Tarena International, Inc. (NASDAQ:TEDU) Q3 2020 Earnings Conference Call November 13, 2020 7:00 AM ET

Company Participants

Amanda Wang – Investor Relations Director

Yongji Sun – Chief Executive Officer

Nancy Sun – Senior Vice President

Kelvin Lau – Chief Financial Officer

Conference Call Participants

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2020 Tarena International, Incorporated Earnings Conference Call. At this time, all participants are in listen-only mode. After speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your first speaker today, Ms. Amanda Wang, IR, Director. Thank you. Please go ahead.

Amanda Wang

Thank you, operator. Hello, everyone, and welcome to Tarena’s earnings conference call for the third quarter of 2020. The company’s earnings results were released earlier today and are available on our website, ir.tedu.cn, as well as on Newswire services. Today, you will hear from Mr. Yongji Sun, our CEO; Ms. Nancy Sun, our Senior VP and Mr. Kelvin Lau, our CFO, who will take you through the company’s operational and financial results for the third quarter of 2020 and give revenue guidance for the fourth quarter. After their prepared remarks, Mr. Sun, Nancy and Kevin will be available to answer your questions.

Before we continue, please note that the discussion today will contain certain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Tarena does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Also, please note that some of the information to be discussed includes non-GAAP financial measures, as defined in Regulation G. The U.S. GAAP financial measures and information reconciling these non-GAAP financial measures to Tarena’s financial results prepared in accordance with U.S. GAAP are included in Tarena’s earnings release, which has been posted on the company’s IR website. Finally, as a reminder, this conference call is being recorded. In addition, a webcast of this conference call is available on Tarena’s IR website.

I will now turn the call over to Mr. Yongji Sun, CEO of Tarena.

Yongji Sun

Thank you, Amanda, and thank you everyone for joining us today. We are delighted to announce our results for the third quarter of 2020. We had a weird recovered quarter with inspiring performance. Our total net revenue in the third quarter of 2020 was RMB620.8 million, which was higher than the guidance of RMB570 million to RMB600 million that we provided. Compare to the total net revenue of RMB659.2 million in the third quarter of 2019. The total net revenue in the third quarter of 2020 decreased by RMB38.4 million or 5.8%.

The net loss in the third quarter of 2020 was RMB63.9 million as compared to the net loss of RMB110 million in the same period of 2019. Net revenue from K-12 education business increased by 146% from RMB117.7 million in the third quarter of 2019 to RMB289.6 million in the same period of 2020. The number of student enrollments for K-12 education increased by 62% from 75,800 in third quarter of 2019 to 122,800 in the same period in 2020. The number of new students recruited for K-12 education increased by 8.2% from 23,100 in the third quarter of 2019 to 25,000 in the same period in 2020.

Net revenue from adult professional education business, decreased by 38.8% from RMB541.5 million in the third quarter of 2019 to RMB331.2 million in the same period of 2020. The number of student enrollments for adult professional education business decreased by 29.4% from 54,400 in the third quarter of 2019 to 38,400 in same period in 2020.

The number of new students recruited for adult professional education business decreased by 45.3% from 27,600 in the third quarter of 2019 to 50,100 in the same period in 2020. As the COVID-19 pandemic has been properly controlled and contained in China, most of the social and economic activities have been resumed in the third quarter of this year. Our adult and K-12 learning centers have been reopened gradually and resumed in class lessons since June of 2020. We have been implementing effective costs and expenses, control policies and the procedures since the beginning of this year.

All these actions have brought improvement to our operational and financial performance in the third quarter of this year. Despite our net revenue dropping by 5.8% in the third quarter of this year, our operating loss decreased by 52.6% from RMB119.4 million in the third quarter of 2019 to RMB56.6 million in the same quarter of 2020. The total operating expenses decreased by 70.6% from RMB493.5 million in the third quarter of 2019 to RMB406.5 million in the same period of 2020.

Our total headcount decreased by 13.6% from average 11,474 in the third quarter of 2019, to average 9,917 in the same period of 2020. Productivity per capita increased by 8.9% from RMB57,500 in the third quarter of 2019 to RMB62,600 in the same period of 2020.

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We have started to close or merge those nonprofit for Adult Learning Center. Since that second half of last year, the number of Adult Learning Centers decreased from 134 in the third quarter of 2019 to 106 in the same period of 2020. The students’ enrollments for adult learning center increased from 338 in the second quarter of this year to 364 in the third quarter of this year.

The number of K-12 education learning centers increased from 209 in the third quarter of 2019 to 236 in the same period of 2020. The student enrollments for K-12 learning center increased from 431 [ph] in the second quarter of this year to 520 in the third quarter of this year.

In the coming quarters, our strategies are two-folded. Firstly, we will continue to uplift the efficiency of our operation to improve our margins. Secondly, in order to strengthen our market leading position and expand our market share, we will focus on further streamlining our product lines, optimizing online and offline programs and curriculums, and further improving our tutoring qualities and user experience.

With that, I would turn the call to our Operations Senior VP, Nancy Sun, who will present to you some details of our operating performance in the third quarter of this year.

Nancy Sun

[Foreign Language]

Thanks you, Yongji. Hello everyone. Nice to meet all of you again and I’m going to present you with information regarding our operation performance in the third quarter of this year.

First of all, I would like to update you the impact of COVID-19 pandemic on our business. In July and August, except for Beijing, Harbin, and Dalian, our adult and the K-12 offline 2C learning centers have resumed their in class session.

Starting from September, the direct impact of COVID-19 pandemic on our learning centers in all cities in China, including Beijing, Harbin, and Dalian has basically faded out.

Next, please let me share with you some operational information of our adult education business. As I have mentioned in the prior earning release conference, our operational strategy for adult education business is profit maximization. In the past more than one year, we have been optimizing our operational efficiency.

Despite that our operations scale have shrunk, the profitability of our adult education has been elevating. Adult education business returned to be profitable in the third quarter of this year. The gross margin increased from 70%, in the third quarter of last year to 71.3% in the same period of this year, increased by 1.3%.

Net revenue, in the third quarter of this year decreased by 38.8% to RMB331.2 million, compared to net revenue in the same period of last year. Cost of revenue in the third quarter of this year decreased, by 41.6% to RMB95 million, compared to cost revenue, in the same period of last year.

Students enrollment decreased by 29.4%, from 54,400 in the third quarter of last year to 38,400, in the same period of this year. The number of new students recruited, decreased by 45.3% to 15,100, in the third quarter of this year, compared to the number of new students recruited, in the same period of last year. The decrease was mainly due to the significant decrease in number of learning centers. Moreover, due to the COVID-19 pandemic, we were not able to execute most of our summer vacation student recruitment activities.

The average of six months and three months post-course job placement rate were 89% and 82% respectively. By the end of September 30, 2020, the three month post-course job placement rate for most of the students who attended our online lessons during the COVID-19 pandemic period was 74%. Our online tutoring experience and the capability, which has been accumulated for more than 18 years, can provide a very solid foundation for our future adult education business development.

[Foreign Language]

Now I would like to give you some taste of our K-12 education operations. In the third quarter of this year, our K-12 education business achieved significant growth in net revenue, optimization of cost structure and improvement of operational efficiency. Gross margin increased to 39.3% in the third quarter of this year from a gross margin of minus 4.1% in the same period of last year.

Net revenue increased by 146% from RMB117.7 million in the third quarter of last year to RMB289.6 million in the same period of this year. K-12 education net revenue contributed 46.6% of the total net revenues in the third quarter of this year. The number of new contracted students, including newly registered students and renewal students increased by 12.5% to 31,400 in the third quarter of this year, compared to the number of new contracted students in the same period of last year.

As of September 30, 2020, our student enrollments were 122,800, increased by 62% compared to the student enrollment in the same period of last year. About 83% of those students who have been studying our K-12 education programs for more than one-year have completed the renewal in the third quarter of this year.

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Cost of revenue increased by 43.6% to RMB125.8 million as compared to the cost of revenue in the same period of last year. There were two reasons for the increase in cost of revenue. First, the number of learning centers increased significantly from 209 in the third quarter of last year to 236 in the same period of this year.

Second, as the impact of COVID-19 pandemic has started to fade out, all learning centers have resumed their normal operations. The increase in cost of revenue was in line with the growth of students enrollment and net revenue.

[Foreign Language]

Our sales and marketing sides for K-12 is also going quite well. The average acquisition costs, including — excluding personnel-related salary and welfare expenses for each new contracted students decreased by 29.9% as compared to the relevant cost in the same period of last year.

Moreover, 41.4% of the total number of students who have paid tuition fees in the third quarter of this year came from student renewal or word of mouth promotional activities. This ratio increased by 5% as compared to the same ratio in the third quarter of last year.

Our K-12 education online business also demonstrated a steady growth in the third quarter of this year. Net revenue of K-12 education online business increased by 180.8% in the third quarter of this year compared to the net revenue in the third quarter of last year. Online business revenue represented 11.6% of the total K-12 education revenue.

Lastly, I would like to give you a brief conclusion and outlook. Our results show that operating loss in the third quarter of this year decreased by 52.6% as compared to operating loss in the same period of last year. The net cash outflow from operating activities in the third quarter was RMB11.7 million, which was much lower than the net cash outflow from operating activities of RMB183.6 million incurred in the first half of this year.

In the third quarter of this year, we can see that our adult education business have returned to be profitable. And the operation performance data including student recruitment, net revenue, and cost of revenue and operating expenses were quite stable.

Our K-12 education business achieved an outstanding result in the third quarter. K-12 education contributed 46.6% of the total net revenues and the gross margin increased to 39.3% in the third quarter of this year from a minus 4.1% in the same period of last year.

Regarding the outlook for the next quarter, after taking into consideration of the seasonal fluctuation factors, we expect that our total net revenues will drop in the fourth quarter, as compared to the total net revenues in the third quarter. However, we expect that the number of students recruitment and renewal of our K-12 education will be better than the number in the fourth quarter of last year. Furthermore, in the fourth quarter, we expect that our cost of revenue and operating expenses may remain stable, and the students enrollment of K-12 education will continue to grow. With that, I would like to take this opportunity to thank all of you for your support and your attention.

Now, let me hand over to Kelvin, our CFO who will share with you, our 2020 first half financial highlights. Thank you.

Kelvin Lau

Thank you, Nancy. Now, I would like to take you through the third quarter of 2020 financial highlights. Total net revenues decreased by 5.8% to RMB620.8 million in the third quarter of 2020 from RMB659.2 million in the same period of 2019.

Net revenue from adult education business decreased by 38.8% to RMB 331.2 million in the third quarter of 2020 from RMB541.5 million in the same period of 2019. The decrease was primarily due to decline in student enrollments of adult education by 29.4%, from 54,400 in the third quarter of 2019 to 38,400 in the same period of 2020.

Net revenues from K-12 education business increased by 146% to RMB 289.6 million in the third quarter of 2020, from RMB117.7 million in the same period of 2019. The increase was primarily due to increase in student enrollments of K-12 education by 62%, from 75,800 in the third quarter of 2019 to 122,800 in the same period of 2020.

Cost of revenues decreased by 5% to RMB 270.8 million in the third quarter of 2020, from RMB285.1 million in the same period of 2019. For adult education business, cost revenues decreased by 41.6% to RMB 95 million in the third quarter of 2020, from RMB 162.6 million in the same period of 2019. The decline was primarily due to decrease in number of learning centers, which resulted in reduction of personnel-related costs and rental expenses.

The K-12 education business, costs of revenues, increased by 43.6% to RMB175.8 million in the third quarter of 2020, from RMB122.5 million in the same period of 2019. The increase was primarily due to addition of new learning centers, which we saw the additional personnel-related cost and rental expenses.

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Gross profit decreased by 6.4% to RMB 350 million in the third quarter of 2020 from RMB 374 million in the same period of 2019. Gross margin, which is equal to gross profit divided by net revenues, was 56.4% in the third quarter of 2020, compared to previous 56.8% in the same period of 2019.

Total operating expenses decreased by 17.6% to RMB 406.5 million in the third quarter of 2020, from RMB 293.5 million in the same period of 2019. Total non-GAAP operating expenses, which excluded share-based compensation expenses decreased by 15% to RMB 399.3 million in the third quarter of 2020 from RMB 469.5 million in the same period of 2019.

Total share-based compensation expenses allocated to the related operating expenses decreased by 69.6% to RMB7.3 million in the third quarter of 2020 from RMB 24 million in the same period of 2019.

Selling and marketing expenses decreased by 12.2% to RMB 239.2 million in the third quarter of 2020 from RMB 272.3 million in the same period in 2019. The decline was mainly due to a decrease in marketing activities and promotional spending and decrease in personnel-related expenses resulting from a low headcount in the third quarter of this year.

General and administrative expenses decreased by 26.8% to RMB 143.1 million in the third quarter of 2020 from RMB 195.6 million in the same period of 2019. The decline was mainly due to a decrease in personnel-related expenses resulting from a low headcounts in the third quarter of this year and there we didn’t have investigation related professional expenses occurred in the third quarter of last year.

Research and development expenses, decreased by 5.1% to RMB 24.3 million in the third quarter of 2020 from RMB 25.6 million in the same period of 2019. The decline was mainly due to a decrease in personnel-related expenses resulting from a lower headcounts.

Operating loss was RMB 56.6 million in the third quarter of 2020, compared to the operating loss of RMB 119.4 million in the same period of 2019. Non-GAAP operating loss, which excluded share-based compensation expenses was RMB 49.2 million in the third quarter of 2020, compared to non-GAAP operating loss of RMB 95.1 million in the same period of 2019.

The company recorded an income tax expenses of RMB 10.1 million in the third quarter of 2020, compared to RMB1.1 million in income tax benefit in the same period of 2019. As a result of foregoing, net loss was RMB 63.9 million in the third quarter of 2020, compared to net loss of RMB 110 million, in the same period of 2019.

Non-GAAP net loss, which excluded share-based compensation expenses, was RMB 56.5 million in the third quarter of 2020, compared to non-GAAP net loss of RMB 85.7 million in the same period of 2019. Loss per ADS was RMB 1.16 in the third quarter of 2020. Non-GAAP loss per ADS, which excluded share-based compensation expenses, was RMB1.02 in the third quarter of 2020.

Net cash outflow from operating activities in the third quarter of 2020 was RMB 11.7 million. Capital expenditures in the third quarter of 2020 were RMB 13.0 million. Cash and cash equivalents and time deposits, including current and non-current, and restricted cash, decreased by 39.7%, from RMB 621.2 million as of December 31, 2019 to RMB 374.7 million as of September 30, 2020.

The decrease in cash and cash equivalents and time deposits, including current and non-current, and restricted cash was mainly due to net cash used in operating activities, which mainly are composed of net loss of RMB676.5 million incurred in the first nine months of 2020, and was partially offset by the increase in total deferred revenue of RMB 377.4 million.

In terms of financial guidance, based on our current operations, total net revenues for the fourth quarter of 2020 are expected to be between RMB 540 million and RMB 570 million, after taking into consideration the seasonal fluctuation factor and likely continued impact of the COVID-19.

This guidance is based on the current market conditions and reflects the Company’s current and preliminary estimates of market and operating conditions, which are subject to change, particularly due to potential impact of COVID-19 on the economy in China and elsewhere in the world.

This concludes my financial highlights section. Operator, we are ready for questions. Thank you so much.

Question-and-Answer Session

Operator

Amanda Wang

Okay. Thank you, operator. If there’s no further question’s at present, we would like to conclude by thank you everyone for joining our conference call. We welcome you to reach out to our directly by emailing at ir.tedu.cn. Should you have any questions or requests for additional information, we encourage you to visit our Investor Relations site at ir.tedu.cn. Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes the conference for the day. And thank you for participating. You now all disconnect.



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