Sunlands Technology Group (STG) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) Today's conference call is being recorded. (Operator Instructions)

I would now like to turn the conference over to your host today, [Yuhua Ye], Sunlands IR representative. Please go ahead.

Hello, everyone, and thank you for joining Sunlands' Fourth Quarter and Full Year 2020 Earnings Conference Call. The company's financial and operating results were issued in our press release via Newswire services earlier today and are posted online. You can download the earnings press release and sign up for our distribution list by visiting our IR website.

On the call, our CEO, Tongbo Liu, will provide an update on our operational performance as well as our strategic initiatives. Our CFO, Selena Lu Lu Selena Lu Lu, will give you an overview of our financial performance and also provide our guidance for the first quarter of 2021. Following their 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 trends, 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 statement. 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, [Yuhua]. Hello, everyone. Welcome to Sunlands' First Quarter and Full Year 2020 Conference Call. While first with the year of both unusual challenges and changes, we concluded 2020 with steady and solid growth in the fourth quarter. We continued our strategic focus on developing diverse product offerings, improving student acquisition efficiency and enhancing curriculum effectiveness and pursued the opportunities in the market as overall demand growth for higher education and professional skills programs.

In the fourth quarter, our net revenues reached RMB 584.6 million, growing 6.3% compared to the same period of 2019, thanks to enhanced operational efficiency and expanded across categories. Our new student enrollment increased remarkably by 51.8% year-over-year to over 140,000 in the fourth quarter. The driving force behind this steady student growth was our further expansion of course portfolios spanning all over the categories based on the solid foundation of our degree-oriented programs. Our exploration of diverse avenues for user acquisition as well as enhanced operating efficiency and service quality also contributed to the strong growth.

Our master's degree-oriented programs continue to yield robust results in 2020. With the COVID-19 pandemic impacting industries and creating heavy uncertainty in the job market, there has been an increasing recognition of the importance of post-graduate education. The national post-graduate entrance exams for the 2021 concluded in December, with registered applicants reaching a record high of almost 3.8 million, and we are well prepared to handle the growing volume and demand.

As the competition intensifies and admission rates continue to decline, we are seeing more applicants waiting to pay for preparation courses. In fact, our master's degree-oriented programs showed strong growth momentum in 2020, with RMB 32.9 million in gross billings, increasing 49.5% compared with 2019. The solid performance was the result of our high-quality and tailored courses that helped capture the increasing number of applicants for post-graduate studies who are mostly the working professionals. We are also developing more undergraduate-oriented programs to meet the changing demands of (inaudible). We offer rich opportunities and various options for people wanting to pursue their undergraduate education later in life. For example, we are ending preparation courses targeting entrance exam for (inaudible) universities and the Open University of China in addition to our STE programs, which will further diversify our income sources and consolidate our market position.

The online education has become more accessible and widely accepted in China. And the Chinese government has been supportive and vocational -- supportive of vocational and continuing education. We believe the demand for quality online post-secondary courses will continue to grow, and we are well positioned to seize growth opportunities as we roll out diversified curriculum mix meeting various demand.

In the fourth quarter, we witnessed robust growth as we further developed more professional certification and skill courses. New enrollments in the fourth quarter increased more than 6x year-over-year, primarily due to the increase in professional skills and general interest courses, catering to growing demand for diverse personal education as well as the low base last year. We developed more general courses helping users to cultivate soft skills, interests and hobbies as we saw a surge in interest for these courses online, especially during the COVID pandemic.

Courses [offered] and expansion of course portfolio have paved the way for promising further growth as we continue to release new courses and programs to satisfy the market demand. With our course portfolio solid foundation, we can effectively scale up our user base for both existing and new programs to similar fields.

In pursuit of boosting operating efficiency and enhancing curriculum effectiveness, our team further improved our user acquisition and service quality. This enables us to take advantage of rising opportunities in professional certification and skills education.

We further improved our sales efficiency to serve our enlarged product portfolios, and we saw a notable increase in the efficiency of our workforce. With rising traffic acquisition costs, we also expanded our sales channel through B2B training service working. We're working with corporations and institutions, which began to bear fruit. We are confident that the integration of various channels targeting individual users and corporate customers will further increase our market penetration and the user base as well as optimize our user acquisition cost.

With our commitment to offering high-quality online education, we have established procedures to both procure and train first grade teachers. We have also improved their services to encourage active and participatory learning, which is especially available for (inaudible) students. In 2020, the number of class participants increased 29.3% year-over-year. In the STE exam held in October '20, we maintained a high level pass rate of above 60%, which further cemented our market leadership.

In the fourth quarter, we held our annual teaching contest to motivate teaching improvement. The focus on teaching quality creates a virtuous circle of academic success, user referrals, user acquisition and then sustainable growth. In order to assist our experienced teachers and motivate our students further, we applied cutting-edge AI technology into our teaching policies. Our AI system is able to predict students' exam scores based on their practice performance, with an accuracy rate as high as 80%. It can then offer suggestion to help students adjust their study plans accordingly. We also employed our AI technology to analyze and predict the most frequently test questions using our vast historical examination database and Big Data analysis capability.

In the fourth quarter, we further expanded our exercise database and encouraged the number of exam questions to 825,000, representing year-over-year growth of 18.8%.

Heading further into 2021, we will maintain agility and adaptability as we remain committed to enhancing the development and the rollout of top notch and diversified products and services for -- and of continued education and skill training. We are also keeping a close eye on improving our operating efficiency as well as expanding and boosting sales channels.

With that, I will turn the call over to our CFO, Selena, to run through our financials.

Thank you, Tongbo. Hello, everyone. In the fourth quarter, we deepened our strategy to balance business growth and profitability in a challenging environment. Our net revenues continue to grow at a healthy rate, exceeding the high end of our guidance by 4.4%. As we further improved operating efficiency and optimized the costs, our general and administrative expenses in the fourth quarter declined 44.6% year-over-year, which contributed to the significant narrowing of our net loss to RMB 73.5 million from RMB 139.5 million in the fourth quarter of 2019. Our net loss margin decreased considerably to 12.6% from 25.4% in the fourth quarter of 2019.

Going forward, we will continue to refine our operation and sales execution as we strive for robust and sustainable long-term growth in order to consistently create value for our students and shareholders, as well as the broader society.

Now let me walk you through some of the key financial results for the fourth quarter of 2020. All comparisons are year-over-year and all numbers are in RMB unless otherwise noted. In the fourth quarter, net revenue was RMB 584.6 million, an increase of 6.3% year-over-year. Cost of revenue decreased by 3.6% to RMB 97.8 million in the fourth quarter from RMB 101.5 million in the fourth quarter of 2019. The decrease was primarily due to reduced insurance-related costs incurred for our integrated online education service package purchased by students.

Gross profit increased by 8.6% to RMB 486.7 million from RMB 448.2 million in the fourth quarter of 2019. In the fourth quarter, operating expenses were RMB 673.7 million, representing a 12.5% increase from RMB 599 million in the fourth quarter of 2019. Sales and marketing expenses increased by 27.8% to RMB 608.5 million in the fourth quarter from RMB 476.1 million in the fourth quarter of 2019. The increase was mainly due to increases in: number one, compensation expenses related to our sales and marketing personnel; and number two, spending on branding and marketing activities, including more marketing promotion activities to diversify student acquisition channels.

General and administrative expenses was RMB 54.7 million in the fourth quarter of 2020, decreased by 44.6% year-over-year, mainly due to the decrease in compensation expenses. Product development expenses decreased by 56.4% to RMB 10.6 million in the fourth quarter from RMB 24.3 million in the fourth quarter of 2019. The decrease was primarily due to a decrease in the compensation expenses incurred related to our product and technology development personnel during the quarter.

Other income increased to RMB 109.4 million in the fourth quarter from RMB 6.9 million in the fourth quarter of 2019. The increase was primarily due to the value-added tax exemption of RMB 77.5 million, offered by the relevant authorities as part of the national COVID-19 relief efforts. Net loss for the fourth quarter was RMB 73.5 million compared with RMB 179.5 million in the fourth quarter of 2019. Basic and diluted net loss per share was 10.87% in the fourth quarter of 2020.

As of December 31, 2020, the company has RMB 760.7 million of cash and cash equivalents and RMB 517.8 million of short-term investments. As of December 31, 2020, the company had a deferred revenue balance of RMB 3,024.4 million compared with RMB 3,228.8 million as of December 31, 2019. Capital expenditures were incurred primarily in connection with IT infrastructure equipment and the leasehold improvement necessary to support the company's operations. Capital expenditures were RMB 4.7 million in the fourth quarter compared with RMB 10.4 million in the fourth quarter of 2019. For more of our 2020 full year financial results, please refer to our earnings press release for further details.

And now for our outlook. For the first quarter of 2021, Sunlands currently expects net revenue to be between RMB 670 million to RMB 690 million, which would represent an increase of 18.6% and 22.1% year-over-year. This outlook is based on the current market conditions and reflects the company's management's current and preliminary estimates of market, operating conditions and customer demand, which are all subject to change.

With that, I'd like to open up the call to the questions. Operator?

(Operator Instructions) Showing no questions, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to [Yuhua Ye], IR representative for any closing remarks.

Once again, thank you, everyone, for joining today's call. We look forward to speaking with you again soon. Good day and good night.

This concludes the earnings conference call. You may now disconnect your line. Thank you.