Four Seasons Education (Cayman) Inc. Q4 FY2020 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for the Four Seasons Education's Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in 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 fourth quarter and 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. Yi Zuo, our Chief Executive Officer, will start the call by providing an overview of the company performance highlights for the quarter. Ms. Xun Wang, the company's Vice President of Finance, 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 these 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 CEO, Ms. Zuo. Please go ahead.

Thank you, Olivia, and hello, everyone. Before providing an overview of our fourth quarter performance, we would like to extend our condolences to the families of those individuals who passed away due to COVID-19. We are also profoundly grateful for the medical professionals, community staff and all those people who have fought against the coronavirus at the frontlines. I also want to thank all of our employees for their hard work and dedication that allowed us to overcome numerous challenges during this unprecedented time. In the fourth quarter of fiscal 2020, we achieved a revenue growth of 10% year-over-year, a solid performance in light of the COVID-19 epidemic in China. After the outbreak of coronavirus, we immediately took precautionary measures to protect our students and our employees. In response to the government's containment, we swiftly transitioned our offline courses of all academic subjects to online classes, ensuring our students were able to take courses online. Our quick transition to online classes has allowed us to successfully retain the majority of our students who registered for our offline courses to study with us online. Concurrent with the course migration, we also provided a series of supplemental online services such as course replay, abstract question-and-answer sessions, and homework review, all in an effort to facilitate a smooth-use experience for students and parents. Additionally, in collaboration with East China Normal University Press, we have officially launched One Lesson One Exercise online courses for primary school students during the fourth quarter. One Lesson One Exercise is a well-known and widely used reference book series. Our partnership with East China Normal University Press on the book series corresponding online courses is a clear testament to our curriculum development capability. These class years will also help us enhance our brand awareness to a broader student audience. Besides our online classes, in the fourth quarter, our technology team has also established a more integrated operational system that's best organized and streamlines our resources of teaching staff, learning center operations, courseware production and technology. Such consolidated operations emphasize the efficiency in our course development, fast monitoring and internal training. Thus, it sets the foundation for an advanced online-merging-offline or OMO model. Presently, we expect to reopen the majority of the offline facilities in June following the guidance from the government. Looking ahead, we plan to continue providing a considerable proportion of courses online when our offline learning centers reopen and resume course delivery. Our online education provides students optimized learning experiences and improved study results with unlimited course replay and diversified supplementary services. In turn, it will significantly broaden our outreach to the market and effectively expand our student base. As a critical front of our OMO strategy, we will also increase our investment in our infrastructure, technology, and content development. Overall, the COVID-19 epidemic presented challenges, as well as the very moment where we have to accelerate the digital transformation of operations to embrace online education. During this epidemic period, we have completely transitioned our academic offline courses delivery and realized seamless online operations. These efficient operation adjustments allowed for a more cohesive online and offline model, which would definitely benefit our business development in the long run. Faced with extraordinary challenges brought by the outbreak of COVID-19 in the last quarter of 2020, we successfully maintained the majority of our student base, sustained the top-line growth, and expanded gross margin compared with the fourth quarter last year. Our resilient performances in the fourth quarter helped us conclude fiscal year 2020 with solid top-line growth of 16% year-over-year. Such results demonstrate the strength of our education content, teaching capabilities, courseware and operations, and more importantly, our strong brand image. Through our strengthening online-merging-offline model, we remain dedicated to providing diversified course offerings to K-12 student groups with superior learning experience to improve academic performance and cultivate interest in learning. With that, I’d now turn the call over to our Vice President of Finance, Ms. Xun Wang, who will discuss key financial results.

Thank you, Olivia, and hello, everyone. In the full fiscal year, we promptly adjusted our operations in response to the COVID-19 epidemic and efficiently maintained our student base. In this quarter, our new enrollments decreased by 48% year-over-year because we started our course registration ahead of time, considering the early Chinese New Year holiday in 2020. Consequently, a considerable number of enrollments were recorded during the third quarter. The COVID-19 outbreak also impacted our enrollments for the quarter. As a result, total enrollments of the second half of fiscal year 2020 was relatively flat compared with the year-ago period. Despite the challenging situation due to COVID-19, we still achieved about 10% year-over-year revenue growth to RMB71.0 million for the fourth quarter. We're continuing our stringent cost control and operational optimization to improve our profitability. Although we will face uncertainties as the epidemic situations develop, we are confident in the long-term potential of the after-school education market in China. With our ever-strengthening online facility in place and a more integrated OMO system, we’re able to attract a wider and larger student demographic to study with us. Last but not least, our strong cash position and healthy balance sheet enables us to upgrade our online and offline facilities and make appropriate investments with sufficient capital support. Now, I'd like to walk you through further details of our fourth quarter of fiscal year 2020 financial results. Revenue increased by 9.8% to RMB71.1 million for the fourth quarter of fiscal year 2020 from RMB64.7 million in the same period of last year, primarily attributable to the healthy ramp-up of new learning centers opened by the company during fiscal year 2019 and expanded course offerings. Cost of revenue increased by only 0.6% to RMB46.3 million for the fourth quarter of fiscal year 2020 from RMB46.0 million in the same period of last year. Gross profit increased by 32.4% to RMB24.8 million for the fourth quarter of fiscal year 2020 from RMB18.7 million in the same period of last year. General and administrative expenses increased by 1.5% to RMB39.8 million for the fourth quarter of fiscal year 2020 from RMB39.2 million in the same period of last year. Impairment loss on intangible assets and goodwill was RMB145.4 million for the fourth quarter of fiscal year 2020, compared to RMB0.6 million in the same period of last year, mainly due to the decline in a reporting unit's fair value. Sales and marketing expenses decreased by 15.0% to RMB7.7 million for the fourth quarter of fiscal year 2020 from RMB9.1 million in the same period of last year, primarily attributable to the decrease of advertising due to the impact of COVID-19. Operating loss was RMB168.2 million for the fourth quarter of fiscal year 2020, compared with RMB30.1 million in the same period of last year. Adjusted operating loss, which is calculated as operating loss excluding share-based compensation expenses and impairment loss on intangible assets and goodwill, was RMB15.1 million for the fourth quarter of fiscal year 2020, compared with RMB20.4 million in the same period of last year. Other income, net was RMB4.9 million for the fourth quarter of fiscal year 2020, compared with RMB2.7 million in the same period of last year, primarily due to investment fair value changes. Income tax benefit was RMB15.7 million for the fourth quarter of fiscal year 2020, compared to RMB8.1 million in the same period of last year, mainly from the tax effect of intangible assets impairment. Net loss was RMB145.4 million during the fourth quarter of fiscal year 2020, compared with RMB18.5 million in the same period of last year. Adjusted net loss, which is calculated as net loss excluding share-based compensation expenses, fair value change of the company's investments and impairment loss on intangible assets and goodwill, net of tax effect, was RMB4.7 million compared with RMB11.7 million in the same period of last year. Basic and diluted net loss per ADS attributable to ordinary shareholders for the fourth quarter of fiscal year 2020 were both RMB3.11 compared with both RMB0.36 for the same period of last year. Adjusted basic and diluted net loss per ADS attributable to ordinary shareholders for the fourth quarter of fiscal year 2020 were both RMB0.07 compared with both RMB0.22 for the same period of last year. Cash and cash equivalents. As of February 29, 2020, the company had cash and cash equivalents of RMB404.7 million compared with RMB439.6 million as of February 28, 2019. Looking forward, for the first quarter of fiscal 2021, the company expects to generate revenue in the range of RMB55.7 million to RMB60 million. The above outlook is based on current market conditions and reflects the company's preliminary estimate of the market and operation conditions and customer demand, which are all subject to change, particularly in consideration of uncertainties related to the COVID-19 outbreak, among others. This concludes my portion of prepared remarks. We will now open the call to questions. Operator, please go ahead.

The first question is from Joy Wei from 86Research. Please proceed.

My question is regarding the structural change of the after-school tutoring market. Could management share your views on the development of the online education market? Do you think online education will cannibalize the offline market? And what's your strategy to conform to this trend? Thank you.

First of all, let me clarify. What do you mean by the change of the structure of the tutoring market? You mean the breakdown between online and offline?

Yes, because the online education market is growing very quickly, so it's like taking market share from the whole market.

Online tutoring has been very, very fast for a year, especially for the past two years, and then COVID-19 definitely accelerated such growth. But we believe the quality is still very different between online and offline. Taking COVID-19 as an example, many parents realized that the effectiveness of offline is somewhat better, probably say, or at least very different from online. I think it's definitely the online portion will catch up, but offline has its own strategy. In our view, we believe the core essence of education is the content, the faculty, which lead to the results of the tutoring. Online or offline is just a method. That is why we believe that this whole COVID-19 forced us to transform into an online model, and we adapted to this change very quickly. For us, it's a challenge and an opportunity as well. As we pointed out earlier, even after you resume the offline facility delivery of courseware, we will still maintain a consistent portion of our delivery online. Going forward, online will be part of our business model too. We believe online-merge-offline is what we will excel at because we have the best content and the best faculty. Online and offline are just two means to reach students.

And I have a follow-up question on your student acquisition strategy. So what will you do in the spring and also the summer vacation period to acquire these students considering that the spring semester is shortened?

Yes. As you know, the tutoring business is basically in most cases once a week, so it doesn't matter that the summer break is shortened in a way. For us, we heavily rely on word-of-mouth referrals. Four Seasons has already established its brand in Shanghai. Historically, and which is still the case, we have spent very little on marketing. All the students came to us because of word-of-mouth referrals and because of our brand, which is a testament to our teaching quality. So going forward, I think it will still be the main channel of our student acquisition, which is our brand awareness and word-of-mouth referrals. But we also started to invest more in marketing and advertising. Previously we spent almost nothing, but we are going to and we are doing that; we will cautiously increase our spending in advertising and other marketing methods that will help us acquire students effectively.

Could you remind us of the referral rate of the enrollment and also probably also retention rate?

Sorry, we don't disclose that publicly. You can schedule a follow-up call with our IR, and we can do it later. But we don't disclose those two metrics publicly for now.

As there are no further questions, I would like to hand the call back to the company for any closing remarks.

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 or the Piacente Group Investor Relations.

This concludes this conference call. You may now disconnect your line. Thank you.