent of what we're seeing in the 1on1 space? My third questions is on learning center resumption or ramp up by city tier. We understand that you have a very matured or successful operations in Shanghai. How are the situations outside Shanghai? I recall previously, during the period of rapid expansion, the utilization of non-Shanghai relatively under pressure. So, when do we expect that to improve going forward?

[Steve Zhang:]

Thank you, Felix. So, the first question regarding the revenue and margin trajectory from here. So, obviously Q3 has been a quarter mostly hit by COVID-19. But as we have explained earlier in the call that we have seen and observed very strong demand for our business in the recent months. So I think in our discussions with our consumer, parents and students, these people experienced pretty difficult and special times. During February through June, they experienced the lockdown in the country and closed out public schools. They have a lots of uncertainty on ZhongKao and GaoKao schedule. So they have taken a lot of online classes during the period of time. Later on, they all have to face the exams, especially GaoKao, which is delayed one month this year, as you know. So they have learned a lot during that period to time to compare different education programs, whether it's online or offline. But their conclusion is clearly that OneSmart 1on1 program is clearly very effective to provide the best customer experience in helping them as we have elaborated earlier in this discussion, ZhongKao and GaoKao results for our students is very excellent this year. So that probably explains why we have seen cash sales growth of 25% to 29% year-over-year, we reported recently. So we are very encouraged by this result. So with that, we predict a pretty strong growth for new fiscal year 2021 starting September. We expect to resume our historical top-line growth add of 30% plus for next year. So in terms of margin, if top-line growth resumes to the normal level with a leaner cost structure that we achieved during the COVID-19 period, we are optimistic on margin as well. So we expect the market to be back to the pre-COVID level in the next few quarters. But the exact number, it’s hard to say for margin as you can imagine. And so Q1 next year still will have some tail impact by COVID-19. And Q1, which is September to November historically has been a low season in terms of productivity. So I think we look at more positive margin expansion towards the later half of the year. So that answers the first question. The second question regarding consumer preference, I think that's an excellent question. We have done a lot of research, consumer surveys internally as well because during that period of time, obviously, consumer experienced a lot of learning education programs, online and offline. But let me -- want to point a few points. Number one, OneSmart's 1on1 premium education services serve a very different demand than a typical mass market class format as well as those online education programs as we mentioned in the last Q earnings call. We are serving the students in the middle school and high school who appreciate very effective 1on1 personalized learning experience, which can help them quickly improve their scores and do well in their exams, especially ZhongKao and GaoKao. So we did -- in our survey of 2,500 parents, more than 90% of them have responded and said they prefer OneSmart 1on1 education services, especially the offline centers, which basically provides better results than other online platforms. Having said that, I think I -- we will also recognize that some of the parents, they still appreciate online channel because online provides convenience, more choices and better teachers, right? So I think, as I mentioned earlier, we will let parents and students decide whether they want online or offline, but we provide both services in a high quality fashion. So I think to summarize, I think, if the consumer want to have a quality education and seamless experience, clearly OneSmart Online and OneSmart Offline provide the best services. So I think that answers your second question regarding consumer preferences going forward. I think your last question is regarding the learning center ramp up situation, especially in non-Shanghai learning centers. As I mentioned, that we still have pretty large number of learning centers that are quite young. So I mentioned 57% of them opened in the last few years, clearly they are ramping up as planned as I mentioned in Shanghai as well as non-Shanghai cities. We didn't provide the ramp up results this quarter because those are during the May -- March to May period, the COVID-19 period, but we will continue to disclose our ramp up numbers in Q4 and beyond. But I can tell you our ramp up is still largely on track as we have been previously provided, which means that they follow pretty healthy pattern of margin ramp up and offline ramp up. So, with this large number of learning centers being ramping up at the same time, we are very confident in our performance and margin recovery going forward, which ties back to earlier questions.

[Operator:]

Our next question comes from Tommy Wong of China Merchants Securities. Please go ahead.

[Tommy Wong:]

Just a quick question. I think a lot of people in offline business right now are talking about the industry consolidation, and I think it’s not about this year, I think it’s about next year or even the year after. I know we have added a lot of capacity before and we’re trying to increase utilization. But then on the other hand, I heard from other players like 40%, 30% of Shanghai learning centers are shutdown. And so it seems like a lot of the competition has disappeared. And so how do we -- how do you think about the investments? What are you -- what is the nice thing thinking about investments for expansion over the next year? What are you hearing from the local market about this so-called industry consolidation?

[Steve Zhang:]

Yes. Thank you Tommy for the question. I think this is a good question as well. We actually mentioned this earlier in our presentation that consolidation is a long-term positive factor for our performance going forward. And then we echo your observation and discussion with other players, we have observed similar trends. For a lot of smaller scale players, it has been pretty challenging for them to recover. So we observed that when the government allows the reopening of learning centers, we found many of them cannot be reopened forever. So I think this is factoring our one-time impairment losses as well for a lot of smaller players as we invested in, we gained the insight that their performance being hurt. That gives opportunity for larger players like us, we're a market leader in the 1on1 space. As you've seen, a very rapid and swift V-shaped rebound of our cash sales. Actually, I think it’s because of that reason. Previously, we will find it harder for our new -- signing of new students to walk in. But we found out our conversion rates and number of walk-ins to our learning centers much improved than before. So that's very encouraging in a sense for us to going forward. So with that in mind, we'll continue to focus on the cash sales and signing of new students which as you know, will generate future revenues. And also -- we will also do opportunistic acquisitions of, maybe not companies, but also -- but students nearby. So we’ll try to acquire students of other players in a large number through some transaction arrangements to take advantage of these opportunities. So, to summarize, we still believe industry consolidation provides a positive opportunity for larger players like us. And we will continue to take advantage of that.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Ida Yu for any closing 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. Thank you. Bye, bye.

[Operator:]

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