Gaotu Techedu Inc.

And gentlemen, thank you for standing by and welcome to the Gautu Tech Edu, Inc. Second Quarter 2022 Earnings Conference Call. All participants will be in 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 one on your telephone keypad. To withdraw your question, press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Ms. Sherry Liu, IR Manager of GAL2. Please go ahead.

Thank you very much, operator. Good evening, everyone, and thank you all for joining us tonight for GAL2's second quarter 2022 earnings conference call. GAL2's second 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, I'm Mr. Larry Chen, GALTO's founder, chairman, and chief executive officer, and Ms. Shannon Shen, 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 Securities 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 will involve known or unknown risks and certainties and other factors, all of which are difficult to predict and many of which are beyond the company's control and may cost the company's actual results performance, or achievements to defer maturity from those containing any forward-looking statements. Further information regarding these and other risks is included in the company's filings with the U.S. SBC. 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. 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. Thank you for joining us on GAL2's second quarter 2022 earnings conference call. Before I start, I would like to remind everyone that all financial information that I mention later is based on IMB and is otherwise noted. During the second quarter of this year, our businesses sustained a healthy and stable growth. Our growth speed nearly doubled compared with that of last quarter, and we successfully generated a positive net of reaching cash flow. Moreover, our net loss substantially narrowed year over year, and this is the third consecutive quarter that we realize non-gap profitability after our business restructuring. Going forward, we will continue to focus on educational services for college students and adults, non-academic tutoring services, and educational content and digitalized learning products. continue to uphold our strategy of profitable growth, and continue to strive for effective growth through improving operational efficiency and optimizing cost structure. During this quarter, our net revenues reached $537.8 million, and our gross billing increased 92.3% quarter-over-quarter to $611.6 million. $7 million to provide a consistent basis on comparison. If we compare continuing businesses, the net revenues of our comparable businesses increased over 30 percent quarter-over-quarter. And the gross billions of comparable businesses have also achieved quarter-over-quarter growth for four consecutive quarters. Our growth margin this quarter was 70.2 percent, slightly higher than that of the same period of last year. Additionally, we also generated a net operating cash flow of 93.8 million, demonstrating that we have achieved effective growth. In the second quarter, we upgraded our user products and made solid progress in our main businesses. Additionally, we saw decent improvement in some of our key operational metrics, including R&I for selling expenses and employee efficiency. We will now briefly talk about the progress we made in each of these areas during the quarter. First, in terms of product upgrades, we have repositioned and transformed the GoToAPP from a course delivery tool into a comprehensive learning content and service platform. To better serve our students, we have equipped our APP with additional tools, including independent mini-programs for key business lines, delay upcoming live streaming announcements, and exam guides, as well as new features such as mock examinations and test banks, teacher-student interactions, and exam reminders. After the upgrade, delayed active users, student retention rate, and the number of newly registered users for our APP all showed gradual increase. The improvement in the level of user engagement demonstrates that our EPP better fulfills students' multilevel and highly diversified learning needs and solidifies our corporate missions as a learner-centric lifelong learning and service platform. By reaching out to a larger and broader customer base, our ATP has delivered better performance in customer retention and generated more synergy among our business lines, thereby expanding our customer acquisition channels while reducing marketing costs. Going forward, we will continue to enhance our products with dedication to make learning a better and a more convenient experience through technology and innovation. Second, we saw stable development for our key businesses during the quarter. In May, we released the GoTo College Students Postgraduate Entrance Examination White Paper, which presents detailed guidance and a numerical analysis that we summarize based on numerous surveys and studies and is intended to help students scientifically prepare for their exams and boost their passing rate. With our continuous pursuit of the best teachers, the best consultants, the best services, according to our survey results, The success rate was more than twice that of the national average for our 2022 class for the national graduate school entrance exam. Additionally, our non-academic tutoring services also delivered solid performance in this quarter. It not only achieved quality of reaching profit, but also contributed a positive net of reaching cash flow. With continuous effort to refine and optimize our products, we are pleased to see a higher user satisfaction. For instance, the retention rate of our programming tutoring business reached almost 80% during this quarter, and its growth billions increased approximately four times quarter-over-quarter. We believe that a high retention rate is a best indicator of users' satisfaction. Going forward, we will continue to optimize our products and services to further increase retention rates and customer satisfaction. Third, ROI for selling expenses and employee efficiency both increased during the quarter. ROI for selling expenses doubled compared with that of the last quarter, and employee efficiency also nearly doubled quarter over quarter. Going forward, guided by our effective growth strategy, we will continue to implement budget control on marketing expenses and continue to further improve ROI for selling expenses and operational efficiency. Lastly, I would like to say that we celebrate GoTo's eighth anniversary on June 16th of this year. In this era of abundant challenges, as well as opportunities. We are well prepared to leverage our strong organizational capability to properly respond and adjust to the ever-changing environment. Although we have restructured our businesses and our organization, we remain true to our preachers' original aspiration to educate. Our starting point has never changed, nor have our hopes for the future of our competence in the education industry. With the emphasis on long-term value, we will continue to deep dive in the education industry, practice corporate social responsibilities as an education company, and actively play a role as advocates, practitioners, and leaders in the cause of education in China over the next eight 18 and even 28 years, we will continue to offer exceptional services, create better products, provide superior content, empower more students, and build a better Go tool. Thank you very much. Now I will pass the call over to our CFO, Shannon, to walk you through our financial and operational details of this quarter.

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 second quarter, 2022. Please note that all financial data that I mentioned later is based on RMB terms, unless otherwise noted. The education industry highly relies on employees' operational efficiency and the synergies among the workforce. During the second quarter, through optimizing costs, and enhancing operational efficiency, we continued to achieve effective growth under this challenging economic environment. Net revenues generated by comparable businesses showed quarter-to-quarter growth for three consecutive quarters, and their gas billings showed quarter-to-quarter growth for four consecutive quarters. We expect this momentum to continue in the next quarter. Additionally, net loss was hugely narrowed by 94.6% year-over-year to $49.8 million on the GAAP basis. And we remained profitable this quarter on the non-GAAP basis with the amount of $645.4 thousand. We are also seeing a positive net operating cash flow of $93.8 million. With that, our capital position remains strong. As of June 30, 2022, we had a total of approximately $3.4 billion in terms of cash, cash equivalents, restricted cash, and short-term investments on our balance sheet, providing ample resources for continued business development. Going forward, we will continue to focus on our three core businesses, educational services for college students and adults, non-academic children's services, and educational contents and digital learning products, well guided by our strategy of sustainable growth. Now, I will go through our key financial data for the second quarter. As the new businesses we initiated after our business restructuring 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 comparable businesses. In the second quarter of 2022, our net revenues decreased 75.9% year-over-year to $537.8 million. To provide a consistent basis of comparison, if we compare our comparable businesses, our net revenues achieved healthy growth with a higher than 270% increase year-over-year and over 30% increase quarter-over-quarter. We would like to point out that from the second quarter onwards, all net revenues and gas billings come from continuing businesses. Gas billings decreased 77.3% year-over-year and increased 92.3% quarter-over-quarter to $611.7 million. Gross billings of our comparable businesses showed quarter-over-quarter increase for four consecutive quarters. Among that, gross billings for non-academic tutoring services showed substantial quarter-over-quarter increase. The performance for non-academic tutoring services displayed seasonality, as course retentions normally happen during the second and the fourth quarter of the year. during which upfront tuition will be collected, and therefore, gross billings will increase. We accept the same increasing trend to also appear in the following fourth quarter of this year. Our cost of revenues this quarter decreased by 77.9% year-over-year to $160 million. Our gross profit decreased 74.9% year-over-year to $377.8 million, which gave us a gross profit margin of 70.2%, 269 basis points higher than that of the same period of last year. Non-GAAP gross profit was $396.4 million, and non-GAAP gross profit margin was 73.7%, The increase in gross profit margin is because compensation for instructors and tutors in new businesses took up a smaller proportion of net revenues. Operating expenses decreased by 81.4% year-over-year to $438.3 million. To break down the operating expenses, selling expenses decreased by 83.6% year-over-year and 5.3 percent quarter-over-quarter to $269 million. Selling expenses have shown quarter-over-quarter decrease for five consecutive quarters since the first quarter of last year. Selling expenses margin for the first quarter was 50 percent, a solid decrease compared to the same period of last year. ROI for sales and marketing expenses has also increased over the last quarter. The improvement of selling expenses efficiency is due to lower cost and diversified customer acquisition channels and constantly increased operational efficiency. Since different customer acquisition strategies are suited for different business lines, after our restructuring, we prefer to acquire new customers more vertically and we have upgraded our model for private traffic operations to better identify potential customers with high conversion rates. We have also upgraded our APP, which is not only a learning tool, but also an application for customer acquisition and retention through enriched content. Further, we will continue to establish our branding in the education industry through exceptional service, superior quality, and better learning results, and gradually become more reliant on customer acquisition through word-of-mouth referrals. And in this way, constantly lower our customer acquisition cost and the selling expenses margin to pursue shareholder value and sustainable growth. Research and development expenses decreased by 75.6% year-over-year to $103.9 million. To provide superior quality education and to be able to offer contents and products that exceed users' expectations, we will invest in R&D according to the development of each specific business line. Meanwhile, we will adjust the R&D employee structure to continuously enhance ROI for R&D expenses. and realize R&D efficiency improvement. General and administrative expenses decreased by 73% year-over-year to $65.4 million. Since our new businesses are still in the early development stage, initial fixed costs, including R&D expenses, are still taking up a relatively high proportion of net revenues. We expect some R&D and G&A expenses to start showing economic scale as the size of new businesses grow larger. Going forward, we will continue to improve our operational efficiency and optimize our cost structure to achieve greater value for our stakeholders. Our loss from operations for the second quarter was reduced by 92.9% to $60.5 million. Our net loss was reduced by 94.6% to $49.8 million. Net gap net income was $645.4 million. Our net loss margin was 9.3%, and net gap net income margin was 0.1%. Due to the effect of restricted stock units offered to employees in the past years, the share-based compensation expenses were still being recognized towards cost and expenses acceleratingly, and thus took a high proportion of net revenues, causing a relatively wide gap between gap and non-gap bottom line. With the end of this acceleration and the increase in our revenue, we expect share-based compensation expenses to gradually account for a lesser and lesser proportion of revenues in the following quarters. Additionally, Our net operating cash flow turned positive this quarter, reaching 93.8 million, and representing an improvement in efficiency compared with the same period of last year and last quarter. The large increase in cash flow was primarily due to increase in gross billings. We are pleased to be able to continue to achieve effective growth this quarter, and we will strive to continue this momentum. Turning to our balance sheet, as of June 30, 2022, we had 591.5 million cash, cash equivalents, and restricted cash, and 2.8 billion short-term investments, which totaled approximately 3.4 billion, providing ample resources for continued business development. Further, as of June 30, 2022, Our default revenue balance was $647.9 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, net revenues for the third quarter of 2022 are expected to be between $576 million and $596 million, representing a decrease of 46.5% to 48.3% on a year-over-year basis. This concludes my prepared remarks. Operator, we are now ready for the Q&A section. 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.

Hi, management. Thanks for your presentation and congrats on breaking even in this quarter in the non-GAAP net profit. My first question is about the Q3 revenue outlook. We see the Q on Q revenue improvement. Could you share a bit on maybe the breakdown of the major segments, or could you comment on the QOQ growth drivers for the major segments? Thank you.

Thanks, Mark. We are gradually becoming more focused on our businesses and products to target a more vertical student population, and in this way, to create synergies between our users and to enhance our branding, and to increase the market penetration rate. As such, during this quarter, we are focused on the three main businesses, including educational services for college students and adults, and academic children's services, and educational content and digitalized learning products. Our new businesses are still in their early development stages and the revenue contributed by each of the business lines will be affected by different seasonalities and different stages of the development. So currently we did not disclose our revenue breakdown in details because our current revenue structure is not a very perfect indication for what's going on and we expect it to change in the following quarters as our revenues grow larger. I can give you a high-level picture that this quarter, I mean in the second quarter, our academic children's services and educational contents and digitalized learning products combined together contributed roughly 60% of our revenues and constantly contributed operating profit and sizable net operating cash flow. So we will leverage our brand recognition and the large user base as we have accumulated in the past years to constantly upgrade our products and to better serve our students. And other than the 60%, the rest of our 40% revenue were contributed by educational services for college students and adults, which includes some categories such as graduate school entrance exam preparations and civil servant exam preparations and also like financial and accounting qualification test prep, as well as other non-exam preparation categories. Because different business lines are at different stages, so we will now disclose more, we will disclose more information when this business enter a more mature stage. So then if you're looking to next quarter for Q3's outlook, We foresee all these three categories of revenue to grow, but it still depends on the seasonality and the different stages. Hope that helps.

Got it. Thank you. May I have a quick follow-up on the education service for the college adults? Like looking into Q3, what are the major drivers for the courses or any new courses you could highlight to us?

Yes, thanks for your question, Mark. So this is the third quarter where we are transforming and restructuring our business. Currently, we have categorized our core businesses according to the groups of clients that we wanted to target. So college students and working adults are a group of students which is still energetic about learning, and their demand is very strong. And historically speaking, we have achieved success decent progress for these new businesses. If you look into last quarter, this business achieved over 200% year-over-year growth, and growth building also achieved over 60% year-over-year growth. And this quarter, we are happy to see the momentum to continue. And we also think the growth building is always an indicator, and it will build a strong foundation for the future development. So further, some of our business lines within this group have achieved quarterly operating profits, such as financial qualification prep businesses. And also, like the graduate school entrance exam preparation businesses also achieved around 30% quarterly growth in revenue. Besides, we have courses called language training and OAC test preparations. This also achieved acceptable quarter-over-quarter revenue growth, about over 30%. So based on this, because we invest in certain categories, and they all grow in a sustainable way, so we can see that in Q3, they do foresee our education services for the college students and working adults to continue to grow. So then in terms of the seasonality, for instance, I will use the graduate school entrance examination preparation as an example. So this business shows a strong seasonality. Like Q1 and Q3 are usually the season that will collect the tuition fees. Then you will see the cost to increase. Then for the second quarter and the fourth quarter, that's usually when the students started to take the courses. so we will see revenue to grow. So because there are certain categories in this direction, so both of them are in a very stable way to grow.

Thank you very much.

Thanks, Mark.

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, operator, and thank you, everyone, for joining the call tonight. If you have any further questions, please don't hesitate to contact our University Relations Department or our management via email at ir.cultu.vn directly. You're also welcome to subscribe to our news alerts on the company's IR website. Thank you very much, Aileen, for your time. Have a great night.

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