Sunlands Technology Group (NYSE:STG) Q2 2022 Earnings Conference Call August 18, 2022 7:30 AM ET
Company Participants
Yuhua Ye – IR Representative
Tongbo Liu – CEO
Selena Lu Lv – CFO
Conference Call Participants
Operator
Ladies and gentlemen, thank you for standing by. And welcome to Sunlands’ Second Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. Today’s conference call is being recorded.
I will now turn the call over to your host today, Yuhua, Sunlands’ IR Representative. Please go ahead.
Yuhua Ye
Hello, everyone, and thank you for joining Sunlands’ second quarter 2022 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.
Participants on today’s call will be our CEO, Mr. Tongbo Liu; and our CFO, Selena Lu Lv. Management will begin with prepared remarks and the call will conclude with a Q&A session.
Before I hand it over to the management, I would 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 our 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 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.
Tongbo Liu
Thank you, Yuhua. Hello, everyone. Welcome to Sunlands second quarter 2022 conference call. In [ph] the pandemic resurgence and the macroeconomic weakness in the second quarter, we achieved RMB114.6 million of net income, representing a fourfold increase year-over-year.
The increase was primarily driven by our consistent emphasis on operating efficiency and solid execution of our business strategies, as we remained steadfast while navigating the company through external uncertainties.
We were also pleased to see our continued efforts to optimize our product mix and expand our course portfolio were rewarded with improving operational results, reflected in a 39.4% year-over-year increase in our new student enrolments and a reduced year-over-year decrease in gross billings.
We accomplished this by acquiring students from a wider range of age groups with higher sales efficiency, as we cut down our sales and marketing expenses by 34.8% year-over-year. These results highlight our organizational resilience and reinforce our confidence in our strategy to achieve balanced growth and profitability.
During the second quarter with massive pandemic operating several major cities severity disruptive business operations caused area of industries. The pandemic also resulted in cancellation of many competitive exams affecting demand for our professional courses and leading us to seek other pockets of opportunity to increase profitability in this segment.
Furthermore, the complex microenvironment business took a more conservative approach in the operations and emphasis cost reduction and the efficiency improvement more than ever, with the goal of enhancing their risk resistance. Against the backdrop, consumers were more prudent about purchasing discretionary goods. For example, they made temporary delay their self-improvement plans within this period to combat the lingering external uncertainties in the macro-environment. We also prioritized the cash flow management and focused on profitability generating business while continuing to improve our cost efficiency.
Despite that, many people remained in [indiscernible] about holding their skills, hoping to elevate their overall competence within the highly competitive job market. Others also sort ways to shift off pandemic inertia, such as inserting online courses resulting in searching demand for our skill courses.
As such, we assist this opportunity to deliver enhanced learning experience to our students and develop the new skill training courses to address a broad range of student’s needs helping our students improve their career flexibility and the competitiveness in the job market.
Our [indiscernible] to save them through tough times. As a result, our growth experience for professional certification and skills programs in the second quarter grew by 82.9% year-over-year driven by 94.9% year-over-year increase in new student enrolments. Net revenues generated by these programs also increased by 13.3% over year.
Furthermore, our extensive course resources, high teaching quantity and efficient online learning platform have contributed to improved student satisfaction and stickiness, as well as a high referral rate. As we continue to optimize our product means, we will keep developing premium process covering in-demand skills and general interest as well as industry recognized credentials.
With our established brand awareness in this field, diverse course choices and quality course content, we are confident that we can continue to attract new students and capture additional growth opportunity presented by student’s rising demand for Master degree or into the programs.
New student enrolments and cost billings decreased on the back of our strategic reduction of marketing activities and growing market competition as new players try to capitalize on the segment’s enormous potential. Highly rated teaching staff, which is difficult to replicate for late comers to the segment is considered to the main differentiating factor among industry players.
Thus, we believe that our 19 years’ experience in exam preparation experienced and well-received teaching staff and extensive learning resources will position us and we’re compared [ph] to our competitors in the long run. Despite the intense competition and the complex macro-environment, we are proud of the critical role that we have played in helping our students achieve individual success in the face of huge economy uncertainty. And we remained committed to doing the right thing to maintain our influence in this field.
For example, on June 18, we held our first MBA Education Promotion Event with many top universities in China, joining us to share their MBA admissions in information. The event was a great success and attracted huge number of students to participate.
In terms of government policies, we’re encouraged by the Chinese government support of diverse forms of education as evidenced by the revised vocational educational adopted during the meeting of the standing committee of the 19th National People’s Congress April 20. This was the first major reform in 25 years since the law was enacted in 1996. It upgrades the status of vocational education in China to be equally important as general education and encourages collaboration between schools and enterprises while also supporting social participation in vocational education.
The government is planning to adopt various [indiscernible] to organize diverse forms of occupational education, such as training prior to employ to – employment, on the job training reemployment training for the unemployed and other special groups of people, which significantly enhanced our confidence in the industry. We will closely follow the government’s policies and will remain steadfast in our contributions to China’s effort to improve its workforce skills and employment rates through occupational education.
Finally, I’m pleased to state that in June, we declared a special cash dividend to share our success with shareholders, following four consecutive quarters of profitability. Going forward, we will strive to create additional shareholder value by continuously improving our profitability and cash flow.
At the same time, we remain focused on developing diverse skill and interest courses and enhancing our teaching and service quality to attract new students with a target of bringing life changing and fulfilling learning experience to our students.
With that, I will turn the call to our CFO, Selena to run through our financials.
Selena Lu Lv
Thank you, Tongbo. Hello everyone. Our second quarter results were in line with our expectations. We sustained bottom line strength, despite the 11.8% year-over-year decrease in natural revenues as we strive for healthy and sustainable growth.
During the quarter, we continued executing barriers initiative to build a highly efficient and lean organization, while optimizing our expense management, leading to a 32.4% year-over-year decrease in our operating expenses. Our cost efficiency improvements resulted in notable net income growth from RMB22.1 million for the second quarter of 2021 to RMB114.6 million for this quarter.
Going forward, we are optimistic that our continued efforts to broaden our online cost offerings, streamline our cost structure and dedicate ourselves to providing enhanced services to our students will ultimately enable us to realize long-term growth.
Now, let me walk you through some of our key financial results for the second quarter of 2022. All comparisons are year-over-year and all numbers are in RMB unless otherwise noted. In the second quarter of 2022 net revenues were RMB555 million, a decrease of 11.8% year-over-year. Cost of revenue decreased by 6.2% to RMB91.2 million in the second quarter of 2022 from RMB97.3 million in the second quarter of 2021. The decrease was primarily due to the decline in employee conversation expenses related to the cost of revenues.
Gross profit decreased by 12.9% to RMB463.8 million from RMB532.2 million in the second quarter of 2021. In the second quarter of 2022, operating expenses were RMB351.2 million, representing a 32.4% decrease from RMB519.6 million in the second quarter of 2021. Sales and marketing expenses decreased by 34.8% to RMB293 million in the second quarter of 2022 from RMB449.1 million in the second quarter of 2021. The decrease was mainly due to number one; lower spending on branding and marketing activities. And number two, declines of conversation expenses related to our skills in the marketing personnel.
General and administrative expenses decreased by 9.7% to RMB 46.6 million is the second quarter of 2022 from RMB51.6 million in the second quarter of 2021. Product development expenses decreased by 38.3% to RMB11.6 million in the second quarter of 2022 from RMB18.8 million in the second quarter of 2021. Product development expenses were mainly comprised of our compensation expenses.
Other income decreased by 41.8% to RMB4.8 million in the second quarter of 2022 from RMB8.2 million in the second quarter of 2021. Net income for the second quarter of 2022 was RMB114.6 million compared with RMB22.1 million in the second quarter of 2021. Basic and diluted net income per share was RMB16.89 million in the second quarter of 2022.
As of June 30, 2022, the company has RMB727.5 million of cash and cash equivalence and RMB138.7 million of short term investment. As of June 30, 2022, the company had a deferred revenue balance of RMB1,998.1 million compared with RMB2,348.2 million as of December 31, 2021. Capital expenditure were incurred primarily in connection with IT infrastructure equipment and the leasehold improvement necessary to support the company’s operations. Capital expenditure were RMB0.3 million in the second quarter, compared with RMB7.8 million in the second quarter of 2021.
And now for our outlook, for the third quarter of 2022, Sunlands currently expects net revenue to be between RMB520 million to RMB540 million, which would represent a decrease of 9.3% to 12.6% year-over-year. This outlook is based on the current market conditions and reflects the company’s management current and preliminary estimate of the market; operating conditions and customer demand, which are all subject to change.
With that, I’d like to open up the core to the questions. Operator?
Question-and-Answer Session
Operator
Now I’d like to turn the conference back over to Yuhua Ye, IR representative for any closing remarks.
Yuhua Ye
Once again, thank you everyone for joining today’s call. We look forward to speaking with you again soon. Good day and good night.
Operator
This concludes the earnings conference call. You may now disconnect your line. Thank you.
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