Sunlands Technology Group ADR

Ladies and gentlemen, thank you for standing by and welcome to Sunland's first quarter 2021 earnings conference call. At this time, all participants are 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'd now like to turn the call over to your host today, Yuha Yi, Sunland's IR representative. Please go ahead.

Hello everyone and thank you for joining Sunline's first quarter 2021 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 earnings press release and sign up for our distribution list by visiting our IR website. On the call, our CEO, Tom Bo Liu, will provide an update on our operational performance as well as our strategic initiatives. Our CFO, Celina Lu Lu, will give you an overview of our financial performance and also provide our guidance for the second 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's 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 your 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 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, Yu Hua. Hello, everyone. Welcome to Sunland's first quarter 2021 conference call. We are pleased to announce that Sunland Technology Group had a very strong opening quarter for 2021, starting with net revenues that rose to 694.3 million RMB, a 22.9% year-over-year increase. The increase in net revenues was mainly driven by the year-over-year growth in gross billings since the second half of 2020. Girls' balance in the first quarter rose to 5,930.7 million RMB, representing year-over-year growth of 14.9%. In terms of new enrollments, we achieved a 107.6% increase year-over-year, which surged to over 145,000 students. The solid performance was driven by our continued efforts in diversifying product offerings rising brand awareness, and improving student satisfaction. Sunland continues to focus on expanding and refining its master's degree-oriented programs. Because of this strategy, girls' buildings in master's degree-oriented programs attended a growth rate of 73.6% year-over-year and contributed approximately 34% to total girls' buildings. compared with 22% in the same quarter last year. The enrollment also grew at a significant rate of 72.8% year-on-year. Our master's degree programs cater especially to students with full-time jobs who are more financially stable but have relatively limited time and demand more customized assistance for learning. with full-time jobs tend to be more dependable and more eager to attend online test prep courses like those offered by Sunland. We believe this fact, coupled with Sunland's continued investment in brand awareness and course offerings, will continue to provide thrust for our wider market share. We also continue to focus on market opportunities for our professional certification and are making significant progress in growing this segment as well. Since the outbreak of COVID-19 last year, people are getting more comfortable attending online classes to improve work-related and hobby-related skills. Moreover, the employment market is becoming more competitive for employees, and they are feeling the growth sense of urgency to attend professional certification courses. with the purpose of maintaining their level of employability. In addition, the Chinese government also established multiple policies to support the professional certification education, such as subsidies, training vouchers, and so on. According to the State Council of China, more than 27 million subsidized vocational training opportunities were provided in 2020. We believe these factors will continue to play out in the future, bowed well for our professional certification business. While it is encouraging to see such strong growth momentum in both master's degree-oriented and professional certification programs, we remain confident of our ST programs and will continue to fine-tune and expand our product offerings. According to the 7th National Population Census of China, Only 218 million Chinese held an associate degree or above, representing a percentage of 15.5% compared to the total population of 1.41 billion in China. We believe STE is still a sizable market and the company will continue to generate revenue from this industry. High-level teaching quality is our priority, and we are devoted to recruiting first-class teachers with competitive composition packages. By the end of the first quarter, more than 17% of our teachers held degrees from top-tier universities in both China and around the world. Furthermore, we are committed to building an extensive teacher rating and a training system, deploying our database of case studies and the templates in teaching. and establishing dimensional teaching channels to ensure top-notch teaching standards. Driven by our efforts in pursuing high-level teaching quality, we are enthusiastic that our students' level of satisfaction has reached a record high according to our internal survey. Aside from our efforts in upgrading teaching quality, we continue to expand and improve our academic research team. refine our research and development framework for new courses with the assistance of AI technologies. In order to widen our course offerings and accelerate the pace with introduced new courses, we believe our academic research team continue to grow. Our research personnel will have better opportunity to become more specialized in his or her own academic discipline. which will further enhance the synergies between our existing and new cost offerings, and subsequently improve the overall academic research efficiency. We are confident this snowball effect in academic research will pave the way for solidifying our competitive position and strengthening our economic mode in post-secondary education industry. Looking ahead, We are endeavoring to proliferate our master's degree-oriented and professional skills programs to capture the benefits of economic skill while solidifying our market-leading position in STE programs. We are devoted to delivering the best learning experience to our students so they can have the best career prospects while also creating values for all stakeholders. With that, I will turn the call to our CFO, Selena, to run through our financials.

Thank you, Congbo. Hello, everyone. We are pleased to see first quarter net revenues beat guidance once again and hit a record high. As rising brand recognition for our master's degree-oriented and professional skills programs bolstered our top-line growth momentum. Our ongoing diversification from STE programs and our commitment to optimizing the students' experience affirms our confidence in sustaining this momentum. We also managed to lower costs, delivering 52.2% and 16.3% reductions in G&A and R&D expenses respectively. As a result, First quarter net loss narrowed 18.7% year-over-year to 53.3 million RMB. As we look ahead, our marketing department will continue to explore avenues to promote brand awareness, while our sales team will target a higher referral rate and sales conversion rate to fuel future growth. And most importantly, Our management is keeping an eye on implementing optimal strategies that deliver the best returns for all shareholders. Now let me walk you through some of the key financial results for the first quarter of 2021. All comparisons are year-over-year and all numbers are in RMB, unless otherwise noted. In the first quarter, net revenues were $694.3 million, an increase of 22.9% year-over-year. The increase was mainly driven by the year-over-year growth in gross billions since the second half of 2020. Cost of revenues increased by 9.8% to $106.4 million in the first quarter from $96.9 million in the first quarter of 2020. The increase was primarily due to an increase in compensation expenses. Gross profit increased by 25.6% to $587.9 million from $468.2 million in the first quarter of 2020. In the first quarter, operating expenses were $666.6 million, representing a 17.4% increase from $567.8 million in the first quarter of 2020. Sales and marketing expenses increased by 32.5% to $606.4 million in the first quarter from $457.9 million in the first quarter of 2020. The increase was mainly due to increase in, number one, compensation expenses related to our sales and marketing personnel, and number two, spending on branding and marketing activities. including more marketing promotional activities to diversify student acquisition channels. General and administrative expenses were $42.3 million in the first quarter of 2021, decreasing 52.2% year-over-year, mainly due to the decline in compensation expenses. Product development expenses decreased by 16.3%, to $17.9 million in the first quarter from $21.4 million in the first quarter of 2020. The decrease was primarily due to decrease in the compensation expenses incurred related to our product and technology development personnel during the quarter. Other income decreased to $21.3 million in the first quarter of 2021 from $29 million in the first quarter of 2020. The decrease was primarily due to a decrease in value added tax exemption offered by the relevant authorities as part of the national COVID-19 relief effort. Net loss for the first quarter was 53.3 million compared to 65.6 million in the first quarter of 2020. Basic and diluted net loss per share was 7.87 in the first quarter of 2021. As of March 31st, 2021, the company had $826.6 million of cash and cash equivalents and $306.5 million of short-term investments. As of March 31st, 2021, the company had a deferred revenue balance of $2,902.5 million compared with $3,024.4 million as of December 31st, 2020. 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 $1.7 million in the first quarter, compared with $7 million in the first quarter of 2020. And now for our outlook. For the second quarter of 2021, Sunlands currently expects net revenues to be between $600 million to $620 million, which should represent an increase of 17.1% and a 21% year-over-year. This outlook is based on the current market conditions and reflects the company's management current and the 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 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 touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. 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. At this time, we'll pause momentarily to assemble our roster. Our first question is from Henry Lee from Tree Fund. Please go ahead.

Henry Lee from Tree Fund. I have a question in Chinese. I am an investor in China. I would like to ask, the first question is that we are now testing the ratio in the general account, that is, the ratio in Gauss-Billing, and then there is the number of people, the number of researchers and the ratio, and then there is the ratio of skills. This is the first question. The second question is that I would like to ask, Why did our student numbers increase compared to Q4? But our gross dealing didn't increase. And it decreased. And then the third question is, I want to ask about the situation of operating cash flow. Because we haven't disclosed the operating cash flow. I want to ask about our cash flow. For example, is this record flowing in or out? What is the number of people? These are the three questions. Thank you, Mr. Guan.

Thank you, Henry. Let me repeat the three questions you just asked. The first question you asked is about self-examination and our master's and other categories. It's about the proportion between oil and water and the proportion of recruiters. Yes, the proportion in cash income.

The second question is about our gross billing total amount.

The total amount did not increase, but some other categories, such as the Master, increased. Do you want to know the results of the other ones?

The second question I want to ask is why our student numbers increased compared to Q4 this quarter, but our growth billing decreased. Because our Q4 should be around 6.5 billion. I understand. The third question is about operating cash flow, right?

Yes, that's right. If you pay attention to the past few seasons, you can see that there has been a change in the structure of the recruitment flow and the number of people. In fact, our self-examination has slightly decreased in the overall score in each season. On the one hand, our resources and recruitment structure, based on the opportunities in the market, are being written down on the MBA. We can see that the number of recruits in the NBA and the flow rate have been increasing. Currently, although the recruitment rate in all categories is revealed in the annual report, it is generally not revealed in the quarter report. However, I can give you a reply. In the first quarter of 2021, the current income ratio of the flow rate is about 25%. One-fourth of them. And our NBA has about 33% of them. Other categories are about 41%. And then from the number of recruits, it can also be combined with your second question. Our number of recruits has increased a lot, but the whole... The reason why the cash income has not increased significantly is because we can see that the third category, in fact, our proportion is now relatively large. The third category, professional qualifications and interests, compared to the first two, its price is relatively low. But the third category, its overall recruitment number actually supports the growth of our system. Its price is low, but the number of people is relatively high. This is the third category. Actually, this is the second question we just talked about. The third question is that in terms of operating cash flow, we have not disclosed the situation of cash flow in every quarter. But what I can tell you is that our current trend is getting better and better. Okay, I have one more question. I want to ask, you just mentioned that your cash flow increase is very fast.

Then I want to ask, in this part of the industry, its profits, for example, from the perspective of its profits, what kind of projects will be more profitable in the future?

In fact, the characteristics of the cash flow in these three big screens are not the same. For example, MBA and self-study, in general, it is the contribution to the cash flow, including including the prediction of future revenue confirmation is very helpful. The third type, Certificate, is relatively low in price, but the difference between it and the previous two types is that it can support a future report. It will be reflected as profitable marketing. So for its first batch of products, maybe for the first payment, its profitability is not as good as the previous two. But its advantage is that there will be a larger proportion of students who will have the second and third consumption. So in general, these three categories are not bad. From the perspective of cash flow. For example, we can see that the test type is only 25%.

Compared to the same period last year, it has actually dropped a lot. Will this self-consideration continue to decline? Or will this self-consideration return to the same level as last year? We will actually look at it in several categories.

Because we will always look at the balance of growth and profitability. If we think about it, what we see now is that in fact, since 1819, the total number of registrants, especially in some developed regions, the trend of registration has changed. So we may focus more on some market opportunities or areas with better profitability, rather than like before, it will develop more in the national scope. In addition, we will put this resource in line with what I just said, Our next question comes from Phoebe Chen from CDC Capital. Please go ahead. Hello, management.

So thanks for sharing because I really didn't get the, you know, the question from Mr. Lee. So I'm not sure if there's any repeated questions in the news. I'm sorry. My apologies. But I would ask you to probably answer it again in English. So my first question would be, could you please kindly provide the breakdown of STE and MBA programs? a natural-orientated business and other certificate, you know, sectors. The second would be that why, the reason, you know, growth billion is lower than net revenue from Q1.

Okay, maybe I can answer your second question first. Because we pre-connect all the gross billing from the students, but we need to recur the revenue during the serious period. So that means our revenue will not equal to the gross billing all the time. And that quite depends on our students.

I mean, from the previous quarter, I mean, because we know that, as you said, the pre-collect nature of education sector, that's why gross living is always higher probably than net revenue, and that is also what we observed from the previous quarter.

Yes, let me finish my answer. So the speed to recognize the the gross billing quite depends on our mixture of our products. When you can see during the past several quarters, the percentage of certificate and MBA will get higher and higher and that the service period of these two categories are much shorter than the STE. That means With the development of this structure changes, then the recognition period will be shorter. That means faster. That's why our revenue now is greater than the gross billing.

Thank you. That perfectly answers my question.

Okay. Could you repeat your first question? Sorry.

It's a breakdown of revenue and or gross billing of different business sectors.

This is quite similar to the first question. Our growth billing structure, I can repeat, the structure from the percentage of STE accounts for 24%, and the MBA accounts for 38%, and the third category accounts for 41%. That's for net growth. And you mean the revenue? The second is revenue percentage?

Right.

The revenue, FTE accounts for 60%. That means that comes from the gross billing of last, maybe the year. Okay, about the structure of net gross billing and net revenue, I think that question is refer to this angle. And the percentage of STE in that gross billion will be 24%. MBA accounts for 33.8%. And the third one accounts for 42%. And regarding to the net revenue, the structure is different. STE accounts for 60.4%. And MBA accounts for 53.8%. And the third one accounts for net revenue. The STE accounts for 40.8%. MBA accounts for 22.6%. And the third one Okay.

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 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 lines.