Yahoo Finance Sunlands Online Education Group (STG) Q2 2019 Earnings Call Transcript
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Sunlands Online Education Group (NYSE: STG)
Q2 2019 Earnings Call
Aug 23, 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' Second Quarter 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 Sunland's second 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 third 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 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' second quarter 2019 conference call. As we have outlined in previous quarters, Sunlands' keenly focused on developing and strengthening our brand through several key initiatives. I am pleased to report that this initiatives drove second quarter top-line revenue of RMB552.7 million, which was in line with our guidance and those represented a 14.7% increase year-over-year. We are also significantly narrowed our net loss margin to 2.3% in the second quarter versus 56.4% in the same period last year, as a way to confirm disciplined approach to managing costs and expenses.
During the second quarter, we continued to advance our strategic initiatives in our effort to innovate our program offerings and strengthening our brand awareness. Through these unique initiatives we are building a solid and multi-faceted foundation to reach a high-quality customer base and attract more students to our online platform.
With increased platform accessibility and a diverse approach to student acquisition, we strive to attract new students to our platform. For example, creative marketing techniques such as expansion of our free trial classes enable prospective students to experience our advanced online and mobile learning platform first hand.
In addition, diversifying our product offerings to include more professional certificates and a master's-oriented products, launching and upgrading of our mobile app and building a unique learning community where students, teachers and mentors freely interact with one another, all contributed to the rise in utility and the value of our programs and solutions offer.
Our strategic initiatives also entail a commitment to using technology to further upgrade and distinguish our platform. Through our one-to-many live streaming model, we are [Indecipherable] to attract and serve a large number of students while at the same time add new courses and content with ease and speed. By leveraging integrated AI technology with our online platform, we offer a cutting-edge technological solution and create user-friendly personalized experience for students, which facilitates a virtual circle of recurrent, loyal and active users.
Next, let me provide some specifics on several of our key strategic initiatives. First, in addition to our STE programs, as I mentioned on previous earnings call, we are strengthening our business focus on master's-oriented products. Our master's-oriented products has gained increasing popularity, recording for 19.4% of our gross billing at the end of quarter two 2019 compared with about 5.1% at the end of quarter two 2018, and 5.5% at the end of 2018.
This strong growth has been driven by the burgeoning master's-oriented education market in China. The number of master's degree applicants in China is estimated to reach 2.9 million by year-end 2019, representing a 21.8% year-over-year growth, the fastest growth rate in the past 10 years. While the number of master's degree applicants has continued to rise, universities and colleges have been tightening their program entrance requirements and overall program admission rates are down year-over-year. We see this as a golden opportunity for Sunlands, capitalizing on this environment, and leveraging our expertise in online and other learning management.
We are actively working to develop products and solutions that cater specifically to market demands of this segment. As an example, since October 2018, in addition to our existing MBA entrance exam tutoring programs, we have added additional categories for our master programs and have co-developed with universities around the world many online international masters degree programs designed specifically for Chinese and other learners. Overall, we believe Sunlands online international master programs is the most flexible and a sensible solution in the market.
Although all of our effort to build out our portfolio of master's-oriented products is still in the early stages, and will require time to ramp, we are optimistic based on our early traction. We will continue to enhance our master's-oriented products to take further advantages of the opportunities in this market, as we strive to provide the best educational products to Chinese and other learners, who are challenged by [Indecipherable] and ever increasing pressure from busy lives.
Second, our professional certificate programs are still witnessing robust growth reaching 8.6% of our gross billings by the end of second quarter 2019 compared with 6.8% at the end of second quarter last year. This growth is being fueled in part by our broader range of course and subject offerings to meet changing market work force demand for professional certification. With increasing diversified educational products, we are enjoying a more balanced revenue mix.
Third, our mobile apps, Sunlands Speed Edition, the free learning platform with diverse courses launched in January and designed for users with border interests and intentions for learning is proving to be very popular. Designed to meet the busy lifestyle needs of today's online learner, our app poses easy accessibility, faster interaction speeds and minimal memory storage requirements. Speed Edition not only broadens our subjects demands and deepens of our content offerings, it serves as an excellent tool to build up a self developed traffic pool of potential students. By the end of second quarter, we had already recorded nearly 1 million users up from 215,000 at the end of first quarter. This radical rise in users is a strong witness to the market appeal of other offerings.
Lastly, we continue to upgrade our trial program and customized AI technological to attract prospective students and enable them to see firsthand how our course offerings work. In addition, the excellent result achieved by Sunlands' students in their national examination period are well above the national average, which is a very attractive proposition to prospective students.
In April 2019 examination period the number of Sunlands students who participated in the exam reached 148,000, increasing 14,000 compared with the October 2018 examination period. Total number of exams participated by Sunlands students reached 515,000 and the pass rate was as high as 63.1%, further improved from the October 2018 examination period and significantly higher than the national average pass rate for self study courses.
According to our research data, the average pass rate of self study courses from 2012 to 2016 in China was 43.4% for students who self studied and 35.6% for students enrolled in private schools. In short, we believe our upgraded trial program and attractive pass rates will lead to increasing average gross billings, conversion rates and sales efficiency over time.
While we are optimistic about the long term impact our initiatives will have on gross billings and new enrollment growth, we also see the need to proactively respond to China's low macro economy and the challenges our industry is facing surrounding students' acquisition costs. In an effort to manage headwinds, we continue to be strategic and prudent in our cost structure and the timing of our sales and marketing campaigns, as well as our operating activities, aiming to achieve the proper balance between investing in new initiatives and mitigating risks.
As a result, from our disciplined approach, other net loss during the quarter narrowed significantly to RMB12.9 million, decreasing 88.6% from RMB112.9 million net loss last quarter. We are pursuing balanced growth as we execute our five-pronged expansion and a return on a retention plan for 2019 with our best-in-class technology, high-quality educational content and one-to-many business model. We are confident in our ability to grow and be the market leader in China's online education industry.
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
Thank you, Tongbo, and hello, everyone. Thanks for joining us. As mentioned, we are pleased to report revenue in line with our guidance for the second quarter. Our gross billings and new student enrollment declined 43.1% and 44%, respectively, year-over-year, as we see the need to proactively respond to China's slowing macro economy and the challenges our industry is facing surrounding student acquisition costs.
Against this backdrop, we took quick and decisive actions to reduce operating expenses. As Tongbo just mentioned, our second quarter net loss narrowed significantly to RMB12.9 million compared with a loss of RMB112.9 million in first quarter of 2019, and RMB271.8 million in second quarter last year, representing a 95.3% decrease year-over-year. We are confident that steady and focused execution of our five-pronged strategy to expansion and retention will improve average gross billings, conversion rates and the sales efficiency over the long term.
Now, let me walk you through some of the key financial results for the second quarter. In the second quarter of 2019 net revenues increased by 14.7% to RMB552.7 million from RMB481.8 million in the second quarter of 2018. The increase was mainly driven by the growth in the number of students in the second quarter of 2019 compared with the second quarter of 2018, following new strong enrollments increase over the past years.
Cost of revenues increased by 8.1% to RMB95.7 million in the second quarter of 2019 from RMB88.5 million in the second quarter of 2018, which was primarily due to a increase in insurance premiums related to online education services with insurance coverage since late in 2018.
Gross profit increased by 16.2% to RMB457 million from RMB393.3 million in the second quarter of 2018. In the second quarter of 2019, operating expenses were RMB498.7 million, representing a 27.5% decrease from RMB688.3 million in the second quarter of 2018. Sales and marketing expenses decreased by 33% to RMB389.7 million in the second quarter of 2019 from RMB581.7 million in the second quarter of 2018. The decrease was mainly due to the reduced marketing spending, reflective of disciplined, prudent cost management and the decreased in the expense of sales and the marketing personnel.
General and administrative expenses decreased by 7.9% to RMB84.9 million in the second quarter of 2019 from RMB92.2 million in the second quarter of 2018. The decrease was mainly due to the decrease in office expenses and professional service fees.
Product development expenses increased by 68.1% to RMB24 million in the second quarter of 2019 from RMB14.3 million in the second 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 second quarter of 2019 was RMB12.9 million compared with RMB271.8 million in the second quarter of 2018. Basic undiluted net loss per share was RMB1.87 in the second quarter of 2019.
As of June 30, 2019, the Company had RMB1.5 billion of cash and cash equivalents and RMB269.9 million of short-term investments compared with RMB1.2 billion of cash and cash equivalents and RMB1.03 billion of short-term investments as of December 31, 2018. As of June 30, 2019, the Company had a deferred revenue balance of RMB3.2 billion compared with RMB3.3 billion 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 RMB2.2 million in the second quarter of 2019 compared with RMB97.3 million in the second quarter of 2018.
And in terms of the key financial results for the first six months of 2019, let me walk you in the details too. In the first six months of 2019, net revenues increased by 25.8% to RMB1.1 billion from RMB888.2 million in the first six months of 2018. Cost of revenues increased by 13.8% to RMB181.2 million in the first six months of 2019 from RMB159.2 million in the first six months of 2018.
Gross profit increased by 28.4% to RMB935.8 million from RMB729 million in the first six months of 2018. In the first six months of 2019, operating expenses were RMB1.1 billion, representing a 12.9% decrease from RMB1.3 billion in the first six months of 2018.
Sales and marketing expenses decreased by 17.9% to RMB887 million in the first six months of 2019 from RMB1.1 billion in the first six months of 2018. G&A expenses increased by 2% to RMB173.4 million in the first six months of 2019 from RMB169.9 million in the first six months of 2018. Product development expenses increased by 97% to RMB51 million in the first six months of 2019 from RMB25.9 million in the first six months of 2018.
Net loss for the first six months of 2019 was RMB125.8 million compared with RMB517 million in the first six months of 2018. Basic and diluted net loss per share was RMB18.38 in the first six months of 2019 compared with RMB91.06 in the first six 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 RMB3.3 million in the first six months of 2019 compared with RMB245.0 million in the first six months of 2018.
For the third quarter of 2019 Sunlands currently expects net revenues to be between RMB510 million to RB530 million, which would represent a decrease of 1.4% to an increase of 2.5% 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 demands, which are all subject to change.
With that, I'd like to open up the call to questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] The first question today comes from Christine Cho with Goldman Sachs. Please go ahead.
Christine Cho -- Goldman Sachs -- Analyst
Hello. Thank you Tongbo, and Steven. I have three quick questions. So, firstly, I think the guidance came in a bit softer than we were expecting. Could you elaborate on what are some of the macro industry challenges that you are facing , and what needs to happen in order for you to regain confidence in stepping up the investments again? And then, secondly, how do you think about balancing growth and profitability in the second half of '19? And lastly, I think we saw very good effective cost savings come through this quarter. How much room do you think you have for further cost savings? Thank you.
Steven Yipeng Li -- Chief Financial Officer
Okay. For the first question regarding the guidance, like we mentioned during the conference call, this outlook is based on the current market conditions. And I think we mentioned -- both me and Tongbo mentioned during our conference call that right now the Company is more focused on the user experience and also we are diversifying our product mix. We are relying less and less on STE, both the master-oriented market and professionals or vocational markets are increasing as well. So I think the Company is currently in a transition period. So like I said, our guidance is based on the current best estimates by the management.
And the second question is regarding the profitability. Yes, the net loss narrowed very significantly for the second quarter, but like we mentioned before, the probability is not the Company's number one focus. Our primary goal is to gain as much market share as possible. Yes. So in the future with that in mind we will strive to work really hard for this goal. In the meantime, we will control our cost also as much as possible. I'm sorry, I can't remember the third question. Could you repeat the third question one more time?
Christine Cho -- Goldman Sachs -- Analyst
Yes. I think it's about the cost saving room going forward. You mentioned -- I think you partly answered that in your second question.
Steven Yipeng Li -- Chief Financial Officer
Okay. Yes. I can probably add a little bit regarding the -- well in terms of the cost saving, yes for the Company, we believe there's still room for us to further save the cost and also the -- for example, sales and marketing expenses, as Tongbo mentioned, right now, we are still expanding our free to all classes and some other new initiatives. And we believe once those new initiatives take effect, then we will save more cost regarding the student acquisition cost. Yes. So, the simple answer is, yes, we will still have room to further save our cost and expenses.
Christine Cho -- Goldman Sachs -- Analyst
Thank you.
Operator
[Operator Instructions] The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.
Timothy Zhao -- Goldman Sachs -- Analyst
Hi, management. Thanks for taking my question. Just quick follow up. I think you made a pretty good progress on diversifying the revenue and the gross billings. Can you discuss more about between the master-oriented program and STE and professional certification, can you share more color on the ASP and also how much or how long does that take to recognize the revenue? Thank you.
Steven Yipeng Li -- Chief Financial Officer
Okay. I think first of all, I want to emphasize that both master-oriented education market and the professionals certification market have huge potential, that's the reason why the Company is focusing more on those two sub-sectors compared to before. In terms of ASP and service period, in the master-oriented education market and professional certification market unlike STE their courses sometimes are very different, some courses are long, some courses are pretty short, so it is really hard to give a very exact like service period and ASP. But overall, compared to STE, those courses tend to have a shorter service period and higher -- especially the master-oriented education market, has a higher ASP compared to the STE market.
Timothy Zhao -- Goldman Sachs -- 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
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
[Operator Closing Remarks]
Duration: 28 minutes
Call participants:
Yingying Liu -- Investor Relations Director
Tongbo Liu -- Chief Executive Officer and Director
Steven Yipeng Li -- Chief Financial Officer
Christine Cho -- Goldman Sachs -- Analyst
Timothy Zhao -- Goldman Sachs -- Analyst
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