Earnings Call: Q1 2019

May 28, 2019

Earnings release

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only 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, Yingying Liu, Sunlands IR Director. Please go ahead. Hello, everyone, and thank you for joining Sunlands' 1st 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, Stephen Lee, will give you an overview of our financial performance and also provide our guidance the second quarter of 2019. Following their prepared remarks, we will Before I hand 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 Li. Thank you, Yingying. Hello, everyone. Welcome to Sonang's first quarter 2019 conference call. During this first quarter, we continue to advance our strategic initiatives to elevate our program offerings and strengthen our brand equity. With a keen focus on diversified student and enhancing user friendly marketing techniques During the first quarter, we advanced each of these initiatives, including launching a new mobile app that burdens our subject domains and the deepest of our content offerings. This is a milestone and a starting point for Sunlands to build up of own free learning community and the self developed traffic pool. We successfully delivered revenue of 564 1000000 for the first quarter, which is in line with our guidance and represents a 39% increase year over year. We also narrowed our net loss margin to 20%. Students are also spending more time on our platform. The average time spent on live main classes grew 39.2% year over year for the first quarter. As we discussed in the last earnings, we are working to further expand our free trial offerings to reach out to a wider population of prospective students. To realize that the goal more specifically in Q1, we kicked off a pre learning plan along with the independent mobile app. Providing free short courses across professional domains and industries. Launched in the end of generate the app is aimed to attract more students to our professional education and skills courses. And more importantly to expand our own active students pool for future conversion in the long term. Since the launch of the app in the late January to the end of the first quarter. Sunlands new mobile app had rejected user of 215,000 As we know, from the end of online free learning platform to achieve scale and activity at the same time, it's not an easy task. But with our 1 to many live streaming model, we can attract students more easily and end courses and content more easily. Currently, we provide more than printing free short course offerings and targeted student demographics. While utilizing our existing infrastructure and maintaining a low cost structure. This key demographic of professionals who are already in the workforce, along with those looking for obtaining a university degree, represent an opportunity for us to further grow our business. As we have discussed in the past, one of the main ways we are attracting new students to our program is through free introductory seminars and trials of common subjects among the 18 ST majors we provide. We continue to end to this connection to deepen our connection with those prospective students looking for support to upgrade their degree and with education credentials. By providing potential students with an overview of our course offerings, along with a way to experience select introductory courses at a low or low cost. They are able to see if our program is a good fit for them. This method allows us to the base of community students, but also improve the way our brand and courses are perceived. Thanks to this change in outreach, we are seeing a shift in our relationships with our students. We are beginning to be viewed as more collaborative acting as partners with our students rather than holding a role as a vendor. When we became a listed company, we stated that our business focused on 3 main categories, FTE, master degree offering and professional certification offerings. As of the end of the Q1 2019, we can see that the popularity of must oriented products is growing rapidly. The percentage of gross billing for must oriented product is up significantly to more than 10% by the end of Q1, comparing to 3.2% of gross billing in 2017. And 5.5% of gross billing in 2018. This clearly shows there is a ready market for this offering. The synergies of our proprietary AI technology and industry leading end of the online education programs appaving the way for sustainable growth over the longer term. Many of the programs that began last year are showing earnings signs of traction. While we are not yet realizing the financial benefits of these new initiatives, we believe once they take hold they will help us build an even broader base of paying students, gain us faster recruiting cycles, directly increasing student enrollment numbers, positively impacting our gross billings. 19 follows a 5 prout approach. 1st, we are continuing to enrich and upgrade our existing trial programs any STE courses and we are building out our professional certification certificate programs. To reach a high quality constituency. 2nd, we're hiring and training live streaming teachers. Suitable for our adult students. We believe we have a talent pool of educators to attract to our competitive compensation structure which also help us to return this talent. 3rd, we are cultivating a unique online learning community we actively encourage our students to interact with our teachers, mentors and each other. Building the important relationships reinforced our students commitment to our programs, improved referrals and helped solidify our leading reputation. 4th, we are enhancing our technology in order to improve our students' ability to learn efficiently, reduce study time and support their overall success. Finally, we are continuing to expand our range to cover more attractive course offerings that help our students achieve their post secondary and professional education goals. At the same time, we're offering more diverse trial programs and deploying more effect after sales service. All in an effort attract most students and strengthen our position as a market leader. With our best in class technology, high quality educational content and wealth management model, we believe we are well positioned to see the tremendous growth opportunity before us. 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. We are pleased to report revenue in line with our guidance for the first quarter. While the seasonal slowdown due to Chinese New Year, softer marketing tactics and our expanded trial program negatively impacted student enrollments and gross billings, we are confident that our upgraded free trials, introduction seminars and free short courses for graduates, post graduates and professionals can increase average gross billings, conversion rates and sales efficiency over the long term. Let me walk you through some of the key financial results for the first quarter. In the first quarter of 2019, net revenues increased by 38.8% to 500 RMB464.2 million from RMB406.4 million in the first quarter of 2018. The increase was mainly driven by the growth in the number of students in the first quarter of 2019 compared to the first quarter of 2018 following a continuous increase in new student enrollments over the past years. Cost of revenues increased by 20.9% to RMB85.5 million in the first quarter of 2019 from RMB70.7 million in the first quarter of 2018. Which was primarily due to the increase in the compensation for faculty members. Gross profit increased by 42.6 percent to RMB478.7 million from RMB335.7 million in the first quarter of 2018. In the first quarter of 2019, operating expenses were RMB612.7 million, representing a 4.2% increase from RMB 588.3 million in the first quarter of 2018. Sales and the marketing expenses were RMB497.3 million in the first quarter of 2019, compared to RMB499 million in the first quarter of 2018. General and administrative expenses increased 13.8 percent to RMB88.4 million in the first quarter of 2019 from 77 point 7,000,000 in the first quarter of 2018. The increase was mainly due to the increase in compensation, mainly as a result of hiring more R and D talent to strengthen our IT infrastructure and R&D capabilities. Product development expenses increased by 132.7 percent to RMB27 million in the first quarter of 2019 from 11,600,000 in the first quarter of 2018 The increase was primarily due to an increase in the number of employees and the compensation paid to our course and educational content professional and technology development personnel during the first quarter. Net loss for the first quarter of 2019 was RMB112.9 million compared with RMB 245.2 million in the first quarter of 2018. Basic and diluted net loss per share was RMB16.48 in the first quarter of 2019. As of March 31, 2019, we had RMB1.3 billion of cash and cash equivalents and RMB836 800,000 of short term investments. These compared to RMB 1,200,000,000 of cash and cash equivalents and RMB1 billion of short term investments as of December 31, 2018. Our deferred in new balance as of March 31, 2019, was rmb 3,400,000,000. Capital expenditures were 1.1 1,000,000 in the first quarter of 2019. This compares to RMB147.7 million in the first quarter of 2018. Capital expenditures were incurred primarily in connection with purchases of buildings and the IT infrastructure equipment necessary to support our operations. For the second quarter of 2019, we currently expect our net revenues to be between RMB550 million RMB570 1,000,000, which would represent an increase of 14.2% to 18.3% year over year. Before opening the call to your questions, I want to mention that order to enhance user experience, we have recently changed certain terms of our refund policy, which are applicable to new students orders. We believe that this will enhance our branding and reputation by enabling a more flexible and smoother refund process. We expect that as a result of the new terms, our annual refund rate for 2019 will be higher than 2018. With that, I would like to open up the call to questions. For questions. Today's first question comes from Alex Zee of Credit Suisse. Please go ahead. So my first question is about regulation. I noticed that the Beijing government, just conducted inspections of Sunlands operations in April. I'm wondering what are the results of government reviews and what the government require Sunlands to change? And my second question is about our OpEx. I noticed a significant quarter over quarter decrease in our G and A expenses management share more color on the reason behind such decrease? And what about our headcount change in this quarter? Question. Yes, you may, read from the, the recent public news that, we did have some conversations with the government And as of now, there's no, a final decision made by any party yet. And basically, the of the major topics we had a discussion with the government is regarding the user experience and like refund process. Actually, that's part of the reason why we have this change of new terms. And believe with our new refund terms, that will both enhance the user service and satisfy the requirements from the government. Regarding your second question, the, the decrease on the G and A expense quarter over quarter. This was mainly due to the higher efficiency of our employee. And also, we the number of, like you mentioned, the number of our employees, especially the R and D team, we did see some decrease over there, since we, we, we, we, right now, we work in a more effective manner. Thank you, management. And our next question today comes Anthony Zhao of Goldman Sachs. Please go ahead. Hi management. Thanks for taking my questions. There are two questions from my side. First question is that, I think in this quarter, we see a big hike in ASP or the average gross billing per student, either on a year on year or quarter on quarter basis. Could you share more color on what is behind this price increase and how should we think about this trend going forward? And the second one is with this higher SB trend and also the higher refund rate that you mentioned. Can you talk about the trend of the gross billings and the student enrollment for the rest of this year or when shall we expect them to turn back to growth? Okay. For the, the first question, I think our CEO, Tunbo, mentioned, just now that So right now, the master oriented products, you know, as a percentage of our gross billing has been increasing a lot for Q1. Right now, the master oriented products, the gross billings for the master oriented products right now account for than 10% of our total gross billings, that's up from, only like 3% from 2017 5% from 20 18. And those master oriented products apparently has a much higher ASP compared to the IST course. I think this is one of the reasons why we have a higher ASP for Q1. And as for the trend, we expect you know, as we diversify our course offerings, as we expand our course offerings the, the percentage of master oriented products and professional certification offerings, will continue to increase in the future. Yeah, so we are very confident the, our average, you know, the the price, our average gross billings will continue to increase as well. And, for your second as for the trend, for the rest of this year, since right now, it's only the beginning of the year, we are still are expanding our free, our short courses, our free trials, introduction seminars, and also expand our across offerings. As of now, we are not entirely sure what this trend will be but, we are pretty confident as we, offer more course offerings as we along with the change of refund policy as we continue to enhance user appearance, we will see continues increase of new student enrollments and gross billings for the rest of the year. Thank you. Just a quick follow-up. So another follow-up question is on, if you look at the sales and marketing costs per enrollment, So this number seems a bit higher for this quarter. Could you share a little more color on what is behind this cost increase? I think for this quarter, the sales mark sales and marketing spend procedents is roughly same as the last quarter. Well, I think, as you may know, the traffic position cost has been increasing for the past year or 2. I think this is not a just an issue for us, but it's an issue for this is a challenge for everyone. And, that's the reason why we have, those, new, actual courses, I think Tongbo, our CEO also mentioned, we want to establish our own, traffic pool so that in the future, I think we believe this will be a very the sales and marketing expense per student. Okay. Thank you, Steven. Showing no further questions. This will conclude our question and answer session. At this time, I would like to turn the conference back over to Yingying Liu, Investor Relations Director for any closing remarks. So 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.