Earnings Call: Q2 2019

Aug 23, 2019

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands Second Quarter 2019 Earnings Conference by the management team. There will be a question and answer session. Today's conference call is being recorded. Would now like to turn the conference over to your host today, Yingying Liu, Sunlands IR Director. Please go ahead. Hello, everyone, and thank you for joining Sunlands' 2nd quarter 2019 earnings conference call. On the call, our CEO Tongbo Liu will provide an update on our operational performance as well as our strategic initiatives Our CFO, Steven Yifeng Li, will give you an overview of our financial performance and also provide our guidance for the third quarter of 2019. Following the 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 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. Thank you, Yuhao, everyone. Welcome to Sunlands' second quarter 2019 conference call. As we have outlined in previous quarters, Sunlands is keenly focused on developing and strengthening our brand through several key initiatives I'm pleased to report that these initiatives drove 2nd quarter top line revenue of RMB 552.7000000000 which was in line with our guidance and represented a 14.7% increase year over year. We also significantly narrowed our net loss margin to 2.3% in the second quarter versus 56.4% in the same period last year. As a way to confirm and disciplined approach to managing costs and expenses. During the second quarter, we continued to advance our strategic initiatives in an effort to elevate our program offerings and strengthen our brand awareness. Through these unique initiatives, we are building a solid and multi faceted nation to reach a high quality customer base and attract more students to our online platform. With increased platform accessibility, and a diverse approach to student acquisition, which drive to attract new students to our platform. For example, in the first quarter of 2019. In the first quarter of 2019, we and mobile learning plans on first hand. In addition, diversifying our product offerings to include more professional certificates and masters oriented products, launching and upgrading our mobile app and building a unique learning community where students, teachers and mentors freely interact with one another, all contributed to the rise in utility and the value of our program center solutions offer. Our strategic initiatives also entail our commitment to using technology to further upgrade and distinguish our platform. Through our one to many live streaming model, we are equipped to attract and serve a large number of students while at the same time and new courses and content with ease and speed. By leveraging integrated AI technology, With our online platform, we offer a cutting edge technological solution and create user friendly personalized experience for students. Which facilitate a virtuous circle of recurrent loyal and active users. Next, let me provide some specifics on several of our key strategic initiatives. First, in addition to our ST programs, as we mentioned on previous earnings call, we are strengthening our business focused on Master's oriented products. Our masters oriented products has gained increase in popularity, according for 19.4% of our gross billing at the end of quarter 2, 2019 compared with about 5.1% at the end of quarter 2, 2018 and 5.5% at the end of 2018. This strong growth has been driven by the originally master's oriented education market in China. The number of masters degree applicants in China is estimated to reach $2,900,000 by year end 2019, representing a 21.8% year over year growth. The fastest growth rate in the past 10 years. While the number of masters degree applicants has continued to rise, universities and colleges has been tightening their program entrance requirements and the overall program of the machine rates are down year over year. We see this as a golden opportunity for Sunlands, capitalizing on this environment and leveraging our expert teas on online and learning management. We are actively working to develop products and solutions that cater specifically to market demands of this segment. As an example, since October 2018, in addition to our existing and be interested in them to train programs. We have added an additional categories for our master programs and have core developed with universities around the world, many online international masters degree programs, designed specifically for Chinese end of learners. Overall, we believe Sunlands online International Master Program is the most flexible and sensible solution in the market. Although our effort to build out our portfolio of master's oriented product is still in the early stages and will require time to ramp. We are optimistic based on our early attractions We will continue to enhance our master oriented products to take further advantages of the opportunities in this market. As we strive to provide the best fit educational products to Chinese Anderson learners who are challenged by NIMCO Tai and ever increasing pressure from busy lives. 2nd, our professional certificate programs are also witnessed named robust growth reaching 8.6% 0.8% at the end of second quarter last year. This growth is being fueled in part by our broader range of course and subject offerings. To meet changing market workforce demand for professional certification, with increasingly diversified educational products we are enjoying a more balanced revenue mix. 3rd, our mobile app, Sunlands speed addition, a free learning plan for with diverse courses launched in January and designed for users with border interests and intentions for learnings. Is proving to be very popular. Designed to meet the busy lifestyle needs of today's endowment learn, our app, both easy, on the go accessibility, faster interaction speeds, and the minimal memory or memory storage requirements Speed addition not only burdens our subject's demands and deepens our content offerings, it serves as an excellent tool to build up self developed, developed traffic pool of potential students. By the end of the same quarter, we already recorded nearly 1,000,000 users up from 215,000 of the end of first quarter. This wrapped rise in users is a strong witness to the market appeal of our offerings. Lastly, we continue to upgrade our trial program and customize AI technology to attract prospective students and enable them to see firsthand how our course offerings work. In addition, the excellent result achieved by frontline students in the national examination period are well above national average, which is very attractive for production to prospective students. The April 2019 examination period, the number of Sunlands students who participated in the exam reached $148,000, increasing 14,000 compared with the October 2018 examination period. Total number of exams participated by Sonae students reached $515,000 and the pass rate was as high as sixteen 3.1% further improved from the October 2018 examination period and significantly higher than the national average pass rate. For self study courses. According to our research data, the average pass rate of self study courses from 2012 to to 2016 in China was 43.4 percent for students who self studied and the 35.6% for students enrolled in private schools. In short, we believe our upgraded trial program and attractive pass rates will lead to increasing average gross billings, conversion rates and sales efficiency over time. Well, we are optimistic about the long term impact of our initiatives we'll have on gross billings and the new student enrollment growth. We also see the need to proactively respond to China's low macro economy and the challenges our industry is facing. Surrounding students acquisition costs. In an effort to manage headwinds, we continue to be strategic and prudent in our cost structure and the timing of our sales and marketing campaigns as well as our operating activities. Aiming to achieve the proper balance between investing in new initiatives and mitigating risks. As a result from our disciplined approach, our net loss during the quarter narrowed significantly to RMB12.9 million decreasing 88.6 percent from 112,900,000 RMB net loss quarter net loss last quarter. We are pursuing balanced growth as we execute our 5 pronged expansion and retention plan for 2019 with our best in class technology, high quality educational content. Went to many business model. We are confident in our ability to grow and be the market leader in China's annual online education industry. With that, I would like to hand over the call to our CFO Steven to run through our financials. Thank you, Tongbo. Hello, everyone. Thanks for joining us. As mentioned, we are pleased to report revenue in line with our guidance for the second quarter. Our gross billings and new student enrollment declined 43.1% and the 44%, respectively, year over year. As we see the need to proactively respond to China's slowing macro economy and the challenges our industry basing surrounding student acquisition costs. Against this backdrop, we took quick and decisive actions to reduce operating expenses. As Tunbo just mentioned, our 2nd quarter net loss narrowed significantly to RMB12.9 million compared with a loss of RMB112.9 million in first quarter of 2019, Rmb271.8 million in second quarter last year, representing a 95.3% decrease year over year. We are confident the steady and focused execution of our 5 Pro strategy to expansion and retention will improve average gross billings, conversion rates and sales efficiency over the long term. Now, let me walk you through some of the key financial results for the second quarter. In the second quarter of 2019, net revenues increased by 14.7 percent to RMB552.7 million from RMB481.8 million in the second quarter of 2018. The increase was mainly driven by the growth in the number of students the second quarter of 2019 compared with the second quarter of 2018 following new student enrollments increase over the past years. Cost of revenues increased by 8.1 percent to RMB95.7 million in the second quarter of 2019 from RMB88.5 million in the second quarter of 2018, which was primarily due to an increase in insurance premiums related to online education services with insurance coverage since late in 2018. Gross profit increased by 16.2 percent to RMB457 1,000,000 from RMB393.3 million in the second quarter of 20 18. In the second quarter of 2019, operating expenses were RMB498.7 million representing a 27.5 percent decrease from RMB688.3 million in the second quarter of 2018. Sales and the marketing expenses decreased by 33 percent to RMB 389.7 million in the second quarter of 2019 from RMB581.7 million in the second quarter of 2018. The decrease was mainly due to the reduced marketing spending, reflective of disciplined, prudent cost management and the decrease in the expense of sales and marketing personnel. General and administrative expenses decreased by 7.9 percent to RMB84.9 million in the second quarter of 2019 from RMB92.2 million in the second quarter of 2018. The decrease was mainly due to the decrease in office expenses and professional service fees. Product development expenses increased by 68.1percentto24000000 in the second quarter of 2019 from RMB14.3 million in the second quarter of 2018. Increase was primarily due to an increase in the number of employees and compensation paid to sell us product and technology development personnel during the quarter. Net loss for the second quarter of 2019 was RMB12.9 million compared with RMB271.8 million in the second quarter of 2018. Basic and diluted net loss per share was RMB1.87 in the second quarter of 2019. As of June 30, 2019, the company had RMB 1,500,000,000 of cash and cash equivalents and RMB 269 900,000 of short term investments compared with RMB 1,200,000,000 of cash and cash equivalents and RMB 1 point RMB3 1,000,000,000 of short term investments as of December 31, 2018. As of June 30, 2019, the company had a deferred revenue balance of RMB3.2 billion compared with RMB3.3 billion as of December 31, 2018. Capital expenditures were incurred primarily in connection with purchases of buildings and IT Infrastructure electric equipment necessary to support Sunlands operations. Capital expenditures were RMB 2,200,000 in the second quarter of 2019, compared with RMB97.3 million in the second quarter of 2018. And in terms of the key financial results for the 1st 6 months of 2019. Let me walk you in the details too. In the first 6 months of 2019, net revenues increased by 25.8 percent to RMB1.1 billion from RMB888.2 million in the 1st 6 months of 2018. Cost of revenues increased by 13.8 percent to RMB181.2 million in the 1st 6 months of 2019 from 100 and RMB59.2 million in the 1st 6 months of 2018. Gross profit increased by 28.4% to RMB935.8 million from RMB729 1,000,000 in the 1st 6 months of 2018. In the 1st 6 months of 2019, our operating expenses were RMB 1,100,000,000, representing a 12.9% decrease from RMB1.3 billion in the 1st 6 months of 2018. Sales and marketing expenses decreased by 17.9% to RMB887 million in the 1st 6 months of 2019 from RMB 1,100,000,000 in the 1st 6 months of 2018. G and A expenses increased by 2% to RMB173.4 million in the 1st 6 months of 2019 from 100 and RMB 69,900,000 in the 1st 6 months of 2018. Product development expenses increased by 97% to RMB 51,000,000 in the 1st 6 months of 2019 from RMB 25,900,000 in the 1st 6 months of 2018. Net loss for the 1st 6 months of 2019 was RMB125.8 million comparments RMB517 1,000,000 in the 1st 6 months of 2018. Basic and diluted net loss per share was 18 point 38 RMB in the 1st 6 months of 2019 compared with RMB 91.06 in the 1st 6 months of 28 in. Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support silent operations capital expenditures were RMB 3,300,000 in the 1st 6 months of 2019, compared with RMB 245,000,000 the 1st 6 months of 2018. For the third quarter of 2019, Sunlands currently expects net revenues to be between 510,000,000 to 530,000,000, which would represent a decrease of 1.4% to an increase of 2.5% year over year. The above outlook is based on the current market conditions 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 to questions. Operator? Thank you. For the benefit of all participants on today's call. Please immediately repeat your question in The first question today comes from Christine Odo with Goldman Sachs. Please go ahead. Hello. Thank you, Tombo and Steven. I have 3 quick questions. So firstly, I think the guidance came in a bit softer than you were expecting. Could you elaborate on what are some of the industry challenges where you're facing and what needs to happen in order for you to regain confidence in stepping up the investments again? And then secondly, How do you think about balancing growth and profitability in the second half of twenty nineteen? And lastly, I think we saw very good, effective cost savings come through this quarter. How much room do you think you have for further cost savings? Okay. For the, the first kind of, for the first question regarding the guidance, you know, like, like, we mentioned, during the conference call, this this outlook is based on the carbon market conditions. And, I think we mentioned this, you know, both me and Torel mentioned it during our conference call that, right now, comp to company is, more focused on the, the user, experience. And also, we are diversifying our product mix the, we are relying less and less on ST and, you know, both the, the master oriented market and, professional certification markets are increasing as well. So I think this, is for the company is kind of, transition period. So we, like I said, our guidance is based on the current the best estimate by the management. And the second question is regarding the profitability, yes, our, the net loss narrowed very significantly for the 2nd quarter. But, like we mentioned, before, the probability is not the company's, number 1 focus, we are still, our primary goal is still to gain, as much market share as possible. Yeah, so in the future, with that in mind, we will still, to, to work really hard for Bradesco. In the meantime, we will control cost, also as much as possible. For the, I'm sorry, I can't remember the 3rd question you repeat that, the 3rd question one more time? Yeah. I think it's about the cost saving room going forward. You mentioned, I think you've partly answered that in your second question. Oh, okay. Yeah. Yeah. Like, well, I I can probably add a little bit regarding the well, in terms of, the cost saving, you know, yes, for the company, we believe there's still a room for for us to to to further save the cost and also the, the sales, like, for example, the sales and marketing expenses, as Tunba mentioned, right now, we are still expanding our for trial classes and some other, new initiatives. And we believe, once those new initiatives take effect, then, we will save more cost regarding the skilled acquisition cost. Yes. So the simple answer is, yes, we will still have drilled to further save our costs and expenses. The next question comes from Timothy Zay with Goldman Sachs. Please go ahead. Hi, management. Thanks for taking my questions. Just one quick follow-up. I think you made a pretty good progress on diversity buying the revenue and the gross billings. Can you discuss more about, so, between the master oriented program and and STE and professional notification. Can you share more color on the ASP and also how you recruit, how much or how long does that take to recognized for revenue? Thank you. Okay. For the I think first of all, I want to, really emphasize that, you know, both master oriented education market and professionals or vacation market have a huge potential. That's the reason why the company is focusing more, on those 2, subsectors compared to before. In terms of, ASP and, and search period, because, the amounts are in the education market and, professionals, professional certification market unlike STE, their courses, sometimes are very different. Some courses are wrong. Some courses are pretty short. So, it's really hard to give, a very exact, like, service and, ASP. But overall, compared to STE, those courses tend to have a shorter our service fee rate and higher, especially the master oriented education market has a higher ASP compared to the SDE market. Telling 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. This concludes the earnings conference call. You may now disconnect your lines. Thank you.