Sunlands Technology Group (NYSE:STG) Q3 2022 Earning Call Transcript November 23, 2022
Operator: Ladies and gentlemen, thank you for standing by, and welcome to Sunland’s Third 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, Sunland’s IR Representative. Please go ahead.
Yuhua Ye: Hello, everyone, and thank you for joining Sunlands’ third quarter 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. Participants on today’s call will be our CEO, Mr.Tongbo Liu; and our CFO, Selena Lu Lv, and our Financial Controller. Selena will provide an update on our operational performance on behalf of our CEO, Mr.Lu, and then will give you an overview of our financial performance on behalf of Selena. 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’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 measures 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 CFO, Selena Lu Lv.
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Selena Lu Lv: Thank you, Yuhua. Hello, everyone. Welcome to Sunlands’ third quarter 2022 conference call. Despite the macroeconomic uncertainty and shifting industry landscape, we delivered encouraging results in the third quarter with sequential top line growth, further bottom line improvement and increased new food and enrollment. This achievement testifies to the effectiveness of our strategic initiatives to prioritize profitability and healthy growth. Amid the ongoing pandemics and uncertain macroeconomics, our third quarter net revenues came in at RMB 576.3 (ph) million, up by 3.8% quarter-over-quarter despite 3.3% year-over-year drop. To navigate the macro challenges, we remain laser focused on cost optimization and the profitability rather than blind pursuit of school expansion.
We adopted multiple measures to enhance our operational efficiency and streamline our organization during the quarter. Due to our effective expense control measures and improved operational efficiency, we reduced our G&A expenses by 29.6% year-over-year and 4.7% quarter-over-quarter. This cost reduction initiative enables us to deliver on our commitment to creating additional shareholder value will sustained profitability. Our third quarter net income reached RMB168.1 million, representing an 81.1% year-over-year increase and a 48% — 46.7% quarter-over-quarter increase, demonstrating our organization’s resilience during tough times like this. With a leaner and more efficient organization, we also further refined our product strategies in the third quarter.
We focused more on margin accretive programs and allocated our capital and human resources accordingly to expand our course offerings in those programs, leading to an optimized product lineup and a more diversified cost content. Additionally, we leveraged our solid and convenient online teaching infrastructure and the learning resources to further refine our services, which has increased our user stickiness and the core selling opportunities. Given this, we have transformed our student acquisition efforts, focusing more on users’ lifetime value instead of investing heavily in marketing activities. As you may have seen in our earnings release published earlier today, our sales and marketing expenses declined by 23.9% year-over-year and 8.2% quarter-over-quarter.
And as a percentage of net revenues, sales and marketing expenses were down by 12.7 percentage points year-over-year. Despite that, our new student enrollment for the quarter rose by 44.7% year-over-year and 11.8% quarter-over-quarter, reaffirming the effectiveness of our business strategies. Turning to our learning programs. Our professional certification and scale programs continued to grow strongly as evidenced by 91.3% year-over-year increase in new student enrollment, which drove gross billings to derive (ph) by 51.8% year-over-year. Net revenues generated by this sector also increased by 83.7% year-over-year. This growth was primarily attributable to our efforts in expanding our core catalog to target diverse age growths as we start to capture the rising demand we witnessed for skills and courses during the quarter.
In the third quarter, pandemic associated lockdowns led to the postponement for transformation of certain qualification tests, affecting our exam preparation program for those steps. Nevertheless, demand for our preparation courses for professional exams remain solid as intense career competition per, prompted working professionals to enhance their competitiveness or shopping their sales with courses from educational providers such as Sunlands. In addition to courses for working professionals, we continue to develop new courses to satisfy other cohorts, learning and leisure needs. We are excited about what we are offering and we offer our students. As we have always been committed to helping to build a lifelong learning society. We will continue to capture opportunities in these sectors to deliver more high demand courses and high quality services to our students.
Thanks to our extensive course options, premium core quality and experience teaching staff. We are pleased to see students across a wider range of ages adopting our platform as well as greater diversity in the course too. As a result, we achieved sequential growth in new student enrollments for our professional skills program for five consecutive quarters. We are also glad to have played a part in helping our students achieve their learning goals, bringing them a sense of fulfillment. Going forward, we will continue to adjust our course offerings in this sector based on market demand maximizing our value by further contributing to our students’ success and our society as a whole. Next, our Master’s degree oriented programs. During the quarter, the challenging macro environment, the pandemics and the competitive market dynamics continue to weigh on our performance in this category.
Due to macroeconomic weakness, some people may choose to delay their higher education plans and as the course for obtaining an MBA degree is relatively high compared to other sales improvement options. Meanwhile, the pandemic also prevented some people from pursuing overseas post-graduate education. Lastly, market competition was increasingly intense with more industry players join this sector after the K-12 education industry reform. Taken together, these factors resulted in reduced demand for our master’s degree oriented preparation costs leading to a decline in gross billings and student enrollment. Before I conclude, I would like to mention that alongside our efforts to solidify our industry position with our existing learning programs. We have also been prudently exploring some other new business initiatives to drive our future growth.
We are conducting invest market research on those initiatives such as combining retail or commerce with core skills. By maximizing our strength as an education provider to expand our product and service portfolio, we look forward to enhancing our risk management and creating additional revenue streams while bringing more value to our students. Looking ahead, we are confident that our proven business strategy and continued commitment to delivering premium and tailored courses to more students will help us navigate current challenges and achieve meaningful growth. That concludes Tongbo’s prepared remarks. With that, I will turn the call over to our Financial Controller to run through our financials on behalf of me.
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Unidentified Company Representative: Thank you, Selena. Hello, everyone. We are pleased with our third quarter results amid a soft macro environment. Our net revenue reached on the RMB576.2 million during the quarter, exceeding the high end of our guidance reached by 6.7%, despite a slight 3.2% year-over-year decrease, benefiting from our dedicated efforts under major steps in cost control and operational efficiency enhancement. Our third quarter operating expenses declined by 24.5% year-over-year and 7.4% quarter-over-quarter. As a result, we maintained our profitability with a net income of RMB168.1 million, up 81.1% year-over-year, and 46.7% quarter-over-quarter. Our net profit margin for the quarter remained solid at 29.2%, expanding 13.
6 percentage points year-over-year, and 8.6 percentage points quarter-over-quarter. Moving forward, we will continue to prudently manage costs and expenses enrich our cost offerings and further optimize our operations, aiming for continued success and additional shareholder value. Now let me walk you through some of our key financial results for the third quarter of 2022.All comparisons are year-over-year and all numbers are in RMB, unless otherwise noted. In the first quarter of 2022, net revenue were RMB576.2 million, a decrease of 3.2% year-over-year. Cost of revenue increased by 2.2% to RMB84.9 million in the third quarter of 2022 from RMB83.1 million in the first quarter of 2021.The increase was primarily due to increased service fees based to educational institution and increased cooperation costs.
Gross profit decreased by 4% to RMB491.3 million from RMB510 million in the third quarter of 2021.In the third quarter of 2022, operating expenses were RMB325 million, representing a 24.5% decrease from RMB430.6 million in the first quarter of 2021.Sales and marketing expenses decreased by 23.9% to RMB259.1 million in the third quarter of 2022 from RMB353.5 million in the third quarter of 2021.The decrease was mainly due to the lower spending on branding and marketing activities and the declined compensation expenses related to our sales and marketing personnel. General and administrative expenses decreased by 29.6% to RMB44.4 million in the third quarter of 2022 from RMB63.2 million in the third quarter of 2021.The decrease was mainly due to a decline in rental expenses.
Product development expenses decreased by 17.5% with RMB11.5 million in the third quarter of 2022 from RMB14 million in the third quarter of 2021.The decrease was mainly due to a decline in compensation expenses. Other income decreased by 58.6% and to RMB5.3 million in the third quarter of 2022 from RMB12.9 million in the third quarter of 2021.Net income for the third quarter of 2022 was RMB168.1 million compared with RMB92.8 million in the third quarter of 2021.Basic and diluted net income per share was 24.08% in the third quarter of 2022.As of September 30, 2022, the company had RMB678.8 million of cash and cash equivalents and RMB170.1 million of short-term investments. As of September 30, 2022, the company had a deferred revenue balance of RMB1,798.
6 million compared with RMB2,3482.2 million as of September 31, 2021.Capital expenditures were incurred primarily in connection with IT infrastructure equipment and a leasehold improvement necessary to support the company’s operations. Capital expenditures were RMB1.3 million in the third quarter compared with RMB1.8 million in the third quarter of 2021.And now for our outlook, for the fourth quarter of 2022, Sunlands currently expect net revenue to be become RMB520 million and RMB540 million which would represent a decrease of 8.3% to 11.7% year-over-year.This outlook is based on the current market conditions and reflects the company’s management’s current and preliminary estimate of the market, operating conditions and customer demand, which are all subject to change.
That concludes Selena’s prepared remarks. With that, I’d like to open up the call to the questions.
Operator: We will now begin the question-and-answer session. Showing no further questions, this will conclude our question-and-answer session. 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 lines, thank you.
End of Q&A:
