© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the OneSmart Third Quarter Fiscal Year 2018 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Rebecca Shen, Investor Relations Director. Please go ahead.
Thank you, operator. Hello, everyone, and thank you for joining OneSmart's Third Quarter Fiscal Year 2018 Earnings Conference Call. The company's results were released earlier today and together with the presentation are available on the Company's IR website, www.onesmart.investorroom.com. On the call today are Mr. Steve Zhang, our Founder, Chairman and CEO; and Mr. Dong Li, our Director and CFO. Dong will give a brief overview of the company's business operations and highlights and will go through the financials and guidance. They will both be available to answer your questions during the Q&A session that follows. I remind you that this call may contain forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and 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 U.S. Securities and Exchange Commission. The company does not undertake any obligations to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the law. With that, I will now turn the call over to Dong. Please go ahead.
Thank you, Rebecca. Hello, everyone. We are pleased to report another strong quarter of financial and operational results, which further strengthened our #1 position in China's premium K-12 after-school education market. We are well positioned to benefit from the rapid growth of the premium market and to further consolidate the fragmented market through both organic growth and acquisitions. As the largest premium K-12 after-school education service provider in China, we have accumulated extensive operational and management expertise and are ready to leverage and monetize by effectively improving the educational quality and operational performance of acquired business. Following the recent acquisition of FasTrack English in January 2018, we introduced our Standard Operation Perfection System, SOPS, which significantly enhanced the growth of the business. We are closely monitoring and will take advantage of other acquisition opportunities to accelerate the growth of our business. I would like to go over some of the key highlights of our business during the third fiscal quarter of 2018, first, for OneSmart VIP, our exam preparation services for students from the 3rd grade to the 12th grade. Despite having opened 15 new OneSmart VIP learning centers in Shanghai over the past 12 months, OneSmart VIP in Shanghai continued to achieve a healthy EBIT margin of above 40% during the third fiscal quarter of 2018. In the meantime, we experienced extremely strong growth in markets outside Shanghai. Monthly average student's enrollments increased by over 50% in the following cities, most of which we entered during the past 2 years. The 14 cities include Chengdu, Xiamen, Fuzhou, Kunming, Xi'an, Zhengzhou, Chongqing, Tianjin, Shenyang, Shijiazhuang, Yancheng, Zhenjiang, Dongguan, and Taizhou. We opened 19 new OneSmart VIP learning centers during the third fiscal quarter of 2018. Revenues from 1-on-1 (sic -- see press release, "1-on-3") programs increased by 62.6% year-over-year. To provide families with a premium one-stop shopping opportunity and further accelerate growth, we extended OneSmart VIP business into overseas language training, overseas study consultation, and study camp programs. Second, for HappyMath, our kids mathematics business for children aged 3 to 8 years old. Growth in HappyMath continued to accelerate with revenues increasing by 76.0% year over year to RMB 90.6 million from RMB 51.5 million in the same quarter of last year, with monthly average student enrollments increasing by 75.1% year over year to 21,178 from 12,094 in the same quarter of last year. Revenues in mature markets such as Shanghai increased by 59.4% year over year. We saw strong revenue and student enrollment growth momentum in every city that HappyMath entered into. Revenues in Shenzhen and Guangzhou increased by more than 50% year-over-year. Revenues in Chengdu, Xiamen, Nanjing and Changsha all achieved more than 100% growth year-over-year; while revenues in Beijing and Suzhou increased by 264.5% and 384.9% year-over-year, respectively. We successfully launched 3 new subjects into the HappyMath program, chinese, science, and computer programming, since second fiscal quarter of 2018. More than 4,200 students were enrolled for the Chinese subject during the third fiscal quarter of 2018. Average students taken by HappyMath students were 1.22 subjects in May 2018. Lastly, for FasTrack English, our kids English business for children aged 3 to 8 years old. With our Standard Operation Perfection System, SOPS, we successfully accelerated the growth of the newly acquired FasTrack English business. We repositioned it as premium kids English brand with a focus on STEM English, successfully opened 8 new learning centers and managed to expand operations into the city of Shenzhen.
New student enrollments increased by 138% year-over-year during the third fiscal quarter of 2018 vs approximately 30% historical growth before our acquisition. I believe these results demonstrate our strong execution capabilities to continuously integrate and manage our growth from acquired business. We will continue to assess acquisition opportunities as one major approach to further consolidate the fragmented market and to accelerate our top line growth. In the online space, we have -- we will continue to heavily invest in the online business and incubate them, which will strength our position over the long term. For example, Yimi Online Tutoring, a leading online K-12 tutoring company, which we incubated and took a significant strategic stake has seen growth accelerate significantly since its inception. For the first 6 months ended June 30, 2018, gross billings and revenues increased by 523.6% and 338.6% year-over-year, respectively. Student's enrollment for Yimi Online Tutoring in June 2018 increased by 469.8% year-over-year. Going forward, we will increase the pace of our top line growth by accelerating the expansion of new learning centers, devoting more resources to investing in research and development and continuously incubating new business both online and offline. We are confident that we have the right expansion strategy in place to drive additional revenue and profitability growth and we will carefully balance expansion and operational efficiency to deliver more sustainable value for our shareholders in the long term. Next, I will go over financials. Please be reminded that all amounts quoted here will be RMB and all percentage increases will be on a year-over-year basis unless otherwise stated. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis. Financial results for the third fiscal quarter ended May 31, 2018. Net revenues were RMB 824.5 million, an increase of 37.6% from RMB 599.2 million during the same period last year. The increase was mainly driven by an increase in the monthly average student enrollment in our OneSmart VIP business as well as HappyMath and FasTrack English compared with those in the same period of last year. Monthly average student enrollments increased by 44.7% year over year to 124,892, of which monthly average student enrollments from premium K-12 tutoring program and premium young children education services, including HappyMath and FasTrack English, increased by 30.0% and 132.2%, respectively, from the same period of fiscal year 2017. With the integration of the FasTrack English program in January 2018, we expect the scale and growth rate of our premium young children educational services to further accelerate. Total number of consumed class units increased by 34.7% year over year to 4.2 million. Total number of study centers increased to 302 centers in 43 cities as of May 31, 2018, which represents a total classroom capacity expansion of 31.9% year-over-year, of which 220 were OneSmart VIP study centers, 60 were HappyMath study centers and 22 were FasTrack English study centers. Operating costs and expenses for the quarter were RMB 767.8 million, an increase of 70.5% from RMB 450.3 million during the same period last year. Non-GAAP operating costs and expenses, which excludes share-based compensation expenses, were RMB 657.6 million, an increase of 49.7% from RMB 439.2 million during the same period last year. Cost of revenues increased by 38.7% year-over-year to RMB 368.1 million, which was primarily due to the 106 newly opened learning centers. Selling and marketing expenses increased by 96.3% year over year to RMB 160.8 million. Non-GAAP selling and marketing expenses, which excludes share-based compensation expenses, were RMB 159.4 million, an increase of 94.9% from RMB 81.8 million during the same period last year. The increase was primarily in support of the newly opened learning centers, new programs and service offerings, including, among others, FasTrack English, OneSmart Class, OneSmart Online and additional subjects that were also in HappyMath compared to the same period last year. As a result, we incurred more compensation costs for sales and marketing staff, marketing and promotion activities and higher rental expenses. General and administrative expenses increased by 132.0% year-over-year to RMB 238.8 million. Non-GAAP general and administrative expenses, which excludes share-based compensation, were RMB 130.1 million, an increase of 41.4% from RMB 92.0 million during the same period last year. The increase was primarily due to more learning centers opened, enlarged investment in research and development in new product and services and education technology and new curriculum materials. Accordingly, compensation for general and administrative personnel, rental expenses and service expenses increased. Total share-based compensation expenses, which were allocated to related operating expenses, increased by 892.6% year-over-year to RMB 110.1 million in the third fiscal quarter of 2018. The increase was mainly due to onetime share-based compensation costs of RMB 95.3 million under the amended and restated 2015 share incentive plan, which was not exercisable until the IPO completion date. Operating income for the quarter was RMB 56.7 million, a 61.9% decrease from RMB 148.9 million in the same period of the prior fiscal year. Non-GAAP operating income, which excludes shared-based compensation, was RMB 166.8 million, a 4.3% increase from RMB 160 million during the same period last year. Operating margin for the quarter was 6.9% compared to 24.9% in the same period of the prior fiscal year. Non-GAAP operating margin was 20.2% compared with 26.7% during the same period last year. Other income was RMB 30.3 million compared with RMB 3.8 million during the same period last year. The increase was mainly due to realized gains from short-term investments and government subsidies. Income expense (sic) [ Income tax expense ] was RMB 32.0 million compared with RMB 31.6 million during the same period last year. Net income attributable to OneSmart was RMB 58.4 million compared with RMB 122 million during the same period last year. Basic and diluted net income attributable to OneSmart per ADS was RMB 0.38 and RMB 0.364, respectively. Non-GAAP net income attributable to OneSmart was RMB 168.5 million compared with RMB 133.1 million during the same period last year. Non-GAAP basic and diluted net income attributable to OneSmart per ADS was RMB 1.2881 and RMB 1.2428, respectively. Capital expenditures for the third quarter of fiscal year 2018 were RMB 62.7 million, an increase of RMB 25 million from RMB 37.7 million in the third quarter of fiscal year 2017. The increase was mainly due to leasehold improvement as a result of the opening of new learning centers and renovations of existing learning centers. Financial position. As of May 31, 2018, the company had cash and cash equivalents of RMB 1,513.3 million and short-term investments of RMB 841.1 million. The company completed its initial public offering of 16,300,000 American depositary shares traded on the New York Stock Exchange on March 28, 2018. Proceeds from the offering was USD 179.3 million before deducting underwriting discounts, commissions and offering expenses. Net cash provided by operating activities in the third quarter was RMB 323.1 million. Net cash used by investing activities in the third quarter was RMB 425.8 million. Net cash provided in financing activities in the third quarter was RMB 1,038,700,000. Turning to guidance for fiscal year 2018, OneSmart expects net revenues to be between RMB 2.75 billion and RMB 2.88 billion, an increase of 33.6% to 40.0% from fiscal year 2017. This forecast reflects OneSmart's current and preliminary view, which is subject to changes and uncertainty. This concludes our prepared remarks. I will now turn the call to the operator and open for Q&A. Operator, we are ready to take questions.
[Operator Instructions] Tianli Wen, Blue Lotus.
I have 2 questions here. The first one is can management give us more information on the investment on [ Mikow ], the reasons to make this investment and the recent synergy with the company. And my second question is about the regulations. Did company see any impact from the regulations this quarter?
Thank you. Okay. So your first question about our investment, our recent investment in [Mikow] which we invested about US$4 million. [Mikow] is a leading operator and platform that offers [10 new] [indiscernible] activities, STEM and study camp programs for children aged 3 to 12, with accumulated number of users of more than 2 million in more than 30 cities in China. We are [indiscernible] synergies and cross-selling opportunities among the students of our HappyMath and FasTrack English programs and we're seeing such in [Mikow]. So we made that investment. And we expect to expand our presence in STEM and related application sectors through further cooperation and collaboration with [ Mikow ]. So this is our answer to the first question. The second question is about any new regulatory impact on us. And from our perspective, we are closely monitoring any new regulations in the industry. And so far we haven't seen any major impact on our business, since we do not have any business in relation with [indiscernible], or we do not have any curriculum which has accelerated teaching programs, or we didn't push our students to learn more advanced curriculum. So, so far we haven't seen any indications. And on the license and the permits perspective I think we have made good improvement during the past quarter. I think more than 10 to 20 of our learning centers we have obtained the required licenses and the permits from -- with the regional government authority. So actually we have made quite good progress during the past quarter as well. So, so far we haven't seen any major impact from the regulation perspective.
Sheng Zhong, Morgan Stanley.
I have 2 questions. First one is the premium tutoring achieved strong growth in out of Shanghai city this quarter. So just wondering what the further expansion strategy in this non-Shanghai cities, and including the new learning centers openings planned in these cities maybe next quarter and next year. And secondly is the [indiscernible] base this quarter was -- the margin or the operating expense is a little bit -- is higher than versus before. So I think it's also related to our fast expansion. So what do you [track] the margin for expense guidance in next quarter?
Thank you. Okay. I think on the expansion plan for our [indiscernible] business outside Shanghai, I think during the [first] fiscal quarter of 2018 we added a net of 19 OneSmart VIP centers. And out of the 19 centers I think most are opened in the [ top 8 ] cities that we operate outside Shanghai, such as Hangzhou, Nanjing, Guangzhou, Shenzhen, Suzhou, [indiscernible] and [indiscernible]. Okay. So I think going forward we intend to achieve sustained acceleration of our top-line growth through opening additional OneSmart VIP centers. And I think for Q4 we currently have planned to open another, like, 10 to 15 VIP centers for the fourth quarter. And then we also mentioned our [indiscernible] expansion plan for 2019. I think we are expecting to further accelerate our top-line growth through opening more learning centers. And we are [confident] to achieve a capacity expansion of about 30% in fiscal year 2019. And at the same time I want to highlight although we opened additional learning centers during the third quarter, like, 19 VIP centers, our gross profit margin for the last [indiscernible] we actually -- versus actually we achieved about 50% -- 56% gross profit margin expansion. And I think going forward we expect to maintain quite stable in terms of the gross profit margin. And then your second question is about the temporary jump of the operating margin during the third quarter this year. I think before we address -- we comment in more details, I want to highlight -- so basically our main focus is to achieve this trend of acceleration of our top-line growth through expansion from existing -- from the increase the utilization of existing learning centers, opening of additional new learning centers, launch of new business and through potential acquisitions. So we want to focus on the top line. And then we still want to ensure a healthy margin and achieve a good balance between expansion and profitability. So I think in the short term we recommend the investors not focus too much on the quarterly margin, since we want to take more market share and create value for shareholders in the longer term. And then back to the [indiscernible], for the third quarter the Company had about a 6% operating margin decrease. I think it's mostly related with the opening of new learning centers. And then because we also -- additional subjects [in the] HappyMath, including Chinese mathematics and computer -- [indiscernible] Chinese computer programming and STEMs. And then because we just acquired FasTrack English and then we increased more resources for OneSmart Class. So we have increased [indiscernible] more resources in the selling and marketing expenses and also in terms of the marketing activities. But at the meantime, I think our margins for the mature business such as Shanghai -- even though we have opened new additional centers in Shanghai, our OneSmart VIP in Shanghai still achieved a healthy EBIT margin of about 30%. And then take [ Hangzhou ] as another example. Hangzhou, [indiscernible] opening the third fiscal quarter of 2018 still achieved an EBIT margin of about [ 7% ]. So actually we still maintained a quite stable and strong EBIT margin in those mature and sub-mature cities. Okay. So going through it I think we would like to return a healthy margin and then to have a good balance between expansion and profitability. Sheng, so I hope I have answered your questions.
Tallan Zhou, Deutsche Bank.
Li Dong, my first question is about non-GAAP operating margin drop. Can you give us some breakdown like how much percentage of the margin drop is related to new product, like the [group class] and how much percentage is on capacity expansion? And how much percentage is strong, like, promotion? This is my first question. And the second question -- what margin, what [o-p] margin level is Management looking at that can balance your current revenue growth forecast?
Thanks, Zhou. So in the first fiscal quarter of 2018, the non-GAAP operating margin decreased by 650 bps, which was mainly because of our expansion of the new markets, because we opened 106 new learning centers and because we also launched new programs, including FasTrack English, and OneSmart Class. And we had launched the additional [subjects] and the Happy Math, including Chinese computer programming and [ STEM ]. [Technical difficulty] and 50 bps, like, [indiscernible]. 233 bps were for OneSmart VIP in newly opened centers, and then 290 bps were for HappyMath newly opened centers and the additional three new subjects that we offered. And then 47 bps were for the launch of FasTrack English and the OneSmart Class program. And then we had another [ 30 ] bps related to the increased research and development of curriculum materials and other advancement in artificial technology. Okay, so here is the breakdown of the [indiscernible]. And I think for our margin guidance for Q4, I think firstly we want to highlight that we are very confident that we can achieve the full-year revenue guidance of about 36% to 40% growth. And then, so secondly, if you take a look, our gross profit margin for the third quarter, actually the gross profit margin for OneSmart VIP and Happy Math we achieved 50 bps and [ 130 ] bps margin expansion, respectively. And then so overall our gross profit margin will maintain at a very stable and healthy level. And then in terms of the sales and marketing and G&A expenses combined as a percentage of revenue, we are still expecting to [ maintain ] a, like, 35% level within the whole year, [ which is the ] same as last year. And then [indiscernible] [ quick look ] on the non-GAAP income for the first three quarters, we have already achieved non-GAAP net income of -- well, I think the non-GAAP net income for the first nine months was already the same level for the full year as we did in the year 2017. And because I think we had about 120 million net income contributed from Q4 of last fiscal year. So I think for the full year we are pretty confident that we are -- we can return very healthy net income increase and also return very healthy net income, non-GAAP net income margin.
Edwin Chen, UBS.
Just one quick follow-up regarding your margin guidance for Q4, for the full year. Did you mention your non-GAAP SG&A [ ratio ] would stay at 35% for full-year '18?
We are expecting the combined non-GAAP SG&A expenses as a percentage of revenue to be approximately 35% compared -- very similar to last year.
Right. And also, you mentioned the increasing sales and marketing expenses are mostly for the new learning centers openings and the new business new products. I assume that those will continue in the first quarter in the next year. That means you will continue to open new learning centers. You will continue to expand HappyMath and the new business and new acquisitions. How should we look at margins, especially SG&A costs, for next year? I mean, how do you balance the top-end goals and the margin performance? That's [inaudible -- multiple speakers].
[indiscernible]. And, two -- yes, please go ahead.
Okay. So I think if you take a look on our sales and marketing expenses as a percentage of revenue for the second fiscal quarter, we actually had a shift of [ 330 ] bps margin expansion. So actually I would like to encourage the investors to take a look on the combined SG&A expenses as a percentage of revenue on a relatively longer-term basis. So actually we had elected in Q3 and then to acquire more market share and then to add more revenue and create [indiscernible] [ returns ] in the longer term. So I think we won't spend as heavily as we did in the third quarter in the fourth quarter. So and then in terms of our guidance for fiscal year 2019, I think we will [indiscernible] detailed guidance in the next -- fourth fiscal quarter, with that announcement.
Yes. And just one more question, if I may. We're already now at end of July. And so how is your revenue growth and revenue -- the profitability track for the first two months of fourth quarter, I mean in June and July?
Okay. I think the financial results for July we have not finalized yet. It's just the end of July. But based on the operating data that we have seen so far, we expect to have a very strong [ fourth ] quarter [ billed ] in the top line. I think in terms of the students [ who renew ] and top-line growth, we are seeing [indiscernible] a very strong growth compared with the third fiscal quarter.
Natalie Wu, CICC.
I have a couple of questions here. First of all is about your capacity expansion. You mentioned that you had about [ 30% ] capacity expansion planned in the fiscal year of 2019. Can you help us understand how to allocate those among the [indiscernible] expenses among your different business lines? And it's not [indiscernible] since earlier this year. You mentioned that you hadn't witnessed any impact from regulation change. Just want to clarify whether this will impact your future expansion plans, especially those license-related issue that might [indiscernible] [ caution ].
Okay. So we happen to have [indiscernible] capacity expansion in terms of the number of classrooms in fiscal 2019. And I think -- so that translates to about 150 learning centers. And I think they'll be 150 learning centers. We currently will have about -- I think 40% will come from the HappyMath -- will come from the FasTrack English program. And we expect to have about another 60 for FasTrack for Happy Math. And then we'll have 50 to 60 for VIP, for OneSmart VIP. Yes. So 50 for OneSmart VIP and about [ 60 ] for Happy Math and then 40 for FasTrack. Yes. And then we also add to that about potential [indiscernible] like impact or restrictions in terms of our expansion, our opening of additional new learning centers. I think so far we are on track in terms of our opening of [indiscernible] in those learning centers in [indiscernible] first quarter of fiscal year 2019. There are some, like, longer approval times on relevant government authorities, but I think so far that we are on track.
Got it. Good to know. And secondly, are you saying that we should be [aware of] our guiding the competition landscape because of the recent fast ramping up of several online 1-on-1 tutoring players?
Natalie, can you repeat your second question? Thank you.
Just curious about the competitive landscape change, because of the fast ramping up of several online 1-on-1 tutoring players, especially those ones in Shanghai.
Okay. So you are mentioning really the fact -- the growing of the -- the ramping [ interest ] from the new [indiscernible]. Right? Okay. So actually we are not [indiscernible] --
Not [indiscernible], not [indiscernible], but, like, large players but also like the recent [indiscernible] start-ups.
Okay. So we do see very strong growth in the premium segment of the K-12 after-school tutoring market. And as you can see, we are expecting a very strong growth in the next several years. And then in terms of the potential impacts on online, in terms of the competition from potential online K-12 tutors, we think that they impact this more for the mass market. And then [indiscernible] more on the [indiscernible] programs which are more -- so I think in the premium market we haven't seen much competition from the online players. And we do see very strong [indiscernible] growth and top-line revenue growth in every city that we have entered.
Yes, this is [ on the line ] CEO Steve. Yes, we haven't seen any competition in the premier segment yet. We do not see that as threat. And in the meantime, I think overall the K-12 tutoring market is still growing fast, even though the online market grows even faster. So for now I think the market is overall still segmented. So for every one we can see [indiscernible], especially in the premium segment. Yes. We don't see any major competition from the online players yet. Yes, we are pretty comfortable with our current position.
Got it. So lastly, just wondering, how many quarters do you need for a typical learning center to mature to achieve a healthy margin level?
So it varies from mature market to sub-mature market or new markets. Let's take one where we actually did this as an example. For our new learning centers in mature markets such as Shanghai, we really think this can become breakeven and can make money at the end of first year. So [indiscernible] can become breakeven in [8 to 9]. And then for [indiscernible] for sub-mature cities I think it might take about 1 year to 1 1/2 year. And then for new learning centers in new cities, I think it will take 18 months to 2 years to become breakeven and then starting to make profits.
Yes. Again, this is Steve, our CEO. Overall we open more centers in our mature markets and sub-mature markets. So in these cities we feel we can actually quickly build EBIT. So like mature cities like Shanghai. But [indiscernible] like 8 to [ 10 ] months and the sub-mature cities like Hangzhou, Guangzhou, [indiscernible] where -- we have a bunch of all these cities -- we [indiscernible] in a dramatic -- in a quick [indiscernible] revenue growth. It usually takes us about 1 1/2 years to break even. So we feel very confident to open more centers in these mature cities and sub-mature cities, so we can penetrate the whole city, yes, as quick as possible.
[Operator Instructions] Ladies and gentlemen, showing no further questions this will conclude our question-and-answer session. I would now like to turn the conference back over to Ms. Rebecca Shen for any closing remarks.
Thank you, Operator. In closing, on behalf of the entire management team, we would like to thank you for you again for your participation in today's call. If you any further inquiries in the future, please feel free to contact us. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.