Earnings Call: Q2 2020

Aug 14, 2020

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to Sunlands Second Quarter 2020 Earnings Conference Call. At this time, 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 host today, Yu Huya Sunlands' IR representative. Please go ahead. Hello, everyone, and thank you for joining Sunlands' 2nd quarter 2020 earnings conference call. The company's financial and operating results were issued in a 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 CEO, Tongvolio, will provide an update on our operational performance as well as our strategic initiatives. Our CFO, Lena Blue, will give you an overview of our financial performance and also provide our guidance for the second quarter of 2020. Following their prepared remarks, we will move into the Q and A session. Before I hand it over to the management, I'd like to remind you of Simon's 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 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, Yuval. Hello, everyone. Welcome to Sunlands' same quarter 2020 conference call. The COVID-nineteen pandemic in China was effectively during the second quarter due to the varying work resumption requirements in different regions, the average resumption rate of our Wuhan campers and the headquarters in Beijing was about 18%. Against this backdrop, we are pleased with maintaining steady growth in the 2nd quarter, Thanks to our self developed, collaborative online office system, efficient operation management and rigorous execution. We achieved the satisfactory financial results for this quarter. Our net revenues reached RMB512.5 million in line with our guidance. Additionally, we are proud to say that our more than 8000 employees in cities are all second and sound. Our gross billing achieved year over year growth for the first time in five quarters, increasing by 21.3 percent to RMB531.5 million compared with the prior year period. In addition, new student enrollments increased by 10.2% year over year. The increases was mainly driven by our strategy to diversify product and service offerings continues expansion in training cost categories, improve the efficiency of our sales team, as well as tremendous efforts from all of our employees. Next, let me provide highlights at the biggest segment level. Our business manual focus on 3 categories: STE, master's degree oriented programs and professional certification and skills programs of ST programs have maintained a solid market position and market share and masters degree oriented programs have become the strong new growth our strong new growth driver. According to Ministry of Education, the number of applicants for post grant programs are expected to reach a record high of $3,141,000, representing an increase of, 5 10,000 or 17.6 percent year over year from $2,900,000 in 2019. In response to the strong growth of applicants, the Ministry of Education made an announcement in February to expand the number of admissions in 2020 by 189,000 from last year's level. The ever expanding number of people taking the post granted admission test comes from the rising pressure of employment in China and the increasing demand for talents with higher education from enterprises. According to China Education Online, former students mostly working professionals accounted for 45% of those taking the postgraduate admission test in 2018, leveraging our student algorithm experience and the service advantages for this group of people with folks on providing the postgraduate admission test preparation for working professionals. And have achieved remarkable results. Our master's degree oriented programs have grown year over year for 8 consecutive quarters. Gross billings of Master's degree oriented programs for this quarter reached the new high of Rmb135.2 million, up 58.7% year over year and accounting for 25.4% of total billing. This proportion was significantly higher than 20192018, during which 1st degree oriented programs accounted for only 17 line 17.9% and 5.5% of gross billings. Respectively. At the same time, based on student demands and new market trends, Sunlands is also actively expanding our course offerings in multiple categories, including professional certifications and trainings related new occupations as well as new skills and hobbies training catering to persons diverse interests. The segment reached RMB59.5 million in gross billing this quarter, up 58.4% year over year. Accounting for 11.2% of total compared with 6.9% in 2019. We expect continued robust growth for this segment as its ASP is relatively low at approximately RMB3000. And we are in the process of adding more courses for our new and existing students to experience on our live streaming a live teaching platform. We are pleased to say that as this deal categories of courses are much shorter than degree courses, Students are steeper and have a high higher repurchase rate, which we expect to contribute positively to our profitability improvement. In the future, we will continue to take advantage of STES platform and our teachers to reach teaching experience constantly developing more online short term courses Super 4 and outs in order to expand our targeted user base and the promote course setting. Lastly, due to the post power of performance of the National STE exams from April to August, gross billings of STE programs are largest based segment also increased by 6.8% year over year in the 6th quarter as both new student enrollments and ASP increased. The second quarter, our students including those taking trial and free classes showed greater enthusiasm to study during the pandemic period. As we continuously optimize our 3 teacher system. The system refers to our comprehensive solution that combines live streaming lectures after class mentors and AI powered personal tutors. In this quarter, prototypes on online classes on our learning platform was 22,300,000 hours, increasing 16, 4% year over year, and a 25% quarter over quarter. The total number of online class attendees reached 758,000 than the average time spent this quarter for each student with almost 30 hours. The interesting fact was that of total time spent on live streaming classes during this quarter, nearly 5,500,000 hours or about 24.5% were driving by students spending time on presale trial of free courses, including various new courses and the many tutorials. This was 8 times higher compared to the level in the same period last year and the same time higher versus last quarter. In addition, trial classes students accounted for 27% of total students attending classes this quarter through the trial program we enable prospective students to experience our cost content and the teaching services in advance, which not only improves the retention rate of new students and spend our potential user pool, but also helps us develop a deeper understanding of student interests and realize additional cost saving potentials. Looking forward, we are confident to maintain the market leading position of our existing service categories and continue improve the learning effectiveness of our students through technical and operational advancement. We're also optimistic of the market opportunities and the possibilities of course setting as we develop new content and if acute our efficient student's acquisition strategy. With that, I would like to hand over the call to our CFO, Selena, to run through our financials. Thank you, Tongbo, and hello, everyone. During the second quarter, our net revenues declined 7.3% year over year. Due to the decrease of gross billings last year. However, we are pleased that even against the backdrop of pandemic and a severe macroeconomic environment, our gross billings achieved a more than 20% year over year growth. Reaching an important inflection point and giving us confidence in its continuous growth in the We also noticed a greater change in the product mix of our gross billings. The proportions of master degree oriented program and professional certification and skills programs with our total gross billings both further increase. Since the service periods of these 2 categories are much shorter compared with our FTE offerings, their increasing proportions will accelerate our revenue recognition and reduce the time gap due to mismatch. Between revenue recognition over time and expenses booking upfront. On the expense side, We continued our pursuit of cost structure optimization, achieving 33.9% and 33.6% reductions. In administrative expenses and R and D expenses respectively compared with the same period last year. Going forward, our focus remains on the diversification of technology and operational capabilities. More product offerings translate to bigger addressable market for us. And higher cost to leverage as well as increasing repurchasing potential from our students. Whereas technological and operational improvements provides our students better experiences, which will further stream strengths our brand image and reputation and ultimately improve our referral rate. We'll also continue diverse find our student acquisition strategy and upgrading our conversion model, all in an effort to further improve our sales conversion rate and efficiency and drive sustainable long term growth. Now let me walk you through some of the key financial results for the second quarter of 2020. All comparisons are year over year and all numbers are in RMB. In the second quarter of 2020, net revenues were $512,500,000, decreased by 7.3 percent year over year, mainly due to the decrease of gross billings last year. Cost of revenues increased by 4.1% to $99,600,000 in the second quarter of 2020 from $95,700,000 in the second quarter of 2019 which was primarily due to an increase in expenses related to service fees to educational institutions. Gross profit decreased by 9.7 percent to $4,120,900,000 from 4 point 457,000,000 in the second quarter of 2019. In the second quarter of 2020, operating expenses were 5 $60,000,000, representing a 12.3 percent increase from $498,700,000 in the second quarter of 2019. Sales and marketing expenses increased by 25.2 percent to RMB487.9 million in the second quarter of 2020 from $389,700,000 in the second quarter of 2019. The increase was mainly due to increases in number 1 compensation paid to our sales and marketing personnel and number 2, spending on branding and marketing activities, including investments in broadening our diversified student acquisition channel General and administrative expenses was 56,100,000 in the second quarter of 2020, decreased by 33.9% year over year, mainly due to the decrease in compensation expenses. Product development expenses decreased by 33.6 percent to RMB16 1,000,000 in the second quarter of 20 from RMB24 million in the second quarter of 2019. The decrease was primarily due to a decrease in the compensation incurred related to our product and technology development personnel during the quarter. Other income increased to RMB17.5 million in the second quarter of 2020 from RMB9 million in the second quarter of 2019. The increase was primarily due to the value added tax exemptions offered by the relevant authorities in the amount of 15,000,000 during the COVID-nineteen outbreak. Net loss for the second quarter of 2020 was $126,100,000 compared with $12,900,000 in the second quarter of 2019. Basic undiluted net loss per share was RMB18.7 in the second quarter of 2020. As of June 30, 2020, the company had 1079,400,000 cash and cash equivalents and $288,600,000 of short term investments. As of June 30, 2020, the company had a deferred revenue balance of 36,000,000 compared with $3228,800,000 as of December 31, 2019. Capital expenditures were incurred primarily in connection with IT Infrastructure equipment and leasehold improvement. Necessary to support Sunlands operations. Capital expenditure were $1,000,000 in the second quarter of 2020, compared with $2,200,000 in the second quarter of 2019. For the third quarter of 2020, Sunlands currently expects net revenues to be between 500,000,000 to 520,000,000 which would represent a decrease of 5.2 percent to 1.4% year over year. The above outlook is based on the current market conditions and reflects the company's company management current and the preliminary estimates of market. Operating conditions and the customer demand, which are all subject to change With that, I'd like to open up Thank you. You. 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. Showing no further questions. This will conclude our question and answer session. Once again, thank you everyone for joining today's call. We look forward to speaking with you again soon. Good day and good night. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.