Sunlands Technology Group

NYSE:STG

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands Fourth Quarter and Full Year 2023 Earnings Conference Call. Today's conference call is being recorded. I will now turn the call over to your host today, Yuhua from Sunlands IR Representative. Please go ahead.

[Yuhua Ye, executive]

Hello, everyone, and thank you for joining Sunlands Fourth Quarter and Full Year 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 could 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 Controller, Mr. Hangyu Li. 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'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 will 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 now turn the call over to our CEO, Tongbo Liu.

[Tongbo Liu, executive]

Thank you, Bam. Hello, everyone. Welcome to Sunlands Fourth Quarter and Full Year 2023 Earnings Conference Call. Prior to commencing, I would like to kind of remind all attendees that the financial information referenced in this release is presented on a continuing operations basis and all figures are denominated in RMB unless explicitly specified otherwise.

It is with great pride that we unveiled the successful commission of the fourth quarter, characterized by a noteworthy net profit of RMB 155.2 million and an impressive net profit margin of 28.6%. These metrics underscore our firm financial foundation and a steadfast dedication to the operational excellence.

In the meanwhile, our revenue stands at RMB [ 542 ] million, marking a 3.3% increase from the previous quarter and surpassing our earlier forecast despite the year-over-year revenue decrease of 6.4%. Reflecting on the entire fiscal year, we successfully recorded an annual revenue of RMB [ 2.16 ] billion and a net income of RMB [ 614.8 ] million. Additionally, we observed a significant 15.4% increase in enrollment year-over-year, highlighting the growing demand for our offerings.

Our prudent financial management resulted in a net cash inflow from operating activities of over RMB 135 million, being a solid financial foundation for our future growth initiatives. Throughout the year, we remained agile in responding to market dynamics and evolving user preferences, driving continuous innovation across our product and service portfolio.

A pivotal driver has been the dynamic expansion of our interest-based courses, which experienced a 54.9% year-over-year growth. The sector has emerged as the important growth catalyst focused company, further solidifying our leading position in the adult education landscape.

Turning to the performance of our major course programs. You can also see the post, the secretary programs accounted for 24.7% of our revenue in 2023. While we continue to optimize the sector investment, we believe in its promising future. And current employment landscape, individuals navigating academic pursuits of professional [ stories ] find themselves confronted with intricate challenges.

The symbiotic relationship between salary offerings and educational tenant has become more pronounced. This in turn has precipitated a surge in the productivity of individual towards pursuing further education. The sector encompassing professional certifications, skills and interest programs continue to serve as our key growth engine, showcasing a year-over-year revenue increase of 13.3% and contributing to 77.1% of our total revenue. In 2023, we observed a 21.1% rise in new student enrollments within the sector compared to 2022.

Our approach to catering to the growing educational need of learners, course, various age group has been particularly rewarding. Moreover, the standout performance of interest-based education courses remained in foremost highlights of this sector, accounting for 63% of our total revenue and experiencing a significant 54.9% year-over-year revenue growth. In 2023, the user search volume for adult interest training has surged, ranking first to monthly new business segments in the education sector. This trend signifies a growing focus among adults in the [ real ] and personal interest, thereby resulting in a disenable concurrent elevation in the demand for associated knowledge and services.

Compared to our degree program users, who tend to be younger and more clear oriented, the age range of users in interest sector is much broader with a significant portion of the user base comprising middle-aged and elderly population. After several quarters of practical exploration, we have gained a deeper understanding of the elderly learning market. And today, I'm delighted to share some insights.

Firstly, the expansive nature of China's new demographic presented permits landscape for market penetration. As of 2022, China confronted a rare phenomenon of net population decrease. This marks the first negative growth since the 1917s, signifying the onset of a period of population decline. Additionally, the impending retirement phase of China's baby boom generation, spanning versus from 1962 to 1975, introduces a cohort with significant social economic influence.

According to China private wealth report released by China Merchants Bank and [ Ben ] in 2023, the age group of 50 to 59 accounts for 14% of the high net worth individuals with investable assets of over RMB 10 million.

In the past, senior education was predominantly supplied by the government agencies. However, this newly retired individuals have the autonomy to start it from market-oriented educational institutions and are willing to pay premium prices for such offerings.

Secondly, the last preference and demands exhibited by elderly cohorts across various age brackets underscore the complexity of this demographic, indicating significant untapped potential. Individuals aged 50 to 59 display a reverent demeanor with a great direction towards culture and the spiritual pursuits such as travel and lifelong learning endeavors. Conversely, those aged 60 and above tend to gravitate towards health-centered consumption patterns, embracing nutritional supplements and the hair services.

Upon meticulous scrutiny of our senior course in our list, taking over transitional learning program as an example, individuals aged 46 to 65 accounts for 16% with over 13% being female and 20% from first tier cities. We define them as a new generation of vibrant seniors characterized by high cultural refinement, relative affluence, leisure opportunities and a higher pursuit of spiritual enrichment. Our products are well received by this golden age group, and we will continue to seize the demand of this demographic to expand this [ co-power ] services in the future.

Drawing inspiration from the developmental trajectory of Japan's elder industry, notably illustrated by Club Tourism, Japan's leading senior travel conglomerate with a membership base of 7 million, which initially focused on travel products and later expanded horizontally into nursing, insurance and consumer goods. We aim to maximize our lifetime value to diversified offerings and the high-value propositions rooted in effective senior interest in education services.

For instance, we have launched educational travel packages integrating courses with tourism activities. These ongoing and innovative initiatives afford us a swifter and more profound insights into our user base, floating our imagination for future possibilities.

We also note the government's attention to and [ ever since arm ] the elder industry. On January 15 to 24, the General Office of the State Council of China issued the first dedicated documents supporting the development of the silver economy, which specifically mentioned enriching elderly education services. We will continue to increase investment in course development for this burgeoning demographic.

We have created had a range of specified offerings, including premium Chinese funding and music courses, supplemented by a variety of offline events tailored to diverse situational context. Notably, our center brand clinched the prestigious Craftsman Service Award from People's Daily Online, a testament to our unbearing pursuit of excellence. As we progress in 2024, we remain committed to constantly exploring and refining our product mix, targeting different age groups while developing our operational efficiency improvement efforts to support our long-term sustainable growth.

Since our initial public offering, the company has been constantly progressing with stock repurchases. As of December 31, 2023, under the share repurchase plan adopted in December 2021 and August 2018, we have successfully executed the repurchase of American depository shares equivalent to approximately 420,000 ordinary shares, representing a total investment of USD 15.7 million. Looking ahead, we pledged to fortify shareholder value through ongoing share repurchases, underscoring our steadfast commitment to shareholder interest.

With that, I will turn the call over to our Financial Controller, Hangyu, to run through our financials.

[Hangyu Li, executive]

Thank you, Tongbo. Hello, everyone. I'm pleased to present our fourth quarter results. Over the past year, we have been committed to achieving sustainable growth, placing a high priority on improving operational efficiency and optimizing our cost structure. We continued our impressive level of profitability with a net profit margin of 28.6%, up 3.5 percentage points quarter-over-quarter. This demonstrated the effectiveness of our operational strategies and highlights our ability to adapt to changing market conditions.

It is also important to highlight that our net cash inflows from operating activities for the year exceeded RMB 135 million, providing a solid financial foundation for the sustainable development of our business. This success is a direct reflection of our commitment to strengthening our core competitors, allowing us to quickly adjust our strategy in response to changing market conditions and customer demand.

Notably, since the fourth quarter of 2021, our net profit margin has remained above 20%, which is a testament to the strength and the resilience of our business model. Looking to the future, we'll continue to focus on refined operations and the efficient financial management to ensure the company sustain healthy and stable development.

In addition, we'll strictly follow the instructions of the Board and implement strategic share repurchases to enhance shareholder value. Now let me present to you some of our key financial results for the fourth quarter of 2023.

All comparisons are year-over-year and all figures are in RMB, unless otherwise noted. For the fourth quarter of 2023, net revenues decreased by 6.4% to RMB 541.7 million from RMB 578.6 million in the fourth quarter of 2022. The decrease was primarily due to a year-over-year decline in gross billings from post-secondary courses in 2023.

Cost of revenues decreased by 2% to RMB 73.8 million in the fourth quarter of 2023 from RMB 75.3 million in the fourth quarter of 2022. The decrease was primarily due to lower compensation expenses related to a reduction in our cost of revenue headcount.

Gross profit decreased by 7% to RMB 468 million in the fourth quarter of 2023 from RMB 503.3 million in the fourth quarter of 2022. In the fourth quarter of 2023, operating expenses were RMB 348.9 million, representing a 3.8% increase from RMB 336 million in the fourth quarter of 2022.

Sales and marketing expenses increased by 12.2% to RMB 305.8 million in the fourth quarter of 2023 from RMB 272.5 million in the fourth quarter of 2022. The increase was primarily due to increased spending on sales activities, including higher salesforce compensation as well as higher spending on brand and marketing activities focused on interest-based courses.

General and administrative expenses decreased by 36.8% to RMB 35.5 million in the fourth quarter of 2023 from RMB 56.1 million in the fourth quarter of 2022. The decrease was primarily due to lower office costs and rental expenses resulting from the early termination of 13 office places.

Product development expenses increased by 3.6% to RMB 7.6 million in the fourth quarter of 2023 from RMB 7.4 million in the fourth quarter of 2022. Net income for the fourth quarter of 2023 was RMB 155.2 million compared with RMB 181 million in the fourth quarter of 2022.

Basic and the diluted net income per share was RMB 22.59 in the fourth quarter of 2023. As of December 31, 2023, the company had RMB 766.4 million of cash, cash equivalents and restricted cash and RMB 142.1 million of short-term investments, compared with RMB 757.4 million of cash, cash equivalents under restricted cash, and RMB 70.5 million of short-term investments as of December 31, 2022.

As of December 31, 2023, the company had a deferred revenue balance of RMB 1,130.9 million compared with RMB 1,690.9 million as of December 31, 2022. Capital expenditures were primarily for information technology infrastructure equipment and the leasehold improvements required to support the company's operations.

Capital expenditures were RMB 0.2 million in the fourth quarter of 2023 compared with RMB 0.7 million in the fourth quarter of 2022. For more details on our full year 2023 financial results, please see our earnings press release.

Now for our outlook. For the first quarter of 2024, we currently expect net revenues to be between RMB 500 million and RMB 520 million, a year-over-year decrease of 8.3% to 11.8%. This outlook is based on current market conditions and reflects the company's management's current on the preliminary estimates of the market, operating conditions and the customer demand, all of which are subject to change.

With that, I'd like to open up the call to questions. Operator?

[Operator]

[Operator Instructions] At this time, we are showing no further questions, so this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Yuhua for any closing remarks.

[Yuhua Ye, executive]

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

[Operator]

This concludes today's conference call. You may now disconnect your lines. Thank you.