Earnings Call Transcript - STG Q3 2022

Yuhua Ye, IR Representative

Hello, everyone, and thank you for joining Sunlands' third quarter 2020 earnings conference call. The company's financial and operating results were released earlier today and are available online. You can download the earnings press release and sign up for our distribution list by visiting our investor relations website. On today's call, we have our CEO, Mr. Tongbo Liu; our CFO, Selena Lu Lv; and our Financial Controller. Selena will update our operational performance on behalf of our CEO, and then our Financial Controller will provide an overview of our financial performance. Management will start with prepared remarks, and the call will end with a Q&A session. Before I turn it over to management, I want to remind you of Sunlands' safe harbor statement regarding today's call. Aside from historical information, some of the measures discussed are forward-looking statements based on current trends, estimates, and projections, and you should not place undue reliance on them. Forward-looking statements carry inherent risks and uncertainties. Several important factors could lead to actual results differing significantly from those in any forward-looking statements. For more information about these potential risks and uncertainties, please refer to the company's SEC filings.

Selena Lu Lv, CFO

Thank you, Yuhua. Hello, everyone. Welcome to Sunlands' third quarter 2022 conference call. Despite the macroeconomic uncertainty and shifting industry landscape, we delivered encouraging results in the third quarter with sequential top line growth, further bottom line improvement and increased new student enrollment. This achievement testifies to the effectiveness of our strategic initiatives to prioritize profitability and healthy growth. Amid the ongoing pandemics and uncertain macroeconomics, our third quarter net revenues came in at RMB 576.3 million, up by 3.8% quarter-over-quarter despite a 3.3% year-over-year drop. To navigate the macro challenges, we remain laser-focused on cost optimization and profitability rather than blind pursuit of school expansion. We adopted multiple measures to enhance our operational efficiency and streamline our organization during the quarter. Due to our effective expense control measures and improved operational efficiency, we reduced our G&A expenses by 29.6% year-over-year and 4.7% quarter-over-quarter. This cost reduction initiative enables us to deliver on our commitment to creating additional shareholder value with sustained profitability. Our third quarter net income reached RMB 168.1 million, representing an 81.1% year-over-year increase and a 46.7% quarter-over-quarter increase, demonstrating our organization's resilience during tough times like this. With a leaner and more efficient organization, we also further refined our product strategies in the third quarter. We focused more on margin accretive programs and allocated our capital and human resources accordingly to expand our course offerings in those programs, leading to an optimized product lineup and a more diversified cost content. Additionally, we leveraged our solid and convenient online teaching infrastructure and learning resources to further refine our services, which has increased our user stickiness and the core selling opportunities. Given this, we have transformed our student acquisition efforts, focusing more on users' lifetime value instead of investing heavily in marketing activities. As you may have seen in our earnings release published earlier today, our sales and marketing expenses declined by 23.9% year-over-year and 8.2% quarter-over-quarter. And as a percentage of net revenues, sales and marketing expenses were down by 12.7 percentage points year-over-year. Despite that, our new student enrollment for the quarter rose by 44.7% year-over-year and 11.8% quarter-over-quarter, reaffirming the effectiveness of our business strategies. Turning to our learning programs, our professional certification and scale programs continued to grow strongly as evidenced by a 91.3% year-over-year increase in new student enrollment, which drove gross billings to derive by 51.8% year-over-year. Net revenues generated by this sector also increased by 83.7% year-over-year. This growth was primarily attributable to our efforts in expanding our core catalog to target diverse age groups as we start to capture the rising demand we witnessed for essential skills and professional courses during the quarter. In the third quarter, pandemic-associated lockdowns led to the postponement for transformation of certain qualification tests, affecting our exam preparation program for those steps. Nevertheless, demand for our preparation courses for professional exams remains solid as intense career competition prompted working professionals to enhance their competitiveness or sharpen their skills with courses from educational providers such as Sunlands. In addition to courses for working professionals, we continue to develop new courses to satisfy other cohorts' learning and leisure needs. We are excited about what we are offering to our students. As we have always been committed to helping build a lifelong learning society, we will continue to capture opportunities in these sectors to deliver more high-demand courses and high-quality services to our students. Thanks to our extensive course options, premium course quality, and experienced teaching staff, we are pleased to see students across a wider range of ages adopting our platform as well as greater diversity in the courses too. As a result, we achieved sequential growth in new student enrollments for our professional skills program for five consecutive quarters. We are also glad to have played a part in helping our students achieve their learning goals, bringing them a sense of fulfillment. Going forward, we will continue to adjust our course offerings in this sector based on market demand, maximizing our value by further contributing to our students’ success and our society as a whole. Next, our Master's degree oriented programs. During the quarter, the challenging macro environment, the pandemics, and the competitive market dynamics continued to weigh on our performance in this category. Due to macroeconomic weakness, some people may choose to delay their higher education plans and as the costs of obtaining an MBA degree are relatively high compared to other self-improvement options. Meanwhile, the pandemic also prevented some people from pursuing overseas post-graduate education. Lastly, market competition was increasingly intense with more industry players entering this sector after the K-12 education industry reform. Taken together, these factors resulted in reduced demand for our master's degree oriented preparation courses, leading to a decline in gross billings and student enrollment. Before I conclude, I would like to mention that alongside our efforts to solidify our industry position with our existing learning programs, we have also been prudently exploring some other new business initiatives to drive our future growth. We are conducting market research on those initiatives such as combining retail or commerce with core skills. By maximizing our strength as an education provider to expand our product and service portfolio, we look forward to enhancing our risk management and creating additional revenue streams while bringing more value to our students. Looking ahead, we are confident that our proven business strategy and continued commitment to delivering premium and tailored courses to more students will help us navigate current challenges and achieve meaningful growth.

Unidentified Company Representative, Financial Controller

Thank you, Selena. Hello, everyone. We are pleased with our third quarter results amid a soft macro environment. Our net revenue reached RMB 576.2 million during the quarter, exceeding the high end of our guidance by 6.7%, despite a slight 3.2% year-over-year decrease, benefiting from our dedicated efforts under major steps in cost control and operational efficiency enhancement. Our third quarter operating expenses declined by 24.5% year-over-year and 7.4% quarter-over-quarter. As a result, we maintained our profitability with a net income of RMB 168.1 million, up 81.1% year-over-year, and 46.7% quarter-over-quarter. Our net profit margin for the quarter remained solid at 29.2%, expanding 13.6 percentage points year-over-year and 8.6 percentage points quarter-over-quarter. Moving forward, we will continue to prudently manage costs and expenses, enrich our cost offerings, and further optimize our operations, aiming for continued success and additional shareholder value. Now let me walk you through some of our key financial results for the third 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 revenue was RMB 576.2 million, a decrease of 3.2% year-over-year. Cost of revenue increased by 2.2% to RMB 84.9 million in the third quarter of 2022 from RMB 83.1 million in the first quarter of 2021. The increase was primarily due to increased service fees paid to educational institutions and increased cooperation costs. Gross profit decreased by 4% to RMB 491.3 million from RMB 510 million in the third quarter of 2021. In the third quarter of 2022, operating expenses were RMB 325 million, representing a 24.5% decrease from RMB 430.6 million in the first quarter of 2021. Sales and marketing expenses decreased by 23.9% to RMB 259.1 million in the third quarter of 2022 from RMB 353.5 million in the third quarter of 2021. The decrease was mainly due to the lower spending on branding and marketing activities and the decline in compensation expenses related to our sales and marketing personnel. General and administrative expenses decreased by 29.6% to RMB 44.4 million in the third quarter of 2022 from RMB 63.2 million in the third quarter of 2021. The decrease was mainly due to a decline in rental expenses. Product development expenses decreased by 17.5% to RMB 11.5 million in the third quarter of 2022 from RMB 14 million in the third quarter of 2021. The decrease was mainly due to a decline in compensation expenses. Other income decreased by 58.6% to RMB 5.3 million in the third quarter of 2022 from RMB 12.9 million in the third quarter of 2021. Net income for the third quarter of 2022 was RMB 168.1 million compared with RMB 92.8 million in the third quarter of 2021. Basic and diluted net income per share was 24.08% in the third quarter of 2022. As of September 30, 2022, the company had RMB 678.8 million in cash and cash equivalents and RMB 170.1 million in short-term investments. As of September 30, 2022, the company had a deferred revenue balance of RMB 1,798.6 million compared with RMB 2,348.2 million as of September 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 RMB 1.3 million in the third quarter compared with RMB 1.8 million in the third quarter of 2021. And now for our outlook, for the fourth quarter of 2022, Sunlands currently expects net revenue to be between RMB 520 million and RMB 540 million, which would represent a decrease of 8.3% to 11.7% 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.

Yuhua Ye, IR Representative

Once again, thank you, everyone for joining today's call. We look forward to speaking with you again soon. Good day and good night.