Market Overview

China Online Education Group Announces Third Quarter 2019 Results

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BEIJING, Dec. 9, 2019 /PRNewswire/ -- China Online Education Group ("51Talk" or the "Company") (NYSE:COE), a leading online education platform in China, with core expertise in English education, today announced its unaudited financial results for the third quarter ended September 30, 2019.

Third Quarter 2019 Financial and Operating Highlights

  • Net revenues were RMB409.2 million (US$57.2 million), a 35.0% increase from RMB303.2 million for the third quarter of 2018.
  • Gross billings[1] were RMB547.3 million (US$76.6 million), a 28.9% increase from RMB424.5 million for the third quarter of 2018.
  • Gross margin was 71.7%, compared with 63.8% for the third quarter of 2018.
  • GAAP net loss decreased 94.1% year-over-year to RMB5.3 million and sequentially decreased 83.6% from RMB32.4 million for the second quarter of 2019.
  • Non-GAAP net loss decreased 97.8% year-over-year to RMB1.8 million and sequentially decreased 93.2% from RMB26.7 million for the second quarter of 2019.
  • Operating cash inflow was RMB123.2 million (US$17.2 million), compared with RMB1.7 million cash outflow for the third quarter of 2018.
  • Cash, cash equivalents, time deposits and short-term investments balance reached RMB906.4 million (US$126.8 million) as of September 30, 2019.

Key Operating Data


For the three months ended




Sep. 30,


Sep. 30,


Y-o-Y


2018


2019


Change







Gross billings (in RMB millions)

424.5


547.3


28.9%

K-12 mass-market one-on-one offering

331.9


504.6


52.0%

        K-12 small class offering

16.6


8.7


(47.6%)

Adult offering

54.7


29.3


(46.4%)

K-12 American Academy one-on-one offering

21.3


4.7


(77.9%)

Active students[2] (in thousands)

210.0


258.2


23.0%







"The third quarter is a seasonally strong quarter for us, and our results reflected solid execution of our focused strategy. We exceeded the high end of both our net revenues and gross billing guidance ranges by 2.3% and 5.7%, respectively, fueled in large part by a 23.0% year-over-year increase in total active students," said Mr. Jack Jiajia Huang, Founder, Chairman and Chief Executive Officer of 51Talk. "Our primary growth driver remains our K-12 mass-market one-on-one offering in non-tier-one cities[3]. K-12 mass-market one-on-one gross billings grew 52.0% year-over-year to reach RMB504.6 million and represented 92.2% of our total gross billings. The improvement in our fundamentals reflected our consistent strategy of focusing on K-12 mass market in non-tier-one cities. 

"During the third quarter, we launched our mobile-friendly, interactive curriculum for levels 0 to 2 of our flagship program, Classic English Junior. The enhanced curriculum improves learning effectiveness and leads to better learning outcomes through several new features including interactive games, virtual teaching aids, improved facial emotional recognition and engaging role-play scenarios. I am also very proud to share that two of our students were selected to represent Chinese youth and present speeches in English on the topic of environmental protection at the United Nations Climate Change Conference in Madrid, Spain, on December 5, 2019. Such an honor is indeed a testament to the hard work of these students, the dedication of their teachers and their supportive families. 

"I am also delighted to share that we successfully delivered over 100 million one-on-one online English lessons, including free trial lessons, from our inception in 2011 through the end of November this year. As 51Talk continues to grow, we are confident our balanced growth strategy and operational focus on non-tier-one cities will continue to yield solid value for our stakeholders," Mr. Huang concluded. 

"Our momentum from the first half continued into the third quarter as we achieved record high revenues, gross billings, gross margins, as well as the smallest non-GAAP net loss in our history at RMB1.8 million," said Mr. Min Xu, Chief Financial Officer of 51Talk. "We are also proud to report record high operating cash flow of RMB123.2 million for the quarter. Non-GAAP net margin improved to negative 0.4% this quarter from negative 7.6% in the second quarter this year. These results reflect the wide market appeal of our offerings and our on-going effort to improve operation efficiencies. As we wind down the year in the seasonally slower fourth quarter, we remain on track to prudently execute our balanced growth strategy." 

[1] Gross billings for a specific period, which is one of the Company's key operating data, is defined as the total amount of cash received for the sale of course packages and services in such period, net of the total amount of refunds in such period.
[2] An "active student" for a specified period refers to a student who booked at least one paid lesson, excluding those students who only attended paid live broadcasting lessons or trial lessons.
[3] Tier-one cities include Beijing, Shanghai, Shenzhen, Guangzhou and Tianjin.

Third Quarter 2019 Financial Results                            

Net Revenues

Net revenues for the third quarter of 2019 were RMB409.2 million (US$57.2 million), a 35.0% increase from RMB303.2 million for the same quarter last year. The increase was primarily attributed to an increase in the number of active students and, to a lesser extent, an increase in the average revenue per active student. The number of active students in the third quarter of 2019 was 258,000, a 23.0% increase from 210,000 for the same quarter last year.

Net revenues from one-on-one offerings for the third quarter of 2019 were RMB383.4 million (US$53.6 million), a 37.6% increase from RMB278.6 million for the same quarter last year. Net revenues from small class offering for the third quarter of 2019 were RMB25.8 million (US$3.6 million), a 4.9% increase from RMB 24.6 million for the same quarter last year.

Cost of Revenues

Cost of revenues for the third quarter of 2019 was RMB116.0 million (US$16.2 million), a 5.8% increase from RMB109.6 million for the same quarter last year. The increase was primarily driven by an increase in total service fees paid to teachers, mainly due to the delivery of an increased number of paid lessons. 

Cost of revenues of one-on-one offerings for the third quarter of 2019 was RMB104.6 million (US$14.6 million), a 12.6% increase from RMB92.9 million for the same quarter last year. Cost of revenues of small class offering for the third quarter of 2019 was RMB11.4 million (US$1.6 million), a 32.0% decrease from RMB16.7 million for the same quarter last year.

Gross Profit and Gross Margin

Gross profit for the third quarter of 2019 was RMB293.2 million (US$41.0 million), a 51.5% increase from RMB193.5 million for the same quarter last year.

Gross margin for the third quarter of 2019 was 71.7%, compared with 63.8% for the same quarter last year.

One-on-one offerings gross margin for the third quarter of 2019 was 72.7%, compared with 66.6% for the same quarter last year. The increase was mainly attributable to 1) price increases and 2) the inclusion of the Company's audio picture book in course packages, which carries a higher margin and is recognized as revenues at the time of delivery. 51Talk's small class offering gross margin for the third quarter of 2019 was 56.0%, compared with 32.0% for the third quarter of 2018. The increase was mainly due to optimization of product structure of small class offerings by reducing the lower margined products.

Operating Expenses

Total operating expenses for the third quarter of 2019 were RMB299.4 million (US$41.9 million), a 6.1% increase from RMB282.2 million for the same quarter last year. The increase was mainly the result of an increase in sales and marketing expenses, partially offset by decreases of product development, and general and administrative expenses.

Sales and marketing expenses for the third quarter of 2019 were RMB215.4 million (US$30.1 million), a 16.9% increase from RMB184.2 million for the same quarter last year. The increase was mainly due to higher sales personnel costs related to increases in both the number of sales and marketing personnel and average sales commission. Excluding share-based compensation expenses, non-GAAP sales and marketing expenses for the third quarter of 2019 were RMB214.8 million (US$30.1 million), a 17.5% increase from RMB182.7 million for the same quarter last year. Non-GAAP sales and marketing expenses, excluding branding expenses, were 32.6% of the gross billings for the third quarter of 2019, compared with 36.5% for the same quarter last year.

Product development expenses for the third quarter of 2019 were RMB38.4 million (US$5.4 million), a 15.8% decrease from RMB45.6 million for the same quarter last year. The decrease was primarily due to a decrease in the number of personnel. Excluding share-based compensation expenses, non-GAAP product development expenses for the third quarter of 2019 were RMB37.3 million (US$5.2 million), a 13.9% decrease from RMB43.4 million for the same quarter last year.

General and administrative expenses for the third quarter of 2019 were RMB45.6 million (US$6.4 million), a 12.9% decrease from RMB52.3 million for the same quarter last year. Excluding share-based compensation expenses, non-GAAP general and administrative expenses for the third quarter of 2019 were RMB43.8 million (US$6.1 million), a 10.5% decrease from RMB48.9 million for the same quarter last year.

Loss from Operations

Loss from operations for the third quarter of 2019 was RMB6.2 million (US$0.9 million), compared with RMB88.6 million for the same quarter last year.

Non-GAAP loss from operations for the third quarter of 2019 was RMB2.8 million (US$0.4 million), compared with RMB81.5 million for the same quarter last year.

Net Loss

Net loss for the third quarter of 2019 was RMB5.3 million (US$0.7 million), compared with RMB90.4 million for the same quarter last year.

Non-GAAP net loss for the third quarter of 2019 was RMB1.8 million (US$0.3 million), compared with RMB83.3 million for the same quarter last year.

Basic and diluted net loss per American depositary share ("ADS") attributable to ordinary shareholders for the third quarter of 2019 was RMB0.26 (US$0.04), compared with RMB4.50 for the same quarter last year. Each ADS represents 15 Class A ordinary shares.

Non-GAAP basic and diluted net loss per ADS attributable to ordinary shareholders for the third quarter of 2019 was RMB0.09 (US$0.01), compared with RMB4.05 for the same quarter last year.

Balance Sheet

As of September 30, 2019, the Company had total cash, cash equivalents, time deposits and short-term investments of RMB906.4 million (US$126.8 million), compared with RMB712.1million as of December 31, 2018.

The Company had deferred revenues (current and non-current) of RMB2,000.8 million (US$279.9 million) as of September 30, 2019, compared with RMB1,676.1 million as of December 31, 2018.

Impact of Recently Adopted New Accounting Standard

In February 2016, the FASB issued ASU 2016-02 "Leases", which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. The Company adopted the new standard on January 1, 2019 on a modified retrospective basis and did not restate comparative periods. The Company recognized approximately RMB55.8 million as total

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