Sunlands Technology Group (STG) Q1 2026 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to Sunland's first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host today, Yu Hua, Sunland's IR representative. Please go ahead.

Hello, everyone, and thank you for joining Sandland's first quarter 2026 earnings conference call. The company's financial and operating results were issued in our press release via news for our services earlier today and are posted online. You could download the earnings press release and sign up for our distribution list by visiting our IR website at ir.sandland.com. Participants on today's call will be our CEO, Mr. Chungbo Liu, and our financial director, Mr. Hong-Yu Lee. Management will begin with prepared remarks followed by our question and answer session. Before I hand it over to the management, I'd like to remind you of Sunland's safe heart birth statement in relation to today's call. Except for the historical information contained herein, certain of the methods 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.

OK, thank you, Hua. Hello, everyone. We will come to Sunland's first quarter 2026 earnings conference call. Prior to commencing, I would like to kindly remind all attendees that the financial information referenced in this release is presented on a continuing operation basis. And all fingers are denominated in RMB unless explicitly specified otherwise. We opened in 2026 with the general of RMB 414.7 million and the net income of RMB 176.8 million, marking our 20 consecutive profit for a quarter. Net income margin reached 17.4 percent, selling expenses declined 19.5 percent year-over-year, representing the largest single-quarter reduction we have recorded in recent years, and the third consecutive quarter of year-over-year decline. At the same time, R&D expenses rose 5.6% year-over-year, reflecting of continued investment in technology capacity, capability enhancement. The 9.6% year-over-year revenue decline reflected the two concurrent dynamics. Continued structural softness in degree and deployment-oriented programs and of ongoing recalibration of customer acquisition standards towards higher quality learner cohorts. While these factors place pressure on the top line, our profitability reflects the progress we have made in cost-structure optimization. operation, operating discipline, and technology enabled efficiency. Let me now turn to the performance of our major course categories. Degree and diploma oriented post-secondary programs contributed 17.9% of their revenues in the first quarter of 2026. We continue to manage this segment in line with genuine learner demand while allocating resources with discipline. Interest-based programs, professional skills, and the professional certification preparation together contributed 67.9% of land revenues and the remains important areas of focus as we continue to diversify our revenue mix. Within this border category, senior interest-based learning remains one of the areas where we continue to see meaningful long-term opportunities. This quarter, we further deepened our catalog within the arts and in new courses such as colored pencil and folk music in response to express learner demand. We are also exploring adjunct content directions through early-stage pilots, including language learning where we have initial learner interest. Beyond course content, we continue to extend the learning experience into more tangible scenarios. We launched a study tool designed around our existing course content so that a learner who has spent a year studying Chinese painting with us can take a natural next step by visiting their landscapes, artists, and museums connected to that tradition. This This allows us to deepen the learning journey and reinforce the investment learners have already made, rather than asking them to start from there though in an unrelated program. We also continue to partner with art galleries and cultural institutions to bring our learners into physical spaces where their coursework comes alive. Through curated visits, online categorizing and painting, students can see masterwork up close. Meet practitioners and gain a clearer sense of where sustained practice can take them. A new learning back has been constructive and generally positive, and we believe this type of learning reinforcement is an effective level for improving both competition and then repurchase. These initiatives remain at an early stage with initial synchronous warranty, continued operation and refinement. We are not simply building a course catalog but gradually extending the learning experience into a more integrated and continuous journey for the new learners. Repurchase behavior within our core cohorts continues to provide encouraging indications that for the increasing share of learners, this involving experience is gained resonance. The most consequential operating development this quarter relates to the continual the maturation of our AI capability, which we believe may have meaningful implications for long-term operating efficiency. A year ago, we described AI primarily as a productivity tool, as adoption has formed a course in the business, that framing has continued to evolve. involved. In our customer acquisition workflow, our internally developed AI assistant assistant has increasingly played a decision-supported role. It helps surface signals in live perspective interactions, including sentiment, hesitation, and decision friction, and provides tailored conversational guidance based on each agent's communication style and the conversational content. In parallel, our intelligent voice system has shortened the time to first contact the window for new leads, a factor that has historically been associated with conversion efficiency. It has also enabled our human teams to focus more on high-value interactions that requires judgment and accuracy, which remain critical to enrollment outcomes. Looking ahead, we expect AI driving capabilities to continue to be embedded more broadly across both acquisition and service workflows, supporting ongoing improvements in operating efficiency. Besides, we're also exploring how the capabilities can be extended into broader parts of the learner lifecycle to further improve overall service efficiency and experience. To close, this quarter reflects disciplined execution against the priorities we outlined at the start of the year. Revenue mix continues to involve profitability and supported by operating discipline and our knowledge capabilities continue to deepen. We believe the investments we are making today are strengthening the foundation for sustainable long-term development. As the initial initiatives continue to mature, we remain focused on disciplined execution and the prudent resource allocation. That concludes Tongbo's prepared remarks. I will now turn the call over to our finance director, Hang Yu.

Thank you, Tongbo. Hello everyone. I'm pleased to share our final results for the first quarter of 2026. This quarter, our numbers demonstrate the rewards of our strategic persistence. As Tungpo discussed, we have deliberately prioritized revenue quality and the learner cohort health over low top-line scale. This disciplined execution has translated integrated into a linear cost structure, healthy margins, and a resilient balance sheet. Our focus on precision has led to a significant milestone in cost management, with selling expenses declining by 19.5% year-over-year. This marks the largest single quarter reduction we have recorded in recent years, and our third consecutive quarter of year-over-year decline. While we prudently managed overhead, we continued to expand our technological edge. Our product development expenses rose by 5.6% year-over-year, reflecting our commitment to embedding AI deep into our operations. This scaling of our AI capability is already serving as a primary operational catalyst to enhance delivery, automate engagement, and offset structural costs. These strategic trade-offs have directly enforced our profit quality and bottom-line resilience. Despite 9.6% year-over-year decline in net revenues, our profitability remained strong. We maintained a solid growth margin of 86.5%, while our net income margin expanded to 17.4%. Securing this execution is our resilient balance sheet position. Our robust liquidity profile provides us with the strategic flexibility required to fully absorb microeconomic variations while aggressively compounding capital into priority growth initiatives. Now let me work through some of our key financial results for the fourth quarter of 2026. All comparisons are year-over-year, and all figures are in RMB, unless otherwise noted. In the fourth quarter of 2026, net revenues decreased by 9.6% to $440.7 million from $487.6 million in the fourth quarter of 2025. Cost of revenues decreased by 17.7% to $59.5 million from $72.3 million in the first quarter of 2025, mainly due to a decline in costs related to learning materials, books, and service fees paid to educational institutions. Growth profit was 381.1 million, compared to 415.3 million in the first quarter of 2025. Growth profit margin expanded to 86.5%, up from 85.2% in the prior year period. Total operating expenses were $284.3 million, a 16.7% decrease from $341.1 million in the first quarter of 2025. Sales and marketing expenses decreased by 19.5% to $241.9 million from $300.4 million in the first quarter of 2025, primarily due to optimized compensation for sales personnel and more targeted branding and marketing activities. General and administrative expenses increased by 4.1 to $35.9 million from $34.5 million in the first quarter of 2025. Product development expenses rose by 5.6% to $6.6 million from $6.2 million in the first quarter of 2025. Net income for the first quarter of 2026 reached $76.9 million and got to $75.2 million in the first quarter of 2025. Basic and diluted night income per share was 11.48 in the first quarter of 2026. As of March 21, 2026, the company held 547.2 million of cash, cash equivalents and restricted cash, alongside $236 million of short-term investments, compared to $576.8 million of cash and cash equivalents, and $235.9 million of short-term investments as of December 31, As of March 31, 2026, the company maintained a deferred revenue balance of $500.5 million compared to $585.3 million as of December 31, 2025. Turning to our outlook, for the second quarter of 2026, we expect net revenues to be between 410 million to 430 million, representing a decrease of 20.2% to 23.9% year-over-year. This outlook is based on our current market dynamics and reflects our preliminary assessment of micro-conditions under learner demand patterns, which remain subject to substantial uncertainty. This includes our prepared remarks. We'll now open the call for questions. Peter, please go ahead.

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. For the benefit of all participants on today's call, if you wish to ask your question in Chinese, please immediately repeat your question in English.

As a reminder, to ask a question, please press star 11 on your telephone.

At this time, we are showing no further questions, so I will conclude our Q&A session and I will now turn the conference back to Yu Hua 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 today's conference call. Thank you for participating. You might now disconnect.