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Sunlands Online Education Group (NYSE:STG)
Q1 2019 Earnings Call
May 28, 2019, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Sunlands' First Quarter 2019 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 call over to your host today, Yingying Liu, Sunlands IR Director. Please go ahead.

Yingying Liu -- Investor Relations Director

Hello, everyone, and thank you for joining Sunlands' First Quarter 2019 Earnings Conference Call. On the call our CEO, Tongbo Liu, will provide an update on our operational performance as well as our strategic initiatives. Our CFO, Steven Yipeng Li, will give you an overview of our financial performance and also provide our guidance for the second quarter of 2019. Following their prepared remarks, we will move into the Q&A session.

Before I hand 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 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 and Director

Thank you, Yingying. Hello, everyone. Welcome to Sunlands' first quarter 2019 conference call. During this first quarter, we continued to advance our strategic initiatives to elevate our program offerings and strengthen our brand equity, with a keen focus on diversifying students acquisition methods, increasing accessibility and enhancing user-friendly marketing techniques.

During the first quarter, we advanced each of these initiatives, including launching a new mobile app that broadens our subject domains and deepens our content offerings. This is a milestone and a starting point for Sunlands to build up our own free learning community and a self developed traffic pool. We successfully delivered a revenue of RMB564 million for the first quarter, which is in line with our guidance and represents a 39% increase year-over-year. We also narrowed our net loss margin to 20%. Students are also spending more time on our platform. The average time spent on live streaming classes grew 39.2% year-over-year for the first quarter.

As we discussed in the last earnings, we are working to further expand our free trial offerings to reach out a wider population of prospective students. To realize that goal, more specifically in Q1, we kicked off a free learning plan along with our independent mobile app, providing free short courses across professional domains and industries. Launched in the end of January, the app is aimed to attract more students to our professional education and skills courses and more importantly, to expand our own active students pool for future conversion in the long term. Since the launch of the app in the late January to the end of the first quarter, Sunlands new mobile app had registered users of 250,000.

As we know, from the end of online free learning platform to achieve scale and activity at the same time is not an easy task. But with our one to many live streaming model, we can attract students more easily and the courses and the content more easily. Currently, we provide more than 23 short course offerings and in fact, have now expanded students demographic. While utilizing our investing infrastructure and maintaining a low cost structure, this key demographic of professionals who are already in the workforce, along with those looking for optimal university degree, represents an opportunity for us to further grow our business.

As we have discussed in the past, one of the main way we are attracting new students to our program is through free introductory seminars and free trials of common subjects among the 18 STE majors that we provide. We continue to -- and to this connection to deepen our connection with those prospective students looking for support to upgrade their degree and with education credentials. By providing potential students with an overview of our course offerings, allowing the way to experience selected introductory courses at low cost, they are able to see if our program is a good fit for them.

This method allows us to not only build the best of community of students, but also improve the way our brand and courses are perceived. Thanks to this change in average, we are seeing a shift in our relationships with our students. We are getting to be viewed as more collaborative, acting as partners with our students rather than holding a role as a vendor. When we became a listed company, we stated that our business focused on three main categories; STE, master degree offerings and professional certification offerings. As of the end of the Q1 2019, we can see that the popularity of our master-oriented products is growing rapidly. The percentage of gross billing for master-oriented product is up significantly to more than 10% by the end of Q1 comparing to 3.2% of gross billing in 2017 and 5.5% of gross billing in 2018.

This clearly shows there is a ready market for this offering. The synergies of our proprietary AI technology and the industry leading online education programs are paving the way for sustainable growth over the longer term. Many of the programs that began last year are showing early signs of traction. While we are not yet realizing the financial benefits of these newer initiatives, we believe once they take hold, they will help us build an even broader base of paying students, gaining us faster recruiting cycles, directly increasing student enrollments numbers and positively impacting our gross billings.

Our expansion and retention plan for 2019 follows a five pronged approach. First, we are continuing to enrich and upgrade our existing trial programs. We are adding STE courses and we are building out our professional certification -- certificate programs to reach a high quality constituency. Second, we are hiring and training live streaming teachers suitable for our adult students. We believe we have a talented pool of educators to attract to our competitive compensation structure, which will also help us to retain this talent. Third, we are cultivating a unique online learning community. We actively encourage our students to interact with our teachers, mentors and each other. Building these important relationships reinforce our students' commitment on the programs, improve referrals and help solidify our leading reputation.

Fourth, we are enhancing our technology in order to improve our students' ability to learn efficiently, reduce study time and support their overall success. Finally, we are continuing to expand our range to cover more attractive course offerings that help our students achieve their post-secondary and professional education goals. At the same time, we are offering more diverse trial programs and deploying more effect after sales service, all in an effort to attract more students and strengthen our position as a market leader. While we basically have technology, high quality educational content and one-to-many business model, we believe we are well positioned to see the tremendous growth opportunity before us.

With that, I would like hand over the call to our CFO, Steven, to run through our financials.

Yipeng Li -- Chief Financial Officer

Thank you, Tongbo, and hello, everyone. Thanks for joining us. We are pleased to report revenue in line with our guidance for the first quarter. While the seasonal slowdown due to Chinese New Year, softer marketing tactics and our expanded trial programs negatively impacted student enrollments and gross billings, we are confident that our upgraded free trials, introductory seminars and free short courses for graduates, post-graduates and professionals, can increase average gross billings, conversion rates and sales efficiency over the long term.

Let me walk you through some of the key financial results for the first quarter. In the first quarter of 2019, net revenues increased by 38.8% to RMB564.2 million from RMB406.4 million in the first quarter of 2018. The increase was mainly driven by the growth in the number of students in the first quarter of 2019 compared to the first quarter of 2018, following a continuous increase in new student enrollments over the past years. Cost of revenues increased by 20.9% to RMB85.5 million in the first quarter of 2019 from RMB70.7 million in the first quarter of 2018, which was primarily due to the increase in the compensation for faculty members.

Gross profit increased by 42.6% to RMB478.7 million from RMB335.7 million in the first quarter of 2018. In the first quarter of 2019, operating expenses were RMB612.7 million, representing a 4.2% increase from RMB588.3 million in the first quarter of 2018. Sales and marketing expenses were RMB497.3 million in the first quarter of 2019, compared to RMB499 million in the first quarter of 2018. General and administrative expenses increased by 13.8% to RMB88.4 million in the first quarter of 2019 from RMB77.7 million in the first quarter of 2018. The increase was mainly due to the increase in compensation, mainly as a result of hiring more R&D talent to strengthen our IT infrastructure and R&D capabilities.

Product development expenses increased by 132.7% to RMB27 million in the first quarter of 2019 from RMB11.6 million in the first quarter of 2018. The increase was primarily due to an increase in the number of employees and compensation paid to our course and educational content professionals and technology development personnel during the first quarter. Net loss for the first quarter of 2019 was RMB112.9 million compared with RMB245.2 million in the first quarter of 2018. Basic and diluted net loss per share was RMB16.48 in the first quarter of 2019.

As of March 31, 2019, we had RMB1.3 billion of cash and cash equivalents and RMB836.8 million of short-term investments. These compare to RMB1.2 billion of cash and cash equivalents and RMB1 billion of short-term investments as of December 31, 2018. Our deferred revenue balance as of March 31, 2019 was RMB3.4 billion. Capital expenditures were RMB1.1 million in the first quarter of 2019. This compares to RMB147.7 million in the first quarter of 2018. Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support our operations. For the second quarter of 2019, we currently expect our net revenues to be between RMB550 million to RMB570 million, which would represent an increase of 14.2% to 18.3% year-over-year.

Before opening the call to your questions, I want to mention that in order to enhance user experience, we have recently changed certain terms of our refund policy, which are applicable to new student orders. We believe that this will enhance our branding and reputation by enabling a more flexible and smoother refund process. We expect that as a result of the new terms, our annual refund rate for 2019 will be higher than 2018.

With that, I would like to open up the call to questions. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Today's first question comes from Alex Xie of Credit Suisse. Please go ahead.

Alex Xie -- Credit Suisse -- Analyst

Hi management. Thank you for taking my questions. So my first question is about regulation. I noticed that the Beijing government just conducted inspections of Sunlands' operations in April. I'm wondering what are the results of government reviews and what the government required Sunlands to change? And my second question is about our OpEx. I noticed a significant quarter-over-quarter decrease in our G&A expenses. Can management share more color on the reason behind such a decrease? And what about our headcount change in this quarter? Thank you.

Yipeng Li -- Chief Financial Officer

Okay. Regarding the first question, yes, we are -- you're right from the recent public news that we did have some conversations with the government. And as of now, there is no final decision made by any party yet. And basically, the -- one of the major topics we had a discussion with the government is regarding the user experience and -- like refund process. Actually, that's part of the reason why we have this change of new terms. And we believe, with our new refund terms, that will both enhance the user experience and satisfy the requirements from the government. Regarding your second question, the decrease on the G&A expense quarter-over-quarter, this was mainly due to the higher efficiency of our employee. And also we -- the number of -- like you mentioned, the number of our employees, especially the R&D team, we did see some decrease over there since we -- right now, we work in a more effective manner.

Alex Xie -- Credit Suisse -- Analyst

Thank you, management.

Operator

And our next question today comes from Timothy Zhao of Goldman Sachs. Please go ahead.

Timothy Zhao -- Goldman Sachs -- Analyst

Hi, management. Thanks for taking my questions. There are two questions from my side. First question is that I think in this quarter, we see a big hike in the ASP or the average gross billing per student, either on a year-on-year or quarter-on-quarter basis. Could you just share more color on what is behind this price increase and how should we think about this trend going forward? And the second one is, with this higher ASP trend and also the higher refund rate that you mentioned, can you talk about the trend of the gross billings and the student enrollment for the rest of this year? Or shall we expect them to turn back to growth? Thank you.

Yipeng Li -- Chief Financial Officer

Okay. For the first question, I think our CEO, Tongbo mentioned, just now that right now, the master oriented products as a percentage of our gross billing has been increasing a lot for Q1. Right now, the master oriented products -- the gross billings for the master oriented products right now account for more than 10% of our total gross billings. That's up from only like 3% from 2017 and 5% from 2018. And those master oriented products currently has a much higher ASP compared to the STE course. I think this is one of the major reasons why we have a higher ASP for Q1. And as for the trend, we expect, as we diversify our course offerings, as we expand our course offerings, the percentage of master oriented products and professional certification offerings will continue to increase in the future. Yeah, so we are very confident the -- our average -- the price -- our average gross billings will continually increase as well. And for your second question, as for the trends or for the rate of this year, since right now, it's only the beginning of the year, we are still expanding our free short courses, our free trials, introductory seminars and also expand our course offerings. As of now, we are not entirely sure what this trend will be. But we are pretty confident, as we offer more course offerings, as we -- along with the change of refund policy, as we continue to enhance user experience, we will see a continuous increase of new student enrollments and gross billings for the rest of the year.

Timothy Zhao -- Goldman Sachs -- Analyst

Thank you. Just a quick follow-up. So another follow-up question is, if you look at the sales and marketing cost per enrollment, so this number seems a bit higher for the quarter. Could you share a bit more color on what is behind this cost increase?

Yipeng Li -- Chief Financial Officer

I think for this quarter, the sales and marketing expense per students is roughly as same as the last quarter. While I think as you may know, the traffic average billing cost has been increasing for the past year or two. I think this is not just an issue for us, but this is an issue for -- this is a challenge for everyone. And that's the reason why we have one of those new actual courses. I think Tongbo, our CEO, also mentioned we want to establish our own traffic pool so that in the future, I think we believe this will be a very efficient way for us to decrease the sales and marketing expense per student.

Timothy Zhao -- Goldman Sachs -- Analyst

Okay. Thank you, Steven.

Operator

Showing no further questions, this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Yingying Liu, Investor Relations Director for any closing remarks.

Yingying Liu -- Investor Relations Director

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.

Duration: 23 minutes

Call participants:

Yingying Liu -- Investor Relations Director

Tongbo Liu -- Chief Executive Officer and Director

Yipeng Li -- Chief Financial Officer

Yingying Liu -- Investor Relations Director

Alex Xie -- Credit Suisse -- Analyst

Timothy Zhao -- Goldman Sachs -- Analyst

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