UPDATE: China Online Education Group (COE) Tops Q1 EPS by 19c, Revenues Beat

China Online Education Group (NYSE: COE) reported Q1 EPS of $0.25, $0.19 better than the analyst estimate of $0.06. Revenue for the quarter came in at $68.8 million versus the consensus estimate of $63.4 million.

First Quarter 2020 Financial and Operating Highlights

• Excluding the favorable impact, diluted net income per American depositary share ("ADS") attributable to ordinary shareholders for the first quarter of 2020 was RMB1.51 (US$0.21) and non-GAAP diluted net income per American depositary share ("ADS") attributable to ordinary shareholders for the first quarter of 2020 was RMB1.79 (US$0.25), respectively.
• Net revenues were RMB487.1 million (US$68.8 million), a 52.2% increase from RMB320.1 million for the first quarter of 2019.
• Gross margin was 70.4%, compared with 67.0% for the first quarter of 2019.
• GAAP net income was RMB50.8 million, compared with GAAP net loss RMB66.2 million for the first quarter of 2019.
• Non-GAAP net income was RMB57.0 million, compared with non-GAAP net loss RMB62.4 million for the first quarter of 2019.
• Operating cash inflow was RMB172.7 million (US$24.4 million), compared with RMB8.4 million cash inflow for the first quarter of 2019.
• Cash, cash equivalents, time deposits and short-term investments balance reached RMB1,214.0 million (US$171.5 million) as of March 31, 2020.
• Gross billings[1] were RMB596.9 million (US$84.3 million), a 31.9% increase from RMB452.5 million for the first quarter of 2019.

"We started 2020 with strong, 52.2%, year-over-year growth in net revenues, 10 percentage points higher than the growth rate implied by the high end of our guidance. In particular, K-12 one-on-one mass market net revenues increased 76.7% year-over-year to RMB404.2 million. This performance was driven by our continued strategic focus and successful execution of our K-12 one-on-one mass market offerings in non-tier-one cities[3], in addition to a direct incremental revenue boost from students spending more time at home amidst the COVID-19 outbreak and an increasing awareness of both our brand and online education," said Mr. Jack Jiajia Huang, Founder, Chairman and Chief Executive Officer of 51Talk. "Benefitting from these factors, our gross billings grew sequentially to RMB596.9 million. This growth was even more impressive in that it came versus our fourth quarter peak season. Our K-12 one-on-one mass market gross billings increased 44.6% year-over-year to RMB563.5 million, reaching 94.4% of our total gross billings. For the first quarter of 2020, our active students increased to 286,600 from 257,200 for the last quarter, up 11.4% sequentially.

"During the COVID-19 pandemic, aside from our previously announced donation of online classes and one-on-one English lessons to K-12 students in Wuhan and other impacted regions in China, we also donated medical supplies to the Philippines, in an effort to contribute to the country's pandemic recovery efforts.

"Our employees, especially those in Wuhan, overcame many difficulties arising from COVID-19 outbreak. In the first quarter of 2020, almost all of our colleagues in Wuhan worked from home, while only about half of the colleagues in other regions could come to the Company office. I am very proud of our employees who have made extraordinary efforts to help students maintain their study continuity during the COVID-19 outbreak. With their extraordinary efforts, we were able to largely preserve productivity and operational efficiencies during the lockdown period. We worked closely with our Filipino teachers to ensure they could conduct classes effectively at home to meet the rising demands of our students, promoting further integration of the education resources of China and the Philippines. These unprecedented times have further highlighted and deepened both the value and natural progression of online education in China. We have seen increasing penetration of online education in non-tier-one cities due to the COVID-19 outbreak. This, together with our strong performance in the first quarter, provides us even further confidence in our chosen pathway to sustained top-line growth and profitability, especially as we further fine tune our products and services, and continue to enhance our core business focus on K-12 one-on-one mass market offerings in non-tier-one cities," concluded Mr. Huang.

"Solid first quarter financial and operating performance helped us begin 2020 on a positive note," said Mr. Min Xu, Chief Financial Officer of 51Talk. "I am excited to report that in addition to robust growth in net revenues and gross billings, we delivered another profitable quarter with GAAP net income of RMB50.8 million and non-GAAP net income of RMB57.0 million. Excluding RMB16.9 million favorable impact of coronavirus relief policies, our GAAP and non-GAAP net profit margin was 7.0% and 8.2%, compared with GAAP and non-GAAP net loss margin of 20.7% and 19.5% for the same period last year, primarily resulting from significantly higher lesson consumption and operating efficiency gains. Additionally, we achieved record high operating cash flow of RMB172.7 million. To keep the Company on track for healthy growth and profitability, we have been proactively adapting our operational strategy. This has allowed us to minimize the potential business impact caused by the COVID-19 outbreak and maintain high efficiency at all levels, ultimately stimulating organic growth in brand recognition as a leading and dependable online education platform in China."

Management Change

Ms. Ting Shu had resigned as a senior vice president of the Company. She will remain a director of the Company. Her resignation as a senior vice president did not result from any disagreement with the Company.

Outlook

We cannot predict whether the incremental revenue boost from students spending more time at home amidst the COVID-19 outbreak will continue during the remainder of 2020. However, based on latest information available at the time of this release, for the second quarter of 2020, the company currently expects net revenues to be between RMB460 million to RMB470 million, which would represent an increase of approximately 30.5% to 33.3% from RMB352.6 million for the same quarter last year;

The above outlook is based on the current market conditions and reflects the Company's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

For earnings history and earnings-related data on China Online Education Group (COE) click here.

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