Four Seasons Education (Cayman) Inc. Q2 FY2020 Earnings Call

Hello ladies and gentlemen. Thank you for standing by for the Four Seasons Education's Second Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Ms. Olivia Li, Investor Relations Manager for the company. Please go ahead, Olivia.

Hello everyone and welcome to the second quarter fiscal year 2020 earnings conference call of Four Seasons Education. 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 email distribution list by visiting the IR section of our website at ir.sijiedu.com. Ms. Joanne Zuo, our Director and Chief Financial Officer, will read CEO remarks on behalf of Mr. Peiqing Tian, our Chairman and Chief Executive Officer, and will provide details on the company's financial results and business outlook before opening the call for your questions. 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 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 prospectus 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 applicable law. Please also note that Four Seasons Education's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Four Seasons Education's press release contains 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 CFO, Ms. Zuo. Please go ahead.

Thank you, Olivia, and hello everyone. Let me first read the CEO remarks on behalf of Mr. Tian. We achieved a strong quarter with remarkable operating and financial performances, thanks to our successful strategy and relentless efforts to optimize and adjust our operations. In the second quarter, total student enrollment reached 39,357, representing a vigorous growth of 90.8% year-over-year. The active student participation reflects the attractiveness of our programs and our enhanced brand awareness. We consistently enrich and diversify our course offerings to cover more academic subjects and educational topics. With differentiated programs designed for different grade levels, we have efficiently extended our courses to broader age groups. To our satisfaction, the optimization program for our learning center network in previous quarters paid off well with satisfactory enrollment in learning centers both in and out of Shanghai. In addition, we prudently expanded our network in key cities where we already have a presence. In the second quarter, we added an additional learning center in Chongqing and one in Shenzhen. Both cities are economically dynamic markets that we believe have great growth potential for K-12 after-school education. As of August 31, 2019, we had 54 learning centers, including 44 in Shanghai and 10 in other cities. Besides the solid growth of our student base and the healthy development of our learning centers, we have made encouraging strides across our other interest-oriented educational programs. During the second quarter, Four Seasons Education's teams achieved outstanding performances in various Sudoku and Bridge matches, including winning top awards in national activities. A special note for this year, we launched our first Bridge summer camp where students enjoyed learning the history and technique of bridge cards. All these interest-oriented activities illustrate that we are not only an excellent tutoring service provider for students' academic improvement, but also an attractive and recognized community for students to develop their interest in various logical thinking games with friends. Furthermore, our math learning program also started its in-school collaborations with multiple interest-oriented educational projects on track while leveraging our strength in math tuition to nurture students' enthusiasm for study and to substantiate their learning experience. As we mentioned, fiscal 2019 was a year of transformation for the company where we proactively adjusted our business to adapt to the new regulatory environment and evolving market demands. Our efforts are bearing fruit in fiscal 2020, especially our outstanding second quarter results demonstrated the success of our strategic adjustments. We believe we have gained a trajectory of healthy development following a stage of transformation. With our extensive educational capability and successful operating experience, we will focus on solidifying our strength and its advantages in Shanghai and other cities where we have already established our presence. Meanwhile, we will remain prudent and diligent in our expansion plan with the goal of maintaining quality growth. More importantly, we are always dedicated to bringing diversified educational content and an enriching learning experience to students of different ages. Now let's move on to the financial results. First, I would like to emphasize a few financial highlights for the quarter in Chinese, which will also be introduced later in English. Our robust second quarter result is a clear testament to our strategy of providing comprehensive education after-school for K-12 students with an extensive and a variety of course offerings. We reported excellent total enrollment growth while carrying the momentum of diversification with an increasing number of enrollments in our non-math courses and middle school programs. Bolstered by the enormous market demand for our high-quality courses, our revenue growth reached 37.9% year-over-year in the second quarter, exceeding the high end of our guidance range. Our learning center network optimization program in previous quarters led to substantial expansion in gross margin, which was up 282 basis points to 55.1% in the second quarter compared to the year-ago period. Coupled with our efficient operational cost control, we're thrilled to deliver strong operating income and net profit, which grew 234.9% and 217.8% year-over-year, with operating margin and net margin up 22.0% and 15.8%, respectively, for the quarter. Our improving operational performance demonstrates the effective execution of our business model and the strategic transformation. We stayed true to our mission to unlock students' intellectual potential through a high-quality and effective education while bringing long-term value to our shareholders. Now I'd like to walk you through more details on our second quarter fiscal 2020 financial results. Revenue increased by 37.9% to RMB128.8 million for the second quarter of fiscal year 2020 from RMB93.4 million in the same period of last year, primarily attributable to the healthy ramp-up results of new learning centers that the company opened during fiscal 2019 and the increase in student enrollments as a result of the expanded course offerings with higher diversification. The cost of revenue increased by 29.8% to RMB57.9 million for the second quarter of fiscal year 2020 from RMB44.6 million in the same period of last year, primarily due to the increase in faculty staff costs as well as learning centers' rental, utilities, and maintenance costs. Gross profit increased by 45.3% to RMB71.0 million for the second quarter of fiscal 2020 from RMB48.8 million in the same period of last year. General and administrative expenses increased by 1.8% to RMB32.6 million for the second quarter of fiscal 2020 from RMB32.0 million in the same period of last year. Sales and marketing expenses increased by 20.4% to RMB10 million for the second quarter of fiscal year 2020 from RMB8.3 million in the same period of last year, primarily due to increased advertising expenses. Operating income increased by 234.9% to RMB28.3 million for the second quarter of fiscal year 2020 from RMB8.5 million in the same period of last year. Adjusted operating income, which excludes share-based compensation expenses, increased by 115.3% to RMB35.7 million for the second quarter of fiscal year 2020 from RMB16.6 million in the same period of last year. Subsidy income was RMB24.0 thousand for the second quarter of fiscal year 2020, compared with RMB3.4 million in the same period of last year, primarily due to the subsidy income of unrestricted cash incentives that the company received from the local government authority, the amount of which varies from period to period. Interest income net was RMB1.5 million for the second quarter of fiscal year 2020, compared with RMB1.9 million in the same period of last year. Other expenses net was RMB0.3 million for the second quarter of fiscal year 2020 compared with RMB1.2 million in the same period of last year, primarily due to fair value changes and foreign exchange fluctuations of investments. Net income increased by 217.8% to RMB20.3 million during the second quarter of fiscal year 2020 compared with RMB6.4 million in the same period of last year. Adjusted net income increased by 70.9% to RMB26.9 million compared with RMB15.7 million in the same period of last year. Basic and diluted income per ADS attributable to ordinary shareholders for the second quarter of fiscal year 2020 were RMB0.40 and RMB0.39 compared with RMB0.14 and RMB0.13, respectively, for the same period of last year. Non-GAAP basic and diluted net income per ADS attributable to ordinary shareholders for the second quarter of fiscal year 2020 was RMB0.53 and RMB0.52 compared with RMB0.33 and RMB0.31, respectively, for the same period of last year. Cash and cash equivalents as of August 31, 2019, amounted to RMB516.3 million, an increase of 17.5% compared with RMB439.6 million as of February 28, 2019. To be mindful of the length of our earnings call, for the first six months of fiscal 2020 financial results, I will encourage listeners to refer to our earnings press release for further details. Looking forward to the third quarter of fiscal 2020, the company expects to generate revenue in the range of RMB100.3 million to RMB104.8 million, representing year-over-year growth of approximately 10% to 15%. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of market and operating conditions and customer demand, which are all subject to change. This concludes my portion of prepared remarks. We will now open the call for questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. Our first question comes from Huang Zao of Guangzhou Securities. Please go ahead.

I'm from Guangzhou Securities. First, I want to congratulate the company for a solid performance during the past quarter. I have two questions. I hope you can kindly explain. First, I have noticed that there is a robust increase in student enrollments during the second quarter. Part of the reason was the change in the tuition fee collection schedule. I wonder, besides policy reasons, what the organic growth of student enrollments was due to, like class diversification and recruiting? And how about the average tuition fee? And the second question is, during the second quarter there were two new study centers. I wonder what the future plan for new study centers geographically and at what pace? And the third question is, according to the guidance of the third quarter, the growth of revenue is 10% to 15% year-over-year. So it's a little slower compared to the first half of the year and second quarter. Is there any particular reason? Thank you.

Yes. Let me answer the question. To the first question, yes, part of the reason is due to the change of the fee collection schedule. However, we are not able to disclose the precise increase. If we exclude those, the actual growth would definitely be lower than 90%. You can reach out to investor relations, and we can schedule a separate call, and maybe I can give you a rough range after our internal calculation to exclude those factors that result from the policy change. As for your question on average tuition, yes, in the summer, we increased the portion of small class sizes, and for our small classes, we've had higher hourly rates. That's also part of the reason why our revenue increased robustly in the summer season, which coincides with our fiscal quarter. So the revenue increase is attributable to the actual enrollment change and the tuition adjustment. To your second question regarding new study centers, we mentioned our two new study centers, right? We opened one new study center in Chongqing and one in Shenzhen. Both cities are important economic hubs in China with large market potential. We opened our first center in Chongqing roughly one year ago, and we already have seen very strong results from our Chongqing operation. We decided that we are ready to open the second center there. Our program and our brand are well-received. Shenzhen is an important market, and this will be one of our top priority cities in our expansion plan outside Shanghai. We have a dedicated team to develop business in Shenzhen. Hopefully, we will see strong revenue growth and contribution from that center, but since it is relatively new, we don't have any operations there yet. Regarding your third question about revenue guidance, yes, we estimate that the third quarter will not be as strong as the second quarter based on our current estimates, but as you know, our third quarter concludes in November. We want to be as conservative as possible with our guidance for the time being, which is part of the reason why we provided a conservative estimate.

Okay. Thank you.

This concludes our question-and-answer session. I would like to hand the call back to the company for their closing remarks. Thank you, Olivia.

Thank you once again for joining us today. If you have further questions, please feel free to contact Four Seasons Investor Relations through the contact information provided on our website.

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