TCTM Kids IT Education Inc.
Q1 2017 Earnings Call Transcript

Published: 23 May 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Tarena International Incorporated First Quarter of Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks there will be a question-and-answer session. Today's conference is being recorded. If you have any objections you may disconnect at any time. I would now like to turn the call over to your host for today's conference, Ms. Helen Song; Tarena's Investor Relations Director.

[Helen Song:]

Thank you, Operator. Hello, everyone, and welcome to Tarena's first quarter 2017 earnings conference call. The Company's earnings results were released earlier today and are available on our IR website ir.tedu.cn, as well as on news wire services. Today, you will hear opening remarks from Tarena's Founder, Chairman and CEO, Mr. Shaoyun Han, followed by our Chief Financial Officer, Dennis Yang, who will take you through the Company's operational and financial results for the first quarter 2017 and give guidance for the second quarter and the full year of 2017. After their prepared remarks, Mr. Han and Mr. Yang 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 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 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 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 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 Mr. Shaoyun Han, Tarena's Founder, Chairman and CEO. Mr. Han will speak in Mandarin and Mr. Yang will translate.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

Thank you Helen, and welcome everyone to our first quarter 2017 earnings conference call.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

I am very pleased to report that our net revenues in the first quarter increased by 23.5% to reach RMB333 exceeding the high end of our previously issued guidance. This quarter we are committed to positively invest in both professional education business and K-12 training programs through a number of new initiatives such as standard network expansion and new courses research and development which significantly increase our geographic coverage, total number of learning centers as well as seat capacity, which laid a solid foundation for our full year growth outlook.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

In the first quarter of 2017, total course enrollments increased by 16% year-over-year to reach 24,500. This is primary factor contributing to our net revenue growth in this quarter. Our student enrollment number is more of a lead operational indicator that defined as the number of new students recruited and registered, in the quarter continue as healthy growth because of early timing of Chinese new year. We took this favorable market opportunity and successfully achieved more than 20% year-over-year growth in student enrollment, despite high base in the same period last year. Total student enrollment this quarter reached 27,785, which is the second highest quarterly enrollment figure in Tarena’s entire operational history.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

This quarter we continue to execute the teaching at a appropriate level strategy to further upgrade the curriculum portfolio and implement differentiated advanced courses teaching model, which help fully accomplish the expected growth target in student enrollment. In meantime, we stay focused on collaborating with universities and enterprises to jointly explore professional education market opportunities. On one hand with accelerated pace in collaborating with universities and colleges in China and have successfully established 62 joint major programs with universities and colleges in provinces such as Shandong, Inner Mongolia, Jiangsu and Jilin, et cetera. In January, Tarena won award of enterprise-university cooperation partner issued by Ministry of Education in China. In addition, this April, we also signed a strategic cooperation agreement with Microsoft who joined research and develop professional education teaching content provides total solutions for higher education as well as team education for K-12.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

Besides professional education business, our business initiated in K-12 education under the name of Tongcheng, Tongmei and Tongchuang have shown solid progress towards our target. By the end of first quarter, the key education program has been rolled out in 15 cities. And in the quarter, we enrolled close to 1,000 students, which represents 304% year-over-year growth. Most of our Most of our students in K-12 education programs are recruited were taking courses through shared learning center facilities with professional education business. Our strategic adjustment in optimizing our cost content, operational model and organizational structure for K-12 business in the past several quarters have been well implemented according to market demand, and we believe K-12 business will show robust growth momentum in the future.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

This quarter, we've accelerated pace in opening new learning centers, better prepare for even greater growth potential in peak season for the business. Based on initiatives to expand standard network and optimize lease areas in existing learning centers, our total seat capacity jumped to 52,822 by the end of this quarter, up by 20% from the same period last year.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

In term of professional education services, we opened 18 new learning centers this quarter on March 3. As a result, our total number of learning centers reached to 160, covering 51 cities by the end of this quarter. More specifically, we opened one learning center in each of the following 15 cities which are Beijing, Dongguan, Changsha, Tianjin, Fushun, Nanchang, Wuhan, Jinzhong, Wuhu, Xuzhou, Suzhou, Jilin, Yantai, Jinan, Kunming and Harbin and opened two learning centers in Chongqing, among which Jinzhong, Jilin, Wuhu, Xuzhou and Fushun are the five cities that we newly entered.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

We continue to focus on balancing utilization of facility resources and promoting center efficiency. Given that we opened more learning centers this quarter, the standard utilization rate slightly decreased to 69% compared with the same period last year. We believe that standard utilization rate will gradually go up to historical level as we enter into peak season.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

As a key indicator that shows our education quality and outcome, job placement record is an operating metric that we always focus on. Six month post-graduation job placement rate this quarter remains at high level as we did in previous quarters which was above 95%. This outstanding result will further support our leading brand and overall competitive position in the industry.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

Our non-GAAP operating margin this first quarter was negative 6.9%, slightly lower than the same period last year. This can be mainly attributable to the expansion plan we opened more centers while enter into more cities. Operational efficiency in these new centers associated with new cities are still in ramp-up period and have not yet reached to the similar level to the mature current centers, which will, in turn, affect overall operating margin. Furthermore, our K-12 business is still in a fast-growing period, resulting in a lower margin than mature professional education business in the short term. Our CFO, Dennis, will elaborate this further in his later remarks.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

To sum up, our efforts in expanding business skills for professional education services will drive further growth outlook, and revenue growth is expected to accelerate from third quarter which is the peak season in the year. Our effort in rolling out K-12 business has started to bear fruit with robust business momentum. Given that we have high base in net revenue during the first quarter of 2016, we expect to achieve higher revenue growth rate in the second half this year. Tarena has been well prepared in expanding teaching resources and operational facilities this quarter which laid solid foundation to achieve our operational and financial target for the full year 2017.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

With that I will now turn the call over to our CFO, Dennis Yang, to discuss first quarter financial results and outlook for the second quarter of 2017.

[Dennis Yang:]

Thank you, Han, and hello, everyone on the call. Since you already have the detailed numbers in the press release, I will review financial results for this quarter briefly and only focus of more important areas. Lets start with net revenue. For the first quarter of 2017, our net revenues increased by 23.5% year-over-year to RMB333 million, which exceeded the high- end of our revenue guidance we've previously issued. One major driver for net revenue growth is enrollment growth. This why high comparison base for the quarter. Total student enrollment increased by 20.6% year-over-year to 27,785. For the course enrollment, which is a primary driver for our revenue growth, increased by 16% year-over-year to 24,500. Besides enrollment, ASP increase is another driver for our revenue growth. Average revenue per course enrollment in the quarter, as defined by net revenue divided by course enrollment, was RMB 13,214, which increased by 3.8% as compared to RMB 12,758 in it’s same quarter last year. Such an increase of average revenue per course enrollment were mainly attributable to the increase of our standard tuition by approximately RMB 1,000 selected courses in March 2016. Seat utilization rate is one of key metric measuring our operational efficiency of teaching resources. We opened seven and eighteen learning centers in the fourth quarter of 2015 and the first quarter of 2017, respectively. Utilization rate of such newly opened learning centers have not yet reached the optimal level as compared with other more and more mature centers. Therefore, utilization rate for this quarter decreased by 2.1 percentage points to 68.6%. In the first quarter, gross margin decreased by 2.8 percentage points to 61.6% as compared with the same quarter last year. Such a decrease in gross margin was mainly attributable to the following two reasons

[Operator:]

[Operator Instructions] We will now take our first question from Alex Liu from Daiwa. Please go ahead you line is now open.

[Alex Liu:]

[Foreign Language] I will translate myself. So thanks Management for this very strong results. First, on capacity growth. Can we talk about the 2017 capacity growth target? And also, the capacity growth plans in the coming two years. And also, what factors are the major constraints for our capacity expansion plan? The second question is on our high-end class. Could the management talk about what's the current scale of the high-end class, the subject cover by the high-end cohort and also specifically this employer profile difference for high end versus normal course? Thank you

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

Okay back you your first question. The core concern for Tarena's capacity expansion in the future couple of years as the supply of human resources. We believe professional education market size is quite huge. And in the recent couple of years, we successfully entered in some third-tier cities, so we believe in this business area, there's still very big room to grow. So the core concern right now for Tarena is how to develop a good number of qualified people to join the team that enough human resources supply is the core concern for our future expansion. So you observed in the third quarter 2017, we accelerated the pace for standard expansion, and we established or we set up Tarena training institute to provide trainings internally to our employees. So we believe we can to better develop our employees to fulfill our target for our future geographic expansion. Your second question about advanced courses. Currently, our advanced courses in Java, Digital art and WebFront, Web software testing. In the past, since last year, we implemented in teaching on appropriate level strategy. We designed advanced level courses. In last year, we provide advanced courses in separate classes. That means we had different classes for the basic class, basic course and advance course. This means we can only implement this advanced courses teaching model in those big cities, in top cities. For example, one of our principle is the city is with per course, the monthly enrollment between 60 to 80 of people for this kind of advanced courses development. But for other cities, for example, 30 to 50 monthly enrollment that with no chance to run separate classes for advanced courses. So starting from this year, we will provide additional course content to more capable people give those students, take courses with other people in basic courses. We will provide them additional courses for advanced course content, which has the 20% higher in their tuition. And for the monthly salary, other than their training, those students taking advanced courses will be on 30% or 40% higher than the students only gone through basic course.

[Alex Liu:]

[Foreign Language]

[Operator:]

Your next question comes from the line of Andrew Orchard from Nomura. Please go ahead.

[Andrew Orchard:]

Hi Management thanks for taking my question. My question is on deferred revenue growth. Just wondering why it's such a strong deferred revenue growth in the period yet your guidance is not that high. I understand that one of these is due to the K-12, business, but this doesn't seem to fully explain the big difference. And then, the other question that I wanted to ask is with regards to your K-12 efficiency, right. I think in the call, Yang, you mentioned that the utilization of the K-12 courses is a little bit low. And I think that is probably due to low student teacher ratios. So I just trying to understand what that student teacher ratio is for the K-12 business and also if you could give us a sense of what the optimal level would be eventually. That would also be very helpful. Thanks.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

Hi Andrew, for differed revenue, your question is about deferred revenue growth is not in line with our revenue guidance for second quarter. My answer is yes. Deferred revenue growth have a couple of drivers. And one of the drivers is K-12 business. All of the K-12 students pay their For K-12 business, this revenue will be recognized in the longer period. Typically on 40 weeks. So that business, the revenue won't be not recognized that fast as compared to our professional business. That's the first reason. Second reason is difference from what we did in last year or in previous years. We started to accelerate the cash collection from our students. So we're not encourage the students to pay the tuition during their starting period. So most of our students needs to pay tuition up front before they start training. So this strategy change will help the company to collect more cash faster than before. So this also the contributor to the increase our net deferred revenue. So these are two main drivers for the increase of deferred revenue. Your question about K-12 utilization. Yes, you're right. K-12 business just started, so we roll out in 15 cities. So we placed tutors who are teachers in these 15 cities. But for these students, K-12 students at school who are not or the number of the students for K-12 at school were not as high as to the ideal level. So with the future fast-growing in this business segment, we believe the teacher and tutor ratio will be getting much better. Specifically, by the end of Q1 2017, our teachers for K-12 teacher and tutor will be 1

[Andrew Orchard:]

Got it thank you.

[Operator:]

Your next question comes from the line of Zoe Zhao from Credit Suisse. Please go ahead.

[Zoe Zhao:]

Hi Management thank you taking my question. My first question is regarding the advertising expenses between the sales and marketing expenses. Can management give us an update on the referral rate during the quarter? And the second question is if we take your guidance for the full year and the second quarter, it seems like that the second half revenue run rate will be over 30% versus our current capacity expansion is only around like 20%. So do we plan to increase our price by over 10% or like at even more capacity in the second quarter for the peak season. And the third question is regarding the gross profit margin for K-12 when the business stabilizes in the future. [Foreign Language]

[Dennis Yang:]

Zoe your first question about advertising. First, simply, the student referral now took about 21% for the quarter. For advertising for a second, let me check. It's about 40 advertising took about 40% of revenue. Selling marketing? Go ahead. Helen will answer this question.

[Helen Song:]

Advertising expenses just represents about 40% of the total selling and marketing expenses.

[Dennis Yang:]

Zoe, to your second question we do both, we are trying to do both. In the second quarter, we plan to open at least 10 new learning centers. We already opened three or four as of now, so we target to open more in the rest of second quarter. And we also try to increase ASP. As Ms. Helen mentioned, we'll roll out the new design advanced courses in Q2. So for this newly designed advanced courses, we'll charge additional tuition for more capable people. So this also would be a driver to ASP increase going forward. So we do both. This is our answer to your second question. Your third question is about gross profit margin for K-12 at the optimal level. As we use for our K-12 business, we use prerecorded video plus teaching assistance. So with this hybrid learning model, we target a still very high gross profit margin in this area. So that gross profit margin for K-12 at the optimal level will be somewhere 60% to 70%.

[Zoe Zhao:]

That is very helpful. Thank you.

[Operator:]

Your next question come from the line of Johnny Wong from Jefferies. Please go ahead.

[Johnny Wong:]

Hello management thank you for taking my questions and congratulations on another strong quarter. I just have a strategic question. In the longer term, how does our cooperation with Microsoft? How will that help our course design as well as tuition going forward, and when would we expect to be seeing these contributions? Would that be in the short term or in the long term? Thank you.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

We are cooperating with Microsoft in two fields. First, we believe Microsoft will have technology advancement in VR and AR. So we partnered with Microsoft to develop new courses in these two areas. And the second, we have partnered with Microsoft and K-12 higher education area that if our K-12 student gone through a certain competition that Microsoft will be our award a certain certificate, a Microsoft certificate, MTA, is it? MTA certificate to those K-12 students.

[Johnny Wong:]

[Foreign Language]

[Dennis Yang:]

You mean the new course.

[Johnny Wong:]

Yes.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

We believe in the fourth quarter 2017, you will see the new courses will be launched.

[Johnny Wong:]

Thank you.

[Operator:]

[Operator Instructions] The next question comes from Eric Qiu from CCBI. Pleas go ahead.

[Eric Qiu:]

Hello management, thank you for taking my question. I just want to ask how about gross margin and OP margin trend going forward? Because you said, we're entering into some new areas which currently the utilization rate or margin ratio are relatively low. So I noticed that first quarter, the GP margin was down about 3% as well as OP margin down about 3%. I was just wondering for next three quarters will both margins issues also down few percentage compared to last year. [Foreign Language]

[Dennis Yang:]

We believe there will be gradual ramp-up in the margins in the following three quarters. So as we provide the general guidance for the whole year that the margins will be, to some extent, flattish in 2017 as compared to 2016. That means we got low margin in first quarter. And then, in Q2 through Q4, that the margin will be ramped up gradually, which will be resulting from the ramp-up of new centers in new cities as well as the new courses we plan to launch in the second half.

[Eric Qiu:]

Okay thank you, and my follow- up question is regarding to the new learning center because apparently, you accelerated the new learning center opening up to speed. I was just wondering for this year 2017, what should we expect the outcome? I was wondering if opening more new learning center, we'll have to raise the earnings or we'll bring down the margin more heavily because we have a ramp-up period? [Foreign Language]

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

So won’t be taking too long for the new centers to be breakeven or to materialize. So from my perspective that we target to open more new learning center before peak season. That means before Q3. And in Q3, this professional education business will be very big number of student to take classes. So if we can get the new centers in operation before Q3, then we can realize the more student enrollment and more profit in the peak season for the year. So there won't be much impact, not adverse impact on the margin for the new centers. And back to what Mr. Han mentioned, the successful rate for opening new learning centers in the past couple of years for Tarena, those success rate is quite high. So we are open new learning center based on our analysis of the market demand. So whatever we see through if there is enough market demand in that area, we open new learning center. So this helped Tarena to take pretty much in the strong period and go through ramp-up period for the new learning centers to that are in process.

[Eric Qiu:]

Okay. Thank you.

[Operator:]

There are no further questions at this time. Please continue.

[Helen Song:]

Thank you Operator. I will now like to close the earnings call. Thank you for everyone for joining our call and if there is any further questions, please welcome, everyone, to log on to our IR website at ir.tedu.cn. Thank you.