TCTM Kids IT Education Inc.
Q3 2021 Earnings Call Transcript

Published: 23 Nov 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter of 2021 Tarena International, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. I would now like to hand the conference – I must also advise you that the conference has been recorded today, November 23, 2021. I would now like to hand the conference over to first speaker today, Ms. Sylvia Yang, the Investor Relations Manager. Thank you. Please go ahead.

[Sylvia Yang:]

Thank you, operator. Hello everyone. And welcome to Tarena’s earnings conference call for the third quarter of 2021. The company’s earnings results were released earlier today and are available on our IR website, ir.tedu.cn, as well as on Newswire services. Today, you will hear from Ms. Nancy Ying Sun, our CEO; and Mr. Kelvin Lau, our CFO, who will take you through the company’s operational and financial results for the third quarter of 2021 and give revenue guidance for the fourth quarter of 2021. After their prepared remarks, Nancy and Kelvin will be available to answer your questions. Before we continue, please note that this discussion today will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Tarena does not assume any obligations to update any forward-looking statements, except as required under applicable law. Also, please note that some of the information to be discussed includes non-GAAP financial measures, as defined in Regulation G. The U.S. GAAP financial measures and information reconciling these non-GAAP financial measures to Tarena’s financial results prepared in accordance with U.S. GAAP are included in Tarena’s earnings release, which has been posted on the company’s IR website at ir.tedu.cn. Finally, as a reminder, this conference call is being recorded. In addition, a webcast of this conference call is available on Tarena’s Investor Relations website. I will now turn the call over to Ms. Nancy Ying Sun, the CEO of Tarena.

[Nancy Ying Sun:]

Thank you, Sylvia. And thanks everyone for joining us today. We want to thank you all of our investors for your continuous support for us. So we are delighted to announce the Tarena’s results for the third quarter of 2021 for everyone. Our total net revenues in the third quarter of 2021 was RMB615.2 million, which is in accordance with the revenue guidance we gave in last quarter. In the first three quarters of 2021, our total net revenues have shown a significant increase of 38.8% to RMB1,731.2 million from RMB1,247.6 million in the same period of 2020. Gross profit margin has shown an increase of 11.6% points to 49.5% in the first three quarters of 2021 from 37.9% in the same period of last year. From the beginning of 2021 to the end of this reporting period, gross profit has shown an increase of 81.6% to RMB857.5 million from RMB472.3 million in the same period of 2020. Net revenues from childhood and adolescent quality education business increased by 14.8% from RMB289.6 million in 2020 Q3 to RMB332.6 million in 2021 Q3. The number of student enrollments increased by 19.6% from 122,800 or 122,800 in 2020 Q3 to 146,900 in 2021 Q3. The number of new contracted students, including new registered students and renewal students increased by 21.0% from 31,400 in 2020 Q3 to 38,000 in 2021 Q3. Net revenues from adult professional education business dropped by 14.7% from RMB331.2 million in 2020 Q3 to RMB282.6 million in 2021 Q3. This is largely due to the number of student enrollments dropped by 13.0% from 38,400 in 2020 Q3 to 33,400 in 2021 Q3. However, we have seen an increase of 7.4% in number of student enrollments as compared to the student enrollment of 31,100 in 2021 Q2. In the first three quarters of 2021, we have enacted and implemented a series of effective policies and measures to minimize the negative impact from the adverse weather conditions and COVID-19 pandemic on our business through continuous efforts in optimizing the organizational structure, improving operational management efficiency and controlling cost and expenses. We have only seen a slight increase in our total cost of revenues and operating expense by 3.6% to RMB2,040.0 million in the first three quarters of 2021 from RMB1,968.9 million in the same period of 2020 on the premise that our student enrollment are increasing. Our operating loss in the first three quarters of 2021 has significantly decreased by 57.2% to RMB308.7 million from RMB721.3 million in the same period of last year. Net loss in the first three quarters of 2021 was RMB293.2 million, which was 56.7% less than the net loss of RMB676.5 million in the same period of 2020. This was mainly due to the significant increase in total net revenues and the continued implementation of effective optimization and management of cost and expenses in the first three quarters of this year. Our total number of employees rose by 4.2% from 9,905 at the end of 2020 Q3 to 10,321 at the end of 2021 Q3. The production capacity per capita increased by 47.0% to about RMB 169,000 in the first three quarters of 2021 from about RMB115,000 in the same period of last year. In 2021, we continue to focus on our core strategy of improving the operational and management efficiency of our adult professional education learning center. Since September 30, 2020, we have stopped the operation of six underperforming adult professional education learning centers, and this lead to in a decline in number of student enrollments by 8.9% to 55,400 in the first three quarters of 2021 as compared to the number of student enrollments in the same period of last year. However, net revenues per single learning center increased by 22.7% to about RMB8.15 million in the first three quarters of 2021 from about RMB6.64 million in of 2020. So the number of childhood and adolescent quality education learning centers has expanded from 236 at the end of 2020 Q3 to 238 at the end of 2021 Q3. The number of student enrollments per single learning center increased from 543 in the first three quarters of last year to 689 in the same period of 2021. Net revenues per single learning center rose by 86.3% from about RMB2.04 million in the first three quarters of last year to about RMB3.80 million in the same period of 2021. Next, I will report and share with you the status of our operations in 2021 Q3. During 2021 Q3, the sporadic occurrence of severe weathers and COVID-19 cases have brought short-term impacts to some areas in China, which were mainly manifested in the suspicion of offline operations of some learning centers in certain cities, including Zhengzhou, Nanjing, Changsha and Wuhan City and et cetera. Our entire team has taken prompt and effective action. For example, we take some offline teaching to online delivery, up to now the negative impacts on our operations have been mostly eliminated. Now I will discuss the operation of our adult professional education business. From the beginning of 2021 to the end of this reporting period, our Adult Professional Education business has continued to adhere to the business strategy of optimizing cost, increasing production capacity, healthy operation and steady development. Net revenues increased by 6.0% to RMB830.9 million in the first three quarters of 2021 from RMB783.7 million in the same period of 2020. Meanwhile, cost of revenues decreased by 1.1% to RMB297.9 million in the first three quarters of 2021 from RMB301.2 million in the same period of 2020. Gross profit for the first three quarters of 2021 was RMB533.0 million, which was 10.5% higher than the gross profit of RMB482.5 million in the same period of 2020. The number of adult professional education learning centers at the end of 2021 Q3 decreased by six as compared to the number of learning centers at the end of 2020. And the total learning center site areas decreased by 7.4% to 119 point or 119,400 square meters. Our net revenues decreased by 14.7% to RMB282.6 million in 2021 Q3 from RMB331.2 million in 2020 Q3. However, by implementing effective control on operating expenses throughout the first three quarters of 2021 gross profit margin in the first three quarters of 2021 increased by 2.5 percentage points to 64.1% in the first three quarters of 2021 from gross profit margin of 61.6% in the same period of 2020. We have also made good progress in optimizing the structure of operating expenses. Our operation teams have increased the percentage of new student recruitment from underground promotion in university and word of mouth promotional activities resulting in a 10.2% reduction in selling expenses in 2021 Q3 as compared to the selling expenses in same period of 2020. Based on our strong teaching team and job placement service system, the six month post-course job placement rate of our students remain about 90% in 2021 Q3, a good security of job placement is the foundation for the sustainable growth of our business. We are very pleased to see a series of government policies that encourage the development of adult professional education. Looking into 2021 Q4, we will continue to adhere to our business strategy of healthy operation and steady development, as well as achieving better efficiency, developing new customer acquisition channels and improving profitability. Okay. Next, I will discuss the status of our operation of childhood and adolescent quality education business. With the implementation of the government double reduction policy, the development of education that truly supports the growth of children and teenagers will receive long-term support and encouragement from the government. We actively respond to the government policy and shall ensure that our operations would comply with all the relevant requirements. As you all know, our childhood and adolescent information technology quality education business has long been committed to being an expert in information technology education that every child can trust and becoming an IT education partner that every family can depend on. This is in compliance with the national policy. In 2021 Q3 our childhood and adolescent quality education business has continued to improve in all levels of product and services, operation and customer acquisition. In general, the net revenues increased significantly and with more effective control of cost of revenues and operating expenses, we have also achieved better operational efficiency. At the end of 2021 Q3 the number of childhood and adolescent quality education learning centers was 238, which was two more than the number of learning centers at the end of 2020 Q3. In 2021 Q3 net revenues of childhood adolescent quality education business increased year-over-year by 14.8% to RMB332.6 million. The cost of revenues increased year-over-year by 15.7%, gross profit increased year-over-year by 13.5% and the gross profit margin reached 38.8%. The number of student enrollments increased year-over-year by 32.5% to 163,300 in the first three quarters of 2021 as compared to the number of student enrollments in the same period of last year. In terms of revenue growth, the number of new contracted students, which including new registered students and renewal students increased year-over-year by about 21.0% to approximately 38,000 in 2021 Q3 as compared to the same period of last year. The number of new contracted students, including new registered students and renewal students increased year-over-year by about 46.2% to approximately 100,000 in the first three quarters of 2021 from approximately 58,400 in same period of last year, as our operational priorities are continued to optimize products, improve services and enhance students’ satisfaction. About 63.7% and 64.5% of new contracted students came from student renewal or word of mouth promotional activities in 2021 Q3 and in the first three quarters of 2021, respectively. Students high satisfaction level led to a renewal rate of student who has – who have been studying our programs for more than one year, over 80%. In 2021 Q3, we have a continued to work on improving the efficiency of marketing activities and the student acquisition. The average selling expense, excluding personnel related salary and welfare expenses per each new contracted students was about RMB1,063 in 2021 Q3 dropped year-over-year by 18.6%. In the first three quarters of 2021 the average selling expenses per each new contracted students was about RMB1,175 decreased year-over-year by 26.4%. Our childhood and adolescent quality education online business has continued to grow with revenue of RMB28.5 million in 2021 Q3, which represented an increase of 3.1% from the previous quarter and accounted for about 8.6% of the total net revenue of childhood and adolescent quality education in 2021 Q3. In 2021 Q4, we will continue to optimize our business model, enhance the services and reputation and increase efficiency, so as to achieve a healthy revenue growth. Looking ahead under the favorable of government policies on the adult professional education and childhood and adolescent quality education, we will continue to provide high quality educational products and services, enhance operational efficiency and maintain a healthy business growth. Offline user management and customer acquisition channels as well as online live broadcasting education programs will continue to be the two important basis for our development. We will adhere to our original vision of education, dedicated to providing good educational products and continue to explore healthy business models to achieve business profitability as soon as possible. I want to take this opportunity to thank you all again for your continued support. I’d like to turn the call to Kelvin, our CFO who will share with you the third quarter of 2021 financial highlights. Thanks.

[Kelvin Lau:]

Thank you, Nancy. Now I would like to take you through the third quarter of 2021 financial highlights. Total net revenue decreased by 0.9% to RMB615.2 million in the third quarter of 2021 from RMB620.8 million in the same period of 2020. Net revenue from adult professional education business decreased by 14.7% to RMB282.6 million in the third quarter of 2021 from RMB331.2 million in the same period of 2020. The decrease was primarily due to decreasing student enrollments from 38,400 in the third quarter of 2020 to 33,400 in the same period of this year. Net revenues from childhood and adolescent quality education business increased about 14.8% to RMB332.6 million in the third quarter of 2021 from RMB289.6 million in the same period of 2020. The increase was primarily due to decrease in student enrollments from 122,800 in the third quarter of 2020 to 146,900 in the same period of 2021. Cost of revenues increased by 11.5% to RMB302 million in the third quarter of 2021, from RMB270.8 million in the same period of 2020. For adult professional education business the cost of revenues increased by 3.8% to RMB98.6 million in the third quarter of 2021 from RMB95 million in the same period of 2020. The increase was primarily due to increase in social security fees, which were exempted according to the preferential policies enacted by the government during COVID-19 pandemic in the third quarter of 2020 but were not exempted in the third quarter of 2021. For childhood and adolescent quality education business cost of revenues increased it by 15.7% to RMB203.4 million in the third quarter of 2021 from RMB175.8 million in the same period of 2020. The increase was priority to increase in personnel related-costs resulting from growing number of teaching staff at our childhood & adolescent quality education learning centers, and increase in social security fees which were exempted according to the preferential policies enacted by the government during COVID-19 pandemic in the third quarter of 2020, but were not exempted in the third quarter of 2021. Gross profit decreased by 10.5% to RMB313.2 million in the third quarter of 2021, from RMB350 million in the same period of 2020. Gross margin, which is equal to gross profit divided by net revenues, was 50.9% in the third quarter of 2021, compared to 56.4% in the same period of 2020. The decrease was mainly attributable to the decrease in net revenue from adult professional education, which results in decrease in its gross profit and gross margin in the third quarter of 2021. Total operating expenses decreased by 1.2% to RMB401.7 million in the third quarter of 2021, from RMB406.5 million in the same period of 2020. Total non-GAAP operating expenses, which excluded share-based compensation expenses, decreased by 0.4% to RMB397.7 million in the third quarter of 2021 from RMB399.3 million in the same period of 2020. Total share-based compensation expenses allocated to the related operating expenses decreased by 45.4% to RMB4 million in the third quarter of 2021, from RMB7.3 million in the same period of 2020. Selling and marketing expenses decreased by 6.5% to RMB223.7 million in the third quarter of 2021, from RMB239.2 million in the same period of 2020. The decrease was mainly due to decrease in advertising expenses in the third quarter of 2021 as compared to the advertising expenses incurred in the same period of 2020. General and administrative expenses increased by 5.9% to RMB151.5 million in the third quarter of 2021 from RMB143.1 million in the same period of 2020. The increase was mainly due to a one-time charge of the loss arising from the disposal of property, and partially offset by decrease in office and other miscellaneous expenses. Research and development expenses increased by 9.5% to RMB26.6 million in the third quarter of 2021, from RMB24.3 million in the same period of 2020. The increase was mainly due to increase in social security fees, which were exempted according to the preferential policies enacted by the government during COVID-19 pandemic in the third quarter of 2020, but were not exempted in the third quarter of 2021. Operating loss was RMB88.5 million in the third quarter of 2021, compared to operating loss of RMB56.6 million in the same period of 2020. Non-GAAP operating loss, which excluded share-based compensation expenses, was RMB84.4 million in the third quarter of 2021, compared to non-GAAP operating loss of RMB49.2 million in the same period of 2020. We recorded an income tax expense of RMB8 million in the third quarter of 2021, compared to income tax expense of RMB10.1 million in the same period of 2020. As a result of the foregoing, net loss was RMB94.7 million in the third quarter of 2021, compared to net loss of RMB63.9 million in the same period of 2020. Non-GAAP net loss, which excluded share-based compensation expenses, was RMB90.5 million in the third quarter of 2021, compared to non-GAAP net loss of RMB56.5 million in the same period of 2020. Loss per ADS was RMB1.64 in the third quarter of 2021, compared to loss per ADS of RMB1.16 in the third quarter of 2020. Non-GAAP loss per ADS, which excluded share-based compensation expenses, was RMB1.57 in the third quarter of 2021, compared to non-GAAP loss per ADS of RMB1.02 in the third quarter of 2020. Net cash outflow used in operating activities in the third quarter of 2021 was RMB35.4 million. Net cash inflow from investing activities in the third quarter of 2021 was RMB28.6 million. The net proceeds from the disposal of property and office equipment in the third quarter of 2021 were RMB46 million and RMB0.7 million, respectively. Capital expenditure incurred on leasehold improvement and office equipment in the third quarter of 2021 was RMB17.9 million. In terms of financial guidance based on our current operations, total net revenues for the fourth of 2021 are expected to be between RMB610 million and RMB640 million, after taking into consideration the seasonal fluctuation factors and the likely continues to impact of the COVID-19. This guidance is based on the current market conditions and reflects the company’s current and preliminary estimates of market and operating conditions, which are subject to change, particularly as to the potential impact of COVID-19 on the economy in China and elsewhere in the world. This concludes my financial highlights section. Operator, we are ready for questions.

[Operator:]

Your first question comes from the line of . Please go ahead.

[Unidentified Analyst:]

Hi. Thank you for the strong operating performance in 2021. It’s good to see. I just have two main questions. The first is, in prior years you guys were repurchasing stock, quite meaningfully. Is there any consideration given where things are trading right now to launch a share repurchase plan? And the second question is, do you have any guidance on when you expect to reach breakeven and does the company have sufficient liquidity to get there? Thank you.

[Kelvin Lau:]

Thank you. Okay, I’m going to answer your first question. This is a very good question. Thank you. Regarding the NAV purchase share – repurchase plan I think up to now, we still haven’t have any share repurchased plan on the table for discussion. I think it’s one of the good options for us. Once we have any decision on any share repurchased plan, we have appropriate announcement up to now, at least at this moment, we don’t have any share with special trail on the table. Thank you. Nancy is going to answer your second question.

[Nancy Ying Sun:]

So just I’ll try to answer your second question first. Let me rephrase your question. You’re asking about when can we breakeven, and also your question is also about our current water status call of our liquidity, right?

[Unidentified Analyst:]

Correct. Yeah.

[Nancy Ying Sun:]

Well, first of all, let me say that to breakeven as soon as possible, this has always been the priority of the management. So, because we have a very stable adult information technology education business, and we are looking at further improve our cost structure and improve our operational efficiency as well as improving our profitability. So actually, we are doing quite good in several fronts. For example one of our business is called the childhood & adolescent quality education business, our kid business, which also is another stream of revenue for us. It is a new business actually this is a business in China starting in 2017, we have been always the top leader in terms of the adolescent & childhood quality education business. And at the beginning of this year, we tried to explore new opportunities to create new products and new services. And now we can say that we are the veteran, or we are very experienced in this industry, starting last year, we began to think about how can we improve profitability for this business. And by that first, we need to enroll more students in the classroom. We need to promote more service and the more business. And also we provided a series of different short-term campus-based learning opportunities for those students to choose from. Those are some of the methods that we adopted to improve profitability for this business. So from those efforts, as you can see that we try our best to continue to improve our revenue, very steady way, and looking to the future in order to improve the profitability of all of our business, we need to continue to iterate and optimize our business models, decrease costs, and optimize our expenditure. We actually made a lot of breakthroughs, which I’m very happy to share with you. For example, in the third quarter, we have a restructure our organization structure. For example, we have restructure our group mid platform, and we will continue to do that in the future. In the meantime, we will continue to lower our costs perfect, our expenditure in order to improve profitability of this business. Thirdly, I want to say that one of our core competitive edges is offline acquisition expenditure as well as offline centers operation. And we have accumulated a lot of good experience in terms of offline acquisition, and we will continue to do that and we will continue to leverage this competitive edge in the future in order to lower the cost, improve our expenditure structure. So as to improve our profitability And so lastly, I want to say that we will continue to lower the cost to perfect our expenditure because right now our cash revenue, as you can see are increasing, they are increasing a lot. So that is – that means our operational liquidity right now is in a very positive situation. And this will be our top priority for the future month. In addition, our operation management team is continuing to find other financing methods.

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