TCTM Kids IT Education Inc.
Q1 2022 Earnings Call Transcript

Published: 17 May 2022

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter of 2022 Tarena International Incorporation Earnings Conference Call. I must advise you that this conference is being recorded today, May 17, 2022. I would now like to hand the conference over to your first speaker today, Ms. Sylvia Yang, the Investor Relationship Manager. Thank you. Please go ahead.

[Sylvia Yang:]

Thank you, operator. Hello, everyone, and welcome to Tarena's earnings conference call for the first quarter of 2022. 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 first quarter of 2022 and give revenue guidance for the second quarter of 2022. After their prepared remarks, Nancy and Kelvin will be available to answer your questions. Before we continue, please note that the discussion today will contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Form 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 obligation 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 Recognition 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. Generally, 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, CEO of Tarena.

[Nancy Ying Sun:]

[Foreign Language] Thank you, Sylvia, and I want to thank the attention from all the investors, and I want to thank everyone for joining us today.

[Nancy Ying Sun:]

[Foreign Language] I am delighted to announce the result of Tarena for the first quarter of 2022. In the first quarter of 2022, we ended our losses and achieved a net income. This marked the beginning of a healthy operating trajectory of our business. Our net income reached RMB 27.1 million, operating income reached RMB 28.6 million, and operating margin reached 4.6%. Even under the impact of seasonal factors of the Chinese New Year, our cash balance remained relatively well preserved at RMB 416.4 million. Looking back at the first quarter of 2021, we had net loss of RMB 121.9 million, operating loss of RMB 129.5 million and operating margin of minus 24.3%. [Foreign Language] We were able to accomplish these operational results, mainly because we have been adopting and executing our sound continuous strategies effectively and efficiently, both adult professional education and telco and adolescent quality education businesses achieved revenue growth and continued cost reduction in the first quarter of 2022. [Foreign Language] On the one hand, our net revenues in the first quarter of this year was RMB 623.5 million, which was higher than the revenue guidance we gave in the previous quarter and was 16.8% higher than the net revenues of RMB 533.8 million in the same period of 2021. Among them, we are glad to see that the adult professional education business renewed year-on-year growth of 5.5%. The child and adolescent quality education business has seen positive year-over-year growth for seven consecutive quarters since the outbreak of the pandemic with a 27.2% year-over-year increase in the first quarter of 2022. The increase in net revenues led to the increment of productivity per capita by 22.1% from about RMB 52,000 in the same period last year to about RMB 64,000 in the first quarter of 2022. [Foreign Language] On the other hand, our long-term adherence to the strategies of improving operational efficiency and reducing costs has enabled us to reduce our cost of revenues and operating expenses by 10.3% in the first quarter of 2022 compared to the same period of 2021. [Foreign Language] In the first quarter of 2022, our gross profit reached RMB 358.9 million, an increase of 43.6% compared to RMB 249.9 million in the same period of last year, with gross margin increased by 10.8 percentage points to 57.6%. [Foreign Language] Next, I want to introduce the performance of our adult professional education business. [Foreign Language] It is always our business strategy for adult professional education business to optimize business structure, reduce costs and uplift operational efficiency and capacity. The number of students enrollments in the first quarter of 2022 was 29,300, down 5.5% from 31,000 in the same period of 2021. Despite of the decrease in the number of student enrollments, net revenue reached RMB 269.6 million in the first quarter of 2022, up 5.5% from RMB 255.5 million in the same period of 2021. This was mainly attributable to the adoption of our product strategy of exploring the whole life cycle of users and adding more short-term courses, which attracted students to make repeated enrollments in different courses and thus increase our revenue. [Foreign Language] We continue to make great progress in managing and controlling the cost of revenues and operating expenses which were 15.0% lower and that in the same period in 2021. [Foreign Language] The gross profit of adult professional education business in the fourth quarter of 2022 was RMB 184.2 million, up 20.8% from RMB 152.5 million in the same period of 2021. The gross margin was 68.3%, up 8.6 percentage points from 59.7% in the same period of 2021. Meanwhile, the adult professional education business has achieved operating income for four consecutive quarters. [Foreign Language] At the end of the first quarter of 2022, the number of learning centers for adult professional education business increased by a net of three compared to that at the end of the first quarter of 2021, while the net revenue per learning center also improved effectively, with the average revenue per learning center increasing by 5.5% from approximately RMB 2.56 million in the first quarter of 2021 to approximately RMB 2.70 million in the first quarter of 2022. [Foreign Language] In the first quarter of 2022, the 6-month post-graduate job placement rate remained at over 90%. Our long-term, stable tutoring quality and good job placement results have provided strong evidence to demonstrate that our adult professional education business has the ability to deliver high-quality products and services in the market. [Foreign Language] Next, I would like to introduce our childhood and adolescent quality education business. [Foreign Language] In the first quarter of 2022, the net revenue from childhood & adolescent quality education business was RMB 363.9 million, up 27.2% compared to RMB 278.3 million in the same period of 2021. The number of student enrollments increased from 135,500 in the first quarter of 2021 to 173,100 in the first quarter of 2022, up 27.7%. The number of new contracted students, including new registered students and renewal students was 42,600 [ph] in the first quarter of 2022, up 43% from 29,800 in the same period of 2021. Among them, the proportion came from student renewal and word of miles [ph] promotional activities continued to increase, up 9.7 percentage points from 64.7% in the first quarter of 2021 to 74.4% in the first quarter of 2022. The good student satisfaction rate ensure that in the first quarter of 2022, the renewal rate of students who have enrolled for more than 1 year was over 83.4%. [Foreign Language] The number of learning centers for the childhood and adolescent quality education business decreased by a net of 4 from 236 at the end of the first quarter of 2021 to 232 at the end of the first quarter of 2022. However, the number of student enrollments per single learning center increased from 574 in the first quarter of 2021 to 737 in the first quarter of 2022. The average net revenue per single learning center increased by 27.7% from about RMB 1.18 million in the first quarter of last year to about RMB 1.51 million in the first quarter of 2022. [Foreign Language] In the first quarter of 2022, with the growth of net revenue by 27.2% year-over-year and the reduction of cost of revenues by 0.9% year-over-year, gross profit of childhood and adolescent quality education increased by 79.3% year-over-year, and gross margin reached 49.4%, up 14.4 percentage points year-over-year. [Foreign Language] Finally, in review of our operations in the first quarter of 2022, our core competitive advantages are backed by the constant optimization and upgrading of our business procedures and processes, which include our online merge offline customer acquisition model and omnichannel service delivery capability. This ability was tested in the first quarter when we kept the business running smoothly, even with the resurgence of COVID cases emerged in certain areas in China. [Foreign Language] Looking ahead, we will continue to focus on the core advantages of adapting or adaptation of the online merge offline model to develop and deliver our comprehensive products, off-line learning center operation capability and customer acquisition capability to continually improve operational efficiency and maintain positive and healthy development [Foreign Language] I want to take this opportunity to thank you all again for your continued attention and support. [Foreign Language] So I'd like to turn the call to Kelvin, our CFO, who will share with you the first quarter of 2022 financial highlights. Thanks.

[Kelvin Lau:]

Thank you, Nancy. Now I would like to take you through the first quarter of 2022 financial highlights. Total net revenues increased by 16.8% to RMB 623.5 million in the first quarter of 2022 from RMB 533.8 million in the same period of 2021. Net revenue from childhood & adolescent quality education business increased by 27.2% to RMB 353.9 million in the first quarter of 2022 from RMB 278.3 million in the same period of 2021. The increase was primarily due to increase in student enrollments from 135,500 in the first quarter of 2021 to 173,100 in the same period of 2022. Net revenue from adult professional education business increased by 5.5% to RMB 269.6 million in the first quarter of 2022 from RMB 255.5 million in the same period of 2021. The increase was mainly attributable to the increase in certificate revenue, partially offset by a drop in staff student enrollments from 31,000 in the first quarter of 2021 to 29,300 in the same period of 2022. Cost of revenue decreased by 6.8% to RMB 264.6 million in the first quarter of 2022 from RMB 283.8 million in the same period of 2021. The decrease was primarily due to decline in personnel-related costs resulting from a decrease in the accrual of performance-based bonus and decreasing depreciation expenses. Gross profit increased by 43.6% to RMB 358.9 million in the first quarter of 2022 from RMB 249.9 million in the same period of 2021. Gross margin, which is equal to gross profit divided by net revenues, was 57.6% in the first quarter of 2022 compared to 46.8% in the same period of Q1. The increase in gross margin was primarily attributable to the increase in net revenues and a decrease in cost of revenues in both childhood & adolescent quality education at sell [ph] professional education businesses. Total operating expenses decreased by 12.9% to RMB 330.3 million in the first quarter of 2022 from RMB 379.4 million in the same period of 2021. Total non-GAAP operating expenses, which excluded share-based commission expenses decreased by 11.8% to RMB 328.9 million in the first quarter of 2020 from RMB 372.7 million in the same period of 2021. Total share-based compensation expenses allocated to operating expenses decreased by 79.1% to RMB 1.4 million in the first quarter of 2022 from RMB 6.7 million in the same period of 2021. Selling and marketing expenses decreased by 19.3% to RMB 172.4 million in the first quarter of 2022 from RMB 213.8 [ph] million in the same period of 2021. The decrease was mainly due to a decrease in personnel-related costs resulting from the drop in the number of sales staff and declined in advertising expenses in the first quarter of 2022 as compared that to the same period of 2021. In general and administrative expenses decreased slightly by 1.1% to RMB 141.6 million in the first quarter of 2022 from RMB 143.3 million in the same period of 2021. Research and development expenses decreased by 27.3% to RMB 16.3 million in the first quarter of 2022 from RMB 22.5 million in the same period of 2021. The decrease was mainly due to a decrease in personnel-related expenses in the first quarter of 2022. Operating income was RMB 28.6 million in the first quarter of 2022 compared to operating loss of RMB 129.5 million in the same period of 2021. Non-GAAP operating income, which excluded share-based compensation expenses, was RMB 30 million in the first quarter of 2022 compared to non-GAAP operating loss of RMB 122.6 million in the same period of 2021. The company recorded an income tax expenses of RMB 5.4 million in the first quarter of 2022 compared to income tax benefit of RMB 7.4 million in the same period of 2021. The increase in tax expenses was mainly because the company has made a profit in the first quarter of 2020. As a result of the foregoing, net income was RMB 27.1 million in the first quarter of 2020 compared to a net loss of RMB 121.9 million in the same period of 2021. Non-GAAP net income, which excluded share-based commission expenses was RMB 28.5 million in the first quarter of 2022 compared to the non-GAAP net loss of RMB 116 [ph] million in the same period of 2021. Basic income per ordinary share was RMB 0.48 in the first quarter of 2022 compared to lost order ratios of RMB 27 in the first quarter of 2021. Diluted income per ordinary shares was RMB 0.47 in the first quarter of 2022 compared to loss per ordinary share of RMB 2.17 in the first quarter of 21%. Non-GAAP basic income per ordinary share, which exclude share-based compensation expenses was RMB 0.5 in the first quarter of 2022 compared to non-GAAP loss per ordinary share of RMB 2.05 in the first quarter of 2021. Non-GAAP diluted income per ordinary share, which excluded share-based compensation expenses, was RMB 0.49 in the first quarter of 2022 compared to non-GAAP loss per ordinary shares of RMB 2.05 in the first quarter of 2021. Net cash outflow from operating activities in the first quarter of 2020 was RMB 18.9 million. Capital expenditures in the first quarter of 2020 was RMB 10.6 million. In terms of financial guidance, based on our current estimates, total net revenues for the second quarter of 2022 are expected to be in the range of RMB 600 million and RMB 630 million, which represents an increase of 3.1% to 8.2% as compared to the net revenues in the second quarter of 2021. After taking into consideration of - after taking into consideration of the seasonal fluctuation status and the likely continuous impact of the [indiscernible] 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 - we are ready for questions...

[Operator:]

Thank you, management. [Operator Instructions] Our first question comes from Dave. Please go ahead.

[Unidentified Analyst:]

[Foreign Language] So there's a question from the gentleman. First of all, congratulations to Tarena's outstanding performance in the first quarter, making net gains. And as we all know that normally, the first quarter in China's market would always be an off-season for the education industry. So what are the breakthroughs, but what were the breakthroughs made by Tarena in this respect? And the lastly answer is that, first, thank you very much. Indeed, the first quarter in China market is always an off-season for education business because we have the Lunar China New Year happened in January. However, we did make a lot of breakthroughs in terms of business operations. And let me give you two- which can be divided into two categories.

[Unidentified Company Representative:]

[Foreign Language] And the first thing is that our gain comes from the decreasing or shall we say, the continuous decreasing of the cost, as well as the expenses all the way since last year. That serves as a solid foundation for us to achieve gains.

[Unidentified Analyst:]

[Foreign Language]

[Unidentified Company Representative:]

And to our delight, since Q1 of this year, we have seen a positive growth rate for our adult professional education business, as well as our childhood and adolescent and quality education business. And by the way, our childhood and adolescent quality education business has been increasing for seven consecutive quarters.

[Unidentified Analyst:]

[Foreign Language]

[Unidentified Company Representative:]

By the way, our adult professional education started to increase its income as well as profit since Q1 of this year. So let me break it down. What is - what would be the reason for the positive growth for our childhood and adolescent quality education business as well as our adult professional education business. First of all, let's talk about childhood and adolescents. Actually, the increase and the positive growth rate for our childhood and adolescent quality education business is attributable to our high-quality products as well as services, which resulted in high renewal and retention rate. For our adult professional education business, it is also attributable to our long-term digging for the lifetime value of our users, which leads to more repurchase rate and better satisfaction, and that serves as the foundation for so many breakthroughs that have been made for our adult professional education...

[Unidentified Analyst:]

[Foreign Language]

[Unidentified Company Representative:]

So to sum up, all of our breakthroughs and gains are indispensable with the satisfaction rate of our customers and users. So here on behalf of the management, I would like to send our heartfelt appreciation to the continued focus and attention paid by our investors. We know that you guys want us to make more breakthroughs and achieve more gains, and we also hope that we can continue stepping up our efforts to live up to your expectations.

[Unidentified Analyst:]

[Foreign Language]

[Unidentified Company Representative:]

So thank you very much, David, for your questions. I hope I answer your question.

[Operator:]

Thank you. There are no questions on the line at a moment. [Operator Instructions] Next question is from Sam. Please go ahead.

[Unidentified Analyst:]

Hey, good morning, good evening over there in China. Thank you for your presentation. My question is regarding the offer that was made by the founder, maybe 1.5 years ago, 2 years ago. At that point, the coronavirus and the education space in China being uncertain, it seemed like a good deal. It seemed like something the company was interested in. Now that with the hard work of the Tarena team, there's actually a profit being turned. Is that something you can disclose anything regarding if there is still interest in selling the company, taking a price there? Or now that there is actually profit and things are moving in the right direction. Does the team prefer to just continue to build? So I guess just to summarize my question is now that there is a profit, what are the plans for the future with regards to that. Thank you.

[Nancy Ying Sun:]

[Foreign Language] All right. This is Nancy. And first of all, thank you for that question. Actually, we think this is a 2-part question. And let me first share with you our long-term continued strategy for our businesses. And then I will hand over to Kelvin, our CFO, to take the questions on the financial side. [Foreign Language] First of all, regarding our two businesses, they are turning profits. They are very profitable. And they are moving very - in a very healthy manner. And we have already figured out the rationale and the logic of how to maintain this momentum, and we know how to improve the income for our adult professional education as well as our childhood & adolescent quality education business going forward. So we have every confidence to continue the business in the future. [Foreign Language] So - and as we all know that the Chinese government have really stepped up their efforts to promote vocational education development in China. So we believe there will be more opportunities for our ad of professional education, and we are very confident because there are policy support in the future. Regarding our childhood and adolescent quality education business, actually, some of this business's products has been included in the curriculum for some middle school and primary schools in China. So I believe that this will gain more positive feedback for us in the future... [Foreign Language] And for the time being, indeed, COVID really has some impact on our businesses in some regions and areas in China, but those impacts are quite marginal. [Foreign Language] Meanwhile, we have our business gathered around although the China, so a small portion of impact will not impact the whole picture of our businesses. And meanwhile, we have this online merger off-line model to develop and deliver comprehensive products, so we additional issue for us. [Foreign Language] So I hope you are happy with my answer regarding the business strategy side. And now over to Kelvin, our CFO, to share with you the financial side.

[Kelvin Lau:]

Hi, Sam. This is Kelvin. Thanks for the question regarding the prioritization. What I can say right now is we do not receive an offer regarding prioritization at this moment. So of course, I think later, if we receive any protection offers, we will make immediate announcement, I mean, according to all those rules and recognition issued by SEC or tested. So can contact, there's no offer at this moment.

[Operator:]

[Foreign Language] [Operator Instructions] There are no questions on the line. [Operator Instructions] There are no questions on the line at a moment, I'll pass it back to the management... Thank you, operator. If there are no further questions at present, we would like to conclude by thanking everyone for joining our conference call. We welcome you to reach out to us directly by e-mailing at [e-mail].. If you have any questions or requests for additional information. We encourage you to visit our Investor Relations site at ir.tedu.cn. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our call for today. Thank you for your participating. You may all disconnect.+