Q1 2018 RYB Education Inc Earnings Call
May 16, 2018 PM UTC
查看原文
RYB.N - RYB Education Inc
Q1 2018 RYB Education Inc Earnings Call
May 16, 2018 / 12:00PM GMT
==============================
Corporate Participants
==============================
* Serena Xue
* Wei Ping
RYB Education, Inc. - CFO
==============================
Conference Call Participants
==============================
* Alex Xie
Crédit Suisse AG, Research Division - Analyst
* Jack Chang
BNP Paribas Cardif TCB Life Insurance Company Ltd. - Chief Executive
* Sheng Zhong
Morgan Stanley, Research Division - Associate
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Good day, and welcome to RYB Education's First Quarter 2018 Earnings Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Serena Xue, RYB's Investor Relations Manager. Please go ahead.
------------------------------
Serena Xue, [2]
------------------------------
Thank you, operator. Please note the discussion today will contain forward-looking statements relating to future performance of the company and are intended to qualify for the Safe Harbor from liability, as established by U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in the company's 2018 first quarter earnings news release and the discussion today.
A general discussion of the risk factors that could affect RYB's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information, except as required by law.
During today's call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2018 first quarter earnings news release issued via the wire services and also posted in the Investor Relations section of our website. As a reminder, this conference is being recorded. A webcast replay of this conference call will be available on the RYB's corporate website at ir.rybbaby.com.
Joining us today on the call is Ms. Ping Wei, Chief Financial Officer. I will now turn the call over to Ms. Wei. Please go ahead.
------------------------------
Wei Ping, RYB Education, Inc. - CFO [3]
------------------------------
Thank you, Serena, and thank you, everyone, for joining us today on our first quarter 2018 earnings conference call. We started fiscal 2018 with a stable Q1 performance, despite this being a seasonally slow quarter for the industry due to students taking winter break around Chinese New Year, and more so this year, due to the particularly late timing of the Chinese New Year as well as the bad weather that hit a large area in South China right before the Chinese New Year, all which affected January and February attendance across our kindergarten facilities.
Net revenue was $28.8 million for the quarter, an 8.4% increase from year ago period.
Adjusted non-GAAP net loss was USD 1 million compared with adjusted non-GAAP net income of $1 million in same period last year.
As of March 31, 2018, the number of our directly operated kindergartens increased to 86 from 81 a year ago. Student enrollment at directly operated kindergartens increased by 11.3% year-over-year to 22,087 as of March 31, 2018. In addition, the number of our franchise kindergartens and franchise play-and-learn centers in operation were 212 and 966, respectively, as of March 31, 2018.
For fiscal 2018, we continue to strive to enhance our educational content through [RMV], enhance teacher training and development and develop and further improve our operational and management system and standards, including both security and safety standards. Quality starts with security and safety. This year, we have undertaken extensive measures across our business operations to raise quality standards for the security and safety of our children.
Firstly, we established a special task force under the leadership and supervision of our independent directors to conduct a comprehensive self-inspection of security and safety policies and practices across our kindergarten facilities. For the first stage, the task force inspected a wide selection of sample kindergartens. The inspection covered 10 critical areas of operational and environmental safety, such as site monitoring, staff training and supervision, food preparation, facility safety and first aid and medical related particles among others.
Based on the recommendations from the task force, we have started putting in measures to improve communication with parents. We continue to enhance our central surveillance system, both from a hardware perspective and from a management use perspective. We have added teachersâ emotional and psychological tests during the recruitment process and after, and have improved the teachers' ethics and compliance training process among other measures.
We treat these recommendations with high importance and have started implementing them across our network. In addition, to ensure the continuous monitoring of our security and safety practices, we have established a special team within our internal audit function, which reports to the audit committee of our Board of Directors directly to continue to spot check our facilities to ensure that the improvement measures as well as our security and safety policies and standards are implemented fully throughout our network.
To further improve our security monitoring and management system, our board has also approved the installation of additional comprehensive central surveillance systems and the upgrading of monitoring and management systems in directly operated and franchised kindergarten facilities. This operating system is now fully functional in our directly operated kindergartens, and we will continue to connect both our directly operated and franchised facilities to this central surveillance system.
The quality of our education services in large part relies on the quality, commitment and dedication of our teachers. We have undertaken measures to further enhance our teacher team. To name a few, we raised our teacher's pay in December, subsequent to another raise in September of 2017. In addition, we enhanced our consultation and advisory effort to help our teachers cope with work-related stress. We have also taken steps to implement more stringent teacher recruitment requirements and strengthened both online and off-line training for our teachers and nursery aides, with particular emphasis on moral and ethical professional conduct.
We believe the best way to educate children is to collaborate with families and society in general to give children comprehensive all around education, that we call the education's Golden Triangle. We also believe transparency and collaboration are essential to better our children's education. As such, we have taken measures such as inviting parents to participate in open classes at our teaching facilities, inviting parents as teaching assistants to co-teach classes as well as organizing joint competitions and activities with parents and other organizations.
All of the above measures have enabled us to reinforce a stronger foundation for high quality, premium early type of education.
In regards to franchise operations for this year, our goal is to help our franchisees to enhance their standards and quality of service, make their facilities more efficient and generate better operational results. For that, we decided to temporarily suspend the addition of new kindergarten franchisees and focus on giving our franchisees more training and marketing and operational support.
All of the above is expected to result in some impact to our revenues and costs for 2018. However, we believe the efforts we have taken and our dedication to quality education and to the security and safety of our children, will strengthen our teaching and management, and in the long run, build RYB into a more secure and more transparent place that offers a superior quality of care and education to children in China and provide continued long-term prospects and sustainable healthy financial performance.
It's early time for the education market in China. Itâs large and still growing rapidly. In addition, it is highly fragmented and still in its early development stage. We aim to grow our service network through both organic growth and M&A. On the M&A side, in April 2018, we entered into a definitive agreement to acquire an 80% equity interest in a franchisee for 4 of our franchise kindergartens in Shandong province. In addition, we have also contracted to acquire 2 kindergarten facilities that are ready to be used. We are also in advanced discussions with a few kindergarten operators to acquire a number of kindergartens and certain other assets in this 0 to 6-year old education services space. We will announce more details on this transaction once definitive agreements have been executed.
Moving to financials. During the quarter, revenues from 2 agencies at our directly operated kindergartens and play-and-learn centers, increased by 14.7% to USD 22.8 million for the first quarter -- from the first quarter of 2017.
Services revenue from our franchisees decreased by 56.4% to USD 1.2 million. Sales of our education materials grew nicely by 8.8% year-over-year to $2.8 million compared with $2.5 million for the first quarter of 2017.
Product revenues includes revenue from our [judo carotene] product, which brings classroom education into children's homes. We gave some annual franchise fee relief to our existing franchisees, offered some free and discounted training programs to help our franchisees run their operations better and also provide a discount on some of our products.
In addition, as mentioned just now, we have temporarily suspended recruiting new kindergarten franchisees. All of this will result in a relatively slow franchise-related revenue growth for this year. However, we expect this measure to enhance our franchisees' operational results and build a solid foundation for our future franchise network expansion.
On January 1, 2018, we adopted Topic 606, revenue from contracts with customers, or ASC 606, applying the modified retrospective method to all contracts that were not completed as of January 1, 2018.
Results for reporting periods beginning after January 1, 2018, are presented under Topic 606, while prior periodsâ amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior periods. Specifically, under ASC 606, initial franchise fees collected are amortized over initial set up service periods, while under the older GAAP, it was recognized as revenue upon our franchisees opening their facilities for business operations.
The cumulative effect of initially applying the new standards of USD 0.9 million is recorded as an adjustment to the opening balance of equity upon adoption.
Cost of revenues for the first quarter of 2018 was USD 28.1 million, a 23.2% increase from USD 22.8 million for the same quarter of 2017.
Cost of services revenues for the first quarter of 2018 was USD 26.7 million compared with USD 21.4 million for the same quarter of 2017. The increase was primarily due to an increase in staff compensation at our directly operated kindergartens and play-and-learn centers, and to a lesser extent, an increase in compensation to our franchise service and supervision team.
Cost of product revenues for the first quarter of 2018 was USD 1.4 million compared with USD 1.5 million for the same quarter of 2017.
Gross profit for the first quarter of 2018 decreased by 83.1% to USD 0.6 million compared with USD 3.7 million for the same quarter of 2017.
Gross margin for the first quarter of 2018 was 2.2% compared with 13.9% for the same quarter last year, primarily due to the increase in staff compensation at direct operated facilities and lower margin from franchise fee revenue and training revenues, as we provided one-off preferential training rates and annual franchise fee relief to our franchisees.
Total operating expenses for the first quarter of 2018 were USD 5.8 million, a 106.8% increase from $2.8 million for the same quarter of 2017. Excluding share-based compensation expenses, operating expenses were USD 4.1 million.
Selling expenses of USD 0.3 million for the first quarter of 2018 remained flat compared with $0.3 million for the same period of 2017.
General and administrative expenses for the first quarter of 2018 were $5.5 million, a 123.4% increase from $2.5 million for the same quarter of 2017. Excluding share-based compensation expenses, G&A expenses were $3.8 million for the first quarter of 2018, a 54.1% increase from $2.5 million for the same period of 2017. The increase in G&A expense excluding share-based compensation expenses was primarily due to higher cash compensation cost and an additional expenses incurred in professional services. The share-based compensation included in G&A expense was USD 1.7 million for the quarter.
Operating loss for the first quarter of 2018 was USD 5.1 million compared with operating income of $0.9 million for the same period last year. Adjusted operating loss was USD 3.4 million for the first quarter of 2018 compared with adjusted operating income of USD 0.9 million for the same quarter of 2017.
Net loss attributable to ordinary shareholders of RYB for the first quarter of 2018 was $2.7 million compared with net income attributable to ordinary shareholders of USD 1.0 million for the same quarter of 2017.
Adjusted net loss attributable to ordinary shareholders of RYB, which excludes the impact of $1.8 million of share-based compensation expense for the first quarter of 2018 was USD 0.9 million compared with adjusted net income attributable to ordinary shareholders of 0 -- USD 1.0 million for the same quarter of 2017.
Basically -- basic and diluted net loss per American depositary shares, or ADS, attributable to ordinary shareholders of RYB for the first quarter of 2018 were $0.09 and $0.09, respectively, compared with basic and diluted net income per ADS attributable to ordinary shareholders of RYB of $0.05 and $0.04, respectively, for the same quarter of 2017. Each ADS represents one Class A ordinary share.
Adjusted safety and diluted net loss per ADS attributable to ordinary shareholders of RYB for the first quarter of 2018 was $0.03 and $0.03, respectively, compared with adjusted basic and diluted net income per ADS attributable to ordinary shareholders of RYB of $0.05 and $0.04, respectively, for the same quarter of 2017.
EBITDA for the first quarter of 2018 was a loss of USD 2.8 million compared with an income of $2.4 million for the same period of 2017. Adjusted EBITDA for the first quarter of 2018 was a loss of $1 million compared with an income of $2.4 million for the same quarter of 2017.
As of March 31, 2018, the company had total cash, cash equivalents and term deposits of USD 162.8 million compared with $158.7 million as of December 31, 2017.
Cash generated from operating activities were USD 5.3 million during the first quarter of 2018. The cash inflow in the quarter was primarily driven by the advance tuition payments from our directly-operated facilities, partially offset by the refund of security deposits and franchise fees to potential and contracted franchisees.
Moving on to our growth strategy and financial outlook. For our directly-operated kindergartens, we plan to open additional facilities in cities where we already have an established presence and intend to selectively enter new cities that complement our current locations. We also plan to introduce more premium and international kindergartens into top-tier cities to meet the increasing demand for premium kindergarten services.
We have decided to make certain adjustments to our strategy regarding franchise to kindergartens. First, we will temporarily suspend our recruitment efforts aimed at attracting new kindergarten franchisees under RYB brand and instead focus on expanding through our Hong Shan Enable Alliance by offering our well-structured, high-quality courses, educational products and materials, management solution packages and other services to the kindergartens outside our network.
We will continue to serve our existing franchise kindergartens and help those franchisees, which have not yet opened up kindergartens to commence operations over the next few years. We will continue our endeavor in developing more premium courses, improve our technology infrastructure and seek to continue to implement best practices to maintain a safe and happy environment for each and every RYB child, and give each child the best education possible. We believe our multi-pronged growth strategies firmly support the health and sustainable expansion of our service offerings, while also bringing sustainable long-term value to all of our stakeholders, children, parents, employees, partners and investors.
With that, I would like to turn to our business outlook. For the second quarter of 2018, the company expects net revenues to be between USD 41.6 million and USD 43.5 million, representing a year-over-year increase of approximately 10% to 15%.
For the full year of 2018, the company currently expects net revenues to be between $154.9 million and $166.1 million, representing a year-over-year increase of approximately 10% to 18%. This outlook is based on current market conditions and reflects the company's current and preliminary estimate of the market, operating conditions and customer demand, all of which are subject to change.
Thank you for your attention. Operator?
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions) The first question comes from Sheng Zhong of Morgan Stanley.
------------------------------
Sheng Zhong, Morgan Stanley, Research Division - Associate [2]
------------------------------
Only one question for me is, can you talk about the tuition fee change in the first quarter? And what's our pricing strategy on the current -- in the future on the current -- on our current strategy?
------------------------------
Wei Ping, RYB Education, Inc. - CFO [3]
------------------------------
Shang. And thanks for joining us. The pricing for first quarter is pretty stable compared to prior quarters. In terms of our pricing strategy for this year, basically for current year, we intend to adopt a relatively conservative pricing strategy. So that basically means we will have relatively small type adjustments for this year, as we focus on building a solid foundation for a sustainable long-term growth. In the long run, that actually ensures that we can do better long-term growth. I hope that answers your question, Sheng.
------------------------------
Operator [4]
------------------------------
(Operator Instructions) The next question comes from Alex Xie of Crédit Suisse.
------------------------------
Alex Xie, Crédit Suisse AG, Research Division - Analyst [5]
------------------------------
I have one question. I highly appreciate the company's efforts to invest more to strengthen the quality and control across the education facilities. I would like to know what's the management outlook for the margin of this year and going forward.
------------------------------
Wei Ping, RYB Education, Inc. - CFO [6]
------------------------------
Alex. We are not providing margin guidance for this year, but to answer your question, we do anticipate a much lower margin this year as we invest in the quality of our education services and security and safety of our facilities as well as helping our franchisees to run better operations. Having said that, we do anticipate our non-GAAP margin from organic growth to be probably lower than 5% for this year. That's the non-GAAP net. In the long run, we actually believe Chinese parents are more than willing to pay a premium fee for premium and differentiated educational services. As such, we actually believe there is good margin potential for our business. I hope that answers your question, Alex.
------------------------------
Operator [7]
------------------------------
The next question comes from Jack Chang of BNP Paribas.
------------------------------
Jack Chang, BNP Paribas Cardif TCB Life Insurance Company Ltd. - Chief Executive [8]
------------------------------
I have one question. Can you give us a breakdown for the growth margin for directly-operated and the franchise? And a second question is that -- did the management give any time line that you will start to set the new franchise for our kindergartens?
------------------------------
Wei Ping, RYB Education, Inc. - CFO [9]
------------------------------
Right. Okay, Jack, in terms of the margin breakdown, as you look at our press release, we actually do not sort of -- we don't have per se business lines per se. So we only operate as one business unit. So we only report services revenues, product revenues and other revenues, and then you will see our overall gross margins. As you can tell, for this year, our gross margin for this quarter is pretty low at -- yes.
------------------------------
Jack Chang, BNP Paribas Cardif TCB Life Insurance Company Ltd. - Chief Executive [10]
------------------------------
Can you give us a breakdown -- more color like -- the gross margin from directly-operating and the gross margin from franchise?
------------------------------
Wei Ping, RYB Education, Inc. - CFO [11]
------------------------------
Right. Okay, let me tell -- okay, so for this quarter in U.S. dollar terms, the gross margin for -- gross margin, hold on. Okay, for services for this quarter, okay -- we're talking about services, right? For services, we actually have a slightly negative gross margin of negative 2.8%. And then for our -- sorry, okay, so for kindergarten, the services gross margin is negative primarily because our direct-operated PLC has a negative margin for the quarter because it's low season. For direct owned kindergarten, we actually generated about 4.1% gross margin for the quarter, okay? And then for our franchise model, the gross margin is around -- let me see, high single-digit okay? I hope that answers your question.
------------------------------
Operator [12]
------------------------------
This concludes our question-and-answer session. I would like to turn the conference back over to Serena Xue for any closing remarks.
------------------------------
Serena Xue, [13]
------------------------------
Thank you. Thank you all once again for joining us today. If you have any further questions, please do not hesitate to contact us at ir@rybbaby.com, or TPG Investor Relations at ryb@tpg-ir.com. Thank you very much for your time, and we hope you have a wonderful day.
------------------------------
Wei Ping, RYB Education, Inc. - CFO [14]
------------------------------
Thank you all.
------------------------------
Operator [15]
------------------------------
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------