Earnings Transcript for GOTU - Q4 Fiscal Year 2022

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded on Tuesday, February 28, 2023. I would now like to hand the conference over to your first speaker today, Ms. Sherry Liu, IR Manager of Gaotu. Thank you. Please go ahead.

Sherry Liu: Thank you very much, operator. Good evening, everyone. Thank you very much for joining us on Gaotu's fourth quarter and fiscal year 2022 earnings conference call. Gaotu's earnings release the fourth quarter and the full fiscal year was published earlier today and is available on the company's IR website at ir.gaotu.cn. Joining the call with me tonight from Gaotu's senior management is Ms. Shannon Shen, Gaotu's Chief Financial Officer. Shannon will first read the prepared remarks on behalf of Larry Chen, Gaotu's Founder, Chairman and Chief Executive Officer, and then Shannon will discuss the financials in more detail. Following the prepared remarks, Shannon will be available for the Q&A session. Before we begin, I'd like to remind you that this conference call will contain forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current beliefs and expectations as well as the current market and operating conditions, and they involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control and may cause the company's actual results, performance or achievements to differ materially from those contained in any forward-looking statements. Further information regarding these and other risks is included in the company's public filings with the US 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 reconciliations of GAAP to non-GAAP financial results, please refer to our fourth quarter and fiscal year 2022 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 Gaotu's IR website. It is now my pleasure to introduce Shannon, who will provide this quarter's general business highlights on behalf of Larry. Shannon, please.

Shannon Shen: Thank you, Sherry. Hello, everyone. This is Shannon speaking. Larry is in the middle of his live-streaming session on Douyin right now. It is part of his 15-day consecutive book reading session on Douyin. Larry's valuable explorations in the short video ecosystem have huge strategic significance in the future business development and brand enhancement for Gaotu. Please excuse his absence tonight, and I will read Larry's prepared remarks on his behalf. Good evening, and good morning, everyone. Thank you for joining us on Gaotu's fourth quarter and fiscal year 2022 earnings conference call. I would like to take this opportunity to once again convey my gratitude for your continued interest in and support for Gaotu and the education industry. Before I start, I would like to remind everyone that our financial information that I'll mention later is based on RMB, unless otherwise noted. We delivered a decent set of results in the fourth quarter of 2022. We achieved steady quarter-over-quarter revenue growth for the third consecutive quarter, and we also reported another profitable quarter with a sizable net operating cash inflow. Our net revenues for the quarter increased to RMB629.6 million. Our gross billings secured a significant quarter-over-quarter increase, up 64.3% to approximately RMB1 billion, symbolizing that our business have entered a phase of continued steady development. During the quarter, we retained a net income margin of 11.2% and a non-GAAP net income margin of 13.9%, which brought our non-GAAP net income margin for the full fiscal year to 5.4%. Even more noteworthy is that we recorded a net operating cash inflow of RMB476.7 million during the quarter, which meaningfully lifted the full year number into positive territory and strengthened our cash position, attesting to our superior operational efficiency. We achieved effective growth on both the quarter and in annual basis, which is the combination of our unwavering commitment to our long-lasting strategy for profitable growth and our relentless efforts to optimize students' experience and teaching quality. We are pleased to close a challenging 2022 on such solid footing, which has reinforced our confidence as we welcome unknown challenges in the next year. As we enter the spring season, alongside the healthy growth momentum, our organization has shown exceedingly resilient and cohesive, and we are ready to deliver another year of profitability and substantial net cash inflow from operations in 2023. Going forward, we will continue to execute our customer-centric, long-term oriented and substantial growth strategy to create enduring value for our students, employees and shareholders. Now, I would like to provide updates on the progress we made this quarter from the following four aspects. First, each of our core business lines remained on a steady growth trajectory. The sharp sequential increase in gross billings during the quarter was mostly driven by non-academic tutoring services and other traditional learning services, which partially benefited from favorable seasonality. In terms of revenues, we saw quarter-over-quarter growth across both educational services for college students and adults, and in non-academic tutoring services. Especially, the post-graduate entrance exam prep business [reached] (ph) a quarterly profit for the first time. Looking ahead, we expect our business segments to sustain their positive growth momentum in 2023. Second, we continue to focus on enriching our talent pool and enhancing our organizational capabilities. At Gaotu, our underlying philosophy is that love, compassion, goodness and patience are the cornerstones of education. We always remind ourselves of our original aspiration to educate, hence, to uphold the highest level of education to essentially deliver compelling learning results by offering tailored services through outstanding teaching experts. Dedicated teachers have always been our core competitive advantage. Internally, we are actively cultivating more excellent instructors and tutors. Externally, we have also established long-term partnerships with top universities and colleges to continuously channel teaching professionals passionate about education to Gaotu. During this quarter, we successfully hosted 2023 Gaotu Beidou Management Trainee recruitment events at Tsinghua and [Peking] (ph) University to engage more aspiring young talents. Moving forward, we will continue to invest additional efforts into recruiting top-notch talent who meet our strict hiring standards across various fields to build the long value chain of our education and reinforce our deep-rooted competitiveness. Third, we continued to improve our operational efficiency. On the services front, gross profit margin during the quarter registered both year-over-year and quarter-over-quarter increase due to higher course delivery efficiency. Regarding customer acquisition, we reduced our sales and marketing expenses margin by 9.5 percentage points as compared to last quarter to 46%. At the same time, the selling expenses ROI saw sequential improvement, representing greater marketing efficiency. Meanwhile, to develop proprietary channels with higher conversion rates, we are actively implementing private traffic acquisition through short video platforms, offline channels and others to further enhance customer acquisition efficiency. As for [headquarter] (ph) expenses, compared with the prior quarter, they remained largely flat with moderate declines after adjusting for exchange loss and the negative impact of some one-off expenses of the quarter. Going forward, we expect our headquarter expenses to remain stable as our revenues expand and our operating leverage should lead to accelerated profitability improvement. Last, but not least, we continue to explore and experiment with new business initiatives to expand the range of our offerings. In the fourth quarter, we officially started our live streaming e-commerce journey on Douyin, the Chinese version of TikTok. Our live-streaming brand, Gaotu Jiapin, debuted on the evening of December 21 last year. And I also launched my personal account on Douyin to share my experience on Korea and a personal development and offer some life lessons. As we continue to undergo transformation, I would like to personally explore the boundless possibilities of this platform through more-effected learning and repeated upgrades. Since we've started out as a live online large-class tutoring services provider, we have a [range of] (ph) talent reserve, whose capabilities resemble [indiscernible] an ideal live-stream host. By leveraging the superior presentation skills and wealth of knowledge base [accrued] (ph) through years of live teaching, our live-stream hosts have a natural advantage in providing high-quality and appealing content, enabling them to seamlessly pivot from important knowledge to students through sharing wholesome food and quality of lifestyle with consumers. With the mission of making life better, Gaotu Jiapin is committed to serving as a bridge between producers and consumers, introducing customers to reputable products with proven excellent quality and high repurchase rates. We believe our endeavors in the live-streaming business will create huge leverage in terms of brand exposure and brand enhancement. As of now, we are still in the initial stage of this undertaking and we will continue to accumulate insight and know-how on short video operations going forward. I have always said to our teams, the best times are usually the toughest times, and the hardest times often lead to the best moments in your life. It is because everyone of us at Gaotu is [continuingly] (ph) devoting their best efforts and unyieldingly displaying the same enthusiasm to humility and entrepreneurship that we started with day one, that we are transforming into a better Gaotu every day. Looking ahead into 2023, guided by our effective growth strategy, we will continue to develop, continue to innovate and continue to contribute to the development of education in China. Thank you everyone for listening. This concludes Larry's prepared remarks. And now, I will walk you through our detailed financial and operational performance for the fourth quarter and full fiscal year 2022. Please note that all financial data that I'll mention later is based on RMB, unless otherwise noted. During the fourth quarter, our net revenues grew 3.9% quarter-over-quarter to RMB629.6 million and our gross billings increased by a considerable 64.3% quarter -- over the last quarter to approximately RMB1 billion. The notable rise in gross billings was driven by our enhanced education product quality, steadily growing user base and sound business development. As a leading indicator for revenues, gross billing's meaningful expansion has boosted our confidence in our top-line growth prospects for 2023. Moreover, our net income for the quarter was RMB70.6 million and non-GAAP net income was RMB87.4 million, which led to a net income margin of 11.2% and a non-GAAP net income margin of 13.9%. In addition to attaining profitability, we also generated a sizable net operating cash inflow of RMB476.7 million and recorded a year-over-year increase in cash reserves during the quarter, bolstering the long-term development of our company and validating our continuous improvement and efficiency optimization efforts. Turning to our full year results. Net revenues and gross billings for fiscal year 2022 both reached approximately RMB2.5 billion. Meanwhile, we also achieved profitability on full year basis. Our net income for the year was RMB13.2 million and our non-GAAP net income was RMB135.8 million, yielding a net income margin of 0.5% and a non-GAAP net income margin of 5.4%. In addition to earning annual profitability, we also generated a net operating cash inflow of RMB54.5 million this year. [Annual profitability] (ph) of top-line growth coupled with positive bottom-line and cash inflow it is clear testament to the resilience, innovative ability and operational efficiency of our organization. The sizable cash inflow [drove] (ph) continuous growth in our cash reserves. As such, as of December 31, 2022, our cash, cash equivalents, restricted cash and short-term investments increased by RMB72.7 million compared to that at the end of 2021 to approximately RMB3.7 billion, providing solid ground for our continued operation and exploration of new initiatives. We categorized our main businesses into two sectors

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from [indiscernible]. Please go ahead.

Unidentified Analyst: Okay, thanks. First, today congratulations on astounding financial results on Q4 and the whole fiscal year. Thanks for taking my question. I have two questions for management. The first one is how will the product structure be adjusted in the next fiscal year? And my second question is, what are the quarter-on-quarter changes in spring enrollments of each courses? And what are the changes compared with the same period on last spring semester? Thanks.

Shannon Shen: Thanks for your questions. So, first, for the product structure, for the revenue structure, we foresee it to maintain sustainable in the first quarter in 2023, which means the learning services will still be the largest revenue contributor that it will contribute over 90% of the revenues, and the remainder of the 10% will contributed by the digital products. And within the 90% of the learning services revenues, we foresee the learning services from college students and adult business to contribute around 30% of the total revenues. And the rest will contributed by our non-academic tutoring services and other traditional learning services. And for your second question, like the quarter-over-quarter enrollments in the spring semester, because our business is fairly different between 2023 and 2022 -- if we can recall that in the first quarter in 2022, we announced a public release that we kind of like seized our tutoring services for high school section. And like in the first quarter in 2023, some of the traditional learning services will be picked up again. So, the enrollments is not that comparable between these two quarters. But going forward, we will be providing more specific instructions on the enrollments if the business develop in a more stable stage. Thanks.

Unidentified Analyst: Okay. Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Sherry Liu for any closing remarks.

Sherry Liu: Thank you, operator, and thank you everyone for joining the call today. If you have any further questions, please don't hesitate to contact our Investor Relations Department or our management via e-mail at ir@gaotu.cn directly. You're also welcome to subscribe to our news alert on the company's IR website. You're also cordially invited to join Larry's live-streaming section on Douyin right now. Thank you very much again for your time. Have a great night.

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