Sunlands Technology Group (NYSE:STG) Q1 2023 Earnings Call Transcript May 25, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Sunlands First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded. I’ll now turn the conference over to your host, Yuhua, Sunlands IR representative. Please go ahead.

Yuhua Ye: Hello, everyone and thank you for joining Sunland’s first 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; 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 could cause actual results to differ materially from those contained in any forward-looking statements. For more information about 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: Thank you, Yuhua. Hello, everyone. Welcome to Sunland’s first quarter 2023 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 operation basis, and all figures are denominated in RMB unless explicitly specified otherwise. As we reflect on the first quarter of 2023, we have witnessed a steadfast and consistent performance in the challenge operating environment. Our first quarter net revenue remains steady, reaching RMB566.9 million, exceeding the high end of our guidance range. Our net income also experienced a slight year-over-year increase, reaching RMB118.1 billion, marking the eighth consecutive quarter of sustained profitability for our company and setting a remarkable net income margin of 31.8%.

We remain optimistic about our future prospects based on this encouraging start to the year. During this quarter, we also achieved a year-over-year increase of 3.8 percentage points in our gross profit margin, setting a new record high of 88%. Meanwhile, we have maintained a sharp focus on diversifying our course content, elevating the quality of our offerings, and optimizing student acquisition process. These concerted efforts have yielded remarkable results, as evidenced by a substantial year-over-year increase of 22.2% in new student enrollments. Moving forward, we are committed to maintaining this positive trajectory and continuing our success employing our cost-saving and efficiency-enhancing business strategies to support long-term sustainable growth.

Now, let’s turn to the performance of each of our major course programs. For post-secondary programs, our strategic reduction of marketing activities, coupled with increasing market competition from the new entrants aiming to tap into the immense potential of this segment, led to a decline in both new student enrollments and course payings . Despite facing intense competition and operating with a complex macro environment, we maintain our optimistic outlook for the future of our academic programs. This optimizing is particularly bolstered by the rising demand for continuing education, especially driven by the heightened employment pressures. Moving forward, we remain committed to delivering more precisely targeted, high-quality post-secondary courses to our students.

We believe that our 20 years of experience in exam preparation, along with our experienced and well-received teaching staff and extensive learning resources, will position us advantageously compared to our competitors in the long run. The sector comprising professional certification preparation, professional skills, and interest courses have demonstrated outstanding performance, with the year-over-year revenue increase exceeding 15.9%. Additionally, our relentless pursuit of developing novel interest programs has constantly borne fruit, propelling the revenue generated by the sector to an impressive growth rate of 105.7%. This substantial increase has cemented it as a significant and reliable source of income for our organization. Building upon this remarkable success, our steadfast commitment drives us to continuously refine our products and services, meeting the evolving learning needs of a broader universe of potential customers, ensuring that we remain at the forefront of industry.

The domestic economy continues to recover, leading to an overall improvement in the employment situation. However, according to the data from the National Bureau of Statistics, since the start of 2023, the youth unemployment rate for the individuals aged 16 to 24 has persistently remained at an elevated level, reaching 20.4% in April. The fierce job market competition will continue to drive to growth of online education as job seekers utilize it as a means to enhancing their skillsets and improve their chances of securing desirable employment opportunities. Additionally, we have observed that contemporary young individuals demonstrate a general inclination towards interest-based education. They recognize the dual benefits it offers, the opportunity to explore and develop personal interests for personal enrichment and self-fulfilment, as well as the potential for supplemental income or career advancement.

Furthermore, there are other notable trends that continue to gain momentum, such as the increasing focus on lifelong learning and the shift from offline to online education. As we move forward, we remain committed to adapting our educational offerings to meet the evolving demands of learners and leveraging these trends to fascinate accessible, effective and lifelong educational experiences. While we have made significant accomplishments, it is important to acknowledge that we are also confronted with challenges in other aspects of our business. The persistent macro-uncertainties and the evolving market dynamics have influenced customer behaviour for several of our products’ offerings, leading to a year-over-year decrease in net revenues. We have been proactive in addressing these challenges by refining our operations and closely managing our expenses.

Looking ahead, we will continue to explore our potential revenue streams, diversifying our products and services offerings to enhance our resilience in the face of various challenges. In conclusion, our performance in the first quarter of 2023 reflects our commitment to balance growth and profitability. We remain focused on delivering high-quality education and expanding our market presence. We extend our gratitude for your presence today and the continued support you provide. Thank you, and we look forward to your valuable engagement. With that, I will turn the call to our financial controller, Hangyu Li, to run through our financials.

Hangyu Li: Thank you, Tongbo. Hello, everyone. I would like to present our first quarter results, which have met our expectations and demonstrated our steadfast commitment to achieve sustainable growth despite a 7.6% year-over-year decrease in net revenues. Throughout the quarter, we maintained our disciplined cost management practices and streamlined operations to boost our efficiency and profitability, leading to a 7.3% year-over-year decrease in operating expenses. This focused approach to cost optimization has brought positive outcomes as evidenced by the growth in our net income from RMB179.4 million in the first quarter of 2022 to RMB180.1 million in the current quarter. Looking ahead, we maintain a positive outlook on our long-term growth prospects.

We will continue to expand our portfolio of online course offerings, optimize our course structure, and deliver exceptional services to our students. These strategic measures will enable us to capture the emerging opportunities and consolidate our leadership position in the industry. Now, let me walk you through some of our key financial results for the first 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 RMB566.9 million, a decrease of 7.6% year-over-year. Cost of revenue decreased by 29.5%. Cost of revenue decreased by 29.5% to RMB68.2 million in the first quarter of 2023, from RMB96.7 million in the fourth quarter of 2022. The decrease was primarily due to declined compensation expenses related to high-count reduction of our cost of revenues personnel, including teachers and mentors.

Gross profit decreased by 3.5% to RMB498.7 million, from RMB516.6 million in the first quarter of 2022. In the first quarter of 2023, operating expenses were RMB320.7 million, representing a 7.3% decrease from RMB345.8 million in the first quarter of 2022. Sales and marketing expenses decreased by 8% to RMB271.4 million in the first quarter of 2023, from $295 million in the fourth quarter of 2022. The decrease was mainly due to declined compensation expenses related to high-count reduction of our sales and marketing personnel. General and administrative expenses increased by 3.1% to RMB39.6 million in the first quarter of 2023, from RMB38.5 million in the first quarter of 2022. Product development expenses decreased by 21.7% to RMB9.7 million in the first quarter of 2023, from RMB12.4 million in the first quarter of 2022.

The decrease was mainly due to declined compensation expenses related to high-count reduction of our product development personnel. Other income decreased by 8.3% to RMB8.8 million in the first quarter of 2023, from RMB9.6 million in the first quarter of 2022. Net income for the first quarter of 2023 was RMB180.1 million, compared with net income of RMB179.4 million in the first quarter of 2022. Basic and diluted net income per share was RMB26 in the first quarter of 2023. As of March 31, 2023, the company had RMB721.8 million of cash and cash equivalents and RMB87.7 million of short-term investments. As of March 31, 2023, the company had a deferred revenue balance of RMB1,513.9 million, compared with RMB1,690.9 million as of September 31, 2022.

Capital expenditures were incurred primarily in connection with IT infrastructure equipment and a leasehold improvement necessary to support the company’s operations. Capital expenditures were RMB3.8 million in the first quarter, compared with RMB0.9 million in the first quarter of 2022. And now for our outlook. For the second quarter of 2023, Sunlands’ currently expects net revenues to be between RMB480 million to RMB500 million, which would represent a decrease of 9.9% to 13.5% year-over-year. This outlook is based on the current market conditions and reflects the company’s management current and 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: At this time, we are showing no further questions. So this will conclude our questions-and-answer session. At this time, I would like to turn the conference back over to you for any closing remarks.

Yuhua Ye: 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: That concludes the conference for today. Thank you for participating. You may all disconnect.