Q4 2019 Earnings Call

Good day and welcome to one smart to report fourth quarter in fiscal year 2019 financial results on November 13th 2018.

All participants will be any listen only mode.

Do you need assistance. Please take note conference specialist bypassing the Starkey followed by zero.

After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like turn the conference over to Rebecca Shen Director of Investor Relations. Please go ahead.

Operator, good morning, good evening, everyone. Thank you for 21 more International Education Group Limited fourth quarter 2019 earnings Conference call. The Companys earnings result was that because that's a slide presentation released earlier today and are available on the Companys website CW dot work smarter.

Joining me today are mr. or all the CEO mr. fees down Mr breast or how would you refer to your financial officer and she was strategic August .

Well, we are prepared remarks.

Switching will join a kinase I shouldn't I saw a reminder, that this call may contain forward looking statements made under the safe Harbor provisions of the private Securities Litigation Reform Act like 95.

Statements are based on management's current expectations and current market and operating condition I relate to events that involve known and unknown.

Her disease and other factors.

All of which are difficult to predict.

Which I'd be on the company's control, which may cause the company's actual results performance or achievements to differ materially in the forward looking statement.

The information regarding these and other risks uncertainties and factor. It does include it in the company's finally.

The U.S. Securities and Exchange Commission, a company does not undertake any obligation to update any forward looking statements. As a result is a nation good shape.

Or otherwise, except as required under the wall with that I'll now turn call over to Steve. Please go ahead.

Hello, everyone.

Piece the to conclude fiscal year, 2000, Nike with low botched topline close and the solid financial and operational results.

Which the most treated all strong execution, despite the very challenging.

Good morning, why Didnt, we felt that strengthened our position in the premium pay talk obviously, we're training market.

Strong market demand.

Oh premium brand and the service quality and all this outstanding operational skin.

You mean shouldn't be market help continue to gain market yet.

As we move forward to the new fiscal year stopping September 2019, we will spend <unk> upgrade a premium services to improve customer satisfactory. They fight out incentives that didn't motorways I'll stop and optimize all patients to be sure profitable growth.

We are even made its got off to foster globally, and the constantly changing industry waste both opportunities and challenges I had the boss.

Going forward, we will continue to do what you were seeing was not a wide.

And then intense optimism is it by integrating online merger offline, Oh and mobile technologies.

40 integrated with our offline services now recently launched ones much like that that's delivered a satisfactory nishu operating results.

Oh, no technologies have to wait three improved student lending inkjet and the customer satisfactory.

Oh go east to establish she wants Mel Watt, it's the largest online based leaving the Piceance Douglas please.

To better serve a heightened demand through both online and offline trend.

We believe that Oh, hi strategies will help on that into Nokia speaking you know.

Well recently by the final blowing Piedmont, an opportunity to better motorway did those will make outstanding contribution to the company.

Not yet developing insects that.

I have decided to donate 1.2% Oh no.

The company's total shares.

Phase I owe to establish a super US you know but.

I think see any hope that more people will be entitled to enjoy the benefit obligations and the success ultimate combined.

I went out to look cool over to Greg who will go why the presentation well market condition strategy and appreciate thanks.

Thanks, Steve we are extremely thankful to youre getting around three or four sitting out a super Hero Fund I don't maybe all money and cheers.

Hello, everyone. Thank you all for joining US today, we are very pleased to deliver another year of solid gross now revenue, which is approximately RMB 4 billion, which almost doubled from RMB 2.1 billion of fiscal year 2017, just two years ago. We continue to see is good.

Demand from the K 12, and a young children After school education services industry in China.

Also benefited from the consolidation that units we are experiencing.

Oh advantages in providing premium services lean cost structure and standardize the system help us drive outstanding economics, and creating substantial entry barriers.

During the past fiscal year 2019, we experienced several external factors that quite notable impact to our <unk> business.

We had a yeah when the industry had the most heightened regulatory requirements, we have to relocate some of our learning centers open larger new center at lower along with higher five co standards.

We also had to spend extra time enough cost go higher all prepare our teachers to be compliant with teachers license requirement.

Those added onetime cost expenses, we believe all of this effort will make up that more competitive player in a better industry environment.

In addition to.

It was other lighting is also yeah. When we saw rapid adoption of education technology by our students and parents.

That's a market leader in the Premier sector, we believed that advanced all night technologies.

If integrated with extensive offline teaching experience and operations can significantly improve learning experience and effectively.

As such.

While we decided to deploy a more balanced expansion strategy offline.

Make reasonable investment to people that are all night strategies.

[noise] no Tony into todays presentation that we uploaded into our website.

We live first spend a fair amount of time to discuss the premium education service sector. We felt it is important to explain tare left us in more granularity how attractive does affect our use what advantages we have viewed to make us the number one player in the sector and why we are optimistic about the.

Well and profitability prospect of our business.

If you turn to page five of our earnings presentation slides.

We would like to point out that we haven't clearly differentiated position in the China Education service market, where some of their largest hey, that's all industry focus on the map and mid to high end markets. We are focused on the premier sector with higher price point, a providing more demand premium services.

Thanks to the one on one personalized tutoring nature.

According to a solely by Frost <unk> Sullivan once Mark is the most recognized premium brand in China.

Page six gives a good overview of the premium market.

Premier After school tutoring sector is projected to grow much faster than overall market and expect originally any RMB 200 billion by 2022.

We believe the fast growth is underpinned by the threeg secular trends our industry.

Right and awareness and preferences for individualized learning.

Consumption upgrade by increasing number of middle class family in China.

Right the willingness to pay for premium services.

It is also notable that while once not least the launch of your player in the premier sector by revenue.

We only take about 2.4% market shares.

Indicating substantial rental gross.

We pretty elaborate on page seven how we feel like distinguished position in providing industry, leading premium services.

Which we believe likes on the three key pillars quality services.

Innovation.

Oh premium one on one tutoring services is the most effective way to improve student school within a limited time frame.

A much needed help far students to prepare for their highly selective entrance exam in China.

This is our main demand and we expect that demand remains very robust.

Second is our touching services, which provides a personalized care college students and helps improve level off engagement.

Third innovation, we continuously pursue an upgrade new products and technologies to enhance the learning experience and effectiveness.

What do you have another robust teaching system, you P.C. omo talking platforms. He I'd call. It once more all nine if that's right.

We are very excited to announce that we are building our own nice strategies.

And ankle you establish once more online that's the largest all night base premium service platform.

Oh My strategy I paid a based on our fundamental belief that Oh, my education help better sort of a need to other customers, which include convenience better communication and enhanced and learning experience.

We already launched lead off that we all night caucus far students for one on one.

Yeah, I'd be happy mass fast track student.

We believe our years of experience will enable us to beauty once more online with improved other reason power by data collected from extensive off my experience.

He is also important to point out that our goal is to deliver profitable growth, which means we're not brand money for scale.

We will focus on our existing student base in cross selling this new services, which helped us to deliver a profitable business model.

We plan to provide more details on once my online in our future earnings cost.

We would also like to refresh a few key points that we discussed in our previous earnings call.

Page nine explains why we could consistently achieve scale sustainable profitability in the past few years. We believe these three core advantages in our business model will continue to drive growth and profitability as we've got our learning centers portfolio on national level.

Page nine we updated Oh roundup data the latest the Q4 quarter, which once again confirmed satisfactory results both in Shanghai, and the top 10 city, especially Uh huh.

It is critical to understand how ramp up performance, which essentially east, but explain why we're having temporary.

Tom what margin trend, that's new learning centers consists of more than a falling type unfolding.

We maintain our outlook that we look returned to double digit operating margin in fiscal year 2020.

We'll continue to put to disclose this ramp up data in future earnings costs.

Page 11, it's the sweet year strategy, we discussed during last earnings call as we move into fiscal year 2020, we will focus on these three cost so it's nice and prioritize the top 20 cities to generate scale and economics, we plan to open much fewer new learning centers you the new fiscal yes, we carry out a more balance.

Capacity expansion plan and continue to focus on ramping up that large number of existing newly opened centers.

I would now like to turn the call over to Rebecca older goals for details of all financial result during the fourth fiscal quarter of 2019. Please go ahead. Thank you Brad Let me first provide key financial highlights then discuss the performance and well it's a in our core business Douglas and lastly walk you through the key financial strain.

For fiscal year 2019, let me start with two strong growth my friend.

Yesterday enrollments increased by over 50% year over year on top line growth for the quarter exceeding 40% turn it into geographic revenue contribution as we continue to further scale up instead it okay somehow revenue of Shanghai accounted for 55% of Dakota revenue down from 62% same quarter of 2018 no.

Let me go to key highlights during the fourth fiscal quarter of 2019 light you. What's the outlook on your auto business development, what a fiscal years plenty of money not let me.

Smart VIP business, which is all cleaning pay so when I when cleaning services I've seen strong average monthly emboldened well exceeded 50% in if all incident, including who don't have Oh.

Oh, sorry drill time too high so wouldn't go to high anymore is that correct. It's like one of regulatory.

One other regulatory in have already started to normalize.

Not revenue outraged on high grew by 53% year over year and show sort of revenue increased to 45, [laughter] Oh newly launched the I'd. He went on one when you said that the which is a premium version of.

15, VIP program and supported by almost have knowledge is precisely towards the asking him in markets and further strengthen our premium brand image have received positive feedback from the customer.

Oh latest you PCTEL ultrapars proprietary teaching and service.

System for name could sell existing Daisy services by upgrading curriculums database and better allows to teach and I study after that.

How many of international how did you say education program, which is seen in one on one penny. So this is sports you does it kind of international school.

By 73% year over year, well average monthly enrollments grew by 889% compared with the same favorite last year, we see this I've done its public sector within login demand and serves the needs some high end customers.

Operating margin excluding.

What are you can expect just 41 my VIP business reached 27.9 like Q4 compared with 27.7, what are the same period last year happy My switches the premium mass education called them has seen a robust well since it is also Shanghai over 80% Oh geographic focus.

Into the new fiscal year, when new capacity will be in cities, including until 19, so, though huh et cetera to.

To adapt to the regulatory changes in the ever a school admission process.

Equally in Shanghai, we have updated Oh program. So it's not the border market demand for young children My education, an increase other instead, it Oh, sorry Shanghai.

Integrating ABT eight Oh latest pipes, we'd happy my education system with cutting edge when all the technology artificial intelligence tools and smart devices, we successfully enhanced customer satisfaction, so more engaged learning experience.

We also introduced.

And you happy mask, the ATM program, which is built on a investment in our in R&D and how ammo technology and aim to adopt massport well teaching English I think I defer to improve units learning outcome fast track English Oh premium English education brand continues to reflect crappy bralettes.

And then by strong market demand will continue to grow in young the with the Delta to strengthen no advantage physician leverage in Limbo technology, we have launched life wrong asking for well during the way we work day to help the students prepared and butyl courses.

The peer five Oh proprietary innovative English teaching methodology has integrated with cutting edge technologies of AI is BD foundation enhanced student engagement and money outcome and operating margin excluding regional and has put a G.N. expenses has turned positive during the quarter. Despite hobby.

R&D investments and rapid after the friendship and expected to further improve in the new fiscal year.

Not let me walk you through the others you financial detail, what a fourth fiscal quarter 2019, net revenues were RMB. It's all the 311.1 million an increase of 40.4% from RMB 933.6 million shares the same here last year.

The increase was mainly attributable to that both the average monthly involvement I smell like the consolidation of tend to find business.

Average marketing Bowman increased by 29.5% year over year to almost 860000 <unk> steel fiscal year 2019 for the company during the quarter.

[laughter] asked me if were fiscal year 2019 for the company was down by.

Around 3% year over year, we're just if you do.

Which is due to the consolidation of simplifying business was primary business is classical them.

If he wants my VIP increased by about 4% compared with fiscal year 2018 also revenues increased by 44.6% year over year RMB six 667.1 million, we increased teaches conversations to attract more experienced teachers and I'd ever I know cost to support he reallocation.

Okay money senses, well regulatory compliance purpose.

Selling and marketing expenses increased by 34.1% year over year to RMB 259.9 million non-GAAP , selling and marketing focus which is what's gonna based compensation expenses were 259 point I RMB Millen, an increase of 40.

<unk> an increase of 34.4 from RMB 193.5 million during the same theme of last year.

Chris was as a result of so that was their marketing activities to support new student enrollments, well and adoption of more if sockets. There was no marketing channel as well like marketing.

Activities associated with the newly launched one of my online.

General and administrative expenses increased by 83.7% year over year to RMB 307.7 million non-GAAP General.

And on administrative expenses, which exclude share based compensation were RMB 282.1 million an increase of 100% from RMB 141.1 million Junior same period last year increase was primarily due to rising R&D development of education technology teaching system.

Curriculum material associated with both.

Oh, what you meant offline business and newly launched online business will also include fair amount, it's kinda and an administrative classes they comply with the new regulatory standards.

Well you openings, that's my senses.

Now, let me move on to cover some more other key financial points for the fourth fiscal quarter 2019.

Capital expenditures for the fourth fiscal quarter of 2019 were RMB 76.2, moving an increase of RMB 11.2 million from RMB 5 million in the fourth fiscal quarter of 2018 increase was mainly due to the payment leasehold improvement as of August 31st fit does a nice.

The company had passionately Ashley equivalent of RMB. It's all done in 377, well informed me that ensures to me last night of RMB 454.1 million.

Thanks, Mark for payments from customer of ours, which represents a lot. There for me in both students were close to a recognized approximately at the training sessions are delivered well RMB 2001 hundred 61.9 million at the end of the fourth fiscal quarter, if a 19 increase of 8.4% RMB.

1991 point.

At the end up the fourth fiscal quarter, there's other 18.

Turning to outlook for fiscal years plenty plenty based on Oh, no carbon asking me not revenues for fiscal years plenty plenty of I expect it should be between RMB work on a 992.3 minutes and RMB 505000, 192 million an increase of 25%.

To 30% from fiscal year 2019. This outlook represents one smart current and preliminary view, which is subject to uncertainty. This concludes our prepared remarks I will now turn the call operator and open up again, a operator were ready to take question.

Thank you we will now begin the question and answer session to ask your question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your hands that before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.

The first question today comes from else sang of Morgan Stanley . Please go ahead.

Hello management. Thank you for taking my question I have two questions on behalf of films.

First question out your online G. Oh, you mentioned that you will focus on well once my online and mobile strategy and next year can you elaborate more on D. online and also do I have any talk yet in terms of snap and you have margins for the online business second companies.

Outdoor imagine you mentioned that Youre module will start to recover Oh.

No coming here and do it has any marquee how's about like starting from which quarter. The module will see attendant Ralph Thank you.

Thank you I'll see if for no questions. Let me answer your first question regarding our all my strategy and then followed by the second question on the margin expansion status. So regarding one smartphone nine as we just very pleased to I loved a we actually have been.

Developing once more our own eye for a couple of quarters now.

We are developing this strategy because based on all fundamental belief that we think the on my education, well greatly help our children and parents in learning and also communications.

So we first have launch in a small scale the last two quarters.

That we provided middle of the week, one on one tutoring services power, we IP or students.

In those programs, we have the same teacher shortage or offline and the same student who learn through our standard curriculum. So we filed.

In that way and combining online offline to provide a great a greater convenience, but also at better exactly as you know are teaching.

Secondly, as I mentioned it is online offline integrated now as you know we have a very robust internal teaching system called U P. C for the way I T program, which has 12 million teaching nodes and 10 million tasks and questions. We have already basically Pittsburgh Pittsburgh.

Hi.

Most material, we're not a pure online players who just launched the services we are launching their services based on our years of.

Did you experience.

And thirdly.

We want to emphasize that we want burn money to treat the beauty business in a very large scale in short time every time, we will first harken all existing student base between constant not experience.

Which means what we're going to cross sell just product which means.

The customer acquisition cost, which is a common and challenge for the El Nio education will be much lower in our business model and third secondly, as we mentioned we already digitized our pitching nodes and in addition, we incurred about RMB 80 million.

In R&D and related costs.

And expenses in the last quarter already so that spend was primarily to.

Integrate our digitized teaching content with the live broadcasting platform that went building so [noise].

Regarding your question on the guidance on that.

Topline margin for this once more on my business, we whereas during the middle finalized a plan. We just had a new senior management team on board to lead to be in charge of this business well finalize the plan would continue to disclose more details once we once we had affirmed plan.

For the fiscal year 2020, now turn into a second question regarding the margin expansion status.

We actually for this past Q4, our margin already starting to expand.

Do you view, if you take out the additional R&D spending of 80 million I, just mentioned, which is roughly equivalent to 8% to 5.5% over Q4 revenue fell in our Q4 non-GAAP operating margin would have been that's 2.3 per.

Then that compared to 42.8% for the same period last year, that's a significant narrowed down to gap, which from the Q3, which kinda capital of 7% as you recall. So we're very pleased with though he's up now we gave the older.

Look I think Alaska caught that our margin well recover in fiscal year 2020 started in September we maintain that that'd be we think all margin will be well be back to double digit.

For the full year 2020.

In terms of Tommy we think there would probably will be less visible in the first two quarters.

Of the new year than the last two quarters. So for a couple of reasons one.

You go take time to digest.

A large amount of newly opened centers, who will take couple more quarters for the ramp up.

Due to the nature of our business.

And and two we plan to open another 50 centers for the with the new physically in 2020, and we actually are usually opened center during the first quarter. So we will have another fair amount of New center to open in Q1 that will dilute every other run.

Well, if those existing centers, a little bit and actually one more reasons. As you know Q1 September to November is a pin quarter in terms of seasonality.

Rather than Q3 in Q4, so that effect will be less visible. So about me to conclude we are very optimistic about all margin recovery as you can read front the ramp up data we have be providing a we're very optimistic about margin recovery.

Well, the yet to come as well.

Okay. Thank you very much filed detailed information.

Thank you.

Your next question today comes from Felix though you B.S. Please go ahead.

<unk>.

Oh, Hello, Hello, Seaton Graco, Scott congratulations on their robots.

Thank you for every time.

My question.

My question, that's mostly on the topline you mentioned that going into that by 28.

Youre going to have a more control the capacity expansion.

It's all my I know what will be the impact to the topline well do I notice, we expect they sort of that slowed down and top line growth how will that.

Be distributed between the the.

The full quarter.

Next year. Thank you.

Thank you feel like a question on the topline growth we gave the guidance for the new yeah, a four year over year gross or 25% to 30%.

For a few reasons one after two years all its expansion. We are we would like to have a more balanced and controlled grows with the new yeah, which means we're going to open much less center, which right now we plan for 50 cents compared to 107.

Incentives last year. So this will slow down topline growth due to less opening up new centers secondly.

The reason, we decide to slow down what this quarter, which I think it's pretty understandable far industry. After two years of rapid growth you would take a one year to for us to slow down and enhance our operations, we need to further improve our premium services in a number of areas we want to be.

Oh My strategy, which is we just launched and we're making efforts on stopping.

Incentive plan, which we try to help.

Our productivity as well.

So certainly Oh, no, we're saying to regulate regulatory impact will be largely behind us we anticipate Sanofi impact will continue to spill over to fiscal year 2020, It's me, especially for our young children Mass program happy Matt as you know.

Our our carbon market, it's mainly in Shanghai, and Shanghai is experiencing a change in admission procedure.

Even some a lottery plan in.

In the primary school so do we do we target at so those are three reasons are behind the rationale why we lowered our guidance for the new fiscal year, which we think it's very reasonable and which well lay a foundation for much faster growth in the years to kinda, we do and kids.

Paid a Saturday gross between 30 to 40, and even 45% in a year or two after 2020.

Oh, Thank you, Greg and May I, just follow up on the on the regulation I think I'm very glad to see that you have a adjusted Youre happy math courses.

DAP to the regulation and ER and also I I pull up question on that is that how how it's our compliance that is on the learning center as well as teacher licensing or so far and Oh. Thank you any spillover impact on that into that.

Thank you.

So regulatory is a couple a front as you mentioned at the first one is the rest of tracing licenses and permits for learning Center operations.

We have.

The regulations in particular is very stringent you noted a number of province to we operate in such a Jonny Jones, who we're very pleased to turn that even though we have largely achieved on received most of the permit to license for those centers into two provinces, which as a sick.

You never can progress, we made well actively applying for.

Licenses and permits for the rest of learning center in another part of China, which is less stringent indeed forsman state status, but had a much slower approval process will patient patiently wait waiting for that pool, but in the meantime, we're improving our own standards.

I think it the second front on regulatory impact is I, what I mentioned on for score at mission prestige procedures, particularly in Shanghai, which had an impact on sort of way business. As you know we are changing our program Hello curriculum to move away from.

I promise score at mission.

And trends a interviews, but more on the broader.

Demand for young to can mask education and training. So we have as you know.

Revamped our pitching mattoon material made a press release, it's a couple of months back.

We are rapidly diversifying our business away from Shanghai as you know, we Oh, our business I was actually down to 80% the last quarter. So those were how our I'll ask to mitigate the impact by we do anticipate that a couple more quarters Oh.

Pressure on the gross rates on that simply business, which means they are happy mass business.

Thank you Greg Thank you very much.

Again, if you have your question. Please press Star then one.

Your next question comes from carried away of Blue Lotus. Please go ahead.

Hi mentioned much sense flip that you might call I had one question on ship that way. So company you own the online competition landscape, especially for you on my expectation.

Yeah on these.

We can't actually see that go to market demands follow on line three men I kind of a teaching. So this is growing but it's not because the whole try nice kind of examples involved I know about consumption upgrade. So we can definitely see that like why not only in the first p. and second tier cities.

The patents I love that place got new bundle a convenient.

So that's why we say that the whole demand for the Polymet teaching services, increasing actually but if I ask why not in China. So we see that's a huge opportunity for ones not because we have looked Brad.

Good teacher and I've said. This is this will also have not kind of off the kind of it yeah.

A lot because.

Uh huh.

So I think that way I mean, several years Oh My part will also be Wellbore major close drivers, yeah, Medicare and you'd have to be Monty.

Yeah. Thanks, Steve just to add to more 0.22, I'm sure I think Terry we first 21 emphasizes that and it's very.

Very experienced operator.

Youngsters in Education me.

Regardless the format online offline, we don't want to emphasize that teaching quality and training effectiveness is the key long term success factor for the for the business. So in general we believe we're very well positioned to play the sector as we accumulated.

Millions or did you know 10 question answers in throw off of my experience. The went very well positioned to place a sector, especially as you mentioned the premium one on one online sector. The second point I want to mentioned that and as we all know that the unique long makes our economic model Oh pure.

Online there is not sustainable the reason behind is the very high.

Customer acquisition cost, which we believe will continue for a couple of years at least.

And also there on development of teaching material Nike development auto builds areas. It's actually that are all our advantage as we have a pretty large student base that we can cross sell but also.

That we are has accumulated existing brand lots pays off digitized a material which will.

Coffee much less in research and development of those on my platforms and teaching system.

Okay. Thank you Steve Thank you quick.

Yeah.

Okay. If you have a question. Please press Star then one.

Oh, sorry, no further questions. This concludes our question and answer session I would like to turn the conference back over to Rebecca Shen for any closing remarks.

Thank you operator in closing on behalf of the entire management team, we would like to thank you again for your participation on today's call. If you have any further inquiries in the future. Please feel free to contact.

Thank you.

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