TARENA INTERNATIONAL INC. (TEDU) Q3 2022 Earnings Call Transcript

TARENA INTERNATIONAL INC. (NASDAQ: TEDU) Q3 2022 earnings call dated Nov. 30, 2022

Corporate Participants:

Sylvia Yang — Investor Relations Manager

Ying Sun — Chief Executive Officer

Ping Wei — Chief Financial Officer

Analysts:

Giovanni Giulio — Private Investor — Analyst

Unidentified Participant — — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2022 Tarena International, Inc. Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your first speaker today, Sylvia Yang, 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 third 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 third quarter of 2022 and give revenue guidance for the fourth 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 IR — 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]

In the third quarter of 2022, our overall business continued a steady growth with net revenue increasing by 4.6% year-over-year. Our business also remained profitable for the third consecutive quarter, achieving an operating margin of 3.3%, a turnaround from our operating loss in the same period of last year. Our gross profit margin on the Group level reached 55.1%, up 4.2 percentage points year-over-year. Specifically, our IT professional education business remained stable with the gross profit margin of 68.3%.

In addition, our IT-focused supplementary STEAM education business continues to grow at a steady pace and the healthy operations, registering a gross profit margin of 45%. As of the end of the reporting period, we realized the total net profit of RMB103 million in the first three quarters of this year compared with a net loss in the same period of last year.

[Foreign Speech]

Our total net revenues amounted to RMB643 million in the third quarter, coming at the high end of the revenue guidance we provided last quarter. This represents a year-over-year increase of 4.6% from RMB650 million in the third quarter of 2021. Segment-wise, we produced steady revenue growth of 99% year-over-year in IT-focused supplementary STEAM education in the third quarter, while our IT professional education revenues declined 1.7% due to the market economic headwinds.

[Foreign Speech]

With respect to cost control, we continue to optimize our model to enhance operational efficiencies and effectively control expenses. In the third quarter, we further lowered our cost with a year-on-year reduction of 4.3%. Against this backdrop, we achieved a gross profit of RMB354 million in the third quarter and an increase of 13.1% year-over-year. Due to the strict cost and expense control measures that were implemented this year, we realized a net profit again in the third quarter, amounting to RMB27.95 million from a net loss in the same period of last year.

[Foreign Speech]

Next, let me walk you through our IT-focused supplementary STEAM education business.

[Foreign Speech]

In the third quarter of 2022, net revenue from IT-focused supplementary STEAM education was RMB366 million, up 99% from RMB353 million in the third quarter of 2021, accounting for 57% of our total revenue. Enrollment increased by 25.6% from 146,900 in the third quarter of 2021 to 184,500 in the third quarter of 2022, benefiting from our high quality courses and delivery as well as our growing brand influence. Meanwhile, with steady revenue growth and effective cost control at our centers, our gross profit rose by 27.4% year-over-year in the third quarter and our gross profit margin climbed by 6.2 percentage points to 55%.

[Foreign Speech]

On the customer acquisition front, the renewal students increased by 37.6% year-over-year. Meanwhile, students acquired by word-of-mouth referrals and the renewal students accounted for 72.6% of our fee-paying students in the third quarter, up 8.9 percentage points from 63.7% in the third quarter of 2021. Our total number of fee-paying students in the third quarter of 2022 was 40,800 [Phonetic], an increase of 10% from 38,000 in the third quarter of 2021. We believe this growth fully demonstrates that our excellent course and the delivery quality and our students’ learning results in IT-focused supplementary STEAM education had translated into word-of-mouth referrals and an increase in renewal students. Note that the percentage of our renewal students who have enrolled for over a year continue to exceed 78% in the third quarter.

[Foreign Speech]

Regarding the operation of our centers, we continue to optimize operating costs and expand single-center capacity by improving operational efficiency. In the third quarter, the total number of centers providing IT-focused supplementary STEAM education services declined from 238 at the end of the third quarter of 2021 to 222 at the end of third quarter of 2022, a nice reduction of 16 centers. At the same time, the number of students enrolled per center increased from 621 in the third quarter of last year to 820 in the same period of this year. In the third quarter, average revenue per center grew by 15.8% from about RMB1.41 million in 2021 to RMB1.63 million this year.

[Foreign Speech]

Next, moving to our IT professional education business.

[Foreign Speech]

In the third quarter, due to regional COVID-19 flare-ups and the market economic headwinds, we failed to facilitate stable operation by focusing on the quality of our course content delivery system, reducing costs and improving operational effectiveness and efficiency. This initiative was intended to ensure high quality course delivery at a time when business expansion was difficult, while also lowering costs and enhancing efficiencies to ensure profitability.

Although some of our offline centers had to temporarily suspend operations at one point, we were able to achieve high quality course delivery without interruption, thanks to our stable and mature online course delivery system developed through long-time efforts. We also endeavor to meet students’ various [Phonetic] needs in job hunting and career advancements. Supported by this initiative, our students employment rate within six months of graduation was at about 92% in the third quarter of 2022.

[Foreign Speech]

In the third quarter, our net revenue from IT professional education fell slightly from RMB283 million in the third quarter of 2021 to RMB278 million this year. Despite the revenue decline and the macroeconomic uncertainties on the back of our strategy to reduce costs and incurred [Phonetic] efficiencies, the gross profit of IT professional education business rose by 3.1% from RMB184 million in the third quarter of 2021 to RMB190 million in the third quarter of 2022 with the gross profit margin of 68.3%. In addition, as we continue to streamline our costs and operating expenses, the total cost and operating expenses of IT professional education business decreased by 14% year-over-year.

[Foreign Speech]

Turning to the Lifelong Learning product strategy that we implemented in 2022. We have created a more diversified multinational product portfolio aimed at student career enhancement in addition to our core products of Java [Indecipherable] to update our product system and encourage rapid purchases. Meanwhile, we believe market demand for professionals who are positioned in technology, most in demand nowadays, such as big data, artificial intelligence, and cloud computing will continue to grow as China’s digital industry continues to expand. We believe this investment will bring healthy growth momentum to the company after the pandemic’s setback.

[Foreign Speech]

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

[Foreign Speech]

Next, I will turn the call over to Ping to walk you through our financials for the third 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 the third quarter. Please also refer to the press release for more information.

For the third quarter of 2022, the company recorded operating income of RMG21 million or $3 million compared to operating loss of RMB88.5 million in the same period of 2021. Non-GAAP operating income, which excluded share-based compensation expenses was RMB30.2 million or $4.2 million in the third quarter of 2022 compared to non-GAAP operating loss of RMB84.4 million in the same period of 2021. The improvement in our operating profit was driven by our healthy revenue growth as well as our well executed cost and expenses control during the quarter.

Our total net revenues reached RMB643.3 million or $90.4 million in the third quarter of 2022, up 4.6% from RMB615.2 million in the same period of 2021. Whereas, thanks to our effective cost control measures, our cost of revenues decreased by 4.3% to RMB289.1 million or $40.6 million in the third quarter of 2022 from RMB302 million in the same period of 2021. Meanwhile, total operating expenses decreased by 17% to RMB333.2 million or $46.8 million in the third quarter of 2022 from RMB401.7 million in the same period of 2021 as we achieved expense reductions across our entire organization.

The main contributors to the cost and expense reductions include, firstly, closing low-performing centers and optimizing personnel operations to improve efficiency. As a result, as Nancy mentioned earlier, our learning centers for both IT-focused supplementary STEAM education and IT professional education businesses decreased to 222 and 98 centers respectively and our total headcount decreased by 16.8% year-over-year.

Secondly, reducing sales and marketing personnel as well as marketing spending and remaining focused on operational excellence, which is through endeavoring to uplift our quality of course content, delivery and services, we continue to generate more of word-of-mouth referrals and renewal enrollment and maximize lifetime value of our students.

And finally, overall prudent maintenance of R&D and general management spending also helped lower overall spending and improved operational margin. As a result of the foregoing, net income was RMB27.9 million or $3.9 million in the third quarter of 2022 compared to net loss of RMB94.7 million in the same period of 2021.

Non-GAAP net income, which excluded share-based compensation expenses was RMB37.2 million or $5.2 million in the third quarter of 2022 compared to non-GAAP net loss of RMB90.5 million in the same period of 2021. For the nine months of 2022, net income has reached RMB102.9 million or $14.5 million compared to a net loss of RMB293.2 million for the same period of 2021. Non-GAAP net income was RMB114.7 million or $16.1 million for the nine months of 2022 compared to non-GAAP net loss of RMB278 million in the same period of 2021.

Now on the EPS side. Basic income per ADS was RMB2.55 or $0.36 in the third quarter of 2022 compared to loss per ADS of RMB8.21 in the third quarter of 2021. Diluted income per ADS was RMB2.43 or $0.34 in the third quarter of 2022 compared to loss per ADS of RMB8.21 in the third quarter of 2021. For the nine months of 2022, basic income per ADS was RMB9.28 for the three quarters of 2022 compared to loss per ADS of RMB26.01 for the same period of 2021. Diluted income per ADS was RMB8.85 for the nine months of 2022 compared to loss per ADS of RMB26.01 for the same period of 2021.

As of September 30, 2022, the total balance of cash, cash equivalents and time deposits was RMB342.1 million or $48.1 million, decreasing by RMB88.3 million from the end of 2021. The decrease was mainly due to net cash outflow from operating activities in the first nine months of 2022 of RMB48 million or $6.7 million, as cash collected from IT professional education increased compared to the same period of last year and it was lower than GAAP revenue recognized during the period. This resulted in a decrease in deferred revenue balance, which contributed to the massive changes in working capital.

Net cash outflow from investing activities for the nine months of 2022 was RMB14.1 million or $2 million as we repaid RMB15.5 million or $2.2 million of short-term bank loans. Capital expenditures in the first nine months of 2022 was RMB33.1 million or $4.7 million mainly from purchasing IT equipment used in [Indecipherable] and payments to renovate teaching centers. Share repurchase also contributed to the cash outflow in the past three quarters.

Going forward, as the COVID-19 pandemic continues to affect the mobility of our students and the normal operations of our offline centers, cash received from enrollment is expected to decrease in the fourth quarter compared to the same period of last year. Despite the uncertainties, we will strive to maintain a positive operating cash flow in the fourth quarter as well as a healthy cash and equivalent balance towards year end with continued operational efficiency improvement and fixed spending control.

That concludes my financial highlights section. And Nancy will share with you the business outlook and revenue guidance for the fourth quarter.

Ying Sun — Chief Executive Officer

[Foreign Speech]

Thank you, Ms. Wei for your summary of our financial performance for the third quarter of 2022. Now turning to the company’s outlook for the fourth quarter.

[Foreign Speech]

Given the complex pandemic situation, some cities have took measures to reduce social and business activities to contain the spread of virus. We expect these measures to limit students’ mobility and our offline centers’ operations, thereby impacting our enrollments and revenue in the fourth quarter. Specifically, currently out of 54 cities where we operate, 41 of them had various COVID-related control measures, which have affected to normal operations of 80% of our STEAM education centers and 76% of our IT professional training centers. However, thanks to OMO-based system we have developed over the years, we are continuing to provide online course and services to minimize the impact on our student class attendance and participation.

With respect to financial guidance, according to the company’s current estimate, our total net revenues for the fourth quarter of 2022 are expected to be between RMB560 million and RMB590 million, which represents a decrease of 10% to 15% from the fourth quarter of 2021. The company’s guidance reflects our preliminary estimates of the current market environment and the company’s operating conditions which may change.

[Foreign Speech]

Despite the short-term uncertainty, we remain confident about tremendous potential of the IT education services market. We will continue to optimize our OMO-based student acquisition and product delivery system and ensure the quality of our course delivery and services, regardless of the operational status of our offline centers. Moreover, while enhancing the delivery quality of our courses, we will continue to reinforce our core competencies to build a trusted brand for students and expand the word-of-mouth referrals [Indecipherable] of enrollments. In addition, we will continue to improve operational efficiencies, adopt high spending controls with the goal of achieving positive operating cash flow in the fourth quarter and maintain the company’s healthy development amid COVID-19 flare-up.

[Foreign Speech]

Above is our outlook for the future and our revenue guidance.

[Foreign Speech]

I would like to take this opportunity to thank you again for your attention and support. We are now ready for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And the first question comes from Giovanni Giulio [Phonetic], a Private Investor.

Giovanni Giulio — Private Investor — Analyst

Yes, hello. Good morning. Thank you for taking my question. I was wondering when is the company going to be free cash flow positive and what’s preventing the company from achieving this target? And as a second question, I see your enrollment going up and up at very high growth rate, but this is not translating into high revenue growth. So what’s impacting that? Thank you.

Ying Sun — Chief Executive Officer

[Foreign Speech]

First of all good questions. Thanks for asking them. First of all, on the free cash flow side, you may notice that we actually had the positive cash flow — operating cash flow in Q2. In Q3, we had negative cash flow, primarily due to the decrease in adult, the cash taxes as compared to the revenue recognized. That’s the reason.

However, on an ongoing basis, if not because of COVID-19, we actually expected overall free cash to be positive for 2022. But because of the pandemic-related controls that we saw recently and getting worse actually by day, we don’t expect free cash flow positive overall for the year, but we actually expect at least a near-positive free cash for Q4. So having said that, for 2023, if the COVID-related restrictions get relaxed, we are actually confident that we should be free cash positive next year. But if you look at our financials, we actually are profitable for most of this year. So that’s the first part.

And second part, why enrollment is going up and revenue is not going up as much; two reasons. One is, for our children, sort of like IT STEAM education, we actually have accumulated very strong brand influence and usually are fairly eager to renew and then — especially when there are opportunities for them to take advantage of promotions we have from time-to-time. As a result, we keep our cumulative revenues from the children’s side. At the same time, again, COVID-related restrictions affected the normal operations of our offline centers. And for some of the children’s courses, especially for children at the age of six or younger, it’s very hard to move courses online.

So those affect our overall revenue recognition, and as a result, like revenue growth is not at the same pace as enrollment. Now again, going forward, once the COVID-related restrictions got lifted, we fully expect the revenue recognition or consumption of courses versus enrollment start to like more — in the same pace. Hope those answers your questions?

Operator

Thank you. [Operator Instructions] All right. We don’t have any other questions as of the moment. Presenters, please continue.

Sylvia Yang — Investor Relations Manager

Operator, do you mind to ask for questions again?

Operator

Okay, yes. [Operator Instructions] And we do have a question from Dave from [Indecipherable]

Unidentified Participant — — Analyst

[Foreign Speech]

Well, first, congratulations on achieving sustained profitability in the third quarter. I noticed the company has launched a new share repurchase program. Facing the uncertainties from the current economic environment and the pandemic, what is the company’s outlook for next year and expectations for market conditions? Thank you.

Ying Sun — Chief Executive Officer

[Foreign Speech]

Thank you for your question. The economic environment and the pandemic did bring some uncertainties. Nearly 80% of our STEAM education centers and 70% of our adult education centers have been affected to varying degrees and many centers have to suspend offline operations, which is expected to impact our Q4 revenue. However, the top market environment has raised the bar for our refined operations.

On top of building on our core competitiveness, we’ll continue with our steady and conservative operational strategy to ensure financial health and stable cash flows. We will also leverage our experience accumulated over the years to minimize the pandemic’s impact on our course and delivery. In addition, as you mentioned, today, the company announced a new share repurchase program. So we remain confident about our future. Thank you for your question. I hope I’ve answered your question?

Unidentified Participant — — Analyst

[Foreign Speech]

I have another question. Facing the challenging market environment, what are the company’s operational priorities for your two business; children and adult education businesses?

Ying Sun — Chief Executive Officer

[Foreign Speech]

Thank you for your question. Facing the pressures and challenges from the market environment, we have different operational priority for our two businesses. First, in terms of STEAM education, we’ll continue to optimize and upgrade our OMO-based customer acquisition process and product delivery system and refine our operations to consistently improve the health of our business.

[Foreign Speech]

To that end, as attractive brand among students and parents continuing to increase word-of-mouth referrals and student renewals is our priority. At the same time, we will also try to minimize the impact of this pandemic by building on our OMO format.

[Foreign Speech]

Regarding our adult business, we’ll closely monitor the job market environment. And with the current upgrade of the industrial Internet, we’ll capture the changes and opportunities in talent demand to upgrade our courses and other products. We’ll also optimize our product mix and business structure.

[Foreign Speech]

In addition, for professional education, which is encouraged by the government, we’ll actively promote industry education integration and school enterprise cooperation.

[Foreign Speech]

Lastly, with the current tough market environment faced by all the players in the industry, it is those with good operational capabilities and core competencies that will stand out from the competition after the pandemic. And we are fully confident about our competitiveness.

[Foreign Speech]

I hope I’ve answered your questions?

Unidentified Participant — — Analyst

[Foreign Speech]

I have one last question. The digital transformation of the economy is imperative and a huge demand for digital talent has driven the expansion of the IT education and training market. Facing the increasing competition in the adult IT training industry, what is Tarena’s competitive barrier?

Ying Sun — Chief Executive Officer

[Foreign Speech]

Well, I would like to answer your question with three points. The first advantage of Tarena is our focus on the IT industry and our two decades of experience in IT training, which has provided us with the most in-depth understanding of the IT training industry.

[Foreign Speech]

As our management come from the IT industry, they have extensive industry insights. And our 20 years of experience in IT training has allowed us to pick up on the changes in information technology and understand what it means for talent supply and demand in the market.

[Foreign Speech]

On that basis, we have built our independent course development capabilities, including the abilities to iterate and upgrade our core content delivery system and teaching platform, which constitute our core competitiveness. In other words, we have a solid first mover advantage.

[Foreign Speech]

Secondly, we have operational experience expanding economic cycles and technology development cycles. Over the past 20 years, we experienced several economic cycles and large-scale technology iterations.

[Foreign Speech]

We have been able to quickly respond and adjust in time to follow the trends of our time, including adjusting our operational strategies and our courses.

[Foreign Speech]

And this has enabled us to lead the development of the industry.

[Foreign Speech]

In addition, through years of persistent efforts, we have created a complete OMO system, which allows the seamless integration of our online and offline operations from customer acquisition and course delivery to student services and tracking learning results.

[Foreign Speech]

Our OMO system has allowed students to get good services whenever they need and wherever they are, ensuring a good learning experience and learning effectiveness.

[Foreign Speech]

That’s my answer to your question about Tarena’s competitive barrier from three perspectives.

Unidentified Participant — — Analyst

[Foreign Speech]

Thank you.

Operator

Thank you. And we don’t have any other questions as of 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 e-mailing 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]