TCTM Kids IT Education Inc ADR (VSA) Q4 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter and Full Year of 2022 Tarena International Incorporated Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I must advise you that today's conference call is being recorded today March 28, 2023. I would now like to hand the conference call over to your first speaker today, Ms. Sylvia Yang, the Investor Relationship Manager. Thank you. Please go ahead.

Thank you, operator. Hello, everyone and welcome to Tarena’s earnings conference call for the fourth quarter and full year of 2022. The Company's earnings results were released earlier today and 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, who will take you through the Company's operational and financial results for the fourth quarter and full year of 2022 and give revenue guidance for the first quarter of 2023. After their prepared remarks, Nancy and Ms. Wei 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 this 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 Company's IR website at ir.tedu.cn. Finally, as a reminder, this conference call 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 Ms. Nancy Ying Sun, the CEO of Tarena.

[Foreign Language]. Thank you, Sylvia, and thanks everyone for joining us. [Foreign Language]. The month around the end of 2022 was a challenging period for us as COVID-19 dynamics and the Chinese New Year temporarily have impacted our daily operations. Our offline centers closed for almost two months as the large number of teachers and students have to suspend classes due to pandemic restrictions or illnesses. Meanwhile, some employees were also unable to work for a period of time. To varying degrees, this affected our offline customer acquisition. Our online and offline course delivery and our offline center services. [Foreign Language]. In this challenging business environment, we achieved a positive operating cash inflow of RMB24 million and a non-GAAP operating income excluding share-based compensation expenses in the fourth quarter. This was due to our operational agility our stable OMO-based course delivery system and our consistent improvement of operational efficiencies. Our gross profit margin on the group level reached 58.4% in the fourth quarter, up 8.4 percentage point’s year-over-year. Specifically, our IT professional education business remained stable, with a gross profit margin of 73.2% rising by 8.1 percentage point’s year-over-year. Our IT-focused supplementary STEAM education business continued to demonstrate market resilience and business model scalability registering an enrollment growth of 17% and a gross profit margin of 48.6% in the fourth quarter, up 13 percentage point’s year-over-year. In addition, despite the challenges from external headwinds throughout 2022, we achieved a turnaround from a net loss to a net profit of RMB85.23 million and a non-GAAP net profit of RMB102 million for the year. As a result of the continuous upgrades in our operating model, deliver quality and service capabilities. [Foreign Language]. Our total net revenues amounted to RMB552 million in the fourth quarter, down 15.7% compared with RMB655 million in the same period of 2021 due to the factors I mentioned earlier. Segment-wise our IT-focused supplementary STEAM education revenue was comparable with that of the fourth quarter of 2021, while our IT professional education revenue declined by 31.6% due to the impact of macroeconomic headwind. [Foreign Language]. With respect to cost control during the period, we optimized our business management model to enhance operational efficiencies and effectively control expenses. In the fourth quarter, impacted by factors beyond our control, our revenue decreased. However, our cost decreased by 29.8% year-over-year, as a result, our gross profit -- our gross margin rose by 8.4 percentage point’s year-over-year in the fourth quarter. Additionally, operating expenses decreased by 15.7% year-over-year substantially narrowing our operating loss by 92.4% year-over-year to RMB4.57 million. Our non GAAP operating income, excluding share-based compensation expenses was RMB233,000, meanwhile we realized an operating income of RMB93.04 million for the full year of 2022, compared with an operating loss in 2021 as well as a non-GAAP operating income of RMB109.6 million. [Foreign Language]. Next, let me walk you through our IT-focused supplementary STEAM education. [Foreign Language]. In the fourth quarter of 2022, net revenue from our IT-focused supplementary STEAM education program was RMB334 million, comparable to RMB336 million we recorded in the fourth quarter of 2021. This represented 60.5% of our total revenue during the period, an increase from the fourth quarter of 2021. Enrollment increased by 17% from 151,300 in the fourth quarter of 2021 to 177,000 in the same period of 2022, thanks to our high quality courses and delivery as well as our growing brand recognition. Meanwhile, with steady revenue growth and effective cost control at our centers, our gross profit rose by 35.8% year-over-year in the fourth quarter and our gross profit margin climbed by 13 percentage points to 48.6%. [Foreign Language]. On the customer acquisition front, our total number of fee paying students in the fourth quarter of 2022 was 38,200, a decrease of 10.7% year-over-year as our student recruitment was affected by the temporary closure of our offline centers. However, our excellent course and delivery quality and our students' learning results in IT-focused supplementary STEAM education have translated into word-of-mouth referrals and an increase in a number of renewal students as a percentage of fee paying students, partially offsetting the decrease in customer acquisition due to limited vendor access. Meanwhile, thanks to our integrated online and offline course delivery system and our non-staff OMO service model we ensure high course and service quality to the maximum extent despite the constraints imposed on our operations in the fourth quarter. In the fourth quarter, enrollments increased by 17% year-over-year, notably the percentage of renewal students who have enrolled for over a year continued to exceed 78.7% in the fourth quarter. [Foreign Language]. Regarding the operation of our centers, although some of them suspended operations due to the pandemic in the fourth quarter, we managed to improve operational efficiency while ensuring course and service quality. This helps us to reduce operating costs and expand single center profitability. At the end of the fourth quarter of 2022, the total number of centers providing IT-focused supplementary STEAM education services declined to 213 from 238 at the end of the fourth quarter of 2022, a net reduction of 21 centers. At the same time, the number of students enrolled per center increased from 336 in the fourth quarter of 2021 to 805 in the same period of 2022. In the fourth quarter, average revenue per center grew by 7.8%. [Foreign Language]. Next, moving to our IT professional education business. [Foreign Language]. During the fourth quarter, the pandemic impacted societal mobility in general, affecting our enrollments and operations as well. To cope with the situation, we suspended the operation of some offline centers for a period. This had a significant impact on our operations in the fourth quarter. Specifically, net revenue for our IT professional education business dropped by 31.6% year-over-year. Of course, our centers have resumed full operations in since the Chinese New Year holiday. In addition, we continued to facilitate stable operations by reducing costs and improving operational efficiency. In the fourth quarter, the total costs and operating expenses of our IT professional education business decreased by 23.7% year-over-year. [Foreign Language]. Our society places more emphasis on digitalization and information-based development. We'll embrace new opportunities brought about by the digital economy during China's macroeconomic recovery. ChatGPT has set up a new wave of AI technology advancements worldwide and its core generative AI models will promote the deployment of new technology and influence how business and society develop. We always stay abreast of the latest cutting edge technologies and market demand and continuously innovate our courses, services and operations accordingly. Meanwhile, we have continued to explore the application of the latest technologies. Recently, we became one of the first approved ecosystem partners of the ERNIE Bot developed by Baidu. Through this collaboration, we will explore the application of smart dialogue technology in professional education, which marks the first application of the conversational language model in professional education in China. We believe that broader application and rapid development of AI technology are bound to drive the demand for high standard IT talent and that they will fuel the development of the IT professional education industry. We will continue to spend at the forefront of technological innovations in industry and continue to create value for our students and their employers with our industry leading courses and delivery services. [Foreign Language]. That concludes my review of the Company's operations for the fourth quarter and full year of 2022. [Foreign Language]. Next, I'll turn the call over to Ping, to walk you through our financials for the fourth quarter and full year of 2022.

Thank you, Nancy, and hello everyone. Now let me walk you through some of the financial highlights of the fourth quarter and fiscal year 2022. Please refer to the press release for more information as I'll try to be brief. For the fourth quarter of 2022, the Company narrowed its operating loss to RMB4.6 million or US$0.7 million compared to an operating loss of RMB60.4 million in the same period of 2021. Non-GAAP operating income, which excluded share-based compensation expenses, was RMB0.2 million or US$0.03 million in the fourth quarter of 2022, compared to a non-GAAP operating loss of RMB56.5 million in the same period of 2021. The improvement in our operating profit was driven by our well executed cost and expense controls during the quarter although we faced challenges from temporary uncertainties in the business environment. Our total net revenues reached RMB552.4 million or US$80.1 million in the fourth quarter of 2022 of which net revenue from our IT-focused supplementary STEAM education business was RMB334.1, representing about 60% of our total revenue. Meanwhile, thanks to our effective control measures, our cost of revenues decreased by 29.8% to RMB230.1 million or US$33.4 million in the fourth quarter of 2022, from RMB327.7 million in the same period of 2021. Total operating expenses decreased by 15.7% to RMB326.9 million or US$47.4 million in the fourth quarter of 2022, from RMB388 million in the same period of 2021, as we achieved expense reductions across our organization. The main contributors to the cost and expense reductions include the following. Firstly, we continuously closed the low performing centers and optimizing personnel operations to improve efficiency. As a result, as Nancy mentioned earlier, our learning centers for both IT-focused supplementary STEAM education and IT professional education businesses decreased to 217 and 86 centers respectively, and our total headcount decreased by 20.5% year-over-year. Secondly, we reduced sales and marketing personnel as well as marketing spending. While remaining focused on operational excellence by endeavoring to upgrade the quality of our core content delivery and services. We continue to generate more word-of-mouth referrals and renewal enrollment and maximize the lifetime value for our students. Thanks to the strong word-of-mouth referral effect. Our enrollment showed strong resilience despite social mobility restrictions during this exceptional period. As a result of the foregoing, we narrowed our net loss to RMB17.7 million or US$2.6 million in the fourth quarter of 2022, compared to a net loss of RMB182.5 million in the same period of 2021. Non-GAAP net loss, which excluded share-based compensation expenses, was RMB12.9 million or US$1.9 million in the fourth quarter of 2022, compared to a non-GAAP net loss of RMB178.6 million in the same period of 2021. On annual basis, given our implementation of operational strategies that emphasize the profitable growth of the Company, net income for the year has reached RMB85.2 million or US$12.4 million, compared to net loss of RMB475.8 million for 2021. Non-GAAP net income was RMB101.8 million or US$14.8 million for 2022, compared to a non-GAAP net loss of RMB456.7 million in the same period in 2021. Now on the EPS side, basic and diluted loss per ADS was RMB1.72 or US$0.25 in the fourth quarter of 2022, compared to a loss per ADS of RMB16.12 in the same period of 2021. On an annual basis, basic income per ADS was RMB7.64 or US$1.11 in 2022, compared to loss per ADS of RMB42.17 in 2021. Diluted income per ADS was RMB7.23 or US$1.05 in 2022, compared to loss per ADS of RMB42.17 in 2021. As of December 31, 2022, the total balance of cash, cash equivalents and time deposits, including current and non-current, and restricted cash was RMB380.5 million or US$55.2 million increasing by RMB38.4 million from September 30, 2022. The increase was mainly due to RMB24 million of operating cash inflow generated in the quarter and RMB27 million of inflow from financing activities as we do down on our credit facilities. Capital expenditures in the fourth quarter of 2022 were RMB9.2 million or US$1.3 million mainly from purchasing IT equipment used in cautions and payments to renovate learning centers. This concludes my financial highlights section. And, Nancy will share with you the business outlook and revenue guidance for the first quarter of 2023. Nancy, please.

[Foreign Language]. Thank you, Ms. Wei, for your summary of our financial performance for the fourth quarter and full year 2022. Now turning to the Company's outlook for 2023. [Foreign Language]. The pandemic evolved continuously from October 2022 through the Chinese New Year. As many of our teachers, employees, students and their families fell ill from December until around the Chinese New Year, we made good decision to suspend most of our non-essential operations for January 2023, including the majority of our classes. That meant we only maintained normal operations for approximately two-thirds of the first quarter of 2023. As a result, our first quarter revenue represents only about two months of revenue. In addition, we estimated a RMB280 million R&D reduction in our cash receipts during this period compared with periods of normal operations. As customer came in, proceed services rendered based on our operating model for both IT professional education and IT-focused supplementary STEAM education services, this results in later recognition of accounting revenue than cash receipts. In addition, given that IT professional education courses last four to nine months, our GAAP revenue for subsequent quarters, particularly the first quarter of 2023, will also be effective. [Foreign Language]. Of course, we believe the impact of suspending our centers' operations is temporary. By the end of the Chinese New Year holiday in early February, we fully resumed to normal operations. And as the steady recovery of macroeconomic conditions fueled student’s enthusiasm to enroll in our courses, we have seen an enhanced level of course sign-up. Moreover, we emerged from the top challenges stronger with an upgraded OMO-based delivery system as well as optimized customer acquisition and operational capabilities, laying a solid foundation for our full year operations in 2023. This has given us confidence that from the second quarter onwards, our great performance since early February will offset some of the earlier adverse effects of external headwinds on the Company's financials in 2023. [Foreign Language]. Accordingly, with respect to financial guidance, we estimate our total net revenues for the first quarter of 2023 to be between RMB365 million and RMB380 million, representing a decrease of 39.1% to 41.5% from the first quarter of 2022, the Company's guidance reflects our preliminary estimate of the current market environment and the Company's operating conditions, which may change. [Foreign Language]. Looking ahead, we are fully confident about the potential of the IT education services market, we’ll continue to optimize our OMO-based product delivery system and services and further improve our course and service quality to bring more value and a better experience to our students. We are optimistic about the rebound in enrollment and we’ll consistently reinforce word-of-mouth referrals to drive growth in new fee-paying students and renewal students while lowering customer acquisition costs. At the same time, will further enhance our operating efficiency and strive to achieve a new level of full year profitability with healthy in the both businesses and operations. [Foreign Language]. The statement above is our outlook for the future and our revenue guidance. [Foreign Language]. I would like to take this opportunity to thank you again for your attention and support. We're now ready for questions.

Ladies and gentlemen, thank you. [Operator Instructions]. Our first question today comes from Edward Riley from E. F. Hutton. Please go ahead with your question.

Thanks for taking my question. So I'm trying to reconcile the first quarter guidance with the fourth quarter results. Given the environment kind of seemed the same. So there are virtually no classes in January you said, but in the fourth quarter, it looks like you continued online classes during the lockdown. So I'm just kind of wondering if you could maybe provide some color on what gross margins might look like for the first quarter given that you still had rental costs and probably some personnel costs in the quarter, but limited revenue in January?

Right, Eddie. Okay. I'll have Kathy translate the question first, then I will take the question. [Foreign Language]. Eddie. That's actually a great question because as Nancy mentioned, we basically didn't have any non-essential classes opened for January and a lot of our staff had to take sick leave, etcetera. So overall, for first quarter, we won't be able to match the margin we achieved in Q1 of 2022, we are more looking for gross margin slightly below 40%. So that's what we expect. Now you mentioned the personnel cost, the rent, we actually got some rental relief in Q4 and in the other quarters of 2022. We don't expect that to be repeated in January and 2023. So rent extends all cost for Q2 will be about the same as last year, but we were sort of progressively improving efficiency and optimizing organization. So from personnel front, first of all, as I mentioned earlier, we already had 20% of headcount reduction during the year. So the first quarter of 2023, people related costs will be much lower, one is with the 20% reduction in headcount, two is also some of them take sick leave. So overall, on cost expense adding together, we should be able to say like more than probably around RMB130 million to RMB150 of costs and expenses for the first quarter as compared to a normal quarter, so through all means. So while we will have a significant lower top line revenue for the quarter, loss wise, we'll probably be losing money for the quarter. But it won't be as significant. Also, on a more sort of longer horizon we actually expect our full year margin both on growth and net size will be better. And on operating income actual dollar number wise as well, we actually expect to for 2023 after Q1 and on annual basis would be better than 2022. So I hope that answers your question, Eddie?

Yes, absolutely. Thanks so much for that. And just some housekeeping, I'm wondering what enrollment was for the professional segment in the fourth quarter. I might have missed it.

[Foreign Language]. Right. The enrollment for adult is around 27,000 give or take few hundred. It's about 10% lower than the same period of last year, primarily because of what we mentioned like from October onwards social mobility is much lower as compared to a normal period.

Okay, got it. And then students enrolled per center continues to grow pretty strong within the adolescent segment. Should we expect this to continue going forward throughout 2023? And is there any specific target or capacity constraint that you have on the centers or the target in terms of what you're looking to hit per students enrolled per center?

[Foreign Language]. Again, very good question, Eddie. After we resumed normal operation in February, we do see fairly strong momentum with enrollment, etcetera. So we still expect on a run rate basis like for kids especially an enrollment growth probably high teens to even low 20 percentage points. Now second part of the year, question is about whether the current number of centers will be able to accommodate this kind of enrollment growth. The answer for this year is yes for sure. And at the same time, so that's -- we have a very scalable model because we have an OMO model. While some of students come to centers for classes, we have some of the classes taught purely online. We have some of the classes with combined online and offline learning. So center utilization certainly has yield for those enrollment growth. At the same time, since the country is now put back to normal, we are exploring expansion plans with our children's segment as this market -- as we are sort of operating in huge market with great growth potential. And we certainly won't want to forgive the expansion opportunities due to any sort of because we want to just drive profit. So we want to drive sustainable profitable growth. So, yes.

Okay, got it. I mean should we expect total centers to continue to decline going forward, remain flat or it seems like there might be some growth there?

Right. For the first half of this year, I would say we probably will stay on a relatively stable numbers. And then heading into second half, yes, you should expect some growth in center numbers. Won't be a lot like we will primarily drive current year’s growth from existing centers.

Okay, got you. And then regarding some of the cost reductions taken during the year, how much of these reductions are permanent or should we expect costs to revert back to normal levels in 2023?

Right. Again on the cost reduction side, you can see that both for sales and marketing and for G&A as well as cost of revenue, we actually did pretty -- achieved a sizable reduction from 2021 to 2022. On a going forward basis, cost of revenue size is like basically we don't anticipate overall cost of revenue to be higher than 2022. Simply because, one is overall headcount reduction of 20% kicking full gear for this year. And secondly, for most part of this year, we will be running and optimizing our operations with the existing centers rather than center expansion. So there won't be more -- a lot more structural cost from that front. So basically, rents will stay pretty stable. And then on marketing side, again, headcount reduction achieved and marketing spending optimized. So what we will see some of additional spending as our scale growth as we generate more leads and cover more leads. But other than that, it will be fairly conservative control on spending. On the sales and marketing side, I think actually G&A side, I think those will also delivered lower overall annual numbers as compared to 2022. Yes. I think 10% to 15% saving on sales and marketing side and the on G&A, yes we mentioned on G&A while overall we probably would have stayed flat. But in 2022, they are about RMB15 million of one-time expenses, one is, remember the one-time litigation settlement charge of $3 million that's a one-time charge. And secondly, we have some on provisions taking on balance sheet. That's also a one-time thing. So I would say G&A side we will probably will stay flat compared to the excluding one-time G&A expense level for 2023.

Okay, great. That's great color. And then I was wondering if you could maybe provide us with some details on what taxes might look like for the next year?

Tax?

Yes.

Eddie, are you asking about income tax?

Yes.

[Foreign Language]. Yes. For 2022, we estimated our effective tax rate to be around 18% but through on sort of the -- we have various level of tax rates for different legal entities within the organization. So for 2023, because of the mix shift we actually expect around 16% of the effective tax rate for the year.

Okay, great. That's it from me. Thank you.

Thank you, Eddie.

And ladies and gentlemen, we don't have any other questions at the moment. Presenters, please continue.

Are there more questions, operator?

We do have an additional question actually from [G. Dave from Superbowl] (ph). Please go ahead with your question.

[Foreign Language]. My question is, in the current market competition of both adults and children's education services, what are Tarena’s differentiated advantages?

[Foreign Language]. Thank you for your question. Actually in 2023, some changes have taken place in both children's and adults education businesses, but Tarena has maintained our leading advantages, mainly in two areas. Firstly, in terms of STEAM education, our advantages mainly lie in our diverse education scenarios and our high delivery quality. These two advantages will continue to help us win trust from our customers. [Foreign Language]. Secondly, again in our STEAM education business, we have win increasing recognition and word-of-mouth from parents because of our highly professional services and growing brand influence. [Foreign Language]. Third, we have an expansive national offline customer acquisition network that have boosted our customer acquisition capabilities and this will continue to be our advantage. [Foreign Language]. Fourth, our highly efficient operational system will continue to increase our competitiveness. [Foreign Language]. So, we are fully confident about the development of our STEAM agitation business in 2023. [Foreign Language]. And now moving on to our advantages in IT professional education for adults. [Foreign Language]. We have been developing our IT professional education business for 20 years. And over these past years, we have accumulated ample experience and insight into the changes of technology and market demand, along with the birth of new technologies always come changes in business models and the applications of technologies. And we have been able to keep a breath of these latest developments, including new technologies and new market demand. And we have rich experience in these areas. [Foreign Language]. Our stable and strong OMO based course delivery system and experience teacher team, these are all our advantages in IT professional education. [Foreign Language]. I hope I've answered your questions. Thank you. Operator?

Thank you, operator, there are no further questions. Yes, please.

I was just going to say that there are no additional questions at the moment and you may continue.

Thank you, operator. There are 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 requests for additional information we encourage you to visit our Investor Relations site at ir.tedu.cn. Thank you.

Thank you all.

Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.