Gaotu Techedu Inc.

Hello, ladies and gentlemen. Thank you for standing by, and welcome to the GOW2 TechEDU Inc. Fourth Quarter and Fiscal Year 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.

Thank you, Operator. Good evening, everyone. Thank you for joining GAL2's Fourth Quarter and Physical Year 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.galto.cn, as well as through PR Newsware Services. Joining the call with me tonight from Galto Senior Management is Mr. Larry Chen, Galto's founder, chairman, and chief executive officer, and Ms. Shannon Shen, Galto'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 obligations to update any forward-looking statement except as required under applicable law. During today's call, management will also discuss certain non-GAAP measures for comparison purpose only. For a definition of non-GAAP financial measures and reconciliation of GAAP to non-GAAP financial results, please refer to our fourth quarter and fiscal year 2025 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 fourth quarter and fifth year 2025 earnings comment call. I would like to take this opportunity to express my gratitude to each of you for your interest and support for GAL2. Before I start, I would like to remind everyone that all financial figures discussed today are IEMB, unless stated otherwise. 2025 marked a year of exceptional resilience for GoTo. We delivered a high-quality operating performance amid a rapidly evolving environment. If I were to summarize this year's achievements in one word, it would be refinement. representing not just a sharpening of our teaching quality, but a systematic elevation of our operational granularity. Throughout the year, we not only exceeded our growth targets, but more importantly, reinforced our organizational foundation, strengthening our core capabilities while continuing to scale rapidly. As we enter 2026, our approach to growth continues to evolve and mature. We are intentionally refining the way we grow, prioritizing profitable growth with the advancement of AI capabilities as a core of our operations, all with AI, always AI. This is how we are driving improvements in business health, operational efficiency, and long-term viability. Our fourth quarter performance represents an early validation of this strategic focus at the operational level. In the fourth quarter, we maintain steady top-line expansion while realizing meaningful operating leverage. Revenue increased by 21.4% year-over-year to $1.7 billion, and the bottom line improved by 38.0%, driven by continued efficiency gains. For the full year of 2025, revenue grew by 35.0% to $6.1 billion, exceeding our initial expectations at the beginning of 2025. net operating cash inflow reached $416 million, a net increase of $158 million year-over-year, reflecting continued improvement in operational quality and efficiency. After Excluding the impact of share repurchases, our cash position increased by 221 million year-over-year, providing strong support for our ongoing investments in products, technology, and talent, and pinning sustainable long-term growth. We remain firmly committed to enhancing long-term shareholder value and our aggregated share repurchase authorization. We have repurchased a total of RMB 670 million of shares, representing 12.8% of our total outstanding shares, including RMB 343 million in buybacks in 2025. As our business fundamentals continue to strengthen, We are well positioned to balance long-term strategic investments with a stable, predictable shareholder return framework. Through consistent and prudent capital allocation, we seek to build durable value, enabling investors who grow alongside the go-to to benefit from both our capital returns and the intrinsic value we generate. Most encouragingly, our operational gains are increasingly translating into tangible financial performance. We are shaping a more resilient, sustainable, and profitable business model, a virtuous growth flywheel anchored in healthy unit economics, driven by strong operational excellence and steered by our unwavering commitment to long-term user value. Guided by this framework, in 2026, we will focus on advancing strategic priorities across five fronts. First, in calibrating growth pace, profitability will remain a core strategic priority. Over the past year, we have comprehensively optimized our cost structure, resource education, and operating processes to fortify our business models and reinforce its economic foundation. Throughout 2025, our core business delivered stable profitability. validating the strategic direction we set in the prior period. Meanwhile, our strategic initiatives have progressed well and are steadily emerging as new growth engines, while near-term revenue trends may not fully capture our underlying momentum. We assess performance based on the quality, structure, and the sustainability of our growth, which are the pillars of lasting value creation. Second, in product development, we remain relentlessly user-centric driving continuous innovation in educational products and learning services. The essence of innovation lies in helping learners make real progress rather than merely completing cost delivery. We will continue deepening our understanding of users' real learning needs and pathways systematically embedding these insights into curriculum design, teaching methods, and service experiences. We firmly believe that truly valuable growth stems from superior learning outcomes, higher user satisfaction, and stronger brand trust. Third, with respect to technology, we are integrating innovation across our business, operations, and organizations, making it a structural driver for enhancing operational efficiency and user experience. Technology must enable teaching effectiveness, service excellence, and operational precision. In teaching scenarios, we are proactively combining high-quality instructor resources with AI-powered tools to make learning more engaging and effective. On the operations side, we are leveraging technology and data analysis to optimize resource allocation and enable more informed data-driven decision-making. At the organizational level, we are fostering more seamless collaboration through technology, empowering our team to focus on high-impact initiatives that drive meaningful value creation. Fourth, in terms of talent strategy, we continue to reinforce our competitive mode built around high-caliber educators. Educators are our most valuable assets and essential to sustaining our long-term competitive advantage. We will keep refining our talent selection, development, and incentive mechanisms, building a robust pipeline of educators and fostering an environment that supports educators' professional growth and long-term careers. A stable, high-caliber teaching team is a cornerstone for successfully scaling product innovation and technology upgrades. Fifth, to enhance our business portfolio, we are architecting a comprehensive lifelong learning service platform. Personal development is an ongoing journey, and learning needs at different stages are inherently connected rather than isolated. Through systematic integration of product formats and delivery models, we ensure learners have access to tailored solutions within GoTo's ecosystem during every critical developmental stage. By cultivating deep connections with users, we further strengthen our cross-maintenance synergies and extend the user lifecycle, significantly enhancing our operating model's resilience and long-term return potential. After nearly a decade of development and achievement, GALT will celebrate its 12th anniversary in 2026, Standing at this important milestone, we feel immense pride and a strong sense of responsibility. Through an ever-deepening understanding of our users, we have cultivated a core leadership team with a strong sense of ownership and long-term vision. assembled an outstanding, well-trained talent pool, distilled a set of cultural principles that shape our direction, and most importantly, earned the invaluable trust of tens of millions of students and parents. Since day one, GoTo's original aspiration has remained unchanged. to build a truly exceptional technology education enterprise when where every team member can achieve both material and spiritual prosperity, where every student enjoys an exceptional learning experience and accelerated personal growth, and where we accompany learners on a lifelong journey of progress while contributing enduring value to the development of the education industry in society. Looking ahead, we will remain committed to disciplined, prudent management, strictly control risk, and continuously strengthen our organizational and cultural foundation through unwavering strategic focus and powerful execution. I firmly believe that as long as we uphold the long-termism insist on value creation, and remain true to the essence of education, GoTo will advance steadily, generating lasting value for our shareholders, employees, users, and society at large. Thank you very much, everyone. This concludes my prepared remarks. I will now pass the call over to our Chief of Training to walk you through this quarter's financial and operational details.

So Larry, and thank you everyone for joining our call today. I will now walk you through our operating and financial performance for the fourth quarter and fiscal year 2025. Please note that all financial data are in RMB terms and lies otherwise stated. In 2025, we systematically optimized our product portfolio and channel mix, building constant improvements in our revenue quality. We remained firmly committed to advancing our deep integration strategy of AI plus education, substantially enhancing both our educational products and end-to-end operational efficiency through the systematic optimization of our product portfolio and channel structure. leveraging AI as our foundation, learning solutions as our core value, and AI-powered digitalization as our operational support. From a structural perspective, after years of focused investments and refinements, we have established a staged growth map that provides great visibility into future development. Our core businesses deliver solid growth with higher enrollments, optimized unit economics, and ongoing profitability improvements, serving as the fundamental pillar supporting the company's profit expansion. At the same time, our strategic initiatives are gaining traction and demonstrating upward momentum, serving as new engines for our skill expansion and profitable growth. In 2026, we will sharpen our focus on user experience and learning outcomes, advancing from skill-oriented growth toward a more efficiency-led model. Driven by both revenue skill expansion and operating efficiency gains, we have realized operating leverage for five consecutive quarters, continuously elevating our bottom line. In particular, on the user acquisition front, we leveraged AI-driven capabilities and a dynamic resource allocation mechanism to boost user acquisition efficiency. Measured as gross billings divided by selling expenses, user acquisition efficiency improved by 10.8% year-over-year in 2025. Turning to our fourth quarter performance, revenue grew by 21.4% year-over-year to 1.7 billion. Operating expenses as a percentage of revenue declined by 4.1 percentage points year-over-year, contributing to a 20.9% reduction in our operating loss As of December 31st, 2025, our default revenue balance rose by 23.0% year-over-year to 2.6 billion, providing solid visibility for our future revenue growth. Meanwhile, our cash, cash equivalents, restricted cash, short-term and long-term investments totaled 4.0 billion, With these robust cash reserves, we are well-funded to deepen our organizational capabilities and improve shareholders' interests throughout 2026. Next, an overview of this quarter's growth process by business segment. Learning services contributed over 95% of net revenues. Non-academic children's services and traditional learning services as our core segments contributed over 80% of our total revenues. Our new initiatives focused on online and offline non-academic tutoring services sustained strong growth momentum. In the fourth quarter, growth ratings increased by over 30% year-over-year, while revenue grew by 45%. On a full-year basis, revenue rose by 90% year over year. Within this segment, as our online business benefited from expanding enrollment and enhanced product competitiveness, it demonstrated a constant margin expansion, obtaining a middle single-digit margin for the full year. Through ongoing educational content innovation and refined operations, we elevated both product value and the learning experience, driving the retention rate of existing students, which exceeds 75% this quarter. Meanwhile, we continued to step up investment content development centered on cultivating learners' comprehensive capabilities and competencies. Our latest offerings, including AI-related courses, have further enriched and refined our product and content portfolio, enabling us to more effectively address the evolving demands for holistic, long-term development. In the fourth quarter, our traditional business maintained stable growth in enrollment while continuing to enhance service quality and efficiency to boost ongoing operational gains. We comprehensively upgraded Tutor's service standards, deepening our focus on learning process management and learner engagement through clearly defined key procedures and measurable performance indicators, which further reinforced our systematic service delivery capabilities. On the product front, We focused on optimizing our courses to better align with students' learning process and proficiency levels. While strengthening our modular needs-based content to enable more targeted and effective instruction. The parallel strengthening of our teaching services and educational products contributed to continued improvement in the overall learning experience at Galtool. The retention rate for new students also rose meaningfully year-over-year this quarter, reflecting stronger user stiffness. For the full year 2025, revenue from our traditional business grew nearly 15% year-over-year, driven by operational efficiency gains and the enhanced organizational capabilities. Profitability for both online large classes and one-on-one tutoring improved year over year. Our ongoing refinement of product competitiveness and optimization of operational quality has laid a strong foundation supporting our traditional business sustainable growth. Another key component of our learning services is educational services for college students and adults. where growth feelings grew over 15% year-over-year in the fourth quarter, contributing over 15% of total revenues. By prioritizing user needs, optimizing the product mix, and sharpening our refined management capabilities, this segment has entered a consecutive growth trajectory and achieved full-year profitability. across its online offerings in 2025. In our educational services for college students, by leveraging deeper insights into students' life cycle, we have pivoted from selling standalone products to developing innovative stage-aligned solutions. These offerings are integrated with adaptive learning pathways that can adjust based on real-time feedback and performance, effectively extending the user learning cycle. Meanwhile, we continued deepening the integration of online courses and AI technologies, fostering personalized learning support and planning capabilities, simultaneously improving both learning experience and outcomes. For the full year, Our educational services for college students delivered meet the double-digit growth in both revenue, while reaching profitability at the business line level. Lastly, I will walk you through our financial data. Our cost of revenue this quarter was $540.9 million. Gross profit increased 20.7% year-over-year. to over 1.1 billion, with a gross margin of 67.9%. Total operating expenses during the quarter increased 15.0% year-over-year to nearly 1.3 billion. Breaking it down, selling expenses increased 20.3% year-over-year this quarter to 885.3 million, accounting for 52.5% of net revenues. Research and development expenses increased 14.0% year over year to $165.4 million, accounting for 1.8% of net revenues. General and administrative expenses decreased 2.1% year over year to $211.8 million, accounting for 12.6% of net revenues. Loss from operations was 118.0 million, and operating loss margin was 7.0%. Net gap loss from operations was 110.7 million, and net gap operating loss margin was 6.6%. Sand loss was 84.2 million, and net loss margin was 5.0%. Net gap net loss was 76.8 million, and net gap net loss margin was 4.6%. Our net operating cash inflow increased 23.1% year-over-year to $964.8 million. Now, turning to our balance sheet, as of December 31, 2025, We held $712 million in cash, cash equivalents, and restricted cash, along with $2.7 billion in short-term investments and $551.6 million in long-term investments. This comes to a total of nearly $4.0 billion. As of December 31, 2025, our deferred revenue balance was around 2.6 billion, primarily consisting of tuition received in advance. As of March the 4th, 2026, we had repurchased an aggregate of around 30.6 million ADS on open market for nearly 670 million 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 revenue for the first quarter of 2026 are expected to be between $1,578 million. and 1,598 million, representing an increase of 5.7% to 7.0% on a year-over-year basis. This single-digit increase rate is due to seasonality. We expect the increase rate to return to double digits in the second quarter in 2026. This concludes my prepared remarks. Operator, 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 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. 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 Crystal Lee with CMS. Please go ahead.

Thank you. Congratulations on the strong results and thank you for the opportunity to ask questions. So I just want to maybe on the development of your offline business and maybe elaborate more on your future plan on this offline business. Thank you.

Thanks, Crystal, for your question. We launched the expansion of our offline learning centers back in 2023. First, from a strategic perspective, Our offline business represents a clear second growth curve for us and one of the top strategic priority at the group level. The integration of online and offline is a highly effective approach to enhancing learning efficiency and the overall learning experience and also makes our product metrics more holistic. And it is also a critical step in building our long-term competitive advantages. This initiative is led directly by our founder with prioritization in resource allocation, decision-making efficiency, and cross-sector collaboration. By capturing a favorable window of strong user demand in 2023, we have moved quickly to scale our footprint over the past three years. we have attracted outstanding industry professionals with deep expertise in local operations, educational product design, and teacher sourcing and calculations, et cetera. Building a professional team is truly important for offline operations and also can execute effectively and also supports scalable growth. This has already laid a very solid foundation for our offline businesses. In terms of the current progress and results, our offline business has achieved clear economics of scale. Since 2023, with continuous investment and operational refinement, our offline learning center network and revenue scale has grown steadily and rapidly. Based on our current expansion pace and operating plan, we expect the overall scale, I mean the top line, the revenue of our offline business to surpass that of several independently listed peers in the coming year. This is not just a simple increase in the number of learning centers. It also represents healthy growth driven by proven unique economics, strong brand reputation, and a well-developed supply chain for high-quality teachers. After nearly three years of market penetration, Our brand has established solid credibility and influence among students in regional markets. User satisfaction and retention rates continue to improve, and our brand mode is gradually taking shape. Simply, we have evolved from a pure online service provider to a fully integrated platform, and this is the fundamental and the most definitive outcome of our transformation. That is being said, The offline business has relatively high barriers to entry, including those related to management effectiveness, organizational alignment, and also system processes, and most importantly, the supply of top tier teachers. We still have some errors that we need to further optimize and integrate. We are systematically reviewing and refining and continually building up a system to support the growth of this segment. Our upfront investments are focused on strengthening our network footprint, brand reputation, and operational capabilities. And we are committed to capturing greater long-term market space and value, and progressing steadily towards sustainable profitability. So we foresee at the school level, we can achieve a profitability of this year. And also, you know, next year we will foresee our offline business to be profitable, including the headquarter overhead. Hope that address your question, Crystal.

Thanks, Shannon. That's very helpful.

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 via email at ir.goto.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.