China Online Education Group (NYSE:COE) Q2 2024 Earnings Call Transcript

China Online Education Group (NYSE:COE) Q2 2024 Earnings Call Transcript August 23, 2024

Operator: Hello, ladies and gentlemen. Thank you for standing by for 51Talk’s Online Education Group’s Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded. I will now turn the call over to your host, Mr. David Chung, Investor Relations for the company. Please go ahead, David.

David Chung: Hello, everyone, and welcome to the second quarter 2024 earnings conference call of 51Talk. The company’s results were issued by Newswire services earlier today and are posted online. You can download the earnings press release and sign up for the company’s distribution list by visiting ir.51talk.com. Mr. Jack Huang, our CEO; and Ms. Cindy Tang, our CFO, will begin with some prepared remarks. Following the prepared remarks, there will be a Q&A session. Before we continue, please note that the discussion 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 results may be materially different from the views expressed today.

Further information regarding this and other risks and uncertainties is included in the company’s Form 20-F and other public 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 the applicable law. Please also note that earnings press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. 51Talk’s press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our CEO, Jack Huang. Jack, please go ahead.

Jack Huang: Thank you, David. Hello, everyone. Thank you very much for joining our conference call today. We have achieved strong growth in Q2, exceeding our guidance, and anticipate sustained momentum in the foreseeable future, as reflected in our Q3 guidance. Our strategic investments across a diverse portfolio of markets are yielding positive results, propelling us towards our objective of becoming a globally leading EdTech company. Through our localization efforts, we have gained a deeper understanding of individual markets, allowing us to meet specific local needs. This approach has improved our product market fit. Additionally, we actively explore new market opportunities that align with our strategic direction and existing product offerings.

Our strategy hinges on global expansion based on local needs and platform strength enabled by AI. We make targeted investments to enhance team efficiency and local customer experience, aiming to drive higher retention rates and more customer referrals. With that, I will now turn the call over to our CFO, Cindy Tang

Cindy Tang: Thank you, Jack. Now let me walk you through our second quarter financial details. Second quarter net revenues were US$11 million, a 75.1% increase from the same quarter last year largely driven by the increase of active students with attended lesson consumption. Gross margin for the second quarter was 78.1%. Gross billings grew by 61.3% from the same quarter last year to US$15.9 million. Q2 operating expenses were US$11 million, an increase of 39.7% compared to the same quarter last year. Specifically, this has been driven by Q2 sales and marketing expenses of US$7.3 million, a 43.6% increase from the same quarter last year due to higher sales personnel costs related to increases in a number of sales and marketing personnel.

Q2 product development expenses were US$0.9 million, a 22.6% increase from the same quarter last year. Finally Q2 general and administrative expenses were US$2.8 million, a 35.8% increase from the same quarter last year. Overall Q2 operating loss was US$2.4 million, while net loss was US$1.3 million, an 18.1% and 56.5% decrease from the same quarter last year, respectively. Due to GAAP and non-GAAP earnings per ADS were negative US$0.22 and US$0.18, respectively. The company’s total cash, cash equivalents and time deposits were US$21 million at the end of the second quarter. Fees including deposits in third party payment channels, et cetera, the total balance would have been US$24.2 million. Advances from students were US$34.5 million at the end of the second quarter.

Looking forward to the third quarter of 2024, we currently expect the net gross billings to be between US$17 million and US$18 million. The above outlook is based on our current market conditions and reflect the company’s current and preliminary estimates of the market and operating conditions and customer demand, which are all subject to change. This concludes our prepared remarks. We will now open the line for questions. Operator, please go ahead.

Q&A Session

Operator: [Operator Instructions] Today’s first question comes from [John Banks] at B&G Capital Management. Please go ahead.

Unidentified Analyst: Hi, thanks for letting me ask a question. Congratulations on a great quarter. Just a quick question on the new market you guys are going after. I know originally you guys were in China. It was 100% there, and the tutors were mostly Philippines. So then you went to Asia, but now it looks like you’re spreading out in Japan and the Middle East. So I guess my question, when you go to these localized markets, are you using AI? Are you using local teachers and just try to explain a little on the new market you guys are looking to enter or are you looking to enter every market going forward? Thank you.

Jack Huang: Okay. Thank you very much for your question. Okay. Obviously, you have done a lot of research on our markets. Yes. So currently we are – our new markets include Southeast Asia, Japan includes the Middle East market. And right now, our core product – our core product is the foreign tutor [indiscernible] fitness model. Mostly we are using the filipino features. However, we are also utilizing the AI technology to enable the Filipino tutors as well. So the Filipino tutors can use – can utilize the AI technology to make the lesson to be more interactive, to be more personalized. And also we are using AI technology to make the – to do the pre-lesson – the preview of the lesson and review of the lesson. And we are utilizing AI technology a lot. So basically understanding our business model to be the model we were using in China, which means the Filipino tutors. However, we are utilizing the new AI technology to be part of the solution.

Unidentified Analyst: Excellent. Thank you. That was perfect. Thank you. You kind of broke it down. My final question, just because I know it was interesting because you guys basically did the same model in China, then what happened there and you moved it to overseas. So one of the questions I was thinking about is, like, I think in China, you guys got to close to about 250 million to 300 million gross billings. I was wondering when you left China, like, what the size of the market would be. Do you have a feeling like the markets as big or bigger than China, obviously, that you can get to in the next, say, five to 10 years?

Jack Huang: Yes, definitely. Actually, we are very confident about the market size, the outside of China. We believe that – we believe that it’s not only China, it’s all of the developing countries, like Thailand, like Malaysia, like Vietnam, and also some developed countries, like Japan, like Korea. They have the demand. And we believe that there are less competitors there comparing with heavily competing market in China. I believe, you know that. So we definitely believe that the market size is at least as big as China market outside of China because if you look at the population and the economy scale. Right. And considering the competition situation, we believe that we can, even if we look at five to 10 years looking forward we believe that we can even we are optimistic about the market size we can achieve in the next five to 10 years.

Unidentified Analyst: Excellent. Thank you for detailed answers on all my questions. Great quarter and hopefully the momentum keeps coming for the next three to five years. Thank you.

Jack Huang: Thank you very much.

Operator: Thank you. [Operator Instructions] Well, as we are reaching the end of our conference call, I’d like to turn the call back over to the company for closing remarks. Mr. David, please go ahead.

David Chung: Thank you once again for joining us today. If you have further questions, please contact 51Talk’s Investor Relations through the contact information provided on our website. Thank you.

Operator: Thank you, sir. And this concludes todays’ conference call. We thank you all for attending today’s presentation. You may now disconnect your lines. And have a wonderful day.