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

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, or the DBVIC. I'm pleased to announce that our next presentation will be from 51Talk Online Education Group from Singapore. [Operator Instructions] On a final note, all today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Cindy Tang, CFO of 51Talk Online Education Group, which trades on the New York Stock Exchange under the symbol COE. Welcome, Cindy.

Thank you. Hello, everyone. Welcome to 51Talk Online Education Group presentation. I'm Cindy Tang, the CFO of the company. I congratulate you for your curious mindset. You are about to listen to the presentation of the smallest listed company in terms of revenues you have probably come across in your entire life as an investor. Still, you attend the session. This makes you stand out. Thank you for giving me 20 minutes to convince you that, that your intuition was right, and that is worth having a closer look at 51Talk. We were not always a small company. In fact, we were one of the leading Chinese online education companies. Our business is to teach English to K-12 students in the form of one-on-one tutor lessons online. 1.5 years ago, more than 40,000 online tutors were teaching more than 470,000 active students on our platform. Our students were very active indeed with more than 50 million [ taught ] lessons per year. Our students took an average more than 2 lessons per week. Our students loved us so much that they made us the largest online English platform based on a number of top lessons in China and maybe globally. It is not only that students liked us, we were also a good business. With annual cash revenues around USD 400 million, we generated around USD 110 million cash inflow per year. This was remarkable since in the fierce competition in the online English market in China, most of our competitors were not profitable. They burned money. We made money, a lot of it. Then in July 2021, the Chinese government released the so-called Double Reduction Policy. The Double Reduction policy aims to release pressure from school students inside the classroom and after school. Private for-profit tutoring to K-12 students has been banned. And more importantly, foreign online tutors have been banned. We recruit our tutors mainly from the Philippines. With the Double Reduction Policy from July 2021, we are not allowed to teach K-12 students in China online anymore. For the whole tutoring profession and education industry, the Double Reduction Policy came as a shock. It was the same for us. We lost 90% of gross billings. Within a month, we have to let go more than 80% of our employees. Every education company had to find its own way, how to deal with the new reality. Some companies changed their business model. Some [ famously ] started to sell vegetable online. For us, it was clear that we want to continue to teach children to speak English. It is what we know best and what we are passionate about. We decided to use our experience, our platform, our technology and our curriculum to reach out to the world and help children globally to learn English. The more we thought about it, the more we tested the water, the more we gained confidence. We realized that would sound like a far-fetched dream, born out of necessity is, in fact, possible. We are confident that we can repeat the success story we had in China and enable children in the world to speak English and other languages too. I'm here to tell you how we will do it and why we will succeed. First, it is important to understand that we are not a Chinese company anymore. We have divested our China business entirely. Today, we are a Singapore-based company that derives its revenues entirely from international markets. Our China base has turned into an R&D center. We have changed our auditor to a U.S.-based auditor. You do not face China regulatory risk when investing in us. We did not start our international journey without taking important assets with us. They give us a strong head start. First, we have a proprietary technology product in which we previously invested a total of USD 100 million. Second, we have rigorously selected tutors that we trained over many years on our product. Our tutors are an integral part of our learning solution. They are the best of the best. Third, we have our self-developed curriculum of more than 500 hours of classes on our shelf. Finally, we have USD 22 million in cash on our balance sheet. We have a self-sustaining operating business that is cash flow positive. We could not have been #1 in China if we don't have an outstanding product. Our course is fully animated and interactive. It is an immersive language learning path that is playful and visually exciting. One-on-one tutors are at the center of the learning progress since no technology can replace the human world, and the personalized care that our tutors give to each of our students. Tutors are assisted by the most advanced data and AI technology to foster learning success. To give an example, our tutors are complemented by AI tutors that assist students to prepare classes and review learning content. We think that our tutor plus technology approach is redefining how children will learn in future. Success as an educator is only possible if parents fully trust that we teach their children well. We have earned the trust of millions of Chinese parents as their educator of choice because, first, each tutor has gone through a rigorous selection process, has received ample training and is fully TESOL certified. We offer parents free choice among our tutors. Our holistic curriculum is fun for students, follows scientific learning principles and guarantees faster study success. Our classes are affordable. We offer good value for money. We are not a tutor platform. Experts from technology and education developed our tutor-centric EdTech solution over 10 years to combine the attentiveness of the human tutor with technology-assisted learning. The result is what convinced Chinese parents, among the most demanding in terms of education for their tutor to let us become #1 in China. You might believe me that we are able to teach well, but you still want to know what you get as an investor. Allow me to explain what you get when you put your money with us. First, you buy into a company with a battle-hardened management team. Becoming #1 in China in education is not easy. The management team of 51Talk achieved just that. Surviving the crackdown on private education in China and transforming to an international business is not easy. Only a few made it, the management team of 51Talk achieved just that. We will not give up. We are on a mission to enable every child to talk to the world. We will not rest until we have achieved just that. Second, you will get access to a large market. The global language learning market is big and continues to grow fast with an estimated CAGR of 26% from 2019 to 2025 based on data from inews. We offer a way to investors to unlock this market step by step, region by region, country by country. We apply a 4-step approach to fully unlock the potential of each market. In the first step, we test the water and gather market intelligence. Based on the market dynamics we find, we choose the most promising markets and pick the low-hanging fruits, first, via online marketing. With a moderate initial investment, we can reach cash flow breakeven sometimes within months. To reach deeper into the market, we built a local team, adapt the product and engage with local partners to expand and eventually penetrate the market to its full potential. Since we already received billings during that time, we can do this while staying cash flow positive. The key to our profitable growth is our high gross margin of above 70%. These are 2 factors that help us achieve such a margin. First of all, the salary level in the Philippines is low. Our local terms, we pay tutors well compared to schools, for instance. Our tutor cost allows us to offer classes at a significantly lower price compared to Western tutor companies. The lower price point helps us to address a larger target market. Second, we are selling a learning product, not tutor classes. Parents don't pay us on a cost-plus approach. They pay for the student's experience and student's success. Online marketing is costly. High marketing expenses is the most common reason why many online educator never reached profitability. It is the student satisfaction resulting in referrals and renewals that ultimately drives profitable growth. We think that despite our small scale, it is difficult to copy us. To build the technology, we have spent a total of USD 100 million while improving it over the course of 10 years. Equal efforts went into the systems and processes to train our rigorously selected tutors. We operate a large local organization in the Philippines for this purpose. It is the combination of the car and the driver and the ability to scale this combination that provides a superior learning experience for each student. Now we have reached the end of today's presentation. Please allow me to summarize. I wish you can remember the following 4 points when thinking of 51Talk. First, we were not always a small company. We have the technology, the systems and the processes that allowed us to become #1 in the fiercely competitive market in China before July 2021. We invested more than USD 100 million in our technology platform. We worked for more than 10 years to perfect our systems and processes. Second, we are not a Chinese company anymore. The China business is divested. Today, we are a Singapore-based company, with a U.S.-based auditor, earning our revenues outside China. Third, we offer a tutor-centric education technology product. We are not a language tutor platform. This allows us to achieve a high gross margin, enabling cash flow positive, profitable growth. Fourth, we have a proof of concept and a clear path to land, expand and penetrate international markets, market by market, step by step while staying cash flow positive. Thank you for listening to our story. I hope I could convince you that we are worth your attention. Now we are open to Q&A.

Okay. We have -- got a question. Why do you believe you will be able to succeed in international markets? That's a good question. Well, there are 3 factors where we draw our confidence from. First, we are not the only K-12 online English education platform in the global market. There are several competitors which have already reached considerable size. Therefore, we know that demand exists equally outside China. There is a sizable market, global market for our product. So the question is not if there is an opportunity but who captures the opportunity. Second, we have achieved cash flow positive reflecting our strong execution of our healthy and sustainable growth strategy. Meanwhile, our initial testing the water in many markets in our intensified efforts in selected markets gives us full confidence that our product is highly competitive. The combination of our motivated, thoroughly trained and caring tutors with our state-of-the-art technology platform provides a learning experience that is [ hard to beat ]. It is not only our curriculum, it is the fully animated, interactive and immersive approach enabled by the latest AI technologies. That creates a wow effect, and that provides a learning experience that cannot be find -- found anywhere else. We have a very good product. Third, we have a clear proven strategy to capture the opportunities in each market step by step as I just mentioned in the presentation. Data gathered from exploring a market by initial online marketing efforts let us -- tells us the market potential and drives us approach to further expand and penetrate these markets with a local team and a localized entry strategy. We know that the price we can offer our product is attractive and allows us to target broader market segment than our competitors. I hope my answer could satisfy you. Okay. The second question is what are your strategic priorities? That's a good question. So well, we continue to focus on the following 6 areas: one, our core business of K-12 101 mass market product offering; two, active student growth in order to take a leading position in our target markets with a localized approach; three, product and curriculum development; four, marketing and branding in order to expand the market; five, localized the support of customer; six, operational efficiencies. I'm afraid that we can only answer 2 questions here. For the remaining questions, we can give you feedback later after this session. And thank you all for your time today. If you are interested in us and want to know more about us, you can contact us, contact me or my team. Here are -- here is the contact information. And we will reply to you. And if you want to have one on meeting, we welcome that, and thank you.