QuantaSing Group Ltd (NASDAQ:QSG) Q2 2024 Earnings Call Transcript

QuantaSing Group Ltd (NASDAQ:QSG) Q2 2024 Earnings Call Transcript March 8, 2024

QuantaSing Group Ltd isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and good evening, ladies and gentlemen. Thank you for standing by. And welcome to QuantaSing’s Earnings Conference Call. At this time, all participants are in a listen only mode. We will be hosting a question-and-answer session after management’s prepared remarks. Please note that today’s event is being recorded. I will now turn the conference over to Ms. Leah Guo, Investor Relations, Associate Director of the Company. Please go ahead, ma’am.

Leah Guo: Thank you. Hello, everyone. And welcome to QuantaSing’s Earnings Call for the Second Quarter of Fiscal Year 2024. With us today are Mr. Peng Li, our Founder, Chairman and CEO; and Mr. Tim Xie, our CFO. Mr. Li will provide a business overview for the quarter. Then Tim will discuss the financials in more details. Following their prepared remarks, Mr. Li and Tim will be available for the QA session. I will translate for Mr. Li. You can refer to our quarterly financial results on our IR Web site at ir.quantasing.com. You can also access a replay of this call on our IR Web site when it becomes available a few hours after its conclusion. Before we’ll continue, I would like to refer you to our Safe Harbor statements in our earnings press release, which also applies to this call as we will be making forward looking statements.

Please note that all members stated in the following management’s prepared remarks are in RMB terms, and we will discuss non-GAAP measures today, which are more thoroughly explained and reconciled to the most comparable measures reported in our earnings release and filings with the SEC. I will now turn the call over to the CEO and Founder of QuantaSing. Mr. Li.

Peng Li: Hello, everyone. And thank you all for joining us today. Last quarter, we saw solid 24.7% increase in revenue, proving that our strategy to expand our cost offerings is paying off. Following the past success of our financial literacy courses, we have been actively adding new courses to diversify our revenue streams. We are also [Indiscernible] [seeding] the opportunity presented by growing demand for courses made for senior learners. We have adjusted our revenue presentations under other personal interest courses this quarter. We further broke down our other personal interest courses into skills upgrading courses and recreation and leisure courses. We think the new revenue breakdown better reflects our business strategies and can provide useful and updated information to investors.

Under the new breakdown, skills upgrading courses mainly include courses for training productive skills, such as short video production and memory training courses. Recreation and learning courses mainly include more personal enrichment courses, such as personal wellbeing courses, electronic keyboard courses, understanding meditation courses. Now let’s pivot to discuss some new developments and initiatives with our organization. Recent government data has highlighted the strong growth of China’s elderly population. China had over 297 million people aged 60 and above in 2023, which was 21.1% of the total population. As such, China has officially become a super aged society by World Bank standards. The silver economy is currently valued at around RMB7 trillion, [Indiscernible] [$82 billion] and is focused to search to RMB30 trillion, $4.2 trillion by 2035.

This would made up roughly 10% of the country’s total GDP according to China National rating. The evolving needs and the desires of middle aged and elderly people in China represent significant opportunity for us. This is growing demand for personalized services in the silver economy sector. In a positive move, the government recently introduced merits to strengthen the silver economy. This initiative urged in enterprises to enhance their offerings for the elderly population. For example, to enhance digital services thousands of Web sites and the apps are being revamped and the standards are being established for senior friendly mobile devices. This development is also beneficial for us as it will enhance the learning experience for our users from a hardware perspective.

We are prone to how anticipated this shift in demand. We have been preparing for this opportunities for years. Our team have built a solid foundation and measured business model and we are well positioned to meet this growing demand. As living standards improve, middle aged and elderly people seek more than just the health or longevity. They want experience that will provide cultural and intellectual enrichment. Our diverse range of online courses includes many which are tailor made to the interest of this demographic. Our platform is dedicated to lifelong learning and we have always emphasized user engagement and satisfaction. This means we are all equipped to fulfill user desire for intellectual simulation and personal growth. Now let’s move on to our ongoing efforts to enhance user engagement and satisfaction.

We’ll be diligently engaging our learners in a variety of offline and online initiatives, leveraging the power of AI to elevate users’ learning experiences. Additionally, we utilize our scalable self operated system to boost learners’ repurchase risk. We have hosted a series of community events surrounding our recreation and [learning] courses. This event include standing meditation sessions and appreciation sessions for pursuits like, electronic keyboard and calligraphy. We provide ample opportunities for interaction, communication and personal enrichment for our middle aged and elderly users. For example, our recent initiative involved offering complimentary trial courses to residents of community in Beijing. Our offline and online initiatives have resulted in constantly high levels of user engagement.

Attendees of our sharing sessions speak highly of the valuable knowledge they gained from instructors and peers during events. We have received lots of positive feedback from participants for both our online courses and offline activities, especially from elderly learners. They expressed deep appreciation for activities like calligraphy and the standing meditation, and recognize them as valuable opportunities for personal growth and learning. This feedback highlights their strong desire for spiritual and cultural enrichment, which emphasize the importance they place on these experiences. Among the variety of merits we have used to apply AI in our business, we have successfully enhanced live streaming quality using AI, improving both visual clarity and stream stability.

Additionally, we have leveraged the AI in our online tutoring system by intelligently identifying and anticipating learners’ behavior. As a result, learners have been able to significantly reduce their waiting times during Q&A sessions with our tutors. Our commitment to learner satisfaction is closely followed by a more efficient approach to retaining our learners. Recently, we upgraded our integrated business management process and conducted pillars testing before rolling it out to more SQs. Our tutor can now easily manage tasks like one click class, reminders and optimizing private domain traffic. By doing so, we have not only increased our cost complete risk but also enhanced overall repurchase. For example, the repurchase rate of our standing meditation cost has improved from 26.2% in last fiscal year to an impressive 34.7% in this quarter.

We aim to streamline the observation system across all SQs and to maximize user retention on our platform. Next, let’s turn to our efforts to increase operational efficiency while growing our top line. We remain focused on streamlining process and optimizing resource allocation by carefully investing in sales, marketing and leveraging technology. We aim to enhance our market presence. Our test and scale approach ensures efficient results utilization, minimizes financial risk and allow us to seize market opportunities. At present, we are focused on streamlining processes and the results allocation to boost cost efficiency. We aim to ensure that the quality of our services also remain topnotch. We have managed to limit our relative growth in headcount.

This demonstrates our ongoing commitment to prudent results management. Moreover, we are assembling a new team in [Hefei]. We efficiently capitalized on the cost advantages of operating in that region, including but not limited to, labor cost and administrative expenses. We also made improvements to our operational system. Specifically, we developed our own instant messaging system, which has been officially deployed this quarter. The strategy will not only significantly reduce our operational expenses but also enhance real time interactively among learners. We achieve highly efficient sales under marketing by leveraging technology. We are carefully allocating resources to enhance our market business. For example, we leveraged tax including big data and our advanced operational systems to create diversified and effective marketing channels.

During this quarter, we upgraded our technologies so we were able to reach paying users more effectively. Meanwhile, we are employing a test and scale methodology. For this methodology, we invest [modestly] in new initiatives, such as new cost offerings, marketing campaigns and the live e-commerce product offerings [Indiscernible] [then we] access the ROI. We only take steps to process and the expense initiative if the ROI miss are actually exceeded our expectations. This data driven decision making process maximizes our resource allocation and minimizes the financial risk for new initiatives. Also by collecting feedback from the market and our customers, we gain a better understanding of their needs. This broadens our reach and enhances our ability to address shifting demand.

The flexibility of our business model allow us to scale up our operations without sacrificing cash flow. Ultimately, this enables us to seize market opportunities as they arise. In addition to our ongoing efforts to drive revenue growth and maintain cost efficiency, we are actively pursuing new initiatives that offer significant potential for expanding and diversifying our business. Live e-commerce and overseas markets are important to broaden our revenue streams. Thus, we have launched a new number of strategic initiatives in these areas. Live e-commerce provides an interactive platform to enhance sales and driven customer engagement. Recognizing this, we are currently leveraging live e-commerce to strengthen our online presence and increase our market share.

We’re also developing private label products that priortize innovation and customer satisfaction. The recent launch of our private label Chinese Baijiu brand YUNTING is one example. Meanwhile, our focus on overseas expansion aims to access new markets and demographics, thereby, diversifying our revenue streams and broadening our market reach. We are carefully planning our expansion strategy for sustainable growth. Chinese education serves us a key trial venture proceeding broader international expansion efforts. We are closely monitoring its process to refine our strategies and inform further expansion plans, ensuring prudent and a well informed approach to scaling our international operations. In conclusion, the second quarter of our fiscal year 2024 demonstrated strong revenue growth, reflecting the success of our strategic initiatives.

We have taken steps to diversify our cost offerings and to cater to burgeoning demand for middle aged and the senior learners. We’re also actively pursuing new opportunities in live e-commerce and international markets, while still maintaining a lean and efficient operational model. With the focus on innovation and prudent results management, we are well positioned to sustain our growth trajectory and deliver lasting value to our shareholders. With that, I will turn the call over to Tim to discuss the details of our financials. Thank you.

Tim Xie: Thank you. Before I go into details of our financial results, please know that all amounts are in RMB terms, that’s the reporting period is the second quarter of fiscal year 2024, ending on June 30, 2024, and that in addition to GAAP measures, we’ll also be discussing non-GAAP measures to provide greater clarity on the trends in our actual operations. For second quarter of fiscal year 2024, we grew our total revenues by 24.7% year-over-year and 12.8% quarter-over-quarter to RMB980.5 million, mainly driven by growth from skills upgrading courses. Among our revenues, revenues from individual online learning services grew by 24.1% year-over-year to RMB873.6 million or 89.1% of total revenues, mainly due to continued demand for skills upgrading courses.

Our gross billings of individual online learning services increased by 15.4% year-over-year to RMB944.6 million. Revenues from enterprise services were RMB57.6 million, a change of 30% from a year ago and representing 5.9% of total revenues, primarily due to a decline in revenues from related partly transactions. Gross profit was RMB835.5 million, representing a gross margin of 85.2% compared to 87.4% in the same period last year. Total operating expenses were RMB733.2 million compared to RMB731.7 million in the same period last year. To break this down, sales and marketing expenses was RMB657.1 million, representing a change of 5.5% year-over-year. The change is mainly due to our increased to spending on outsourcing labor and marketing efforts.

The increase is partially offset by a decrease in our staff costs, which also included a decrease in share based compensation. As a percentage of total revenue, non-GAAP sales and marketing expenses, which excluded share based compensation, decreased to 68.6% from 77.3% a year ago. Research and development expenses were RMB41 million, representing a decrease of 36.2% year-over-year, primarily driven by a decrease in share based compensation. As a percentage of total revenue, non-GAAP R&D expenses, which exclude share based compensation, decreased to 4% from 5.6% a year ago. General and administrative expenses were RMB35.1 million, representing a decrease of [21.3%] year-over-year, primarily due to decreases in share based composition and office expenses, partially offset by increase in professional service fees.

As a percentage of total revenue, non-GAAP G&A expenses, which excluded share based compensation decreased to 2.8% from 3.1% a year ago. Net income was RMB107.6 million, excluding share based compensation. Adjusted net income was RMB103.9 million, representing adjusted net margin of 10.6% during the quarter. Basic and diluted net income per share were RMB0.65 and RMB0.64 respectively during the quarter. Adjusted basic and diluted net income per share were RMB0.63 and RMB0.62 respectively during the quarter. Turning to our balance sheet. As of December 31, 2023, our company held RMB1,050.8 million in cash and cash equivalents and short term investments compared to RMB930.6 million as of June 30, 2023. Lastly, I want to provide some color on our outlook.

For the third quarter of fiscal year 2024, which ends on June 30, 2024. We expect revenues to be between RMB900 million and RMB930 million, representing a year-over-year increase of between 11.5% and 15.2%. These projections take into consideration the current market conditions prevailing in the industry. In summary, our steadfast commitment to delivering exceptional online learning experiences and a broad spectrum of courses, coupled with our focus on cost efficiencies and cash flow optimization delivered solid results to this quarter. Our expansion efforts are executed with a keen eye on maintaining profitability as we continue to create long term value for our shareholders. Looking ahead, our strategic direction will remain aligned with our dedication to sustainable growth.

That concludes my prepared remarks. Operator, let’s open up the call for questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Howard Halpern from Taglich Brothers.

Howard Halpern: In terms of your live e-commerce offering, you talked about, I guess, you announced in January, the first private label brand. So how — is this offering being received and are we going to see additional private label offerings launched throughout the year to continue the growth in that segment?

Tim Xie: Regarding our recent introduction of YUNTING, our first label — for first private label Chinese Baijiu Brand within our live e-commerce offering. We are pleased with the initial reception it has received. YUNTING represents a significant milestone for QuantaSing as it marks our entry into the private label business through a live streaming — leveraging our expertise in live streaming e-commerce. The response from our customers has been positive with many expressing appreciations for the rich taste and the quality of YUNTING, Baijiu. The limited edition gift box, especially designed for the Chinese Lunar New Year with dragon themed packaging has resonated well with consumers, symbolizing good luck and future success.

And also I think we still need time to tack the market and to try this kind of private label live e-commerce business. And then discuss more evidence that the private label business is — the positive review continue our test and scale approach and business strategy to enlarge this kind of business. As for the future plans, while we don’t have specific announcements to make at this time, we are actively exploring opportunities to expand our private label offerings through the year. We recognize the importance of providing unique and high quality products and services to our customers. And the launching of YUNTING reinforces our confidence in pursuing additional private label initiatives. I think based on our customer, the large customer base and also our business strategy to launch the businesses, catering to the needs of our risks suitable to the customers’ demographic and profile, I think in the future, we will do more efforts for this kind of private label e-commerce business.

We will notice and we will publish any significant news in the future, if any. Thank you.

Operator: The next question comes from Hunter Diamond of Diamond Equity.

Hunter Diamond: Firstly, congratulations on the results. So it was noted that QuantaSing’s live e-commerce segment has been demonstrating promising growth. Could you elaborate on some of the key performance metrics that underscore this growth? And then additionally, what strategic initiatives are being implemented to capitalize on this momentum?

Tim Xie: Yes, I think I will ask my CEO to answer this question, and Matt will answer in Chinese, Leah will help translate.

Peng Li: Our live e-commerce business has shown promising growth with key performance metrics, such as the average order value, repeat purchase rates and paid users and GMV. It strategically aligns product offerings with cost content enhancing relevance and value for our users. For example, we — for the house management courses, we introduced complimentary products like [moxa stick]. And as for the short video editing courses, we pair the course content with software services. This approach ensures synergy between the education and also consumer goods optimizing the customer experience and engagement. In addition, we leveraged our robust customer base, our operational capabilities and the tech structure so that we can expand offerings beyond the course related products, such as Baijiu.

This means that we are seizing opportunities to diversify and extend our products range in line with the evolving market demands. This approach is quite flexible and underscores our commitment to delivering the comprehensive solutions and capitalizing on growth opportunities in live e-commerce landscape.

Operator: The next question comes from Steve Silver of Argus Research.

Steve Silver: Congratulations on a strong quarter as well. You guys spoke quite a bit in the prepared remarks on your efforts to grow the company efficiently and sustainably over the long term using AI for many of these initiatives. I was just hoping you could provide any additional color on the company’s current thinking about scaling the size of the workforce over time as these e-commerce enterprise services and geographic expansion like Kelly’s Education continue to ramp up?

Tim Xie: I think as we grow across a number of areas, especially for online learning business, we focus on efficiency and lowering cost by using technology, including AI to streamline operations, especially in the area that which can — which is useful to use such kind of technologies to streamline the efficiency of the operation process. Instead of hiring more people, we are now improving and trying to many possibilities to improve our processes and reducing headcounts through automation and AI driven solutions, especially in the process driven area. As e-commerce and enterprise services grow, we also use AI to work smarter and faster. This includes automating everyday tasks, improving decision making processes and enhancing resource allocation to reduce costs while keeping operational effectiveness during the whole process of our daily operation to deliver the services to our online learners.

Likewise with the acquisition of Kelly’s Education and our entry into the global online education market, I think we are trying to test and use AI technology and other technologies, the big data technology and so on, to scale operations efficiently, the lower overhead costs. We automate admin tasks, personalized learning experiences and optimize cost delivery to achieve a greater cost efficiency, while expanding our reach and impact. But I think overall our strategy for managing our workforce involves using technology, including AI and other technologies to reduce costs and to improve efficiency across all business segments. By using the power technology, we achieved our growth objectives by reducing the need for more manpower and resources.

But I think in the end, all of the technologies and solutions we adopted, the aim is to cater to our customers’ needs and their desire and to improve and upgrade our service level to our customers. So in the end, whether we use technology, including AI or not, depends on the servicing and the service quality we provided to our customers and also depends on the business nature. If we can upgrade our service level, it can improve the operation efficiency we will use that and we will invest that. So that is our methodology. Thank you.

Operator: The next question comes from Pat McCann of Noble Capital Markets.

Patrick McCann: My question is that given the acquisition of Kelly’s Education, can you comment on the market opportunity for youth online learning in Asia, given that you traditionally target a market that’s more adult learning focus?

Tim Xie: Indeed in Mainland, China, we currently — is a adult online learning service provider, we are the largest. And also using our technology edge and also our experiences, we cooperate and we will help Kelly’s Education to enlarge their service offering to the children’s online learning in Asia, maybe currently the major market is Hong Kong, and also we are researching and trying other markets. And also, our acquisition of Kelly’s Education is an important step for us to enter into the rapidly growing market for children’s online learning in Asia. In Asia, many parents are very keen about their children’s education and their massive need for this kind of services. And we are also expanding beyond our former focus on adult education.

This growth of the children’s online education, online learning market is driven by increasing digital adoption, parents’ focus on education and the post COVID rise of online learning. As parents seek convenient and effective educational solutions for their children, I think we are ready to use our expertise to become a leading provider of personalized online learning experiences, meeting the changing needs of families across this region. But in terms of the method we use to develop and to deliver our services to each of the local market in Asia, maybe worldwide, we view they always speak to the methodology that we view cater to the local market. We view research with local market. We will make our services suitable to the local market. By creating fresh new curriculums and with our commitment to excel, I think we plan to take over advantage of this huge market opportunity and drive growth in children’s online education in Asia and be worldwide.

I think this is a good start and we will speak to our test and scale methodology for this kind of market. Thank you.

Operator: The next question comes from BJ Cook of Singular Research.

BJ Cook: Can you just talk about your strategy for attracting repeat customers and turning them into paid customers?

Tim Xie: I think for the attracting repeat customers or turning them into paid customers, our strategy for attracting them and converting them revolve around continuously enhancing our online learning platforms’ quality, ensuring its user friendly, interactive and filled with valuable content. For example, because we are now catering to [enduring] services to more and more elderly people, we cater and we tailor made our app. We tailor made our products to make it suitable to their personal habits, to suitable for their physical use and also for regular updates driven by our user feedback and educational trends, maintain our competitive edge. And I think in addition to this, we host a diverse range of engaging events, both online and offline including webinars, workshops, seminars and networking sessions tailored to our customers’ interests and learning needs.

I think, this event not only enrich the overall learning experience but also foster a sense of community among our learners. I think in summary, by integrating these efforts, we cultivate a loyal customer base, driving sustainable growth for our online learning service company, our platform. And also, I think maybe more importantly, during the past years of operation experiences, we accumulated a seamless technological operation process using the technical — the technology skills and also our experience to streamline the operation of the cost — during the cost delivery. For example, for our initial launch, financial literacy courses, we have delivered a very strong [Indiscernible]. And by leveraging such kind of experiences we scale our personal skills upgrading courses and later recreation courses.

For such kind of courses, we can duplicate and leverage our experiences accumulated for the financial literacy courses to launch the repeat [purchase] programs to launch the — to attract the repeat customers to our advanced courses, so that demonstrating a very healthy ratio for our [operational] metrics. So that is our methodology. Thank you.

Operator: This concludes our question-and-answer session. I would like to hand the conference back to management for closing remarks.

Leah Guo: Thank you, again for joining our call today. If you have had further questions, feel free to contact us or submit a request through our IR Web site. We look forward to speaking with everyone in our next call. Have a good day.

Operator: The conference is now concluded. Thank you for attending today’s presentation, and you may now disconnect.