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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, and welcome to the OneSmart Second Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions]
Please note, today's event is being recorded. I now would like to turn the call over to Ida Yu, Investor Relations with OneSmart. Please go ahead, ma'am.
Thank you, operator. Good morning, good evening, everyone, and thank you for joining OneSmart International Education Group Limited Second Quarter 2021 Earnings Conference Call. The company's earnings results as well as supplementary slide presentation were released earlier today and are available on the company's IR website at ir.onesmart.org. Joining me on this call are Mr. Steve Zhang, Chairman and CEO; and Mr. Greg Zuo, our CFO and CSO.
I will remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1991 -- 1995. Such statements are based on management's current expectations and the current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the United States Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law. With that, I will now turn the call over to Steve. Please go ahead.
Thank you, Ida. Hello, everyone. We are pleased that we'll see the return of strong sales growth despite the challenges in offline operation due to the COVID-19 resurgence in the certain cities along the Chinese New Year in January and the start of the 2021. Our Go Premium strategy of execution is well on track, with better enhancements made on product, learning centers, services and agreement. The upgraded and optimized product offering has started to contribute to the remarkable top line growth, which will lead to improvement in profitability in the following quarters. Our continuous investment in technology benefits, both online and offline operations. We have revamped and built a strong digitalized operating platform to support standardization, efficiency and customer satisfaction. In addition, we are making great efforts for premium brand building and the local marketing to reach our public customers, more effectively. With that, I will now turn the call over to Greg, who will provide you with more details of our strategic achievements and an update on the capital performance in Q2. Greg, please go ahead?
Thank you, Steve. Hello, everyone. Thank you for joining us on today's earnings call. I would like to start with comments on the overall performance before I go through the individual presentation slides, which were uploaded onto our company website earlier today. In our new phase of growth, post-pandemic, we are delighted to see the return of solid topline growth, driven by strong demand for our core 1-on-1 tutoring products, our improved premium products, sales and services and our enhanced student acquisition approach. Following the 20-ish percent year-over-year growth in fiscal Q2, our company-wide cash sales growth has continued to trend up, recording more than 100% year-over-year increase in the pivotal Q3 to date. The Go Premium strategy that we launched in the beginning of fiscal 2021 has boosted our revenues for OneSmart VIP 1on1 program, the growth driven by the year-over-year increase in volume i.e. the consumed class units enterprise. In addition to tutoring, our value-added premium services of personalized school admission planning and in-person caring distinguish us from other education service providers. Encouraged by the initial success of the Go Premium strategy and a justified but increased revenue profile, we will continue to invest in our product's features, credentials, learning centers and build our premium brand. In the recent months, we have completed the upgrade of our nationwide learning centers, improved our teachers' profiles, launched the premium brand campaigns and build the digital operations platform. These efforts largely enhance customer satisfaction, leading to the growth in new student growth sequentially. I will now turn to our earnings presentation slides. I first start with our operational achievements related to Go Premium strategy as illustrated on Page 7 of the presentation. First, we have upgraded teachers profile learning centers with value-added premium offerings in personalized school admission planning and in-person caring services.
Consequently, as of April 2021, our nationwide year-over-year growth in average price per class unit consumed is 23%, 7% and 11% for OneSmart VIP, HappyMath and FasTrack English product, respectively. Our conversion rate of new customers from these doubled from 11% to 23% during April 2021, after the launch of digitalized customer service platform.
Second, by the end of April 2021, we newly opened and upgraded 14 flagship VIP learning centers to provide a premium learning center experience. Third, since December 2020, we have conducted a series of premium branding campaigns and local marketing in the key cities, which largely enhanced OneSmart's premium brand awareness among target families in these cities and boosted the number of new students enrolled. In the fiscal Q2, the number of new students enrolled from local marketing channels increased by 19% from the fiscal Q1. We have strictly followed the necessary and appropriate guidance continuously to protect the safety and health of all of our students and employees. In the fiscal Q2, we introduced contactless tutoring services to set up an industry-leading, high standard of safety and cleanliness in offline learning centers, thus to further protect our teachers and students in response to the COVID-19 resurgence in certain cities. Please turn to Page 8 for our latest performance trend. We focus on the key data of capital as it provides latest status of our business, which gives visibility of future growth. In the fiscal Q2, December to February, despite COVID resurgence impact in certain cities along the Chinese New Year, capital still achieved a double-digit year-over-year growth. The key drivers for such accelerated growth include: first, students are back to normal study schedules to boost the post-pandemic recovery to offline centers; second, Go Premium strategy is building our customer satisfaction and the brand -- premium brand perceptions; and third, the successful launch of VIP premium products. Heading into fiscal Q3, our company-wide cash sales year-over-year growth has continued to trend up, recording 119% and 102% in March and in April 2021, respectively. Q3, to date, cash sales has grown more than 100% year-over-year, mainly attributable to a strong demand for our 1-on-1 services and the success of our Go Premium strategy. We are optimistic about the continuous growth trends in the future. In fiscal Q2, our net revenue grew by 5.2% year-over-year to RMB 932 million. On Page 9, by breaking down, we achieved net revenues of RMB 735 million from OneSmart VIP business, accounting for 78.9% of total net revenues, increasing 7.4% year-over-year and 51% sequentially. Net revenues from Young Children Education business were RMB 155 million, accounting for 16.6% of total net revenues. Net revenues from OneSmart Online were RMB 32 million, accounting for 3.5% of total net revenues. I will elaborate more on our operational progress on OneSmart VIP business in the next few pages. Please turn to Page 10. On a like-for-like basis, for our 1-on-1 program, in the fiscal Q2, cash sales increased by 23% year-over-year and the net revenue grew by 22% year-over-year, driven by a 12% increase in class units consumed and a 9% increase in average price per class unit consumed.
In March and April 2021, our cash sales improved by 119% year-over-year for OneSmart VIP 1-on-1 program. These are combined result of robust demand, but highly effective 1-on-1 tutoring products as exam schedules have normalized, and two, improved customer experience of our upgraded products, centers and services, and three, our proactive marketing campaigns to build brands to attract new customers, and four, the relatively low comparison base due to COVID outbreak in the same period last year. Please turn to Page 11. On top of our scope improving 1-on-1 tutoring, our value-added premium services or personalized school admission planning and in-person caring are highly appreciated by customers. Under the personalized school admission planning, we'll provide the timely and in-depth analysis on school admission policy, the system in searching reasonable academic goals agreed by students and parents. The full cycle is a standardized quality control process, including constantly tracking the progress, providing feedback reports and making proper adjustments to achieve the goals. Furthermore, our in-person caring service is designed to bring out Power Learning of each student. Power Learning includes Learning Motivation, Learning Attitude and Learning Perseverance.
As Steve mentioned earlier, OneSmart is committed to put Power Learning first. We train our students, teachers and advisers to inspire students to realize their full potentials. This is essence of education that we believe in. For the past few years, we have continuously invested in technology to revamp and build a strong digitalized operating platform, which is highly customized to our unique 1-on-1 business model, both for front-end and back end. Today, I'm also pleased to provide an update how the technology supports Go Premium strategy, as shown on Page 12. First, the platform delivers high-efficiency in customer acquisition and full cycle management, second, the platform enhances professional premium tutoring and other value-added services, which contribute to improve customer satisfaction; third, the platform simplifies class-scheduling management to generate synergy across learning centers and improve transparency. We believe the constantly evolving technology applications will further support our service standardization, operational efficiency and in return to enhance customer satisfaction. As shown on Page 13, by the end of April 2021, we opened and upgraded 14 flagship VIP learning centers, provide a premium learning center experience. Students' performance aside from teaching quality relies on a variety of factors such as environment, attendance and concentration. Our unique high tech-enabled flagship learning center offers a spacious, safe and friendly environment to help students learn more effectively. Our upgrades include facial recognition and fingerprint system for security, enhanced lighting and ventilation, and expenditures for better safety and health and innovative, comfortable facilities for more holistic learning experience. In the first 6 months of fiscal 2021, Elite VIP program accounted for 11% of the cash sales from OneSmart VIP business. In the fiscal Q2, we also further enhanced our local marketing approach. Just before the peak season, which are Q3 and Q4, as we have shared with our investors previously, we leverage our offline center network to effectively reach target families to improve our brand awareness. Page 14 summarizes how our marketing campaign works to acquire new customers through local marketing activities, by enhancing professional brand influence, through public seminars, and our increasing brand awareness and expanding customer reach around learning centers.
In fiscal Q2, new students enrolled from local marketing channels increased by 19% from the prior quarter. Cash sales from new customers and referrals contributed 55% of total cash sales, up from 47% in the same period last year, primarily due to the effective customer acquisition approach from local marketing channels, the enhanced customer satisfaction. Now move on to profitability snapshot of OneSmart VIP business on Page 15. We are pleased to see Q2 fiscal year 2021's revenue and the profit margin improved with quarterly gross margin of 45% and the BU level operating margin of 6% during the quarter. This is encouraging recovery in -- is primarily attributable to strong demand for premium 1-on-1 tutoring to support business model, our strong localized teaching R&D capabilities to adapt in evolving operational environment, and three, strategic expense plans to focus on scale-up of top 20 cities to drive profitable growth. We are pleased to see the start of gross margin recovery during the quarter, driven by strong topline growth. However, our fiscal Q2 P&L results have not yet reflected recent strong cash sales momentum, that it typically takes a couple of quarters for sales to translate into cloud consumptions, i.e., revenue recognition in our business. Our peak season for revenue recognition is typically Q3, which is March to May, and Q4, which is June to August due to intensive study and exam schedule in China. In the meantime, we need to invest in our brands in advance to support our Go Premium strategy. As a result, we observed temporary operating margin pressure in fiscal Q2. With a strong cash sales trends and significantly higher new sales in average price per class units consumed. We are optimistic about our future performance. Lastly, we are aware of and closely following the regulatory developments. We have continued to promote high standards in providing better learning environment, quality and services for our students. However, we have limited exposure in Beijing, which contributed about 5% of our net revenue in fiscal 2020. With that, let me turn the call over to Ida. Ida, please go ahead.
Thank you, Greg. In the second quarter of fiscal 2021, cash sales totaled RMB 939 million, increasing 44.2% and 18.9% from the same period of fiscal 2019 and fiscal 2020, respectively. Excluding the impact of 1on3 program, cash sales increased 66.8% and 17% from the same period of fiscal 2019 and fiscal 2020, respectively. Net revenues were RMB 932 million, an increase of 5.2% from RMB 886 million during the same period last year. Excluding 1on3 program, the net revenue showed an increase of 11.4% from fiscal Q2 of 2019. The year-over-year increase was mainly attributable to the growth in average price per class unit consumed, driven by a strong recovery in fiscal Q2 and our Go Premium strategy post pandemic. Cost of revenues increased by 2.5% year-over-year to RMB 543 million. The year-over-year increase was mainly attributable to higher cost -- stock costs relating to an increase in class units consumed and enhanced teacher profiles and additional costs for learning center upgrade and online teaching operations to support our Go Premium strategy. In the fiscal Q2, gross profit was RMB 389 million, a year-over-year increase of 9.2%. The gross margin was 41.8%, up from 40.2% in the same period last year. Non-GAAP, selling and marketing expenses, which excludes share-based compensation expenses, were RMB 289 million, accounting for 31% of net revenues or 30.7% of cash sales, an increase of 46.9% from RMB 197 million, accounting for 22.2% of net revenues or 24.9% of cash sales during the same period last year. The year-over-year increase was primarily due to the strategic branding and offline marketing activities to reach target families in the execution of Go Premium strategy as well as the requirements of running major marketing campaigns in a timeline ahead of the Q3 and Q4 peak tutoring season, and the relatively low spending due to limited offline marketing activities during COVID-19 outbreak in fiscal Q2 last year. General and administrative expenses decreased by 1.8% year-over-year to RMB 211 million. The decrease was primarily due to our expense control policy to keep a healthy financial condition during the post-pandemic recovery. Non-GAAP G&A expenses, which excludes share-based compensation, were RMB 185 million, accounting for 19.8% of net revenue compared with 20.1% of net revenue during the same period last year. Operating loss for the quarter was RMB 110 million compared with operating loss of RMB 50 million in the same period of last year. Non-GAAP operating loss, which excludes share-based compensation, was RMB 85 million compared with non-GAAP operating loss of RMB 18 million during the same period of prior fiscal year. Operating margin for the quarter was negative 11.8% compared with negative 6.2% in the same period of the prior fiscal year. Non-GAAP operating margin was negative 9.1% compared with negative 2% during the same period last year. The decrease of the margin was mainly due to the revenue improvement, offset by the increased investments in teacher profiles, learning centers and increased sales and marketing activities to support the Go Premium strategy. Now let me move on to cover some other key financial points for the second fiscal quarter of 2021. Capital expenditures for Q2 were RMB 69 million, a year-over-year increase of 1.2% from RMB 68 million in the same period last year. Capital expenditures accounted for 7.4% of net revenues in Q2, representing a year-over-year decrease of 30 basis points from 7.7% in the same period last year. The slight increase in capital expenditures was mainly due to learning center upgrade and new opening of OneSmart VIP flagship centers. OneSmart's prepayments from customers balance, which represents cash collected from enrolled students for courses and recognized proportionately as the training sessions are delivered, reached RMB 2.73 billion at the end of fiscal Q2 2021, representing a year-over-year increase of 14.5% from the end of fiscal Q2 last year. As of February 28, 2021, the company had cash and cash equivalents, restricted cash and short-term investments of RMB 1.02 billion. The decrease from cash balance as of November 30, 2020, was mainly due to management's decision to repay some of company debt, which was strategically built up during the pandemic period last year. The continued strong cash sales helped further reduce the requirements of large cash balances. The total balance of debt decreased by RMB 419 million during fiscal Q2. Revenue guidance, on the latest estimate, we expect to generate net revenues of RMB 950 million to RMB 1 billion for the fiscal Q3 of 2021, equivalent to 27.5% to 34.2% increase year-over-year. We expect our full year revenue to reach above fiscal '19 level. However, this outlook represents OneSmart's current view, which is subject to change. This concludes our prepared remarks. I will now turn the call over to the operator and open for Q&A. Operator, we are ready to take questions.
[Operator Instructions]
And the first question comes from Sheng Zhong with Morgan Stanley.
I have 2 questions here. The first one is -- glad to see the Go Premium strategy going on well. And would you mind to give us more color about the 1-on-1 -- Elite 1-on-1 programs margin now? And what do you expect it to ramp up?
And secondly is on -- you have a very strong cash revenue growth. But in the meantime, we also see the sales marketing is also a little bit higher than the cash sales revenue growth. So can you share some observation on the customer acquisitions cost trend now from the market?
The last question is, you pay -- you repay some bank loans, so your cash balance now is lower. So -- and there are a lot of concerns on the regulation, especially on the tuition fee supervision. So can you share your view about how this regulation could impact your balance sheet and operations?
Thank you, Zhong Sheng. So the first question regarding the Go Premium strategy, what is the latest update on the Elite VIP product? So as you noticed, we have provided a lot of details in today's earnings call regarding the Well Progress program that we launched. In essence, this program address better the customer needs by providing value-added services. The improved satisfaction rates helped us to generate pretty robust results, evidence not only the cash sales growth, the ASP growth and additional purchase side of the growth rates, which we provided consistently in the last few quarters. So we'll continue to be very confident about the future of this strategy. Secondly, the Elite 1-on-1 product ramp up on margin. As we explained before, there is a time lag between capital and revenue generation. So in the beginning of this year, we started to sell this Elite VIP product. The sales was robust. However, it will take time for the new students under this program to continue the cross unit and then later on and then accumulate and reflect in the P&L, especially revenue. So in the coming quarters, Q3 and Q4, those are the peak seasons in terms of class unit consumption. We expect the cash sales will fully reflect in the revenue and then will lead to margin, which will provide a better view in the next couple of quarters. Your second question is regarding the sales and marketing percentage of revenue. Indeed, we mentioned with a breakdown of this, cash sales revenue of 31%. For that number, I just want to elaborate and specialize. Only 14% is spent on marketing dollar percentage revenue. So that's -- whether it will be higher than previous quarter in terms of about 6%, as we explained, that's, one, because we have to spend to build the brand to support the Go Premium strategy. Secondly, we need to spend ahead of the peak season, which is Q3 and Q4. And three, just so you know, this additional 6% incremental growth of marketing dollars only represent about RMB 58 million. So it's a pretty modest increase to support a strategic growth. We expect, on full year basis, again, as we said before, marketing percentage of -- we use cash sales revenue. So marketing dollar as a percentage of cash sales remain to be 8% to 12% range. That's the number we mentioned before. So we expect the full year basis, we'll hit the goal in this range. Your third question is regarding cash balance, which has dropped some portions, as we explained, to repay the debt, we borrowed strategically, to prepare for the COVID situations. So it was -- we communicated last quarter's earnings call that we will repay. So these reductions reflect that. So we will pay back about RMB 490 million for the total debt reduction. Under the regulatory environment, we would definitely take a very prudent approach in working our cash and liquidity situation. However, I want to elaborate, our cash sales momentum is quite strong even as of right now. As we disclosed to you, our cash sales in the last 2 months, March and April, were more than 100% year-over-year. So we continue to see pretty strong robust cash profile. As you noticed, for Q2, our net operating cash was RMB 125 million for fiscal single quarter compared to a total of RMB 241 million for the full year last year. So we are having a pretty robust net operating cash position here. So again, we will wait -- and the exact written regulatory requirements to be announced. But in the meantime, we're optimistic about our business demand and performance in the future.
And the next question comes from Felix Liu with UBS.
Glad to see the return to the positive growth on the revenue and the good guidance. My question is -- first question is on your margin outlook for the second half. You commented that you expect year-on-year margin expansion for the second half. I understand the base was low due to COVID-19. So may I know, could you give a little bit more color on the degree of margin expansion? Do we expect to see positive margin in the second half or the second half still be loss making? My second question is on regulation. I understand this time, the government is doing a lot more strict on the enforcement side. So could you share any color on the percentage of teachers that have license as well as the percentage of learning centers that are properly licensed?
My third question on the -- is on our tuition. Again, this ties to the regulation. I think the government is enforcing quite strictly the 3 months through, in terms of tuition prepayment. So may I know how long typically does the tuition prepayment you cover? I know your business is 1-on-1, is a little bit special, but I just want to know how much on average the parent paid for in their core package? And my last question is on the short-term borrowing. I noticed that the current balance of short-term borrowing on your balance sheet is slightly bigger than your cash balance. So may I know the due date of the short-term borrowings and any refinancing plan?
Yes. Thank you, Felix. You've got 4 questions here. Let me try to answer one by one. So first one is regarding margin expansion. You mentioned that we may have a low base. But as you know, up until Q2 last year, we do have -- we did have a strong quarter. So for this current fiscal year Q2, we achieved such expansions quite a good performance, driven by the topline growth. Moving on to second half, we'll continue to see such a topline growth, we evidenced by the cash sales, which we said it provides good visibility for future revenue recognitions. So as we are showing you, the last few months, our cash sales trends continue to trending up, which is a pretty good sign. You mentioned we may see a loss-making for the second half. Currently -- but it's hard to comment on the profitability, but we don't think with such a strong topline growth, we will continue to have much losses -- operating losses going forward. Second question regarding regulations. Yes, as I mentioned earlier, it's hard to comment regulation without knowing the exact written requirements to be announced by the government. But in the meantime, as you guys know, we hold very high standards on our learning environment, quality and services for our students. We are one of the highest standard in the industry. So we are pretty comfortable with the regulatory requirements. We'll continue to follow and complying with government's regulatory requirements. The second -- the third question regarding tuition prepayment. Yes, we comply with the local government variance requirements when it comes to reinforcement. So we are not concerned, at this point, any changes on such practice. The last question regarding short-term borrowings. This short-term borrowings are 2 balances. One is our traditional revolving local banks borrowings. These banks have been with us for years. They stayed with us throughout the COVID situations. So we have pretty stable and robust relationship with such bank relationships. As you know, in China, typically, the local banks only lend on year-over-year basis. As a result, we have to qualify this as a short-term borrowing rather than long term. But in reality, majority -- vast majority of these vendors have been working with us over the last few years. So we are pretty comfortable on the liquidity situation. Again, with our pretty strong operating cash flow we're generating. So we are comfortable on such a position we have.
[Operator Instructions]
And the next question comes from Natalie Wu with Haitong International.
Hello, this is on [indiscernible] behalf of Natalie Wu. Congratulations on the strong quarter. My first question is about your learning center expansion plan. Could you help us understand your learning center expansion plan over the next 1 to 2 years? That's number one. Number two is regarding the competitive landscape. Yes, could the management share with us some colors on the competitive landscape and share with us your thoughts?
Thank you for your questions. So the first question regarding learning center expansion plan for the next 1 to 2 years? We will have a consistent learning center expansion which we already explained on our slide, on Page 9. So we will -- basically, we will continue to expand our 1-on-1 VIP center this year, about 10% annualized expansion rate. We said in the earnings material that we opened already about 20 learning centers, of which some of them are our flagship VIP learning centers. So we will continue to set trend throughout the year. For next year or 2, we probably will continue such a expansion plan, maybe a little bit higher rate when the COVID situation normalized. But again, let's wait and see the regulatory requirements and how would that impact our plan. On the second question regarding competitive landscape. Yes, we are -- as you see, our very strong operational results for this quarter. We expect our performance continue to be very strong, which is really a prove that our product and services is at the edge of competitive advantages over our competitors. We're very comfortable that we'll continue to generate such a advance in the future performance. Given the post-pandemic and the new environment of the regulations, we feel -- in the mid to long term, we feel more positive in terms of the opportunity ahead, especially those market consolidation opportunities. With our strong performance, we expect to continue to consolidate the market shares, especially for the 1-on-1, personalized learning education market segment. Thank you for your questions.
And as there are no more questions at the present time, I would like to return the floor to management for any closing comments.
Thank you, operator. In closing, on behalf of the entire management team, we would like to thank you again for your participation in today's call. If you have any further inquiries in the future, please feel free to contact us. Thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.