Gaotu Techedu Inc. Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Incorporated Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. All participants will be in the listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded on Tuesday, March 08, 2022. I would now like to hand the conference over to your first speaker today, Ms. Sherry Liu, IR Manager of GOTU. Thank you. Please go ahead.

Thank you very much, operator. Good evening everyone and thank you for joining us on our fourth quarter and full-year 2021 earnings conference call. GOTU's fourth quarter earnings release was distributed earlier and is available on the company's IR website at ir.gotu.cn. On the call with me are Mr. Larry Chen, GOTU's Founder, Chairman, and Chief Executive Officer; and Ms. Shannon Shen, GOTU's Chief Financial Officer. Larry will give a general overview and then Shannon will discuss the financials. Following the prepared remarks, Larry and Shannon will be available to answer your questions. I will translate for Larry. Before we begin, I would 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 expectations and the current market and operating conditions, and related events 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 materially. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the SEC. The company does not undertake any obligation to update any forward-looking statements, except as required under applicable law. As a reminder, this conference is being recorded. In addition, a live and archived webcast of this conference call will be available on GOTU's IR website. It is now my pleasure to introduce Larry. Larry, please go ahead.

Thank you, Sherry. Good evening and good morning to you all. Thank you for joining us on our fourth quarter and full year 2021 earnings conference call. Before I start, I would like to remind everyone that all financial information I mention later is based in RMB unless otherwise noted. In the fourth quarter of 2021, our revenue was RMB1.3 billion representing a 14.3 percentage point quarter-over-quarter increase, which brought our revenues for the full year of 2021 to RMB6.6 billion. Our gross billings for this quarter also showed a 233.7% quarter-over-quarter increase to RMB1 billion. During this quarter, net revenues and gross billings from our comprehensive tutoring services, which consist of our business other than K-12 academic subject tutoring services, were RMB149.1 million and RMB234.8 million respectively, representing a notable increase in size compared with previous quarters and demonstrating that we are on the right track of gradually shifting our emphasis to businesses other than K-12 academic subject tutoring services. It's especially worth noting that after we restructured our business in the third quarter, we achieved considerable profitability in both GAAP and non-GAAP terms as well as positive net cash flow. Our net profit was RMB285.9 million and our non-GAAP net profit was RMB324.4 million, which gave us a record high non-GAAP net profit margin of 25.5%. Our net operating cash inflow was RMB245.8 million. All of these indicate that the business restructuring and organizational adjustments we performed in the last quarter delivered significant results, confirming that we are driving the right strategic direction, which has proven effective in a short period of time. In the meantime, we maintained a strong cash position. As of December 31, 2021, our cash and cash equivalents, restricted cash, and short-term wealth management investments totaled approximately RMB3.7 billion. Going forward, we will continue to focus on online vocational education, professional education, and digital products. We will continue to emphasize high operational efficiency as we always have. We will continue to prioritize the effective growth of our business and we will continue to focus on the personal development of our team. Next, I will elaborate on these four points and briefly cover our progress in the quarter. First, in the fourth quarter we further expanded our vocational and professional education course offerings to better meet the broad range of demands from our existing and potential students. In November last year, we repositioned ourselves as a learner-centric lifelong learning and service platform, which is our new vision statement. We now offer a relatively comprehensive range of vocational and professional education categories, including recruitment for children, qualification examinations, and preparation for college-level academic exams, but also vocational skills training, capability improvement, professional counseling, comprehensive training, and others covering most types of training courses that cater to a variety of needs of learners of various age groups, educational backgrounds, and life and work experiences. In addition to benefiting society by developing more talent, our course offerings also help learners enrich their lives, creating a multi-category platform that reinforces the branding we built in the K-12 space in both the vocational and professional education sector and reimposing the cross-setting, upsetting, and retention risk. We acknowledge that the demand for vocational and professional education in China is enormous and is growing rapidly. We are confident that by leveraging the insights and resources that our operations, products, research and development, and tutors have accumulated in the online K-12 business, which gives us a strong competitive advantage. We will achieve significant growth in the vocational education sector. Second, we have always emphasized the importance of high operational efficiency since the founding of our company. We have determined to build a highly efficient, organized, and unified team. Our greatest asset is our team, which is also the core engine of our business growth. After our restructuring in the fourth quarter, our gross margin was 69.7% higher than that of the previous two quarters. Our operating margin also reached record high levels, both of which are solid tests of the high operational efficiency of our team. Third, we will continue to focus on the effective growth of our business. We do not pursue meaningless expansion. Rather, we prioritize maintaining healthy, stable, and sustainable growth before introducing a new cost offering. We carefully analyze unit economics and profit models before launching a new product, ensuring that we can provide the best quality, service, and user experience to our customers. Finally, we continue to invest heavily in our employees by providing them with ongoing training. We regularly arrange core competency training, including leadership, operations, and organizational skills for our business leaders as part of our efforts to develop dependable talents for our business. At the same time, we continue to offer highly competitive compensation by industry standards and maintain high standards for the recruitment, training, ranking, and performance evaluation of our tutors and employees. Looking back, 2021 was undeniably an eventful year as we went through large-scale strategic and organizational adjustments in the wake of regulatory policy changes in the industry. However, within a short period of time, we completed our restructuring and ended the year with a strong quarterly profit. Looking ahead into 2022, we will continue to comply with government policies, cherish our goal to spread positivity, put our hearts into it, and try our best efforts, and continue to leverage the deep roots of our experience in the online education industry along with the hard work of our excellent team to deliver superior vocational and professional education courses, superior digital products, and a better learning experience to more customers to fulfill our mission of making learning better. Now I will pass the call over to our CFO, Shannon, to walk you through our financial and operational details.

Thank you, Larry, and thank you all for joining our call today. I will now walk you through our operating and financial performance for the fourth quarter and the full year of 2021. Please note that the financial data I mention later is in RMB terms unless otherwise noted. We closed fiscal year 2021 with a strong fourth quarter with considerable GAAP and non-GAAP net profit and positive net operating cash flow. Following the restructuring, which was completed in the third quarter, our new businesses achieved rapid and healthy growth. Both gross billings and net revenues generated from our comprehensive tutoring services showed quarter-over-quarter increases, which reflect our promotional business restructuring, strong organization, solid talent pool, and deep industry experience. In the future, we will continue to explore new businesses and remain dedicated to refining our products and services with the goal of offering superior quality courses and services that exceed our students’ expectations. By the end of 2021, we terminated all after-school tutoring services to students from kindergarten through ninth grade. We would like to thank all of our teachers and related staff for the hard work they devoted to course delivery and their cooperation during the transition. We wish them the best and hope they will cherish the public welfare nature of education and continue to devote themselves to providing excellent courses and services in non-profit institutions. Our current strategic focus is on non-degree based vocational and professional education. According to official data released by the Chinese Ministry of Education, as well as independent third-party research, the market size for non-degree-based vocational education in China will be RMB 250.7 billion in 2022, and by 2026 it will reach RMB 344.5 billion, representing a CAGR of 8.3% from 2022 to 2026. Combined with the demand for some degree-based vocational education for college students, such as preparation for graduate school entrance examinations and the college English test, the degree-based vocational education market has substantial hidden opportunities. The competitive job market means that there is a huge demand for transferable job skills. Students, whether they are in college, new graduates, those already in the workforce, or just individuals trying to improve their skills, are looking for reliable and high-quality courses to meet various learning needs. We will personally study user demand, design products that will satisfy the learning needs of most users, and offer constructive accounts to create an internet matrix of learning tools while promoting the Gaotu brand in the vocational and professional education sector through word-of-mouth referrals. Now I will share our operating data in more detail. Since we terminated after-school tutoring services for students in compulsory education in the fourth quarter of 2021, and for senior high school in the first quarter of 2022, I will focus on sharing more information about our comprehensive tutoring services, which is our business other than K-12 after-school tutoring services, and present some of our financials on a quarter-over-quarter basis to better provide context on the performance of our new strategic focus. Please note that retroactive adjustments to historical data have also been made to provide a consistent basis of comparison for the financial results. In the fourth quarter, our net revenues increased 40.3% quarter-over-quarter to RMB1.3 billion. Net revenues from our comprehensive tutoring services increased by 1.4% quarter-over-quarter to RMB149.1 million. Gross billings, the leading indicator for future financial performance, increased by 233.7% quarter-over-quarter to RMB1 billion. Gross billings from our comprehensive tutoring services increased by 72.8% quarter-over-quarter to RMB234.8 million. They have shown quarter-over-quarter increases for two consecutive quarters since the second quarter of 2021 up to the fourth quarter, demonstrating that we are gradually shifting our strategic focus away from K-12 after-school children-related services. Moving on to our selected financial metrics summary, our cost of revenues decreased by 45.9% quarter-over-quarter and 37.3% year-over-year to RMB386.7 million. The decrease was mainly due to a reduction in compensation for instructors and tutors as a result of the restructuring in the last quarter, along with decreases in learning material costs and rental advances. Our gross profit increased by 122.1% quarter-over-quarter to RMB887.6 million, leading to a gross profit margin of 69.7%. Non-GAAP gross profit, which excludes share-based compensation, increased by 107.9% quarter-over-quarter to RMB908.2 million, giving us a non-GAAP gross profit margin of 71.3%. The increase was primarily due to a decrease in cost of revenue as previously explained. Operating expenses decreased by 57.5% quarter-over-quarter and 72.5% year-over-year to RMB629.3 million. Breaking down the operating expenses, selling expenses decreased by 54.9% quarter-over-quarter and 79.3% year-over-year to RMB373 million in the fourth quarter, primarily due to a decrease in marketing expenses as a result of government policy impacts and a reduction in compensation for sales and marketing staff from the restructuring completed in the last quarter. The selling expenses margin decreased to a record low of 29.3%, a sharp decline compared to previous quarters. At the same time, we are also exploring new customer acquisition strategies, including utilizing live-stream e-commerce and short-media platforms. A multi-channel customer acquisition model could reduce the risk of over-dependence on a single method. On the other hand, we will constantly improve our user conversion rates. Additionally, we will continue to expand our course offerings to establish our branding in the vocational education sector and gradually rely more on customer acquisitions through word-of-mouth referrals. In this way, we can lower our customer acquisition costs and selling expenses margins to pursue sustainable growth. Research and development expenses decreased by 62.8% quarter-over-quarter and 54.5% year-over-year to RMB125 million. This decrease was primarily due to a reduction in compensation for research and development staff from the restructuring in the last quarter. General and administrative expenses decreased by 41.8% quarter-over-quarter and 55.9% year-over-year to RMB95.9 million, also attributed to a reduction in compensation for G&A staff due to the restructuring. Our income from operations for the first quarter of 2021 was RMB258.3 million, compared with a loss from operations of RMB696.1 million in the first quarter of 2020. Our operating margin this quarter reached a record high of 20.3%. The significant increase in operating margin was primarily due to a reduction in compensation for staff resulting from the restructuring completed in the third quarter of 2021, along with a decrease in other operating-related expenses. Our net profit was RMB285.9 million, compared with a net loss of RMB627 million in the fourth quarter of 2020. The non-GAAP net profit was RMB324.4 million compared to a non-GAAP net loss of RMB554.4 million in the fourth quarter of 2020. It is worth mentioning that our net profit margin and non-GAAP net profit margin both reached record high levels of 22.4% and 25.5% respectively. Additionally, our net operating cash inflow was RMB245.8 million. Turning to our balance sheet results, as of December 31, 2021, we have RMB897.1 million in cash, cash equivalents, current and restricted cash, and approximately RMB2.8 billion in short-term investments, which totals approximately RMB3.7 billion and is sufficient to support our current operating scale and explorations into new business. As for our full-year results, net revenues for 2021 decreased 7.9% year-over-year to RMB6.6 billion. The decrease was mainly due to the cessation of K-9 academic subject tutoring services as a result of the impact of government policies. Net revenues from our comprehensive tutoring services were RMB551.1 million. Gross billings decreased 42.4% year-over-year to RMB5.2 billion, with gross billings from our comprehensive tutoring service amounting to RMB669.7 million. The net loss for 2021 was RMB3.1 billion compared to a net loss of RMB1.4 billion in 2020. The non-GAAP net loss for 2021 was RMB2.8 billion, compared with a non-GAAP net loss of RMB1.2 billion in 2020. Considering the uncertainty in government policies impacting our financial conditions, we will not provide the next quarter’s performance guidance for now. This concludes my prepared remarks. Operator, we are now ready for questions. Thank you everyone.

We will now begin the question-and-answer session. The first question comes from Mark Li with Citi. Please go ahead.

Hey, hi Larry, Shannon, and management. Thank you very much for the presentation. May I ask firstly we understand we terminate the high school tutoring by the end of February? How much impact do we expect from this termination? And also could you share a bit more on the key metrics for the vocational and professional education segment such as margins, etc.? Thank you.

Thanks Mark. So for the high school business termination, we made an announcement on February 16th because we are a company registered in Beijing, so that we follow local government instructions that the high school policy aligns with the double reduction policy. The exact impact will be disclosed in our Q1 results. But in terms of the restructuring, we have completed a business and organizational restructuring in the third quarter and settled the majority of the payments and expenses. The termination for the high school business is more natural and we are fully prepared. We do not expect to incur additional meaningful payments going forward. Currently, we have a strong cash balance sufficient to support our current business scale, and our current cash balance also supports our venture into new businesses. In terms of more details about the operational margin for vocational education, there are many categories within the sector and each category has distinct characteristics. The model for cost deliveries varies as well, resulting in inconsistencies in profit margins. Our profit margin is also influenced by the percentage that each category contributes to total revenue, meaning it is currently not very stable. As we are still in the early stages of exploring these new businesses, we are not able to provide a precise expectation for profit margins. However, we are committed to maintaining operational efficiency and will not sacrifice profitability just for scaling expansion. We will review providing guidance once our business has reached a more sustainable stage. I hope that addresses your questions. Thanks.

Hi, good evening. Hi Mr. Chen, Hi Shannon. Thanks for taking my question, and by the way, congratulations on the record profits and margins this quarter. I have two quick questions regarding the PATH 4 similar to what Mark just mentioned. If we think not about the restructuring costs, but in terms of the recurring operating expense runway from the second quarter of this year, how should we expect it for the rest of the year? Shall we anticipate operating expenses returning to the level recorded in 4Q or perhaps down by half or even 80% in proportion to the revenue? What can we expect regarding operating expenses? That's the first question. The second question, if I may, is related to our non-K12 business. I'm not asking for guidance per se, but say for 2022 or 2023 next year, how much revenue can we expect, roughly, like up 100% from the current rate, or 200%? Any sense of size would be appreciated. If possible, how will that revenue be made up from different segments, i.e., vocational and professional education versus digital products versus any new businesses like e-commerce and whatnot? Thank you.

Thanks for your questions. To address your first question regarding operating expenses, running an online education business has a straightforward cost structure comprising the cost of goods sold, sales and marketing expenses, G&A expenses, and R&D expenses. In the past, sales and marketing expenses have often contributed the most to our operating expenses, sometimes making up 80% to 90% of revenue. However, moving forward, especially in the vocational and professional education sectors, we are exploring more channels for customer acquisition. We hope that over time our expense levels will return to levels seen in 2019. We aim to maintain R&D and G&A expenses at under 20% of total revenue, providing us enough room to acquire new customers and explore new products. As mentioned, everything is still in early stages, but we believe our extensive experience in cost delivery and product refinement will benefit us going forward. Regarding future growth, we prioritize maintaining effective growth while achieving positive net profit. Given our current operating scale and market size, it is possible for us to achieve high double-digit or even triple-digit revenue growth concerning our new strategic focus. The key is to constantly refine our products to better satisfy user needs. We will provide revenue guidance as soon as the policy and external environment stabilize, as we have done in the past. Thanks.

Thank you so much, Shannon. That's really helpful. If I may follow-up on that earlier part, my question was more about how operating expenses would look after exiting K12, including high school. For instance, in the fourth quarter, those were just a little over RMB 200 million while our non-K12 revenue was RMB 150 million. Can we expect a meaningful decline in fixed costs further, or will we focus, as you mentioned, on product-driven growth opportunities rather than concentrating too heavily on remaining fixed costs? And that's all my questions. Thank you again for your answers.

Yes, the question makes a lot of sense. When running a business, we are always trying to find that balance. We have the legacies and experiences from the past, which will help us grow. All the talents and systems we built up will assist us in our future success. When considering further investment in R&D and G&A, we also need to consider the top line scale we can acquire from the market. Initially, I believe we will maintain a certain level of investment in R&D to support continuous refinement of our teaching products. As revenue grows, we anticipate that the proportion of R&D and G&A expenses will decrease, benefiting from economies of scale and enhancing profitability.

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

Thank you very much operator, and thank you everyone for joining the call today. If you have any further questions, please don't hesitate to contact the company or reach out to us via email at ir.gaotu.cn directly. Please feel free to subscribe to our news alert or quarterly investor newsletter on the company's IR website. Thank you very much again for your time. Have a great night.

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