Earnings Call: Q3 2019

Nov 22, 2019

Earnings release

Ladies and gentlemen, thank you for standing by and welcome to Sunlands Third Quarter 2019 Earnings Conference Call. At this time Today's conference call is being recorded. Turn the call over to your host today, Union Lu, Sunlands IR Director. Please go ahead. Hello, everyone, and thank you for joining Sunlands first quarter 2019 earnings conference call. On the call, our CEO, Tongbo Liu will provide an date on our operational performance as well as our strategic initiatives. Our CFO, Stephen Yifeng Li will give you an overview of our financial performance and also provide our guidance for the fourth quarter of 2019. Following the prepared remarks, we will Before I hand it over to the management, I'd like to remind you of Sunlands' Safe Harbor statements. 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, Tombo Liu, Thank you. Hello, everyone. Welcome to Sunlands Third Quarter 2019 Conference Call. During this third quarter, we continue to focused on a diversified set of student acquisition methods to attract more students to our online platform. Driven by these initiatives, our 3rd quarter top line reached RMB527.3 million which was in line with our guidance and represented a 2% increase year over year. We also narrowed our net loss margin to 20 0.6% in the 3rd quarter versus 14 3.8% in the same period last year. As we continue to manage costs and expenses. During the third quarter, we continued to advance our strategic initiatives and new product features in the effort to promote our brands and improve the quality of courses and services we bring to our students. Our strategic initiatives also include the relentless pursuit of cutting edge technologies particularly with an emphasis on applying AI to education as we strive to further depreciate our offerings. Through data mining our vast database of learning records and leveraging our integrated AI technology we are able to analyze individual learning habits and develop personalized study plans for our students. So that their learning can be more efficient and effective. We also use AI technology to analyze our massive database of historical examination questions in order to predict the most frequent test knowledge points and optimize of test and preparation materials. Moreover, artificial intelligence plays an essential role in Sunlands' intern management to improve quality of services for students and education and training as well as protect students rights. For example, all phone calls to our students are monitored by our AI system, which can detect sensitive words and the protocol violations and immediately since that alerts for corrective action, Data analysis is also the foundation of our recruitment process. We have detailed data records for candidate profiling interview results and training that first suited recruitment and internal staff promotions. Next, let me provide some specifics on several of our key highlights of this quarter. First, As we mentioned in previous earnings call, we are strengthening our strategic emphasis on non ST products with Master's oriented products growing rapidly with an increasingly diversified portfolio of educational products We are enjoying a more balanced revenue mix. Our masters oriented products continue to attract the interests from students. Increasing to 16.9 percent of gross billings at the end of the 3rd quarter from approximately 5.9 ended at the end of quarter 3, 2018. The solid growth was attributable to Fairables buy and demand dynamics for master's degree programs in China as we celebrated during the last quarter's earnings call and also to our efforts in developing products designed specifically to match the needs of prospective students in this segment. It is worth mentioning that we and one of our international partnership Universities hosted the 1st graduation ceremony of our international MBA program. Many students far away from value also attended the ceremony and showed how much they had enjoyed the courses, which symbolizes our milestone and the effectiveness of our revolutionary OPM model. We are more than ever convinced that continuing to expand our masters oriented products will help more people benefit from learning and help eliminate the information and the combination gap resulting from historical geographic cultural and economic factors. We are more than ever determined to expand our online international master programs to bring high quality and high education resource from Europe and the United States to students in China and share China's education resource with other developing countries. We are confident we will continue to capture the market opportunity for higher education as we provide progress in response to ever evolving market needs. 2nd, our mobile apps financed speed edition which we launched in January continues to gain popularity amongst students due to its easy accessibility. Fast interaction speed and the minimal memory storage requirements. By the end of the third quarter, users users of this app reached 6,300,000, increasing further from the only 1,000,000 users at the end of the second quarter. And 250,000 at the end of the first quarter. It also continuously upgraded and diversified our WeChat Mini programs. Which are designed to allow students to maximize their study time on their mobile devices. Through the efficient use of tie fragments, we an increasingly number of design preparation questions completed by our students, which we believe will need to hire pass rates going forward. Lastly, while we are optimistic about the long term growth of our gross billings, and new student enrollment, we also continue to seek balance the top line and bottom line performers. In the third quarter, our net loss narrowed by 42.6 percent year over year to MB129.8000000 as we prudently manage our expenses with our leading technology, high quality educational content and the 1 to many business model we are confident in our ability to grow and be the market leader in China's end of our education industry. With that, I would like to hand over the call to our CFO Steven to run through our financials. Thank you, Tongbo. And hello, everyone. Thanks for joining us. For the third quarter, our net revenues were RMB527.3 million in line with our guidance. Our gross billings and new student enrollment declined by 18.8% and 20.8% respectively year over year, as we continued to adjust the marketing expenses in view of uncertainties in student acquisition costs and macroeconomic trends. However, the rates of decrease moderated from the 2nd quarter, which shows our student acquisition efforts are gaining traction. In addition, as Tungo just mentioned, following the improvement in net loss in the 2nd quarter, in the 3rd quarter, our net loss narrowed again year over year to RMB129.8 million compared with a loss of RMB200 $26,300,000 in third quarter of 2018, primarily as a result of reduced administrative expenses and sales and marketing expenses. Going forward, we will continue with steady execution of our 5 prompt expansion and retention strategies to bring long term returns for both our customers and shareholders. Now let me walk you through some of the key financial results for the third quarter. In the third quarter of 2019, net revenues increased by 2% to RMB527.3 million from RMB517 1000000 in the third quarter of 2018. The increase was mainly driven by the growth in the number of students in the third quarter of 2019 compared with the third quarter of 2018 following new student enrollments increase over the past years. Cost of revenues increased by 22.7 percent to RMB113.7 million the third quarter of 2019 from RMB92.7 million in the third quarter of 2018, which was primarily due to the insurance premiums related to online education services with insurance coverage since late in 2018. Gross profit decreased by 2.5 percent to RMB413.6 million from RMB424.4 million in the third quarter of 2018. In the third quarter of 2019, operating expenses were RMB546.9 million, representing a 21.5% decrease from RMB696.3 million in third quarter of 2018. Sales and marketing expenses decreased by 20.8 percent to RMB429.2 million in third quarter of 2019 from RMB $542,000,000 in third quarter of 2018. The decrease was mainly due to reduced marketing spending reflective of disciplined, prudent cost management and the decrease in expense of sales and the marketing personnel. General and administrative expenses decreased by 30.4% to RMB91 $300,000 in the third quarter of 2019 from RMB 131.1 1,000,000 in the third quarter of 2018. Product development expenses increased by 14% to RMB26.4 million in third quarter of 2019, from RMB23.2 million in the third quarter of 2018. The increase was primarily due to an increase in the number of employees and compensation paid to Sunlands, products and technology, development personnel during the quarter. Net loss for the third quarter of 2019 was RMB129.8 million compared with RMB226 $300,000 in third quarter of 2018. Basic and diluted net loss per share was RMB19 in third quarter of 2019. As of September 3, 2019, the company had RMB 1000 $569,400,000 of cash and cash equivalents and RMB 208.8 million of short term investments compared with RMB1248.8 million of cash and cash equivalents and RMB1000 and $28,600,000 of short term investments as of December 31, 2018. As of September 30, 2019, the company had a deferred revenue balance of RMB3000 and $214,600,000 compared with RMB3286 1,000,000 as of December 31, 2018. Capital expenditures were incurred primarily in connection with purchases for buildings and infrastructure equipment necessary to support Sunlands operations. Capital expenditures were RMB $11,800,000 in the third quarter of 2019, compared with RMB10.3 million in the third quarter of 2018. And in terms of the key financial results, for the 1st 9 months of 2019, let me walk you in the details too. In the 1st 9 months of 2019, net revenues increased by 17% to RMB1000 $644,200,000 from RMB 1,405,200,000 in the 1st 9 months of 2018. Cost of revenues increased by 17.1 percent to RMB294.8 million in 1st 9 months of 2019 from RMB251.9 million in the 1st 9 months of 2018. Gross profit increased by 17% to RMB1349 point $4,000,000 from RMB1153.3 million in the 1st 9 months of 2018. In the 1st 9 months of 2019, operating expenses were RMB1658 point $3,000,000, representing a 15.9 percent decrease from RMB1972.9 million in 1st 9% to RMB1316.2 million in the 1st 9 months of 2019 from RMB1622.7 million in the 1st 9 months of 2018. General and administrative expenses decreased by 12.1 percent to RMB200 and $64,700,000 in the 1st 9 months of 2019 from RMB301.1 million in the 1st 9 months of 2018. Product development expenses increased by 57.8% to RMB77.4 million in the 1st 9 months of 2019 from RMB49.1 million in the 1st 9 months of 2018. Net loss for the 1st 9 months of 2019 was RMB $255,600,000 compared with RMB 743,300,000 in the 1st 9 months of 2018. Basic and diluted net loss per share was rmb37.36 in the 1st 9 months of 2019 compared with RMB 121.93 in the 1st 9 months of 2018. Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support Sunlands operations. Capital expenditures were RMB15.1 million in the 1st 9 months of 2019 compared with RMB255.3 million in the 1st 9 months of 2018. For the fourth quarter of 2019, Sunlands currently expects net revenues to be between RMB520 million to RMB540 1,000,000, which would represent a decrease of 5.1% to 8.6% year over year. The above outlook is based on the current market conditions and reflects the company management's 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 for questions. Operator, please. Questions. Please. The first question today comes from Alex Xu of Credit Suisse. Please go ahead. Hi, management. Thank you for taking my question. So, my observation is that in Q3 compared with Q2, we have Q on Q growth in terms of gross billings and the new student enrollments, but at the same time, our, net loss also increased, Q on Q. So, with management share your thoughts on what will be your priority in the future, still to boost gross billings growth or, to continue, to, narrow the loss? Thank you. Thank you for the question. Yes, like like you mentioned, the gross billings for 3rd quarter, we see an increase compared the second quarter and also the loss is a bigger than 10 quarter. And that's primarily due to the additional spending on the sales market expenses. As you may know, the most of the sales and marketing expenses are recorded, advanced right after the gross billing, but most of the gross billings will be deferred and to be recognized as revenue in the future periods. So that's the, the reason why the, the, the loss for 3rd quarter is bigger than the loss for 2nd quarter. But as we mentioned, during the call, the, we, we, the company for the past few quarters, we continue to try all different ways to control our costs control the general and administrative expenses, control the sales and marketing expenses. And we have seen some results from our actions. So in the future, I think our number one priority is still to get more market share, to, that's our number one goal. But at the same time, we, believe we can, yeah, we can, cost and all the expenses and continue to, to, to narrow our loss. 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 Yingying Wu, Investor Relations Director for any closing remarks. Thank you. And once again, thank you everyone for joining today's call. We look forward to speaking with you again. Good day and good night. This concludes the earnings conference call.