By Michael Kim

NASDAQ:QSG

READ THE FULL QSG RESEARCH REPORT

Pre-market open on 3/11/25, QuantaSing (NASDAQ:QSG) reported F2Q25 (Dec) earnings results. On a GAAP basis, QSG reported net income of $17.4 million for F2Q25, or $0.32 per ADS. That said, excluding share-based compensation expenses, adjusted EPS came in at $0.33, or well above our estimate of $0.20. Relative to our model, the beat primarily reflected higher-than-expected revenues and operating income partially offset by a higher share count, as management took a pause on buybacks during the quarter.

After updating our model for F2Q25 actuals, we are taking up our F2025 and F2026 adjusted EPS estimates from $0.78/$0.76 to $0.90/$0.85. Despite lower revenue assumptions, as the business model increasingly transitions from traffic-driven (legacy online learning course fees) growth to high-quality (product/services) growth, our upward revisions primarily reflect the F3Q25 EPS beat and modestly higher margin assumptions, as management remains focused on optimizing profitability through the strategic transition (and beyond).

We are leaving our price target unchanged at $5.50, still representing meaningful upside potential from the stock’s current price. Given QuantaSing’s ongoing business model transition, differentiated focus on the silver demographic in China, and long-term growth potential, we are leaning on our DCF model to value QSG shares. At a high level, despite what we believe to be conservative inputs/assumptions, our valuation work suggests a wide disconnect between QuantaSing’s fundamentals and the stock’s current price.

Following our review of F2Q25 results, we highlight the following key takeaways:

1. Legacy online learning business evolution: At a high level, senior executives remain focused on continually realigning/improving the online learning course catalog. To be sure, demand trends across QSG’s diversified suite of health and lifestyle offerings continue to improve amongst middle-aged and senior citizens. Moreover, management added 22 new lectures and enhanced training modules across the company’s financial literacy segment. Next, increasingly leveraging QSG’s existing online platform and customer base (139.6 million registered users as of 12/31/24) remains a key strategic priority. Initiatives are underway to improve user engagement and conversion rates, thereby extending customer Lifetime Values (LTVs), all else equal. From a financial perspective, senior officials remain committed to reallocating steady cash flows from the legacy online learning services platform to fund the strategic transition, with a focus on higher-quality products/services geared toward the silver demographic.

2. Ongoing focus on broadening the product suite: Beyond online learning courses, management continues to launch new health/wellness related products and services aimed at the silver demographic. More specifically, demand for the company’s ZhiQiuTang brand of "Food as Medicine" products continues to build, while QSG recently launched a VIP membership program that includes discounts on travel study products and tickets along with other related services. Looking ahead, we expect the company to launch additional health and wellness products via organic growth initiatives and strategic partnerships. Stepping back, senior officials continue to explore opportunities across the consumer sector to enhance growth. Case in point, management recently began investing in Letsvan, a toy manufacturer in China, with ongoing investments through March. Though seemingly immaterial in size, Letsvan’s revenue will likely be consolidated into QSG’s financials starting in F3Q25. 

3. Balance sheet provides strategic flexibility: Liquid assets (cash and cash equivalents, restricted cash, and short-term investments) totaled RMB 1.2 billion ($166 million) as of December 31, 2024, thereby providing flexibility to continue to invest in newer business at a measured pace (without the need to tap external financing sources), with management remaining committed to returning excess capital to shareholders (primarily via share repurchases).

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