Sunlands Technology Group (STG) 2020 Q3 法說會逐字稿

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

I would now like to turn the call over to our host today, (inaudible) Sunlands' IR representative. Please go ahead.

Hello, everyone, and thank you for joining Sunlands' Third Quarter 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, will give you an overview of our financial performance and also provide our guidance for the third quarter of 2020. 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 statement in relation to today's call. Except for the historical information and 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' Third Quarter 2013 Conference Call. Despite the short-term impact on our operations of the COVID-19 pandemic in the first half 2020, Sunlands delivered steady year-over-year increases in both gross billings and net revenues in the third quarter.

Our results were fueled by a combination of the recovering macroeconomic conditions in China as well as the implementation of our optimization initiatives within our business.

In the third quarter, our gross billings reached RMB 654.3 million increasing by 6.6% year-over-year and 23.1% quarter-over-quarter. We attribute our strong gross billings results largely to improvements we made in sales efficiency with new approaches to students acquisition as well as our enhancing brand awareness and continuous upgrade to our product categories.

Additionally, following the solid performance in the second quarter of 2020, net revenues increased 2.7% year-over-year to RMB 541.6 million, exceeding the top end of our guidance by 4.2%. Moreover, our new enrollments reached over 114,000 in the third quarter, growing 47.8% year-over-year and 17.5% quarter-over-quarter.

During the third quarter, we made further progress to balance our top line growth mix. Proving the efficacy of our long-term strategy in efforts to continually expand our portfolio of educational products and bring content innovation. While maintaining a leading market share in STE programs master's degree-oriented the programs and the professional certification and the skills programs continue to reveal great potential to become the next pillars among the company's offerings.

Let me start with master's degree-oriented the program, which contributed around 31% to gross billings in the third quarter compared with approximately 17% in the same quarter last year. The growth of master's degree-oriented programs in terms of gross billings was phenomenal, registering 93.3% year-over-year and 48.4% quarter-over-quarter. This growth was primarily driven by increasing need from working professionals as uncertain shifts in the labor market remain in the wake of the COVID-19 pandemic. Together with the increasing demand for Thailand with higher educational background.

In light of this, in order to enrich our program portfolio and increased demand for diversified and differentiated higher education. In the third quarter, we further expanded our partnership with overseas universities such as (inaudible) State University to provide joint offering programs.

Take into account our existing partners in the United States, the United Kingdom and Australia, we have now established the joint offerings program with over (inaudible) universities. In line with our balanced growth strategy, this effort is designed to further enhance our attractiveness and competitiveness and the complement of master's degree-oriented offerings.

Due to the current backhaul conditions, in particular, international COVID-related travel restrictions, we are seeing an uptick in demand for those international online focused joint offering programs. And we believe this trend will continue for foreseeable future.

Based on current number of admission applications received for 2021, already announced by most universities in China, we expected the number of applicants for post-graduate entrance exams for 2021 admission to surpass the record of 3.41 million 2020.

Given this trend, also with feedback reports from our sales and marketing department, we have high confidence in the continually favorable demand in this area. With our proven ability to bring compelling offerings to the market that meet students' needs, with the sustainable growth possible in developing our portfolio of master's degree-oriented and joint offering programs. This program also typically carry higher margins than our standard programs or into their (inaudible) especially MBA programs.

To further deployment of our sustainable overall growth of the strategy, we continue to promote the rapidly growing underlined course offerings targeting professional certification, vocational education and popular hobbies.

I'm very pleased that this segment also delivered significant growth in gross billings in third quarter. It generated gross billings of RMB 139.9 million, up 301.9% year-over-year and 135% quarter-over-quarter. In the third quarter, the segment accounted for 21.4% of our total gross billings compared to 5.7% for the third quarter of 2019. The increase in this segment primarily stems from rising requirements from the labor market for workers and candidates equipped with occupational skill sets and professional qualifications to meet higher demanding growth and responsibilities.

With our cost offerings, presenting attractive ASPs and shorter time durations than traditional post (inaudible) options, with the favorable growing demand in this segment in the long run.

Moreover, we believe (inaudible) from the courses are more likely to purchase services from us, again, when changing employment factors require enhanced competitiveness.

In the third quarter, we experienced much greater utilization of our online platform to help students succeed in national STE exams in August and October, as well as post-graduate entrance exams and MBA programs candidates in the fourth quarter.

Our teachers are committed to further improving the quality and the efficiency of our live streaming classes, schedules, courses and tutorial materials with such efforts and the increased enthusiasm in exam preparation. The total class type spend, the number of class participants and the number of courses completed all increased significantly in this quarter, up 39%, 44% and 45%, respectively, year-over-year.

Furthermore, to bring an unparalleled user experience and drive user stickiness, we further integrated our cutting-edge AI technology into all aspects of our online platform, customizing our curriculum offerings and teaching materials to deliver innovative breakthroughs.

Continuing to invest in our (inaudible) and increasing applications of AI technology to improve teaching results and efficiency will always be part of our effort to sustain our long-term growth.

With our (inaudible) into the online education industry has sustained multi-pronged growth [strategy]. We are confident in the continued further enhancement of our brand and diversified products. Looking forward, we aim to drive top line growth by expanding our program categories, increasing the approaches we use to acquire students and by improving our lead conversion efficiency.

At the same time, we will further optimize bottom line performance enabled by cost saving increments and using AI technologies throughout our organizations.

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

Thank you, Tongbo, and hello, everyone. Our third quarter financial results reflects our balance expansion strategy. Net revenues increased by 2.7% year-over-year, exceeding our expectations. This result is attributable to broad-based improvements across our organization. In particular, optimizing our revenue contribution structure.

Other highlights in the quarter include a significant increase in gross billings and a higher proportion of revenues coming from non-STE programs. This accomplishment came from improved efficiency in our student acquisition and commercial methods, recognition of our program diversity and content enrichment.

In terms of cost control management, we pursued a strict spending policy, especially in regards to G&A expenses, which were reduced by 16.7% year-over-year. Looking ahead, we will continue to focus on product and service upgrades by deploying our AI-enabled platform systems and further requirement of our internal operations. We believe these dual-fold effort will bring long-term value to our users and shareholders through a sustainable and balanced approach to growth.

Now let me walk you through some of the key financial results for the third quarter 2020. All comparisons are year-over-year and all numbers are in RMB, unless otherwise noted.

In the third quarter, net revenue were RMB 541.6 million, an increase of 2.7% year-over-year. Cost of revenue decreased by 18.2% to RMB 92.9 million in the third quarter from RMB 113.7 million in the third 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 8.5% to RMB 448.7 million from RMB 413.6 million in the third quarter of 2019. In the third quarter, operating expenses were RMB 664.1 million, representing a 21.4% increase from RMB 546.9 million in the third quarter of 2019.

Sales and marketing expenses increased by 32.7% to RMB 569.4 million in the third quarter from RMB 429.2 million in the third quarter of 2019. The increase was mainly due to increases in: #1, compensation paid to our sales and marketing personnel; and #2, spending on branding and marketing activities, including more marketing promotion activities to diversify student acquisition channels; and #3, share-based compensation expenses recognized in the third quarter of 2020.

General and administrative expenses was RMB 76.1 million in the third quarter of 2020, decreased by 16.7% year-over-year, mainly due to the decrease in compensation expenses. Product development expenses decreased by 29.7% to RMB 18.6 million in the third quarter from RMB 26.4 million in the third quarter 2019. The decrease was primarily due to a decrease in the compensation incurred related to our product and technology development personnel during the quarter.

Other income increased to RMB 47.3 million in the third quarter from RMB 5.1 million in the third quarter of 2019. The increase was primarily due to the value-added tax exemption of RMB 44.1 million offered by the relevant authorities as part of the national COVID-19 relief efforts.

Net loss for the third quarter was RMB 165.8 million compared with RMB 129.8 million in the third quarter of 2019. Basic and diluted net loss per share was RMB 24.62 in the third quarter of 2020.

As of September 30, 2020, the company has RMB 1.1 billion of cash and cash equivalents and RMB 234.4 million of short-term investments. As of September 30, 2020, the company had a deferred revenue balance of RMB 3,090.3 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 a leasehold improvement necessary to support Sunlands' operations. Capital expenditures were RMB 14.3 million in the third quarter compared with RMB 11.8 million in the third quarter of 2019.

And now for our outlook. For the fourth quarter of 2020, Sunlands currently expects net revenue to be between RMB 540 million to RMB 560 million, which would represent a decrease of 1.8% to an increase of 1.9% year-over-year. This outlook is based on the current market conditions and reflects the company's management's current and preliminary estimate 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) At this time, we are showing no questions. So this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to (inaudible) 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 our earnings conference call. You may disconnect your line now. Thank you.