Top Online Educator Learns Tough Lessons During Pandemic

Koolearn Technology Holding Ltd., the online arm of China’s leading education services provider, reported its losses ballooned in the first half of this year, as the company and its peers struggled to accommodate droves of new users — often for free — during the global pandemic.

The pandemic has cast a near-constant spotlight on online education this year after schools worldwide shuttered their campuses and moved classes online to lower the risk of infection. Many better-run Chinese players had only recently started earning money due to intense competition in the sector. But most of those slid back into the red as they made classes available for little or no tuition to avoid accusations of profiteering.

Koolearn said that it “proactively offered free courses to a significant number of students” during the pandemic to ease the strain that many households felt when their children’s schools were abruptly closed and all education was moved online.

“Whilst these initiatives cushioned the impact Covid-19 had on students and parents in China, it required us to increase our cost of revenue as we have had to further invest in underlying infrastructure and human resources to meet the surge in demand in time and students using our products and services,” Koolearn said in comments accompanying a late Friday filing to the Hong Kong Stock Exchange detailing results for its fiscal year ended May 31.

The company’s revenue for the six months through May 31 rose a modest 16% to 512 million yuan ($74 million), roughly the same as the rate of increase during the previous six months, according to calculations by Caixin based on company data. But as expenses rose during the pandemic, the company’s gross profit margin fell to 45.6% in the 12 months to May 31 this year, from 55.1% in the previous 12 month period. The company said the donation of free courses during the pandemic was a major factor behind the drop.

As a result of that, Koolearn’s net loss for the six months through May 31 ballooned to 671 million yuan from an 89 million yuan loss in the year-ago period, according to Caixin’s calculations. In late July the company warned it would report a net loss of between 700 million yuan and 800 million yuan in its latest fiscal year, with the final figure announced Friday putting the figure at 742 million yuan.

Many of China’s online education firms similarly swung deeper into the red as the pandemic worsened an already intensely competitive climate.

The smaller OneSmart International Education posted a net loss of 454 million yuan in the three months through the end of May, reversing a 109 million yuan profit a year earlier. And Rise Education also swung into the loss column for the three months through the end of June, posting a 58 million yuan loss for the three month period versus a 21.2 million yuan profit a year earlier.

While challenges remain, Koolearn said the pandemic and resulting school closures also provided it with a valuable opportunity to plant the seeds for future growth.

“Despite Covid-19, (our latest fiscal year) has provided us with a unique opportunity to introduce our course offerings and services to a greater number of students in a number of new cities (including third-tier and fourth-tier cities) and allowed us to accelerate the development and introduction of new products to our students or existing products in new regions and new customers,” Koolearn said.

Koolearn’s shares were down 1.8% in late afternoon trade on Monday after the report’s release. But much of that may have been profit-taking after a sharp rally for the stock this year. Even after the Monday decline, Koolearn’s stock is still up more than 80% year-to-date, as investors bet on the strong future prospects for online learning.

Contact reporter Yang Ge (geyang@caixin.com)

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