Sunlands Technology Group Q1 FY2022 Earnings Call

Thank you for joining us today. Welcome to Sunlands’ First Quarter 2022 Earnings Conference Call. This call is being recorded. I will now hand it over to Yuhua, Sunlands’ Investor Relations Representative. Please proceed.

Hello, everyone, and thank you for joining Sunlands’ first quarter 2022 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. Participants on today’s call will be our CEO, Mr. Tongbo Liu; and our CFO, Selena Lu Lv. Management will begin with prepared remarks and the call will conclude with a Q&A session. Before I hand it over to the management, I would like to remind you of Sunlands' Safe Harbor statement 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 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 2022 conference call. We are affected by the ongoing COVID-19 pandemic and geopolitical conflicts, leading to significant macro-economic uncertainties. In times like these, we believe that focusing on cost-efficient spending and profitability is crucial for navigating through this challenging period. Thus, we have continued to pursue our business goals and profitability strategies in the first quarter. Our strategic efforts have allowed us to maintain momentum in 2022, achieving a first quarter net profit of RMB179.4 million, a remarkable improvement from a net loss of RMB53.3 million in the same period last year, and a 19% increase quarter-over-quarter. Focusing on healthy and sustainable growth, we enhanced our cost management and improved student acquisition efficiency, resulting in a 9.1% reduction in general and administrative expenses year-over-year. We also scaled back our marketing activities, which is reflected in a 51.4% decline in sales and marketing expenses compared to last year. Consequently, there was a year-over-year drop of 19.5% in new student enrollments and 34.2% in gross billings. However, the percentage increase in new student enrollments and gross billings is significantly less than the percentage decrease in marketing spending, which is attributed to our enhanced student acquisition efficiency. Our balanced growth has been supported by a wide array of premium course resources, effectively addressing our students' learning needs. During the first quarter, we continued to progress in a challenging macro environment, optimizing our product mix and expanding our course offerings to include master's degree-oriented and professional skills programs, all while aiming to provide an optimal and efficient learning experience. Given the tough job market, we focused on designing new courses to offer diverse skills training, thereby enhancing our students' competitiveness and employment opportunities. As we assess our major course programs, the job market is rapidly changing amidst ongoing digital transformation and macro-economic shifts. Individuals are increasingly looking to upskill to remain competitive, while our platform is being utilized across various demographics to enhance lives through online skill or hobby courses. As we move forward, we are attracting students from diverse age groups, supported by our adaptable online learning platform and a range of course content that caters to both career credentials and general interests. This has led to a 1% year-over-year growth and a 20.9% quarter-over-quarter increase in new student enrollments for our professional certification skills programs, even with reduced marketing efforts. Gross billings for this sector also saw a 6.7% year-over-year rise. We anticipate continued positive momentum in this area due to our varied course offerings and learners' interest in new challenges. We will persist in updating our course content and providing tailored courses for different groups. In regard to our master's degree-oriented programs, we have encountered heightened competition as more players enter the market, particularly following new regulations in China that restrict after-school tutoring for younger students. Consequently, both new student enrollments and gross billings in this segment have declined. Despite this short-term setback, we are confident that our effective profitability strategy, skilled teaching staff, and improved services will enable us to achieve long-term growth in this area. The market for master's entrance exam preparation courses is substantial, valued at RMB6.1 billion in 2021, with continued growth expected. In conclusion, we believe that the quality and pricing of our courses, our effective teaching system, and our experienced team will drive our future growth. We are committed to empowering our students, who face changing challenges, by continuously enhancing our offerings to meet their needs, which we believe will support our long-term objectives while contributing to China's economic development amidst macro challenges. Now, I will hand the call over to our CFO, Selena, to discuss our financials.

Thank you, Tongbo. Hello, everyone. We are excited to start the year with encouraging first quarter results. Our net revenues reached RMB613.3 million during the quarter, above the top end of our guidance range, despite an 11.7% year-over-year decrease. As we remain unwavering regarding sustainable growth instead of the blind pursuit of scale expansion to meet the existing complex macro-economic environment. Meanwhile, we continue to manage our costs responsibly, thanks to which our operating expenses in the first quarter declined by 48.1% year-over-year. As a result, we reported our profitability in this quarter, with the net profit margin reaching 29.3%, representing a substantial 37 percentage points increase year-over-year. Notably, we also maintained positive operating cash flow in the first quarter at RMB10.1 million. We are confident that our improved operational efficiency and profitability combined with our unremitting efforts to diversify course offerings, and enhance service quality will drive our future growth, while creating additional value for our students, employees, and shareholders. Now, let me walk you through some of our key financial results for the first quarter of 2022. All comparisons are year-over-year and all numbers are in RMB, unless otherwise noted. In the first quarter of 2022, net revenues were RMB613.3 million, a decrease of 11.7% year-over-year. Cost of revenues decreased by 9.1% to RMB96.7 million in the first quarter of 2022 from RMB106.4 million in the first quarter of 2021. The decrease was primarily due to declined compensation expenses related to our cost of revenues personnel and reduced insurance-related costs incurred for our integrated online education service package purchased by students. Gross profits decreased by 12.1% to RMB516.6 million from RMB587.9 million in the first quarter of 2021. In the first quarter of 2022, operating expenses were RMB345.8 million, representing a 48.1% decrease from RMB666.6 million in the first quarter of 2021. Sales and marketing expenses decreased by 51.4% to RMB295 million in the first quarter of 2022 from RMB606.4 million in the first quarter of 2021. The decrease was mainly due to lower spending on branding and marketing activities and declined compensation expenses related to our sales and marketing personnel. General and administrative expenses decreased by 9.1% to RMB38.5 million in the first quarter of 2022 from RMB42.3 million in the first quarter of 2021. The decrease was mainly due to a decrease in rental expenses and declined compensation expenses related to general and administrative personnel. Product development expenses decreased by 31.0% to RMB12.4 million in the first quarter of 2022 from RMB17.9 million in the first quarter of 2021. Product development expenses were mainly comprised of compensation expenses. Other income decreased by 54.9% to RMB9.6 million in the first quarter of 2022 from RMB21.3 million in the first quarter of 2021. The decrease was primarily because value-added tax exemption offered by the relevant authorities as part of the national COVID-19 relief effort came to an end in April 2021. Net income for the first quarter of 2022 was RMB179.4 million, compared with a net loss of RMB53.3 million in the first quarter of 2021. Basic and diluted net income per share was RMB27.16 in the first quarter of 2022. As of March 31, 2022, the Company had RMB637.7 million of cash and cash equivalents and RMB219.9 million of short-term investments. As of March 31, 2022, the Company had a deferred revenue balance of RMB2,170.9 million compared with RMB2,348.2 million as of December 31, 2021. Capital expenditures were incurred primarily in connection with IT infrastructure equipment and leasehold improvements necessary to support the Company's operations. Capital expenditures were RMB0.9 million in the first quarter compared with RMB1.7 million in the first quarter of 2021. And now for our outlook. For the second quarter of 2022, Sunlands currently expects net revenues to be between RMB520 million to RMB540 million, which would represent a decrease of 14.2% to 17.4% 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 would like to open up the call to the questions.

Q - A -

Again, thank you everyone for joining this 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 lines. Thank you, and have a wonderful day.