Q3 2022 Gaotu Techedu Inc Earnings Call

Good day, ladies and gentlemen, thank you for standing by and welcome to the go to Heck E. D. U Inc. Third quarter 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Sherri Luther IR manager for Golf you. Please go ahead.

Thank you very much I'll be yeah, good evening, ladies and gentlemen, and thank you all for joining us Tonight and forgot to say call. It eight points nine two earnings conference call talking to third quarter earnings release published earlier today and it's available on the company's IR website at about you don't see it on the call with me Tonight, I Miss or Larry.

I Gotcha is founder Chairman and Chief Executive Officer, and Michelle Michelle <unk> Chief Financial Officer.

Well I will give a general business overview for the quarter and as Shannon will discuss the financials in more detail.

Following their prepared remarks, Larry and Shannon will be available for the Q&A session I will translate for Larry.

Before we begin I'd like to remind you that this conference call will contain forward looking statements I think finding the U S. Private Securities Litigation Reform Act of 90 95.

Forward looking statements are based upon management's current beliefs and expectations as long as the part of the market and operating condition and that 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.

For materially from those contained in any forward looking statement.

Further information regarding these and other risks is included in the company's filings with the U S. N V C.

The company does not undertake any obligation to update any forward looking statement, except as required under applicable law. As a reminder, this conference is being recorded.

In addition, our life in Opex, but part of this conference call will be available on couches outside it is my pleasure to introduce Larry Larry. Please go ahead.

Okay.

Thanks, Sandeep good evening.

And good morning, everyone. Thank you for joining us on Gaza third quarter 2022 earnings call. During the call I wasn't rockets would take this opportunity to convey my gratitude for your continued interest and support of the boardwalk and the idea.

And just before I start I wonder actually remind everyone that all financial information as I mentioned data base RMB unless otherwise noted in 2022, so it'll gradually deepening our understanding of customer needs. We have been actively exploring neoplatonist.

The models and expanding their name it.

Undeniably, bringing this transformation is a very challenging process as we have overcome numerous.

It is thanks to our outstanding operational skills and extensive experience we have accumulated in the past.

Every year, we have your 90, the more powerful organization with a deep passion for education, I've seen time, our capital and the pattern of the reserve remains school.

I said I gave it a strong age when confronting unknowing turnover rates.

We are confident that as long as we remain patient and persevere, while remaining true to our regional exploration. We will eventually achieve a significant break through already being Nancy ball into a greater organization.

In this quarter, we divided our business into two categories why isn't granule services.

Andre is accretion all content and digitalize to bring in product.

The new strategic direction as Louisiana, our learning services.

Claude educational services for the college students and the adult overseas study related to services.

I say Omega choudary surfaces and objects.

Waves of our new business sales in Chile, and Chilean they're steady development as opposed to restructuring.

We are connected to report that had to do the rounds of quarter. Our net revenue yield increased travel part of the 7% quarter over quarter to a state of Pandora and the state of pointing to 2 million and our net loss has significantly narrowed EBITDA over here.

And we are still in the process of bidding there's pent formation, the gradual and a stable increase of our net revenue is a solid evidence that is these are new York and they say, it's Arthur OEM continuously and it doesn't pay anybody.

Exports are a week boost our confidence in our future and I indicated that our strategic choices are right. Our organization is our resident and our operations are efficient.

Do you feel to paper and say it again past Kim Susan market demand and the cost to gradually scaling our new businesses, because the basis differential seasonality pattern.

Guided by the stretchy.

Profitable growth where it is.

Back to the growth momentum of our business as it will continue at a week at the back of that to see a sizable positive net operating cash flow in the next quarter.

This is a complex macroeconomic environment, we firmly believe that it's essential to persist as companies seek.

Grass and sharpening our scale, while maintaining a steady pace.

The rhetoric.

X.

Exploration, we have accumulated a fair amount of insight into our new business as we have made a few cents savings. This quarter I know, we will continue to propel our long term effective growth now I will present, the progress we made if you're ever in the quarter from three aspects.

First we will continue to play as a fundamental emphasis I'm going to try to deal with the teachers are at the core of education and service and professionalism ours a pre requisite.

Four with Peters.

Our recruitment efforts have always a photo that the principle that the future of this would not only be able to improve students' academic performance day is underground and capabilities by dish would also sort of <expletive> and yes, but it is bearing role model and the men part.

Who will provide.

Emotional.

Mark.

Pick a hour postgraduates entrance exam preparation been as for example, more than 50% of all of our children's Museum beneath the line you have graduate degrees a high ratio relative to our computers and we are aiming to further increase the ratio.

Yeah, our opinion to trade them.

They passed the exam can be more compassion not to fill this core going on through the same experience as it kind of better understand if you would have a need and therefore can offer more to construct teva surveys and achieve better results the around the clock or Oliver Postgraduates and trends.

Cause I'm crap in this low rate quality of roughly 17% quarter over quarter increase in your net revenue.

Over 46% quarter over quarter and crazy in broadband in wafer where the property driven by the food brand in gradually established by our top notch teaching and patterns and their high quality services.

Second we will continue to focus on improving our operational efficiency in the quarter. Our gross margin rate of 17, 2.2% higher than last quarter of the same pair with them last year.

Our efficiency for the customer acquisition also improved but with all of our eye for customer acquisition achieved with the quality of our quarter increase.

Considering that in terms of the or excuse me 93, the third quarter is the peak season for deploying new enrollments. We see is that there's a market opportunity to increase inside the base. So not really reading marketing expenses is that the result in small scale losses.

However, as our customer acquisition efficiency improve that in our opinion is to expand weibo's brackets to see higher brand its border and agree there in market share and ultimately more profitability gains are made up of long term.

Third we will continue to fulfill our carburate social responsibilities and we strive for effective growth do you ever been on the QUADRA. We co organized as a third go to rural Education support program away, the China Youth Development Foundation.

The program when we provided the financial summit space and a training class eight the two principals of rural primary school to help improve their teaching quality provide us it says four more needy children.

And again this way aid Udo revitalization.

Further our board of Directors day authorized a new share repurchase program under which we may repurchase up to $30 million worth of our industry or our cash position remains strong as of September 30th Tucson.

Turning to our cash cash equivalents restricted cash and short term investments totaled approximately $3 3 billion I also intend to purchase up to 20 million U S dollars or just the average fare.

Demonstrate all are made of demand and we were in confidence in the future development of our company.

Finally, I'm very happy and proud to share with you is that on October nine chance to go into 'twenty. Two we receive at our Claudio matter of Thrombus E. C. Regarding its investigation related to a number of a shrunk Saturday path from a proximity early to a made to solve them.

Are the quantity and that we've had a previous dated clothing and our annual report for the fiscal year 'twenty.

And the 21.

You can either they I think you see notified us that it had concluded its investigation into our company and based on the information.

As of the date of that either they either you see it stayed not intend to recommend any enforcement action against US integrity is our color copying the value as a public company. We are fully dedicated to value creation for shareholders and I have always ensure the timely.

And truthful disclosure of financial and operational information.

Now I will pass the call over to our Oh, Shannon to walk you through our financial and operational details of its quota.

Thank you Larry and thanks, everyone for Johnny on the call today.

I will now walk you through our operating and financial performance, Florida, So quarter of 2022.

But he smelled that all financial data Madame National later as based on RMB unless otherwise noted.

We continue to explore new businesses post restructuring against the backdrop of external challenges and uncertainty. We are pleased to report that our business sustained its kent.

And how is he girls absolutely expected.

Driven by our defining and understanding of the new vertical market.

This effort to optimize our operational efficiency and the constant investment in teaching quality.

During the quarter.

<unk> revenues increased 12, 7% quarter over quarter to 600 in a $6 2 million.

That's putting more than doubled compared to that of last year.

There is a shot yeah, Oh, yeah, you can place all 501, 2% and flat quarter over quarter do you place.

There was one 8% to $607 million.

This solid performance well in part due to favorable seasonality wasn't driven by a decent progress of our businesses.

Which can say south of learning services as well as educational content and digital life learning products.

Leasing learning services, our new business Moneymaking include educational services for college students and adults overseas that is related to services and academic student services and others.

Now I will elaborate the progress we've made in each of these business lines during the quarter.

First learning services, which accounted for about 90% of net revenues in the quarter. It's still the biggest contributor of our revenues.

I don't think that a percent approximately 70% of the net revenues were contributed by educational services for.

College students and adults.

School holidays are typically high demand season for our businesses related to college students.

And students from junior to high school, including our postal glad to entrance exam preparation business and where she started related to services as the holiday coincides with the tax preparation period.

Correspondingly, we are glad to see our related businesses achieved high double digit quarter over quarter goes in revenue during the quarter.

Further we have noticed that I see a lot of number of exams graduate students goes up that's.

That's what it is to participate in preparation causes escalate.

And as a result, the market for services related to college students photo agitation and job searching is booming.

Take the poster gladding entrance exam prep business for example.

According to a multiple market research and that's where all Africans, China 2000, and Chinese three Pulitzer glad it would mean a diminished but the nation exam is predicted to see Alexa to 5 million.

Cause resenting a year over year increase.

At 10%.

Additionally, one more students are starting their preparation.

Is there a freshman year.

Well they'll continue to serve students preparing for SaaS, he's done with dedicated to teachers and comprehensive application planning.

At the same time, we have also witnessed cost registration filing students for auto Korea, you have spent of courses.

Such as the National certification preparation of courses or civil services, you've done nation preparation courses.

Could reduce our cost of acquisition costs.

Through operational efficiency.

Our financial certificate preparation business.

Achieved profitability for two consecutive quarters.

Apart from our educational services for college students and adults.

The rest of the drop in that 60% of our learning services revenues came from services targeting the group of students from primary to high school.

Including that in academics tutoring services and others.

We expect parent exhibits a more silent seasonality.

Of course, the retention and the corresponding shop in place in golf spinning normally happen in the second and fourth quarter.

However, there's some quota is the season for acquiring new students.

And as a result.

The quarter with strategically increased our investment in sales and marketing to improve our market penetration rate.

As you may have noticed even though the third quarter is not a peak season for a call to attention Oh gosh billings for the quarter remained at the same level as that of last quarter.

Indicating that the golf settings country ability to buy new students are taking up a higher percentage due to our effecting new customer acquisition strategies.

This increasing he thought will snowball until for a lot more leverage to next quarter's golf's bidding.

Thus, we expect to see a sizable positive net operating cash flow in the fourth quarter.

The remaining 10% of the quota not revenues came from agitation no content and digital life learning products.

This segment, mainly includes smart textbooks learning devices and other digital product for students.

We've put out there as a supplement to our courses satisfying students diversified learning needs and will boost user retention on our platform so that it user engagement.

Next I will present, our financials of the quarter in more detail.

Our cost of revenues this quarter decreased by 76, 4% year over year to 106 to $8 8 million.

Our gross profit increased nine 4% year over year to 400, and the citizen for a minute.

Golf's profit margin was 32, 2%.

190 basis point increase compared to that of last quarter.

And I think another kind of year over year improvement.

non-GAAP gross profit was 400 and the city now wants to admit them yeah on the non-GAAP gross margin was 32, 5%.

The increase in gross profit margin is largely due to higher service delivery efficiency.

Well I think you can place in the average number of students served.

What about each tutor for all our businesses.

To college students and adults.

Operating expenses decreased by 65, 8% year over year to $506 9 million.

Now, let's break down our opex.

Selling expenses decreased 15, nine 2% year over year, and slightly increased quarter over quarter choose $376 8 million.

The quarter over quarter increase in selling expenses was mainly due to seasonality.

The family occasion is usually the peak new customer in humans.

Obama learning service businesses.

We allocated marketing investments, probably pushing it to the store he won't be mined we observed in the market.

So really improving operational efficiency and our ROI of our marketing expenses, we can gradually increase our brand exposure and market share.

We are also exploring wireless new and cost effective customer acquisition channels.

Including but not limited to life's Jamie classes pass the banks and other you jumped blackface applications to attract high intent customers either lower cost.

As a company with a long term orientation.

We'll continue to focus on brand building and the recognition.

We reduced our customer acquisition costs by heavy reliance on word of mouth referrals.

And to enhance user tuition rate and the selling expenses are alike.

Better using targeting and Emily slate achieving sustainable growth.

Moving all research and development that you're sciences decreased 68, 3% year over year to $106 5 million accounting for 17, 6% of net revenues.

Which was one 7% lower than last quarter's R&D margin.

This was mainly due to the greater economies of scale as the increase in net revenues outpaced the growth in R&D expenses.

We allocated the most of the incremental R&D budget to course content development.

Including recording curriculum design experts were interesting and I think kind of experience and influence in their respective fields.

Yeah.

General and other maintenance expenses decreased 61, 4% year over year to 63.6 million accounting for 10, 5% of net revenues.

Loss from operations for the quarter was reduced by that is food plus 6% year over year to 69 6 million.

non-GAAP loss from operations was 53 million.

Net loss for the quarter was significantly reduced by 90, 421% year over year to $61 4 million.

non-GAAP net loss was $44 8 million.

If we exclude the $17 5 million losses on our offshore M D reserved.

So by exchange rate fluctuations during the quarter from our net loss the actual net loss margin would be seven 2%.

Our operating cash flow this quarter was set at $4 7 million.

We expect you expect that operating cash flow to turn significantly positive in the next quarter.

Turning to our balance sheet as of September 32022, we had $909 5 million cash cash equivalents and restricted cash.

And two 4 billion in short term investments, which totaled approximately three points with them.

Providing ample resources for continued business development.

Further as of September 32022, our deferred revenue balance was $608 4 million.

Which primarily consists of tuition cloud paid equally lungs.

That's my speech comes too and I would like to take this opportunity to emphasize our managements I'm seething effort. He is pulling all the responsibilities to shareholders.

Our board today has authorized a three year share repurchase program up to 30 million U S dollars.

Our founder and CEO . Larry has also promised to increase he shareholding by pushing up to $20 million worth of our shares personally.

Our management would like to demonstrate our face and affirm confidence in the long term development of our company.

Moore for closing letter, we received from the U S. I P. C eliminated a potential I've seen no negative effects, yeah. It's a perfect a testament to the high standard in corporate governance.

The disclosure on the compliance that we have always abided by.

Going forward, we will focus more on satisfying customer needs and continue to avoid value for all shareholders.

Before I provide our business outlook for the next quarters. Please allow me to remind everyone that this contains forward looking statements, which involve risks and uncertainties.

Which 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 fourth quarter of 2000 and trying to are expected to be between 608 million and 628 million representing a decrease of 15, 7% to 52.

3% on a year over year basis.

This concludes my prepared remarks, operator, we're now ready for the Q&A session. Thank you everyone for listening.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

Our first question comes from Mark Li of Citi. Please go ahead.

Hi management, congratulations on the resolve and things for the share repurchase and a slight increase.

This is Martin from Citi.

Asa four hour because I'm, a education could you share about our recent key development and perhaps the outlook for the next year.

Ah Thanks, Mark Thanks for your question our academic.

Services is one of the new businesses, we focused at all after our restructured and this business line is still in the process of optimizing our course paradox and gradually were winning recognition among students and parents. So I've heard the dabbled you'd axiom policy.

Students have more spare time during the weekends and holidays.

What did you had spurred a huge denying the all for it and I cannot make children services, especially among first and second tier cities. So we currently offer a variety often that academic children's services, including programming.

Yes.

The National Test humanity, and also science courses exactly.

Our students for online education and interaction. These courses are very constructive in our sparking children's interest and intellectual curiosity.

Now academic courses coding has students' learning skills and at some level Canadian directly improve students' our performance back in school. So it has won the trust and support among parents.

And also see not that many children services follow a progressive and systematic curriculum design. They started to exhibit seasonality as well I wish coverage I shouldn't normally happen in the second quarter and the fourth quarter.

So you know second and fourth quarter, usually has a large increase in the golf things. We just finished the Q4 retention I guess November and the retention rate it was as high as 78%, which actually exceed you seeded our expectation and then also.

So you can start us.

And also the E. S. P for non academic children services is a proportionate to the market demand. So its unit economy makes it more house Sea rays are high gross profit margin and as you may have noticed that our gross profit margin also increased in this quarter. So based on what do we see now the development of this.

Sector I'm actually it's our expectation as the sector is still in the early development stage, we will disclose more information all you know mines and revenues as it matures.

Going forward, we will continue to focus on optimizing the products any housing our learning experience and continuously improving our core curriculum, so but it's for I see expectations are where.

We're oh, we have more preferred to provide a more short term oh, you've got instructions. So we do see like the gross billings.

The fourth quarter to increase meaningfully and also we'll be having a basketball all are positive not operating cash flow in the fourth quarter and that majority of it was country of units by our academic education, Although New survey center and others that may serve our students from junior school to high School.

Hopefully that address your question thanks Mark.

Thank you Shannon.

A quick follow up you mentioned about increasing our gross billing and the positive cash flowing through for me.

I know for our profitability is it likely to see also a margin or perhaps make up our EBITDA performance out in the Q4. Thank you.

Yeah. So yeah. So we're supposed to see Q4, what it'll be profitable.

They're not probably imagine there'll be higher than breakeven. They do still are in a range of high single digit, but it shouldn't be a meaningful a non-profit nugget.

Thanks.

Very helpful. Thank you.

Thank you Mark. This concludes our question and answer session I would like to turn the conference back over to Sherri Lee for closing remarks.

Thank you very much operator, and thank you everyone for joining our call today. If you have any further questions. Please don't hesitate to contact our Investor Relations Department or management via email and they go to Adelphia and directly you're also welcome to subscribe to our newsletter on Companys IR website. Thank you very much again for your time.

Have a great time.

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

Yeah.