Ladies and gentlemen, thank you for standing by, and welcome to the Gaotu Techedu Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to your first speaker today, Ms. Catherine Chen, Head of Investor Relations. Please go ahead, Catherine.

Thank you, operator. Good evening, everyone. Thank you for joining Gaotu's First Quarter 2024 Earnings Conference Call. My name is Catherine, and I'll help host the earnings call today. Gaotu's earnings release for the quarter was distributed earlier and is available on the company's IR website at ir.gaotu.cn, as well as through PR newswire services. Joining the call with me tonight from Gaotu’s Senior Management is Mr. Larry Chen, Gaotu’s Founder, Chairman, and Chief Executive Officer, and Ms. Shannon Shen, Gaotu's Chief Financial Officer. Larry will first provide the business highlights for the quarter, and then afterward, Shannon will discuss our financial performance in more detail. Following their prepared remarks, we will 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 of the US 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 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 measures and reconciliations of GAAP to non-GAAP financial results, please refer to our first-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 Gaotu's IR website. It is now my pleasure to introduce our Founder, Chairman, and Chief Executive Officer, Larry. Larry, please.

Good evening and good morning, everyone. Thank you for joining us on Gaotu’s first quarter of fiscal year 2024 earnings conference call. I would like to take this opportunity to express my gratitude to all of you for your interest and support of Gaotu. Before I start, I would like to remind everyone that all financial figures discussed today are quoted in RMB unless stated otherwise. I am pleased to report our financial and operational results for the opening quarter of the year. During the first quarter, we remained laser-focused on refining our educational products and expanding our customer acquisition channels. On the product front, we worked diligently to align our offerings more closely with user needs, while enhancing the educational proficiency of our established products. We also made significant progress in diversifying our portfolio to better address user needs and improve learning efficiency. On the customer acquisition front, we expanded our outreach by tapping into diverse channels and boosting acquisition efficiency by streamlining and optimizing the teaching processes tailored to our product and content characteristics. This combination of high-caliber educational offerings and robust customer acquisition channels has laid a solid foundation for the sustainable and rapid growth of our business. In the first quarter, our net revenue increased 33.9% year-over-year to RMB946.9 million, while our gross billings grew 35.3% year-over-year to RMB729.4 million. Excluding the one-off impacts, such as different class retention schedules, our comparable gross billings saw an annual increase of more than 70%. Non-GAAP net income reached RMB3.0 million with a non-GAAP net income margin of 0.3%. Our cash position remains strong with a total of RMB3.8 billion in cash, cash equivalents, restricted cash, and short- and long-term investments, RMB374.6 million higher than the same time last year. Our strong performance in the first quarter has strengthened our confidence in continuing strategic investments in educational products, learning services, talent development, and organizational enhancements while expanding into diverse customer acquisition channels. High-quality educational products, teaching excellence, and premium learning services are the cornerstones of our education business. At Gaotu, we deployed diverse incentive mechanisms including regular mock classes, teaching competitions, and performance evaluations to ensure rigorous quality control of our learning services, improve the quality of teaching and the service capabilities of our teachers, and provide targeted support to enhance their professional growth. With respect to product design, we enriched our offerings by introducing localized online content and personalized solutions dedicated to different learning needs to ensure optimal learning outcomes. Our internal data revealed that the success rate of our class of 2024 on the national graduate school entrance exam was more than twice the national average. Alongside bolstering the long-term competitive strengths of our established business, we are also pushing forward with new initiatives. Within our learning services for college students and adults, we have established an offline boot camp to help users achieve their academic goals within a shorter timeframe. We have also launched offline all-round education services to better cultivate students' holistic development and improve their overall well-being. As our business has experienced rapid growth, we have been increasingly ramping up our investment in content development. Specifically, the number of our full-time course content development professionals increased by roughly 50% year-over-year in the first quarter. As our business continues to expand, we are taking proactive steps to engage with regulatory bodies at various levels, seeking guidance on industry policies and compliance, and enhancing our educational product services based on related guidelines. Exceptional talent is one of the most critical strategic assets in the education industry. At Gaotu, we are committed to investing in and strengthening our ability to recruit, cultivate, and retain outstanding individuals to advance our strategic goals and drive rapid business growth. Campus recruitment is one of our most important hiring channels. By collaborating with the top 10 universities nationwide, we are able to proactively engage with and secure promising candidates, ensuring a steady expansion of our talent pool. As of the first quarter, we have entered into strategic partnerships with thousands of universities. We have also taken several initiatives to support our teams in improving their professional expertise. These include refining our talent development and retention mechanisms, strengthening our organizational culture and cohesion, and offering various themed courses and internal experience-sharing opportunities. Lastly, we have improved our organizational vitality by implementing a fast-track promotion mechanism for exceptional team members. Investing in the development of diverse customer acquisition channels and competitive content, while ensuring operational efficiency, is critical to our company's long-term success. So far, we have expanded into a diverse range of new acquisition channels, including live streaming, short-form videos, book sales, and offline presence. By consistently offering high-quality content, we have built up our competitive edge in these channels, amplified user engagement, and reduced acquisition costs. Along with ensuring operational efficiency, we are also actively exploring new avenues to acquire customer traffic and maintain our competitive edge. This year, we will boost our regional brand recognition and market penetration by ramping up investment in offline channels with initiatives like establishing offline learning centers for college students. Gaotu is about to mark its 10th anniversary since founding. Throughout this long journey, we have stayed true to our educational aspirations and actively embraced our social responsibility by collaborating with philanthropic organizations to promote rural development and advance educational equity. We have full confidence in our ability to provide lasting value for our users, shareholders, and society at large as we continue to contribute to and promote the sustainable development of China's education industry. Thank you very much. This concludes my prepared remarks. Now I will pass the call over to our CFO, Shannon, to walk you through the financial and operational details of this quarter.

Thank you, Larry, and thank you everyone for joining our call today. I will now walk you through our operating and financial performance for the first quarter of fiscal year 2024. We commenced 2024 with a notable surge in growth momentum in the first quarter. Backed by ample cash reserves, we remained committed to enhancing the expansion of our core business. This was achieved by strengthening our portfolio and organizational capabilities, thereby reinforcing our leading position in brand recognition and competitive advantages. In parallel, we actively explored and cultivated product optimization and channel innovation, fortifying our core competitive moats and creating lasting value for our shareholders. Our gross billings demonstrated robust growth. On a comparable basis, gross billings surged by more than 70% year-over-year to RMB729.4 million. We anticipate maintaining this growth trajectory throughout the remainder of the year, which will gradually translate into accelerated revenue growth. In the first quarter of the year, our net revenues increased by 33.9% year-over-year to RMB946.9 million. The business model for online education exhibits certain statistical and seasonal patterns. The second quarter is typically the peak demand season, necessitating proactive investments in marketing expenses and teaching resource reserves to capitalize on the enrollment window. This strategy ensures the maximization of operational efficiency and economics of scale. Historically, this entails certain upfront market expenditure in marketing costs with revenue realization gradually materializing in the latter half of the year. As student retention increases along with concurrent enrollment, product penetration, and brand recognition, the manpower costs associated with course and service delivery can be amortized, progressively unlocking profitability potential. As such, profitability in a single quarter for online education is contingent on the ratio of new users to existing users. While working to ensure a healthy unit economy, we recognize the need for a simultaneous escalation in marketing investment going forward. Beginning in the second quarter, we plan to deploy additional tutors and resources and dynamically manage our customer acquisition channels to seize the acquisition window to drive meaningful growth in student enrollment. Next, I will walk you through the progress we have made during the quarter. Learning services contributed over 95% of net revenues. Breaking it down, more than 75% of total revenues came from non-academic tutoring services and other traditional learning services, representing an increase of roughly 35% year-over-year. Our new initiatives are centered on academic tutoring services aimed at unleashing students' potential and fostering activities and holistic development through engaging content. During the quarter, this segment generated year-over-year growth of more than triple digits in gross billings on a comparable basis. Furthermore, it surpassed 20% for the first time as a percentage of total gross billings. This increasing progress is a testament to our ongoing efforts to improve the teaching standard of our instructors and tutors, coupled with the continuous refinements we have made to our educational offerings. Additionally, we are venturing into offline non-academic all-around education courses, including coding and basketball, which align with government and regulatory initiatives to promote diversified education and holistic development for K-9 students. Our traditional learning services continued to generate robust growth momentum. With a diversified portfolio tailored to varied user needs, we expanded user outreach and enhanced the sustainability and scalability of our product pipeline. This will serve as a long-term driver for sustainable growth. During the quarter, this segment recorded high double-digit growth in gross billings on a comparable basis and a year-over-year revenue increase of more than 35%. The other crucial component of our learning services is educational services for college students and adults, which accounted for around 20% of total revenues during the quarter. Revenue and gross billings both increased by more than 30% year-over-year. The better-than-expected performance of this segment was primarily attributable to rapid growth in overseas data-related services driven by our expanded customer acquisition efforts across short-form radio and live streaming platforms. During the quarter, our overseas data-related services saw a year-over-year increase of more than triple digits in revenue and gross billings. Jointly developed by industry-leading teachers and course content development professionals, our educational offerings harness cutting-edge technologies like artificial intelligence, providing users with a personalized one-stop exam preparation experience, teaching tailored content plans, learning paths that adapt to their pace, and progress evaluation tools. Notably, our postgraduate entrance exam prep services generated positive cash flow for the third consecutive quarter, while our civil service exam prep business achieved profitability for the second consecutive quarter. I will now present our financials in more detail. Our cost of revenues this quarter was RMB271.4 million. Gross profit increased 23.4% year-over-year to RMB675.5 million, with a gross profit margin of 71.3%. The year-over-year decrease in gross margin was predominantly a result of changes to our product mix and the more proactive recruitment of teaching staff to meet future demand. Total operating expenses during the quarter increased 66.6% year-over-year to RMB753.2 million. Breaking it down, selling expenses increased 82.8% year-over-year to RMB506.4 million, accounting for 53.5% of net revenues. This was partially attributable to the low-base effect created during the same period last year. The increase also reflected a rise in marketing expenses in response to heightened market demand over the winter season. We track and monitor sales and marketing efficiency on a weekly basis and drive scalable growth within such boundaries to enhance brand awareness, provided that our unit economics meet specific profitable criteria. Based on our performance in the first quarter, our long-term investment in diversified channels and the meticulous refinement of our expert teaching quality have yielded satisfactory results. Our return on investment metrics remain efficient, prompting us to appropriately increase our investment in sales expenses, thereby laying a solid foundation for long-term growth. Moving on, research and development expenses increased 56.3% year-over-year to RMB151.6 million, accounting for 16.0% of net revenues. General and administrative expenses increased by 21.7% year-over-year to RMB95.2 million, accounting for 10.1% of net revenues. Loss from operations was RMB77.7 million, and operating margin was negative 8.2%. Non-GAAP loss from operations was RMB62.4 million, and non-GAAP operating margin was negative 6.6%. Net loss was RMB12.3 million, and net income margin was negative 1.3%. Non-GAAP net income was RMB3.0 million, and non-GAAP net income margin was 0.3%. Our net operating cash outflow was RMB197.4 million. Turning to our balance sheet, as of March 31st, 2024, we held RMB1.2 billion in cash, cash equivalents, and restricted cash, RMB1.6 billion in short-term investments, and RMB974.1 million in long-term investments. This totals RMB3.8 billion, approximately RMB374.6 million higher than at the same point last year. As of March 31st, 2024, our deferred revenue balance was RMB1.0 billion, which primarily consists of tuition received in advance. As of March 31st, 2024, we have repurchased an aggregate of approximately 4.9 million ADS on the open market for approximately $12.4 million. We will continue to execute stock buybacks in accordance with the guidance of the Board of Directors to create long-term value for our shareholders. Furthermore, Larry has reinforced his confidence in the company and unwavering commitment to the original aspiration of education by personally purchasing an additional 0.51 million ADS in 2024. Before I provide our business outlook for the next quarter, please allow me to remind everyone that this contains forward-looking statements, which include risks and uncertainties that 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 second quarter of 2024 are expected to be between RMB908 million and RMB928 million, representing an increase of 29.1% to 32.0% on a year-over-year basis. This concludes my prepared remarks. Operator, we are now ready for the Q&A section. Thank you everyone for listening.

We will now begin the question-and-answer session. Our first question comes from Alice Cai with Citibank. Please go ahead.

Good evening management. Thank you for taking my question. I have a question regarding the second quarter revenue guidance and the impact of the shift in the re-enrollment timeline. Because we know that the guidance appears relatively conservative, could you please provide more information on whether it is influenced by the shift in the re-enrollment period? Last year, re-enrollment occurred in March, while this year it took place in April. Could you please break down the situation for us, sharing details on how re-enrollment of existing students and enrollment of new students are performing separately? Thank you.

Thanks, Alice. Let's start with the guidance of the second quarter, then we can dive into our expectations for the whole year. So from the revenue perspective, we expect the revenue to be between RMB908 million and RMB928 million in the second quarter of 2024, representing an increase of 29% to 32% on a year-over-year basis. The primary revenue contributor is learning services, within which around 75% of our total revenues came from non-academic tutoring and traditional learning services. We still see strong momentum for this segment and foresee this part of revenue to grow near or over 45% on a year-over-year basis in the second quarter. The segments with growth rates lower than the overall company growth primarily reflect the impact of the educational services we provide for college students and adults. Although the gross billings increased in the past two quarters, showing strong momentum, it is mainly contributed by college learning services and overseas-related business. According to the class schedule and seasonality, the revenue is usually recognized in the third quarter and even the second half of the year. Therefore, although we saw strong growth momentum in gross billings, the revenue remains flat in the second quarter and therefore it drags down the whole company's revenue growth rate. In terms of gross billings, we still anticipate high double-digit growth rates in the second quarter of 2024 on a year-over-year basis, especially for our academic children's services and traditional learning services, where the gross billings collected from new students are expected to grow over triple digits. This momentum has continued from last November, and we still see it continuing in the second quarter. Despite the scheduling differences compared with last year, if we assess the first half of 2024 as a whole, we still expect gross billings to grow at the high end of the middle double digits on a year-over-year basis. Since gross billings are a leading indicator for revenue growth, this can lay a solid foundation for the whole year's revenue growth. Looking into the second half, the demand for academic tutoring and traditional business remains substantial. With clear compliance and governance guidance in place, our business growth initiatives with new enrollments will generate substantial incremental revenue through retention and course expansion. We have confidence in our operational capabilities and the reputation we have established among the students and parents. Therefore, we anticipate that the growth rates for both gross billings and revenues will accelerate in the second quarter and especially in the second half of the year. We should have higher clarity by the time of our next earnings call, but based on our assessment of the current situation, we see the revenue growth rate moving toward the high end of our expectations for the whole year. Regarding the enrollment changes, we haven't disclosed details of the enrollment by segment, but since the average selling price remains stable, the increase in gross billings shows the same pace as the enrollment increase. In summary, while the revenue guidance for the second quarter may appear a bit weak, focusing on the gross billings collected during the fourth quarter last year and the first half of 2024 still provides us strong confidence for the whole year's revenue goal. For specific quarterly growth guidance, we will share updates with you in each of the earnings releases. Hope that addresses your question, Alice.

Thank you.

And the next question comes from Jeffrey Chan with CLSA. Please go ahead.

Hi, thank you, management, for taking my question. I have a question regarding the operating expenses and also the gross profit margin. Can management give us some more insights on the gross profit margin and the operating expense ratio in the next quarter and for the rest of this year, 2024? Additionally, if you could provide a brief outlook on profitability for the full year 2024. Thank you.

Thanks, Jeffrey, for your question. So let's break down the operating expenses line by line and start with the change in our gross profit margin. We observed a around 6% decrease in gross profit margin on a year-over-year basis. The year-over-year decrease in gross profit margin stems from a few reasons. The primary reason is the revenue mix change. In terms of revenue contributors, to meet diversified user demand, we have constructed a product mix primarily focused on online large class business, complemented by one-on-one classes, smart textbooks, and offline small classes. Among these business models, online large classes yield the highest gross profit margin. As our business expands, the proportion of revenue generated from our one-on-one classes, smart textbooks, and offline classes is gradually increasing, thus altering the revenue mix and subsequently impacting gross profit margins. Our offline learning center expansion is accelerating, leading to a higher level of cost of goods sold, which results in lower gross profit margin at this point in time. Secondly, to enhance the comprehensiveness and competitiveness of our curriculum system, we are investing in developing new courses, which incurs early-stage costs associated with faculty resources, impacting gross profit margin before they achieve their full capacity. In the long run, our gross profit margin will depend significantly on future revenue structures, which explains the fluctuations. Now, let's delve into our research and development expenses change. The year-over-year increase in our research and development expenses this quarter was primarily due to the investment in innovative technologies like artificial intelligence, initiated in the second half of last year. Education, with its vast potential, stands as a promising domain for practical implementation. Currently, our application of AI focuses on enhancing internal efficiency rather than external tools, including curriculum research, student auto question and answer sections, product research and design, customer service call centers, and overall internal operations. We are also exploring tool-based products aimed at improving learning efficiency, allowing students to learn at a higher level. To support our offline business development, we are investing in research and development for an offline operating system, distinct from our online operations, along with content development. Comparing quarter-over-quarter, the R&D expenses as a percentage of revenue decreased nearly 2%, indicating economies of scale and operating leverage. Lastly, regarding general and administrative expenses, the year-over-year growth was mainly due to labor cost increases. Since the beginning of this year, we have onboarded several top-notch talents for our non-academic tutoring services, especially at offline learning centers. We believe this will drive rapid growth as well as improve operational quality and efficiency. Talent is a crucial factor behind our offline business success. Lastly, in terms of sales and marketing expenses, it is highly related to our gross billings increase. As mentioned in our prepared remarks, when making an apple-to-apple comparison, the gross billings collected from newly added students increased over 70% on a year-over-year basis. Our sales and marketing expenses increased nearly around 58% year-over-year. We still find that our customer acquisition cost is within profitability boundaries. There is still room for improvement on the customer acquisition side, and we maintain a high efficiency of our returns over investment. I hope that gives you a clearer picture of our operating expense variations. Thanks, Jeffrey.

This concludes our question-and-answer session. I would like to turn the conference back over to Catherine Chen for any closing remarks.

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 team via email at [email protected] directly. You are also welcome to subscribe to our news alert on the company's IR website. Thank you very much again for your time. Have a great night.

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