This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Ladies and gentlemen, thank you for standing by for China Online Education Group's second quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Ni Yan, investor relations for the company. Please go ahead, Ni.
spk02: Hello, everyone, and welcome to the second quarter 2022 Earnings Conference Call of China Online Education Group, also known as 5M Talk. The company's results were issued via 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 our website at ir5mtalk.com. Mr. Jack Huang, our chief executive officer, and Mr. Ming Xu, our chief financial officer, will begin with some prepared remarks. Following the prepared remarks, there will be a Q&A session. Before we continue, please know that the session will contain forward-looking statements made under the Steve Harper provision 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 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 the applicable law. Please also note that the online press release and its conference call include discussion of unaudited gap financial information, as well as unaudited non-gap financial matters. Five Untalked press releases contain a reconciliation of the unaudited non-gap matters to the audited most directly comparable gap matters. I will now turn the call over to our CEO, Jack Huang. Please go ahead.
spk04: Thank you. Hello, everyone. Thank you for joining our conference call today. In the second quarter of 2022, we successfully completed the divestiture of our China mainland business, and we are solely focused on our overseas business going forward. Starting from the third quarter, 100% of the company's revenues will be derived from overseas markets. Furthermore, to reflect our overseas focus, we will hold an annual general meeting on September 30th to vote on the proposal of changing our legal name from China Online Education Group to Five One Talk Online Education Group. We are very excited to report another quarter marked by continuing top-line growth of our overseas business. In the second quarter, our overseas business continues to see healthy and sustainable development. Our second quarter overseas business net the gross billing reached $7.8 million, representing 46.5% sequential growth. The number of our 10 students reached 8.1,000, representing 25% sequential growth. And the number of our active students with attended lesson consumption reached 40.9,000, representing a 60% sequential growth in the second quarter. In addition, our overseas business achieved breakeven in cash flow during the two months of May and June. This reflects our strong execution of healthy growth strategy in overseas business, and we are looking forward to the future performance of cash flow. We are sorry to announce that our CFO, Mr. Ming Xu, submitted his resignation for today for personal reasons, and his last day will be September 30, 2022. Our VP of Finance, Ms. Cindy Chen Tang, will assume the role of CFO on October 1, 2022. On behalf of the Board of Directors and myself, I would like to thank Moon for his service over the past four years, leading our company to profitability by focusing on sustainable growth. We wish him the best in his future endeavors. With that, I will now turn the call over to Moon.
spk01: Thank you, Jack, for your nice words. I want to thank every 5.1 Talk investor, employee, teacher, student, parent, and partner for your support in the past four years, making my every moment at Phi One Talk a memorable one. Jack has led us through the most difficult time in Phi One Talk history, and I trust Phi One Talk under his leadership is only going to grow stronger, fulfilling our dream of helping everyone talk to the world. My successor, Cindy, current VP finance has been with the company for eight years and played an instrumental role in the company's IPO in 2016 and turning mainland China business profitable in Q4 2019. I'm confident that she will leverage her leadership and experiences and work with the team to reproduce the success in the overseas market. So now let's take a look at Q2 numbers. The momentum of our overseas business continued into Q2 with gross billing reaching $7.8 million, surpassing the top end of our guidance of $7.5 million. We will continue on our pathway of sustainable growth and focus on delivering strong value proposition to our students in this rapid developing overseas market. Please note that we completed divestiture of our China mainland business on June 30th, and we'll focus on overseas market going forward. Since we started our overseas business in July last year, there is no comparable figure for Q2 last year. Net revenues for Q2 of continued business were $3.5 million, representing 87.7% sequential growths. The gross margin for the second quarter was 79.2%. Q2 operating expenses of continuing business were $6.9 million, a 38.3% sequential increase from $5.0 million last quarter. Q2 sales and marketing expenses of continuing business were $3.6 million, a 79.3% sequential increase from $2 million last quarter. for last quarter. Q2 product development expenses of continuing business were $0.7 million, a 36.4% sequential decrease from $1.1 million for last quarter. Q2 G&A expenses of continuing business were $2.6 million, among which $0.5 million were one-time fee related to the divestiture of our China mainland business. Excluding this one-time cost, Q2 GNA expenses would have been $2.1 million. GNA expenses for the overseas business were $1.9 million in the first quarter of 2022. Q2 operating loss of continuing business was $4.1 million. Q2 net loss was $15.0 million. Net loss for continuing overseas business and the discontinued mainland China business were $4.6 million and $10.4 million, respectively. Q2 GAAP and non-GAAP EPS were both negative 67 cents. The company's total cash equivalent and the restrict cash were $22.1 million at the end of the second quarter. Advances from students of continuing business were $10.2 million at the end of the second quarter. Looking forward to the third quarter of 2022, we currently expect the net gross billing to be between $8.0 million and $8.2 million. The above outlook is based on our current market conditions. and reflects the company's current and preliminary estimate of the market and operating conditions and the customer demand, which are all subject to change. This concludes our prepared remarks. We will now open the line for questions. Operator, please go ahead.
spk00: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. 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 second, then follow up with an English translation. At this time, we will pause momentarily to assemble our roster. The first question comes from Long Lin with the Benchmark Company. Please go ahead.
spk03: Hi. Good morning. Good evening. Thanks for taking my questions. So the company delivered better than expected revenue growth for the second quarter. Just wondering what are some of the key drivers behind that? and can management give a breakdown of your key market performance for the quarter? Thank you. Let me translate it. The growth of the company this quarter is better than before. I want to ask what the main reason is. And then, can Guan Yicheng give some performance of the main market this quarter? Thank you.
spk01: Jack, do you want to take the question?
spk04: Okay. We think that the rapid growth in the past few seasons is still very big. The elements that we have achieved in mainland China in the past. In fact, we think that in fact, in this Yes, so we believe that
spk01: The overseas market is still in the very early stage, and the strong growth we see in the past quarter or a few quarters really leveraged our success factors in our existing China markets. And we believe the English training market is very different from other education products because the demand for English learning is a common demand for many countries and markets in the world, and we see a very strong demand in the overseas market. Jack, continue. 然后就是从这个对我刚才还没有讲完的是
spk04: We can see that we have spent less than a year from July last year to now, which is more than three to four years in China. Actually, the reason behind this rapid growth is because we think there is a big reason. In the past ten years, we have accumulated our technical advantages in mainland China for such a long time, including our product advantages, our Philippine diplomatic supply chain advantages, and our So we do see very strong growth since we started our overseas business in July last year.
spk01: And so the strong growth of the past year is actually a result of our expertise and experience in China market in the past decade. In the past decade, we already accumulated a lot of knowledge in terms of technology, you know, product development in terms of Filipino teacher operation and K-12 curriculum. And so as a result, we do have a very solid, very competitive product in our overseas market from the very, from the very beginning.
spk04: Right now, 90% of our users are in Southeast Asia, and less than 10% are in other regions other than Southeast Asia.
spk01: So in terms of a market breakdown, majority of our, you know, growth spilling, roughly 90% of our growth spilling are from Southeast Asia and only 10% from outside of Southeast Asia.
spk04: Thank you. Thanks.
spk03: Thank you. That's very helpful. My second question is about the company's outlook. Can you provide an outlook for the company's revenue growth and profitability in the second half 2022 and next year? Does the company expect any macro impact on the overseas market?
spk01: I'll take this question. So we provide Q3 growth spilling guidance, which is 8.0 to 8.2 million U.S. dollar. And if you look at Q4, it's likely going to be flat sequentially given the historical seasonality. But again, we're not giving our guidance right now. It just gives you some color on how to estimate Q4. And we do see many positive macro impact in our target market. You know, for example, COVID-19 continues to boost online education needs over the world, and the digitization process in Southeast Asia continues to have a very positive impact on our on the online education demand in our target market. And we're very confident that the overseas market is going to be very, very attractive for us. And in addition, in terms of the online English training, we have a very You know, we kind of have a niche product, and we have very limited competition in many of our target markets. So our strategy is to continue to focus on our customer needs and satisfaction, which will, in turn, continue to drive the retention and referral and sales. which are, you know, we believe are the key factors to drive our success in China market. And we believe it will do the same magic in the overseas market. I hope this answers your question.
spk04: Let me add to what you asked about the future profitability issue. Actually, you can see that in the past, in our model, because we received the prepayment first, we are now actually reporting the school's billing. In fact, you can understand it as the prepayment. Then, it will be confirmed as income after the user finishes the class. If you study our past business in China, we achieved the first quarter of cash flow in 2018. Then in Q4 of 2019, we achieved the first quarter of US GAAP break-even. So our goal is to achieve cash flow transfer first. Our spin-off is finished at the end of June, but at the end of April, we have done a more clear cut on domestic and overseas business finance. From the end of April, we can calculate that the entire cash flow in the first five or six months is actually break-even. Taiwan Taiwan We are in a fast-growing situation. In fact, we can achieve positive cash flow very quickly. Of course, we don't have a specific time table for when we can make profit in the future. But we think it's just a matter of time. When we start to achieve positive cash flow, in fact, the whole profit in the future is a time period.
spk01: Okay, so Jack will add a little bit of information on the possibility. And if we look at the student events, we know that we're getting the cash first. then the revenue gets recognized after the lessons are consumed. So as a result, you know, our business has a very unique pattern. If you look at our historical data, the company was established in 2011 and first achieved cash flow breakeven in 2016. That's a five-year period. And then in 2018, we achieved a growth spilling contribution positive. That's another two years. Then in 2019 Q4, we achieved the gap profitability, and that's about a year and a half. So, however, our pace of getting from, you know, the start of the business going to cash flow breakeven, then go to gross bidding contribution positive, then to gap probability will be much accelerated in the overseas market compared to the China market. One of the key reasons is that because we've done this well and we have the experience, we have the expertise, we know how to do it. If you look at, even though we did our spinoff at the end of June, our reference date is end of April. So from end of April to end of June, we've already seen that the overseas market cash flow has achieved breakeven. And it is very likely that Q3, we're going to target cash flow breakeven for Q3 too. So basically, right out of the gate, After only one year, you know, starting our overseas business, we already achieved cash flow breakeven. And we do see, you know, we do see the timeline for achieving gross bidding contribution positive and gap profitability will be much more accelerated compared to the China market.
spk03: Thank you. That's very helpful. I will jump back into queue.
spk00: Thanks. All right. Thank you. Again, if you have a question, please press star, then 1. As we are reaching the end of our conference call, I'd like to turn the call back over to the company for closing remarks. Ms. Ni Yan, please go ahead.
spk02: Thank you once again for joining us today. If you have further questions, please feel free to contact 5M Talks Investor Relations through the contact information provided on our website.
spk00: The conference has now ended. You may now disconnect your line. Thank you.
Disclaimer