China Online Education : Earning Release

China Online Education Group Announces Second Quarter 2021 Results

Second quarter active students increased by 35.7% year-over-year

Second quarter revenue increased by 17.5% year-over-year

BEIJING, September 28, 2021 -- China Online Education Group ("51Talk" or the "Company") (NYSE: COE), a leading online education platform in China, with core expertise in English education, announced its unaudited financial results for the second quarter ended June 30, 2021.

Second Quarter 2021 Financial and Operating Metrics

• Net revenues were RMB579.8 million (US$89.8 million), a 17.5% increase from RMB493.5 million for the second quarter of 2020.
• Gross margin was 72.7%, compared with 70.9% for the second quarter of 2020.
• Net loss was RMB27.0 million (US$4.2 million), compared with net income of RMB32.8 million for the second quarter of 2020.
• Non-GAAPnet loss1 was RMB17.8 million (US$2.8 million), compared with non-GAAP net income of RMB39.6 million for the second quarter of 2020.
• Operating cash outflow was RMB69.7 million (US$10.8 million), compared with RMB172.1 million of operating cash inflow for the second quarter of 2020.
• Cash, cash equivalents, time deposits and short-term investments balance stood at RMB1,642.8 million (US$254.4 million) as of June 30, 2021.
• Gross billings2 were RMB549.9 million (US$85.2 million), an 18.7% decrease from RMB676.4 million for the second quarter of 2020.

1. For more information on non-GAAP financial measures, please see the section of "Use of Non-GAAP Financial Measures" and the table captioned "Reconciliation of Non-GAAP Measures to the Most Comparable GAAP Measures" set forth in this press release.
2. Gross billings for a specific period, which is one of the Company's key operating data, is defined as the total amount of cash received for the sale of course packages and services in such period, net of the total amount of refunds in such period.

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Key Financial and Operating Data	For the three months ended
	Jun. 30,		Jun. 30,		Y-o-Y
	2020		2021		Change
Net Revenues (in RMB millions)	493.5	579.8	17.5%
K-12one-on-one mass market offering	417.9	534.6	27.9%
K-12 small class offering	28.5	16.8	(41.1%)
Others	47.1	28.4	(39.7%)
Gross billings (in RMB millions)	676.4	549.9	(18.7%)
K-12one-on-one mass market offering	612.5	516.0	(15.8%)
K-12 small class offering	42.4	17.4	(59.0%)
Others	21.5	16.5	(23.3%)
Active students3 (in thousands)	298.2	404.7	35.7%

"Our second quarter net revenue reached RMB579.8 million, primarily driven by a 35.7% year- over-year increase in the number of active students," said Mr. Jack Jiajia Huang, Founder, Chairman and Chief Executive Officer of 51Talk.

"On July 24, 2021, relevant Chinese authorities issued the Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education ("the Opinion"), which contains high-level policy directives about requirements and restrictions related to online and offline after-school tutoring services. Aligned with the Opinion's directives and requirements, 51Talk launched brand new All-round Proficiency Courses in small class format for children and teenagers led by Chinese teachers. Meanwhile, we plan to develop our overseas business by offering one-on-one classes for international K-12 and adult student users taught by foreign teachers.

"Where there are new challenges, there will also be new opportunities. In keeping with the revised framework and regulations for our industry, we will continue to innovate our course offerings and explore growth opportunities." Concluded Mr. Huang.

"We recorded a 17.5% increase of net revenue and a 20.5% increase of gross profit on a year-over- year basis," said Mr. Min Xu, Chief Financial Officer of 51Talk. "Net loss for the second quarter was RMB27.0 million, attributable mainly to higher operating expenses incurred as we spent efforts in brand building and upgrading courses offerings and services. Under the new regulations, the Company has taken actions to adapt to the latest operating environment and will take further measures to improve operating efficiency. Looking ahead, we will continue to create value for our students and teachers while conforming to all laws and regulations."

3 An "active student" for a specified period refers to a student who booked at least one paid lesson, excluding those students who only attended paid live broadcasting lessons or trial lessons.

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Second Quarter 2021 Financial Results

Net Revenues

Net revenues for the second quarter of 2021 were RMB579.8 million (US$89.8 million), a 17.5% increase from RMB493.5 million for the same quarter last year. The increase was primarily attributed to an increase in the number of active students, partially offset by a decrease in average revenue per active student. The number of active students in the second quarter of 2021 was 404,700, a 35.7% increase from 298,200 for the same quarter last year.

Cost of Revenues

Cost of revenues for the second quarter of 2021 was RMB158.1 million (US$24.5 million), a 10.2% increase from RMB143.6 million for the same quarter last year. The increase was primarily driven by an increase in total service fees paid to teachers, mainly due to an increased number of paid lessons.

Gross Profit and Gross Margin

Gross profit for the second quarter of 2021 was RMB421.6 million (US$65.3 million), a 20.5% increase from RMB349.9 million for the same quarter last year.

Gross margin for the second quarter of 2021 was 72.7%, compared with 70.9% for the same quarter last year. The increase was mainly attributable to the decrease of the cost per lesson, partially offset by the decrease of the revenue per lesson.

Operating Expenses

Total operating expenses for the second quarter of 2021 were RMB461.0 million (US$71.4 million), a 38.7% increase from RMB332.4 million for the same quarter last year. The increase was mainly due to an increase in sales and marketing expenses.

Sales and marketing expenses for the second quarter of 2021 were RMB315.8 million (US$48.9 million), a 31.7% increase from RMB239.9 million for the same quarter last year. The increase was mainly due to higher sales personnel costs related to increases in both the number of personnel and average salary and higher marketing and branding expenses. Excluding share-based compensation expenses, non-GAAP sales and marketing expenses for the second quarter of 2021 were RMB313.4 million (US$48.5 million), a 32.0% increase from RMB237.4 million for the same quarter last year.

Product development expenses for the second quarter of 2021 were RMB65.0 million (US$10.1 million), a 68.4% increase from RMB38.6 million for the same quarter last year. The increase was primarily due to higher product development personnel costs related to increases in the number of personnel. Excluding share-based compensation expenses, non-GAAP product development expenses for the second quarter of 2021 were RMB63.4 million (US$9.8 million), a 71.5% increase from RMB37.0 million for the same quarter last year.

General and administrative expenses for the second quarter of 2021 were RMB80.2 million (US$12.4 million), a 48.7% increase from RMB53.9 million for the same quarter last year. The

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increase was primarily due to higher general and administrative personnel costs related to increases in both the number of personnel and average salary. Excluding share-based compensation expenses, non-GAAP general and administrative expenses for the second quarter of 2021 were RMB75.0 million (US$11.6 million), a 46.6% increase from RMB51.1 million for the same quarter last year.

Other income

The exemption for the value added tax (VAT) of consumer services has been stopped as of March 31, 2021. This exemption, which covers a wide range of consumer services, was part of the Chinese government's effort to ease the burden of businesses affected by the COVID-19 pandemic. The income obtained by taxpayers from providing essential services shall be exempted from VAT. The favorable impact of such COVID-19 relief policies was nil and RMB7.0 million in the second quarter of 2021 and 2020 respectively.

On September 30, 2019, the Ministry of Finance and the State Taxation Administration announced that from October 1, 2019 to December 31, 2021, taxpayers engaging in the provision of essential services are allowed to deduct an extra 15% of the deductible input value-added tax for the current period from the payable value-added tax. The impact of the policy of additional value-added tax credit for the income generated by the essential services provided by enterprises was RMB5.6 million and RMB2.6 million in the second quarter of 2021 and 2020 respectively.

(Loss)/income from Operations

Operating loss for the second quarter of 2021 was RMB33.8 million (US$5.2 million), compared with operating income of RMB27.1 million for the same quarter last year. Operating margin for the second quarter was negative 5.8%, compared with operating margin of 5.5% for the same quarter last year.

Non-GAAP operating loss for the second quarter of 2021 was RMB24.5 million (US$3.8 million), compared with non-GAAP operating income of RMB34.0 million for the same quarter last year. Non-GAAP operating margin for the second quarter was negative 4.2%, compared with non-GAAP operating margin of 6.9% for the same quarter last year.

Net (loss)/income

Net loss for the second quarter of 2021 was RMB27.0 million (US$4.2 million), compared with net income of RMB32.8 million for the same quarter last year. Net margin for the second quarter was negative 4.7%, compared with net margin of 6.6% for the same quarter last year.

Non-GAAP net loss for the second quarter of 2021 was RMB17.8 million (US$2.8 million), compared with non-GAAP net income of RMB39.6 million for the same quarter last year. Non- GAAP net margin for the second quarter was negative 3.1%, compared with non-GAAP net margin of 8.0% for the same quarter last year.

Income tax expense for the second quarter of 2021 was RMB2.9 million.

Basic net loss per share attributable to ordinary shareholders for the second quarter of 2021 was RMB0.08 (US$0.01), compared with basic net income per share of RMB0.10 for the same quarter

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last year. Diluted net loss per share attributable to ordinary shareholders for the second quarter of 2021 was RMB0.08 (US$0.01), compared with diluted net income per share of RMB0.10 for the same quarter last year.

Non-GAAP basic net loss per share attributable to ordinary shareholders for the second quarter of 2021 was RMB0.05 (US$0.01), compared with non-GAAP basic net income per share attributable to ordinary shareholders of RMB0.12 for the same quarter last year. Non-GAAP diluted net loss per share attributable to ordinary shareholders for the second quarter of 2021 was RMB0.05 (US$0.01), compared with non-GAAP diluted net income per share attributable to ordinary shareholders of RMB0.12 for the same quarter last year.

Basic and diluted net loss per American depositary share ("ADS") attributable to ordinary shareholders for the second quarter of 2021 was RMB1.24 (US$0.19), compared with basic net income per ADS of RMB1.55 and diluted net income per ADS of RMB1.44 for the same quarter last year. Each ADS represents 15 Class A ordinary shares.

Non-GAAP basic and diluted net loss per ADS attributable to ordinary shareholders for the second quarter of 2021 was RMB0.82 (US$0.13), compared with non-GAAP basic net income per ADS attributable to ordinary shareholders of RMB1.87 and diluted net income per ADS of RMB1.75 for the same quarter last year.

Balance Sheet

As of June 30, 2021, the Company had total cash, cash equivalents, time deposits and short-term investments of RMB1,642.8 million (US$254.4 million), compared with RMB1,727.7 million as of December 31, 2020. As a part of cash, cash equivalents, time deposits and short-term investments, the Company had non-current time deposits of RMB412.0 million (US$63.8 million), compared with RMB414.0 million as of December 31, 2020.

As of June 30, 2021, the Company has a consolidated net current liability of RMB1,440.4 million, compared with net current liability of RMB1,400.4 million as of December 31, 2020. The Company had advances from students4 (current and non-current) of RMB2,695.0 million (US$417.4 million) as of June 30, 2021, compared with RMB2,721.0 million as of December 31, 2020.

Subsequent Events

Based on the management's assessments, as a result of the changing regulatory environment and the business adjustment plan taken by the Company, impairment of long-lived assets and reversal of interest income recognized for time deposit are expected to be recognized in subsequent period.

4"Advances from students," which is defined as the amount of obligation to transfer good or service to students or business partners for which consideration has been received from students in advance. The deposits from students are also presented in the total amount of "advances from students".

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