51Talk Online Education Group (COE) Earnings Call Transcript & Summary

Hello, and welcome to the Deutsche Bank Depositary Receipt Virtual Investor Conference, dbVIC. My name is Zafar Aziz, part of the Deutsche Bank team. I'm pleased to announce our next presentation will be from China Online Education Group. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box below the slides. Once the Q&A session is ended, don't log out. It automatically transferred to the China Online Education booth the conversation and ask by chat and access shareholder materials. On a final note, all days presentation to be recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Min Xu, Chief Financial Officer of China Online Education, which trades on the NYSE under the symbol COE. Over to you, Min Xu.

Group's presentation. My name is Min Xu, I'm the CFO of the company. Just a very brief introduction with the safe harbor statement. We're the leading player in China's online education market. In China, we are commonly known as 51Talk, which means I want to talk. We bring together more than [ 2,000 ] students and roughly teachers to our online platform to one-on-one and small group live English lessons. Our mission is to empower everyone to talk to. So in July, this government issued a policy which bans foreign teachers by China to teach in this K-9 students online. We responded with the following 3 measures. We quickly launched our efficiency also known as [ Sue Yang ] Course, which is taught by Chinese team that were compliant to the government policy. And second, we start to focus -- we started to refocus our 51Talk market product, these markets outside Mainland China. And third, continue to support worry-free English product for our adult students. So we announced our launch of our All-Round Proficiency Course the Q2 earnings call. And so basically, this course consists of kind of 4 sessions, of the sessions are AI sessions. One is the AI preview and the other 1 is the AI reading class. And we also have 5 sessions up by Chinese teacher in a small class format. So that's 225-minute sessions with a 10-minute break in between. So this is -- this course actually is designed to have a relatively fixed schedule, which is different from our one-on-one typically, like that 4 sessions is taught in 1 week in a fixed time. And all the sessions are 45 minutes each. And live session taught by Chinese teacher is the class size that typically 6 to 8 students. And so outside class, we also have a WeChat Group, which you can get the round clock help from Chinese teaching system. This actually has -- people probably is a little bit surprised that we came out with this new course very quickly. However, this product actually has already has 10 years' track record. Ever since 10 years ago, we've been experimenting with small class and also with Chinese teacher that. And specifically for [ Sue Yang ] course, we have fixed class mix is really help students to establish kind of a sense of a classroom setting and develop friendship with his peers. And we have fixed teachers so that the students can be familiar with the teacher and the teachers will know the students level and will kind of make customized plans to develop our students. And also, we have fixed time, which helps students to establish a good habit of learning. And so let's talk a little bit about our competitive advantage. So when we compare ourselves with our online education platforms in live English lessons you will find out that we are a platform with the longest track record of more than 10 years, and we are a platform or numbers of online Filipino teachers of more than 3,000. And third, we have a proven curriculum and technology platform tested by the large scale of student base than 400,000 active students. So teachers are the key as an education experience. So teacher operational excellency is our top priority. We currently have roughly 32,000 Filipino teachers and about 1,000 global teachers. Local operation team in the Philippines bring [indiscernible] and quality assurance. In order to ensure high teaching quality, we maintain a very high recruiting standard. Out of every 100 entities, we only hire 4 teachers. Have rigorous training and development system. There are 7 different levels of teacher rating, in order to move up the ladder, just need to attend training programs, receive good ratings from our students. So here are some pictures of our Filipino teachers and our Filipino office. Our teachers are really kid-friendly and enthusiastic. Teachers are home-based teachers. We established 1,000 teachers class, teachers and develop a sense of off-line community. Teachers can meet off-line to exchange ideas, learn from each other, to do some training. It is great opportunity at candidates to become 51Talk. One of the very few online English education companies in China and has capabilities to develop a proprietary curriculum to show because much of the third-party content on market, they are designed for native English [indiscernible] of English. By developing our own curriculum, we make learning experience much more friendly for student and the teaching process much more easier for our teachers. In our own curriculum also allows us to be involved in the teaching and learning cycle and have a deeper understanding education process. We believe curriculum development is crucial in shaping a great education product that is both friendly and effective for our students. It's also one of the very few online education platforms that owns a proprietary technology platform our air class platform can now handle more than 50,000 lessons a day in our own technology platform really allows more flexible, scalable and be able to incorporate the latest AI and big data technology, learning experience and teaching the effectiveness. So I want talk also has brand awareness in both [indiscernible] and in China, and we believe our recognition will not only help the transition to [ Sue Yang ] class in China. It will also help the quick growth of our international business. So I'll just very quickly go through some of our Q2 results in terms of net revenue growth, Q2, it was 17.5% year-over-year growth. The revenue reached RMB 580 million. And our margin has been quite consistent staying above 70%. And our income actually in Q2, we had a loss of RMB 18 million because we are seeing a slowing down of our revenue. And at the same time, we were gearing up and to having assets in Q2 marketing for higher growth. That resulted in a loss of RMB 18 million. And so our operating expenses banks at in terms of a [indiscernible] higher than the Q2 earlier than Q1. It's mostly because we were increasing our expense trying to hit higher growth, while at the same time, sensors. Yes, I'm saying the net loss is about RMB 18 million. You can see that because of the mismatch of spending and the revenue growth and also the gross billing is slowing down, we're seeing a cash outflow of RMB 70 million in Q2. And our cash balance is fine to about RMB 1.6 billion. So that wraps up the presentation, and I'll just open up for questions.

So all right. The first question is that are the margins in this new [ Sue Yang ] product. We designed this product a 70% margin. And second question is that any non-Chinese being open to date? Yes, outside Mainland China, and now we already have students from many regions, including Taiwan, Malaysia and Eastern Europe. So there are many markets, but it's not significant. So we are continuing on this, and we should give you more update in our Q3 call. So the next question, what is our view of double reduction policy? And will it impact your business? Yes. So of course, beginning of the presentation, I mentioned that main thing about the double reduction policy that advance growing teachers in China to teach K-9 students online. But we pretty much prevented our Filipino teachers teaching kids. However, the government is giving us a great period, allowing us to finish up the lesson credit we've already sold. However, we are working very hard. One, we developed the new [ Sue Yang ] class for Chinese students. Two, we are finding kind of the national market for our Filipino teacher as market product. And we believe our Chinese product in our Filipino teacher mass market product will be very, very attractive. The Chinese students and international students. So next question, where do you see the company in 1 year. And so basically, I think like in the year time frame, we will see our international business will be the growth driver. And we do see our international business will drive the future growth of the company. And for China market, obviously, we won't be able to maintain a customer base, the student number of 400,000 or it will decline initially. However, we do believe the demand for English learning is still there in China. We believe after probably a few quarters of decline, we will get back to the track of continue to grow forward. Another question. Can you provide any revenue guidance for 2022? Sorry, we cannot provide that for next year. However, we did provide revenue guidance for Q3, which is RMB 555 million. And so when will this grace period end? So it is hard to say, right? So because it -- right now, we haven't got any notice or we do not know whether this grace period will end. But at the same time, we are -- we do have a contingency plan even if the grace period end, we have products for our stand. I don't think that's going to be a big issue for us. And next question. So are you going to repurchase any share given the cash on balance and the stock price? So right now, we don't have any repurchase plan. And so we're going to continue to focus on our operation, and I'm sure the stock price will reflect the company's value long term. And what's your ratio of overseas teachers and outlook for hiring more domestic? Well, I would say right now, majority of our teachers are overseas. And we are in the process of hiring more domestic teachers to meet our demand for the [ Sue Yang ] class, and it is increasing quickly. And so however, we face the pace hiring to meet our demand. And the next question is, any visibility regarding revenue drop on '20? So that is a little bit hard to speak. But in general, we do believe at the very beginning, because our as market one-on-one product is kind of a ban there. We replaced this with 2 new business. One is a class in China, which is kind of a new business. It is growing quickly, but obviously, the scale is small compared to the previous old product. And we also have a product in international markets, that it is also quite attractive product, and it is growing fast. However, the international market right now is very small compared to the Chinese market. So we kind of replaced a mature product with 2 new products. So it will take the new products a little while to grow. And so we do expect that in general, the revenue will decline in... Are you a nonprofit in China? No. So number one, we do believe our product is a non-academic product. However, that is not for us to say. The government will make the decision. So they will evaluate our product and decide whether it's an academic product or a nonacademic product. So however, we do believe we have a good chance of being a nonacademic product. If -- even if we are evaluated as an academic product, we will continue to modify our product, make sure it qualifies for a nonacademic product. And so that the public company can continue to run this business. So it should not be a problem. And Next question. What is your market share for online English learning in China? And what are your key revenue drivers for 2022? And I would say our market share in China should be 30% and above. However, there is no clear data because many of our peers are private companies. And for our key driver, I would say, it will be the international market, and that's going to be our key driver for 2022. However, it is not going to be big enough to compensate the loss of our existing product. So in general, our revenue is more than likely to decline in 2022. And next question, how many Chinese teachers have you been able to date? So sorry, I cannot disclose this number right now. However, we have enough Chinese teachers to meet the demand of our students to try out for [ Sue Yang ] class and decide to -- many of our students decide to switch their lesson credit to [ Sue Yang ] class continue to study with us. And next question. Do you foresee any market consolidation going forward? I would say it is very unlikely the market consolidation is not going to happen in China. And so in China, you're either going to survive? Or you're going to close down your business? And however, we do expect the market consolidation will happen in international market. And right now, there are many, many players in the international market focusing on online education. And -- but also, we are a few very large companies growing very fast. So in order for the market to mature, I'm sure those small players will have to do a lot of market consolidation to stay competitive. So that's pretty much all the questions I've got. So let me know if you have more questions. So the question is that do you have to lay off any Filipino teachers? So actually, the Filipino teachers are not full-time employees. They're based teachers with a service agreement with us. And typically, like if they do not get enough lessons booked if they're not making enough money and they're just going to turn -- they're just going to do something else. And so there is no laying off. So however, we are working very hard trying to find the lessons -- the trying to get the demand to fill our Filipino teachers slot. Next question, have you reduced your workforce in China? Yes. Yes, we have. Because now with the new business structure. And obviously, you can see that our gross billing is declining and our -- right now, our active students are declining. Our revenue is more than likely to decline. So obviously, we need to reduce our best level to stay competitive. And yes, so we have reduced our workforce in panel. Yes. Let me know if you have more questions. The question is how much wrong way does the cash on balance give you to revenue drop? I would say like -- so we have enough cash finished all the lessons that's already. And we also have enough cash to fuel the growth of our new products. So if you separate discontinued business and continuing business at our cash can definitely cover the discontinued business. And at the same time, we are kind of adjusting our cost structure, make sure we can have a very lean structure so that we can drive the growth of our 2 new products in the new markets. Next question. Can you advertise your product in China? So right now, there is a clear rule that cannot advertise academic product in China. So in principle, you can. However, because the environment is very different. The government is discouraging parents and the students to do kind of academic training, which also kind of really reduced the parents and students interest to do nonacademic training. At this time, if you do any advertising in China, Chinese market, the ROI is going to be terrible. And the conversion rate going to be terrible. And so the best strategy, marketing strategy, is that do not do any advertisement and however, rely on your existing to do a lot of referrals. That's the way to really survive your customer base and to stay profitable. Next question, have any provinces already qualified online English as noncurriculum? Right now, we know that some of the products from some company has been qualified as noneconomic in Shanghai. And so there are some cases of province haven't really announced are academic or nonacademic. All right. So I'll wrap up this call and really appreciate everybody's time for to decade after the Q3 earnings call. Thank you. Bye-bye.