Gaotu Techedu Q1 2024 Earnings Call Transcript

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May 21, 2024

Key Takeaways

  • In Q1, net revenues increased 33.9% YoY to RMB946.9 million and gross billings rose 35.3% (over 70% on a comparable basis), underpinning strong top-line momentum.
  • Despite revenue growth, rising operating expenses—selling expenses up 82.8% and R&D up 56.3% YoY—led to a non-GAAP net income margin of just 0.3% and an operating loss.
  • The company diversified its offerings with new online boot camps, offline holistic education and rapidly growing overseas study services, each achieving triple-digit gross billing growth.
  • Management expects Q2 net revenues of RMB908 million–928 million (+29.1%–32% YoY), noting seasonality and upfront marketing investments typical of the peak enrollment period.
  • Gaotu maintains a robust balance sheet with CNY3.8 billion in cash and investments, enabling continued strategic investments and share buybacks.
AI Generated. May Contain Errors.
Earnings Conference Call
Gaotu Techedu Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Gatu Tech EDU 4th Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to your first speaker today, Ms. Katherine Chen, Head of Investor Relations.

Operator

Please go ahead, Katherine.

Speaker 1

Thank you, operator. Good evening, everyone. Thank you for joining Gaotun's Q1 2024 earnings conference call. My name is Catherine, and I'll help host the earnings call today. Gautu's earnings release for the quarter was distributed earlier and is available on the company's IR website at ir.gau2.cn as well as through PR Investor Services.

Speaker 1

Joining the call with me tonight from Gaofu's senior management is Mr. Larry Chen, Gaofu's Founder, Chairman and Chief Executive Officer and Ms. Shannon Shen, Soutout'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.

Speaker 1

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 position 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.

Speaker 1

Further information regarding this and other risks is included in the company's public filings with the U. S. SEC. The company does 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 purposes only.

Speaker 1

For a definition of non GAAP financial measures and reconciliations of GAAP to non GAAP financial results, please refer to our Q1 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 Gaoxu's IR website. It is now my pleasure to introduce our Founder, Chairman and Chief Executive Officer, Larry. Larry, please?

Speaker 2

Good evening and good morning everyone. Thank you for joining us on Gaotuo's Q1 quarter fiscal year 2024 earnings conference call. I would like to take this opportunity to express my gratitude to all of you for your interest in and the support of Gauthu. 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.

Speaker 2

During the Q1, 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 educational draw of our established 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 the content characteristics. This combination of high caliber educational offerings and the robust customer acquisition channels have laid a solid foundation for the sustainable and rapid growth of our business.

Speaker 2

In the Q1, our net revenues increased 33.9 percent year over year to 9 RMB946.9 million, while our gross billings grew 35.3% year over year to RMB729.4 million. Excluding the one off impact such as different client retention schedules, our comparable gross billings saw an annual increase of more than 70%. Non GAAP net income reached RMB3.0 million and the non GAAP net income margin was 0.3%. Our cash position remains strong with a total of CNY3.8 billion in cash, cash equivalents, restricted cash and short and long term investments, RMB374.6 million higher than the same time point last year. Our strong performance in the Q1 has strengthened our confidence in continuing strategic investments in educational products and learning services, talent development and organizational enhancement and expansion into diverse customer acquisition channels.

Speaker 2

High quality educational products, teaching excellence and the premium learning services are the cornerstones of the education business. At Gautou, we deployed diverse incentive mechanisms including regular mock 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 targeted support to enhance their professional growth. With respect to product design, we reached our offerings by introducing localized online content and personalized solutions dedicated to different learning needs and ensure optimal learning outcomes. Our internal data reviews 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 the bolstering the long term competitive strength of our established business, we are also pushing forward with new initiatives.

Speaker 2

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 timeframe. We have also launched offline all round education services to better cultivate students' holistic development and improve their overall well-being. As our business has experienced rapid growth, we have been increasingly ramping up our investment in cross content development. So specifically, the number of our full time cross content development professionals increased by roughly 50% year over year in the Q1. 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 in midstream and interim our educational product services based on related guidelines.

Speaker 2

Exceptional talent is one of the most critical strategic assets in the education industry. At Gautou, we are committed to investing in and strengthening our ability to recruit, cultivate and retain outstanding individuals to advance strategic goals and drive rapid finance growth. Hyamp's recruitment is one of our most important hiring channels. By collaborating 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 Q1, we have entered into strategic partnerships with dozens of universities.

Speaker 2

In addition, we have taken several initiatives to support our teams in improving their professional expertise. These include refining our talent development and retention mechanisms, strengthening our organizational culture and the cohesion and offering various themed courses and internal experience sharing opportunities. Lastly, we have improved our organizational vitality by implementing a 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 the online presence.

Speaker 2

By consistently operating high quality content, we have built up our competitive edge in these channels, amplified 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 the market penetration by wrapping up investments in offline channels with initiatives like establishing offline learning centers for college students. SOUTHU is about to mark its 10th anniversary since founding. Throughout this decade long journey, have stayed true to our educational aspirations and activity and actively embrace our social responsibilities by collaborating with philanthropic organizations to promote rural development and advanced educational equity.

Speaker 2

We have full confidence in our ability to provide a lasting value for our users, shareholders and the society at large as we continue to contribute to and spread ahead the 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 to our business quarter.

Speaker 3

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 Q1 of fiscal year 2024. We commenced 2024 with a notable surge in growth momentum in the Q1. Backed by ample cash reserves, we remain committed to enhancing the expansion 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.

Speaker 3

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 RMB729,400,000. We anticipate maintaining this growth trajectory throughout the remainder of the year, which will gradually translate into accelerated revenue growth. In the Q4 of the year, our net revenues increased by 33.9% year over year to RMB 946,900,000.

Speaker 3

The business model for online education exhibits certain cyclical and seasonal patterns. The Q2 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 improves, demand power costs associated with course and service delivery can be amortized and the economy of scale, progressively unlocking profitability potential.

Speaker 3

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 Q2, 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.

Speaker 3

Breaking it down, more than 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' innate potential and fostering 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 offering.

Speaker 3

Additionally, we are venturing into offline academic all around education courses, including coding and basketball that align with government and regulatory initiatives to promote diversified education and holistic development for K-nine students. Our traditional learning services continued to generate robust growth momentum. With a diversified portfolio tailored to varied 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 more than 35%.

Speaker 3

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 video and live streaming platforms. During the quarter, our overseas study related services saw a year over year increase of more than triple digit in revenue and gross billings. Jointly developed by industry leading teachers and course content development professionals, our educational offerings harness cutting edge technologies like artificial intelligence, providing users with a personalized one stop exam preparation experience, featuring tailored content plans, learning paths that adapt to their pace and progress evaluation tools.

Speaker 3

Notably, our postgraduate entrance exam prep services generated positive cash flow for the 3rd consecutive quarter, while our sewer service exam prep business achieved profitability for the 2nd consecutive quarter. I will now present our financials in more detail. Our cost of revenues this quarter was 271,400,000 dollars Gross profit increased 23.4 percent year over year to $675,500,000 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 the more proactive recruitment of teaching staff to meet future demand. Total operating expenses during the quarter increased 66.6% year over year to RMB753,200,000 Breaking it down, selling expenses increased 82.8% year over year to RMB 564,600,000 accounting for 53.5 percent of net revenues.

Speaker 3

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 basis and drive scalable growth within such boundaries to enhance brand awareness, provided that our unit economics meet specific profitable criteria. Based on the performance in the Q1, our long term investment 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.

Speaker 3

Moving on, research and development expenses increased 56.3% year over year to RMB151,600,000, accounting for 16.0 percent of net revenues. General and administrative expenses increased 21.7% year over year to RMB95,200,000 accounting for 10.1 percent of net revenue. Loss from operations was US77.7 million dollars dollars and operating margin was negative 8.2%. Non GAAP loss from operations was 62,400,000 dollars and non GAAP operating margin was negative 6.6%. Non loss was 12.3 $1,000,000 and net income margin was negative 1.3%.

Speaker 3

Non GAAP net income was 3,000,000 dollars and non GAAP net income margin was 0.3%. Our net operating cash outflow was 197,400,000 dollars Turning to our balance sheet. As of March 31, 2024, we held $1,200,000,000 in cash, cash equivalents and restricted cash, dollars 1,600,000,000 in short term investments, dollars 974.1 $1,000,000 in long term investments. This comes to a total $3,800,000,000 approximately 300 and $74,600,000 higher than that at the same time point last year. As of March 31, 2024, our deferred revenue balance was RMB1.0 billion, which primarily consists of tuition received in advance.

Speaker 3

As of March 31, 2024, we have repurchased an aggregate of approximately 4,900,000 ADS on the open market for approximately 12,400,000. 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 enduring commitment to the original aspiration to education by personally purchasing an additional 0.51000000 ADS in 2024. Before I provided our business outlook for the next quarter, please allow me to remind everyone that this contains forward looking statements, which include risks and uncertainties that are beyond our control and could cause the actual results to differ materially from our predictions. Based on our current estimates, total net revenues for the Q2 of 2024 are expected to be between 9 $8,000,000 $928,000,000 representing an increase of 29.1% to 32.0% on a year over year basis.

Speaker 3

This concludes my prepared remarks. Operator, we are now ready for the Q and A section. Thank you everyone for listening.

Operator

We will now begin the question and answer session. Our first question comes from Alice Kao with Citibank. Please go ahead.

Speaker 4

Good evening, management. Thank you for taking my question. I have a question regarding the 2Q revenue guidance and the impact of the shift in reenrollment timeline. 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 reenrollment period? Last year, reenrollment occurred in March, while this year, it took place in April.

Speaker 4

Could you please break down the situation for us, sharing details on how reenrollment of the existing students and enrollment of new students are performing separately? Thank you.

Speaker 3

Thanks, Alex. Let's start with the guidance of the Q2, then they can dive into our expectations for the whole year. So, from the revenue perspective, we expected the revenue to be between RMB908 1,000,000 and RMB928 1,000,000 in the Q2 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 non academic tutoring services and our traditional learning services. So we're 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.

Speaker 3

So the segment with growth rates slower than overall company growth, primarily the impact of the education services we provided for college students and adults. Although the gross billings increased in the past 2 quarters showed a strong momentum, but it's mainly contributed by college learning services and overseas related business. According to the class schedule and the seasonality, the revenue usually recognized in the Q3 and even the second half of the year. So, therefore, although without the strong growth momentum in gross billings, the revenue remains flat in the second quarter and therefore it cannot drag down the whole company's revenue growth rate. So in terms of gross billings, we expect it to I mean, in the Q2 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.

Speaker 3

And also for especially for our academic tutoring services and our traditional learning services, the gross billings collected from new students are expected to grow over triple digits. And this momentum has been continued from last November and we still see the momentum to continue in the Q2. So regardless, all the scheduling differences compared with last year, if we see the first half in 2024 as a whole, we still expect 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 the academic recruiting and traditional business is still substantial.

Speaker 3

With clear compliance and governance guidance in place, our business growth initiatives with new enrollments and sequential generated incremental revenue through retention and cost expansion. So we do have the confidence in our operational capabilities and the reputation we have at the village among the 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.

Speaker 3

And in terms of the enrollment changes, because like we haven't disclosed details the enrollments by segment, but because the ASP stays stable, so actually the increase of the gross billings shows basically at the same pace with the enrollments increase. So, that's put all this information together. So although the revenue guidance of the Q2 seems a little bit weak, but if we put emphasis on the gross billings we collected during the Q4 last year and the first half of twenty twenty four, we still have strong confidence for the whole year's revenue goal. And for specific quarterly growth guidance, we will probably share updates with you in each of the earnings release. Hope that address your questions, Alice.

Speaker 4

Thank you.

Operator

And the next question comes from Jeffrey Chen with CLSA.

Speaker 2

Please go ahead.

Speaker 5

Hi. Thank you, management, for taking my question. Other question regarding the OpEx and also GP margins. 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?

Speaker 5

Thank you.

Speaker 3

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.

Speaker 3

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 1 on 1 class, smart test books and offline 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 1 on 1 classes, smart textbooks and offline classes is gradually increasing, altering the revenue mix and sequentially impacting gross profit margins. Especially, our offline learning center expansion is accelerating, brought as a higher level of cost of goods sold, 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.

Speaker 3

The associated investment in factory 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 and 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.

Speaker 3

Education with its vast 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 offline operating system.

Speaker 3

That's basically a new system and different from our online operating system as well as content development. Our offline 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 and 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 and A section, so the year over year growth in our G and A expenses was mainly due to the increase in labor cost.

Speaker 3

So, since the beginning of this year, we brought a reasonable number of general management talents to our academic tutoring services, especially a couple numbers of top notch offline learning center managers. And we believe that by doing so, our K-twelve related business will achieve rapid growth while also improving operational quality and efficiency because we all know that talent is the most factor to success for our offline business. And last but the 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 equitable comparison, actually the gross billings collected from our newly added students increased over 70% on a year over year basis.

Speaker 3

Well, our sales and marketing expenses increased nearly around 58 percent 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 customer acquisition side still maintains a 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.

Speaker 1

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 via email at iroutu. Cn directly. You are also welcome to subscribe to our news alerts on the company's IR website. Thank you very much again for your time.

Speaker 1

Have a great day.

Operator

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

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