Sunlands Technology Group

NYSE:STG

Earnings Call Transcript

[Operator]

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

[Yuhua Ye, executive]

Hello, everyone, and thank you for joining Sunlands Third 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. 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 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 now turn the call over to our CEO, Tongbo Liu.

[Tongbo Liu, executive]

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

In Q3, our business has constantly adjusted to the evolving economic landscape and has strategically progressed despite the challenges. Our overarching objective of propelling the group towards persistent and high-level profitability has yielded positive results as we maintained stable net profit for 10 consecutive quarters.

Net income reached RMB 131.6 billion, and revenues despite a slight year-over-year decrease exceeded the high end of our guidance range and reached RMB 524.6 million. We were also pleased to see our ongoing efforts to optimize our product structure and expand our cost portfolio rewarded with enhanced operational results, reflecting a 14.3% year-over-year increase in our new student enrollments and a 6.7% year-over-year increase in gross billings.

We are delighted in our capability to remain profitable under challenging environment. This success is attributable to improvement in gross margins, the implementation of cost-cutting measures, and enhanced financial planning and analysis across the entire business. Our cost of revenue has achieved a year-over-year decrease of 24.5%, and G&A expenses have achieved a year-over-year decrease of 21%.

We firmly believe that only by adhering to a long-term perspective and ensuring the healthy growth of the enterprise can we create sustainable value for shareholders and users.

Now, let's turn to the performance of each of our major course programs. Due to uncertainties surrounding the macroeconomic environment, our degree or diploma-oriented consumers have adopted a more conservative approach to the spending. This sector experienced a year-over-year revenue decline of 55.2%, influenced by our strategic reduction in marketing activities.

We will persistently enhance our operational efficiency through continuous market observation and remain dedicated to providing premium courses for our in-progress students. The segment, including professional certifications, professional skills, and interest programs has represented as our new growth driver, accounting for 17.4% of the total revenue and exhibiting a year-over-year revenue growth of 23.8%.

We have strengthened our determination and the confidence to increase investment in interest-based education following due process of testing and validation. The number of new student enrollments in professional certifications, professional skills, and interest programs [indiscernible] of 2023 increased by 29.1% compared to the same period of 2022, as the total students has exceeded 1.2 million since 2021.

Today, we would like to delve deeper into our landscape better. There are several noteworthy shifts in the education landscape. Firstly, there's the pertinent market potential of the [indiscernible] economy. While the age group of 20 to 30 remains a steadfast pillar in the industry, it's crucial to highlight that the demographic size of the [indiscernible] generation continues to grow.

According to the data disclosed by the National Bureau of Statistics, at the end of 2022, China's elderly population reached to 280 million, which is aged 60 and above. Among them 153 million are Internet users indicating that at least 1 in every 2 elder individuals has Internet access.

A significant portion has already adopted the habits of online learning, communication, and socialization. Furthermore, projections indicated that during the 14th 5-year plan period, China's population aged 60 and above surpassed 300 million, accounting for over 20% of the total population.

With the aging population extended [indiscernible] and the rising per capita income, this represents a significant incremental market. This [indiscernible] of course, tailored to elderly individuals covering various interest areas such as [indiscernible] content creation and services capabilities, and technological expertise quickly gained recognition from the schools.

Specifically, according to our survey, the satisfaction rate for calligraphy courses is as high as 94.59% and for traditional Chinese painting courses, it reaches impressive 98.25%. We are delighted to say that this group not only learned online, but also connect with like-minded friends establishing new social relationships from our platform. We received numerous feedback from this group, and they relayed the narratives resonate deeply with us, affirming the meaningful impact of our work.

They illustrate our -- how [indiscernible] caters to the diverse interests and the many needs of various users fostering continuous personal development and meaningful connections. Secondly, the increasing competitive job market is still calling for higher overall qualifications from individuals leading to a varied and personalized demand for end authentication.

The transformation is evident on the supply side as well with an increase in the diversity of professional courses offerings. Our strategy is in alignment with the market as well. We have meticulously curated and provided a suite of premium tailor-made courses with a professional focus.

We are pleased to witness our students on varying commitments to actively participate in these courses, and we take pride in assisting them in navigating the challenges of the dynamic working environment.

Additionally, we have carefully augmented our selection of interest-based courses in response to the burgeoning inclination towards personalized and [indiscernible]. We strive to provide a comprehensive range of additional services and products that extends beyond the confines of traditional learning experience.

Furthermore, we have also been closely monitoring the application of new technologies in our industry, such as [indiscernible] business content. We are optimistic about our -- about the prospects of the development of this technology. It's worth mentioning that our product development expenses have also increased by 5.3% compared to the previous quarter.

In summary, drawing on a decade of valuable experience and industry acclaim, we are positive to rapidly and efficiently expand our market presence. Going forward, our dedication remains unwavering as we adjust our educational offerings to align with the changing needs of learners, reinforcing our leading position in end authentication sector.

With that, I will turn the call to our financial controller, Hangyu, to run through our financials.

[Hangyu Li, executive]

Thank you, Tongbo. Hello, everyone. I'm pleased to present our third quarter results, which are in line with our expectations and demonstrate the effectiveness of our pursuit of sustainable growth.

As you can see, last quarter was another excellent quarter in operations. As a result of steady growth in interest-based programs, new student enrollments went up by 14.3%. Our gross billings increased by 6.7% year-over-year. Thanks to our strategy of balanced sustainable growth and profitability, group profit margin increased by 2.5 percentage points to 87.8% compared to the same period last year.

Operating expenses as a percentage of gross billings decreased by 2.1 percentage points compared to the third quarter of last year. These improvements were reflected in our net income. Last quarter, we achieved net income of RMB 131.6 million, our 10th profitable quarter since the second quarter of 2021.

Looking ahead, we are optimistic about the long-term growth. We are committed to expanding online cost offerings optimizing cost effectiveness and providing exceptional service to our students. These strategic initiatives are conducive to seizing new opportunities and consolidating our position in the industry, which intent will help us maintain our competitive edge in the industry and continue to value our stakeholders.

Now, let me walk through some of our key financial results for the third quarter of 2023. All comparisons are year-over-year and all numbers are in RMB, unless, otherwise, noted. In the first quarter of 2023, net revenues were RMB 524.6 million, a decrease of 9% year-over-year.

Cost of revenue decreased by 24.5% to RMB 64.1 million in the third quarter of 2023 from RMB 84.9 million in the third quarter of 2022. The decrease was primarily due to lower compensation expenses related to our cost of revenue personnel.

Gross profit decreased by 6.3% to RMB 460.5 million from RMB 491.3 million in the third quarter of 2022. In the third quarter of 2023, operating expenses were RMB 368.5 million, representing a 4.1% increase from RMB 325 million in the third quarter of 2022.

Sales and marketing expenses increased by 9.6% to RMB 295 million in the third quarter of 2023 from RMB 259.1 million in the third quarter of 2022, primarily due to increased spend on branding and marketing activities, General and administrative expenses decreased by 21% to RMB 35.1 million in the third quarter of 2023 from RMB 44.4 million in the third quarter of 2022.

Product development expenses decreased by 27% to RMB 8.4 million in the third quarter of 2023 from RMB 11.5 million in the third quarter of 2022. Product development expenses were mainly comprised of compensation expenses. Net income for the third quarter of 2023 was RMB 131.6 million, compared with net income of RMB 168.1 million in the third quarter of 2022.

Basic and diluted net income per share was RMB 19.13 in the third quarter of 2023. As of September 30, 2023, the company had RMB 751.8 million of cash, cash equivalents, and restricted cash and RMB 122.3 million of short-term investments.

As of September 30, 2023, the company had a deferred revenue balance of RMB 1,277 million compared with RMB 1,690.9 million as of September 31, (sic) [ December 31 ], 2022. Capital expenditures were incurred primarily in connection with IT infrastructure equipment and leasehold improvement necessary to support the company's operations. Capital expenditures were RMB 1.4 million in the third quarter compared with RMB 1.3 million in the third quarter of 2022.

And now for our outlook. For the first quarter of 2023, Sunlands currently expects net revenues to be between RMB 490 million to RMB 510 million, which would represent a decrease of 11.9% to 15.3% year-over-year. This outlook is based on the current market conditions and reflects the company's management's current and the 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. Operator?

[Operator]

[Operator Instructions] There are no questions so far. [Operator Instructions] At this time, there are no questions coming through, so that will conclude the question-and-answer session. At this time, I would like to turn the conference back over to you, 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 good night.

[Operator]

This concludes this conference call. You may now disconnect your line. Thank you.