TCTM Kids IT Education Inc ADR (VSA) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter of 2022 Tarena International, Inc. Earnings Conference Call. At this time all participants are in listen only mode. After speaker's presentation there will be a question-and-answer session. [Operator Instructions] I must advise you that conference is being recorded today, August 16, 2022. I would now like to hand over to your first speaker today, Ms. Sylvia Yang, Investor Relationship Manager. Thank you. Please go ahead.

Thank you, operator. Hello, everyone and welcome to Tarena earnings conference call for the second quarter of 2022. The company's earnings results were released earlier today and our available on our IR website ir.tedu.cn, as well as our newswire services. Today you will hear from Ms. Nancy Ying Sun, our CEO; and Ms. Ping Wei, our CFO. I'll take you through the company's operational and financial results for the second quarter of 2022 and give the revenue guidance for the third quarter of 2022. After the prepared remarks, Nancy and Ping Wei will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the US 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 US non-US GAAP financial measures and information reconcile in this non-GAAP financial measures to Tarena’s financial results prepared in accordance with US GAAP is included in Tarena’s earnings release, which has been posted on the company's IR website at ir.tedu.cn. And finally, as a reminder, this conference call is being recorded. In addition, webcast of this conference code is available on Tarena’s Investor Relations website. I will now turn the call over to Ms. Nancy Ying Sun, the CEO of Tarena.

[Foreign Language] Thank you, Sylvia, and thanks everyone for joining us today. [Foreign Language] I am pleased to announce that in the second quarter of 2022, both of our businesses continue progress soundly on a trajectory of sustainable growth, and we achieved an operating margin of 7.4%. We have generated a net profit from operations for two consecutive quarters, which represents a major turnaround from the same quarter of last year, when we were incurring losses. The group's gross profit margin reached 58.0%, which was 7.4% points higher than the same quarter of last year. The adult professional education business maintained stable growth and the gross profit margin reached 17.5%. With the healthy growth of our childhood and adolescent quality education business, as gross profit margin also reached a record high of 47.1% in this quarter. [Foreign Language] Our total net revenues in the second quarter of this year reached RMB649 million higher than the revenue guidance we provided last quarter and represented 11.4% year-over-year increase from RMB582 million in the same period of 2021. Our childhood and adolescent quality education business achieved a solid growth of 19.6% compared with the same period of last year and the adult professional education business grow at a steady pace achieving a growth of 3.3%. [Foreign Language] While the outbreak of COVID-19 in the second quarter in Beijing, Shanghai and other cities brought a certain degree of challenge for our business growth. With our long-term commitment to the integration of online and offline services value systems as well as the product strategy honed throughout the whole lifecycle of our customers. Our net operational cash flow turned positive compared to the same period of last year, reaching RMB19.35 million by the end of the second quarter of 2022, the cash balance remained solid reaching RMB422 million [Foreign Language] In terms of cost control, by optimizing business management process, improving operational efficiency and implementing effective spending control, we achieved a sizeable improvement in our cost efficiency. In the second quarter of 2022, the company's cost of revenue decreased by 5.4% and gross profit reached RMB377 million, an increase of 27.9% compared with the same period of last year. At the same time, we generated a net profit of RMB47.92 million in the quarter while for the same period of the last year. We were still having operational losses thanks to our strict expense control measures. [Foreign Language] Next, let me walk you through our childhood and adolescent quality education businesses. [Foreign Language] Net revenue from the childhood and adolescent quality education was RMB346 million in the quarter, up 19.6% a percentage point from RMB289 million in the second quarter of 2021. Accounting for 53.4% of our total business revenue. Enrollment increased 25.9% to 176,500 in the second quarter of 2022. From 140,200 in the same period of time 2021. In the second quarter of 2022, with steady growth of our revenue and effective cost control, our gross profit in the second quarter increased by 66.5% year-on-year and our gross profit margin increased by 13.3% points year-on-year to 47.1%. [Foreign Language] In terms of customer acquisition, the number of renewal students increased by 81.6% this quarter, compared with the same period last year. The number of students acquired by word-of-mouth referral and renewable students accounted for 79.9% of our fee-paying students in the second quarter of 2022, up by 14.9% point from 65.0% in the second quarter of 2021. The total number of our fee-paying enrollments in this quarter was 43,500, up by 33.8% from 32,500 in the second quarter of 2021. This indicates that the highest teaching quality and good learning results of our childhood and adolescent quality education have started to pay off rewarding us with strong word-of-mouth referral and repeat student enrollment growth. 78.8% of the students will have enrolled for more than one year have renewed their fees. [Foreign Language] In terms of the operation of our centers, we continue to focus on improving the center operation efficiency, thus optimizing the operation cost of centers and expanding the single center capacity. In the second quarter of 2022, the total number of centers providing the childhood and adolescent quality education business decreased from 235 at the end of the second quarter of 2021 to 227 at the end of the second quarter of 2022. Meanwhile, the number of students enrolled per center increased from 595 last year to 767 in the second quarter of 2022. In the second quarter, average revenue per center rose to 22.8%. From about RMB1.23 million last year to about RMB1.51 million in the same period of 2022. [Foreign Language] Next, moving on to our adult IT professional education business. [Foreign Language] Optimizing content quality and court system, reducing costs, and improving operational efficiency and effectiveness is the consistent goal and focus of our adult professional IT education. In the second quarter of 2022, although offline courses were suspended temporarily in some of our urban centers due to the resurgence of the pandemic. Our courses were delivered with high quality. Thanks to our stable and mature online course delivery system. Simultaneously since 2022, we have adhered to the Lifelong Learning product strategy and launched a broad selection of courses for students lifelong learning journey. To that end, during this quarter, we reformed and updated our short-term courses like CID course, and our tech industry certificate courses such as Red Hat and Huawei to encourage students to stay with us longer and sign up for more courses. This combination of high-quality education products and excellent delivery services enabled us to achieve net business revenue of RMB303 million in the second quarter of 2022, up 3.3% from RMB293 million in the same period of 2021. Gross profit of adult professional education business in the second quarter was RMB213, up 8.7% from RMB196 million in the second quarter of 2021. With the development trend of seeking progress while maintaining stability, the gross profit margin of our business increased to 70.5%. [Foreign Language] Throughout the quarter, we continue to strengthen the management and control of cost and operating expenses. The total costs and expenses for our adult professional education business decreased by 15.6%, compared to the same period in 2021. By optimizing the online customer acquisition channels, and enhancing the lead conversion of the admission consultants, our customer acquisition efficiency has improved. The spending in customer acquisition decreased by 13.2%, as compared with the same period of last year. At the same time, the number of centers was optimized to 98 by the end of the second quarter in 2022. The average single center revenue increased by 2.3% from about RMB3.0 million in the second quarter of 2021 to about RMB3.07 million in the second quarter of 2022. [Foreign Language] Despite a challenging macro environment in the second quarter, partially due to the COVID-19 pandemic, with the continuous improvement in the quality of our online course and services, we continue to receive favorable employer feedback and achieve good results from our students. The employment rate of our students within six months after graduation was 97 this quarter. [Foreign Language] That concludes my review of the company's operations for the second quarter of 2022 [Foreign Language] As you have learned from the press release this afternoon, the Board of Directors has appointed Ms. Wei Ping as the new CFO of the company. On behalf of Tarena, I would like to welcome Ms. Wei Ping to join us. We believe that with her rich experience and professional ability in the field of education and internet, Ping Wei helped the company make new milestones. At the same time, we thank Mr. Kelvin Wang Kee Lau for his dedication as CFO over the past two years. [Foreign Language] Next, I will turn the call to Ping to walk you through the financials of the second quarter of 2022.

Thank you, Nancy. And hello, everyone. Now, let me walk you through some of the financial highlights of this quarter. Please also refer to the press release for more information. For the second quarter of 2022, the company recorded operating income of RMB48 million or US$7.2 million, compared to operating loss of RMB90.7 million in the same period of 2021. Non-GAAP operating income, which excluded share-based compensation expenses was RMB49.2 million or US$7.3 million in the second quarter of 2022, compared to non-GAAP operating loss of RMB86.6 million in the same period of 2021. This was achieved by a combination of healthy growth of total net revenues, which was 11.4% of increase to RMB648.8 million or US$96.9 million in the quarter from RMB582.3 million in the same period of last year, and well executed cost controls during this quarter. Due to this measures, cost of revenues decreased by 5.4% to RMB272.3 million or US$40.7 billion in the second quarter of 2022 from RMB287.9 million in the same quarter last year. Furthermore, total operating expenses decreased by 14.7% to RMB328.5 million or US$49 million in the second quarter of 2022 from RMB385.1 million in the same period of 2021. The main contributors of the cost and expense reductions include firstly, closing of low performing centers and optimizing headcount to improve efficiency. As a result, as Nancy mentioned earlier, our optimized learning centers for both childhood and adult adolescent quality education and adult professional education businesses have decreased to 227 and 98 centers, respectively. And our headcount decreased by 11.8%. Secondly, optimizing spending on marketing and sales and keeping our focus to operational excellence, which is, through focusing on quality of content, delivery and services. We continue to generate more word-of-mouth referral enrollments and higher lifetime value of our students. And finally, include the efficiency and streamlined OMO strategies further helped with overall operational efficiency, resulting in lower General and Administrative expanding, while a one-time provision for the expected settlement of a cost action partially resulted in an increase in G&A expense in the second quarter, we expect G&A to stay at a low level in next few quarters. As a result of the foregoing net income was RMB47.9 million or US$7.2 million in the second quarter of 2022, compared to net loss of RMB76.7 million in the same period of 2021. Non-GAAP net income, which excluded share-based compensation expenses was RMB49.1 million or US$7.3 million in the second quarter of 2022, compared to non-GAAP net loss of RMB72.5 million in the same period last year. Now, our EPS side, basic income per ADS was RMB4.36 or US$0.65 in the second quarter of 2022, compared to last per ADS as of RMB6.97 in the second quarter of 2021. Diluted income per ADS was RMB4.29 or US$0.64 in the second quarter of 2022, compared to last put ADS on the RMB6.97 in the second quarter last year. As of June 30, 2022, the total balance of cash, cash equivalents and time deposits increased by RMB9.2 million to RMB425.6 million or US$63.5 million. The increase was mainly from net cash inflow from operating activities in the second quarter of this year of RMB19.4 million or US$2.9 million. Capital expenditures in the second quarter were RMB8.9 million or US$1.3 million, mainly from purchasing of office equipment and payment to renovate teaching centers. Share repurchase also contributed to the cash outflow in the quarter. And this concludes my financial highlights. Now, Nancy will share with you our business outlook for the second half of 2022 and gain revenue guidance for next quarter. Nancy, please.

[Foreign Language] Thanks for Ms. Wei’s summary of the financial performance for the second quarter of 2022. Now, turning to the company's outlook for the next quarter. [Foreign Language] In the second half of 2022, we will continue to optimize our OMO based customer acquisition and product delivery system to provide our students with high quality courses and better services to further enhance our competitiveness and earn our students trust and confidence, generating more word-of-mouth and referral based growth. At the same time, we will continue to improve operational efficiency so as to maintain healthy and sustained profitability in spite of potential challenges also future pandemic outbreak. In terms of financial guidance, based on the company's current estimates, our total net revenues for the third quarter of 2022 are expected to be between RMB620 million and RMB650 million representing a year-over-year increase of 2.8% to 5.7% from net revenues for the third quarter of 2021. The company's guidance reflects a preliminary estimate of our current market environment and company operating conditions based on current market conditions which may change. [Foreign Language] Above is our outlook for the future and the revenue guidance. I would like to take this opportunity to thank you again for your following and support. We are now ready for questions.

Thank you. [Operator Instructions] Okay, we have the first question is coming from the line of Lei Yang from CIMB. Please ask your question.

[Foreign Language] So the first question is, first of all, let me say congratulations to the company to achieve continue profitability in the second quarter of 2022. Especially during the pandemic period, the company can achieve continuous revenue growth and stay profit. So we were wondering, what will be the competitive edge of your company now? My second part of the question is, we observed that the policy environment is quite favorable to our business. So the future of our adult professional education business is very promising. So what is your opinion on the competition landscape? [Foreign Language] CEO, Nancy to answer this question. Nancy?

Thank you so much for the question. First of all, I'm like Nancy, and let me take the first part of your question. [Foreign Language] Over the past 20 years, we have gained very rich experience in terms of delivering training for adult IT professional education. And also, we emphasize on our own and online merging offline education, we have very good customer acquisition experience, we have very good delivery of our products, as well as the good design of our product enter a product-based interaction. And also, we have very good R&D skills and no house. In terms of multi-channel customer acquisition, we're also very good at that as well. And we also are very good at our product design, product system iteration and we are very good at our delivery. So those are our competitive edge. To be more specific, we are very good at word-of-mouth and renewal students when it comes to our childhood and adolescent quality education and we are very good at the job application for our adult professional education business. Our graduates from our adult professional education, education business all gain all achieved good jobs. So those are our competitive edge for our two businesses. And that that is my answer for your first part of the question. [Foreign Language] Let me take the second part of your question. Actually, we've enjoyed very favorable policy support from the government in China, which is really conducive to our professional education, which is also very conducive to the overall sound growth of this professional education industry. We were very good at customer acquisition, also about product delivery at the back end. We were also very happy with our center operation and we are also very good at product R&D. So, those actually serves a very stable growth for our business. In terms of our adult professional education, we not only have to see business, but also to be business working with universities. So in terms of our to see side, our enrollment actually contributed to more than 68% of our total revenue. So those are our competitive edge and that is why we are very satisfied with our and very promising about our future. [Foreign Language] I see that concludes the answer to both of your questions. Thank you very much again for raising that question.

Thank you, Nancy.

[Operator Instructions] We do not have any other questions at the moment. presenters, please continue.

Thank you, operator. If there are no further questions at present, we would like to conclude by thanking everyone for joining our conference call. Welcome you to reach out to ask to look directly by emailing at ir@tedu.cn. Should you have any questions or record requests for additional information? We encourage you to visit our Investor Relations site at ir.tedu.cn. Thank you.

Ladies and gentlemen, that does conclude our call for today. Thank you for participating You may now disconnect your lines. Speakers, please standby.