Bright Scholar Education Holdings Ltd

NYSE:BEDU

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, and thank you for standing by for Bright Scholar's 2021 Third Fiscal Quarter Earnings Conference Call. [Operator Instructions].

I would now like to turn the meeting over to your host for today's conference, Ms. Ruby Yim, Investor Relations Counsel.

[Ruby Yim, IR Counsel]

Thank you, Operator. Good morning and good evening. Welcome to Bright Scholar's Third Fiscal Quarter ended May 31, 2021, Earnings Call. Joining me today are Mr. Jerry He, our Executive Vice Chairman; Mr. Andy Chen and Ms. Wanmei Li, our Co-Chief Executive Officers; 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. This was distributed on July 21, 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 terminology 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 and current market and operating conditions and relates 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 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 law.

During this call, we'll be referring to the 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 in our management remarks are in RMBand all comparisons refer to the year-over-year comparisons unless otherwise stated. And for those who are new to our company, we have included in our earnings presentation a brief corporate introduction in Section 1 from Slide 5 to 11, which you can download from our IR website.

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 third fiscal quarter 2021 conference call. We appreciate your continued interest in Bright Scholar.

On today's call, on behalf of the senior management team, my prepared remarks will cover our quarterly performance, business progress and updates. Dora will then provide details on our respective business and financial performance. I will wrap up with brief conclusion before opening the call for questions.

I would like to start with a quick note on the massive and widespread flooding in Zhengzhou and other places in Henan province. A dozen cities with hundreds of thousands of people are affected. Our hearts go out to those who have been affected by the record-breaking rainfall, and we express the utmost gratitude for the rescuers saving and pulling people to safety. As for global pandemic, while vaccinations are rolling out and the case rates are declining in most developed countries, situation in many other places have not been as good.

Turning to our business. Let's start with the overall financial performance in Slide 12 - 13 on Section 2 for the highlights of our third fiscal quarter and 9 months as well as detailed breakdown by respective business in Slide 14 to 15. We are pleased to report strong third fiscal quarter results, driven primarily by a stronger-than-expected recovery in our domestic business. We believe this demonstrated the strength and agility of our value proposition and our sustainable growth business model.

In the third quarter, we focused on our engines of growth and continued to employ cost discipline across all of our businesses, resulting in 42.5% revenue growth and 141% net income growth compared to the same quarter last year. On a 9-month basis, top line grew 7.4% year-over-year and the net income was RMB312.4 million despite the material impact the pandemic had on our overseas business. The strong recovery in earnings also reflect the continuation and the acceleration of our key strategic initiatives we have discussed in the past few quarters, which continued in this quarter.

Looking more closely at our respected businesses. Please refer to Slide 16. Revenue from domestic K-12 schools, especially kindergartens, have experienced a sharp decline when pandemic situation was in its worst in China in fiscal 2020. We are very encouraged that the domestic K-12 business recorded their strongest recovery in the third fiscal quarter 2021 where the enrollment of international school, bilingual schools and the kindergartens grew by 11.6%, 8.4% and 29.4%, respectively. In the quarter, revenues and average fees per student were also back to pre-COVID level.

Underpinning this strong rebound is the remarkable academic results that our students continue to achieve year after year, shown in Slide 17. As of May 31, 2021, 94% of the students in the 2021 graduating class of our international schools in China have received offers from the global top 50 institutions, including 12 offers from Oxbridge, 3 from the University of Chicago, 2 offers from Cornell University, 2 offers from Vanderbilt University, 2 offers from UC Berkeley and 7 offers from New York University. Shown in Slide 18 is our extensive school network and expansive capacity as our foundation for scaling up our business sustainably over long term.

Moving on to Slide 19. Complementary business remains a significant growth driver for Bright Scholar, and we have been very pleased with the strong recovery and the progress our team had made in increasing the company's reach and brand awareness as well as enrich our service offering and generating diversified revenue sources. In the quarter, revenue grew by 78.5% year-over-year to RMB130.2 million. The growth was primarily driven by the moderate recovery of camps and the domestic tour business and after-school all-round education service as compared to last year, which was relatively low due to COVID-19 impact.

Overseas-related complementary business continued to be impacted by the ongoing pandemic and the travel restrictions. However, with a speedy COVID-19 vaccine rollout in the U.K. and the U.S., campus reopen and the lifting of travel restrictions is in sight, we continue to see expanding opportunities, spurred by the need of parents to accelerate the growth of reading and all-round education for their children. These trends support our confidence in a very strong recovery to be continued for complementary business in our coming quarters and the fiscal years. The synergy with our overseas network offers tremendous opportunities. We expect growth will resume and accelerate once the vaccination programs begin to take effect and the subsequent travel restrictions are lifted.

Turning to our overseas business in Slide 20. As anticipated, recovery was slower than domestic business due to significant impact of COVID. The challenging operating environment has continued to put pressure on the financial position of our overseas business. While we are managing expenses prudently in response to this anticipated and significant decline, we have also taken this opportunity to rebrand and consolidate our overseas business.

CATS Global Schools cater to 3,500 full-time students and 14,500 students from our English language training institutions. Our students represented over 100 nationalities from 16 locations in the U.K., U.S., Canada and China. And our portfolio includes independent and international boarding schools, an arts university, English language training institutions and a variety of summer programs. We offer students the opportunity to study at different campus to benefit from learning with different cultures to prepare for today's increasingly globalized society and economy.

We are setting our business up to capture market opportunities when operating environments return to normal. Looking ahead, we are also very mindful of the continued risks related to economic, political, regulatory and global health issues that affect our business. However, with the multiple engines of growth, the company is confident that it is well positioned to drive continued recovery as pandemic recedes and the market dynamics support it.

We will continue to focus on our strategic initiatives as recapped in Slide 21, namely to improve utilization and enhance efficiency of our domestic K-12 business, rebuild our revenue growth for overseas business post COVID and expand the breadth and depth of our complementary service offerings. We expect this initiative will also booster our brand awareness, build an effective global organization, expand our emblematic offerings and enrich learning experience of our students and to generate new business growth over mid- to long term.

Our solid balance sheet and market-leading position have enabled us to navigate through this challenging period while strengthening our capacities for greater success long term in China and internationally. We are excited by the magnitude of opportunities in front of us, underpinning our confidence in the company's financial future. The Board of Directors have recently declared a cash dividend of $0.12 per ADS to our shareholders. We remain committed to executing our growth strategy, developing our business, strengthening our market position and delivering our - for our students as we invest for future to deliver value for all our stakeholders.

With this note, I will turn the call to Dora.

[Dora Li, CFO]

Thank you, Jerry. Let's turn back to our financials. Please be reminded that all numbers are in RMBand 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 23. Our domestic business continued its strong recovery traction, mainly attributed to the strength of domestic K-12 and the complementary education service business. Top line for the quarter was up 42.5% to CNY1,053.8 million for the quarter and up 7.4% to CNY2,914.4 million on a 9-month basis.

Domestic K-12 schools, that includes international schools, bilingual schools and kindergartens, showed a stronger-than-expected recovery. Revenue was up 72.5% for the quarter and 28.4% on a 9-month basis. International schools revenue for the quarter up 23.6% primarily due to 11.6% increase of student enrollment. On a 9-month basis, revenue was up 15.4% due to 9.6% increase in student enrollment. Bilingual schools revenue for the quarter up 40.3% due to 8.4% increase in student enrollment. On a 9-month basis, revenue was up 23.2% mainly attributed to 8.2% increase in student enrollment.

Kindergartens. As Jerry mentioned earlier, kindergartens have experienced a sharp decline in third quarter fiscal 2020 when pandemic situation was at its worst in China. Kindergarten had the strongest recovery for the quarter with a 29.4% increase in student enrollment. On a 9-month basis, revenue was up 71.3%, and student enrollment was up 22.3%.

Revenue from overseas schools was down 32.4% for the quarter and 44.3% on a 9-month basis primarily due to the continued impact of the pandemic. Revenue from education technology was up 47.1% for the quarter and up 47.9% on a 9-month basis primarily due to the acquisition of online Academic Olympiad training business. Revenue from complementary education was up 78.5% primarily due to the moderate recovery of camps and domestic tour business and after-school all-round education services as compared to last year, which was relatively low due to the COVID-19 impact. On a 9-month basis, revenue increased 19.7%.

On Slide 24, cost of revenue. Our focus remains on effectively managing the changing business environment through balancing cost control measures with initiatives to drive immersive business growth. For the third fiscal quarter, total cost of revenue was CNY635.6 million, an increase of 42.1% and accounted for 60.3% of total revenue compared to 60.5%. On a 9-month basis, total cost of revenue increased by 15.1% to CNY1,889.3 million and accounted for 64.8% of total revenue compared to 60.5%.

Teaching staff cost, the primary cost contributor, accounted for 34.3% of total revenue in the third fiscal quarter, which is the same percentage as the same quarter last fiscal year. On a 9-month basis, teaching staff cost was 36.9% of total revenue, up from 32.8%. Our domestic K-12 schools average student-teacher ratio for the first 9 months of fiscal year 2021 was 9.3 compared to 9.0 in the same period last fiscal year.

On Slide 25, our gross profit and margins. While overseas business continued to be impacted by ongoing pandemic, we are encouraged by the significant gross margin improvement of our domestic K-12 business in the third fiscal quarter. Gross profit was up 43.2% for the quarter and down 4.4% on a 9-month basis. Gross margin was up 0.2 percentage points to 39.7% for the quarter, and on a 9-month basis, gross margin was down 4.3 percentage points to 35.2%. The increase in gross profit and gross profit margin for the quarter was mainly due to the stronger recovery of domestic business in the fiscal quarter.

Continue on Slide 26. We continue to employ tight cost control across all our business to maximizing cost effectiveness and optimization opportunities. Adjusted SG&A expenses was CNY213.5 million, up 7.5% for the third fiscal quarter and accounted for 20.2% of the total revenue compared to 26.9% in the same quarter last fiscal year. On a 9-month basis, adjusted SG&A expenses was CNY645.1 million, up 3.9% and accounted for 22.1% of total revenue compared to 22.8% last fiscal year.

To elaborate more on the adjusted SG&A expenses, please turn to Slide 27. Our top priority is to enhance the cost competitiveness and rebuild revenue of our overseas operations through accelerating the integration and advancing operational efficiency. Adjusted EBITDA recorded significant recovery, as shown in Slide 28. For the quarter, it was CNY319.3 million, up 94.1% from CNY164.5 million. Adjusted EBITDA margin was 30.3%, up from 22.2%. On a 9-month basis, adjusted EBITDA was CNY688.2 million, up 2.8% from CNY669.4 million. Adjusted EBITDA margin was 23.6% compared to 24.7%.

Adjusted net income for the quarter was CNY170.6 million, up 285.5% from CNY44.3 million. Adjusted net margin was 16.2%, up from 6%. On a 9-month basis, adjusted net income was CNY331.8 million, up 1.6% from CNY326.7 million. Adjusted net margin was 11.4% compared to 12%.

We have a strong balance sheet that enabled us to mitigate through challenging periods, as shown in Slide 29. As of May 31, 2021, our cash and cash equivalent and restricted cash totaled CNY1,668.1 million or USD 262 million as compared to CNY2,098.4 million as of February 28, 2021. We also have a short-term investment of CNY2,507.2 million as of May 31, 2021.

Moving to Slide 31. The Board of Directors has recently approved a cash dividend of $0.12 per ADS. It reflects our strong financial position and confidence in the company's financial future.

In addition, we continue to execute our third share repurchase program announced in November 2020. As of July 7, 2021, the company has bought back 385,964 shares for USD 2.1 million. We will continue to maintain our excess capital at the level which can allow us to financially - financial flexibility to grow our organic business and pursue acquisition opportunities.

Going to Slide 32. We are on track to achieve our revenue 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 potential acquisitions. We also reaffirm our guidance on enrollment and 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%. At the same time, we are revising down the guidance regarding school and kindergarten openings as we reprioritize our strategic initiatives to be more judicious in new expansion and developments.

Please refer to the table in Slide 34 and 35 for the condensed income statement. Slide 36 shows the reconciliation for SG&A expenses, EBITDA and net income on a GAAP to non-GAAP results. Slide 37 shows our balance sheet and cash flow statement. For the 9 months ended May 31, 2021, the company's capital expenditure was approximately RMB110.4 million, up 2.9% compared to last fiscal year. Also, Slide 38 shows our average student enrollment and average tuition fee across our network.

This concludes my financial update. Now I will turn to Jerry for his closing remarks. Jerry?

[Jerry He, Executive Vice Chairman]

Thank you, Dora. This past year was a year of enormous change in global as well as China's education sector. It accelerated the changes and pushed all of us serving this industry to be flexible and innovative. It has pushed us to evolve faster than we ever thought possible. We firmly believe that the changes of this past year will lead to a better and more equitable future for K-12 education in China. Bright Scholar has demonstrated resilience and agility to evolve and progress, which makes us very optimistic about our ability to create sustainable value for our shareholders.

The challenge of this past year required tremendous fortitude and adaptability from all of our staff around the world. I'm very grateful for their dedication and commitment to operate at the highest standards amid these ongoing challenges. We remain steadfast in executing our strategy to build a strong global company while driving scale growth in areas where we operate.

This concludes our prepared remarks, and I would like to open the call for questions. Operator, please?

[Operator]

[Operator Instructions]. We have a question from Len Law with Lucror Analytics.

[Len Law, Lucror Analytics]

I would like to ask about the short-term investments. So are these short-term investments held onshore or offshore? And if onshore, do you foresee any difficulty repatriating the cash for your bond repayment due to the new regulations? That's my first question.

[Dora Li, CFO]

The short term - this is Dora. The short-term investment is onshore, but we have the vehicle and the ability to transfer the onshore funds to offshore. In short, we have - we are capable to repay all the bonds when it comes to - it matures. Thank you.

[Len Law, Lucror Analytics]

Sure. And my second question, can you provide an update on the regulations on China's private education sector? At this stage, what are your expectations of the impact from the law for promoting private education? That's all.

[Jerry He, Executive Vice Chairman]

This is Jerry. I will take that question. There are a lot of new laws and policy that came out in the last couple of months. If you're talking about - specifically about private schools, as we understand it today, it's very likely that going forward, it's very difficult to obtain new school licenses. But the existing ones, from what we can see today, most likely are continuing to operate. That's - and of course, there are details about recruiting and fees and stuff like that, but I don't think it's going to materially impact any of our existing schools.

[Operator]

[Operator Instructions]. At this time, there are no further questions. And I would like to turn the call back over to management for any closing remarks.

[Jerry He, Executive Vice Chairman]

Okay. Great. Thank you very much for joining the conference call. Please feel free to contact us if you have any further questions. I wish everyone a great day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.