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spk04: Ladies and gentlemen, thank you for standing by for China Online Education Group's fourth quarter and full year 2020 earnings conference call. At this time, all participants will be in listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference call is being recorded. I will now like to turn the call over to your host, Ms. Judy Piao. investor relations for the company. Please go ahead, Judy.
spk01: Thank you. Hello, everyone, and welcome to the fourth quarter and full year 2020 earnings conference call of China Online Education Group, also known as Taiwan Talk. The company's results were issued by Newswire Services earlier today and are posted online. You can download the earnings press release and sign up for the company's distribution list by visiting the IR section of its website at ir.51talk.com. Mr. Jack Huang, our Chief Executive Officer, and Mr. Min Xu, our CFO, will begin with some prepared remarks. Following the prepared remarks, Mr. Li Min Zhang, our Chief Operating Officer, will also join the call. for our Q&A session. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's results may be materially different from the views expressed today. Further information regarding this and other risks and uncertainties is included in the company's form 20F and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that 5.1 talks, earnings press release, and this conference call include discussions of unaudited gap financial information as well as unaudited non-gap financial measures. 5.1 talks press release contains a reconciliation of the unaudited non-gap measures to the unaudited most directly comparable gap measures. I will now turn the call over to our CEO, Jack Huang, please go ahead.
spk00: Hello, everyone. Thank you for joining our conference. The growth momentum from the beginning of 2020 continued into the fourth quarter, reflecting solid strategic execution in our online K-12 English mass market offerings. Fourth quarter net revenues grew 34.7% year-over-year to reach 535.1 million RMB. We also recorded historically high operating cash flow of 188.5 million RMB. In addition, the number of new paying students grew over 70% year-over-year to boosted by our effective curriculum and improving service quality, while our active students reached 353,800, up 37.6% compared with the same period in 2019. Although 2020 presented an array of unforeseen challenges, Our strong pre-established foundational groundwork allowed us to not only manage this two-meters period, but in fact benefit from the shifting environment as we took advantage of new opportunities. Full-year net revenues grew 38.9% to 2.1%. 2020 operating cash flow rose 80.8% to reach a historical high of 719.3 million RMB, compared with 397.9 million RMB in 2019, further strengthening our financial position for future growth. We also witnessed remarkable growth in new paying students, which increased 60% year over year. We are also very excited about our recent acquisition of GKIDS product portfolio and industry-leading AI technologies. GKIDS offers innovative AI-driven online English courses through highly interactive animation and picture books for children. With product offerings intended for those between the ages of 3 and 8, this acquisition both extends our adjustable market and broadens our product and curriculum portfolio. We foresee many potential collaboration and integration opportunities between our platform and G-Kids products and industry-leading AI technologies. leading to both new products and product improvements, which will better serve our customers. As we head further into 2021, we are focusing on user growth and enhanced brand promotions to advance market share expansion. To better attract and retain users, we will continue optimizing learning experiences through upgraded product offerings and an enriched curriculum mix. We are launching innovative AI-powered robotic tutors to help students learn core knowledge points with the aim of enhancing overall learning efficiency. To make our courses more interesting and engaging to young children, We are also integrating more interactive features into our textbooks. Additionally, we are expanding our curriculum portfolio in order to provide a holistic learning experiences through investing in R&D, upgrading our services to students, and expanding our teacher operations. Finally, we target to further increase our branding and marketing efforts to heighten brand awareness as we enter the next phase of growth. We are also pleased to have successfully provided over 15 million one-on-one online English lessons, including free trials, between November 2019 and December 2020. A rapid increase that took our cumulative offerings since our inception in 2011 to more than $150 million and a strong testament to our accelerating growth trajectory. As Five One Talk continues to grow, we are confident our balanced growth strategy will continue to yield solid value for our stakeholders. With that, I will now turn the call over to Ximing.
spk03: Thank you, Jack. We conclude a turbulent 2020 with solid operating and financial results, evidenced by sustained revenue growth and the first profitable year in our company history. We recorded non-GAAP net income of $173.7 million, RMB for 2020 compared to a non-GAAP net loss of 87.7 million RMB in 2019. In 2021, our investment will be channeled toward the development of our curriculum, technology platform, and brand as we look to capitalize on market dynamics, drive user growth, and achieve a leading market position. Now let me walk you through our fourth quarter financial results. Net revenues for the fourth quarter were 535 million RMB, a 35% increase from 397 million RMB for the same quarter last year. The increase was primarily attributable to an increase in the number of active students. The number of active students in the fourth quarter was 306. 54,000, a 38% increase from 257,000 for the same quarter last year. Net revenues from 101 offerings were 515 million RMB, a 39% increase from last year. Net revenues from small class offerings were 20 million RMB, a 23% decline from last year. Gross margin for the fourth quarter was 72.7%. compared with 72.1% for the same quarter last year. One-on-one gross margin for the quarter was 73.2%, compared with 73.5% for the same quarter last year. And the small class gross margin was 59.5%, up from 52.7% for Q4 2020. Operating, I'm sorry, for Q4 2019. Total operating expenses for the fourth quarter were 386 million RMB, up 34% year-over-year. Sales and marketing expenses for the fourth quarter were 285 million RMB, 39.5% of Q4 gross billings. Excluding share-based compensation expenses, non-GAAP sales and marketing expenses for the quarter were 283 million RMB, 39.2% of Q4 gross biddings. Non-GAAP sales and marketing expenses, excluding branding expenses, were 33.6% of the gross bidding for the fourth quarter compared with 30.4% a year ago. The increase of sales and marketing expenses as a percentage of gross billing was mostly due to a decrease in order size. Product development expenses for the fourth quarter were 44.6 million RMB, a 20% increase year-over-year, excluding share-based compensation. Non-GAAP product development expenses for the fourth quarter were 43.3 million RMB, an 18% increase from last year. G&A expenses for the fourth quarter were 56.6 million, a 16% increase from the same quarter last year. Excluding share-based compensation expenses, non-GAAP G&A expenses for the fourth quarter were 53 million RMB, a 14% increase from last year. Other income for fourth quarter was 7.8 million RMB, which included 7.5 million RMB VAT exemption and 0.3 million RMB super deduction. Operating income for fourth quarter was 11 million RMB compared with operating loss of 1.9 million RMB for the same quarter last year. Non-GAAP operating income for the fourth quarter was 17.8 million RMB compared with operating profit of 1.8 million RMB a year ago. Net income for the fourth quarter was 31.8 million RMB compared with net income of 0.8 million RMB for the same quarter last year. Non-GAAP net income for the fourth quarter was 38.6 million RMB compared with a non-GAAP net income of 4.5 million RMB for the same quarter last year. Income tax benefit for the fourth quarter of 2020 was 8.9 million RMB, including releasing of valuation allowance for deferred tax asset of 9.7 million RMB. Basic EPS for fourth quarter was 1.48 RMB compared with 4 RMB cents for the same quarter last year. Diluted EPS for the quarter was 1.39 RMB compared with 4 RMB cents for the same quarter last year. Each ADS represents 15 Class A ordinary shares. Non-GAAP EPS for the quarter was 1.79 RMB compared with EPS of 20 RMB cents for the same quarter last year. Non-GAAP EPS for the fourth quarter was The diluted non-GAAP EPS for the fourth quarter was 1.68 RMB compared with 20 RMB cents last year. Growth fillings for the fourth quarter were 721 million RMB, a 24% year-over-year increase. This is driven by more than 50% year-over-year growth of order number, partially offset by close to 20% order size year-over-year decline. At the end of 2020, the company had total cash balance of 1.73 billion RMB compared with 1.05 billion RMB last year. Advances from students was 2.7 billion RMB at the end of 2020 compared with 2.2 billion RMB last year. Our GAAP and non-GAAP bottom lines for the year of 2020 turned positive for the first time in our company history. For more of our 2020 full-year financial results, please refer to our earnings press release for further details. Looking forward to the first quarter of 2021, we currently expect net revenues to be between 595 million RMB to 600 million RMB. which could represent an increase of approximately 22.2% to 23.2% from 487 million RMB for Q1 last year. The above outlook is based on current market conditions and reflects companies' current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open the call to questions. Operator, please go ahead.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we will pause momentarily to assemble our roster. The first question comes from Vincent Yu with Needham and Company. Please go ahead.
spk06: Thank you for taking my question and congrats on another profitable quarter. So I have three questions. One, the first one is that we are seeing a large amount of capital being invested in the online education space, in particular by these unicorn startups. So are we seeing any new growth initiative launched by these companies in real time that may pose threat to our core business? And what's our strategy to address these new entries? The second question is about in 2021, what we expect to see investment to be made in different online tutoring area by COE. And how should we think about net margin for COE in 2021 versus last year? And third question is about tied to the second one. What are some of the areas we think should be a natural market for COE to enter in addition to areas such as pre-K English learning? Thank you.
spk00: Okay, thank you. Let me answer the first question. The first question is about the market competition. Currently, in the entire market of online education, competition is very intense. In general, So, in fact, the vast majority of employment education companies are actually at a disadvantage. Of course, our company should be a relatively small number of companies that can achieve profits throughout the year in 2020. However, it should be said that the main competition at present is in two major areas. The first one is that you see the online school for K-12, the online school for hard work. Another one is in 在这个学龄前的这个启蒙的AI的这个市场, 那么这两个市场现在是目前呢, 是竞争最为激烈的这个领域。 那么在我们的,我们自己所图的这个赛道呢, 就是在线青少儿英语这个赛道, 因为其实呢,整体上的竞争最, 应该说我们是比,刚刚说的这两个赛道, 应该说竞争都要早了这个好几年啊, 应该说经过了这个五年以上的竞争呢, By 2020, we will be on a relatively mature track. Basically, we are a few companies. Obviously, We Are Talk has become one of the best online Chinese and English tracks. a prominent market leader. In fact, in the growth of 2020, we are not only the only profitable company in the industry, but also the fastest growing company in the market. In 2020, our new users increased by 60% compared to 2019. Yes, so appreciate the question. And so for the first question, we do see very intense competition
spk03: in the online education space. And this is why you're seeing a lot of the players in this space are putting up a huge loss. However, we are actually one of the very few profitable company, online education company. And if you look at the K-12 test preparation focus, the large class online education space, as well as the pre-K AI-based Early education sector, a lot of companies are actually, you know, the competition in these two sectors are extremely intense. And we're actually in a different sector, which is the K-12 online English education sector. which is one of the earlier sectors to really see a strong growth. So our sector is already more mature than other sectors. There's already... a very small number of players in our market, and we're one of the market leaders. And obviously, if you look at the Q4 user growth in 2020, we're seeing user growth, new paying user growth of more than 60%. And this is obviously the fastest growing, you know, company in our sector. So we're very confident that, you know, we're going to do well in 2021. 好,那么第二个问题,就我见您的这个第二个问题呢,也可以讲一下我们在整个的2021年咱们就是
spk00: We want to talk about a core strategy. In 2021, our most important strategy is to continue to improve the trend of growth in 2020 and continue to promote user growth. Then we hope to become this track. This is a very significant leader. Then at the same time, to get the biggest market share in the future of this track. So this is our most important strategy in 2021. So our funds will also be all of our investments. The core investment will also be in this place. Then in 2021, we have two main investment directions. One is that we will We hope to bring better user experience, better product experience, and better service experience to drive user growth, rather than burning money. Therefore, in 2021, we will greatly increase our research and development costs. In the past, we realized that our research and development costs were somewhat insufficient compared to other online education companies. In 2021, we will increase our technical research and development as well as our course research. We will increase our R&D investment to bring better user experience, bring better product upgrades to the next generation. We mentioned in this report that we have just acquired an AI technology and product company, GKID. We will also use their AI capabilities and our own AI capabilities. In 2021, we will convert more of these AI capabilities into the best product experience and our real-life service. Taiwan Taiwan Taiwan Taiwan AI class. This AI class and our foreign language class will form a very good complement. So this is the first aspect. We will invest in the development. The second one, we will also further, because we hope our brand can have greater influence, so we will further invest in the brand's popularity. So for the second question,
spk03: Basically, in 2021, our strategy is going to be continue to focus on our core business of K-12 English education. We want to continue our momentum of user growth in 2020. We target to be the absolute leader in our sector in 2021. So there are two areas we will put our investment in to achieve that goal. So number one is we're target to, you know, to make sure to drive our user growth with better user experience in both products and services. In order to do that, we are going to invest more in R&D. We have to say that our investment in R&D was not sufficient in early years, so we're going to fix this and put more into the development of our products and curriculum. And this will allow us to drive our user growth through user referral, but not just blindly putting in more marketing dollars. So, you know, as one of the, you know, example, we recently acquired GKIT's product line and their industry-leading AI technology. So we will integrate the AI technology together, you know, with our one-on-one, you know, products. to provide a holistic experience for our users and students. You know, we're expecting to come up with a new product, which is a five-minute AI pre-session before our 25-minute one-on-one session. one-on-one foreign teacher session. We believe this is a very complementary product which can really help our students to better enjoy their learning experience. The second area we plan to invest in is actually the branding. And we target to elevate the brand awareness by putting more branding investment in different channels. And we believe this is a very important area when you have a very satisfying consumer product and having a good brand is a must. And in summary, we are going to continue to invest in our product, service, and user experience as well as the branding to make sure our user growth will continue in the in our core business area.
spk00: The third question, you just answered most of the questions in the second one. In 2021, we will focus on the online youth English track, which we think has a lot of room. On the one hand, we believe that this track still has a lot of room for growth. On the other hand, we also believe that in the competition of other competing brands in our track, We also believe that we are very confident. So this is our main direction in 2021. But at the same time, we will also try some more new markets. For example, we talked about the company that we acquired from GKID. This company uses AI technology and advanced products. We think that we see that it is a very good product in the market. We will also use their product as a starting point. We will also develop our own product for children's AI learning English. This will also be one of our attempts this year. In addition, since last year, we have also started to try some offline business. For example, we have now opened more than 100 offline experience stores. This year, we plan to open more offline experience stores to try to integrate online and offline business. In addition, we are also exploring the future. Based on our hundreds of thousands of users, OK.
spk03: So for third question, you know, we do see our current sector is a big market and still have a lot of room to grow. And so our top priority will still be in our current core market. However, you know, and also we're quite confident that we can provide better products and services than our peers. However, we always look for opportunity to continue to expand our target market. You know, just for an example, you know, our recent acquisition of a G-Kit product is just an effort to kind of expand that market, you know, You know, we will, based on G-Kit product, we will continue to develop, you know, AI product for pre-K students. And this is a pretty efficient way to expand our market. And, you know, we are also, you know, Last year, we also kind of started exploring using offline experience store as a new channel to reach to our target customers in lower tier cities. And we've already set up more than 100 experience stores online. you know, throughout the country. And this is a very major, you know, initiative for online merge offline effort strategy. And our COO, Li Mingzhang, will elaborate more on our, you know, OMO strategy later. And as we continue to expand our active students from 350,000 students to maybe someday we can reach more than one million students and with that huge student base, we will always look for ways to explore their demand and we will provide whatever they need and we will just follow our students' demand. So I'll hand the call to Li Ming to offer you some more, you know, lights on OMO strategy.
spk05: Can you hear me? Hello, everyone. Yes, we can hear you. Okay. More than 100 stores and more than 20 provinces in China have our own experience stores. This OMO experience store is a kind of test, a kind of intentional exploration to explore whether we can enter a more low-end market. At present, the overall development is not bad. We believe that such an exploration can be useful to us not only in We can get more benefits from the customer base. The customer base and the brand base can be used in more B-line markets. We can have more brand exposure. We also have sales base. Because users can see the store, the conversion rate will be higher. There are also service bases. Because the store can add services that are not available online. So these four bases can make users have a better experience. Sure. So since last year, we've already expanded our offline experience store to more than 100 stores in roughly 20 provinces.
spk03: So this is an experiment to find a way to better reach our potential customers in the lower tier cities. So there are four ways we can make ourselves closer to our customers in the lower tier cities. One is, you know, the customer acquisition is closer to our target market. And second, the brand awareness, you know, it is with a physical store, you know, you significantly increase your brand awareness in your target town. And then also the sales effort is, you know, kind of more closer to our market. our customer with local people, you know, face-to-face instead of on the phone or on WeChat. And the sales effort is closer to our customers. And also the service. And with a place to go to do trial lessons or maybe even paid lessons and ask questions, and the service we can provide is closer to our customers. So this is a very meaningful effort for us to explore the offline, you know, method to kind of expand our customer acquisition channels and exposures. And so we will continue to put more effort in our offline experience store and look forward to having more impact and help 5.1 Talk to reach to more of the mass market customers.
spk04: Thank you.
spk06: Thank you very much.
spk03: Thanks, Vince.
spk04: The next question comes from Fon Chang of Benchmark. Please go ahead.
spk02: Thanks for taking my question and congrats on the 30th quarter and a very strong finish of the year. Just want to follow up and dig a little bit more on your user behavior, I guess, where roughly one year after COVID. Just wonder, you know, with the current online adoption curve among your students, And also notice that your active students continue to accelerate. Just wonder what's the driver behind it. In particular, you know, what's the source of your future growth? Are we looking for more students from lower tier cities or we are, you know, moving up into the higher tier cities and how you're planning to allocate your resources going forward?
spk00: Okay. Then I will first answer your first question, which is about the adoption of online education one year after the pandemic. First of all, we now see that in the past year, it should be the whole of China's online education. In fact, on the one hand, it is the epidemic. On the other hand, it is actually in this. a lot of huge amounts of money, under the influence of these two factors, it should be said that in the past year, like this spring rain, it should be said that the parents of online education throughout the country have made an online education. So now it should be said that online education has been a new thing in the past, and now it should be said that everyone is not unfamiliar with it. But we also see that after the whole epidemic, consumers have changed from the past to a more mature mentality. So he may not be like the past, he may say that he heard that product, we will try it, maybe buy it. But now the competition is also intensifying, the market is becoming more mature. So, in fact, there are more and more consumer choices. So, in fact, the whole market is heading towards the immature from the past, starting to mature. I think this is a very beneficial thing for the industry. So, I believe that in the future, it will definitely be... uh, uh, uh, uh, uh, Okay, so let's first talk about the customer behavior change after pandemic.
spk03: What we see, you know, as you expected, the online adoption significantly increased for two reasons. One is because of COVID-19 impact. People have to go online. And the other one is actually the heavy investment of many test prep large class education peers. they put in a lot of marketing dollars to really raise the awareness of online education. So this is a good thing because people are, you know, online education, you know, are turning from a new fancy, you know, way to do, you know, education, become a very familiar way, you know, actually... probably the preferred way to learn and to take lessons. And many people, a lot of parents are from just hearing online education through friends and try it by curiosity. Now, many of the parents are becoming very mature shoppers of online education. Many of them are experts in comparison shopping, so they know a lot about every company. So this is a good thing, and the market is becoming more mature, which means that a lot of times maybe advertising is not enough, and you have to meet your customers' demand. You have to provide great product and great services. And that's the only way to generate customer loyalty and to guarantee the long-term customer satisfaction. So that's why we are going to put a lot of money in product development and services to drive customer satisfaction and, in turn, drive user growth.
spk00: The average class consumption is between 13 to 15 classes, depending on the month. In fact, it is one of the highest companies in the industry. Since our students have very good classes, their activity is very high. In fact, good English activity is very important. Class number is the most important factor. So our time, our users, in such a high frequency of learning, we have accumulated a lot of positive feedback. Positive feedback is always, we think, the most important driver in our online youth language. The second driver, we think, is that our brand is beginning to show its advantages. Uh, uh, So, in fact, in the past year, in fact, our company, Real Talk, has become the largest brand in the market. So I believe the advantages of these brands have also brought us very important growth motivation. Then the third is that we have also adopted a lot of other operating strategies. For example, in the second half of 2020, we have greatly reduced the price of our customer packages. I mean our package size, not the price of each class. The price of each class is rising every year, but we have lowered the price of the customer package, which has greatly reduced the threshold. Because we are still very confident in our future user flow. So after the threshold is lowered, we can see that not only in the first-tier cities, but even in the first-tier cities, we can see a very exciting signal. We can see that even in the first-tier cities, So, uh,
spk03: So now let's talk about the user growth. So, yeah, we are seeing very strong user growth and accelerating user growth in second half 2020. And we believe there are three major drivers. Number one is the customer satisfaction. We mostly drive our user growth through referral. One of the key reasons is that our students' lesson consumption is roughly 13 to 15 per month, which is the highest in industry. Because the students are very actively taking the lesson, making the progress, leading to better results, and then leading to better customer satisfaction. So we believe this is one of the key. And second is the brand. And our brand is gaining momentum throughout the year. And as you guys probably know, in the past few years, we've had a strong competition from many peers focusing on North American teachers. And, you know, in the past year, many of them stopped very aggressive or excessive advertising, which leading to, you know, our brand is actually, our brand awareness is accelerating. And now we're becoming the biggest brand in our sector. And the third one is the operation strategy. And one operation strategy I want to point out is that, you know, in the past year, we actively lowered the average package size. And by lowering the average package size, we lowered the barrier for many of our customers to buy our product. And one exciting thing we find out is that after we lowered average package size, not only the lower-tier city market are seeing very strong growth. We're seeing actually accelerated growth in the Tier 1 city, which means it doesn't matter what the market is. As long as you have great product, great service, and a reasonable price, you're going to see very strong long-term growth. Okay. So, yeah, so I'm not sure if we answered all your questions.
spk02: Yes, that's very helpful. Thank you.
spk03: Excellent. Thank you.
spk04: Again, if you have a question, please press star, then one. As there are no further questions now, I'd like to turn the call back over to the company for closing remarks.
spk01: Thank you once again for joining us today. If you have further questions, please feel free to contact 5.1 Talks Investor Relations through the contact information provided on the website of the Pearson Group Investor Relations. This concludes the conference call. You may now disconnect at your line. Thank you.
spk04: Again, this concludes this conference call. You may now disconnect your line. Thank you.
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