Sunlands Technology Group Q2 FY2023 Earnings Call

Hello, everyone, and thank you for joining Sunlands' Second Quarter 2023 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 financial representative, Mr. Hangyu Li. I will first read the prepared remarks on behalf of Tongbo and then Hangyu will discuss the financials in more detail. Following the prepared remarks, Tongbo and Hangyu will be available for the Q&A session. Before we begin, 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 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 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 read Tongbo's prepared remarks on his behalf.

Hello, everyone. Welcome to Sunlands' Second Quarter 2023 Conference Call. Before we begin, I would like to remind all attendees that the financial information mentioned here is based on continuing operations and all figures are in RMB unless stated otherwise. In Q2, our business demonstrated strong resilience and steady performance. Our net revenue for the second quarter has seen a minor decline compared to the previous quarter, yet it surpassed the upper limit of our guidance, reaching RMB526.4 million. Net income has increased year-over-year to RMB173.9 million in Q2, marking our ninth consecutive quarter of profitability. We maintain a positive outlook for the second half of the year. Through a proactive reassessment of our long-term strategy and various initiatives, our ongoing development of valuable interest courses has shown significant results. Specifically, revenue from professional certification preparation, professional skills, and interest courses increased by 32.7% year-over-year, along with a 36.8% rise in new student enrollments in this area. The strong market demand has bolstered our confidence, and we are dedicated to seizing new opportunities, fostering innovation, and meeting the diverse needs of adult learners to achieve sustainable growth. Now, let’s discuss the performance of our major course programs. We have been consistently optimizing our gross billing structure, resulting in revenue from post-secondary programs now accounting for less than 30% of our total revenue. We are pleased with this structural change and are committed to continued optimization in line with our strategic goals. The sector encompassing professional certification preparation, professional skills, and interest courses remains our primary focus and has shown impressive year-over-year revenue growth of 32.7%. We are also happy to report that revenue from this sector is increasing, now making up 64.6% of our total revenue. Our interest-based programs, in particular, have consistently delivered strong results, driving an impressive 70% year-over-year revenue growth in this sector. This success can be attributed to our keen market insights and our readiness to take strategic risks. In today's context, many adults face various pressures and seek flexible workplaces and enjoyable activities. Pursuing personal interests through learning has become a valuable way to mitigate stress. According to the 2023 Baidu adult education industry white paper, there has been a significant rise in demand for adult interest-driven courses, as reflected by a 38% increase in search volume. Our operational-level insights align with this trend. Adult education is no longer limited to rigid professional needs but is increasingly driven by personal interests, allowing us to connect with a broader clientele and build a strong foundation for future business. Our course development is guided by a structured standard operating procedure. We start by identifying relevant topics based on market analysis, then offer high-quality content tailored to learner needs. Before large-scale launches, we conduct small trials to evaluate content quality and delivery. For example, our Chinese traditional painting course, developed in 2021, has seen an impressive 86% year-over-year revenue increase, benefiting from an understanding of post-COVID market trends. This course in classical Chinese art education has captured significant interest. With an engaged participant base, it attracts individuals passionate about traditional painting and wanting to enhance their aesthetic appreciation. We will continue to broaden our interest-based education efforts, leading to high repeat purchases and operational efficiency, which positively impact our financial performance. We remain committed to leveraging learner insights to strategically promote related courses, enabling participants to explore diverse subjects. In conclusion, with our extensive experience and recognition in this field over the past decade, we are well-positioned to quickly and efficiently capture a larger market share. As we progress, we will adapt our educational offerings to meet changing learner demands and reinforce our leadership in adult education. Thank you for being here today and for your ongoing support. We look forward to your engagement.

This concludes Tongbo's prepared remarks. With that, I will turn the call over to our financial controller, Hangyu, to run through our financials.

Thank you, Yuhua. Hello, everyone. I'd like to turn to our second quarter results, which was in line with projections and showed our ongoing efforts toward sustainable growth. It was also an excellent quarter in terms of financial performance. Our gross profit margin reached 88.7%, an increase of 5.1 percentage points compared with the same period last year. The operating expenses decreased to RMB40.1 million or 11.4% year-over-year. Our net income margin increased by 12.4 percentage points compared to the same period last year. Looking ahead, we'll keep our commitment to delivering value to our stakeholders and maintaining a competitive edge in the industry. Going forward, we are optimistic about long-term growth. Our initiatives involve expanding the range of online courses, improving operational efficiency, and providing outstanding services to our valued students. These strategic measures will enable us to better seize emerging opportunities and enhance our competitiveness within the industry. Now let me walk you through some of our key financial results for the second quarter of 2023. All comparisons are year-over-year and all numbers are in RMB unless otherwise noted. In the second quarter of 2023, net revenues were RMB526.4 million, a decrease of 5.2% year-over-year. Cost of revenue decreased 34.8% to RMB59.5 million in the second quarter of 2023 from RMB91.2 million in the second quarter of 2022. The decrease was primarily driven by lower compensation expenses attributed to headcount reduction of teachers and mentors. Gross profit increased 0.7% to RMB466.9 million from RMB463.8 million in the second quarter of 2022. In the second quarter of 2023, operating expenses were RMB311 million, representing an 11.4% decrease from RMB351.2 million in the second quarter of 2022. Sales and marketing expenses decreased 7.9% to RMB270 million in the second quarter of 2023 from RMB293 million in the second quarter of 2022. The decrease was mainly due to lower compensation expenses attributed to headcount reduction of sales and marketing personnel. General and administrative expenses decreased by 29.1% to RMB33.1 million in the second quarter of 2023 from RMB46.6 million in the second quarter of 2022. Product development expenses decreased by 31% to RMB8 million in the second quarter of 2023 from RMB11.6 million in the second quarter of 2022. The decrease was mainly due to the lower compensation expenses attributed to headcount reduction of product development personnel. Net income for the second quarter of 2023 was RMB173.9 million compared with net income of RMB114.6 million in the second quarter of 2022. Basic and diluted net income per share was RMB25.12 in the second quarter of 2023. As of June 30, 2023, the company had RMB749.5 million of cash, cash equivalents, and restricted cash and RMB63.2 million of short-term investments. As of June 30, 2023, the company had a deferred revenue balance of RMB1,379.1 million compared with RMB1,690.9 million as of December 31, 2022. Capital expenditures were incurred primarily in connection with IT infrastructure equipment and leasehold improvements necessary to support the company's operations. Capital expenditures were RMB1 million in the second quarter compared with RMB0.3 million in the second quarter of 2022. And now for our outlook. For the third quarter of 2023, Sunlands currently expects net revenues to be between RMB470 million to RMB490 million, which would represent a decrease of 15% to 18.4% year-over-year. This outlook is based on the current market conditions and reflects 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.

Thank you. We're showing no questions. This will conclude our question-and-answer session. I would like to turn the conference back over to Yuhua 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 this conference call. You may now disconnect your lines. Thank you.