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Sunlands Online Education Group (NYSE:STG)
Q4 2019 Earnings Call
Mar 27, 2020, 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' Fourth Quarter and Full Year 2019 Earnings Conference Call. [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 Sunlands' fourth quarter and full year 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 overview of our financial performance and also provide our guidance for the first quarter of 2020. Following their 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 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 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' fourth quarter and full year 2019 conference call. Against the backdrop of macroeconomic challenges during the fourth quarter, we remain focused on attracting students to our online platform and improving engagement through a variety of strategic methods. Our fourth quarter net revenues were RMB549.7 million, in line with our guidance. We narrowed our net loss margin to new 5.4% in the fourth quarter versus 32.3% in the same period last year as we continue to prudently manage costs and expenses.

In the fourth quarter of 2019, we continue to focus on our multi-pronged strategy for students acquisition and retention. Our efforts centered about -- around the further development and the depreciation of our products and the services through the application of big data and analytics and AI technology. This has allowed us to produce significant operational benefits to both our employees and the students, facilitate our digital transformation and further strengthen our data security and the risk control capability.

Next, let me provide some key specifics on the drivers of our fourth quarter performance. First, we continue developing our non-STE programs, especially the master's-oriented products to build a more will [Phonetic] around the course portfolio and meet the diverse needs of our students. In 2019, the number of people entering the entrance examination for master's program reached to 2.9 million in China, growing 21.8% year-over-year and representing the farthest growth rate in the past 10 years. Equipped with the deep understanding of the online learning process, as well as solid operational track record, we have been sitting upon this mark-to-market opportunity by actively investing in master's-oriented products, making every effort to create specialized programs and solutions.

For example, we provide students with comprehensive tutoring and the training for test preparation and MBA program interviews, taught by teachers from both domestic and international top universities. This has resulted in a interview pass rate of 75% in 2019. In addition, we have continued expanding our partnership with international universities in order to bring students in China access to high quality and higher education resources from Europe and the United States, as well as share China's educational resources with other developing countries. For example, we reached cooperation agreements to jointly launch Online Master's Program with renowned international universities with efforts such as this; our master's-oriented products continue to attract high interest for our students, culminating in 19.8% of course billing, nearly RMB120 million at the end of the fourth quarter from approximately 7.8% of course billing or RMB60 million at the end of the fourth quarter 2018.

Second, for our STE program, we remain dedicated to improving the brave steps and the efficiency of this program for our students. For 2019, our students achieve an average pass rate of 51.1%. This is significantly higher than the average pass rate of 43.4% achieved by self-taught students during the 2012 to 2015 period according to add research. For subjects such as fiscal policies and the finance, principles of computer science and the management economics, pass rate for our students were over 90%. The more strength in the effectiveness of our learning platform.

I would also like to highlight the tremendous potential ahead of us in terms of our post-secondary and professional education. According to the statistical report, our Internet development in China published in August 2019 by Office of the Central Cyberspace Affairs Commission, less than 10% of Internet users have college degrees or higher, while online education penetration was just a 27% of total Internet users as of June 2019. Both showing significant room for further expansion, which will [Indecipherable] our future growth.

Third, we made a solid progress in the fourth quarter with our trial programs that enable prospective students to experience our advanced online and mobile learning platform. Through a targeted and the process user outreach, trial classes that accurately cater to user needs and the effective follow-up of trial users by our teachers and staff achieved material increase in conversion rates for some of our trial classes. Going forward, we will continue to leverage various tools such as our mobile app which had mini program to improve our sales efficiencies and grow our gross billing study time.

Finally, in regard to the recent coronavirus epidemic that has posted unprecedented global challenges, our thoughts are with the people who have been affected by the outbreak. As a show of support, we're donating masks, gogos and protective clothing with a total value of RMB5 million in addition to free online courses worth approximately RMB50 million to medical staff and people most affected by the coronavirus.

Despite the disruption caused by the pandemic to our business operation, we expect the adverse impact the coronavirus operate has on our business and results of operations to be limited. Given there is a quarantine and other types of restriction imposed due to the outbreak are expected to be temporary and that our courses and other offerings are delivered in a live streaming format and can be consumed in an indoor environment.

Looking ahead, we are optimistic about our long-term growth of our gross billings and new student enrollment as we continue to seek balanced top-line and bottom line performance. Our leading technology, high quality and cushioned accountant, coupled with our solid track record of pass rates position us well to capture the strong long-run growth opportunity present in the online post-secondary and professional education market.

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. Our net revenues were RMB549.7 million in the fourth quarter of 2019 in line with our guidance. Our gross billing and new student enrollments declined at 15.5% and 22.6% respectively year-over-year, primarily as a result of slowing macroeconomic growth in China. During the fourth quarter, we continue to pursue a balanced approach to improve profitability, while executing our student acquisition strategy by focusing on streamlining our cost structures.

Our administrative expenses, as well as sales and market expenses decreased by 30.9% and 10.2% respectively compared with the same quarter last year. Our cost efficiency improvement measures led to a reduction in net loss in the fourth quarter to RMB139.5 million, 24% lower compared with the loss of RMB183.7 million in the fourth quarter of 2018. Looking into 2020, we are optimistic that our dedication to persistent product and service upgrades will continue to bring value to our customers and ultimately our shareholders.

Now let me walk you through some of the key financial results for the fourth quarter and full year 2019. All comparisons are year-over-year and all numbers are in RMB. In the fourth quarter of 2019, net revenues decreased by 3.4% to RMB549.7 million from RMB568.8 million in the first quarter of 2018. The decrease was mainly due to the decrease of gross billings in 2019 compared with 2018. Cost of revenues increased by 29.3% to RMB101.5 million in the first quarter of 2019 from RMB78.5 million in the first quarter of 2018, which was primarily due to insurance premiums related to online education services with insurance coverage since late in 2018.

Gross profit decreased by 8.6% to RMB448.2 million from RMB490.3 million in the first quarter of 2018. In the first quarter of 2019, operating expenses were RMB599.0 million, representing a 14.4% decrease from RMB699.7 million in the first quarter of 2018. Sales and marketing expenses decreased by 10.2% to RMB476.1 million in the fourth quarter of 2019 from RMB530.1 million in the fourth quarter of 2018. The decrease was mainly due to reduced marketing spending, reflective of disciplined and prudent cost management, as well as a decrease in expenses related to sales and the marketing personnel.

General and administrative expenses decreased by 30.9% to RMB98.6 million in the fourth quarter of 2019 from RMB142.6 million in the fourth quarter of 2018, mainly due to a decrease in office and compensation-related expenses. Product development expenses decreased by 9.9% to RMB24.3 million in the fourth quarter of 2019 from RMB27 million in the fourth quarter of 2018. The increase -- the decrease was primarily due to a decrease in the number of employees and compensation paid to Sunlands product and technology development personnel during the quarter.

Net loss for the fourth quarter of 2019 was RMB139.5 million compared with RMB183.7 million in the fourth quarter of 2018. Basic and diluted net loss per share was RMB20.46 in the fourth quarter of 2019. As of December 31, 2019, the company had RMB1,402.2 million of cash and cash equivalents and RMB217.6 million of short-term investments compared with 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 December 31, 2019, the company had a deferred revenue balance of RMB3,228.8 million compared with RMB3,286 million as of December 31, 2018. Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support Sunlands' operations. Capital expenditures were RMB10.4 million in the fourth quarter of 2019 compared with RMB263.1 million in the fourth quarter of 2018.

And in terms of the key financial results for the full year 2019, let me walk you through in the details too. In the year of 2019, net revenues increased by 11.1% to RMB2.2 billion from RMB2 billion in 2018. Cost of revenues increased by 20% to RMB396.3 million in the year of 2019 from RMB330.4 million in 2018. Gross profit increased by 9.4% to RMB1.8 billion from RMB1.6 billion in 2018.

In 2019, operating expenses were RMB2.3 billion, representing a 15.5% decrease from RMB2.7 billion in 2018. Sales and marketing expenses decreased by 16.7% to RMB1.8 billion in 2019 from RMB2.2 billion in 2018. The decrease was mainly due to reduced marketing spending, reflective of disciplined prudent cost management and the decrease in the expenses of sales and marketing personnel.

G&A expenses decreased by 18.1% to RMB363.3 million in 2019 from RMB443.7 million in 2018. Product development expenses increased by 33.8% to RMB101.7 million in 2019 from RMB76 million in 2018. Net loss for 2019 was RMB395.2 million compared with RMB927 million in 2018. Basic and diluted net loss per share was RMB57.81 in 2019 compared with RMB147.27 in 2018. Capital expenditures were incurred primarily in connection with purchases of buildings and IT infrastructure equipment necessary to support Sunlands' operations. Capital expenditures were RMB25.5 million in 2019 compared with RMB518.4 million in 2018.

For the first quarter of 2020. sunlands currently expects net revenues to be between RMB540 million to RMB560 million, which would represent a decrease of 4.3% to 0.7% year-over-year. The above outlook is based on the current market conditions and reflects the company management's current and the preliminary estimates of market operating conditions and the customer demand, which are all subject to change.

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

Questions and Answers:

Operator

[Operator Instructions] Showing no further questions, this concludes 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 making efforts joining today's call despite the serious coronavirus disruptions. We look forward to speaking with you again. And good day, and good night.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Yingying Liu -- Investor Relations Director

Tongbo Liu -- Chief Executive Officer and Director

Yipeng Li -- Chief Financial Officer

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