CL Educate Limited (CLEDUCATE) Earnings Call Transcript & Summary

Very good afternoon to everyone, and a very warm welcome to the CL Educate Q1 FY '21 Earnings Conference Call. My name is Arjun Wadhwa. I'm the CFO of CL Educate, and I'll be your host this afternoon. Joining me on this call are the senior leadership team of CL virtually as we practice safe social distancing, having adapted ourselves to the new normal of working as a work-from-home organization. My colleagues joining me today are Mr. Satya Narayanan, Chairman and CEO of CL Educate, he also heads our test-prep business; Mr. Nikhil Mahajan, the Executive Director and Group CEO of our Enterprise Business; and Mr. Gautam Puri, our Vice Chairman and Managing Director. This conference call, as always, will be recorded. An archive and a transcript of the same will be made available on the Investors zone of our website within the next 24 to 48 hours. I'd like to kick off this session by inviting Satya to take over. Satya, if you could please begin?

Thank you, Arjun. I hope I'm audible clearly and...

Satya, you need to be little louder, please. I'm sorry to interrupt.

Yes. Is it better now?

Yes. Absolutely fine. Thank you.

Is it better, Arjun? Yes. Okay. All right. So welcome, everyone, and Arjun, thanks for bringing back all of us, but you're in a little bit of a precarious net situation today. So I'll be followed by Nikhil, who will take us through most of the presentation, and we'll take up the Q&A at the end. I will start off by taking the broad summary before I hand it over to Nikhil. We'll go to the Slide #1, which is a brief snapshot, which is what you're seeing right now on the screens. And I'm quite delighted to actually share with all of us that CL is celebrating the completion of first 25 years of service to the students, to the families. And this is something that is -- as you know, a hugely valuable and rarely seen milestone in the journey as a small entrepreneurship team that started off way back in 1995. So I would like to congratulate you as well for being the part of this journey and being a very important contributor to various things that were important in this journey. That's the first point that I would like to make. And it also is appropriate that we should be reminded of this milestone because we are bang in the middle of an unprecedented event, COVID-19, which has never been seen before in the modern era of last 300 years, at least, where the whole world has been shut down by a single invisible organism, and CL Educate has not been an exception. And in this slide, I'm going to make 1 or 2 comments, which perhaps might stay relevant for the next few ensuing quarters itself. The first thing is that the entire physical touch business globally and in India has come to a standstill. And fortunately for us, there was a hope. There was a great possibility of converting that into [Audio Gap] we are still in the early stage. Physical business was a ratio of 90:10, same time last year, just for the sake of comparison. If CL made INR 100 of revenue, about 90% physical classes, businesses that were in the touch form, okay? And the consumer also asked for those in those forms. This quarter, as we go ahead and look at the numbers, you will find that, that has become 10:90 from a 90:10, which means it's quite literally, other than 1 or 2 exceptions, everything is pure digital. So 90% of Q1 numbers is digital. And [Audio Gap] the total income was INR 89 crores last year. And 90% of it was physical and 10% was digital, which means you could broadly say, let's say, 80 and 10. The 80 come down to 8 and the 10 has gone ahead and become something like a 48 -- or 48 and 2 is the right equation. That's the magnitude of impact that COVID has created. CL is coping with it by looking at it as a great opportunity and doing a whole lot of transitions that we have done in a hurry between March 25 and June 30. And as Nikhil takes us through the rest of it, you will see some highlights of this summary that I'm speaking about here. So that's where I will pause by saying that Q1 looks like a top line of INR 50 crores, EBITDA of INR 7.3 crores and the PAT of INR 1.6 crores against INR 89 crores, INR 12 crores and INR 5.6 crores for the same quarter last year. Nikhil, you could take it away from here and take us through the details of it over the next 20 minutes. Over to you, Nikhil.

Yes. Thank you, Satya. I hope I am audible. So I'll keep my video off just to ensure that there is no audio disruption because the Internet can be slightly disruptive at points of time. So I'll just move to the slide, Slide #6, which basically is the new normal. So as Satya outlined, COVID had started affecting our business, especially our corporate business as early as end of January and -- or early February, though our core education and the Career Launcher test-prep business had remained largely untouched till about mid of March. However, when India got down into -- the centers were shut by 15th or 16th of March and India got down into an extended lockdown, a lot of the activities, which only used to take place at the centers, actually got discontinued with immediate effect. With the centers totally shut, the high-value premium products with basically buying products, which are priced between INR 5,000 to INR 1,50,000, the sales discontinued with immediate effect. And being an education business, while the small ticket programs, which we used to be selling even earlier, the students were willing to buy small tickets or medium-ticket programs. But before they took a premium product buying this year, everybody used to visit a center before taking the final decision. So that was one major significant impact. The other thing which affected our corporate and the enterprise business was that as businesses shut down and remained shut till about second or third week of May, was that physical activities and the physical events actually came to a complete standstill. As a proactive measure, most organizations started cutting their marketing budgets, and Kestone and CL Media, which reflect our enterprise business, that is the share of the corporate wallet which we go after. So in the initial month of April and May, the businesses were as -- as was close to a trickle. It has only started picking up when things have started reopening. The other thing is the admission cycles for all schools and colleges has been thrown out of sync. As you recall, most of the undergraduate competitive examinations used to take place in the period of April to June. Due to lockdown, most of those examinations have still not taken place. As a result, most admission decisions for either UG or PG, which used to be done in the months of May and June, are at least 90 to 120 days behind the original schedule. We hope that, hopefully, if, in the month of September, some of the exams do take place, the admission cycles will get completed within the next 60 to 90 days, and the new sessions will start, and the things will start coming back to normal. This was more or less what happened on the external front. What we did on -- from the CL side was, we were able to completely move our delivery of our educational products online without a delay of even one day. And with the lockdown effective 22nd of March, we were able to immediately move for 100% delivery online, with effect from 23rd of March. The sales process took a slightly longer period to be able to convince customers well. The sales process already existed for the digital platform or the online platform on our website or the app. However, for the consumers to accept and start buying products online, it took -- it has taken a little bit of a while, but now those things also got straightened out. On the corporate and the enterprise side, since physical events became totally -- were discontinued totally, we launched a virtual events platform within 4 to 6 weeks, and this has shown a significant traction in the last 60 days. I'll come to that more in the detailed part of the presentation. We started focusing on the digital enterprise businesses, which were lead generation, customer engagement programs, marcomm services and digital offerings. One critical change in the Career Launcher test-prep business was, we started -- earlier, we were organized -- the business was organized on a geographical basis. Now because of COVID, all geography became one, and that helped a consolidated lead generation and a marketing outreach activity. And our business became more product-centric rather than geography-centric. Besides these actions on the business front, we also did a lot of action on the back side in order to ensure a significant optimization in terms of costs. We renegotiated large parts of our rental costs, optimized manpower costs, reskilled and restructured our businesses, resulting in significant cost savings. Some of the cost savings have not got fully reflected in Q1 because whatever rationalizations we were able to negotiate and do, either in the rentals or fixed costs or in terms of the manpower, the full play out of that will begin reflecting from Q2 onwards, and it has only been partially reflected in Q1. Now I'll move to the next slide, Slide 7. I'll just get into slightly more details on what all specific changes we have done. On the Career Launcher test-prep side, we restructured our organization and brought everything under a centralized outreach program, so that it became one single geography -- India became one single geography rather than being split into either 4 zones or 25 big cities and 75 smaller cities. So our outreach became more product-centric rather than geographical -- geography-centric. Product managers and category managers became more critical rather than the vertical manager or the geographical vertical managers. And we created 4 different buckets of products which we have -- which were like MBA and Law, the IPM became bucket A; Civil Services and GATE were in the second bucket; engineering, tuitions and the undergraduate, other products, are bucket C; and the new products like fin school, data school, international educations, they all got clubbed in bucket D. And based on the price points of premium services, moderate engagement and sachet products, they were broken down into different price buckets. There were category managers handling different product lines and horizontally handling different price points across the organization. The sales team and the digital marketing team and the technology team became one integrated outreach arms. And that also got rationalized significantly in terms of head count. From maybe previously having around 175 people, we have created an integrated 115-member outreach, digital marketing and the sales team, which is then focusing on generating leads and converting leads based on product categories, and not on geography basis. The delivery, as I had earlier shared, we went digital within 24 hours of the lockdown being announced. And instead of having centralized deliveries, most of our business partners are also involved in doing local digital delivery at their locations. So instead of a few central studios from where we are operating, we have 75 different studios operating from 75 different cities catering to, not just the local geographies but also on a consolidated basis. On the corporate side, as I said, we launched a virtual events program -- platform to replace business, which was earlier done in form of physical event. I will spend some time and take you through a few visuals of that separately, and put in a lot of efforts on digital marketing and marcomm and lead gen business to be able to manage the revenue trajectory and the profitability trajectory. Now I'll move to the next slide, Slide 8, the changes affected by us on the back end and the support side. We are currently operating as a purely work-from-home model, with 95% to 96% of the employees working from home. And only very few people come to office on, as and when is required, for certain necessary work. All our teams are now operating on clouds and probably a lot of future delivery and servicing and engagement will also be a cloud-based. Our future real estate requirements will reduce. We will not discontinue physical centers. Physical centers will become places of delivery for a more premium, high-touch, high-value services. So a lot of business will remain digital. The high-value, high-touch premium service will run along with the digital services. The data security is -- as we understand, is a critical element, and we have taken all necessary precaution in terms of data integrity, safety, access to data from our cloud servers and protection of our IP on the Cloud, et cetera. I'll move to the next slide, changes affected by us. This is Slide 9 and the cost impact of changes. As I shared, the full impact of cost changes hasn't yet got flowed into the P&L in Q1 because they were implemented at different points of time, some in April and some in May. And all of them had a 30- to 60-day lag period before the financial benefits would flow in. However, to basically indicate, in Q1, we made a rent reduction or a rent saving of roughly around 46%. And in Q2, when the full impact is felt, the rent reduction will be upwards of 75%. This reduction will continue till centers remain closed. We have let go of large -- some part of infrastructure, which we don't think is required in the future. Some of the infrastructure has been negotiated at zero rental for an extended period of time till things go back to normal. And some rental is being incurred by us for places, which we think are critical to be retained by us. Similarly, on the manpower front, there was a manpower rationalization and optimization. And it was also accompanied by some salary cuts from across the board from between 10% to 35%. On an average, in Q1, the salary was lower by about INR 3 crore quarter-on-quarter. And from Q2 onwards, the salary saving is going to be about INR 4 crores to INR 4.5 crores, which is roughly 33% of the comparable salary bill at that point of time, same time last year. Our marketing spends have also gone up, while our digital marketing spends have gone up. However, our physical marketing spends in terms of spend on newsprint, newspapers, radio, audio/visual in terms of hoardings, et cetera, has gone down significantly. So overall, the marketing spend is purely in the digital era, which in current environment is more productive. In absolute terms, the saving is substantial. And other overheads of business like travel, conveyance, office overhead, staff welfare, all those expenses have got eliminated and will remain eliminated for the period of time, till the time offices and centers do remain shut. As we see, at least, for the next couple of quarters, a significant chunk of these overheads and admin expenses will remain on an extremely subdued side. Now I move to the next slide, Slide #11. If you look at our business how it has transformed as compared to the same quarter last year, our enrollment -- digital enrollments have gone up by about -- have gone up nearly 3x in the same period. They have gone up by 188% as compared to June '19. Our daily active users have [ grown ] from 33,000 daily users to about 63,000 active paid users. Our digital revenue has grown about 4x and monthly repeat users has gone -- has also grown by about 33% from 25% repeat users to over 36%. Now I move to the next slide. So the key lead indicators are, the ones in orange are June '19 and the ones in dark blue are June '20. The numbers are self-explanatory. A 50% growth in digital users; 100% increase in monthly active users; about 40% growth in monthly repeat users. The time spent has gone up by another 50%. The assessments, which have been completed, might only show a 25 -- 20% growth, but look at the total number of assessments, we did about 20 million assessments in one single quarter this year. Enrollments, the enrollments and -- revenue hasn't shown that kind of a thing. While digital enrollments have grown 3x, the absolute enrollments have declined, which I will capture, because the physical centers, the enrollments which were -- which used to happen at about 125, 130 physical centers have declined. Now I'm going to spend a couple of minutes on the virtual conference platform, virtual events platform, which we have developed in Kestone. This is a platform which we are trying to say that this platform will give you as close an experience of a real-life physical event, without having to venture out of your seat at home or office. So in this, we are able to provide a 3D virtual lobby, interactive booth, branding, social media, video sharing, polls, gamification. What all used to happen in a physical event on the ground, we are able to offer a replicate with a much more customization and a much more personalized engagement for each and every participant. And we have done -- some of the big events, which we have done, we did a big event for Redington. We have done a big event for Economic Times. We did an event for Google. Some of these events have had 3,000 participants with over 1,200 CXOs participating. We've also done a big event for IBM in the recent past. And all of this has happened in the last 6 weeks. We are seeing an extremely good traction of this, not just in India but also in the overseas market, including Southeast Asia, Singapore and in North America, including both U.S. and Canada. We hope that in the next 6 to 8 months, this events platform will bring in a significant amount of business traction. And one of the critical thing is, since it is a digital event execution delivery, after the initial cost, this comes with -- at a significant higher gross margin as compared to any physical event. These are some of the images how someone would feel when he attends. He can feel himself in a lounge as he would feel when he visits a physical event at a 5-star hotel. He can be in an auditorium. So the look and feel and his physical presence is more or less as close to reality as he would experience in a real-life environment. Now I'll move to Slide 18. This is the broad financial snapshot. So while -- as indicated in my previous slide, our digital enrollments increased 3x. Our absolute enrollments, we saw a 30% dip from 30,000 last year to about 21,000 this year. So very few enrollments have actually taken place at our physical locations, which have reopened only for customer engagement, customer service points, so there's no teaching involved. So 90% of the enrollments are still happening on the digital platforms. Our revenue is down by about 43%. We have been able to maintain our EBITDA margin despite a 43% revenue contraction quarter-to-quarter. Obviously, with the revenue contraction, EBITDA has contracted from INR 12.9 crore to INR 7.3 crores. With the expected further savings of rentals and manpower expected to flow in, in Q2 and beyond, we can expect a marginal uptick in the EBITDA margin in the remaining quarters. And since EBITDA has contracted in absolute terms, the profit margin has dipped by about 48%. However, some of this is also because of some adverse deferred tax movement, which has happened because of revenue contraction and unearned revenue and some implications of Ind AS. I think the net profit margin will go back to more or less -- as a taxation -- the deferred taxation normalizes itself over the remaining 3 quarters, I think the net profit margin will more or less go back to the same level as it was in the previous year or might be slightly higher. The update on the merger. Last 4 months, there have been no hearings in NCLT Chandigarh. Despite having moved to a VC mode, they have not heard any merger matter. Last 4 hearings have been adjourned. The next date is on September 11, and we have filed an emergency petition requesting to be heard, so that the process doesn't get delayed further. However, as things stand right now, we are not sure when actually it will get effective. The best-case scenario is early January next year. And the worst-case scenario is March to April next year depending upon as and when NCLT starts hearing such matters. I think with that, I come to an end of the presentation. And whatever queries you may have, we'll be happy to answer any questions. Arjun, could you coordinate, please? Coordinate the questions.

Yes. Sure, Nikhil. [Operator Instructions]

Nikhil, there is a question in the chat. You want to take that up on the institutional business side?

So for the benefit of everyone, I'll just read it out it then before Nikhil addresses it. Can you please provide an update on the enterprise institutional business in light of its assets going up sharply and also turning profitable at the EBIT level in the June quarter?

I'm not very sure the asset -- institutional business is an extremely asset-light business. So I'm not very clear about assets going -- what would you interpret by institutional assets going up. Anyhow, the Q1 is usually the lowest business month for the institutional business because that's when most institutions are involved in completing their admission processes. And as I'd shared earlier, this year, the admission processes are running about a quarter late. We have -- we expect most of the institutions to be able to complete their admission processes by end September, mid-October, and start only their new academic seasons by December. We have already started engaging with most of our existing and newer client for the next year's processes. They, as expected, are running about a quarter behind schedule. But we have -- the current pipeline looks good. And we hope that over the next 2 quarters, this business will stand out. And let me share that this is a highly profitable with an EBIT margin upwards of 35% on the institutional side.

Nikhil, I'd just like to also add here that we've created a lot of intangibles over the course of the last 6 months on account of the exercise that we've undergone towards the development of the virtual events platform. So...

Okay. But that would be a couple of crores only. That's it, nothing bigger.

That's right, yes.

I think the asset increase could be because of the refund, which we've received, INR 7.5 crores refund, which if you want, we'll share more details.

Sure. Just to add. We had mentioned it in our last Board meeting as well, that we had received INR 7,17,00,000 tax refund from the government on account of assessment year '18-'19, and that has improved our -- both our cash position as well as [Audio Gap] I'll move on to the next question. Manoj has asked any thoughts on the proposed new education policy? There's also a similar question from Sandeep. He is also asking about the implications of the NEP on CL's education business. Satya, would you like to address this?

I think I'll keep it very simple, Arjun. Directionally, it has been more or less similar for a few years now. It's a very thick 800-page document. And when it's an 800-page document, one can be sure that nothing is going to change dramatically. Whatever changes that are happening over the last 2, 3 years, some of them are very visible. If they continue, I think it has an impact on us. For example, National Testing Agency is into action on a full-time basis. So entrance exams, they will undergo transformation. NRA has been announced by the government. So these are the nimble-footed new steps that are far more important than a whole lot of intention-level steps that are made. And if you keep tracking the blogs that we do or the updates that we do, we keep responding to these on a weekly and a monthly basis. So that would just be my update on the NEP-based observations. Over to you, Arjun.

Yes. Thanks, Satya. I'll just take the next question. Manoj has again asked, any thoughts to sell noncore assets and redeploy money back into the business or to use it to do a share buyback? Manoj, I'll take this one on. Manoj, we're continuing to look for relevant buyers for the land that we have in CLIP. For those who are not familiar, we have the land and building of 2 schools in one of our step-down subsidiaries, CLIP. And in addition to that, we have another couple of parcels of land. And we also have a plot in Greater Noida. We're continuing to look for buyers for these, and we will look at the best way to deploy these funds as and when they become available to us. Right now, market is not necessarily the most ideally suited for selling these assets, but we continue to remain in the market. We've spoken to all the relevant people, and they know about the availability of these assets. And as soon as we have something to share on this, we'll definitely get back to you. Manoj has also asked about the progress on the vocational receivables. Manoj, unfortunately, there is no progress to report as of now. The relevant government departments were shut during the period between our last Board meeting and this one. Our physical assets continue to be deployed by the government. The places where we were holding vocational classes earlier continue to be used by the government as COVID centers. And there is no progress yet on this account. But as soon as we have some progress on this, we'll let you know. The files are in the process of moving, and it is something that is very much on our radar. So as soon as we have an update to share on this, we will definitely let all the shareholders know about the same. There is another question from Manoj. Assuming FY '21 to be a reset year, when do you see high revenue growth coming back for the company? Manoj, yes, FY '21 does appear to be a washout from a revenue perspective straight up. But in some ways, it's also maybe -- I wouldn't necessarily like to use these words, but in some ways, it's also a blessing in disguise, that it has helped us accelerate our digital action plans by at least a year or so. We've gone into hyperdrive in terms of the digital movement that we've done, both in the consumer test-prep space as well as the enterprise space. And while the ARPU and the ASPs continue to be slightly lower on account of the sale mix being different in our digital business, we certainly hope that this is -- we're building a platform for ourselves, and this becomes a year where the digital business can take off drastically. So we continue to be hopeful of a significant growth in the future in this space. Yes. There's a question from Muthu. Muthukumar has asked, 90:10 mix is a drastic change. When off-line centers are allowed to open, how do you see the course mix panning out in terms of digital and off-line? Secondly, what constitutes digital in terms of revenues? Okay. So I'll quickly answer your second question first, Muthu. Anything sold online is considered digital in terms of revenues. And right now, everything is also being serviced online. So everything that we are doing from a virtual space that we continue to operate in right now is digital. In terms of how do we see the course mix panning out in terms of digital and off-line in the future, well, when physical centers are allowed to open, we definitely see them continuing to exist as part of our service offering. But what will change significantly is that is where the touch of premium products will get serviced. The digital business, we believe, is now set for an accelerated growth path as a result of what has happened over the last 5 months. And what will change radically is the ARPUs that we are currently operating in the digital space. The ARPUs that we will operate at in the physical space will be this x plus a significantly better y, which will be added over and above that in terms of the mix. Also, in terms of delivery, as some amount of digital delivery is happening right now, we continue to see that being a part of the delivery growth going forward. And over and above that, there will be a premium face-to-face component of delivery that will happen once the centers open. I hope that addresses your query. My apologies for the phone.

Just one more follow-up query to that. Can I ask now?

Yes. I'm sorry. Is that Muthukumar?

Muthukumar. Yes, yes, Muthukumar.

Yes. My apologies, yes. Go ahead.

So with that -- how would you see that changing from, say, 90:10 to a scenario, like would -- where do you see it going? I know it's difficult to put a number to it. But given that we also -- you also would like to have a presence in both the physical and the digital space, how do you see that panning out?

Muthu, it's hard to say when the 90:10 will become 80:20 or 60:40 going forward. But what I do hope is that 90 -- the 90 portion will grow at a significantly rapid pace as well. And the 10 portion, obviously, as a result of -- if I were to look at it from a value perspective, it would also perhaps move towards potentially evening out. But if I were to look at it from a volume perspective in terms of number of enrollments, the direction we seem to be headed in continues to be fairly similar to a 90:10 mix. Yes. The next question is from Swastik Agarwal. Can you please clarify what your premium product plan is? And how that will be different from before? Satya, would you like to address this?

Sure, sure, sure. Yes. So as Nikhil mentioned, currently, products are classified at level 1, level 2, level 3, which is an internal classification is INR 8,000 and above, okay? When it comes to premium -- when we're talking about premium, we are talking about anything that is priced beyond INR 20,000, we're internally marking it as a premium product. And premium are like [Audio Gap] have 2 manifestations. One, right now, even at INR 25,000, INR 40,000 or a INR 1.5 lakh IIT-JEE program, the entire delivery is happening digitally. As Arjun said, the customer discovery, customer acquisition and fulfillment, everything is happening digitally. That's when it is classified clearly as digital, digital premium. What we see coming back, which you saw in one of the earliest slides is, when post-COVID premium face-to-face returns, that is a matter that again is an asset-light, capital-light model for us. We see that face-to-face part growing, and the face-to-face premium will be serviced in a face-to-face environment by a partner location or by a local faculty as demanded by the customer. It could be a 1-on-1, 1-on-30, 1-on-50. And the way it is going to be different from the pre-COVID, it need not be. So all the network business that we are talking about will -- at the time when students come back, will all be classified as the premium face-to-face business post-COVID. Right now, every single thing that you are seeing is either digital or a digital premium, discovery, enrollment and fulfillment. Everything is happening digitally.

Thanks, Satya. The next question from Muthukumar is, what is the distribution of digital courses sold in terms of MBA, Law, IIT, NEET, GATE, et cetera, and across A, B, C product baskets? Muthu, Muthukumar, I'm sorry, we don't make this information public. [Audio Gap] it was a part of our presentation because it is of usefulness from a competitive intelligence perspective. And a large number of our competitors are privately listed companies. So they get to know the -- they get the benefit of listening into our presentations without us getting to hear what their numbers are. So if it's all right, we will not address this question. All right. Thank you, ladies and gentlemen. If there are no more questions, we'll wrap up the analyst call at this point in time. Nikhil, if I could just request you for a quick minute to put on the next slide, please. These are our contact details. We continue to be available at these numbers, my colleague, Amit Kanabar, and I. Should you have any further queries later on in the week or next week, if there's anything you would like to get back to us on, please feel free at any time. Once again, thank you, everyone, for your time today. And stay safe, stay healthy. And we'll see you all in 3 months' time for the Q2 investor call. Thank you.

Thank you. Thank you, Arjun. Thank you, everybody.