Gaotu Techedu Inc.

Ladies and gentlemen, thank you for standing by and welcome to the GAL2TechEDU second quarter 2024 earnings conference call. All participants will be in a 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 a touch tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Catherine Chen, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good evening, everyone. Thank you for joining Gallatin's Second Quarter 2024 Earnings Conference Call. My name is Catherine, and I'll help host the earnings call today. GALTO's earnings release for the quarter was distributed earlier and is available on the company's IR website at ir.galto.cn, as well as through PR newsletter services. Joining the call with me tonight from GALTO's senior management is Mr. Larry Chen, GALTO's founder, chairman, and chief executive officer, and Ms. Shannon Shen, GALTO's chief financial officer. Mary 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 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 invoke 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 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 purpose only. For definition of non-GAAP financial measures and reconciliation of GAAP and non-GAAP financial results, please refer to our second 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, chairman, and chief executive officer, Larry. Larry, please.

Good evening and good morning, everyone. Thank you for joining us on GoTo's second 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 unless stated otherwise. We achieved encouraging results in the second quarter with net revenues increasing 43.6% year-over-year to $1.0 billion, reflecting strong accelerating growth momentum. Our growth billions grew by a substantial 87.4% year-over-year to 1.7 billion, which not only exceeded market expectations, but also underscored our growth potential in the education sector. Thanks to our long-term investment in diversified and proprietary channels, we maintain the industry-leading customer acquisition efficiency while serving robust market demand. During the quarter, our net operating cash inflow reached $386.2 million. Our cash reserves remained strong, totaling $4.1 billion in cash, cash equivalents, restricted cash, and short-term and long-term investments which is 361.3 million higher than at the same point in time last year. This ongoing improvement in our operational efficiency is the result of our consistent focus on business health and commitment to our educational aspirations. As of June 30, 2024, Our deferred revenue reached 1.6 billion, representing a 71.5% increase from the same point in time last year, ensuring robust support for our continued growth in the second half of the year. I will now provide an update on the progress we have achieved in the quarter. We've consistently recognized that learning services and the teaching quality form the bedrock of our core competition. Over the past few months, we have significantly enhanced learning experience and outcomes for students through the continuous optimization and refinement of course content alongside the strategic strengthening of our instructors and tutors expertise and qualifications. For instance, Within our educational services for college students, we have increased the proportion of our tutors and content development teams holding master's degree, thereby elevating our overall professional, academic, and teaching quality. In our non-academic tutoring services, we have not only fostered our team by raising the percentage of tutors from top-ranked universities, but also diligently refine the classroom activities and the course design based on student feedback and industry insights. This has boosted greater student engagement, fostering their comprehensive capability in innovation, problem solving, and self-directed learning. To address individualized learning needs, we have introduced innovative teaching models and flexible course structures that have significantly boosted student engagement and satisfaction. This approach has, in turn, contributed to the overall health of our business. During the quarter, we observed a steady increase in retention rates for our traditional learning services with a particularly notable uptake among new enrollments. These efforts have reinforced our competitive edge within the industry and laid a solid foundation for the effective growth of our business. Looking forward, our strategic priorities will remain focused on refining our educational offerings, improving our teaching quality, and optimizing the learning experience. Top-tier talent is the core driving force behind the long-term growth of our company and the education industry at large. At GoTo, we have enhanced the professional expertise and the stability of our leading instructors and tutors by refining our incentive and evaluation frameworks, strengthening our organizational culture, and expanding our training and feedback mechanisms. We have also established a robust recruitment system and made substantial investments in cultivating new teachers. In the first half of 2024, we formed a strategic partnership with over 60 leading universities across China, engaging in collaborative initiatives such as joint programs and on-campus lecture series to support new hires. We have implemented programs like mentor orientation and newcomer camp to facilitate their seamless acclimation to our culture, smooth team integration, and effective transition into teaching roles. These initiatives equip them with the skills and knowledge needed to succeed in their role. Moreover, we are actively onboarding seasoned industry professionals with extensive industry experience and management capabilities. Their proven methodologies and strategic insights are infusing our rapidly expanding business with invaluable expertise and comprehensive perspective. Going forward, we remain dedicated to cultivating our talent pool to ensure a solid foundation for sustained and effective growth. While rapidly expanding our business, we have maintained an unwavering focus on operational efficiency in terms of customer acquisition. We have proactively increased investment in talent and resources, developed a diverse range of acquisition channels, with a particular focus on building proprietary channels and private traffic poles. This strategy not only established positive market position for us, but also effectively mitigated risks by fostering closer cross-team collaboration and streamlining operations. We have consistently maintained the user conversion rates at a high level. Looking ahead as our enrollment grew and the brand recognition expands, we will continue to leverage the power of positive word of mouth to further to strengthen our brand and drive effective business growth. June the 16th marked the 10th anniversary of Goal 2's founding. Over the past decade, we have stayed true to our educational aspirations of striving for excellence by harnessing the power of artificial intelligence. We are advancing our mission to make learning better and working diligently pursuing our operational goal of fostering student growth through exceptional teachers and realizing meaningful social value. In response to China's evolving demands for talent cultivation, we co-hosted the second top-notch innovative talent collaborative cultivating academic forum in collaboration with esteemed official organizations, including the Chinese Society of Educational Development Strategy, This initiative underscores our dedication to advancing the framework and practices essential for nurturing innovative talent in the education sector. According to our internal data, the number of GoTo students admitted to the top two Chinese universities in 2024 has seen a further increase from last year, a strong testament to our excellence in cultivating outstanding innovative talent. Our success is fundamentally rooted in the trust and support of our shareholders. We remain steadfastly committed to enhancing shareholder value. As of August 26, 2024, the company had repurchased drawn the 7.9 million EDS in aggregate for a total of approximately 27 million US dollars under the existing share repurchase program. Moving forward, we remain committed to prioritizing customer needs and creating lasting value for our shareholders. 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.

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 fiscal year 2024. We kicked off the year with robust growth and successfully carried this momentum into the second quarter, further scaling our operations while delivering results that exceeded our expectations in both revenues and growth feelings. Specifically, net revenues grew 43.6% year-over-year to $1.0 billion, outpacing the growth rate we set in the first quarter by approximately 10 percentage points. Gross billings for the first half of the year increased 67.7% to $2.4 billion, laying a solid foundation for further revenue growth in the second half of the year. These results reflect our ongoing efforts to boost operational efficiency, address market demand, and enhance teaching quality. Moving forward, We will maintain our focus on co-education business, expand our product offerings, attract top talents, and refine operations to capitalize on market opportunities and drive long-term sustainable growth. Before diving into the results this quarter, I would like to first address the seasonality and the vitality inherent in our online education business. To effectively manage the summer surge in demand, we strategically planned and allocated resources ahead of time, particularly for teacher recruitment, team training, and customer acquisition channels. Since there is typical three to six months lag between these investments and revenue recognition, we recommend using the ratio of gross billings to market expenditure as a key metric to more accurately get customer acquisition efficiency for our online business. During the quarter, we dynamically adjusted our investments in marketing activities and customer acquisition channels, which led to better than expected growth feelings while ensuring acquisition efficiency, thereby successfully delivering on our goal of effective growth. Additionally, since our fiscal quarter do not fully align with the school calendar. The extensive investments made during the summer would spend substantially both in the second and the third fiscal quarters, impacting our near-term operating profit. We are confident that our strategic investments in summer will drive meaningful growth in student enrollment, further solidify our market position, and boost brand recognition. Next, I will walk you through the progress we've 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 tutoring services and other traditional learning services. representing an increase of nearly 55% year-over-year. Our new initiatives centered around non-academic tutoring services experienced remarkable growth in this quarter. Net revenues and growth feelings both surged by more than triple digits year-over-year. Notably, growth feelings from new student enrollments soared by more than 200% compared to the same period last year. These results speak volumes about the strong market recognition our educational products and learning services have received. For the first time, this segment contributed more than 20% of total revenues, making it one of our key revenue drivers. This success is the result of our keen insights into market trends and deep understanding of user needs, which have enabled us to continually optimize curriculum and learning services, making them more engaging and interactive while better integrating the underlying transferable knowledge and skills. Additionally, the average number of enrolled courses per student also improved on a year-over-year basis, further demonstrating the effectiveness of our courses and services in addressing drivers' user needs. Our educational learning services maintained a healthy growth trajectory. During the quarter, this segment saw a high double-digit year-over-year increase in growth. Refined learning services significantly boosted student retention, especially for new enrollments. Moreover, The notable enrollment in our overall student structure and a more diverse student base further bolstered the health of this segment. The other crucial component of our learning services is educational services for college students and adults. During the quarter, this segment contributed just under 20% of total revenues, growing roughly 10% year over year. To better address the diverse learning needs of users from various backgrounds. We have rebranded our postgraduate entrance exam prep services into educational services for college students and expanded our offerings to include services such as CT4 and CT6, examination prep and career consulting. Additionally, we have partnered with prestigious price to provide high quality educational content and resources to college students, servicing their need for academic support, career planning, and quality job opportunities. During the quarter, gross earnings from our educational services for college students increased by high double digits year over year, while revenues from our overseas study-related services rose by high double digits. I will now present our financials in more detail. Our cost of revenue this quarter was $313.4 million. Gross profit increased 34.3% year-over-year to $696.4 million with a gross margin of 69.0%. The year-over-year decrease in gross margin was predominantly a result of change to our product mix. Total operating expenses during the quarter increased 144.2% year-over-year to about $1.2 billion. Breaking it down, selling expenses increased 137.8% year-over-year to $835.4 million, accounting for 82.7% of net revenues. This was partially attributable to our proactive recruitment of short-term tutors at the beginning of the quarter to ensure operational efficiency during the peak summer season. The increase also reflected a rise in our marketing expenses in response to heightened market demand over the period, while maintaining solid unit economics. Research and development expenses increased 64.7% year-over-year to 162.1 million, accounting for 16.1% of net revenues. General and administrative expenses increased 209.3% year-over-year to 169.6 million, accounting for 16.2% of net revenues. The increase was largely driven by the recruitment of seasoned management professionals and operational staff to support and scale growth of our online business, and the expansion of our offline operations, ensuring the smooth development of our business. Loss from operations was 464.8 million, and operating margin was negative 46.0%. Net gap loss from operations was 453.2 million. And net gap operating margin was negative 44.9%. Net loss was 429.6 million. And net income margin was negative 42.5%. Net gap net loss was 418.0 million. and net income margin was negative 41.4%. Our net operating cash inflow was $386.2 million. Now, turning to our balance sheet, as of June 30, 2024, we held $1.4 billion in cash, cash equivalents, and restricted cash, along with $1.8 billion in short-term investments and $905.8 million in long-term investments. This comes to a total of over $4.1 billion, approximately $301 million higher than at the same point in time last year. As of June 30, 2024, our deferred revenue balance was $1.6 billion, which primarily consists of tuition received in advance. As of August 26, 2024, we have repurchased an aggregate of around 7.9 million ADS on the open market for approximately 27 million US dollars under the existing share repurchase program. 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. Before I provide 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 third quarter of 2024 are expected to be between 1,188 million and 1,208 million, representing an increase of 50.5% to 53.0% on a year-over-year basis. This concludes my prepared remarks. Operator, we 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 touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Alice Cai with Citibank. Please go ahead.

Good evening, Larry and Shannon. I have a question about the offline expansion because we've noticed the interest of losses related to offline expansion, I guess. Could you please share some insights on the progress of offline extension? For instance, how many cities have you entered? How many learning centers have you opened so far? And how is the student enrollment in these cities? Any kind would be appreciated. Thank you.

Thanks, Alice. You were asking about our offline business expansion progress and the numbers of learning centers, right? And we are very glad to share the progress we have made on our offline business. Relying on the brand recognition and the industry influence of our founder, Larry, a highly efficient and professional team was rapidly assembled in the first half in 2024, providing a strong foundation for our offline operations. And therefore, the expansion of learning centers, both in terms of city coverage and the number of learning centers, has significantly exceeded our expectations at the beginning of the year. At the same time, the business is progressing steadily and rapidly with notable achievements across a lot of tasks. And on the journey of exploring our offline business, we found several key parts where offline and online business can work synergistically. Firstly, in teacher recruitment, we have a strong capability in recruiting top-tier talent from prestigious domestic universities like Beijing, Fujiao, and also other top-notch universities. And our headquarters recruitment team has been able to, across these institutions, combined with the ability to share excellent teaching resources to our offline operations, provides critical faculty support for our offline operations in their early stage, which is very important for an offline learning center. This will greatly enhance the quality of our offline education, offering students superior educational resources because we all know that teacher is the most successful factors of offline learning centers. And secondly, in terms of educational products and content, the meticulously refined online teacher materials, particularly those overlapping with offline education, such as COSWARE, can be shared. This could significantly increase the efficiency of our offline education product process. This is only conservative resources, but also ensure that offline teaching is supported by high quality content. And also, and most importantly, is our brand awareness. Compared to other brand new offline education brands, our brand holds significant value in the minds of parents and students, providing a strong boost to our offline business. There are notable differences between offline and online operations that have been identified in the past half of the year. Offline education products place a greater emphasis on localization and personalization. Given our simultaneous expansion into multiple cities and multiple learning centers, current education research efforts are paid to meet the specific needs of students in different regions. That means we need to invest in localized content at this stage, and this is partially explained in the increase in our R&D expenses. And also, the operation is quite different as well if we compare the offline business to the offline business. We need to develop an operational support system distinct from our online business, requiring investment in product research and development. system to support set selection and renovation of campus, as well as systems for students to check in and class rescheduling, etc. These significant differences in operation details between online and offline business make a comprehensive operational support system crucial for our multiple locations and multiple campus expansion. Such a system will significantly enhance operational efficiency and ensure that our operation in offline business will be successful. At the same time, we fully recognize that the entry barriers for offline business are very high, and the mold is deep. Building systems for teacher recruitment and training, principal cultivation, educational products, and operational support requires a long, long cycle. And we do not underestimate the challenge of establishing recognition and reputation among students and parents as a new entrant. Now we overlook the time and cost of team integration and development. However, we are deeply committed to our offline business strategy with a high level of patience and determination. The current investment is of great importance for our long-term growth. Finally, when the time is right and when our offline revenue contribution reaches a certain level of significance, we will begin disclosing relevant operation metrics, including the cities we entered and also the numbers of our learning centers. That can help us to gain a more comprehensive understanding of the progress of our offline business in the future. Thanks, Alice.

The next question comes from Timothy Zhao with Goldman Sachs. Please go ahead.

Great. Thank you, Benjamin, for taking my question. I think in your prepared remarks you mentioned about the AI. So my question is regarding the AI empowerment in education. Just wondering what is Benjamin's view and what is your strategy in this field for different benefit segments? and how much potential open efficiency gains do you think AI will bring to your business? Thank you.

Yeah, thanks, Timothy. This is a very good question, and the whole management team paid a lot of attention in the most recent update on the artificial intelligence. So with the rapid development of AI technology and the continuous evolution and development of AI forms, in various industries recently, we have a more profound and clear understanding of the application of artificial intelligence and very personally visited in the United States and personally meet a couple of entrepreneurs in the Silicon Valley to get the most recent knowledge about artificial intelligence. So currently, AI has been widely used in quite a few aspects of our business, And the current applications are mainly focused on internal cost reduction and efficiency improvement. Firstly, in the field of teaching product design and research and development, artificial intelligence can help our designers improve efficiencies very well, like automatic corrections of the student's homework and AI oral language practice that the students can talk to can talk to the app or the programs on their VChat and to do all the daily oral practice. And also the design of more interactive AI teaching products are used to assist all of our tutors and our teachers to provide more personalized learning of our existing students. But currently, a majority of our products were provided to our existing students instead of promoting them to the new students because we want them to be polished and we want to make sure they can create incremental value to our students before we promote them to the market. And secondly, in the link of internet product research and development, AI has significantly improved the efficiency in front-end research and development, including our internal instant message system and also other internal efficiency tools, we all applied AI technology to improve our office efficiency. Finally, like in other operational links, such as constructions of customer service and automatic responses, AI is also playing an important role in reducing cost and improving efficiency in different links. So we believe in the future as the technology develops, artificial intelligence can create huge value to our company. But right now, we want the investment in this field to be more conservative. And right now, we only use it to improve our internal efficiency at this stage. Thanks, Timothy.

Thank you, Shannon.

The next question comes from Summer Chien with CLSA. Please go ahead.

Thank you for taking my question and congratulations on a strong quarter. My question is that we see the guidance that the quarter three will be a faster growth quarter. So can you share more color about the revenue growth breakdown for quarter three? like by online or offline and in the segment. Thank you.

Thanks, Summer. We wouldn't be able to hear clearly, but I guess you were asking about the revenue guidance for the next quarter. Yeah, and I do think the guidance should be diving into the numbers deeply. So as of now, our cost savings in the first half of the year is approximately $2.4 billion, with a year-over-year growth rate of about 67.7%. And the deferred revenue balance increased over 30% year-over-year. That all indicated a higher revenue growth rate in the third quarter, right? And the upper limit of revenue guidance we provided in the earnings release is $1.208 billion, with a year-over-year growth rate It appears that the growth rate of growth buildings is much higher than that revenue. There are mainly two reasons for this. And first, the class schedule in September, which is the last month in the Q3, has one less weekend compared to 2023, which negatively impacts the year-over-year growth rate by approximately five percentage points. and the related revenue will be recognized in Q4. And secondly, we conducted some special prize class operations for entrance-level grade during the summer course, seizing the precious strategic window to increase the student scale. For these students, the main contribution in Q3 is gross feelings instead of revenues, and the revenue contribution will be present in Q4. We could continuously predict the revenue growth rate in Q4 by referring to our Q3 gross fittings gross rated together with the Q1 and Q2 gross fittings. This is also the typical seasonality of the online large live class business model. The combined effect of these reasons causes our revenue guidance to fall within the currently indicated range. And I think your second part of your question indicates the breakdown of our offline revenues contribution and online revenues contribution. So as of this year, the offline revenues contribution is not significant enough to be disclosed separately. So majority of the contribution of revenue and gross billions were contributed by our online business. Thanks, Summer. Hope that address your question.

It's very clear. Thank you.

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

Thanks, management, for taking my question. So I see you have an exceptional new enrollment in this summer reflected by your cross-billion growth. And could you elaborate more on the main driver behind this? And how about the retention of this new enrollment? And my second question regarding your marketing strategy going forward. Thank you.

Sure, thanks a lot. Right, actually Q2 is a critical quarter for our business for every year because there are two significant events happening in the second quarter. The first is the retention happens usually at the end of April or in the early part of May. then because in the past few years, we keep investing in our teachers recruitment and training, and we keep polishing our educational product, so that I just mentioned in my prepared remarks, we do see our retention rate keep increasing, especially for our newly joined students. And that's something we really have confidence in our future business. And the second important part is the preparation for the summer campaign, or usually started in the middle of May. And this summer, the education market has shown a vibrant landscape, and we've felt the strong demand firsthand. And to ensure we can fully meet the diverse learning needs of students and parents during the summer, we proactively plan operations to better seize this valuable opportunity. First, in terms of our teacher recruitment training, we understand that excellent teachers are the key to the success of our summer operations. Outstanding lead teachers and tutors can provide high-quality educational services, greatly enhancing the learning experience. Therefore, we initiated the recruitment of tutors early on this year, followed by comprehensive and systematic training immediately after they joined us. Most teachers began their training four to six weeks in advance, focusing on professional skills, teaching methods, and improving their communication skills and train up them to be more familiar with our educational products. This thorough preparation allowed them to approach their summer teaching assignments with greater passion and professionalism. And secondly, and also address your second question, in terms of our customer acquisition channels, there have been characterized by a highly diversified approach, particularly in the live streaming sector, where we've already achieved scalable customer acquisition and also contributed a majority of the customer acquisition this summer, we intensified our investment during the summer. We successfully attracted attention from students and parents. During the summer enrollment, we fully capitalized on the benefits of this diversified channel strategy, Additionally, we actively expanded other channels such as social media and some offline channels to comprehensively cover potential customer groups, thereby increasing brand awareness and influence. So through these strategic and operational measures, we successfully achieved the expected growth in student enrollment and we've been able to maintain a favorable level of return on investment of our sales and marketing expenses as you can count on our P&L and the operating metrics we will provide it. Based on the information provided by third parties, because we always do channel checks during the summer vacation, we found our customer acquisition costs remain relatively low within the industry. And this not only reflects the effectiveness of our operational strategies, but also gives us a competitive edge in the market. So we will continue to optimize our operations to provide even better educational services to students and parents. And for our customer acquisition channels, we will further to optimize the structure of the channels, and we make sure like the low-cost channels and more private-type channels will contribute in more student enrollments in the future. Thanks, Crystal.

Thanks, Shannon. That's very helpful.

This concludes our question and answer session. I would like to turn the conference back over to Catherine 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 Invest 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.

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