Gaotu Techedu Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the GoTo Techadoo, Inc. First Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. If you need assistance, please press star zero to reach the operator. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To remove yourself from the queue, please press star then two. Please note, today's event is being recorded on Monday, June 6th, 2022. I would now like to hand the conference over to your first speaker today, Ms. Shei Liu, IR Manager to GALTU. Thank you, and please go ahead.

Thank you very much, operator. Good evening, everyone, and thank you for joining us on our first quarter 2022 earnings conference call. GALTU's first quarter earnings release was published earlier today. and it's available on the company's IR website at ir.galto.ca. On the call with me tonight are Mr. Larry Chen, Galto's founder, chairman, and chief executive officer, and Ms. Shannon Chen, Galto's chief financial officer. Larry will give a general business overview for the quarter, and then Shannon will discuss the financials. Following their prepared remarks, Larry and Shannon will be available for the Q&A session. 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 Security Litigation Reform Act of 1995. These forward-looking statements are based upon management's current beliefs and expectations as well as the current market and operating conditions, and they 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, or achievements to differ materially from those contained in any forward-looking statement. Further information regarding these and other risks is included in the company's filings with the U.S. SEC. The company does not undertake any obligation to update any forward-looking statement except as required under applicable law. As a reminder, this conference is being recorded. 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, everyone. Thank you for joining us on our 2022 First Quarter Earnings Conference Call on this special day, which happens to be GAL2's third year listing anniversary. Before I start, I would like to remind everyone that all financial information that I mention later is based on RMB and is otherwise noted. In the first quarter of 2022, our business continued to maintain a healthy and sustainable development, and we have remained profitable for two consecutive quarters since we began our business restructuring. In this quarter, our net revenues were $724.6 million, and our gross billions were $318.1 million. To present consistent basis of comparison, if we only look at our comparable businesses, which are professional education for college students and adults, vocational education, STEAM education, and digital educational products, the net revenues of our comparable businesses increased over 200% year-over-year, and their gross billions increased approximately 42% year-over-year. Moreover, gross billions of comparable businesses have shown quarter-over-quarter growth for three consecutive quarters. Our growth margin this quarter was 70.6 percent, slightly higher than that of the same period of last year. Our net income and non-GAAP net income were 53.7 million and 92.5 million, respectively, indicating that we have achieved effective growth. Furthermore, our capital position remains strong. As of March 31st, 2022, we had a total of approximately $3.2 billion in terms of cash, cash equivalent, restricted cash, and short-term investments on our balance sheet. Since we initiated our business restructuring and organizational adjustments in the third quarter of last year, our operations have been centered upon three key aspects, focusing on the core businesses, enhancing product quality, and improving operational efficiency. I will now briefly talk about our progress during the quarter on each of these three points. First, in terms of focusing on our core businesses, we will continue to concentrate on online education, and we will continue to develop and invest in our four core businesses, which are professional education for college students and adults, vocational education, team education, and digital educational products. During this quarter, the skill of our professional and vocational education services further increased compared with that of the last quarter. Its net revenues realized an approximately 82% quarter-over-quarter growth, and its gross billions secured an approximately 85% quarter-over-quarter growth. Our STEAM education service has also made solid progress, especially in its programming tutoring businesses, which grew over 10 times year-over-year in terms of gross billions. Through the gradual development of our new businesses, we will continue to expand our product portfolio across various categories. We will also extend our advantages in the high school tutoring services to other businesses continue to offer existing students upgraded and modified courses that satisfy related government policies, fulfill the diverse and multidimensional learning demands of students, and to build a true learner-centric lifelong learning and service platform. Second, in terms of enhancing our product quality, we believe that now is the best time to accumulate know-how cherish our original aspiration to education and return to the fundamental essence of education. We remain rigid on our principle that quality is the core of education. As such, we will continue to uphold our pursuit of delivering exceptional education quality. We will continue to invest in teaching resources to offer the best education content and products and we will continue to invest in technology to provide more user-friendly and personalized products. Meanwhile, we continue to maintain our standard of hiring the best instructors in the industry and offering very competitive packages. In the quarter, research and development expenses accounted for 17% of our total revenue. returning to a relatively high proportion and reflecting our emphasis on the importance of R&D in online education. Because our new businesses are still in their early development stage, adequate R&D investment is essential, but we will gradually reduce and strictly control our R&D and other operating costs to be within a specific range as we execute our strategy of effective growth and constantly evaluate the development of our business. At the same time, we have sufficient cash reserves to support our investment in R&D. Going forward, we will uphold our principles of good teachers are fundamental and our corporate value of customer first. Continuously requiring our product quality based on a long-term view and strive to provide the best educational services in the industry to students and that creates the most value for our customers. By firmly focusing on customer value proposition and firmly investing in the capabilities to deliver value we believe we will generate sustainable and high-quality revenue growth. Third, in terms of improving our operational efficiency, we continue to revamp our on-site operations and management to strengthen organizational and operational efficiency. After a profitable last quarter, we continued to profit with 12.8% non-gap and income margins in this quarter, indicating that we have achieved healthy and sustainable growth. Our sales and marketing costs also significantly decreased. As an end margin, this quarter decreased 79% points compared with that of the same period of last year, while the S&M efficiency has notably improved. This is solid proof that our multi-channel customer acquisition method is highly effective, even in this changing external environment. To further improve efficiency, we will continue to work towards optimizing our business processes and resources education to enhance productivity. We have never once changed our competence in China's massive education market. and our determination on delivering the highest quality education to students. China's economic development has brought about profound transformation and upgrades in various industries, which have created demands for new skills and thus presented more opportunities and possibilities. We will closely monitor and follow the ongoing trends in the Chinese labor market, continue to cultivate the education industry while guided by the skills and training needs required by the country's future talent, actively shoulder our social responsibilities as an education company, and utilize technology to deliver high-quality education thereby delivering real value and promoting the long-term growth of the Chinese education industry. Through the ups and downs, we will be celebrating Dao Tu's eighth anniversary next week. It might be easy to do a business for one year or maybe even three years, but it's hard to find companies that have sustained for over 10 years, and only a selected few companies can become long-lasting organizations. Success belongs to the optimistic few who dare to transform, who are eager to innovate, who have faith, and who persevered through the challenges. Regardless of how the surrounding environment changes, we will stay true to our original aspiration to educate education and treasure our love to education. We firmly believe that as long as we slow down and persist while keeping accumulating experiences and expertise, we will be able to create a world of our own in the field of education. Lastly, we would like to take this opportunity to deeply thank all medical staff for their dedication and hard work in the past days. May we overcome the pandemic soon and all stay safe and healthy. Thank you very much. Now, I will pass this call over to our CFO, Shannon, and walk you through our financial and operational details.

Thank you, Larry, and thank you everyone for joining our call today. I will now walk you through our operating and financial performance for the first quarter of 2022. Please note that all the financial data that I mentioned later is based on RMB, unless otherwise noted. Following our strategy of effective growth, we are pleased to be able to continue to profit in this challenging environment, with a net income margin of 7.4% and a net gap net income margin of 12.8% during this quarter. As most of our new businesses are still in their early development phases, we will compare our financial performance on a quarter-over-quarter basis alongside with year-over-year comparisons to better present the development of our new strategic businesses. Our focus this year remains on four core businesses, professional education for college students and adults, vocational education, team education, and digital education products. On April 20, 2022, China's top legislature passed the amended vocational education law of the People's Republic of China at the 31st session of the 13th National People's Congress. The law has taken effect since May 1, 2022. It has confirmed for the first time that vocational education is of equal importance as general education, and it advocates for a higher public acceptance of vocational education. We believe that under the strong support of government policy, vocational education will have a better future with higher market demand. We sincerely hope that by providing the best service and the best education quality, we will be able to establish Bell2 as a reputable brand in the vocational and professional education market. Now, I will go through our key financials in more detail. In the first quarter of 2022, our net revenues decreased 43.1% quarter-to-quarter and 62.7% year-over-year to $724.6 million. to provide a consistent basis of comparison. If we exclude seized businesses and look at our comparable businesses, which are professional education, vocational education, team education, and digital educational products, our net revenues increase over 200%, both year over year and quarter over quarter basis, representing a significant increase in scale. Gas billings this quarter decreased 68.4% quarter-over-quarter and 73.1% year-over-year to $318.1 million. Gas billings of our comparable businesses increased approximately 42% year-over-year and approximately 60% quarter-over-quarter. We will continuously monitor regulatory policy updates and remotely adjust our service accordingly. In the meantime, we will continue to offer policy permitted services to high school students and college students. Further, our cost of revenues this quarter decreased 62.7% year-over-year to $212.9 million. Our current level of cost of revenue is proportionate to our net revenue. And in the future, we will continue to improve our operational efficiency and effectively reduce and limit our costs to within a specific range. Our gross profit decreased 62.6% year-over-year to $511.7 million, which still adds a gross profit margin of 70.6%, higher than that of the same period of last year. and also higher than that of last quarter. Non-GAAP gross profit was 530 million, and non-GAAP gross profit margin was 73.1%. Operating expenses decreased by 83.1% year-over-year to 486.4 million. To break down the operating expenses, Selling expenses decreased by 87.6% year-over-year to $284.2 million. The selling expense margin was 39.2%, a sharp decrease compared to that of the same period of last year. Since our restructuring last year, we have been actively exploring new customer acquisition strategies, including utilizing live stream e-commerce and short radio platforms. Additionally, we will continue to expand our courses offering to build a learning platform across multiple categories to establish our branding in the vocational and professional education sector and gradually become more reliant 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 66.2% year-over-year to $123.3 million. Investment in R&D is crucial, especially for us, since we are at the early exploration stage of our new businesses. We will determine our budget for investment for different business lines according to its development and our evaluation of the market. To guarantee the quality of education, we provide and to be able to offer products that exceed users' expectations. We are also bringing highly experienced and outstanding research and teaching staff in the vocational and professional education industry to our company to improve our curriculum design. Meanwhile, we will adjust the R&D employee structure to continuously enhance return on investment and realized R&D efficiency improvement. General and administrative expenses decreased by 63.7% year-over-year to $78.9 million. With that, our net income from operations for the first quarter of 2022 was $25.3 million, compared with loss from operations of $1.5 billion in the same period of last year. We have always adhered to the strategy of effective growth when we expand new businesses. By optimizing unit economics before running the operations at scale, we were able to achieve successful profits for two consecutive quarters. Our net income was $53.7 million, compared with the net loss of $1.4 billion in the first quarter of 2021. non-GAAP net income was 92.5 million. Our net income margin and non-GAAP net income margin rate, 7.4% and 20.8%. We are pleased to be able to continue to achieve effective growth this quarter. Additionally, our net operating cash flow was 481.3 million, representing a significant improvement compared with that of the same period of last year. Turning to our balance sheet, as of March 31, 2022, we had $979.8 million cash, cash equivalent and restricted cash, and $2.2 billion short-term investments, which totaled approximately $3.2 billion, more than enough to support our current operating scale and our explorations into new businesses. Further, As of March 31, 2022, our deferred revenue balance was $599.7 million, which primarily consists of tuition collected in advance. Before I provide our business outlook for the next quarter, please allow me to remind everyone that this contains forward-looking statements, which involve risks and uncertainties. which are beyond our control and could cause the actual results to differ materially from our predictions. Based on our current estimates, total net revenues for the second quarter of 2022 are expected to be between $400 and $38 million and $468 million, representing a decrease of 79% to 80% on a year-over-year basis. We are also expecting to see net operating cash flow turning positive next quarter. This concludes my prepared remarks. Operator, we are now ready for the Q&A session. Thank you, everyone.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Mark Lee with Citi. Please go ahead.

Hi, management. Thank you for the result presentation. This is Mark Lee from Citi. May I ask a question on your Q2 guidance? I noticed your Q2 guidance offer $438 to $468 million. revenue. May I know a rough breakdown for the revenue, especially for the four core segments that we may sustain going forward? Thank you.

Thanks, Mark. So regarding the second quarter guidance, we haven't provided the details and break down that into the four core sessions. And as everyone has noticed that on our earnings release, we have combined all the business and we didn't kind of like separate them into like the four core different segments. And because majority of our new businesses are still at early stage, and we want the business to become more stable before we can provide a process guidance and separate them into different segments. So right now, we will recommend you to look at the company as a whole and see how the revenue is trending.

Got it. May I follow up quickly? Could you just maybe comment on the momentum for these four segments, let's say, into the Q2? Any qualitative comment could be helpful.

Yeah, so this is kind of like our second quarter after the transformation of our new business, and we're still making gratifying progresses. Although we have higher expectations on ourselves, And as I mentioned earlier, the revenue of our new businesses, if we make an apple-to-apple comparison, has exceeded 200% growth, both on a year-over-year basis and a quarter-over-quarter basis. And also the growth ceiling has increased by more than 60% year-over-year, laying the foundation for our future development. While maintaining the high growth, we have also managed to profit maintained a non-GAAP margin of 12.8%. That proved that we have the ability to balance the rapid growth and profitability. So in terms of various categories, like our STEAM education, finance-related examination training, or civil servant examination training, and the preparations we provide for postgraduate college entrance exams, These have all achieved considerable growth from previous quarter, and we also foresee these sectors to grow over high double-digit percent on a quarter-over-quarter basis. And we believe these businesses will continue to become our growth engines in the future. Mark.

Very helpful. Thank you.

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Sherry Liu for any closing remarks.

Thank you, Operator, and thank you, everyone, for joining the call today. If you have any further questions, please don't hesitate to contact the company's Investor Relations Department via email at iricultury.ca directly. You're also welcome to subscribe to our newsletter and quarterly investor newsletters on the company's IR website. Thank you very much again for your time. Have a great night.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day or evening. Thank you.