NaaS Technology Inc. (NAAS) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by and welcome to the RISE Education First Quarter 2021 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Aaron Li. Thank you. Please go ahead. Aaron Li: Thank you, operator. Hello, everyone and welcome to RISE Education’s first quarter 2021 earnings conference call. Today, you will hear from Ms. Lihong Wang, Chairwoman and CEO and Mr. Warren Wang, CFO. Lihong will go over recent business updates, operations and the company’s long-term strategy. Warren will go over the financial results for the quarter. Both will be available to take your questions in the Q&A session that follows. Lihong Wang: Thank you, Aaron. Hello, everyone. Thank you for joining our earnings call today. We are pleased that 2021 started off on a positive note, with the business recovering strongly compared with the prior year. Despite the resurgence of COVID-19 in certain areas of Northern China and recently introduced the regulatory restrictions, we still managed to deliver strong year-over-year improvement on both our top line and bottom line in Q1. We are pleased with the overall business performance when measured against the unfavorable macro environment. Moving ahead, given the critical regulatory changes we are facing right now as an industry, we are working to fully upgrade RISE into a multiform aptitude training provider in order to proactively navigate the challenging environment of the domestic education market and drive sustainable long-term development of our business. Now, I would like to give you some details of our quarterly results first. Please turn to Slide 3 for our financial and operational highlights for Q1 2021. Revenues were RMB262 million in Q1, up 140% from the same period of 2020. We also significantly narrowed our adjusted EBITDA loss and adjusted net loss on a yearly basis. Total number of new students enrolled for RISE regular courses was 5,846 in Q1 compared with 1,507 for Q1 2020. We saw a quarter-over-quarter decrease in the number of new students’ enrollments. This was mainly due to strong seasonality in the ELT market, where students’ enrollments are usually lower during the Chinese New Year season in Q1 as well as the recently introduced regulatory restrictions in Beijing. Warren Wang: Thank you, Lihong. Let me now go through our financial results for the first quarter of 2021. Before I begin, please note that all numbers stated are in RMB. Let’s take a look at Slide 7. Despite unfavorable macro environmental conditions, we generated RMB77.2 million of operational cash inflow during the first quarter compared with cash outflows of RMB82.4 million and RMB108.5 million in the first quarter and fourth quarter of 2020 respectively. This was mainly attributed to a couple of key factors: firstly, the strong market demand for our diverse cost offerings; and secondly, RISE brand exposure and solid reputation built on extensive experience in the sector and high-quality. In addition, we continue to optimize costs with overweight offline marketing channels and improved performance on new student acquisition and retention. This healthy cash flow has laid a solid foundation for further business expansion and to navigate any possible changes that may emerge in the macro environment. Turning to Slide 8, total revenues increased 140% year-over-year to RMB261.5 million. Revenues from educational programs increased by 125% to RMB229.5 million. The year-over-year increase in revenues from educational programs was primarily due to the redemption of online and offline operations of our self-owned learning centers as a result of the subsiding COVID-19 pandemic and our quick OMO strategy deployment. Although there are still ongoing uncertainties and challenges arising from the impact of COVID-19, we believe that we are well positioned to mitigate risks. Franchise revenues increased by 420.6% to RMB31.8 million. The year-over-year increase was primarily due to the growth in current franchise revenue as a result of subsidy in COVID-19 pandemic. Other revenues decreased by 69.2% year-over-year to RMB0.3 million. Lihong Wang: Yes. Thanks, Warren. Now on Slide 11, as you know, our macro environmental factors have a profound influence on the entire after-school tutoring market in China. Over the past 2 months, we have been facing educational bureau implemented or tested a series of regulatory requirements related to after-school tutoring sector, including restrictions on subject-based education, fund supervision and advertising related to preschool tutoring. These regulations have broadly affected the entire sector. The accelerated growth of the aftermarket – after-school tutoring market in China has no doubt brought some chaotic problems. So, we believe that it was necessary for the government to define clear regulations to promote the long-term and healthy development of the education industry and we fully appreciate and support the government’s initiatives. We believe that there will be both challenges and opportunities for the after-school tutoring sector to shift its focus on to the original building blocks of a well-rounded education system. We have entered a new chapter for RISE to fully upgrade into a multiform aptitude training platform. Look 14 years’ history, we think RISE platform has two strong – sorry, has four strong pillars: first, we are a market leading education brand; second, we have academic capability, strong course development and training capabilities; third, we have a student base with more than 150,000 students in class; the last not the least, nationwide network of self-owned and franchise centers over 500 centers nationwide and an IT and operating system that can support online education as well. So, let me elaborate those four strong pillars: the first one, market leading brand and the second one, academic capabilities. During the past 14 years, we have mainly specialized in English language training, or ELT services. And at the same time, we have also been a dedicated practitioner of aptitude education, because we have always advocated for our students to develop well-rounded foundations. Unlike most test-oriented courses, our curriculum, are designed to foster leadership and cognitive skills in students, while developing their self-confidence and sense of independence. This is fully in line with the education concept advocated by the government and the public in China. In addition, we have developed and executed our plans since early 2020 to directly tap opportunities in the STEAM markets. Our experience and expertise in aptitude education and our deep dive into these new segments have laid a solid foundation for the development of our complete aptitude education ecosystem. Operator: Thank you. Your first question comes from Sheng Zhong of Morgan Stanley. Please ask the question. Sheng Zhong: Hey, good morning. Thank you taking my question and thanks for a very comprehensive introduction about your results and the new business. So I am very interested in your new initiatives, including Hiyeah and WhySTEAM. Can you give us more color on the market potential you see in these two areas and with the current competition landscape? And what’s your operation model like your pricing, your positioning? And maybe also how much revenue contribution you would expect from this new business this year and the next year? This is the first question. And the second question is regarding to our current major business, ELT, you also mentioned there was some regulatory uncertainty here. So, could you share us with more color where your communication with the government, especially in the Beijing reopening process. What do you see the government attitude to the – tuiting for the children below 6 years old, because at the same time, we see some online players, they already removed their online courses for 6 years old below children? So that’s my question. Thank you very much. Lihong Wang: Thank you, Zhong Sheng. So, on the first question, maybe I start with WhySTEAM, because this is of course extended from our mass logic thinking. To be frank, this is the second largest area after English. So, the demand from students and parents are pretty high, partially proved by, I would say, online players like . For us, we believe our strength is offline. So, the WhySTEAM is extended from mass logics to include more science literacy and science exploration, partially to make it more comprehensive. But just to be frank, we don’t want this to be subject to the regulation in terms of what they call subject-based course to be categorized as mathematics. So for us, the positioning is to try to be the offline number one player in the market. And the pricing right now to the market is a bit, I would say, pretty competitive for 3 months courses we price below RMB6,000. We do think with offline more interactive immersion experience, this could be quite attractive. For Hiyeah, this – I would say, one is, you can call it a new course. The first purpose is to, in some ways, if the regulation prohibit us to teach English below 6 years old, we wanted to convert our students into this class to prevent losing our current student base. Then the second, of course, this is of course focused on social emotional and also growth mindset. In these two major areas, it is actually quite common into the teaching courses overseas. However, in China, there is, I would say, lack of very good offerings in this space. However, families – parents are very focused on preparing their kids to be able to blend into the society into the schools. So, we see very strong demand. In terms of competition, there is not much competition offering comprehensive courses. However, there are one or two players offer partially, including the social emotional growth mindset. Two names, I can give you one called . They started as kids who have trouble learning, but expanded into the social emotional space. They are quite small. The second player called . They are much more focused on oral delivering. However, for us, our oral communication is only part of the courses. We do see very strong potential. However, for Hiyeah, this year, majority of the students would come from the ELT age below 6 if regulation really targets that space to prohibit learning English as a subject. So there is less focus on generating additional revenue. In the long run, however, we do think this course will have high demand and can be a separate business avenue. However, this year is not the focus. So, that’s the first answer related to – the answer related to your first question. On the second question, the current ELT business, as I mentioned, in Beijing, it is not officially – there is no official so-called regulation put in place. However, each district and also Beijing Education Bureau from a lot from the so-called the oral communication, we see a couple of areas that they are very much focused. The first one is the license, including the centers that you have to have education license. The second is a teacher need to have a license. Then the third area is really the so-called – I think I mentioned the – what’s the right word? The fund supervision, meaning you have to have deposit to guarantee that you have the capital to run schools. Each district has a very different requirement. So this is the third element. The fourth element is also not written. So far, they prefer or they – in some way, only let you get students an age above 6 come to the classroom. So you cannot offer offline classes for children below age 6. All these are not on paper. However, we have to satisfy the – their requirement to resume offline schools. So far, we have three offline schools resumed, teaching children above 6 years old. So if this requirements become official and implement across the city as you mentioned that this will definitely have impact on our business, also competitors as well. Therefore, our strategy is to continue the offline teaching for age above 6. And then for age below 6, once they have an official requirement, we will convert them into Hiyeah. In fact, even before that, the first two schools under Hiyeah will be launched in mid-June. And for the – we use the existing facility, we will convert those students in those two schools into Hiyeah first, so test all the marketing materials and teaching methodologies prepared for the launch to cover Beijing if the requirement becomes real. In terms of online players, my understanding is so far, there is no clear regulation yet. However, if the regulation becomes official and public, that will apply to all players, including online players. But that’s my personal understanding. Sheng Zhong: Thank you very much. That is very helpful. And may I follow-up, one quick question for Hiyeah and WhySTEAM? Are the course content internally developed? Lihong Wang: Yes. WhySTEAM started from mass logics. We also tried out STEAM courses in 2019. So we combine these two together to be the new RISE team courses. And Hiyeah, we have also studied similar courses overseas. And of course, in China, the education guidance also included areas like social, emotional and growth mindset. So we combine those with the leadership courses from the English ELP. So this is, I would say, partially take over some of the content from the ELT courses and then develop more into social, emotional and growth mindset. This will hopefully be teached in – be thought in English and Chinese. However, we’re less focused on English language. Sheng Zhong: Thank you very much. Lihong Wang: Just one additional point, I think the so-called the study – if you study subjects, for example, English and – sorry, mathematics and Chinese under 6, this is strictly prohibited right now. That’s why you see some players already take off of the shelf. However, the so-called English language or the – some online courses named for example, or the enlightenment still not very clear whether this will be categorized as subject-based courses. If it is, I think all of that may be prohibited under age 6. Sheng Zhong: Got it. Thank you. Operator: Your next question comes from Lei Yang of China Galaxy International. Please ask your question. Lei Yang: Okay, thank you management for the opportunity to ask questions. I have two questions. So the first one is, because your offline classes not resumed largely currently, so could you elaborate more on your OMO learning system? And what’s the part of the OMO learning playing in your new businesses? And also about – the second question is about the sales contribution of each of your brands. Could you elaborate more on this? Thank you. Lihong Wang: Okay. So when we articulate the OMO model last year, my point is that we can offer pure online, pure offline and online merging with offline really depends on the situation and age group. When offline can be resumed or can be utilized for age below 6, we encourage all offline learnings given the better experience and also interaction offline. For age above 6, when offline are available, we offer OMO model, meaning during weekdays, one course will be offered online, focusing more on subjects to have better experience in terms of language, in terms of learning grammar and rating comprehension. Then the two courses will be offered offline during weekend. So the – these are more students school. So this OMO model better system better to stay at home during weekdays and come to the center during the weekend. And when – if there is a COVID-19 situation or other situations that prohibited offline learning, all the students can be removed – can be moved to online learning. Therefore, in Beijing and Shijiazhuang during the COVID-19 resurgence, all the students continue their learning online. And for Beijing the centers now still cannot open off-line or our students are learning online. So this is the OMO model, try to better suit the experience and also the so-called the time management for our students. And this is also part of the benefit for our network. As I mentioned, we have both offline network and online platform. On the – the OMO is the strategy for RISE. Therefore, all the new business will be able to have one more blend into the business. For example, the new Hiyeah courses, each course target students. At the same time, we will offer video – short videos to parents. So the parents understand what students are learning. At the same time, they can be supportive in this so-called social, emotional growth mindset development because we do think this is a matter for the whole family and not just the students. So the OMO model will continue. Even for the camp and social studies, we will have an OMO model into the business. The second question regarding the sales contribution. Right now, as we planned, the WhySTEAM will go through both SOCs and franchisees model. Therefore, the sales contribution from direct-owned and the franchisees will be according to the plan we had in the beginning of the year. This year, the contribution will be small. This is a year that we wanted to open more centers but the revenue recognition may need some time to realize – the cash revenue could be – of course, will realize earlier. For Hiyeah, as I mentioned, the first or critical objective for Hiyeah this year is to convert our students below age 6 in the ELP space so that we can student base, keep the business in a healthy status. However, if we do see this as very attractive, we can, of course, open separate independent centers, both in SOCs area and franchisee areas. But I don’t think this is the key component this year. This could be the revenue potential or growth potential in the future. Lei Yang: Thank you. Thank you very much. Operator: Your next question comes from of Credit Suisse. Please ask your question. Unidentified Analyst: Thanks management for taking my questions. So I have two questions. The first one is still about regulation, considering there is still some suspension of the offline learning center. Would you share some color of your expectation for the new student enrollment growth for the upcoming quarters? And the second one is about user acquisition strategy, given the high percentage of your traffic relies on the offline referral. If there is further restriction offline learning center, what would be the marketing spending plan to acquire new users for the rest of the year? Thank you. Lihong Wang: Okay. As I mentioned, Beijing, we actually will see – resume more schools for offline learning. The restriction is that you have children age above 6. With the offline learning center opened, we definitely see better enrollment in those schools. However, even in the first quarter, when all the Beijing centers were closed, Beijing new enrollments still see, I would say, pretty good results. As I mentioned in earlier, the enrollment for all other cities see very strong growth quarter-over-quarter year-over-year. In the second quarter, I think that trend will continue. And of course, Shijiazhuang resumed the offline operation in the end of March. So the Q2 will also be stronger. The Beijing, I think may still see soften. However, once we resume more offline centers, we will see better traction. That’s one point. The second point is that we are shifting to more efforts to acquire students at age 5 years old, so that they can come to school when they are getting to the right age group. On that front, I do think we need to look at the whole market if we are restricted, everyone else would be restricted as well. So the course is that you can offer will be limited the so-called educational providers will be a number of players will be fewer. And with our reputation and ability to navigate these challenges, we actually think in the future, you will see fewer players getting more market share, although it may not happen in the near quarter. But in the long run, the so-called the bigger players or stronger players, the players who can comply with the government’s regulations will be there. Of course, the second quarter in terms of seasonality, it’s never a very strong quarter. So I think we will see a normal quarter, maybe a little bit weaker because of the Beijing situation. But overall, outside Beijing are very strong. The second question regarding acquisition costs. In fact, I mentioned government and regulator advertising channels and the languages that you can use for advertisement. So this actually affects a lot of the online channels much significantly. For us, we have a very large offline network. From the acquisition cost, you can see that our acquisition cost actually is controlled very well. We still think the offline channel has a very strong advantage. This year, the strategy for RISE is to overweight the offline channel, and we are doing it according to this strategy. In Beijing, in fact, you can still have a demo with students and their parent. So it is not entirely off the market. That’s why in Beijing, we still be able to have new student enrollment. Going forward, we will continue this strategy to have a balanced deployment in terms of online and offline advertising and offline promotion. The other point is we are building the best courses to attract private traffic. Going forward, hopefully, the private traffic can help us to generate leads and to convert students into our courses, ELT, Hiyeah and STEAM. For the private traffic, the strategy for us, one, of course, to have light courses, diversified courses. The second approach is to cooperate with other, I would say, companies in different industries. For example, we trialed activities or host events at the Walmart Sam’s Club in Shijiazhuang. When we actually got pretty good and accurate leads these are the tools that we can expand our lead and private traffic pool and help further conversion into our regular or main courses. Unidentified Analyst: Thank you. Operator: Your next question comes from . Please ask your question. Unidentified Analyst: Hello, management. Thank you for taking my question. And I have two simple questions. First, how does the potential regulation affect our original strategy on expansion and marketing? And what is our long-term strategy now, like in 3 to 5 years? Thank you. Lihong Wang: So the first question is about marketing or about the network? Unidentified Analyst: Both. Lihong Wang: Okay. As I mentioned, we deploy the so-called the – or we acquire students utilizing all channels, online and offline. With our offline network, we easily can do the offline promotion around the school. So that this is – this will continue to be our major channel. Of course, we use the online channel like the search engine, the , the other social media as well, I think it will be a combination. But for RISE, the – we always wanted to utilize our offline network. In terms of network expansion, so far, in Beijing, the license approval is actually very difficult. However, super majority of our schools already have licensed. We actually feel this is an advantage. Part of the, I would say, it becomes a scarce asset. Outside Beijing, we continue to see very normal operations. That’s why you see that the franchisee partners opened some more schools in the franchisee areas. And going forward, we will see how regulation will – how – what’s the regulation and how do we cope with the regulation. But comes to the strategy, I do think once we have that license, naturally, we can expand beyond ELT. So of course, the courses require educational licenses, definitely not only English. How to expand into other courses? We are thinking about that. Some can be self-developed. Some can, in fact, invite other partners so that we can have our schools utilization increase. But I would say for the near-term, we wanted to focus on our ELT, Hiyeah and WhySTEAM, this is the core courses we offer. At the same time, we are building that private traffic pool target, what we call the RISE can and also social kind of social practice. I do feel these are a market that had very strong demand. And RISE already had experience in the past to manage that. My – I would – maybe go beyond RISE. I feel the regulation will definitely change the landscape. So in 3 to 5 years, I personally think you will see more companies with both online and offline capabilities to getting their mergers acquisitions very likely to happen. And at the same time, multi subjects or a platform that can offer multi subjects for the aptitude training will definitely become leaders. That’s also why RISE is going along this strategy. I think single course will be very difficult to survive. So for RISE, we will be focused on building the online and offline platform and adding aptitude-related courses to extend our lifetime value and also all these courses are in a way definitely compliant with the government requirement. So that’s kind of an explanation. Maybe we can articulate better in the coming months. But so far, I think the business upgrade and branding upgrades give you a preview about what we are trying to do. Unidentified Analyst: Thank you. Operator: Ladies and gentlemen, due to time constraint, that will be our final question and the end of our conference call. Thank you for participating. You may all disconnect.NAAS Ratings Summary
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NaaS Technology Inc. (NASDAQ:NAAS) reported its Q1 earnings results on Friday, with EPS coming in at ($0.47) and revenue at $36.16 million.
In the first quarter of 2023, NaaS' network handled a gross transaction value of RMB990.5 million (US$144.2 million), marking a 107% surge compared to the same period the previous year. The number of orders processed through NaaS' platform also witnessed a significant rise, reaching 44.4 million - a jump of 110% year over year.
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