51Talk Online Education Group Q2 FY2022 Earnings Call

Hello everyone, and welcome to the second quarter 2022 earnings conference call of China Online Education Group, also known as 51Talk. The Company’s results were issued via newswire services earlier today and are posted online. You can download the earnings press release and financials of 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 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 note that today’s discussion will contain forward-looking statements made under the Safe Harbor Provision of the U.S. Private Securities Litigation 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 51Talk’s earnings press release and its conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. 51Talk’s press release consists of a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our CEO, Jack Huang. Please go ahead.

Okay. Thank you, Ni. 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 51Talk Online Education Group. We are excited to report another quarter marked by continuing top-line growth of our overseas business. In the second quarter, our overseas business continued to see healthy and sustainable development. Our second quarter overseas business net gross billings reached $7.8 million, representing 46.5% sequential growth. The number of our gross students reached 8.1 thousand, representing 25% sequential growth and the number of our active students with attended lesson consumption reached 14.9 thousand, 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 a 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. Min Xu will not be with us today for personal reasons. His last day will be September 30, 2022. Our VP of Finance, Miss Cindy Chun 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 him 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 Xu.

Thank you, Jack, for your nice words. I want to thank every 51Talk investor, employee, teacher, student, parent, and partner for your support in the past few years, making my every moment at 51Talk a memorable one. Jack has led us through the most difficult time in 51Talk history and I trust 51Talk under his leadership is only going to grow stronger, fulfilling our dream of helping everyone communicate with the world. My successor Cindy, current VP of Finance, has been with the company for eight years and played an instrumental role in the company's IPO in 2016 and turning the 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 success in the overseas market. But now let's take a look at Q2 numbers. The momentum of our overseas business continued into Q2 with gross billings 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 a strong value proposition to our students in this rapidly developing overseas market. Please note that we completed the divestiture of our China Mainland business on June 30th and we're focused on overseas markets 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 growth. 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. Due to product development expenses of continuing business were $0.7 million, a 36.4% sequential decrease from $1.1 million last quarter. Q2 G&A expenses of continuing business were $2.6 million, among which $0.5 million were one-time fees related to the divestiture of our China Mainland business. Excluding this one-time cost, Q2 G&A expenses would have been $2.1 million, G&A 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, with net loss for continuing overseas business and the discontinued Mainland China Business being $4.6 million and $10.4 million, respectively. Q2 GAAP and non-GAAP EPS were both negative $0.67. The company's total cash, cash equivalents, and restricted cash were $22.1 million at the end of the second quarter. Advances from students for continuing business were $10.2 million at the end of the second quarter. Looking forward to the third quarter of 2022, we currently expect 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.

The first question comes from Fawne Jiang with the Benchmark Company. Please go ahead.

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.

Jack, you want to take the question?

Yes, so we believe the overseas market is still in a very early stage and the strong growth we see in the past few quarters really leveraged our success factors in our existing China markets. The English training market is very different from other education products because the demand for English learning is a common demand in many countries around the world; we see a very strong demand in the overseas market. So, we do see very strong growth since we started our overseas business in July last year. The strong growth of the past year is a result of our expertise and experience in the China market over the past decades. We have already accumulated a lot of knowledge in terms of technology, product development, Filipino teacher operations, and K-12 curriculum. As a result, we have a very solid and competitive product in our overseas market from the very beginning. In terms of market breakdown, the majority of our gross billing, roughly 90% of our gross spending, comes from Southeast Asia and only 10% from outside of Southeast Asia.

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 of 2022 and next year? Does the company expect any macro impact on the overseas market?

I'll take this question. So we provide Q3 gross billing guidance, which is $8.0 million to $8.2 million, and if you look at Q4, it's likely going to be flat sequentially given historical seasonality. But again, we're not giving our guidance right now; it just gives you some color on how to estimate Q4. We do see many positive macro impacts in our target market. For example, COVID-19 continues to boost educational needs around the world, and the digitization process in Southeast Asia continues to have a very positive impact on online education demand in our target market. We have a very unique product and limited competition in our target market. Our strategy is to continue to focus on our customer needs and satisfaction, which will, in turn, continue to drive retention and referrals – key factors for our success in the China market, which we believe will have the same effect in the overseas market. Jack will add a little more information on the possibility. Historically, we reach cash flow breakeven within five years of establishing the company. Since we did our spin-off at the end of June, our reference date is the end of April, and we've seen overseas market cash flow already achieve breakeven. It’s likely we’re going to target cash flow breakeven for Q3 too. After only one year, starting our overseas business, we've already achieved cash flow breakeven, and we see the timeline for achieving growth, contribution positive, and GAAP profitability accelerating compared to the China market.

Thank you. That's very helpful. I'll jump back in the queue. Thanks.

Alright. Thank you.

As we approach the conclusion of our conference call, I'd like to hand it back to the company for their closing remarks. Ni Yan, please continue.

Thank you once again for joining us today. If you have further questions, please feel free to contact 51Talk’s investor relations through the contact information provided on our website.

The conference has now ended. You may now disconnect your line. Thank you.