Gaotu Techedu Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the GAL2 Tech EDU fourth quarter and fiscal year 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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, please press star then two. Please note this event is being recorded on Tuesday, February 28th, 2023. 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, Alpreta. Good evening, everyone. Thank you very much for joining us on GAL2's first quarter and fiscal year 2022 earnings conference call. GAL2's earnings release for the first quarter and full fiscal year was published earlier today and is available on the company's IR website at ir.gal2.cn. Joining the call with me tonight from GAL2's senior management is Ms. Shannon Shen, GAL2's chief financial officer. Shannon will first read the prepared remarks on behalf of Larry Chen, GAL2's founder, chairman, and chief executive officer, and then Shannon will discuss the financials in more detail. Following the prepared remarks, Shannon will be available for the Q&A session. 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 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 public 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. During today's call, management will also discuss certain non-GAAP measures for comparison purposes only. For the definition of non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial results, please refer to our fourth quarter and fiscal year 2022 earnings release published earlier today. 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 Shannon, who will provide this quarter's general business highlights on behalf of Larry. Shannon, please.

Thank you, Sherry. Hello, everyone. This is Shannon speaking. Larry is in the middle of his live streaming session on Douyin right now. It is part of his 15-day consecutive book reading session on Douyin. Larry's valuable explorations in the short video ecosystem have huge strategic significance in the future business development and brand enhancement for GoTo. Please excuse his absence tonight. and I will read Larry's prepared remarks on his behalf. Good evening and good morning everyone. Thank you for joining us on GAL2's fourth quarter and fiscal year 2022 earnings conference call. I would like to take this opportunity to once again convey my gratitude for your continued interest in and support for GAL2 and the education industry. Before I start, I would like to remind everyone that all financial information that I mention later is based on RMB unless otherwise noted. We delivered a decent set of results in the fourth quarter of 2022. We achieved steady quarter-over-quarter revenue growth for the third consecutive quarter, and we also reported another profitable quarter with successful net operating cash inflow. Our net revenues for the quarter increased to $629.6 million. Our gross billings secured a significant quarter-over-quarter increase of 64.3% to approximately $1 billion, symbolizing that our business has entered a phase of continued steady development. During the quarter, we attained a net income margin of 11.2% and a non-GAAP net income margin of 13.9%, which brought our non-GAAP net income margin for the full fiscal year to 5.4%. Even more noteworthy is that we recorded a net operating cash inflow of $476.7 million during the quarter. which meaningfully lifted the full year number into positive territory and strengthened our cash position, attesting to our superior operational efficiency. We achieved effective growth on both a quarter and an annual basis, which is the culmination of our unwavering commitment to our long-lasting strategy for profitable growth and our relentless efforts to optimize students' experience and teaching quality. We are pleased to close a challenging 2022 on such solid footing, which has reinforced our confidence as we welcome unknown challenges in the next year. As we enter the spring season, alongside the health growth momentum, our organization has shown exceedingly resilient and cohesive and we are ready to deliver another year of profitability and substantial net cash inflow from operations in 2023. Going forward, we will continue to execute our customer-centric, long-term oriented, and substantial growth strategy to create enduring value for our students, employees, and shareholders. I would like to provide updates on the progress we made this quarter from the following four aspects. First, each of our core business lines remained on a steady growth trajectory. The sharp sequential increase in gross billings during the quarter was mostly driven by non-academic children's services and other traditional learning services, which partially benefited from favorable seasonality. In terms of revenues, we saw quarter-over-quarter growth across both educational services for college students and adults, and non-academic tutoring services. Specifically, the postgraduate entrance exam prep business reaped a quarterly profit for the first time. Looking ahead, we expect all business segments to sustain their positive growth momentum in 2023. Second, we continue to focus on enriching our talent pool and enhancing our organizational capabilities. At GoTo, our underlying philosophy is that love, compassion, goodness, and patience are the cornerstones of education. We always remind ourselves of our original aspiration to educate and to uphold the highest level of education to essentially deliver compiling learning results by offering tailored services through outstanding teaching experts. Dedicated teachers have always been our core competitive advantage. Internally, we are actively cultivating more excellent instructors and tutors. Externally, we have also established long-term partnerships with top universities and colleges to continuously channel teaching professionals passionate about education to Gaotu. During this quarter, we successfully hosted 2023 Gaotu Beidou Management Trainee Recruitment Events at Tsinghua and Beida University to engage more aspiring young talents. Moving forward, we will continue to invest additional efforts into recruiting top-notch talent who meet our strict hiring standards across various fields to build the long value chain of education and reinforce our deep-rooted competitiveness. Third, we continued to improve our operational efficiency. On the services front, gross profit margin during the quarter registered both year-over-year and quarter-over-quarter increase due to higher course delivery efficiency. Regarding customer acquisition, we reduced our sales and marketing expenses margin by 9.5 percentage points as compared to last quarter to 46%. At the same time, the selling expenses ROI saw sequential improvement, representing greater marketing efficiency. Meanwhile, to develop preparatory channels with higher conversion rates, we are actively implementing private traffic acquisition through shop radio platforms, offline channels, and others to further enhance customer acquisition efficiency. As for headquarter expenses, compared with the prior quarter, they remained largely flat with moderate declines after adjusting for the exchange loss and the negative impact of some one-off expenses of the quarter. Going forward, we expect our headquarter expenses to remain stable as our revenues expand, and our operating leverage should lead to accelerated profitability improvements. Last but not least, we continue to explore and experiment with new business initiatives to expand the range of our offerings. In the fourth quarter, we officially started our live streaming e-commerce journey on Douyin, the Chinese version of TikTok. Our live streaming brand, Gaotu Jiaping, debuted on the evening of December 24th last year. And I also launched my personal account on Douyin to share my experience on Korea and personal development and offer some life license. As we continue to undergo transformation, I would like to personally explore the boundless possibilities of this platform through multifaceted learning and repeated upgrades. Since we started out as a live online large-class tutoring services provider, we have a rich talent reserve whose capabilities resemble that of an ideal live stream host. By leveraging the superior presentation skills and vast knowledge base accrued through years of live teaching, our livestream hosts have a natural advantage in providing high quality and appealing content, enabling them to seamlessly pivot from imparting knowledge to students, to sharing wholesome food and a quality lifestyle with consumers. With the mission of making life better, Gautam Jatim is committed to serving as a bridge between producers and consumers, introducing customers to reputable products with proven excellent quality and high repurchase rates. We believe our endeavors in the live streaming business will create a huge leverage in terms of brand exposure and brand enhancement. As of now, we are still in the initial stage of this undertaking. and we will continue to accumulate insights and know-how on short radio operations going forward. As I have always said to our teams, the best times are usually the toughest times, and the hardest times often lead to the best moments in our lives. It is because every one of us at Gaochu is unceasingly devoting their best efforts and unyieldingly displaying the same enthusiasm. humility, and entrepreneurship that we started with day one, that we are transforming into a better Gaotu every day. Looking ahead into 2023, guided by our effective growth strategy, we will continue to develop, continue to innovate, and continue to contribute to the development of education in China. Thank you everyone for listening. This concludes Larry's prepared remarks. And now, I will walk you through our detailed financial and operational performance for the first quarter and full fiscal year 2022. Please note that all financial data that I mention later is based on RMB, unless otherwise noted. During the first quarter, our net revenues grew 3.9% quarter-to-quarter to $629.6 million, and our gross billings increased by a considerable 64.3% over the last quarter to approximately $1 billion. The notable rise in gross billings was driven by our enhanced educational product quality, steadily growing user base, and sound business development. As a leading indicator for revenues, Girls Billing's meaningful expansion has boosted our confidence in our Topline Girls prospects for 2023. Moreover, our net income for the quarter was $70.6 million, and non-GAAP net income was $87.4 million, which led to a net income margin of 11.2%. and a net income margin of 13.9%. In addition to attaining profitability, we also generated a successful net operating cash inflow of $476.7 million and recorded a year-over-year increase in cash reserves during the quarter, fostering the long-term development of our company and validating our continuous improvement and efficiency optimization efforts. Turning to our full-year results, net revenues and gross billings for fiscal year 2022 both reached approximately $2.5 billion. Meanwhile, we also achieved profitability on a full-year basis. Our net income for the year was $13.2 million, and our non-GAAP net income was $135.8 million. yielding a net income margin of 0.5% and a non-GAAP net income margin of 5.4%. In addition to earning annual profitability, we also generated a net operating cash inflow of $54.5 million this year. Annual profitable top line growth coupled with positive bottom line and cash inflow, it is clear testament to the resilience innovative ability, and operational efficiency of our organization. The sizable cash inflow of jobs continues growth in our cash reserves. As such, as of December 31, 2022, our cash, cash equivalents, restricted cash, and short-term investments increased by $72.7 million compared to that at the end of 2021. to approximately $3.7 billion, providing solid ground for our continued operations and exploration of new initiatives. We categorized our main businesses into two sectors, learning services and educational content and digitalized learning products. Learning services are comprised of educational services for college students and adults. non-academic tutoring services and other traditional learning services, whereas educational content and digitalized learning products primarily are supportive smart learning tools that serve as supplements to learning services. I will now elaborate on the progress we have made in each of these business lines during the quarter. Learning services accounted for over 90% of net revenues in a quarter. Breaking it down, close to 60% of revenues came from non-academic tutoring courses and other traditional tutoring courses. Our non-academic tutoring services consist of intelligent, creatively presented courses modules that encourage school-age keys, holistic progress by improving students' overall learning capability, nurturing their comprehensive development, sparking their interest and passion, and motivating them to be continuously inquisitive. Paid course enrollments for our non-academic courses in the fourth quarter achieved triple-digit quarter-over-quarter growth. We constantly upgrade and refine the curriculum design of our non-academic children courses with the intention of improving students' integrated development, which led to higher retention rates during the quarter. In December last year, the government has published clear policy guidelines. Going forward, we will constantly improve our retention rates and customer satisfaction by engineering courses' products that exceed the expectations of students and parents, while ensuring compliance. Non-academic tutoring and other traditional courses exhibit excellent seasonality. For online businesses such as ourselves, the second and fourth quarter are normally course retention seasons, during which cross-billings are mostly contributed by existing students renewing their courses, and typically account for a higher percentage of annual gross billings than the first and third quarters. As our businesses continued to gain traction and our retention rates rebounded, gross billings from our non-academic tutoring services increased roughly 90% quarter over quarter, creating a strong foundation for the future revenue growth. Aside from the above mentioned, the other crucial component to learning services is educational services for college students and adults, which nearly doubled in revenue compared to the same period of last year, constituting more than 30% of revenues for the quarter. Our core business focus for this sector includes postgraduate entrance exam prep services, financial certificate prep services, civil services exam prep services, and overseas related services. Among these articles, the postgraduate entrance exam prep business recorded a quarter-over-quarter revenue increase of roughly 23% and celebrated its first profitable quarter. Lastly, the remainder of our less than 10% revenues came from educational content, and digitalized learning products, which mainly include intelligent learning products for students, such as smart textbooks and learning apps. These complementary products are designed as supplements to our course products to fulfill students' various learning needs. Next, I will present our financials in detailed numbers. Our cost of revenues this quarter was $159.3 million. Our gross profit increased 7.5% per quarter to $470.3 million. Gross profit margin was 74.7%, representing a 504 basis point increase year-over-year. and a 255 basis point increase quarter-over-quarter. Non-GAAP gross profit increased 7.9% quarter-over-quarter to $473.9 million, and non-GAAP gross profit margin was 75.3%. The increase in gross profit margin was largely due to higher course delivery efficiency Operating expenses decreased 23.2% year over year and 4.6% quarter over quarter to $483.6 million. Breaking it down, selling expenses decreased 22.3% year over year and 14% quarter over quarter to $289.8 million. accounting for 46% of net revenues, which was 9.5 percentage points lower than in the third quarter. The quarterly quarter decrease in selling expenses can be explained by two factors. First, in terms of customer acquisition, we are constantly seeking out more innovative, cost-effective channels with better conversion rates to precisely target high intent customers with strong willingness to pay. On one hand, we have set up our own metrics accounts on short radio platforms to attract high quality users with premium content creation while continuously performing customer-made activation and retention of private traffic. Some of our courses have achieved breakthroughs on live streaming platforms. For instance, one of our English instructors has ranked among the top five of the Douyin Virtual Life product channel, or 虚拟生活, in terms of GMOA for multi-time. On the other hand, we have been exploring more offline channels, offering more tailored trail courses to better serve students in local regions and cities and targeting prospective students with high granularity. At the same time, after over a year of providing consistently high-standard services and superior quality courses content, we are gradually establishing our brand and reputation among college students and adults. We have significantly reduced selling expenses through greater reliance on word-of-mouth referrals. Looking ahead, we will continue to enhance our conversion rate and improve our selling expenses ROI through focusing on college students as our target customer base to drive sustainable long-term growth. Second, from a seasonality standpoint, The first quarter is now the most efficient season for new student enrollment for non-academic tutoring services and other traditional services. As such, they allocated lower marketing expenses during the quarter considering operational efficiency. Moving on, research and development expenses decreased 10.9% year-over-year to $111.4 million. accounting for 17.7% of net revenues. If we exclude the negative effects of some one-off expenses, R&D expenses remain flat with moderate quarter-over-quarter decline. General and administrative expenses decreased 14.1% year-over-year to 82.4 million. accounting for 13.1% of revenues. The sacrificial slight increase in G&A expenses were the combined effects of unrealized exchange losses due to large unexpected exchange rates fluctuations and some run-off expenses. Loss from operations per quarter was 13.2 million. Non-GAAP income from operations was 3.5 million. Non-GAAP operating margin was 0.6%. For total added income, its sequential increase to a large extent was due to gains from wealth management instruments and value added tax related benefits. Further, due to greater possibilities for future profitability, We also recognized an appropriate amount of income tax benefits resulting from deferred tax assets. During the quarter, net income was $70.6 million. Net gap net income was $87.4 million. Our net operating cash inflow was $476.7 million. Moving on to our full fiscal year results, in 2022. Our loss from operations was $118.1 million. Net gap income from operations was $4.6 million. Net income for the year was $13.2 million. Net gap net income was $135.8 million. Our net operating cash inflow was $54.5 million. Turning to our balance sheet, as of December 31st, 2022, we had $819.9 million in cash, cash equivalents, and restricted cash, and $2.9 billion in short-term investments, totaling approximately 3.7 billion RMB. As of December 31st, 2022, Our default revenue balance was $959.3 million, which primarily consists of tuition received in advance, and a large proportion of which will be recognized as revenues within one to two quarters. Additionally, our founder, chairman, and CEO, Larry Chen, has increased his shareholding by an aggregate of $3.6 million ADS in 2022, highlighting management's firm confidence in the future development of our company. 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 uncertainty, 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 first quarter of 2023 are expected to be between $686 million and $706 million, representing a decrease of 5.3% to 2.6% on a year-over-year basis. This concludes my prepared remarks. Operators are now ready for the QA section. Thank you everyone for listening.

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. To withdraw your question, please press star then 2. Once again, that was star then 1 to ask a question. And at this time, we will pause momentarily to assemble the roster. And our first question will come from Duan Leon of Guatai Securities. Please go ahead.

Okay, thanks. First, congratulations on the stunning financial results on Q4 and the whole fiscal year. Thanks for taking my question. I have two questions for management. The first one is how will the product structure be adjusted in the next fiscal year? And my second question is what are the quarter-on-quarter changes in spring enrollment of each process, and what are the changes compared with the same period on last spring semester? Thanks.

Thanks, Duanlin, for your question. So first, for the product structure or for the revenue structure, we foresee it to maintain sustainable in the first quarter in 2023, which means the learning services will still be the largest revenue contributor. It will contribute over 90% of the revenues, and the remainder of the 10% will be contributed by the digital products. And within the net percent of the learning services revenues, we foresee the learning services from college students and the adult business to contribute around 30% of the total revenues. And the rest will be contributed by our non-academic tutoring services and other traditional learning services. And for your second question, the quarter-over-quarter enrollment in the spring semester. Because our businesses are slightly different between 2023 and 2022, if we can recall that in the first quarter in 2022, we announced a public release that we kind of seized our children's services for the high school section. and like in the first quarter in 2023, some of the traditional learning services will be picked up again. So the enrollments, it's not that comparable between these two quarters, but going forward, we will be providing more specific instructions on the enrollments if the business devise in a more stable stage. Thanks.

Okay, thank you. This concludes our question and answer session. I would like to turn the conference back over to Ms. 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 our Investor Relations Department or our management via email at ai.go2.cn directly. You're welcome to subscribe to our news alert on the company's AI website. You're also cordially invited to join Larry's live streaming session on OEN right now. Thank you very much again for your time. Have a great night.

The conference is now concluded. Thank you for attending today's meeting.