Q3 2023 Gaotu Techedu Inc Earnings Call

Hello, and welcome to the Gao to attack a D youth third quarter 'twenty Transkei earnings Conference call.

All participants will be in listen only mode.

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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 your question. Please press Star then two please note today's event is being recorded.

Now, let's turn the conference over to Catherine Chen head of Investor Relations. Please go ahead.

Thank you operator.

Thank you for joining.

23 earnings conference call.

No.

How close the Earth's coffee.

Got it.

For the quarter were distributed earlier.

Available.

Iowa.

Well.

He argued.

Joining me on the call with me Tonight from Golf is senior management team.

Larry.

<unk> founder Chairman and Chief Executive Officer, and Shannon Sharpe.

Chief Financial Officer.

We will first provide the business highlights for the quarter.

Thereafter, what Shannon will discuss our financial performance.

Following their prepared remarks, we'll open the floor to questions from analysts.

Before we begin.

I'd like to remind you that this conference call will contain forward looking statements made under the safe Harbor provision I'll, let you ask private security Litigation Reform Act of 19 nineties.

These forward looking statements.

Are based upon management's current belief.

Patients as well as the public market trading conditions.

They involve known.

Uncertainties and other factors.

Which are difficult to predict and many of which are beyond the company's control and may cause a company truly now well achievement to differ materially from both companies.

Forward looking statements.

Further information regarding this and other risks.

Got it in the Companys public filings with the U S.

The company does not undertake any obligation to update any forward looking statement, 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 measure and a reconciliation of GAAP to non-GAAP financials. Please refer to our third quarter earnings release published earlier today.

As a reminder, this conference is being recorded in addition, a live and archived webcast of this conference call will be available on <unk> IR website.

It is now my pleasure to introduce our founder Larry.

Good evening and good morning.

So I think even for Tony Hawk and gone.

During the quarter. It was founded in 2023 earnings conference call I want the market to take this opportunity to express my gratitude to all of you for your interest and support of the go to the broader education industry before I start I would like to remind everyone that all financial favorite is the gospel today okay.

In RMB unless stated otherwise.

Benefiting from the rising needs of students are opinionated continue to focus all of our Speedways and student lifecycle, where they are lending could would be to take it at a storm that we aim to me. It is there are many leave and do you have.

So efficiency by continuously enriching product the operands and deliberate format.

After the first nine months of operation opt not optimization and a rapid racing in 2023. We are currently booked defining clear the bedroom rental direct chance and are tracking a well defined path forward dedicated at the beauty of our call.

Our organizational competitiveness and a continuous need delving into the openness and may see a team well.

Where are we investing in areas that are strategically important affords the company has been fast companion to refine products and services for non academic tutoring services. So these are never going to be instead of a safe and educational services for college students and I thought on the build resilience.

Billions organization and absorb as call of a tenant.

In the third quarter of 2000, and the 20th Street, our net revenue grew 32% year over ear to 789 point for a minute and our garage paydowns as rates Vegas, Android that stood at 9.3 media.

I'm kind of 3% year over ear.

Despite a decline in profits due to seasonality and historical operational constraints into its smaller than that of plenty too we remain confident in our growth prospects and probably the biggest thing in the Tommy ear proven by our constantly improving panning the poll Colin.

We're gonna be flying the grille was stretched either for each segment and ample cash reserves.

We also continued our share repurchase program during the quarter, demonstrating an hour and we were doing in covenants in our growth prospects.

Now I'll discuss our business highlights from the third quarter across the five add back.

First what do you feel that the use of it for so we can we can opinion to investigate our Christian no product teaching quality underground services.

Florida, Our next time, making sure Terry on services on the traditional EVAR Granule services. We further expanded our knowledge graph optimizing our product metrics and ensure the precise alignment between C O doesn't need and the cost saves that we offer.

Following I E continuing or is a refinement of the curriculum and services are already not academic children services gained as a cost of both RV and.

And the market at all.

We noticed a significant improvement again indicators that'd be good.

Blacks are teaching quantity.

Xilinx as high as the retention rate in terms of traditional granule services revenue achieved the year over year growth of over 40% in the third quarter.

We broadened our variety of a class operands and teaching them PAH band or dry gas is the diverse needs of our existing field NCR phase into the deal teacher online Rhonda class, we have introduced Neil operate including personal lines renewal services.

Having enhanced the scalability and the sustainability of our portfolio and the way I had the math, but the demand the students at all levels.

Second anchor in our effective growth strategy, we further optimized our organizational structure to create a more dynamic my dynamic enterprise seems to have taken the quality, we have strategically scale with a bag of sort of convenience in irons.

Louisiana kitchen that all services for college students and adults to focus on areas with high demand and the rebate the gorilla.

This segment showed a promising signs of a turn.

Wrong at the end of that throughout the quarter premium as the last day of the pioneer deal while high end that are preferring to buy a boat with a high quality content and a war a mouse referrals to drive customer acquisitions as well as enhancing our competitive advantage in terms of other surveys quantity.

Third we can quantify the our efforts to onboard on the car debate Australian professional talents tour is a band of the brands and the depth of our talent pool are cool.

Please save our.

And motivate pay the team as a driving force behind our sustainable growth.

Our team of exceptional and a skilled employees and accumulating and a Korean password practices will enable us to consistently replicate always so fast that they drive further business expansion.

She is our business.

Structuring we have planned.

All of the pie that the expansion of our talent pool and brought in a number of seasoned industry veterans.

So if it <unk> pay the prospective nast and faithful triangle Red Cross I proving a highly beneficial to the development of our business. Meanwhile, we initiated a strategic program called the golf, who a tenant for the rain for three and program for the 2024 for the.

Chrome and seasoning in collaboration with leading trying to pay the University there.

Program allowed us to freeze the Korean topnotch, Kennedy's and provided them with the opportunity to gain insight into the industry. So that's the T pen mutual understanding and increased tenant acquisition efficiency.

We can sing treated finishing customer acquisition, all I by diversifying our acquisition triangle and fortifying our competitive edge in our content agreement in the stretch team so improving the overall health of our business model.

A combination of initiatives, including leveraging our strongest form of video and live streaming and the book of sales because branding our offline premise and engaging them private the traffic and we aim to improve our acquisition efficiency in particular, we have to type of multiple offline centers.

Florida, Postgraduates and trends exam properties in Venice, and overseas study related to the services.

Z as a centers enable us to acquire customers and deliver services.

Or the other I am format, we can not only improve the content acquisition.

And the survey delivery quantity, but also enhance our bank our brand visibility now.

In that study, we have a strong covenants and you all where the company is to fuel the growth and the impediment added up in November 'twenty. Two so then on the 20th Street.

I had to be purchased a kill them you have to pay a total of approximately.

For the two immediate yes.

And our share repurchase 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 $80 million worth of debt.

On November 22nd 2025, we will continue to promote our long term would repurchase program to enhance it.

Long term shareholder value.

We see tremendous growth potential, Florida golf tool and are confident.

Our base case would be David a high quality of services and efficient operations through our ongoing effort to improve our customer acquisition efficiency refi.

Educational products and services offering and upholstery and rapid growth of our patents and organization we believe.

Z initiative, so we'll put the Gao to under fast track to girls Sankey Obeida. Much. These days is they end up in my prepared remarks, now I will pass the call over to our CFO Shannon to walk you through the financial and operational details of the quarter.

Thank you Larry and thanks, everyone for joining our call today I will now walk us through our operating and financial performance for the third quarter of 2020 straight lease.

Please note that all financial figures discussed today are quoted in RMB terms.

Otherwise stated.

The company maintained gross momentum during the third quarter of 2020 straight now.

Revenues increased by 32% year over year to $789 4 million.

Well go spending increased by five 3% year over year to $639 3 million.

We have maintained a strong cash position, which was 186 million higher than that at the same time last year.

This highlights the ample resources may have to continue driving the development of our business.

I have your occasional services targeted at the group of students from primary to high school that must trade sell it seasonality.

And there's some corner coincides with summer vacation.

The big season of the year for online customer acquisition.

Operations need to be aligned they'd school schedules to capitalize.

And limited window of opportunity for acquiring new customers.

Coordinating I've I've heard also allowed us to benefit from economies of scale and maximize operational efficiency in our lives.

During the period, we could allocate the marketing expenses and shooter in line with market demand.

As such our selling expenses typically peak for the year during the third quarter Nobel, notably impacting our overall profitability.

To align with school schedules, the second and first quarters have been designated as our main customer retention seasons during which gross billings I know for the higher when compared to the first and the third quarter.

Through all this quarter or somewhere you can Goldman Cheerlead, we observed a robust learning demand from students.

This also puts a higher demand on our ability to adapt and fine tune operations in response.

We plan to enhance the effectiveness and efficiency of our marketing efforts in the falling through.

Sure.

In terms of student recruitment, we are taking a more proactive approach to acquire temporary tenants.

Florida 2000, Twenty's for fall recruitment season, we initiated a strategic a program called golf talent, putting programs in collaboration with leading targeted at universities and no more universities.

As the project deepens candidates can you engage with that and experience our culture from day one.

Completing the two way of clustering and selection process.

It also allows us really glad the recoupment progress and result in a timely and accurate manner in order to align with customer acquisition scheduled.

Second on the market front.

We'll continue to expand our presence across a diverse range of innovative content driven classroom acquisition tainos.

Bombshells video platforms and loved training platform to probably channels such as unconquered seminars.

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 a high quality leads.

Lastly on the technology field.

Hence our operational efficiency and allegedly by leveraging advanced technologies to empower internal teams across children basic sales and customer services.

Next I will walk you through the progress we have made during the quarter.

But any services contributed over 95% of them that Rodney.

Breaking it down approximately 70% of total revenues came from the academic and children's services.

Other traditional learning services.

Presenting an increase of over 40% year over year, and inquiries and Saudi to finding at least several months ago as a key driver of our business.

Our non academic or doing any services.

Help students develop independent thinking and problem solving skus and spark their passion for learning through engagement engaging content.

After nearly two years off of assignment and multiple divisions. We have made considerable progress in fine tuning, our product offerings and making it a more sustainable and scalable.

The segment recorded double digit growth year over year, and a quarter and is expected to achieve high double digit annual growth for the full year.

Underscoring these projects position as a key revenue driver.

The other crucial component of Avalon Your services is educational services.

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 potential and as I paid it goes right.

Given the quota as do the job organic growth through innovative customer acquisition strategies and word of mouth is worse.

Remaining services significantly reducing the losses by nearly 100% year over year.

Whereas in the segment the posted graduate entrance exam private business saw a year over year increase more than 25% in both net revenues and cost of bidding.

Some of our overseas test prep and overseas study consulting businesses achieved triple year over year growth in both net revenues and gross billings.

I will now present, our financial in detailed numbers.

Our cost of revenues this quarter was $218 1 million.

Goss profit increased 76% year over year to $571 3 million.

And gross profit margin was 72, 4%.

Total operating expenses during the quarter increased 32, 2% year over year to 617.8 minutes.

Breaking it down selling expenses increased 29% year over year to 400, instead of a full point for a minute.

The economy in Florida, 75% of net revenues.

This was primarily attributable to our increased marketing investments to address there's robust demand during the summer season.

Moving on research and development expenses increased 22, 6% year over year to 100 instead of on six minute.

So putting a floor of 16, 5% of net revenues.

This was primarily attributable to increased investment in AI related skus.

General and administrative expenses increased 66, 4% year over year to 105 1 million.

Accounting for 34% of net revenues.

Loss from operations increased what is super sense year over year to $99 5 million.

And operating margin was negative 12, 6%.

non-GAAP loss from operations was it is three 6 million.

non-GAAP operating margin was negative 10, 6%.

Net loss narrowed 6% year over year to $57 7 million and net income margin was nugget himself what he says.

non-GAAP net loss was $41 7 million and non-GAAP net income margin was negative five 7%.

Our net operating cash outflow was $209 9 million.

Turning to our balance sheet as of September 32.

2023, we held $885 6 million in cash cash equivalents and restricted cash along with $1 6 billion in short term investments at $1 1 billion in long term investments.

Let it comes out to a total of approximately $3 5 billion 100, and edible and 6 million higher than the same time of last year.

As of September to cities 2000, Twenty's suite, our deferred revenue balance was at $761 7 million, which primarily consist of tuition.

England alone.

It is worth mentioning that on November 22nd 2022, our board of directors authorized a share repurchase program of up to Sydney men in U S dollars.

Sure so the six month period.

As of November 22023, we have pushes and aggregated approximately $4 2 million a D S.

For approximately $10 8 million U S dollars from the open market.

Moreover, we are pleased to announce that our board today also rise upsizing of existing share repurchase program to eight in mainland, which demonstrates our long term confidence in our growth prospect prospects.

Larry also pushes approximately zero blend and minute maid, yes in the 2023 using his personal phone.

To demonstrate management's I live in 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, you Aldo too crazy sustainable long term value for its customers and shareholders.

Before I provide our business outlook for the nice quarter. 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 first quarter of 2023.

That had to be between 668 million.

108, 8 million, representing an increase of six 1% to 9.3% all in year over year basis.

This concludes my prepared remarks, operator, we're now ready for the truly section. Thank you everyone for listening.

Thank you.

At this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys because it's all a question. Please press Star then two.

This time, we will pause momentarily to assemble the roster.

And the first question comes from human Zhang with China Renaissance.

Hi management. Thanks for taking my question, so everybody knows somebody with a few times what stood out in my mind, so to discuss more details or what it was all watch strategy and give us an update on how much the way hotels I'll warn you that magical swamped and into summer. Thank you.

Oh, Thank you and thanks for the question. So at the financials of Q3 are partially reflected the operations during the summer break in terms of the revenue growth. We have maintained an overall gross laid off or something with that our revenues are primarily consist.

Self agitation those services, which is further divided up into no academic children services and traditional linear services and learning services for college students and the adults.

So as for the linear services for college students and adults like I mentioned, the last quarter and I mentioned in my prepared remarks, there is a strategic shift our strategy has evolved from scale expansion. Two is so crucial advertisers on profitability So and then.

The strategic direction, we have gradually Jesse and the phased out some unprofitable all pushing all units. So the revenue from this segment girls slower Q3 as compared to the same period all of last year and and lastly.

Lastly, I mean in the 2022 in the third quarter, although no services for college students and adults actually country. The OTH over a city, where certain of our total revenue, which has somewhat influenced our revenue growth rate for the third quarter of 2023 and also this is the same dynamic.

In the fourth quarter of 'twenty and financially and that's why I always feel like our revenue guidance.

Was around or a less than 10%.

However, if we exclusively examine the income girls off our pay 12 related to the business, which includes now academic children services and traditional learning services. It's do you maintain a over 40% year over year increase we have observed strong denying the from customer.

During the summer break.

And the availability of high qualified service providers are which is capable of delivering a high quality colleges has been limited as a result, our revenue has maintained a rally relatively high I'll go through it again, the truth right in the first quarter, our gross billings.

However, the growth rate was approximately 5% are the primary drivers of Oregon, The caito business and of course right like the hand, the revenue gross rate mainly due to two reasons firstly, our traditional business is a major contributor to their graph getting gross.

And actually the new customer acquisition efficiency during the summer break.

Overall impressive and the job of a meaningful year over year increase.

But there was a significant decrease in the supply of Ah that's greatest students compared to last year. Therefore, the scale off gross billings grow more slowly than the revenue and the second a like face always a strong demand during the summer break we did not reserve is sufficient to supply up to others.

Resulting in situations where.

At some point customer demand cannot be fully met our leading to a less level off gross billing and collection.

So I've herself, reflecting and to achieve a higher close rate and next to sound like I mean 2024, we have implant mandate a few measures Oh my hand within the boundaries and 10 screens. The policy compliance, we proactively acquired and I'll quit hate it.

Classic private traffic to attract and engage.

What are the students around the middle school, especially for a nice way to students by providing services related to like learners planning and psychological consulting and so all our we aim to build up a pool of a highly engaged with the students in the Mito School and we expect that the pool in the Nexus.

Spring two race or event, you can see it largely as marvell and and so that can that.

That can kind of like provide a sufficient students for a four hour next summer is gossip meeting girls and on the other hand do you. All these years fall recruitment process like I just mentioned that Larry also mentioned, what you call elaborate database top schools and some no more institutions engaging in.

Earlier, and if they do two way communication with graduation, but those new graduations next year to improve recruitment efficiency and better meet the demands of tutors supply for the next summer break.

Yeah. This actually work are so as off the current progress in the first quarter are the golf billings growth rate of our K 12 business has rebounded to nearly 30% of our year over year basis. So that's the the house, we really are onto shared Florida some of it.

Patient and hope that address your question even.

Yeah, that's very clear thank you.

Thanks.

Thank you and this concludes our question and answer session.

What you were trying to call it a catherine Chen for any closing comments.

Yeah.

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 a management that email and I are at go to a doctor and directly you are also welcome to subscribe to our news alert on the company.

IR website. Thank you very much again for your time have a great night.

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

Yeah.