Q2 2021 OneSmart International Education Group Ltd Earnings Call
[music].
Hello, and welcome to the one smart second quarter of fiscal year 2021 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be and opportunity to ask questions.
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To withdraw your question. Please press Star then two please note today's event is being recorded.
Now I'd like to turn the call over to other you Investor Relations with one smart. Please go ahead ma'am.
Thank you operator.
Morning, Good evening, everyone and thank you for joining <unk> International Education Group Ltd second quarter 2021 earnings Conference call.
These earnings results as well as supplementary slide presentation were released earlier today and are available on the company's IR website, and I I got one more thought Oh Archie Joy.
Joining me this call are Mr. Steve Zhang Chairman, and CEO and Mr. Greg <unk>, our CFO and Seattle.
I would remind you that this call may contain forward looking statements made under the safe Harbor provisions of the private Securities Litigation Reform Act of 1990, 190 and 95.
Such statements are based on management's current expectation and current market and operating condition and.
Late two events that and well know and love it.
Certainties and other factors.
Which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results performance or achievements to differ materially from those in the forward looking statements.
Further information regarding these and other risks uncertainties and factors is included in the company's filings with the United States Securities and changed Commission.
The company does not undertake any obligation to update any forward looking statements as a result of new information future events or otherwise, except as required and the law.
With that I will now turn the call over to Steve. Please go ahead.
Thank you Hello, everyone.
Please see the reason of gilt sales.
Okay.
A total of COVID-19.
And.
And Jeff.
The other 2000.
Although we missed strategists excuse me.
We said it has been made the quota.
And sensors.
And the premium for that revenue.
The upgraded and optimized for the ultra.
And it started to contribute to the big buckets I would put livelihoods.
Which will lead to improvement.
And the beauty.
And in corporate.
Our continued investment and economic benefits, both online and offline okay.
We have to lead revenue.
And that's due to the strong digital operations group.
Support and standardization.
And the fishing.
And the customer satisfaction.
In addition, we are making great efforts for Cleveland cliffs beauty and the local market to reach all pocket.
What percentage.
With that I will now turn the call over to cliff with the wild and do more detail.
And then.
From a company performance.
Please go ahead.
Thank you, Steve and Hello, everyone and thank you for joining us today for today's call.
I'd like to start with comments on the overall performance before I go to individual presentation slides, which were uploaded on to our company website earlier today.
And our new phase of growth post the pandemic, we're delighted to see the return of a solid topline growth driven by strong demand for our cold one O. One two and products are we improved the premium products and services and other.
Student acquisition approach for them.
And the Twentyish percent year over year growth and physical Q2, our company wide cash sales growth has continued to trend up recording more than 100% year over year increase and the physical Q3 to date.
The growth premium strategy that we launched in the beginning of physical 2021 has boosted our revenues for once and my VIP one on one program for <unk>.
Driven by the year over year increase in volume I E. They're consumed class units and price.
In addition to a tutoring or value added premium services of personalized mission planning and in person carry distinguish us from other education service providers.
Encouraged by the initial success of the goal for me and strategy and it justified but increased revenue profile, we're going to continue investing and our product teachers credentials noni and centers and build our premium brands.
And there is some months as we have completed the upgrades of our nationwide and learning centers improve our teachers profiles and launched a premium brand campaigns and the beauty the digital operations and platform.
These efforts largely enhance customer satisfaction, leading to the growth and new student growth sequentially.
I will now turn to our earnings presentation slides.
I first start with our operational achievements related to go from a strategy.
On page seven of the presentation.
First we have upgraded teachers profile money centers with us.
Value added premium offerings, and personalized support and mission planning and imports and carrier services.
Consequently, as of April 2021 nationwide year over year growth and average price for Pos units consumed is 23%, 7% and 11% for once a month VIP pack and masks and the fast track and English product.
Respectively.
From a conversion rate for new customers from beef doubled from 11% to 23%. During April 2021, after the launch of Pittsburgh type customer service platform.
Second by the end of April 2021.
We newly opened and upgraded 14 flagship VIP and learning centers to provide a premium NUCYNTA experience.
Third since December 2020, we have conducted a series of premium brand and you can ping and local marketing is a key cities, which largely in and once.
One small premium Brent awareness among target families in these cities and boosted the number of new students and road.
And the fiscal Q2, the number for new students even growth from our local marketing channels increased by 19% from the fiscal Q1.
We have strictly followed the necessary and appropriate guidance.
Continuously to protect the safety and health of all of our students and employees and the fiscal Q2, we introduced contactless tutoring services set up and industry, leading high standard of safety and cleaning and offline learning centers, that's to further protect our teachers and students.
In response to the COVID-19 resurgence in certain cities.
Please turn to page eight.
For our Navy its performance trends.
And we focus on the cheap data both capital and it provides latest status of our business, which gave gifts.
Theater deal and future growth.
And the fiscal Q2 December to February despite the COVID-19 resurgence impact in certain cities along the chance to do here cash there still are cheap and double digit year over year growth.
The key drivers for such accelerated growth and crude for.
Students are back to normal study schedules for both the post pandemic and recovery offline centers second Goldberg and strategy is building up customer satisfaction and the Brent.
Premiums for this.
Sections and third the successful launch of VIP and premium products.
D into fiscal Q3, our companywide cash sales year over year growth has continued to trend up recording 119% and 102% in March and in April 2021, respectively.
Q3 to date cash sales has grown more than 100% year over year, mainly attributable to a strong demand for.
Our one on one services and <unk>.
Excess of our blueprint and strategy.
We are optimistic about the continuous growth trends in the future.
In fiscal Q2 net revenue grew by five 2% year over year to RMB 932 million homepage and I by breaking down and we achieved net revenues of RMB 735 million from one small business accounting for 78, 9% of total net.
Revenues, increasing seven 4% year over year and 51% sequentially.
Net revenue from young children Education business were RMB 155 million accounting for 16, 6% of total net revenues net.
Our revenue was from one of my all night were RMB 32 million accounted for three 5% of the total net revenues.
Okay.
To elaborate more on our operational progress on once Mark we had a business in the next few pages.
Please turn to page 10.
Like for like basis for one one and one program and the physical Q2 cash sales increased by 23% year over year and the net revenue grew by 22% year over year, driven by a 12% increase and class a units consumed and a nice increase in average price per class a unit and tuned.
In March and April 2021, our cash flow improved by 119% year over year for once a month VIP one on one program.
As a combined result of robust demand for the highly effective one and one tutoring product and the exam schedules have normalized.
And to improve customer experience of our upgraded products centers and services and three our proactive marketing campaigns and the beauty brand to attract new customers and for the <unk>.
Got it and the low comparison base due to COVID-19 outbreak and the same period last year.
Please turn to page 11.
On top of our scope improving and one on one tutoring our value added premium services and personalized school admission planning and in person carry are highly appreciated by customers under the personalized support mission planning will provide for the timely and in depth analysis on school admissions policy.
The assistance in setting reasonable academic goals and grid by students and parents.
The full cycle is a standardized for quality control process, including constantly tracking the progress providing feedback and report and to making profit adjustments to achieve the goals for.
For the more our inputs and carrying service is designed to bring out how and learning.
Interest students.
Hello, and learning and crude.
Bernie motivation and only attitude and learning for severance.
As Steve mentioned earlier once more is committed to putting power and Rooney first we train our students.
Teachers and.
And and advisors, who inspire students to realize their full potential.
And also education debt, we believe in.
For the past few years, we have continuously investing in technology for revenge and build and strong digital type operating platform.
And as highly customized to our unique and one on one business model both for front end and backend.
Today I'm also pleased to provide an update how the technology support and co premium and strategy as shown on page 12.
First the platform delivers high efficiency and customer acquisition and full cycle management second the platform he and countries professional premium tutoring and other value added services, which touch rate to improve customer satisfaction and third the platform and simplifies classic schedule.
And management to agenda or generate vintage across 90 centers and improve the transparency.
We believe that cause the constantly evolving technology applications and will further support our service and standardization and operational efficiency and he and return for enhanced customer satisfaction.
As shown on page 13, and by the end of April 2021, we opened and upgraded 14 flush VIP learning centers provide a premium and learning center experience.
And its performance aside from teaching quality relies on a variety of factors such as the environment attendance and the concentration.
Nick Hi Tech enabled flush money center awkward day spacious sales.
And finally environment to help students learn more effectively.
Upgrades include facial recognition and fingerprint system for security and enhanced lighting and ventilation and expenditures for better safety and health and.
And the weighted comfortable subsidiaries for more holistic and learning experience.
And the first six months of fiscal 2021 elite VIP program accounted for 11% of the cash sales from one small VIP business.
And the physical Q2, we also further enhanced our local marketing approach.
And that's before the peak season, which are Q3 and Q4.
And we have shared with our investors and previously we leverage our offline and sensor network to effectively which target families and improve our brand awareness.
Page 14 summarizes how our marketing campaign works to acquire new customers through local marketing activities.
Hunting and professional brand and important influence.
From a public seminars and our increasing brand awareness and extending customer, which Iran. Learning centers in fiscal Q2, new student growth for local marketing channel increased by 19% from the prior quarter cash.
Sales from new customers and the referrals contributed 55% of total cash sales up from 47%.
And for same period last year, primarily due to the effective customer acquisition approach from local marketing channels.
And customer satisfaction.
Now move on to profitability snapshot of once and I'll get the business on page 15.
We're pleased to see Q2, physical year 2021 revenue and the profit margin improved with quarterly gross margin of 45%.
And the Bu level operating margin of 6% during the quarter. This is encouraging recovery in <unk> is primarily attributable to strong demand for premium and 101 tutoring for support didn't model Armstrong localized teaching R&D capabilities to adapt to and you Bobby operational environment and three.
<unk> expenses and the focus on scale up of top 20 cities to drive profitable growth.
We're pleased to see the start of growth margin recovery during the quarter driven by strong top line growth.
However, our fiscal Q2 P&L results.
Not yet reflected with and strong cash that momentum.
It typically takes a couple of quarters for us.
Sales to translate into cloud consumption I E revenue recognition and our.
Business.
Our peak season for revenue recognition is typically Q3, which is March to me and Q4, which is June to August due to intensive study and exam schedule P and China in the meantime, we need to invest in our brands you know the ones to support I'm, hoping and strategy as a result, we all observed.
Temporary operating margin pressure in fiscal Q2.
With a strong cash sales trends and a significantly higher new sales and average price for class a units consumed and we're optimistic about our future performance.
Lastly, we are aware of and closely following the regulatory developments. We have continued to promote high standard and providing better learning environment quality and services for our students. However, we have limited exposure and Beijing, which contributed about 5% other net revenue and physical 2020.
With that let me turn the call over to Idaho.
Please go ahead.
Okay.
Thank you Brad and.
The second quarter of fiscal 2021 cash sales totaled RMB 939 billion, increasing 44, 2% and 18, 9% from the same period of fiscal 2019, and physical 2020 with Factset.
<unk>.
Excluding the impact of one and three program cash sales increased 66, 8% and 17% from the same period of fiscal 2019 and fiscal 2020 with Backpedaling.
Net revenue were RMB, 900, 932 million and increase of five 2% from RMB $886 million during the same period last year.
Excluding one I'll say program and net revenue showed an increase of 11, 4% from fifth coach Q2 of 2019 day.
And we get increase was mainly attributable to the growth in average price per class a unit to consume cash.
And by a strong recovery and we ceased.
Fiscal Q2, and I won't go premium strategy post pandemic.
Cost of revenue increased by two 5% year over year to RMB 543 million net.
And you only and increase was mainly attributable to higher cost.
And relating to an increase in <unk>.
Got you and it gets consumed and in house Pizza profiles and additional path for learning Center update and online teaching operations to support our growth premium Saturday and.
For fiscal Q2.
Profit was RMB $389 million a year over year increase of nine 2%. The gross margin was 41, 8% up from 40 point, 42% in the same P&L and off here.
Non-GAAP, selling and marketing expenses, which excludes share based compensation expenses were RMB 289 million accounts for 31% of net net revenue.
And 37% of cash sales and.
And increase of 46, 9% from RMB 197 million accounting for 22, 2% of net revenues.
And 24, 9% of cash still dealing that and he will get us here.
The Yodlee and increase was primarily due to the strategic branding and offline marketing activities to reach target families in the execution off for premium strategy.
And the requirements of running major marketing campaign in timeline head off the Q3 and Q4 peak two drilling season.
And then relatively low spending due to limited offline marketing activities doing COVID-19 outbreak in fiscal Q2 last year.
General and administrative expenses decreased by one 8% year over year to RMB 211 million. The decrease was primarily due to our expense control policy to keep a healthy financial condition during the post pandemic recovery.
Non-GAAP G&A expense.
<unk> expenses, which exclude share based compensation were RMB 185 million accounting for 19, 8% net revenue compare.
And with 21% of net revenue during the Thanksgiving and off here.
Operating loss for the quarter was RMB $110 million compared with operating loss of RMB 50.
And in the same period last year.
Non-GAAP operating loss, which excludes share based compensation was RMB $85 million compared with non-GAAP operating loss of RMB 18 million during the same period of prior fiscal year.
Operating margin for the quarter was negative 11, 8% compared with net pik.
0.2% in the same period of the prior fiscal year.
Non-GAAP operating margin was negative nine 1% compared with net two 2% during the same period last year.
Let me pick up and Martin Joyce, mainly due to the revenue improvement offset by the increased investments in pizza profiles learning centers and increase the sales and marketing activities to support the go Kim your strategy now.
Now, let me move on to cover some other key financial points for the second fiscal quarter of 2021 cash.
For the expenditures for Q2 were RMB 16, 9 million a year over year increase of one 2% from RMB 68 million in the same period last year cash.
Capital expenditures accounted for 7.4% of net revenue in Q2, representing a year over year decrease of 30 basis points from 7% in the same period last year.
The slight increase in capital expenditures and what May.
And they do to learning center upgrade and new opening of one smart VIP flagship center.
One smart prepayments from customers balance, which represents cash collected from enrolled students for courses and recognized the proportionate proportionately as the training sessions are delivered with the RMB 273 billion at the end of fiscal Q2 'twenty.
21, well per day.
And a year over year increase of 14, 5% from the and all fiscal Q2 last year.
As of February 'twenty, eight 2021.
The company had cash and cash equivalents with get this cash and short term investments of RMB 1.1 point 2 billion.
And they'll be paid from cash balance that's all from November 30th 'twenty, and 'twenty, well, mainly due to management's decision to repay some of companies that which was strategically built up during the pandemic period last year.
Continued strong cash sales talk further reduced the requirements of large cash balance at the total balance of debt decreased by RMB $419 million during our fiscal Q2.
Revenue guidance, that's on the latest estimate.
We expect to generate net revenue of RMB 915 million two 1 billion for the fiscal Q3 of 2021 equivalent to 27, 5% two study for <unk>, 2% increase year over year.
We expect our full year revenue to reach about six COVID-19 level.
However, this outlook represents one of my current view, which is subject to change. This concludes our prepared remarks, I went and I'll turn the call over to the operator and open for Q&A I'll play too we're ready to take touch it.
Thank you.
And now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speakerphone, please pick up your handset before pressing the keys.
Australia a question please press star and the true.
At this time, we will pause momentarily towards some other roster.
And the first question comes from Sheng Zhong with Morgan Stanley.
Oh, Hi, and thank you for taking my question I have two questions here. The first one is.
I'm glad to see the go premium strategy, Oh, Wow and go with you online too.
Can you give us more color about the one and one in each one and one pill once a month and now and.
And then what do you expect them to two to ramp happens.
And then second for me and and.
And you'll have them and strong cash revenue growth, but we also see E sales marketing it.
Also I think I think are higher than the cash sounds back and you'll grounds.
So can you shed from our observation and a tuck in acquisition cost trend now from the market.
And the last question and so you.
Hum you paint.
And you retained from our bank knows so y'all cash Spanish now aims are and nowhere, so and there and not all concerns on the regulation.
Actually all the a tuition fees and.
Archie a chicken features from supervision and so I can't share your view about.
How do you see a recommendation could impact your your balance sheet and operations. Thank you.
Okay.
And I think it's owns and.
For the first question regarding E girlfriends, and where do you what is the latest update and then you'll need.
Yeah and tea products.
And as you noticed we have provided a lot of details in today's earnings call regarding the.
And well progress.
Programs that we launched.
In essence this program.
And address better the customer needs.
Providing value added services.
And the satisfaction rates helped us to generate pre rolls out for the Gulf evidenced not only the best sales growth the ASP growth and additional purchase size and growth.
Which we provided is consistent and the last few quarters, two and we'll continue to be very confident about the future of this strategy and secondly, the live one on one product ramp up on margin as we explained before there is a.
I'm left between cash flow and revenue generation. So in the beginning of this year, we started himself and if we got to keep product for sales was robust. However, it will take time for the new students under this program to continue the classroom and then later on and then accumulate.
And as reflected in the P&L, especially the revenue.
So.
In the coming quarters, two three and two for those other peak season in terms of plus units Consumptions and we expect there.
The cash flows were 40.
Reflecting the revenue and then will lead to margin kind of weak.
We'll provide better view and the next couple of quarters.
Your second question is regarding the sales and marketing.
And each of our revenue.
We.
We mentioned, we have a breakdown of this cash sales revenue of 31% for.
But that number just Wanna.
Elaborate and specialized only 14% is spent on marketing dollars.
And that revenue.
So that's what it would be higher than previous quarter.
In terms of about 6% as we explained.
And that's one because we have to spend to build the brand to support the Gulfstream and strategy and secondly, we need to spend ahead of the peak season.
Which is Q3 and Q4 and three just so you know this addition of 6% incremental growth from marketing dollars only represent about <unk>.
And B.
And 58 million so it's a it's a pretty modest increase.
To support our strategic growth.
We expect on a full year basically against and we said before.
Marketing percentage of we.
We used cash of 11 and revenue so marketing dollar percentage for cash and it could be remain to be 8% to 12% range. That's number we mentioned before so we expect a full year basis well hit the goal.
And this range.
Your third question is regarding cash balance.
And she has dropped.
And portions as we explained to leap day.
The debt, we borrow strategically prepare for the COVID-19 situations.
Was that we communicated last quarter for those earnings call.
We will repay so this reduction and respect that.
So what do you pay back about 419 million in RMB for that.
Total debt reduction.
And then there and what the luxury.
Government.
We would definitely take a very prudent approach and watching our cash and liquidity.
Liquidity situation, however, I want to elaborate or cash.
Yes.
Momentum is quite strong even as of right now as we disclosed a U S sales and the last two months.
March and April for more than 100% year over year. So we continue to see pretty strong and robust cash profile and have you noticed from Q2 <unk> net.
Operating cash.
Well, so 125 million RMB for single quarter compared to a total of 241.
And in R&D for the full year last year. So we were having a pretty robust net.
Net operating cash.
Position here, so again, we will.
Oh wait.
The debt.
Exact which and what the luxury.
And to be announced but in the meantime, we're optimistic a bottle business demand and performance and the future.
Thank you.
Thank you and the next question comes from Phoenix Lu with UBS.
Hi, Good evening management, and glad to see them return to the positive growth on the revenue and that and.
Guidance Mike.
My question and our first question is long and go on our margin outlook for the second half and you can.
And then now you expect it and young and get margin expansion and for the fact that past I understand the base what the loan due to COVID-19 from I know you know could you give a little bit more color on the degree of margin expansion and do we expect to see positive and margin in the second half for.
For the second half and still be loss, making and my second question and on regulation and I honestly and this round and the government is doing a lot more strength on the enforcement side and so could you share any color on the percentage of teachers that have license as well as the percentage of net.
And and sensors that are properly licensed and my third question on the E com.
And our tuition and I've done this ties to the regulation I think there and the government is important and quite strictly and the three months ago in terms of tuition prepayment. So may I know how long are typically does and.
And the tuition prepayment and you collect cover I know you ignore business and its one O one little bit of social, but I just want to know how and how.
How much on average.
And for paid for and Theyre and Theyre quite package and my last question is on the short term borrowing I noticed that the current the current balance off for short term borrowings on your balance sheet and he's a slightly bigger than your cash balance and all the due date off for sure.
And some borrowings and any refinance and quant and thank you.
Yeah. So thank you Felix and you've got for questions here.
And we tried to answer one by one so first of all once without any margin expansion.
And that we might have a low base, but as you know.
Up until Q2, and Austria, we do have we do.
Good habits from strong quarter, so I'm sorry for this.
Current and physically and Q2, we and cheap such expenses quite quite a good performance driven by top line growth moving on to second half. We will continue to see such a pop of my growth evidenced by the cash sales.
And which we said is it provides good visibility for future revenue recognition. So are we.
We're showing you the last few months is our cash sales trends continue to 'twenty net which is pretty good time.
You mentioned and we may see and loss, making for the second.
Currently, although it's hard to comment on them and profitability, but we don't think are with.
And with such a strong top line growth will continue to have much losses operating losses going forward.
A second question regarding regulations, yeah, as I mentioned earlier, it's hard to come and recommendation without moving the exact which and requirements to be announced by the government, but the meantime, and you guys know, we hope very high standard.
All other money and environment quality and services for our students. We are one of the highest.
Standard and then the industry. So we are pretty comfortable with our regulatory requirements. We will continue to follow and combined these elements with our regulatory requirements.
Second the third question regarding tuition prepayments, yes, we comply with the local government there is for requirements.
I'm from the enforcement. So we are not concerned about at this point any.
Changes on inside the practice.
The last question regarding the children borrowings. This a short term borrowings are a tool.
Too bad and says one is our traditional.
Bobby local banks are about four and these banks have been with us for years. They stayed with us throughout the COVID-19 situation. So we have pretty stable and robust relationship with such a bank relationships as you know and China typically the local bank only land.
And year over year basis.
As a result, we have to quantify at this as a short term borrowing rather than long term, but in reality. The majority vast majority of these vendors.
And I've been working with us over the last few years. So we are pretty comfortable on the liquidity situation.
Again, with our strong operating cash flow with.
Generating so we are working.
We're comfortable.
Such a position warehouse.
Great and I, thank them very much and I plant.
Thank you Felix.
Thank you and once again. Please press Star then one if you would like to ask a question.
And the next question comes from Hollywood to International.
Hello. This is ringing on behalf of Honeywell. Thanks management for taking my question and congratulations on another strong quarter. My first question and it's a balance here and I know, sometimes pension plan because you have class I understand you're doing the same thing as pension plan over the next two months for two years that's number one.
Number two and regarding the competitive landscape, Yeah group could management share with us some colors on the competitive landscape and the sharing with us relative Cogs. Thanks.
Thank you for your questions. So the first question regarding learning center expansion plan for them and for one for three years.
Have a consistent management expenses, which we explained on our site.
On page nine so basically we will continue to expand our one on one VIP center.
This year about 10% annualized expansion rates, we we sat and the earnings and print.
Mature that we opened already about 20 learning centers of which some of them Oh flagship and VIP learning centers.
And so we will continue to trend throughout the year from next year or two we probably will.
Continue such a.
Expansion plan, maybe a little bit.
The higher rate.
When the COVID-19 situation normalized but again net.
It's a wait and see the regulatory requirements and how would that impact that plan.
Oh and the second question regarding competitive landscape, yes, we are.
We as you see you'll see a very strong operational result for this quarter. We expect our performance continued to be very strong, which is really a and proved that our product and services.
And is at the edge of our competitive advantages over other competitors, who are very comfortable debt will continue to generate such a advanced.
And what's your performance given.
Given the supposed to and that makes and the new environment for them.
And I correct and regulations, we feel is to meet the long term we feel more.
Positive in terms of the opportunity ahead, and especially those in market consolidation opportunities.
Without strong performance, we we.
Back to.
Continue to consolidate and market shares.
Especially for the 101 personalized learning.
Education market segment.
Thank you for your questions.
And.
And that's where and hopeful.
Yeah.
Thank you.
And as there are no more questions at the present time and would like to return the Florida management and for any closing comments.
Thank you operator.
And called me I'm caught off the entire management team, we liked it and again for your participation in today's call. If you have and you put it and part D C.
Please feel free to call and thank.
Thank you.
Thank you. The conference has now concluded thank you for attending today's presentation.
Disconnect your lines.
Okay.
Okay.