CFO Interview: 51Talk Speaks on Bullish Online Education Market

This China-based gainer's CFO talks about the stock's recent performance, and the niche market the company targets.

Belinda Zhou
    Mar 25, 2020 1:00 PM  PT
CFO Interview: 51Talk Speaks on Bullish Online Education Market
author: Belinda Zhou   

Working and learning from home in China was the only way to go amid the coronavirus outbreak. This increase in demand boosted businesses in China in the online edcuation sector, and correspondingly boosted investors' interest in online education stocks. A big winner has been China Online Education Group (NYSE: COE), which skyrocketed over 180% since 2020 to $27.69 per American depositary share intraday Wednesday.

The company reported earlier this month that it beat revenue guidance and turned profitable in the fourth quarter. 

Min Xu, the chief financial officer of 51Talk, told CapitalWatch that the company is working to be well prepared for the new "online world" with the support from the local regulation, 5G technology, foreign teachers acquisition, small-and-medium cities development.

CapitalWatch: To what do you attribute the recent stock price appreciation?

Xu: There are two main reasons. One is the, obviously, the company delivered solid results. There is an improvement in the fundamentals of the company. In December, we reported our 2019 Q3 number, that's the first time we achieved the breakeven for our one-on-one business. 

The company has two parts of the business, one is the one-on-one business and the other is small class business.

Then in March, we reported our Q4 number and people in the capital market are excited about it. Bullish coverage from the investment banks.

The second reason related to the coronavirus outbreak. When the coronavirus started in China, everybody was locked at the home to prevent the further spread of the virus.

As a result, the schools closed and people all work from home and so there may be more than 200 million are forced to continue to study online. Because people spent a lot of time online, people see that it's beneficial to online education and administration so we get best from that. In our Q4 call, we guided our Q1 revenue of 450 million to 455 million RMB, which is about 40% growth and it's higher than that of 23% a year ago.

People view the coronavirus is actually a big push for online education. After that, we believe the awareness of the online education will be elevated to a new level.

CapitalWatch: Some market commentators think that the coronavirus has sped up an inevitable transition to a more "online world," where online education and telecommuting become the norm. Can you comment on this?

Xu: We're forced to work from home with Tencent meeting, zoom or WeChat. So I think people find it quite efficient someway. You can delimitate face-to-face communication but people will do more online work. In terms of schooling, I believe school will be more digitalized. The online component will be heavier. In fact, I believe the online portion and the offline portion should be roughly equal in the future. So the online penetration, I believe, can be reached over 50% at a certain point. 

You just need to partner with those education experts. I believe in the future it's more common for people to meet online, study online and work online, remotely.

CapitalWatch: How will 51talk manage to maintain its number of student enrollments after the coronavirus outbreak subsides? Can we expect this momentum to continue into next year? 

Xu: If you are not able to keep your students on your platform, you are not taking advantage of the surge of online education. So we do believe the key to keeping the student is your teaching quality and the great service. So during the two-week spring break, the Chinese new year break, we do see the incoming traffic more than doubled for that period. 

We do see incremental demand coming in. So I think we have a very strong technology platform that can handle this traffic. Because when tens of millions of new users come in, some platforms' whole system crashed. But we developed our own platform, so we are able to handle the traffic.

The number of teachers right now we have more than 23,000 teachers all over the world. The majority of the teachers are from the Philippines and so we are able to able to deliver more lesson demands. Even though the Philippines is also hit by the virus, most of the teachers are teaching from home. So they are staying at home anyway. They're able to deliver more lessons. 

With that platform and our great teachers, fun teaching style, we have actually improved our retention rate. One number we disclosed in Q4 is that our one-year retention rate is more than 80%. They continued to study at your platform and they introduced their friends to join. 

CapitalWatch: Online education expansion of 51Talk was leveraged by technologies. Could you talk about the technology development the company has undergone as well as future technological additions or upgrades?

Xu: We're doing a lot of things like HAWO, in addition to our AI class. For example, the capacity of our AI class has been improved from roughly 80,000 lessons a day to 140,000 lessons a day. 

We added AI technology, big data technology including facial recognition, tik tok style microphone, voice recognition. We used a lot of third party technology, and we improved it and later it become our own technology to detect some mistakes and grammar errors as well as record how many minutes the student talked in the class. The students and their parents can see the study progress and where they can make an improvement to help the students grow.

The upcoming 5G technology makes the network much faster and makes the band wiser. All of these are beneficial to video technology on the internet. Basically, a lot of things we can not do in the current internet will be possible in the future 5G network, especially the video field. 

5G is very important to one on one live lessons, in comparison to recorded lessons. Because you can't ask questions and play interactive games for recorded lessons. We're really excited that we have developed a lot of technology that will be enabled by the 5G network.  

CapitalWatch: How has this overall market volatility affected your company in terms of both operational strategy and investor relations strategy if at all?

Xu: The company recently hasn't been impacted by market volatility. In terms of operations, the education industry is a unique industry, because students will prepay their tuitions. So we are happy with our strong cash flow. We have an operating cash flow of over 157 million yuan in the fourth quarter. This is a great improvement from a few years ago. Between 2016 and 2018, for the whole three years, we got a free cash flow of 140 million. 

We have one billion yuan cash balance, so we're well isolated from cash issues. The liquidity issue can kill a company but we haven't seen any slowdown and people are still kinda moving to online and look for online courses. Q1 is normally a soft season for us because of the Chinese new year, people won't do anything. But because of coronavirus, we have a very strong Q1.

The volatility won't affect our investor relations strategies. We're still very actively talking to investors and they do understand that we are the beneficiary of the cellular transition to online education plus the coronavirus lockdown is a very short-term impact.

CapitalWatch: Could you please talk about the impact of regulation on the online education?

Xu: The government did a lot of research on online education and before that they focus on offline education. Through the process, as the leader of online education, we gave them a lot of feedback. I believe the government is more knowledgable about online education and they actually believe online education is the trend. They really want the company in the private sector to invest more on online education.  

However, the regulation is necessary and make the industry more healthy. They are screening out the companies which are not contributing to the industry.

One rule is that the government required to display the teachers' credentials publicly. We're selective and have the best teachers in the industry. For example, in the Philippines, our hire rate is 7%, which means only seven teachers of every 100 candidates will be hired by our platform.

Also, we have a regular training program and most of them have TESOL certificates, which is an international certificate for teaching English as a second language. 

We're happy to see the government has a higher requirement of the teacher quality.

CapitalWatch: When compared with the online education arm of internet giants like Tencent, NetEase, or peers like other English learning platform like LAIX, what's the advantage of 51talk?

Xu: We do one thing best. We only focus on very niche market of one-on-one spoken English. Other companies may work on test preparation to help kids. That's helpful. A lot of peers are using Chinese teachers while we're using foreign teachers. 

So luckily, we have qualified teachers in Philippines, whose official language is English. Through our platform, we can make those resources available to students in different cities, especially lower-tier cities.

In tier one city, people may be able to find some foreigners to teach them spoken English offline but still very difficult and expensive.

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