Sunlands Technology Group (STG) Q1 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

Hello, everyone, and thank you for joining Sunlands' First 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 Director, Mr. Hangyu Li. Management will begin with prepared remarks, and the call will conclude with the 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 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.

Thank you Yuhua, everyone. Welcome to Sunlands' First Quarter 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 operation basis and all figures are denominated in RMB, unless we have concern stability in the next challenging vision by a year-over-year increase of net revenue and net income for the quarter to that [indiscernible], respectively. This marks our 12th consecutive quarter of profitability. I'm supporting our operational efficiency and commitment to shareholder value. with strong focus on [indiscernible], we bolstered our endeavors in cost control [Technical Difficulty].

Ladies and gentlemen please stay on the line, your conference will resume shortly. Presenter please continue.

Additionally, our enrollment surged by 22.8% to a historical high of over 175,000, demonstrating the enhanced proficiency in acquiring students. This improvement reflects our dedicated initiatives to attract new users and enhance user retention and engagement by refining our cost 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 assist [indiscernible] package. Moving forward, we are dedicated to delivering exceptional services and products while exploring avenues for further business growth and operational efficiency improvements. Now let's turn to the performance of each of our major course programs. Our [indiscernible] programs now account for 14.3% of our total revenue. A testament to our strategic structure optimizations and alignment with our latest investment return goals. Given the structural makeup of education on [indiscernible] with the Chinese population, the universal access to compulsory education and the prevailing demand 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 B2B strategy decisively leverage our deep-rooted expertise in this area. Through our sub plan for initiating, we provide small and medium-sized organizations with comprehensive solutions, including extensive course content, authentic examination questions and advanced teacher 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 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 various customer, enhance customer retention rates and ultimately optimize the lifetime value of our users. This approach has proven successful as evidenced by a 32.4% increase in new enrollments in our interest-based education programs this quarter, underscoring the effectiveness of our strategic initiatives. Through ongoing practice, we have gained fresh insights into different age groups. Shifting our approach to course design and service. For example, unlike younger individuals, whose question of pursuits are often career-oriented or driven by external expectations. More mature learning experiences that enrich their lives, bring enjoy and foster meaningful connections. The fundamental difference this is [indiscernible] a substantial departure from traditional education and paradigms in both customer 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 cognizant learning environment, that encourages active participation and continuous engagement. We have consistently pushed the boundaries of our innovative [indiscernible] achieved notable milestones through industry integration. A prime example is our educational travel adventure projects. announced in March 2023, which are well suited for the elderly. At the end of the first quarter of 2024, we have already crafted over 1440 study tours. According to McKinsey [indiscernible] for China consumer trends report Senior citizens in first-tier cities have a funding expectations for travel that notably exceeded those who of the general population, marking this as the emerging market segment. These consumers are not primarily driven by price when deciding which travel products to purchase. Instead, this 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 auto traditional Chinese buildings into [indiscernible] of the journey, enriching experience with culture, depth and immersive learning opportunities. In the first 3 months of 2024 [indiscernible], revenue from educational travel adventure projects has already surpassed 65% of the earnings -- of the earnings for the entire of 2023. In the future, we will expand our efforts into other areas to offer our elderly users a wider array of products intending 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 process -- processes focused on increasing page views and refined 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. Where our focus will remain on delivering high-quality education, expanding our market presence and/or repricing shareholder value. Thank you for your presence today. With that, I will turn the call to our Financial Director, Hangyu, to run through our financials.

Thank you Tongbo, Hello, everyone. I will next review our quarter results. All figures are denominated in RMB like explained unless clarified otherwise. For the quarter, we have achieved net income of RMB 112.7 million with net income margin of 21.5%. Our tenth consecutive quarterly net income margin of 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 balance, sustainable growth and profitability brought us cash operating inflows of RMB 76.4 million in the quarter. At the end of the first quarter, 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 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 first quarter of 2024. All comparisons are year-on-year unless otherwise noted. In the first quarter of 2024, net revenues decreased by 7.7% to RMB 523.2 million, from RMB 566.9 million in the first 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 sales of goods such as books and learning materials. Cost of revenues increased by 13.2% to RMB 77.2 million in the first quarter of 2024 from RMB 68.2 million in the first quarter of 2023. The increase was primarily due to the growth in the cost of revenues from sales of goods. Gross profit decreased by 10.6% to RMB 446.1 million in the first quarter of 2024 from RMB 498.7 million in the first quarter of 2023. In the first quarter of 2024 Operating expenses were RMB 341.1 million, representing a 6.4% increase from RMB 320.7 million in the first quarter of 2023. The Sales and marketing expenses increased by 11.1% to RMB 301.6 million in the first quarter of 2024 from RMB 271.4 million in the first quarter 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 cost offerings. General and administrative expenses decreased by 17.9% to RMB 32.6 million in the first quarter of 2024 from RMB 39.6 million in the fourth quarter of 2023. The decrease was mainly due to the decline in rental expenses as certain businesses or office space were partially vacated in 2023 before expiration of the lease term for cost savings. Product development expenses decreased by 27.6% to RMB 7 million in the first quarter of 2024 from RMB 9.7 million in the first quarter of 2023. The decrease was mainly due to declined compensation expenses related to high [indiscernible] reduction of our product development personnel. Net income for the first quarter of 2024 was RMB 112.7 million as compared to RMB 180.1 million in the first quarter of 2023. Basic and diluted income per share was RMB 16.44 in the first quarter of 2024. As of March 31, 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 756.4 million of cash, cash equivalents and restricted cash of RMB 142.1 million of short-term investments as of December 31, 2023. As of March 31, 2024, the company had a deferred revenue balance of RMB 1,044.9 million as compared to RMB 1,130.9 million as of December 31, 2023, regarding the outlook for the second quarter, 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 reflects the company's management's current and preliminary estimates of market or [indiscernible] conditions and the customer demand, which are all successful change. With that, I'd like to open up the call to the questions. Operator?

[Operator Instructions] At this time, we're showing no further questions. So this will conclude our question-and-answer session. I would now like to turn the conference back to Yuhua for any closing remarks.

Once again, thank you, everyone, for joining today's call. We look forward to speaking with you again soon, good day, and good night.

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