Sunlands Technology Group - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' Q1 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I'll now turn the call over to your host today, Yuhua, Sunlands' IR representative. Please go ahead.

Yuhua Ye (Head of Investor Relations)

Hello, everyone, and thank you for joining Sunlands' Q1 2024 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 director, Mr. Hangyu Li. Management will begin with prepared remarks, and the call will conclude with the QA 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, and numerous 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.

Tongbo Liu (CEO and Director)

Thank you, Yuhua. Hello, everyone. Welcome to Sunlands' Q1 2024 Conference Call. Prior to commencing, I would like to kindly remind all attendees that the financial information referenced in this release are presented on a continuing operating basis, and all figures are denominated in RMB unless. We have maintained stability in the midst of challenging conditions. Despite a year-over-year decrease of net revenue and net income for the quarter to RMB 532 million and RMB 100.7 million, respectively. This marks our twelfth consecutive quarter of profitability, underscoring our operational efficiency and commitment to shareholder value. With a strong focus on returns and enduring expression, we bolstered our endeavors in cost control while maintaining acquisition effectively.

Operator (participant)

Ladies and gentlemen, please remain on the line. Your conference will resume shortly. Presenters, please continue.

Tongbo Liu (CEO and Director)

Additionally, our enrollment surged by 22.8% to a historical high of over 175,000, demonstrating enhanced proficiency in acquiring students. This improvement reflects our dedicated initiatives to attract new users and enhance user retention and engagement by refining our course offerings to meet diverse learning needs. Looking ahead, we remain optimistic about our long-term profitability. We endeavor to closely monitor and enhance student experience across all phases of teaching, learning, assessment, and practice. Moving forward, we are dedicated to delivering exceptional services and products while exploring avenues for further business growth and operational efficiency improvement. Now, let's turn to the performance of each of our major course programs.

Our post-secondary programs now account for 14.3% of our total revenue, a testament to our strategic structural optimizations and alignment with our latest investment return goals. Given the structural makeup of educational terrain with the Chinese population, the universal access to compulsory education and the prevailing demands of the job market, we are still convinced these programs are in demand, and we remain dedicated to providing premium courses to our in-progress students. In addition, we continue to pursue B2Bs strictly, effectively, leveraging our deep-rooted expertise in this area. Through our soft-brand for Knowledge Shares, we provide small and medium-sized organizations with comprehensive solutions, including extensive course content, authentic examination questions, and advanced teaching management tools to help them improve their teaching and content distribution abilities....

Our aim is to provide our partners with advanced, intuitive tools that can significantly improve the learning experience for their users, and ultimately enhance the quality and efficiency of operations across the industry. The sector, including professional certifications, professional skills, and interest programs, continue to be our primary growth engine, contributing 74.4% to the total revenue. Interest program, in particular, has exhibited a 22.2% year-over-year growth. In this sector, our strategy remains unwavering to continuously expand our course offerings, attract a broader audience through varied curriculum, enhance customer retention rates, and ultimately optimize the lifetime value of our users. This approach has proven successful, as evidenced by a 13.4% increase in new enrollments in our interest-based education program this quarter, underscoring the effectiveness of our strategic initiative.

Through ongoing practice, we have gained fresh insights into different age groups, shaping our approach to course design and service provision. For example, unlike young, younger individuals, whose educational pursuits are often career-oriented or driven by external expectations, more mature learners seek learning experiences that enrich their lives, bring joy, and foster meaningful connections. This fundamental difference necessitates a substantial departure from traditional education and paradigms in both curriculum development and service delivery models. Simply migrating existing course online does not suffice. Instead, we must intricately align with the unique needs of this demographic to enhance and customize our offerings accordingly.

Moreover, the service delivery model should be adaptable and considerate of their physical and cognitive abilities, emphasizing the creation of a supportive and inclusive learning environment that encourages active participation and continuous engagement. We have consistently pushed the boundaries of our innovative curriculum and achieved notable milestones through industry integration. A prime example is our educational travel adventure projects, launched in March 2023, which are well suited for the elderly. At the end of the Q1 of 2024, we have already crafted over 40 study tour routes. According to McKinsey's 2024 China Consumer Trends report, senior citizens in first-tier cities have spending expectations for travel that notably exceed those of the general population, marking this as a burgeoning market segment.

These consumers are not primarily driven by price when deciding which travel products to purchase. Instead, they seek diverse, high quality, and unique travel experiences, making premium travel products particularly well received. Setting ourselves apart from traditional tourist offerings, we seamlessly integrate components from our courses, such as the art of traditional Chinese painting, into very fabric of the journey, enriching the experience with cultural depth and immersive learning opportunities. In the first three months of 2024 alone, revenue from educational travel adventure projects has already surpassed the 15.5% of the earnings for the entire 2023. In the future, we will, we will expand our efforts into other areas to offer our elderly users a wider array of products, aiming to extend their customer life cycle.

Furthermore, as a company in embracing cutting-edge artificial intelligence technology, we have steadily enhanced our integration of AI into our business operations. For example, we streamlined content creation processes focused on increasing page views and refine multiple models to deliver personalized teaching. This led to a reduction in production time and significantly boosted the efficiency of our operational teams. We will continue to monitor updates in large models and apply to our business, ultimately enhancing our users' learning experience. While we have achieved significant milestones, it's essential to acknowledge that we also face challenges. Moving forward, we are dedicated to adjusting our strategies to navigate market uncertainties. Our focus will remain on delivering high quality education, expanding our market presence, and prioritizing shareholder value. Thank you for your presence today.

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

Hangyu Li (CFO)

... Thank you, Tongbo. Hello, everyone. I'd like to introduce our Q1 results. All figures are denominated in RMB, unless explicitly specified otherwise. For the quarter, we achieved net income of RMB 112.7 million, with net income margin of 21.5%. Our tenth consecutive quarterly net income margin above 20%. The stable margins in recent quarters are due to our continued efforts to improve operational efficiencies and optimize our cost structure. Also, our revenue declined year-over-year due to changes in our product mix. The successful strategy of balanced, sustainable growth and profitability brought us, brought us cash operating inflows of RMB 76.4 million in the quarter.

At the end of the Q1, the total balance of cash, cash equivalents, restricted cash, and short-term investments totaled RMB 983.2 million, an increase of 8.2% from the end of the previous year. Our healthy financial position gives us the confidence to face the challenge ahead. This will enable us to capitalize on emerging opportunities, strengthening our leadership position in the industry and continue to create value for our shareholders. Now, let me walk you through some of our key financial results for the Q1 of 2024. All comparisons are year-over-year, unless otherwise noted. In the Q1 of 2024, net revenues decreased by 7.7% to RMB 523.2 million, from RMB 566.9 million in the Q1 of 2023.

The decrease was primarily driven by the decline in gross billings from post-secondary courses over the recent quarters, partially offset by the growth in revenues from sales of goods, such as books and learning materials. Cost of revenues increased by 13.2% to CNY 77.2 million in the Q1 of 2024, from CNY 68.2 million in the Q1 of 2023. The increase was primarily due to the growth in the cost of revenues from sales of goods. Gross profits decreased by 10.6% to CNY 446.1 million in the Q1 of 2024, from CNY 498.7 million in the Q1 of 2023.

In the Q1 of 2024, operating expenses were CNY 341.1 million, representing a 6.4% increase from CNY 320.7 million in the Q1 of 2023. Sales and marketing expenses increased by 11.1% to CNY 301.6 million in the Q1 of 2024, from CNY 271.4 million in the Q1 of 2023. The increase was mainly due to the growth in spending on sales activities, including enhanced compensation for sales personnel, as well as increased spending on branding and marketing activities, focusing on interest courses offerings. General and administrative expenses decreased by 17.9% to CNY 32.6 million in the Q1 of 2024, from CNY 39.6 million in the Q1 of 2023.

The decrease was mainly due to the decline in rental expenses, as certain leases for office space were partially terminated in 2023 before the expiration of the lease term for cost savings. Product development expenses decreased by 27.6% to RMB 7 million in the Q1 of 2024, from RMB 9.7 million in the Q1 of 2023. The decrease was mainly due to declined compensation expenses related to high contribution of our product development personnel. Net income for the Q1 of 2024 was RMB 112.7 million, as compared to RMB 180.1 million in the Q1 of 2023. Basic and diluted net income per share was 16.44 in the Q1 of 2024.

As of 31 March, 2024, the company had RMB 803.5 million of cash, cash equivalents, and restricted cash, and RMB 179.7 million of short-term investments, as compared to RMB 766.4 million of cash, cash equivalents, and restricted cash, and RMB 142.1 million of short-term investments as of 31 December, 2023. As of 31 March, 2024, the company had a deferred revenue balance of RMB 1,044.9 million, as compared to RMB 1,113.9 million as of 31 December, 2023. Regarding the outlook for the Q2, we expect net revenues to be between RMB 480 million and RMB 500 million, a year-over-year decrease of 5% to 8.8%.

This outlook is based on the current market conditions and reflect the company's management's current and preliminary estimate 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 (participant)

Thank you. We will now begin the question and answer session. To ask a question, please press star one one on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Please stand by while we compile the Q&A roster. As a reminder, to ask a question, please press star one one on your telephone keypad. At this time, we're showing no further questions, so this would conclude our question and answer session. I'd now like to turn the conference back to you, Hua, for any closing remarks.

Yuhua Ye (Head of Investor Relations)

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 (participant)

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.