Sunlands Technology Group - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' second quarter 2024 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 Ye, Sunlands' IR representative. Thank you. Please go ahead.

Yuhua Ye (Investor Relations Representative)

Hello, everyone, and thank you for joining today's Sunlands' second quarter 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 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.

Hangyu Li (Financial Controller)

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 (CEO)

Thank you, Yuhua. Hello, everyone. Welcome to Sunlands' second quarter 2024 conference call. Prior to commencing, I would like to kindly remind all attendees that the financial information referenced in this release is presented on a continuing operation basis, and all figures are denominated in RMB, unless explicitly specified otherwise. In the face of challenging macroeconomic conditions, our company demonstrated strategic flexibility to deliver solid results in the second quarter. We achieved a net revenue of CNY 492.2 million and a net income of CNY 82.3 million. This underscored our resilience and ability to adapt in the face of adversities and demonstrated our strong commitment to cost reduction and sustainable growth. Our cash flow also remains solid, with net cash flow from operating activities showing consistently positive over the past four quarters.

Hangyu Li (Financial Controller)

This strong financial standing not only equips us to handle unpredictable circumstances effectively, but also creates opportunities for pioneering business development. It is also worth noting that the diversification of interest course offerings has continued to bear fruit, with overall new student enrollments up by 9.1% year-over-year, and a corresponding 8.4% increase in course billings. This strategy aims not only to attract a broader and more varied user base, but also to foster increased engagement through repeat purchases and to capitalize on course setting opportunities across our extensive product portfolio. As we continue to expand our course selection and refine our offerings, we are poised to uncover even more market opportunities.

Our substantial user base will provide a strong foundation for this growth, enabling us to maximize the lifetime value of each customer. Looking ahead to second half of the year, our top priorities are to enhance brand awareness and improve the quality of our existing products and services. We are taking a prudent but proactive approach to expanding and refining the offerings. Our commitment to the key growth initiatives remains unwavering as we continue to focus on improving operational efficiency and profitability. Now, let's turn to the performance of each of our major areas. The sector, including interest, professional skills, and professional certification preparation programs, has been a pivotal driver of our growth, contributing 76.7% of our total revenue, existing and anticipating an 11% year-over-year increase.

Differentiating itself from traditional test-oriented courses, the adult online education market is evolving, with learning objectives becoming more diverse. We believe there are significant opportunities in the interest-based education area, driven by a broader educational growth. We realized early on the great potential of interest-based courses, particularly within the silver-haired demographic. Recent market developments have validated our strategic vision. Degree or diploma-oriented post-secondary courses accounted for 10.7% of our total revenue, which is consistent with our near-term goals. To enhance their competitiveness in employment, the demand for working adults to upgrade their degrees or diploma has remained steady. Online education offers convenience and flexibility, enabling working adults to balance career development with competency enhancement. We are optimistic about the future of this area, and we'll dynamically adjust our business arrangements as necessary.

In addition, we are enhancing our online course offerings with ongoing user research to meet diverse needs. Beyond maintaining our leading position in senior arts education, we are venturing into new areas, leveraging over two decades of expertise and insights. We are poised to gain a competitive edge by aligning our courses with market demands. Furthermore, we have expanded into products and services around the course offerings for this demographic, such as the new materials and educational travel. For the former, we tend to work with top-tier supply chains to ensure the highest standards of product delivery. In terms of educational travel, we have already achieved a remarkable success, with revenue six times that of the same period last year. In June, we introduced the Echoes of the Yellow River Expedition trip, collaborative project with Beijing Radio & Television Station.

This trip was consisted of visiting several cities along the Yellow River, to sketch famous landmarks under the guidance of distinguished artists, with a TV crew documenting the entire process. During the trip, participants gained a comprehensive learning experience, both on the road and in the field. Feedback from participants indicated that they appreciated the range of activities, including lectures, unique field trips, and ongoing in-depth Q&A sessions with the artists. These activities not only enriches our offerings, but also greatly enhances the visibility and the reputation of our brand. These updates provide a snapshot of our business progress. Now, let's delve into some industry insights. As a company firmly believing in technology as a key driver for innovation, we are proactively participating in the AIGC wave.

Our platform now integrates AI to synthesize the voices of distinguished educators, providing timely and personalized learning support to address students' queries. Additionally, we have incorporated AI-driven assessment grading, which offers rapid and objective evaluations, enhancing assessment accuracy, and efficiency, while reducing the administrative burden on our educators. For instance, the AI simulated teacher now provides calligraphy evaluations for students, saving approximately two hours of teacher time per day. This allows them to focus more on teaching and interaction. On the macroeconomic policy front, we continue to receive encouraging news about the government's strong support for the industry in which we operate. In August, the State Council introduced a policy aimed at promoting the high quality development of service consumption.

The policy supports the integration of the accommodation industry with tourism, recreation, and educational travel, and also emphasizes the importance of senior consumption and educational consumption. Guided by these policy directives, we are committed to developing quality products and services to better serve our students and the users. The adult education market presents both opportunities and challenges. On the way forward, we will continue to focus on providing high-quality courses, experimenting with education and peripheral products and services, and maximizing shareholder value. Thank you for your interest and support today. With that, I will turn the call over to our Financial Controller, Hangyu, to run through our financials. Hangyu, please.

Thank you, Tongbo. Hello, everyone. I'd like to present our second quarter results, which are in line with our expectations. We have been profitable since the second quarter of 2021. Our business continues to dramatically adjust to market conditions, while prudently pursuing new opportunities. Our gross margin was 84.4%, and the net margin was 16.67%, making us profitable for the thirteenth consecutive quarter. Growth in sales revenues from interest course offerings compensated for the decline in the post-secondary courses, maintaining a stable profitability. In addition, we had healthy cash flows with 4 consecutive quarters of positive net cash, net cash from operating activities. Our solid cash position not only enhances our ability to cope with an uncertain environment, but also provides opportunities for innovative business expansion.

Continuing from peripheral products and services accounted for 11.5% of the total in the quarter, and our efforts to diversify the offerings are working well. We are optimistic about the long-term prospects. Looking ahead, we'll continue to optimize our course offerings, while maintaining efficient operation. These strategic initiatives will enable us to capitalize on emerging opportunities, strengthen 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 second quarter of 2024. All comparisons are year-over-year, and all figures are in RMB, unless otherwise noted. For the second quarter of 2024, net revenues decreased by 6.5% to CNY 492.2 million, from CNY 526.4 million in the second quarter 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 interest course offerings. Cost of revenues increased by 28.8% to CNY 76.6 million in the second quarter of 2024, from CNY 59.5 million in the second quarter of 2023. The increase was primarily due to an increase in the cost of revenues from sales and the goods, such as books and the learning materials. Gross profit decreased by 11% to CNY 415.6 million in the second quarter of 2024, from CNY 466.9 million in the second quarter of 2023.

In the second quarter of 2024, operating expenses were CNY 338.9 million, representing a 9% increase from CNY 311 million in the second quarter of 2023. Sales and marketing expenses increased by 10.2% to CNY 297.4 million in the second quarter of 2024, from CNY 270 million in the second quarter of 2023. The increase was mainly due to the growth in spending on sales activities, including increased enhanced compensation for sales personnel, as well as increased spending on branding and marketing activities, focusing on interest course offerings. General and administrative expenses increased by 2.2% to CNY 33.8 million in the second quarter of 2024, from CNY 33.1 million in the second quarter of 2023.

Product development expenses decreased by 4.2% to CNY 7.7 million in the second quarter of 2024, from CNY 8 million in the second quarter of 2023. The decrease was mainly due to declined compensation expenses related to head count reduction of our product development personnel. Net income for the second quarter of 2024 was CNY 82.3 million, as compared to CNY 173.9 million in the second quarter of 2023. Basic and diluted net income per share was CNY 0.12 in the second quarter of 2024.

As of June 30, 2024, the company had CNY 758.6 million of cash, cash equivalents, and restricted cash, and CNY 243.9 million of short-term investments, as compared to CNY 766.4 million of cash, cash equivalents, and restricted cash, and CNY 142.1 million of short-term investments as of December 31st, 2023. As of June 30th, 2024, the company had a deferred revenue balance of CNY 986.9 million, as compared to CNY 1,113.9 million as of December 31st, 2023. Now, for our outlook.

For the third quarter of 2024, we currently expect net revenues to be between CNY 490 million to CNY 510 million, a decrease of 2.8% to 6.6% year-over-year. This outlook is based on the current market conditions and reflect the company's management's current and the preliminary estimate of market, operating conditions of 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 question-and-answer session. To ask a question on the phone, please press star one one and wait for your name to be announced. For the benefit of all participants in today's call, if you wish to ask your questions to management in Chinese, please immediately repeat your questions in English. Please stand by while questions are being collected. As a reminder, if you'd like to ask question, please press star one one and wait for your name to be announced. 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 (Investor Relations 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.

Operator (participant)

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect your line.