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Sunlands Online Education Group (NYSE:STG)
Q3 2019 Earnings Call
Nov 22, 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' Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]

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 Sunland's third 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 fourth quarter of 2019. Following the prepared remarks, we will move into the Q&A session.

Before I hand it over to the management, I'd like to remind you of Sunlands' Safe Harbor statements 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' third quarter 2019 conference call. During the third quarter, we continue to focus on diversified set of student acquisition methods to attract more students to our online platform. Driven by the initiatives, our third quarter top line reached RMB527.3 million, which was in line with our guidance and represented a 2% increase year-over-year. We also narrowed our net loss margin to 24.6% in the third quarter versus 43.8% in the same period last year as we continue to manage costs and expenses.

During the third quarter, we continued to advance our strategic initiatives and new product features in the effort to promote our brands and improve the quality of courses and services we bring to our students. Our strategic initiatives also include the relentless pursuit of cutting-edge technologies, particularly with emphasis on applying AI to education as we strive to further differentiate our offerings through data mining [Indecipherable] database of learning records and leveraging our Integrated AI technology by able to analyze individual learning habits and develop personalized study plans for our students, so that their learning can be more efficient and attractive.

We also use AI technology to enhance [Phonetic] our massive database of historical examination questions in order to predict most frequent past knowledge [Phonetic] points and optimize our test preparation materials. Moreover, Artificial Intelligence plays an essential role in Sunlands' internal management to improve quality of services for student's education and training as well as protect students' rights. For example, [Indecipherable] course to our students are monitored by our AI system which can detect sensitive words and protocol violations and immediately alert for corrective action. Data analysis [Phonetic] is also the foundation of our recruitment process. We have detailed data records for candidates profiling interview results and training that first [Indecipherable] recruitment and internal staff promotions.

Next, let me provide some specifics on several of our key highlights of this quarter. First, as we mentioned in previous earnings call, we are strengthening our strategic emphasis on non-STE products with masters-oriented products growing rapidly. With increasingly diversified portfolio of educational products, we are enjoying a more balanced revenue mix, our masters-oriented products continue to attract interest from students, increasing to 15.9% of course [Phonetic] at the end of the third quarter from approximately 5.9% at the end of quarter three, 2018. This solid growth was attributable to favorable supply and demand dynamics for master's degree programs in China as we elaborated during the last quarter's earnings call and also to our efforts in developing products designed specifically to match the needs of prospective students in this segment.

It is worth mentioning that we and [Indecipherable] international partnership universities hosted first graduation ceremony of our International MBA program. Many students far away from the venue also attended the ceremony and showed how much they had enjoyed the courses, which symbolizes our first milestone and proves the effectiveness of our revolutionary OPM model. We are more than ever convinced that continuing to expand our masters-oriented products will help more people benefited from learning and help eliminate the information and the combination gap resulting from historical geographic cultural and economic factors. We are more than ever determined to expand our online international master programs to bring high quality and high [Indecipherable] resource from Europe and the United States to students in China and share China's education resource with other developing countries.

We are confident we will continue to capture the market opportunity for higher education as we provide programs in response to ever evolving market needs. Second, our mobile app Sunlands' Speed Edition which we announced in January continues to gain popularity among students due to its easy accessibility, faster interaction speed and minimum memory storage requirements. By the end of the third quarter, users of this app reached 6.3 million increasing further from only 1 million users at the end of the second quarter and 215,000 at the end of the first quarter. We also continuously upgraded and diversified our reach out to mini programs, which are designed to allow students to maximize their study time on their mobile devices through the efficient use of time fragments [Phonetic], we saw an increasing the number of exam preparation questions completed by our students, which we believe will need to higher [Phonetic] pass rates going forward.

[Indecipherable], we are optimistic about the long-term growth of our gross billings and new student enrollment, we also continue to seek balance the top line and the bottom-line performers. In the third quarter, our net loss narrowed by 42.6% year-over-year to RMB129.8 as we prudently managed our expenses. With our leading technology, high quality educational accountant and one-to-many business model, we are confident in our ability to grow and be the market leader in China and online education industry.

With that, I would like to 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. For the third quarter, our net revenues were RMB527.3 million in line with our guidance. Our gross billings and new student enrollment declined by 18.8% and 20.8% respectively year-over-year as we continued to adjust our marketing expenses in view of uncertainties in student acquisition cost and macroeconomic trends. However, the rate of decrease moderated from the second quarter, which shows our student acquisition efforts are gaining traction.

In addition, as Tongbo just mentioned, following the improvement in net loss in the second quarter, in the third quarter, our net loss narrowed again year-over-year to RMB129.8 million compared with a loss of RMB226.3 million in the third quarter of 2018, primarily as a result of reduced administrative expenses and sales and marketing expenses. Going forward, we will continue with steady execution of our five-pronged expansion and the retention strategies to bring long-term returns for both our customers and shareholders.

Now let me walk you through some of the key financial results for the third quarter. In the third quarter of 2019, net revenues increased by 2% to RMB527.3 million from RMB517 million in the third quarter of 2018. The increase was mainly driven by the growth in the number of students in the third quarter of 2019 compared with the third quarter of 2018 following new student enrollments increase over the past years.

Cost of revenues increased by 22.7% to RMB113.7 million in the third quarter of 2019 from RMB92.7 million in the third quarter of 2018, which was primarily due to the insurance premiums related to online education services, whereas insurance coverage since late in 2018. Gross profit decreased by 2.5% to RMB413.6 million from RMB424.4 million in the third quarter of 2018.

In the third quarter of 2019, operating expenses were RMB546.9 million, representing a 21.5% decrease from RMB696.3 million in the third quarter of 2018. Sales and marketing expenses decreased by 20.8% to RMB429.2 million in the third quarter of 2019 from RMB542 million in the third quarter of 2018. The decrease was mainly due to reduced marketing spending, reflective of disciplined prudent cost management and the decrease in expense of sales and marketing personnel.

General and administrative expenses decreased by 30.4% to RMB91.3 million in the third quarter of 2019 from RMB131.1 million in the third quarter of 2018. Product development expenses increased by 14% to RMB26.4 million in the third quarter of 2019 from RMB23.2 million in the third quarter of 2018. The increase was primarily due to an increase in the number of employees and compensation paid to Sunlands product and technology development personnel during the quarter.

Net loss for the third quarter of 2019 was RMB129.8 million compared with RMB226.3 million in the third quarter of 2018. Basic and diluted net loss per share was RMB19 in the third quarter of 2019. As of September 30, 2019, the company had RMB1,569.4 million of cash and cash equivalents and RMB208.8 million of short-term investments compared verse RMB1,248.8 million of cash and cash equivalents and RMB1,028.6 million of short-term investments as of December 31, 2018. As of September 30, 2019, the company had a deferred revenue balance of RMB3,214.6 million compared with RMB3,286 million as of December 31, 2018.

Capital expenditures were incurred primarily in connection verse purchases of buildings and IT infrastructure equipment necessary to support Sunlands operations. Capital expenditures were RMB11.8 million in the third quarter of 2019 compared with RMB10.3 million in the third quarter of 2018.

And in terms of the key financial results for the first nine months of 2019, let me walk you in the details too. In the first nine months of 2019, net revenues increased by 17% to RMB1,644.2 million from RMB1,405.2 million in the first nine months of 2018. Cost of revenues increased by 17.1% to RMB294.8 million in the first nine months of 2019 from RMB251.9 million in the first nine months of 2018.

Gross profit increased by 17% to RMB1,349.4 million from RMB1,153.3 million in the first nine months of 2018. In the first nine months of 2019, operating expenses were RMB1,658.3 million, representing a 15.9% decrease from RMB1,972.9 million in the first nine months of 2018.

Sales and marketing expenses decreased by 18.9% to RMB1,316.2 million in the first nine months of 2019 from RMB1,622.7 million in the first nine months of 2018. General and administrative expenses decreased by 12.1% to RMB264.7 million in the first nine months of 2019 from RMB301.1 million in the first nine months of 2018. Product development expenses increased by 57.8% to RMB77.4 million in the first nine months of 2019 from RMB49.1 million in the first nine months of 2018.

Net loss for the first nine months of 2019 was RMB255.6 million compared verse RMB743.3 million in the first nine months of 2018. Basic and diluted net loss per share was RMB37.36 in the first nine months of 2019 compared with RMB121.93 in the first nine months 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 RMB15.1 million in the first nine months of 2019 compared with RMB255.3 million in the first nine months of 2018.

For the first quarter of 2019, Sunlands currently expects net revenues to be between RMB520 million to RMB540 million, which would represent a decrease of 5.1% to 8.6% year-over-year. The above outlook is based on the current market conditions and reflects the company management's current and preliminary estimates of market, operating conditions and customer demand which are all subject to change.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question today comes from Alex Xie of Credit Suisse. Please go ahead.

Alex Xie -- Credit Suisse -- Analyst

Hi, management. Thank you for taking my question. So my observation is that in Q3 compared with Q2 we have Q-on-Q growth in terms of gross billings and new student enrollments, but at the same time our net loss also increased Q-on-Q. So will management share your thoughts on what will be your priority in the future still to boost gross billings growth or to continue to narrow the loss? Thank you.

Yipeng Li -- Chief Financial Officer

Thank you for the question. Yeah, like you mentioned, the gross billings for third quarter, we see a increase compared to the second quarter and also the loss is bigger than quarter and that's primarily due to the additional spending on the sales and marketing expenses. As you may know, the most of the sales and marketing expenses are recorded at once right after the gross billing. But most of the gross billings will be deferred, and to be recognized, that's revenue in the future periods, so that's the reason why the loss for third quarter is bigger than the loss for second quarter, but as we mentioned during the call, the company for the past few quarters, we continue to trial different ways to control our cost, control the general and administrative expenses, control the sales and marketing expenses and we have seen some results from our actions. So in the future, I think our number one priority is still to get more market share to -- that's our number one goal, but at the same time, we believe we can still control our costs and other expenses and continue to narrow our loss.

Alex Xie -- Credit Suisse -- Analyst

Thank you.

Operator

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

Yingying Liu -- Investor Relations Director

Thank you. And once again, thank you, everyone, for joining today's call. We look forward to speaking with you again. Good day and good night.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

Yingying Liu -- Investor Relations Director

Tongbo Liu -- Chief Executive Officer and Director

Yipeng Li -- Chief Financial Officer

Alex Xie -- Credit Suisse -- Analyst

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