Sunlands Technology Group - Earnings Call - Q1 2025

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' first quarter 2025 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, Yuhua, Sunlands' IR representative. Please go ahead.

Yuhua Ye (Head of Investor Relations Representative and Senior Investment Director)

Hello everyone, and thank you for joining Sunlands Technology Group's first quarter 2025 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 a Q&A session. Before I hand it over to the management, I'd like to remind you of Sunlands Technology Group's safe harbor statement in relation to today's call. Except for historical information contained herein, certain 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 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 (Director and CEO)

Thank you, Yuhua. Hello everyone. Welcome to Sunlands Technology Group's first quarter 2025 earnings conference call. Prior to commencing, I would like to kindly remind all attendees that the financial information referenced in this release is operated on a continuing operation basis, and all figures are denominated in RMB unless explicitly specified otherwise. In the first quarter of 2025, we reported net revenue of RMB 87.6 million and net income of RMB 75.2 million, marking our 16th consecutive profitable quarter, an encouraging start to the year that reinforces our confidence in delivering certain growth throughout 2025. While net revenue remained relatively stable, our continued profitability and disciplined execution reflect the underlying resilience of our business model. The income margin reached 15.4%, supported by effective cost optimization and ongoing operational efficiency improvements. Meanwhile, our financial fundamentals remain robust.

This quarter marked our seventh consecutive period of positive operating cash flow, underpinned by sound execution and prudent capital management. Looking ahead, we will continue to refine our business mix, concentrating on high-margin, high-potential areas to reinforce structural flexibility and long-term resilience. On the product front, we continue to deepen and diversify our course portfolio. We refine our core subject areas while extending into adjacent domains such as wellness and lifestyle, aligning with increasingly diverse needs of lifelong learners. Driven by our core diversification strategy, this quarter's total enrollments reached over 179,000, also supported by measurable improvements in learner engagement and retention. Technology also remains central to our strategy. This quarter, we further advanced the digital transformation of operations by embedding AI tools that enhance curriculum precision and boost learner engagement. Now, let's turn to the performance of each of our major course programs.

In the first quarter of 2025, degree and diploma-oriented post-secondary courses contributed 9.7% of total revenue. The sector has experienced a moderated trajectory, and our celebrated scale-back investment has allowed us to reallocate resources toward high-growth opportunities more effectively. Going forward, we will continue to monitor macro-education trends and demographic shifts closely, ensuring our approach remains agile and responsive to evolving conditions. The sector, encompassing interest-based programs, professional skills development, and professional certification exam preparation, accounted for a substantial 78.2% of our total revenue, with interest-driven courses emerging as a fundamental pillar. Unlocking the full potential of interest-linked learning among middle-aged and senior learners remains a central strategic priority. In this area, we have remained steadfast in pursuing a clear future-oriented strategy rooted in openings, integration, and innovation, while deepening our initiatives across multiple fronts. First, we have embraced a partnership-driven approach to amplify value creation.

As China's aging population expands, the senior consumer market is drawing increased participation from diverse industries, including consumer brands, healthcare service providers, and traditional media. This convergence presents significant opportunities for core sector collaboration. Following last year's successful partnership with Beijing TV, we established a new cooperation with Hunan TV's Happy Shopping platform this quarter, leveraging its broad consumer reach and brand influence. Second, we have further strengthened our hybrid delivery model to meet the evolving needs of older learners. For this demographic, education is not only about acquiring knowledge; it is equally about social participation and emotional fulfillment. To address this need, we have adopted a primarily online, supplemented by offline hybrid model that offers both flexibility and depth. This model has proven especially effective in boosting learner retention and satisfaction.

Notably, our curated study tour, with integrated educational content with cultural travel, has been particularly well received for their immersive and differentiated value. At the same time, we are deepening our core sector collaboration by partnering with galleries and museums to develop culturally resonant experiences, further strengthening engagement within the senior segment. Third, we have refined our curriculum design with a self-developed assess framework, which is Answer, Comment, Supervisor, and Study, to fuel ongoing growth and ensure learner success. This dual-teacher model, while pairs academic mentors and learning facilitators, makes our courses more accessible, engaging, and outcome-driven. Leveraging this collaborative learning system, we have attained a 98% course completion rate among new students and a 14% increase in knowledge retention, scoring its effectiveness in delivering substantial educational outcomes. Beyond academic innovation, social mission remains integral to our strategy.

Each year, we organize nearly 100 free public interest activities, ensuring elderly individuals with cultural or intellectual operations can access meaningful learning experiences. We view this not only as an expression of corporate responsibility but as a long-term investment in brand trust and mission element. Recent policy developments further reinforce our confidence. This government's focus on stimulating domestic consumption and expanding service-oriented sectors, including cultural tourism and education, lies closely with our strategic direction. Targeted initiatives and fiscal incentives for innovation in community-based and lifelong learning programs affirm that we are operating in the right space at the right time, with ample room to scale, lead, and grow. Taken together, these efforts reflect our holistic and forward-looking approach to lifelong learning. Today's adult learners are increasingly value cultures, seeking premium, immersive, and socially engaging experiences.

This shift affirms our early position and highlights the long-term potential of the adult learning economy. Moving forward, we will continue enhancing our offerings, strengthening ecosystem integration, and deepening engagement, ensuring we remain well-positioned to lead this evolving sector. While macroeconomic and geopolitical uncertainties persist, the impact on our business has been limited, given our domestic focus. Nonetheless, we remain vigilant, proactively managing risks while staying alert to new opportunities. Looking ahead, we will continue strengthening our core capabilities, expanding our core offerings, embracing intelligent technology and disciplined focus on value creation. We are confident this approach will deliver sustainable long-term returns for shareholders and meaningful learning outcomes for our students. This concludes my prepared remarks. With that, I will turn the call to our Financial Director to run through our financials.

Hangyu Li (CFO)

Thank you, Tongbo Li. Hello everyone. I'm pleased to report our results for the first quarter of 2025. During the quarter, we successfully responded to the volatile market environment and achieved solid results. We had a gross profit margin of 85.2% and a net income margin of 15.4%, with net income of RMB 75.2 million. This solid start is a testament to our prudent financial management and the sustainability of our business. Our core interests and professional certification programs continue to be engines of growth. The series of successful strategic initiatives supported average order value growth of 7.5% and resulted in 169,083 new student enrollments. Financially, we maintained positive operating cash flows for the seventh consecutive quarter, with cash equivalents and short-term investments totaling RMB 796.9 million. Our healthy financial position further strengthens our ability to cope with market uncertainties while making strategic investments.

Looking ahead, we maintain efficient operations, enhance artificial intelligence-driven course personalization, and capitalize on policy benefits in the lifelong learning space. Despite the recent decline in revenues, we believe our healthy financial position and the flexible business model will allow us to capitalize on the long-term opportunities in China's aging-driven education market. Let me now walk you through some of the key financial results for the first quarter of 2025. Unless otherwise noted, all figures are in RMB, and all comparisons are made year over year. In the first quarter of 2025, net revenues decreased by 6.8% to RMB 487.6 million, from RMB 523.2 million in the first quarter of 2024. The decrease is primarily driven by the decline in gross billing from post-secondary courses over the recent quarters, resulting in a year-over-year decrease in net revenues from post-secondary courses.

Cost of revenue decreased by 6.3% to RMB 72.3 million in the first quarter of 2025, from RMB 77.2 million in the first quarter of 2024. The decrease was mainly due to the declined compensation expenses related to high-cost reduction, including teachers and mentors. Gross profit decreased by 7.9% to RMB 415.3 million in the first quarter of 2025, from RMB 446.1 million in the first quarter of 2024. In the first quarter of 2025, operating expenses were RMB 341.1 million, which were the same as the first quarter of 2024. Sales and marketing expenses were RMB 304 million in the first quarter of 2025, which remained relatively stable as compared to RMB 301.6 million in the first quarter of 2024. General and administrative expenses increased by 5.9% to RMB 34.5 million in the first quarter of 2025, from RMB 32.6 million in the first quarter of 2024.

Product development expenses decreased by 11% to RMB 6.2 million in the first quarter of 2025, from RMB 7 million in the first quarter of 2024. The decrease was mainly due to declined compensation expenses related to high-cost reduction of our product development personnel. Net income for the first quarter of 2025 was RMB 75.2 million as compared to RMB 112.7 million in the first quarter of 2024. Basic and diluted net income per share was RMB 11.12 in the first quarter of 2025. As of March 31, 2025, the company had RMB 596.2 million of cash and cash equivalents and RMB 200.7 million of short-term investments, as compared to RMB 507.2 million of cash equivalents and RMB 276 million of short-term investments as of December 31, 2024. As of March 31, 2025, the company had a deferred revenue balance of RMB 891.6 million as compared to RMB 916.5 million as of December 31, 2024.

Now, for our outlook for the sixth quarter of 2025, Sunlands currently expects net revenues to be between RMB 500 million-RMB 520 million, which would represent an increase of 1.6%-5.6% year-over-year. This outlook is based on the current market conditions and reflects the company's management's current and preliminary estimate of current 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. If you wish to ask a question, please press star one, one on your telephone, and wait for your name to be announced. 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. Once again, if you wish to ask a question, please press star one, one on your telephone. As a reminder, if you do wish to ask a question, please press star one, one on your telephone. As we are showing no questions, I 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 (Head of Investor Relations Representative and Senior Investment Director)

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)

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