Q3 2023 Sunlands Technology Group Earnings Call



Yuhua Ye; IR; Sunlands Technology Group

Tongbo Liu; CEO and Director; Sunlands Technology Group

Hangyu Li; Financial Controller; Sunlands Technology Group



Ladies and gentlemen, thank you for standing by and welcome to Sunlands’ third quarter 2023 earnings conference call. (Operator Instructions) 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’ third quarter 2023 earnings conference call. The company’s financial and operating results were issued in our press release and (technical difficulty) 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 financial representative, Mr. Hangyu Li. 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 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 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, and welcome to Sunlands’ third quarter 2023 conference call. Prior to commencing, I would like to kindly remind all attendees that the financial information referenced in this release are presented on a continuing operation basis and all figures are denominated in RMB unless explicitly specified otherwise.
In Q3, our business has constantly adjust to the evolving economic landscape and has strategically progressed despite the challenges. Our overarching objective of propelling the Group towards sustained and high-level profitability has yielded positive results, as we maintained sizable net profit for ten consecutive quarters.
Net income reached RMB131.6 billion. Net revenues despite a flat year-over-year decrease, exceeded the high-end of our guidance range and reached RMB524.6 million. We were also pleased to say our ongoing efforts to optimize our product structure and expand our course portfolio rewarded with enhanced operational results, reflecting a 14.3% year-over-year increase in our new student enrollments and a 6.7% year-over-year increase in gross billings.
We are delighted in our capability to remain profitable under challenging environment. This success is attributed to improvements in gross margins, the (technical difficulty) of cost cutting measures and enhanced financial planning and analysis across the entire business. Our cost of revenue has achieved a year-over-year decrease of 24.5%. And the G&A expenses have achieved a year-over-year decrease of 21%. We firmly believe that only by adhering to long-term perspective and ensuring the healthy growth of the price, can we create sustainable value for shareholders and users.
Now, let’s turn to the performance of each of our major course programs. Due to uncertainties surrounding the macroeconomic environment, our degree or diploma orientated consumers have adopted a more conservative approach to the spending. This sector experienced a year-over-year revenue decline of 55.2%, influenced by our strategic reduction in marketing activities.
We will persistently enhance our operational efficiency through continuous market observation and remain dedicated to providing premium courses for our in-progress students. The segment, including professional certifications, professional skills, and interest programs, has represented as our new growth driver accounting for 17.4% of the total revenue and exhibiting a year-over-year revenue growth of 23.8%.
We have strengthened our determination and the confidence to increase investment in interest-based education following through process of testing and validation. The number of new student enrollments in professional certifications, professional skills, and interest programs, first for nine months of ’23 increased by 29.1% compared to the same period of 2022. And (technical difficulty) the total number of paid students has exceeded 1.2 million since 2021.
Today, we would like to delve deeper into our [understanding of the sector]. There are several noteworthy shifts in the adult education landscape. Firstly, there’s the burgeoning market potential of the silver economy. While the age group of 20 to 50 remains a steadfast pillar in the industry, it’s crucial to highlight that the demographic set of this silver generation continues to grow. According to the data disclosed by the National Bureau of Statistics, at the end of 2022 China’s elderly population reached 280 million, which aged 60 and above. Among them 153 million are Internet users, indicating that at least one every two elderly individuals has Internet access. A significant portion has already adopted the habits of online learning, communication, and socialization.
Furthermore, projections indicate that during the 14th Five-Year Plan period, China’s population aged 60 and above surpass 300 million accounting for over 20% of the total population. With the aging population extended life expectancy and the rising per capita income, this represents a significant incremental market.
Based on this (technical difficulty) of course tailored to elderly individuals covering various interest areas such as vocal music, musical instrument, (technical difficulty) of accumulated content creation, services capabilities, and technological expertise. We quickly gained recognition from this group. Specifically, according to our survey, the satisfaction rate for calligraphy courses is as high as 94.59%. And for traditional Chinese painting courses, it reaches an impressive 98.25%.
We are delighted to say that this group not only learn online but also connect with like-minded friends, establishing new social relationships for our platform, which we received numerous feedback from this group and their vivid narrative resonates deeply with us, affirming the meaningful impact of our work. They illustrate how our learning platform caters to the diverse interests and the needs of various users, fostering continuous personal development and meaningful connections.
Secondly, the increasingly competitive job market is still calling for higher overall qualifications for individuals leading to varied and personalized demand for adult education. The transformation is evident on the supply side as well, with the increase in the diversity of professional courses offerings. Our strategy is in alignment with the market as well. We have meticulously curated and provided a suite of premiums, tailor-made courses with a professional focus.
We are pleased to witness our students’ unwavering commitment to actively participate in the courses, and we take pride in assisting them in navigating the challenges of the dynamic working environment. Additionally, we have carefully augmented our selection of interest-based courses in response to the burgeoning inclination towards personalized and passion (technical difficulty). We strive to provide a comprehensive range of additional services and products that extend beyond the confines of transitional learning experience.
Furthermore, we have also been closely monitoring the application of new technologies in our industry, such as the latest AIGC technology in our educational business content. We are optimistic about the prospects of the development of this technology. It’s worth mentioning that our product development expenses have also increased by 5.3% compared to the previous quarter.
In summary, drawing on our decades of valuable experience and industry acclaim, we are poised to rapidly and efficiently expand our market presence. Going forward, our dedication remains unwavering as we adjust our education offerings to align with the changing needs of learners, reinforcing our leading position in adult education sector.
With that, I will turn the call to our Financial Controller, Hangyu Li, to run through our financials.

Hangyu Li

Thank you, Tongbo Liu. Hello, everyone. I’m pleased to present our third quarter results, which are in line with our expectations and demonstrate the effectiveness of our pursuit of sustainable growth. As you can see, last quarter was another excellent quarter in operations. As a result of steady growth in interest-based programs, new student enrollments went up by 14.3%. Our gross billings increased by 6.7% year over year. Thanks to our strategy of balanced, sustainable growth, and profitability. Gross profit margin increased by 2.5 percentage points to 87.8% compared to the same period last year.
Operating expenses as a percentage of gross billings, decreased by 2.1 percentage points compared to the third quarter of last year. These improvements were reflected in our net income. Last quarter, we achieved net income of RMB131.6 million, our 10th profitable quarter since the second quarter of 2021.
Looking ahead, we are optimistic about long-term growth. We are committed to expanding online course offerings, optimizing cost effectiveness, and providing exceptional service to our students. These strategic initiatives are conductive to seizing new opportunities and consolidating our position in the industry, which in turn will help us maintain our competitive edge in the industry and continue to (technical difficulty) value for our stakeholders.
Now let me walk through some of our key financial results for the third quarter of 2023. All comparisons are year-over-year, and all numbers are in RMB unless otherwise noted. In the third quarter of 2023, net revenues were RMB524.6 million, a decrease of 9% year over year. Cost of revenue decreased by 24.5% to RMB64.1 million in the third quarter of 2023 from RMB84.9 million in the third quarter of 2022. The decrease was primarily due to lower compensation expenses related to our cost of revenue personnel.
Gross profit decreased by 6.3% to RMB460.5 million from RMB491.3 million in the third quarter of 2022. In the third quarter of 2023, operating expenses were RMB338.5 million, representing a 4.1% increase from RMB325 million in the third quarter of 2022. Sales and marketing expenses increased by 9.6% to RMB295 million in the third quarter of 2023 from RMB269.1 million in the third quarter of 2022, primarily due to increased spend on branding and marketing activities.
General and administrative expenses decreased by 21% to RMB35.1 million in the third quarter of 2023 from RMB44.4 million in the third quarter of 2022. Product development expenses decreased by 27% to RMB8.4 million in the third quarter of 2023 from RMB11.5 million in the third quarter of 2022. Product development expenses were mainly comprised of compensation expenses.
Net income for the third quarter of 2023 was RMB131.6 million compared with net income of RMB168.1 million in the third quarter of 2022. Basic and diluted net income per share was RMB19.13 in the third quarter of 2023. As of September 30, 2023, the company had RMB751.8 million of cash, cash equivalents, and restricted cash; and RMB122.3 million of short-term investments.
As of September 30, 2023, the company had a deferred revenue balance of RMB1,277 million compared with RMB1,690.9 million as of September 31, 2022. Capital expenditure were incurred primarily in connection with IT infrastructure equipment and a leasehold improvement necessary to support the company (technical difficulty).
Capital expenditures were RMB1.4 million in the third quarter compared with RMB1.3 million in the third quarter of 2022.
And now for our outlook for the third quarter of 2023, Sunlands currently expects net revenues to be between RMB419 million to RMB510 million, which would represent a decrease of 11.9% to 15.3% year over year. This outlook is based on the current market conditions and reflects the company’s management’s current and 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?

Question and Answer Session


(Operator Instructions) 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.
(Operator Instructions) There are no questions so far.
(Operator Instructions) At this time, there are no questions coming through, so that will conclude the question-and-answer session. At this time, I would like to turn the conference back over to Yuhua 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.


This concludes this conference call. You may now disconnect your line. Thank you.


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