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Rise Education Cayman Limited (NASDAQ:REDU)
Q2 2018 Earnings Conference Call
Aug. 16, 2018 9:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and good evening, everyone. Welcome to RISE Education second-quarter 2018 earnings conference call. [Operator instructions] The call is also being webcast live on the company's IR website. Joining us today are Mr. Yiding Sun, CEO; Ms. Chelsea Wang, CFO; and Ms. Mei Li, senior IR director of RISE Education. Following management's prepared remarks, we will conduct a question-and-answer session.

Before we begin, I refer you to the safe harbor statement in the company's earnings release, which also applies to the conference call today as management will make forward-looking statements. I will now turn the call over to Mr. Yiding Sun, CEO of RISE Education. Please go ahead, sir.

Yiding Sun -- Chief Executive Officer

[Inaudible]

Mei Li -- Senior IR Director

Thank you. Hello, everyone. Welcome to our second-quarter 2018 earnings conference call. This is Mei Li.

I will now speak on behalf of our CEO Mr. Yiding Sun. We are delighted to report yet another quarter with strong financial and operating performance. This was highlighted by a 32.4% year-over-year increase in our total revenues in the second quarter of 2018, which exceeded our previous expectation.

We are particularly pleased with our continued profitability improvements during the quarter with 43.3% year-over-year increase in our non-GAAP net income attributable to RISE. More importantly, as educational programs in our self-owned learning centers remain the primary driving force of our robust growth momentum, its key operating indicators continue to exceed last year's achievement. Our total student enrollments in our self-owned learning centers and online courses, including enrollment of short-term courses, increased by 67.3% year over year to 14,419 this quarter. In addition, our student retention reached 71% in the second quarter compared to the 70% in the same period of the last year.

The increases are achieved through our efforts in understanding the needs of our students and fostering mutual trust with both our students and their parents. Maintaining these strong relationships not only enhances our brand reputation, but also helps us reduce our student acquisition cost. On the expansion front, we are also pleased with the progress that we achieved in the second quarter of 2018. As of June 30, 2018, we have accumulated 307 learning centers across 101 cities in China and one in Singapore, including 68 self-owned and 239 franchised centers.

With the four new opened self-owned learning centers during the quarter, we have demonstrated that we are on track to meet our target of adding 13 to 15 self-owned learning centers in our network by the end of 2018. Compared with teams added in the first six months last year, we are executing our expansion plan more efficiently than we did last year. Even though in the short term, our new centers might add pressure on our gross margin and our average number of new student enrollment for self-owned learning centers per month, we believe that maintaining a fast pace network expansion is a key driver to our sustainable enrollment growth. We are confident that our strong geographic presence will further enhance our brand recognition and help us gain a greater market share in China's junior ELT industry.

In addition to expanding our learning center network, we also made meaningful progress in enriching our course offerings. During the strategic -- following the strategic partnership with SSAT China, we became exclusive on-site learning institute in China. In June, for the first time, we chose three of our learning centers to host the SSAT for a total 116 RISE participants. We are delighted to report that 28 of RISE students achieve notably higher capital result than the average level worldwide.

Our top students outperformed as many 94% of old SSAT participants at the same rate across the board, which further demonstrates the superior quality of our regular educational products. In addition, given the global acceptance of SSAT, especially by high-caliber schools in the U.S., the test results of our students also reinforces the brand awareness and increases the prestige of RISE among global academic institutions. Furthermore, as part of our partnership, SSAT China also provided support for our SSAT-related preparation courses. Now with a series of premium SSAT preparation courses in our pipeline, we expect that in the future, a larger number of comparatively older students will be attracted to our regular courses, our new test preparation programs and our admission consulting services.

This marks an important milestone for us as we have, for the first time, integrated high-end test preparation and admission consulting services into our course offerings. As we continue to actively expand our online business, we were encouraged by the solid growth in enrollment contributions from our online segment in the second quarter, namely our online flagship called the Can-Talk and Rise Up. Now with the implementation of online SSAT courses and services, we will continue to leverage our experience and expertise in operating those online and offline educational programs to capture the growth opportunities in China's flag-raising junior ELT market. Moreover, we are delighted to report that we have recently completed the application process of Rise Up.

As of now, the number of students who registered for the upcoming event increased by 31.5% from last year to a record-breaking 56,000. At this point, we fully expect that the final competition at the end of August will emphatically demonstrate our students' accomplishments to the prospect of students and their families. In addition, our Rise Start event also achieved the encouraging branding influence. During the entire event, around 54,000 students uploaded their projects, which attracted around 20 million unique visitors and generated around 63 million page views compared to around 33,000 uploads around 19 million unique visitors and around 39 million page views last year.

We believe that the success of our nationwide event will not only enhance the value of our brand, but also promote our new student enrollment growth in the future. We pride ourselves while maintaining our high-retention rate, which demonstrates the high lifetime value of our students and the contributions of our investments in the marketing activities. Recently, we had an increasingly high amount of marketing investments in both online and off-line advertising channels from other educational service providers in China. This is a manifestation of the healthy growth of the domestic junior ELT market.

As a premium brand name with sustainably high student retention, we have actively adjusted our marketing strategy. Since the beginning of the third quarter, we have increased our investments in sales and marketing to drive the future enrollment growth. At the same time, we are starting to optimize ROI of our marketing dollars through the efficient management of our existing marketing channels, as well as introduction of short-term course offerings to attract students. Although this effort may increase our full-year selling and marketing expenses as a percentage of total revenues by about 100 basis points as compared with that of the prior year.

We are confident that such investments will lead to faster enrollment growth, enhance excellent shareholder value in the long run. To summarize this quarter, we are pleased that our branding influence was significantly strengthened by the vast expansion of our learning center network, as well as our online and off-line offerings of courses and services. We are confident that we have the right team and right strategy in place to solidify our leadership in the junior ELT market in China. This concludes the prepared remarks of our CEO Mr.

Yiding Sun. I will now turn the call over to our CFO Ms. Chelsea Wong to go over our financial highlights. Chelsea, please, go ahead.

Chelsea Wang -- Chief Financial Officer

Thank you, Mei, and hello, everyone. Before I begin, please note that all numbers stated are in RMB terms. As Mr. Sun mentioned earlier, our total revenues increased by 32.4% year over year to CNY 300.2 million from CNY 226.8 million in the second-quarter year 2017.

This increase was primarily attributable to a 29.9% year-over-year increase in revenues from our educational programs, which increased to CNY 258.6 million or 86.1% of our total revenues in the second-quarter year 2018. Such growth was primarily attributable to our higher retention rate of 71% this quarter, as well as the faster expansion of our self-owned learning center network from 56 as of June 30th year 2017 to 68 as of June 30th year 2018. Franchise revenues increased by 20.9% year over year to CNY 33.2 million in the second-quarter year 2018, primarily due to: first, the steady growth of the recurring franchise fees; and second, a 25.8% increase in the number of franchised learning centers from 190 as of June 30th last year to 239 as of June 30th this year. Other revenues increased to CNY 8.5 million in the second quarter 2018 from CNY 0.3 million in the second-quarter year 2017, primarily due to the revenue contributions from The Edge.

Cost of revenues increased by 37.2% year over year to CNY 136.8 million. This was primarily attributable to an increase in personnel costs because of more teaching hours delivered to our students. In addition, because we have opened more new self-owned learning centers in the second-quarter year 2018, both rental costs and personnel costs increased. Gross profit for the second-quarter year 2018 increased by 28.6% year over year to CNY 163.4 million.

Gross margin for the second-quarter 2018 was 54.4% compared with 56% in the second quarter of year 2017. The decline of gross margin was mainly due to our opening of more new self-owned learning centers in the second quarter of year 2018 than the same year-ago period. Selling and marketing expenses for the second-quarter year 2018 were CNY 50.2 million or 16.7% of our total revenues in the second quarter year 2018 compared with CNY 39.9 million with 17.6% of our total revenues in the same period last year. General and administrative expenses for the second-quarter year 2018 were CNY 55.5 million or 18.5% of our total revenues in the second-quarter year 2018 compared with CNY 43.6 million or 19.2% of our total revenues for the same period last year.

Operating income for the second-quarter year 2018 increased by 32.7% to CNY 57.7 million. Operating margin remained unchanged from 19.2% of the second quarter of year 2017. Non-GAAP operating income for the second-quarter year 2018 increased by 39.2% year over year to CNY 60.5 million. Non-GAAP operating margin expanded by 100 basis points year over year to 20.2% from the same period last year.

Adjusted EBITDA for the second-quarter year 2018 increased by 34.8% to CNY 75.5 million from CNY 56 million in the same period last year. Adjusted EBITDA margin improved by 40 basis points year over year to 25.1% in the second quarter. Net income attributable to RISE for the second-quarter year 2018 increased by 34.3% year over year to CNY 42.7 million. Non-GAAP net income attributable to RISE for the second-quarter year 2018 increased by 43.3% year over year to CNY 45.6 million.

Non-GAAP net margin attributable to RISE expanded by 120 basis points year over year to 15.2% in the second quarter. Basic and diluted net income attributable to RISE per ADS was CNY 0.75 and CNY 0.74, respectively, for the second quarter. Basic and diluted non-GAAP net income attributable to RISE per ADS was CNY 0.8 and CNY 0.79, respectively, for the second quarter. Turning to our cash flow and balance sheet.

We generated CNY 232.8 million positive cash flow from operating activities for the first half of year 2018 compared with CNY 259.8 million of cash generated from operating activities in the same period of the prior year. The decrease was mainly attributable to the final repayment of the termination fee to Bain Capital Advisors of CNY 20 million, as well as more new self-owned learning centers we have opened in the first half of year 2018 than in the same period of the prior year. As of June 30th year 2018, we had a total of CNY 1,086.3 million of cash and cash equivalents, restricted cash and short-term investments compared to CNY 1,084.9 million as of December 31st year 2017. In the first half of year 2018, we have repaid loan of CNY 75.9 million, the final termination fee of CNY 20 million to Bain Capital Advisors and settled the final payment of CNY 16.6 million for the acquisition of The Edge.

If we normalize above items, cash and cash equivalents, restricted cash and short-term investments should be CNY 1,197.4 million as of June 30th year 2018. As of June 30th year 2018, total deferred revenue and customer advances balance increased by 26.9% to CNY 1,031.7 million from CNY 812.8 million at the end of year 2017. This increase was primarily driven by higher pre-paid tuition and fees from our rising level of student enrollment. Now let me provide you with our guidance.

For the third quarter of year 2018, we expect our total revenues to be between CNY 343.2 million and CNY 348.4 million, representing year-over-year growth of approximately 32% to 34%. Please be reminded, additional marketing investment will put some margin pressure in the third quarter. In addition, we have a two weeks summer vacation in every Q3, resulting in seasonality -- seasonally lower margins in each Q3 compared to Q2. We reiterate our full-year 2018 revenue growth guidance of around 30%.

At the same time, please note that with our plans to increase our marketing spending, we expect our full-year EBITDA margins to be around 24%. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. Operator, we would now like to open up the call for questions from our audience.

For those who would like to ask a question, please state your question in Chinese first and then English. Operator, please proceed. 

Questions and Answers:

Operator

Thank you, Chelsea. [Operator instructions] Your first question comes from Felix Liu from UBS. Please ask a question.

Felix Liu -- UBS Securities Co. -- Analyst

[Inaudible] Hi, management, thank you very much for the presentation. So two housekeeping questions from me. Number one, we have quite a noticeable improvement in enrollment numbers. So could management provide a breakdown between online and off-line and maybe if other short-term enrollments are also blended in? Also could management provide us with the numbers of teachers in Q1 and Q2? Thank you.

Yiding Sun -- Chief Executive Officer

[Inaudible]

Mei Li -- Senior IR Director

Let me answer your first question. For this kind of -- for this summer class, we have this format in the prior year. So this is nothing new, but for this year -- because typically the prior summer course only target to those existing RISE students. But for this year, we changed customer target to more outside our non-RISE students.

So for this year, we find the feedback as pretty positive. In this year, we have total 3,000 number of students who participated in our short-term course -- short-term summer courses from those online and off-line. This has become our conversion channel. This is new -- this is also one of our new marketing channel for this year.

And so far, we already see roughly 7% of our students who participate in the short-term courses. They already registered for our regular classes. This is very effective approach to recruit new students for RISE. So we -- going forward, we will continue to do this.

Chelsea Wang -- Chief Financial Officer

OK. This is Chelsea. Let me answer your -- the second question. So about -- regarding to our -- the number of teachers by the first quarter of this year, we totally have 1,627 teachers in the first quarter.

And as of June 30, we totally have 1,707 teachers. That's all our answers.

Felix Liu -- UBS Securities Co. -- Analyst

[Inaudible] Let me translate myself. Given the very strong enrollment growth in Q2, may I get an updated guidance on the full-year enrollment number? Thank you.

Chelsea Wang -- Chief Financial Officer

Let me answer the question. So I don't think, we've provided any enrollment guidance before. But so far, we do think we're -- for the total number of enrollments, we're on track. And also for the revenue guidance, we do think we can keep the same guidance as before.

Felix Liu -- UBS Securities Co. -- Analyst

OK, thank you.

Operator

Your next question comes from Alex Xie from Credit Suisse. Please ask a question.

Alex Xie -- Credit Suisse -- Analyst

[Inaudible] So first my -- first question is about the short-term courses. Can management share with us more about short-term courses in terms of contents, duration, ASP, and how much of the enrollment is online? And the second question is about why does deferred revenue decrease from Q1 to Q2? And the third question is about why do management plan to increase our sales and marketing spending? Is it because we have seen intensified competition in terms of student acquisition? Thank you.

Yiding Sun -- Chief Executive Officer

[Inaudible]

Mei Li -- Senior IR Director

So first let me answer your first question. Thank you for the question, Alex. Let me give you introduction of our short-term courses. Our -- the RISE's short-term courses comprises online and off-line tutor apps.

The package is not -- it's just a trial course and the duration is not that short. For example, for the online -- for the off-line short-term courses, typically, we offer these classes in 10 or few days. And for the online short-term courses, typically, we have 10 sessions that will be completed online. And we also tailor this product, tailor the short-term classes to different age groups.

For example, for the age group 8 to 10, we will focus on the teaching of grammar. So actually this format is well accepted by all of our students. In the prior years, these kind of short-term courses only targeted those existing RISE students. But this year, we changed -- we encouraged those existing students to introduce their friends, the non-RISE students to study with them together, so that they can get some discount.

So for this summer, we have 300 headcount -- 300 students where 4,500 enrollments who participated in the short-term classes. This new format actually is very helpful in terms of the spread of word of mouth and help us get more new students and convert them to the regular classes. So it's a new marketing approach for RISE. In the market, we have seen other education augmentations already test this approach before like TAL, like, EDU.

So for RISE, it's something new. But based on our observation, the result is pretty good.

Yiding Sun -- Chief Executive Officer

[Inaudible]

Mei Li -- Senior IR Director

For your third question, we've noticed that recently increasingly a high amount of marketing investments in both online and off-line advertising channels from other educational service providers in China. Yes, this is very good demonstration that the market is good. And as a premium brand name, we would like to grasp this opportunity. So we decided to increase our marketing spending from the beginning of the first quarter so that we can drive our enrollment growth of the future, for example, in the next year.

And one thing is very important that our retention rate is very high. We keep our retention rate as high as 70%, and in Q2 this quarter, we reached 71%. So think about the lifetime value that students spend on RISE platform. Actually, on average, they stay with us for at least three years.

So when you think about this additional spending over three years, the impact is not so huge. So we have actively changed our plan. Also, on the other hand, we also adopted a new marketing approach, for example, we increased our investment in the Internet word-of-mouth marketing. For example, the WeChat moments, we increased our advertising investments in WeChat moments.

Also, we have new approaches like the introduction of short-term courses for those child students. So going forward, we believe that our marketing spending will be very worthwhile. The ROI will be pretty good, and it will drive our future enrollment growth.

Chelsea Wang -- Chief Financial Officer

And regarding deferred revenue, actually our deferred revenue and customer advances mainly consisted of upfront tuition fees from students that will be converted proportionally into revenues as we deliver our courses. So it is a net balance of crossbreeding and recognized revenue. So we don't disclose our quarterly balance of deferred revenue because we have some cash in transit between two quarters. So if you look at the balance of deferred revenue and customer advances by the end of the first half, the totally number is increased by CNY 26.9 million to CNY 1,031.7 million, which is higher -- much higher than last year.

That is my answer.

Alex Xie -- Credit Suisse -- Analyst

OK.

Operator

Hi, Alex. Please continue, your line is now open.

Alex Xie -- Credit Suisse -- Analyst

Hello, I have no further questions at this time. Thank you management for taking my questions.

Chelsea Wang -- Chief Financial Officer

Thank you.

Operator

[Operator sign-off]

Duration: 40 minutes

Call Participants:

Yiding Sun -- Chief Executive Officer

Mei Li -- Senior IR Director

Chelsea Wang -- Chief Financial Officer

Felix Liu -- UBS Securities Co. -- Analyst

Alex Xie -- Credit Suisse -- Analyst

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