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spk01: Hello, and welcome to the GAL2 Tech EDU 3rd Quarter 2022-2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please send the World 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 touchtone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I would now like to turn the conference over to Catherine Chen, Head of Investor Relations. Please go ahead.
spk03: Thank you, Operator. Good evening, everyone. Thank you for joining GALTO's third 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 newsletter services. Joining the call with me tonight from GoTo's senior management team 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 filing with the USFDC. 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 third 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 GALJU's IR website. It is now my pleasure to introduce our founder, Larry. Larry, please.
spk02: Good evening and good morning, everyone. Thank you for joining us on GoTo's third quarter to Expenditure 23 Early Income Call. I would like to take this opportunity to express my gratitude to all of you for your interest in support of GoTo and the broader education industry. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB unless stated otherwise. Benefiting from the rising needs of students, our business continues to focus on the stages in students' life cycle where their learning capability is at its strongest, and we aim to meet their learning needs and enhance learning efficiency by continuously enriching product offerings and delivery formats. After the first nine months of operation optimization and rapid iteration in 2023, we are currently focusing on defining clear development directions and tracking a well-defined path forward dedicated to building up our core organizational competitiveness and continuously delving into new business initiatives. We will invest in areas that are strategically important for the company's success, continue to refine products and services for non-academic tutoring services, traditional learning services, and educational services for college students and adults, and build a resilient organization and a robust pool of talent. In the third quarter of 2023, our net revenues grew 30.2% year-over-year to $789.4 million, and our gross billions reached $639.3 million, up 5.3% year-over-year. Despite a decline in profits due to seasonality and historical operational constraints in 2022, we remain confident in our growth prospects and profitability in the coming year, driven by our constantly improving tenant pool, clearly defined growth strategies for each segment, and ample cash reserves. In the meantime, we also continued our share repurchase program during the quarter, demonstrating our unwavering confidence in our growth prospects I will now discuss our business highlights from the third quarter across five aspects. First, putting students and the users first so we can continue to invest in our educational products, teaching quality, and learning services. For our non-academic tutoring services and traditional learning services, we further expanded our knowledge graph, optimized our product matrix, and ensured precise alignment between students' needs and the courses we offer. Following our year of continuous refinement, the curriculum and services of our non-academic tutoring services have gained the trust of both our users and the market as a whole. We noticed a significant improvement in indicators that reflects our teaching quality and learning results, such as the retention rate. In terms of traditional learning services, revenue achieved year-over-year growth of over 40% in the third quarter. We broadened our variety of class offerings and teaching products to better address the diverse needs of our existing students, in addition to the dual teacher Online large class, we have introduced new offerings including personalized learning services, which have enhanced the scalability and sustainability of our portfolio as well as met the demands of students at all levels. Second, Anchoring on our effective growth strategy, we further optimized our organizational structure to create a more dynamic enterprise. Since the second quarter, we have strategically scaled back certain business lines within our educational services for college students and adults to focus on areas with high demand and rapid growth. This segment shows the promising signs of a turnaround in the third quarter, trimming its losses by nearly 100% by focusing on high-quality content and word-of-mouth referrals to drive customer acquisitions as well as enhancing our competitive advantage in terms of service quality. intensified our efforts to onboard and cultivate outstanding professional talents to expand the breadth and depth of our talent pool. A cohesive and motivated team is a driving force behind our sustainable growth, building a team of exceptional and skilled employees and accumulating and entering on best practices will enable us to consistently replicate our success and drive further business expansion. Since our business restructuring, we have prioritized the expansion of our talent pool and brought in a number of seasoned industry veterans. Their sophisticated prospectiveness and successful track record have proven highly beneficial to the development of our business. Meanwhile, we initiated a strategic program called Go to Talent Fostering Program for the 2024 recruitment season in collaboration with leading targeted universities. The program allowed us to brief screen top-notch candidates and provide them with the opportunity to gain insight into the industry, so as to deepen mutual understanding and increase talent acquisition efficiency. Fourth, we concentrated on enhancing customer acquisition ROI by diversifying our acquisition channels and fortifying our competitive edge in content-driven strategies. so improving the overall health of our business model. Through a combination of initiatives, including leveraging short-form video, live streaming, and book sales, expanding our offline presence, and engaging in private traffic, we aim to improve our acquisition efficiency. In particular, we have set up multiple offline centers for postgraduate entrance exam preparation business, and overseas study-related services. These centers enable us to acquire customers and deliver services in an online or offline format, which not only improves customer acquisition efficiency and service delivery quality, but also enhances our brand visibility. Lastly, we have strong confidence in our company's future growth and development. as of November 20, 2023. We had repurchased a cumulative total of approximately 4.2 million ADIs, and our share repurchasement plan adopted in November 2022. In addition, our Board of Directors today authorized the up-signing of our existing share repurchase program, pursuant to which we may repurchase up to 80 million U.S. dollars worth of EDS through November 22, 2025. We will continue to promote our long-term repurchase program to enhance our long-term shareholder value. We see tremendous growth potential for GoTo and are confident in our ability to deliver high-quality services and efficient operations through our ongoing efforts to improve customer acquisition efficiency, refine our educational products and services offerings, and fostering rapid growth of our talents and organizations. We believe These initiatives will put GoTo on the fast track to growth. 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 the financial and operational details of the quarter.
spk04: 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 third quarter of 2023. Please note that all financial figures discussed today are quoted in RMB terms unless otherwise stated. The company maintained growth momentum during the third quarter of 2023. Net revenues increased by 30.2% year-over-year to $789.4 million. Wealth growth feelings increased by 5.3% year-over-year to $639.3 million. We maintained a strong cash position, which was $180.6 million higher than that of the same time of last year. This highlights the ample resources we have to continue driving the development of our business. Educational services targeted the group of students from primary to high school demonstrate salient seasonality. And the subquarter coincides with summer vacation, making it the peak season of the year for online customer acquisition. Operations need to be aligned with school schedules to capitalize on a limited window of opportunity for acquiring new customers. Coordinating our efforts also allows us to benefit from economies of scale and maximize operational efficiency and ROI. During the period, we could allocate marketing expenses and tutors in line with market demand. As such, our selling expenses typically peak for the year during the third quarter, notably impacting our overall profitability. To align with school schedules, the second and fourth quarters have been designated as our main customer retention seasons, during which growth feelings are notably higher when compared to the first and the third quarters. Throughout this quarter's summer enrollment period, we observed a robust learning demand from students. This also puts a higher demand on our ability to adapt and find new operations in response. We plan to enhance the effectiveness and efficiency of our marketing efforts in the following three ways. First, in terms of tutor recruitment, we are taking a more proactive approach to acquire campus talents. For the 2024 fall recruitment season, we initiated a strategic program called Goto Talent Fostering Program in collaboration with leading targeted universities and normal universities. As the project deepens, candidates can engage with us and experience our culture from day one, completing the two-way fostering and selection process. It also allows us to fully grasp the recruitment progress and result in a timely and accurate manner in order to align with customer acquisition schedules. Second, on the market front, we will continue to expand our presence across a diverse range of innovative content-driven customer acquisition channels, from short video platforms and live streaming platforms to proprietary channels such as on-campus seminars. At the same time, we aim to improve our ROI by expanding and refining our customer profile, which could help boost our effectiveness at acquiring high-quality leads. Lastly, on the technology field, we will enhance our operational efficiency and elaborate by leveraging advanced AI technologies to empower internal teams across tutoring, research, sales, and customer services. Next, I will walk you through the progress we have made during the quarter. Learning services contributed over 95% of net revenues. Breaking it down, Approximately 70% of total revenues came from non-academic tutoring services and other traditional learning services, representing an increase of over 40% year-over-year and increase in solidifying this segment's role as a key driver of our business. Our non-academic tutoring services help students develop independent thinking and problem-solving skills and spark their passion for learning through engaging content. After nearly two years of refinement and multiple iterations, we have made considerable progress in funding our product offerings and making it more sustainable and scalable. The segment recorded middle double digit growth year over year in the quarter and is expected to achieve high double digit annual growth for the full year. underscoring its position as a key revenue driver. The other crucial component of our learning services is educational services for college students and adults, which accounted for around 25% of total revenues during the quarter. We made strategic adjustments to this business segment by discontinuing certain services and investing in areas with huge market potentials and a rapid growth rate. During the quarter, as we drove organic growth through innovative customer acquisition strategies and word-of-mouth referrals, the remaining services significantly reduced the losses by nearly 100% year-over-year. Within the segment, the postgraduate entrance exam prep business saw a year-over-year increase of more than 25% in both net revenues and gross billings. Some of our overseas test prep and overseas study consulting businesses achieved triple year-over-year growth in both net revenues and growth buildings. I will now present our financial in detail numbers. Our cost of revenues this quarter was $218.1 million. Growth profit increased 30.6% year-over-year to $571.3 million. and gross profit margin was 72.4%. Total operating expenses during the quarter increased 32.3% year-over-year to $670.8 million. Breaking it down, selling expenses increased 29% year-over-year to $434.4 million, accounting for 55% of net revenues. This was primarily attributable to our increased marketing investments to address the robust demand during the summer season. Moving on, research and development expenses increased 22.6% year-over-year to $136 million, accounting for 16.5% of net revenues. This was primarily attributable to increased investment in AI-related fields. General and administrative expenses increased 66.4% year-over-year to $105.8 million, accounting for 13.4% of net revenues. Loss from operations increased 43% year-over-year to $99.5 million. operating margin was negative 12.6%. Net gap loss from operations was 83.6 million, and net gap operating margin was negative 10.6%. Net loss narrowed 6% year over year to 57.7 million, and net income margin was negative 7.3%. Net gap net loss was 41.7 million, and net gap net income margin was negative 5.3%. Our net operating cash outflow was $209.9 million. Turning to our balance sheet, as of September 30, 2023, we held $885.6 million in cash, cash equivalents, and restricted cash, along with $1.6 billion in short-term investments, and $1.1 billion in long-term investments. This comes out to a total of approximately $3.5 billion, $180.6 million higher than the same time of last year. As of September 30, 2023, our deferred revenue balance was $761.3 million, which primarily consists of tuition received in advance. It is worth mentioning that on November 22nd, 2022, our board of directors authorized a share repurchase program of up to $30 million over a 36-month period. As of November 20th, 2023, we have repurchased an aggregated of approximately 4.2 million ADS, for approximately $10.8 million from the open market. Moreover, we are pleased to announce that our board today authorized upsizing of existing share repurchase program to $80 million, which demonstrates our unwavering long-term confidence in our growth prospects. Larry also purchased approximately $0.88 million ADS in 2023 using his personal phone to demonstrate management's unwavering commitment to the original aspiration to education. Going forward, the company will keep to its original goal of addressing user needs and enhancing learning outcomes in order to create sustainable long-term value for its customers and shareholders. 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 first quarter of 2023 are expected to be between $668 million and $688 million. representing an increase of 6.1% to 9.3% on a year-over-year basis. This concludes my prepared remarks. Operators, we are now ready for the Q&A section. Thank you, everyone, for listening.
spk01: Yes, thank you. At this time, we will 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 speakerphone, please pick up your handset before pressing the keys. To answer your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Yiwen Zhang with China Renaissance.
spk00: Hey, management. Thanks for taking my question. So as we know, summer is a good time for student enrollment. So could you discuss more on details of what was our strategy and give us an update on how does our enrollment perform during the summer? Thank you.
spk04: Thanks, Ewan. Thanks for your question. So the financials of Q3 partially reflected the operations during the summer break. In terms of the revenue growth, we have maintained an overall growth rate of over 30%. Our revenues primarily consist of educational services, which is further divided into non-academic children's services and traditional learning services and learning services for college students and adults. So as for the learning services for college students and adults, like I mentioned the last quarter and mentioned in my prepared remarks, there is a strategic shift. The strategy has evolved from scale expansion to a sequential emphasizes on profitability. So under this strategic direction, we have gradually adjusted and filled out some unprofitable operational units. So the revenue from this segment grows lower in Q3 as compared to the same period of last year. And in last year, I mean in the 2022 quarter, learning services for college students and adults actually contributed to over 3% of our total revenue, which has somewhat influenced our revenue growth rate for the third quarter of 2023 and also this is the same dynamic in the fourth quarter of 2023. And that's why we see like our revenue guidance was around or less than 10%. And however, if we exclusively examine the income growth of our K-12 related business, which includes non-academic tutoring services and traditional learning services, it still maintained a over 40% year-over-year increase. We have observed strong demand from customers during the summer break. And the availability of high-qualified service providers, which is capable of delivering high-quality courses, has been limited. As a result, our revenue has maintained a relatively high growth rate in Q3. In the third quarter, our gross billings, however, the growth rate was approximately 5%. The primary drivers were in the K-12 business, and the growth rate lagged behind the revenue growth rate, mainly due to two reasons. Firstly, our traditional business is a major contributor to the gross billing growth. And actually, the new customer acquisition efficiency during the summer break was overall impressive and drove a meaningful year-over-year increase. But there was a significant decrease in the supply of next-grade students compared to last year. Therefore, the scale of growth buildings grew more slowly than the revenue. And secondly, face-to-face strong demand during the summer break. we did not reserve a sufficient supply of tutors, resulting in situations where at some point customer demand could not be fully met, leading to a less level of gross billing collection. So after self-reflecting and to achieve a higher growth rate next summer, I mean in 2024, we have implemented a few measures On one hand, within the boundaries and constraints of policy compliance, we proactively acquired and operated private traffic to attract and engage the students from the middle school, especially for next-grade students, by providing services related to, like, learners planning and psychological consulting and so on. We aim to build up a pool of highly engaged students in the middle school, and we expect the pool in the next spring to reach or even exceed last year's level. And so that can kind of like provide a sufficient student pool for our next summer's girls' building growth. And on the other hand, during this year's fall recruitment process, like I just mentioned and Larry also mentioned, We collaborated with top schools and some normal institutions engaging in earlier, and we do two-way communication with those new graduations next year to improve recruitment efficiency and better meet the demands of tutors' supply for the next summer break. And this actually worked. So as of the current progress in the fourth quarter, the gross variance growth rate of our K-12 business has rebounded to nearly 30% on a year-over-year basis. So that's the details we really want to share for the summer vacation and hope that address your questions even.
spk00: Yeah, that's very clear. Thank you.
spk04: Thanks.
spk01: Thank you. And this concludes the question and answer session. I would like to return the call to Catherine Chen for any closing comments.
spk03: Thank you, Operator. 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.
spk01: Thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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