Gaotu Techedu Inc.

Hello, ladies and gentlemen. Thank you for standing by, and welcome to the GOW2 TechEDU, Inc. Second Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's remarks, there will be a question and answer session. Today's conference call 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.

Good evening, everyone. Thank you for joining GAL2's second quarter 2025 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 it's 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 Galtooth Senior Management is Mr. Larry Chen, Galtooth's founder, chairman, and chief executive officer, and Ms. Shannon Shen, Galtooth'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 containing any forward-looking statements. 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 statements 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 to 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 R-type 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 GAL2's second quarter of fiscal year 2025 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 GoTo. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB and as stated otherwise. Over the past quarter, we maintained solid growth momentum in our core business while harnessing the power of AI to enhance our service models foster product innovation, and strengthen our organizational capabilities. Together, these efforts are shaping a clear growth trajectory and sustainable competitive advantages. Upholding our user-centric approach, we consistently upgraded our educational products, improved teaching quality, and refined service delivery. Our strategic prioritization and efficient resource allocation have significantly increased per capita productivity. As we progress through 2025, we are steadily elevating our skill of reaching efficiency and user satisfaction. underscoring the resilience and disciplined execution driving our business's high-quality growth. In the second quarter, our revenue increased by 37.6% year-over-year to nearly $1.4 billion, with growth buildings up by 36.2% to approximately $2.3 billion. Thanks to our refined operational execution and improved organizational efficiency, we narrowed our net loss by 50.5% year-on-year on a non-GAAP basis. We achieved a net operating cash inflow of $588.8 million this quarter, an increase of $202.6 million from the same period last year. These results reflect our ability to sustain solid growth momentum while strengthening operational quality and sharpening our competitive edge. Now I'd like to elaborate on this quarter's operating highlights on four fronts. First and foremost, we are deepening our investment in AI, advancing our Always AI, Always AI strategy to upgrade both our teaching models and technology infrastructure. These efforts aim to empower personalized learning at scale and create long-term value. Innovation is part of our DAA and has been a core growth driver since day one. preparing our consistent exploration and the development of emerging technologies, particularly forward-looking AI initiatives. We believe AI-driven education solutions can make personalized, adaptive learning scalable, allowing every learner to enjoy a more efficient, individualized, and high-quality learning experience. Guided by this strategic vision, we have reshaped our previous dual teacher model into an advanced tri-teacher model, integrating instructors, tutors, and AI companions. This new model deeply embeds AI throughout the teaching and course content development process, transforming how education is delivered. For instructors, AI offers the data-driven feedback and a pair of clinical insights to enhance teaching precision and the course quality. For tutors, AI tracks individual students' progress and pinpoints knowledge gaps, increasing tutors' efficiency and enabling them to deliver more professional, personalized learning solutions. For curriculum developers, AI accelerates analysis of learning pathways, optimizing cloud design and content innovation. We continue to increase our investment in AI, centering technology for innovation at our engine, fostered by a strong talent base and a robust ecosystem. More specifically, we will further advance AI innovations in educational use cases, cultivate cross-disciplinary teams featuring both education and AI experts, and integrate our content, data, and partner resources to create a highly efficient, effective, and sustainable AI-empowered learning paradigm. This strategy will also lay the groundwork for high-quality long-term growth and reinforce our commitment to delivering lasting value. While preparing educational innovation, we are also embedding AI technology across our entire corporate operations and management processes as our core engine for boosting organizational productivity. by streamlining procedures and unlocking data-driven insights. We are maximizing operational efficiency and enhancing strategic decision-making. Furthermore, AI empowers every go-to employee to transcend the boundaries, fostering both professional growth and personal fulfillment. Together, we are building long-term markets advantages and a more dynamic organization positioned for sustainable growth. Second, with our user-centric approach firmly in mind, we continue to explore new products and develop innovative models to meet a wide range of learning scenarios and individual needs. We have successfully introduced a series of novel products such as the Gaotu reading app, the legend of Gao Xiaotu, and the model LoveLearning, all designed to spark interest in learning, enhance the learning experience, and boost student engagement. Through ongoing exploration and market validation, we continually strive to find the optimal product market fit, driving expansion across our business. We also launched our AI Flash Learning Model, which uses advanced algorithms to break down knowledge into granular units connected by dynamic knowledge graphs. This approach enables scenario-based bias-sized and interactive learning that measurably improves efficiency and creates more flexible, personalized learning experiences. Third, we remain laser-focused on building a lifelong learning services platform that is accessible and enjoyable for all. Our comprehensive product portfolio spans non-academic tutoring services, professional learning services, educational services for college students and adults, and overseas study programs, both online and offline. We also offer students a selection of large class, small class, and one-on-one sessions for maximum flexibility. Our broad user coverage and robust product matrix comprehensively address diverse learning needs. Strengthening goal-to-brand awareness and reputation through word-of-mouth referrals while also driving cross-category conversions. By consistently amplifying user engagement and long-term educational value, we are steadily building an enduring competitive moat in the education industry. Fourth, we remain committed to fulfilling our social responsibilities, aligning long-term shareholder value with broader societal impact to enhance shareholder returns as of August 25th. 2025, we have allocated a total of nearly $557 million to repurchase approximately 25 million ADS, a strong testament to our persistent focus and long-term competence in creating shareholder value. Moreover, Through the GoTo Foundation, we have partnered with top tier universities to establish career-free basis for college students, a one-stop career support system, encompassing curated internships, opportunities, employment grants, career mentorship programs, and professional development workshops. This end-to-end career accelerator not only empowers the young talent, but also demonstrates our commitment to creating both commercial and social value with a focus on healthy growth at the heart of everything we do and remain confident in going to the future trajectory. Our diverse educational product portfolio, rapidly evolving AI technology capabilities, solid financial foundation, and highly cohesive and effective team position us for continued innovation and success. Our goal is to deliver a best-in-class learning experience to our users while creating long-term shareholder value and advancing both our social impact and commercial success. Thank you very much, everyone. This concludes my prepared remarks. I will now pass the call over to our CFO, Shannon, to walk you through this quarter's financial and operational details.

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 2025. In this quarter, we remain focused on advancing our healthy growth strategy, creating solid, high-quality growth momentum. Net revenues reached nearly $1.4 billion, exceeding the upper end of our guidance. by 5.4%. Growth readings grew by 36.2% year-over-year, outpacing last quarter's growth rate by 14.4 percentage points. In addition to our top-line growth, loss from operations and net loss narrowed by 48.0% and 39.7%, respectively. Reflexing continued gains in operational efficiency and outstanding resource allocation. Deferred revenue increased by 38.9% year-over-year to about $2.2 billion, providing a solid foundation for sustained future growth. We maintain our ample cash position with cash, cash equivalents, restricted cash, and short-term and long-term investments totaling over $3.8 billion as of June 30, 2025. Excluding the impact of shared buybacks, our cash position increased by $135.6 million compared to a year ago. Supported by consistent investments in enhancing user experience, course and service quality, and organizational capabilities, the profitability and operational quality of our core established business continued to strengthen. In our ongoing efforts to boost operating leverage and efficiency, AI and other cutting-edge technologies are increasingly playing a crucial role in the refinement of operations, reducing operating expenses as a percentage of net revenue by 31.6 percentage points compared to the same period last year. To capitalize on the peak student demand during the summer period, we typically allocate key resources such as teacher recruitment, team training, and customer acquisition channels well in advance. Given the approximately three- to six-month gap between marketing investment and revenue recognition, we recommend easing the ratio of gross billions to marketing investment as a more accurate indicator of customer acquisition efficiency for the online business. This quarter, they not only effectively captured and converted high student demand to drive gross savings growth, but also achieved a 1.7% year-over-year reduction in setting expenses and an increase of 38.6% in setting expenses ROI, bringing ROI to its highest level over the past four years. Simultaneously, G&A expenses and R&D expenses decreased year-over-year for a second consecutive quarter as a percentage of net revenues. The ratio fell by 8.0 percentage points year-over-year this quarter, reflecting effective and growing economies of scale. Through process optimization and data-driven decision-making, we have further enhanced group overhead efficiency, laying a strong groundwork for sustained profitability improvements going forward. Next. an overview of this quarter's progress by business segment. Learning services contributed over 95% of net revenues. Breaking it down, over 85% of total revenues came from the academic tutoring services and the other traditional learning services, representing an increase of 50% year-over-year. Combined cost savings from these two segments grew by over 40% year-over-year. Our new initiatives focused on non-academic tutoring services in both online and offline sightings delivered strong growth each quarter. Growth swings were up by over 100% year-over-year, while net revenues from this segment recorded three-digit growth, contributing nearly 40% of total revenues. This also marked the fifth consecutive quarter of this three-digit achievement. By further optimizing operational processes and teaching services quality, we boosted student retention rate for the spring semester, with new enrollment student retention rate in a climbing trend year over year. In addition, we actively expanded into emerging traffic platforms and introduced innovative products to optimize our customer acquisition mechanisms, enhancing acquisition efficiency. Our traditional learning services maintained its healthy growth trajectory. Well, the early timing of the swimming festival led to a year-over-year decline in the number of class sessions delivered this quarter. Higher enrollment resulted in a 12.1% year-over-year increase in net revenues for the quarter, contributing to nearly 25% growth in total revenues for the first half of 2025. we remain focused on localizing our curricula to better align course content and services, a strategy that has already been validated by positive outcomes from user acquisition through service delivery. Building on this early success, we plan to duplicate this model across multiple cities and regions. According to preliminary statistics, the number of students from Gautu's class of 2025 admitted to the top two universities in China, reached 267, marking five consecutive years of growth. To date, 1,118 Gaohu students have been admitted to the top two leading universities, a strong testament to our competitiveness across educational products, teaching quality, and learning services. Additionally, our referral rate for the second quarter surged by 75% compared to a year ago. The other crucial component of our learning services is educational services for college students and adults. In the second quarter, this segment contributed over 10% of total revenues. Loss from operations from this segment significantly narrowed year over year, with operating cash flow turning positive, demonstrating our strong strategic execution. effective resource planning, and increasing team productivity. Costs raised from educational services for college students increased by more than 50% year-over-year, with operating cash flow growing over full-time. On top of ongoing improvements in our online product quality and operating efficiency, we steadily expanded our offline product portfolio and our online-merge offline modules to cover a wider range of learning scenarios and needs. It is worth noting that Cal2J Center, our flagship offline service platform for college students, reached full enrollment capacity within just three months of its launch. Affirming both our regional brand influence and this business model's commercial availability, I will now present our financials in more detail. Our cost of revenue this quarter was $472.8 million. Gross profit increased 31.6% year-over-year to $916.5 million, with a gross margin of 66.0%. The year-over-year decrease in gross margin was primarily due to changes in our product mix Total operating expenses during quarter decreased 0.2% year-over-year to approximately $1.2 billion. Breaking it down, selling expenses decreased 1.7% year-over-year this quarter to $828.9 million, accounting for 59.1% of net revenues. Research and development expenses decreased 8.6% year-over-year to approximately $148.2 million, accounting for 10.7% of net revenues. General and automated trading expenses increased 15.7% year-over-year to approximately $189.3 million, accounting for 13.6% of net revenues. Loss from operations was $241.9 million, and operating loss margin was 17.4%. Net debt loss from operations was $232.7 million. I'm sorry, I'm a bit under the weather today, so I might need to drink water from time to time. Sorry for the inconvenience. I will continue. And Nangat opening net loss margin was 16.7%. Net loss was 217.1 million. And net loss margin was 15.5%. Nangat net loss was 206.8 million. And Nangat net loss margin was 14.9%. Power net opening cash inflow was 588.8 million. Now turning to our balance sheet, as of June 30th, 2025, we held $841.4 million in cash, cash equivalents, and restricted cash, along with $2.6 billion in short-term investments and $387.5 million in long-term investments. This comes to a total of over $3.8 billion. As of June 30th, 2025, our default revenue balance was around $2.2 billion, primarily consisting of tuition received in a month. As of August 26, 2025, there were pressures in aggregate of around $25 million on the open market for approximately $557 million in RMB. 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 from the third quarter of 2025 are expected to be between $1,558 million and $1,578 million, representing an increase of 28.9% to 36.6% 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.

Thank you. 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'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 2. For the benefit of all participants on today's call, If you wish to ask your question to management in Chinese, please immediately repeat your question in English. For the sake of clarity and order, please ask one question at a time. Management will respond, and then feel free to follow up with your next question. At this time, we will pause momentarily to assemble our roster. The first question comes from LC Sheng with CLSA. Please go ahead.

Thank you, management, for taking my question, and also congratulations on continuing to deliver strong growth. I have a question on the offline centers development, because although right now the offline is a relatively small portion of our revenue, but there is potential room to grow in the future. So I would like to know our latest update, especially on the offline business and the Do you have any operating metrics or indicators to share, like the RANPAP and the future growth target? Thank you.

Thanks, Elsie, for your question and for your interest in our offline initiatives. Our offline business is experiencing strong momentum and has quickly become a new growth engine for In the second quarter, offline learning center revenues grew by more than 20% on a year-over-year basis and has already contributed over 5% of gross savings this quarter. So the reason behind that is first, on the customer side, we are leveraging the unique advantage of new person interaction to build a deeper trust with students and parents in a more direct way. So by precisely matching localized and personalized learning needs and fostering high-frequency engagement, we are significantly strengthening our customer loyalty. And secondly, from the educational product perspective, leveraging the meticulously refined online content, there's no need for the offline learning centers to build up the content from scratch. So the Outland Learning Centers are able to extend vertically our localization and personalization, speed up iteration, and improve their content quality quickly. And third, on brand awareness and headquarter support, Galtools has a strong brand recognition, enhances customer trust, and attracts high-quality talent. We have the ability to provide critical faculty support for our online operations in their early stages. We are also integrating some online private traffic with offline channels to meet diverse student needs, and it's also a strong support for offline business to grow at the beginning stage. In addition, our headquarters has been able to invest in digital infrastructure to improve the quality and efficiency of our offline operations. So we already saw the trend that in certain cities, especially for those cities and regions we already entered after two to three years operations, we are seeing a worker cycle that if we have strong teachers and high quality instructors and company there, they also have positive word of mouth referrals and are able to lead into a steady improving retention rates. And that's one of the reasons in the second quarter The growth phase in our offline, our new initiative goes so fast. So the last and for the most, a highly efficient and professional team was assembled in the past two years, providing a strong foundation for the advancement of our offline operations. Leaders in each city are highly sophisticated, senior in experience. They are innovative and proactive. This gives us strong confidence in the scalability and the sustainability of their business. So the series we already entered and the learning centers we already opened. All the numbers have been studied in the past quarter. Overall, our offline business is continuously validating this business model. And at the same time, its development enriches our product mix that enables us to serve increasingly diverse learning needs of our students. So that basically means that students have a demand of online learning, they can choose our online services. And if a student wanted more personalized or a person-in-person interaction, they can also choose an offline learning. So it kind of like enriches our product metrics. So we look forward to the future that our offline business will bring more students and more customer satisfaction to the group. Thanks, Elsie. Hope that addresses your question.

Yeah, it's very clear, and congratulations again. Thank you.

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

Okay, thanks. Thanks, Larry, Shannon, and Katherine. Congratulations on the strong results. I have two questions here. One is for the summer enrollment. Could you share more color on that and maybe the industry insights? And my second question is, how should we look at the full-year growth outlook given your strong first half and the third quarter guidance? Thank you.

Thanks, Crystal. Yeah, and summer is very important for the whole academic year. So as a summary, enrollment season just to close and it is almost closed by the end of this month. We are very glad to share that our overall performance has successfully exceeded expectations and probably you can tell from the guidance they provided for the next quarter. So the biggest contributor is the improvement of teaching qualities. The retention rate, a core indicator that directly reflects customer recognition and product satisfaction, delivered an outstanding performance this summer, as I just mentioned in my prepared remarks. So compared to both our own historical levels and the industry average, retention has been continuously improving. And what surprises us more is that we saw the new student retention rate keep improving, but also help with our customer acquisition efficiencies. So from the perspective of operational efficiency, specifically our ROI in the second quarter improved from 1.99 in the same period last year to 2.75 this year. This means an increase of 38.6%, reflecting our significant setup in efficiency. And as I just mentioned in my prepared remarks, that the absolute number of our sales marketing expenses actually decreased on a year-on-year basis, but our costly billing still shows an over 36% year-on-year increase. So that's suggesting the positive trend will continue, and we also have the confidence in Q3 that our ROI for sales marketing will further improve on a year-on-year basis. So beyond the refinement of teaching quality, our AI gains also reflect our multiple prolonged efforts on customer acquisition, ongoing explorations of diversified channels, our long-term investment in referrals and private traffic, and also systematic enhancement of organizational capabilities. But both of the efforts are inseparable from the deep empowerment of our AI technology. Our AI strategy is crystal clear, as Larry just mentioned, always AI and always AI. We sometimes focus on the value chain of the whole customer journey. So on the student side, we are able to build up a three-teacher model, adding to the dual-teacher model. We have a leading instructor. We have a supporting tutor. And also we have an AI instructor. The three-compact guider can deliver comprehensive full-cycle learning support. And on the teacher support side, AI takes on repetitive tasks, freeing our teachers from those repetitive tasks, and they can focus more on their core educational value, like sparking curiosity and shaping characters of students. in turn continuously enhance our teachers' professional well-being and personal satisfaction. Actually, in the summer and in the peak season, they can actually reduce their working hours in the peak season. That's a big step. And on the operational side, AI is optimizing efficiency across the entire writing chain. This includes faster customer service response through AI-assisted interactions, like automatic Q&As, more precise user profiling for targeted operations, and intelligent optimizing of operational processes. And all these initiatives not only drive cost reduction and efficiency gains, but also provide a solid technology foundation for sustainable business growth. And leveraging all the efforts, we are able to lay a solid foundation for the whole-use growth We set an initial goal at the beginning of this year to target around 30% year-over-year revenue growth. And if you look at the total numbers we have got together, our total revenue growth rate for the first half of this year stood at around 47.3%. And the upper limit of the Q3 revenue guidance, we just provided a 3.6%. From this perspective, our year-over-year revenue growth for the first nine months will exceed 40%, a figure that significantly surpassed the upper limit we have set up for the four-year goal at the beginning of the year. Therefore, we will also accordingly raise our expectations for the three revenues. I hope that will address your question, Crystal.

Thanks. Very clear.

As there are no further questions now, I'd like to turn the call back over to the company for 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.

This concludes today's conference call. You may disconnect your line. Thank you.