First High-School Education Group Co., Ltd. (OTCQB:FHSEY) Q4 2023 Results Conference Call April 25, 2024 8:00 AM ET
Company Participants
Tommy Zhou – CFO
Operator
Good day, ladies and gentlemen. Thank you for standing by and welcome to the First High-School Education Group Fiscal Year 2023 Unaudited Financial Results Earnings Conference Call. Currently all participants are in the listen-only mode, and later we will conduct a question-and-answer session. [Operator Instructions].
Now, I will turn the call over to Mr. Tommy Zhou, Chief Financial Officer of the company. Mr. Zhou, please proceed.
Tommy Zhou
Thank you, operator, and greetings, investors and friends. I’m still having cold. Welcome to the First High-School Education Group fiscal year 2024 earnings conference call. This is Tommy speaking, the Chief Financial Officer of the company, and I will lead today’s conference call.
We released our most recent earning results earlier today, prior to market open. The press release is available on the company’s IR website at ir.diyi.top, as well as AccessWire and OTC services.
Before we continue, please note that today’s 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 actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company’s public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that, unless otherwise stated, all figures mentioned today during the conference call are in Chinese Renminbi.
With that, thank you all again for joining us. I will spend the next 15 minutes, updating our fiscal year 2023 unaudited financial results for the 12 months ended December 31, 2023. Just in case I get disconnected, please wait on the line, and the operator will connect me back in.
So 2023 proved to be a challenging year for the company. As a battle against numerous headwinds in its business operations. We experienced a decline in revenue, especially revenues from government cooperative agreements, which declined 88.8% compared to the same period of last year. Under our cooperative agreements with various local governments, we are obligated to admit a portion of publicly-sponsored students to our school program each year. And for these students in which we do not collect tuition fees directly from these sponsored students. Rather, the local government will make a payment to us on their behalf. Historically, these publicly sponsored students will make up about 30% to 40% of our newly enrolled students each year, and the government would make payments to us between September to December each year.
However, during the 2023 fiscal year, local government’s budget had been extremely tight. They are facing many difficulties, meeting their own operational needs, such as, basic compensation utilities. Therefore, they have put payment to us for these publicly-sponsored student at a much lower priority. We were not able to collect most of the public sponsored students’ tuition, and therefore, put us in this very unfavorable financial situation today. We are in constant communication with all the local governments, and hopefully, to collect these payments as soon as possible. Most of the communications had been positive.
As the governments do recognize the service that we have already performed, so let’s just hope that, it’s a matter of time to get them resolved. As a result of these unfavorable collection, we recorded an asset impairment loss of RMB 52.1 million, which is about $7.3 million to reflect our account receivable in a more conservative manner. This impairment was actually already recorded during our third quarter 2023 report that we reported last year back in November. It is now simply carried forward to our fiscal 2023 report.
The 2 factors mentioned above, the unfavorable collection and also the impairment loss, was the main reasons for our unfavorable result of net loss for the fiscal year of 2023.
Moreover, the macro environment — macroeconomic environment had not been helping also, I think, as most investor would find out that, since most of our schools are located in smaller and lower tier cities, Yunnan Province and across China, the economic slowdown means, the marginal propensity to consume has been even lower in 2023, which means that the average consumers, the everyday people, had not been making a lot of money. With the little money that they made, they tend to save it, rather than spending it.
Reflecting back to our business, we faced headwinds in raising tuition and also experienced a decline in the selling of educational materials, such as practice exams, digital lectures or auxiliary teaching materials. And — of course, we also experienced a decrease in the income from meal cater catering services that’s provided within our school.
Accordingly, of course, we are constantly adjusting to this declining revenue by adjusting our cost. Taking that cost adjustments are usually slower than revenue adjustments, so we are currently actively optimizing our staff and administrative costs to be inline with our revenue and to achieve a target profitability. The company will stay focused, continue to stay focused on providing premium education services for our students and look forward to positive developments across our schools.
A bit on the strategic directions of 2023. Due to the external and some internal difficulties, I just mentioned in operating new schools. The company focused most of its expansion efforts in providing school management services.
Just a reminder, the school management service is where we provide our expertise to help public or private schools in their operation, usually in 5 key areas. Student admission, teacher training, academic guidance, catering and lodging management and also teaching material supplies. We would tailor design a unique service package for each client school, either public or private. And then with these services package, by utilizing them on their own or with our personnel or staff on-site, it will improve their schools’ operating efficiencies.
We were able to add four more schools to the school management service program throughout the 2023 year. We had an increase of students under management to 31,928 as part of the continuing operation. Again, the company is actively refining our business to ensure that, school under management deliver high-quality education services with solid academic performances. We will concurrently explore new opportunities and innovate to stay competitive in the industry.
That includes the highlights section. Now, I will go through line-by-line financial highlights for the fiscal year 2023. Again, please note that, all numbers are presented in RMB unless otherwise stated. All percentage changes on a year-over-year basis. Detailed analysis is contained in our earnings press release, which is already available on the IR website or the OTC, equivalent services.
For the fiscal year of 2023, the financial results, our total revenue was RMB 266.3 million, a decrease of 22.3% from RMB 342. 5 million for the fiscal year that ended 2022. The decrease was primarily due to mix of factors, including significant declines in revenue from government cooperative agreements and reduced sales of education materials and income, from meal catering services and the discontinued and limited operation of some schools. Revenues from customers were RMB 261.5 million, a decrease of 12.9% from RMB 300.4 million for the fiscal year ended 2022. The decrease was primarily due to mix factors, including reduced sales of education materials and incomes of meal catering services and the discontinued and limited operations of some schools in our network.
Revenues from government cooperative agreements were RMB 4.7 million, a decrease of 88.8% from RMB 42 million of the fiscal year ended 2022. The decrease was primarily due to the tightened budget of various local governments. Cost of revenue were RMB 195 million, a decrease of 8.7%, compared to RMB 2130 million for the fiscal year ended 2022. The decrease was primarily due to a reduction in our rental expenses for discontinued schools and also a bit of decreased staff number and compensation. Gross profit was RMB 71.3 million, a decrease of 44.7% from RMB 128.9 million the fiscal year ended 2022.
Gross margin was 26.8% compared with 37.6% for the same period last year. The decrease in margin was again primarily due to the increase in total revenue. As a result, we could not collect from the government cooperative agreements. And also, we had a decrease in the income from meal catering services and the discontinued of some school in our network.
Total operating expense were RMB 61 million, an increase of 5.8% from RMB 57.7 million last year. Of the total operating expenses, selling and marketing expenses were RMB 3.1 million, which remained relatively stable compared to RMB 3.1 million of last year. General and administrative expenses were RMB 58 million, an increase of 6.2% from RMB 54.6 million of last year. The increase was primarily due to rising employee cost and increased use of professional services.
Income from operations was RMB 10.2 million a decrease of 85.7% from RMB 71 million of last year. Such decrease was primarily due to the decreased gross profit and slight increase in total operating expense. That comes to our net loss from continuing operations was RMB 44.6 million compared with net income of RMB 47 million last year.
Net loss from discontinued operations was RMB 26 million compared with a net loss of RMB 9 million of last year. The combined net loss was RMB 70.6 million compared with a net income of RMB 38.4 million for the fiscal year ended 2022. Such decrease was, again, due to the decrease in income from operations and the non-cash charge of asset impairment loss. Adjusted net income or adjusted net loss was RMB18.6 million, compared with adjusted net income of RMB 38.4 million. The adjustment, I mentioned earlier is the non-cash charge of asset impairment loss of RMB52 million.
The above is my financial highlight briefing. Both Mr. John, the CEO, and myself wish to thank everyone for your time in participating today.
We do have time for Q&A, so let’s now open the call for questions. Operator, go ahead.
Question-And-Answer Session
Operator
Tommy Zhou
No problem.
Operator
[Operator Instructions]. I can now hand back over to Tommy for any closing comments.
Tommy Zhou
Okay. Thank you. If anyone have any further questions, of course, feel free to e-mail us. Our contact information is displayed in the bottom part of every earnings release and news release. Thank you, again, operator, and we thank you all for participating in today’s call and for your further support. We appreciate everyone’s interest in our company and greatly look forward to reporting to you again next quarter on our progress.
Operator
Thank you very much. Thank you all again. This does conclude the call. You may now disconnect.
