Gaotu Techedu Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Gatu Tech EDU second quarter 2023 earnings conference call. All participants will be in a listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be a question and answer session. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note that today's event is being recorded. I would now like to turn the conference over to your first speaker today, Ms. Catherine Chen, Head of Investor Relations. Please go ahead, Catherine.

Thank you, Operator. Good evening, everyone. Thank you for joining Galtu's second quarter 2023 earnings conference call. My name is Catherine, and I'll help host the earnings call today. GoTo's earnings release for the quarter was distributed earlier and is available on the company's IR website at ir.goto.cn, as well as through PR NewsWare services. Joining the call with me tonight from GoTo's senior management is Mr. Larry Chen, GoTo's founder, chairman, and chief executive officer, and Ms. Shannon Shen, GoTo's chief financial officer. Larry will first provide the business highlights for the quarter, and then afterwards, Shannon will discuss our financial performance in more detail. Following their prepared remarks, we'll open the floor to questions from analysts. Before we begin, I'd like to remind you that this conference call will contain forward-looking statements made under the safe harbor provision of 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 this and other risks is included in the company's public with the U.S. SEC. The company does not undertake any obligations 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 a definition of non-GAAP financial measures and reconciliation of GAAP to non-GAAP financial results, please refer to our seven-quarter 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 our founder, Larry. Larry, please.

Thank you, Catherine. Good evening and good morning, everyone. Thank you for joining us on GAL2's second quarter to the Summit 23 Earnings Conference Call. I would like to take this opportunity to express my gratitude to all of you for your interest in and support for GoTo and the education industry. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB, unless stated otherwise. During the second quarter of 2023, we continued to execute our effective growth strategy. We grew gross billions substantially on both an annual and sequential basis while also recording our third consecutive quarter of profitability and generating a sizable positive net of reaching cash flow. Our net revenues grew 30.7% year-over-year to $703.1 million. and our gross billions reached $882.3 million, up by 63.7% quarter-over-quarter and 44.2% year-over-year. Thanks to ongoing improvements in our organizational and operational efficiency, we delivered a triple-digit year-over-year increase in both income from operations and net income. Our non-GAAP net income margin for the quarter reached 9%, and we generated a positive net operating cash flow of $288.5 million. Backed by ample cash reserves, we've been steadily racking up our investments in talent, continuously refining our executional content services, and persistently improving teaching quality and learning efficiency through artificial intelligence, technological innovation, and organizational upgrades. These efforts have strengthened our competitive edge in terms of content-driven content acquisition and teaching quality, creating a flywheel effect. As the flywheel started to turn, our customer acquisition experienced ongoing improvement in efficiency and operating leverage began to grow, resulting in increasing clarity for our growth trajectory. Our focus remains on two major business lines, learning services and educational content and digitalized learning products. Learning services continues to serve as the core pillar of our business and the predominant revenue contributor. It mainly includes non-academic tutoring services and other traditional learning services, educational services for college students and adults, and overseas study related services. I will now discuss business highlights of the quarter from three aspects. First, Propelled by the dual engines of the product, process, and organizational capability, we remained laser-focused on enhancing our products and services. While all of our core business segments continued a healthy development trajectory, our cost, delivery, quality, and operational efficiency also improved during the quarter. With a strong focus on building organizational capacity, we not only cultivated a large pool of highly talented instructors and tutors internally, but also forged a long-term partnership with prominent universities to continuously source passionate teaching professionals. By fostering an innovative and cohesive workforce, we aim to internally drive business breakthroughs. Meanwhile, Our relentless pursuit of excellence in educational products, teaching quality, and learning services is best represented by the compelling results our students are able to achieve. I will now share some of the progress and accomplishments we have achieved in this aspect during the second quarter. To start, our non-academic tutoring services book roughly 75% year-over-year increase in revenue and generated a positive net of reaching cash flow during the quarter. We continuously optimize the product value and service quality and diversify the delivery format to cater to customer needs. As a result, the business delivered a double-digit increase in gross billions on both annual and sequential basis in the second quarter, operationally, we are glad to see increased user satisfaction as well. In particular, in non-academic tutoring services, core offerings, our retention rate improved remarkably compared to the same period of last year. Educational services for college students and adults, another key component of our learning services, also deliver the solid performance Within the segment, the postgraduate entrance exam prep business saw a nearly 40% year-over-year increase in net revenues. According to our survey results, the success rate was more than twice that of the national average for the national graduated school entrance exam class of 2023. In addition, some of our overseas test prep and overseas study consulting business, such as the IELTS prep, business achieved nearly triple-digit revenue growth quarter-over-quarter. Finally, our well-established traditional learning services business also delivered robust performance. According to our preliminary data, more than 210 GoTo students were admitted to the top two universities in 2023. Going forward, we expect all of our main business lines to sustain healthy growth momentum while maintaining a high standard of instruction and delivering improved learning outcomes. Second, we're constantly pushing the boundaries through business innovation, expanding into a diverse range of new channels to acquire customers and improve conversion efficiency. Since the beginning of this year, we have been actively exploring innovative customer acquisition channels, including short-form videos and live streaming platforms, aiming to reinforce our competitive advantage in channels by delivering premium content, boosting user engagement, and reducing acquisition costs. We are happy to share with you that the contribution ratio from our self-operated traffic channels increased significantly within certain business segments this quarter. Meanwhile, certain key business lines also achieved breakthroughs in scaling customer acquisition through short video and live streaming. In June, the number of monthly transactional users of the IELTS business acquired through a live streaming platform surged by more than 300% compared to six months prior. The improved efficiency of customer acquisition further contributed to our overseas past prior fitness positive monthly net operating cash flow and operating profit. Furthermore, there has been a significant surge in domestic demand for studying abroad as the pandemic's impact gradually recedes and countries around the world ease entry restrictions. It's worth mentioning that in terms of the specific efficiency indicators. Our selling expenses RI for this quarter saw a nearly 20% improvement compared to the same period last year. Looking ahead, we will continue to build upon our experience and know-how to further optimize our diverse China layout. Moreover, we will continue to leverage our lean operations management model to elevate overall operational efficiency. Third, by cultivating talents and investing in emerging technologies, we are able to amplify the impact and value our exceptional instructors and tutors have. This, in turn, unlocks greater front-end productivity and strengthens our organizational capabilities. Recent developments in artificial intelligence and reliably present significant opportunities and raise expectations for the education industry. We have applied artificial intelligence technologies into numerous user case scenarios for our products and services to continuously improve the efficiency of our teams across front-end teaching, back-end research, customer service, and design, ultimately enhancing the overall learning experience for our students. In closing, I would like to emphasize that making learning better will always be God's willing mission, and we are willing to embrace all opportunities and challenges that lie ahead. Our dedication to addressing customer needs prioritizing teaching quality and enhancing learning outcomes will remain unchanged. Our continued investment in technological innovation and organizational capability will remain unchanged. Our commitment to our original aspiration to educate will remain unchanged. Guided by our effective growth strategy, we are confident in our ability to create long-term value for our shareholders, customers, and society at large, while contributing to the educational development of China. Thank you very much. This is the end of my prepared remarks. Now I will pass the call over to our CFO, Shannon, to walk you through our financial and operational details of the 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 of 2023. Please note that all financial figures discussed today are quoted in RMD terms, unless otherwise stated. During the second quarter of 2023, our business continued to grow in a healthy manner, achieving profitability while maintaining robust top line growth momentum. Our net revenues increased by 30.7% year-over-year to more than $703.1 million. Our gross earnings, a leading indicator of net revenues, increased considerably by 44.2% year-over-year and 63.7% quarter-to-quarter to $882.3 million. laying a solid foundation for future revenue growth. Additionally, as net revenues continued to scale, the impact of operating leverage became more evident. During the quarter, operating expenses as percentage of revenues decreased by roughly 14 percentage points year-over-year and 9 percentage points compared to the full-year figure for 2022. Furthermore, Key profit metrics improved significantly compared to the same period last year due to greater operating leverage, together with our ongoing efforts to streamline operations and boost efficiency. Our net income experienced triple-digit year-over-year growth, and net income margin improved by approximately 17 percentage points to 8% on an annual basis. Net gap net income increased to $63.2 million with a net gap net income margin of 9%, marking our third consecutive quarter of positive outcomes. Apart from sustaining profitable growth, it is worth mentioning that during this quarter, we also generated a sizable positive net operating cash flow of $2,288.5 million. Our solid financial performance stands as the ultimate testament to our resilient business model, strong organizational cohesion, and continuous endeavors in customer acquisition and operational efficiency. In terms of gross billing, which is a leading indicator of revenue, we attained a 44.2% year-over-year increase in this measure. To align with the school schedule, We designate the second and the fourth quarters as our main customer retention season, during which growth ratings are no further higher compared to the first and the third quarters. On the operational front, we have firmly adhered to the principle of growth and the efficiency goal in hand. During the quarter, we achieved healthy year-over-year revenue growth while enhancing customer acquisition efficiency. Our selling expenses in quarter increased by only 20.5% compared to the same period last year, but dropped an impressive 44.2% year-over-year increase in gross billing, implying roughly 20% growth in our selling expenses ROI. In particular, our new user acquisition efficiency improved by more than 30% year-over-year, This was mainly attained through our continued effort to explore more innovative channels to target and acquire high-intent students at lower costs with higher returns. Since the first quarter, we have enhanced our autonomy over customer acquisition by exploring proprietary channels. These channels have effectively lowered our customer acquisition costs and enabled us to boost user engagement across our platform through creating premium content. As of the end of the second quarter, some of our key business lines have made promising progress on live streaming and short radio platforms. And we will fully leverage the accumulated insights and know-how in the other business in order to add value to the company as a whole. Take our overseas tax prep as an example. In June, the number of monthly enrollments acquired through live streaming platforms surged by more than 300% compared to six months ago. Additionally, we have already seen the contribution ratio from our self-operated traffic channels surge significantly within certain business segments in the second quarter. Lastly, We also adopted a targeted approach to acquire customers and serve students through localized and personalized operations. Going forward, we will continue to improve customer acquisition efficiency to drive effective growth and create a long-term value for our stakeholders. Now, I will walk you through the process we have made during the quarter. Learning services contributed over 95% of net revenues. Rating it down, more than 70% of total revenues came from non-academic tutoring services and other traditional learning services, making it a key contributor to our business. For the education industry, non-academic tutoring services represent an emerging vertical with booming market demand and high growth potential, and we expect this segment to be one of our core growth drivers. During the quarter, in addition to turning a profit, this segment achieved a roughly 75% year-over-year growth in net revenue. Our near-term focus for this business line will still be enhanced and upgrade our curriculum design and product development to deliver offerings that exceed customer expectations and to explore sound customer acquisition channels that drive continuous growth. Leading on our competitive strengths in traditional learning services, we will further refine our products and services and diversify our delivery formats to cater to customer needs, through which we aim to improve enrollment and retention to promote the sustainable growth of our non-academic tutoring business. The other crucial component of our learning services is educational services for college students and adults, which accounted for more than 20% of the quarter's total revenue. We optimized our product categories and overall metrics to better align with market demand and improved customer acquisition efficiency and profitability by prioritizing acquisition efforts through content-driven proprietary channels. It's worth mentioning that in the second quarter, our overseas tax-private business achieved positive monthly net operating cash flow and operating profit as a result of improved customer acquisition efficiency. Now, I will present our financials in detailed numbers. Our cost of revenues this quarter was $184.4 million. Gross profit increased 37.3 percent year-over-year to $518.7 million, and gross profit margin was 73.8 percent. Total operating expenses during the quarter increased 8.5 percent year-over-year and 5.1 percent quarter-over-quarter to $475.4 million. Operating expenses as percentage of revenues increased roughly 14 percentage points year-over-year, falling from 81.5% in the same period of last year to 67.6%. This was approximately 9 percentage points lower than in the full year 2022, signaling operating leverage that resulted in an increase in operating profit margins. Breaking it down, selling expenses increased 20.5% year-over-year and 17% total quarter to $324.1 million. Selling expenses margin increased roughly seven percentage points to 46.1% total quarter, reflecting our increased marketing investments to address the robot demand during the summer season. Moving on, research and development expenses decreased 5.3% year-over-year. and increased 1.4 percent quarter-to-quarter to $98.4 million, accounting for 14 percent of net revenues, which was 0.3 percentage points higher than that of last quarter. General and administrative expenses increased 19.1 percent year-over-year and 32.4 percent quarter-to-quarter to $52.9 million, accounting for 7.5% of net revenues, which was 3.5 percentage points lower than that of last quarter. This was primarily attributable to a substantial sequential reduction in share-based compensation expenses. Income from operations increased 171.6% year-over-year to $43.3 million, and operating margin was 6.2%. Net gap income from operations was $50.3 million, and net gap operating margin was 7.2%. Net income increased 212.8% year-over-year to $56.2 million, and net income margin was 8%. Net gap net income was $63.2 million, and net income margin was 9%. Our net operating cash inflow increased 207.6% year-over-year to $288.5 million. Turning to our balance sheet, as of June 30, 2023, we held $768.2 million in cash, cash equivalents, and restricted cash. along with $2.9 billion in short-term investments and $114.5 million in long-term investments. This total reached approximately $3.7 billion, marking $388.9 million higher than the same period of last year, ensuring ample cash resources for continued business development. As of June 30th, Our deferred revenue balance was $922.6 million, which primarily consists of tuition received in advance. Based on our current estimate, total net revenues for the third quarter of 2023 are expected to be between $728 million and $748 million. representing an increase of 20.1% to 23.4% on a year-over-year basis. This concludes my prepared remarks. Operator, we are now ready for the Q&A section. Thank you for everyone. Thank you everyone for listening. Thanks.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then two. The first question today comes from Yuen Zhang with China Renaissance. Please go ahead.

Hey, good evening, management. Thanks for taking my question. So my question is actually on our Q3 revenue guidance. If we look on a concrete basis, it's roughly, you know, grew by a single digit. Such growth rate, you know, if compared with normal seasonality, seems a bit softer. So it would be great if you can work out through more details what is driving that. Thank you.

Yeah, thanks, Yvonne, for joining us. And I do believe this question is fairly representative. We have provided revenue guidance for the upcoming third quarter, ranging between $700,000 28 to 700 million RMB in terms, indicating a year-over-year growth of 20.1% and 23.4%. The guidance we provided has factored in two reasons. Firstly, there is a strategic shift in focus within the learning services for college students and adults. The strategy has involved from scale expansion to a sequential emphasis on profitability. Under this strategic direction, we have gradually adjusted and phased out some unprofitable operation units in this segment. It is anticipated that the revenue from this segment will remain relatively flat in Q3 as compared to the same period of last year. And in last year, in Q3, learning services for college students and adults actually contributed to over 30% of our overall revenue, which has somewhat influenced our revenue growth rate for the third quarter of 2023. However, if we exclusively examine the income growth of the K-12 related business for the next coming quarter, it is feasible to achieve a fairly reasonable middle double-digit year-over-year growth. And secondly, during the summer, we introduced some lower-priced courses to boost enrollment, especially in some entrance level of K-12 students, which has also moderately influenced the revenue during the quarter. But this enrollment will contribute more revenue in the fourth quarter this year. So, and as for the whole year, yeah, I think, I hope this addresses your questions even.

Yeah, yeah, sure. That's very clear. Thank you.

Thanks. The next question comes from Crystal Lee with CMS. Please go ahead.

Thanks, Benjamin, and congratulations on the strong results. Could you give us some color on your enrollment growth during the summer season, and what's your marketing strategy going forward? Thank you.

Thanks, Crystal, for your question. So for the enrollment growth, based on the situation during the summer vacation, we have indeed observed some different patterns compared to prior years. So on one hand, there has been a concentrated surge in students' learning needs, and the overall timing in this summer has leaned towards consistency, resulting in a tighter operational schedule, which is quite different from the vacations influenced by COVID. And on the other hand, this summer, parents have allocated a substantial amount of time for the children to travel and to go out. This factor also led to a more concentrated study period. Based on these factors, we will be able to manage our organization to fit the parents' demand and the students' time schedule and be able to provide enough capacity to provide the learning services they need. If we look at the summer vacation operations as a management team, we could always have done better. And this year, when we do some reflections, we always feel like there are a few aspects that we can improve in the future. For instance, we were a bit conservative in the early stage of the teacher recruitment. Facing the boosting demand in summer, early recruitment can reserve sufficient time for teachers to train up and therefore guarantee the service capacity and quality. So maybe in the future we intend to take a more proactive approach to the scalable recruitment and the training of our teachers. But if we look in the bright side, we still see there is a huge potential in the education space and for us to grow. In summary, the performance during the summer vacation is basically aligned with our expectations, and we will be able to see the enrollment starting to grow in a more saleable rate. And the performance is basically within our expectation. But going forward, we will refine our operations and achieve a better operating income. And in terms of the marketing strategy, as we mentioned in our prepared remarks, we will be able to explore in some more innovative channels like live streaming channels and short video platforms and also channels with more preparatory content and more like on the ground side that we can host some events back in the school and to talk to the students in a more face-to-face basis. And this way we can have a more clear picture of our students and customers and therefore we'll be able to acquire new leads and students in a lower cost. So that's why we can recognize that in this quarter and compared to the same period of last year, we can see our sales marketing ROI has improved almost 20%. And we will keep exploring channels like this and keep to lower the customer acquisition cost and to build up the competitive advantage in all the channels we build up. and hope that address your questions, Crystal.

Thank you. That's very helpful.

Thanks.

This concludes our question and answer session. I would like to turn the conference back over to Katherine Chen 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 ir.go2.cn directly. You are also welcome to subscribe to our news alert on the company's IR website. Thank you very much again for your time. Have a great night. Thank you.

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