TCTM Kids IT Education Inc ADR (VSA) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the Tarena International, Incorporated Fourth Quarter and Fiscal Year 2015 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to your host for today, Ms. Helen Song, Tarena’s Investor Relations Manager.

Thank you, Operator. Hello, everyone and welcome to Tarena’s fourth quarter and fiscal year 2015 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 newswire services. Today, you will hear opening remarks from Tarena’s Founder, Chairman and CEO, Mr. Shaoyun Han, followed by our Chief Financial Officer, Suhai Ji, who will take you through the company’s operational and financial results for the fourth quarter and fiscal year 2015 and give guidance for the first quarter and full year of 2016. After their prepared remarks, Mr. Han and Mr. Ji [indiscernible] 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. Ji will translate.

Thank you, Helen and a welcome everyone to our fourth quarter and fiscal year 2015 earnings conference call. 2015 marked our second fiscal year as a public company and we again finished it on a strong note. Our net revenues for the fourth quarter and for the year grew by 51% and 39% respectively supported by robust growth in student enrollment, continued business expansion into new verticals as well as strengthened brand recognition nationwide. In the fourth quarter our net revenue has increased by more than 51% to reach 60 million, another record high and exceeding the high end of our previously issued guidance. The strong top line revenue growth in the fourth quarter was mostly due to strong student enrollment growth recorded in the second and third quarter and it is reflected in the course enrollment number for the fourth quarter. As we explained in a previous earnings call course enrollment for periods is the cumulative total number of courses enrolled in by our students during such period and a better correlates with the revenue recognized in the quarter. In the fourth quarter, our course enrollments totaled 23,466 an increase of 37% year over year and this is the primary factor contributing to our revenue growth in the quarter. In addition we had about 2000 students recruited through the university channel in the first and second quarter who postponed their enrollment onto summer and only completed their courses in the fourth quarter revenues from those students also contributed to the higher than expected revenues in the fourth quarter. Our student enrollment number which is more of a lead indicator and define as the number of new students recruited and registered in the quarter also grew strongly at 38% year over year to reach 22,782 in the fourth quarter. Both IT and the non-IT courses kept strong growth momentum in the fourth quarter. Total student enrollment for the 11 IT courses grew by 59% year over year while enrollments for the three non-IT courses grew by 21% year over year. IT courses together accounted for 62% of the total student enrollments in the fourth quarter as compared to 56% in the previous year. In the fourth quarter we had a total of seven courses with enrollment about 1000 and we will continue to execute our strategy to diversify our course offerings and expand into other high growth disciplines for example we launched Tongcheng and Tongmei courses in December 2015 to target younger audience from primary to high school. This is another new initiative that we're excited about and we'll bring additional growth opportunities. In the fourth quarter our student enrollments from the retail and university channels were 80% and 20% of the total student enrollments respectively this compared to 82% from retail and 18% from university channel in the same period a year ago. As we further penetrate into the university channel and drive enrollment growth more and more students recruited through such channel and not in their final year of college and may postpone their training until later date. This would also impact the quarterly revenues as we explained earlier. For fiscal year 2015 we grew our revenues by 39% to 189 million, our course enrollments increased by 35% to reach 78,729 while student enrollment increased by 40% to reach 84,041. Student enrollment mix from retail and a university channel for fiscal year 2015 was 84% and 16% compared with 82% and 18% for fiscal year 2014. Together with the standard tuition fee increase in March 2015 such channel mix also contributed to the higher effective average selling price for our courses. In terms of course offering as previously mentioned we launched Tongcheng and Tongmei courses in the fourth quarter of 2015 thus bringing the total number of course offerings to 16 in fiscal year 2015 up from 12 in fiscal year 2014. The other two new courses launched in 2015 were front and web development in the first quarter and the Java big data in second quarter. In terms of the new learning centers we opened a sixth in the fourth quarter of 2015 compared to '13 in the same period of 2014 and four in the previous quarter. Specifically we opened two centers in Schengen [ph] and one each in Shanghai [indiscernible] with the latter three being the new tier 3 cities that we just entered. The total number of learning centers by the end of 2015 increased to 134 to 128 in the previous quarter and a 118 at the end of 2014. In addition to opening new learning centers we also expanded lease areas in a number of existing learning centers so that our total seat capacity increased to 42,434 at the end of fiscal year 2015 up by 2% from the end of the previous quarter and by 35% from the end of fiscal year 2014. Our center utilization rate in the fourth quarter declined slightly to 72% from 75% percent in the same period a year ago due to the capacity expansion and opening of the New Learning Centers but for the year as a whole center utilization for fiscal year 2015 was 73% higher than the 71% figure into 2014 reflecting increased operating efficiency. Another operating metric that we are particularly proud of has being our job placements record which is a key indicator of our education quality and outcome and I'm pleased to report that in 2015 we continued to deliver employment results for our students, our four months post-graduation job placement rates in 2015 was once again above 95%. This best in class results are function of the strengthen and the quality of our learning platform as well as the market demand for trained professionals. They also support our market leading brand, pricing strategy and overall competitive position. As a mission focused organization we're proud of our role in enhancing the career prospects of 10s of 1000s of students who went through a period of course each year and I believe strongly that our student success is the foundation of our own. In the fourth quarter we are also pleased to see the significant year over year improvement in profitability for our business. Our gross margin in the fourth quarter increased by 210 basis points year over year to 75% and a non-GAAP operating margin increased by 890 basis points year over year to reach 26% mainly due to the increased business scale as well as improvement in sales and marketing efficiency and better control on bad expenses. Our CFO Suhai will elaborate on this further in his later remarks. Now a quick update on the progress of our online learning platform tmooc.cn which was launched in March 2015. The number of TMOOC users has reached more than 160,000 today and our proprietary content library currently offers nearly 13000 hours of video content. Through TMOOC we also generated 12,500 VIP users to-date who have become our paying customers. Lastly I would also like to share our teaching at an appropriate level strategy that we were focused on implementing in 2016. We believe that we can achieve better teaching results and make better use of student's time if they can be taught at appropriate levels. To meet this objective we would redesign one course into two levels, basic course and advanced course and the students can choose the course most appropriate for them. Through this arrangement we can help more capable students equipped with even better skills and therefore make them more competitive in the job market. In 2016 we plan to adopt and implement this strategy in five different subjects and we believe this will provide better service to our students as well as new opportunity to scale up our business. With that I will now turn the call over to our CFO, Suhai Ji to discuss the fourth quarter financial results and outlook for the first quarter and full year 2016.

Thank you, Shaoyun and hello to everyone on the call. We are pleased with the strong results for the fourth quarter and fiscal year 2015 with net revenues existing the high end of our guidance. Since you already have all the detail numbers in the press release I will review our financial results briefly and only focus on a few more important areas. For the fourth quarter of 2015 we grew our net revenues by 51% year over year to 60 million. Total student enrollments in the quarter increased by 42% year over year to 22,781. Total course enrollments increased by 37% year over year to 23,466 which as Shaoyun Han explained earlier is a primary driver for the revenue growth. Average revenue per course enrollment in the fourth quarter as defined by net revenues divided by course enrollment was 2555 compared to 2311 in the same period last year. The 10% year over year increase was mainly due to the nominal tuition fee increase of RMB1000 and the higher than expected revenue from university channels students who deferred there enrollments as explained earlier. Cost of revenues in the fourth quarter increased by 40% year over year to 15 million mainly due to the higher personnel costs, higher rental cost and higher depreciating expenses. Gross profit increased by 56% year over year to 45 million and a gross margin increased from 73% to 75% year over year due to increased business scale and the leverage we get from teaching and rental cost as a percentage of their revenue. Selling and marketing expenses increased by 36% year over year upto 17 million mainly due to the higher personnel costs and higher advertising expenses. However our average advertising spending per student enrollment for the fourth quarter decreased to $290 from $330 in the same quarter a year ago. Advertising spending accounted for 11% of the total revenue in the fourth quarter compared to a 13.4% in the same period a year ago. As previously communicated with investors after a traditional second quarter we have fully realized that benefit of the Baidu account migration and a further enhanced our sales and marketing efficiency. General and administrative expenses increased by 29% year over year to 12 million mainly due to higher compensation costs, higher bad debt allowance and higher share based compensation expenses. In the fourth quarter, we incurred 3.7 million in bad debt allowance compared to 3.2 million in the same period a year ago and 3.9 million in the previous quarter. As explained to investors previously bad debt expenses result from the legacy issue of installment payment plans we extended to our students. We have partnered up with third party financing providers such as Bank of China, Credit E [ph] and the Bank of Beijing in 2013 to greatly reduce the percentage of students on the installment payment plan extended by Tarena. In addition, we have also implemented strengthened controls over credit and cash collection to reduce the risk of accounts receivable becoming uncollectible. In 2015, we took the conservative approach to accelerate the provisioning for longer age accounts receivable and made a total bad debt allowance of 10.1 million. We're hopeful that we're finally turning the corner on this issue and the bad debt expenses will start going down in 2016 after reaching its peak in 2015. Research and the development expenses increased by 41% year over year to 2 million mainly due to the higher personnel costs as we expanded our course offering and operations. As a result of non-GAAP operating income for fourth quarter was about 15 million was a non-GAAP operating margin of 26% compared with about 7 million and 17% in the same period a year ago. As you can see after transitional second quarter when we had lower than expected operating margins we have delivered two consecutive strong quarters with solid margins, our net income for fourth quarter was 14.5 million and non-GAAP net income was 16 million. GAAP, basic and diluted net income per ADS were $0.27 and $0.25 respectively. Non-GAAP basic and diluted net income was $0.29 and $0.27 respectively for the fourth quarter. In the fourth quarter we generated almost 13 million in positive operating cash flow and incurred 3.5 million expenditures mostly in the opening of new centers and upgrade and maintenance of the IT infrastructure. Before fiscal year 2015 we grow our net revenues by 39% year over year to 189 million, total student enrollments in 2015 increased by 40% year over year to 84,041. Total course enrollments increased by 35% year over year to 78,729 which is the primary driver for the revenue increase. Average revenue per course enrollments in 2015 as defined by net revenues divided by course enrollments was 2403 compared to 2338 in 2014. The 2.8% increase was mainly due to the nominal tuition fee increase of RMB1000 and the higher retail channel mix in 2015. Cost of revenues in 2015 increased by 37% year over year to 54 million mainly due to the high personnel costs, high rental cost and high depreciation expenses. Gross profit increased by 40% year over year to 136 million and a gross margin increased slightly from 71.3% in 2014 to 71.7% in 2015. Selling and marketing expenses increased by 45% year over year to 62 million mainly due to higher personal cost and a higher advertising expenses. General and administrative expenses increased by 35% year over year to 40 million, the increase was mainly due to the high compensation cost, high bad debt allowance and higher share based compensation expenses. Research and development expenses increased by 49% year over year to 8 million mainly due to higher personnel costs as we expanded our course offerings and operation. As a result our non-GAAP operating income for fiscal year 2015 was 31 million with a non-GAAP operating margin of 16% compared to 23 million and a 17% for fiscal year 2014. So this lowered non-GAAP operating margin was mostly caused by the transitional quarter we experienced in the second quarter. Our net income for 2015 was about 29 million and our non-GAAP net income was 34 million. GAAP, basic and the diluted net income per ADS were $0.52 and $0.49 respectively. Non-GAAP basic and diluted net income per ADS was $0.63 and $0.58 respectively. In 2015 we generated almost 56 million in positive operating cash flow and incurred 16 million in capital expenditures. So looking forward to the first quarter of 2015 we have taken into consideration the recent significant change in RMB exchange rate against the U.S. dollar. Total net revenue for the first quarter of 2016 expected to be between 38.5 million and 39.5 million representing an increase of 37% to 40% on a year over year basis. If not incurring an impact from the recent depreciation of RMB against the U.S. dollar the projected revenue growth rate is expected to be in the range of 43% to 46% on a year over year basis. The company also expects its total net revenues for the full year of 2016 to be between 230 million and 236 million representing an increase of 22% to 25% on a year over year basis, if not including the impact from the recent depreciation of RMB against the U.S. dollar the projected revenue growth rate is expected to be in the range of 28% to 31% on a year over year basis for fiscal year 2016. And finally the company's Board Of Directors have approved and have declared a special cash dividend of $0.15 per ordinary share or per ADS. The cash dividend will be paid on or around May 30, 2016 to shareholders of record as of the close of trading on April 6, 2016. So this concludes my remarks and open the line for questions.

[Operator Instructions]. Our first question will come from Zoe Zhao with Credit Suisse. Please go ahead.

I actually have three questions, the first one is why do we see like a higher gross margin when our utilization rate of this quarter is actually lower than last year. And second one our deferred revenue increased by 21% but then there is a slight gap between the number versus our first quarter guidance and so could you explain a little bit on why that is slower than our first quarter revenue guidance? And the third question is could you give us an update on how many students currently on installment plan and how much direct exposure do we have towards this students? Thank you.

So for the last question is quite straightforward, I think for fiscal year 2015 for the whole year there are only 14% of the total number of students who are still on this so-called installment payment options and those are extended mostly to the students from the university channel because they cannot get third party financing so Tarena would extend credit to such plans to number of students. So it's already a much lower than what we previously did, so for most of the students they have to go sort a certain party financing providers to borrower and then pay us upfront and that about 50% of the total students in 2015 and then the rest of about 35% they would just pay us upfront out of their own pocket. So the 50% of students would borrow from a third party financing providers. Did that answer your third question, Zoe?

Yes it did. Thank you.

[Foreign Language]. Okay maybe I just quickly explain also the first and the second question to other audience on the call. The second question is really about deferred revenue growth seems smaller than the first quarter revenue guidance and that we just explained because the first quarter 2015 the timing of the Chinese New Year is more favorable to Tarena because the [indiscernible] beginning of the February. So we commenced new courses at end of January and also and of February. So first quarter of 2016 on the year over year basis will be much better in terms of the student enrollment than the first quarter of 2015 when the Chinese New Year fall towards the latter part of the February. So we won't have new course commencing at the end of February and in January we have very few students. So you see very strong year over year growth in terms of revenues for first quarter 2016 compared to the same quarter a year ago and also deferred revenue as other people who have already paid but have not received service yet. So for first quarter students enrolled after January 1st you know none of that will be considered as deferred revenue. So that's the reason for simulating the difference between the deferred revenue growth and the first quarter revenue guidance. And the first question is really on the gross margin in the Q4 last year, Q4 of 2015 is higher than the same quarter in 2014 but the center utilization rate is lower, why is that? Actually our utilization rate is a data at certain point in time. It's the utilization rate at the end of the quarter because in the fourth quarter we also opened a new learning centers and also expanded our seat capacity, so by the end of the quarter that number will be lower but that does not necessarily mean our gross margin will be lower because throughout the quarter the utilization rate could be still quite high and that’s the reason for the discrepancy there as well.

Your next question comes from the line of Anne Shih with Brean Capital.

Thanks for taking my questions, I have two. First could you share with the contribution from Tongcheng and Tongmei were in the fourth quarter and how this is factoring into perhaps your 1Q and full year guidance and also could you just share with the profitability of this business looks like. My second question is related to the pricing, in 4Q you saw the university channel accounted for a very slightly higher percentage of enrollments but the implied pricing just based on the course enrollments increased pretty substantially almost 11% year over year. So just wondering what contributed to the strong pricing growth and then also wondering kind of looking forward are you planning to implement another price increase this March and is the level still about RMB1000 and then you mentioned during the remarks that the five courses are being separated between basic and advanced, just wondering what the pricing difference is between basic and advanced? Thank you.

We will address your questions, first it's Tongcheng and Tongmei, we actually only launched it being December so for the fourth quarter and only in Beijing. So for the fourth quarter in total we only had slightly over 128 students being enrolled in this program so the contribution in terms of revenue. It's relatively immaterial and as we report earnings for first quarter we will give you a more detailed update on the progress of the course as we starting to roll it out to other cities in China. So even for the whole year the revenue contribution from this course will be relatively small and for the course enrollment and the student enrollment data we disclosed in the fourth quarter and full year of 2015 actually they do not include the enrollment from this children of kids IT training program. We will disclose them separately in the future when the number gets bigger, that’s your first question. And sorry what's your second question? Can repeat again?

It's related to the pricing. Just in fourth quarter we saw that the implied pricing [Technical Difficulty] increased pretty substantially.

That a good question and actually it's the one that -- yes at first sight it may look a bit strange but if you look the average pricing for the whole year of 2015 it only went up by 2.8%, it's only in the fourth quarter and the third quarter also went up quite a bit probably less than 5% and there are a couple reasons for that. One is as we planned earlier we had a higher than expected revenue in the fourth quarter it's because we had some additional revenue coming from the students through the university channel with deferred [indiscernible] enrollment. So they are registered. So they were counted as student enrollment number and as we amortized over four months. So they were already accounted for the course enrollment in the previous quarter but then when they generated revenue they contributed revenues, so the revenue will be larger than expected but the course enrollment did not factor in -- you know they were already counted before. So the denominator is smaller and the numerator is bigger. So when you divide those two that will make the number much higher. So that’s the reasons for the signaling much higher average pricing of our courses is because certain disproportion cost on the revenue and also on the costs enrollment number. So in the future we try to give even more accurate course enrollment number instead of deriving it from the student enrollment number by simply amortizing them but we would recognize on a real time basis, i.e. if this student is in class we recognize as if he defers the enrollment then he will be not counted as part of course because the number you'll get that pricing is really a derived number using the net revenues divided by the course enrollment number and if there are some discrepancy on post both numbers that will cause some confusion. Is that more or less clear to you?

Yes that makes sense. And then just for pricing going forward.

We continue to plan to increase the price in March this year but not in all cities. In certain cities tier 1, cities we will increase by 1000 but in some other lower tier cities we may keep the pricing the same for certain courses.

The difference between the basic and advanced courses?

The RMB2000 difference the more advanced course would cost RMB2000 more.

Your next question will come from the line of Cynthia Meng with Jefferies. Please go ahead.

I have two question. Our number one in about your recent announcement for the partnership with Aliyun, can management give some more color on how you expect this strategic partnership will help Tarena in terms of your training course development? My second question is on your outlook for the future course mix, your course mix in the future, what other new now IT courses do you expect for FY ‘16 and FY ‘17, is there emerging new areas that you see that has a strong potential from a supply and demand from the employer point of view. Thank you.

[Foreign Language]. Okay. Just a quick summary in English for the answer to the first question. The cooperation with Aliyun is mostly centered on the training for cloud computing and the big data and they will be actually integrated into five different courses that we offer you know including Java and Aliyun will actually provide the training platform for our students and also certification for our students and most of those a still free at current stage offered to our students, but the corporation that we believe will attract more and more students to Tarena to enhance our reputation and a brand and support our future growth. So in terms of on your second question in terms of outlook for the future of course mix. You know obviously the focus for 2016 couple one is we just launched Tongcheng and Tongmei, the children and kids' programming IT training courses in December. So 2016 and also 2017 will be the year we try to expand the presence in this area and secondly as we mentioned earlier in the earlier remarks we are launching this strategy of teaching at appropriate levels. So basically for five existing courses we will split them into more basic one and a more advanced one. So that as if we already have a five new courses and so that’s the area we'll be focusing on. In terms of new course usually we would start something at the end of the fourth quarter each year. We're currently still exploring that new subject and we announce it as they materialize. But we believe that all these Tongcheng and Tongmei and also the advanced and basic courses that will provide sufficient and enough gross engine for our company at least in the foreseeable future in 2016 and 2017.

Your next question comes from the line of Fan Liu with Goldman Sachs. Please go ahead.

So I’ve two questions, number one is about your learning center and the capacity expansion plan for 2016 and also I had noticed that in 2016 that gross is actually in the mid-point so that is getting down to 30% year-over-year growth. So how should we see longer term growth outlook for our company. And the second question is about our expansion in lower tier cities, so this quarter we enter three cities, so may I know how you evaluate the market demand before you enter new cities especially a lower tier city given that RMB17.8 [ph] quarters since not to be an affordable pricing for most of the [indiscernible] lower tier cities so how should we deal with the market demand at that level.

First question in terms of our capacity expansion and longer term growth outlook at least for the next three years we want to keep annual compound growth rate above 20 or between 20% to 25% for the next three years and we’re quite confident in our ability to drive such kind of growth from both the existing courses and newer courses we’re going to launch. Regarding question on the penetration to the lower tier cities, in fact, we also mentioned this in previous earnings calls we have had some good success in entering those Tier 3 cities before for example in [indiscernible] those four cities we enter previously actually they have been doing quite well and about 60% to 70% of the students who actually studied in those cities they will end up working outside of those cities. They would go to you capital city of their province or even go to Beijing, Shanghai, Guangdong those Tier 1 city to work, only about 30% to 40% of the students will remain in those lower tier cities and work locally but even that at local level the salary it's about 3000 to 4000 average. So they can make their money back or the payback period is probably around six months which is still pretty good return for those students. So we're not as concerned about the potential of those lower tier cities given there are so many number of them in China. And also we have had a good success story in penetrating into those Tier 3 cities.

Our next question comes as a follow-up question from Zoe Zhao with Credit Suisse.

I just have a follow-up question on our 2016 revenue guidance and since that our percentage of students on installment plan has stepped down a bit from 70% to 65% and in that regard since we’re tightening our credit. Do we see that impact our revenue growth prospect?

[Foreign Language]. Okay a quick summary of the answer to Zoe's question. So typically there are three ways for students to pay for their Tarena education. In 2015, about half, 50% of student would take loans from third party financing providers. They would borrow and a pay us up front so those students do not create any credit risk to Tarena, we get a cash up front and another roughly 15% students would -- 35% students sorry would pay us out of their own pocket. So there's no credit risk for those students as well. Then only about 14% - 15% of students who are extended so-called install payment options extended by Tarena so those students are the ones who would create accounts receivable and a potential credit risk. So we enhanced our credit control for those type of students to ensure that in the future we have less of a [indiscernible] problem and also lower bad debt. So some of those as I mentioned earlier in my remarks we believe that bad debt expenses will start coming down in 2016 after we have digested most of the legacy issues from this installment payment plan that we extended to students.

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

Thank you, Operator. If there are no further questions at present, we would like to conclude. Thank you everyone for joining us on the call. We welcome you to reach out to us directly by emailing ir@tedu.cn. Should you have any questions or requests for additional information and encourage you to visit our Investor Relations side at ir.tedu.cn. This concludes Tarena's earnings conference call. Thank you.

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