TCTM Kids IT Education Inc.
Q4 2017 Earnings Call Transcript

Published: 6 Mar 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to Tarena International, Inc. Fourth Quarter and 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-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 fourth quarter and fiscal year 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 our newswire 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 fourth and fiscal year 2017 and give guidance for the first quarter and full year of 2018. 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 the 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:]

Thank you, Helen, and welcome everyone to our fourth quarter fiscal year 2017 earnings conference call. I am very pleased to report that our net revenues in the fourth quarter increased by 33% to reach RMB617 million and have recently recovered from previous quarters and exceeding the high end of our previously issued guidance. Our net revenues for the full year 2017 grew by 25% year-over-year to RMB1, 974 million. Last quarter, we achieved solid performance in both professional education and kid education business First of all, we adopted active enrollment strategy in our professional education business to better cater for changes in the market. At the same time by building out new courses and upgrading existing courses, we achieved 27.2% enrollment growth last quarter, which shows significant improvement compared with previous quarters. Additionally, through the positive investment in K-12 result education programs in terms of network expansion, talent recruitment, new courses research and development which significantly increased its geographic coverage, the total number of learning centers as well as student enrollment. The faster growth in both professional education and kid education business line has reflected our ability to achieve full year target in 2018 and laying the solid foundation on our growth outlook in the long run. Student enrollment growth is the prime factor contributing our net revenue growth in professional education. Total student enrollment in fourth quarter increased by 27.2% year-over-year to reach 34,223. Enrollment growth have obviously picked up from 17.5% in previous quarter. Our implementation of proactive advertisement and marketing strategy since August 2017 started to bear fruit this quarter. We are able to get more students enrollment with well -controlled acquisition cost that's achieving relatively fast business growth and maintaining our competitive advantage in the market. Meet growing demand in IT talent, the company have continued to launch new courses while upgrading existing curriculum. Currently, IT industry in the transition period, looking forward AI and this related field are expected to bring in new growth momentum in employment market. Tarena has rolled out Python course in the last quarter and gradually build up a new curriculum system to cover this popular field including Big Data, Linux Cloud Computing courses. These three courses which are Big Data, Linux together with Python has shown robust growth and contributed a total of more than 3,700 student enrollment in the quarter, representing 300% year-over-year growth. We believe that continuous content development and introduction to new courses to capture the future trends in IT industry will keep Tarena abreast of changes in the market and continue to maintain our competitive edge in professional training programs. This quarter, we remain at moderate pace in opening new training centers. Based on initiative to expand central network and optimizing existing learning centers, our total seat capacity reached 56,984 by the end of this quarter, up by 11.5% from the same period last year. We believe while pace expansion in seat capacity will bring recovery in our utilization rate, since we take value positive view on IT professional education market in just three cities. We also aimed to extend our presence and build up more seat capacity into tier 3 and tier 4 cities. In terms of professional education business, this quarter we opened 11 new centers and merged 6. As a result, the total number of learning centers reached 184 and covers 59 cities at the end of this quarter. Beside professional education business, K-12 education is another important business line to drive our future growth. This quarter it continues to maintain robust momentum and enrolled 3,271 students, which represented 300% year-over-year growth. Our Tongchuang and Tongmei programs have quickly expanded into 24 cities with 30 separate centers and 28 shared centers nationwide by the end of this quarter. Among which six separate centers are opened this quarter. We are moderately open independent centers; our K-12 education programs also leverage our sales and marketing and teaching facilities with professional education business in order to achieve better financial returns. On Nanchang level, primary and secondary schools are expected to see education curriculum system upgrading and key science, technology courses are within the future direction. It also helps young people develop a variety of basic literacy. Therefore, more and more parents and students increase the recognition of science, technology education courses. We believe the favorable market environment is the basis for our K-12 business to keep ongoing powerful momentum, through extensive experience in IT education industry and active investment into teaching recruitment and content development, we expect to launch more K-12 courses in 2018. In meantime, we are committed to adopt new teaching model in K-12 education which has one of business expansion and acceptance from parents and students. There are 70% of students continue to register after finishing their classes over the past year. In 2018, Tarena will accelerate the investment into K-12 business in terms of new course development, network expansion as well as talent recruitment, which will strengthen the foundation of K-12 to deliver sustainable growth in the future. We plan to open 60 to 70 new centers for K-12 business next year making the total number of k-12 centers reached to 100 by the end of 2018. Although, this initiative require more investment and may affect margin level in short term has the new standard are still in ramp up period and have not been breakeven. There will be significant return on building competitive position in the market and driving powerful growth with this new business. Our non-GAAP operating margin in the fourth quarter and fiscal year 2017 were 16.1% and 12.5% respectively, lower than the same period last year. This can be mainly attributable to K-12 business which is due to have fast growing period and have led to having loss in short term. For the benefit in long term growth, it may temporarily affect our margin. On the other hand, as I have mentioned earlier, we undertake positive sales and marketing strategy and achieved recovered growth in student enrollment. But our quarters associated with the marketing efforts were occurred ahead of the revenue ramp up and most of tuitions from new student enrollment in the fourth quarter will be recognized next quarter. This also brought some active impact on overall margin level. Our CFO, Dennis Yang will elaborate on this further in his later remarks. To sum up, 2017 is an important year of investment. By proactively adjusting enrollment strategy and upgrading course portfolio, we will achieve solid performance in both professional education and K-12 education unit. As we move forward into fiscal year 2018, we will continue to strengthen our core competency as a top level professional education service provider through our proprietary innovative curriculum development system. More strategic alliances with well known international enterprises and joint major programs with universities and colleges. Furthermore, through more scientific education of teaching and marketing resources, continues optimization of center network and upgrading seat utilization, we aim to focus the balance between expansion and operational efficiency in order to further improve operational efficiency and increasing the major progress of new centers. At the same time, we will continue to expand our expansion plan in K-12 business. The exciting growth performance in recent consecutive quarters reflected our ability to recover from capacity expansion and new course development effort. Our K-12 business is expected to deliver even higher revenue contribution in 2018 and gradually become important pillar for our company. We believe that with these initiatives Tarena has been well shaped for higher growth and sustainable profitability over the longer term. With that, I'll now turn the call over to our CFO, Dennis Yang to discuss the fourth quarter financial results and outlook for the first quarter and full year 2018.

[Dennis Yang:]

Thank you, Shaoyun, and hello everyone on the call. We are pleased with recover enrollment growth in professional education business and exciting performance in K-12 business as well in this quarter. As you've already have detail numbers in press release, so I'll review our financial result for the quarter and fiscal year briefly by focusing on some important areas. Let's start with net revenues. For the fourth quarter 2017, our net revenue increase by 33% year-over-year to RMB617 million. For the full fiscal year 2017, net revenues grew by 25% year-over-year to RMB1, 974 million has primary driver for the revenue growth student enrollment and course enrollment in the quarter increased by 27% and 26% year-over-year respectively to 34,223 and 35,145. For the fiscal year 2017, student enrollment and course enrollment increased by 20% and 18% respectively. In the fourth quarter, gross margin declined by 121 basis points year-over-year to 72.5%, such decrease is mainly due to lower gross margin from K-12 business as we open 14 new independent learning centers in the past two quarters. And such new learning centers are far from reaching breakeven level. If we exclude K-12 impact, gross margin of other business for the quarter was 74.7% which was at the similar level to that in the same quarter last year. Seat utilization of other business for this quarter was 69.6% and we are glad to see that the cost of enrollment growth recovery, a year-over-year decline of utilization rate narrowed to 210 basis points from 340 basis points in the previous quarter. For the full fiscal year gross margin declined by 210 basis point which comprised of 130 basis points margin drag from K-12 business and 80 basis points from other business due to lower seat resources utilization. We have already seen the recovery of other business gross margin and we believe it can be further improved by remaining high seat utilization level and better facility staff productivity. Next let's move to student acquisition cost. Advertising spending per student enrollment in the quarter was RMB2, 191 which was 8.6% higher than the amount the same quarter a year ago. Considering seat resources were not fully utilized, we have started to adopt active enrollment strategy since August 2017 through which we could recruit additional students to fill up our empty seat. Despite higher acquisition cost per student. We can make profit from those additional students at their tuition exceeded incremental variable cost we spend to recruit them and provide services. We've seen improved seat utilization after we took such positive marketing strategy and such a strategy will be adopted till utilization goes back to normal level. Apart from acquisition strategy, in order to improve utilization we also slowdown adding new seats and optimizing seat resources in our current learning centers. Such additional spending for student acquisition made our operating margin decline by 500 basis points and 270 basis points for the fourth quarter and the full year fiscal 2017 respectively. Looking ahead, we plan to further optimize acquisition channel mix and after marketing strategy back to normal, we still target to remain advertising cost per student enrollment around RMB2, 000. As we communicated in the previous quarter conference call, our typical K-12 course last for about one year. And given its one top period, the operating losses of K-12 business result from that K-12 student acquisition cost occurred ahead of revenue recognition. For K-12 business, the net revenue recorded in fiscal year 2017 and 2016 were RMB38 [Technical Difficulty] the year growth of 384%. However, as most of K-12 learning center are still ramping up, operating losses from this key business were about RMB71 million and RMB30 million for the fiscal year 2017 and 2016, respectively, representing margin, operating margin adverse impact of approximately 300 basis points in 2017. Our non-GAAP operating profit for fiscal year 2017 were RMB247 million as compared to RMB298 million in 2016. Such decreases in non-GAAP operating profit were the combination of increase or profit from our other business and increase in losses from K-12 business. If we exclude K-12 losses, although the challenging market condition of other professional education business in 2017 and the new partnership mode and the university channel made tuition revenue deferred into future years, our non-GAAP operating profit from our traditional business increased from RMB311 million in 2016 to RMB318 million in 2017. Finally, here are some updates on our partnership with student loan providers. As we mentioned in previous quarter conference call, some changes in the policies of student loan providers brought temporarily adverse impact in our operating cash flows in the one to two quarter period. In the first quarter, the company added a couple of new partners to provide loans to our students. And we believe that we can increase loan processing and cash collection terms by maintaining modable selected loan providers. And therefore we expand operating cash flow will be recovering in the coming quarters. Looking forward for the first quarter of 2018, we expect most student recruited in the quarter won't start their study until March due to the late timing of Chinese New Year in 2018. This brings a favorable impact in the revenue for the quarter because a smaller portion of tuition can be recognized as the revenue for those students recruited in the first quarter. Considering such a seasonal factor, we expect the total net revenues for the first quarter 2018 are expected to be between RMB370 million and RMB390 million, representing an increase of 11.2% to 17.2% on a year-over-year basis. We also expect the net revenues for the full year of 2018 to be between RMB2, 300 million and RMB2, 450 million, representing the increase of 16.5% to 24.1% on a year-over-year basis. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Mariana Kou from CLSA. Please go ahead.

[Mariana Kou:]

Hi, good morning, management. Thank you for taking my question. I actually have two questions. The first one is on I think on the K-12 business. It's very exciting I think we are seeing the student enrollment tripling and also we have a pretty big expansion plan for 2018. So just wondering off the back of that how much kind of margin pressure we should expect for the full year and I suppose especially for Q1 since we just mentioned that Q1 because of the Chinese New Year may have a bit of impact on the revenue. And the second question is more of housekeeping. On the utilization and I think just now mentioned on the call that the utilization rate decline is narrowing. Could you like to remind us what the utilization was in Q4, 2016 and also I guess for 2017 and also confirm that K-12 is not included in the utilization calculation. Thank you.

[Dennis Yang:]

Your first question about K-12 margin pressure. We actually got a very ambitious K-12 expansion plan for 2018. The enrollment we expanded double, further double based on enrollment we achieved in 2017. So the K-12 enrollment we expect the K-12 enrollment 2018 would be more than 220,000. In terms of margins, the total loss we expect from K-12 in 2018 will be around RMB150 million. So this is range of between like 300 basis points margin pressure to our overall financial. This is answer to your first question. And your second question about utilization. Is it? So, yes, we capitalizing utilization rate not including K-12. So the seat utilization we disclosed in our press release and mentioned in our conference call just now is all out of training program utilization. So this is will be comparable between years 2018--

[Mariana Kou:]

Yes. And just kind of to get the exact number because I think last quarter the utilization I think we were discussing last quarter it was as above 73.7% that's three and then so Q4, 2017 would be at what level?

[Dennis Yang:]

Yes. This is normally our quarters have kind of seasonality. Our third quarter, most of them peak season in a year and first quarter will be slightly down from the peak in the Q3. So if you want to compare on a year-over-year basis, you will see that decline of utilization in first quarter will narrow from 340 basis points last quarter to 210 basis points in the first quarter.

[Operator:]

The next question comes from Greg Zhu from Credit Suisse. Please go ahead.

[Greg Zhu:]

Hi, thank you, management for taking my question. I actually have two questions. And the first question can management talked about the growth strategy for K-12 in 2018 in regard of organic growth as well as M&A? And can management share more color on the recent acquisition of robotic K-12 education Rtec? And what's their revenue size and what's the estimated margin for that and the expansion plan management mentioned through 100 learning centers for K-12 in 2018? Does that include the new centers acquired from this company? And my second question is regarding the K-12 target and competition as well. So management mentioned some color regarding the K-12 target for2018-2019 and 2020 for the following you lined up the recent accelerated plan just announced. Will this target be at -- if there will be any change regarding this target. Thank you.

[Dennis Yang:]

Greg, your first question about the contribution from the K-12 in 2018 from organic growth or acquisition for some other K-12 business. Only in terms of 100 learning centers we target to maintain by the end of 2018, the numbers is not included the learning centers we acquired. I mean it's not included the 26 learning centers we acquired from Rtec. So based on our current budget and forecast, most of the K-12 business revenues in 2018 will come from organic growth. The revenue size of Rtec in 2018 will be around RMB35 million to RMB40 million. Your second question about three year plan for K-12. Let me translate, in 2018, we target 200% growth in 2018 and 2019 -- 2018. In 2019 and 2020 we expect to maintain growth rate around 100%.

[Operator:]

The next question comes from Lei Yang from CIMB. Please go ahead.

[Lei Yang:]

Hi, good morning, management. I want to get some guidance on the overall margin trend for FY2018. And also on the professional training side, what's the new learning center expansion plan for FY2018 and also will you maintain the heavy marketing and promotion policy for professional training in this year? Thank you.

[Dennis Yang:]

If you want to know our plan for new centers for our other business because of -- because we are entering Q3, Q4 series and we tend to open smaller learning centers, so if you look at number of new learning centers will be around 25 to 30 in 2018. But if you look at number of seats because of smaller learning centers, smaller size of seats of each learning center, the total additions in our seats will be around 15% for 2018.

[Lei Yang:]

Okay. And can you give us some guidance on overall margin trend for this year?

[Dennis Yang:]

I am going to split the margin expectations in two pieces. Our traditional other training business and K-12. I already mentioned the K-12 margin pressure for 2018 was around 300 basis points. And for our other training business, our traditional factor, we expect the margins will be maintained at a similar in 2017.

[Operator:]

The next question comes from Johnny Wong from Jefferies. Please go ahead.

[Johnny Wong:]

Hello, management. Thank you for taking my call and congratulations on the recovery in revenue. I just have two questions. Firstly, my question with regards to the new courses that are being offered in both the traditional and K-12 business. Can you give us a little more color and especially in terms of the type of enrollment in the first quarter? Whatever you've seen in terms for traditional courses. And that's the first question. Second question will be in terms of the revenue contribution for K-12. What are we expecting for that overall percentage contribution for K-12 in 2018 revenues? Thank you.

[Dennis Yang:]

Johnny, for the first quarter 2018 other training enrollment, as the late timing of Chinese New Year, this year, so we actually most of the students recruit in the quarter will be March end, probably and further into April. So the Q1 enrollment growth will be between 10% to 15%. This is -- we've already seen the pick up of enrollment momentum after Chinese New Year. And right now the peak season is actually after Chinese New Year for our traditional sector. Your question about K-12 contribution. As I mentioned, the K-12 revenue recognized in the longer period, so also want to size two verticals. The first is cash revenue. The cash revenue in 2017 was around RMB100 million, which already around 4% to 5% of our total business. If we are looking into 2018, the cash revenue could be around RMB250 million, which is around 10% of our total cash revenues for Tarena. So back to another vertical, accounting revenue. 2017, the total K-12 revenue contribution around 2% to 3%. Next year 2018, the K-12 accounting revenue will be growing to 5%. I am sorry Johnny, around 6% to 7%, sorry.

[Shaoyun Han:]

As you compare the timing of Chinese New Year between 2017 and 2018, you will see that in 2017 the Chinese New Year was late January and as compared to the timing of Chinese New Year 2018 in February 16. So this brings kind of unfavorable impact on our revenue recognition in the first quarter of 2018 because no such students are recruited in the first quarter will be started -- will be starting their study in March not in February. So this is the seasonal factor. And I will also want to add one more thing here is if you look at the time of Chinese New Year, the Chinese New Year timing in 2018 will be very, very similar to the timing of Chinese New Year 2015. So if you kind of made comparison between the enrollment in the first quarter 2014 to see the kind of relation between such a relation of the timing of Chinese New Year will be have kind of impact on the revenue recognition in the coming quarter. We enroll -- we rollout some new courses for our traditional other training business. We already mentioned we have some kind of some new courses including Big Data, Cloud computing and Python. Out of those three courses contributed more than 3,700 students in the first quarter. I want to particularly -- want to say that Python currently -- Python is a course we launched last quarter but right now Python already runs the third in our all course offerings of Tarena in the first quarter.

[Operator:]

The next question comes from [Alex Feng] from First Beijing Company. Please go ahead.

[Alex Feng:]

Hi, management. Thank you for taking my questions. I have two questions. The first one is about credit policy. I noticed that your accounts receivables doubled at the end of year, it's much more quickly than your revenue growth. And so have you reducing your credit policy? And my second question is about competitive landscape. Could you give us more color of the competitive landscape in 2018 compared to 2017? Thank you.

[Dennis Yang:]

Hi, Alex. Let me address your first question. The increase of accounts receivables, this is kind of direct relation to what I mentioned the slowdown of cash sanction from the loan providers due to the change in the policies of those providers. In order to expedite in cash collection we already sign up more loan providers in the first quarter. So we can have a chance to have a better cash collection terms among those increasing loan providers. So we believe with the incremental loan providers make the big pool of valuable loan companies to provide loans to our students. The cash -- the cash will bring cash flows will be getting better in the coming quarters. I mean the Q1 and Q2, 2018 we will see that evolving cash flow getting better. So when the operating cash flow getting better, the accounts receivables will be steady decrease economy.

[Shaoyun Han:]

In 2017, for our IT professional education market is quite challenging. There are some quality, education quality issues happen to our some small IT training institutions using recruitment channel, but those institutions won't have good control over their service quality. So they drew a lot of students' complaints and lot of adverse news presence in 2017. So this is actually makes the overall IT professional education business in 2017 will be very difficult, this is same thing for Tarena and other players. So we've already seen some other IT professional business providers in 2017, their business is going down, lose their momentum to grow their business. And some players out of business go bankrupt. In 2018, we believe the market condition will be getting more favorable because of some poor performing players is out of market and Tarena is one of those to maintain very high quality and few in the market who provide high standard services to our students.

[Operator:]

The next question comes from [Fiona Chen] from Fiona Vista Fund Management. Please go ahead.

[Fiona Chen:]

Hello, management. Thank you for taking my questions. I just want to ask about the new announcement that the Ministry of Education and Ministry of Civil Affairs announced that they will be cleaning up I guess more of the informal education training organization. Just wanted to ask if you think this will affect you guys since you are now focusing more on K-12 business. Thank you.

[Dennis Yang:]

Based on our understanding, we believe the new policies more or so for those curriculums training business like English Chinese and math basically. Our K-12 technology courses more focused on quality education, does not included in curriculum training. So in our opinion, we won't see the very big adverse impact over our K-12 business from the new regulation. So we still put the positive expansion plan for K-12 business in 2018. Mr. Han added two points. The first because of currently in the primary secondary school, the government encourage the student to have some courses related to technology and science. So Tarena with our K-12 course content, we are able to partnership with the primary and the secondary school to provide those services in the school. And second point Mr. Han mentioned is as the new policies more focused on curriculum courses without those after school curriculum training programs, the young kids may take more time and it gives kids the challenge to select modable quality oriented education program that the kids shows interest. So, Tarena's computer programming and robotic courses will be among those quality oriented education programs.

[Operator:]

The final question comes from Eric Qiu from CCBI. Please go ahead.

[Eric Qiu:]

[Foreign Language]

[Dennis Yang:]

Let me translate the question. There is kind of mismatch between student enrollment and course enrollment in the third quarter and fourth quarter. So could you give some explanation on those two enrollment correlation? And the second question is about the net revenues. Currently gross fee revenue in 2017, the first quarter recorded the highest revenue numbers, higher than in the Q3 within reason behind. Let me address these two questions. The first around the course enrollment. Course enrolment, we calculate based on the actual delivery of the courses. Student enrollments are the students record registered for our course. So between the two metrics, there is some impact from suspension and resumption of study. For example, some students from university channel, we register some students but the students may suspend their study in the later date. For example, as a final year in the school they coming back to our learning center and resume the study. So the student enrollment will be recorded many quarters earlier, so right now in Q3 and Q4, a number of the students from university channel resume their study and finish the course. So that's drive out the cost enrollment in a less than bigger growth pace. And this is my answer to your first question. The second question is because you know in the previous quarter, previous two quarters actually, you will see that by the time our enrollment grows is to some extent pre lack, and it's not very strong. In the second quarter, the enrollment growth around 14.7% and in the third quarter enrollment growth around 17.5%. This actually, the slight enrollment growth has adverse impact on the revenue recognized in Q3. This is normal case. If you look at our financial in the past years in 2014 through 2016, you will see the third quarter will be the biggest -- the revenue contribution quarter basically. So 2017 just want to mention is very challenging. During the year there is some kind of changes in the market. And as Tarena also face difficulties in the mid of year, so we started to take proactive marketing strategy later on and we will see that the student enrollment picks up in the fourth quarter. So this is actually the basic reason why we will see the first quarter revenue greater than the third quarter revenue.

[Eric Qiu:]

[Foreign Language]

[Dennis Yang:]

The last question -- the reason for the decrease in seat capacity. We, actually [Foreign Language].We start to optimize the center network at the half of 2017. So the total capacity just decrease a little bit Q-on-Q but this increase by about 11.5% year-over-year. Thank you.

[Operator:]

Thank you. Now I revert the call to Ms. Helen Song, Tarena's Investor Relations.

[Helen Song:]

Thank you, operator. If there are no further questions at present, we would like to conclude. And thank you, everyone for joining us on the call. We welcome you to reach out us directly by emailing ir.tedu.cn should you have any questions or request for additional information. We encourage you to visit our Investor Relations site ir.tedu.cn. Thank you.