Sunlands Technology Group (STG) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' Third Quarter 2019 Earnings Conference Call.

(Operator Instructions) Today's conference call is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to turn the call over to your host today, Yingying Liu, Sunlands' IR Director.

Please go ahead.

Hello, everyone, and thank you for joining Sunlands' Third Quarter 2019 Earnings Conference Call.

On the call, our CEO, Tongbo Liu, will provide an update on our operational performance as well as our strategic initiatives.

Our CFO, Steven Yipeng Li, will give you an overview of our financial performance and also provide our guidance for the fourth quarter of 2019.

Following the prepared remarks, we will move into the Q&A session.

Before I hand it over to the management, I'd like to remind you of Sunlands' safe harbor statements in relation to today's call.

Except for the historical information contained herein, certain of the matters discussed in this conference call are forward-looking statements.

These statements are based on current plans, estimates and projections, and therefore, you should not place undue reliance on them.

Forward-looking statements involve inherent risks and uncertainties.

A number of important factors could cause actual results to differ materially from those contained in any forward-looking statements.

For more information about the potential risks and uncertainties, please refer to the company's filings with the Securities and Exchange Commission.

With that, I will now turn the call over to our CEO, Tongbo Liu.

Thank you, Yingying.

Hello, everyone.

Welcome to Sunlands' Third Quarter 2019 Conference Call.

During the third quarter, we continued to focus on a diversified set of student acquisition methods to attract more students to our online platform.

Driven by these initiatives, our third quarter top line reached RMB 527.3 million, which was in line with our guidance and represented a 2% increase year-over-year.

We also narrowed our net loss margin to 24.6% in the third quarter versus 43.8% in the same period last year as we continue to manage costs and expenses.

During the third quarter, we continued to advance our strategic initiatives and new product features in an effort to promote our brands and improve the quality of courses and services we bring to our students.

Our strategic initiatives also include the relentless pursuit of cutting-edge technologies, particularly with the emphasis on applying AI to education as we strive to further depreciate our offerings through data mining our vast database of learning records and leveraging our integrated AI technology, we're able to analyze individual learning habits and develop personalized study plans for our students, so that their learning can be more efficient and attractive.

We also use AI technology to analyze our massive database of historical examination questions in order to predict most frequent test knowledge points and optimize our test preparation materials.

Moreover, artificial intelligence plays an essential role in Sunlands' internal management to improve quality of services for student education and training as well as protect students’ rights.

For example, all phone calls to our students are monitored by our AI system, which can detect sensitive words and protocol violations and immediately sends an alert for corrective action.

Data analysis is also the foundation of our recruitment process.

We have detailed data records for candidate profiling, interview results and training that facilitates recruitment and internal staff promotions.

Next, let me provide some specifics on several of our key highlights of this quarter.

First, as we mentioned in previous earnings call, we are strengthening our strategy -- strategic emphasis on non-STE products with masters-oriented products scoring rapidly.

With the increasingly diversified portfolio of educational products, we are enjoying a more balanced revenue mix.

Our masters-oriented products continue to attract interest from students, increasing to 15.9% of gross billings at the end of the third quarter from approximately 5.9% at the end of quarter 3, 2018.

This solid growth was attributable to favorable supply and demand dynamics for master’s degree programs in China, as we elaborated during the last quarter's earnings call and also to our efforts in developing products designed specifically to match the needs of prospective students in this segment.

It is worth mentioning that we and one of our international partnership universities hosted the first graduation ceremony of our international MBA program.

Many students far away from the venue also attended the ceremony and showed how much they had enjoyed the courses, which symbolizes our first milestone and approves the effectiveness of our revolutionary OPM model.

We are more than ever convinced that continuing to expand our masters-oriented products will help more people benefit from learning and help eliminate the information and the cognition gap resulting from historical, geographic, cultural and economic factors.

We are more than ever determined to expand our online international master programs, to bring high-quality and high education resource from Europe and the United States to students in China and share China's education resource with other developing countries.

We are confident we will continue to capture the market opportunity for higher education as we provide programs in response to ever-evolving market needs.

Second, our mobile app, Sunlands' speed edition, which we announced in January, continues to gain popularity among students due to its easy accessibility, fast interaction speed and minimal memory storage requirements.

By the end of the third quarter, users of this app reached 6.3 million, increasing further from the only 1 million users at the end of the second quarter and 250,000 at the end of the first quarter.

We also continuously upgraded and diversified our WeChat mini-programs, which are designed to allow students to maximum their study time on their mobile devices.

Through the efficient use of time fragments, we saw an increasing number of exam preparation questions completed by our students, which we believe will lead to higher pass rates going forward.

Lastly, while we are optimistic about the long-term growth of our gross billings and new student enrollment, we also continue to seek balance the top line and bottom line performers.

In the third quarter, our net loss narrowed by 42.6% year-over-year to RMB 129.8 million, as we prudently managed our expenses with our leading technology, high-quality educational content and the one-to-many business model.

We are confident in our ability to grow and be the market leader in China's online education industry.

With that, I would like to hand over the call to our CFO, Steven, to run through our financials.

Thank you, Tongbo, and hello, everyone.

Thanks for joining us.

For the third quarter, our net revenues were RMB 527.3 million, in line with our guidance.

Our gross billings and new student enrollment declined by 18.8% and 20.8%, respectively, year-over-year, as we continued to adjust the marketing expenses in view of uncertainties in student acquisition costs and macroeconomic trends.

However, the rate of decrease moderated from the second quarter, which shows our student acquisition efforts are gaining traction.

In addition, as Tongbo just mentioned, following the improvement in net loss in the second quarter, in the third quarter, our net loss narrowed again year-over-year to RMB 129.8 million compared with a loss of RMB 226.3 million in the third quarter of 2018, primarily as a result of reduced administrative expenses and sales and marketing expenses.

Going forward, we will continue with steady execution of our 5-pronged expansion and the retention strategies to bring long-term returns for both our customers and shareholders.

Now let me walk you through some of the key financial results for the third quarter.

In the third quarter of 2019, net revenues increased by 2% to RMB 527.3 million from RMB 517 million in the third quarter of 2018.

The increase was mainly driven by the growth in the number of students in the third quarter of 2019 compared with the third quarter of 2018, following new student enrollments increased over the past years.

Cost of revenues increased by 22.7% to RMB 113.7 million in the third quarter of 2019 from RMB 92.7 million in the third quarter of 2018, which was primarily due to the insurance premiums related to online education services with insurance coverage since late in 2018.

Gross profit decreased by 2.5% to RMB 413.6 million from RMB 424.4 million in the third quarter of 2018.

In the third quarter of 2019, operating expenses were RMB 546.9 million, representing a 25.5 -- 21.5% decrease from RMB 696.3 million in the third quarter of 2018.

Sales and marketing expenses decreased by 20.8% to RMB 429.2 million in the third quarter of 2019 from RMB 542 million in the third quarter of 2018.

The decrease was mainly due to reduced marketing spending, reflective of disciplined, prudent cost management and the decrease in the expense of sales and marketing personnel.

General and administrative expenses decreased by 30.4% to RMB 91.3 million in the third quarter of 2019 from RMB 131.1 million in the third quarter of 2018.

Product development expenses increased by 14% to RMB 26.4 million in the third quarter of 2019 from RMB 23.2 million in the third quarter of 2018.

The increase was primarily due to an increase in the number of employees and compensation paid to Sunlands' product and technology development personnel during the quarter.

Net loss for the third quarter of 2019 was RMB 129.8 million compared with RMB 226.3 million in the third quarter of 2018.

Basic and diluted net loss per share was RMB 19 in the third quarter of 2019.

As of September 30, 2019, the company had RMB 1,569.4 million of cash and cash equivalents and RMB 208.8 million of short-term investments compared with RMB 1,248.8 million of cash and cash equivalents and RMB 1,028.6 million of short-term investments as of December 31, 2018.

As of September 30, 2019, the company had a deferred revenue balance of RMB 3,214.6 million compared with RMB 3,286 million as of December 31, 2018.

Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support Sunlands' operations.

Capital expenditures were RMB 11.8 million in the third quarter of 2019 compared with RMB 10.3 million in the third quarter of 2018.

And in terms of the key financial results for the first 9 months of 2019, let me walk you in the details, too.

In the first 9 months of 2019, net revenues increased by 17% to RMB 1,644.2 million from RMB 1,405.2 million in the first 9 months of 2018.

Cost of revenues increased by 17.1% to RMB 294.8 million in the first 9 months of 2019 from RMB 251.9 million in the first 9 months of 2018.

Gross profit increased by 17% to RMB 1,349.4 million from RMB 1,153.3 million in the first 9 months of 2018.

In the first 9 months of 2019, operating expenses were RMB 1,658.3 million, representing a 15.9% decrease from RMB 1,972.9 million in the first 9 months of 2018.

Sales and marketing expenses decreased by 18.9% to RMB 1,316.2 million in the first 9 months of 2019 from RMB 1,622.7 million in the first 9 months of 2018.

General and administrative expenses decreased by 12.1% to RMB 264.7 million in the first 9 months of 2019 from RMB 301.1 million in the first 9 months of 2018.

Product development expenses increased by 57.8% to RMB 77.4 million in the first 9 months of 2019 from RMB 49.1 million in the first 9 months of 2018.

Net loss for the first 9 months of 2019 was RMB 255.6 million compared with RMB 743.3 million in the first 9 months of 2018.

Basic and diluted net loss per share was RMB 37.36 million in the first 9 months of 2019 compared with RMB 121.93 in the first 9 months of 2018.

Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support Sunlands' operations.

Capital expenditures were RMB 15.1 million in the first 9 months of 2019 compared with RMB 255.3 million in the first 9 months of 2018.

For the fourth quarter of 2019, Sunlands currently expects net revenues to be between RMB 520 million to RMB 540 million, which would represent a decrease of 5.1% to 8.6% year-over-year.

The above outlook is based on the current market conditions and reflects the company management's current and preliminary estimates of market, operating conditions and customer demand, which are all subject to change.

With that, I would like to open up the call to questions.

Operator, please.

(Operator Instructions) The first question today comes from Alex Xie of Crédit Suisse.

So my observation is that in Q3 compared with Q2, we have Q-on-Q growth in terms of gross billings and new student enrollments.

But at the same time, our net loss also increased Q-on-Q.

So would management share your thoughts on what would be your priority in the future still to boost gross billings growth or to continue to narrow the loss?

Thank you for the question.

Yes, like you mentioned, the gross billings for third quarter, we see an increase compared to the second quarter.

And also, the loss is bigger than quarter end.

That's primarily due to the additional spending on the sales and marketing expenses.

As you may know, the -- most of the sales and marketing expenses are recorded at once right after the gross billing.

But most of the gross billings will be deferred and to be recognized as revenue in the future periods.

So that's the reason why the loss for third quarter is bigger than the loss for second quarter.

But as we mentioned during the call, we -- the company for the past few quarters, we continue to trial different ways to control our costs, control the general and administrative expenses, control the sales and marketing expenses and we have seen some results from our actions.

So in the future, I think our #1 priority is still to gain more market share to -- that's our #1 goal.

But at the same time, we believe we can -- yes, we can still control our costs and all the expenses and continue to narrow our loss.

(Operator Instructions) Showing no further questions, this will conclude our question-and-answer session.

At this time, I'd like to turn the conference back over to Yingying Liu, Investor Relations Director, for any closing remarks.

Thank you.

And once again, thank you, everyone, for joining today's call.

We look forward to speaking with you again.

Good day, and good night.

This concludes the earnings conference call.

You may now disconnect your lines.

Thank you.