4. QUALITY EDUCATION

RISE Education Cayman Ltd (REDU) Q1 2020 Earnings Call Transcript – Motley Fool

Impact team
Written by Impact team

RISE Education Cayman Ltd (REDU) Q1 2020 Earnings Call Transcript  Motley Fool

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RISE Education Cayman Ltd (NASDAQ:REDU)
Q1 2020 Earnings Call
May 15, 2020, 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the RISE Education First Quarter 2020 Earnings Call conference. [Operator Instructions]

I’d now like to hand the conference over to your first speaker today, Ms. Mei Li. Thank you. Please go ahead.

Mei LiInvestor Relations

Thank you, operator. Hello, everyone and welcome to RISE Education’s first quarter 2020 earnings conference call. Today, you will hear from Ms. Lihong Wang, Chairman and CEO; and Ms. Jiandong Lu, CFO. Ms. Wang will go over recent business updates, operations and the Company’s long-term strategy, Ms. Lu will go over the financial results of the quarter. Both will be available to take your questions in the Q&A section that follows.

Before we proceed, I would like to remind you that today’s discussion may contain certain forward-looking statements made under the safe harbor provisions of the US 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. To understand the factors that could cause results to materially differ from those in the forward-looking statements, please refer to our Form 20-F filed with the SEC on April 17th, 2020. We do not assume any obligation to update any forward-looking statements, except as required under applicable law.

Throughout today’s call, Ms. Wang and Ms. Lu will be referring to the earnings presentation that has been uploaded to our IR website as a supplement to today’s call.

Now I’d like to turn the call over to Ms. Wang [Phonetic]. Ms. Wang, please go ahead.

Lihong WangChairwoman and Chief Executive Officer

Thank you, Mei. Hello, everyone. Thank you for joining our earnings call. I’d like to begin by expressing our deepest sympathy to everyone across the globe that has been impacted by the COVID-19 pandemic. We sincerely hope that the situation improves quickly and allow everyone to return to work safely. I’d like to begin my remarks on slide 3. The outbreak of COVID-19 8th [Phonetic], January, 2020 had a significant and material adverse impact on our operations during the quarter. In accordance with government regulations to contain the outbreak, RISE learning centers were temporarily closed starting on January 19th, 2020, and all our self-owned learning centers remain close as of today. This has adversely impacted our ability to generate cash and GAAP revenue from regular courses and limited our ability to make — to market our services and acquire students through our learning center network.

While we have resumed online operations, the extent of the disruptions on offline operations and the related impact on our financial and operational results and outlook depend on COVID-19’s further development as the global pandemic.

Before going to details, I however, would like to make three key points regarding our business. Number one, we have ample liquidity to make this extended period of uncertainty. As of March 31st, 2020, we had RMB925.1 million in cash, cash equivalents and restricted cash. Number two, we now can run our business smoothly both online and offline. With resuming regular courses online, we achieved close to 90% participation rate, meaning most of our students are learning online with their teachers from offline learning centers before the pandemic. Number three, we are transforming into an online merging offline model. We also expanded our classes beyond English. So the OMO model, which is developing as we speak.

Turning to slide 4. Over the Chinese New Year holiday, which marks the beginning of China’s shutdown, we immediately began stable — strategizing a road map to navigate this challenging environment. The first stage is to stabilize our business by controlling costs and reserving ample liquidity. The second stage is to optimize our business by conducting our business online and enhancing digitalization capabilities. Now we are in a transformation stage to pursue our long-term strategy to transition into a digitalized cross-disciplinary skill-based OMO educational platform.

I’d like to begin by addressing our efforts during the quarter to stabilize our business and offset the impact from the pandemic through targeted cost controls and adjusted capital expenditure and liquidity plans to reserve cash. With limited visibility on when our offline operations will be able to resume, we immediately roll out a series of initiatives to cut rental, personnel and overhead costs, which are laid out on slide 5. We negotiated hard with all our landlords for rental concessions and were able to obtain a roughly 20% cut in monthly rents which will remain in effect until learning centers are able to reopen.

At the same time, we began prolonging underutilized and unutilized support staff, restructured compensation schemes for management, reduced the social security contributions by RMB8 million per government policies and strengthened the support we offer frontline teachers and sales staff to ensure business continuity and higher productivity throughout the period of disruption. This resulted in personnel costs falling by approximately 23% sequentially. Overall, G&A expenses fell by 35% sequentially during the quarter.

Turning to slide 6. You can see the measures we have taken to manage and preserve cash. Following a careful assessment of our expansion plan for the year, we rescheduled the openings of certain new learning centers to 2021, which will allow us to substantially reduce capital expenditure from the original RMB140 million to less than RMB50 million throughout 2020. The cutdown on physical learning center rollout will not impact our growth going forward. The growth can be driven by a combination of ramping up the existing offline classrooms, leveraging our OMO model to free up capacity and adding online classroom capacity. The new OMO model will improve capital expenditure efficiency.

Turning to slide 7. The disruption to the cost of normal work business by the pandemic has compelled us to accelerate the execution of our strategy to digitalize our operations by moving OMO sectors online, including marketing, teaching, training and communications with parents and students. As I laid out during last quarter’s call, our IT team was able to transform Rise Plus [Phonetic] into a robust open technology platform that is capable of supporting interactive online teaching nationwide within 20 days. This was spearheaded by the official launch of online small group classes for our existing and new students in late February, which we began monetized in early March. As of March 31st, 2020, approximately 127,000 students across 144 cities had taken online small group classes. We also leveraged Rise Plus to provide over 40 online training sessions to over 20,000 teaching and sales staff in franchised learning centers during the quarter.

Rise Plus rapidly proved to be a reliable, stable and solid foundation for us to transition all regular courses online in late April. I’m proud to say that in just under four months, we have been able to successfully build and launch online platform and online products that offer a truly unique value proposition and experience to an increasing number of students who choose to resume their courses online.

On slide 8, we’ve laid out the tangible results from moving our business online. We did not simply move our regular offline courses online, we actually modified our regular courses by adding sessions with foreign teachers and created a pure online small group classes to supplement our existing students or students who prefer online courses only. The first online small group classes was launched early March and have enrolled over 31,000 students and generated RMB38 million cash revenue.

The second significant effort was to resume our regular courses online. The overall participation rate is close to 90%, a very impressive high participation rate which reflected the trust and loyalty our customers have in our brand and service online.

Early May, we started to sell dual-teacher small group classes. This is a pure online courses that we are likely to continue going forward. I believe these solid initial results reflect our ability to offer high quality classes and services online. This is enormous growth for — there’s enormous growth potential ahead of us as we scaled up our online efforts and further accelerate our digitalization strategy.

On slide 9, you can see that RISE has strong brand, unique curriculum, deep academic capabilities and 13 years of proven educational experience and results. This pandemic also helps RISE to build a proprietary technology platform suitable for online teaching and learning, train thousands of teachers that can teach both online and offline. All these attributes position RISE well to be an OMO, an Offline-Merge-Online [Phonetic] player. As we have experienced ourselves, brick-and-mortar model has seen growth slowing down as a result of strong competition from online players and the disruption impact from the pandemic.

At the same time, most of the pure online players still haven’t figured out the economic model yet, often suffered from high acquisition costs and weak unit economics. The OMO model allow us to utilize our strong presence offline and online and combine it with our core competitive advantages in curriculum development, nationwide student base of over 130,000 students and proprietary platform to emerge from the pandemic, bigger, better and stronger and drive our transformation into a digitalized cross-disciplinary and skill-based OMO educational platform.

On slide 10, we’ve outlined the two steps that will drive this transformation. First, delivering courses online, and second, completing our digital transformation. As part of step 1, we will strengthen our core OMO curriculum by migrating portions of our offline regular courses online, freeing up space in our offline learning centers to enhance utilization and improve our return on capital expenditures. We will then diversify our product offerings beyond courses talk in English to include STEAM, math and other subjects to expand cross-selling opportunities and increase average revenue per user, ARPU.

Step 2, we will focus on generating higher ROI on digital marketing through social media and word-of-mouth, leading reference — word-of-mouth lead referrals, while at the same time leveraging private traffic to reduce customer acquisition costs and improve monetization. This will be followed by leveraging data from across our nationwide network to standardize processes through a more detailed business intelligence system.

To help drive our digital strategy to the next stage and navigate our business through its transformation, we have brought on onboard additional highly experienced and seasoned industry professionals which can be found on slide 11. The appointment of Ms. Tai Hui, in particular, as our Chief Operating Officer, is exciting as she brings with her extensive experience in enhancing enterprise’s operational excellency and digital transformation, which will be critical for transforming RISE into a digitalized education platform.

The strengthening of our management team with the new COO, Head of Strategy, Head of OMO Product Development and Head of New Media Marketing truly reflects our commitment to building a more digitalized platform.

While the pandemic came as a shock to everyone, I’m proud of the progress we have made in stabilizing our business during the quarter and look forward to working closely with my colleagues to further optimize and transform RISE. We understand there is still a lot of work to be done. Strong branding, high-quality curricular and teaching resources and the ability to offer both online and offline classes, all of which we have already had are critical to thriving in the post-pandemic era of education in China. Building an effective OMO model will ensure RISE’s long-term growth and success.

We all look forward to the exciting journey ahead. Now I will hand the call to Jiandong to go through the financial results.

Jiandong LuChief Financial Officer

Thank you, Lihong. Let me now go through the financial results for the first quarter of 2020. Before I begin, please note that all numbers stated here are in RMB. As Lihong mentioned earlier, COVID-19 caused huge disruption to our business. As an online education company, we rely heavily on our offline learning center network to offer services and market our products to students.

Starting in late January, we temporarily closed all our learning centers in compliance with government regulations to contain COVID-19. All our self-owned learning centers remain closed as of today. The temporary closure of our offline learning centers has inhibited our ability to offer offline classes and market our products to prospective students. This has adversely impacted our ability to generate cash and recognize revenue. Our learning centers were in operation for only 18 days in January and were closed throughout the remainder of the first quarter of 2020, which significantly and materially impacted our financial performance for the quarter. Total revenues during the quarter, decreased by 67.5% year-over-year to RMB109 million. The decrease in revenues was driven primarily by a 64.7% year-over-year decrease in revenues from our educational programs to RMB102 million. Starting this quarter, revenues from educational programs will include revenues generated by Can-Talk, which more accurately reflects our focus and long-term strategy going forward. Revenues from educational programs in previous years have been adjusted to make them comparative.

Revenue from regular courses, namely Rise Start and Rise On was RMB74.4 million, the result of 18 days of offline operations in January. Revenues from other RISE courses, including Rise Up, Can-Talk and short-term online small group courses, and courses offered by The Edge were RMB27.6 million. Franchised revenues decreased by 84% year-over-year to RMB6.1 million during the quarter, primarily due to a decline in recurring franchise revenue, impacted by the closure of our franchised learning centers since late January. Other revenues decreased by 89.2% year-over-year to RMB0.9 million, primarily due to the impact of travel restrictions on our study tour services which have all been postponed to the summer or even a later time.

Cost of revenues for the quarter decreased by 7.7% year-over-year to RMB142.6 million. Non-GAAP cost of revenues for the quarter decreased by 8.1% year-over-year to RMB138.3 million. The decrease was primarily caused by a decline in business resulting from the COVID-19 disruption. Furthermore, we made rigid efforts in cutting costs, we managed to cut the rental expenses by about RMB8 million, about 13% compared with the last quarter. Personnel costs decreased as a result of the reduction in teachers’ headcount and reduced teaching hours during the period.

Gross profit for the quarter was RMB33.6 million compared with gross profit of RMB180.6 million in the six — in the same period of last year. Selling and marketing expenses for the quarter were RMB43.2 million, a decrease of 34.2% year-over-year from RMB65.7 million. Non-GAAP selling and marketing expenses were RMB42.2 million, a decrease of 34.8% year-over-year. The decrease is primarily due to the reduced offline marketing activities and reduced personnel costs, which were associated with the sales team downsizing and decreased incentives as a result of the lower enrollment.

G&A expenses for this quarter were RMB54.6 million a decrease of RMB11.8 million year-over-year. The decrease was mainly attributable to the reversal of share-based compensation expenses due to the actual forfeiture in the first quarter of 2020. Non-GAAP G&A expenses were RMB55.5 million, a decrease of 6% year-over-year. The decrease reflects our initiatives to cut administrative costs and to offset the adverse impact of COVID-19.

Operating loss was RMB131.4 million as compared with operating income, RMB53 million for the same period of last year. Non-GAAP operating loss was RMB127.1 million compared with non-GAAP operating income, RMB60.7 million for the same period of last year. Adjusted EBITDA loss was RMB108 million compared with adjusted EBITDA income, RMB80.5 million in the same period of last year. Income tax benefit for the quarter was RMB19.7 million compared with income tax expense, RMB18.7 million in the same period of last year. Net loss attributable to RISE for the quarter was RMB103.8 million, non-GAAP net loss attributable to RISE was RMB99.5 million. Basic and diluted net loss attributable to RISE per ADS for the quarter was RMB1.84. Basic and diluted non-GAAP net loss attributable to rise per ADS was RMB1.78 — RMB1.76.

Turning to our cash flow performance. Net cash flow used in operating activities during the quarter, was RMB82.4 million compared with RMB5 million of cash generated from operating activities in the same period of last year, mainly due to reduced cash collection for our regular courses, which resulted from the temporary closure of our self-owned and franchised learning centers. As of March 31st, 2020, the Company had a combined cash and cash equivalents and restricted cash of RMB925.1 million compared with RMB1,022.8 million as of December 31st, 2019.

As of March 31st, 2020, total deferred revenue and customer advances was RMB776.3 million, an increase of 2.7% from RMB755 million as of December 31st, 2019. The increase was primarily due to revenue recognition for offline and online courses lagging behind cash collection. As a reminder, starting last quarter, we began reporting the number of students in class and the new students enrolled, which we believe are more accurately reflective of our business performance and provide a more meaningful comparative analysis than the previously reported student enrollment matrix. Please refer to the earnings material we issued for the fourth quarter of 2019 for a more detailed explanation for the change in disclosure.

The slide shows as of March 31st, 2020, students in class for regular courses, including Rise Start and Rise On programs was 52,585, an increase of 901 from 51,684 as of March 31st, 2019. New students enrolled for Rise regular courses in the first quarter of 2020 were 1,507 compared with 7,406 during the same period of last year. The significant decrease in student enrollment is the direct result of the closure of our learning centers throughout the majority of the first quarter of 2020, which severely limited our ability to leverage our offline channels to acquire prospective students. Students enrolled for other Rise courses, which were taught in line — online, including Rise Up, Can-Talk and online small group classes, and other Rise short term courses and courses provided by The Edge was 32,404 — 32,494 in the first quarter of 2020 compared with 1,470 during the same period of last year. Students enrolled for online small group classes were 31,882 in the first quarter of 2020, 92.6% of whom are RISE existing students.

Turning to the next slide. With the effect of the pandemic in China beginning to ease, we expect our performance to gradually improve on a sequential basis. Starting from the second quarter of 2020. On April 20, we transitioned Rise Start and Rise On courses online with approximately 90% of our students signing up for the online courses to resume their original academic schedule. We also launched upgraded online small group classes earlier this month, which combined with the initial online small group classes, are expected to contribute revenue in the second quarter.

With back-to-school schedules being rolled out in increasing number of regions, some of our franchised learning centers in certain parts of the country have already resumed the business offline. Taking into account all these recent developments and excluding any potential revenue from our own — self-owned learning centers, which are expected to resume operations sometime in the second quarter of 2020, we expect revenue in the second quarter of 2020 to be in the range of RMB135 million to RMB145 million. We’ll continue exercising rigid controls over cost and expenses going forward, and we also expect our EBITDA loss to narrow substantially in the second quarter of 2020. The second half of 2020 should see our business rebound from the lows of the first half of the year.

With that, I would now like to hand the call over to the operator so we can begin the Q&A session. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question today comes from the line of Sheng Zhong from Morgan Stanley. Please ask your question.

Sheng ZhongMorgan Stanley — Analyst

Hey, thank you for taking my question and very impressed with cost savings. My question is on the digital and online strategy. It seems like that you accelerated this online movement. So wondering what the positioning of the online path in your overall business? And any — and can you share with us the plan to — on the operation of online including the student acquisition? Is it mainly from your existing students or are you targeting more broadly? And related with online student acquisition, my second question is the sales and marketing spending in second quarter and maybe the full year. So given the offline in gradual [Phonetic] resumption, so what’s the plan for the summer season sales marketing spending and longer term? Because we see a smaller spending in sales and marketing in first quarter, but also the new student enrollment also lower. But I understand it’s also because of the coronavirus. But going forward, what’s the plan? Thank you.

Lihong WangChairwoman and Chief Executive Officer

Yeah. Sheng, thank you for the question. I will ask the strategy of the online business or the OMO business — OMO model. And then Jiandong, you can talk about the sales and marketing plan. Sheng, as I mentioned, now we are able to offer classes both online and offline smoothly. Going forward, the thinking is, one, we will modify our offline classes to be online class/offline combination. The proportion of online will be around 25% to 30%. On a higher grade from S1 to S6, we will have 30% to 40% online. And then for the younger age K1, K2, most of the classes will still be offline. And to supplement these classes, we will offer what we call targeted enhancement classes, which are purely online with a combination of foreign and Chinese teachers. So this is the OMO model.

At the same time, as I mentioned, the online small group classes was actually pretty successful. Then we upgraded to a dual-teacher model, so one Chinese teacher, one foreign teacher. Foreign teachers mainly to teach students regarding knowledge and also the so-called the listening and speaking part of the language training. And the Chinese teacher will be more focused on how to complete a project, so-called the inquirer-based learning online. And this class has started to sell May 8th. The first bunch, we target existing students. At the same time, we will roll out to prospect students as well. This is a lower, so-called, ASP and shorter term on pure online classes which we think will continue. So this student segment is different from our existing offline students or the future OMO model students, so this target a little bit lower spending preference and pure online students.

Jiandong LuChief Financial Officer

Okay. Sheng, it’s Jiandong. Let me address your question on sales and marketing. So for the first quarter of 2020, our sales and marketing expenses in total is about RMB43 million. So half of that will be the personnel costs related to sales and marketing and then half related to the market branding and also marketing expenses.

Since the culture of our offline network, offline learning centers closed, we started to try the new media marketing channels, and we watch very closely on the investment in the new channels and try to maximize kind of the return on the investment in the new channels as well. At the same time, because we just started marketing online, and it’s a period for us to actually accumulate experiences, in the new media marketing. Looking for the whole year, basically, when business resume in the second quarter — second half of this year, and we try to actually invest more in marketing in order to increase our total student enrollment. Having said that, we’ll still watch very carefully on the acquisition cost per student, and we’ll try to maintain the percentage of the investment in sales and marketing in line with our total — in line with the cost and marketing expenses as a percentage of revenue in 2019. So throughout the year 2020.

Sheng ZhongMorgan Stanley — Analyst

Thank you.

Operator

Your next question today comes from the line of Alex Xie from Credit Suisse. Please ask your question.

Alex XieCredit Suisse — Analyst

Hi, management. Thank you for taking my question. My first question is about second quarter guidance. So would you please give us a breakdown of your second quarter guidance? What are the assumptions for regular courses? What is the portion from the new, upgraded new online class and what’s the expectation for offline resumption contribution?

Secondly, I would like to ask about your headcount in terms of teachers. I think in this quarter, you achieved quite significant cost reduction in G&A and sales and marketing, but there’s a decrease in personnel costs in COGS is lower, so can you share your thoughts on that? And thirdly, I think there is still a long term loan with CTBC, have you talked with the bank? Is there any chance for the bank to ask [Phonetic] for the early repayment, or is there a risk? Thank you.

Lihong WangChairwoman and Chief Executive Officer

Yeah. Alex, thank you very much for the questions. So I’ll ask Jiandong to answer the first one, the second quarter revenue guidance and the composition, then I’ll talk about headcount. The CTBC loan, back to Jiandong. Maybe you’ll answer the first and third — the third question.

Jiandong LuChief Financial Officer

Okay. Thank you, Alex. On the guidance, since our offline regular course students already resumed their study online, starting from the 20th of April. And as Lihong explained, the participation rate is around 90 — more than 90% for senior age group and around 88% for the junior age group and much higher than our originally expected. So majority of the revenue for the second quarter will be from the resumption of the studies for our offline students online. So on the normal business environment, our offline revenue per month is more than RMB100 million. So you can do the math, 90% of the students resume their classes online. And another factor you have to consider is when we move the students online, they only consume half of their course hours as compared to their offline class hours. So this offline regular courses online will contribute roughly like 80% of our revenue in the second quarter.

And we continue to harvest from our online small group classes. As Lihong mentioned, we had a cash revenue of about RMB38 million recognized in the first quarter. And only about half of that, less than half of that has been recognized in the first quarter. So the online small group classes will continue to contribute roughly RMB20 million in the second quarter. And also because our franchised revenues will increase, because the franchised learning centers already started operations, which cover roughly about 100 — already 15,000 students. So we do see the increase in the recurring revenues recognized in the second half — second quarter of 2020 for our franchise revenues. But we didn’t take into account the fact that some of our own learned — our own — self-owned learning centers may resume business probably in the second half of the second quarter. So that’s going to be another addition. However, in our guidance, we didn’t take that into consideration. Is that clear to you, Alex?

Alex XieCredit Suisse — Analyst

Yes. Thanks.

Jiandong LuChief Financial Officer

Okay. So your question on the financing. We did start a conversation with our lender, the CTBC and shared with them the impact on our business from the COVID-19 and what happened to our cash burn in the second quarter and likely to be in the first quarter and likely to be in the second quarter and the situation. And so basically, our lender has already verbally granted approvals to waive our covenants compliance. At the same time, they are going to — in terms of the principal repayment, which is about RMB19.25 million due in September 2020, that’s going to be divided in two installments. RMB9.25 million will be paid in September, and the balance will be postponed to the first quarter of 2021. So with ample cash in the bank, cash balance in the bank, we don’t see any liquidity issues. And we are pretty — very confident that we will sustain given the uncertainty environment.

Lihong WangChairwoman and Chief Executive Officer

Yeah. So overall, I think the second quarter guidance is very conservative because we cannot predict when the self-owned learning centers will open. But very likely, you see that government issued guidance for kindergartens to open in early June, both in Shanghai and Beijing. So we do believe that we will be the next one to resume operations. In terms of the head count, in fact, the number we disclosed by the end of March, in some way, is only about — sorry, just [Speech Overlap].

Jiandong LuChief Financial Officer

[Indecipherable]

Lihong WangChairwoman and Chief Executive Officer

Yeah. The number of headcounts continue to decrease along the way. In March, we disclosed the number around 37,000. And in fact, even within that, around 400 are furloughed, which is underutilized or unutilized. By the end of April, the total headcount already reduced to 34,000. And so this is a 15% down from beginning of the year. The government actually did not allow enterprises to lay off people in February. So we started in March, and we continue to optimize personnel compositions.

We do mostly keep high productivity sales person and teachers, but we also optimize who are not productive. Right now, the teacher headcount and the sales force headcount are slightly down, but we do think it is the opportunity that we can later on add on better, more qualified people to have the growth in the second half of the year.

Jiandong LuChief Financial Officer

Sorry, Alex, let me just correct one number. I think Lihong was mistaken in quoting the headcount numbers. By the end of March, in 2020, our total headcount is 3,700.

Lihong WangChairwoman and Chief Executive Officer

Yeah, yeah, 3,700, yeah. Yeah, yeah, it’s not 37,000.

Jiandong LuChief Financial Officer

As of early May, the headcount is about 3,400.

Lihong WangChairwoman and Chief Executive Officer

That’s right. Yeah.

Alex XieCredit Suisse — Analyst

Thank you, [Indecipherable].

Operator

[Operator Instructions] I think that we have no further questions on the line today. [Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Mei LiInvestor Relations

Lihong WangChairwoman and Chief Executive Officer

Jiandong LuChief Financial Officer

Sheng ZhongMorgan Stanley — Analyst

Alex XieCredit Suisse — Analyst

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