Gaotu Techedu Inc.

Ladies and gentlemen, thank you for standing by and welcome to the GAL2 TechDo Incorporated fourth quarter and fiscal year 2021 earnings conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event is being recorded on Tuesday, March 8, 2022. I would now like to hand the conference over to your first speaker today, Ms. Sherry Liu. IR Manager of GAL2. Thank you. Please go ahead.

Thank you very much, Operator. Good evening, everyone, and thank you for joining us on our first quarter and full year 2021 earnings conference call. GAL2's first quarter earnings release was distributed earlier and is available on the company's IR website at ir.gal2.cn. On the call with me today are Mr. Larry Chen, GAL2's Founder, Chairman, and Chief Executive Officer and Ms. Shannon Shen, Gautu's Chief Financial Officer. Larry will give a general overview and then Shannon will discuss the financials. Following the prepared remarks, Larry and Shannon will be available to answer your questions. I will translate for Larry. Before we begin, I'd like to remind you that this conference call will contain forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and the current market and operating conditions and related events that involve known or unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control and may cause the company's actual results, performance, and achievements to differ materially. Further information regarding these and other risks, uncertainties, or factors is included in the company's filings with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this conference call will be available on GAL2's IR website. It is now my pleasure to introduce Larry. Larry, please go ahead.

Thank you, Sherry. Good evening and good morning to you all. Thank you for joining us on our fourth quarter and fourth year 2021 earnings conference call. Before I start, I would like to remind everyone that all financial information that I mention later is based in RMB, unless otherwise noted. In the fourth quarter of 2021, our revenue was 1.3 billion, representing a 14.3 point quarter-over-quarter increase. which brought our revenues for the full year of 2021 to $6.6 billion. Our gross billions of this quarter also showed a huge 233.7% quarter-over-quarter increase to $1 billion. During this quarter, net revenues and gross billions from our comprehensive tutoring services which consists of our fitness other than control of academic subjects tutoring services were $149.1 million and $234.8 million respectively, representing a decent increase in size compared with previous quarters. and demonstrate that we are on the right track of gradually shifting our emphasis to business other than K-12 academic subject tutoring services. It's especially worth noting that after we restructured our business in the third quarter, in the fourth quarter we achieved considerable profitability in both GAAP and non-GAAP terms. as well as positive net of reaching cash flow. Our net profit was $285.9 million, and our non-GAAP net profit was $324.4 million, which gave us a record high non-GAAP net profit margin of 25.5%. Our net operating cash inflow was $245.8 million. All of these indicate that the business restructuring and organizational adjustments we performed in the last quarter delivered significant results, confirming that we chose the right strategic direction, which proved effective in a short period of time. In the meantime, we maintained a strong cash position as of December 31, 2021. Our cash and cash equivalents, restricted cash, and short-term wealth management investments totaled approximately $3.7 billion. Going forward, We will continue to focus on online vocational education, professional education and digital products. We will continue to focus on high operational efficiency as we have always emphasized. We will continue to focus on the effective growth of our business and we will continue to focus on the personal development of our team. Next, I will elaborate on these four points and briefly cover our progress in the quarter. First, in the fourth quarter, we further expanded our vocational and professional education cost offerings to better meet the broad range of demand of our existing and potential students. In November last year, we repositioned ourselves as a learner-centric lifelong learning and service platform, which is our new corporate vision statement. We now offer a relatively comprehensive range of vocational and professional education categories, including not only tutoring for recruitment and qualification examinations and preparation for a college-level academic exam, but also vocational skills training, capability improvement, professional counseling, comrades training, and others, covering most types of training courses that cater to a variety of needs of learners of various age groups, educational background, and life and work experience. In addition to benefiting society by developing more talent, our course offerings also help learners enrich their lives. A multi-category platform both reinforces the branding that we build up in the K-12 space in the vocational and professional education sector and will boost cross-selling, upselling, and retention rates. We all know that the demand for vocational and professional education in China is enormous and is growing rapidly. And we are confident that by leveraging the insights and resources that our operations, products, research and development, and tutors have accumulated in the online K-12 business, which have given us a strong competitive advantage. we will achieve significant growth in the vocational education sector. Second, we have always emphasized the importance of high operational efficiency. Since the founding of our company, we have been determined to build a highly efficient, organized, and unified team. Our greatest asset is our team, which is also the core engine of our business growth. After our restructuring in the fourth quarter, our growth margin was 69.7 percent, higher than that of previous two quarters. Our operating margin also reached a record high level. are solid testament to the high operational efficiency of our team. Third, we will continue to focus on the effective growth of our business. We do not pursue meaningless size expansion. Rather, we put a priority on maintaining healthy, stable, and sustainable growth. Before introducing a new cost offering, we carefully analyze its unit economic and profit model. Before launching a new product, we put ourselves into the shoes of the lender to ensure that we can provide the best quality, the best service, and the best user experience to our customers. Finally, we continue to invest heavily in our employees by providing them with ongoing training. We regularly arrange core competency trainings, including leadership, operations, and organizational skills for our business leaders as part of our efforts to develop well-rounded talent for our business. At the same time, we continue to offer highly competitive compensation by industry standards and continue to maintain high standards for the recruitment training, ranking, and performance evaluation of our tutors and employees. Looking back, 2021 was undeniably an eventful year as we went through large-scale strategic and organizational adjustments in the wake of regulatory policy changes in the industry. However, within a short period of time, we completed our restructuring and ended the year with a strong quarterly profit. Looking ahead into 2022, we will continue to comply with government policies, continue to cherish the goal to spread, putting our heart into it, and trying our best. and continue to leverage the deep roots of our experience in the online education industry and the hard work of our excellent team to bring superior vocational and professional education courses, superior digital products, and a better learning experience to more customers to fulfill our corporate mission of making learning better. Now I will pass the call over to our CFO, Shannon, to walk you through our financial and operational details.

Thank you, Larry, and thank you all for joining our call today. I will now walk you through our operating and financial performance for the first quarter and for the full year of 2021. Please note that all financial data I mention later is in RMB terms, as otherwise noted. We closed fiscal year 2021 with a strong fourth quarter with considerable gap and non-gap net profit and positive net operating cash flow. Following the restructuring which was completed in the third quarter, our new businesses achieved rapid and healthy growth. Both gross billings and net revenues generated from our comprehensive tutoring services showed quarter-over-quarter increases. which reflects our promote and decisive restructuring, strong organizations, solid talent pool, and deep industry experience. In the future, we will continue to explore new business and remain dedicated to refining our product and services with the goal of offering superior quality courses and services that exceed our students' expectations. By the end of 2021, We terminated all after school tutoring services to students from kindergarten through ninth grade. We would like to thank all of our teachers and other related staff for the hard work that they devoted to course delivery and their cooperation with the transition. We would like to give our best wishes to them and we hope that they will cherish the public welfare nature of education and continue to devote themselves to providing excellent courses and services in the non-profit institutions. Our current strategic focus is on non-degree based vocational and professional education. According to official data released by the Chinese Ministry of Education, as well as an independent third party, the market size for non-degree based vocational education in China in terms of revenue will be $250.7 billion in 2022. By 2026, it will reach $304.5 billion, representing a CAGR of 8.3% from 2022 to 2026. Combined with the demand for some degree-based vocational education for college students, such as preparation for graduate school entrance examinations and the college English test, and the degree-based vocational education market has substantial hidden opportunities. Further, the competitive job market means that there is a huge demand for transferable job skills. And everyone, whether college students, new graduates, those already in the workforce, or simply students trying to improve their skills, is looking for reliable and high-quality courses to satisfy various learning needs. We will patiently study user demand, design products that will satisfy the learning needs of most users, and offer constructive content to create an internet metric of learning tools, promoting the GALTO brand in the vocational and professional education sector through word of mouth referrals. Now, I will share with you our opening data in more detail. Since we terminated after school tutoring services for students in compulsory education in the fourth quarter of 2021, and in senior high school in the first quarter of 2022, I will put the focus on sharing more information about our comprehensive tutoring services, which is our business other than K-12 after school tutoring services, and present some of our financials on a quarter-over-quarter basis to better provide color on the performance of our new strategic focus. Please note that retroactive adjustments to historical data have also been made to provide a consistent basis of comparison for the financial results. In the fourth quarter, our net revenues increased 14.3% quarter over quarter to 1.3 billion. Net revenues contributed by our comprehensive tutoring services increased by 1.4% quarter-over-quarter to $100 and $49.1 million. Gross billings, the leading indicator for future financial performance, increased 233.7% quarter-over-quarter to $1 billion. Gross billings contributed by our comprehensive tutoring services increased by 72.8% quarter-over-quarter to 234.8 million. They have shown quarter-over-quarter increase for two consecutive quarters since the second quarter of 2001 up to the fourth quarter. This shows that we are gradually shifting our strategic focus to business other than K-Club after-school children related services. Moving over to our selected financial metrics summary, our cost of revenues decreased by 45.9% quarter-over-quarter and 37.3% year-over-year to $386.7 million. The decrease was mainly due to a decrease in compensation for instructors and tutors as a result of the restructuring in the last quarter, as well as decreases in learning material costs and rental expenses. Our gross profit increased 122.1% quarter over quarter to $887.6 million, which give us a gross profit margin of 69.7%. Non-GAAP gross profit which excludes share-based compensation, increased 107.9% quarter-over-quarter to $908.2 million, which gave us a non-GAAP gross profit margin of 71.3%. The increase was primarily due to decreased cost of revenue explained earlier. Operating expenses decreased by 57.5% quarter over quarter and 72.5% year over year to $629.3 million. To break down the operating expenses, selling expenses decreased by 54.9% quarter over quarter and 79.3% year over year to $373 million in the fourth quarter This was primarily due to a decrease in marketing expenses as a result of the impact of government policies as previously disclosed, and a decrease in the compensation for sales and marketing staff as a result of the restructuring completed in the last quarter. The selling expenses margin decreased to a record low 29.3%, a sharp decrease compared to previous quarter. At the same time, we are also exploring new customer acquisition strategies, including utilizing live stream e-commerce and short video platforms. A multi-channel customer acquisition model could reduce the risk of over-dependence on one single means. On the other hand, we will constantly improve our user conversion courses Additionally, we will continue to expand our courses offerings to establish our branding in the vocational education sector and gradually become relying more on customer acquisition through word-of-mouth referrals. And in this way, lower our customer acquisition cost and the selling expenses margin to pursue sustainable growth. Research and development expenses decreased by 62.8% quarter over quarter and 54.5% year over year to $125 million. The decrease was primarily due to a decrease in the compensation for research and development staff as a result of the restructuring completed in the last quarter. General and administrative expenses decreased by 41.8% quarter over quarter and 55.9% year over year to 95.9 million. The decrease was primarily due to a decrease in the compensation for G&A staff as a result of the restructuring completed in the last quarter. With that, our income from operations for the fourth quarter of 2001 was 258.3 million. compared with loss from operations of $696.1 million in the fourth quarter of 2020. Our operating margin this quarter reached a record high, 20.3%. The sharp increase in OP margin was primarily due to a decrease in compensation for staff as a result of the restructuring in the third quarter of 2021, as well as decrease in other operating related expenses. Our net profit was $285.9 million, compared with the net loss of $627 million in the fourth quarter of 2020. Nangap's net profit was $324.4 million, compared with the Nangap net loss of $554.4 million in the fourth quarter of 2020. It is worth mentioning that our net profit margin and non-GAAP net profit margin both reached its record high level of 22.4% and 25.5%, respectively. Additionally, our net operating cash inflow was $245.8 million, Turning to our balance sheet results, as of December 31st, 2021, we had $897.1 million cash, cash equivalents, and restricted cash, and approximately $2.8 billion short-term investments, which add up to be approximately $3.7 billion, sufficient to support our current operating scale and our explorations into new business. As for our four-year results, net revenues for 2021 decreased 7.9% year-over-year to 6.6 billion. The decrease was mainly due to the session of K-9 academic subject tutoring services as a result of the impact of government policies. Net revenues from our comprehensive tutoring services were 561.1 million. Gross billings decreased 42.4% year-over-year to $5.2 billion. Gross billings from our comprehensive tutoring services was $669.7 million. Net loss of 2022 was $3.1 billion, compared with net loss of $1.4 billion in 2020. Net gap net loss of 2021 was $2.8 billion, compared with non-GAAP net loss of $1.2 billion in 2020. Considering the uncertainty that government policy brings to our financial conditions, we will not provide the next quarter's performance guidance for now. This concludes my prepared remarks. Operator, we are now ready for questions. Thank you, everyone.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Mark Lee with Citi. Please go ahead.

Hey, hi, Larry, Shannon, and management. Thank you very much for the presentation. May I ask, firstly, we understand we terminate the high school tutoring by end of February. How much impact do we expect from this termination? And also, could you share a bit more on the key metrics for the vocational and professional education segment, such as margin, et cetera? Thank you.

Thanks, Mark. So for the high school business termination, we have made an announcement in February the 16th Because we are a company registered in Beijing, so that we follow local government instruction that the high school policy should exactly the same with the double detection policy. And the exact impact will be disclosed in our Q1 results. But in terms of all the restructuring, we have completed business and organizational restructuring in the third quarter. and have settled the majority of the payment and expenses. The following termination for the high school business is more natural and fully prepared. We do not expect to incur additional meaningful payment going forward. And currently, we have a strong cash balance sufficient to support our current business scale. So then, And our current cash balance also support our operations into the new businesses. And as for more details about the OP margins for the vocational education, so there are many categories in the vocational education sector. And different category has different characteristics. And the model for cost deliveries are quite different as well. that all result in inconsistency in the level of profit margin. So our profit margin is also affected by the percentage that each category takes up in terms of total revenue, which means it is now not very stayable. So as we're still in the early stage in exploring and investing stage of our new businesses, we're not able to provide precise expectations on the profit margin for our vocational businesses. But there's one thing for sure that we will insist on our operating strategy, which is always to run our business in an effective way, so we will not sacrifice the profitability just for the skill extension. We will resume providing guidance as soon as our business has entered a stable stage. Hope that address your questions. Thanks.

Thank you.

The next question comes from DS Kim with JP Morgan. Please go ahead.

Hi, good evening. Hi, Mr. Chen. Hi, Shannon. Thanks for taking my question. By the way, congrats on the record high profits and the margins this quarter. I have a quick question on the path forward, similar to what Mark just mentioned, but if we think not about one of these structuring costs, but in terms of the recurring OPEX operating expense run rate from second quarter of this year, how shall we think about it for the rest of the year, i.e., shall we expect OPEX run rate to be similar to the 4Q that we reported, or maybe down by half or even 80% as proportionate with the revenue side? What shall we expect on the operating expense? That's the first question. Second question, if I may, is related to our non-K-12 business. I'm not asking for the guidance per se, but say for 2022 or 2023 next year, how much of the revenue can we expect roughly, you know, very ballpark figure, like up 100% from current rate or 200%? Any, you know, sense of size would be appreciated. And if possible, how will that revenue be made up of a different segment, i.e., vocational and professional education versus digital product versus any new businesses like e-commerce and whatnot? Thank you.

Thanks for your question. So to address the first question about the OPEX, so because we're running an online education business, so the cost structure for us is very straightforward. It consists of the cost of good sales, sales marketing expenses, G&A expenses, and R&D expenses. So in the past, it was always the sales marketing expenses contributed the most. in the OPEC. And facing the first combination in the past, we're kind of like the same with other education companies. Sometimes the sales and marketing expenses can contribute like 80% or even 90% over the revenue. But going forward, especially facing the adult market, professional and vocational education, we are exploring more channels to acquire customers. And also, going forward, we will pursue the effective growth. So ideally, we hope that the expenses level will go back to the year of 2019 for us. So to leverage the economics of scale, we still wish our R&D and G&A expenses to be under 20% of total revenue. which provide us with enough room to acquire new customer as well as for a new product. But as I just mentioned, everything is still in a very early stage and we still see that in a K-12 business, we have accumulated extensive experience in cost delivering and refining our product development process, we also have developed a refining R&D platform. So all the legacies we get from the past will take us to the future. And also for our business, we still face a certain level of uncertainty. And we do see in the sub-segment, some of the leading players that have been performing very well. So that all shows the market has a huge potential. But for us, especially experiencing all the policy changes and the first combination in the past, it became more clear for us that we will focus on ourselves and focus on the development of our management team and our employees and to provide the best product to our customers. At the same time, keep improving our operating efficiencies I hope in the near future we can get a healthy and sustainable growth as well as a profitable growth. And you also mentioned like any color on the future growth. So we will put priorities on maintaining the effective growth while achieving a positive net profit. Given our current operating scale and market size, we think it is possible for us to achieve like high double digits or even triple digits revenue growth regarding our new strategic focus. The key is to constantly refine our products to better satisfy users' needs. And also, we will provide revenue guidance as long as the policy and the external environment is stable, like we always do in the past. Thanks.

Thank you so much, Shannon. That's really helpful. If I may follow up on that earlier part, my question was more about after the exit of K-12, including high school, how about R&D and G&A fixed costs would look like? For instance, fourth quarter, those were a little over 200 million renminbi in fourth quarter. our non-K-12 revenue was $150 million. So just wanted to, you know, balance that, you know, after the exit of K-12, shall we have a meaningful step down in a fixed cost further, or we would rather focus on, as you mentioned, you know, product-driven growth opportunity rather than focusing too much on the remaining fixed cost. And that's all my question. Thank you again for your answer.

Yeah, so yeah, the question makes a lot of sense. So like for us, when running a business, we are always trying to find a balance. So we did get legacies and experiences in the past, and that all helped us to grow in the past. And also like all the talents we had and all the systems we have built up also assist us to success in the future. So when we consider the further investment in R&D and the G&A scale, we also need to consider the top line scale we can acquire from the market. And also, like we always mentioned, probably at the first stage, we will still maintain a certain level of investment in R&D to support, to keep refining our teaching product Then going forward, as the revenue grows rapidly, we believe the percentage of R&D and G&A expenses can become lower, which we call it the economic sales scale that also provides us with the profitability. But also it depends on how fast we can get there. But still, we need to maintain a level of investment, especially in the R&D expenses.

Thank you very much.

This concludes our question and answer session. I would like to turn the conference back over to Sherry Liu for any closing remarks.

Thank you very much, operator, and thank you everyone for joining the call today. If you have any further questions, please don't hesitate to contact the company or contact us via email at ir.go2.ca directly. Please feel free to subscribe to our news alert or quarterly investor newsletter on the company's IR website. Thank you very much again for your time. Have a great night.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.