Gaotu Techedu Inc.

Ladies and gentlemen, thank you for standing by and welcome to the GATU TechEDU fourth quarter and fiscal year 2023 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 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this 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 GAL2's first quarter 2024 earnings conference call. My name is Catherine, and I'll help host the earnings call today. GAL2's earnings release for the quarter was distributed earlier and is available on the company's IR website at ir.gal2.cn, as well as through PR newsletter services. Joining the call with me tonight from GAL2's senior management is Mr. Larry Chen, Souto's founder, chairman, and chief executive officer, and Ms. Shannon Shen, Souto'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 will 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 provisions 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 USSEC. 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 a definition of non-GAAP financial measures and recommendations of GAAP to non-GAAP financial results, please refer to our first 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 Galtis' IR website. It is now my pleasure to introduce our founder, chairman, and chief executive officer, Larry. Larry, please.

Good evening and good morning, everyone. Thank you for joining us on GoTo, the first quarter of fiscal year 2024 earnings conference call. I would like to take this opportunity to express my gratitude to all of you for your interest in and support of GoTo. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB and as stated otherwise. I'm pleased to report our financial and operational results for the opening quarter of the year. During the first quarter, we remained laser-focused on refining our educational products and expanding our customer acquisition channels. On the product front, we worked diligently to align our offerings more closely with user needs. While enhancing the educational prowess of our established products, we also made significant progress in diversifying our portfolio to better address user needs and improve learning efficiency. On the customer acquisition front, We expanded customer outreach by tapping into diverse channels and boost acquisition efficiency by streamlining and optimizing the teaching processes tailored to our product and content characteristics. This combination of high caliber educational offerings and robust customer acquisition channels have laid a solid foundation for the sustainable and rapid growth of our business. In the first quarter, our net revenues increased 33.9% year-over-year to $946.9 million, while our gross billions grew 35.3% year-over-year to $729.4 million. Excluding the one-off impact such as different class retention schedules, our comparable gross billions saw an annual increase of more than 70%. Non-GAAP net income reached $3.0 million, and non-GAAP net income margin was 0.3%. Our cash position remains strong with a total of $3.8 billion in cash, cash equivalents, restricted cash, and short- and long-term investments, $374.6 million higher than the same time point last year. Our strong performance in the first quarter has strengthened our confidence in continuing strategic investments in educational products and learning services. talent development, and organizational enhancement and expansion to diverse customer acquisition channels. High-quality educational products, teaching excellence, and premium learning services are the cornerstones of the education business. At GoTo, we deployed diverse incentive mechanisms, including regular mock classes, teaching competitions, and performance evaluations to ensure rigorous quality control of our learning services, improve the quality of teaching and the service capabilities of our teachers, and providing targeted support to enhance their professional growth with respect to product design We enriched our offerings by introducing localized online content and personalized solutions dedicated to different learning needs and ensure optimal learning outcomes. Our internal data revealed that the success rate of our class of 2024 on the National Graduate School Entrance Exam with more than twice the national average. Alongside the fostering the long-term competitive strength of our established business, we are also pushing forward with new initiatives. Within our learning services for college students and adults, we have established online boot camps to help users achieve their academic goals within a shorter timeframe. We have also launched offline all-round education services to better cultivate students' holistic development and improve their overall well-being. As our business has experienced rapid growth, we have been increasingly ramping up our investment in course content development. Specifically, the number of our full-time course content development professionals increased by roughly 50% year-over-year in the first quarter. As our business continues to expand, we are taking proactive steps to engage with regulatory bodies at various levels, seeking guidance on industry policies and compliance, and entering our educational products and services based on related guidelines. Exceptional talent is one of the most critical strategic assets in the education industry. At GoTo, we are committed to investing in and strengthening our ability to recruit, cultivate, and retain outstanding individuals to advance our strategic goals and drive rapid business growth. Time-based recruitment is one of our most important hiring channels. By collaborating with top 10 universities nationwide, we are able to proactively engage with and secure promising candidates, ensuring a steady expansion of our talent pool. As of the first quarter, we have entered into a strategic partnership with thousands of universities. In addition, we have taken several initiatives to support our teams in improving their professional expertise. These include refining our talent development and retention mechanisms, strengthening our organizational culture and cohesion, and offering various themed courses and internal experience sharing opportunities. We have improved our organizational vitality by implementing a fast track promotion mechanism for exceptional team members. Investing in the development of diverse customer acquisition channels and the competitive content while ensuring operational efficiency is critical to our company's long-term success. So far, we have expanded into a diverse range of new acquisition channels, including live streaming, short-form videos, book sales, and offline presence. By consistently offering high-quality content, we have built up our competitive edge in these channels, amplified user engagement, and reduced acquisition costs. Along with ensuring operational efficiency, we are also actively exploring new avenues to acquire customer traffic and maintain our competitive edge. This year, we will boost our regional brand recognition and market penetration by ramping up investment in offline channels with initiatives like establishing offline learning centers for college students. GALT is about to mark its 10th anniversary since founding. Throughout this decade-long journey, we have stayed true to our educational aspirations and actively embraced our social responsibilities by collaborating with philanthropic organizations to promote rural development and advance educational equity. We have full confidence in our ability to provide lasting value for our users, shareholders, and society at large as we continue to contribute to and spread ahead the sustainable development of China's education industry. 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 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 first quarter of fiscal year, 2024. We commenced 2024 with a notable surge in growth momentum in the first quarter, Backed by ample cash reserves, they remained committed to enhancing the expansion of our core business. This was achieved by strengthening our portfolio and organizational capabilities, thereby reinforcing our leading position in brand recognition and competitive advantages. In parallel, we actively explored and cultivated product optimization and channel innovation fortifying our core competitive modes and create lasting value for our shareholders. Our growth feelings demonstrated robust growth. On a comparable basis, growth feelings surged by more than 70% year-over-year to 700 and 29.4 million. We anticipate maintaining this growth trajectory throughout the remainder of the year. which will gradually translate into accelerated revenue growth. In the first quarter of the year, our net revenues increased by 33.9% year-over-year to $946.9 million. The business model for online education exhibits certain statistical and seasonal patterns. The second quarter is typically the peak demand season. necessitating proactive investments in marketing expenses and teaching resources reserves to capitalize on the enrollment window. This strategy ensures the maximization of operational efficiency and economics of scale. Historically, this entails certain upfront market expenditure in marketing costs, with revenue realization gradually materializing in the latter half of the year. As student retention increases and concurrent enrollment, product penetration, and brand recognition improve, the manpower costs associated with course and service delivery can be amortized and the economy upscale, progressively unlocking profitability potential. As such, profitability in a single quarter for online education is contingent. on the ratio of the users to existing users. Well, working to ensure healthy unit economics, we recognize the need for a simultaneous escalation in marketing investment going forward. Beginning in the second quarter, we plan to deploy additional tutors and resources and dynamically manage our customer acquisition channels to seize the acquisition window to drive meaningful growth in the student enrollment. 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, more than 75% of total revenues came from non-academic children's services and other traditional learning services, representing an increase of roughly 35% year over year. Our new initiatives are centered on academic tutoring services aimed at eliciting students' innate potential and fostering activities and holistic development through engaging content. During the quarter, this segment generated year-over-year growth of more than triple digits in growth buildings on a comparable basis. Furthermore, It surpassed 20% for the first time as a percentage of total growth feelings. This increasing progress is a testament to our ongoing efforts to improve the teaching standard of our instructors and tutors, coupled with the continuous refinements we have made to our educational offerings. Additionally, we are venturing into offline non-academic all-around education courses including coding and basketball, that align with government and regulatory initiatives to promote diversified education and holistic development for K-9 students. Our traditional learning services continued to generate robust growth momentum. With a diversified portfolio tailored to varied user needs, We expanded user outreach and enhanced the sustainability and scalability of our product pipeline. This will serve as a long-term driver for sustainable growth. During the quarter, this segment recorded high double-digit growth in growth buildings on a comparable basis and a year-over-year revenue increase of more than 35%. The other crucial component of our learning services is educational service for college students and adults, which accounted for around 20% of total revenues during the quarter. Revenue and growth buildings both increased by more than 30% year-over-year. The better-than-expected performance of this segment was primarily attributable to rapid growth in overseas study-related services, driven by our expanded customer acquisition efforts across short-form radio and live streaming platforms. During the quarter, our overseas data-related services saw a year-over-year increase of more than triple digits in revenue and growth buildings. Jointly developed by industry-leading teachers and course content development professionals, our educational offerings harness cutting-edge technologies like artificial intelligence, providing users with a personalized one-stop exam preparation experience, future-tailored content plans, learning paths that are adopted to their pace, and progress evaluation tools. Notably, our postgraduate entrance exam prep services generated positive cash flow for the third consecutive quarter. Well, our zero-service exam prep business achieved profitability for the second consecutive quarter. I will now present our financials in more detail. Our cost of revenues this quarter was $271.4 million. Gross profit increased 23.4% year-over-year to $675.5 million, with a gross profit margin of 71.3%. The year-over-year decrease in gross margin was predominantly a result of changes to our product mix and the more proactive recruitment of teaching staff to meet future demand. Total operating expenses during the quarter increased 66.6% year-over-year to $753.2 million. Breaking it down, selling expenses increased 82.8% year-over-year to $564.2 million. accounting for 53.5% of net revenues. This was partially attributable to the low base effect created during the same period last year. The increase also reflected a rise in marketing expenses in response to heightened market demand over the winter season. We track and monitor sales and marketing efficiency on a weekly basis. and drive scalable growth within such boundaries to enhance brand awareness, provided that our unit economics meet specific profitable criteria. Based on the performance in the first quarter, our long-term investment in diversified channels and the meticulous refinement of our expert teaching quality have yielded satisfactory. Our return on investment metrics remain high efficiency, promoting us to appropriately increase our investment in sales expenses, thereby laying a solid foundation for long-term growth. Moving on, research and development expenses increased 56.3% year-over-year to $151.6 million, accounting for 16.0% of net revenues. General and administrative expenses increased 21.7% year-over-year to $95.2 million, accounting for 10.1% of net revenues. Loss from operations was $77.7 million, and operating margin was negative 8.2%. Non-GAAP loss from operations was $62.4 million, and net gap operating margin was negative 6.6%. Net loss was $12.3 million, and net income margin was negative 1.3%. Net gap net income was $3.0 million, and net gap net income margin was 0.3%. Our net operating cash outflow was $197.4 million. Turning to our balance sheet, As of March of the 31st, 2024, we held $1.2 billion in cash, cash equivalents and restricted cash, $1.6 billion in short-term investments, $974.1 million in long-term investments. This comes to a total $3.8 billion, approximately $374.6 million higher than that at the same time a point last year. As of March 31, 2024, our default revenue balance was $1.0 billion, which primarily consists of tuition received in advance. As of March 31, 2024, we have repurchased an aggregate of approximately 4.9 million ADS on the open market for approximately $12.4 million U.S. dollars. We will continue to execute stock buybacks in accordance with the guidance of the Board of Directors and create a long-term value for our shareholders. Furthermore, Larry has reinforced his confidence in the company and a very commitment to the original aspiration to education by personally purchasing an additional $0.51 million ADS in 2024. Before I provided our business outlook for the next quarter, please allow me to remind everyone that this contains forward-looking statements, which include risks and uncertainties that are beyond our control and could cause the actual results to differ materially from our predictions. Based on our current estimates, total net revenues for the second quarter of 2024 are expected to be between $908 million and 928 million, representing an increase of 29.1% to 32.0% on a year-over-year basis. This concludes my prepared remarks. Operator, we are now ready for the Q&A 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 touch-tone phone. If you're 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 two. Our first question comes from Alice Kao with Citibank. Please go ahead.

Good evening, Benjamin. Thank you for listening to my question. I have a question regarding the 2Q revenue guidance. and impact of the shift in re-enrollment timeline, because we know that the guidance appears relatively conservative. Could you please provide more information on whether it is influenced by the shift in the re-enrollment period? Last year, re-enrollment occurred in March, while this year it took place in April. Could you please break down the situation for us, sharing details on how re-enrollment existing students and enrollment of new students are performing separately. Thank you.

Thanks, Alice. Let's start with the guidance of the second quarter, then we can dive into our expectations for the whole year. So from the revenue perspective, we expected the revenue to be between RMB $908 million and RMB $928 million in the second quarter of 2004. representing an increase of 29% to 32% on a year-over-year basis. So the primary revenue contributor is learning services, within which around 75% of our total revenues came from non-academic tutoring services and our traditional learning services. So we still, in the second quarter, we see strong momentum for this segment, and we foresee this part of revenue to grow significantly near or over 45% on a year-over-year basis in the second quarter. So the segments with growth rates lower than the overall company growth are primarily the impact of the education services we provided for college students and adults. Although the gross billings increase in the past two quarters shows a strong momentum, but it's mainly contributed by college learning services and overseas-related business. According to the class schedule and the seasonality, the revenue usually recognized in the third quarter and even the second half of the year. So therefore, although we saw the strong growth momentum in gross billings, the revenue remains flat in the second quarter, and therefore, it kind of drags down the whole company's revenue growth rate. So in terms of gross billings, we expect it to, I mean, in the second quarter of 2024, we still anticipate it to grow at a high double-digit growth rate in the second quarter on a year-over-year basis. And also, especially for our academic children's services and our traditional learning services, the growth billions collected from new students are expected to grow over triple digits. And this momentum has been continued from last November, and we still see the momentum to continue in the second quarter. So regardless, all the scheduling differences compared with last year, if we see the first half in 2024 as a whole, we still expected the growth buildings to grow at the high end of middle double digit on a year-over-year basis. So because we all know that growth buildings is a leading indicator for the revenue growth, so which basically this can place a solid foundation for the whole year revenue growth. So then if we're looking into the second half, the demand for non-academic tutoring and traditional business is still substantial. With clear compliance and the governance guidance in place, our business growth initiatives with new enrollments and substantial generated incremental revenue through retention and course expansion. So we do have the confidence in our operational capabilities. And the reputation we have established among the students and parents. Therefore, we anticipate that the growth rate for both growth buildings and the revenues to accelerate in the second quarter and especially in the second half of the year. So we should have a higher level of clarity by the time of our next earnings call. But based on our assessment of the current situation, we saw revenue growth rate move towards to the high end of our expectations for the whole year. And in terms of the enrollment changes, because, like, we haven't disclosed details of the enrollment by segment, but because the ASP is state-stable, so actually the increase of the growth feelings shows basically the same pace with the enrollment increase. So let's Let's put all this information together. So although the revenue guidance of the second quarter seems a little bit weak, but if we put emphasizes on the growth feelings we collected during the first quarter last year and the first half of 2024, we still have strong confidence for the whole year's revenue goal. And for specific quarterly growth guidance, we will remotely share updates with you in each of the earnings release. Hope that addresses your questions, Alice.

Thank you.

And the next question comes from Jeffrey Chen with CLSA. Please go ahead.

Hi. Thank you, management, for taking my question. I have a question regarding the OTACs and also GP margins. Can management give us some more color on the GDP margin and the old price ratio in the next quarter and in the rest of this year, 2024? And perhaps if you could, can you get some more color on the profitability in full year 2024? Thank you.

Thank you, Jeffrey, for your question. Let's split the OPEX line by line and start with the change of our GP gross profit margin. So first, for the gross profit margin, we observed around 6% decrease in GP margin on a year-over-year basis. So the year-over-year decrease in gross profit margin was due to a few reasons. The primary reason was the revenue mix change. In terms of revenue contributor, to meet diversified user demand, we have constructed a product mix primarily focused on online large class business, complemented by one-on-one class, smart textbooks, and offline small classes. Among all these business models, online large class boosts the highest GP margin level. As our business expands, The proportion of revenue generated from our one-on-one classes, smart textbooks, and offline classes is gradually increasing, altering the revenue mix and subsequently impacting gross profit margins. Especially, our offline learning center expansion is accelerating, brought us a higher level of cost of good sales, which marks the GP margin lower at this point of time. Secondly, to enhance the comprehensiveness and competitiveness of our curriculum system, we are making efforts to introduce and develop new courses. The associated investment in faculty resources in the early stage will also impact the gross profit margin before they achieve their full capacity. So in the long run, our GP margin will highly depend on the future revenue structures. So that's the reason for the GP margin fluctuation. Then secondly, let's look into the details of our R&D expenses change. So the year-over-year increase in our research and development expenses in this quarter was mainly due to corresponding resources investment in innovative technologies. such as artificial intelligence started in the second half of last year. Education with its vast potential stands as a promising domain for practical implementation. So currently, our application of AI primarily focuses on enhancing internal efficiency other than external tools. This includes areas such as curriculum research, student auto question and answer section and also product research and design customer service call center and overall internal operations. Simultaneously, we are also exploring tool-based products aimed at improving learning efficiency like that they can assist our students to learn at a higher efficient level. Also, to support the development of our offline business, we also started to invest in the research and development of offline operating system. That's basically a new system and different from our online operating system, as well as content development. Our offline business is expanding very fast, so we recruit top-notch content researchers to help us to to make a solid foundation for the content development. But if we make a quarter-over-quarter comparison, the R&D expenses as percentage of revenue actually decreased nearly 2%, which shows the economics of scale and operating leverage. And thirdly, if we dive into the G&A section, So the year-over-year growth in our GNA census was mainly due to the increase in labor costs. So since the beginning of this year, we've brought a reasonable number of general management talents to our academic tutoring services, especially a couple numbers of top-notch offline learning center managers. And we believe that by doing so, Our K-12 related business will achieve rapid growth while also improving operational quality and efficiency because we all know that talent is the most factor to success for our offline business. Last but not the most is our expenses we spend on sales marketing. It's highly relative to our growth feelings increase. As I mentioned in the prepared remarks, if we make an apple-to-apple comparison, actually the gross biddings collected from our newly added students increased over 70% on a year-over-year basis. Well, our sales marketing expenses increased nearly around 58% on a year-over-year basis. So we still see our customer acquisition costs increasing. is within the profitability boundaries and we still see like we have cushion and room there that we saw our investment, our returns over investment on the customer acquisition side still maintains a high efficiency. So that gives you a high level or a color on our OPEX variations there and hope that helps. Thanks Jeffrey.

This concludes our question and answer session. I would like to turn the conference back over to Catherine Chen for any closing remarks.

Thank you, operator, and thank you, everyone, for joining the call today. And if you have any further questions, please don't hesitate to contact our Investor Relations Department or our management team via email at ir.gov2.ca directly. You are also welcome to subscribe to our newsletter on the company's IR website. Thank you very much again for your time. Have a great night.

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