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spk09: Hello, ladies and gentlemen. Thank you for standing by for China Online Education Group's fourth quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. Today's conference is being recorded. I will now turn the call over to your host, Mrs. Ni Yan, Investor Relations for the company. Please go ahead, Ni.
spk01: Hello, everyone. and welcome to the first quarter 2021 earnings conference call of China Online Education Group, also known as Five One Talk. The company's results were issued via newsletter 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 our website at ir.fiventalk.com. Mr. Jaqua, our Chief Executive Officer and Mr. Mingqi, our Chief Financial Officer, will begin with some prepared remarks. Following the prepared remarks, Mr. Li Mingzhang, 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 limitation 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 20-F and other public filings as felt 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 the applicable law. Please also note that Final Talk's earnings price release and its conference call include discussion of unaudited gap financial information, as well as unaudited non-gap financial measures. Silent Talks press release contains a reconciliation of the unaudited non-GAAP merits to the unaudited most directly comparable GAAP merits. I will now turn the call over to our CEO, Jaquan. Please go ahead.
spk03: Okay. Thank you.
spk02: Hello, everyone. Thank you for joining our conference call. In response to the changes in the government regulations related to after-school tutoring, we have taken measures to restructure our business so that the company's 2022 strategy will keenly focus on overseas business. In the fourth quarter, overseas business net growth fillings have reached $2.9 million, more than triple Q3 net growth fillings. As the overseas business momentum continues to build, we have extended our product offerings to students in more than 50 countries and regions outside mainland China. We have been able to leverage our strengths in high-quality teacher resources, interactive curriculum, and advanced technology platform to quickly establish our presence in the new markets. We will stick with our proven business model, which balances growth with profitability and was proven in mainland China market. We are excited for exploring opportunities in overseas markets, which allow our Filipino teachers to help more students in the world to be able to talk to the world. In order to comply with applicable laws and regulations, regulations and allow our listing company to focus on the overseas business. I have sent a proposal to our board to acquire the company's mainland China business. Meanwhile, I will continue to lead our listing company as the chairman of the board and the CEO to drive the growth in the overseas markets. and the board has formed a special committee to evaluate my proposal. With that, I will now send the call to our CFO, Ximing.
spk06: Thank you, Jack. Hello, everyone.
spk05: We concluded 2021 with 2.2 billion RMB revenue, a 5.5% increase from last year. Non-GAAP net income for 2021 was 133 million RMB, representing a non-GAAP net margin of 6.1%. We have streamlined our operation to meet our smaller scale. As a result, the fourth quarter operating expenses were 321 million RMB, representing 30% decrease from the second quarter. Net revenues for Q3 and Q4 of 2021 were 574 million RMB and 413 million RMB respectively, representing a sequential decline of 1% and 28%. The number of active students with attended lesson consumption in Q4 was 299,000, a 20% sequential decline from $376,000 for Q3. Worth margin for Q3 and Q4 was 73.5% and 78.6% respectively. Total non-GAAP operating expenses as a percentage of net revenue was 63% in Q3 and 77% in Q4. Non-GAAP sales, marketing, Expenses for Q3 were 191 million RMB, down 39% sequentially. Non-GAAP sales and marketing expenses for Q4 were 235 million RMB, among which 124 million RMB were due to deferred sales and marketing expenses write-off. Excluding the write-off, Q4 non-GAAP sales and marketing expenses without being 111 million RMB, down 42% sequentially. Non-GAAP product development expenses for Q3 were 39 million RMB, down 38% sequentially. Non-GAAP product development expenses for Q4 were 16 million RMB, down 60% sequentially. Non-GAAP G&A expenses for Q3 were 101 million RMB, among which 51 million RMB was restructuring cost. Excluding the restructuring cost, Q3 GNA expenses would have been 50 million RMB down 34% sequentially. Non-GAAP GNA expenses for Q4 were 67 million RMB, among which 22 million RMB was restructuring cost. Excluding the restructuring cost, Q4 G&A expenses would have been 45 million RMB down 10% sequentially. Q3 impairment loss of 31.8 million RMB was due to goodwill and intangible asset write-off related to acquisitions. Other income for Q3 was due to 6.0 million RMB super deduction credit. Q4 impairment loss of 0.4 million RMB was due to intangible asset write-off related to employee performance evaluation system. Other income for Q4 was due to 0.6 million RMB super deduction credit. Non-GAAP operating income was 64 million RMB in Q3 and 7 million RMB in Q4, representing 11% and 2% operating margin, respectively. Interest income for the third quarter of 2021 was negative 7 million RMB due to 15 million RMB reversal of interest income accrual from the time deposit early withdrawal. partially offset by interest income of 8 million RMB. Other income for Q4 was 8 million RMB mainly due to government subsidy. Non-GAAP net income was 79 million RMB in Q3 and 55 million RMB in Q4 representing 14% and 13% net margin respectively. Non-GAAP diluted EPS was 23 RMB cents in Q3 and 16 RMB cents in Q4. The company's total cash, cash equivalent, time deposits, and short-term investments were 1.3 billion RMB at the end of Q3, and there was no restricted cash. The company's total cash, cash equivalent, time deposits, short-term investments, and restricted cash were 0.99 billion RMB at the end of Q4, and among which 50.6 million RMB were restricted cash, which was advances from students under the government supervision. Advances from students were 2.3 billion RMB at the end of Q3 and 1.8 billion RMB at the end of Q4. The gap between advances from students and the cash balance has decreased from 1,052 million RMB in Q2 to 997 million RMB in Q3, and then to 775 million RMB in Q4. For more of our, you know, Tucson 21 full year and Q3, Q4 results, please refer to our earnings press release. Looking forward to the first quarter of 2022, we currently expect the net gross billing of overseas business to be between $4.4 million and $4.6 million, representing sequential growth between 52% to 59%. The above outlook is based on our current market condition and reflects the company's current and preliminary estimate 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.
spk06: Operator, please go ahead.
spk09: For the benefit of all participants on today's call, please limit yourself to two questions. If you have additional questions, you may re-enter the queue. Please ask your question in Chinese first, then follow up with an English translation. To ask a question, press star 1 on your telephone keypad.
spk06: And we will take the first question from Long Lin from the Benchmark Company. Hello, Long. We cannot hear you. You might be muted.
spk08: Oh, hi. Sorry. Can you hear me now?
spk07: Yeah.
spk03: Yes.
spk07: Hi. Thank you for taking my question. So my question is about your overseas business. Just want to get a sense of the growth potential for the overseas expansion, and where do you see your key markets, and how conductive these markets for your services?
spk06: So I'll take this question.
spk05: Hey, Jack, you want to take this question?
spk02: 那我先来回答吧,好不好? Okay. Especially in online English education, it is very similar in many regions and mainland China. You just asked which regions. We will focus on Southeast Asian countries and regions this year. Okay, yeah. Thank you for the question. So we are very positive on the potential of our overseas market.
spk05: We've done a lot of work, and we see this market size is huge. And in addition, the overseas market is actually very similar to the Chinese market. And we look at the global market. In 2022, our focus will be in Southeast Asia. And these countries are actually very, very similar to China in terms of English education demand, especially K-12 English education demand.
spk02: Another very important factor is that we can also see that the impact of COVID-19 is still very big. And this kind of epidemic is actually the same as the acceleration of the internet education penetration rate in mainland China in 2020. The entire market scale of online education is expanding rapidly. The penetration rate is increasing rapidly. It is because of this that we can see that we can see that we can see that we can see that we can see that we can see that So there's another very crucial fact is that the COVID-19, you know, continued to drive the demand for online education.
spk05: in Southeast Asia, very similar to what was happening in China in 2020. And we see the penetration of online education increase dramatically. And we started our overseas business in Q3 2021, and already we are able to achieve 2.9 million US dollar gross spending in Q4. which, you know, more than tripled the, you know, the growth spilling in Q3. And we also gave the guidance for Q1, which represent a more than 50% sequential increase. 那么另外呢,我们的一个比较
spk02: It is important to note that in the field of education abroad, online English learning is still a very important category in the language learning track. It should be said that in online language training, English learning is still the largest track. And we see online English education to be probably the largest segment in terms of online language learning.
spk05: And we see very limited competition in these target markets in Southeast Asia. This also gives us a lot of confidence that we can quickly drive our overseas market.
spk02: 当然最重要的还是我们这个公司,我们WeTalk在中国大陆, 我们觉得在过去的几年当中其实还是 Our entire business model has achieved great success in mainland China. We have verified our rapid growth and scale-based profits. We believe that with our mature team, we have transferred our know-how to the foreign market. We believe that we can make our company into a global online English training platform.
spk05: Also, our business model has been well proven in the Chinese market in the past few years. We were able to achieve very balanced, sustainable growth in the past few years. And, you know, with that expertise and know-how, we believe we can transfer that knowledge to overseas market and to be one of the leading brand in terms of online English education.
spk02: Okay.
spk05: Yeah, I hope this answers your question. Thank you.
spk07: Okay, thank you. So just to follow up, so for your key markets, what are the competition and regulation risks like in those markets? And also, how do you build your brand in those markets?
spk06: So I'll take the first question.
spk05: I'll let Jack take the second part. So far, we have not yet identified any regulatory risk in the markets where we're active. Right now, we have paying students from more than 50 countries and regions outside mainland China. So this kind of geographic diversification also helps to mitigate impact from any potential regulatory risk in any specific region. So, Jack, can you talk about brand building? 好,那么首先呢,其实在品牌的建设上面呢,
spk02: We think that our basic understanding of the entire online education market is that good products and services are the basis to build a brand. One of our great advantages is that in the past five to ten years of our business in mainland China, we have accumulated a lot of knowledge. We have excellent course products that meet the needs of users. And because language training is cross-national, our courses are developed according to European common language standards. Let me give an example. In addition to the course system, our entire technology platform, including our product system, and our entire service standard, these are the products and services that we have verified in China for five to ten years in the past two seasons. In these new markets, we found that there is still a very big advantage in competition for us to establish a brand. In terms of branding, we always believe that good product and good service is actually the key driver for a good reputation. Luckily, we have already
spk05: you know, tested our product and service in Chinese market for the past decade. And we have, you know, the most interactive curriculum that meets our customers' demand. And our curriculum is also designed according to the European standard CFR, And, you know, with this kind of, you know, very advanced technology platform, you know, interactive curriculum, as well as high quality service, you know, we have been very successful in China in the past decade. And we believe in terms of custom demand in English learning as a second language, you know, The demand is very similar in Southeast Asia markets versus in China. And so we're very confident that as we continue to improve our product service, we will have an advantage in those markets. And the second part of the brand building is actually localization. And we understand it is very important, you know, to do a good localization job in our key market. And we are putting resources on this, try to drive our branding in our initial key markets.
spk06: Okay. Okay. Thank you.
spk07: Okay. Thank you. So my second question is about the cost structure for the difference for the international business compared with China business. So can management also provide an outlook for the company's profitability this year? Also, you just mentioned about localization, which is a key part of your overseas business. How will that impact your cost going forward?
spk05: Sure, I'll take the question. So actually, if you look at in terms of a business model, the steady state cost structure of overseas business is very similar to our current business in mainland China. So we believe the gross margins are both above 70% and also the target ratio as a percentage of gross spending is also 50% for sales marketing and below 10% for G&A and R&D. Obviously, we need to reach a certain scale to reach that kind of cost structure target. So if we can grow at a moderate pace, you know, we're likely that, you know, we can achieve positive cash flow in 2023 and positive growth spending contribution in 2024. So localization actually, you know, there are many Chinese companies are going overseas and the, you know, One lucky thing for us is that we do not make major localization work on our core product, which is part of teaching English, and we do not need to make major work on curriculum nor technology platform. The only localization work we need to do is the sales and marketing part. So, you know, any customer interfaces that are related to sales marketing, we need to do that. And in terms of core product curriculum and technology, there are some localization work, but it is very light. So we do not expect this to, you know, change our target for, you know, the research and development expense ratio.
spk02: Actually, the cost structure that you asked about, because our core product is still in English, and we still use our best Filipino teachers, because our company has 30,000 Filipino foreign teachers. As you all know, our Filipino foreign teaching business has always had a very good profit margin. So this will be the same overseas. In addition, because we have established the advantage of the Philippine diplomatic supply chain in the past five to ten years, in fact, we have been in our company for the past five to ten years. In fact, there is this in the entire supply chain itself is a Yeah, so just want to add one more point is that
spk05: English learning is our core product. We actually have a good advantage in that we have more than 30,000 Filipino teachers. And the Filipino teachers is the reason that we have very good, you know, students have very good learning experience and also we can achieve very good margin. And so in terms of, because of our advantages in the teacher resources and also because these Filipino teachers, We are actually more international than many other Chinese companies, and that's the reason why we are able to make good progress in terms of the transition and to quickly move our strategy and the focus from domestic business to overseas markets.
spk08: Got it. Thank you. That's all my questions for now. I will get back to the queue.
spk06: Thank you, Long.
spk09: And as a reminder, to ask a question, press Start 1. We will now take the next question from Boris Suvorov from BOVA. Please go ahead. Your line is open.
spk04: Hello, and thanks for taking my question. My question is, about distribution of assets and liabilities between mainland China and non-mainland China students. I see that as of last report, there is about 151 million in current assets in U.S. dollars. What percentage of those current assets are for mainland China?
spk06: I'll take this question.
spk05: Yes, so I'll take this question. So right now, you know, there's no clear cut of liability and assets between the mainland China part and the overseas market part. So this, you know, once the board has made evaluation and the in terms of the value of both business and we still need to split the overhead. However, there's one principle we will look at in terms of splitting these two part of businesses that we will always make sure the overseas business we have positive net equities, which means, you know, in principle, we will keep more cash than the gross billings or different revenues from the overseas students. And in terms of domestic business, you know, as I mentioned earlier, that There always has been a huge gap between the advance from students versus the cash. And so after that, we believe once we split these two businesses, our domestic business will keep that way. However, going forward, all these advances from students will be consumed and turned into profit. So this is why we are confident that by splitting domestic business and overseas business, we allow a very clean balance sheet for overseas business allow it to grow on its own trajectory. And at the same time, for domestic vendors, we can focus on our students to make sure all these lesson credits will be consumed and our students will learn and improve.
spk04: Thank you very much. And as a follow-up, Similar question, if the company will be split in non-mainland China and mainland China, what about product development expense and general and admin in terms of staffing? Do you see any reduction of cost, split of cost between two companies or most of engineers and general and admin staff staying in non-mainland China?
spk05: Yes, so we will split our staff in terms of G&A and R&D and so obviously anything related to a public company will stay with the public company and most of the patent and the IP, you know, will go to the public company. And we believe, you know, like right now we have a very, very small GNA and R&D team. So roughly, you know, it will be probably 50-50. You know, half of the staff will stay with the domestic business and half of the staff will stay with the public company focusing on overseas market.
spk06: Thank you. All right.
spk09: Then offer the questions at the moment. As a reminder, to ask a question, press star 1.
spk06: Once again, press star 1 if you wish to ask a question.
spk09: And we have a follow-up question from Longlin from the Benjamin Company. Please go ahead. Your line is open.
spk07: Hi, yes. Yeah, I have a follow-up on your overseas business. So just want to see, does the company need any additional capital to fund the overseas expansion?
spk05: I'll take this question. Currently, we do not need additional capital to fund overseas business growth. So the cash balance on our overseas bank accounts are sufficient to drive our growth by the time we turn cash flow positive, which I said earlier, we believe this could happen in 2023. Okay, got it. Thank you.
spk09: And we have no further questions, so I would like to turn the call back to the company for closing remarks.
spk06: Mrs. Niying, please go ahead. Thank you once again for joining us today.
spk01: If you have further questions, please feel free to contact 5M Talks Investor Relations through the contact information provided on our website.
spk06: Thank you, everyone. This concludes this conference call. You may now disconnect your line.
spk08: Thank you.
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