Gaotu Techedu Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 30, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Gautu Tech EDU First Quarter 2023 Earnings Conference Call. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I'd now like to turn the conference over to your first speaker today, Ms. Sherry Lu, IR Manager of Gaotu.

Operator

Please go ahead, Sherry.

Speaker 1

Thank you, operator. Good evening, everyone. Thank you for joining Daotu's Q1 2023 earnings conference call. Daotu's earnings release for the quarter was published earlier today and is available on the company's IR website at ir. Gautou.

Speaker 1

Cn. Joining the call with me tonight from Gautou's senior management is Mr. Larry Chen, Gaochu's Founder, Chairman and Chief Executive Officer and Ms. Shannon Shen, Gaochu's Chief Financial Officer. Glenn will first provide business highlights Before we begin, I would like to remind you that this conference call will contain forward looking statements as defined in the U.

Speaker 1

S. Private Securities Litigation Reform 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 it may cause the company's actual results, performance or achievements to differ materially from those contained in any forward looking statements. Further information regarding these matters is included in the company's public filings with the U. S.

Speaker 1

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 purposes only. For a definition of non GAAP financial measures and A reconciliation 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.

Speaker 1

In addition, a live and archived webcast of this conference call will be available on Gaotou's IR website. It is now my pleasure to introduce Larry. Larry, please?

Speaker 2

Thank you, Sherry. Good evening and good morning, everyone. Thank you for joining us on Gautau's Q1 2023 earnings conference call. Before I start, I would like to remind everyone that all financial figures discussed tonight are put in RMB unless stated otherwise. During the Q1 of 2023, we maintained the healthy and stable sequential growth in net revenues and drove a Our net revenues increased 12.3 percent quarter over quarter to $707,300,000 and our gross billings were up 69.4 percent year over year to RMB 539,000,000.

Speaker 2

Moreover, the improvement The operational efficiency strengthened our profitability, which was demonstrated by the triple digit year over year increase in both income from Operations and net income. Our non GAAP net income margin for the quarter reached 18 0.9%. While favorable seasonality partially contributed to the strong start to the year, It was primarily driven by our exceptional organizational capabilities and we remain committed to our strategy of long term sustainable and Profitable Growth. And it further reinforced our confidence in achieving annual effective growth and generating sizable positive net operating cash flow for the full year 2023. Our focus Continued to remain on 2 major business lines, learning services and educational content and Digitalized Learning Products.

Speaker 2

Learning services continue to serve as the core pillar of our business and the predominant revenue contributor. It mainly includes educational services for college students and adults, Overseas study related services, non academic tutoring services and other traditional learning Certainly, I will now discuss the business highlights of the quarter through 3 aspects. First, all of our core business Thank you. And we continue to remain on high and steady development trajectory. To start, our educational Services for college students and adults generated a positive net operating cash flow during the quarter, which not only reflected the seasonal uptick in gross billings, but more meaningfully was a confirmation of robust operational efficiency enhancement.

Speaker 2

For instance, our postgraduate entrance exam trial business saw roughly 36% Increasing gross billings as well as a triple digit year over year growth in marketing expense are well positioning us to gain further revenue growth. Moreover, some of our overseas study related services such as the IELTS Prime business delivered Triple digit year over year growth in both gross billings and revenues. Additionally, our non academic tutoring services Also booked a triple digit year over year increase in gross billings. Looking forward, we expect all of our core business lines to sustain A positive momentum. 2nd, we continue to innovate to achieve business breakthroughs.

Speaker 2

We have been ramping up our efforts to develop a diverse range of regional and self operated consumer acquisition channels With higher conversion rates with a particular focus on private traffic such as a short video live streaming operation. During the quarter, I created my own account on Dong In to lead and encourage our team to explore the Condolee's opportunity is a short video ecosystem. Live streaming ongoing has already become one of the major customer acquisition for some of our new businesses and live streaming sessions hosted by a number of our instructors have repeatedly ranked among the Call platformers in their respective verticals in terms of gross merchandise value, our GMV. Attending to the value of their premium content, repeating presentations and their seamless We have dramatically improved the customer acquisition efficiency and a strengthened recognition of the Gautau brand, which will facilitate word-of-mouth referrals going forward, forming a positive feedback loop. Finally, we are convinced that artificial intelligence will have a tremendously transformative effect on a broad range of industries, It's basically the education and sector.

Speaker 2

As an online education company, we will leverage our advantages in students' learning statistics and the technological expertise that we have accumulated over the year to see the emerging opportunities. Accelerating the realization of AI technologies in educational settings and develop innovative and highly Personalized intelligence products that exceed expectations will reinforce user engagement. 3rd, we continue To enhance our operational efficiency, on one hand, the integration of generative AI with the acquisition had already and will further Expedited internal efficiency improvements, allowing our instructors and tutors to dedicate more time to assist We have also improved cross delivery efficiency through continuous training of instructor and the tutors as well as the optimization of operational systems. As a result, we achieved the 3rd consecutive sequential improvement in gross profit margin. Further, thanks to our improved customer acquisition efficiency and growing brand popularity, Selling expenses ROI was up by approximately 74% year over year, prompting the notable year over year growth in gross billings.

Speaker 2

Moving forward, we will continue to boost efficiency and profitability while ensuring high standards for teaching quality and customer satisfaction. We are convinced That the rapid development of AI technology will bring about a paradigm shifting transformation Across the education industry, we are actively embracing all the emerging changes As we push the boundaries with un remitting efforts to develop and innovate across this dynamic market landscape To create more efficient educational products with your peer learning services and more convincing results and to better fulfill the educational needs of next generation. Nevertheless, regardless of how the industry will be received, We will stay true to our cherished original aspiration to educate. Our pursuit of excellence in educational Product, teaching quality and learning services is uncertain. As we look ahead, Committed to our mission of making learning better, we will continue to deepen our presence in the education sector Thank you very much.

Speaker 2

This is the end of my prepared remarks. Now, I will pass the call over to our CFO, Shannon, to walk you

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 2023. Please note that all financial figures discussed today are quoted in RMB unless otherwise noted. We reported another quarter of solid financial performance. It is encouraging to see that our net revenues recorded The 3rd quarter of consecutive sequential growth, increasing by 12.3% quarter over quarter to $707,300,000 Additionally, gross billings increased by a considerable 69.4% year over year to $539,000,000 Even more noteworthy is that during the quarter, we considerably enhanced Our key profit metrics on both an annual and quarterly basis.

Speaker 3

Specifically, Net income grew sharply by 112.1 percent year over year to 113,900,000 which led to an 8.7 percentage points year over year increase in net income margin to 16.1%. Non GAAP net income rose to $133,600,000 accompanying in non GAAP net income margin of 18.9 Representing the highest quarterly net income margin since our business restructuring in 2022. The substantial improvement in profitability is a testament to our sound business model, sustainable growth strategy and Outstandingly Cohensive Organization and also underlines the effectiveness of our continuous Breaking it down, more than 75% of total revenues came from non academic tutoring services and other traditional learning services, which remain a key priority for our business. For the Education Industry, non academic tutoring services represent an emerging vertical with booming market demand And high growth potential. Our non academic tutoring services focus on offering holistic and systematic education For school age kids by sharpening their oral learning, logical reasoning and critical thinking abilities.

Speaker 3

During the quarter, in addition to being profitable, this segment achieved a triple digit year over year growth in gross billings. At present, our top priorities for this business line is to develop products that exceed customer expectations By leveraging our extensive resources, conducting in-depth market analysis and driving product and technology innovation, Leading on our competitive strength in traditional learning services, we will further refine our products and Services and diversify our delivery formats to cater to customer needs, through which We aim to improve enrollments and retentions to promote the substantial growth of our non academic tutoring business. The other crucial component of our learning services is education services for college students and adults, which accounted for nearly 20% of the quarter's total revenues. This segment generated Positive net operating cash flow during the 1st quarter through building up a more comprehensive spectrum of educational products and a more systematic process of students' retention, cross registration and referral. Efficiency in customer acquisition has also been noticeably improved through higher reliance on content driven proprietary channels.

Speaker 3

Our business demonstrates Salient's seasonality, chiefly through the following three measures. 1st, in terms of gross billings, which is a leading indicator of revenues in the education industry, We attained a 69.4% year over year increase in this measure. GAAP billings for our learning services With schedule, we designate the 2nd and the 4th quarter as our main customer retention season, Due to which, GAAP billings are notably higher compared to the 1st and the 3rd quarters. This is particularly true for the 4th quarter When our total concurrent student enrollments typically climb to the peak of the year, following customer acquisition efforts during the summer holiday period, leading to the highest quarterly level in gross billings. Insecutively, gross billings in the first Quarter are generally lower than in the preceding 4th quarter as it is an uptick season for students' retention.

Speaker 3

Additionally, you may notice that our net revenues slightly declined in the quarter compared to the same period of last year. This was mainly due to the higher base in revenues of our existing traditional services as a result of regulatory adjustments in the Q1 of last year. Along with the ongoing steady recovery of our traditional business, We expect to see a year over year growth in net revenues and in gross billings next quarter as well as a meaningful profitability. According to management's current expectations, Weibo see an up to 24.2% year over year growth in revenues and a much higher year over year growth rate in gross billings next quarter. Turning to our bottom line.

Speaker 3

We meaningfully improved our profit margins on both year over year and quarter over quarter basis during the quarter. Our margins during the 1st and the 4th quarters are usually higher related to the rest of the year due to reduced marketing expenses during the summer holiday period. For example, our selling expenses are normally lower in the Q1 given the fact That it is a low season for customer acquisition and that demand is weak during the Chinese New Year holiday, giving rise to improved profitability. Moreover, due to a higher student to tutor ratio and tight course Scheduling. We also usually witnessed an increase in gross margins during the Q4.

Speaker 3

However, in the second and the third quarters, which are the most effective seasons for customer acquisition. We often allocate a higher amount of sales and marketing expense proportionate to market demand as we strive to attract and engage with potential students to expand our customer base, at the same time enhancing efficiency. This implies relatively lower expected margins in the second and third quarter relative to the first We believe these marketing investments are essential to strengthening our competitive position, And we are firmly confident that we will maintain a meaningful profitability as we improve our market penetration rate next quarter. With regard to the full year 2023, our prior projections of generating sizable positive net operating cash flow as well as achieving effective growth remain unchanged. Lastly, regarding customer acquisition efficiency, Our selling expenses in the quarter decreased 2.5% year over year, but brought about a nearly 70% year over year increase in gross billings, which implies that our sales and marketing expenses ROI has registered a 73.8% increase.

Speaker 3

This was mainly attained through our continued efforts to explore more innovative channels to target and acquire high quality and motivated students at lower cost with higher returns. 1st, we enhanced our autonomy over customer acquisition by expanding proprietary self operated channels, And through which we effectively lowered our customer acquisition costs and boosted user engagement across our platform through creating premium content. After months of continuous hard work, we have made promising progress With some of our key business lines, our short video platforms, we will reapply the insights and know how to other businesses. Secondly, we also have expanded into offline channels, such as hosting on campus seminars. 3rd, we are also conducting personalized and localized operations to acquire and serve students more effectively.

Speaker 3

Going forward, we will continue to improve our customer acquisition efficiency to drive sustainable growth And to create long term value for all of our stakeholders. Now I will present our financials in detailed numbers. Our cost of revenues this quarter was $160,000,000 Gross profit increased 7% year over year and 16.4 percent quarter over quarter to 547,300,000. Gross profit margin was 77.4%, representing a 677 basis points increased year over year and a 2 68 basis point increase quarter over quarter. Non GAAP gross profit was $571,300,000 and non GAAP gross profit margin was 77.9%.

Speaker 3

The increase in gross profit margin was largely due to higher efficiency In course delivery, as our instructors and tutors became more experienced and our new initiatives continued to develop. Total operating expenses during the quarter decreased 7% year over year and 6.5% quarter over quarter Q442,200,000, signaling operating leverage that resulted in an increase in operating profit margins. Breaking it down, selling expenses decreased 2.5% year over year and 4.4% quarter over quarter to $277,000,000 Selling expenses margin was 39.2%, which was almost 7 percentage points lower than in the prior quarter. Moving on, research and development expenses decreased 21.3 percent year over year and 12.9 percent quarter over quarter to 97,000,000 Accounting for 13.7 percentage of net revenues, general and administrative expenses decreased 0.9% year over year and 5.1% quarter over quarter to 78,200,000 Accounting for 11.1 percent of net revenues, accordingly, income from operations for the quarter sharply rose to Non GAAP income from operations was RMB 100 and 14,900,000. Operating margin increased 10 percentage points year over year to 13.5 percent and non GAAP operating margin increased 7.4 percentage points year over year to 16.2%.

Speaker 3

Net income significantly increased 112.1 percent year over year to $113,900,000 Non GAAP net income was 100 And RMB 33,600,000 Net income margin increased 8.7 percentage points year over year to Our net operating cash outflow this quarter was $216,400,000 mainly due to annual bonus payouts and the fact that gross billings during non peak retention seasons are generally lower than those during peak seasons. Seasonality wise, cash flows from operations in the second and fourth quarter are generally positive compared with those in the first and the third quarters. We expect net operating cash flow to turn positive at a meaningful scale next quarter. Turning to our balance sheet. As of March 31, 2023, we had $1,200,000,000 of cash, and restricted cash and RMB 2,200,000,000 of short term investments, which totaled approximately 3,400,000,000, providing ample resources for continued business development.

Speaker 3

Additionally, as of March 31, 2023, we had receivables from 3rd party payment platforms such as WeChat Pay and Alipay of 86 And converted into cash and cash equivalents. If we count it for its balance, our cash position reached around RMB 3,500,000,000 Nearly $303,000,000 higher than at the end of the same period of last year. As of March 31, 2023. Average deferred revenue balance was $770,600,000 which primarily consists of tuition received in advance. Before I provide our business outlook for the next quarter, Please allow me to remind everyone that this contains forward looking statements, which involve risks and uncertainties That are beyond our control and could cause the actual results to differ materially from our predictions.

Speaker 3

Based on management's current estimates, total net revenue for the Q2 of 20 This concludes my prepared remarks. Operator, we are now ready for the Q and A session. Thank you, everyone, for listening.

Operator

Our first question comes from Crystal Lee from CMS. Please go ahead.

Speaker 3

Hi, management. Thanks for taking my question. I have one question regarding your margin. I noticed that your Q1 net margin improved a lot. And could you provide some insight into the margin outlook for the next few quarters?

Speaker 3

And how should we think about any potential seasonality factors Impacting Margins. Thanks. Thanks, Crystal, for your questions. So let me recap our guidance first. For our guidance for the next quarter, we are foreseeing an up to 24.2 percent revenue increase on a year over year basis.

Speaker 3

On top of the revenue guidance, we Still anticipate gross billings to grow far more quickly than revenue in the Q2 year over year. Considering the nearly 70% year over year increase in gross billings in the Q1 and a mid double digit growth rate in the 2nd quarter, We have full and firm confidence in the scale of annual revenue growth in 2023. And in terms of margin, our profitability primarily depends on our operational efficiency. And I will elaborate from A few aspects. Firstly, over the past year, we've been focused on building up organizational capabilities and optimizing our cost The work itself has yielded significant results, leading to continuous improvements in our key profit margins.

Speaker 3

And secondly, we have benefited from operating leverage as our total R and D and And G and A expenses have remained relatively stable. With the increase in scale in revenues, operating leverage will have a more A pronounced impact on profitability enhancements. And last, customer acquisition efficiency It's another critical factor influencing our margin. We've been dedicated to exploring customer acquisition channels with high And we have gradually shifted our customer acquisition strategy from purchasing traffic from those social platforms to more like a content driven platforms and such as short video live streaming platforms and offline channels. This has resulted in a significant improvement in ROI levels.

Speaker 3

As you can see, like our first quarter results, Our ROI actually increased over like 73% on a year over year basis. ORI, as Larry mentioned earlier, Our goal remains to achieve profitable growth, and we believe that we'll witness a meaningful level of profitability for The full year of 2023. And actually, our business shows a seasonality. They would you and other investors to put more weight on the year over year comparisons from now on. Taking the Q2 as an example, We usually generate a large scale of net operating cash flow in the Q2 because it is a typical retention season.

Speaker 3

And although The demo campaign usually begins in middle June. Our strategic focus on improving efficiency remains strong as ever, And we expect to see a meaningful profitability in the Q2 as well. So actually, we still see the Q2 as a Thanks, Shannon.

Operator

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

Speaker 1

Thank you, operator. Thank you, everyone, for joining the call today.

Operator

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

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Earnings Conference Call
Gaotu Techedu Q1 2023
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