TCTM Kids IT Education Inc ADR (VSA) Q1 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter of 2023 Tarena International, Inc. 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 this conference is being recorded today, June 13, 2023. I would now like to hand the conference 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 first quarter of 2023. The Company's earnings results were released earlier today and are 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'll take you through the Company's operational and financial results for the first quarter of 2023 and give revenue guidance for the second 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 reconciled in this non-GAAP financial measure 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, and thanks everyone for joining us today. The first quarter while the overall business environment was challenging, we achieved a relatively healthy financial performance. In particular our net operating cash outflow narrowed year-over-year as we continued to execute our prudent financial and operational strategy. While we temporarily closed our learning centers early in the quarter beating to a year-over-year reductions in cash receipts, we strictly controlled our cash expenditures through cost reductions and efficiency enhancements to minimize the impact. Additionally, aided by the general economic recovery following the Chinese New Year, enrollments started to recover, leading to relatively strong performance in the second half of the quarter. In particular monthly enrollments in our IT focus a supplementary STEAM education services surpassed that of our pre-pandemic levels resulting in a rebound in operating cash inflow. Our total net revenues amounted to RMB385 million a year-over-year decline of 38.2% from RMB624 million in the same period of 2022. The decrease was primarily due to learning center closures for the whole month of January amid external challenges. These dynamics affected both our IT focus supplementary STEAM education business and our IT professional education business. Among them revenue from STEAM education services fell by 29.1% year-over-year, while revenue from our IT professional education dropped by 50.2%. Despite multiple challenges our long term prudent financial and operational strategy combined with our consistent cost reductions and efficiency enhancements, helped our operating cash flow return to positive territory during subsequent months for the first quarter. In the quarter our net operating cash outflow narrowed by 6% year-over-year to RMB17.73 million. In the first quarter of 2023 our costs declined by 30.4% year-over-year partially mitigating the effects of decreased revenue on our overall gross margin, which fell by 5.4 percentage points year-over-year. Additionally, operating expenses decreased by 21.3% year-over-year, which was primarily attributable to our effective cost controls - to our effective control marketing expenses, which declined by 34.4% Next let me walk you through our IT focus supplementary STEAM education business In the first quarter of 2023, net revenue from our STEAM education programs was RMB250.8 million down 29.1% from RMB353.9 million in the first quarter of last year. This represented 65.12% for total net revenue during the first quarter of 2023, an increase from the first quarter of last year. Meanwhile, we implemented effective cost controls at our learning centers. And as a result, our costs and expenses fell by 28.6% year-over-year in the first quarter. Under customer acquisition front enrollments increased during the quarter. This was due in part to our high quality courses and their delivery, as well as the gradual economic recovery. In the first quarter of 2023, enrollments reached 174,800 a slight increase compared with last year. Notably the number of renewal students and students enrolled through word of mouth referrals as a percentage of new fee paying students rose year-over-year to 81.6% in the first quarter of 2022. Regarding the operation of our center, the total number of our learning centers providing STEAM education services declined from 232 at the end of the fourth quarter of 2022 to 216 at the end of the first quarter of 2023. At the same time, number of students enrolled percenter increased from 737 in the first quarter of last year to 807 in the same period this year. Next, moving to our IT professional education business. In the first quarter, we suspended the opposition of some of our learning centers, leading to a year-over-year drop of 50.2% in net revenue for our IT professional education business. Nevertheless, as we strictly follows our operational strategy of cost reductions and efficiency improvements, the total costs of our IT professional education business declined by 42.9% year-over-year, while the gross margin decreased to 63.7%. Our enrollments has stabilized since February as gradual improvements in the external environment drove abroad its economic recovery. In addition, in order to focus on our core competence, namely providing IT professional and IT focus, supplementary STEAM education with a 2C model, the Board of Directors approved an investment agreement in April, whereby the company would carve out the college collaboration related business and retain only a minority interest. At the same time, a third party strategic investor would provide future funding for the further advancement of this business, which will operate independently. The college collaboration related business includes several cooperation model, one of which is joint major program. Under this model, colleges recruit students and provide general degree courses while we provide students with IT major related courses, hands on training, internships and job recommendations. We also have colleges build artificial intelligence - and we also have colleges build artificial intelligence and provide training services for colleges to use their labs effectively for peripherals business relating to college collaboration also carved out part of the deal. This particular business contributed about 4% of the company's total net revenue in 2022. The transaction is expected to close soon. That's a the [time to see the company acquisition] for the first quarter of 2023. Next I'll turn the call over to Ping Wei, our CFO to walk you through our financials for the first quarter of 2023.

Thank you, Nancy, and hello, everyone. Now let me walk you through some of the financial highlights of the first quarter. Please also read press release for more information. For the first quarter of 2023, the Company narrowed its net operating cash outflow to RMB17.7 million or US$2.6 million, compared to a net operating cash outflow of RMB18.9 million in the same period of 2022. While we experienced a tough and challenging transition period since the second half of fourth quarter, our businesses have gradually recovered since February of 2023. Temporary closures of our learning centers, as well as a slow social mobility weighed on our customer acquisition and cost delivery, leading to a year-over-year reduction in cash receipts. As such, revenue also declined. In the first quarter of 2023, our total net revenue was RMB385.1 million or US$56.1 million, a 38.2% decrease from the same quarter of last year. The decrease in revenues was primarily due to a reduction in student enrollment, particularly for IT professional education. Additionally, the Company suspended courses and services for almost the entire month of January, resulting in a dent in revenues. Net revenues from our IT-focused supplementary STEAM education business was RMB250.8 million, representing about 65.1% of total net revenues. Our cost of revenues decreased by 30.4% to RMB184.1 million or US$26.8 million in the first quarter of 202 from RMB264.6 million in the same period of 2022. The decrease was mainly attributable to a reduction in headcount and the resulting decrease in personnel and related welfare costs. Rental costs also decreased as the number of teaching centers decreased compared to the same period of 2022. Although revenue decline in the quarter is greater than the reduction in the cost of revenues which brought a decrease of our gross profit to RMB201.0 million or $29.3 million, followed by a narrowed gross margin to 52.2%, effective operational measures partially offset the impact. Total operating expenses decreased by 21.3% to RMB259.8 million or US $37.8 million in the first quarter of 2023 from RMB330.3 million in the same period of 2022. Expense reductions across our organization mainly included the optimizing personnel efficiency and reducing customer acquisition costs. Total non-GAAP operating expenses, which excluded share-based compensation expenses, decreased by 21.3% to RMB258.7 million or $37.7 million in the first quarter of 2023 from RMB328.9 million in the same period of 2022. Selling and marketing expenses decreased by 34.4% to RMB113.2 million or US$16.5 million in the first quarter of 2023 from RMB172.4 million in the same period of 2022. The decrease was mainly due to a decrease in personnel-related costs resulting from a decrease in the number of sales staff in the first quarter of 2023, compared to the same period of 2022. In addition, the reducing advertisement clicks resulted in a decrease in advertising expenses. General and administrative expenses decreased by 7.1% to RMB131.5 million or US$19.2 million in the first quarter of 2023 from RMB141.6 million in the same period of 2022. The decrease mainly resulted from the reduction of G&A-related headcount and lower office attendance as we temporarily suspended operations early in the quarter. The decrease was partially offset by the provision of allowance on accounts receivable pertaining to certain college-related businesses which we disposed of subsequently. Research and development expenses decreased by 7.4% to RMB15.1 million or US$2.2 million in the first quarter of 2023 from RMB16.3 million in the same period of 2022. The decrease was primarily due to a lower number of staff and effective cost control in the first quarter of 2023. As a result of the foregoing, operating loss was RMB58.8 million or US$8.6 million in the first quarter of 2023, compared to operating income of RMB28.6 million in the same period of 2022. Non-GAAP operating loss, which excluded share-based compensation expenses, was RMB57.7 million or US$8.4 million in the first quarter of 2023, compared to non-GAAP operating income of RMB30 million in the same period of 2022. Net loss was RMB49.9 million or US$7.3 million in the first quarter of 2023, compared to net income of RMB27.1 million in the same period of 2022. Non-GAAP net loss, which excluded share-based compensation expenses, was RMB48.8 million or US$7.1 million in the first quarter of 2023, compared to non-GAAP net income of RMB28.5 million in the same period of 2022. Now on the EPS side, basic and diluted loss per ADS was RMB4.67 or US$0.68, while non-GAAP basic and diluted loss per ADS, which excluded share-based compensation expenses, was RMB4.57 or US$0.67 in the first quarter of 2023. As mentioned earlier, our net operating cash outflow was RMB17.7 million for the quarter, 6% lower than that of the same period last year. Capital expenditures in the first quarter of 2023 were RMB5.8 million. In this quarter, we received RMB19 million of down payment for the disposition of two buildings we own. We anticipate the full payment will be settled by end of the second quarter [technical difficulty]. As of March 31, 2023, the total balance of cash, cash equivalents, and restricted cash was RMB371 million or US$54 million, decreased by RMB3 million from December 31 of 2022. This concludes my financial highlights section. And Nancy will share with you the business outlook and revenue guidance for the second quarter of 2023. Nancy?

[Foreign Language] Thank you, Ping, for your summary of our financial performance for the first quarter of 2023. Now, turning to the Company's outlook for the second quarter of 2023. Due to the dynamics in our external environment around the end of 2022 and the beginning of 2023, and the temporary closure of our learning centers, the impact on cash receipts during the period will continue to marginally affect our revenue for a few more quarters. Additionally, the carve out of our college-collaboration related business will result in a year-over-year decrease of ongoing revenue run rate by around 4%. During this period, we remain focused on our continuous course upgrades and operational and management excellence. We believe this will go a long way toward enhancing our future development and profitability. In addition, renewed market enthusiasm for our STEAM education services since the beginning of the second quarter, we expect a year-over-year increase in cash receipts and GAAP revenue. Accordingly, with respect to financial guidance, we estimate that our total net revenues for the second quarter of 2023 will be in the range of RMB520 million and RMB550 million, representing a decrease of 15% to 20% from the second 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. [technical difficulty] sustained market demand for IT talent as the general job market gradually recovers. Additionally, as China aspires to develop the country's technical capabilities, we believe that IT-focused STEAM education for children will continue to be in strong demand. We're confident that we are well positioned to capitalize on the large IT education market in China and that will continue to deliver enhanced shareholder value. The statement above is my outlook for the future and our revenue guidance. I'd like to take this opportunity to thank you all again for your attention and support. We're now ready for questions.

[Operator Instructions] Your first question comes from [indiscernible]. Please go ahead.

[Foreign Language] I will translate myself. Thanks for taking my question. I have a question regarding STEAM education. How does management see this year's trend? And can management provide a more color on the growth strategy? Thanks.

[Foreign Language] Thank you for your question. Despite external headwinds early in the year that impacted our business, our STEAM education segment has gradually returned to normal and resumed growth. In particular, we have seen rising market demand for value-added services such as competitions and challenges, and favorable policies have increased the market interest in programming education coupled with the economic recovery, active market demand drove enrollment increase leading to market expansion. Although more players have entered the market in recent years, we believe it will facilitate growth in the scale and penetration of the STEAM education market for [indiscernible] due to our advantages in our product delivery, we believe we will stand out in the competition. As to our growth strategy, firstly on the front end, we are trying new customer acquisition channels and we believe these new channels will bring us new [tools]. Secondly, we've always had high renewal rates in the industry and we have continued to maintain our leadership in acquiring students through renewals. Third, we are hosting a larger variety of challenges, competitions and camps, which will increase the repeat purchase rates among our students, and this, again, will lead to growth in new students. And now with the flourishing of ChatGPT-related technology, we will also gradually add more generative AI technology content to our courses to bring our user - to bring our students different experience. And we believe such product upgrades will help us gain more trust from our students. So, we believe a richer product portfolio will help us gain more user trust and thus acquire more users. These are the most important advantages of our STEAM education services. And again, I want to thank you for your support.

Thank you. Your next question comes from Edward Reilly with EF Hutton. Please go ahead.

Hi, guys. Just some housekeeping. What is the enrollment and total number of centers within the professional education segment during the quarter?

They are in total about 83 add-on centers at the end of Q1 2023. And after the quarter-end with the carve out of our college-related business, the number came down to around 57. So that will be most likely the number for end of Q2. Thanks, Eddie.

Okay, great. And then where do you see the capacity for STEAM education with regard to enrollment per center? And just directionally, do you see that the total number of centers within that segment expanding or decreasing throughout the year?

That's a good question. Yes, I'll ask Ms. Sun to answer the question. We'll translate first.

[Foreign Language] Well, first, thank you for your question. It's a very good question. It's true that our enrollments per center has been increasing along with our profitability, which shows that we have a solid business foundation. We will consider expanding our - we will consider establishing new centers in different cities or regions based on the operational quality of those centers. We believe this will be important to expand our market share in the STEAM education market. Thank you again for your question.

Okay. And then last one for me. Just on pricing, what's the pricing action look like for the rest of the year for both segments?

[Foreign Language] Well, actually, we've seen an increase in our price per hour as well as the transaction value per course. So basically, we haven't changed our pricing. But because our students are choosing to take our courses for longer hours or they are choosing more courses from us, we have maintained our pricing on - including the transaction value of our courses on the group level. And in [technical difficulty] the government's regulatory policies on double reduction and also on non-academic subjects in our pricing. I hope I've answered your question. Thank you.

Thank you. Your next question comes from William Gregozeski with Greenridge Global. Please go ahead.

Hi. For the Q2 guidance of 15% to 20% down, you said 4% was from the college carve out. Can you break out what's expected from the STEAM and the professional for that remainder?

[Foreign Language] The kids side actually will be comparable to last year. So on the Q2 revenue side, it will be actually either slightly increasing from year ago period, both on cash and non-GAAP side. So basically the decrease of 15% to 20% reflects the last cash collected during the December, January like the peak of COVID period, the lingering impact that is the main reason. Second reason is actually the - there's still a bit of headwind in China's general economic conditions as well as the employment market. As such, our adult side is the key - is the main reason for the decrease in number. So basically 4% from a carve out probably 5 to - yes about 5% to 10%, 5% I will say more likely from the lingering impact of last quarter and then the remaining as adults, economic how we relate it.

Okay. And last question is given the current environment and your cost efficiency initiatives, do you guys expect the term profitable this year?

We were profitable last year and we will still be profitable this year. Sorry, I [technical difficulty]. So, we will still be profitable this year. For Q1, as you see, we -- even though our loss was about RMB49 million, our operating cash side is much smaller number. For Q2, I [technical difficulty] probably operating sort of - a small sort of operating cash outflow number. But on the GAAP side, we are already looking at around breaking even at the net margin level for Q2. And the second half of this year will all be profitable, based on the current outlook, without giving guidance, okay.

All right. Great. Thank you.

Thank you, Bill.

Your next question comes from [Giovanni Di Giulio], who is a Private Investor. Please go ahead.

Good morning, everyone. Just two quick questions. First one is on the buyback. Please correct me if I'm wrong, but did you repurchase about 2 million shares in the first quarter? And if you do give an update on what the remaining amount in the buyback authorization?

[Foreign Language] Thanks for the question. First of all the 2 million you referred probably was the prior share repurchase program, We used that back to 2 million, the Board of Directors actually authorized another US$3 million of buyback companies actively executing owner program. you know, we basically gave notice question to the broker we mandated on the buyback program to do the repurchase. So, we basically - in general do not provide monthly or quarterly update on the exact amount of cash used in the quarter, but we still have decent room to continue the buyback program.

Thank you. Thank you very much. And second question on the college division carve out. Are you going to receive cash consideration or how are you structuring this transaction? And what are you going to do with the proceeds from this transaction and also the proceeds from the building that you're selling is about 15 million right?

That's right. [Foreign Language] So basically, the half of our college related business is a non-cash transaction. The - it's actually because the particular part of the adult business is actually losing money for the past few years. And considering that our core strength is in the 2C market both for adults and for children, and to focus the company's strategic attention, as well as financial resources, we decided to introducing financial and slash strategic investor, that's why we carved it out. Our non-cash consideration returns a minority interest, having the hold a controlling investor to be the continuous financial sponsor for this particular business. You know, so, hopefully, the minority interest in the carved out business will actually accrete sort of increase in value over time with sort of deep pockets and strategic investor supporting the sort of the funding needs, as well as the strategic direction. For the company part, we will lose - we will sort of base basically increase bottom line, but not increasing cash in the - with the transaction. So additionally, the question on the use of the proceeds from the beauty, which is a net additional 15 million of cash, basically, we will let it sit on balance sheet, basically, sort of to enhance our cash position. And we don't intend to use it for other purposes. So we'll be for operational purpose - working capital purpose.

Thank you very much. That was helpful.

Thank you.

Thank you. We don't 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. We welcome you to reach out to us directly by emailing 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.

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