Q2 2021 Gaotu Techedu Inc Earnings Call
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[music].
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the go to take a do incorporated second quarter 2021 earnings conference call.
All participants will be in a listen only mode.
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Please note. This event is being recorded on Wednesday September 22nd 2021.
I would now like to hand, the conference over to your first speaker today, Ms. Sandy Chen IR director of gout too. Thank you. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining US today go to earnings release was distributed earlier and is available.
Companies.
I also cultural stocks.
On the call with me are Mr. Larry <unk>, founder Chairman and Chief Executive Officer.
And if it's Shannon <unk> Chief Financial Officer will give a general overview and then Shannon will discuss the financial.
All line up with her remarks, Larry as Shannon will be available to answer your question about translates to Larry before we begin I'd like to remind you that this conference call contains forward looking statements as defined in the U S. Private Securities Litigation Reform Act of 19 Maritime.
All right.
These are based on management's current expectations and current market and.
Operating conditions in real life.
Events that involve known unknown risks uncertainties and other taxes authors are difficult to predict.
Where are you at a conference and so.
Cause the company's actual results performance or achievements to differ materially.
Other information regarding these and other risks.
Exactly.
Got it and the Companys filings with SEC.
The company does not undertake any obligations to update any forward looking statements.
However, as required under applicable law.
Minor.
In addition, a live and archived webcast of this conference call.
Billable on Golf course, Neely Investor Relations website at IR calls with all the time it's.
It's now my pleasure to introduce that.
Please go ahead thank.
Thank you Andy good even in the morning to you all thank you for joining US today, our second quarter 'twenty to 'twenty, One earnings conference call.
In the second quarter of 2021 our revenue reached a record high of coupons of two states who paid in RMB.
It's fair to say the market ended the quarter and also substantially Brooke and Ohio to be birthdays, a similar low level. The way it is probably a year ago and the we haven't entirely startup New York sees advertising spending he hasn't made it made it here.
As you all know the education industry has experienced some 10 days over the past few months.
However, as the saying goes we will begin with the mine when setting our spreadsheets, we will always remain committed to our regional exploration of a quality education, and we will seek to provide authentic education services.
In the meantime, we have like a payment a shoulder our social responsibility.
Creation company ever since May we have successfully cause everybody paid the way the multiple non profit organization.
Colonial the China charities aid foundation for children, the China, the minimum and the foundation and the China less than inflation Education Foundation and is a cooling on normal University, making cash are freaked horses to answer that.
Vitalize they used to have a rural area of education and support the goal of providing equal access to education for all.
So activity responded to the nature of the call.
It's funny in the rapidly that's paid the organizational structure of our company. So folks professional education and a theme education and we are further exploring opportunity as it related to digital product and vocational education.
First we will continue to expand our investments in our professional education segment.
As a financial certificate and the public obviously cause I'm collaboration while constantly.
I'll ring more professional education portfolio opportunities.
As opposed to graduate to design collaboration and overseas study preparation among which some have already achieved a better than and does it say I read all right.
We aim to establish a diversify the professional education profit O'neill with multiple segments.
Secondly, we have also increased our investments are seen education segment, which is developing rapidly.
He co branding.
Paul just being cool I plan to take and what the conversion rate from style pass and Vancouver class before coffees exceeded 30%.
Surely we are simultaneously exploring new opportunities you can see in our product and vocational education, continuing towards even before it was a positive effect technology.
Patient content and either pushing toward.
And expanding our footprint across the education sector.
We firmly believe that the education market in China, We will continue to control Saturday.
We also affirm and he believes that a credit education firm will play a very implausible.
We are confident that our company, we don't live up to our responsibility is animation.
And finally, we have made the Nomura Britta said towards the end of the K 12 area, including a streamlined.
The tire industry supply chain refining our standard correct theater premium expert teachers at a scale because the drugs can affect payment services, the payments and improving operational efficiencies.
All of our lease having accumulated a great deal of insight and expertise, we now plan to replicate it.
The insights and expertise to seem education professional education, and vocational education, and we sincerely hope that we can sort of return to the profit.
Profitable growth trajectory that we saw back in 2019.
As many of you know our company experienced a severe castrol page back in 26, 10, and the 20th 17 and almost the win that we call it that.
Barack has at the moment internally.
But either was exactly under that that pressure that we came together as a united unaffected team with tremendous cookie that ended the best execution to build a miraculous business that has been repaid the rapid revenue growth and the Caribbean, probably the pay to pay over seven.
Exactly what Teva quality.
2014, with all our first time as a start up and the 20th Chin with artists that kind of stuff. Then we can say is that a 'twenty 'twenty. One is are there as a stock.
As someone who has a work begins the education industry in Florida 33 years.
I believe we should always have a love for our families and our country.
Always a painful.
The goal of education in March.
<unk> always affirmative believes that education is a noble profession and always have space that is the future I've had and brought both for our industry and our society.
Now I will pass the call over to our CFO, Shannon and walk you through our financial and operational details.
Thanks, Larry and thanks, everyone for joining the call now I will walk you through our operating and financial results.
Please note that all financial data that I mentioned later is in RMB terms.
Otherwise noted.
First allow me to share with you some details about that that's implying that is post the policy changes.
On July 20th for 2021 China's official state media, including King Pine News agency, and China Central television and now the Albany further out about 18 to burden of homework and a political cheering for students.
Compulsory education.
Which was issued about a general office of the C. P C Central Committee and the General office of the State Council.
We're laser issued an announcement you saw me lots of policy will have a material impact on our operations.
He's the new policy announcement, we are dedicated to respond within the shortage the time up here at <unk>.
And two other jobs to our business and strategy Accordingly.
With high compliance standards, which can be seen from the falling attacks.
So regarding little housing were stopped acquiring traffic from online social platform since the second quarter.
Regarding class I want other Jasmine rice.
It's strictly abide by the new rule, let after school tutoring institutions shall now organized and classes all national festivals weekends or summer and winter holidays.
We have adjusted the full cause that's scheduled for a compulsory education classes from weekend and a national festivals to illegal time from Monday to Friday, putting required by the new policy.
Based on the data we have cause it felt right. After scheduled adjustment is in single digits.
Regarding the standardization of the mountain, but it's strictly attract and revealed our accountants to make sure no content is all I'll have the regulatory limit.
Regarding the requirement entre lesion prepayment according to the requirement by the Beijing government on the management of volatile you shouldn't I other school stopped at the Chilean institutions.
Rehab technologically collaborated with custodian banks to monitor I promise to you shouldn't they turned over quite a phone's, probably and make sure our clients threats towards filing it's protected.
Moving on we will continue to focus on the following two aspects.
First regarding fee stand around tuition.
On September six the National Development and Reform Commission B M O E and the third of administration for market regulation.
Until they issued announcements are adopting a government a guy data privacy must need them. We're critical on the day after school tutoring courses for students at the stage of compulsory education.
Online and offline subject tutoring institutions for students at the stage of a compulsory education must adopt the government instructed price limit.
What is the upper limit of the price that started by local government no higher than 10% and no lower limits.
Ovens, you know we have not yet received any precise guidance on the price control on online education.
We will adjust our pricing after we have received a specific a gunman infection.
Second in terms of turning a stomach S. T institutions for students at the stage of compulsory education into none not for profit organization.
We will continue to communicate it with the government.
So too will strictly abide by all the laws and regulation and the communicated with all of our stakeholders probably mostly no.
Now, let's review, our financial and operational status after this quarter.
For the second quarter of 2021 not.
<unk> revenues increased.
Five 3% year over year to 2.23 billion driven by our casinos like spending paid of course, you can Goldman goes back to our enhance the teaching quality and brand recognition.
So I think the leading indicator for that revenue was $9.0 billion, increasing by 12, 2%, Yeah, Oh, well, yes, so until 10.4 billion last year.
And of course from Goldman which referred to enrollments right at or about I didn't know you an increased to a record high of 1.63 million for the quarter.
At 441%.
Yeah, you can claim.
Now, let's break down our operations and the financials by business line.
Net revenue from our K 12 courses, including seemed courses increased by 51% year over year to 2.09 billion and accounted for 94% up net revenue.
Trusting contributed by K 12 courses increased by 17, 2% year over year due to a 158 billion.
Pay the close needleman for K 12 grew by four 5% year over year to 1.6 minimum.
Average in humans for pets with 1700 in the second quarter in 2021 compared to 2002 hundred units for one quarter.
So a quarter the number of sleep slightly because we all sort of shorter term courses, but smaller class sizes potatoes, lueras students' needs.
Net revenues from our foreign language professional of the mission and Idaho National Education services, So to 100, and well do a million and like probably at four 6% up that revenue.
That's things since your ability to buy foreign language professional automation and other sources reached 120 to 22 million.
And of course, when Goldman for foreign language professional automation and other services.
68000.
Moving over to our selected financial metrics that I'm right Alex.
Our cost of revenue increased by 148% year over year to 724 million.
The year over year growth rate was mainly due to increases in compensation for instructors and tutors learning materials rental expenses as well and so that was tough.
GAAP gross profit margin decreased to 67, 6% down from 78, 1% in the same period off the 20th wanted it.
Non-GAAP gross profit margin, which excludes share based compensation was 269, 1% down from 17, 941% innocent cheery about 2021.
The decrease was primarily due to a young place in the number of instructors and tutors three times, our service level and the personalized experience that our students receive as well as an increase in conversations for a SEC stuff.
Selling expenses increased to about one 6 billion in the second quarter up plenty of kind of what was in that expense is for traffic acquisition were approximately zero bornite by them.
That is for branding activities were approximately 95, when one of them yeah. The remaining expenses have a labor so what does aircrafts.
The selling expenses margin equates to year over year to 17, 4%.
We have seen continue improvement of margin, which falls back to its original level year adult things without new seat and all on life, although with heightened spending your money.
Research and development expenses increased by 204% or 9% to <unk>.
Oh year to 427 million.
Increase was primarily due to an increase in the number of course professionals and technology development personnel as well as an increase in compensation for SEC stuff.
G&A expenses increased by 128, 9% to 203.2 million, mainly due to the increase in G&A has town and related to the compensation.
Non-GAAP net loss was 763.9 million compared to net income of 72 point selling mainly in the first quarter of 'twenty 'twenty.
GAAP net loss margin rules for photo one 2%.
As of June 30.
For 2020, one we have one point due to burn of cash and cash equivalents.
Instead of cash.
2.95 billion of short term investments and $523.0 million of long term investment.
Binding to be five 9 billion.
As of June 30 'twenty.
2021 our deferred revenue balance was 1.98 billion deferred revenue primarily consists of the tuition collected eat along now.
Net operating cash outflow for the second quarter up 20% to one was $324.0 million.
Considering the uncertainty that the government policy brings to the falling financial conditions, we will not pull what next quarters pro forma guidance for now that concludes my prepared remarks, operator, we're now ready to take questions. Thanks.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Steven Young with Goldman Sachs. Please go ahead.
Hi, Thanks.
Thanks, very much for kind of sharing it's been clear. So we've got two questions first is on the plans and priorities for the next 12 months for example, unprofessional and steam and a more details on how the company has to be older and I so far accordingly.
Example, home.
<unk>, you'll see with inflation can be tied to their future plans.
Yeah.
Yeah.
Yeah, so true.
Well make sure I got them, but it doesn't cut a bit hard to shower, Michelle How're you doing do.
So you've got a chairman I'm sure sure Cynthia you send all you'll see the power of talking about general pacing here with them.
Let me ask you got you got you shuja seem to be able to hold onto them.
Talks about which elements of that total went down on a well measure a coupon or 50 yard either chime in though.
And finally, the price with our children for sure.
But you got it.
Thank you so would you leave Andrew to current policy.
We are from a wider.
If you didn't company to formally start the online team services for three to six year old children and we are the first education company to fully staff all the traffic acquisition spending.
These channels and I believe we might also be the first one my mom and pop players to have a comprehensive and there's every bathroom in the organization to better focus on our part isn't it.
So when you say do you have that.
Do you agree or disagree IDP out which element from the analysts.
For me and I E D.
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Will you be used to either pay for it on the assortment Goldwater left to mature our go to disrupt your pie.
I'll talk a talk I don't go shop without doing without a lot of income.
So yeah I wasn't really sure. She does go down go to jail.
You are not looking hard at some docs going on media.
Alex as you had a nice year Shunyata women are intact. Our number show women are intact and will come in Colorado.
Shingon between GAAP.
Well I mean, if we just use that you thought more of in the timeshare Ginger.
Syndrome, a dog food is going to go down in the cool pool, how machine either timeshare NIM go down time, she's a number what she told me because.
Cause that goes with it.
Yes.
So in the next couple of months, we will focus on two aspects. Firstly, we will focus on our organization focus on talent and pockets I'm really worried of SaaS products in the past seven years.
Well, we have accumulated this guy was organization, our Brent and the rest of the night vision and we have realized that at the time.
We will continuously to lay out what was his decision to growing a healthy and more powerful way. We will continue to train our talent. So that our people can have a better growth.
And then we will continuously improve and optimize our products.
We will develop the products that our customers really like so that we can use our products to represent our organization service quad.
Good yeah, and that Oh, what does a strong again go out and do their share you always you always get right.
Nah, which element are taught ought to cause.
Cause like junk bonds and Oh.
Hi, Amanda.
The opportunity in July we don't want them to know what you had and that's the only I'm sure.
I'll, let you answer yeah, yeah, well I mean, if you can.
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Tony you want at all to make sure that you're doing your initial kind of die.
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Paul do you ever find me I don't know if I got all your Fatih, our suite of young women.
Women's I should say on the show, a countertop interim, which I'm kind of industrial kitchen hygiene.
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Okay.
So the client trends honestly, it's the whole reduction policy, mainly focused on from Katherine education right after switches.
I believe he was part of the uncertainty brought bodies always remodels, we will focus on three business lines.
Professional education.
As you know we have started 2000.
2016, and we have accumulated.
For instance, we have totally also meet some trial and error.
And I believe as we adjust our operating model, we will make some breakthrough.
Definitely oxy courses.
As I spoke.
So earlier, we have tried for granted and we have seen a lot of great data.
So going forward, we will fires before it just seems with it.
Lastly, we will try the vocational education hanging off of digital products.
We are having some exploration and according to our long term development plan and position the company I believe we will do something right.
Thank you.
Thank you forgot the second question is regarding not for profit organization. So the Mou has published documents specifying diminishes and luggage do you need legislation. So would you mind sharing the company's registration progress so far.
Non profit organization, how would that impact shareholders for example, with the onshore offshore assets. Thank you.
Oh, that's even on September the 16th the Mou and other safe government ministries jointly announced a a a kind of like guidance are stating the online education institutions, a need to change it from the registration base that region too.
Well basically major them, all and for compulsory education service provider like all the somebody's provider needs to be a food and not for profit institutions by the end of last year. So this is like a high level, our infection and according to the announcement that probably I could get off be approved.
Is that the organization has to be registered with the government in a pet which go through has already done in the 'twenty to 'twenty. We were already on the watch list you shielded by the Beijing.
Education Bureau, so other requirements to be approved that you also include having qualified offline training centers, having a secure data and privacy and so on so we will stick life, followed a notice to ensure full compliance and maintain frequent communications with the regulators.
Besides the announced then Oh, well you're talking to the regulators all our weekly basis, just trying to get a more detailed instructions about how we should do for the 14 a month so it's still ongoing.
I'll go in status, we will update you once we have a player and specific infection.
Thank you sure. Thank you.
Yeah.
The next question comes from Mark Li with Citi. Please go ahead.
Hey, Hi, much man Oh man I ask a question on the stop optimization, a deepened a big change of all our focus from a subject to the AGA area.
Would that stop optimization, and where would you think it can.
Loft.
And what would be the cash impact to them.
You know over 5 billion I wouldn't be all casual we have okay. Thank you.
Thanks Mark.
So we reacted in the shortest time right. After the that'll deduction policy was released.
The restructuring was already done back in July and August we closed a certain operating centers outside of Beijing, and we also paid for at a severance cost for some of the employee layoffs. So it's a tough decision to make but making that decision quickly also lap as a precious time and room.
To think about our future and make the right decisions. So we expect our company size and and employees are scaled to be salable in the short term to support us to explore our new businesses and also from the cash perspective like I just mentioned, we have one around one point.
Well I'll try one 5 billion cash and cash equivalents and short term or long term investments on hand.
Even that we paid for the cancellation penalties for leasing agreement or the southern Costa for our employees. That's still left to ask sufficient cash to continue to drive and East, Florida, New business and support our business. You know you know in the future. So are we are you know it's so.
I think the key for us to think about is like how to.
Provide a high level.
The high quality of our learning products that meet the do you mind and for Oh vacation, though agitation for professional education, all foreseeing causes and like maybe I. Just mentioned, we also are developing our digitalization product to provide more efficient learning.
Methodology for our customers. So we will try our best.
And I would just imagine this is our third time slot to kind of let you start for the new a new new business are willing to travel, but our best choose and to show you that the team still holds the face in the future the education industry and also in the company.
Thanks May I know, what's the number of our key a we have do some moment. Thank you.
After all the restructuring for our employees are we still maintain sufficient of a of a tutor to support the learning Trust the learning service for our Oh, sorry Masters students. So then the number of feet our current comp.
<unk> site, and we will adjust the employee skill and that the scale to cede the future development of our company.
Understood. Thank you.
Thanks.
This concludes our question and answer session I would like to turn the conference back over to MS. Sandy Chen for any closing remarks.
Okay. Thank you operator, and thanks, everyone for joining the call today do you have any further questions. Please don't hesitate to contact the company you want to contact us via E Mail I, our asphalt who've not seen directly please feel free to subscribe to our news alerts scorn swallowing for newsletters on a company that's fine.
Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.