Gaotu Techedu Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Gallatin Tech EDU third 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 on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. 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 GALTOS' third quarter 2024 earnings conference call. My name is Catherine, and I'll help host the earnings call today. Gautu's earnings relief for the quarter was distributed earlier and is available on the company's IR website at ir.gautu.cdn, as well as through PR Newsware Services. Joining the call with me tonight from Gautu Senior Management is Mr. Larry Chen, Gautu's founder, chairman, and chief executive officer, and Ms. Shannon Shen, Gautu'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 performance or achievements to differ materially from those contained in any forward-looking statements. Further information regarding this and other risks is included in the company's public filing with the U.S. SBC. The company does not undertake any obligations to update any forward looting statement, except as required under obstacle 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 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 GoTo'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 GAL2's third quarter of fiscal year to a 724 earnings conference call. I would like to take this opportunity to express my gratitude to each of you for your interest in and support of GAL2. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB unless stated otherwise. During the past quarter, our core businesses continued to make steady progress with gross billions increasing by 67.2% year-over-year to approximately $1.1 billion and revenue growing by 53.1% year-over-year to over $1.2 billion. This growth is attributed to our keen understanding of market trends and the continuous optimization of our strategy and execution. As our business scales rapidly and the product matrix enriches gradually, we ramped up investments with particular focus on upgrading our educational systems, enhancing organizational capabilities, and improving management practices. We also intensified efforts in talent development and professional training. In the course of business development and refinement, we have nurtured and promoted high-performing frontline and managerial talent from within, while also attracting seasoned professionals from the broader industry. This has enhanced our team's ability to navigate various complex business environments and improve execution efficiency. In this quarter, we allocated more than $120 million for share buybacks, underscoring our strong commitment to shareholder returns. While this share repurchase has impacted our cash balance, our liquidity position remains solid and robust as of September 30, 2024. We held a total of over $3.3 billion in cash, cash equivalents, restricted cash, and short-term and long-term investments, providing a firm foundation for our strategic priorities and long-term growth. Next, I will provide an update on the progress we have achieved this quarter. First, we further enhanced our educational products, learning services, and teaching quality. by seamlessly integrating the expertise of our top tier instructors, outstanding tutors, and the content development team with advanced technology. Our ultimate goal has always been to deliver an exceptional learning experience that leads to tangible learning outcomes for our users. For our instructors, We strive to achieve the best teaching practices through systematic course refinement and training by our content development team, ensuring the complex knowledge is presented to students in a clear, engaging, and accurate way. At the same time, emerging technologies such as AI are empowering our tutors with deep insight into each student's individual needs, enabling them to provide comprehensive and efficient assessment, tailored learning plans, and targeted support to boost user engagement and learning efficiency. This quarter, the referral rate of our educational services for college students achieved a significant breakthrough serving as a strong endorsement of the value we provided and highlighting the growing recognition of our brand. Furthermore, we have established a multi-tiered educational support and content system designed to meet the diverse needs of students at different stages of their learning journey. Meanwhile, our Dream Coach program has been rolled out at scale, where outstanding alumni from Tsinghua and Peking Universities are invited to share their learning experiences, provide career guidance, and offer both emotional support and practical advice to current students, further enhancing student engagement. Second, we actively embraced the market changes and proactively advanced our customer acquisition capabilities. Despite the evolving market landscape and the macro environment, our efficiency in customer acquisition through live streaming and other channels remains industry-leading. This has driven significant growth in gross billions and steadily increased our market share. Since 2023, we have consistently focused on expanding and diversifying our customer acquisition channels, building a comprehensive and resilient acquisition system that encompasses self-operated channels, private traffic activation, and content-driven strategies. This decentralized approach can effectively reduce exposure to external volatility and mitigate market risks. Going forward, we will further increase investments into proprietary channels and private traffic engagement and conversion efforts, maintaining a strong emphasis on their efficiency and effectiveness. Our goal is to build a more robust and sustainable traffic acquisition system that supports our steady growth in the long run. Third, we remain committed to social responsibility and creating long-term value with dedication. This quarter, we continue to promote education equity by awarding underprivileged first-year college students in Xin'an County, Hainan Province, with scholarships to pursue their dreams and advance their educational journeys. Additionally, we supported regional education by building libraries and donating a substantial collection of books to schools in Gansu Province, providing local students with enhanced educational resources and a better reading environment in alignment with our mission to generate value for all stakeholders. We have also made progress in delivering shareholder returns. From the start of the year through December the 3rd, we repurchased an aggregate of more than 6.5 million EDS for approximately 25.1 million US dollars, representing approximately 2.6% of total outstanding shares as of the end of 2023. This brings the cumulative value of shares repurchased under the program to approximately 37.5 million dollars. Looking ahead, we will continue to uphold our social responsibilities while prioritizing shareholder value by creating business values and contributing to societal progress. We aim to drive sustainable and high-quality long-term growth for our company. Thank you very much, everyone. 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 third quarter of fiscal year 2024. In the past quarter, we capitalized on the robust market demand during the summer vacation period, successfully achieving our growth-feeding targets aimed at rapid business growth and driving meaningful increases in student enrollment and market share. With a continuous rise in student enrollments, growth in our top line has accelerated sequentially in each of the past three quarters. In the third quarter, our revenue increased 53.1% year-over-year and grew by approximately 10 percentage points sequentially. As of September 30, 2024, our deferred revenue balance increased 89.0% year-over-year to over $1.4 billion. Looking ahead, we anticipate year-on-year revenue growth to peak in the fourth quarter with our core online businesses set to outpace the broader industry, further consolidating our leading position in the market and laying a strong foundation for future growth. Well, continuing to strengthen the core competence of our online products, we are actively deploying resources to explore and expand into diverse educational offerings. This approach helps us better address students' learning needs across various scenarios, expanding our addressable market and enhancing user engagement. We are focusing on segments with clear user demand, strong willingness to pay, and proven business models. Additionally, we are utilizing advanced technologies like artificial intelligence to continuously optimize both teaching quality and operational efficiency. Although these investments may weigh on our financial results in the short term, we remain committed to refining our operations and dynamically tracking key business metrics to effectively balance investments and returns. We believe these educational offerings with great growth potential will further boost our market share and brand recognition, supporting long-term revenue expansion and value creation for our users. Next, I will walk you through the progress we have made during the quarter. Learning services contribute 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 70% year-over-year. Our new initiatives centered around non-academic tutoring services experienced remarkable growth in this quarter. In product development, we consistently refine our knowledge graphs and curriculum and conduct in-depth analysis of students' needs at different stage of their development. This approach ensures that our courses are scientifically grounded and systematically structured to provide students with course arrangements that best align with their learning path. On the delivery front, we have developed a standardized scalable talent development system through careful screening, rigorous training, and ongoing performance evaluation. As a result of these efforts, net revenues and gross billings from our new initiatives surged by more than triple digits year over year. Notably, gross billings from new student enrollments soared by over 200% compared to the same period last year. Our traditional learning services maintained steady growth. During the quarter, we further optimized our student composition by refining operations for key entry grades, strengthening the foundation for sustainable future development. While leveraging the influence of our top-tier instructors, we have also enhanced the professional expertise, and service quality of our tutors. Building on the improvement of teaching quality, we have placed greater emphasis on addressing user needs by offering comprehensive solutions, encompassing study plans, and family education guidance to foster students' holistic development. As a result, gut feelings of this segment grew by more than 40% year-over-year in the quarter, underscoring the high regard and trust students have for the value we have provided. The other crucial component of our learning services is educational services for college students and adults, which contributed under 20% of total revenues in the quarter. We optimized our business mix and the resource allocation to focus on areas with strong market demand and clear paths to profitability. During the quarter, core offerings in this segment maintained healthy growth momentum. Educational services for college students achieved high double-digit year-over-year revenue growth, along with quarterly profit and positive cash flow. Overseas data-related services achieved high double-digit year-over-year revenue increase and generated positive cash flow for the quarter, further demonstrating the success of our product optimization and business adjustment efforts. I will now present our financials in more detail. Our cost of revenue this quarter was $429.8 million. Gross profit increased 36.3% year-over-year to $778.5 million with a gross margin of 64.4%. Total operating expenses during the quarter increased 89.1% year-over-year to approximately $1.3 billion. From a seasonal perspective, The fourth quarter is typically not a peak period for new customer acquisition in our traditional and non-academic businesses. As such, we plan to adjust our selling expenses accordingly. Breaking it down, selling expenses this quarter increased 139% year-over-year to $885.8 million, accounting for 73.3% of net revenues. This was primarily driven by higher marketing expenses in response to heightened market demand during the summer vacation period. Research and development expenses increased 44.9% year-over-year to $189.3 million, accounting for 15.7% of net revenues. General and administrative expenses increased 82.9% year-over-year to $193.5 million, accounting for 16.0% of net revenues. Loss from operations was $490.1 million, and operating margin was negative 40.6%. Non-GAAP loss from operations was $476 million, and net gap opening margin was negative 39.4%. Net loss was $471.3 million, and net income margin was negative 39.0%. Net gap net loss was $457.2 million, and net gap net income margin was negative 37.8%. Our net operating cash outflow was $714.4 million. Now, turning to our balance sheet, as of September 30, 2024, we held $862.7 million in cash, cash equivalents, and restricted cash, along with $1.5 billion in short-term investments and $964.4 million in long-term investments. This comes to a total of over $3.3 billion. As of September 30, 2024, our default revenue balance was over $1.4 billion, primarily consisting of tuition received in advance. As of December 3, 2024, we repurchased an aggregate of approximately 11.5 million ADFs on the open markets, for approximately over 37.5 million U.S. dollars under the existing share repurchase program. We will continue to execute share buybacks in accordance with the board director's guidance to create long-term value for our shareholders. Before I provide our business outlook for the next quarter, I would like to remind everyone that this contains forward-looking statements that involve risks and uncertainties beyond our control, which may cause the actual results to differ materially from our expectations. Based on our current estimates, we expect total net revenues for the fourth quarter of 2024 to be between $1,288 million and $1,308 million, representing an increase of 69.2% to 71.9% 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 telephone keypad. 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 two. At this time, we will pause momentarily to assemble our options. The first question today comes from Crystal Lee with CMS. Please go ahead.

Thanks, Najm, for taking my questions. I saw you provided the growth guidance for group revenue in fourth quarter. How about the growth by different business segments? And could you give us some color on 2025's growth outlook? Thank you.

Thanks, Crystal. From the current perspective, looking at the overall operational performance in 2024, we observed two primary deviations from the expectations we set at the beginning of this year. First, adjustments in the psychological counseling segment within the educational services for college students and adults impacted by the certification requirements, which led to a revenue shortfall compared to the projections we performed at the beginning of the year. And second, some of our innovative efforts in traditional education services did not fully exceed our expectations. And also in the second half of the year, we are navigating a period of subdued economic growth accompanied by a more cautious consumer spending environment together with the switch on social platforms further handle the recovery of the gap. And also our loss in 2024 has widened. On one hand, Our increased investment in the offline operations and overseas study services, while creating short-term pressure, actually strategic decisions aimed at long-term growth. We believe these efforts will eventually generate better returns for our students and shareholders and create the value we provided. And on the other hand, our handling of explosive business opportunities in the first half of the year coupled with inefficiencies in resource allocation during the period of rapid growth, which also contributed to the current loss as well. So looking ahead to 2025, we will take a more dynamic approach to balancing, scaling, investment, and profitability. Our focus will be on expanding the profit base and improving our operating profit margins in our existing business. Also, at the same time, we will be optimizing fixed cost structures such as research and development expenses and also G&A expenses. And we will be continuously driving cost reductions and the efficiency improvements. So we expect both growth buildings and the revenues to achieve steady growth in 2025. with a significant reduction in losses. And during this period, we will also strive to enhance shareholder value and continue to execute the share your purchase plan under the guidance of our board of directors and hope that address our questions. Thanks, Crystal. Thanks a lot.

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. 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.

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