RYB Education, Inc.
Q2 2020 Earnings Call Transcript

Published: 28 Aug 2020

[Operator:]

Hello, ladies and gentlemen, thank you for standing by for RYB Education, Inc.'s Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to your host, Serena, Investor Relations manager for the company. Please go ahead, Serena.

[Serena Xue:]

Thank you very much. Hello to everybody on today's call. Today on the call are Ms. Yanlai Shi, our Co-Founder, Director and Chief Executive Officer; and Mr. Hao Gu, our Chief Financial Officer. Our earnings press release was issued earlier today through newswire services and is also posted on our Investor Relations website, ir.rybbaby.com. On our website, you will also find a webcast replay of today's call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended December 31, 2019, and other filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. During this call today, management will also discuss certain unaudited non-GAAP financial measures for informational purposes only. The company's second quarter 2020 earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. Now I'll turn the call to Ms. Shi for her to take us through a review of the second quarter and provide updates on the business.

[Yanlai Shi:]

Thank you to all of you who have joined us today. I'll begin by reviewing our business and operating results for the second quarter of 2020. Then our Chief Financial Officer, Chris, will follow with a more detailed review of the financials. During the second quarter, in the face of prolonged facility closure due to impact of COVID-19 pandemic, we've taken various actions to mitigate impacts, including measures to ensure the health and safety of the students and families and optimized personnel and control discretionary spending. Moreover, we continued efforts in our digital transformation, maintained ongoing communication with parents and students and further actions to build out and strengthen our comprehensive early childhood education solution. In terms of our digital strategy in the second quarter, we continued to enhance our online service capabilities to ensure that students would have undisrupted remote access to high-quality at-home learning resources and to a good collection of early childhood education concepts, following the initial launch in the first quarter of our paid course platform for kindergartners. During the second quarter, the team further added content offerings available on the platform. We simultaneously carried out a pilot promotion of this platform for enrolled students on some directly operated kindergartens, and their parents provided positive feedback. With the help of this platform and most of our facilities across regions back to normal operation over time, we'll push forward the online-merge-offline practice for learning at the kindergarten level. While still in its very early stage, I believe this platform will help us better upgrade our service quality as part of our digitalization efforts in kindergarten services. With a complete and polished content platform fully established in the future, we look forward to exploring its potential to be adopted across market. We also worked on initiatives, including kindergarten and play-and-learn center service management and early-years child care services. We completed planning for a service management model for third-party kindergarten and play-and-learn center operations. We plan to leverage our integrated online-merge-offline model and expand existing services by this service management model. Through this service management model, we can deliver high-quality content, standardized management systems and targeted training to a broad range of facility operators in a systematic manner with modularized offerings. We believe this can also help reinvigorate the industry. In addition, we kicked off our early-years child care business, an initiative for children under three year old and for which we have been doing market research, developing educational content and assembling a team of expertise for early three years, for the nearly three years. We've gradually accumulated experiences and certain know-hows in curriculum, staff training, facility operations and management and in building a program with special considerations to combining care, education and medical care and treatment. Starting in the second quarter of 2020, we have launched and plan to continue a number of promotional events for our early-years child care business, given its positive early reception, with a supportive policy environment for early-years child care services, along with our core strength and network presence. We're confident to see further growth in this service unit and it becoming an integral part of a refined and extended service offerings for 0 to 6 year-olds. Now let me share some insights on our kindergarten and play-and-learn center business. First, I'm pleased to report that by the end of the second quarter, 75% of the company's directly operated kindergartens in China and Singapore and over 70% of franchise play-and-learn centers have resumed operations. Student attendance rate has been satisfactory and met our expectations. This number reflected the loyalty of the families we serve and trust from parents in us in the reopening process. As we always put the health and safety of our students as the highest priority, we'll continue exerting all efforts to meticulously follow pandemic prevention guidelines and implement measures and requirements issued by related governing departments. Next, on to the enrollment of our directly operated kindergartens for the upcoming semester starting this September. Since the COVID-19 pandemic, we have proactively introduced ways of enrolling students via both online and off-line channels. Through kindergarten-specific official accounts and facility service apps, we keep effective and continuous communication with parents. This includes those whose children have already started attending and those who have enrolled their children, but have not yet started in addition to prospective students and parents. Our communication efforts not only keep current parents updated regularly of the kindergarten operation, but also have potentially contributed to a boosted ratio of referrals. For facilities that have resumed operations, we host a hybrid of online consultation and off-line site visits for parents. For those that have not yet resumed normal kindergarten operations, we adopt a fully online enrollment marketing strategy and with the help of technological tools, arrange online virtual site tours and online promotions. Enrollment and admissions-related efforts are also an integral part of the services we provide. Through a friendly and efficient recruitment process at the kindergarten, we instill a welcoming atmosphere that is important in the early stages of engaging potential parents, laying the foundation for future visits and better lease and conversion rates once normal operation is resumed at those not-yet-reopened facilities. The enrollment results in most of our directly operated kindergartens has met our expectations compared to our internal annual budget made at the beginning of this year, and we'll continue to make smooth progress. We intend to carry on with more proactive enrollment activities. Moreover, our kindergartens have planned for an eventful summer vacation. For example, we offered preschool bridging courses, special graduation activities and summer season events through the integration of online and off-line research. By doing so, we hope to increase summer attendance and financial performance for our facility. Moving on to our franchise play-and-learn center business. As mentioned previously, as of the end of June, we saw approximately 70% of franchise PLCs reopened, and we expect to see 90% total reopening by the end of August. The sudden outbreak of COVID-19 and the pandemic costed impact in our franchise network expansion in the first half of this year. We've seen gradual improvement in franchise network expansion efforts started to resume in the second quarter. We believe we are well positioned to win more market interest and expand our franchise networks through leveraging our core strengths in content, existing network and our long-standing relationship with our franchisees. We'll continue our communication with current franchisees and provide additional training and supervision support in order to enhance their loyalty and engagement levels. Together, we're confident that our franchisees will be able to achieve normal operational levels after their play-and-learn centers reopen. In addition, we continue to strengthen the online-merge-offline model for our play-and-learn center business. As mentioned in previous calls, our family education app, iLoveGrowth, an online service platform to provide high-quality educational content and product, has already attracted more than 300,000 registered users. The app helps make structured parent-child interactions and home education times easier for parents to manage while also providing our franchisees with added opportunities to engage with parents and students to increase program loyalty. In the future, we look forward to further building out and promoting our digital strategy, exploring new monetization avenues and growth initiatives and continuing to contribute to the greater good of children, their families and communities by delivering high-quality educational services and offerings. With that, I'll turn it over to our Chief Financial Officer, Chris, to provide highlights of the second quarter financial results.

[Hao Gu:]

Thank you, Grace and Serena. I will now go through our second quarter financial results. Please also refer to our earnings press release posted on our IR website for a complete discussion of our financial performance. In the second quarter, the company's revenues came under pressure as the prolonged facility closures were observed due to the COVID-19 impacts across the regions that we operate. Our net revenue for the quarter were $12.8 million, which is a 76.2% decrease from the same time last year. And our operating cash outflow for the quarter was $5 million. However, we actively executed stringent measures to reduce expenses and expenditures and control our cash outflow. We carried out multiple rounds of optimization to improve labor efficiency at headquarter level, especially in our back office departments. We also implemented strict protocols for professional fee services expenses, travel and other expenses, while we also defer nonessential capital expenditures to preserve the company's financial flexibility and liquidity. As at the end of the second quarter, we had a total of $48.3 million of cash and cash equivalents. We believe that we still have sufficient liquidity to navigate through the COVID-19 impacted period. Our directly operated facilities have started to resume operation in the second quarter. With the upcoming semester starting in September, we expect to see significant improvement in the company's operating cash flow. We are also pleased that the end of the second quarter, with the exception of facilities in Beijing and Dalian. Facilities in other regions and areas operations have also reopened. Thanks to the comprehensive planning beforehand and the meticulous advanced preparation, we're happy to report a satisfactory attendance rate or what we call rate of return to our facilities of approximately 80% as compared to the pre-COVID-19 enrollment level. Additionally, for the facilities in Beijing, related government authorities have also recently announced a clear schedule for reopening in early September. Our faculty and staff members have made preparations, and we're ready to welcome students back to kindergartens once those facilities reopen. In the process of upgrading our services and our business transformation, we will make use of the advantages of our existing facility network and enrollment and as well as leverage other resources to achieve better performance and long-term growth. Now I'll move on to the second quarter financials. As I mentioned, net revenue for the second quarter decreased by 76.2% to $12.8 million from $53.6 million for the same quarter of 2019. Services revenues for the second quarter were $11.6 million compared with $48.2 million for the same quarter of last year. The decline was mainly attributable to decreased tuition fees due to the temporary closure of our facilities in China. Although over 60% of direct-operated facilities have gradually resumed operations, starting from late May, they remained closed for the most part of the quarter. Franchise services revenues also decreased due to the slowdown of play-and-learn center franchise network expansion and lower revenue generated from franchisees as the vast majority of them have just resumed operation this quarter. Product revenues for the second quarter were $1.2 million compared with $5.4 million for the same quarter last year. The decrease was due to much smaller merchandise sales through the company's franchise network as they have also just resumed operations during the late period of the second quarter. Cost of revenues for the second quarter was $22.3 million, which is 46.4% decrease from $41.6 million for the same quarter last year. Cost of revenues for services for the second quarter was $21.8 million compared with $38.8 million for the same quarter last year. Again, the decrease was mainly driven by a decrease in direct costs as those facilities remain temporarily closed during most period of the quarter. And various cost control measures have been taken by the company in response to pandemic, such as reducing labor costs and discretionary spending, especially for business initiatives facing more serious negative impact in the short term. Cost of product revenues for the second quarter of this year was $0.6 million as compared to $2.8 million for the same quarter last year. This was generally in line with the decrease in product revenues. Gross profit for the second quarter was $9.5 million compared with gross profit of $11.9 million same period last year. Total operating expenses for the second quarter were $5.4 million compared with $6.6 million same quarter last year. Excluding share-based compensation, operating expenses were $4.6 million, which is a decrease of 18.6% from $5.7 million for the same quarter last year. Selling expenses for this quarter were only $100,000 compared with $700,000 for the same quarter last year. General and administrative expenses for this quarter were $5.3 million, which is a 10.2% decrease from $5.9 million for the same quarter last year. Excluding share-based compensation, general and administrative expenses were $4.5 million for the second quarter, which is a 9% decrease compared with $4.9 million last year. The decrease in G&A expenses, excluding share-based compensation, was primarily driven by the decrease in G&A expenses in China as a result of our efforts on cost control. The share-based compensation expenses included in the G&A expenses were $0.8 million for the second quarter. Operating loss for the second quarter was $14.9 million compared with a $5.3 million of operating profit for the same quarter last year. Adjusted operating loss was $14.1 million for the second quarter compared with $6.3 million of adjusted operating profit last year. Net loss attributable to ordinary shareholders of the company for this quarter was $12.8 million compared with an income of $2.9 million last year. Adjusted net loss attributable to ordinary shareholders of RYB, which excludes the impact of $800,000 of share-based compensation, was $12 million for this quarter compared with a $3.9 million of income last year. Basic and diluted net loss per American depository share attributable to ordinary shareholders for this quarter were both $0.46 compared with net income of $0.11 and $0.10, respectively, for the same quarter last year. Adjusted and diluted net loss per ADS attributable to ordinary shareholders for the second quarter were both $0.43 compared with $0.14 and $0.13 for the same quarter last year. Our EBITDA for the second quarter was a loss of $10.2 million. Adjusted EBITDA for this quarter was a loss of $9.4 million. Based on our current estimates, for the third quarter of this year, the management expects the net revenue to be in the range of $27 million to $28 million. This outlook is based on the current market conditions and the management assessment of our business recovery, which is still subject to change given the dynamic impact of the COVID-19. Thank you for your attention. We will now open the call to questions. Operator, please go ahead. Thank you.

[Operator:]

[Operator Instructions]. The first question comes from Elsie Sheng of Morgan Stanley.

[Elsie Sheng:]

I have a question about your 3Q guidance. What rate of off-line resumption that you assumed to get this revenue guidance and what rate of student returning to off-line?

[Yanlai Shi:]

So let me start answering this question. So in recent months, we see most parts of the country have contained outbreak of COVID-19. And as a result, by the end of this second quarter, most of our directly operated kindergartens and most of our franchise PLC centers have successfully resumed operations. In the process, our students and their parents have entrusted us and shown us tremendous support. Our faculty and staff members have also made great efforts to make a safe return to facilities not only possible but also smooth and effective. So to be exact, at the end of June of 2020, 75% of our directly operated kindergartens and about 70% of the franchise facilities have resumed operations. And the rate of return to facility is generally in line with our expectations, and we see that rate to 80% by the end of July. The numbers reflect the enrollment loyalty and also the trust of parents in the process for our kindergartens in Beijing. The Education Bureau also announced a definitive schedule for reopening in early September. As we always put the health and safety of our students as priority, we'll continue to exerting all efforts to meticulously follow epidemic prevention guidelines and implement measures and requirements by related educational governing departments. So as I mentioned earlier, the enrollment of our directly operated kindergartens for the upcoming semester starting in this September, to begin with, given the onset of the COVID-19 pandemic, we've actively introduced ways of enrolling students via both online and off-line channels. We keep an effective and continuous communication through kindergarten-specific official accounts and service apps of the facilities the student parents including those who have already started attendance and also who have already registered but not yet started attending and also prospective students and parents. Our communication efforts not only keep current parents updated regularly, but also might have contributed to a boosted ratio of referrals. Some of our directly operated facilities hold a hybrid of online consultation and off-line site visits for parents, where those facilities have resumed operations. And in other, where the kindergarten operation has not yet resumed, we adopt a fully online enrollment strategy. The enrollment and admissions-related efforts as an integral part of the service that we provide, the online recruitment and a feeling of effective service in early stage towards potential parents lay a good foundation for the future conversion once the facilities start to resume. The enrollment number in most of our directly operated kindergartens have met our expectation respective to the annual budget made at the beginning of this year and is making smooth progress. We intend to carry out with more proactive and strategic enrollment activities to promote admission and to be able to share our accumulated educational resources and experiences in early childhood education with more students and parents. Some areas are still subject to ongoing impact of COVID-19 and other factors. So as a result, enrollment promotion activities cannot be carried out 100%. So these areas, we have planned for corresponding enrollment strategies and believe that their facility enrollment will start to pick up once operation is resumed and over time will eventually meet the expected number of enrollment set at the beginning of the year. In addition, what we also have done to boost summer attendance, including the following

[Operator:]

[Operator Instructions]. The next question comes from [indiscernible].

[Unidentified Analyst:]

I have two questions. The first question is, you mentioned about the launch of 30-year-old child care business, which many other market players are trying to develop as well. Can you give some more information about the child care business such as current status and TAM? Can management comment on the recovery of the franchise business during the COVID-19 period so far? And how should we think about its outlook?

[Yanlai Shi:]

As I mentioned on previous conference calls, that we have selected early years child care as one of our new initiatives after thorough investigation and analysis of the evolving market conditions and demand, we've also started to promote the brand after a period of three years of preparation. Last year, in May, the General Office of the State Council issued the guidance on promoting the development of care services of infant and children under three years old. The guidelines and other related regulations aim to build a safe, suitable and service accessible community for infants and children under three years old, which is highly in favor of early years child care business development. So before our early year education business launch to the market, we have actually started preparation since a little bit over two years, almost three years ago. We have gradually accumulated experiences and certain know-hows in content, curriculum, staff training, facility operations and management and also in building a program with special considerations to combining care, education and medical care and treatment. With supporting policy environment and combining our strength and network presence, we're confident to see further growth in the service option. In the second half of 2019, we actually set out two directly operated early-years child care centers for the pilot period. In August, this year, we launched two marketing and promotion events and signed up close to 50 new contracts. Market reception at this point is very good. In the second half of 2020, we look forward to a greater performance from the early-years child care business operation.

[Hao Gu:]

Thank you, Serena. So I'll take the second question about the recovery of our franchise business and how we think about its future development. So indeed, our franchise centers, our franchise partners were also heavily impacted by the COVID-19 pandemic since its outbreak in the first quarter and pretty much throughout the entire second quarter. So I think the priority of our work during these two quarters are basically to try to maintain the stability of our franchise network and provide as much services and support as we possibly can to help our franchisees navigate through this difficult period of time. So specifically, I think Grace have also briefly mentioned on the call, but we have adopted several measures, supportive measures to help franchisees. Firstly, we shared online high-quality education content with our franchise partners. Recently, we also put more effort on the online content updates of our iLove app application as well as embed various educational programs into the iLove app to improve user experience. We also believe that the educational content and improving user experience will help our franchisees achieve unique and effective communication with their members. So hopefully, the trust built in this process between the franchise centers and their members will contribute to additional course purchases and even referrals of new members in the future. And secondly, I think we also provided effective supervision services and other training services online to our franchisees partners across the country. And very importantly, because during the COVID-19 period, the local governments have announced a series of provincial policies, so we worked with our franchise partners to help them clarify their question in this regard and also help them take advantage of these preferential policies such as rental reductions, et cetera. And also to show our determination to fight against the pandemic, together with the franchise partners, we also decided to waive a total of three months annual fee for our existing franchise partners. So that's basically the supportive measures that we took. So in terms of the scale of our network or the number of franchise centers by the end of the second quarter, we had a total of 1,162 franchise centers. And this number is -- we still see a slight increase from the number that we had at the end of last quarter. So basically, again, our franchise network is still stable at this point. And also in the prepared speech that we mentioned just now, by the end of the second quarter, the rate of the franchise kindergartens that have resumed operations achieved close to 70%. And as of now, I think by the end of the third quarter, i.e., by the end of September, this ratio can achieve close to 90%. So I think with the situation of the COVID-19 gradually getting under control in China, we expect our marketing and promotion activities will resume gradually as well. In order to resume more swiftly, our sales team has drafted a series of sales and promotion plans. For example, a few weeks ago, our North China sales team have rolled out a series of promotional activities to convert the sales. So looking into the rest of the year and also into 2021, and generally speaking, I think the fluctuating macroeconomic environment and the evolving early-child education market and the recent COVID-19 epidemic might still continue to cast impacts on our franchise play-and-learn center business. But I think in the long run, having in mind the evolving market condition, we still believe that the early education spending has been and always will continue to have a significant part of family expenditure and that we are facing only short-term challenges and we will have greater opportunities and potentials in the long run. So I think we will continue to take advantage of our existing strengths in regions and cities that our existing operations already have a good presence. We also believe that our distinctive products and services will continue to appeal to quality play-and-learn center operators in the market. And also our centers are also widely distributed in Tier 2, Tier 3 and Tier 4 cities. That said, we will further enhance our competing advantages in these regions and continue to open up franchise centers and also expand to new areas that our brands haven't entered as of now. Also, I think we mentioned in the past quarter that we are in the process of preparing a new premium brand for our franchise PLC business. And we think this effort will hopefully bear fruit over the next few months.

[Operator:]

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks.

[Serena Xue:]

Thank you. Thanks to everyone for joining us today. If you have any further questions, please do not hesitate to contact us at [e-mail]. We hope you have a good day and a good night. Thank you.

[Operator:]

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