Bright Scholar Education Holdings Ltd

NYSE:BEDU

Earnings Call Transcript 2021-Q1

[Operator]

Good day and welcome to the Bright Scholar First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to management. Please go ahead.

[Ruby Yim, Investor Relations]

Thank you, operator. Good morning and good evening. Welcome to Bright Scholar’s first fiscal quarter ended November 30, 2020 earnings call. Joining me today are Mr. Jerry He, our Executive Vice Chairman; Mr. Andy Chen, our Co-Chief Executive Officer; and Ms. Dora Li, our Chief Financial Officer.

As a reminder, today’s conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. By now, you should have received a copy of our press release that was distributed on January 20, 2021 after market close Eastern Time. If you have not, it is available on the IR section of our website.

Before we get started, let me remind you that today’s call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, the company’s business plans and development which can be identified by terminologies such as may, will, expect, anticipate, aim, estimate, intend, plan, believe, potential, continue is or are likely to or other similar expressions. Such statements are based upon management’s current expectations in 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 this and other risks, uncertainties or factors is included in the company’s filing with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law. During this call, we’ll be referring to GAAP and non-GAAP financial measures. We use certain non-GAAP measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for net income attributable to company or other consolidated statement of comprehensive income data prepared in accordance with U.S. GAAP. Please note, all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated.

With that, I’ll turn the call over to our Executive Vice Chairman, Jerry He. Jerry?

[Jerry He, Executive Vice Chairman]

Thanks, Ruby. Good morning and good evening. Thank you for joining us on our first fiscal quarter 2021 conference call. Again, we appreciate your continued interest in our company. The pandemic remains as the destruction to the global economy and our global business, in particularly our overseas K-12 business.

On today’s call, on behalf of the senior management team, I will provide a little bit of context for our fiscal 2021 first quarter performance and discuss key trends in our business. I will also highlight our strategic priority for fiscal 2021 that will further enhance our market position for long-term growth. Dora will then provide details on our business and the financial performance and an update on our guidance. I will wrap up and then we will take your questions. For those who are new to our company, we have included in our earnings presentation a brief corporate introduction in Section 1 from Slides 5 to 11, of which you can download it from our IR website. Again, all numbers are in RMB and our comparisons refer to year-over-year, unless otherwise stated.

Let’s start with Slide 13 for the highlights of our first fiscal quarter, with detailed breakdown by respective businesses in Slide 14. In the quarter, the overall business performance was significantly affected by our overseas school and overseas-related complementary business while all other businesses in China have shown major improvement in year-over-year revenue growth. The revenue for the first fiscal quarter was RMB1.051 billion, dropped by 4.2%. The company produced net income of RMB 190.9 million, down by 6.6%.

On our domestic K-12 business, we are off to a very promising start and the momentum to our business clearly has picked up in the first fiscal quarter, as likely in China continues to return to new normal. Demand for our K-12 grew in the quarter, enrollment of international school, bilingual school and the kindergarten up by 9.7%, 8% and 17%, respectively as shown in Slide 15.

Average tuition fees of international school and bilingual school have also recorded an increase of 1.9% and 5%. In these challenging times, we could not be more pleased with the momentum across all of our domestic K-12 businesses. Our near-term priority is to drive enrollment growth, optimize utilization and improve operating efficiency. The strength of our brand reflects our unwavering commitment to deliver quality education consistently. As of January 15, approximately 60.5% of students in the 2021 graduating class of our international school have received over 400 offers from global top 50 institutions with 6 conditional offers from Oxford, 2 from the University of Chicago, 2 from Cornell, 4 from New York University and 1 from Northwestern University, as shown in Slide 16. We expect more students will receive offers from the elite institutions and the academic performance of our students will continue to improve across all age groups.

Our overseas business performance has been adversely impacted by devastating pandemic. In the UK, where most of our overseas school is based, the government continues to institute lockdown measures to control the spread of the virus and address the emergence of a new virus variant. The whole educational system continue to be upended by the ongoing health crisis and the school face the daily challenges in meeting the needs of our students with after-school nor learning centers opened for in-person learning. Although we have been able to help schools to overcome these obstacles with online solutions to turn around learning loss and the potential impact on student achievement, our top line was significantly impacted by the absence of traditional school-based activities.

In the quarter, our overseas revenue dropped by 48.2%. During the quarter, we remain intently focused on both supporting our schools, students, parents and teaching staff as they adapt to COVID-19 disruptions and delays as well as managing the negative effect of COVID-19, our student enrollment and financials as we continue to lower costs and increase efficiency, taking steps to reduce operating cost and optimize our operations and improve our IT infrastructure. The benefits realized from the cost-cutting measures and the investment taken over the last two quarters should bring long-term improvements to the cost structure of our overseas business as well as opportunities for significant gains in profitability, while the operating environment resumes to normalcy. Again, our global network is of strategic importance in realizing long-term value with enormous market opportunities and synergies yet to be unlocked as shown in Slide 17.

Let’s move on to Slide 18 for our complementary education services business. The recovery is evident and the demand for our service remains strong in China. In the quarter, there was a solid uptake in domestic after-school training and study camp business, with revenue increased by 7.7% and 635%, respectively. However, the ongoing pandemic in Europe and the rising U.S.-China tensions continue to have adverse impact on our overseas-related complementary business, including overseas study counseling, whose revenue dropped by 49.4%, which in return affected the overall business performance for the quarter, with total revenue decreased by 5.8%. In spite of the challenges for overseas-related business, there are growing opportunities with regulatory tailwinds beginning to build in area of online courses, after-school training and study camp business. Amidst the macro headwinds, I am pleased to report that our EdTech business has been doing quite well, with revenue up 64% in the quarter, including the acquisition of Linstitute.

Please turn to Slide 19 for our EdTech business. The COVID-19 pandemic has put a spotlight on the importance of education technology for learning. Digital adoption in home and school education continued to accelerate at a fast pace. We are gaining more traction for 3i Global Academy and other EdTech initiatives as we expand our blended traditional and digital learning solutions to meet their fast evolving needs of students, parents and the teachers. Looking forward, though we face continuing uncertainty in our overseas operations in the coming quarter, the strategic steps we are taking are providing benefits today and more importantly, they are positioning us for continued success in post-COVID-19 business environment.

Before I turn the call to Dora, I would like to share with you the key strategic priorities as shown in Slide 20. In the 2021 fiscal year, our strategy will continue to build upon our four strategic pillars. First, focus on maintaining organic growth in our domestic K-12 business, which provides a cash cow to fuel the new growth initiatives and acquisitions; second, focus on cost management to lower our cost base and improve our long-term operating leverage and profit margins; third, optimize integration planning to unlock new revenue and cost synergies and expand complementary education offerings; finally, continue to invest in education technology and complementary education services and deploy capital in strategic acquisitions for long-term growth.

Due to the uncertainties associated with COVID-19 and the macroeconomic headwinds, our overseas management team has analyzed several scenarios that are contingent on the depth and duration of the COVID-19 pandemic and the resulting impact to our overseas business. We have taken the most conservative approach that forms the basis for our revised guidance, of which I will leave it to Dora to further details.

With this note, I turn the call to Dora.

[Dora Li, Chief Financial Officer]

Thank you, Jerry. Let’s turn back to our financials. Please also be reminded that all numbers are in RMB and all comparisons refer to year-over-year comparisons, unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis.

Please turn to Slide 22, revenue for the quarter. Overall, the revenue was down 4.2% to RMB1,051.5 million. Revenue for our domestic K-12 schools, including international schools, bilingual schools and kindergartens was up 10.9% for the quarter to CNY742.4 million, accounted for 70.6% of total revenue as compared to 60.9%. For international schools, revenue was up 11.1% to CNY304.3 million, primarily due to the 9.7% increase of student enrollment and a 1.9% increase in average tuition fees. Our bilingual schools revenue was up 13.5% to CNY260.8 million due to the 8% increase in student enrollment and a 5% increase in average tuition fees. For our kindergarten, revenue was up 6.8% to CNY177.3 million, primarily due to a 17% increase in student enrollment. Revenue from our overseas K-12 schools was down 48.2% to CNY134.2 million, primarily due to the impact of COVID-19. Revenue for our education technology segment was up 64% to CNY36.7 million, primarily due to the acquisition of Linstitute. Revenue from complementary education was down 5.8% to CNY138.2 million due to the impact of overseas-related complementary business.

On Slide 23, cost of revenue for the quarter was 57.9% of total revenue compared to 56.9% in the same quarter of last fiscal year. Teaching staff cost, the primary cost contributor, accounted for 32.6% of total revenue, up from 29.5% for same quarter last year. Our domestic K-12 schools average student-teacher ratio for this fiscal quarter was 9.2 compared to 8.9 in the same period last fiscal year.

On Slide 24, the gross profit and margin, gross profit was down 6.5% to CNY442.8 million for the quarter, and gross margin was 42.1% compared to 43.1%. Continuing on Slide 25, adjusted SG&A expenses as a percentage of total revenue was 21%, up from 18.2% in the same quarter last fiscal year. The increase in SG&A expenses was primarily due to the incremental SG&A expenses associated with newly established international school and the kindergartens and also the acquisition of new business on a comparable business – basis. To elaborate more on the adjusted SG&A expenses, please refer to our Slide 26.

Continuing to Slide 27, adjusted EBITDA for the quarter was CNY320.6 million compared to CNY352.5 million, and adjusted EBITDA margin was 30.5% compared to 32.1%. Adjusted net income for the quarter was CNY197.1 million compared to CNY223 million, and adjusted net margin was 18.7% compared to 20.3%. On Slide 28 shows our cash and bank balance. As of November 30, 2020, our cash and cash equivalent and restricted cash totaled CNY1,697 million or $258.1 million as compared to CNY4,424 million on August 31, 2020. We also have short-term investments of CNY2,175 million as of November 30, 2020.

Moving to Slide 30, in November 2020, the Board approved the third share repurchase program of the company of up to $50 million. As of January 15, 2021, the company has bought back 61,622 shares for $0.4 million. Continuing to Slide 31, we are revising our guidance for the fiscal year ending August 31, 2021. We expect our total revenue in the range of CNY3.59 billion and CNY3.69 billion, representing a growth of 7% to 10% based on existing business and without any potential acquisitions. We also expect average student enrollment in our domestic and overseas schools to be between approximately 56,000 and 57,000, representing an increase of 8% to 10%. We also expect to open 19 kindergartens for fiscal 2021 and also beyond fiscal 2021, we have 7 schools and 39 kindergartens contracted for operation. Please refer to the table in Slide 33 and 34 for the condensed income statement.

Slide 35 shows the reconciliation for SG&A expenses, EBITDA and net income on a GAAP to non-GAAP results. Slide 36 shows our balance sheet and the cash flow statement. For the fiscal year ended – for the fiscal quarter ended November 30, 2020, the company’s capital expenditure was approximately CNY55.2 million, down 25.8% compared to the same period of last fiscal year. Also on Slide 37 shows our average student enrollment and average tuition fee across our network. This concludes my financial update.

Now I will turn back to Jerry for his closing remarks. Jerry?

[Jerry He, Executive Vice Chairman]

Thank you, Dora. I’m very pleased with the way our company has adapted to the continuing challenge associated with COVID 19. With deeper conviction and strong resilience, we’re constantly looking for new ways of enriching the learning experience of our students at school and at home, signing new streams of revenue while enhancing our competitive cost base to protect our operating income and case positions. We remain certain of our value proposition of providing premier education service to be supported by our global network of schools and powered by technologies. We remain certain of our addressable market with enormous market opportunities and the synergies yet to be unlocked. We are most certain that Bright Scholar is well positioned to weather the storm and to capitalize on the opportunities for the years to come. We remain confident in our ability to deliver on our targets and a sustainable shareholder value through this unprecedented period of pandemic uncertainty. This concludes our prepared remarks, and then we would like to open the call to the questions. Operator, please.

[Operator]

Thank you. [Operator Instructions] The first question is from Timothy Zhao from Goldman Sachs. Please go ahead.

[Timothy Zhao, Goldman Sachs]

Hi, management. Thank you for taking my question. So just a quick one on your revenue guidance, I see that you kept the revenue guidance by around 5%. Can you explain in more detail about the rationale behind that? And also on your overseas schools, because I see in the first quarter, it seems that the domestic business is growing quite well but overseas revenue dropped a lot. So what kind of recovery path are you expecting for the overseas business? Thank you.

[Jerry He, Executive Vice Chairman]

Hi, Tim, this is Jerry. I’ll take your question. So we lowered guidance mainly because what’s going on with the second wave of pandemic, because we were – when we did the guidance last time, we’re expecting some students with delay registration from fall semester to the spring semester, meaning they’re going to come back in January. That was before – of course, before the fall semester started. And of course, as we all know that if you look at the new cases in the UK, back in April of last year, I think daily new cases was around 4,000, 5,000. And at its peak, it actually went to 60,000, which is more than 10x what it was prior to peak. So the entire country is in the lockdown. So – and as we found out, the deferred students who are supposed to come back in January, now they couldn’t come because of all the travel restrictions that you probably heard in the news. Many, many countries cut their travel connections with the UK. So that’s – so enrollment would not come. Also with that, they – of course, who are registered already would be converted online. So everybody is online other than those – one campus in Cambridge, where we – some students who are already there, they didn’t go home for Christmas. So we kept them in the dorm, but even though, they are taking classes online. So we are going to lose some revenue from the boarding as well. If it still not count we are going to do that as well. So now we are basically factoring all that in the second wave, and also the new variant, if you will, of the virus, more presumably more contagious one. So we basically say whoever not on our campus now or not registered now, we just assume they couldn’t come for the rest of the fiscal year. So we basically write that down. That’s contributed to the drop of tuition – basically the tuition, the boarding. And also there are some – we also have a business in language training, that staff house under on the CATS. Of course, with lockdown, there are very limited teaching you can do over there as well. So because of those three loss in revenue, we write-down our – we lowered our guidance to that. And for the domestic, as you mentioned, mostly back to normal. As you can see, the enrollment went up and – but I want to say, we couldn’t do much this year because of the pandemic and the increase of the tuition. So even though we get more student, but we will less – we were not able to increase tuition as much as we have done in the previous years. But even with that, we still see growth, as you see the numbers in domestic hit off.

[Timothy Zhao, Goldman Sachs]

Sure. Thank you.

[Operator]

[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I’d like to turn the conference back over to Jerry He for any closing remarks.

[Jerry He, Executive Vice Chairman]

Thank you very much for joining the conference call. Please feel free to contact us if you have any further questions. We wish everybody a good day and a great year. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.