Sunlands Technology Group (STG) Q1 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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.

Hello, everyone, and thank you for joining Sunlands' First Quarter 2026 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 could download the earnings press release and sign up for our distribution list by visiting our IR website at ir.sunlands. com. 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, followed by a question-and-answer 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 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.

Okay. Thank you, Yuhua. Hello, everyone. Welcome to Sunlands' First Quarter 2026 Earnings 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. We opened 2026 with net revenues of RMB 440.7 million and net income of RMB 76.8 million, marking our 20th consecutive profitable quarter. Net income margin reached 17.4%. Selling expenses declined 19.5% year-over-year, representing the largest single-quarter reduction we have recorded in recent years and the third consecutive quarter of year-over-year decline. At the same time, R&D expenses rose 5.6% year-over-year, reflecting our continued investment in technology capability enhancement. The 9.6% year-over-year revenue decline reflected the 2 concurrent dynamics, continued structural softness in degree and diploma-oriented programs and our ongoing recalibration of customer acquisition standards towards higher quality learner cohorts. While these factors placed pressure on the top line, our profitability reflected the progress we have made in cost structure optimization, operating discipline and technology-enabled efficiency. Let me now turn to the performance of our major cost categories. Degree and diploma-oriented postsecondary programs contributed 17.9% of net revenues in the first quarter of 2026. We continue to manage this segment in line with genuine learner demand while allocating resources with discipline. Interest-based programs, professional skills and professional certification preparation together contributed 67.9% of net revenues and remains important areas of focus as we continue to diversify our revenue mix. Within this broader category, senior interest-based learning remains one of the areas where we continue to see meaningful long-term opportunity. This quarter, we further deepened our catalog within the arts by adding new courses such as colored pencil and folk music in response to express learner demand. We are also exploring adjacent content directions through early-stage pilots, including language learning, where we have seen initial learner interest. Beyond course content, we continue to extend the learning experience into more [ tangible ] scenarios. We launched a study tool designed around our existing course content. So the learner who has spent a year studying Chinese painting with us can take a natural next step by visiting the landscapes, artists and museums connected to that tradition. This allows us to deepen the learning journey and reinforce the investment learners have already made rather than asking them to start from 0 in an unrelated program. We also continue to partner with art galleries and cultural institutions to bring our learners into physical spaces where their course work comes alive. Through curated visits, online calligraphy and printing students can see master work up close, meet practitioners and gain a clearer sense of where sustained practice can take them. Initial feedback has been constructive and generally positive. And we believe this type of learning reinforcement is an effective lever for improving both completion and repurchase. These initiatives remain at an early stage with initial signals warranting continued observation and refinement. We are not simply building a course catalog, but gradually extending the learning experience into a more integrated and continuous journey for the new learners. Repurchase behavior within our core cohorts continues to provide encouraging indications that for the increasing share of learners, this evolving experience is gaining resonance. The most consequential operating development this quarter relates to the continued maturation of our AI capabilities, which we believe may have meaningful implications for long-term operating efficiency. A year ago, we described AI primarily a productivity tool as adoption has broadened of course in the business that framing has continued to evolve. In our customer acquisition workflow, our internally developed AI assistant system has increasingly played a decision support role. It helps surface signals in live prospect interactions, including sentiment, hesitation and a decision friction and provides tailored conversational guidance based on each agent's communication style and conversational content. In parallel, our intelligent voice system has shortened the time-to-first-contact window for new leads, a factor that has historically been associated with conversion efficiency. It has also enabled our human teams to focus more on high-value interactions that requires judgment and empathy, which remain critical to enrollment outcomes. Looking ahead, we expect AI-driven capabilities to continue to be embedded more broadly across both acquisition and service workflows, supporting ongoing improvement in operating efficiency. Besides, we are also exploring how these capabilities can be extended into other parts of the learner life cycle to further improve overall service efficiency and experience. To close, this quarter reflects disciplined execution against the priorities we outlined at the start of the year. Revenue mix continues to evolve, profitability supported by operating discipline and our knowledge capabilities continue to deepen. We believe the investments we are making today are strengthening the foundation for sustainable long-term development. As these initiatives continue to mature, we remain focused on disciplined execution and prudent risk resource allocation. That concludes Sunlands' prepared remarks. I will now turn the call over to our Finance Director, Hangyu Li.

Thank you, Tongbo. Hello, everyone. I'm pleased to share our financial results for the first quarter of 2026. This quarter, our numbers demonstrate the rewards of our strategic persistence. As Tongbo discussed, we have deliberately prioritized revenue quality and learner cohort health over low top line scale. This disciplined execution has translated into a leaner cost structure, healthy margins and a resilient balance sheet. Our focus on precision has led to a significant milestone in cost management with selling expenses declining by 19.5% year-over-year. This marks the largest single quarter reduction we have recorded in recent years and our third consecutive quarter of year-over-year decline. While we prudently management overhead, we continued to expand our technological edge. Our product development expenses rose by 5.6% year-over-year, reflecting our commitment to embedding AI deeply into our operations. This scaling of our AI capability is already serving as a primary operational catalyst to enhance delivery, automate engagement and offset structural costs. These strategic trade-offs have directly reinforced our profit quality and the bottom line resilience. Despite 9.6% year-over-year decline in net revenues, our profitability remained strong. We maintained a solid gross margin of 86.5% while our net income margin expanded to 17.4%. Securing this execution is our resilient balance sheet position. Our robust liquidity profile provides us with the strategic flexibility required to fully absorb macroeconomic variations while aggressively compounding capital in our priority growth initiatives. Now let me walk you through some of our key financial results for the first quarter of 2026. All comparisons are year-over-year and all figures are in RMB, unless otherwise noted. In the first quarter of 2026, net revenues decreased by 9.6% to RMB 440.7 million from RMB 487.6 million in the first quarter of 2025. Cost of revenues decreased by 17.7% to RMB 59.5 million from RMB 72.3 million in the first quarter of 2025, mainly due to a decline in costs related to learning materials, books and service fees paid to educational institutions. Gross profit was RMB 381.1 million compared to RMB 415.3 million in the first quarter of 2025. Gross profit margin expanded to 86.5%, up from 85.2% in the prior year period. Total operating expenses were RMB 284.3 million, a 16.7% decrease from RMB 341.1 million in the first quarter of 2025. Sales and marketing expenses decreased by 19.5% to RMB 241.9 million from RMB 300.4 million in the first quarter of 2025. primarily due to optimized compensation for sales personnel and more targeted branding and marketing activities. General and administrative expenses increased by 4.1% to RMB 35.9 million from RMB 34.5 million in the first quarter of 2025. Product development expenses rose by 5.6% to RMB 6.6 million from RMB 6.2 million in the first quarter of 2025. Net income for the first quarter of 2026 reached RMB 76.8 million compared to RMB 75.2 million in the first quarter of 2025. Basic and diluted net income per share was RMB 11.48 in the first quarter of 2026. As of March 31, 2026, the company held RMB 547.2 million of cash, cash equivalents and restricted cash alongside RMB 236 million of short-term investments compared to RMB 576.8 million of cash and cash equivalents and RMB 235.9 million of short-term investments as of December 31, 2025. As of March 31, 2026, the company maintained a deferred revenue balance of RMB 500.5 million compared to RMB 585.3 million as of December 31, 2025. Turning to our outlook. For the first -- second quarter of 2026, we expect net revenues to be between RMB 410 million to RMB 430 million, representing a decrease of 20.2% to 23.9% year-over-year. This outlook is based on our current market dynamics and reflects our preliminary assessment of macro conditions and the learner demand patterns, which remains subject to substantial uncertainty. This concludes our prepared remarks. We will now open the call for questions. Operator, please go ahead.

[Operator Instructions] At this time, we are showing no further questions. So I will conclude our Q&A session, and I will now 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.

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