TARENA INTERNATIONAL INC. (TEDU) Q1 2022 Earnings Call Transcript

TARENA INTERNATIONAL INC.  (NASDAQ: TEDU) Q1 2022 earnings call dated May. 17, 2022

Corporate Participants:

Sylvia Yang — Manager-Investor Relations

Ying Sun — Chief Executive Officer

Kelvin Wing Kee Lau — Chief Financial Officer

Analysts:

David — — Analyst

Sam — — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter of 2022 Tarena International Incorporation Earnings Conference Call. I must advise you that this conference is being recorded today, May 17, 2022.

I would now like to hand the conference over to your first speaker today, Ms. Sylvia Yang, the Investor Relationship Manager. Thank you. Please go ahead.

Sylvia Yang — Manager-Investor Relations

Thank you, operator. Hello, everyone, and welcome to Tarena’s earnings conference call for the first quarter of 2022. The company’s earnings results were released earlier today and are available on our IR website, ir.tedu.cn as well as on newswire services.

Today, you will hear from Ms. Nancy Ying Sun, our CEO; and Mr. Kelvin Lau, our CFO, who will take you through the company’s operational and financial results for the first quarter of 2022 and give revenue guidance for the second quarter of 2022. After their prepared remarks, Nancy and Kelvin 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 at ir.tedu.cn. Finally, as a reminder, this conference call is being recorded. In addition, a webcast of this conference call is available on Tarena’s Investor Relations website.

I will now turn the call over to Ms. Nancy Ying Sun, the CEO of Tarena.

Ying Sun — Chief Executive Officer

[Foreign Speech] Thank you, Sylvia. And I want to thank the attention from all the investors, and I want to thank everyone for joining us today.

[Foreign Speech] I am delighted to announce the result of Tarena for the first quarter of 2022. In the first quarter of 2022, we ended our losses and achieved a net income. This marked the beginning of a healthy operating trajectory of our business. Our net income reached RMB27.1 million, operating income reached RMB28.6 million, and operating margin reached 4.6%. Even under the impact of seasonal factors of the Chinese New Year, our cash balance remained relatively well preserved at RMB416.4 million. Looking back at the first quarter of 2021, we had net loss of RMB121.9 million, operating loss of RMB129.5 million and operating margin of minus 24.3%.

[Foreign Speech] We were able to accomplish these operational results, mainly because we have been adopting and executing our sound continuous strategies effectively and efficiently. Both Adult Professional Education and Childhood and Adolescent Quality Education businesses achieved revenue growth and continued cost reduction in the first quarter of 2022.

[Foreign Speech] On the one hand, our net revenues in the first quarter of this year was RMB623.5 million, which was higher than the revenue guidance we gave in the previous quarter and was 16.8% higher than the net revenues of RMB533.8 million in the same period of 2021. Among them, we are glad to see that the Adult Professional Education business renewed year-on-year growth of 5.5%. The Childhood and Adolescent Quality Education business has seen positive year-over-year growth for seven consecutive quarters since the outbreak of the pandemic with a 27.2% year-over-year increase in the first quarter of 2022. The increase in net revenues led to the increment of productivity per capita by 22.1% from about RMB52,000 in the same period last year to about RMB64,000 in the first quarter of 2022.

[Foreign Speech] On the other hand, our long-term adherence to the strategies of improving operational efficiency and reducing costs has enabled us to reduce our cost of revenues and operating expenses by 10.3% in the first quarter of 2022 compared to the same period of 2021.

[Foreign Speech] In the first quarter of 2022, our gross profit reached RMB358.9 million, an increase of 43.6% compared to RMB249.9 million in the same period of last year, with gross margin increased by 10.8 percentage points to 57.6%.

[Foreign Speech] Next, I want to introduce the performance of our Adult Professional Education business.

[Foreign Speech] It is always our business strategy for Adult Professional Education business to optimize business structure, reduce costs and uplift operational efficiency and capacity. The number of students’ enrollments in the first quarter of 2022 was 29,300, down 5.5% from 31,000 in the same period of 2021. Despite of the decrease in the number of student enrollments, net revenue reached RMB269.6 million in the first quarter of 2022, up 5.5% from RMB255.5 million in the same period of 2021. This was mainly attributable to the adoption of our product strategy of exploring the whole life cycle of users and adding more short-term courses, which attracted students to make repeated enrollments in different courses and thus increase our revenue.

[Foreign Speech] We continue to make great progress in managing and controlling the cost of revenues and operating expenses, which were 15.0% lower than that in the same period in 2021.

[Foreign Speech] The gross profit of Adult Professional Education business in the first quarter of 2022 was RMB184.2 million, up 20.8% from RMB152.5 million in the same period of 2021. The gross margin was 68.3%, up 8.6 percentage points from 59.7% in the same period of 2021. Meanwhile, the Adult Professional Education business has achieved operating income for four consecutive quarters.

[Foreign Speech] At the end of the first quarter of 2022, the number of learning centers for Adult Professional Education business increased by a net of three [Phonetic] compared to that at the end of the first quarter of 2021, while the net revenue per learning center also improved effectively, with the average revenue per learning center increasing by 5.5% from approximately RMB2.56 million in the first quarter of 2021 to approximately RMB2.70 million in the first quarter of 2022.

[Foreign Speech] In the first quarter of 2022, the six-month post-graduate job placement rate remained at over 90%. Our long-term, stable tutoring quality and good job placement results have provided strong evidences to demonstrate that our Adult Professional Education business has the ability to deliver high-quality products and services in the market.

[Foreign Speech] Next, I would like to introduce our Childhood and Adolescent Quality Education business.

[Foreign Speech] In the first quarter of 2022, the net revenue from Childhood and Adolescent Quality Education business was RMB353.9 million, up 27.2% compared to RMB278.3 million in the same period of 2021. The number of student enrollments increased from 135,500 in the first quarter of 2021 to 173,100 in the first quarter of 2022, up 27.7%. The number of new contracted students, including new registered students and renewal students was 42,600 in the first quarter of 2022, up 43% from 29,800 in the same period of 2021. Among them, a proportion came from student renewal and word of mouth promotional activities continued to increase, up 9.7 percentage points from 64.7% in the first quarter of 2021 to 74.4% in the first quarter of 2022. The good student satisfaction rate ensured that in the first quarter of 2022, the renewal rate of students who have enrolled for more than one year was over 83.4%.

[Foreign Speech] The number of learning centers for the Childhood and Adolescent Quality Education business decreased by a net of four from 236 at the end of the first quarter of 2021 to 232 at the end of the first quarter of 2022. However, the number of student enrollments per single learning center increased from 574 in the first quarter of 2021 to 737 in the first quarter of 2022. The average net revenue per single learning center increased by 27.7% from about RMB1.18 million in the first quarter of last year to about RMB1.51 million in the first quarter of 2022.

[Foreign Speech] In the first quarter of 2022, with the growth of net revenue by 27.2% year-over-year and the reduction of cost of revenues by 0.9% year-over-year. Gross profit of Childhood and Adolescent Quality Education increased by 79.3% year-over-year, and gross margin reached 49.4%, up 14.4 percentage points year-over-year.

[Foreign Speech] Finally, in review of our operations in the first quarter of 2022, our core competitive advantages are backed by the constant optimization and upgrading of our business procedures and processes, which include our online merge offline customer acquisition model and omnichannel service delivery capability. This ability was tested in the first quarter when we kept the business running smoothly, even with the resurgence of COVID-19 cases emerged in certain areas in China.

[Foreign Speech] Looking ahead, we will continue to focus on the core advantages of adapting or adaptation of the online merge offline model to develop and deliver our comprehensive products, off-line learning center operation capability and customer acquisition capability to continually improve operational efficiency and maintain positive and healthy development.

[Foreign Speech] I want to take this opportunity to thank you all again for your continued attention and support.

[Foreign Speech] So I’d like to turn the call to Kelvin, our CFO, who will share with you the first quarter of 2022 financial highlights. Thanks.

Kelvin Wing Kee Lau — Chief Financial Officer

Thank you, Nancy. Now I would like to take you through the first quarter of 2022 financial highlights. Total net revenues increased by 16.8% to RMB623.5 million in the first quarter of 2022 from RMB533.8 million in the same period of 2021.

Net revenue from Childhood and Adolescent Quality Education business increased by 27.2% to RMB353.9 million in the first quarter of 2022 from RMB278.3 million in the same period of 2021. The increase was primarily due to the increase in student enrollments from 135,500 in the first quarter of 2021 to 173,100 in the same period of 2022.

Net revenue from Adult Professional Education business increased by 5.5% to RMB269.6 million in the first quarter of 2022 from RMB255.5 million in the same period of 2021. The increase was mainly attributable to the increase in certificate revenue, partially offset by a drop in student enrollments from 31,000 in the first quarter of 2021 to 29,300 in the same period of 2022.

Cost of revenue decreased by 6.8% to RMB264.6 million in the first quarter of 2022 from RMB283.8 million in the same period of 2021. The decrease was primarily due to decline in personnel-related costs resulting from decrease in the accrual of performance-based bonus and decrease in depreciation expenses.

Gross profit increased by 43.6% to RMB358.9 million in the first quarter of 2022 from RMB249.9 million in the same period of 2021. Gross margin, which is equal to gross profit divided by net revenues, was 57.6% in the first quarter of 2022 compared to 46.8% in the same period of 2021. The increase in gross margin was primarily attributable to the increase in net revenues and decrease in cost of revenues in both Childhood and Adolescent Quality Education and Adult Professional education businesses.

Total operating expenses decreased by 12.9% to RMB330.3 million in the first quarter of 2022, from RMB379.4 million in the same period of 2021. Total non-GAAP operating expenses, which excluded share-based compensation expenses, decreased by 11.8% to RMB328.9 million in the first quarter of 2022 from RMB372.7 million in the same period of 2021. Total share-based compensation expenses allocated to operating expenses decreased by 79.1% to RMB1.4 million in the first quarter of 2022 from RMB6.7 million in the same period of 2021.

Selling and marketing expenses decreased by 19.3% to RMB172.4 million in the first quarter of 2022, from RMB213.8 million in the same period of 2021. The decrease was mainly due to a decrease in personnel-related costs resulting from the drop in the number of sales staffs and decline in advertising expenses in the first quarter of 2022 as compared to the same period of 2021.

General and administrative expenses decreased slightly by 1.1% to RMB141.6 million in the first quarter of 2022, from RMB143.2 million in the same period of 2021. Research and development expenses decreased by 27.3% to RMB16.3 million in the first quarter of 2022, from RMB22.5 million in the same period of 2021. The decrease was mainly due to decrease in personnel-related expenses in the first quarter of 2022.

Operating income was RMB28.6 million in the first quarter of 2022 compared to operating loss of RMB129.5 million in the same period of 2021. Non-GAAP operating income, which excluded share-based compensation expenses, was RMB30 million in the first quarter of 2022, compared to non-GAAP operating loss of RMB122.6 million in the same period of 2021.

The company recorded an income tax expenses of RMB5.4 million in the first quarter of 2022, compared to income tax benefit of RMB7.4 million in the same period of 2021. The increase in tax expenses was mainly because the company has made profits in the first quarter of 2022.

As a result of the foregoing, net income was RMB27.1 million in the first quarter of 2022, compared to net loss of RMB121.9 million in the same period of 2021. Non-GAAP net income which excluded share-based compensation expenses was RMB28.5 million in the first quarter of 2022, compared to the non-GAAP net loss of RMB115 million in the same period of 2021.

Basic income per ordinary share was RMB0.48 in the first quarter of 2022, compared to loss per ordinary share of RMB2.17 in the first quarter of 2021. Diluted income per ordinary share was RMB0.47 in the first quarter of 2022, compared to loss per ordinary share of RMB2.17 in the first quarter of 2021. Non-GAAP basic income per ordinary share, which excluded share-based compensation expenses, was RMB0.5 in the first quarter of 2022, compared to non-GAAP loss per ordinary share of RMB2.05 in the first quarter of 2021. Non-GAAP diluted income per ordinary share, which excluded share-based compensation expenses, was RMB0.49 in the first quarter of 2022, compared to non-GAAP loss per ordinary share of RMB2.05 in the first quarter of 2021.

Net cash outflow from operating activities in the first quarter of 2022 was RMB18.9 million. Capital expenditures in the first quarter of 2022 was RMB10.6 million.

In terms of financial guidance, based on our current estimates, total net revenues for the second quarter of 2022 are expected to be in the range of RMB600 million and RMB630 million, which represents an increase of 3.1% to 8.2% as compared to the net revenues in the second quarter of 2021, after taking into consideration of — after taking into consideration the seasonal fluctuation factors and the likely continuous 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 as to the 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.

Questions and Answers:

Operator

Thank you management. [Operator Instructions] Our first question comes from Dave [Phonetic]. Please go ahead.

David — — Analyst

[Foreign Speech] First of all, congratulations to Tarena’s outstanding performance in the first quarter, making net gains. And as we all know that normally, the first quarter in China’s market would always be an off-season for the education industry. So what are the breakthroughs? But what were the breakthroughs made by Tarena in this respect?

Ying Sun — Chief Executive Officer

[Foreign Speech] First, thank you very much. Indeed, the first quarter in China market is always an off-season for education business because we have the lunar China New Year happened in January. However, we did make a lot of breakthroughs in terms of business operations. And let me give you two — which can be divided into two categories.

[Foreign Speech] And the first thing is that our gain comes from the decreasing or shall we say, the continuous decreasing of the costs as well as the expenses all the way since last year. That serves as a solid foundation for us to achieve gains.

[Foreign Speech] And to our delight, since Q1 of this year, we have seen a positive growth rate for our Adult Professional Education business as well as our Childhood and Adolescent Quality Education business. And by the way, our Childhood and Adolescent Quality Education business has been increasing for seven consecutive quarters.

[Foreign Speech] By the way, our Adult Professional Education started to increase its income as well as its profit since Q1 of this year. So let me break it down. What is — what would be the reason for the positive growth for our Childhood and Adolescent Quality Education business as well as our Adult Professional Education business. First of all, let’s talk about childhood and adolescents. Actually, the increase and the positive growth rate for our Childhood and Adolescent Quality Education business is attributable to our high-quality products as well as our services, which resulted in high renewal and retention rates. For our Adult Professional Education business, it is also attributable to our long-term digging for the lifetime value of our users, which leads to more repurchase rate and better satisfaction, and that serves as the foundation for so many breakthroughs which has been made for our Adult Professional Education.

[Foreign Speech] So to sum up, all of our breakthroughs and gains are indispensable with the satisfaction rates of our customers and users. So here on behalf of the management, I would like to send our heartfelt appreciation to the continued focus and attention paid by our investors. We know that you guys want us to make more breakthroughs and achieve more gains, and we also hope that we can continue stepping up our efforts to live up to your expectation.

[Foreign Speech] So thank you very much, David, for your question. I hope I answer your question.

Operator

Thank you. There are no questions on the line at a moment. [Operator Instructions] Next question is from Sam [Phonetic]. Please go ahead.

Sam — — Analyst

Hey, good morning, good evening over there in China. Thank you for your presentation. My question is regarding the offer that was made by the founder, maybe a year-and-a-half ago, two years ago. At that point, with coronavirus and the education space in China being uncertain. It seemed like a good deal. It seemed like something the company was interested in. Now that with the hard work of the Tarena team, there’s actually a profit being turned. Is that something you can disclose anything regarding if there is still interest in selling the company taking a price there or now that there’s actually profit and things are moving in the right direction does the team prefer to just continue to build. So I guess just to summarize my question is now that there is a profit, what are the plans for the future with regards to that? Thank you.

[Foreign Speech]

Ying Sun — Chief Executive Officer

[Foreign Speech] All right. This is Nancy. And first of all, let me say thank you for that question. Actually, we think this is a two-part question. And let me first share with you our long-term continued strategy for our businesses. And then I will hand over to Kelvin, our CFO, to take the question on the financial side.

[Foreign Speech] First of all, regarding our two businesses, they are turning profits. They are very profitable. And they are moving very — in a very healthy manner. And we have already figured out the rationale and the logic of how to maintain this momentum, and we know how to improve the income for our Adult Professional Education as well as our Childhood and Adolescent Quality Education business going forward. So we have every confidence to continue the business in the future.

[Foreign Speech] So — and as we all know that the Chinese government have really stepped up their efforts to promote vocational education development in China. So we believe there will be more opportunities for our Adult Professional Education. And we are very confident because there are policy support in the future. Regarding our Childhood and Adolescent Quality Education business, actually, some of this business’ products has been included in the curriculum for some middle school and primary schools in China. So I believe that this will gain more positive feedback for us in the future.

[Foreign Speech] And for the time being, indeed, COVID really has some impacts on our businesses in some regions and areas in China, but those impacts are quite marginal.

[Foreign Speech] Meanwhile, we have our business scattered around all over China, so a small portion of impact will not impact the whole picture of our businesses. And meanwhile, we have this online merge offline model to develop and deliver comprehensive products. So we — there is no issue for us.

[Foreign Speech] So I hope you are happy with my answer regarding the business strategy side. And now over to Kelvin, our CFO, to share with you the financial side.

Kelvin Wing Kee Lau — Chief Financial Officer

Hi, Sam, this is Kelvin. Thanks for the question regarding the productization. What I can say right now is we do not receive any offer regarding productization at this moment. So of course, I think later, if we receive any productization offers, we will make immediate announcement, according to all those rules and recognition issued by SEC on their side. So I can confirm there’s no offer at this moment. Thank you.

[Foreign Speech]

Operator

[Operator Instructions] There are no questions on the line. [Operator Instructions] Since there are no questions from the line at the moment, I’ll pass it back to the management.

Sylvia Yang — Manager-Investor Relations

Thank you, operator. If there are no further questions at present, we would like to conclude by thanking everyone for joining our conference call. We welcome you to reach out to us 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

[Operator Closing Remarks]