RYB Education Inc (RYB) CEO Yanlai Shi on Q1 2020 Results - Earnings Call Transcript

RYB Education Inc (NYSE:RYB) Q1 2020 Results Earnings Conference Call May 29, 2020 8:00 AM ET

Company Participants

Serena Xue - Investor Relations

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

Hao Gu - Chief Financial Officer

Operator

Hello, ladies and gentlemen. Thank you for standing by for the RYB Education Inc.’s First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded.

I’d now like to turn the call over to your host, Serena, Investor Relations Manager for the company. Please go ahead, Serena.

Serena Xue

Thank you, Anita, and hello to everybody on today’s call. With me today are Ms. Yanlai Shi, our Co-Founder, Director and Chief Executive Officer; and Mr. Hao Gu, our Chief Financial Officer. Our earnings press release was issued post market close on Thursday and is also posted on our Investor Relations website ir.rybbaby.com. On our website, you will also find a webcast replay of today's call.

Please note that 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, 2019 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 this call today, management will also discuss certain unaudited non-GAAP financial measures for informational purposes only. The company’s first quarter 2020 earnings press release contains a reconciliation of the unaudited non-GAAP financial measures to the unaudited most directly comparable GAAP measures.

Now, I will turn the call over to Ms. Shi for her to take us through a review of the first quarter and provide an update on the business.

Yanlai Shi

Thanks to all of you who have joined us today. I will review our business and operating results for the first quarter of 2020. Our CFO, Chris, will then follow with a more detailed review of the financials.

The COVID-19 outbreak has brought upon unprecedented circumstances to all walks of life and lines of business. In response to the challenges presented by the COVID-19 pandemic, during the first quarter we swiftly adjusted our operations to meet the evolving demands of the challenging environment. During this quarter, we focused our efforts on several key priorities, including proactively monitoring the health status of our students, families and staff members to keep track of their wellbeing and safety during the challenging time; accelerating our digital strategy to help families maintain the educational continuity for their children during temporary facility closure; aggressively managing costs to maintain sufficient cash balance and liquidity; and positioning ourselves ready for a timely and safe reopening of facilities.

One highlight during the COVID-19 outbreak period was the progress we made in advancing our digital strategy. During this period of temporary facility closure, we initiated online portals providing families and students with rich educational content. These portals included self-developed platforms and channels as well as resources utilized from third-party platforms. During that time, our teaching, training, operations, marketing and IT teams devoted themselves to producing and promoting online content. The broad spectrum of high-quality content and applicable tools were made available online received positive feedback from parents and were warmly embraced by our students.

Additionally, we started building an online platform with extra options to promote and distribute paid content. These actions reflect our ability to respond quickly and our ability to act and execute.

Our directly operated facilities temporarily suspended operations due to the COVID-19 outbreak after the national holiday for Chinese New Year in January in accordance with governmental requirements to contain the outbreak. The temporary closure for all of our facilities in China caused a substantial year-over-year decline in revenues for the first quarter of this year. As the COVID-19 outbreak in China has gradually come under control, following the guidance and timetable announced by government and related local authorities, a number of are directly operated facilities have reopened in China as of May 28th. Additionally, the majority of our directly operated facilities are getting ready to resume normal operations hopefully by the end of June, in accordance with the timeline upon issuance by local government authorities.

During the period of temporary facility closure, we acted quickly and effectively to establish and maintain open communication with the families we serve through various ways. We distributed high quality educational content via online portals and gained positive feedback from parents. By the end of the first quarter of 2020, we attracted more than 350,000 registered users through several service accounts and apps including iLoveGrowth mobile app, and accumulated more than 660,000 views in the early childhood education section of a third-party video streaming platform.

As of March 31, 2020, the number of students enrolled at our directly operated facilities was 31,251, an increase of 27.2% year-over-year from 24,572 students enrolled at the end of the first quarter last year. This growth primarily reflected our facility network expansion and increased facility utilization, both domestically and overseas.

Our primary focus and attention have been, and continue to be, on the health and safety of the children and families we serve. To make sure a smooth reopening, we have upgraded our safety and health operations manual with special COVID-19 protocol. With phased reopening of virtually all of our facilities, we will continuously monitor ongoing guidelines and follow the directions from government authorities and medical experts to operate our facilities in accordance with strict health and safety measures.

As I mentioned earlier, as of May 28th a number of our facilities in China have resumed daily operation following the timeline issued by government authorities. Our facilities in Singapore have also temporarily suspended operation in April and May per requirements by Singapore government concerning the COVID-19 pandemic. The company received aid relief or subsidies from the government of Singapore during this month and currently expects to reopen facilities in Singapore starting in early June. We should also note that parents have a strong incentive to send their children back to our facilities as we have learned from parents both domestically and abroad that during this outbreak they're struggling to balance work and taking care of their children at home. We look forward to resuming normal operations and welcoming back our students.

In terms of our strategic positioning, we remain committed to our brand portfolio approach, sticking to the diverse needs of students and families while actively supporting new regulatory policies for the healthy development of early childhood education. We will continue to grow and focus on the development of the premium international branded facilities in China by leveraging our domestic operational and educational knowhow, along with the strong brand equity, bilingual education, and staff training of our Singapore operations. We'll also continue to integrate business operations across multiple geographies to create additional synergies and better serve our students and their families.

Moving on to our franchise play-and-learn center business, by the end of the first quarter of 2020, we had more than 1,100 play-and-learn centers in our network. Similar to our directly operated kindergartens, our franchise play-and-learn centers also temporarily suspended their operations in response to the COVID-19 outbreak.

As part of our support to help franchisees weather the challenges brought upon by the COVID-19 pandemic and help them enhance communication with the families they serve, we provided a 99 day free access pass through the educational content on our self-developed mobile application iLoveGrowth. Our iLoveGrowth app offers structured educational content easily accessible to students and families, and has attracted to over 330,000 registered users to-date. We have further developed iLoveGrowth online courses and hold weekly webinars on popular topics that serve not only to enhance the user experience, but also to pave the way for paid user conversion at a later date. In addition, we offer various tailor-made online trainings to our franchisees across the country and offer assistance to them applying for support measures introduced by local governments such as rental reduction.

What’s more? To show our strong support to our current franchisees, we have announced to waive a total of three months worth of annual fees to help them stabilize operations during the recovery phase of the outbreak.

In terms of the reopening schedule of the franchise play-and-learn centers, while there are still some uncertainties, we believe that we're well positioned to help them resume normal operations confidently and swiftly taking into account our brand network and close relationship with our franchisees. Based on our current estimation, we expect that over 60% of the franchise play-and-learn centers will have resumed operations by the end of the second quarter of this year.

As discussed in our previous earnings call, starting from the second half of 2019, we have proactively slowed down the pace of adding new PLC franchisees, focusing instead on upgrading our products, services and content offerings for our existing franchise partners in addition to preparing to launch a separate new premium brand for PLC business. These initiatives remain on track for our play-and-learn center business. We continue to believe that spending on early childhood educational services and resources has been and will continue to be a significant priority for parents and family budgets. We believe that we're facing all new short-term challenges hosted by the pandemic and are positioning ourselves to capture the evolving business opportunities going forward.

In the face of the challenges posted by the pandemic this year, the management decisively adopted strict cost control measures to reduce costs and improve operational efficiency, aiming to maintain a healthy financial position and liquidity that can support the company’s stable operation and sustainable development. At the same time, considering the practical impact of COVID-19 pandemic for a period of time in the near future, we'll maintain focus on strengthening and growing our core business. That said, we'll dial down investments in new initiatives to avoid unnecessary risks and uncertainties. Over time, we're confident that the company will return to steady growth and on track of creating long-term value.

At last, I want to point out that during the COVID-19 outbreak, and these unprecedented circumstances, our team showed strong resilience and capabilities to respond quickly to the evolving conditions. Despite a challenging start to 2020, we remain confident in our business model and the strong underlying demand for high quality early childhood education services. We remain committed to providing quality early educational services to children and their families. At the same time, we look forward to better addressing the evolving needs of modern parents and students under the evolving environment, and providing online-merge-offline early childhood education services that blends facility based learning and learning at home.

With that, I'll turn it over to our CFO Chris to provide highlights of the first quarter financial results. Thank you.

Hao Gu

Thank you, Grace and Serena. Now please allow me to go through our first quarter 2020 financial results. Please refer to our earnings press release posted on our IR website earlier today for a complete discussion of our financial performance.

In the first quarter, our financial performances and operations were heavily disrupted by the COVID-19 outbreak, as all of our facilities in China were temporarily closed starting from late January this year. Our net revenues for the quarter were US$17.3 million, which is a 49.5% decrease from the same time last year. And our operating cash outflow for the quarter was US$14 million mainly due to the temporary facility closures during the outbreak.

In response, we focused our efforts on cost control and capital expenditure reduction and took steps to strengthen our liquidity position and to further optimize cost structures within the company.

I would like to take this opportunity to share a set of actions that we've taken so far related to cost control and our liquidity position. This year, we are continuing to carry out stringent cost control measures that we started in the second half of last year. These measures include headcount reduction, strict control of operational and discretionary expenses such as professional fees and travel expenses, as well as deferred discretionary capital expenditure.

In addition, we have reassessed our resource allocation and sharpened our focus on core business as Grace mentioned. We have also decided to cut spending on certain new initiatives in light of their limited brand awareness, and other uncertainties in current market environment. Moreover, we applied for kindergarten related subsidies and other support measures provided by the government during the COVID-19 to strengthen our financial position and liquidity.

As of March 31, 2020, we had a total of $53.9 million of cash and cash equivalents and currently we're also in the process of obtaining a credit facility from a commercial bank. We believe our balance sheet as at the end of the first quarter remains healthy.

Looking ahead to the rest of the year, with stringent cost control measures in place and prudent investment strategies, we believe that the current business disruption resulting from the pandemic will gradually subside. Despite the conditions created by the COVID-19 outbreak, we remain confident in our business model and the strength of our balance sheet and liquidity. We will continue to improve our educational services and products, particularly through leveraging our digital technology to capture evolving market opportunity.

We believe our steadfast commitment to high quality education will help us navigate short-term challenges, yield healthy long-term growth and create long-term shareholder value.

Now, I'll move on to the first quarter financial discussion. Net revenues for the first quarter of this year decreased by 49.5% to [$17.3 million] (sic) from $34.3 million for the same quarter last year. Service revenues for the first quarter decreased by 47.3% to $16.8 million from $31.8 million for the same quarter of 2019. The decrease was due to decreased tuition fees as the company began the temporary closures of all facilities in China from late January as a result of COVID-19 outbreak. Franchise services revenue also decreased due to the slow-down of play-and-learn franchise expansion and lower revenue generated from franchisees during the impact of the COVID-19 period. The decrease was partially offset by services revenues contributed by facilities in Singapore that remained operational during the first quarter this year.

Product revenues for the first quarter decreased by 78.2% to US$500,000, from $2.4 million for the same quarter of last year. The decrease was due to a significant drop in the amount of merchandise sold through the company’s franchise network as all of the franchisees’ facilities were also temporarily closed during most of the first quarter.

Cost of revenues for the first quarter was $28.9 million, which is a 10.8% decrease from $32.4 million for the same quarter of 2019. Cost of revenues for services for the first quarter 2020 was $28.7 million, compared with $31.2 million for the same quarter of last year. The decrease was mainly due to the fact that all of our facilities remained temporarily closed during most time of the first quarter as well as certain mitigating steps taken by the company to minimize facility level fixed operating costs, such as reducing labor costs. The decrease was partially offset by operational costs incurred at kindergarten and student care center levels in Singapore that we acquired during the second quarter of 2019.

Cost of products revenues for the first quarter of this year was US$300,000 compared with $1.2 million for the same quarter last year. The decrease was generally in line with the decrease in products revenues.

So as a result of the foregoing gross loss for the first quarter of 2020 was US$11.6 million compared with gross profit of US$1.28 million for the same quarter of 2019. Total operating expenses for the first quarter was US$14.5 million, compared with $5.9 million for the first quarter of last year. Excluding share-based compensation expenses, operating expenses were US$13.7 million, which is an increase of 198% from $4.6 million for the first quarter of 2019.

Selling expenses for the first quarter were US$200,000, compared with US$600,000 for the same quarter of last year.

General and administrative expenses, G&A, for the first quarter of 2020 were US$5.8 million, which is a 9.2% increase from $5.3 million for the same quarter of last year. Excluding share-based compensation, G&A expenses were $5 million, compared with $4 million for the same quarter last year. The share-based compensation expenses included in G&A expenses for this quarter was US$800,000. The increase in G&A expenses excluding share-based compensation was primarily due to the G&A expenses incurred from our Singapore business unit, which was not consolidated in the first quarter of last year. The total G&A expense increase was partially offset by a decrease in G&A expenses in China as a result of stringent cost control measures taken in response to COVID-19 outbreak.

As part of our operating expenses, we recorded impairment loss on goodwill in the amount of $8.5 million during the first quarter of this year. Due to the impact of the COVID-19 on our business operations, the company concluded that an impairment indicator existed at the end of the first quarter and the value of the certain reporting units, primarily those with our new initiatives, were less than their carrying value. As a result of the impairment assessments, the company decided that there was an impairment loss on goodwill in the amount of $8.5 million for the quarter.

Operating loss for the first quarter of 2020 was $26.1 million, compared with $4 million for the same quarter last year. And adjusted operating loss was $25.3 million for this quarter, compared with $2.7 million for the same quarter last year. Net loss attributable to ordinary shareholders of RYB for this quarter was $26.6 million. Adjusted net loss attributable to ordinary shareholders of RYB, which includes the impact of [$800,000] (sic) share-based compensation expense for the first quarter was US$25.8 million.

Basic and diluted net loss per American depositary shares, ADS, attributable to ordinary shareholders of RYB for the first quarter of 2020 were both $0.96. Each ADS represents one Class A ordinary share. Adjusted basic and diluted net loss per ADS attributable to ordinary shareholders of RYB for the first quarter of 2020 were both $0.93.

Now for the outlook. As China effectively contains the rapid spread of the COVID-19 and new infection cases continue to decline, economic activities are gradually picking up throughout the country. Since early May, local authorities have announced the back-to-school schedule, providing visibility to the recovery of our business operations. A number of our facilities have reopened as of today, and we expect the majority of our existing kindergartens will be able to resume their operations by the end of the second quarter.

Based on the information available as of today, for the second quarter of 2020, we now expect our net revenues to be in the range of US$11 million and US$11.8 million. The above outlook is based on the current market conditions and reflects the company management review, which is still subject to change given the dynamic nature of the COVID-19 situation and uncertainty surrounding the reopening schedule of our facilities as a result.

Thank you for your attention. This concludes our prepared remarks. And we will now open the call to questions. Operator, please go ahead. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question today comes from [Patrick Rilling] with [Sintra Capital]. Please go ahead.

Unidentified Analyst

I have two questions. The first question is regarding your digital strategy. The company mentioned digital strategy a few times in your results announcement last year as well as in this call. Could you please provide more details on its rate of development? The second question is, can you comment on your plan in terms of opening up new kindergartens, what would be your focus in the future? Thanks.

Yanlai Shi

Firstly, I’m going to say, the COVID-19 outbreak and circumstances that have come along have raised the awareness of the power of online education as well as students and parents willingness to try home-based e-learning. This has subsequently sparked the demand of online education and accelerated the adoption. We have taken innovative steps to adapt accordingly. With the abundance of educational offerings and knowhow accumulated through throughout the years of our practice, we quickly developed and started offer a spectrum of educational resources to students and families via our online platforms and portals. These contents and activities are easily accessible through both our self-developed mobile applications, mini apps, and also on third-party platforms.

Four our directly operated kindergarten, starting from this quarter, we actually have launched a series of age appropriate online educational content comprising of 10 learning modules, including [English], art, music, and literacy. This approach has proven to be very popular among children and parents and reached more than 80,000 users in China.

The above mentioned online educational content not only helps us stay connected with our students and their parents, but also enhance the willingness to attend at our kindergartens for those who already paid but not yet started attending. Also, the online content helps to enhance brand awareness amongst parents and facilitate parent referrals through word of mouth. Ultimately, our ability to maintain and attract new student enrollment gets improved.

For our play-and-learn centers, our self-developed mobile application iLoveGrowth family education app offers online quality content easily accessible to students and families. We regularly update the online content library in the iLoveGrowth app and hold weekly webinars as I mentioned earlier. Recently, we also launched two themes webinars where we invited in-house and external healthcare professional to share their insights. We believe our efforts to enrich content and improve user experience also paves the way for the next stage of paying user conversion.

iLoveGrowth app will not only promote the parent-child interaction and family education, but also provide our franchisees a lot of opportunities to communicate with their members. The registered users of iLoveGrowth app have exceeded [330,000] and we believe that with a meaningful amount of user traffic we're confident in the future abilities to accelerate monetization.

As far as technology itself is concerned, our strategy is to leverage both internal and external teams, and in particular through external partnerships to build the needed infrastructure, support the execution of our digital strategy and ultimately achieve the goal of an online-merge-offline business model.

We're excited and pleased to see that our efforts to provide online content has received positive feedback from our students and their parents. While our commitment to focus on child development and education innovation remains unchanged, we'll work harder to leverage digital and information technologies to integrate more high-quality content. It’s imperative for us to capture this window of opportunity to digitalize our business such that we can have a viable all new model, achieve better economics and execute our business.

Hao Gu

Thank you, Serena. Maybe I'll take the second question on the schedule for our new facility set up or acquisition. Before I comment on our plan for this year, let me maybe share our facility growth last year. We had a total of seven premium international branded kindergartens newly set up in China last year. And six of them were opened up for business in the second half. In Singapore, we completed a total of three facilities over the past two quarters. These acquired or newly setup facilities will be one of our key operational priorities over the next few quarters. I think once they reach mature stage with significant student enrollment pickup, we anticipate actually remarkable revenue contribution from these facilities on top of our existing ones.

Therefore, I think new facilities will continue to be a meaningful source of our growth for RYB and we actually want to maintain this part of growth in a paced manner. But unfortunately, the outbreak of the COVID-19 this year to a certain extent has interrupted our plan for new facilities this year. But I think that the flip side of this situation is actually quite a number of interesting acquisition opportunities popped up because of the pandemic, which I think would have been otherwise unavailable to us. On the other hand, as I mentioned, we've been focusing on financial flexibility and cost control measures in today's difficult environment.

So as a result, we may not aggressively pursue significant acquisitions or even we will likely cut back on some of the discretionary capital expenditure in general for the remainder of the year. Therefore, I think we will adopt a set of more prudent assessment criteria when we come up with new facility opportunities. A couple of key factors in our assessment would include such as license nature. We will have to make sure that the facilities carry a commercial license, price for sure, as well as the infrastructure quality of the properties where the facility is located. And of course curriculum, which is always a core part of the kindergarten operations. And I think most importantly the team itself.

So considering and combining these various factors, it's probably not practical to set a specific goal here for this year in terms of how many new facilities we'll be able to set up or acquire this year. But I think instead, it will likely be a dynamic process and for sure we will hope to keep everybody updated as we decided to go for these new ones.

And also looking into the mid to long-term perspective, we will continue to source actionable opportunities both in China and in the overseas market. For China I think it will likely be top tier cities and coastal provinces and regions where the demand for premium kindergarten services remains strong. For overseas market as we acquired our Singapore business, which is under healthy operation, we will treat Singapore as our regional hub and help our Singapore business grow locally and expand into Southeast Asian countries.

Thank you.

Operator

As there appears to be no further question, I'd like to turn the call back over to Serena for any closing remarks.

Serena Xue

Thank you, Anita. Thanks, everyone, for joining us today. If you have any further questions, please don't hesitate to contact us at ir@rybbaby.com. We hope you have a good day. Thank you.

Operator

This concludes this conference call. You may now disconnect your lines. Thank you.