CL Educate Limited (CLEDUCATE) Earnings Call Transcript

Yes. Very good afternoon to everyone. Thank you so much for joining us for this investor call today. I hope my slide is visible on the screen. My name is Arjun Wadhwa, I'm the CFO of CL Educate. Joining me on this call today are Mr. Satya Narayanan, he's the Chairman of CL Educate and the CEO of our test-prep business. Also on this call are Mr. Nikhil Mahajan. He's our -- Group CEO of our Enterprise Business; and Mr. Gautam Puri, our Vice Chairman and Managing Director. It gives me great pleasure to have you here for our Q2 H1 investor presentation. And I'd like to invite Satya to take you through the early part of the slides. After which, I'll come back as your host and run you through the second half of the presentation. Over to you, Satya.

Thank you. Thank you, Arjun. I hope I'm audible as well. Welcome, everybody, and maybe I should start by wishing everyone a great week of festivities with you, your family and your near and dear ones. What I'll do is take the first few slides and give a very broad qualitative commentary on the overall business on both sides, the consumer as well as enterprise. And then Arjun will pick straight up from there. Yes. Moving forward, as you know, the theme from the beginning of the year has been singular. If you look at it from the negative side of the coin, it's COVID, COVID impacted. And if you take the optimistic view of that and keep doing your action on various fronts to keep the business growing, that part of the -- that side of the coin could be called as digital transformation. So from off-line first and digital as a support, it has now moved from -- moved to digital first and premium on demand, which could be off-line or online. Premium on demand is the support that has happened. That's the theme wherein the businesses have gone from 90-10. If you recall that I mentioned in the last quarterly meeting, 90-10 off-line online to 10-90, where 90% is digital now on both sides, and 90 I'm saying by keeping a little bit of a margin. Strictly speaking, it is 100%. Every single business rupee that you have seen in the first 6 months, the numbers that Arjun will share, are 100% of the fulfillment of both the Kestone as well as the Career Launcher side, everything is digital. It's a very important thing to keep in mind. And in order to do that, the amount of things, the kind of reorganizations that have -- that we had to do have been fairly, fairly interesting as a journey. Looking at the next few quarters, we think or we are bracing ourselves to the fact that this [turmoil], this turbulence will continue definitely for the next 2 to 4 quarters. And strictly speaking, if you ask me, I'm telling my business teams, 2022 is going to be the next period of -- if there is anything called usual -- business as usual, BAU, as it was called in the pre-COVID, BAU has gone out of the window. So it will be COVID-determined turbulence for the next 2 to 4 quarters. On our internal response to this side, a whole lot of costs that were directly attributable to the off-line arms and legs of the businesses pre-COVID, those have improved, they will remain flat. And any changes, some of those that we have noticed or we have taken a conscious decision that you might see when Arjun explains, he will explain that. Any increase vis-à-vis the preceding quarter that you would have seen, which might come in, let's -- heading like other expenses, you'll find that those are very conscious choices of either more investments in market development, business development or some pertaining to fulfillment, which got booked as a business, okay? But cost as an overhead now is minimal, and we're trying to keep as much of our cost elements as very direct and variable as possible to the businesses. Going forward, in the changing phase, what we see is our -- in test-prep consumer business, the MBA, Law, IPM, which are cash cows in a sense of the term, there the effort is how can we move to higher volumes, better ARPU compared to the digital earlier, getting comparable to the off-line revenue per student, which was higher off-line, as you know, and more importantly, better EBITDA models is what we are chasing in the growth paradigm of ours. And the opportunities that we are seeing is that the newer areas, such as UPSC, GATE, banking and so on, can we use this opportunity to do some land grab to get some market share going, that's the mindset with which the business teams are working. Moving forward, to put it in a little bit more clearly articulated boxes that the areas of focus in test-prep have been digital sales and marketing, product innovations and that is a fairly detailed chapter. Hopefully, we will get yields or dividends coming out of it as we move into the next 2 to 4 quarters. And the third is almost every single student of the 55,000 that we have enrolled, they are now being delivered digitally. There's no center that has offered a single day of classes since April 1, 2020. On the Kestone side, again, the response of the team has been quite commendable in these challenging circumstances. Many of their competition -- competitive brands, et cetera, they have struggled a lot more. But our team has responded very well with their virtual events platform. And as we will go ahead and see and taken it to the market, sold it to the marquee customers of Kestone, including many of those Fortune 500 companies and not just in India and Singapore, but also in Europe, West Asia and the U.S. So Kestone, I think the response has been very good, very challenging times. But with the focus on moving everything into the virtual arena, they hopefully are building something that might make the story look very different when we come out of the COVID in the next 2 to 4 quarters. I'll move forward to what -- a little bit of a summary. When I say post-COVID, not post-COVID, but the period post the onset of COVID, that's what I should qualify here. See, as you are yourself perhaps noticing around in your environment or even the businesses that you are chewed into, one of the interesting points of time that we are in is that many of us don't know whether we are coming out of COVID or we are going into a more intensive, more challenging period of COVID, is it wave 2 that we are facing? Because now the numbers are quite crazy, quite comparatively speaking to last quarter, it's far more challenging. However, on an operational side, because some bit of guidelines have come, our business units, business leaders are keeping in step with that. Study centers have been cautiously opened up but only for customer interface with 1-man presence or a 2-member presence with all the COVID guidelines being followed. And this is only to make sure that we don't want to be caught staying in denial or taking very extreme positions. But what is very sure is that it will continue to be digital first for a long time. And the good thing is that while the off-line business is practically literally 0 on both sides, this digital billing of 5.5x is on the test-prep side compared to the last year corresponding figures, okay? Last year, at this time, our digital business, it had done about INR 11 crores billing and this year, it has done approximately INR 62 crores of billing. And the digital enrollments have shown an 89% growth over the combined -- over the similar apples-to-apples comparison last year. If you break it down, MBA combined has shown a growth of 15% growth after making up for the off-line enrollments not happening. So the volumes, the presence in the market, not yielding market share, rather going after it a little bit more aggressively by knowing that this is going to be a year of opportunity and challenge at once is how we are operating. On the enterprise side, same thing. I think off-line revenues have literally vanished. And if you look at an overall level, perhaps we are doing anywhere between 50% to 62%, 63% vis-à-vis the same comparison last year. That perhaps will continue. And the whole idea is not to yield market share and keep working on improving our EBITDA even as we improve our revenue or the top line growth. That's what the focus is. Moving forward, Arjun. A little bit of a summary on the enterprise side. Non-India virtual events has seen a lot of traction. It gives for a much better -- 2.5x EBITDA -- 3x the EBITDA margins on a per event per corporate engagement basis. That's a good sign, early days, but the stack is not bad the way we're looking at it. It is very, very likely that the virtual events initiative, including the platform around which a whole lot of things are happening, will perhaps become and that's also the team, the leadership is working towards making that as the main engine of growth when we are looking at the next 12 to 24 months. International business is picking up. And the good thing is when we have the back-end team, when we have the support sitting out of Bangalore or Coimbatore or Delhi and then you have business developments happening across the globe, it presents for an interesting model of growth for corporate side over the next year or 2. On the institutional side, many of you are aware, more as a citizen, as a parent, in your family that the entire academic year has been -- the calendar has got completely disrupted this year. Even as we speak in November, the counseling and enrollments to premier institutes, like the IITs, NITs, law schools, they have not got finished. A leading college, like an LSR, had 0 students paying the fee in the first list because in many of these top colleges, the way it happens is it's a cascading effect. Students wait for the IIT results and then go to the next colleague and then the next college. So the private universities and then the Tier 2, Tier 3 universities, they all are in total disarray. That has affected our business in terms of their ability to pay, they don't know how to get business. A lot of this business is linked to students paying up. And this time, they start their action for the next academic season. So this is disrupted. We are responding as well as one could. The numbers are going to be 50% of last year, but that's likely to be when we look around and benchmark ourselves with our competition in each of these, we still are doing okay. And hopefully, when we come out of it, we'll come much, much stronger in each of these practices. Yes.

Satya, I'll take over from here.

Yes, Arjun.

And to the business updates and then the financials. So as Satya shared previously, our business has moved from almost a 90% being an off-line physical business and a 10% being digital in terms of support services to a complete opposite of that. And that is -- and that thing we saw happen in Q1, we've seen it happen in Q2 as well. And while it may not be 90-10 necessarily going forward, the rest of this year, it is very much a digital first strategy when we look at Q3 and Q4. In terms of how we fund, as far as the financials go, at this time last year, we were at INR 193 crores. This year, we're at about INR 98 crores. From an EBITDA perspective, at the same stage last year, we were at about INR 25 crores, we're at about INR 9 crores so far. And our PBT and our PAT is also obviously affected as such. I will spend more time on the financials in the next segment, where I look at our EBITDA margins and so on. If I were to just share a bit snapshot of that right now, my EBITDA margins continue to be healthy. If I were to just compare these figures with last year, INR 25 crores on INR 192 crores versus INR 9.2 crores on INR 98 crores, my EBITDA margins are down by only about 370 basis points. Moving ahead, I'm going to spend a little bit of time looking at our test-prep business because now that we look at things from a digital first perspective, it's also important to put this in perspective in terms of what are the areas that we, as a business team, look at going forward. One of the things, obviously, that we look at are the enrollments and the billings done. But for us, these are more like the lag indicators in terms of performance. And there are certain things that we look at, like daily active users and monthly repeat users, which are our lead indicators going forward. I'll spend a little bit more time on that on this slide. As Satya shared previously, my billing has gone up 5.5x from September to September perspective, if I look at my digital business. My enrollments are up from a shade under 30,000 to about 55,000, that's about 89%. But yes, those are outcomes. If I look at what is driving this business and that is how a lot of digital businesses are measured, I see a lot of positive trends in terms of the number of users that are visiting my website, how many of them are active on a monthly basis, how many of them are -- keep coming back to my website and how many of them are active even on a daily basis. So in terms of the health of my digital business, these are some fantastic numbers to look at. And we also look at other indicators, like course completion rate, which are actually in phenomenal ranges of close to about 99%. So the digital business looks very positive from a 6-month perspective, and we continue to remain optimistic about this going forward. Also, just to put into some perspective into -- I've taken one particular case study here to just also give you an idea of how we look at this business. What I have here is CAC. That's my cost of acquiring a customer. So this is my monthly CAC, the cost of customer acquisition, and the revenue that I derive from these customers. So we've pulled out one particular segment here, and we've taken into account seasonality. You will notice that there are certain peaks that happen at specific times in the year, you see it here in November. This accounts for the seasonality in our business. But if you were to look at it from a month-to-month perspective, what we look at in terms of a key performance metric for us is how is our bench moving. So what is the difference between the revenue that I'm generating and the cost that I'm spending to generate that revenue. And you'll notice here that post-COVID, these numbers have really shot up, and it gives us great cause for optimism. Moving ahead, I'll also spend a little bit of time on where we are from a financial perspective. I've shared previously that our digital enrollments are 55 -- a little over 55,000. As Satya mentioned, every enrollment that we're doing virtually this year has been digital. So if I were to do a comparison with last year in terms of total enrollments, yes, we did about 66,000 enrollments. But about 35,000, 36,000 of those were pure off-line enrollments, which have obviously not happened this year because centers are closed. What that has translated into is a huge jump on the digital side, which is visible here. These enrollments, and I'm referring here to the total enrollments. When I'm doing enrollments to billing comparison, this would be my comparative billing for my total enrollments last year to this year. We've already shared with you that the digital side, there's a growth of about 5x. In terms of other key financial parameters that we look at, my consolidated revenue for this year, I've already shared with you, is about INR 98 Cr, my EBITDA margins are 9.4%, and my EBITDA this year is 9.2%. Moving ahead, this is just to give you a little bit of an idea in terms of what we have done in terms of management of costs. As soon as COVID happened, we set up a business continuity group that was headed by our Former CFO and now currently our Group CEO, Nikhil Mahajan; and the Managing Director, Gautam Puri and I were the other members of this group. And we worked together on how we could operationalize the key elements of our business in terms of what are the fixed costs that can be effectively managed to minimize the COVID impact and how we can continue to leverage our variable cost to ensure that our businesses get enough marketing muscle, enough marketing spend to ensure that business continues to grow. So a few of the key things that we've done is we've created a sustainable reduction of fixed costs by about INR 5.5 Cr a quarter. That includes a range reduction and optimization of manpower expenses and a reduction in our administrative costs. Also, we've been working with our bankers and we're looking at reducing our cost of debt by about 100 basis points. And we see the benefits of some of these have already started accruing to us in Q2, and we will see further benefits happening in Q3 and Q4. Satya mentioned earlier that our other expenses have increased on a quarter-to-quarter basis. If I look at Q1 versus Q2, the number is up about INR 5.5 crores. That is because we've increased our spends from supporting our online business, our digital business by about INR 1.7 Cr, both in terms of business support and in terms of digital marketing spends. And we've also seen an increase in the Kestone servicing costs, which are to the tune of about INR 3 Cr, in line with the growth in the top line in Kestone for this quarter. The Kestone in Q1 delivered about INR 16 crores of business. In Q2, it has delivered about INR 20 crores of business. So the costs are very much in line with what the revenue has grown. Additionally, we've also seen an increase in our bad debts. This is about INR 1.9 crores this quarter, predominantly on account of COVID across businesses. So we've seen this impact in our test-prep business because sadly there are people who've lost jobs. There are also people who dropped out of courses because they had originally joined a course, which was a longer duration course, which was to be delivered off-line. And there are people in the -- in our media business, we've also seen a slight increase in bad debts and also in our digital business. I'll move ahead. This is our net cash position. I had shown this to you last time around as well. Our net cash has moved from INR 18 crores come March to we had built a little bit of a copse of about INR 32 crores come June, and that has come down slightly to about INR 29 crores in September largely on account of our reducing our trade papers. I'll also -- this is my last slide. This is a quick update on where we are in terms of the merger. As for those of you who are not aware, a lot of our subsidiary companies, Kestone, CL Media, AKMS and ICE were in the process of being merged into CL Educate, the parent entity. The proceedings, unfortunately got halted on account of COVID because NCLT Chandigarh, despite moving to a VC mode, was not hearing merger matters. They were predominantly hearing bankruptcy matters on an urgent basis. So 5 consecutive hearings unfortunately got postponed. So we filed an emergency petition request with the NCLT bank, which was heard in October, towards the end of October, around 27th October. The order for that is currently reserved, and it is expected to be released post Diwali. If I were to be optimistic and the bench does decide to hear -- to give us a chance to present our merger petition, which is currently at the second stage, we could very well see the merger happening before the closure of the books for this financial year. However, if there is a chance that they do not accept our request for an early hearing, the merger could well get postponed into next year. From our perspective, we are prepared for both scenarios, and we shall be in a better position to comment on the same come the second half of November. That's it from us in terms of the former slides. What I'd like to now do is throw the floor open to questions. Please post your questions in the chat window. And if required, I'll also unmute you and give you a chance to address us if you have any additional questions thereafter.

Yes, Muthu. Am I audible, Arjun?

Yes, you are, Satya. I'm sorry, I'm just going to stop sharing the screen so that I can access the chat window.

Sure. Sure. Sure. So I'll take the first question, Arjun. You can take the next question also, I can see from Sunil. So Muthu, there are 2 or 3 ways in which this we see happening. And one is when we are doing the business development entirely digitally, the extent to which you can scale your business development engine to cover the entire geography of relevance without extending investments in big chunks that we used to do in the off-line world, that begins to play a large part. So that is number one, which means we can pick students, enrollments from diverse geographies without necessarily looking at you having the physical presence there. That's number one. Because in the cash cows, CL brand is so predominant that the questions don't get asked of the value proposition. It's only a question of access whether I have this pro-product or not, okay? Number two, and a very, very important component in this is that the batch size, the number of students in a batch has altered dramatically in the online fulfillment model. Number two, the number of students or the number of sessions, whichever metric you use to see the productivity of a teacher, that also has grown manyfold, okay? So the number of full-time faculty has dropped significantly, while the numbers that we have shown in the presentation has gone from 29,000 to 58,000. So these are the ways in which we see the profitability will go up on a per student basis in the digital era in for the cash cows, okay? What are the couple of carriers? A couple of carriers is that we make sure that the ARPUs are pushed up significantly. While the margins can be better, off-line had a significant chunky pricing businesses. So we are going after that. If you actually go to our website today and try to enroll for an MBA or a Law or an IPM, you'll find that we have programs at are priced from INR 10,000 to INR 1 lakh. The destination is the same. You want to crack a chat or -- chat and go to an IIM or a law school. But you can -- you have a much greater choice. At this, we could offer in the digital world, not so easily in the physical world because you needed that many more classrooms. So those are the 2, 3 levers that we are working upon. As I said earlier, we are not looking for magic to happen -- all magic to show up in this year, but it's a good year to make all those innovations and a lot of it will play out in the next 12 to 15 months. Yes. Arjun, you want to take Sunil's question?

Yes. Sure, Satya. Sunil, the assets that are held for sale are plot of land in Indore and Raipur, land and building, fully constructed in our clip business. So those are the assets held for sale, our Indore school and our Raipur school, the land and building. I'm just running through the list of the questions.

One more question from Sunil about the digital business and the payments in advance. Maybe you want to take that or...

Yes. Sure. So Sunil, the debtors are largely -- the bad debts that we reporting are largely related to the previous financial year. So we're hoping that this year, as we move to a more digital world and to a more digital model, there will be a considerable reduction in our bad debt going forward. Also, traditionally, in this business, we have a bad debt of between 3.5% to 5%. So last year, we did a billing of about INR 200 crores. So typically, about -- between 3.5% to 5% of that would come over the course of the year.

I'll take Mukesh's question, Arjun, which is about -- Mukesh, I'm reading your question, Mukesh is questioning if others haven't paid attention to it, how are we going to compete with the players like BYJU and Unacademy as these players have very good presence in digital market And, at the same time, they're putting a lot of money in advertising? Good point, Mukesh. There are 2 specific points that I would want to highlight in response -- as a response. See, number one is our business is -- our consumer business is an extremely outcome-driven business, okay? And as an entrepreneur, as a leadership team, we are very respectful towards all the entrepreneurs and the models, everyone is successful by their own yard stick that they take. So I don't want to be dismissive of anyone. But long-term sustainability of business comes from the outcomes that you deliver. What do you mean the outcome in our business? How many of your students went to an IIT or a medical school or a law school or an IIM? That's a very important measure. And if you look at our figures, our CAC, cost of customer acquisition, as a result, is in single digits in our cash cow businesses and, at an overall level, it's about 14%, whereas most of these brands that you are talking about or in fact anyone, their -- Unacademy, for example, last year spent INR 120 crores to do INR 11 crores of top line, okay? It's no different when you take -- go name by name. So what we have seen -- the way we are looking at it is from a location of opportunity, not disrespect, not ideologically win the war. We want to win the battle in terms of business. So these people are throwing money. They're creating awareness. But when a student gets up and begins to enroll in the markets that we operate in, we have a terrific advantage. They operate in our core segments also, but their numbers aren't anything worth mentioning. But in the segments that they operate in, which is grade 7, 8, 9, 10, 11, 12 is BYJU's core area. That still is not an area for us. So in that sense, it's not competing for us. But UPSC, MBA, Law, where we operate or banking to read a great numbers. I would say anyone other than BYJU at this point in time, they are at a very early stage of excitement on the part of investors, entrepreneurs. They are on pivoting every quarter. They want to know what will work. And we are very respectful towards that journey also. We would not be dismissive. We're learning a lot by observing a lot of them closely. But our focus is, can we increase our numbers by playing the external factors with an inside out strategy that works for superior growth, superior returns for our investors. Those are the 2 things that we would measure constantly without being presumptive about anything.

Satya, I'll come in for a second and take Muthukumar's question. Is there further scope for rationalizing expenses? And can you give us a perspective on the other expenses? Muthukumar, just to give you a broad perspective on what we've done in terms of the fixed cost, we've done a fair bit of rationalization on that already. But some of that visibility is there in Q2. There will be further visibility of that in Q3 and Q4 because it takes a little bit of time for it to happen over a little bit of period. But there is a chance as centers do begin to open up a little bit in the second half of this year that there might be an increase in rental expenses in a few of our company-owned centers but even that will be -- will not be a hugely significant amount because the way our businesses run, our business partners take care of the complete costs. So we work on a negative CapEx model there. So they run -- all rental costs are theirs, all costs of servicing are theirs. So that is completely on them. In terms of the other expenses, the biggest hit that comes into other expenses is the cost of servicing. So if I look at my other expenses as a particular category, the cost of servicing of my test-prep students hits that and the cost of servicing for my Kestone business hits that. So those are the good biggest parts of other expenses. Satya?

Yes. Thanks, Arjun. I'll take the question I see from Manoj about how do you plan to reach wider students base as digital has broken the physical barriers. And India and the world becomes a target market. Do you see small franchisees in semi-urban and rural areas as a part of strategy? With digital as a primary trend, when do you see 15% growth coming back to CL? I'll make 3 specific points, Manoj, and for others who are listening in. Yes, one area that we are very sharply focused on and trying to make a significant progress this financial year is in our -- what internally we call as this basket B, which is the jobs market, which includes UPSC, GATE and the banking and related exams, okay? And in this basket, we have grown by a factor of 5.5x in volumes in this 6 months compared to the same period last quarter. UPSC means the IAS and related exams. GATE, as you know, is the exams to get into a lot of public sector jobs in addition to you using it for higher education and engineering post grad. And the government has announced that NRA, if you have followed it, National Recruitment Agency, all the government recruitments will -- is going to happen through that agency over the next 2, 3 years, a lot of movement you're going to see, okay? So if you look at our core cash cow business, which is MBA, Law and IPM, the denominator there is just about, let's say, 0.5 million, 5 lakh students by extending it in all directions with all imaginations, okay? Strictly speaking, 3.5 lakhs, 4 lakhs, but extended, it will be about 5 lakhs, 0.5 million. This jobs market, and this is still only white collar good sought-after jobs. The apex of it is IAS and the bottom of which is the banking exam, that's almost a 1.5 crore segment. And that's not so populated. It is disruptable. Unlike the noise that you see in the Vedantu, BYJU, et cetera, which is very crowded, cost of customer acquisition is very expensive, we are staying very focused on this segment, and teams are working. We are going after getting market share even at the expense of higher investment on the customer acquisition cost. So that's one area where we are expanding the student base, Manoj. The second question, we also have made gentle, we're not throwing money at it, to get students outside of India for our international exams program. That's a very good, very nuanced point that you have made. It may not be a big number, but using our SAP, GRE, GMAT, IGCSE Maths tutoring and so on, we are looking at that project growing gradually. It's very early for us, but that's the second area that we're looking at. And lastly, we are looking -- we are betting a little bit on the virtual business partner model who doesn't even need to have a physical space. The way we grew the physical business partner who also had to do the fulfillment part. And those are 100-plus of them in 150-plus locations. That's the earlier model. Well, that will continue. We are looking at how do we create anyone who's got a mobile phone and some training and certification from CL could become a partner, is a business development partner, franchisee partners who manages this cost, but we get the revenue share. That's what we are looking at. We are looking at this 15% coming back to CL growth part on an everyday basis, Manoj, but I must say and set expectations that this year, the year of survival, reinvention, don't commit any hara-kiri. And if we do that well, we retain our teams. We regroup ourselves well. We could emerge a winner in the next financial year. I must say that very clearly to all of us who are here. Yes.