TCTM Kids IT Education Inc.
Q4 2016 Earnings Call Transcript

Published: 1 Mar 2017

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Tarena International Inc. Fourth Quarter Fiscal Year 2016 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 fourth quarter and fiscal year 2016 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 fourth quarter ended fiscal year 2016 and give guidance for the first 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] Thank you Helen, and welcome everyone to our fourth quarter and fiscal year 2016 earnings conference call. [Foreign Language] We are delighted to report that we finished 2016 on a strong note. Our net revenues in full year 2016 grow by 34% year-over-year to RMB1,580 million while net revenues for the fourth quarter grew by 22% year-over-year to RMB464 million, which is in line with our previously issued guidance. In addition, non-GAAP net income increased by 52.4% year-over-year to RMB323 million. [Foreign Language] In the fourth quarter, our cost enrollments totaled 27,897, an increase of 19% year-over-year, this is primarily factored contributing to our revenue growth in the quarter. [Foreign Language] Our student enrollment number is more of lease operational indictor and defined as the number of new incidence recorded and registered in the quarter, continued its healthy growth. Because of the early timing of Chinese New Year, our new student enrollment were like within the month of December. Although we experienced a simple impact, total student enrollment this quarter increased by 80% year-over-year to reach 26,898. [Foreign Language] Deployment amount for certain IT related positions experienced some fluctuations in 2016. Building all the success of upgrading click portfolio and implementing differentiated balanced courses teaching model, we fully accomplished the target plans that at the beginning of the year. The student enrollment in the full year 2016 totaled 107,493, increasing by 28% year-over-year. [Foreign Language] Besides the professional education business, our business initiatives in kid education and in the name of TongChuang and Tongmei have showed solid progress towards our target. By the end of fourth quarter, TonChuang and Tongmei courses have been brought out in 15 cities and cumulatively enrolled 2,354 students, 883 of which were enrolled in the fourth quarter. [Foreign Language] In the past several quarters, they committed to continuously optimize our cost content, our operational model and organizational structure for kid business to better serve market amount. This strategic adjustment has started to bear fruit and brought us in the quarterly record high student enrollment figure in first quarter which laid solid foundation for event steady growth in the long run. [Foreign Language] Opening mew learning centers and expanding lease areas of current learning centers are critical ways that we increase our classroom areas so as to accommodate growing demand and business development. By the end of this quarter, our total batch capacity increased to 51,127, up by 21% the same period last year and approximately 2% from the end of previous quarter. In meantime, we focused on balancing utilization of facility resources and promoting standard efficiency. Our seat utilization rate this quarter has reached 71.7% reflecting that our operational efficiency effectively maintained and a relatively high level as we continue business expansion. [Foreign Language] In terms of new learning centers, we opened seven this quarter. As a result, our total number of learning centers cap at 145. Specifically this quarter, we opened one learning center in each of the 47 cities which are Guangzhou, [indiscernible] are cities were newly entered. [Foreign Language] As a key indicator, our education quality and outcome, job placement record is operating metric that we always focus on. The six months post-graduation job placement rate in the quarter was above 95%. This outstanding result would further support our leading brand and other competitors positioned in the industry. [Foreign Language] We're also encouraged to see relatively strong operating margin in the first quarter and the full year 2016. Our non-GAAP operating margin in the first quarter increased by 0.4 percentage point, year-over-year to 25.9%. Non-GAAP operating margin in 2016 increased by 2.6 percentage point's year-over-year to 18.8% which is the highest level in the Tarena's history as a public company. The expansion of our operating margin was primarily driven by greater business skill, optimized sales and marketing workflow to drive better operational efficiency, as well as effective control in bad debt. Our CFO, Dennis will elaborate on this further in his later remarks. [Foreign Language] To sum up, with constant effort in expansion and skill for professional education services, launching new disciplines, exploring more opportunities in K-12 business, Tarena achieved actual performance in both top line and bottom line in fiscal year 2016. And has been well positioned to drive future growth in the next year. [Foreign Language] With that, I will 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 2017.

[Dennis Yang:]

Thank you, Han Zong, and hello everyone on the call. We are pleased with the strong financial results for the first quarter and fiscal year 2016. Since you already have heard the detailed numbers in the press release, I will review the financial results for the fourth quarter and the fiscal year briefly and only focus on the couple of more important areas. So now last hour with numbers. For the first quarter 2016, our net revenue increased by 22% year-over-year to RMB464 million. For fiscal year 2016, we grew our net revenues by 34.1% year-over-year to RMB1,580 million. As Han mentioned, student enrollment is the leading indicator of our business growth and course enrollment is a primary driver of our revenue growth. Total student enrollment in the quarter increased by 18.1% year-over-year to 26,898. Total course enrollment increased by 18.9% year-over-year to 27,897. For fiscal year 2016, student enrollments and course enrollments increased by 27.9% and 29.9% respectively as compared with those of fiscal of 2015. ASP increase is another driver for revenue growth. Average revenue per quarter enrollment in the first quarter as defined by net revenue divided by course enrollment was RMB16,634 which increased by 2.6% as compared to RMB16,208 in the same quarter last year. For the fiscal year 2016, average revenue per course enrollment increased by 3.2% to RMB15,441, sudden increase of average revenue per course enrollment were mainly attributable to the increase of the standard tuition by RMB1,000 to RMB2,000 for selected courses in 2016. Now let's move onto cost and revenue and gross profit. Seat utilization rate is one of the key metrics measuring our operational efficiency of facility per sources. This is an additional rate for this quarter were 71.7% which is almost flattish as compared during the same period last year. For fiscal year 2016, seat utilization rate fairly decreased by 30 basis points from 73.5% in the fiscal year 2015 to 73.2% in fiscal year 2016 because the properties we purchased in 2016 has not yet reached to the optimal utilization level. In the fourth quarter, gross margin decreased by 1.4 percentage points to 73.4% as compared in the same quarter a year ago. Such a decrease in the gross margin was mainly attributable to currently lower K-12 business gross margin than our professional education business in fiscal year 2016. As K-12 is due entry to run per period and utilization of our K-12 seat resources has not yet reached the ideal level. For the fiscal year 2016, gross margin were 1.6% which were stable as compared to 71.7% of fiscal year 2015. Elsewhere operating expenditures since 2015 we have been focusing on operational efficiency improvement and implementation of adequate controls over account receivables. Our strategy started to bear fruit in 2016. I would like to highlight the following key points. Firstly, student acquisition cost is one of our largest operating expenditures. In this quarter we continue to optimize student acquisition channel mix and improve our sales lead conversion. We are pleased to see that average advertising spanning per student enrollment decreased by 2.5% from RMB2,069 in the previous quarter to RMB2,017 in this quarter. This represents that our student acquisition improvement strategy is successful. For fiscal year 2016, average advertising spending per student enrollment increased by 6% from RMB1,890 in fiscal year 2015 to RMB2,004 in 2016. This increase was resulted from higher unit cost per student acquired from such and in channel in 2016, especially after IDO revised its advertising policy in May 2016 and partially offset by the optimization of channel mix and improvement of our certainly conversion. Second, we recorded bad debt allowances for down account receivables from 2014. As communicated previously, our bad debt expenses resulted from the legacy issue of installment payment plans extended by -- to our recipients. After having partnered with third-party financing providers, and implemented expense in internal controls over credit rating and cash collections, we'll well manage this issue and in the first quarter bad debt expenses decreased by 65% from the same period last year to RMB8.2 million. For fiscal year 2016, we recorded bad debt expenses of RMB33.6 million which was 47% lower than the amount of fiscal year 2015. We're pleased to see that we finally turn a corner of this legacy issue and bad debt expenses started to decrease after reaching the peak in 2015. In addition, in 2016 we also attempted to improve the employee productivity through workflow standardization and improvement of our internal systems and providing adequate trainings to our employees. The overall employee productivity ratio which is defined as total student enrollment divided by the average number of employees for the period improved by 5% from 16.7% in fiscal year 2015 to 17.5% in fiscal year 2016. As a result from our business, improvement of operational efficiency and reduced bad debt expenses, our non-GAAP operating income for this quarter increased by 23.7% as compared to the same period in 2015 while non-GAAP operating income for fiscal year 2016 increased by 56.2% as compared to fiscal year 2015. The non-GAAP operating margin also expanded accordingly. Non-GAAP operating margin expanded by 36 basis points to 29% in the first quarter of 2016 from 25.5% in the same quarter in 2015. For fiscal year 2016, non-GAAP operating margin expansion was even stronger expanded by 266 basis points from 16.2% in 2015 to 18.8% in 2016. Our net profit was RMB242 million for the fiscal year of 2016 which increased by 35% from RMB179 million last year. Non-GAAP net income also increased by 52% to RMB323 million for fiscal year 2016 from the non-GAAP net profit of RMB212 million in 2015. Non-GAAP net profit margin also expanded by 245 basis points from 18% in 2015 to 20.4% in 2016. We generated RMB534 million in positive operating cash flow in fiscal year 2016 which was 52% hard than the amount of fiscal year 2015. In 2016, we spend capital expenditures of RMB282 million to purchase for properties, mainly for teaching purposes. Looking forward to first quarter of 2017, total net revenues for the quarter are expected to be between RMB322.5 million and RMB329.5 million representing an increase of 19.7% to 22.3% on a year-over-year basis. We also expect the revenue for the full year of 2017 to be between RMB1,990 million and RMB2,070 million, representing an increase of 26% to 31% on a year-over-year basis. Operator?

[Operator:]

Thank you, Mr. Yang. [Operator Instructions] We'll take our first question from Zoe from Credit Suisse. Please go ahead, your line is open.

[Zoe Zhao:]

Hi management, thank you for taking my questions. I actually have three questions here. First question is that Mr. Han mentioned that with seasoned fluctuations mentioned in certain sectors, can we please elaborate on this? What is the outlook over the total -- the overall job market? The second question is, just wanted to get some update on the core at the course enrollment growth after Chinese New Year? And the third question is on the 2017 operating margin, I'll look especially around our sales and marketing strategy; where shall we expect more additional operating leverage? [Foreign Language]

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

Okay, let me translate. Mr. Han answered Zoe's question. The first question, after the fluctuation of IT related courses employee market in 2016; all we know that -- I mean 2015 -- male in China, they are over-hated in other market. And then we turn to 2016, the auto markets went down and this has adversely impacted on the student enrollment -- job and placement for [indiscernible]. So in 2016, we encouraged the students, initially we want to take how as -- to take other courses. For example; Java and Web front, and for Java and Web front we observed a very strong year-over-year growth in student enrollment. For example; Java, the year-over-year enrollment growth of close to 60% versus what we have mentioned in our speech on the IT employment market fluctuation. Zoe's second question is about the student enrollment after Chinese New Year. From the very beginning on February, after the Chinese New Year was stared, our marketing and student enrollment. The student enrollment right now is very strong and we believe the total enrollment what we have 20% -- around 25% year-over-year gross with last -- as compared to Q1 2016. As all we know the Q1 2016 back order have very strong growth as compared to the previous year with 51.8% year-over-year growth. With that very strong high base, we are expected to further grow our student enrollment by around 25% in this quarter, first quarter 2017. For the third quarter, the presence about the operational expanded structure, Mr. Han mentioned about the student acquisition cost. In 2016, we optimized on the channel mix to acquire students as the search engine is most expensive channel we acquired new stints. So in 2016 we started to try to optimize the overall channel mix and reduce the contribution from the search engine; contribution like VIDU searches. We continue to optimizing the channel mix in 2017 and we try to further reduce the contribution from search engines -- from -- for our total seat enrollment. We try to increase the student referrals and assuming media in 2017, and for those two we believe we are a channel with lower cost. So with this, the overall -- the student acquisition cost will be maintained at relatively stable level as compared to 2016. In terms of our year 2017 margins, I will say the overall financial were about flattish in the non-GAAP operating margins which included two parts; the first we -- due to the business scalability and further control of bad debt expenses in 2017; we may see the certain level of expansion in non-GAAP operating margin in professional education business. But K-12 in 2017 is a ramp-up period and the operating margin from K-12 will be very low or even inactive in short-term. So with those and the pressure from K-12 in the overall margin, so our expectation for the whole year non-GAAP operating margin would be flat in 2017 as compared to 2016. Zoe?

[Zoe Zhao:]

Okay, that's very helpful. Thank you.

[Operator:]

Thank you. Your next question comes from the line of Fan [ph] of Goldman Sachs. Please go ahead.

[Unidentified Analyst:]

Thanks management for taking my questions. I have two quick questions. First question is about may I know what's your current new technician level of K-12 segment? And what kind of operating margin are you looking at on a normalized level? And the second question is regarding to your advertising; apologies if I may -- may I know how much do the enrollment contributed by VIDU and that refer with respect to this quarter? Thank you.

[Dennis Yang:]

In first quarter 2016 we enrolled 800 of verticals, 900 K-12 students. Some often -- the K-12 students, they take classes in our professional education. So right now we have limited number of K-12 centers, special center for K-12 is very limited. So it's hard to say the utilization purely for K-12 business right now; this is the answer to your first question. Your second question is the contribution for search engine and senior referral in the first quarter; let me check the number; 43% is contributed from search engine and senior referral take to about 20%.

[Unidentified Analyst:]

Thank you. May I know what kind of operating margin you are looking at for K-12 segment, normalized level. Maybe even near-term or even longer-term?

[Dennis Yang:]

Okay, good question. Yes, for 2017 we target to grow our K-12 business dramatically. In 2016, the total seat enrollment for K-12 with 2,354 and we targeted to double, more than -- well, even more than double the total student enrollment in 2017. With this you might realize the K-12 revenue will be recognized in the longer term. I mean our professional education will be down the 12 month full month but the K-12 business will be run throughout the year. So the revenue recognized and as well as in the marketing spend with count on mismatch and then in the short-term there will no pressure in the margin. In the long run, we believe the normalized level in the K-12 business can generate non-GAAP -- operating the margin higher than 30%. Incremental -- for example -- sorry, let me clarify. The incremental non-GAAP operating margin for K-12 will be higher than 30% and the long run at the normalized level.

[Unidentified Analyst:]

Thanks. Very helpful.

[Operator:]

Your next question comes from the line of Ivy [ph] Mcquarie. Please go ahead.

[Unidentified Analyst:]

Thank you, management, for taking my question. I have two quick question; the first one is just to follow-up on the tunnel mix of our student acquisition. So we mentioned that 33% from the search engine and 20% from student referral. I'm wondering what's the percentage that pick up from those job posting websites such as Real Jobs and OPA and also what's the percentage that sounds our cooperation with college and university? And my second question is our payout; so currently what's the percentage of student's enrollment from the fancy payout and the revenue contribution? Thank you.

[Dennis Yang:]

Let me check the number. First off, I'll have to highlight the search engine talk about 43%. Senior referral take 20% and job posting website takes about 18% in the first quarter which included cross by website and job recruiting websites. And university contributed 19% of the total enrollment in the first quarter 2016. So this is the overall channel mix of our student enrollments in the quarter. So the second question about the proportion of advanced courses; the total student to take in advanced courses -- 14% of students take advanced courses in the first quarter in 2016.

[Unidentified Analyst:]

Thank you, veryhelpful.

[Operator:]

[Operator Instructions] Your next question comes from the line of [indiscernible]. Please go ahead.

[Unidentified Analyst:]

Great, thank you management for taking my question and congratulations on the solid effort. I just want to understand your growth strategy of your professional education in 2017. Can you break out just in terms of penetration to new series, designing of new course which will be the major driver going forward. Just give us some color on that. Also interesting you are Chief Education, I think this is very topical at the moment. I think there won't a shift from the current and our focus on mathematics, English to the future -- maybe to IT scales. I just want to understand what's your strategy to grow your key education business by over 100%, so you talk about -- you want to double your kid enrollment this year; just want to know -- learn about little bit more about your strategy of kid education this year and mainly the update from -- I don't know, regional government policy change, is there any talk among the regulatory bodies regarding this new area of education for K-12 students? Thank you.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

In 2017 we target to launch at least one new course for our professional education sector. In terms of the Series we entered in 2017, we have a lust of the Series we -- in our shortlist which includes [indiscernible]. We target to expand our -- penetrate our business into third-tier cities and in the meantime we also focus on to grow our business in our currencies, especially in the first tier and second tier cities.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

We with our business and plan in the future to expand our business into third tier cities; in the third tier cities there was lower personal costs as well as the rental costs in built areas. So with the relatively constant tuition in the third tier cities with other cities, we believe the higher contribution margin will be generated from the third tier cities, and with that there will be fee potential to further expanding our overall margins in our financial report in the long run.

[Shaoyun Han:]

[Foreign Language]

[Dennis Yang:]

Okay, our cost for K-12 has to focus on some of the impact with leveraging our existing resources in professional education learning centers. So we try to use most of our professional education teaching resources, we're supplemented by the K-12 flagship vendors in the cities we launched the K-12 business. Those flagships are standard for K-12 will be more focused on our sales and marketing, as well as some branding and to try listening provided to the students and their parents. In terms of the regulatory, we believe the K-12 technology courses will be followed the similar rules and regulations at other K-12 business like math, like English, Chinese. For a professional, right now K-12 is way focused on the technology what computer related, of course this most of our learning center; most of our companies have the licensed -- in the cord, the computer training. So we don't believe any -- we believe there won't be many problem for us to run [indiscernible] business.

[Unidentified Analyst:]

Got it, thank you so much.

[Operator:]

[Operator Instructions] Our next question comes from the line of Eric Koo from CCBI. Please go ahead.

[Eric Koo:]

Hi, good morning management team. Thank you for taking question. My question is regarding tool banish girls; you said because some reason for instance less demand for some IT cost or the spring festival or seasons than you see some flowing down of penis. I was just wondering if it's temporary, the bin is closed, we'll come into new stable level, I mean -- Ron, 20% year-over-year growth for the next few quarters because I see the churn. The revenue growth is decreasing for several quarters already in the last four/five quarter. Thank you.

[Dennis Yang:]

So first of all, I would like to say that only one or two IT discipline have certain level of fluctuation in 2016. And the main driver for business growth is not from reach of a specific but discipline. So my -- I'm Howard, key drover of business growth is the future demand in the market. From the graduates and the young people, those young people has not equipped with unnecessarily skills and to find ideal job opportunities in IT related industry. So overall in China, we believe it was the transition to new economy there; so no doubt that more and more people will shift to the IT where technology-related provisions. With this we believe IT related and technology related trainings; professional training where we have a huge market potential. What did we missed that Mr. Han discussed? In 2016, our seat enrollment grows very close to 28% year-over-year. With those students coming to our learning centers; initially some of our students may want to take hour as an enjoy but if we stand out at that time, we now have Sam Jose [ph] not the best of their recruit or employee market. So we encourage those students to take with the backend development like Java, PHP or other front end development like webscromp. With this we believe those three disciplines whilst a very good job market where more idle to much either to find job opportunities when the seniors finish their study. So we don't have any doubt for the long-term growth for IIT; related professional which education moment.

[Eric Koo:]

The only fluctuation, coming from 1 or 2, specific this plan splits certain level of market trend in particularly point of time, like iOS and Enjoy because it's overheated market in 2015 and sudden kind of traction; in 2016 and we don't believe this kind of question will be a ;potentially of line. And in 2017, maybe last or next year. Goes to the employee market looking to coming better.

[Operator:]

Thank you. Now I'll reverse the call to Misser to remove investor relations direct.

[Helen Song:]

Thank you, operator. If there are no further questions, we'd like to conclude. We'd like to conclude by thank you everyone for joining us on the call. When we'll commute, reach out to us directly by e-mail at [e-mail]. Should you have any questions or request for additional information and I encourage you to visit our investor relation site at [e-mail]. This concludes Tarena's earnings conference call. Thank you.

[Operator:]

That does conclude our conference for today. Thank you for participating. You may now disconnect.