Sunlands online education group (STG) Q4 2018 Earnings Conference Call Transcript

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Sunlands Online Education Group (NYSE: STG)Q4 2018 Earnings Conference CallMarch 22, 2019, 7:30 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Sunlands' fourth quarter and full year 2018 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 would now like to turn the conference over to your host today, Yingying Liu, Sunlands' IR Director. Please go ahead.

Yingying Liu -- Director, Investor Relations

Hello, everyone, and thank you for joining Sunlands fourth quarter and full year 2018 earnings conference call. On the call, our CEO, Tongbo Liu, will provide you an update on our operational performance as well as our our strategic initiatives. Our CFO, Steven Yipeng Li, will give you an overview of our financial performance and also provide our guidance for the first quarter of 2019. Following their prepared remarks, we will move into the Q&A session.

Before I hand 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 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.

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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 CEO Tongbo Liu.

Tongbo Liu -- Chief Executive Officer

Thank you, Yingying. Hello, everyone. Welcome to Sunlands' fourth quarter and full year 2018 conference call. 2018 was a memorable year for us. Coincidentally, today is the one-year anniversary of our listing on the NYSE. Thank you for joining our quarter four and full-year earnings call.

In 2018, we made a number of substantial changes to our company. In addition to our U.S. public listing, we've fine-tuned our business, enhanced our brand, served even more students, and launched more courses. Throughout the year, we work to support and enrich our industry-leading brand by focusing on user experience and course offerings development.

First, we continue to bring students our best-in-class STE programs. We will also introduce new, proprietary AI technology designed to help students develop better study habits and support our unrivaled pass rates. Importantly, we've refined our marketing tactics by offering a broader of free trials for selected course offerings. We're adding more free course offerings, including graduate, postgraduate, and professional classes. We believe we can support our goals over the longer term.

We're ending the year going over annual net revenues by nearly 104%, or RMB 2 billion, with fourth-quarter revenues of RMB 569 million, at the high end of our guidance, demonstrating an increase of 65%. The increase was mainly driven by the growth in numbers of students in the year 2018 compared to 2017, following new student enrollment continued increase over the past years. During the year, we continued to introduce the market to the benefits of online [audio cuts out], and more specifically to our high-quality postsecondary education and our technologically advanced platform.

In April, we reached a considerable milestone, initiating our free trial program. We began working diligently to gain the interest of new students with increasingly versatile courses on both mobile and PC. We have a tightened pool of teachers that support our online offerings, and our platform is now equipped with customized AI technology designed to make personal selections for our students.

We now offer free introductory seminars which enable prospective students to see firsthand how our course offerings work, as well as select free short courses to provide our students with free introductory learning opportunities. We believe our upgraded free trials with introductory seminars and free short courses can, over time, increase average gross billings, conversion rates, and sales efficiency. These initiatives also support our emphasis on enhancing the overall user experience, including how students perceive our [inaudible]. Previously, our primary challenge had revolved around bringing in more students through social marketing tactics. With our upgraded free trials in place, we see an opportunity to familiarize the broader population with Sunlands' platform and our extensive education services.

As awareness of our brand grows, we believe we can reach a larger prospective pool of students. While it will take time to achieve the long-lasting effects we are looking for, we are seeing early signs of the benefit of these programs. Empowered by our one-to-many live streaming model, we are able to continue to broaden our course offerings to serve a larger number of students. At the same time, we can leverage our premier AI technology and industry-leading online platform to build positive user experience that could add a base for future learning and a virtuous circle of recurrent users.

In 2019, we will be focused on attracting more students by upgrading our free trials with even more offerings, as well as further enhancing the user experience. We strive to bring our students inclusive, effective, and efficient learning opportunities, and we are at the forefront of technological advances for enabling this easy-to-use and seamless platform integration. Sunlands are spending an increasing amount of time on our platform, demonstrating that our programs work, and students are utilizing them to their full potential. The total number of students engaged in live streaming class grew 45.8% in Q4 2018 compared to Q4 2017, and more importantly, the average time spent on live streaming classes continued to grow 26.6% year over year for the fourth quarter. Our users are also becoming more engaged and are showing increased passion for studying on our platform.

There is even more of a leap if we look at the gains we made over the course of this year. Students took a total of more than 2 billion courses online in 2018 compared to just 200 million courses in 2017. In return, for 2018, our pass rates continue to be well above the industry average, and this has increased constantly on an annual basis. Our highest average pass rates continue to be among students taking STE exams in the Jiangsu province. For 2018, our pass rate in this province was 76.8%, up from 71.9% in 2017, and we are pleased to maintain this exceptionally high level of education for our students.

As we move through 2019, new student enrollment will be key. We believe the initiatives we have put in place to improve our user experience throughout the front and back end of our business, our advanced technology, and expanded course offerings will prove attractive to students. The online postsecondary and professional education market is massive and continues to evolve. We are dedicated to providing a complete online continuing education ecosystem that is tailored to each student's learning patterns. We believe these initiatives will help develop online learning habits for more students transferring from offline to online and enhance a stronger brand for Sunlands over the longer term. Our innovative approach to online learning scaled our one-to-many live streaming model is ideally suited to support our future growth. With that, I would like to hand over the call to our CFO, Steven, to run through our financials.

Steven Yipeng Li -- Chief Financial Officer

Okay. Thank you, Tongbo, and hello, everyone. Thanks for joining us. We are pleased to report that we delivered revenue at the higher end of our guidance in the fourth quarter, reflecting the effectiveness of our initiatives to strengthen brand awareness and attract more students to our platform. Let me walk you through some of the key financial results for the fourth quarter and full year 2018. All comparisons are year over year and all numbers are in RMB.

In the fourth quarter of 2018, net revenues increased by 65% to RMB 568.8 million from RMB 344.7 million in the fourth quarter of 2017. The increase was mainly driven by the growth in the number of students in the fourth quarter of 2018 compared to the fourth quarter of 2017, following new student enrollments' continuous increase over the past years. Cost of revenues decreased by 1.1% from RMB 79.4 million in the fourth quarter of 2017 to RMB 78.5 million in the fourth quarter of 2018. Gross profit increased by 84.8% to RMB 490.3 million from RMB 265.3 million in the fourth quarter of 2017.

In the fourth quarter of 2018, operating expenses were RMB 699.7 million, representing a 0.2% increase from RMB 698 million in the fourth quarter of 2017. Sales and marketing expenses increased by 2.5% to RMB 530.1 million in the fourth quarter of 2018 from RMB 517.3 million in the fourth quarter of 2017. The increase was mainly due to increases in spending on branding and marketing activities, including investments in broadening Sunlands' search engine and mobile application channels.

General and administrative expenses decreased by 15.5% to RMB 142.6 million in the fourth quarter of 2018 from RMB 168.7 million in the fourth quarter of 2017. The decrease was mainly due to significant share-based compensation expenses recognized in the fourth quarter of 2017. Product development expenses increased by 125.6% to RMB 27 million in the fourth quarter of 2018 from RMB 11.9 million in the fourth quarter of 2017. The increase was primarily due to an increase in the number of employees and compensation paid to Sunlands' course and educational content professionals and technology development personnel during the quarter.

Net loss for the fourth quarter of 2018 was RMB 183.7 million, compared with RMB 427.8 million in the fourth quarter of 2017. Basic and diluted net loss per share was RMB 26.68 in the fourth quarter of 2018. As of December 31st, 2018, the company had RMB 1,248.8 million of cash and cash equivalents and RMB 1,028.6 million of short-term investments respectively, compared to RMB 559.5 million of cash and cash equivalents and RMB 353.1 million of short-term investments respectively as of December 31st, 2017. As of December 31st, 2018, the company had deferred revenue balance of RMB 3,286 million.

Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support Sunlands' operations. Capital expenditures were RMB 263.1 million in the fourth quarter of 2018, compared to RMB 307.2 million in the fourth quarter of 2017.

Now, I will go through some financial results for the full year of 2018. For the year of 2018, net revenues increased by 103.5% to RMB 1,974 million from RMB 970.2 million in the year of 2017. The increase was mainly driven by the growth in the number of students in the year of 2018 compared to 2017, following new student enrollments continuous increase over the past years.

Cost of revenues increased by 94% from RMB 170.3 million in the year of 2017 to RMB 330.4 million in the year of 2018. The increase was primarily due to the increase in compensation for our faculty members, which mainly included teachers and mentors, as we continued to retain our existing faculty members and attract new faculty members. Gross profit increased by 105.5% to RMB 1,643.6 million from RMB 799.9 million in the year of 2017.

For the year of 2018, operating expenses were RMB 2,672.5 million, representing a 54.7% increase from RMB 1,727.6 million in the year of 2017. Sales and marketing expenses increased by 59.3% to RMB 2,152.8 million from RMB 1,351.8 million in the year of 2017. The increase was mainly due to increases in our sales and marketing compensation and spending on branding and marketing activities, including investments in broadening our search engine and mobile application channels. G&A expenses increased by 29.4% to RMB 443.7 million from RMB 342.9 million in the year of 2017.

Product development expenses increased by 131.3% to RMB 76.0 million from RMB 32.9 million in the year of 2017.The increase was primarily due to an increase in compensation for our course and educational content professionals and technology development personnel during the quarter.

Net loss for the year of 2018 was RMB 927.0 million, compared to RMB 918.7 million in the year of 2017. Basic and diluted net loss per share was RMB 147.27 in the year of 2018. Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support Sunlands' operations. Capital expenditures were RMB 518.4 million and RMB 398.9 million for the years ended December 31st, 2018 and 2017, respectively.

For the first quarter of 2019, Sunlands currently expects net revenues to be between RMB 550-570 million, which would represent an increase of 35.3-40.3% year-over-year. The above outlook is based on the current market conditions and reflects the company's current and preliminary estimates of market and operating conditions and customer demand, which are all subject to substantial uncertainty. With that, I'd like to open up the call to questions. Operator, please?

Questions and Answers:

Operator

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press *1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press *2. For the benefit of all participants on today's call, if you wish to ask your question to the management in Chinese, please immediately repeat your question in English. With these instructions in mind, we will pause momentarily to assemble the roster. And, the first question comes from Alex Xie with Credit Suisse.

Alex Xie -- Credit Suisse -- Analyst

Hi, management. Thank you for taking my questions. So, my first question is about our outlook for 2019. What are management's expectations for the growth in 2019 and what are our key initiatives to drive growth? My second question is about GP margin of this quarter. I think the GP margin of fourth quarter is higher than the previous three quarters. Could management provide some explanations about it? Thank you.

Steven Yipeng Li -- Chief Financial Officer

For the first question, in terms of the guidance our outlook for the entire of 2019, I don't think as of now, the company has a very clear guidance or outlook for the entire year of 2019. As I mentioned during the call, our guidance for the first quarter of 2019 in terms of net revenues will be between RMB 550-570 million. I think that's what we can give right now in terms of the guidance.

However, for the entire year of 2019, as our CEO mentioned during his call, I think the most important thing for the company is we will continue to offer more courses through our free trials, through our introduction seminars, through our knowledge-open programs in order for our potential students to have more experience in terms of online learning, in terms of all the course offerings, the content, the quality, and I think those are the primary goals for the company. We want to build up better brand awareness, offer better content to the students, but not...really, transfer those students into our paid students advance. So, in terms of the strategy for 2019, we will continue to expand our course offerings from those perspectives.

For your second question, in terms of the gross profit margin for the first quarter of 2018, I believe that's only a little bit higher compared to previous quarters because 1). Our net revenues for first quarter actually continue to increase, and 2). In terms of controlling the costs for the teachers and mentors for the fourth quarter of 2018, yes, the company sees some progress from that regard, too. So, that's why our GP margin is just a little bit higher compared to previous quarters.

Alex Xie -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you. And, once again, please press *1 if you would like to ask a question. All right. Showing now further questions, this will conclude the question and answer session. At this time, I would like to turn the conference back over to Yingying Liu, Investor Relations Director, for closing remarks.

Yingying Liu -- Director, Investor Relations

Once again, thank you, everyone, for joining today's call, and we look forward to speaking with you again soon. Good day and good night.

Operator

Thank you. This concludes the earnings conference call. You may now disconnect your lines. Thank you.

Duration: 24 minutes

Call participants:

Yingying Liu -- Director, Investor Relations

Tongbo Liu -- Chief Executive Officer

Steven Yipeng Li -- Chief Financial Officer

Alex Xie -- Credit Suisse -- Analyst

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