RISE Education Cayman Ltd
Q4 2020 Earnings Call Transcript

Published: 16 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to RISE Education Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today Mr. Aaron Li. Thank you. Please go ahead.

[Aaron Li:]

Thank you, operator. Hello, everyone, and welcome to RISE Education's fourth quarter and full year 2020 earnings conference call. Today, you will hear from Ms. Lihong Wang, Chairwoman and CEO; and Mr. Warren, CFO. Lihong will go over recent business updates, operations, and the company's long-term strategy. Warren will go over the financial results for the quarter. Both will be available to take your questions in the Q&A session that follows.

[Lihong Wang:]

Thanks, Aaron. Hello, everyone. Thank you for joining our earnings call today. We are very pleased to see solid improvement continued this quarter on our financial and operational performance. Revenue for Q4 2020 was at the high end of our guidance. Both adjusted EBITDA and net income before goodwill write-down increased substantially. 2020 was an unprecedented year of challenges amidst COVID-19 pandemic, which affected the China's education industry and our company. We took immediate action in the onset of the academic to stabilize the business with the quick deployment of our Online-Merge-Offline or OMO strategy, and gradually recover the business with various initiatives to develop a unique and strong multi-disciplinary capability-based educational platform. As the pandemic containment gradually return life to normalcy in China, almost all of our offline learning centers resumed normal operation in the fourth quarter. Following the reopening of our self-owned learning centers in Beijing by the end of September 2020, our business essentially recovered during the fourth quarter with significant improvement on both operational and financial side. During this quarter, new student enrollments increased on a yearly basis for both RISE regular courses and other courses. Total revenue reached the high-end of our guidance. And adjusted EBITDA was close to the level compared with the fourth quarter of 2019. This encouraging result, not only demonstrated the effectiveness of our strategy to navigate this new economic environment and contain the impact of COVID-19 on our business, but has also positioned us well to see its new growth opportunities in the future.

[Warren Wang:]

Thank you, Lihong. Let me now go through our financial results for the fourth quarter of 2020. Before I begin, please note that all numbers stated are in RMB. As expressed by Lihong, while we're pleased to report that our business gradually recovered in the fourth quarter, as almost all our offline learning centers resumed normal operation in the fourth quarter. Our top line and profitability continue to improve, thanks to our store execution capacities under the OMO model. While offline learning centers remain at the core of the OMO strategy, we have continued to invest in our digital transformation and improve our online curriculum or light courses can switch between online and offline seamlessly, whenever the demand comes for it. Turning to slide 11. Total revenues for the fourth quarter of 2020 increased by 13.9% quarter-over-quarter and decreased by 12.4% year-over-year to RMB 364.5 million. Revenues from educational programs increase by 11% quarter-over-quarter and decrease by 14.7% year-over-year to RMB 325.8 million. The quarter-over-quarter increase in revenues from educational programs was primarily attribute to the offline operation, resuming in Beijing and Shijiazhuang by the end of September, 2020, following the reopening of other self-owned learning centers in Shanghai, Guangzhou, Shenzhen, and Wuxi since June 2020, as the COVID-19 situation was alleviating. The year-over-year decrease in revenues from educational programs was primarily due to the decline of students in class, as a result of the business impact from COVID-19. Franchise revenues increased by 49.3% quarter-over-quarter and 13.8% year-over-year to RMB 37.8 million. The quarter-over-quarter increase in franchise revenues was mainly due to growth in recurring franchise revenues as a result of the gradual reopening of franchised learning centers. The year-over-year increase in franchise revenues was primarily due to a growth in initial franchise fees associated with an increase in the total number of franchised learning centers from 383 as of December 31, 2019 to 420 as of December 31, 2020. Other revenues decreased by 19.7% quarter-over-quarter and decreased by 17.7% year-over-year to RMB0.9 million. Cost of revenues for the fourth quarter of 2020 decreased by 4.3% to RMB155.9 million from RMB162.9 million for the preceding quarter and decreased by 15.1% from RMB183.9 million for the same period of the prior year. The quarter-over-quarter decrease was primarily due to decrease in rental costs and the lower cost of learning materials. The year-over-year decrease was primarily due to the decline in teachers' compensations as a result of the reduced teaching hours and social insurance exemption, as well as rental concession. Non-GAAP cost of revenues for the fourth quarter of 2020 decreased by 4.3% quarter-over-quarter and by 15.4% year-over-year to RMB152.1 million. Gross profit for the quarter was RMB208.6 million, an increase of 32.8% quarter-over-quarter and decreased by 10.3%, year-over-year. Slide 12, selling and marketing expenses decreased by 5% quarter-over-quarter and by 17.8% year-over-year to RMB72.1 million for the fourth quarter of 2020. The quarter-over-quarter and year-over-year decrease was primarily associated with company's disciplined investments in online and offline marketing activities. Non-GAAP selling and marketing expenses for the fourth quarter of 2020 decreased by 5.3% quarter-over-quarter and by 18.2% year-over-year to RMB17.8 million. General and administrative expenses increased by 44.2% quarter-over-quarter and by 5.6% year-over-year to RMB89 million for the fourth quarter of 2020. The quarter-over-quarter increase was primarily due to the increased share-based compensation expenses as a result of the modification and new grant of share-based awards in August and September 2020. The year-over-year increase was primarily due to the increase in personnel costs related to our online courses business. Non-GAAP general and administrative expenses for the fourth quarter of 2020 increased by 30.3% quarter-over-quarter and increased by 4.1% year-over-year to RMB77.2 million. Operating income for the fourth quarter of 2020 was RMB47.5 million, an increase of RMB28 million from RMB19.4 million for the preceding quarter compared with operating income of RMB60.7 million for the same period of the prior year. Non-GAAP operating income for the fourth quarter of 2020 was RMB64.4 million, compared with RMB27.1 million for the preceding quarter and RMB75.6 million for the same period of the prior year. Adjusted EBITDA income was RMB85.3 million, compared with RMB57.8 million for the preceding quarter, and RMB91 million for the same period of the prior year. Turning to slide 13, net income attributable to RISE for the first quarter of 2020 was RMB1.4 million, compared with RMB28 million for the preceding quarter and RMB51.1 million for the same period of the prior year. During the fourth quarter -- for the RMB37 million impairment loss on long-term investment, this one-time operational loss was mainly due to a decline in the fair value of our long-term investment in investee, which focus on education for young children and whose business and financial performance was severely impacted by COVID-19. Non-GAAP net income attributable to RISE for the fourth quarter of 2020 was RMB55.4 million, compared with RMB35.7 million, for the preceding quarter and RMB66.1 million for the same period of the prior year. Basic and diluted net income attributable to RISE per ADS was RMB0.03 and RMB0.02 for the fourth quarter of 2020. Basic and diluted non-GAAP net income attributable to RISE per ADS was RMB0.98 and RMB0.97, respectively for the fourth quarter of 2020. Net cash outflow from operating activities for the fourth quarter of 2020 was RMB108.5 million, compared with net cash inflow from operating activities of RMB103.2 million, and RMB74.4 million for the preceding quarter and the same period of prior year, respectively. The quarter-over-quarter decrease in cash generated from operating activities was mainly due to an increase in accumulated refunds of tuition fees paid out and a decrease in cash collections from renewed enrolments during the fourth quarter, and the year-over-year decrease in net cash flow from operating activities was primarily attributable to reduced cash collection on tuition fees as a result of the temporary closure of certain learning centres during the COVID-19 pandemic. As of December 31, 2020, the company had combined cash and cash equivalents and restricted cash of, RMB639.2 million, as compared with RMB1,022.8 million as of December 31, 2019. As of December 31, 2020, current and non-current deferred revenue and customer advance was RMB601.9 million representing a decrease of 20.4% from RBM756 million as of December 31, 2019. The decrease was primarily due to the fact that revenue recognized for our process and services was larger than the cash tuition collected from the process. Deferred revenue and customer advances, mainly consists of upfront tuition payments from students and initial franchise fees from the company's franchisee. Now let's look at the business outlook on slide 14. Following a relatively stable environment in the fourth quarter of 2020. Local resurgence of COVID-19 had an impact on our operation and the performance in the fourth quarter of 2021. Although, the full economic impact of COVID-19 is yet to be realized, current epidemic contaminant matters have been largely effective. We believe we are well positioned to navigate the rapidly evolving market environment and the capture potential opportunities in the education industry. Our learning centers in Shanghai, Guangzhou, Shenzhen and Wuxi have remained in full offline operation. Our learning centers in Beijing and Shijiazhuang are expected to reopen from later this month at a pace regulated by the government. Our flexibility to switch seamlessly between the online and offline models and our ability to manage both online and offline operations concurrently have helped us to mitigate risks and potential resurgence of COVID-19 impacting our business. Looking ahead, combined with our profitable and continuously expanding offline operation across China and the increase – comprehensive online offering and digital capacities of our resources, we're very optimistic about the business outlook and will accelerate our growth in the next few years to solidify our leading market position by increasing our market share in the domestic education space and deliver strong financial results for more long term value. In 2021, we will continue to execute our expansion plan. It has the OMO model to new heights and rollout profitable multiple-disciplinary products system-wide. Regular courses fees are expected to slightly increase in 2021. Taking into account, we expect our revenue in the full year of 2021 to be in the range of RMB1420 to RMB1730 million. With that, I would now like to hand the call over to the operator, so we can begin the Q&A session. Thank you.

[Operator:]

Thank you so much. Ladies and gentlemen, we will now begin the question-and-answer session. And our first question comes from the line of Sheng Zhong from Morgan Stanley. Sheng, your line is now open. Hi, Sheng, your line is now open. You may know ask your question. Hi Sheng, your line is now open. Maybe you are on mute, please unmute your line. Thank you. He got disconnected. And your next question comes from the line of Lauren Xu from Credit Suisse. Lauren, your line is now open.

[Lauren Xu:]

Thank you for taking my question. I’m Lauren from Credit Suisse. I have two questions on behalf of Alex. The first one is about the student acquisition costs. Considering the competition's data much more intensified, would we expect to see higher student acquisition costs this year? And the second question is about online retention rates, can management share more color on the current retention rate? And how should we think about the trend this year after launching those digital upgrades? Thank you so much.

[Lihong Wang:]

Okay. I can start and then Warren can add more insights. For customer acquisition costs, as you mentioned, Lauren, we see here is competition from our online channels. So, the strategy for us is to continue to use our offline channels and the wage for the leads to be generated through offline channels continue to increase. The overall percentage is already close to 70%. So, 70% of the leads coming from our offline learning center promotions and offline activities. We think we'll continue to focus on offline this year. And of course, the fourth quarter number is very encouraging, but I think the full year 2021; the acquisition cost will be slightly higher than the fourth quarter. But I don't think we'll use the expensive channels to -- will hopefully contain that acquisition cost level around the fourth -- the third and fourth quarter of 2020. In terms of retention rates, as I mentioned, 2020 is unprecedented year. Most of our students acquired in 2019, who did not experience offline learning because of the pandemic went on online right away after we launched our online courses. So, the whole experiences are not that satisfactory. The retention rate came down in the third quarter. However, as I mentioned, for the fourth quarter and continued in the first two months of this year, we see the retention rate going up to the normal level. So for the Beijing, the three instalments, the renewal rate is already close to 90% back to the level prior pandemic and then the graduation retention rates also coming back to high 60%. So we see a very encouraging recovery from retention rate.

[Warren Wang:]

A little more input for the first question. In addition to Lihong mentioned, the offline customer acquisition mindset is values of core competence of RISE, as Lihong mentioned. And also, we offer more online multiple classes to the customers, so we can use this order lease we acquired more effectively. So that's why these cost decreased in this quarter. Thank you.

[Operator:]

Thank you so much. And your next question comes from the line of Sheng Zhong from Morgan Stanley. Sheng, your line is now open.

[Sheng Zhong:]

Hi. Thank you for taking my question. Sorry that I lost my connection for awhile. So if my question is already answered you may skip it. I have a few questions here. The first one is about the regulation risk impact. Can you share some of your thinking about this regulation this time in this year? Well, how and how could that impact the new learning center – new learning center opening because you have 100 learning center opening plan and teacher and tuition fee collection and also maybe the capital supervision impact? And I think you mentioned that you expect your Beijing learning centers to reopen later this month. So that – do you already get the government communicate with government yet on this. This is a first question. And second one is, you’re now expanded your subject to mathematics and logic thinking. So could you share some more color on how you – how – what the strategy on this or the operations thinking on this like how this cost develop is internally. And how will acquire students and what the price for the subject? And you are targeting number one for – in the offline. So, can ask the near-term target maybe what the current revenue contribution from the subject retention in this year? And last one is, what's your franchise acquisition plan this year? Thank you.

[A – Lihong Wang:]

Thank you, Sheng. Let me answer the first question first. In terms of regulation, we all know that during this month, particularly and started from Beijing that more regulation target, I would say the training or the -- what we call the Sheng as you mentioned there are a number of areas that government wanted to tighten the regulations and put more supervisions. The first is so-called the license to operate ex-curriculum. And for this one it really reinforced the regulation published in 2018. So we checked our licensing status and feel majority of our schools already obtained licenses and approval. Only a very small number of schools is in the process to getting licensed. And maybe two to three in Beijing there are hard obstacles. For example the property is not -- cannot satisfy the requirement. So, I would say, we don't have much issue around that area. The second area, the government wanted to put more -- maybe restrictive measures is the tuition -- prepaid tuition. However, how to really regulate this is front is still uncertain. And for RISE we already have experience in Shanghai for example that we need to put in a so-called custodian account for each school we opened. And so this is not an issue for RISE particularly with abundant cash that we have on hand. The second possibility on this front is to work with a bank or insurance firm to put in measures to make sure that if there's anything happened with the so-called providers then the parents can get the money refund. On this one, we still are waiting for the detailed implementations. Personally, I feel this is not easy to implement, so Warren will look for partners and see what is a better way to cope with the regulation. The third you mentioned is, whether government encouraging the education accountant. I think for RISE we target a very young age starting at 3. And majority of our students are aged, 3 to 6 and the teaching content for RISE focuses on how to communicate, how to think logically and how to become the leader for the future. I think this teaching or educational philosophy is consistent with what government wanted to promote. And we are confident that we -- plus the mathematical logic thinking courses, we really focus on how to train the kids to be a creative thinker, to be a logic thinker rather than focusing on test prep. So hopefully on the regulation side, we will not be the one really targeted by the government. In terms of learning centers in Beijing, we already received requirement from a local district educational bureau to submit documentations and we have data on that. Some of the requirements associated with putting money in the custodian account and also ask a certain percentage of destination. So, we are all in the process to satisfy those requirements. However, I don't know when we will be allowed to open. Across the nation, we don't see stricter restrictions. And as you can see that our new centers continue to open outside Beijing both direct owned and franchisee centers. So we have the full confidence that this should not be a problem on the center expansion. The second question regarding the mathematical logic thinking. In fact, we started to create STEAM courses in the middle of 2019. So this -- the cost development has been ongoing for quite some time. During the pandemic, because we have to move everything online. We made the decision to simplify the STEAM courses to focus on mathematical logic thinking. So that courses already been offered to students since June 2020. And we have tried out in our self-owned learning centers to recruit students and also higher new students recruit new students online directly. So we have experience on the teaching and we already have a number of times of renewal for that classes. The reason we think we wanted to target offline because first RISE has a very strong offline network. Second we have very good experience running offline centers both on the operational side and teaching side. The third is, we see the landscape -- we feel this is a sector already get embraced by parents. However, there is no clear leader in the offline market. And through the surveys we conducted, we feel very similar to English, a majority of the parents are very willing to consider offline courses offered in this category. As I mentioned we have a plan. So the two ways that we expand our network; one is we'll open a dedicated classroom in our existing self-owned centers. This year we already started three in Beijing, and we target to open dedicated classrooms in 30 to 40 self-owned learning centers this year. On the franchisee network side, we will start from our existing franchisees. In fact, the first franchise schools will be open in -- hopefully in April in Guangzhou. And this year the target is to sign on 100 franchisees partners. However, because it's offline, they need time to open stores. So for the schools, at the end of the year, hopefully, we'll see dedicated to mathematics logic franchisee learning centers to be around 20 to 30 schools. In terms of revenue, it is still early. So pardon me that we are not at the stage to give you the number. However, with the plan to leverage our existing student base and learning centers and franchisee partners, we feel very confident that we can roll out the mathematical logic thinking courses very quickly to be meaningful -- with meaningful scales at the end of the year. The third question -- sorry, Sheng, I forgot the third question is about --

[Sheng Zhong:]

Yes. It's about your acquisition plan of your franchise.

[A – Lihong Wang:]

Yes, yes, yes. On this front I will start and let Warren to add more color. This is always our strategy since we get listed in 2017. However, the first acquisition of Shijiazhuang really took some time to complete and integrate. The good news is that, right now, Shijiazhuang is fully integrated into our direct owned business and performed quite resilient during the pandemic. The acquisition gave us a very good experience, so this year we will continue the acquisition whenever the right opportunity comes up. Warren, you can go ahead and talk more about how we think about the pipeline

[Warren Wang:]

Yes. We have a, let's say, a strong pipeline for the acquisition of our franchisees. We basically divided them into three categories, first second and third, and we are now, let's say, we're talking to a few of them. And we are in the middle of negotiating all the terms. But, however, we are not -- let's say, not allowed to disclose anything right now. And, hopefully, we can announce some good news and file all these files recently. Thank you.

[Sheng Zhong:]

Okay. Thank you very much. That's very helpful.

[Lihong Wang:]

Thank you so much.

[Operator:]

And your next question comes from the line of Blake Lee from Aviation Investment. Blake, your line is now open.

[Blake Lee:]

Okay. Thanks for taking my question. Firstly, I want to congratulate RISE team that you have done great job on the number of new students enrolled in Q4. And my question is about the 2021 business outlook, and what our assumption is 2021 guidance based on? And is there any projection for near-term? Thank you.

[Warren Wang:]

Lihong, I'll take this. The guidance for the full year 2021 basically shows a resume wide range, due to the uncertainties of COVID-19 and the progress of our online, offline operations in this industry. As I mentioned in the script of ER that basically we were quite optimistic about the COVID-19 situations in this year. And also, we have – you can see that we have a strong results in this quarter. We've demonstrated that we recover from all these impacts and we are quite optimistic about this coming year. That’s the – again, let me readout the guidance for the 2021. We expect our revenue in the full year to be in the range of RMB 1,420 million to RMB 1,730 million. And for this quarter 2021 the Q1, as you'll probably know like, there's a slight COVID-19 impact in Beijing and the Shijiazhuang around the Chinese New Year, and so the revenue is around let's say, RMB 300 million because of the COVID-19. And – but the performance for this quarter will not represent the actual operating outcome and that's we have strong confidence than for the whole year guidance, we can make it. Thank you.

[Lihong Wang:]

Yeah, I'll just add some color for this year. As I mentioned, we right now have very strong operational capability delivering OMO model, which means that in normal situations, our higher grade classes will have online during weekday. And then all the weekend classes are delivered offline. However, if there's any COVID-19 situation comes up, we will switch the classes online. We can do that within a couple of hours. So in the case of Shijiazhuang and Beijing, basically the next day, every classes was put online. However, the online, as you know that has shorter time, therefore the revenue recognition will be some compromise or discount. That's why for the first quarter, we still don't know when Beijing will open, therefore will impact revenue recognition. However, with the capability to switch online, offline, also the ability to offer additional courses online, including the English small classes, plus the expansion plans, both on the network and the category, we feel 2021 will be a very exciting year. So, near-term maybe some fluctuation, but for the whole year, we have a very high confidence that we'll be able to deliver very strong results.

[Blake Lee:]

Okay. Thank you very much.

[Operator:]

Thank you so much. And our next question comes from the line of Joy Wei from 86Research. Your line is now open.

[Joy Wei:]

Hi management. Thanks for taking my questions. I have one more question. It's on the competitive landscape. So, how do management view the current competition environment. So, we noticed that certain AI classes are gaining popularity recently such as Zebra, AI cost, et cetera. So, how do management view the challenge this kind of new form player has brought? Thank you.

[Lihong Wang:]

Thank you. It's a very good question. On the competitive landscape, we definitely feel 2020 also onwards going forward will be very interesting. First thing first, we still see very strong demand for offline learning at the same time, combined with desire to have online exposure as well. So, on the offline side, in fact, we actually see fewer competitors. Some really cannot just survive during the pandemic and the people survived, especially like RISE offering OMO model becomes stronger. That's also why you see a very strong enrollment in fourth quarter. Normally, fourth quarter is not a peak season. However, the fourth quarter enrollment for us almost caught up with the third quarter of 2020. So, on the offline side, we feel very confident. We definitely are the top choices for parents and students. For online, there are more formats and players coming into the arena. I think Zebra as you mentioned, use AI to offer 15 minutes of classes -- class coaching and then they can offer at a very cheap price. The observation I have is that definitely attract a lot of young-aged kids and it's a very complementary courses to offline study. And in fact, during the survey, we can see that 30% of our students would have some form of online courses, either Zebra or a VIPKid. However, at the same time, the online students normally would also have one offline courses to complement that because the courses delivered online has a limited effect. So, going forward, we think these two formats will coexist. And even for RISE, as I mentioned during the presentation, we definitely see the demand, therefore we launched the 1

[Joy Wei:]

Okay. That's very helpful. Thank you.

[Operator:]

Thank you so much. And there were no further question at this time. And that does conclude our conference for today. Thank you all for participating. You may now disconnect.