Gaotu Techedu Inc

NYSE:GOTU

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the GaoTu Techedu Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your first speaker today, Ms. Katherine Chen, Head of Investor Relations. Please go ahead, Katherine.

[Katherine Chen, executive]

Thank you, operator. Good evening, everyone. Thank you for joining GaoTu's First Quarter 2024 Earnings Conference Call. My name is Katherine, and I'll help host the earnings call today. GaoTu's earnings release for the quarter was distributed earlier and is available on the company's IR website at ir.gaotu.cn, as well as through PR news services. Joining the call with me tonight from GaoTu's senior management is Mr. Larry Chen, GaoTu's Founder, Chairman and Chief Executive Officer; and Ms. Shannon Shen, GaoTu's Chief Financial Officer. Larry will first provide the business highlights for the quarter. And then afterwards, Shannon will discuss our financial performance in more detail. Following their prepared remarks, we will open the floor to questions from analysts. Before we begin, I'd like to remind you that this conference call will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities 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 more 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 statements. Further information regarding this and other risks is included in the company's public filings 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 a definition of non-GAAP financial measures and reconciliation of GAAP to non-GAAP financial results, please refer to our first quarter earnings release published earlier today. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this conference call will be available on GaoTu's IR website. It is now my pleasure to introduce our Founder, Chairman and Chief Executive Officer, Larry. Larry, please?

[Larry Chen, executive]

Good evening, and good morning, everyone. Thank you for joining us on GaoTu the first quarter of fiscal year 2024 earnings conference call. I would like to take this opportunity to express my gratitude to all of for your interest in and support of GaoTu. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB unless stated otherwise. I'm pleased to report our financial and operational results for the opening quarter of the year. During the first quarter, we remained laser focused on refining our educational products and expanding our customer acquisition channels. On the product front, we worked diligently to align our offerings more closely with user needs. While enhancing the [indiscernible] of our [indiscernible] products, we also made significant progress in diversifying our portfolio to better address user needs and improve learning efficiency. On the customer acquisition front, we expanded customer outreach by tapping to diverse channels and boost acquisition efficiency by streamlining and optimizing the teaching processes tailored to our product and content [ characteristics ]. This combination of high caliber educational offerings and robust customer acquisition channels have laid a solid foundation for the sustainable and rapid growth of our business. In the first quarter, our net revenue increased 33.9% year-over-year to RMB 946.9 million, while our gross billings grew 35.3% year-over-year to RMB 729.4 million. Excluding the one-off impact such as different clients retained schedules, our comparable growth [indiscernible] saw an annual increase of more than 70%. Non-GAAP net income reached RMB 3.0 million and non-GAAP net income margin was 0.3%. Our cash position remains strong with a total of RMB 3.8 billion in cash, cash equivalents, restricted cash and short and long-term investments, RMB 374.6 million higher than the same time point last year. Our strong performance in the first quarter has strengthened our confidence in continuing strategic investments in educational products and learning services, talent development and organizational enhancement and expansion to diverse customer acquisition channels. High-quality educational products, teaching excellence and premium learning services are the cornerstones of the education business. At GaoTu, we deployed diverse incentive mechanisms, including [indiscernible] classes, teaching competitions and the performance evaluations to ensure rigorous quality control of our learning services, improve the quality of teaching and the service capabilities of our teachers and providing [indiscernible] support to enhance their professional growth. With respect to product design, we enriched our offerings by introducing localized online content and personalized solutions that cater to different learning needs and ensure optimal learning outcomes. Our internal data reveals that the success rate of our class of 2024 on the National Grade 8 School entrance exam was more than twice the national average. Alongside bolstering the long-term competitive strength of our established business, we are also pushing forward with new initiatives. Within our learning services for college students and adults, we have established online boot camps to help users achieve their academic goals within a shorter time frame. We have also launched offline all round education services to better cultivate the students' holistic development and improve their overall wellbeing. As our business has experienced rapid growth, we have been increasingly wrapping up our investment in core content development. Specifically, the number of our full-time core content development professionals increased by roughly 50% year-over-year in the first quarter. As our business continues to expand, we are taking proactive steps to engage with regulatory bodies at various levels, seeking guidance on industry policies and compliance and [indiscernible] our educational product services based on related guidelines. Exceptional talent is one of the most critical strategic assets in the education industry. At GaoTu, we are committed to investing in and strengthening our ability to recruit, cultivate and retain outstanding individuals to advance our strategic goals and drive rapid finance growth. Time for the recruitment is one of our most important hiring channels by leveraging with top tier universities nationwide we are able to proactively engage with and secure promising candidates, ensuring a steady expansion of our talent pool. As of the first quarter, we have entered into a strategic partnership with dozens of universities. In addition, we have taken several initiatives to support our teams in improving their professional expertise. These include refining our talent development and retention mechanism, strengthening our organizational culture and the coherence and offering various [indiscernible] courses and internal experience sharing opportunities. Lastly, we have improved our organizational vitality by implementing our fast track promotion mechanism for exceptional team members. Investing in the development of diverse customer acquisition channels and the competitive content while ensuring operational efficiency is critical to our company's long-term success. So far, we have expanded into a diverse range of new acquisition channels, including live streaming, short-form videos, book sales and off line [ project ]. By consistently operating high-quality content, we have built up our competitive edge in these channels, amplified the user engagement and reduced acquisition costs. Along with ensuring operational efficiency, we're also actively exploring new avenues to acquire customer traffic and maintain our competitive edge. This year, we will boost our regional brand recognition and market penetration by ramping up investment in off-line channels with initiatives like establishing offline learning centers for quality students. GaoTu is about to mark its 10th anniversary since [indiscernible]. Throughout this [indiscernible] long journey, we have stayed true to our [ additional ] aspirations and actively embrace our social responsibilities by collaborating with [indiscernible] organization to promote rural development and advance educational equity. We have full confidence in our ability to provide [indiscernible] value for our users, shareholders and society at large as we continue to contribute to -- and to privatize sustainable development of China's education industry. Thank you very much. This is the end of my prepared remarks. Now I will pass the call over to our CFO, Shannon, to walk you through the financial and operational details of this quarter.

[Nan Shen, executive]

Thank you, Larry, and thank you, everyone, for joining our call today. I will now walk you through our operating and financial performance for the first quarter of fiscal year 2024. We commenced 2024 with a notable search in growth momentum in the first quarter. Backed by ample cash reserves, we remain committed to enhancing the extension of our core business. This was achieved by strengthening our portfolio and organizational capabilities, thereby reinforcing our leading position in brand recognition and competitive advantages. In parallel, we actively explored and cultivate product optimization and channel innovation, fortifying our core competitive modes and create lasting value for our shareholders. Our gross billings demonstrated robust growth. On a comparable basis, gross billings surged by more than 70% year-over-year to RMB 729.4 million. We anticipate maintaining this growth trajectory throughout the remainder of the year, which will gradually translate into accelerated revenue growth. In the first quarter of the year, our net revenues increased by 33.9% year-over-year to RMB 946.9 million. The business model for online education exhibit certain [indiscernible] and seasonal patterns. The second quarter is typically the peak demand season, necessitating proactive investments in marketing expenses and teaching resources reserves to capitalize on the enrollment window. This strategy ensures the maximization of operational efficiency and economics of scale. Historically, this entails certain upfront market expenditure in marketing costs with revenue realization gradually materializing in the latter half of the year. As student retention increases and concurrent enrollments, product penetration and brand recognition improved, the manpower costs associated with course and service delivery can be amortized and the economies of scale, progressively unlocking profitability potential. As such, profitability in a single quarter for online education is contingent on the ratio of new users to existing users, while working to ensure healthy unit economics, we recognize the need for simultaneous escalation in marketing investments going forward. Beginning in the second quarter, we plan to deploy additional tutors and resources and dynamically manage our customer acquisition channels to seize the acquisition window to drive meaningful growth in the student enrollments. Next, I will walk you through the progress we have made during the quarter. Learning Services contributed over 95% of net revenues. Breaking it down, or 75% of total revenues came from non-academic tutoring services and other traditional learning services, representing an increase of roughly 35% year-over-year. Our new initiatives are centered on academic tutoring services aimed at unleashing students in its potential and [ footing ] activities and holistic development through engaging content. During the quarter, this segment generated year-over-year growth of more than triple digits in gross billings on a comparable basis. Furthermore, it surpassed 20% for the first time as a percentage of total gross billings. This increasing progress is a testament to our ongoing efforts to improve the teaching standard of our instructors and tutors, coupled with the continuous refinements we have made to our educational offerings. Additionally, we are venturing into offline academic all around education courses, including [ coating ] and basketball that align with government and regulatory initiatives to promote diversified education and holistic development for [indiscernible] students. Our traditional learning services continued to generate robust growth momentum. With a diversified portfolio tailored to ward user needs, we expanded user outreach and enhanced sustainability and scalability of our product pipeline. This will serve as a long-term driver for sustainable growth. During the quarter, this segment recorded high double-digit growth in gross billings on a comparable basis and a year-over-year revenue increase of 35%. The other crucial component of our learning services is educational service for college students and adults, which accounted for around 20% of total revenues during the quarter. Revenue and gross billings, both increased by more than 30% year-over-year. The better-than-expected performance of this segment was primarily attributable to rapid growth in overseas study related services, driven by our expanded customer acquisition efforts across short-form radio and live streaming platforms. During the quarter, our overseas [indiscernible] related services saw a year-over-year increase of more than triple digits in revenue and gross billings. Jointly developed by industry-leading teachers and cross content development professionals, our educational offerings harness cutting-edge technologies like artificial intelligence, providing users with a personalized one-stop exams, preparation experience, fusing tailored content plan, learning paths that adopt to their pace and progress evaluation tools. Notably, our post-graduate entrance exam prep services generated positive cash flow for the third consecutive quarter. While our silver service exam prep business achieved profitability for the second consecutive quarter. I will now present our financials in more detail. Our cost of revenues this quarter was RMB 271.4 million. Gross profit increased 23.4% year-over-year to RMB 675.5 million with a gross profit margin of 71.3%. The year-over-year decrease in gross margin was predominantly a result of changes to our product mix and a more proactive recruitment of teaching staff to meet future demand. Total operating expenses during the quarter increased 66.6% year-over-year to RMB 753.2 million. Breaking it down, selling expenses increased 82.8% year-over-year to RMB 506.4 million, accounting for 53.5% of net revenues. This was partially attributable to the low base effect creating during the same period last year. The increase also reflected a rise in marketing expenses in response to heightened market demand over the winter season. We track and monitor sales and marketing efficiency on a weekly basis and drive scalable growth within such foundries to enhance brand awareness, provided that our unit economics meet specific profitable criteria. Based on the performance in the first quarter, our long-term investments in diversified channels and the meticulous refinement of our expert teaching quality have yielded satisfactory. Our return on investment metrics remain high efficiency, promoting us to appropriately increase our investment in sales expenses, thereby laying a solid foundation for long-term growth. Moving on, research and development expenses increased 56.3% year-over-year to RMB 151.6 million, accounting for 16.6% of net revenues. General and administrative expenses increased 21.7% year-over-year to RMB 95.2 million, accounting for 10.1% of net revenue. Loss from operations was RMB 77.7 million, and operating margin was negative 8.2%, Non-GAAP loss from operations was RMB 62.4 million, and non-GAAP operating margin was negative 6.6%. Net loss was RMB 12.3 million, and net income margin was negative 1.3%. Non-GAAP net income was RMB 3.0 million and non-GAAP net income margin was 0.3%. Our net operating cash outflow was RMB 197.4 million. Turning to our balance sheet. As of March 31, 2024, we held RMB 1.2 billion in cash, cash equivalents and restricted cash, RMB 1.6 billion in short-term investments, RMB 974.1 million in long-term investments. This comes to a total RMB 3.8 billion, approximately RMB 374.6 million higher than that at the same time point last year. As of March 31, 2024, our deferred revenue balance was RMB 1.0 billion, which primarily consists of tuition received in advance. As of March 31, 2024, we have repurchased an aggregate of approximately 4.9 million [ ADS ] on the open market for approximately USD 12.4 million. We will continue to execute stock buybacks in accordance with the guidance of the Board of Directors and create long-term value for our shareholders. Furthermore, Larry has reinforced his confidence in the company and [indiscernible] commitment to the original aspiration to education by personally purchasing an additional 0.51 million ADS in 2024. Before I provide our business outlook for the next quarter, please allow me to remind everybody that this contains forward-looking statements, which include risks and uncertainties that are beyond our control and could cause the actual results to differ materially from our predictions. Based on our current estimates, total net revenues for the second quarter of 2024 are expected to be between RMB 908 million and RMB 928 million, representing an increase of 29.1% to 32.0% on a year-over-year basis. This concludes my prepared remarks. Operator, we are now ready for the Q&A section. Thank you, everyone, for listening.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Alice Kou with Citibank.

[Unknown Analyst]

Good evening, management. I have a question regarding the 2Q revenue guidance and the impact of the shift in enrollment online, because we know that the guidance appears relatively conservative. Could you please provide more information on whether it is influenced by the shift in the enrollment period? Last year, reenrollment occurred in March, while this year it took place in April. Could you please put down the situation from us sharing detail them on how enrollment of the existing students and enrollment of new students outperformed separately? Thank you.

[Nan Shen, executive]

Thanks, Alex. Let's start with the guidance of the second quarter, then they can dive into our expectation for the whole year. So from the revenue perspective, we expected the revenue to be between RMB 908 million and RMB 928 million in the second quarter of 2024, representing an increase of 29% to 32% on a year-over-year basis. So the primary revenue contributor is learning services within which around 75% of our total revenues came from academic teaching services and our traditional learning services. So we still in the second quarter, we see strong momentum for this segment, and we foresee this part of revenue to grow near or over 45% on a year-over-year basis in the second quarter. So the segment with growth rates slower than overall company growth are primarily the impact of the education services we provide for college students and adults. Although the gross billings increased in the past 2 quarters show a strong momentum, but it's mainly contributed by college learning services and overseas-related business. According to the class schedule and seasonality, the revenue usually recognized in the third quarter and even the second half of the year. So therefore, although we saw the strong growth momentum in gross billings, the revenue remains flat in the second quarter, and therefore, it kind of drag down the whole company's revenue growth rate. So in terms of gross billings, we expect it to -- I mean, in the second quarter of 2024, we still anticipate it to grow at a high double-digit growth rate in the second quarter on a year-over-year basis. And also for -- especially for our academic tutoring services and our traditional learning services, the gross billings collected from new students, I expect it to grow over triple digits. And this momentum has been continued from last November, and we still see the momentum to continue in the second quarter. So regardless, all the scheduling differences compared with last year, if we see the first half in 2024 as a whole, we still expected the gross billings to grow at the high end of middle double digit on a year-over-year basis. So because we all know that gross billings is a leading indicator for the revenue growth, so which basically can place a solid foundation for the whole year revenue growth. So then if we're looking into the second half, the demand for non-academic [indiscernible] and the traditional business is still of essential. With clear compliance and governance guidance in place, our business growth initiatives with new enrollments and substantial generated incremental revenue through retention and cost expansion. So we still have the confidence in our operational capabilities and the reputation we have as [indiscernible] among students and parents. Therefore, we anticipate that the growth rate for both gross billings and revenues to accelerate in the second quarter and especially in the second half of the year. So we should have a higher level of clarity by the time of our next earnings call, but based on our assessment of the current situation, we saw revenue growth rate move towards to the high end of our expectations for the whole year. And in terms of the enrollment changes, because like we haven't disclosed details of the enrollment by segment., but because the ASP has stayed stable. So actually, the increase of the gross billings shows basically at the same pace with the enrollment increase. So like -- let's put all this information together, so although the revenue guidance of the second quarter seems a little bit weak. But if we put advertises on the gross billings we collected during the fourth quarter last year and the first half of 2024, we still have strong confidence for the whole year's revenue goal. And for specific quarterly growth guidance, we will remotely share updates with you in each of the earnings release. I hope that address your questions, Alice?

[Operator]

The next question comes from Jeffrey Chan with CLSA.

[CH Chan, analyst]

I have a question regarding the OpEx and also GP margin. Can management give us some more color on the GP margin and the OpEx ratio in the next quarter and in the rest of this year 2024? And perhaps if you could, can you give us more color on the profitability in full year 2024?

[Nan Shen, executive]

Thanks, Jeffrey, for your question. So let's believe the OpEx line by line and start with the change of our GP gross profit margin. So first, for the gross profit margin, we observed around 6% decrease in GP margin on a year-over-year basis. So the year-over-year decrease in gross profit margin was due to a few reasons. The primary reason was the revenue mix change. In terms of revenue contributor to meet diversified user demand. We have constructed a product mix primarily focused on online live large class business, complemented by one-on-one class, smart test books and off-line small classes. Among all these business models, online large class boosts the highest GP margin level. As our business expands, the proportion of revenue generated from our one-on-one classes, smart text books and off-line classes is gradually increasing, opening the revenue mix and subsequentially impacting gross profit margins, especially our offline learning center expansion is accelerating brought us a higher level of cost of goods sales, which marks the GP margin lower at this point of time. Secondly, to enhance the comprehensiveness and competitiveness of our curriculum system, we are making efforts to introduce and develop new courses. The associated investment in [indiscernible] resources in the early stage will also impact the gross profit margin before they achieve their full capacity. So in the long run, our GP margin will highly depend on the future revenue structures. So that's the reason for the GP margin fluctuation. Then secondly, let's look into the details of our R&D expenses change. So the year-over-year increase in our research and development expenses in this quarter was mainly due to corresponding resources, investments in innovative technologies, such as artificial intelligence started in the second half of last year. Education which was potential stands as a promising domain for practical implementation. So currently, our application of AI primarily focused on enhancing internal efficiency other than external tools. This includes areas such as curriculum research student auto question-and-answer section and also product research and design customer service call center and overall internal operations. Simultaneously, we are also exploring tool-based products aimed at improving learning efficiency like -- that they can assist our students to learn at a higher efficient level. Also to support the development of our offline business, we also started to invest in the research and development of off-line operating system. That's basically a new system and different from our online operating system as well as content development. We -- our off-line business is expanding very fast, so we recruit top-notch content researchers to help us to make a solid foundation for the content development. So -- but if we make a quarter-over-quarter comparison, the R&D expenses as a percentage of revenue actually decreased nearly 2%, which shows the economics of scale and operating leverage. And thirdly, if we dive into the G&A section. So the year-over-year growth in our G&A expenses was mainly due to the increase in labor cost. So since the beginning of this year, we brought a reasonable number of general management talent to our non-academic tutoring services, especially a couple of numbers of top-notch off-line learning center managers. And we believe that by doing so, our K-12-related business will achieve rapid growth while also improving operational quality and efficiency because we all know that talent is the most factors to success through our off-line business. And last but most is our expenses we spend on sales and marketing. So it's highly relative to our gross billings increase. So as I mentioned in the prepared remarks, if we make an actual comparison, actually, the gross billing is collected from our newly added students increased over 70% on a year-over-year basis. Well, our sales and marketing expenses increased nearly around 58% on a year-over-year basis. So we still see our customer acquisition cost is within the profitability boundaries, and we still see like we have cushion and room there that we saw our investment -- our returns over investment on the [indiscernible] side still maintains our high efficiency. So that gives you a high level or a color on our OpEx variations there and hope that helps. Thanks, Jeffrey.

[Operator]

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

[Katherine Chen, executive]

Thank you, operator, and thank you, everyone, for joining the call today. And if you have any further questions, please don't hesitate to contact our Investor Relations department or our management team [indiscernible] @[e-mail] 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 day.

[Operator]

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