TCTM Kids IT Education Inc ADR (VSA) Q2 2023 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Tarena Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sylvia Yang, Investor Relationship Manager. Please go ahead.

Thank you, operator. Hello, everyone, and welcome to Tarena's earnings conference call for the second 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 on Newswire services. Today, you will hear from Ms. Nancy Ying Sun, our CEO; and Mr. Xiaobo Shao, our CFO, who will take you through the company's operational and financial results for the second quarter of 2023. After their prepared remarks, Nancy and Mr. Shao will be available to answer your questions. Before we continue, please note that the discussion today will contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Tarena does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The U.S. GAAP financial measures and information reconciling these non-GAAP financial measures to Tarena's financial results prepared in accordance with U.S. GAAP are included in Tarena's earnings release, which has been posted on the company's IR website at ir.tedu.cn. Finally, as a reminder, this conference 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 our earnings conference call today. In the second quarter of 2023 as the impact of uncertainties in external business environment at the beginning of this year abated, we achieved a 42% quarter-over-quarter increase in revenue. Benefiting from the prudent financial and operational strategy we adopted during the post-pandemic period, we effectively alleviated the sluggish economic recoveries impact on top market supply and demand while enhancing the financial health of our IT-focused supplementary STEAM and 2C professional education services. As a result, our group second quarter operating loss narrowed substantially by 88% quarter-over-quarter. Furthermore, as part of our focused business strategy, we have cut out our college collaboration related to the business. This transaction brought up disposal gains enabling us to achieve a net profit of RMB 8.34 million in the second quarter. Our total net revenues in the second quarter of 2023 amounted to RMB 545 million a year-over-year decline of 16% for RMB 649 million in the same period of 2022. Among them, revenue from our IT-focused supplementary STEAM education business recovered to the level of the same period last year, thanks to the improving external business environment. Meanwhile, revenue from our IT professional education business declined by 34.8% year-over-year due to a relatively longer recovery period as a result of the sluggish economic recovery impact on this market. In the second quarter of 2023, our costs and expenses decreased by 8.2% year-over-year, mainly due to reduced expenditures on rent, depreciation and other aspects as we adjusted our management structure and optimized our stock mix on learning centers have over consistent cost reduction and efficiency enhancement strategy. Meanwhile, the year-over-year decrease in the G&A expenses was also attributable to the one-time plus action charge last year. Now let me walk you through our IT-focused supplementary STEAM education business. In the second quarter of 2023, net revenues from our IT-focused supplementary STEAM education business was [RMB 647.7 million] in line with the second quarter of 2022. Despite a slight 1.7% year-over-year increase in cost and expenses, we achieved an operating profit of RMB 25.3 million, marking our second consecutive quarter of operating profitability, as we gradually shook off the ongoing impact of the first quarter's external business environment limitations our overall prior efficiency enhancement led to the improvement of our financial health. From the customer acquisition front, environment increased since the beginning of the first quarter, benefiting from our premium courses and delivery quality as well as our very excellent word of mouth referral. This facilitated our recovery from the ongoing impact of the challenging general business environment. In the second quarter of 2023, enrollment reached 177,000, a slight decrease from one year ago. Among them, renewable students and students enrolled through word of mouth referrals accounted for 76.3% of new fee-paying students. Regarding the operation of our centers, the total number of centers providing IT-focused supplementary STEAM education services declined to 215 as of the end of the second quarter of 2023 from 227 at the end of the second quarter of 2022. At the same time, the number of students enrolled at the center increased from 767 the second quarter of the last year to 822 in the same period of 2023, what revenue percent increased to RMB 1.61 million in the second quarter of 2023 from RMB 1.51 million last year. Next, moving to our IT professional education business. As the business environment improved, the net revenue of our IT professional education business increased by 47% quarter-over-quarter. This business experiencing a relatively longer recovery period. As a sluggish overall post-epidemic economic recovery continues to affect top market supply and demand to a certain extent, impacted by weak market demand and reduced the cash received in the past quarters. Net revenue for our IT professional education business decreased by 34.8% year-over-year. We strictly adhered to our operating strategy of cost reductions and efficiency enhancements during this quarter, driving a decrease in our IT professional education business total cost of 15.5% year-over-year. Its gross margin decreased due to the revenue decline. On the operation front, our total number of centers providing IT professional education services declined to 52 at the end of the second quarter of 2023 from 98 in the second quarter of 2022. Excluding the impact of our carve-out of the college collaboration-related business, of a net reduction in the number of centers, providing To-C IT for professional education services was 23 compared with 75 centers one year ago. Our long-term disciplined control of central operations as well as the decreased number of centers enabled us to effectively control of operating expenses. Meanwhile, as we continued to optimize the staff mix enhanced operating efficiency and comprehensively upgrade our organization's refined management, we significantly narrowed our operating loss in our overall IT professional education business by 85.4% quarter-over-quarter. In addition, in order to focus on our core competence, that is providing To-C IT professional and STEAM education services. The company carved out the college collaboration-related business the second quarter of 2023 and retained our minority interest. As we mentioned before, the carve-out of our college collaboration-related business will improve our financial health, while allowing us to focus on enhancing our operational capability and the profitability of our two core businesses. That concludes my review of the company's operations for the second quarter of 2023. The impact of the uncertainties in the external business environment spanning the end of 2022 through the beginning of 2023 has almost faded away, although the IT professional education business will take some time to recover due to the sluggish economic recover impact on the stock market demand, our IT-focused supplementary STEAM education business is benefiting from the relatively strong market demand in the supplementary STEAM education field, demonstrating our business resilience. During this period, we will continue to enhance our operating capability and management efficiency with a more focused operational strategy while adapting to the evolving market demand across digital transformation and artificial intelligence by adjusting our course catalog according to -- accordingly to empower students development, we believe this will prepare the company's long-term growth and drive our profitability improvement. Looking ahead, as the business environment stabilizes, company's rising need for digital transformation and the rapid development of artificial intelligence will drive the continuous growth of market demand for IT talent, although the normalization of the market supply and demand while lag behind the economic recovery in the short term. We are confident that supported by favorable professional education policies, we can help our students adapt to social development and promote employment by creating courses that cater to their needs as well as the professional needs of the market. As always, we will continue to fully leverage our own competitive advantages to create additional shareholder value. As announced previously in our public filings, the Board of Directors has appointed Mr. Xiaobo Shao, as the company's Chief Financial Officer. On behalf of Tarena, I would like to send a warm welcome to Mr. Shao. We believe that with his abundant experience in the education and Internet field and his professional expertise, he will help us achieve new breakthroughs in operational efficiency and profitability enhancement through a combination of the financial and operational management activities. Meanwhile, I would like to thank Ms. Ping Wei for her contributions during her tenure as our CFO over the past year. Next, I will turn the call over to Mr. Xiaobo Shao to walk you through our financials for the second quarter of 2023.

Thank you, Nancy, and hello, everyone. Now let me walk you through some of our second quarter financial highlights. Please also refer to the press release for more information. For the second quarter of 2023, the company measured its operating loss to RMB 6.8 million compared to an operating loss of RMB 58.8 million in the first quarter. While we experienced a tough and challenging transition period in the first quarter, our business have gradually recovered in the second quarter and recorded a sequential growth of 42% in revenue, representing a relatively resilient recovery and an improved operating environment. The uncertainty of sustained economic recovery in the post-pandemic phase has an impact on employment supply and demand, which has led to a relatively longer recovery period for the adult professional education business. Although we narrowed the decline of cash collection in the adult business year-over-year, recognized revenues will decrease due to lower cash receipts. Meanwhile, thanks to restored social mobility, our IT-focused STEAM education has emerged from the temporary closures of our learning centers with stable and continuous demand for STEAM education, we witnessed a relatively healthy year-over-year growth in cash reserves. Contributing to the return of STEAM education net revenue to the same level as in the same period of 2022. Overall, our total net revenues in the second quarter of this year was RMB 545 million, a 16% decrease from the same quarter of last year. The decrease in revenue was primarily attributable to IT professional education given its lower student enrollment number resulting from the closure of lower profitability teaching centers as well as the impact of the college collaboration-related business divestiture with only two methods of revenue recognized in the second quarter of this year. Average cost of revenues decreased by 2.2% to RMB 266.3 million in the second quarter of this year from RMB 272.3 million in the same period of last year. The decrease was mainly due to a decrease in personnel cost attributable to head count reduction and the decrease in rental fees and the depreciation costs attributable to the closure of some teaching centers during this period. The decrease was partially offset by the increase in cost of camps and the competition activities in this quarter and made a high demand for extracurricular courses. Although the decline in revenues exceeded the reduction in the cost of revenues, resulting in a decrease in gross profit to RMB 278.5 million and the narrowed gross margin at 51.1%. Our effective operational measures partially offset the impact in the post-pandemic phase. Total operating expenses decreased by 13.1% to RMB 285.5 million in the second quarter of this year from RMB 328.5 million in the same period of 2022. Total non-GAAP operating expenses, which excluded share-based compensation expenses, decreased by 13% to RMB 284.6 million in the second quarter of this year from RMB 327.4 million in the same period of 2022. Total share-based compensation expenses allocated to the related operating expenses decreased by 23.5% to RMB 0.9 million in the second quarter of this year from RMB 1.5 million in the same period of last year. Selling and marketing expenses decreased by 3.7% to RMB 151 million in the second quarter of 2023 from RMB 156.9 million in the same period of last year. The decrease was mainly due to a decrease in the personnel-related costs resulting from a decrease in the number of sales staff in the second quarter of 2023, partially offsetting the increased advertising costs during the recurring phase. Benefiting from the effective control of marketing spending as well as a decrease in personnel-related costs, selling and marketing expenses decreased by 19.8% to RMB 264.2 million in the first half of this year from RMB 329.3 million in the same period of last year. General administrative expenses decreased by 25.1% to RMB 118.8 million in the second quarter of this year from RMB 158.7 million in the same period of last year. The decrease was mainly due to headcount reduction as well as a onetime provision related to a class action also in the previous period. There was no such expense accrual for the second quarter of this year. Research and development expenses increased by 21.9% to RMB 15.7 million in the second quarter of 2023 from RMB 12.9 million in the same period of 2022. The increase was mainly due to an increase in spending on operating systems improvements to enhance operating efficiency. As a result of foregoing, operating loss was RMB 6.8 million in the second quarter of 2023 compared to operating income of RMB 48 million in the same period of last year. Non-GAAP operating loss, which excludes the share-based compensation expenses, was RMB [0.9] million in the second quarter of 2023 compared to a non-GAAP operating income of RMB 49.2 million in the same period of 2022. As we mentioned in the last quarter, we spent off the college collaboration related business in the second quarter, which brought a gain on disposal of RMB 26.8 million. This contributed to net income of RMB 8.3 million in the second quarter of 2023 compared to a net income of RMB 47.9 million in the same period of last year. Non-GAAP net income, which excluded share-based compensation expenses, was RMB 9.2 million in the second quarter of this year compared to non-GAAP net income of RMB 49.1 million in the same period of 2022. Also with the gain of disposal, we narrowed our net loss to RMB 41.6 million and non-GAAP net loss to RMB 39.6 million for the first six months of 2023. Now on the EPS side. Basic income per ADS was RMB 0.7 in the second quarter of 2023. Diluted income per ADS was RMB 0.67 in the second quarter of this year. Non-GAAP basic income per ADS, which excluded share-based compensation expenses, was RMB 0.78 in the second quarter of this year. Non-GAAP diluted income per ADS, which excluded share-based compensation expenses, was RMB 0.75 in the second quarter of 2023. Net cash outflow from operating activities in the second quarter of this year was RMB 20 million. During the second quarter, we received RMB 76.6 million in payments for the disposition of the two buildings we own, the remaining final payment was already settled in the third quarter. Capital expenditures in the second quarter of 2023 were RMB 11.6 million. As mentioned earlier, we experienced a challenging quarter with a relatively lucky recovery of the adult business. As of June 30 of 2023, the total balance of cash, cash equivalents and restricted cash was RMB 368.1 million, a decrease of RMB 5.9 million from December 31, 2022. That concludes my financial highlights section. Thank you again for your attention and support. Now I'd like to open the floor for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from [indiscernible]. Please go ahead.

[Foreign Language] Thank you for having me here. I have a question to you. According to the statistics, the company registered improvement quarter-to-quarter. I'm wondering what are the major driving factors behind except for the improvement on the operating environment. Thank you.

[Foreign Language] Thank you for having -- thank you for posing questions. I'm going to offer you three major factors as far as I could understand. First of all, as the general business environment is on the improvement we are seeing a boost up of the social liquidity as a natural result, we are seeing the cost of the custom acquisition as well as the delivery of the courses on the improvement as well. That is the first reason. And secondly, we are also conducting a wide range of social events such as the challenges, competitions and camps for the youth and youngsters. They are also getting good experiences which would eventually win the word of mouth among the general users and potential customers. For the third reason, we are also seeing friendly policies as well. Currently, we are seeing the good policy to promoting the growth of the programming abilities as well as the STEAM education services. The parents are developing new awareness which is leading us to have a deeper market penetration. So the good news is we are in the market is getting stabilized with a good growing momentum. Thank you. So thank you for staying with us in the previous years as well as in the upcoming years, and thank you for your support to Tarena again.

Hi operator, could you ask it again?

[Operator Instructions] As I see no further questions, I would like to turn the conference back over to Sylvia Yang for any closing remarks.

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 e-mailing 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.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.