Earnings Call: Q1 2021

May 25, 2021

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After prepared remarks by the management team, there will be a question and answer session. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to your host today, Yuhua Yi, Sunlands' IR representative, please go ahead. Hello, everyone, and thank you for joining Sunlands' Q1 2021 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. On the call, our Chief CEO, Tongbo Liu, will provide an update on our operational performance as We are at our strategic initiatives. Our CFO, Selina Lu Li, will give you an overview of our financial performance and also provide our guidance for the Q2 of 2021. Following their prepared remarks, 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. Thank you, Yuan. Welcome to Sunlands First Quarter 2021 Conference Call. We are pleased to announce that Sunlands Technology Group Had a very strong opening quarter for 2021, starting with net revenues that rose to RMB694.3 million, a 20 2.9% year over year increase. The increase in net revenues was mainly driven by the year over year growth in gross billings since the second half of Gross billings in the Q1 rose to RMB 5,93,700,000, representing year over year growth of 14.9%. In terms of new enrollments, we achieved a 107.6% increase year over year, which surged to over 145,000 students. The solid performance was driven by our continued efforts in diversifying product offerings, rising brand awareness and improving student satisfaction. Sunlands continue to focus on expanding and refining its master's degree oriented programs. Because of this strategy, Gross billings in master's degree oriented programs attended a growth rate of 73.6% year over year and contributed approximately 13.4 percent to total gross billing compared with 22% in the same quarter last year. The enrollments also grew at a significant rate of 72.8% year over year. Our master's degree programs cater especially to students with full time jobs who are more financially stable, but have relatively limited time and demand more customized assistance for learning. Students with full time jobs We believe this fact, coupled with Sunlands' continued investment in brand awareness and the course offerings, We'll continue to provide thrust for our wider market share. We'll also continue to focus on market opportunities For our professional certification and are making significant progress in growing this segment as well. Since the outbreak of COVID-nineteen last year, People are getting more comfortable attending online classes to improve work related and hobby related skills. Moreover, the employment market is I mean, more competitive for employees and they are feeling the gross sense of urgency to attend the professional certification courses with the purpose of maintaining their level of employee liability. In addition, the Chinese government also established According to the State Council of China, more than 27,000,000 subsidized vocational training opportunities We believe these factors will continue to play out in the future, bode well for our professional certification business. While it is encouraging to see such Strong growth momentum in both master's degree oriented and professional certification programs. We remain confident of our programs and we will continue to fine tune and expand our product offerings. According to the Famous National Population Centers of China, Only 218,000,000 Chinese held an associate degree or above, Representing a percentage of 15.5 percent compared to the total population of RMB1.41 billion in China, we believe STE is still a sizable market and the company will continue to generate revenue from this industry. High level teaching quality is our priority and we are devoted to recruiting 1st class teachers with competitive compensation packages. By the end of the Q1, more than 17% of our teachers held degrees from top tier universities in both China and around the world. Furthermore, we are committed to building an extensive teacher rating and a training system, deploying our database of Case studies and templates in teaching and establishing dimensional teaching channels to ensure top notch teaching standards, Driven by our efforts in pursuing high level teaching quality, we are enthused that our students' level of Satisfaction has reached a record high according to our internal survey. Aside from our efforts In upgrading teaching quality, we continue to expand and improve our academic research team, refine our research and development framework In order to widen our course offerings and accelerate the pace with Introduce new courses. We believe our academic research team continue to grow. Our research personnel will have Better opportunity to become more specialized in his or her own academic discipline, which will further enhance our synergies between our existing and new cost offerings and subsequently improve the overall academic research efficiency. We are confident this snowball effect in academic research will pave the way for solidifying our competitive position and strengthening our economic moat in post secondary education industry. Looking ahead, We are endeavoring to proliferate our master's degree oriented and professional skills programs to capture the benefits of Economic scale, while solidifying our market leading position in STE programs. We are devoted to delivering the best learning experience to our students, so they can have the best career prospects, while also creating values for all stakeholders. With that, I will turn the call to our CFO, Selina, to run through our financials. Thank you, Tongbo. Hello, everyone. We are pleased to see 1st quarter Net revenues beat guidance once again and hit a record high as rising brand recognition for our master's degree oriented and professional from SDE programs and our commitment to optimizing the students' experience, affirms our confidence in sustaining this momentum. We also managed to lower costs, delivering 52.2 percent 16.3 percent reductions in G and A and R and D expenses, respectively. As a result, 1st quarter net loss narrowed 18.7% year over year to RMB53.3 million. As we look ahead, our marketing department will continue to explore avenues To promote brand awareness, while our sales team will target a higher referral rate and the sales conversion rate to fuel future growth. And most importantly, our management is keeping an eye on implementing optimal strategies that deliver the best returns for all shareholders. Now, let me walk you through some of the key financial results for the Q1 of 2021. All comparisons are year over year and all numbers are in In the Q1, net revenues were RMB 690 for RMB4.3 million, an increase of 22.9 percent year over year. The increase was mainly driven by the year over year growth in gross billings since the second half of twenty twenty. Cost of revenues increased by 9.8% to RMB106.4 million in the Q1 from RMB96.9 million in the Q1 of 2020. The increase was primarily due to an increase in compensation expenses. Gross profit Increased by 25.6 percent to 587.9000000 from 468 RMB2000000 in the Q1 of 2020. In the Q1, operating expenses were RMB666,600,000, representing a 17.4% increase from RMB567.8 million in the Q1 of 2020. Sales and marketing expenses increased by 32.5 percent to RMB606.4 million in the first quarter from RMB457.9 million in the Q1 of 2020. The increase was mainly due to increase in, Number 1, compensation expenses related to our sales and marketing personnel and number 2, spending on branding and marketing activities, including more marketing promotional activities to diversify student acquisition channels. General and administrative expenses were $42,300,000 in the Q1 of 2021, decreasing 52.2 percent year over year, mainly due to the decline in compensation expenses. Product development expenses decreased by 16.3 percent to $17,900,000 in the 1st quarter from RMB21.4 million in the Q1 of 2020. The decrease was primarily due to decrease in the compensation expenses encouraged related to our product and the technology development personnel during the quarter. Other income decreased to RMB21.3 million in the Q1 of 2021 from RMB29 1,000,000 in the Q1 of 2020. The decrease was primarily due to a decrease in value added tax exemption offered by the relevant authorities as part of the national COVID-nineteen relief effort. Net loss for the Q1 was RMB53.3 million compared to RMB65.6 million in the Q1 of 2020. Basic and diluted net loss per share was RMB7.87 in the Q1 of 2021. As of March 31, 2021, the company Had RMB 826.6 million of cash and cash equivalents and RMB306.5 million of short term investments. As of March 31, 2021, the company had a deferred revenue balance of RMB 2902.5 million compared with RMB 3,024,400,000 as of December 31, 20 Capital expenditures were incurred primarily in connection with IT infrastructure equipment and the leasehold improvement necessary to support the company's operations. Capital expenditures were $1,700,000 in the 1st quarter compared with 7,000,000 in the Q1 of 2020. And now for our outlook. For the Q2 of 2021, Sunlands currently expects net revenues to be between 600,000,000 to RMB620 1,000,000, which should represent an increase of 17.1 percent and 21% year over year. This outlook is based on the current market conditions and reflects the company's management's Current and preliminary estimates of markets, 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? Thank you. We will now begin the question and answer session. 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. At this time, we'll pause momentarily to assemble our roster. Our first question is from Henry Lee from Tre Fund. Please go ahead. Our next question comes from Phoebe Chen from CDC Capital, please go ahead. Hey, hello, management. So thanks for sharing, because I really didn't get the question from Mr. Li. So I'm not sure if there's any repeated questions in the news. I'm sorry. My apologies, but I would like you to Probably answer it again in English. So my first question would be, could you please kindly provide The breakdown of STE and MBA, a master orientated business and other certificate sectors. The second would be that, why the reason gross billing is lower than net revenue from Q1. Okay. Maybe I can answer your second question first. We pre connect all the gross billings from the students, but we need to Recur the revenue by during the serious period. So why that means our revenue will not equal to the gross billing all the time. And that quite depends on our Right. Sure. But I mean from the I'm sorry. I mean from the previous quarter, I mean, because we know that the as you said, the pre collect Nature of education sector, that's why gross revenue is always higher probably than net revenue and that is what also What we observed from the previous quarter? Yes. Let me finish my answer. So The speed to recognize the gross billing quite depends on our mixture of our You can see during the past several quarters, The percentage of certificate and MBA will get higher and higher and that The service period of these two categories are much shorter than the SGE. That means With the time with the development of this structure changes, then the recognition period will be shorter. That means faster. That's why our revenue now is greater than the gross billing. Thank you. That perfectly answers my questions. Okay. Could you repeat your first question? Sorry. There's a breakdown of revenue and or gross billing of different business sectors. That's quite similar to the first question, Rasa. Our gross billing structure, I can repeat, the structure from The percentage of STE accounts for 24% and MBA accounts for 30 3.8 percent and the 3rd category accounts for 41%. That's for net growth. And you mean the revenue, the segment is revenue percentage? Right. The revenue FTE accounts for 60%. That means that comes from the gross billing Okay. About the structure of Net gross billing and net revenue, I think that question is referred to this angle. And the percentage of SCE in net gross billion will be 24%. MBA accounts for 33.8 percent and the third one accounts for 42%. And regarding to the net revenue, the structure is different. STE accounts for 60.4% And MBA accounts for 53.8% and Net revenue sorry, net revenue, the SGE accounts for 40.8 percent, NVA accounts for 22.6 percent and the third one, 34%. Showing no further questions, This will conclude our question and answer session. At this time, I'd like to turn the conference back over to Yuhua Ye, IR Representative, 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 the earnings conference call. You may now disconnect your lines.