RYB Education, Inc.
Q3 2019 Earnings Call Transcript

Published: 20 Nov 2019

[Operator:]

Hello, ladies and gentlemen. And thank you for standing by for RYB Education Incorporated Third Quarter 2019 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded.I would now like turn the call over to your host, Ms. Serena of Investor Relations Manager for the company. Please go ahead, Serena.

[Serena Xue:]

Thank you, Chuck, and hello to everybody on today's call. With me today here are Ms. Yanlai Shi, our Co-Founder, Director and CEO and Mr. Hao Gu, our CFO. As Chuck just mentioned, today's call is being recorded and a webcast replay will be available on the company's IR Web site at ir.rybbaby.com.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, 2018 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 third quarter 2019 earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.Now, I will now turn the call over to Ms. Shi for her to take us through the review and update on the business.

[Yanlai Shi:]

Thanks to all of you who have joined us today. As always, on today's call, I'll review our business and operating results for this past quarter, and Chris will then follow with a more detailed review of the numbers.During the third quarter of 2019, we continued to enrich the content of our existing educational offerings capped on innovating and diversifying our products and services, and making improvements to existing model, all in an effort to improve our operations efficiencies and to perpetuate opportunities presented in this ever evolving education market. That said, we remain fully committed to our strategic focus of balanced growth and to our mission of providing high quality individualized and age appropriate care and education to nurture and inspire our students for their betterment in life.In the third quarter of 2019, we continue to focus on attracting and retaining best talent and consistent investments in proprietary course research and development. We are also encouraged by innovations and enhancements made across aspects of our existing educational products, services and other offerings. In particular, we have seen progress in enhancement of our internal operations management system, and adding digital components to the educational products and services that we offer, resulting from our team's continued efforts. These actions are geared towards optimizing internal operational efficiencies, facilitating easier and better communication with families and constantly improving the end user and business partner experience.For example, our cross functional team explored new ways of facilitating parent teacher communication or rather the joint education of kindergarten and families. Our team set up a mobile based facility specific service account one by one, which has already been tested in around 100 facilities in our network. And we expect to roll it out to essentially all our facilities and achieve improved operations and efficiencies. These measures are also dedicated through sensing, serving and satisfying the needs of parents of each kindergarten.As we receive good feedback from parents, will make improvements to our system stability and keep our services more user oriented and more sensitive to user habits over time. This newly introduced interaction and operations management system also help us track data and performance more closely, improve the quality of services provided at our directly operated facilities and customize informational updates for individual parents.In the third quarter of 2019, stable enrollment of our directly operated facilities was contributed by an increase in number of students enrolled at our mature and ramping facilities, both at home and abroad. At the end of September, we had 30,184 students at our directly operated facilities, 31.2% year-over-year growth from 23,010 students last year. We expect the trend to continue as we open up more new directly operated facilities and as existing reach improved utilization domestically and abroad.We are also pleased with early results of introducing or integrating the multi-intelligent inquiry based learning experiences and future curriculum from Singapore to local facilities within our network in China, as these are also important baby steps for us to expand brand universe and an important move to serve the broader customer base now we have.We'll continue explore more ways of leveraging our brand portfolio advantage through dedicated and concerted efforts with Singapore operations in curriculum design, staff training, resource sharing and IT system integration. In addition, we'll route for Singapore team to explore and develop their own niche growth locally and in other region via organic expansion and/or by acquisition of merit.Moving on to our franchise play-and-learn center business. By the end of the third quarter, we had over 1,100 play-and-learn centers in operation, as we slow down the pace of extending our franchise network purposely and amplify existing center operational improvement. Given that, we're preparing for a new curriculum and sets of products during the quarter. While our vision for the long term growth and value has never been clearer, factors beyond our operational control has impacted results of this past quarter. For example, an overall decrease in discretionary spending.In addition to solidifying our existing content and offerings, the play-and-learn centers business team and R&D team are also in a process of getting our new line up play-and-learn center ready. With the efforts in course upgrades and franchisee optimization, looking ahead, we expect the sequential improvement in the performance and expansion of our play-and-learn center business in 2020.We stay focused on solidifying and expanding and making constant improvement to the educational offerings and services at our directly operated kindergarten and franchise play-and-learn centers. Additionally, we take our time and necessary steps and made continued efforts to course development, curriculum related trainings, facility operations and management manuals and so on, to improve new business initiatives, i.e. quality-oriented education and third-party kindergarten services. We look forward to introducing the above to the market once as completed and pass our internal assessment.To conclude, we believe that early childhood education market in China is still in its nascent stages of development, and there is a long runway with plenty of opportunities ahead. We believe that quality education will stand out and is pivotal to our long term growth, and to continuously creating value for the families and the society. We remain committed as ever to our founding mission and our values. We also made unremitting efforts to delivering quality content and curriculum, and improving our R&D capabilities.We'll stay focused on our balanced growth and leverage our multi-layered brand portfolio advantage to bring about many more new educational practices to early childhood education industry. Our ever improving comprehensive education solutions will meet the shifting needs of children of different ages and their families through structured courses at both our kindergartens and play and learn centers, as well as at home educational products and services.With that, I'll turn it over to our CFO, Chris, to provide highlights of our 2019 third quarter financial performance.

[Hao Gu:]

Okay, thank you, Grace and Serena. Next I'll go through our third quarter financial results. Please also refer to our earnings press release that we posted on the Web site already for a complete discussion of our financial performance for the past quarter. Please also note that our reporting currency is in U.S. dollars and our all percentage changes is on a year-over-year basis unless we otherwise state it.So for the third quarter this year, which is a typical low season for our business, our net revenue reached $43.7 million growing 24% year-over-year. This is thanks to the solid performance at our directly operated facilities. We recorded a healthy enrollment increase of 31.2% compared to the third quarter last year, as well as higher tuition fees. This is also due to a favorable shift in our students mix.So during the quarter, we opened up a total of five new kindergartens for business. And all of them are premium and international branded kindergartens and carry different brand names from RYB. They're all located in top tier cities in China. We believe the newly added facilities will add to an increasingly diverse brand portfolio for the company, and we're also hopeful that they will contribute to the solid performance of our directly operated kindergarten business segment going forward.However, on the other hand, as you noticed, our net revenue for the quarter were slightly below our guidance range, mainly due to the weaker results at our play and learn centers. This part of the business was affected by macro headwinds and weaker market demand, as mentioned by Grace earlier. In response, we have upgraded and diversified our course offerings for our franchisees in an effort to help them stimulate sales.Turning into margins. Our gross margin and operating margin reached 7.1% and a negative 10.2% during the quarter. Both improved from 3.5% and enacted 14.9% respectively from the same period a year ago. Going forward, we will continue to seek a balance of growth and profitability. In particular, we shall stay very disciplined on cost management and we will be more proactive in making strategic investments that will lead the way for our long-term growth and vision.Now moving on to our third quarter financials. Net revenue for the third quarter of 2019 increased by 24% to $43.7 million from $35.3 million over last year. Service revenue for the third quarter of 2019 increased by 26.8% to $39.5 million from $31.2 million for the same quarter of 2018. The increase was primarily contributed by increased tuition fees owing to a student mix shift, which is favorable to us and an increase in the number of students enrolled at our directly-operated facilities.The increase in student enrollment was driven by higher utilization ratio at our newer facilities and contribution from directly-operated facilities in Singapore. Product revenues for the third quarter of 2019 increased by 2.8% to $4.2 million from $4.1 million over the same period of last year. The increase was primarily due to an increase in the average selling price of our products related to the courses that we sold to our franchise centers.On the cost side, cost of revenue for the third quarter of 2019 was a total of $40.6 million, representing a [19.3] increase from $34 million for the same quarter in 2018. Cost of revenues for services for the third quarter of 2019 was $38.5 million compared with $31.9 million for the same quarter of 2018. The increase was primarily due to an increase in our staff compensation at our directly-operated facilities, as well as directly-operating costs as the company's facility work expanded. Cost of products revenues for the third quarter was $2.1 million, which remained flat compared to $2.2 million for the same quarter last year.Gross profit for the third quarter increased by 155.6% to $3.1 million. This is in comparison with $1.2 million for the same quarter last year. Gross margin for the third quarter of 2019 was 7.1% compared with 3.5% for the same quarter last year. The increase in our gross margin was primarily due to higher utilization rate as I mentioned at our directly-operated facilities, as well as increased average tuition fees from a favorable student mix shift and increased average selling price of our course related products offered by the company.Total operating expenses for the third quarter of 2019 were $7.6 million compared with $6.5 million for the same quarter last year. If we exclude share-based compensation expenses, operating expenses were $6.8 million, which represent an increase of 37.3% from $4.9 million for the third quarter last year. And then selling expenses for the third quarter this year were $0.8 million, which remains largely unchanged from last year.General and administrative expenses for the third quarter of 2019 amounted to $6.7 million compared with $5.6 million for the same quarter last year. Excluding share-based compensation expenses, G&A expenses were $5.9 million for the third quarter this year, representing a 45% increase from $4.1 million for the same quarter last year.The increase in the general and administrative expenses, excluding the SBC was primarily due to higher payroll expenses and additional expenses related to our Singapore business, which were acquired during the previous quarter by us. The share based compensation expenses included in the G&A expenses were $0.8 million for the quarter.Operating loss for the third quarter this year was $4.4 million compared with $5.3 million of operating loss for the same quarter last year. On an adjusted basis, operating loss was $3.7 million for the third quarter this year compared with $3.7 million of operating loss for the same quarter last year.And then net loss attributable to ordinary shareholders of RYB for this quarter was $3.3 million compared with $4.3 million for the same quarter of 2018. Adjusted net loss attributable to ordinary shareholders of RYB, which excludes the impact of $0.8 million of share based compensation for the third quarter of 2019, was $2.5 million. This is in comparison with $1.9 million for the same quarter last year.Basic and diluted net losses per ADS attributable to ordinary shares of the company for the third quarter of 2019 were $0.12 and $0.12 both, compared with both $0.15 respectively for the same quarter last year. Adjusted basic and diluted net losses per ADS attributable to ordinary shareholders of the company for the third quarter were both $0.09 compared with both $0.06 respectively for the same quarter last year.EBITDA for the third quarter of 2019 was a loss of $1.3 million compared with a loss of $2 million for the same quarter last year. Adjusted EBITDA for the third quarter of this year was a loss of $0.5 million compared with a loss of $0.4 million for the same quarter last year. This is basically an overview of our financial results for the past quarter.Next, I'll turn to our business outlook. For the fourth quarter of 2019, the company's management expects net revenue to be between $49 million and $51 million, representing a year-over-year increase of approximately 9% to 13%. The above outlook is based on our current market condition and reflects the company management's current and preliminary estimate of market and operating conditions, customer demands, as well as foreign exchange environment. All of these factors are subject to change.Thank you for your attention. That concludes my section on the financial results. Next, we will open up the call for questions. Chuck, please go ahead.

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator instructions]. And our first question will come from Elsie Sheng of Morgan Stanley. Please go ahead.

[Elsie Sheng:]

I have two questions on behalf of Zhong Sheng. The first question is regarding your guidance. You're guiding for the next quarter, their annual growth is lower. Can you give us more color on why this is the guidance? And the second question is about your plan of kindergarten opening. How many kindergartens do you plan to open for first quarter and for next year? Thank you.

[Hao Gu:]

Regarding y our first question, we did revise down our revenue guidance for the fourth quarter. And as I mentioned, the latest guidance range is between $49 million and $51 million. The decision to revise down the numbers mainly takes into consideration two impacts from our perspective. One is -- the first one is our play-and-learn center business is to deliver lower than budgeted revenue, which I'll discuss why shortly. And the second reason is, because of the slower new business initiative, which so far has not meaningfully contributed to our revenue for this quarter and next one.Well firstly, regarding the slower PLC business. Firstly, I would like to mention that we intentionally but slightly slowed down the expansion of our franchise play-and-learn center network. This is because we would like to fine tune and improve our existing brand image and operation of the franchise business, and also to provide better services to our franchise partners. Also, we are in the process of preparing and hope to launch a separate new premium brand for our PLC business. To a less extent, we do feel the impact from the broader macro headwind, and the fact that some parents are actually cutting back on discretionary spending on early childhood education for their kids. As a result, we're now providing a relatively conservative guidance for the next quarter.Also as for our new initiatives, as I mentioned, we do not expect significant revenue contribution from these new initiatives in the fourth quarter. This is because we're still in the process of evaluating the products and the content by the industry experts along with our business teams. So for 2020, we currently do not have any guidance yet. But for the fourth quarter, we're actually providing the market with a relatively conservative range for our revenue. Hopefully, this answers your first question.Regarding second question, if I remember correctly, you're asking about our kindergarten expansion plan for the fourth quarter and next year. So first of all, if you recall, we had a total of seven brand new premium and international branded kindergartens that were newly up set up during the first three quarters. And five of them are actually just opened up for business during the past quarter. So this number -- the total number of these new kindergartens are pretty much in line with our internal budget number.So in terms of opening up new kindergartens or acquiring existing ones, we're able to source and identify actionable opportunities in the market through various channels, either through our internal team or through external advisors. But of priority for us, we look for kindergarten targets that are; first of all, they have to be full profit nature; they are premium and international branded; and also, we would only consider kindergartens located at commercial properties.So as I mentioned, we had a total of seven new kindergartens that are still in the early ramping up stage, all of them are brand new kindergartens. These will be one of our key operational priorities over the next few quarters. I think once they reach a mature stage with significant student enrollment number then we would expect them to remarkably contribute revenue for our kindergarten business. So then back to your question looking into the fourth quarter and 2020 you know for our expansion we would only focusing on opening up and acquiring premium and international branded kindergartens. At this stage, we actually already have a couple of actionable targets that we are expecting or internally negotiating with the sellers.We do have couple of key factors to consider in our criteria, and they include price of the kindergartens, the quality and location of the physical facility, curriculum, their content quality and most importantly, we do care a lot about the team, whether the team is capable of running the facility efficiently. So for 2020, the number of newly opened or acquired facilities under our budgets, we would expect them to be not lower than the number we had in 2019. So in essence, we expect to open or acquire more facilities over the next year.And lastly, I would also like to mention about of Singapore business. As everybody knows, we acquired a network of Singapore kindergartens about a year ago. So in Singapore as well as other overseas markets, we are also very keen to acquire high-quality kindergartens. We currently also have a few targets that we are assessing already. And similar to our plan for China, we will also continue to expand our network in overseas markets by either opening up new facilities or through bolt-on acquisitions. So this is pretty much our plan for -- on the new facility set up front for the coming quarter and next year. I don't know if this answers your question, Elsie.

[Elsie Sheng:]

Yes, it's very clear. Thank you very much.

[Operator:]

Our next question will come from Alex Xie of Credit Suisse.

[Alex Xie:]

So I think in the prepared remarks and earnings release, you mentioned you are going to upgrade and diversify the cost offering, particularly I think for your franchise business. So would you please share more details about the upgrades in the strategy and diversifying cost offerings? Thank you.

[Yanlai Shi:]

So having in mind of these evolving market conditions, we'll further solidify our advantageous position in regions and cities where our existing operations already have a good preference. We also firmly believe that our distinct products and services and also other educational offerings will continue to appeal to quality play-and-learn center operators in the market, and will help us stay on track of our long term growth trajectory. Our franchise play-and-learn center business are widely distributed in Tier 2, Tier 3, Tier 4 cities. That said, we shall further our competitive advantage in those regions, opening up more new franchise centers and it also gradually expands to new areas and cities where our brand currently haven't entered.For the franchise play-and-learn centers in operation, we'll also gradually launch planned adjustment and system upgrades so as to help franchisees better present their services to the local market and at the same time, to provide more marketing and operation support and so as to help them generate more revenue.In addition, we're in preparation for a separately developed new line or rather new brand of play-and-learn center using different set of future courses and enrichment and training programs. Under this differently positioned play-and-learn center line, we'll offer a brand new set of curriculum and operations and management system and also corresponding support. Thank you for the question, Alex.

[Operator:]

As there are no further questions, now I'd like to turn the call back over to the company for closing remarks. Please go ahead.

[Serena Xue:]

Thank you, Chuck. Thanks everyone for joining us today. If you have any further questions, please do not hesitate to contact us at IR at rybbaby.com. We hope you have a great day. See you on the road. Thank you.

[Operator:]

This concludes the conference call. You may now disconnect your lines. Thank you.