Four Seasons Education (FEDU) Misses Q3 EPS by 3c, Revenues Miss

Four Seasons Education (NYSE: FEDU) reported Q3 EPS of $0.04, $0.03 worse than the analyst estimate of $0.07. Revenue for the quarter came in at $13.1 million versus the consensus estimate of $13.38 million.

• Revenue increased by 4.5% to RMB91.2 million (US$13.1 million) from RMB87.2 million in the same period of last year.
• Gross profit decreased by 15.7% to RMB48.1 million (US$6.9 million) from RMB57.1 million in the same period of last year. Gross margin was 52.8%, compared with 65.4% in the same period of last year.
• Operating income decreased by 64.4% to RMB7.7 million (US$1.1 million) from RMB21.6 million in the same period of last year.
• Adjusted operating income(1) (non-GAAP) decreased by 40.2% to RMB16.7 million (US$2.4 million) from RMB27.9 million in the same period of last year. Adjusted operating margin (non-GAAP) was 18.3% compared with 32.0% in the same period of last year.
• Net income decreased by 74.8% to RMB2.7 million (US$0.4 million) from RMB10.7 million in the same period of last year.
• Adjusted net income(2) (non-GAAP) decreased by 19.5% to RMB13.7 million (US$2.0 million) from RMB17.0 million in the same period of last year. Adjusted net margin(3) (non-GAAP) was 15.0%, compared with 19.5% in the same period of last year.
• Basic and diluted net income per American Depositary Share (\"ADS\") attributable to ordinary shareholders was RMB0.06 (US$0.01) and RMB0.05 (US$0.01), respectively, compared with RMB0.27 and RMB0.26 respectively, for the same period of last year. Each two ADSs represent one ordinary share.
• Adjusted basic and diluted net income per ADS attributable to ordinary shareholders (non-GAAP) was RMB0.28 (US$0.04) and RMB0.27 (US$0.04), compared with RMB0.46 and RMB0.44, respectively, for the same period of last year.
• Number of learning centers reached 56 as of November 30, 2018, compared to 33 as of November 30, 2017.
• Total student enrollment(4) reached 45,857, down 8.7% from 50,221 during the same period of last year, primarily due to enrollment re-arrangement in accordance with the Opinion on Regulating the Development of After-School Tutoring Institutions issued by the State Council limiting the prepayment of a curriculum registration to three months.

"During the third quarter, we continued to adjust our operations under the new regulatory requirements, while remaining steadfast in carrying out our strategy for quality growth," said Mr. Peiqing Tian, Chairman and Chief Executive Officer of Four Seasons Education. "As we constantly broaden our course coverage across the entire K-12 age groups with more in-demand class offerings on a variety of academic topics and areas, we have achieved further enrollment diversification in various subjects and age groups. Besides the course offerings that target improving students' academic performance, we are hosting a series of interest-oriented classes and activities to further promote student engagement. Based on our strong math teaching capabilities and resources, our featured classes for logic-based games such as Bridge, Sudoku and Rubik's Cube gained great popularity. We now deliver Bridge classes at ten Four Seasons Education's learning centers and have formed Four Seasons Education training teams in 2018 and 2019 for national competitions. Recently, our teams also achieved outstanding performance in bridge and Sudoku matches. We plan to organize more of these dynamic and enjoyable courses and activities which help students' logic-thinking and intellectual development.

"To comply with the latest set of regulatory changes, we have accordingly re-arranged our enrollment and class delivery process by limiting prepayment to cover a maximum of three-month curriculums. This operational adjustment has led to a year-over-year decrease in total enrollment for the quarter as we anticipated. However, we believe this change will not affect the overall demand. In addition, we have been optimizing our learning center network with prudent expansion. We added a learning center in Shanghai and one in Chongqing during the quarter. At the same time, we moved three learning centers in Shanghai to new locations to better meet the related requirement and provide a refreshing environment to our students. We also plan to restructure a few centers to optimize our facility utilization and profitability in the quarters ahead.

"Our ongoing efforts to comply with the latest regulation have been recognized by the government and related authority. We are pleased to report that our Shanghai Four Seasons Education and Training Co., Ltd., Four Seasons Class Training Co., Ltd. and other entities in our group were among the white list of after-school tutoring institutions released by the Shanghai Education Bureau in late December 2018, demonstrating our compliance in terms of operating licensure, educational content and the teaching facility environment. We would like to continue working with related authorities and adapting our operations to the evolving regulations of a rapidly growing after-school tutoring industry in China, as we fulfill our commitment to providing best-of-class educational services and learning experience to our students," Mr. Tian concluded.

Ms. Yi (Joanne) Zuo, Director and Chief Financial Officer of Four Seasons Education, commented, "It was very encouraging for us to achieve approximately 5% growth in the topline as compared to a relatively high revenue base in the same period of last year, thanks to our strategic adjustments to course offerings which better accommodate the evolving market's needs. During the third quarter, we focused on strengthening our core business, as we strategically combined several classes to improve overall efficiency. We are pleased with the initial positive result that gross margin improved sequentially in the third quarter. Looking forward, we plan to maintain our business strategy, seeking quality growth while making prudent operational adjustments for enhanced efficiency."

Business Outlook

For the fourth quarter of fiscal year 2019, the Company expects revenue to be relatively flat compared to the fourth quarter of fiscal 2018.

For earnings history and earnings-related data on Four Seasons Education (FEDU) click here.

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