Sunlands Technology Group Q2 FY2020 Earnings Call

Hello, everyone and thank you for joining Sunlands second 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 will give you an overview of our financial performance and also provide our guidance for the second 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 contained herein, certain 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 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, Yufei. Hello, everyone. Welcome to Sunlands second quarter 2020 conference call. While the COVID-19 pandemic in China was effectively contained during the second quarter due to the varying work resumption requirements in different regions, the average resumption rate of our Wuhan campus and at the headquarters in Beijing was about 80%. Against this backdrop, we are pleased with maintaining steady growth in the second quarter, thanks to our self-developed collaborative online office system, efficient operation management and rigorous execution. We achieved satisfactory financial results for this quarter. Our net revenues reached RMB 512.5 million, in line with our guidance. Additionally, we are proud to say that our more than 8,000 employees in four cities are all safe and sound. Our gross billings achieved year-over-year growth for the first time in five quarters, increasing by 21.3% to RMB 531.5 million compared with the prior year period. In addition, new student enrollments increased by 10.2% year-over-year. The increases were mainly driven by our strategy to diversify product and service offerings, continuous expansion in training course categories, improved efficiency of our sales team, as well as tremendous efforts from all of our employees. Next, let me provide highlights for the period's segment level. Our business mainly focuses on three categories: STE, master's degree-oriented programs and professional certification skills programs. Our STE programs have maintained a solid market position and market share. And master's degree-oriented programs have become our strong new growth driver. According to the Ministry of Education, the number of applicants for postgraduate programs is expected to reach a record high of 3.41 million, representing an increase of 510,000 or 17.6% year-over-year from 2.9 million in 2019. In response to the strong growth of applicants, the Ministry of Education made an announcement in February to expand the number of admissions in 2020 by 189,000 from last year's level. The ever-expanding number of people taking the postgraduate admission test comes from the rising pressure of employment in China and the increasing demand for talents with higher education for enterprises. According to China education online, former students, most of the working professionals accounted for 45% of those taking the postgraduate admission test in 2018, leveraging our skills and operating experience and the service advantage for this group of people. We're focused on providing the postgraduate admission test preparation for working professionals and have achieved remarkable results. Our master's degree-oriented programs have grown year-over-year for eight consecutive quarters. Gross billings of master's degree-oriented programs for this quarter reached a new high of RMB 135.2 million, up 58.7% year-over-year, and accounting for 25.4% of total gross billings. This proportion was significantly higher than 2019 and 2018, during which master's degree-oriented programs accounted for only 17.9% and 5.5% of gross billings, respectively. At the same time, based on student demand and the new market trends, Sunlands is also actively expanding our course offerings in multiple categories, including professional certifications and trainings related to new occupations as well as new skills and hobbies training catering to diverse interests. The segment reached RMB 59.5 million in gross billings this quarter, increasing by 38.4% year-over-year, accounting for 11.2% of total compared with 6.9% in 2019. We expect continued robust growth for this segment as its average selling price is relatively low at approximately RMB 3,000. We are in the process of adding more courses to enhance our new and existing students' experience on our live streaming, live teaching platform. We are pleased to say that as this new category of courses is much shorter than degree courses, students are more engaged and have a higher repurchase rate, which we expect to contribute positively to our profitability improvement. In the future, we will continue to take advantage of STG platform and our teachers' teaching experience, constantly developing more online short-term courses suitable for adults in order to expand our attractive user base and promote course settings. Lastly, due to the performance of the national STE exams for April to August, gross billings of STE programs, our largest segment, also increased by 6.8% year-over-year in the second quarter, as both new student enrollments and average selling price increased. In the second quarter, our students, including those taking trial and free classes, showed greater enthusiasm to study during the pandemic period, as we continuously optimize our student-teacher system. This system refers to our comprehensive solution that combines live streaming lectures, after-class mentors, and AI-powered personal tutors. In this quarter, total time spent on online classes on our learning platform was 22.3 million hours, increasing by 16.4% year-over-year and 25% quarter-over-quarter. The total number of online class attendees rose to 758,000, with the average time spent this quarter for a student at almost 30 hours. Notably, out of the total time spent on live streaming classes during this quarter, 35.5 million hours, or about 24.5%, was driven by students spending time on free trials or free courses, including various new courses and mini-tutorials. This was 8 times higher compared to the level in the same period last year and significantly higher versus last quarter. Additionally, trial class students accounted for 27% of total students attending classes this quarter. Through this trial program, we enable prospective students to experience our course content and teaching services in advance, which not only improves the retention rate of new students and expands our potential user pool, but also helps us develop a deeper understanding of student interest and realize additional cost-saving potential. Looking forward, we are confident in maintaining the market-leading position of our existing service categories and continuously improving the learning effectiveness of our students through technical and operational advancement. We're also optimistic about the market opportunities and the possibilities of course settings as we develop new content and execute our efficient student acquisition strategy. 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. During the second quarter, our net revenues declined by 7.3% year-over-year due to the decrease in gross billings last year. However, we are pleased that even against the backdrop of the pandemic and a severe macroeconomic environment, our gross billings achieved more than 20% year-over-year growth, reaching an important inflection point and giving us confidence in this continuous growth in the future. We also noticed a greater change in the product mix of our gross billings. The proportions of master's degree-oriented programs and the professional certification and skills programs within our total gross billings both further increased. The service periods of these two categories are much shorter compared with our STE offerings. Their increase in proportions will accelerate our revenue recognition and reduce the time gap due to the mismatch between revenue recognition over time and expenses booked upfront. On the expense side, we continued our pursuit of cost structure optimization, achieving 33.9% and 33.6% reductions in administrative expenses and R&D expenses, respectively, compared with the same period last year. Going forward, our focus remains on the diversification of our online courses and the improvement of our technology and operational capabilities. More product offerings translate to a bigger addressable market for us, and higher costs to leverage as well as increasing repurchasing potential from our students. Whereas technological and operational improvements provide our students with better experiences, which will further strengthen our brand image and reputation and ultimately improve our referral rate. We're also continuing to diversify our student acquisition strategy and upgrade our conversion model, all in an effort to further improve our sales conversion rate and efficiency and drive sustainable long-term growth. Now, let me walk you through some of the key financial results for the second quarter of 2020. All comparisons are year-over-year and all numbers are in RMB. In the second quarter of 2020, net revenues were RMB 512.5 million, decreased by 7.3% year-over-year, mainly due to the decrease in gross billings last year. Cost of revenues increased by 4.1% to RMB 99.6 million in the second quarter of 2020, from RMB 95.7 million in the second quarter of 2019, which was primarily due to an increase in expenses related to service fees to educational institutions. Gross profit decreased by 9.7% to RMB 412.9 million from RMB 457 million in the second quarter of 2019. In the second quarter of 2020, operating expenses were RMB 560 million, representing a 12.3% increase from RMB 498.7 million in the second quarter of 2019. Sales and marketing expenses increased by 25.2% to RMB 487.9 million in the second quarter of 2020, from RMB 389.7 million in the second quarter of 2019. The increase was mainly due to increases in: number one, compensation paid to our sales and marketing personnel; and number two, spending on branding and marketing activities, including investments in broadening our diversified student acquisition channels. General and administrative expenses were RMB 56.1 million in the second quarter of 2020, decreased by 33.9% year-over-year, mainly due to the decrease in compensation expenses. Product development expenses decreased by 33.6% to RMB 16 million in the second quarter of 2020, from RMB 24 million in the second quarter of 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 17.5 million in the second quarter of 2020, from RMB 9 million in the second quarter of 2019. The increase was primarily due to the value-added tax exemptions offered by the relevant authorities in the amount of RMB 15 million during the COVID-19 outbreak. Net loss for the second quarter of 2020 was RMB 126.1 million, compared with RMB 12.9 million in the second quarter of 2019. Basic and diluted net loss per share was RMB 18.7 in the second quarter of 2020. As of June 30, 2020, the company had RMB 1,079.4 million of cash and cash equivalents and RMB 288.6 million of short-term investments. As of June 30, 2020, the company had a deferred revenue balance of RMB 3,066 million, compared to RMB 3,228.8 million as of December 31, 2019. Capital expenditures were incurred primarily in connection with IT infrastructure equipment and leasehold improvements necessary to support Sunlands' operations. Capital expenditures were RMB 1 million in the second quarter of 2020, compared with RMB 2.2 million in the second quarter of 2019. For the third quarter of 2020, Sunlands currently expects net revenues to be between RMB 500 million and RMB 520 million, which would represent a decrease of 5.2% to 1.4% year-over-year. The robust 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'd like to open up the call to questions.

Thank you. We will now begin the question-and-answer session. 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 management 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.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.