Luna Innovations Q3 2023 Earnings Call Transcript

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November 22, 2023

There are 4 speakers on the call.

Operator

Hello, and welcome to the Gautu Tech EDU Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode.

Speaker 1

After today's presentation, there will be an opportunity to ask questions.

Operator

Please note, today's event is being recorded.

Speaker 1

I would now like to turn the conference over

Operator

to Catherine Chen, Head of Investor Relations. Please go ahead.

Speaker 2

Thank you, operator. Good evening, everyone. Thank you for joining Gautou's Q3 2023 earnings conference call. My name is Catherine, And I'll now host the earnings call today. Gaotu's earnings release for the quarter was distributed earlier And it's available on the company's IR website at ir.gou2.cn as well as through PR News Care Services.

Speaker 2

Joining the call with me tonight from Gautu's senior management team is Mr. Larry Chen, Gautu's Founder, Chairman and Chief Executive Officer And Ms. Shannon Shen, Gaozu'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 2

Following their prepared remarks, we'll open the floor to questions from Before we begin, I'd like to remind you that this conference call will contain forward looking statements made under the Safe Harbor provisions 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 may 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 contained in any forward looking statements, further information regarding this and other risks is included in the public filings with the U. S.

Speaker 2

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 Q3 earnings release published earlier today. As a reminder, this conference is being recorded.

Speaker 2

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, Larry. Larry, please.

Speaker 1

Good evening and good morning, everyone. Thank you for joining us on Gaotu's 3rd quarter 2023 earnings conference call. I would like to take this opportunity to express my Gratitude to all of you for your interest and support of Gaotu and the broader education industry. Before I start, would like to remind everyone that all financial figures discussed today are quoted in RMB unless stated otherwise. Benefiting from the rising needs of students, our business continues to focus on the stages in students' life cycle Where their learning capability is at its strongest and we aim to meet their learning needs and enhance learning efficiency by continuously enriching product offerings and delivery formats.

Speaker 1

After the 1st 9 months of operation optimization and rapid iteration in 2023, We are currently focused on defining clear development to direct trends and tracking a well defined path forward dedicated to building up our core organizational competitiveness and continuously delving Into new business initiatives, we will invest in areas that are strategically important for the company's success, Continue to refine products and services for non academic tutoring services, traditional learning services and educational In the Q3 of 2023, our net revenues grew 30 point 2% year over year to RMB789,400,000 and our gross billings reached RMB 630 Climb in profits due to seasonality and historical operational constraints into 2020 2, We remain confident in our growth prospects and profitability in the coming year, driven by our constantly improving tenant pool, Clearly defined growth strategy for each segment and ample cash reserve. In the meantime, we also continued our share repurchase program during the quarter, demonstrating our unwavering confidence in our growth prospects. I will now discuss our business highlights from the Q3 across 5 aspects. 1st, putting students and the users first, so we continue to invest in our For our non academic tutoring services and the traditional learning We further expanded our knowledge graph, optimized our product metrics and ensured the precise alignment The alignment between students' needs and the courses we offer.

Speaker 1

Following a year of continuous refinement, the Curriculum and the services of our non academic tutoring services have gained the trust of both our users and the market as a whole. We noticed a significant improvement in indicators that reflects our teaching quality and learning results such as the retention rate. In terms of traditional revenue services, revenue achieved year over year growth of over 40% in the Q3. We broadened our variety of class offerings and teaching products to better address the diverse needs of our existing students. Listen to the dual teacher online large class, we have introduced new offerings, including personalized learning services, which have enhanced the scalability and sustainability of our portfolio as well as met Strategy, we further optimized our organizational structure to create a more dynamic enterprise Since the Q2, we have strategically scaled back certain business lines within our educational services for This segment showed the promising signs of a Turning around in the Q3, streaming its losses by nearly 100% by focusing on high quality content And award-of-mouth referrals to drive customer acquisitions as well as enhancing our competitive advantage In terms of service quality, 3rd, we identified our efforts to onboard and cultivate Outstanding professional talents to expand the breadth and depth of our talent pool, cohesive our And a motivated team is a driving force behind our sustainable growth, building a team of consistently replicate our success and drive further business expansion.

Speaker 1

Since our business Structuring, we have prioritized the expansion of our tenant pool and brought in a number of seasoned industry Veterans, their sophisticated prospectiveness and successful track record have proven highly beneficial to the development of our business. Meanwhile, we initiated a strategic program called Gautu Talent Footring Program For the 2024 full recruitment season in collaboration with leading targeted universities, the program allows us to bridge the green top notch candidates and provide them with the opportunity To gain insight into the industry, so as to deepen mutual understanding and increase talent acquisition efficiency. 4th, We concentrated on enhancing customer acquisition ROI by diversifying our Position channels and fortifying our competitive edge in content driven strategies, so improving the overall health of our business model. Through a combination of initiatives, including leveraging short form video, live streaming and book sales, expanding Our offline presence and engaging in private traffic, we aim to improve our acquisition efficiency. In particular, we have set up multiple offline centers for postgraduate entrance exam preparation business and overseas study related services.

Speaker 1

These centers enable us to acquire customers And service delivery quality, but also enhance our brand visibility. Lastly, we have strong confidence in our company's future growth and development as of November 20 2023, we had repurchased a cumulative total of approximately 4,200,000 ADS and our share repurchasement plan adopted in November 2022. In addition, our Board of Directors today authorizes the upsizing of our existing share repurchase program, Pursuant to which we may repurchase up to US80 $1,000,000 worth of ADS Through November 22, 2025, we will continue to promote our long term repurchase We see tremendous growth potential for Gaoutu and are confident in our ability to deliver high quality services and efficient operations through our ongoing efforts To improve customer acquisition efficiency, refine our educational products and services offerings and fostering rapid growth of our tenants and organizations. We believe These initiatives will put Gautau on the fast track to growth. Thank you very much.

Speaker 1

This is the end of my prepared remarks. Now I will pass the call over to our CFO, Sheng, to walk you through the financial and operational details of the 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 Q3 of 2023, please note that all financial figures Discussed today are quoted in RMB terms unless otherwise stated. The company maintained growth momentum during the Q3 of 2023. Net revenues increased by 30.2% year over year to RMB789,400,000, while gross billings increased by 5 Which was $180,600,000 higher than that of same time of last year. This highlights the ample resources we have to continue driving the development of our business.

Speaker 3

Educational services targeted the group of students from primary to high school demonstrate salient seasonality. And the Q3 coincides with summer vacation, making it the peak season of the year for online customer acquisition. Operations need to be aligned with school schedules to capitalize on a limited window of Coordinating our efforts also allowed us to benefit from economies of And maximize operational efficiency and ROI. During the period, we could allocate marketing expenses and tutors in line with market demand. As such, our selling expenses typically peak for the year during the Q3, notably impacting our overall profitability.

Speaker 3

To align with school schedules, The second and the 4th quarters have been designated as our main customer retention seasons, during which gross billings are notably higher when compared to the 1st and the 3rd quarters. Throughout this quarter's summer enrollment period, We observed robust learning demand from students. This also puts a higher demand on our ability to adapt and phantom operations in response. We plan to enhance the effectiveness and efficiency of our marketing efforts in the following three ways. 1st, in terms of tutor recruitment, we are taking a more proactive approach to acquire campus talents.

Speaker 3

For the 2024 fall recruitment season, we initiated a strategic program called Gautu Talent Footprint Program in collaboration with leading targeted universities and normal universities. As the project deepens, candidates can engage with us and experience our culture from day 1, Completing the two way fostering and selection process. It also allows us to fully grasp The recruitment progress yet result in a timely and accurate manner in order to align with customer acquisition schedules. 2nd, on the market front, we will continue to expand our presence across a diverse range of innovative At the same time, we aim to improve our ROI by expanding and refining our customer profile, which could help boost our effectiveness at acquiring high quality leads. Lastly, on the technology field, We will enhance our operational efficiency and largely by leveraging advanced AI technologies to empower internal teams Across tutoring, research, sales and customer services.

Speaker 3

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, Approximately 70% of total revenues came from non academic tutoring services and other traditional learning services, Representing an increase of over 40% year over year, an increase and solidifying this segment's role as a key driver Our non academic tutoring services help students develop independent thinking and problem solving And spark their passion for learning through engaging content. After nearly 2 years of refinement At multiple iterations, we have made considerable progress in front owning our product offerings and making it more sustainable and scalable. The segment recorded middledoubledigitgrowth Year over year in the quarter and is expected to achieve high double digit annual growth for the full year, underscoring its position as a key revenue driver.

Speaker 3

The other crucial component of our learning services is educational services For college students and adults, which accounted for around 25% of total revenues during the quarter. We made strategic adjustments to this business segment by discontinuing certain services And investing in areas with huge market potentials and rapid growth rate. During the quarter, As we draw organic growth through innovative customer acquisition strategies and word-of-mouth referrals, The remaining services significantly reduced the losses by nearly 100% year over year. Within the segment, the postgraduate entrance exam prep business saw a year over year increase of more than 25% In both net revenues and gross billings, some of our overseas test prep and overseas static consulting businesses Achieved triple year over year growth in both net revenues and gross billings. I will now Present our financials in detailed numbers.

Speaker 3

Our cost of revenues this quarter was RMB218,100,000. Gross profit increased 30.6% year over year to 571,300,000 EMS gross profit margin was 72.4%. Total operating expenses during the quarter increased 32.3 percent year over year to RMB 670,800,000. Breaking it down, Selling expenses increased 29% year over year to RMB434,400,000, Accounting for 55 percent of net revenues. This was primarily attributable to our increased marketing investments to address the robust demand during the summer season.

Speaker 3

Moving on, research and development expenses Increased 22.6 percent year over year to RMB130,600,000, accounting for 16.5% of This was primarily attributable to increased investment in AI related deals. General and administrative expenses increased 66.4 percent year over year to RMB105,800,000, Accounting for 13.4 percent of net revenues, loss from operations increased 43% year over year And operating margin was negative 12.6%. Non GAAP loss from operations was RMB 83,600,000 and non GAAP operating margin was negative 10.6%. Net loss narrowed 6% year over year to RMB 57,700,000 and net income margin was negative 7 point Non GAAP net loss was $41,700,000 and non GAAP net income margin was Negative 5.3%. Our net operating cash outflow was 209,900,000.

Speaker 3

Turning to our balance sheet. As of September 30, 2023, we held RMB885,600,000 in cash, cash equivalents and restricted cash, along with RMB1.6 billion in short term investments and RMB 1,100,000,000 in long term investments. This comes out to a total approximately RMB $3,680,600,000 higher than the same time of last year. As of September 30, 2023, our deferred revenue balance was RMB 761,300,000, which primarily consists of tuition received in advance. It is worth mentioning that On November 22, 2022, our Board of Directors authorized a share repurchase program of up to $30,000,000 over a 36 month period.

Speaker 3

As of November 20, 2023, We have repurchased an aggregated of approximately 4,200,000 ADS for approximately US10.8 million dollars Moreover, we are pleased to announce that our Board today authorized upsizing of existing share repurchase program to 80,000,000, which demonstrates our unwavering long term confidence in our growth prospects. Larry also purchased approximately 800,000 ADS in 2023 using his personal funds to demonstrate management's unwavering commitment to the original exploration to education. Going forward, the company will keep to its original goal of addressing user needs and enhancing learning outcomes in order to create sustainable long term value for its customers Before I provide our business outlook for the next quarter, please allow me to remind remind that this contains forward looking statements, which involve risks and uncertainties, which are beyond our control and could cause Actual results could differ materially from our predictions. Based on our current estimates, Total net revenues for the Q4 of 2023 are expected to be between RMB668 1,688,000,000, representing an increase of 6.1% to 9.3% on a year over year basis. This concludes my prepared remarks.

Speaker 3

Operator, we are now ready for

Speaker 1

And the first question comes from Yuen Zhang with China Renaissance. So as we know, someone is up due time for student enrollment. So could you discuss more details on what was our strategy and

Speaker 3

Thanks, Yuen. Thanks for your question. So the financials of Q3 partially reflected the operations during the summer break. In terms of the revenue growth, we have maintained an overall growth rate of over 30%. Our revenues primarily consist of educational services, which is further divided into Academic tutoring services and traditional learning services and learning services for college students and adults.

Speaker 3

So as for the learning services for college students and adults, like I mentioned in the last quarter and mentioned in my prepared remarks, There is a strategic shift. The strategy has evolved from scale expansion to a sequential Emphasizes on profitability. So under this strategic direction, we have gradually adjusted and phased out some unprofitable Operational units. So, the revenue from this segment grew slower in Q3 as compared to the same period of last year. And in last year, I mean, in the 2022 Q3, our learning services for college students and adults actually Contributed to over 3% of our total revenue, which has somewhat influenced our revenue growth rate for Q3 of 2023 and also this is the same dynamic in the Q4 of 2023.

Speaker 3

And that's why We see like our revenue guidance was around or less than 10%. And however, if we Excluding the income growth of our K-twelve related business, which includes non academic tutoring services and traditional learning It still maintained a over 40% year over year increase. We have observed strong demand from customers during the summer break And the availability of high qualified service providers, Which is capable of delivering high quality courses has been limited. As a result, our revenue has maintained a relatively high Growth rate in the Q3. In the Q3, our gross billings, however, the growth rate was approximately 5%.

Speaker 3

The primary drivers were in the K-twelve business and the growth rate lagged behind the revenue growth rate, Mainly due to two reasons. Firstly, our traditional business is a major contributor to the gross billing growth. And actually, the new customer acquisition efficiency during the summer break was overall impressive and drove a meaningful year over year increase, but there was a significant decrease in the supply of next grade students compared to last Therefore, the scale of gross billings grow more slowly than the revenue. And secondly, faced with strong demand during the summer break, We did not reserve a sufficient supply of tutors, resulting in situations where At some point, customer demand could now be fully met, leading to a less level of gross billing collection. So after self reflecting and to achieve a higher growth rate next summer, I mean in 2024, We have implemented a few measures.

Speaker 3

On one hand, within the boundaries and constraints of policy compliance, We proactively acquired and operated private traffic to attract and engage The students from the middle school, especially for 9th grade students, by providing services related to like Learners, planning and psychological consulting and so on, we aim to build up a pool of highly engaged students in the Middle school and we expect the pool in the next spring to reach or even exceed last year's level. And so That can kind of like provide a sufficient student pool for our next summer's gross billing growth. And on the other hand, during this year's fall recruitment process, like I just mentioned and Larry also mentioned, we collaborated with Top schools and some normal institutions engaging in earlier and we do two way communication with Those new graduations next year to improve recruitment efficiency and better meet the demands And this actually worked. So as of the current progress in the 4th quarter, The gross billings growth rate of our K-twelve business has rebounded to nearly 30% on a year over year basis. So, last details we really want to share for the summer vacation and hope that address your question, Yvonne.

Speaker 1

Yes, that's very clear. Thank you. Thanks.

Operator

Thank you. And this concludes the question and answer session. Would like to return the call to Katherine Chen for any closing comments.

Speaker 2

Thank you, operator. 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 Thank you very much again for your time. Have a great night.

Operator

Thank you. As mentioned, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Luna Innovations Q3 2023
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