Q1 2020 Earnings Call
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Ladies and gentlemen, thank you Stan.
Because the wide education, that's quite a few pathway cookies phasing coking coal.
You'd like to today's conference is being recorded.
I'd now like to head of <unk> I've just speaking today, maybe they keep please go ahead.
Thank you operator, Hello, everyone and welcome to write that have taken from all her to follow time here I'm conference call today really care falling asleep along there man if he all in the newsstand. Only example, it well we all go over a reasonable business after its operations and the company's longtime Staticy, Italy.
Go over the financial resolved public water both will be available, we'll take your cost and seems like an infection that follows.
Well. We proceed I would like to remind you that today's discussion may contain certain forward looking statements made and know that they pop I, probably should help the U.S. private Securities Litigation Reform Act talk 1995. This fast forward looking statements pass up into the risks and uncertainties that may cause actual results could differ materially from all the kind of expectations.
I understand the factors that food cost resolve that materially differ from those in the forward looking statements. Please refer to our form 20-F as filed with SEC on April 17, Twentytwenty, who do not assume any obligation to update any forward looking statements, except as required under applicable law throughout todays call.
Ms. Wang Animates Louisville, referring to the earnings presentation that have been uploaded to our IR website as a supplement to today's call now I'd like to turn the call over to me people want sequel. Please go ahead.
Thank you May go everyone. Thank you for during our earnings call I'd like to begin by expressing our stupid sympathy to everyone across the globe that has been impacted by the koby bitumen dynamics wind facility holds about the situation improves quickly and allow everyone to return to work safely.
I'd like to begin my.
Remarks of like three the outbreak of recovery.
H. January 2020 had a significant and mature adverse impact our operations during the quarter in according with government regulations to contain the outbreak right learning centers were tempered and quote study on January 19th 2020, Oh.
Our cell phones learning centers, we may close as of today. This has adversely impacted our ability to generate cash spend guest revenue from regular courses and limited our ability to make to market our services and acquire students through our learning Center network.
While we have resumed all I operations, the extent of the disruption our offline operations and the related impact our financial and operational results and outlook depend on coping 19th further developments on the global pandemic.
Before I go into details I I, however would like to make three key points regarding our business number was we have unholy liquidity to navigate this extended period of uncertainties also from March 31st 2020, We had RMB off my my 925.1 meeting.
In cash cash equivalents unrestricted cash.
Number two we know how to run our business, it's mostly both online and offline.
With resuming regular courses online we achieved the close to 90% participation rate, meaning most all of our students on learning all aligned with their teachers from offline learning centers before a pandemic.
Number three we're transforming into an online emerging offline.
Although we also expanded or Ah Ah closers beyond the English so the Oh I'm old model.
Which is.
Developing a us we speak.
Turning to slide four.
Over the Chinese new year holiday, which marks the beginning of China's shutdown. We immediately began stable started strategizing or roadmaps to navigate this challenging environment. The first stage is through stood stabilize our business by controlling costs and reserving and poll liquidity.
Second stage it to optimize our business by conducting our business online and in hunting digitalization capabilities NOL, where he led transformation stage to pursue our long term strategy. So tradition into digital life cost discipline to raise skill based oh, I'm or educational platform.
I'd like to begin by addressing all efforts during the quarter to stabilize our business and offset the impact from the pandemic.
Soon targeted at cost controls and adjusted capital expenditure and liquidity plans to reserve cash.
With limited visibility on one Oh offline operations would be able to resume we immediately go out a series of initiatives, who copper upto personnel and overhead costs, which are laid out on slide five.
We negotiated at heart was all all landlords for rental concessions and were able to obtain a roughly 20% caught the monthly was which will remain in fact on fuel learning centers <unk> able to reopen.
At the same time, we'd be games belonging under utilized and underutilized and support stop restructured the compensation schemes for management reduce the social security contributions by RMB 8 million per government policies and things into supported we offer first like teachers as Bill said.
To ensure business continuity and higher productivities throughout the period or disruption.
This resulted in personnel costs 40 by a proper approximately 23% sequentially.
Overall, GMV a expenses fell by 35% sequentially during the quarter.
Turning to slide six you can see the measures we have taken two men aged and preserve cash following a careful assessment of our expansion plan for the year, we risk scheduled rescheduled the openings of certain new learning centers to 2021, which will allow us to.
Substantially reduce capital expenditure from the original RMB 140 million to less than RMB 50 million throughout 2020.
The cost on physical learning center rollout will not impact our growth going forward the growth can be driven by a combination of ramping up the existing offline classrooms, leveraging oh I'm old models to free up capacity and I think online classroom capacity.
The new all I'm old model will improve capital expenditure efficiencies.
Turning to slide seven that disruption to the course of normal work business by the pandemic pop kids compelled us to accelerate the execution of off with strategy to digital lives or operations by moving Oh aspect of.
Oh lie in including marketing teaching screening and communications was parents and students.
I was I laid out during last quarter's call Oh, I team was able to transform rights plot into a robust opened technology platform that is capable of supporting interrupted Oh my teaching nationwide within 20 days.
This work breed headed by the official launch of all I smoke group classes for our existing and new students in late February which we began monetized in early March as of March 30 for 2020, approximately 127 saw.
The students across 144 cities had taken online small group classes.
We also leveraged rights Clos to provide over 40 online training sessions to over 20000 teaching and they'll stop in franchise the learning centers do even during the quarter.
Great pots rapidity proved to be a reliable stable and solid foundation for us to transition old regular courses online in late April.
I'm proud to say that in just under four months is we have been able to successful they viewed and launch online platform and only products that offer a truly unique value proposition and experience to an increasing number of students who choose to resume their courses online.
On slide eight we've laid out the tangible results from moving over business online.
We did not simply move all a regular offline courses online, we actually modified or regular course is by adding sessions with worrying teachers and created a pure online small group classes to supplement our existing students or students who prefer online courses only.
The first on like small group crosses was launched early March and had to have been rolled over 31000 students as generated RMB 38 million cash revenue.
The second significant effort was to resume off all all regular courses online.
The overall participation rate is close to 90% a very impressive hypertensive patient rate, which reflected the trust and loyalty all customers have you know Brent and service online.
Already made we started to sell do teachers small who classes. This is a pure online courses that we're likely to continue going forward.
I believe these solid initial results reflect our ability to offer high quality classes and service services online.
It is enormous growth <unk>, there's enormous growth potential ahead of us we scaled up online efforts and further accelerate our digitalization strategy.
On slide nine you can see that rice has strong Brent unique curriculum deep academic capabilities and 13 years of proven educational experience and resolved.
This pandemic also helped the rights to views of proprietary technology platform suitable for online teaching and learning train solvents of teachers that can teach both online and offline.
All these attributes.
[laughter] publishing rights wells to be Oh, Oh, Oh offline merger all night player as we have experienced ourselves.
Brick and motor model has seen growth slowing down as a result of strong competition from online players and the disruption impact from the pandemic.
At the same time most of a pure online players still haven't figure out economic model, yet often suffered from high acquisition costs and weak economic the with unit economics.
The Oh I'm all model allow us to utilize our strong presence offline and online I'm combining.
With our core account competitive advantages in curriculum development nationwide student base over 130000 students and proprietary platform to emerge from the pandemic.
Bigger better and stronger and drive all transformation into a digital lives caused disciplinary and skill based on low educational platform.
On slide 10, we've outlined the two steps that will drive this transformation first delivered and of course is online and second.
Completing our digital transformation.
As part of step one we will strengthen our core Oh I'm old curriculum by migrating portions off all were offline regular courses online freeing up space, you know offline learning centers to enhance utilization and improve our return on capital expenditures we will.
Then diversify our product offerings beyond courses Poppy English to include steam Matt and other subjects to expand cross selling opportunities and increased average revenue per user ARPU.
That's too we will focus on generating higher ROI on digital marketing through social media and word of mouth eating <unk> lessons.
The word of mouth leaps lead refers to the referrals well at the same time, leveraging private topic to reduce customer acquisition costs and improve monetization.
This will be followed by leveraging data from a crossover nationwide network to standardize processes through a more detailed business intelligence system.
To help drive our digital strategy to the next stage and navigate our business through its transformation. We have bought all on board additional Hyatt highly experienced a seasoned industry professionals, which can be found on slide 11.
<unk> appointment of missed the type ways in particular I saw were chief operating officer exciting as she brings with her extensive experience in enhancing enterprises operational excellence eat and digital transformation, which will be critical.
For towards forming right into our Digitalized education platform.
The stringent being all a stringent gene or management team with a new fuel head of strategy head of Oh, I'm old product development and head up a new media marketing truly reflect our commitment to building a more digitalized as possible.
Well the pandemic came as a shock to everyone and part of the progress we have made in stabilizing our business during the quarter I look forward to working closely.
With my colleagues to further optimize and transformed rise.
We understand theres still a lot of work to be done.
Strong branding high quality curricula, I'm teaching resources and the ability to offer both online and offline classes off which we have already have a critical to us writing in the post pandemic error of education in China.
Building, a effective Oh I'm old model will ensure right long term growth and success.
We all look forward to the exciting journey ahead.
Now I will hand, the call to Gen don't to go through the financial results.
Thank you de home [noise].
No go through the financial results for the first quarter of Twentytwenty before I begin. Please note that all numbers stated here I mean arnie.
And the whole mentioned earlier comic 19, kosta huge there's disruption to our business.
As the online education company, we relying heavily on our offline learning Center network to offer services in a market our products to students.
Definitely in late January we temporarily closed all aluminum centers in compliance with governmental regulations to contain colleagues 19th.
Oh itself only learning centers remain closed as of today.
The tempo closure of up offline learning centers has he became our ability to offer offline classes and the market our products to prospective students.
This has adversely impacted our ability to generate cash and a recognize revenue.
Oh learning centers, where your operation. So only 18 days in January and it will close the through over the remainder of the first quarter Twentytwenty, we could significantly and the materially impacted on financial performance for the quota.
Total revenue dealing the quota decreased by 67.5 year over year to 109, meaning.
The decrease in revenues was driven primarily by 64.7% year over year decreasing revenues from our educational pull them to 100 and to meeting.
No this quarter revenues from educational program to live in crude revenues generated by 10 call, which more accurately reflects our focus and the long term strategy going forward.
Revenues from educational programs in previous years, there have been adjusted to make them comparative.
Revenue from rather look foresees, namely rice, dark and the right Oh.
Was 70 point 74.4, meaning the result of 18 days of applying operations. He and generally revenues from other will rise cosy, including right that can talk in a short term online small group copies.
And of course is offered by the edge was 27.6, meaning.
Franchise revenues decreased by 84% year over year to 6.1 million during the quota.
How many due to a decline in recruiting franchise remains impacted by the closure of our franchised learning centers things late in January.
Other revenues decreased by 89.2% year over year 2.9 million, primarily due to the impact of a travel restrictions on our study towards releases, we travel all being postponed for the summer or even a late one time.
Cost of revenues for the quarter decreased by 7.7% year over here to 142.6 million.
Non-GAAP cost of revenue simple the quota.
Decreased by 8.1% year over year to 138.3 news.
The decrease was primarily caused by a decline in business, resulting from the Colby 19 disruptions.
Furthermore, we made a week feed effort in cotton costs.
We managed to cover the rental expenses by about 8 million about 13% up 13% compared with the last quarter.
Personnel costs decreased as a result of the reduction and teachers headcount and to reduce the teaching hours during the period.
Gross profit for the quarter was 33.6 million compared with gross profit.
180.6 million in the seeks appeal in the same period of last year.
Many of the marketing expenses for the quarter were 43.2 million a decrease of 34.2% year over year from 65.7, meaning.
Non-GAAP selling and marketing expenses was 42.2 million a decrease of 34.8% year over year.
The decrease is primarily due to there's infused offline marketing activities.
And the reviews, the personnel costs, which were associated with the sales.
Sales team downsizing and decrease the incentives as a result of the lowering enrollments.
She any expenses for this quarter.
54.6, meaning a decrease of 11.8 meeting here over yet the decrease was mainly attributable to the reversal of share based compensation expenses due to the actual feature in the first quarter of Twentytwenty.
Now we got DNA expenses were 55.5 million a decrease of 6% year over year. The decrease in reflects all the initiatives to cod administrative costs and to offset to the adverse impact of called me to 19th.
Operating loss was 131.4, meaning as compared with operating income 53 meeting for the same period of last year.
Non-GAAP operating loss was 127.1 million compared with non-GAAP operating income 60.7 million for the same period of last year.
Adjusted EBITDA loss was 108 million compared with adjusted EBITDA income 80.5 million in the same period of last year.
Income tax benefit for the quarter was up 19.7 million compared with income tax expense 18.7 dealing in the same period of last year.
Net loss attributable to right for the quarter was 103.8, neither no GAAP net loss attributable to rise was 99.5 move it.
Basic and diluted net loss attributable to write per Avi ads for the quarter was 81 point 84.
Basic and diluted non-GAAP net loss attributable to lives per ATM was 1.78 76.
Turning to our cash flow performance net cash flow used the operating activities to dealing the quota was 82.4 million.
Compared with the find media of and cash generated from operating activities in the same period of last year, mainly due to review the cash collection for our Red River courses, we truly sounds either from the temporary closure of our self owned them and the franchise to learning centers.
As of March 31st 2020, the company had a combined a cash and cash equivalents and a restricted cash of 925.1 million compared with 1000 22.8 million as of December 31st 2019.
As of March 31st Twentytwenty total deferred revenue customer among thing. He was 776 point Threemillion increase of 20.7% from 765 million as of December 31st 2019 <unk>.
The increase was primarily due to revenue reclamation, <unk> offline and online courses lagging behind cash collections.
As a reminder, stocking last quarter, we began reporting the number of students in Canada and the new students He road, which we believe.
I'm more accurate weekly reflective of our business performance and to provide a more meaningful comparative analysis and then the previously reported student enrollment the matrix.
Please refer to the earnings material, we issued for the fourth quartile 2019 for a more detailed explanation for the change in disclosure.
The fact that this slide shows as of March 31st Twentytwenty butane Clark for weather cool season, including right starts and rice all programs or 52585, an increase of 901 from 15.
1684 as of March 31st at 2019.
Yes students enrolled for why into regular closings in the fourth quarter of 20, 21507, compared with 7400 and seeks feeling the same period of last year. It.
The significant a decrease in student enrollment is a direct result of the closure of our learning centers through all the majority of the first quarter 2020, which severely limited our ability to leverage our offline channels to acquire prospective students.
Even if you really wonderful otherwise courses, which were taught in line or including like job can call and online smokeless coffee and other REIT and short term courses and of course is provide either by the edge was 32400 and the full so there.
In 2490 pool in the first quarter of 2020 compare to we used to 1470 doing the same period of last year.
Students enrolled for only small group called things were 31882 in the fourth quarter of 2020, 92.6% of a who are right existing students.
Turning to the next flight we de facto the and then make in China, beginning to east, we expect outperformance to gradually improve on a sequential BC.
From the second quarter 2020.
April 20, we transitioned.
Right starts and rise on courses online with approximately 90% of our students signing up for the online courses to resumed their original academics.
Academic schedule.
We also launched the upgraded online small group coffee earlier this month.
We combine that with the initial online smoker across these are expected to contribute revenue into effect second the quota.
We back to school schedule is being rolled out in an increasing number of the region. Some of our franchise. The learning centers in certain parts of potentially have already resumed a business offline taking into account. All these recent developments and excluding any potential revenue from our own self owned and learning Center.
Because we can't expect people to review the operations sometime in the second quarter of 2020, we expect revenue in the second quarter of 2020 to be in that range.
175 million to 140 find Lydia.
We'll continue exercising lead you to controls over cost and expenses going forward and we also expect our EBITDA loss to narrow substantially in the second quarter over 2020.
The second hobbled 2020 truly see our vision is to rebound from the low of the first half of the year with that I would now like to hand, the call over to the up recur. So we can be games accumulates session. Thank you.
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HM Thank you.
Yeah I'm a show Ah. Thank you for the question I will ask or the strategy of the online business or or the old I'm old because ER business didn't Oh I'm more model and then just don't you can talk about the sales marketing plan.
So as I mentioned, no we are able to offer closers.
Both online and offline smoothes late they're going forward or the thinking is up one we will modify our offline classes to be our online plus offline a combination would be the the proportion of online or will be around.
Got a 25% to 30% or on a higher grade from S. One to a six or we will have a 30 to.
40% online and then for the the younger age or pay one k. to most of their classes will still be offline and to supplement the each these these ah Ah classes, we will all for or what we call. It a targeted the enhancement.
Our classes, which are purely on the online or with a combination alpha flooring and Chinese teachers. So this is the oil animal model at the same time as I mentioned, Oh, the ER online small group causes a was actually pretty successful then we upgraded to a.
Teacher model, so one Chinese teacher or one four in future foreign teachers, mainly to you know Ah Ah teach the students regarding you know knowledge and also the so called the listening in and speaking part of the huge language screening and the tiny.
Teacher would be more focused all you know how to.
On a computer project or a so called that he prepares the learning online and this Clos has started to sell or maybe ace or the first bunch, what we're targeting existing students at the same time, where we will go out too.
Oh pardon prospects students as well or there's just no worse, so called the S.P. or a shorter term oh pure online classes, which we think will continue and so that the this or student segment is different from our existing offline.
Students for the future or animal models students. So these targets are they didnt lower spending a preference and pure online or a students.
Okay.
Sure Yeah, It's Kendall and let me address your question on sales and marketing.
So for the first quarter Elephant talk just 2020 or sales and marketing spend it seems in total is about 43 meeting on so hop over data will be the personnel costs <unk> related to us and sales and marketing and done on half of it later.
He too on the market a branding and also a marketing centene and seeing some on the culture of or the ultra high net worth Ah Ah offline learning centers kilns, we sunny to try on the new media marketing channels.
And we watch very closely big investment in the new channels and or try to maximized the kind of with the return on investment isn't the new channels as well at the same time, because Oh, we just started marketing all line and a is appealing to for us too.
Actually accumulate a experience is oh, yes experience he and the new media marquee can.
Looking.
For the whole year basically when a business the resumed in the second quarter second half of this year and we try to actually that's more in marketing you know audit you a increase all total student enrollment, having said that it will still and watch very carefully.
Oh, the acquisition cost the persecuted Anna we'll try to and maintain the percentage of a big investment in sales and marketing.
You lie with on our total a your language and the cost him I'm going to expenses as a percentage of revenue in 2019.
The throughout the year 2020.
Thank you.
[noise] [noise] next question today also line.
<unk> from credit Suisse.
Please ask your question.
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Yeah, I think thank you very much for the French and Ah so oxygen doing to offer the first one beach, the second quarter revenue guidance or the composition than the and talk about headcount Mitsubishi lower by too much into maybe you answer the numbers and third the Truett Hurst Okay. Thank you Alex.
Oh, the guidance things our offline a record real close to students already already with doing there a study all lines starting from the 20 itself April and as a little a explained in the participation rate is a wrong 90 more than 90% of POSIMIR agent Booth and around 80 atypical.
And for the junior age group and a much higher than our original they are expected to so majority of the revenue for the second quarter will be from you know the resumption of the studies of all I'll offer my students at home like so on a normal business anymore.
And our offline on revenue per load is more than a 100 million on so you can do them at a 90% of the students means doing their costs he's online and us a another a another factor you have to consider is when we moved the students the online the only because.
Humor hop over there across all was as compared to a deal offline oclock hours or so and they said all flying back a little courses online will contribute a roughly a like a 80% of hours of anything in the second quarter and though we continue to a hobby.
From our online smuggled Cacis evidently who mentioned we had a cash revenue of about a 38 needing a recognized it.
In the first quota and only.
About half of that less than half of that has been less than I've seen the first quarter. So all night smokers coffees and we'll continue to contribute roughly 20 million give my second quarter and also because they'll franchised revenues well increase because the franchise the learning centers already.
As a study to operations, which cover roughly about 100 already 15000 students until we do see they increased in the recurring revenue was recognized in the second half a second quarter of 2024 hour franchise revenues.
But we didn't to take into account and the fact that if some of our own learn our own a self owned and learning centers, maybe doing business probably in the second half of.
The second quarter Ah So that's going to be. Another addition, however, you know guidance that we didn't take that into consideration.
Is that clear to you Alex.
Yes.
Okay. So your question on the.
Financing Oh, we do to start a conversation with our lender the CP V C and that Uh huh.
A share with them again on the impact to all business.
From the coffee 19, and what happened to already with a cash barring another second quarter and are likely to be into a universal to end the likely to be in the second quarter and Ah Ah the situation and so basically oh lender has already verbally on a ground.
<unk> approval is a two ways, our you know covenant compliance.
Same time on the I'll go into.
In terms of the principal repayment, which is about 19 point Tony Fine Neely due in September 2020, that's going to be divided into installments of 9.25 million will be paid in September and and the balance will be postponed to the for.
Quarter over 2021.
So with ample cash in a bad cash balance here. The backup we don't see any liquidity issues and Ah well pretty very confident that take you know will.
Sustained given the uncertainty alarm and.
Yes, so overall I think the second quarter guidance items is very conservative because we cannot predict a win cellphone learning centers will open, but a very likely on you see that government issue guidance for Q.
Got it kindergarten through open in early June mostly in Shanghai and Beijing. So we do believe Ah that Oh, we won't be the next one to review accretions in terms of a headcount in factor the number we disclosed by the end of March.
In some way is only about or.
Oh, sorry, just tender.
Victory the interesting thing done the number of Ah or had comps continue to to decrease of a along the way or the March we disclose the number around 37 saw then a in fact, even within Dod a a 400, our awful long which is underutilized.
Or I'm utilized by the end of April or the the total headcount already reduced to a 34000.
And Ah Ah. So this is a 15% down from the age a or b. The beginning of the year. The the government to actually did not allow enterprises to lay off people in February Ah So restarted the in March.
And we continue to optimize.
Oh personnel Hall compositions, we do <unk>, mostly keep a high productivity so person as our teachers above we also optimized.
Who are not productive right now or the teacher had comps and the sales force had called off slightly Dol, but we do think a it is the opportunities that weekend later on I I don't have a bigger on called it more qualified people are too.
Two or two or a healthy the growth in the second half the year.
So I think that's me just correct to one numbers and I think is he and the whole was mistaken including had come numbers and by the end of.
In March 2020, our total headcount is 3700 3700, yeah. Good there's not some patterns or if they're not as overall and as of early may the headcount is about a 3400 incidence rate.
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[noise] once again, ladies and gentlemen, you wish to us a cushion to star one for you to with it.
I do they have no. So the question I mean, like but that does conclude todays call.
Thank you and your participation.
Right now.
Good.
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