Sunlands Technology Group ADR

Ladies and gentlemen, thank you for standing by and welcome to Sunland's fourth quarter and full year 2020 earnings conference call. At this time, all participants will be 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 conference over to your host today, Hu Hua Yi, Sunland's IR representative. Please go ahead.

Hello everyone and thank you for joining Sunline's fourth quarter and four-year 2020 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 CEO, Tongbo Liu, will provide an update on our operational performance as well as our strategic initiative. Our CFO, Selena Lu Lui, will give you an overview of our financial performance and also provide our guidance for the first quarter of 2021. Following their prepared remarks, we will move into the Q&A session. Before I hand it over to the management, I'd like to remind you of Sunland Safe Harbor Statement in relation to today's call. Except for the historical information and contained hearing, 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 statement. For more information about potential risks and opportunities, 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, Tong Bo Liu.

Thank you, Yu Hua. Hello, everyone. Welcome to Sunland's first quarter and full year 2020 conference call. While faced with a year of both unusual challenges and changes, we concluded 2020 with steady and solid growth in the first quarter. We continued our strategic focus on developing diverse product offerings, improving student acquisition efficiency, and enhancing curriculum effectiveness, and pursued the opportunities in the market as overall demands growth for higher education and professional skills programs. In the fourth quarter, our net revenues reached 584.6 million RMB, going 6.3% compared to the same period of 2019. Thanks to enhanced operational efficiency and expanded course categories, our new student enrollment increased remarkably by 51.8% year-over-year to over 114,000 in the fourth quarter. The driving force behind the study student growth was our further expansion of course portfolios spanning all over the categories based on the solid foundation of our degree-oriented programs. Our exploration of diverse avenues for user acquisition as well as enhanced operating efficiency and service quality also contributed to the strong growth. Our master's degree-oriented programs continue to yield robust results in 2020. With the COVID-19 pandemic impacting many industries and creating heavy uncertainty in the job market, there has been an increasing recognition of the importance of postgraduate education. The national postgraduate entrance exams for 2021 concluded in December with registered applicants reaching a record high of almost 3.8 million, and we are well prepared to handle the growing volume and demand. As the competition intensifies and admission rates continue to decline, we are seeing more applicants willing to pay for preparation courses. In fact, our master's degree-oriented programs showed strong growth momentum in 2020, with six, 32.9 million R&B English buildings, increasing 49.5% compared with 2019. This solid performance was the result of our high-quality and tailored courses that helped capture the increasing number of applicants for postgraduate studies who are mostly working professionals. We are also developing more undergraduate-oriented programs to meet the changing demands of adult education. We offer rich opportunities and various options for people wanting to pursue their undergraduate education later in life. For example, we are ending preparation courses targeting entrance exams for adult universities and the Open University of China in addition to our FTE programs. which will further diversify our income sources and consolidate our market position. The online education has become more accessible and widely accepted in China, and the Chinese government has been supportive of vocational and continuing education. We believe the demand for quality online post-secondary courses will continue to grow and we are well positioned to seize growth opportunities as we roll out diversified curriculum mix meeting various demands. In the fourth quarter, we witnessed robust growth as we further developed more professional certification and skills courses. New enrollments in the fourth quarter increased more than six times year-over-year, primarily due to the increase in professional skills and general interest courses catering to growing demand for diverse personal education, as well as the low-based last year. We developed more general courses helping users cultivate soft skills, interests, and hobbies as we saw a surge in interest for these courses online, especially during the COVID pandemic. All these efforts and expansion of course portfolio have paved the way for permit for promising further growth as we continue to release new courses and programs to satisfy the market demand. With our course portfolio solid foundation, we can effectively scale up our user base for both existing and new programs to similar fields. In pursuit of boosting operating efficiency and enhancing curriculum effectiveness, our team further improved our user acquisition and service quality. This enables us to take advantage of rising opportunities in professional certification and skills education. We further improved our sales efficiency to serve our enlarged product portfolios, and we saw a notable increase in the efficiency of our workforce. With rising traffic acquisition costs, we also expanded our sales channel through B2B training service working, working with corporations and institutions, which began to bear fruit. We are confident that the integration of various channels targeting individual users and corporate customers will further increase our market penetration and user base as well as optimize our user acquisition cost. With our commitment to offering high-quality online education, we have established procedures to both procure and train first-rate teachers. We have also improved their services to encourage active and participatory learning, which is especially valuable for end-of-students. In 2020, the number of class participants increased 29.3% year-over-year. In the STE exam held in October 2020, we maintained a high-level pass rate of above 16%, which further cemented our market leadership. In the fourth quarter, we held our annual teaching contest to motivate teaching improvement. The focus on teaching quality creates a virtuous circle of academic success, user referrals, user acquisition, and then sustainable growth. In order to assist our experienced teachers and motivate our students further, we applied cutting edge AI technology into our teaching process. Our AI system is able to predict students' exam scores based on their practice performance, with an accuracy rate as high as 18%. It can then offer suggestions to help students adjust their study plans accordingly. We also employ our AI technology to analyze and predict the most frequently-tested questions using our vast historical examination database. and big data analysis capability. In the first quarter, we further expanded our exercise database and increased the number of exam questions to 825,000, representing year-over-year growth of 18.8%. Heading further into 2021, we will maintain agility and adaptability as we remain committed to enhancing the development and rollout of top-notch and diversified products and services for end-of-continue education and skilled training. We are also keeping a close eye on improving operating efficiency, as well as expanding and boosting sales channels. With that, I will turn the call over to our CFO, Selena, to run through our financials.

Thank you, Tongbo. Hello, everyone. In the fourth quarter, we deepened our strategy to balance business growth and profitability in a challenging environment. Our net revenues continue to grow at a healthy rate, exceeding the high end of our guidance by 4.4%. As we further improved operating efficiency and optimized the costs, Our general and administrative expenses in the fourth quarter declined 44.6% year-over-year, which contributed to the significant narrowing of our net loss to 73.5 million RMB from 139.5 million RMB in the fourth quarter of 2019. Our net loss margin decreased considerably to 12.6% from 25.4% in the fourth quarter of 2019. Going forward, we will continue to refine our operation and sales execution as we strive for robust and sustainable long-term growth in order to consistently create value for our students and shareholders, as well as the broader society. Now let me walk you through some of the key financial results for the fourth quarter of 2020. All comparisons are year-over-year and all numbers are in RMB, unless otherwise noted. In the fourth quarter, net revenue was $584.6 million, an increase of 6.3% year over year. Cost of revenue decreased by 3.6% to $97.8 million in the fourth quarter, from $101.5 million in the fourth quarter of 2019. The decrease was primarily due to reduced insurance-related costs, incurred for our integrated online education service package purchased by students. Gross profit increased by 8.6% to $486.7 million from $448.2 million in the fourth quarter of 2019. In the fourth quarter, operating expenses were 673.7 million, representing a 12.5% increase from 599 million in the fourth quarter of 2019. Sales and marketing expenses increased by 27.8%. to $608.5 million in the fourth quarter, from $476.1 million in the fourth quarter of 2019. The increase was mainly due to increases in, number one, compensation expenses related to our sales and marketing personnel, and number two, spending on branding and marketing activities. including more marketing promotion activities to diversify student acquisition channels. General and administrative expenses was $54.7 million in the fourth quarter of 2020, decreased by 44.6% year-over-year, mainly due to the decrease in compensation expenses. Product development expenses decreased by 56.4% to $10.6 million in the fourth quarter from $24.3 million in the fourth quarter of 2019. The decrease was primarily due to a decrease in the composition expenses incurred related to our product and technology development personnel during the quarter. Other income increased to $109.4 million in the fourth quarter from $6.9 million in the fourth quarter of 2019. The increase was primarily due to the value-added tax exemption of $77.5 million offered by the relevant authorities as part of the national COVID-19 relief efforts. Net loss for the fourth quarter was $73.5 million compared with $179.5 million in the fourth quarter of 2019. Basic undiluted net loss per share was 10.87 in the fourth quarter of 2020. As of December 31, 2020, the company has $760.7 million of cash and cash equivalents. and $517.8 million of short-term investments. As of December 31, 2020, the company had a deferred revenue balance of $3,024.4 million compared with $3,228.8 million as of December 31, 2019. 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 $4.7 million in the fourth quarter, compared with $10.4 million in the fourth quarter of 2019. For more of our 2024 year financial results, please refer to our earnings press release for further details. And now for our outlook. For the first quarter of 2021, Sunlands currently expects net revenue to be between 670 million RMB to 690 million RMB, which would represent an increase of 18.6% and 22.1% year-over-year. This outlook is based on the current market conditions and reflects the company's management's current and preliminary estimate of market, 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. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Again, if you have a question, please press star, then 1. And for the benefit of all participants on today's call, if you wish to ask a question to management in Chinese, please immediately repeat your question in English. Showing no questions, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to Yu-Hua 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 line. Thank you.