RYB Education, Inc. (RYB) Q2 2019 Earnings Call Transcript

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RYB Education, Inc. (RYB)
Q2 2019 Earnings Call
Aug 21, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen. Thank you for standing by for the RYB Education Incorporated second-quarter 2019 earnings conference call. [Operator instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms.

Serena Xue, investor relations manager for the company. Please go ahead, Serena.

Serena Xue -- Investor Relations Manager

Thank you, Nancy. I'll quickly cover the safe harbor. Please note the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's annual report on Form 20-F for the fiscal year ended December 31, 2018 and other filings as filed with the U.S. Securities and Exchange Commission.

The company does not assume any obligation to update any forward-looking statements except as required under applicable law. During today's call, management will also discuss certain unaudited non-GAAP financial measures for informational purposes only. The company's press release for second-quarter 2019 earnings contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. As a reminder, this conference call is being recorded.

A webcast replay of this conference call will be available on the company's IR website at ir.rybbaby.com. On today's call is Ms. Yanlai Shi, our co-founder, director, and CEO; and Mr. Hao Gu, CFO of the company.

I'll now turn the call over to Ms. Shi. Please go ahead.

Yanlai Shi -- Co-Founder, Director, and Chief Executive Officer

[Foreign language] We delivered another solid performance during the second quarter of 2019, which was driven by the strength of our core offerings, play and learn centers and kindergarten services as we benefited from both healthy domestic growth and contributions from our overseas operation. The strong market appeal of our expanded educational platform continues to be fueled by our steadfast commitment to offering high-quality differentiated educational products and services to the students and families we serve. [Foreign language] First of all, our franchise play and learn center business had a robust quarter in terms of business performance. We continue to show market leadership in selected regions.

For the first half of 2019, we signed around 16 new play and learn center contracts, which beat our internal budgeted number. These new contracts also give us more visibility and comfort on new center opening schedule in the second half of this year. Since we formally launched the revenue sharing model, charging at a 7% fee for our franchise play and learn center business in the second half of last year, we have made progress over the past two to three quarters. In the first half of this year, all of our new play and learn center contract -- franchise contracts were signed under the revenue-sharing model.

We also have come up with a so called million dollar project where we help newly opened franchise play and learn centers on marketing and student enrollment. In some instances, we managed to help new centers achieve RMB 1 million tuition fee collection within the first quarter of the center opening. [Foreign language] On the course front, we continue to offer a breadth of courses suitable for kid development and parent-kid interaction at our play and learn centers. For example, we launched a new course called i Scholar with which we recorded satisfactory sales in the second quarter and also received highly positive feedback from our franchisees and the parents.

[Foreign language] Moving on to the second half of 2019, we plan to leverage positive momentum on franchise contract signing and focus on helping our partners on new center opening. Ultimately, we expect to build a continually expanding play and learn center network across the country. [Foreign language] Moving on to our directly operated kindergartens. We continued our focus on quality, safety and differentiated and diversified services to meet the demand and need for high quality, safe kindergarten services of multiple market segments and remain fully committed to provide differentiated, quality kindergarten services for our children.

Furthermore, we further enhanced staff and teacher training, standardized management system, as well as security and safety of our facilities. [Foreign language] During the first six months of 2019, we have upgraded our enrollment strategies and improved our performance in terms of student enrollment. Looking ahead, we're confident that student enrollment for the second half of the year will stay healthy. [Foreign language] With the extended brand portfolio for our kindergarten business following our Singapore acquisition, we now adopt a multi-layered brand portfolio strategy to cater to a broader student base and improve our children and parent satisfaction level.

Our teams on both sides will explore opportunities for resources sharing and introduce integrated early education services to our students at home and abroad. We expect potential benefits to unfold through our combined effort. [Foreign language] We and our newly added Singapore team have kicked off our exchanges by team onset bonding events, facility visits, dedicated discussions and meetings, giving a much attention on future training, talent management, internal information system and tools, to name a few. We started sharing resources and exploring ways to learn from each other and collaborate with each other.

Our strong research and development capabilities, management systems, as well as our board facility network in China, coupled with the Singapore team and their bilingual curriculum have positioned us well in serving the unmet demand of a wider target market in China and abroad. Furthermore, Singapore operations itself have a healthy trajectory for expansion and a momentum of growth. We have already started exploring market opportunities outside Singapore, for example, other countries in Southeast Asia. [Foreign language] Apparent pursuit of a better life for the family and quality education for the children will always remain a constant, regardless of external factors in the market and the economy.

Keeping the needs of the students and families we serve is our No. 1 priority. We will always strive to remain true to our mission to provide high-quality, individualized and age-appropriate care and education to nurture and inspire our students for their betterment in life. We believe following this philosophy is not only socially significant but at the same time a strong path to a healthy and sustainable growth.

[Foreign language] With that, now, I'll turn it over to Mr. Gu for a detail of our second-quarter financial results.

Hao Gu -- Chief Financial Officer

Thank you. Thank you, Mrs. Shi and Serena. Next, I'll spend some time to go through our financial performance during the second quarter.

Please refer to our press release for more complete discussions about our financial performance during this quarter. Please also note that our reporting currency is U.S. dollars and all percentage changes will be on a year-over-year basis unless we otherwise state. So in the second quarter of 2019, our net revenues reached 53.6 million despite currency headwinds.

In RMB terms, our net revenues grew over 20% still. The solid revenue growth was attributable to a few things, including enrollment increase at our directly operated facilities and product revenues increased from our newly added courses. Our adjusted operating income was 6.3 million in this quarter, improving from the adjusted operating income generated in the second quarter last year and this excludes certain estimate change, which resulted in a high comparison base in the same quarter last year. Our improving top line and bottom line results were driven by focused execution of our growth strategy, prudent cost management and continued investment in offering more quality products and services solutions.

At the end of the second quarter this year, we had a total of 1,141 franchise play and learn centers in operation. We will continue to help our franchisees improve their operational performance through in-house training and other forms of operational support. Now turning to our directly operated kindergarten business. We ended the second quarter with a total of 30,478 students enrolled at our directly operated facilities and this compares with a 23,526 students at the end of the quarter last year -- at the end of second quarter last year.

This growth was contributed by both our domestic and newly added Singapore operations. We believe healthy student growth is sustainable because of our continued commitment to the delivery of high-quality early childhood education. In April 2019, we have successfully closed the acquisition of our Singapore business. And by doing so, we have expanded our directly operated facility networks considerably, as well as our brand universe.

As our CEO Grace mentioned just now, we're very excited to be able to explore more synergistic opportunities with our Singapore operations. Now moving on to the second-quarter financials. Again, net revenues for the second quarter this year were 53.6 million, compared with 47.5 million for the same quarter last year. Service revenues for the second quarter this year were 48.2 million, compared with 43.6 million for the same quarter 2018.

The increase was primarily contributed by enrollment increase at directly operated facilities and newly acquired facilities in Singapore. And it was also partially offset by the decrease in our franchise service revenue. Franchise fee revenue in the second quarter last year was relatively high due to a recording of an accounting estimate change. Product revenues for the second quarter this year were USD 5.4 million, compared with 3.9 million for the same quarter last year.

This is primarily due to an increase in the delivery of products of certain new courses rolled out by us during the first quarter this year and an increase in the amount of merchandise sold through the company's franchise network. On the cost side, cost of revenues for the second quarter this year was 41.6 million, which represents a 31.7% increase from 31.6 million during the same quarter last year. Cost of revenues for services for the second quarter this year was 38.8 million, compared with 29.4 million for the same quarter last year. And the increase was primarily due to an increase in our staff compensation at our directly operated facilities, as well as higher operating cost.

Cost of product revenues for the second quarter was 2.8 million, compared with 2.2 million for the same quarter last year and the increase was pretty much in line with the increase in our product revenues. Now let me turn on to the margins. Gross profit margin for the second quarter this year decreased by 24.9% to 11.9 million, and this is in comparison with 15.9 million for the second quarter last year. And the decrease was primarily due to the increase in staff compensation and operating cost at our directly operated facilities and the decrease in our franchise services revenue as we just mentioned.

Gross profit margin for the second quarter of 2019 was 22.3%, compared with 33.5% in the second quarter of 2018. The decrease in gross margin was primarily due to the staff compensation, operating costs and the decrease in franchise services revenue as we just discussed above. Total operating expenses for this quarter was 6.6 million, compared with 8.4 million for the second quarter in 2018. Ifh we exclude share-based compensation expenses, the operating expenses were 5.7 million, which is a 9.1% decrease from the 6.2 million over the same quarter last year.

Selling expenses for the second quarter of 2019 were 0.7 million comparing with 0.4 million for the same quarter last year. General and administrative expenses or G&A expenses for this quarter was 5.9 million, which is a 26.2% decrease from the 8 million last year. If we also exclude the share-based compensation, G&A expenses were 5 million this quarter, representing a 15.2% decrease from the 5.8 million over the same quarter last year. The decrease in G&A expenses, excluding SBC was also primarily due to less expenses incurred in our professional services fee and stringent cost control.

The share-based compensation expenses included in G&A expenses were $900,000 for the quarter. Now, operating income -- on operating income level, the operating income for the second quarter this year was 5.3 million, compared with 7.5 million for the same quarter last year. On an adjusted basis, operating income was, again, 6.3 million this quarter, compared with 9.7 million last year. Moving on to net income attributable to ordinary shareholders of RYB, this quarter, the number was 2.9 million, compared with 4.7 million the same quarter last year.

On an adjusted basis, net income attributable to ordinary shareholders, which basically includes the impact of 1 million share-based compensation, excluding that, the number was 3.9 million, compared with 6.9 million same quarter last year. Basic and the diluted net income per American depositary share or ADS, attributable to ordinary shareholders of the company for this quarter was $0.11 and $0.10 respectively comparing with $0.16 and $0.15 respectively for the second quarter of 2018. Again, on an adjusted basis, basic and diluted net income per ADS attributable to ordinary shareholders were $0.14 and $0.13 respectively for the quarter, compared with $0.24 and $0.22 respectively for the same quarter last year. Our EBITDA for the second quarter this year was 8.2 million, compared with 10.1 million same quarter last year.

And adjusted EBITDA for the second quarter was 9.2 million versus 12.3 million over the same period last year. Cash flow wise, cash used in operating activities was 2.9 million during the second quarter in comparison with 10.6 million cash used in operating activities during the second quarter last year. As of end of June 2019, the company had a total cash and cash equivalents in the amount of 80.7 million, a decrease of 104.1 million as of end of 2018. And the decrease in cash and cash equivalents balances was mainly due to the payment for our acquisitions, as well as other investment activities and we also -- the share repurchases executed in the quarter also contributed to the decrease in our cash balances.

To summarize, I think we believe that we still adopt a balanced approach of growth and profitability, and as well as the execution of focus and diversification. And we also maintain -- we also aspire to maintain high standards for curriculum and operations at our facilities. And this will hopefully help us achieve healthy growth and optimize for our long-term shareholder value. With the above, I would like now to turn onto our business outlook.

For the third quarter of 2019, the company's management currently expects net revenues to be between 45.5 million and USD 47 million, representing a year-over-year increase of approximately 29% to 33%. For the full year of 2019, the company's management maintains our previously stated guidance and expect net revenues to be 195.9 million and 203.5 million, and this represents a year-over-year increase of approximately 25% to 30%. Please kindly note that the above outlook is based on our current market conditions and it also reflects the company's management's current and preliminary estimates of market and operating conditions, customer demand, as well as foreign exchange environment, all of which are subject to change. The above outlook also includes revenue consideration of our completed acquisition for the leading Singapore-based private school education group as we initially announced on February 5, 2019.

Thank you all for your attention for the above. I'd like now to turn the call over to Serena for closing remarks.

Serena Xue -- Investor Relations Manager

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. Thank you very much for your time and we hope you have a wonderful day.

Questions & Answers:

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Serena Xue -- Investor Relations Manager

Yanlai Shi -- Co-Founder, Director, and Chief Executive Officer

Hao Gu -- Chief Financial Officer

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