Sunlands Technology (NYSE:STG) held its first-quarter earnings conference call on Tuesday. Below is the complete transcript from the call.

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Summary

Sunlands Technology reported a net income of RMB 76.8 million for Q1 2026, marking its 20th consecutive profitable quarter, with a net income margin of 17.4%.

The company experienced a 9.6% year-over-year decline in revenue, attributed to structural softness in degree programs and recalibration of customer acquisition standards.

Selling expenses decreased by 19.5% year over year, while R&D expenses increased by 5.6% as the company continues to invest in enhancing technology capabilities.

The company is focusing on diversifying its revenue mix with a strong emphasis on professional skills and certification preparation programs, which contributed 67.9% of revenues.

AI capabilities have become integral in improving operational efficiency, particularly in customer acquisition and service workflows, with further plans to embed these capabilities more broadly.

The company provided guidance for Q2 2026 with expected net revenues between RMB 410 million and RMB 430 million, representing a decrease of 20.2% to 23.9% year over year.

Full Transcript

OPERATOR

Ladies and gentlemen, thank you for standing by and hello and welcome to Sunlands Technology's First Quarter 2027 Earnings Conference Call at this time all participants are listen only mode. Today's conference is call being recorded. I will now turn the call over to your host today, Yuhua Sunlands Technology IR Representative. Please go ahead. Hello everyone and thank you for joining Sunlands Technology's first quarter 2026 earnings conference call. The Company's financial and operating results were issued in our press release via Newswire services earlier today and are posted online. You could download the earnings press release and sign up for our distribution list by visiting our IR [email protected] Participants on today's call will be our CEO, Mr. Zhong Bo Liu and our Financial Director, Mr. Hanyu Li. Management will be begin with prepared remarks followed by a question and answer session. Before I hand it over to the management, I'd like to remind you of Sunlands Technology's 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, Zhong Bo Liu.

Zhong Bo Liu (CEO)

Okay, thank you. Hua, hello everyone. Welcome to Sunland's first quarter 2026 earnings conference call. I would like to kindly remind all attendees that the financial information referenced in this release is presented on a continuing operation basis and all figures are denominated in RMB unless explicitly specified otherwise. We open 2026 of RMB 414.7 million and net income of RMB 76.8 million, marking our 20th consecutive profitable quarter. Net income margin reached 17.4%. Selling expenses declined 19.5% year over year representing the largest single quarter reduction we have recorded in recent years and the third consecutive quarter of year over year decline. At the same time, R and D expenses rose 5.6% year over year reflecting our continued investment in technology capability enhancement. The 9.6% year over year revenue decline reflects the two concurrent dynamics, continued structural softness in degree and diploma oriented programs and our ongoing recalibration of customer acquisition standards towards higher quality than their cohorts. While these factors place pressure on the top line. Our profitability reflected the progress we have made in cost structure optimization, operating discipline and technology enabled efficiency. Let me now turn to the performance of our major cost categories. Degree and diploma oriented postsecondary programs contributed 17.9% of their revenues in the first quarter of 2026. We continue to manage this segment in line with genuine learner demand while allocating resources with discipline interest based programs. Professional skills and the professional certification preparation together contributed 67.9% of landed revenues and remains important areas of focus as we continue to diversify our revenue mix within this border category. Senior interest based learning remains one of the areas where we continue to see meaningful long term opportunities. This quarter we further deepened our catalog within the arts and in new courses such as colored pencil and folk music in response to express learner demand. We are also exploring adjacent content directions through early stage pilots including language learning. Where we have seen initial learner interest beyond course content, we continue to extend the learning experience into more touchpoints scenarios. We launched a study tool designed around our existing course content so that learner who has spent a year studying challenge printing with us can take a natural next step by visiting the landscapes, artists and museums connected to that tradition. This allows us to deepen the learning journey and reinforce the investment learners have already made rather than asking them to start from zero. In an unrelated program, we also continue to partner with art galleries and cultural institutions to bring our learners into physical spaces where their coursework comes alive. Through curated visits, online catographing and printing, students can see masterwork up close, meet practitioners, and gain a clearer sense of where sustained practice can take them. Initial learning back has been constructive and generally positive, and we believe this type of learning reinforcement is an effective lever for improving both completion and repurchase. These initiatives remain at an early stage with initial signals warrantying continued observation and refinement. We are not simply building a course catalog, but gradually extending the learning experience into a more integrated and continuous journey for senior learners. Repurchase behavior within our core cohorts continues to provide encouraging indications that for the increasing share of learners this involving students is gaining resonance. The most consequential operating development this quarter relates to the continued maturation of our AI capabilities, which we believe may have meaningful implications for long term operating efficiency. A year ago we described AI primarily productivity tool as adoption has fallen course in their business. That framing has continued to involve in our customer acquisition workflow. Our internally developed AI assistant has increasingly played a decision support role. It helps surface signals in live prospect interactions, including sentiment, hesitation and decision friction and provides tailored conversational guidance based on each agent's communication style and conversational content. In parallel, our intelligent voice system has shortened the time to first contact window for new leads, a factor that has historically been associated with conversion efficiency. It has also enabled our human teams to focus more on high value interactions that requires judgment and efficacy, which remain critical to enrollment outcomes. Looking ahead, we expect AI driven capabilities to continue to be embedded more broadly across both acquisition and service workflows, supporting ongoing improvements in operating efficiency. Besides, we're also exploring how the capabilities can be extended into broader parts of the learner life cycle to further improve overall service efficiency and experience to close this quarter reflects disciplined execution against the priorities we outlined at the start of the year. Revenue mix continues to involve profitability supported by operating discipline, and our technology capabilities continue to deepen. We believe the investments we are making today are strengthening the foundation for sustainable long term development. As the initiatives continue to mature, we remain focused on disciplined execution and prudent risk resource allocation. That concludes Tombo's prepared remarks. I will now turn the call over to our Finance Director Hanyu.

Hanyu Li (Financial Director)

Thank you, Tunbo hello everyone. I'm pleased to share our final results for the first quarter of 2026 this quarter. Our numbers demonstrate the rewards of our strategic persistence. As Zhong Bo Liu discussed, we have deliberately prioritized revenue quality and learner cohort health over raw top line scale. This disciplined execution has translated into a linear cost structure Healthy margins on a resilient balance sheet Our focus on precision has led to a significant milestone in cost management with selling expenses declining by 19.5% year over year. This marks the largest single quarter reduction we have recorded in recent years and our third consecutive quarter of year over year decline. While we prudently management overhead, we continued to expand our technological edge. Our product development expenses rose by 5.6% year over year, reflecting our commitment to embedding AI deep into our operations. This scaling of our AI capability is already serving as a primary operational catalyst to enhance delivery, automate engagement and offset structural costs. These strategic trade offs have directly enforced our profit quality and the bottom line resilience. Despite 9.6% year over year decline in net revenues, our profitability remains strong. We maintained a solid gross margin of 86.5% while our net income margin expanded to 17.4%. Securing this execution is our resilient balance sheet position. Our robust liquidity profile provides us with the strategic flexibility required to fully absorb macroeconomic valuations while aggressively compounding capital appropriate priority growth initiatives. Now let me walk you through some of our key financial results for the first quarter of 2026. All comparisons are year over year and all figures are in RMB unless otherwise noted. In the first quarter of 2026, net revenues decreased by 9.6% to 440.7 million from 487.6 million in the fourth quarter of 2025. Cost of revenues decreased by 17.7% to 59.5 million from 72.3 million in the fourth quarter of 2025, mainly due to a decline in costs related to learning materials, books and service fees paid to educational institutions. Gross profit was 381.1 million compared to 415.3 million in the first quarter of 2026. Gross profit margin expanded to 86.5%, up from 85.2% in the prior year period. Total operating expenses were 284.3 million, a 16.7% decrease from 341.1 million in the first quarter of 2026. Sales and marketing expenses decreased by 19.5% to $241.9 million from $300.4 million in the first quarter of 2026, primarily due to optimized compensation for sales personnel and more targeted branding and marketing activities. General and administrative expenses increased by 4.21% to 35.9 million from 34.5 million in the fourth quarter of 2025. Product development expenses rose by 5.6% to 6.6 million from 6.2 million in the fourth quarter of 2025. Net income for the first quarter of 2026 reached 76.9 million to 75.2 million in the first quarter of 2026. Basic and diluted net income per share was 11.48 in the first quarter of 2026. As of March 31, 2026, the Company held $547.2 million of cash, cash equivalents, unrestricted cash alongside $236 million of short term investments compared to. $576.8 million of cash and cash equivalents and $235.9 million of short term investments as of December 31, 2025. As of March 31, 2026, the company maintained a deferred revenue balance of $500.5 million compared to $585.3 million as of December 31, 2025. Turning to our outlook for the second quarter of 2026, we expect net revenues to be between $410 million and to 430 million, representing a decrease of 20.2% to 23.9% year over year. This outlook is based on our current market dynamics and reflects our preliminary assessment of market conditions and learner demand patterns, which remain subject to substantial uncertainty. This includes our prepared remarks. We'll now open the call for questions. Operator, please go ahead.

OPERATOR

Thank you. To ask a question, please press Star one one on your telephone and wait for your name to be announced. For the benefit of all participants on today's call, if you wish to ask your question in Chinese, please immediately repeat your question in English. As a reminder to ask a question, please press star 11 on your telephone. At this time, we are showing no further questions, so I will conclude our Q&A session and I will now turn the conference back to Yuhua for any closing remarks. Once again, thank you everyone for joining today's call. We look forward to speaking with you again soon. Good day and good night. This concludes today's conference call. Thank you for participating. You may now disconnect.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.