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Bright Scholar Education Holdings Limited (NYSE:BEDU)
Q2 2020 Earnings Call
Apr 29, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and thank you for standing by for Bright Scholar's FY 2020 Second Fiscal Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the meeting over to your host for today's conference, Ms. Ruby Yim, Investor Relations Counsel.

Ruby Yim -- Investor Relations Counsel

Thank you, operator. Good morning and good evening. Welcome to Bright Scholar's second fiscal quarter ended February 29, 2020 earnings call. Joining me today are Mr. Derek Feng, our Chief Executive Officer; and Ms. Dora Li, our Chief Financial Officer.

As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. By now you should have received a copy of our press release that was distributed on April 28, 2020 after market close US Eastern Time. If you hasn't, it is available on the IR section of our website.

Before we get started, let me remind you that today's call may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, the Company's business plans and development, which can be identified by terminology such as may, will, expect, anticipate, aim, estimate, intend, plan, believe, potential, continue, is/are likely to, or other similar expressions. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the Company's filings with the US Securities and Exchange Commission. The Company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

During this call, we'll be referring to GAAP and non-GAAP financial measures. We use certain non-GAAP measures as supplemental measures to review and assess our operating performance. These non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for net income attributable to Company or other consolidated statement [Technical Issues] prepared in accordance with the US GAAP. Please note all numbers are in RMB and all comparisons refer to year-over-year comparisons unless otherwise stated.

With that, I will turn the call over to our CEO, Derek Feng. Derek?

Derek Feng -- Chief Executive Officer

Thank you, Ruby. Thank you, everyone, who is joining our call today to review 2020 second fiscal quarter results. Before my remarks, a few words on the pandemic. The outbreak of COVID-19 is affecting millions of lives around the world and causing unprecedented disruption to education across all ages. Our hearts and thoughts go out to the people who have been affected by this unprecedented event, and we appreciate the healthcare workers, local communities and governments around the world who are on the front line working to contain this coronavirus.

Let's begin. Again, for those who are new to Bright Scholar, we have included in our earnings presentation a brief corporate introduction from Slide 5 to Slide 13, which you can download from our IR website. All numbers are in renminbi and all comparisons refer to year-over-year, unless otherwise stated. I will begin first, before passing the call to Dora to provide a detailed financial review and an update on our guidance. We will keep the remarks brief to allow more time for Q&A.

Please turn to Slide 13 -- Slide 15 for the highlight of our second fiscal quarter and first half performance with detailed segment breakdown on Slide 16 and Slide 17. Following a strong start in our first fiscal quarter, we have delivered even better performance during the second fiscal quarter, which demonstrate the strength of our operations. Compared to the second quarter of last fiscal year, the revenue grew by 72.4%, gross profit, net income and adjusted EBITDA increased by 104%, 683% and 209.4% respectively.

Driven by the operating initiatives started last fiscal year, the revenue, gross profit, net income and adjusted EBITDA for the first half of this fiscal year increased by 70.5%, 74.6%, 49.7% and 89.3% respectively. In particular, the domestic K-12 segment delivered remarkable margin improvements. During first half of this fiscal year, the adjusted gross margin and adjusted EBITDA margin increased by 4.2 percentage points and 7.2 percentage points respectively.

In addition, our adjusted unallocated corporate expenses, which were mainly from our headquarters, in the second quarter and first half of this fiscal year decreased by 9.4% and 16.2% respectively, despite of the increasing business scale and complexity.

Turning to Slide 18 and 19, our enrolment continues its solid traction, driven by organic growth. The average student growth -- enrolment of first half of fiscal 2020 increased by 23.4% to 51,879 students, with blended utilization improved to 77.2% from 71%.

The academic accomplishments of our students are the shining stars of Bright Scholar, as shown in Slide 20. As of April 2, 2020, 92.1% of students in 2020 graduating class of our international schools have received over 970 offers from the global top 50 institutions, including three offers from Oxford, three offers from Cambridge, four offers from University of Chicago and nine offers from UC Berkeley.

We entered second half fiscal year of 2020 with a focus on implementing a number of exciting strategic initiatives to drive organic growth and achieve synergies with acquired businesses. Please turn to Slide 21 for the highlights. Fettes College Guangzhou, an ultra-elite international school, is on schedule to open this coming fall. Our Online Merge Offline, OMO, initiative was accelerated shortly after the outbreak of COVID-19 virus. The shared services center aimed to provide central operational support function in UK is on schedule to be in operations by this summer. We expect these initiatives will allow us to increase the value from acquired businesses.

Our deep collaboration with Country Garden has always been crucial to the expansion of our school network. As of the release date, we have entered into agreements with Country Garden to operate a total of 53 kindergartens and seven schools with a total capacity of approximately 30,000 students.

There is little doubt that we are operating in an environment with an unprecedented level of uncertainty. While the full impact of this global pandemic remains uncertain, I am confident that our operational strength, healthy balance sheet and world-class teams will lead Bright Scholar to deal with the current challenges and emerge stronger. We have taken measures mentioned in our earnings release and listed in Slide 22 and have vigorous action plans in place to minimize risk of infection in premises as our schools gradually reopen in China, minimize disruption to our global operations and pursue innovative opportunities in challenging environment. We are dealing with this period of uncertainty starting from a position of strength, and I'm confident, that we have the right strategy, right service offerings and financial resources to navigate through this environment and emerge from the situation poised for more success in the future.

With this note, I will turn the call over to Dora.

Dongmei Li -- Chief Financial Officer

Thank you, Derek. Let's come back to our financials. Please be reminded that all numbers are in RMB and all comparisons refer to year-over-year comparisons unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis.

Please turn to Slide 24. We have delivered another strong quarter with top line growth of 72.4% to RMB877 million for the quarter and up 70.5% to RMB1,975 million for the first half of fiscal year. Domestic K-12 schools, including international schools, bilingual schools and the kindergarten, all performed solid 20 plus percent top line growth for the quarter and on a six-month basis.

Our International School revenue increased 22.1% for the quarter, and this was primarily due to 19.3% increase of student enrollment. On a six-month basis, revenue for international schools was up 24% due to an 18.9% increase in student enrollment. Our bilingual school revenue for the quarter up 20.9%, and primarily due to a 12.1% increase in students enrollment. And for the six months, our bilingual school revenue up 19.5%, and mainly attributed to 12.2% increase in students enrollments. So our kindergartens, revenue for the quarter was up 21.3% due to increase in student enrollment of 22%. And on a six-month basis, revenue for kindergarten up 20.8%, and this was primarily attributed to 22.5% increase in student enrollment on the six-month basis.

The blended ASP for kindergarten, blended was down 1.4% on a six-month basis, basically due to the impact from Qiqiaoban kindergarten. If we exclude Qiqiaoban kindergarten, the average tuition fee for our other kindergartens would have increased 4.4% on a six-month basis.

Overseas schools is an important part of our global strategy. Due to the inclusion of St. Michael's School, Bosworth School and CATS, the second quarter revenue from overseas school was RMB297.2 million, accounted for 33.9% of total revenue. On a six-month basis, revenue was RMB556.4 million, accounted for 28.2% of total revenue. Overseas Schools contributed about 46.6% revenue growth and 48.4% gross profit growth in the first half of fiscal 2020. Average number of students was 3,300 for the quarter and 3,260 on a six-month basis, due to the inclusion of St. Michael's, Bosworth and CATS in the first half.

Our complementary education business revenue was up 6.4% for the quarter and 34.6% for the six-month basis.

Please turn to Slide 25. Cost of revenue for the quarter was 65% of total revenue compared to 70.5% in the same quarter of last fiscal year. On a six-month basis, cost of revenue was 60.5% and compared to 61.4% in the same period of last fiscal year. Teaching staff cost, the primary cost contributor, accounted for 35.6% of total revenue, down from 47.8% for the quarter. On a six-month basis, teaching staff cost was 32.2%, down from 40.3%. For our domestic K-12 schools, the average student-teacher ratio for the first half of fiscal 2020 was 8.9% compared to 9% in the same period last fiscal year.

On Slide 26, our gross profit and margin: despite the COVID-19 impact on our complementary segment in February, strong top line growth and improved operating efficiency drive our gross profit growth and the margin expansion. Gross profit was up 104% for the quarter and 74.6% for the first half. Gross margin was up 5.5 percentage point to 35% for the quarter. And on a six-month basis, gross margin was up 0.9 percentage point to 39.5%.

Continuing on Slide 27, it illustrates more on our operational discipline and improving operational leverage. For second fiscal quarter, adjusted SG&A as a percentage of total revenue was down to 25.3% from 26.8% in the same quarter last fiscal year. On a six-month basis, adjusted SG&A as a percentage of total revenue was down to 21.4% compared to 21.7% in the same period last fiscal year. Adjusted SG&A as a percentage of revenue for our domestic K-12 for the quarter was 7.5%, down from 13.5%. And on the six-month basis, adjusted SG&A as a percentage of revenue for domestic K-12 was 7.1% down from 12%.

As a percentage of gross revenue, adjusted unallocated corporate expenses, mainly our headquarter expenses, for the quarter was 4.1%, down from 7.9%. On a six-month basis, it was 3%, down from 6%. Adjusted unallocated corporate expenses for the quarter was RMB36.2 million compared to RMB40 million last year. On a six-month basis, it was RMB58.6 million, down from RMB70 million. And on Slide 28, it elaborates more on the adjusted SG&A expenses.

Please turn to Slide 29. Adjusted EBITDA for the quarter was up 209.4% to RMB152.5 million. Adjusted EBITDA margin was 17.4%, up from 9.7%. For the six-month basis, adjusted EBITDA up 89.3% to RMB505 million. Adjusted EBITDA margin was 25.6%, up from 23%.

Our adjusted net income for the quarter up 92.7% to RMB61.7 million. Adjusted net margin was 7%, up from 6.3%. For the first half, adjusted net income was up 43.9% to RMB287.1 million, and our adjusted net margin was 14.5% as compared to 17.2%.

Due to the uncertainty surrounding the impact of COVID-19, we are revising our guidance for fiscal year 2020 on Slide 31. For the fiscal year ending August 31, 2020, we expect our total revenue in the range of RMB3.37 billion and RMB3.47 billion, representing a growth of 31% to 35% based on the existing business and without potential acquisition.

We also expect average student enrollment to be between approximately 51,800 and 52,800, representing an increase of 11% to 13%. Meanwhile, as Derek mentioned in our earnings release, we are taking aggressive cost containment actions possible to minimize the impact from lower revenue growth and expect to achieve our targeted margins for the group of this fiscal year.

We are also in preparation to open 15 kindergarten and three international bilingual schools for fiscal 2021. Beyond fiscal 2021, we have four schools and 43 kindergartens contracted for operations.

Please refer to the table in Slide 33 and 34 for the condensed income statement. And Slide 35 shows the reconciliation for SG&A, EBITDA and net income on a GAAP to non-GAAP results.

A quick note on our cash and the bank balance in Slide 36. As of February 29, 2020, the Company's cash and cash equivalents and restricted cash totaled RMB2,433.4 million, or $348.1 million, as compared to RMB2,426.6 million as of November 30, 2019. For the six months ended February 29, 2020, the Company's capital expenditure was approximately RMB81.7 million, up 84.3% compared to the same period of the last fiscal year, including new kindergartens openings and improvement and ramp-up capex for existing schools.

This concludes my financial update. Now, I will turn to Derek for his closing remarks.

Derek Feng -- Chief Executive Officer

Thank you, Dora. We look forward to building on the momentum experienced during the first half of fiscal 2020, once the global environment begins to normalize. We believe that the market opportunities, our business fundamentals and other -- the same factors that drove -- that has been driving our growth trajectory this year-to-date and in recent years, will help Bright Scholar to resume accelerated growth for the long-term.

This concludes our prepared remarks, and we'd like to open the call for questions. Operator?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho -- Goldman Sachs -- Analyst

Congratulations, Derek and Dora, for such a great set of results. I just have a quick question regarding your revised guidance. Can you just walk us through some key assumptions in considering these revisions, particularly with aspect to the kindergarten business, as well as overseas and complementary education services divisions, please? And then, also if there are any kind of update on potential refund obligations, either in China or in the overseas markets that you're in? Thank you.

Dongmei Li -- Chief Financial Officer

Hi, Christine. This is Dora. Thank you for the question. Okay. Regarding the revised guidance, we have put all the conservative consideration we can have our best estimation [Phonetic]. For instance, for our domestic K-12 business, because of all the kindergartens are not back to campus as we speaking right now, so we conservatively considered there will be 2.5 months kindergarten closing. So we didn't account in the 2.5 months revenue, tuition fee revenue, meals revenue for kindergarten. And also for our domestic K-1 to K-12, although all the classes are majority started online class -- extended classes started at the beginning of March, but students still didn't come back to campus. So we conservatively accounted about a half -- a month and half of boarding and meal fee into our consideration in the current forecast.

And also, for our Overseas, it's the same situation. Because of the school closed in overseas, students either go back to their home country or live off-campus. So we consider some revenue shortage in the boarding and the meal. And also, the impact for our complementary mainly, for instance, for the after-school class -- after school training business, because all the offline classes cannot be resumed until all the regular schools are reopened. So that's part of the impact for our complementary. And also for our study tour and camp business, for the summer, which is usually the peak season for the study tour and camp business, so because of the current situation, so we consider there might be some impact for our study and -- study tour and camp business for the summer.

And for our overseas, there is also some short-term summer language training program. And due to the COVID-19 impact, that part of business probably will have some shortage. That's pretty much our expectation based on the current COVID-19 situation.

Also for the refund, as you know, for all domestic schools, we pretty much collected the tuition fees for the spring term. We will -- as I mentioned before, we already -- in terms of revenue, we conservatively lowered down our revenue recognition. For the refund, we will follow whatever the local authority, the instruction. But right now, we haven't heard any formal instruction from the local education authorities.

Christine Cho -- Goldman Sachs -- Analyst

Okay. Thank you.

Derek Feng -- Chief Executive Officer

Yeah, Christine, this Derek. Let me just comment on that. Number one, for the tuitions, our general policy is that we will not refund any of them, particularly for domestically because the school actually opened in the beginning of March even though over distance. So we don't think there is much a problem from that. They are our moderate risks obviously from a kindergarten perspective. As you know, generally, the cash -- or the revenue is calculated n a monthly basis. But as Dora mentioned, right now, we're all -- everybody is waiting for the clear guidelines from the government. And because of some of the classes may go into the weekends as well as part of the summer, so that would also claw back some of the missing time. So therefore, from a refund perspective, we're not worrying too much.

Christine Cho -- Goldman Sachs -- Analyst

That's very clear. Thank you, Derek.

Operator

Our next question will come from Elsie Sheng with Morgan Stanley. Please go ahead. [Operator Instructions]

Elsie Sheng -- Morgan Stanley -- Analyst

Hello, management. Thank you. I have a question on the margin. How should we look at the margin trend in the second half? Because on the one hand, you have operating improvement and more leverage on the operation, but on the other hand, the revenue will be lower. So, how should we look at the margin trend? Thank you.

Derek Feng -- Chief Executive Officer

Number one, we generally don't give the guidance on the margin, but I could answer in the following way. So internally, we are taking initiatives to reduce the cost structure a lot more aggressive than what we think this reduction of the revenue would be, because we want to make sure we are more conservatively prepare our cost structure, not only for the short term, but using -- also using the opportunity to right-size our operation going forward. So relative to the portion of the reduced revenue, the cost savings were actually -- could be higher than that percentage. So without giving you any guidance on the margins -- and I think you guys -- the models are a lot -- actually very detailed, actually openly very conservative. So I would say, internally, we are targeting to achieve and over-achieve our internally targeted blended margin. So, that's how far that I could go. And if you look at our ability to take cost out, the margin is probably one of the last things that you would worry about.

Elsie Sheng -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] At this time, I'm showing no questions in our queue. So, this will conclude our question-and-answer session. I'd like to turn the conference back over to Derek Feng for any closing remarks.

Derek Feng -- Chief Executive Officer

Well, thank you very much for joining the conference call. Please feel free to contact us if you have any further questions. And I would conclude the remarks with -- the session with one wish. I wish everybody stay healthy. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Ruby Yim -- Investor Relations Counsel

Derek Feng -- Chief Executive Officer

Dongmei Li -- Chief Financial Officer

Christine Cho -- Goldman Sachs -- Analyst

Elsie Sheng -- Morgan Stanley -- Analyst

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