TCTM Kids IT Education Inc ADR (VSA) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter and Full-Year of 2020 Tarena International, Incorporated Earnings Conference Call. At this time, all participants are in listen-only mode. After speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded March 19, 2021. I would now like to hand the conference over to your first speaker today, Ms. Amanda Wang, the Investor Relations Director. Thank you. Please go ahead ma’am.

Thank you, operator. Hello, everyone, and welcome to Tarena's earnings conference call for the fourth quarter and full-year of 2020. The company's earnings results were released earlier today and are available on our website, ir.tedu.cn, as well as on Newswire services. Today, you will hear from Mr. Yongji Sun, our CEO; Ms. Nancy Sun, our Senior VP; and Mr. Kelvin Lau, our CFO, who will take you through the company's operational and financial results for the fourth quarter and full-year of 2020 and give revenue guidance for the first quarter of 2021. After their prepared remarks, Mr. Sun, Nancy, and Kelvin will be available to answer your questions. Before we continue, please note that the discussion today will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation 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 obligations 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. Finally, as a reminder, this conference call is being recorded. In addition, a webcast of this conference call is available on Tarena's IR website. I will now turn the call over to Mr. Kelvin Lau, CFO of Tarena.

Hi everybody. I’m Kelvin. First of all I got to apologize first, our CEO, Mr. Sun is out on meeting and he is on the way back to the office now. So, I will present Mr. Sun’s script on his behalf. Okay. Let’s go ahead. Thank you, Amanda, and thank you everybody for joining us today. We are delighted to announce our results for the fourth quarter and full-year of 2020. Our net revenue in the fourth quarter of 2020 was RMB650.3 million, which was higher than the guidance range of RMB540 million to RMB570 million we gave, compared to the net revenue of RMB509.6 million in the fourth quarter of 2019 the net revenue in the fourth quarter of 2020 increased by RMB140.7 million or 27.6%. The net revenue for the year-end December 31, 2020 was RMB1,897.9 million decreased by RMB153.5 million or 7.5% as compared to the net revenue of RMB2,051.4 million for the year ended December 31, 2019. Net revenue from K-12 education business increased by 64.7% from RMB180.9 million in the fourth quarter of 2019 to RMB297.9 million in the same period of 2020. The number of student enrollments for K-12 education increased by 47% from 87,300 in the fourth quarter of 2019 to 128,300 in the same period of 2020. The number of new students we equipped for K-10 education increased by 6.7% from 19,400 in the fourth quarter of 2019 to 20,700 in the same period of 2020. Net revenue from adult professional education business increased by 7.2% from RMB328.7 million in the fourth quarter of 2019 to RMB352.4 million in the same period of 2020. Despite the number of student enrollments for adult professional education business decreased by 21.3% from 44,600 in the fourth quarter of 2019 to 35,100 in the same period of 2020, and a number of new students were equipped for adult professional education business decreased by 20.1% from 20,900 in the fourth quarter of 2019 to 16,700 in the same period of 2020. In 2020, we have adopted a series of policies and actions to minimize the impact of COVID-19 pandemic on our businesses. We have achieved a remarkable result on the optimization of organizational structure, improvement of operational efficiency, and effective controls on costs and expenses. The total cost of the revenues and operating expenses decreased by 12.6% from RMB841.4 million in the fourth quarter of 2019 to RMB735.4 million in the same period of 2020. The net loss decreased by 68.8% from RMB303.8 million in the fourth quarter of 2019 to EMB94.7 million in the same quarter of 2020. The net loss decreased by 25.8% from RMB1,038.9 million for the full-year of 2019 to RMB771.2 million for the full-year of 2020. Our total headcounts decreased by 14.3% from an average of 11,713 in the fourth quarter of 2019 to 10,043 in the same period of 2020. Productivity per capita increased by about 49% from RMB43,500 in the fourth quarter of 2019 to RMB64,800 in the same period of 2020. Improving the operational efficiency of our adult learning centers is one of our key strategies in 2020. We have taken active steps to close or merge those underperformed learning centers. The number of Adult Learning Centers decreased from 130 in the fourth quarter of 2019 to 104 in the same period of 2020. The net revenue per adult learning center increased by about 34% from RMB2.53 million in the fourth quarter of 2019 to RMB3.39 million in the fourth quarter of 2020. The net revenue per student enrollment increased by about [35.1%] from RMB7,400 in the fourth quarter of 2019 to RMB10,000 in the same period of 2020. The number of K-12 education learning centers increased from 217 in the fourth quarter of 2019 to 236 in the same period of 2020. The net revenue per K-12 learning center increased by about 51.4% from RMB0.83 million in the fourth quarter of 2019 to RMB1.26 million in the fourth quarter of this year. We are pleased with the progress and result of our K-12 business development we have achieved. In 2020, the company has devoted more resources to our K-12 education online courses and encourage the more strategic migration to the online operation and business. The net revenue contributed by our K-12 online education business increased by 215.8% from RMB34.2 million in 2019 to RMB108 million in 2020. K-12 online education business contributed 14.2% and 6.5% of the K-12 education net revenue for the fiscal year of 2020 and 2019, respectively. Going into 2021, we will continuously stick to and implement our strategies we adopted in 2020, which are streamlining our products and services and uplifting the operational and organizational structure efficiencies. For adult education business, we will further explore deeper and more value-added cooperation with educational institutions to strengthen our existing leading positions in the market. For K-12 education business, we will further devote more resources to products research and development, and enlarge our K-12 services capacity. On top of the K-12 programming and robotic training programs, we will organize and launch more IT-related competitions and relevant training campaigns. We will continuously build and strengthen our national brand, both for the adult professional trainings and K-12 IT educations. With that, I will turn the call to our Operation SVP, Nancy Sun who will present to you some detail of our operational performance in the fourth quarter and full-year operations.

[Foreign Language] Thank you Kelvin, and hello ladies and gentlemen. I am going to present to you with information regarding our operation performance in the fourth quarter and the full-year of 2020. [Foreign Language] In the fourth quarter, some local areas were affected for a short-term by the COVID-19, including Beijing, Shenyang, Dalian, Harbin and some cities of Hubei provinces. Our team however has gathered a wealth of experiences in the delivery and the marketing of products and the operations management allowing us to get through this wave without causing serious impact on our actual operations. [Foreign Language] I'll start with the adult education business. [Foreign Language] In 2020, we have been adhering to the business strategy of cost efficient and productivity improvement to achieve healthy operation and steady development in the adult education business. Affected by the pandemic, our revenue in 2020 was RMB1,136.1 million, a decline of 25.6%, compared with RMB1,527.2 million in 2019, and the cost of revenues also dropped by 33.1% from RMB627.8 million in 2019 to RMB420.3 million in 2020. The gross profit decreased by 20.4% from RMB899.4 million in 2019 to RMB715.8 million in 2020. [Foreign Language] But the good news is that our cost of revenues and operating expenses in the fourth quarter have decreased allowing us to have huge regain and efficiency with us retaining our operating profitability in the fourth quarter, continuing the operating profitability in the third quarter. [Foreign Language] In the fourth quarter of 2020, despite the number of learning centers for adult education had a net decrease of 26 and [decide areas], which is [129.2000 square meters] were reduced by 32%, as compared to the same period of 2019. Our revenue reached up to RMB352.4 million with an increase of 7.2%, compared with RMB328.7 million achieved in the fourth quarter of 2019. The cost of revenues was RMB119.2 million, marking a drop of 22.3%, compared with a cost of RMB153.5 million in the fourth quarter of 2019. The gross profit increased by 33.1% from RMB175.2 million in the fourth quarter of 2019 to RMB233.2 million in the same period of 2020. [Foreign Language] In respect of revenue growth, we lifted the sales and service abilities of the frontline employees continuously optimize our product lines, raise the average tuition fees per student by using effective operational means such as reducing the price discounts and the sales of low priced module courses with us realize the year-over-year growth of revenues. [Foreign Language] Meanwhile, we made good progress in terms of the optimization of operating expense structure. The increased proportion of student enrollments by word of mouth promotion at the front-end enabled a great reduction in the marketing expenses. [Foreign Language] By virtue of our strong strength in teaching and employment service, the six month post course job placement rate remained above 90%. Good job placements rates served the foundation for our sustainable business development. [Foreign Language] Looking forward to 2021, we will continuously follow the strategies of maintaining healthy operation and steady development, optimizing organizational structures, enhancing efficiency and exploring new models of products delivery. [Foreign Language] Now, I like to give you some colors of our K-12 education business operation. [Foreign Language] As it is known for K-12 education business, our goal and position are to provide professional programming education to Chinese students aged 3 to 18. Based on our strong accumulated experience and knowledge on professional programming education, we have long been committed to becoming a programming education expert that every child can trust and a Science and Technology Education partner that every family can rely on. [Foreign Language] In the fourth quarter of 2020, we witnessed a continuous improvement in products and services, operation and student recruitment in the K-12 education business sector relying on our efficient management we realized an overall substantial increase in revenues and operational efficiency with reduction of total cost of revenues and operating expenses. [Foreign Language] In the fourth quarter of 2020 there were 236 learning centers in K-12 education with a net increase of 19 centers, compared with a number in the fourth quarter of 2019. The revenues contributed by the K-12 education business reached RMB297.9 million in the fourth quarter of 2020, increasing by 64.7% on a year-to-year basis. Besides in the fourth quarter of 2020, the cost of revenues increased by 9.9%. The gross profits grew by 419.7% year-over-year. The gross margin reached up to 42.2%. The net revenue in 2020 was RMB761.8 million, a year-over-year growth of 45.3%. The cost of revenues increased by 18.4% and the gross profit increased by 626.7%. In 2020, the total student enrollment was 141,600, indicating a year-over-year growth of 42.7%. [Foreign Language] In the aspects of revenue growth, the number of new contracted students, including newly registered students and renewal students reached up to 35,000 in the fourth quarter of 2020, increasing by 22.4%, compared with the same period of 2019. For the whole year of 2020, there were a total of 103,300 new contracted students, including newly registered students, and renewal students, representing a year-over-year increase of 11.3%. The renewal and word of mouth recruited students accounted for 56.1% and 49.8% of new contracted students in the fourth quarter of 2020 and the full-year of 2020, respectively, which was attributed to our business focus on optimizing product lines, improving services and students satisfaction. About 86% of those students who have been studying our K-12 education programs for more than one year have completed the renewal in the fourth quarter of 2020. [Foreign Language] We also achieved excellent results on optimizing the sales and marketing expenses and students acquisition cost in the fourth quarter of 2020. While our student enrollment increased specifically the marketing expenses per student enrollment, which is excluding wages and the welfare expenses of related personnel dropped by 46% year-over-year. For the whole year of 2020, the marketing expenses per student enrollment decreased by 21%. [Foreign Language] In 2020, we achieved a revenue of RMB108 million in the K-12 education online business, making a year-over-year growth of 215.8%, which accounted for 14.2% of total revenue in K-12 education business. [Foreign Language] In 2021, we will carry out the operating management focusing on healthy growth, word of mouth recognized service, product innovation, and lastly, organizational development. We will provide better products and services and boost the efficiency through the continuous optimization of cost structure, thus, achieving the sound growth of revenues. [Foreign Language] Looking into the future, offline customer relationship management, [exploitation of student] recruitment channels, as well as online live broadcasting education will continue to be our key pillars on the track of K-12 education. We will keep the original faith to provide good educational products and keep on exploring healthy business models for profitable operations. [Foreign Language] Thanks again for your constant support. I'd like to turn the call to Kelvin, our CFO who will share with you the fourth quarter and the full-year of 2020 financial highlights. Thank you.

Thank you, Nancy. Now, I would like to take you through the fourth quarter and full-year of 2020 financial highlights. First of all, I will go through the fourth quarter financial highlights. So, the revenue increased by 27.6% to RMB650.3 million in the fourth quarter of 2020 from RMB509.6 million in the same period of 2019. Net revenue from adult education business increased by 7.2% to RMB352.4 million in the fourth quarter of 2020 from RMB328.7 million in the same period of 2019. The increase was primarily due to less price discussed were offered to students as a result of the implementation of the [standardized pricing] and discount policies in the fourth quarter of 2020. Net revenues from K-12 education business increased by 64.7% to RMB297.9 million in the fourth quarter of 2020 from RMB180.9 million in the same period of 2019. The increase was primarily due to the increase in student enrollments of K-12 education by 47% from 87,300 in the fourth quarter of 2019 to 128,300 in the same period of 2020, as well as higher cost consumption rates resulting from the increase in numbers of students attending, organize the competition and sitting for certificate examinations. Cost of revenue decreased by 6% to RMB291.5 million in the fourth quarter of 2020 from RMB310.1 million in the same period of 2019. The decrease was primarily due to the decrease in number of adult education learning centers, which resulted in a reduction of both personnel related costs and rental expenses, partially offset by the increase in costs arising from the addition of K-12 education new data centers. Gross profit increased by 79.9% to RMB358.8 million in the fourth quarter of 2020, from RMB199.4 million in the same period of 2019. Gross margin which is equal to gross profit divided by net revenue was 55.2% in the fourth quarter of 2020, compared to 39.1% in the same period of 2019. The increase in gross margin was primarily due to significant increase in net revenue, plus the effective control on costs. Total operating expenses decreased by 16.4% to RMB443.9 million in the fourth quarter of 2019, from RMB531.3 million in the same period of 2019. Total non-GAAP operating expenses, which excluded share based compensation expenses decreased by 16.3% to RMB436.4 million in the fourth quarter of 2020, from RMB521.4 million in the same period of 2019. Total share based compensation expenses are located to the related operating expenses decreased by 23.7% to RMB7.5 million in the fourth quarter of 2020, from RMB9.9 million in the same period of 2019. Selling and marketing expenses decreased by 26.8% to RMB223.3 million in the fourth quarter of 2020, from RMB305.1 million in the period of 2019. The decline was mainly due to decrease in marketing activities and promotional spendings, and decrease in personnel related expenses resulting from lower headcounts in the fourth quarter of 2020. General and administrative expenses decreased by 1.4% to RMB195.3 million in the fourth quarter of 2020, from RMB198.1 million in the same period of 2019. The decline was primarily due to decrease in personnel related expenses resulting from lower headcounts in the fourth quarter of 2020, and there were one-time investigation related professional expenses incurred in the fourth quarter of 2019. Research and development expenses decreased by [21%] to RMB25.2 million in the fourth quarter of 2020, from RMB28.1 million in the same period of 2019. The decline was mainly due to a decrease in personnel related expenses resulting from lower headcounts. Operating loss was RMB85.1 million in the fourth quarter of 2020, compared to the operating loss of RMB331.9 million in the same period of 2019. Non-GAAP operating loss, which excluded share based compensation expenses was RMB77.5 million in the fourth quarter of 2020, compared to non-GAAP operating loss of RMB321.7 million in the same period of 2019. The company recorded income tax expenses of RMB7 million in the fourth quarter of 2020, compared to the income tax and benefit of RMB28.7 million in the same period of 2019. As a result of the foregoing, net loss was RMB94.7 million in the fourth quarter of 2020, compared to net loss of RMB303.8 million in the same period of 2019. Non-GAAP net loss, which excluded share-based compensation expenses, was RMB87.1 million in the fourth quarter of 2020, compared to non-GAAP net loss of RMB293.6 million in the same period of 2019. Loss per ADS was RMB1.72 in the fourth quarter of 2020, compared to loss per ADS of RMB5.64 in the fourth quarter of 2019. Non-GAAP loss per ADS, which excluded share-based compensation expenses, was RMB1.58 in the fourth quarter of 2020, compared to non-GAAP loss per ADS of RMB5.45 in the fourth quarter of 2019. Net cash inflow from operating activities in the fourth quarter of 2020 was RMB86.5 million. Capital expenditures in the fourth quarter of 2020 were RMB14.6 million. Now I'm going to take you through the full-year of 2020 financial highlights. Net revenues decreased by 7.5% to RMB1,897.9 million in 2020, from RMB2,051.4 million in 2019. The decrease was primarily due to the reduction of class consumption rates for both adult and K-12 education businesses during the COVID-19 pandemic in the fiscal year of 2020. Cost of revenues decreased by 9.1% to RMB1,066.8 million in 2020, from RMB1,173.8 million in 2019. The decrease was mainly due to the reduction of cooperation with tutoring service providers as most students were transferred to online studying during the COVID-19 pandemic. Furthermore, during the COVID-19 pandemic, the utility and office fees declined as our employees worked from home, and the social security fees were exempted due to the preferential policies enacted by the government. The decrease was also partly attributable to the decrease in number of adult education learning centers, which resulted in decrease in personnel-related costs and rental expenses. Gross profit decreased by 5.3% to RMB831 million in 2020, from RMB877.5 million in 2019. Gross margin, which is equal to gross profit divided by net revenues, was 43.8% in 2020, compared with 42.8% in 2019. The increase in gross margin was mainly attributable to our efficient cost controls implemented in 2020. Total operating expenses decreased by 17.1% to RMB1,637.4 million in 2020, from RMB1,975.7 million in 2019. Total non-GAAP operating expenses, which excluded share-based compensation expenses, decreased by 16.5% to RMB1,601.6 million in 2020, from RMB1,917.5 million in 2019. Total share-based compensation expenses allocated to the related operating expenses decreased by 38.4% to RMB35.8 million in 2020, from RMB58.2 million in 2019. Selling and marketing expenses decreased by 19.1% to RMB906.3 million in 2020, from RMB1,119.7 million in 2019. The decline was mainly due to decrease in marketing activities and promotional spending in the fiscal year of 2020. In addition, personnel-related expenses decreased as a result of lower headcounts, and social security fees were exempted due to the preferential policies enacted by the government during COVID-19 pandemic in the fiscal year of 2020. General and administrative expenses decreased by 12.8% to RMB630.6 million in 2020, from RMB723.3 million in 2019. The decline was mainly due to decrease in personnel-related expenses resulting from lower headcounts, and social security fees were exempted according to the preferential policies enacted by the government during COVID-19 pandemic in the fiscal year of 2020. Furthermore, there were one-time investigation related professional expenses incurred in the fiscal year of 2019. Research and development expenses decreased by 24.3% to RMB100.5 million in 2020, from RMB132.7 million in 2019. The decline was mainly due to decrease in personnel-related expenses resulting from lower headcounts. Operating loss was RMB806.4 million in 2020, compared to operating loss of RMB1,098.2 million in 2019. Non-GAAP operating loss, which excluded share-based compensation expenses, was RMB770.1 million in 2020, compared to non-GAAP operating loss of RMB1,039 million in 2019. The company recorded an income tax benefit of RMB35 million in 2020, compared to income tax benefit of RMB41.6 million in 2019. As a result of the foregoing, net loss was RMB771.2 million in 2020, compared to net loss of RMB1,038.9 million in 2019. Non-GAAP net loss, which excluded share-based compensation expenses was RMB734.9 million in 2020, compared to non-GAAP net loss of RMB979.7 million in 2019. Loss per ADS was RMB14.11 in 2020, compared to loss per ADS of RMB19.41 in 2019. Non-GAAP loss per ADS, which excluded share-based compensation expenses, was RMB13.44 in 2020, compared to non-GAAP loss per ADS of RMB18.30 in 2019. Cash and cash equivalents and time deposits, including current and non-current, and restricted cash, decreased by 41.3%, from RMB621.2 million as of December 31, 2019 to RMB364.8 million as of December 31, 2020. The decrease was mainly due to net cash used in operating activities, which was mainly composed of net loss of RMB771.2 million incurred in the year of 2020, partially offset by the increase in total deferred revenue of RMB412.2 million and depreciation and amortization charges of RMB177.5 million and net cash used in financing activities, which was mainly composed of a repayment of RMB78.5 million bank borrowings in 2020. Capital expenditures in 2020 were RMB71.5 million. In terms of financial guidance, based on our current operations, total revenues for the first quarter of 2021 are expected to be between RMB470 million and RMB500 million, after taking into consideration the seasonal fluctuation factors and the likely continued impact of COVID-19. This guidance is based on the current market conditions and reflects the company's current and preliminary estimates of market and operating conditions, which are subject to change, particularly as to the potential impact of COVID-19 on the economy in China and elsewhere in the world. This concludes my financial highlights section. Operator, we are ready for questions.

Certainly. [Operator Instructions] Thank you.

Hey operator. Our CEO, Mr. Sun is already back to the office. He wants to speak a little bit, okay.

[Foreign Language]

So please go ahead. We have no questions at this point of time. Please go ahead.

[Foreign Language] So, Hello everyone. My name is Yongji Sun, I'm the CEO of Tarena International, Incorporated. So sorry, first of all, I want to say sorry, because I was caught in a traffic jam. So, I was late for a conference call. But I believe that you guys are very excited after hearing our SVP, Nancy, and Kelvin, our CFO’s his words. So, we do have a very promising Q4 in 2020 and we do have very promising figures in the 2024 year. So, the time is quite precious here. If you guys have any questions. You're welcome to ask your question and we will answer your question.

Thank you very much. We have a question on the line. So, the first question comes from the line of [indiscernible] Management. Please go ahead. Excuse me [indiscernible], your line is open. You can ask your question now. Please go ahead.

[Foreign Language] So we’re not in a proper position to comment, I mean the progress or the – expectation of the [indiscernible] process, so any progress or any development in terms of the – related to the [partnership project] we will make the announcement and [then publish] or to inform everybody, not proper place to [indiscernible] about the [partnership] in this conference call.

Okay, so previously, the question was about the Q4 financials and the total financials. It seems that Tarena have scored very positive Q4 numbers. However, overall speaking Tarena are still in a loss position. So, I was just wondering whether we can achieve the earning or monthly profitability like our management have said before, and our SVP, Ms. Nancy has said, I've answered the question that we do have a very positive earnings for our adults business in Q4, and our revenues for K-12 business is very exciting. And we will continue our rather conservative strategies going forward because the market is developing very fast. We don't want to lose our market shares. Based on the Q3 numbers, we can see that our adult business figures and our revenues for K-12 business in the Q4 of 2020 is quite promising and excluding the factors such as COVID-19. From July to December in 2020, we do see 96% of revenue growth for our K-12 business, compared with the second half of 2019. So that is a huge opportunity for us. We don't want to miss the opportunity. And we do have very positive cash revenue. So, in the future, we will continue to focus on cash revenue increase and our increase of cost or decrease of COGS per acquisition.

[Foreign Language] So, this is the last question for our conference call, and it is a question about K-12 business or children education business, so just asking what is the strategy for K-12 this year? Do we want to expand our learning centers? And if we want to expand our sites, that means we need more money? How to solve that issue?

[Foreign Language] Okay. So, to answer your first question, we were in this market since 2015. And over the past three years from 2017, 2018, and 2019, we've witnessed a very fast development for Tarena International. And although there was a COVID-19 pandemic in 2020, we do have positive financials in 2020. And in 2021, we want to continue our fast development based on a very sound structure, meaning that we will continue to rely on our very stable operating structure. We will continue to enhance and adjust our organization power. We believe that we want to be a powerhouse rather than a big house. And in 2021, we will continue to strengthen our services, our word of mouth referrals, our innovative operating methods, and our value-added structures. So, we don't have any new plans to build new sites in Q1 of 2021.

[Foreign Language]

No question.

Thank you. [Operator Instructions] Thank you. As there are no further questions, I would like to hand the call back to our presenters for any closing remarks.

Okay, thank you, operator. If there's no further questions at present, we would like to conclude by thanking everyone for joining our conference call. We welcome you to reach out to us directly by email at ir@tedu.cn should you have any questions or request for additional information. We encourage you to visit our IR website at ir@tedu.cn. Thank you.

Thank you.

Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you for participating. You may all disconnect now. Thank you.