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TARENA INTERNATIONAL INC. (TEDU) Q2 2022 Earnings Call Transcript

TARENA INTERNATIONAL INC.  (NASDAQ: TEDU) Q2 2022 earnings call dated Aug. 16, 2022

Corporate Participants:

Sylvia Yang — Investor Relations Manager

Ying Sun — Chief Executive Officer

Ping Wei — Chief Financial Officer

Analysts:

Unidentified Participant — — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter of 2022 Tarena International, Inc. Earnings Conference Call. [Operator Instructions] I must advise you that conference is being recorded today, August, the 16th 2022.

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

Sylvia Yang — Investor Relations Manager

Thank you, operator. Hello, everyone, and welcome to Tarena’s earnings conference call for the second 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 Ms. Ping Wei, our CFO, who will take you through the company’s operational and financial results for the second quarter of 2022 and give revenue guidance for the third quarter of 2022. After their prepared remarks, Nancy and Ms. Wei 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 thanks, everyone, for joining us today.

[Foreign Speech]

I am pleased to announce that in the second quarter of 2022, both of our businesses continue to progress soundly on a trajectory of sustainable growth, and we achieved an operating margin of 7.4%. We have generated a net profit from operations for two consecutive quarters, which represents a major turnaround from the same quarter of last year when we were incurring losses.

The group’s gross profit margin reached 58.0%, which was 7.4 percentage points higher than the same quarter of last year. The adult professional education business maintained stable growth and the gross profit margin reached 17.5%. With a healthy growth of our childhood and adolescent quality education business, its gross profit margin also reached a record high of 47.1% in this quarter.

[Foreign Speech]

Our total net revenues in the second quarter of this year reached RMB649 million, higher than the revenue guidance we provided last quarter and represented 11.4% year-over-year increase from RMB582 million in the same period of 2021. Our childhood and adolescent quality education business achieved a solid growth of 19.6% compared with the same period of last year, and the adult professional education business grew at a steady pace, achieving a growth of 3.3%.

[Foreign Speech]

While the outbreak of COVID-19 in the second quarter in Beijing, Shanghai, and other cities brought a certain degree of challenge for our business growth, with our long term commitment to the integration of online and offline services value system, as well as the product strategy honed throughout the whole lifecycle of our customers, our net operational cash flow turned positive compared to the same period of last year, reaching RMB19.35 million by the end of the second quarter of 2022. The cash balance remained solid, reaching RMB422 million.

[Foreign Speech]

In terms of cost control by optimizing business management process, improving operational efficiency and implementing effective spending control, we achieved sizeable improvement in our cost efficiency. In the second quarter of 2022, the company’s cost of revenue decreased by 5.4% and gross profit reached RMB377 million, an increase of 27.9% compared with the same period of last year. At the same time, we generated net profit of RMB47.92 million in the quarter while for the same period of the last year. We were still having operational losses, thanks to our strict expense control measures.

[Foreign Speech]

Next, let me walk you through our childhood and adolescent quality education businesses.

[Foreign Speech]

Net revenue from the childhood and adolescent quality education was RMB346 million in the quarter, up 19.6 percentage points from RMB289 million in the second quarter of 2021, accounting for 53.4% of our total business revenue. Enrollment increased 25.9% to 176,500 in the second quarter of 2022 from 140,200 in the same period of 2021. In the second quarter of 2022, with steady growth of our revenue and effective cost control, our gross profit in the second quarter increased by 66.5% year-on-year and our gross profit margin increased by 13.3 percentage points year-on-year to 47.1%.

[Foreign Speech]

In terms of customer acquisition, the number of renewal students increased by 81.6% this quarter compared with the same period of last year. The number of students acquired by word-of-mouth, referral and renewal students, accounted for 79.9% of our fee-paying students in the second quarter of 2022, up by 14.9 percentage points from 65.0% in the second quarter of 2021.

The total number of our fee-paying enrollments in this quarter was 43,500, up by 33.8% from 32,500 in the second quarter of 2021. This indicates that the high teaching quality and good learning results of our childhood and adolescent quality education have started to pay off, rewarding us with strong word-of-mouth referral and repeat student enrollment growth. 78.8% of the students who have enrolled for more than one year have renewed their fees.

[Foreign Speech]

In terms of the operation of our centers, we continue to focus on improving the center operation efficiency, thus, optimizing the operation cost of centers and expanding the single-center capacity. In the second quarter of 2022, the total number of centers providing the childhood and adolescent quality education business decreased from 235 at the end of the second quarter of 2021 to 227 at the end of the second quarter of 2022.

Meanwhile, the number of students enrolled per center increased from 595 last year to 767 in the second quarter of 2022. In the second quarter, average revenue per center rose to 22.8% from about RMB1.23 million last year to about RMB1.51 million in the same period of 2022.

[Foreign Speech]

Next, moving on to our adult IT professional education business.

[Foreign Speech]

Optimizing content quality and course system, reducing costs and improving operational efficiency and effectiveness is the consistent goal and focus of our adult professional IT education. In the second quarter of 2022, although offline courses were suspended temporarily in some of our urban centers due to the resurgence of the pandemic, our courses were delivered with high quality, thanks to our stable and mature online course delivery system.

Simultaneously, since 2022, we have adhered to the lifelong learning product strategy and launched a broad selection of courses for students’ lifelong learning journey. To that end, during this quarter, we reformed and updated our short-term courses like CIB [Phonetic] course, and our tech industry certificate courses such as Red Hat and Huawei, to encourage students to stay with us longer and sign up for more courses.

This combination of high-quality education product and excellent delivery services enabled us to achieve net business revenue of RMB303 million in the second quarter of 2022, up 3.3% from RMB293 million in the same period of 2021. Gross profit of adult professional education business in the second quarter was RMB213 million, up 8.7% from RMB196 million in the second quarter of 2021. With the development trend of seeking progress while maintaining stability, the gross profit margin of our business increased to 70.5%.

[Foreign Speech]

Throughout the quarter, we continued to strengthen the management and control of costs and operating expenses. And the total costs and expenses for our adult professional education business decreased by 15.6% compared to the same period in 2021.

By optimizing the online customer acquisition channels and enhancing the lead conversion of the admission consultants, our customer acquisition efficiency has improved and the spending in customer acquisition decreased by 13.2% as compared with the same period of last year. At the same time, the number of centers was optimized to 98 by the end of the second quarter in 2022. The average single center revenue increased by 2.3% from about RMB3.0 million in the second quarter of 2021 to about RMB3.07 million in the second quarter of 2022.

[Foreign Speech]

Despite a challenging macro environment in the second quarter partially due to the COVID-19 pandemic, with the continuous improvement in the quality of our online courses and services, we continue to receive favorable employer feedback and achieved good results from our students. The employment rate of our students within six months after graduation was 97 this quarter.

[Foreign Speech]

That concludes my review of the company’s operations for the second quarter of 2022.

[Foreign Speech]

As you have learned from the press release this afternoon, the Board of Directors has appointed Ms. Wei Ping as the new CFO of the company. On behalf of Tarena, I would like to welcome Miss Wei Ping to join us. We believe that with her rich experience and professional ability in the field of education and Internet, Ping will help the company meet new milestones. At the same time, we thank Mr. Kelvin Wing Kee Lau for his dedication as CFO over the past two years.

[Foreign Speech]

Next, I will turn the call to Ping to walk you through the financials of the second quarter of 2022.

Ping Wei — Chief Financial Officer

Thank you, Nancy, and hello, everyone. Now let me walk you through some of the financial highlights of this quarter. Please also refer to the press release for more information.

For the second quarter of 2022, the company recorded operating income of RMB48 million or $7.2 million, compared to operating loss of RMB90.7 million in the same period of 2021. Non-GAAP operating income, which excluded share-based compensation expenses, was RMB49.2 million or $7.3 million in the second quarter of 2022, compared to non-GAAP operating loss of RMB86.6 million in the same period of 2021. This was achieved by a combination of healthy growth of total net revenues, which was 11.4% of increase to RMB648.8 million or $96.9 million in the quarter from RMB582.3 million in the same period of last year, and well executed cost controls during this quarter. Due to this measures, cost of revenues decreased by 5.4% to RMB272.3 million, or $40.7 million in the second quarter of 2022 from RMB287.9 million in the same quarter last year.

Furthermore, total operating expenses decreased by 14.7% to RMB328.5 million or $49 million in the second quarter of 2022 from RMB385.1 million in the same period of 2021. The main contributors of the cost and expense reductions include; firstly, closing of low-performing centers and optimizing headcount to improve efficiency. As a result, as Nancy mentioned earlier, our optimized learning centers for both childhood and adolescent quality education and adult professional education businesses, have decreased to 227 and 98 centers, respectively, and our headcount decreased by 11.8%.

Secondly, optimizing spending on marketing and sales and keeping our focus to operational excellency, which is, through focusing on quality of content, delivery and services, we continue to generate more word-of-mouth referral enrollment and higher lifetime value of our students. And finally, improved the efficiency and streamlined OMO strategy, further helped with overall operational efficiency, resulting in lower general and administrative expenses. While a one-time provision for the expected settlement of a cost action partially resulted in an increase in G&A expense in the second quarter, we expect G&A to stay at a low level in next few quarters.

As a result of the foregoing, net income was RMB47.9 million, or $7.2 million in the second quarter of 2022, compared to net loss of RMB76.7 million in the same period of 2021. Non-GAAP net income, which excluded share-based compensation expenses was RMB49.1 million, or $7.3 million in the second quarter of 2022, compared to non-GAAP net loss of RMB72.5 million in the same period last year.

Now on EPS side. Basic income per ADS was RMB4.36, or $0.65 in the second quarter of 2022, compared to loss per ADS of RMB6.97 in the second quarter of 2021. Diluted income per ADS was RMB4.29, or $0.64 in the second quarter of 2022, compared to loss per ADS of RMB6.97 in the second quarter last year.

As of June 30, 2022, the total balance of cash, equivalents and time deposits increased by RMB9.2 million to RMB425.6 million, or $63.5 million. The increase was mainly from net cash inflow from operating activities in the second quarter of this year of RMB19.4 million, or $2.9 million. Capital expenditures in the second quarter was RMB8.9 million, or $1.3 million, mainly from purchasing of office equipment and payment to renovate teaching centers. Share repurchase also contributed to the cash outflow in the quarter.

And this concludes my financial highlights. Now, Nancy will share with you our business outlook for the second half of 2022 and give revenue guidance for next quarter. Nancy, please?

Ying Sun — Chief Executive Officer

[Foreign Speech]

Thanks for Miss Wei’s summary of the financial performance for the second quarter of 2022.

Now turning to the company’s outlook for the next quarter.

[Foreign Speech]

In the second half of ’22, we will continue to optimize our OMO-based customer acquisition and product delivery system.

[Technical Issues] Students with high-quality courses and better services to further enhance our competitiveness and earn our students trust and confidence, generating more word-of-mouth and referral-based growth. At the same time, we will continue to improve operational efficiency so as to maintain healthy and sustained profitability in spite of potential challenges of the future pandemic outbreak.

In terms of financial guidance, based on the company’s current estimates, our total net revenues for the third quarter of 2022 are expected to be between RMB620 million and RMB650 million, representing a year-over-year increase of 0.8% to 5.7% from net revenues for the third quarter of 2021. The company’s guidance reflects a preliminary estimate of our current market environment and company operating conditions based on current market conditions, which may change.

[Foreign Speech]

Above is our outlook for the future and the revenue guidance. I would like to take this opportunity to thank you again for your following and support. We are now ready for questions

Questions and Answers:

Operator

Thank you. [Operator Instructions] Okay. We have the first question coming from the line of CT Qiu [Phonetic] from 3Q [Phonetic]. Please ask your question.

Unidentified Participant — — Analyst

[Foreign Speech]

So the first question is, first of all, let me say congratulations to the company to achieve continued profitability in the second quarter of 2022. Especially during the pandemic period, the company can achieve continued revenue growth and steady profit. So, we were wondering what will be the competitive edge of your company now?

My second part of the question is, we observed that the policy environment is quite favorable to our business. So the future of our adult professional education business is very promising. So, what is your opinion on the competition landscape?

Sylvia Yang — Investor Relations Manager

[Foreign Speech]

I will have our CEO, Nancy, to answer this question.

Ying Sun — Chief Executive Officer

Thank you so much for the questions. First of all, I’m Nancy. And let me take the first part of your question.

[Foreign Speech]

Over the past 20 years, we have gained very rich experience in terms of delivering training for adult IT professional education, and also we emphasize on our OMO online merging offline education. We have very good customer acquisition experience. We have very good delivery of our products, as well as the good design of our product-based interaction and also we have very good R&D skill and know-how. And in terms of multichannel customer acquisition, we’re also very good at that as well. And we also are very good at our product design, product system iteration and we are very good at our delivery.

So, those are our competitive edge. To be more specific, we are very good at word-of-mouth and renewal students when it comes to our childhood and adolescent quality education. And we are very good at job applications for our adult professional education business. Our graduates from our adult professional education business, all gain — all achieved good jobs. So, those are our competitive edge for our two businesses and that is my answer for your first part of the question

[Foreign Speech]

Let me take the second part of your question. Actually, we’ve enjoyed very favorable policy support from the government in China, which is really conducive to our professional education, which is also very conducive to the overall sound growth of this professional education industry. We are very good at customer acquisition. Also about product delivery at the back end, we were also very happy with our center operation. And we are also very good at product R&D. So those actually serves a very stable growth for our business.

In terms of our adult professional education, we not only have 2C business, but also 2B business, working with universities. So in terms of our 2C side, our enrollment actually contributed to more than 68% of our total revenue. So, those are our competitive edge and that is why we are very satisfied with our — and very promising about our future.

[Foreign Speech]

So that concludes my answer to both of your questions. Thank you very much again for raising that question.

Unidentified Participant — — Analyst

[Foreign Speech], Nancy.

Operator

[Operator Instructions] We do not have any other questions at the moment. Presenters, please continue.

Sylvia Yang — Investor Relations Manager

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]

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