51Talk Online Education Group

Q1 2021 Earnings Conference Call

5/17/2021

spk03: Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group's first quarter 2021 earnings conference call. At this time, all participants are in a 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 turn the call over to your host, Ms. Joyce Lee, Investor Relations for the company. Please go ahead, Joyce.
spk04: Hello, everyone, and welcome to the first quarter 2021 earnings conference call of China Online Education Group, also known as 5.1 Talk. The company's results were issued via newsware services earlier today and are posted online. You can download the earnings price release and sign up for the company's distribution list by visiting the IR section of our website at ir.51talk.com. Mr. Jack Huang, our Chief Executive Officer, and Mr. Min Xi, our Chief Financial Officer, 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 Security Legitimacy 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 these and other risks and uncertainties is included in the company's Form 20-F and other public filings as filled 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 abdicable law. Please also note that 5.1 TOCS Earnings Price Release and its conference call include discussion of end-audit GAAP financial information, as well as end-audit non-GAAP financial measures. 5.1 TOCS Price Release contains a reconciliation of the end-audit non-GAAP measures to the end-audit most directly comparable GAAP measures. I will now turn the call over to our CEO, Jack Huang. Please go ahead.
spk06: OK. Hello, everyone. Thank you for joining our conference call. We are happy to report another solid quarter as the first quarter net revenues exceeded 600 million RMB, a 23.3% year-over-year increase that once again beat the top end of our guidance. Remarkably, our net revenues from K-12 101 mass market offerings grew 36% compared to first quarter last year. This performance was mainly driven by an increase in active students, which rose 37% year over year. These results illustrate the massive opportunity that exists in K-12 mass market with the growing acceptance of online education. In addition to organic growth, through our existing strategies. We have also been pursuing external opportunities with our recent acquisition of Koala Reading. We are leveraging its expertise in Chinese reading assessments and the plan to further establish a trailblazing English reading skill evaluation system that allows us to improve our product offerings. Furthermore, this acquisition widens our course offerings with additional Chinese courses, which is in line with the long-term strategy of expanding our curriculum portfolio, along with our efforts in enhancing teacher operations, optimizing curriculums, and advancing AI-powered robotic tutors. The acquisition of Koala Reading is a testament to our commitment in providing the best learning experience to our students. In order to solidify our leadership in K-12 mass market English education, we are focused on wrapping our market efforts and improving student satisfaction, while also investing in research and upgrading course offerings. We are excited to announce the appointment of Ms. Meng Mendoza as our latest Brand Ambassador and the Five One Talk guest teacher. Meng Mendoza is a well-known Filipino actress and a social media influencer. Her appointment instantly became the most treated event in the Philippines, first strengthening our brand recognition in the country. I look forward to continuing to execute our mission to generate long-term benefits to all stakeholders. With that, I will now turn the call to our CFO, Ximing.
spk01: Thank you, Jack. Hello, everyone. We started off 2021 with a solid financial and operating performance. In addition to 23% year-over-year growth in net revenues, we delivered another profitable quarter with non-GAAP net income of 17 million RMB. In order to keep the company on track for healthy growth, we are proactively investing in our operations to drive students' growth and brand awareness. Now let me walk you through our first quarter 2021 financial highlights. Net revenues for the first quarter were 600 million RMB, a 23% increase from 487 million RMB for the same quarter last year. The number of active students in the first quarter was 393,000, a 37% increase from 287,000 for the same quarter last year. Gross margin for the first quarter was 73%, compared with 70% for the same quarter last year. This increase was mainly attributable to slightly higher revenue per lesson. One-on-one gross margin for the first quarter was 74%, and small class gross margin was 66%. Total operating expenses for the first quarter were 446 million RMB, up 42% year-over-year. Sales and marketing expenses for the first quarter were 319 million RMB, 47% of Q1 gross billing. Excluding share-based compensation, or SBC, non-GAAP sales and marketing expenses for the first quarter were 317 million RMB, representing 46% of Q1 gross billings. Excluding branding expenses, non-GAAP sales and marketing expenses were 40% of the gross billing for the first quarter of 2021, compared with 32% a year ago. The increase was mostly due to a decrease in order size Product development expenses for the first quarter were 58 million RMB, a 61% increase year-over-year, excluding SBC. Non-GAAP product development expenses for the first quarter were 56 million RMB, a 56% increase from last year. G&A expenses. for the first quarter were 69 million RMB, a 37% increase from the same quarter last year. Excluding SBC, non-GAAP G&A expenses for the first quarter were 65 million RMB, a 39% increase from last year. Other income for the first quarter was 11.1 million RMB, which included 10.7 million VAT exemption and 0.4 million super deduction credit. Operating income for the first quarter was 5.9 million RMB compared with the operating income of 44.9 million RMB for the same quarter last year. Non-GAAP operating income for the first quarter was 14.6 million RMB compared with non-GAAP operating income of 51.1 million RMB a year ago. Net income for the first quarter was 8.0 million RMB compared with net income of 50.8 million RMB for the same quarter last year. Non-GAAP net income for the first quarter of 2021 was 16.8 million RMB compared with non-GAAP net income of 57 million RMB for the same quarter last year. Income tax expenses for the first quarter was 6.1 million RMB. Basic EPS for the first quarter was 37 RMB cents compared with 2.43 RMB for the same quarter last year. Diluted EPS for the first quarter was 35 RMB cents compared with 2.26 RMB for the same quarter last year. Each ADS represents 15 Class A ordinary shares. Non-GAAP EPS for the first quarter was 78 RMB RMB cents compared with EPS of 2.73 RMB for the same quarter last year. The diluted non-GAAP EPS for the first quarter was 73 RMB cents compared with 2.54 RMB last year. Growth buildings for the first quarter were 685 million RMB, a 15% year-over-year increase. This is driven by 43% year-over-year growth of older numbers. partially offset by 20% order size year-over-year decline. At the end of first quarter 2021, the company had total cash balance of 1.73 billion RMB, flat with cash balance on December 31, 2020. Advances from students was 2.76%. billion RMB at the end of first quarter 2021, slightly up from 2.72 billion RMB as of December 31st, 2020. Looking forward to the second quarter of 2021, we currently expect net revenues to be between 597 million RMB to 603 million RMB, which would represent an increase between 21% and 22% from 494 million RMB for Q2 last year. The above outlook is based on the current market condition and reflects the company's 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.
spk03: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch down phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. 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 today comes from Roger Dewan with Needham and Company. Please go ahead.
spk02: Good morning. Thank you, management, for taking my question. I have two questions. First is can management discuss briefly about the recently introduced private education sector development guidelines issued by the State Department? Is there any positive or negative implication for COE's business model that we should pay attention to? And my second question has two parts. First is About the color reading acquisition we just made, can management share with us the strategy that COE has for this new platform? Will it be built into a new English reading learning platform or will it be continued to operate as a Chinese reading training platform? If it's the second case, does that signal that we're officially entering into a non-English product offering? Thank you.
spk01: Hey Roger, thanks for the question. So I'll answer the first question and Jack will comment on the second. So our read to the guideline is that number one, it is mostly focused on the private school section instead of after school training. So we actually do expect detailed regulation to be issued for after school training in the next month or so. Second, the guideline actually addressed some of the major concerns of private education sector investors, and it's mostly expected. So in general, it is positive to vocational education and training, and slightly positive to private high school education. I hope this answers your question. Jack?
spk06: Okay, then let me answer the second question about some of our thoughts about acquiring Kola Reading. So, actually, like you just said, we should all have these two intentions. So, first of all, of course, our focus this year will definitely be on the entire English learning, and we will continue to grow our products and solutions in English learning. So, we will focus on Kola Reading, because their entire evaluation system is very leading in China. So, we will focus on their...
spk01: Thank you. We would like to share our thoughts on the Keola acquisition. Actually, we would do both what you mentioned in your question. In 2021, our first priority is to leverage COELA's industry-leading assessment and reading rating system and add English component onto that system in order to improve our current English learning product and help our existing students. Obviously, Coela has very nice award-winning Chinese reading product, and we intend to continue to support that, and we do expect to offer Coela's product to our existing students. But again, as I mentioned earlier, our first priority is still on the English assessment system, And our priority is still in our core business of K-12 101 mass market product in Lower Pier City, and that's not going to change. Thank you. Thanks.
spk00: Thank you, Roger.
spk03: The next question comes from Fani Zhang with Benchmark. Please go ahead.
spk05: Thanks for taking my question. First question is actually just want to get a bit better understanding of your 2Q guidance as well as the potential outlook for the rest of the year. It seems like the 2Q guidance was a little bit on softer side. I just wonder what has contributed to the weakness. In addition, for the 2Q guidance, what's the implied growth baiting growth as well as the active student growth? And how should we think about overall growth for 2021? That's my first question.
spk01: Sure. Hey, Fang. So thank you for the question. So first of all, in our Q4 earnings call, we actually indicated both Q1 and Q2 revenue growth is going to be, what's going to be, you know, soft. The main reason is because our pool is going to be lower comparing to a very strong first half in 2020. And for Q2 guidance of $597 million to $603 million revenue, and the underlying active student year-over-year growth rate assumption is low 30%. We actually do not have good visibility in growth spilling trend. The logic behind our Q2 revenue guidance is a couple of things. Number one, roughly 10% decline in ARPU, as I mentioned before. we are comparing to an exceptionally strong base of 2020 Q2, which had benefited from a positive COVID-19 impact. So I hope that answers your question.
spk05: Yeah. Lee, just a quick follow-up there. How should we think about 2021 overall, the second half?
spk01: Yes, so at this point, yeah, so it's, you know, like we're not giving any official guidance, but it makes sense if you look at the 2021 active student growth rate. You know, it is going to be between those of 2019 and 2020, because as I mentioned, 2020 is very strong due to COVID-19 positive impact. but we should be doing better than 2019. And in terms of our pool, as I mentioned before, our pool is going to decline kind of roughly 10% for both Q1 and Q2, and our pool should stay flat for Q3 and Q4. So putting together, you can probably get the big picture for 2021 pools.
spk05: And it's very helpful. The second question is a combination of where you're going to spend your resources, you know, in the coming quarters as well as just, you know, some follow-up on the Koala acquisition. I guess the question here is, will Koala run as independent brand or it will be fully immersed with a 51 talk? And also, What's the resource commitment you're going to allocate into the new components of the new pilot, whether on the English side or on the Chinese side? I noticed that your R&D has a special uptake in the first quarter. Just wondering where you are spending your incremental resources, and how should we look at that for the rest of the year?
spk01: OK, thank you.
spk06: Let me answer the question about resource investment. In the short term, our first focus is based on KALA's very leading assessment system. We will invest more research resources to work with our English experts to develop the English assessment system. We will use the English evaluation system to serve our current students and improve the user experience of current students. We will also use the English evaluation system to make future customers. 那么关于说未来的这个中文的考拉阅读的品牌 未来会不会独立保留 那么这个我们现在还在讨论当中 目前还没有得出最后的结论 可能我们会在今年下半年吧 我们会当我们考虑 当我们去做更多的尝试的时候 就可能会有更多的insight出来
spk01: So let's first talk about the Coela acquisition. So as I mentioned before, our first priority for this year is going to be on the assessment system. And we're going to leverage Coela's expertise in AI and machine learning combined with our expertise in English training And we plan to come up with an English assessment system, which can really improve the learning experience of our existing students. And we also plan to find ways to help our customer acquisition. In terms of the Coela brand, we plan to continue to run the Coela brand this year, and we will decide whether we will create a new brand or combined brand, what to do with the Coela brand in the future.
spk05: Understood. Last question, actually, so a quick follow-up on the Corella acquisition. In terms of the access system, do you guys see that more of expansion to your R tool as part of your product offering, or you see that as independent, I think, revenue source down the road? I'm just wondering if there's any color on the incremental revenue opportunity here.
spk06: First of all, we think that if we want to promote Kala Reading, we should start with our current user group. Because among our current user group, there are a lot of children aged 4 to 12 years old. They will also have the need for language learning. So we will increase the number of our users. At the same time, if this step is taken, then the next step may be So our first step is to provide the Coela product to our existing 5.1 Talk students.
spk01: This can potentially increase our ARPU. However, it is relatively insignificant because the ASP of Coela product is relatively small compared to 5.1 TOC current ASP. And, you know, after that, then we potentially could run, you know, Coela's Chinese product as an independent product and, you know, trying to do customer acquisition for that. But again, it's, you know, right now it is still, you know, on the paper. And so, you know, in the near term, this is not going to be a major revenue contributor.
spk05: Got it. Thank you.
spk03: The next question is a follow-up from Roger Doolin with Needham. Please go ahead.
spk02: Hi, management. Thank you for taking my question again. A quick follow-up on the COELA. I understand the acquisition has been closed. I'm just wondering how much of revenue contribution will that have on our four-year result, and which quarter will that start to hit, if there is any contribution? Thank you.
spk01: As I mentioned earlier, COELA's ASP is relatively small compared to our current ASP, so it is not going to be a significant impact. In terms of modeling, because it's insignificant and we do not intend to disclose that number in the near future either. What we're trying to do is that we believe the value of Coela is actually in its industry-leading assessment system. If we can make We can combine our English training expertise with this industry-leading system, and it can really improve our students' learning experience, and it can also help our customer acquisition. That's where the Coela acquisition will add value to File on Talk.
spk02: Very helpful. Thank you.
spk01: Thank you.
spk03: If you have a question, please press star, then 1. The next question comes from Roger Perotti with Silverhorn. Please go ahead.
spk00: Hi, Jack. Hi, Shimi. Congratulations for a solid quarter. I have two questions. The first question is about the cash flow, the operating cash flow that you mentioned in the release. Are there some one-off effects or how should I understand the cash flow? And the second question is regarding the the Q2 guidance, is there already something, is there something in the guidance included, a potential impact from regulatory changes? Or could regulatory changes have a further, do you expect that regulatory changes that come within one month could have an impact on your Q2 guidance?
spk01: Okay, so first question, the cash flow. Our Q1 cash flow is at 39 million RMB. It is relatively low compared to the quarters in 2020. However, I want to point out that Q1 is typically kind of a soft season for operating cash flow. And you can see that in 2019 and even before, like before, we probably have negative cash flow for Q1s. So the reason is that in Q1, typically that's the quarter we pay out our full-year bonuses. And there are some of annual payments that's going to happen in Q1. So that's the reason that it is going to be relatively low compared to other quarters. Also, we have a slight impact from G-Kit acquisition. Part of the cash payment is related to that acquisition. For Q2 guidance, we took partially the regulation impact into our guidance, so it is hard to predict. what we did see a little bit slowing down due to the overhand of the potential government regulation. So, you know, but we do not, you know, right now we do not expect, you know, a big surprise, and we will see how things go after. No, we do expect the regulation coming out in a month or so.
spk03: We have a follow-up from Roger. Hold up. Roger, please go ahead.
spk00: Yeah, sorry. I just fell out of the call. Sorry, just to confirm, and thank you for the explanation.
spk01: No problem at all.
spk03: Since there's no one in the question queue and there are no further questions, I'd like to turn the call back over to the company for closing remarks.
spk04: Thank you once again for joining us today. If you have further questions, please feel free to contact 511 Talks Inviter Relations through the contact information provided on our website or the Academy Group Inviter Relations.
spk03: This concludes this conference call. You may now disconnect your line. Thank you for attending.
Disclaimer

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