RYB Education, Inc.
Q4 2019 Earnings Call Transcript

Published: 31 Mar 2020

[Operator:]

Hello, ladies and gentlemen. Thank you for standing by for RYB Education Inc.’s Fourth Quarter and Full Year 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. [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. Hello to everybody on today’s call. With me today are Ms. Yanlai Shi, our Co-Founder, Director and Chief Executive Officer and Mr. Hao Gu, our Chief Financial Officer. As operator just mentioned, today’s call is being recorded and a webcast replay will be available on the company’s IR website 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 maybe 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 fourth quarter and full year 2019 earnings press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.Now, I will turn the call 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. I will review our business and operating results for the fourth quarter and full year 2019 and then our CFO, Chris will then follow with a more detailed review of the financials.In the fourth quarter of 2019 in the face of many challenges in the overall market, we continued to focus on growing our core businesses, improving the educational quality of our educational offerings and services, increasing operational efficiencies, achieving higher levels of customer satisfaction and finally, exploring new business initiatives.At the end of December 2019, we had a total of 30,806 students enrolled at our directly-operated facilities, an increase of 30.4% year-over-year from 23,627 students at the end of 2018. This growth was primarily driven by the facility network expansion as well as increasing utilization at our facilities both domestically and overseas.Throughout the year of 2019 we carried out our brand portfolio strategy and respond to the diverse needs of students and families, while actively supporting new regulatory policies of early childhood education. In 2019 specifically during the second half, we have made enhancements in the existing premium international early education services at our facilities on solid foundation of the dedicated operations and performance of our mass-market oriented kindergartens and inclusive facilities. With our domestic operational and educational know-how piggybacking off the strong brand equity, bilingual education and dovetailing of our Singapore operations, we upgraded several existing locations and has opened new ones that now offer reinvigorated bilingual education to students. Going forward, we are confident that they will not only help us cater to the very needs of families and students but also broadened our student base and substantially generate incremental revenues and profit.Additionally, we continue to make news progress integrating business operations across multiple geographies through resource sharing, IT system integration and enriching our suite of diversified product and services. Our Singapore business also will serve as an additional corporate base for talent development, principal and staff training and in exchange foreign location for best practices in early childhood education. In 2020, we will further execute on this integrate and explore more methods for collaboration targeting additional synergies between our domestic and overseas business so that we may better serve our students and their families.The Singapore operation has also been making its own steady progress which resulted in healthy growth in 2019. With its unique geographical location, it is well positioned to organically expand its existing educational services and offerings to surrounding countries and regions and to serve the needs of bilingual education in the educational space. As for the Singapore market, we also pursue high quality acquisition opportunities further leveraging the talented local team and solid track record in early childhood education research and promoting the growth of our Singapore operation.Moving on to our franchise play-and-learn center business, by the end of the fourth quarter of 2019, we have more than 1,100 play-and-learn centers in operation. As we discussed in our third quarter earnings call, we have proactively slowed down the pace of adding new PLC franchisees during the second half of 2019 focusing instead on upgrading our products, services and content offerings for existing franchise partners. Going forward, we are emphasizing deeper penetration in cities and regions where we already have strong market leadership gradually establishing our presence in new areas, strengthening promotional efforts and homing in on recruitment and service support comprehensively for our PLC franchisees to deliver better performance. Overall, we are optimistic that early education spending will still remain a top priority for family budget and parent spending.In addition to focusing our core kindergarten and play-and-learn center business, in 2019 we also pursued new initiatives centering our overall strategy to build a global education ecosystem empowered by technology. Towards a better and more effective integration of online-merge-offline service for families, our self-developed mobile application, I Love Family education app, offers structured quality educational content, easily accessible to students and families. With rapid changes in educational practices and constant deliveries of all sorts of information nowadays we hope that with the help of this mobile app we can facilitate this generation of young parents parent-child interaction, family education and children’s early education jointly at kindergarten and at home. We aim to fulfill the evolving needs of parents and hope to receive good user feedback over time. We think that with meaningful amount of user traffic in the future the app has its potential of generating revenue.Lastly, I would like to personally talk about the measures and actions we have taken since the coronavirus outbreak. Over the past two months, China has fought with tremendous courage against the coronavirus outbreak. As the responsible corporate citizens, we have taken heightened measures regarding facility security and health management seriously, including first, the quickly established response working group setup a health status mechanism and system for the company and the facilities nationwide to track the health conditions of students, their families and of our staff which is updated on a daily basis. Second, our established working group at our headquarters has quickly prepared emergency supplies and coordinated with regional offices to ensure local distribution to our facilities across the country plus our headquarters has given heightened support for facilities in Hubei province, the epicenter in China where 13 kindergartens and 54 play-and-learn centers are located. Third, provide guidance on academic prevention and control to facilities across the nation and issued internal guide on COVID-19 epidemic prevention and control specific to headquarters, kindergartens and PLCs and requiring facilities to comply and implement the measures thoroughly.Since we have been having a technical issue with Serena’s line out, I will briefly translate for Grace on the paragraph that she just commented on. We have worked diligently to provide our students and the families with continuous co-parenting support resources, which facilitate at-home learning and parent-child interaction. In an effort to maintain educational continuity for families and teachers affected by the facility closures, we have provided free access by our self-developed mobile app and collaborating third-party platforms to an entire library of home education content.In particular, in early February, we launched a series of online educational content comprising of 10 learning modules for our kindergartens. This approach has proven to be very popular reaching over 100,000 students in total. For franchise play-and-learn centers we also offered a 99-day free access to education content on the I Love App, which attracted over 300,000 registered users to-date. Other parts of the efforts also include additional online training for our teaching staff during this time. We are in frequent communication with parents, teachers and staff. We are actively communicating our actions and plans and getting feedback from parents in this difficult time.Going forward, we will continue to execute our growth strategy by focusing on our core operations advancing our digital transformation which leverages self-developed platforms and external resources and developing new and innovative ways to serve children and families.With that, I will turn it over to our Chief Financial Officer, Chris to provide highlights of fourth quarter and full year financial results of 2019.

[Hao Gu:]

Thank you, Grace and Serena. Now, please allow me to go through our fourth quarter and full year 2019 financial results. Please also refer to our earnings press release posted on our IR website for a complete discussion of our financial performance over the past quarter and the past financial year.In the fourth quarter of 2019, the number of students enrolled at our directly operated facilities reached 30,806 students and our net revenues grew 12.7%. Our gross profit in the fourth quarter increased by 24.8% as compared with the same period last year while operating income were $3.3 million versus an operating loss of around $130,000 during the fourth quarter of 2018. For the full year 2019, we delivered a decent increase of 16.5% in revenues and a positive operating cash flow of $13 million as compared to $800,000 during 2018.The health and welfare of our children and families we serve is of our highest priority. Over the past couple of years, we have invested in initiatives to enhance teacher training and upgrade our operating systems. Today, we have a very solid professional foundation in place that allows us to respond effectively to unexpected developments such as the COVID-19 outbreak. Despite the temporary suspension of some of our operations as a result of the disease we remain confident that the resilience of our business. By further integrating technology into our offering, we are pressing ahead with our company-wide digital strategy to drive education innovation. We see this as a viable way for us to provide a wider spectrum of products and services and diversify revenue stream. Technologies will also allow us to achieve a better cost structure and improved operating efficiencies ultimately to deliver long-term profitable returns for our investors.Now, moving on to the fourth quarter financials, net revenues for the fourth quarter of 2019 increased by 12.7% to $50.7 million from $45 million for the same quarter of 2018 service revenues for the fourth quarter of 2019 increased by 21.3% to $46.6 million from $38.5 million for the same quarter of last year. The increase was primarily contributed by student enrollment game indirectly operated facilities in ramp up stage and from directly-operated facilities in Singapore. Franchise services revenues also increased due to the expansion of our franchise network and an increase in average franchise fee. Product revenues for the fourth quarter of 2019 decreased by 37.4% to $4.1 million from $6.5 million for the same quarter last year. The decrease was primarily due to a decrease in the amount of merchandise that we sold through the company’s franchise network.Cost of revenue for the fourth quarter of this year was $40.9 million, which is a 10.2% increase from $37.1 million for the same quarter of last year. Cost of revenues for services for the fourth quarter of this year was $39.1 million compared with $33.6 million for the same quarter last year. The increase was primarily due to higher staff compensation and operating costs such as rental and material consumption as we continue to moderately expand our facility network including directly operating facilities in Singapore that we acquired during the second quarter of last year. Cost of products for the fourth quarter of 2019 was $1.8 million compared with $3.5 million for the same quarter of 2018. The decrease was generally in line with the decrease in product revenue gross profit for the fourth quarter of 2019 increased by 24.8% to $9.9 million compared with $7.9 for the same quarter of 2018.Gross margin for the fourth quarter of 2019 was 19.4% compared with 17.6% for the same quarter last year. Total operating expenses for the fourth quarter were $6.5 million compared with $8 million of the fourth quarter of 2018 excluding share-based compensation expenses, operating expenses were $5.6 million, representing a decrease of $17.6 million % from $6.8 million for the fourth quarter of 2018. Selling expenses for the fourth quarter were $700,000 similar to the amount for the same quarter of 2018.General and administrative expenses for the fourth quarter were $5.9 million which is a 20.2% decrease from $7.3 million for the same quarter of 2018. Excluding share-based compensation expenses, general and administrative expenses were $5 million for the fourth quarter of 2019 compared with $6.1 million, for the same quarter of 2018. The decrease in our G&A expenses, excluding share based compensation expenses was attributable to our most stringent cost control measures the share based compensation expenses included in G&A were $900,000 for the quarter.Operating income for the fourth quarter were 3.3 million as compared with $100,000 of operating loss for the same quarter last year. Adjusted operating income was $4.2 million for the fourth quarter compared with $1.1 million of the fourth quarter of 2018. Net income attributable to ordinary shareholders of RYB for the fourth quarter were $200,000. This is in comparison with $600,000 for the same quarter of 2018 as adjusted net income attributable to ordinary shareholders of RYB, which excludes the impact of $900,000 of share-based compensation expense for the quarter, was $1.1 million, which is in line with the $1.1 million that we had for the fourth quarter of 2018.Basic and diluted net income per ADS attributable to ordinary shareholders for the fourth quarter this year, were both $0.01. This is in comparison with basic and diluted net income per ADS attributable to ordinary shareholders of $0.02 for the same period of 2018 as adjusted basic and diluted net income per ADS attributable to ordinary shareholders of RYB for the fourth quarter of 2019 were both $0.04 compared with $0.04 and $0.03 respectively for the same quarter of 2018. EBITDA for the fourth quarter of 2019 was $6.7 million as compared with $4.3 million for the same quarter of 2018. Adjusted EBITDA for the fourth quarter was $7.6 million compared with $5.5 million for the same quarter of 2018.Now, moving on the full year of 2019, net revenues for 2019 were $182.3 million compared with $156.5 million for 2018. Services revenues for the full year of 2019 were $166.2 million compared with $139.2 million for 2018. The increase was primarily attributable to increased tuition fees to a student mix shift, enrollment increase at our directly-operated facilities and contribution from acquired facilities in Singapore. Product revenues for the full year were $16.1 million compared with $17.3 million for 2018. The decrease was primarily due to a decrease in the amount of merchandise that we sold through the company’s franchise network.Cost of revenue for the full year of 2019 was $155.5 million compared with $130.9 million for 2018. Cost of services revenues for the full year of 2019 was $147.7 million compared with $121.5 million for the year 2018. The increase was primarily due to an increase in staff compensation and higher operating cost such as rental and material consumption as we continue to modestly expand our facility network. Cost of products revenues for the full year of 2019 was $7.9 million compared with $9.3 million for 2018.Gross profit for the year of 2019 was $26.7 million compared with $25.6 million for 2018. Gross margin for the full year of 2019 was 14.7% as compared with 16.4% for 2018. Total operating expenses for the full year were $26.6 million compared with $28.7 million for 2018. And if we exclude share-based compensation expenses, operating expenses were $22.6 million compared with $22.1 million for 2018. Selling expenses were $2.8 million for the full year of 2019 compared with $2.2 million for 2018.General and administrative expenses for the full year of 2019 were $23.8 million compared with $26.4 million for 2018. Excluding share-based compensation expenses, G&A expense were $19.9 million for the full year of 2019 compared with $19.9 million for the 2018 despite network expansion and this is in greater extent, thanks to our stringent cost control measures.Operating income for the full year of 2019 was $200,000 compared with operating loss of $3 million for 2018. Adjusted operating income for 2019 was $4.1 million compared with $3.7 million for 2018. Net loss attributable to ordinary shareholders of RYB for the full year of 2019 was $2.4 million compared with $1.8 million for 2018. Adjusted net income attributable to ordinary shareholders of RYB, which excludes the impact of share-based compensation expenses and changes of redeemable and non-controlling interest for the full year of 2019 was $1.4 million compared with $5.1 million for 2018.Basic and diluted net losses per ADS attributable to ordinary shareholders of RYB for the full year of 2019 were both $0.09 compared with basic and diluted net loss for ADS attributable to ordinary shareholders of both $0.06 for 2018. Adjusted basic and diluted net income per ADS attributable to ordinary shareholders for 2019 were both $0.05 compared with $0.18 and $0.16 respectively for 2018. EBITDA for the full year of 2019 was $12.9 million compared with $8.8 million for 2018. Adjusted EBITDA for 2019 was $16.8 million as compared with $15.6 million for 2018.In terms of business outlook, due to the evolving COVID-19 situation that’s creating various uncertainties around our business operation we are unable to provide an accurate first quarter or full year 2020 outlook at this point in time. Once we have more visibilities into the macro condition and the evolving status of the COVID-19, we can come back and provide more accurate guidance again as we did before. This concludes our prepared remarks. Thank you for your attention. We will now open the call to questions. Operator, please go ahead.

[Operator:]

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Elsie Sheng of Morgan Stanley. Please go ahead.

[Elsie Sheng:]

Hello, management. Thank you for taking my question. I would like to ask what would be the coronavirus impact in terms of the operations and revenue recognition and also will that impact the new semester dealer recruitment and does that affect your capacity expansions in 2020? Any color in terms of how should we think of the closing 2020 would be helpful? Thank you.

[Yanlai Shi:]

I will cover the business operations and some of our heightened facility security measures in place and then I will let our Chief Financial Officer, Chris, provide comments on regulatory and the financial perspective. Firstly during the facility closures, we take preventative measures to ensure the health of our students and staff at our facilities.

[Hao Gu:]

Serena seems to be having another technical issue. So I will briefly translate for Grace. So first of all in response to the outbreak, we have setup a coronavirus epidemic response working team and started implementing facility suspension of our facilities swiftly. And also we carried out daily health tracking and reporting mechanism to attract the health status of our enrolled students and their families as well as our faculty and staff members at our facilities. And also the working group has also quickly started planning and preparing protective equipment and related supplies for the prevention of the local epidemic. Our regional centers and subsidiaries have coordinated the distribution locally and the headquarters level we have given direct support and allocated prevention equipment and gears for facilities in the COVID-19 affected Hubei province. We have also created a prevention manual with very detailed guidelines and control measures for the epidemic prevention and we have made preparations for disinfecting communal areas in our facilities and learning tools and toys in classroom etcetera repeatedly and will standby and get ready for resuming normal facility operation.

[Yanlai Shi:]

In the time of facility closures, home-based education and e-learning have become more important. With more than 20 years of experience, we want to dedicate our continuous efforts and share with families across the country our educational contents and operating for the continuity of education. Following the outbreak, we acted quickly, thanks to our dedicated teaching staff, R&D team, and IT team, who have worked tirelessly even during the Chinese new year holidays. We have successfully rolled out online educational contents of various categories and interactive education experience in record time.In terms of educational contents with our abundance of educational resources at hand, we have quickly developed various online educational offerings and share our learning practices and know-how in the field of early education throughout years with more children and family. This content and activities are easily accessible via our self-developed mobile-based application through mini apps and third-party video platforms. To maintain education continuity, we offer support resources to children and their parents in this difficult time to carry on their education and learning without disruption.In terms of platform and technology, we continue to advance our digital strategy which leverages our internal and external resources and continue to accelerate the development of our online-merge-offline model. We have also announced donations and free access of online educational content. We are still pursuing our strategic objective of building a powerful education ecosystem or global portfolio of learning dedicated for children education and continuously to bring about educational innovation empowered by technology. With uninterrupted commitment to provide good joint education at our facilities and with parent’s health at home we will continue to improve our ability to transform and digitalize our operations overall to our unique online-merge-offline model, while leveraging our quality educational content. In doing so, we aim to optimize our value proposition and look forward to more revenue generating ability. In March, we have set trials in paid content offered online as facilities or rather at pilot classes. We are hopeful to introduce paid online content to a broader audience upon good reception from the piloting phases and will further promoted in the second half of this year.We are really prepared with full preparation to embrace the back-to-school crowd. Firstly is the back-to-school events and showcases, we will demonstrate our preventative measures and actions and our disinfecting efforts at the facility level with our teaching staff ready to welcome our students back to facility. And secondly is the PDA meetings online, we will brief on all the measures we have taken and proactively communicate our ongoing plan effectively retain students and keep their families and parents at ease. Thirdly is that we also have prepared the shooting of the first class video for the preparation of facility reopening. We will also conduct one-on-one virtual home visits or rather telephone tuck-ins with enrolled parents in the two-week duration prior to facility reopen to conduct health status tracking and help guide parents through anxiety during this difficult time. For the enrolled students who haven’t attended in our facility before, each facility has setup classes with teachers assigned ready to reopen during facility closure communications between parents and teachers are already in place through mobile-based application.

[Hao Gu:]

Thank you, Serena. Relating to the question that Elsie just raised maybe I’ll add a few additional comments on top of what Grace has just mentioned. I think following the outbreak of the COVID-19, the government and education bureaus or regulators have actually issued a couple of preferential policies which are relevant to our business operations. I will give you a few examples. First of all, for facilities operating on government-owned or SOE owned properties, the government has offered some rental reduction policies given the impact on business due to the outbreak. So we – for some of our facilities, they are located in such properties so we are able to receive the rental reduction in this regard. And also education regulators have announced their plan to increase the scope and size of government subsidies available to qualified kindergarten operators and also fully take into consideration the COVID-19 impact on private businesses, local governments across a number of provinces have also allowed reductions and delays in the payment of social insurance premiums. So I think these measures and policies are actually helping us better navigate through this difficult and uncertain period of the COVID-19.Having said that, I think we are also well aware of the impacts on our financial and business performance this year. Due to the temporary suspension of our facilities until further notice from the government, our first quarter performance will be actually adversely affected due to the several uncertainties surrounding the COVID-19 outbreak and the evolving situations has also led to some uncertainties for us to, as I just mentioned, accurately forecast our 2020 revenue, but we would like to share more color with you on the following. First of all, actually before the Chinese New Year, we have already completed most of our promotion and student enrollment work for the coming new semester. Currently, we have maintained very close contact with the children and their parents and families to strengthen their confidence and ensure their willingness to come back to our facilities after we reopen them. And also as for the impact on opening up new kindergartens or acquiring existing ones, as mentioned in our previous conference call, we anticipate that for this year we will probably have similar level of newly opened or acquired M&A kindergarten facilities as compared to 2019. We expect that the overall target remains unchanged, but most of the new facilities were likely to open up for business in the second half of this year. And also as we mentioned in the previous conference call, we have intentionally slowed down the expansion of our franchise play-and-learn center of network. We are of the view that we will achieve a moderate expansion this year, because the coronavirus does impact on the promotion of our franchise play-and-learn center business. But season one is our typically low season or quiet period. So I think we think the impact from the COVID-19 will be relatively limited.And lastly, I would like to share a bit more color on our cost control measures. We have implemented very stringent cost control measures across all of our business and functional units actually starting the second half of 2019. And these have actually yielded very positive results already if you look at our fourth quarter financials. Looking into this year, we will continue to carryout these cost control measures. For example, we will optimize our staff structure, which we already did. We will be cutting discretionary spending such as corporate travel, daily headquarter expenditures as well as professional fees. And I think you would probably also be interested in our cash flow and cash position. Right now, I think we remain strong on our balance sheet as we have still sufficient cash balance. Therefore, we actually do not anticipate major cash flow issues at this stage because of the COVID-19 and the suspension of our facilities. And when our facilities resume operations, we will actually be able to collect tuition fee again for the new semester and that will further strengthen our balance sheet.And as for the question or your comment about the revenue recognition, I think the conclusion is during the COVID-19 period because our operations are suspended, so our kindergarten business for this period won’t be able to recognize much of the revenue, but for our franchise business, because all of the contracts are still valid so the revenue recognitions for this part of the annual fee are still, we are still able to recognize them. But to a less extent, the revenue from the sale of merchandise on the franchise revenue will indeed be affected as well. So I hope that addresses your question, Elsie.

[Elsie Sheng:]

Yes, that is very clear. Thank you very much.

[Operator:]

As there no further questions now, I would like to turn the call back over to the company for closing remarks.

[Serena Xue:]

Thank you, Andrew. 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 pleasant day.

[Operator:]

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